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 June 30, 1998 Commission File Number 001-13855
------------- ---------
ILX RESORTS 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)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
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(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
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---------------------------------------------
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 June 30, 1998
- -------------------------------------- ----------------------------
Common Stock, without par value 4,216,893 shares
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,226,038 $ 3,173,778
Notes receivable, net 15,861,621 17,826,619
Resort property held for Vacation Ownership Interest sales 14,666,658 20,610,309
Resort property under development 2,943,936 --
Land held for sale 1,557,498 1,593,009
Deferred assets 289,009 254,227
Property and equipment, net 3,472,899 4,034,114
Deferred income taxes 304,430 --
Other assets 1,400,224 1,698,131
------------ ------------
TOTAL ASSETS $ 43,722,313 $ 49,190,187
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,830,375 $ 1,593,112
Accrued and other liabilities 2,220,566 1,488,372
Notes payable 19,884,479 17,064,358
Notes payable to affiliates 2,166,100 2,050,073
Income taxes payable -- 137,570
------------ ------------
Total liabilities 27,101,520 22,333,485
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares authorized;
380,468 shares issued and outstanding; liquidation preference of
$ 3,804,680 1,384,891 1,384,891
Common stock, no par value; 30,000,000 shares authorized;
2,692,433 and 4,332,533 shares issued 10,267,667 19,962,338
Treasury stock, at cost, 103,060 and 115,640 shares (652,587) (728,288)
Additional paid in capital 79,450 79,450
Retained earnings 5,541,372 6,158,311
------------ ------------
Total shareholders' equity 16,620,793 26,856,702
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,722,313 $ 49,190,187
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TIMESHARE REVENUES:
Sales of Vacation Ownership
Interests $ 5,846,579 $ 5,686,991 $10,937,875 $11,247,814
Resort operating revenue 2,801,978 3,068,945 5,229,764 5,587,278
Interest income 294,031 485,666 558,754 933,673
----------- ----------- ----------- -----------
Total timeshare revenues 8,942,588 9,241,602 16,726,393 17,768,765
----------- ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership
Interests sold 851,327 816,875 1,516,981 1,608,317
Cost of resort operations 2,550,141 2,933,587 5,094,727 5,548,727
Sales and marketing 3,332,044 3,488,551 6,141,997 6,819,821
General and administrative 676,755 617,308 1,470,402 1,277,680
Provision for doubtful accounts 170,823 167,913 317,593 330,182
Depreciation and amortization 95,198 97,892 208,278 184,510
----------- ----------- ----------- -----------
Total cost of sales and operating
expenses 7,676,288 8,122,126 14,749,978 15,769,237
----------- ----------- ----------- -----------
Timeshare operating income 1,266,300 1,119,476 1,976,415 1,999,528
Income from land and other, net 5,052 3,252 9,584 17,540
----------- ----------- ----------- -----------
Total operating income 1,271,352 1,122,728 1,985,999 2,017,068
Interest expense 472,177 401,618 935,762 907,133
----------- ----------- ----------- -----------
Income before income taxes and
minority interests 799,175 721,110 1,050,237 1,109,935
Income tax expense 281,884 289,000 352,457 445,000
----------- ----------- ----------- -----------
Income before minority interests 517,291 432,110 697,780 664,935
Minority interests 94,468 -- 168,753 --
----------- ----------- ----------- -----------
NET INCOME $ 422,823 $ 432,110 $ 529,027 $ 664,935
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
Diluted $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 529,027 $ 664,935
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Undistributed minority interest 168,478 --
Deferred income taxes 316,359 442,000
Provision for doubtful accounts 317,593 330,182
Depreciation and amortization 208,278 184,510
Amortization of guarantee fees 45,850 35,675
Gain on settlement of liability (98,705) --
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation
Ownership Interest sales 790,834 (2,999,715)
Increase in resort property under development (137,539) --
Increase in land held for sale (3,572) (35,511)
Increase in other assets (173,161) (235,207)
Decrease in accounts payable (531,466) (1,237,263)
Increase (decrease) in accrued and other liabilities 315,596 (608,073)
----------- -----------
Net cash provided by (used in) operating activities 1,747,572 (3,458,467)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (2,660,127) (2,295,180)
Increase in deferred assets (54,434) (893)
Purchases of property and equipment, net (2,570) (733,425)
----------- -----------
Net cash used in investing activities (2,717,131) (3,029,498)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,238,048 7,040,435
Principal payments on notes payable (2,016,166) (9,860,556)
Principal payments on notes payable to affiliates (137,433) (157,627)
Net proceeds from issuance of common stock 39,875 9,537,150
Redemption of common stock -- (75,701)
Preferred stock dividend payments (7) (47,996)
----------- -----------
Net cash (used in) provided by financing activities (875,683) 6,435,705
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,845,242) (52,260)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,523,047 3,226,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,677,805 $ 3,173,778
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
The consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly 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.
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
Regulation 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 six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
The Company's significant business activities include developing,
operating, marketing and financing ownership interests ("Vacation Ownership
Interests") in resort properties located in Arizona, Colorado, Florida, Indiana
and Mexico. The Company's operations also include marketing of skin and hair
care products, which are not considered significant to resort operations.
Reverse Stock Split
On January 9, 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to effect a one-for-five reverse stock
split of the Company's issued and outstanding shares of common stock. The
reverse stock split has been retroactively reflected in the accompanying
financial statements.
Revenue Recognition
Revenue from sales of Vacation Ownership Interests is recognized in
accordance with Statement of Financial Accounting Standard No. 66, Accounting
for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as
a minimum of 10% of the purchase price has been received in cash, the statutory
rescission period has expired, the buyer is committed to continued payments of
the remaining purchase price and the Company has been released of all future
obligations for the Vacation Ownership Interest. 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.
Consolidated Statements of Cash Flows
Cash equivalents are liquid investments with an original maturity of
three months or less. The following summarizes interest paid, income taxes paid
and capitalized interest.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
Interest paid $ 403,000 $ 602,000 $ 939,000 $1,141,000
Income taxes paid $ -- $ -- $ -- $ 3,000
Capitalized interest $ 40,000 $ 178,000 $ 86,000 $ 323,000
5
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
(continued)
Resort Property Under Development
Resort property under development totaling $2,943,936 at December 31,
1997 was reclassified as resort property held for Vacation Ownership Interest
Sales as of June 30, 1998 in conjunction with the substantial completion of
construction. The resort opened to revenue paying guests in July 1998.
Accounting Matters
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which was effective for
financial statements for periods beginning after December 15, 1997 and
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS 130 in 1998.
There were no items of other comprehensive income, as that term is defined in
SFAS 130, in the three and six months ended June 30, 1997 or June 30, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133"),
which is effective for the Company in 2000. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The standard also provides specific
guidance for accounting for derivatives designated as hedging instruments. The
Company is currently evaluating what impact this standard will have on its
financial statements.
Reclassifications
The financial statements for 1997 have been reclassified to be
consistent with the 1998 presentation.
Note 2. Notes Payable
In June 1998, the Company entered into a borrowing agreement under
which it may borrow up to $40 million against eligible receivables through June
2002. The terms of the agreement provide for borrowing at prime plus 1.5% to
prime plus 1.75%, with a maturity date of June 11, 2007. A commitment fee of 1%
is payable as amounts are advanced under the line.
In June 1998, the Company acquired residential real estate in Sedona,
Arizona for $308,000 for which it paid $58,000 in cash and borrowed $250,000
secured by a deed of trust. The note bears interest at 8.5%, and matures in
2003.
Note 3. Net Income Per Share
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
Basic Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 422,823 $ 432,110 $ 529,027 $ 664,935
Less: Series A preferred stock dividends (11,974) (12,000) (23,947) (24,000)
Series C convertible preferred stock cumulation
share dividends (8,859) (8,568) (17,719) (16,892)
----------- ----------- ----------- -----------
Net income available to common stockholders -
basic $ 401,990 $ 411,542 $ 487,361 $ 624,043
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding - basic 2,614,396 4,047,463 2,609,737 3,331,751
=========== =========== =========== ===========
Basic net income per share $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
(continued)
Diluted Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 422,823 $ 432,110 $ 529,027 $ 664,935
Less: Series A preferred stock dividends (11,974) (12,000) (23,947) (24,000)
----------- ----------- ----------- -----------
Net income available to common stockholders -
diluted $ 410,849 $ 420,110 $ 505,080 $ 640,935
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding 2,614,396 4,047,463 2,609,737 3,331,751
Add: Convertible preferred stock (Series B and C)
dilutive effect 112,100 110,541 113,210 110,541
----------- ----------- ----------- -----------
Weighted average shares of common stock
outstanding - dilutive 2,726,496 4,158,004 2,722,947 3,442,292
=========== =========== =========== ===========
Diluted net income per share $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
</TABLE>
Stock options and warrants to purchase 157,200 shares of common stock
at prices ranging from $6.75 per share to $8.125 per share were outstanding at
June 30, 1998 but were not included in the computation of diluted net income per
share because the options' and warrants' exercise prices were greater than the
average market price of common shares. These options and warrants expire at
various dates between 1998 and 2004.
Note 4. Shareholders' Equity
During the first quarter of 1998, the Company issued 28,100 shares of
restricted common stock, valued at $82,521, to employees in exchange for
services provided. In February 1998, the Company issued 12,000 shares, valued at
$75,000, to EVEREN Securities, Inc., for investment banking and underwriting
services (see Note 5).
Note 5. Common Stock Offering
In April 1998, the Company sold, through a public offering, 1,400,000
shares of its common stock at a price of $6.75; EVEREN Securities, Inc., the
underwriter of the offering, also exercised its overallotment option and
purchased an additional 200,000 shares at a price of $6.75, for total proceeds
of $10,800,000. Proceeds of the offering, net of the costs of the underwriting
(including a 7% underwriting discount, professional fees, printing and
promotional costs totaling $1,262,850), were recorded as common stock.
Note 6. Other
In June 1998, the Company entered into an agreement to acquire 1,500
one-week, 25-year right-to-use Vacation Ownership Interests to be constructed on
land adjacent to a full service resort in San Carlos, Mexico. Such interests
will be contributed to Premiere Vacation Club in exchange for participation in
the profits of Premiere Vacation Club as provided in the agreement.
The following discussion of the Company's financial condition and results of
operations includes certain forward-looking statements. When used in this Form
10-Q, the words "estimate," "projection," "intend," "anticipates" and similar
terms are intended to identify forward-looking statements that relate to the
Company's future performance. Such statements are subject to substantial
uncertainty. Readers are cautioned not to place undue reliance on the
forward-looking statements set forth below. The Company undertakes no obligation
to publicly update or revise any of the forward-looking statements contained
herein.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
ILX Resorts Incorporated was formed in 1986 to enter the Vacation
Ownership Interest business. The Company generates revenue primarily from the
sale and financing of Vacation Ownership Interests. The Company also generates
revenue from the rental of its unused or unsold inventory of units at the ILX
Resorts and from the sale of food, beverages or other services at such resorts.
The Company currently owns five resorts in Arizona, one in Indiana and one in
Colorado.
The Company recognizes revenue from the sale of Vacation Ownership
Interests at such time as a minimum of 10% of the purchase price has been
received in cash, the statutory rescission period has expired, the buyer is
committed to continued payments of the remaining purchase price and the
Company's future obligations for the Vacation Ownership Interests have been
released. Resort operating revenues are recorded as the rooms are rented or the
services are performed.
Costs associated with the acquisition and development of Vacation
Ownership Interests, including carrying costs such as interest and taxes, are
capitalized and amortized to cost of sales as the respective revenue is
recognized.
Results of Operations
The following table sets forth certain operating information for the
Company:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
As a percentage of total timeshare
revenues:
Sales of Vacation Ownership Interests 65.4% 61.5% 65.4% 63.3%
Resort operating revenue 31.3% 33.2% 31.3% 31.4%
Interest income 3.3% 5.3% 3.3% 5.3%
------ ------ ------ ------
Total timeshare revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As a percentage of sales of Vacation
Ownership Interests:
Cost of Vacation Ownership Interests
sold 14.6% 14.4% 13.9% 14.3%
Sales and marketing 57.0% 61.3% 56.2% 60.6%
Provision for doubtful accounts 2.9% 3.0% 2.9% 2.9%
Contribution margin percentage from
sale of Vacation Ownership
Interests (1) 25.5% 21.3% 27.1% 22.1%
As a percentage of resort operating
revenue:
Cost of resort operations 91.0% 95.6% 97.4% 99.3%
As a percentage of total timeshare
revenues:
General and administrative 7.6% 6.7% 8.8% 7.2%
Depreciation and amortization 1.1% 1.1% 1.2% 1.0%
Timeshare operating income 14.2% 12.1% 11.8% 11.3%
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
<TABLE>
<CAPTION>
Selected operating data:
<S> <C> <C> <C> <C> <C>
Vacation Ownership Interests sold (2)
(3) 382 386 709 762
Average sales price per Vacation
Ownership Interest sold (excluding
revenues from Upgrades) (2) $13,181 $12,963 $13,021 $12,919
Average sales price per Vacation
Ownership Interest sold (including
revenues from Upgrades) (2) $15,305 $14,752 $15,427 $14,771
</TABLE>
- -------------------------
(1) Defined as: the sum of Vacation Ownership Interest sales less the cost of
Vacation Ownership Interests sold less sales and marketing expenses less
a provision for doubtful accounts, divided by sales of Vacation Ownership
Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Vacation Ownership Interests consist of 178 annual and 408 biennial for
the three months ended June 30, 1997 and 180 annual and 411 biennial for
the three months ended June 30, 1998, and 341 annual and 736 biennial for
the six months ended June 30, 1997 and 360 annual and 803 biennial for
the six months ended June 30, 1998.
Comparison of the Three and Six Months Ended June 30, 1997 to the Three and Six
Months Ended June 30, 1998
Sales of Vacation Ownership Interests decreased 3% or $159,588 to
$5,686,991 for the three months ended June 30, 1998, from $5,846,579 for the
same period in 1997 and increased 3% or $309,939 to $11,247,814 for the six
months ended June 30, 1998 from $10,937,875 for the same period in 1997. The
variations in sales reflect a decline in sales from the South Bend and Sedona
sales offices as a result of fewer tours generated to those offices, net of
sales from the Tucson sales office, which opened in August 1997. The average
sales price per Vacation Ownership Interest sold (excluding revenues from
Upgrades) was comparable between periods.
The number of Vacation Ownership Interests sold were comparable between
years for the three months ended June 30 and increased 8% to 762 for the six
months ended June 30, 1998 from 709 for the same period in 1997. Sales of
Vacation Ownership Interests in the three and six months ended June 30, 1998,
included 411 and 803 biennial Vacation Ownership Interests (counted as 205.5 and
401.5 annual Vacation Ownership Interests) compared to 408 and 736 biennial
Vacation Ownership Interests (counted as 204 and 368 annual Vacation Ownership
Interests) for the same periods in 1997, respectively.
The decrease in tour flow to the South Bend sales office in the first
half of 1998 was due to the termination of the marketing company which had
provided the majority of tours to the sales office, in favor of internal
generation of tours. Fewer tours have been generated during the transition and
start-up periods of these new programs. Tour flow to the Sedona sales office has
decreased due to increasing competition for tours in the Phoenix market. In
response to this trend, the Company has sought approval in California to
generate tours to its Sedona sales office, and such approval was received in
July 1998. The Company intends to begin marketing into California late in the
third quarter.
Upgrade revenue, included in Vacation Ownership Interest sales,
decreased 15% to $689,812 for the three months ended June 30, 1998 from $811,525
for the same period in 1997 and decreased 17% to $1,409,825 for the six months
ended June 30, 1998 from $1,705,951 for the same period in 1997, as a result of
limiting other programs in anticipation of introduction of the Premiere Vacation
Club, which was delayed beyond its expected start date due to delays in
regulatory approval. Approval was received late in the second quarter and
marketing of this new product to existing owners began in the last few weeks of
the quarter. Also, in 1997 a greater proportion of Upgrades were by owners of
Golden Eagle Vacation Ownership Interests which have a higher trade-in value
than the Company's other properties. Upgrades generally do not involve the sale
of additional Vacation Ownership Interests (merely their exchange) and,
therefore, such Upgrades increase the average sales
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
price per Vacation Ownership Interest sold. The reduced upgrade revenue due to
the delayed Premiere Vacation Club promotion and the change in upgrade mix to
include fewer Golden Eagle owners resulted in lower average sales prices per
Vacation Ownership Interest sold (including Upgrades) of $14,752 for the three
months ended June 30, 1998 from $15,305 for the same period in 1997 and $14,771
for the six months ended June 30, 1998 from $15,427 for the same period in 1997.
Resort operating revenues increased 10% and 7% or $266,967 and $357,514
to $3,068,945 and $5,587,278 for the three and six month periods ending June 30,
1998, respectively, reflecting increases in sales of food and beverage and other
amenities at Kohl's Ranch Lodge and increases in occupancy at Varsity Clubs of
America - South Bend Chapter.
The increases in cost of resort operations as a percentage of resort
operating revenue for both the three and six month periods ended June 30, 1998
are a result of initial operating costs of Varsity Clubs of America - Tucson
Chapter, which opened to revenue paying guests in July 1998.
Interest income increased 65% to $485,666 for the three months ended
June 30, 1998 from $294,031 for the same period in 1997 and increased 67% to
$933,673 for the six months ended June 30, 1998 from $558,754 for the same
period in 1997 as a result of the increase in customer notes retained by the
Company and increases in interest rates charged by the Company on its customer
notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales are comparable between periods.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 61% for the three and six months ended June 30, 1998 from
57% and 56% for the same periods in 1997, respectively, due to reduced tours to
the South Bend sales office as a result of transition from the utilization of a
major outside vendor of tours to internal generation of tours as discussed
above, and the increased costs of generating tours to the Sedona sales office
due in part to the inclement weather (during the first quarter of 1998) and in
part to increasing costs of generating tours from the Phoenix market. In July
1998 the Company received regulatory authority to market in California to its
Sedona sales office and intends to begin marketing for the first time in that
state late in the third quarter.
The provision for doubtful accounts as a percentage of Vacation
Ownership Interest sales remained comparable between years.
General and administrative expenses decreased 9% to $617,308 for the
three months ended June 30, 1998 from $676,755 for the same period in 1997 and
decreased 13% to $1,277,680 for the six months ended June 30, 1998 from
$1,470,402 for the same period in 1997. General and administrative expenses
decreased as a percentage of total timeshare revenues to 7% for the three and
six months ended June 30, 1998 compared to 8% and 9% for the same periods in
1997, respectively. These decreases were primarily due to the recognition of a
gain on the write off of an accrued liability in the second quarter of 1998 and
a reduction in property tax expense related to successful appeals of property
tax assessments in the first quarter of 1998.
Interest expense decreased 15% to $401,618 for the three months ended
June 30, 1998 from $472,177 for the same period in 1997 and decreased 3% to
$907,133 for the six months ended June 30, 1998 from $935,762 for the same
period in 1997, reflecting reductions in borrowings in the second quarter of
1998 from the use of proceeds of the follow-on offering of the Company's common
stock, net of an increase in borrowings against notes receivable as the Company
retains and borrows against, rather than sells, a greater portion of its
customer notes receivable.
Income tax expense as a percentage of pre-tax income net of minority
interests is comparable between years.
The elimination of minority interests in 1998 is due to the buyout by
the Company of the LAP minority interest in August 1997.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
Liquidity and Capital Resources
Sources of Cash
The Company generates cash primarily from the sale of Vacation
Ownership Interests (including Upgrades), the financing of customer notes from
such sales and resort operations. During the six months ended June 30, 1997 and
1998, cash provided by (used in) operations was $1,747,572 and $(3,458,467),
respectively. The negative cash flow for the six months ended June 30, 1998 was
due primarily to the construction of Varsity Clubs of America - Tucson Chapter,
which was financed in large part through a construction loan and lease
financing. Because the Company uses significant amounts of cash in the
development and marketing of Vacation Ownership Interests, but collects the cash
on the customer notes receivable over a long period of time, borrowing against
and/or selling receivables is a necessary part of its normal operations.
For regular federal income tax purposes, the Company reports
substantially all of its non-factored financed Vacation Ownership Interest sales
under the installment method. Under the installment method, the Company
recognizes income on sales of Vacation Ownership Interests only when cash is
received by the Company in the form of a down payment, as installment payments
or from proceeds from the sale of the customer note. The deferral of income tax
liability conserves cash resources on a current basis. Interest may be imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the related tax is
paid. If the Company is otherwise not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year. The consolidated financial statements do not contain an accrual for
any interest expense that would be paid on the deferred taxes related to the
installment method, as the interest expense is not estimable.
At December 31, 1997, the Company, excluding Genesis, had NOL
carryforwards of $4.8 million, which expire in 2001 through 2012. At December
31, 1997, Genesis had federal NOL carryforwards of $1.9 million, which are
limited as to usage because they arise from built-in losses of an acquired
company. In addition, such losses can only be utilized through the earnings of
Genesis and are limited to a maximum of $189,000 per year. To the extent the
entire $189,000 is not utilized in a given year, the difference may be carried
forward to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Code imposes additional limitations on
the utilization of NOLs by a corporation following various types of ownership
changes, which result in more than a 50% change in ownership of a corporation
within a three-year period. Such changes may result from new Common Stock
issuances by the Company or changes occurring as a result of filings with the
Securities and Exchange Commission of Schedules 13D and 13G by holders of more
than 5% of the Common Stock, whether involving the acquisition or disposition of
Common Stock. If such a subsequent change occurs, the limitations of Section 382
would apply and may limit or deny the future utilization of the NOL by the
Company, which could result in the Company paying substantial additional federal
and state taxes.
Uses of Cash
Investing activities typically reflect a net use of cash because of
capital additions and loans to customers in connection with the Company's
Vacation Ownership Interest sales. Net cash used in investing activities for the
six months ended June 30, 1997 and 1998 was $2,717,131 and $3,029,498,
respectively.
The Company requires funds to finance the acquisitions of property for
future resort development and to further develop the existing resorts, as well
as to make capital improvements and support current operations. During the six
months ended June 30, 1998 the Company was constructing Varsity Clubs of America
- - Tucson Chapter, which was complete in July 1998. During that period, the
Company borrowed $3,438,076 on its construction financing commitment and
$800,200 on its lease commitment for this property.
