<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SIGNATURE RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 6552 95-4582157
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5933 WEST CENTURY BOULEVARD, SUITE 210
LOS ANGELES, CALIFORNIA 90045
(310) 348-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
ANDREW D. HUTTON
VICE PRESIDENT AND GENERAL COUNSEL
SIGNATURE RESORTS, INC.
5933 WEST CENTURY BOULEVARD, SUITE 210
LOS ANGELES, CALIFORNIA 90045
(310) 348-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
<TABLE>
<S> <C>
JOHN M. NEWELL, ESQ. PETER T. HEALY, ESQ.
LATHAM & WATKINS O'MELVENY & MYERS LLP
633 W. FIFTH STREET 275 BATTERY STREET
SUITE 4000 EMBARCADERO CENTER WEST
LOS ANGELES, CALIFORNIA 90071 SAN FRANCISCO, CALIFORNIA 94111
(213) 485-1234 (415) 984-8833
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------
If any of the securities on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434 of
the Securities Act of 1933, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE/NOTE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per Share....... 3,450,000 Shares $34.50 $119,025,000 $36,069
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% Convertible Subordi-
nated Notes due 2007.. $115,000,000 100% $115,000,000 $34,849
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Common Stock, $0.01 par
value per share....... (3) -- -- --
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</TABLE>
(1) Includes 450,000 shares of Common Stock and $15,000,000 aggregate
principal amount of Convertible Notes issuable upon exercise of the
Underwriters' over-allotment options.
(2) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low trading prices of the Common Stock on
the Nasdaq National Market on December 13, 1996.
(3) Such indeterminable number of shares of Common Stock as may be required
for issuance upon conversion of the Convertible Notes being registered
hereunder. Pursuant to Rule 457(i), no registration fee for such shares of
Common Stock is required.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE>
SIGNATURE RESORTS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT PROSPECTUS CAPTION
------------------------------- ------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus........ Facing Page; Cross-Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus....... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges......................... Summary; Risk Factors; Recent
Developments
4. Use of Proceeds.................. Summary; Use of Proceeds; Consolidated
Capitalization; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
5. Determination of Offering Price.. Outside Front Cover Page; Underwriting
6. Dilution......................... Not Applicable
7. Selling Security Holders......... Principal and Selling Stockholders
8. Plan of Distribution............. Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered...................... Summary; Description of Capital Stock
10. Interests of Named Experts and
Counsel......................... Experts; Legal Matters
11. Information with Respect to the
Registrant...................... Outside and Inside Front Cover Pages of
Prospectus; Summary; Risk Factors; Use
of Proceeds; Concurrent Offerings;
Common Stock Price Range; Dividend
Policy; Consolidated Capitalization;
Selected Combined Historical Financial
Information of the Company; Selected
Financial Data of AVCOM International,
Inc.; Pro Forma Financial Information;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; The Proposed
Merger; Management; Certain
Relationships and Related
Transactions; Principal and Selling
Stockholders; Description of Capital
Stock; Description of Notes; Certain
Federal Income Tax Considerations;
Certain Provisions of Maryland Law and
of the Company's Charter and Bylaws;
Shares Eligible for Future Sale;
Underwriting; Legal Matters; Experts;
Additional Information
12. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities...... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with the offering of the Common Stock (the "Common Stock
Prospectus") and one to be used in connection with a concurrent offering of
Convertible Subordinated Notes (the "Convertible Notes Prospectus"). The
Common Stock Prospectus and the Convertible Notes Prospectus will be identical
in all respects except that they will contain different front and back cover
pages and different descriptions under the captions "Summary," "Risk Factors",
"Concurrent Offerings", "Underwriting" and "Legal Matters". In addition, the
Convertible Notes Prospectus will contain additional sections under the
captions "Description of Notes" and "Certain Federal Income Tax
Considerations". The Common Stock Prospectus is included herein and is
followed by those pages to be used in the Convertible Notes Prospectus which
differ from, or are in addition to, those in the Common Stock Prospectus. Each
of the additional pages for the Convertible Notes Prospectus included herein
has been labeled "Alternate Page for Convertible Notes Prospectus."
The offering of the Common Stock and the offering of the Convertible Notes
are not conditioned upon one another and, therefore, one offering may be
consummated without the other offering being consummated.
If required pursuant to Rule 424(b) of the General Rules and the Regulations
under the Securities Act of 1933, as amended, copies of each of the
prospectuses in the forms in which they are used after the Registration
Statement becomes effective will be filed with the Securities and Exchange
Commission.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
3,000,000 SHARES
[LOGO OF SIGNATURE RESORTS]
SIGNATURE RESORTS, INC.
COMMON STOCK
Of the 3,000,000 shares of Common Stock, $0.01 par value ("Common Stock"), of
Signature Resorts, Inc., a Maryland corporation (the "Company" or "Signature"),
offered hereby (the "Stock Offering"), 1,600,000 shares are being sold by the
Company and 1,400,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "SIGR." On December 17, 1996, the last
reported sale price of the Company's Common Stock was $37.25 per share. See
"Common Stock Price Range."
Concurrently with the Stock Offering, the Company is offering $100 million
principal amount of its % Convertible Subordinated Notes due 2007 (the
"Convertible Notes"). See "Concurrent Offerings" and "Use of Proceeds."
SEE "RISK FACTORS" COMMENCING ON PAGE 16 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
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<S> <C> <C> <C> <C>
Per Share ............. $ $ $ $
Total (3).............. $ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 240,000 additional shares of Common Stock solely to cover over-
allotments, if any. The Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 210,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise these options in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will
total $ and the Proceeds to Selling Stockholders will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, when, as and if delivered and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that the
delivery of the certificates representing such shares will be made against
payment therefor at the office of Montgomery Securities on or about ,
1997.
----------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
, 1997
<PAGE>
[Fold-Out--Photos/Art Work]
IN CONNECTION WITH THE STOCK OFFERING AND THE CONVERTIBLE NOTES OFFERING,
THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND THE CONVERTIBLE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, ON THE OPEN MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE STOCK OFFERING, THE UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
EMBASSY VACATION RESORTSSM IS A SERVICE MARK OF THE PROMUS HOTEL
CORPORATION. WESTIN HOTELS & RESORTSSM IS A SERVICE MARK OF THE WESTIN HOTEL
COMPANY.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment options. Unless the
context otherwise indicates, the "Company" means Signature Resorts, Inc. and
includes its corporate and partnership predecessors and wholly-owned
subsidiaries and affiliates. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANY
Signature Resorts, Inc. is one of the largest developers and operators of
timeshare resorts in North America, based on number of resorts in sales. The
Company is devoted exclusively to timeshare operations and owns eight timeshare
resorts currently in sales, which include one under construction, and a ninth
resort in sales in which the Company holds a partial interest (the "Existing
Resorts"). The Existing Resorts are located in a variety of popular resort
destinations including Hilton Head Island, South Carolina, Koloa, Kauai,
Hawaii, the Orlando, Florida area (two resorts), St. Maarten, Netherlands
Antilles (two resorts), Branson, Missouri, South Lake Tahoe, California and
Avila Beach, California. In addition, in December 1996 the Company announced
plans for the acquisition and development of its tenth resort to be located in
St. John, U.S. Virgin Islands. The Company's principal operations currently
consist of (i) acquiring, developing and operating timeshare resorts, (ii)
marketing and selling timeshare interests in its resorts, which typically
entitle the buyer to use a fully-furnished vacation residence, generally for a
one-week period each year ("Vacation Intervals") and (iii) providing financing
for the purchase of Vacation Intervals at its resorts.
As part of its growth and acquisition strategy, the Company in September 1996
entered into a definitive agreement and plan of merger (the "Merger Agreement")
to acquire AVCOM International, Inc. ("AVCOM"), the parent company of All
Seasons Resorts, Inc. ("All Seasons"), a developer, marketer and operator of
timeshare resorts in Arizona, California and Texas. AVCOM currently operates
nine resorts, which include two under construction, and a tenth resort in which
AVCOM holds a partial interest. Five of AVCOM's Resorts are located in Sedona,
Arizona, two are located in South Lake Tahoe, California and one resort is
located in each of Lake Arrowhead, California, Lake Conroe (near Houston),
Texas and Scottsdale, Arizona (the "AVCOM Resorts"). AVCOM currently sells
Vacation Intervals at six of its ten resorts, sales at three resorts have been
substantially completed and sales at one resort have yet to commence. The
Company anticipates that the merger with AVCOM (the "Merger") will be
consummated in the first quarter of 1997, assuming all conditions to closing
are timely satisfied. See "The Proposed Merger" and "Risk Factors--Risks
Related to the Proposed Merger. "
The Company believes that, based on published industry data, it is the only
developer and operator of timeshare resorts in North America that will offer
Vacation Intervals in each of the three principal price segments of the market
(value, upscale (characterized by high quality accommodations and service) and
luxury (characterized by elegant accommodations and personalized service)). The
Company's resorts operate in the following three general categories, each
differentiated by price range, brand affiliation and quality of accommodations:
. NON-BRANDED RESORTS. Vacation Intervals at the Company's six non-branded
resorts, which are not affiliated with any hotel chain, generally sell
for $6,000 to $15,000 and are targeted to buyers with annual incomes
ranging from $35,000 to $80,000. The Company believes its non-branded
resorts offer buyers an economical alternative to branded timeshare
resorts (such as Embassy Vacation Resorts and Westin Vacation Club
resorts) or traditional vacation lodging alternatives. Vacation
Intervals at the resorts acquired in the Merger with AVCOM generally
sell for $9,000 to $18,000 and are targeted to buyers in the same non-
branded market segment.
3
<PAGE>
. EMBASSY VACATION RESORTS. Vacation Intervals at the Company's three
Embassy Vacation Resorts generally sell for $14,000 to $20,000 and are
targeted to buyers with annual incomes ranging from $60,000 to $150,000.
Embassy Vacation Resorts are designed to provide timeshare
accommodations that offer the high quality and value that is represented
by the more than 135 Embassy Suites hotels throughout North America.
. WESTIN VACATION CLUB RESORTS. Through its agreement with Westin Hotels &
Resorts ("Westin"), the Company has the exclusive right through May 2001
to jointly acquire, develop and market with Westin "four-star" and
"five-star" timeshare resorts located in North America, Mexico and the
Caribbean (the "Westin Agreement"). The Company anticipates that
Vacation Intervals at Westin Vacation Club resorts generally will sell
for $18,000 to $25,000 and will be targeted to buyers with annual
incomes ranging from $80,000 to $250,000. The Westin Agreement
represents Westin's entry into the timeshare market. The Company and
Westin recently announced plans for the acquisition and development of
the first Westin Vacation Club resort to be located in St. John, U.S.
Virgin Islands. See "Business--Westin Vacation Club Resorts."
For the twelve month period ended September 30, 1996, the Company sold 6,512
Vacation Intervals at the Existing Resorts, compared to 3,566 and 5,687 for the
same periods ended in 1994 and 1995, respectively. Total revenue from Vacation
Interval sales at the Existing Resorts for the same periods increased from
$36.6 million in 1994 to $57.2 million in 1995 to $84.2 million in 1996. The
number of Existing Resorts increased during the same periods through
acquisitions and development from four in 1994, to seven in 1995, and to nine
in 1996. See "Business--The Resorts."
The Company's Existing Resorts and the AVCOM Resorts participate 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.
Participation in the RCI network entitles Vacation Interval owners to exchange
their annual Vacation Intervals for occupancy at any of the approximately 2,900
other resorts participating in the RCI network. In November 1996, HFS
Incorporated consummated its acquisition of RCI for a combination of cash and
securities. According to the American Resort Development Association ("ARDA"),
a non-profit industry organization, the ability to exchange Vacation Intervals
is cited by buyers as a primary reason for purchasing a Vacation Interval.
According to ARDA, during the fifteen year period ending in 1994 (the most
recent year for which ARDA statistics are available), the total Vacation
Interval sales volume for the timeshare industry increased from $490 million in
1980 to $4.6 billion in 1994. A year-by-year presentation of annual Vacation
Interval sales volume is detailed under "Business--The Timeshare Industry--The
Market." Based on industry data, the Company believes that the total Vacation
Interval sales volume for the timeshare industry exceeded $5 billion in 1995.
The Company believes that, based on ARDA reports and other industry data, the
timeshare industry has benefited recently from increased consumer acceptance of
the timeshare concept resulting from effective governmental regulation of the
industry, the entry into the industry by national lodging and hospitality
companies and increased vacation flexibility resulting from the growth of
Vacation Interval exchange networks. The Company expects the timeshare industry
to continue to grow as consumer awareness of the timeshare industry increases
and as the baby boom generation continues to enter the 40-55 year age bracket,
the age group which purchased the most Vacation Intervals in 1994.
