UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
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Commission File Number: 0-18201
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EQUIVEST FINANCE, INC.
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(Exact name of Registrant as specified in its charter)
Florida 59-2346270
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2 CLINTON SQUARE, SYRACUSE, NEW YORK 13202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (315) 422-9088
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the Company (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 Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of July 31, 1998, 21,905,706 shares of common stock of Equivest Finance, Inc.
were outstanding.
Transitional Small Business Disclosure Format Yes |_| No |X|
1
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements 3
Consolidated Financial Information:
Consolidated Balance Sheets - June 30, 1998(unaudited) and
December 31, 1997 3
Unaudited Consolidated Income Statements - Three Months Ended
June 30, 1998 and 1997 4
Unaudited Consolidated Income Statements - Six Months Ended
June 30, 1998 and 1997 5
Unaudited Consolidated Statement of Equity Accounts 6
Unaudited Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1998 and 1997 7
Notes to Interim Consolidated Financial Information 8
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 19
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31,
(Unaudited) 1997
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<S> <C> <C>
ASSETS
Cash $ 1,172,185 $ 4,620,479
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Receivables:
Accounts receivable 1,327,426 1,437,928
Notes and advance receivable 134,289,565 119,210,250
Less allowance for doubtful receivables (2,893,538) (2,442,244)
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132,723,453 118,205,934
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Accounts receivable - related parties 10,952 -0-
Notes receivable - related party 1,941,372 4,023,431
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Total Receivables 134,675,777 122,229,365
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Deferred financing costs, net 3,762,785 4,125,972
Cash - restricted 966,229 855,138
Accrued interest receivable 672,360 341,107
Deferred taxes 1,221,536 1,141,536
Other Assets 234,461 170,370
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$ 142,705,333 $ 133,483,967
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Accounts Payable and Other Liabilities:
Accounts payable $ 1,079,542 $ 434,072
Accounts payable - related parties -0- 11,235
Accrued expenses and other liabilities 2,294,540 519,109
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Total Accounts Payable and Other Liabilities 3,374,082 964,416
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Notes payable 104,114,442 99,961,357
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107,488,524 100,925,773
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12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
$3 par value; 1,000,000 shares authorized, -0- shares
outstanding in 1998 and 9,915 shares outstanding in 1997 -0- 29,745
PREFERRED AND COMMON STOCK AND OTHER CAPITAL
Cumulative Redeemable Preferred Stock--Series 2 Class A,
$3 par value; 15,000 shares authorized, 10,000
shares issued and outstanding 30,000 30,000
Common Stock, $.05 par value; 50,000,000 shares
authorized, 21,905,706 shares outstanding in
1998 and 21,834,443 outstanding in 1997 1,095,286 1,091,723
Additional paid-in capital 32,401,421 32,078,721
Retained earnings (deficit) 1,690,102 (671,995)
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35,216,809 32,528,449
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$ 142,705,333 $ 133,483,967
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</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
3
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
3 Months Ended June 30,
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1998 1997
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<S> <C> <C>
Revenues:
Interest $ 4,913,987 $ 3,637,126
Other Income 281,558 295,997
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5,195,545 3,933,123
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Costs and Expenses:
Provision for doubtful receivables 225,000 -0-
Interest 1,718,602 2,112,993
Debt related costs including amortization of
financing costs 369,264 246,213
Selling, general and administrative 874,429 602,376
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3,187,295 2,961,582
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Income Before Provision for Income Taxes 2,008,250 971,541
Provision for Income Taxes
Current 865,000 96,000
Deferred credit (80,000) -0-
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Total Provision for Income Taxes 785,000 96,000
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Net Income $ 1,223,250 $ 875,541
============= =============
Basic earnings per common share $ 0.05 $ 0.07
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Diluted earnings per common share $ 0.05 $ 0.04
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
4
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
6 Months Ended June 30,
-----------------------
1998 1997
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<S> <C> <C>
Revenues:
Interest $9,663,685 $7,314,229
Gains on Sales of Contracts -0- 29,689
Other Income 614,798 306,233
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10,278,483 7,650,151
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Costs and Expenses:
Provision for doubtful receivables 450,000 --
Interest 3,371,830 4,277,092
Debt related costs including amortization of
financing costs 710,367 498,411
Selling, general and administrative 1,631,037 1,094,120
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6,163,234 5,869,623
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Income Before Provision for Income Taxes 4,115,249 1,780,528
Provision for Income Taxes
Current 1,520,000 180,000
Deferred credit (80,000) -0-
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Total Provision for Income Taxes 1,440,000 180,000
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Net Income $2,675,249 $1,600,528
============ ============
Basic earnings per common share $0.11 $0.13
============ ============
Diluted earnings per common share $0.11 $0.08
============ ============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
5
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS
<TABLE>
<CAPTION>
Redeemable
Additional Preferred Retained
Common Stock Paid in Stock-Series Earnings
Total Shares Amount Capital 2 Class A (Deficit)
------------ ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 32,528,449 21,834,443 $ 1,091,723 $ 32,078,721 $ 30,000 $ (671,995)
Dividends on 12.5%
Redeemable Convertible
Preferred Stock (8,819) (8,819)
Convert 12.5% Redeemable
Convertible Preferred
Stock to Common Stock 21,930 20,541 1,027 20,903
Dividends on Series 2
Class A Preferred Stock
paid in Common Stock -0- 50,722 2,536 301,797 (304,333)
Net Income 2,675,249 2,675,249
------------ ------------ ------------ ------------ ----------- ------------
Balances at June 30, 1998 $ 35,216,809 21,905,706 $ 1,095,286 $ 32,401,421 $ 30,000 $ 1,690,102
============ ============ ============ ============ =========== ============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
6
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
6 Months Ended June 30,
-----------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net Income $ 2,675,249 $ 1,600,528
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 708,283 483,187
Provision for doubtful receivables 450,000 -0-
Provision for deferred taxes 80,000 -0-
Gains on sales of contracts -0- (29,689)
Changes in assets and liabilities:
Increase in other assets (686,128) (634,932)
Increase in accounts receivable - related parties (10,952) (301,479)
Increase in restricted cash (111,091) (2,656,636)
Increase (Decrease) in accounts payable and
accrued expenses 2,420,901 (291,184)
Decrease in accounts payable--related parties (11,235) (2,682)
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NET CASH USED IN OPERATING ACTIVITIES 5,515,027 (1,832,887)
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
(Increase) decrease in receivables, net (15,554,442) 909,395
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NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (15,554,442) 909,395
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Payments on notes receivable - related party 2,438,035 775,970
Proceeds on loans payable - related party -0- 821,597
Proceeds from recourse notes payable 18,678,331 6,633,749
Payments on recourse notes payable (13,364,013) (7,148,870)
Proceeds from non-recourse notes payable 1,224,572 8,809,829
Payments on non-recourse notes payable (2,385,804) (10,703,048)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 6,591,121 (810,773)
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INCREASE (DECREASE) IN CASH (3,448,294) (1,734,265)
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Cash at beginning of period 4,620,479 4,037,201
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CASH AT END OF PERIOD $ 1,172,185 $ 2,302,936
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
7
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EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated interim financial statements as of June 30,
1998 and 1997 and for the three-month and six-month period ended June 30, 1998
and 1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal accruals) considered necessary for fair
presentation have been included. Operating results for the three-month and
six-month periods ended June 30, 1998 and 1997 are not necessarily indicative of
the results expected for the year ended December 31, 1998. For further
information, please refer to the consolidated financial statements and footnotes
thereto included in Equivest Finance, Inc.'s (the "Company") Form 10-KSB for the
year ended December 31, 1997.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Equivest Capital Funding, Inc. (inactive), and
Resort Funding, Inc. ("Resort Funding") and its subsidiary, BFICP Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and costs and expenses during
the reporting period. Actual results could differ from the Company's estimates.
Interest Income
The Company recognizes interest income on consumer financing contracts
using the interest method over the term of the contract. The Company recognizes
interest income on outstanding resort acquisition and development loans when
earned, based on the terms of the loan agreements. The accrual of interest on an
impaired loan is discontinued when accrued and unpaid interest, together with
the loan principal outstanding, exceeds the loan's projected cash flow or the
loan's net collateral value.
Gains on Sales of Contracts
Gains on sales of contracts result from periodic non-recourse sales of
consumer receivables. A gain is recorded to the extent the net proceeds exceed
the net investment in the consumer receivables sold.
8
<PAGE>
Other Income
Other income primarily represents fees, which are recognized as income
when Resort Funding performs the related service. These services include billing
services for developers and loan commitment, chargeback and collection fees
charged to resorts.
Allowance for Doubtful Receivables
Receivables have been reduced by an allowance for doubtful receivables.
The allowance is an amount which management believes will be adequate to absorb
possible losses on existing receivables. The evaluation incorporates past loss
experience, known and inherent risks in the portfolio, adverse conditions that
may affect the borrower's ability to repay, the estimated value of underlying
collateral, and current economic conditions. Receivables are charged against the
allowance when management believes that collectibility is unlikely. Because of
uncertainties in the estimation process, it is at least reasonably possible that
management's estimate of loan losses inherent in the loan portfolio and the
related allowance will change in the near term.
The Company follows Statement of Financial Accounting Standards No. 114
(SFAS 114) "Accounting by Creditors for Impairment of a Loan". Under SFAS 114,
the allowance for doubtful receivables for loans identified as impaired is
specifically determined using the loan's projected discounted cash flow or its
net collateral value.
Deferred Financing Costs
Deferred financing costs represent unamortized expenses associated with
issuing certain debt and fees payable pursuant to certain bank settlement
transactions. Amortization of these costs is computed on a straight-line basis
over the term of the associated debt and does not differ materially from that
computed using the effective interest method.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 is an asset and liability
approach to accounting for deferred income taxes. This method requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in tax laws or rates. A valuation allowance reduces deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
Earnings Per Share
The Company computes earnings per share under Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires
the presentation of earnings per share by all entities that have common stock or
potential common stock (such as options, warrants and convertible securities)
outstanding that trade in a public market. Those entities that have only common
stock outstanding present basic earnings per share amounts. All other entities
present basic and diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations.
9
<PAGE>
Transfers of Assets
The Company accounts for its transfers and servicing of financial assets
and extinguishment of liabilities under Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" (SFAS 125). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.
C. Pending Acquisition of Eastern Resorts Corporation
On July 17, 1998, the Company announced the execution of a definitive
merger agreement pursuant to which Eastern Resorts Corporation ("ERC") of
Newport, Rhode Island, one of the largest developers of timeshare resorts in New
England, will become a wholly owned subsidiary of the Company. Upon completion
of the merger, all of the outstanding common stock of ERC will be exchanged for
$15 million in cash and 3.2 million shares of the Company's common stock. The
Company has arranged for short-term bridge financing of the cash portion of the
merger through Credit Suisse First Boston Mortgage Capital LLC, which will
receive 180,000 warrants at $8.00 per share of the Company's common stock as
part of its consideration. The Company expects to complete the merger by the end
of August, 1998.
D. Collections and Contingencies
In July 1997, a Las Vegas, Nevada developer and customer of Resort Funding
filed for bankruptcy court protection. As of July 31, 1998, the developer had
outstanding indebtedness on its acquisition and development loans of
approximately $6,600,000, secured by first and third mortgages on a hotel and
casino located in Las Vegas. This amount owed includes principal, accrued
interest, and certain other fees relating to such loans. On August 5, 1998, the
hotel and casino were sold at auction. Under the terms of the auction, the
Company expects that its loans, together with accrued interest and costs, will
be repaid out of the proceeds of the sale.
In September 1997, Resort Funding commenced foreclosure proceedings
against a resort property located in Hilton Head, South Carolina which was
approximately four months delinquent in payment of its obligations to Resort
Funding under an acquisition and development loan agreement. On November 3,
1997, Resort Funding reached an agreement with the developer to settle the
arrears. As part of the agreement, the developer paid Resort Funding all past
due amounts in full and remitted payment in advance for installments due for
October, November and December, 1997. As additional security for future
payments, the developer agreed to grant Resort Funding a deed in lieu of
foreclosure to be held in escrow pending Resort Funding's receipt of all other
payments as they were to become due. However, in January, 1998, the developer
refused to deliver the deed in lieu of foreclosure and terminated the November 3
agreement. On March 17, 1998, the developer filed an answer and counterclaims in
the foreclosure action alleging, among other things, that it was not in default
of the loan agreements. Resort Funding intends to pursue vigorously its claims
and defend the counterclaims. On June 30, 1998, the developer agreed to deposit
all past-due interest amounts into an escrow account accessible only by order of
the court. Additionally, the developer agreed to pay into the escrow account all
future interest payments as they become due, pending the outcome of the
foreclosure action. In the event that any such payments are not timely received,
Resort Funding shall have the right to have a receiver appointed to operate the
resort. As of July 31, 1998, the balance owed to Resort Funding under the
referenced loan was approximately $3,500,000. Resort Funding's acquisition and
development loan agreement provides that principal will be
10
<PAGE>
repaid through release fees on interval units sold. As of July 31, 1998, the
developer had not sold any interval units. There can be no assurance Resort
Funding will receive principal payments relating to this obligation in the short
term, or that it will not incur a loss on this loan.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED JUNE 30, 1998
Results of Operations
Income before income taxes increased 106.7% to $2,008,300 for the three
months ended June 30, 1998, from $971,500 for the same period in 1997. Net
income increased 39.7% to $1,223,300 for the three months ended June 30, 1998
compared to $875,500 for the same period in 1997. The increase was due primarily
to an increase in interest income as a result of growth in portfolios being held
for investment and lower interest expenses. These increases were partially
reduced by an increased provision for income taxes, higher selling, general and
administrative costs, along with a higher provision for doubtful accounts. The
Company made a provision for incomes taxes of $785,000 for the second quarter of
1998, representing a 717.7% increase over the $96,000 provision for income taxes
provided during the second quarter of 1997. Revenues increased 32.1% to
$5,195,500 for the three months ended June 30, 1998, from $3,933,100 for the
same period in 1997. The increase was due primarily to an increase in interest
income as a result of portfolio growth in both consumer receivables and
acquisition and development loans. Total originations rose 87.0% to $30.1
million for the second quarter of 1998, compared to $16.1 million for the same
period in 1997.
Interest Income
Interest on loans increased 35.1% to $4,914,000 for the three months ended
June 30, 1998, from $3,637,100 for the same period in 1997, primarily due to
growth in the portfolio held for investment. Interest on consumer notes
increased 32.6% to $3,305,300 for the three months ended June 30, 1998 from
$2,492,900 for the same period in 1997, also as a result of growth in the
portfolio held for investment. Interest on acquisition and development loans
increased 67.8% to $1,497,900 for the three months ended June 30, 1998 from
$892,900 for the same period in 1997, primarily as a result of average higher
outstanding balances. The outstanding balances for acquisition and development
loans during the second quarter of 1998 averaged approximately $48.0 million
(average interest rate of 12.2%) compared with an average balance of
approximately $27.2 million (average interest rate of 12.9%) during the same
period in 1997. The growth in interest income was offset by $106,000 from
interest income on notes receivable from a related party, which had higher
average outstanding balances for the same period in 1997.
Gains on Sales of Contracts
There were no Gains on Sales of Contracts for the three months ended June
30, 1998, or for the same period in 1997.
Other Income
Other income decreased by 4.9% to $281,600 for the three months ended June
30, 1998, from $296,000 for the same period in 1997. The slight decrease was
primarily due to a decrease in other contract-related fees.
12
<PAGE>
Provision for Doubtful Receivables
The provision for doubtful receivables increased 100% to $225,000 for the
three months ended June 30, 1998, from $0 for the same period in 1997, as a
result of increased levels of outstanding receivables.
Interest Expense
Interest expense decreased 18.7% to $1,718,600 for the three months ended
June 30, 1998, from $2,113,000 for the same period in 1997, primarily due to
lower interest rates. The interest expense on the Company's consumer receivable
facility decreased 1.46% to $876,800 for the second quarter of 1998 from
$889,800 for the second quarter of 1997, due entirely to a decrease in interest
rates. The consumer receivable facility had higher average outstanding balances
of almost $13,000,000 for the second quarter of 1998, compared to the same
period in 1997, but interest rates were approximately 290 basis points lower.
Interest expense on other bank notes increased 18.4% to $773,900 for the three
months ended June 30, 1998, from $653,500 for the same period in 1997, due to
higher average outstanding balances. The average outstanding balance on other
bank notes increased more than $11 million between the second quarter of 1998
and the second quarter in 1997. The average interest rates on other bank notes
decreased to 6.1% for the second quarter of 1998, from 6.5% for the same period
in 1997. The Company had interest costs of approximately $495,000 for the second
quarter of 1997 (and no corresponding costs during the same period in 1998) in
association with approximately $25 million of intercompany debt, which debt was
converted into equity effective October 30, 1997.
Selling, General and Administrative
Selling, General and Administrative costs increased 45.1% to $874,400 for
the three months ended June 30, 1998, from $602,400 for the same period in 1997.
The increased costs are mainly due to an increase in payroll, servicing, legal,
advertising, and travel costs. The increased payroll-related cost is mainly due
to a reduction in payroll costs allocated to the Debtors for certain of the
Company's employees during the first quarter of 1998, compared to the same
period in 1997. Lower office-related costs slightly offset the increase in other
selling, general and administrative costs.
Debt-Related Costs and Amortization
Debt-related costs and amortization increased 50.0% to $369,300 for the
three months ended June 30, 1998, from $246,200 for the same period in 1997. The
increase was mainly attributable to the amortization of deferred financing costs
and the discount associated with the issuance of common stock warrants to a
bank. In the fourth quarter of 1997, the Company obtained a credit facility from
the bank. In connection with the transaction, warrants to purchase 250,000
shares of the Company's common stock were granted to the bank. The value of the
warrants is being accounted for as a discount in consideration for making the
loan and will be amortized as interest expense over the term of the agreement.
The increase was also attributable to an increase in the 3% per annum
arrangement fee charged by Bennett Funding Group, Inc. ("BFG") and certain
affiliated companies (collectively, the "Debtors") in the BFG bankruptcy case
(the "Bankruptcy Case"), relating to loans (the "Settlement Loans") made to
Resort Funding. The Settlement Loans resulted from the settlement of claims made
by several lenders (the "Banks") in the Bankruptcy Case, arising out of
lease-financing agreements pursuant to which the Banks made loans to the
Debtors. The settlements, which were approved by the United States Bankruptcy
Court for the Northern District of New York (the "Bankruptcy Court"), required
the Banks to make new, interest-only term loans to Resort Funding at favorable
1/2 to 4% interest rates, ranging in term from 30 to 120 months, with an average
duration of 70 months. Resort Funding is obligated to pay the arrangement fee
based on the unpaid principal balance of the new term loans.
13
<PAGE>
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 1998
increased 717.7% to $785,000, from $96,000 for the same period in 1997. The
current portion of the provision relates to currently payable federal and state
income taxes. The provision for income taxes for the three months ended June 30,
1997 also reflects utilization of net operating loss carryforwards and the
deferred tax provision relating to the provision for doubtful receivables.
