As filed with the Securities and Exchange Commission on November 17, 1995
Registration No. 33-61477
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------------
AMENDMENT NO. 4
FORM S-2
Registration Statement Under The Securities Act of 1933
- -------------------------------------------------------------------------------
ILX INCORPORATED
(formerly International Leisure Enterprises Incorporated)
(Exact name of registrant as specified in its charter)
ARIZONA 6531 86-0564171
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.
incorporation or Code Number)
organization
2777 East Camelback Road
Phoenix, Arizona 85016
(602) 957-2777
(Address, and telephone number, of registrant's principal executive offices)
JOSEPH P. MARTORI
Chief Executive Officer
ILX Incorporated
2777 East Camelback Road
Phoenix, Arizona 85016
(602) 957-2777
(Name, address, and telephone number, of agent for service)
Copies to:
Carol A. Colombo, Esq. Ronald Warner, Esq.
Colombo & Bonacci, P.C. Thelen, Marrin, Johnson & Bridges
2525 East Camelback Rd., Ste. 840 333 South Grand Avenue, 34th Fl.
Phoenix, Arizona 85016 Los Angeles, California 90071
(602) 956-5800 (213) 229-2066
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[] If the registrant elects to deliver its latest
annual report to its security holders, or a complete and legible facsimile
thereof, pursuant to Item 11(a)(1) of this form, check the following box. [ ] If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering.___________ [ ] If delivery of the prospectus is
expected to be made pursuant to Rule 434, check the following box. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Aggregate Offering Registration Fee
Unit(1) Price(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
Convertible Adjustable Secured
Bonds due 2000 $5,000,000 100% $5,000,000 $3,965.51
====================================================================================================================================
Common Stock, no par value,
issuable upon Conversion of
Convertible Adjustable
Secured Bonds(2) -- -- -- --
====================================================================================================================================
Placement Agent's Warrants (3) 100,000 $3.60 $360,000 $413.79
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee.
(2) Such indeterminate number of shares of ILX common stock as may be issuable
upon conversion of the CAS Bonds being registered hereunder. Such shares of
common stock will, if issued, be issued for no additional consideration and
therefor no registration fee is required.
(3) Brookstreet Securities Corporation will receive warrants to purchase a
minimum of 40,000 shares and a maximum of 100,000 shares of ILX common
stock, determined in increments of 1,000 shares of common stock for every
$50,000 in aggregate principal amount of CAS Bonds sold.
</TABLE>
- --------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<TABLE>
ILX INCORPORATED
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in the Prospectus
of Information Required by Items of Form S-2
<CAPTION>
Form S-2 Item Number and Caption Prospectus
-------------------------------- ----------
<S> <C>
1. Forepart of Registration Statement and Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus Outside Front Cover Page of the Prospectus
2. Inside Front and Outside Back Cover Pages Available Information; Incorporation of
of Prospectus Certain Documents by Reference; Table of
Contents
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors; Ratio of
of Earnings to Fixed Charges Earnings to Fixed Charges
4. Use of Proceeds Prospectus Summary; The Company -- The
Varsity Clubs Concept; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Description of ILX Securities and Pertinent
Arizona Statutes
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Available Information; Prospectus Summary;
Incorporation of Certain Documents by
Reference; Risk Factors
12. Incorporation of Certain Information by Available Information; Incorporation of
Reference Certain Documents by Reference
13. Disclosure of Commission Position on Disclosure of Commission Position
Indemnification for Securities Act Liabilities
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1995
ILX INCORPORATED
(formerly INTERNATIONAL LEISURE ENTERPRISES INCORPORATED)
MINIMUM: $2,000,000
MAXIMUM: $5,000,000
10% CONVERTIBLE ADJUSTABLE SECURED BONDS DUE 2000
(Denominated in $1,000 Increments)
ILX Incorporated, an Arizona corporation ("ILX"), is offering, on a
"best efforts" basis, a minimum of TWO MILLION DOLLARS ($2,000,000) and a
maximum of FIVE MILLION DOLLARS ($5,000,000) aggregate principal amount of
Convertible Adjustable Secured Bonds due _________, 2000 ("CAS Bonds") for sale
at $1,000 per CAS Bond. See "Description of ILX Securities -- CAS Bonds." The
CAS Bonds will bear interest at the rate of 10% per annum. Interest on the CAS
Bonds will be payable on January 1 and July 1 in each year the CAS Bonds are
outstanding. The first interest payment on the CAS Bonds will be due and payable
on January 1, 1996. This offering shall terminate on December 15, 1995, unless
extended for an additional 30 day period by ILX. There is no minimum amount of
CAS Bonds required to be purchased by any purchaser of CAS Bonds. ILX's
officers, directors, employees and principal stockholders may purchase CAS Bonds
in the offering. Any such purchases may be used to satisfy the $2,000,000
minimum. (See "Plan of Distribution".) All offering proceeds will be deposited
into an escrow account with U.S. Trust Company of California, N.A., the escrow
agent for the offering (the "Escrow Agent"). (See "Plan of Distribution".) All
of the CAS Bonds will be offered on a best efforts basis. At ILX's discretion
but not later than 10 business days after ILX has sold at least $2,000,000
aggregate principal amount of CAS Bonds, ILX shall select a date on which the
CAS Bonds subscribed for prior to such date will be issued and funds paid
therefor will be released by the Escrow Agent (the "Initial Closing"). If the
minimum amount of CAS Bonds is not sold within the offering period, the offering
will terminate and all funds held in escrow will be returned promptly to
subscribers by the Escrow Agent without any deduction therefrom but with the pro
rata interest earned thereon while held in the Escrow Account. Unless previously
redeemed, the CAS Bonds will be convertible as described on the inside front
cover of this Prospectus and elsewhere herein.
The CAS Bonds are an outstanding debt obligation of ILX and, in terms
of preference, are junior to the Senior Indebtedness (as hereinafter defined).
Payment by the Company on the CAS Bonds is not permitted in the event of a
default on the Senior Indebtedness, regardless of the existence of the security
interest in the VCA Stock. In addition, the CAS Bonds are secured by all of the
issued and outstanding capital stock of Varsity Clubs of America Incorporated,
an Arizona corporation and a wholly owned subsidiary of ILX ("VCA"). ILX may
redeem the CAS Bonds, in whole or in part, at any time after ILX's common stock
has traded at a price in excess of $4.00 per share for a period of 20
consecutive trading days. The redemption price shall be 120% of the outstanding
principal amount of each CAS Bond.
As of September 30, 1995, the aggregate amount of outstanding Senior
Indebtedness was approximately $13.9 million. There is no limit on the amount of
Senior Indebtedness that ILX may incur. In addition, there is no restriction on
VCA's or its subsidiaries' ability to incur additional debt and to secure such
debt with a pledge or mortgage of all or a portion of VCA's or its subsidiaries'
assets. Incurrence of additional debts and/or encumbrance of the assets of VCA
or its subsidiaries may adversely affect the value of the VCA Stock offered as
security for the CAS Bonds. Further, any financial condition that might cause
ILX to default on the CAS Bonds might also result in a decrease in the value of
the VCA Stock securing the CAS Bonds thus reducing or eliminating any ability of
the VCA Stock to satisfy the obligations under the CAS Bonds. (See "Risk
Factors--Adequacy of Security for CAS Bonds May Not Be Adequate.") Recourse to
other assets of ILX is subject to the Senior Indebtedness and the terms of the
Indenture. (See "Description of ILX Securities and Pertinent Arizona Statutes --
Description of CAS Bonds -- Events of Default.")
SEE "RISK FACTORS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT
IN ILX CAS BONDS INCLUDING UNLIMITED SENIOR INDEBTEDNESS, QUALIFIED SECURITY AND
DISCRETIONARY USE OF PROCEEDS. THESE ARE SPECULATIVE SECURITIES.
================================================================================
Price to Placement Agent Proceeds to Issuer or
Public Commissions(1) Other Persons(1)(2)
- --------------------------------------------------------------------------------
Per CAS Bond 100% 9% 91%
- --------------------------------------------------------------------------------
Total
Minimum (3) $2,000,000 $180,000 $1,820,000
- --------------------------------------------------------------------------------
Total
Maximum (3) $5,000,000 $450,000 $4,550,000
================================================================================
(1) Does not include additional compensation to Brookstreet Securities
Corporation in the form of a non- accountable expense allowance equal to 2% of
the gross proceeds of the offering. See "Plan of Distribution."
(2) Before deduction of estimated expenses payable by ILX of approximately
$252,584 if the minimum number of CAS Bonds are sold and approximately $312,584
if the maximum number of CAS Bonds are sold, including the 2% non-accountable
expense allowance, of which $50,000 has been paid to Brookstreet Securities
Corporation. ILX has also agreed to grant to Brookstreet Securities Corporation,
for nominal consideration, warrants to purchase a minimum of 40,000 shares and a
maximum of 100,000 shares of ILX common stock at $3.60 per share. See "Plan of
Distribution."
(3) The CAS Bonds are being offered on a "best efforts" $2,000,000 minimum,
$5,000,000 maximum basis. The offering will terminate on December 15, 1995,
unless extended for an additional 30 day period by ILX.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[BROOKSTREET LOGO]
CONVERSION
Unless previously redeemed, the CAS Bonds will be convertible at the
following rates: (i) Commencing 30 calendar days after the Initial Closing of
this offering and continuing until the 29th calendar day after the second
anniversary of the Initial Closing of this offering, the CAS Bonds will be
convertible into ILX common stock at $2.50 per share; (ii) On the 30th calendar
day after the second anniversary of the Initial Closing of this offering, the
conversion price will be adjusted so that from that date until the 29th calendar
day after the fourth anniversary of the Initial Closing of this offering the CAS
Bonds will be convertible into ILX common stock at a price equal to: (a) 75% of
the "Mark Price" of ILX's common stock, where the "Mark Price" is defined as a
price equal to the average of the sale price (as defined in the Indenture)
("closing price") of ILX common stock as of the close of business each day for
the 30 calendar day period beginning 30 calendar days before the second
anniversary of the Initial Closing and ending on and including the day before
the second anniversary of the Initial Closing, or (b) $2.50 per share, whichever
is higher; (iii) The conversion price will again be adjusted on the 30th
calendar day after the fourth anniversary of the Initial Closing of this
offering so that from that date until maturity, the CAS Bonds will be
convertible into ILX common stock at a price equal to: (a) 75% of the "Mark
Price" of ILX common stock, where the "Mark Price" is defined as a price equal
to the average of the closing price of ILX common stock as of the close of
business each day for the 30 calendar day period beginning 30 calendar days
before the fourth anniversary of the Initial Closing and ending on and including
the day before the fourth anniversary of the Initial Closing, or (b) $2.50 per
share, whichever is higher.
AVAILABLE INFORMATION
ILX is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission by ILX can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the regional
offices of the Commission located in Room 3190, Kluczynski Federal Building, 230
South Dearborn Street, Chicago, Illinois 60604, and at 7 World Trade Center, New
York, New York 10007. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
ILX's common stock is quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") Small Cap Market System under the symbol
"ILEX." Reports, proxy statements and other information concerning ILX can be
inspected at the National Association of Securities Dealers, Report Section,
1735 "K" Street, N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
The following documents are hereby incorporated by reference: (i)
ILX's annual report on Form 10-K for the fiscal year ended December 31, 1994 as
amended on October 2, 1995, October 27, 1995 and October 31, 1995 ("ILX's
10-K"); (ii) ILX's first quarter Form 10-Q report (dated March 31, 1995) and
ILX's second quarter Form 10-Q report (dated June 30, 1995), which were filed
with the Commission on May 12, 1995, and July 28, 1995 as amended on October 2,
1995 and ILX's third quarter Form 10-Q report (dated September 30, 1995) which
was filed with the Commission on November 13, 1995 ("ILX's 10-Qs"); (iii) ILX's
Proxy Statement dated April 21, 1995, which was filed with the Commission on
April 28, 1995 as amended on October 2, 1995 ("ILX's Proxy Statement"); and (iv)
the Registration Statement on form S-2 filed with the Commission on August 1,
1995 and all amendments and exhibits thereto of which this Prospectus is a part
("ILX's S-2 Registration Statement"). Copies of ILX's 10-K, ILX's most recent
10-Q and ILX's Proxy Statement accompany this Prospectus.
This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. Documents relating to ILX (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents or into this Prospectus) are
available, and will be provided without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered upon a written or oral
request to ILX Incorporated, Attention: Nancy J. Stone, 2777 East Camelback
Road, Phoenix, Arizona 85016, telephone number (602) 957-2777.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
No person is authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to exchange or sell, or
a solicitation of an offer to exchange or purchase, the securities offered by
this Prospectus in any jurisdiction to or from any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any distribution of the securities to which this Prospectus
relates shall, under any circumstances, create any implication that there has
been no change in the affairs of ILX since the date of this Prospectus.
Until __, 199_, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus.
The Company
ILX is an Arizona corporation formed (as International Leisure Enterprises
Incorporated) in October, 1986 for the purpose of developing, operating,
financing and marketing interval ownership ("timeshare") interests in resort
properties, and engaging in other leisure-oriented business activities. ILX's
timeshare portfolio consists of interests in resorts located in Arizona,
Colorado, Florida, Indiana and Mexico.
ILX's wholly owned subsidiary, Varsity Clubs of America Incorporated
("VCA"), is an Arizona corporation formed to capitalize on a perceived market
niche in the hospitality industry: the potential demand for high quality
accommodations near prominent colleges and universities with nationally
recognized athletic programs. The first Varsity Clubs facility was completed in
August, 1995 and is located approximately 2.8 miles from the University of Notre
Dame in Indiana. The site for the second Varsity Clubs facility was acquired on
July 13, 1995 and is located in Tucson, Arizona, approximately 2.3 miles from
the University of Arizona. VCA initially has targeted a total of 15 sites for
development of Varsity Clubs facilities in the next five years, including the
Arizona and Indiana sites. All Varsity Clubs facilities will be operated as
hotels to the extent of their unused or unsold timeshare inventory. As of the
date of this offering, VCA or its wholly owned subsidiaries have obtained
options to acquire properties located in Auburn, Alabama (Auburn University);
Iowa City, Iowa (University of Iowa); Norman, Oklahoma (Oklahoma University);
and State College, Pennsylvania (Penn State University). Due to the existence of
larger and better financed competitors in the lodging industry, ILX's management
believes that VCA's ability to capitalize on this perceived market niche
depends, at least in part, upon the successful implementation of a reasonably
aggressive development strategy. Accordingly, ILX intends to advance all of the
net proceeds of this offering to VCA to finance a portion of the costs
associated with the acquisition and development of Varsity Clubs facilities in
strategic locations throughout the United States. ILX will require VCA to
reimburse from the proceeds of this offering advanced to VCA a portion of the
development costs incurred by ILX on behalf of VCA, which costs, as of September
30, 1995, totalled $4.4 million. The portion of the development costs that VCA
will pay ILX will be an amount equal to (i) $900,000 if the minimum amount of
CAS Bonds are sold pursuant to this "best efforts" offering; (ii) $1,000,000 if
more than $3,000,000 but less than $5,000,000 of CAS Bonds are sold pursuant to
this "best efforts" offering; or (iii) $1,500,000 if the maximum amount of CAS
Bonds are sold pursuant to this "best efforts" offering. See "Use of Proceeds,"
"The Company -- The Varsity Clubs Concept" and "Risk Factors -- VCA Repayment
for Development Costs."
ILX's principal executive office is located at 2777 East Camelback Road,
Phoenix, Arizona 85016, and its telephone number is (602) 957-2777.
The Offering
CAS Bonds $3,000,000 aggregate principal amount of Convertible
Adjustable Secured Bonds due 2000 (the "CAS Bonds"). In
addition, the Underwriters have been granted an over-allotment
option for an additional $450,000 aggregate principal amount
of CAS Bonds. See "Description of ILX Securities -- CAS
Bonds."
Interest Rate 10% per annum, payable on January 1 and July 1 in each year
the CAS Bonds are outstanding, commencing on January 1, 1996.
Escrow All offering proceeds will be deposited into an escrow account
with U.S. Trust Company of California, N.A., the escrow agent
for the offering (the "Escrow Agent"). If the minimum of
$2,000,000 of CAS Bonds is not sold prior to termination of
the offering, all offering proceeds will be returned promptly
to subscribers by the Escrow Agent without any deduction
therefrom or interest thereon. See "Plan of Distribution."
Conversion Unless previously redeemed, the CAS Bonds will be convertible
into ILX common stock at the following rates: (i) Commencing
30 calendar days after the Initial Closing of this offering
until the 29th calendar day after the second anniversary of
the Initial Closing of this offering, at the rate of $2.50 per
share; (ii) On the 30th calendar day after the second
anniversary of the Initial Closing of this offering the
conversion price will be adjusted so that from that date until
the 29th calendar day after the fourth anniversary of the
Initial Closing of this offering, the CAS Bonds will be
convertible into ILX common stock at a price equal to (a) 75%
of the "Mark Price" of ILX's common stock, where "Mark Price"
is defined as a price equal to an average of the closing price
of ILX common stock as of the close of business each day for
the 30 calendar day period beginning 30 calendar days before
the second anniversary of the Initial Closing and ending on
and including the day before the second anniversary of the
Initial Closing, or (b) $2.50 per share, whichever is higher;
and (iii) The conversion price will again be adjusted on the
30th calendar day after the fourth anniversary of the Initial
Closing of this offering, so that from that date until
maturity, the CAS Bonds will be convertible into ILX common
stock at a price equal to (a) 75% of the "Mark Price" of ILX's
common stock, where "Mark Price" is defined as a price equal
to an average of the closing price of ILX common stock as of
the close of business each day for the 30 calendar day period
beginning 30 calendar days before the fourth anniversary of
the Initial Closing and ending on and including the day before
the fourth anniversary of the Initial Closing, or (b) $2.50
per share, whichever is higher. See "Description of ILX
Securities -- CAS Bonds -- Conversion."
Redemption ILX may redeem the CAS Bonds, in whole or in part, any time
after ILX's common stock trades at a price in excess of $4.00
per share for a period of 20 consecutive trading days. The
redemption price shall be 120% of the outstanding principal
amount of each CAS Bond, together with interest accrued to the
date fixed for redemption. ILX is not required to make any
sinking fund payments prior to maturity of the CAS Bonds. See
"Description of ILX Securities -- CAS Bonds -- Redemption" and
"Risk Factor -- Lack of Sinking Fund; Substantial Final
Payment for the CAS Bonds." However, if ILX receives proceeds
from the key person life insurance policy maintained under the
Indenture, such proceeds must be used by ILX for payment of
the principal on the CAS Bonds, or used to redeem or otherwise
acquire the CAS Bonds at the discretion of ILX's Board of
Directors.
Security The CAS Bonds are an outstanding debt obligation of ILX and,
in terms of preference, are junior to the Senior Indebtedness.
In addition, the CAS Bonds are secured by a pledge of all of
the issued and outstanding capital stock of Varsity Clubs of
America Incorporated (the "VCA Stock"). As of September 30,
1995, the aggregate amount of outstanding Senior Indebtedness
was approximately $13.9 million. See "Description of ILX
Securities -- CAS Bonds -- Secured Interest," "Risk Factors --
Adequacy of Security for CAS Bonds" and "Risk Factors -- VCA
Repayment for Development Costs."
Subordination The CAS Bonds are subordinated in right of payment to all
present and future "Senior Indebtedness" (as defined in this
Prospectus) incurred by ILX. The Indenture does not restrict
ILX or its subsidiaries from incurring additional Senior
Indebtedness. Incurrence of additional debts and/or
encumbrance of the assets of VCA or its subsidiaries may
adversely affect the value of the VCA Stock offered as
security for the CAS Bonds. See "Description of ILX Securities
-- CAS Bonds -- Senior Indebtedness," "Risk Factors --
Subordination" and "Risk Factors --No Limitation on Additional
Debt of VCA."
Use of Proceeds ILX intends to advance all of the proceeds from the sale of
the CAS Bonds to VCA primarily to finance the acquisition and
development of Varsity Clubs facilities throughout the United
States in sites located near prominent universities with
nationally recognized athletic programs. ILX will require VCA
to reimburse, from the proceeds of this offering advanced to
VCA, a portion of the development costs incurred by ILX on
behalf of VCA, which costs, as of September 30, 1995, totalled
$4.4 million. The portion of the development costs that VCA
will pay to ILX will be an amount equal to (i) $900,000 if the
minimum amount of CAS Bonds are sold pursuant to this "best
efforts" offering; (ii) $1,000,000 if more than $3,000,000 but
less than $5,000,000 of CAS Bonds are sold pursuant to this
"best efforts" offering; or (iii) $1,500,000 if the maximum
amount of CAS Bonds are sold pursuant to this "best efforts"
offering. See "Use of Proceeds," "The Company -- The Varsity
Clubs Concept" and "Risk Factors -- VCA Repayment for
Development Costs."
Trustee U.S. Trust Company of California, N.A. is the Trustee for the
CAS Bonds under the Indenture.
NASDAQ
Stock Symbol ILEX
<TABLE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data for ILX
derived from ILX's consolidated financial statements. The historical financial
data are qualified in their entirety by reference to, and should be read in
conjunction with, the financial statements and notes thereto of ILX, which are
incorporated by reference into this Prospectus.
<CAPTION>
9 Month 9 Month
Period Period
Year Ended December 31 Ended September 30 Ended September 30
- -----------------------------------------------------------------------------------------------------------------------------------
1990(1) 1991(1) 1992 1993(2) 1994 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,352,734 $6,095,859 $18,856,660 $20,459,379 $29,950,669 $22,557,272 $23,343,875
Net income (1,602,093) (307,051) 1,325,874 2,076,231 2,148,287 1,994,921 1,540,100
(loss)
Income (loss) (0.28) (.04) .12 .18 .17 .16 .12
per common
equivalent
share()
Pro-forma
income per
common
equivalent
share
(a) Assuming
$2,000,000
offering. .16 .15 .11
(b) Assuming
$5,000,000
offering. .15 .14 .10
Total Assets 5,528,943 15,026,975 15,748,315 24,906,969 28,403,404 25,274,966 36,993,861
Notes 2,550,758 5,557,229 4,865,107 5,408,898 6,882,445 4,504,579 13,060,457
Payable
Total 1,562,096 5,095,895 6,477,383 10,541,495 12,957,129 12,746,930 14,681,054
shareholders'
equity
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
1. ILX ceased consolidating the accounts of BIS-ILE on January 8, 1990, the
date BIS-ILE filed a petition for reorganization under Chapter 1 of the U.S.
Bankruptcy Code. ILX commenced consolidating the accounts of LAP, the
successor in interest to BIS-ILE, on September 11, 1991.
2. 1993 data includes the effects of the acquisition of Genesis effective
November 1, 1993.
3. Supplemental pro-forma income per common equivalent share has been presented
for the year ended December 31, 1994 and for the nine month periods ended
September 30, 1995 and September 30, 1994 to disclose the pro-forma per
share amounts as if $2,000,000 minimum principal amount and $5,000,000
maximum pricipal amount of the CAS Bonds offered herein had been outstanding
and had been converted to common stock at $2.50 per share on January 1,
1994. Although ILX will use approximately $900,000 of the net proceeds of
the offering to retire certain high interest indebtedness (see "Use of
Proceeds"), interest expense has not been reduced in such pro-forma amounts
for the periods to reflect such debt retirement nor other retirements that
could be made with the proceeds because ILX has not taken formal corporate
action to dedicate such proceeds to the retirement of such outstanding
indebtedness. Pro-forma income per common equivalent share excludes the
effect of ILX's and VCA's investment of the net proceeds.
</FN>
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of ILX at September 30, 1995,
and as adjusted to give effect to the sale of the minimum and the maximum amount
of CAS Bonds in this offering and use of the net proceeds from the sale of the
CAS Bonds. This table is qualified in its entirety by reference to, and should
be read in conjunction with, the financial statements and notes thereto of ILX,
which are incorporated by reference into this Prospectus.
September 30, As
1995 Adjusted
-------- ---------------------------
Minimum Maximum
----------- -----------
Genesis Funds Certificates $ 1,366,379 $ 1,366,379 $ 1,366,379
Notes Payable 10,621,700 10,621,700 10,621,700
Notes Payable to Affiliates 2,438,757 2,438,757 2,438,757
CAS Bonds 2,000,000 5,000,000
----------- ----------- -----------
Total Debt 14,426,836 16,426,836 19,426,836
----------- ----------- -----------
Minority Interests 2,876,855 2,876,855 2,876,855
----------- ----------- -----------
Shareholders' Equity
Preferred Stock 1,523,476 1,523,476 1,523,476
Common Stock 9,309,501 9,309,501 9,309,501
Treasury Stock (25,032) (25,032) (25,032)
Additional Paid-in Capital 30,160 30,160 30,160
Retained Earnings 3,842,949 3,842,949 3,842,949
----------- ----------- -----------
Total Shareholders' Equity 14,681,054 14,681,054 14,681,054
----------- ----------- -----------
TOTAL CAPITALIZATION $31,984,745 $33,984,745 $36,984,745
----------- ----------- -----------
(1) Adjusted to give effect to the sale of the minimum and maximum amount of CAS
Bonds in the offering.
RISK FACTORS
An investment in Convertible Adjustable Secured Bonds involves certain
risks. In addition to other information contained in or incorporated by
reference into this Prospectus, prospective purchasers carefully should consider
the following risk factors before purchasing CAS Bonds.
Development of Varsity Clubs Concept. ILX's management is aware of no
other timeshare concepts that are targeted toward VCA's identified market niche,
which is the development of high quality accommodations near prominent colleges
and universities with nationally recognized athletic programs. The hotel
industry is, however, quick to recognize and copy profitable lodging concepts.
There can be no assurance that VCA will be able to capitalize on this perceived
market niche, if and to the extent it exists, before other larger and better
financed competitors become aware of and exploit this opportunity.
New Concept; Uncertainty of Market Acceptance. ILX's management
believes that the Varsity Clubs concept is new and, as is typical in the case of
a new concept, the ultimate level of demand for and market acceptance of the
Varsity Clubs concept is uncertain. There can be no assurance that VCA will be
able to implement its business strategy or, if the strategy is implemented, that
it will be profitable. Failure of the Varsity Clubs concept could adversely
affect ILX's business and the value of ILX's securities, including the CAS
Bonds, the common stock into which the CAS Bonds are convertible and the VCA
Stock that is pledged as security for the CAS Bonds.
Allocation of Proceeds and Potential Acquisitions; Broad Management
Discretion. Not less than $667,000 of the offering proceeds will be allocated
for the acquisition, development and marketing of Varsity Clubs facilities. See
"Use of Proceeds." Investors in this offering will not be able to direct the use
of these funds (or any other offering proceeds) or have any opportunity to
review any acquisition. Investors must therefore rely on ILX's management for
directing the expenditure of the offering proceeds. Further, there can be no
assurance that any such acquisition, development or marketing will prove
successful.
VCA Repayment for Development Costs. ILX intends to advance all of the
net proceeds of this offering to VCA in the form of a capital contribution to
finance a portion of the costs associated with the acquisition and development
of Varsity Clubs facilities in strategic locations throughout the United States.
As of September 30, 1995, ILX had advanced $4.4 million to VCA to pay for VCA's
development costs. Upon making its contribution of the net proceeds of the
offering to VCA, ILX will require VCA to repay ILX an amount equal to (i)
$900,000 if the minimum amount of CAS Bonds are sold pursuant to this "best
efforts" offering; (ii) $1,000,000 if more than $3,000,000 but less than
$5,000,000 of CAS Bonds are sold pursuant to this "best efforts" offering; or
(iii) $1,500,000 if the maximum amount of CAS Bonds are sold pursuant to this
"best efforts" offering. By making the repayment, VCA will be reducing its
assets and thereby reducing the immediate value of the VCA Stock by a
commensurate amount. See "Use of Proceeds."
Subordination. The CAS Bonds are junior in right of payment to the
Senior Indebtedness. See "Description of ILX Securities -- CAS Bonds -- Senior
Indebtedness." There is no limit on the amount of Senior Indebtedness that ILX
or its subsidiaries may incur in the future, nor any limit on ILX's or its
subsidiaries' ability to grant security interests in any of its property, except
VCA's capital stock. Between January 1, and September 30, 1995, VCA incurred
debt totalling approximately $7.5 million. Of that debt, VCA borrowed
approximately $2.6 million from ILX in connection with VCA's development of the
Notre Dame facility. Approximately $3.4 million of that debt was incurred under
a loan taken to fund the construction of the Notre Dame facility and is secured
by a deed of trust on that facility and approximately $700,000 of that debt was
incurred under a loan taken to fund the development of the Tucson facility and
is secured by a purchase money deed of trust on the Tucson land.
No Limitation on Additional Debt of VCA. There is no restriction on
VCA's or its subsidiaries' ability to incur additional debt, and to secure such
debt or other obligation with a pledge, lien, mortgage or other encumbrance of
all or any portion of VCA's or its subsidiaries' assets. Incurrence of
additional debt and/or encumbrance of the assets of VCA or its subsidiaries may
adversely affect the value of the VCA Stock offered as security for the CAS
Bonds.
Security for CAS Bonds May Not be Adequate. The CAS Bonds are an
outstanding debt obligation of ILX and, in terms of preference, are junior to
the Senior Indebtedness. In addition, the CAS Bonds are secured by a first
priority lien against all of the issued and outstanding capital stock of VCA.
See "Description of ILX Securities and Pertinent Arizona Statutes -- Description
of CAS Bonds -- Secured Interest." If ILX fails to satisfy its obligations under
the CAS Bonds and it becomes necessary for the holders of the CAS Bonds ("CAS
Bondholders") to elect to foreclose their interest in the VCA Stock, there can
be no assurance that the proceeds received from such foreclosure will be
adequate to satisfy amounts due under CAS Bonds. If ILX encounters circumstances
that undermine its financial condition causing it to default on the CAS Bonds,
such a condition may likely be accompanied by circumstances that undermine VCA's
financial condition and, accordingly, the value of the VCA Stock. In addition,
the value of the VCA Stock may be reduced significantly if it is held other than
by ILX or if the then current value of the VCA Stock at the time of such
foreclosure has diminished.
Default on Senior Indebtedness Precludes Payment by the Company on CAS
Bonds. In the event of a default on any item of Senior Indebtedness, ILX is not
permitted to make payments on or in respect of the CAS Bonds. However, the
subordination (including upon the occurrence of an event of default on the
Senior Indebtedness) will not prevent the occurrence of an Event of Default
under the CAS Bonds. Further, such subordination will not interfere with the CAS
Bondholders' first priority lien against the VCA Stock or the rights of the CAS
Bondholders to receive payment as a result of the exercise of their rights as
to the VCA Stock.
Appraisal; Assumptions in Excess of Historic Performance; VCA Stock May
be Inadequate Security. Under the terms of the Trust Indenture Act, ILX sought
an appraisal of the VCA stock. Accordingly, for that purpose only, ILX engaged
The Mentor Group, an independent appraiser, unaffiliated with and previously
unknown to ILX, to prepare such an appraisal (the "Appraisal"). At The Mentor
Group's request, ILX management provided its internal financial projections of
income and cash flow and development objectives with respect to VCA facilities.
Based on ILX's internal financial projections for VCA, the appraiser then
prepared its own projections (attached to the Appraisal) of cash flows through
1999, including an estimated terminal value, all of which were discounted to
present value using a capitalization factor determined by the appraiser. The
appraiser projected growth of VCA's business based on ILX management's growth
projections to assume the addition of three VCA facilities each year, which is
substantially in excess of VCA's historic growth rate during its start-up phase.
Resulting cash flow projections also are substantially in excess of VCA's
historic performance. No assurance can be given that ILX or VCA will achieve the
results set forth in ILX's financial projections or in the Appraisal. If VCA
does not achieve the projected growth rates and resulting cash flows, VCA's
financial condition would be undermined, thereby undermining the value of the
VCA Stock securing the CAS Bonds. In addition, in preparing the financial
projections, ILX faced a potential conflict of interest: Over-statement of such
projections might benefit ILX in attracting investors, although only to the
extent investors would be convinced to rely on them, which ILX has not sought to
do. The appraised value of VCA Stock exceeds VCA's book value by more than $26
million. The description of the Appraisal is qualified in its entirety by
reference to the Appraisal and the exhibits attached thereto. See "Description
of ILX Securities and Pertinent Arizona Statutes -- Description of CAS Bonds --
Appraisal."
Lack of Sinking Fund; Substantial Final Payment for the CAS Bonds.
ILX's management anticipates that the holders of the CAS Bonds will elect to
convert their CAS Bonds into ILX common stock. Assuming, however, that the
holders of the CAS Bonds do not so elect, ILX is under no obligation to make any
sinking fund payments with respect to the CAS Bonds and the CAS Bonds are
redeemable only at ILX's option prior to their stated maturity. Thus, ILX will
be required to repay on maturity, a minimum of $2,000,000 principal amount of
the CAS Bonds up to a maximum of $5,000,000 principal amount of the CAS Bonds.
If ILX does not have sufficient funds to pay such amount at maturity, it will
have to refinance the CAS Bonds at that time. There can be no assurance that ILX
will be able to obtain such refinancing. See "Description of ILX Securities --
CAS Bonds."
No Public Market for the CAS Bonds. There is no existing market for the
CAS Bonds, nor will a public market exist upon completion of this offering. The
CAS Bonds will not qualify for listing on the NASDAQ system. ILX is under no
obligation to develop a public market for the CAS Bonds. Accordingly, purchasers
of the CAS Bonds must invest with the intent to hold the CAS Bonds for an
extended period of time. It is not expected that the CAS Bonds will be assigned
a rating by any of the nationally recognized statistical rating agencies. The
absence of such a rating may also limit any potential market for the CAS Bonds.
Purchase of CAS Bonds by Related Parties to Satisfy Minimum
Requirements. ILX's officers, directors, employees and principal stockholders,
including but not limited to Joseph P. Martori (as a trustee for the Cynthia J.
Polich Irrevocable Trust), Edward J. Martori and Martori Enterprises
Incorporated, may purchase up to $850,000 aggregate principal amount of CAS
Bonds in the offering. All such purchases may by used to satisfy the $2,000,000
minimum requirement. See "Plan of Distribution."
Uncertainty as to Trading Price. Even if a market for the CAS Bonds is
established, there can be no assurance as to the prices at which the CAS Bonds
will trade. To the extent there is any market for the CAS Bonds, whether the CAS
Bonds will be traded at prices that are higher or lower than their initial sale
price will depend on many factors including, among other things, prevailing
interest rates in the market for similar securities and the underlying value of
the ILX common stock. The holders of the CAS Bonds will bear the risk that an
increase in market interest rates or a decrease in the value of ILX common stock
may adversely affect the prices at which the CAS Bonds will trade, if they trade
at all.
Nature of Business; Business Plan. Resort development and sales to
owner-users, whether through condominium creation or interval ownership,
including timesharing or vacation club membership, present certain financial and
operational risks that should be considered by each prospective purchaser. These
risks include, but are not limited to, the following:
Unfavorable Publicity; Remarketing Difficulty. The timeshare
or interval ownership industry has been the subject of unfavorable
publicity, particularly with respect to difficulties faced by
purchasers in remarketing their timeshare interests. Negative publicity
might reduce sales and adversely affect the value of the CAS Bonds and
ILX's common stock into which the CAS Bonds are convertible.
Marketing Expenses High Compared to Sales Prices. The cost of
marketing timeshare interests is a high percentage of the selling price
of the timeshare interests. Although ILX has set the sales prices of
timeshare interests at levels that are believed to be sufficiently high
to cover such costs, there can be no assurance that the timeshare
interests of the projects currently involved or other timeshare
interests of any other given project will continue to be saleable at
such prices. Higher costs could reduce or eliminate profit margins.
Buyer Defaults. Generally, buyers of vacation ownership
interests present a greater risk of default than home mortgagors, even
if they meet credit qualification standards. Private mortgage insurance
or its equivalent is not readily available to cover defaults with
respect to buyers' purchases of vacation ownership interests. If a
buyer defaults, the costs ILX expended to make the associated sale are
not recoverable and such costs must be incurred again after the
timeshare interest has been returned to ILX's inventory for resale.
Lack of Diverse Locations. The attractiveness of interval
ownership in resorts may be enhanced by the availability of exchange
networks allowing owners to "trade" the time they have purchased for
time at another resort. Several companies, including Resort
Condominiums International ("RCI") and Interval International ("II"),
provide broad-based exchange networks. ILX has qualified its Los
Abrigados Resort & Spa, Golden Eagle Resort, Kohl's Ranch Lodge and
Ventura Resort properties for participation in the RCI network, and has
qualified Varsity Clubs of America -- South Bend Chapter, Varsity Clubs
of America -- Tucson Chapter, and Costa Vida Vallarta Resort for
participation in the II network. Neither ILX's ability to qualify
additional properties nor the continued availability of such exchange
networks, however, can be assured. If ILX is unable to respond to
consumer demand for greater choices of locations, it may be at a
competitive disadvantage with companies that can offer such choices.
Potential Competition. Resort development and operation,
including condominiums and timesharing, is a highly competitive
industry. ILX anticipates that it will continue to face keen
competition in all aspects of its operations from organizations that
are larger, better financed and more experienced, such as the Walt
Disney Company, Hilton Hotels Corporation, Hyatt Hotels Corporation and
Marriott International Corporation. There can be no assurance that ILX
will be able to compete successfully with such companies.
Regulation. ILX's timeshare sales are subject to state
regulation by the states in which properties are located and states in which
timeshare interests are marketed or sold. ILX and its subsidiary companies
presently market and sell timeshare interests in Arizona, Colorado, Florida,
Illinois, Indiana, Iowa, Nevada and Pennsylvania. ILX anticipates that ILX and
its subsidiaries will apply for the right to conduct additional sales operations
in those states and in various other states throughout the United States. There
can be no assurance that each or any such state will grant, or continue to
grant, ILX the right to sell its timeshare interests in such states or that, if
such right to conduct sales operations is granted, it will be granted on terms
and conditions acceptable to ILX. Further, if agents or employees of ILX violate
such regulations or licensing requirements, such acts or ommissions might cause
the revocation or non-renewal of such licenses required for the sale by ILX and
its subsidiary companies of timeshare interests in such states. Under certain
conditions, timeshare interests may be considered "securities" under state or
federal law, with consequent time-consuming and expensive requirements for
registration of such interests, licensing of salespeople and compliance with
other regulations. There is no assurance that ILX's interval ownership plans can
be designed definitely to avoid regulation as "securities" under federal law or
the state law in the states where ILX desires to or does conduct sales or in
which its properties are located. If ILX's timeshare interests are deemed to be
securities, there can be no assurance that ILX will be able to comply with the
applicable state and federal securities requirements and if ILX's timeshare
interests are deemed to be securities, such a determination may create
liabilities or contigencies that may impact ILX's ability to perform its
obligations under the CAS Bonds.
Failure to Achieve Business Plan. Although ILX intends to expand its
marketing of timeshare interests and open additional sales offices, no assurance
can be given that ILX will be able to achieve these objectives or that, if these
objectives are achieved, ILX will be profitable.
Potential Lack of Development Financing. ILX's ability to expand its
business to new resort projects, including the development of additional Varsity
Clubs facilities, will in large part depend upon the availability of financing
for the acquisition and development of such projects. The proceeds of this
offering will be sufficient to cover only a small portion of the anticipated
costs of VCA's facility development plans. There can be no assurance that
adequate additional financing will continue to be available or that, if it is
available, it will be available on terms and conditions favorable to ILX.
Possibility of Downturn in General Economic Conditions. Any substantial
downturn in economic conditions or any significant increase in the cost of fuel
or transportation in general could significantly depress discretionary consumer
spending and, therefore, have a material adverse effect on ILX's sales of
vacation timeshare interests, including sales of timeshare interests in Varsity
Clubs facilities. In addition, the future unavailability of attractive financing
rates and favorable tax treatments (e.g. deductibility of interest payments for
"second homes," including interval ownership weeks) could adversely affect ILX's
business.
Potential Lack of Consumer Receivable Financing. A substantial majority
of ILX's timeshare sales are made on an installment basis. At such time as a
sale is made, ILX is required to pay commissions and other costs that exceed
ILX's cash-up-front receipts. Written arrangements presently exist for both the
sale and financing of consumer receivables created by such installment sales.
The financing is on a recourse basis and thus requires ILX to bear the risk of
consumer default. ILX's ability to sell interval ownership weeks will depend
upon the continued availability of consumer receivable financing. There can be
no assurance that such financing will continue to be available or that, if it is
available, it will be available on terms and conditions favorable to ILX. If
such financing becomes unavailable upon expiration of existing written
arrangements, ILX will have to rely upon other methods that could severely limit
ILX's ability to fund future operations.
Dividends. ILX has paid no cash dividends on its common or any series
of preferred stock and it does not contemplate paying cash dividends in the
foreseeable future. It is the present intention of ILX's management to retain
future earnings, if any, for use in ILX's business. Failure to pay dividends on
the Series C Stock will entitle the holders thereof to receive additional ILX
common stock upon conversion and the increased liquidation preference
attributable to the Cumulation Shares (see "Description of ILX Securities and
Pertinent Arizona Statutes -- Description of Series C Stock"); however,
dividends on the Series C Stock are not otherwise cumulative. Further, dividends
cannot be paid on Series C Stock unless mandatory sinking fund requirements are
met and dividends are paid with respect to ILX's Series A Stock. The Series B
Stock pays no dividends.
Arizona Anti-takeover Provisions. ILX does not have any provisions in
its Articles of Incorporation or Bylaws that directly prohibit the takeover or
change in control of ILX. However, Sections 10-1201 et seq. of the Arizona
Revised Statutes, as amended, restrict a security holder or acquiror from
affecting changes in control of corporations such as ILX or from exercising
voting rights without shareholder approval when shareholdings exceed certain
thresholds. See "Description of ILX Securities and Pertinent Arizona Statutes --
Anti-takeover Legislation and Anti-takeover Devices." Such statutory
restrictions may adversely hamper future transactions involving a change in
control or potential change in control of ILX or transactions with persons with
shareholdings over specified percentages, thereby depressing the price of ILX
common stock or the price of other ILX securities, including the CAS Bonds.
Further, such restrictions may adversely affect the ability of one or more
holders of ILX securities, including the CAS Bonds, to effect a change in
control of ILX.
Reliance on Key Personnel. ILX relies upon certain key management
employees, including its Chairman, Chief Executive Officer and President, Joseph
P. Martori, and the loss of any such individual could adversely affect ILX. ILX
believes that its future success will depend upon its ability to attract and
retain key personnel. There can be no assurance that ILX will be able to retain
key members of its current management team or that it will be able to attract
experienced personnel in the future. ILX currently does not have employment
agreements with such personnel. Pursuant to the Indenture and in order to reduce
the potential adverse affects on the value of the CAS Bonds in the event of the
death of Joseph P. Martori, ILX has purchased key man life insurance in the
amount of $5,000,000 on Joseph P. Martori for the benefit of the holders of the
CAS Bonds. See "Description of ILX Securities and Pertinent Arizona Statutes --
Description of CAS Bonds -- General."
Voting Control by Existing ILX Shareholders. ILX is required by Arizona
law to elect directors utilizing cumulative voting. By exercising his or her
right to vote cumulatively, a common shareholder would be able to elect a
percentage of directors corresponding to the percentage of the ILX common stock
held by such shareholder assuming the existence of a sufficient number of
directorships. ILX's Bylaws authorize a Board of no less than one nor more than
15 directors. ILX currently has eight directorships (seven of which are filled
and one of which is vacant). Consequently, a purchaser must hold 11.11% plus one
share of the ILX common stock to be able independently to elect a director.
Martori Enterprises Incorporated, an Arizona corporation ("MEI"), Joseph P.
Martori and Edward J. Martori, collectively, own or have the power to vote
approximately 49.3% of the outstanding ILX common stock, and thereby have the
power to elect at least 4 members of the 8 member Board of Directors and to
influence substantially ILX's business and affairs. If the interests of MEI,
Joseph P. Martori and Edward J. Martori, as shareholders, differ from the
interests of the holders of the CAS Bonds, the holders of the CAS Bonds may be
adversely affected by such control. Joseph P. Martori and Edward J. Martori also
are directors of ILX and Joseph P. Martori is Chairman of the Board, President
and Chief Executive Officer of ILX. Joseph P. Martori and Edward J. Martori also
are controlling shareholders of MEI. Accordingly, MEI, Joseph P. Martori and
Edward J. Martori are able to exert substantial influence over and in most cases
control essentially all of ILX's and VCA's business and affairs. In addition,
MEI, Edward J. Martori and Joseph P. Martori (as a trustee for the Cynthia J.
Polich Irrevocable Trust) may purchase up to $850,000 aggregate principal amount
of CAS Bonds in the offering, which CAS Bonds would be convertible (at a
conversion price of $2.50 per share of common stock) into 340,000 shares of ILX
common stock. (See "Plan of Distribution.") If MEI, Edward J. Martori and Joseph
P. Martori (as a trustee for the Cynthia J. Polich Irrevocable Trust) purchase
CAS Bonds in the offering, they may (depending on the total amount of CAS Bonds
purchased by such parties) be deemed to beneficially own more than fifty percent
(50%) of the outstanding ILX common stock and accordingly, may be required to
comply with the provisions of applicable Arizona anti-takeover legislation. See
"Arizona Anti-takeover Legistation and Anti-takeover Devices." ILX's management
believes that Alan R. Mishkin owns an amount of ILX's common stock sufficient to
elect at least one member of the Board of Directors.
Effect of Shares Eligible for Future Sale on Market Price of ILX
Securities. Certain ILX shareholders hold commercially significant amounts of
ILX common stock. Such stock is (i) freely tradeable, (ii) may become available
for resale in the open market pursuant to Rule 144 promulgated under the
Securities Act, or (iii) may become freely tradeable pursuant to a registration
of such shares. The sale of commercially significant amounts of ILX common stock
subsequent to this offering could adversely affect the prevailing market price
of the CAS Bonds, if any, and the ILX common stock into which the CAS Bonds are
convertible. Such sales also could impair ILX's ability to raise additional
capital through the sale of its securities. ILX filed a Form S-3 Registration
Statement on May 9, 1994 (supplemented on August 19, 1994), in order to register
on a "continuous basis" the stock of certain ILX shareholders. A total of
7,838,462 shares of ILX common stock were registered pursuant to the Form S-3
Registration Statement. Of these registered shares, ILX's management believes
that the selling shareholders are entitled, pursuant to the terms of the Form
S-3 Registration Statement, to sell publicly only 1,682,787 shares of ILX common
stock under the registration effected on that Form S-3 Registration Statement,
at least 700,000 shares of which have, to the best of ILX's management's
knowledge, already been sold by certain selling shareholders. ILX's management
believes that a sale of additional shares pursuant to such S-3 Registration
Statement would require an amendment to such S-3 Registration Statement.
THE COMPANY
General.
ILX is an Arizona corporation formed in October, 1986 for the purpose
of developing, operating, financing and marketing interval ownership interests,
often referred to as "timeshare" interests, in resort properties and engaging in
other leisure-oriented business activities. ILX's principal executive offices
are located at 2777 East Camelback Road, Phoenix, Arizona 85016, telephone
number (602) 957-2777.
ILX sells timeshare interests in resorts located in Arizona, Colorado,
Florida, Indiana and Mexico. Generally, ILX either owns an interest in the
resort itself, or it owns a designated number of timeshare interests in a resort
and has a corresponding right to sell those timeshare interests to third
parties. See "Risk Factors -- Nature of Business; Business Plan."
ILX owns an interest in the following resorts: Los Abrigados Resort &
Spa in Sedona, Arizona, Golden Eagle Resort in Estes Park, Colorado, Kohl's
Ranch Lodge in Gila County, Arizona, and Varsity Clubs of America -- South Bend
Chapter in Mishawaka, Indiana.
================================================================================
RESORT OWNERSHIP INTEREST
- --------------------------------------------------------------------------------
1. Los Abrigados Resort & Spa 78.5% Fee Simple
through Subsidiary*
- --------------------------------------------------------------------------------
2. Golden Eagle Resort 100% Fee Simple
- --------------------------------------------------------------------------------
3. Kohl's Ranch Lodge 100% Fee Simple
- --------------------------------------------------------------------------------
4. Varsity Clubs of America -- South 100% Fee Simple
Bend Chapter through Subsidiary
================================================================================
*The Los Abrigados Resort & Spa is owned by Los Abrigados
Limited Partnership ("LAP"). ILE Sedona Incorporated, a wholly
owned subsidiary of ILX, is the managing general partner of
LAP and owns 78.5% thereof.
The properties owned by ILX or its subsidiaries are operated as hotels to the
extent of unused or unsold timeshare inventory.
In addition, ILX owns a designated number of timeshare interests in the
following resorts and has a right to sell those timeshare interests to third
party purchasers: Ventura Resort in Boca Raton, Florida and Costa Vida Vallarta
Resort in Puerto Vallarta, Mexico.
================================================================================
RESORT LOCATION
- --------------------------------------------------------------------------------
1. Ventura Resort Boca Raton, Florida
- --------------------------------------------------------------------------------
2. Costa Vida Vallarta Resort Puerto Vallarta,
Mexico
================================================================================
Except for the Costa Vida Vallarta Resort, described below, timeshare
purchasers acquire deed and title to an undivided fractional interest in a unit
or type of unit, which entitles the purchaser to use a unit at the selected
resort and to use the resort's common areas during a designated time period. On
occasion, ILX reacquires a timeshare interest through a variety of circumstances
including, but not limited to, customers' defaults on their obligation to pay
for their timeshare interests. In those instances, the reacquired timeshare
interests are restored to ILX's inventory for resale.
Each of the above referenced resorts is affiliated with a
not-for-profit organization, the members of which are the purchasers of
timeshare interests in each such resort. These not-for-profit organizations have
certain recorded governing documents that contain restrictions concerning the
use of the resort property.
With respect to those resort properties owned by ILX or its
subsidiaries (Los Abrigados Resort & Spa; Golden Eagle Resort; Kohl's Ranch
Lodge; and Varsity Clubs of America -- South Bend Chapter), a portion of the
price paid to ILX by a purchaser of a timeshare interest in those resorts must
be paid by ILX to the holder(s) of the underlying mortgage(s) on the property in
order to release such timeshare interest from the lender's underlying
encumbrance. This "release fee" ensures that the timeshare purchaser can acquire
clear title to his or her timeshare interest.
ILX began marketing timeshare interests in the Ventura Resort in Boca
Raton, Florida in 1987. The Ventura Resort is located across from Boca Beach in
Boca Raton, Florida. ILX is authorized by the states of Arizona and Florida to
sell timeshare interests in Ventura Resort in those states. ILX had
approximately 20 weeks available for sale at September 30, 1995.
In 1986, ILX purchased, and in 1987 began operations at, the Golden
Eagle Resort, which is located in the town of Estes Park, Colorado, within three
miles of the Rocky Mountain National Park. The Golden Eagle Resort, including a
four-story wood-frame main lodge, is situated on approximately 4 acres of land
and is bounded generally by undeveloped forested mountainside land. The lodge
property contains 27 guest rooms, a restaurant, bar, library and outdoor
swimming pool, as well as two other free standing buildings containing 6 guest
rooms and support facilities. Space is available to construct additional suites
in the lodge and adjacent buildings. ILX also owns a residence in a duplex
adjacent to the property.
Marketing of timeshare interests in the Golden Eagle Resort began in
1987. ILX plans to offer a minimum of 1,785 timeshare weeks in the Golden Eagle
Resort. Arizona, Colorado and Indiana have authorized ILX to sell timeshare
interests in Golden Eagle Resort in those states. ILX had approximately 550
weeks available for sale in completed suites at September 30, 1995. The Golden
Eagle Resort is, as of September 30, 1995, encumbered by (i) a note and deed of
trust in the amount of $1,649,990, which is payable in monthly installments of
interest at the rate of 12% per annum and annual installments of principal in
the amount of $100,000, and matures in December, 1998, and (ii) a second deed of
trust securing repurchase obligations relating to borrowings against consumer
notes receivable in the principal amount of $861,335 and sales of consumer notes
receivable sold with recourse in the approximate amount of $940,000 at September
30, 1995.
In September, 1988 ILX acquired an ownership interest in the Los
Abrigados Resort & Spa in Sedona, Arizona through BIS-ILE Associates
("BIS-ILE"), a partnership that was formed to acquire and market the property
and in which ILX held an interest as a general partner. See "The Company --
Other Wholly Owned Subsidiaries -- ILE Sedona Incorporated." The Los Abrigados
Resort & Spa is located on the northwest bank of Oak Creek in Sedona, Arizona,
approximately 110 miles northwest of Phoenix. The resort consists of a main
building, which houses the lobby and registration area, executive offices,
meeting space, a health spa and athletic club, food and beverage facilities and
support areas. The hotel contains 174 suites in 22 one and two story
free-standing structures. In addition, a two bedroom historic homesite that has
been renovated to include a spa and other luxury features is also on the
property and has been marketed by ILX. The resort has an outdoor swimming pool,
tennis courts and other recreational amenities and is situated on approximately
19 acres of land.
Marketing of timeshare interests in the Los Abrigados Resort & Spa
began in February, 1989. ILX, directly and through its wholly owned subsidiary,
ILE Sedona Incorporated, has served as managing general partner of BIS-ILE and
its successor, Los Abrigados Partners Limited Partnership, an Arizona limited
partnership ("LAP"), since inception. A total of 9,100 timeshare weeks may be
sold in Los Abrigados Resort & Spa. Arizona, Colorado, Indiana, Iowa and Nevada
have authorized ILX to sell timeshare interests in Los Abrigados Resort & Spa in
those states. At September 30, 1995, ILX had approximately 3,597 weeks available
for sale, and options to purchase 457 weeks had been extended to potential
buyers. Also, Genesis Investment Group, Inc., a wholly owned subsidiary of ILX,
holds an option to purchase 517 additional timeshare weeks in the Sedona
Vacation Club at Los Abrigados Resort & Spa, which timeshare weeks will be made
available for sale upon exercise of the option. See "The Company -- Other Wholly
Owned Subsidiaries -- Genesis Investment Group, Inc." The Los Abrigados Resort &
Spa is, as of September 30, 1995, encumbered by (i) a deed of trust, securing a
note in the amount of $1,045,000, which is payable in monthly installments of
$80,000 principal and interest at the rate of prime plus 1.25% and matures in
September, 1996, and (ii) two subordinate deeds of trust of equal priority
securing repurchase obligations relating to borrowings against consumer notes
receivable in the principal amount of $289,142 and sales of consumer notes
receivable with recourse in the amount of approximately $17 million.
The Costa Vida Vallarta Resort is a beach front resort located in
Puerto Vallarta, Mexico. During 1993 and 1994, ILX acquired timeshare weeks in
the resort that provide a right to occupy a specific week and unit in the resort
and to use the common areas of the resort (during the week of occupancy) through
and including the year 2009. Arizona, Colorado and Indiana have authorized ILX
to sell timeshare interests in the Costa Vida Vallarta Resort in those states.
ILX had approximately 50 timeshare interests available for sale as of September
30, 1995.
On June 1, 1995, ILX acquired ownership of Kohl's Ranch Lodge ("Kohl's
Ranch"). Kohl's Ranch is a 10.5 acre property located 17 miles northeast of
Payson, Arizona. It is bordered on the eastern side by Tonto Creek and is
surrounded by Tonto National Forest. The main lodge of Kohl's Ranch contains 41
guest rooms and a variety of common area amenities. Kohl's Ranch also includes
eight 1- and 2-bedroom cabins along Tonto Creek, a triplex cabin with two
1-bedroom units and one efficiency unit, and a free standing building that
contains sales offices and food and beverage facilities.
On June 14, 1995, the Arizona Department of Real Estate approved ILX's
application to sell timeshare interests in Kohl's Ranch. Timeshare sales
commenced in July, 1995. As of September 30, 1995, ILX had approximately 2,657
timeshare weeks available for sale. In addition to the sale of timeshare
interests, ILX intends to continue operating Kohl's Ranch as a lodge-hotel. ILX
has begun refurbishing Kohl's Ranch and intends to maintain its authentic ranch
atmosphere and decor. ILX anticipates commencing construction of six new duplex
cabins on the property in the spring of 1996, thus adding twelve 2- bedroom
cabins, for a total of 64 units and 3,328 timeshare weeks available for sale.
Kohl's Ranch is, as of September 30, 1995, encumbered by (i) a first position
note and deed of trust in the amount of $920,250, which is payable in monthly
installments of $3,000 principal plus accrued interest through December 1995. On
December 1, 1995, the then remaining principal balance will be amortized over a
thirty-six month period, payable in equal installments of principal and interest
through December 1998, and (ii) a second position note and mortgage in the
amount of $367,750, which is payable, commencing June 1, 1996, in monthly
installments of $7,500 principal plus interest at the rate of 8% per annum, and
matures on June 1, 2000.
ILX's interval ownership plans compete both with other interval
ownership plans as well as hotels, motels, condominium developments and second
homes. ILX considers its competitive environment to include not only the areas
near its properties but also other vacation destination alternatives. ILX's
competitive posture is based on the distinction of its products, the
desirability of the locations of its properties, the quality of the amenities
ancillary to the timeshare weeks, the value received for the price and the
availability of a variety of destination locations. ILX employs approximately
450 people. ILX plans to continue exploring options for the development and
marketing of new resort facilities.
ILX will comply with the requirements of Rules 13e-4 and 14e-1 under
the Securities Exchange Act of 1934 and any other applicable securities laws in
connection with such provisions and any related offers by ILX.
The Varsity Clubs Concept
In 1988, ILX formed VCA to participate in a joint venture with a wholly
owned subsidiary of Coachman Incorporated, a publicly traded corporation. In
March, 1992 VCA acquired all of Coachman Incorporated's subsidiary's interest in
the Varsity Clubs joint venture, giving VCA 100% ownership of the venture.
VCA was formed to capitalize on a perceived niche market: the potential
demand for high quality accommodations near prominent colleges and universities
with nationally recognized athletic programs. Large universities host a variety
of sporting, recreational, academic and cultural events that create a
substantial and relatively constant influx of participants, attendees and
spectators. The Varsity Clubs concept is a lodging alternative targeted to
appeal to university alumni, basketball or football season ticketholders,
parents of university students and corporate sponsors of university functions,
among others. The Varsity Clubs concept is designed to address the specific
needs of these individuals and entities by creating specialty timeshare hotels
that have a flexible ownership structure, enabling the purchase of anything from
a single day (such as the first home football game) to an entire football
season. Each Varsity Clubs facility will operate as a hotel to the extent of
unsold or unused timeshare inventory. See "Risk Factors -- Development of
Varsity Clubs Concept" and "Risk Factors -- New Concept; Uncertainty of Market
Acceptance."
The prototype Varsity Clubs facility is an all-suite, 62 unit lodging
facility that features amenities such as The Stadium (a sports-theme atrium
lounge), a private Member's Lounge, exercise facilities, a swimming pool and
whirlpool spa, complete business services and other facilities popular with the
target market of likely purchasers. The prototype Varsity Clubs facility is
expandable to approximately 90 units, without the need to acquire additional
real property, and can be built in smaller configurations if warranted by a
particular market.
