-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdUr9kEqB3p0UVSM7j3K8zyC3m6TrP6eAZB04HP5TRyEfEOYu2En7zfu3RFKTzDw V/LtPw7x450XTL60rEwt/Q== 0001058737-99-000007.txt : 19990331 0001058737-99-000007.hdr.sgml : 19990331 ACCESSION NUMBER: 0001058737-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAINTREE RESORTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001058737 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 760549149 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24331 FILM NUMBER: 99579152 BUSINESS ADDRESS: STREET 1: 10000 MEMORIAL DRIVE STREET 2: SUITE 480 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7136132800 MAIL ADDRESS: STREET 1: 10000 MEMORIAL DRIVE STREET 2: SUITE 480 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: CLUB REGINA RESORTS INC DATE OF NAME CHANGE: 19980327 10-K 1 FORM 10-K FOR RAINTREE RESORTS INTERNATIONAL, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended December 31, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________. Commission File Number: 000-24331 Raintree Resorts International, Inc. CR Resorts Capital S. de R.L. de C.V. * (Exact name of Registrant as Specified in its Charter) Nevada 76-0549149 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10000 Memorial Drive, Suite 480 Houston, Texas 77024 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (713) 613-2800 Securities registered pursuant to Section 12(b) of the Act: 13% Redeemable Senior Notes due 2004 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates as of December 31, 1998: Not Applicable. As of December 31, 1998, the Registrant had 10,766,300 shares of Common Stock outstanding and Warrants to purchase 1,869,962 shares of Common Stock at $0.01 per share. *CR Resorts Capital, S. de R.L. de C.V., a subsidiary of Raintree Resorts International, Inc., is a co-registrant, formed under the laws of the United Mexican States (Mexican tax identification number CRC 970811E5A). ------------------------- DOCUMENTS INCORPORATED BY REFERENCE: None This report on Form 10-K includes 87 pages with the Index to Exhibits located on pages 37 to 39. Part I ITEMS 1 AND 2 - BUSINESS AND PROPERTIES RAINTREE RESORTS INTERNATIONAL, INC. This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which represent the Company's expectations and beliefs concerning future events that involve risks and uncertainties, including those associated with the effects of international, national and regional economic conditions. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Actual results may differ materially from those projected in the forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this document will prove to be accurate. Considering the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Except as otherwise noted, (i) all references to the "Company" or "Raintree" are to Raintree Resorts International, Inc. and its subsidiaries, including Whiski Jack Resorts Ltd. ("Whiski Jack"), and to the vacation ownership segment of the predecessor business (the "Predecessor Business"), and (ii) all references to "pesos" or "Ps." are to the currency of Mexico and all references to "dollars" or "$" are to U.S. dollars. BUSINESS Overview Raintree is a leading developer, marketer and operator of luxury vacation ownership resorts in North America with resorts in Mexico, the United States, and Canada. The Company believes that by positioning itself in the luxury segment of the vacation ownership market and offering flexible ownership alternatives and membership benefits the Company is able to capitalize on the increasing acceptance of vacation ownership by high income consumers who desire larger and more luxurious vacation accommodations than generally available at upscale hotels. Depending on the resort, the Company offers floating Club Memberships in its Raintree Vacation Club, and fractional interests of three to five weeks in its Raintree Owners Club. The Company's resorts are located in popular beachfront, mountain and golf destinations, including Cancun, Los Cabos, Puerto Vallarta, and Whistler, British Columbia. The Company has also agreed to acquire the Villa Vera Hotel & Racquet Club ("Villa Vera") in Acapulco which will be converted in part, to vacation interval ownership units. In addition, the Company is developing a Raintree Owners Club in the Teton Village near Jackson Hole, Wyoming, and has agreed to acquire additional properties in Whistler, British Columbia. The Company's future plans also include the development of a resort on ocean-front property it owns adjacent to its resort in Los Cabos and on ocean-front property it owns in Cozumel. The Company primarily targets high income consumers of luxury vacation experiences. The Company markets two types of vacation ownership interests in its resorts: weekly intervals ("Weekly Intervals") in certain resorts and fractional interests ("Fractional Interests" and, together with Weekly Intervals, "Vacation Intervals") in others. Weekly Intervals provide Members at Raintree Resorts with the assurance of luxury accommodations in a one-or-two-bedroom fully-furnished vacation unit for one week annually, representing an attractive alternative to hotel and lodging accommodations. Owners of Weekly Intervals receive convenient check-in and check-out services, full-scale patron restaurants and bars, routine maid and room service, recreational facilities, health clubs, spas and a complete range of other personal services. Fractional Interests will provide Members at Raintree Resorts with a deeded interest to two- or three-bedroom, fully-furnished vacation residences for multiple weeks and are an attractive, convenient, lower-cost alternative to "second home" ownership. Fractional Interests will include most of the amenities described above and many additional personalized conveniences such as equipment and clothing storage, pre-arrival shopping services, on-site transportation, concierge services for a variety of activities and events, ski passes and golf club memberships or preferred tee-times, and maintenance and security services. 2 Growth Strategy The Company believes it can achieve significant growth internally and through an aggressive development and acquisition program. Key elements of this strategy include: Develop and Acquire Additional Resorts. The Company intends to concentrate its growth during the next two to three years in the development or acquisition of resort properties that will substantially increase the Company's revenues outside Mexico, while maintaining a strong supply of inventory for the Raintree Vacation Club or its Weekly Intervals. The Company intends to develop additional vacation ownership resorts, in the immediate future, primarily in the Western United States and Canada and then in other parts of North America. The Company's evaluation of resort development opportunities includes determination of the most desirable resort destinations in North America, the number of annual tourists, the availability of golf club memberships or preferred tee-times, property that is accessible to the resort area's primary activities such as skiing, availability of other amenities, including spas and luxury hotel type services and economic considerations. Where appropriate, the Company will seek attractive hotel operators to own and manage on-site hotels. In addition, the Company from time to time seeks opportunities to acquire vacation ownership companies and assets, including those with marketing and other programs which complement the Company's current operations throughout North America. Increase Sales of Vacation Intervals. The Company plans to increase the rate of sales of Vacation Intervals through (i) increasing the number of sales locations as the Company expands and (ii) increasing the effectiveness of the marketing initiatives described above by increasing the use of marketing channels such as, travel agents, real estate agents, theme stores, domestic and international print media, cross-selling opportunities of additional Vacation Intervals and upgrades to existing Members and the world-wide web. As the number of Raintree Resorts that Members can access expands, the Company believes that the flexibility of its product will make its Vacation Intervals more attractive. Improve Operating Margins. In August 1998, the Company instituted a cost reduction program in Mexico, including the reduction of certain administrative personnel. In addition, the Company believes it will improve its operating margins as its business expands and its overhead cost in Mexico and in Houston is spread over a higher number of sales and additional resort locations. The Product The Company believes that by selling a membership it has created a product which provides members with an attractive range of vacation planning choices and value not generally available in connection with traditional vacation ownership products. The Company's memberships include Weekly Interval memberships ("Weekly Memberships") in Raintree Vacation Clubs and Fractional Interest memberships ("Fractional Memberships") in Raintree Owners Club. Weekly Memberships. Weekly Memberships allow members of the Club Regina Resorts to stay at any one of the Raintree Resorts in Cancun, Los Cabos, Puerto Vallarta and Acapulco. Whiski Jack traditionally sold and, since its purchase, the Company has continued to sell, a deeded interest in a specific unit to a specific week. The Company intends to integrate buyers of such interests into its existing vacation ownership club. Weekly Memberships range in price from approximately $9,000 for a studio unit with a maximum occupancy of two, approximately $10,000 to $21,500 for a one-bedroom unit with a maximum occupancy of four, and approximately $13,500 to $30,000 for a two-bedroom unit with a maximum occupancy of six. Each one- and two-bedroom unit contains a separate living room and kitchen area. Weekly Intervals at the Club Regina Resorts in Cancun, Puerto Vallarta and Los Cabos can be purchased for any one of three seasons: Holiday, Prime and Select. Holiday Weekly Intervals allow Members to use resorts at these locations during any time of the year including the five weeks of highest demand. Prime Weekly Intervals allow Members to use the Club Regina Resorts during any time of the year except the five weeks of highest demand, while Select Weekly Intervals allow Members to use these resorts during 17 weeks of traditionally lower demand. Weekly Intervals at the Club Regina Resorts are sold under the Company's flexible "floating time," "floating unit," and "floating location" program. This program allows a Member to use his or her Weekly Interval at any time during the season to which it relates, or any less expensive season at any Club Regina Resort and the Villa Vera. In addition, depending on the type of Weekly Interval purchased, the program gives a Club Regina Resorts Member the flexibility to: (i) elect the time of year to vacation at the Club Regina Resorts, (ii) stay at the Club Regina Resorts at different times during a single year by dividing such Member's week-long Weekly Interval into more than one 3 segment, (iii) increase the number of weeks that such Member is entitled to stay at the Club Regina Resorts by dividing such Member's unit into smaller units, and (iv) buy an annual or bi-annual Weekly Interval. Furthermore, Members may divide their Weekly Intervals into three split-week segments and thereby spend a portion of a week at a resort at one time and the other two portions at the same or other resorts at other times. Finally, Club Regina Resorts Members with Weekly Intervals for one- and two-bedroom units can divide their Weekly Intervals and use a single module within any such unit over two weeks. For example, under this program, subject to availability, a Member that purchased a two-bedroom unit could divide that unit into six different split week stays (three in one-bedroom accommodations and three in studio accommodations) over the year. Members who are at least 55 years old have the option, subject to availability, to accelerate the use of their Weekly Interval up to one extra week during the "Prime" season or two extra weeks during the "Select" season so long as such Members pay an additional service fee for each year that is accelerated. In addition, Members of Raintree Vacation Clubs also benefit from the Company's participation in the vacation interval exchange network operated by Resort Condominiums International, Inc. ("RCI"), the world's largest vacation interval exchange organization with more than two million vacation interval owners as members. Membership in RCI entitles Members, subject to availability, to exchange their Weekly Intervals for occupancy at any of the approximately 3,100 other resorts participating in the RCI network. At Whistler, British Columbia, the Company sells a deeded interest to Weekly Interval purchasers. The Company is currently investigating the design and regulatory implications of integrating buyers of Weekly Intervals in Whistler into the vacation ownership club to which Club Regina Resort members belong. Fractional Interest Memberships. Members owning Fractional Memberships will have deeded interests in a two- or three-bedroom residence and may stay at any Raintree Owners Club. The Company's first Raintree Owners Club will be The Teton Club in Jackson Hole, Wyoming. The sales office for The Teton Club opened in January 1999 and ground-breaking is expected in late Spring 1999 with completion by late 2000. Memberships will range from approximately $50,000 to $240,000 depending upon the amount of time, season and size of unit. The Company intends to allow Fractional Members to use other Raintree Owners Clubs as developed (other than their "home resorts") on an as available basis. The memberships entitle Members to use a fully-furnished two or three bedroom unit primarily for three or five weeks in each year and also offer memberships in local luxury golf or country clubs. Fractional Interest memberships allow a Member to use his or her Fractional Interval at any time during the year, subject to availability and seasonal concentration restrictions. All units at the Raintree Owners Club will feature luxury amenities such as steam showers and spa tubs; stone fireplaces; vaulted or high ceilings; and fully equipped kitchens. In addition, the Company intends to allow these Members to use the Company's resorts containing Weekly Intervals as a part of the Company's plan to integrate the availability of resorts and the type of vacation experience desired by Members. Sales and Marketing The Company believes its sales and marketing programs are among the most innovative and effective in the industry. For example, the Club Regina Resorts and Villa Vera are located on properties shared with luxury hotels which generally provide the Company with a steady source of high quality lead-generation. In addition, the Company has designed and implemented innovative marketing initiatives to attract affluent buyers of vacation intervals. These marketing venues include: promotional programs such as telemarketing, discount vacation packages; advantage points associated with airport shopping or auto rental; and off-site sales offices. In addition, the Company owns contemporary retail "theme stores" that offer high-end products associated with ecological consciousness, wildlife conservation, photography, art and local culture and plans to expand this community-oriented marketing venue because patrons of the theme stores tend to match the profiles of Members. All of these marketing venues are designed to create sales leads which are given to the Company's professionally trained sales representatives. The Company markets Fractional Interests through traditional real estate agencies and, as a result, has experienced lower selling costs on Fractional Interests sales. The Company also markets directly to existing Members in terms of offering larger units (e.g. one bedroom to two bedroom) or additional weeks (e.g. add a week in a different season) or Fractional Interests. As a part of the services provided to Members, the Company offers financing to buyers of Weekly Intervals. The Company encourages larger down-payments (at least 15%) than industry standards on its Weekly Intervals to increase the quality of the pool of the Company's receivables ("Vacation Interval receivables"). The Company sells Weekly Intervals through both on-site sales personnel at each of its resorts and at sales offices currently located throughout Mexico. A variety of marketing programs are employed to generate prospects for these sales efforts, theme stores, presentations to co-located hotel guests, as well as overnight mini-vacation packages, certificate programs, travel agencies, telemarketing, owner referrals and various destination-specific local marketing efforts. Additionally, incentive premiums are offered to co-located hotel guests to encourage resort tours, 4 in the form of entertainment tickets, hotel stays, gift certificates or free meals. The Company's sales process is tailored to each prospective buyer based upon the marketing program that brought the prospective buyer to the resort for a sales presentation. Prospective target customers are identified through various means of profiling. At applicable resorts, the Company emphasizes marketing its Weekly Intervals to guests of co-located hotels. Programs directed to these guests have been consistently successful, both in the number of prospects generated and in the closing rate, due to the direct experience of such guests with the quality of the resorts and the likelihood that such guests, who typically belong to high income households, will prequalify to purchase Vacation Intervals. In general however, the Mexican and Canadian vacation ownership industry tends to follow seasonal buying patterns with peak sales occurring during the peak travel/tourism seasons, usually December through April and July through August. The timing of these purchases, however, may be affected by weather conditions and general or local economic conditions. Sales of Weekly Intervals at or near the Raintree Resorts locations are made through Company-owned theme stores, travel agencies and ground operators and other lead generation points located in airports or shopping centers, independently or in association with other businesses such as auto rental companies and restaurants. The Company's theme stores, one of the Company's most successful marketing programs, are retail businesses with a strong contemporary appeal to affluent tourists, offering products associated with ecological consciousness, wildlife, conservation and local culture, while at the same time promoting the resort and inviting customers to attend sales presentations. A share of these stores' profits is contributed to causes related to the stores' themes. There are theme locations in Los Cabos, Puerto Vallarta and Cancun. In Mexico, the Company also operates travel agencies in Los Cabos, Cancun and Puerto Vallarta which provide traditional travel services to Westin Hotel guests and potential members and also encourage their customers to attend a Raintree presentation. Under the Company's ground operator program, the Company also provides local transport and other services in each of Los Cabos, Puerto Vallarta and Cancun to visitors of many different resorts in these destinations and encourages those visitors to attend a Raintree presentation. The Company also focuses on selling Weekly Intervals through off-site sales centers in eight cities throughout Mexico. Each off-site sales office is staffed with a sales manager, an office administrator, salespeople, verification representatives and additional staff for guest registration and clerical assistance. In addition, by using data base-based marketing approaches including telemarketing, qualified prospects are offered mini-vacations, fly-in and drive-in programs as a method to introduce the benefits of membership to potential Members. Members are also contacted for referrals. Most recently, the "universal salesman" program has been instituted whereby potential Members are contacted by one representative of the Company, who is the potential Member's only contact with the Company through closing of the purchase. The Company believes that this program solves a significant problem in traditional vacation ownership marketing approaches which is the lack of continuity in a customer's relationship with the seller. Finally, the Company believes that one of its best marketing resources is its current Members. Accordingly, the Company directs programs at these Members to encourage them to purchase additional Weekly Intervals and Fractional Interests. These programs include a points-based program by which Members who refer potential Members to the Company are given awards, and its bonus week program whereby every new buyer is given a week to give to a friend or relative. The Company cross-markets its products to its Members, continuously offering the right to upgrade in terms of a better season, additional weeks, additional rooms and larger units, by offering Weekly Interval Members the benefits of a Fractional Interests. Finally, the Company markets the opportunity to stay at the resort for additional days or weeks to Members as well as the right to rent additional units for guests accompanying the Member to the resort. Under the laws of the jurisdictions in which the Company sells Memberships, each purchaser has a right to rescind a purchase for a period ranging up to 7 days. During 1998 the Company estimates its' rescission rate to be less than 13% for Weekly Interval sales. Customer Financing Since an important part of the Company's sales strategy is the affordability of Memberships, the Company believes that it will be required to continue to finance a significant portion of its sales of Memberships. The Company has historically provided financing for approximately 70% of its Weekly Interval buyers and approximately 30% of all Weekly Interval buyers either pay cash at or within 60 days of closing. Prior to its purchase by the Company, Whiski Jack only provided third party sources of financing to Members; however, the 5 Company plans to provide such financing to purchasers of Weekly Intervals in Whistler. Sales of Fractional Interests will generally be financed by conventional financial or banking institutions. Buyers who finance through the Company are required to make an adequate down payment and pay the balance of the purchase price over one to nine years. For the year ended December 31, 1998, the average down payment on a financed Weekly Interval was approximately 24% of its purchase price. Due to its ownership of Vacation Interval receivables, the Company bears the risk of purchaser default. The Company's practice has been to continue to accrue interest on its loans to purchasers of Vacation Intervals until such loans are deemed to be uncollectible, at which point it expenses the interest accrued on such loan, terminates the underlying conditional sale agreement and returns the Vacation Interval to the Company's inventory for resale. The Company closely monitors its loan accounts and determines whether to foreclose on a case-by-case basis. At December 31, l998, the Company had a portfolio of approximately 6,900 Vacation Interval receivables amounting to approximately $54 million in outstanding principal amount, with a weighted average maturity of approximately five years, 57% of Vacation Interval receivables were U.S. dollar denominated, with a weighted average interest rate of approximately 13.1%, 10% of Vacation Interval receivables were denominated in pesos, with a weighted average interest rate of approximately 22.2%, 28% of Vacation Interval receivables were denominated in UDI's with a weighted average interest rate of approximately 7.9% and 5% of Vacation Interval receivables were Canada dollar denominated with a weighted average interest rate of approximately 13.8%. The UDI is an obligation denominated in pesos which is adjusted for Mexican inflation. The value of the UDI is tied to the Consumer Price Index of Mexico (Indice Nacional de Precios al Consumidor). The proceeds of loans denominated in UDI's are paid to a borrower in pesos at the applicable UDI-peso conversion ratio on the day of the loan. Payments of both principal and interest to the lender are made in pesos. The amount of payments in pesos to be made as of any date depends on the applicability of the UDI-peso conversion ratio at that date. The effect of denominating Vacation Interval receivables in UDIs is to protect the Company from inflation in Mexico, but not from variations in the exchange rate between the peso and the U.S. dollar. An additional effect is that when Mexican inflation is high, that inflation rate is effectively added to the Company's Vacation Interval receivable income, thereby increasing the Company's Mexican peso revenue. Conversely, if the Mexican inflation rate should decline, Vacation Interval receivable interest rates would decline. Flexible Membership Programs The Company's resorts in Cancun, Puerto Vallarta and Los Cabos have been rated "Gold Crown" by RCI (a rating given to the top 10% of all vacation interval resorts), thus giving Members with Weekly Intervals at those resorts superior interval exchange opportunities. The Villa Vera has also been rated "Gold Crown" by RCI. In a 1995 study sponsored by the Alliance for Timeshare Excellence and ARDA, the exchange opportunity was cited by purchasers of Weekly Intervals as one of the most significant factors in determining whether to purchase a vacation ownership interval. This is particularly true given most Weekly Interval owners' propensity to travel. According to RCI, its members in the United States engage in an average of 25.7 personal travel days per year and an average of 6.2 domestic trips per year with an average duration of 4.2 days. Members in an interval exchange program are typically allowed to exchange one or more years of their Vacation Interval for an occupancy right in another participating resort, based upon availability and the payment of a variable exchange fee. A Member may exchange his Vacation Interval for an occupancy right in another participating resort by listing the Vacation Interval as available with the exchange organization and by requesting occupancy at another participating resort, indicating the particular resort or geographic area to which the Member desires to travel, the size of the unit desired and the period during which occupancy is desired. Interval exchange programs usually assign a rating to each listed interval, based upon a number of factors, including the location and size of the unit, the quality of the resort and the period during which the interval is available, and attempts to satisfy the exchange request by providing an occupancy right in another interval with a similar rating. If an interval exchange program is unable to meet the member's initial request, it suggests alternative resorts based on availability. The Company's weekly interval membership programs at the Club Regina Resorts and the Villa Vera provide access to multiple resorts, allowing Members to tailor their vacations according to their schedule, desired length of stay, location preference and space requirement. For example, under the Company's flexible "floating time," "floating unit," and "floating location" program, each Member of the Club Regina Resorts is entitled to stay at any of the Club Regina Resorts and the Villa Vera. In addition, depending on the type of Weekly Interval purchased, the program gives a Club Regina Member the flexibility to: (i) elect the time of year to vacation at the Club Regina Resorts, (ii) stay at the Club Regina Resorts at different times during a single year by dividing such Member's 6 Weekly Interval into more than one segment, (iii) increase the number of weeks that such Member is entitled to stay at the Club Regina Resorts by dividing such Member's unit into smaller units, and (iv) buy an annual or bi-annual Weekly Interval. In Whistler, the Company sells fixed weekly deeded interests. In addition, Members of Raintree Resorts may participate in the largest vacation interval exchange network in the world operated by Resort Condominiums International, Inc. ("RCI"), which entitles Members, subject to availability, to exchange their Weekly Intervals for occupancy at any of the approximately 3,100 participating resorts. The Fractional Interests that the Company intends to offer through the development of Raintree Owners Clubs will also offer exchange for members of any Raintree Owners Clubs to use any other Raintree Owners Club or any of the Raintree Vacation Clubs. Given the innovative and flexible attributes of its products, the Company believes it should be able to establish an international brand name vacation ownership club. The Raintree Resorts Overview. The following tables set forth certain information regarding the Company's resorts, current and planned Vacation Interval inventory, sales and average prices.
Resort Data Units(1) -------------------- Date Total Resort and Location Opened Current Planned(2) Units ------ ------- -------- -------- Weekly: Los Cabos.................. 1/94 130 120(3) 250 Puerto Vallarta............ 6/92 203 -- 203 Cancun..................... 3/91 69 -- 69 Acapulco................... 10/98 -- 61(4) 61 Whistler, B.C.............. (5) 10 50(6) 60 ------- -------- -------- Total.................... 412 231 643 ======= ======== ======== Fractional: Jackson Hole, Wyoming...... 37 37 ======== ======== - ---------- (1) Units for Weekly Intervals contain one or two bedrooms and a common room with a kitchen while units for Fractional Intervals contain two or three bedrooms and a common room with a kitchen. (2) There can be no assurance that the Company's planned expansion will occur or that the number of units will equal the estimates set forth. (3) The expansions at Los Cabos are in the planning stages and it is uncertain as to the precise number of units that may be developed. (4) The Company currently manages the Villa Vera in Acapulco which provides exchange privileges to Club Regina members. The Company has agreed to acquire the Villa Vera in November 1999. (5) Whiski Jack Resorts has been in the vacation interval ownership business in Whistler, B.C. since 1978 and currently has approximately 500 Weekly Intervals remaining in inventory. (6) The planned expansion in Whistler will be made primarily through the acquisition of existing condominium units in Whistler Village.
At December 31, 1998, the Company had remaining Weekly Intervals of 6,072 in Mexico and 585 in Canada. The Company believes that the remaining Weekly Intervals provide sufficient sales product for slightly more than one year of sales without any additional acquisitions or development of Weekly Intervals.
Weekly Intervals Sold/Average Price Year Ended December 31, -------------------------------------------------------------------------- 1995 1996 1997 1998 --------------- --------------- ---------------- --------------- Weekly # Sold Price # Sold Price # Sold Price # Sold Price ------ ------ ----- ------ ----- ------ ----- ------ ----- Club Regina (1) 2,289 $10,941 2,508 $14,859 3,623 $14,163 3,563 $14,009 Whiski Jack (2) 533 $10,668 - -------------- (1) Includes Vacation Intervals sold by the Predecessor Business and the Company for the applicable periods. (2) Includes Vacation Intervals sold by the Company for the period from July 27, 1998 through December 31, 1998 only.
7 The Raintree Resort at Cancun. The Raintree Resort at Cancun has offered Weekly Memberships since March 1991. Ricardo Legorreta designed this resort, which is on an 11-acre site at Punta Nizuc and is the first landmark tourists see after arriving in the Cancun hotel zone from the airport. The resort, including the co-located Westin hotel, consists of eight buildings and all rooms offer views of either the Caribbean or the Nichupte Lagoon. The total accommodations in the Raintree Resort in Cancun consist of 56 one-bedroom and 13 two-bedroom units. The Raintree units are in a self-contained section of three buildings. This area has its own bar, snack bar, multi-purpose recreation room, delicatessen, swimming pool and Jacuzzi. Of the total of 69 apartments, 56 are one-bedroom, two-bath units with a maximum occupancy of four, and 13 have two bedrooms and three baths, with a maximum occupancy of six people. The units all have views of either the sea or lagoon, fully equipped kitchens, with stoves, dishwashers, microwave ovens, terraces with small Jacuzzis, televisions in both the living room and bedrooms, and other decorations and furnishings of a home. Amenities include restaurants and bars, five swimming pools, four whirlpools, two lighted tennis courts, a fitness center, a business center and several lobby shops including a boutique, a beauty salon and a sundries shop with magazines, books, tobacco goods and similar items. Members have priority access to a nearby Robert Trent Jones, Jr. 18-hole golf course. The Raintree Resort at Puerto Vallarta. The Raintree Resort at Puerto Vallarta has offered Weekly Memberships since it began operating. This Raintree Resort was inaugurated in June 1992 on a 21-acre site in the Marina Vallarta master-planned resort in Puerto Vallarta. Architect Javier Sordo Madaleno designed the resort and the co-located Westin Hotel within the framework of Puerto Vallarta's architectural tradition. The total accommodations in the Raintree Resort in Puerto Vallarta consist of 161 one bedroom and 42 two bedroom vacation ownership units. All of these facilities are distributed along an 875-foot beach facing the Pacific Ocean. The 203 Raintree Resort units are distributed among the seven buildings in the complex. All have views of either the beach or the marina. Of the total, 161 are one-bedroom, two-bath units with a maximum occupancy of four; and 42 have two bedrooms and three baths, with a maximum occupancy of six. Each unit has a fully equipped kitchen (including stove, dishwasher, microwave oven) and its own Jacuzzi on a private terrace. Furnishings and decorations are consistent with the quality of the complex and the idea of a Raintree Resort vacation home. In the Raintree Resort area there is a bar, snack bar, multi-purpose recreational room and delicatessen. Other amenities include five restaurants and bars, four swimming pools, three lighted tennis courts, a fitness center, a business center and shops. The surrounding Marina Vallarta community includes an 18-hole golf course, a marina with specialty shopping, and a separate large shopping center. The Raintree Resort at Los Cabos. The Raintree Resort at Los Cabos has offered Weekly Memberships since its inception. Javier Sordo Madaleno designed this Raintree Resort, completed in January 1994, on a 15-acre site on the beach where the Pacific Ocean meets the Sea of Cortez. The two buildings of the co-located Westin Hotel feature a curvilinear design connecting two hills. Inspired in color and form by the surrounding desert, this eight story structure was constructed in native red stone. Bright, bold accents of hot pink, yellow and green highlight the garden oasis of tropical foliage. The 130 Raintree Resort apartments are housed in neighboring two-story structures. The 130 Raintree Resort vacation ownership units have been distributed in small buildings over the hilly topography to offer views of the beach and ocean. Of the total, 104 are one-bedroom, two-bath units with a maximum occupancy of four; and 26 have two bedrooms and three baths, with a maximum occupancy of six people. Each unit has a fully equipped kitchenette and its own Jacuzzi on a private balcony. Amenities include four restaurants and bars, three swimming pools, two lighted tennis courts, a fitness center, a business center and shops. There are five championship golf courses in the area, designed by Pete Dye, Robert Trent Jones, Jr., and Jack Nicklaus. Nearby, Cabo San Lucas has a marina with specialty shopping. The Company also owns approximately nine acres immediately adjacent to the Westin Regina Hotel on the west side ("Cabo West") which it acquired during 1998 for approximately $6.5 million of which approximately $5.0 million remains to be paid during 1999. The Company plans to develop Cabo West with approximately 100 two and three-bedroom units and a possible hotel. The development of Cabo West is contingent upon availability of financing on terms that it believes are economic. The Company has future plans to construct approximately 20 additional two-bedroom units, for 1,040 annual Weekly Intervals, on a property the Company owns adjacent to the east side of the Raintree Resort at Los Cabos ("Cabo East"). There can be no assurance that such development will 8 occur or that the number of Weekly Intervals added to the Company's inventory from such development will equal what is presently contemplated. The Raintree Resort at Acapulco. The Villa Vera consists of 61 hotel units, suites and villas. Since the Company has agreed to acquire the Villa Vera and currently manages this property, the Company has permitted Club Regina Resorts Members to stay there as guests and has operated the resort as a hotel. The Company has instituted an on-site marketing program targeting non-Member guests and has designated rooms to be made available for Club Regina Resorts Members with Weekly Memberships. The Villa Vera is currently undergoing capital renovations of approximately $2.0 million to convert approximately 28 units for vacation interval ownership under the Club Regina program. Raintree Resort at Whistler. The Raintree Resorts in Canada consist of the operations of Whiski Jack Resorts Ltd. in the popular mountain resort area of Whistler/Blackcomb, British Columbia. In July 1998, the Company acquired Whiski Jack, a leader in vacation ownership marketing and sales at Whistler/Blackcomb Mountain for almost 20 years. Whiski Jack has completed marketing fixed deeded weeks at nine different resorts in the Whistler Village area and the Company is currently marketing unsold inventories at five additional resorts. The Company recently purchased seven units at the new Intercontinental Cascades Hotel. In addition, the Company has 19 units under contract at the new Westin Whistler resort scheduled for completion in late 1999. The Company is also evaluating several other opportunities to acquire units in Whistler Village during 1999. Commencing in mid 1999, the purchasers of Weekly Intervals at Whiski Jack and at Club Regina in Mexico will be integrated into a single vacation ownership club to be called the Raintree Vacation Club. Planned Raintree Resort at Jackson Hole The Raintree Resorts in the United States currently consists of one resort under development in Wyoming. The Company has entered into a partnership agreement with Jackson Hole Ski Corporation ("JHSC"), the owner and developer of the Teton Village ski area near Jackson Hole, Wyoming, through which the Company intends to develop The Teton Club containing 37 two- and three-bedroom units. The Teton Club will offer a deeded interest in the real estate and will be sold in three or five week intervals. Membership in Teton Pines Golf and ski privileges are included in the membership. Planned Raintree Resort at Cozumel The Company owns approximately 54 acres of prime ocean-front property on Cozumel that it plans to develop in the future as a hotel and vacation ownership resorts. Although the Company has conducted preliminary development activities for the Cozumel resort, it expects that the active development of this property will not occur until late 2000 or later. Certain Matters Regarding Club Regina Resorts Operating Agreements. As of August 18, 1997, the Company and an affiliate of Starwood Lodging Corporation ("Starwood") entered into an Operating Agreement for each Club Regina Resort and co-located Westin Hotel, establishing the day-to-day operating relationship between the Westin Hotels and the Club Regina Resorts, including operating standards, plans, budgets, allocation of services, expansion and construction of additional facilities, and allocation of labor and other expenses. Each Operating Agreement is binding on any future owners of any Westin Hotel or Club Regina Resort. Each Operating Agreement provides that the applicable Club Regina Resort/Westin Hotel must be operated as a "first class" resort and establishes a procedure by which a joint operating plan and budget will be maintained by Starwood and the Company for the applicable resort. Additionally, Starwood must provide the same services to each Club Regina Resort as it provides to the adjacent Westin Hotel and additional services may be contracted for, subject to the first class standard and appropriate allocation of costs between the applicable Westin Hotel and Club Regina Resort. Each Operating Agreement prohibits the applicable Club Regina Resort from renting, selling or marketing any units on a transient basis except with respect to: (i) the provision of complimentary accommodations to prospective members that participate in marketing presentations arranged by such resort, (ii) the rental of units to wholesalers specifically targeting potential purchasers, (iii) the rental of units to persons accompanied by Members, and (iv) the rental of units to vacation ownership operators experiencing overflow in their facilities. If any Club Regina Resort rents or sells a unit on a transient basis not described above, then the Company will be subject to significant penalties. Starwood currently rents 54 rooms at Los Cabos and 60 rooms at Puerto Vallarta and the Company has rented the "Pink Tower" of the Westin Regina at Cancun. 9 Asset Management Agreement. In connection with Starwood's purchase of the Westin Hotels from the Company on August 18, 1997, the Company and Starwood entered into an Asset Management Agreement, which has a term of 50 years. Pursuant to this agreement, the Company retained an interest in the net cash flows of the Westin Hotels equal to 20% of the net cash flow of the Westin Hotels in excess of approximately $18.5 million per year (the "Base Amount"). After December 31, 2000, the Base Amount will decrease pursuant to a formula. The Company expects to recognize minimal, if any, revenue from the Asset Management Agreement prior to 2001. The Company also is entitled to 20% of the net sale proceeds of the Westin Hotels subject to the priority return to Starwood upon a sale. Trusts. The Club Regina Resorts are held through trusts. These trusts were created on August 18, 1997, when three separate trust agreements (the "Trust Agreements") were entered into among the Operating Subsidiaries, a subsidiary of CR Mexico and Bancomer, as trustee, pursuant to which title to the Regina Resorts was transferred to Bancomer, acting solely in its capacity as trustee. Originally, under the Trust Agreements, the Operating Subsidiaries had the right to use and exploit the vacation ownership condominium units until August 18, 2027 (the "Initial Term"), and a subsidiary of CR Mexico had the right to hold direct title to the vacation ownership condominium units after August 19, 2027 (the "Remainder Rights"). In March 1998, the Trust Agreements were modified to extend the Initial Term from 30 to 50 years. The Company has assigned the proportional beneficial interests to trusts for the benefit of Members who purchased their interest from the Company subsequent to August 18, 1997. Government Regulation General. The Company's marketing and sales of Weekly Intervals and certain of its other operations are subject to extensive regulation by the states and foreign jurisdictions in which the Raintree Resorts are located and in which Weekly Intervals and Fractional Interests are marketed and sold. Most U.S. states and Canadian provinces have adopted specific laws and regulations regarding the sale of weekly interval ownership programs. Washington, Oregon, California, Hawaii and British Columbia require the Company to register the Raintree Resorts, the Company's vacation program, and the number of Weekly Intervals available for sale in such state or province with a designated state or provincial authority. The Company must amend its registration if it desires to increase the number of Weekly Intervals registered for sale in that state or province. Either the Company or the state or provincial authority assembles a detailed offering statement describing the Company and all material aspects of the project and sale of Weekly Intervals. The Company is required to deliver the offering statement to all new purchasers of Weekly Intervals, together with certain additional information concerning the terms of the purchase. Laws in each state where the Company sells Weekly Intervals grant the purchaser of Weekly Intervals the right to cancel a contract of purchase at any time within a period ranging from three to seven calendar days following the later of the date the contract was signed or the date the purchaser received the last of the documents required to be provided by the Company. Most states have other laws which regulate the Company's activities, such as real estate licensure laws, laws relating to the use of public accommodations and facilities by disabled persons, sellers of travel licensure laws, anti-fraud laws, advertising laws, and labor laws. The Federal Trade Commission has taken an active regulatory role in the interval ownership industry through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which the Company is or may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Civil Rights Act of 1964 and 1968, the Fair Housing Act and the Americans with Disabilities Act. Although the Company believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it is currently subject, there can be no assurance that it is in fact in compliance. Any failure by the Company to comply with applicable laws or regulations could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company will continue to incur significant costs to remain in compliance with applicable laws and regulations, and such costs could increase substantially in the future. The Mexican Ministry of Tourism (Secretaria de Turismo) is the principal regulator of the Company's activities in the tourism services area. The Company believes that it has obtained from the Mexican Ministry of Tourism, and registered in the Mexican National Tourism Registry, all material permits required for the operation of the Raintree 10 Resorts in Mexico. In order to maintain registration under the Mexican National Tourism Registry, services such as restaurants and bars must be provided at the Raintree Resorts in Mexico. The Company expects to cause these services to be rendered by Starwood and Westin pursuant to the Operating Agreements. See "Certain Considerations -- Recent Acquisition; Lack of Prior Operating History." The Company also believes that it is in material compliance with all federal, state, local and foreign laws and regulations to which it and its Weekly Intervals marketing and sale activities are or may be subject. However, no assurance can be given that the cost of qualifying under weekly interval ownership regulations in all jurisdictions in which the Company desires to conduct sales will not be significant. Any failure to comply with applicable laws or regulations could have a material adverse effect on the Company. Under various United States federal, state, local and foreign laws, ordinances and regulations, the owner or operator of real property generally is liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Other federal and state laws require the removal or encapsulation of asbestos-containing material when such material is in poor condition or in the event of construction, demolition, remodeling or renovation. Other statutes may require the removal of underground storage tanks. Noncompliance with these and other environmental, health or safety requirements may result in the need to cease or alter operations at a property. There can be no assurance that any environmental assessments undertaken by the Company with respect to the Raintree Resorts have revealed all potential environmental liabilities, or that an environmental condition does not otherwise exist as to any one or more of the Raintree Resorts that could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's present operations in Mexico and Canada are subject to Mexican and Canadian federal, state and local laws and regulations, respectively, relating to the protection of the environment, including those concerning water supply, wastewater, noise, soil pollution and generation and handling of hazardous waste and materials and environmental impact. The possibility exists that in the future the company and its facilities and operations will encounter (i) newer and stricter federal, state or local environmental laws and regulations, (ii) more rigorous interpretations of existing environmental laws and regulations, and/or (iii) stricter enforcement of federal, state and local environmental law regulations. The Company believes that the Raintree Resorts are in compliance in all material respects with all federal, state and local laws and regulations relating water, atmospheric pollution, hazardous wastes or substances. The Company has not been notified by any environmental authority or any third party, of any material noncompliance, liability or claim related to those environmental matters in connection with any of its present properties. Insurance The Company carries comprehensive liability, fire, hurricane, storm, earthquake and business interruption insurance with respect to the Company's resorts, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate. There are, however, certain types of losses that are generally not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in a resort, as well as the anticipated future revenues from such resort and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on the Company. Legal Proceedings The Company is currently subject to litigation with respect to claims that arose prior to August 18, 1997 respecting employment, contract, construction and commissions disputes, among others. In management's judgment, none of such lawsuits against the Company is likely to have a material adverse effect on the Company. Moreover, pursuant to the Stock Purchase Agreement with Bancomer, the Company is entitled to indemnification for all such claims against it. In addition, the Company is subject to litigation with respect to a limited number of claims that arose on or after August 18, 1997. In management's judgment, none of such lawsuits against the Company are likely to have a material adverse effect on the Company. 11 Certain Considerations Growth Strategy Risks. The Company intends to grow primarily through the development and acquisition of additional resorts. The Company's future growth and financial success will depend upon a number of factors, including its ability to identify attractive resort acquisition opportunities, consummate the acquisitions of such resorts on favorable terms, convert such resorts to use as vacation ownership resorts and profitably sell Vacation Intervals at such resorts. If the vacation ownership industry continues to consolidate, increased competition for acquisition candidates may develop such that there may be fewer acquisition opportunities available to the Company as well as higher purchase prices. There can be no assurance that the Company will be able to finance, identify, acquire or profitably manage additional businesses, or successfully integrate acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Further, acquisitions involve a number of special risks, including (i) possible adverse effects on the Company's operating results, (ii) diversion of management's attention, (iii) lack of local market knowledge and experience, (iv) inability to hire, train and retain key acquired personnel, (v) inability to secure sufficient marketing relationships with local hospitality, retail and tourist attraction operators, (vi) risks associated with unanticipated events or liabilities, and (vii) adverse changes in zoning laws, changes in real estate taxes and other operating expenses, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. Customer dissatisfaction or performance problems at a single acquired company could have an adverse effect on the reputation of the Company and render ineffective the Company's sales and marketing initiatives. In addition, as the Company expands its resort locations to resorts catering to snow skiing, golf, hiking, fishing and other pursuits, the Company plans to market additional Vacation Intervals to existing Members. There can be no assurance that the Company will be able to implement such marketing program on an economic basis, if at all. Finally, there can be no assurance that the Company or other businesses acquired in the future will achieve anticipated revenues and earnings. Development and Construction Risks. The Company intends to construct, redevelop, convert and expand additional resorts. There can be no assurance that the Company will complete the expansion plans set forth in "Business -- The Raintree Resorts" and "Business -- Business Strategy" or undertake to develop other resorts or complete such development if undertaken. Risks associated with the Company's development, construction and redevelopment/conversion activities may include the risks that: (i) acquisition and/or development opportunities may be abandoned; (ii) construction costs of a property may exceed original estimates, possibly making the resort uneconomical or unprofitable; (iii) sales of Vacation Intervals at a newly completed property may be insufficient to make the property profitable; (iv) financing may not be available on favorable terms for the development of, or the continued sales of Vacation Intervals at, a property; (v) construction may not be completed on schedule, resulting in decreased revenues and increased interest expense and (vi) borrowing capacity may be limited by the Company's existing indebtedness. In addition, the Company's construction activities will typically be performed by third-party contractors, the timing, quality and completion of which the Company will be unable to control. Furthermore, construction claims may be asserted against the Company for construction defects and such claims may give rise to liabilities. New development activities, regardless of whether they are ultimately successful, typically require a substantial portion of management's time and attention. Development activities are also subject to risks relating to the Company's inability to: (i) obtain, or avoid delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, (ii) coordinate construction activities with the process of obtaining such permits and authorizations, and (iii) obtain the financing necessary to complete the necessary acquisition, construction, and/or conversion work. In addition, local laws may impose liability on property developers with respect to construction defects discovered, or repairs made by future owners of such property. Pursuant to such laws, future owners may recover from the Company amounts in connection with any repairs made to the developed property. Finally, to the extent the Company elects to develop properties adjacent to luxury hotels to provide Members with service offered to guests of such hotels, the Company will need to negotiate the terms by which such hotels would provide services to the Company and the Members. There can be no assurance that the Company will be able to negotiate such terms on a basis that is favorable to the Company. Recent Acquisitions; Lack of Prior Operating History. The Company was organized in August 1996 by Raintree Capital Company, LLC ("RCC"). RCC is a merchant banking firm formed in 1994 to consolidate highly fragmented industries. The Company started operations on August 18, 1997. Prior to such closing, the Westin Hotels and the Club Regina Resorts were under common ownership of Bancomer, but the Club Regina Resorts were operated separately from the Westin Hotels. The combined historical financial results of Club Regina Resorts cover periods when they were not under control or management of the Company and, therefore, may not be indicative of the Company's future financial or operating results. The prospects for the Company's success must be considered in 12 light of the risks, expenses and difficulties often encountered in the establishment of a new business in a continually evolving industry characterized by an increasing number of market competitors. Expansion and Regulation of Company's Business Outside of Mexico. Raintree has recently expanded its business, including Vacation Interval marketing and sales and acquisition and development of additional resorts outside of Mexico. These activities are subject to extensive regulation by the applicable jurisdictions in which its resort properties were located and in which Vacation Intervals are or are to be marketed and sold. While the Company will continue to use its best efforts to be in material compliance with all foreign laws and regulations to which it may become subject, no assurance can be given that the cost of qualifying under vacation interval ownership regulations and other regulations in any jurisdiction in which the Company desires to conduct sales and operate its business would not be significant. Any failure to comply with applicable laws or regulations could have a material adverse effect on the Company. Adverse Mexican Economic Conditions and Government Policies. The following information was derived in part from the Form 18-K, as amended, filed by the United Mexican States with the Commission on June 20, 1997. The Company does not warrant the accuracy or completeness of such information. Because each Club Regina Resort is located in Mexico and a significant percentage of the owners of Weekly Intervals are Mexican nationals (approximately 47% as of December 31, 1998), the Company's financial condition and results of operations are greatly affected by the strength of the Mexican economy. During the late 1980s and early 1990s, as a result of Mexican government initiatives and the attendant increase in foreign investment, Mexico's growth rate increased, the inflation rate was reduced significantly and the U.S. dollar/peso exchange rate was relatively stable. During 1994, however, Mexico experienced an economic crisis caused in part by a series of internal disruptions and political events, including a large current account deficit (8.0% of gross domestic product in 1994), reduced level of domestic savings (15% of gross domestic product in 1994), civil unrest in the southern state of Chiapas, the assassination of two prominent political figures and significant devaluation of the peso. These events undermined the confidence of investors in Mexico during 1994 and, combined with an increase in interest rates, led to a substantial outflow of capital. The weaker value of the peso relative to the dollar increased the cost, in peso terms, of imported goods and services, and thereby increased the rate of inflation in Mexico to 52.0% in 1995 (as compared to 7.1% in 1994). To the extent that employers adjusted wages upward to compensate for the decline in purchasing power resulting from the devaluation of the peso, and then adjusted prices to reflect increased wage costs, additional inflationary pressures arose. The devaluation of the peso also led to a lack of confidence on the part of investors in Mexico's ability to repay its short-term obligations and, consequently, a reluctance of investors to reinvest in Mexico's maturing government bonds. As a result, Mexico experienced a liquidity crisis closely linked to the $29.2 billion of short-term government bonds (Tesobonos) outstanding at the end of 1994 and maturing in 1995. Since 1995, the Mexican government has instituted programs which sought to (i) stabilize the exchange rate and maintain the current floating rate exchange policy, (ii) stabilize the Mexican banking sector, (iii) establish tax incentives for business to increase productivity and employment, (iv) increase exports, (v) reform the pension system to encourage private domestic savings, (vi) control inflation by decreasing public spending and implementing a restrictive monetary policy, (vii) increase private sector investment through privatization of transportation and telecommunications and (viii) increase public-sector revenues, in part through increases in the general rate of the value-added tax for certain goods and services from 10% to 15% (except for certain "free zones" such as Cancun, Cozumel and Los Cabos, where the rate continues to be 10%), increases in prices of fuel oil, natural gas and electricity and increases in the minimum wage. In addition, the Mexican government sought to minimize inflation by promoting the gradual implementation of price increases. Economic conditions in Mexico improved somewhat in 1996, with gross domestic product in 1996 5.1% higher than gross domestic product in 1995, and interest rates on 28-day Cetes declining to an average of 31.4% (from an average of 48.4% in 1995). According to preliminary figures, in the first quarter of 1997, gross domestic product increased by 5.1% as compared to the same period in 1996. On January 15, 1997, the Mexican government repaid the remaining balance that it borrowed on the line of credit extended by the United States and Canada. There can be no assurance that the economic plan of the Mexican government will achieve its stated goals or the improvement of the Mexican economy in 1996 will continue in future periods. The future performance of the Mexican economy may be adversely affected by political instability in Mexico. On August 28, 1996, a little-known group calling itself the Ejercito Popular Revolucionario (the Popular 13 Revolutionary Army, or "EPR") initiated attacks in various parts of Mexico, concentrating on military and police targets, and since that date has claimed responsibility for a number of other attacks and has been involved in direct skirmishes with Mexican government troops. Although the extent of popular support enjoyed by the EPR is not known, and none of the attacks occurred within 600 miles of any of the Club Regina Resorts, the attacks adversely affected Mexico's foreign exchange and securities markets. No assurance can be given that attacks in the future by the EPR or any other insurgent group will not have a similar, or worse, effect on such markets. The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions could have a significant effect on companies with Mexican operations (including the Company), market conditions, prices and returns on securities of companies with significant Mexican operations (including those of the Company). On July 6, 1997, national elections were held in Mexico in which parties opposed to the ruling Institutional Revolutionary Party ("PRI") increased their representation in the Mexican legislature and captured the mayoralty of Mexico City and the governorship of several states of Mexico. Although the term of President Ernesto Zedillo, a member of the PRI, is scheduled to continue until the year 2000, there can be no assurance that the increased political power of parties opposed to the PRI will not result in a change in Mexico's economic policies or the ability of President Zedillo to implement plans or agreements similar to those referred to above. Any change in Mexico's economic policies could have a material adverse effect on the Company's business, results of operations, financial condition, ability to obtain financing and prospects. Future declines in the gross domestic product of Mexico, continued high rates of inflation in Mexico or other adverse social, political or economic developments in or affecting Mexico or other emerging market countries could have a generally adverse effect on the Mexican economy, which could result in a material adverse effect on the Company's business, results of operations, financial condition, ability to obtain financing and prospects and on the market price of the Issuers' securities. Finally, securities of companies, such as Raintree, with significant exposure to emerging markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries. Although economic conditions are different in each country, investors' reactions to developments in one country may have effects on the securities of issuers in other countries. There can be no assurance that the trading price of the Common Stock will not be adversely affected by events elsewhere, especially in emerging market countries. In addition, the Company denominates many of its Vacation Interval receivables in UDIs. See "Customer Financing." Although the Company believes that its UDI program protects it from peso inflation, it does not insulate the Company from foreign currency risk, and there can be no assurance that the rate of return on the Company's UDI denominated loans will not be adversely affected by a change in dollar/peso exchange rates. Exchange Rates. The value of the peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. The peso has experienced significant fluctuations in short time periods including a major decline in March 1994 (following the assassination of a leading candidate in Mexico's presidential elections) of that year. Between January 1, 1995 and December 31, 1998, the Mexican peso depreciated an additional 87.9% to Ps.9.9 per U.S. dollar at December 31, 1998 and fluctuated from a high, relative to the U.S. dollar, of Ps.5.27 to a low, relative to the U.S. dollar, of Ps.10.63. No assurance can be given that the peso will not further depreciate in value relative to the U.S. dollar in the future. The Mexican economy has suffered balance of payment deficits and shortages in foreign exchange reserves. While the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert pesos to U.S. dollars, no assurance can be given that the Mexican government will not institute a restrictive exchange control policy in the future. Any such restrictive exchange control policy could adversely affect the Company's ability to convert dividends or other payments received in pesos into U.S. dollars, and could also have a material adverse effect on the Company's business and financial condition. The following table sets forth, for the periods indicated, the high, low, average and period-end free market rate for the purchase and sale of U.S. dollars (presented in each case as the average between such purchase and sale rates), expressed in pesos per U.S. dollar. 14 Free Market Rate ----------------------------------------- Year Ended Period December 31 High Low Average(1) End ----------- ------ ----- --------- ------ 1992 3.12 3.08 3.10 3.12 1993 3.33 3.12 3.17 3.33 1994 5.75 3.11 3.39 5.00 1995 8.05 5.27 6.42 7.69 1996 8.05 7.33 7.61 7.88 1997 8.43 7.71 8.07 8.06 1998 10.63 8.04 9.16 9.90 - ---------- (1) Average exchange rates represent the annual average of the daily free exchange rates. Source: Banco de Mexico until November 5, 1993, with the free market rate representing the average of the buy and sell rates on the relevant dates. Commencing November 8, 1993, the free market rate is the Noon Buying Rate for Mexican pesos reported by the Federal Reserve of the United States. Seasonality. The Mexican and Canadian vacation ownership industry in general tends to follow seasonal buying patterns with peak sales occurring during the peak travel/tourism seasons, usually December through April and July and August. In Mexico, American tourists tend to vacation in the destinations where the Regina Resorts are located in the December through April season while Mexican tourists tend to travel to these destinations more frequently during the summer months. The timing of these purchasers, however, may be effected by weather conditions and general and local economic conditions. Seasonality influences could have a material adverse effect on the Company's operations. General Economic Conditions; Concentration in Vacation Ownership Industry. Any downturn in economic conditions or any price increases (e.g., airfares) related to the travel and tourism industry could depress discretionary consumer spending and have a material adverse effect on the Company's business. Any such economic conditions, including recessions, may also adversely affect the future availability of attractive financing for the Company or its customers and may materially adversely affect the Company's business, financial condition and results of operations. Furthermore, adverse changes in general economic conditions may adversely affect the collectibility of the Vacation Interval receivables. Because the Company's operations are conducted almost entirely within the vacation ownership industry, any adverse changes affecting the vacation ownership industry such as an oversupply of vacation ownership units, a reduction in demand for vacation ownership units, changes in travel and vacation patterns, changes in governmental regulations of the vacation ownership industry and increases in construction costs or taxes, as well as negative publicity, could have a material adverse effect on the Company's operations. Sales Volume Risks. The Company depends on sales leads generated from guests of its co-located hotels, other local offices, theme stores, real estate agents and off-site offices. With respect to off-site offices, as the number of potential customers in the geographic area of a sales office who have attended a sales presentation increases, the Company may have increasing difficulty in attracting additional potential customers to a sales presentation at that office, and it may become increasingly difficult for the Company to maintain current sales levels at its existing sales offices. Accordingly, the Company anticipates that a substantial portion of its future sales growth will depend on opening additional off-site sales offices which may be subject to local taxes and compliance with additional registration and other requirements. There can be no assurance, however, that sales from existing or new off-site sales offices will meet the Company's expectations. If the Company does not open additional sales offices or if existing or new sales offices do not perform as expected, the Company's business, results of operations and financial condition could be materially adversely affected. Geographic Concentration in Mexico; Concentration of Customers in North America. Until July 1998, the Company only sold Vacation Intervals in Mexico, and at December 31, 1998 approximately 47% of Members reside in Mexico. The Company intends to continue to sell Vacation Intervals in Mexico and to initiate registration to permit sales in selected locations in the United States. Since most of the Company's sales offices are currently located in Mexico, any economic downturn in Mexico could have a disproportionate material adverse effect on the Company's business, results of operations and financial condition. In addition, at December 31, 1998, approximately 53% of the Company's Members resided in the United States or Canada, and as a result, the Company may be vulnerable to downturns in the U.S. and Canadian economies as well. 15 Competition. The Company is subject to significant competition from other entities engaged in the business of resort development, sales and operation, including vacation interval ownership, condominiums, hotels and motels. Some of the world's most recognized lodging, hospitality and entertainment companies have begun to develop and sell vacation intervals in resort properties. Major companies that now operate or are developing or planning to develop vacation ownership resorts include Marriott International, Inc., The Walt Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, Inc., Intercontinental Hotels and Resorts, Inc., and Westin. In addition, other publicly-traded companies in the vacation ownership industry, such as Sunterra Resorts, Inc., Fairfield Communities, Inc., Vistana, Inc., Trendwest Resorts, Inc. and SilverLeaf, Inc. currently compete, or may compete, with the Company. The Company believes that the fractional interest segment of the vacation ownership market is highly fragmented and, although no major company competitors exist, includes such competitors as Franz Klammer Lodge in Telluride, Resort Quest International, Inc., a company specializing in vacation home rentals and America Skiing Corporation, which sell one-quarter share interests in vacation homes at certain of its ski locations. Many of these entities possess significantly greater financial, marketing and other resources than those of the Company. Management believes that recent and potential future consolidation in the vacation interval industry will increase industry competition. Independent Contractors. A portion of the Company's sales force has been comprised of independent contractors. From time to time, U.S., Mexican and Canadian federal, state and provincial authorities have asserted that independent contractors are employees, rather than independent contractors. If, as a result of any such assertion the Company were required to pay for and administer added benefits and taxes related to the time such persons have been classified as independent contractors, the Company's operating costs would increase. Natural Disasters - Uninsured Loss. The Company's resorts may be subject to hurricanes, earthquakes and adverse weather patterns such as "El Nino" and damages as a result thereof. There are certain types of losses for which the Company does not have insurance coverage because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in a resort, as well as the anticipated future revenues from such resort and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on the Company. Limited Inventory. The Company believes that its remaining inventory of Vacation Intervals will be sold in slightly over one year. There can be no assurance that the Company will be able to implement its internal growth and acquisition strategy successfully and thereby increase its inventory of Vacation Intervals. If the Company is unable to acquire or develop additional inventory, the Company's business, results of operations, and financial condition could be materially adversely affected. Substantial Leverage and Ability to Service Debt. The Company is, and will continue to be, highly leveraged, with substantial debt service in addition to operating expenses and planned capital expenditures. The Company's level of indebtedness will have several important effects on its future operations, and could have important consequences to the holders of Common Stock, including, without limitation, (i) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest and principal on its indebtedness, (ii) covenants contained in the indenture governing the Senior Notes (the "Indenture") and the Credit Facility will require the Company to meet certain financial tests, and other restrictions will limit its ability to pay dividends, borrow additional funds or to dispose of assets, and may effect the Company's flexibility in planning for, and reacting to, changes in its business, including possible acquisition activities, (iii) the Company's leveraged position will substantially increase its vulnerability ot adverse changes in general economic, industry and competitive conditions, (iv) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited, and (v) in the event of a change of control the Company, the Company may be required to purchase all of the outstanding Senior Notes at 101% of the principal amount, as the case may be, of the Senior Notes plus any accrued and unpaid interest thereon, and Additional Interest (as defined in the Indenture), if any, to the date of purchase. The exercise by the holders of the Senior Notes of their rights to require the Company to offer to purchase Senior Notes upon a change of control could also cause a default under other indebtedness of the Company, even if the change of control itself does not, because of the financial effect of such purchase on the Company. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company's future performance, which will be subject to general economic, industry and competitive conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required, among other things 16 to seek additional financing in the debt or equity markets, to refinance or restructure all or a portion of its indebtedness, including the Senior Notes, to sell selected assets, or to reduce or delay planned capital expenditures. Employees At December 31, 1998, the Company employed 425 persons, with 253 persons in Mexico, 164 persons in Canada and 8 persons in the United States. The Company believes employee relations are good. ITEM 3 - LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the operating results or financial position of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable Part II ITEM 5 - MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common equity has not been registered pursuant to Section 12(b) of the Act and is not traded. ITEM 6 - SELECTED FINANCIAL DATA The historical income statement data presented below for the Predecessor Business were derived from the historical financial statements of the Predecessor Business and includes the use of the lease accounting method for the Vacation Interval revenues reported by the combined resorts, because the Predecessor Business did not sell Vacation Intervals that met the requirements for the full accrual method of accounting. The historical income statement data presented below for the Company uses the full accrual method of accounting subsequent to the date it purchased the vacation ownership segment of the Predecessor Business. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements of the Company and the Predecessor Business and the notes thereto included elsewhere herein. 17
Summarized Historical Financial Data Vacation Ownership Segment of Predecessor Business (1) (2) Company -------------------------------------------------- ---------------------- Seven and (Unaudited) 1/2 months Years Ended Years Ended December 31, Ended December 31, ------------------------------------ August 17, ---------------------- 1994 1995 1996 1997 1997(5) 1998 -------- -------- -------- -------- -------- -------- Historical Income Statement Data: (in thousands except share and per share data) Vacation ownership revenues: Vacation Interval sales ............ $ 24,500 $ 25,034 $ 37,263 $ 31,479 Less amounts deferred ........... (24,064) (24,461) (36,435) (30,653) Plus amounts recognized ........ 196 1,131 2,039 1,650 -------- -------- -------- -------- Total Vacation Interval revenue 632 1,704 2,867 2,476 $ 18,098 $ 56,508 Interest income on Vacation Interval receivables..................... 1,042 1,839 3,294 3,277 1,557 5,848 Rental and service fee income........ 1,313 4,105 5,497 7,021 3,896 8,926 Other income ........................ 2,631 690 760 1,329 2,153 2,701 -------- -------- -------- -------- -------- -------- Total vacation ownership revenues.... 5,618 8,338 12,418 14,103 25,704 73,983 Costs and operating expenses Cost of Vacation Interval sales . 4,569 13,161 Provision for doubtful accounts .. 2,318 4,450 Advertising, sales and marketing..... Commissions paid ................. 4,919 7,108 5,512 Less amount deferred (4) ....... (4,824) (5,807) (5,413) Plus amount recognized (4) ..... 178 303 313 Advertising, sales and marketing . 4,128 3,829 4,899 -------- -------- -------- Total advertising, sales and marketing (4) 15,523 4,401 5,433 5,311 8,576 23,874 Maintenance and energy............ 3,969 3,183 3,798 4,669 1,938 8,013 Depreciation and amortization (3) 10,118 -- -- -- 49 620 Amortization of goodwill.......... -- -- -- -- -- 2,885 General and administrative........ 15,688 6,637 5,400 4,504 5,417 11,463 -------- -------- -------- -------- -------- -------- Total costs and operating expenses... 45,298 14,221 14,631 14,484 22,867 64,466 -------- -------- -------- -------- -------- -------- Operating income (loss) from vacation Ownership operations ............. (39,680) (5,883) (2,213) (381) 2,837 9,517 Interest expense.................. -- 3,884 3,108 2,827 3,931 14,947 Foreign currency exchange losses, net 4,266 2,464 (351) 74 1,333 4,299 -------- -------- -------- -------- -------- -------- Loss from vacation ownership Operations before provision for taxes (43,946) (12,231) (4,970) (3,282) (2,427) (9,729) Foreign income and asset taxes 5,881 3,356 3,312 1,756 909 672 -------- -------- -------- -------- -------- -------- Net loss from vacation ownership operations before preferred stock dividend (49,827) (15,587) (8,282) (5,038) (3,336) (10,401) -------- -------- -------- -------- -------- -------- Preferred stock dividends............ -- -- -- -- 232 711 -------- -------- -------- -------- -------- -------- Net loss available to common stockholders $(49,827) $(15,587) $ (8,282) $ (5,038) $ (3,568) $(11,112) ======== ======== ======== ======== ======== ======== Net loss from operations per share .. $ (0.40) $ (1.03) ======== ======== Basic and diluted weighted average.. 8,843,383 10,747,409 ========= ========== shares............................... Other Historical Financial Data: EBITDA (6)........................ $(29,562) $ (5,883) $ (2,213) $ (381) $ 2,886 $ 13,022 ======== ======== ======== ======== ======== ======== - ---------- (1) The financial data was derived from the Combined Historical Financial Statements of the Predecessor Business which were prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The historical vacation ownership segment information was prepared by identifying the direct vacation ownership revenues and expenses and allocating the vacation ownership ("Regina Resorts") and the hotel shared expenses based on the relative number of total rooms at the beginning of each period. The operating results of the hotel segment were reported by the Predecessor Business as discontinued operations and accordingly, are not included in this presentation. (2) Because the Company acquired perpetual ownership of the Regina Resorts, which had been sold by the Predecessor Business as a 30 to 50 year memberships to its customers, the historical financial information has been prepared by using the lease accounting method as required by U.S. GAAP, which required the Predecessor Business to recognize annually only 1/30th of cumulative vacation ownership revenues, net of cumulative provisions for doubtful accounts and cumulative commission expenses. For periods after August 17, 1997, financial data is presented using the full accrual method of accounting in accordance with SFAS No. 66 rather than the lease accounting method. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Depreciation was not recognized by the Predecessor Business during the periods presented because the prior owner had recorded a significant impairment loss in 1994 and the assets of the combined hotels and Regina Resorts were held for sale from then until their sale on August 18, 1997. The Company's Historical Consolidated Statement of Operations for the year ended December 31, 1997 includes the operations of the purchased Regina Resorts only for the period August 18, 1997 through December 31, 1997. (4) The detail of commission expense for 1994 is not available and is included in advertising, sales and marketing. 18 (5) Reflects the results of operations of the Company for the twelve months ended December 31, 1997 including operations of the acquired Regina Resorts for the period from August 18, 1997 through December 31, 1997, and does not include results of operations of the Predecessor Business. The Company had no vacation ownership business activity prior to August 18, 1997. (6) EBITDA represents net income before interest expense, taxes, depreciation and amortization, and also includes foreign currency exchange gains and losses and preferred stock dividends. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be construed as a substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position and cash flows. The EBITDA measure presented herein may not be comparable to EBITDA as presented by other companies and is not the same as "Consolidated Cash Flow" under the Indenture.