Customer defaults have a significant impact on cash available to the
Company from financing customer notes receivables in that notes which are more
than 60 to 90 days past due are not eligible as collateral. As a
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
result, the Company in effect must repay borrowings against such notes or buy
back such notes if they were sold with recourse.
Credit Facilities and Capital
The Company has agreements with financial institutions for total
commitments aggregating $25.0 million under which the Company may sell certain
of its customer notes. These agreements provide for sales on a recourse basis
with a percentage of the amount sold held back by the financial institution as
additional collateral. Notes may be sold at discounts or premiums to yield the
consumer market rate as defined by the financial institution. At June 30, 1998,
approximately $12.7 million was available under these commitments.
The Company also has financing commitments aggregating $42.0 million
whereby the Company may borrow against notes receivable pledged as collateral.
These borrowings bear interest at a rate of prime plus 1.5% to prime plus 5.0%
and expire at various dates from 2002 through 2003. At June 30, 1998,
approximately $39.5 million is available under these commitments. The Company
has a written commitment for an additional $10.0 million of notes receivable
financing that is subject to final documentation.
In April 1998, the Company sold, through a public offering, 1,400,000
shares of its common stock at a price of $6.75; EVEREN Securities, Inc., the
underwriter of the offering, also exercised its overallotment option and
purchased an additional 200,000 shares at a price of $6.75, for total proceeds
of $10,800,000. Proceeds of the offering, net of the costs of the underwriting
(including a 7% underwriting discount, professional fees, printing and
promotional costs totaling $1,262,850), were recorded as common stock.
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. There is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for at least the next 12 months.
Other
In June 1998, the Company entered into an agreement to acquire 1,500
one-week, 25-year right-to-use Vacation Ownership Interests to be constructed on
land adjacent to a full service resort in San Carlos, Mexico. Such interests
will be contributed to Premiere Vacation Club in exchange for participation in
the profits of Premiere Vacation Club as provided in the agreement.
Seasonality
The Company's revenues are moderately seasonal with the volume of ILX
Owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
Year 2000 Issues
As with other organizations, some of the Company's computer programs
were originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields would not work properly with
dates from the year 2000 and beyond. The Company has initiated efforts to remedy
this situation and expects all programs to be corrected and tested prior to the
year 2000. The incremental costs of this project are not expected to have a
material effect on the Company's consolidated financial statements or results of
operations.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
Inflation
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the three or six months ended June 30, 1998.
However, to the extent inflationary trends affect short-term interest rates, a
portion of the Company's debt service costs may be affected as well as the rates
the Company charges on its customer notes.
13
<PAGE>
Part II
Item I. Legal Proceedings
None
Item II. Changes in Securities and Use of Proceeds
None
Item III. Defaults Upon Senior Securities
None
Item IV. Submission of Matters to a Vote of Security Holders
None
Item V. Other Information
None
Item VI. Exhibits and Reports on Form 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
10-1 Secured Line of Credit Lending Agreement
between Litchfield Financial Corporation
and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and
Premiere Development Incorporated dated as
of June 12, 1998 (filed herewith)
10-2 Secured Line of Credit Promissory Note
between Litchfield Financial Corporation
and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and
Premiere Development Incorporated dated as
of June 12, 1998 (filed herewith)
10-3 Business Agreement among ILX Resorts
Incorporated, Premiere Vacation Club and
Premiere Development Incorporated and
Treasures of the Sea of Cortez, Promotora
de Inversion Turistica, Immobiliaria y
Hotelera Los Algodones and Immobiliaria
Cerro Pelon dated as of June 8, 1998
(filed herewith)
27-1 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused its quarterly report on Form
10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
--------------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
--------------------------------
Nancy J. Stone
President
/s/ Stephen W. Morgan
--------------------------------
Stephen W. Morgan
Chief Financial Officer
and Senior Vice President
Date: As of August 10, 1998
15
<PAGE>
EXHIBIT INDEX
No. Description
- --- -----------
10-1 Secured Line of Credit Lending Agreement between Litchfield
Financial Corporation and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and Premiere
Development Incorporated dated as of June 12, 1998 (filed
herewith)
10-2 Secured Line of Credit Promissory Note between Litchfield
Financial Corporation and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and Premiere
Development Incorporated dated as of June 12, 1998 (filed
herewith)
10-3 Business Agreement among ILX Resorts Incorporated, Premiere
Vacation Club and Premiere Development Incorporated and
Treasures of the Sea of Cortez, Promotora de Inversion
Turistica, Immobiliaria y Hotelera Los Algodones and
Immobiliaria Cerro Pelon dated as of June 8, 1998 (filed
herewith)
27-1 Financial Data Schedule (filed herewith)
16
Exhibit 10-1
SECURED LINE OF CREDIT
LENDING AGREEMENT
(ILX Resorts Incorporated-Global Facility)
THIS SECURED LINE OF CREDIT LENDING AGREEMENT ("Agreement") is dated
this 12th day of June, 1998, and is entered into by and between ILX RESORTS
INCORPORATED, an Arizona corporation, LOS ABRIGADOS PARTNERS LIMITED
PARTNERSHIP, an Arizona limited partnership, and PREMIERE DEVELOPMENT
INCORPORATED, an Arizona corporation, having their principal places of business
at 2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016 (collectively,
"Borrower"), and LITCHFIELD FINANCIAL CORPORATION, a Massachusetts corporation
having its western division offices at 13701 West Jewell Avenue, Suite 200,
Lakewood, Colorado 80228 ("Lender"), under the following facts:
RECITALS:
WHEREAS, the Borrower is the owner, developer and marketer of that
certain timeshare development projects located in the states of Arizona,
Colorado and Indiana; and
WHEREAS, the Borrower owns and will subsequently be generating
portfolios of purchase money receivables originated from its timeshare sales
operations which it desires to pledge to Lender, along with other collateral as
is more fully described herein, which shall serve to secure Borrower's repayment
of a loan of even date herewith to be advanced by Lender; and
WHEREAS, the parties hereto desire to be legally bound by the terms and
conditions of this Agreement along with all exhibits attached hereto and related
contractual agreements referenced herein, the terms and conditions of which are
incorporated herein by this reference;
NOW, THEREFORE, for and in consideration of the foregoing Recitals, and
the covenants and agreements hereinafter set forth and other good and valuable
consideration, the legal adequacy and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound hereby, hereby
agree:
1. DEFINITIONS.
------------
In addition to the definitions set forth in the introductory
paragraphs, the following terms shall have the following meanings unless
otherwise agreed.
"Account" means each and every promissory note, installment land sales
contract, or other evidence of indebtedness, along with all security of whatever
nature securing the repayment of same including, without limitation, all deeds
of trust, mortgages and/or other debt securing instruments executed by any
Account Debtor, which is originated by Borrower in connection with its
development and sale of Timesharing Interests to Account Debtors within the
Project at retail and in Borrower's ordinary course of business.
<PAGE>
"Account Debtor" means any Person who is or who may become obligated
under, with respect to, or on account of an Account whether as the maker thereof
or as a guarantor thereto.
"Advance" means each and every advance of principal by Lender to
Borrower.
"Amortization Period" means that period of time which begins after the
expiration of the Borrowing Period during which all Obligations shall be repaid
in sixty (60) equal and fully amortizing monthly installments, with the first
such installment becoming due and payable one month after the expiration of the
Borrowing Period and with successive installments becoming due and payable
monthly thereafter until all Obligations hereunder are paid in full; provided,
however, that all Obligations owing hereunder, if not paid sooner, shall
immediately become due and payable in full on or before the Maturity Date.
"Borrowing Base" means an amount equal to ninety percent (90%) of the
then unpaid total aggregate outstanding principal balance of all Qualified
Pledged Accounts.
"Borrowing Period" means the forty-eight (48) month period following
the Closing Date.
"Business Day" means any day which is not a Saturday, Sunday or other
day on which national banks are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Club" means the Premiere Vacation Club, an Arizona nonprofit
corporation, which is the owner of certain Timesharing Interests located within
the Project and which allows for the use of said Timesharing Interests on a
first come, first served membership basis.
"Collateral" means the Pledged Accounts; the Credit Agreement;
Borrower's books and records as they pertain to the Pledged Accounts; all other
collateral referenced in the Credit Agreement; and the proceeds and products,
whether tangible or intangible, of any of the foregoing.
"Collateral Assignment of Management, Marketing and Exchange Contracts"
means that agreement executed by Borrower in favor of Lender in which Borrower
collaterally assigns to Lender all of the Borrower's rights, title and interest
in and to the management, marketing and exchange contracts which Borrower has
executed regarding the operation, management and administration of the Project.
"Collateral Assignment of Deeds of Trust" means that agreement executed
by Borrower in favor of Lender in which Borrower collaterally assigns to Lender
all of the Borrower's rights, title and interest in and to those deeds of trust,
mortgages or debt securing instruments which secure repayment of the Pledged
Accounts.
2
<PAGE>
"Collateral Assignment of Promissory Notes" means that agreement
executed by Borrower in favor of Lender in which Borrower collaterally assigns
to Lender all of the Borrower's rights, title and interest in and to the Pledged
Accounts.
"Credit Agreement" collectively means all agreements executed by and
between Lender and Borrower pertaining to the establishment of the lending
relationship described herein, including, without limitation, the Secured Line
of Credit Lending Agreement, Line of Credit Note, Pledge and Security Agreement,
Collateral Assignment of Promissory Notes, Collateral Assignment of Deeds of
Trust, Collateral Assignment of Management, Marketing and Exchange Contract,
Custodial Agreement, Servicing Agreement, and Escrow Agreement.
"Custodial Agreement" means that agreement of even date herewith which
has been executed by the Borrower and the Lender and the Custodian.
"Custodian" means that party designated as such in the Custodial
Agreement.
"Cut-Off Date" means ________________________ , 1998.
"Daily Balance" means the amount of an Obligation owed at the end of a
given day.
"Delinquent Account" means any Pledged Account which is eighty-nine
(89) days or more contractually delinquent.
"End-Loan Documents" means those documents executed by Account Debtors
in connection with their purchase of Timesharing Interests at the Project and
their financing of the purchase prices thereof which include: (a) original
promissory note or contract for deed; (b) original deed of trust, mortgage or
debt securing instrument, if applicable; (c) copy of original public report
receipt; (d) proof of down payment; (e) servicing and delinquency accounting
records; (f) along with all other documents which Lender may reasonably request.
"Event of Default" means the occurrence of those events as are more
fully described in Paragraph 24, hereof.
"GAAP" mean generally accepted accounting principals as in effect from
time to time in the United States, consistently applied.
"Hazardous Materials" means (a) those substances as defined as
"hazardous substances," "hazardous materials," "toxic substances," or "solid
waste" in CERCLA, RCRA, and the Hazardous Materials, Transportation Act, 49
U.S.C. Section 1801 et. seq., and in the regulations promulgated pursuant
thereto; (b) those substances designated as a "hazard substance" under or
pursuant to the Federal Water Pollution Control Act, 33 U.S.C. ss. 1257, et
seq., and in the regulations promulgated pursuant thereto; (c) those substances
listed in the United States Department of Transportation Table (40 CFR 172.101
and amendments thereto) or by the Environmental Protection Agency (or any
successor agency) as hazardous substances (40 CFR Part 302 and amendments
thereto); and (d) such
3
<PAGE>
other substances and materials which are classified as hazardous or toxic under
any local, state or federal statute, rule or regulation of any nature.
"Lender Expenses" means costs or expenses (including taxes,
photocopying, notarization, telecommunication and insurance premiums) required
to be paid by Borrower under the Credit Agreement that are paid or advanced by
Lender; documentation, filing, recording, publication, appraisal, lock box,
custodial, loan servicing fees paid to Servicer; costs and expenses incurred by
Lender in the disbursement of funds or incurred by Lender resulting from the
dishonor of checks; costs and expenses paid or incurred by Lender to correct any
default or enforce any provision of the Credit Agreement, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising the Collateral for sale, regardless of
whether a sale is consummated; costs incurred by Lender in connection with
work-out, restructuring or related discussions or litigation incurred in
connection with the enforcement of Lender's rights hereunder and the protection
and liquidation of the Collateral; costs and expenses paid or expenses of third
party claims or any other suit paid or incurred by Lender in enforcing or
defending the Credit Agreement; and Lender's reasonable attorney's fees and
expenses incurred in advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing (including attorney's fees and expenses
incurred in connection with a "workout," a restructuring, or an insolvency
proceedings concerning Borrower or any guarantor of the Obligations), defending,
or concerning the Credit Agreement, irrespective of whether suit is brought.
Provided, however, in all instances, Lender Expenses shall be limited to
reasonable expenses which are reasonably necessitated by Lender's transactions
with Borrowers or as may otherwise be required in order to protect Lender's
rights in and to the Collateral.
"Line of Credit Note" means that promissory note in the original face
amount of Forty Million Dollars ($40,000,000) of even date herewith which
evidences certain of the Obligations associated with the Credit Agreement and
which provides for the manner of the repayment of the principal, interest, fees
and other sums evidenced thereby.
"Maturity Date" means that date which is one hundred and eight (108)
months from and after the date of the Line of Credit Note.
"Maximum Line Amount" means the sum of Forty Million Dollars
($40,000,000).
"Obligations" means all loans, advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), premiums, liabilities (including all amounts charged to
Borrower's loan account pursuant to any agreement authorizing Lender to charge
Borrower's loan account), obligations, fees (including pre-payment
entitlements), lease payments, guarantees, covenants, and duties owing by
Borrower to Lender of any kind and description (whether pursuant to or evidenced
by the Credit Agreement, Line of Credit Note, or by any instrument, or pursuant
to any other agreement between Lender and Borrower, and irrespective of whether
for the payment of money), whether direct of indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to third parties that Lender may
have obtained by assignment or otherwise, and
4
<PAGE>
further including all interest not paid when due and all Lender Expenses that
Borrower is required to pay or reimburse pursuant to the Line of Credit Note,
the Credit Agreement, by law, or otherwise.
"Person" means and includes natural persons, limited liability
companies, corporations, limited partnership, general partnership, joint
ventures, trusts, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.
"Pledge and Security Agreement" means that agreement executed by the
Borrower in favor of the Lender pursuant to which the Borrower shall grant to
Lender a first and priority security interest in and to the Pledged Accounts and
the Collateral.
"Pledged Accounts" means each and every Account which is delivered to
Lender pursuant to the terms of this Agreement.
"Project" collectively means Los Abrigados Resort & Spa in Sedona,
Arizona, The Inn at Los Abrigados in Sedona, Arizona, Kohl's Ranch Lodge in
Payson, Arizona, Golden Eagle Resort in Estes Park, Colorado, Roundhouse Resort
in Pinetop/Lakeside, Arizona, Varsity Clubs of America -- South Bend and Varsity
Clubs of America -- Tucson, along with all Timesharing Interests which are
deeded to the Club and which form the basis of the Premiere Vacation Club
Membership Plan dated January 5, 1998, along with those other resort and Varsity
Clubs of America sites which Borrower may develop during the Borrowing Period
and which may be approved by Lender from time to time by means of subsequent
written agreement.
"Qualified Pledged Account" means those Pledged Accounts that meet the
criteria set forth in Paragraph 8, hereof.
"Reference Rate" shall mean that rate of interest which is designated
by the Wall Street Journal, Eastern Edition, as the nation's average "prime
interest" rate on corporate loans at large U.S. money center commercial banks.
If more than one rate is published by the Wall Street Journal as the "prime
rate," the highest of the published rates shall be used. Should the Wall Street
Journal cease reporting said rate of interest, then the Reference Rate shall be
deemed that rate of interest designated by Citibank, N.A. or its successors as
its "prime rate" of interest.
"Servicer" means Concord Servicing Corporation.
"Servicing Agreement" means any loan servicing agreement entered into
between Servicer, Borrower, and Lender respecting the agreement of Servicer to
serve as servicing agent for the Pledged Accounts.
"Timesharing Interest" means a legally identifiable undivided interest
in real property which is located within the Project, which is sold in a fee
simple manner to an Account Debtor or which has been subjected to those use
rights as set forth in the Club constituent documents and has been subjected to
a timeshare form of ownership and which vests in the Account Debtor the right to
use the overnight lodging and common area facilities of the Project for at least
seven (7) nights including
5
<PAGE>
a weekend on either an annual or biennial basis or which otherwise vests in the
Account Debtor overnight lodging and common area use rights for an alternative
period of time which Lender shall deem acceptable in Lender's sole discretion.
"Timesharing Interest Purchaser" means the purchaser of a Timesharing
Interest at the Project.
2. THE LOAN AND TERMS OF PAYMENT.
------------------------------
A. Line of Credit Note. Upon Borrower's compliance with all
conditions precedent and terms and conditions as are set forth herein and in the
Credit Agreement, Lender hereby agrees to extend credit to Borrower in a
collective sum not to exceed Forty Million Dollars ($40,000,000). Concurrently
herewith, Borrower shall execute and deliver to Lender the Line of Credit Note
in the face amount of Forty Million Dollars ($40,000,000). The indebtedness
evidenced by the Line of Credit Note shall be paid by, among other sources, a
collateral assignment of the principal, interest, late charges and all other
sums payable from and on the Pledged Accounts and shall be secured by, among
other things, the Deed of Trust, and that other Collateral and security as is
more fully described in the Credit Agreement.
B. Term of Credit Facility. All Obligations outstanding hereunder
shall be due and payable at the Maturity Date, subject to earlier payment
through amortization, voluntary or mandatory call and/or acceleration as
provided in the Credit Agreement and in the Line of Credit Note. The Obligations
shall bear interest at the rate and pursuant to the terms and conditions of the
Line of Credit Note.
C. Advances of Principal. Subject to Borrower's compliance with
the required terms and conditions of the Credit Agreement, Lender, during the
Borrowing Period, agrees to make loans and advances of principal to Borrower
upon the pledge and physical delivery to Lender of Pledged Accounts by Borrower
so long as, and to the extent that, the Obligations outstanding (inclusive of
all Advances) do not exceed either the Borrowing Base or the Maximum Line
Amount. Advances made pursuant to this Paragraph 2 (D) shall not be made more
frequently than weekly, or in amounts less than $25,000 per Advance. Borrower
shall be allowed to reborrow principal during the Borrowing Period at an advance
rate, however, which shall not exceed ninety percent (90%) of the principal
amount of any Qualified Pledged Account which is pledged to Lender as collateral
for said reborrowing. Any reborrowings (those occurring after new borrowings
have first aggregated the Maximum Line Amount) shall not be subject to the
Origination Fee specified in Paragraph 2(G) below.
D. Maximum Line Amount. At no such time shall the collective
principal amount of all Advances exceed the Maximum Line Amount.
E. Interest Rates, Payment and Calculation. All Obligations shall
bear interest, on a 360 day basis in accordance with the terms and conditions of
the Line of Credit Note. Interest shall begin to accrue on the date of any and
all Advances hereunder.
6
<PAGE>
Interest hereunder shall be due and payable as provided in the
Line of Credit Note. Lender may charge such interest, all Lender Expenses (as
and when incurred), and all installments or other payments due hereunder or
under the Credit Agreement to Borrower's loan account, which amounts shall
thereafter accrue interest at the then applicable rate of interest. Any interest
not paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.
In no event shall the interest rate or rates payable under the
Credit Agreement and the Line of Credit Note, plus any other amounts paid in
connection herewith, exceed the highest rate permissible under any law that a
court of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Lender, in executing the Credit Agreement and the Line
of Credit Note, intend to legally agree upon the rate or rates of interest and
manner of payment stated within it; provided, however, that, anything contained
herein or in the Line of Credit Note to the contrary notwithstanding, if said
rate or rates of interest or manner of payment exceeds the maximum allowable
under applicable law, then, ipso facto as of the date of the Credit Agreement
and the Line of Credit Note, Borrower is and shall be liable only for the
payment of such maximum rate of interest as allowed by law, and payment received
from Borrower in excess of such legal maximum, whenever received, shall be
applied to reduce the principal balance of the Obligations to the extent of such
excess.
F. Crediting Payments; Application of Collections. On the Friday
of each week, commencing with the week following the week in which the Closing
Date occurred, Lender will apply 100% of the funds collected under all Pledged
Accounts as of said dates, first to any unpaid Lender Expenses, then to the
payment of accrued and unpaid interest and then to the reduction of the
principal balance of the Obligations. The crediting of collections against
Obligations outstanding shall not be considered a payment against the
Obligations unless any wire transfer is of immediately available federal funds
and is made to the appropriate deposit account of Lender or unless and until
such check or other item of payment is honored when presented for payment. Any
Account payments received directly by the Borrower shall be immediately
forwarded to the Lender. Should any check or item of payment not be honored when
presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly.
G. Origination Fee. In consideration for underwriting, due
diligence and credit analysis services rendered, Borrower covenants and agrees
to pay Lender an origination fee equal to one percent (1%) of each Five Million
Dollars ($5,000,000), or portion thereof, of principal advanced by Lender to
Borrower pursuant to the terms of the Line of Credit Note, it being understood
that Lender is authorized by Borrower to deduct this sum directly from any
Advance once the initial or any subsequent origination fee is earned if said sum
is not otherwise paid by Borrower. In illustration of the foregoing, Lender
shall be entitled to deduct $50,000 from the first advance of principal
hereunder as its origination fee associated with the first $5,000,000 tranche of
principal becoming subject to advance hereunder and Lender shall be entitled to
deduct $50,000 once any principal is advanced from each successive $5,000,000
tranche of successive principal becoming subject to advance hereunder. If not
otherwise paid in accordance with the procedure referenced above, the entire
origination fee, or portion thereof, of one percent (1%) of the Maximum Line
Amount shall be due and payable in full at the expiration of the Borrowing
Period. However, no Origination Fee
7
<PAGE>
is due for any $5,000,000 tranche not commenced. Conversely, the entire $50,000
increment is due for any $5,000,000 tranche commenced, but not completed.
3. CONDITIONS TO ADVANCES.
-----------------------
Conditions to Advances. The obligation of Lender to make any
Advance is subject to the fulfillment, to the satisfaction of Lender and its
counsel, of each of the following conditions on or before the date of any
Advance:
(a) With respect to the initial Advance, all of those documents as
are more fully described on that closing agenda attached hereto as EXHIBIT A,
which collectively constitute and comprise portions of the Credit Agreement are
in form and substance satisfactory to Lender and shall have been duly executed
by all parties thereto, with the signatures properly notarized and the
instruments in proper form for recordation, as required, and shall have been
recorded and/or delivered to Lender or Lender's agent, as appropriate.