The first Varsity Clubs facility was completed in August, 1995 and is
located in Mishawaka, Indiana, approximately 2.8 miles from the University of
Notre Dame. The Indiana facility is owned, to the full extent of unsold
timeshare interests, by VCA South Bend Incorporated, a wholly owned subsidiary
of VCA. VCA South Bend Incorporated is affiliated with Varsity Clubs of America
- -- South Bend Chapter, a not-for-profit corporation whose members are the
purchasers of timeshare interests in the Indiana facility. Indiana, Arizona,
Illinois, Florida and Pennsylvania have authorized VCA South Bend Incorporated
to sell timeshare interests in the Indiana facility in those states. The Indiana
Varsity Clubs facility is, as of September 30, 1995, encumbered by a first
position mortgage and note in the amount of $3,824,643 the principal of which is
payable through release fees and interest is payable monthly at the rate of 13%.
The note matures in November 1998. The property is further encumbered by sales
of consumer notes receivable with recourse in the amount of approximately $1.3
million at September 30, 1995. This encumbrance was repaid in September 1995
through proceeds from the sale of consumer notes receivable, which also are
secured by the property.
The site for the second Varsity Clubs facility was acquired in July,
1995 and is located in Tucson, Arizona, approximately 2.3 miles from the
University of Arizona. The Arizona property is owned by VCA Tucson Incorporated,
a wholly owned subsidiary of VCA. Construction of the Arizona facility is
expected to commence in the fall of 1995. In July, 1995, VCA Tucson Incorporated
received a written commitment for construction financing for the Arizona
facility in the amount of $6 million, which is expected to be sufficient to
build and furnish the property. In addition, the commitment includes up to $20
million in financing for eligible notes received from the sale of timeshare
interests in the Arizona facility.
VCA initially has targeted a total of 15 sites for development of
Varsity Clubs facilities in the next five years, including the Varsity Clubs
facility in Indiana and the proposed facility in Tucson, Arizona. As of the date
of this offering, VCA or its wholly owned subsidiaries have obtained options to
acquire properties located in Auburn, Alabama (Auburn University); Iowa City,
Iowa (University of Iowa); Norman, Oklahoma (Oklahoma University); and State
College, Pennsylvania (Penn State University). Due to the existence of larger
and better financed competitors in the lodging industry, ILX's management
believes that VCA's ability to capitalize on this perceived market niche
depends, in part, on the successful implementation of a reasonably aggressive
development strategy. Accordingly, a minimum of approximately $667,000 and a
maximum of approximately $2,737,000 of the proceeds of this offering will be
used to finance a small portion of the expansion costs associated with the
acquisition and development of Varsity Clubs facilities in strategic locations
throughout the United States. See "Use of Proceeds."
As of September 30, 1995, VCA had incurred development expenses of
approximately $10.4 million, 4.4 million of which have been advanced by ILX.
Such expenses include costs associated with the research and development of the
Varsity Clubs concept, the design and creation of the prototype Varsity Clubs
facility, the development of advertising and marketing materials, the
acquisition of real property in Mishawaka, Indiana and Tucson, Arizona, the
construction of the Varsity Clubs facility in Indiana, and the acquisition of
options to acquire real property in Auburn, Alabama; Iowa City, Iowa; Norman,
Oklahoma; and State College, Pennsylvania. A substantial portion of the proceeds
of this offering will be used to reimburse all or a portion of the development
costs incurred by ILX on behalf of VCA. See "Use of Proceeds."
Other Wholly Owned Subsidiaries of ILX
ILE Sedona Incorporated. In September, 1988, ILX acquired, through its
wholly owned subsidiary, ILE Sedona Incorporated ("ILES"), a 40% interest in
BIS-ILE, the owner in fee simple of the Los Abrigados Resort & Spa. During 1989,
ILX acquired additional interests that increased its ownership in BIS-ILE. On
January 8, 1990, BIS-ILE filed a petition for relief with the United States
Bankruptcy Court for the District of Arizona, under Chapter 11 of the Bankruptcy
Code. At that time, ILX owned 55.875% of BIS-ILE. Sales of vacation ownership
interests in Los Abrigados Resort & Spa had ceased on January 8, 1990, pending
completion of the Chapter 11 filing. During 1990, while BIS-ILE prepared its
plan of reorganization, and in anticipation of that plan, ILX increased its
interest in BIS-ILE to 89.999%. On August 26, 1991, the Bankruptcy Court
approved BIS-ILE's amended plan of reorganization and sales of vacation
ownership interests in Los Abrigados Resort & Spa resumed on September 20, 1991,
following the successful reorganization. On September 10, 1991, Los Abrigados
Partners Limited Partnership, an Arizona limited partnership ("LAP") became the
successor in interest to BIS-ILE. ILX, directly and through ILES, owns a total
of 78.5% of LAP, which now owns the Los Abrigados Resort & Spa. LAP's other
partners are Alan Mishkin (11.5%) and MEI (10%). ILES serves as LAP's managing
general partner. LAP has contracted with ILX to manage the resort and to market
fee simple interval ownership interests in the resort through the sale of
membership interests in the Sedona Vacation Club. The management contract
between ILX and LAP will terminate in September, 1996, unless otherwise renewed
pursuant to the terms of the contract or unless sooner terminated by 90% of the
owners of timeshare interests in the Sedona Vacation Club. It is the opinion of
ILX's management that the management contract will be renewed on equal or more
favorable terms to ILX.
Red Rock Collection Incorporated. Red Rock Collection Incorporated, an
Arizona corporation ("Red Rock Collection"), has, since July, 1994, been engaged
in the manufacture and distribution of personal care products. The complete
product line consists of spa and salon formulated products for face, body, bath
and hair care. The Red Rock Collection corporate headquarters are located at
3840 North 16th Street, Phoenix, Arizona. This 8400 square foot building is
owned by Red Rock Collection and houses the executive offices, customer service,
accounting, warehouse and shipping operations.
Currently, Red Rock Collection products primarily are marketed through
resort properties owned and operated by ILX. This resort-based sales program
includes an upscale amenities line, an in-room gift basket promotion and retail
product sales at ILX resort venues. Based upon Red Rock Collection's initial
success with this method, it has begun promoting the sales program to other
hoteliers and resort properties. Red Rock Collection intends to distribute and
market its products through salons, retail stores and spas. This distribution
system will target well trafficked locations that have stylists, aestheticians
and salespeople capable of promoting the Red Rock Collection product line.
Red Rock Collection products are also used by ILX and its subsidiaries
as tour promotion incentives. The products are given as gifts to individuals who
attend timeshare tours and presentations.
On February 2, 1993, ILX acquired, through a stock subscription
offering, 71.4% of the issued and outstanding common stock of Red Rock
Collection. ILX agreed to contribute (at prices mutually acceptable to ILX and
Red Rock Collection) $700,000 in goods and services at Los Abrigados Resort &
Spa in exchange for its Red Rock Collection stock. Effective February 11, 1994,
ILX acquired the remaining 28.6% of Red Rock Collection's issued and outstanding
common stock from Alan R. & Carol Mishkin and from MEI. In exchange for the Red
Rock Collection stock, ILX issued to the Mishkins and MEI each 61,500 shares of
restricted ILX common stock and each a promissory note in the principal amount
of $150,000, requiring the payment of 10% interest annually and due and payable
in 36 equal monthly installments of $4,840.08 commencing March 11, 1994 and
ending with a final payment on February 11, 1997.
Genesis Investment Group, Inc. Genesis Investment Group, Inc. is an
Arizona corporation, ("Genesis") and, as of November 1, 1993, a wholly owned
subsidiary of ILX. Genesis' business is the holding and liquidating of ownership
interests in real estate (both fee and liens), most of which is unimproved, and
the developing and selling of timeshare interests. In August, 1995, Syracuse
Project Incorporated, a wholly owned subsidiary of Genesis, became the general
partner of Orangemen Club Limited Partnership, a New York limited partnership.
The partnership will acquire three floors of a hotel from Hotel Syracuse, Inc.
The hotel is located within 2 miles of Syracuse University. The purpose of the
partnership is to renovate and sell timeshare interests in the portion of the
hotel owned by the partnership. The Genesis subsidiary owns an 80% interest in
the partnership.
ILX acquired Genesis through the merger of Genesis into ILX's wholly
owned subsidiary, ILE Acquisition Corporation, an Arizona corporation ("ILEAC"),
that was effective on November 1, 1993 (the "Merger"). Pursuant to the Merger,
holders of Genesis common stock received the right to receive five shares of ILX
common stock and three shares of Series C Stock for every ten shares of Genesis
common stock. (At the time of the Merger, the Genesis shareholders were entitled
to receive a maximum of 305,964 shares of the Series C Stock and 509,940 shares
of ILX common stock.) Since the Merger, Genesis has continued to liquidate its
real estate holdings and has acquired an option to purchase 667 timeshare
intervals in the Sedona Vacation Club at Los Abrigados Resort & Spa. Pursuant to
such option, Genesis acquired for resale 50 timeshare weeks in the Sedona
Vacation Club at Los Abrigados Resort & Spa, and Genesis has engaged LAP to
market these timeshare interests.
Prior shareholders of Genesis, who held Genesis stock immediately
preceding the Merger (the "Genesis Shareholders") also received certain rights
(the "Recovery Rights") in certain proceeds of certain lawsuits (the "Lawsuits")
that had been filed by Genesis and two Genesis affiliates, (collectively, the
"Plaintiffs") prior to the Merger. The Lawsuits were filed to recover real
estate from four partnerships that had claimed that their interests in the real
estate were superior to the Plaintiffs' various interests in that real estate.
Genesis agreed that, following the Merger, it would act as agent for the Genesis
Shareholders solely to (i) pursue the Lawsuits in its reasonable discretion, and
(ii) collect and distribute the proceeds of the Recovery Rights, if any, to the
Genesis Shareholders.
Golden Eagle Resort, Inc. Golden Eagle Resort, Inc. was formed in 1987
to serve as the management company for the Golden Eagle Resort in Estes Park,
Colorado. The management contract between ILX and Golden Eagle Resort, Inc.
could terminate on May 31, 1997, unless otherwise renewed pursuant to the terms
of the contract or unless sooner terminated by 90% of the owners of timeshare
interests in the Golden Eagle Resort. It is the opinion of ILX's management that
the management contract will be renewed.
ILE Florida, Inc. ILE Florida, Inc. was formed in 1987 for the purpose
of holding 100% of the issued and outstanding stock of Southern Vacations, Inc.
Southern Vacations, Inc. owns timeshare interests in the Ventura Resort in Boca
Raton, Florida. At the present time, all timeshare interests in the Ventura
Resort are being marketed and sold by ILX in Arizona.
In addition to the above mentioned wholly owned subsidiaries, ILX also
owns three corporations, SHI Health Institute Incorporated, Golden Eagle Realty,
Inc., and Red Rock Worldwide Incorporated, none of which has any assets or
liabilities or is conducting any business at the present time.
Consulting Arrangements
Effective June, 1995, ILX entered into Consulting Agreements with
Investor Resource Services, Inc., a Florida corporation ("IRC"), and Universal
Solutions, Inc., a Colorado corporation ("Universal"), pursuant to which IRC and
Universal agreed to provide certain investor relations, broker relations and
public relations services. Concurrently, IRC and Universal entered into
Consulting Agreements with Martori Enterprises Incorporated ("MEI") under which
MEI, as the largest shareholder of ILX, agreed to make certain payments to IRC
and Universal for their services. Under the terms of the Agreements, each of IRC
and Universal receive from ILX a total of 50,000 shares of ILX common stock,
plus options to purchase an additional 200,000 shares of ILX common stock at
$1.25 per share and 50,000 shares at $1.625 per share. ILX has agreed that the
common stock received from ILX (including pursuant to the exercise of an option)
may be registered pursuant to the terms of the Consulting Agreements.
Additionally, MEI agreed to transfer to each of IRC and Universal 50,000 shares
of ILX common stock together with options to purchase 50,000 shares each at
$1.625 per share.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for ILX were as follows for the
respective periods indicated:
<TABLE>
<CAPTION>
======================================================================================================
Year Ended December 31 Nine Months
Ended
- ------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1994(1) 1995 1995(1)
Pro Forma Pro Forma
Min. Max. Min. Max.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges 2.40 3.48 3.08 2.54 2.02 2.53 2.21 1.86
- ------------------------------------------------------------------------------------------------------
Coverage Deficiency
(in thousands) ($1,602) ($307)
======================================================================================================
(1) The pro forma ratios assume the minimum and the maximum principal
amount of CAS Bonds are outstanding during the applicable periods and
that the proceeds from issuance of the CAS Bonds are not invested and
do not earn a return.
</TABLE>
For the purpose of these ratios, earnings consist of income before
losses from joint ventures accounted for under the equity method. Fixed charges
consist of interest, the amortization of debt issuance costs and an estimated
interest factor in rentals. Earnings in the years ended December 31, 1994,
December 31, 1993 and December 31, 1992 were sufficient to cover the combined
fixed charges. Earnings for the years ended December 31, 1990 and December 31,
1991 were not sufficient to do so. The coverage deficiency for the years ended
December 31, 1990 and December 31, 1991 represents the excess of fixed charges
over earnings.
USE OF PROCEEDS
The net proceeds from the sale of the Convertible Adjustable Secured
Bonds offered hereby are estimated to be a minimum of approximately $1,567,000
and a maximum of approximately $4,237,000 after deduction of all estimated
offering expenses.
ILX intends to advance all of the net proceeds of this offering to VCA
in the form of a capital contribution to finance a portion of the costs
associated with the acquisition and development of Varsity Clubs facilities in
strategic locations throughout the United States. See "The Company -- The
Varsity Clubs Concept." See "Risk Factors -- Allocation of Proceeds and
Potential Acquisitions; Broad Management Discretion."
ILX will require VCA immediately to reimburse, from the offering
proceeds contributed to VCA, a portion of the development costs incurred by ILX
on behalf of VCA, which costs, as of September 30, 1995, totalled $4.4 million.
The development costs include, but are not limited to, costs associated with the
research and development of the Varsity Clubs concept, the design and creation
of the prototype Varsity Clubs facility, the development of advertising and
marketing materials, the acquisition of real property in Mishawaka, Indiana and
Tucson, Arizona, the construction of the Varsity Clubs facility in Indiana, and
the acquisition of options to acquire real property in Auburn, Alabama (Auburn
University); Iowa City, Iowa (University of Iowa); Norman, Oklahoma (Oklahoma
University); and State College, Pennsylvania (Penn State University). The
portion of the development costs that VCA will pay to ILX will be an amount
equal to (i) $900,000 if the minimum amount of CAS Bonds are sold pursuant to
this "best efforts" offering; (ii) $1,000,000 if more than $3,000,000 but less
than $5,000,000 of CAS Bonds are sold pursuant to this "best efforts" offering;
or (iii) $1,500,000 if the maximum amount of CAS Bonds are sold pursuant to this
"best efforts" offering. See "Risk Factors -- VCA Repayment for Development
Costs."
ILX intends to utilize the reimbursement payment to repay existing,
high interest bearing indebtedness that bears interest at a rate of 13.5% per
annum and has a stated maturity date of July 31, 1998 (approximately $900,000).
The indebtedness was used to finance a portion of certain improvements to the
Los Abrigados Resort & Spa and the lending group includes certain affiliates of
ILX (see "Information About the Registrant"). Any remaining proceeds
(approximately $100,000 if more than $3,000,000 but less than $5,000,000
principal amount of CAS Bonds are sold, and approximately $600,000 if the
maximum amount of CAS Bonds are sold) will be used to provide working capital to
ILX. See "Risk Factors -- VCA Repayment for Development Costs."
VCA initially has targeted a total of 15 sites for development in the
next five years, including the six locations discussed above. VCA's management
estimates that the total development cost in present dollars for each Varsity
Clubs facility is approximately $6 million, including land acquisition, land
improvements, construction, and furniture, fixtures and equipment costs. VCA
also will incur additional costs associated with staffing each facility,
marketing the facilities to, and financing the purchase of timeshare interests
by, interested customers. The proceeds of this offering will be sufficient to
cover only a small portion of the anticipated costs of VCA's facility
development plans. Accordingly, significant amounts of additional capital will
be required to achieve VCA's facility development goal within the proposed
5-year period. Although VCA's management intends to seek traditional bank loans
and other financing to finance a majority of the above referenced costs, there
can be no assurance that such credit facilities will be available, or if
available, that VCA will qualify for such financing or that such financing will
be on terms acceptable to VCA. See "Risk Factors --Potential Lack of Development
Financing."
PLAN OF DISTRIBUTION
The following is a summary of the principal terms of the Placement
Agent Agreement among ILX and Brookstreet Securities Corporation (the "Placement
Agent"). The form of the Placement Agent Agreement is filed as an exhibit to the
Registration Statement, of which this Prospectus forms a part. This summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Placement Agent Agreement, including
the definitions therein of certain terms, which provisions and definitions are
incorporated herein by reference.
Subject to the terms and conditions of the Placement Agent Agreement,
ILX has agreed to retain the Placement Agent, and the Placement Agent has agreed
to serve, as the exclusive selling agent (subject to the Placement Agent's
rights to appoint Soliciting Dealers, as defined below), in an offering of CAS
Bonds on a minimum $2,000,000 principal amount, maximum $5,000,000 principal
amount, "best efforts" basis, for a period ending of December 15, 1995, unless
extended for up to 30 additional days by ILX pursuant to the Placement Agent
Agreement. ILX's officers, directors, employees, principal stockholders, and
their respective family members and affiliates, may purchase CAS Bonds in the
offering. Of such individuals and entities, Edward J. Martori, Martori
Enterprises Incorporated and the Cynthia J. Polich Irrevocable Trust, of which
Joseph P. Martori is a trustee, have indicated an intent to purchase CAS Bonds
in principal amounts of $550,000, $100,000 and $200,000, respectively. Assuming
conversion of the CAS Bonds into shares of ILX common stock at a conversion
price of $2.50 per share, the purchasers referenced in the prededing sentence
would be entitled to convert their CAS Bonds into 220,000 shares, 40,000 shares
and 80,000 shares of ILX common stock, respectively. All purchases by ILX
officers, directors, employees, principal stockholders and their respective
family members and affiliates, including purchases by those specifically
referenced herein, may by used to satisfy the $2,000,000 principal amount
minimum.
All funds received by the Placement Agent with the subscriptions to
purchase CAS Bonds will be deposited in an escrow and impound account (the
"Escrow") with the Escrow Agent, pursuant to an Escrow and Impound Agreement
entered into by ILX, the Placement Agent and the Escrow Agent (the "Escrow and
Impound Agreement"). Payments shall be made by either check or wire transfer and
must be accompanied or preceded by a completed subscription agreement (the
"Subscription Agreement"). All checks for subscriptions of the CAS Bonds shall
be made payable to the Escrow Agent. If a least $2,000,000 principal amount of
CAS Bonds offered hereby are sold within the period ending December 15, 1995 (or
any extended period of up to 30 additional days as set forth in the Placement
Agent Agreement), and if the requirements set forth in the Escrow and Impound
Agreement are met (including that applicable state securities administrators
enter any required orders releasing the funds to ILX), all funds received, less
the Placement Agent's commissions and expense allowance, will be delivered to
ILX, and the CAS Bonds purchased will be delivered to of for the account of
subscribers. If the minimum amount of CAS Bonds is not sold within the
designated period, all funds held in the Escrow will be returned to subscribers
without any deduction therefrom, but with a pro rata share of any interest
earned thereon while on deposit in the Escrow. Until such time as funds have
been released from Escrow and the CAS Bonds delivered to the purchasers therof,
such purchasers will be deemed subscribers and not CAS Bondholders and shall
have only the rights and obligations described in the Subscription Agreement.
Such rights and obligations include that the subscription for CAS Bonds shall be
irrevocable by the subscriber, but such subscription may be accepted or rejected
in whole or in part, in ILX's sole discretion. If a subscription is rejected
in whole, then ILX will return the entire amount and, if rejected in part, will
return a pro rata portion, paid by the subscriber, with interest at the rate
provided by the Escrow Agent. The above description of the Escrow and Impound
Agreement and the Subscription Agreement are qualified in their entirety by
reference to the actual agreements, which are attached to the Registation
Statement of which this Prospectus forms a part.
ILX and the Placement Agent shall have an Initial Closing at such time
designated by ILX after at least $2,000,000 principal amount (and up to the
maximum principal amount) of CAS Bonds have been sold and the subscriptions for
such sales have been accepted by ILX. After the Initial Closing, ILX may
continue the offering until the earlier to occur of the date on which: (a) ILX
and the Placement Agent agree to terminate the offering or (b) the maximum
$5,000,000 principal amount of CAS Bonds are sold or (c) the designated period
of the offering terminates. If any additional CAS Bonds are sold and the
subscriptions accepted by ILX after the Initial Closing, there shall be a
subsequent closing (the "Final Closing") at such time designated by ILX after
the termination of the offering.
The Placement Agent may offer the CAS Bonds to the public at $1,000.00
per CAS Bond and may pay to certain dealers ("Soliciting Dealers") who are
members of the National Association of Securities Dealers, Inc. (the "NASD"),
commissions (payable from, and not in addition to, commissions payable to
Selling Agent) of not in excess of five percent (5%) for CAS Bonds sold by them.
All Soliciting Dealers shall take part in this offering pursuant to a Soliciting
Dealer Agreement. The form of the Soliciting Dealer Agreement is filed as an
exhibit to the Registration Statement, of which this Prospectus is a part.
The Placement Agent is responsible for paying all fees and expenses it
incurs. ILX, however, has agreed to pay the Placement Agent a non-accountable
expense allowance equal to two percent (2%) of the gross proceeds received by
ILX from the sale of the CAS Bonds. ILX has advanced to the Placement Agent, on
a non-refundable basis, $50,000 to be applied against the non-accountable
expense allowance.
ILX has agreed to indemnify the Placement Agent, any controlling person
of Placement Agent, and other persons related to the Placement Agent and
identified in the Placement Agent Agreement, against certain liabilities,
including liabilities arising (i) under the Securities Act, (ii) out of any
untrue statement of a material fact contained in the Registration Statement,
this Prospectus, any amendments thereto, and certain other documents, or (iii)
out of any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless the statement or
omission is made in reliance upon and in conformity with written information
furnished to ILX by or on behalf of the Placement Agent for use in the document
in which it was used.
In connection with this offering and as additional, nominal
consideration for the Placement Agent's efforts in connection with the offering,
ILX has agreed to sell to the Placement Agent, for nominal consideration,
warrants ("Placement Agent's Warrants") to purchase a minimum of 40,000 shares
and a maximum of 100,000 shares of ILX common stock (determined in increments of
1,000 shares of ILX common stock for each $50,000 principal amount of CAS Bonds
sold in the offering) at $3.60 per share, subject to adjustment upon the
occurrence of certain events, including stock splits and combinations,
reclassifications, exchanges and substitutions relating to ILX common stock. The
Placement Agent's Warrants will be granted at the Final Closing. The Placement
Agent's Warrants are exercisable for a period of four years commencing one year
from the date of the Initial Closing. The Placement Agent's Warrants grant to
the holders thereof certain rights with respect to the registration under the
Securities Act of the securities issuable upon exercise of the Placement Agent's
Warrants.
DESCRIPTION OF ILX SECURITIES AND PERTINENT ARIZONA STATUTES
Description of CAS Bonds
General. The Convertible Adjustable Secured Bonds are to be issued
under an Indenture (the "Indenture"), dated as of ______________, 1995, between
ILX and U.S. Trust Company of California, N.A., as trustee (the "Trustee"). The
form of the Indenture and form of the CAS Bonds are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following
statements summarize certain provisions of the CAS Bonds and the Indenture. The
summary statements do not purport to be complete, and are subject and qualified
in their entirety by reference to all of the provisions of the Indenture and the
CAS Bonds, including the definitions therein of certain terms (generally
capitalized when used herein), which provisions and definitions are incorporated
herein by reference.
The CAS Bonds to be issued under the Indenture will be limited to a
minimum of $2,000,000 and a maximum of $5,000,000 aggregate principal amount.
The CAS Bonds are an outstanding debt obligation of ILX and, in terms of
preference, are junior to the Senior Indebtedness. In addition, the CAS Bonds
are secured by a first priority lien against all the issued and outstanding VCA
Stock. See "The Company -- The Varsity Clubs Concept." ILX is not required to
establish a sinking fund for the retirement of principal (see "Risk Factors --
Lack of Sinking Fund; Substantial Final Payment for the CAS Bonds"); however, if
ILX receives proceeds from the "key person" life insurance policy maintained
under the Indenture, such proceeds must be held by ILX in trust, to the full
extent of the principal amount of the CAS Bonds outstanding plus any accrued and
unpaid interest, for the payment of the principal on the CAS Bonds or used to
redeem or otherwise acquire the CAS Bonds at the discretion of the Board of
Directors. ILX may incur Senior Indebtedness (as defined in the Indenture and
described below) to which the CAS Bonds will be subordinated. There is no limit
on the amount of Senior Indebtedness that ILX or its subsidiaries may incur. See
"Risk Factors -- Subordination" and "Risk Factors -- No Limit on Additional Debt
of VCA." The CAS Bonds will mature on _______________, 2000. Each CAS Bond will
bear interest from the Initial Closing or the Final Closing, as appropriate, at
a rate of 10% per annum payable on January 1 and July 1 in each year ("Interest
Payment Dates") commencing January 1, 1996. Such interest installments will be
paid to the person in whose name the CAS Bond is registered on the Bond Register
maintained under the Indenture at the close of business on the Regular Record
Date for such interest, which shall be December 15 and June 15 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Principal and interest will be payable at the office or agency to be maintained
by the Trustee.
ILX will issue the CAS Bonds only in fully registered form, without
coupons, in denominations of $1,000. ILX will not assess a service charge for
any transfer or exchange of the CAS Bonds, but it may require payment of a sum
sufficient to cover the tax or governmental charge payable in connection
therewith. Holders may transfer the CAS Bonds by surrendering them for transfer
at the office of the Registrar, together with such written instrument of
transfer and evidence of compliance with applicable laws as ILX and the
Registrar may require. ILX has appointed the Trustee as the Registrar.
Conversion. Unless previously redeemed, each CAS Bond will be
convertible at any time after thirty (30) calendar days from the close of this
offering, at the option of the CAS Bondholder, into shares of ILX common stock
at the following conversion prices:
(i) Commencing 30 calendar days after the Initial Closing of this
offering and continuing until the 29th calendar day after the second
anniversary of the Initial Closing of this offering, the CAS Bonds will
be convertible into ILX common stock at the price of $2.50 per share;
(ii) On the 30th calendar day after the second anniversary of the
Initial Closing of this offering, the conversion price shall be
adjusted so that from that date until the 29th calendar day after the
fourth anniversary of the Initial Closing of this offering, the CAS
Bonds will be convertible into ILX common stock at a price equal to:
(a) seventy-five percent (75%) of the "Mark Price" of ILX common stock,
where the "Mark Price" is defined as a price equal to an average of the
closing price of ILX common stock as of the close of business each day
for the 30 calendar day period beginning 30 calendar days before the
second anniversary of the Initial Closing and ending on and including
the day before the second anniversary of the Initial Closing, or (b)
$2.50 per share, whichever is higher;
(iii) On the 30th calendar day after the fourth anniversary of the
Initial Closing of this offering, the conversion price shall be
adjusted so that from that date until maturity, the CAS Bonds will be
convertible into ILX common stock at a price equal to: (a) seventy-five
percent (75%) of the "Mark Price" of ILX common stock, where the "Mark
Price" is defined as a price equal to an average of the closing price
of ILX common stock as of the close of business each day for the 30
calendar day period beginning 30 calendar days before the fourth
anniversary of the Initial Closing and ending on and including the day
before the fourth anniversary of the Initial Closing, or (b) $2.50 per
share, whichever is higher.
On conversion, no adjustment for interest accrued on the CAS Bonds or
distributions on the ILX common stock will be made. ILX currently has reserved
1,380,000 shares of common stock for issuance upon conversion of the maximum
amount of CAS Bonds. The number of shares of ILX common stock reserved for
issuance may be adjusted upon termination of the offering if less than the
maximum amount of CAS Bonds are issued, and upon any adjustment in the
conversion price.
The conversion price is further subject to adjustment in certain events
including: (i) the payment of dividends on common stock in shares of common
stock; and (ii) the subdivision or combination of common stock. With respect to
CAS Bonds called for redemption, conversion rights expire at the close of
business on the last business day prior to the Redemption Date. No fractional
shares will be issued upon conversion, but ILX will pay cash in lieu thereof at
the fraction of the conversion price that corresponds to the fractional share.
Redemption. The CAS Bonds will be subject to redemption at the option
of ILX, in whole or in part, from time to time, at any time after ILX's common
stock has traded at a price in excess of $4.00 per share (subject to adjustment
for subdivision, combination and other events) for a period of 20 consecutive
trading days, upon not less than 30 nor more than 60 days' notice mailed to the
holders thereof, at the Redemption Price of 120% of the outstanding principal
amount of each CAS Bond, together, in each case, with interest accrued to the
date fixed for redemption (subject to the right of a holder on the Regular
Record Date for an interest payment to receive such interest).
ILX may elect to redeem less than all of the CAS Bonds. If ILX elects
to redeem less than all of the CAS Bonds, the Trustee will select which CAS
Bonds to redeem, using such method as it shall deem fair and appropriate. Such
method may include the selection for redemption of portions (equal to $1,000 or
any multiple thereof) of the principal amount of any CAS Bond of a denomination
larger than $1,000.
Senior Indebtedness. The CAS Bonds are subordinated and junior in right
of payment to the Senior Indebtedness of ILX to the full extent set forth in the
Indenture. As of September 30, 1995, the aggregate amount of outstanding Senior
Indebtedness was approximately $13.9 million. There is no limit on the amount of
Senior Indebtedness that ILX may incur. See "Risk Factors -- Subordination."
During the continuance of any default in payment of Senior Indebtedness, no
payment may be made by ILX on or in respect of the CAS Bonds. In the event of
any dissolution, winding-up, liquidation, or reorganization of ILX (whether in
bankruptcy, insolvency, or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise), and except to the extent of the rights
of the CAS Bondholders to exercise their rights in respect of the VCA Stock, the
holders of Senior Indebtedness then outstanding will be entitled to receive
payment in full of all such Senior Indebtedness before the holders of CAS Bonds
are entitled to receive any payment on account of the principal of, premium, if
any, or interest on the CAS Bonds. Such subordination will not prevent the
occurrence of an Event of Default under the Indenture or the CAS Bonds, and will
not, of itself, affect the rights of the CAS Bondholders to enforce their rights
with respect to the VCA Stock.
In the event of a default on the Senior Indebtedness, no payment may be
made by ILX on or in respect of the CAS Bonds. However, the existence of a
default in payment of Senior Indebtedness shall not prevent the existence of an
Event of Default on or in respect of the CAS Bonds. In addition, the
subordination of the CAS Bonds does not affect the rights of the CAS Bondholders
(including upon the occurrence of an event of default on the Senior
Indebtedness) to enforce their first priority rights with respect to the VCA
Stock, including the rights to foreclose or take other action against the VCA
Stock upon the occurrence of an Event of Default. If the CAS Bondholders
successfully foreclose upon and aquire the VCA Stock, then the CAS Bondholders
as a group would have the rights of shareholders of VCA to control VCA's assets,
subject to VCA's organizational documents and the rights of VCA's creditors. See
"Risk Factors -- Effect of Default on Payments."
"Senior Indebtedness" is defined in the Indenture as "the principal of,
premium (if any) and interest on any and all Indebtedness of the Company (other
than the [CAS] Bonds) incurred in connection with (i) the borrowing of money
from or guaranteed to banks, trust companies, leasing companies, insurance
companies and other financial institutions, including all Indebtedness to such
institutions and other specialized industry lenders to the extent it is secured
by real estate and/or assets of the Company, evidenced by bonds, debentures,
mortgages, notes or other securities or other instruments, (ii) purchase money
Indebtedness incurred to or assumed from or on behalf of a seller in connection
with the acquisition of assets by the Company, (iii) the borrowing of money from
any source (including from Affiliates of the Company) for the purpose of
financing timeshare arrangements and secured by receivables or timeshare
interests generated from the sales of interval ownership interests by the
Company or any Subsidiary, or (iv) notes payable arising from the acquisition of
stock in [Red Rock Collection] and the acquisition of partnership interests in
[LAP], in each instance under (i), (ii) and (iii), to the extent such
Indebtedness is incurred, assumed or guaranteed by the Company before, at or
after the date of execution of this Indenture, and all renewals, extensions and
refundings thereof, unless in the instrument creating or evidencing any such
Indebtedness or pursuant to which such Indebtedness is outstanding, it is
provided that such Indebtedness, or such renewal, extension or refunding
thereof, is junior or is not superior in right of payment to the [CAS] Bonds."
Events of Default. The Indenture defines the following as "Events of
Default": (1) default in the payment of interest and the continuance of such
default for 30 days after becoming due; (2) failure to pay principal (or
premium, if any) when due at Maturity or upon redemption; (3) failure to
perform any other covenants for 60 days after written notice specifying the
default and allowing ILX to remedy such default; or (4) certain events of
bankruptcy, insolvency, or reorganization.
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of an Event of Default, give the CAS Bondholders written notice of
all uncured defaults known to it. The term "default" means the above specified
events without grace periods; provided that, except in the case of default in
the payment of principal of (or premium, if any) or interest on any of the CAS
Bonds, the Trustee shall be protected in withholding such notice if and so long
as it in good faith, determines that the withholding of such notice is in the
interest of the CAS Bondholders.
If an Event of Default shall occur, and be continuing, either the
Trustee or the holders of at least a majority in aggregate principal amount of
outstanding CAS Bonds may accelerate the maturity of all such outstanding CAS
Bonds. Prior to acceleration of maturity of such CAS Bonds, the CAS Bondholders
of at least a majority in principal amount of outstanding CAS Bonds may waive
any past defaults under the Indenture, except for default in certain covenants
as provided in the Indenture, which require unanimous consent. The CAS
Bondholders of at least a majority in principal amount of outstanding CAS Bonds
may waive an Event of Default resulting in acceleration, and annul the
acceleration, of such CAS Bonds, but only if all the Events of Default have been
remedied and all payments (other than those due as a result of acceleration)
have been made.
Upon an Event of Default, and following the passage of any applicable
grace periods, the Trustee under the Indenture or the holders of a majority in
principal amount of the CAS Bonds outstanding, on behalf of all the holders of
the CAS Bonds, may institute proceedings and collect monies adjudged payable out
of the property of ILX, subject to the rights of holders of Senior Indebtedness.
Such proceedings may include (1) enforcing the rights of the CAS Bondholders as
against the VCA Stock (by the Trustee acting at the direction of a majority in
principal amount of the CAS Bonds), or (2) an action against other assets of
ILX, provided that the ability of the CAS Bondholders to recover directly from
ILX (including in the event the value of the security is insufficient to satisfy
the CAS Bonds) is subject to the rights of the holders of Senior Indebtedness.
Absent a security interest or interests granted by VCA as to specific assets of
VCA, holders of Senior Indebtedness of ILX may not reach the assets of VCA.
However, there is no limitation on VCA's ability to incur debt or encumber its
assets, including encumbrances of VCA's assets to secure Senior Indebtedness.
There does not currently exist any encumbrance on the VCA Stock that is
senior to the security interest of the CAS Bondholders. Without the consent of
the CAS Bondholders, ILX may not grant any security interest in the VCA Stock
senior to the security interest of the CAS Bondholders.
Upon an application by ILX to the Trustee to take any action under the
Indenture, ILX must deliver an officer's certificate and an opinion of counsel
regarding ILX's compliance with conditions precedent to the taking of the
requested action. In addition, annually ILX must deliver a certificate of
certain officers of ILX concerning their knowledge, if any, of any default, and
of ILX's compliance with the Indenture.
Modification, Waiver of Certain Covenants and Satisfaction of
Indenture. With certain exceptions that permit modifications of the Indenture by
ILX and the Trustee only, the Indenture, the rights and obligations of ILX and
the rights of CAS Bondholders may be modified by ILX with the consent of holders
of not less than a majority in aggregate principal amount of outstanding CAS
Bonds affected thereby; provided that ILX may make no such modification without
the consent of the holder of each CAS Bond affected thereby if such modification
would (1) impair or affect the rights of the CAS Bondholders to receive
principal (or premium, if any) and interest at the Stated Maturity, (2) impair
or affect the right to institute suit for the enforcement of any such payment on
or with respect to any such CAS Bond (except as to postponement of an interest
payment as provided below), or (3) modify the foregoing requirements. The
holders of not less than seventy-five percent (75%) in aggregate principal
amount of outstanding CAS Bonds may consent to a postponement of any interest
payment for a period not exceeding three years from its due date. No
supplemental indenture shall affect adversely the rights of the holders of
Senior Indebtedness without the consent of such holders.
The holders of a majority in aggregate principal amount of outstanding
CAS Bonds may waive ILX's compliance with certain restrictive provisions of the
Indenture.
The Indenture shall be satisfied and discharged when (i) either (a) all
authenticated and delivered CAS Bonds have been delivered to the Trustee for
cancellation; or (b) all CAS Bonds not delivered for cancellation are or will be
due and payable, or are to be called for redemption, within one year, and ILX
has deposited sufficient amounts with Trustee to pay the amounts due on the CAS
Bonds; (ii) ILX has paid all other sums payable by ILX under the Indenture; and
(iii) ILX has delivered a certificate of an officer of ILX and a opinion of
counsel stating that all conditions precedent to discharge have been completed.
Secured Interest. The CAS Bonds are an outstanding debt obligation of
ILX and, in terms of preference, are junior to the Senior Indebtedness. In
addition, the VCA Stock has been pledged to secure the obligations evidenced by
the CAS Bonds. The stock pledge represents a first priority lien against the VCA
Stock. If ILX fails to satisfy its obligations under the CAS Bonds and it
becomes necessary for the CAS Bondholders to elect to foreclose their interest
in the VCA Stock, there can be no assurance that the proceeds received from such
foreclosure will be adequate to satisfy amounts due under CAS Bonds. In
addition, the value of the VCA Stock may be reduced significantly if it is held
other than by ILX or if the then current value of the VCA Stock at the time of
such foreclosure has diminished. See "Risk Factors -- Security for CAS Bonds May
Not Be Adequate."
Appraisal. An appraisal concerning the value of the VCA Stock was
prepared by The Mentor Group, Inc., an independent appraisal and valuation firm
that is not affiliated with and was previously unknown to ILX. The Mentor Group
established a valuation for VCA of $26,300,000 (the "Appraisal"), an amount that
is substantially in excess of VCA's current book deficit as of September 30,
1995 totaling ($158,000). The Appraisal was prepared to comply with the terms of
the Trust Indenture Act of 1939, which may require the Company to provide the
Trustee under the CAS Bonds with an appraisal setting forth the value of VCA to
ILX. The appraiser requested and was provided with ILX's internal financial
projections prepared for VCA for use in raising funds from third party
investors. The financial projections prepared by ILX's management were based on
assumptions regarding VCA that are believed by ILX's management to be
reasonable. Those assumptions were made based on management's combined
experience in the timeshare and hotel industries and assume availability of
financing necessary for growth. The assumptions include assessments of VCA's
future success rates in marketing timeshare interests in its facilities
(including that VCA would achieve sales of approximately 70% of the combined
timeshare inventory by the end of 1997 from the first three facilities
constructed on a timely basis), the likely prices at which such intervals would
be sold, room night rental prices (assuming occupancy rates of 73% to 78%)
averaging $78.00 to $80.00 per night, maintenance subsidies for timeshare
intervals of approximately $18.00 per day, cash flows from timeshare sales
payments based on downpayments of 30% and notes receivable of 70% of sales
prices, that the notes receivable may be financed to generate immediate cash
equal to 85% of their face values with receipt of the balance upon customers'
payment of their notes, and construction costs for the standard facility
averaging $6.0 million (with approximate amounts of $700,000 paid for land,
$300,000 for land improvements, $3.9 million for direct construction costs and
$1.1 million for furniture, fixtures and equipment). Based on ILX's internal
financial projections for VCA, the appraiser then prepared its own projections
(attached to the Appraisal) of cash flows through 1999, including an estimated
terminal value, all of which were discounted to present value using a
capitalization factor determined by the appraiser. The appraiser projected
growth of VCA's business based on ILX management's growth projections to assume
the addition of three VCA facilities each year, which is substantially in excess
of VCA's historic growth rate during its start-up phase. Resulting cash flow
projections also are substantially in excess of VCA's historic performance.
ILX's management believes such growth is reasonable assuming sale of the CAS
Bonds and ILX's continuing ability to secure construction and timeshare
financing for new facilities commensurate with its recent acquisition of
financing for VCA's Notre Dame facility and Tucson facility. See "Risk Factors
- -- Appraisal;" Assumptions in Excess of Historic Performance; VCA Stock May be
Inadequate Security." However, no assurance can be given that ILX or VCA will
achieve such projections or that ILX or VCA will achieve the projected results
even if such projections are met. If VCA does not achieve the projected growth
or cash flows, VCA's financial condition would be undermined, thereby underming
the value of the VCA Stock securing the CAS Bonds. The description of the
Appraisal is qualified in its entirety by reference to the Appraisal and the
exhibits attached thereto. A Statement of the Assumptions and Limiting
Conditions is set forth in the Appraisal. In particular, the Statement discloses
that, in preparing its analysis, The Mentor Group relied on certain of ILX's
financial statements, projections for VCA and related assumptions, and other
pertinent data. The Mentor Group accepted the information it received from ILX
without further verification (except as otherwise noted in the Appraisal) as a
reflection of ILX's and VCA's overall business operations and conditions. A
potential investor in the CAS Bonds should refer to the Statement attached to
the Appraisal, which is incorporated herein by reference.
The Trustee. U.S. Trust Company of California, N.A. will be the Trustee
under the Indenture. The Trustee need not take any action in the enforcement of
any remedy available to the Trustee if the Trustee does not have sufficient
indemnification against loss or expense.
Certain Covenants
Restrictions on Dividends. For such time as at least 50% of the
principal amount of the CAS Bonds remain outstanding ILX will not declare or pay
any cash dividends or dividends in kind on its shares of common stock other than
dividends payable solely in shares of ILX common stock.
Limitation on Liquidation. Neither the board of directors nor the
holders of common stock of ILX shall adopt a plan of liquidation that provides
for (i) the sale, lease, conveyance or other disposition of all of the assets of
ILX, other than substantially as an entirety, and (ii) the distribution of all
or substantially all of the proceeds of such transaction, and of the remaining
assets of ILX, to the holders of common stock or preferred stock unless ILX,
prior to making any liquidating distribution pursuant to such plan, makes
provision for the satisfaction of its obligations as to the payment of principal
and interest on the CAS Bonds.
Overhead Allocation Limitation. ILX shall maintain its annual
expenditures for general and administrative costs at an amount not to exceed 16%
of ILX's gross revenue.
Limitation on Change of Control. ILX shall not experience a change in
control, where "change in control" means (a) when any person, or any persons
acting together that would constitute a "group" for purposes of Section 13(d) of
the Securities Exchange Act of 1934 (other than a person or group including or
comprised of ILX, an entity in which Joseph P. Martori, Edward J. Martori or
Martori Enterprises Incorporated owns an interest (or any of them individually),
any subsidiary, any employee stock purchase plan, stock option plan or other
incentive plan or program, retirement plan or automatic dividend reinvestment
plan or any substantially similar plan of ILX or any subsidiary or any person
holding securities of ILX for or pursuant to the terms of any such plan,
together with any affiliates thereof), acquires beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act) of at least a majority of all classes of
capital stock of ILX, or (b) all or substantially all of ILX's assets (defined
as greater than 75% of the fair market value of ILX's assets) are sold as an
entirety to any person or related group of persons in any one transaction or
series of related transactions.
A "change in control" does not violate the covenant if (i) the market
price of the common stock on the date of the change in control occurred is at
least 105% of the conversion price of the CAS Bonds in effect immediately
preceding the time of the change in control, or (ii) all of the consideration
(excluding cash payments for fractional shares) in the transaction giving rise
to the change in control to the holders of common stock consists of securities
that are, or are immediately upon issuance will be, listed on a national
exchange or quoted on a quotation system, and as a result of such transaction
the CAS Bonds become convertible into such security, or (iii) the consideration
in the transaction giving rise to the change in control to the holders of the
common stock consists of cash, securities that are, or immediately upon issuance
will be, listed on a national securities exchange or quoted on a quotation
system, or a combination of cash and such securities and the aggregate fair
value of such consideration is at least 105% of the conversion price of the CAS
Bonds in effect on the date immediately preceding such transaction, or (iv) the
CAS Bonds or the shares of common stock into which the CAS Bonds are convertible
are freely tradeable without restriction in time or quantity with respect to
sales of CAS Bonds or shares of common stock.
The Indenture offers limited or no protection to the CAS Bondholders in
the event of a leveraged buyout initiated by ILX, certain management of ILX, or
any of their affiliates, or by an entity in which they have an interest.
Limitation on Merger. ILX may not merge into or consolidate with any
other corporation in a transaction in which ILX is not the surviving corporation
unless: (i) the successor is a corporation organized under the laws of any
domestic jurisdiction; (ii) the successor corporation assumes ILX's obligations
on the CAS Bonds and under the Indenture; (iii) after giving effect to the
transaction, no default, and no event that, after notice of lapse of time, would
become a default, shall have occurred and be continuing; (iv) the successor
corporation must have a class of equity securities listed on a national exchange
or quotation system, and the CAS Bonds must be convertible into such securities;
and (v) ILX delivers to the Trustee appropriate opinions and certifications as
to compliance with conditions precedent under the Indenture.
Description of ILX Common Stock
Each share of ILX common stock entitles the holder thereof to one vote
in all matters submitted to a vote of ILX's shareholders, except that election
of directors shall be by cumulative voting to the extent and in the manner
provided by Arizona law. Cumulative voting requires that in any election for
board members, each share of stock is entitled to a total number of votes equal
to the total number of board members to be elected. Such votes may be cast for
one or more directors as the shareholder desires. No holder of ILX common stock
has any preemptive right to subscribe for or purchase additional shares of ILX's
stock. Holders of ILX common stock are entitled to share ratably in all
dividends not attributable to the Series A or Series C Stock that are declared
by the Board of Directors and in all assets available for distribution upon
liquidation after giving effect to the liquidation preferences of the Series A,
Series B and Series C Stock.
Description of Series A Stock
Pursuant to the plan of reorganization of BIS-ILE Associates dated
September 10, 1991 (see "The Company--Other Wholly Owned Subsidiaries--ILE
Sedona Incorporated), the unsecured trade creditors of BIS-ILE Associates agreed
to accept 82,540 shares of ILX's non-voting Series A Preferred Stock, $10.00 par
value ("Series A Stock"), in full satisfaction of a debt to such trade creditors
in the amount of $825,400. Accordingly, ILX authorized 110,000 shares of Series
A Stock, 66,769 shares of which remain issued and outstanding at September 30,
1995. Beginning July 1, 1996, the Series A Stock is entitled to an annual
dividend of $.80 per share when and as declared by ILX's Board of Directors out
of funds legally available therefor. Dividends may not be paid on ILX common,
Series B or Series C Stock until the Series A Stock sinking fund requirements
and dividends payments are satisfied.
The Series A Stock has a liquidation preference of $10.00 per share
that is superior to the liquidation preferences of the Series B Stock and Series
C Stock and the liquidation rights on the ILX common stock. Prior to June 30,
1996, ILX may redeem the Series A Stock at a price of $10.00 per share.
Beginning January 1, 1993, ILX, through one of its affiliates, is required
quarterly to make provision for a dividend sinking fund in an amount equal to
$100 for each unrescinded timeshare sale in the Sedona Vacation Club at Los
Abrigados Resort & Spa made during the preceding calendar quarter, adjusted for
certain conversions of Series A Stock into Lodging Certificates, as described
below.
Before June 30, 1996, each holder of Series A Stock may exchange up to
$35,000 par value of Series A Stock for "Lodging Certificates" at the rate of
one Lodging Certificate for every fifteen shares of Series A Stock so exchanged.
Subject to certain conditions, a Lodging Certificate may be exchanged for one
night's stay at Los Abrigados Resort & Spa. Additionally, a holder of more than
one thousand shares of Series A Stock may exchange one thousand shares of Series
A Stock plus $2,100 for a timeshare membership in the Sedona Vacation Club at
Los Abrigados Resort & Spa in Sedona, Arizona. The foregoing discussion of the
Series A Stock is qualified in its entirety by reference to the Certificate of
Designation of the Series A Stock, a copy of which may be obtained from ILX.
Description of Series B Stock
Pursuant to the plan of reorganization of BIS-ILE Associates, ILX
authorized and issued 275,000 shares of non-voting Series B Convertible
Preferred Stock, $10.00 par value ("Series B Stock"), in full satisfaction of a
debt to B.I. Sedona, Inc., in the amount of $2,750,000, 55,000 shares of which
remain issued and outstanding at September 30, 1995.
The Series B Stock has a liquidation preference of $10.00 per share
that is junior to the liquidation preference of the Series A Stock but senior to
the liquidation preference of the Series C Stock and the liquidation rights on
the ILX common stock. Prior to June 30, 1996, ILX may redeem the Series B Stock
at a price of $10.00 per share. From and after July 1, 1996, each share of
Series B Stock may be converted into two shares of ILX common stock. The
conversion rate shall be adjusted for dividends paid in ILX common stock, stock
splits, reverse stock splits and stock reclassifications.
Prior to June 30, 1996, a holder of Series B Stock may exchange up to
$100,000 par value of Series B Stock for Lodging Certificates at the rate of one
Lodging Certificate for every fifteen shares of Series B Stock so exchanged.
Additionally, a holder of more than one thousand shares of Series B Stock may
exchange one thousand shares of Series B Stock plus $2,100 for a timeshare
membership in the Sedona Vacation Club at Los Abrigados Resort & Spa in Sedona,
Arizona. The foregoing discussion of the Series B Stock is qualified in its
entirety by reference to the Certificate of Designation for the Series B Stock,
a copy of which may be obtained from ILX.
Description of Series C Stock
In connection with the Merger of Genesis into ILX's wholly-owned
subsidiary, ILX authorized 309,000 shares of non-voting Series C Convertible
Preferred Stock, $10.00 par value ("Series C Stock"). ILX issued 305,652 shares
of Series C Stock, of which 290,748 shares remain issued and outstanding at
September 30, 1995. The Series C Stock has been issued, along with certain
shares of ILX common stock, to former Genesis Shareholders in exchange for their
Genesis common stock.
The Series C Stock is entitled to receive dividends, when and as
declared by ILX's Board of Directors, out of any funds legally available
therefore at the rate of $.60 per share per annum (the "Dividend Preference"),
payable in preference and priority to any payment of any dividend on ILX common
stock but subordinate and subject to the dividend rights of the Series A Stock.
Except for Cumulation Shares (as hereafter defined) issuable on conversion or
liquidation of the Series C Stock, the right to Dividend Preference is not
cumulative. If, during any year prior to the fifth anniversary (November 1,
1998) of the effective date of the Merger between ILX's wholly owned subsidiary,
ILEAC, and Genesis (see "The Company - Other Wholly Owned Subsidiaries --
Genesis"), the Dividend Preference is not paid in full, the unpaid portion
thereof will accumulate through November 1, 1998 (the total amount of such
cumulation expressed in dollars is referred to herein as the "Dividend
Arrearage"). ILX is not required to pay the Dividend Preference in cash except
upon liquidation. "Cumulation Shares" means the total Dividend Arrearage (as of
the date of calculation thereof) owed to any holder of Series C Stock with
respect to all shares of Series C Stock owned of record by such holder divided
by $6.00. Partial fiscal years are to be equitably prorated. The Series C Stock
has a liquidation preference of $10.00 per share plus any Dividend Arrearage
allocable to such shares. Such liquidation preference is subordinate to the
liquidation preferences of ILX's Series A Stock and Series B Stock. The Series C
Stock may be redeemed by ILX at any time on or after November 1, 1996 at a price
of $10.00 per share plus payment of all declared but unpaid dividends. At the
option of the holder, shares of Series C Stock may be converted into shares of
ILX common stock after November 1, 1994 but prior to November 1, 2003 at a rate
of five shares of ILX common stock for every three shares of Series C Stock. A
holder of Series C Stock also shall convert the applicable Dividend Arrearage
with respect to such shares into ILX common stock at the rate of one share of
ILX common stock for every $6.00 of Dividend Arrearage. This summary of the
terms of the Series C Stock is qualified in its entirety by the Certificate of
Designation of the Series C Stock, a copy of which may be obtained from ILX.
Arizona Anti-takeover Legislation and Anti-takeover Devices
Arizona Revised Statutes Sections 10-1201 et seq. were adopted by the
Arizona legislature in an attempt to prevent corporate "greenmail" and to
restrict the ability to acquire domestic corporations. These statutes generally
apply to business combinations or control share acquisitions of "issuing public
corporations," which are defined as corporations having a class of equity
securities registered pursuant to Section 12 of the Exchange Act or subject to
Section 15(d) of the Exchange Act and either (i) incorporated under the laws of
Arizona or (ii) having a principal place of business or principal executive
office in Arizona, owning or controlling assets in Arizona that have a fair
market value of at least $1,000,000 and having more than 500 employees residing
in Arizona. ILX has securities registered pursuant to Section 12 of the Exchange
Act and is subject to Section 15(d) of the Exchange Act, and therefore is
subject to these statutes. These statutes could impede an acquisition of ILX and
its affiliates.
Arizona Revised Statutes Section 10-1204 limits the ability of a
corporation to repurchase stock from a beneficial owner of more than 5% of the
voting power of an issuing public corporation unless certain conditions are
satisfied. ARS Section 10-1205 limits the ability of the issuing public
corporation to enter into or amend any agreements containing provisions that
increase the current or future compensation of any officer or director of the
issuing public corporation during any tender offer or request or invitation for
tenders of any class or series of shares of the issuing public corporation
(other than an offer, request or invitation by the issuing public corporation).
ARS Section 10-1211 regulates control share acquisitions, defined as a direct or
indirect acquisition of beneficial ownership of shares of an issuing public
corporation that would, when added to all other shares of the issuing public
corporation beneficially owned by the acquiring person, entitle the acquiring
person immediately after the acquisition to exercise either (a) more than 20%
but less than 33-1/3% or (b) at least 33- 1/3% but less than 50% or (c) more
than 50% of the voting power. Among other things, control share acquisitions
exclude statutory mergers and acquisitions, and acquisitions pursuant to
security agreements. Within ten days after engaging in a control share
acquisition, the acquiring person must deliver to the issuing public corporation
an information statement setting forth the identity of the acquiring person and
all of its affiliates, the number and class of securities of the issuing public
corporation beneficially owned before, and to be acquired in, the control share
acquisition, and the terms of the control share acquisition. The shares acquired
in a control share acquisition have all the same voting rights as other shares
in elections for directors, but do not have the right to vote on other matters
unless approved by a resolution of shareholders of the issuing public
corporation other than the acquiring person and any officer or director. If the
shareholders vote not to accord voting rights to the shares acquired by the
acquiring person, the issuing public corporation may redeem the control shares
at their then current market price. Finally, in certain circumstances, ARS
Section 10-1221 prohibits an issuing public corporation or a subsidiary thereof
from engaging in a business combination with any interested shareholder of the
issuing public corporation or any affiliate or associate of the interested
shareholder for three years after the interested shareholder's share acquisition
date.
The constitutionality of these provisions of Arizona law has not been
tested under Arizona or federal law. No assurance can be given that such
statutes would withstand any such constitutional challenge. The existence of
these statutes may make ILX a less attractive merger or acquisition candidate.
Except as described above with respect to the statutory provisions of
the Arizona anti-takeover laws, ILX has not adopted any anti-takeover devices
with respect to its equity or debt securities, including the CAS Bonds. See
"Risk Factors -- Arizona Anti-takeover Provisions."
INFORMATION ABOUT THE REGISTRANT
Information regarding ILX is incorporated by reference from ILX's 10-K,
ILX's 10-Qs, ILX's Proxy Statement and ILX's S-2 Registration Statement. Copies
of ILX's 10-K, ILX's most recent 10-Q and ILX's Proxy Statement accompany this
Prospectus.
In late July, 1995, ILX borrowed $900,000 from Edward J. Martori and
the Cynthia J. Polich Irrevocable Trust, of which Joseph P. Martori is a
trustee. The note bears interest at 13.5% and is secured by 320 timeshare weeks
in the Sedona Vacation Club at Los Abrigados Resort & Spa. This debt will be
repaid from the proceeds of this offering. See "Use of Proceeds."
SEC POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Articles 13 and 14 of ILX's Articles of Incorporation, under certain
circumstances, provide for the indemnification of ILX's officers and directors
against liabilities they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided is contained herein, but
that description is qualified in its entirety by reference to Articles 13 and 14
of ILX's Articles of Incorporation.
In general, any director or officer of ILX is eligible to be
indemnified against all expenses, including attorneys' fees, judgments, fines,
punitive damages and amounts paid in settlement, that were incurred in
connection with a proceeding to which the director or officer was a party as a
result of his or her relationship with ILX, unless (1) the individual breached
his or her duty of loyalty to ILX, (2) the individual's acts or omissions are
not in good faith, (3) the individual engaged in intentional misconduct or
knowing violation of law, or (4) indemnification is expressly prohibited by
applicable law. In addition, ILX will not indemnify a director or officer for
any liability incurred in a proceeding initiated (or participated in as an
intervenor or amicus curiae) by the officer or director seeking indemnification
unless such initiation or participation is authorized by the affirmative vote of
a majority of the directors in office.
ILX shall advance funds to pay the expenses of any officer or director
involved in a proceeding provided ILX receives an undertaking that the
individual will repay the funds if it is ultimately determined that he or she is
not entitled to indemnification. The indemnification rights granted to ILX's
officers and directors are deemed to be a legally binding contract between ILX
and each such officer and director. Any repeal, amendment or modification of
Articles 13 or 14 of ILX's Articles of Incorporation shall be effective
prospectively and shall not affect any prior rights or obligations concerning
the indemnification of ILX's officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the authorization and issuance
of the CAS Bonds and the shares of ILX common stock issuable upon conversion
thereof will be passed upon for ILX by Colombo & Bonacci, P.C., Phoenix,
Arizona. Thelen, Marrin, Johnson & Bridges, Los Angeles, California, is acting
as counsel to the Placement Agent in connection with certain legal matters
relating to the CAS Bonds offered hereby.
UNDERTAKINGS
Beginning after the closing of the offering, all investors will be
provided annually with financial statements of the issuing entity and its
subsidiaries, including a balance sheet and the related statements of income and
retained earnings and changes in financial position, accompanied by a report of
an independent public accountant stating that an audit of such financial
statements has been made in accordance with generally accepted accounting
principles, stating the opinion of the accountant with respect to the financial
statements and the accounting principles and practices reflected therein and
with respect to the consistency of the application of the accounting principles,
and identifying any matters to which the accountant takes exception and stating,
to the extent practicable, the effect of each such exception on such financial
statements.
ILX does not currently make loans to its affiliates. Further, all
future material affiliated transactions and loans with affiliates of ILX will be
made or entered into on terms that are no less favorable to ILX than those that
can be obtained from an unaffiliated third party, and any such transaction,
including any forgiveness of loans, shall be approved by a majority of the
directors who do not have an interest in the transaction.
INDEX TO FINANCIAL STATEMENTS
The VCA Financial Statements are attached to this Prospectus as an
exhibit and made a part hereof.