SIX MONTHS ENDED JUNE 30, 1998
Results of Operations
Income before income taxes increased 131.1% to $4,115,200 for the six
months ended June 30, 1998, from $1,780,500 for the same period in 1997. Net
income increased 67.1% to $2,675,200 for the six months ended June 30, 1998
compared to $1,600,500 for the same period in 1997. The increase was due
primarily to an increase in interest income as a result of portfolio growth, an
increase in commitment fees, and a decrease in interest expenses. These
increases were partially reduced by an increased provision for income taxes,
higher selling, general and administrative costs, a higher provision for
doubtful accounts, and an increase in debt-related costs and amortization. The
Company made a provision for income taxes of $1,440,000 for the first six months
of 1998, a 700.0% increase over the $180,000 provision for income taxes during
the same period in 1997. Revenues increased 34.4% to $10,278,500 for the six
months ended June 30, 1998, from $7,650,200 for the same period in 1997. The
increase was due primarily to an increase in interest income as a result of
portfolio growth in both consumer receivables and acquisition and development
loans, as well as higher fees. Total originations rose 91.8% to $49.5 million
for the first six months of 1998, compared to $25.8 million for the same period
in 1997.
Interest Income
Interest on loans increased 32.1% to $9,663,700 for the six months ended
June 30, 1998, from $7,314,200 for the same period in 1997, primarily due to
growth in the portfolio held for investment. Interest on consumer notes
increased 35.0% to $6,594,900 for the six months ended June 30, 1998 from
$4,884,300 for the same period in 1997, as a result of growth in the portfolio
held for investment. Interest on acquisition and development loans increased
50.2% to $2,824,000 for the six months ended June 30, 1998 from $1,879,800 for
the same period in 1997, primarily as a result of average higher outstanding
balances. The outstanding balances for the acquisition and development loans
during the six months ending June 30, 1998 averaged approximately $45.0 million
(average interest rate of 12.3%) compared with an average balance of
approximately $29.2 million (average interest rate of 12.9%) during the same
period in 1997. The reduction in average outstanding balances on notes
receivable from a related party, also caused a reduction of $204,900 in interest
income for the period as compared to the same period during 1997.
14
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Gains on Sale of Contracts
In 1998, the Company's management made a decision not to sell consumer
contracts. In 1997, gains on sales of the contracts amounted to $29,700.
Other Income
Other income increased by 100.8% to $614,800 for the six months ended June
30, 1998, from $306,200 for the same period in 1997. The increase was primarily
due to an increase in fee income.
Provision for Doubtful Receivables
The provision for doubtful receivables increased 100.0% $450,000 for the
six months ended June 30, 1998, compared to $0 for the same period in 1997. The
provision was recorded as the Company increased the allowance for doubtful
receivables in conjunction with the growth of the portfolio.
Interest Expense
Interest expense decreased 21.2% to $3,371,800 for the six months ended
June 30, 1998, from $4,277,100 for the same period in 1996, primarily due to
lower interest rates. The interest expense on the Company's consumer receivable
facility decreased 3.3% to $1,713,900 for the six months ending June 30, 1998
from $1,772,900 for the same period in 1997, due entirely to a decrease in
interest rates. The consumer receivable facility had higher average outstanding
balances of almost $11,000,000 for the six months ending June 30, 1998, compared
to the same period in 1997, but interest rates were approximately 280 basis
points lower. Interest expense on other bank notes increased 10.1% to $1,523,600
for the six months ended June 30, 1998, from $1,383,400 for the same period in
1997, due to higher average outstanding balances. The average outstanding
balance on other bank notes increased over $9 million between the first six
months ending June 30, 1998 and the same period in 1997. The average interest
rates on other bank notes decreased to 6.1% for the six months ending June 30,
1998, from 6.5% for the same period in 1997. A further reduction of interest
expense is the result of satisfying $25 million of intercompany debt through the
issuance of the Company's common stock on October 30, 1997. For the six months
ended June 30, 1997, approximately $976,000 of interest expense was charged to
operations.
Selling, General and Administrative
Selling, General and Administrative costs increased 49.1% to $1,631,000
for the six months ended June 30, 1998, from $1,094,100 for the same period in
1997. The increased costs are mainly due to an increase in payroll, servicing,
legal, advertising, and travel costs. The increased payroll-related cost is
mainly due to a reduction in payroll costs allocated to the Debtors for certain
of the Company's employees during the first quarter of 1998, compared to the
same period in 1997.
Debt-Related Costs and Amortization
Debt-related costs and amortization increased 42.5% to $710,400 for the
six months ended June 30, 1998, from $498,400 for the same period in 1997. The
increase was mainly attributable to the amortization of fees and common stock
warrants associated with a credit facility the Company obtained in the fourth
quarter of 1997. The value of the warrants is being accounted for as a discount
in consideration for making the loan and will be amortized as interest expense
over the term of the agreement. The increase was also attributable to an
increase in the 3% per annum arrangement fee charged in connection with the
Settlement Loans. Resort Funding is obligated to pay the arrangement fee based
on the unpaid principal balance of the new term loans.
15
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Provision for Income Taxes
The provision for income taxes for the six months ended June 30, 1998
increased 700.0% to $1,440,000, from $180,000 for the same period in 1997. The
current portion of the provision relates to currently payable federal and state
income taxes. The current-period tax provision reflects the benefit of the
availability of net operating loss carryforwards of approximately $675,000 in
1998 which partially shelter the Company's book income from federal taxes. The
provision for income taxes for the six months ended June 30, 1997 also reflects
utilization of $1.4 million the net operating loss carryforwards, and the
deferred tax provision relating to the provision for doubtful receivables.
Pending Acquisition of Eastern Resorts Corporation
On July 17, 1998, the Company announced the execution of a definitive
merger agreement pursuant to which Eastern Resorts Corporation ("ERC") of
Newport, Rhode Island, one of the largest developers of timeshare resorts in New
England, will become a wholly owned subsidiary of the Company. Upon completion
of the merger, all of the outstanding common stock of ERC will be exchanged for
$15 million in cash and 3.2 million shares of the Company's common stock. The
Company has arranged for short-term bridge financing of the cash portion of the
merger through Credit Suisse First Boston Mortgage Capital LLC, which will
receive 180,000 warrants at $8.00 per share of the Company's common stock as
part of its consideration. Consummation of the merger is not subject to
Hart-Scott-Rodino clearance or shareholder approval, but is subject to other
customary conditions. The Company expects to complete the merger by the end of
August, 1998.
16
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 29, 1998, Resort Funding filed a motion (the "Motion") in the
Bankruptcy Court for the Northern District of New York to obtain court approval
for certain corrections to the terms of a November 1997 order of the Bankruptcy
Court. Under that order, Resort Funding satisfied all of its outstanding debt
under certain notes to BFG through an exchange of debt for common stock of the
Company. Under the terms of the Motion, BFG would be authorized to accept an
additional 67,113 shares of the Company's common stock at the price of the
original issuance ($5.375 per share) to correct an error in the computation of
the amount of the outstanding intercompany debt at the time the debt-equity swap
was approved in November 1997. Additionally, the Debtors would provide
appropriate legal documentation to Resort Funding confirming Resort Funding's
title in approximately $27 million in receivables and development loans which
are currently recorded in the name of BFG-related entities which acted as
nominees, even though such loans were either paid for or advanced directly by
Resort Funding. Both the BFG bankruptcy trustee and the Official Committee of
Unsecured Creditors of the BFG bankruptcy estate have supported the Motion.
However, several parties, including banks litigating with BFG, have filed
objections to the motion. The Bankruptcy Court has scheduled an evidentiary
hearing on the Motion for September 2, 1998. There can be no assurance as to the
outcome of the Motion.
For other information regarding certain litigation involving the Company,
its subsidiaries and affiliates, reference is made to the Company's Form 10-KSB
for the year-ended December 31, 1997, which is incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On July 10, 1998, the trustee in the BFG Bankruptcy Case filed a motion on
behalf of BFG and other debtors in the Bankruptcy Case (the "Estate") in the
Bankruptcy Court for the Northern District of New York seeking (i) to sell all
of the Estate's shares of common stock in the Company to a syndicate of
underwriters, of which Credit Suisse First Boston Corporation will be the lead
or co-lead manager, in connection with a public offering of such common stock
and (ii) to exchange all of the Estate's Series 2 Preferred Stock in the Company
for 1,860,465 shares of the Company's common stock. A hearing on the motion is
currently scheduled for September 2 or 3, 1998.
Item 6. (a) Exhibits
The following exhibits are filed herewith:
17
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10.1 Agreement and Plan of Merger dated July 17, 1998 by and among
Equivest Finance, Inc., ERC Acquisition Corp. and Eastern
Resorts Corporation.
11.1 Statement re: computation of earnings per share
(b) Reports on Form 8-K.
(i) On July 14, 1998, the Company filed a Report on Form 8-K
announcing that Richard C. Breeden, as trustee in bankruptcy for The
Bennett Funding Group, Inc., Bennett Management and Development
Corporation and certain other related debtors (the "Estate"), filed
a motion in the United States Bankruptcy Court for the Northern
District of New York on July 10, 1998 seeking (i) to sell all of the
Estate's shares of common stock in the Company in connection with a
public offering of such common stock and (ii) to exchange all of the
Estate's Series 2 Preferred Stock in the Company for 1,860,465
shares of the Company's common stock.
(ii) On July 22, 1998, the Company filed a Report on Form 8-K
announcing the execution of a definitive merger agreement pursuant
to which Eastern Resorts Corporation will become a wholly-owned
subsidiary of the Company.
(iii) On August 12, 1998, the Company filed a Report on form 8-K
announcing the filing of a Motion by Resort Funding in the
Bankruptcy Court for the Northern District of New York to correct
certain mistakes incorporated into a November 24, 1997 order of the
Bankruptcy Court.
18
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, there unto duly authorized.
EQUIVEST FINANCE, INC.
BY: /s/ Gerald L. Klaben, Jr.
----------------------------------------------------
Gerald L. Klaben, Jr.
Executive Vice President and Chief Financial Officer
Dated: August 14, 1998
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") is made as of July
17, 1998 by and among Equivest Finance, Inc., a Florida corporation
("Purchaser"), ERC Acquisition Corp., a Delaware corporation ("Acquisition
Corp."), and Eastern Resorts Corporation, a Rhode Island corporation ("ERC").
W I T N E S S E T H:
WHEREAS, R. Perry Harris and Karen Harris (the "ERC Shareholders")
own all of the issued and outstanding stock of ERC; and
WHEREAS, ERC is the sole member and the sole manager of Eastern
Resorts Company, LLC, a Rhode Island limited liability company (the "LLC"),
which develops, owns and operates timesharing resorts in Rhode Island and
Massachusetts; and
WHEREAS, Purchaser desires to acquire ERC and has formed Acquisition
Corp. for the sole and express purpose of completing such acquisition; and
WHEREAS, the Board of Directors of ERC (i) has determined that the
merger of ERC with and into Acquisition Corp. (the "Merger") is fair to and in
the best interests of ERC and the ERC Shareholders and has approved this
Agreement and the Merger and (ii) has recommended the approval of this Agreement
and the Merger by the ERC Shareholders;
WHEREAS, the ERC Shareholders have approved this Agreement and the
Merger;
WHEREAS, the Board of Directors of Purchaser has determined that the
Merger is fair to and in the best interests of Purchaser and its shareholders
and has approved this Agreement and the Merger;
WHEREAS, the Board of Directors of Acquisition Corp. (i) has
determined that the Merger is fair to and in the best interests of Acquisition
Corp. and its shareholder and has approved this Agreement and the Merger and
(ii) has recommended the approval of this Agreement and the Merger by the
shareholder of Acquisition Corp., and Purchaser, as sole shareholder of
Acquisition Corp., has approved this Agreement and the Merger;
WHEREAS, the Merger will be consummated upon the terms and subject
to the conditions of this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL") and the Rhode Island Business Corporation Act (the
"RBCA"); and
WHEREAS, for federal (and applicable state and local) income tax
purposes, it is intended that the Merger shall qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, the parties hereto, intending legally
to be bound, hereby agree as follows:
<PAGE>
2
ARTICLE I
TERMS OF MERGER
SECTION 1.1 MERGER.
Purchaser, Acquisition Corp. and ERC acknowledge and agree that
their representations, covenants, warranties, agreements, indemnities and other
undertakings contained in this Agreement are made and given to induce the other
parties to enter into this Agreement and to consummate the Merger and that each
party in reliance thereon has agreed to execute this Agreement and consummate
the Merger. Subject to the satisfaction or waiver of the conditions set forth in
this Agreement, at the Closing (as defined in Section 1.2), pursuant to the
terms and provisions of this Agreement and all relevant laws, ERC shall be
merged with and into Acquisition Corp. As a result of the Merger, the separate
corporate existence of ERC shall cease and Acquisition Corp. shall continue as
the surviving corporation of the Merger (the "Surviving Corporation").
SECTION 1.2 TIME AND PLACE OF CLOSING.
As promptly as practicable and in no event later than the fifth
business day following the satisfaction or waiver of the conditions specified in
Article VI (other than conditions which, by their nature, are to be satisfied at
the Closing, but subject to those conditions), the closing of the Merger (the
"Closing") shall take place at the offices of Shearman & Sterling, 599 Lexington
Avenue, New York, N.Y. 10022. At the Closing, there shall be delivered to
Purchaser and the ERC Shareholders the consideration, certificates and other
documents and instruments required to be delivered under Articles VI and VII.
The parties shall prepare, execute and file a certificate of merger and articles
of merger and any other related documents in order to comply in effecting the
Merger in all respects with the respective requirements of the DGCL and the
RBCA. Upon filing of the articles of merger with the Secretary of State of the
State of Rhode Island and a certificate of merger with the Secretary of State of
the State of Delaware, the Merger shall become effective (the time of such
effectiveness being referred to as the "Effective Time").
SECTION 1.3 EFFECTS OF MERGER.
At the Effective Time, the effect of the Merger shall be as provided
in the applicable provisions of the DGCL and the RBCA. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time all the
property, rights, privileges, powers and franchises of ERC and Acquisition Corp.
shall vest in the Surviving Corporation, and all debts, liabilities,
obligations, restrictions, disabilities and duties of each of ERC and
Acquisition Corp. shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.4 CONVERSION OF SECURITIES. (a) At the Effective Time, by virtue of
the Merger and without any action on the part of Acquisition Corp., ERC or the
ERC Shareholders:
(i) each issued and outstanding share (each a "Share" and,
collectively, the "Shares"), of common stock, no par value per share, of
ERC ("ERC Common Stock") issued and outstanding immediately prior to the
Effective Time (other than any Shares to be canceled pursuant to Section
1.4(a)(ii)) shall be converted into the right to receive (A) $1,500 (the
"Per Share Cash Amount") plus (B) 320 shares (the "Per Share Stock Amount"
and, together with the Per Share Cash Amount, the "Merger Consideration")
of common stock, $.05 par value per share, of Purchaser ("Purchaser Common
Stock"); provided, however, that if, between the date of this Agreement
and the Effective Time, the Purchaser Common Stock or the ERC Common Stock
shall have been reclassified for any reason (other than pursuant to any
action described in Schedule 2.4 hereto) including, without limitation,
any reclassification, recapitalization, split, stock dividend, combination
or exchange of shares, the
<PAGE>
3
Per Share Cash Amount and the Per Share Stock Amount shall be equitably
adjusted to reflect such change; and
(ii) each Share held in the treasury of ERC and each Share owned by
Purchaser or any direct or indirect wholly owned subsidiary of Purchaser
or ERC immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof, and no payment shall be made
with respect thereto.
SECTION 1.5 EXCHANGE OF CERTIFICATES.
(a) Exchange Procedures. At the Closing, each ERC Shareholder shall
surrender to Purchaser for cancellation a certificate or certificates
representing the Shares held by such holder (collectively, the "Certificates"),
duly endorsed in blank, or with appropriate stock powers, duly executed in
blank, attached thereto, in proper form for transfer, and with all applicable
taxes, if any, paid or provided for. At the Closing, Purchaser shall deliver to
such ERC Shareholder, in exchange for the surrendered Certificates, (i) cash (by
wire transfer) in an amount equal to the number of Shares to be exchanged by
such holder pursuant to Section 1.4(a) multiplied by the Per Share Cash Amount
and (ii) a certificate representing that number of shares of Purchaser Common
Stock that such holder shall have the right to receive in respect of the Shares
formerly represented by such Certificate or Certificates (after taking into
account all Shares then held by such holder), and the Certificate or
Certificates so surrendered shall forthwith be canceled.
(b) No Further Rights in Shares. All Merger Consideration
transferred to the ERC Shareholders upon conversion of the Shares in accordance
with the terms hereof (including any cash paid pursuant to Section 1.5(c)) shall
be deemed to have been issued in full satisfaction of all rights pertaining to
such Shares.
(c) No Fractional Shares. No certificates or scrip representing
fractional shares of Purchaser Common Stock shall be issued upon the surrender
for exchange of Certificates. Each holder of a fractional share interest shall
be paid an amount in cash equal to the product obtained by multiplying (i) such
fractional share interest to which such holder (after taking into account all
fractional share interests then held by such holder) would otherwise be entitled
by (ii) the Exchange Price. As used herein, the "Exchange Price" means an amount
equal to the average of the per share closing prices, as reported by NASDAQ
SmallCap Market, of shares of Purchaser Common Stock for the 20 consecutive
trading days ending on (and including) the trading day immediately preceding the
Effective Time.
(d) Withholding Rights. Purchaser shall be entitled to deduct and
withhold from the Merger Consideration otherwise payable pursuant to this
Agreement to the ERC Shareholders such amounts, if any, as it is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. However, if Purchaser will
in fact have an obligation to deduct and withhold from the Merger Consideration,
then to the extent such obligation can be avoided or minimized by either (i) the
ERC Shareholders' compliance with any applicable certification requirement or
other exemption or (ii) Purchaser's compliance with any applicable certification
requirement or other exemption, or by both (i) and (ii), each party agrees to
individually undertake such action or actions prior to the Closing as will be
necessary to so comply with any such certification requirement or other
exemption that is available to it (and, to the extent reasonably necessary, to
assist the other party in so complying with any certification requirement or
other exemption that is available to such other party). To the extent that
amounts are so deducted and withheld from the Merger Consideration by Purchaser,
(i) such deducted and withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the ERC Shareholders in respect of which such
deduction and withholding was made by Purchaser and (ii) such deducted and
withheld amounts shall be paid by Purchaser to the appropriate governmental
bodies and agencies.
<PAGE>
4
(e) Dividends. Holders of shares of Purchaser Common Stock issued
pursuant to the Merger shall be entitled to any dividends paid with respect to
such shares of Purchaser Common Stock that become payable to persons who are
holders of record of Purchaser Common Stock as of any record date following the
Effective Time.
SECTION 1.6 STOCK TRANSFER BOOKS.