The following table reconciles historical EBITDA to historical net loss reported for the vacation ownership segment: Summarized Historical Financial Data Vacation Ownership Segment of Predecessor Business Company -------------------------------------------------- ---------------------- Seven and (Unaudited) 1/2 months Years Ended Years Ended December 31, Ended December 31, ------------------------------------ August 17, ---------------------- 1994 1995 1996 1997 1997(5) 1998 -------- -------- -------- -------- -------- -------- ( in thousands) Net loss available to common $(49,827) $(15,587) $ (8,282) $ (5,038) $ (3,568) $ (11,112) stockholders......................... Interest expense ................... -- 3,884 3,108 2,827 3,931 14,947 Foreign income and asset taxes ...... 5,881 3,356 3,312 1,756 909 672 Depreciation and amortization ...... 10,118 -- -- -- 49 3,505 Foreign currency exchange losses, net 4,266 2,464 (351) 74 1,333 4,299 Preferred stock dividends ........... -- -- -- 232 711 -------- -------- -------- -------- -------- -------- EBITDA .............................. $(29,562) $ (5,883) $ (2,213) $ (381) $ 2,886 $ 13,022 ======== ======== ======== ======== ======== ========
Historical Consolidated Balance Sheet Data Years Ended December 31, ------------------------- 1997 1998 --------- --------- (in thousands) Cash and cash equivalents .............................................. $ 9,005 $ 2,960 Vacation Interval receivables and other trade receivables, net ......... 41,915 51,835 Land held for vacation ownership development,........................... 12,405 22,170 Office furniture and equipment.......................................... 1,542 3,046 Cost of unsold vacation ownership intervals ............................ 33,178 27,606 Total assets ........................................................... 119,979 129,667 Senior Notes, due 2004, net of unamortized original issue discount ..... 90,780 92,093 Shareholders' investment ............................................... 13,052 4,943
19 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Financial Data" and related notes thereto. COMPANY FORMATION AND INITIAL OPERATIONS IN MEXICO The Company was organized to seek acquisition opportunities within the vacation ownership industry. On August 18, 1997, the Company acquired the Regina Resorts in Mexico for approximately $86.8 million. In connection with the purchase transactions, the Company placed the property underlying each of the three Regina Resort properties into three separate trusts held by the Company's operating subsidiaries that were established for each resort. The operating subsidiaries had the right to use the Regina Resorts for a period of 30 years ending August 18, 2027. A separate subsidiary of the Company owns rights (the "Remainder Interests") pursuant to which it had the right to indefinitely use the Regina Resorts after August 18, 2027. Until March 13, 1998, the Predecessor Business and the Company sold a right to use a vacation ownership unit ("Vacation Interval") for a period of 30 years. This 30-year period was initially selected because Mexican law limited property ownership by trusts to 30 years. Subsequently, Mexican law was changed to allow a trust ownership period of 50 years and in March 1998, the Company began selling a 50-year Vacation Interval. The 30-year Vacation Intervals that had been sold prior to the acquisition, however, were not extended to 50 years, but the Company intends to offer to sell a 20-year extension to these pre-acquisition Vacation Interval owners. In June 1998, the Company assigned a proportional beneficial interest of the Remainder Interests to each purchaser of Vacation Intervals who had bought subsequent to the August 18, 1997 acquisition. The Company effected this assignment of proportional beneficial interests by a legally enforceable assignment for the benefit of such Members. The Company is currently examining the method by which such assignment will be evidenced to Members. The Company believes that this change in structure has had a positive effect on its Mexican sales and marketing program as it has enabled the Company to sell an interest that is more closely aligned with the traditional fee simple deeded interest offered to buyers of vacation intervals in the United States. This structure also provides for the economic interest in the Vacation Interval to be transferred to the purchaser and allows for the use of full accrual accounting method of profit recognition for sales made by the Company. The Company uses a membership as its means of transferring Vacation Intervals rather than a deeded interest because Mexican real property law does not have effective mechanisms that would allow non-Mexicans to directly own real property in certain areas (forbidden zones) for certain purposes. Accordingly, the Company does not sell deeded interests. Mexican law allows Mexican corporations, wholly owned by foreign corporations, to own land within the forbidden zones. Accordingly, the Vacation Interval is sold through a right to use. ACQUISITION OF WHISKI JACK In July 1998, the Company acquired Whiski Jack Resorts Ltd. ("Whiski Jack") for approximately $6.6 million. The acquisition was accounted for as a purchase and, accordingly, the results of operations are included in the financial statements only for the periods subsequent to the date of acquisition. RESULTS OF OPERATIONS The following discussion relates to the financial condition and results of operations of the Company and the vacation ownership segment of the Predecessor Business, and is based on the financial information included in "Selected Financial Data." The Company did not begin significant operations until August 18, 1997 and, therefore, a comparison of the Company's results between 1997 and 1998 is not meaningful as it provides results for less than a full years' operations for 1997. In order to provide a meaningful analysis of the changes in the operational activity levels, the Predecessor Businesses' results for the first 7 1/2 months of 1997 are being combined with the Company's results for the last 4 1/2 months of 1997 (both periods as outlined in the "Selected Financial Data" section), and are presented without adjusting for the impact of either deferred Vacation Interval revenues or deferred commission expenses as included in the "Selected Financial Data". The Company believes that this analysis is helpful to understand the changes in the aggregate activity levels between years. 20 After taking into account these adjustments, the comparison of 1998 to combined 1997 and combined 1997 to 1996 remains difficult because the Company's accounting principles for the following revenue and expense elements were not comparable with the accounting principles used to develop the historical operating data for the Predecessor Business: - - Vacation Interval revenues -- Prior to August 18, 1997, the Predecessor Business sold 30-year Vacation Intervals that were recognized using operating lease accounting, thus deferring substantially all revenues until future periods. Starting August 18, 1997 the Company sold Vacation Intervals that transferred the entire economic interest to the purchaser and recognizes all Vacation Interval revenues under the full accrual method of profit recognition. - - Cost of Vacation Interval revenues -- Prior to August 18, 1997, the Predecessor Business did not record Vacation Interval cost of sales. Instead, the value of the assets was depreciated over the assets' useful life. Starting August 18, 1997, the Company amortizes a portion of the book value of the cost of unsold Vacation Intervals with each sale of a Vacation Ownership interval using the relative sales value method. - - Provision for doubtful accounts -- Prior to August 18, 1997, the Predecessor Business recognized no receivables because virtually all revenues were deferred. Therefore, no provision for bad debts was required. Starting August 18, 1997, the Company began recognizing receivables consistent with full revenue recognition accounting and a provision to bad debts as necessary to provide for losses inherent in the contract receivables portfolio. - - Commission expenses -- Similar to Vacation Interval revenues, a substantial portion of commission expenses representing direct selling expenses were deferred prior to August 18, 1997. Commencing August 18, 1997, all commission expenses were recognized consistent with full revenue recognition accounting. - - Depreciation -- Prior to August 18, 1997, no depreciation was recognized because Bancomer had committed to selling the assets and had, therefore, classified the assets as assets to be disposed of in accordance with the provisions of FASB 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of and the assets were recorded at their net realizable value." The annual changes between combined 1997 and 1998 and between 1996 and combined 1997 that are presented below are caused, in part, by the difference in these accounting principles used by the Company and by the Predecessor Business. 21 Comparison of the twelve months ended December 31, 1998 to the twelve months ended December 31, 1997 (the combined results of the Vacation Interval segment of the Predecessor Business and the Company). The Company believes that this analysis is helpful to understand the changes in the aggregate activity levels between combined 1997 and 1998 (in thousands):
1997 ------------------------------------- Annual Amounts of Predecessor --------------------- Business - Company - Percentage Seven and Four and Combined Increase Increase 1/2 Months 1/2 Months Total 1998 (Decrease) (Decrease) --------- --------- --------- --------- -------- -------- Vacation ownership revenues: Vacation Interval sales ............ $ 31,479 $ 18,098 $ 49,577 $ 56,508 $ 6,931 14.0% Interest Income on Vacation Interval receivables, rental and service fee income, and other income ....... 11,627 7,606 19,233 17,475 (1,758) (9.1)% --------- --------- --------- --------- -------- Total revenues ................ $ 43,106 $ 25,704 $ 68,810 $ 73,983 $ 5,173 7.5% ========= ========= ========= ========= ======== Operating expenses: Cost of Vacation Interval sales .... -- $ 4,569 $ 4,569 13,161 $ (*) (*) Provision for doubtful accounts..... -- 2,318 2,318 4,450 (*) (*) Advertising, sales and marketing.... 10,411 8,576 18,987 23,874 4,887 25.7% Maintenance and energy ............. 4,669 1,938 6,607 8,013 1,406 21.3% Depreciation and amortization....... -- 49 49 620 (*) (*) Amortization of goodwill ........... -- -- -- 2,885 2,885 -- General and administrative ......... 4,504 5,417 9,921 11,463 1,542 15.5% --------- --------- --------- --------- -------- Total operating expenses....... $ 19,584 $ 22,867 $ 42,451 $ 64,466 (*) (*) ========= ========= ========= ========= ======== (*) The amount and percentage change are not presented since the amount between years are not prepared on a comparable basis. See discussion above.
Total recognized revenues increased approximately $5.2 million, or 7.5%, during 1998. This increase was primarily due to a 14% increase in recognized Vacation Interval sales, a 21% increase in interest income on Vacation Interval receivables offset by a 18.2% decrease in rental and service fee income. Recognized Vacation Interval sales grew approximately $6.9 million, or 14.0%, during 1998. The acquisition of Whiski Jack contributed approximately $5.6 million of this increase. In Mexico, Vacation Interval sales increased by approximately $1.3 million, or 2.7%, for the 12 months ended December 31, 1998. The primary reason for this increase in Mexico was the implementation of new marketing programs combined with the opening of two new sales offices during the first nine months of 1998. The sales increase occurred despite the fact that the actual number of weekly intervals sold in Mexico decreased 1.7%. Also, the selling environment was impacted by several factors; first, the change in the Mexican VAT tax laws effective January 1, 1998 whereby the sale of vacation intervals became subject to either 10% or 15% VAT; second, a milder winter in the U.S. and Canada that decreased the level of tourism in the first half of 1998 to Mexican resort destinations; third, adverse weather conditions in the third quarter of 1998 including a hurricane in Los Cabos, a strong tropical storm in Cancun and significant flooding in Puerto Vallarta; and fourth, the uncertain economic climate in Mexico and throughout the world during the latter part of 1998. Interest income on Vacation Interval receivables grew by approximately $1 million, or 21%. This increase is due primarily to the corresponding increase in the interest bearing Vacation Interval receivables, which increased from $43.9 million to $53.6 million, or 22.1%, during 1998. Vacation Interval receivables increased with the acquisition of Whiski Jack and, in addition, due to an overall increase in sales. Rental and service fee income decreased by 18.2% or $2 million during 1998. In Mexico, rental and service fee income decreased by approximately $2.6 million, or 23.7%, due in part to the rental of units to Westin at an average rate lower than that experienced by the company during 1997. The rate negotiated with Starwood for 1998 would have been higher except that a one-time fee of $1.25 million was also negotiated with Starwood. This fee was recognized in 1998 as other income. Rental and service fee income was also negatively impacted because the negotiated agreement with Starwood precludes the Company from renting the remaining unsold units to transient vacationers other than Club Regina members and their guests and guests secured through marketing and promotional 22 programs. Finally, increased usage by a larger owner base resulted in fewer unsold units available for rental to guests of members or for use in marketing promotions. The acquisition of Whiski Jack offset the decrease by approximately $0.6 million. The Predecessor Business did not recognize depreciation after the prior owner classified the assets as assets to be disposed of. Under lease accounting, the depreciation represented the cost applicable to the units leased whereas under the full accrual method, the cost of the property is allocated to inventory. After the August 18, 1997 acquisition, the Company began recognizing cost of sales based on its allocation of its purchase price to unsold inventory of Vacation Intervals and allocated the cost based on the relative sales value method. Depreciation during 1998 relates to leasehold improvements associated with the relocation of the Mexico City headquarters during the first quarter of 1998 combined with the implementation of new RCC software, which is the main operations software used by the company. The 1998 amortization of goodwill relates to the acquisition of Whiski Jack. The goodwill is being amortized as the number of units acquired are sold. The Predecessor Business did not record any provision for uncollectible accounts because most of its Vacation Interval revenues were deferred, however, the Company made a full provision for its estimated uncollectible accounts because Vacation Interval sales after August 18, 1997 are fully recognized each period. Advertising, sales and marketing expenses increased approximately $4.9 million, or 25.7%, during 1998. The acquisition of Whiski Jack contributed approximately $1.6 million to the increase. In Mexico, advertising, sales and marketing expenses increased as a result of greater marketing efforts. In particular, the Company has implemented marketing programs that involve theme stores designed to promote the Company's presence through popular local cultural and environmental themes. Maintenance and energy expenses increased approximately $1.4 million, or 21.3%, in 1998. The acquisition of Whiski Jack contributed approximately $0.5 million to the increase. In Mexico, maintenance and energy expenses increased approximately $0.9 million during 1998 as a result of higher occupancy rates. The general and administrative expenses increased approximately $1.5 million, or 15.5%, in 1998. Primary causes of this increase included approximately $1.1 million related to Whiski Jack and additional costs from increased compensation of certain key executives, plus an increase in the number of executive, administrative and temporary personnel in Mexico and the U.S. to support an active development program and an administrative operation independent of the prior owner. Interest expense increased approximately $5.8 million in 1998 as compared to 1997 as the Company used primarily debt in the acquisition of the timeshare business. The Company capitalized interest of $0.5 million and $1.8 million in 1997 and 1998, respectively, associated with the land development in Cozumel and Los Cabos during 1998. Foreign currency exchange losses increased approximately $2.9 million, or 205.5%, in 1998. The value of the peso decreased from 8.083 per U.S. dollar at December 31, 1997 to 9.865 per U.S. dollar at December 31, 1998, or 22%, causing the significant 1998 exchange loss. The Company maintains a portfolio of UDI receivables (receivables denominated in an alternate Mexican currency that is adjusted for inflation on a daily basis) to partially offset the peso devaluation. These inflation adjustments should offset the long-term effect of the peso devaluation but do not offset the short-term losses that have occurred in 1998. The amount of UDI inflation adjustments, which is included under interest income on Vacation Interval receivables, was approximately $0.6 million and $1.9 million for the years ended December 31, 1997 and 1998, respectively. Included in vacation ownership revenues and operating expenses for 1998 is the $1.6 million operating loss of Whiski Jack for the period subsequent to the date of acquisition through year end 1998. 23 Comparison of the combined historical twelve months ended December 31, 1997 to the historical twelve months ended December 31, 1996. No comparison of historical Company financial information is presented for the period from 1996 to 1997 as the company did not have operations in 1996. The Company believes that the following analysis is helpful to understand the changes in the aggregate activity levels between 1996 and 1997. The analysis presents the changes in the operational activity levels during 1997 and 1996 and a summary of vacation ownership sales and expense activity levels without adjusting for the impact of either deferred Vacation Interval revenues and or deferred commission expenses (in thousands):
1997 ------------------------------------- Predecessor Business Annual Amounts of ----------------------- Company - --------------------- Seven and Four and Combined Percentage 1996 1/2 Months 1/2 Months Total Increase Increase --------- --------- --------- --------- -------- -------- Vacation ownership revenues: Vacation Interval sales ............ $ 37,263 $ 31,479 $ 18,098 $ 49,577 $ 12,314 33.0% Interest income on Vacation Interval receivables, rental and service fee income, and other income ....... 9,551 11,627 7,606 19,233 9,682 101.4% --------- --------- --------- --------- -------- Total revenues ................ 46,814 43,106 25,704 68,810 21,996 47.0% ========= ========= ========= ========= ======== Operating expenses: Cost of Vacation Interval sales .... -- -- 4,569 4,569 (*) (*) Provision for doubtful accounts .... -- -- 2,318 2,318 (*) (*) Advertising, sales and marketing.... 10,937 10,411 8,576 18,987 8,050 73.6% Maintenance and energy ............. 3,798 4,669 1,938 6,607 2,809 74.0% Depreciation and amortization....... -- -- 49 49 (*) (*) General and administrative ......... 5,400 4,504 5,417 9,921 4,521 83.7% --------- --------- --------- --------- -------- Total operating expenses....... $ 20,135 $ 19,584 $ 22,867 $ 42,451 (*) (*) ========= ========= ========= ========= ======== (*) The amount and percentage change are not presented since the amount between years are not prepared on a comparable basis. See discussion above.
Total revenues increased approximately $22 million, or 47%, during 1997. This was the result of an increase of 33% in the 1997 Vacation Interval sales and an increase of 101.4% for all other income. The actual number of weekly intervals sold increased 44.5%. Management attributes the increase in the number of Vacation Intervals sold to improved marketing efforts, stronger demand and the introduction of the lower cost biannual product. Interest income on Vacation Interval receivables grew approximately $1.5, or 46.8%, primarily due to a corresponding increase in Vacation Interval receivables of 16.4%. Rental and service fee income increased 98.6% in 1997 due to an overall increase in vacation ownership units which were available to the Company to rent because of the late 1996 completion of an expansion of units at the Los Cabos location, and because of improved rental market demand in 1997. Service fee income increased as a result of the overall increase in the number of Members during the 1997 period. The Predecessor Business did not recognize depreciation after the prior owner classified the assets as assets to be disposed of. Under lease accounting, the depreciation represented the cost applicable to the units leased whereas under the full accrual method, the cost of the property is allocated to inventory. After the August 18, 1997 acquisition, the Company began recognizing cost of sales based on its allocation of its purchase price to unsold inventory of Vacation Intervals and allocated the cost based on the relative sales value method. The Predecessor Business did not record any provision for uncollectible accounts because most of its Vacation Interval revenues were deferred, however, the Company made a full provision for its estimated uncollectible accounts because Vacation Interval sales after August 18, 1997 are fully recognized each period. The 73.6% annual increase during 1997 in advertising, sales and marketing expenses reflects the marketing investments made during 1997 to increase the marketing program activity levels which resulted in the 33% increase in Vacation Interval sales. 24 Maintenance and energy increased approximately $2.8, or 74%, during 1997 because (i) an additional 110 vacation ownership units were completed at the Los Cabos location in late 1996, (ii) occupancy in the vacation ownership facilities increased significantly due to the substantial growth in the average number of members as well as the increased number of transient guests using the facilities in 1997, and (iii) inflationary increases in these expense elements. General and administrative expense in 1997 increased approximately $4.5, or 83.7%. These expense elements increased significantly because (i) growth in the administrative organization was necessary to manage and control the Company which was experiencing overall revenue growth (ii) added costs of personnel that were dedicated to provide services to Starwood's hotel operation which enabled the Company to earn other income fees after August 17, 1997 (prior to August 18, 1997 the cost of these persons had been allocated directly to the discontinued hotel segment) and (iii) the administrative expense of the Company's newly formed Corporate group for the period August 18th through December 31, 1997 represented an increase because these functions did not exist during 1996 within the Predecessor Businesses. LIQUIDITY AND CAPITAL RESOURCES The Company generates cash for operations primarily from the sale of Vacation Intervals, receipt of payments on the Vacation Interval receivables, and the receipt of service fees charged to members. With respect to the sale of Vacation Intervals, the Company generates cash from all-cash purchases and the receipt of down payments on financed Vacation Intervals. The Company generates cash from financing Vacation Interval sales based on principal payments and the interest charged on Vacation Interval receivables. Additionally, the Company uses Vacation Interval receivables as collateral in order to obtain loans. At December 31, 1998, the Company had $53.6 million Vacation Interval receivables with a weighted average maturity of approximately five years. At such date, approximately (i) 62% of all of the Vacation Interval receivables were U.S. or Canadian dollar denominated (ii) 28% of all Vacation Interval receivables were denominated in UDIs, an obligation denominated in pesos which is adjusted for Mexican inflation, and (iii) 10% of all Vacation Interval receivables were denominated in pesos. At December 31, 1998, the Company has $117.1 million of debt outstanding consisting primarily of $100 million of 13% Senior Notes due 2004, $9.1 million outstanding under the FINOVA credit line ("FINOVA"), which at year-end bears interest at 9.5%, $5 million of debt bearing interest at 10%, and $2.8 million mortgage notes payable to a bank which at year-end bears interest at 11.1%. Approximately $5.6 million of the outstanding debt is due in 1999. In addition to such debt, the Company has $2.1 million of 10% redeemable convertible preferred stock which is redeemable by the holders thereof in installments of $500,000 beginning April 1, 1999, and thereafter, redeemable quarterly. The Company is finalizing the $13.5 million inventory financing portion of the FINOVA credit agreement. This, along with the existing $20 million accounts receivable based credit facility, will complete the FINOVA credit agreement. Additionally, the Company has a credit line available from Bancomer for a four year line of credit of $20 million. The agreement limits the use of this line to the payment of Senior Note interest incurred and payable. This line of credit bears interest at 11.5%, requires a fee of approximately 1.5% of amounts drawn under the line of credit, and is secured by a portion of the Vacation Interval receivables of CR Resorts Puerto Vallarta. At December 31, 1998, the Company estimates that based on the current level of CR Resorts Puerto Vallarta receivables, only $3.5 million to $4 million would be available to be drawn under the line. The Company intends to pursue a growth-oriented strategy. From time to time, the Company may acquire, among other things, additional vacation ownership properties, resorts and completed vacation ownership units, land upon which additional vacation ownership resorts may be built (which may require capital expenditures by the Company) and/or other operations in the vacation ownership industry. The Company is evaluating certain resort asset acquisition or development opportunities, but it currently has no contracts or capital commitments relating to any potential acquisitions or developments other than those discussed above. However, the Company is actively pursuing financing for development of the Teton Club joint venture and the Los Cabos land. In addition, the Company is evaluating several strategic partnership opportunities, but it likewise has no agreements relating to any such potential strategic partnership opportunities. To finance its growth strategy, in addition to accessing the lines of credit with FINOVA, the Company may from time to time consider issuing debt, equity or other securities, entering into traditional construction financing or credit 25 agreements, entering into joint venture or development agreements with respect to its undeveloped property, or factoring additional Vacation Interval receivables. The Company is highly leveraged and, under the Indenture, there are limitations on the Company's ability to borrow funds and make certain equity investments. Additionally, the FINOVA credit agreement requires the Company to maintain certain financial covenants, including minimum equity levels. Accordingly, there can be no assurance that the Company will be able to use debt to finance any expansion plans beyond its plans to finance its current commitments. At December 31, 1998, the Company had an inventory of 6,994 Vacation Intervals weeks in Mexico and 585 Weekly Intervals in Canada. Accordingly, the Company believes its existing inventory will provide it with slightly more than one year of product available for sale under existing or planned marketing programs. The Company plans to increase its Vacation Interval inventory through development of additional properties and making acquisitions in the short term, by purchasing the Villa Vera, acquiring condominiums in Whistler, British Columbia, developing the Teton Club joint venture, developing its land in Los Cabos, developing its land in Cozumel, and making acquisitions in Mexico, the United States and Canada. The Company believes that its current financial position plus borrowings available under the credit agreement with FINOVA and anticipated results from operations will satisfy its currently planned 1999 capital expenditures of approximately $14.2 million. The 1999 planned expenditures include the purchase of Villa Vera, the development activities in Los Cabos and the purchase of Vacation Interval inventory in Whistler, British Columbia. During 1998, the Company purchased land adjacent to the Company's property in Cabo San Lucas for $6.7 million, to be developed for use as Vacation Interval inventory. Additionally, land held for development increased during 1998 as a result of capitalized interest of $1.8 million and associated development costs. At December 31, 1998, the Company is, and will continue to be, highly leveraged, with substantial debt service requirements. The Company has incurred losses since its inception and expects to incur a net loss for fiscal 1999. To achieve profitable operations the Company is dependent upon a number of factors, including its ability to increase its Vacation Interval inventory on an economical basis through development projects or acquisition of existing resort properties. The Company expects that its existing credit capacity and its ability to obtain capital financings, as well as the Company's anticipated results of operations, will be sufficient to fund its capital requirements through the year 1999. MEXICAN PESO CURRENCY FLUCTUATIONS Since December 1994, Mexico has experienced difficult economic conditions, including significant devaluation and volatility of the peso with respect to the U.S. dollar, reduced economic activity, higher inflation, and high interest rates. Through 1998, Mexico was considered a highly inflationary economy for purposes of applying SFAS 52, since the three-year cumulative rate of inflation exceeded 100%. Effective January 1, 1999, Mexico is no longer considered a highly inflationary economy. The financial statements of the Company as well as the Predecessor Business were prepared for all periods using the U.S. dollar as the functional currency. The U.S. dollar was used since the debts were payable in U.S. dollars and prices were generally established in U.S. dollars. The effects of the Mexican peso on the Company are tempered because the Company sells certain of its Vacation Intervals for U.S. dollars and adjusts the price of Vacation Intervals sold for pesos to keep the revenue from such sales constant in dollar terms. Therefore, devaluation and inflation of the peso have not affected the Company's revenue from customers who purchase Vacation Intervals without financing them. However, approximately 70% of the Company's customers elect to finance their purchase of Vacation Intervals through the Company. Of those financed, approximately 28% of the Vacation Interval receivables are denominated in UDI's which insulate the Company from effects of peso inflation over extended time periods with respect to those receivables. However, the Company is not insulated from the effect of changes in the U.S dollar/peso exchange rate with respect to UDI receivables or the 10% of receivables denominated in pesos. Accordingly, to the extent the rate of Mexican inflation exceeds or is less than the rate of devaluation of the peso during any period, the Company's rate of return in constant dollar terms on UDI denominated Vacation Interval receivables will increase or decrease. When the rate of devaluation of the peso in any fiscal period exceeds the rate of inflation of the peso for such period, the cost of the Company's other transactions (such as labor expenses and general and administrative expense in Mexico) denominated in pesos will decrease when translated into U.S. dollars. During 1998, the devaluation of the peso exceeded the rate of inflation. 26 SEASONALITY The Mexican and Canadian vacation ownership industry in general tends to follow seasonal buying patterns with peak sales occurring during the peak travel/tourism seasons, usually December through April and July and August. Seasonal influences also affect the Company's earnings so that net income and cash receipts from customer initial down payments are typically higher in the first and fourth calendar quarters. In Mexico, American tourists tend to vacation in the destinations where the Regina Resorts are located in the December through April season while Mexican tourists tend to travel to these destinations more frequently during the summer months. IMPACT OF YEAR 2000 The Company commenced active operations in 1997 with the acquisition of three resorts in Mexico. The Company is implementing systems commensurate with business objects that includes using uniform operating and financial systems for each operating site. The Company uses Resort Computer Corporation's ("RCC") software to manage its vacation ownership operations, including marketing activities, sales presentations, contract management, collections, member reservations and hotel operations. In contrast with traditional software run on mainframe systems, the RCC software was developed in the late 1980's, and has been Year 2000 compliant since 1994. The Company is in the process of installing a new financial system to be used in conjunction with the operating system. This system is scheduled for implementation prior to the end of June 1999 and is year 2000 compliant. During 1998, the Company acquired Whiski Jack in Canada. The Company has commenced with the conversion process of the Whiski Jack systems in order to integrate them with the standard systems to be used by the Company. This project is to be completed by the end of the third quarter of 1999. Additionally, the Company has initiated discussions with all significant suppliers including the Westin Hotels. No significant Year 2000 issues have been identified. The Company believes that there are no significant Year 2000 issues and that this conclusion is based on a comprehensive study of this issue. Accordingly, management has concluded that no significant costs will be incurred to address this issue. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. In addition to the U.S. dollar, the Company conducts its business in the Mexican peso and the Canadian dollar. Currently, a substantial portion of the Company's operations are conducted in Mexico and, as a result, are subject to the impact of the any changes in the value of the Mexican peso against the U.S. dollar. This exposure to the Mexican peso, however, is reduced by several factors: (1) the pricing of vacation intervals is set in U.S. dollars and thus, notwithstanding competitive pricing issues, is not affected by fluctuations in foreign currency, and (2) as of December 31, 1998, 73% of the Company's receivables that are denominated in Mexican pesos are protected against currency fluctuations resulting from inflation. This portion of the Company's receivables is denominated in UDI's, a Mexican currency tied to the peso and indexed monthly for inflation. The Company is exposed to interest rates with respect to its long-term debt obligations and receivables. The Company's primary exposures are in long-term receivables in Mexico, totaling approximately $50.8 million, and in fixed rate, long-term U.S. dollar denominated debt that is publicly held, totaling approximately $105 million. The following table sets forth the average interest rates for the scheduled maturities of the Company's long-term debt obligations and receivables in the context of (a) interest rate risk and (b) foreign currency exchange rate risk: 27
Estimated Fair Value at 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 -------- -------- -------- -------- -------- -------- -------- -------- Fixed rate long-term debt: Amount (U.S. dollar) 5,000 -- -- -- -- 100,000 105,000 (1) Average interest rate 10.0% -- -- -- -- 13.0% 12.9% Amount (Canadian dollar) 611 564 453 433 402 587 3,049 3,049 Average interest rate 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% 11.1% Variable rate long-term debt: Amount (U.S. dollar) -- -- -- -- -- 9,086 9,086 9,086 Average interest rate -- -- -- -- -- 9.5% 9.5% Fixed rate long-term Receivables: Amount (U.S. dollar) 5,939 6,007 5,480 3,759 2,017 1,334 24,535 24,535(2) Average interest rate 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% Amount (Canadian dollar) 442 420 434 424 412 624 2,756 2,756 Average interest rate 13.8% 13.8% 13.8% 13.8% 13.8% 13.8% 13.8% Amount (Mexican peso) 6,360 6,432 5,868 4,025 2,159 1,428 26,273 26,273(2) Average interest rate 11.7% 11.7% 11.7% 11.7% 11.7% 11.7% 11.7% (1) The fair value of the Company's senior notes cannot be determined as none of the these instruments are actively traded on the open market. Also, the amount of premium or discount cannot be predicted were these notes to become actively traded in the future. (2) These financial instruments are held for other than trading purposes; the carrying amount of these instruments approximates fair value.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index to the consolidated financial statements, Report of Independent Auditors and the Consolidated Financial Statements, which appear beginning on Page F-1 of this report and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company filed Form 8-K on August 3, 1998, as amended on August 6, 1998, regarding changes in and disagreements with accountants on accounting and financial disclosure. 28 Part III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers and Directors; Other Key Employees The following table sets forth the names, ages and positions of the directors, executive officers and other key employees of the Company or its subsidiaries. A summary of the background and experience of each of these individuals is set forth after the table.