(b) All conditions set forth herein to the making of the initial
Advance shall have been satisfied on or before the Closing Date.
(c) All representations and warranties contained herein shall be
true and correct as of the date of the execution of the Credit Agreement, the
Closing Date and the date of Advance.
(d) Borrower shall have executed such certificates and resolutions
as are required by Lender and will perform such other acts as may be required to
perfect Lender's security interests in the Collateral.
(e) There shall be no Event of Default, then in existence, or any
event or occurrence which with notice, the passage of time or both, would
constitute an Event of Default.
(f) Lender reviewed and approved sufficient Pledged Accounts
complying with the requirements of Paragraph 8 herein to support the
contemplated Advance.
(g) Borrower shall have delivered and Lender shall have received
and approved all certificates, instruments and other additional documents and
assurances as Lender may reasonably require and shall have the on-going right to
receive all other documents from Borrower which Lender may reasonably require
and which shall be in furtherance of the intentions and goals of this agreement.
(h) Lender has or shall have received copies of articles of
partnership or incorporation of Borrower and a current Certificate of Good
Standing for Borrower issued by the appropriate governmental authority as well
as copies, if any, of Borrower's licenses or qualifications to do business.
(i) With regard to the initial Advance, Lender shall have received
an executed attorney opinion letter from legal counsel for Borrower in form and
substance satisfactory to Lender,
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addressed to Lender in form and scope satisfactory to Lender and covering such
matters relating to Borrower, the Pledged Accounts as Lender and its counsel in
their discretion may require.
(j) With regard to any subsequent Advance, if Lender has reason to
believe that any material change in any legal issue affecting the Project has
arisen, Lender shall have received a reaffirmation of the legal opinion issued
by Borrower's Counsel as of the Closing Date verifying that no changes in
condition to said opinion or the facts or legal conclusion referenced therein
have occurred.
(k) Lender shall have received satisfactory evidence that the
Pledged Accounts are (i) exempt from or in compliance with applicable statutes
and regulations governing the sale of timeshare interests or operation of
timeshare projects, or that the business of Borrower fully complies with all
such statutes and regulations, (ii) Borrower is in good standing with all
applicable governmental authorities, and (iii) the Pledged Accounts comply with
all applicable federal, state, and local statutes, regulations and ordinances.
(l) Lender shall have received and reasonably reviewed and
approved all documents relating to the sale of Timesharing Interests in the
Project including without limitation all regime documents and amendments
thereto, applicable state timeshare registrations, forms of sales contracts,
disclosure documents and property owner association constituent documents and
budgets.
(m) Lender or Escrow Agent shall have received the End-Loan
Documents with respect to each Pledged Account, which shall have been fully
executed by all applicable Account Debtors, and any cross-outs, erasures,
write-outs and modifications regarding any of the foregoing shall be initialed
by the Timeshare Purchaser.
(n) Borrower shall have provided Lender with evidence of insurance
in place in an amount sufficient to restore the improvements upon the property
constituting the Project to a usable state. At the time of execution hereof,
Lender acknowledges that Borrower has provided proof of insurance satisfying the
foregoing requirements.
(o) Borrower's net worth shall not decrease below $17,500,000.
(p) There shall have been no material adverse change or threatened
adverse change to the financial condition of Borrower nor shall there be any
material adverse change in Borrower's business operations or the Project.
(q) Lender shall have received verification that the Project
remains in continuing compliance with all local, state, and federal laws.
(r) Borrower shall have paid Lender all Lender's Expenses
including, without limitation, legal fees (but not more than $5,000 for such
fees, plus necessary costs incurred) and disbursements of Lender's counsel,
incurred by Lender in connection with the subject loan, and the preparation of
the Credit Agreement. Any unpaid reimbursement as provided in this paragraph may
be deducted by Lender from any Advance.
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<PAGE>
(s) Borrower shall be in material compliance with all financial
and protective covenants and warranties and representations of every nature as
may be found in Borrower's lending agreements with third party lenders and
Borrower shall not be in material default in any term or condition of any other
agreement of whatever nature to which Borrower is a party.
(t) Lender must be satisfied that the Project is in complete
accordance with all applicable zoning requirements.
(u) Borrower shall demonstrate the existence of adequate
Timesharing Interest inventory so as to meet all demands for usage as required
by Account Debtors.
(v) During the term of the Credit Agreement, Borrower shall
maintain a debt to equity ratio of not greater than 7 to 1.
4. ADVANCES.
---------
Subject to the terms, limitations, and conditions herein, in the Credit
Agreement and in the Line of Credit Note, Lender agrees to advance funds to
Borrower as follows:
Procedures for Advances. Advances shall be made no more than
weekly in a minimum amount of $25,000 upon receipt by Lender of a written
request for an Advance from Borrower received by Lender at least five (5)
Business Days prior to the requested date of the Advance and Borrower's
compliance with all requirements as set forth herein and the satisfaction of all
criteria set forth herein regarding qualifying Accounts.
Principal of Note. Upon making an Advance or receiving a repayment
of principal or interest, Lender shall make such entries in its records as
Lender may deem necessary or appropriate to indicate the amount outstanding
under the Line of Credit Note and the Credit Agreement as adjusted for all
Advances hereunder. In the absence of manifest error, Lender's records shall be
conclusive proof of the amount outstanding, subject to rebuttal by Borrower.
5. SERVICER AND CUSTODIAN.
-----------------------
Servicer. Servicer shall act as servicer of all Pledged Accounts.
The duties of the Servicer are set forth in the Servicing Agreement, which among
other things, shall limit the amount of servicing fees and costs which may be
imposed by Servicer.
Custodian. Lender shall serve as custodian of the Pledged Accounts
and all books and records pertaining thereto pursuant to the terms and
conditions of the Custodial Agreement.
6. (RESERVED)
7. SECURITY.
---------
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<PAGE>
As security to collateralize the Borrower's duty to pay and
perform all Obligations hereunder, Borrower shall and does hereby give and grant
to Lender:
(a) a first lien security interest in and to the Pledged
Accounts;
(b) a collateral assignment of all Pledged Accounts along with
corresponding deed of trust;
(c) a collateral assignment of all of Borrower's rights, title
and interest in and to all marketing, management, exchange and
related contracts in favor of Borrower or its affiliates and
otherwise associated with the Project;
(d) that other collateral and security which Lender may
reasonably require;
After the Closing Date, upon request by Lender, Borrower shall
grant to and in favor of Lender a security and collateral interest in the form
of a "surety" deed of trust in and to all or a portion, in Lender's discretion,
of The Inn at Los Abrigados and the 5000 Timesharing Interests currently owned
by Premiere Vacation Club (which number may be increased through amendment)
which shall be subordinate to the interests of Timesharing Interest Purchasers
and which shall otherwise contain nondisturbance provisions in favor of
Timesharing Interest Purchasers to the reasonable satisfaction of Borrower and
the Arizona Department of Real Estate. It is agreed that the form of said
instrument shall be similar to that form of surety deed of trust executed by
Borrower in favor of Lender in the Kohl's Ranch Lodge lending facility which was
entered into between the parties on or about June 27, 1997, which form will be
used as a general guide only in fulfilling the goals of this paragraph. At any
time and from time to time, the surety deed of trust will contain provisions to
automatically release a Timesharing Interest from the encumbrance of the surety
deed of trust upon the closing of a purchase by a Timesharing Interest Purchaser
so that no recording of a release, nor execution of any release document, is
necessary. If requested by Borrower, Lender will enter into inter-creditor pari
passu agreements with other lenders of Borrower which are fair and reasonable in
their terms and are not materially detrimental to Lender.
8. ELIGIBILITY OF ACCOUNTS.
------------------------
In order to be considered Qualified Pledged Accounts and therefore
subject to having the Borrowing Base applied thereto, an Account must meet the
following underwriting standards:
(a) The Account must relate to sale of fee simple Timesharing
Interests or the sale of Club membership interests in the Project to a citizen
of the United States or Canada. However, not more than five percent (5%) of the
Pledged Accounts may be from citizens of other countries if such Pledged
Accounts meet Lender's reasonable underwriting criteria;
(b) The Accounts must be fully amortizing and have an original
term of no more than eighty-four (84) months and a minimum cash (or other
immediate funds) down payment of ten percent (10%) or paid-in equity of ten
percent (10%), less closing costs; provided that fully amortizing Accounts
possessing an original term of eighty-five (8 5) to one hundred and twenty (
120)
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<PAGE>
months or less are permissible so long as the monthly payments associated with
same or equal to or greater than $150. With regard to Accounts possessing a term
of eighty-four (84) or less months, then the minimum monthly installment payable
with regard thereto shall not be less than $80;
(c) At the time of any Advance, no installment on the Account may
be more than twenty-nine (29) days contractually past-due, unless waived by
Lender. Subsequent to any Advance, any Pledged Account will be considered
ineligible for Borrowing Base application should any scheduled monthly
installment become more than eighty-nine (89) days contractually past-due,
unless waived by Lender provided Lender shall accept previously delinquent
Accounts which have been reinstated by Borrower and have been amended, in
writing, to provide for the deferral of the delinquent payments to the end of
the contract payment obligation (thereby extending the term of said contract),
provided (a) such contract otherwise meets the requirements hereunder in
relation to an Advance; (b) the agreement of extension or modification must be
in writing and signed by the Account Debtor; (c) the Account Debtor has made the
three (3) successive payments immediately prior to submittal for Pledged Account
status and (d) such an extension accommodation has not been made between
Borrower and Account Debtor more than three (3) times during the life of the
Account.
(d) The maker or guarantor of the Account shall not claim a
defense, set-off or counterclaim with respect to the Account or dispute, contest
or repudiate its purchase of a Timesharing Interest;
(e) The repayment of the Account is secured and collateralized by
a deed of trust or assignment of contract for sale encumbering the Timesharing
Interest subject only to (i) the lien of real property taxes and assessments not
yet due or payable, and (ii) such other non-monetary exceptions to title as are
acceptable to the Lender;
(f) Lender is satisfied that all dwelling units and promised
Project amenities have been completed and are ready for occupancy and usage;
(g) All monies to be paid under and pursuant to the Account are to
be paid in United States Dollars;
(h) Borrower shall furnish to Lender an executed credit
application with respect to each Account submitted to Lender for underwriting,
and a credit report along with appropriate scoring matrix in that format that
Lender may reasonably request;
(i) Lender may reject any Account which, in its sole discretion,
reasonably fails to meet Lender's underwriting criteria and conditions;
j) All Timesharing Interests giving rise to Accounts to be
financed hereunder shall be located in buildings wherein the appropriate
governmental entity has issued a certificate of occupancy or similar document;
(k) The obligor's creditworthiness must be reasonably acceptable
to Lender;
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<PAGE>
(1) All monies to be paid under the pursuant to the accounts shall
be paid in United States Dollars; Pledged Accounts may be paid by automatic
debit to an Account Debtor's bank account;
(m) All Timesharing Interests giving rise to Accounts must have
been registered with and approved by all applicable regulatory entities and the
Project in which the Timesharing Interest is located along with all regime
documents pertaining thereto must have been reviewed and approved by Lender.
Should any Pledged Account become more than eighty-nine (89) days or
more contractually delinquent or fail to meet or to continue to meet the
above-noted eligibility criteria (an "Ineligible Account"), then the cumulative
principal of all Pledged Accounts to which the Borrowing Base is applied in
determining Borrower's prospective Advances hereunder shall be reduced by the
principal value of the Ineligible Account even if the Account had previously
qualified for inclusion in determining Advance availability.
9. WEIGHTED AVERAGE COUPON.
------------------------
The Pledged Accounts shall at all times possess and maintain a weighted
average coupon rate ("WAC") of not less than the interest rate set forth in the
Line of Credit Note plus 100 basis points. If the WAC requirements hereunder
become out of balance then Lender shall have the right to take any action with
regard to subsequently Pledged Accounts that it deems reasonable in order to
bring the Pledged Accounts into compliance with the WAC standard.
10. (RESERVED)
11. BORROWING PERIOD.
-----------------
During the Borrowing Period, payments of interest only at a minimum
shall be due and payable on the first (1st) day of the first month following the
Closing Date and on the first (1st) day of each month thereafter. All payments
received on the Pledged Accounts shall be applied first to amounts, fees, costs
and Lender Expenses due under the Credit Agreement, then to interest due
thereunder, then to principal due thereunder or, at the option of holder, to any
other indebtedness or Obligations owed by Borrower or its affiliates to Lender
or its affiliates. In the event the funds received by Lender from the Pledged
Accounts are less than the required monthly payment hereunder, Borrower shall
pay the difference within ten (10) days after notice. In the event that payments
received from and on the Pledged Accounts and forwarded to Lender exceed the
amount required to fund the then-due interest, the excess amounts and payments
shall be applied to reduce the principal outstanding under the Line of Credit
Note and this Credit Agreement.
12. EXTENSION OF BORROWING PERIOD.
------------------------------
Upon request of the Borrower, the Borrowing Period may be extended for
an additional period at Lender's sole discretion.
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<PAGE>
13. PRINCIPAL AMORTIZATION PERIOD.
------------------------------
Equal fully amortizing monthly payments of principal and interest shall
at a minimum be due and payable beginning on the first (1st) day of the first
month immediately following the end of the Borrower Period and monthly
thereafter during the Amortization Period. Lender shall provide Borrower with
notice of the amount of such installment payments. If not otherwise paid during
the Amortization Period, all Obligations outstanding under the Credit Agreement
and the Line of Credit Note shall be due and payable in full on or before the
Maturity Date. The minimum monthly payment during the Amortization Period shall
be an amount which will amortize the unpaid balance of the Obligations over the
Amortization Period. All payments received by Lender from and on the Pledged
Accounts shall be applied first to amounts, fees, costs and Lender Expenses due
under the Agreement, then to interest due hereunder, then to principal due
hereunder, or at the option of the holder, to any other indebtedness owed by
Borrower or its affiliates to Lender or its affiliates. In the event the funds
received by Lender from the Pledged Accounts are less than the required monthly
payment hereunder, Borrower shall pay the difference within ten (10) days after
notice.
14. VOLUNTARY PRE-PAYMENTS.
-----------------------
The Borrower is prohibited from prepaying principal during the Borrowing
Period. Thereafter, at any time and from time to time, subject to the following
prepayment fees, Borrower may prepay all or a portion of the Line of Credit Note
commencing upon the termination of the Borrowing Period and continuing for a
twelve (12) month period thereafter by tendering with such prepayment a
prepayment fee of three percent (3%) of the amount of the prepayment. Commencing
at the beginning of the thirteenth (13th) month after the termination of the
Borrowing Period and for a twelve (12) month period thereafter, any such
prepayment shall be accompanied by a prepayment fee of two percent (2%) of the
amount of the prepayment. Commencing at the beginning of the twenty-fifth (25th)
month after the termination of the Borrowing Period and continuing for a period
of twelve (12) months thereafter, any such prepayment shall be accompanied by a
prepayment fee of one percent (1%) of the amount of the prepayment. Thereafter,
there shall be no prepayment fee. In the event Borrower does not tender a
prepayment fee as required herein, Lender may deduct same from the amount of any
tendered prepayment and apply the remainder of the payment against the
Obligations owing under the Line of Credit Note and this Credit Agreement. Any
such prepayments shall not delay or reduce the next-due monthly installments.
The prepayment fees referenced herein are understood to compensate the Lender
for its costs associated with the Lender's commitment of funds and other
expenses associated with the providing of this credit facility to Borrower. The
prepayment penalties hereunder shall not apply to principal payments which are
collected by the Servicer through the natural payment or pre-payment of the
Pledged Accounts by the Account Debtors during the Borrowing Period or the
Amortization Period, nor shall it apply to the relocation of Pledged Accounts
from this credit facility to any other credit facility between Lender and
Borrower. Such prepayments on Pledged Accounts by Account Debtors shall apply to
Borrower's installments in the order of their maturity. Moreover, the prepayment
penalties hereunder shall not apply to prepayments from receivables
securitizations or other like financing proceeds so long as (a) Lender has been
engaged by Borrower to negotiate and effectuate the contemplated securitization
or other like financing, (b) the receivables which are the subject of the
contemplated securitization or other like financing are aged at least twelve
(12) months or more, and (c) at least Ten Million
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<PAGE>
Dollars ($10,000,000) of principal continues to be owed and outstanding under
this Agreement after the closing and funding of the contemplated securitization
or other like financing.
15. MANDATORY PREPAYMENT.
---------------------
Should the Obligations outstanding ever exceed the Borrowing Base, then
the Borrower shall be required within twenty (20) days after notice to pledge
additional eligible Accounts sufficient to reinstate the Borrowing Base to its
prescribed ratio. Borrower may also, or in the alternative, repay in cash an
amount equal to the deficit under the Borrowing Base. No prepayment fee will be
payable in connection with prepayments in such circumstances. Mandatory
prepayment shall also arise should an Event of Default occur hereunder. Upon the
occurrence of an Event of Default, all Obligations outstanding hereunder shall
immediately become due and payable.
16. CONFIRMATION AUDIT OF PLEDGED ACCOUNTS.
---------------------------------------
Lender shall have the right to audit the Pledged Accounts by
confirmatory letters at any time prior to or after the Closing Date. Lender
shall have the right to perform confirmatory telephone audits. Borrower agrees
to furnish or to cause Servicer to furnish Lender all information necessary for
Lender to conduct such audits and to fund all reasonable costs incurred by
Lender in performing such audits.
17. REPRESENTATIONS AND WARRANTIES.
-------------------------------
Borrower makes the following representations and warranties to Lender,
each of which shall be deemed made again as of the date of each and every
Advance:
(a) Borrower is a corporation or partnership, as the case may be, duly
organized, validly existing, and fully qualified and authorized to do business
in the State of Arizona; and Borrower and its business and operations are in
full compliance with all applicable federal, state and local laws, ordinances
and regulations. Borrower is governed by the terms of its Articles of
Incorporation or constituent documents, true copies of which have been delivered
to Lender. The Articles of Incorporation or constituent documents are in full
force and effect and have not been amended or modified in any manner, except as
indicated in the copies furnished to Lender. There is no agreement of any kind
other than as provided Lender which governs Borrower or the relative rights and
duties of the parties holding interests in Borrower.
(b) Borrower has taken all action to permit Borrower to enter into this
Agreement or any other agreement or transaction contemplated herein, and the
same is valid and binding upon Borrower. No officer or agent of Lender shall be
required to make any inquiry concerning the validity of any transaction
purported to be made by Borrower or the authenticity of any signature or
endorsements relating to same, and Lender may conclusively assume that every
obligation, agreement, instrument or act or thing done and executed by such
person purportedly on behalf of Borrower has been so executed or done in this
official capacity as an agent of Borrower.
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<PAGE>
(c) Borrower is not subject to any disciplinary actions or proceedings
by any governmental authority or trade organization with respect to any licenses
or permits held by Borrower.
(d) Borrower's execution, delivery and performance of this Agreement,
the Credit Agreement and the borrowing evidenced by the Line of Credit Note (i)
will not violate any indenture, agreement or any other instrument to which
Borrower is a party or by which Borrower or any of its property is bound; and
(ii) will not be in conflict with, result in a breach of or constitute (with due
notice and/or lapse of time) a default under any such indenture, agreement or
other instrument, or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of its property or assets, except
as contemplated by the provisions of this Agreement. Each of the documents which
collectively constitute the Credit Agreement, when executed and delivered to
Lender, will constitute the legal, valid and binding obligations of respective
signatories thereto enforceable in accordance with their terms.
(e) All financial data and other information of whatever nature that
have been given to Lender with respect to Borrower (i) is complete and correct
in all material respects and do not omit to state any material fact necessary in
order to make the statements herein or therein not misleading; and (ii)
accurately present the financial condition of Borrower as of the date on which
the same have been furnished. All balance sheets disclose all known liabilities,
direct and contingent, as of their respective dates. There has been no adverse
change in the financial condition of Borrower since the date of the most recent
of each such financial statement given to Lender other than changes in the
ordinary course of business, none of which changes has been materially adverse.
(f) The Borrower is not a party to any agreement or instrument
materially and adversely affecting its present or proposed business, properties
or assets, operations or condition, financial or otherwise; and is not in
material default in performance, observance or fulfillment of any of the
material obligations, covenants or conditions set forth in any agreement or
instrument to which it is a party.
(g) All other reports, papers, data and information given by Borrower to
Lender with respect to Borrower and other persons and entities, are accurate and
correct in all material respects and complete insofar as completeness may be
necessary to give Lender a true and accurate knowledge of the subject matters.
(h) Borrower has filed all required federal, state, county and municipal
income tax returns and has paid all taxes which have become due pursuant to such
returns or pursuant to any assessments received by it. Borrower knows of no
basis for a material additional assessment in respect of any such taxes.
(i) There is not now pending against or affecting Borrower nor to its
knowledge is there threatened any action, suit or proceeding at law or in equity
or by or before any administrative agency which, if adversely determined, would
materially impair or affect the financial condition or operation of Borrower.
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<PAGE>
(j) No authorization, consent, approval, license, exemption, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or securities exchange,
is or will be necessary to the validity of the rights created under this
Agreement.
(k) This Agreement, the documents relating thereto and all aspects of
the transactions contemplated therein do not violate any federal or state laws
or regulations, including without limitation laws or regulations relating to
usury and the Truth-in-Lending Act.
(l) Borrower has not made an assignment for the benefit of creditors;
has not suspended business or commenced proceedings for its dissolution; has not
filed bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings for relief under the bankruptcy laws for the
relief of debtors, instituted by or against it or has consented thereto; or has
any judgment, writ or warrant or attachment, or similar process, entered or
filed against it or any of its property or assets which renders it insolvent or
impairs its ability to continue doing business and which has remained unvacated,
unbonded or unstayed for a period of 30 days.
(m) Borrower has good and marketable legal title to and is the sole
owner of the Pledged Accounts and the Pledged Accounts are not subject to a
security interest or other claim from third parties, except as may be disclosed
to Lender in writing.
(n) The real property which is the subject of each Pledged Account is
free and clear from all material encumbrances which might have a substantive
negative impact upon the use of said real property as contemplated by the Credit
Agreement and, during the term of the Credit Agreement, shall remain free and
clear of all such material encumbrances.