At the Effective Time, the stock transfer books of ERC shall be
closed and there shall be no further registration of transfers of Shares
thereafter on the records of ERC. From and after the Effective Time, the holders
of Certificates representing Shares outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such Shares,
except as otherwise provided herein or by applicable law. On or after the
Effective Time, any Certificates presented to Purchaser for any reason shall be
converted into Merger Consideration and any cash in lieu of fractional shares of
Purchaser Common Stock to which the holders thereof are entitled pursuant to
Section 1.5(c).
SECTION 1.7 METHOD OF CARRYING MERGER INTO EFFECT.
Purchaser, Acquisition Corp. and ERC shall cooperate in all
reasonable respects in effecting the Merger, including, without limitation,
taking, or causing to be taken, such actions as may be required in order to
cause the Merger to become effective, subject to and in accordance with the
provisions hereof.
SECTION 1.8 CHARTER, BY-LAWS AND BOARD OF DIRECTORS OF THE SURVIVING
CORPORATION.
At the Effective Time: (a) the Certificate of Incorporation and
By-Laws of Acquisition Corp., as the Surviving Corporation in the Merger, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation and By-Laws of the Surviving Corporation; provided, however, that,
at the Effective Time, Article I of the Certificate of Incorporation of the
Surviving Corporation shall read as follows: "The name of the Corporation is
Eastern Resorts Corporation" and (b) the directors of Acquisition Corp.
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the officers of ERC
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
SECTION 1.9 TAX-FREE REORGANIZATION.
(a) The parties intend that (i) the Merger shall qualify as a
reorganization pursuant to Section 368(a) of the Code, (ii) the ERC Shareholders
shall recognize no gain or loss and shall take into account no income as a
result of the Merger (except for gain recognition with respect to the cash
portion of the Merger Consideration received by the ERC Shareholders), (iii) the
tax basis of ERC's assets that are directly transferred to Acquisition Corp. by
ERC in exchange for the Merger Consideration, as well as the tax basis of the
LLC's assets that are indirectly transferred by ERC to Acquisition Corp. as a
result of the Merger shall remain unchanged by reason of the Merger, and (iv)
any elections made by ERC or the LLC with respect to periods ending on or prior
to the date of the Effective Time to account for the sale of certain timeshare
units (as set forth in Schedule 3.17 hereto) on an installment basis shall be in
effect and be similarly accounted for by the Purchaser Group (as defined in
Section 4.5(a)) after the date of the Effective Time. Each party shall report
the transactions contemplated by this Agreement to the Internal Revenue Service
and other taxing authorities in a manner consistent with this Section 1.9, and
no party will take or fail to take (or permit any of its subsidiaries or
affiliates to take or fail to take) any action or position if the taking of such
action or position or the failure to take such action or position, as the case
may be, would be inconsistent with
<PAGE>
5
or would jeopardize such treatment, unless and until such party is required
pursuant to a Final Determination (as defined below) under applicable law to
report the transaction in another manner. The parties do not intend that the
transfer of the equity interests in ERC Ventures, Inc. by R. Perry Harris on or
prior to the Closing shall constitute a transaction contemplated or otherwise
governed by this Agreement.
(b) If, pursuant to a Final Determination (as defined below), the
ERC Shareholders are required to report the transactions contemplated by this
Agreement or the income associated with the sale of certain timeshare units
described in Section 1.9(a)(iv), or both, in a manner inconsistent with Section
1.9(a), Purchaser agrees to use its reasonable efforts to cause the members of
the Purchaser Group (as defined in Section 4.5(a)) to revise their reporting of
the transactions or the sale of certain timeshare units as contemplated by this
Agreement (including, but not limited to, by the filing of an amended return or
claim for a refund of Taxes (as such term is defined in Section 3.17); provided
that Purchaser shall have no obligation to take any action that it concludes
would have an adverse effect on the Purchaser Group.
(c) For purposes of this Agreement, "Final Determination" shall mean
the final resolution of liability for any Tax for a taxable period, including
any related interest or penalties, (i) by Internal Revenue Service Form 870 or
870-AD (or any successor forms thereto), on the date of acceptance by or on
behalf of the Internal Revenue Service (the "IRS"), or by a comparable form
under the laws of other jurisdictions; except that a Form 870 or 870-AD or
comparable form that reserves (whether by its terms or by operation of law) the
right of the taxpayer to file a claim for refund and/or the right of a taxing
authority to assert a further deficiency with respect to an item or items shall
not constitute a Final Determination with respect to such item or items; (ii) by
a decision, judgment, decree, or other order by a court of competent
jurisdiction, which has become final and unappealable; (iii) by a closing
agreement or accepted offer in compromise under Section 7121 or 7122 of the
Code, or comparable agreements under the laws of other jurisdictions; (iv) by
any allowance of a refund or credit in respect of an overpayment of Tax, but
only after the expiration of all periods during which such refund may be
recovered (including by way of offset) by a taxing authority; or (v) by any
other final disposition, including by reason of the expiration of the applicable
statute of limitations.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to ERC and the ERC
Shareholders as follows:
SECTION 2.1 ORGANIZATION.
Each of Purchaser and Acquisition Corp. is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation, is duly qualified and in good standing as a foreign
corporation in the jurisdictions where the ownership of its assets or the
conduct of its business requires such qualification (except where the failure to
so qualify would not have a Purchaser Material Adverse Effect), and has full
power and authority to own its properties and assets and to carry on lawfully
its business as currently conducted. Purchaser owns all of the stock of, and
controls all of the voting power of, Acquisition Corp. The term "Purchaser
Material Adverse Effect" means any change in or effect on the business of
Purchaser and its subsidiaries that, individually or together with all other
related adverse changes and effects, is reasonably likely to be materially
adverse to the business, results of operations, properties or financial
condition of Purchaser and its subsidiaries taken as a whole.
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6
SECTION 2.2 ARTICLES OF INCORPORATION, BYLAWS AND AGREEMENTS.
A true, complete and correct copy of the Articles of Incorporation
and By-Laws of Purchaser and the Certificate of Incorporation and By-Laws of
Acquisition Corp. as currently in effect have been delivered to ERC. There are
no agreements by and between or among Purchaser, Acquisition Corp. and any or
all of their respective shareholders imposing any restrictions upon the transfer
of or otherwise pertaining to the Purchaser Common Stock to be received by the
ERC Shareholders or the ownership thereof.
SECTION 2.3 AUTHORIZATION.
Each of Purchaser and Acquisition Corp. has full legal right, power
and authority to enter into this Agreement and consummate the Merger. The
execution, delivery and performance by Purchaser and Acquisition Corp. of this
Agreement and the Related Agreements (as defined in Section 7.1(g)) and the
actions contemplated hereby and thereby have been duly and validly authorized by
all necessary corporate action, and this Agreement and (upon their execution)
each of the Related Agreements constitute or will constitute valid and binding
obligations of Purchaser or Acquisition Corp., as applicable, enforceable
against it in accordance with their terms.
SECTION 2.4 CAPITAL STRUCTURE.
(a) Since March 31, 1998 (except as disclosed in the SEC Documents
(as defined in Section 2.5) filed prior to the date hereof or as set forth on
Schedule 2.4 hereto), there has been no change in the authorized and outstanding
equity securities and rights to acquire equity securities of Purchaser.
(b) Since March 31, 1998, Purchaser has not taken any action
prohibited by Section 4.1(c) of this Agreement.
SECTION 2.5 SEC DOCUMENTS; FINANCIAL STATEMENTS.
(a) Except as set forth on Schedule 2.5(a) hereto, Purchaser has
filed all required reports, forms and documents required to be filed by it with
the Securities and Exchange Commission (the "SEC") since June 30, 1996 (the "SEC
Documents"). All of the SEC Documents (i) were prepared in accordance with the
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, (ii) did not, at the time they were filed, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, except to
the extent such statements have been modified or superseded by subsequent SEC
Documents filed prior to the date hereof.
(b) Except as set forth on Schedule 2.5(b) hereto, the consolidated
financial statements of Purchaser included in the SEC Documents have been
prepared in accordance with generally accepted accounting principles ("GAAP")
(except, in the case of interim financial statements, as permitted by the
applicable forms of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), fairly presented, in
all material respects, the consolidated financial position of Purchaser and its
subsidiaries, taken as a whole, as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of interim financial statements, to normal year-end adjustments) and
include all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair presentation of the consolidated financial condition of
Purchaser and its subsidiaries and the results of operations and cash flows of
Purchaser and its subsidiaries as of the dates thereof or for the periods
covered thereby.
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7
SECTION 2.6 PURCHASER COMMON STOCK.
The shares of Purchaser Common Stock to be issued in the Merger have
been duly authorized by all necessary corporate action on the part of Purchaser
and, upon issuance to the ERC Shareholders in accordance with this Agreement,
will be validly issued, fully paid and non-assessable and not subject to
preemptive rights.
SECTION 2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth on schedule 2.7 hereto or disclosed in the SEC
Documents filed prior to the date hereof, since the date of the most recent
financial statements included in the SEC Documents filed prior to the date
hereof, there has not been any change in or effect on the business of Purchaser
and its subsidiaries that, individually or together with all other adverse
changes and effects, is reasonably likely to be materially adverse to the
business, results of operations, properties or financial condition of Purchaser
and its subsidiaries taken as a whole.
SECTION 2.8 NONCONTRAVENTION; REQUIRED CONSENTS.
(a) Except as described in Schedule 2.8 hereto, the execution and
delivery of this Agreement and the Related Agreements by Purchaser, the
consummation by Purchaser of the Merger and compliance by Purchaser with the
provisions of this Agreement and the Related Agreements will not conflict with,
or result in any violation of, or give rise to a right of termination,
cancellation or acceleration of any obligation or to a loss of a material
benefit under, or result in the creation of any lien upon any of the properties
or assets of Purchaser or any of its subsidiaries under, (i) the Articles of
Incorporation or By-Laws of Purchaser or the comparable charter or
organizational documents or limited liability or partnership or similar
agreement (as the case may be) of any such subsidiary, (ii) any material loan or
credit agreement, note, bond, mortgage, indenture, reciprocal easement
agreement, lease or other agreement, instrument, permit, concession, franchise
or license of Purchaser or any of its subsidiaries or (iii) any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Purchaser or
any of its subsidiaries or their respective properties or assets, other than, in
the case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights or liens that individually or in the aggregate would not (x) constitute a
Purchaser Material Adverse Effect or (y) prevent the consummation of the Merger.
(b) The execution and delivery of this Agreement by Purchaser does
not, and the performance of this Agreement by Purchaser will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign ("Governmental
Entity"), except (i) for applicable requirements, if any, of the Exchange Act,
state securities or "blue sky" laws ("Blue Sky Laws"), the National Association
of Securities Dealers, Inc. (the "NASD"), and state takeover laws, and filing
and recordation of appropriate merger documents as required by the DGCL and the
RBCA, and (ii) where failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not prevent or delay
consummation of the Merger or otherwise prevent Purchaser from performing its
obligations under this Agreement, and would not constitute a Purchaser Material
Adverse Effect.
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SECTION 2.9 LIABILITIES.
There are no material liabilities of Purchaser or its subsidiaries,
except (i) as set forth in Schedule 2.9(a) hereto, (ii) as and to the extent
reflected or reserved against in the financial statements of Purchaser, or (iii)
incurred since the date of this Agreement in the ordinary course of business,
consistent with past practice of Purchaser and its subsidiaries, and which do
not and are not reasonably likely to have a Purchaser Material Adverse Effect.
For purposes of this Section 2.9 only, "material" means in excess of $25,000
individually or $100,000 in the aggregate. Except as set forth on Schedule
2.9(b) hereto, reserves are reflected on the financial statements of Purchaser
and its subsidiaries against all liabilities of Purchaser and its subsidiaries
in amounts that have been established on a basis consistent with past practices
of Purchaser and its subsidiaries and in accordance with GAAP.
SECTION 2.10 CONTRACTS.
Except as set forth in Schedule 2.10 hereto, neither Purchaser nor
any of its subsidiaries is in material breach of any provisions of, or is in
material violation or default under the terms of, any material contract (except
for such defaults which individually or, in the aggregate, would not constitute
a Purchaser Material Adverse Effect).
SECTION 2.11 LITIGATION AND COMPLIANCE.
Except as set forth in Schedule 2.11 hereto and except as set forth
in the SEC Documents filed prior to the date hereof, there is no litigation,
suit, claim, action, arbitration, administrative proceeding, or, to the
knowledge of Purchaser, investigation of Purchaser or any of its subsidiaries or
the operation of any of their businesses pending before any court, arbitrator,
administrative agency or other governmental authority or, to the knowledge of
Purchaser, threatened against Purchaser or any of its subsidiaries, by or before
any court, arbitrator, administrative agency or other governmental authority,
that is not adequately covered by available insurance (subject to normal
deductibles). There are no pending or threatened collective strikes,
controversies, slowdowns, work stoppages or other labor disturbances between the
Company and its employees. Except as otherwise set forth in this Agreement and
except where such non-compliance that would not have a Purchaser Material
Adverse Effect, Purchaser and its subsidiaries are in compliance in all material
respects with all federal, state and local laws and regulations and
administrative orders (collectively, "Laws") and there is no order, writ,
injunction or decree of any court, arbitrator, administrative agency or other
governmental authority materially affecting the operations or the business of
Purchaser or any of its subsidiaries or prohibiting the consummation of the
Merger.
SECTION 2.12 CONSOLIDATED TAX LIABILITY.
Neither Purchaser nor any of its subsidiaries has or could have any
liability for any Taxes (as defined in Section 3.17) pursuant to Treasury
Regulation ss. 1.1502-6, (or comparable provisions of state, local or foreign
tax law), or otherwise with respect to Bennett Funding Group, Inc. or Bennett
Management and Development Corporation) that would result in a Purchaser
Material Adverse Effect. Set forth in Schedule 2.12 hereto is a list of those
taxable years for which the Purchaser and its subsidiaries could potentially be
liable under Treasury Regulation ss.1.1502-6 or otherwise for Taxes attributable
to the Bennett Funding Group, Inc. or Bennett Management and Development
Corporation.
SECTION 2.13 KNOWLEDGE OF PURCHASER.
For purposes of this Article II, "knowledge" means with respect to
Purchaser, the actual knowledge of the persons listed in Schedule 2.13 hereto.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ERC AND THE ERC SHAREHOLDERS
ERC and each ERC Shareholder does hereby represent and warrant to
Purchaser as follows:
SECTION 3.1 ORGANIZATION.
(a) Each of ERC and the LLC has been duly organized as a corporation
or limited liability company, as appropriate, and is validly existing and in
good standing under the laws of the State of Rhode Island and is duly qualified
and in good standing as a foreign corporation in the states set forth in
Schedule 3.1(a) hereto (which list of states includes all states in which the
ownership of its assets or the nature of its business, including the
advertising, soliciting or consummating the sale of Intervals (as defined in
Section 3.6(a)), requires such qualification), except where the failure to so
qualify would not have an ERC Material Adverse Effect. The term "ERC Material
Adverse Effect" means any change in or effect on the business of ERC, the LLC or
any Subsidiary (as defined below) that, individually or together with all other
related adverse changes and effects, is reasonably likely to be materially
adverse to the business, properties, results of operations or financial
condition of ERC, the LLC and the Subsidiaries taken as a whole. Except as set
forth on Schedule 3.1(a), neither ERC nor the LLC (i) owns, directly or
indirectly, the stock of any corporation, (ii) is a partner in any partnership
or (iii) is an equity owner in any limited liability company or other entity
(excluding the Associations (as defined in subsection (b) of this Section 3.1)).
Each Subsidiary is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
and is qualified to do business and in good standing in all jurisdictions where
such qualification is necessary to carry on its business as now conducted,
except where the failure to so qualify would not have an ERC Material Adverse
Effect. Each of ERC, the LLC and each Subsidiary has full power and authority to
own its properties and assets and to carry on lawfully its business as currently
conducted in all material respects in the states set forth in Schedule 3.1(a)
hereto.
(b) Except as set forth in Schedule 3.1(b) hereto, there are no
condominium, timeshare or other homeowner associations (each, an "Association"
and, collectively, the "Associations") for any of the Resorts (as defined in
Section 3.6(a)). To ERC's knowledge, each Association is organized and validly
existing under the laws of the state of Massachusetts or Rhode Island, and is
duly qualified and in good standing, with full power and authority to own its
properties and assets and to carry on lawfully its business as currently
conducted in all material respects.
SECTION 3.2 ARTICLES OF INCORPORATION, BYLAWS AND AGREEMENTS.
A true, complete and correct copy of the articles of incorporation,
by-laws, limited liability company certificate, operating agreement or other
organizational documents of ERC, the LLC, each Subsidiary and each Association,
together with all amendments thereto, have been delivered to Purchaser, as set
forth on Schedule 3.2 hereto. There are no agreements by and between or among
ERC, the LLC or any Subsidiary imposing any restrictions upon the transfer of or
otherwise pertaining to the securities of ERC, the LLC or any Subsidiary
(including but not limited to the ERC Stock and the LLC membership interests).
<PAGE>
10
SECTION 3.3 CAPITAL STRUCTURE AND OWNERSHIP.
Each of ERC, the LLC and each Subsidiary has authorized, issued and
outstanding the number of shares of stock or other securities so indicated on
Schedule 3.3 hereto. All such outstanding securities have been duly and validly
issued, are fully paid and nonassessable, are owned, free and clear of all
encumbrances, by the ERC Shareholders and have not been issued in violation of
(a) any preemptive rights of any person or (b) applicable federal or state
securities laws. No shares of any other class of capital stock or security of
ERC, the LLC or any Subsidiary are outstanding. There are no outstanding
options, warrants or other rights to acquire securities of ERC, the LLC or any
Subsidiary, nor are there securities outstanding which are convertible into
securities of ERC, the LLC or any Subsidiary. The name and residence address of
each of the ERC Shareholders, and the holder of the securities of the LLC and
each Subsidiary and the respective number and description of outstanding
securities held by each holder are set forth on Schedule 3.3 hereto.
SECTION 3.4 AUTHORIZATION.
(a) ERC and (to the extent they are parties thereto), the ERC
Shareholders, have full legal right, capacity, power and authority to enter into
this Agreement and each Related Agreement and to consummate the Merger. The
execution, delivery and performance by ERC of this Agreement and the Related
Agreements and the actions contemplated hereby and thereby have been duly and
validly authorized by all necessary corporate action, and this Agreement and
(upon their execution) each of the Related Agreements constitute or will
constitute valid and binding obligations of ERC and (to the extent they are
parties hereto), the ERC Shareholders, enforceable against such persons in
accordance with their terms. Moreover, this Agreement has been approved by the
ERC Shareholders pursuant to a unanimous consent resolution, a copy of which is
attached hereto as Schedule 3.4.
(b) The ERC Shareholders hereby agree not to revoke such unanimous
written consent and not to take any other action to prevent the consummation of
the Merger, including, without limitation, transferring any Shares held by the
ERC Shareholders to any other person or granting any proxy, lien or other rights
to any person in respect of such Shares. The ERC Shareholders also agree to vote
their Shares against any business combination transaction, recapitalization or
other transaction which could result in any of the conditions to the
consummation of the Merger not being fulfilled.