Executive Officers and Directors Age Position --------------------- ------ ---------------------------------------------------------- Douglas Y. Bech 53 Chairman and Chief Executive Officer John McCarthy 43 President and Director of the Company Robert L. Brewton 46 Executive Vice President - Chief Investment Officer George E. Aldrich 52 Senior Vice President - Finance and Accounting Fred Daniels 52 Senior Vice President - Canada Bruce S. MacIntire 48 Senior Vice President - Raintree Owners Club Mario Muro 52 Senior Vice President - Marketing Gustavo Ripol 35 Senior Vice President - Product Development Brian R. Tucker 36 Senior Vice President - Corporate Planning and Development Christopher W. Allick 45 Director Christel DeHaan 56 Director Walker G. Harman 52 Director Thomas R. Powers 60 Director Robert M. Werle 42 Director
Douglas Y. Bech is a founding principal of Raintree Capital Company, LLC ("RCC") and the principal promoter in organizing the Company and effecting the acquisition of the Club Regina Resorts and Westin Regina Hotels. From 1994 through October 1997, Mr. Bech was a partner in the Houston office of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. From 1993-1994, Mr. Bech was a partner in the Houston office of the law firm of Gardere & Wynne, L.L.P. Mr. Bech was associated with and a senior partner of Andrews & Kurth, L.L.P. from 1970 until 1993. Throughout his career Mr. Bech has specialized in mergers and acquisitions and financial and securities transactions. Mr. Bech serves as a director of Frontier Oil Corporation, a New York Stock Exchange company, eFax.com, Inc., a Nasdaq company, Pride Companies, L.P., a publicly traded master limited partnership, and several private companies. Mr. Bech serves as an advisory director of The Salvation Army, Houston Metropolitan Area and as a director of The Drexler Foundation, a charitable foundation established by Clyde Drexler, a former NBA basketball player, to assist inner city youths. John McCarthy has been the President of the Company since August 1997. Mr. McCarthy has been the principal executive officer of the Club Regina Resorts since 1992. From 1992 until August 17, 1997, he served first as Vacation Ownership Director and beginning 1993 as Director General of Bancomer's Tourism Division. During most of this period Mr. McCarthy was responsible for development and management of the Combined Resorts as well as the sale of The Westin Regina Resorts for Bancomer. From 1983 to 1992 Mr. McCarthy held several positions in Grupo Los Remedios, a large Construction and Development Group, where among other projects, he developed The Pacifica Project in Ixtapa Mexico, where he developed, sold and operated some 6,000 vacation intervals. Mr. McCarthy's previous experience was with the Babcock International Group and the Tolteca Group where he obtained experience in Finance, Personnel, Administration and product development. He is the past President and Secretary of the Asociacion Mexicana de Desarrolladores Turisticos (AMDETUR), the Mexican equivalent of ARDA; he is also the past Secretary and present adviser of the Consejo Nacional Empresarial Turistico, Mexico's Tourism Board. He serves on the boards of Hoteles Presidente Intercontinental Mexico (seven Hotels) and Complejos Turistico Huatulco (Club Med Huatulco). Mr. McCarthy acted as an advisor on Tourism to President Zedillo during his campaign. He is the Treasurer of Brimex, a charitable foundation funded by the British Government and members of the British community for the poor, the sick and those who have suffered because of natural disasters. Mr. McCarthy is also a Professor and acts on the Board of The Tourism School at the Universidad Anahuac del Sur. Robert L. Brewton was appointed Executive Vice President -- Chief Investment Officer of the Company in April 1998. Mr. Brewton was a Senior Partner and the Chief Investment Officer of Residential Company of America ("RCA"), a privately held multifamily real estate investment and management company, from January 1995 until 29 March 1998 when it was sold. Prior to working at RCA, Mr. Brewton served as the President and Chief Operating Officer of Transwestern Property Company's Multifamily Division from November 1987 until January 1995 when it was merged into RCA. During his 24 year career in the real estate business, Mr. Brewton has been involved in all aspects of the multifamily housing industry and has served as either a principal, developer, or intermediary in over 100,000 apartment units nationwide. Mr. Brewton is involved in several industry organizations, including the Urban Land Institute, and serves on the Advisory Committee of the National Multi Housing Council. He serves as a member of the Boards of Directors of Apple Orthodontix, an American Stock Exchange company, and Network One, Inc., a private company. Mr. Brewton also serves on the Board of Directors of the Baylor University Alumni Association and has served as a Director of the Juvenile Diabetes Foundation. George E. Aldrich joined the Company in November 1998 as Senior Vice President - Accounting and Finance. In this capacity Mr. Aldrich will be responsible for overseeing the financial reporting, tax, treasury and insurance functions. From August 1996 through November 1998 Mr. Aldrich served as Chief Financial Officer for KBC Advanced Technologies, Inc., a U.S. subsidiary of a British-based public company that provides consulting services and specialized software to the refining industry. From 1983 to 1996 Mr. Aldrich was Vice President - Controller for Wainoco Oil Corporation (now, Frontier Oil Corporation), a New York Stock Exchange Company. During Mr. Aldrich's tenure at Wainoco, Wainoco had operations in the United States and Canada as well as activities in other international locations. Prior to joining Wainoco, Mr. Aldrich was with Arthur Andersen LLP. Mr. Aldrich has a degree in accounting from North Texas State University and is a licensed C.P.A. Fred Daniels joined the Company as Senior Vice President - Canada in July 1998. In this capacity, Mr. Daniels is responsible for operations of Whiski Jack Resorts, Ltd. with whom Mr. Daniels has served since November 1997 as general manager. Prior to joining Whiski Jack Resorts, Ltd. he was a consultant to the vacation ownership industry and served as general manager of Christmas Mountain Village, a mixed used resort in Wisconsin owned by Resort Development International, Inc. ("RDI"). Prior to joining RDI in 1996 Mr. Daniels served for more than five years as vice president of Long Lines, Ltd. in charge of resort operations for Village West Resort in Spirit Lake, Iowa. Bruce S. MacIntire joined the Company as Senior Vice President -- Raintree Owners Club in October 1998. In this capacity Mr. MacIntire will be responsible for the development and operation of the Raintree Owners Club, the Company's Fractional Interest product. From 1997 until joining the Company, Mr. MacIntire served as Vice President - Sales and Marketing for The River Club, a luxury fractional vacational ownership resort in Telluride, Colorado. From 1994 until 1997 Mr. MacIntire served as Vice President Development for Marriott Ownership Resorts, Inc., the vacation interval club business unit of Marriott Hotels. In that capacity Mr. MacIntire managed development projects in Park City, Utah, Aruba, Marbella, Spain, Kauai, Hawaii, Williamsburg, Virginia and Breckenridge, Colorado. Previously, Mr. MacIntire was head of marketing for The Doral Resort and Spa (currently The Peaks) in Telluride, Colorado including its vacation interval ownership sales and marketing. Mr. MacIntire conceived Doral's opening day sales event which resulted in a record opening day vacation interval sales of $22 million. Mr. MacIntire has served in various capacities in the real estate industry since 1972 and holds a degree in Business Administration from Principia College. Mario Muro is Senior Vice President -- Marketing of the Company and will also serve as acting Chief Operating Officer for Whiski Jack beginning December 1998. Prior to the closing of the Purchase Transactions, Mr. Muro was Project Manager, Regional Director of Bancomer Tourism Division from 1993 to 1997. He was Director of the Los Remedios Tourism Division from 1992 to 1993, and Director of the Grand Baja Club B.C. Project from 1991 to 1992. Mr. Muro was President of the Association of Commercializers of TimeSharing in Puerto Vallarta, First President of the Association of Tourist Developers in Ixtapa Zihuatanajo and is currently the President of the AMDETUR until the year 2000. Mr. Muro, who has 25-years experience in the vacation ownership and tourism industry, has developed various vacation ownership marketing programs including theme stores, marketing through travel agencies, and the Club Regina referral program. Mr. Muro has a degree in accounting from the Instituto Tecnologico Autonomo de Mexico . Gustavo Ripol joined the Company in October 1997 as Senior Vice President - -- Finance and Marketing. From 1995 to 1997, he was RCI's Marketing and Communications Director for Latin America, where he was also responsible for developing new business units in the region for the marketing, sale and implementation of vacation ownership services. From 1993 to 1994, Mr. Ripol served as Planning Director for Bancomer's Tourism Division responsible for strategic planning for the hotel and vacation ownership business units and development of the Club Regina Resort vacation interval product. From 1987 to 1992, Mr. Ripol held various positions as Manager of Planning & Systems, Director of Finance and Administration and Director of Planning and Business Development 30 for Grupo Los Remedios. Mr. Ripol graduated from the Universidad Anahuac with a degree in Engineering, and received a graduate degree in Finance at the Instituto Tecnologico Autonomo de Mexico. Brian R. Tucker was Vice President -- Planning and Development of the Company from August 1997 until May 1998, at which time he was made Senior Vice President - Corporate Planning and Development. From 1995 through 1997, Mr. Tucker was an associate of RCC. Prior to joining RCC, Mr. Tucker was employed for five years at Deloitte & Touche Management Consulting Group where he advised clients in various industries concerning mergers, acquisitions and bankruptcy. Mr. Tucker also worked for British Petroleum as a drilling and production engineer for three years prior to receiving an M.B.A. from the Wharton School of Finance in 1990. Christopher W. Allick has been a Director of the Company since January 1998. Mr. Allick began serving as Managing Director, Manager Western States Investment Banking of McDonald & Co. Securities, Inc. in July 1998. He was a Director and Executive Vice President of Jefferies & Company, Inc., a registered broker-dealer, from May 1993 until July 1998. Christel DeHaan has been a director of the Company since January 1998. She currently serves as CEO of CD Enterprises, Ltd. and the Christel DeHaan Family Foundation, Inc. Ms. DeHaan co-founded Resort Condominiums International, Inc., ("RCI") the world's largest vacation interval exchange company, in 1974, and became its Chairman, CEO and sole shareholder in 1989. In November, 1996 she sold RCI to Cendant Corporation and served on its Board of Directors until January 1998. She is a founding director of the International Timeshare Foundation and was elected twice to the American Resort Development Association Board of Directors. She was appointed by President Clinton in 1995 to the White House Conference Task Force on Travel and Tourism, and was named to the British Tourism Hall of Fame in 1997. Ms. DeHaan is Chairman of the Board of Trustees of the University of Indianapolis, President of the American Pianists Association and serves on the Boards of Directors of the Indiana Symphony Society and Dance Kaleidoscope. Walker G. Harman has been a director of the Company since 1997. Mr. Harman was President and Chief Executive Officer of Metro Hotels, Inc. ("Metro") from 1978 until 1998, and was its sole owner from 1985 until its sale to Meristar Hotels and Resorts. Metro owned, developed and operated hotels and resorts including franchises such as Hilton, Radisson, Omni, Holiday Inn and Embassy Suites. Mr. Harman also owns and operates Sonny Bryan's Smokehouse, which has 11 locations in the Dallas, Texas area. Mr. Harman currently serves as a member of board of directors of the Baylor Health Care System, the Board of Regents of Baylor University, and the board of directors of the Interfaith Housing Coalition. Mr. Harman is a member of the World Presidents Organization and the American Hotel Motel Management Association and was president of the Baylor Development Council from 1993 to 1994. Thomas R. Powers has been a director of the Company since 1997. Mr. Powers is a founding principal of RCC where he has been engaged since 1994. He served as Chairman, President and CEO of Transamerica Fund Management Company and its predecessor companies ("TFM") from 1976 to 1993. TFM was the investment advisor and underwriter for a complex of 21 mutual funds. In 1995, he completed a three year term as a member of the Board of Governors of the National Association of Securities Dealers where he also served on the Executive Committee as well as Chairman of the Audit Committee and the Investment Companies Committee. For almost 20 years Mr. Powers served on the Board of Governors of the Investment Company Institute, the national association of mutual funds ("ICI"). During that time he served on ICI's Executive Committee and was Chairman from 1989 to 1990. From 1988 to 1997, Mr. Powers was a member and past Chairman of the Board of Regents of Baylor University and served as its Chairman. Mr. Powers is also a member of the Baylor University Foundation, a Trustee and member of the Finance Committee for the Memorial Healthcare System of Houston, Texas and a member and past President of the Houston Chapter of the Financial Executives Institute as well as a member of the Texas Society of C.P.A.'s and the American Institute of C.P.A.'s. Mr. Powers is also the current Chairman of the Texas Infrastructure Fund, a quasi-state agency. Mr. Powers serves as a director of the Fidelity Charitable Gift Fund, a 501 (c)3 company and several private companies. Robert M. Werle has been a Director of the Company since September 1998. Mr. Werle is a Managing Director at Jefferies & Company, Inc. where he directs the firm's real estate investment banking efforts. Mr. Werle has been engaged in real estate investment banking for over 13 years with several investment banks including, prior to joining Jefferies in 1997, Robertson Stephens & Company and PaineWebber Incorporated. 31 Director Classes and Agreements The Company's Board of Directors currently consists of eight members and is divided into three classes, one class of which is elected each year to hold office for a three-year term and until successors are elected and qualified. The terms of the Class A, Class B and Class C directors of the Company will expire at the 2001, 1999 and 2000 annual meetings, respectively. Mr. Powers and Ms. DeHaan serve in Class A, Messrs. Harman, and Werle in Class B and Messrs. Bech, McCarthy and Allick in Class C. Successors to the directors whose terms have expired are required to be elected by stockholder vote while vacancies in unexpired terms and any additional positions created by board action are filled by action of the existing Board of Directors. The executive officers named above were elected to serve in such capacities until the next annual meeting of the Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. No family relationships exist among the executive officers or directors of the Company. Robert Werle was appointed to the Company's Board of Directors pursuant to an agreement by and among Jefferies & Company and the Company, and Messrs. Bech, Powers and McCarthy. This agreement was entered into as part of the original issue of the Senior Notes. Director Compensation Directors do not receive compensation for serving as directors. Directors will be reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof incurred in their capacity as directors. Committees of the Board of Directors The Company has an Executive Committee and an Audit and Compensation Committee. The Audit and Compensation Committee reviews and reports to the Board of Directors the scope and results of audits by the Company's outside auditor. The committee also recommends the firm of certified public accountants to serve as the Company's independent public accountants, subject to nomination by the Board of Directors and approval of the stockholders, authorize all audit and other professional services rendered by the auditor and periodically review the independence of the auditor. The Committee also determines the compensation of the Company's executive officers. Membership of the Audit and Compensation Committee is restricted to those directors who are not active or retired officers or employees of the Company. Ms. DeHaan and Messrs. Harman and Powers are members of the Audit and Compensation Committee and Mr. Powers serves as Chairman. Messrs. Bech, McCarthy, Powers and Harman and Ms. DeHaan are members of the Executive Committee, of which Mr. Bech serves as Chairman. Each Committee met once during 1998. 32 ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth certain compensation information for the Company's five most highly compensated executive officers (the "Named Executive Officers"). Compensation information is shown for all services rendered during the fiscal year 1998 and for the period from August 18, 1997 to December 31, 1997.
Securities Underlying Name/Principal Position Year Annual Compensation* Options/SARs - ----------------------------------------------------- ------ --------------------- ------------- Douglas Y. Bech 1998 $ 255,000 100,000 Chairman 1997 90,000 -- John McCarthy 1998 260,000 20,000 President 1997 87,179 100,000 Robert L. Brewton 1998 178,906(1) 85,000 Executive Vice President - Chief Investment Officer George Stroesenreuther 1998 143,750(2) Senior Vice President - Finance and Accounting George Aldrich 1998 21,250(3) 50,000 Senior Vice President - Finance and Accounting Brian Tucker 1998 160,000 35,000 Senior Vice President - Planning 1997 45,000 -- And Development - ------------------ (1) Mr. Brewton's employment with the Company commenced on April 15, 1998. (2) Mr. Stroesenreuther resigned effective as of December 31, 1998 and was paid a severance of $57,500. (3) Mr. Aldrich's employment with the Company commenced on November 15, 1998. * The Company provides the Named Executive Officers with certain group, life, health, medical and other non-cash benefits generally available to all salaried employees.
Report on Executive Compensation This report documents the components of the Company's compensation programs for its executive officers and describes the basis on which fiscal 1998 compensation determinations were made with respect to the executive officers of the Company. All fiscal 1998 compensation decisions with respect to base salaries, annual compensation and stock option grants were made by the Board of Directors with the objectives of attracting, retaining, motivating and rewarding high caliber executive officers to manage the Company's business; inspiring executive officers to innovatively and aggressively pursue Company goals; and align the long-term interests of executive officers with those of the Company's stockholders through use of stock options. Compensation for each of the Company's executive officers were determined on an individual basis, taking into account compensation by industry competitors, their performance as executive officers of the Regina Resorts when owned by Bancomer, if applicable, and general economic conditions. Mr. McCarthy's compensation was negotiated based upon his performance as an executive officer of the Regina Resorts prior to the Company's purchase thereof and the Company's desire to retain him, formalized in an employment agreement. See "- Employment Agreements." Mr. Bech's compensation was structured to be comparable to Mr. McCarthy's compensation. Messrs. Brewton's and Tucker's compensation were based on their experience in real estate acquisition and development and financial and corporate planning, respectively. Stock Options: The Company uses stock options to relate the benefits received by executive officers and key employees to the amount of appreciation realized by the stockholders over comparable periods. While the Company directly granted Mr. McCarthy stock options, the other executive officers were granted stock options under the Company's 1997 Long Term Incentive Plan. See " - 1997 Long Term Incentive Plan." 33 Stock Options Granted Except as noted, the following table provides certain information regarding the number of stock options to purchase shares of the Company's Common Stock granted pursuant to the Plan to the Named Executive Officers during the period form October 1997 through December 1998, all of which were granted at an exercise price of $5.00 per share with a 10-year term. The Company currently has outstanding options to purchase 546,500 shares of common stock, all of which were granted at $5.00 per share except for options for 100,000 shares granted to Mr. McCarthy at $2.00 per share. The Company makes no representation as to the current market value of its common stock but believes that the $5.00 per share represents a fair price to grant options to employees.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Percentage of For Option Term (1) Options Total Options -------------------------- Name Granted Granted 5% 10% - ----------------- --------- ------- ----------- ----------- Douglas Y. Bech 100,000 15.5% $ 314,447 $ 796,871 John McCarthy 120,000 18.6% 188,668 478,123 Robert L. Brewton 85,000 13.1% 267,280 677,341 George Aldrich 50,000 7.7% 157,224 398,436 Brian Tucker 35,000 5.4% 110,057 278,905 - ---------- (1) The 5% and 10% assumed annual rates of compound stock price appreciation over the term of option are computed in accordance with rules and regulations of the Securities and Exchange Commission and do not represent the Company's estimate of stock price appreciation or a projection by the Company of future stock prices.
Option Exercises and Option Values Value of Unexercised Total In-the-Money Options Shares Options at Year-End 1998 at Year-End 1998* ------------------------ ------------------------ Acquired on Value Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable ----------------- ---------- ---------- ---------- ---------- ---------- ---------- Douglas Y. Bech -- -- 20,000 80,000 -- -- John McCarthy -- -- 40,000 80,000 -- -- Robert L. Brewton -- -- 17,000 68,000 -- -- George Aldrich -- -- 10,000 40,000 -- -- Brian Tucker -- -- 7,000 28,000 -- -- ---------- * The Company does not have any publicly-traded equity and, therefore, the market value of the Company's Common Stock is considered speculative. In early 1998, the Company issued a certain number of shares of Common Stock at $5.00 per share but makes no representation as to the current value of such shares.
1997 Long Term Incentive Plan In August 1997, the Board of Directors of the Company approved the Company's 1997 Long Term Incentive Plan (the "Plan"). The purpose of the Plan is to provide directors, officers, key employees, consultants and other service providers with additional incentives by increasing their ownership interests in the Company. Individual awards under the Plan may take the form of one or more of: (i) either incentive stock options and nonqualified stock options ("NQSOs"), (ii) stock appreciation rights (iii) restricted or deferred stock; (iv) dividend equivalents and (v) other awards not otherwise provided for, the value of which is based in whole or in part upon the value of common stock. The Compensation Committee, or such other committee as the Board of Directors designates, who will administer the Plan and select the individuals who will receive awards and establish the terms and conditions of those awards. The maximum number of shares of Common Stock that may be subject to outstanding awards, determined immediately after the grant of any award, may not exceed the greater of 800,000 shares or 8% of the aggregate number of shares of Commons Stock outstanding at the time of such grant. Shares of Common Stock which are attributable to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. 34 The Plan will remain in effect until terminated by the Board of Directors. The Plan may be amended by the Board of Directors without the consent of the stockholders of the Company, except that any amendment, although effective when made, will be subject to stockholder approval if required by any federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common stock may then be listed or quoted; provided, however, that without the consent of any affected participant in the Plan, no such action may materially impair the rights of such participant under any award granted to him. Employment Agreements The Company has entered into employment agreements with each of the Named Executive Officers. Each employment agreement provides for three-year employment terms at the end of which each extends for successive one-year terms. Each of the employment agreements provide for an initial base salary plus a bonus pursuant to the Company's bonus plan administered by the Compensation Committee of the Company's Board of Directors. In addition to any other payments to be made to the Named Executive Officers under his employment agreement, each Named Executive Officer is generally entitled to his salary for up to one year, earned bonuses, vested stock options and any other sums due him, if his employment is terminated thereunder for any reason other than "cause" (as defined in the employment agreement), resignation, death or disability. Each of the Named Executive Officers is subject to a one-year non-competition agreement with the Company. Exculpatory Charter Provision; Liability and Indemnification of Officers and Directors The Company has included in its Amended and Restated Articles of Incorporation provisions to eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty; provided, however, that such provision does not eliminate liability for (i) acts or omissions not in good faith or which involve intentional misconduct, fraud, or a knowing violation of law, or (ii) violations under Section 78.300 of the NGCL concerning unlawful distributions to shareholders. However, these provisions will not limit the liability of the Company's directors under the federal securities laws. The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. 35 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of March 30, 1998, by each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, (giving effect for such purpose the outstanding Warrants to purchase Common Stock for $0.01 per share) each of the Company's directors and executive officers and all executive officers and directors of the Company as a group. Unless otherwise indicated, each person's address is 10000 Memorial Drive, Suite 480, Houston, Texas 77024. The number of shares of Common Stock currently outstanding is 10,766,300 and there are outstanding Warrants to purchase 1,869,962 shares of Common Stock at $0.01 per share, or a total of 12,636,262. Beneficial Ownership(1) -------------------------- Shares Beneficially Percent Name Owned(1) of Class ------------------------------------ ---------- -------- Douglas Y. Bech (2) 1,901,912 15.1 John McCarthy (2) 215,367 1.7 Robert L. Brewton (2) 120,000 * George Aldrich (2) 56,000 * Fred Daniels (2) 4,000 * Bruce MacIntire (2) 12,000 * Mario Muro (2) 12,500 * Gustavo Ripol (2) 4,000 * Brian R. Tucker (2) 106,000 * Christopher W. Allick (3) 72,955 * 345 California Street, Suite 3400 San Francisco, CA 94104 Christel DeHaan 783,333 6.2 10 West Market Street, Suite 1990 Indianapolis, IN 46204 Walker G. Harman (4) 1,840,000 14.6 8080 N. Central Expwy. Suite 1600, LB 82 Dallas, TX 75206 Thomas R. Powers 1,110,213 8.8 Robert Werle (5) 328,345(6) 2.6 Jefferies & Company, Inc. 11100 Santa Monica Blvd. 10th Floor Los Angeles, CA 90025 William T. Criswell (7) 1,077,440 8.5 3000 Bent Cypress Drive Wellington, FL 33414 All directors and officers as a group 6,566,625 52.0(8) (14 persons) * Less than 1% (1) To the Company's knowledge, such person has sole voting and investment power with respect to all Common Stock shown as beneficially owned by such person, unless otherwise indicated. The outstanding Warrants to purchase 1,869,962 shares for $0.01 per share are included for purposes of computing the percentage of outstanding shares. (2) Excludes options to purchase shares of Common Stock. (3) Mr. Allick's shares are beneficially owned by and are held of record by Jefferies & Company, Inc. (4) Includes 1,840,000 shares of Common Stock held by Metro Mexico Investment Partners ("MMIP"). Mr. Harman is a general partner of MMIP and, as such, can be deemed to have beneficial ownership of the shares MMIP holds. Mr. Harman disclaims ownership of 120,000 of such shares. (5) Mr. Werle disclaims beneficial ownership to all such shares except 33,062 shares. (6) Excludes 72,955 shares owned beneficially by Mr. Allick. (7) Includes 673,400 shares of Common Stock that Mr. Criswell or affiliated entities hold, subject to the claims of two other persons. (8) All directors and officers as a group have an aggregate voting power with respect to the outstanding shares of Common Stock (excluding the Warrants) of 61.0%. 36 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K (a) (1) and (a) (2) Financial Statements and Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules are not applicable or not required and accordingly have been omitted. (a) (3) Exhibits The following documents are filed as part of this report. Exhibit No. Description - ------------ ------------- 3.1* -- Amended and Restated Articles of Incorporation Raintree Resorts International, Inc. ("RRI US"), dated August 12, 1997. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 3.2* -- Articles of Incorporation of C.R. Resorts Capital, S. de R.L. de C.V., dated August 11, 1997 (English Translation which includes by-laws). (incorporated by reference to Exhibit 3.2 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 3.3* -- By-Laws of Raintree Resorts International, Inc., formerly known as Club Regina Resorts, Inc., effective April 15, 1997. (incorporated by reference to Exhibit 3.3 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 3.4* -- Certificate of Designations of Class A Redeemable Convertible Preferred Stock of RRI US. (incorporated by reference to Exhibit 3.4 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 3.5* -- Certificate of Amendment to the Amended and Restated Articles of Incorporation of Club Regina Resorts, Inc., changing the name to Raintree Resorts International, Inc., dated May 12, 1998. (incorporated by reference to Exhibit 3.5 to Amendment No. 2 dated May 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 3.6* -- Certificate of Designations of Class B Preferred Stock of the Company. (incorporated by reference to Exhibit 3.1 to Registrant's Form 10-Q for the quarter ended September 30, 1998) 4.1* -- Indenture (including Forms of Registered Note and Outstanding Note), dated December 5, 1997, among the Issuers and IBJ Schroder Bank & Trust Company. (incorporated by reference to Exhibit 4.1 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 4.2* -- Series B Warrant Agreement (including form of warrant), dated December 5, 1997, between RRI US and Jefferies & Company, Inc. (Initial Purchaser). (incorporated by reference to Exhibit 4.2 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 4.3* -- Warrant Agreement (including form of warrant), dated December 5, 1997, between RRI US and the Warrant Agent. (incorporated by reference to Exhibit 4.3 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 37 4.4* -- Articles of Raintree Resorts Holdings Ltd., (Canada) dated July 19, 1998. (incorporated by reference to Exhibit 4.1 to Registrant's Form 10-Q for the quarter ended June 30, 1998) 4.5* -- Voting Trust, Exchange and Support Agreement, dated as of July 27, 1998, by and among Raintree Resorts International, Inc., Raintree Resorts International Canada Ltd. and Raintree Resorts Holdings, ULC. (incorporated by reference to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended June 30, 1998) 10.1*-- Second Amended and Restated Stock Purchase Agreement, dated August 18, 1997, by and among Bancomer, RRI US, Desarrollos Turisticos Bancomer, S.A. de C.V. and CR Hotel Acquisition Company, L.L.C. (incorporated by reference to Exhibit 10.1 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.2*-- Cross Indemnity Agreement, dated August 18, 1997 by and among Bancomer, RRI US and others named therein. (incorporated by reference to Exhibit 10.2 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.3*-- Post-Closing Agreement, dated August 19, 1997, by and among Bancomer, RRI US and others named therein. (incorporated by reference to Exhibit 10.3 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.4*-- Asset Management Agreement, dated August 18, 1997, by and among Starwood Lodging Corporation and RRI US. (incorporated by reference to Exhibit 10.4 to Amendment No. 2 dated May 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.5*-- Form of Operating Agreement by and among Starwood and subsidiaries of RRI US (English translation). (incorporated by reference to Exhibit 10.5 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.6*-- Warrant Shares Registration Rights Agreement, dated December 5, 1997, between RRI US and the Initial Purchaser. (incorporated by reference to Exhibit 10.6 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.7*-- A/B Exchange Registration Rights Agreement, dated December 5, 1997, among the Issuers and the Initial Purchaser. (incorporated by reference to Exhibit 10.7 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.8*-- Series B Warrant Registration Rights Agreement, dated December 5, 1997, between RRI US and the Initial Purchaser. (incorporated by reference to Exhibit 10.8 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.9*-- Form of Indemnity Agreement. (incorporated by reference to Exhibit 10.10 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.10* -- Form of Registration Rights Agreement, by and among RRI US and stockholders of RRI US. (incorporated by reference to Exhibit 10.11 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.11* -- Form of Shareholders Agreement, by and among RRI US and stockholders of RRI US. (incorporated by reference to Exhibit 10.12 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.12* -- 1997 Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.13 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.13* -- Tax Allocation Agreement dated August 18, 1997, by and among Starwood Lodging Corporation and RRI US. (incorporated by reference to Exhibit 10.14 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 38 10.14* -- Agreement dated May 20, 1996 by and among Starwood Capital Group, L.L.C., RRI US and Raintree Capital Company, LLC. (incorporated by reference to Exhibit 10.15 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.15* -- Agreement dated May 20, 1996 by and among SLT Realty Limited Partnership, RRI US and Raintree Capital Company, LLC. (incorporated by reference to Exhibit 10.16 to Amendment No. 1 dated April 22, 1998 to Registrant's Registration Statement on Form S-4/A-File No. 333-49065) 10.16* -- Agreement on Opening of Loan Against Current Account with Trust Guarantee, dated July 20, 1998, by and among Bancomer Sociedad Anonima de Capital Variable, Institucion de Banca Multiple, Grupo Financiero, C.R. Resorts Capital S. de R.L. de C.V., and C.R. Resorts Puerto Vallarta, Variable Capital Limited Liability Corporation. (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 30, 1998) 10.17* -- Registration Rights Agreement, dated as of July 27, 1998, by and among Raintree Resorts International, Inc., a Nevada corporation, and certain Shareholders thereof. (incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended June 30, 1998) 10.18+ -- Loan and Security Agreement for $20,000,000, dated November 23, 1998, by and between FINOVA Capital Corporation and CR Resorts Cancun, S. de R.L. de C.V.; CR Resorts Los Cabos, S. de R.L. de C.V.; CR Resorts Puerto Vallarta, S. de R.L. de C.V.; Corporacion Mexitur, S.A. de C.V.; CR Resorts Cancun Timeshare Trust S. de R.L. de C.V.; CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V. and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V. 10.19+ -- Corporate Guarantee and Subordination Agreement to the Loan and Security Agreement for $20,000,000 with FINOVA, dated November 23, 1998, by and between FINOVA Capital Corporation and Raintree Resorts International, Inc. 21.1+ -- List of Subsidiaries of RRI Inc. 27.1+ -- Financial Data Schedule - ------------------- * previously filed + filed herewith 39 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas, on March 19, 1999. RAINTREE RESORTS INTERNATIONAL, INC. CR RESORTS CAPITAL, S. DE R.L. DE C.V. By: /s/ GEORGE E. ALDRICH ---------------------------------------- George E. Aldrich Senior Vice President - Finance and Accounting Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ DOUGLAS Y. BECH - -------------------------- Chairman and Chief Executive March 16, 1999 Douglas Y. Bech Officer (principal executive officer) /s/ JOHN McCARTHY - -------------------------- President and Chief Operating Officer March 16, 1999 John McCarthy /s/ GEORGE E. ALDRICH Senior Vice President - Finance March 16, 1999 - -------------------------- and Accounting (principal George E. Aldrich financial and accounting officer) /s/ CHRISTOPHER W. ALLICK - -------------------------- Director March 16, 1999 Christopher W. Allick - -------------------------- Director March __, 1999 Christel DeHaan /s/ WALKER G. HARMAN - -------------------------- Director March 16, 1999 Walker G. Harman /s/ THOMAS R. POWERS - -------------------------- Director March 16, 1999 Thomas R. Powers /s/ ROBERT M. WERLE - -------------------------- Director March 16, 1999 Robert M. Werle 40
INDEX TO FINANCIAL STATEMENTS Page RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES Report of Independent Public Accountants.................................................................F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998...........................................................................F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1997 and 1998 ......................................................F-4 Consolidated Statements of Shareholder's Investment for the years ended December 31, 1997 and 1998.......................................................F-5 Consolidated Statements of Cash Flows for the period for the years ended December 31, 1997 and 1998 ......................................................F-6 Notes to Consolidated Financial Statements...............................................................F-7 CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A WHOLLY OWNED FINANCE SUBSIDIARY) Report of Independent Public Accountants.................................................................F-22 Consolidated Balance Sheets as of December 31, 1997 and 1998.............................................F-23 Consolidated Statements of Income and Retained Earnings for the period August 18, 1997 through December 31, 1997 and for the year ended December 31, 1998.............................................................F-24 Consolidated Statements of Cash Flows for the period August 18, 1997 through December 31, 1997 and for the year ended December 31, 1998..............................................................................F-25 Notes to Consolidated Financial Statements...............................................................F-26 FINANCIAL STATEMENTS OF PREDECESSOR BUSINESS FOR JANUARY 1, 1997 THROUGH AUGUST 17, 1997 - DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES Report of Independent Public Accountants.................................................................F-31 Consolidated Statement of Operations for the Period January 1, 1997 through August 17, 1997..............................................................F-32 Consolidated Statement of Cash Flows for the Period January 1, 1997 through August 17, 1997..............................................................F-33 Notes to Consolidated Financial Statements...............................................................F-34 FINANCIAL STATEMENTS OF PREDECESSOR BUSINESS FOR 1996- DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES Consolidated Statement of Operations (unaudited) for the year ended December 31, 1996 ...................................................................................F-41 Consolidated Statement of Cash Flows (unaudited) for the year ended December 31, 1996 ...................................................................................F-42 Notes to Consolidated Financial Statements (unaudited)...................................................F-43
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Raintree Resorts International, Inc.: We have audited the accompanying consolidated balance sheets of Raintree Resorts International, Inc. (a Nevada corporation) and subsidiaries (the Company) as of December 31, 1997 and 1998, and the related consolidated statements of operations and comprehensive income, shareholders' investment and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Raintree Resorts International, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 19, 1999 F-2
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share and per share data) December 31, --------------------------------------- 1997 1998 ------------------ ----------------- Assets Cash and cash equivalents ............................................... $ 9,005 $ 2,960 Vacation Interval receivables and other trade receivables, net........... 41,915 51,835 Inventories ............................................................. 939 775 Refundable Mexican taxes ................................................ 4,117 3,488 Office furniture and equipment .......................................... 1,542 3,046 Land held for vacation ownership development ............................ 12,405 22,170 Equity investments....................................................... 2,500 2,949 Cost of unsold vacation ownership intervals and related club memberships 33,178 27,606 Retained interest in hotel cash flows ................................... 4,000 4,000 Deferred loan costs...................................................... 8,697 7,413 Goodwill, net .......................................................... -- 1,240 Prepaid and other assets ............................................... 1,681 2,185 -------- -------- Total assets ................................................................ $119,979 $129,667 ======== ======== Liabilities and Shareholders' Investment Liabilities Accounts payable and accrued liabilities ............................... $ 10,093 $ 11,850 Notes payable .......................................................... 1,000 17,135 Senior Notes, due 2004, net of unamortized original issue discount of $9,220 and $7,907, respectively .......................... 90,780 92,093 Taxes payable .......................................................... 2,131 1,618 Unearned services fees .................................................. 2,923 2,028 ------- ------- Total liabilities .......................................................... 106,927 124,724 Commitments and Contingencies Shareholders' Investment Preferred stock; par value $.001; 5,000,000 shares authorized, shares issued and outstanding 37,500 at December 31, 1997 and 1998 .......... -- -- Convertible preferred stock; $100 per share liquidation value; 0 and 20,775 shares issued and outstanding at December 31, 1997 and 1998, respectively ............................................... -- 2,078 Common stock; par value $.001; 45,000,000 shares authorized, shares issued and outstanding 10,701,300 and 10,766,300 at December 31, 1997 and 1998, respectively ............................. 11 11 Additional paid-in capital .............................................. 7,046 7,371 Warrants to purchase 1,869,962 shares of common stock.................... 9,331 9,331 Accumulated deficit ..................................................... (3,336) (13,737) Cumulative translation adjustment ....................................... -- (111) -------- -------- Total shareholders' investment .............................................. 13,052 4,943 -------- -------- Total liabilities and shareholders' investment .............................. $119,979 $129,667 ======== ======== The accompanying notes are an integral part of these financial statements.
F-3
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands except share and per share data) Years Ended December 31, ----------------------------------- 1997 1998 ---------------- --------------- Statement of Operations Revenues Vacation Interval sales ....................................................... $ 18,098 $ 56,508 Rental and service fee income ................................................. 3,896 8,926 Interest income on vacation interval receivables .............................. 1,557 5,848 Other income .................................................................. 2,153 2,701 --------- --------- Total revenues ............................................................. 25,704 73,983 Costs and Operating Expenses Cost of Vacation Interval sales ............................................... 4,569 13,161 Provision for doubtful accounts ............................................... 2,318 4,450 Advertising, sales and marketing .............................................. 8,576 23,874 Maintenance and energy ........................................................ 1,938 8,013 General and administrative .................................................... 5,417 11,463 Depreciation .................................................................. 49 620 Amortization of goodwill ...................................................... -- 2,885 --------- --------- Total costs and operating expenses ......................................... 22,867 64,466 --------- --------- Operating income ................................................................ 2,837 9,517 Interest expense, net ......................................................... 3,931 14,947 Foreign currency exchange losses, net ......................................... 1,333 4,299 --------- --------- Net loss before taxes ........................................................... (2,427) (9,729) Foreign income and asset taxes ................................................ 909 672 --------- --------- Net loss before preferred dividends ............................................. (3,336) (10,401) Preferred stock dividends ..................................................... 232 711 --------- --------- Net loss available to common shareholders ....................................... $ (3,568) $ (11,112) ========= ========= Loss per share Basic and Diluted ............................................................. $ (.40) $ (1.03) Weighted average number of common shares: Basic and Diluted ............................................................. 8,843,383 10,747,409 Comprehensive Income Net loss before preferred stock dividends ....................................... $ (3,336) $ (10,401) Other comprehensive loss: Foreign currency translation adjustment ..................................... -- (111) --------- --------- Comprehensive loss .............................................................. $ (3,336) $ (10,512) ========= ========= The accompanying notes are an integral part of these financial statements.
F-4
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (in thousands except share and per share data) Total Convertible Additional Warrants Cumulative Shareholders' Common Preferred Preferred Paid-In To Purchase Accumulated Translation Investment Stock Stock Stock Capital Stock Deficit Adjustment (Deficit) ------ --------- --------- --------- ----------- ----------- ----------- ------------- Issue 8,100,000 common shares........ $ 8 $ 4 $ 12 Issue 2,000,000 commons shares on August 18, 1997 to subsidiary of Starwood Capital in connection with the purchase transactions .. 2 2 Issue 37,500 preferred shares in exchange for shareholder loans of $3.75 million .................. $ -- 3,750 3,750 Issue common shares; 200,000 for cash; 258,450 in connection with Senior Note offering; and 142,850 in connection with the purchase transaction ..................... 1 3,292 3,293 Issue warrants to purchase 1,869,962 common shares and related issue costs ............. $ 9,331 9,331 Net loss for the year ended December 31, 1997................ $ (3,336) (3,336) ------ ------- -------- -------- -------- ---------- ------- -------- Balance, December 31, 1997........... 11 -- 7,046 9,331 (3,336) 13,052 Issue 65,000 common shares at $5 per share ................. -- 325 325 Issue 20,775 convertible preferred stock as partial consideration for the purchase of Whiski Jack . -- $ 2,078 2,078 Cumulative translation adjustment $ (111) (111) Net loss for the year ended (10,401) (10,401) December 31, 1998................ ------ ------- -------- -------- -------- ---------- ------- -------- Balance, December 31, 1998........... $ 11 $ -- $ 2,078 $ 7,371 $ 9,331 $ (13,737) $ (111) $ 4,943 ====== ======= ======== ======== ======== ========== ======= ======== The accompanying notes are an integral part of these financial statements.
F-5
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, ------------------------------------- 1997 1998 ----------------- ----------------- Operating activities Net loss ..................................................................... $ (3,336) $ (10,401) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .............................................. 252 6,033 Provision for doubtful accounts ............................................ 2,318 4,450 Equity loss in investments ................................................. (13) 25 Changes in other operating assets and liabilities: Vacation Interval receivables and other trade receivables .................. (5,753) (11,383) Inventories ................................................................ (132) 164 Refundable Mexican taxes ................................................... (3,375) 629 Cost of unsold vacation ownership intervals and related club memberships ... 627 8,515 Deferred loan costs ........................................................ (407) 69 Prepaid and other assets ................................................... (1,447) (327) Accounts payable and accrued liabilities ................................... 6,681 7 Taxes payable .............................................................. (815) (541) Unearned services fees ..................................................... 1,070 (1,129) ----------- ---------- Net cash used in operating activities (4,330) (3,889) Investing activities Purchase of vacation ownership business, net of cash acquired................. (85,482) (3,225) Purchase of land and other assets held for vacation ownership development .... (43) (5,240) Additions to office furniture and equipment .................................. (813) (1,968) ----------- ---------- Net cash used in investing activities ........................................... (86,338) (10,433) Financing activities Issuance of stock ............................................................ 1,013 325 Proceeds from shareholder loans .............................................. 4,900 -- Proceeds from issuance of notes payable to a bank in connection with the purchase transactions ............................................. 82,954 -- Additional bank and other loans .............................................. 1,000 11,575 Repayment of bank and shareholder loans ...................................... (84,104) (3,667) Issuance of Senior Notes, less related expenses .............................. 93,910 -- ----------- ---------- Net cash provided by financing activities ....................................... 99,673 8,233 Increase (decrease) in cash and cash equivalents ................................ 9,005 (6,089) Effect of exchange rate changes on cash ......................................... -- 44 Cash and cash equivalents, at beginning of the period ........................... -- 9,005 ----------- ---------- Cash and cash equivalents, at end of the period ................................. $ 9,005 $ 2,960 =========== ========== Supplemental disclosures of cash flow information Cash paid during the period for interest ..................................... $ 3,252 $ 14,053 Cash paid during the period for income and asset taxes ....................... 183 1,672 Non-cash investing activities Issuance of warrants in conjunction with debt offering ....................... $ 9,331 $ -- Issuance of common stock in conjunction with debt offering ................... 1,292 -- Issuance of common stock in settlement of financial advisory fees ............ 1,000 -- Conversion of shareholder loans to preferred stock ........................... 3,750 -- Issuance of preferred stock in conjunction with purchase of Whiski Jack ...... -- 2,078 Issuance of notes payable in conjunction with purchase of land ............... -- 5,000 The accompanying notes are an integral part of these financial statements.