(o) Borrower and the Project are in material compliance with all state
laws and regulations, concerning the operation of the Project from which the
Pledged Accounts arise and the sale of interests therein. The Project possesses
the presence of no Hazardous Materials to Borrower's knowledge nor is Borrower's
current or proposed operation of the Project likely to cause the production or
location upon the Project of Hazardous Materials. The Borrower's operations of
the Project and the Project's current status are all in accordance with all
state, federal or other environmental rules, regulations and laws of every
nature.
(p) Borrower is not insolvent nor has made an assignment for the benefit
of creditors; has not suspended business or commenced proceedings for
dissolution or become insolvent; has filed any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceedings for
relief under bankruptcy, insolvency or receivership laws for the relief of
debtors, instituted by or against it or has consented thereto; or has any
judgment, writ or warrant of attachment, or similar process, entered or filed
against it or any of its property or assets, which renders it insolvent or
impairs its ability to continue doing business and which has remained unvacated,
unbonded or unstayed for a period of 30 days; has generally not failed to pay
its debts as they become due; has not taken any action, nor has any intentions
to take any action, which would constitute an "act of bankruptcy" under the
Federal Bankruptcy Code or in contemplation thereof.
17
<PAGE>
(q) The purpose of this transaction is exclusively for commercial or
business purposes.
(r) Borrower has (i) undertaken a detailed inventory, review and
assessment of all areas within its business operations that could be adversely
affected by the failure of Borrower to be year 2000 compliant on a timely basis,
(ii) developed a detailed plan and time line for becoming year 2000 compliant on
a timely basis and (iii) to date, implemented that plan in accordance with that
time table in all material respects. Borrower reasonably anticipates that it
will be year 2000 compliant on a timely basis.
(s) Borrower has made, or will make, written inquiry of each of its key
suppliers, vendors and customers as to whether such persons will, on a timely
basis, be year 2000 compliant in all material respects and on the basis of such
inquiry believes that all such persons will be so compliant, or Borrower
believes that such an inquiry is not necessary. For purposes hereof, "key
suppliers, vendors and customers" refers to those suppliers, vendors and
customers of Borrower whose business failure would, with reasonable probability,
result in a material adverse change in the business, properties, condition
(financial or otherwise), or prospects of Borrower.
(t) At the time of the execution of this agreement and throughout the
term of this credit facility, including any extensions hereto, Borrower shall at
all times maintain a ratio of at least one deeded, perpetual and unencumbered
Timesharing Interest per Club membership which has been sold to a third party
and is outstanding, all in accordance with the Club's recorded membership plan.
18. PROTECTIVE COVENANTS.
---------------------
So long as any of the Obligations remains unpaid, Borrower shall at all
times be in full and timely compliance with all of the following covenants and
perform all duties and obligations set forth below in a timely manner:
(a) The Borrower shall at all times insure that the Project and the
Pledged Accounts are in material compliance with all laws, rules and regulations
of whatever nature associated with the Borrower's operation of the Project and
its sale of Timesharing Interests or Club memberships therein including, without
limitation, all laws pertaining to timeshare sales and marketing activities, the
providing of consumer credit to third parties, the manner in which real property
transactions are closed, and all other laws and regulations that serve as a
condition to or might otherwise have a negative impact upon the enforceability
of the Pledged Accounts as represented in the Credit Agreement.
(b) True and correct pro-forma copies of all end-loan consumer documents
which pertain to the sale of Timesharing Interests or Club memberships in and to
the Project have been presented to the Lender for review prior to the date
hereof. All such documents are and will always be in complete compliance with
all rules and regulations applicable thereto and will continue to so remain in
compliance during the term of the Credit Agreement.
(c) The Borrower shall comply with the requirement of all applicable
laws, rules, regulations and orders of any governmental authority, including,
without limitation, applicable usury laws, Truth-
18
<PAGE>
in-Lending laws, subdivisions law, consumer credit laws, Timesharing Interest
sales and registration laws and the Interstate Land Sales Full Disclosure Act.
(d) The Borrower shall keep adequate records and books of account
reflecting all financial transactions in conformity with (i) generally accepted
accounting practices applied on a consistent basis, and (ii) all applicable
requirements of any governmental agency having jurisdiction over Borrower or any
of its businesses.
(e) Borrower acknowledges that the placement of any additional liens
upon the Pledged Accounts described in the Credit Agreement may impair the
ability of Lender to obtain assurance that its security interest remains in a
prior position and that the Obligations will be repaid in accordance with the
Credit Agreement. Accordingly and to facilitate the purposes of this Agreement
and to avoid causing damage to Lender, Borrower agrees that it shall not create
or suffer to be created any additional lien upon any of the Pledged Accounts
without Lender's prior written consent which will not be unreasonably withheld.
(f) Upon the request of Lender, the Borrower shall execute or cause the
execution, acknowledgment and delivery of such further instruments (including,
without limitation, declarations of no set-off) and do such further acts as may
be necessary, desirable or proper to carry out more effectively the purposes of
this Agreement or the other Credit Agreement.
(g) The Borrower shall not take any action with respect to any of the
security for the Obligations held by Lender from time to time which is
inconsistent with the provisions and the purpose of this Agreement or which
would materially and adversely affect the rights of Lender under the Credit
Agreement.
(h) Lender shall have the right to make reasonable periodic audits of
Borrower's books and records and those of the Project, and to verify the Pledged
Accounts, with Lender's reasonable expenses to be reimbursed by Borrower.
(i) Borrower shall not use Lender's name, or the name of any of Lender's
affiliates, in connection with its business activities, except as necessary in
Borrower's dealing with governmental agencies, financial institutions, and
Borrower's internal business matters.
(j) Borrower shall supply Lender on a monthly basis with all forms of
Timeshare Interest inventory reconciliation reports as Lender may reasonably
require to insure that Borrower's Pledged Accounts are consistent with its
available and unencumbered sales inventory and so as to insure that Borrower's
Club membership sales are consistent with the provisions of paragraph 17(t)
hereof.
(k) Borrower shall provide Lender with a schedule of all proposed
Accounts which may be subject to a contemplated Advance hereunder at least five
(5) Business Days prior to the date of the contemplated Advance.
(1) Borrower or Servicer shall furnish and deliver to Lender within five
(5) days after the end of each month a detailed trial balance of the collection
and accounting status of each Pledged Account
19
<PAGE>
which shall contain a monthly delinquency report, a cash transactions report, a
collections report, and all other reports as Lender may request, all in form
acceptable to the Lender.
(m) Borrower shall submit to Lender at least annually and as otherwise
requested by Lender a detailed annual operating budget for the Project and
financial statements regarding the operations of the Project's property owners
associations, certified by an appropriate officer of Borrower.
(n) Borrower shall take all steps necessary in order to insure that its
data processing, management information and related computer systems are year
2000 compliant and are otherwise in accordance with year 2000 policies and
procedures which are routinely observed by publicly traded corporations.
(o) Borrower shall at all times pay all personal and real property taxes
of whatever nature which are applicable to the Project and shall, moreover, at
all times insure that the Project carries liability and casualty insurance in
amounts which Lender deems reasonable based upon objective industry standards.
Borrower shall provide Lender with proof of payment of all real and personal
property taxes applicable to the Project on an annual basis upon request, and
shall additionally upon request, provide Lender with a certificate of insurance
from a nationally recognized insurance company certifying the existence of the
required casualty and liability insurance, which without request shall
additionally specify Lender as a co-insured and co-loss payee thereon.
19. FINANCIAL STATEMENTS; REPORTS AND TAX RETURNS.
----------------------------------------------
Accountings, Tax Returns and Financial Statements. Borrower shall
deliver to Lender: (a) monthly sales and cancellation reports, (b) quarterly
financial statements within forty-five (45) days after the end of each fiscal
quarter, (c) annual audited consolidated financial statements for ILX Resorts
Incorporated within ninety (90) days after the end of each fiscal year, and (d)
such other information as Lender might reasonably request from time to time.
With regard to internally generated reports, all shall be certified by
Borrower's chief financial officer as being true and correct.
20. AUDIT.
------
Lender shall have the right to inspect and/or audit Borrower's books and
records at Borrower's place of business during business hours upon ten (10) days
notice to Borrower.
21. TIMESHARING INTEREST SALES PRICE LIST.
--------------------------------------
Borrower shall, upon request, provide to Lender quarterly current
Timesharing Interests sales price list, and minimum sales prices regarding the
sale of Timesharing Interests to third party retail purchasers.
22. SERVICING REPORTS.
------------------
Servicer and/or Borrower shall provide Lender upon request by Lender
with copies of all reports produced by Servicer with respect to the Pledged
Accounts.
20
<PAGE>
23. CROSS-DEFAULT.
--------------
Any defaults under the Credit Agreement, Line of Credit Note, Secured
Line of Credit Lending Agreement (ILX Incorporated) dated April 9, 1996,
$2,000,000 Secured Line of Credit Promissory Note dated April 9, 1996,
Receivables Sale and Purchase Agreement dated February 19, 1997, $1,500,000
Secured Term Promissory Note dated June 27, 1997, $5,000,000 Secured Line of
Credit Promissory Note dated June 27, 1997, Secured Line of Credit Lending
Agreement (ILX Incorporated -- Kohl's Ranch Lodge Facility) and all documents
referenced therein or pertaining thereto which have been previously executed by
and between Lender and Borrower, or any other obligation from Borrower or its
affiliates to Lender or its affiliates shall be deemed to constitute and
comprise an Event of Default hereunder and a default under any and/or all of the
other loans or agreements with Lender or its affiliates and any collateral under
any or all of the above shall be deemed to be collateral for the others. Lender,
at its option may exercise any of its rights and remedies under these agreements
to cure a default under any of the agreements, including but not limited to
retention of and/or application of payments on the Pledged Accounts, and/or any
other collateral.
24. DEFAULT.
--------
The occurrence of any one or more of the following events and/or
occurrences shall constitute an "Event of Default" hereunder:
(a) Default in the performance of any obligation by Borrower under the
Line of Credit Note, this Secured Line of Credit Lending Agreement, or any of
the documents which constitute the Credit Agreement, whether or not such default
is with respect to the payment of money or otherwise;
(b) Borrower's failure to comply with the provision of any financial
covenant or any other covenant, condition or obligation contained in the Credit
Argument;
(c) Any warranty or representation contained herein at any time proves
to be false or misleading in any material respect;
(d) The levy of an attachment, execution or other such process against
Borrower's property or any of its assets with respect to a claim or claims
aggregating $100,000 or more and the failure by Borrower to obtain the discharge
thereof or provide adequate bond acceptable to Lender as security therefor
within 30 days after attachment;
(e) Default in the performance of any other obligation of Borrower to
Lender under any other agreement between Borrower and Lender;
(f) Borrower's entry into or granting of a general assignment for the
benefit of its creditors, the voluntary or involuntary appointment of a receiver
for all or substantially all of its assets, Borrower's bankruptcy or Borrower
admits in writing its inability to make payments on its debts as they mature;
21
<PAGE>
(g) The occurrence of any material adverse change in the financial
conditions or operations of Borrower;
(h) The occurrence of a default in the performance of any other payment
obligation of Borrower, whether owed to Lender or any other person, firm, or
entity, which default gives rise to a liability of $100,000 or more, which
obligation is not contested or defended by Borrower in good faith;
(i) The occurrence of a monetary or non-monetary event of default under
the Secured Line of Credit Lending Agreement (ILX Incorporated) dated April 9,
1996, $2,000,000 Secured Line of Credit Promissory Note dated April 9, 1996,
Receivables Sale and Purchase Agreement dated February 19, 1997, $1,500,000
Secured Term Promissory Note dated June 27, 1997, $5,000,000 Secured Line of
Credit Promissory Note dated June 27, 1997, Secured Line of Credit Lending
Agreement (ILX Incorporated -- Kohl's Ranch Lodge Facility) and all documents
referenced therein or pertaining thereto which have been entered into by and
between Lender and Borrower.
25. REMEDIES.
---------
Upon the occurrence of any Event of Default, Lender may:
(a) Declare all of the Obligations immediately due and payable;
(b) Commence foreclosure or otherwise enforce Lender's rights against
any security then held by Lender for the Obligations in such order as Lender may
determine;
(c) Terminate Lender's agreement to make further Advances under this
Agreement;
(d) Offset any indebtedness from any amounts due Borrower under any
other agreement between Borrower and Lender;
(e) Exercise any and all other rights and/or remedies which may be
available to Lender either at law or in equity.
Marshalling. Borrower specifically waives, to the fullest extent
permitted by law, any right to require marshalling of any of the assets
encumbered to secure the Obligations and to direct the order in which such
assets are sold.
Disposition of Proceeds. Subject to the provisions of all
applicable law, the net cash proceeds resulting from the sale or other
disposition of all or any part of the security held by Lender shall be applied
in the following order: (i) first, to the costs and expenses (including any
trustee's and attorney's fees) of retaking, holding, storing, processing and
preparing for sale, selling, collecting, liquidating the Collateral securing the
repayment of the Obligations and the like, including all costs associated with
work-out negotiations, litigation and bankruptcy proceedings, legal and
administrative costs, (ii) then to the satisfaction of the Obligations, with
application to principal, interest, charges and expenses to be in such order and
manner as determined by Lender in its sole discretion; and (iii) then to
satisfaction of any remaining obligations of Borrower hereunder. Any surplus
after such
22
<PAGE>
application shall be delivered to Borrower, and Borrower shall be liable for,
and shall pay to Lender on demand, any deficiency remaining after such
application.
Remedies Cumulative. The remedies provided for herein are
cumulative and shall be in addition to any and all other rights or remedies
provided for herein or at law or in equity including any banker's lien and right
of offset. The exercise of any right or remedy by Lender hereunder shall not
constitute a cure or waiver of any default in connection with the Obligations
nor invalidate any notice of default or act done pursuant to any such notice,
nor prejudice Lender in the exercise of any of its other rights.
26. MISCELLANEOUS.
--------------
(a) Waiver. No waiver by Lender of any default or breach by Borrower
hereunder shall be implied from any omission by Lender to take, or any delay in
taking, action on account of such default other than the default expressly made
the subject of the waiver and any such express waiver shall be operative only
for the time and to the extent therein stated. Any waiver of any covenant, term
or condition contained herein shall not be construed as a waiver of any
subsequent breach of the same covenant, term or condition. The consent or
approval by Lender to or of any act by Borrower requiring further consent or
approval shall not be deemed to waive or render unnecessary the consent or
approval to or of any subsequent similar act. Notwithstanding anything set forth
herein to the contrary, if no notice of a default or waiver is required
hereunder and none has been given, Lender shall not be deemed to have waived any
rights which it may have hereunder until seven (7) days following receipt by it
of written notice from Borrower alerting Lender to the fact that the time for
exercising any right or remedy hereunder has elapsed without exercise thereof
and such time for exercise shall automatically be extended to seven (7) days
following notice, said right shall conclusively be deemed to have been waived by
Lender. The intent of this paragraph is to avoid unintentional waivers by Lender
of any of its rights hereunder.
(b) No Duty of Lender. Nothing in this Agreement shall impose or imply
any duty or obligation whatsoever upon Lender, and Lender shall be under no duty
to take any action to preserve rights of Borrower with respect to any of the
security held by Lender for the Obligations. Borrower waives any and all
impairment of recourse and/or impairment of collateral defenses which it may
possess against the Lender.
(c) Amendment. The Agreement and the Credit Agreement, and the terms of
each of them, is the entire agreement between the parties and may not be
changed, waived, discharged or terminated orally, but only by an instrument or
instruments in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is asserted.
(d) Indemnification. To the fullest extent permitted by law, Borrower
agrees to indemnify and hold harmless Lender, and Lender's officers, directors,
shareholders, agents, attorneys and employees (collectively Indemnitee"), from
and against any and all out of pocket costs resulting from liability, loss,
damage, costs or expense, including court costs and attorney's fees, that
Indemnitee may hereafter suffer, incur, reasonably pay or in any manner be held
liable for to third parties, by reason of any breach, default, misstatement or
misrepresentation of any of the statements, warranties
23
<PAGE>
or representations of Borrower contained in the Credit Agreement or any related
agreement, or by reason of any breach or default by Borrower, or any of
Borrower's employees, officers or agents, in the performance of any duties,
covenants or obligations arising under this or any related agreement. In this
connection, but without limitation, Borrower agrees to reimburse any Indemnitee
promptly upon demand for any payments reasonably made by such person to a third
party with respect to any liability, damage, loss or claim to which the
foregoing indemnity relates.
(e) Notices. Any notice, demand or request which may be permitted,
required or desired to be given in connection herewith shall be in writing and
directed to the parties at the respective addresses set forth below (or at such
other address as a party hereto may designate in writing) and shall be tendered
by personal delivery or by facsimile transmission with verifiable transmission
capability or be deposited in the U.S. mail, registered or certified, return
receipt requested. Such notice, if forwarded by mail, shall be deemed effective
seventy-two (72) hours after deposit in the U.S. mail, or if personally
delivered, upon delivery. A registered mail or certified mail receipt will be
prima facie evidence of the giving of such notice and the date thereof. If such
notice is personally served, such notice shall be effective upon delivery or if
such notice is sent by facsimile transmission, such notice shall be effective
upon the completion of the transmission of the same (so long as the sender
retains evidence of the recipient's(s') receipt).
If to Borrowers: ILX Resorts Incorporated
Attn: Nancy Stone
2111 East Highland Avenue
Suite 210
Phoenix, AZ 85016
Facsimile: 602-957-2780
If to Lender: Litchfield Financial Corporation
Attn: Wayne Greenholtz
Senior Vice President
13701 West Jewell Avenue, Suite 200
Lakewood, Colorado 80228
Facsimile: 303-985-5375
With a copy to: Heartsill Ragon III
Gill Law Firm, P.A.
3801 TCBY Tower
Little Rock, Arkansas 72201
Facsimile: 501-372-3359
Nothing herein contained shall be construed as preventing the parties
hereto, respectively, from changing the place to which notice shall be
addressed, but no such change shall be valid unless it is given in
accordance with the terms of this paragraph.
24
<PAGE>
(f) Attorneys' Fees. Borrower does hereby covenant and agree that it
shall reimburse Lender for any and all reasonable litigation, collection and
enforcement fees and costs of whatever nature, including attorneys reasonable
fees and court costs, which Lender may incur as a result of its enforcement of
Borrower's obligations hereunder including, without limitation, all "workout" or
similar discussions and negotiations, and all reasonable fees and costs incurred
in connection with Lender's involvement in any bankruptcies arising therefrom.
(g) Binding Effect; Assignment. This Agreement may be assigned by
Lender. Borrower may not assign its interest in, or obligation under, this
Agreement except with the written consent of Lender. Subject to the forgoing,
all of the terms, covenants, conditions, representations and warranties hereof
shall inure to the benefit of, and be binding upon, the successors and assigns
of Lender and Borrower. Borrower hereby consents to the Collateral Assignment of
Lender's interests in and to the Credit Agreement to third party creditors of
Lender without the need for any further consent of whatever nature by Borrower.
Should Lender's assignee assume rights under the Credit Agreement, Lender
covenants and agrees that it will continue to perform the Credit Agreement in
accordance with its terms and conditions and shall recognize said assignee as
the lawful and enforceable successor in interest to Borrower.
(h) Interpretation and Venue. This Agreement shall be governed and
interpreted under Colorado law. Whenever the context requires, all words used in
the singular will be construed to have been used in the plural, and vice versa,
and each gender will include any other gender. The captions of the paragraph of
this Agreement are for convenience only and do not define or limit any terms or
provisions. Time is of the essence in the performance of this Agreement by
Borrower. The invalidity or unenforceability of any one or more provisions of
this Agreement will in no way affect any other provision.
(i) Preparation of Agreement. The parties hereto acknowledge that this
Agreement has been negotiated and prepared in an arms-length transaction and
that both Lender and Borrower have negotiated all the terms contained herein.
Accordingly, the parties agree that neither party shall be deemed to have
drafted the Agreement and the Agreement shall not be interpreted against either
party as the draftsman.
(j) Other Acts and Documents. The parties agree to undertake such other
acts and execute such other documents as may be reasonably necessary to effect
the purpose and intent of this Agreement.
(k) Merger. This Agreement represents the culmination of all prior
negotiations, representations, and agreements between the parties with respect
to the transaction contemplated hereby. All such prior negotiations,
representations, and agreements are merged herein.
(1) Advice of Counsel. Each party acknowledges to the other that such
party has been advised by legal counsel in connection with the negotiation and
execution of this Agreement and that each party understands the terms and
conditions contained herein and that each has entered into this Agreement
voluntarily.
25
<PAGE>
(m) JURY WAIVER. BORROWER HEREBY KNOWINGLY AND VOLUNTARILY WAIVES ITS
RIGHT TO A JURY TRIAL IN THE EVENT OF ANY DISPUTE OR LITIGATION ARISING
HEREUNDER OR UNDER ANY RELATED DOCUMENT EXECUTED IN CONNECTION HEREWITH.
BORROWER COVENANTS AND AGREES THAT THE SOLE AND EXCLUSIVE JURISDICTION AND VENUE
FOR ALL LITIGATION ARISING IN CONNECTION WITH THE ENFORCEMENT, COLLECTION OR
ADMINISTRATION OF THIS SECURED LINE OF CREDIT LENDING AGREEMENT SHALL REST
EXCLUSIVELY IN JEFFERSON COUNTY, COLORADO AND MAKER WAIVES ALL RIGHTS TO ASSERT
OTHERWISE.
(n) Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statement" shall include all notes and schedules thereto.
(o) Construction. Unless the context of any provision of this document
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the term "including" is not
limiting, and the term "or" has, except where otherwise indicated, the inclusive
meaning represented by the phrase "and/or". The words "hereof," "herein,"
"hereby," "hereunder," and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this Agreement.
Section, paragraph, exhibit and similar references are to this Agreement unless
otherwise specified. Any reference in this Agreement to the Credit Agreement or
any other Agreement to which Lender and Borrower are a party shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions and supplements thereto.