The Company has historically provided financing for approximately 85% of its
Vacation Interval buyers. Buyers who finance through the Company typically are
required to make a down payment of at least 10% of the Vacation Interval's
sales price and pay the balance of the purchase price over a period of one to
ten years. The Company typically borrows against its loans to Vacation Interval
buyers with borrowings from third-party lending institutions. At September 30,
1996, the Company had a portfolio of approximately 12,800 loans to Vacation
Interval buyers amounting to approximately $90.8 million with respect to the
Company's consolidated resorts (all of the Existing Resorts except the Embassy
Vacation Resort Poipu Point). The Company's consumer
4
<PAGE>
loans had a weighted average maturity of approximately seven years and a
weighted average interest rate of 15% compared to a weighted average cost of
funds of 10.25% on the Company's borrowings secured by such customer loans. As
of September 30, 1996, approximately 8.1% of the Company's consumer loans were
considered by the Company to be delinquent (past due by 60 or more days) and
the Company has completed or commenced foreclosure or deed-in-lieu of
foreclosure on approximately 2.5% of its consumer loans. The Company also
provides resort management and maintenance services at its non-branded resorts
for which it receives fees paid by the homeowners associations at its resorts.
Pursuant to management agreements between the Company and the Vacation Interval
owners, the Company generally has sole responsibility and exclusive authority
for the day-to-day operation of its resorts, including administrative services,
procurement of inventories and supplies and promotion and publicity.
The Company's objective is to become North America's leading developer and
operator of timeshare resorts. To meet this objective, the Company intends to
(i) acquire, convert and develop additional resorts to be operated as Embassy
Vacation Resorts, Westin Vacation Club resorts and non-branded resorts,
capitalizing on the acquisition and marketing opportunities to be provided
through its relationships with Promus Hotel Corporation ("Promus") which is the
owner of the Embassy Suites brand, Westin and selected financial institutions,
(ii) increase sales and financings of Vacation Intervals at the Existing
Resorts through broader-based marketing efforts and in certain instances
through the construction of additional Vacation Interval inventory,
(iii) improve operating margins by consolidating administrative functions,
reducing borrowing costs and reducing its sales and marketing expenses as a
percentage of revenues and (iv) acquire additional Vacation Interval inventory,
management contracts, Vacation Interval mortgage portfolios, and properties or
other timeshare-related assets that may be integrated into the Company's
operations. To implement its growth strategy, the Company intends to pursue
resort acquisitions and developments in a number of resort markets that will
complement the Company's operations, including the California and Hawaii
markets which are subject to barriers to entry and in which the Company's
founders, Messrs. Kaneko, Gessow and Kenninger (the "Founders"), have extensive
acquisition and development experience.
The Company has established strategic agreements and relationships with
certain lodging companies and financial institutions, including the following:
. The Company is currently the only licensee and operator of Embassy
Vacation Resorts. The Company presently operates two Embassy Vacation
Resorts and plans to complete the first phase of construction of a third
in February 1997. The Company is evaluating additional properties which
could be operated as Embassy Vacation Resorts and Promus has created a
new timeshare division to expand its Embassy Vacation Resort timeshare
operations.
. The Company, through the Westin Agreement, has the exclusive right
through May 2001 to jointly acquire, develop and market with Westin
Vacation Intervals at "four-star" and "five-star" Westin-affiliated
resorts. The Company and Westin recently announced plans for the
acquisition and development of the first Westin Vacation Club resort to
be located in St. John, U.S. Virgin Islands. See "Business--Westin
Vacation Club Resorts." In addition, the Company and Westin are
evaluating the potential acquisition of a number of other properties
which may be operated as Westin Vacation Club resorts.
. The Company has relationships with financial institutions which control
significant real estate portfolios and has acquired three of the
Existing Resorts from such institutions. The Company expects that these
relationships will continue to permit the Company to acquire resort
properties at attractive prices. The Company currently is evaluating the
acquisition of a number of properties currently owned or controlled by
such financial institutions.
The Company's principal executive offices are located at 5933 West Century
Boulevard, Suite 210, Los Angeles, California 90045, and its telephone number
is (310) 348-1000.
5
<PAGE>
RECENT DEVELOPMENTS
The Company intends to pursue resort acquisitions and developments in a
number of vacation destinations that will complement the Company's operations.
The Company's pending merger with AVCOM and the proposed acquisition and
development of the first Westin Vacation Club resort to be located in St. John,
U.S. Virgin Islands, which transactions were announced in the third and fourth
quarter of 1996, respectively, are the result of the Company's growth strategy.
Merger with AVCOM. On September 22, 1996, the Company signed the Merger
Agreement to acquire AVCOM for shares of the Company's Common Stock (determined
as described below). AVCOM is the parent company of All Seasons, a developer,
marketer and operator of timeshare resorts in the western United States. AVCOM
currently operates nine resorts, which includes two under construction, and a
tenth resort in which AVCOM holds a partial interest. Five of the AVCOM Resorts
are located in Sedona, Arizona, two are located in South Lake Tahoe, California
and one resort is located in each of Lake Arrowhead, California, Lake Conroe
(near Houston), Texas and Scottsdale, Arizona. Vacation Intervals at the AVCOM
Resorts generally sell for $9,000 to $18,000 and are targeted to buyers in the
same market segment as the Company's non-branded resorts. For the twelve month
period ended September 30, 1996, AVCOM sold approximately 2,560 Vacation
Intervals at the AVCOM Resorts, compared to approximately 1,760 and
approximately 2,230 for the same periods ended in 1994 and 1995, respectively.
Total revenue from Vacation Interval sales at the AVCOM Resorts for the same
periods increased from approximately $21.7 million in 1994 to approximately
$31.0 million in 1995 to approximately $39.3 million in 1996. The number of
AVCOM Resorts increased during the same periods through acquisitions and
development from three in 1994, to four in 1995, and to nine in 1996. See
"Business--Description of AVCOM's Resorts."
The number of shares of Common Stock to be issued in the Merger is subject to
adjustment based on the market value of the Company's Common Stock at the
closing of the Merger. However, the Merger Agreement provides that the Company
will issue not more than $34.6 million nor less than $23.1 million in value of
its Common Stock at the closing. Based on the closing price of the Company's
Common Stock on December 17, 1996 and assuming the Merger had closed on that
date, the Company would have been required to issue $34.6 million of its Common
Stock in the Merger. In addition, the Company will assume AVCOM's existing
indebtedness. In connection with the Merger Agreement, the Company has agreed
to loan AVCOM up to $4.0 million, of which $3.0 million had been loaned as of
the date of this Prospectus and which was used by AVCOM for working capital
purposes. Management expects that the Merger will qualify for pooling
accounting treatment. It is anticipated that the Merger will be consummated in
the first quarter of 1997, subject to the timely satisfaction of all conditions
to closing, including the favorable vote of the stockholders of AVCOM, which
vote is currently scheduled for January 10, 1997, the satisfactory completion
of due diligence by the Company, and other customary conditions. See "The
Proposed Merger" and "Risk Factors--Risks Related to the Proposed Merger."
Development of First Westin Vacation Club Resort. In December 1996, the
Company and Westin announced plans to acquire and develop the first Westin
Vacation Club resort in St. John, U.S. Virgin Islands. The Westin Vacation Club
at St. John will involve a conversion of the existing Virgin Grand Villas
condominium development (the "St. John Villas"), located adjacent to the Great
Cruz Bay Resort Hotel (formerly known as the Hyatt Regency St. John) which will
be operated as a Westin Resort Hotel (the "St. John Hotel"). Pursuant to the
purchase and sale agreement, Westin will acquire a 100% interest in the St.
John Hotel and the Company and Westin will form an entity owned 50% by each of
the Company and Westin (the "Westin Partnership") to acquire the St. John
Villas, consisting of 96 units, representing 4,163 remaining unsold Vacation
Intervals, which will be operated as the Westin Vacation Club resort at St.
John. Of the $10.5 million purchase price for the remaining unsold Vacation
Intervals at St. John Villas, each of the Company and Westin is obligated to
contribute approximately $2.5 million in cash, with the remaining $5.5 million
of the acquisition price to be paid by the Westin Partnership. In addition, the
Westin Partnership will borrow approximately $7.1 million to complete the
conversion of the St. John Villas to a Westin Vacation Club resort.
The acquisition of the St. John resort is anticipated to close during the
first quarter of 1997 and commencement of Vacation Interval sales at the resort
is anticipated to begin by the fourth quarter of 1997. Located adjacent to the
beachfront hotel, the St. John Villas consist of 96 studio, one bedroom, two
bedroom and three bedroom units located on 12.3 hillside acres, of which 48
units are completed and ready for immediate occupancy. The additional 48 units
currently require construction of interior finishes and installation of
furniture, fixtures and equipment prior to occupancy. See "Risk Factors--Risks
of the St. John Acquisition" and "Business--Westin Vacation Club Resorts."
6
<PAGE>
THE RESORTS
The following table sets forth certain information as of September 30, 1996
regarding each of the Existing Resorts, the Westin Vacation Club at St. John
and the AVCOM Resorts to be acquired in the pending Merger, including location,
date acquired or to be acquired by the Company, the number of existing and
total potential units at the resort, and the number of Vacation Intervals
currently available for sale and occupancy and additional expansion potential.
Of the 20 resorts set forth below, the Embassy Vacation Resort Poipu Point is
partially owned by the Company, the Westin Vacation Club Resort at St. John
will be partially owned by the Company when acquired and the North Bay Resort
at Lake Arrowhead is partially owned by AVCOM. The exact number of units and
Vacation Intervals ultimately constructed may differ from the following
estimates based on future land planning and site layout considerations.
<TABLE>
<CAPTION>
VACATION
UNITS AT RESORT INTERVALS AT RESORT
DATE ----------------------- -------------------------
ACQUIRED/TO BE TOTAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED(A) CURRENT(B) POTENTIAL(C) INVENTORY(D) EXPANSION(E)
------ -------- -------------- ---------- ------------ ------------ ------------
<C> <S> <C> <C> <C> <C> <C>
NON-BRANDED
RESORTS:
Cypress Pointe Lake Buena Vista, November 1992 224 500(f) 3,111 14,076(f)
Resort Florida
Plantation at Branson, Missouri July 1993 98 400(g) 690 15,402(g)
Fall Creek
Royal Dunes Hilton Head Island, April 1994 40 55(h) 641 765(h)
Resort South Carolina
Royal Palm Beach St. Maarten, Netherlands July 1995 140 140(i) 1,937 -- (i)
Club Antilles
Flamingo Beach St. Maarten, Netherlands August 1995 172 257(j) 2,584 4,420(j)
Club Antilles
San Luis Bay Avila Beach, California June 1996 68 130(k) 907(l) 3,162(k)
Resort
EMBASSY VACATION
RESORTS:
Poipu Point(m) Koloa, Kauai, Hawaii November 1994 219 219(n) 9,966(n) --
Grand Beach Orlando, Florida January 1995 102 370(o) 2,673 13,668(o)
Lake Tahoe South Lake Tahoe, May 1996 -- 210(p) -- 10,710(p)
California
WESTIN VACATION
CLUB:
St. John(q) St. John, U.S. Virgin First Quarter 1997 48 96(r) 1,715(r) 4,448(r)
Islands
AVCOM RESORTS:
Scottsdale Villa Scottsdale, Arizona First Quarter 1997 -- 168(s) -- 8,568(s)
Mirage Resort
The Ridge on Sedona, Arizona First Quarter 1997 -- 120(t) -- 6,120(t)
Sedona Golf
Resort
Sedona Springs Sedona, Arizona First Quarter 1997 40 40 62 --
Resort
Sedona Summit Sedona, Arizona First Quarter 1997 12 60(u) -- (u) 2,448(u)
Resort
Villas of Poco Sedona, Arizona First Quarter 1997 33 33 78 --
Diablo
Villas of Sedona Sedona, Arizona First Quarter 1997 40 40 104 --
North Bay Resort Lake Arrowhead, First Quarter 1997 13 13(v) 429 -- (v)
at Lake California
Arrowhead(v)
Tahoe Beach & South Lake Tahoe, First Quarter 1997 140 140 1,195 --
Ski Club California
Tahoe Seasons South Lake Tahoe, First Quarter 1997 21 21(w) 943(w) --
Resort California
Villas on the Lake Conroe, Texas First Quarter 1997 37 85(x) 1,807 2,448(x)
Lake
----- ----- ------ ------
TOTAL......................................................... 1,447 3,097 28,842 86,235
===== ===== ====== ======
</TABLE>
- -------
(a) The dates listed below with respect to the Existing Resorts represent the
date of acquisition or, if later, the date of completion of development of
the first phase of the resort by the Company and the dates listed below
with respect to the Westin Vacation Club at St. John and AVCOM Resorts
represent the anticipated closing dates of the pending acquisitions. See
"The Proposed Merger" and "Business--Westin Vacation Club Resorts."