F-6 RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share and interval data) 1. GENERAL INFORMATION General The financial statements include the accounts of Raintree Resorts International, Inc., a Nevada corporation, (the "Ultimate Parent") and all of its wholly owned subsidiaries (the "Company"). The Company develops, markets, and operates vacation ownership resorts in North America with resorts in Mexico, Canada and the United States. The Company's headquarters are located in Houston, Texas with administrative offices in Mexico City, Mexico and Whistler, British Columbia, Canada. Company Formation and Initial Operations On August 18, 1997, Raintree Resorts International, Inc. (formerly Club Regina Resorts, Inc.) which was incorporated in August 1996, purchased all of the stock of Desarrollos Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the "Predecessor Business"). In summary, the Company acquired net vacation ownership assets ("Regina Resorts") of approximately $86.8 million from a Mexican bank (Bancomer) using shareholder loans of approximately $3.8 million and seller financing of approximately $83 million. The allocation of the purchase price was to the following net assets (in millions): Vacation Interval receivables and other trade receivables........................................ $ 37.2 Land held for vacation ownership development .................................................... 12.2 Cost of unsold vacation ownership intervals and employee housing, etc. .......................... 33.8 Investment in a 50% held company ................................................................ 2.5 Cash and other assets ........................................................................... 6.0 Retained interests in hotel cash flows .......................................................... 4.0 ------ Total assets .................................................................................... 95.7 Less liabilities assumed ........................................................................ (8.9) ------ Net purchase price .............................................................................. $ 86.8 ======
Contemporaneous with the purchase, the real property of the Predecessor Business, the Regina Resorts and Westin Hotels, was segregated such that each would be able to be owned by separate companies. The Westin Hotels were then sold by the Company to SLT Realty Limited Partnership, an affiliate of Starwood Lodging Trust and Starwood Lodging Corporation (collectively "Starwood") for $132.75 million on August 18, 1997. No gain or loss was recognized on the sale. These transactions are referred to herein as the Purchase Transactions. As a result of the Purchase Transactions, the Company owns and operates three luxury Mexican vacation ownership resorts in Cancun, Puerto Vallarta and Cabo San Lucas, Mexico. Prior to August 18, 1997, the Company did not have significant operations or revenues and prior to April 1997 the Company was inactive. In connection with the Purchase Transactions, the Company borrowed approximately $83 million and replaced such borrowing with its Senior Notes. The Company is, and will continue to be, highly leveraged, with substantial debt service requirements. The Company has incurred losses since its inception and expects to incur a net loss for fiscal 1999. To achieve profitable operations the Company is dependent upon a number of factors, including its ability to increase its Vacation Interval inventory on an economical basis through development projects or acquisition of existing resort properties. The Company expects that its existing credit capacity and its ability to obtain capital financings as well as the Company's anticipated results of operations will be sufficient to fund its capital requirements through the year 1999. F-7 Acquisition of Whiski Jack On July 24, 1998, the Company acquired the assets and assumed certain liabilities of Whiski Jack Resorts Ltd. ("Whiski Jack") for approximately $6.6 million. The acquisition was accounted for as a purchase and, accordingly, the results of operations are included in the financial statements only for the periods subsequent to the date of acquisition. The purchase price has been allocated to the assets and liabilities assumed based upon the fair values at the date of acquisition. The excess purchase price over the fair values of the net assets acquired has been recorded as goodwill, totaling approximately $4.2 million, to be amortized pro rata as the individual weeks acquired in the acquisition are sold. Amortization expense was $2.9 million for the year ended December 31, 1998. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and prospects and market and economic conditions. Proforma Financial Information The following unaudited pro forma consolidated results of operations for the year ended December 31, 1997 and 1998 assume the Predecessor Business and Whiski Jack acquisitions occurred as of January 1, 1997:
Years Ended December 31, -------------------------------- 1997 1998 ------------- ------------- Net revenues ................................................................... $ 77,666 $ 81,237 Net loss ....................................................................... (9,122) (6,654) Net loss available to common shareholders ...................................... (9,949) (7,500) Basic and diluted loss per common share ........................................ (0.94) (0.70)
The pro forma adjustments include the pre-acquisition results of the Predecessor Business for the period from January 1, 1997 to August 17, 1997, and Whiski Jack for 1997 and for the period from January 1, 1998 to July 23, 1998. The adjustments include the recognition of deferred revenue and expenses that were previously accounted for under the lease method of accounting by the Predecessor Business, the amortization of goodwill generated from the acquisitions, interest expense on the debt assumed to be issued to finance the purchase, and the effect of the acquisitions on income taxes. The pro forma amounts are based upon certain assumptions and estimates and do not reflect any benefit from economies which might have been achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of each of the fiscal periods presented, nor are they indicative of the results that will be obtained in the future. New Product Structure Effective July 1, 1998, the Company put into effect a new product structure to sell its Vacation Intervals ("Vacation Intervals") under a right-to-use membership entitling owners to a 50-year contractual right to use Vacation Interval units. This right includes the right to participate either in (i) an extension of the contractual right to use if practicable under Mexican law or (ii) the proceeds from the sale of the Los Cabos, Cancun and Puerto Vallarta Resorts in 2047. This new membership has a term of 50 years instead of the 30 years which applied under the prior marketing structure. The Company believes that the change in structure has had a positive effect on its Mexican sales and marketing programs as it has been able to sell an interest that is more closely aligned with the traditional fee simple deeded interest offered by the timeshare industry to buyers of vacation intervals in the United States. The Company has also extended the same rights of ownership to purchasers of vacation ownership interest for the period from August 18, 1997 to July 1, 1998 through a legally enforceable assignment. The Company is currently examining the method by which such assignment will be evidenced to the purchasers. F-8 Amendment to Mexican Value Added Tax Law In December 1997, the Mexican Value Added Tax Law ("VAT") was amended to make all vacation ownership operations, regardless of the structure subject to the VAT, effective January 1, 1998. This would have caused a new Company member to pay 10 to 15% more for each Vacation Interval depending on the sales location. In response to these events, the Company decreased its Vacation Interval prices on an average of five percent to compensate in part for the tax charged to the customer. The Company will benefit, however, from the fact that the Company is now able to recover all of the VAT paid as part of the marketing efforts to sell the Vacation Intervals. The Company believes that because of these changes in the tax law and its marketing arrangements, the Company will be able to reduce VAT tax expenses equivalent to six percent of the revenue from the sale of Vacation Intervals. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany balances have been eliminated in consolidation. The Company reports its 50% interest in a company that owns and rents housing to both employees and non-employees of the Company using the equity method of accounting. Certain reclassifications have been made to prior year's financial statements to be consistent with the current year's presentation. Foreign Currency Accounting and Fluctuations The Company maintains its Mexican accounting records and prepares its financial statements for its Mexican subsidiaries in Mexican pesos. The accounts of the Mexican subsidiaries have been re-measured into United States ("U.S.") dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. The Company's stated sales prices are U.S. dollar denominated as are a significant amount of its vacation interval contracts receivable. Additionally, the Company's debt is U.S. dollar denominated. Accordingly, the Mexican pesos are translated to U.S. dollars for financial reporting purposes in using the U.S. dollar as the functional currency and exchange gains and losses as well as translation gains and losses are reported in income and expense. The resulting net exchange and translation losses for the period August 18, 1997 through December 31, 1997 (the period the Company had operations in Mexico during 1997) and the year ended December 31, 1998 were $1,333 and $4,299, respectively. This net loss was primarily related to the decline in the value of the peso to the U.S. dollar during the period August 18, 1997 through December 31, 1997 and the year ended December 31, 1998 as follows:
Exchange rates Pesos US Dollar -------------- ----- --------- August 18, 1997........................................................ 7.766 = $1.00 December 31, 1997...................................................... 8.083 = $1.00 March 31, 1998......................................................... 8.517 = $1.00 June 30, 1998 ......................................................... 9.041 = $1.00 September 30, 1998 .................................................... 10.112 = $1.00 December 31, 1998...................................................... 9.865 = $1.00
The Company uses the U.S. dollar as the functional currency in Mexico based on the Company's analysis of the salient factors for selection of functional currency under FASB Statement No. 52 - Foreign Currency Translation. Therefore, the recent decline in the inflation rate in Mexico below the threshold for mandatory designation of the functional currency as the U.S. dollar in Mexico, will not change the Company's accounting for its Mexican operations. The Company maintains its Canadian accounting records and prepares its financial statements for its Canadian subsidiaries in Canadian dollars. The balance sheet accounts of the Canadian subsidiaries have been re-measured into U.S. dollars. Accordingly, the Canadian dollars are translated to U.S. dollars for financial reporting purposes using the U.S. dollar as the basis for reporting translation gains and losses. The resulting net translation gains and losses are reported as required in the equity section of the balance sheet under the caption "cumulative translation adjustment." F-9 The future valuation of the Mexican peso and the Canadian dollar related to the U.S. dollar cannot be determined, estimated or projected. Comprehensive Income Comprehensive income is defined by Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, and is net income plus direct adjustments to stockholders' equity. The cumulative translation adjustment of the Company's Canadian foreign subsidiaries is the only such direct adjustment applicable to the Company. Cash and Cash Equivalents The Company considers demand accounts and short-term investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include $0.8 million in restricted funds at December 31, 1998. Vacation Interval Receivables and Concentration of Geographic and Credit Risk As of December 31, 1998, 95% of the Company's Vacation Interval receivables relate to sales that entitle the owner upon payment of a service fee, a defined right to use vacation ownership facilities at the Company's various resorts in Mexico. While the Company does not obtain collateral for such Vacation Interval receivables, the Company does not believe it has significant credit risk with regard to its Vacation Interval receivables, because in the instance of uncollectibility of a contract, the Company retains the right to recover and re-sell the underlying defaulted Vacation Interval. Historically, the Company has been able to re-sell such intervals at prices in excess of the defaulted receivable balances. Management believes the allowance for uncollectible accounts is adequate to cover probable losses inherent in the contracts receivable portfolio at December 31, 1998. The Company estimates that at December 31, 1998 approximately 57% of all of the Vacation Interval receivables were U.S. dollar denominated, 28% of all Vacation Interval receivables were denominated in UDIs, an obligation denominated in pesos which is adjusted for Mexican inflation ("UDI"), and 10% of all Vacation Interval receivables were denominated in Mexican pesos and 5% of all Vacation Interval receivables were denominated in Canadian dollars. A significant portion of the Company's customers reside in Mexico and all of the Company's sales offices which sell vacation ownership interest of Club Regina are currently located in Mexico. Any economic downturn in Mexico, which has a history of economic instability, could have a material adverse effect on the Company's business, results of operations and financial condition. Seasonality The Mexican and Canadian vacation ownership industry in general tends to follow seasonal buying patterns with peak sales occurring during the peak travel/tourism seasons, usually December through April and July and August. Seasonal influences also affect the Company's earnings so that net income and cash receipts from customer initial down payments are typically higher in the first and fourth calendar quarters. In Mexico, American tourists tend to vacation in the destinations where the Regina Resorts are located in the December through April season while Mexican tourists tend to travel to these destinations more frequently during the summer months. Fair Market Value of Financial Instruments The carrying amount of Vacation Interval receivables and other trade receivables, reimbursements receivable from Starwood for shared acquisition costs, notes payable, and notes payable to shareholders approximate their estimated fair market value because of the short-term maturity of those instruments and/or because they bear market interest rates as of December 31, 1998. The fair market value of the Senior Notes has not be determined since they are not traded on a formal exchange market and they are volatile due to being speculative in nature. F-10 Inventories Inventories, which include supplies, other consumables, and items held for sale in the Company's retail shops are stated at the lower of cost (FIFO method) or estimated market. Office Furniture and Equipment Office furniture and equipment is stated at cost net of accumulated depreciation of $57 and $662 at December 31, 1997 and 1998, respectively, and the office furniture and equipment are related to assets used by the Company in its administration and marketing functions and is depreciated using the straight line method over the estimated useful lives of three to seven years. Land Held for Vacation Ownership Development The Company owns a parcel of undeveloped beachfront property located in Cozumel, Mexico and a parcel of land adjacent to its Regina Resort located in Cabo San Lucas, Mexico. The Company plans to construct additional vacation ownership facilities on these parcels of land. Although preliminary architectural and engineering planning has commenced, no commitments have been made regarding these planned expansion projects. Further work on the Cozumel property will likely occur in late 2000 or later. Land held for vacation ownership development includes the cost of land, and additionally, development costs and capitalized interest. Interest of $0.5 million and $1.8 million during the year ended December 31, 1997 and 1998, respectively, was capitalized related to these developmental properties. Costs of Unsold Vacation Ownership Intervals and Related Club Memberships In Mexico, the Company is the beneficiary of trusts that hold fee simple title to the vacation ownership facilities at the three Regina Resorts. The Company reports its allocated acquisition costs related to these trust rights to use these facilities, to the extent that such Vacation Intervals were unsold, within the balance sheet as "cost of unsold vacation ownership interval weeks and related club memberships." At December 31, 1997 and 1998, the Company holds rights for 12,566 and 6,994 Vacation Interval weeks, respectively. The Company also includes in inventory the rights to Vacation Intervals sold prior to August 18, 1997 that revert back to the Company at the end of the 30-year lease. Trust rights in Mexico are carried at the lower of carrying amount or fair value less cost to sell. Fair value is estimated by discounting estimated future net cash flow from the sale of such rights. In Canada, the Company sells Vacation Interval ownership properties on a weekly interval basis under a fee simple title arrangement. The Company reports its costs related to these properties at the lower of cost or market, within the balance sheet as "Cost of unsold vacation ownership intervals and related club memberships". At December 31, 1998, the Company held title to properties totaling 585 weeks. Retained Interests in Hotel Cash Flows In connection with the August 18, 1997 Purchase Transactions discussed in Note 1, the Company sold the Westin Hotels to Starwood but retained an economic interest in the hotels which is defined by an agreement under which Starwood will pay the Company 20% of it's future cash flows, as defined, over a 50 year period. The Company allocated $4.0 million of its net purchase price to this agreement based on the estimated present value of expected payments arising from the agreement. The Company estimates that it will begin receiving amounts under this agreement in 2001. The Company will carefully monitor the expected cash flow based on the reported results of the hotel operations and will record an impairment loss if the carrying value of this asset should exceed the present value of the expected future cash payments. F-11 Deferred Loan Costs The costs incurred in connection with the Senior Notes and the Finova Capital Corporation credit agreement in the amount of $8,721 have been deferred and are being amortized over the term of the Senior Notes and credit agreement using the effective interest method. The balance of deferred loan costs was $8,697 and $7,413 at December 31, 1997 and 1998, respectively. Amortization expense for the years ended December 31, 1997 and 1998 totaled $92 and $1,215, respectively, and is included in interest expense. Revenue Recognition The Company recognizes sales of Vacation Intervals on an accrual basis after a binding sales contract is executed and an adequate down payment is received. For transactions that do not qualify for accrual method of accounting, all revenue is deferred using the deposit method. Advertising Expense The Company expenses advertising costs as incurred. Loss Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share also includes the assumed conversion of all securities, such as options, warrants, convertible debt and convertible preferred stock, if dilutive. Since the Company has a net loss for the periods reported, no conversion is assumed as conversion of the Company's warrants and stock options would be anti-dilutive. Additionally, the Preferred Stock and Convertible Preferred Stock are convertible only upon the consummation of an initial public offering and are, therefore, not included in weighted average number of common shares. The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share:
Year Ended December 31, --------------------------------------- 1997 1998 ----------------- ----------------- Numerator - Basic and Diluted: Loss available to common shareholders ............................... $ (3,568) $ (11,112) Denominator: Basic - weighted average number of common shares .................... 8,843,383 10,747,409 Adjustments: Warrants associated with Senior Notes ............................ -- -- Common stock options ............................................. -- -- Diluted ............................................................ 8,843,383 10,747,409 Loss per share Basic and diluted.................................................... $ (.40) $ (1.03)
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-12 Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares, as determined by the Board of Directors, at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants. New Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. The Company currently does not employ derivative instruments and believes that the adoption of SFAS No. 133, required in the year 2000, will not materially impact the Company. 3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES Vacation Interval receivables and other trade receivables were as follows:
December 31, -------------------------------- 1997 1998 -------------- -------------- Vacation Interval receivables ....................................... $ 43,872 $ 53,563 Service fee receivables ............................................. 2,156 1,047 Other trade receivables ............................................. 3,892 4,787 Less - allowances for uncollectible accounts ........................ (8,005) (7,562) --------- --------- Total ....................................................... $ 41,915 $ 51,835 ========= =========
At December 31, 1998, the weighted average interest rate earned on Vacation Interval receivables denominated in U.S. dollars was 13.1%, in Mexican pesos was 22.2%, in UDI's was 7.9%, and in Canadian dollars was 13.8%. These receivables are collected in monthly installments over periods ranging from 12 months to 9 years. The overall weighted average interest rate is 12.7%. The interest rates range from 8% to 40.9%. The following table reflects the principal maturities of Vacation Interval receivables as of December 31, 1998 (in thousands):
Period ended December 31: 1999 ............................................................................. $12,742 2000 ............................................................................. 12,859 2001 ............................................................................. 11,782 2002 ............................................................................. 8,207 Thereafter ........................................................................ 7,973
The activity in the Vacation Interval receivables and other trade receivables allowance for doubtful accounts for the year ended December 31, 1997 and 1998 is as follows:
December 31, ----------------------------------- 1997 1998 --------------- ---------------- Balance, beginning of year -- $ 8,005 Amount recorded in connection with Purchase Transaction ............. $ 5,500 -- Adjustment to purchase price allocation ............................ 850 -- Provision charged to expense ........................................ 2,318 4,450 Cancellation of contracts and receivables charge off ................ (663) (4,893) ---------- ---------- Balance, end of year ................................................ $ 8,005 $ 7,562 ========== ==========
F-13 4. SENIOR NOTES PAYABLE On December 5, 1997, the Company and its indirect wholly-owned Mexican financial subsidiary ("Issuers") jointly issued $100 million of Senior Notes due December 1, 2004. The Company also issued warrants to the noteholders to purchase 1,869,962 common shares. The estimated fair market value of the warrants on the date that the warrants were issued was $4.99 per warrant or $9,331 in total. This amount was recorded as an increase in shareholders' investment and original issue discount in the Company's balance sheet. The original issue discount is being amortized to expense over the warrant exercise period of 84 months. A portion of net proceeds ($82,954) was used to repay the outstanding loans and related accrued interest payable to the Company's lender bank (Bancomer). The Senior Notes are payable in U.S. dollars and bear interest at 13% per annum with interest payable semi-annually on June 1st and December 1st. The Senior Notes are general unsecured obligations of the Issuers. The indenture pursuant to which the Senior Notes were issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers to incur certain additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase equity interests (as defined) or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of the Issuers, issue or sell equity interests of the Company's subsidiaries, or enter into certain mergers and consolidations. In addition, under certain circumstances, the Issuers will be required to offer to purchase the Senior Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase, with the proceeds of certain asset sales (as defined). Any payments (interest or principal) made to the noteholders will be made free and clear of any withholding for any present or future taxes, duties, levies, imposts, assessments or other governmental charges of whatever nature imposed by Mexico or any subdivision of Mexico, or by any related authority or agency having power to tax, unless such taxes are required by law, rule or regulation to be withheld or deducted, in which case, subject to certain exceptions, the Issuers will pay such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by noteholders of the Senior Notes (including Additional Amounts) after such withholding or deduction will not be less than the amount that would have been received in the absence of such withholding or deduction. 5. NOTES PAYABLE Summary of Notes Payable - December 31, ---------------------------------------- 1997 1998 ------------------ ------------------ Notes Payable to a Bank ....... $ 1,000 $ 276 Cabos West Notes Payable ..... -- 5,000 Credit Agreement Notes ........ -- 9,086 Mortgages Payable ............. -- 2,773 Line of Credit ................ -- -- --------- --------- $ 1,000 $ 17,135 ========= ========= The current maturities of Senior Notes and notes payable are $5,611 in 1999, $564 in 2000, $453 in 2001, $433 in 2002, $402 in 2003 and $109,672 thereafter. Notes Payable to a Bank - The notes payable to a bank at December 31, 1997 and 1998 had interest payable at 11%, and 7.75%, respectively. The 1997 note was paid in 1998 and the 1998 notes are due in 1999 and 2000 in the amounts of $162 and $114, respectively. Cabos West Notes Payable - On September 17, 1998, in connection with the Cabos West land purchase, the Company entered into notes payable secured by the land. The notes bear interest at 10% and are due in 1999. F-14 Credit Agreement Notes - In November 1998, the Company negotiated a commitment letter with Finova Capital Corporation, which included an agreement to provide a receivables based credit facility of $20 million that was finalized in November 1998, and an inventory based credit facility to be finalized in 1999. The agreement limits the use of proceeds to acquisitions, development, working capital and repayment of existing obligations. Notes receivable denominated in United States dollars and held by United States or Canadian residents are assigned to the lender and as payments are received, they are applied to this loan. The agreement requires replacement of notes that become 60 days past due. Furthermore, the outstanding loan balance bears interest at a fluctuating base rate plus 175 points, which, at December 31, 1998 was 9.5% per annum. The fluctuating base rate is the "Corporate Base" rate of Citibank, N.A., New York, which the bank publicly announces from time to time, and is a rate charged by the bank to it's most creditworthy commercial borrowers. Also, the agreement requires the Company to maintain certain minimum financial ratios including a minimum capital requirement. The line of credit matures 84 months from the date of the last advance made against it. Mortgages Payable - Mortgages payable consist of the assignment of specific Whiski Jack Vacation Interval receivables to related and third party buyers. The mortgages payable bear interest at a major Canadian bank's prime rate plus 1.25% to prime plus 8.5% and are payable in monthly installments over periods ranging from twelve months to ten years. The average interest rate during 1998 was 11.1% and at December 31, 1998 the prime rate was 6.75%. Line of Credit - In July 1998, the Company received approval from Bancomer of a $20 million line of credit that expires July 2002. The agreement limits the use of proceeds to the payment of interest incurred and payable under the Senior Notes. The outstanding loan balance bears interest at 11.5% per annum. Under the line of credit, all borrowings and interest will be payable in U.S. dollars. Loans under the line will be secured by a portion of the present and future United States dollars, pesos and UDI based accounts receivable of an indirect wholly-owned subsidiary (CR Resorts Puerto Vallarta). Also, the agreement requires certain of the Company's subsidiaries to maintain certain minimum financial ratios. In order to activate the line of credit, the Company will be required to pay the bank a fee of 1.5% of funds drawn under the line of credit. 6. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA In July 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued. SFAS, No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has only one line of business, which develops, markets and operates luxury vacation ownership resorts. The Company has operations in three geographic areas. The following is a breakdown of revenues and assets by geographic area:
United Mexico Canada States Total -------- -------- -------- -------- As of and for year ended December 31, 1998: Revenues from external customers ......................... $ 66,036 $ 6,524 $ 1,423 $ 73,983 Operating Income (loss) .................................. 13,481 (1,550) (2,414) 9,517 Total Assets ............................................. 117,541 9,643 2,483 129,667 Capital expenditures ..................................... 11,381 163 190 11,734 As of and for year ended December 31, 1997: Revenues from external customers ......................... $ 24,857 $ -- $ 847 $25,704 Operating Income (loss) .................................. 3,670 -- (833) 2,837 Total Assets ............................................. 105,051 -- 14,928 119,979 Capital expenditures ..................................... 930 -- 51 981
Revenues are attributed to countries based on the location of the vacation ownership resorts. F-15 7. RELATED PARTY TRANSACTIONS AND AGREEMENTS Related Party Mortgages Payable At December 31, 1998, the aggregate principal amount of mortgages payable to related parties was $1,868. Interest accrues on the mortgages at rates ranging from prime plus 3% to prime plus 7.75% per annum and are payable in monthly installments over periods ranging from twelve months to ten years. Related Party Notes Payable At August 18, 1997, the Company had a $1.15 million note payable to CR Management Company, a partnership and the original shareholder, which accrued interest at 8%. The note plus accrued interest was paid in full in December 1997. Related Party Agreements In connection with the Purchase Transactions, the Company and Starwood entered into various operating agreements related to the joint operation and ownership of certain common facilities at the combined resorts. Starwood has rented specified rooms at two of the Company's Regina Resorts for a one-year period ending August 18, 1998 for $1.06 million which has been recognized into income along with related fees of $1.95 million over the term of the agreements. The operating agreements provide for certain operating standards at the combined resorts and prohibit the Company from renting vacant vacation ownership units on a transient basis. The Company will be liable for significant penalties should it violate certain provisions of these operating agreements. In connection with the sale of the Westin Hotels to Starwood as discussed in Note 1, the Company entered into an agreement with Starwood which provided the Company with a retained economic interest in the future cash flows of the hotels in excess of defined levels. This agreement provides, among other things, for the Company to receive 20% of the cash flow, as defined, including cash flow from any future refinancing and/or sale of the hotel facilities. The Company is to provide certain strategic advisory services to Starwood which will involve minimal cost to the Company. The Company has allocated a value of $4 million to this retained interest in the balance sheet under the caption, "retained interest in hotel cash flows," based on discounted estimated future cash flows to be received by the Company. 8. SHAREHOLDERS' INVESTMENT Preferred Stock On May 20, 1997, the Company obtained a loan from Starwood Capital of $0.75 million which included warrants for the issuance of 2 million shares of common stock at no exercise price. The Company determined that the value of the warrants on the date of issue was nominal. Accordingly, no debt discount was recorded in connection with the borrowing. The Company had obtained additional shareholder loans of $3 million which were subordinated to other indebtedness and provided for interest to accrue at the annual rate of 16.5%. On October 29, 1997, the shareholders waived all interest and exchanged the $3.75 million of total shareholder loans for 37,500 shares of Class A Preferred Stock (Class A Preferred) which provide for preferential annual dividends of $619 (16.5% of $3.75 million), accruing from and after August 18, 1997. The dividend rate shall be 20% after August 18, 2002. Cumulated dividends accrue dividends, on a quarterly basis, at the rate of 12% per year. Cumulative unpaid dividends totaled $232 and $943 at December 31, 1997 and 1998, respectively. No cash dividends are required to be paid prior to an initial public offering of the Company's common stock or the sale of the Company. Under the Class A Preferred, upon an initial public offering or stock merger by the Company, the Company may redeem all cumulated dividends in exchange for either cash or stock of the Company valued at 85% of the IPO price or 100% of the merger consideration value, as the case may be. Furthermore, in such event, the holders of the Class A Preferred have the right to convert the liquidation preference of each share of Class A Preferred into stock of the Company valued at 85% of the IPO price or 100% of the merger consideration value, as the case may be. F-16 So long as any shares of the Class A Preferred are outstanding, no dividend is permitted to be declared or paid or set apart for payment on any other series of stock ranking on a parity with the Class A Preferred as to dividends, unless all unpaid dividends on the Class A Preferred are paid. Furthermore, if all accrued dividends on the Class A Preferred Stock have not been paid, the Company is not permitted to declare or pay or set apart for payment any dividends or make any other distributions on its Common Stock or any other class of stock or series thereof of the Company ranking, as to distributions in the event of a liquidation, dissolution or winding up of the Company, voluntary or involuntary (a "Liquidation"), junior to the Class A Preferred until such dividends on the Class A Preferred and any redemption obligations due and owing under the Certificate of Designations governing the Class A Preferred have been paid. Upon any Liquidation of the Company, the holders of the Class A Preferred are entitled to receive, out of assets of the Company which remain after satisfaction in full of all valid claims of creditors of the Company and which are available for payment to stockholders, and subject to the rights of the holders of any stock of the Company ranking senior to or on a parity with the Class A Preferred in respect of distributions upon Liquidation, before any amount shall be paid to or distributed among the holders of Common Stock, or any other shares ranking junior to the Class A Preferred in respect of distributions upon Liquidation, liquidating distributions per share of the Class A Preferred in the amount of $100 per share, plus an amount equal to the accrued and unpaid dividends thereon. Preferred shares also provide that dividends will accrue monthly whether paid currently or not. Dividends may be paid by the Company, at its option in shares of common stock. The Class A Preferred Stock is redeemable at the Company's option and is convertible at the holders option into shares of common stock. Convertible Preferred Stock In connection with the purchase of Whiski Jack, the Company issued 20,775 shares of redeemable convertible preferred stock (Convertible Preferred) through its wholly owned subsidiary, Raintree Resorts International Canada, Ltd. (Raintree Canada). The shares are redeemable with a liquidation preference of $100 per share. The preferred shares accrue dividends at the rate of 10% per annum, which are required to be paid quarterly beginning on October 31, 1998. If the Company has not satisfied certain conditions, primarily the completion of an initial public offering of the Company's common stock, prior to November 1, 1998 and prior to April 1, 1999, the Convertible Preferred will be redeemable by the holders thereof in installments of $500 beginning April 1, 1999, and quarterly thereafter. If the conditions are met, the Convertible Preferred will automatically convert into shares of exchangeable preferred of Raintree Canada, based on the price of the Company's common stock, if publicly traded. Each share of exchangeable preferred cannot be transferred and will only be exchangeable for one share of the Company's common stock. Company Stock Options 1997 Long Term Incentive Plan - On August 18, 1997, the Board of Directors and the Company's stockholders approved the Company's 1997 Long Term Incentive Plan (the Plan). The purpose of the Plan is to provide directors, officers, key employees, consultants and other service providers with additional incentives by increasing their ownership interest in the Company. Individual awards under the Plan may take the form of one or more of (i) either incentive stock options or non-qualified stock options; (ii) stock appreciation rights; (iii) restricted or deferred stock; (iv) dividend equivalents and (v) other awards not otherwise provided for, the value of which is based in whole or in part upon the value of the common stock. The maximum number of shares of common stock that may be subject to outstanding awards, determined immediately after the grant of any award, may not exceed the greater of 800,000 shares or 8% of the aggregate number of shares of common stock outstanding. Other Options - On August 15, 1997, the Company issued stock options covering 100,000 shares of common stock to the Company's president at an agreed upon exercise price of $2 per share, which management believes was not less than the estimated fair market value of the common stock on the date of grant. A total of 25,000 of these options vested immediately; the remainder vest at the rate of 25,000 per year for three years. F-17 Stock Option Summary - As allowed by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123), the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock option plans. Under APB 25, the Company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. As required by FAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of FAS 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions: risk-free interest between 6.33% and 5.16% for 1997 and 1998 dividend yield of 0%, expected market price volatility factor of 0, and a option life of ten years for both years ended December 31, 1997 and 1998. The following are pro forma disclosures that may not be representative of similar future disclosures because: (i) additional options may be granted in future years and (ii) the computations used to estimate the "fair value" of the stock options are subject to significant subjective assumptions, any one or all of which may differ in material respects from actual amounts. Furthermore, management believes that these disclosures may vary were the Company's common stock publicly traded.
Years Ended December 31, ------------------------------- 1997 1998 ------------- ------------- Net income available to common shareholders as reported .......... $ (3,568) $ (11,112) Estimated "fair value" of stock options vesting during the periods. -- (192) ----------- ----------- Adjusted net loss ................................................ $ (3,568) $ (11,304) =========== =========== Adjusted loss per share - basic and diluted ...................... $ (.40) $ (1.05) Number of common shares used in the per share calculations: Basic and diluted .............................................. 8,843,383 10,747,409
A summary of all the Company's stock option activity, and related information for the years ended December 31 follows:
1997 1998 --------------------------- --------------------------- Weighted- Weighted- Options Average Options Average (000) Exercise Price (000) Exercise Price ------- -------------- ------- ---------------- Outstanding at the beginning of the year ................. -- $ -- 258 $ 3.84 Granted .................................................. 263 3.86 450 5.00 Exercised ................................................ -- -- -- -- Forfeited ................................................ 5 5.00 62 5.00 Outstanding at the end of the year ...................... 258 3.84 646 4.54 Exercisable at the end of the year........................ 57 3.67 165 4.09
Exercise prices for options outstanding as of December 31, 1998 ranged from $2.00 to $5.00. The weighted-average remaining contractual life of those options is 9.3 years. F-18 9. INCOME TAXES The Company, a Nevada corporation, files an annual U.S. Federal income tax return. The Company incurred net losses for the period ended December 31, 1997 and 1998 in Mexico as well as the United States. Accordingly, no provision for U.S. or Mexican income taxes was made during 1997 or 1998. The Company's Canadian operations which were acquired in 1998 were taxable for Canadian tax purposes. The Company has indicated that the earnings of the Mexican and Canadian subsidiaries will be permanently reinvested by those subsidiaries. Accordingly, a provision for taxes has been made for 1998 Canadian taxes, with no addition for dividend withholding tax or for U.S. federal income tax or credits on such income. Furthermore, no addition for dividend withholding tax or for U.S. federal income tax or credits on Mexican income has been provided. For the period ended December 31, 1997, the Mexican subsidiaries of the Company filed separate Mexican income tax returns. An application has been made to file certain of the income tax returns of the Company's Mexican operations on a consolidated basis beginning in 1998. In connection with the Purchase Transactions of August 18, 1997, the Company and Starwood were allocated a portion of the net operating losses of the Predecessor Businesses. The Company anticipates that it has received approximately $60 million of Mexican net operating losses, which will begin to expire in the year 2000 as follows: 2000 -- $2.5 million, 2001 -- $9 million, 2002 -- $14.3 million, 2003 -- $33.6 million, and the remainder through the year 2005. For financial statement purposes, a valuation allowance of $20 million has been recognized to offset the estimated $20 million of deferred tax assets related to those carryforwards. Additionally, the Mexican subsidiaries have approximately $1 million of asset tax carryovers from prior periods which will be used to offset future taxable income, to the extent that the net operating losses are no longer available. For financial statement purposes, a valuation allowance has been recognized to offset the estimated deferred tax assets related to these carryovers. The U.S. federal income tax regulations may, under certain circumstances, cause income transactions in Mexico or Canada to give rise to U.S. income taxes, subject to an adjustment for foreign tax credits. For 1997, the Company's Mexican operations subsequent to August 18, 1997 resulted in losses for purposes of U.S. federal income taxation. For 1998, Mexican operations gave rise to a loss for purposes of U.S. federal income taxation, and as stated above, no provision has been made for U.S. tax on such income. Conversely, the Canadian operations will give rise to income for purposes of U.S. federal income taxation under Subpart F of the Internal Revenue Code. This income will be recognized to the extent of current Canadian earnings and profits. However, such income will be offset by U.S. net operating losses currently available, and therefore, no provision has been made for U.S. tax on such income. Furthermore, the foreign tax credits associated with Subpart F income will give rise to an additional deferred tax asset for U.S. purposes. Federal income taxes are as follows:
Year Ended December 31, 1997 Year Ended December 31, 1998 ---------------------------------- -------------------------------------------- U. S. Mexico Total U. S. Mexico Canada Total -------- -------- -------- -------- -------- -------- -------- Federal Current ........................ $ -- $ 909 $ 909 $ -- $ 100 $ 572 $ 672 Deferred ....................... -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- $ -- $ 909 $ 909 $ -- $ 100 $ 572 $ 672 ======== ======== ======== ======== ======== ======== ========
Year Ended December 31, 1997 Year Ended December 31, 1998 ---------------------------------- -------------------------------------------- U. S. Mexico Total U. S. Mexico Canada Total -------- -------- -------- -------- -------- -------- -------- Income tax expense (recovery) at the statutory rate...................... $ (390) $ (175) $ (565) $ (1,056) $ 212 $ (531) $ (1,375) Increase (decrease) resulting from Non-deductible expenses.............. 44 -- 44 160 -- 960 1,120 Exchange losses net of tax inflation. -- 178 178 -- (224) -- (224) Other ............................... 346 906 1,252 896 112 143 1,151 -------- -------- -------- -------- -------- -------- -------- $ -- $ 909 $ 909 $ -- $ 100 $ 572 $ 672 ======== ======== ======== ======== ======== ======== ========
F-19 Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effects of these temporary differences for the years ended result principally from the following:
Year Ended December 31, 1997 Year Ended December 31, 1998 ---------------------------------- -------------------------------------------- U. S. Mexico Total U. S. Mexico Canada Total -------- -------- -------- -------- -------- -------- -------- Deferred income tax liabilities Depreciation ............... $ -- $ (140) $ (140) $ -- $ (812) $ -- $ (812) Inventories ................ -- (331) (331) -- (305) -- (305) Prepaid expenses / fees..... (234) (342) (576) -- (253) -- (253) Accounts receivable ........ -- -- -- -- (7,566) -- (7,566) -------- -------- -------- -------- -------- -------- -------- Total (234) (813) (1,047) -- (8,936) -- (8,936) Deferred income tax assets Deferred finders fee........ 414 -- 414 -- -- -- -- Reserves ................... -- 2,804 2,804 -- 3,517 -- 3,517 Unearned service fees ...... -- 596 596 -- 700 -- 700 Asset tax carryovers ....... -- 1,015 1,015 -- 1,026 -- 1,026 Tax loss (NOL) carryovers .. 166 23,188 23,354 1,242 21,838 -- 23,080 Foreign tax credits ........ -- -- -- 75 -- -- 75 -------- -------- -------- -------- -------- -------- -------- Total 580 27,603 28,183 1,317 27,081 -- 28,398 Valuation allowance (346) (26,790) (27,136) (1,317) (18,145) -- (19,462) -------- -------- -------- -------- -------- -------- -------- Total $ -- $ -- $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ======== ======== ========
10. CONTINGENCIES AND COMMITMENTS General The Company is subject to various claims arising in the ordinary course of business, and is a party to various legal proceedings which constitute ordinary routine litigation incidental to the Company's business. In the opinion of management, all such matters are either adequately covered by insurance or are not expected to have a material adverse effect on the Company. Lease Information The Company leases administrative and sales office space and certain equipment under non-cancellable lease agreements. Total rent expense for the years ended December 31, 1997 and 1998 was approximately $317 and $1,659, respectively. These operating leases expire in various years in the future. Some of these leases may be renewed. Future minimum payments under all of the Company's non-cancelable operating leases with initial terms of one year or more were as follows at December 31, 1998: 1999 ............................................................................. $ 1,634 2000 ............................................................................. 1,123 2001 ............................................................................. 731 2002 ............................................................................. 641 2003 ............................................................................. 105 -------- Total ............................................................................ $ 4,234 ========
Villa Vera Acquisitions The Company has executed a letter of intent and made an advance payment of $500 to acquire the land and facilities of the Villa Vera Hotel & Racquet Club (the "Villa Vera") for $6.1 million. The purchase price includes the cost of conversion of certain of the 74 hotel units into vacation ownership units. The Villa Vera is in Acapulco, Mexico and the vacation ownership units will increase the Company's inventory by approximately 3,200 vacation interval weeks. Closing of this acquisition is expected in late 1999. F-20 Canadian Condominium Acquisitions The Company has committed to purchase 23 condominium units in Whistler, British Columbia at an aggregate purchase price of $4.4 million. Deposits of $409 have been paid with the balance to be paid during 1999, or thereafter, based on completion of construction and transfer of ownership. Legal Proceedings The Company is currently subject to litigation with respect to claims that arose prior to August 18, 1997 respecting employment, contract, construction and commissions disputes, among others. In management's judgment, none of such lawsuits against the Company is likely to have a material adverse effect on the Company. Moreover, pursuant to the Stock Purchase Agreement with Bancomer, the Company is entitled to indemnification for all such claims against it. In addition, the Company is subject to litigation with respect to a limited number of claims that arose on or after August 18, 1997. In management's judgment, none of such lawsuits against the Company are likely to have a material adverse effect on the Company. F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of CR Resorts Capital, S. de R.L. de C.V.: We have audited the accompanying balance sheets of CR Resorts Capital, S. de R.L. de C.V. (a Mexican Corporation), translated into U.S. dollars, as of December 31, 1997 and 1998, and the related statements of operations and accumulated results and cash flows for the period from August 18, 1997 through December 31, 1997, and for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the translated financial statements referred to above present fairly, in all material respects, the financial position of CR Resorts Capital, S. de R.L. de C.V., as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from August 18, 1997 through December 31, 1997, and for the year ended December 31, 1998, in conformity with the accounting principles generally accepted in the United States. ARTHUR ANDERSEN March 19, 1999 Mexico City, Mexico F-22
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A Wholly Owned Finance Subsidiary) BALANCE SHEETS (In thousands of U.S. dollars) December 31, ------------------------------- 1997 1998 ----------- ----------- Assets Cash ................................................................ $ 8 $ 24 Loans and related accrued interest receivable from affiliates........ 90,862 94,751 Deferred loan costs, net of accumulated amortization of $67 and $1,010 at December 31, 1997 and 1998 respectively......... 5,536 5,596 Other assets......................................................... 2 295 ----------- ----------- Total assets ............................................................ $ 96,408 $ 100,666 =========== =========== Liabilities and Shareholders' Equity Accrued expenses .................................................... $ 138 $ 1,267 Due to Raintree Resorts International, Inc. (Ultimate Parent) ....... 13,931 17,116 Notes payable to a bank ............................................. 1,000 -- Senior Notes due 2004, bearing interest at 13%, net of unamortized original issue discount of $9,469 and $8,104 at December 31, 1997 and 1998, respectively....................... 80,530 81,896 Accrued interest payable ............................................ 808 1,025 ----------- ----------- Total liabilities ....................................................... 96,407 101,304 Shareholders' Equity Capital stock........................................................ -- -- Accumulated results.................................................. 1 (638) ----------- ----------- Total shareholders' equity............................................... 1 (638) ----------- ----------- Total liabilities and shareholders' equity............................... $ 96,408 $ 100,666 =========== =========== The accompanying notes are an integral part of these financial statements.
F-23
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A Wholly Owned Finance Subsidiary) STATEMENTS OF OPERATIONS AND ACCUMULATED RESULTS (In thousands of U.S. dollars) For the Period August 18, 1997 For the through Year Ended December 31, December 31, 1997 1998 ----------- ----------- Revenues, representing interest and related fees charged to affiliates .. $ 3,778 $ 15,960 Expenses Interest expense on bank loans and Senior Notes ..................... 3,623 14,949 Interest expense on notes payable to the Ultimate Parent ............ 42 889 General and administrative, including $94 and $244 of managementfees charged by an affiliate for accounting and administrative services for the periods ended December 31, 1997 and 1998, respectively.... 101 783 Translation loss (gain), net ........................................ 11 (22) ----------- ----------- Total expenses 3,777 16,599 ----------- ----------- Income (loss) before income taxes........................ 1 (639) Income taxes....................................................... -- (273) Tax loss carryforwards............................................. -- 273 ----------- ----------- Net income (loss) for the period......................................... 1 (639) Accumulated results at beginning of period .............................. -- 1 ----------- ----------- Accumulated results at end of period .................................... $ 1 $ (638) =========== =========== The accompanying notes are an integral part of these financial statements.
F-24
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A Wholly Owned Finance Subsidiary) STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) For the Period August 18, 1997 For the through Year Ended December 31, December 31, 1997 1998 ----------- ----------- Operating activities Net income (loss) for the period ..................................... $ 1 $ (639) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of loan costs and discount 158 2,379 Changes in operating assets and liabilities Other assets ...................................................... (2) (363) Due to Ultimate Parent ............................................ 620 (615) Due from affiliates ............................................... (4,158) (3,889) Accrued expenses and accrued interest ............................. 946 1,346 ----------- ----------- Net cash used in operating activities .................................... (2,435) (1,781) Investing activities Loans to affiliates .................................................. (86,704) -- ----------- ----------- Cash used in investing activities ........................................ (86,704) -- ----------- ----------- Financing activities Proceeds from Ultimate Parent loan ................................... 3,750 3,800 Proceeds from issuance of notes payable to a bank in connection with the purchase transactions .................................... 82,954 -- Repayment of bank loans .............................................. (82,954) (3,000) Issuance of Senior Notes ............................................. 90,000 -- Payments for debt issuance costs ..................................... (5,603) (1,003) Proceeds from bank loan .............................................. 1,000 2,000 ----------- ----------- Net cash provided by financing activities ................................ 89,147 1,797 ----------- ----------- Increase in cash ......................................................... 8 16 Cash at beginning of period............................................... -- 8 ----------- ----------- Cash at end of period .................................................... $ 8 $ 24 =========== =========== Supplemental disclosure of cash flow information Cash paid during the period for interest ............................. $ 2,913 $ 12,444 =========== =========== Non-cash financing activities Increase in due to affiliate resulting from debt discount and costs $ 8,398 $ 2,790 =========== =========== The accompanying notes are an integral part of these financial statements.
F-25 CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A Wholly Owned Finance Subsidiary) NOTES TO FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share data) 1. ORGANIZATION AND FINANCIAL ACTIVITY CR Resorts Capital, S. de R.L. de C.V. ("Capital"), which is 100% owned by Canarias Future SRL, a wholly-owned subsidiary of Raintree Resorts International, Inc. (formerly "Club Regina Resorts, Inc.") (the "Ultimate Parent"), was formed in August, 1997 for purposes of obtaining financing of the Ultimate Parent's Mexican operations. The Company has no employees, therefore administrative services are provided by an affiliated company. On August 18, 1997, the Ultimate Parent purchased all of the stock of Desarrollos Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the "Predecessor Businesses"). Contemporaneous with the purchase, the real property was segregated into condominium regimes so that the Regina Resorts and Westin Hotels would be able to be owned by separate companies. The Westin Hotels were then sold to SLT Realty Limited partnership, an affiliate of Starwood Capital Group, L.L.C. ("Starwood"). These transactions are referred to herein as the Purchase Transactions. On August 18, 1997, Capital obtained bank loans aggregating $82,954 as well as other related party loans that were used to make loans to the operating subsidiaries of the Ultimate Parent. See Note 4. On December 5, 1997, Capital and its Ultimate Parent ("Issuers") jointly issued $100 million of Senior Notes due December 1, 2004 ("Senior Notes") and Capital recorded $90 million of such debt along with the related deferred loan costs of $5,603. The Ultimate Parent also issued warrants to the noteholders to purchase 1,869,962 common shares. These warrants were estimated to have a value of $4.99 per warrant or $9,331 in total. This amount was recorded as an increase in shareholders' investment by the Ultimate Parent and as original issue discount and account payable to the Ultimate Parent in the amount of $9,561 on Capital's balance sheet. The original issue discount is being amortized to expense over the warrant exercise period of 84 months and was $91 and $1,366 for the periods ended December 31, 1997 and 1998, respectively, and is included in interest expense. Substantially, all of the net proceeds of the Senior Notes offering were used to repay the outstanding loans and related accrued interest payable by Capital to its lender bank (Bancomer). The Senior Notes are payable in United States ("U.S.") Dollars and bear interest at 13% with interest payable semi-annually on June 1st and December 1st. The Senior Notes are general unsecured obligations of the Issuers. Any payments (interest or principal) in respect of the Senior Notes will be made free and clear of and without any withholding or deduction for or on account of any present or future taxes, duties, levies, imposts, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of Mexico or any subdivision thereof or by any authority or agency therein or thereof having power to tax ("Taxes"), unless such Taxes are required by law, rule or regulation or by the interpretation or administration thereof to be withheld or deducted, in which case, subject to certain exceptions, the Issuers will pay such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by holders (the "Holders") of the Senior Notes (including Additional Amounts) after such withholding or deduction will not be less than the amount that would have been received in the absence of such withholding or deduction. F-26 The indenture pursuant to which the Senior Notes were issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers to incur additional Indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase Equity Interest (as defined) or Subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of the Issuers, issue or sell Equity Interests of the Ultimate Parent's subsidiaries, or enter into certain mergers and consolidations. In addition, under certain circumstances, the Issuers will be required to offer to purchase the Senior Notes as a price equal to 100% of the principal, if any, to the date of purchase, with the proceeds of certain Assets Sales (as defined). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Translation to U.S. Dollars All amounts are recorded in the Company's accounting records in Mexican pesos. Since the significant transactions are denominated in U.S. dollars, the functional currency of the Company's operations is the U.S. dollar. Therefore, the Mexican peso financial statements were remeasured into U.S. dollars by applying the procedures specified in Statement of Financial Accounting Standards (SFAS) No. 52 as follows: a) Quoted year-end rates of exchange are used to remeasure monetary assets and liabilities. b) All other assets and shareholders' investment accounts are remeasured at the rates of exchange in effect at the time the items were originally recorded. c) Revenues and expenses are remeasured at the average rates of exchange in effect during the period. d) Foreign exchange gains and losses recorded in Mexican pesos as a result of fluctuations in the rate of exchange between the Mexican peso and U.S. dollar are eliminated. e) Translation gains and losses arising from the remeasurement are included in the determination of net income of the period in which such gains and losses arise. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Deferred Loan Costs The costs incurred in connection with the issue of the Senior Notes, due 2004, have been deferred in the balance sheets and are being amortized on an effective interest rate method over the seven-year term of these Senior Notes. Amortization expense for the periods ended December 31, 1997 and 1998 totaled $67 and $943, respectively, and is included in interest expense. Income Taxes Deferred income taxes are provided by the liability method in accordance with SFAS No. 109 for all temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. F-27 SFAS No. 109 requires that deferred tax liabilities or assets at the end of each period be determined using the tax rate expected to be in effect when the related taxes are expected to be paid or recovered. Accordingly, income tax provisions increase or decrease in the same period in which a change in tax rates is enacted. There are no significant timing differences between book and tax basis. Due to the uncertainty of their realization, the Company has not recorded the deferred income tax asset for the potential future tax saving related to tax loss carryforwards amounts indicated in Note 6. Financial Instruments The Company has considered the disclosure provisions of Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk", as well as the provisions of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The Company does not have any financial instruments which would call for any additional disclosures under Statements 105 and 107. The fair market value of the Senior Notes has not been determined since they are not traded on a formal exchange market and they are volatile due to being speculative in nature. Transactions in Foreign Currency Foreign currency transactions are recorded at the exchange rate as of the date of the transaction. At December 31, 1997 and 1998, the Company adjusted its foreign currency denominated assets and liabilities to the exchange rate of 8.0833 and 9.865 Mexican pesos per U.S. dollar, respectively. 3. RELATED PARTY TRANSACTIONS AND BALANCES Loans Receivable from Intercompany Affiliates Loans receivable from affiliates are payable in U.S. dollars upon demand and bear interest at 16% and 13.80% in 1997 and 1998, respectively. Receivable balances at December 31, are:
1997 1998 ----------- ----------- Top Acquisition Sub, S. de R.L. de C.V. $ 22,898 $ 27,290 CR Resorts Puerto Vallarta, S. de R.L. de C.V. 47,791 51,722 CR Resorts Cancun, S. de R.L. de C.V. 7,779 9,308 CR Resorts Los Cabos, S. de R.L. de C.V. 12,246 11,951 Corporacion Mexitur, S. de R.L. de C.V. - (5,900) Other 148 380 ----------- ----------- $ 90,862 $ 94,751 ============ ===========
Loans receivable from affiliates and associated interest income are eliminated in the consolidation of Capital into the consolidated financial statements of the Ultimate Parent. Notes Payable to Related Parties At December 31, 1997 and 1998, Capital had $3.75 million and $7.55 million of notes payable to the Ultimate Parent which bear interest at 16% and are payable upon demand. Notes payable to related parties and the associated interest expense are all payable in U.S. dollars and have been eliminated in the consolidation of Capital into the consolidated financial statements of the Ultimate Parent. F-28 4. NOTES PAYABLE TO A BANK The note payable to a bank at December 31, 1997 represented a $1 million loan with interest at 11% per annum which was due on January 19, 1998. Capital had notes payable to a bank at August 18, 1997 of $82,954 with interest at approximately 10% per annum. These loans were paid in full on December 5, 1997 from the proceeds of the Senior Note offering. 5. LINE OF CREDIT In July 1998, the Company received approval from Bancomer of a $20 million line of credit that expires July 2002. The agreement limits the use of proceeds to the payment of interest incurred and payable under the Senior Notes. The outstanding loan balance bears interest at 11.5% per annum. Under the line of credit, all borrowings and interest will be payable in U.S. dollars. Loans under the line will be secured by a portion of the present and future United States dollars, pesos and UDI based accounts receivable of an indirect wholly-owned subsidiary (CR Resorts Puerto Vallarta, S. de R.L. de C.V.). Also, the agreement requires certain of the Company's affiliates to maintain certain minimum financial ratios. In order to activate the approved line of credit, the Company will be required to pay the bank a fee of 1.5% of fund drawn under the line of credit. At December 31, 1998, there were no outstanding balances under this facility. 6. TAX ENVIRONMENT Income and Asset Tax Regulations The Company is subject to income taxes (ISR) and the asset tax (IMPAC). ISR is computed taking into consideration the taxable and deductible effects of inflation, such as amortization calculated on restated asset values and considering the effects of inflation on certain monetary assets and liabilities through the inflationary component. The statutory rate for income taxes was 34% for the year ended December 31, 1998. Beginning in 1999, the income tax rate increased from 34% to 35%, with the obligation to pay this tax each year at a rate of 30% (transitorily 32% in 1999) and the remainder upon distribution of earnings. IMPAC is computed at an annual rate of 1.8% of the average of the majority of restated assets less certain liabilities, and the tax is paid only to the extent that it exceeds the ISR of the period. Any required payment of IMPAC is recoverable against any excess of ISR over IMPAC for the preceding three and following ten years. The main differences that affect taxable income are the recognition of inflation effects for tax purposes through the inflationary component, and nondeductible expenses. Tax Loss Carryforwards At December 31, 1998 the Company has tax loss carryforwards for income tax purposes which will be indexed for inflation through the year applied, in the following restated amounts: Expiration Date Amount --------------- ------ 2007 $ 167 ====== F-29 7. SHAREHOLDERS' EQUITY At December 31, 1997 and 1998, capital stock consisted of two shares fully subscribed and paid, representing the fixed portion in the amount of 3,000 Mexican pesos, which is not subject to withdrawal. Variable portion is unlimited. The annual net income of the Company (in Mexican pesos) is subject to the legal requirement that 5% thereof be transferred to a legal reserve until the reserve equals 20% of capital stock. This reserve may not be distributed to the shareholders during the existence of the Company, except in form of a stock dividend. As of 1999, dividends paid to individuals or foreign residents will be subject to income tax withholding at an effective rate ranging from 7.5% to 7.7%, depending on the year in which the earnings were generated. In addition, if earnings for which no corporate tax has been paid are distributed, the tax must be paid upon distribution of the dividends. Consequently, the Company must keep a record of earnings subject to each tax rate. F-30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Desarrollos Turisticos Bancomer, S.A. de C.V.: We have audited the accompanying consolidated statements of operations and cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V. (a Mexican Corporation) and Subsidiaries (the Company), translated into U.S. dollars, for the period from January 1, 1997 through August 17, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the translated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V. and Subsidiaries, for the period from January 1, 1997 through August 17, 1997, in conformity with the accounting principles generally accepted in the United States. ARTHUR ANDERSEN March 19, 1999 Mexico City, Mexico F-31
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands of U.S. dollars) January 1, 1997 Through August 17, 1997 ----------- Revenues Vacation interval sales ........................................................ $ 31,479 Less: amounts deferred to future periods ....................................... (30,653) Add: amounts recognized from prior periods ..................................... 1,650 ----------- 2,476 Interest income on contracts receivables ....................................... 3,277 Rental of unsold units ......................................................... 4,560 Maintenance fee income ......................................................... 2,461 Other .......................................................................... 1,329 ----------- 11,627 Total revenue ......................................................... 14,103 Operating expenses Commissions paid to sales personnel........................................ 5,512 Less: amounts deferred to future periods .................................. (5,413) Add: amounts recognized from prior periods ................................ 313 Maintenance of unsold units ............................................... 110 ----------- Total operating expenses, net ......................................... 522 Gross profit ................................................................... 13,581 Advertising, sales and marketing ............................................... 4,899 General and administrative ..................................................... 4,504 Maintenance ................................................................... 4,559 Interest expense ............................................................... 2,827 Valued added and other taxes.................................................... 1,002 Translation loss, net .......................................................... 74 ----------- 17,865 Loss from continuing operations before taxes .......................... (4,284) Asset taxes .................................................................... 754 ----------- Net loss from continuing operations .............................. (5,038) Discontinued hotel operations Net income of discontinued hotel operations (less tax expense of $1,256) ......................................................... 2,302 ----------- Net loss for the period......................................................... $ (2,736) =========== The accompanying notes are an integral part of this financial statement.
F-32
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of U.S. dollars) January 1, 1997 Through August 17, 1997 ----------- Operating Activities Net loss from continuing operations .............................................. $ (5,038) Adjustments to reconcile net loss to net cash provided by operating activities - Changes in operating assets and liabilities: Accounts receivable ....................................................... (10,088) Deferred costs ............................................................ (5,100) Accounts payable .......................................................... 628 Deferred revenue .......................................................... 26,269 Net income of discontinued hotel operations ............................... 2,302 Assets/liabilities of discontinued hotel operations........................ 264 ----------- Net cash provided by operating activities ........................................ 9,237 Investing Activities Acquisition of property, plant, and equipment .................................... (849) ----------- Net cash used in investing activities ............................................ (849) Financing Activities Proceeds from notes payable to related parties ................................... 1,727 Distribution to shareholders .................................................... (11,000) ----------- Net cash used in financing activities ............................................ (9,273) Decrease in cash and cash equivalents ............................................ (885) Cash and cash equivalents at beginning of period ................................. 2,563 ----------- Cash and cash equivalents at end of period ....................................... $ 1,678 =========== Supplemental disclosure of cash flow information Interest paid ............................................................... $ 7,197 Income and asset taxes paid ................................................. $ 1,752 Non-cash financing activities Conversion of debt to equity ................................................ $ 120,743 The accompanying notes are an integral part of this financial statement.
F-33 DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Prior to August 18, 1997, Desarrollos Turisticos Bancomer, S.A. de C.V.(the "Company"), was a wholly owned subsidiary of Bancomer, S.A. de C.V.("Bancomer"), a Mexican banking and financial services institution. The Company was acquired by Raintree Resorts International Inc. (formerly "Club Regina Resorts, Inc."). Contemporaneous with the purchase, the real property was segregated into condominium regimes so that the Regina Resorts and Westin Hotels would be able to be owned by separate companies. The Westin Hotels were then sold to SLT Realty Limited Partnership, an affiliate of Starwood Capital Group L.L.C. The Company owns and operates certain hospitality assets, which comprise primarily deluxe resort hotels and vacation ownership properties in Cancun, Puerto Vallarta, and Cabo San Lucas, Mexico. The Company's principal operations consist of (1) developing and acquiring hotel and vacation ownership resorts, (2) marketing and selling vacation intervals at its resorts, (3) providing consumer financing for the purchase of vacation intervals at its resorts, and (4) managing the operations of its resorts. The accompanying consolidated financial statements include the accounts of Desarrollos Turisticos Bancomer, S.A. de C.V., and all of its majority owned subsidiaries, which are listed below: Club Regina, S.A. de C.V. Servicios Turisticos Integrales Cobamex, S.A. de C.V. Corporacion Habitacional Mexicana, S.A. de C.V. Corporacion Mexitur, S.A. de C.V. Promotora y Desarrolladora Pacifico, S.A. de C.V. Promotora Turistica Nizuc, S.A. de C.V. Desarrollos Turisticos Integrales Cabo San Lucas, S.A. de C.V. Desarrollos Turisticos Integrales de Cozumel, S.A. de C.V. All significant intercompany balances and transactions have been eliminated. Translation to U.S. Dollars All amounts are recorded in the Company's accounting records in Mexican pesos. Since the significant transactions in U.S. dollars are mainly vacation interval sales, advertising expenses, advisory services and interest earned, the functional currency of the Company's operations is the U.S. dollar. Therefore, the Mexican peso consolidated financial statements were remeasured into U.S. dollars by applying the procedures specified in Statement of Financial Accounting Standards (SFAS) No. 52 as follows: a) Quoted period-end rates of exchange are used to remeasure monetary assets and liabilities. b) All other assets and shareholders' equity accounts are remeasured at the rates of exchange in effect at the time the items were originally recorded. c) Revenues and expenses are remeasured at the average rates of exchange in effect during the period. d) Foreign exchange gains and losses recorded in Mexican pesos as a result of fluctuations in the rate of exchange between the Mexican peso and U.S. dollar are eliminated. F-34 e) Translation gains and losses arising from the remeasurement are included in the determination of net income of the period in which such gains and losses arise. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Contracts Receivable and Concentration of Credit Risk Substantially all contracts receivable relate to sales of vacation ownership interests. While the Company does not obtain collateral for such contracts, the Company does not believe it has significant concentrations of credit risk in its contracts receivable because in the instance of uncollectibility of a contract, the Company retains the right to recover and resell the defaulted interval. Historically, the Company has been able to resell such intervals at prices in excess of the defaulted receivable balances. A portion of the Company's customers reside in Mexico and the Company intends to continue to conduct business in Mexico. All of the Company's sales offices are currently located in Mexico and any economic downturn in Mexico, which has a history of economic instability, could have a material adverse effect on the Company's business, results of operations and financial condition. Revenue Recognition The Company sells shares of Class B stock in a majority-owned subsidiary to vacation ownership buyers. The rights associated with the Class B shares allow the buyers to use a specified type of accommodation (one-bedroom, two-bedroom, etc.) during a specified season at any of the Company's resorts on a first-come, first-serve basis annually for approximately thirty years. The sales price of such Class B shares is recognized using operating lease accounting and therefore ratably over the thirty-year right to use period and the costs of selling the Class B shares, which include brokerage commissions, commissions to sales personnel, and marketing costs directly associated with successful sales, are deferred and recognized ratably over the right-to-use period. Interest income from contracts receivable is recognized as accrued. Maintenance fees are billed to Class B shareholders annually and recognized as earned over 12 months. Maintenance expenses are recognized when incurred. A provision for uncollectible contracts receivable is accrued for contracts which become more than 180 days past due. Deferred revenue related to contracts cancelled in any year subsequent to the year of sale is recognized to the extent of cumulative cash collections in excess of costs. Deferred costs are recognized in their entirety. Advertising Expense Advertising costs, which include solicitations of prospective vacation interval buyers, are expensed as incurred to the extent they cannot be directly associated with a successful sale of Class B shares to a vacation interval buyer. Advertising expenses in the period from January 1, 1997 through August 17, 1997 totaled $2,965, and are included in advertising, sales and marketing expenses. F-35 Income Taxes Deferred income taxes are provided by the liability method in accordance with SFAS No. 109 for all temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. SFAS No. 109 requires that deferred tax liabilities or assets at the end of each period be determined using the tax rate expected to be in effect when the related taxes are expected to be paid or recovered. Accordingly, income tax provisions increase or decrease in the same period in which a change in tax rates is enacted. Due to the uncertainty of the realization of the tax loss carryforwards, the Company has not recorded the deferred income tax asset for the potential future tax saving related to temporary differences, as indicated in Note 4. Transactions in Foreign Currency Foreign currency transactions are recorded at the exchange rate as of the date of the transaction. At August 17, 1997, the Company adjusted its foreign currency denominated assets and liabilities to the exchange rate of 7.766 Mexican pesos per U.S. dollar. Employee Benefits Under Mexican labor law, the Company is liable for indemnity payments and seniority premiums to employees terminating under certain circumstances. Seniority premiums are charged to operations as incurred. Indemnity payments to involuntarily terminated employees are charged to results in the period in which they are made. 2. CONTRACTS RECEIVABLE AND CREDIT LOSSES Vacation ownership contracts receivables are originated when vacation ownership buyers elect to finance their purchases through the Company. The Company requires a minimum 15% down payment. A majority of purchasers are citizens of the United States and Canada. Vacation ownership contracts receivable bear interest from 14% to 15% and are collected in monthly installments over periods ranging from 12 months to 7 years. Approximately 66% of vacation interval contracts receivable were U.S. dollar-denominated at August 17, 1997. Because the Company collects non-refundable cash from vacation ownership buyers in excess of deferred profit, and because the Company has historically been able to resell vacation ownership intervals at prices in excess of canceled receivable balances, the Company does not provide for credit losses related to doubtful contracts. 3. RELATED IMPAIRMENT LOSS During the last quarter of 1994, management approved and committed to a plan to dispose of the hotel and vacation interval assets of the Company. Based on the issuance of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, in March 1995, the Company concluded that the assets should be classified as held for sale and valued at the lower of cost or fair value less costs to sell. An impairment loss was recorded in the year ended December 31, 1994 to reflect the estimated sales proceeds less costs to sell. No depreciation expense was provided from the period from the adoption of the plan of disposal through the date of sale. F-36 4. TAX ENVIRONMENT Income and Asset Tax Regulations The Company is subject to income taxes (ISR) and the asset tax (IMPAC). ISR is computed taking into consideration the taxable and deductible effects of inflation, such as depreciation calculated on restated asset values, and the deduction of purchases instead of cost of sales, which permits the deduction of current costs, and considering the effects of inflation on certain monetary assets and liabilities through the inflationary component. The statutory rate for income taxes was 34% for the period ended August 17, 1997. Beginning in 1999, the income tax rate increased from 34% to 35%, with the obligation to pay this tax each year at a rate of 30% (transitorily 32% in 1999) and the remainder upon distribution of earnings. IMPAC is computed at an annual rate of 1.8% of the average of the majority of restated assets less certain liabilities, and the tax is paid only to the extent that it exceeds the ISR of the period. Any required payment of IMPAC is recoverable against any excess of ISR over IMPAC for the preceding three and following ten years. The subsidiaries of the Company generally file separate Mexican income tax returns. Because operations of the Company and each of its subsidiaries have resulted in losses, only nominal amounts of income taxes have become payable. Employee Profit Sharing Regulations The income for purposes of employee profit sharing does not consider the inflationary component. Depreciation is based on historical rather than restated values. Employee profit sharing has been computed on the basis of the results of each individual company. Tax Loss Carryforwards At August 17, 1997 the Company has tax loss carryforwards for income tax purposes which will be indexed for inflation through the year applied, in the following restated amounts: Expiration Date Amount --------------- ---------- 2002 $ 14,973 2003 22,295 2004 47,212 2005 12,296 2006 1,665 2007 3,896 ---------- $ 102,337 ========== Net Loss The annual net income of the Company (in Mexican pesos) is subject to the legal requirement that 5% thereof be transferred to a legal reserve until the reserve equals 20% of capital stock. This reserve may not be distributed to the shareholders during the existence of the Company, except in form of a stock dividend. As of 1999, dividends paid to individuals or foreign residents will be subject to income tax withholding at an effective rate ranging from 7.5% to 7.7%, depending on the year in which the earnings were generated. In addition, if earnings for which no corporate tax has been paid are distributed, the tax must be paid upon distribution of the dividends. Consequently, the Company must keep a record of earnings subject to each tax rate. F-37 5. RELATED PARTY TRANSACTIONS The Company's shareholder is the principal owner or has substantial ownership interests in other entities with which the Company transacts business. The following table summarizes transactions with related parties for the period from January 1, 1997 through August 17, 1997: Expense for the period: Interest........................ $ 7,539 Lease........................... $ 244 6. COMMITMENTS Certain subsidiaries of the Company entered into an operation and administrative agreement with Westin Mexico, S.A. de C.V. ("Westin"), through December 2003. The Company believes it has the right to terminate the agreement pursuant to provisions related to change of control of Westin, but has not asserted that right. Under the agreement, the subsidiaries are obligated to pay certain cost and expense reimbursements related to promotion, marketing, reservations, and sales. Additionally, the subsidiaries are obligated to pay 0.9% of total operating revenues for technical services provided by Westin. Technical services expense was $1,564 for the period. Additionally, Westin is entitled to management fees based on a percentage of the total operating revenues of the hotels (ranging from 1% to 2% over the life of the contract), as well as additional fees for maintaining certain percentages related to gross margin operations (calculated as a percentage of total operating revenues and ranging from 2.5% to 6%). Management fees were $756 and gross margin fees were $1,564 for the period, respectively. 7. CONTINGENCIES The Company is subject to various claims arising in the ordinary course of business, and is a party to various legal proceedings which constitute litigation incidental to the Company's business. In the opinion of management, all such matters are either adequately covered by insurance or are not expected to have a material adverse effect on the Company. 8. SALE OF COMPANY On the close of business on August 17, 1997, Bancomer sold its interest in the Company to Raintree Resorts International, Inc. (formerly Club Regina Resorts, Inc.) In connection with such sale, the Bancomer affiliate provided financing to Raintree Resorts International for approximately $83,000. 9. DISCONTINUED OPERATIONS As mentioned in Note 1, contemporaneously with the acquisition of the Company, Raintree Resorts International, Inc. sold the hotel operations. Accordingly, the Company's hotel segment has been presented as discontinued operations in accordance with APB Opinion No. 30. F-38 Information relating to the discontinued hotel operations for the seven and one-half month period ended August 17, 1997 are as follows: Revenues: Rooms ........................................... $ 20,832 Food and beverage ............................... 11,342 Other departments ............................... 2,297 Miscellaneous ................................... 242 -------- Total revenues ........................ 34,713 Expenses: Rooms ........................................... 2,952 Food and beverage ............................... 6,068 Other departments ............................... 746 Advertising, sales and marketing ................ 2,964 General and administrative ...................... 6,311 Maintenance ..................................... 4,818 Interest expense ................................ 4,712 Valued added and other taxes..................... 1,682 Other expense ................................... 819 Translation loss ................................ 83 -------- 31,155 Income before taxes ............................... 3,558 Asset taxes ..................................... 1,256 -------- Net income for the period.............. $ 2,302 ======== F-39 DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS December 31, 1996 F-40
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (in thousands) Year Ended December 31, 1996 ----------- Revenues Vacation interval sales ............................................................... $ 37,263 Less: amounts deferred to future projects ........................................ (36,435) Add: amounts recognized from prior sales ......................................... 2,039 ----------- 2,867 Interest income on contracts receivables .............................................. 3,294 Rental of unsold units ................................................................ 2,898 Maintenance fee income ................................................................ 2,599 Other ................................................................................. 760 ----------- Total revenue ................................................................ 12,418 Operating expenses Commissions paid to salespeople........................................................ 7,108 Less amounts deferred to future periods .......................................... (5,807) Add amounts recognized from prior sales .......................................... 303 Maintenance of unsold units ........................................................... 188 ----------- Operating expenses, net ...................................................... 1,792 ----------- Gross profit .......................................................................... 10,626 Advertising, sales and marketing ...................................................... 3,829 General and administrative ............................................................ 5,400 Maintenance .......................................................................... 3,610 Interest expense ...................................................................... 3,108 Exchange loss ......................................................................... (351) ----------- Loss from continuing operations before taxes ................................. (4,970) Income taxes .......................................................................... -- Other taxes ........................................................................... 3,312 ----------- Net loss from continuing operations .............................................. (8,282) Discontinued hotel operations: Net income of discontinued hotel operations (less tax expense of $1,321 in 1996).. 6,537 ----------- Net loss .............................................................................. $ (1,745) =========== The accompanying notes are an integral part of this financial statement.