SECTION 3.5 FINANCIAL STATEMENTS AND ABSENCE OF CHANGES.
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11
(a) True and complete copies of (i) the audited consolidated balance
sheet of ERC for each of the three fiscal years ended as of December 31, 1995,
December 31, 1996, and December 31, 1997, and the related audited consolidated
statements of income, retained earnings, stockholders' equity and changes in
financial position of ERC, together with all related notes and schedules
thereto, accompanied by the reports thereon of Donovan, Sullivan & Ryan
(collectively referred to herein as the "Financial Statements") and (ii) the
unaudited consolidated balance sheet of ERC as of May 31, 1998, and the related
consolidated statements of income of ERC for the five months ended May 31, 1998,
together with all related notes and schedules thereto (collectively referred to
herein as the "Interim Financial Statements") have been delivered by ERC to
Purchaser. The Financial Statements and the Interim Financial Statements (i)
present fairly in all material respects the consolidated financial condition,
results of operations, and cash flows of ERC, the LLC and the Subsidiaries as of
the dates thereof or for the periods covered thereby, (ii) were prepared in
accordance with GAAP applied on a basis consistent with the past practices of
ERC, (iii) were prepared in accordance with the books of account and other
financial records of ERC, and (iv) include all adjustments (consisting only of
normal recurring accruals) that are necessary for a fair presentation of the
consolidated financial condition of ERC and the Subsidiaries and the results of
the operations, and cash flows of ERC and the Subsidiaries as of the dates
thereof or for the periods covered thereby.
(b) The books of account and other financial records of ERC, the LLC
and the Subsidiaries: (i) reflect all items of income and expense and all assets
and liabilities required to be reflected therein in accordance with GAAP applied
on a basis consistent with the past practices of ERC, the LLC and the
Subsidiaries, respectively, (ii) are in all material respects complete and
correct, and do not contain or reflect any material inaccuracies or
discrepancies and (iii) have been maintained in accordance with good business
and accounting practices. Except as set forth in Schedule 3.5 hereto, since
December 31, 1997, there has not been any change in or effect on the business of
ERC, the LLC and the Subsidiaries that, individually or together with all other
adverse changes and effects, is reasonably likely to be materially adverse to
the business, properties, results of operations or financial condition of ERC,
the LLC and the Subsidiaries taken as a whole.
SECTION 3.6 TITLE TO AND CONDITION OF ASSETS AND PROPERTY.
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(a) As of the date hereof, Schedule 3.6(a) hereto sets forth (i) a
list of each of the condominium or timesharing resorts, properties under
development and undeveloped real property holdings or interests therein
(collectively, the "Resorts") in which ERC, the LLC or any Subsidiary directly
or indirectly owns real property, (ii) a description of all real property which
comprises the Resorts (the "Real Property" or "Real Properties") (which
description includes a description of all land comprising the Resorts (the
"Land"), a description of all condominium, undivided interests and other
dwelling units which have been constructed on the Land (the "Dwelling Units"),
including all Dwelling Units which have been dedicated to timeshare regimes and
which have not been dedicated to timeshare regimes, as well as a list of all
timeshare interests therein which have not been sold and which are owned by ERC,
the LLC and/or the Subsidiaries as of five business days prior to the date
hereof (the "Unsold Inventory") and (iii) a list of all material real property
leases, material easements, material licenses or similar material possessory
agreements pursuant to which ERC, the LLC and/or any Subsidiary uses or occupies
real property (the "Leases"), true, correct and complete (in all material
respects) copies of which have been delivered to Purchaser. As of the date
hereof, except as set forth on Schedule 3.6(a) hereto, neither ERC nor the LLC
or any Subsidiary owns any interest in any real property or any leasehold
interest therein and has not entered into any agreements to acquire additional
Real Property ("Purchase and Option Agreements"). ERC, the LLC and/or the
Subsidiaries have good title to all Real Property, including Unsold Inventory,
and good title to all other assets reflected in the Financial Statements or
currently owned and used in the operation of their businesses, and such Real
Property and other assets are free and clear of all material liens (except for
liens for Taxes that are (i) not yet due and payable or (ii) being contested in
good faith by proper proceedings, and in each case as to which appropriate
reserves are being maintained), claims, charges, security interests, purchase
options, or other material encumbrances, except for the "Encumbrances" described
on Schedule 3.6(a) hereto or set forth on the title policies (other than general
exceptions) listed on Schedule 3.6(a) hereto attached hereto (which liens,
claims, charges, security interests, purchase options, or other encumbrances set
forth on such title policies (other than general exceptions) or listed on
Schedule 3.6(a) hereto, together with Interval Sales or the creation of interval
ownership or condominium regimes in each case in the ordinary course of business
since the date hereof) are collectively referred to herein as the "Permitted
Exceptions" and such title policies are referred to herein as the "Title
Policies").
(b) Except as set forth on Schedule 3.6(b) hereto, neither ERC, the
LLC nor any of the Subsidiaries has any patents, copyrights, trade names,
trademarks, service marks, other such names or marks or applications therefor.
There are no pending, nor to the knowledge of ERC, threatened claims of
infringement upon the rights to any intellectual property referred to on
Schedule 3.6(b) hereto of others or, except as set forth on Schedule 3.11
hereto, any agreements or undertakings with respect to any such rights.
(c) Except as noted on Schedule 3.6(c) hereto, with respect to the
Leases and the Purchase and Option Agreements, there is no material breach or
event of default on the part of ERC, the LLC or any Subsidiary which would have
an ERC Material Adverse Effect. The Leases and the Purchase and Option
Agreements are in full force an effect and, to the knowledge of ERC, are valid
and enforceable against the parties thereto in accordance with their terms
(subject to bankruptcy, insolvency and other similar laws or equitable
principles relating to, affecting or qualifying the rights of creditors
generally) and all rental and other payments currently due under each of the
Leases and all option and other payments currently due under each of the
Purchase and Option Agreements have been duly paid or are outstanding for fewer
than 30 days.
(d) There is no pending or, to the knowledge of ERC, threatened
condemnation, eminent domain or similar proceeding with respect to any Real
Property.
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13
(e) ERC, the LLC and the Subsidiaries have not granted any
outstanding options or rights of first refusal to purchase or lease any of the
Real Property, or any portion thereof or interest therein, except as noted in
Schedule 3.6(e) hereto.
(f) Prior to Closing, no portion of the Real Property or any
interest of ERC, the LLC or any Subsidiary therein shall be further (after the
date hereof) alienated, encumbered, conveyed or otherwise transferred except for
sales and financing of Intervals in the ordinary course of business and
borrowings on currently existing construction loans. Except as set forth on
Schedule 3.6(a) hereto, there are no agreements (whether or oral or written) to
sell, convey or transfer any Intervals, except sales and financing of Intervals
in the ordinary course of business (i.e., for a price and upon terms which are
in the ordinary course of business of ERC, the LLC and any Subsidiary).
(g) ERC has made available to Purchaser true and complete copies of
each deed for each parcel of Real Property and all the title insurance policies,
title reports, surveys, certificates of occupancy, environmental reports and
audits, appraisals, permits, other title documents and other documents relating
to or otherwise affecting the Real Property in the possession of ERC, the
operations of ERC, the LLC or any Subsidiary thereon or any other uses thereof.
ERC, the LLC or a Subsidiary, as the case may be, is in peaceful and undisturbed
possession of each parcel of Real Property and to the knowledge of ERC there are
no contractual or legal restrictions that preclude or restrict the ability to
use the Real Property for the purposes for which they are currently being used.
(h) With respect to each of the Leases:
(i) except as otherwise disclosed in Schedule 3.6(h), with respect
to each such lease or sublease: (A) none of ERC, the LLC nor any
Subsidiary has received any notice of cancellation or termination under
such lease or sublease and no lessor has any right of termination or
cancellation under such lease or sublease except as set forth therein, (B)
none of ERC, the LLC nor any Subsidiary has received any notice of a
breach or default under such lease or sublease, which breach or default
has not been cured, and (C) none of ERC, the LLC nor any Subsidiary has
assigned or sublet all or any portion of its interest under such Leases,
except in connection with a collateral assignment thereof; and
(ii) none of ERC, the LLC, any Subsidiary nor (to the knowledge of
ERC) any other party to such lease or sublease, is in breach or default in
any material respect, and, to the knowledge of ERC, no event has occurred
that, with notice or lapse of time would constitute such a breach or
default or permit termination, modification or acceleration under such
lease or sublease.
(i) All the Real Property is occupied under a current certificate of
occupancy or similar permit, the transactions contemplated by this Agreement
will not require the issuance of any new or amended certificate of occupancy.
SECTION 3.7 INSURANCE.
Schedule 3.7 hereto sets forth a list of all policies of insurance
which insure the properties, business or liabilities of ERC, the LLC and each of
the Subsidiaries setting forth the types and amounts of coverage. Each of such
policies is current and in full force and effect and neither ERC, the LLC nor
any of the Subsidiaries has received notice of default under, or notice of
intended cancellation or nonrenewal of, any such policies. ERC, the LLC and each
of the Subsidiaries will use their commercially reasonable efforts to keep all
insurance policies listed in Schedule 3.7 in effect through the Closing.
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SECTION 3.8 ENVIRONMENTAL MATTERS.
(a) For purposes of this Agreement, the following terms shall have
the following meanings: (i) "Environmental Law" means any Law now in effect and
any judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to pollution or
protection of the environment, health, safety or natural resources, including
without limitation, those relating to the use, handling, transportation,
treatment, storage, disposal, release or discharge of Hazardous Materials; (ii)
"Environmental Permit" means any permit, approval, identification number,
license or other authorization required under any applicable Environmental Law;
(iii) "Hazardous Materials" means (a) petroleum and petroleum products,
by-products or breakdown products, radioactive materials, asbestos-containing
materials and polychlorinated biphenyls and (b) any other chemicals, materials
or substances regulated as toxic or hazardous or as a pollutant, contaminant or
waste under any applicable Environmental Law and (iv) "Release" means disposing,
discharging, injecting, spilling, leaking, leaching, dumping, emitting,
escaping, emptying, seeping, placing and the like into or upon any land or water
or air or otherwise entering into the environment. Except as noted on Schedule
3.8 hereto and except for violations which would not have an ERC Material
Adverse Effect: (i) each of ERC, the LLC and each Subsidiary have conducted and
are conducting their respective businesses in substantial compliance with all
applicable Environmental Laws and have all permits, licenses and other approvals
and authorizations necessary for the operation of their respective businesses as
presently conducted, (ii) ERC has not, and (to the knowledge of ERC) no other
Person has, Released Hazardous Materials on any of the Real Property, (iii)
neither ERC, the LLC nor any Subsidiary has received any written notice that it
is the subject of any pending or threatened investigation or inquiry by any
governmental authority, or subject to any remedial obligations under any
Environmental Laws, (iv) no Hazardous Materials have been disposed of, released
or transported in violation of any applicable Environmental Law from any
properties owned by ERC, the LLC or any Subsidiary and (v) neither ERC, the LLC
nor any Subsidiary nor any of their respective properties are subject to any
material liabilities relating to any suit, settlement, court order,
administrative order, judgment or claim asserted or arising under any applicable
Environmental Laws.
SECTION 3.9 MINUTE AND STOCK BOOKS; RECORDS.
The respective minute books of ERC, the LLC and each of the
Subsidiaries made available to Purchaser contain accurate records of all
meetings held and reflect all other material corporate or similar actions of the
respective shareholders, directors, partners and members (and committees
thereof). The copies of the corporate charter, bylaws, limited liability company
agreement and certificate which are contained in or kept with said minute books
are true, complete and correct and contain all amendments thereto duly adopted
and in force. The stock transfer ledger maintained by ERC and made available to
Purchaser is complete and accurate. The respective stock or other interests
transfer records maintained by LLC and each of the Subsidiaries and made
available to Purchaser are complete and accurately disclose all issuances and
transfers of stock or other interest of the LLC and each of the Subsidiaries.
SECTION 3.10 LIABILITIES.
There are no material liabilities of ERC, the LLC or the
Subsidiaries, except (a) as set forth on Schedule 3.10(a) hereto, (b) as and to
the extent reflected or reserved against in the Financial Statements, or (c)
incurred since the date of this Agreement in the ordinary course of business,
consistent with past practice of ERC, the LLC and the Subsidiaries and which do
not and are not reasonably likely to have an ERC Material Adverse Effect. For
purposes of this Section 3.10 "material" means in excess of $25,000 individually
or $100,000 in the aggregate. Except as set forth on Schedule 3.10(b) hereto,
reserves are reflected on the Financial Statements dated December 31, 1997 and
May 31, 1998 against all liabilities of ERC, the LLC and the Subsidiaries in
amounts that have been established on a basis consistent with past practices of
ERC, the LLC and the Subsidiaries and in accordance with GAAP.
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SECTION 3.11 CONTRACTS.
Except as set forth in Schedule 3.11 hereto, as of the date hereof
neither ERC, the LLC nor any Subsidiary is a party to or bound by any of the
following (each a "Contract" and collectively the "Contracts") and true, correct
and complete copies of which referenced items have previously been delivered to
Purchaser:
(a) any contract for the purchase or sale of services, equipment,
inventory, materials, supplies, or any capital item or items (the cost or
expense of which is more than $100,000 in any single instance or which cannot be
terminated without penalty on 90 days or less notice), or supply agreements with
the federal government or any state or local government or any agency thereof;
(b) any employment, consulting or similar agreements which
individually are likely to result in payments by ERC, the LLC or any Subsidiary
in excess of $100,000 during any consecutive 12-month period;
(c) any executive severance agreements, non-competition and retainer
agreements, executive compensation plans, bonus plans, deferred compensation
agreements, employee pension plans or retirement plans, employee stock option or
stock purchase plans, employee stock ownership plans and group life, health and
accident insurance and other employee benefit or welfare plans, agreements or
arrangements;
(d) any loan agreements, indentures, mortgages (other than mortgages
securing notes receivable issued to the Company by purchasers of Intervals
("Timeshare Notes Receivable")), notes (other than Timeshare Notes Receivable),
capital leases or other instruments relating to the borrowing of money (or
guarantees thereof);
(e) any licenses, leases or other agreements to provide or acquire
services or equipment related to the timeshare industry;
(f) any contracts relating to the sale, hypothecation or factoring
of accounts receivable, notes receivable or servicing of accounts receivable;
(g) any instruments or agreements relating to indebtedness by way of
lease-purchase agreements, conditional sale, guarantee or other undertakings on
which others rely in extending credit, any joint venture agreements or any
chattel mortgages or other security agreements not otherwise disclosed;
(h) any agreements or contracts with, or any obligation to or from
an ERC Shareholder or any of its affiliates. For purposes of this Agreement,
"Affiliate" shall mean any person or entity that controls or is controlled by or
is under common control with, the person involved;
(i) any joint venture, "partnering" and similar agreements or
understandings;
(j) any agreements relating to the management of, or provision of
services at, each Resort.
(k) any broker, distributor, dealer, franchise, agency, sales
promotion, market research, marketing consulting and advertising agreements to
which ERC, the LLC or any Subsidiary is a party;
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16
(l) any management contracts and contracts with independent
contractors or consultants (or similar arrangements) to which ERC, the LLC or
any Subsidiary is a party and which are not cancellable without penalty or
further payment and without more than 30 days' notice;
(m) any contracts and agreements with the federal government or any
state or local government or any agency thereof to which ERC, the LLC or any
Subsidiary is a party;
(n) any contracts and agreements that limit or purport to limit the
ability of ERC, the LLC or any Subsidiary to compete in any line of business or
with any Person or in any geographic area or during any period of time;
(o) any contracts and agreements between or among ERC, the LLC or
any Subsidiary and any affiliates of ERC, the LLC or any Subsidiary; and
(p) any other contracts and agreements whether or not made in the
ordinary course of business, which are material to ERC, the LLC or any
Subsidiary or the conduct of the business of ERC, the LLC or any Subsidiary or
the absence of which would have an ERC Material Adverse Effect.
Except as set forth in Schedule 3.11 hereto, none of ERC, the LLC or
any Subsidiary is in material breach of any provisions of, or is in material
violation or default under the terms of, any Contract.
SECTION 3.12 LITIGATION AND COMPLIANCE.
Except as set forth on Schedule 3.12 hereto, there is no litigation,
suit, claim, action, arbitration, administrative proceeding, or, to the
knowledge of ERC, investigation of ERC, the LLC or a Subsidiary or the operation
of any of their businesses pending before any court, arbitrator, administrative
agency or other governmental authority or, to the knowledge of ERC, threatened
against ERC, the LLC or any Subsidiary, by or before any court, arbitrator,
administrative agency or other governmental authority which is not adequately
covered by available insurance (subject to normal deductibles). Except as
otherwise set forth in this Agreement and except where such non-compliance would
not have an ERC Material Adverse Effect, ERC, the LLC and the Subsidiaries are
in compliance in all material respects with all Laws including, without
limitation, all Laws regarding the advertising, marketing, offer to sell, or
sale of Intervals in each state and local jurisdiction in which ERC, the LLC and
the Subsidiaries are doing business and there is no order, writ, injunction or
decree of any court, arbitrator, administrative agency or other governmental
authority materially affecting the operations or the business of ERC, the LLC or
any of the Subsidiaries or the Merger.
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SECTION 3.13 NON-CONTRAVENTION; CONFLICTS.
(a) Except as described on Schedule 3.13, the execution and delivery
of this Agreement and the Related Agreements, the consummation of the Merger and
the compliance with the provisions of this Agreement and the Related Agreements
by ERC, the LLC and ERC Shareholders (in each case to the extent each is a party
thereto) will not conflict with, or result in any violation of, or default
under, or give rise to a right of termination, cancellation or acceleration of
any material obligation of or to a loss of a material benefit under or result in
the creation of any lien upon any of the properties or assets of ERC, the LLC,
or any Subsidiary under, (i) the Articles of Incorporation or By-laws of ERC or
the comparable limited liability agreement, charter or organizational documents
or partnership or joint venture or similar agreement (as the case may be) of the
LLC or any Subsidiary, (ii) any material loan or credit agreement, note, bond,
mortgage, indenture, reciprocal easement agreement, lease or other agreement, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulations
applicable to ERC, the LLC or any Subsidiary (or such other party) or their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights or liens that
individually or, in the aggregate, would not (x) constitute an ERC Material
Adverse Effect or (y) prevent the consummation of the Merger.
(b) The execution and delivery of this Agreement by ERC and the ERC
Shareholders do not, and the performance of this Agreement by ERC and the ERC
Shareholders will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except (i) for
applicable requirements, if any, of the Exchange Act, Blue Sky Laws, the NASD
and state takeover laws, and filing and recordation of appropriate merger
documents as required by the DGCL and the RBCA, and (ii) where failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent ERC from performing its obligations under this Agreement, and
would not, individually or in the aggregate, have an ERC Material Adverse
Effect.
SECTION 3.14 LICENSES, PERMITS AND REQUIRED CONSENTS.