7
<PAGE>
(b) Current units at each resort represents only those units that have received
their certificate of occupancy as of September 30, 1996.
(c) Total potential units at each resort includes, as of September 30, 1996,
(i) units which have received their certificate of occupancy, (ii) units
currently under development that have not yet received their certificate of
occupancy and (iii) units planned to be developed on land currently owned
by the Company or AVCOM.
(d) Current inventory of Vacation Intervals at each resort represents only
those unsold intervals that have received their certificate of occupancy as
of September 30, 1996.
(e) Potential expansion of Vacation Intervals at each resort includes, as of
September 30, 1996, (i) intervals currently under development that have not
yet received their certificate of occupancy and (ii) intervals planned to
be developed on land currently owned by the Company or AVCOM.
(f) Includes an estimated 276 units, which will accommodate an additional
estimated 14,076 Vacation Intervals, which the Company plans to construct
on land which it owns at the Cypress Pointe Resort and for which all
necessary governmental approvals and permits (except building permits) have
been obtained. Should the Company elect to construct a higher percentage of
three bedroom units, rather than its current planned mix of one, two and
three bedroom units, the actual number of planned units and Vacation
Intervals will be lower than is indicated above.
(g) Includes 16 units, which will accommodate an additional 816 Vacation
Intervals, on which the Company commenced construction in June 1996 and for
which all necessary discretionary governmental approvals and permits have
been received by the Company. Also includes an additional estimated 286
units, which will accommodate an additional estimated 14,586 Vacation
Intervals, which the Company plans to construct on land which it owns or is
currently subject to a contract to purchase at the Plantation at
Fall Creek.
(h) Includes 15 units, which will accommodate 765 Vacation Intervals,
construction of which is planned to begin in the second quarter of 1997 and
for which all necessary governmental approvals and permits have been
received by the Company.
(i) The Company has not committed to any expansion of the Royal Palm Beach
Club. The Company is considering the acquisition of additional land
adjacent to the Royal Palm Beach Club for the addition of an estimated 60
units, which will accommodate an estimated 3,060 Vacation Intervals, but
has yet to enter into an agreement with respect to such additional land or
to obtain the necessary governmental approvals and permits for such
expansion.
(j) In May 1996 the Company acquired a five-acre parcel of land adjacent to the
Flamingo Beach Club on which the Company plans to develop approximately 85
units which will accommodate an estimated 4,420 Vacation Intervals. The
Company is in the process of seeking to obtain the necessary governmental
approvals and permits for such proposed expansion.
(k) Includes 62 units, which will accommodate an estimated 3,162 Vacation
Intervals, for which all necessary governmental approvals and permits have
been received by the Company. Construction of the first 31 units began in
October 1996. In addition, the Company is considering the acquisition of
additional land near the San Luis Bay Resort for the addition of an
estimated 100 units which will accommodate an estimated 5,100 Vacation
Intervals, but has yet to enter into an agreement with respect to such land
or to obtain the necessary governmental approvals and permits for such
proposed expansion.
(l) The Company in June 1996 acquired approximately 130 Vacation Intervals at
the San Luis Bay Resort out of the bankruptcy estate of Glen Ivy Resorts,
Inc. In addition, the Company acquired promissory notes in default that are
secured by approximately 900 Vacation Intervals. The Company intends to
foreclose upon and acquire clear title to such Vacation Intervals and
intends to complete such foreclosure procedures (or deed-in-lieu
procedures) during the second quarter of 1997. These 900 Vacation Intervals
are included in the above table as Current Inventory.
(m) The Company acquired a 30.4% partnership interest in the Embassy Vacation
Resort Poipu Point in November 1994. The Company owns, directly or
indirectly, 100% of the partnership interests in one of the two co-managing
general partners of Poipu Resort Partners L.P., a Hawaii limited
partnership ("Poipu Partnership"), the partnership which owns the Embassy
Vacation Resort Poipu Point. The managing general partner owned by the
Company holds a 0.5% partnership interest for purposes of distributions,
profits and losses. The Company also holds, directly or indirectly, a
29.93% limited partnership interest in the Poipu Partnership for purposes
of distributions, profits and losses, for a total partnership interest of
30.43%. In addition, following repayment of any outstanding partner loans,
the Company, directly or indirectly, is entitled to receive a 10% per annum
return on the Founders' and certain former limited partners' initial
capital investment of approximately $4.6 million in the Poipu Partnership.
After payment of such preferred return and the return of approximately $4.6
million of capital to the Company, directly or indirectly, on a pari passu
basis with the other general partner in the partnership, the Company,
directly or indirectly, is entitled to receive approximately 50% of the net
profits of the Poipu Partnership. In the event certain internal rates of
return specified in the Poipu Partnership agreement are achieved, the
Company, directly or indirectly, is entitled to receive approximately 55%
of the net profits of the Poipu Partnership.
(n) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(o) Includes at least 24 units, which will accommodate an additional 1,224
Vacation Intervals, on which the Company commenced construction in the
fourth quarter of 1996 and for which all necessary discretionary
governmental approvals and permits (excluding building permits which have
not yet been applied for by the Company) have been received by the Company.
The Company has also received all necessary discretionary governmental
approvals and permits to construct an additional estimated 244 units on
land which it owns at the Embassy Vacation Resort Grand Beach, which will
accommodate an additional estimated 12,444 Vacation Intervals (excluding
building permits which have not yet been applied for by the Company). The
Company plans to apply for and obtain these building permits on a building-
by-building basis.
(p) Includes 62 units, which will accommodate 3,162 Vacation Intervals, on
which construction began in May 1996 and for which all necessary
discretionary governmental approvals and permits have been received by the
Company. Twenty-seven units, which will accommodate 1,377 Vacation
Intervals, are scheduled for completion in February 1997 and 35 units,
which will accommodate 1,785 Vacation Intervals, are scheduled for
completion in March 1997. Of this total, the Company is obligated
8
<PAGE>
to convey four Vacation Intervals to the former owners of the land on which
the Embassy Vacation Resort Lake Tahoe is being developed. Such conveyance
will be made upon completion of the first phase of development. The Company
has also received all necessary discretionary governmental approvals and
permits to construct an additional estimated 148 units (excluding building
permits which have not yet been applied for by the Company and which will be
applied for and obtained on a phase-by-phase basis) on land that it owns at
the Embassy Vacation Resort Lake Tahoe, which will accommodate an estimated
7,548 Vacation Intervals, and, subject to market demand, currently plans to
construct 40 of such units commencing in May of each year from 1997 through
1999 and the remaining 28 units commencing in May 2000. The Company
commenced sales of Vacation Intervals at the Embassy Vacation Resort Lake
Tahoe in June 1996, although the Company will not be able to close any of
such sales until the completion of the first units. The Company currently is
pre-selling Vacation Intervals at the Embassy Vacation Resort Lake Tahoe
prior to receipt of certificates of occupancy.
(q) As described under "Business--Westin Vacation Club Resorts," the Company
will own 50% of the entity which will acquire the unsold Vacation
Intervals at this resort. The acquisition is anticipated to close during
the first quarter of 1997 and commencement of Vacation Interval sales is
anticipated to begin by the fourth quarter of 1997.
(r) Includes 48 units, which will accommodate approximately 1,715 unsold
Vacation Intervals, which are ready for immediate occupancy. With respect
to such 48 units, 36 of such units have received all necessary
discretionary governmental approvals and permits necessary to commence
Vacation Interval sales and, upon closing of the pending acquisition, the
Company plans to file the necessary documentation to receive such
approvals with respect to the remaining 12 of such units. Also includes an
additional 48 units, which will accommodate an additional approximately
2,448 Vacation Intervals, which will require the installation of
utilities, furniture, fixtures and equipment and interior finishes before
occupancy. Upon closing of the pending acquisition, the Company currently
anticipates completing the renovation of such 48 additional units by the
fourth quarter of 1997. Upon closing of the pending acquisition, the
Company also will have acquired adjacent land at the St. John resort which
will accommodate the development of additional units. The Company has not
yet determined the amount of potential additional units which may be
constructed on such adjacent land or the timing of such potential
development. See "Business--Westin Vacation Club Resorts."
(s) Scottsdale Villa Mirage Resort is in the final stages of construction of
the 64 units which constitute Phase I of the resort. Such 64 units will
accommodate approximately 3,264 Vacation Intervals and are scheduled for
completion in January, 1997. The 40 units in Phase II, which will
accommodate approximately 2,040 Vacation Intervals, and the 64 units in
Phase III, which will accommodate approximately 3,264 Vacation Intervals,
are scheduled for completion in the first quarters of 1998 and 1999,
respectively. All necessary discretionary approvals and permits have been
received by AVCOM for the Scottsdale Villa Mirage Resort. AVCOM currently
is pre-selling Vacation Intervals at the Scottsdale Villa Mirage Resort
prior to receipt of certificates of occupancy.
(t) Construction began in December 1996 on The Ridge on Sedona Golf Resort,
which upon completion will consist of 120 units. The first 12 units, which
will accommodate approximately 612 Vacation Intervals, and clubhouse are
scheduled for completion in April 1997, for which all necessary
discretionary governmental approvals and permits have been received by
AVCOM. Governmental approvals and permits have not been received for the
additional planned 108 units, which will accommodate approximately 5,508
Vacation Intervals.
(u) The Sedona Summit Resort is being developed by an affiliated entity,
Sedona Summit Development, L.P. of which All Seasons, a wholly owned
subsidiary of AVCOM, is the sole general partner. Sales and construction
commenced in February 1996 and the Sedona Summit is in the final stages of
construction of the final 48 units, which will accommodate approximately
2,448 Vacation Intervals, at which point no further expansion is planned.
Construction of the final 48 units is scheduled for completion in the
second quarter of 1997. All necessary discretionary governmental approvals
and permits have been received by AVCOM. AVCOM currently is pre-selling
Vacation Intervals in the final 48 units at the Sedona Summit Resort prior
to receipt of certificates of occupancy. All Vacation Intervals at the
initial 12 units have been sold as of September 30, 1996. See "Business--
Description of AVCOM's Resorts."
(v) All Seasons owns 40% of Trion Capital Corporation, and has the power to
vote another 40% of Trion, the General Partner of Arrowhead Capital
Partners, L.P., the developer of North Bay Resort at Lake Arrowhead. The
General Partner is entitled to receive 1% of the profits of Arrowhead
Capital Partners, L.P., but under certain circumstances, is entitled to
receive substantially higher profits. All Seasons has an exclusive sales
and marketing contract for sales at North Bay, and is the property manager
of the resort. Although Arrowhead Capital Partners, L.P. owns undeveloped
land and buildings under construction at the North Bay Resort at Lake
Arrowhead, no definitive expansion plans have been made.
(w) AVCOM purchased a portfolio of 1,057 defaulted consumer notes at the Tahoe
Seasons Resort in March 1996 which are secured by Vacation Intervals. Of
the notes purchased, 414 notes have been converted to inventory of which
114 Vacation Intervals have been sold and 41 of the notes have been
reaffirmed by the original buyers. AVCOM intends to foreclose on the
remaining notes and acquire clear title to the intervals. These remaining
602 notes are included in the above table as Current Inventory.
(x) Villas on the Lake consists of 37 existing units purchased in February
1996 currently in the final phase of renovation. Land included in the
initial purchase is able to accommodate construction of an additional 48
units, which will accommodate an additional approximately 2,448 Vacation
Intervals. The phase II construction start date has not yet been
determined. All necessary discretionary governmental approvals and permits
(excluding building permits which have not yet been applied for by AVCOM)
have been received by AVCOM.
9
<PAGE>
CORPORATE BACKGROUND
Signature Resorts, Inc. was incorporated in Maryland in May 1996 by Osamu
"Sam" Kaneko, Andrew J. Gessow and Steven C. Kenninger to effect the
Consolidation Transactions and the Company's initial public offering, which
were consummated on August 20, 1996 (the "Initial Public Offering"). The
exchange of direct and indirect interests in, and obligations of, certain
limited partnerships, limited liability companies and other corporations
affiliated with the Founders for shares of Common Stock in the Company are
referred to herein as the "Consolidation Transactions." For additional
information regarding the Consolidation Transactions and resulting effect
thereof, see "Certain Relationships and Related Transactions--Consolidation
Transactions" and "Principal and Selling Stockholders."