F-41 DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in thousands) Year Ended December 31, 1996 ----------- Operating Activities Net loss ............................................................................. $ (1,745) Adjustments to reconcile net loss to net cash provided by operating activities - Changes in operating assets and liabilities: Accounts receivable ........................................................... (1,508) Contracts receivable .......................................................... (7,024) Inventory ..................................................................... (154) Taxes to be recovered ......................................................... (1,299) Deferred costs ................................................................ (5,504) Other assets .................................................................. (714) Accounts payable .............................................................. 218 Reservations deposits ......................................................... 59 Other liabilities ............................................................. (2,271) Unearned deposits ............................................................. 1,030 Deferred revenue .............................................................. 31,100 Assets/liabilities of discontinued hotel operations, net ........................ (4,824) ----------- Net cash provided by operating activities ............................................ 7,364 Investing Activities Acquisition of property, plant, and equipment ........................................ (2,565) ----------- Net cash used in investing activities ................................................ (2,565) Financing Activities Proceeds from notes payable to related parties ....................................... 50,112 Distribution to stockholders ........................................................ (54,620) ----------- Net cash used in financing activities ................................................ (4,508) Increase in cash and cash equivalents ................................................ 291 Cash and cash equivalents at beginning of period ..................................... 2,272 ----------- Cash and cash equivalents at end of period ........................................... $ 2,563 =========== Supplemental Disclosures Interest paid ........................................................................ $ 7,725 Income and asset taxes paid .......................................................... 2,138 The accompanying notes are an integral part of this financial statement.
F-42 DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Prior to August 18, 1997, Desarrollos Turisticos Bancomer, S.A. de C.V. (the "Company"), was a wholly owned subsidiary of Bancomer, S.A. de C.V. ("Bancomer"), a Mexican banking and financial services institution. The Company owns and operates certain hospitality assets of Bancomer, which comprise primarily deluxe resort hotels and vacation ownership properties in Cancun, Puerto Vallarta, and Cabo San Lucas, Mexico. The Company's principal operations consist of (1) developing and acquiring hotel and vacation ownership resorts, (2) marketing and selling vacation intervals at its resorts, (3) providing consumer financing for the purchase of vacation intervals at its resorts, and (4) managing the operations of its resorts. The consolidated financial statements include the accounts of Desarrollos Turisticos Bancomer, S.A. de C.V., and all of its majority owned subsidiaries, which are listed below: Club Regina, S.A. de C.V. Servicios Turisticos Integrales Cobamex, S.A. de C.V. Corporacion Habitacional Mexicana, S.A. de C.V. Corporacion Mexitur, S.A. de C.V. Promotora y Desarrolladora Pacifico, S.A. de C.V. Promotora Turistica Nizuc, S.A. de C.V. Desarrollos Turisticos Integrales Cabo San Lucas, S.A. de C.V. Desarrollos Turisticos Integrales de Cozumel, S.A. de C.V. All significant intercompany balances and transactions have been eliminated. Translation of Foreign Currency The Company maintains its accounting records and prepares its financial statements for domestic purposes in Mexican pesos. The balance sheet accounts of the Mexican subsidiaries have been remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. The Company's stated sales prices are dollar denominated as are a significant amount of its Vacation Interval contracts receivable. Additionally, the Company's debt is US Dollar denominated. Accordingly, the Mexican Pesos are translated to US Dollars for financial reporting purposes in using the US Dollar as the functional currency and exchange gains and losses as well as translation gains and losses are reported in income and expense. Accordingly, the exchange gain of $351 for the year ended December 31, 1996 has been included in income and expense. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-43 Contracts Receivable and Concentration of Credit Risk Substantially all contracts receivable relate to sales of vacation ownership interests. While the Company does not obtain collateral for such contracts, the Company does not believe it has significant concentrations of credit risk in its contracts receivable because in the instance of uncollectibility of a contract, the Company retains the right to recover and resell the defaulted interval. Historically, the Company has been able to resell such intervals at prices in excess of the defaulted receivable balances. A significant portion of the Company's customers reside in Mexico and the Company intends to continue to conduct business in Mexico. All of the Company's sales offices are currently located in Mexico and any economic downturn in Mexico, which has a history of economic instability, could have a material adverse effect on the Company's business, results of operations and financial condition. Revenue Recognition The Company sells shares of Class B stock in a majority-owned subsidiary to vacation ownership buyers. The rights associated with the Class B shares allow the buyers to use a specified type of accommodation (one-bedroom, two-bedroom, etc.) during a specified season at any of the Company's resorts on a first-come, first-serve basis annually for approximately thirty years. The sales price of such Class B shares is recognized under operating lease accounting and therefore, ratably over the thirty-year right to use period and the costs of selling the Class B shares, which include brokerage commissions, commissions to sales personnel, and marketing costs directly associated with successful sales, are deferred and recognized ratably over the right-to-use period. Interest income from contracts receivable is recognized when received. Maintenance fees are billed to Class B shareholders annually and recognized as earned over 12 months. Maintenance expenses are recognized when incurred. A provision for uncollectible contracts receivable is accrued for contracts which become more than 180 days past due. Deferred revenue related to contracts cancelled in any year subsequent to the year of sale is recognized to the extent of cumulative cash collections in excess of costs. Deferred costs are recognized in their entirety. Advertising Expense Advertising costs, which include solicitations of prospective timeshare buyers, are expensed as incurred to the extent they cannot be directly associated with a successful sale of Class B shares to a timeshare buyer. Advertising expense for the year 1996 totaled $4,398, and is included in advertising, sales and marketing expenses. 2. CONTRACTS RECEIVABLE AND CREDIT LOSSES Contracts receivables are originated when vacation ownership buyers elect to finance their purchases through the Company. The Company requires a minimum 15% down payment; a majority of purchasers are citizens of the United States and Canada. Vacation ownership contracts receivable bear interest from 14% to 15% and are collected in monthly installments over periods ranging from 12 months to 7 years. Approximately 71% of timeshare contracts receivable were U.S. dollar-denominated at December 31, 1996. F-44 Changes in the allowance for uncollectible accounts for the year ended December 31, 1996 were as follows: Balance at beginning of year ..................... $ 3,014 Provisions for uncollectible accounts ............ 2,895 Cancellations and write-offs of uncollectible accounts ........................ (4,134) ------- Balance at end of year ...................... $ 1,775 ======= Because the Company collects non-refundable cash from vacation ownership buyers in excess of deferred profit, and because the Company has historically been able to resell vacation ownership intervals at prices in excess of canceled receivable balances, the Company does not provide for credit losses related to doubtful contracts. 3. IMPAIRMENT LOSS During the last quarter of 1994, management approved and committed to a plan to dispose of the hotel and timeshare assets of the Company. Based on the issuance of SFAS 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of, in March 1995, the Company concluded that the assets should be classified as held for sale and valued at the lower of cost or fair value less costs to sell. An impairment loss of $130,000 was recorded in December of 1994 to reflect the estimated sales proceeds less costs to sell. No depreciation expense was provided from the period from the adoption of the plan of disposal through December 31, 1996. The Company was the beneficiary of certain trusts established to retain title to beachfront property in accordance with Mexican law. The property held in trust consists of the real estate upon which the Company has constructed hotels and vacation ownership buildings in Cancun, Puerto Vallarta, and Cabo San Lucas. The trusts are for an original term of 33 years and expire from 2017 through 2023. The Trusts can be renewed for an additional thirty years. 4. INCOME TAXES The subsidiaries of the Company generally file separate Mexican income tax returns. Because operations of the Company and each of its subsidiaries have resulted in losses, only nominal amounts of income taxes have become payable. The Company pays the greater of its income tax liability or a tax on net assets. The amount of asset tax paid in excess of income taxes is available to reduce future income tax payments. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are deferred timeshare revenue and costs, inventories, and tax loss carryforwards. F-45 Net deferred tax assets at December 31, 1996 are as follows: Deferred costs ................................ $ (5,200) Inventories ................................... (1,800) Deferred revenue .............................. 26,000 Net operating losses .......................... 99,000 -------- Net deferred taxes before valuation allowance . 118,000 Valuation allowance ........................... (118,000) -------- Net deferred tax assets ....................... $ -- ======== 5. RELATED PARTY TRANSACTIONS The Company's shareholder is the principal owner or has substantial ownership interests in other entities with which the Company transacts business. The following table summarizes transactions with related parties: 1996 --------- Liabilities: Notes payable .............................. $ 119,016 Accounts payable ........................... -- Interest payable ........................... 2,264 Expenses: Interest expense ........................... 8,287 Lease expense .............................. 161 Fees ...................................... -- 6. COMMITMENTS Certain subsidiaries of the Company entered into an operation and administrative agreement with Westin Mexico, S.A. de C.V. ("Westin"), through December 2003. The Company believes it has the right to terminate the agreement pursuant to provisions related to change of control of Westin, but has not asserted that right. Under the agreement, the subsidiaries are obligated to pay certain cost and expense reimbursements related to promotion, marketing, reservations, and sales. Additionally, the subsidiaries are obligated to pay 0.9% of total operating revenues for technical services provided by Westin. Technical services expense was $867 for the year ended December 31, 1996. Additionally, Westin is entitled to management fees based on a percentage of the total operating revenues of the hotels (ranging from 1% to 2% over the life of the contract), as well as additional fees for maintaining certain percentages related to gross margin operations (calculated as a percentage of total operating revenues and ranging from 2.5% to 6%), the management fee was $764 and gross margin fee was $437 for the year ended December 31, 1996. F-46 7. CONTINGENCIES The Company is subject to various claims arising in the ordinary course of business, and is a party to various legal proceedings which constitute litigation incidental to the Company's business. In the opinion of management, all such matters are either adequately covered by insurance or are not expected to have a material adverse effect on the Company. 8. SALE OF COMPANY On August 18, 1997, Bancomer sold its interest in the Company to Raintree Resorts International, Inc. (formerly Club Regina Resorts, Inc.). In connection with such sale, the Bancomer affiliate provided financing to Raintree Resorts International Inc. 9. DISCONTINUED OPERATIONS Contemporaneously with the acquisition of the Company, Raintree Resorts International, Inc. sold the hotel operations. Accordingly, the Company's hotel segment has been presented as discontinued operations in accordance with APB No. 30 for all periods presented. Information relating to the discontinued hotel operations for the year ended December 31, 1996 is as follows: Revenues: Rooms .................................... $ 27,328 Food and beverage ........................ 13,606 Other departments ........................ 3,950 Miscellaneous ............................ 178 --------- Total revenues ................. 45,062 Expenses: Rooms .................................... 4,904 Food and beverage ........................ 7,547 Other departments ........................ 1,894 Advertising, sales and marketing ......... 4,099 General and administrative ............... 7,340 Maintenance .............................. 5,411 Interest expense ......................... 5,179 Other expense ............................ 830 --------- Income before taxes .......................... 7,858 Income taxes ............................. -- Other taxes .............................. 1,321 --------- Net income ..................... $ 6,537 ========= F-47 EX-10.18 2 FINOVA LOAN AGREEMENT LOAN AND SECURITY AGREEMENT CR Resorts Cancun, S. de R.L. de C.V. CR Resorts Los Cabos, S. de R.L. de C.V. CR Resorts Puerto Vallarta, S. de R.L. de C.V. Corporacion Mexitur S.A. de C.V. CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V. CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V. CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V. Borrower c/o Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Address $20,000,000 Amount of Loan Date: November 23, 1998 INTERNATIONAL RESORT FINANCE TABLE OF CONTENTS
Page 1. DEFINITIONS....................................................................................................1 2. LOAN COMMITMENT; USE OF PROCEEDS...............................................................................6 2.1 Receivables Loan Commitment; Determination of Advance Amounts.........................................6 2.2 Receivables Loan Revolver.............................................................................6 2.3 Continuation of Obligations Throughout Term...........................................................6 2.4 Use of Advances.......................................................................................6 2.5 Repayment of Receivables Loan.........................................................................6 2.6 Interest..............................................................................................6 2.7 Receivables Loan Minimum Required Payments............................................................7 2.8 Prepayment............................................................................................7 2.9 Receivables Loan Fee; Custodial Fee; Availability Fee.................................................7 2.10 Application of Proceeds of Collateral and Payments....................................................8 2.11 Borrower's Unconditional Obligation to Make Payments..................................................8 3. SECURITY 8 3.1 Grant of Security Interest in Receivables Collateral..................................................8 3.2 Ineligible Instruments................................................................................9 3.3 Lockbox Collections and Servicing.....................................................................9 3.4 Replacement of Agents.................................................................................9 3.5 Maintenance of Security..............................................................................10 3.6 Liability of Guarantors..............................................................................10 4. CONDITIONS PRECEDENT TO ADVANCES; MINIMUM AMOUNT AND MAXIMUM FREQUENCY OF ADVANCES; METHOD OF DISBURSEMENT....10 4.1 Delivery of Receivables Loan Documents and Due Diligence Items Prior to Initial Advance..............10 4.2 Additional Conditions Precedent for Subsequent Advances..............................................13 4.3 General Conditions Precedent to All Advances.........................................................13 4.4 Conditions Satisfied at Borrower's Expense...........................................................13 4.5 Minimum Amount and Maximum Frequency of Advances.....................................................13 4.6 Disbursement of Advances.............................................................................13 4.7 No Waiver............................................................................................13 5. BORROWER'S REPRESENTATIONS AND WARRANTIES.....................................................................13 5.1 Good Standing........................................................................................14 5.2 Power and Authority; Enforceability..................................................................14 5.3 Borrower's Principal Place of Business...............................................................14 5.4 No Litigation........................................................................................15 5.5 Compliance with Legal Requirements...................................................................15 5.6 No Misrepresentations................................................................................15 5.7 No Default for Third Party Obligations...............................................................15 i 5.8 Payment of Taxes and Other Impositions...............................................................15 5.9 Sales Activities.....................................................................................15 5.10 Time-Share Interest Not a Security...................................................................15 5.11 Zoning Compliance....................................................................................15 5.12 Eligible Instruments.................................................................................15 5.13 Assessments and Reserves.............................................................................15 5.14 Title to and Maintenance of Common Areas and Amenities...............................................15 5.15 Trust................................................................................................15 5.16 Year 2000............................................................................................16 5.17 Survival and Additional Representations and Warranties...............................................16 6. BORROWER'S COVENANTS..........................................................................................16 6.1 Borrower's Affirmative Covenants.....................................................................16 6.2 Borrower's Negative Covenants........................................................................20 6.3 Survival of Covenants................................................................................22 7. DEFAULT 22 7.1 Events of Default....................................................................................22 7.2 Remedies.............................................................................................23 7.3 Application of Proceeds During an Event of Default...................................................24 7.4 Uniform Commercial Remedies; Sale; Assembly of Receivables Collateral................................24 7.5 Application of Proceeds..............................................................................24 7.6 Lender's Right to Perform............................................................................25 7.7 Non-Exclusive Remedies...............................................................................25 7.8 Waiver of Marshalling................................................................................25 7.9 Attorney-in-Fact.....................................................................................25 8. COSTS AND EXPENSES; INDEMNIFICATION...........................................................................25 8.1 Costs and Expenses...................................................................................25 8.2 Indemnification......................................................................................26 9. CONSTRUCTION AND GENERAL TERMS................................................................................26 9.1 Special Provisions Relating to Trust.................................................................26 9.2 Payment Location.....................................................................................28 9.3 Entire Agreement.....................................................................................28 9.4 Powers Coupled with an Interest......................................................................28 9.5 Counterparts; Facsimile Signatures...................................................................28 9.6 Notices..............................................................................................28 9.7 Successors and Assigns...............................................................................28 9.8 Severability.........................................................................................29 9.9 Time of Essence......................................................................................29 9.10 Miscellaneous........................................................................................29 9.11 CHOICE OF LAW........................................................................................29 9.12 CHOICE OF JURISDICTION; WAIVER OF VENUE..............................................................29 9.13 WAIVER OF JURY TRIAL.................................................................................29 9.14 INDUCEMENT TO LENDER.................................................................................29 9.15 Compliance With Applicable Usury Law.................................................................29 9.16 NO RELATIONSHIP WITH PURCHASERS......................................................................30 9.17 NO JOINT VENTURE.....................................................................................30 9.18 Standards Applied to Lender's Actions................................................................30 9.19 Meaning of Subordination.............................................................................30 9.20 Scope of Reimbursable Attorney's Fees................................................................30 9.21 Publicity............................................................................................30 9.22 Permitted Contests...................................................................................30 9.23 Reliance.............................................................................................31 9.24 Currency.............................................................................................31 9.25 Consideration........................................................................................31 9.26 Judgment Currency....................................................................................31 Schedule ......... Schedule of Additional Terms Exhibit A......... Conditions of Eligible Instrument Exhibit B......... Permitted Encumbrances Exhibit C......... Borrower's Certificate Exhibit C-1....... Receivables Re-Assignment ii Exhibit D......... FINOVA Wiring Information Exhibit E......... Additional Conditions to Receivables Loan Advances Exhibit E-1....... Request for Receivables Loan Advance and Certification Exhibit E-2....... Receivables Assignment iii
This LOAN AND SECURITY AGREEMENT is entered into for good and valuable consideration, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and CR Resorts Cancun, S. de R.L. de C.V. ("CR Cancun"); CR Resorts Los Cabos, S. de R.L. de C.V. ("CR Cabos"); CR Resorts Puerto Vallarta, S. de R.L. de C.V. ("CR Puerto Vallarta"); Corporacion Mexitur, S.A. de C.V. ("Corporacion Mexitur"); CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V. ("Cancun Sub"); CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V. ("Cabos Sub") and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V. ("Puerto Vallarta Sub"), individually and collectively, jointly and severally, "Borrower". 1. DEFINITIONS As used in this Agreement and the other Receivables Loan Documents unless otherwise expressly indicated in this Agreement or the other Receivables Loan Documents, the following terms shall have the following meanings (such meanings to be applicable equally both to the singular and plural terms defined). "Advance": an advance of the proceeds of the Receivables Loan by Lender to, or on behalf of, Borrower in accordance with the terms and conditions of this Agreement. "Affiliate": with respect to any individual or entity, any other individual or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such individual or entity. "Agents": the Servicing Agent and the Lockbox Agent. "Agreement": this Loan and Security Agreement, as it may be from time to time renewed, amended, restated or replaced. "Applicable Usury Law": the usury law chosen by the parties pursuant to the terms of paragraph 9.11 or such other usury law which is applicable if such usury law is not. "Articles of Organization": the charter, articles, operating agreement, joint venture agreement, partnership agreement, by-laws and any other written documents evidencing the formation, organization, governance and continuing existence of an entity. "Availability Advance": an Advance which is made against an Eligible Instrument after the first Advance made against such Instrument and is based upon the difference at such time between the Borrowing Base of such Instrument and the unpaid principal balance of the Receivables Loan attributable to such Instrument; provided that the substitution of an Eligible Instrument for an ineligible Instrument pursuant to paragraph 3.2 shall not be deemed to be an Availability Advance for purposes of this paragraph, but the first and every subsequent Advance against such substituted Eligible Instrument shall be deemed to be an Availability Advance. "Availability Fee": the meaning given to it in paragraph 2.9(c). "Base Rate": means the publicly announced "Corporate Base" rate of Citibank, N.A., as initially determined on the closing of the Receivables Loan and as the same may thereafter change from time to time. As used above, the "Corporate Base" rate of Citibank shall mean the rate of interest publicly announced from time to time by Citibank, N.A., New York, New York, as the base rate of interest charged by Citibank to its most creditworthy commercial borrowers, notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates less than such announced base rate. "Basic Interest": the meaning given to it in paragraph 2.6. "Basic Interest Rate": the per annum rate of interest described in the Schedule as the Basic Interest Rate. "Borrower": individually and collectively, jointly and severally, the individuals or business organizations signing below and identified above as "Borrower"; and, subject to the restrictions on assignment and transfer contained in this Agreement, their respective successors and assigns. "Borrower's Knowledge": the actual, current knowledge of the chief executive officers of Borrower. "Business Day": any day other than a Saturday, a Sunday, a national holiday in the United States of America or Mexico or a day on which banks in Phoenix, Arizona or Mexico City are required to be closed. "CILP Assignment": a written assignment to be executed and delivered to Lender by Borrower and creating in favor of Lender a perfected, direct, first and exclusive assignment of the Contracts, Intangibles, Licenses and Permits in order to facilitate Performance of the Obligations, as it may be from time to time renewed, amended, restated or replaced. "Collateral": the Receivables Loan Collateral and the collateral pledged to Lender pursuant to the Receivables Loan Security Documents. "Commitment Letter": that certain Commitment Letter from Borrower to Lender dated November 13, 1998 concerning the Receivables Loan and the Inventory Loan. 1 "Contracts, Intangibles, Licenses, Permits": all contracts, licenses, permits, plans and other intangibles in which Borrower now or hereafter has rights and are now or hereafter used in connection with the marketing and sale of Time-Share Interests and the management and/or operation of the Time-Share Project. "Custodial Fee": the meaning given to it in paragraph 2.9(b). "Default Rate": the per annum rate of interest identified in the Schedule as the Default Rate. "Dollars" or "$": shall mean United States Dollars. "Eligible Instrument": an Instrument which conforms to the standards set forth in Exhibit A. An Instrument that has qualified as an Eligible Instrument shall cease to be an Eligible Instrument upon the date of the first occurrence of any of the following: (a) any installment due with respect to that Instrument becomes more than sixty (60) days past due or (b) that Instrument otherwise fails to continue to conform to the standards set forth in Exhibit A. "Environmental Certificate": an environmental certificate executed and delivered to Lender by Borrower and such other persons as Lender may require and containing representations, warranties and covenants regarding the environmental condition of the Time-Share Project, as it may be from time to time renewed, amended, restated or replaced. "Event of Default": the meaning set forth in paragraph 7.1. "FPSI": FINOVA Portfolio Services, Inc., an Arizona corporation, and its successors and assigns. "GAAP": shall mean generally accepted accounting principles as in effect from time to time in the United States of America, consistently applied, throughout the period involved and with the prior periods, which shall include the official interpretations thereof by the Financial Accounting Standards Board or any successor thereto. "Guarantor": at any time, a person or entity then required under the terms of this Agreement to guarantee all or any part of the Obligations. "Guaranty": a primary, joint and several guaranty or guarantee agreement made by a Guarantor with respect to all or any part of the Obligations, as it may be from time to time renewed, amended, restated or replaced. "Impositions": all real estate, personal property, excise, privilege, transaction, documentary stamp and other taxes, charges, assessments and levies (including non-governmental assessments and levies such as maintenance charges, association dues and assessments under private covenants, conditions and restrictions) and any interest, costs, fines or penalties with respect thereto, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which at any time prior to or after the execution hereof may be assessed, levied or imposed. Impositions shall include any and all taxes, withholding obligations, deduction, license fees, assessments, charges, fines, penalties, or any property, privilege, excise, real estate or other taxes, charges or assessments currently or hereafter levied or imposed by any state, local or federal authority of Mexico upon or in connection with or measured by the Receivables Loan Documents, the Collateral or the principal, interest or other amounts payable by Borrower to Lender under the Receivables Loan Documents, together with any amounts which must be withheld from the proceeds of the Receivables Collateral pursuant to, without limitation, Sections 871, 881 and 1442 of the IRC. Imposition shall not include taxes payable to the United States of America or to any state or political subdivision thereof measured by the net income payable by Lender. "Incipient Default": an event which after notice and/or lapse of time would constitute an Event of Default. "Indenture": the Indenture dated December 5, 1997, pursuant to which the Redeemable Senior Notes were issued. "Ineligibility Event": the meaning given to it in paragraph 3.2. "Inventory Loan": that certain loan identified in the Commitment Letter as the Inventory Loan. "Installment Date": the meaning given to it in paragraph 2.7. "Instrument": a purchase money promissory note which has arisen out of a sale of a Time-Share Interest by Borrower to a Purchaser, is made payable by such Purchaser to Borrower. "Insurance Policies": the insurance policies that Borrower is required to maintain and deliver pursuant to paragraph 6.1(c). "IRC": The United States Internal Revenue Code, as amended. "Lease Assignment": a written assignment to be executed and delivered to Lender by Corporacion Mexitur and creating in favor of Lender a perfected, direct, first and exclusive security interest in any sales office leases under which Corporacion Mexitur conducts Time-Share Interest sales, in order to secure Performance of the Obligations, and as it may be from time to time renewed, 2 amended, restated or replaced. The execution and delivery of the Lease Assignment shall be a condition precedent to the closing of the Inventory Loan. "Legal Requirements": (a) all present and future judicial decisions, statutes, regulations, permits, licenses or certificates of any governmental authority in any way applicable to Borrower directly or by virtue of its trust beneficial interest on the Time Share Project; and (b) all contracts or agreements (written or oral) by which Borrower directly or by virtue of its trust beneficial interest on the Time Share Project, is bound or, if compliance therewith would otherwise be in conflict with any of the Receivables Loan Documents, by which Borrower directly or by virtue of its trust beneficial interest on the Time Share Project, becomes bound with Lender's prior written consent. "Lender": FINOVA Capital Corporation, a Delaware corporation, and its successors and assigns. "Lockbox Agent": business organization identified in the Schedule as the Lockbox Agent, or its successor as lockbox agent under the Lockbox Agreement. "Lockbox Agreement": an agreement to be made among Lender, Borrower, Trustee and Lockbox Agent, which provides for Lockbox Agent to collect through a lockbox payments under Instruments constituting part of the Receivables Collateral and to remit them to Lender, as it may be from time to time renewed, amended, restated or replaced. "Maximum Receivables Loan Amount": the amount identified in the Schedule as the Maximum Receivables Loan Amount. "Mexican GAAP": generally accepted accounting principals in Mexico in accordance with the provisions established by the Mexican Accountants Institute. "Minimum Opinion Matters": (a) A favorable legal opinion of counsel for Borrower and Guarantor, which counsel must be acceptable to Lender, dated as of the day of Required Closing Date, covering the due authorization, execution and delivery of the Receivables Loan Documents; the enforceability and sufficiency of Borrower's consumer documents; the absence of environmental liability schemes in Mexico that would impose any liability on Lender upon an enforcement of Lender's lien on the Time-Share Project, or otherwise; the enforceability, validity and binding effect of the Receivables Loan Documents and of all legal charges, liens and security interests granted thereby, under law of the state of Arizona and the laws of Mexico; the enforceability under the laws of Mexico of the Arizona choice of law, venue and jurisdiction provisions contained in the Receivables Loan Documents; compliance under the laws of Mexico of applicable usury laws; the procedures and requirements which must be satisfied by the Borrower in connection with the making of withholding payments to the Mexican taxing authorities; and such other matters as Lender may require, including without limitation, Lender's satisfaction that under Mexican law, it can achieve the practical realization of the remedies set forth in the Receivables Loan Documents. In connection with such usury opinion, counsel shall be required to opine that the Receivables Loan is not usurious under the law of Mexico (without reliance on any usury savings clause). (b) A favorable opinion from a tax attorney, acceptable to Lender, providing that Borrower will be exempt from the payment of withholding taxes associated with the Receivables Loan and with the Receivables Collateral due to the foreign location of the Time-Share Project, Borrower's foreign jurisdiction of organization, or the nationality of the purchasers of use rights and memberships and further providing that Lender will incur no adverse tax consequences as a result of making the Receivables Loan. "Minimum Required Time-Share Approvals": Official communications issued by the Mexican Consumer Protection Agency (Procuraduria Federal del Consumidor) evidencing that the Purchase Contract and Time-Share Program Consumer Documents were approved and registered by such government agency. "Mirror Notes": Those notes totaling, in the aggregate, One Hundred Million Dollars ($100,000,000.00) issued by CR Cancun, CR Cabos or CR Puerto Vallarta in favor of CR Resorts Capital S. de R.L. de C.V. "Obligations": all obligations, agreements, duties, covenants and conditions of Borrower to Lender which Borrower is now or hereafter required to Perform under the Receivables Loan Documents. "Operating Agreements": shall mean each of the following: (a) that certain Contrato de Operacion, dated as of March 18, 1998, by and between Starwood Cancun, S. de R.L. de C.V., CR Cancun, CR Resorts Remainder Company, S. de R.L. de C.V., and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero Bancomer, Division Fiduciaria, (b) that certain Contrato de Operacion, dated as of March 18, 1998, by and between Starwood Los Cabos, S. de R.L. de C.V., CR Cabos, CR Resorts Remainder Company, S. de R.L. de C.V., and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero Bancomer, Division Fiduciaria, and (c) that certain Contrato de Operacion, dated as of March 18, 1998, by and between Starwood Puerto Vallarta, S. de R.L. de C.V., CR Puerto Vallarta, CR Resorts Remainder Company, S. de R.L. de C.V., and Bancomer, S.A., 3 Institucion de Banca Multiple, Grupo Financiero Bancomer, Division Fiduciaria. "Oversight Agreement": an agreement between Borrower Lender, FPSI and Servicing Agent, in form and substance satisfactory to Lender, allowing FPSI to oversee and monitor the collection and servicing functions of the Servicing Agent. "Pass-Through Certificates": shall mean each of the following: (a) the Club Regina Trust I Trust Certificate Nos. 1 and 2, each of which has been issued, signed, registered and authenticated by Trustee, together with all replacements and substitutions therefor, each representing an undivided fifty percent (50%) of the beneficial interest in said Trusts, and (b) the Club Regina Trust II Trust Certificate Nos. 1 and 2, each of which has been issued, signed, registered and authenticated by Trustee, together with all replacements and substitutions therefor, each representing an undivided fifty percent (50%) of the beneficial interest in said Trust. "Performance" or "Perform": full, timely and faithful performance of the Obligations by Borrower. "Permitted Debt": the meaning given to it in paragraph 6.2(b). "Permitted Encumbrances": the rights, restrictions, reservations, encumbrances, easements and liens of record which Lender has agreed to accept as set forth in Exhibit B. "Pledge Agreement": shall mean, individually and collectively, (i) that certain Security Agreement dated of even date herewith, between Trustee and Lender, pursuant to which Trustee has granted to Lender a security interest in the Receivables Collateral owned by Trustee under the Club Regina Trust I as security for Borrower's payment and Performance of the Obligations and as security for Trustee's Performance of Trustee's obligations under such Pledge Agreement, in form and substance acceptable to Lender in its discretion, and (ii) that certain Security Agreement dated of even date herewith, between Trustee and Lender, pursuant to which Trustee has granted to Lender a security interest in the Receivables Collateral owned by Trustee under the Club Regina Trust II as security for Borrower's payment and Performance of the Obligations and as security for Trustee's Performance of Trustee's obligations under such Pledge Agreement, in form and substance acceptable to Lender in its discretion. "Purchase Contract": a purchase contract pursuant to which Borrower has agreed to sell and a third party has agreed to purchase a Time-Share Interest. "Purchaser": a purchaser who has executed a Purchase Contract. "Quiet Enjoyment Rights": the meaning given to it in paragraph 4.1(b). "Receivables": membership, use rights and other consumer receivables arising from the sale of Time-Share Interests in the Time-Share Project. "Receivables Assignment": a written assignment of specific Instruments and their proceeds, executed by Borrower and Trustee substantially in form and substance identical to Exhibit E-2. "Receivables Collateral": (a) the Instruments which are now or hereafter assigned, endorsed or delivered to Lender pursuant to this Agreement or against which an Advance has been made; (b) all rights under all documents evidencing, securing or otherwise pertaining to such Instruments, including, without limitation, Purchase Contracts and escrow agreements; (c) all collateral and other security interests given to secure an Instrument; (d) all Borrower's rights under all escrow agreements and accounts pertaining to any of the foregoing; (e) all reservation systems pertaining to the use of Time-Share Interests; (f) the Trust Collateral; (g) all computer software, files, books and records of Borrower pertaining to any of the foregoing; and (h) the cash and non-cash proceeds of all of the foregoing, including, without limitation (whether or not acquired with cash proceeds), all accounts, chattel paper, contract rights, documents, general intangibles, instruments, fixtures, and equipment, inventory and other goods. "Receivables Loan": the revolving line of credit loan made pursuant to Article 2. "Receivables Loan Borrowing Base": with respect to an Eligible Instrument, an amount equal to the percentage of the unpaid principal balance of such Eligible Instrument identified in the Schedule as the RLBB Principal Balance Percentage. "Receivables Loan Borrowing Base Shortfall": at any time, the amount by which the unpaid principal balance of the Receivables Loan exceeds the aggregate Receivables Loan Borrowing Base of all Eligible Instruments. "Receivables Loan Borrowing Term": the period commencing on the date of this Agreement and ending on the close of the Business Day (or if not a Business Day, the first Business Day thereafter) on the date identified in the Schedule as the Receivables Loan Borrowing Term Expiration Date. "Receivables Loan Collateral": the Receivables Collateral, the Insurance Policies, and any and all other property now or hereafter serving as security for the Performance of the Obligations, and all products and proceeds thereof. 4 "Receivables Loan Documents": this Agreement, the Receivables Loan Note, any and all Guaranties, any and all Subordination Agreements, the Lockbox Agreement, the Servicing Agreement, the Oversight Agreement, the Environmental Certificate, the Receivables Loan Security Documents, and all other documents now or hereafter executed in connection with the Receivables Loan, as they may be from time to time renewed, amended, restated or replaced. "Receivables Loan Fee": the amount identified in the Schedule as the Receivables Loan Fee. "Receivables Loan Maturity Date": the date (or if not a Business Day, the first Business Day thereafter) which is identified in the Schedule as the Receivables Loan Maturity Date. "Receivables Loan Note": the promissory note to be made and delivered by Borrower to Lender pursuant to paragraph 4.1, having a face amount equal to the Maximum Receivables Loan Amount, dated as of even date herewith, and made payable to Lender to evidence the Receivables Loan, as it may be from time to time renewed, amended, restated or replaced. "Receivables Loan Opening Prepayment Date": the date identified in the Schedule as the Receivables Loan Opening Prepayment Date. "Receivables Loan Prepayment Premium": an amount to be paid pursuant to paragraph 2.8 upon a prepayment of the Receivables Loan, determined by multiplying the amount of the prepayment by the percentage identified in the Schedule as the Receivables Loan Prepayment Premium and determined in accordance with provisions of the Schedule. "Receivables Loan Security Documents": the CILP Assignment, the Pledge Agreement, the Receivables Assignments, the Time-Share Management Agreement Assignment, the Time-Share Marketing Agreement Assignment, this Agreement, the Lease Assignment and all other documents now or hereafter securing the Obligations, as they may be from time to time renewed, amended, restated or replaced. "Redeemable Senior Notes": those Series A and Series B thirteen percent (13%) senior notes due December 1, 2004 in the aggregate principal amount of One Hundred Million Dollars ($100,000,000.00) issued by Guarantor and CR Resorts S. de R.L. de C.V. and held by IBJ Schroder Bank and Trust Company, as trustee. "Resolution": a resolution of a corporation certified as true and correct by an authorized officer of such corporation, a certificate signed by the manager of a limited liability company and such members whose approval is required, or a partnership certificate signed by all of the general partners of such partnership and such other partners whose approval is required. "Required Closing Date": the date identified in the Schedule as the Required Closing Date. "Required Guarantors": the individuals identified in the Schedule as the Required Guarantors. "Schedule": the Schedule of Additional Terms which follows the signature pages of the parties. "Servicing Agent": the business organization identified in the Schedule as the Servicing Agent, or its successor as Servicing Agent under the Servicing Agreement. "Servicing Agreement": the agreements to be made among Lender, Borrower, Trustee and Servicing Agent, which provides for Servicing Agent to perform for the benefit of Lender accounting, reporting and other servicing functions with respect to the Receivables Collateral, as it may be from time to time renewed, amended, restated or replaced. "Subordination Agreement": a subordination agreement made by a Subordinator subordinating indebtedness owed to it by Borrower to all or a part of the Obligations, as it may be from time to time renewed, amended, restated or replaced. "Subordinator": at any time, a person or entity then required under the terms of paragraph 6.1(e) to subordinate indebtedness owed to it by Borrower to all or any part of the Obligations. "Term": the duration of this Agreement, commencing on the date as of which this Agreement is entered into and ending when all of the Obligations have been Performed and Lender has no further obligation to extend credit in connection with the Receivables Loan. "Third Party Consents": those consents which Lender requires Borrower to obtain, or which Borrower is contractually or legally obligated to obtain, from others in connection with the transaction contemplated by the Receivables Loan Documents. "Time-Share Interest": a personal right to occupy and use a variable Unit in the Time-Share Project at any time during the season to which it relates for a period of at least seven (7) consecutive days every calendar year or every other calendar year. "Time-Share Program": the program under which Purchasers may own Time-Share Interests, enjoy their respective Time-Share Interests on a recurring basis, and share the expenses associated with the operation and management of such program. 5 "Time-Share Program Consumer Documents": the Purchase Contract, Instrument, deed of conveyance, credit application, credit disclosures (if applicable), rescission right notices, final subdivision public reports/prospectuses/public offering statements, receipt for public report, exchange affiliation agreement and other documents used or to be used by Borrower in connection with the sale of Time-Share Interests. "Time-Share Program Governing Documents": the trusts holding the Time-Share Project; the Purchase Contracts; the Instruments, the rules and regulations of the Borrower; the regulations for Club Regina's Multi-Resort System; any and all rules and regulations from time to time adopted by the Borrower; the Operating Agreements; and any subsidy agreement by which Borrower is obligated to subsidize shortfalls in the budget of the Time-Share Program in lieu of paying assessments. "Time-Share Project": individually and collectively, those time-share projects identified in the Schedule as the Time-Share Project. "Trusts": shall mean each of: (a) the Club Regina Trust I established pursuant to that certain Receivables Trust Agreement, dated as of November ___, 1998, by and between Cabos Sub and Puerto Vallarta Sub, collectively as depositor, and Trustee, as trustee, (b) the Club Regina Trust II, established pursuant to that certain Receivables Trust Agreement, dated as of November ___, 1998, by and between Cabos Sub and Puerto Vallarta Sub, collectively as depositor, and Trustee, as trustee, together with any and all amendments, substitutions and modifications of the foregoing. "Trust Collateral": shall mean the Pass-Through Certificates, all the beneficial interest in the Trusts and all proceeds of the foregoing. "Trustee": shall mean U.S. Trust Company, National Association, a national banking association organized and existing under the laws of the United States of America, as Trustee under the Trusts, and any successor trustees thereunder. "Unit": a dwelling unit in the Time-Share Project. 2. LOAN COMMITMENT; USE OF PROCEEDS 2.1 Receivables Loan Commitment; Determination of Advance Amounts. Lender hereby agrees, if Borrower has Performed all of the Obligations then due, to make Advances to Borrower in accordance with the terms and conditions of this Agreement for the purposes specified in paragraph 2.4. The maximum amount of an Advance shall be equal to (a) the aggregate Receivables Loan Borrowing Base for all Eligible Instruments less (b) the then unpaid principal balance of the Receivables Loan; provided, however, at no time shall the unpaid principal balance of the Receivables Loan exceed the Maximum Receivables Loan Amount. 2.2 Receivables Loan Revolver. The Receivables Loan is a revolving line of credit; however, all Advances shall be viewed as a single loan. Borrower shall not be entitled to obtain Advances after the expiration of the Receivables Loan Borrowing Term unless Lender, in its discretion, agrees in writing with Borrower to make Advances thereafter on terms and conditions satisfactory to Lender. 2.3 Continuation of Obligations Throughout Term. Whether or not Borrower's right to obtain Advances has terminated, this Agreement and Borrower's liability for Performance of the Obligations shall continue until the end of the Term. 2.4 Use of Advances. Borrower will use the proceeds of the Receivables Loan only for the following purposes: acquisitions, development, working capital and repayment of existing obligations. The initial Advance of the Receivables Loan shall be used, inter alia, to satisfy Guarantor's or its Affiliate's existing indebtedness to Bancomer S.A. and pay the interest due on the Redeemable Senior Notes. In order to accomplish the foregoing purposes, Borrower shall be permitted to make intercompany loans to its Affiliates. 2.5 Repayment of Receivables Loan. The Receivables Loan shall be evidenced by the Receivables Loan Note and shall be repaid in immediately available funds according to the terms of the Receivables Loan Note and this Agreement. 2.6 Interest. Except as otherwise provided in this Receivables Loan Note or this Agreement, interest ("Basic Interest") shall accrue on the unpaid principal balance of the Receivables Loan from time to time outstanding at the Basic Interest Rate. Basic Interest shall be calculated on the basis of the actual number of days elapsed during the period for which interest is being charged predicated on a year consisting of three hundred sixty (360) days. Payments of principal, Basic Interest and any other amounts due and payable under the Receivables Loan Documents shall earn interest after the date on which they are due at the Default Rate. At the option of Lender, while an Event of Default exists, Basic Interest shall accrue at the Default Rate. 2.7 Receivables Loan Minimum Required Payments. (a) Monthly Payments. Commencing on the last Business Day of the calendar month in which the initial Advance is made and on the last Business Day of each 6 succeeding month thereafter ("Installment Date") until the Receivables Loan Maturity Date or the date on which the Receivables Loan is paid in full, whichever date first occurs, Borrower will pay to Lender an installment payment of principal and interest on the Receivables Loan equal to one hundred percent (100%) of all proceeds (except servicing fee payments made by consumers whose principal and interest payments then due have been paid in full and payments which are identified by such consumers as tax and insurance impounds or maintenance and other assessment payments and are required to be so treated by Lender) of the Receivables Collateral collected during the month in which the payment is required to be made plus all such proceeds collected during any preceding month during the Term and not previously paid to Lender, including, without limitation, all payments collected under the Instruments which constitute part of the Receivables Collateral. Regardless of whether the proceeds of the Receivables Collateral are sufficient for that purpose, interest on the principal balance hereof from time to time outstanding shall be due and payable monthly in arrears on each Installment Date. (b) Borrowing Base Maintenance. If there exists a Receivables Loan Borrowing Base Shortfall for any reason other than an Ineligibility Event which is subject to the provisions of paragraph 3.2 and Borrower knows of the occurrence of such condition or should have known of its occurrence by virtue of reports required to be delivered to Lender, Borrower, without notice or demand, will immediately (a) make to Lender a principal payment in an amount equal to the Receivables Loan Borrowing Base Shortfall plus accrued and unpaid interest on such principal payment or (b) deliver to Lender or cause the Trustee to deliver to Lender one or more Eligible Instruments having an aggregate Receivables Loan Borrowing Base not less than the Receivables Loan Borrowing Base Shortfall. Simultaneously with the delivery of Eligible Instruments to correct a Receivables Loan Borrowing Base Shortfall, Borrower will deliver to Lender or cause Trustee to deliver to Lender all of the items (except for a "Request for Receivables Advance and Certification") required to be delivered by Borrower (or Trustee) to Lender pursuant to paragraph 4.2, together with a "Borrower's Certificate" in form and substance identical to Exhibit C. 2.8 Prepayment. (a) Prohibitions on Prepayment; Receivables Loan Prepayment Premium. Without the prior written consent of Lender, Borrower shall not be entitled to prepay the Receivables Loan except in accordance with the terms of this Agreement. Commencing on the Receivables Loan Opening Prepayment Date, Borrower shall have the option to prepay the Receivables Loan on any Installment Date, upon thirty (30) days' prior written notice, accompanied by the simultaneous payment of the applicable Receivables Loan Prepayment Premium. No more than fifty percent (50%) of the then outstanding principal balance of the Receivables Loan may be prepaid within the twelve (12) month period beginning on the Receivables Loan Opening Prepayment Date or during any successive twelve (12) month period thereafter, provided, however, that at such time as the unpaid principal balance of the Receivables Loan is no greater than Two Million Dollars ($2,000,000), Borrower shall have the right to prepay the Receivables Loan in full during any successive twelve (12) month period thereafter, under the conditions set forth above. (b) Exceptions to Prepayment Prohibitions. Notwithstanding anything in paragraph 2.8(a) to the contrary, the following shall not be prepayments prohibited pursuant to paragraph 2.8(a) or require the payment of the Receivables Loan Prepayment Premium: (i) principal payments scheduled under the Receivables Loan Note including, without limitation, those payments required pursuant to paragraphs 2.7 and 3.2 unless due to an intentional misrepresentation or breach of warranty by Borrower or Guarantor concerning the Receivables Collateral qualifying as Eligible Instruments; and (ii) prepayments of the Receivables Loan resulting from prepayments of the Receivables Collateral by Purchasers which have not been solicited by Borrower in breach of the terms and conditions of paragraph 6.2(e). (c) Receivables Loan Prepayment Premium Payable for Involuntary Prepayments. The Receivables Loan Prepayment Premium shall be payable regardless of whether the prepayment of the Receivables Loan is voluntary or is required because repayment of the Receivables Loan has been accelerated pursuant to any of Lender's rights under the Receivables Loan Documents (including, without limitation, any right to accelerate following casualty or 7 condemnation or when an Event of Default exists). 2.9 Receivables Loan Fee; Custodial Fee; Availability Fee. (a) Receivables Loan Fee. Borrower will pay to Lender the Receivables Loan Fee in accordance with the requirements set forth in the Schedule. The Receivables Loan Fee has been earned and shall be non-refundable. An application fee in the amount of Ten Thousand Dollars ($10,000) has been received by Lender, is non-refundable and shall not be applied against the Receivables Loan Fee or any other costs and expenses due to Lender. (b) Custodial Fee. In addition to all other fees required to be paid in connection with the Receivables Loan, Borrower shall pay to Lender the fee ("Custodial Fee") identified in the Schedule as the Custodial Fee per each Instrument which is delivered to Lender in connection with the Receivables Loan and is in the physical custody of Lender. The Custodial Fee for an Instrument shall be paid by Borrower to Lender at the time the Instrument is assigned to Lender. After the Custodial Fee is paid for an Instrument, no fee shall be payable to Lender for any Instrument which is delivered to Lender pursuant to paragraph 3.2 in replacement for an Instrument for which Borrower has paid the Custodial Fee. Once a Custodial Fee has been paid to Lender, Borrower shall not be entitled to any reimbursement of any portion hereof. (c) Availability Fee. Borrower will pay to Lender, at the time of any Advance, a fee ("Availability Fee") equal to the product of the percentage identified in the Schedule as the Availability Fee Percentage times the portion of such Advance which constitutes an Availability Advance. 2.10 Application of Proceeds of Collateral and Payments. Notwithstanding anything in the Receivables Loan Documents to the contrary, the amount of all payments or amounts received by Lender with respect to the Receivables Loan shall be applied to the extent applicable under the Receivables Loan Documents: (a) first, to any past due payments of interest on the Receivables Loan and to accrued interest on the Receivables Loan through the date of such payment, including any default interest; (b) then, to any late fees, examination fees and expenses, collection fees and expenses and any other fees and expenses due to Lender under the Receivables Loan Documents in connection with the Receivables Loan; and (c) last, the remaining balance, if any, to the unpaid principal balance of the Receivables Loan; provided, however, while an Event of Default or Incipient Default exists, each payment received with respect to the Receivables Loan shall be applied to such amounts owed to Lender by Borrower as Lender in its discretion may determine. In calculating interest and applying payments as set forth above: (a) interest on the Receivables Loan shall be calculated and collected through the date payment is actually received by Lender; (b) interest on the outstanding principal balance of the Receivables Loan shall be charged during any grace period permitted under the Receivables Loan Documents; (c) at the end of each month, all past due interest and other past due charges provided for under the Receivables Loan Documents with respect to the Receivables Loan shall be added to the principal balance of the Receivables Loan in accordance with the provisions of Article 363 of the Mexican Commercial Code; and (d) to the extent that Borrower makes a payment or Lender receives any payment or proceeds of the Collateral for Borrower's benefit that is subsequently invalidated, set aside or required to be repaid to any other person or entity, then, to such extent, the Obligations in connection with the Receivables Loan intended to be satisfied shall be revived and continue as if such payment or proceeds had not been received by Lender and Lender may adjust the Receivables Loan balance as Lender, in its discretion, deems appropriate under the circumstances. The provisions of this paragraph 2.10 are also subject to the parties rights and obligations under the Receivables Loan Documents as to the application of proceeds of the Collateral following an Event of Default. 