ERC, the LLC and each of the Subsidiaries have all federal, state
and local licenses, certifications, approvals, authorizations and permits
necessary to the conduct of their businesses as currently conducted, including,
but not limited to licenses and other permits required by federal, state and
local laws (i) to sell the Intervals in the states and local jurisdictions in
which the Resorts are located, as well as all other state and local
jurisdictions in which the Intervals are being advertised, marketed and sold
(ii) to occupy and operate the Real Property (collectively, "Licenses and
Permits" or in the case of permits issued by any governmental authority, a
"Governmental Permit"). A list of the Licenses, Permits and Governmental Permits
is set forth on Schedule 3.14(a) hereto, true, correct and complete copies of
which have previously been delivered to Purchaser. Except as would not have an
ERC Material Adverse Effect, all Licenses, Permits and Governmental Permits are
in full force and affect, and, no material violations have been made in respect
thereof and no proceeding is pending which is likely to have the effect of
revoking or limiting any such Licenses and Permits. The execution and delivery
of this Agreement and the Related Agreements, and the consummation of the Merger
and the compliance with the provisions of this Agreement and the Related
Agreements by ERC, the LLC and the ERC Shareholders will not conflict, or result
in any violation of or default under any License, Permit or Governmental Permit.
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SECTION 3.15 LABOR MATTERS.
Neither ERC, the LLC, nor any of the Subsidiaries has any
obligations, contingent or otherwise, under any employment or consulting
agreements (except if and as set forth in Schedule 3.11 hereto), collective
bargaining agreement or other contract with a labor union or other labor or
employee group. To ERC's knowledge, there are no efforts presently being made or
threatened by or on behalf of any labor union with respect to employees of ERC,
the LLC, or any Subsidiary. There are no pending or threatened collective
strikes, controversies, slowdowns, work stoppages or other labor disturbances
between ERC, the LLC or any Subsidiary. To ERC's knowledge, ERC, the LLC and
each of the Subsidiaries are in compliance in all material respects with all
federal, state, or other applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and have not
and are not engaged in any unfair labor practice; no unfair labor practice
complaint against ERC, the LLC or any Subsidiary is pending or, to ERC's
knowledge, threatened before the National Labor Relations Board.
SECTION 3.16 EMPLOYEE BENEFIT PLANS.
(a) Plans and Material Documents. Schedule 3.16(a) lists (i) all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, restricted stock, incentive, deferred compensation, retiree
medical or life insurance, supplemental retirement, severance or other benefit
plans, programs or arrangements, and all employment, termination, severance or
other contracts or agreements, whether legally enforceable or not, to which ERC,
the LLC and any Subsidiary is a party, with respect to which ERC, the LLC and
any Subsidiary has any obligation or which are maintained, contributed to or
sponsored by ERC, the LLC and any Subsidiary for the benefit of any current or
former employee, officer or director of ERC, the LLC and any Subsidiary, (ii)
each employee benefit plan for which ERC, the LLC and any Subsidiary could incur
liability under Section 4069 of ERISA in the event such plan has been or were to
be terminated, (iii) any plan in respect of which ERC, the LLC and any
Subsidiary could incur liability under Section 4212(c) of ERISA and (iv) any
contracts, arrangements or understandings relating to employee benefit matters
between ERC, the LLC and any Subsidiary or any of its Affiliates and any
employee of ERC, the LLC and any Subsidiary including, without limitation, any
such contracts, arrangements or understandings relating to a sale of ERC, the
LLC and any Subsidiary (collectively, the "Plans"). The LLC and any Subsidiary
has furnished Purchaser with a true and complete copy of each Plan and each
material document prepared in connection with each such Plan including, without
limitation, (i) a copy of each trust or other funding arrangement, (ii) each
summary plan description and summary of material modifications, (iii) the most
recently filed Internal Revenue Service ("IRS") Form 5500, (iv) the most
recently received IRS determination letter for each such Plan, and (v) the most
recently prepared financial statement in connection with each such Plan. Except
as disclosed in Schedule 3.16(a), there are no other employee benefit plans,
programs, arrangements or agreements, whether formal or informal, whether in
writing or not, to which ERC, the LLC and any Subsidiary is a party, with
respect to which ERC, the LLC and any Subsidiary has any obligation or which are
maintained, contributed to or sponsored by ERC, the LLC and any Subsidiary for
the benefit of any current or former employee, officer or director of ERC, the
LLC and any Subsidiary. Except as described in Schedule 3,16(a), ERC, the LLC
and any Subsidiary has no express or implied commitment, whether legally
enforceable or not, (i) to create, incur liability with respect to or cause to
exist any other employee benefit plan, program or arrangement, (ii) to enter
into any contract or agreement to provide compensation or benefits to any
individual or (iii) to modify, change or terminate any Plan, other than with
respect to a modification, change or termination required by ERISA or the
Internal Revenue Code of 1986, as amended (the "Code").
(b) Absence of Certain Types of Plans. None of the Plans is a multi
employer plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a
"Multi Employer Plan") or a
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single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which ERC, the LLC and any Subsidiary could incur liability under
Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). Except as set forth
in Schedule 3.16(a), none of the Plans provides for the payment of separation,
severance, termination or similar-type benefits to any person or obligates ERC,
the LLC and any Subsidiary to pay separation, severance, termination or
similar-type benefits solely or partially as a result of any transaction
contemplated by this Agreement or as a result of a "change in control", within
the meaning of such term under Section 280G of the Code. None of the Plans
provides for or promises retiree medical, retiree disability or life insurance
benefits to any current or former employee, officer or director of ERC, the LLC
and any subsidiary. Each of the Plans is subject only to the laws of the United
States or a political subdivision thereof.
(c) Compliance. Except as would otherwise have a Purchaser Material
Adverse Effect, (i) each Plan is now and always has been operated in all
material respects in accordance with its terms and the requirements of all
applicable laws, regulations and rules promulgated thereunder, including,
without limitation, ERISA and the Code, and (ii) ERC, the LLC and any Subsidiary
has performed all obligations required to be performed by it under, is not in
any respect in default under or in violation of, and has no knowledge of any
default or violation by any party to, any Plan. Except as described in Schedule
3.16(c), no action, claim or proceeding is pending or, to the knowledge of ERC,
the LLC and any subsidiary, threatened with respect to any Plan (other than
claims for benefits in the ordinary course) and no fact or event exists that
could give rise to any such action, claim or proceeding.
(d) Qualification of Certain Plans. Each Plan that is intended to be
qualified under Section 401(a) of the Code or Section 401(k) of the Code has
timely received a favorable determination letter from the IRS and to the
knowledge of ERC, the LLC and any Subsidiary, no fact or event has occurred
since the date of such determination letter or letters from the IRS to adversely
affect the qualified status of any such Plan or the exempt status of any such
trust.
(e) Absence of Certain Liabilities. ERC, the LLC and any Subsidiary
has not incurred any liability under, arising out of or by operation of Title IV
of ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from
any Multi Employer Plan or Multiple Employer Plan, and no fact or event exists
which could give rise to any such liability.
SECTION 3.17 TAXES AND RETURNS.
Except as disclosed on Schedule 3.17 hereto:
(a) All federal, state, county and local income, franchise, excise,
tariff, gross receipts, sales and use, payroll, real and personal property and
all other taxes, fees, levies, duties, imposts and governmental charges,
assessments and contributions, of any kind whatsoever (including, but not
limited to, any interest and penalties imposed with respect thereto) ("Taxes"),
for which ERC, the LLC or any of the Subsidiaries is liable with respect to any
period, or portion of any period, ending on or prior to the date of the
Effective Time and that are or will be required to be paid, collected or
withheld by ERC, LLC or any Subsidiary and remitted to the appropriate
governmental agency or other taxing authority on or prior to the date of the
Effective Time, have been or will be paid collected, withheld, and remitted on
or prior to the date of the Effective Time. Except with respect to certain
receivables from the sale of time share units (as listed in Schedule 3.17
hereto), neither ERC, nor the LLC or any Subsidiary has any liability for any
Taxes that are attributable to any period, or any portion of any period,
beginning prior to the date of the Effective Time but as to which payment is not
actually required until after the date of the Effective Time other than Taxes
(i) attributable to the current taxable year and (ii) the payment of which has
been adequately provided for and separately
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set forth in the Financial Statements or the Interim Financial Statements.
Copies of all returns, reports, notices, forms and other documents (including
all schedules, exhibits and other attachments thereto) required to be filed by
ERC, the LLC or any Subsidiary on or prior to the date of the Effective Time
with respect to Taxes (including, without limitation, information returns) ("Tax
Returns") have been or will be timely filed with the appropriate governmental
agency or other taxing authority on or prior to the date of the Effective Time
and such Tax Returns and the copies thereof which have been or will be provided
to Purchaser (as set forth in Schedule 3.17) are or will be true, accurate and
complete in all material respects.
(b) ERC or the LLC has made or will make any elections (and has
taken or will take any other acts) necessary to receive installment sale
treatment under Section 453 of the Code with respect to the sale of certain time
share receivables (as set forth in Schedule 3.17 hereto), and no acts or
omissions have been or will be committed by ERC , the LLC or any of the
Subsidiaries on or prior the Effective Time (other than any acts necessary to
effect the Merger or the transactions contemplated by this Agreement) (i) that
have caused or will cause a disposition of such receivables for purposes of
Section 453 of the Code or (ii) that have otherwise caused or will cause any
income with respect to such receivables to be realized sooner than anticipated
by the terms of such receivables. The amount of income associated with the
deferred Taxes attributable to certain time share receivables of the LLC (as set
forth in Schedule 3.17 hereto) with respect to the 1997 taxable year and the
first five months of the 1998 taxable year of the LLC will not be in excess of
approximately $7,000,000.
(c) Neither ERC, nor the LLC or any of the Subsidiaries is currently
subject to a Tax audit or any other similar proceeding nor has received from any
governmental or taxing authority any written notice of proposed adjustment,
deficiency or underpayment of any Taxes, which notice has not been satisfied by
payment or been withdrawn, and there are no claims relating to Taxes that have
been asserted or threatened against ERC, the LLC or any of the Subsidiaries.
There are no agreements or waivers relating to the extension of time for the
assessment of any Taxes of ERC, the LLC or any of the Subsidiaries other than
routine audit extensions granted in the ordinary course of business. No consent
under Section 341(f) of the Code has been filed with respect to ERC, the LLC or
any of the Subsidiaries. There are no proposed reassessments of any property
owned by ERC, the LLC or any of the Subsidiaries that could increase the amount
of any Tax to which ERC, LLC or any of the Subsidiaries would be subject.
Neither ERC, nor the LLC or any of the Subsidiaries has (i) been a member of any
affiliated group (other than the affiliated group of which each such party is
currently a member) or (ii) filed a Tax Return on a consolidated, combined or
unitary basis. Neither ERC, nor the LLC or any of the Subsidiaries is subject to
any accumulated earnings tax penalty nor has received any notification regarding
a personal holding company tax. Except with respect to certain receivables from
the sale of time share units (as listed in Schedule 3.17 hereto) neither ERC,
nor the LLC or any of the Subsidiaries has any deferred income reportable for a
period ending after the date of the Effective Time but that is attributable to a
transaction (e.g. an installment sale) occurring in, or resulting from a change
in accounting method made for, a period ending on or prior to the date of the
Effective Time. Neither ERC, nor the LLC or any of the Subsidiaries is obligated
under any agreement with respect to industrial development bonds or other
obligations with respect to which the excludability from gross income of the
holder for U.S. federal income tax purposes could be affected by the
transactions contemplated by this Agreement. No power of attorney that is
currently in force has been granted with respect to any currently ongoing audits
of Taxes that could affect ERC, the LLC or any of the Subsidiaries. At all times
since August 25, 1994, ERC has had in effect (i) a valid election under Section
1362(a) of the Code (or a comparable election under any successor provision) to
be taxed as an S Corporation for federal income tax purposes (an "S Election")
(or comparable election under state or local law), (ii) to the extent permitted
by law, a comparable election in each state in which it conducts business, and
(iii) to the extent permitted by law, a comparable local law election in each
locality in which it conducts business and is subject to a local income tax. ERC
has not received and is not aware of any proposal from any federal, state
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21
or local taxing authority to disallow such S Election (or comparable state or
local law election) for any taxable year. ERC has not been and is not subject to
Taxes imposed by (i) Section 1371 of the Code, (ii) Section 1375 of the Code, or
(iii) Section 1374 of the Code. Neither ERC, nor the LLC or any of the
Subsidiaries is a party to any agreement relating to allocating or sharing the
payment of, or liability for, Taxes for any taxable period (or portion thereof).
Neither ERC, nor the LLC nor any of the Subsidiaries has any liability for any
Taxes pursuant to Treasury Regulation ss. 1.1502-6 or comparable provisions of
state, local or foreign tax law or as a transferee or successor, by contract or
otherwise. ERC, the LLC, each Subsidiary and each of the ERC Shareholders
qualifies as a "United States person" within the meaning of Section 7701(a)(30)
of the Code.
SECTION 3.18 RECEIVABLES
Schedule 3.18 sets forth an aged list of the Receivables of ERC, the
LLC and the Subsidiaries as of May 31, 1998 showing separately those receivables
that as of such date had been outstanding (i) 30 days or less, (ii) 31 to 60
days, (iii) 61 to 90 days, and (iv) more than 90 days. All receivables reflected
on the Financial Statements arose from, and the receivables existing at the
Effective Time will have arisen from, the sale of inventory, Intervals or
services to persons not affiliated with ERC, the ERC Stockholders, the LLC or
any Subsidiary (except for receivables arising from sales of Intervals to
employees of ERC, the LLC or any Subsidiary) and in the ordinary course of the
business consistent with past practice.
SECTION 3.19 CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES, EVENTS
AND CONDITIONS.
Since December 31, 1997, except as disclosed in Schedule 3.19, the
business of ERC, the LLC and the Subsidiaries has been conducted in the ordinary
course and consistent with past practice. As amplification and not limitation of
the foregoing, except as disclosed in Schedule 3.19, since December 31, 1997,
neither ERC, the LLC nor any Subsidiary has:
(i) permitted or allowed any of the real property of ERC, the LLC or
any Subsidiary to be subjected to any material encumbrance, other than
encumbrances (A) that will be released at or prior to the Closing or (B)
in existence on or prior to December 31, 1997;
(ii) redeemed or repurchased any of the capital stock or declared,
made or paid any dividends or distributions (whether in cash, securities
or other property) to the holders of capital stock of ERC, the LLC or any
Subsidiary or otherwise, other than dividends, distributions and
redemptions declared, made or paid by the LLC or any Subsidiary solely to
ERC;
(iii) merged with, entered into a consolidation with or acquired an
interest of 5% or more in any material person or acquired a substantial
portion of the assets or business of any material person or any material
division or line of business thereof, or otherwise acquired any material
assets other than in the ordinary course of business consistent with past
practice, or sold, transferred, leased, subleased, licensed or otherwise
disposed of any material assets other than in the ordinary course of
business consistent with past practice;
(iv) issued or sold any capital stock, notes, bonds or other
securities, or any option, warrant or other right to acquire the same, of,
or any other interest in, ERC, the LLC or any Subsidiary;
(v) entered into any agreement, arrangement or transaction with any
of its directors, officers, employees or shareholders (or with any
relative, beneficiary, spouse or affiliate of such person);
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(vi) (A) granted any increase, or announced any increase, in the
wages, salaries, compensation, bonuses, incentives, pension or other
benefits payable by ERC, the LLC or any Subsidiary to any of its
employees, including, without limitation, any increase or change pursuant
to any employee benefit plan or (B) established or increased or promised
to increase any benefits under any employee benefit plan, in either case
except as required by Law or involving ordinary increases consistent with
the past practices of ERC, the LLC or such Subsidiary;
(vii) incurred any indebtedness (other than draws under credit
facilities existing as of the date hereof in the ordinary course of
business consistent with past practice) (A) in excess of $500,000 or (B)
pursuant to any credit agreement, loan agreement, indenture or other
financing arrangement or agreement entered into after the date hereof;
(viii )made any capital expenditure or commitment for any capital
expenditure other than capital expenditures in the ordinary course of
business and not in excess of $2,000,000 individually or in the aggregate;
(ix) except in the ordinary course of business, consistent with past
practice, materially amended, modified or consented to the termination of
any material Contract or ERC's, the LLC's or any Subsidiary's rights
thereunder;
(x) amended or restated the Articles of Incorporation or the By-laws
(or other organizational documents) of ERC, the LLC or any Subsidiary; or
(xi) except with respect to any required elections that are
necessary to account for the sale of time share units on an installment
basis, made any Tax election or settled or compromised any material
federal, state or local income tax liability.
SECTION 3.20 CERTAIN INTERESTS
(a) Except as disclosed in Schedule 3.20, no officer or director of
ERC, the LLC or any Subsidiary and no relative or spouse (or relative of such
spouse) who resides with, or is a dependent of, any such officer or director:
(i) has any direct or indirect financial interest in any competitor,
supplier or customer of ERC, the LLC or any Subsidiary, provided, however,
that the ownership of securities representing no more than one percent of
the outstanding voting power of any competitor, supplier or customer, and
which are listed on any national securities exchange or traded actively in
the national over-the-counter market, shall not be deemed to be a
"financial interest" so long as the person owning such securities has no
other connection or relationship with such competitor, supplier or
customer;
(ii) owns, directly or indirectly, in whole or in part, or has any
other interest in any tangible or intangible property which ERC, the LLC
or any Subsidiary uses or has used in the conduct of its business or
otherwise; or
(iii) has outstanding any material indebtedness to ERC, the LLC or
any Subsidiary.
(b) Except as disclosed in Schedule 3.20(b), no officer or director
of ERC, the LLC or any Subsidiary and no relative or spouse (or relative of such
spouse) who resides with, or is a dependent of, any such officer or director has
outstanding any indebtedness to the ERC Shareholders.
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(c) Except as disclosed in Schedule 3.20(c), neither ERC, the LLC
nor any Subsidiary has any liability or any other obligation of any nature
whatsoever to any officer, director or shareholder of ERC, the LLC or any
Subsidiary or to any relative or spouse (or relative of such spouse) who resides
with, or is a dependent of, any such officer, director or shareholder.
SECTION 3.21 BROKERS.
Except for Salomon Smith Barney, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of ERC. Except for fees and expenses paid by
ERC prior to June 1, 1998, the ERC Shareholders are solely responsible for the
fees and expenses of Salomon Smith Barney.
SECTION 3.22 PRIVATE PLACEMENT.
(a) Each ERC Shareholder understands that (i) the shares of
Purchaser Common Stock will not be registered under the Securities Act on the
ground that the offering and sale of the shares of Purchaser Common Stock are
exempt from registration pursuant to Section 4(2) of the Securities Act, (ii)
the resale or other disposition of the shares of Purchaser Common Stock is
restricted pursuant to the securities laws and the Stockholders' Agreement and
(iii) there can be no assurance that such ERC Shareholder will be able to sell
or dispose of such shares purchased by it pursuant to this Agreement.