VARSITY CLUBS OF AMERICA
Independent Auditors' Report........................................F-1
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994 and 1993......................................F-2
Consolidated Statements of Operations for the nine months ended
September 30, 1995 and for the year ended December 31, 1994.........F-3
Consolidated Statements of Shareholder Equity for the years
ended December 31, 1991, 1992, 1993 and 1994........................F-4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995 and for the year ended December 31, 1994.........F-5
Notes to Consolidated Financial Statements..........................F-6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Varsity Clubs of America Incorporated
Phoenix, Arizona
We have audited the accompanying balance sheets of Varsity Clubs of America
Incorporated (the "Company") as of December 31, 1994 and 1993, the statements of
operations and of cash flows for the year ended December 31, 1994, and the
statements of shareholders' equity for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1993, and the results of their operations and their cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
July 26, 1995
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, December 31,
1995 1994 1993
------ ------- --------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents (Note 6) $ 317,554 $ 97,502 $ 15
Notes receivable, net (Note 2) 991,537 251,679 26
Resort property held for timeshare sales 7,076,351 -- --
Resort property under development
(Note 3) 1,045,515 1,735,592 --
Deferred assets (Note 4) 361,062 204,383 221,336
Property and equipment, net (Note 5) 134,979 60,266 --
Other assets 132,752 7,670 --
----------- ---------- --------
$10,059,750 $2,357,092 $221,377
=========== ========== ========
Liabilities and Shareholder Equity
Accounts payable $ 247,967 $ 67,817 $3,623
Accrued and other liabilities 1,076,857 92,161 --
Due to affiliates (Note 6) 4,366,405 1,788,294 203,866
Deferred income (Note 3) -- 365,195 --
Notes payable (Note 7) 4,526,044 400,784 --
----------- ---------- --------
10,217,273 2,714,251 207,489
----------- ---------- --------
Shareholder Equity
Common stock, no par value; 1,000,000
shares authorized; 1,000 issued
and outstanding 126,095 126,095 126,095
Retained Deficit (283,618) (483,254) (112,207)
----------- ---------- --------
(157,523) (357,159) 13,888
----------- ---------- --------
$10,059,750 $2,357,092 $221,377
=========== ========== ========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Nine months Year ended
ended September 30, December 31,
1995 1994
---- ----
(unaudited)
<S> <C> <C>
Revenues
Sales of timeshare interests $4,329,074 $ --
Resort operating revenue 60,175 --
Commissions on timeshare interests sold 98,831 149,446
---------- -------
4,488,080 149,446
---------- -------
Cost of sales and operating expenses
Cost of timeshare interests sold 1,913,849 98,022
Cost of resort operations 219,512 --
Advertising and promotion 1,248,005 525,184
General and administrative 128,738 29,205
Provision for doubtful accounts 259,825 --
--------- --------
3,769,929 652,411
--------- --------
Operating income (loss) 718,151 (502,965)
Other income (expense)
Interest expense (444,959) (115,447)
Interest income 59,535 --.
Income (loss) before income taxes 332,727 (618,412)
Income taxes (133,091) 247,365
---------- --------
Net income (loss) $ 199,636 $(371,047)
========== =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDER EQUITY
<CAPTION>
Common Stock
--------------------
Accumulated
Shares Amount Deficit Total
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Balances, December 31, 1991 1,000 $ 98,866 $(112,207) $(13,341)
Additional capital contribution --- 27,229 --- 27,229
-------- -------- --------- ---------
Balances, December 31, 1992 and 1993 1,000 126,095 (112,207) 13,888
Net loss --- --- (371,047) (371,047)
--------- -------- -------- ---------
Balances, December 31, 1994 1,000 126,095 (483,254) (357,159)
Net income (unaudited) --- --- 199,636 199,636
--------- -------- --------- ---------
Balances, September 30, 1995 (unaudited) 1,000 $126,095 $(283,618) $(157,523)
========= ======== ========= =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1995 1994
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 199,636 $ (371,047)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Additions to notes receivable (2,358,607) (251,653)
Proceeds from sale of notes receivable 1,358,924 --
Provision for doubtful accounts 259,825 --
Depreciation and amortization 23,222 1,035
Change in assets and liabilities:
Increase in resort property held for
timeshare sales (5,352,745) --
Increase in resort property under development (344,115) (1,735,592)
Increase in other assets (125,082) (7,670)
Increase in accounts payable 180,150 64,194
Increase in accrued and other liabilities 984,696 92,161
Increase (decrease) in deferred income (365,195) 365,195
----------- ----------
Net cash used in operating activities (5,539,291) (1,843,377)
----------- ----------
Cash flows from investing activities:
(Increase) decrease in deferred assets (156,679) 16,953
Purchases of plant and equipment (85,949) (61,301)
----------- ----------
Net cash used in investing activities (242,628) (44,348)
----------- ----------
Cash flows from financing activities:
Proceeds from notes payable 5,211,148 400,784
Principal payments on notes payable (1,787,288) --
Increase in due to affiliates 2,578,111 1,584,428
----------- ----------
Net cash provided by financing activities 6,001,971 1,985,212
----------- ----------
Net increase in cash and cash equivalents 220,052 97,487
Cash and cash equivalents at beginning of period 97,502 15
----------- ----------
Cash and cash equivalents at end of period $ 317,554 $ 97,502
=========== ==========
See notes to consolidated financial statements
</TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
The consolidated financial statements include the accounts of Varsity Clubs of
America Incorporated and its wholly-owned subsidiaries ("VCA" or the "Company").
All significant intercompany transactions and balances have been eliminated in
consolidation. VCA is a wholly owned subsidiary of ILX Incorporated ("ILX").
The Company's significant business activities include developing, operating,
marketing and financing ownership interests in quality lodging accommodations
near prominent colleges and universities.
There was no income statement activity in 1992 and 1993.
Revenue Recognition
- -------------------
Revenue from sales of timeshare interests is recognized in accordance with
Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real
Estate ("SFAS No. 66"). No sales are recognized until such time as a minimum of
10% of the purchase price has been received in cash, the buyer is committed to
continued payments of the remaining purchase price and the Company has been
either released of, or has provided for, the delivery of all future obligations
for the timeshare interest. Revenue will be recognized by the percentage of
completion method as development and construction proceeds and as the costs of
development and profit can be reasonably estimated.
Income Taxes
- ------------
VCA has an informal tax sharing agreement with ILX under which it receives a tax
benefit from ILX for tax losses included in the ILX tax return if such losses
can be utilized by ILX. Amounts will be payable by VCA to ILX when VCA taxable
income is included in the ILX tax return. This payable will be calculated based
upon taxes that VCA would owe on a stand alone basis. Deferred tax assets and
liabilities are recorded when there is a difference between the tax basis of
such accounts in the ILX consolidated tax returns and the financial statement
basis. At December 31, 1994, due to affiliates included a current tax receivable
of $165,969 and a deferred tax asset of $90,290.
Statements of Cash Flows
- ------------------------
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the year ended December 31, 1994, the Company paid
interest of approximately $30,748, which was capitalized to resort property
under development.
Note 2 - Notes Receivable
Notes receivable consist of the following:
December 31,
1994
----
Timeshare receivables $282,483
Allowance for possible credit losses (30,804)
--------
$251,679
========
Notes generated from the sale of timeshare interests bear interest at annual
rates ranging from 9% to 13.5% and have terms of five to seven years. In
addition, the Company offers 0% interest and below market interest, and one and
two year financing, to certain timeshare purchasers. These notes are discounted
to yield a consumer market rate. The notes are collateralized by deeds of trust
on the timeshare interests sold.
The Company has a $10 million financing commitment whereby the Company may sell
eligible notes received from sales of timeshare interests on a recourse basis
through February 1996. The commitment may be extended for an additional eighteen
month period and an additional $10 million at the option of the financing
company. This commitment was unused at December 31, 1994.
Note 3 - Resort Property Under Development
The Company intends to develop lodging accommodations in areas located near
major university campuses, and to market those lodging accommodations, including
interval ownership interests, to alumni and other sports enthusiasts. During
1994, the Company acquired its first site near the University of Notre Dame for
$690,655 and commenced construction. Acquisition and construction costs totaling
$1,735,592 are included in resort property under development at December 31,
1994. Revenues of $513,400, net of related selling costs of $148,205, have been
deferred at December 31, 1994, until construction is substantially complete.
The Company has a construction financing commitment for $5 million to complete
the Notre Dame facility, of which $400,784 has been drawn at December 31, 1994.
(Note 7)
Note 4 - Deferred Assets
Deferred assets consist of loan fees and land deposits on potential future
sites.
Note 5 - Property and Equipment
Property and equipment consists of the following:
December 31,
1994
----
Office equipment $15,564
Computer equipment 45,737
-------
61,301
Accumulated depreciation (1,035)
------
$60,266
=======
Note 6 - Due to Affiliates
The balances in due to affiliates represent advances from ILX and cash
overdrafts that will be covered by ILX. The advances bear interest at 13.5% and
are payable on demand, although no demand is anticipated until VCA has
sufficient working capital to commence repayment.
Note 7 - Notes Payable
Notes payable consists of a construction note payable, collateralized by a deed
of trust on the Varsity Clubs of America - Notre Dame facility in Mishawaka,
Indiana. The note bears interest at 13%, with interest payable monthly, release
fees of $2,180 per interval applied to the principal balance of the note, with
the balance due in full 36 months from the date of the final loan draw. This
note was issued pursuant to a commitment for $5 million. Under certain
circumstances the lender has the option to convert the repayment terms to a 60
month amortization.
Note 8 - Commitments
Future minimum lease payments on noncancelable operating leases are as follows:
Year ending
December 31,
------------
1995 $51,000
1996 26,000
1997 13,000
-------
$90,000
=======
Total rent expense for the year ended December 31, 1994, was approximately
$63,000.
Note 9 - Subsequent Events
In July 1995, the Company acquired a two acre site in Tucson, Arizona, near the
University of Arizona, to be the site of its second Varsity Clubs of America.
The land was acquired for $1,002,000, consisting of a $300,600 down payment and
a note payable to the seller of $701,400. The Company has a commitment for
construction financing for the facility in the amount of $6 million, which is
expected to be sufficient to build and furnish the property.
Note 10 - Unaudited Interim Period
Summary of Significant Accounting Policies
- ------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the nine month period ended September 30, 1995, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1995. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
Notes Payable
- -------------
During the first nine months of 1995, the Company borrowed $4,068,049 on its $5
million construction financing commitment for the Varsity Clubs of America -
Notre Dame facility and following completion of the property in August, 1995,
paid $644,190 in release payments bringing the balance outstanding on the loan
to $3,824,643 at September 30, 1995.
During the second and third quarters of 1995, the Company borrowed $1,143,099
against consumer notes receivable. The borrowing was repaid in September, 1995
upon the sale of the consumer notes under the $10,000,000 financing commitment.
<PAGE>
================================================================================
No dealer, salesperson or any other Minimum $2,000,000
person has been authorized to give any Maximum $5,000,000
information or to make any
representation not contained in this
Prospectus in connection with the offer -----------
made hereby. If given or made, such
information or representation must not
be relied upon as having been authorized ILX INCORPORATED
by the Company. This Prospectus does not
constitute an offer to sell or
solicitation of an offer to purchase by 10% Convertible
any person in any jurisdiction in which Adjustable
such offer would be unlawful. Neither Secured Bonds
the delivery of this Prospectus nor any
sale made hereunder shall under any
circumstances create any implication Due 2000
that the information contained herein is
correct as of any time subsequent to the
date hereof. However, in the event of
any material change during the period
when this Prospectus must be delivered,
this Prospectus will be amended or
supplemented accordingly.
----------------------------------
TABLE OF CONTENTS
AVAILABLE INFORMATION...................1
CORPORATION BY REFERENCE................1
PROSPECTUS SUMMARY......................2
---------------
RISK FACTORS............................6
PROSPECTUS
THE COMPANY............... ............11
---------------
RATIO OF EARNINGS TO FIXED CHARGES ....18
USE OF PROCEEDS....................... 18
PLAN OF DISTRIBUTION.................. 19
DESCRIPTION OF ILX SECURITIES AND
PERTINENT ARIZONA STATUTES........... 21
BROOKSTREET SECURITIES
INFORMATION ABOUT THE REGISTRANT..... 30 2361 Campus Drive
Suite 210
SEC POSITION ON INDEMNIFICATION Irvine, California 92715
FOR SECURITIES ACT LIABILITIES....... 30 (714) 852-7905
LEGAL MATTERS........................ 30
UNDERTAKINGS......................... 31
INDEX TO FINANCIAL STATEMENTS ....... 31
--------------------------------
================================================================================
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Minimum Maximum
SEC Registration Fee................$ 4,379.30 $ 4,379.30
NASD Fees...........................$ 2,770.00 $ 2,770.00
Representative Non-Accountable
Expense Allowance ..................$ 40,000.00 $ 100,000.00
Accounting Fees and Expenses........$ 50,000.00 $ 50,000.00
Legal Fees and Expenses.............$ 65,000.00 $ 65,000.00
Printing Expenses...................$ 20,000.00 $ 20,000.00
Blue Sky Fees and Expenses..........$ 41,235.00 $ 41,235.00
Appraiser Fees......................$ 8,700.00 $ 8,700.00
Trustee Fees........................$ 10,500.00 $ 10,500.00
Miscellaneous.......................$ 10,000.00 $ 10,000.00
------------ ------------
Total................ $ 252,584.30 $ 312,584.30
Item 15. Indemnity of the Officers and Directors and Commission Position on Such
Indemnity.
Articles 13 and 14 of ILX's Articles of Incorporation, under certain
circumstances, provide for the indemnification of ILX's officers and directors
against liabilities they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is contained herein,
but that description is qualified in its entirety by reference to Articles 13
and 14 of ILX's Articles of Incorporation.
In general, any director or officer of ILX is eligible to be
indemnified against all expenses, including attorneys' fees, judgments, fines,
punitive damages and amounts paid in settlement, that were incurred in
connection with a proceeding to which the director or officer was a party as a
result of his or her relationship with ILX, unless (1) the individual breached
his or her duty of loyalty to ILX, (2) the individual's acts or omissions are
not in good faith, (3) the individual engaged in intentional misconduct or
knowing violation of law, or (4) indemnification is expressly prohibited by
applicable law. In addition, ILX will not indemnify a director or officer for
any liability incurred in a proceeding initiated (or participated in as an
intervenor or amicus curiae) by the officer or director seeking indemnification
unless such initiation or participation is authorized by the affirmative vote of
a majority of the directors in office.
ILX shall advance funds to pay the expenses of any officer or director
involved in a proceeding provided ILX receives an undertaking that the
individual will repay the funds if it is ultimately determined that he or she is
not entitled to indemnification. The indemnification rights granted to ILX's
officers and directors are deemed to be a legally binding contract between ILX
and each such officer and director. Any repeal, amendment or modification of
Articles 13 or 14 of ILX's Articles of Incorporation shall be effective
prospectively and shall not affect any prior rights or obligations concerning
the indemnification of ILX's officers and directors.
Item 16. Exhibits.
The Exhibits required by Item 601 of Regulation S-K have been supplied
as follows:
Exhibit Page
------- ----
(1) Form of Placement Agent Agreement,
(including the Form of Subscription
Agreement and Escrow and Impound Agreement)
and Soliciting Dealer Agreement
(4) Form of Indenture between ILX and
U.S. Trust Company of California, N.A., as
Trustee (including the Form of CAS Bonds)
(5) Opinion of Colombo & Bonacci, P.C. *
(10) Material Contracts *
(a) Consulting Agreement between ILX Incorporated
and Investor Resources Services, Inc. *
(b) Consulting Agreement between ILX Incorporated
and Universal Solutions, Inc. *
(11) Statement re Computation of Per Share Earnings
(12) Statement re Computation of Ratios
(13) Annual Report to Security-Holders on Form 10-K/A-3 +
and Third Quarter Form 10-Q Dated September 30, 1995
(23) Consents of Experts and Counsel
(a) Consent of Colombo & Bonacci, P.C. *
(b) Consent of Deloitte & Touche LLP
(c) Consent of The Mentor Group, Incorporated
(25) Statement of Eligibility of Trustee *
(99) Additional Exhibits
(a) Appraisal prepared by The Mentor Group, Inc.
concerning Valuation of VCA Stock
* Previously Filed
+ Form 10-K/A-3 Previously Filed
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) deliver or cause to be delivered with the Prospectus, to each
person to whom the Prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
Prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to
deliver, or cause to be delivered to each person to whom the Prospectus
is sent or given, the latest quarterly report that is specifically
incorporated by reference in the Prospectus to provide such interim
financial information.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted form the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on November 16, 1995.
ILX INCORPORATED
By /s/ Joseph P. Martori
--------------------------------
Joseph P. Martori, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Joseph P. Martori President/Director 11-16-1995
- -------------------------
Joseph P. Martori
/s/ Nancy J. Stone Chief Financial Officer/ 11-16-1995
- -------------------------
Nancy J. Stone Director
/s/ Denise Janda Controller 11-16-1995
- -------------------------
Denise Janda
/s/ Ronald D. Nitzberg Director 11-16-1995
- -------------------------
Ronald D. Nitzberg
/s/ Edward J. Martori Director 11-16-1995
- -------------------------
Edward J. Martori
/s/ James W. Myers Director 11-16-1995
- -------------------------
James W. Myers
/s/ Steven R. Chanen Director 11-16-1995
- -------------------------
Steven R. Chanen
/s/ Luis C. Acosta Director 11-16-1995
- -------------------------
Luis C. Acosta
$2,000,000 Minimum
$5,000,000 Maximum
10% Convertible Adjustable Secured Bonds Due 2000
ILX INCORPORATED
PLACEMENT AGENT AGREEMENT
Phoenix, Arizona
November __, 1995
BROOKSTREET SECURITIES CORPORATION
2361 Campus Drive, Suite 210
Irvine, California 92715
Ladies and Gentlemen:
ILX Incorporated, an Arizona corporation (the "Company"), confirms its
agreement with you, as placement agent (the "Agent"), with respect to the sale
by the Company of a minimum $2,000,000 aggregate principal amount, and a maximum
$5,000,000 aggregate principal amount, of the Company's 10% Convertible
Adjustable Secured Bonds due 2000 (the "Bonds") to be issued pursuant to the
provisions of an Indenture, dated as of _______________ (the "Indenture"),
between the Company and U. S. Trust Company of California, N.A., as trustee (the
"Trustee"). The shares of the Company's common stock, no par value (the "Common
Stock"), issuable upon conversion of the Bonds are hereinafter referred to as
the "Underlying Stock." The Company also proposes to grant to Brookstreet
Securities Corporation warrants (described in Section 5(d) hereof) to purchase a
minimum of 40,000 and a maximum of 100,000 shares of the Company's Common Stock
(the "Warrants") (determined in increments of 1,000 shares per $50,000 in
principal amount of Bonds sold). The Bonds, the Underlying Stock and the
Warrants are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with the Agent as of the date hereof, and
as of the Initial Closing (as defined in Section 2(c) hereof) and the Final
Closing (as defined in Section 2(c) hereof) if any, as follows:
(a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an amendment or
amendments thereto, on Form S-2 (No. 33-61477), including any related
preliminary prospectus deemed by the Company to be in compliance with and filed
pursuant to Rule 430 (the most recent of which is hereinafter referred to as the
"Preliminary Prospectus"), for the registration of the Bonds and the Underlying
Stock under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations (the "Regulations") of the Commission under the Act. Subject to
Section 4(a), the Company will promptly file a further amendment to said
registration statement in the form theretofore delivered to the Agent. Except as
the context may otherwise require, said registration statement, as amended, on
file with the Commission at the time said registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations) is hereinafter
called the "Registration Statement," and the form of prospectus in the final
form filed with the Commission pursuant to Rule 424(b) of the Regulations,
including the documents incorporated by reference therein pursuant to Item 12 of
Form S-2, is hereinafter called the "Prospectus." For purposes hereof, "Rules
and Regulations" mean the rules and regulations adopted by the Commission under
the Act, or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of the Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of the
Registration Statement, any of the Company's securities have been instituted or
are pending or threatened. Each of the Preliminary Prospectus, the Registration
Statement and the Prospectus conformed at the time of filing thereof with the
requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement or the Prospectus at the time
of filing thereof contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein and necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to the Agent or Soliciting Dealers (as
defined herein) by or on behalf of the Agent expressly for use in such
Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Initial Closing and the Final Closing, if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Agent or a Soliciting Dealer (as
defined herein), the Registration Statement and the Prospectus will contain all
statements that are required to be stated therein in accordance with the Act and
the Rules and Regulations, and will conform to the requirements of the Act and
the Rules and Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in conformity with information furnished to the
Company in writing by or on behalf of any Agent expressly for use in such
Registration Statement, Prospectus, amendment or supplement.
(d) Each of the Company and its subsidiaries set forth on
Exhibit A attached hereto and incorporated herein by this reference
(collectively, the "Subsidiaries"), has been duly organized and is validly
existing as a corporation (or other entity) in good standing under the laws of
the state of its incorporation or formation. Except as set forth in the
Registration Statement or the Prospectus or listed on Exhibit A hereto, neither
the Company nor any of the Subsidiaries owns a material interest (defined for
the purposes hereof as meaning a ten percent or more interest) in any
corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations require such qualification or
licensing. Each Subsidiary is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations requires such qualification
or licensing. Except as set forth on Exhibit A hereto, the Company owns 100% of
the outstanding capital stock of each of its Subsidiaries, in each case free and
clear of all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever; and all
outstanding shares of capital stock of each of the Subsidiaries have been
validly issued and are fully paid and non-assessable and not issued in violation
of any preemptive rights or applicable securities laws. Each of the Company and
the Subsidiaries has all requisite power and authority (corporate and other),
and has obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), to own or lease its
properties and conduct its business as described in the Prospectus; each of the
Company and the Subsidiaries is and has been doing business in compliance with
all material authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, foreign, state and local laws, rules and
regulations, or if a failure to so comply exists, such failure would not
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs, position, prospects, value, operation, properties,
business or results of operations of the Company and the Subsidiaries taken as a
whole; and neither the Company nor any of the Subsidiaries has received any
notice of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company and the
Subsidiaries taken as a whole. The Company advises that the Arizona Department
of Real Estate has submitted to the Company a Consent Order, which includes a
fine of $2,000.00 payable by the Company, in connection with the Company's
Kohl's Ranch timeshare operation. The disclosures in the Registration Statement
concerning the effects of federal, state and local laws, rules and regulations
on each of the Company's and the Subsidiaries' businesses as currently conducted
and as contemplated are correct in all material respects and do not omit to
state a material fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and will have the
adjusted capitalization set forth therein on the Initial Closing and the Final
Closing, if any, as of the dates and based upon the assumptions set forth
therein. Neither the Company nor any of the Subsidiaries is a party to or bound
by any material instrument, agreement or other arrangement, including, but not
limited to, any voting trust agreement, stockholders' agreement or other
agreement or instrument, affecting the securities or options, warrants or rights
or obligations of security holders of the Company or any of the Subsidiaries or
providing for any of them to issue, sell, transfer or acquire any capital stock,
rights, warrants, options or other securities of the Company or any of the
Subsidiaries, except for this Agreement, the Indenture and as described or
referred to in the Registration Statement or the Prospectus. The Bonds, the
Underlying Stock, the Warrants and all other securities issued or issuable by
each of the Company and the Subsidiaries conform or, when issued and paid for,
will conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of each of the Company or any of the Subsidiaries have
been duly authorized and validly issued and are fully paid and non-assessable;
the holders thereof have no rights of rescission with respect thereto and are
not subject to personal liability for the Company's acts or omissions solely by
reason of being such holders; and none of such securities was issued in
violation of the preemptive rights of any security holder of the Company or any
of the Subsidiaries or similar contractual rights granted by the Company or any
of the Subsidiaries. The Bonds will be issued pursuant to the terms and
conditions of the Indenture, and the provisions of the Indenture described in
the Prospectus will conform to the description thereof contained in the
Prospectus but such description is qualified by reference to the actual terms of
the Indenture. The Bonds have been duly authorized and, when validly
authenticated, issued, delivered and paid for in the manner contemplated by the
Indenture, will be duly authorized, validly issued and outstanding obligations
of the Company entitled to the benefits of the Indenture. The shares of Common
Stock issuable upon conversion of the Bonds will, upon such issuance, be duly
authorized, validly issued, fully paid and nonassessable, and the Company has
duly authorized and reserved for issuance upon conversion of the Bonds the
shares of Common Stock issuable upon such conversion. The Bonds and the
Underlying Stock are not and will not be subject to any preemptive or other
similar rights of any securityholder of the Company or any of the Subsidiaries;
the holders thereof will not be subject to any liability for the Company's acts
or omissions solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Bonds and the Underlying Stock has
been duly and validly taken; and the certificates representing the Bonds and the
Underlying Stock will be in due and proper form.
(f) The consolidated financial statements of the Company and
the Subsidiaries together with the related notes thereto included in the
Registration Statement, the Preliminary Prospectus and the Prospectus fairly
present the financial position, income, change in stockholders' equity, cash
flow and the results of operations of the Company and the Subsidiaries at the
respective dates and for the respective periods to which they apply. There has
been no adverse change or development involving a material prospective change in
the condition, financial or otherwise, or in the earnings, business affairs,
position, prospects, value, operation, properties, business or results of
operations of the Company or any of the Subsidiaries, whether or not arising in
the ordinary course of business, since the date of the financial statements
included in the Registration Statement and the Prospectus, except as set forth
in the Registration Statement and the Prospectus, and the outstanding debt, the
property, both tangible and intangible, and the businesses of each of the
Company and the Subsidiaries described in the Registration Statement and the
Prospectus conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "SUMMARY INFORMATION,
RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHARGES" and "SELECTED CONSOLIDATED
FINANCIAL DATA" fairly present, on the basis stated in the Prospectus, the
information set forth therein and have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus.
(g) Each of the Company and the Subsidiaries (i) has paid all
federal, state and local taxes for which it is currently liable, including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes that are not due and
payable or are being contested in good faith by the Company and (iii) does not
have any material tax deficiency or claims outstanding, proposed or assessed
against its respective business or assets.
(h) No U.S. transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Agent in connection with (i) the issuance by the
Company of the Securities or the Underlying Stock, or (ii) the consummation by
the Company of any of its obligations under this Agreement and the Indenture.
(i) Each of the Company and the Subsidiaries maintains
insurance policies, including, but not limited to, general liability, property
and product liability insurance and surety bonds which insures the Company and
the Subsidiaries and their respective professional staffs against such losses
and risks generally insured against by comparable businesses. Neither the
Company nor any of the Subsidiaries (A) has failed to give notice or present any
insurance claim with respect to any matter, including, but not limited to, the
Company's or any of the Subsidiaries' businesses, property or professional
staff, under any insurance policy or surety bond in a due and timely manner, (B)
has any disputes or claims against any underwriter of such insurance policies or
surety bonds or has failed to pay any premiums due and payable thereunder or (C)
has failed to comply with all conditions contained in such insurance policies
and surety bonds. The Company has not received notice of facts or circumstances
under any such insurance policy or surety bond which would relieve any insurer
of its obligation to satisfy in full any valid claim of the Company or any of
the Subsidiaries.
(j) There is no material action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or, to the best of the Company's
knowledge, threatened against, or involving the properties or businesses of, the
Company or any of the Subsidiaries which (i) questions the validity of the
capital stock of the Company or any of the Subsidiaries, this Agreement and the
Indenture or of any action taken or to be taken by the Company or any of the
Subsidiaries pursuant to or in connection with this Agreement or the Indenture,
(ii) is required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration Statement
are accurately summarized in all respects) or (iii) materially and adversely
affects the condition, financial or otherwise, or the earnings, business
affairs, position, prospects, stockholders' equity, value, operation,
properties, businesses or results of operations of the Company and the
Subsidiaries taken as a whole. For the purposes hereof, a material action shall
be an action resulting in liability to the Company in excess of five percent of
its net worth, as reflected on its most recent balance sheet.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Bonds, the Underlying Stock and the
Warrants, to enter into this Agreement and the Indenture and to consummate the
transactions provided for in such agreements; and this Agreement and Indenture
have each been (or, as to the Indenture, will be prior to the Initial Closing
Date) duly and properly authorized, executed and delivered by the Company. Each
of the Agreement and the Indenture, when executed, constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, and none of the Company's issue and sale of the
Bonds, the Underlying Stock and the Warrants, the execution or delivery of this
Agreement and the Indenture, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein and therein or the conduct
by it and the Subsidiaries of their businesses as described in the Registration
Statement, the Prospectus or any amendments or supplements thereto conflicts or
will conflict with or results or will result in any breach or violation of any
of the terms or provisions of, or constitutes or will constitute a default
under, or results or will result in the creation or imposition of any lien
(other than the lien created by the Indenture), charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever upon any property or assets (tangible or intangible) of the Company
or any of the Subsidiaries pursuant to the terms of, (i) the certificate of
incorporation or by-laws of the Company or any of the Subsidiaries, (ii) any
material license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note, loan or credit agreement or other
agreement or instrument to which the Company or any of the Subsidiaries is a
party or by which it is or may be bound or to which its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (iii) to
the best of the Company's knowledge, any statute, judgment, decree, order, rule
or regulation applicable to the Company or any of the Subsidiaries of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of the Subsidiaries or any of their
respective activities or properties.
(l) No consent, approval, authorization or order of, and no
filing with, any domestic court, regulatory body, government agency or other
body is required for the issuance of the Bonds pursuant to the Prospectus and
the Registration Statement, the performance of this Agreement and the Indenture
or the transactions contemplated hereby or thereby, including, without
limitation, any waiver of any preemptive, first refusal or other rights that any
entity or person may have for the issue and/or sale of any of the Securities,
except such as have been or may be required to be obtained under the Act, the
Exchange Act and the rules of the National Association of Securities Dealers,
Inc. or may be required under state securities or Blue Sky laws in connection
with the offering and sale of the Bonds.
(m) Each of the Company and the Subsidiaries shall have duly
and validly authorized, executed and delivered each agreement, contract or other
document filed as an exhibit to the Registration Statement (or the original of
such agreement, contract or document if a copy thereof is filed as an exhibit to
the Registration Statement) to which it is a party or by which it may be bound
or to which its assets, properties or businesses may be subject, and each such
agreement, contract or other document constitutes its legal, valid and binding
agreement enforceable against it in accordance with its terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate but such descriptions are qualified by reference to the actual terms of
such agreements, contracts and other documents. There are no contracts or other
documents which are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required; and the exhibits which
have been filed are complete and correct copies of the documents of which they
purport to be copies, except to the extent such documents are filed as unsigned
forms of documents.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the Company
nor any of the Subsidiaries has (i) entered into any material transaction other
than in the ordinary course of business or (ii) declared or paid any dividend or
made any other distribution on or in respect of its capital stock of any class
and there has not been any material change in the capital stock, debt (long or
short term) or liabilities (except for (x) financing in connection with
acquisition of assets of the Company through purchase money financing and
financing related to timeshare sales which is secured by timeshare receivables,
(y) debt incurred to finance capital improvements to existing properties not to
exceed $3,000,000 outstanding and (z) debt for working capital not to exceed
$1,500,000 outstanding) or any material change in or affecting the general
affairs, management, financial operations, stockholders' equity or results of
operations of the Company or any of the Subsidiaries.
(o) No material default exists in the due performance and
observance of any material term, covenant or condition of any license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders' agreement, note, loan or credit agreement,
purchase order, agreement or instrument evidencing an obligation for borrowed
money or other material agreement or instrument to which the Company or any of
the Subsidiaries is a party or by which the Company or any of the Subsidiaries
may be bound or to which the property or assets (tangible or intangible) of the
Company or any of the Subsidiaries is subject or affected. For the purposes
hereof, a material default shall be a default resulting in liability to the
Company in excess of five percent of its net worth, as reflected on its most
recent balance sheet.
(p) Each of the Company and the Subsidiaries is in material
compliance with all federal, state, local and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. Except as described in the Prospectus, the
Company has not received notice of any pending investigations involving the
Company or any of the Subsidiaries by the U.S. Department of Labor or any other
governmental agency responsible for the enforcement of such federal, state,
local or foreign laws and regulations. The Company has not received notice of
any unfair labor practice charge or complaint against the Company or any of the
Subsidiaries pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company or any of the Subsidiaries, or any predecessor entity
of the Company or any of the Subsidiaries, and none has ever occurred. No
collective bargaining agreement or modification thereof is currently being
negotiated by the Company or any of the Subsidiaries. No material labor dispute
with the employees of the Company or any of the Subsidiaries exists or, to the
best of the Company's knowledge, is imminent.
(q) Except as described in the Registration Statement and
except for the ILX Profit Sharing Plan, dated December 31, 1994, neither the
Company nor any of the Subsidiaries maintains, sponsors or contributes to any
program or arrangement that is an "employee pension benefit plan," an "employee
welfare benefit plan" or a "multi-employer plan" ("ERISA Plans") as such terms
are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither the
Company nor any of the Subsidiaries maintains or contributes to, now or at any
time previously, a defined benefit plan as defined in Section 3(35) of ERISA. To
the best of the Company's knowledge, no ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code which could subject the Company
or any of the Subsidiaries to any tax penalty on prohibited transactions and
which has not adequately been corrected. To the best of the Company's knowledge,
each ERISA Plan is in compliance with all material reporting, disclosure and
other requirements of the Code and ERISA as they relate to such ERISA Plan.
Neither the Company nor any of the Subsidiaries has ever completely or partially
withdrawn from a "multi-employer plan" as so defined.
(r) Neither the Company or any of the Subsidiaries, nor any of
the directors, principal stockholders, executive officers or, to the best of the
Company's knowledge, employees, affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing or Alan Mishkin, a principal shareholder,
has taken, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the Exchange
Act or otherwise, stabilization or manipulation in violation of the Exchange Act
of the price of any security of the Company to facilitate the sale or resale of
the Securities, the Underlying Stock or otherwise.
(s) Each of the Company and the Subsidiaries (i) to the best
of the Company's knowledge, owns or possesses, or has a license or other right
to use, all copyrights, trademarks, service marks and trade names, together with
all applications for any of the foregoing, presently used or held for use by it
in connection with its businesses as described in the Registration Statement,
(ii) has not received any notice of infringement of or conflict with asserted
rights of others with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition, financial or otherwise, or the
business affairs, position, prospects, properties, results of operations or net
worth of the Company and the Subsidiaries, taken as a whole, and (iii) is not
obligated or under any liability whatsoever to make any material payments by way
of royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any trademark, service mark, trade name or copyright or other intangible
asset with respect to the use thereof or in connection with the conduct of its
business or otherwise. None of the copyrights, trademarks, service marks and
trade names presently owned or used by the Company or any of the Subsidiaries
are in dispute or, to the best of the Company's knowledge, are in conflict with
the right of any other person or entity.
(t) Each of the Company and the Subsidiaries has good and
marketable title to, or valid and enforceable leasehold estates in, all material
items of real and personal property described in the Registration Statement to
be owned or leased by it, in each case free and clear of all monetary liens,
charges, claims, encumbrances, pledges, security interests, defects and other
restrictions and equities of any kind whatsoever, other than those referred to
in the Prospectus or the Registration Statement and liens for taxes not yet due
and payable.
(u) Deloitte & Touche, whose reports are filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(v) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Bonds hereunder or
any other arrangements, agreements, understandings, payments or issuance not
described in the Prospectus with respect to the Company, any of the Subsidiaries
or any of their respective officers, directors, stockholders, employees or
affiliates that may affect the Agent's compensation as determined by the
National Association of Securities Dealers, Inc. ("NASD").
(w) Neither the Company or any of the Subsidiaries nor any of
their respective executive officers, principal stockholders, or, to the best of
the Company's knowledge, employees or agents nor any other person acting on
behalf of the Company or any of the Subsidiaries nor Alan Mishkin, a principal
shareholder, has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or any official or employee of any governmental agency
(domestic or foreign), or any instrumentality of any government (domestic or
foreign), or any political party or candidate for office (domestic or foreign),
or any other person who was, is or may be in a position to help or hinder the
businesses of the Company or any of the Subsidiaries (or assist the Company or
any of the Subsidiaries in connection with any actual or proposed transaction)
which (i) might subject the Company or any of the Subsidiaries, or any of such
others to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign), (ii) if not given in the past,
might have had a materially adverse effect on the assets, businesses or
operations of the Company or any of the Subsidiaries or (iii) if not continued
in the future, might adversely affect the assets, businesses, operations or
prospects of the Company or any of the Subsidiaries. Each of the Company's and
the Subsidiaries' internal accounting controls are sufficient to cause the
Company and the Subsidiaries to comply with the Foreign Corrupt Practices Act of
1977, as amended.
(x) Except as set forth in the Registration Statement
Prospectus, no officer, director, principal stockholder or key employee of the
Company or any of the Subsidiaries, or any "affiliate" or "associate" (as these
terms are defined in Rule 405 promulgated under the Rules and Regulations) of
any of the foregoing persons or entities, has or has had, either directly or
indirectly, (i) any interest in any person or entity which furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company or any of the Subsidiaries or (ii) a material interest in
any person or entity which purchases from or sells or furnishes to the Company
or any of the Subsidiaries any goods or services or (iii) a beneficial interest
in any material contract or agreement to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound or affected. Except as set forth in the Registration Statement or the
Prospectus, there are no existing material agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company or any of the
Subsidiaries and any such officer, director, principal stockholder or key
employee or any "affiliate" or "associate."
(y) The minute books of each of the Company and the
Subsidiaries have been made available to the Agent, contain a complete summary
of all actions of the directors and stockholders of each of the Company and the
Subsidiaries since the time of their respective incorporation and reflect all
transactions referred to in such minutes accurately in all respects.
(z) No holders of any securities of the Company or any of the
Subsidiaries or of any options, warrants or other convertible or exchangeable
securities of the Company or any the Subsidiaries have the right to include any
securities issued by the Company or any of the Subsidiaries in the Registration
Statement and no person or entity holds any anti-dilution rights with respect to
any securities of the Company or any of the Subsidiaries that would be triggered
by the issuance of the Bonds, the Warrants or the Common Stock into which they
are convertible as described in the Registration Statement and the Prospectus.
(aa) Any certificate signed by any officer of the Company and
delivered to the Agent or Thelen, Marrin, Johnson & Bridges ("Agent's Counsel")
shall be deemed a representation and warranty by the Company to the Agent as to
the matters covered thereby.
(bb) To the best of the Company's knowledge, each of the
Company and the Subsidiaries is in compliance with all federal, foreign, state
and local laws, rules and regulations relating to environmental protection, and
neither the Company nor any of the Subsidiaries has been notified or is
otherwise aware that it is potentially liable, or is considered potentially
liable, under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any similar law ("Environmental Laws").
Neither the Company nor any of the Subsidiaries is involved in or subject to any
action, suit, regulatory investigation or other proceeding, pending or (to the
best of the Company's knowledge) threatened, relating to environmental
protection or the Environmental Laws, nor does the Company or any of the
Subsidiaries believe any such action, suit, investigation or proceeding is
probable of assertion against the Company or any of the Subsidiaries, provided
that the Company has filed voluntarily for a Determination of Applicability from
the Arizona Department of Environmental Quality to determine the applicability
of either General or Individual Acquifier Protection Permit requirements to the
Company's Kohl's Ranch property in accordance with Arizona Revised Statutes
ss.49-241, et seq. To the best of the Company's knowledge, no disposal, release
or discharge of hazardous or toxic substances, pollutants or contaminants,
including petroleum and gas products, as any of such terms may be defined under
federal, state or local law, has occurred on, in, at or about any of the
facilities or properties of the Company or any of the Subsidiaries.
(cc) Neither the Company nor any of the Subsidiaries has ever
received a notice, orally or in writing, with respect to the denial of any
license the Company or any Subsidiary has sought to obtain under, and the
Company-approved operating procedures and practices of each of the Company and
the Subsidiaries are, to the best of the Company's knowledge, in material
compliance with, federal, state and local laws, rules and regulations, provided
that the Company's application to obtain a license to sell timeshare interests
in the State of California has not yet been approved.
(dd) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(ee) The Company makes no representation regarding compliance
with the laws of any foreign jurisdiction. The Company has relied on the Agent
and Soliciting Dealers offering the Bonds for sale in any foreign jurisdiction
as to compliance with applicable laws, rules and regulations thereof.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby appoints the Agent as its sales agent and grants the Agent the exclusive
right (subject to the right of Agent to retain Soliciting Dealers (defined
below)) to offer and sell the Bonds during the Offering Period (as hereinafter
defined) for the account of the Company. The Agent accepts such appointment and
agrees to use its best efforts as sales agent, following written or telegraphic
receipt of notice of the effective date of the Registration Statement, to offer
and sell such principal amount of Bonds as contemplated by this Agreement at
$1,000 per Bond.
(b) Each prospective purchaser of Bonds will be required to
complete, execute, and deliver to the Company a subscription agreement in
substantially the form attached as Exhibit E hereto and filed as an exhibit to
the Registration Statement (the "Subscription Agreement"). Prior to or
concurrently with the delivery to the Company of any Subscription Agreement by
any purchaser, funds sufficient to purchase the Bonds subscribed for shall be
deposited in an escrow account (the "Escrow Account") to be maintained pursuant
to an escrow agreement between the Escrow Agent (as hereinafter defined), the
Company, and the Agent in substantially the form attached hereto as Exhibit F
and filed as an exhibit to the Registration Statement (the "Escrow Agreement").
The Company shall be entitled in its sole discretion to reject in whole or in
part any Subscription Agreement tendered to it. The Company will forward to the
Agent copies of each Subscription Agreement accepted by it within three business
days of receipt by the Company of such Subscription Agreement.
(c) All subscriptions for Bonds will be conditioned upon the
acceptance by the Company of Subscription Agreements for at least $2,000,000
principal amount of Bonds (the "Minimum Subscriptions") by December 15, 1995,
which is the last date on which the offering of Bonds may be made, except that
such last offering date may be extended by the Company, in its sole discretion
by written notice to the Agent, to a date not later than January 14, 1996 (the
last date on which the offering of Bonds may be made is herein referred to as
the "Termination Date" and the period during which the offering of Bonds may be
made is herein referred to as the "Offering Period"). If Minimum Subscriptions
are not tendered to and accepted by the Company by the Termination Date, this
Agreement shall, subject to the provisions of Section 10 hereof, terminate. If
at least the Minimum Subscriptions are tendered to and accepted by the Company
on or before the Termination Date, a closing will be held at the offices of the
Agent at a date (which date may occur after the Termination Date) and time
determined by the Company as soon as practicable after the Company's acceptance
of the last of such Minimum Subscriptions (the "Initial Closing") and shall be
subject to each of the conditions precedent to closing provided for in this
Agreement. The Company may continue the Offering after the Initial Closing and
prior to the Termination Date until up to $5,000,000 principal amount of Bonds
are subscribed for, or until the offering is earlier terminated by agreement of
the Company and Placement Agent. Officers, directors, employees, principal
shareholders, their respective family members and affiliates, of the Company
shall have the right to purchase Bonds from time to time to achieve the Minimum
Subscriptions amount. If additional subscriptions are tendered and accepted
after the Initial Closing and prior to the Termination Date, an additional
closing with respect to such subscriptions shall be held in accordance with the
terms of the Prospectus (the "Final Closing"). The Final Closing will be held at
the offices of the Agent at a date (which date may occur after the Termination
Date) and time determined by the Company and shall be subject to each of the
conditions precedent to closing provided for in this Agreement. Each closing
date provided for under this Agreement (including the Initial Closing) shall
constitute a "Closing".
(d) Prior to the applicable Closing, all cash payments of
subscribers received (unless and until returned to the purchasers pursuant
hereto) will be placed in a segregated escrow account (the "Escrow Account")
with U.S. Trust Company of California, N.A. (the "Escrow Agent") for the
subscribers' benefit. The Agent will, and will cause each Soliciting Dealer to,
promptly deliver the funds into the Escrow Account in accordance with Rule
15(c)2-4 of the Securities Exchange Act of 1934, as amended, but in any event
not to exceed the next business day after receipt of such funds.
(e) The purchase price paid by any prospective purchaser whose
subscription is rejected, or is returned because the conditions to closing were
not satisfied, shall be returned to such prospective purchaser with interest at
the rate provided by the Escrow Agent.
(f) If prior to the Termination Date, subscriptions for more
than $5,000,000 principal amount of Bonds are received, the Agent, in its sole
discretion, may allocate the Bonds among the subscribers as to whom a closing
has not already been held in such a manner as they shall see fit.
(g) Payment of the purchase price for, and delivery of
certificates for, the Bonds shall be made at the offices of Brookstreet
Securities Corporation, 2361 Campus Drive, Suite 210, Irvine, California 92715
or at such other place as shall be agreed upon by the Agent and the Company.
Such delivery and payment shall be made at 10:00 a.m. (New York City time) on
the applicable Closing or at such other time and date as shall be agreed upon by
the Agent and the Company. Delivery of the certificates for the Bonds shall be
made to the Agent against release from the Escrow Account of the purchase price
for the Bonds to the order of the Company in Los Angeles Clearing House funds.
Certificates for the Bonds shall be in definitive, fully registered form and
shall be in such denominations and registered in such names as the Agent may
request in writing at least two business days prior to the applicable Closing.
The certificates for the Bonds shall be made available to the Agent at such
office or such other place as the Agent may designate for inspection, checking
and packaging no later than 9:30 a.m. on the last business day prior to the
applicable Closing.
(h) As soon as practicable after the Closing, the Agent shall
deliver or cause to be delivered by mail to each purchaser of Bonds on such
Closing (i) a copy of an executed Subscription Agreement which indicates thereon
the number of Bonds such purchaser has purchased and (ii) a certificate
representing such Bonds, registered in such purchaser's name.
(i) Subject to the sale of at least the Minimum Subscription
of the Bonds, the Company agrees to direct the Escrow Agent to pay to the Agent
an underwriting commission computed at the rate of 9% of the public offering
price for each of the Bonds sold by the Agent or any Soliciting Dealer at the
public offering price of $1,000.00 per Bond for which the Company has accepted
the Subscription Agreement and received payment from the Escrow Account. If a
sale for which a Subscription Agreement has been received does not occur for any
reason whatsoever, no commission or other payment shall be due in respect
thereof. Commissions shall be payable at each Closing, based on the Bonds as to
which such Closing relates, from the funds which have been deposited in the
Escrow Account.
3. Public Offering of the Securities. As soon after the Registration
Statement becomes effective as the Agent deems advisable, the Agent shall make a
public offering of the Bonds (other than to residents of or in any jurisdiction
in which qualification of the Bonds is required and has not become effective) at
the price and upon the other terms set forth in the Registration Statement and
the Prospectus. The Agent may enter into one or more agreements as the Agent, in
its sole discretion (provided that such broker-dealer shall have appropriate
licenses and permits to offer and sell the Bonds in the states in which they are
offered and sold), deems advisable with one or more NASD member broker-dealers
who shall act as dealers (the "Soliciting Dealers") in connection with such
public offering under the terms and conditions of Soliciting Dealer Agreements
in a form filed as an exhibit to the Registration Statement. The Agent may agree
to direct payment of commissions to such Soliciting Dealers from the Escrow
Account in amounts not to exceed 5% (which amounts shall be part of, and not in
addition to, the Agents commissions). Payment of all such commissions shall be
the responsibility of the Agent, and ILX shall have no responsibility or
liability therefore. Agent represents, warrants and covenants to the Company to
conduct the offering of the Bonds according to the same representation, warrants
and covenants made by the Soliciting Dealers in the Soliciting Dealer Agreement.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the Agent as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Bonds of
which the Agent and Agent's Counsel shall not previously have been advised and
furnished with a copy, or to which the Agent or Agent's Counsel shall have
objected (except if deemed necessary by counsel for the Company, in which case
the Agent shall have the right to terminate this Agreement upon prompt notice to
the Company), or which is not in compliance with the Act, the Exchange Act or
the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Agent and as soon as practicable confirm in
writing, (i) when the Registration Statement, as amended, becomes effective and,
if the provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A and when
any post-effective amendment to the Registration Statement becomes effective,
(ii) of the issuance by the Commission of any stop order or of the initiation,
or the threatening, of any proceeding suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose, (iv) of the receipt of any comments from the
Commission, and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
shall enter a stop order or suspend such qualification at any time, the Company
will make every effort to obtain promptly the lifting of such order or
suspension.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Agent or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1), or, if applicable and if consented to by the Agent, pursuant to Rule
424(b)(4)) on or before the date it is required to be filed under the Act and
the Rules and Regulations.
(d) The Company will give the Agent notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus that the Company proposes for use by the Agent
in connection with the offering of the Bonds that differs from the corresponding
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish
the Agent with copies of any such amendment or supplement a reasonable amount of
time prior to such proposed filing or use, as the case may be.
(e) The Company shall endeavor in good faith, in cooperation
with the Agent, at or prior to the time the Registration Statement becomes
effective, to qualify the Bonds for offering and sale under the securities laws
of such jurisdictions identified on Exhibit C to permit the continuance of sales
and dealings therein for as long as may be necessary to complete the
distribution, and shall make such applications, file such documents and furnish
such information as may be required for such purpose, provided the Company shall
not be required to qualify as a foreign corporation or file a general consent to
service of process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Agent agrees that
such action is not at the time necessary or advisable, use all reasonable
efforts to file and make such statements or reports at such times as are or may
reasonably be required by the laws of such jurisdiction to continue such
qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act and the Exchange Act, as now
and hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Bonds in accordance with the provisions hereof and the Prospectus, or any
amendments or supplements thereto. If at any time when a prospectus relating to
the Bonds is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Agent's Counsel, the Prospectus, as then amended or supplemented, includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Agent promptly and prepare and file with the Commission
an appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be satisfactory to Agent's Counsel, and the
Company will furnish to the Agent copies of such amendment or supplement as soon
as available and in such quantities as the Agent may request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12- month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its securityholders (including Bondholders), in the
manner specified in Rule 158(b) of the Rules and Regulations, and to the Agent
an earnings statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least 12 consecutive months after
the effective date of the Registration Statement.
(h) So long as any of the Bonds remain outstanding, the
Company will furnish to its Bondholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants), and
the other reports required to be delivered pursuant to the Indenture, and will
deliver to Agent:
(i) concurrently with furnishing such quarterly
reports to its securityholders, statements of income of the Company for each
quarter in the form furnished to the Company's securityholders and certified by
the Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports
to its securityholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations, stockholders'
equity and cash flows of the Company for such fiscal year, accompanied by a copy
of the report thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
state securities commission, the NASD or any securities exchange; (v) every
press release and every material news item or article of interest to the
financial community in respect of each of the Company and the Subsidiaries or
their respective affairs which was released or prepared by or on behalf of the
Company or any of the Subsidiaries; and
(vi) any additional information of a public nature
concerning the Company or any of the Subsidiaries (and any future subsidiaries)
or their respective businesses which the Agent may request.
During such period, if the Company has active subsidiaries, the foregoing
financial statements will be on a consolidated basis to the extent that the
accounts of the Company and its subsidiaries are consolidated, and will be
accompanied by similar financial statements for any significant subsidiary which
is not so consolidated.
(i) The Company will maintain a transfer agent and, if
necessary under the laws of the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the Common
Stock, and also for the Bonds.
(j) The Company will furnish to the Agent or on the Agent's
order, without charge, at such place as the Agent may designate, copies of the
Preliminary Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be signed and will
include all financial statements and exhibits), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such reasonable quantities as the Agent may request.
(k) Neither the Company nor any of the Subsidiaries nor any of
their respective executive officers directors, principal stockholders or
affiliates (within the meaning of the Rules and Regulations) will take, directly
or indirectly, any action designed to, or which might in the future reasonably
be expected to cause or result in, stabilization or manipulation of the price of
any securities of the Company in violation of the Exchange Act.
(l) The Company shall apply the net proceeds from the sale of
the Securities in the manner, and subject to the conditions, set forth under
"USE OF PROCEEDS" in the Prospectus. No portion of the net proceeds will be
used, directly or indirectly, to acquire or redeem any securities issued by the
Company, provided that this covenant shall not restrict the Company's ability to
redeem the Securities pursuant to their terms.
(m) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time under the
Act, the Exchange Act and the Rules and Regulations, and all such reports, forms
and documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act and the Rules and Regulations.
(n) The Company shall furnish to the Agent as early as
practicable prior to each of the date hereof, the Initial Closing and Final
Closing, if any, but no later than two full business days prior thereto, a copy
of the latest available unaudited interim consolidated financial statements of
the Company and the Subsidiaries (which in no event shall be as of a date more
than 30 days prior to the date of the Registration Statement) which have been
read by the Company's independent public accountants as stated in their letters
to be furnished pursuant to Section 6(i) hereof.
(o) The Company shall, as soon as practicable, but in no
event later than five business days before the effective date of the
Registration Statement, file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Securities and the Underlying Stock.
(p) Until the Termination Date, neither the Company nor any
of the Subsidiaries shall, without the prior written consent of the Agent and
Agent's Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company, any of
the Subsidiaries, their respective activities or the offering contemplated
hereby, other than trade releases issued in the ordinary course of the Company's
business consistent with past practices with respect to the Company's
operations.
(q) For any period during which any of the Bonds are
outstanding, the Company will not take any action or actions which may cause the
exemption from registration provided by Section 3(a) of the Act (or any
successor provision) to be unavailable for the conversion of the Bonds into
Common Stock.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Initial
Closing and the Final Closing (to the extent not paid at the Initial Closing)
all expenses and fees (other than fees of Agent's Counsel) incident to the
performance of the obligations of the Company under this Agreement and the
Indenture including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing (including mailing and
handling charges), filing, delivery and mailing (including the payment of
postage with respect thereto) of the Registration Statement and the Prospectus
and any amendments and supplements thereto and the printing, mailing (including
the payment of postage with respect thereto) and delivery of this Agreement and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectus, the Prospectus and any amendments thereof or supplements
thereto supplied to the Agent and such dealers as the Agent may request, in
quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of the Bonds including, but not limited to (y) the consummation by the
Company of any of its obligations under this Agreement and the Indenture and (z)
sale of the Bonds by the Agent in connection with the distribution contemplated
hereby, (iv) the qualification of the Bonds and the Underlying Stock under state
securities or "Blue Sky" laws including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum" and the "Supplemental Blue Sky Memorandum," if
any, and disbursements and fees of counsel in connection therewith, (v) costs
and expenses of travel of personnel of the Company in connection with the "road
show," information meetings and presentations, (vi) fees and expenses of the
Trustee, transfer agent and registrar, and (vii) the fees payable to the
Commission and the NASD.
(b) The Agent acknowledge receipt of $50,000 from the
Company to offset certain expenses of the Agent. If this Agreement is terminated
by the Agent in accordance with the provisions of Section 2, Section 4(a),
Section 6, Section 10(a) or Section 12, the Agent shall retain such funds as
payment for all of their actual reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of Agent's Counsel and shall have no
additional recourse to the Company for expenses incurred.
(c) The Company further agrees that, in addition to
the expenses payable pursuant to Section 5(a) hereof, it will pay to the Agent
on each Closing by certified or bank cashier's check or, at the election of the
Agent, by directing a disbursement from the Escrow Account, a non-accountable
expense allowance equal to two percent of the gross proceeds received by the
Company from the sale of the Bonds less the $50,000 paid pursuant to Section
5(b), which $50,000 shall be subtracted from the first such payment by the
Company.
(d) In addition to the sums payable to the Agent, as provided
elsewhere herein, Agent shall be entitled to receive on the Final Closing, as
partial compensation for its services, warrants (the "Warrants") for the
purchase of a minimum of 40,000 shares and a maximum of 100,000 shares of the
Company's Common Stock (determined in increments of 1,000 shares for every
$50,000 principal amount of Bonds sold). No Warrants are issuable if a Closing
does not occur for at least the Minimum Subscriptions. The Warrants shall be
issued pursuant to the Agent's Warrant in the form of Exhibit B attached hereto
and shall be exercisable, in whole or in part, for a period of four years
commencing one year from the date of the completion of the Offering, at $3.60
per share. The Warrants shall be non-exercisable for one year from the date of
issuance of the Warrants, and non-transferrable (whether by sale, transfer,
assignment or hypothecation) except for (i) transfers to officers of Brookstreet
Securities Corporation who are also shareholders of Brookstreet Securities
Corporation, and (ii) transfers occurring by operation of law.
6. Conditions of the Agent's Obligations. The obligations of the Agent
hereunder shall be subject to the continuing accuracy of the representations and
warranties of the Company herein as of the date hereof and as of the Initial
Closing and Final Closing, if any, as if they had been made on and as of the
Initial Closing or Final Closing, as the case may be; the accuracy on and as of
the Initial Closing or Final Closing, if any, of the statements of officers of
the Company made pursuant to the provisions hereof; and the performance by the
Company on and as of the Closing and Final Closing, if any, of its covenants and
obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York time, on the date of this Agreement or such later
date and time as shall be consented to in writing by the Agent, and, at the
Initial Closing and Final Closing, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Agent's Counsel. If the Company has elected to rely upon Rule
430A of the Rules and Regulations, the price of the Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing the Company shall have
provided evidence satisfactory to the Agent of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Agent shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Agent's reasonable opinion, is material, or omits to state
a fact which, in the Agent's reasonable opinion, is material and is required to
be stated therein or is necessary to make the statements therein not misleading,
or that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Agent's reasonable opinion, is material, or omits to state
a fact which, in the Agent's reasonable opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) On or prior to the applicable Closing, the Agent shall
have received from Agent's Counsel, such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the Registration
Statement, the Prospectus and other related matters as the Agent may request and
Agent's Counsel shall have received such papers and information as they request
to enable them to pass upon such matters.
(d) At the Initial Closing, the Agent shall have received from
Colombo & Bonacci, P.C., counsel to the Company, dated the Closing, addressed to
the Agent in substantially the form attached hereto as Exhibit D. In rendering
such opinion, such counsel may rely: (A) as to matters involving the application
of laws other than the laws of the United States and jurisdictions in which they
are admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, if at all, upon an opinion or opinions (in form and
substance satisfactory to Agent's Counsel) of other counsel acceptable to
Agent's Counsel, familiar with the applicable laws; and (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company and certificates or other written statements
of officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company and the
Subsidiaries, provided copies of any such statements or certificates shall be
delivered to Agent's Counsel if requested. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Agent and they are justified in
relying thereon. At the Final Closing, if any, the Agent shall have received the
favorable opinion of Colombo & Bonacci, P.C., counsel to the Company, dated such
Final Closing, addressed to the Agent and in form consistent with Exhibit D
confirming as of such Final Closing the statements made by Colombo & Bonacci,
P.C. in their opinion delivered on the Initial Closing.