2.11 Borrower's Unconditional Obligation to Make Payments. Whether or not the proceeds from the Receivables Loan Collateral shall be sufficient for that purpose, Borrower will pay when due all payments required to be made pursuant to any of the Receivables Loan Documents, Borrower's obligation to make such payments being absolute and unconditional. 3. SECURITY 3.1 Grant of Security Interest in Receivables Collateral. To secure the Performance of all of the Obligations and to secure to Trustee's Performance of all of its obligations under the Pledge Agreement, Borrower hereby grants to Lender a security interest in and assigns to Lender (i) the Trust Collateral and (ii) all other items of Receivables Collateral (other than the Trust Collateral). Such security interest shall be absolute, continuing, perfected, direct, first, exclusive and applicable to all existing and future Advances and to all of the Obligations and to all of the obligations of the Trustee under the Pledge Agreement. Borrower will unconditionally assign, endorse and deliver to Lender, with full recourse, all Instruments which are part of the Receivables Collateral. 8 To the extent that the Trustee is the owner of the Receivables Collateral, Borrower hereby irrevocably instructs the Trustee to grant to Lender, pursuant to the Pledge Agreement, a security interest in the Receivables Collateral owned by the Trustee and furthermore instructs the Trustee to unconditionally assign, endorse and deliver to Lender, with full recourse, all of the Instruments owned by the Trustee and which are part of the Receivables Collateral. Borrower further warrants and guarantees the enforceability of the Receivables Collateral. Lender is hereby appointed Borrower's attorney-in-fact to take any and all actions in Borrower's name and/or on Borrower's behalf deemed necessary or appropriate by Lender with respect to the collection and remittance of payments (including the endorsement of payment items) received on account of the Receivables Collateral; provided, however, that Lender shall not take any action which is described in paragraph 7.2(c) unless an Event of Default exists. Lender may notify persons bound thereby of the existence of Lender's interest as assignee in the Receivables Collateral and request from any person bound by the Receivables Collateral any information relating to such person. 3.2 Ineligible Instruments. If an Instrument which is part of the Receivables Collateral ceases to be an Eligible Instrument or is determined not to be an Eligible Instrument ("Ineligibility Event") and as a result of the occurrence of such Ineligibility Event, the unpaid principal balance of the Receivables Loan is in excess of the Receivables Loan Borrowing Base, (such excess, hereinafter the "Borrowing Base Shortfall"), then within thirty (30) days thereafter Borrower will either (a) make to Lender a principal payment in an amount equal to the Borrowing Base Shortfall plus accrued and unpaid interest on such payment or (b) replace or cause the Trustee to replace such ineligible Instruments with one or more Eligible Instruments having an aggregate Receivables Loan Borrowing Base not less than the Borrowing Base Shortfall. Simultaneously with the delivery of the replacement Eligible Instrument to Lender for an ineligible Instrument, Borrower will deliver to Lender and cause the Trustee to deliver all of the items (except for a "Request for Receivables Loan Advance and Certification") required to be delivered by Borrower (or Trustee) to Lender pursuant to paragraph 4.2, together with a "Borrower's Certificate" in form and substance identical to Exhibit C. Lender will reassign and/or endorse to Trustee, without recourse or warranty of any kind, the ineligible Instrument if: (a) no Event of Default or Incipient Default exists; (b) Borrower has made any principal payment and Performed any replacement obligations as required above in connection with any Ineligibility Event caused by such ineligible Instrument; and (c) Borrower has requested Lender in writing to release the ineligible Instrument. Borrower will prepare the reassignment document which shall be in form and substance identical to Exhibit C-1 and will deliver it to Lender for execution, and Lender will send Borrower and Trustee the re-assignment document and send to Borrower or Trustee, as the case may be, the Instrument being reassigned within thirty (30) days after satisfaction of the conditions precedent specified in the foregoing sentence. 3.3 Lockbox Collections and Servicing. Lockbox Agent shall be instructed and required to collect payments on the Instruments constituting part of the Receivables Collateral and remit collected payments to Lender on the last day (or if such day is not a Business Day, on the preceding Business Day) of each and every month after the date of the first Receivables Loan Advance, according to the terms of the Lockbox Agreement. Payments shall not be deemed received by Lender until Lender actually receives such payments from Lockbox Agent. Pursuant to the Servicing Agreement, Servicing Agent shall be instructed and required to furnish to Lender at Borrower's sole cost and expense, no later than the tenth (10th) day of each month commencing with the first full calendar month following the date of this Agreement, a report, in a format satisfactory to Lender, which: (a) shows as of the end of the prior month with respect to each Instrument which constitutes part of the Receivables Collateral (i) all payments received, allocated between principal, interest, late charges and taxes, (ii) the opening and closing balances, (iii) present value calculated at the Discount Rate (when and if Servicing Agent possesses such capability), (iv) average consumer interest rates; and (v) extensions, refinances, prepayments and other similar adjustments; and (b) indicates delinquencies of thirty (30), sixty (60), ninety (90) days and in excess of ninety (90) days. Borrower will pay without notice or demand any amount which was due and payable by Borrower on the last Business Day of the preceding month covered by such reports within five (5) Business Days of Borrower's Knowledge of such amounts. If such reports are not timely received, Lender may estimate the amount which was due and payable. Borrower will pay upon demand the amount determined by Lender in good faith to be due and payable. If payment is made on the basis of Lender's estimate and thereafter reports required by this paragraph are received by Lender, the estimated payment amount shall be adjusted by an additional payment or a refund to the correct amount, as the reports may indicate; such additional amount to be paid by Borrower upon demand and such refund to be made by Lender within five (5) Business Days after the receipt by Lender of the aforementioned reports, in accordance with the provisions of Section 9.6 hereof. At the end of each calendar quarter, Borrower will deliver or cause the Servicing Agent to deliver to Lender a current list of the names, addresses and phone numbers of the obligors on each of the Instruments constituting part of 9 the Receivables Collateral. Borrower will also deliver or cause Servicing Agent to deliver to Lender, promptly after receipt of a written request for them, such other reports with respect to Instruments constituting part of the Receivables Collateral as Lender may from time to time reasonably require. 3.4 Replacement of Agents. If a default on the part of an Agent exists and continues under the agreement to which it is a party or an Event of Default exists and continues, Lender, subject to any additional restriction thereon contained in the Lockbox Agreement or the Servicing Agreement, as applicable, may at any time and from time to time, substitute a successor or successors to any Agent acting under the Servicing Agreement or Lockbox Agreement. In any event, if, at any time during the term of the Receivables Loan, Lender is not satisfied with the servicing and collection abilities of Resort Communications, Inc., Lender shall have the right to require that such servicing and collection functions be performed by another servicing and collection company satisfactory to Lender pursuant to a servicing agreement satisfactory in form and content to Lender. 3.5 Maintenance of Security. Borrower will deliver or cause to be delivered to Lender and will maintain or cause to be maintained in full force and effect throughout the Term (except as otherwise expressly provided in such Receivables Loan Document), as security for the Performance of the Obligations, the Receivables Loan Security Documents and all other security required to be given to Lender pursuant to the terms of this Agreement. 3.6 Liability of Guarantors. The payment and Performance of the Obligations shall be jointly, severally, primarily and unconditionally guaranteed by the Required Guarantors. 4. CONDITIONS PRECEDENT TO ADVANCES; MINIMUM AMOUNT AND MAXIMUM FREQUENCY OF ADVANCES; METHOD OF DISBURSEMENT 4.1 Delivery of Receivables Loan Documents and Due Diligence Items Prior to Initial Advance. Lender's obligation to make the initial Advance shall be subject to and conditioned upon the terms and conditions set forth in the following subparagraphs and elsewhere in this Agreement: (a) Receivables Loan Documents. Borrower shall have delivered to Lender or caused to be delivered to Lender the following duly executed, delivered (where appropriate) and in form and substance satisfactory to Lender, not later than the Required Closing Date: (i) the Receivables Loan Documents; (ii) UCC financing statements for filing and/or recording, as appropriate, where necessary to perfect the security interests in the Collateral; (iii) the Receivables Assignment applicable to such Advance; (iv) [Reserved] (v) a favorable opinion or opinions from independent counsel for Borrower, which counsel shall be satisfactory to Lender and which opinion shall cover such matters as Lender may require, including, without limitation, the Minimum Opinion Matters pertaining to Borrower and the Time-Share Project; (vi) a favorable opinion or opinions from independent counsel for any and all Guarantors and (if any) other sureties for the Performance of the Obligations, which counsel shall be approved by Lender and which opinion shall cover such matters as Lender may require, including, without limitation, the Minimum Opinion Matters pertaining to such persons; (vii) the Third Party Consents; (viii) a request for the Receivables Loan Advance in form and substance identical to Exhibit E-1; and (ix) such other documents as Lender may reasonably require to effect the intent and purposes of this Agreement. (b) Organizational, Time-Share Project and Other Due Diligence Documents. Borrower shall have delivered to Lender prior to the earlier of (a) the date of the initial Advance or (b) the Required Closing Date: (i) the Articles of Organization of Borrower, any and all Required Guarantors and (if any) other sureties for the Obligations; (ii) the Resolutions of Borrower, any and all Required Guarantors and (if any) other sureties for the Obligations and, if applicable, their respective managers, members and partners, to the extent any such entity is not a natural person, authorizing the execution and delivery of the Receivables Loan Documents, the transactions contemplated thereby and such other matters as Lender may require; 10 (iii) evidence of good standing for all Required Guarantors and (if any) other sureties for the Performance of the Obligations and, if applicable, their respective managers, members and partners, to the extent any such entity is not a natural person, from the state of its organization and evidence that Borrower and Guarantor have obtained all approvals, consents and business licenses which are necessary to enable each of them, as applicable, to execute the Receivables Loan Documents, consummate the Receivables Loan and operate within Mexico; (iv) a Phase I environmental assessment of the Time-Share Project; (v) evidence that all taxes and assessments on the Time-Share Project have been paid; (vi) such evidence as Lender may reasonably require that Purchasers whose Instruments are the subject of the Receivables Assignment have good and marketable title to the Time-Share Interests they have purchased; (vii) a condominium map of the Time-Share Project; (viii) all permits, licenses, approvals and certificates for the occupancy, use and operation of the Time-Share Project for time-share and other intended uses and for the sale of Time-Share Interest, including any necessary architectural committee approvals; (ix) evidence that the Time-Share Project is zoned for time-share and other intended uses and that all approvals required for such uses under any covenants, conditions and restrictions have been obtained. In addition, evidence satisfactory to Lender that the present use of the Time-Share Project will not violate any existing bylaws, restrictions, covenants or regulations affecting the Time-Share Project; (x) the Minimum Required Time-Share Approvals; (xi) a copy of the Time-Share Program Consumer Documents and the Time-Share Program Governing Documents; (xii) the Insurance Policies; (xiii) evidence that the Time-Share Project is not located within a flood prone area or, if within a flood zone, evidence that flood insurance has been obtained; (xiv) evidence of the current and continued availability of utilities necessary to serve the Time-Share Project for time-share and other intended uses; (xv) evidence of access to and parking for the Time-Share Project adequate for time-share and hotel uses; (xvi) a copy of all marketing contracts, management contracts, service contracts, operating agreements, equipment leases, space leases and other agreements pertaining to the Time-Share Project and which are necessary for the sale, operation and intended time-share use of the Time-Share Project and are not otherwise required pursuant to another item in this paragraph; (xvii) evidence that each owner of a Time-Share Interest will have available to it the quiet and peaceful enjoyment of the Time-Share Interest (including promised amenities and necessary easements) owned by it which cannot be disturbed so long as such owner is not in default of its obligations to pay the purchase price of its Time-Share Interest, to pay assessments to the Borrower, and to comply with reasonable rules and regulations pertaining to the use of the Time-Share Interest ("Quiet Enjoyment Rights"); (xviii) the items required pursuant to Exhibit E; (ixx) fully executed copy of the Trusts in a form approved by Lender, certified correct by Borrower and Trustee; (xx) original Pass-Through Certificates, with the assignment section thereof executed by Borrower "in blank"; (xxi) copy of the notification, as contemplated under paragraph 9.1(c) hereof, given by Borrower to Trustee, the contents of which shall be acceptable to Lender, together with an acknowledgment from Trustee indicating receipt thereof; (xxii) copy of the notification, as contemplated under paragraph 9.1(d) hereof, given by Borrower to Trustee, the contents of which shall be acceptable to Lender, together with an acknowledgment from Trustee indicating receipt of such 11 notification and receipt of the agreements relating to the Obligations ; (xxiii) satisfactory evidence that upon the initial Advance, Borrower shall have good and marketable title to the Collateral. In addition, satisfactory evidence that the security interests to be granted to Lender have been duly perfected as first and prior charges and security interests and that there are no other legal charges or security interests filed against Borrower or the property of Borrower; and (xxiv) such other items as Lender requests which are reasonably necessary to evaluate the request for the Advance and the satisfaction of the conditions precedent to the Advance. (c) Local Issues. Lender shall be satisfied with Mexican laws governing all matters relating to the Receivables Loan, including without limitation, the creation and perfection of security on real estate, the creation and perfection of the assignment of purchaser contracts, the creation, marketing and sale of unsold use rights and memberships, and other related matters. (d) Transfer Fees. Lender shall have received in form and substance satisfactory to Lender, evidence of payment of transfer fees and taxes assessed by applicable governmental authorities in connection with the Receivables Loan or the transfer as contemplated in paragraph 4.1(k) hereof. (e) Certificate re Financial Statements. Lender shall have received in form and substance satisfactory to Lender, a certification by the Borrower and the Guarantor that the financial statements submitted to Lender by Borrower and the Guarantor prior to the issuance of the Commitment Letter are true and correct in all material respects. Borrower shall deliver to Lender proforma consolidated financial statements prepared on the assumption that the full amount of the Receivables Loan and the Inventory Loan have been advanced to the Borrower and reflecting that the Borrowers, on a consolidated basis, have a positive net worth and are solvent. (f) Portfolio Interest Trust. Lender shall have received, in form and substance satisfactory to Lender, evidence that the Instruments from United States residents forming part of the Receivables Collateral being pledged to Lender are held in one of the Trusts. (g) Operating Agreements. Lender shall have received and approved the Operating Agreements and shall have received evidence satisfactory to Lender that the Operating Agreements are appurtenant to and run with the land and that Lender would have the benefits of the Operating Agreements if Lender held a first beneficial interest in the fideocomiso trust that holds the unsold Time-Share Interest inventory or by other means. (h) Credit Reports; Search Reports; Site Inspections. Lender shall have received, in form and substance satisfactory to Lender, the results of UCC searches (or its equivalent under Mexican law) with respect to Borrower, lien, litigation, judgment and bankruptcy searches (or its equivalent under Mexican law) for Borrower, any and all Required Guarantors and conducted in such jurisdictions as Lender deems appropriate and having a currency meeting Lender's requirements, credit references with respect to Borrower and all Required Guarantors and background checks on Douglas Y. Bech, Antonio Gutierrez, John McCarthy and Robert Brewton. In addition, a member of Lender's credit department shall have visited the Time-Share Project and shall be satisfied with the results of such inspection. (i) Organizational Structure. Lender shall be satisfied with the organizational structure of Borrower and Guarantor. (j) Broker: If the services of a broker have been utilized by Borrower to arrange the Receivables Loan, evidence that any fee due such broker or brokers has been paid or shall be paid. In any event, such fees are to be borne solely by Borrower. (k) Subsidiaries. All of the beneficial interest in the Trusts shall be held by, or shall have been transferred by CR Cancun, CR Cabos and CR Puerto Vallarta, as the case may be, into the name of Cancun Sub, Cabos Sub and Puerto Vallarta Sub, and Lender shall be satisfied that none of the Borrowers will incur any adverse income tax consequences as a result of the foregoing. (l) Existing Debt. Lender shall have reviewed and approved the terms and conditions of the Redeemable Senior Notes, the Mirror Notes and any other indebtedness owed by 12 Borrower or Guarantor. There shall exist no default, events of default or incipient defaults under the Redeemable Senior Notes, the Mirror Notes or such other indebtedness. (m) Year 2000 Questionnaire. Borrower shall have satisfactorily completed Lender's Year 2000 Questionnaire. (n) Affiliation. Lender has received evidence satisfactory to it that the Time-Share Projects are affiliated with either Resort Condominium International or Interval International and are in good standing with such exchange companies. 4.2 Additional Conditions Precedent for Subsequent Advances. For each Advance, other than an Availability Advance, Lender's obligation to make such Advance shall be subject to the terms and conditions set forth in Exhibit E, including delivery of the items called for therein, by no later than the Required Closing Date, with respect to the initial Advance, and at least five (5) Business Days prior to the date of an Advance, with respect to each Advance thereafter. 4.3 General Conditions Precedent to All Advances. Lender's obligation to fund any Advance is subject to and conditioned upon the additional terms and conditions set forth in the following subparagraphs being satisfied at the time of such Advance: (a) No material adverse change shall have occurred in the Time-Share Project, the Collateral, the business or financial condition of Borrower or any Required Guarantor (since the date of the latest financial and operating statements given to Lender by or on behalf of Borrower or any such Guarantor), or the ability of Borrower to Perform the Obligations. (b) There shall have been no material, adverse change in the warranties and representations made in the Receivables Loan Documents by Borrower, any Required Guarantor and/or any surety for the Performance of the Obligations. (c) Neither an Event of Default nor Incipient Default shall have occurred and be continuing. (d) The interest rate applicable to the Advance (before giving effect to any savings clause) will not exceed the maximum rate permitted by the Applicable Usury Law. (e) Borrower shall have paid to Lender the Receivables Loan Fee and all other fees which are required to be paid at the time of the Advance. (f) Lender is satisfied, in its discretion, that Lender will incur no adverse foreign tax consequences as a result of the making of the Advance and the performance of its obligations under the Receivables Loan Documents. Lender shall be further satisfied, in its discretion, that the principal and interest payments being made to Lender with respect to the Receivables Loan and any other monies payable to Lender under the Receivables Loan Documents will not be subject to withholding or subject Lender to a withholding requirement. (g) In the event the Instrument against which the Advance is to be made is from a United States resident, such Instrument is held in one of the Trusts. (h) The Pass-Through Certificates are "in registered form". 4.4 Conditions Satisfied at Borrower's Expense. The conditions to Advances shall be satisfied by Borrower at its expense. 4.5 Minimum Amount and Maximum Frequency of Advances. Advances shall be made in amounts not less than the amounts identified in the Schedule as the Minimum Advance Amount. Advances shall be made no more frequently in any calendar month than the frequency identified in the Schedule as the Maximum Advance Frequency. 4.6 Disbursement of Advances. Advances may be payable to Borrower; or if requested by Borrower and approved in writing by Lender, to others, either severally or jointly with Borrower, for the credit or benefit of Borrower. Advances shall be disbursed in Dollars by wire transfer or, at Borrower's option exercised by written request to Lender, by check or drafts. Borrower will pay Lender's reasonable charge in connection with any wire transfer, and Lender's current charge is identified in the Schedule as the Wire Transfer Fee. Lender may, at its option, withhold from any Advance any sum (including costs and expenses) then due to it under the terms of the Receivables Loan Documents or which Borrower would be obligated to reimburse Lender pursuant to the Receivables Loan Documents if first paid directly by Lender. 4.7 No Waiver. Although Lender shall have no obligation to make an Advance unless and until all of the conditions precedent to the Advance have been satisfied, Lender may, at its discretion, make Advances prior to that time without waiving or releasing any of the Obligations. 13 5. BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower hereby jointly and severally represent and warrant to Lender that: 5.1.1 Corporate Existence. CR Cancun is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where CR Cancun is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. CR Cancun has full power and authority to carry on its business and own its property. 5.1.2 Corporate Existence. CR Cabos is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where CR Cabos is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. CR Cabos has full power and authority to carry on its business and own its property. 5.1.3 Corporate Existence. CR Puerto Vallarta is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where CR Puerto Vallarta is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. CR Puerto Vallarta has full power and authority to carry on its business and own its property. 5.1.4 Corporate Existence. Corporacion Mexitur is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where Corporacion Mexitur is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. Corporacion Mexitur has full power and authority to carry on its business and own its property. 5.1.5 Corporate Existence. Cancun Sub is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where Cancun Sub is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. Cancun Sub has full power and authority to carry on its business and own its property. 5.1.6 Corporate Existence. Cabos Sub is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where Cabos Sub is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. Cabos Sub has full power and authority to carry on its business and own its property. 5.1.7 Corporate Existence. Puerto Vallarta Sub is a duly organized and validly existing business organization of the type identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and is authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where Puerto Vallarta Sub is at any time selling Time-Share Interests or where at any time the location or nature of its properties or its business makes such qualification necessary. Puerto Vallarta Sub has full power and authority to carry on its business and own its property. 5.2 Power and Authority; Enforceability. Borrower has full power and authority to execute and deliver the Receivables Loan Documents and to Perform the Obligations. All action necessary and required by Borrower's Articles of Organization and all other Legal Requirements for Borrower to obtain the Receivables Loan, to execute and deliver the Receivables Loan Documents which have been or will be executed and delivered in connection with the Receivables Loan Documents and to Perform the Obligations has been duly and effectively taken. The Receivables Loan Documents 14 are and, and to Borrower's Knowledge, shall be, legal, valid, binding and enforceable against Borrower; and do not violate the Applicable Usury Law or constitute a default or result in the imposition of a lien under the terms or provisions of any agreement to which Borrower is a party. Except for the Third Party Consents delivered pursuant to paragraph 4.1(a) and the consents evidenced by the Resolutions delivered pursuant to paragraph 4.1(b), no consent of any governmental agency or any other person not a party to this Agreement is or will be required as a condition to the execution, delivery or enforceability of the Receivables Loan Documents . 5.3 Borrower's Principal Place of Business. Each Borrower's principal place of business and chief executive office are located at the addresses identified in the Schedule as Borrower's Principal Place of Business and Borrower's Chief Executive Office. 5.4 No Litigation. There is no action, litigation or other proceeding pending or, to Borrower's Knowledge, threatened before any arbitration tribunal, court, governmental agency or administrative body against Borrower, which might materially adversely affect the Time-Share Project, the Collateral, the business or financial condition of Borrower, or the ability of Borrower to Perform the Obligations. Borrower will promptly notify Lender if any such action, litigation or proceeding is commenced or threatened. Borrower is not subject to governmental liens, levies or garnishments for liabilities unrelated to the taxation of the income from the Trusts. 5.5 Compliance with Legal Requirements. To Borrower's Knowledge, Borrower has complied with all Legal Requirements in all material respects, including, without limitation, all Legal Requirements of the state in which the Time-Share Project is located and all other governmental jurisdictions in which the Time-Share Project is located or in which Time-Share Interests will be sold or offered for sale by Borrower. 5.6 No Misrepresentations. The Receivables Loan Documents and all certificates, financial statements and written materials furnished to Lender by or on behalf of Borrower in connection with the Receivables Loan do not contain as of the date furnished to Lender any untrue statement of a material fact or omit to state a fact which materially adversely affects or in the future may materially adversely affect the Time-Share Project, the Collateral, the business or financial condition of Borrower or any Guarantor, or the ability of Borrower to Perform the Obligations. 5.7 No Default for Third Party Obligations. Borrower is not in default under any other agreement evidencing, guaranteeing or securing borrowed money or a receivables purchase financing or in violation of or in default under any material term in any other material agreement, instrument, order, decree or judgment of any court, arbitration or governmental authority to which it is a party or by which it is bound. 5.8 Payment of Taxes and Other Impositions. Borrower has filed all tax returns and has paid all Impositions, if any, required to be filed by it or paid by it, including real estate taxes and assessments relating to the Time-Share Project or the Collateral. 5.9 Sales Activities. Prior to the date of this Agreement, Borrower has sold Time-Share Interests and offered Time-Share Interests for sale only in the jurisdictions identified in the Schedule as the Jurisdictions Where Sales And/or Offers to Sell Have Occurred. 5.10 Time-Share Interest Not a Security. Borrower has not sold or offered for sale any Time-Share Interest as an investment. Except for the sale to Purchasers of Series B Shares of variable capital stock in and to any of CR Cancun, CR Cabos and/or CR Puerto Vallarta (in connection with Borrower's Club Regina B Shares sales program), neither the sale nor the offering for sale of any Time-Share Interest will constitute the sale or the offering for sale of a security under any applicable law. 5.11 Zoning Compliance. Neither time-share use nor other transient use and occupancy of the Time-Share Project violates or constitutes or will violate or constitute a non-conforming use or require a variance under any private covenant or restriction or any zoning, use or similar law, ordinance or regulation affecting the use or occupancy of the Time-Share Project. 5.12 Eligible Instruments. Each Instrument which is assigned to Lender pursuant to this Agreement and against which an Advance is requested or which is assigned in satisfaction of Borrower's obligations under paragraph 2.7 or 3.2 shall be an Eligible Instrument at the time of assignment. Borrower has Performed all of its obligations to Purchasers, and there are no executory obligations to Purchasers to be Performed by Borrower, except for non-delinquent and executory obligations disclosed to Purchasers in their Purchase Contracts. 5.13 Assessments and Reserves. (a) The Borrower has authority to levy annual assessments to cover the costs of maintaining and operating the Time-Share Project; (b) to Borrower's Knowledge, levied assessments will be adequate to cover the current costs of maintaining and operating the Time-Share Project and to establish and maintain a reasonable reserve for capital improvements to the extent and as required under the Operating Agreements and Time-Share Program Consumer Documents; and (c) to Borrower's Knowledge, there will be no events (other than inflation) which could give rise to a material increase in such costs, except for 15 additions of subsequent phases of the Time-Share Project that will not materially increase assessments. 5.14 Title to and Maintenance of Common Areas and Amenities. (a) The Borrower will at all times own the furnishings in the Units and all the common areas in the Time-Share Project and other amenities which have been promised or represented as being available to Purchasers, free and clear of liens and security interests except for the Permitted Encumbrances; (b) no part of the Time-Share Project is or will be subject to partition by the owners of Time-Share Interests; and (c) all access roads and utilities and off-site improvements necessary to the use of the Time-Share Project will have been dedicated to and/or accepted by the responsible governmental authority or utility company or are owned by an association of owners of property in a larger planned development or developments of which the Time-Share Project is a part. 5.15 Trusts. Each of Cabos Sub and Puerto Vallarta Sub have good right and power to execute the Trusts and perform their respective obligations thereunder. All action necessary and required by Cabos Sub's and Puerto Vallarta Sub's Articles of Organization and all applicable laws for the execution and delivery of the Trusts and all other documents executed and delivered in connection therewith have been duly and effectively taken and the Trusts are and shall be legal, valid, binding and enforceable against each of Cabos Sub and Puerto Vallarta Sub in accordance with their terms. The execution, delivery and performance of the Trusts and all other documents executed and delivered in connection therewith will not violate, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance (other than in favor of Lender) upon any of the properties or assets of Cabos Sub or Puerto Vallarta Sub pursuant to the provisions of any law, regulation, judgment, decree, order, franchise or permit applicable to Cabos Sub or Puerto Vallarta Sub; Cabos Sub's and Puerto Vallarta Sub's Articles of Organization; or any other contract or other agreement or instrument which Cabos Sub or Puerto Vallarta Sub is a party or by which Cabos Sub or Puerto Vallarta Sub or Cabos Sub's or Puerto Vallarta Sub's properties or assets are bound. No consent of any government or agency thereof, or any other person, firm or entity not a party thereto, is or will be required as a condition to the execution, delivery, performance or enforceability of the Trusts. 5.16 Year 2000. Borrower has taken all action necessary to assure that there will be no material adverse change to Borrower's business by reason of the advent of the year 2000, including without limitation that all computer-based systems, embedded microchips and other processing capabilities effectively recognize and process dates after April 1, 1999. 5.17 Survival and Additional Representations and Warranties. The representations and warranties contained in this Article 5 are in addition to, and not in derogation of, the representations and warranties contained elsewhere in the Receivables Loan Documents and shall be deemed to be made and reaffirmed prior to the making of each Advance. 6. BORROWER'S COVENANTS 6.1 Borrower's Affirmative Covenants. (a) Corporate Existence. Borrower will maintain its existence as a business organization of the type described below when it has signed this Agreement, duly organized and validly existing as the type of organization identified in the Schedule as Borrower's Type of Business Organization under the laws of the jurisdiction identified in the Schedule as Borrower's Jurisdiction of Organization and remain authorized to do business in the jurisdiction where the Time-Share Project is located and in each jurisdiction where Borrower is then selling Time-Share Interests or where at any time the location or nature of its properties or its business then makes such qualification necessary. Borrower will maintain full authority to Perform the Obligations and to carry on its business and own its property. (b) Compliance with Legal Requirements. Borrower will comply with and maintain in full force and effect all Legal Requirements in all material respects, including, without limitation, all Legal Requirements of the jurisdiction in which the Time-Share Project is located and all other governmental jurisdictions in which the Time-Share Project is located or in which Time-Share Interests will be sold or offered for sale by Borrower. Borrower shall at all times cause the Time-Share Project to be affiliated and in good standing with Resort Condominium International or Interval International. (c) Insurance. Borrower will pay the cost of and will maintain and deliver to Lender evidence of insurance policies required by Lender which cover such risks (including hurricane risk), are written by insurers and are in amounts and on forms satisfactory to Lender. (d) Reports. (i) Financial Information. During the Term, Borrower shall be required to furnish or cause to be furnished to Lender the following financial statements prepared in 16 reasonable detail, and certified as correct by the principal financial officer of the subject of such statement: (a) within forty-five (45) days after the end of each fiscal quarter, a statement of profit and loss, a balance sheet, and a cash flow statement as of the end of such quarter, as to each entity constituting Borrower (prepared on a consolidated basis and translated into English) and as to Guarantor, showing operating results for such quarter for the period from the beginning of the relevant fiscal year through the end of such quarter and for the comparable period of the preceding fiscal year, if any; (b) within one hundred twenty (120) days after the end of each fiscal year, a statement of profit and loss, a balance sheet and a cash flow statement as of the end of such year, as to each entity constituting Borrower, as to Guarantor, and as to any time-share association; (c) within thirty (30) days after end of each fiscal quarter, an audit report of Borrower's existing Time-Share Interests inventory levels as of the end of such quarter year, in a form acceptable to Lender, reconciling the Time-Share Interests inventory levels and the sales thereof prepared by Lender or a certified public accounting firm acceptable to Lender. Such report shall demonstrate to Lender that (A) accurate inventory levels are being maintained by Borrower and reported to Lender, (B) accurate inventory systems and controls are being maintained by Borrower, (C) Lender has received any required release payments, and (D) Borrower has not sold more Unit types than are available during a particular season. The annual financial statements of the Borrower shall be prepared on a consolidated basis and shall be statutory audited by a certified public accounting firm acceptable to Lender in accordance with Mexican GAAP. The annual financial statements of Guarantor shall be audited by a certified public accounting firm acceptable to Lender in accordance with GAAP. The annual financial statements for the Time-Share Association shall be in the form typically prepared by such association. Borrower's and Guarantor's annual financial statements shall be accompanied by a management letter from the accountants detailing any deficiencies in accounting practices and commenting on any other accounting-related matters. Together with Borrower's and Guarantor's quarterly financial statements, Borrower and Guarantor will deliver to Lender a certificate signed by Borrower's and Guarantor's chief executive officer and chief financial officer stating that there exists no Event of Default or Incipient Default or, if any such Event of Default or Incipient Default exists, specifying the nature and period of its existence and what action Borrower and Guarantor propose to take with respect to it. Such certificate shall state specifically that Borrower is in compliance with paragraphs 6.1(c), 6.1(e), 6.2(b) and 6.2(c), shall demonstrate the extent to which Borrower is in compliance with Sections S.5(a), S.5(b) and S.5(c) of the Schedule, shall demonstrate the extent to which Guarantor is in compliance with the financial covenants required of Guarantor under the Guaranty and shall be accompanied by Borrower's bank statement reflecting compliance with the Cash Equivalents covenant contained in Section S.5(b) of the Schedule. Borrower shall require that Guarantor supply to Lender copies of any compliance certificates submitted by Guarantor to the holder of the Redeemable Senior Notes concurrently with the submission of such certificate to such holder(s) and any notices (other than notices of a routine nature) given by the holder of the Redeemable Senior Notes to Guarantor or given by Guarantor to the holder of the Redeemable Senior Notes, concurrently with such giving or receipt. For purposes of this paragraph, in the case of a partnership or limited liability company, "chief executive officer" of an entity shall mean the general partner, member or manager having primary responsibility for the operations of such entity; and "chief financial officer" of such an entity shall mean the general partner, member or manager having primary responsibility for the finances of such entity. (ii) Litigation. Borrower will promptly notify Lender if any action, litigation or other proceeding becomes pending or, to Borrower's Knowledge, threatened before any arbitration tribunal, court, governmental agency or administrative body against Borrower, which might materially adversely affect the Time-Share Project, the Collateral, the business or financial condition of Borrower, or the ability of Borrower to Perform the Obligations. (iii) Sales Reports. On or before the tenth (10th) day after the end of each month, Borrower will cause to be furnished to Lender a sales report showing the following information prepared with respect to each Time-Share Project and on a consolidated basis as to all Time-Share Projects: the number of tours, the number of sales and closings of Time-Share Interests and the aggregate dollar amount 17 thereof, including average sales price and down payments, during such month. (iv) Time-Share Project and Sales Information. Borrower will deliver current price lists for Time-Share Interests to Lender from to time to time within ten (10) Business Days after receipt of a written request from Lender to do so. Borrower will deliver to Lender from time to time, as available and promptly upon amendment or effective date, sales literature, registrations/consents to sell, and final subdivision public reports/public offering statements/prospectuses. Borrower will deliver to Lender any changes which Borrower proposes or any other person having the power to do so proposes be made to the Time-Share Program Consumer Documents and/or the Time-Share Program Governing Documents last delivered to Lender, together with a description and explanation of the changes; and other items requested by Lender which relate to the Time-Share Interests. (v) Right to Inspect. Borrower will at its expense permit Lender and its representatives at all reasonable times to inspect the Time-Share Project and to inspect, audit and copy Borrower's books and records, provided, however, that, so long as no Event of Default or Incipient Default has occurred and is continuing, Lender shall provide to Borrower ten (10) Business Days' prior written notice before conducting such inspections and audits. In that regard, Lender shall likewise have the right to audit Borrower's use right or membership inventory levels at such frequencies as Lender shall deem appropriate, at Borrower's sole cost and expense. Borrower will permit FPSI, Lender's wholly owned servicing subsidiary, to monitor the collection and servicing function of Borrower with respect to those Receivables collected and serviced by Borrower. Such monitoring shall be performed at Lender's sole cost and expense except that Borrower shall reimburse FPSI, on demand, for FPSI's travel expenses incurred in connection with such monitoring. Provided there does not exist an Event of Default, FPSI shall perform such monitoring no more frequently than once per calendar year. During an Event of Default, there shall be no limit on the frequency of such monitoring by FPSI and all such monitoring performance during the pendency of an Event of Default shall be performed at Borrower's sole cost and expense. (vi) Time-Share Project Budgets. Within thirty (30) days after the end of each fiscal year, Borrower will submit to Lender a proposed annual maintenance and operating budgets of the Time-Share Project, certified to be adequate by the Borrower and a statement of the annual assessment to be levied upon the owners of Time-Share Interests. (vii) Material Increases to Assessments. If Borrower has Knowledge or has reason to believe that an event (other than general changes in the economy) has occurred or could occur which could give rise to a material increase in assessments to cover the then current costs of operating the Time-Share Project and to establish and maintain a reasonable reserve for capital improvements to the Time-Share Project, it will notify Lender of the occurrence of such event. (viii) Additional Information. Borrower will deliver to Lender the reports and other information required pursuant to paragraph 3.3, and Borrower will make available such further information as Lender may from time to time reasonably request. (e) Subordination of Indebtedness Owing to Affiliates. Borrower will cause any and all indebtedness (other than the Mirror Notes) owing by it to its shareholders, directors, officers, partners, members or managers, as the case may be, to Guarantors, or to the relatives or Affiliates of Borrower or any of the foregoing, and all liens, security interests and other charges on the assets of Borrower to be fully subordinated in all aspects to the Obligations pursuant to written agreements satisfactory to Lender; provided, however, that (A) if neither an Event of Default nor an Incipient Default then exists or will exist after giving effect to such payment, such subordination shall not extend to (i) reasonable bonuses, salaries, other compensation and fees at normal and customary rates for services actually rendered so long as the payment of such salaries and fees is not prohibited or otherwise limited pursuant to any provision set forth in the Schedule and (ii) payments expressly permitted pursuant to the terms of this Agreement and (B) any such subordination shall be subject to section 4.08 of the Indenture. (f) Payment of Taxes. Borrower will file all tax returns and will pay all taxes, if any, required to be filed by it or paid by it, including real estate taxes and assessments 18 relating to the Time-Share Project or the Collateral. Borrower will provide to Lender not more than thirty (30) days after such Impositions required to be paid pursuant to the preceding sentence become delinquent evidence that all taxes required to be paid pursuant to the preceding sentence on the Units and Time-Share Project common areas and related amenities have been paid in full. (g) Impositions. All payments to be made by Borrower under the Receivables Loan Documents shall be free of expense to Lender and to FPSI with respect to the amount of any Impositions, all of which Impositions Borrower assumes and shall pay when due pursuant to the laws of each of Mexico and the United States of America, and in all events prior to the date on which penalties apply, in addition to the other payments provided for in the Receivables Loan Documents to be made by it. Borrower's Obligation to pay Impositions shall likewise include the Obligation to pay any increase to Lender or FPSI in tax imposed by Mexico or the United States of America (or any political subdivisions of either) as a result of inclusion in income of Lender of any amount required by this paragraph 6.1(g) to be paid to or for Lender or FPSI. In that regard, but without limiting the generality of the foregoing, the Basic Interest, the Default Rate, the Receivables Loan Fee, the Custodial Fee, the Availability Fee, any prepayment premiums and any other amounts payable under the Receivables Loan Documents on which Impositions may be imposed shall be "grossed up" by any such Impositions which may be imposed, in the way of withholding payments or otherwise, so that after taking into account the payment of such Impositions, Lender and FPSI receive, at the times and frequencies required under the Receivables Loan Documents, the same amount of interest and other amounts as it would receive had such Impositions not been imposed. Borrower shall promptly make such withholding payments to the Mexican and United States of America taxing authorities, shall obtain receipts from such authorities as to the making of such withholding payments, shall supply Lender with true and correct copies of such receipts within five (5) Business Days following receipt thereof and shall in all other respects comply with all applicable Mexican and United States of America tax laws with respect to the making of such Imposition payments. FPSI is hereby expressly made a third-party beneficiary of the provisions of this paragraph and shall have the right to enforce this paragraph against Borrower in the same manner as if FPSI were a party to this Agreement. (h) Further Assurance. Borrower will execute or cause to be executed all documents and do or cause to be done all acts necessary for Lender to perfect or evidence and to continue the perfection of the liens and security interest of Lender in the Collateral or otherwise to effect the intent and purposes of the Receivables Loan Documents. (i) Fulfillment of Obligations to Purchasers. Borrower will fulfill, and will cause its Affiliates, agents and independent contractors at all times to fulfill, all their respective material obligations to Purchasers. Borrower will Perform all of its material obligations under the Time-Share Program Consumer Documents and the Time-Share Program Governing Documents. (j) Material Increases to Assessments. Borrower (i) will (A) discharge its obligations under the Time-Share Program Governing Documents and (B) maintain a reasonable reserve for capital improvements to the Time-Share Project to the extent and as required under the Operating Agreements and Time-Share Program Consumer Documents; and (ii) will pay not less often than once every twelve (12) months, the difference between (A) the cumulative total amount of the maintenance and operating expenses incurred in the operation and maintenance of the Time-Share Project, together with a reasonable reserve for capital improvements to the extent and as required under the Operating Agreements and Time-Share Program Consumer Documents; and the amount of any installment of real property taxes currently due and payable with respect to the Time-Share Project and related amenities, through the end of the calendar month preceding the month in which such payment is made and (B) the cumulative total amount of assessments payable to the Borrower, by owners (other than Borrower) of Time-Share Interests therein through the end of the calendar month preceding the month in which such payment is made. (k) Maintenance of Time-Share Project and Other Property. Borrower will maintain or cause to be maintained in good condition and repair all common areas in the Time-Share Project and other on-site amenities which have been promised or represented as being available to Purchasers and, to the extent 19 owned by Borrower or an Affiliate of Borrower, all portions of improvements in which Units are located and are not part of the Time-Share Project. Borrower will maintain a reasonable reserve to assure compliance with the terms of the foregoing sentence. Borrower shall maintain the Operating Agreements in full force and effect and shall make no material modifications to the same without the prior written consent of Lender. (l) Maintenance of Larger Tract. To the extent either the Time-Share Project is part of a larger common ownership regime or planned development or parts of buildings in which Units are located are not part of the Time-Share Project, Borrower will pay its commercially reasonable share of common expenses to be allocated to the Time-Share Project. Borrower will use commercially reasonable efforts to cause all such property which is not part of the Time-Share Project to be professionally managed in a first class manner. (m) Collection of Receivables Collateral. Borrower will undertake the diligent, timely and commercially reasonable collection of amounts delinquent under each Instrument which constitutes part of the Receivables Collateral and will bear the entire expense of such collection. Lender shall have no obligation to undertake any action to collect under any Instrument. (n) Notice of Lender's Interest. Borrower will deliver under its letterhead notice of Lender's interest in the Receivables Collateral to persons bound thereby, if requested, and will cause such notice to comply with applicable law. (o) Year 2000. Borrower shall take all action necessary to assure that there will be no material adverse change to Borrower's business by reason of the advent of the year 2000, including without limitation that all computer-based systems, embedded microchips and other processing capabilities effectively recognize and process dates after April 1, 1999. At Lender's request, Borrower shall provide to Lender assurance reasonably acceptable to Lender that Borrower's computer-based systems, embedded microchips and other processing capabilities are year 2000 compatible. (p) Inventory Loan. In the event the Inventory Loan has not closed by January 31, 1999, Borrower shall, on or before that date, cause Lender to be named as beneficiary under the fideocomiso trust that holds Borrower's unsold Time-Share Interest inventory or otherwise be granted rights in form satisfactory to Lender to such extent so that Lender will have the right, directly or indirectly, to enforce the Operating Agreements. Lender's ability to enforce the Operating Agreement shall not restrict or limit the Borrower's ability to sell Time-Share inventory in the ordinary course of business. (q) Withholding Tax. For so long as any of the Obligations remain outstanding, Borrower agrees to take all steps now or hereafter required in order to avoid the imposition of withholding taxes under Section 871, 881 and 1442 of the IRC or any successors statutes. Without limiting the generality of the foregoing, Borrower hereby agrees, for so long as any of the Obligations are made outstanding: (i) to maintain the Trusts in full force and effect, provided, however, that Borrower may dissolve any Trust at any time from and after the date on which the corpus of said Trust no longer contains any Instruments forming a part of the Receivables Collateral; (ii) prior to such time as Borrower requests that Lender make an Advance against a particular Instrument, to transfer and convey the Instrument to the applicable Trust and cause the Instrument to remain within such Trust for so long as Lender has a security interest in such Instrument; (iii) to perform all acts required of Borrower under the Trusts including without limitation the delivery to the Trustee of an IRS Form W-8 within the time period required under the Trusts and furnish Lender with a copy of such Form W-8 concurrently with the delivery of the same to the Trustee; and (iv) not to engage in a United States trade or business, as that term is interpreted under the IRC. In that regard, but without limited to generality of the foregoing, Borrower agrees to engage in no operational, marketing, collection, administrative, servicing or other business within the United States. To the extent that Borrower retains the services of an Affiliate for purposes of performing operational, marketing, collection, administrative, servicing or other business activities for the benefit of Borrower, such business activities shall be conducted pursuant to arms-length pricing and terms and be evidenced by a written agreement 20 approved by Lender. Borrower shall abide by all of its obligations under such agreement in a timely fashion. Any such Affiliate retained to perform such business activities on the part of Borrower shall perform similar businesses and services with and on behalf of persons or entities other than Borrower. (r) Signatures. In the event recommended by Lender's Mexican counsel, Borrower shall cause its authorized officer to initial or execute each page of each Receivables Loan Document, promptly upon the request of Lender. 6.2 Borrower's Negative Covenants. (a) Change in Borrower's Name or Principal Place of Business. Borrower will not change its name or move its principal place of business or chief executive office except upon not less than sixty (60) days' prior written notice to Lender. (b) Restrictions on Additional Indebtedness. Subject to the additional restrictions set forth in paragraph 6.2(c) below, Borrower will not incur any additional indebtedness, including, without limitation, any liability under any capitalized lease or any liability as a guarantor or other contingent liability, except for (i) short term accounts payable incurred in connection with the operation of the Time-Share Project in the ordinary course of business, (ii) the financing of time-share receivables denominated in Mexican Pesos or Unidades de Inversion ("UDI's"), and (iii) the Mirror Notes ("Permitted Debt"). If Lender consents to the incurring by Borrower of additional indebtedness, Lender shall have the right of first refusal to provide such financing to Borrower. If, during the Term, Borrower wishes to accept an offer from a third party for financing Borrower shall give Lender written notice of its intent to do so together with a copy of the written proposal for the financing from the prospective third party lender. Lender shall have ten (10) Business Days from receipt of the notice and any other items reasonably requested by Lender in connection with such proposed financing to issue a financing proposal to extend such financing upon terms substantially equivalent or better than those contained in the proposal from the prospective third party lender and failure to do so shall be deemed to be an election by Lender not to extend such financing. Lender shall have forty-five (45) days following the receipt of the financing proposal timely accepted by Borrower within which to issue a commitment; provided, however, Lender shall have no obligation to issue such commitment. The failure of Lender to issue a commitment within the foregoing period of time shall be deemed to be an election by Lender not to extend such financing. In such event, Borrower shall be free to accept the proposal from such third party lender and close such transaction on terms that are in all material respects no more favorable to the third party lender than those contained in its proposal. Borrower shall not however, have the right to close such financing with such third party lender on terms more favorable to the third party lender than those contained in the proposal from the third party lender unless Lender has been given the right to provide Borrower financing on terms substantially equivalent to or better than those offered by such third party lender, as more fully provided above. (c) Restrictions on Liens or Transfers. Borrower, without the prior written consent of Lender, will not: (i) sell, convey, lease, pledge, hypothecate, encumber or otherwise transfer any security for the Performance of the Obligations; (ii) permit or suffer to exist any liens, security interests or other encumbrances on the Collateral, except for the Permitted Encumbrances and liens and security interests expressly granted to Lender; (iii) sell, convey, lease, transfer or dispose of all or substantially all of its assets to another entity provided, however, that this section (iii) shall not be any more restrictive to the Borrower than is permitted by section 4.08 of the Indenture; or (iv) if Borrower is an organization, permit or suffer to exist any change in the legal or beneficial ownership of Borrower or any person controlling Borrower (whether directly or indirectly, through one (1) or more intermediaries) or any change in the power to control it or any person controlling Borrower (whether directly or indirectly, through one or more intermediaries). Without limiting Lender's right to withhold its approval for other reasons, as a condition to approval of any lien, security interest or other charge upon any of the Collateral, Lender may require that the third party execute a subordination agreement satisfactory to Lender and provide Quiet Enjoyment Rights to owners of Time-Share Interests. (d) No Sales Activities Prior to Approval. Borrower will not sell any Time-Share Interest or offer any Time- 21 Share Interest for sale in any jurisdiction, unless: (i) Borrower has delivered to Lender true and complete copies of the Minimum Required Time-Share Approvals required in such jurisdiction for its proposed conduct and all other evidence required by Lender that Borrower has complied with all Legal Requirements of such jurisdiction governing its proposed conduct; and (ii) Borrower has delivered to Lender the Time-Share Program Consumer Documents and the Time-Share Program Governing Documents which Borrower will be using in connection with the Time-Share Project and the sale or offering for sale of Time-Share Interests in such jurisdiction and such documents have been approved by Lender, which approval shall not be unreasonably withheld. (e) No Modification of Receivables Collateral or Payments by Borrower. Borrower will not cancel or materially modify, or consent to or acquiesce in any material modification (including, without limitation, any change in the interest rate or amount, frequency or number of payments) to, or solicit the prepayment of, any Instrument which constitutes part of the Receivables Collateral (except for solicitations by the Borrower which result in prepayment of a particular Instrument in exchange for a discount not exceeding five percent (5%) of the principal balance of such Instrument); or waive the timely performance of the material obligations of the Purchaser under any such Instrument or its security; or release the security for any such Instrument. Borrower will not pay or advance directly or indirectly for the account of any Purchaser any sum required to be deposited or owing by the Purchaser either under any Purchase Contract or under any Instrument which constitutes part of the Receivables Collateral. (f) No Modification of Time-Share Documents. Borrower will not cancel or materially modify, or consent to or suffer to exist any cancellation or material modification of any Time-Share Program Consumer Document or any Time-Share Program Governing Document without the prior written consent of Lender, such consent not to be unreasonably withheld or delayed. (g) Maintenance of Larger Tract. To the extent either the Time-Share Project is part of a larger common ownership regime or planned development or parts of buildings in which Units are located are not part of the Time-Share Project, Borrower will not permit common expenses to be allocated to the Time-Share Project in an unreasonably disproportionate manner. 