The Company's timeshare resort acquisition and development business commenced
in 1992 to take advantage of the unique real estate development, financing and
travel industry expertise of the Founders. Mr. Kaneko, who is a Japanese
national and was educated in the United States, has more than 24 years of
experience in resort real estate acquisition and development. Prior to forming
the Company, Mr. Kaneko co-founded KOAR Group, Inc. ("KOAR"), a Los Angeles-
based real estate acquisition and development company, with Mr. Kenninger in
1985 and was previously the executive vice-president of the Hawaii-based United
States operations of a Japanese publicly-traded real estate developer. Mr.
Kenninger, a former business attorney for the seven years prior to co-founding
KOAR, has had overall responsibility for the development, acquisition,
licensing, branding and legal operations of the Company since 1993. Prior to
forming the Company, Mr. Gessow in 1990 formed one of the predecessors of the
Company, Argosy Group, Inc. ("Argosy"), a Woodside, California based real
estate acquisition and development company and, prior to forming Argosy, was
previously president of both the Florida and west coast offices of Trammell
Crow Residential Services, a real estate development company. See "Management--
Directors and Executive Officers."
10
<PAGE>
THE STOCK OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........ 1,600,000 shares(1)
Common Stock offered by the Selling
Stockholders.............................. 1,400,000 shares(1)
Common Stock to be outstanding after
the Stock Offering........................ 18,992,205 shares(1)(2)
Use of Proceeds............................ The Company will use the net
proceeds of the Offerings
primarily in the following order
of priority: (i) approximately
$40.4 million to retire existing
indebtedness of the Company,
(ii) approximately $21.1 million
to retire existing indebtedness
of AVCOM that will be assumed by
the Company in the Merger, (iii)
approximately $2.5 million to
finance acquisition costs related
to the St. John Villas and
(iv) the balance to complete
construction and expansion at
certain Existing Resorts and
AVCOM Resorts, to finance the
acquisition and development of
additional resorts and timeshare-
related assets, to finance sales
of Vacation Intervals and for
working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.............. "SIGR"
Concurrent Offerings....................... Concurrently with the Stock
Offering, the Company is offering
$100 million principal amount of
its % Convertible Subordinated
Notes due 2007 (the "Convertible
Offering" and together with the
Stock Offering, the "Offerings").
The Stock Offering and the
Convertible Offering are not
conditioned upon one another and,
therefore, one offering may be
consummated without the other
offering being consummated. See
"Concurrent Offerings" and "Use
of Proceeds."
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Does not include an estimated 843,942 shares of Common Stock issuable in
connection with the Merger, shares of Common Stock issuable upon
conversion of the Convertible Notes, 1,750,000 shares of Common Stock
reserved for issuance upon exercise of options granted pursuant to the
Company's 1996 Equity Participation Plan (as defined) and 500,000 shares of
Common Stock reserved for issuance pursuant to the Company's Employee Stock
Purchase Plan (as defined). See "Management--1996 Equity Participation
Plan" and "--Employee Stock Purchase Plan."
11
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION OF THE
COMPANY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated historical and pro forma
financial information of the Company. For the historical period ended
September 30, 1996, the financial information presented below includes the
effect of the Consolidation Transactions and the Initial Public Offering which
were consummated in August 1996. For periods ending prior to September 30,
1996, the historical financial information presented below combines each of
the Company's predecessor limited partnerships, limited liability companies
and other affiliated corporations that were combined into the Company in the
Consolidation Transactions. Such information should be read in conjunction
with the selected consolidated historical and pro forma financial information
of the Company, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements for the
Company and the notes thereto which are contained elsewhere in this
Prospectus. The pro forma information for the year ended December 31, 1995 and
each nine month period ended September 30, 1995 and 1996 give effect to the
Consolidation Transactions, the Initial Public Offering and the Merger as if
each had occurred as of the beginning of the period presented. Due to
seasonality, other market factors and additions to the number of the Company's
resorts, the combined historical and pro forma results for the nine months
ended September 30, 1995 and 1996 are not necessarily indicative of results
for a full year.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- ----------------------
HISTORICAL
---------------------------------------------------------------
1992 1993 1994 1995 1995 1996
------- -------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Vacation Interval
sales............. $11,328 $ 22,238 $ 40,269 $ 59,071 $ 46,385 $49,459
Interest income... 402 1,825 3,683 6,929 4,669 6,627
Other income...... 115 373 338 6,608 2,641 7,646
------- -------- -------- ---------- ---------- ----------
Total revenues.... 11,845 24,436 44,290 72,608 53,695 63,732
COSTS AND
OPERATING
EXPENSES:
Vacation Interval
cost of sales..... 2,999 5,708 12,394 15,650 12,547 11,255
Advertising,
sales, and
marketing......... 4,734 10,809 18,745 28,488 22,429 24,408
Loan portfolio:
Interest
expense--
treasury........ 168 674 1,629 3,586 2,533 4,022
Other expenses.. 50 208 851 1,189 758 1,048
Provision for
doubtful
accounts........ 555 619 923 1,787 1,471 1,372
General and
administrative:
Resort-level.... 665 2,346 2,864 4,947 2,760 4,961
Corporate....... 375 877 874 1,607 1,130 2,428
Depreciation and
amortization...... 209 384 489 1,675 1,158 1,675
Interest expense--
other............. -- 518 959 476 344 1,868
------- -------- -------- ---------- ---------- ----------
Total costs and
operating
expenses.......... 9,755 22,143 39,728 59,405 45,130 53,037
Net operating
income............ 2,090 2,293 4,562 13,203 8,565 10,695
Resort property
valuation
allowance......... -- -- -- -- -- --
Minority interest
in profits of LP.. -- -- -- -- -- --
Equity loss on
investment in
joint venture..... -- -- 271 1,649 1,293 95
------- -------- -------- ---------- ---------- ----------
Income before
taxes............. 2,090 2,293 4,291 11,554 7,272 10,600
Income taxes...... -- -- -- 641 210 539
------- -------- -------- ---------- ---------- ----------
Net income........ $ 2,090 $ 2,293 $ 4,291 $ 10,913 $ 7,062 $10,061
======= ======== ======== ========== ========== ==========
Net income per
share of Common
Stock............. -- -- -- $ 0.96 $ 0.62 $ 0.82
Weighted average
number of shares
outstanding....... -- -- -- 11,354,705 11,354,705 12,321,759
------- -------- -------- ---------- ---------- ----------
Pro forma net
income(b)......... $ 1,301 $ 1,414 $ 2,674 $ 7,206 $ 4,533 $ 6,608
Pro forma net
income per share
of Common
Stock(b).......... -- -- -- -- 0.40 0.54
Pro forma weighted
average number of
shares of Common
Stock outstanding. -- -- -- -- 11,354,705 12,321,759
OTHER DATA:
Ratio of earnings
to fixed
charges(c)........ 4.23 2.00 1.82 2.77 2.56 2.07
Pro forma ratio of
earnings to fixed
charges(d)........ -- -- -- 3.48 -- 2.27
EBITDA(e)......... $ 2,467 $ 3,869 $ 7,368 $ 17,291 $ 11,307 $ 18,165
Cash flows
provided by (used
in)
Operating
activities....... (6,166) (3,262) (10,964) 2,304 4,345 (21,851)
Investing
activities....... (51) (10,776) (24,940) (36,919) (31,382) (27,390)
Financing
activities....... 5,146 15,341 36,134 37,102 30,121 54,744
Number of Existing
Resorts at period
end............... 1 3 4 7 7 9
Number of Vacation
Intervals sold(f). 1,284 2,442 4,482 5,675 4,321 5,157
Numbers of
Vacation Intervals
in inventory(f)... 1,164 1,233 2,401 9,917 18,122 22,509
Average price of
Vacation Intervals
sold(f)........... $ 8,822 $ 9,106 $ 8,985 $ 11,353 $ 11,196 $ 13,223
<CAPTION>
PRO FORMA (UNAUDITED)
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------- ---------------------------------------------------
1995 1995 1996
------------------------- ------------------------- -------------------------
CONSOLIDATION CONSOLIDATION CONSOLIDATION
TRANSACTIONS/ TRANSACTIONS/ TRANSACTIONS/
INITIAL PUBLIC THE INITIAL PUBLIC THE INITIAL PUBLIC THE
OFFERING MERGER(a) OFFERING MERGER(a) OFFERING MERGER(a)
-------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Vacation Interval
sales............. $ 59,071 $ 92,302 $ 46,385 $ 71,206 $ 49,459 $ 79,870
Interest income... 6,929 7,523 4,669 4,922 6,627 9,023
Other income...... 6,928 7,372 2,881 3,521 7,856 6,799
-------------- ---------- -------------- ---------- -------------- ----------
Total revenues.... 72,928 107,197 53,935 79,649 63,942 95,692
COSTS AND
OPERATING
EXPENSES:
Vacation Interval
cost of sales..... 15,586 26,667 12,497 20,179 11,205 19,949
Advertising,
sales, and
marketing......... 28,488 42,408 22,429 33,661 24,408 39,525
Loan portfolio:
Interest
expense--
treasury........ -- 518 -- 78 1,810 3,159
Other expenses.. 1,074 1,074 668 668 982 982
Provision for
doubtful
accounts........ 1,787 2,579 1,471 1,683 1,372 2,427
General and
administrative:
Resort-level.... 4,947 4,947 2,760 2,760 4,961 4,961
Corporate....... 1,607 6,202 1,130 4,255 2,428 7,886
Depreciation and
amortization...... 1,675 1,860 1,158 1,289 1,675 2,446
Interest expense--
other............. -- 1,300 -- 1,044 28 1,623
-------------- ---------- -------------- ---------- -------------- ----------
Total costs and
operating
expenses.......... 55,164 87,555 42,113 65,617 48,869 82,958
Net operating
income............ 17,764 19,642 11,822 14,032 15,073 12,734
Resort property
valuation
allowance......... -- -- -- -- -- 839
Minority interest
in profits of LP.. -- -- -- -- -- 112
Equity loss on
investment in
joint venture..... 1,804 1,804 1,355 1,355 485 485
-------------- ---------- -------------- ---------- -------------- ----------
Income before
taxes............. 15,960 17,838 10,467 12,677 14,588 11,298
Income taxes...... 6,297 7,135 4,135 5,071 5,835 4,519
-------------- ---------- -------------- ---------- -------------- ----------
Net income........ $ 9,663 $ 10,703 $ 6,332 $ 7,606 $ 8,753 $ 6,779
============== ========== ============== ========== ============== ==========
Net income per
share of Common
Stock............. $ 0.56 $ 0.59 $ 0.36 $ 0.42 $ 0.50 $ 0.37
Weighted average
number of shares
outstanding....... 17,392,205 18,236,147 17,392,205 18,236,147 17,494,836 18,338,778
-------------- ---------- -------------- ---------- -------------- ----------
</TABLE>
- ----------------
(continued on following page)
12
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------------
AS ADJUSTED AS ADJUSTED AS ADJUSTED
COMPANY FOR THE FOR STOCK FOR CONVERTIBLE AS ADJUSTED
ACTUAL MERGER(G) OFFERING(H) OFFERING(I) FOR THE OFFERINGS(J)
-------- ----------- ----------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash, including escrow.. $ 11,339 $ 12,026 $ 47,139 $ 68,083 $103,196
Total assets............ 214,529 292,812 327,925 349,119 384,232
Long-term debt.......... 81,145 134,051 112,951 193,651 172,551
Stockholders' equity.... 100,115 103,881 160,094 103,881 160,094
</TABLE>
- --------
(a) Reflects the effects of the Merger, as well as the Consolidation
Transactions and the Initial Public Offering.
(b) Reflects the effect on historical statement of operations data, assuming
the combined Company had been treated as a C corporation rather than as
individual limited partnerships and limited liability companies for federal
income tax purposes.
(c) The ratio of earnings to fixed charges has been computed by dividing
earnings before income tax, plus fixed charges (excluding capitalized
interest) and amortization of previously capitalized interest by fixed
charges. Fixed charges consist of interest and other finance expenses and
capitalized interest.
(d) The pro forma ratio of earnings to fixed charges has been computed as
described in (c) above after giving effect to the net decrease in interest
expense resulting from the portion of the convertible offering used to
retire existing indebtedness of the Company. See "Use of Proceeds."