(p) Financing Rights. In consideration for Lender's establishing of the
subject credit facility, the reservation of funds needed to fulfill Lender's
obligations hereunder, and Lender's underwriting of Borrower's operations and
the Project, the Borrower does hereby grant to Lender and its successors and
assigns during the term of this Credit Agreement or any extensions hereof a
first right of refusal to purchase, hypothecate or otherwise finance all
Accounts generated, originated or otherwise owned by Borrower or any of
Borrower's affiliated entities from that project owned by Borrower and known as
the Inn at Los Abrigados and that project owned by Borrower known as Kohl's
Ranch Lodge (subject to Tammac Financial Corp.'s right to finance Accounts from
Kohl's Ranch Lodge in accordance with the provisions of that Secured Line of
Credit Lending Agreement -- Kohl's Ranch Lodge Facility dated June 27, 1997 and
any agreement between Tammac and Lender). Except for projects specifically named
in this subparagraph, Borrower further grants Lender the first right of refusal
to purchase, hypothecate or otherwise finance all Accounts generated, originated
or otherwise owned by Borrower for any of its affiliated entities from units
constructed at any project wherein Lender advances to Borrower in the future the
acquisition, development or construction financing for such units. Except for
Tammac's rights, should Borrower consider financing or selling any Account
referred to above to a third party, Borrower shall first inform Lender of such
plan and shall provide Lender with a definitive written commitment to provide
such financing from the contemplated finance company which sets forth the
definitive terms and conditions of the contemplated financing. Thereafter,
Lender shall have a twenty (20) day period in which to match the terms and
conditions as set forth in said letter. Should Lender match said terms and
conditions,
26
<PAGE>
then Borrower covenants and agrees that Borrower shall utilize Lender as its
exclusive financing source in connection with the subject financing. Recognizing
the difficulty in determining Lender's damage or damages should Borrower breach
the terms and conditions hereof, Borrower agrees to pay as liquidated damages to
Lender a sum equal to ten percent (10%) of the total principal value of all
accounts which Borrower finances to a third party in violation of the terms and
conditions of this Agreement. Additionally, subject to any existing rights of
lenders, Borrower will offer to Lender the non-exclusive opportunity to finance
Accounts generated from timeshare sales of Los Abrigados Resort & Spa, Varsity
Clubs of America at South Bend and Tucson, and Premiere Vacation Club.
(q) Schedules and Exhibits. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by this reference.
(r) Other Credit Facilities. It is recognized that Lender and Borrower
have entered into previous credit facilities that continue to remain outstanding
and enforceable including that Secured Line of Credit Lending Agreement (ILX
Incorporated) dated April 9, 1996, $2,000,000 Secured Line of Credit Promissory
Note dated April 9, 1996, Receivable Sale and Purchase Agreement dated February
19, 1997, $1,500,000 Secured Term Promissory Note dated June 27, 1997,
$5,000,000 Secured Line of Credit Promissory Note dated June 27, 1997, Secured
Line of Credit Lending Agreement (ILX Incorporated -- Kohl's Ranch Lodge
Facility) and all documents referenced therein or pertaining thereto
(collectively, the "Pre-existing Credit Facilities"). Nothing herein shall serve
to modify or amend any of the terms and conditions of the Pre-existing Credit
Facilities. As evidenced by Borrower's signature below, Borrower covenants,
agrees and acknowledges that, except to the extent a Pre-Existing Credit
Facility is retired by proceeds from this transaction, all documents and
agreements of every nature which evidence or pertain to the Pre-Existing Credit
Facilities continue to remain in full force and effect, completely enforceable
in accordance with their terms and free from all set-off rights, counterclaims
or other defenses to payment and enforceability by Lender.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year set forth above.
LENDER:
LITCHFIELD FINANCIAL CORPORATION,
a Massachusetts corporation
By: /s/ Wayne M. Greenholtz
---------------------------------
Title: Senior Vice President
-----------------------------
(Additional Signature Page Follows)
27
<PAGE>
BORROWER:
ILX RESORTS INCORPORATED,
an Arizona corporation
By: /s/ Nancy J. Stone
---------------------------------
Title: President
-----------------------------
LOS ABRIGADOS PARTNERS LIMITED
PARTNERSHIP, an Arizona limited partnership
By: ILE SEDONA INCORPORATED,
an Arizona corporation, its sole general partner
By: /s/ Nancy J. Stone
---------------------------------
Title: Vice President
-----------------------------
PREMIERE DEVELOPMENT INCORPORATED,
an Arizona corporation
By: /s/ Nancy J. Stone
---------------------------------
Title: President
-----------------------------
28
<PAGE>
EXHIBIT A
CLOSING AGENDA
$40,000,000
HYPOTHECATION LINE OF CREDIT LOAN
(GLOBAL FACILITY)
BETWEEN
LITCHFIELD FINANCIAL CORPORATION
TO
ILX RESORTS INCORPORATED
1. Good Standing Certificates
1. ILX Resorts Incorporated
2. Los Abrigados Partners Limited Partnership
3. Premiere Development Incorporated
2. Authorizing Resolutions
3. Closing and Incumbency Certificates
4. Secured Line of Credit Promissory Note
5. Secured Line of Credit Lending Agreement
6. Pledge and Security Agreement
7. UCC-1 Financing Statements
1. Arizona Secretary of State
2. Pima County
8. Collateral Assignment of Management, Marketing, Exchange and Other Contracts
9. Collateral Assignment of Receivables
10. Collateral Assignment of Deeds of Trust
11. UCC Lien Search Updates
12. Custodial Agreement
13. Irrevocable Limited Power of Attorney
14. Form of Allonge
15. Opinion of Borrower's Counsel
29
Exhibit 10-2
SECURED LINE OF CREDIT
PROMISSORY NOTE
$40,000,000 June 12, 1998
FOR VALUE RECEIVED, ILX RESORTS INCORPORATED, an Arizona corporation,
LOS ABRIGADOS PARTNERS LIMITED PARTNERSHIP, an Arizona limited partnership, and
PREMIERE DEVELOPMENT INCORPORATED, an Arizona corporation (collectively,
"Borrower"), whose address is 2111 East Highland Avenue, Suite 210, Phoenix,
Arizona 85016, do hereby jointly and severally covenant and promise to pay to
the order of LITCHFIELD FINANCIAL CORPORATION, a Massachusetts corporation
"Lender'), at its principal office at 13701 West Jewell Avenue, Suite 200,
Lakewood, Colorado 80228, or its assigns, or at such other place as the Lender
may designate to the Borrower in writing from time to time, in legal tender of
the United States, the sum of Forty Million Dollars ($40,000,000) or so much
thereof as may be advanced by Lender to Borrower hereunder along with interest
as provided herein.
Definitions. As used throughout this Promissory Note, the following
capitalized terms shall have the following meanings:
"Amortization Period" shall mean that sixty (60) month period of time
beginning upon the first month after the expiration of the Borrowing
Period.
"Borrowing Period" shall mean that forty-eight (48) month period
beginning the first month after the date of this Promissory Note.
"Change Date" shall mean that date upon which any change in the
Reference Rate occurs.
"Credit Agreement" shall collectively mean that Secured Line of Credit
Lending Agreement executed by and between Lender and Borrower of even
date herewith along with all documents referenced therein or executed
in connection therewith.
"Event of Default" shall mean the Borrower's failure to pay when due
any required payment of principal, interest or other sums due hereunder
or upon the occurrence of an event of default as defined under the
Credit Agreement.
"Interest Rate" shall mean, with regard to the first Five Million
Dollars ($5,000,000) of principal advanced hereunder, the Reference
Rate plus one and three-quarters percent (1.75%) per annum; and with
regard to all other principal advanced hereunder, the Reference Rate
plus one and one half percent (1.50%) per annum if (a) borrowings under
this Promissory Note which have not previously been the subject of a
principal advance by Lender (i.e. previous borrowings being paid with
funds from this transaction) total at least Five
Page 1 of 7 Pages
<PAGE>
Million Dollars ($5,000,000) and are advanced within eight (8) months
from the date of this Promissory Note (the "Initial Five Million"), and
(b) at least Ten Million Dollars ($10,000,000) in new principal is
advanced and outstanding under this Promissory Note for each subsequent
twelve (12) month period (commencing the day following the date on
which the Initial Five Million has been advanced) occurring during the
Borrowing Period. If at the end of any such twelve (12) months period,
the foregoing requirements have not been fulfilled, then the Interest
Rate on all Advances thereafter shall be the Reference Rate plus one
and three-quarters percent (1.75%) per annum.
"Maturity Date" shall mean that date which is one hundred and eight
(108) months from and after the date of this Promissory Note.
"Reference Rate" shall mean that rate of interest which is designated
by the Wall Street Journal, Eastern Edition, as the nation's average
"prime interest' rate on corporate loans at large U.S. money center
commercial banks. If more than one rate is published by the Wall Street
Journal as the "prime rate," the highest of the published rates shall
be used. Should the Wall Street Journal cease reporting said rate of
interest, then the Reference Rate shall be deemed that rate of interest
designated by Citibank, N.A. or its successors as its "prime rate" of
interest.
Interest Rate. The principal amount due hereunder shall bear annual
interest from the date of each advance of principal hereunder at the Interest
Rate. Interest shall accrue on a 360 day per year basis. The Interest Rate may
increase or decrease as provided herein as and when the Reference Rate changes.
With regard to the initial advance of principal hereunder, interest shall begin
to accrue as of the date of said advance. Interest shall similarly begin to
accrue against subsequent advances of principal hereunder as of the date of said
subsequent advance.
Adjustments to Interest Rate. The initial Interest Rate shall be based
upon the Interest Rate calculated on the date of execution of this Promissory
Note. The Interest Rate in effect hereunder shall be adjusted as of each Change
Date to reflect the Reference Rate then in effect. No adjustment that results in
a decrease in the Interest Rate shall take effect during any period in which
Borrower is in default under the terms of this Promissory Note or the Credit
Agreement. Any such decrease shall not become effective until the next regular
adjustment in the Interest Rate after the date that all such defaults have been
cured.
Usury. The Lender does not intend to violate any applicable usury laws.
Accordingly, all agreements between Borrower and Lender are expressly limited so
that in no contingency or event whatsoever, whether by reason of advancement of
the proceeds hereof, acceleration of maturity of the unpaid principal balance
hereof, or otherwise, shall the amount paid or agreed to be paid to the Lender
hereunder exceed the maximum rate allowed by applicable law. If, from any
circumstances whatsoever, fulfillment and payment of Borrower's obligations, at
the time performance of such obligation shall be due, shall cause the effective
rate of interest upon the sums evidenced hereby to exceed the maximum rate of
interest allowed by applicable law, then, the obligation to be fulfilled
Page 2 of 7 Pages
<PAGE>
shall be reduced automatically to the extent necessary to prevent that effective
rate of interest from exceeding the maximum rate allowable under applicable law
and to the extent that the Lender shall receive any sum which would constitute
excessive interest, such sum shall be applied to the reduction of the unpaid
principal balance due hereunder and not to the payment of interest or, if such
excessive interest exceeds the unpaid balance of principal, the excess shall be
refunded to Borrower. This provision shall control every other provision of all
agreements between Borrower and the Lender including, without limitation, the
Credit Agreement.
Borrowing Period. During the Borrowing Period, Borrower shall pay to
Lender at a minimum installment payments of interest only which shall be due and
payable on the first (1st) day of the month following the month of execution of
this Promissory Note and on the first (1st) day of each month thereafter. All
payments received by Lender from Borrower and the Pledged Accounts shall be
applied first to amounts, fees, costs and Lender Expenses due under the Credit
Agreement, then to interest due hereunder, then to principal due hereunder or,
upon the occurrence and continuation of an Event of Default, at the option of
holder, to any other indebtedness owed by Borrower or its affiliates to Lender
or its affiliates. In the event the funds received by Lender from the Pledged
Accounts or otherwise are less than the required monthly payment hereunder,
Borrower shall pay the difference immediately upon demand by Lender.
Amortization Period. Upon commencement of the Amortization Period and
throughout said period, Borrower shall pay to Lender at a minimum equal monthly
payments of principal and interest and, if applicable Lender Expenses, of an
amount which at least will fully amortize the unpaid balance of this Promissory
Note and all the Obligations over the Amortization Period. All such installment
payments shall be due and payable beginning on the first (1st) day of the month
following the beginning of the Amortization Period and on the first (1st) day of
each month thereafter. Such payment shall be due and payable on the first (1st)
day of the first (1st) month of the Amortization Period and on the first (1st)
day of each month thereafter. If not otherwise paid during the Amortization
Period, all principal, accrued but unpaid interest and all other Obligations
outstanding under the Credit Agreement and this Promissory Note shall be due and
payable on or before the Maturity Date. All payments received by Lender from
Borrower and the Pledged Accounts during the Amortization Period shall be
applied first to amounts, fees, costs and Lender Expenses due under the Credit
Agreement, then to interest due hereunder, then to principal due hereunder, or,
upon the occurrence and continuation of an Event of Default, at the option of
the holder, to any other indebtedness owed by Borrower or its affiliates to
Lender or its affiliates. In the event the funds received by Lender from the
Pledged Accounts or otherwise are less than the required monthly payment
hereunder, Borrower shall pay the difference immediately upon demand by Lender.
Voluntary Prepayment. The Borrower is prohibited from prepaying
principal during the Borrowing Period. Thereafter, at any time and from time to
time, subject to the following prepayment fees, Borrower may prepay all or a
portion of this Promissory Note commencing upon the termination of the Borrowing
Period and continuing for a twelve (12) month period thereafter by tendering
with such prepayment a prepayment fee of three percent (3%) of the amount of the
prepayment. Commencing at the beginning of the thirteenth (13th) month after the
termination of
Page 3 of 7 Pages
<PAGE>
the Borrowing Period and for a twelve (12) month period thereafter, any such
prepayment shall be accompanied by a prepayment fee of two percent (2%) of the
amount of the prepayment. Commencing at the beginning of the twenty-fifth (25th)
month after the termination of the Borrowing Period and continuing for a period
of twelve (12) months thereafter, any such prepayment shall be accompanied by a
prepayment fee of one percent (1%) of the amount of the prepayment. Thereafter,
there shall be no prepayment fee. In the event Borrower does not tender a
prepayment fee as required herein, Lender may deduct same from the amount of any
tendered prepayment and apply the remainder of the payment against the
Obligations owing under this Promissory Note and the Credit Agreement. Any such
prepayments shall not delay or reduce the next-due monthly installments. The
prepayment fees referenced herein are understood to compensate the Lender for
its costs associated with the Lender's commitment of funds and other expenses
associated with the providing of this credit facility to Borrower. The
prepayment penalties hereunder shall not apply to principal payments which are
collected by the Servicer through the natural payment or pre-payment of the
Pledged Accounts by the Account Debtors during the Borrowing Period or the
Amortization Period, nor shall it apply to the relocation of Pledged Accounts
from this credit facility to any other credit facility between Lender and
Borrower. Such prepayments on Pledged Accounts by Account Debtors shall apply to
Borrower's installments in the order of their maturity. Moreover, the prepayment
penalties hereunder shall not apply to prepayments from receivables
securitization or other like financing proceeds so long as (a) Lender has been
engaged by Borrower to negotiate and effectuate the contemplated securitization
or other like financing, (b) the receivables which are the subject of the
contemplated securitization or other like financing are aged at least twelve
(12) months or more, and (c) at least Ten Million Dollars ($10,000,000) of
principal continues to be owed and outstanding under this Promissory Note after
the closing and funding of the contemplated securitization or other like
financing.
Term and Maturity. If not otherwise paid, all unpaid principal and
accrued but unpaid interest plus any other sums due hereunder shall be
immediately due and payable on or before the Maturity Date. This Promissory Note
is subject to acceleration upon the occurrence of an Event of Default or as set
forth below and in the Credit Agreement.
Default and Acceleration. This Promissory Note shall be payable in full
and all of the Obligations outstanding shall immediately become accelerated and
due and payable in full without notice, demand or presentment upon the
occurrence of an Event of Default. Time is of the essence in connection with
Borrower's obligations under this Promissory Note and under the Credit
Agreement. Provided, however, that with regard to events referenced above that
involve the payment of cash or funds by Borrower pursuant to the Credit
Agreement, Lender shall not assert its remedies under this Promissory Note until
Lender provides Borrower with notice of the occurrence of said Event of Default
and Borrower fails to cure such within four (4) Business Days after the receipt
of said notice. Provided, further, that with regard to events referenced above
that do not involve the payment of funds to Lender by Borrower pursuant to the
Credit Agreement, Lender shall not assert its remedies under this Promissory
Note until Lender provides Borrower with notice of the occurrence of said Event
of Default and Borrower fails to cure such within twenty (20) days after the
receipt of said notice. Borrower covenants and agrees that Borrower shall pay
all costs and expenses
Page 4 of 7 Pages
<PAGE>
incurred by Lender and its successors and assigns in enforcing and/or collecting
this Promissory Note and/or the Obligations, including, without limitation,
reasonable attorneys' fees, and court and litigation costs, whether incurred
out-of-court, in work-out discussions, in restructuring and renegotiation
discussions or in litigation, including appeals and bankruptcy proceedings.
Default Interest. Upon the occurrence of an Event of Default and
continuing until Lender acknowledges in writing that said Event of Default has
been cured or waived, all principal and interest owing and outstanding under
this Promissory Note or otherwise shall immediately begin bearing interest until
paid in full at a rate equal to the lesser of four hundred (400) basis points
above the otherwise applicable interest rate, or the maximum rate of interest
which Borrower may by law pay or Lender may charge and collect.
Security and Collateral for Repayment. This Promissory Note is secured
by Pledged Accounts, and the Collateral as set forth and defined in the Credit
Agreement and Pledge and Security Agreement of even date herewith.
Waivers. All parties to this Promissory Note, whether Borrower,
principal, surety, guarantor, endorser, or any other party, hereby waive
presentment for payment, demand, protest, notice of protest, notice of
non-payment, and notice of dishonor, impairment of recourse and impairment of
security. The failure of the holder of this Promissory Note to exercise any
right hereunder shall not preclude the holder from exercising any other right
which the holder may be entitled to exercise upon the happening of such event
and the failure to exercise any right hereunder which the holder may be entitled
to exercise shall not constitute a waiver of the right to exercise said right or
any other right upon the subsequent occurrence of any such event nor shall any
waiver by the Lender of any such right or rights on any one occasion be deemed a
bar to or waiver of the same right or rights on any future occasion. All
endorsers, guarantors, sureties or other persons who may now or hereafter be
liable for the payment of this Promissory Note, by endorsing, guaranteeing or
assuming this Promissory Note, consent to all of the terms and conditions herein
contained and agree that this Promissory Note may be modified, extended or
renewed in whole or in part, without notice, including (a) the impairment,
substitution, exchange or release at any time or times of all or any part of any
security or collateral security now or hereafter furnished, (b) the release of,
or the impairment of the right of recourse against Borrower or any endorser,
guarantor, surety or any other person now or hereafter liable hereon, (c) the
substitution of, renewal or extension of this Promissory Note, (d) the
modification of any terms hereof, or other agreement now or hereafter given in
connection with or as security for this Promissory Note, and (e) any change in
the rate of interest, if any, hereon or the imposition of any fees whether
authorized under this Promissory Note, or any note, mortgage, security
agreement, loan agreement, or any other agreement now or hereafter given in
connection with or as security for this Promissory Note.
Choice of Laws. This Promissory Note is to be construed and enforced in
accordance with the laws of the State of Colorado. In the event of any dispute
concerning the interpretation, application or enforcement of this Promissory
Note, or any other document executed in connection herewith, the sole and
exclusive venue for same shall be the District Court in and for the County of
Page 5 of 7 Pages
<PAGE>
Jefferson, State of Colorado. Borrower hereby consents to the jurisdiction of
said Court.
Severability. In the event that any one or more of the provisions
contained in this Promissory Note or in any other loan document executed in
connection herewith shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Promissory Note or any other loan
document executed in connection herewith and in lieu of such invalid, illegal or
unenforceable provision there shall be added automatically as part of this
Promissory Note a provision as similar in terms to such invalid, illegal or
unenforceable provision as may be possible and be valid, legal and unenforceable
thereafter.
Binding Effect. This Promissory Note and all covenants, promises and
agreements contained herein or associated herewith shall be binding upon and
inure to the benefit of the respective legal representatives, personal
representatives, devisees, heirs, successors and assigns of the Lender and the
Borrower. The term "Lender" shall be deemed to mean the holder of this
Promissory Note from time to time.
Authorization. The individual who is executing this Promissory Note on
behalf of the Borrower personally covenants, warrants and represents that he or
she has the full power, authority and legal right to execute and deliver this
Promissory Note and all other documents executed and delivered in connection
herewith, that all requisite authority and action necessary to bind the Borrower
has previously been taken, and that this Promissory Note and all documents
executed in connection herewith constitute legal, valid and binding obligations
of the Borrower.
No Joint Venture. The parties hereto covenant and agree that the
relationship between Lender and Borrower shall be strictly construed as a
relationship between a debtor and a secured party and never as a joint venture
or similar relationship between Lender and Borrower. Lender shall not be
obligated to perform or discharge any obligation or duty of Borrower with
respect to (a) the operation of the mortgaged property or (b) the performance of
any obligations under any leases affecting the mortgaged property. Borrower
covenants and agrees to hold harmless, defend and indemnify the Lender from and
against any liability arising with respect to (a) Borrower's operation of the
mortgaged property or (b) Borrower's performance of any of its covenants or
obligations under any of the leases pertaining to the mortgaged property.
Multiple Borrower. Should more than one entity or individual execute
this Promissory Note, then each and every such entity or individual recognizes
and agrees that they shall be jointly and severally responsible for all
financial or other obligations of whatever nature evidenced hereby or under any
other document executed by and between Borrower and Lender.
Capitalized Terms. Capitalized terms not otherwise defined herein shall
have those meanings assigned to them in the Credit Agreement of even date
herewith.
JURY WAIVER. MAKER HEREBY WAIVES MAKER'S RIGHT TO A JURY TRIAL IN THE
EVENT OF ANY DISPUTE OR LITIGATION ARISING HEREUNDER OR UNDER ANY
Page 6 of 7 Pages
<PAGE>
RELATED DOCUMENTS EXECUTED IN CONNECTION HEREWITH. MAKER COVENANTS AND AGREES
THAT THE SOLE AND EXCLUSIVE JURISDICTION AND VENUE FOR ALL LITIGATION ARISING IN
CONNECTION WITH THE ENFORCEMENT, COLLECTION OR ADMINISTRATION OF THIS PROMISSORY
NOTE SHALL REST EXCLUSIVELY IN JEFFERSON COUNTY, COLORADO AND MAKER WAIVES ALL
RIGHTS TO ASSERT OTHERWISE.