(b) The shares of Purchaser Common Stock to be issued to each ERC
Shareholder are being acquired for investment only and not with a view to any
sale or distribution of such shares or any part thereof in violation of the
Securities Act. Each ERC Shareholder agrees at all times to sell or otherwise
dispose of all or any part of the shares of Purchaser Common Stock only pursuant
to a registration, or exemption therefrom, under the Securities Act and in
compliance with applicable state securities laws. Each such ERC Shareholder
shall take any steps necessary to ensure that any purchaser thereof shall agree
not to sell or otherwise dispose of shares of Purchaser Common Stock except in
compliance with the requirements contained in the preceding sentence.
(c) Each ERC Shareholder is an "accredited investor" within the
meaning of Rule 501 promulgated under the Securities Act and has such knowledge
and experience, or has consulted with persons having knowledge and experience,
in financial and business matters as to be capable of evaluating the merits and
risks of an investment in the shares of Purchaser Common Stock. Such ERC
Shareholder has received all the information that such ERC Shareholder deems
material to his or her evaluation of the business, assets, liabilities,
financial condition and results of operations of Purchaser and all the
information that such ERC Shareholder has requested from Purchaser and considers
necessary or appropriate for deciding whether to acquire the shares of Purchaser
Common Stock. Such ERC Shareholder has the ability to bear the economic risks of
such ERC Shareholder's prospective investment and such ERC Shareholder is able,
without materially impairing such financial condition, to hold the shares of
Purchaser Common Stock for an indefinite period of time and to suffer complete
loss on such ERC Shareholder's investment, in the event such a loss should
occur. Each ERC Shareholder acknowledges that the shares of Purchaser Common
Stock received by such person are subject to the various restrictions and other
provisions contained in the Stockholders' Agreement.
SECTION 3.23 KNOWLEDGE OF ERC; DELIVERY OF INFORMATION.
(a) For purposes of this Article III, "knowledge" means, with
respect to ERC, the actual knowledge of the persons listed on Schedule 3.23.
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(b) For purposes of this Article III "delivery" when used in
connection with documents to be provided to or disclosed to Purchaser, shall
include the review of (or opportunity to review) such documents by Purchaser,
provided that such documents are listed in the relevant schedule attached hereto
and ERC, upon the request of Purchaser, provides the Purchaser and its
representatives with copies of all such documents or the opportunity to conduct
such review or additional review of such documents as the Purchaser deems
necessary.
ARTICLE IV
ADDITIONAL AGREEMENTS AND REPRESENTATIONS
OF THE PARTIES
SECTION 4.1 CONDUCT OF BUSINESS OF ERC, THE LLC AND PURCHASER
(a) The ERC Shareholders and ERC covenant and agree that, except as
described in Schedule 4.1, between the date hereof and the time of the Closing,
none of the ERC Shareholders, ERC, the LLC nor any Subsidiary shall conduct its
business other than in the ordinary course and consistent with ERC's, the LLC's
and such Subsidiary's past practice. Without limiting the generality of the
foregoing, except as described in Schedule 4.1, the ERC Shareholders shall cause
ERC, the LLC and each Subsidiary to (i) continue its advertising, marketing and
promotional activities, and selling, pricing and purchasing policies, in
accordance with past practice; (ii) use its commercially reasonable efforts to
(A) preserve intact their business organizations, (B) keep available to
Purchaser the services of the employees of ERC, the LLC and each Subsidiary, (C)
continue in full force and effect without material modification all existing
policies or binders of insurance currently maintained in respect of ERC, the LLC
and each Subsidiary, and (D) preserve and manage its current relationships with
its customers, suppliers and other persons with which it has significant
business relationships in the ordinary course of business consistent with past
practice; (iii) maintain or refrain from terminating, canceling or compromising
any material claims of ERC, the LLC or any Subsidiary and refrain from waiving
any other rights of substantial value to ERC, the LLC or any Subsidiary, except
in the ordinary course of business consistent with past practice, (iv) maintain
or renew any permit or Environmental Permit issued or related to ERC, the LLC or
any Subsidiary and (v) not engage in any practice, take any action, fail to take
any action or enter into any transaction which would be likely to cause any
representation or warranty of the ERC Shareholders or ERC to be untrue or result
in a breach of any covenant made by the ERC Shareholders or ERC in this
Agreement.
(b) Except as described in Schedule 4.1, ERC and each ERC
Shareholder covenant and agree that, prior to the Closing, without the prior
written consent of Purchaser (not to be unreasonably withheld or delayed),
neither ERC, the ERC Shareholders nor any Subsidiary will do any of the things
enumerated in the second sentence of Section 3.19. In the event ERC, any ERC
Shareholder or any Subsidiary desires to obtain the consent of Purchaser to take
any action restricted by this Section 4.1(b), such person shall submit a request
for such consent to Purchaser in accordance with Section 10.2 hereof, and
communicate such request to Richard C. Breeden, Thomas J. Hamel, Gerald l.
Klaben, or Paul Joslyn, in a conversation by telephone. Purchaser shall respond
to such request by the end of the second business day after receipt of such
written request. In the event Purchaser does not so respond, ERC may proceed
with the proposed transaction.
(c) Except for such actions as are listed on Schedule 2.4 hereto,
Purchaser covenants and agrees that, between the date hereof and the Closing,
Purchaser will not, without the prior written consent of ERC (not to be
unreasonably withheld or delayed): (i) issue or sell any capital stock or any
option, warrant or other right to acquire the same, of Purchaser or any of its
subsidiaries or (ii) redeem or repurchase any of its capital stock or declare,
make or pay any dividends or
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25
distributions (whether in cash, securities, or other property) to the holders of
capital stock of Purchaser or any of its subsidiaries or otherwise, other than
dividends, distributions and redemptions declared, made or paid of any
subsidiary of Purchaser solely to Purchaser. In the event Purchaser desires to
obtain the consent of ERC to take any action restricted by this Section 4.1(c),
Purchaser shall submit a request for such consent to ERC in accordance with
Section 10.2 hereof, and communicate such request to R. Perry Harris, James A.
Mercurio or Richard Winkler in a conversation by telephone. ERC shall respond to
such request by the end of the second business day after receipt of such written
request. In the event ERC does not so respond, Purchaser may proceed with the
proposed transaction.
SECTION 4.2 ACCESS PRIOR TO CLOSING.
(a) Upon reasonable notice from the date hereof through the Closing,
ERC, the LLC and the Subsidiaries, and their respective directors, officers,
agents, and employees, shall afford Purchaser and its representatives reasonable
access to, and opportunity to examine, during normal business hours, any and all
of the premises, properties, contracts, books, records, business, data,
personnel, customers and vendors of or relating to ERC, the LLC and any of the
Subsidiaries.
(b) Upon reasonable notice from the date hereof through Closing,
Purchaser and its subsidiaries and their respective directors, officers, agents,
and employees, shall afford ERC, the LLC and the Subsidiaries and their
respective representatives access to, and opportunity to examine, during normal
business hours, any and all of the premises, properties, contracts, books
records, business, data, personnel, customers and vendors of or relating to
Purchaser and its subsidiaries.
SECTION 4.3 REGULATORY AND OTHER AUTHORIZATIONS.
(a) ERC, the ERC Shareholders, the LLC and the Subsidiaries (i)
shall obtain all governmental, regulatory and third-party approvals, consents,
filings, authorizations or certifications necessary in order for such parties to
consummate the Merger and (ii) will cooperate fully with Purchaser in promptly
seeking to obtain all such approvals, consents, filings authorizations or
certificates.
(b) Purchaser and its subsidiaries (i) shall obtain all
governmental, regulatory and third-party, consents, filings, authorizations or
certificates necessary in order for Purchaser and Acquisition Corp. to
consummate the Merger and (ii) will cooperate fully with ERC, the ERC
Shareholders, the LLC and the Subsidiaries in promptly seeking to obtain all
such approvals, consents, filings, authorizations or certifications.
(c) The parties hereto will not take any action that will have the
effect of delaying, impairing or impeding the receipt of any of the foregoing
and will use their commercially reasonable efforts to secure the same as
promptly as possible.
SECTION 4.4 FURTHER ASSURANCES.
At any time and from time to time at or after the Closing,
Purchaser, ERC and the ERC Shareholders agree to cooperate with each other, to
execute and deliver such other documents, instruments of transfer or assignment,
files, books, and records and do all such further acts and things as may be
reasonably required to carry out the transactions contemplated hereby.
SECTION 4.5 CERTAIN TAX MATTERS.
(a) The ERC Shareholders shall pay (i) all Taxes arising out of or
related to their receipt of the Merger Consideration as contemplated by this
Agreement and (ii) (x) if the transactions
<PAGE>
26
contemplated by this Agreement are not characterized as intended for tax
purposes (as described in Section 1.9, including, but not limited to, the Merger
qualifying as a reorganization within the meaning of Section 368(a) of the Code)
for any reason (other than by the breach by any member of the Purchaser Group
(as defined below) of a covenant contained in this Agreement) or (y) the sale of
the timeshare units described in Section 1.9(a)(iv) are not accounted for as
intended in Section 1.9(a)(iv) for tax purposes for any reason (other than by
the breach by any member of the Purchaser Group (as defined below) of an
agreement or covenant contained in this Agreement), or in the case of both (x)
and (y), then the ERC Shareholders shall indemnify and hold Purchaser, its
affiliates (including, following the Closing, ERC, the LLC and the
Subsidiaries), and their successors, transferees and assigns (collectively, the
"Purchaser Group") harmless from and against all expenses, losses, costs,
deficiencies, liabilities and damages (including, without limitation, reasonable
attorney's fees and expenses) incurred or suffered by such Purchaser Group with
respect to Taxes resulting from or arising out of such alternative
characterization or accounting, or both.
(b) The ERC Shareholders shall prepare and file, or cause to be
prepared and filed, with the appropriate governmental authority all federal,
state, local and foreign Tax Returns (as defined in Section 3.17) required to be
filed (with extensions) by or with respect to ERC or the LLC on or prior to the
date of the Effective Time. The ERC Shareholders shall prepare (or cause to be
prepared) and the Purchaser shall timely file (or cause to be timely filed), all
Tax Returns of ERC, the LLC or any Subsidiary with respect to periods ending on
or prior to the date of the Effective Time that are required to be filed after
the date of the Effective Time. In connection with such Tax Returns and the
preparation thereof, the ERC Shareholders shall be permitted to utilize the
installment method under Section 453 of the Code (or similar provisions of
state, local or foreign law), provided all necessary elections are properly made
with respect to the sale of timeshare units (as set forth in Schedule 3.17
hereto).
(c) INTENTIONALLY OMITTED.
(d) Purchaser agrees that it will and will cause ERC and the LLC and
each Subsidiary to make available all such information, employees and records of
ERC and the LLC and each Subsidiary to the ERC Shareholders and their employees
and advisors as the ERC Shareholders may reasonably request with respect to
matters relating to Taxes (including, without limitation, the right to make
copies of such information and records) and will cooperate as requested by
either ERC Shareholder with respect to all matters relating to Taxes (including,
without limitation the filing of Tax Returns, audits, and proceedings). No
member of the Purchaser Group shall file or permit to be filed any amended Tax
Returns with respect to ERC or the LLC or any Subsidiary for any period (or
portion thereof) ending on or prior to the date of the Effective Time without
the prior written consent of the ERC Shareholders, which consent shall not be
unreasonably withheld and no member of the Purchaser Group shall with respect to
Taxes attributable to periods ending on or prior to the date of the Effective
Time take or advocate any position, initiate any claim or otherwise take any
action that would adversely affect the ERC Shareholders, ERC, the LLC or any
Subsidiary.
(e) Notwithstanding any other provision of this Agreement, all
transfer, registration, stamp, documentary, sales, use and similar Taxes
(including, but not limited to, all applicable real estate transfer or gains
Taxes and any stock transfer Taxes) incurred in connection with this Agreement
and the transactions contemplated hereby shall be the responsibility of and be
paid by the ERC Shareholders. The ERC Shareholders and Purchaser shall cooperate
in the timely making of all filings, returns, reports and forms as may be
required in connection therewith.
(f) If for any reason whatsoever (i) the Merger fails to qualify as
a reorganization within the meaning of Section 368(a) of the Code, (ii) the
transactions contemplated by this Agreement are not characterized as intended in
Section 1.9 for tax purposes, or (iii) sales of the timeshare units described in
Section 1.9(a)(iv) are not accounted for as intended in Section
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27
1.9(a)(iv) for tax purposes and, in the case of (i), (ii), or (iii), or any
combination of the foregoing, the Purchaser Group obtains any basis increase in
any asset (other than the equity interests in ERC Ventures, Inc.) (a "Purchaser
Group Basis Increase") then (in addition to any other remedies which may be
available to the ERC Shareholders but without duplication thereof) Purchaser
shall pay to the ERC Shareholders an amount (the "Amount") equal to (a) the
excess of (i) with respect to a taxable period, the liability for the aggregate
amount of Taxes to which the Purchaser Group would have been subject in each
relevant jurisdiction had no such Purchaser Group Basis Increase occurred (and
had Purchaser not been required to make any such payments pursuant to this
Section 4.5(f)), over (ii) the actual liability for such Taxes for such taxable
period (after taking into account any Purchaser Group Basis Increase), plus
(b)(i) professional fees and related costs and expenses, if any, incurred by the
ERC Shareholders in connection with the events described in this Section 4.5(f)
less (ii) professional fees and related costs and expenses, if any, incurred by
Purchaser Group in connection with the events described in this Section 4.5(f);
provided, however, that no payment of such Amount, if any, shall be required if,
to the extent that and for as long as (x) any Taxes (for any reason whatsoever,
other than by the breach by any member of the Purchaser Group of a covenant
contained in this Agreement) have become the obligation of, or are otherwise
imposed on or assessed against, the Purchaser Group by a taxing authority in
connection with the Purchaser Group obtaining a Purchaser Group Basis Increase
and (y) such Taxes have not been paid by the ERC Shareholders or been the
subject of a Final Determination that relieves the members of the Purchaser
Group that have become so obligated or against which such Taxes are imposed or
assessed against from any potential liability for such Taxes. In addition,
Purchaser shall have no obligation to make payment under this Section 4.5(f) to
the extent that the Amount required to be paid is in excess of the amount of
Taxes, if any, that become imposed on or otherwise assessed against the ERC
Shareholders (and that are not otherwise reimbursed by Purchaser under this
Agreement) in connection with a Purchaser Group Basis Increase (taking into
account Taxes imposed on the ERC Shareholders as a result of payments, if any,
made under this Section 4.5(f)). Such payment will be due (subject to a 10 day
grace period) when, as, and to the extent the Purchaser Group derives an actual
benefit (including in the form of any refund or reduction in Tax liability) as
the result of such excess. Any dispute concerning the calculation of payments
due under this Section 4.5(f) will be resolved by a nationally recognized
accounting firm that is jointly selected and mutually engaged by ERC
Shareholders and Purchaser (the fees and expenses of which shall be shared
equally by the ERC Shareholders and the Purchaser).
(g) With respect to the transactions contemplated by this Agreement
and the sale of certain timeshare units as described in Section 1.9 (a)(iv) and
their intended treatment for federal state, and local tax purposes as set forth
in Section 1.9, neither the ERC Shareholders, nor ERC, the LLC or Purchaser, nor
any of their respective subsidiaries or other affiliates shall take any action,
or fail to take any action, that would jeopardize such intended treatment of the
transactions contemplated by this Agreement (including, but not limited to, the
Merger qualifying as a reorganization within the meaning of Section 368(a) of
the Code) or the sale of certain timeshare units as described in Section
1.9(a)(iv) for federal, state and local tax purposes, or both; provided,
however, that in no event shall Purchaser be deemed to have breached its
obligation under this Section 4.5(g) to the extent that the ERC Shareholders
elect to make an indemnification payment to Purchaser in Purchaser Common Stock
pursuant to Section 9.2(b) and such election and payment cause the transactions
contemplated by this Agreement, as a result of a Final Determination, to be
characterized for tax purposes other than in the manner contemplated by Section
1.9. Without limiting the foregoing, no member of the Purchaser Group shall take
a position with respect to tax basis in the assets of a member of the Purchaser
Group that is inconsistent with an acquisition of a "carryover" tax basis in
such assets.
(h) If any member of the Purchaser Group receives any written notice
from any taxing authority proposing any adjustment to any Tax relating to ERC or
the LLC, such member shall give prompt written notice thereof to the ERC
Shareholders, which notice shall describe in detail each
<PAGE>
28
proposed adjustment. If the ERC Shareholders receive any written notice from any
taxing authority proposing any adjustment to any Tax or are notified of any
Final Determination relating to the ERC Shareholders, ERC or the LLC (in each
case, with respect to the transactions contemplated by this Agreement or with
respect to the sale of certain timeshare units as described in Section
1.9(a)(iv), or both), the ERC Shareholders shall give prompt written notice
thereof to either Purchaser or Acquisition Corp., which notice shall describe in
detail each proposed adjustment or such Final Determination, as applicable.
(i) The parties hereto agree that, except as prohibited by
applicable law, all indemnity payments made pursuant to this Agreement shall be
treated as adjustments to the applicable Merger Consideration. In the event that
the laws of a jurisdiction provide otherwise, such indemnity payments shall be
made in an amount sufficient to indemnify the relevant party on an after-Tax
basis (i.e., such amounts shall be grossed-up for Tax detriments and reduced for
Tax benefits).
(j) Purchaser shall make no claim against the ERC Shareholders for
indemnification pursuant to Section 9.2(a) of this Agreement in respect of
income or withholding Taxes unless the aggregate of all claims for such income
and withholding Taxes exceeds $25,000, in which case the ERC Shareholders shall
be required, subject to the provisions of Article IX (other than the dollar
limitations set forth in the first sentence of Section 9.2(b)) to pay or be
liable for all such claims.
(k) For purposes of determining whether the conditions to Closing
have been satisfied (but not for purposes of the ERC Shareholders'
indemnification of Purchaser for Taxes) the representations in Section 3.17 of
this Agreement shall apply only with respect to items which could have a
Material Adverse Effect. For purposes of Article IX of this Agreement, the
representations in Section 2.12 and Section 3.17 of this Agreement shall be
deemed to have been made without any exception for items identified in Schedule
2.12 and Schedule 3.17 (other than, in the case of Schedule 3.17, with respect
to certain receivables from the sale of time share units so identified and
listed on such Schedule).
SECTION 4.6 DELIVERY.
Subject to the terms and conditions of this Agreement, Purchaser,
ERC and the ERC Shareholders shall cause the delivery of the respective
documents required to be delivered or caused to be delivered by them pursuant to
Article VII below. In addition to their respective obligations under Section 4.3
and elsewhere in this Agreement, each of Purchaser and ERC also agree to
cooperate and take or cause to be taken all commercially reasonable steps
necessary or desirable and proceed diligently and in good faith to satisfy each
condition to such party's obligations contained in this Agreement and to
consummate the Merger as promptly as practicable.
SECTION 4.7 EMPLOYEES.