(e) As shown below, EBITDA represents net income before interest expense,
income taxes and depreciation and amortization. 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 an alternative to net income as a measure of the Company's operating
results or to operating cash flow as a measure of liquidity. The following
table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ---------------
1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income.................. $2,090 $2,293 $4,291 $10,913 $ 7,062 $10,061
Interest expense--treasury.. 168 674 1,629 3,586 2,533 4,022
Interest expense--other..... -- 518 959 476 344 1,868
Taxes....................... -- -- -- 641 210 539
Depreciation and
amortization............... 209 384 489 1,675 1,158 1,675
------ ------ ------ ------- ------- -------
EBITDA...................... $2,467 $3,869 $7,368 $17,291 $11,307 $18,165
====== ====== ====== ======= ======= =======
</TABLE>
(f) Includes the effect of sales or inventory at the Company's non-consolidated
resort (the Embassy Vacation Resort Poipu Point).
(g) The pro forma adjustments for the Merger represent the historical financial
statements of AVCOM. These adjustments assume the Merger will be accounted
for using the pooling-of-interests method of accounting. See "Risk
Factors--Risks Related to the Proposed Merger--Accounting Treatment."
(h) Adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered in the Stock Offering by the Company at an assumed offering price
of $37.25 per share, less the underwriting discount and the payment by the
Company of the estimated offering expenses.
(i) Adjusted to give effect to the sale of $100 million of Convertible Notes
offered in the Convertible Offering by the Company at an assumed offering
price of 100% of the principal amount of the Convertible Notes, less the
underwriting discount and the payment by the Company of the estimated
offering expenses.
(j) As adjusted to give effect to the offerings described in footnotes (h) and
(i) above.
13
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF AVCOM
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The operating data for the years ended December 31, 1993, 1994 and 1995 and
the balance sheet data as of December 31, 1994 and 1995 are derived from
AVCOM's consolidated financial statements and notes thereto which have been
audited by Ernst & Young LLP, independent public accountants, and are included
elsewhere in this Prospectus. Balance sheet data as of December 31, 1993 is
derived from AVCOM's consolidated financial statements which have been audited
by Ernst & Young LLP, independent public accountants, which are not included in
this Prospectus. The operating data and the balance sheet data as of and for
the nine months ended September 30, 1995 and 1996 and the operating data and
balance sheet data as of December 31, 1991 and December 31, 1992 have been
derived from unaudited financial statements that in the opinion of AVCOM's
management reflects all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial information for such
periods and of such dates. The selected consolidated financial data presented
below should be read in conjunction with AVCOM's consolidated financial
statements, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS:
Revenues:
Sales of Vacation
Intervals............ $6,416 $9,859 $ 14,481 $ 24,130 $ 33,231 $ 24,821 $ 30,411
Timeshare management.. -- -- 452 650 1,256 962 1,059
Contract commission
revenue.............. -- -- -- -- -- -- 497
Gain on sale of notes
receivable........... -- -- 167 571 566 564 77
Health club revenue... -- -- -- -- -- -- 375
Other................. -- -- 99 66 193 137 250
------ ------ --------- --------- --------- --------- ---------
Total revenues........ 6,416 9,859 15,199 25,417 35,246 26,484 32,669
Costs and operating
expenses:
Cost of Vacation
Intervals sold....... 1,676 2,641 3,548 6,792 11,081 7,682 8,744
Marketing and selling. 3,212 4,921 6,950 12,232 13,920 11,232 15,117
Timeshare management.. -- -- 547 743 1,571 1,023 1,769
Contract marketing and
selling.............. -- -- -- -- -- -- 974
Health club expenses.. -- -- -- -- -- -- 572
General and
administrative....... 323 715 1,621 3,034 4,780 3,256 6,229
Resort property
valuation allowance.. -- -- -- -- -- -- 839
Provision for doubtful
accounts............. 322 140 251 371 792 212 1,055
------ ------ --------- --------- --------- --------- ---------
Total costs and
operating expenses... 5,533 8,417 12,917 23,172 32,144 23,405 35,299
Operating income
(loss)............... 883 1,442 2,282 2,245 3,102 3,079 (2,630)
Minority interest in
consolidated limited
partnership.......... -- -- -- -- -- -- (112)
Interest and financing
costs................ (42) (299) (335) (809) (1,818) (1,122) (2,944)
Interest income....... 35 179 236 180 594 253 2,396
------ ------ --------- --------- --------- --------- ---------
Income (loss) before
income taxes......... 876 1,322 2,183 1,616 1,878 2,210 (3,290)
Income taxes
(benefit)............ 0 0 1,970 695 838 936 (1,316)
------ ------ --------- --------- --------- --------- ---------
Net income (loss)..... $ 876 $1,322 $ 213 $ 921 $ 1,040 $ 1,274 $ (1,974)
====== ====== ========= ========= ========= ========= =========
Cumulative preferred
stock dividends...... -- -- -- 105 105 79 79
------ ------ --------- --------- --------- --------- ---------
Net income (loss)
available for holders
of Common Stock...... -- -- -- 816 935 1,195 (2,053)
====== ====== ========= ========= ========= ========= =========
Earnings (loss) per
share of Common Stock
(pro forma in
1993)(a)............. -- -- 0.27 0.16 0.17 0.22 (0.41)
Weighted average
number of shares of
common stock and
common stock
equivalents (pro
forma in 1993)....... -- -- 4,682,507 4,942,759 5,554,089 5,530,669 4,987,080
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(b)............... $ 1,052 $ 1,738 $ 2,574 $ 2,571 $ 3,881 $ 3,463 $ 502
Cash flows provided by
(used in):
Operating activities... 291 (3,545) 2,907 291 3,564 3,101 1,327
Investing activities... (43) (120) (2,197) (1,926) (13,413) (9,009) (17,904)
Financing activities... (247) 3,636 (183) 1,046 11,378 6,164 15,735
Number of existing
resorts at period end.. 1 2 2 4 4 4 9
Number of Vacation
Intervals sold......... 605 922 1,061 1,987 2,304 1,809 1,994
Number of Vacation
Intervals in inventory. 1,078 2,196 1,211 3,948 1,995 2,322 8,888
Average price of
Vacation Intervals..... $10,609 $10,693 $13,650 $12,140 $ 14,420 $ 13,720 $ 15,600
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash, including cash in
escrow................. 64 35 589 1,026 1,807 486 687
Total assets............ 2,658 7,385 8,459 20,852 35,934 31,380 78,283
Long-term debt
(including capitalized
leases)................ 82 4,477 3,454 12,960 23,453 18,540 52,906
Stockholders' equity(c). 1,078 1,724 2,514 3,415 5,340 5,673 3,766
</TABLE>
- --------
(a) See Footnote 1 to AVCOM's consolidated financial statements.
(b) As shown below, EBITDA represents net income (loss) before interest
expense, income taxes and depreciation and amortization. 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 an alternative to net income as a measure of
AVCOM's operating results or to operating cash flow as a measure of
liquidity. The following table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........... $ 876 $1,322 $ 213 $ 921 $1,040 $1,274 $(1,974)
Interest and financing
costs...................... 42 299 335 809 1,818 1,122 2,944
Taxes....................... 0 0 1,970 695 838 936 (1,316)
Depreciation and
amortization............... 134 117 56 146 185 131 848
------ ------ ------ ------ ------ ------ -------
EBITDA...................... $1,052 $1,738 $2,574 $2,571 $3,881 $3,463 $ 502
====== ====== ====== ====== ====== ====== =======
</TABLE>
- --------
(c) Partners' capital for 1991 and 1992.
15
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the
Company and its business before purchasing any of the shares of Common Stock
offered hereby. The Company cautions the reader that this list of risk factors
may not be exhaustive.
Certain statements in this Prospectus that are not historical fact
constitute "forward- looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing such forward-
looking statements may be found in the material set forth under "Summary,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as within the
Prospectus generally. In addition, when used in the Prospectus the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to a number
of risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth below and the matters set forth in the Prospectus generally. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
A principal component of the Company's strategy is to continue to grow by
acquiring 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 timeshare resorts and profitably sell Vacation Intervals at such resorts.
There can be no assurance that the Company will be successful with respect to
such factors. The Company's ability to execute its growth strategy depends to
a significant degree on the existence of attractive resort acquisition
opportunities (which, in the past, have included completed or nearly completed
resort properties), its ability both to consummate acquisitions on favorable
terms and to obtain additional debt and equity capital and to fund such
acquisitions and any necessary conversion and marketing expenditures.
Currently, there are numerous potential buyers of resort real estate which are
better capitalized than the Company competing to acquire resort properties
which the Company may consider attractive resort acquisition opportunities.
There can be no assurance that the Company will be able to compete against
such other buyers successfully or that the Company will be successful in
consummating any such future financing transactions or equity offerings on
terms favorable to the Company. The Company's ability to obtain and repay any
indebtedness at maturity may depend on refinancing, which could be adversely
affected if the Company cannot effect the sale of additional debt or equity
through public offerings or private placements on terms favorable to the
Company. Factors which could affect the Company's access to the capital
markets, or the cost of such capital, include changes in interest rates,
general economic conditions, the perception in the capital markets of the
timeshare industry and the Company's business, results of operations,
leverage, financial condition and business prospects. In addition, an
important part of the Company's growth strategy is to acquire and develop
additional Embassy Vacation Resorts and Westin Vacation Club resorts. See
"Business--Embassy Vacation Resorts," and "--Westin Vacation Club Resorts."
Westin has not previously been active in the timeshare market and may not
devote the corporate resources to such projects at levels which will make the
projects successful. Moreover, there can be no assurance that Promus will
elect to continue licensing the Embassy Vacation Resort name to the Company
with respect to possible future resorts.
RISKS RELATED TO THE PROPOSED MERGER
Uncertainty as to Future Financial Results. The Company believes that the
Merger with AVCOM will offer opportunities for long-term efficiencies in
operations that should positively affect future results of the combined
operations of the Company and AVCOM. However, the Merger may adversely affect
the Company's financial performance in 1997 and future years until such time
as the Company is able to realize the positive effect of such long-term
efficiencies. In addition, the combined companies will be more complex and
diverse than the Company individually, and the combination and continued
operation of their distinct business operations will present difficult
challenges for the Company's management due to the increased time and
resources required in
16
<PAGE>
the management effort. While management and the Board of Directors of the
Company believe that the combination can be effected in a manner which will
realize the value of the two companies, management has no experience in
combinations of this size. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Following the Merger, in order to maintain and increase profitability, the
combined companies will need to successfully integrate and streamline
overlapping functions. The Company and AVCOM have different systems and
procedures in many operational areas which must be rationalized and
integrated. There can be no assurance that integration will be successfully
accomplished. The difficulties of such integration may be increased by the
necessity of coordinating geographically separate organizations. The
integration of certain operations following the Merger will require the
dedication of management resources which may temporarily distract attention
from the day-to-day business of the combined companies. Failure to effectively
accomplish the integration of the two companies' operations could have an
adverse effect on the Company's results of operations and financial condition.
Merger and Related Expenses. Transaction costs relating to the negotiation
of, preparation for, and consummation of the Merger and the anticipated
combination of certain operations of the Company and AVCOM will result in a
one-time charge to the Company's earnings of approximately $1.7 million to
$1.9 million in the quarter in which the Merger is consummated (expected to be
the first quarter of 1997). This charge is expected to include the fees and
expenses payable to financial advisors, legal fees and other transaction
expenses related to the Merger. In addition, there can be no assurance that
the Company will not incur additional charges in subsequent quarters to
reflect costs associated with the Merger and the integration of the Company's
and AVCOM's operations. Additionally, transaction costs relating to the
consummation of the Merger and the anticipated combination of operations of
the Company and AVCOM, along with changes in AVCOM's accounting policies to
conform to the Company's and the write-down and write-off of certain AVCOM
assets, will result in a one-time charge to AVCOM's earnings of approximately
$6 million to $8 million. This charge is expected to include the estimated
costs associated with workforce reductions, contractual payment obligations
and other restructuring activities. While the exact timing of this charge
cannot be determined at this time, management anticipates that this charge to
earnings will be recorded primarily in the fourth quarter of 1996.