(e) On or prior to each of the Initial Closing and each Final
Closing, if any, Agent's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6 or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(f) Prior to each of Initial Closing and Final Closing, if
any: (i) there shall have been no materially adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company and
the Subsidiaries taken as a whole, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
or any of the Subsidiaries, from the latest date as of which the financial
condition of the Company and the Subsidiaries is set forth in the Registration
Statement and Prospectus which is adverse to the Company and the Subsidiaries
taken as a whole; (iii) neither the Company nor any of the Subsidiaries shall be
in material default under any provision of any instrument relating to any
outstanding indebtedness; (iv) neither the Company nor any of the Subsidiaries
shall have issued any securities (other than the Bonds or underlying common
stock from the exercise of options or warrants) or declared or paid any dividend
or made any distribution in respect of its capital stock of any class and there
has not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or obligations (contingent or otherwise) of the
Company or any of the Subsidiaries, except (x) in connection with the
acquisition of assets of the Company through purchase money financing and
financing related to timeshare sales which is secured by timeshare receivables,
(y) for debt incurred to finance capital improvements to existing properties not
to exceed $3,000,000 outstanding and (z) for debt for working capital not to
exceed $1,500,000 outstanding; (v) no material amount of the assets of the
Company or any of the Subsidiaries shall have been pledged or mortgaged other
than in the ordinary course of the Company's business, except as set forth in
the Registration Statement and Prospectus and except (x) in connection with the
acquisition of assets of the Company through purchase money financing and
financing related to timeshare sales which is secured by timeshare receivables,
(y) for debt incurred to finance capital improvements to existing properties not
to exceed $3,000,000 outstanding and (z) for debt for working capital not to
exceed $1,500,000 outstanding; (vi) no material action, suit or proceeding, at
law or in equity, shall have been pending or, to the best of the Company's
knowledge, threatened against the Company or any of the Subsidiaries, or
affecting any of their respective properties or businesses, before or by any
court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding may materially
adversely affect the business, operations, prospects, financial condition or
income of the Company and the Subsidiaries taken as a whole, except as set forth
in the Registration Statement and Prospectus; and (vii) no stop order shall have
been issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission or any state regulatory authority.
(g) At each of the Initial Closing and Final Closing, if any,
the Agent shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Initial Closing or Final Closing, as the case
may be, to the effect that each of such persons has examined the Registration
Statement, the Prospectus, this Agreement and the Indenture, and that:
(i) the representations and warranties of the Company
in this Agreement and the Indenture are true and correct, as if made on and as
of the Initial Closing or such Final Closing, as the case may be, and the
Company has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement and the Indenture on its part to be
performed or satisfied at or prior to the Initial Closing or such Final Closing,
as the case may be;
(ii) no stop order suspending the effectiveness of
the Registration Statement or any part thereof or the qualification of the
Trustee has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the best of each of such person's knowledge
after due inquiry, are contemplated or threatened under the Act;
(iii) the Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto, contain all statements
and information required to be included therein, and none of the Registration
Statement, the Prospectus or any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and none of the Preliminary Prospectus or any supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and
(iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus: (a)
neither the Company nor any of the Subsidiaries has incurred up to and including
the Initial Closing or Final Closing, as the case may be, other than in the
ordinary course of its business, any material liabilities or obligations, direct
or contingent (except as otherwise contemplated in subclause (d) of this clause
(iv)); (b) neither the Company nor any of the Subsidiaries has paid or declared
any dividends or other distributions on its capital stock; (c) neither the
Company nor any of the Subsidiaries has entered into any material transactions
not in the ordinary course of business (except as otherwise contemplated in
subclause (d) of this clause (iv)); (d) there has not been any material change
in the capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-term borrowings in the ordinary
course of business) of the Company or any of the Subsidiaries (except for (x)
financing in connection with the acquisition of assets of the Company through
purchase money financing and financing related to timeshare sales which is
secured by timeshare receivables, (y) debt incurred to finance capital
improvements to existing properties not to exceed $3,000,000 outstanding and (z)
debt for working capital not to exceed $1,500,000 outstanding); (e) neither the
Company nor any of the Subsidiaries has sustained any material loss or damage to
its property or assets, whether or not insured; (f) there is no material
litigation which is pending or, to the best of the Company's knowledge,
threatened against the Company, any of the Subsidiaries or any affiliated party
of any of the foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (g) there has occurred
no event required to be set forth in an amended or supplemented Prospectus which
has not been set forth. References to the Registration Statement and the
Prospectus in this subsection (g) are to such documents as amended and
supplemented at the date of such certificate.
(h) By the Closing, the Agent will have received clearance
from the NASD as to the amount of compensation allowable or payable to the Agent
and Soliciting Dealers, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Agent shall
have received a letter, dated such date, addressed to the Agent in form and
substance satisfactory in all respects (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) to the Agent
and Agent's Counsel, from Deloitte & Touche:
(i) confirming that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the Exchange Act and the applicable Rules and Regulations; (ii) stating that it
is their opinion that the consolidated financial statements and supporting
schedules of the Company and the Subsidiaries, as applicable, included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and the Rules
and Regulations thereunder;
(iii) and stating that, on the basis of a limited
review which included a reading of the latest available unaudited interim
consolidated financial statements of the Company and the Subsidiaries, as
applicable, (with an indication of the date of the latest available unaudited
interim consolidated financial statements of the Company and the Subsidiaries,
as applicable), a reading of the latest available minutes of the stockholders
and board of directors and the various committees of the board of directors of
each of the Company and the Subsidiaries, consultations with officers and other
employees of each of the Company and the Subsidiaries responsible for financial
and accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A) the unaudited
consolidated financial statements and supporting schedules of the Company and
the Subsidiaries, as applicable, included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the Rules and Regulations or
are not fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
consolidated financial statements and supporting schedules of the Company and
the Subsidiaries, as applicable, included in the Registration Statement, (B) at
a specified date not more than five days prior to the later of the date of this
Agreement or the effective date of the Registration Statement, there has been
any change in the capital stock or long-term debt of the Company or any of the
Subsidiaries, or any decrease in the stockholders' equity or net current assets
or net assets of the Company, as compared with amounts shown in the
________________, 199_ balance sheet included in the Registration Statement
other than as set forth in or contemplated by the Registration Statement, or, if
there was any change or decrease, setting forth the amount of such change or
decrease, and (C) during the period from _______________, 1995 to a specified
date not more than five days prior to the later of the date of this Agreement or
the effective date of the Registration Statement, there was any decrease in net
revenues, net earnings or net earnings per common share of the Company and its
consolidated Subsidiaries or any of the Company's unconsolidated Subsidiaries,
in each case as compared with the corresponding period beginning
_______________, 1994, other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease, setting forth the
amount of such decrease;
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements
and/or other financial information pertaining to the Company and the
Subsidiaries set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be derived from
the general accounting records, including work sheets, of the Company and/or the
Subsidiaries and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures need not constitute
an examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement; and
(v) statements as to such other matters incident to
the transaction contemplated hereby as the Agent may reasonably request.
(j) At the Initial Closing and Final Closing, if any, the
Agent shall have received from Deloitte & Touche a letter, dated as of the
Initial Closing or such Final Closing, as the case may be, to the effect that
they reaffirm that statements made in the letter furnished pursuant to
subsection (i) of this Section 6, except that the specified date referred to
shall be a date not more than five days prior to the Initial Closing or such
Final Closing, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial information
as specified by the Agent and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(k) On each of the Initial Closing and Final Closing, if any,
there shall have been duly tendered to the Agent for the Agent's and Soliciting
Dealer's accounts the appropriate number of Bonds.
(l) No order suspending the sale of the Bonds in any
jurisdiction designated by the Agent pursuant to Section 4(e) hereof shall have
been issued on either the Initial Closing or the Final Closing, if any, and no
proceedings for that purpose shall have been instituted or shall be
contemplated.
If any condition to the Agent's obligations hereunder to be
fulfilled prior to or at the Initial Closing or the Final Closing, as the case
may be, is not so fulfilled, the Agent may terminate this Agreement or, if the
Agent so elect, they may waive any such conditions which have not been fulfilled
or extend the time for their fulfillment. In the event the Agent so elect to
terminate, the Agent shall have no recourse against the Company for expenses
except to retain the $50,000 paid to the Agent pursuant to Section 5(b) hereof.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of
the Agent (for purposes of this Section 7, "Agent" shall include the officers,
directors, partners, employees, agents and counsel of the Agent), and each
person, if any, who controls an Agent ("controlling person") within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against
any and all losses, claims, damages, expenses or liabilities, joint or several
(and actions, proceedings, suits and litigation in respect thereof), whatsoever
(including but not limited to any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any action, suit,
proceeding or litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, to which the Agent or any such controlling person may become
subject, under the Act, the Exchange Act or any other statute or at common law
or otherwise or under the laws of foreign countries, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained (i) in the Preliminary Prospectus, the Registration Statement or the
Prospectus (as from time to time amended and supplemented), (ii) in any
post-effective amendment or amendments or any new registration statement and
prospectus in which the Bonds are included or (iii) in any application or other
document or written communication (in this Section 7 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Bonds or
such securities under the securities laws thereof or filed with the Commission,
any state regulatory authority, NASDAQ or any securities exchange or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading (in the case
of the Prospectus, in the light of the circumstances under which they were
made), unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to the
Agent by or on behalf of the Agent or the Soliciting Dealers expressly for use
in the Preliminary Prospectus, the Registration Statement or the Prospectus, or
any amendment thereof or supplement thereto, or in any application, as the case
may be. The Company acknowledges that the statements set forth under "PLAN OF
DISTRIBUTION" and the stabilization legend in the Preliminary Prospectus and the
Prospectus constitute the only written information furnished to the Company with
respect to the Agent by or on behalf of the Agent or a Soliciting Dealer
expressly for use in the Preliminary Prospectus, the Registration Statement, the
Prospectus or any application. The indemnity agreement in this subsection (a)
shall be in addition to and not duplicative of any liability which the Company
may have at common law or otherwise.
(b) The Agent agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Agent but only with respect to statements or omissions,
if any, made in the Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, or in any
application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to such Agent by such Agent
expressly for use in such Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendment thereof or supplement thereto, or in any such
application, provided that such written information or omissions only pertain to
disclosures in the Preliminary Prospectus, the Registration Statement or the
Prospectus. The Company acknowledges that the statements set forth under "PLAN
OF DISTRIBUTION" and the stabilization legend in the Preliminary Prospectus and
the Prospectus constitute the only information furnished in writing by or on
behalf of any of the Agent expressly for use in the Preliminary Prospectus, the
Registration Statement, the Prospectus or any application. The Agent shall also
indemnify the Company to the same extent as the foregoing for matters arising
from sales activities of the Agent and Soliciting Dealers in contravention of
the Act, the Exchange Act, state securities laws or regulations, Rules and
Regulations and the NASD rules. The indemnity agreement in this subsection (b)
shall be in addition to and not duplicative of any liability which the Agent may
have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in a material respect by such failure or from any liability
which it may have otherwise). In case any such action, suit or proceeding is
brought against any indemnified party, and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or parties will be
entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of one additional
counsel shall be borne by the indemnifying parties. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. Anything in this Section 7 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent, provided that such
consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, suits, proceedings or litigation in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified on
the other hand, from the offering of the Bonds or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand, in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is a contributing party and an Agent is the
indemnified party, the relative benefits received by the Company, on the one
hand, and such Agent, on the other, shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Bonds (before deducting
expenses) bear to the total underwriting commission and expense allocations
payable to Agent hereunder, in each case as set forth in the table on the Cover
Page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by Agent, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions, suits, proceedings or litigation in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating,
preparing or defending any such action, claim, suit, proceeding or litigation.
Agent shall not be required under this subsection (d) to contribute any amount
in excess of the underwriting commissions and expense allocations payable
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 12(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subsection (d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit, proceeding or litigation against such party in respect to which a
claim for contribution may be made against another party or parties under this
subsection (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subsection (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto
shall be deemed to be representations, warranties and agreements at the Initial
Closing and Final Closing, as the case may be, and such representations,
warranties and agreements of the Company and the respective indemnity agreements
contained in Section 7 hereof shall remain operative and in full force and
effect as of such dates, regardless of any investigation made by or on behalf of
the Agent, the Company, any of the Subsidiaries or any controlling person, and
shall survive termination of this Agreement.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the date hereof, or at such earlier time after the
Registration Statement becomes effective as the Agent, in its discretion, shall
undertake to offer the Bonds for the sale to the public, provided that the
provisions of Sections 5, 7 and 10 of this Agreement shall at all times be
effective. For purposes of this Section 9, the Bonds to be offered hereunder
shall be deemed to have been so offered upon the earlier of dispatch by the
Agent of telegrams to securities dealers releasing the Bonds for offering or the
release by the Agent for publication of the first newspaper advertisement which
is subsequently published relating to the Bonds.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Agent
shall have the right to terminate this Agreement (i) if any domestic or
international event or act or occurrence has or in the Agent's reasonable
opinion will in the immediate future have a material adverse effect on the
Company or the securities market in general or (ii) if trading on the New York
Stock Exchange, the American Stock Exchange or in the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been required
on the over-the-counter market by the NASD or by order of the Commission or any
other government authority having jurisdiction; or (iii) if the United States
shall have become involved in a war or major hostilities, or there shall have
been an escalation in an existing war or major hostilities, or a national
emergency shall have been declared in the United States; or (iv) if a banking
moratorium has been declared by a state or federal authority; or (v) if a
moratorium in foreign exchange trading has been declared; or (vi) if the Company
or any of the Subsidiaries shall have sustained a loss material or substantial
to the Company or any of the Subsidiaries by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Agent's reasonable opinion,
make it inadvisable to proceed with the delivery of the Bonds; or (vii) if there
shall have been such a material adverse change in the conditions or prospects of
the Company or any of the Subsidiaries, or such material adverse change in the
general market, political or economic conditions in the United States or
elsewhere, as in the Agent's judgment would make it inadvisable to proceed with
the offering, sale and/or delivery of the Bonds; or (viii) if Joseph P. Martori
shall no longer serve the Company in his present capacity.
(b) If this Agreement is terminated by the Agent in accordance
with the provisions of Section 2, Section 4(a), Section 10(a)(i), 10(a)(ii),
Section 10(a)(iii), Section 10(a)(iv), Section 10(a)(v), Section 10(a)(vi),
Section 10(a)(vii), Section 10(a)(viii) or Section 11 or if this Agreement shall
not be carried out within the time specified herein, or any extension thereof
granted to the Agent, by reason of any failure on the part of the Company to
perform any material undertaking or satisfy any material condition of this
Agreement by it to be performed or satisfied (including without limitation,
pursuant to Section 2, Section 6, Section 10(a) or Section 11), then the Agent
shall be entitled to retain as sole recourse against the Company all amounts
paid under Section 5(b) hereof. In addition, the Company shall remain liable for
all reasonable Blue Sky counsel fees of the Company and expenses and Blue Sky
filing fees of the Company. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 2, 6, 10 and 11 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Default by the Company. If the Company shall fail at the Initial
Closing or Final Closing, as applicable, to sell and deliver the number of Bonds
which it is obligated to sell to applicable purchasers on such date, then this
Agreement shall terminate without any liability on the part of any party other
than pursuant to Sections 5, 7 and 10 hereof.
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be given in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Agent shall be directed to the Agent as
follows:
Brookstreet Securities Corporation
2361 Campus Drive, Suite 210
Irvine, California 92715
Attention: Mr. Daniel C. Montano
Director of Investment Banking
With a copy to:
Thelen, Marrin, Johnson & Bridges
333 South Grand Avenue, 34th Floor
Los Angeles, California 90071
Attention: Ronald Warner, Esq.
Notices to the Company shall be directed to the Company as
follows:
ILX Incorporated
2777 East Camelback Road
Phoenix, Arizona 85016
Attention: Joseph P. Martori, Esq.,
Chairman and Chief Executive Officer
With a copy to:
Colombo & Bonacci, P.C.
2525 East Camelback Road, Suite 940
Phoenix, Arizona 85016
Attention: Anthony A. Bonacci, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon the Agent, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Bonds from any Agent shall be deemed to be a successor by reason
merely of such purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing signed by the
Agent and the Company.
If the foregoing correctly sets forth the understanding between the
Agent and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
ILX INCORPORATED
By
--------------------------------
Nancy Stone
Chief Financial Officer
Confirmed and accepted as of the date first above written.
BROOKSTREET SECURITIES CORPORATION
By
Daniel C. Montano,
Director of Investment Banking
<PAGE>
EXHIBIT A
Subsidiaries of ILX Incorporated
Percentage of
State in Capital Stock
which Owned by ILX
Name Incorporated Incorporated
Corporate Entities:
Genesis Investment Group, Inc. ..................... Arizona 100%
Harbour Southwest Development, Inc.(1) ............. Arizona 100%
Laveen Properties, Inc.(1) ......................... Arizona 100%
Pilot Service Corp.(1) ............................. Arizona 100%
Golden Eagle Realty, Inc. .......................... Colorado 100%
Golden Eagle Resort, Inc. .......................... Arizona 100%
ILX Florida, Inc. .................................. Arizona 100%
Southern Vacations, Inc.(2) ........................ Florida 100%
ILE Sedona Incorporated ............................ Arizona 100%
Red Rock Collection Incorporated ................... Arizona 100%
Red Rock Worldwide Incorporated .................... Arizona 100%
SXI Health Institute Incorporated .................. Arizona 100%
Varsity Clubs of America Incorporated .............. Arizona 100%
VCA Iowa Incorporated(3) ........................... Arizona 100%
VCA Management Incorporated(3) ..................... Arizona 100%
VCA South Bend Incorporated(3) ..................... Arizona 100%
VCA Tucson Incorporated(3) ......................... Arizona 100%
Syracuse Project Incorporated(1) ................... Arizona 100%
Partnerships/Joint Ventures:
Los Abrigados Partners Limited Partnership ......... Arizona (4)
Orangemen Club Limited Partnership ................. New York (6)
Name State in which Incorporated
Non-Profit Entities (5):
Golden Eagle Resort Condominium Colorado
Association, Inc.
Kohl's Ranch Owners Association Arizona
Sedona Vacation Club Incorporated Arizona
Varsity Clubs of America -- Iowa Arizona
Varsity Clubs of America -- Norman Arizona
Varsity Clubs of America -- South Bend Arizona
Chapter
(1) Subsidiaries of Genesis Investment Group, Inc.
(2) Subsidiary of ILX Florida, Inc.
(3) Subsidiaries of Varsity Clubs of America Incorporated
(4) The general partner of the partnership is ILE Sedona Incorporated,
which has a 78.5% interest in the partnership, which is pledged to a
third party to secure financing. The limited partners, which include
controlling persons of ILX Incorporated, have a 21.5% interest in the
partnership.
(5) Non-profit entities without capital stock.
(6) The general partner is Syracuse Project Incorporated, which has an 80%
interest in the partnership.
<PAGE>
EXHIBIT B
ILX INCORPORATED
(An Arizona Corporation)
Placement Agent's Warrant ("Warrant") to Purchase
Shares of Common Stock
NEITHER THIS WARRANT NOR THE COMMON STOCK UNDERLYING THIS WARRANT HAVE BEEN
REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE. CONSEQUENTLY, NEITHER THIS WARRANT NOR THE COMMON STOCK UNDERLYING THIS
WARRANT MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR OTHERWISE HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE APPLICABLE
SECURITY, OR AN EXEMPTION THEREFROM, ACCOMPANIED BY AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
1. Grant of Warrant. For value received in connection with the offering
(the "Offering") of its 10% Convertible Adjustable Secured Bonds due 2000 (the
"Bonds"), ILX Incorporated, an Arizona corporation ("ILX" or the "Company"),
hereby grants to Brookstreet Securities Corporation, a California corporation,
or its registered assigns ("Holder"), the right to purchase from the Company
("Warrant") _________ shares of ILX Common Stock (the "Shares"), no par value,
("Common Stock") upon the Final Closing (as defined in Section 2(c) of the
Placement Agent Agreement, dated ______________, 1995, between the Company and
Brookstreet Securities Corporation) of the Offering on the terms and conditions
set forth herein. The Exercise Price for such Warrant shall be $3.60 per share.
The Exercise Price is subject to adjustment as provided in Section 5 below.
2. Right and Manner of Exercise. This Warrant shall be exercisable at
any time from and after the first anniversary of the date hereof and ending at
5:00 P.M. California time on the fifth anniversary of the date hereof (the
"Exercise Period"). The Holder may elect to exercise this Warrant anytime during
the Exercise Period as to any or all of the Shares by delivering written notice,
or successive written notices, of exercise to the Company (as provided in
Section 11) in the form attached hereto as Exhibit A accompanied by payment of
an amount equal to the product of (i) the number of Shares being purchased and
(ii) the Exercise Price, as each may have been adjusted pursuant to the terms of
this Agreement.
3. Issuance of Shares and New Warrant. If the purchase rights evidenced
by this Warrant are exercised in whole or in part, one or more certificates for
the Shares so purchased shall be issued at the Company's expense as soon as
practicable thereafter to the Holder exercising such rights. Such Holder shall
also be issued at such time at the Company's expense a new Warrant on the same
terms and conditions as this Warrant, but representing the number of Shares (if
any) for which the purchase rights under this Warrant remain unexercised.
4. Privilege of Stock Ownership. The Holder shall for all purposes be
deemed to have become the holder of record of Shares issued upon an exercise of
this Warrant on, and the certificate evidencing such Shares shall be dated, the
date upon which the Holder presents to the Company each of notice of an intent
to exercise this Warrant pursuant to Section 2 and payment of the Exercise
Price. Holder shall receive good and marketable title to all Shares that Holder
purchases and the Company delivers upon the exercise of any or all of the
Warrants. Prior to exercise of this Warrant, the Holder shall not be entitled to
any rights as a shareholder of the Company, including (without limitation) the
right to vote, receive dividends or other distributions, exercise preemptive
rights or be notified of shareholder meetings, and such Holder shall not be
entitled to any notice or other communication concerning the business or affairs
of the Company except as otherwise provided herein.
5. Reservation and Availability of Shares. The Company will at all
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued shares of Stock for the purpose of
enabling it to satisfy any obligation to issue Shares upon exercise of this
Warrant, the full number of Shares deliverable upon the exercise or conversion
of the entire outstanding amount of this Warrant. Before taking any action which
would cause an adjustment pursuant to Section 6 reducing the Exercise Price, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and non-assessable Shares at the Exercise Price as so adjusted. The Company
covenants that all Shares which may be issued upon exercise of this Warrant
will, upon issue, be fully paid and non-assessable, free and clear of all voting
and other trust arrangements, liens, encumbrances, equities and claims
whatsoever, and the Company shall have paid all taxes, if any, in respect of the
issuance thereof.
6. Adjustment of Exercise Price/Anti-Dilution. The Exercise Price and
the number and kind of securities purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of the
events enumerated in this Section 6.
6.1. Stock Splits and Combinations. If the Company shall at
any time subdivide or combine its outstanding Common Stock, or fix a record date
for payment of a dividend in Common Stock or other securities of the Company
exercisable, convertible or exchangeable for Common Stock (in which latter event
the maximum number of shares of Common Stock issuable upon the exercise,
conversion or exchange of such securities shall be deemed to have been
distributed), after that subdivision, combination or dividend, the number of
Shares subject to purchase shall be adjusted to that number of Shares which is
determined by (A) multiplying the number of shares of Common Stock purchasable
immediately prior to such adjustment by the Exercise Price in effect immediately
prior to such adjustment, and then (B) dividing that product by the Exercise
Price in effect immediately after such adjustment. If the Company shall at any
time subdivide the outstanding shares of Common Stock or fix a record date for
payment of a dividend in Common Stock or other securities exercisable,
convertible or exchangeable into Common Stock, the Exercise Price then in effect
immediately before that subdivision or dividend shall be proportionately
decreased, and, if the Company shall at any time combine the outstanding shares
of Common Stock, then the Exercise Price in effect immediately before that
combination shall be proportionately increased. Any adjustment under this
Section 6.1 shall become effective at the close of business on the date the
subdivision or combination becomes effective or the dividend is distributed.
6.2 Reclassification, Exchange and Substitution. If the Shares
issuable upon exercise of the Warrant shall be changed into the same or a
different number of shares of any other class or classes of securities, whether
by capital reorganization, reclassification, or otherwise (other than a
subdivision or combination or payment of dividend of securities provided for
above), the Holder of this Warrant shall, on its exercise, be entitled to
purchase for the same aggregate consideration, in lieu of the Shares which the
Holder would have become entitled to purchase but for such change, a number of
shares of such other class or classes of securities which such Holder would have
been entitled to receive as the holder of that number of Shares subject to
purchase by the Holder on exercise of this Warrant immediately before that
change.
6.3 Reorganizations, Mergers, Consolidations or Sales of
Assets. If at any time there shall be a capital reorganization of the Common
Stock (other than a subdivision, combination, payment of dividend,
reclassification or exchange of Common Stock provided for above), or merger or
consolidation of the Company with or into another corporation, or the sale of
the Company's properties and assets as, or substantially as, an entirety to any
other person, then, as a part of such reorganization, merger, consolidation or
sale, lawful provision shall be made so that the Holder of this Warrant shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified in this Warrant and upon payment of the Exercise Price then in
effect, the number of Shares or other securities or property of the Company, or
of the successor corporation resulting from such merger or consolidation, to
which a Holder of the Shares issuable upon exercise of this Warrant would have
been entitled in such capital reorganization, merger, or consolidation or sale
if this Warrant had been exercised immediately before that capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder of this Warrant after the
reorganization, merger, consolidation, or sale such that the provisions of this
Warrant (including adjustment of the Exercise Price then in effect and number
and kind of securities purchasable upon exercise of this Warrant) shall be
applicable after that event in relation to any securities purchasable after that
event upon exercise of this Warrant.
6.4 Minimum Exercise Price Adjustment. No adjustment in the
Exercise Price shall be required unless such adjustment would require in
increase or decrease of at least one-half of one percent (0.5%) or more of the
Exercise Price, provided, however, that any adjustments which by reason of this
Subsection 6.4 are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 6
shall be made to the nearest cent or to the nearest one-hundredth of a Share as
the case may be.
7. Notices to Holder. Upon any adjustment of the Exercise Price
pursuant to Section 6, the Company within 20 days thereafter shall cause to be
given to the Holder pursuant to Section 11 hereof written notice of such
adjustment, which notice shall set forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made. Where appropriate, such notice may be given in advance and
included as a part of the notice required to be mailed under the other
provisions of this Section 7.
In the event of any of the following:
7.1 the Company shall authorize the issuance to its holders of
shares of Common Stock of rights or warrants to subscribe for or purchase shares
of Common Stock or of any other subscription rights or warrants; or
7.2 the Company shall authorize the distribution to all
holders of shares of Common Stock of evidences of its indebtedness or assets
(other than cash dividends not exceeding [$ ____] per share of Common Stock
payable during any three-month period or distributions or dividends payable in
shares of Common Stock); or
7.3 any consolidation or merger to which the Company is a
party and for which approval of any shareholder of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company as, or
substantially as, an entirety, or of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination); or
7.4 the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
7.5 the Company proposes to take any action (other than
actions of the character described in Subsection 6.1 except as required under
Subsection 7.3 above) which would require an adjustment of the Exercise Price
pursuant to Section 6; then the Company shall cause to be given to the Holder,
at least 20 days (or ten days in any case specified in Subsections 7.1 or 7.2
above) prior to the applicable record date hereinafter specified, a written
notice stating (i) the date as of which the holders of record of shares of
Common Stock to be entitled to receive any such rights, warrants, or
distribution are to be determined, or (ii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation, or
winding up is expected to become effective, and the date as of which it is that
holders of record of shares of Common Stock shall be entitled to exchange their
shares of Common Stock for securities or other property, if any, deliverable
upon such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation, or winding up. The failure to give the notice required
by this Section 7 or any defect therein shall not affect the legality or
validity of any distribution, right, warrant, consolidation, merger, conveyance,
merger, dissolution, liquidation, or winding up, or the vote upon any such
action.
8. Transfers. The Holder acknowledges and agrees that this Warrant and
the Common Stock underlying this Warrant may not be sold, pledged, assigned,
transferred or otherwise hypothecated without registration under the Act except
in certain limited circumstances where an exemption from registration exists,
supported by an opinion of counsel satisfactory to the Company and its counsel
that registration is not required thereunder. The Warrants are non-transferable
(whether by sale, transfer, assignment or hypothecation) except for (i)
transfers to officers of Brookstreet Securities Corporation who are also
shareholders of Brookstreet Securities Corporation, (ii) transfers occurring by
operation of law.
9. Fractional Shares. No fractional shares of Common Stock shall be
issued in connection with any exercise of this Warrant. In lieu of the issuance
of such fractional share, the Company shall make a cash payment equal to the
then fair market value of such fractional share as determined in good faith by
the Company's Board of Directors.
10. Successors and Assign. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon the Company and the Holder
hereof and their respective successors and assigns.
11. Notices. All notices, requests, demands and other communications
(collectively, "Notices") under this Warrant shall be in writing and shall be
deemed to have been duly given on the date of service if served personally on
the party to whom Notice is to be given, or on the third business day after the
date of mailing if mailed to the party to whom Notice is to be given, by first
class mail, registered to the Holder, at his address as shown in the Company
records; and if to the Company, at its principal office. Any party may change
its address for purposes of this Section by giving the other party written
Notice of the new address in the manner set forth above.
12. Registration Rights. The Holder shall have registration rights with
respect to the Shares as set forth in Appendix I attached hereto.
13. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Arizona without regard to principles of
conflicts of laws.
14. Loss or Mutilation of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company regarding the loss, theft, mutilation or destruction
of this Warrant and upon delivery of appropriate indemnification with respect
thereto or upon surrender or cancellation of the mutilated Warrant, the Company
will make and deliver to the Holder a new Warrant of like tenor.
ILX INCORPORATED
By
, President
Attest:
, Secretary
ASSIGNMENT
FOR VALUE RECEIVED, __________________________________________________ hereby
sell(s), assign(s), and transfer(s) unto ____________________________________,
of _______________________, the right to purchase Shares evidenced by the within
Warrant, and does hereby irrevocable constitute and appoint
______________________________ to transfer such right on the books of the
Company, with full power of substitution.
DATED: ____________________, 199_
- ---------------------------------------------
SIGNATURE
- --------------------------------------------------------------------------------
NOTICE:
This Warrant, or the Common Stock underlying the Warrant, have not been
registered under the Securities Act of 1933 (the "Act") or any states'
securities laws (the "laws") and may not be sold, pledged, transferred or
otherwise disposed of in the absence of an effective registration statement
covering these securities under the Act or laws, or an available exemption
therefrom, accompanied by an opinion of counsel satisfactory to the Company and
its counsel that registration is not required thereunder.
The signature to this Assignment must correspond with the name as written upon
the face of the within Warrant, in every particular, without alteration or
enlargement, or any change whatsoever.
<PAGE>
EXHIBIT A
EXERCISE NOTICE
ILX INCORPORATED
2777 East Camelback Road
Phoenix, Arizona 85016
Gentlemen:
____________________________________________________(the "Undersigned")
(Type or Print Name)
hereby elects to purchase, pursuant to the provisions of the ILX Incorporated
Placement Agent's Warrant dated _________, 1995 held by the undersigned,
__________ shares of the Common Stock of ILX Incorporated.
As an inducement to your acceptance hereunder, the undersigned
certifies that the Common Stock is being purchased for the undersigned's own
account, for investment purposed, and not with a view toward a public
distribution in violation of the registration requirements of the Securities Act
of 1933, as amended.
Payment of the purchase price of $__________ per share of Common Stock
in U.S. funds required under such Warrant accompanies this subscription.
DATED: _________________________, 199_
Company: __________________________________
Signature: __________________________________
Address: __________________________________
----------------------------------
<PAGE>
Appendix I
Registration Rights
This Appendix I ("Appendix") is attached to an Placement Agent's
Warrant ("Warrant") of ILX Incorporated, an Arizona Corporation (the "Company"),
issued in favor of Brookstreet Securities Corporation, a California Corporation
(the "Holder").
1. Definitions. For purposes of this Appendix:
1.1 The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "1933 Act"), and the declaration or ordering of effectiveness of
such registration statement or document by the Securities and Exchange
Commission ("SEC");
1.2 The term "Registerable Securities" means any common stock
of the Company ("Common Stock") issued upon an exercise of the Warrant;
1.3 The number of shares of "Registerable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to any unexercised portion of the Warrant which are, Registerable
Securities;
1.4 The term "Holder" means any person owning or having the
right to Registerable Securities or any assignee thereof in accordance with the
provisions of Section 11 of this Appendix; and
1.5 The term "Applicable Form" means such registration form
under the 1933 Act as in effect on the date hereof or any registration form
under the Act subsequently adopted by the Securities and Exchange Commission
("SEC") that may be used by the Company for the registration of its securities.
1.6 The term "Offering" means any offering of Common Stock of
the Company pursuant to a registration statement filed with the SEC under the
1933 Act.
1.7 The term "Indenture" means that certain Indenture dated as
_______ __, 1995 between the Company and __________________________, as Trustee.
1.8 All other capitalized terms contained herein shall have
the meaning ascribed to them in the attached Warrant.
2. Registration of Registerable Securities.
2.1 If the Company intends to conduct an Offering on or before
the seventh anniversary of the date of the Indenture (including for the purpose
of a registration effected by the Company for shareholders other than the
Holder) of any of its Common Stock or other securities under the 1933 Act in
connection with the public offering of such securities solely for cash (other
than a registration relating either to (i) the sale of securities to
participants in a Company stock option, stock purchase or similar plan, or (ii)
a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registerable Securities), the Company shall, at such
time, promptly give the Holder written notice of such proposed registration
pursuant to Section 11 of the Warrant. Upon the written request of Brookstreet
Securities Corporation only, regardless of whether it has assigned any portion
of the Warrants, given to the Company within 20 days after deemed receipt of
such notice from the Company, the Company shall, subject to the provisions of
Section 6 of this Appendix, cause to be registered under the 1933 Act not less
than all of the Registerable Securities. The Company shall be entitled to
postpone the inclusion of the Shares in the Registration Statement for a
reasonable time if the underwriter in the Offering reasonably determines that
registration of the Shares would render the Offering impracticable or
infeasible.
2.2 If (a) the Company has not conducted an Offering on or
before the seventh anniversary of the Indenture or (b) the Company has conducted
an Offering on or before the seventh anniversary of the Indenture but,
notwithstanding the request of the Holder in accordance with Section 2.1, the
Registerable Shares were not registered, then for a period of one (1) year from
such date, the Holder may, by written notice to the Company pursuant to Section
11 of the Warrant, demand that the Company file a registration statement
covering not less than all of the Holder's Registerable Securities on such form
as shall be appropriate under the 1933 Act for the sale of such Registerable
Securities. The Company shall file the applicable registration statement within
60 days of receipt of such notice (or such longer period as may be agreed to by
Holder).
2.3 The registration rights granted pursuant to this Section 2
may not be exercised more than once (provided, however, that any request made
pursuant to this Section 2 which does not result in the declaration of
effectiveness of a registration statement covering the Registerable Securities
owned by the Holder, whether as a result of the withdrawal of the registration
statement by the Company, through other action or inaction of the Company, a
postponement by the underwriters in the Offering or otherwise, shall not
constitute the exercise of Holder's rights pursuant to this Section 2 and such
rights shall remain intact pursuant to Section 2.1 or Section 2.2, as
applicable).
3. Obligations of the Company. Whenever required under this Appendix to
effect the registration of any Registerable Securities, the Company shall, as
expeditiously as reasonably possible:
3.1 Prepare and file with the SEC a registration statement
with respect to such Registerable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holder, keep such registration statement effective for up to 120 days;
3.2 Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all securities
covered by such registration statement;
3.3 Furnish to the Holder such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as the Holder may
reasonably request in order to facilitate the disposition of Registerable
Securities owned by the Holder;
3.4 Use its best efforts to register and qualify the
securities covered by such registration statement (i) under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holder and (ii) with (or obtain the approval of) such other
governmental agencies or authorities as may be necessary by virtue of the nature
and business of the Company to enable the Holder or any underwriter to
consummate the disposition of Registerable Securities so registered; provided
that the Company shall not be required in connection with or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such state or jurisdictions;
3.5 In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering, including, but
not limited to, making such representations and warranties to such underwriter
and using best efforts to cause Company counsel to render such opinions to such
underwriter as such underwriter may reasonably request;
3.6 Notify the Holder of Registerable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and
promptly prepare and file with the SEC an appropriate amendment or supplement in
form satisfactory to the Holder;
3.7 Furnish, at the request of the Holder, if such Holder has
requested registration of Registerable Securities pursuant to this Appendix, on
the date that such Registerable Securities are delivered to the underwriters for
sale in connection with a registration pursuant to this Appendix if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated such
date, of counsel representing the Company for the purpose of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holder
requesting registration of Registerable Securities, and (ii) a letter dated such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holder requesting registration of Registerable
Securities;
3.8 Promptly notify the Holder (i) when the registration
statement or any amendment to the registration statement or the prospectus used
in connection therewith may be filed, and with respect to the registration
statement and any post-effective amendment thereto, when the same has become
effective, (ii) of any request by the SEC for amendments or supplements to the
registration statement or prospectus or for additional information, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of the
registration statement or the prospectus or the initiation of any proceedings
for that purpose, and (iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Registerable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceedings for that purpose;
3.9 Make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the registration statement at the
earliest possible moment;
3.10 Furnish to counsel for the Holders of Registerable
Securities without charge, at least one copy of the registration statement and
any post-effective amendment thereto, including financial statements and
schedules and all documents incorporated therein by reference; and
3.11 Make generally available to Holder as soon as
practicable, but not later than the first day of the eighteenth full calendar
month following the effective date of the registration statement, an earnings
statement (which need not be certified by independent public or independent
certified public accountants unless required by the 1933 Act or the rules and
regulations promulgated thereunder, but which shall satisfy the provisions of
Section 11(a) of the 1933 Act) covering a period of at least twelve months
beginning after the effective date of the registration statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Appendix with
respect to the Registerable Securities of the Holder that such Holder shall
furnish to the Company such information regarding itself, and the Registerable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of Holder's Registerable
Securities.
5. Expenses of Registration. The Company shall bear and pay expenses
incurred in connection with any registration, filing or qualification of
Registerable Securities with respect to registration pursuant to Section 2 or
Section 10 of this Appendix for the Holder (which right may be assigned as
provided in Section 11 of this Appendix), including (without limitation) all
registration, filing, and qualification fees (including those fees with respect
to filings required to be made with the NASD and fees and expenses of compliance
with state securities or blue sky laws), printers and accounting fees relating
or apportionable thereto, but excluding the fees and disbursements of counsel
for the Holder and underwriting discounts and commissions relating to
Registerable Securities.
6. Underwriting Requirements. In connection with any Offering pursuant
to Section 2.1 hereof, involving an underwriting of shares being issued by the
Company, the Company shall not be required under Section 2 of this Appendix to
include any of the Holders' Registerable Securities in such underwriting unless
the Holder accepts the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it, and then only in such quantity as
will not, in the opinion of the underwriters, jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registerable Securities, requested by Holders to be included in such offering
exceeds the amount of securities sold other than by the Company that the
underwriters reasonably believe compatible with the success of the offering,
then the Company shall be required to include in the offering only that number
of such securities, including Registerable Securities, which the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling Holders according to the
total amount of securities entitled to be included therein owned by each selling
Holder or in such other proportion as shall mutually be agreed to by such
selling Holders). If all of the Holders' Registerable Securities have not been
registered for sale due to the provisions of this Section 6, the provisions of
Section 2.3 shall control.
7. Agreements by Holder. Whenever required under this Appendix to
effect the registration of any Registerable Securities, the Holder shall, as
expeditiously as reasonably possible:
7.1 Furnish the Company all material information requested by
the Company concerning Holder and Holder's holdings of securities of the Company
and the proposed method of sale or other disposition of the Registerable
Securities and such other information and undertakings as shall be reasonably
required in connection with the preparation and filing of any such registration
statement covering all or part of the Registerable Securities and in order to
ensure full compliance with the 1933 Act;
7.2 Cooperate in good faith with the Company and its
underwriters, if any, in connection with such registration, including performing
its obligations under any underwriting agreement and placing the Registerable
Securities to be included in such registrations statement in escrow or custody
to facilitate the sale and distribution thereof.
8. Indemnification. In the event any Registerable Securities are
included in a registration statement under this Appendix:
8.l To the extent permitted by law, the Company will indemnify
and hold harmless the Holder, any underwriter (as defined in the 1933 Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as
amended (the "1934 Act"), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the 1933 Act, the 1934
Act or other federal or state laws, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"); (i) any untrue statement of a material fact by the Company or
alleged untrue statement of a material fact contained in such registration
statement, including prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission by the
Company to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the 1933 Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the 1933 Act, the
1934 Act or any state securities law. The Company will pay as incurred to such
Holder, underwriter or controlling person, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 8.1 shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld) nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by the Holder, underwriter or controlling person.
8.2 To the extent permitted by law, the Holder will indemnify
and hold harmless the Company, each of its directors, each officer who has
signed the registration statement, each person, if any, who controls the Company
within the meaning of the 1933 Act, any underwriter, any other holder selling
securities in such registration statement and any controlling person of any such
underwriter or other holder, against any losses, claims, damages, or liabilities
(joint or several) to which any of the foregoing persons may become subject
under the 1933 Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereto) arise
out of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation in reliance upon and in conformity with
information furnished by the Holder expressly for use in connection with such
registration; and the Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
Section 8.2 in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this Section 8.2 shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder (which consent shall not be unreasonably
withheld); provided, that in no event shall any indemnity under this Section 8.2
exceed the gross proceeds from the offering received by such Holder.
8.3 Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action (including any
governmental action), such indemnified party will if a claim in respect thereof
is to be made against any indemnifying party under this Section 8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties provided that an indemnified party shall have the
right to retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 8, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party other than under this Section 8.
8.4 If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liability or expenses referred to herein, then an indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Holder and any underwriter from
the offering at issue, or (ii) if the allocation by clause (i) above is not
permitted by law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, the Holder and any underwriter in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the Company,
the Holder and any underwriter shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, or with respect to the Holder or any underwriter,
information supplied by such person for inclusion in documents relating to the
offering and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Notwithstanding
the provisions of this Section 8.4, the Holder shall not be obligated to
contribute hereunder any amount which in the aggregate exceeds the amount for
which it would have been liable pursuant to Section 8.2 in respect of such loss,
claim, damage, liability or action had indemnification been available under
Section 8.2. The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 8.4 were determined by a pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to above in this Section 8.4. The
amount paid or payable by any party as a result of the losses, claims, damages,
liabilities and expenses referred to in this Section 8.4 shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
8.5 Any losses, claims, damages liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of any entity, (ii) acceptance of any securities and payment
therefor, and (iii) any termination of the provisions of this Appendix.
8.6 Notwithstanding any provisions in the Warrant or this
Appendix to the contrary, the benefits and obligations of this Section 8 shall
survive the termination of the Warrant and the termination of any registration
rights set forth in this Appendix.
9. Reports Under the 1934 Act. With a view to making available to the
Holder the benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and
any other rule or regulation of the SEC that may at any time permit the Holder
to sell securities of the Company to the public without registration or pursuant
to a registration on any Applicable Form, the Company agrees to:
9.1 make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after 90 days following the
closing by the Company of an Offering;
9.2 take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holder to utilize any applicable Form for the sale of Registerable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the Company closes an Offering;
9.3 file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act; and
9.4 furnish to the Holder, so long as the Holder owns any
Registerable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after 90 days following the closing by the Company of an Offering), the
1933 Act and the 1934 Act (at any time after it has become subject to such
reporting requirements), or that it qualifies as a registrant whose securities
may be resold pursuant to the Applicable Form (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company filed with the SEC and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably requested
in availing the Holder of any rule or regulation of the SEC which permits the
selling of any securities without registration or pursuant to any Applicable
Form.
10. Assignment of Registration Rights. The rights to cause the Company
to register Registerable Securities pursuant to this Appendix may be assigned by
the Holder to a transferee or assignee of at least twenty-five percent (25%) of
the shares of such securities (appropriately adjusted to reflect any stock
dividend, distribution, stock split or combination, reclassification,
recapitalization or other similar event affecting the number of shares of Common
Stock after ________ __, 1995); provided the Company is, within a reasonable
time after such transfer, furnished with written notice of the name and address
of such transferee or assignee and the securities with respect to which such
registration rights are being assigned; provided, further, that such assignment
shall be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted under
the 1933 Act and the transfer otherwise complies with all applicable provisions
under applicable federal and state securities laws.
11. Amendment of Registration Rights. Any provision of this Appendix
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of a majority of the Registerable
Securities then outstanding.
12. Termination of Registration Rights. No person shall be entitled to
exercise any right relating to registration provided for in this Appendix after
the seventh anniversary of the date of the Warrant.
<PAGE>
EXHIBIT E
SUBSCRIPTION AGREEMENT
ILX Incorporated
2777 East Camelback Road
Phoenix, Arizona 85016
Fax Number: (602) 957-2780
ATTN: Nancy J. Stone
Ladies and Gentlemen:
The undersigned (the "Subscriber") hereby subscribes for and agrees to
purchase 10% Convertible Adjustable Secured Bonds (the "CAS Bonds") of ILX
Incorporated, an Arizona corporation (the "Company"), at a price of $1,000 per
CAS Bond, in the amount set forth on the Signature Page to this Subscription
Agreement (the "Subscription Price") and on the terms set forth in this
Subscription Agreement and in the Prospectus dated November __, 1995 (the
"Prospectus"), which is part of Securities and Exchange Commission Registration
Statement No. 33-61477, which is incorporated herein by this reference.
The Subscriber represents and warrants to the Company and covenants and
agrees with it as follows:
1. Payment; Escrow. The Company has entered into an Escrow and Impound
Agreement (the "Escrow and Impound Agreement") with U.S. Trust Company of
California (the "Trust Agent"), and the Trust Agent has established an escrow
and impound account (the "Escrow and Impound Account") subject to the Escrow and
Impound Agreement. The Subscriber delivers with this Subscription Agreement the
full amount of the Subscription Price paid by check, payable to the ILX CAS Bond
Escrow and Impound Account, or concurrently with the delivery of this
Subscription Agreement has wire transferred to the ILX CAS Bonds Escrow and
Impound Account as follows:
Trust Agent
ABA: _______________
FBO: _______________
--------------------
Attn: ______________
Ref: ILX Incorporated
2. Termination of Escrow and Impound; Distribution of Funds. The Escrow
and Impound Account will terminate and the funds held therein shall be disbursed
as described below on December 15, 1995 or such later date as extended by the
Company in its sole discretion, by written notice to Brookstreet Securities
Corlporation ("Placement Agent"), to a date not later than January 14, 1995 (the
"Termination Date"); provided, however, that if the Company provides a written
statement to the Trust Agent that the Company has accepted subscriptions for at
least $2,000,000 in principal amount of CAS Bonds and the Trust Agent has
received gross proceeds of $2,000,000 in "collected funds" (defined below) (the
"Minimum Subscriptions") by and before the Termination Date, then the Escrow and
Impound Account shall not terminate but shall be extended until and including
the last "Closing" (defined below) to occur.
For purposes of this Agreement, the term "collected funds" shall mean
all funds received by the Trust Agent that have cleared normal banking channels
and are in the form of cash or cash equivalents.
a. If the Trust Agent receives the Minimum Subscriptions prior to the
Termination Date in collected funds and the other conditions are met as set
forth in the Escrow and Impound Agreement, a copy of which is attached as an
Exhibit to the Registration Statement and incorporated herein by this reference,
a closing (the "Initial Closing") shall be held on a date selected by the
Company, which date may be after the Termination Date but as soon as practicable
after the Company's acceptance of the last of the Minimum Subscriptions. At the
Initial Closing, the Trust Agent shall release the collected funds then on
deposit in the Escrow and Impound Account based on the subscriptions as to which
the Iniitial Closing relates, along with all accrued interest thereon, at the
direction of the Company.
b. The Company may agree to continue the offering of the CAS Bonds
after the Initial Closing and prior to the Termination Date until up to
$5,000,000 in principal amount of the CAS Bonds are subscribed for, or until
earlier terminated by agreement between the Company and Placement Agent. If such
additional subscriptions are tendered and accepted after the Initial Closing and
prior to the Termination Date, an additional closing (the "Final Closing") with
respect to such subscriptions shall be held in accordance with the terms of the
Prospectus which shall be and occur on a date selected by the Company, which
date may be after the Termination Date, but as soon as practicable after the
Company's acceptance of such subscriptions. Each of the Initial Closing and the
Final Closing shall be referred to herein as a "Closing." If, prior to the
Termination Date, subscriptions for more than $5,000,000 in principal amount of
CAS Bonds are received (an "Oversubscription"), the Placement Agent in its sole
and absolute discretion, may allocate (in such manner as the Placement Agent
determines) the CAS Bonds among the subscribers as to whom a Closing has not
already been held.
c. Upon the occurrence of a Closing with respect to which the
Subscriber's subscription has been accepted, in whole or in part, and as soon as
practicable thereafter but in any event in compliance with all applicable laws,
the Placement Agent shall cause certificates representing the CAS Bonds for
which the Subscriber's subscription has been accepted to be transmitted to the
Subscriber or such other person or entity as the Subscriber has indicated below.
If the Trust Agent does not receive the Minimum Subscriptions prior to the
Termination Date, the Trust Agent promptly shall notify each of the applicable
state securities administrators if and as required, by telephone or telegraph
confirmed in writing, of such fact, and shall promptly, thereafter, refund to
the Subscriber the amount received from the Subscriber, without deduction,
penalty, or expense to the Subscriber, and the Trust Agent shall notify the
Company of its distribution of the funds. Such distribution shall include the
Subscriber's pro rata share of any interest earned while the Subscriber's funds
were on deposit in the Escrow and Impound Account and such funds were invested,
as described in the Escrow and Impound Agreement. The purchase money returned to
the Subscriber shall be free and clear of any and all claims of the Company or
any of its creditors. Except as otherwise agreed between the Subscriber and the
Company, certificates representing the CAS Bonds shall not bear any legends
restricting transfer.
2. Irrevocable; Rejection of Acceptance of the Subscription by the
Company. This Subscription Agreement is irrevocable by the Subscriber. The
Company may, in its sole discretion, accept or reject this Subscription
Agreement in whole or in part at any time. If the Company rejects the Agreement
in whole or the Placement Agent does not allocate CAS Bonds to the subscriber
due to Oversubscription, the Company or the Placement Agent, as applicable, will
promptly cause the Trust Agent to return the entire amount paid by the
Subscriber in connection with this Subscription Agreement, with accrued
interest, by mailing a check to the Subscriber. If the Company rejects the
Subscription Agreement in part or the Placement Agent does not allocate the full
amount of CAS Bonds subscribed for hereunder due to an Oversubscription, the
Company or the Placement Agent, as applicable, promptly will cause the Escrow
and Impound Agent to return the amount paid by the Subscriber in connection with
the portion of this Subscription Agreement that is rejected or for which CAS
Bonds are not allocated, with accrued interest, by mailing a check in such
amount to the subscriber. Unless and until the Company accepts this Subscription
Agreement and the Company receives payment in full for the CAS Bonds upon
release of the funds therefor from the Trust Agent, the Subscriber will not
become a holder of the CAS Bonds subscribed for hereunder and such CAS Bonds
will not be considered issued or outstanding.
3. Acknowledgements. By entering this Subscription Agreement, the
Subscriber acknowledges that the Subscriber has received and thoroughly reviewed
the Prospectus relating to the offering of CAS Bonds. The Subscriber further
acknowledges that the Subscriber has investigated all issues to the Subscriber's
satisfaction, and has consulted with such of the Subscriber's own legal counsel
or other advisors as the undersigned deems necessary. The Subscriber understands
that the Company is obligated to obtain the Minimum Subscriptions prior to the
Termination Date before the Company will receive any offering proceeds and
before the Subscriber will receive certificates representing the CAS Bonds for
which and to the extent that this Subscription Agreement may have been accepted,
if any.
4. Capacity; Enforceability. The Subscriber represents and warrants
that: (a) if the Subscriber is executing this Subscription Agreement in a
representative or fiduciary capacity, the Subscriber has full power and
authority to execute and deliver this Subscription Agreement in such capacity
and on behalf of the Subscriber's principal; and (b) this Subscription Agreement
constitutes a legal, valid and binding obligation of the Subscriber (or the
person for whom the Subscriber is executing this Subscription Agreement)
enforceable against the Subscriber (or such person) in accordance with its
terms.
5. Miscellaneous. This Subscription Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and it
supersedes and discharges all prior agreements (written and oral) and
negotiations and all contemporaneous oral agreements concerning such subject
matter. This Subscription Agreement may not be amended or terminated except by a
writing signed by the party against whom any such amendment or terminations is
sought. If the Subscriber is more than one person, the obligation of the
Subscriber shall be joint and several. This Subscription Agreement is governed
by Arizona law.
6. Subscription.
Number of CAS Bonds subscribed for: ___________________
Total Amount of payment: $______________________________
ADDRESS OF SUBSCRIBER: SIGN AND DATE HERE:
(Street) (Print Name of Subscriber)
By:
(Signature)
(City) (Print Name of Signatory)
(State) (Zip Code) (Print Title of Signatory)
(Telephone Number)
(Taxpayer Identification Number) (Date)
REGISTRATION AND ADDRESS:
Registration Mr.
Mrs. Please Print Name(s) in which your CAS Bonds
Ms. are to be registered _____________________
Other ___________________________________________
Social Security or Taxpayer ID number(s): _____________________________________
---------------------------------------
Ownership
Check One: Individual Ownership or Separate Property
Joint Tenants with Right of Survivorship (all parties sign)
Community Property (both sign if to be registered in both names)
Tenants in Common (all parties sign)
Corporation
Partnership (General or Limited)
IRA/Keogh Plan (circle one)
As Trustee or Other Fiduciary for:____________________________
Other:
Broker-Dealer (Firm):__________________________________________________________
Registered Representative (please print):______________________________________
Office Address:__________________________________ Phone:____________________
Dated:_____________________ Signature:____________________________________
<PAGE>
EXHIBIT F
ESCROW AND IMPOUND AGREEMENT
This Escrow and Impound Agreement is made and entered into as of _______, 1995,
by and among U.S. Trust Company of California, N.A. (the "Escrow and Impound
Agent"), Brookstreet Securities Corporation (the "Placement Agent") and ILX
Incorporated, an Arizona corporation (the "Company").
RECITALS
The Company proposes to offer for sale to investors through one or more
registered broker-dealers up to 5,000 Convertible Adjustable Secured Bonds (the
"CAS Bonds") at a price of $1,000 per CAS Bond (the "Proceeds").
The Placement Agent intends to sell the CAS Bonds as the Company's
agent on a best efforts part-or- none basis for 2,000 CAS Bonds and on a best
efforts basis for the remaining CAS Bonds in a public offering (the "Offering")
according to the terms and conditions of a Placement Agent Agreement dated
November __, 1995 (the "Placement Agent Agreement").
The Company and the Placement Agent desire to establish an escrow
account in which funds received from subscribers will be deposited pending
completion of the escrow and impound period. U.S. Trust Company of California is
a bank, as defined in Section 3(a)(6) of the Securities Exchange Act of 1934 and
agrees to serve as Escrow and Impound Agent in accordance with the terms and
conditions set forth herein and subject to the approval of any state
administrator exercising proper jurisdiction and authority with respect to this
Agreement (collectively, "State Administrators").
The purpose of this Escrow and Impound Agreement is to comply with the
provisions of Rules 10(b)-9 and 15c2-4 under the Exchange Act of 1934, state
laws that may be applicable and regulations adopted thereunder and the terms and
conditions of the Placement Agent Agreement. The term Selected Dealer as used
herein shall include the Placement Agent and other agent and/or other selected
dealers as part of the selling group, all of whom shall be registered with the
Securities and Exchange Commission and under the securities laws of the states
in which such Selected Dealer sells the CAS Bonds, and all of whom shall be
members of the National Association of Securities Dealers. All Selected Dealers
shall be bound by this Agreement. However, for purposes of communications and
directives of the Selected Dealers, the Escrow and Impound Agent need only
accept those communications and directives signed by the Placement Agent.
AGREEMENT
Now therefore, in consideration of the foregoing, it is hereby agreed
as follows:
1. Establishment of Escrow and Impound Account. The parties hereby
establish an interest-bearing escrow and impound account with the Escrow and
Impound Agent, which escrow account shall be entitled ILX CAS Bond Escrow and
Impound Account (the "Escrow and Impound Account"). Each Selected Dealer will
instruct subscribers to make checks for subscriptions payable to the order of
the Escrow and Impound Agent. Any checks received that are made payable to a
party other than the Escrow and Impound Agent shall be returned to the Selected
Dealer who submitted the check.
2. Escrow and Impound Period. The Escrow and Impound Period shall begin
with the commencement of the Offering and shall terminate on December 15, 1995,
or such later date selected by the Company, in its sole discretion, but not
later than January 14, 1995 (the "Termination Date"); provided that, if the
Company provides a written statement to the Escrow and Impound Agent that the
Company has accepted subscriptions for at least $2,000,000 in principal amount
of CAS Bonds and the Escrow and Impound Agent has received gross proceeds of
$2,000,000 in "collected funds" (defined below) (the "Minimum Subscriptions") by
and before the Termination Date, then the Escrow and Impound Period shall be
extended until and including the date of the "Final Closing" (as defined below).
For purposes of this Agreement, the term "collected funds" shall mean all funds
received by the Escrow and Impound Agent that have cleared normal banking
channels and are in the form of cash or cash equivalents able to be converted
into cash on a same day basis.
During the Escrow and Impound Period, the Company is aware and understands that
it is not entitled to any funds received into escrow and no amounts deposited in
the Escrow and Impound Account shall become the property of the Company or any
other entity, or be subject to the debts of the Company or any other entity,
except to the extent that such funds are directed to be paid in connection with
the Initial Closing, as defined in the Placement Agent Agreement.
3. Deposits into the Escrow and Impound Account. Each Selected Dealer
agrees that it shall promptly deliver all monies received from subscribers for
the payment of the CAS Bonds to the Escrow and Impound Agent for deposit in the
Escrow and Impound Account together with a written account of each sale, which
account shall set forth, among other things, the subscriber's name and address,
the number of CAS Bonds purchased, the amount paid therefor, whether the
consideration received was in the form of a check or wire transfer, the date of
said check or wire transfer, and the date received by such Selected Dealer. All
monies so deposited in the Escrow and Impound Account are hereinafter referred
to as the "Escrow and Impound Amount."
4. Disbursements from the Escrow and Impound Account.
A. If the Escrow and Impound Agent does not receive the
Minimum Subscriptions prior to the Termination Date, the Escrow and Impound
Agent promptly shall notify each of the applicable State Administrators if and
as required, by telephone or telecopy confirmed in writing, of such fact (or, if
permitted, shall notify the Company, which shall notify the applicable State
Administrators as required), and shall promptly, thereafter, refund to each
subscriber the amount received from the subscriber, without deduction, penalty,
or expense to the subscriber, and the Escrow and Impound Agent shall notify the
Company and each Selected Dealer of its distribution of the funds. Such
distribution shall include each subscriber's pro rata share of any interest
earned while the subscriber's funds were on deposit in the Escrow and Impound
Account as set forth in paragraph 6 hereof. The purchase money returned to each
subscriber shall be free and clear of any and all claims of the Company or any
of its creditors.
B. If the Escrow and Impound Agent receives the Minimum
Subscriptions prior to the Termination Date in collected funds and the other
conditions (as set forth below) are met, the Escrow and Impound Agent shall
release the collected funds then on deposit in the Escrow and Impound Account
based on Subscriptions as to which the Initial Closing relates, along with all
accrued interest thereon, as directed by the Company on the date of the Initial
Closing.