The parties contemplate that the employees of ERC, the LLC and the
Subsidiaries shall continue employment on substantially the same terms as in
effect on the Closing Date; provided, however, that nothing herein contained is
intended to limit the discretion of Purchaser to change or eliminate such
employment for any employees following the Closing, subject to severance rights
of certain executive employees as set forth in the severance agreements
described on Schedule 3.11.
<PAGE>
29
SECTION 4.8 EMPLOYMENT AGREEMENT.
Each of Purchaser and R. Perry Harris hereby covenant and agree to
enter into an employment agreement on the Closing Date substantially in the form
attached as Exhibit 4.8 (the "Employment Agreement").
SECTION 4.9 CONFIDENTIALITY.
(a) That certain Confidentiality Agreement dated February 6, 1998
(the "CA") executed between Purchaser and Salomon Smith Barney Inc. on behalf of
ERC, is hereby incorporated by reference in its entirety and Purchaser and
Acquisition Corp agree to abide by all of the covenants and agreements set forth
in the CA, as if they were each an original party thereto. Notwithstanding the
foregoing, (a) Purchaser may issue or make a press release, announcement or
other disclosure regarding this Agreement and the transactions contemplated
hereby which it reasonably determines necessary or desirable under applicable
law or NASDAQ SmallCap Market rule or regulation, and (b) Purchaser may, at any
time after the date of this Agreement, file with the SEC a Form 8-K pursuant to
the Exchange Act with respect to the transactions contemplated by this
Agreement, provided that Purchaser will provide to ERC a copy of any proposed
release or Form 8-K in advance of its dissemination or filing to provide ERC an
opportunity to comment thereon.
(b) ERC and the ERC Shareholders agree to, and shall cause their
Affiliates, agents, representatives and employees to: (i) treat and hold as
confidential (and not disclose or provide access to any person) all information
relating to trade secrets, price, customer and supplier lists, pricing and
marketing plans, policies and strategies, details of client and consultant
contracts, operations methods, business acquisition plans, new personnel
acquisition plans and all other confidential information with respect to the
business, of Purchaser, its subsidiaries, ERC, the LLC and the Subsidiaries,
(ii) in the event that ERC or the ERC Shareholders or any such agent,
representative or employee becomes legally compelled to disclose any such
information, provide Purchaser with prompt written notice of such requirement so
that Purchaser or any of its subsidiaries may seek a protective order or other
remedy or waive compliance with this Section 4.9(b), (iii) in the event that
such protective order or other remedy is not obtained, or Purchaser waives
compliance with this Section 4.9(b), furnish only that portion of such
confidential information which is legally required to be provided and exercise
its best efforts to obtain assurances that confidential treatment will be
accorded such information. ERC and the ERC Shareholders agree and acknowledge
that remedies at law for any breach of their obligations under this Section
4.9(b) are inadequate and that in addition thereto Purchaser shall be entitled
to seek equitable relief, including injunction and specific performance, in the
event of any such breach.
SECTION 4.10 NOTICE OF DEVELOPMENTS.
(a) Prior to the Closing, ERC and the ERC Shareholders shall
promptly notify Purchaser in writing of (i) all events, circumstances, facts and
occurrences arising subsequent to the date of this Agreement which could result
in any breach of a representation or warranty or covenant of ERC in this
Agreement or which could have the effect of making any representation or
warranty of ERC in this Agreement untrue or incorrect in any material respect
(ii) all other material developments affecting the assets, liabilities,
business, financial condition, operations, results of operations, customer
relations, employee relations, projections or prospects of ERC, the LLC or any
Subsidiary and (iii) all acquisition of real property or any interest therein.
(b) Prior to the Closing, Purchaser and its subsidiaries shall
promptly notify ERC, the LLC and the Subsidiaries in writing of (i) all events,
circumstances, facts, and occurrences arising subsequent to the date of this
Agreement which could result in a breach of a representation or warranty or
covenant of Purchaser in this Agreement or which could have the effect of making
any representation or warranty of Purchaser in this Agreement untrue or
incorrect in any material respect, (ii) all other material developments
affecting the assets, liabilities, business, financial condition,
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30
operations, results of operations, customer relations, employee relations,
projections or prospects of Purchaser or any of its subsidiaries and (iii) all
acquisitions of real property or an interest therein.
SECTION 4.11 NO SOLICITATION OR NEGOTIATION.
Each of ERC and the ERC Shareholders agree that between the date of
this Agreement and the earlier of (i) the Closing and (ii) the termination of
this Agreement pursuant to Article VIII, none of the ERC Shareholders, ERC, the
LLC or any Subsidiary nor any of their respective affiliates, officers,
directors, investment bankers, representatives or agents will (a) solicit,
initiate, consider, encourage or accept any other proposals or offers from any
person (i) relating to any acquisition or purchase of all or any portion of the
capital stock of ERC, the LLC or any Subsidiary or assets of ERC, the LLC or any
Subsidiary (other than assets to be sold in the ordinary course of business
consistent with past practice), (ii) to enter into any business combination with
the ERC, the LLC, or any Subsidiary or (iii) to enter into any other
extraordinary business transaction involving or otherwise relating to ERC, the
LLC or any Subsidiary, or (b) participate in any discussions, conversations,
negotiations and other communications regarding, or furnish to any other person
any information with respect to, or otherwise cooperate in any way, assist or
participate in, facilitate or encourage any effort or attempt by any other
person to seek to do any of the foregoing. ERC and the ERC Shareholders
immediately shall cease and cause to be terminated all existing discussions,
conversations, negotiations and other communications with any Persons conducted
heretofore with respect to any of the foregoing. ERC and the ERC Shareholders
agree not to, and to cause the LLC and each Subsidiary not to, without the prior
written consent of Purchaser, release any Person from, or waive any provision
of, any confidentiality or standstill agreement to which the ERC Shareholders,
ERC, the LLC or any Subsidiary is a party.
ARTICLE V
INTENTIONALLY OMITTED
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 CLOSING CONDITIONS OF ERC AND THE ERC SHAREHOLDERS.
The obligations of ERC and the ERC Shareholders under this Agreement
are subject to the reasonable satisfaction, or waiver by the ERC Shareholders,
at or prior to the Closing, of each of the following conditions:
(a) The representations and warranties of Purchaser contained in
this Agreement shall be true and correct in all material respects on the date
hereof and on the Closing Date as though made on and as of the Closing Date or,
in the case of representations and warranties made as of a specified date
earlier than the Closing Date, on and as of such earlier date, provided,
however, that if any portion of any representation or warranty is already
qualified by materiality, for purposes of determining whether this Section
6.1(a) has been satisfied with respect to such portion of such representation or
warranty, such portion of such representation or warranty as so qualified must
be true and correct in all respects.
(b) Purchaser shall have performed and complied with all of the
covenants and agreements in all material respects and satisfied all of the
conditions in all material respects required
<PAGE>
31
by this Agreement to be performed or complied with or satisfied by Purchaser at
or prior to the Closing;
(c) On the Closing Date, there shall be no injunction, restraining
order or decree of any nature of any court or governmental authority in effect
that restrains or prohibits the consummation of the transactions contemplated by
this Agreement;
(d) Purchaser shall have executed and delivered the Related
Agreements to the respective parties thereto.
(e) Acquisition Corp. shall have received, from R. Perry Harris,
100% of the equity interests in ERC Ventures, Inc., free and clear of all liens
and encumbrances, in exchange for (i) a payment of nominal consideration of $10,
and (ii) a payment of $150,000 to reimburse R. Perry Harris for a deposit
delivered on behalf of ERC Ventures, Inc to the Bankruptcy Court in the District
of Rhode Island in relation to the purchase of certain assets.
SECTION 6.2 CLOSING CONDITIONS OF PURCHASER.
The obligations of Purchaser under this Agreement are subject to the
reasonable satisfaction, or waiver by Purchaser, at or prior to the Closing, of
each of the following conditions:
(a) The representations and warranties of ERC and the ERC
Shareholders contained in this Agreement shall be true and correct in all
material respects on the date hereof and on the Closing Date as though made on
and as of the Closing Date or, in the case of representations and warranties
made as of a specified date earlier than the Closing Date, on and as of such
earlier date, provided, however, that if any portion of any representation or
warranty is already qualified by materiality, for purposes of determining
whether this Section 6.2(a) has been satisfied with respect to such portion of
such representation or warranty, such portion of such representation or warranty
as so qualified must be true and correct in all respects.
(b) ERC, the LLC and each of the Subsidiaries shall have performed
and complied with all of the covenants and agreements in all material respects
and satisfied all of the conditions in all material respects required by this
Agreement to be performed or complied with or satisfied by it or them at or
prior to the Closing;
(c) All authorizations, consents, licenses, approvals and other
actions by, and all notices to and filings with, any lender, governmental
authority, or other persons that are required for the due execution, delivery
and performance of this Agreement listed on Schedule 6.2(c) hereto, or the
failure of which to be obtained would constitute an ERC Material Adverse Effect,
shall have been made or obtained in form and substance reasonably satisfactory
to Purchaser, and all waiting periods which are required by law to have expired
or to have been terminated prior to consummation of the Merger shall have
expired or been terminated;
(d) On the Closing Date, (i) there shall be no injunction,
restraining order or decree of any nature of any court or governmental authority
in effect that restrains or prohibits the consummation of the transactions
contemplated by this Agreement and (ii) no action, order to show cause, or other
motion or pleading brought by any third party seeking such an injunction,
restraining order or decree shall be pending before any court or governmental
authority;
(e) (i) On or prior to July 31, 1998 (A) the Bankruptcy Court of the
Northern District of New York (the "Bankruptcy Court"), which currently has
jurisdiction over the bankruptcy estate of The Bennett Funding Group, Inc.,
Bennett Management and Development Corporation and certain other related
entities (the "Estate"), shall not have taken any action to assert jurisdiction
over or otherwise impede the Merger or the other transactions contemplated
hereby, (B) neither the Official
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32
Creditors Committee of the Estate nor any other person shall have asserted in
writing to the Estate or the Bankruptcy Court that such court's approval is
required with respect to the Merger or the other transactions contemplated
hereby and (C) the Company shall not have reasonably concluded that the approval
of the Bankruptcy Court is required with respect to the Merger or the other
transactions contemplated hereby, unless (ii) the Bankruptcy Court shall have
subsequently (A) determined that its approval of the Merger is not required or
(B) approved the Merger.
(f) Acquisition Corp. shall have received, from R. Perry Harris,
100% of the equity interests in ERC Ventures, Inc., free and clear of all liens
and encumbrances, in exchange for (i) a payment of nominal consideration of $10,
and (ii) a payment of $150,000 to reimburse R. Perry Harris for a deposit
delivered on behalf of ERC Ventures, Inc to the Bankruptcy Court in the District
of Rhode Island in relation to the purchase of certain assets.
(g) (i) R. Perry Harris shall have executed and delivered to
Purchaser the Employment Agreement and (ii) the ERC Shareholders shall have
executed and delivered to Purchaser the Stockholders' Agreement (as defined in
Section 7.1(g)).
(h) Purchaser shall have received an undertaking which shall not
have been withdrawn prior to Closing of Donovan, Sullivan & Ryan, independent
public accountants to ERC, to cooperate with Purchaser in causing to become
effective an registration statement with the Securities and Exchange Commission
for a public offering of Purchaser Common Stock, by providing such assistance,
including such comfort letters and other accounting opinions and consents to be
included in a registration statement for Purchaser Common Stock, as shall be
necessary or desirable to effect such a registration and public offering,
consistent with customary practices; and
(i) Each of the directors of ERC shall have resigned.
ARTICLE VII
THE CLOSING
SECTION 7.1 DELIVERIES BY ERC AND ERC SHAREHOLDERS.
At the Closing, ERC or Purchaser shall receive from ERC or the ERC
Shareholders (as applicable) the following and the ERC Shareholders (as
applicable) shall cause the same to be delivered to Purchaser:
(a) A certificate or certificates representing the stock of ERC,
duly endorsed in blank by the ERC Shareholders for transfer, or accompanied by a
duly executed stock power or assignment form, duly executed in blank;
(b) The resignation of all officers and directors of ERC, effective
as of the Closing Date;
(c) Certificate of good standing from the Secretary of State of each
of the states in which ERC, the LLC or any of the Subsidiaries is incorporated
or organized, stating that each such entity is a validly existing corporation
(or limited liability company, as the case may be);
(d) A certificate, dated as of the Closing, signed by an officer of
ERC to the effect that the conditions specified in Sections 6.2(a) and (b) above
have been satisfied in all material respects.
<PAGE>
33
(e) Copies of duly adopted resolutions approving the execution,
delivery and performance of this Agreement and the other instruments
contemplated hereby certified by the Secretary of ERC;
(f) A true, correct and complete copy of the Articles of
Incorporation (or similar public record of formation), as amended, of ERC, the
LLC and each Subsidiary, certified by the Secretary of State of its state of
incorporation or formation, and a true, correct and complete copy of the Bylaws,
operating agreement or partnership limited liability company agreement (as
applicable) as amended, of ERC, the LLC and each Subsidiary, certified by the
secretary of other appropriate party of each such entity;
(g) Executed counterparts of (i) the Stockholders' Agreement
substantially in the form attached hereto as Exhibit 7.1(g) (the "Stockholders'
Agreement"; and together with the Employment Agreement, the "Related
Agreements") and (ii) the Employment Agreement, executed by the parties thereto
other than Purchaser;
(h) A certificate of the secretary of ERC certifying (i) the
resolutions referred to in clause in clause (f) above, (ii) the Bylaws of ERC
and (iii) the names and signatures of the officers of ERC authorized to sign
this Agreement and each certificate or other document delivered on behalf of ERC
pursuant hereto.
(i) An affidavit from each of ERC, the LLC, each Subsidiary, and
each ERC Shareholder stating that such party qualifies as a "United States
person" within the meaning of Section 7701(a)(30) of the Code.
SECTION 7.2 PURCHASER'S DELIVERIES.
At the Closing, the ERC Shareholders shall receive from Purchaser
the following and Purchaser shall cause the same to be delivered to the ERC
Shareholders:
(a) the Merger Consideration in accordance with the provisions of
Section 1.3 hereof;
(b) Certificate of good standing from the Secretary of State of the
State of Florida (in the case of Purchaser) and the Secretary of State of the
State of Delaware (in the case of Acquisition Corp.) stating that Purchaser and
Acquisition Corp are each validly existing corporations in good standing;
(c) A certificate, dated as of the Closing, signed by an officer of
Purchaser to the effect that the conditions specified in Section 6.1(a) and (b)
above have been satisfied in all material respects;
(d) Copies of duly adopted resolutions of Purchaser's Board of
Directors and Acquisition Corp.'s shareholders and Board of Directors approving
the execution, delivery and performance of this Agreement and the Related
Agreements, certified by their respective Secretaries;
(e) The Stockholders' Agreement and the Employment Agreement each
executed by Purchaser.
(f) A true, correct and complete copy of the Articles of
Incorporation, as amended, of each of Purchaser and Acquisition Corp., certified
by the Secretary of State of its state of incorporation or formation, and a
true, correct and complete copy of the Bylaws, certified by the secretary of
Purchaser and Acquisition Corp.
<PAGE>
34
(g) A certificate of the secretary of Purchaser and Acquisition
Corp. certifying (i) the resolutions referred to in clause (d) above, (ii) the
By-laws of Purchaser and Acquisition Corp., and (iii) the names and signatures
of the officers of Purchaser and Acquisition Corp. authorized to sign this
Agreement and each certificate or other document delivered on their behalf
pursuant hereto.
ARTICLE VIII
TERMINATION
SECTION 8.1 TERMINATION.
Notwithstanding anything in this Agreement to the contrary, this
Agreement may be terminated only:
(a) by mutual consent of the Boards of Directors of Purchaser and
ERC;
(b) by Purchaser or ERC if, for any reason, the Closing has not
occurred on or before September 15, 1998;
(c) by Purchaser, upon a breach of any representation, warranty,
agreement or covenant on the part of ERC or the ERC Shareholders set forth in
this Agreement, such that the conditions set forth in Section 6.2(a) or 6.2(b),
as the case may be, would be incapable of being satisfied by September 15, 1998;
(d) by ERC, upon a breach of any representation, warranty, agreement
or covenant on the part of Purchaser, such that the conditions set forth in
Section 6.1(a) or 6.1(b), as the case may be, would be incapable of being
satisfied by September 15, 1998; or
(e) by Purchaser or ERC if any court of competent jurisdiction in
the United States or other governmental authority shall have issued an order,
decree or ruling or taken any other final action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
is or shall have become non-appealable.
SECTION 8.2 EFFECT OF TERMINATION.
Upon the termination of this Agreement pursuant to Section 8.1, this
Agreement shall forthwith be void and of no further force and effect without any
liability or obligation on the part of either party, except (a) that the
provisions set forth in Sections 4.9, Article X, Section 8.3, Section 8.4 and in
this Section 8.2 shall continue in full force and effect and (b) that nothing
herein shall relieve either party from liability for any breach of this
Agreement.
SECTION 8.3 FEES AND EXPENSES.
All expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Merger or any other transaction is consummated,
provided, however, that, irrespective of whether the Merger is consummated,
Purchaser shall pay the reasonable legal and accounting fees and expenses of ERC
and the ERC Shareholders up to a maximum of $250,000, except in the event that
the transaction is terminated due to a breach by ERC or the ERC Shareholders of
their obligations hereunder.
<PAGE>
35
SECTION 8.4 SPECIFIC PERFORMANCE.
It is expressly agreed and understood that nothing in this Agreement
shall preclude either party from seeking specific performance, injunctive relief
or any other remedies not involving the payment of monetary damages in the event
of any material breach or material violation of any provision of this Agreement
by the other party (whether or not this Agreement is terminated as a result of
such breach or violation) and each party acknowledges that, in light of the
unique benefit to it of its rights under this Agreement, such remedies shall be
available in respect of any such breach or violation by it in any suit properly
instituted in a court of competent jurisdiction.
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties made by Purchaser and ERC
and each ERC Shareholder in this Agreement or pursuant hereto shall survive for
a period of 18 months after the Closing Date; provided, however, that
representations, warranties, covenants and promises made by Purchaser and ERC
and each ERC Shareholder with respect to Tax matters shall survive until 60 days
after the expiration of the statute of limitations (including any extensions
thereof pursuant to the delivery of waivers or other documents having similar
effect) applicable to any assessments by any taxing authority of Taxes with
respect to which such representations, warranties, covenants and promises
relate. No claim may be asserted against any party hereto and no party hereto
shall have any liability to the other party hereto, with respect to any
inaccuracy in or any breach of any representation or warranty after the survival
period, except that if a claim shall be first asserted within the applicable
period, such claim shall not thereafter be barred. Each representation,
warranty, covenant and agreement of the parties contained in this Agreement is
independent of each other representation, warranty, covenant, and agreement. The
Closing of the Merger shall not constitute a waiver of any rights to
indemnification. The rights of each indemnified party to obtain indemnification
with respect to each indemnifying party's representations and warranties shall
not be reduced by any investigation made at any time by or on behalf of such
indemnified party.