6.3 Survival of Covenants. The covenants contained in this Article 6 are in addition to, and not in derogation of, the covenants contained elsewhere in the Receivables Loan Documents and shall be deemed to be made and reaffirmed prior to the making of each Advance. 7. DEFAULT 7.1 Events of Default. The occurrence of any of the following events or conditions shall constitute an Event of Default by Borrower under the Receivables Loan Documents: (a) failure of Lender to receive from Borrower within five (5) Business Days of the date when due and payable (i) any amount payable under the Receivables Loan Note or (ii) any other payment due under the Receivables Loan Documents, except for the payment due at the Receivables Loan Maturity Date for which no grace period is allowed; (b) any representation or warranty which is made by Borrower or Guarantor and is contained in the Receivables Loan Documents or in any certificate furnished to Lender under the Receivables Loan Documents by or on behalf of Borrower proves to be, in any material adverse respect, false or misleading as of the date deemed made; (c) a default in the Performance of the Obligations set forth in paragraph 3.2, 6.1(c), 6.1(e), 6.2(b), 6.2(c)(i), 6.2(c)(iii) or 6.2(c)(iv) hereof or in Sections S.5(a), S.5(b) or S.5(c) of the Schedule; (d) a default in the Performance of the Obligations or a violation of any term, covenant or provision of the Receivables Loan Documents (other than a default or violation referred to elsewhere in this paragraph 7.1) which continues unremedied (i) for a period of thirty (30) days after notice of such default or violation to Borrower in the case of a default under or violation of paragraph 6.2(c)(ii) or any default or violation which can be cured by the payment of money alone or (ii) for a period of thirty (30) days after notice to Borrower in the case of any other default or violation; 22 (e) an "Event of Default," as defined in any of the other Receivables Loan Documents; (f) any default, which default continues beyond any applicable cure period, by any Borrower under (i) the Mirror Notes or under the documents and instruments executed in connection therewith or (ii) any other agreement evidencing, guaranteeing or securing borrowed money or a receivables purchase financing involving an obligation in excess of Fifty Thousand Dollars ($50,000) to make a payment of principal or interest or to repurchase receivables; or any other material default by any Borrower permitting the acceleration of any of the payment or repurchase obligations of such Borrower which, if accelerated, will be in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (g) any final, non-appealable judgment or decree for money damages or for a fine or penalty against any Borrower which is not paid and discharged or stayed within thirty (30) days thereafter and, when aggregated with all other judgment(s) or decree(s) that have remained unpaid and undischarged or are not stayed for such period, such amount is in excess of Fifty Thousand Dollars ($50,000) as to any individual Borrower or Two Hundred Thousand Dollars ($200,000) in the aggregate as to all such Borrowers. (h) any party holding a lien on or security interest in any Collateral, other than a lien created by a Purchaser solely with respect to the Time-Share Interest(s) owned by it, commences foreclosure or similar sale thereof; (i) a material adverse change in the Time-Share Project, the Collateral or the business or financial condition of any Borrower, which change is not enumerated in this paragraph 7.1, as the result of which Lender in good faith deems the prospect of Performance of the Obligations impaired or the Collateral imperiled; (j) Any Borrower shall (i) generally not be paying its debts as they become due, (ii) file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization, arrangement or liquidation or any other petition in bankruptcy or insolvency under the laws of any jurisdiction including, without limitation, the commencement of a bankruptcy (quiebra), insolvency (suspension de pagos) or similar proceedings in accordance with the Mexican Bankruptcy Insolvency Law (Ley de Quiebras y Suspension de Pagos), (iii) make an assignment for the benefit of its creditors, (iv) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers for itself or any substantial part of its property, (v) be adjudicated insolvent, (vi) dissolve or commence to wind-up its affairs or (vii) take any action for purposes of the foregoing; or a petition for relief or reorganization, arrangement or liquidation or any other petition in bankruptcy or insolvency or the appointment of a custodian under the laws of any jurisdiction is filed against any Borrower or a custodian is appointed for any Borrower, the Collateral or any material part of any Borrower's property and such proceeding is not dismissed and appointment vacated within ninety (90) days thereafter; (k) any of the events enumerated in paragraphs 7.1(b), (f), (g), (h), (i) or (j) occurs with respect to any partner or manager of Borrower, if Borrower is a partnership or limited liability company, Guarantor or other surety for the Performance of the Obligations or Guarantor defaults in the Performance of any of its obligations under the Guaranty executed by it; (l) failure of Lender to receive from Borrower, within thirty (30) days of the date Borrower knows of such event, notice of any event which renders any representation or warranty in any Receivables Loan Documents false in any material, adverse respect were it made after the occurrence of such condition; (m) any default, which continues beyond any applicable cure period, by Guarantor under (i) the Redeemable Senior Notes or under the document and instruments executed in connection therewith or (ii) any other agreement evidencing, guaranteeing or securing borrowed money or a receivables purchase financing involving an obligation in excess of Fifty Thousand Dollars ($50,000) to make a payment of principal or interest or to repurchase receivables; or any other material default by Guarantor permitting the acceleration of any of the payment or repurchase obligations of Guarantor which, if accelerated, will be in excess of Fifty Thousand Dollars ($50,000) in the aggregate; (n) Trustee defaults in the performance of its Secured Obligations under and 23 as defined in the Pledge Agreement, if such default continues unremedied for (i) a period of fifteen (15) days after notice thereof to Trustee and Borrower in the case of a default which can be cured by the payment of money only or (ii) a period of thirty (30) days after notice thereof to Trustee and Borrower in the case of any other default; (o) any representation or warranty of Trustee contained in the Pledge Agreement proves to be, in any material respect, false or misleading as of the date deemed made and such misleading representation or warranty has a material adverse effect on Lender. (p) if by or under the authority of any governmental authority the management of any Borrower or its business is curtailed to the point of making it effectively inoperative by any seizure or intervention or proceedings of any nature; (q) if any of the Time-Share Projects are appropriated or possession thereof is lost by the Borrower; (r) if for any reason any Mexican authorities close the Time-Share Project or enjoin the further sale of Time-Share Interests therein; or (s) if caused by the acts of Borrower or the Trustee, the zero balance accounts maintained in the name of the Trustee under the Lockbox Agreement are not swept into an account of which Lender is the sole owner, as required under the Lockbox Agreement and such condition continues for a period of five (5) Business Days. 7.2 Remedies. At any time after an Event of Default has occurred and while it is continuing, Lender may but without obligation, in addition to the rights and powers granted elsewhere in the Receivables Loan Documents and not in limitation thereof, do any one or more of the following: (a) cease to make further Advances; (b) declare the Receivables Loan Note, together with any applicable Receivables Loan Prepayment Premium and all other sums owing by Borrower to Lender in connection with the Receivables Loan, immediately due and payable without notice, presentment, demand or protest, which are hereby waived by Borrower; (c) with respect to the Receivables Collateral, (i) after any applicable delinquency on a Purchase Contract, institute collection, foreclosure and other enforcement actions against Purchasers and other persons obligated on the Receivables Collateral, (ii) enter into modification agreements and make extension agreements with respect to payments and other performances, (iii) release persons liable for performance, (iv) settle and compromise disputes with respect to payments and performances claimed due, all without notice to Borrower, without being called to account therefor by Borrower and without relieving Borrower from Performance of the Obligations, and (v) receive, collect, open and read all mail of Borrower for the purpose of obtaining all items pertaining to the Receivables Collateral; (d) proceed to protect and enforce its rights and remedies under the Receivables Loan Documents and to foreclose or otherwise realize upon its security for the Performance of the Obligations, or to exercise any other rights and remedies available to it at law, in equity or by statute; (e) without notice to Borrower, have a receiver appointed for Borrower and/or its property; (f) Exercise any and all remedies of a secured party under the Arizona Uniform Commercial Code and under Mexican law with respect to the Collateral; (g) following the realization by Lender of its security interest in the Trust Collateral, terminate or revoke the Trusts or either of them; (h) without limiting any other rights or remedies of Lender, exercise all rights and remedies under the Pledge Agreement; and 7.3 Application of Proceeds During an Event of Default. Notwithstanding anything in the Receivables Loan Documents to the contrary, while an Event of Default exists, any cash received and retained by Lender in connection with the Receivables Collateral may be applied to payment of the Obligations in the manner provided in paragraph 7.5. 7.4 Uniform Commercial Remedies; Sale; Assembly of Receivables Collateral. (a) UCC Remedies; Sale of Receivables Collateral. Lender shall have all of the rights and remedies of a secured party under 24 the Uniform Commercial Code of the State of Arizona and all other rights and remedies accorded to a Secured Party at equity or law. Any notice of sale or other disposition of the Receivables Collateral given not less than ten (10) Business Days prior to such proposed action in connection with the exercise of Lender's rights and remedies shall constitute reasonable and fair notice of such action. Lender may postpone or adjourn any such sale from time to time by announcement at the time and place of sale stated on the notice of sale or by announcement of any adjourned sale, without being required to give a further notice of sale. Any such sale may be for cash or, unless prohibited by applicable law, upon such credit or installment as Lender may determine. Borrower shall be credited with the net proceeds of such sale only when such proceeds are actually received by Lender in good current funds. Despite the consummation of any such sale, Borrower shall remain liable for any deficiency on the Obligations which remains outstanding following such sale. All net proceeds recovered pursuant to a sale shall be applied in accordance with the provisions of paragraph 7.5. (b) Lender's Right to Execute Conveyances. Lender may, in the name of Borrower or in its own name, make and execute all conveyances, assignments and transfers of the Receivables Collateral sold in connection with the exercise of Lender's rights and remedies; and Lender is hereby appointed Borrower's attorney-in-fact for this purpose. (c) Obligation to Assemble Receivables Collateral. Upon request of Lender when an Event of Default exists, Borrower shall assemble the Receivables Collateral and make it available to Lender at a time and place designated by Lender, if it is not already in Lender's possession. 7.5 Application of Proceeds. The proceeds of any sale of all or any part of the Receivables Collateral made in connection with the exercise of Lender's rights and remedies shall be applied in the following order of priorities; first, to the payment of all costs and expenses of such sale, including without limitation, reasonable compensation to Lender and its agents, attorneys' fees, and all other expenses, liabilities and advances incurred or made by Lender, its agents and attorneys, in connection with such sale, and any other unreimbursed expenses for which Lender may be reimbursed pursuant to the Receivables Loan Documents; second, to the payment of all late charges required by the Receivables Loan Documents to be paid by Borrower, in such order and manner as Lender shall in its discretion determine; third, to the payment of the Obligations, in such order and manner as Lender shall in its discretion determine, with no amounts applied to payment of principal until all interest has been paid; fourth, to the other Obligations in such order and manner as Lender may determine; and last, to the payment to Borrower, its successors or assigns, or to whosoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 7.6 Lender's Right to Perform. Lender may, at its option, and without any obligation to do so, pay, perform and discharge any and all obligations agreed to be paid or Performed in the Receivables Loan Documents by Borrower or any surety for the Performance of the Obligations if (a) such person fails to do so and (b) (i) an Event of Default exists and at least five (5) Business Days' notice has been given to such person of Lender's intention to take such action, (ii) the action taken by Lender involves obtaining insurance which such person has failed to maintain in accordance with the Receivables Loan Documents or to deliver evidence thereof, or (iii) in the opinion of Lender, such action must be taken because an emergency exists or to preserve any of the Collateral or its value. For such purposes Lender may use the proceeds of the Collateral. All amounts expended by Lender in so doing or in exercising its remedies under the Receivables Loan Documents following an Event of Default shall become part of the Obligations, shall be immediately due and payable by Borrower to Lender upon demand, and shall bear interest at the Default Rate from the dates of such expenditures until paid. 7.7 Non-Exclusive Remedies. No remedy in any Receivables Loan Document conferred on or reserved to Lender is intended to be exclusive of any other remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under any Receivables Loan Document or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power shall be construed to be a waiver of or acquiescence to any default or a waiver of any right or power; and every such right and power may be exercised from time to time and as often as may be deemed expedient. 7.8 Waiver of Marshalling. Borrower, for itself and for all who may claim through or under it, hereby expressly waives and releases all right to have the Collateral, or any part of the Collateral, marshalled on any foreclosure, sale or other enforcement of Lender's rights and remedies. 7.9 Attorney-in-Fact. For the purpose of exercising its rights and remedies under paragraphs 7.2(c) 25 and 7.6, Lender may do so in Borrower's name or its name and is hereby appointed as Borrower's attorney-in-fact to take any and all actions in Borrower's name and/or on Borrower's behalf as Lender may deem necessary or appropriate in its discretion in the accomplishment of such purposes. 8. COSTS AND EXPENSES; INDEMNIFICATION 8.1 Costs and Expenses. 8.1.1 Borrower will pay on demand any and all costs and expenses incurred by Lender (exclusive of Lender's employees' expenses other than travel expenses) in connection with the initiation, documentation and closing of the Receivables Loan, the making of Advances, the protection of the Collateral, or the enforcement of the Obligations against Borrower, including, without limitation, all attorneys', inspecting architect's/engineer's and other professionals' fees (including, without limitation, reasonable out-of-pocket expenses and reasonable and normal charges of such attorneys' and other professionals for photocopy, telecopy and computer services, and clerical overtime), consumer credit reports, and revenue, documentary stamp, transaction and intangible taxes. Without limiting the generality of the foregoing, if a bankruptcy proceeding is commenced by or against Borrower or otherwise involving the Collateral, Lender shall, to the extent not already provided for herein, be entitled to recover, and Borrower shall be obligated to pay, Lender's attorneys' fees and costs incurred in connection with: any determination of the applicability of the bankruptcy laws to the terms of the Receivables Loan Documents or Lender's rights thereunder; any attempt by Lender to enforce or preserve its rights under the bankruptcy laws or to prevent Borrower or any other person from seeking to deny Lender its rights thereunder; any effort by Lender to protect, preserve or enforce its rights against the Collateral, or seeking authority to modify the automatic stay of 11 U.S.C. Section 362 or otherwise seeking to engage in such protection, preservation or enforcement; or any proceeding(s) arising under the bankruptcy laws, or arising in or related to a case under the bankruptcy laws. In addition to the foregoing, Borrower agrees to timely pay all fees and expenses of Trustee to perform the services contemplated under the Pledge Agreement and under the Trusts. Borrower agrees to supply to Lender written notice in the event the Trustee advises Borrower that the Trustee intends to increase the fees and expenses payable to Trustee in connection with the performance of its services under the Pledge Agreement and Trusts, within three (3) Business Days following Borrower's Knowledge of such contemplated increase. 8.1.2 Borrower agrees to timely pay and reimburse the Trustee for all Trustee's fees, costs and expenses incurred by or due and owing to the Trustee under or in connection with the Trusts and Pledge Agreement and agrees to take such steps as are necessary in order to prevent the Trustee from charging such costs, fees and expenses against the Trust Estate (as that term is defined in the Trusts) or from seeking reimbursement of such fees and expenses from the proceeds of the Receivables Collateral. In the event Borrower or Trustee withholds tax from the proceeds otherwise payable under the Receivables Collateral, Borrower shall pay to Lender on the last day of each and every month during the Term, the amount of tax so withheld during such month. In the event Trustee expends or advances any funds which will be charged against the Trust Estate or for which Trustee will be seeking reimbursement from the proceeds of the Receivables Collateral, Borrower shall, within eight (8) days following notification by Trustee as to such contemplated expenditure or advance, deposit with Trustee, monies in an amount equal to such contemplated advance or expenditure so that the Trust Estate and the proceeds from the Receivables Collateral shall not be reduced by such advance or expenditure. In the event such notice is given and Borrower fails to deposit such monies (and notwithstanding the fact that such failure shall be deemed an Event of Default), in the event Trustee does not or, has no obligation to so notify Borrower, or in the event the Trustee charges Trustees fees, costs or expenses against the Trust Estate or against the proceeds of the Receivables Collateral (and notwithstanding the fact that such act on the part of the Trustee shall be deemed an Event of Default), Borrower nevertheless shall pay to Lender on the last day of each and every month during the Term, the amount of such advance, expenditure or charge so made by Trustee during such month. The amounts payable by Borrower to Lender hereunder shall be deemed proceeds from the Receivables Collateral and shall be applied in the priority set forth in paragraph 2.10 hereof. 8.2 Indemnification. Borrower will INDEMNIFY, PROTECT, HOLD HARMLESS, and 26 defend Lender, FPSI and their respective successors, assigns and shareholders (including corporate shareholders), and the directors, officers, employees, servants and agents of the foregoing, for, from and against: (a) any and all liability, damage, penalties, or fines, loss, costs or expenses (including, without limitation, court costs and attorneys' fees), claims, demands, suits, proceedings (whether civil or criminal), orders, judgments, penalties, fines and other sanctions whatsoever asserted against it and arising from or brought in connection with the Time-Share Project, the Collateral, Lender's status by virtue of the Receivables Loan Documents, creation of liens and security interests, the terms of the Receivables Loan Documents or the transactions related thereto, the security interest that Lender asserts in the Trust Collateral, the holding by Lender of a beneficial interest in the Trusts or the dissolution and liquidation of the Trusts, a breach of Borrower's obligations under Paragraph 6.1(g), any assertion or claim that Lender is required to withhold any tax due on the proceeds of any Instrument or Trust Collateral, or any act or omission of Borrower or an Agent, or their respective employees or agents, whether actual or alleged unless such act or omission is caused by Lender's gross negligence or willful misconduct; and (b) any and all brokers' commissions or finders' fees or other costs of similar type by any party in connection with the Receivables Loan. On written request by a person or other entity covered by the above agreement of indemnity, Borrower will undertake, at its own cost and expense, on behalf of such indemnitee, using counsel satisfactory to the indemnitee, the defense of any legal action or proceeding to which such person or entity shall be a party. At Lender's option, Lender may at Borrower's expense prosecute or defend any action involving the priority, validity or enforceability of the Collateral. FPSI is hereby expressly made a third-party beneficiary of the indemnity obligations of Borrower contained in this paragraph 8.2 and shall have the right to enforce such indemnity obligations against Borrower in the same manner as if FPSI were a party to this Agreement. 9. CONSTRUCTION AND GENERAL TERMS 9.1 Special Provisions Relating to Trusts. (a) Borrower acknowledges that Lender's security interest in the Receivables Collateral and other collateral pledged to Lender as security for the Obligations and Trustee's obligations under the Pledge Agreement secures, inter alia, the payment and performance by Trustee of its obligations under the Pledge Agreement. Borrower agrees that neither demand on, nor pursuit of any remedies against Trustee shall be required as a condition precedent to, and neither the pendency nor prior termination of any action, suit or proceeding against Trustee shall bar or prejudice the making of a demand upon Borrower hereunder or the exercise of any remedies against Borrower. Neither (i) the exercise or failure to exercise by Lender of any rights or remedies conferred to it under the Pledge Agreement; (ii) the recovery of a judgment against Trustee; (iii) the commencement of any action at law or the recovery of a judgment against Trustee and the enforcement thereof; (iv) the taking or institution of any action against Trustee nor (v) any delay in taking or pursuing any of the foregoing shall extinguish or affect the obligations of Borrower hereunder. Lender may, without impairing the liability of Borrower hereunder, extend the time for payment or performance of any obligations of Trustee under the Pledge Agreement; release or compromise any liability of Trustee thereunder; extend the time for payment of the obligations of Trustee thereunder; and agree to any amendment or modification or alteration of the Pledge Agreement on such terms and conditions as may be acceptable to Lender. Borrower shall have no rights of subrogation and hereby waives any right to participate in any of the Collateral (as that term is defined in the Pledge Agreement). Borrower waives any and all suretyship defenses and defenses in the nature thereof. (b) Borrower agrees to perform all acts that are necessary, required or contemplated under the terms of the Trusts in order for Lender to have and receive a security interest in the Receivables Collateral (including without limitation a security interest in the Trust Collateral and an assignment of the Pass-Through Certificates) and in order to insure that all of the proceeds of the Receivables Collateral are paid directly to Lender by virtue of and as a result of Lender's Security Interest in the Trust Collateral and by virtue of the assignment in favor of Lender of the Pass-Through Certificates. (c) Without limiting the generality of the foregoing, Borrower agrees to notify Trustee, pursuant to the provisions of Section V(D) of the Trusts, that (i) Lender has a Security Interest in the Trust Collateral, (ii) such Security Interest is a Pledge and/or Security Interest (as such terms are defined in the Trusts) and not an outright assignment and (iii) all amounts due with respect to the Trust Collateral shall be paid to Lender rather than to Borrower until all of the Obligations have been paid and Performed in full. Borrower agrees not to vary, 27 modify or revoke the foregoing instructions to Trustee without the prior written consent of Lender. (d) Without further limiting the generality of the foregoing, Borrower agrees to instruct Trustee, pursuant to Section II(C) of the Trusts, to grant to Lender a Security Interest in Trustee's interest in the Receivables Collateral as security for the payment and Performance of the Obligations. Borrowers agree not to vary, modify or revoke the foregoing instructions to Trustee, without the prior written consent of Lender. (e) Borrower hereby agrees that Lender is entitled to receive, by virtue of its security interest in the Trust Collateral, all proceeds from Receivables Collateral and that all amounts due with respect to the Trust Collateral (to the extent arising from or pertaining to the Receivables Collateral) shall be paid to Lender rather than to Borrower until all of the Obligations have been paid and Performed in full. (f) Borrower shall not authorize or approve the performance by Trustee of any extraordinary services, for which Trustee shall seek compensation, without the advance written consent of Lender. (g) Borrower shall not remove Trustee (or any successor to Trustee) as trustee under the Trusts without the express written consent of Lender. Borrower shall not appoint a successor trustee under the Trusts without obtaining Lender's consent as to the identity of such successor and without causing such successor, as a condition to such appointment, to become a party to the Pledge Agreement, the Servicing Agreement and the Lockbox Agreement in the same manner and to the extent that Trustee is such a party. Borrower shall not modify the Trusts in any respect without the prior written consent of Lender. Borrower shall not revoke or terminate the Trusts without the prior written consent of Lender. (h) Borrower recognizes that registration of certain of the Receivables Collateral or other collateral under the federal and state securities laws may be impractical because of the expenses or delays involved in the registration process and that in the absence of such registration, Lender may be unable to effect a public sale of all or a part of the Collateral, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such collateral for their own account, for investment and not with a view to the distribution or resale thereof. Borrower agrees that private sales so made may be at prices and other terms less favorable to the seller than if such collateral were sold at public sales, and that Lender has no obligation to delay sale of any such Collateral for a period of time necessary to permit such collateral to be registered for public sale under the Securities Act of 1933, as amended, and any applicable Blue Sky or other state securities laws. Borrower agrees that sales made under the foregoing circumstances shall not be deemed to have been made in a commercially unreasonable manner by virtue of any terms less favorable to the seller resulting from the private nature of such sales. (i) Borrower agrees to enforce, short of termination, all of the obligations of Trustee under the Trust Agreements and hereby authorizes Lender, following an Event of Default, to so enforce such obligations, in the name of Borrower or otherwise but at the cost and the expense of Borrower. (j) Borrower shall not, at any time during the Term, (i) own in the aggregate ten percent (10%) or more of the voting stock of any corporate obligor of any receivables held by the Trusts, or ten percent (10%) or more of the capital or profits interests of any obligor of any such receivables that is a partnership or (ii) become a related person with respect to any obligor on any of the receivables within the Trusts (within the meaning of IRC Section 864(d)(4); (k) Notwithstanding the fact that such transfer may constitute an Event of Default, the Pass-Through Certificates shall be transferred only by the surrender of an old Pass-Through Certificate and either the reissuance of the old Pass-Through Certificate to the new holder or the issuance of a new Pass-Through Certificate, in each case registered in the name of the new holder; (l) The identity of the owner of the receivables held by the Trusts shall be reflected on books and records maintained by the Collection Agent maintained pursuant to the Trust on behalf of the makers of those note representing such receivables. 9.2 Payment Location. All monies payable under the Receivables Loan Documents shall be paid to 28 Lender at its address set forth following its signature in lawful monies of the United States of America, unless otherwise designated in the Receivables Loan Documents or by Lender by notice. 9.3 Entire Agreement. The Receivables Loan Documents exclusively and completely state the rights and obligations of Lender and Borrower with respect to the Receivables Loan. No modification, variation, termination, discharge, abandonment or waiver of any of the provisions or conditions of the Receivables Loan Documents shall be valid unless in writing and signed by a duly authorized representative of the party sought to be bound by such action. The Receivables Loan Documents supersede any and all prior representations, warranties and/or inducements, written or oral, heretofore made by Lender, Borrower and the Required Guarantors concerning this transaction, including the Commitment Letter. However the Commitment Letter, to the extent it pertains to the Inventory Loan, shall survive the execution of the Receivables Loan Documents and the closing of the Receivables Loan. 9.4 Powers Coupled with an Interest. The powers and agency hereby granted by Borrower are coupled with an interest and are irrevocable until the Obligations have been paid in full and are granted as cumulative to Lender's other remedies for collection and enforcement of the Obligations. 9.5 Counterparts; Facsimile Signatures. Any Receivables Loan Document may be executed in counterpart, and any number of copies of such Receivables Loan Document which have been executed by all parties shall constitute one (1) original. Delivery of an executed counterpart of any Receivables Loan Document by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of such Receivables Loan Document. Any party delivering an executed counterpart of any Receivables Loan Document by telefacsimile shall also deliver a manually executed counterpart of such Receivables Loan Document, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of such Receivables Loan Document. 9.6 Notices. All notices, requests or demands required or permitted to be given under the Receivables Loan Documents shall be in writing, and shall be deemed effective (a) upon hand delivery, if hand delivered or (b) two (2) Business Days after such are deposited for delivery via Federal Express or other nationally recognized overnight courier service, addressed as shown below, or to such other address as the party being notified may have designated in a notice given to the other party. Written notice may be given by telecopy to the telecopier number shown below or to such other telecopier number as the party being notified may have designated in a notice given to the other party, which notice shall be effective on the day of receipt if received during the recipient's normal business hours on the day of receipt or otherwise on the next Business Day; provided that such notice shall not be deemed effective unless not later than the next Business Day, a copy of such notice is hand delivered or deposited for delivery via courier in accordance with the requirements set forth above. The notice addresses and telecopy numbers for Borrower and Lender are set forth at the end of this Agreement following their respective signatures. 9.7 Successors and Assigns. All the covenants of Borrower and all the rights and remedies of the Lender contained in the Receivables Loan Documents shall bind Borrower, and, subject to the restrictions on merger, consolidation and assignment contained in the Receivables Loan Documents, its successors and assigns, and shall inure to the benefit of Lender, its successors and assigns, whether so expressed or not. Borrower may not assign its rights in the Receivables Loan Documents in whole or in part. Except as may be expressly provided in a Receivables Loan Document, no person or other entity shall be deemed a third party beneficiary of any provision of the Receivables Loan Documents. 9.8 Severability. If any provision of any Receivables Loan Document is held to be invalid, illegal or unenforceable under present or future laws, the legality, validity and enforceability of the remaining provisions of the Receivables Loan Documents shall not in any way be affected or impaired thereby. In lieu of each such illegal, invalid or unenforceable provision, there shall be added to the Receivables Loan Document affected, a provision that is legal, valid and enforceable and as similar in terms to such illegal, invalid and unenforceable provision as may be possible. 9.9 Time of Essence. Time is of the essence in the Performance of the Obligations. 9.10 Miscellaneous. All headings are inserted for convenience only and shall not affect any construction or interpretation of the Receivables Loan Documents. Unless otherwise indicated, all references in a Receivables Loan Document to clauses and other subdivisions refer to the corresponding paragraphs, clauses and other subdivisions of the Receivables Loan Document; the words "herein," "hereof," "hereto," "hereunder" and words of similar import refer to the Receivables Loan Document as a whole and not to any particular paragraph, clause or other subdivision; and reference to a numbered or lettered subdivision of an Article or paragraph shall include relevant matter within the Article or paragraph which is applicable to but not within such numbered or lettered subdivision. All 29 Schedules and Exhibits referred to in this Agreement are incorporated in this Agreement by reference. Whenever the words "including", "include", or "includes" are used in the Receivables Loan Documents, they shall be interpreted in a non-exclusive manner as though the words, "without limitation," immediately followed the same. 9.11 CHOICE OF LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED THEREIN, THE RECEIVABLES LOAN DOCUMENTS AND THE RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTIES THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ARIZONA (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS) AND TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. 9.12 CHOICE OF JURISDICTION; WAIVER OF VENUE. EACH OF BORROWER AND LENDER: (A) HEREBY IRREVOCABLY SUBMITS ITSELF TO THE PROCESS, JURISDICTION AND VENUE OF THE COURTS OF THE STATE OF ARIZONA, MARICOPA COUNTY, AND TO THE PROCESS, JURISDICTION, AND VENUE OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA, FOR THE PURPOSES OF SUIT, ACTION OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO ANY RECEIVABLES LOAN DOCUMENT OR THE SUBJECT MATTER THEREOF AND WAIVE ANY OTHER JURISDICTION OR VENUE TO WHICH THE PARTIES MAY OTHERWISE BE ENTITLED; AND (B) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH OF BORROWER AND LENDER HEREBY WAIVES THE RIGHT TO COLLATERALLY ATTACK ANY JUDGMENT OR ACTION IN ANY OTHER FORUM. 9.13 WAIVER OF JURY TRIAL. LENDER AND BORROWER ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER ANY RECEIVABLES LOAN DOCUMENT WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES; AND THEREFORE, THEY AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED BY A JUDGE SITTING WITHOUT A JURY, AND KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY SUCH PROCEEDING. 9.14 INDUCEMENT TO LENDER. ALL OF THE PROVISIONS SET FORTH IN THIS PARAGRAPH ARE A MATERIAL INDUCEMENT FOR LENDER'S MAKING ADVANCES TO BORROWER. (BORROWER'S INITIALS RE: 9.11 - 9.14 _____) 9.15 Compliance With Applicable Usury Law. It is the intent of the parties hereto to comply with the Applicable Usury Law. Accordingly, notwithstanding any provisions to the contrary in the Receivables Loan Documents, in no event shall the Receivables Loan Documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. 9.16 NO RELATIONSHIP WITH PURCHASERS. LENDER DOES NOT HEREBY ASSUME AND SHALL HAVE NO RESPONSIBILITY, OBLIGATION OR LIABILITY TO PURCHASERS, LENDER'S RELATIONSHIP BEING THAT ONLY OF A CREDITOR WHO HAS TAKEN AN ASSIGNMENT FROM BORROWER OF THE INSTRUMENTS IN ORDER TO FACILITATE PERFORMANCE OF THE OBLIGATIONS. EXCEPT AS REQUIRED BY LAW AND FOR FILINGS MADE WITH THE SECURITIES & EXCHANGE COMMISSION OR ANY STOCK EXCHANGE ON WHICH BORROWER'S STOCK IS TRADED, BORROWER WILL NOT, AT ANY TIME, USE THE NAME OF OR MAKE REFERENCE TO LENDER WITH RESPECT TO THE TIME-SHARE PROJECT, THE SALE OF TIME-SHARE INTERESTS OR OTHERWISE, WITHOUT THE EXPRESS WRITTEN CONSENT OF LENDER. 9.17 NO JOINT VENTURE. THE RELATIONSHIP OF BORROWER AND LENDER IS THAT OF DEBTOR AND CREDITOR, AND IT IS NOT THE INTENTION OF EITHER OF SUCH PARTIES BY THIS OR ANY OTHER INSTRUMENT BEING EXECUTED IN CONNECTION WITH THE RECEIVABLES LOAN TO ESTABLISH A PARTNERSHIP, AND THE PARTIES HERETO SHALL NOT UNDER ANY CIRCUMSTANCES BE CONSTRUED TO BE PARTNERS OR JOINT VENTURERS. 9.18 Standards Applied to Lender's Actions. Unless otherwise specifically stipulated elsewhere in the Receivables Loan Documents, if a matter is left in the Receivables Loan Documents to the decision, requirement, request, determination, judgment, opinion, approval, consent, satisfaction, acceptance, agreement, option or discretion of Lender, its employees, Lender's counsel or 30 any agent for or contractor of Lender, such action shall be deemed to be exercisable by Lender or such other person in its sole and absolute discretion and according to standards established in its sole and absolute discretion. Without limiting the generality of the foregoing, "option" and "discretion" shall be implied by use of the words "if" or "may." 9.19 Meaning of Subordination. Any subordination required to be given under the Receivables Loan Documents to Lender shall include the subordination of and the deferral of the right to receive payments on the subordinated obligations except to the extent expressly permitted in this Agreement; the remittances to Lender of all prohibited payments received by the third party; the subordination of all liens, security interests, assignments and other encumbrances and claims held by the subordinating party on or against any of Borrower's property to Lender's interest (whenever acquired) in such property; and an agreement on the part of the third party not to exercise any remedies against Borrower so long as all obligations under the Receivables Loan Documents have not been fully satisfied. 9.20 Scope of Reimbursable Attorney's Fees. As used in the Receivables Loan Documents, the term "attorneys' fees" includes the reasonable fees of attorneys licensed to practice law in any jurisdiction, law clerks, paralegals, investigators and others not admitted to the bar but performing services under the supervision of a licensed attorney, and the expenses (including, without limitation, normal and customary charges for telecopy and photocopy services and clerical overtime) incurred by them in the performance of their services. As used in the Receivables Loan Documents, attorneys' fees incurred by Lender in the enforcement of any remedy or covenant include, without limitation, attorneys' fees incurred in any foreclosure of the Receivables Loan Security Documents, in protecting or sustaining the lien or priority of the Collateral, or in any proceeding arising from or connected with any such matter, including any bankruptcy, receivership, injunction or other similar proceeding, or any appeal from or petition for review of any such matter, and with or without litigation. 9.21 Publicity. Lender is hereby authorized to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. Borrower consents to such advertising and authorizes Lender to use Borrower's name, logo, insignia, descriptive art work, trade name, trademark, or other similar material, whether or not protected by copyright (or otherwise), in any such advertisement. 9.22 Joint and Several. All of the Obligations, covenants, representations and warranties of Borrower in any of the Receivables Loan Documents shall be the joint and several Obligations, covenants, representations and warranties of each entity constituting Borrower, except to the extent otherwise set forth to the contrary. Although Lender and Borrower intend that each entity constituting Borrower shall be jointly and severally liable for all Obligations, to the extent that this Agreement or the other Receivables Loan Documents may be determined to secure indebtedness of any Borrower for which any other Borrower is not primarily liable, each Borrower expressly waives the benefit of any and all defenses available to a guarantor, surety, endorser or accommodation party dependent on an obligor's character as such. Without limiting the generality of the foregoing, each such other Borrower's liability hereunder shall not be affected or impaired in any way by any of the following acts or things (which Lender is hereby expressly authorized to do, omit or suffer from time to time without notice to or consent of anyone): (i) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all Obligations; (ii) any extension or renewal of any Obligations (whether or not for longer than the original period) or any modification of the interest rate, maturity or other terms of the Obligations; (iii) any waiver or indulgence granted to any Borrower, and any delay or lack of diligence in the enforcement of any or all Obligations owed by any Borrower; (iv) any full or partial release of, compromise or settlement with, or agreement not to sue, any Borrower or the Guarantor or other person liable on any Obligations; (v) any release, surrender, cancellation or other discharge of any or all Obligations of Borrower or the acceptance of any instrument in renewal or substitution for any instrument evidencing any Obligations; (vi) any failure to obtain collateral security (including rights of setoff) for any Obligations or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to preserve, protect, insure, care for, exercise or enforce any collateral security for any Obligations; (vii) any modification, alteration, substitution, exchange, surrender, cancellation, termination, release or other change, impairment, limitation, loss or discharge of any collateral security for any Obligations; 31 (viii) any assignment, sale, pledge or other transfer of any of the Obligations owed by any Borrower; or (ix) any manner, order or method of application of any payments or credits on any Obligations. Each Borrower waives all rights that it may now have or hereafter acquire, whether by subrogation, contribution, reimbursement, recourse, exoneration, contract or otherwise, to recover from any other Borrower or from any property of any other Borrower any sums paid under this Agreement. No Borrower will exercise or enforce any right of contribution to recover any such sums from any person who is a co-obligor with any Borrower or a guarantor or surety of the Obligations or from any property of any such person or entity until all of the Obligations shall have been fully paid and discharged. 9.23 Reliance. Lender's examination, inspection, or receipt of information pertaining to Borrower, any Guarantor, the Collateral or the Time-Share Project shall not in any way be deemed to reduce the full scope and protection of the warranties, representations and Obligations contained in the Receivables Loan Documents. 9.24 Currency. All monetary amounts for all purposes hereunder shall be denominated in United States Dollars. All amounts payable under the Receivables Loan Documents shall be payable solely in United States Dollars in immediately available funds for deposit into the bank account set forth in the attached Exhibit D or such other account as Lender shall from time to time indicate by written notice to Borrower. 9.25 Consideration. Each of the entities comprising Borrower acknowledges the Lender would not make the Receivables Loan contemplated hereby unless each of such entities (a) became a party to this Agreement and the other Receivables Loan Documents, (b) became jointly and severally liable for the payment and performance of all of the Obligations, and (c) granted to Lender a security interest, subject to Permitted Encumbrances, in all items of Collateral owned by each Borrower. Although each of the entities comprising Borrower maintains its separate legal existence and operates as a distinct and separate entity, such entities have historically engaged in substantial business with each other and have operated, and intend to continue operating, as a joint and consolidated entity for financial planning and cash management purposes and for purposes of achieving certain business operation efficiencies. Each of the entities comprising Borrower will therefore benefit from the financing arrangement and accommodations made by Lender under this Agreement and the other Receivables Loan Documents. Finally, it was a condition precedent on the part of Lender to the closing of the Receivables Loan that each of CR Cabo, CR Cancun and CR Puerto Vallarta form Cabo Sub, Cancun Sub and Puerto Vallarta Sub, respectively, and that CR Cabo, CR Cancun and CR Puerto Vallarta assign to Cabo Sub, Cancun Sub and Puerto Vallarta Sub, inter alia, all of their right, title and interest, if any, in and to the beneficial interest in the Trusts. 9.26 Judgment Currency. If, for the purpose of obtaining or enforcing judgment against Borrower or Guarantor in any court in any jurisdiction, it becomes necessary to convert into any other currency (such other currency being hereinafter referred to as the "Judgment Currency") an amount due in United States Dollars under the Receivables Loan Documents, the conversion shall be made at the rate of exchange available to Lender on the Business Day immediately preceding (i) the date of actual payment of the amount due, in the case of any proceeding in the courts of the State of Arizona or in the courts of any other jurisdiction that will give effect to such conversion being made on such date, or (ii) the date on which the judgment is given, in the case of any proceeding in the courts of any other jurisdiction (the applicable date as of which such conversion is made pursuant to this provision being hereinafter referred to as the "Judgment Conversion Date"). If, in the case of any proceeding in the court of any jurisdiction referred to above, there is a change in the rate of exchange available to Lender between the Judgment Conversion Date and the date of actual receipt of the amount due in immediately available funds, Borrower or Guarantor, as the case may be, shall pay such additional amount (if any, but in any event not a lesser amount) as may be necessary to ensure that the amount actually received in the Judgment Currency, when converted at the rate of exchange available to Lender on the date of payment, will produce the amount of United States dollars, which could have been purchased with the amount of the Judgment Currency stipulated in the judgment or judicial order at the rate of exchange on the Judgment Conversion Date. [SIGNATURE PAGE FOLLOWS] 32 [SIGNATURE PAGES/LOAN AND SECURITY AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective name, personally or by their duly authorized representatives as of November 23, 1998. BORROWER CR RESORTS CANCUN, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 CR RESORTS LOS CABOS, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 [ADDITIONAL SIGNATURES FOLLOW] CR RESORTS PUERTO VALLARTA, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 CORPORACION MEXITUR, S.A. de C.V., a Mexican corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 [ADDITIONAL SIGNATURES FOLLOW] CR RESORTS CANCUN TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 CR RESORTS CABOS TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 [ADDITIONAL SIGNATURES FOLLOW] CR RESORTS PUERTO VALLARTA TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital /s/ DOUGLAS Y. BECH By: Douglas Y. Bech Title: Attorney-in-Fact WITNESS: /s/ ROBERT L. BREWTON Name: Robert L. Brewton Notice Address and Telecopy Number: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Chief Financial Officer Telecopy No.: 713-613-2828 A copy of all notices to the Borrower shall also be sent as follows (which shall not be deemed notice): Battle Fowler 2049 Century Park East, Suite 2350 Los Angeles, CA 90067 Attention: Rick Davis, Esq. Telecopy No.: 310-277-0336 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resort Cancun, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resorts Los Cabos, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resort Puerto Vallarta, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of Corporacion Mexitur, S.A. de C.V., a Mexican corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) The foregoing instrument was acknowledged before me this 23 day of November, 1998, by DOUGLAS Y. BECH, the Attorney-in-Fact of CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. /s/ BEA M. ROBERTSON Notary Public in and for said State and County NOTARY SEAL HERE My commission expires: 10-31-99 LENDER FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ MIRIAN SANTA CRUZ Name: Mirian Santa Cruz title: Vice President Lender's Notice Address and Telecopy Number: FINOVA Capital Corporation 7272 East Indian School Road, Suite 410 Scottsdale, Arizona 85251 Attn.: Vice President--International Resort Finance Telecopy: (602) 874-6444 with a copy to: FINOVA Capital Corporation 7272 East Indian School Road, Suite 410 Scottsdale, Arizona 85251 Attn.: Vice President-Group Counsel Telecopy: (602)874-6445 SCHEDULE OF ADDITIONAL TERMS S.1 This Schedule has been incorporated by reference into and form a part of that Loan and Security Agreement dated as of November 23, 1998 between FINOVA Capital Corporation and CR Resorts Cancun, S. de R.L. de C.V., CR Resorts Los Cabos, S. de R.L. de C.V., CR Resorts Puerto Vallarta, S. de R.L. de C.V., Corporacion Mexitur, S.A. de C.V., CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V. S.2 To the extent of any inconsistency between this Schedule and the other provisions of the provisions of the Loan and Security Agreement, the provisions of this Schedule shall prevail. S.3 The provisions of the Loan and Security Agreement are supplemented as follows (paragraph references are references to paragraphs of the Loan and Security Agreement) which are intended to be supplemented by the following provisions : (a) [RESERVED] (b) P. 1. Basic Interest Rate: One and three-fourths percent (1.75%) per annum in excess of the Base Rate fluctuating monthly on the first day of each calendar month based upon the Base Rate in effect on such date. (c) P. 1. Default Rate: two percent (2%) above the Basic Interest Rate or (b) the maximum contract rate permitted under the applicable usury law, whichever of (a) or (b) is lesser. (d) [Reserved] (e) P. 1. Lockbox Agent: Bank One, Arizona, N.A. (f) P. 1. Maximum Receivables Loan Amount: Twenty Million Dollars ($20,000,000). (g) P. 1. RLBB Principal Balance Percentage: ninety percent (90%). (h) [RESERVED] (i) P. 1. Receivables Loan Borrowing Term Expiration Date: Eighteen (18) months following the date of the first Advance, provided, however, that in the event during such eighteen (18) month period there does not occur an Event of Default or Incipient Default with respect to which Lender gave Borrower written notice, the Receivables Loan Borrowing Term Expiration Date shall be thirty six (36) months from the date of the first Advance. (j) P. 1. Receivables Loan Fee: Two Hundred Thousand Dollars ($200,000). (k) P. 1. Receivables Loan Maturity Date. Eighty-four (84) months from the last Advance. (l) P. 1. Receivables Loan Opening Prepayment Date. The date two (2) years from the date of the first Advance. (m) P. 1 Receivables Loan Prepayment Premium: The Receivables Loan Prepayment Premium at any time shall be equal to an amount which is the product of the then unpaid principal amount being prepaid times a percentage based upon the year after the Receivables Loan Opening Prepayment Date in which the prepayment occurs and determined in accordance with the following schedule:
Years After Receivables Loan Applicable Receivables Loan Opening Prepayment Date Prepayment Premium Percentage Year 1 4 % Year 2 3 % Year 3 2 % thereafter none