The Minimum Subscriptions may be met by all collected funds that are
deposited during the Escrow and Impound Period. However, escrow cannot be broken
and the Offering may not proceed to any Closing (as defined below) until
collected funds have been collected through the normal banking channels in an
aggregate amount sufficient to meet the Minimum Subscriptions. In no event may a
Selected Dealer substitute its own good check for the check of a purchaser that
has insufficient funds, nor otherwise purchase to satisfy the offering
contingency, unless purchasing for investment prior to the termination of the
Escrow and Impound Period, and the offering document discloses the maximum
amount of such potential purchase, and such arrangement has been approved, to
the extent required by applicable law, by the State Administrators.
The Escrow and Impound Agent will not release the Escrow and Impound
Amount to the Company until the Company has provided written notice that it has
accepted subscriptions for the Minimum Subscriptions and, if and to the extent
required by law (it being understood that the Escrow and Impound Agent has no
duty to investigate the law), each of the State Administrators identified by the
Company in writing to the Escrow and Impound Agent has entered an order
authorizing the release of funds in the Escrow and Impound Account. If required,
such order will be entered only five business days after receipt by the
State Administrator of an application that includes the following:
(i) A verified statement duly executed by the Escrow and
Impound Agent setting forth the total amount in collected funds on deposit with
the Escrow and Impound Agent on the most recent practicable date,
(including purchases for which check or other payment had been received by the
purchaser and were subsequently collected as provided in paragraph 5 hereof),
and states therein that all of the conditions of this Escrow and Impound
Agreement have been met; and
(ii) A verified statement duly executed by the Company that
states:
a. That there have been no material omissions or
changes in the financial condition of the Company, or other changes of
circumstances, that would render the amount of the Proceeds inadequate to
finance, to the extent described in the registration statement, the Company's
purposes set forth in the registration statement; and
b. That there have been no material omissions or
changes that would render the representations contained in the registration
statement to be fraudulent, false, or misleading.
C. If the Escrow and Impound Agent previously has released
funds to the Company pursuant to paragraph B of this Section, the Escrow and
Impound Agent shall release to the Company all additional funds deposited with
respect to the Offering, together with all interest earned thereon, for all
subscriptions regarding which the Company has given written notice of its
acceptance to the Escrow and Impound Agent on the Final Closing Date, which date
shall be selected by the Company and may be after the Termination Date.
5. Collection Procedure.
A. The Escrow and Impound Agent hereby is authorized to
forward each check for collection and, upon collection of the proceeds of each
check, deposit the collected proceeds in the Escrow and Impound Account. As an
alternative, the Escrow and Impound Agent may telephone the bank on which the
check is drawn to confirm that the check has been paid. Any check returned
unpaid to the Escrow and Impound Agent shall be returned to the Selected Dealer
that submitted the check. In such cases, the Escrow and Impound Agent promptly
will notify the Company of such return.
B. If the Company rejects in whole any subscription for which
the Escrow and Impound Agent already has collected funds, the Escrow and Impound
Agent shall promptly return the entire amount paid by the rejected subscriber,
with accrued interest, by mailing a check to the rejected subscriber. If the
Company rejects in part any subscription for which the Escrow and Impound Agent
has collected funds, the Escrow and Impound Agent shall promptly return the
amount paid by the subscriber in connection with the rejected portion, with
accrued interest, by mailing a check to the rejected subscriber. If the Company
rejects, in whole or in part, any subscription for which the Escrow and Impound
Agent has not yet collected funds but has submitted the subscriber's check for
collection, the Escrow and Impound Agent shall promptly mail a check in the
applicable rejected amount to the rejected subscriber after the Escrow and
Impound Agent has cleared such funds. If the Escrow and Impound Agent has not
yet submitted a rejected subscriber's check for collection, the Escrow and
Impound Agent shall promptly remit the subscriber's check directly to the
subscriber.
6. Investment of Escrow Amount. The Escrow and Impound Agent shall
invest, at reasonable and convenient times after receipt, the Escrow and Impound
Amount only in short-term securities issued or guaranteed by the U.S. Government
or in money market funds of the Trustee, it's affiliates or other entities that
invest in such securities. If the funds of the Escrow and Impound Account have
been so invested, refunds to subscribers pursuant to paragraph 4A or paragraph 5
hereof shall include each subscriber's pro rata share of any interest earned
while the subscriber's funds were on deposit. The Escrow and Impound Agent shall
have no liability for funds invested in accordance with this paragraph 6.
7. Compensation of Escrow and Impound Agent. The Company shall pay the
Escrow and Impound Agent a fee for its escrow services in an amount of $_____.
If it is necessary for the Escrow and Impound Agent to return funds to the
purchasers of the CAS Bonds, the Company shall pay to the Escrow and Impound
Agent an additional amount sufficient to reimburse it for its actual cost in
disbursing such funds. However, no such fee, reimbursement for costs and
expenses, indemnification for any damages incurred by the Escrow and Impound
Agent, or any monies whatsoever shall be paid out of or chargeable to the funds
on deposit in the Escrow and Impound Account upon reasonable prior notice.
8. Books and Records. During the term of this Agreement, the Escrow and
Impound Agent shall keep accurate books and records of all transactions
hereunder. The Company and the Placement Agent shall have access to such books
and records at all reasonable times upon reasonable prior notice.
9. Liability of the Escrow and Impound Agent; Indemnity. The Escrow and
Impound Agent may conclusively rely on, and shall be protected when it acts in
good faith upon, any statement, certificate, notice, request, consent, order or
other document that it believes to be genuine and that has been signed by the
proper party. The Escrow and Impound Agent shall have no duty or liability to
verify any such statement, certificate, notice, request, consent, order, or
other document that it in good faith believes to be genuine and its sole
obligation shall be to act only as expressly set forth in this Agreement. The
Escrow and Impound Agent shall be under no obligation to institute or defend any
action, suit, or proceeding or otherwise incur any expense in connection with
this Agreement unless it is indemnified by the Company or Placement Agent to its
satisfaction. The Escrow and Impound Agent may consult counsel in respect of any
question arising under this Agreement, and the Escrow and Impound Agent shall
not be liable for any action taken, or omitted, in good faith upon advice of
such counsel. The Company and the Placement Agent hereby indemnify and hold
harmless the Escrow and Impound Agent from and against any and all loses,
claims, damages, liabilities and reasonable expenses, including reasonable
attorney fees, that Escrow and Impound Agent may incur in connection with the
performance of its duties hereunder, except that such indemnity shall not extend
to losses, claims, damages, liabilities, or expenses that result, directly or
indirectly from the gross negligence of the Escrow and Impound Agent of its
obligations under this agreement.
10. This Agreement shall be binding upon, and inure to, the benefit of
the parties hereto, their heirs, successors, and assigns.
11. This Agreement shall terminate in its entirety when all the Escrow
and Impound Amount has been distributed as provided in paragraph 4, above.
12. The parties hereby incorporate by reference the terms and
conditions of Section 603(a)-(d), 603(f), 608(b) and 610 of the Indenture
between Escrow and Impound Agent, as "Trustee" thereunder, and the Company, and
agree that all reference to "Trustee" therein shall be deemed to refer to Escrow
and Impound Agent for purposes of incorporating such provisions in this
Agreement.
The Company, the Placement Agent, and the Escrow and Impound Agent have entered
into this Agreement on this ___ day of ________________ in multiple
counterparts, each of which shall be considered an original.
BROOKSTREET SECURITIES CORPORATION, for
itself and as agent for the other
Selected Dealers
By:
Its:
ILX INCORPORATED, an Arizona corporation
By:
Its:
ESCROW AND IMPOUND AGENT
By:
Its:
<PAGE>
ILX INCORPORATED
(an Arizona corporation)
10% Convertible Adjustable Secured Bonds Due 2000
SOLICITING DEALER AGREEMENT
________________, 1995
Ladies/Gentlemen:
We have agreed to use our best efforts to sell a minimum of $2,000,000 and
a maximum of up to $5,000,000 aggregate principal amount of 10% Convertible
Adjustable Secured Bonds Due 2000 (the "Bonds") of ILX Incorporated (the
"Company"). The Bonds are hereinafter sometimes referred to collectively as the
"Securities." The Securities are being offered by us as agent for the Company.
The Securities and the terms of the offering are more fully described in the
enclosed Prospectus, receipt of which you hereby acknowledge.
We are hereby inviting certain Soliciting Dealers, subject to the other
terms and conditions set forth below and in such Prospectus, to solicit
subscriptions for the Securities. You hereby confirm that you are a dealer
actually engaged in the investment banking or securities business and that you
are either (i) a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place
of business located outside the United States, its territories or possessions
and not required to be registered under the Securities Exchange Act of 1934 (the
"1934 Act") who hereby agrees not to make any sales within the United States,
its territories or its possessions or to persons who are nationals thereof or
residents therein. You hereby agree to comply with the provisions of Sections 24
and 34 of Article Ill of the Rules of Fair Practice of the NASD, and if you are
a foreign dealer and not a member of the NASD, you also agree to comply with:
(i) the NASD's interpretation with respect to free-riding and withholding, (ii)
the provisions of Sections 8 and 36 of Article III of such Rules of Fair
Practice, as though you were a member of the NASD, and (iii) Section 25 of
Article III thereof as that Section applies to non-member foreign dealers.
The public offering price of the Units is $1,000 per Bond. By directing
payment from the Escrow Account (as defined below) we will pay to you a
commission of 5 percent of the gross proceeds from the sale of each Bond
sold by the Company pursuant to a subscription therefor (a "Subscription")
solicited by you. Payment will be made promptly on the Initial Closing or the
Final Closing (both as defined in the Placement Agent Agreement); provided,
however, that in the event that a sale of a Bond for which you have solicited a
Subscription shall not occur, whether by reason of the failure of any condition
specified herein or the Sales Agency Agreement, no commission or payment in
respect thereof shall be due. Commissions and payments will be payable only with
respect to transactions lawful in the jurisdiction where they occur. You agree
that the Company shall have no responsibility or liability for the payment of
commissions to you.
You agree to submit on behalf of each person desiring to purchase
Securities, a Subscription in form and substance satisfactory to the Company and
all documents, if any, required under state securities laws. You shall ascertain
that each Subscription has been properly completed. All payments for the
Securities shall be made by check payable to the order of "U.S. Trust Company of
California, N.A. as Escrow Agent for ILX Incorporated"
You agree to promptly submit on behalf of each person desiring to purchase
Securities a completed Subscription, as well as all checks received by you from
subscribers to U.S. Trust Company of California, N.A., at
____________________________________, California (the "Escrow Agent").
Subscriptions for Securities shall be made only during the offering period
described in the Prospectus. You shall have no reasonable grounds to believe, on
the basis of having received and examined the Prospectus, including, without
limitation, the "Use of Proceeds" sections thereof, that all material facts are
not adequately and accurately disclosed and provide a basis for evaluating an
investment in the Company. For purposes of evaluating the Company, you recognize
that under NASD rules you may rely on the information from an inquiry conducted
by another NASD member only if you have reasonable grounds to believe that such
inquiry was conducted with due care, the results of the inquiry were given to
you with the permission of the NASD member that made the inquiry and that no
NASD member that participated in the inquiry is a sponsor or affiliate of the
sponsor of the Company.
All subscriptions solicited by you will be strictly subject to confirmation
by us and acceptance thereof by the Company. Neither you nor any other person is
authorized to give any information, written or oral, or make any
representations, written or oral, in connection with the offer and sale of
Securities other than those contained (i) in the Prospectus in connection with
the sale of any of the Securities or (ii) any supplemental sales material
supplied or prepared by the Company and delivered to you by the Company for use
in making offers of Securities. No dealer is authorized to act as agent for us
when offering any of the Securities to the public or otherwise, it being
understood that you and each other Soliciting Dealer are independent contractors
with us. Nothing herein contained shall constitute you or any other Soliciting
Dealer an association or partner with us.
Upon release by us, you may offer the Securities at the public offering
price, subject to the terms and conditions hereof.
We will provide you with such number of copies of the enclosed Prospectus
and such number of copies of amendments and supplements thereto as you may
reasonably request. If the Company provides us with supplemental sales material
to be used in connection with the solicitation of Securities of the Company, we
will provide such materials to you. In the event you elect to use such
supplemental sales material, you agree that such material shall not be used in
connection with the solicitations of Securities unless accompanied or preceded
by the Prospectus as then currently in effect and as it may be amended or
supplemented in the future. You agree that you will deliver a copy of the
Prospectus, and any amendments or supplements thereto, to each person to whom
you make an offer of Securities and that you will not disseminate or publish any
advertisement relating to your solicitation of subscribers for the Securities
(including, without limitation, any so-called tombstone advertisement or any
advertisement relating to seminars) (i) the form of which has not been submitted
to the NASD by the Company and (ii) that has not been approved in writing by the
Company.
This Agreement shall terminate at the close of business on the 45th day
after the completion of the sale of all the Securities by the Company, unless
earlier terminated.
We shall have full authority to take such action as we may deem advisable
in respect to all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not constitute, a
waiver by you of compliance with any provision of the Securities Act of 1933, as
amended (the "1933 Act"), or of the rules and regulations thereunder.
Upon application to us, we will inform you as to the jurisdictions in which
we believe the Securities have been qualified for sale under, or are exempt from
the requirements of, the respective securities laws of such jurisdictions, but
we assume no responsibility or obligation as to your right to sell the
Securities in any jurisdiction. You agree that we may limit the number of offers
and sales which may be made, or the number of the Securities which may be sold,
by you in any jurisdiction. You agree not to sell the Securities in any
jurisdiction where such sale by you is prohibited.
You warrant and represent that you and your agents and employees are duly
licensed to sell the Securities in those jurisdictions in which you do so. You
further agree that you will promptly notify us of any changes in your, or your
agent's or employee's, status as a licensed broker-dealer in any jurisdiction in
which you or your agent or your employee has been offering or selling the
Securities. If necessary, we will cause to be filed with the Department of State
of New York a Further State Notice with respect to the Securities and will cause
to be sent to the Pennsylvania Securities Commission a list of the Soliciting
Dealers to whom this Agreement is initially being sent.
You confirm that you are familiar with Securities Act Release No. 4698 and
Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary and
final prospectuses, and confirm that you have complied and will comply
therewith. We will make available to you, to the extent they are made available
to us by the Company, such number of copies of the Prospectus as you may
reasonably request for the purposes contemplated by the 1933 Act, the 1934 Act,
and the applicable rules and regulations thereunder.
In making any offer or sale of the Securities, you shall comply with the
provisions of the 1933 Act and the 1934 Act, you shall comply with all of the
provisions of this Soliciting Dealer Agreement, and you shall take all necessary
actions pursuant to instructions given by counsel to the Company or us or
otherwise required to permit the offer and sale of the Securities to comply with
the securities or "blue sky" laws of the jurisdictions in which you make offers
or sales of the Securities.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and permitted assigns, this Agreement
and its conditions and provisions being for the sole and exclusive benefit of
the parties hereto and their respective successors and permitted assigns, and
for the benefit of no other person, firm, partnership or corporation.
The terms used herein, unless defined otherwise, shall have the same
meaning as in the Sales Agency Agreement.
This Agreement may be amended only by means of a written document, signed
by the party to be bound, and may not be assigned by you without our prior
written consent.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California. Any notice from us to you shall be deemed to
have been duly given if mailed or telegraphed to you at the address to which
this Agreement is mailed.
Please confirm your agreement hereto by signing and returning at once to us
at 2361 Campus Drive, Suite 210, Irvine, California 90245. Upon receipt thereof,
this letter and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
BROOKSTREET SECURITIES CORPORATION
By:
(Authorized Representative)
Accepted:
(Signature of Selected Dealer)
(Address to which all communications
are to be sent)
Fax No.:
ILX Incorporated
and
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
--------------------
As Trustee
INDENTURE
Dated as of __________________, 1995
$2,000,000 Minimum
$5,000,000 Maximum
10% Convertible Adjustable Secured Bonds, Due 2000
Reconciliation and tie between Trust Indenture Act of 1939, as amended,
and the Indenture dated as of ______________, 1995.
Trust Indenture Action Section Indenture Section
- ------------------------------ -----------------
Section 310(a)(1)..........................................................607B
Section 310(a)(2)..........................................................607B
Section 310(a)(3)................................................Not Applicable
Section 310(a)(4)................................................Not Applicable
Section 310(a)(5)..........................................................607B
Section 310(b)........................................................607A, 608
Section 311(a)...........................................................611(a)
Section 311(b)...........................................................611(b)
Section 311(b)(2).....................................................704(a)(2)
Section 312(a)......................................................701, 703(a)
Section 312(b)...........................................................702(b)
Section 312(c)...........................................................702(c)
Section 313(a)...........................................................704(a)
Section 313(b)...........................................................704(b)
Section 313(c)...................................................704(a), 704(b)
Section 313(d)...........................................................704(c)
Section 314(a)..............................................................703
Section 314(b).............................................................703A
Section 314(c)(1)...........................................................102
Section 314(c)(2)...........................................................102
Section 314(c)(3)...........................................................102
Section 314(d)(1).......................................................703A(d)
Section 314(d)(2).......................................................703A(c)
Section 314(e)..............................................................102
Section 315(a)...........................................................601(a)
Section 315(b)...................................................602, 704(a)(6)
Section 315(c)...........................................................601(b)
Section 315(d)...........................................................601(c)
Section 315(d)(1).....................................................601(a)(1)
Section 315(d)(2).....................................................601(c)(2)
Section 315(d)(3).....................................................601(c)(3)
Section 315(e)..............................................................514
Section 316(a)(1)(A)...................................................502, 512
Section 316(a)(1)(B)........................................................513
Section 316(a)(2)...........................................................513
Section 316(b).........................................................508, 902
Section 317(a)(1)......................................................503, 905
Section 317(a)(2)...........................................................504
Section 317(b).............................................................1003
Section 318(a)..............................................................113
- -------------------------------------------------------------------------------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Indenture.
TABLE OF CONTENTS
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION...................................................... 1
Section 101. Definitions.................................. 1
Section 102. Compliance Certificates and Opinions......... 7
Section 103. Form of Documents Delivered to Trustee....... 8
Section 104. Acts of Bondholders.......................... 8
Section 105. Notices, etc., to Trustee and Company........ 9
Section 106. Notices to Bondholders; Waiver............... 9
Section 107. Effect of Headings and Table of Contents.... 10
Section 108. Successors and Assigns...................... 10
Section 109. Severability Clause......................... 10
Section 110. Benefits of Indenture....................... 10
Section 111. Governing Law............................... 10
Section 112. Legal Holidays.............................. 10
Section 113. Incorporation of and Conflict with Trust
Indenture Act.................................... 11
ARTICLE TWO
BOND FORM.................................................................. 11
Section 201. Forms Generally............................. 11
ARTICLE THREE
THE BONDS.................................................................. 11
Section 301. Title and Terms............................ 11
Section 302. Denominations.............................. 12
Section 303. Execution, Authentication and Delivery
and Dating....................................... 12
Section 304. Temporary Bonds............................ 13
Section 305. Registration, Transfer and Exchange........ 13
Section 306. Mutilated, Destroyed, Lost and
Stolen Bonds..................................... 15
Section 307. Payment of Interest: Interest Rights
Preserved........................................ 15
Section 308. Persons Deemed Owners...................... 17
Section 309. Cancellation............................... 17
Section 310. Authentication and Delivery
of Original Issue................................ 18
Section 311. Computation of Interest.................... 18
ARTICLE FOUR
SATISFACTION AND DISCHARGE................................................. 18
Section 401. Satisfaction and Discharge of Indenture.... 18
Section 402. Application of Trust Money................. 19
ARTICLE FIVE
REMEDIES................................................................... 19
Section 501. Events of Default.......................... 19
Section 502. Acceleration of Maturity; Recision
and Annulment.................................... 20
Section 503. Collection of Indebtedness and Suits for
Enforcement by Trustee........................... 21
Section 504. Trustee May File Proofs of Claim........... 22
Section 505. Trustee May Enforce Claims Without
Possession of Bonds.............................. 23
Section 506. Application of Money Collection............ 23
Section 507. Limitation on Suits........................ 24
Section 508. Unconditional Right of Bondholder
to Receive Principal, Premium and Interest
and to Convert................................... 25
Section 509. Restoration of Rights and Remedies......... 25
Section 510. Rights and Remedies Cumulative............. 25
Section 511. Delay or Omission Not Waiver............... 25
Section 512. Control by Bondholders..................... 26
Section 513. Waiver of Past Defaults.................... 26
Section 514. Undertaking for Costs...................... 26
ARTICLE SIX
THE TRUSTEE................................................................ 27
Section 601. Certain Duties and Responsibilities........ 27
Section 602. Notice of Defaults......................... 28
Section 603. Certain Rights of Trustee.................. 28
Section 604. Not Responsible for Recitals or Issuance
of Bonds......................................... 29
Section 605. May Hold Bonds............................. 29
Section 606. Money Held in Trust........................ 30
Section 607. Compensation and Reimbursement............. 30
Section 607A. Disqualification: Conflicting Interests.... 30
Section 607B. Corporate Trustee Required; Eligibility.... 36
Section 608. Resignation and Removal; Appointment
of Successor..................................... 36
Section 609. Acceptance of Appointment by Successor..... 37
Section 610. Merger, Conversion or Succession
to Business...................................... 38
Section 611. Preferential Collection of Claims
Against Company.................................. 38
ARTICLE SEVEN
BONDHOLDERS' LISTS AND
REPORTS BY TRUSTEE AND COMPANY............................................. 42
Section 701. Company to Furnish Trustee Names and
Addresses of Bondholders........................ 42
Section 702. Preservation of Information: Communications
to Bondholders................................... 42
Section 703. Reports by Company......................... 43
Section 703A. Reports and Opinions of Fair Value
Regarding Security Interest...................... 44
Section 704. Reports by Trustee......................... 45
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE....................... 46
Section 801. Company May Consolidate, Etc.. on Certain
Terms............................................ 46
Section 802. Successor Corporation Substituted.......... 47
ARTICLE NINE
SUPPLEMENTAL INDENTURES.................................................... 47
Section 901. Supplemental Indentures without Consent
of Bondholders................................... 47
Section 902. Supplemental Indentures with Consent
of Bondholders................................... 48
Section 903. Execution of Supplemental Indentures....... 50
Section 904. Effect of Supplemental Indentures.......... 50
Section 905. Reference in Bonds to Supplemental
Indentures................ 50
Section 906. Effect on Senior Indebtedness.............. 50
ARTICLE TEN
COVENANTS.................................................................. 51
Section 1001. Payment of Principal, Premium and Interest 51
Section 1002. Maintenance of Office or Agency........... 51
Section 1003. Money for Bond Payments to be Held
in Trust......................................... 51
Section 1004. Payment of Taxes.......................... 53
Section 1005. Maintenance of Properties................. 53
Section 1006. Statement as to Compliance................ 53
Section 1007. Corporate Existence....................... 53
Section 1008. Insurance................................. 53
Section 1009. Life Insurance on Key Personnel........... 54
Section 1010. Particular Covenants as to Certain of
Company's Affairs................................ 54
Section 1011. Limitations on Dividends and Other
Distributions.................................... 54
Section 1012. Limitation on Liquidation................. 54
Section 1013. Overhead Allocation Limitation............ 54
Section 1014. Limitation on Change of Control........... 55
Section 1015. Waiver of Certain Covenants............... 55
ARTICLE ELEVEN
REDEMPTION OF BONDS........................................................ 56
Section 1101. Right of Redemption....................... 56
Section 1102. Applicability of Article.................. 56
Section 1103. Election to Redeem; Notice to Trustee..... 56
Section 1104. Selection by Trustee of Bonds to
be Redeemed...................................... 56
Section 1105. Notice of Redemption...................... 57
Section 1106. Deposit of Redemption Price............... 57
Section 1107. Bonds Payable on Redemption Date.......... 58
Section 1108. Bonds Redeemed in Part.................... 58
ARTICLE TWELVE
SUBORDINATION OF BONDS..................................................... 58
Section 1201. Agreement to Subordinate.................. 58
Section 1202. Distribution of Assets, Other than
Collateral Stock................................. 59
Section 1203. No Payment to Bondholders if Senior
Indebtedness is in Default....................... 59
Section 1204. Subrogation............................... 60
Section 1205. Obligation of Company Unconditional....... 60
Section 1206. Payments on Bonds Permitted............... 61
Section 1207. Effectuation of Subordination by Trustee.. 61
Section 1208. Notice to Trustee......................... 61
Section 1209. Rights of Holders of Senior Indebtedness
Not Impaired..................................... 62
Section 1210. Trustee Not Fiduciary for Holders of
Senior Indebtedness.............................. 62
Section 1211. Rights of Trustee as Holder of
Senior Indebtedness.............................. 62
Section 1212. Article Applicable to Paying Agents....... 62
Section 1213. Rights and Obligations Subject to Power
of Court......................................... 62
Section 1214. No Effect on Secured Interest............. 63
ARTICLE THIRTEEN
CONVERSION OF BONDS........................................................ 63
Section 1301. Conversion Privilege and Conversion Price. 63
Section 1302. Exercise of Conversion Privilege.......... 63
Section 1303. Fractions of Shares....................... 64
Section 1304. Adjustment of Conversion Price............ 64
Section 1305. Adjustment Based on Market Price.......... 65
Section 1306. Notice of Adjustments of Conversion Price. 66
Section 1307. Notice of Certain Corporate Action........ 66
Section 1308. Company to Reserve Common Stock........... 67
Section 1309. Taxes on Conversions...................... 67
Section 1310. Covenant as to Common Stock............... 67
Section 1311. Cancellation of Converted Bonds........... 67
Section 1312. Provisions in Case of Consolidation,
Merger or Sale of Assets......................... 68
ARTICLE FOURTEEN
SECURITY FOR PAYMENT OF BONDS.............................................. 68
Section 1401. Pledge of Collateral Stock................ 68
Section 1402. Event of Default and Remedies............. 69
Section 1403. Method of Realizing Upon the Collateral
Stock............................................ 69
Section 1404. Further Assurances........................ 69
Section 1405. Rights Regarding Stock.................... 70
THIS INDENTURE, dated as ______________, 1995, between ILX
Incorporated, an Arizona corporation, having its principal office at 2777 East
Camelback Road, Phoenix, Arizona 85016 (the "Company"), and U.S. Trust Company
of California, N.A., as Trustee (the "Trustee")
- ------------------------------.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Bonds
by the Holders thereof, it is mutually covenanted and agreed, for the benefit of
the parties hereto and for the equal and proportionate benefit of all Holders of
the Company's 10% Convertible Adjustable Secured Bonds (the "Bonds") as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or
unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act of 1939, as amended, either directly or by reference
therein, have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles;
(4) "This Indenture" means this instrument as originally
executed or as it may from time to time be supplemented or amended by
one or more indentures supplemental hereto entered into pursuant to the
applicable provisions hereof;
(5) all references in this instrument to designated
"Articles", "Sections" and other subdivisions are to the designated
Articles, Sections and other subdivisions of this instrument as
originally executed. The words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and
not to any particular Article, Section or other subdivision; and
(6) the word "or" is not exclusive.
Certain terms, used principally in Article Six, are defined in that
Article.
"Act" when used with respect to any Bondholder has the meaning
specified in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or through one or
more intermediaries, whether through the ownership of voting securities, by
contract or otherwise. The terms "affiliate," affiliation," "controlling" and
"controlled" have meanings correlative to the foregoing.
"Board of Directors" means the board of directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day upon which banking institutions in the Cities of
Phoenix, Arizona, New York, New York, and Los Angeles, California are authorized
or required by law to close.
"Collateral Stock" means all of the common stock of Varsity Clubs of
America Incorporated, an Arizona corporation, currently issued, outstanding and
held in the name of the Company.
"Commission" means the Securities and Exchange Commission, or if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it, then the body performing such duties
on such date at such time.
"Common Stock" means the Company's Common Stock, no par value,
authorized at the date this Indenture is executed, and shares of any class or
classes resulting from any reclassification or reclassifications thereof;
provided, however, that warrants, options or other rights to purchase Common
Stock will not be deemed to be Common Stock.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor corporation shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor corporation.
"Company Request", "Company Order" and "Company Consent" mean,
respectively, a written request, order or consent signed in the name of the
Company by its President or a Vice President.
"Conversion Price" has the meaning specified in Section 1301, as
adjusted in accordance with the terms and conditions of Sections 1304 and 1305.
"Date of Issue", as to any Bond, means the date as of which such Bond
shall be dated or of which it is originally issued by the Company to the initial
purchaser in connection with the public offering of the Bonds, which date shall
be the closing date (determined under the Placement Agent Agreement between the
Company and Brookstreet Securities Corporation) upon which the Company received
the proceeds from the purchase by such initial purchaser as designated in the
written confirmation of purchase thereof delivered to the purchaser, subject to
any agreements with respect thereto as the Company may enter into in connection
with the sale of the Bonds, and, otherwise, the Date of Issue shall be as
designated in the Company Order requesting authentication and delivery thereof.
"Bondholder" means a Person in whose name a Bond is registered in the
Bond Register, or the beneficial owner of such Bond if record ownership is held
by a nominee.
"Bond Register" and "Bond Registrar" have the respective meanings
specified in Section 305.
"Equity Securities" means shares of Common Stock, Preferred Stock or of
any other class or classes of capital stock of the Company, and any other
securities of the Company other than debt securities (whether or not such debt
securities are convertible into other securities of the company).
"Event of Default" has the meaning specified in Section 501.
"Holder" when used with respect to any Bond means a Bondholder.
"Indebtedness" means and includes all items of indebtedness which, in
accordance with generally accepted accounting principles, would be included in
determining total liabilities as shown on the liabilities sale of balance sheet
at such date, and in addition and including without limitation,
(1) any debt of the Company (i) for money borrowed or (ii)
evidenced by a note, debenture or similar instrument (including a
capitalized lease and a purchase money obligation) given in connection
with the acquisition of any property or assets, including securities;
(2) any debt of others described in the preceding clause (1)
which the Company has guaranteed or for which it is otherwise liable;
and
(3) any debt or other obligation of the Company to any lender
undertaken to secure or satisfy any obligation of the Company to
repurchase, replace, acquire or liquidate receivables held by such
lenders and arising from the sale by the Company or its Subsidiaries of
interval ownership interests; and
(4) any amendment, renewal, extension, restructuring,
refunding or replacement of any such debt described in (1), (2) and (3)
above.
"Independent" when used with respect to any specified Person means such
a Person who (1) does not have any material direct financial interest or any
material indirect financial interest in the Company, and (2) is not connected
with the Company as an officer, employee, promoter, underwriter, trustee,
partner, director or person performing similar functions. Whenever it is herein
provided that any Independent Person's opinion or certificate shall be furnished
to the Trustee, such Person shall be appointed by a Company Order and approved
by the Trustee in the exercise of reasonable care, and such opinion or
certificate shall state that the signer has read this definition and that the
signer is Independent within the meaning hereof.
"Initial Interest Accrual Date", as to any Bond, means that date from
which interest shall begin to accrue in connection with the original issuance of
such Bond, which shall be the Date of Issue.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Bonds.
"Maturity" when used with respect to any Bond means the date on which
the principal of such Bond becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Officer" means the President, any Executive Vice President, any Vice
President, the Treasurer, or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by an Officer of the
Company.
"Opinion of Counsel" means the written opinion of legal counsel, who
may (except as otherwise expressly provided in this Indenture) be legal counsel
for the Company.
"Outstanding" when used with respect to Bonds means, as of the date of
determination, all Bonds theretofore authenticated and delivered under this
Indenture, except:
(i) Bonds theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Bonds for whose payment or redemption money in the
necessary amount theretofore has been deposited with the Trustee or any
Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Bonds, provided that, if such
Bonds are to be redeemed, notice of such redemption has been duly given
pursuant to this Indenture or provision therefor reasonably
satisfactory to the Trustee has been made; and
(iii) Bonds in exchange for or in lieu of which other Bonds
have been authenticated and delivered pursuant to this Indenture;
provided, however, that solely for purposes of determining whether the Holders
of the requisite principal amount of Bonds Outstanding have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, Bonds
owned, of record or beneficially, by the Company or any person controlled or
under common control with the Company shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Bonds which the Trustee knows, after due inquiry to be
so owned shall be so disregarded. Bonds so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Bonds. "Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Bonds on behalf of the
Company. The Trustee shall be the initial Paying Agent.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Predecessor Bonds" of any particular Bond means every previous Bond
evidencing all or a portion of the same debt as that evidenced by such
particular Bond; and, for the purposes of this definition, any Bond
authenticated and delivered under Section 306 in lieu of a lost, destroyed or
stolen Bond shall be deemed to evidence the same debt as the lost, destroyed or
stolen Bond.
"Preferred Stock" means the Company's (i) Series A Preferred Stock (ii)
the Company's Series B Preferred Stock, and (iii) the Company's Series C
Preferred Stock, each as defined in the Company's Articles of Incorporation, as
amended, taken together, in each case as authorized at the date this Indenture
is executed, whether voting or non-voting, and shares of any class or classes
resulting from any reclassification or reclassifications thereof; provided,
however, that warrants, options or other rights to purchase Preferred Stock
shall not be deemed to be Preferred Stock.
"Principal Corporate Trust Office" means the office of the Trustee
located at 515 South Flower Street, Suite 2700, Los Angeles, CA 90071 (except
for surrenders, exchanges and payments on Bonds, which are care of the corporate
parent of Trustee) and such other offices at the Trustee may designate from time
to time.
"Quotation System" means the National Association of Securities
Dealers, Inc. Automated Quotation System or other over-the-counter securities
market quotation system then in use.
"Redemption Date" when used with respect to any Bond to be redeemed
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Bond to be redeemed
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the date specified in Article Three.
"Responsible Officer" when used with respect to the Trustee means the
Chairman or Vice-Chairman of the Board of Directors, the Chairman or
Vice-Chairman of the Executive Committee of the Board of Directors, the
President, any Vice President, the Secretary, any Assistant Secretary, the
Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any
Trust Officer or Assistant Trust Officer, the Controller and any Assistant
Controller or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
means, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of his or her knowledge of and familiarity
with the particular subject.
"Sale Price" means (a) the closing price for the Company's Common Stock
in the over-the-counter market as reported by a Quotation System, (b) if the
Common Stock is traded on a national securities exchange, the last reported sale
price or, if no sale takes place on a day, the average of the closing bid and
asked prices, for the Company's Common Stock on a national securities exchange
on which the Common Stock is traded, (c) if the Common Stock is not traded on a
national securities exchange or quoted by any Quotation System, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Common Stock selected by the Board of Directors or, if
there is no such market maker, the fair value of the Common Stock as determined
by an investment banking firm of nationally recognized standing selected in good
faith by the Board of Directors of the Company.
"Senior Indebtedness" means the principal of, premium (if any) and
interest on any and all Indebtedness of the Company (other than the Bonds)
incurred in connection with (i) the borrowing of money from or guaranteed to
banks, trust companies, leasing companies, insurance companies and other
financial institutions, including all Indebtedness to such institutions and
other specialized industry lenders to the extent it is secured by real estate
and/or assets of the Company, evidenced by bonds, debentures, mortgages, notes
or other securities or other instruments, (ii) purchase money Indebtedness
incurred to or assumed from or on behalf of a seller in connection with the
acquisition of assets by the Company, (iii) the borrowing of money from any
source (including from Affiliates of the Company) for the purpose of financing
timeshare arrangements and secured by receivables or timeshare interests
generated from the sales of interval ownership interests by the Company or any
Subsidiary, or (iv) notes payable arising from the acquisition of stock in Red
Rock Collection Incorporated and the acquisition of partnership interests in Los
Abrigados Partners Limited Partnership, in each instance under (i), (ii) and
(iii) incurred, assumed or guaranteed by the Company before, at or after the
date of execution of this Indenture, and all renewals, extensions and refundings
thereof, unless in the instrument creating or evidencing any such Indebtedness
or pursuant to which such Indebtedness is outstanding, it is provided that such
Indebtedness, or such renewal, extension or refunding thereof, is junior or is
not superior in right of payment to the Bonds."
"Special Record Date" for the payment of any Defaulted Interest (as
defined in Section 307) means a date fixed by the Trustee pursuant to Section
307.
"Stated Maturity" when used with respect to any Bond or any installment
of interest thereon means the date specified in such Bond as the fixed date on
which the principal of such Bond or such installment of interest is due and
payable.
"Subordinated Indebtedness" means any and all Indebtedness of the
Company created incurred, assumed, or guaranteed by the Company before, at, or
after the date of execution of this Indenture which, by the terms of the
instrument (or any supplemental instrument) creating or evidencing such
Indebtedness or pursuant to which such Indebtedness is outstanding, (a) it is
provided that such Indebtedness, or any renewal, extension, or refunding thereof
is expressly subordinate and junior in right of payment to the Bonds (whether or
not subordinated to any other Indebtedness or the Company) or (b) it is not, by
its terms, Senior Indebtedness.
"Subsidiary" means any corporation of which at least a majority of the
outstanding voting stock is owned, at the time, directly or indirectly, by the
Company, or by one or more Subsidiaries of the Company. For purposes of this
definition, "voting stock" means stock which ordinarily has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
"TIA" means the Trust Indenture Act of 1939, as amended.
"Trading Day" means, with respect to any security, each Monday,
Tuesday, Wednesday, Thursday, and Friday, and which is a Business Day other than
any day on which securities are not traded on the exchange or market on which
such security is traded.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
Section 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with and Opinion of Counsel stating that in the opinion of such Counsel
all such conditions precedent, if any, have been complied with, except that in
the case of any such application or request as to which the furnishing of such
documents is specifically required by any provision of this Indenture relating
to such particular application or request no additional certificate or opinion
need be furnished.
In the case of conditions precedent compliance with which is subject to
verification by accountants, the Company shall furnish to the Trustee a
certificate or opinion of an accountant, chosen and subject to Section 314
(c)(3) of the TIA.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each Person signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such Person, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
Person, such condition or covenant has been complied with.
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion, or, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an Officer of the Company may be based,
in so far as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, a copy of which shall be attached to any such
certificate or opinion of any such officer unless such officer has actual
knowledge that the certificate or opinion or representations with respect to the
matters upon which his or her opinion or representations with respect to the
matters upon which his or her certificate or opinion is base are erroneous. Any
such certificate or Opinion of Counsel may be based, in so far as it relates to
factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Company stating that the information with respect to
such factual matters is in the possession of the Company, unless such Counsel
has actual knowledge that the certificate or opinion or representations with
respect to such matters are erroneous.
Section 104. Acts of Bondholders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Bondholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Bondholders in person or by agent
duly appointed in writing; and, except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Trustee, and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the
Bondholders signing such instrument or instruments. Proof of execution of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 601) conclusive in
favor of the Trustee and the Company, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by an officer of a corporation, a member of a partnership, or agent
of any other entity, on behalf of such corporation, partnership or entity, such
certificate or affidavit shall also constitute sufficient proof of his or her
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the person executing the same, may also be proved in any
other manner which the Trustee deems sufficient.
(c) The ownership of Bonds shall be proved by the Bond Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Bond shall bind every future Holder
of the same Bond and the Holder of every Bond issued upon the transfer thereof
or in exchange therefor or in lieu thereof, in respect of anything done or
suffered to be done by the Trustee or the Company in reliance thereon, whether
or not notation of such action is made upon such Bond.
Section 105. Notices, etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Bondholders or other document provided or permitted by this Indenture
to be made upon, given or furnished to, or filed with, the Trustee or the
Company shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee or the Company, as
appropriate, is mailed, first-class postage prepaid, as follows:
(1) if to the Trustee, at its Principal Corporate Trust Office;
(2) if to the Company, at the address of its principal office
specified in the first paragraph of this instrument;
or at any other address previously furnished in writing to the Trustee or the
Company, as appropriate, by the other.
Section 106. Notices to Bondholders; Waiver.
Where this Indenture or any Bond provides for notice to Bondholders of
any event, such notice shall be sufficiently given (unless otherwise herein or
in such Bond expressly provided) if in writing and mailed, first-class postage
prepaid, to each Bondholder affected by such event, at its address as it appears
in the Bond Register, not later than the latest date, and not earlier than the
earliest date, prescribed for the giving of such notice. In any case where
notice to Bondholders is given by mail, neither the failure to mail such notice,
nor any defect in any such notice so mailed, to any particular Bondholder shall
affect the sufficiency of such notice with respect to other Bondholders. If the
notice or communication is mailed in the manner provided above, it is duly given
whether or not received by the addressee. Where this Indenture provides for
notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Bondholders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
Section 107. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 108. Successors and Assigns.
All covenants and agreements in this Indenture by the Company and the
Trustee shall bind their respective successors and assigns, whether so expressed
or not.
Section 109. Severability Clause.
In case any provision in this Indenture or in the Bonds shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 110. Benefits of Indenture.
Nothing in this Indenture or in the Bonds, express or implied, shall
give to any person, other than the parties hereto and their successors
hereunder, the holders of Senior Indebtedness and the Bondholders, any benefit
of any legal or equitable right, remedy or claim under this Indenture.
Section 111. Governing Law.
This Indenture and the Bonds shall be governed by and construed in
accordance with the laws of the State of Arizona, excluding those applicable to
conflicts of laws.
Section 112. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Bond shall not be a Business Day at any Place of Payment then
(notwithstanding any other provision of this Indenture or of the Bond) payment
of interest or principal (and premium, if any) of the Bonds need not be made at
such Place of Payment on such date, but may be made on the next succeeding
Business Day at such Place of Payment with the same force and effect as if made
on the Interest Payment Date or Redemption Date, or at the Stated Maturity,
provided that no interest shall accrue for the period from and after such
Interest Payment Date, Redemption Date or Stated Maturity, as the case may be.
Section 113. Incorporation of and Conflict with Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. If any
provision hereof limits, qualifies or conflicts with the duties imposed by
subsection 318(c) of the TIA, the TIA-imposed duties shall control.
ARTICLE TWO
BOND FORM
Section 201. Forms Generally.
The Bonds and the certificates of authentication thereon shall be in
substantially the form of Exhibit A hereto, with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon, as may be
required to comply with applicable law, the rules of any securities exchange, or
as may, consistently herewith, be determined by the Officers executing such
Bonds, as evidenced by their execution of the Bond. Any portion of the text of
any Bond may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Bond. The Company shall approve the form of the Bond
and any notation, legend or endorsement thereon; provided that the Bond shall
conform to the requirements of this Indenture.
The definitive Bonds shall be printed, lithographed or engraved or
produced by any combination of these methods in any manner permitted by the
rules of any securities exchange, all as determined by the Officers executing
such Bonds, as evidenced by their execution of such Indenture.
ARTICLE THREE
THE BONDS
Section 301. Title and Terms.
The aggregate principal amount of Bonds which may be authenticated and
delivered under this Indenture is limited to $5,000,000 except for Bonds
authenticated and delivered upon transfer of, or in exchange for, or in lieu of
other Bonds pursuant to Section 304, 305, 306, 905 and 1108 hereof. Forthwith
upon the execution and delivery of this Indenture, or from time to time
thereafter, Bonds up to a maximum aggregate principal amount of $5,000,000 may
be executed by the Company and delivered to the Trustee for authentication, and
shall thereupon be authenticated and delivered by the Trustee upon Company
Order, without any further action by the Company.
The Bonds shall be known and designated as the "10% Convertible
Adjustable Secured Bonds, Due 2000" of the Company. Their Stated Maturity shall
be _____________ , 2000 and they shall bear interest at the rate per annum
specified in the title of the Bonds, from the Initial Interest Accrual Date, or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, as the case may be, payable annually on January 1 and July 1
in each year, commencing January 1, 1996, until the principal thereof is paid or
made available for payment.
The principal of (and premium, if any) and interest on the Bonds shall
be payable at the office or agency of the Company maintained for such purpose
("Place of Payment"), which may be at the Principal Corporate Trust Office of
the Trustee, or at such other location designated by the Company and maintained
pursuant to Section 1002.
The Bonds shall be redeemable as provided in Article Eleven.
The Bonds shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article Twelve.
The Bonds shall be convertible as provided in Article Thirteen.
The Bonds shall be secured by the Collateral Stock as provided in
Article Fourteen.
Section 302. Denominations.
The Bonds shall be issuable only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple thereof in excess
of such minimum purchase.
Section 303. Execution, Authentication and Delivery and Dating.
The Bonds shall be executed on behalf of the Company by two Officers of
the Company. The signature of any of these Officers on the Bonds may be manual
or facsimile.
Bonds bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Bonds or did not hold
such offices at the date of such Bonds.
At any time from time to time after the execution and delivery of this
Indenture, the Company may deliver Bonds executed by the Company to the Trustee
for authentication; and the Trustee shall authenticate and deliver such Bonds as
in this Indenture provided and not otherwise.
All Bonds authenticated for original issuance by the Company to the
initial purchaser thereof shall be dated as of their respective Dates of Issue.
All Bonds authenticated for any other purpose hereunder shall be dated the date
of their authentication.
No Bond shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Bond a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any Bond
shall be conclusive evidence, and the only evidence, that such Bond has been
duly authenticated and delivered hereunder and is entitled to the benefits of
the Indenture.
Section 304. Temporary Bonds.
Pending the preparation of definitive Bonds, the Company may execute,
and upon Company Order, the Trustee shall authenticate and deliver, temporary
Bonds which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any denomination, substantially of the tenor of the definitive
Bonds in lieu of which they are issued and with such appropriate insertions,
omissions, substitutions and other variations as the officers executing such
Bonds may determine as appropriate for temporary Bonds.
If temporary Bonds are issued, the Company will cause definitive Bonds
to be prepared without unreasonable delay. After the preparation of definitive
Bonds, the temporary Bonds shall be exchangeable for definitive Bonds upon
surrender of the temporary Bonds at the office or agency of the Company in a
Place of Payment, without charge to the Holder. Upon surrender for cancellation
of any one or more temporary Bonds the Company shall execute and the Trustee
shall authenticate and deliver in exchange therefor a like principal amount of
definitive Bonds of authorized denominations. Until so exchanged the temporary
Bonds shall in all respects be entitled to the same benefits under this
Indenture as definitive Bonds.
Section 305. Registration, Transfer and Exchange.
The Company shall maintain an office or agency where Bonds may be
presented for registration of transfer or for exchange ("Registrar"), an office
or agency where Bonds may be presented for payment ("Paying Agent") and an
office or agency where Bonds may be presented for conversion ("Conversion
Agent"). The Registrar shall keep a register (the "Bond Register") of the Bonds
and of their transfer and exchange. The Company initially appoints the Trustee
as Registrar, Paying Agent and Conversion Agent and the Trustee hereby accepts
such appointment. The Company may appoint one or more co-Registrars, one or more
additional Paying Agents and one or more additional Conversion Agents. The term
"Paying Agent" includes any additional paying agent, and the term "Conversion
Agent" shall include any additional conversion agent. Reference in this
Indenture to an "Agent" shall mean a Registrar, Paying Agent or Conversion
Agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any such Agent. If the Company fails to
maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as
such.
Upon surrender for registration of transfer of any Bond at the office
or agency of the Company in a Place of Payment, the Company shall execute, and
the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Bonds of any authorized
denominations, of a like aggregate principal amount.
At the option of the Holder, Bonds may be exchanged for other Bonds of
any authorized denominations, and of a like aggregate principal amount, upon
surrender of the Bonds to be exchanged at such office or agency. Whenever any
Bonds are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Bonds which the Bondholder making
the exchange is entitled to receive.
All Bonds issued upon any registration of transfer or exchange of Bonds
shall be the valid obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Bonds surrendered
upon such registration of transfer or exchange.
Every Bond presented or surrendered for transfer or exchange shall (if
so required by the Company or the Trustee) be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Bond Registrar duly executed, by the Holder thereof or his attorney duly
authorized in writing.
No service charge shall be made for any transfer or exchange of Bonds,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any transfer or
exchange of Bonds, other than exchanges pursuant to Section 304 or Section 905
or Section 1108 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Bond during a period beginning at the opening of business
fifteen (15) days before the day of the mailing of a notice of redemption of
Bonds selected for redemption under Section 1104 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer or
exchange of any Bond so selected for redemption in whole or in part, except the
unredeemed portion of any Bond being redeemed in part.
Section 306. Mutilated, Destroyed, Lost and Stolen Bonds.
If (i) any mutilated Bond is surrendered to the Trustee and the Trustee
receives evidence (including without limitation an affidavit from the Holder) to
its satisfaction of the destruction, loss or theft of any Bond, and (ii) there
is delivered to the Company and the Trustee such security or indemnity as may be
required by it to save the Trustee harmless, then, in the absence of notice to
the Company or the Trustee that such Bond has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or
stolen Bond, a new Bond of like tenor and principal amount, bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Bond has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Bond, pay such Bond.
Upon the issuance of any new Bond under this Section, the Company and
the Trustee may require the payment of a sum sufficient to pay any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Bond issued pursuant to this Section in lieu of any
destroyed, lost or stolen Bond shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Bond shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of (and subject to all the limitations of rights set forth in
or with respect to) this Indenture equally and proportionately with any and all
other Bonds duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Bonds.
Section 307. Payment of Interest: Interest Rights Preserved.
Interest on any Bond which is payable, and is punctually paid to the
Paying Agent or duly provided for, on any Interest Payment Date shall be paid to
the Person in whose name that Bond (or one or more Predecessor Bonds) is
registered at the close of business on the Regular Record Date for such payment.
Any interest on any Bond which is payable, but is not punctually paid
to the Paying Agent or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Regular Record Date by virtue of having been
such Holder; and, except as hereinafter provided, such Defaulted Interest may be
paid by the Company, at its election in each case, as provided in Section 307(1)
or Section 307(2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Bonds (or their respective
Predecessor Bonds) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each
Bond and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for
such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as provided herein. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than twenty-five (25) nor less than
ten (10) days prior to the date of the proposed payment and not
less than fifteen (15) days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the expense
of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefore to be mailed,
first-class postage prepaid, to each Bondholder at his address as it
appears in the Bond Register, not less than ten (10) days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefore having been mailed by
the Trustee as aforesaid, such Defaulted Interest shall be paid from
the amounts so deposited by the Company to the Persons in whose names
the Bonds (or their respective Predecessor Bonds) are registered on
such Special Record Date and shall no longer be payable pursuant to
Section 307(2).
(2) The Company may make payment of any Defaulted Interest on
the Bonds in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Bonds may be
listed, and upon such notice as may be required by such exchange, if,
after notice given by the Company to the Trustee of the proposed
payment pursuant to this Clause, such payment shall be deemed
practicable by the Trustee (provided that it is understood that the
Trustee has no duty to verify the legality, or the compliance with any
rules of any securities exchange of, any payment method selected by the
Company).
If any installment of interest whose Stated Maturity is on or prior to
the Redemption Date for any Bonds called for redemption pursuant to Article
Eleven is not paid or duly provided for on or prior to the Redemption Date in
accordance with the foregoing provisions of this Section, such interest shall be
payable as part of the Redemption Price of such Bonds.
Subject to the foregoing provisions of this Section, each Bond
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Bond shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Bond.
All payments of interest on the Bonds to the person entitled thereto,
whether made by the Trustee or any Paying Agent, as authorized pursuant to this
Indenture, shall be made (subject to collection) by check mailed to the address
of the person entitled thereto as such address shall appear on the Bond
Register, unless the Trustee determines such methods to be inappropriate in the
circumstances.
The Regular Record Date referred to in this Section for the payment of
interest payable, and punctually paid or duly provided for, on any Interest
Payment Date shall be the December 15 or June 15 (whether or not a Business Day)
next preceding such Interest Payment Date.
In the case of any Bond which is converted after any Regular Record
Date but on or before the next Interest Payment Date, interest whose Stated
Maturity is on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
that Bond (or one or more Predecessor Bonds) is registered at the close of
business on such Regular Record Date.
Section 308. Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name any Bond is registered on the Bond Register
as the owner of such Bond for the purpose of receiving payment of principal of
(and premium, if any) and (subject to Section 307) interest on, such Bond and
for all other purposes whatsoever, whether or not such Bond be overdue, and
neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Bondholders.
Section 309. Cancellation.
All Bonds surrendered for payment, redemption, registration of
transfer, exchange or conversion shall, if surrendered to any Person other than
the Trustee, be delivered to the Trustee and, if not already canceled, shall be
promptly canceled by it. The Company may at any time deliver to the Trustee for
cancellation any Bonds previously authenticated and delivered hereunder which
the Company may have acquired in any manner whatsoever, and all Bonds so
delivered shall be promptly canceled by the Trustee. No Bonds shall be
authenticated in lieu of or in exchange for any Bonds canceled as provided in
this Section except as expressly permitted by this Indenture. All canceled Bonds
held by the Trustee shall be disposed of as directed by a Company Order.
Section 310. Authentication and Delivery of Original Issue.
Forthwith upon the execution and delivery of this Indenture, or from
time to time thereafter, Bonds up to the aggregate principal amount of
$5,000,000 may be executed by the Company and delivered to the Trustee for
authentication and delivered by the Trustee upon Company Order, without any
further action by the Company.
Section 311. Computation of Interest.
Interest on the Bonds shall be computed on the basis of a 360-day year
of twelve 30-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
Section 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange of Bonds herein
expressly provided for), and the Trustee, on demand of and at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(A) all Bonds theretofore authenticated and delivered
(other than (i) Bonds which have been destroyed, lost or
stolen and which have been replaced or paid as provided in
Section 306, and (ii) Bonds for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 1003) have
been delivered to the Trustee or for cancellation; or
(B) all such Bonds not theretofore delivered to the
Trustee canceled or for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one
(1) year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for the stated
purpose an amount sufficient to pay and discharge the entire indebtedness on
such Bonds not theretofore delivered to the Trustee canceled or for
cancellation, for principal (and premium, if any) and interest to the date of
such deposit (in the case of Bonds which have become due and payable), or to the
Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company, including sums payable to the Trustee
under Section 607 hereof; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 shall survive, and,
if the money shall have been deposited with the Trustee pursuant to this
subclause (B) of clause (1) of this Section, the obligations of the Trustee
under Section 402 and the last paragraph of Section 1003 shall survive.
Section 402. Application of Trust Money.
All money deposited with the Trustee pursuant to Section 401 shall be
held in trust and applied by it, in accordance with the provisions of the Bonds
and this Indenture, to the payment either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee. Such money shall be segregated from other funds held by the Trustee.
ARTICLE FIVE
REMEDIES
Section 501. Events of Default.
"Event of Default," wherever used herein means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Bond when
it becomes due and payable, and continuance of such default for a
period of thirty (30) days (whether or not such payment is prohibited
under the provisions of Article Twelve hereof); or
(2) default in the payment of the principal of (or premium, if
any, on) any Bond at its Maturity (whether or not such payment is
prohibited under the provisions of Article Twelve hereof); or
(3) material default in the performance, or breach, of any
material covenant or warranty of the Company in this Indenture (other
than a covenant or warranty a default in whose performance or whose
breach is elsewhere in this Section specifically dealt with), and
continuance of such material default or breach for a period of sixty
(60) days after there has been given, by registered or certified mail,
to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least a majority in principal amount of the Outstanding
Bonds, a written notice specifying such default or breach and requiring
it to be remedied and stating that such notice is a "Notice of Default"
hereunder; or
(4) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment, or composition of or in
respect of the Company under the Federal Bankruptcy Code or any other
applicable Federal or State law, or appointing a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of the
Company or of a majority of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or
order unstayed and in effect for a period of sixty (60) consecutive
days; or
(5) the institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal Bankruptcy Code, or any other applicable
Federal or State law, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or of
any substantial part of its property, or the making by it of a general
assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due,
or the taking of corporate action by the Company in furtherance of any
such action.
Section 502. Acceleration of Maturity; Recision and Annulment.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Holders of not less than a majority in principal amount
of the Bonds Outstanding may declare the principal amount of all the Bonds to be
due and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Bondholders), and upon any such declaration such entire
principal amount and all interest shall become immediately due and payable.
Collection actions or judicial proceedings may be commenced as set forth in
Section 503.
At any time after such a declaration has been made and before a
judgment or decree for payment has been obtained by the Trustee as hereinafter
in this Article provided, the Trustee or the Holders of a majority in principal
amount of the Bonds Outstanding, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee
a sum sufficient to pay
(A) all overdue installments of interest on all
Bonds,
(B) the principal (and premium,if any) of any Bonds
which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the
Bonds,
(C) to the extent that payment of such interest is
lawful, interest upon overdue installments of interest at the
rate borne by the Bonds, and
(D) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel and the Holders and their agents and counsel if such
Holders have initiated action in accordance with this Section
502; and
(2) all Events of Default, other than the non-payment of the
principal amount of Bonds which have become due solely by such
acceleration, have been cured, or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(1) default occurs in the payment of any installment of
interest on any Bond when such interest becomes due and payable and
such default continues for a period of thirty (30) days, or
(2) default occurs in the payment of the principal of any Bond
at its Maturity thereof,
the Company will, upon demand of the (i) Trustee or (ii) Holders of not less
than a majority in principal amount of the Bonds Outstanding, pay to the
Trustee, for the benefit of the Holders of such Bonds, the whole amount then due
and payable upon such Bonds for principal (and premium, if any) and interest,
with interest upon the overdue principal and, to the extent that payment of such
interest shall be legally enforceable, upon overdue installments of interest, at
the rate borne by the Bonds; and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of (i) the Trustee
and its counsel or (ii) such Holders as set forth herein, their respective
agents and counsel, as the case may be, if judicial proceedings are commenced.
If the Company fails to pay such amount forthwith upon such demand, (i)
the Trustee, in its own name and as trustee of an express trust, or (ii) Holders
of not less than a majority in principal amount of the Bonds Outstanding, on
behalf of all Holders, may institute a judicial proceeding for the collection of
the sums so due and unpaid, and may prosecute such proceeding to judgment or
final decree, and may enforce the same against the Company and collect monies
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon the Bonds, wherever situated.
The Trustee or the Holders of not less than a majority in principal amount of
the Bonds Outstanding may also elect at any time to accelerate the entire
principal amount pursuant to Section 502 and then may institute judicial
proceedings or amend its existing judicial proceedings for the collection of the
entire amount due and owning as set forth herein.
If an Event of Default occurs and is continuing, the Trustee may, in
its discretion, proceeding to protect and enforce its rights and the rights of
the Bondholders by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
Holders of not less than a majority in principal amount of the Bonds
Outstanding, on behalf of all Holders, may initiate such appropriate judicial
proceedings in the same manner as the Trustee. The Trustee or the Holders
initiating action hereunder, as the case may be, shall be reimbursed for the
reasonable costs of collection incurred as provided for above in this Section
503.
Section 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Bonds
or the property of the Company or of such other obligor or the creditors, the
Trustee (irrespective of whether the principal of the Bonds shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of
principal (and premium, if any) and interest owing and unpaid in
respect of the Bonds and to file such other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and
of the Bondholders allowed in such judicial proceeding, and
(ii) to collect and receive any monies or other property
payable or deliverable on any such claims and to disburse the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceedings as hereby authorized by
each Bondholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Bondholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and any other amounts due the Trustee under Section 607.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Bondholder any plan
of reorganization, arrangement, adjustment or composition affecting the Bonds or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Bondholder in any such proceeding.
Section 505. Trustee May Enforce Claims Without Possession of Bonds.
All rights of action and claims under this Indenture or Bonds may be
prosecuted and enforced by the Trustee without the possession of any of the
Bonds or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name as trustee
of an express trust, and any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, be for the ratable benefit of the Holders
of the Bonds in respect of which such judgment has been removed.
Section 506. Application of Money Collection.