Potential Dilution to Existing Stockholders. If the Merger is consummated,
the Company would issue a substantial number of shares of Common Stock to
holders of shares of common stock of AVCOM. Based on current stock prices, the
Company would issue an estimated 843,942 shares of Common Stock in the Merger
in exchange for outstanding shares (or options exercisable into such shares)
of AVCOM common stock. Based on such prices, the estimated 843,942 shares of
Common Stock issuable in connection with the Merger would represent
approximately 4.3% of the number of shares of Common Stock to be outstanding
upon completion of the Stock Offering (assuming no exercise of the
Underwriters' over-allotment options). The actual number of shares of Common
Stock that would be issued in the Merger is subject to certain adjustments.
See "The Proposed Merger."
Shares Eligible for Public Sale. Sales of substantial amounts of the
Company's Common Stock in the public market after the consummation of the
Merger could adversely affect prevailing market prices. The estimated 843,942
shares of Common Stock (based on current stock prices) to be issued in the
Merger will be eligible for immediate sale in the public market, subject to
certain contractual limitations and limitations under the Securities Act
applicable to affiliates of AVCOM. See "Shares Eligible for Future Sale" and
"Underwriting."
Risk of Non-Consummation of the Merger. The closing of the Offerings are not
conditioned upon the closing of the Merger, which is subject to certain
significant conditions contained in the Merger Agreement. Many of these
conditions are beyond the control of the Company. Although the Company
currently expects that such conditions will be satisfied or waived, there can
be no assurance that the closing of the Merger will occur. Such conditions,
include, among others, approval by the stockholders of AVCOM, the receipt by
the Company of an opinion from its and AVCOM's independent public accountants
with respect to certain matters relating to
17
<PAGE>
the availability of pooling-of-interests accounting treatment for the Merger
and the absence of any material adverse change in the business, results of
operations or financial condition of either the Company or AVCOM. See "The
Proposed Merger."
Accounting Treatment. The Merger is expected to be accounted for by the
pooling-of-interests method of accounting. Under this method of accounting,
the recorded assets and liabilities of the Company and AVCOM will be carried
forward at their book values to the Company after the Merger, income of the
Company after the Merger will include the income (or loss) of the Company and
AVCOM for the entire fiscal year in which the Merger occurs, and the reported
income of the Company and AVCOM for prior periods will be combined and
restated as income of the Company after the Merger. It is a condition to the
Company's obligation to effect the Merger that it receive an opinion from its
independent public accountants, that the Merger will qualify for a pooling-of-
interests accounting treatment. See "The Proposed Merger--Conditions of the
Merger." No assurance can be given, however, that the Company will not waive
the foregoing condition and effect the Merger if pooling of interest
accounting is not available. In such case, the purchase method of accounting
would be applicable. Under the purchase method, the book value of AVCOM's
assets would be increased to their fair values, which could result in higher
costs of sales, thereby adversely affecting the Company's earnings.
Additionally, the excess of the purchase price over the fair value of AVCOM's
assets would be amortized and expensed, which could also adversely affect the
Company's earnings.
If the closing of the Merger does not occur, the Company will not succeed to
the business and operations of AVCOM and, accordingly, the business and
operations of the Company will not include any of the business and operations
of AVCOM described in this Prospectus. In connection with the Merger
Agreement, the Company has agreed to loan AVCOM up to $4.0 million, of which
$3.0 million had been loaned as of the date of this Prospectus. Such loan was
used by AVCOM for working capital purposes and AVCOM may or may not be able or
willing to repay the loan. In addition, the Company would be required to take
a one-time charge to earnings to reflect the costs of the payment of certain
amounts relating to the Merger. See "The Proposed Merger," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Pro Forma Financial Information."
VARIABILITY OF QUARTERLY RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's earnings may be impacted by the timing of the completion and
development of future resorts, and the potential impact of weather or other
natural disasters at the Company's resort locations (e.g., hurricanes in
Hawaii, St. Maarten and St. John and earthquakes in California). See "--
Natural Disasters; Uninsured Loss" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Furthermore, the Company
has historically experienced and expects to continue to experience seasonal
fluctuations in its gross revenues and net income from the sale of Vacation
Intervals. This seasonality may cause significant variations in quarterly
operating results. If sales of Vacation Intervals are below seasonal norms
during a particular period, the Company's annual operating results could be
materially adversely affected. In addition, the combination of (i) the
possible delay in generating revenue after the acquisition by the Company of
additional resorts prior to the commencement of Vacation Interval sales and
(ii) the expenses associated with start-up unit or room-rental operations,
interest expense, amortization and depreciation expenses from such
acquisitions may materially adversely impact earnings.
Due to the foregoing and other factors, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not
be relied upon as indications of future performance. Because of the above
factors, it is possible that the Company's operating results will be below the
expectations of stock market analysts and investors, which could have a severe
adverse effect on the market value of the Company's Common Stock. Furthermore,
the market price for the Common Stock has been subject to significant
fluctuations. Numerous factors, including announcements of fluctuations in the
Company's or its competitors' operating results and market conditions for
hospitality and timeshare industry stocks in general, could have a significant
impact on the future price of the Common Stock. In addition, the stock market
in recent years has experienced significant price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
companies. These
18
<PAGE>
broad fluctuations may adversely affect the market price of the Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RISKS OF DEVELOPMENT AND CONSTRUCTION ACTIVITIES
The Company intends to actively continue development, construction,
redevelopment/conversion and expansion of timeshare resorts. There can be no
assurance that the Company will complete development and/or conversion of the
Lake Tahoe and AVCOM's Scottsdale Villa Mirage Resort, Villas on the Lake,
Sedona Summit Resort and The Ridge on Sedona Golf Resort currently under
development, complete the expansion projects currently under development at
the Company's Cypress Pointe, Plantation at Fall Creek and Embassy Vacation
Resort Grand Beach resorts and at AVCOM's Sedona Summit Resort, North Bay
Resort at Lake Arrowhead and Villas on the Lake resorts, undertake the
additional expansion plans set forth in "Business-- Description of the
Company's Resorts" or undertake to develop other resorts or complete such
development if undertaken. Risks associated with the Company's development,
construction and redevelopment/conversion activities, including activities
relating to the Lake Tahoe and AVCOM's Scottsdale Villa Mirage Resort, Villas
on the Lake and The Ridge on Sedona Golf Resort, and expansion activities,
including activities relating to the Cypress Pointe, Plantation at Fall Creek,
San Luis Bay, Flamingo Beach Club and Embassy Vacation Resort Grand Beach
resorts and at AVCOM's Sedona Summit Resort, may include the risks that:
acquisition and/or development opportunities may be abandoned; construction
costs of a property may exceed original estimates, possibly making the resort
uneconomical or unprofitable; sales of Vacation Intervals at a newly completed
property may not be sufficient to make the property profitable; financing may
not be available on favorable terms for development of, or the continued sales
of Vacation Intervals at, a property; and construction may not be completed on
schedule, resulting in decreased revenues and increased interest expense. In
addition, the Company's construction activities typically are performed by
third-party contractors, the timing, quality and completion of which cannot be
controlled by the Company. Nevertheless, 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 or not 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 inability to obtain, or delays in obtaining, all necessary zoning,
land-use, building, occupancy and other required governmental permits and
authorizations, the ability of the Company to coordinate construction
activities with the process of obtaining such permits and authorizations, and
the ability of the Company to obtain the financing necessary to complete the
necessary acquisition, construction, and/or conversion work. Upon the closing
of the Offerings, the Company will not have the financing available to
complete all of its planned expansion as set forth in "Business--Description
of the Company's Resorts." The ability of the Company to expand its business
to include new resorts will in part depend upon the availability of suitable
properties at reasonable prices and the availability of financing for the
acquisition and development of such properties. In addition, certain states
and 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. See
"Business--Business Strategy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF THE ST. JOHN ACQUISITION
Although the Company and Westin have announced the signing of definitive
agreements for the acquisition of the St. John Villas and the St. John Hotel,
the closing of such acquisition is subject to the timely satisfaction of
certain conditions. Although the Company expects such acquisition to be
consummated during the first quarter 1997 and sales of Vacation Intervals to
begin at the resort by the fourth quarter of 1997, there can be no assurance
that such acquisition and commencement of timeshare sales will be consummated
in such time period, if at all. In the event that the closing of the St. John
acquisition or the commencement of timeshare sales is materially delayed or
does not occur, the Company could incur additional transaction and start-up
costs, which may result in an adverse effect on the results of the Company in
1997 or in future years.
19
<PAGE>
RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS
The Company will have significant interest expense and principal repayment
obligations under the Convertible Notes and its other indebtedness. As of
September 30, 1996, after giving effect to the Offerings, and the application
of the net proceeds therefrom, and the Merger, the Company and its
consolidated subsidiaries would have had an aggregate of $172.1 million of
long-term debt. See "Consolidated Capitalization" and "Pro Forma Financial
Information." Future development by the Company at its Existing Resorts and
the AVCOM Resorts will be financed with indebtedness obtained pursuant to the
Company's existing credit facilities or credit facilities obtained by the
Company in the future. The agreements with respect to such facilities do
contain or in the future could contain restrictive covenants, possibly
including covenants limiting capital expenditures, incurrence of debt and
sales of assets and requiring the Company to achieve certain financial ratios,
some of which could become more restrictive over time. Subsequent acquisition
activities will be financed primarily by new financing arrangements. The
Company's pro forma indebtedness as well as the indebtedness to be incurred
under such facilities will be secured by mortgages on the Company's resort
properties as well as other assets of the Company. Among other consequences,
the leverage of the Company and such restrictive covenants and other terms of
the Company's debt instruments could impair the Company's ability to obtain
additional financing in the future, to make acquisitions and to take advantage
of significant business opportunities that may arise. In addition, the
Company's leverage may increase its vulnerability to adverse general economic
and timeshare industry conditions and to increased competitive pressures.
RISKS ASSOCIATED WITH PARTNERSHIP INVESTMENT IN THE POIPU PARTNERSHIP
The Embassy Vacation Resort Poipu Point is owned by the Poipu Partnership,
which consists of the Company and a third party. Property ownership through a
partnership involves additional risks, including requirements of partner
consents for major decisions (including approval of budgets), capital
contributions and entry into material agreements. If the Company and its
partner are unable to agree on major decisions, either partner may elect to
invoke a buy/sell right, which could require the Company to either sell its
interest in the Embassy Vacation Resort Poipu Point or to buy out the interest
of its partner at a time when the Company is not prepared to do so. In
addition, under certain circumstances, the other partner can require the
Company to purchase such partner's interest or sell its interest to the
partner. If a dispute arises under this partnership, an adverse resolution
could have a material adverse effect on the operations of the Company. In
addition, as a general partner, the Company will be subject to certain
fiduciary obligations which may obligate it to act in a manner which is not
necessarily in the best interest of the Company. The Company may elect to
purchase interests in future resorts through similar partnership arrangements.
See "--Risks Related to Westin Agreement; Limited Control of Resorts and
Termination."
LIMITED OPERATING HISTORY
The Company was recently formed in order to effectuate the Consolidation
Transactions and the Initial Public Offering. Although predecessors of the
Company have operating history in the timeshare and hospitality industries,
the Company has limited operating history as an integrated entity with respect
to the Existing Resorts and limited experience operating as a public company,
which could have an adverse impact on the Company's operations and future
profitability. The Company has chosen to conduct its management operations (i)
in two locations in California primarily with respect to acquisition,
development and finance, (ii) in Chicago, Illinois with respect to marketing,
(iii) in Orlando, Florida primarily with respect to sales, accounting,
treasury and property management operations and (iv) following the Merger, in
Sedona, Arizona, primarily with respect to sales, marketing, accounting and
property management of the Company's and AVCOM's Western resorts. However, as
the Company grows and diversifies into additional geographic markets,
including new markets as a result of the Merger with AVCOM, no assurance can
be given as to management's ability to efficiently manage operations and
control functions without a centrally located management team.
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GENERAL ECONOMIC CONDITIONS; CONCENTRATION IN TIMESHARE INDUSTRY; GEOGRAPHIC
CONCENTRATION OF INVESTMENTS
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 recession, may also
adversely affect the future availability of attractive financing rates for the
Company or its customers and may materially adversely affect the Company's
business. Furthermore, adverse changes in general economic conditions may
adversely affect the collectibility of the Company's loans to Vacation
Interval buyers. Because the Company's operations are conducted solely within
the timeshare industry, any adverse changes affecting the timeshare industry
such as an oversupply of timeshare units, a reduction in demand for timeshare
units, changes in travel and vacation patterns, changes in governmental
regulations of the timeshare industry and increases in construction costs or
taxes, as well as negative publicity for the timeshare industry, could have a
material adverse effect on the Company's operations. Additionally, two of the
nine Existing Resorts are located in each of California, Florida and St.