Year 1 shall be the period of time commencing on the Receivables Loan Opening Prepayment Date and expiring twelve months thereafter. Each Year thereafter begins on the next succeeding anniversary date of the Receivables Loan Opening Prepayment Date and ends twelve (12) months thereafter. If the prepayment occurs during a period when prepayment is closed, the applicable prepayment premium percentage (if Lender agrees to allow such prepayment) shall be five percent (5%). (n) P. 1. Required Closing Date. November 25, 1998. (o) P. 1. Required Guarantors: Raintree Resorts International, Inc. (p) P. 1. Servicing Agent: Resort Communications, Inc., subject to Lender's right to remove such Servicing Agent as provided in the Agreement. (q) P. 1. Time Share Project: Club Regina Resort at Los Cabos, Club Regina Resort at Puerto Vallarta and Club Regina Resort at Cancun. (r) P. 2.9(a).Payment of Receivables Loan Fee: The Receivables Loan fee shall be payable as follows: A total of One Hundred Fifty Thousand Dollars ($150,000) is due and payable at or prior to the Required Closing Date. The remaining balance of Fifty Thousand Dollars ($50,000) is due in the earlier of one (1) year following the Required Closing Date or at such time as the unpaid principal balance of the Receivables Loan reaches Fifteen Million Dollars ($15,000,000). (s) P. 2.9(b).Custodial Fee: Five Dollars ($5). (t) P. 2.9(c).Availability Fee Percentage: one percent (1%). (u) P. 4.5. Minimum Advance Amount. One Hundred Thousand Dollars ($100,000). (v) P. 4.5. Maximum Advance Frequency: twice per calendar month with a Five Hundred Dollar ($500) charge being imposed in connection with the second Receivables Advance in any one (1) calendar month. Lender shall have the right to withhold the amount of such charge from such Advance. (w) P. 4.6. Wire Transfer Fee. Twenty Five Dollars ($25). (x) P. 5.1, 6.1. Borrower's Type of Business Organization: (1) CR Cancun: a Mexican limited responsibility corporation with variable capital; (2) CR Cabos: a Mexican limited responsibility corporation with variable capital; (3) CR Puerto Vallarta: a Mexican limited responsibility corporation with variable capital; (4) Corporacion Mexitur: a Mexican corporation with variable capital; (5) Cancun Sub: a Mexican limited responsibility corporation with variable capital; (6) Cabos Sub: a Mexican limited responsibility corporation with variable capital; (7) Puerto Vallarta Sub: a Mexican limited responsibility corporation with variable capital; (y) P. 5.1, 6.1. Borrower's Jurisdiction of Organization. (1) CR Cancun: Mexico (2) CR Cabos: Mexico (3) CR Puerto Vallarta: Mexico (4) Corporacion Mexitur: Mexico (5) Cancun Sub: Mexico (6) Cabos Sub: Mexico (7) Puerto Vallarta Sub: Mexico (z) P. 5.3. Borrower's Principal Place of Business. (1) CR Cancun: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (2) CR Cabos: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (3) CR Puerto Vallarta: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (4) Corporacion Mexitur: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (5) Cancun Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (6) Cabos Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (7) Puerto Vallarta Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (aa) P. 5.3. Borrower's Chief Executive Office. (1) CR Cancun: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (2) CR Cabos: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (3) CR Puerto Vallarta: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (4) Corporacion Mexitur: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (5) Cancun Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (6) Cabos Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (7) Puerto Vallarta Sub: Boulevard Adolfo Ruiz Cortinez No. 3642 P.B. y Piso 7 Col. Jardines del Pedrigal C.P. 01900, Mexico DF (aa) P. 5.9 Jurisdiction Where Sales and/or Offers to Sell Have Occurred. Mexico. S.4 [RESERVED] S.5 In addition to the other representations, warranties and covenants of Borrower set forth in the Loan and Security Agreement, Borrower represents, warrants and covenants as follows: (a) On the final day of each fiscal quarter of Borrower, commencing with the fiscal quarter ending March 31, 1999 and on the final day of each fiscal year of Borrower, commencing with the fiscal year ending December 31, 1999, the sum of (i) the total of Borrower's consolidated costs and expenses for commissions and selling relating to the retail sales of time-share interests, use rights, memberships and fractional ownership interests and (ii) the total of Borrower's consolidated general and administrative expenses (the costs and expenses described in clauses (i) and (ii) hereinafter the "SGA Expenses") shall not exceed sixty percent (60%) of the sum of the gross proceeds of Borrower's consolidated processed sales of retail time-shares interests, use rights, memberships and fractional ownership interests plus "Demo Sales" for the same period (each net of cancellations of and discounts on such sales) ("Net Sales"). The foregoing covenant shall be tested quarterly based upon Borrower's total aggregate SGA Expenses and Net Sales for the immediately preceding three (3) month period and annually based upon Borrower's total aggregate SGA Expenses and Net Sales for the immediately preceding twelve (12) month period. SGA Expenses and Net Sales shall be as determined in accordance with Mexican GAAP. (b) Borrower shall not permit Delinquencies as of the end of any three (3) consecutive calendar months during the term of the Receivables Loan to exceed four percent (4%) of the aggregate then unpaid principal balance of all Receivables which have been pledged or assigned to Lender. For purposes hereof, Delinquencies shall mean, individually and collectively, Receivables pledged or assigned to Lender under which an installment payment becomes more than sixty (60) days past due. This covenant shall be tested on a consolidated level as to all of the entities constituting Borrower. (c) Borrower shall maintain a ratio of Adjusted Current Assets to Adjusted Current Liabilities of no less than 1.25 to 1.0 tested quarterly commencing March 31, 1999. For purposes hereof, the term Adjusted Current Assets shall mean the current assets shown on Borrower's balance sheet minus any receivables owed to Borrower or any of them from any Affiliate and any time-share accounts receivable, plus time-share accounts receivable reserves and time-share cancellation reserves, determined on a consolidated basis as to all entities constituting Borrower. For purposes hereof, the term Adjusted Current Liabilities shall mean the current liabilities shown on Borrower's balance sheet minus the current portion of any liabilities owed by Borrower to any Affiliates and the current portion of any installments due under the Mirror Notes, determined on a consolidated basis as to all entities constituting Borrower. EXHIBIT A CONDITIONS OF ELIGIBLE INSTRUMENT (a) Lender has a valid, direct and perfected first lien/security interest in the Instrument and security therefor and has a valid and perfected first priority right to payments. (b) The Instrument does not represent a sale by Borrower, directly or indirectly, to any of its members, managers, shareholders, directors, officers, partners, as the case may be, its agents, employees or creditors, or any relative or Affiliate of Borrower, of Guarantor or of the foregoing. (c) Borrower has received from the Purchaser a minimum cash down payment of ten percent (10%) of the total sales price (no part which has been advanced or loaned to the Purchaser by Borrower, directly or indirectly) with such down payment being represented by a cash or credit card payment. (d) The Instrument must provide for level consecutive monthly installments of principal and interest in U. S. funds over a term (from its effective date) not exceeding eighty four (84) months from the date of its execution, and after taking into account the making of an Advance against such Instrument, the weighted average interest rate on all Instruments then assigned or pledged to Lender does not fall below thirteen percent (13%) per annum. The foregoing weighted calculation shall be performed by FPSI by applying their usual and customary weighted average formula to such Instruments. (e) At the time of funding of an Advance against the Instrument, no scheduled installment payment on the Instrument is more than thirty (30) days past due or has been deferred more than thirty (30) days. (f) The Purchaser in all respects, including, without limitation, its creditworthiness, is acceptable to Lender; has obtained from Borrower marketable title to the purchased Time-Share Interest; and has not purchased more than four (4) Time-Share Interests. (g) The Instrument and any security for the payment of the amount due under the Instrument are bona fide, are in form and substance satisfactory to Lender and are valid and enforceable in accordance with their terms; upon the obligor's default under the Instrument, subject only to notice and a reasonable grace period, payment of the balance of the indebtedness owing under the Instrument may be immediately accelerated and the lien of any security may be foreclosed or realized upon; and title of the Purchaser to the purchased Time-Share Interest(s) is subject only to the Permitted Encumbrances. (h) The Unit(s) and the amenities that have been promised to the Purchasers have been completed, fully furnished and approved and ready for occupancy and the furnishings in those Units are free of any lien except for the Permitted Encumbrances; no Unit or other part of the common areas of the Time-Share Project is subject to partition; and the time-share use of the Units and amenities conform to all applicable restrictions and laws, necessary approvals having been obtained. (i) The Instrument, any security for the payment of the amount due under the Instrument and the related sale transaction comply with all applicable laws; Borrower has Performed all its obligations due to the Purchaser and there are no executory obligations to the Purchaser to be Performed by Borrower; and the Purchaser does not have any right of rescission, set-off, abatement, counterclaim or the like. (j) The Purchaser is a United States or Canadian resident, unless the Purchasers of at least ninety percent (90%) of all other Eligible Instruments are United States or Canadian residents. (k) The Unit represented by such Time-Share Interest is part of the Club Regina Multi-Resort System. (l) The Instrument executed by a Purchaser who is a United States resident and representing the financed portion of the purchase price of a Time-Share Interest is held by the Trustee in the Trust. In all other circumstances, the Instrument is owned by Cancun Sub, Cabos Sub or Puerto Vallarta Sub. (m) The Instrument is serviced by the Servicing Agent. (n) As an alternative to the eligibility criteria set forth in subparagraphs (c) and (d) above, the Instrument provides for level consecutive monthly installments of principal and interest in U.S. funds over a term (from its effective date) not exceeding twenty four (24) months from its execution, with interest accruing on the unpaid balance at a rate as low as zero percent (0.0%) per annum and the Borrower has received from the Purchaser a minimum cash down payment of fifty percent (50%) of the total sales price (no part of which has been advanced or loaned to the Purchaser by the Borrower, directly or indirectly) with such down payment being represented by cash or credit card payment; and provided that when the unpaid principal balance of such Instrument is added to the unpaid principal balance of all other Instruments meeting the eligibility criteria set forth in this subparagraph and against which an Advance has been made, such sum is not in excess of ten percent (10%) of the unpaid principal balance of all Instruments against which an Advance has been made. (o) The Instruments contained within the Club Regina Trust II shall contain language substantially similar to the following: The maker and payee hereof hereby agree that the identity of the owner of this Promissory Note and the payee entitled to receive payments of principal and interest pursuant to this Promissory Note shall be reflected upon books maintained by Resort Communications, Inc., the "Custodian" on behalf of maker for such purpose, and that all transfers, including pledges, of the ownership of this Promissory Note, or any interest therein, must be reflected in a book entry in the record of ownership maintained by Custodian that identifies the owner of this Promissory Note or any interest therein. For purposes of this paragraph, a "book entry" is defined as a written record of ownership (maintained on paper and/or in magnetic or electronic media) that identifies the holder of an interest in the obligations represented by this Promissory Note. This Promissory Note may not be endorsed in blank, made payable to bearer or otherwise be transferred in such a manner that the Promissory Note could be come a bearer instrument. (q) To the extent that the Instrument is made by a Mexican resident, such Instrument is endorsed with a form of endorsement approved by Lender's Mexican counsel. EXHIBIT B PERMITTED ENCUMBRANCES (a) Taxes and assessments which are a lien but are not yet due and payable. (b) The matters shown on that _________________________ dated _________________, issued by _____________________________, except for the following: EXHIBIT C BORROWER'S CERTIFICATE CR Resorts Cancun, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Los Cabos, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Puerto Vallarta, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; Corporacion Mexitur, S.A. de C.V., a Mexican corporation with variable capital; CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital (collectively "Borrower") hereby jointly and severally certify to FINOVA CAPITAL CORPORATION ("Lender") that (i) the total unpaid payments due under the Instruments described in Schedule A attached hereto and by this reference incorporated herein and the unpaid principal balance for each such Instrument is as set forth in Schedule A; and (ii) such Instruments are, individually and collectively, Eligible Instruments. Except as otherwise defined herein or the context otherwise requires, all capitalized terms used herein have the meaning given to them in the Loan and Security Agreement between Borrower and Lender dated as of ______________, 199____, as it may be from time to time renewed, amended, replaced or restated. DATED: ____________, ______. "BORROWER" CR RESORTS CANCUN, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS LOS CABOS, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS PUERTO VALLARTA, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CORPORACION MEXITUR, S.A. de C.V., a Mexican corporation with variable capital By: Type/Print Name: Title: CR RESORTS CANCUN TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS CABOS TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS PUERTO VALLARTA TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: EXHIBIT C-1 RECEIVABLES RE-ASSIGNMENT When recorded, mail to: RE-ASSIGNMENT OF INSTRUMENTS KNOW ALL MEN BY THESE PRESENTS: That FINOVA Capital Corporation, a Delaware corporation ("Assignor") for Ten Dollars ($10.00) and other valuable consideration to it in hand, the receipt whereof is hereby acknowledged, does by these presents grant, bargain, sell, assign, transfer and set over unto [Trust or Borrower dependent upon the nature of Instrument] ("Assignee") Assignee all of Assignor's interest in the Instruments ("Instruments") described in Schedule A attached hereto and by this reference incorporated herein. TOGETHER WITH all obligations therein secured, all moneys due and to become due thereunder, and all interest thereon, and all rights arising therefrom. This re-assignment is made without recourse and without representation or warranty of any kind, express and implied (except that Assignor has not sold or assigned any interest in or otherwise encumbered the Instruments or other rights being reassigned hereunder). IN WITNESS WHEREOF, the Assignor has caused these presents to be executed the ____ day of _________________, 199__. WITNESS: "Assignor" FINOVA CAPITAL CORPORATION, a Delaware corporation By: Type/Print Name: Title: STATE OF ___________________) ) County of ____________________) I, _______________________, a notary public in and for the State and County aforesaid, do certify that ____________________________________ whose name, as ________________________ of _____________________, is signed to the writing above, bearing date on the ___ day of ________________________, has acknowledged the same before me in my County aforesaid. Given under my hand and official seal this ___ day of ___________________. My term of office expires on the ____ day of ____________________. Notary Public SCHEDULE a to RE-assignment of instruments Purchaser Date Original Principal Amount Secured EXHIBIT D FINOVA BANK ACCOUNT EXHIBIT E ADDITIONAL CONDITIONS TO RECEIVABLES LOAN ADVANCES (a) a completed and executed "Request for Receivables Loan Advance and Certification," in form and substance identical to Exhibit E-1. (b) (i) signed original Instruments which qualify as Eligible Instruments and have been duly and unconditionally endorsed to Lender by Borrower or the Trustee, as the case may be, (ii) copies of signed receipts for public offering statements/property reports/prospectuses required to be given to Purchasers in connection with the sales of Time-Share Interests giving rise to such Instruments, (iii) the original Purchase Contracts and copies of credit disclosure statements and other items requested by Lender which were signed by such Purchasers in connection with such sales, and (iv) evidence that all rescission rights have expired and Borrower has Performed all its statutory and contractual obligations with respect thereto. (c) a Receivables Assignment in recordable form and otherwise in form and substance identical to Exhibit E 2 to the Loan and Security Agreement, properly completed, executed and acknowledged assigning the Instruments covered by item (b) above. (d) if not previously furnished, evidence satisfactory to Lender that: (i) all Time-Share Interests which are the subject of the Instruments covered by item (b) above have all necessary and promised on-site and off-site improvements thereto and necessary and promised utilities are available; (ii) all Units and amenities which are to be available to Purchasers obligated on the Instruments covered by item (b) above have been completed in accordance with all applicable building codes and are fully furnished, necessarily equipped and will be available for use by Purchasers without disturbance or termination of their use rights so long as they are not in default of their obligations under the Instruments; and (iii) all furnishings in the Units and amenities are owned by the Borrower, free of charges, liens and security interests other than the Permitted Encumbrances. (e) if requested by Lender, written confirmation from the Servicing Agent that it has not received notice of any complaint, demand, set-off, or claim by any person, including, without limitation, any Purchaser, with respect to the Instruments covered by item (b) above (other than as to routine matters involving the servicing of an Instrument) and certifying the unpaid total payments due under the unpaid principal balance of such Instruments. (f) if requested by Lender in accordance with its normal underwriting procedures, a credit report from a recognized consumer credit reporting agency on each Purchaser obligated under an Instrument covered by item (b) above. (g) if requested by Lender, evidence reasonably satisfactory to it that there are no conflicting charges or security interests claimed in the Receivables Collateral. (h) if requested by Lender following a material change of circumstances or not more often than annually at Lender's discretion, an opinion from independent counsel to Borrower satisfactory to Lender with respect to the continued compliance of the Time-Share Project and Borrower's sales and marketing activities with applicable laws, the enforceability of the Instruments and such other matters as Lender shall reasonably require. (i) if requested by Lender following a material change of circumstances or not more often than annually at Lender's discretion, an opinion letter from independent counsel to Lender with respect to the continued compliance of the Time-Share Project and Borrower's sales and marketing activities with applicable laws, the enforceability of the Instruments and such other matters as Lender shall reasonably require. (j) if requested by Lender, such other items which are reasonably necessary to evaluate the request for the Receivables Loan Advance and the satisfaction of the conditions precedent thereto. (k) evidence that the Borrower has delivered to the Trustee and the Lender a Form W-8 as required under Paragraph 6.1(r)(iii) of the Agreement of which this Exhibit forms a part. EXHIBIT E-1 REQUEST FOR RECEIVABLES LOAN ADVANCE AND CERTIFICATION The undersigned ("Borrower") requests FINOVA CAPITAL CORPORATION ("Lender") to make a Receivables Loan Advance in the sum of _____________________________ ______________ UNITED STATES DOLLARS (U.S. $_____________) upon receipt hereof, pursuant to the Loan and Security Agreement between such parties dated as of _______________, 19____ (with any amendments, "Agreement"). Borrower hereby certifies to Lender that (i) the total unpaid payments due under the Instruments for which the requested disbursement of the Receivables Loan is sought and the unpaid principal balance for each such Eligible Instrument is as set forth on Schedule A attached hereto and by this reference incorporated herein; (ii) the Instruments against which the requested disbursement of the Receivables Loan is sought are, individually and collectively, Eligible Instruments; (iii) no material adverse change has occurred in the financial condition or in the business and operations of Borrower since _______________, _____, the date of the last financial statements delivered to Lender; (iv) all representations and warranties contained in the Agreement are true and correct as of the date hereof; (v) neither an Event of Default nor an Incipient Default exists; and (vi) Borrower has Performed and complied with all agreements, covenants and conditions required by the Agreement to be Performed and complied with prior to or at the date of the requested disbursement of the Receivables Loan. Except as otherwise defined herein or the context otherwise requires, all capitalized terms used herein have the meaning given to them in the Agreement. DATED: ________________, ______. "BORROWER" CR RESORTS CANCUN, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS LOS CABOS, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS PUERTO VALLARTA, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CORPORACION MEXITUR, S.A. de C.V., a Mexican corporation with variable capital By: Type/Print Name: Title: CR RESORTS CANCUN TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS CABOS TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: CR RESORTS PUERTO VALLARTA TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: EXHIBIT E-2 RECEIVABLES ASSIGNMENT ASSIGNMENT OF INSTRUMENTS AND RECEIVABLES COLLATERAL KNOW ALL MEN BY THESE PRESENTS: That U. S. Trust Company, National Association, as Trustee of the Club Regina Trust I, U.S. Trust Company, a national association, as Trustee of the Club Regina Trust II, CR Resorts Cancun, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Los Cabos, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Puerto Vallarta, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; Corporacion Mexitur, S.A. de C.V., a Mexican corporation with variable capital; CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital (collectively, "Assignor"), as owner of the Instruments ("Instruments") described in Schedule A attached hereto and by this reference incorporated herein, together with all other items of Receivables Collateral pertaining to such Instruments, for Ten Dollars ($10.00) and other valuable consideration to it in hand paid by FINOVA Capital Corporation, a Delaware corporation ("Assignee"), the receipt whereof is hereby acknowledged, does by these presents grant, bargain, sell, assign, transfer and set over unto Assignee all of Assignor's interest in said Instruments and Receivables Collateral pertaining thereto. TOGETHER WITH all obligations therein secured, all moneys due and to become due thereunder, and all interest thereon, and all rights arising therefrom. For purposes hereof, the term Receivables Collateral shall be as defined in that certain Loan and Security Agreement between CR Resorts Cancun, S. de R.L. de C.V., CR Resorts Los Cabos, S. de R.L. de C.V., CR Resorts Puerto Vallarta, S. de R.L. de C.V., Corporacion Mexitur S.A. de C.V., CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., and CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V as Borrower and FINOVA Capital Corporation as Lender dated __________, 19__, as amended. This Assignment may be executed in any number of separate counterparts, all of which, when taken together, shall constitute one and the same instrument, notwithstanding the fact that all parties have not signed the same counterpart. IN WITNESS WHEREOF, the Assignor has caused these presents to be executed the ___ day of ________________, 199__. "Assignor" WITNESS: CR RESORTS CANCUN, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: CR RESORTS LOS CABOS, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: CR RESORTS PUERTO VALLARTA, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: CORPORACION MEXITUR, S.A. de C.V., a Mexican corporation with variable capital By: Type/Print Name: Title: WITNESS: CR RESORTS CANCUN TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: CR RESORTS CABOS TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: CR RESORTS PUERTO VALLARTA TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital By: Type/Print Name: Title: WITNESS: U. S. TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee of the Club Regina Trust I By: Type/Print Name: Title: WITNESS: U. S. TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee of the Club Regina Trust II By: Type/Print Name: Title: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ____________________, 1998, by _______________________________________, the __________________________ of CR Resorts Cancun, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ____________________, 1998, by _______________________________________, the __________________________ of CR Resorts Los Cabos, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ________________________, 1998, by _______________________________________, the __________________________ of CR Resorts Puerto Vallarta, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ________________________, 1998, by _______________________________________, the __________________________ of Corporacion Mexitur, S.A. de C.V., a Mexican corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ________________________, 1998, by _______________________________________, the __________________________ of CR Resorts Cancun Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ____________________, 1998, by _______________________________________, the __________________________ of CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, on behalf of such corporation. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ____________________, 1998, by _______________________________________, the __________________________ of U. S. Trust Company, National Association, as Trustee of the Club Regina Trust I, on behalf thereof. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: STATE OF _____________ ) ) ss. County of ______________ ) The foregoing instrument was acknowledged before me this _____ day of ____________________, 1998, by _______________________________________, the __________________________ of U. S. Trust Company, National Association, as Trustee of the Club Regina Trust II, on behalf thereof. He/She is personally known to me or has produced __________________________ as identification. Notary Public in and for said State and County My commission expires: SCHEDULE a to assignment of instruments Purchaser Date Original Principal Amount Secured EX-10.19 3 FINOVA CORPORATE GUARANTEE CORPORATE GUARANTEE AND SUBORDINATION AGREEMENT THIS CORPORATE GUARANTEE AND SUBORDINATION AGREEMENT ("Guarantee") is made as of November 23, 1998, by and between RAINTREE RESORTS INTERNATIONAL, INC., a Nevada corporation ("Guarantor") and FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"). W I T N E S S E T H: WHEREAS, Lender is contemplating entering into a Loan and Security Agreement (such Loan and Security Agreement, and any and all amendments, modifications, supplements, riders, exhibits and schedules that are attached thereto and may hereafter be attached thereto being hereinafter collectively referred to as the "Agreement") with CR RESORTS CANCUN, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR RESORTS LOS CABOS, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR RESORTS PUERTO VALLARTA, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CORPORACION MEXITUR, S.A. de C.V., a Mexican corporation with variable capital; CR RESORTS CANCUN TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital; CR RESORTS CABOS TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, and CR RESORTS PUERTO VALLARTA TIMESHARE TRUST, S. de R.L. de C.V., a Mexican limited responsibility corporation with variable capital, (individually, collectively, jointly and severally, "Borrower") to be dated as of the date hereof, whereby Lender will lend to Borrower the sum of money ("Loan") as therein set forth, to be evidenced by a promissory note ("Note") as called for in the Agreement, which Loan is to be secured by the collateral ("Collateral") described therein; and WHEREAS, Guarantor is an affiliate of Borrower as set forth in paragraph 4.1(b) of this Guarantee and will benefit from the execution and delivery of the Agreement by and between Borrower and Lender and the making of the Loan; and WHEREAS, Lender is willing to enter into the Agreement with, and make the Loan to, Borrower only if Guarantor agrees for as long as any amounts may be due and payable by Borrower to Lender pursuant to the Note and/or the Agreement (a) to guarantee the full, prompt, complete and faithful performance of all the terms, covenants, conditions and obligations on Borrower's part to be performed under the Receivables Loan Documents and (b) to subordinate all of Guarantor's liens, security interests, claims and rights of any kind that they may now have or hereafter acquire against Borrower and/or Borrower's assets and property, of any and all kinds, now or hereafter existing ("Borrower's Property") resulting from Borrower's present and future indebtedness to Guarantor; other than indebtedness 1 created by the Mirror Notes (as defined in the Indenture [hereinafter defined]; and Guarantor is willing to so agree; and NOW, THEREFORE, in order to induce Lender to enter into the Agreement with Borrower and to fund the Loan, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, Guarantor hereby unconditionally covenants and agrees with Lender as follows: ARTICLE I - GUARANTEE 1.1 Guarantor absolutely and unconditionally, jointly and severally with any other Obligors (as defined in paragraph 3.1), guarantees the full, prompt, complete and faithful performance, payment, observance and fulfillment by Borrower of all the obligations, covenants and conditions on the part of Borrower to be performed or observed pursuant to the Receivables Loan Documents ("Obligations"), including, but not limited to, the payment of any and all sums that may become due to Lender from Borrower thereunder, whether Borrower is liable individually or jointly with others. Guarantor further agrees to pay all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by Lender in endeavoring to collect the Obligations, or any part thereof, or securing the performance thereof, or in enforcing this Guarantee, whether or not litigation is instituted. 1.2 Guarantor covenants and agrees absolutely and unconditionally that, in case of an Event of Default, within five (5) Business Days of the receipt of written notice from or on behalf of Lender to the effect that there exists such an Event of Default and of the Obligations which Borrower has failed to pay or perform, Guarantor will pay in its entirety the entire unpaid principal balance with accrued and unpaid interest due under the Note and any other sums properly due and owing to Lender under the Receivables Loan Documents (collectively, the "Unpaid Amount") in lawful money of the United States to Lender at its offices at 7272 East Indian School Road, Suite 410, Scottsdale, Arizona 85251, or will provide Lender with evidence of the performance of the Obligation which Borrower has failed to perform. If Guarantor should fail to pay any sums properly due Lender hereunder within said five (5) Business Days following receipt of Lender's request for payment of any such sums, then said sums shall bear interest at the Default Rate. Further, if Guarantor shall fail to pay such amount or perform such Obligation, Lender may institute and pursue any action or proceeding to judgment or final decree and may enforce any such judgment or final decree against Guarantor and collect in the manner provided by law out of its property, wherever situated, the monies adjudged or decreed to be payable. If Guarantor shall pay such amount or perform such Obligation within the time frame provided in this paragraph 1.2, Lender shall accept such payment or performance as a cure by Borrower made during the cure periods provided to Borrower in the Receivables Loan Documents. 1.3 This Guarantee shall not be limited to any particular period of time, but, rather, shall continue absolutely, unconditionally and irrevocably until all terms, covenants 2 and conditions of the Receivables Loan Documents have been fully and completely performed by Borrower or otherwise discharged and/or released by Lender, and Guarantor shall not be released from any duty, obligation or liability hereunder so long as there is any claim of Lender against Borrower arising out of the Receivables Loan Documents which has not been performed, settled or discharged in full, or during any period for which this Guarantee is continued in effect or reinstated pursuant to paragraph 3.7. ARTICLE II - SUBORDINATION 2.1 Guarantor, to the extent permitted by Section 4.08 of the Indenture, subordinates all present and future indebtedness other than the Mirror Notes (the "Related Indebtedness") owed by Borrower to Guarantor and all liens, security interests, claims and rights of any kind (the "Related Liens") that Guarantor may now have or hereafter acquire against Borrower and/or Borrower's Property resulting from the Related Indebtedness (the Related Indebtedness and Related Liens are collectively the "Subordinated Indebtedness") shall, to the extent permitted by Section 4.08 of the Indenture, be subordinate, inferior and subject to the claims and rights of Lender against Borrower and/or Borrower's Property under the terms of any of the Receivables Loan Documents whether direct or contingent or whether now or hereafter created. Unless an Event of Default or Incipient Default has occurred and is continuing or will exist after giving effect to such payment, Guarantor may receive, accept and retain for its own account all payments made on the Subordinated Indebtedness. 2.2 Guarantor will not take any action which will either (a) force the sale or cause the foreclosure of Borrower's Property in order to satisfy the Subordinated Indebtedness or (b) affect in any manner any or all of Lender's liens, security interests, claims or rights of any kind that Lender may now have or hereafter acquire against Borrower and/or Borrower's Property. Guarantor will refrain from taking any action which is in any way inconsistent with or in derogation of this subordination or of the rights of Lender hereunder and covenants to perform such further acts as necessary or appropriate to give effect to this subordination. Without limiting the generality of the foregoing, Guarantor will not assign any portion of the Subordinated Indebtedness, except expressly subject to the terms of this Guarantee; and Guarantor shall cause all evidence of the Subordinated Indebtedness to set forth the provisions hereof or to bear a legend that it is subject hereto. ARTICLE III - REMEDIES AND RIGHTS OF LENDER 3.1 Lender shall give Guarantor notice in writing of any Event of Default but neither failure to give, nor defect in, any notice shall extinguish or in any way affect the obligations of Guarantor hereunder or give rise to any claim by Guarantor for breach, other than to the extent the periods governing Guarantor's performance, as set forth in paragraph 1.2, are affected by the timing of the notice. Except as provided for in paragraph 1.2, neither demand on, nor the pursuit of any remedies against Borrower, or any guarantor, surety or insurer of the Obligations or part thereof ("Obligor") shall be required as a 3 condition precedent to, and neither the pendency nor the prior termination of any action, suit or proceeding against the Borrower or any Obligor (whether for the same or a different remedy) shall bar or prejudice the making of a demand on Guarantor by Lender and the commencement against Guarantor after such demand of any action, suit or proceeding, at law or in equity, for the specific performance of any covenant, or agreement contained in the Receivables Loan Documents or for the enforcement of any other appropriate legal or equitable remedy. 3.2 Guarantor's liability hereunder is primary, direct and immediate. Guarantor agrees that neither: (a) the exercise or the failure to exercise by Lender of any rights or remedies conferred on it under the Receivables Loan Documents; (b) the recovery of a judgment against Borrower or any Obligor; (c) the commencement of an action at law or the recovery of a judgment at law against Borrower or any Obligor and the enforcement thereof through levy, execution or otherwise; (d) the taking or institution of any other action or proceeding against Borrower or any Obligor; nor (e) any delay in taking, pursuing or exercising any of the foregoing actions, rights, powers or remedies (even though requested by Guarantor) by Lender or anyone acting for Lender shall extinguish or affect the obligations of Guarantor hereunder except as provided and solely to the extent set forth in paragraph 3.1, but Guarantor shall be and remain liable for and until all Obligations shall have been fully paid and/or performed notwithstanding (i) the previous discharge (total or partial) from further liability of Borrower or any Obligor or (ii) the existence of any bar (total, partial or temporary) to the pursuit by Guarantor of any right or claim to indemnity against Borrower or any Obligor or (iii) any right or claim to be subrogated to the rights or claims of Lender in and to the Collateral or the Receivables Loan Documents, or except as provided and solely to the extent set forth in paragraph 3.1 resulting from any action or failure or omission to act or delay in acting by Lender or anyone entitled to act in its place. 3.3 If Guarantor shall be dissolved or lose its corporate charter by forfeiture or otherwise or shall become insolvent or admit in writing its inability to pay its debts as they mature, or apply for, consent to or acquiesce in an appointment of a trustee, receiver, liquidator, assignee, sequestrator or other similar official for itself or any of its property; or, in the absence of such application, consent or acquiescence, a trustee, receiver, liquidator, assignee, sequestrator or other similar official is appointed for Guarantor or for a substantial part of its property and is not discharged within sixty (60) days thereafter; or any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy, admiralty or insolvency law or at common law or in equity, or any dissolution or liquidation proceeding is instituted by Guarantor, or is instituted against Guarantor and remains for sixty (60) days thereafter undismissed, then, whether any such event occurs at a time when any of the Obligations are then due and payable or not, the Unpaid Amount shall thereupon become due and payable in full, Guarantor will pay to Lender forthwith in its entirety the Unpaid Amount and any other sums properly due and owing to Lender under the Receivables Loan Documents as if such Unpaid Amount and other sums were then due and payable and in any such event Lender, irrespective of whether any demand shall have been made on Guarantor, Borrower or any Obligor, 4 by intervention in or initiation of judicial proceedings relative to Guarantor, its creditors or its property, may file and prove a claim or claims for such sum or any portion thereof and for any other sums due under the Receivables Loan Documents and file such other papers or documents as may be necessary or advisable in order to have such claim allowed in such judicial proceedings and to collect and receive any monies or other property payable or deliverable on any such claim, and to distribute the same; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized to make such payments to Lender. 3.4 The benefits, remedies and rights provided or intended to be provided hereby for Lender are in addition to and without prejudice to any rights, benefits, remedies or security to which Lender might otherwise be entitled. No delay or omission on the part of Lender in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Lender of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Guarantee be binding on Lender except as expressly set forth in writing, duly signed and delivered on behalf of Lender. Except as provided and solely to the extent set forth in paragraph 3.1, no action of Lender or failure or omission to act permitted hereunder shall in any way affect or impair the rights of Lender and the obligations of Guarantor under this Guarantee. 3.5 Anything else contained herein to the contrary notwithstanding, Lender, from time to time, whether before or after an Event of Default, without notice to Guarantor, may take all or any of the following actions without in any manner affecting or impairing the liability of Guarantor hereunder, and without waiving any rights which Lender may have, unless expressly waived in writing by Lender: (a) obtain a security interest in any property to secure any of the Obligations or any obligation hereunder; (b) retain or obtain the primary or secondary liability of any party or parties, in addition to Guarantor, with respect to any of the Obligations; (c) extend the time for payment of the Loan or any installment thereof or the time for performance of any Obligation, in either case for any period (whether or not longer than the original term therefor); (d) release or compromise any liability of Guarantor hereunder or any liability of any nature of any other party or parties with respect to the Obligations; (e) resort to Guarantor for payment of any Obligations, whether or not Lender shall proceed against any other party primarily or secondarily liable on any of the Obligations or against any Collateral; (f) substitute, exchange or release all or any part of the Collateral; (g) agree to any amendment, modification or alteration of any of the Receivables Loan Documents and exercise its rights to consent to any action or nonaction of Borrower which may violate the covenants and agreements contained in any of the Receivables Loan Documents, with or without consideration, on such terms and conditions as may be acceptable to it; or (h) exercise any of its rights confirmed by the Receivables Loan Documents or by law. 3.6 Guarantor shall not be released or discharged, either in whole or in part, by Lender's failure or delay to perfect or continue the perfection of any security interest in any 5 property which secures the Obligations of Borrower or of any Obligor to Lender, or to protect the property covered by such security interest. Guarantor waives any rights or defenses which may arise as a result of errors or omissions in connection with the administration of the Loan by Lender, except for gross negligence or bad faith. 3.7 Guarantor agrees that if at any time all or any part of any payment theretofore applied by Lender to any of the Obligations is or must be rescinded or returned by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of Borrower) such Obligations, for the purpose of this Guarantee, to the extent that such payment is or must be rescinded or returned, shall be deemed to have continued in existence, notwithstanding such application by Lender, and this Guarantee shall continue to be effective or be reinstated, as the case may be, as to such Obligations, all as though such application by Lender had not been made. 3.8 Notwithstanding any payment or performance by Guarantor pursuant to this Guarantee, Guarantor hereby waives and releases any right of reimbursement and any right to be subrogated to any rights of Lender against Borrower. Guarantor acknowledges that the foregoing waiver and release has been specifically bargained for by Lender and has been relied upon by Lender in ascribing value to this Guarantee, which reliance was a condition precedent to Lender's willingness to extend the Loan to Borrower. Guarantor expressly waives any defenses to the enforcement of this Guarantee, to any rights of Lender created or granted hereby or to the recovery by Lender against Borrower, Guarantor or any other Obligor of any deficiency after judicial or nonjudicial foreclosure or sale, even though such a foreclosure or sale may impair the subrogation rights of Guarantor or otherwise prevent Guarantor from obtaining reimbursement or contribution from Borrower or any other Obligor. 3.9 Guarantor hereby expressly waives and relinquishes any duty on the part of Lender (should any such duty exist) to disclose to Guarantor any matter, fact or thing related to the business, operations or condition (financial or otherwise) of Borrower or its affiliates or subsidiaries or their properties, whether now known or hereafter known by Lender during the life of this Guarantee. The execution and delivery of this Guarantee is based solely on the independent investigation of Guarantor and in no part upon any representation or statement of Lender with respect thereto. Guarantor warrants that he/she/it is fully aware of the financial condition of Borrower, has adequate means to obtain such information from Borrower on a continuing basis, and is not relying on Lender to provide such information either now or in the future, but assumes full responsibility to obtain such information. This Guarantee shall in no way be limited or impaired by any change in the business structure of Borrower. 3.10 It is not necessary for Lender to inquire into the powers of Borrower or its officers, directors, partners or agents purporting to act on its behalf, and the Obligations are hereby guaranteed notwithstanding the lack of power or authority on the part of Borrower or anyone acting on its behalf to incur the Obligations. 6 ARTICLE IV - GUARANTOR'S WARRANTIES AND COVENANTS 4.1 Guarantor represents and warrants to Lender that: (a) Guarantor is a corporation duly organized and now existing in good standing under the laws of its state of incorporation as shown on the signature page hereof and is duly qualified and in good standing and authorized to do business in all jurisdictions wherein the location and nature of the properties used or business, as the same is presently or proposed to be conducted, makes such qualification necessary; (b) Guarantor wholly owns all of the issued and outstanding shares of stock in Raintree Resorts Canada, LLC, Raintree Resorts International Canada Ltd. and Canarias Future, SL; Raintree Resorts Canada, LLC owns Raintree Resorts Holdings ULC: Raintree Resorts International Canada Ltd. owns Whiski Jack Resorts Ltd. and Northface Realty Co. Ltd; Whiski Jack Resorts Ltd. owns Whistler Rental Accommodation Center Ltd.; Canarias Future, SL owns CR Resorts Parent Nominee Holding, LLC; Canarias Future, SL and CR Resorts Parent Nominee Holding, LLC own CR Resorts Capital, S. de R.L. de C.V. and CR Resorts Holding, S. de R.L. de C.V.; CR Resorts Capital, S. de R.L. de C.V. and CR Resorts Parent Nominee Holding, LLC own CR Resorts Remainder Company, S. de R.L. de C.V.; CR Resorts Holding, S. de R.L. de C.V. owns Timeshare Nominee Holding, LLC; CR Resorts Holding, S. de R.L. de C.V. and Timeshare Nominee Holding, LLC own Top Acquisition Sub, S. de R.L. de C.V.; Top Acquisition Sub, S. de R.L. de C.V. and Timeshare Nominee Holding, LLC own Desarollos Turisticos Regina, S. de R.L. de C.V., CR Resorts Cancun, S. de R.L. de C.V., CR Resorts Cabos, S. de R.L. de C.V.; and CR Resorts Puerto Vallarta, S. de R.L. de C.V.; CR Resorts Cancun S. de R.L. de C.V. owns CR Resorts Cancun Timeshare Trust S. de R.L. de C.V.; CR Resort Los Cabos, S. de R.L. de C.V. owns CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V.; CR Resorts Puerto Vallarta, S. de R.L. de C.V. owns CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V.; Desarollos Turisticos Regina, S. de R.L. de C.V. owns Corporacion Mexitur, S. de R.L. de C.V., Desarollos Turisticos Integrales Cozumel, S. de R.L. de C.V., 67.85% of Club Regina, S.A. de C.V., Servicios Turisticos Integrales Cobamex, S. de R.L. de C.V. and 50% of Corporacion Habitacional Mexicana, S. de R.L. de C.V. (c) Guarantor has the corporate power and authority to execute and deliver this Guarantee and carry on its businesses as currently conducted and the execution, delivery and performance by Guarantor of this Guarantee have been duly authorized by all necessary corporate action; no consent of stockholders is required therefor; and the execution and delivery of, the consummation of the transactions contemplated in, and compliance by Guarantor with any of the terms and provisions of, this Guarantee, to the Knowledge of Guarantor, do not and will not conflict with or contravene any 7 law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over Guarantor or its Affiliates or any of their activities or properties or conflict with, or result in any default under the Charter or Articles or Certificate of Incorporation, as amended, or the By-Laws of Guarantor and its Affiliates, or any material indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, charter, bank loan or credit agreement (including, but not limiting the generality of the foregoing, that certain Indenture, dated December 5, 1997 by and among Guarantor (under its former name "Club Regina Resorts, Inc.", a Nevada corporation), CR Resorts Capital S de R.L. de C.V., a Mexican variable capital stock limited liability company, and IBJ Schroder Bank Trust Company, as trustee [the "Indenture"]), or any other material agreement or instrument of any kind to which Guarantor or any of its Affiliates is a party or by which Guarantor, its Affiliates or their properties may be bound or affected, except for those as to which consents have been obtained by Guarantor and are in full force and effect; (d) Neither the execution and delivery by Guarantor of this Guarantee nor any of the transactions by Guarantor contemplated hereby requires the consent, approval, order or authorization of, or registration with, or the giving of notice to, any United States federal or state, or any foreign (including without limitation, Mexican), governmental authority, except such consents as have been obtained by Guarantor and are in full force and effect; (e) This Guarantee has been duly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor enforceable against it in accordance with its terms; (f) To the Knowledge of Guarantor there is no action, litigation or other proceeding pending or threatened against Guarantor before any court, arbitrator or administrative agency which may have a materially adverse effect on the assets, business, or financial condition of Guarantor or which would prevent, hinder or jeopardize the performance by Guarantor under this Guarantee; (g) Guarantor shall maintain its corporate existence and right to carry on operations and acquire, maintain and renew all rights, contracts, powers, privileges, leases, lands, sanctions and franchises necessary or useful in the conduct of its business operations; (h) Guarantor is fully familiar with all of the covenants, terms and conditions of the Receivables Loan Documents; (i) Guarantor shall not make nor is permitted to make any Distributions (defined below), except that in the event there exists no Event of Default 8 or Incipient Default, both before and after taking into account the making of such Distribution, Guarantor shall be permitted to make preferred stock dividends on Guarantor's preferred stock reflected in Guarantor's balance sheet delivered to Lender prior to the date hereof and pay reasonable bonuses, salary, other compensation and fees at normal and customary rates for services actually rendered, without the prior written consent of Lender; the term "Distributions" refers to any distribution, advance, payment or loan to any shareholder, officer, director, member, partner or Affiliate of Guarantor including, but not limited to cash dividends, bonuses, salary or other compensation and management fees; (j) Guarantor shall maintain a Adjusted Net Worth of not less than the amount set forth below, which shall be subject to a quarterly test by the Lender; to this end, the Guarantor agrees to provide Lender within time period and in the form set forth in the Agreement, the financial statements and other financial information and reports concerning Guarantor; for purposes of this Agreement the term (i) Adjusted Net Worth shall mean, with respect to any date of determination, Guarantor's consolidated net worth as determined in accordance with GAAP, minus noncash currency exchange gains to the extent that such gains increased net worth and plus noncash currency exchange losses to the extent that such losses reduced net worth, and (ii) "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States, consistently applied, throughout the period involved and with the prior periods, which shall include the official interpretations thereof by the Financial Accounting Standards Board or any successor thereto. 9
Test Date: Net Worth Covenant at all Times Following the Closing of Guarantor's Acquisition of River Club (In US Dollars) 3/31/99 9,500,000 6/30/99 4,500,000 9/30/99 7,300,000 12/31/99 2,000,000 3/31/00 9,300,000 6/30/00 7,300,000 9/30/00 12,300,000 12/31/00 9,900,000 3/31/01 and each quarter 13,000,000 thereafter Test Date: Net Worth Covenant at all Times Prior to the Closing of Guarantor's Acquisition of River Club (In US Dollars) 3/31/99 1,200,000 6/30/99 (1,500,000) 9/30/99 (3,800,000) 12/31/99 (7,114,000) 3/31/00 (2,000,000) 6/30/00 (1,000,000) 9/30/00 1,400,000 12/31/00 2,000,000 3/31/01 and each quarter 7,000,000 thereafter
For purposes hereof, the River Club shall mean that certain resort known as River Club located in Telluride, Colorado. It is understood that Guarantor has no obligation to acquire River Club. (k) On the final day of each fiscal quarter of Guarantor, commencing with the fiscal quarter ending March 31, 1999 and on the final day of each fiscal year of Guarantor, commencing with the fiscal year ending December 31, 1999 the sum of (i) the total of Guarantor's consolidated costs and expenses for commissions and selling relating to the retail sales of time-share interests, use rights, memberships and fraction ownership interests and (ii) the total of Guarantor's consolidated general and administrative expenses, (the costs and expenses 10 described in clauses (i) and (ii) hereinafter the "SGA Expenses") shall not exceed the amount set forth below of the gross proceeds of Guarantor's consolidated processed sales of retail time-share interests, use rights, memberships and fractional ownership interests for the same period (each net of cancellations of such sales) ("Net Sales"). The foregoing covenant shall be tested quarterly based upon Guarantor's total aggregate SGA Expenses and Net Sales for the immediately preceding three (3) month period and annually based upon Guarantor's total aggregate SGA Expenses and Net Sales for the immediately preceding twelve (12) month period. Test Date: Covenant at all Times Prior to the Closing of Guarantor's Acquisition of River Club 3/31/99 through 12/31/99 68% 3/31/00 and thereafter 55% Test Date: Covenant at all Times Following the Closing of Guarantor's Acquisition of River Club 3/31/99 and at all times thereafter 55% (l) Guarantor is not a party to any contract, agreement, indenture or instrument or subject to any charter or other corporate restriction which individually or in the aggregate might materially adversely affect its financial condition, business, or operations or which would in any way jeopardize the ability of Guarantor to perform under this Guarantee; (m) Guarantor was not induced to give this Guarantee by the fact that there are or may be other Obligors; and (n) Guarantor will promptly notify Lender if any action, litigation or other proceeding becomes pending or, to Guarantor's Knowledge, threatened before any arbitration tribunal, court, governmental agency or administrative body against Borrower, which might materially adversely affect the business or financial condition of Guarantor, or the ability of Guarantor to perform its obligations under this Guarantee. 4.2 The provisions of Sections 4.09, 4.11, 4.12, 4.17 and 4.19 of the Indenture (the foregoing Sections are collectively called the "Financial Covenants") are by this reference incorporated herein as if fully set forth in this Agreement. The Guarantor represents, warrants and covenants to the Lender that Guarantor shall not, and shall not permit any of its Affiliates to, directly or indirectly, take, or fail to take, any action that would result in a violation of its Financial Covenants. 11 4.3 The Guarantor on behalf of itself and its Affiliates represents and warrants to the Lender that the Loan is a Permitted Debt (as defined in the Indenture) and that as of the date hereof there exists no Default or Event of Default (as the foregoing two (2) terms are defined in the Indenture) under the Indenture. Guarantor covenants with Lender that (i) as and when required by the Indenture, the Guarantor shall cause the Issuers (as defined in the Indenture) to supply the Lender with true and complete copies of all reports, certifications, notices or demands given by the Issuers under the Indenture (including, but not limiting the generality of the foregoing, materials required by Sections 4.03, 4.04, 4.21, 7.06, and Article 8 of the Indenture), and (ii) it will not amend or modify the Indenture without the prior written consent of the Lender and any such amendment or modification to the Indenture made without the prior written consent of Lender shall not be binding upon Lender or affect the Financial Covenants. The Financial Covenants shall not be deemed amended by any amendments or modifications to the Indenture made without the prior written consent of Lender. Further, the Guarantor agrees to cause the Issuer to promptly (but in any event within three (3) days after the Issuer's receipt of the same) supply the Lender with a true and complete copy of any notice sent to the Issuers under Section 6.01 of the Indenture, or any other notice alleging a default by the Issuers under the Indenture. ARTICLE V - MISCELLANEOUS PROVISIONS 5.1 All the covenants, stipulations, promises and agreements contained in this Guarantee by or on behalf of Guarantor are for the benefit of Lender and its successors or assigns and shall bind Guarantor and its successors and assigns. Lender, without notice of any kind, may sell, assign or transfer the Receivables Loan Documents and/or its interest in all or in part of the Collateral, and in such event each and every immediate and successive assignee or transferee thereof shall have the right to enforce this Guarantee, by suit or otherwise, for the benefit of such assignee or transferee as fully as if such assignee or transferee were herein by name specifically given such rights, powers and benefits. Guarantor hereby agrees for the benefit of any such assignee or transferee that their respective obligations hereunder shall not be subject to any reduction, abatement, defense, set-off, counterclaim or recoupment for any reason whatsoever. 5.2 Any notice or demand which by any provision of this Guarantee is required or permitted to be given by Lender to Guarantor or by Guarantor to Lender shall be deemed to have been sufficiently given for all purposes upon personal delivery or three (3) days after mailing by first-class mail, postage prepaid, to Guarantor or Lender at their respective addresses set forth after their respective signatures below or at such other address as set forth in a written notice given pursuant hereto. 5.3 Terms used and not otherwise defined herein shall have the same meanings given thereto in the Agreement. The term "Knowledge of Guarantor" used herein, shall mean the actual, current Knowledge of the Chief Executive Officers of Guarantor. 12 5.4 Guarantor hereby expressly waives: (a) notice of the acceptance by Lender of this Guarantee; (b) except as provided in paragraph 1.2 notice of the existence, creation or nonpayment of all or any of the Obligations; (c) except as provided in paragraph 1.2 presentment, demand, notice or dishonor, protest, and all other notices whatsoever; (d) all diligence in collection or protection of or realization on the Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing; and (e) any and all suretyship defenses and defenses in the nature thereof, including, without limitation, the benefits of the provisions of Section 12-1641 et seq. of the Arizona Revised Statutes and Rule 17(f) of the Arizona Rules of Civil Procedure and all other laws of similar import. 5.5 THIS GUARANTEE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ARIZONA. FOR PURPOSES OF THIS SECTION 5.5, THIS GUARANTEE SHALL BE DEEMED TO BE PERFORMED AND MADE IN THE STATE OF ARIZONA. 5.6 GUARANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY GUARANTOR AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS GUARANTEE SHALL BE LITIGATED IN THE MARICOPA COUNTY, ARIZONA SUPERIOR COURT, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA. GUARANTOR HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY LENDER IN ANY OF SUCH COURTS, TO THE EXTENT SUCH COURTS WOULD NOT HAVE HAD JURISDICTION ABSENT SUCH CONSENT, AND HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO GUARANTOR AT THE ADDRESS TO WHICH NOTICES ARE TO BE SENT PURSUANT TO SECTION 5.2. GUARANTOR WAIVES ANY CLAIM THAT PHOENIX, ARIZONA OR THE DISTRICT OF ARIZONA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. SHOULD GUARANTOR, AFTER BEING SO SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE MAILING THEREOF, GUARANTOR SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY LENDER AGAINST GUARANTOR AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. THE EXCLUSIVE CHOICE OF FORUM FOR GUARANTOR SET FORTH IN THIS SECTION 5.6 SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY LENDER, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY LENDER, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE 13 JURISDICTION, AND GUARANTOR HEREBY WAIVES THE RIGHT TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION. 5.7 LENDER AND GUARANTOR ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS GUARANTEE OR WITH RESPECT TO THE TRANSACTION CONTEMPLATED HEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES AND, THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. Initials: GUARANTOR /s/ DYB LENDER /s/ RRH 5.8 Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 [SIGNATURE PAGE/CORPORATE GUARANTEE AND SUBORDINATION AGREEMENT IN WITNESS WHEREOF, the parties hereto have executed this Guarantee as of the date first hereinabove written, and acknowledge receipt of a copy hereof. "Guarantor" "Lender" RAINTREE RESORTS INTERNATIONAL, INC. FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By: /s/ DOUGLAS Y. BECH By: /s/ RANDALL HELLER Name: Douglas Y. Bech Name: Randall Heller Title: Chairman Title:Sr. Vice President X Check here to confirm that Section 5.7 has been initialed. X Check here to confirm that Section 5.7 has been initialed. Federal Tax Identification No: 76-0549149 Address: Address: 10000 Memorial Drive 7272 East Indian School Road, Suite 410 Houston, Texas 77024 Scottsdale, Arizona 85251 Attention: /s/ DOUGLAS Y. BECH Attention: Vice President - International Resort Finance With a copy to: With a copy to: Akin,Gump,Strauss,Hauser&Feld L.L.P. 7272 East Indian School Road, Suite 410 1900 Pennzoil Place - South Tower Scottsdale, Arizona 85251 711 Louisiana Street Attention: Vice President - Group Houston, Texas 77002 Counsel Attention: Julien R. Smythe, Esq. 15 EX-21 4 RRI, INC. SUBSIDIARIES Exhibit 21.1 Raintree Resorts International, Inc. Subsidiaries (formed under the laws of the United States unless otherwise indicated) Canaries Future, SL+ CR Resorts Parent Nominee Holding, LLC CR Resorts Capital, S. de R.L. de C.V. * CR Resorts Holding, S. de R.L. de C.V. * Timeshare Nominee Holding, LLC CR Resorts Remainder Company, S. de R.L. de C.V. * Top Acquisitions Sub, S. de R.L. de C.V. * CR Resorts Cancun, S. de R.L. de C.V. * CR Resorts Cabos, S. de R.L. de C.V. * CR Resorts Puerto Vallarta, S. de R.L. de C.V.* Desarrollos Turisticos Regina, S. de R.L. de C.V.* Corporacion Habitacional Mexicana, S.A. de C.V.* Desarollos Turisticos Integrales Cozumel, S.A. de C.V.* Corporacion Mexitur, S.A. de C.V. * Servicios Turistiscos Integrales Cobamex, S.A. de C.V. * Club Regina, S.A. de C.V. * CR Resorts Cancun Timeshare Trust Co., S. de R.L. de C.V. * CR Resorts Cabos Timeshare Trust Co., S. de R.L. de C.V. * CR Resorts Puerto Vallarta Timeshare Co., S. de R.L. de C.V. * Raintree Resorts International Canada Ltd. ** Northface Realty Co. Ltd. ** Whiski Jack Resorts Ltd. ** Whistler Rental Accommodation Center Ltd. ** Raintree Resorts Canada, L.L.C. Raintree Resorts Holding ULC ** - ----------- + Formed under the laws of Spain. * Formed under the laws of the United Mexican States ** Formed under the laws of Canada EX-27.1 5 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) RAINTREE RESORTS INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998. 0001058737 RAINTREE RESORTS INTERNATIONAL, INC. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 2,960 0 59,397 (7,562) 775 88,849 3,708 (662) 129,667 21,107 92,093 0 2,078 11 2,854 129,667 56,508 73,983 13,161 64,466 19,246 4,450 14,947 (9,729) 672 (10,401) 0 0 0 (10,401) (1.03) (1.03)
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