"Borrower":
ILX RESORTS INCORPORATED,
an Arizona corporation
By: /s/ Nancy J. Stone
-------------------------
Title: President
---------------------
LOS ABRIGADOS PARTNERS LIMITED
PARTNERSHIP, an Arizona limited partnership
By: ILE SEDONA INCORPORATED,
an Arizona corporation, its sole general partner
By: /s/ Nancy J. Stone
-------------------------
Title: Vice President
---------------------
PREMIERE DEVELOPMENT INCORPORATED,
an Arizona corporation
By: /s/ Nancy J. Stone
-------------------------
Title: President
---------------------
Page 7 of 7 Pages
Exhibit 10-3
BUSINESS AGREEMENT Among
ILX Resorts Incorporated, an Arizona Corporation ("ILX")
Premiere Vacation Club, an Arizona Nonprofit Corporation ("Club")
Premiere Development Incorporated, an Arizona Corporation ("Premiere")
Treasures of the Sea of Cortez, an Arizona limited liability company, ("TSC"),
Promotora de Inversion Turistica, S.A. de C.V., a Mexican Corporation ("PIT"),
Immobiliaria y Hotelera Los Algodones, S.A. de C.V., a Mexican Corporation
("IHLA")
Immobiliaria Cerro Pelon, S.A. de C.V., a Mexican Corporation ("ICP")
R E C I T A L S:
A. Promotora de Inversion Turistica, S.A. de C. V. is a Mexican
corporation ("PIT") that owns certain real property located in San Carlos,
Sonora, Mexico upon which PIT has begun construction of a 42 unit
condominium/timeshare project known as the Sea of Cortez Beach Club, as such
property and proposed improvements are more particularly described in the legal
description and the construction plans and specifications attached hereto as
Exhibit A (the "Timeshare Project").
B. Immobiliaria y Hotelera Los Algodones, S.A. de C.V. is a Mexican
corporation ("IHLA") that owns certain real and personal property in San Carlos,
Sonora, Mexico upon which IHLA has constructed and is operating a 173 room hotel
known as the San Carlos Plaza Hotel, as such property and improvements are more
particularly described in attached Exhibit B (the "Hotel").
C. Immobiliaria Cerro Pelon, S.A. de C.V. is a Mexican corporation
("ICP") that owns certain real property located in San Carlos, Sonora, Mexico
upon which ICP intends to construct future improvements, as such real property
is more particularly described in attached Exhibit C (the "Beach Property").
D. Treasures of the Sea of Cortez, L.L.C. is an Arizona limited
liability company ("TSC") to which PIT has granted the exclusive right to market
and sell one week interval right-to-use interests in the Timeshare Project.
E. Premiere Vacation Club is an Arizona non-profit corporation (the
"Club") that provides each of its members with one week membership interests
that may be used at any one or more of the resort properties included in the
Club's inventory, which interest may, at each Member's option, be split into
multiple stays of a minimum two day duration and also may be exchanged for stays
at other resorts through a participating exchange network.
F. Premiere Development incorporated is an Arizona corporation
("Premiere") that is a wholly owned subsidiary of ILX Resorts Incorporated, a
leading developer, marketer and operator of timeshare resorts located primarily
in the Western United States ("ILX"). On May ___ 1998, Premiere contributed
5,000 one week interval, perpetual fee simple timeshare interests to the Club
and in exchange therefore became the exclusive marketer and seller of Club
memberships.
<PAGE>
2
G. TSC desires to contribute 1,500 one week interval, 25 year
right-to-use timeshare interests in the Timeshare Project (the "Weeks") to
Premiere with the understanding that Premiere will then transfer such Weeks to
the Club (subject to approval by the Arizona Department of Real Estate) in
exchange for the payment by Premiere to TSC of the consideration set forth in
this Agreement, and Premiere and the Club desire to accept such contribution and
payment obligations, pursuant to the terms and conditions set forth in this
Agreement.
H. PIT and TSC desire to grant Premiere the exclusive right to market
and Sell the Weeks in the Timeshare Project, and Premiere desires to provide
such services on an exclusive basis, subject to the terms and conditions set
forth below.
I. To facilitate sales of the Weeks and construction of the Timeshare
Project, IHLA desires to grant to the Club and its Members the right to use the
Hotel in the place and stead of the Timeshare Project until such time as the
Timeshare Project has been constructed in accordance with the plans and
specifications attached hereto as Exhibit A and is open to the public. The right
to use the Hotel will be coordinated through TSC and will be subject to space
availability at the Hotel.
For good and valuable consideration, the receipt and sufficiency of which the
parties acknowledge, and in reliance upon the recitals, representations,
warranties, covenants and conditions set forth herein, the parties agree as
follows:
A G R E E M E N T:
1. Definitions. For purposes of this Agreement, the following terms shall have
the meanings ascribed to them in this Section 1:
a. "Amenities Core" shall mean all of the amenities associated with the
Hotel, including but not limited to the Hotel pools, restaurants, lobbies, beach
club, tennis courts, palapas, bars and stores.
b. "Combined Club Weeks" shall mean the Weeks contributed by TSC and
PIT to Premiere and, upon approval of the Arizona Department of Real Estate,
transferred by Premiere to the Club, plus the 5,000 Existing Club Weeks, plus
any additional interval interests contributed to the Club from time to time.
"Combined Club Week" shall mean one of the Combined Club Weeks.
c. "Distributions" shall mean any and all payments of any nature made
by Premiere or the Club to TSC or PIT in accordance with the terms and
conditions of this Agreement.
d. "Existing Club Weeks" shall mean the 5,000 one week interval,
perpetual fee simple timeshare interests conveyed to the Club by Premiere on May
___, 1998.
<PAGE>
3
e. "Expenses" shall mean any and all costs, charges and expenses of any
nature directly or indirectly attributable to each Combined Club Week, including
but not limited to Product Costs (defined below), sales and marketing expenses,
general and administrative expenses, financing costs, collection costs, closing
costs, exchange fees, recording fees, loan servicing fees, home owner
association subsidies, interest expenses, bad debt reserves, and any period
expenses that are not typically allocated on a per Week basis, which Expenses,
if estimated, shall be adjusted on a quarterly basis to reflect actual Expenses
directly or indirectly attributable to each Combined Club Week. Premiere agrees
that the cost estimates set forth in the proforma financial statements attached
hereto as Exhibit G will not, during the three years commencing upon the
execution of this Agreement, increase by more than 10% of the projected costs
set forth in the attached proforma financial statements. During the three year
period, any costs increases in excess of 10% will be absorbed by Premiere.
f. "Net Sales Price" shall mean the actual purchase price paid by an
unaffiliated third party purchaser to Premiere for the purchase of a Combined
Club Week less any and all sales concessions. Premiere agrees that the average
minimum price to be charged per Club membership type to third party purchasers
will not be less than the prices established in attached Exhibit H.
g. "Percentage Interest" shall mean a fraction, the numerator of which
is the number of Weeks contributed to Premiere by TSC and the denominator of
which is the total number of Combined Club Weeks in the Club, as adjusted from
time to time.
h. "Product Cost" shall be deemed to mean U.S. $2,415.00 per Combined
Club Week.
i. "Timeshare Project" shall mean that certain 42 unit
timeshare/condominium project known as the Sea of Cortez Beach Club to be
constructed by PIT in accordance with the plans and specifications attached
hereto as Exhibit A on that certain real property more particularly described in
attached Exhibit A.
j. "Week" shall mean a seven day period, consisting of one weekend and
five weekdays during each calendar year for a period of twenty-five (25) years
from the date of execution of this Agreement (or for a period of fifty (50)
years from the date hereof if the Extension Option referenced in Section 10 of
this Agreement is exercised by Premiere) during which period a Club member may
reserve and use a Unit in the Timeshare Project or, until completion of
construction of the Timeshare Project, a suite or room in the Hotel that is
equivalent to the use right purchased by such Club member.
k. "Weeks" shall mean the 1,500 Week interests in two-bedroom units in
the Timeshare Project contributed by TSC and PIT to Premiere in accordance with
Section 2 of this Agreement and, upon approval of the Arizona Department of Real
Estate, transferred by Premiere to the Club.
<PAGE>
4
2. Contribution of Weeks to Premiere and Transfer to the Club. TSC and PIT
hereby contribute 1,500 Weeks in the Timeshare Project to Premiere, each Week of
which includes a twenty-five (25) year right-to-use the Timeshare Project and
the Hotel in accordance with the terms and conditions set forth in this
Agreement. Upon receipt of the Weeks and receipt of approval of the Arizona
Department of Real Estate, Premiere shall transfer the Weeks to the Club, and in
exchange therefore Premiere shall retain the exclusive right to market and sell
the Weeks. TSC and PIT acknowledge and agree that the Weeks shall become a part
of the Club's membership inventory and that all Club members will be entitled to
use the Timeshare Project and the Hotel in accordance with the terms and
conditions set forth in this Agreement and in the Premiere Vacation Club
Membership Plan, a copy of which is attached hereto as Exhibit D. TSC and PIT
agree to execute any additional documents and take any additional actions
required to transfer the Weeks to Premiere. It is understood by the parties that
TSC and PIT may, from time to time contribute additional timeshare weeks to the
Club, subject to the advanced approval of ILX and Premiere. [Grant language
subject to revision based on advice of Mexican counsel]
3. Product Cost Distributions. For each Combined Club Week sold by Premiere, TSC
shall be entitled to receive an amount equal to the following:
a. Until such time as TSC has received aggregate Distributions from
Premiere pursuant to this Section 3 and Section 4 below in an amount equal to
U.S. $2.7 million, TSC shall be entitled to receive an amount equal to two times
(2x) the Product Cost multiplied by the then current Percentage Interest [2 x
(Product Cost x Percentage Interest)], one-half (1/2) of which shall be deemed
to be an advance by Premiere to TSC and PIT (the "Advance") for the purpose of
facilitating construction of the Timeshare Project, and 95% of which Advances
TSC and PIT hereby agree to use for constructing the Timeshare Project;
b. At and after such time as TSC has received aggregate Distributions
from Premiere pursuant to this Section 3 and Section 4 below in an amount equal
to U.S. $2.7 million, TSC shall be entitled to receive an amount equal to
one-half of the Product Cost multiplied by the then Current Percentage Interest
[1/2 x (Product Cost x Percentage Interest)] until such time as TSC has repaid
all of the Advances to the Premiere, together with interest on the Advances at
the rate of ten percent (10%) per annum. For each payment made by Premiere to
TSC pursuant to this Section 3(b), Premiere shall apply an amount equal to each
such payment toward the repayment of the Advance, all of which repayments shall
be applied first toward the repayment any interest then due and owing on the
Advance and then toward the repayment of the principal; and
c. At and after such time as TSC has repaid the Advances and interest
thereon to Premiere, TSC shall be entitled to receive an amount equal to the
Product Cost multiplied by the then current Percentage Interest [Product Cost x
Percentage Interest].
d. All Distributions required pursuant to this Section 3 shall be
estimated and paid on a monthly basis, and shall be adjusted to reflect actual
Distribution on a quarterly basis.
<PAGE>
5
4. Profit Distributions. In addition to the monies paid by Premiere to TSC
pursuant to Section 2 above, for each Combined Club Week sold by Premiere, TSC
shall be entitled to receive an amount equal to the following:
a. Until such time as TSC has received aggregate Distributions from
Premiere pursuant to Section 3 above, and this Section 4 in an amount equal to
U.S. $2.7 million, TSC shall be entitled to receive an amount equal to two times
(2x) the sum of the Net Sales Price less Expenses plus interest income,
multiplied by the then current Percentage Interest [2 x ((Net Sales Price -
Expenses) x Percentage Interest)], one-half (1/2) of which shall be deemed to be
an Advance to TSC and PIT for the purpose of facilitating construction of the
Timeshare Project, and 95% of which Advances TSC and PIT hereby agree to use for
constructing the Timeshare Project;
b. At and after such time as TSC has received aggregate Distributions
from Premiere pursuant to Section 3 above and this Section 4 in an amount equal
to U.S. $2.7 million, TSC shall be entitled to receive an amount equal to
one-half times (1/2x) the sum of the Net Sales Price less Expenses, multiplied
by the then current Percentage Interest [1/2 x ((Net Sales Price Expenses) x
Percentage Interest)] until such time as TSC has repaid the Advances to
Premiere, together with interest on the Advances at the rate of ton percent
(10%) per annum. For each payment made by Premiere to TSC pursuant to this
Section 4(b), Premiere shall apply an amount equal to each such payment toward
the repayment of the Advance, all of which repayments shall be applied first
toward the repayment of any interest then due and owing on the Advance and then
toward the repayment of the principal; and
c. At and after such time as TSC has repaid the Advances and interest
thereon to Premiere, TSC shall be entitled to receive an amount equal to the Net
Sales Price less Expenses, multiplied by the then current Percentage Interest
[(Net Sales Price - Expenses) x Percentage Interest].
d. All Distributions required pursuant to this Section 4 shall be
estimated and paid on a monthly basis, and shall be adjusted to reflect actual
Distributions on a quarterly basis.
e. If Premiere has not made aggregate Distributions to TSC and PIT in
an amount of not less than U.S. $2.7 million within three years after the date
of execution of this Agreement, and if PIT has not completed construction of the
Timeshare Project within such three year period, then Premiere or ILX or its
designee will loan to PIT an amount equal to the difference between U.S. $2.7
million and the aggregate Distributions paid by Premiere within the three year
period, which loan proceeds shall be used for the purpose of completing
construction of the Timeshare Project.
f. TSC shall be entitled to receive its prorata share of the income
earned from the difference in interest paid by Premiere and interest charged to
each Club member.
<PAGE>
6
5. Maintenance Fee Distributions. In addition to the monies paid by Premiere to
TSC pursuant to Sections 3 and 4 above, for each Combined Club Week sold by
Premiere, PIT shall be entitled to receive an amount annually to offset the
Maintenance Fees associated with such Combined Club Week equal to the total
Maintenance Fees received by the Club from its members during each year for
which the Maintenance Fees apply less administrative expenses associated with
operating the Club, multiplied by the Percentage Interest [(Maintenance Fees -
Club's administrative expenses) x Percentage Interest], which payments shall be
made by the Club to PIT in equal quarterly installments, commencing on January
10 of each year.
6. Term. The term of this Agreement shall be for a period of twenty-five (25)
years from the date of execution hereof, unless otherwise extended by Premiere's
exercise of the Extension Option (defined below) in accordance with Section 10
of this Agreement, whereupon the term of this Agreement shall be fifty (50)
years.
7. Representations and Warranties of TSC, PIT, IHLA and ICP. TSC, PIT, IHLA and
ICP each independently represent and warrant to the Club and Premiere as
follows:
a. Authority of TSC, PIT, IHLA and ICP. TSC, PIT, IHLA and ICP each
represent and warrant that this Agreement has been duly and validly executed and
delivered by each of TSC, PIT, IHLA and ICP and is a legal, valid and binding
obligation of each of TSC, PIT, IHLA and ICP, enforceable in accordance with its
terms. Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby nor compliance by TSC, PIT, IHLA or ICP
with any of the provisions hereof will (i) result in any conflict with, breach
of, or default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture or warrant or any franchise, license, permit,
agreement or other instrument or obligation to which TSC, PIT, IHLA or ICP is a
party or by which any of TSC, PIT, IHLA or ICP or any of their respective
properties or assets may be bound, (ii) violate any order, writ, injunction,
judgment, decree, law, statute, rule or regulation applicable to TSC, PIT, IHLA
or ICP or any of their respective properties or assets, or (iii) violate any
provision of any of TSC's, PIT's, IHLA's or ICP's articles of incorporation,
bylaws or regulations. No action, consent or approval by, or filing with, any
federal, state, municipal, court or governmental or administrative body or
agency, or any other regulatory or self-regulatory body, is required in
connection with the execution and delivery by any of TSC, PIT, IHLA or ICP of
this Agreement or the consummation by TSC, PIT, IHLA or ICP of the transactions
contemplated hereby.
b. Corporate Existence. TSC, PIT, IHLA and ICP, respectively, each
represent and warrant that it: (i) is a corporation or company duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, (ii) has the corporate power and authority to enter into and
perform all its obligations under this Agreement, including but not limited to
the power and authority to convey the Weeks to Premiere in accordance with
Section 2 of this Agreement, (iii) has the corporate power and authority to own
its property and carry on its business as presently conducted and possesses all
rights, privileges, franchises, licenses, permits, concessions, authorizations
and approvals, governmental or otherwise necessary
<PAGE>
7
to entitle it to use, own, lease or otherwise hold its properties and assets,
including but not limited to the Hotel, the Timeshare Project and the Weeks, as
applicable, and to carry on its business as presently conducted or as proposed
to be conducted, including business associated with the Hotel and the Timeshare
Project, as applicable, and (iv) has duly and validly granted all powers of
attorney required to execute this Agreement and all such powers of attorney are
in full force and effect.
c. Liabilities and Obligations. Except as disclosed in Exhibit E or in
this Agreement, PIT and IHLA have not, with respect to the Timeshare Project and
the Hotel, respectively, (i) sold, assigned, transferred, conveyed, leased or
otherwise disposed of or agreed to sell, assign, transfer, convey, lease or
otherwise dispose of any of the real property, improvements or other assets of
the Timeshare Project (including but not limited to the Weeks) or the Hotel, or
(ii) taken any action, or omitted to take any action, that resulted in a
material breach of or constituted a material default under (or would, with the
giving of notice or passage of time, result in a material breach of or
constitute a material default under) any note, bond, indenture, mortgage, (ease,
license, agreement or other instrument or obligation to which the Timeshare
Project, the Hotel or the Weeks are bound, or resulted in (or would, with the
giving of notice or the passage of time, result in) the creation or imposition
of any material lien, material charge or material encumbrance of any nature
whatsoever upon the Timeshare Project, the Hotel or the Weeks.
d. Taxes. TSC, PIT and IHLA each independently represent and warrant
that it has timely filed with all appropriate governmental authorities
(including tax, customs, social security, housing and retirement authorities)
all federal, state, local and foreign tax returns and reports required under
applicable law to be filed on or before the date hereof in respect of any fiscal
period ended on or before the date hereof and each such return or report is
complete and correct. All taxes, assessments and other governmental charges upon
each of TSC, PIT and IHLA or upon any of their assets, including but not limited
to the Timeshare Project or the Hotel that are due and payable have been paid in
full, other than those currently payable without penalty or interest. No tax
return of any of TSC, PIT or IHLA is currently under examination by the Ministry
of Finance or any other Mexican authority, nor is the Ministry of Finance or any
other authority (whether domestic or foreign and including customs, social
security, housing, and retirement authorities) asserting or, to the best
knowledge of any of TSC, PIT or IHLA, threatening to assert against any of TSC,
PIT or IHLA any adjustment, deficiency or claim for additional taxes, payments
or interest thereon or penalties in connection therewith.
e. Litigation. There has not been and there is not now pending or
threatened, any claim, action, suit, proceeding, arbitration, investigation or
inquiry before any federal, state, municipal, court or governmental or
administrative body or agency, other regulatory body or any private arbitration
tribunal, relating to or affecting any of TSC, PIT, IHLA or ICP or any director
or officer thereof in his capacity as such, or the Hotel or the Timeshare
Project. There are no orders, judgments or decrees of any court or governmental
or administrative body or agency, or any other regulatory body, affecting any of
TSC, PIT, IHLA or ICP or the Hotel or the Timeshare Project. Each of TSC, PIT
and IHLA independently represent and warrant that
<PAGE>
8
it is not in default under any order, writ, injunction or decree of any court or
governmental or administrative body or agency or any other regulatory body with
respect to, or any way affecting, the Hotel or the Timeshare Project.
f. Compliance with Law. Each of TSC, PIT, IHLA and ICP independently
represent and warrant that: (i) it has complied and is complying in all material
respects with all laws, regulations, rules, ordinances and orders of all
applicable governmental authorities or any other regulatory bodies applicable to
each of TSC, PIT, IHLA and ICP and each of their properties, assets and
businesses, including but not limited to those applicable to the Hotel, the
Timeshare Project and the, Weeks, as applicable, and (ii) it has all federal,
state, local and foreign governmental licenses, permits (including but not
limited to the federal permit necessary to create and sell timeshare interests
in Mexico, any permits, filings or registrations required by the State of Sonora
with respect to the creation and sale of interests in a timeshare project, the
local building permits required to construct the Timeshare Project, and any
other local or state licenses or permits required to create and convey a
timeshare interest in Mexico) and concessions (including but not limited to a
federal beach concession for that portion of the real property associated with
the Hotel, the Timeshare Project and the Beach Property that lies within
Mexico's federal zone), material or necessary to the conduct of its business and
all such licenses, permits and concessions are in full force and effect.
g. Accuracy of Information. The information contained in this Agreement
and the Exhibits and the written information provided by each of TSC, PIT, IHLA
and ICP and their respective agents to Premiere and the Club and their agents is
true, complete and correct in all material respects.
h. Brokers and Finders. None of TSC, PIT, IHLA or ICP, nor any officer,
director or employee thereof has employed any broker or finder, or incurred any
liability for any brokerage fees, commissions or finders' fees, in connection
with the transactions contemplated by this Agreement.
i. Environmental Matters. There has been no storage, disposal or
treatment of solid wastes or hazardous wastes at or on the Hotel, the Timeshare
Project or the Beach Property in violation of any applicable Mexican federal,
state or local law, regulation, order, or permit and none of TSC, PIT, IHLA or
ICP have received any notice of nor have any knowledge of or any reason to
believe that there exists any such violation. There has been no spill,
discharge, leak, emission, injection, escape, dumping or release of any kind
onto the Beach Property, the Hotel or the Timeshare Project or into the
environment surrounding any such property, of any toxic or hazardous substances
as defined under any Mexican federal, state or local regulations, laws or
statutes. None of TSC, PIT, IHLA or ICP have any obligation or liability,
absolute or contingent, with respect to the storage, treatment, cleanup or
disposal of any solid wastes, hazardous wastes or other toxic or hazardous
substances. Each of TSC, PIT, IHLA and ICP have complied with all laws,
regulations, rules, standards and other requirements imposed by governmental
authorities on environmental matters, including those relating to water
discharges, air emissions, and soil contamination.