Any money collected by the Trustee or the Holders directly pursuant to
this Article or Article 14 shall be applied in the following order, at the date
or dates fixed by the Trustee and, in case of the distribution of such money on
account of principal (or premium, if any) or interest, upon presentation of the
Bonds and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 607;
SECOND: To the payment of the amounts then due and unpaid
upon the Bonds for costs of collection, principal
(and premium, if any) and interest, in respect of
which or for the benefit of which such money has been
collected, ratably, without preference on priority of
any kind, according to the amounts due and payable on
such Bonds for principal (and premium, if any) and
interest, respectively; and
THIRD: To the payment of the remainder, if any, to the
Company or any other person lawfully entitled
thereto.
Section 507. Limitation on Suits.
(a) Prior to the declaration of acceleration provided for in Section
502 hereof, no Holder of any Bond shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than a majority in principal
amount of the Outstanding Bonds shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity, consistent with typical arrangements with other
similar indenture trustees, against the costs, expenses and liabilities
to be incurred in compliance with such request;
(4) the Trustee for thirty (30) days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceedings; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such thirty (30) day period by the
Holders of a majority in principal amount of the Outstanding Bonds;
it being understood and intended that no one or more Holders of Bonds shall have
any right in any manner whatever by virtue or, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Bonds, or to obtain or to seek to obtain priority or preference over
any other Holders or to enforce any right under this Indenture, except in the
manner herein provided and for the equal and ratable benefit of all the Holders
of Bonds.
(b) After the declaration of acceleration provided for in Section 502
hereof, Holders of a majority or more in principal amount of Outstanding Bonds
may institute judicial proceedings in respect to such Event of Default which
triggers the declaration of acceleration in their own name in the manner
provided in Section 503 if the Trustee has not instituted such proceedings
within sixty (60) days after such declaration, it being understood that such
Holders shall not have any right in the matter whatever by virtue of, or by
availing of, any provisions of this Indenture to affect, disturb or prejudice
the rights of any Holders of Bonds, or to obtain or to seek to obtain priority
or preference over any other Holders or to enforce any rights under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Bonds.
Section 508. Unconditional Right of Bondholder to Receive Principal,
Premium and Interest and to Convert.
Notwithstanding any other provision in this Indenture, but subject to
the provision of Article Twelve, the Holder of any Bond shall have the right
which is absolute and unconditional to receive payment of the principal of (and
premium, if any) and (subject to Section 307) interest on such Bond on the
respective Stated Maturities expressed in such Bond (or, in the case of
redemption or repurchase, on the Redemption Date or Repurchase Date, as the case
may be), and to convert such Bond in accordance with Article Thirteen and to
institute suit for the enforcement of any such payment and right to convert, and
such right shall not be impaired without the consent of such Holder, except as
to postponement of interest under Section 512 hereof.
Section 509. Restoration of Rights and Remedies.
If the Trustee or any Bondholder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Bondholder, then and in every such case, the Company, the
Trustee and the Bondholders shall, subject to any determination in such
proceeding and the payment of or reimbursement to the Company of any costs and
expenses of the Company associated therewith, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Bondholders shall continue as though no such
proceeding had been initiated.
Section 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Bonds in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Bondholders is intended to be exclusive of any other right or remedy and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion of any other
appropriate right or remedy.
Section 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Bond to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Bondholders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Bondholders, as the
case may be.
Section 512. Control by Bondholders.
The Holders of a majority in principal amount of the Outstanding Bonds
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction,
(3) subject to Section 601, the Trustee need not take any
action which might be prejudicial to the Holders not consenting, or
that might expose the Trustee to personal expense or liability, or if
the Trustee does not have sufficient indemnification against loss or
expense.
and further provided, that Holders of not less than seventy-five percent (75%)
in principal amount of Bonds Outstanding may consent to a postponement of any
interest payment for a period not exceeding three (3) years from its due date.
Section 513. Waiver of Past Defaults.
The holders of not less than a majority in principal of the Bonds
Outstanding specified in Article Five may on behalf of the Holders of all the
Bonds waive any past default hereunder and its consequences, except a default in
respect of a covenant or provision hereof which under Section 902 cannot be
modified or amended without the consent of the Holder of each Outstanding Bond
affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereof.
Section 514. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Bond by his
acceptance thereof shall be deemed to have agreed, that any court may, in its
discretion, require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the cost of such suit, and that such court may, in
its discretion, assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee; to any suit instituted by any Bondholder, or group of Bondholders,
holding in the aggregate more than (i) twenty-five percent (25%) in principal
amount of the Outstanding Bonds if commenced prior to acceleration; or (ii) five
percent (5%) in principal amount of Outstanding Bonds if commenced after
acceleration; or to any suit instituted by any Bondholder for the enforcement of
the payment of the principal of (or premium, if any) or interest on any Bond on
or after the respective Stated Maturities expressed in such Bond (or, in the
case of redemption, on or after the Redemption Date) on the Repayment Date. This
Section is in lieu of Section 315(e) of the TIA.
ARTICLE SIX
THE TRUSTEE
Section 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) The Trustee undertakes to perform its duties hereunder in
good faith, but only such duties as are specifically set forth in this
Indenture, and no implied covenants or obligations shall be read into
this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
the Indenture; but in the case of any such certificates or opinions
which by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this
Indenture.
(b) In any case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and power vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(1) this Subsection shall not be construed to limit the effect
of Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority (or any other amount that may
direct the Trustee in accordance with this Indenture) in principal
amount of the Outstanding Bonds relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred upon the Trustee under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee
to expand or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or power, if it shall have good faith
belief that repayment of such funds or adequate indemnity as required
under this Indenture against such risk or liability is not reasonably
assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
Section 602. Notice of Defaults.
Within ninety (90) days after the occurrence of any default hereunder,
the Trustee shall transmit by mail to all Bondholders and otherwise in
accordance with Section 313(c) of the TIA, as their names and addresses appear
in the Bond Register, notice of such default hereunder known to a Responsible
Officer of the Trustee, unless such default shall have been cured or waived;
provided, however, that except in the case of a default in the payment of the
principal (or premium, if any) or interest on any Bond, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interest of the Bondholders. For the purpose of this Section,
the term "default" means any event which is, or after notice of lapse of time or
both would become, an Event of Default.
Section 603. Certain Rights of Trustee.
Except as otherwise provided in Section 601:
(a) the Trustee may relay and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture or other paper or document reasonable believed
by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of the Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or committing any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(d) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered, or omitted by it hereunder in good faith and in reliance
thereon;
(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Bondholders pursuant to this Indenture,
unless such Bondholders shall have offered to the Trustee reasonable
indemnity, consistent with typical arrangements with other similar
indenture trustees against the costs, expenses and liabilities which
might be incurred by it in compliance with such request or direction;
and
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation,
it shall be entitled at a mutually agreeable time and place to examine
the books, records and premises of the Company, personally or by agent
or attorney.
Section 604. Not Responsible for Recitals or Issuance of Bonds.
The recitals contained herein and in the Bonds, except the certificates
of authentication, shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Bonds. The Trustee shall not be accountable for the use or application by the
Company of Bonds or the proceeds thereof.
Section 605. May Hold Bonds.
The Trustee, any Paying Agent, Conversion Agent, Bond Registrar or any
other agent of the Company, in its individual or any other capacity, may become
the owner or pledgee of Bonds, and, subject to Section 611, if operative, may
otherwise deal with the Company with the same rights it would have if it were
not Trustee, Paying Agent, Conversion Agent, Bond Registrar or such other Agent.
Section 606. Money Held in Trust.
Money held by the Trustee in trust hereunder shall be segregated from
other funds. The Trustee shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed with the Company.
Section 607. Compensation and Reimbursement.
The Company agrees:
(1) to pay the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust) in an amount agreed
on between the Company and Trustee;
(2) except as otherwise provided herein, to reimburse the
Trustee as agreed between the Company and the Trustee upon its request
for all reasonable expenses, disbursements and advances incurred or
made by the Trustee in accordance with any provision of this Indenture
(including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to the Trustee's
negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or
bad faith on its part, arising out of or in connection with the
acceptance of administration of this Indenture, including the costs and
expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder, upon final adjudication of the right to such
indemnification from the Company.
Section 607A. Disqualification: Conflicting Interests.
(a) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section, it shall, within ninety (90) days after ascertaining
that it has such conflicting interest, and if the Default as defined in this
Section, to which such conflict of interest relates has not been cured or waived
or otherwise eliminated before the end of such ninety (90) day period, the
Trustee shall either eliminate such conflicting interest or resign in the manner
and with the effect hereinafter specified in Article Six, and the Company shall
take prompt steps to have a successor Trustee apposited in the manner provided
herein.
(b) In the event that the Trustee shall fail to comply with the
provisions of subsection (a) of this Section 607A, the Trustee shall, within ten
(10) days after the expiration of such ninety (90) day period, transmit by mail
to all Bondholders, as their names and addresses appear in the Bond Register,
notice of such failure, in the manner and to the extent provided in Section
313(c) of the TIA.
(c) For the purposes of this Section, the Trustee shall be deemed to
have a conflicting interest if the Bonds are in default and
(1) the Trustee is trustee under another indenture under which
any other securities, or certificates of interest or participation in
any other securities, of the Company are outstanding, or is Trustee of
more than one outstanding series of Bonds, as defined in this Section,
under a single indenture of the Company, unless (A) such other
indenture is a collateral trust indenture under which the only
collateral consists of securities issued under such other indenture, or
(B) such other indenture is a collateral trust indenture under which
the only collateral consists of the Bonds, provided that there shall be
excluded from the operation of this paragraph any indenture or
indentures under which such securities, or certificates of interest or
participation in other securities, of the Company are outstanding, if
(i) this Indenture and such other indenture or
indentures and all series of securities issuable thereunder
are wholly unsecured and such other indenture or indentures
(and such series as are specifically described in the
Indenture) are hereafter qualified under TIA, unless the
Commission shall have found and declared by order pursuant to
Section 305(b) or Section 307(c) of TIA that differences exist
between the provision of this Indenture and the provisions of
such other indenture or indentures (or such series) which are
so likely to involve a material conflict of interest as to
make it necessary in the public interest or for the protection
of investors to disqualify the Trustee from acting as such
under this Indenture and such other indenture or indentures,
or
(ii) the Company shall have sustained the burden of
proving, on application to the Commission and after
opportunity for hearing thereon, that trusteeship under this
Indenture and such other indenture or indentures or under more
than one outstanding series under such a single indenture is
not so likely to involve a material conflict of interest as to
make it necessary in the public interest or for the protection
of investors to disqualify the Trustee from acting as such
under one of such indentures or with respect to such series;
(2) the Trustee or any of its directors or executive officers
is an underwriter for the Company or an obligor upon the Bonds;
(3) the Trustee directly or indirectly controls or is directly
or indirectly controlled by or is in direct or indirect common control
with the Company or an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers
is a director, officer, partner, employee, appointee or representative
of the Company, or of an underwriter (other than the Trustee itself)
for the Company who is currently engaged in the business of
underwriting, except that (a) one individual may be a director and/or
an executive officer, or both, of the Trustee and a director or an
executive officer, or both, of the Company but may not be at the same
time an executive officer of both the Trustee and the Company; (b) if
and so long as the number of directors of the Trustee is more than
nine, one individual may be a director or an executive officer, or
both, of the Trustee and a director of the Company; and (c) the Trustee
may be designated by the Company or by any underwriter for the Company
to act in the capacity of transfer agent, registrar, custodian, paying
agent, fiscal agent, escrow agent, or depositary, or in any other
similar capacity, or subject to the provisions of paragraph (1) of this
subsection, to act as trustee, whether pursuant to an indenture or
otherwise;
(5) ten percent (10%) or more of the voting securities of the
Trustee is beneficially owned either by the Company or by any director,
partner, or executive officer thereof, or twenty percent (20%) or more
of such voting securities is beneficially owned, collectively, by any
two or more of such persons; or ten percent (10%) or more of the voting
securities of the Trustee is beneficially owned either by an
underwriter for the Company or by any director, partner or executive
officer thereof, or is beneficially owned, collectively, by any two or
more such persons;
(6) the Trustee is the beneficial owner of, or holds a
collateral security for an obligation which is in default (as
hereinafter in this subsection defined), (i) five percent (5%) or more
of the voting securities, or ten percent (10%) or more of any other
class or security, of the Company not including the Bonds issued under
this Indenture and securities issued under any other indenture or
indentures under which the Trustee is also trustee; or (ii) ten percent
(10%) or more of any class of security of an underwriter for the
Company;
(7) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default (as
hereinafter in this subsection defined), five percent (5%) or more of
the voting securities of any person who, to the knowledge of the
Trustee, owns ten percent (10%) or more of the voting securities, of,
or controls directly or indirectly or is under direct or indirect
common control with the Company.
(8) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default (as
hereinafter in this subsection defined) ten percent (10%) or more of
any class of security of any person who, to the knowledge of the
Trustee, owns fifty percent (50%) or more of the voting securities of
the Company; or
(9) the Trustee owns, on the date of Default on the Bonds
(exclusive of any period of grace or requirement of notice) or any
anniversary of such Default which such Default on the Bonds remains
outstanding, in the capacity of executor, administrator, testamentary
or inter vivos trustee, guardian, committee or conservator, or in any
other similar capacity, an aggregate of twenty-five percent (25%) or
more of the voting securities, or of any class of security, of any
person, the beneficial ownership of a specified percentage of which
would have constituted a conflicting interest under paragraphs (6), (7)
or (8) of this subsection. As to any such securities of which the
Trustee acquired ownership through becoming executor, administrator, or
testamentary trustee of an estate which included them, the provision of
the preceding sentence shall not apply, for a period of two (2) years
from the date of such acquisition, to the extent that such securities
included in such estate do not exceed twenty-five percent (25%) of such
voting securities or twenty-five percent (25%) of any such class of
security. Promptly after the date of any such Default upon the Bonds
and annually in each succeeding year that the Bonds remain in Default,
the Trustee shall make a check of its holdings of such securities in
any of the above-mentioned capacities as of such dates. If the Company
fails to make payment in full of the principal of, or the premium, if
any, or interest on, any of the Bonds when and as the same becomes due
and payable, and such failure continues for thirty (30) days
thereafter, the Trustee shall make a prompt check of its holdings of
such securities in any of the above-mentioned capacities as of the date
of expiration of such thirty (30) day period, and after such date,
notwithstanding the foregoing provisions of this paragraph, all such
securities so held by the Trustee, with sole or joint control over such
securities vested in it shall, but only so long as such failure shall
continue to be considered as though beneficially owned by the trustee
for the purposes of paragraphs (6), (7) and (8) of this subsection; or
(10) except under circumstances described in paragraphs (1),
(3), (4), (5) or (6) of Section 611(b) hereof, the Trustee shall be or
shall become a creditor of the Company.
Except in the case of a default in the payment of the principal of or interest
on the Bonds, the Trustee shall not be required to resign as provided by this
subsection if the Trustee shall have sustained the burden of proving, on
application to the Commission and after opportunity of hearing thereon, that (i)
the default under the Indenture may be cured or waived during a reasonable
period and under procedures described in such application, and (ii) a stay of
the Trustee's duty to resign will not be inconsistent with the interests of the
Holder. The filing of such application shall automatically stay the performance
of the duty to resign until the Commission orders otherwise.
The specification of percentages in paragraphs (5) to (9) inclusive, of
this subsection, shall not be construed as indicating that the ownership of such
percentages of the securities of a person is or is not necessary or sufficient
to constitute direct or indirect control for the purposes of paragraph (3) or
(7) of this subsection.
For the purpose of paragraph (1) of this subsection, the terms "series
or securities" or "series" means a series, class or group of securities issuable
under that indenture or indentures pursuant to whose terms holders of one such
series may vote to direct the indenture trustee, or otherwise take action
pursuant to a vote of such holders, separately from holders of another such
series; provided, that "series of securities" or "series" shall not include any
series of securities issuable under an indenture if all such series rank equally
and are not wholly unsecured.
For purposes of paragraphs (6), (7), (8) and (9) of this subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay monies lent to a person by one or more banks, trust companies or banking
firms, or any certificate of interest or participation in any such note or
evidence of indebtedness; (ii) an obligation shall be deemed to be "in default"
when a default in payment of principal shall have continued for thirty (30) days
or more and shall not have been cured; and (iii) the Trustee shall not be deemed
to be the owner or holder of (A) any security which it holds as collateral
security, as trustee or otherwise, for an obligation which is not in default as
defined in clause (ii) above, or (B) any security which it holds as collateral
under this Indenture, irrespective of any default thereunder, or (C) any
security which it holds as agent for collection, or as custodian, escrow agent,
or depositary, or in any similar representative capacity.
(d) For the purposes of this Section:
(1) the term "underwriter" when used with reference to the
Company means every person who, within one year prior to the time as of
which the determination is made, was an underwriter of any security of
the Company outstanding at such time.
(2) The term "director" means any director of a corporation or
any individual performing similar functions with respect to any
organization whether incorporated or unincorporated.
(3) The term "person" means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust, an
unincorporated organization, or a government or political subdivision
thereof. As used in this paragraph, the term "trust" shall include only
a trust where the interest or interests of the beneficiary or
beneficiaries are evidenced by a security.
(4) The term "voting security" means any security presently
entitling the owner or holder thereof to vote in the direction or
management of the affairs of a person, or any security issued under or
pursuant to any trustee, agreement or arrangement whereby a trustee or
trustees or agent or agents for the owner or holder of such security
are presently entitled to vote in the direction or management of the
affairs of a person.
(5) The term "Company" means an obligor upon the Bonds.
(6) The term "executive officer" means the president, every
vice president, every trust officer, the cashier, the secretary, and
the treasurer of a corporation, and any individual customarily
performing similar functions with respect to any organization whether
incorporated or unincorporated, but shall not include the chairman of
the board of directors.
(e) The percentages of voting securities and other securities specified
in this Section shall be calculated in accordance with the following provisions:
(1) A specified percentage of the voting securities of the
Trustee, the Company or any person referred to in this Section (each of
whom is referred to as a "person" in this paragraph) means such amount
of the outstanding voting securities of such person as entitles the
holder or holders thereof to cast such specified percentage of the
aggregate votes which the holders of all the outstanding voting
securities of such person are entitled to cast in the direction or
management of the affairs of such person.
(2) A specified percentage of a class of securities of a
person means such percentage of the aggregate amount of securities of
the class outstanding.
(3) The term "amount" when used in regard to securities, means
the principal amount if relating to evidences of indebtedness, the
number of shares if relating to capital shares, and the number of units
if relating to any other kind of security.
(4) The term "outstanding" means issued and not held by or for
the account of the issuer. The following securities shall not be deemed
outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking fund
relating to securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund
relating to another class of securities of the issuer, if the
obligation evidenced by such other class of securities is not
in default as to principal or interest or otherwise;
(iii) securities pledged by the issuer thereof as
security for an obligation of the issuer not in default as to
principal or interest or otherwise; and
(iv) securities held in escrow if placed in escrow by
the issuer thereof; provided, however, that any voting
securities of an issuer shall be deemed outstanding if any
person other than the issuer is entitled to exercise the
voting rights thereof.
(5) A security shall be deemed to be of the same class as
another security if both securities confer upon the holder or holders
thereof substantially the same rights and privileges; provided,
however, that, in the case of secured evidences of indebtedness, all of
which are issued under a single indenture, differences in the interest
rates or maturity dates of various series thereof shall not be deemed
sufficient to constitute such series different classes and provided,
further, that, in the case of unsecured evidences of indebtedness,
differences in the interest rates or maturity dates thereof shall not
be deemed sufficient to constitute them securities of different
classes, whether or not they are issued under a single indenture.
Section 607B. Corporate Trustee Required; Eligibility.
There shall at times be a Trustee hereunder which shall be a national
association, bank or corporation organized and doing business under the laws of
the United States of America or of any State thereof, or the District of
Columbia, authorized under such laws to exercise corporate trust powers, having
(or the holding company having) a combined capital and surplus of at least
Fifteen Million Dollars ($15,000,000), subject to supervision or examination by
Federal or State authority, and having its principal office in the places
specified above. If such national association, bank, holding company or
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
national association, bank, holding company or corporation shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. Neither the Company, nor any person directly or
indirectly controlling, controlled by, or under common control with the Company
shall serve as Trustee. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
Section 608. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 609.
(b) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within thirty (30) days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by (i) Act of the Company by
a Board Resolution, or (ii) an act by Holders of sixty-six and two-thirds
percent (66-2/3%) in principal amount of the Outstanding Bonds, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee, after this Indenture shall been qualified
under TIA, shall fail to comply with Section 607A after written request
therefor by the Company or by any Bondholder who has been a bona fide
Holder of a Bond for at least six months, or
(2) the Trustee shall cease to be eligible under Section 607B
and shall fail to resign after written request therefor by the Company
or by any such Bondholder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, subject to Section 514, any Bondholder who has been a
bona fide Holder of a Bond for at least six months may, on behalf of himself or
herself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution shall promptly appoint a successor Trustee. If,
within one (1) year after such resignation, removal or incapability, or the
occurrence of such vacancy, the Company has not appointed a successor Trustee, a
successor Trustee shall be appointed by Act of the Holders of a majority in
principal amount of the Outstanding Bonds delivered to the Company and the
retiring Trustee. In either event, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Bondholders and
accepted appointment in the manner hereinafter provided, any Bondholder who has
been a bona fide Holder of a Bond or at least six (6) months, may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Bonds as their names and addresses appear in the Bond Register. Each notice
shall include the name of the successor Trustee and the address of its Principal
Corporate Trust Office.
Section 609. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed, or conveyance, shall become vested with all the rights, powers,
trusts and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee, and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
Section 610. Merger, Conversion or Succession to Business.
Any national association, bank or corporation into which the Trustee
may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any national association, bank or corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such national
association, bank or corporation shall be otherwise qualified and eligible under
this Article, to the extent operative, without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case any
Bonds shall have been authenticated, but not delivered, by the Trustee then in
office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Bonds so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Bond.
Section 611. Preferential Collection of Claims Against Company.
(a) Subject to Subsection (b) of this Section, if the Trustee shall be
or shall become a creditor, directly or indirectly, secured or unsecured, of the
Company within three (3) months prior to a default, as defined in Subsection (c)
of this Section, or subsequent to such a default, then, unless and until such
default shall be cured, the Trustee shall set apart and hold in a special
account for the benefit of the Trustee individually, the Holders of the Bonds
and the holders of other indenture securities (as defined in Subsection (c) of
this Section):
(1) an amount equal to any and all reductions in the amount
due and owing upon any claim as such creditor in respect of principal
or interest, effected after the beginning of such three (3) month
period and valid as against the Company and its other creditors, except
any such reduction resulting from the receipt or disposition of any
property described in paragraph (2) of this Subsection, or from the
exercise of any right of set-off which the Trustee could have exercised
if a petition in bankruptcy had been filed by or against the Company
upon the date of such default; and
(2) all property received by the Trustee in respect of any
claim as such creditor, either as security therefor, or in satisfaction
or composition thereof, after the beginning of such three (3) months
period, or an amount equal to the proceeds of any such property, if
disposed of, subject, however, to the rights, if any, of the Company
and its other creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain for its own account (i) payments made on account
of any such claim by any Person (other than the Company) who is liable
thereon, and (ii) the proceeds of the bona fide sale of any such claim
by the Trustee to a third person, and (iii) distributions made in cash,
securities or other property in respect of claims filed against the
Company in bankruptcy or receivership or in proceedings for
reorganization pursuant to the Federal Bankruptcy Code or applicable
State law;
(B) to realize, for its own account, upon any property held by
it as security for any such claim, if such property was so held prior
to the beginning of such three (3) month period;
(C) to realize, for its own account, but only to the extent of
the claim hereinafter mentioned, upon any property held by it as
security for any such claim, if such claim was created after the
beginning of such three (3) month period and such property was received
as security therefor simultaneously with the creation thereof, and if
the Trustee shall sustain the burden of proving that at the time such
property was so received the Trustee has no reasonable cause to believe
that a default as defined in Subsection (c) of this Section would occur
within three (3) months; or
(D) to receive payment on any claim referred to in paragraph
(b) or (c), against the release of any property held as security for
such claims as provided in paragraph (b) or (c), as the case may be, to
the extent of the fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such three (3) month period for property held as security
at the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released, and, to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of the Trustee as such creditor, such claim shall have
the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property
held in such special account and the proceeds thereof shall be apportioned
between the Trustee, the Bondholders and the holders of other indenture
securities in such manner that the Trustee, the Bondholders and the holders of
other indenture securities realize, as a result of payments from such special
account and payments of dividends on claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to the
Federal Bankruptcy Code or applicable State law, the same percentage of their
respective claims, figured before crediting to the claim of the Trustee anything
on account of the receipt by it from the Company of the funds and property in
such special account and before crediting to the respective claims of the
Trustee and the Bondholders and the holders of other indenture securities
dividends on claims filed against the Company in bankruptcy or receivership or
in proceedings for reorganization pursuant to the Federal Bankruptcy Code or
applicable State law, but after crediting thereon receipts on account of the
indebtedness represented by their respective claims from all sources other than
from such dividends and from the funds and property sol held in such special
accounts. As used in this paragraph, with respect to any claim, the term
"dividends" shall include any distribution with respect to such claim, in
bankruptcy or receivership or proceedings for reorganization pursuant to the
Federal Bankruptcy Code or applicable State law, whether such distribution is
made in cash, securities, or other property, but shall not include any such
distribution with respect to the secured portion, if any, of such claim. The
court in which such bankruptcy, receivership or proceedings for reorganization
is pending shall have jurisdiction (i) to apportion between the Trustee and the
Bondholders and the holders of other indenture securities, in accordance with
the provisions of this paragraph, the funds and property held in such special
account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or
in part, to give the provisions of this paragraph due consideration in
determining the fairness of the distributions to be made to the Trustee and the
Bondholders and the holders of other indenture securities with respect to their
respective claims, in which event it shall not be necessary to liquidate or to
appraise the value of any securities or other property held in such special
account or as security for any such claim, or to make a specific allocation of
such distributions as between the secured and unsecured portions of such claims,
or otherwise to apply the provisions of this paragraph as a mathematical
formula.
Any Trustee which has resigned or been removed after the beginning of
such three (3) month period shall be subject to the provisions of this
Subsection as though such resignation or removal had not occurred. If any
Trustee has resigned or been removed prior to the beginning of such three (3)
month period, it shall be subject to the provisions of this Subsection if and
only if the following conditions exist:
(i) the receipt of property or reduction of claim,
which would have given rise to the obligation to account, if
such Trustee had continued as Trustee, occurred after the
beginning of such three (3) month period; and
(ii) such receipt of property or reduction of claim
occurred within three (3) months after such resignation or
removal.
(b) There shall be excluded from the operation of Subsection (a) of
this Section a creditor relationship arising from
(1) the ownership or acquisition of securities issued under
any indenture, or any security or securities having a maturity of one
(1) year or more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court
of competent jurisdiction, or by this Indenture, for the purpose of
preserving any property which shall at any time be subject to the lien
of this Indenture or of discharging tax liens or other prior lines or
encumbrances thereon, if notice of such advances and of the
circumstances surrounding the making thereof is given to the
Bondholders at the time and in the manner provided in this Indenture;
(3) disbursements made in the ordinary course of business in
the capacity of trustee under an indenture, transfer agent, registrar,
custodian, paying agent, fiscal agent or depositary, or similar
capacity;
(4) an indebtedness created as a result of services rendered
or premises rented; or an indebtedness created as a result of goods or
securities sold in a cash transaction as defined in Subsection (c) of
this Section;
(5) the ownership of stock or other securities of a
corporation organized under the provisions of Section 25(a) of the
Federal Reserve Act, as amended, which is directly or indirectly a
creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation of
any drafts, bills of exchange, acceptances or obligations which fall
within the classification of self-liquidating paper as defined in
Subsection (c) of this Section.
(c) For the purposes of this Section only:
(1) The term "default" means any failure to make payment in
full of the principal of or interest on any of the Bonds or upon the
other indenture securities when and as such principal or interest
becomes due and payable.
(2) The term "other indenture securities" means securities
upon which the Company is an obligor outstanding under any other
indenture (i) under which the Trustee is also trustee, (ii) which
contains provisions substantially similar to the provisions of this
Section, and (iii) under which a default exists at the time of the
apportionment of the funds and property held in such special account.
(3) The term "cash transaction" means any transaction in which
full payment for goods and securities sold is made within seven (7)
days after delivery of the goods or securities in currency or in checks
or other orders drawn upon banks or bankers and payable upon demand.
(4) The term "self-liquidating paper" means any draft, bill of
exchange, acceptance or obligation which is made, drawn, negotiated or
incurred by the Company for the purpose of financing the purchase,
processing, manufacturing, shipment, storage or sale of goods, wares or
merchandise and which is secured by documents evidencing title to,
possession of, or a lien upon, the goods, wares or merchandise or the
receivables or proceeds arising from the sale of the goods, wares or
merchandise previously constituting the security, provided the security
is received by the Trustee simultaneously with the creation of the
creditor relationship with the Company arising from the making,
drawing, negotiating or incurring of the draft, bill of exchange,
acceptance or obligation.
(5) The term "Company" means any obligor upon the Bonds.
(6) The term "Federal Bankruptcy Code" means the Bankruptcy
Act or Title 11 of the United States Code.
ARTICLE SEVEN
BONDHOLDERS' LISTS AND
REPORTS BY TRUSTEE AND COMPANY
Section 701. Company to Furnish Trustee Names and Addresses of
Bondholders.
The Company will furnish or cause to be furnished to the Trustee:
(1) semi-annually, not more than fifteen (15) days after each
Regular Record Date, information in the possession or control of the
Company or any Paying Agent (if other than Trustee), in such form as
the Trustee may reasonably require, of the names and addresses of the
Holders of Bonds as of such Regular Record Date, and
(2) at such other times as the Trustee may request in writing,
within thirty (30) days after the receipt by the Company of any such
request, information of similar form and content as of a date not more
than fifteen (15) days prior to the time such information is furnished.
Section 702. Preservation of Information: Communications to
Bondholders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Bonds contained in the most
recent information furnished to the Trustee as provided in Section 701 and the
names and addresses of Holders of Bonds received by the Trustee in its capacity
as Bond Registrar or Paying Agent. The Trustee may destroy any list furnished to
it as provided in Section 701 upon receipt of a new list so furnished.
(b) If three (3) or more Holders of Bonds (hereinafter referred to as
"applicants") apply in writing to the Trustee, and furnish to the Trustee
reasonable proof that each such applicant has owned a Bond for a period of at
least six (6) months preceding the date of such application, and such
application states that the applicants desire to communicate with the Holders of
Bonds with respect to their rights under this Indenture or under the Bonds and
is accompanied by a copy of the form of proxy or other communication which such
applicants propose to transmit, then the Trustee shall, within five (5) business
days after the receipt of such application, at its election, either
(1) afford such applicants access to the information preserved
at the time by the Trustee in accordance with Section 702(a), or
(2) inform such applicants as to the approximate number of
Holders of Bonds whose names and addresses appear in the information
preserved at the time by the Trustee in accordance with Section 702(a),
and as to the approximate cost of mailing (including applicable service
charges) to such Bondholders the form of proxy or other communication,
if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Bondholder whose name and address appear in the information
preserved at the time by the Trustee in accordance with Section 702(a), a copy
of the form of proxy or other communication which is specified in such request,
with reasonable promptness after a tender to the Trustee of the material to be
mailed and of payment, or provision for the payment, of the reasonable expenses
of mailing, unless within five (5) days after such tender, the Trustee shall
mail to such applicants and file with the Commission, together with a copy of
the material to be mailed, a written statement to the effect that, in the
opinion of the Trustee, such mailing would be contrary to the best interests of
the Holders of Bonds or would be in violation of applicable law. Such written
statement shall specify the basis of such opinion. If the Commission, after
opportunity for a hearing upon the objections specified in the written statement
so filed, shall enter an order refusing to sustain any of such objections of if,
after the entry of an order sustaining one or more of such objections, the
Commission shall find, after notice and opportunity for hearing, that all the
objections so sustained have been met and shall enter an order so declaring, the
Trustee shall mail copies of such material to all such Bondholders with
reasonable promptness after the entry of such order and the renewal of such
tender; otherwise the Trustee shall be relieved of any obligation or duty to
such applicants respecting their application.
(c) Every Holder of Bonds, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee shall
be held accountable by reason of the disclosure of any such information as to
the names and addresses of the Holders of Bonds in accordance with Section
702(b), regardless of the source from which such information was derived, and
that the Trustee shall not be held accountable by reason of mailing any material
pursuant to a request made under Section 702(b).
Section 703. Reports by Company.
The Company will:
(1) file with the Trustee, within fifteen (15) days after the
Company is required to file the same with the Commission, copies of the
annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may,
from time to time, by rules and regulations prescribe) which the
Company may be required to file with the Commission pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the
Company is not required to file information, documents or reports
pursuant to either of the said Sections, then it will file with the
Trustee and the Commission, in accordance with rules and regulations
prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may
be acquired pursuant to Section 13 of the Securities Exchange Act of
1934 in respect of a security listed and registered on a national
securities exchange as may be prescribed from time to time in such
rules and regulations (it is understood that the Trustee has no
obligation to review the contents of information and/or documents
received pursuant to this clause (1) or to take any action based on the
information in such documents).
(2) file with the Trustee and the Commission, in accordance
with rules and regulations prescribed from time to time by the
Commission, such additional information, documents and reports with
respect to compliance by the Company with the conditions and covenants
of this Indenture as may be required from time to time by such rules
and regulations.
(3) transmit by mail to all Bondholders, as their names and
addresses appear in the Bond Register and otherwise to the extent
provided in Section 313(c) of the TIA, within thirty (30) days after
the filing thereof with the Trustee, such summaries of any information,
documents and reports required to be filed by the Company pursuant to
paragraphs (1) and (2) of this Section, as may be required by rules and
regulations prescribed from time to time by the Commission.
(4) furnish to the Trustee, not less than annually, a
certificate from the principal executive officer, principal financial
officer or principal accounting officer of the Company as to his or her
knowledge of the Company's compliance with all conditions and covenants
under this Indenture, without regard to any period of grace or
requirement of notice provided under this Indenture.
(5) furnish annually to the Trustee a certificate of the
principal financial officer of the Company setting forth the then
current Conversion Price.
Section 703A. Reports and Opinions of Fair Value Regarding
Security Interest.
(a) Promptly after the execution and delivery of this Indenture, the
Company shall furnish to the Trustee an opinion of counsel (who may be of
counsel for the Company) either stating that in the opinion of such counsel the
Indenture has been properly recorded and filed so as to make effective the lien
intended to be created hereby covering the Collateral Stock, and reciting the
details of such action, or stating that in the opinion of such counsel no such
action is necessary to make such lien effective.
(b) Within thirty (30) days after each anniversary of this Indenture,
the Company shall furnish to the Trustee an opinion of counsel (who may be of
counsel for the Company) effective as of the anniversary of this Indenture
either stating that in the opinion of such counsel such action has been taken
with respect to the recording, filing, re-recording, and re-filing of the
Indenture as is necessary to maintain the lien of this Indenture covering the
Collateral Stock, and reciting the details of such action, or stating that in
the opinion of such counsel no such action is necessary to maintain such lien.
(c) Upon the execution of this Indenture, the Company shall deliver to
the Trustee a certificate or opinion of an independent appraiser or other expert
as to the fair value to the Company of the Collateral Stock.
(d) In the event of any release of all or any portion of the Collateral
Stock, and as a condition precedent thereto, the Company shall deliver to the
Trustee a certificate or opinion of an appraiser or other qualified expert
reasonably acceptable to the Trustee that as to the Collateral Stock to be
released from the lien of the Indenture, the proposed release will not impair
the security in contravention of the provisions of this Indenture, and requiring
further that such certificate or opinion shall be made by an independent
appraiser, or other expert, if the fair value of such Collateral Stock to be
released, together with all Collateral Stock released since the commencement of
the then current calendar year, as set forth in the certificates or opinions
required by this Section, is ten percent (10%) or more of the aggregate
principal amount of the Bonds at the time Outstanding; provided that such
opinion of an independent expert shall not be required in the case of any
release of Collateral Stock if the fair value thereof as set forth in the
certificate or opinion required by this Section is less than $25,000 or less
than one percent (1%) of the aggregate principal amount of the Outstanding
Bonds.
Section 704. Reports by Trustee.
(a) Within sixty (60) days after [insert anniversary date] of each
year, the Trustee shall transmit by mail to all Bondholders, as their names and
addresses appear in the Bond Register and otherwise as described in Section
313(c) of the TIA, a brief report dated as of [insert anniversary date] with
respect to any of the following events that have occurred within the twelve (12)
month period from the date of the previous report, provided that if no such
event has occurred no report will be transmitted:
(1) any change to its eligibility under Section 607B and its
qualifications under Section 607A;
(2) the creation of or any material change to a relationship
specified in paragraph (1) through (10) of Section 607A(c);
(3) the character and amount of any advances (and if the
Trustee elects so to state, the circumstances surrounding the making
thereof) made by the Trustee (as such) which remain unpaid on the date
of such report, and for the reimbursement of which it claims or may
claim a lien or charge, prior to that of the Bonds, on any property or
funds held or collected by it as Trustee, except that the Trustee shall
not be required (but may elect) to report such advances if such
advances so remaining unpaid aggregate not more than one-half of one
percent of the principal amount of the Bonds Outstanding on the date of
such report;
(4) the amount, interest rate and maturity date of all other
indebtedness owing by the Company to the Trustee in its individual
capacity, on the date of such report, with a brief description of any
property held as collateral security therefor, except an indebtedness
based upon a creditor relationship arising in any manner described in
Sections 611(b)(2), (3), (4) or (6);
(5) any change to the property and funds, if any, physically
in the possession of the Trustee as such on the date of such report;
(6) any change to any release, or release and substitution, of
Collateral Stock subject to the lien of this Indenture (and the
consideration therefore, if any) which the Trustee has not previously
reported;
(7) any additional issue of Bonds which the Trustee has not
previously reported; and
(8) any action taken by the Trustee in the performance of its
duties hereunder which it has not previously reported and which in its
opinion materially affects the Bonds, except action in respect of a
Default, notice of which has been or is to be withheld by the Trustee
in accordance with Section 602, as authorized by Section 315(b) of the
TIA.
(b) The Trustee shall transmit by mail to all Bondholders, as their
names and addresses appear in the Bond Register and to such other Bondholders in
accordance with Section 313(c) of the TIA, a brief report with respect to (1)
the release, or release and substitution, of any or all of the Collateral Stock
(and the consideration therefore, if any) unless the fair value of such
Collateral Stock, as set forth in the certificate or opinion required by Section
703A(c), is less than ten percent (10%) of the principal amount of Bonds
Outstanding at the time of such release, or such release and substitution, such
report to be so transmitted within ninety (90) days after such time; and (2) the
character and amount of any advances (and if the Trustee elects so to state, the
circumstances surrounding the making thereof) made by the Trustee (as such)
since the date of the last report transmitted pursuant to subsection (a) of this
Section (or if no such report has yet been so transmitted, since the date of
execution of this Indenture) for the reimbursement of which it claims or may
claim a lien or charge, prior to that of the Bonds, on property or funds held or
collected by it as Trustee, and which it has not previously reported pursuant to
this subsection, except that the Trustee shall not be required (but may elect)
to report such advances if such advances remaining unpaid at any time aggregate
one percent (1%) or less of the principal amount of the Bonds Outstanding at
such time, such report to be transmitted within ninety (90) days after such
time.
(c) A copy of each such report shall, at the time of such transmission
to Bondholders, be filed by the Trustee with each stock exchange upon which the
Bonds are listed, and also with the Commission. The Company will notify the
Trustee when the Bonds are listed on any stock exchange.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 801. Company May Consolidate, Etc.. on Certain Terms.
The Company shall not consolidate with or merge into any other
corporation or convey, transfer or lease its properties and assets as, or
substantially as, an entirety to any Person unless:
(1) the corporation formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or
transfer the properties and assets of the Company substantially as an
entirety shall be a corporation organized and existing under the laws
of the United States of America or any State or the District of
Colombia, and shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form reasonably
satisfactory to the Trustee, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Bonds and
the performance of every covenant of this Indenture on the part of the
Company to be performed or observed;
(2) immediately after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time, or
both, would become an Event of Default, shall have happened and be
continuing;
(3) immediately after giving effect to such transaction, the
corporation formed by such consolidation or into which the Company is
merged shall have equity securities listed on a Quotation System or a
national securities exchange, and immediately after giving affect to
such transaction the Bonds are convertible into such securities;
(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel as required by Section 102 each
stating that such consolidation, merger, conveyance or transfer and
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with, provided that such Opinion of Counsel may rely
upon a certificate of the Company's auditors as to all financial
matters.
Section 802. Successor Corporation Substituted.
Upon any consolidation or merger, or any conveyance, transfer or lease
of the properties and assets of the Company as, or substantially as, an entirety
to any person in accordance with Section 801, the successor corporation formed
by such consolidation or into which the Company is merged or to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under this Indenture with
the same effect as if such successor corporation had been named as the Company
herein; provided, however, that except in the case of a lease to another Person,
no such conveyance or transfer shall have the effect of releasing the Person
named as the "Company" in the first paragraph of this instrument or any
successor corporation which shall theretofore have become such in the manner
prescribed in this Article from its liability as obligor and maker on any of the
Bonds.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 901. Supplemental Indentures without Consent of Bondholders.
Without the consent of the Holders of any Bonds, the Company, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the
Company, and the assumption by any such successor of the covenants of
the Company herein and in the Bonds contained; or
(2) to add to the covenants of the Company, for the benefit of
the Holders of the Bonds, or to surrender any right or power herein
conferred upon the Company; or
(3) to change or eliminate any of the provisions of this
Indenture, provided that any such change or elimination shall become
effective only when there is no Bond Outstanding created prior to the
execution of such supplemental indenture which is entitled to the
benefit of such provision; or
(4) to secure the Bonds; or
(5) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent
with the provisions of this Indenture, provided such action shall not
adversely affect the interest of the Holders of the Bonds.
Section 902. Supplemental Indentures with Consent of Bondholders.
With the consent of the Holders of not less than a majority in
principal amount of the outstanding Bonds, by Act of said Holders delivered to
the Company and the Trustee, the Company, when authorized by a Board Resolution,
and the Trustee may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of modifying in any manner
the rights of the Holders of the Bonds under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Bond affected thereby,
(1) impair or affect the right of the Holders of Bonds to
receive payment of the principal amount of, or any installment of
interest on, the Bond on or after the Stated Maturity of the principal
or any interest installment, as appropriate, or
(2) impair or affect the right of the Holders of Bonds to
institute suit for the enforcement of any payment of principal of (or
premium, if any) or interest on any Bond on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the
Redemption Date) on or after the Repayment Date, except as to a
postponement of an interest payment consented to as provided in Section
512, or
(3) modify any of the provisions of parts (1) or (2) of this
Section.
It shall not be necessary for any Act of Bondholders under this Section
to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
Section 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not
(except to the extent required in the case of a supplemental indenture entered
into under Section 901(4) be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
Section 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Bonds theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
Section 905. Reference in Bonds to Supplemental Indentures.
Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article shall bear a notation in form
approved by the Trustee as to any matter provided for in such supplemental
indenture. If the Company shall so determine, new Bonds so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any such
supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding Bonds.
Section 906. Effect on Senior Indebtedness.
No supplemental indenture shall adversely affect the rights of any
holder of Senior Indebtedness under Article Twelve without the consent of such
holder.
ARTICLE TEN
COVENANTS
Section 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and premium,
if any) and interest on the Bonds in accordance with the terms of the Bonds and
this Indenture.
Section 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment an office or agency
where Bonds may be presented or surrendered for payment, conversion,
registration of transfer or exchange, which may be the Principal Corporate Trust
Office of the Trustee, and will maintain in Phoenix, Arizona an office or agency
where notices and demands to or upon the Company in respect of the Bonds and
this Indenture may be served. The Company will give prompt written notice to the
Trustee of the location, and of any change in the location, of such office or
agency. If at any time the Company shall fail to maintain such office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
principal corporate trust office of the Trustee, and the Company hereby appoints
the Trustee its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate by notice to the
Trustee as provided herein one or more other offices or agencies where the Bonds
may be presented or surrendered for any or all such purposes and may from time
to time by similar notice rescind such designations; provided, however, that no
such designation or recision shall in any manner relieve the Company of its
obligation to maintain an office or agency in the Place of Payment for such
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
Section 1003. Money for Bond Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any) or interest
on any of the Bonds, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due until such sums shall be paid to such persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, on
or before each due date of the principal of (and premium, if any) or interest on
any Bonds, deposit with a Paying Agent a sum sufficient to pay the principal
(and premium, if any) or interest, so becoming due, such sum to be held in trust
for the benefit of the Persons entitled to such principal, (and premium, if any)
or interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will
(1) hold all sums held by it for the payment of principal of
(and premium, if any) or interest on Bonds in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Bonds) in the making of any such payment of
principal (and premium, if any) or interest on the Bonds; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
monies.
Any monies deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (and premium, if
any) or interest on any Bond and remaining unclaimed for five (5) years after
such principal (and premium, if any) or interest has become due and payable
shall be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Bond shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
Company's sole option and at the expense of the Company cause to be published
once, in a newspaper of general circulation in Phoenix, Arizona or, if
different, in the Place of Payment, notice that such monies remains unclaimed
and that, after the date of such publication, any unclaimed balance of such
money then remaining will be repaid to the Company.
Section 1004. Payment of Taxes.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, all taxes, assessments and governmental
charges levied or imposed upon it or upon its income, profits or property;
provided, however, that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
Section 1005. Maintenance of Properties.
The Company will cause all its properties used or useful in the conduct
of its business to be maintained and kept in good conditions, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this Section shall prevent the
Company from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the judgment of the Company, desirable
in the conduct of its business and not disadvantageous in any material respect
to the Bondholders.
Section 1006. Statement as to Compliance.
The Company will deliver to the Trustee, within one hundred twenty
(120) days after the end of each fiscal year, a written statement signed by the
President or a Vice President of the Company, stating, as to each signer
thereof, the matters required by Section 703(4) hereof. The Company acknowledges
that its fiscal year ends on December 31 of each year.
Section 1007. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises; provided, however,
that the Company shall not be required to preserve any right if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company or that the loss thereof is not
disadvantageous in any material respect to the Bondholders.
Section 1008. Insurance.
Subject to the right to sell, abandon or otherwise dispose of any
building or property whenever in the opinion of the Board of Directors the
retention thereof is inadvisable or not necessary to the business of the Company
and its Subsidiaries, the Company will at all times cause all buildings, plants,
equipment and other insurable properties owned or operated by it or any
Subsidiary to be properly insured and kept insured with insurance carriers
acceptable to the Board of Directors in its reasonable judgement, or adequately
insured by means of property inter-insurance contracts, against loss or damage
by fire and other hazards, in amounts deemed appropriate by the Board of
Directors.
Section 1009. Life Insurance on Key Personnel.
The Company shall obtain and maintain in full force and effect "key
person" life insurance policy covering Joseph P. Martori. Such insurance shall
be in the aggregate face amount of $5,000,000.00, shall be placed with an
insurance carrier reasonably chosen by the Board of Directors, and shall name
the Company as the beneficiary thereof. Any net proceeds from such policy, to
the extent of the principal amount of the Bonds Outstanding, plus interest
accrued and unpaid, shall be set aside by the Company and held in trust for the
purpose of either paying the principal amount of the Bonds upon Maturity or, at
the discretion of the Board of Directors, to redeem a portion of the Bonds as
provided in this Indenture.
Section 1010. Particular Covenants as to Certain of Company's Affairs.
The Company at all times will keep, and will cause each Subsidiary to
keep, true and complete books of record and account, all in reasonable detail,
with respect to all transactions between the Company or such Subsidiary, as the
case may be, and any Affiliate of the Company, other than a Subsidiary. The
Company shall furnish to the Trustee summaries of such transactions as the same
may reasonably be requested by the Trustee from time to time.
Section 1011. Limitations on Dividends and Other Distributions.
For such time as at least fifty percent (50%) of the principal amount
of the Bonds are outstanding, the Company will not declare or pay to holders of
its Common Stock any cash dividends or dividends in kind other than dividends
payable solely in shares of Common Stock.
Section 1012. Limitation on Liquidation.
The Board of Directors or the holders of Common Stock of the Company
shall not adopt a plan of liquidation which provides for, contemplates or the
effectuation of which is preceded by (i) the sale, lease, conveyance or other
disposition of all of the assets of the Company, otherwise than substantially as
an entirety, and (ii) the distribution of all or substantially all of the
proceeds of such sale, lease, conveyance or other disposition and of the
remaining assets of the Company, to the holders of Common Stock or Preferred
Stock unless the Company, prior to making any liquidating distribution pursuant
to such plan, makes provision for the satisfaction of its respective obligations
hereunder and under the Bonds as to the payment of principal and interest on
such Bonds.
Section 1013. Overhead Allocation Limitation.
The Company shall maintain its annual expenditures for general and
administrative costs at an amount not to exceed 16% of the Company's gross
revenue.
Section 1014. Limitation on Change of Control.
Subject to the second paragraph of this Section 1014, the Company shall
not experience a change in control, where "Change in Control" means (a) when any
person, or any persons acting together which would constitute a "group" for
purposes of Section 13(d) of the Exchange Act (other than a person or group
including or comprised of the Company, an entity in which Joseph P. Martori,
Edward J. Martori or, Martori Enterprises Incorporated owns an interest (or any
of them individually), any Subsidiary, any employee stock purchase plan, stock
option plan or other incentive plan or program, retirement plan or automatic
dividend reinvestment plan or any substantially similar plan of the Company or
any Subsidiary or any person holding securities of the Company for or pursuant
to the terms of any such plan, together with any affiliates thereof), shall
acquire beneficial ownership (as defined in Rule 13d-3 under the Exchange Act)
of at least a majority of all classes of capital stock of the Company, or (b)
all or substantially all of the Company's assets (defined for purposes of this
Section 1014 as greater than 75% of the fair market value of the Company's
assets) are sold as an entirety to any Person or related group of Persons in any
one transaction or series of related transactions.
A "Change in Control" shall not be contrary to the foregoing covenant
if (i) the Sale Price of the Common Stock on the date of the Change in Control
occurred is at least 105% of the Conversion Price of the Bonds in effect
immediately preceding the time of such Change in Control, or (ii) all of the
consideration (excluding cash payments for fractional shares) in the transaction
giving rise to such Change in Control to the holders of Common Stock consists of
securities that are, or are immediately upon issuance will be, listed on a
national exchange or quoted on a Quotation System, and as a result of such
transaction the securities become convertible into such security, or (iii) the
consideration in the transaction giving rise to such Change in Control to the
holders of the Common Stock consists of cash, securities that are, or
immediately upon issuance will be, listed on a national securities exchange or
quoted on a Quotation System, or a combination of cash and such securities and
the aggregate fair value of such consideration is at least 105% of the
Conversion Price of the Bonds in effect on the date immediately preceding such
transaction, or (iv) the Bonds or the shares of Common Stock into which the
Bonds are converted pursuant to Article Thirteen hereof are freely tradeable
without restriction in time or quantity with respect to sales of Bonds or shares
of Common Stock.
Section 1015. Waiver of Certain Covenants.
Without limiting the rights of the Holders and the Company with respect
to waivers and amendments set forth in Section 513 and 902, the Company may
fail, in any particular instance, to comply with any covenant or condition set
forth in Section 1001 to 1015, which otherwise does not have a specific waiver
provision, if before or after the time for such compliance the Holders of at
least a majority in principal amounts of the Bonds Outstanding shall, by Act of
such Holders, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Company
and the duties of the Trustee in respect of any such covenant or condition shall
remain in full force and effect.
ARTICLE ELEVEN
REDEMPTION OF BONDS
Section 1101. Right of Redemption.
The Company may, at its option, redeem (provided that at the time of
first publication of notice of redemption it is not in default in the payment of
any Senior Indebtedness and that at such time the making of such redemption
would not result in a default in any covenant contained in any indenture or
other instrument pursuant to which Senior Indebtedness is outstanding) the
Bonds, at any time as a whole or from time to time in part as set forth herein
for a "Redemption Price" equal to one hundred twenty percent (120%) of the then
principal amount of the Bonds plus, in each case, any interest accrued on the
Bonds so redeemed to the Redemption Date, exclusive of installments of interest
whose Stated Maturity is on or prior to the Redemption Date, payment of which
shall have been made or duly provided for to the registered Holders of Bonds on
the relevant Record Dates in accordance with Section 307. Such redemption right
may be exercised from and after the date on which the Sale Price per share of
Common Stock for any twenty (20) consecutive Trading Days equaled or exceeded
four dollars ($4.00) per share (the "Redemption Mark").
If the Company (i) subdivides its outstanding shares of Common Stock,
(ii) pays a dividend in shares of Common Stock or makes a distribution on its
Common Stock in shares of Common Stock, or (iii) issues by reclassification of
its Common Stock any shares of capital stock of the Company, the Redemption Mark
shall be proportionately decreased. If the Company combines the outstanding
shares of Common Stock, then the Redemption Mark shall be proportionately
increased. Any adjustment shall be effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, reclassification or combination.
Notice of any redemption shall be mailed by first-class mail, postage
prepaid to the registered Holders of the Bonds designated for redemption at
their addresses as the same shall appear on the Bond Register not less than
fifteen (15) days but not more than sixty (60) days prior to the Redemption
Date, subject to all the conditions and provisions of the Indenture.
Section 1102. Applicability of Article.
Redemption of Bonds at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
Section 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Bonds shall be evidenced by a
Board Resolution. In case of any redemption at the election of the Company of
less than all of the Bonds, the Company shall, at least thirty (30) days prior
to the Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee) notify the Trustee of such Redemption Date and of
the principal amount of Bonds to be redeemed.
Section 1104. Selection by Trustee of Bonds to be Redeemed.
If less than all the Bonds are to be redeemed, the particular Bonds to
be redeemed shall be selected not more than fifteen (15) days prior to the
Redemption Date by the Trustee, from the Outstanding Bonds not previously called
for redemption, by such method as the Trustee shall deem fair and appropriate
and which may provide for the selection for redemption of portions (equal to
$1,000 or any integral multiple thereof) of the principal of Bonds of a
denomination larger than $1,000.
The Trustee shall promptly notify the Company in writing of the Bonds
selected for redemption and, in the case of any Bond selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Bonds shall relate, in
the case of any Bond redeemed or to be redeemed only in part, to the portion of
the principal of such Bond which has been or is to be redeemed.
Section 1105. Notice of Redemption.
Notice of any redemption shall be given by first-class mail, postage
prepaid, mailed not less than thirty (30) nor more than sixty (60) days prior
to the Redemption Date, to each Holder of Bonds to be redeemed, at his address
appearing in the debenture Register.
All notices of redemption shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) if less than all Outstanding Bonds are to be redeemed, the
identification (and, in the case of partial redemption, the respective
principal amounts) of the Bonds to be redeemed;
(4) that on the Redemption Date the Redemption Price will
become due and payable upon each such Bond (together with accrued
interest to the Redemption Date payable as provided in Section 307 and
1107), and that interest thereon shall cease to accrue from and after
said date; and
(5) the place where such Bonds are to be surrendered for
payment of the Redemption Price, which shall be the office or agency of
the Company in the Place of Payment (which may be the corporate trust
office of the Trustee).
Notice of redemption of Bonds to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
Section 1106. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as it own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price on all the Bonds which are to be
redeemed on that date.
Section 1107. Bonds Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Bonds so to be
redeemed shall, on the Redemption Date, become due and payable at the Redemption
Price therein specified and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such Bonds
shall cease to bear interest. Upon surrender of such Bonds for redemption in
accordance with said notice, such Bonds shall be paid by the Company at the
Redemption Price, together with accrued interest to the Redemption Date.
Installments of interest whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Bonds registered as such on the
relevant Record Dates according to their terms and the provisions of Section
307.
If any Bond called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Bond.
Section 1108. Bonds Redeemed in Part.
Any Bond which is to be redeemed only in part shall be surrendered at a
Place of Payment (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Bond without service charge, a
new Bond or Bonds, of any authorized denomination as requested by such Holder in
aggregate principal amount equal to and in exchange for the unredeemed portion
of the principal of the Bond so surrendered.
ARTICLE TWELVE
SUBORDINATION OF BONDS
Section 1201. Agreement to Subordinate.
The Company covenants and agrees, and each Holder of Bonds by his
acceptance thereof (whether upon original issue or upon transfer or assignment)
likewise covenants and agrees, that the indebtedness represented by the Bonds
and the payment of the principal of (and premium, if any) and interest on each
and all of the Bonds is hereby expressly subordinated, and junior to the extent
and in the manner hereinafter set forth, in right of payment to the prior
payment in full of all Senior Indebtedness.
Section 1202. Distribution of Assets, Other than Collateral Stock.
Upon any distribution of assets of the Company upon any dissolution,
winding-up, liquidation or reorganization of the Company, whether in bankruptcy,
insolvency, reorganization or receivership proceedings or upon an assignment for
the benefit of creditors or any other marshalling of the assets and liabilities
of the Company or upon any acceleration or maturity or the Bonds or otherwise,
subject in all events to any rights of the Trustee and the Holders of the Bonds
to proceed against the Collateral Stock:
(1) the holders of all Senior Indebtedness shall first be
entitled to receive payment in full of the principal thereof (and
premium, if any) and interest due thereon, or adequate provisions shall
be made for such payment, before the Holders or the Bonds are entitled
to receive any payment on account of the principal of (or premium, if
any) or interest on the Indebtedness evidenced by the Bonds; and
(2) any payment by, or distribution of assets of, the Company
of any kind or character, whether in cash, property or securities, to
which the Holders of the Bonds or the Trustee would be entitled except
for the provisions of this Article shall be paid or delivered by the
person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or liquidating trustee or otherwise, directly to
the holders of Senior Indebtedness which may have been issued, ratably
according to the aggregate amounts remaining unpaid on account of the
Senior Indebtedness held or represented by each, to the extent
necessary to make payment in full of all Senior Indebtedness remaining
unpaid after giving effect to any concurrent payment or distribution
(or provision therefore) to the holders of such Senior Indebtedness.
Section 1203. No Payment to Bondholders if Senior Indebtedness is in
Default.
(a) Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, all principal thereof (and premium, if any) and
interest due thereon shall first be paid in full, or such payment duly provided
for in cash or in a manner satisfactory to the holder or holders of such Senior
Indebtedness before any payment is made on account of the principal of or
interest on the Bonds or to acquire or redeem any of the Bonds.
(b) Upon the happening of an event of default with respect to any
Senior Indebtedness, as such event of default is defined therein or in the
instrument under which it is outstanding, permitting the holders to accelerate
the maturity thereof, and, if the default is other than a default in payment of
the principal of (or premium, if any) or interest on such Senior Indebtedness,
upon written notice thereof given to the Company and the Trustee by the holder
or holders of such Senior Indebtedness or their representative or
representatives, unless and until such event of default shall have been cured or
waived or shall have ceased to exist, no payment shall be made by the Company
with respect to the principal or interest on the Bonds or to acquire or redeem
any of the Bonds.
Section 1204. Subrogation.