Maarten, and six of the ten AVCOM Resorts are located in Arizona and three are
located in California. See "Business--The Resorts." The concentration of the
Company's investments in California, Florida, the Caribbean and Arizona could
result in adverse events or conditions which affect those areas in particular,
such as economic recessions and natural disasters, having a more significant
negative effect on the operations of the Company's resorts, than if the
Company's investments were more geographically diverse. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH CUSTOMER FINANCING
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts who make a down payment generally equal to at least 10% of
the purchase price. This financing generally bears interest at fixed rates and
is collateralized by a first mortgage on the underlying Vacation Interval. The
Company has entered into agreements with lenders for the financing of these
customer receivables. These agreements provide an aggregate of up to
approximately $178 million of available financing to the Company bearing
interest at variable rates tied to either the prime rate or LIBOR, of which
the Company as of September 30, 1996, has approximately $116 million of
additional borrowing availability. Under these arrangements, the Company
pledges as security promissory notes to these lenders, who typically lend the
Company 80% to 90% of the principal amount of such notes. Payments under these
promissory notes are made by the buyer/borrowers directly to a payment
processing center and such payments are credited against the Company's
outstanding balance with the respective lenders. The Company does not
presently have binding agreements to extend the terms of such existing
financing or for any replacement financing upon the expiration of such funding
commitments (which have varying borrowing periods ranging from 18 to 20 months
after the initial commitment date), and there can be no assurance that
alternative or additional arrangements can be made on terms that are
satisfactory to the Company. Accordingly, future sales of Vacation Intervals
may be limited by both the availability of funds to finance the initial
negative cash flow that results from sales that are financed by the Company
and by reduced demand which may result if the Company is unable to provide
financing through unaffiliated lenders to buyers of Vacation Intervals. If the
Company is required to sell its customer receivables to lenders, discounts
from the face value of such receivables may be required by such lenders, if
lenders are available at all. At September 30, 1996, the Company had a
portfolio of approximately 12,800 loans to Vacation Interval buyers amounting
to approximately $90.8 million with respect to the Company's consolidated
resorts (all of the Existing Resorts except the Embassy Vacation Resort Poipu
Point). The Company's consumer loans had a weighted average maturity of
approximately seven years and a weighted average cost of funds of 15%. At such
date, the Company had borrowings secured by such loans of approximately $62.2
million, which borrowings bear interest at variable rates with a weighted
average of 10.25%. As of September 30, 1996, approximately 8.1% of the
Company's consumer loans were considered by the Company to be delinquent (past
due by 60 or more days) and the Company has completed or commenced foreclosure
or deed-in-lieu of foreclosure on approximately 2.5% of its consumer loans.
The Company has historically derived income from its financing activities.
However, because the Company's borrowings bear interest at variable rates and
the Company's loans to buyers of Vacation Intervals bear interest at fixed
rates, the Company bears the risk of increases in interest rates with respect
to the
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loans it has from its lenders. To the extent interest rates on the Company's
borrowings decrease, the Company faces an increased risk that customers will
pre-pay their loans and reduce the Company's income from financing activities.
See "Business--Customer Financing."
RISKS OF HEDGING ACTIVITIES
To manage risks associated with the Company's borrowings bearing interest at
variable rates, the Company expects from time to time to purchase interest
rate caps, interest rate swaps or similar instruments. The nature and quantity
of the hedging transactions for the variable rate debt will be determined by
the management of the Company based on various factors, including market
conditions, and there have been no limitations placed on management's use of
certain instruments in such hedging transactions. No assurance can be given
that any such hedging transactions will offset the risks of changes in
interest rates, or that the costs associated with hedging activities will not
increase the Company's operating costs.
RISKS ASSOCIATED WITH CUSTOMER DEFAULT
The Company bears the risk of defaults by buyers who financed the purchase
of their Vacation Intervals. If a buyer of a Vacation Interval defaults on the
loan made by the Company to finance the purchase of such Vacation Interval
during the early part of the repayment schedule the Company generally must
take back the mortgage with respect to such Vacation Interval and replace it
with a performing mortgage. In connection with the Company taking back any
such Vacation Interval, the associated marketing costs other than certain
sales commissions will not have been recovered by the Company and they must be
incurred again after their Vacation Interval has been returned to the
Company's inventory for resale (commissions paid in connection with the sale
of Vacation Intervals may be recoverable from the Company's sales personnel
and from independent contractors upon default in accordance with contractual
arrangements with the Company, depending upon the amount of time that has
elapsed between the sale and the default and the number of payments made prior
to such default). Although private mortgage insurance or its equivalent is
available to cover Vacation Intervals, the Company has never purchased such
insurance. In addition, although the Company in many cases may have recourse
against Vacation Interval buyers, sales personnel and independent contractors
for the purchase price paid and for commissions paid, respectively, no
assurance can be given that the Vacation Interval purchase price or any
commissions will be fully or partially recovered in the event of buyer
defaults under such financing arrangements. The Company purchased defaulted
mortgage notes with respect to 900 Vacation Intervals at the San Luis Bay
Resort on which the Company is in the process of foreclosing. The Company will
be subject to the costs and delays associated with such foreclosure process
and no assurance can be given that the value of the underlying Vacation
Intervals being foreclosed upon at the time of resale will exceed the purchase
price of the defaulted loans, taking into consideration the costs of
foreclosure and resale. See "Business--Customer Financing." Similarly, in
March 1996, AVCOM purchased defaulted mortgage notes with respect to 1,057
Vacation Intervals at the Tahoe Seasons Resort on which AVCOM is in the
process of foreclosing. AVCOM will be subject to the costs and delays
associated with such foreclosure process and no assurance can be given that
the value of the underlying Vacation Intervals being foreclosed upon at the
time of resale will exceed the purchase price of the defaulted loans, taking
into consideration the costs of foreclosure and resale. See "Business--
Description of AVCOM's Resorts."
COMPETITION
The Company is subject to significant competition at each of its resorts
from other entities engaged in the business of resort development, sales and
operation, including interval ownership, condominiums, hotels and motels. Many
of the world's most recognized lodging, hospitality and entertainment
companies have begun to develop and sell Vacation Intervals in resort
properties. Although the Company currently is the sole licensee of Embassy
Vacation Resorts from Promus and the Company recently obtained the exclusive
development rights to Westin Vacation Clubs from Westin pursuant to the Westin
Agreement, other major companies that now operate or are developing or
planning to develop Vacation Interval resorts include Marriott Ownership
Resorts ("Marriott"), The Walt Disney Company ("Disney"), Hilton Hotels
Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Four Seasons Hotels &
Resorts ("Four Seasons") and Inter-Continental Hotels and Resorts ("Inter-
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Continental"). Many of these entities possess significantly greater financial,
marketing, personnel and other resources than those of the Company and may be
able to grow at a more rapid rate or more profitably as a result. The Company
also competes with companies with non-branded resorts such as Westgate,
Vistana and Vacation Break. Vacation Break announced in November 1996 that it
had agreed to purchase the Berkley Group, another timeshare resort developer,
and following consummation of Vacation Breaks' acquisition of the Berkley
Group, such entity will possess greater resources as a consolidated entity.
Furthermore, there can be no assurance that Promus will not grant other
entities a license to develop Embassy Vacation Resorts or that Promus will not
exercise its rights to terminate the Embassy Vacation Resort licenses.
In the event that the Westin Agreement becomes the subject of dispute
between the parties thereto, it is possible that the Company's interest in
pursuing acquisition and development opportunities at "four-star" and "five-
star" resorts located in North America, Mexico and the Caribbean through May
2001 could be barred pending the final resolution of such dispute.
Additionally, at the expiration or early termination of the Westin Agreement,
Westin could become a direct competitor with the Company in the timeshare
resort business, including in the markets most attractive to the Company. See
"--Risks Related to the Westin Agreement; Limited Control of Resorts and
Termination" and "Business--Westin Vacation Club Resorts." In addition, the
five Embassy Suites hotels owned or controlled by affiliates of the Founders,
which will not be owned by the Company, may compete with certain of the
Company's timeshare resorts; however, the Company anticipates that such five
Embassy Suites hotels could be a significant source of lead generation for its
marketing activities. Subject to the covenants not to compete (as described
herein), the Founders could acquire resort and other hotel properties that
could compete with the Company's timeshare business. See "Management--
Employment Agreements" and "--Covenants Not To Compete."
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; RISK OF INABILITY TO
QUALIFY RESORTS
The attractiveness of Vacation Interval ownership is enhanced significantly
by the availability of exchange networks that allow Vacation Interval owners
to exchange in a particular year the occupancy right in their Vacation
Interval for an occupancy right in another participating network resort.
According to the ARDA, the ability to exchange Vacation Intervals was cited by
buyers as a primary reason for purchasing a Vacation Interval. Several
companies, including RCI, provide broad-based Vacation Interval exchange
services, and the Company's Existing Resorts are currently qualified for
participation in the RCI exchange network. In November 1996, HFS Incorporated
consummated its acquisition of RCI.
No assurance can be given that the Company will continue to be able to
qualify its Existing Resorts or the AVCOM Resorts, or will be able to qualify
its future resorts, for participation in the RCI network or any other exchange
network. RCI is under no obligation to include the Existing Resorts or the
AVCOM Resorts in its exchange network. If such exchange networks cease to
function effectively, or if the Company's resorts are not accepted as
exchanges for other desirable resorts, the Company's sales of Vacation
Intervals could be materially adversely effected. See "Business--Participation
in Vacation Interval Exchange Networks."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of Messrs. Kaneko, Gessow and Kenninger, who serve as the Company's
Chief Executive Officer, President, and Chief Operating Officer, respectively,
as well as the abilities of James E. Noyes and Michael A. Depatie, the
Company's Executive Vice President, and Executive Vice President and Chief
Financial Officer, respectively. The loss of the services of any one of these
individuals could have a material adverse effect on the Company, its
operations and its business prospects. See "Management--Employment
Agreements." The Company's success is also dependent upon its ability to
attract and maintain qualified development, acquisition, marketing,
management, administrative and sales personnel for which there is keen
competition among the Company's competitors. In addition, the cost of
retaining such key personnel could escalate over time. There can be no
assurance that the Company will be successful in attracting and/or retaining
such personnel.
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Pursuant to the Poipu Partnership Agreement, the Company may be removed as
managing general partner if, under certain circumstances, two of the three
Founders (Osamu Kaneko, Andrew J. Gessow and Steven C. Kenninger) are no
longer officers of the Company. In addition, the Poipu Partnership Agreement
provides that certain of the Founders will be actively involved in the
management of the Embassy Vacation Resort Poipu Point.
REGULATION OF MARKETING AND SALES OF VACATION INTERVALS; OTHER LAWS
The Company's marketing and sales of Vacation Intervals and other operations
are subject to extensive regulation by the federal government and the states
and foreign jurisdictions in which the Existing Resorts are located and in
which Vacation Intervals are marketed and sold. On a federal level, the
Federal Trade Commission has taken the most active regulatory role 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 appears in the Truth-in-Lending Act and
Regulation Z, the Equal Opportunity Credit Act and Regulation B, the
Interstate Land Sales Full Disclosure Act, Real Estate Standards Practices
Act, Telephone Consumer Protection Act, Telemarketing and Consumer Fraud and
Abuse Prevention Act, Fair Housing Act and the Civil Rights Acts of 1964 and
1968. In addition, many states have adopted specific laws and regulations
regarding the sale of interval ownership programs. The laws of most states,
including Florida, South Carolina and Hawaii, require the Company to file with
a designated state authority for its approval a detailed offering statement
describing the Company and all material aspects of the project and sale of
Vacation Intervals. The laws of California and Arizona require the Company to
file numerous documents and supporting information with their respective
Departments of Real Estate, the agencies responsible for the regulation of
Vacation Intervals. When such Departments determine that a project has
complied with applicable law, they will issue a public report for the project.
The Company is required to deliver an offering statement or public report to
all prospective purchasers of a Vacation Interval, together with certain
additional information concerning the terms of the purchase. The laws of
Illinois, Florida, Hawaii and Texas impose similar requirements. Laws in each
state where the Company sells Vacation Intervals generally grant the purchaser
of a Vacation Interval the right to cancel a contract of purchase at any time
within a period ranging from three to fifteen calendar days following the
earlier of the date the contract was signed or the date the purchaser has
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; seller's of travel licensure; anti-fraud laws;
telemarketing laws; price, gift and sweepstakes laws; and labor laws. 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.