<PAGE>
36
SECTION 9.2 INDEMNIFICATION OF PURCHASER.
(a) The ERC Shareholders agree, jointly and severally, subject to
the limitations in Section 4.5(j) and Section 9.2(b), to indemnify and hold
Purchaser, its affiliates (including, following the Effective Time, ERC, the LLC
and the Subsidiaries), and their officers, directors, employees, agents,
successors, transferees and assigns (each a "Purchaser Indemnified Party")
harmless from and against all expenses, losses, costs, Taxes, deficiencies,
liabilities and damages (including, without limitation, reasonable attorney's
fees and expenses) incurred or suffered by them (collectively, "Purchaser
Indemnifiable Damages") resulting from or arising out of (i) any breach of a
representation or warranty made by ERC or any ERC Shareholder in or pursuant to
this Agreement, (ii) any breach of the covenants or agreements made by ERC or
any ERC Shareholder in this Agreement, or (iii) any inaccuracy in any
certificate delivered by ERC or any ERC Shareholder pursuant to this Agreement,
or (iv) with respect to any Taxes imposed on the ERC Shareholders, ERC, the LLC
or any of the Subsidiaries with respect to any period, or any portion of any
period, ending on or prior to the date of the Effective Time (except to the
extent such Taxes are imposed by reason of a breach by any member of the
Purchaser Group of a covenant or agreement relating to the treatment of the
transactions contemplated by this Agreement as intended in Section 1.9 or
relating to the sale of certain timeshare units as described in Section 1.9
(a)(iv), or both); provided that no indemnity for Taxes shall arise unless such
Taxes are in excess of the reserve for Taxes reflected on either the Financial
Statements or the Interim Financial Statements.
(b) Notwithstanding the foregoing, no claim other than a claim in
respect of income or withholding Taxes (which shall be subject only to the
limitation set forth in Section 4.5(j)) may be made against the ERC Shareholders
for indemnification pursuant to Section 9.2(a) with respect to any claim by
Purchaser unless such claim shall be for an amount in excess of $10,000 (other
than a claim in respect of income or withholding Taxes which shall be subject to
the limitation set forth in Section 4.5(j)) and the aggregate of all claims
shall exceed $500,000, in which case the ERC Shareholders shall be required to
pay or be liable for all claims hereunder; provided the maximum amount for which
all ERC Shareholders may be liable for indemnification hereunder (excluding
claims in respect of income or withholding Taxes) shall not exceed $6,000,000,
of which one-third will be payable in cash, and two-thirds shall be payable (at
the option of the ERC Shareholders) in cash or Purchaser Common Stock (valued at
the greater of its average closing market price for the ten trading days prior
to the payment date or $2.00 per Share). In the event the ERC Shareholders do
not own sufficient shares of Purchaser Common Stock to make the required payment
in such form, such payment will be paid in cash to the extent of shortfall. In
the event that (i) the ERC Shareholders elect to make such an indemnification
payment in Purchaser Common Stock and (ii) such election causes the transactions
contemplated by this Agreement, as a result of a Final Determination (as defined
in Section 1.9), to be characterized for tax purposes in a manner other than the
manner originally intended in Section 1.9 (including, but not limited to, the
Merger qualifying as a reorganization within the meaning of Section 368(a) of
the Code), then (x) Purchaser shall have no obligation to comply with the
covenants made in Section 1.9 and Section 4.5 and (y) the ERC Shareholders shall
be deemed to have breached their covenants made in Section 1.9 and Section 4.5.
For purposes of this Section 9.2, the amount of Purchaser Indemnifiable Damages
hereunder shall be net of any insurance proceeds and any indemnity contribution
or other similar payment payable by any third-party with respect thereto. The
amount of any Purchaser Indemnifiable Damages for purposes of this Section 9.2
shall be (i) reduced by an amount that accounts for any Tax benefits that
Purchaser shall acquire as a result of its receipt or accrual of an
indemnification amount related to such Purchaser Indemnifiable Damages and (ii)
increased by an amount that accounts for any Tax detriment that Purchaser shall
suffer as a result of its receipt of accrual of an indemnification amount
related to such Purchaser Indemnifiable Damages.
(c) Purchaser agrees that it shall give the ERC Shareholders prompt
written notice of any claim by any Purchaser Indemnified Party or any third
party claim that Purchaser receives against any Purchaser Indemnified Party,
ERC, the LLC or any Subsidiary, as to which any Purchaser Indemnified Party is
entitled to request indemnification hereunder (a "Potential Claim
<PAGE>
37
Notice"). The Potential Claim Notice shall include a description of the nature
of the claim, the identity of the party by whom it is being asserted and the
basis for Purchaser's belief that the claim entitles the Purchaser Indemnified
Party to indemnification hereunder. In the case of third-party claims, the ERC
Shareholders shall then have 20 calendar days in which either to (i) agree that
the claim described in the Potential Claim Notice is covered by this indemnify
or (ii) deny that the claim is covered by this indemnity. In the event that the
ERC Shareholders agree that the third-party claim is covered by this indemnity
(such claim being deemed to be a "Covered Claim" for purposes of this
Agreement), (i) the ERC Shareholders shall reimburse Purchaser Indemnified Party
for reasonable costs incurred by the Purchaser Indemnified Party in the defense
of such Covered Claim prior to the assumption of such defense by such ERC
Shareholders (ii) such ERC Shareholders shall have the right to control the
defense of such claim with counsel selected by the ERC Shareholders (subject to
the reasonable approve of Purchaser) and (iii) the ERC Shareholders shall pay
all costs of defense, settlement or judgment relating to such Covered Claim. If
control of the defense is assumed by the ERC Shareholders, Purchaser shall have
the right to participate in the defense of such claim with counsel it selects
but the costs of such counsel shall be borne by Purchaser. In the event that the
ERC Shareholders deny that a third-party claim is covered by this indemnity,
Purchaser shall have the right, subject to the next sentence, to control the
defense of the claim and shall pay all costs of defense, settlement or judgment,
provided that Purchaser shall keep the ERC Shareholders reasonably informed as
to the status of any proceedings and shall consult with the ERC Shareholders
prior to entering into any settlement of the claim (notwithstanding the
foregoing, the ERC Shareholders shall not have the right to disapprove of any
settlement unless the ERC Shareholders agree that the claim underlying the
settlement is covered by this indemnity).
(d) Purchaser grants to the ERC Shareholders and its duly appointed
representatives the right to negotiate, resolve, settle or contest any claim for
Tax with respect to which the ERC Shareholders would be obligated to indemnify
Purchaser or any subsidiary or affiliate under this Agreement (if such contest
or claim were not negotiated, resolved or settled in favor of the ERC
Shareholders), provided that the ERC Shareholders acknowledge such obligation in
writing and allow Purchaser to participate at its own expense, and Purchaser
agrees to cooperate and cause its affiliates to cooperate and take all actions
requested by the ERC Shareholders with respect to the foregoing. If the ERC
Shareholders do not assume the defense of any such claim for Tax, Purchaser may
individually defend the same in such manner as it may deem appropriate, but not
settle or otherwise compromise any such audit or proceeding at the expense of
the ERC Shareholders without first obtaining the written consent of the ERC
Shareholders, which consent shall not be unreasonably withheld.
SECTION 9.3 INDEMNIFICATION OF ERC AND THE ERC SHAREHOLDERS.
(a) Purchaser agrees to indemnify and hold each of the ERC
Shareholders harmless from and against all expenses, losses, costs, Taxes,
deficiencies, liabilities and damages (including, without limitation, counsel,
fees and expenses) incurred or suffered by the ERC Shareholders (collectively,
"ERC Indemnifiable Damages") from or arising out of (i) any breach of a
representation or warranty made by Purchaser in or pursuant to this Agreement,
(ii) any breach of the covenants or agreements made by Purchaser in this
Agreement, (iii) any inaccuracy in any certificate delivered by Purchaser
pursuant to this Agreement, or (iv) the operation by Purchaser of the business
of ERC, the LLC or any of the Subsidiaries following the Closing.
(b) Notwithstanding the foregoing, no claim may be made against
Purchaser for indemnification pursuant to Section 9.3(a) with respect to any
claim by the ERC Shareholders unless such claim shall be for an amount in excess
of $10,000 and the aggregate of all claims shall exceed $500,000, in which case
Purchaser shall be required to pay or be liable for all claims hereunder;
provided that the maximum amount for which Purchaser may be liable for
indemnification hereunder shall not exceed $6,000,000 of which one-third will be
payable in cash, and two-thirds shall be
<PAGE>
38
payable (at the option of Purchaser) in cash or Purchaser Common Stock (valued
at the greater of its average closing market price for the ten trading days
prior to the payment date or $2.00 per Share). For purposes of this Section 9.2,
the amount of ERC Indemnifiable Damages hereunder shall be net of any insurance
proceeds and any indemnity contribution or other similar payment payable by any
third-party with respect thereto. The amount of any ERC Indemnifiable Damages
for purposes of this Section 9.3 shall be (i) reduced by an amount that accounts
for any Tax benefits that the ERC Shareholders shall acquire as a result of
their receipt or accrual of an indemnification amount related to such ERC
Indemnifiable Damages and (ii) increased by an amount that accounts for any Tax
detriment that the ERC Shareholders shall suffer as a result of their receipt of
accrual of an indemnification amount related to such ERC Indemnifiable Damages.
(c) The ERC Shareholders agree that they shall give Purchaser prompt
written notice of any claim by the ERC Shareholders or any third party claim
that the ERC Shareholders receive, as to which the ERC Shareholders are entitled
to request indemnification hereunder (a "Potential Claim Notice"). The Potential
Claim Notice shall include a description of the nature of the claim, the
identity of the party by whom it is being asserted and the basis for the ERC
Shareholders' belief that the claim entitles them to indemnification hereunder.
In the case of third-party claims, Purchaser shall then have 20 calendar days in
which either to (i) agree that the claim described in the Potential Claim Notice
is covered by this indemnity or (ii) deny that the claim is covered by this
indemnity. In the event that Purchaser agrees that the third-party claim is
covered by this indemnity (such claim being deemed to be a "Covered Claim" for
purposes of this Agreement), (i) Purchaser shall reimburse the ERC Shareholders
for reasonable costs incurred in the defense of such Covered Claim prior to the
assumption of such defense by Purchaser (ii) Purchaser shall have the right to
control the defense of such claim with counsel selected by Purchaser (subject to
the reasonable approve of the ERC Shareholders) and (iii) Purchaser shall pay
all costs of defense, settlement or judgment relating to such Covered Claim. If
control of the defense is assumed by Purchaser, the ERC Shareholders shall have
the right to participate in the defense of such claim with counsel they select
but the costs of such counsel shall be borne by the ERC Shareholders. In the
event that Purchaser denies that a third-party claim is covered by this
indemnity, the ERC Shareholders shall have the right, subject to the next
sentence, to control the defense of the claim and shall pay all costs of
defense, settlement or judgment, provided that the ERC Shareholders shall keep
Purchaser reasonably informed as to the status of any proceedings and shall
consult with Purchaser prior to entering into any settlement of the claim
(notwithstanding the foregoing, Purchaser shall not have the right to disapprove
of any settlement unless Purchaser agrees that the claim underlying the
settlement is covered by this indemnity).
SECTION 9.4 EXCLUSIVITY OF INDEMNIFICATION FOR CONTRACTUAL BREACHES.
No party hereto is making any representation, warranty or covenant
other than those contained herein. Anything herein to the contrary
notwithstanding, following the Closing, the rights of the parties under the
provisions of this Article IX shall be the sole and exclusive remedy available
to the parties with respect to claims or damages arising out of breaches of the
representations and warranties or other contractual obligations of the party set
forth in this Agreement. Nothing in the foregoing shall preclude the parties
from seeking any claims or damages under the Related Agreements to remedy
breaches by the parties under such Agreements.
SECTION 9.5 CONSENT TO JURISDICTION.
Each party hereto hereby irrevocably submits to the non-exclusive
jurisdiction of any state or federal court sitting in the City of New York in
any action or proceeding arising out of or relating to this Agreement or any of
the transactions contemplated hereby and hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such state court or, to the extent permitted by law, in such federal court. Each
of the parties hereby irrevocably consents to the service of process in any such
action or proceeding by the mailing by certified mail of copies of any service
or copies of the summons and complaint and
<PAGE>
39
any other process to such party at the address specified in Section 10.2 hereof.
The parties agree that a final judgment in any such action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. Nothing in this Section 9.6 shall affect
the right of a party to serve legal process in any other manner permitted by law
or affect the right of a party to bring any action or proceeding in the courts
of other jurisdictions.
SECTION 9.6 CONTINUATION OF INDEMNITY PROTECTIONS POST-CLOSING.
Purchaser agrees that all rights to indemnification existing in
favor of the present directors, members, officers and managers of each of ERC,
The LLC and the Subsidiaries (collectively, the "Indemnified Fiduciaries") as
provided in the Articles of Incorporation, Articles of Organization, By-Laws,
Operating Agreement or similar organizational documents of any such entity as in
effect as of the date hereof or pursuant to the terms of any written agreements
providing for indemnification (other than any such agreements entered into in
contemplation of the execution of this Agreement) entered into between ERC, the
LLC or any Subsidiary and any of the Indemnified Fiduciaries shall survive the
Merger and shall continue in full force and effect (without modification or
amendment, except as required by applicable law or except to make changes
permitted by law that would expand the scope of the Indemnified Fiduciaries'
right of indemnification), to the fullest extent and for the maximum term
permitted by law, and shall be enforceable by the Indemnified Fiduciaries
against the relevant entity.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 GOVERNING LAW AND CONSENT TO JURISDICTION.
This Agreement shall be deemed to be made in, and in all respects
shall be interpreted, construed and governed by and in accordance with the
internal laws of, the State of New York.
SECTION 10.2 NOTICES.
Any notices or other communications required under this Agreement
shall be in writing, shall be deemed to have been given when delivered in
person, by telecopier, when delivered to a recognized next business day courier,
or, if mailed, when deposited in the United States mail first class, registered
or certified, return receipt requested, with proper postage prepaid, addressed
as follows or to such other address as notice shall have been given pursuant
hereto:
If to ERC or any ERC Shareholder:
R. Perry Harris
Eastern Resorts Company
115 Long Wharf
P.O. Box 2000
Newport, Rhode Island 02840
Fax # 401-846-3888
<PAGE>
40
with a copy to
Stephen R. Goldstein, Esq.
Goldstein, Kaitz & Fellman, LLP
Watermill Center
800 South Street, Suite 380
Waltham, MA 02154
Fax # (781) 894-2129
If to Purchaser
Richard C. Breeden
Chief Executive Officer
Equivest Finance, Inc.
100 Northfield Street
Greenwich, CT 06830
Fax # (203) 618-0063
with a copy to:
Linda C. Quinn, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Fax # (212) 848-7179
SECTION 10.3 ASSIGNMENT.
Neither this Agreement nor any rights hereunder may be assigned, by
operation of law or otherwise.
SECTION 10.4 SECTION HEADINGS.
The section headings contained in this Agreements are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
SECTION 10.5 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
SECTION 10.6 AMENDMENT.
Except as hereinafter provided, this Agreement may not be amended
except by a writing signed by the party to be charged.
<PAGE>
41
SECTION 10.7 ENTIRE AGREEMENT.
This Agreement and the Related Agreements referred to herein
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. Except as may be expressly stated or provided herein, no
party hereto has relied on any representation, warranty, covenant or agreement
by another party or such other party's agents, officers or employees, in
entering into this Agreement and consummating the transactions contemplated
hereby.
SECTION 10.8 BINDING EFFECT.
Subject to Section 10.3, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns.
SECTION 10.9 SEVERABILITY.
In case any provision in this Agreements shall be held invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions hereof shall not in any way be affected or impaired
thereby.
<PAGE>
42
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
EASTERN RESORTS CORPORATION
BY:
------------------------------------
NAME: R. Perry Harris
TITLE: Chairman and
Chief Executive Officer
(CORPORATE SEAL)
EQUIVEST FINANCE, INC.
BY:
------------------------------------
NAME: Richard C. Breeden
TITLE: Chairman and
Chief Executive Officer
(CORPORATE SEAL)
<PAGE>
43
JOINDER OF SHAREHOLDERS
The undersigned ERC Shareholders join in and execute the foregoing
Agreement for the purposes which expressly apply to such ERC Shareholders as set
forth in the Agreement.
- --------------------
R. Perry Harris
- ---------------------
Karen Harris
Exhibit 11.1
EQUIVEST FINANCE, INC.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Net Income $1,223,250
Less: Preferred Stock dividends (150,000)
-----------
Basic earnings per share:
Income available to common stockholders 1,073,250 21,905,706 $.05
====
Effect of dilutive securities:
Warrants 91,651
Stock options 382,688
----------- ----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $1,073,250 22,380,045 $.05
========== ========== ----
<CAPTION>
For the Quarter Ended June 30, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Net Income $875,500
Less: Preferred Stock dividends (195,930)
--------
Basic earnings per share:
Income available to common stockholders 679,570 9,484,847 $.07
====
Effect of dilutive securities:
Cumulative Convertible--Series 2
preferred stock 45,000 7,500,000
Stock Options 69,404
12.5% Redeemable Convertible preferred st 930 27,861
-------- ----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $725,500 17,082,112 $.04
======== ========== ----
</TABLE>
<PAGE>
EQUIVEST FINANCE, INC.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Net Income $2,675,249
Less: Preferred Stock dividends (300,454)
----------
Basic earnings per share:
Income available to common stockholders 2,374,795 21,875,772 $.11
====
Effect of dilutive securities:
Warrants 88,046
Stock options 371,867
---------- ----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $2,374,795 22,335,685 $.11
========== ========== ----
<CAPTION>
For the Six Months Ended June 30, 1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Net Income $1,600,528
Less: Preferred Stock dividends (369,360)
----------
Basic earnings per share:
Income available to common stockholders 1,231,168 9,484,847 $.13
----
Effect of dilutive securities:
Cumulative Convertible--Series 2
preferred stock 67,500 7,500,000
Stock Options 69,404
12.5% Redeemable Convertible preferred
stock 1,860 27,861
---------- ---------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $1,300,528 17,082,112 $.08
========== ========== ----
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from EQUIVEST
FINANCE, INC. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,172,185
<SECURITIES> 0
<RECEIVABLES> 137,569,315
<ALLOWANCES> (2,893,538)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 142,705,333
<CURRENT-LIABILITIES> 3,374,082
<BONDS> 104,114,442
30,000
0
<COMMON> 1,095,286
<OTHER-SE> 34,091,523
<TOTAL-LIABILITY-AND-EQUITY> 142,705,333
<SALES> 0
<TOTAL-REVENUES> 10,278,483
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,341,404
<LOSS-PROVISION> 450,000
<INTEREST-EXPENSE> 3,371,830
<INCOME-PRETAX> 4,115,249
<INCOME-TAX> 1,440,000
<INCOME-CONTINUING> 2,675,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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