Subject to the payment in full of all Senior Indebtedness, the Holders
of the Bonds shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness (other than the
Collateral Stock) until all amounts owing on the Bonds shall be paid in full,
and, as between the Company, its creditors other than holders of Senior
Indebtedness, and the Holders of the Bonds, no such payment or distribution made
to the holders of Senior Indebtedness by virtue of this Article which otherwise
would have been made to the Holders of the Bonds shall be deemed to be a payment
by the Company on account of the Senior Indebtedness, it being understood that
the provisions of this Article are intended solely for the purpose of defining
the relative rights of the Holders of the Bonds, on the one hand, and the
holders of Senior Indebtedness, on the other hand.
Section 1205. Obligation of Company Unconditional.
Nothing contained in this Article or elsewhere in this Indenture or in
the Bonds is intended to or shall impair, as between the Company, its creditors
other than the holders of Senior Indebtedness, and the Holders of the Bonds, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders of the Bonds such principal (and premium, if any) of and interest on the
Bonds as and when the same shall become due and payable in accordance with their
terms, or affect the relative rights of the Holders of the Bonds and creditors
of the Company other than the holders of Senior Indebtedness, nor shall anything
herein or exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this Article
Twelve of the holders of Senior Indebtedness in respect of cash, property or
securities of the Company received upon the exercises of any such remedy.
Upon any payment or distribution of assets of the Company referred to
in this Article , the Trustee and the Holders of the Bonds shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction in
which any such dissolution, winding-up, liquidation or reorganization proceeding
affecting the affairs of the Company is pending or upon a certificate of the
liquidating trustee or agent or other person making any payment or distribution
to the Trustee or to the Holders of the Bonds for the purpose of ascertaining
the persons entitled to participate in such payment or distribution, the holders
of the Senior Indebtedness and other Indebtedness or the Company, the amount
thereof or payable thereon, the amount paid or distributed thereon and all other
facts pertinent thereto or to this Article Twelve.
Section 1206. Payments on Bonds Permitted.
Nothing contained in this Article Twelve or elsewhere in this
Indenture, or in any of the Bonds, shall (a) affect the obligation of the
Company to make, or prevent the Company from making, at any time except during
the pendency of any dissolution, winding-up, liquidation or reorganization
proceeding, and except during the continuance of any even of default specified
in Section 1203 (not cured or waived), payments at the time of principal of (and
premium, if any) or interest on the Bonds, or (b) prevent the application by the
Trustee or any Paying Agent of any moneys held by the Trustee or such Paying
Agent, in trust for the benefit of the Holders of Bonds as to which notice of
redemption shall have been mailed or published at least once prior to the
happening of an event of default specified in Section 1203, to the payment of or
on account of the principal (and premium, if any) and interest on such Bonds, or
(c) prevent the application by the Trustee or any Paying Agent of any moneys
deposited prior to the happening of any event of default specified in Section
1203, with the Trustee or such Paying Agent in trust for the purpose of paying a
specified installment or installments or interest on the Bonds, to the payment
of such installments of interest on the Bonds; or (d) prevent the exercise by
the Trustee or the Bondholders of their respective rights with respect to the
Collateral Stock.
Section 1207. Effectuation of Subordination by Trustee.
Each Holder of Bonds, by his acceptance thereof, authorizes and directs
the Trustee in his behalf (subject to Section 601) to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article and appoints the Trustee his attorney-in-fact for any and all such
purposes.
Section 1208. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment of money to
or by the Trustee in respect of the Bonds pursuant to the provisions of this
Article. Notwithstanding the provisions of this Article or any other provisions
of this Indenture, but subject to section 601, the Trustee shall not be charged
with knowledge of the existence of any facts which would prohibit the making of
any payment or distribution to or by the Trustee in respect of the Bonds
pursuant to the provisions of this Article, unless and until the Trustee shall
have received written notice thereof from the Company, any Bondholder, any
Paying Agent or a holder or holders of Senior Indebtedness or from any trustee
therefor; and prior to the receipt of any such written notice, the Trustee,
subject to the provisions of Section 601, shall be entitled in all respects to
assume that no such facts exist.
Subject to the provisions of Section 601, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself or herself to be a holder of Senior Indebtedness (or a trustee on behalf
of such holder) to establish that such notice has been given by a holder of
Senior Indebtedness or a trustee on behalf of any such holder. In the event that
the Trustee determines in good faith that further evidence is required with
respect to the right of any Person as a holder of Senior Indebtedness to
participate in any payment or distribution pursuant to this Article, the Trustee
may request such Person furnish evidence to the reasonable satisfaction of the
Trustee as to the amount of Senior Indebtedness held by such Person, the extent
to which such Person is entitled to participate in such payment or distribution
and any other fact pertinent to the rights of such Person under this Article;
and if such evidence is not furnished, the Trustee may defer any payment or
distribution to such Person pending judicial determination as to the right of
such Person to receive such payment or distribution.
Section 1209. Rights of Holders of Senior Indebtedness Not Impaired.
No right of any present or future holder of any Senior Indebtedness to
enforce the subordination herein shall at any time or in any way be prejudiced
or impaired by any act or failure to act on the part of the Company with the
terms, provisions and covenants of this Indenture.
Section 1210. Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall in good faith pay over or distribute to the Holders of the Bonds, to the
Company or to any other Person cash, property or securities to which any holders
of Senior Indebtedness shall be entitled by virtue of this Article or otherwise.
Section 1211. Rights of Trustee as Holder of Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder.
Section 1212. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article in addition to or in place of the Trustee; provided, however,
that Section 1210 and 1211 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
Section 1213. Rights and Obligations Subject to Power of Court.
The rights of the holders of Senior Indebtedness and the obligations of
the Trustee and the Bondholders set forth in this Article are subject to the
power of a court of competent jurisdiction to make other equitable provision
reflecting the rights conferred in this Indenture upon the Senior Indebtedness
and the holders thereof with respect to the Bonds and the Holders thereof by a
plan or reorganization under applicable bankruptcy law.
Section 1214. No Effect on Secured Interest.
Nothing contained in this Article shall impair the rights of the
Bondholders or the Trustee with respect to the Collateral Stock, as and to the
extent such Collateral Stock is pledged to secure the payment of principal and
interest on the Bonds under Article Fourteen hereof, including without
limitation the rights of the Trustee and Bondholders to receive payment upon the
sale or other disposition of the Collateral Stock or upon an Event of Default.
ARTICLE THIRTEEN
CONVERSION OF BONDS
Section 1301. Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Article, at
the option of the Holder thereof, any Bond or any portion of the principal
amount thereof which is $1,000 or an integral multiple thereof may be converted
at the principal amount thereof, or of such portion thereof, into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100 of a
share) of Common Stock of the Company, at the Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. Such conversion right
shall begin thirty (30) calendar days from the closing of the public offering of
the Bonds and shall expire at the close of business on _______________, 2000. In
case a Bond or portion thereof is called for redemption or is delivered for
repurchase, such conversion right in respect of the Bond or portion so called
shall expire at the close of business on the last business day prior to the
Redemption Date, unless the Company defaults in making the payment due upon
redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (the "Conversion Price") shall be $2.50 per share of Common Stock, as
adjusted in certain instances as provided in Section 1304 and 1305.
Section 1302. Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any Bond to be
converted shall surrender such Bond, duly endorsed or assigned to the Company or
in blank, at any office or agency of the Company maintained for that purpose
pursuant to Section 1002, accompanied by written notice to the Company at such
office or agency that the Holder elects to convert such Bond or, if less than
the entire principal amount thereof is to be converted, the portion thereof to
be converted. Bonds surrendered for conversion during the period from the close
of business on any Regular Record Date next preceding any Interest Payment Date
to the opening of business on such Interest Payment Date (the "Interest Period")
shall be accompanied by payment of an amount equal to the interest payable on
such Interest Payment Date on the principal amount of Bonds being surrendered
for conversion unless the Bond or the portion thereof being converted has been
called for redemption prior to such Interest Payment Date. Except as provided in
the preceding sentence and subject to the last paragraph of Section 307, no
payment or adjustment shall be made upon any conversion on account of any
interest accrued on the Bonds surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion. All payments required by
this paragraph to be made by a Holder upon the surrender of Bonds for conversion
shall be made in same-day funds or other funds acceptable to the Company.
Bonds shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Bonds for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of such Bonds as Holders shall cease, and the Person or Persons entitled
to receive the Common Stock issuable upon conversion shall be treated for all
purposes as the record holder or holders of such Common Stock at such time. As
promptly as practicable on or after the conversion date, the Company shall issue
and shall deliver at such office or agency a certificate or certificates for the
number of full shares of Common Stock issuable upon conversion, together with
payment in lieu of any fraction of a share, as provided in Section 1303.
In the case of any Bond which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Bond or
Bonds of authorized denominations in aggregate principal amount equal to the
unconverted portion of the principal amount of such Bond.
Section 1303. Fractions of Shares.
No fractional shares of Common stock shall be issued upon conversion of
Bonds. If more than one Bond shall be surrendered for conversion at one time by
the same Holder, the number of full shares which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate principal
amount of the Bonds (or specified portions thereof) so surrendered. Instead of
any fractional share of Common Stock which would otherwise be issuable upon
conversion of any Bond or Bonds (or specified portions thereof), the Company
shall pay a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the Conversion Price per share of Common Stock.
Section 1304. Adjustment of Conversion Price.
(1) In case the Company shall hereafter (i) pay a dividend in
shares of Common Stock or make a distribution on its Common Stock in
shares of Common Stock, (ii) subdivide its outstanding shares of Common
Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock of the
Company, the Conversion Price in effect immediately prior to such
action shall be adjusted so that the Holder of any Bond thereafter
surrendered for conversion shall be entitled to receive the number of
shares of Common Stock or other capital stock of the Company which he
or she would have owned immediately following such action had such Bond
been converted immediately prior thereto. An adjustment made pursuant
to this Subsection (1) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this Subsection (1), the Holder of any Bond
thereafter surrendered for conversion shall become entitled to receive
shares of two or more classes of capital stock (including shares of
Common Stock and other capital stock) of the Company, the Board of
Directors (whose determination shall be conclusive and shall be
described in a statement filed with the Trustee) shall determine in
good faith the allocation of the adjusted Conversion Price between or
among shares of such classes of capital stock or shares of Common Stock
and other capital stock.
(2) In any case in which this Section shall require that an
adjustment be made immediately following a record date, the Company may
elect to defer (but only until five (5) Trading Days following the
filing by the Company with the Trustee of the certificate described in
(a)) issuing to the Holder of any Bond converted after such record date
the shares of Common Stock issuable upon such conversion over and above
the shares of Common Stock issuable upon such conversion on the basis
of the Conversion Price prior to adjustment.
(3) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at
least one percent (1%) of such price; provided, however, that any
adjustments which by reason of this Subsection (3) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment and, provided further, that adjustment shall be
required and made in accordance with the provisions of this Article
Thirteen (other than this Subsection (3)) not later than such time as
may be required in order to preserve the tax-free nature of a
distribution to the holders of Bonds or Common Stock. All calculations
under this Section 1304 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this
Section to the contrary notwithstanding, the Company shall be entitled
to make such reductions in the Conversion Price, in addition to those
required by this Section, as it in its discretion shall determine to be
advisable in order that any stock dividend, subdivision of shares,
distribution or rights to purchase stock or securities, or distribution
of securities convertible into or exchangeable for stock hereafter made
by the Company to its stockholders shall not be taxable.
Section 1305. Adjustment Based on Market Price.
In addition to the adjustments provided in Section 1304, the Conversion
Price shall be adjusted on [insert 30th calendar day after second anniversary of
the "Closing Date," as defined in the Placement Agent Agreement executed in
connection with the initial offering of the Bonds]______________, 1997 and
[insert 30th calendar day after fourth anniversary of the Closing Date],
______________, 1999 as follows:
At 5:00 p.m. local Phoenix, Arizona time on [insert 30th calendar day
after second anniversary of the Closing Date] _________, 1997, the
Conversion Price for all Bonds Outstanding shall be adjusted to the
higher of: (1) seventy-five percent (75%) of the "Mark Price" of Common
Stock, where the "Mark Price" is defined as a price equal to the
average of the Sale Price of Common Stock as of the close of business
each day for the period beginning [insert 30th calendar day before
second anniversary of the Closing Date] ______________, 1997 and ending
[insert date before second anniversary of the Closing Date]
______________, 1997; or (2) $2.50 per share of Common Stock;
At 5:00 p.m. local Phoenix, Arizona time on [insert 30th calendar day
after fourth anniversary of the Closing Date]_______, 1999 the
Conversion Price for all Bonds Outstanding shall be adjusted to the
higher of: (1) seventy-five percent (75%) of the "Mark Price" of Common
Stock, where the "Mark Price" is defined as a price equal to the
average of the Sale Price of Common Stock as of the close of business
each day for the period beginning [insert 30th calendar day before
fourth anniversary of the Closing Date]______________, 1999 and ending
[insert date before fourth anniversary of the Closing Date]
_____________, 1999; or (2) $2.50 per share of Common Stock.
Section 1306. Notice of Adjustments of Conversion Price.
Whenever the Conversion Price is adjusted as herein provided:
(a) the Company shall compute the adjusted Conversion Price in
accordance with Section 1304 and 1305 and shall prepare a certificate
signed by the Treasurer of the Company setting forth the adjusted
Conversion Price and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall forthwith be filed
with the Trustee and at each office or agency maintained for the
purpose of conversion of Bonds pursuant to Section 1002; and
(b) a notice stating that the Conversion Price has been
adjusted and setting forth the adjusted Conversion Price shall
forthwith be required, and as soon as practicable after it is required,
such notice shall be mailed by the Company to all Holders at their last
addresses as they shall appear in the Bond Register.
Section 1307. Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than
exclusively, in cash or (ii) exclusively in cash in an amount that
would require any adjustment pursuant to Section 1304; or
(b) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(d) the Company or any Subsidiary shall commence a tender
offer for all or a portion of the Company's outstanding shares of
Common stock (or shall amend any such tender offer);
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Bonds pursuant to Section 1002, and shall cause to
be mailed to all Holders at their last addresses as they shall appear in the
Bond Register, at least ten (10) days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on which
record is to be taken for the purpose of such dividend or distribution or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend or distribution are to be determined, or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
Section 1308. Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Bonds, the full number of shares of
Common Stock then issuable upon the conversion of all outstanding debentures.
Section 1309. Taxes on Conversions.
The Holder will pay any and all taxes that may be payable in respect of
the issue or delivery of shares of Common Stock on conversion of Bonds pursuant
hereto, and no such issue or delivery shall be made unless and until the Person
requesting such issue or delivery has paid to the Company the amount of any such
tax, or has established to the satisfaction of the Company that such tax has
been paid.
Section 1310. Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Bonds will upon issue be fully paid and nonassessable.
Section 1311. Cancellation of Converted Bonds.
All Bonds delivered for conversion shall be delivered to the Trustee to
be canceled by or at the direction of the Trustee, which shall dispose of the
same as provided in Section 309.
Section 1312. Provisions in Case of Consolidation, Merger or Sale of
Assets.
Notwithstanding any other provision herein to the contrary, in case of
any consolidation or merger to which the Company is a party other than a merger
or consolidation in which the Company is the continuing corporation, or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), there
shall be no adjustment under Section 1304 but the Holder of each Bond then
outstanding shall have the right thereafter to convert such Bond into the kind
and amount of securities, cash or other property which he or she would have
owned or have been entitled to receive immediately after such consolidation,
merger, statutory exchange, sale or conveyance had such Bond been converted
immediately prior to the effective date of such consolidation, merger, statutory
exchange, sale or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set forth in this
Article Thirteen with respect to the rights and interests thereafter of the
Holders of the Bond, to the end that the provisions set forth in this Article
Thirteen shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the Bonds. Any such
adjustment shall be made by and set forth in the supplemental indenture executed
by the Company and the Trustee, evidenced by a certificate to that effect; and
any adjustment so approved shall for all purposes hereof conclusively be deemed
to be an appropriate adjustment.
The above provisions of this Section shall similarly apply to
successive consolidations, mergers, statutory exchanges, sales or conveyances.
The Company shall give notice of the execution of such a supplemental
indenture to the Holders of Bonds in the manner provided in Section 106 within
thirty (30) days after the execution thereof.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in such supplemental indenture relating
either to the kind or amount of shares of stock or securities or property
receivable by Holders upon the conversion of their Bonds after any such
consolidation, merger, statutory exchange, sale or conveyance, or to any
adjustment to be made with respect thereto.
ARTICLE FOURTEEN
SECURITY FOR PAYMENT OF BONDS
Section 1401. Pledge of Collateral Stock.
a. As security for the prompt and complete payment when due of all the
Bonds, the Company hereby pledges to the Trustee, for and on behalf of Holders
on a pro rata basis, a security interest in and to all of the Collateral Stock
owned by the Company, except as may be set forth hereunder.
b. Trustee shall hold the certificate representing said Collateral
Stock on behalf of the Holders. The Company, by its execution and delivery
hereof, expressly acknowledges and agrees that, to the extent provided by law,
such possession by the Trustee shall constitute perfection of this security
interest in the Collateral Stock created hereunder and thereunder and under the
Indenture.
Section 1402. Event of Default and Remedies.
Upon the occurrence of an "Event of Default" hereunder, the Trustee or
holders of a majority in principal amount of the Bonds, determined through any
method established by the Trustee, will have the authority under Section 503 to
take such action as is necessary to redeem, liquidate, dispose of or otherwise
realize upon any and all rights in the Collateral Stock.
Section 1403. Method of Realizing Upon the Collateral Stock.
Except to the extent prohibited by applicable law that cannot be
waived, the following provisions shall govern the Holders' rights to realize
upon the Collateral Stock upon the occurrence of an Event of Default:
a. The Collateral Stock may be redeemed, sold, assigned, transferred or
otherwise disposed of by the Trustee, in the manner the Trustee deems
appropriate in its discretion, upon the direction of a majority in principal
amount of Bonds Outstanding acting for all of the Holders, for cash or other
value in any number of lots at public auction or private sale and may be sold or
disposed of without demand, advertisement or notice (excepting only that the
Trustee shall give the Company ten (10) business days prior written notice of
the time and place of any public sale or of the time after which a private sale
may be made, which notice the Company and Trustee hereby agree to be
reasonable). At any sale or sales of the Collateral Stock, the Trustee may bid
for and purchase the whole or any part of the property and rights sold and upon
compliance with the terms of such sale may hold, exploit and dispose of such
property and rights as provided for herein. The Company will execute and
deliver, or cause to be executed and delivered, such instruments, documents,
assignments, waivers, certificates, and affidavits and supply or cause to be
supplied such further information and take such further action as the Trustee
shall require in connection with such sale.
b. Any deficit realized upon disposition of the Collateral Stock will
be shared among the Holders on a pro rata basis in relation to their
proportional interests (in dollar amount) as evidenced by the Bond.
Section 1404. Further Assurances.
The Company will from time to time, at the Trustee's request, make,
execute, acknowledge, deliver and file all such instruments and take all such
action as the Trustee may reasonably request for assuring and confirming the
security interest in the Pledged Collateral Stock created hereunder.
Section 1405. Rights Regarding Stock.
Unless and until an Event of Default occurs and is continuing, the
Company shall have all rights of ownership of the Collateral Stock, including
without limitation the right to vote such shares of stock and receive dividends
in respect thereof.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all of such
counterparts shall together constitute be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and the Trustee has caused its corporate seal to be hereunto
affixed and attested, all as of the day and year first written above.
ILX Incorporated
By:_____________________________________
Its_____________________________________
ATTEST:
- ----------------------------------
Secretary
U.S. Trust Company of California, N.A.
as Trustee
By:_____________________________________
Its_____________________________________
ILX INCORPORATED
10% CONVERTIBLE ADJUSTABLE SECURED BOND, DUE 2000
No._____ $__________
ILX Incorporated, an Arizona corporation (herein called the "Company,"
which term includes any successor corporation under the Indenture hereinafter
referred to), for value received, hereby promises to pay to [Insert Name of
Holder]_____________, or registered assigns, the sum of ______________________
Dollars ($__________) on __________, 2000 and to pay interest thereon from the
Initial Interest Accrual Date (as defined in said Indenture) or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, semi-annually on January 1 and July 1 in each year, commencing January 1,
1996, at the rate of 10% per annum, until the principal hereof is paid or made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture
hereinafter referred to, be paid to the person in whose name this Bond (or one
or more Predecessor Bonds, as defined in said Indenture) is registered at the
close of business on the Regular Record Date for such interest, which shall be
the December 15 or June 15 next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for shall forthwith cease to be
payable to the Registered Holder on such Regular Record Date, and may be paid to
the person in whose name this Bond (or one or more Predecessor Bonds) is
registered at the close of business on a Special Record Date for the payment of
such defaulted interest to be fixed by the Trustee, notice whereof shall be
given to the Holders not less than ten (10) days prior to such Special Record
Date, or may be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Bonds may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in said Indenture. Payments of the principal of (and premium, if
any) and interest on this Bond will be made at the office or agency of the
Company maintained for that purpose, which may be the Principal Corporate Trust
Office, or in such other office or agency as may be established by the Company
pursuant to said Indenture, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made (subject to collection) by check mailed to the address of
the person entitled thereto as such address shall appear on the Bond Register.
Reference is hereby made to the further provisions of this Bond set
forth on the reverse side hereof and such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Bond shall not be valid or become obligatory for any purpose until
the certificate of authentication hereon shall have been manually signed by the
Trustee under the Indenture.
IN WITNESS WHEREOF, ILX Incorporated has caused this Bond to be signed
in its name by the manual or facsimile signature of its President or one of its
Vice Presidents and attested by the manual or facsimile signature of its
Secretary or one of its Assistant Secretaries.
Dated:___________ ILX Incorporated
By:___________________________________
Its_________________________________
ATTEST:
- ----------------------------------
Secretary
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
--------------------------,
as Trustee
By --------------------------
Authorized Signatory
ILX Incorporated
10% CONVERTIBLE ADJUSTABLE SECURED BOND, DUE 2000
This Bond is one of duly authorized issue of the Bonds of the Company
designated as its 10% Convertible Adjustable Secured Bonds, Due 2000 (herein
called the "Bonds"), limited in aggregate principal amount to $5,000,000 issued
and to be issued under an Indenture dated as of ______________, 1995 (herein
called the "Indenture"), between the Company and U.S. Trust Company of
California, N.A. as Trustee (herein called the "Trustee," which term includes
any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made of a statement of the
respective rights thereunder of the Company, the Trustee and the Holders of the
Bonds, and the terms upon which the Bonds are, and are to be, authenticated and
delivered.
The payment of the principal of (and premium, if any) and interest on
this Bond is expressly subordinated, as provided in the Indenture, to the
payment of all Senior Indebtedness, as defined in the Indenture, and, by the
acceptance of this Bond, the Holder hereof agrees, expressly for the benefit of
the present and future holders of Senior Indebtedness, to be bound by the
provisions of the Indenture relating to such subordination and authorizes and
appoints as his attorney-in-fact the Trustee to take such action in his behalf
as may be necessary or appropriate to effectuate such subordination.
Subject to and upon compliance with the provisions of the Indenture,
the Holder hereof is entitled, at the Holder's option, from and after
___________, at any time on or before the close of business on ____________,
2000, or in case this Bond or a portion hereof is called for redemption or is to
be repurchased, then in respect of this Bond or such portion hereof until and
including, but (unless the Company defaults in making the payment due upon
redemption) not after, the close of business on the Redemption Date, to convert
this Bond (or any portion of the principal amount hereof which is $1,000 or an
integral multiple thereof), at the principal amount hereof, or of such portion,
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100 of a share) of Common Stock of the Company at a Conversion
Price equal to an aggregate principal amount of Bonds for each share of Common
Stock as set, or in the event of an adjustment under the Indenture, at the
current adjusted Conversion Price as provided in the Indenture. The initial
Conversion Price under the Indenture is $2.50 per share. The Conversion Price is
subject to adjustment on ______________, 1997 and _____________, 1999, and
otherwise upon the occurrence of certain events described in the Indenture. The
Bond may be converted by surrender of this Bond, duly endorsed or assigned to
the Company or in blank, to the Company at the Principal Corporate Trust Office
of the Trustee and in such other cities, if any, as the Company may designate in
writing to the Trustee, accompanied by written notice to the Company that the
Holder hereof elects to convert this Bond, or if less than the entire principal
amount hereof is to be converted, the portion hereof to be converted, and, in
case such surrender shall be made during the period from the close of business
on any Regular Record Date next preceding any Interest Payment Date to the
opening of business on such Interest Payment Date (the "Interest Period")
(unless this Bond or the portion hereof being converted has been called for
redemption prior to such Interest Payment Date), also accompanied by payment in
same-day funds or other funds acceptable to the Company of an amount equal to
the interest payable on such Interest Payment Date on the principal amount of
this Bond then being converted. Subject to the aforesaid requirement for payment
and, in the case of a conversion after the Regular Record Date next preceding
any Interest Payment Date and on or before such Interest Payment Date, to the
right of the Holder of this Bond (or any Predecessor Bond) of record at such
Regular Record Date to receive an installment of interest (with certain
exceptions provided in the Indenture), no payment or adjustment is to be made on
conversion for interest accrued hereon or for dividends on the Common Stock
issued on conversion. No fractions of shares or scrip representing fractions of
shares will be issued on conversion, but instead of any fractional interest the
Company shall pay a cash adjustment as provided in the Indenture. In addition to
the adjustments to the conversion price provided in the Indenture, the Indenture
provides that in case of certain consolidations or mergers to which the Company
is a party or the transfer of substantially all of the assets of the Company,
the Indenture shall be amended, without the consent of any Holder of Bonds, so
that this Bond, if then outstanding, will be convertible thereafter, during the
period this Bond shall be convertible as specified above, only into the kind and
amount of securities, cash and other property receivable upon the consolidation,
merger or transfer by a holder of the number of shares of Common Stock into
which this Bond might have been converted immediately prior to such
consolidation, merger, statutory exchange, sale or conveyance.
The Company may, at its option, redeem the Bonds, either in whole or
from time to time in part, for a price equal to One Hundred Twenty percent
(120%) of the principal amount of the Bonds, together with interest accrued and
unpaid thereon to the Redemption Date, at any time after the date on which the
Sale Price of Common Stock for any twenty (20) consecutive Trading Days equaled
or exceeded Four Dollars ($4.00) per share (the "Redemption Mark") of the
Conversion Price then in effect. The Redemption Mark is subject to adjustment as
provided in the Indenture. Notice of any redemption shall be mailed by
first-class mail, postage prepaid to the registered Holders of the Bonds
designated for redemption at their addresses as the same shall appear on the
Bond Register not less than thirty (30) days, but not more than sixty (60) days
prior to the Redemption Date, subject to all the conditions and provisions of
the Indenture.
If this Bond, or a portion hereof, shall be redeemed by call for
redemption or shall be accepted for repayment upon the death of the Holder, and
payment be duly provided therefore as specified in the Indenture, interest shall
cease to accrue on this Bond or such portion hereof, as the case may be.
The indebtedness evidenced by this Bond is, to the extent provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, and this Bond is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Bond, by
accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such actions as may be
necessary or appropriate to effectuate the subordinate so provided and (c)
appoints the Trustee as the Holder's attorney-in-fact for any and all such
purposes.
Interest installments whose Stated Maturity is on or before the
Redemption Date or Repayment Date will be payable to the Holders of such Bonds,
or one or more Predecessor Bonds, of record at the close of business on the
relevant Record Date referred to on the face hereof, all as provided in the
Indenture. In the event of redemption or repayment of this Bond in part only, a
new Bond or Bonds for the unredeemed or unrepaid portion hereof shall be issued
in the name of the Holder hereof upon the cancellation hereof.
In the event of redemption or conversion of this Bond in part only, a
new Bond or Bonds for the unredeemed or unconverted portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.
This Indebtedness is secured by the Collateral Stock, as provided in
the Indenture. The Indenture contains certain provisions permitting the Holders
of specified percentages in aggregate principal amount of the Bonds at the time
Outstanding, as defined in the Indenture, on behalf of the Holders of all Bonds,
to enforce the security interest of the Holders, or to waive such enforcement or
to release all or any portion of the Collateral Stock. Each Holder agrees to be
bound by such provisions, authorizes Trustee to take such actions as may be
approved or directed by the Holders of the specified percentage in aggregate
principal amounts of the Bonds at the time Outstanding, as defined in the
Indenture, and appoints Trustee as the Holder's attorney in fact for all such
purposes.
If an Event of Default as defined in the Indenture shall occur and be
continuing, the principal of all the Bonds may be declared due and payable in
the manner and with the effect provided in the Indenture. The Company shall pay
all reasonable costs of collection in the manner provided in the Indenture. The
Indenture provides that such declaration and its consequences may, in certain
events, be annulled by the Holders of a majority in principal amount of the
Bonds Outstanding.
The Indenture permits, with certain exceptions, as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Bonds under the Indenture at any
time by the Company with consent of the Holders of a majority in aggregate
principal amount of the Bonds at the time Outstanding, as defined in the
Indenture. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Bonds at the time
Outstanding, as defined in the Indenture, on behalf of the Holders of all Bonds,
to waive compliance by the Company with certain provisions of the Indenture and
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Bond shall be conclusive and binding upon such
Holder and upon all future Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof, whether
or not notation of such consent or waiver is made upon this Bond.
No reference herein to the Indenture and no provisions of this Bond or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Bond at the time, places and rate, and in the coin and
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, this Bond is transferable on the Bond Register of the Company, upon
surrender of this Bond for registration of transfer at the office or agency of
the Company to be maintained for that purpose, which may be the Principal
Corporate Trust Office, or at such other office or agency as may be established
by the Company for such purpose pursuant to the Indenture, duly endorsed by, or
accompanied by written instrument of transfer in form satisfactory to the
company and the Bond Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The debentures are issuable only in registered form, without coupons,
in denominations of $1,000 and any integral multiple thereof, as provided in the
Indenture and subject to certain limitations therein set forth. Bonds are
exchangeable for a like aggregate principal amount of Bonds of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such transfer or exchange, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
All terms used in this Bond which are defined in the Indenture have the
meanings assigned to them in the Indenture.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the person in whose name this Bond is registered as the owner hereof
for all purposes, whether or not this Bond be overdue, and neither the Company,
the Trustee, nor any such agent shall be affected by notice to the contrary.
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this Bond, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - ............CUSTODIAN.............
(Cust) (Minor)
under Uniform Gifts to Minors Act
..................................
(State)
Additional abbreviations may also be used through not in the above list.
--------------------
FORM OF TRANSFER
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
Please print or typewrite name of Transferee
________________________________________________________________________________
Please print or typewrite address of Transferee
________________________________________________________________________________
Please print or typewrite Social Security or
other identifying number of Transferee
the within Bond of ILX Incorporated and does here irrevocably constitute and
appoint _______________________________________________________________ Attorney
to transfer the said Bond on the books of the within-named issuer, with full
power of substitution in the premises.
Dated: ___________________________________________________
__________________________________________________________
Signature of Transferor
NOTICE: The signature to this transfer must correspond with
the name as written upon the face of this Bond in every
particular without alteration or enlargement or any change
whatsoever.
Signature Guaranteed:
__________________________________________________________
The signature must be guaranteed by an officer of a commer-
cial bank or trust company, or by a member firm of a
national securities exchange. Notarized or witnessed
signatures are not acceptable.
<TABLE>
ILX INCORPORATED
STATEMENT RE COMPUTATION OF NET INCOME (LOSS)
<CAPTION>
Year ended December 31.
9 Months 9 Months -----------------------------------------------------------------------------
Ended Ended 1994 1993 1992 1991 1990
9/30/95 9/30/94
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PRIMARY:
Net income (loss) $1,540,100 $1,994,921 $ 2,148,287 $ 2,076,231 $ 1,325,874 ($307,051) ($1,602,093)
Less: Cumulative
preferred dividends (52,471) (37,208) (33,529) (7,641)
------------------------------------------------------------------------------------------------------------
$1,487,629 $1,957,713 $ 2,114,758 $ 2,068,590 $ 1,325,874 ($307,051) ($1,602,093)
============================================================================================================
Weighted average common
shares outstanding before
common equivalents 12,473,623 12,328,084 12,344,257 11,605,513 11,229,991 7,858,277 5,668,865
Common equivalent stock
options/warrants 115,796 16,920 8,989 76,273
Common equivalent
preferred stock 110,000 110,000 110,000 110,000
-----------------------------------------------------------------------------------------------------------
12,699,419 12,455,004 12,463,246 11,791,786 11,229,991 7,858,277 5,668,865
===========================================================================================================
Net income (loss)
per share (dollars) $0.12 $0.16 $0.17 $0.18 $0.12 ($0.04) ($0.28)
===========================================================================================================
Pro-forma adjustment for
conversion of CAS Bonds
(Minimum) 800,000 800,000 800,000
Pro-forma income per
common equivalent share
(Minimum) $0.11 $0.15 $0.16
Pro-forma adjustment
for conversion of CAS
Bonds (Maximum) $2,000,000 2,000,000 2,000.000
Pro-forma income per
common equivalent
share (Maximum) $0.10 $0.14 $0.15
FULLY DILUTED:
Net income (loss)
per above $1,540,100 $1,994,921 $ 2,148,287 $ 2,076,231 $ 1,325,874 ($307,051) ($1,602,093)
============================================================================================================
Average common and
equivalent shares
per above 12,699,419 12,455,004 12,463,246 11,791,786 11,229,991 7,858,277 5,668,865
Common equivalent
preferred stock 488,573 509,121 507,988 509,420
------------------------------------------------------------------------------------------------------------
13,187,992 12,964,125 12,971,234 12,301,206 11,229,991 7,858,277 5,668,865
============================================================================================================
Net income (loss)
per share (dollars) $0.12 $0.15 $0.17 $0.17 $0.12 ($0.04) ($0.28)
============================================================================================================
</TABLE>
<TABLE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30 September 30, Years Ended December 31,
-------------------------------- --------------------- ------------------------------------------------------
1995 1994
Pro forma(1) Pro forma (1)
Maximum(2) Minimum(3) 1995 Maximum(2) Minimum(3) 1994 1993 1992 1991 1990
-------------------------------- --------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss)
before income taxes
and after minority
interest $1,228,499 $1,453,499 $1,603,499 $1,486,488 $1,786,488 $1,986,488 $1,976,231 $1,225,874 ($307,051) ($1,602,093)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Add fixed charges:
Interest expense 1,211,850 986,850 836,850 1,166,141 866,141 666,141 599,238 643,023 473,598 395,509
Amortization of debt
service 79,100 79,100 79,100 140,600 140,600 140,600 93,150 185,209 42,839
Rental expense 135,064 135,064 135,064 149,667 149,667 149,667 105,333 46,000
---------------------------------------------------------------------------------------------------------------
Total fixed charges 1,426,014 1,201,014 1,051,014 1,456,408 1,456,408 956,408 797,721 874,232 516,437 395,509
---------------------------------------------------------------------------------------------------------------
Net income (loss)
as adjusted $2,654,513 $2,654,513 $2,654,513 $2,942,896 $2,942,896 $2,942,896 $2,773,952 $2,100,106 $209,386 ($1,206,584)
===============================================================================================================
Fixed charges in
excess of earnings $307,051 $1,602,093
======================
Ratio of earnings to
fixed charges 1.86 2.21 2.53 2.02 2.54 3.08 3.48 2.40
<FN>
- ------------
(1) The pro forma ratios assume the CAS Bonds are outstanding during the
applicable periods and that the proceeds from issuance of such bonds are
not invested and do not earn a return.
(2) Assumes $5,000,000 of the CAS Bonds are outstanding during the applicable
periods.
(2) Assumes $2,000,000 of the CAS Bonds are outstanding during the applicable
periods.
</FN>
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1995 Commission File Number 33-16122
------------------- --------
ILX INCORPORATED
----------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2777 East Camelback Road, Phoenix, AZ 85016
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
-----------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at September 30, 1995
- ------------------------------- ---------------------------------
Common Stock, without par value 12,587,739 shares
Preferred Stock, $10 par value 412,517 shares
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,030,209 $ 3,635,587
Notes receivable, net 8,392,462 6,750,896
Resort property held for timeshare sales 18,042,711 9,407,733
Resort property under development 1,045,515 1,735,592
Land held for sale 1,672,168 1,673,168
Deferred assets 834,198 749,999
Property and equipment, net 1,360,473 1,437,227
Deferred income taxes 1,486,846 1,283,179
Other assets 2,129,279 1,730,023
------------ ------------
$ 36,993,861 $ 28,403,404
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 1,775,538 $ 1,581,659
Accrued and other liabilities 2,649,870 1,488,816
Income taxes payable 103,553 --
Genesis funds certificates 1,366,379 1,612,457
Due to affiliates 478,512 984,534
Deferred income 1,643 365,195
Notes payable 10,621,700 4,881,861
Notes payable to affiliates 2,438,757 2,000,584
------------ ------------
19,435,952 12,915,106
------------ ------------
Minority interests 2,876,855 2,531,169
------------ ------------
Shareholders' Equity
Preferred stock, $10 par value;
10,000,000 shares authorized;
412,517 and 430,313 shares issued
and outstanding; liquidation
preference of $4,125,170 and $4,303,130, respectively 1,523,476 1,648,755
Common stock, no par value;
40,000,000 shares authorized;
12,587,739 issued and 12,567,739 outstanding
at September 30, 1995 and 12,405,325 shares
issued and outstanding at December 31, 1994 9,309,501 8,972,969
Treasury stock, at cost, 20,000 shares (25,032) --
Additional paid in capital 30,160 30,000
Retained earnings 3,842,949 2,305,405
------------ ------------
14,681,054 12,957,129
------------ ------------
$ 36,993,861 $ 28,403,404
============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------ -------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Sales of timeshare interests $ 5,930,648 $ 5,828,785 $ 16,548,152 $ 14,094,357
Resort operating revenue 2,321,423 2,156,286 6,358,548 6,193,016
Sales of land -- 125,960 -- 2,184,638
Sales of consumer products 158,537 85,261 437,175 85,261
------------- ------------- ------------- -------------
8,410,608 8,196,292 23,343,875 22,557,272
------------- ------------- ------------- -------------
Cost of sales and operating expenses
Cost of timeshare interests sold 2,286,937 2,076,327 6,089,296 4,862,089
Cost of resort operations 2,729,194 1,954,948 6,569,344 5,596,774
Cost of land sold -- 106,520 -- 1,741,477
Cost of consumer products 120,989 41,733 293,359 41,733
Advertising and promotion 1,804,247 1,612,740 4,819,673 3,983,606
General and administrative 795,356 894,947 2,281,762 1,833,899
Provision for doubtful accounts 347,598 341,893 950,917 808,694
------------- ------------- ------------- -------------
8,084,321 7,029,108 21,004,351 18,868,272
------------- ------------- ------------- -------------
Operating income 326,287 1,167,184 2,339,524 3,689,000
Other income (expense)
Interest expense (380,611) (166,298) (836,850) (466,109)
Interest income 161,562 90,217 446,511 232,288
------------- ------------- ------------- -------------
Income before minority interests 107,238 1,091,103 1,949,185 3,455,179
and income taxes
Minority interest 948 (380,229) (345,686) (1,218,440)
Income taxes 384,727 (241,818) (63,399) (241,818)
------------- ------------- ------------- -------------
Net income $ 492,913 $ 469,056 $ 1,540,100 $ 1,994,921
============= ============= ============= =============
Net income per common and
equivalent share $ 0.04 $ 0.04 $ 0.12 $ 0.16
============= ============= ============= =============
Number of common and equivalent
shares 13,009,355 12,487,878 12,699,419 12,455,004
============= ============= ============= =============
Net income per share assuming
full dilution $ 0.04 $ 0.04 $ 0.12 $ 0.15
============= ============= ============= =============
Number of fully diluted shares 13,493,935 12,996,703 13,187,992 12,964,125
============= ============= ============= =============
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended
September 30,
------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,540,100 $ 1,994,921
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Undistributed minority interest 345,686 538,712
Additions to notes receivable (9,018,079) (6,848,448)
Proceeds from sale of notes receivable 6,425,596 6,842,216
Provision for doubtful accounts 950,917 808,694
Depreciation and amortization 491,086 489,310
Increase in deferred income taxes (203,667) (364,909)
Amortization of guarantee fees 79,100 104,950
Change in assets and liabilities:
(Increase) decrease in resort property held for timeshare sales (5,655,558) 463,525
Increase in resort property under development (344,115) (55,825)
Decrease in land held for sale 1,000 1,401,600
Increase in other assets (408,206) (1,111,796)
Increase (decrease) in accounts payable 193,879 (452,013)
Increase in accrued and other liabilities 1,056,124 409,309
Increase in income taxes payable 103,553 45,488
Decrease in Genesis funds certificates (246,078) (560,683)
Decrease in due to affiliates (506,022) (157,033)
Decrease in deferred income (363,552) (456,899)
------------- -------------
Net cash (used in) provided by operating activities (5,558,236) 3,091,119
------------- -------------
Cash flows from investing activities:
Increase in deferred assets (163,299) (843,304)
Purchases of plant and equipment (112,210) (754,273)
------------- -------------
Net cash used in investing activities (275,509) (1,597,577)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable to affiliates 900,000 --
Principal payments on notes payable to affiliates (461,827) (502,888)
Proceeds from notes payable 7,715,212 1,254,666
Principal payments on notes payable (3,973,773) (2,840,927)
Proceeds from issuance of common stock 74,181 93,535
Acquisition of treasury stock (25,032) --
Redemption of preferred stock (185) (4,235)
Redemption of common stock (185) (1,786)
Preferred stock dividend payments (24) --
------------- -------------
Net cash provided by (used in) financing activities 4,228,367 (2,001,635)
------------- -------------
Net decrease in cash and cash equivalents (1,605,378) (508,093)
Cash and cash equivalents at beginning of period 3,635,587 2,060,107
------------- -------------
Cash and cash equivalents at end of period $ 2,030,209 $ 1,552,014
============= =============
See notes to consolidated financial statements
</TABLE>
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
- ---------------------------------------------------
The Company's significant business activities include developing, operating,
marketing and financing ownership interests in resort properties and, effective
in the third quarter of 1994, marketing of skin and hair care products.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three and nine month periods ended September 30, 1995, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. The accompanying financial statements should be read in conjunction with
the Company's most recent audited financial statements.
The consolidated financial statements include the accounts of ILX Incorporated
and its wholly-owned and majority-owned subsidiaries ("ILX" or the "Company").
All significant intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition
- -------------------
Revenue from sales of timeshare interests is recognized in accordance with
Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real
Estate ("SFAS No. 66"). No sales are recognized until such time as a minimum of
10% of the purchase price has been received in cash, the buyer is committed to
continued payments of the remaining purchase price and the Company has been
released of all future obligations for the timeshare interest. Revenue from
sales of timeshare interests in Varsity Clubs of America-Notre Dame were
recognized by the percentage of completion method as development and
construction proceeded and as the costs of development and profit could be
reasonably estimated through August 15, 1995, when the property was complete.
Resort operating revenue represents daily room rentals and revenues from food
and other resort services. Such revenues are recorded as the rooms are rented or
the services are performed.
Statements of Cash Flows
- ------------------------
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the three and nine month periods ended September
30, 1995 and 1994, the Company paid interest and income taxes and capitalized
interest to resort property held for sale and under development as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----
Interest $341,944 $156,598 $924,602 $394,054
Income taxes $ 2,786 $255,237 $136,286 $561,287
Interest Capitalized $ 89,577 $ 9,254 $216,380 $ 20,801
Reclassifications
- -----------------
The financial statements for prior periods have been reclassified to be
consistent with the 1995 financial statement presentation.
Note 2 - Income Taxes
The deferred tax asset valuation allowance decreased by $428,000 and $578,000
for the three and nine month periods ending September 30, 1995 and $0 and
$610,000 for the three and nine month periods ending September 30, 1994 to
reflect management's estimate of the future benefit to be provided from the
utilization of Genesis's net operating loss carryovers in 1995 and Los Abrigados
tax benefits in 1994. The valuation allowance is periodically reduced as
management develops new tax planning strategies to ensure that the Company will
benefit from the loss carryovers and other tax benefits. The decrease in the
valuation allowance reflects management's estimate that the loss carryovers and
tax benefits will more likely than not be utilized.
Note 3 - Notes Payable
In March 1995, the first deed of trust holder on the Golden Eagle Resort loaned
an additional $1,010,075 against its interest in the property and its assignment
of the Company's general partnership interest in LAP and extended the maturity
date through 1998.
During the first six months of 1995, the Company borrowed $4,068,049 on its $5
million construction financing commitment for the Varsity Clubs of America-Notre
Dame facility and paid $644,190 in release payments, bringing the balance
outstanding on the loan to $3,824,643 at September 30, 1995.
Note 4 - Notes Payable to Affiliates
In July 1995, the Company borrowed $900,000 from affiliates, secured by 320
timeshare interests in the Los Abrigados resort. The note bears interest at
13.5%, with interest due monthly and the principal due in full in July 1998.
Note 5 - Shareholders' Equity
During the first nine months of 1995, holders of 7,248 shares of Series C
Preferred Stock exchanged their shares for 12,080 shares of common stock. The
exchanges were recorded as a reduction in preferred stock and an increase in
common stock of $20,004. Shares of stock valued at $2,532 and cash of $24 were
issued in the first nine months of 1995 for the Dividend Arrearage due to the
holders of Series C Preferred Stock who converted their shares in the last
quarter of 1994 and first nine months of 1995.
During the second quarter of 1995, the Company acquired 20,000 shares of its
common stock for $25,032. The acquired shares have been recorded as treasury
stock.
During the first nine months of 1995, the Company granted 18,600 shares of
restricted common stock, valued at $14,806, to employees in exchange for
services provided.
In July 1995, the Company granted options for 25,000 shares each to two
directors in exchange for services to be provided in the future. The exercise
price for the options is $2 per share and the options expire in July 2000.
Effective June 1995, the Company entered into a one year consulting agreement
for investor relations, broker relations and public relations services. In
exchange for the services to be provided, the Company issued 50,000 shares of
restricted common stock and will issue an additional 50,000 shares in January
1996. The shares have been valued at $1.1875 per share and the cost is being
recognized over a one year period. In addition, the Company granted options for
400,000 shares of common stock at $1.25 per share and 100,000 shares of common
stock at $1.625 per share. The options expire in June 1997.
Note 6 - Kohl's Ranch Lodge
In June 1995, the Company acquired the Kohl's Ranch Lodge, a 10 acre rustic
resort near Payson, Arizona for a purchase price of $1,590,000, consisting of a
$50,000 cash down payment, assumption of an existing deed of trust of
approximately $932,250, issuance of a $367,750 second deed of trust to the
seller and the issuance of 120,000 shares of ILX restricted common stock valued
at $2 per share. The Company began offering timeshare intervals in the property
in the third quarter of 1995. The assumed first mortgage bears interest at prime
plus 1 1/4%, with $3,000 principal plus accrued interest payable monthly through
December 1, when the remaining balance will begin being amortized over 36 equal
monthly installments of principal and interest through December 1998. Release
fees of $750 per interval sold are applied to principal. The note payable to the
seller bears interest at 8%, with the first year's interest to be added to
principal on June 1, 1996. Principal of $7,500 plus accrued interest is payable
monthly thereafter through June 2000. Release fees of $300 per interval sold are
applied to principal.
Note 7 - Varsity Clubs of America-Tucson
In July 1995, the Company acquired a two acre site in Tucson, Arizona, near the
University of Arizona, to be the site of its second Varsity Clubs of America.
The land was acquired for $1,002,000, consisting of a $300,600 down payment and
a note payable secured by a deed of trust to the seller of $701,400. The note
bears interest at 9.75%, payable in three equal annual payments of principal and
interest of $280,803 through June 1998.
Note 8 - Bond Offering
In June 1995, the Company signed a letter of intent to offer to the public $10
million in convertible secured bonds through Brookstreet Securities Corporation
("Brookstreet"). Subsequently, the offering was reduced to $3,000,000, with a
$450,000 over allotment option. The bonds will have a five year maturity, bear
interest at 10%, and will be convertible to common stock at prices tied to
market rates, with a minimum price of $2.50 per share. The offering is scheduled
for November 1995.
Note 9 - Other
In September 1995, the Company, through a limited partnership in which a
subsidiary of the Company is an 80% general partner, entered into an agreement
to acquire and develop the "Orangemen Club" at the Hotel Syracuse in Syracuse,
New York. The partnership intends to refurbish a portion of the Hotel Syracuse
into timeshare suites and market interests in these suites, together with the
rights to use certain common areas of the hotel. The partnership has a loan
commitment for $5 million for acquisition and construction financing and $30
million in receivables financing.
<PAGE>
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The increases in sales of timeshare interests from $5,828,785 in the third
quarter of 1994 to $5,930,648 in the third quarter of 1995 and from $14,094,357
for the first three quarters of 1994 to $16,548,152 for the first three quarters
of 1995 reflect 1995 sales of interests in Varsity Clubs of America-Notre Dame
and in the Kohl's Ranch Lodge, net of a decrease in sales made from the Phoenix
Sales Office. Sales of interests in Varsity Clubs of America-Notre Dame were
$1,387,727 for the third quarter and $4,329,074 for the first three quarters of
1995. Year-to-date 1995 Varsity Clubs of America-Notre Dame sales include
approximately $513,000 in sales made in 1994 for which recognition was deferred
until 1995, when it was recognized as a percentage of completion. 95.5% of the
1994 and first half 1995 sales were recognized in the first half of 1995, and
the remaining 4.5% (approximately $139,000) was recognized in the third quarter
of 1995. Sales in the Kohl's Ranch Lodge commenced in the third quarter of 1995
and were approximately $339,000 for the quarter.
The Sedona Sales Office closing rates (number of timeshare sales divided by
number of timeshare tours) increased from 1994 to 1995 for both the third
quarter and year-to-date. Sales in the Sedona Sales Office, including upgrades
by existing customers, increased by approximately $1.1 million from the first
three quarters of 1994 to the same period in 1995. Sales from the Sedona office
decreased by approximately $264,000 from the third quarter of 1994 to the third
quarter of 1995 due to a reduced number of timeshare tours, in part as a result
of the allocation of tours to the new Kohl's Ranch Lodge Sales Office.
On April 1, 1995, the Company closed the Phoenix Sales Office, which had sold
primarily interests in Los Abrigados, in favor of directing all Phoenix area
potential customers to the Sedona Sales Office. The Sedona Sales Office has had
consistently higher closing rates than the Phoenix Sales Office. The Phoenix
Sales Office generated approximately $3.7 million in timeshare sales in the
first nine months of 1994 and approximately $771,000 in 1995, prior to closure
of the office.
Year-to-date September 30, 1994, sales of timeshare interests include the
recognition of $428,100 in deferred revenue from a 1992 bulk sale.
The increases between 1994 and 1995 in cost of timeshare interests sold as a
percentage of sales for both the third quarter and first three quarters reflect
improvements to Los Abrigados and sales of interests in Varsity Clubs of
America-Notre Dame, which have a higher product cost as a percentage of revenue
than interests in Los Abrigados.
The increases in resort operating revenue from $2,156,286 for the third quarter
of 1994 to $2,321,423 for the third quarter of 1995 and from $6,193,016 for the
first three quarters of 1994 to $6,358,548 for the first three quarters of 1995
reflect revenue from Varsity Clubs of America-Notre Dame which opened in mid
August 1995 and revenue from the Kohl's Ranch Lodge which was acquired on June
1, 1995, net of reduced room revenue at the Los Abrigados resort as a result of
the decreasing availability of rooms for traditional resort guests.
Cost of resort operations has increased as a percentage of resort operating
revenue from 1994 to 1995 both for the third quarter and the first three
quarters because of the start up of operations at Kohl's Ranch Lodge and Varsity
Clubs of America-Notre Dame and the decreasing occupancy of traditional resort
guests at Los Abrigados as timeshare owners and prospective purchasers, who pay
substantially reduced rates for their room usage, utilize a greater portion of
the facilities. Kohl's Ranch Lodge is being renovated to provide improvements
necessary for timeshare marketing of the property and, as a result, occupancy
during the third quarter was low.
The 1994 sales of land and associated cost of sales reflect sales of parcels
held by Genesis.
Sales of consumer products increased from $85,261 for the third quarter of 1994
to $158,537 for the third quarter of 1995 and from $85,261 for the first three
quarters of 1994 to $437,175 for the first three quarters of 1995. Sales of Red
Rock Collection products commenced in the third quarter 1994. The increase in
the cost of consumer products as a percentage of sales of consumer products
reflects the shift away from the multi-level marketing of Red Rock Collection
products (high prices and high commissions) to consumer and business sales (at
reduced prices and reduced commissions).
Advertising and promotion expenses relate primarily to sales of timeshare
interests. Advertising and promotion as a percentage of timeshare sales
increased slightly from the first three quarters of 1994 to the first three
quarters of 1995 in part because 1994 included the recognition of $428,100 in
deferred revenue for which there was no associated advertising and promotion.
Advertising and promotion increased as a percentage of sales from the third
quarter of 1994 to the third quarter of 1995 due to the startup of marketing
efforts for the Kohl's Ranch Lodge and increased costs of generating tours to
the Sedona Sales Office.
General and administrative expenses declined in dollars and as a percentage of
sales from the third quarter of 1994 to the third quarter of 1995 due to
operating efficiencies. The increase in general and administrative expense for
the first three quarters of 1995 from the same period in 1994 reflects the
recognition in each of the three quarters of 1995 of Red Rock Collection
operating expenses. Red Rock Collection operating expenses were deferred during
the first six months of 1994, pending commencement of operations in the third
quarter of 1994.
The provision for doubtful accounts arises primarily from sales of timeshare
interests and is comparable as a percentage of sales of timeshare interests
between both the third quarter and first three quarters of 1994 and 1995.
The increases in interest expense between years reflect increased borrowings
against consumer paper, interest on notes payable arising from the acquisition
of the Los Abrigados Partners Limited Partnership ("LAP") Class A limited
partnership interests in the third quarter of 1994, and borrowings for
construction of and improvements to resort property held for sale. The increases
in interest income from 1994 to 1995 are a result of the increased consumer
paper retained by the Company.
The decreases in minority interests from 1994 to 1995 reflect the acquisition of
the LAP Class A limited partnership interests, the decrease in LAP net income in
1995 and the minority interests in the income generated from second quarter 1994
Genesis land sales. The decrease in LAP net income between years is a result of
closure of the Phoenix Sales Office and reduced tours and closing rates prior to
the closure, and reduced profitability from Los Abrigados hotel operations due
to decreased availability of rooms for resort guests.
Income tax expense decreased from a provision of $241,818 in the third quarter
of 1994 to a $384,727 benefit in the third quarter of 1995 and from a provision
of $241,818 for the first three quarters of 1994 to a provision of $63,399 for
the first three quarters of 1995. The decreases arise because of the reduction
in the Genesis deferred tax benefit valuation allowance, due to tax planning
strategies which management believes will more likely than not fully utilize
Genesis NOL carryforwards.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs principally arise from the necessity of financing
notes received from sales of timeshare interests. In that regard, the Company
has $13 million in lines of credit issued by a financing company under which
conforming notes from sales of interval interests in Los Abrigados and the
Golden Eagle Resort can be sold on a recourse basis through September 1996. In
addition, the Company has an open ended arrangement with a finance company which
is expected to provide financing of at least $5 million through 1996. At
September 30, 1995, approximately $9 million is available under the fixed
commitment lines and approximately $3 million is expected to be available on the
open ended line. In addition, the Company has a financing commitment whereby the
Company may borrow up to $2.5 million against non-conforming notes through
September 1998. Approximately $900,000 was available under this commitment at
September 30, 1995.
The Company also has a $10 million financing commitment whereby the Company may
sell eligible notes received from sales of timeshare interests in Varsity Clubs
of America-Notre Dame on a recourse basis through February 1996. The commitment
may be extended for an additional eighteen month period and an additional $10
million at the option of the financing company. Approximately $8.6 million was
available under this commitment at September 30, 1995.
The Company has a financing commitment whereby it may borrow up to $10 million
against eligible notes received from sales of timeshare interests in the Kohl's
Ranch Lodge through September 1997. This commitment was unused at September 30,
1995.
The Company will continue to retain certain non-conforming notes which have one
to two year terms or which do not otherwise meet existing financing criteria,
and finance these notes either through internal funds or through borrowings from
affiliates secured by the non-conforming notes. The Company will pursue
additional credit facilities to finance conforming and non-conforming notes as
the need for such financing arises.
The Company has a $500,000 line of credit from one financial institution and a
$400,000 line of credit from another. $400,000 was available on the lines for
working capital at September 30, 1995.
The Company has optioned property near various college campuses for possible
future Varsity Clubs of America sites and expects to finance such land
acquisitions through seller financing or through financial institutions, secured
by the land acquired. The Company may seek equity and/or debt financing for the
construction of facilities and future sites.
Cash provided by operating activities of $3,091,119 in 1994 decreased to cash
used in operating activities in 1995 of $5,558,236 due to greater additions to
resort property held for timeshare sales for Varsity Clubs of America-Notre Dame
in 1995, because 1994 included the collection of $750,000 on a note receivable
which arose from a 1992 bulk sale and the collection of $1,000,000 on a Genesis
mortgage receivable and because in 1995 more notes receivable from timeshare
sales were retained and used as security for borrowing, rather than sold. In
addition, 1994 cash flows from operating activities included Genesis land sales
of $2,048,678.
Cash used in investing activities decreased from $1,597,577 in 1994 to $275,509
in 1995 because 1994 includes investments in Red Rock Collection deferred assets
and the acquisition of the Red Rock Collection office and warehouse facility.
The change from cash used in financing activities in 1994 of $2,001,635 to cash
provided by financing activities in 1995 of $4,228,367 reflects increased
borrowings in 1995 for construction of Varsity Clubs of America-Notre Dame and
for improvements to the Los Abrigados resort.
In March 1995, the Company borrowed an additional $1,010,000 from The Steele
Foundation, Inc., the first mortgage holder on the Golden Eagle Resort. The
Company has used these funds for further expansion of food and beverage
facilities, refurbishment of suites and the construction of additional
administrative facilities at Los Abrigados resort.
In June 1995, the Company acquired the Kohl's Ranch Lodge, a ten acre rustic
resort near Payson, Arizona for $1,590,000, consisting of a $50,000 cash down
payment, assumption of the existing deed of trust of $932,250, seller financing
of $367,750, and the issuance of 120,000 shares of ILX restricted common stock
valued at $2 per share. Construction of additional units and future improvements
may be financed through the existing deed of trust holder, other financing
sources, or from working capital.
In June 1995, the Company signed a letter of intent to offer to the public
$10,000,000 in convertible secured bonds through Brookstreet Securities
Corporation ("Brookstreet"). In October 1995, the terms of the offering were
reduced to provide for $3,000,000, in convertible secured bonds, with a $450,000
overallotment option. The bonds will have a five year maturity, bear interest at
10%, and will be convertible to common stock at prices tied to market rates,
with a minimum price of $2.50 per share. The offering is scheduled for November
1995. The Company intends to use the proceeds of the offering for Varsity Clubs
of America expansion and repayment of high interest debt obligations.
In July 1995, the Company acquired land near the University of Arizona to be the
site of its second Varsity Clubs of America. The Company made a down payment of
$300,600 and the seller is carrying the balance of $701,400. The Company has
received a commitment for construction financing for the facility in the amount
of $6 million, which is expected to be sufficient to build and furnish the
property and a commitment for up to $20 million in financing for eligible notes
received from sales of timeshare interests in the property.