<PAGE>
9
j. Real Property and Improvements. PIT, TSC and IHLA, respectively are
the owners of and possess good and marketable title to the Timeshare Project
(including but not limited to the Weeks to be conveyed to Premiere in accordance
with Section 2 of this Agreement) and the Hotel, respectively, and the
improvements constructed or proposed to be constructed thereon free and clear of
all mortgages, security interests, charges, claims, options, rights of first
refusal, easements, restrictions, liens, rights-of-way or other encumbrances of
any nature whatsoever, except for the liens and encumbrances identified in
Schedule B of the title insurance policies attached hereto as Exhibit E. The
Hotel and the Timeshare Project comply and, during and after completion of
construction of the Timeshare Project, will continue to comply, in all material
respects with all applicable building and zoning codes, ordinances and PIT and
IHLA have obtained all permits, concessions and contracts for the utilities
necessary to service the Timeshare Project and the Hotel, as applicable,
including but not limited to water, sewer, telephone and electricity, and that
all such permits, concessions and contracts are validly issued and fully paid.
k. No Bankruptcy. Except with respect to matters related to the
devaluation of the peso in 1994, each of TSC, PIT and IHLA independently
represent and warrant that there has not been filed any petition or application,
or any proceeding commenced, by or against any of TSC, PIT or IHLA under any
law, domestic or foreign, relating to bankruptcy, reorganization, compromise
arrangements, insolvency, readjustment of debt or creditors rights, and no
assignment for the benefit of creditors has been made by any of TSC, PIT or
IHLA.
1. Insurance. IHLA represents and warrants that the Hotel is insured in
an amount reasonably deemed adequate, against all risks usually insured against
by persons operating similar properties in the country of Mexico under policies
that are not void or voidable and that IHLA believes are enforceable in
accordance with their terms.
8. Representations and Warranties of ILX, Premiere and the Club. ILX, Premiere
and the Club each independently represent and warrant to TSC, PIT, IHLA and ICP
as follows:
a. Authority of Premiere and the Club. Each of ILX, Premiere and the
Club have full right, power and authority to enter into this Agreement, and to
consummate the transactions contemplated herein. This Agreement has been duly
and validly executed and delivered by ILX, Premiere and the Club and is a legal,
valid and binding obligation of ILX, Premiere and the Club enforceable in
accordance with its terms. Except as disclosed in this Agreement, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby nor compliance by ILX, Premiere and the Club
with any of the provisions hereof will (i) result in any conflict with, breach
of, or default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture or warrant or any franchise, license, permit,
agreement or other instrument or obligation to which ILX, Premiere or the Club
is a party or by which ILX, Premiere or the Club, or any of their respective
properties or assets may be bound, (ii) violate any order, writ, injunction,
judgment, decree, law, statute, rule or regulation applicable to ILX, Premiere
or the Club or any of their respective properties or assets or (iii) violate any
provision
<PAGE>
10
of ILX's, Premiere's or the Club's articles of incorporation, bylaws or
regulations. Except for the approval of the Arizona Department of Real Estate,
no action, consent or approval by, or filing with, any federal, state, local,
court or governmental or administrative body or agency, or any other regulatory
or self-regulatory body, is required in connection with the execution and
delivery by ILX, Premiere or the Club of this Agreement or the consummation by
ILX, Premiere or the Club of the transactions contemplated hereby.
b. Corporate Existence. ILX, Premiere and the Club each represent and
warrant that each of them are fully incorporated, validly existing and in good
standing under the laws of the State of Arizona and have the corporate power and
authority to enter into and perform their respective obligations under this
Agreement and to own property and carry on business as presently conducted and
possesses the rights, privileges, franchises, licenses, permits, authorizations
and approvals, governmental or otherwise necessary to carry on their business as
presently conducted.
c. Litigation. There has not been and there is not now pending or
threatened, any claim, action, suit, proceeding, arbitration, investigation or
inquiry before any federal, state, local, court or governmental or
administrative body or agency, other regulatory body or any private arbitration
tribunal, relating to or affecting ILX, Premiere, the Club, or any director or
officer thereof in his capacity as such. There are no orders, judgments or
decrees of any court or governmental or administrative body or agency, or any
other regulatory body, effecting, or with respect to, ILX, Premiere or the Club.
Neither ILX, Premiere nor the Club are in default under any order, writ,
injunction or decree of any court or governmental or administrative body or
agency or any other regulatory body.
d. Accuracy of Information. The information contained in this Agreement
and the Exhibits and the written information provided by ILX, Premiere and the
Club or their respective agents to TSC, PIT, IHLA and ICP or their agents is
true, complete and correct in all material respects.
e. Brokers and Finders. None of ILX, Premiere or the Club, nor any
officer, director or employee thereof has employed any broker or finder, or
incurred any liability for any brokerage fees, commissions or finders' fees, in
connection with the transactions contemplated by this Agreement.
f. Real Property and Improvements. Attached Exhibit F contains a
complete list, by deed reference or otherwise, of all real property and
interests in real property owned, leased or used in connection with the
operation of the Club (the "Club Assets"). The Club has good and marketable
title to the Club Assets free and clear of all mortgages, security interests,
charges, claims, options, rights of first refusal, easements, restrictions,
liens, rights-of-way or other encumbrances of any nature whatsoever, except for
the liens, encumbrances and security interests disclosed on attached Exhibit F.
<PAGE>
11
9. Covenants of TSC, PIT and IHLA. TSC, PIT and IHLA hereby covenant to the Club
and Premiere as follows:
a. Hotel Use Rights. IHLA hereby agrees that until such time as
construction of the Timeshare Project has been completed and the Timeshare
Project is open to the public, all Club members shall be entitled to use the
Hotel and the Amenities Core in lieu of the Timeshare Project and such use
rights shall be consistent with the use rights that would be granted to
purchasers of timeshare interests in the fully constructed Timeshare Project. In
addition, IHLA agrees that all Club members shall be entitled to use the
Amenities Core throughout the entire term of this Agreement, such use rights to
be consistent with the use rights granted to Hotel guests, except for the
convention facilities.
b. Recordation of Condominium Regime. Upon completion of construction
of the Timeshare Project, PIT immediately will prepare and record with the
public registry for the City of Guaymas a condominium regime for the Timeshare
Project, which condominium regime shall be subject to the prior review and
approval of Premiere, such approval not to be unreasonably withheld.
c. Monthly Financial Reports. TSC and PIT shall deliver to Premiere, by
the twentieth (20th) day of each month during the period of construction of the
Timeshare Project, a written financial report (the "Monthly Financial Report")
detailing the manner in which the Advances have been applied toward the
construction of the Timeshare Project, which Monthly Financial Report shall be
in a form acceptable to Premiere. Upon request by Premiere, PIT shall provide
Premiere with copies of invoices and evidence of payment for the items and
services referenced in the Monthly Financial Report.
d. No Liens or Encumbrances on the Weeks. Except as identified in
Schedule B of the title insurance policies attached hereto as Exhibit E, during
the term of this Agreement, PIT, IHLA and TSC shall not permit the creation of
any lien or encumbrance of any nature whatsoever, direct or indirect, affecting
the Weeks. PIT and TSC shall take any and all actions and execute and record any
and all documents reasonably deemed necessary by Premiere to provide public
notice of Premiere's and the Club's interest in the Weeks and in the right of
Club members to use the Hotel, including but not limited to recordation of such
interests in the Public Registry of the City of Guaymas.
e. Obligation to Build. PIT and TSC hereby agree to construct the
Timeshare Project in accordance with the plans and specifications attached
hereto as Exhibit A and in accordance with all applicable building codes and
regulations within a period of 3 years from the date of execution of this
Agreement. PIT also agrees promptly to obtain all licenses, permits and
concessions required to operate the Timeshare Project in accordance with all
applicable local, state and federal laws and regulations.
f. Obligation to Maintain. PIT and IHLA agree to maintain the Timeshare
Project and the Hotel, respectively, in good condition and repair throughout the
term of this Agreement.
<PAGE>
12
g. Obligation to Operate. PIT, TSC and IHLA agree to operate the
Timeshare Project and the Hotel, as applicable, in a manner consistent with good
business practices and in accordance with the promises, terms and conditions set
forth in the timeshare documents distributed to purchasers of interests in the
Timeshare Project, including but not limited to the purchasers of the Combined
Club Weeks. PIT, TSC and IHLA hereby agree to provide to all Club members all of
the rights and privileges accorded under the Premiere Vacation Club Membership
Plan and to operate the Timeshare Project and the Hotel in a manner consistent
with the Premiere Vacation Club Membership Plan.
h. Insurance for the Timeshare Project. Prior to completion of
construction of the Timeshare Project, PIT agrees to obtain insurance for the
Timeshare Project in amounts reasonably deemed adequate, against all risks
usually insured against by persons operating similar properties in the Country
of Mexico. The insurance obtained by PIT shall name Premiere and the Club as
third party beneficiaries of the insurance policy.
10. Extension Option. PIT and TSC, jointly and severally grant to Premiere the
option to renew its interest in the Weeks for one additional twenty-five (25)
year period (the "Extension Option"), which Extension Option may be exercised by
Premiere anytime during the last five years of the initial 25 year term of this
Agreement, provided Premiere is not then in default of its payment obligations
as provided in Sections 3, 4 and 5 of this Agreement. Premiere shall provide PIT
and TSC with written notice of its election to exercise the Extension Option. If
Premiere exercises the Extension Option, then during the term of the Extension
Option (Year 26 through Year 50), TSC and PIT shall be entitled to receive the
Distributions referenced in Sections 3(c), 4(c) and 5 of this Agreement. The
prices to be charged for the Weeks during the term of the Extension Option will
be negotiated between the parties after written notice of Premiere's election to
exercise the Extension Option is deliver to PIT and TSC.
11. Right of First Refusal. ICP hereby grants the following rights and
privileges to Premiere with respect to the Beach Property, and agrees that
Premiere may assign such rights to a Mexican subsidiary corporation formed by
Premiere for the purpose of developing or acquiring real property in Mexico:
a. Joint Development. Prior to undertaking any development of the Beach
Property, ICP shall first provide Premiere with written notice of its
development plans and offer Premiere the right to participate as a partner in
any such development plans on terms and conditions that are agreed upon by the
parties. Premiere shall notify ICP, in writing, whether Premiere elects to
accept or reject the offer to joint venture within one hundred twenty (120) days
of delivery of such notice to Premiere. If Premiere accepts such offer, the
parties shall proceed in good faith to form the joint venture and develop the
Beach Property in accordance with the terms and conditions agreed between the
parties.
b. Sale or Transfer. Any sale or transfer of all or any portion of the
Beach Property to a third party purchaser ("Purchaser") must be pursuant to a
bona fide written offer (the "Bona Fide Offer") from a Purchaser with the
financial ability to perform. If ICP receives a Bona Fide
<PAGE>
13
Offer from a Purchaser, and desires to sell all or any portion of the Beach
property, the following procedure shall apply:
i. ICP shall first offer the Beach Property to Premiere by
giving written notice of the Bona Fide Offer to Premiere. The notice shall be
deemed an offer (the "Offer") to sell the Beach Property to Premiere at a price
and on terms equal to the Bona Fide Offer. Premiere shall notify ICP, in
writing, whether Premiere elects to accept or reject the Offer within sixty (60)
days of delivery of the Offer to Premiere. If Premiere accepts the Offer, the
transaction shall close at the date determined by Premiere, but in no event more
than sixty (60) days after acceptance of the Offer by Premiere. Failure to send
such a notice of acceptance, within the time prescribed, shall be deemed a
rejection of the Offer.
ii. If Premiere rejects the Offer, ICP may sell the Beach
Property within a period of sixty (60) days from the rejection date to the
Purchaser at a purchase price and on terms no more favorable than those set
forth in the Bona Fide Offer. If ICP: (i) desires to sell the Beach Property to
the Purchaser on terms more favorable than the Bona Fide Offer; or (ii) if the
transaction is to be consummated more than sixty (60) days after the rejection
date, notice identifying the proposed Purchaser and all of the terms of sale
shall be given to Premiere and such notice shall constitute a new Offer subject
to this Section.
12. Indemnities. ILX, Premiere and the Club jointly and severally agree to
indemnify, defend and hold harmless each of PIT, TSC and IHLA and their
respective officers, directors, employees and agents from and against any and
all liabilities, obligations, losses, damages, claims, actions or expenses
(including court costs and attorneys' fees) of any nature whatsoever, imposed
on, incurred by or asserted against PIT, TSC or IHLA, occasioned or caused by,
resulting from or arising out of any inaccuracy in or breach of any of the
representations, warranties, covenants or conditions set forth in this Agreement
by Premiere or the Club.
PIT, TSC, IHLA and ICP jointly and severally agree to indemnify, defend and hold
harmless each of ILX, Premiere and the Club and their respective officers,
directors, employees and agents from and against any and all liabilities,
obligations, losses, damages, claims, actions or expenses (including court costs
and attorneys' fees) of any nature whatsoever, imposed on, incurred by or
asserted against any of ILX, Premiere or the Club, occasioned or caused by,
resulting from or arising out of any inaccuracy in or breach of any of the
representations, warranties, covenants or conditions set forth in this Agreement
by any of PIT, TSC, IHLA or ICP.
13. Mandatory Dispute Resolution Mechanism. Every dispute whatsoever that may
arise between the parties to this Agreement or their nominees, designees or
other representatives with respect to the subject matter of this Agreement shall
be resolved as follows:
a. Notice of Breach and Opportunity to Cure. If any party in good faith
concludes that another party has committed a breach of this Agreement, the party
so concluding shall notify the offending party in writing that it is in breach
hereof. Any party receiving notice under this
<PAGE>
14
Section 10 shall have thirty (30) calendar days to cure its breach, if any, and
to notify the party sending such notice that such breach has been cured.
Following the applicable cure period, if the notifying party rejects the cure or
otherwise maintains that an uncured breach of this Agreement exists, the
disputed matter shall be thereupon subject to arbitration in accordance with the
terms and conditions of this Section 13.
b. Arbitration of Disputes. Any and all disputes, controversies, claims
and differences arising out of or relating to this Agreement, or any breach
thereof, shall be finally settled by arbitration in accordance with the
procedural rules established under the International Chamber of Commerce in
effect on the date of this Agreement, by one or more arbitrators selected in
accordance with such rules. If any conflict between the accepted rules of the
International Chamber of Commerce and the provisions of this Section 13 exists,
the rules shall govern.
c. Appointment of Arbitrator. Upon the written demand of either of the
parties concerned, the parties shall attempt to appoint a single arbitrator. If
they are unable to agree within ten (10) calendar days from such demand, then
each of the parties shall appoint one arbitrator and the two nominated
arbitrators shall in turn choose a third arbitrator. If the two arbitrators
chosen by the parties cannot agree on the choice of the third arbitrator within
a period of ten (10) calendar days after their nomination, then the third
arbitrator immediately shall be appointed in accordance with the rules of the
International Chamber of Commerce. The arbitrator or arbitrators shall commence
the arbitration proceeding within thirty (30) calendar days after his/her or
their appointment, as the case may be, (the "Commencement Date") and such
arbitration proceeding shall be concluded and a final and binding determination
shall be rendered by such arbitrator or arbitrators within forty-five (45)
calendar days after the Commencement Date.
d. Forum and Enforcement of Judgment. If Premiere or the Club initiate
an arbitration proceeding, then such proceeding shall be conducted in
Hermosillo, Sonora, Mexico. If TSC, IHLA or PIT initiate an arbitration
proceeding, then such proceeding shall be conducted in Phoenix, Arizona. The
decision of the arbitrator(s) shall be final and binding upon the parties
hereto, not subject to appeal and shall deal with the questions of costs of the
arbitration and all matters related thereto. The proceedings, all pleadings,
documents, correspondence and the arbitration award shall be written in English
if the arbitration is conducted in Phoenix, Arizona. If the arbitration is
conducted in Hermosillo, Sonora, Mexico, the proceedings shall be conducted in
Spanish, and all pleadings, documents, correspondence and the arbitration award
shall be written in Spanish. Judgment upon the award or decision rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof, or
application may be made to such court for a judicial recognition of the Award or
an order of enforcement thereof, as the case may be. TSC, PIT, IHLA and ICP
jointly and severally represent that an arbitration award reached pursuant to
this Agreement with respect to any dispute, controversy, claim or difference
arising out of or relating to this Agreement is enforceable under the laws of
Mexico, and Premiere and the Club represent that an arbitration award reached
pursuant to this Agreement with respect to any dispute, controversy, claim or
difference arising out of or relating to this Agreement is
<PAGE>
15
enforceable under the laws of the State of Arizona.
14. Miscellaneous.
a. Entire Agreement. This Agreement represents the entire agreement
between the parties and supersedes all prior negotiations and agreements among
them, whether written or oral.
b. Amendments. This Agreement may only be amended or modified in a
written agreement that is signed by each and every party to this Agreement.
c. Successors and Assignees. This Agreement shall be binding upon each
party to it and each of such party's successors and assigns.
d. Severability. If any provision of this Agreement is deemed to be
invalid or unenforceable by a court or arbitral body of competent jurisdiction,
such provision of this Agreement shall be deemed deleted and the remaining
provisions shall be enforced to the fullest extent possible.
e. Remedies. A party may pursue any and all remedies that are available
to it in law and equity. If a party pursues one or more remedies and not others,
the party shall not be deemed to have elected its remedy or remedies, and the
party may, thereafter pursue other or different remedies. In addition to all
other rights and remedies available to Premiere and the Club, if any of TSC,
PIT, IHLA or ICP shall be in default of its obligations hereunder, and shall
have failed to cure such default within a period of ten (10) days after Premiere
or the Club's delivery of written notice to the defaulting party in accordance
with Section 14(f) of this Agreement, then Premiere and the Club shall be
entitled to suspend any Distributions otherwise due and owing to TSC and PIT
under this Agreement until such time as the defaulting party shall have cured
such default to Premiere's and the Club's reasonable satisfaction, and TSC and
PIT shall forfeit any Distributions that would have been made during the period
of such default. Premiere's and the Club's election not to pay Distributions to
TSC and PIT as a result of TSC's, PIT's, IHLA's or ICP's failure to perform in
accordance with the terms and conditions of this Agreement shall under no
conditions be deemed a default or breach of this Agreement on the part of
Premiere or the Club.
f. Notices. All notices and other communications which are required or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given (i) when delivered personally, or (ii) when sent if by facsimile
transmitted on a business day prior to 5:00 p.m. local time at the place of
receipt, or on the following business day if sent after 5:00 p.m., or (iii) on
the day following delivery to a courier service if sent by next day delivery via
a recognized international courier service. All such notices of communications
shall be addressed to the parties as follows, or at such other address as shall
be specified by like notice:
<PAGE>
16
If to PIT, IHLA same as below
or ICP:
if to TSC: Treasures of the Sea of Cortez, LLC
4643 East Thomas Road
Suites 11 - 12
Phoenix, Arizona 85018
If to the Club Premiere Development Incorporated
or Premiere: 2111 E. Highland, Suite 210
Phoenix, AZ 85016
g. Governing Language. PIT shall obtain a certified translation of this
Agreement into Spanish and the parties hereto shall execute both a Spanish and
English language version of this Agreement. If an arbitration proceeding is
conducted in Mexico, the Spanish language version of this Agreement shall
control the interpretation of this Agreement, provided, however, that if there
is any ambiguity between the Spanish and English language version of this
Agreement, the English language version of the ambiguous provision shall
control. If an arbitration is conducted in the United States, then the English
language version of this Agreement shall control the interpretation of this
Agreement.
h. Counterparts. This Agreement may be executed in any number of
counterparts and may be executed in both a Spanish and an English language
version, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same Agreement.
i. Governing Law. This Agreement shall be deemed to be a contract made
under, and for all purposes shall be construed in accordance with and governed
by, the laws of the Country of Mexico.
j. Construction. Wherever possible, this Agreement, and all documents
contemplated hereunder, shall be construed and interpreted so as to be effective
and valid under applicable law. If any provision of this Agreement, or any
document contemplated hereunder, for any reason shall be deemed invalid or
prohibited under applicable law, such provision shall be invalid or prohibited
only to the extent of such invalidity or prohibition, which shall not invalidate
the remainder of such provision or the remaining provisions of this Agreement.
In Witness Whereof, the undersigned parties have executed this Agreement as of
this 8th day of June, 1998.