In July 1995, the Company borrowed $900,000 from Joseph P. Martori and Cynthia
J. Polich as Trustees for Cynthia J. Polich and Edward John Martori (an
affiliate), secured by 320 timeshare interests in the Los Abrigados resort. The
Company used these funds for refurbishment at Los Abrigados.
In September 1995, the Company, through a subsidiary, entered into an agreement
to acquire a portion of the Hotel Syracuse in Syracuse, New York and to develop
and market timeshare interests in the property. The Company has a financing
commitment for $5 million in acquisition and development non-recourse financing,
which is expected to be sufficient to acquire and construct the suites, and $30
million in receivables financing through September 1998.
Although no assurances can be made, based on the prior success of the Company in
obtaining necessary financings for operations and for expansion, the Company
believes that with its existing financing commitments, its cash flow from
operations and the contemplated financings discussed above, the Company will
have adequate resources for at least the next twelve to twenty-four months.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ILX INCORPORATED
(Registrant)
/s/ Joseph P. Martori
----------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
------------------
Nancy J. Stone
Executive Vice President/
Chief Financial Officer
/s/ Denise L. Janda
-------------------
Denise L. Janda
Vice President/Controller
Date: November 10, 1995
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 4 to
Registration Statement No. 33-61477 of ILX Incorporated on Form S-2 of our
report dated March 10, 1995, included in the Annual Report on Form 10-K/A-3 of
ILX Incorporated for the year ended December 31, 1994. We also consent to the
use of our report dated July 26, 1995, on the financial statements of Varsity
Clubs of America Incorporated as of December 31, 1994 and 1993, and for the year
ended December 31, 1994, appearing in the Prospectus, which is part of such
Registration Statement.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 15, 1995
INDEPENDENT APRAISER'S CONSENT
We consent to the incorpotation by reference in this Registration Statement of
ILX Incorporated of Form S-2 of our report dated July 17, 1995.
THE MENTOR GROUP, INCORPOTATED
The Mentor Group, Incorpotated
November 15, 1995
EXHIBIT 99
VALUATION OF THE COMMON STOCK OF
VARSITY CLUBS OF AMERICA INCORPORATED
AS OF
JULY 1995
Prepared By: Wesley E. Romberger
July 17, 1995
Board of Directors
C/O Mr. Joseph P. Martori
Chairman
ILX Incorporated
2777 E. Camelback Road
Phoenix, Arizona 85016
In accordance with your authorization, we have completed an analysis to estimate
the fair market value of 100% of the common stock of Varsity Clubs of America
Incorporated (hereinafter referred to as "VCA" or the "Company") as of July
1995. The study was performed for use by the Board of Directors of ILX
Incorporated ("ILX") in order to comply with Regulation 314(d) of the Trust
Indenture Act of 1939. The transaction involves a public offering of $5,000,000
of Convertible Adjustable Secured bonds ("CAS") secured by the common stock of
VCA.
Fair market value is defined as the price at which the property would change
hands between a willing buyer and a willing seller, neither being under
compulsion to buy or sell, and both having reasonable knowledge of relevant
facts.
In determining fair market value, we considered generally accepted procedures
for valuing nonpublicly-traded and closely-held companies. The application of
these procedures indicates a fair market value of the common stock of VCA, as of
July 1995, of $26,300,000, before consideration of the CAS bonds. .
This valuation was based on the premise that the company is and will continue to
be operated as a going concern.
No member of The Mentor Group, Incorporated has any financial interest in ILX,
VCA or the CAS bonds, the fee for the valuation report is not contingent upon
the value reported. We have no responsibility to update this report for events
and circumstances occurring after the date of this report.
In accordance with the terms of our engagement letter, this letter and
accompanying report is to be utilized only as stated in the engagement letter
dated July 12, 1995. This letter and accompanying report is not to be used,
circulated, quoted or otherwise referred to in whole or in part for any other
purpose or in any other document, except as stated in the Service Agreement
attached to and made a part of the engagement letter.
We appreciate this opportunity to serve you.
Best regards,
The Mentor Group, Inc.
DRB:WER
VALUATION OF THE COMMON STOCK OF
VARSITY CLUBS OF AMERICA INCORPORATED
AS OF
JULY 1995
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
Letter of Transmittal ii
Index of Schedules v
1.0 Introduction 1
2.0 Executive Summary - Valuation Methodology 3
3.0 Underlying Assets Approach 5
4.0 Market Approach 6
5.0 Income Approach 8
6.0 Discount for Small Capitalization 14
7.0 Discount for Lack of Marketability 14
8.0 Premium for Control 15
9.0 Conclusion of Value 16
10.0 Schedules 17
VALUATION OF THE COMMON STOCK OF
VARSITY CLUBS OF AMERICA INCORPORATED
AS OF
JULY 1995
INDEX OF SCHEDULES
Schedule A Discounted Cash Flow Approach
Schedule B Derivation of Discount Rate
Schedule C.1-C.4 Guideline Public Companies
- Income Statements and Balance Sheets
Schedule D Guideline Public Companies
- Ratio Analysis
Schedule E Guideline Public Companies
- Market Multiple Analysis
1.0 INTRODUCTION
The Mentor Group, Incorporated has been retained to estimate the fair
market value of 100% of the common stock of Varsity Clubs of America
Incorporated (hereinafter referred to as "VCA" or the "Company") as of
July 1995. The study was performed for use by the Board of Directors of
ILX Incorporated ("ILX") in order to comply with Regulation 314(d) of
the Trust Indenture Act of 1939. The transaction involves a public
offering of $5,000,000 of Convertible Adjustable Secured bonds ("CAS")
secured by the common stock of VCA.
Fair market value is defined as the price at which property would
change hands between a willing buyer and willing seller, when the
former is not under any compulsion to buy and the latter is not under
any compulsion to sell, both parties having reasonable knowledge of
relevant facts.
An established public market for the VCA stock does not exist. The
relevant factors that were taken into consideration included the
following:
1. The history and nature of the business
2. The economic outlook of the United States and that of the
specific industry
3. The book value of the Company's stock and the financial
condition of the business
4. The earnings capacity of the Company
5. The dividend-paying capacity of the Company
6. Whether or not the enterprise has goodwill or other
intangible value
7. Sales of the Company's stock and size of the block of
stock to be valued
8. The market price of publicly-traded stock of corporations
engaged in similar industries or lines of business.
During the course of our investigation, discussions were held with the
management of ILX, and the management of VCA, which provided the
history and nature of the Company, its industry and prospects for the
future.
Financial analysis has been based upon VCA's internally prepared
projected financial statements for the years ended December 31, 1995 to
1999. This information has been accepted as a reflection of overall
business operations and conditions.
In utilizing this financial information and following our discussions
with VCA management, any adjustments to the financial information are
incorporated in the notes of the discounted cash flow approach
(Schedule A.1).
2.0 EXECUTIVE SUMMARY - VALUATION METHODOLOGY
VCA has been valued as an ongoing business enterprise. The methods that
are most commonly used to value a business are the Value of Underlying
Assets or Cost Approach, the Market Approach, and the Income Approach.
The Underlying Assets Approach assigns fair market values to the
subject company's tangible and intangible assets and restates
shareholders' equity to account for the adjustments. A discussion is in
Section 3.0.
Under the Market Approach, stock sales of guideline publicly-traded
companies or transactions involving the sale of similar entities are
analyzed. This analysis is used to develop multiples of income
statement and/or balance sheet statistics. Consideration is given to
these multiples, especially in light of how the financial condition and
operating performance of the subject company compares to each of the
guideline companies. A presentation of the Market Approach is in
Section 4.0.
The Income Approach evaluates the present worth of the future economic
benefits that accrue to the investor or owner of a business. Future
cash flows are discounted to the present, or stabilized cash flows
capitalized, at a rate of return that is commensurate with the inherent
risk of the business. A presentation of the Income Approach is in
Section 5.0. Market multiples and rates of return, used in the Market
and Income Approaches, respectively, are determined from statistics on
publicly-traded companies. Accordingly, the valuation process requires
a comparative analysis of the subject company with these guideline
publicly-traded companies. Although it is clear that no two companies
are completely alike, it is possible to find publicly-traded companies
that are engaged in the same or similar line of business and affected
by similar economic and industry factors. Also, a stock investment in a
guideline company could represent an alternative to investing in the
subject company's stock.
As part of our valuation study, the financial condition and operating
performance of VCA was compared to each of the guideline companies
selected. Financial statements for these companies, for the most recent
12 months closest to the valuation date, and for the most recent
reported fiscal years, are presented in the accompanying Schedules C.1
- C.4.
In order to properly compare the subject company to its publicly-traded
peers, certain adjustments were required. An adjustment was necessary
to reflect the valuation of a position in this small nonpublicly-traded
company versus a minority shareholding in a large publicly-traded
company. This required a discount for the lack of marketability and a
premium for control, which are further discussed in Sections 7.0 and
8.0.
Additionally, in valuing the business enterprise by either the market
or income approach, consideration was given to the quality and
condition of the underlying assets. Those assets which produce goods or
provide services must be in reasonably good condition. If not, the
business enterprise value would be reduced to account for capital
expenditures required to place these assets in an appropriate
productive state. VCA has indicated that all operating assets necessary
to the conduct of business are in place and in good operating
condition.
Similar assumptions are necessary regarding net working capital
requirements. If, in the financial analysis, it is determined that VCA
has a deficiency of working capital, the business enterprise value
would be reduced by the amount of such deficiency (the actual net
working capital of the firm subtracted from an assumed working
capital). On the other hand, if the balance sheet and working capital
are favorable (i.e. providing more than would be required for normal
operations), this excess would be added to the business enterprise
value. The same is true of valuable assets not employed in the normal
business, such as excess land. In the instant case, working capital has
been assessed as adequate and there are no assets on the Company's
balance sheet which are not employed in the business.
3.0 UNDERLYING ASSET APPROACH
As stated above, the underlying asset approach assigns fair market
values to the company's tangible and intangible assets and restates
shareholder's equity to account for the adjustments. However, the
concept that a business interest is worth the value of its underlying
assets may be misleading, especially in the case of a going-concern.
This approach is more relevant to the extent that a significant portion
of the assets are liquid (a holding company with a portfolio of
marketable securities, for example) or to the extent that most of the
value resides in property. Unless liquidation of the assets is a
reasonable prospect, a substantial portion of VCA's value generally
lies in its going concern value, predicated upon its ability to
generate earnings in excess of the required return on its tangible
assets. This is more accurately valued under the discounted cash flow
approach. Accordingly, the underlying assets approach was not used in
this valuation study.
4.0 MARKET APPROACH
Due to the start-up nature of VCA, the traditional application of the
subject companies operating statistics to publicly-traded multiples was
not appropriate. Start-up company operations involve inordinate funding
of marketing, research, and overhead expenses when compared to
established operations. However, the public company information can be
utilized in this context to help form an impartial measure of the
performance of VCA in its projected operations.
The valuation process for a nonpublicly-traded business requires a
comparative analysis of the subject company with publicly traded
companies in the same industry or line of business in order to asses
financial and operating strength relative to similar operations.
Although it is clear that no two companies are completely alike, it is
possible to find publicly traded companies that are engaged in the same
or similar line of business. Also, a stock investment in the guideline
companies could represent an alternative to investing in VCA. The
guideline companies, as well as VCA, are all affected by similar
economic and industry factors.
A comprehensive list of companies in the timeshare industry, S.I.C.
Code 6531, was reviewed. The following criteria were used to select
companies for the comparative analysis:
1. The company's business operations are similar to VCA's.
2. The company has been profitable and adequate financial
data are available.
3. The company's stock is traded on an exchange, or in the
over-the-counter market.
Two companies, ILX Inc. (the parent company of VCA) and Fairfield
Community Inc., met the above criteria.
ILX offers a unique aspect to the valuation of VCA due to the fact that
it is the publicly traded parent of VCA. Therefore, additional
consideration was given to the operating results of ILX in conjunction
with the projections of VCA. This consideration took into account the
fact that ILX and VCA share overhead, management, and selling expenses.
However, the VCA expenses were considered to reflect actual expenses if
VCA was operated as a stand-alone entity.
While it can be argued that VCA should be valued based solely on ILX's
public value, this would not account for the unique risks and rewards
that VCA would face as a stand-alone operation. Therefore, the
operating results of the guideline companies were taken into
consideration when assessing VCA's projections and company risks, but
do not function as indicators of value.
5.0 INCOME APPROACH
The income approach used to value the Company was the discounted cash
flow technique. The underlying concept of this valuation method is that
the purchase of a corporation is analogous to the making of an
investment in an earnings generating asset. Accordingly, the value of
any such investment is directly related to the amount of the earnings
which can be generated by such property.
5.1 Discounted Cash Flow
The discounted debt-free cash flow technique involves the
discounting to present value, the projected cash flows
(excluding interest expense) and a terminal value using a
discount rate which is reflective of the risk in the
investment (See Section 5.2 for discussion of the
derivation of this rate).
The debt-free cash flow projections prepared by VCA for
the years ended December 1995 through December 1999 were
utilized. Cash flows are defined as debt-free net income
plus depreciation less capital expenditures and changes
in operating working capital.
The terminal value was determined by applying long term
growth expectations to 1999 cash flow. This assumption is
based on the Company continuing construction and sales of
three buildings a year which results in stabilized cash
flow in 1999. However, the long term growth could differ
significantly if the construction schedule is altered.
The terminal value cash flow was based on the projected
margins VCA expects to achieve over the period 1995 to
1999, adjusted for long term growth. Additionally,
adjustments were made to the corporate overhead expenses
to reflect VCA's limitation on management's bonuses.
Capital expenditures and the amortization of construction
costs were normalized at sustainable long term levels by
1999. The normalized long term sustainable debt-free cash
flow was then capitalized at the discount rate, net of a
long term rate of growth. The terminal value was then
discounted to the present.
The sum of the resultant present values indicates the
value of the total capital, from which debt is then
deducted to arrive at the value of the capital stock.
Since the CAS bonds are issued by the parent company ILX,
the valuation of VCA did not include the value of the
bonds at $5,000,000 as long term debt of VCA.
5.2 Derivation of Discount Rate
The Weighted Average Cost of Capital (WACC) provides an
expected rate of return for a company based on the
average debt structure of the guideline companies,
current market yield on equity and the current market
yield on long-term debt. These are combined in the
weighted average cost of capital equation as follows.
Ra = E(Re) + D(Rd)(1-T)
Where:
Ra = weighted average return required on total
capitalization (expected return on net assets)
E = equity percentage of total capitalization
Re = expected return required on the equity portion
of total capitalization
D = long-term debt percentage of total
capitalization Rd = rate of return required on
the debt portion of total capitalization
T = income taxes at an assumed marginal tax bracket
of 39% for state and federal taxes
Return on Equity
In order to determine the current market yield
requirement on equity, Re, the Capital Asset Pricing
Model (CAPM) was applied.(1) The CAPM has been
empirically tested and is a generally accepted model for
estimating an investor's required return on equity.
Hence, it estimates a company's cost of equity capital.
The CAPM is represented by the following algebraic
equation:
Re = Rf + (Rs) + B(Rp)
Where:
Re = expected return on equity capital Rf = risk free
return
B = beta or risk coefficient for the particular
investment
Rp = equity risk premium expected on an equity
investment n a diversified portfolio of common
stocks
- -------------
(1) W.F. Sharpe, Investments (Prentice Hall: Englewood Cliffs, New Jersey 1978)
Due to the long-term holding period assumption in the
valuation, the risk-free rate is considered commensurate
with the average yield on long-term U.S. Treasury Bonds.
Treasury Bond yields are "risk-free". That is, if they
are held to maturity, default risk is assumed to be
negligible. As of the valuation date, this yield was
6.54%.
The equity risk premium is the expected return in excess
of the risk-free rate which investors require for
investing in stocks. As of the valuation date, the equity
risk premium was 10.33%. An addition risk premium is
added to the equity risk premium to reflect the
additional risk associated with smaller capitalization
stocks. Based on industry research, this additional risk
premium would be 6.53% in rounded numbers, given the
potential market capitalization of VCA.
Beta is indicative of the risk of investments in
companies similar to VCA, as compared to the risk
associated with equity investments in a diversified
portfolio of common stocks. A diversified portfolio has a
beta of 1.0. The median beta for companies similar to VCA
was .80 based on an analysis of published statistics for
guideline companies with a range of 1.35 to 032. The beta
associated with ILX was utilized for VCA due to similar
operations. FFCI's beta was considered but not utilized
due to recent financial distress.
Company specific risk is also incorporated in the
expected return on equity, which accounts for the
additional risk factors an investor would have to bear in
this investment. These risks included lack of product
diversification, lack of national market shares
(increased risk), and depth of management (reduced risk).
Substitution of the risk free return and equity risk
premium, beta into the CAPM equation results in a market
yield on equity capital (Re) of 33.8%.
Return on Debt
The interest yield on long-term debt (Rd) was assumed to
approximate the cost of debt (construction and business
loans) for small timeshare firms. Thus, a rate of 13.0%
was utilized.
Capital Structure
The proportion of debt financing and equity financing is
an important component of the Weighted Average Cost of
Capital (WACC) calculation. We have calculated the
optimal industry capital structure as an average of the
capital structures of the comparable companies. The
optimal capital structure was estimated to be 75.0%
equity and 25.0% debt. This optimal capital structure was
then applied to the weighted returns on equity and debt
to arrive at the estimated WACC (rounded) of 27.3%
(Schedule B).
5.3 Capitalization Rate The capitalization rate utilized in
the terminal year was derived utilizing the constant growth
model. In this model, the capitalized rate equals the
discount rate less the expected long-term growth rate. In our
valuation analysis, we assumed a long-term growth rate of
3.0%, the estimated rate of long term inflation(2). This
growth was subtracted from the discount rate to arrive at an
estimated capitalization rate of 24.3% in round numbers.
-------------- (2) Per Wharton Econometric Group (WEFA)
6.0 DISCOUNT FOR SMALL CAPITALIZATION
The aggregate market value of the common stock of certain of the
guideline publicly-traded corporations is greater than VCA. In general,
larger corporation's stock have been found to trade at a higher price
ratio than smaller corporation's stock. This reflects the larger
corporations' access to capital markets, depth of management,
sophistication of business and solid market shares with often strong
public identities. This issue has been addressed in the Income Approach
by the incorporation of a small stock premium into the discount rate
calculation.
7.0 DISCOUNT FOR LACK OF MARKETABILITY
A major difference between VCA shares and those of the guideline public
companies is their lack of marketability. Since investors prefer
liquidity, a discount for lack of marketability must be applied to the
indicated value of equity when applying public company data.
Various studies on discounts related to the cost of going public
("flotation costs") have been published(3). These studies indicate
that discounts from registered freely-traded shares generally range
from 3% to 15% based on the size of the issue.
Based on capital structure, relative size of the issue and ILX's access
to capital markets, no lack of marketability discount is indicated for
the valuation.
- --------------
(3) Cost of Flotation of Registered Issues, 1971-72. Washington, D.C.,
Securities and Exchange Commission, 1974, page 9. This study is the most
curent version and is considered to be the most authoritative available.
8.0 PREMIUM FOR CONTROL
In the application of the income approach, an issue that must be
addressed is the additional value inherent in a controlling interest in
the Company. As contrasted to a minority interest, the controlling
interest has the ability to alter the firm's capital structure,
liquidate all or part of the company, elect directors, and declare
dividends, as well as other rights and privileges.
Extensive studies have been undertaken and published on control
premiums. During 1994, the average premium for the equity of all
companies was 38.0%, with median premiums of approximately 35%.(4)
- --------------
(4) Mergerstat Review -- 1994, W.T. Grimm and Associates. c1994.
The components of the premium for control are arguably divided between
the rights and privileges that control provides and the ability of the
controlling shareholder to effect operating efficiency. Moreover,
control premiums in recent years have decreased materially due to the
unavailability of debt financing to effect the purchases of companies.
Based upon the review of the projections and the level of associated
expenditures, the projections reflect both a minority and control
position utilization of the cash flows. Given the foregoing, no control
premium was applied to the indicated interest share value of the
Company.
9.0 CONCLUSION OF VALUE
In determining the fair market value of the common stock of VCA, the
following indicators of value were computed.
Underlying Assets Approach Not Appropriate
Public Company Market Approach: Not Appropriate
Discounted Cash Flow Approach $26,300,000
Accordingly, based upon our analysis of the foregoing factors and value
indicators, and our general understanding of the Company and its
industry, we estimate that the fair market value of 100% of the common
stock of Varsity Clubs of America, as of July 1995, is the rounded
amount of $26,300,000, before consideration of the CAS bonds.
SCHEDULES
<TABLE>
SCHEDULE A
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
DISCOUNTED CASH FLOW APPROACH
<CAPTION>
SIX MONTHS TERMINAL
1995 1996 1997 1998 1999 VALUE
---------- ---------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET TIMESHARE
REVENUES(1) 8,061,282 39,774,171 66,045,651 74,200,926 77,889,933
COST OF SALES
COST OF TIMESHARES(2) 1,778,670 22.1% 8,999,076 22.6% 15,093,820 22.9% 17,083,941 23.0% 18,004,371 23.1%
COMMISSIONS 1,370,418 17.0% 6,761,609 17.0% 11,227,761 17.0% 12,614,157 17.0% 13,241,289 17.0%
CLOSING COSTS 225,600 2.8% 1,188,480 3.0% 2,129,280 3.2% 2,436,480 3.3% 2,578,560 3.3%
PROVISIONS FOR
DOUBTFUL ACCOUNTS 483,677 6.0% 2,386,450 6.0% 3,962,739 6.0% 4,452,056 6.0% 4,673,396 6.0%
---------- ---------- ---------- ----------- ----------
TOTAL COST OF SALES 3,858,365 47.9% 19,335,615 48.6% 32,413,600 49.1% 36,586,634 49.3% 38,497,616 49.4%
GROSS PROFIT 4,202,917 52.1% 20,438,556 51.4% 33,632,051 50.9% 37,614,292 50.7% 39,392,317 50.6%
S G & A
CORPORATE OVERHEAD(3) 450,000 5.6% 950,000 2.4% 1,200,000 1.8% 2,000,000 2.7% 2,100,000 2.7%
SALES/PROCUREMENT
COSTS 1,410,000 17.5% 7,428,000 18.7% 13,308,000 20.1% 15,228,000 20.5% 16,116,000 20.7%
SALARIES 134,623 1.7% 664,229 1.7% 1,102,962 1.7% 1,239,155 1.7% 1,300,762 1.7%
GENERAL AND ADMIN. 176,542 2.2% 871,054 2.2% 1,446,400 2.2% 1,625,000 2.2% 1,705,790 2.2%
---------- ---------- ---------- ----------- ----------
TOTAL S G & A 2,171,165 26.9% 9,913,283 24.9% 17,057,362 25.8% 20,092,156 27.1% 21,222,551 27.2%
OPERATING INCOME
TIMESHARES 2,031,751 25.2% 10,525,273 26.5% 16,574,689 25.1% 17,522,137 23.6% 18,169,766 23.3%
OPERATING INCOME
RESORT(4) 0 310,630 1,151,214 1,824,603 2,420,625
---------- ---------- ---------- ----------- ----------
EARNINGS BEFORE
INTEREST AND TAX 2,031,751 25.2% 10,835,903 27.2% 17,725,903 26.8% 19,346,740 26.1% 20,590,391 26.4%
INCOME TAXES(5) 39% 792,383 9.8% 4,226,002 10.6% 6,913,102 10.5% 7,545,228 10.2% 8,030,252 10.3%
---------- ---------- ----------- ----------- ----------
DEBT-FREE NET INCOME 1,239,368 15.4% 6,609,901 16.6% 10,812,801 16.4% 11,801,511 15.9% 12,560,138 16.1%
PLUS NONCASH
EXPENSES(6) 1,778,670 8,999,076 15,093,820 17,083,941 18,004,371
LESS CHANGES IN
WORKING CAPITAL(7) (838,936) (2,219,001) (3,486,532) (3,664,518) (3,664,518)
LESS CAPITAL
EXPENDITURES
FOR TIMESHARES (4,950,000) (18,000,000) (18,000,000) (18,000,000) (18,000,000)
---------- ---------- ---------- ----------- ----------
CASH FLOW (2,770,897)-34.4% (4,610,025)-11.6% 4,420,089 6.7% 7,220,934 9.7% 8,899,992 11.4%
PRINCIPAL ACQUISITION
OF CONSTRUCTION
LOANS 4,950,000 18,000,000 18,000,000 18,000,000 18,000,000
PRINCIPAL REPAYMENTS OF
CONSTRUCTION LOANS(8) (1,778,670) (8,999,076) (15,093,820) (17,083,941) (18,004,371)
---------- ---------- ---------- ----------- ----------
DEBT FREE CASH FLOW 400,432 5.0% 4,390,899 11.0% 7,326,268 11.1% 8,136,994 11.0% 8,895,621 11.4%
DISCOUNT PERIOD 0.5 1.5 2.5 3.5 4.5
DISCOUNT RATE(9) 27.3%
TERMINAL VALUE(10) 36,607,493
DISCOUNT FACTORS 0.8863 0.6962 0.5469 0.4296 0.3375 0.3375
PRESENT VALUE OF
PERIODIC CASH FLOW 354,907 3,057,109 4,006,931 3,495,945 3,002,261
PRESENT VALUE OF
TERMINAL VALUE 12,354,984
INDICATED VALUE OF
EQUITY SECURITY 26,272,136
ROUNDED $26,300,000
===========
</TABLE>
SCHEDULE A.1
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
NOTES ON DISCOUNTED CASH FLOW APPROACH
1. PER ILX'S MANAGEMENT. ASSUMES BUILDING THREE LOCATIONS A YEAR
2. MANAGEMENT'S PROJECTIONS ADJUSTED TO REFLECT INDUSTRY PRACTICE OF
ACCELERATED RECOVERY OF CONSTRUCTION COSTS
3. MANAGEMENT'S PROJECTIONS ADJUSTED TO ACCOUNT FOR CAPPING OF EXECUTIVE
BONUS
4. BASED ON MANAGEMENT'S PROJECTIONS OF EXCESS ROOMS AT THE FOLLOWING:
AVERAGE 78% OCCUPANCY
AVERAGE ROOM RATE $80
EARNINGS BEFORE INTEREST AND TAX OF APPROXIMATELY 26% OF REVENUES
5. ASSUMES TOP MARGINAL FEDERAL AND STATE INCOME RATES
6. AMORTIZATION OF CONSTRUCTION COSTS
7. REFLECTS WORKING CASH INCREASES AND SPREAD ON NOTES RECEIVABLE
8. REFLECTS MATCHED RECOVERY OF LOANS TO AMORTIZED COST OF CONSTRUCTION
9. WEIGHTED AVERAGE COST OF CAPITAL. SEE SCHEDULE B
10. 1999 CASH FLOW / (DISCOUNT RATE LESS LONG-TERM GROWTH (11))
11. LONG TERM GROWTH IN CASH FLOW AT INFLATION OF 3%
SCHEDULE B
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
DERIVATION OF THE DISCOUNT RATE
RISK-FREE RETURN = LONG TERM U.S. GOVT BOND RATE 6.54% (1)
LONG-TERM EQUITY RISK PREMIUM 10.33% (2)
SMALL STOCK PREMIUM 6.53% (2)
SPECIFIC COMPANY RISK 4.00% (3)
EXPECTED REQUIRED RETURN ON DEBT FOR SUBJECT COMPANY 13.00%
EXPECTED SUBJECT COMPANY LONG-TERM DEBT AS % OF EQUITY 33.00%
EXPECTED SUBJECT COMPANY LONG-TERM DEBT AS A % OF
TOTAL CAPITALIZATION 25.00%
ASSUMED COMBINED FEDERAL & STATE EFFECTIVE TAX RATE 39.00%
<TABLE>
<CAPTION>
EXPECTED WEIGHTED
DEBT AS A % RETURN ON AVERAGE
GUIDELINE LEVERED OF MARKET UNLEVERED EQUITY COST OF
CORPORATIONS BETA EQUITY BETA CAPITAL CAPITAL
<S> <C> <C> <C> <C> <C>
- ------------ ------- ----------- ---------- --------- --------
(4) (A) (C) (D)
ILEX 1.61 31.8% 1.35
FFCI 0.67 182.2% 0.32
MEDIAN 107.0% 1.35 (5)
- ---------------------------------------------------------------------------------------
VCA 1.62 (B) 33.00% 33.80% 27.33%
- ---------------------------------------------------------------------------------------
ROUNDED 33.80% 27.30%
- ---------------------------------------------------------------------------------------
</TABLE>
COMPUTATIONAL NOTES:
(A) BETA UNLEVERED = BETA LEVERED/(1 + (BOOK DEBT/MKT EQUITY) x (1 - TAX
RATE))
(B) BETA LEVERED (SUBJECT) = BETA UNLEVERED x (1 + (SUBJECT BOOK DEBT/MKT
EQUITY) x (1 - TAX RATE)
(C) CAPITAL ASSET PRICING MODEL:
RETURN ON EQUITY = RISK-FREE RETURN + [SMALL STOCK PREMIUM + SPECIFIC
COMPANY RISK] + [ LEVERED BETA x L-T EQUITY RISK PREMIUM ]
(D) WEIGHTED AVERAGE COST OF CAPITAL (AFTER-TAX):
EXPECTED RETURN ON EQUITY x SUBJECT EQUITY AS A % OF CAPITALIZATION +
EXPECTED RETURN ON DEBT x (1 - TAX RATE) x SUBJECT DEBT AS A % OF
CAPITALIZATION
SOURCE OF DATA:
(1) 30 YEAR T-BOND YEILDS
(2) PER STOCKS, BONDS, BILLS, AND INFLATION 1995 YEARBOOK - IBBOTSON
ASSOCIATES, TABLE 7-6 P. 135.
(3) SPECIFIC COMPANY RISK WAS BASED ON THE FOLLOWING FACTORS RELATING TO THE
SUBJECT:
LACK OF PRODUCT DIVERSIF 3%
DEPTH OF MANAGEMENT -2%
LACK OF NATIONAL MARKET 3%
--------
TOTAL 4%
========
(4) CALCULATED AS THE COVARIANCE OF THE STOCK TO THE S&P 500 / STANDARD
DEVIATION OF THE S&P 500^2 OVER THE PERIOD THE STOCK WAS PUBLICLY TRADED
BASED ON MONTHLY CLOSING PRICES.
(5) ILEX UNLEVERED BETA SELECTED BASED ON SIMILAR FINANCIAL CHARACTERISTICS
OF STOCKS.
<TABLE>
SCHEDULE C.1
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - INCOME STATEMENTS AND MARKET DATA
TICKER: ILEX
COMPANY NAME: ILX INC
BUSINESS DESCRIPTION ZACKS EARNINGS ESTIMATES*** FY2
- ----------------------------------------------------------------
DEVELOPS, OPERATES, MARKETS AND FINANCES OWNERSHIP INTERESTS IN EPS
RESORT PROPERTIES; AND MARKETS AND SELLS SKIN AND HAIR CARE PE
PRODUCTS. Long Term Growth
- ----------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INCOME STATEMENTS 12MM FISCAL YEAR END
($ MILLIONS) -------- ---------------------------------------------------------------------------
Mar-95 % Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $30.453 100.0% $29.951 100.0% 20.459 100.0% $18.857 100.0% $6.096 100.0% $2.353 100.0%
Cost of Goods Sold 15.442 50.7% 15.295 51.1% 11.730 57.3% 16.298 86.4% 6.076 99.7% 0.969 41.2%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Gross Profit 15.011 49.3% 14.656 48.9% 8.729 42.7% 2.559 13.6% 0.020 0.3% 1.384 58.8%
SG&A 10.209 33.5% 9.540 31.9% 5.346 26.1% 0.000 0.0% 0.000 0.0% 2.037 86.6%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Operating Income Before
Depreciation and Taxes
(EBITDA) 4.802 15.8% 5.116 17.1% 3.383 16.5% 2.559 13.6% 0.020 0.3% (0.653) -27.8%
Depreciation 1.138 3.7% 1.062 3.5% 0.353 1.7% 0.271 1.4% 0.113 1.9% 0.031 1.3%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Earnings Before Interest
and Taxes (EBIT) 3.664 12.0% 4.054 13.5% 3.030 14.8% 2.288 12.1% (0.093) -1.5% (0.684) -29.1%
Interest Expense 0.706 2.3% 0.666 2.2% 0.599 2.9% 0.643 3.4% 0.474 7.8% 0.395 16.8%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Operating Pretax Income 2.958 9.7% 3.388 11.3% 2.431 11.9% 1.645 8.7% (0.567) -9.3% (1.079 -45.9%
Non Operating Income/Expense 0.447 1.5% 0.403 1.3% 0.360 1.8% 0.169 0.9% 0.187 3.1% 0.136 5.8%
Special Items 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.058 1.0% (0.659 -28.0%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Pretax Income 3.405 11.2% 3.791 12.7% 2.791 13.6% 1.814 9.6% (0.322) -5.3% (1.602) -68.1%
Income Taxes 0.113 0.4% (0.016) -0.1% (0.100) -0.5% (0.100) -0.5% 0.000 0.0% 0.000 0.0%
Minority Interest 1.265 4.2% 1.440 4.8% 0.815 4.0% 0.588 3.1% (0.015) -0.2% 0.000 0.0%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Income Before Adjustments 2.027 6.7% 2.367 7.9% 2.076 10.1% 1.326 7.0% (0.307) -5.0% (1.602 -68.1%
Extraordinary Items 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
Discontinued Operations 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
------- ------ ------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Income $2.027 6.7% $2.367 7.9% $2.076 10.1% $1.326 7.0% ($0.307) -5.0% ($1.602) -68.1%
======= ====== ======= ===== ====== ====== ======= ====== ======= ====== ======== ======
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRICE PER SHARE & BETA AT: Mar-95 Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Price Per Share on 11-Jul-95 $2.00 $1.130 $1.530 $0.690 $0.630 $0.060
Common Shares Outstanding 12.407 12.405 12.084 11.268 10.973 6.195
Market Capitalization $24.814 $13.956 $18.501 $7.741 $6.858 $0.384
Preferred Stock $1.557 $1.649 $1.673 $0.834 $1.100 $0.000
Current Beta 1.61
Debt - LT + ST $7.889 $6.882 $5.409 $4.865 $5.577 $2.551
Debt as a Percentage of MVIC 23.00% 30.60% 21.14% 36.20% 41.20% 86.91%
Market Value of Invested
Capital (MVIC) $34.260 $22.487 $25.583 $13.440 $13.535 $2.935
NOTES
- -----
1) ALL DATA OBTAINED FROM COMPUSTAT DATABASE UNLESS OTHERWISE NOTED.
2) BUSINESS DESCRIPTION OBTAINED FROM MOODY'S DATABASE.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
SCHEDULE C.2
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - BALANCE SHEETS
TICKER: ILEX
COMPANY NAME: ILX INC
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
BALANCE SHEETS 12MM FISCAL YEAR END
($ MILLIONS) --------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mar-95 Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
Cash & Equivalents $2.736 9.0% $3.636 12.7% $2.060 8.3% $0.716 4.5% $0.363 2.4% $0.173 3.1%
Net Receivables 7.504 24.8% 6.751 23.6% 6.672 26.8% 3.686 23.4% 1.956 13.0% 1.563 28.3%
Inventories 14.518 47.9% 12.816 44.8% 12.863 51.6% 9.798 62.2% 11.182 74.4% 2.559 46.3%
Other Current Assets 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Current Assets 24.758 81.7% 23.203 81.1% 21.595 86.7% 14.2 90.2% 13.501 89.8% 4.295 77.7%
Gross Plant, Property &
Equipment 0.0% 1.807 6.3% 0.0% 0.0% 0.0% 0.0%
Accumulated Depreciation 0.0% 0.37 1.3% 0.0% 0.0% 0.0%
Net Plant, Property & Equipment 1.397 4.6% 1.437 5.0% 0.0% 0.0% 0.0% 0.05 0.9%
Other Assets 4.135 13.7% 3.982 13.9% 3.312 13.3% 1.548 9.8% 1.526 10.2% 1.184 21.4%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL ASSETS $30.290 100.0% $28.622 100.0% $24.907 100.0% $15.748 100.0% $15.027 100.0% $5.529 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Debt in Current Liabilities $0.000 0.0% $3.237 11.3% $2.009 8.1% $1.658 10.5% $1.328 8.8% $2.042 36.9%
Accounts Payable 2.197 7.3% 1.582 5.5% 1.800 7.2% 0.719 4.6% 0.926 6.2% 0.411 7.4%
Other Current Liabilities 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Current Liabilities 2.197 7.3% 4.819 16.8% 3.809 15.3% 2.377 15.1% 2.254 15.0% 2.453 44.4%
Long Term Debt 7.889 26.0% 3.645 12.7% 3.400 13.7% 3.207 20.4% 4.249 28.3% 0.509 9.2%
Other Liabilities 6.738 22.2% 6.982 24.4% 7.157 28.7% 3.686 23.4% 3.428 22.8% 1.005 18.2%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL LIABILITIES 16.824 55.5% 15.446 54.0% 14.366 57.7% 9.27 58.9% 9.931 66.1% 3.967 71.7%
Preferred Stock 1.557 5.1% 1.649 5.8% 1.673 6.7% 0.834 5.3% 1.100 7.3% 0 0.0%
Common Stock 8.976 29.6% 8.973 31.4% 8.681 34.9% 7.533 47.8% 7.241 48.2% 4.5 81.4%
Capital Surplus 0.030 0.1% 0.030 0.1% 0.030 0.1% 0.030 0.2% 0 0.0% 0 0.0%
Retained Earnings 2.903 9.6% 2.524 8.8% 0.157 0.6% (1.919) -12.2% (3.245) -21.6% (2.938) -53.1%
Less: Treasury Stock 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL EQUITY 13.466 44.5% 13.176 46.0% 10.541 42.3% 6.478 41.1% 5.096 33.9% 1.562 28.3%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL LIABILITIES
& EQUITY $30.290 100.0% $28.622 100.0% $24.907 100.0% $15.748 100.0% $15.027 100.0% $5.529 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ====== ======
NOTES
1) ALL DATA OBTAINED FROM COMPUSTAT DATABASE UNLESS OTHERWISE NOTED.
</TABLE>
<TABLE>
SCHEDULE C.3
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - INCOME STATEMENTS AND MARKET DATA
TICKER: FFCI
COMPANY NAME: FAIRFIELD COMMUNITIES INC
BUSINESS DESCRIPTION ZACKS EARNINGS ESTIMATES***
HOLDING COMPANY WITH SUBSIDIARIES WHICH DEVELOP, CONSTRUCT, EPS
MARKET AND OPERATE RESORTS AND HOME DEVELOPMENT PROJECTS; AND PE
SELL FURNISHED VACATION INTERVALS, HOMES AND CONDOMINIUMS. Long Term Growth
Covariance
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INCOME STATEMENTS 12MM FISCAL YEAR END
---- --------------------------------------------------------------------------------------------
($ MILLIONS) Mar-95 % Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $115.722 100.0% $110.220 100.0% $108.728 100.0% $113.596 100.0% $131.959 100.0% $197.127 100.0%
Cost of Goods Sold 96.379 83.3% 88.822 80.6% 73.021 67.2% 73.650 64.8% 114.375 86.7% 164.093 83.2%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross Profit 19.343 16.7% 21.398 19.4% 35.707 32.8% 39.946 35.2% 17.584 13.3% 33.034 16.8%
SG&A 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Operating Income Before
Depreciation and Taxes 19.343 16.7% 21.398 19.4% 35.707 32.8% 39.946 35.2% 17.584 13.3% 33.034 16.8%
Depreciation 0.977 0.8% 0.923 0.8% 1.453 1.3% 1.379 1.2% 2.881 2.2% 3.501 1.8%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Earnings Before Interest
and Taxes (EBIT) 18.366 15.9% 20.475 18.6% 34.254 31.5% 38.567 34.0% 14.703 11.1% 29.533 15.0%
Interest Expense(3) 9.714 8.4% 10.528 9.6% 24.927 22.9% 35.780 31.5% 27.201 20.6% 38.197 19.4%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Operating Pretax Income 8.652 7.5% 9.947 9.0% 9.327 8.6% 2.787 2.5% (12.498) -9.5% (8.664) -4.4%
Non Operating
Income/Expense 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.618 0.5% 3.945 2.0%
Special Items 5.200 4.5% 5.200 4.7% 1.000 0.9% (14.010) -12.3% (19.884) -15.1% (54.182) -27.5%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Pretax Income 13.852 12.0% 15.147 13.7% 10.327 9.5% (11.223) -9.9% (31.764) -24.1% (58.901) -29.9%
Income Taxes 2.509 2.2% 2.878 2.6% 3.157 2.9% 0.812 0.7% 0.481 0.4% 0.740 0.4%
Minority Interest 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.913 0.7% 2.062 1.0%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net Income Before Adjustments 11.343 9.8% 12.269 11.1% 7.170 6.6% (12.035) -10.6% (33.158) -25.1% (61.703) -31.3%
Extraordinary Items 0.000 0.0% 0.000 0.0% 0.000 0.0% 125.895 110.8% 0.378 0.3% 0.000 0.0%
Discontinued Operations 0.000 0.0% 0.000 0.0% 0.000 0.0% (6.538) -5.8% (2.494) -1.9% (26.756) -13.6%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net Income $11.343 9.8% $12.269 11.1% $7.170 6.6% $107.322 94.5% ($35.274) -26.7% ($88.459) -44.9%
======== ===== ======= ====== ======== ====== ======== ====== ========== ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
PRICE PER SHARE & BETA AT: Mar-95 Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
- ------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Price Per Share on 11-Jul-95 $5.69 $5.50 $4.50 $0.34 $0.41 $0.28
Common Shares Outstanding 9.965 12.359 9.565 1.425 10.889 10.901
Market Capitalization $56.681 $67.975 $43.043 $0.490 $4.421 $3.063
Preferred Stock $0.000 $0.000 $0.000 $0.000 $0.000 $0.000
Current Beta 0.67
Debt ( LT + ST) 103.292 $111.943 $127.351 $182.302 $133.513 $156.085
Debt as a Percentage
of MVIC 64.6% 62.2% 74.7% 99.7% 96.8% 98.1%
Market Value of
Invested Capital (MVIC) $159.973 $179.918 $170.394 $182.792 $137.934 $159.148
NOTES
1) ALL DATA OBTAINED FROM COMPUSTAT DATABASE UNLESS OTHERWISE NOTED.
2) BUSINESS DESCRIPTION OBTAINED FROM MOODY'S DATABASE.
3) INTEREST EXPENSE ESTIMATED FOR 3/95 BY 12/94 INTEREST TO DEBT
</TABLE>
<TABLE>
SCHEDULE C.4
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - BALANCE SHEETS
TICKER: FFCI
COMPANY NAME: FAIRFIELD COMMUNITIES INC
<CAPTION>
BALANCE SHEETS 12MM FISCAL YEAR END
---- ------------------------------------------------------------------------------------------
($ MILLIONS) Mar-95 % Dec-94 Dec-93 Dec-92 Dec-91 Dec-90
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash & Equivalents $22.874 10.6% $23.148 10.30% $4.475 1.8% $62.411 10.6% $46.279 6.0% $44.338 5.1%
Net Receivables 132.196 61.1% 137.124 61.20% 165.575 65.0% 378.037 64.2% 450.031 58.4% 495.478 56.7%
Inventories 32.748 15.1% 31.802 14.20% 34.607 13.6% 51.504 8.7% 67.532 8.8% 68.981 7.9%
Other Current Assets 0.000 0.0% 0.000 0.00% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
Total Current Assets 187.818 86.8% 192.074 85.70% 204.657 80.4% 491.952 83.5% 563.842 73.2% 608.797 69.6%
Gross Plant, Property
& Equipment 0.0% 0.00% 0.0% 0.0% 34.635 4.5% 42.778 4.9%
Accumulated Depreciation 0.0% 0.00% 0.0% 0.0% 17.556 2.3% 18.017 2.1%
Net Plant, Property
& Equipment 6.399 3.0% 5.956 2.70% 7.527 3.0% 11.999 2.0% 17.079 2.2% 24.761 2.8%
Other Assets 22.24 10.3% 25.996 11.60% 42.399 16.7% 85.309 14.5% 189.55 24.6% 240.992 27.6%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
TOTAL ASSETS $216.457 100.0% $224.026 100.00% $254.583 100.0% $589.260 100.0% $770.471 100.0% $874.550 100.0%
======== ====== ======== ======= ======== ====== ======== ====== ======== ====== ======== ======
Debt in Current Liabilities $0.000 0.0% $0.000 0.00% $0.000 0.0% $0.000 0.0% $0.000 0.0% $0.000 0.0%
Accounts Payable 6.465 3.0% 7.647 3.40% 0.000 0.0% 298.64 50.7% 321.639 41.7% 333.956 38.2%
Other Current Liabilities 5.145 2.4% 5.404 2.40% 0.000 0.0% 0.000 0.0% 0 0.0% 0 0.0%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
Total Current Liabilities 11.61 5.4% 13.051 5.80% 0.000 0.0% 298.64 50.7% 321.639 41.7% 333.956 38.2%
Long Term Debt 103.292 47.7% 111.943 50.00% 127.351 50.0% 182.302 30.9% 133.513 17.3% 156.085 17.8%
Other Liabilities 33.738 15.6% 32.097 14.30% 80.084 31.5% 71.356 12.1% 353.641 45.9% 387.736 44.3%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
TOTAL LIABILITIES 148.64 68.7% 157.091 70.10% 207.435 81.5% 552.298 93.7% 808.793 105.0% 877.777 100.4%
Preferred Stock 0.000 0.0% 0.000 0.00% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
Common Stock 0.124 0.1% 0.124 0.10% 0.120 0.0% 0.100 0.0% 1.089 0.1% 1.090 0.1%
Capital Surplus 46.853 21.6% 46.123 20.60% 38.609 15.2% 35.613 6.0% 67.042 8.7% 67.105 7.7%
Retained Earnings 20.840 9.6% 20.688 9.20% 8.419 3.3% 1.249 0.2% (106.453) -13.8% (71.422) -8.2%
Less: Treasury Stock 0.000 0.0% 0.000 0.00% 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.000 0.0%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
TOTAL EQUITY 67.817 31.3% 66.935 29.90% 47.148 18.5% 36.962 6.3% (38.322) -5.0% (3.227) -0.4%
-------- ------ -------- ------- -------- ------ -------- ------ ------- ------ -------- ------
TOTAL LIABILITIES & EQUITY $216.457 100.0% $224.026 100.00% $254.583 100.0% $589.260 100.0% $770.471 100.0% $874.550 100.0%
======== ===== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
NOTES
1) ALL DATA OBTAINED FROM COMPUSTAT DATABASE UNLESS OTHERWISE NOTED.
SCHEDULE D
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - RATIO ANALYSIS
ILEX FFCI AVERAGE
---- ---- -------
LIQUIDITY:
CURRENT RATIO 11.27 16.18 13.72
QUICK RATIO 4.66 13.36 9.01
OPERATING CURRENT RATIO 10.02 14.21 12.12
OPERATING QUICK RATIO 3.42 11.39 7.40
ACCOUNTS REC. TURNOVER (DAYS) 89.94 416.96 253.45
INVENTORY TURNOVER (DAYS) 343.16 124.02 233.59
SALES/WORKING CAPITAL 1.35 0.66 1.00
SALES/OPER. WORKING CAPITAL 1.54 0.75 1.15
INTEREST COVERAGE RATIO 5.19 1.89 3.54
FINANCIAL LEVERAGE:
DEBT/BVIC 0.37 0.60 0.49
DEBT/MVIC 0.23 0.65 0.44
TOTAL LIABILITIES/TOTAL ASSETS 0.56 0.69 0.62
ASSET UTILIZATION:
SALES/RECEIVABLES 4.06 0.88 2.47
SALES/NET FIXED ASSETS 21.80 18.08 19.94
SALES/TOTAL ASSETS 1.01 0.53 0.77
MARGINS:
GROSS MARGIN 49.29% 16.72% 33.00%
EBITDA 15.77% 16.72% 16.24%
EBTDA 13.45% 8.32% 10.89%
EBIT 12.03% 15.87% 13.95%
OPERATING PRETAX INCOME 9.71% 7.48% 8.59%
NON OPERATING INCOME/EXPENSE 1.47% 0.00% 0.73%
EBT 11.18% 11.97% 11.58%
EXTRAORDINARY ITEMS 0.00% 0.00% 0.00%
NET PROFIT 6.66% 9.80% 8.23%
RETURN ON INVESTMENT:
EBIT/(BOOK EQUITY + DEBT) 17.16% 10.73% 13.95%
OP PRETAX/BOOK EQUITY 21.97% 12.76% 17.36%
EBIT/TOTAL ASSETS 12.10% 8.49% 10.29%
OP PRETAX/TOTAL ASSETS 9.77% 4.00% 6.88%
4 YEAR COMPOUND ANNUAL GROWTH:
SALES 88.88% -13.53% 37.68%
EBITDA NMF -10.29% -10.29%
EBIT NMF -8.75% -8.75%
EBT NMF NMF
NET INCOME NMF NMF
SCHEDULE E
VARSITY CLUBS OF AMERICA INCORPORATED
VALUATION OF CAPITAL STOCK AS OF JULY 1995
GUIDELINE PUBLIC COMPANIES - CURRENT MARKET MULTIPLE ANALYSIS
- --------------------------------------------------------------------------------
MULTIPLES ILEX FFCI AVERAGE
- --------------------------------------------------------------------------------
MVIC/REVENUES (1) 1.13 1.38 1.25
MVIC/EBITDA 7.13 8.27 7.70
MVIC/EBIT 9.35 8.71 9.03
MVIC/(BOOK EQUITY + DEBT) 1.60 0.93 1.27
MVIC/TOTAL ASSETS 1.13 0.74 0.94
PRICE/REVENUES 0.81 0.49 0.65
PRICE/EBTDA 5.17 2.93 4.05
PRICE/OPERATING PRETAX INCOME 8.39 6.55 7.47
PRICE/NET INCOME 12.24 5.00 8.62
PRICE/BOOK EQUITY 1.84 0.84 1.34
PRICE/TOTAL ASSETS 0.82 0.26 0.54
(1) MVIC = MARKET VALUE OF INVESTED CAPITAL
(MARKET VALUE OF EQUITY PLUS DEBT, CAPITALIZED LEASE OBLIGATIONS AND
PREFERRED STOCK)
APPRAISER'S CERTIFICATION
I certify that, to the best of my knowledge and belief:
The statements of fact reported in this report are true and correct.
I have met with the principals of the subject business being appraised and
visited the subject business at its primary location of business.
The reported analyses, opinions and conclusions are limited only by the
reported assumptions and limiting conditions. They represent my personal,
unbiased professional analyses, opinions and conclusions.
I have no present or prospective interest in the business that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the action
or occurrence of a subsequent event resulting from the analyses, opinions
or conclusions in, or from the use of this report, including an amount
which would result in the approval of a loan. Furthermore, future
employment prospects were not discussed nor based upon whether or not a
loan application (if applicable) is approved.
No one provided significant professional assistance to the person(s)
signing this report.
The appraiser has acted in an independent capacity. This appraisal
assignment was not based upon a requested minimum valuation, a specific
valuation, or the approval of a loan.
The reported analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Principles of Appraisal Practice and the Code of Ethics of the American
Society of Appraisers (ASA), the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, the Uniform
Standards of professional Appraisal Practice (USPAP), as promulgated by the
Appraisal Standards Board of the Appraisals Foundation, the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve, the National Credit Union
Association (NCUA) and the Resolution Trust Corporation (RTC)
/s/ Wesley E. Romberger
- ------------------------------------
THE MENTOR GROUP, INC.
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
The analyses and opinions concluded by the The Mentor Group (TMG) and set forth
in this financial valuation report are subject to the following assumptions and
limiting conditions:
We have no present or contemplated material interest in the business or assets
that are the subject of this report.
We have no personal interest or bias with respect to the subject matter of this
report or the parties involved.
To the best of our knowledge and belief, the statements of fact contained in
this report, upon which the analyses, opinions and conclusions expressed herein
are based, are true and correct.
For all initial valuations of business enterprises, TMG has made personal visit
to the premises of the business and conducted interviews with management. If the
business valuation represents an update of previously conducted valuation, we
may not have made a personal visit to the premises of the business.
The fee for this engagement is not contingent upon the values reported.
No investigation of legal fee or title to the business or its assets has been
made and the ownership claim to the business and its assets is assumed valid. No
consideration has been given to liens or encumbrances which may be in place
against the business or assets, except as specifically stated in this report.
All value conclusions are presented as the considered opinion of TMG based on
the facts noted with this report. We assume no responsibility for changes in
values or market conditions nor for the inability of the owner to locate a
purchaser at the estimated value. The value conclusions derived were for the
specific purpose set forth herein and may be invalid if used for any other
purpose. This is not a fairness or solvency opinion and may not be used out of
the context as presented herein nor used to solicit potential buyers.
Client agrees to preserve the confidential format and content of our reports.
Our reports and the TMG name are not to be used in whole or in part outside your
organization, without our prior written approval, except for review by your
auditors, legal counsel, advisors, financial institutions (if the purpose of our
appraisal if financing), and by representatives of taxing authorities. We will
likewise preserve the confidential nature of information received from you, or
developed during this engagement, in accordance with our established
professional standards. Client agrees that TMG does not, either by entering into
this contract or by performing the services rendered, assume, abridge, abrogate
or undertake to discharge any duty of Client to any other person. Unless
otherwise stated in writing, TMG may reference the work performed for Client in
general public announcements.
All financial statements and other pertinent data relating to the income and
expense attributed to the entity have been provided either by management or its
representatives and accepted without further verification, except as may be
noted in the report. Therefore, to the extent that such information may be found
at a latter date to have been inaccurate or misrepresented, we cannot accept
liability for the consequences such inaccuracy or misrepresentation may have on
our value conclusion or the use of our conclusion in actions taken by our
client.
While we accept as correct the information furnished us by others, no guarantee
is expressed or implied herein for the validity of such information, whether in
written or oral form. In addition, we assume that the information supplied by
management and others represented a good faith effort to describe the business
or assets. We further assume that, unless indicated otherwise, there is no
intention of selling control of or liquidating any material assets other than in
the normal course of business.
Neither all nor any part of the contents of this report shall be conveyed to the
public through advertising, public relations, news, sales, or other media,
without the written consent and approval of TMG.
We assume that the terms of any leases currently in effect will not be altered
by any lessor contending that the new financial structure triggers a material
change in the financial condition of the Company, unless and to the extent that
these assertions are specifically disclosed to TMG.
We assume there are no hidden or unexpected conditions of either the real or
personal property utilized by the business enterprise which would materially and
adversely affect value.
We express no opinion as to: a) the tax consequences of any transaction which
may result; b) the effect of the tax consequences of any net value received or
to be received as a result of a transaction; and, c) the possible impact on the
market price resulting from any need to effect a transaction to pay taxes.
No opinion is expressed for matters that require legal or specialized expertise,
investigation, or knowledge beyond that customarily employed by appraisers.
Therefore, this report does not address issues of law, engineering, code
conformance, toxic contamination or discharge, the potential presence of
hazardous substances, etc., unless specifically identified in the body of the
report.
Unless express written notice of noncompliance is delivered and brought to the
attention of TMG, we assume that the Company is in compliance with all laws and
regulations of any government or agency significant and relevant to its
operations.
TMG has no responsibility to update the opinions stated herein for events and
circumstances occurring after the date of this letter. Any additional
consultation, attendance during any hearings or depositions, testimony, or
additional research required in reference to the present engagement beyond the
opinions expressed herein, as of the date of this letter, are subject to
specific written arrangements between the parties.
The analyses and market value estimate may, in part, be based on estimates and
assumptions which are inherently subject to uncertainty and variation, depending
on evolving events. However, some assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur; therefore, actual results
achieved during the period covered by our analyses will vary from our estimates,
and the variations may be material.
This report may contain prospective financial estimates or opinions that
represent the appraiser's view of expectations at a particular point in time,
but such information, estimates or opinions are not offered as predictions or as
assurances that a particular level of income or profit will be achieved, that
events will occur, or that a particular price will be offered or accepted.
Any value estimates provided in the report apply to the overall business
enterprise, and any proration of the total into fractional interests will
invalidate the value estimate, unless such proration or division of interests
has been set forth in the report.
No consideration has been given in this appraisal to the underlying market value
of real and personal property, such as furniture, fixtures, machinery and
equipment located on the premises, unless otherwise identified in this report.
TMG assumes no responsibility for economic or physical factors which may effect
the opinions herein stated which may occur at some date after the date of the
appraisal report. Forecasts of future events which influence the valuation
process are predicated on the continuation of historic and current trends in the
market, as identified in the report.
TMG reserves the right to make such adjustments to the analyses, opinions and
conclusions set forth in this report as may be required by consideration of
additional data or more reliable data that may become available. We assume no
responsibility for any financial reporting judgments which are appropriately
those of management. Management accepts the responsibility for any related
financial reporting with respect to the assets or properties encompassed by this
appraisal.
Any dispute of claim made with respect to this report shall be submitted to
resolved in accordance with the rules of the American Arbitration Association
for arbitration, and the decision of the Association shall be binding. All
appraisal services, pursuant to this report, shall be deemed to be contracted
for and rendered in the county of the The Mentor Group office contracted to
perform the services, and any arbitration or judicial proceedings shall take
place in that county.
With regard to any intangible assets (patents, trademarks, service marks, trade
names, copy rights, trade secrets, etc.) either valued separately and distinctly
from the business or which may contribute to the value of the business
enterprise but not be separately valued as a part of this valuation engagement,
TMG expresses no opinion regarding nor shall it have any responsibility in
connection with, any of the following matters:
a. verifying the ownership of the property;
b. determining whether the owner of the property has granted to other
parties any licenses, options or security interests therein, or made
any commitment to license or assign rights in such property; or whether
such property has liens or other encumbrances against it;
c. the validity or enforceability of any patent, copyright registration or
trademark (or service mark) registration;
d. whether property identified as a trade secret is, in fact a legally
enforceable trade secret, and the scope of protection offered;
e. the scope of patent claims; that is, the range and types of products or
processes covered by any patent;
f. whether the inventor(s) identified in any patent is (are) the true
inventor(s), and whether all inventors have been named;
g. the scope of rights in trademarks, service marks or trade names;
h. the correct authorship of any copyrighted works;
i. whether there has been litigation relating to such intangible assets
and the results of any adjudication or settlement of such litigation,
particularly with respect to issues of validity, enforceability and
scope of protection afforded.
The liability of TMG and its employees and independent contractors is limited to
the client only and to the amount of the fee actually received by TMG. There is
no accountability, obligation, or liability to any third party. If the appraisal
report or any part thereof is disseminated to anyone other than the client, the
client shall make such parties aware of all limiting conditions and assumptions
affecting the appraisal assignment. Neither the appraisers nor TMG is in any way
responsible for any costs incurred to discover or correct any physical,
financial, and/or legal deficiencies of any type present in the subject
property. In the case of limited partnerships or syndication offerings or stock
offerings in real estate, the client agrees that in the event of a lawsuit
brought by the lender, a partner or part owner in any form of ownership, a
tenant or any other party, the client will indemnify and hold the appraiser(s)
and TMG completely harmless in such action with respect to any and all awards or
settlements of any type, such as fines, penalties, or financial losses resulting
from the actions by tax authorities, including but not limited to the Internal
Revenue Service, when such fines, penalties, or losses are not due to fraud or
gross negligence on the part of TMG.