<PAGE>
Premiere Development Incorporated Premiere Vacation Club,
an Arizona corporation an Arizona non-profit corporation
By: /s/ Joseph P. Martori By: /s/ Joseph P. Martori
--------------------------------- ----------------------------------
Its: Chairman Its: Chairman
--------------------------------- ---------------------------------
Treasures of the Sea of Cortez, Promotora de Inversion Turistica,
an Arizona Corporation S.A. de C.V.,
a Mexican Corporation
By: /s/ Alberto Astiazaran Aguilar By: /s/ John R. Payne
--------------------------------- ----------------------------------
Its: Statutory Agent Its: Administrator
--------------------------------- ---------------------------------
Immobiliaria y Hotelera Los Algodones, Immobiliaria Cerro Pelon,
S.A. de C.V., a Mexican Corporation S.A. de C.V., a Mexican Corporation
By: /s/ Gerardo Valenzuela By: /s/ Alberto Astiazaran Aguilar
--------------------------------- ----------------------------------
Its: Apoderado Legal Its: Apoderado Legal
--------------------------------- ---------------------------------
ILX Resorts Incorporated,
an Arizona Corporation
By: /s/ Joseph P. Martori
---------------------------------
Its: Chairman
---------------------------------
<PAGE>
- - - - EL LICENCIADO JOSE GUILLERMO YEPIZ ROSAS, NOTARIO PUBLICO NUMERO TRECE, EN
EJERCICIO Y DE ESTA DEMARCACION NOTARIAL, C E R T I F I C A: QUE LAS FIRMAS QUE
APARECEN AL CALCE DEL PRESENTE ESCRITO, OUE CONSTA DE 17 FOJAS UTILES Y 10
ANEXOS, FUERON PUESTAS EN MI PRESENCIA DE SU PUNO Y LETRA POR LOS SENORES:
ALBERTO ASTIAZARAN AGUILAR, JOHN R. PAYNE Y GERARDO VALENZUELA PARADA, BAJO SUS
RESPECTIVOS NOMBRES, QUIENES MANIFESTARON SER: MEXICANOS EL PRIMERO Y EL ULTIMO,
NORTEAMERICANO EL SEGUNDO, CASADOS, MAYORES DE EDAD, VECINOS DE ESTA CIUDAD, DE
MI PERSONAL CONOCIMIENTO Y HABILES A MI JUICIO PARA CONTRATAR Y OBLIGARSE.- Y
MANIFIESTAN QUE SON LAS MISMAS FIRMAS QUE ACOSTUMBRAN USAR EN TODOS SUS ACTOS Y
RATIFICAN EN TODO EL CONTENIDO Y TERMINO DEL MISMO.- EL SENOR JOHN R. PAYNE, SE
IDENTIFICO CON PASAPORTE NUMERO 054229241 EXPEDIDO EN ESTADOS UNIDOS DE
NORTEAMERICA Y ACREDITA SU LEGAL ESTANCIA EN EL PAIS CON VISA NUMERO 37734545
EXPEDIDA POR 180 DIAS CON FECHA 4 DE MARZO DE 1998 EN NOGALES, SONORA DOCUMENTOS
QUE DOY FE TENER A LA VISTA.- LOS COMPARECIENTES MANIFIESTAN QUE NO REQUIEREN DE
INTERPRETE POR CONOCER EL IDIOMA DEL PRESENTE DOCUMENTO.- EL SENOR ALBERTO
ASTIAZARAN AGUILAR ACREDITA SU PERSONALIDAD DE APODERADO LEGAL DE LA EMPRESA
"TREASURES OF THE SEA OF CORTEZ", L.L.C., CON LOS ARTICULOS DE ORGANIZACION
EXPEDIDO EN EL ESTADO DE ARIZON DE LA OFICINA ENCARGADA DE LA COMISION DE
CORPORACIONES, CON FECHA JUNIO 6 DE 1994, CON FECHA DE EXPIRACION EN JUNIO 6 DEL
ANO 2046; EL SENOR JOHN R. PAYNE, ACREDITA SU PERSONALIDAD DE APODERADO LEGAL DE
LA SOCIEDAD MERCANTIL DENOMINADA "PROMOTORA DE INVERSION TURISTICA", S.A. DE
C.V., CON ESCRITURA PUBLICA NUMERO 7413, VOLUMEN 228, DE FECHA 9 DE JULIO DE
1997, PASADA ANTE LA FE DEL SUSCRITO NOTARIO, E INSCRITA EN EL REGISTRO PUBLICO
DE ESTA CIUDAD, BAJO EL NUMERO 1657, SECCION COMERCIO, LIBRO I VOLUMEN 32, CON
FECHA 15 DE JULIO DE 1997; EL SENOR GERARDO VALENZUELA PARADA, ACREDITA SU
PERSONALIDAD DE APODERADO LEGAL DE LAS SOCIEDADES MERCANTILES DENOMINADAS
"INMOBILIARIA Y HOTELERA LOS ALGODONES", S.A. DE C.V. E "INMOBILIARIA CERRO
PELON", S.A. DE C.V., CON ESCRITURA PUBLICA NUMERO 8,861, VOLUMEN 233, DE FECHA
PRIMERO DE AGOSTO DE 1994, PASADA ANTE LA FE DEL SENOR LICENCIADO CARLOS GAMEZ
FIMBRES, NOTARIO PUBLICO NUMERO 43, CON RESIDENCIA EN HERMOSILLO, SONORA, E
INSCRITA EN EL REGISTRO PUBLICO DE LA PROPIEDAD Y DE COMERCIO DE ESTA CIUDAD,
BAJO EL NUMERO 1559, SECCION COMERCIO, LIBRO 1, VOLUMEN 27, CON FECHA 24 DE
MARZO DE 1997; DOCUMENTOS QUE DOY FE TENER A LA VISTA Y DEVOLVI A SUS
PRESENTANTES.- DOY FE - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
GUAYMAS, SONORA., A 5 DE JUNIO DE 1998.
/s/ Lic. Jose Guillermo Yepiz Rosas
LIC. JOSE GUILLERMO YEPIZ ROSAS,
NOTARIO PUBLICO NUMERO 13.-
<PAGE>
STATE Of ARIZONA )
) ss.
County of Maricopa )
On June 8, 1998, before me, the undersigned Notary Public, personally
appeared Joseph P. Martori who acknowledged him/herself to be Chairman of
Premiere Development Inc., an Arizona corporation, and that he/she, being
authorized so to do, executed the foregoing instrument for the purposes therein
contained, on behalf of such corporation.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
/s/ Dorinne R. .Dobson
---------------------------------
Notary Public
My Commission Expires: OFFICIAL SEAL
August 31, 1999 DORINNE R. DOBSON
Notary Public - State of Arizona
MARICOPA COUNTY
My Comm. Expires Aug. 31, 1999
STATE OF ARIZONA )
) ss.
County of Maricopa )
On June 8, 1998, before me, the undersigned Notary Public, personally
appeared Joseph P. Martori, who acknowledged him/herself to be Chairman of ILX
Resorts Incorporated, an Arizona corporation, and that he/she, being authorized
so to do, executed instrument for the purposes therein contained, on behalf of
such corporation.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
/s/ Dorinne R. .Dobson
---------------------------------
Notary Public
My Commission Expires: OFFICIAL SEAL
August 31, 1999 DORINNE R. DOBSON
Notary Public - State of Arizona
MARICOPA COUNTY
My Comm. Expires Aug. 31, 1999
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR I YEAR 2 YEAR 3 TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TIMESHARE REVENUE
TIMESHARE SALES $19,687,500 $22,500,000 $22,500,000 $64,687,500
INTEREST INCOME 1,126,913 3,450,445 5,746,759 10,324,117
----------- ----------- ----------- -----------
TOTAL TIMESHARE REVENUE 20,814,413 25,950,445 28,246,759 75,011,617
----------- ----------- ----------- -----------
COST OF TIMESHARE SALES
PRODUCT COST 3,803,625 4,347,000 4,347,000 12,497,625
SALES AND MARKETING 52.00% 10,237,500 11,700,000 11,700,000 33,637,500
LOAN PROCESSING/G&A 2.50% 492,188 562,500 562,500 1,617,188
BAD DEBT 3.00% 590,625 675,000 675,000 1,940,625
CLOSING COSTS 3.00% 590,625 675,000 675,000 1,940,625
----------- ----------- ----------- -----------
15,714,563 17,959,500 17,959,500 51,633,563
----------- ----------- ----------- -----------
OPERATING EXPENSES
LEGAL/ACCOUNTING/PROF FEES 100,000 100,000 100,000 300,000
0
----------- ----------- ----------- -----------
100,000 100,000 100,000 300,000
----------- ----------- ----------- -----------
INTEREST EXPENSE 542,321 1,544,329 2,293,686 4,380,336
----------- ----------- ----------- -----------
NET INCOME BEFORE TAXES $ 4,457,529 $ 6,346,617 $ 7,893,573 $18,697,718
=========== =========== =========== ===========
</TABLE>
NOTE 1: MODEL DOES NOT INCLUDE THE INTEREST INCOME ARBITRAGE IN YEARS 4-10 WHICH
WILL BE GENERATED FROM SALES MADE DURING THE THREE YEAR SALES PERIOD SHOWN.
EXAMPLE: ARBITRAGE FOR YEAR 3 IS: $3,453,073 ARBITRAGE WILL CONTINUE IN FACT TO
BE EARNED FOR SEVEN YEARS FROM THE LAST YEAR OF SALES (IE. YEAR 10 FOR SALES
MADE IN YEAR
NOTE 2: MODEL ASSUMES ONLY THREE YEARS OF TIMESHARE SALES. AT END OF MODEL
PERIOD 1325 INTERVALS REMAIN AVAILABLE FOR SALE OF THE 6500 WEEKS OF INITIAL
INVENTORY, MEANING 20% REMAINS AVAILABLE TO SELL.
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
BALANCE SHEET
YEAR 1 YEAR 2 YEAR 3
----------- ----------- -----------
CASH $ 1,632,881 $ 4,922,907 $ 6,381,408
NOTES RECEIVABLE 13,600,913 28,043,139 41,315,544
PROPERTY HELD FOR SALE 11,893,875 7,546,875 3,199,875
OTHER ASSETS
----------- ----------- -----------
$27,127,669 $40,512,920 $50,896,828
=========== =========== ===========
NOTES PAYABLE - CONSTRUCTION DEBT 0 0 0
NOTES PAYABLE - HYPO BORROWINGS 9,950,850 18,385,453 23,700,535
----------- ----------- -----------
9,950,850 18,385,453 23,700,535
EQUITY 17,176,819 22,127,468 27,196,293
----------- ----------- -----------
$27,127,669 $40,512,920 $50,896,828
=========== =========== ===========
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
NOTES RECEIVABLE
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3
----------- ----------- -----------
<S> <C> <C> <C> <C>
BEGINNING BALANCE 0 13,600,913 28,043,139
NOTES GENERATED (A) 14,175,000 16,200,000 16,200,000
PRINCIPAL COLLECTIONS (574,088) (1,757,774) (2,927,594)
----------- ----------- -----------
ENDING BALANCE 13,600,913 28,043,139 41,315,544
=========== =========== ===========
COLLECTIONS 1,701,000 5,208,219 8,674,353
LESS: INTEREST INCOME PORTION 1,126,913 3,450,445 5,746,759
15.90%
PRINCIPAL COLLECTIONS 574,088 1,757,774 2,927,594
=========== =========== ===========
(A) ASSUMES 20% CASH SALES, 80% FINANCED SALES WITH 10% DOWN PAYMENT
INTEREST EXPENSE
NOTES RECEIVABLE BEG BALANCE 0 13,600,913 28,043,139 0
NOTES RECEIVABLE ENDING BALANCE 13,600,913 28,043,139 41,315,544 0
----------- ----------- ----------- -----------
13,600,913 41,644,051 69,358,683 0
2 2 2 2
----------- ----------- ----------- -----------
AVERAGE BALANCE 6,800,456 20,822,026 34,679,341 0
PORTION BORROWED AGAINST 90.00% 90.00% 90.00% 90.00%
ADVANCE RATE 90.00% 90.00% 90.00% 90.00%
----------- ----------- ----------- -----------
AVERAGE ADVANCE AMOUNT 5,508,370 16,865,841 28,090,267 0
BEGINNING BORROWING BALANCE 0 9,950,850 18,385,453 23,700,535
CURRENT YEAR ADVANCES 11,481,750 13,122,000 13,122,000 0
CUSTOMER REPAYMENTS (1,530,900) (4,687,397) (7,806,918) 0
(EXCLUDES IN HOUSE) 10%
----------- ----------- ----------- -----------
ENDING BALANCE 9,950,850 18,385,453 23,700,535 23,700,535
INTEREST RATE 10.90% 10.90% 10.90% 10.90%
----------- ----------- ----------- -----------
INTEREST EXPENSE 542,321 1,544,329 2,293,686 2,583,358
=========== =========== =========== ===========
</TABLE>
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
FINANCING
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3
---------- ---------- ----------
<S> <C> <C> <C> <C>
PARTNER DISTRIBUTIONS
SAN CARLOS PARTNERS:
ANNUAL EQUIVALENTS SOLD (TOTAL) 1,575 1,800 1,800
SAN CARLOS PERCENTAGE INTEREST 23.00% 23.08% 23.08%
PRODUCT COST 2,415 2,415 2,415
NET INCOME 4,457,529 6,346,617 7,893,573
PRODUCT COST DISTRIBUTION (ANNUAL) 877,760 1,003,154 1,003,154
PRODUCT COST DISTRIBUTION X2 1,755,519 2,006,308 2,006,308
PRODUCT COST DISTRIBUTION x l/2 438,880 501,577 501,577
PRODUCT COST DIST/INTERVAL 557 557 557
PRODUCT COST DIST/INTERVAL X2 1,115 1,113 1,115
PRODUCT COST DIST/INTERVAL X1/2 279 279 279
PROFIT DISTRIBUTION (ANNUAL) 1,026,660 1,464,604 1,821,594
PROFIT DISTRIBUTION X 2 2,057,321 2,929,208 3,643,187
PROFIT DISTRIBUTION X l/2 514,330 732,302 910,707
BEGINNING CUMULATIVE DISTRIBUTION 0 2,978,210 4,374,178 0
CURRENT YEAR DISTRIBUTIONS (ASSUMES SALES AND PROFITS
EARNED RATABLY OVER YEAR):
PRODUCT COST DISTRIBUTION X 2 1,243,142 0 0 1,243,142
PROFIT DISTRIBUTION X 2 1,456,858 0 0 1,456,858
---------- ---------- ---------- ----------
2,700,000 0 0 2,700,000
70.81% 0.00% 0.00%
PRODUCT COST DISTRIBUTION X l/2 128,094 435,687 0 563,781
PROFIT DISTRIBUTION X 1/2 150,116 636,103 0 786,219
---------- ---------- ---------- ----------
278,210 1,071,790 0 1,350,000
86.86% 0.00%
PRODUCT COST DISTRIBUTION 0 131,780 1,003,154 1,134,933
PROFIT DISTRIBUTION 0 192,398 1,821,594 2,013,992
---------- ---------- ---------- ----------
0 324,178 2,824,748 3,148,925
---------- ---------- ---------- ----------
ENDING CUMULATIVE DISTRIBUTIONS 2,978,210 4,374,178 7,198,925 7,198,925
---------- ---------- ---------- ----------
NOTE 1: MODEL DOES NOT REFLECT THE INTEREST PAYABLE BY SAN CARLOS PARTNERS ON OUTSTANDING ADVANCES.
NOTE 2: MODEL DOES NOT REFLECT INTEREST ARBITRAGE OR SALES BEYOND THE THREE YEAR MODEL PERIOD.
NOTE 3: MODEL DOES NOT REFLECT THE MAINTENANCE FEE DISTRIBUTIONS PAYABLE TO SAN CARLOS PARTNERS.
PROOF:
STRAIGHT PERCENTAGE DISTRIBUTION 1,906,420 2,467,758 2,824,748 7,198,925
OVER (UNDER) ADVANCED 1,071,790 (1,071,790) 0 0
BEGINNING ADVANCES 0 1,071,790 0 0
CURRENT YEAR ADVANCES
PRODUCT COST DISTRIBUTION X 2 621,571 621,571
PROFIT DISTRIBUTION X 2 726,429 726,429
CURRENT YEAR REPAYMENTS
PRODUCT COST DISTRIBUTION X 1/2 (126,094) (435,687) (563,781)
PROFIT DISTRIBUTION X 1/2 (150,116) (636,103) (786,219)
---------- ---------- ---------- ----------
ENDING ADVANCES 1,071,790 0 0 0
========== ========== ========== ==========
</TABLE>
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
TIMESHARE INVENTORY
TOTAL
------------
NUMBER VALUE
ILX RESORTS INTERVALS 5,000 $ 2,415 $ 12,075,000
SAN CARLOS INTERVALS 1,500 $ 2,415 3,622,500
------------
6,500
------------
TOTAL INVENTORY (PRODUCT) COST 15,697,500
------------
PROPERTY HELD FOR SALE
------------
BEG BALANCE 0 11,893,875 7,546,875
ACQUISITIONS 15,697,500
COST OF SALES TIMESHARE (3,803,625) (4,347,000) (4,347,000)
------------ ------------ ------------
ENDING BALANCE 11,893,875 7,546,875 3,199,875
============ ============ ============
COST OF SALES
- -------------
TOTAL COST $ 15,697,500
COS AS % OF REVENUE 19.32%
<PAGE>
28-May-98 PREMIERE VACATION CLUB Exhibit B
PRO FORMA FINANCIAL STATEMENTS
TIMESHARE REVENUE AND PRODUCT COST
YEAR 1 YEAR 2 YEAR 3
----------- ----------- -----------
TIMESHARE SALES - PRICES
ANNUAL EQUIVALENTS $ 12,500 $ 12,500 $ 12,500
=========== =========== ===========
NUMBER OF SALES PER MONTH
MONTH 1 100 150 150
MONTH 2 100 150 150
MONTH 3 100 150 150
MONTH 4 125 150 150
MONTH 5 125 150 150
MONTH 6 125 150 150
MONTH 7 150 150 150
MONTH 8 150 150 150
MONTH 9 150 150 150
MONTH 10 150 150 150
MONTH 11 150 150 150
MONTH 12 150 150 150
----------- ----------- -----------
1,575 1,800 1,800
=========== =========== ===========
TIMESHARE REVENUE $19,687,500 $22,500,000 $22,500,000
(PRICE TIMES NUMBER OF SALES) =========== =========== ===========
PRODUCT COST $ 3,803,626 $ 4,347,000 $ 4,347,000
2,415 PER WEEK =========== =========== ===========
INVENTORY AVAILABLE END OF YEAR 4,925 3,125 1,325
=========== =========== ===========
<PAGE>
Exhibit C
PREMIERE VACATION CLUB
Prime Season High Season
Program Unit Type Annual $ Biennial $ Annual $ Biennial $
- ------- --------- -------- ---------- -------- ----------
Platinum Penthouse 24,900 16,400
Gold Two Bedroom 18,900 12,900 15,900 10,400
Silver One Bedroom 12,900 8,400 9,900 6,900
Copper Studio 9,900 6,400 7,900 5,400
Maintenance fees
- ----------------
Platinum $525.00 $262.50
Gold $425.00 $212.50
Silver $375.00 $187.50
Copper $325.00 $162.50
<PAGE>
Exhibit D
PREMIERE VACATION CLUB
1996 BUDGET
<TABLE>
<CAPTION>
TOTAL BY MEMBERSHIP TYPE
------------- -------------------------------------------------------------
SALARY RELATED EXPENSES COPPER SILVER GOLD PLATINUM
----------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
HOUSEKEEPING/MAIDS/LAUNDRY $215,000 33.89 42.36 50.64 63.55
FRONT DESK/RESERVATIONS/PBX 112,500 22.50 22.50 22.50 22.50
REPAIRS AND MAINTENANCE 125,000 19.70 24.63 29.56 36.95
MANAGEMENT/ACCOUNTING/HUMAN RESOURCES 250,000 50.00 50.00 50.00 50.00
PAYROLL TAXES AND BENEFITS 112,400 22.70 25.11 27.52 31.14
------------- ------------- ------------- ------------- -------------
TOTAL SALARY RELATED EXPENSE 814,900 148.79 164.60 180.42 204.13
------------- ------------- ------------- ------------- -------------
GENERAL EXPENSES
----------------
UTILITIES/TELEPHONE 250,000 39.41 49.26 59.11 73.89
REPAIRS AND MAINTENANCE 125,000 19.70 24.63 29.56 36.95
INSURANCE 55,000 8.67 10.84 13.00 16.26
PROPERTY TAXES 125,000 19.70 24.63 29.56 35.95
OPERATING SUPPLIES 90,000 14.19 17.73 21.28 26.60
GUEST SUPPLIES/LINENS 100,000 15.76 19.70 23.65 29.56
ALL OTHER 145,000 22.86 28.57 34.29 42.86
------------- ------------- ------------- ------------- -------------
TOTAL GENERAL EXPENSES 890,000 140.30 175.37 210.44 263.05
------------- ------------- ------------- ------------- -------------
RESERVES 225,000 35.47 44.33 53.20 66.50
------------- ------------- ------------- ------------- -------------
MANAGEMENT FEE 214,433 36.06 42.70 49.34 59.30
------------- ------------- ------------- ------------- -------------
$ 2,144,333
=============
TOTAL PER INTERVAL 360.62 427.01 493.40 592.99
DEVELOPER SUBSIDY 35.62 52.01 68.40 67.99
------------- ------------- ------------- -------------
EVERY YEAR OWNER DUES $ 325.00 $ 375.00 $ 425.00 $ 525.00
============= ============= ============= =============
ALTERNATE YEAR OWNER DUES (i) $ 187.50 $ 212.50 $ 237.50 $ 287.50
============= ============= ============= =============
</TABLE>
(1) Alternate year owners pay this amount every year. Thus, when their year of
use arrives, they will have paid the full dues amount for their year of use.
<PAGE>
28-May-98 PREMIERE VACATION CLUB
PRO FORMA FINANCIAL STATEMENTS
CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 TOTAL
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATIONS
<S> <C> <C> <C> <C>
NET INCOME $ 4,457,529 $ 6,346,617 $ 7,893,573 $ 18,697,718
ADD NON CASH:
COST OF SALES - TIMESHARE 3,803,625 4,347,000 4,347,000 12,497,625
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATIONS 8,261,154 10,693,617 12,240,573 31,195,343
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING
CONSTRUCTION BORROWING 0 0 0 0
RELEASE PAYMENTS 0 0 0 0
TIMESHARE PAPER GENERATED (14,175,000) (16,200,000) (16,200,000) (46,575,000)
BORROWING AGAINST TIMESHARE PAP 11,481,750 13,122,000 13,122,000 37,725,750
PRINC COLL ON CUST NOTES 574,088 1,757,774 2,927,594 5,259,456
APP OF CUSTOMER PYMTS (1,530,900) (4,687,397) (7,806,918) (14,025,215)
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING (3,650,063) (6,007,623) (7,957,324) (17,615,009)
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING
DISTRIBUTIONS TO SAN CARLOS (2,978,210) (1,395,968) (2,824,748) (7,198,925)
PARTNERS 0
0
0
0
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING (2,978,210) (1,395,968) (2,824,748) (7,198,925)
------------ ------------ ------------ ------------
NET CASH FLOW 1,632,881 3,290,026 1,458,501 6,381,408
------------ ------------ ------------ ------------
BEGINNING CASH 0 1,632,881 4,922,907 0
------------ ------------ ------------ ------------
ENDING CASH AVAILABLE TO OTHER PARTN $ 1,632,881 $ 4,922,907 $ 6,381,408 $ 6,381,408
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS SECOND QUARTER 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,173,778
<SECURITIES> 0
<RECEIVABLES> 21,043,323
<ALLOWANCES> 3,216,704
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,655,710
<DEPRECIATION> 1,621,596
<TOTAL-ASSETS> 49,190,187
<CURRENT-LIABILITIES> 0
<BONDS> 19,114,430
0
1,384,891
<COMMON> 19,962,338
<OTHER-SE> 5,509,473
<TOTAL-LIABILITY-AND-EQUITY> 49,190,187
<SALES> 11,247,814
<TOTAL-REVENUES> 17,768,765
<CGS> 1,608,317
<TOTAL-COSTS> 15,769,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 330,182
<INTEREST-EXPENSE> 907,133
<INCOME-PRETAX> 1,109,935
<INCOME-TAX> 445,000
<INCOME-CONTINUING> 664,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664,935
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