However, no assurance can be given that the cost of qualifying under Vacation
Interval ownership regulations in all jurisdictions in which the Company
desires to conduct sales will not be significant or that the Company is in
fact in compliance with all applicable federal, state, local and foreign laws
and regulations. Any failure to comply with applicable laws or regulations
could have a material adverse effect on the Company. See "Business--
Governmental Regulation."
In addition, certain state and 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 the repairs made to the
developed property.
In connection with the resorts to be acquired in the Merger with AVCOM, the
California Department of Real Estate has conducted an audit with respect to
AVCOM timeshare operations at the Tahoe Beach & Ski Club and has informed
AVCOM of several discrepancies it claims to have discovered during such audit.
AVCOM has responded to the Department of Real Estate's request for additional
information and has been advised by the Department of Real Estate that it will
close its audit. In addition, the Arizona Department of Real Estate is
investigating AVCOM and its Scottsdale Villa Mirage and Sedona Summit Resorts
with respect to the alleged failure of John R. Stevens, AVCOM's Director of
Marketing and New Projects, to disclose certain events from his prior
development history in Colorado on timeshare registration applications filed
in Arizona and on certain other of AVCOM's timeshare-related activities. As a
result of the Arizona investigation, Mr. Stevens agreed to voluntarily resign
his position as an officer and director of AVCOM, and AVCOM and Mr. Stevens
are cooperating with the Arizona Department of Real Estate. AVCOM and Mr.
Stevens believe that they
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have satisfied all applicable requirements and the Arizona Department of Real
Estate has lifted its request for additional disclosure regarding Mr. Stevens
in public timeshare resorts filed in Arizona. The Texas Real Estate Commission
also has investigated AVCOM. The Company has been advised by the Texas Real
Estate Commission that based on information it has gathered and Mr. Stevens'
resignation as an officer of AVCOM's Texas subsidiaries, the Texas Real Estate
Commission will not take any action in this matter. Upon consummation of the
Merger with AVCOM, it is anticipated that Mr. Stevens will be employed by a
subsidiary of the Company. See "Management--Employment Agreements."
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, the
owner 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 knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner's
ability to sell or lease a property or to borrow using such real property as
collateral. 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.
As of the date of the Prospectus, Phase I environmental reports (which
typically involve inspection without soil sampling or ground water analysis)
have been prepared by independent environmental consultants for each Existing
Resort and for each AVCOM Resort. In connection with the acquisition and
development of the Embassy Vacation Resort Lake Tahoe and the San Luis Bay
Resort, the independent environmental consultants have identified several
areas of environmental concern. The areas of concern at the Embassy Vacation
Resort Lake Tahoe relate to possible soil and water contamination that
originated on the resort site due to prior uses and to contamination that may
migrate onto the resort site from upgradient sources. California regulatory
agencies have been monitoring the resort site and have required or are in the
process of requiring the responsible parties (presently excluding the Company)
to effect remediation action. The Company has been indemnified by certain of
such responsible parties for certain costs and expenses in connection with
contamination at the Embassy Vacation Resort Lake Tahoe (including Chevron
(USA), Inc.) and does not anticipate incurring material costs in connection
therewith; however, there is no assurance that the indemnitor(s) will meet
their obligations in a complete and timely manner. In addition, the Company's
San Luis Bay Resort is located in an area of Avila Beach, California which has
experienced underground contamination resulting from leaking pipes at a nearby
oil refinery. California regulatory agencies have required the installation of
groundwater monitoring wells on the beach near the resort site, and no demand
or claim in connection with such contamination has been made on the Company,
however, there is no assurance that claims will not be asserted against the
Company with respect to this environmental condition. In addition, while
remodeling the Carson Building at the Tahoe Beach & Ski Club, one of the AVCOM
Resorts, AVCOM's contractor informed AVCOM of the possible presence of
asbestos containing materials. AVCOM has given governmental and private
notification to various agencies and persons whom AVCOM determined, after
consulting with counsel, should receive notice. Civil and criminal penalties
could be assessed in this matter, however, it is the present belief of AVCOM,
after conferring with counsel, that such penalties are unlikely. Civil
liability for personal injury is also possible, but AVCOM's consultants do not
believe that the asbestos posed a substantial health hazard and that the
environmental concern has been remediated. The total additional cost to AVCOM
for the asbestos remediation, including all professional fees, was $325,000.
With the exception of the above mentioned resorts, the Company is not aware
of any environmental liability that would have a material adverse effect on
the Company's business, assets or results of operations. No
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assurance, however, can be given that these reports reveal all environmental
liabilities or that no prior owner created any material environmental
condition not known to the Company.
Certain environmental laws impose liability on a previous owner of property
to the extent that hazardous or toxic substances were present during the prior
ownership period. A transfer of the property does not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by its predecessors.
The Company believes that it and AVCOM are in compliance in all material
respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances and, except as described above with
respect to the Embassy Vacation Resort Lake Tahoe and the San Luis Bay Resort,
the Company has not been notified by any governmental authority or third party
of any non-compliance, liability or other claim in connection with any of its
present or former properties. See "Business--Governmental Regulation--
Environmental Matters."
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO
DISABLED PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons on a variety of public accommodations and
facilities. These requirements did not become effective until after January 1,
1991. Although the Company believes that its Existing Resorts and the AVCOM
Resorts are substantially in compliance with laws governing the accessibility
of its facilities to disabled persons, the Company may incur additional costs
of complying with such laws. Additional legislation may impose further burdens
or restriction on property owners (including homeowner associations at the
Existing Resorts) with respect to access by disabled persons. The ultimate
amount of the cost of compliance with such legislation is not currently
ascertainable, and, while such costs are not expected to have a material
effect on the Company, such costs could be substantial. Limitations or
restrictions on the completion of certain renovations may limit application of
the Company's growth strategy in certain instances or reduce profit margins on
the Company's operations. If a homeowners' association at a resort was
required to make significant improvements as a result of non-compliance with
the ADA, Vacation Interval owners may default on their mortgages and/or cease
making required homeowners' association assessment payments. The Company is
not aware of any non-compliance with the ADA, the Fair Housing Act or similar
laws that management believes would have a material adverse effect on the
Company's business, assets or results of operations.
NATURAL DISASTERS; UNINSURED LOSS
In 1992, prior to the Company's purchase of an interest in the Embassy
Vacation Resort Poipu Point, the resort was substantially destroyed by
Hurricane Iniki. The resort was rebuilt with insurance proceeds before the
Company acquired its interest in the resort, but could suffer similar damage
in the future. In September 1995 and July 1996, the Company's St. Maarten
resorts were damaged by hurricanes and could suffer similar damage in the
future. In addition, the Company's other resorts which are or will be located
in Hawaii, Florida and the Caribbean (including the recently-announced St.
John resort which was damaged by Hurricane Marilyn in 1995) may be subject to
hurricanes and damaged as a result thereof. The Company's resorts located in
California and Hawaii may be subject to damage resulting from earthquakes.
There are certain types of losses (such as losses arising from acts of war)
that are not generally insured because they are either uninsurable or not
economically insurable and for which the Company does not have insurance
coverage. 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.
See "Business--Insurance, Legal Proceedings."
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EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS; WESTIN DIRECTOR DESIGNATION
After giving effect to the Stock Offering and without giving effect to the
conversion of the Convertible Notes, the Founders will hold substantial
amounts of shares of Common Stock (Messrs. Kaneko, Gessow and Kenninger will
hold 14.0%, 16.1% and 7.2%, respectively, before consummation of the Merger)
which may allow them, collectively, to exert substantial influence over the
election of directors and the management and affairs of the Company.
Accordingly, if such persons vote their shares of Common Stock in the same
manner, they may have sufficient voting power to determine the outcome of
various matters submitted to the stockholders for approval, including mergers,
consolidations and the sale of substantially all of the Company's assets.
Pursuant to the Westin Agreement, during the term thereof Westin generally
will have the right to designate one member of the Company's Board of
Directors, irrespective of its share ownership in the Company. See "Principal
and Selling Stockholders," "Description of Capital Stock" and "Business--
Westin Vacation Club Resorts." Such control may result in decisions which are
not in the best interest of the Company. In addition, under certain
circumstances, in the event that the Founders collectively own less than 75%
of the shares of Common Stock owned by them immediately following the closing
of the Initial Public Offering and the consummation of the Consolidation
Transactions, and the Common Stock they own thereafter is less than 75% of the
market value of the Common Stock issued to them in the Initial Public
Offering, then the Company's partner in the Poipu Partnership will be entitled
to require the Company to either dispose of its interest or purchase such
partner's interest in the Poipu Partnership pursuant to the terms and
conditions of the partnership agreement.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be in the discretion of the Company's Board of Directors
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual
restrictions in respect of the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
RISK OF TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY; COST OF COMPLIANCE WITH APPLICABLE LAWS
The Company sells Vacation Intervals at its Existing Resorts and will sell
Vacation Intervals at the AVCOM Resorts through independent sales agents. Such
independent sales agents provide services to the Company under contract and,
the Company believes, are not employees of the Company. Accordingly, the
Company does not withhold payroll taxes from the amounts paid to such
independent contractors. Although the Internal Revenue Service has made
inquiries regarding the Company's classification of its sales agents at its
Branson, Missouri resort, no formal action has been taken and the Company has
requested that the inquiry be closed. In the event the Internal Revenue
Service or any state or local taxing authority were to successfully classify
such independent sales agents as employees of the Company, rather than as
independent contractors, and hold the Company liable for back payroll taxes,
such reclassification may have a material adverse effect on the Company.
Additionally, from time to time, potential buyers of Vacation Intervals
assert claims with applicable regulatory agencies against Vacation Interval
salespersons for unlawful sales practices. Such claims could have adverse
implications for the Company in negative public relations and potential
litigation and regulatory sanctions.
LIMITED RESALE MARKET FOR VACATION INTERVALS
The Company sells the Vacation Intervals to buyers for leisure and not
investment purposes. The Company believes, based on experience at its Existing
Resorts and AVCOM's Resorts, that the market for resale of Vacation Intervals
by buyers is presently limited, and that any resales of Vacation Intervals are
typically at prices
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substantially less than the original purchase price. These factors may make
ownership of Vacation Intervals less attractive to prospective buyers, and
attempts by buyers to resell their Vacation Intervals will compete with sales
of Vacation Intervals by the Company. In addition, the market price of
Vacation Intervals sold by the Company at a given resort or by its competitors
in the market in which each resort is located could be depressed by a
substantial number of Vacation Intervals offered for resale.
RISKS RELATED TO OPERATIONS IN ST. MAARTEN, NETHERLAND ANTILLES
Two of the Existing Resorts are located in St. Maarten, Netherland Antilles,
both of which were acquired by the Company in a foreclosure sale. There are a
number of ongoing disputes with owners who owned units at the Flamingo Beach
Club, including certain claims respecting their obligations to pay for annual
maintenance expenses or whether there are certain entitlements to guaranteed
returns. If such claims are adversely determined against the Company, such
determination may have a material adverse impact on the operation of this
property.
In addition, a portion of the Company's Royal Palm Beach Club resort located
in St. Maarten, Netherlands Antilles, is operated by the Company pursuant to a
long-term ground lease that expires in 2050 and the types of tenant
protections, such as estoppel certificates, which would be provided in the
United States, are not available. Although the Company is unaware of any
circumstances that could cause the early termination of such ground lease
before its scheduled expiration date, any such early termination or
cancellation of the ground lease could have an adverse effect on the Company's
operations. In addition, title insurance is not available in the Netherlands
Antilles. Accordingly, title to the Company's real property and ground lease
with respect to the Flamingo Beach Club and Royal Palm Beach Club resorts are
not insured, may be subject to challenge, and, if successfully challenged,
could result in additional costs to operate these resorts.
POTENTIAL CONFLICTS OF INTEREST
Because affiliates of Messrs. Kaneko and Kenninger have operations in the
lodging industry other than those with respect to the development and
operation of timeshare resorts, potential conflicts of interest exist.
Affiliates of KOAR, which are owned by Messrs. Kaneko and Kenninger, have
developed and currently act as the managing general partner of partnerships
which own five hotels that are franchised as Embassy Suites hotels (one of
which, the Embassy Suites Lake Tahoe, is located in a market served by the
Company) and a residential condominium project overlooking the ocean in Long
Beach, California (a market in which the Company may operate in the future).
Messrs. Kaneko and Kenninger will continue to devote a portion of their time
to KOAR's hotel business and to meeting their duties and responsibilities to
investors in such entities existing prior to the Consolidation Transactions
and the Initial Public Offering.
Additionally, notwithstanding their covenants not to compete, the Founders
have the right to pursue certain activities which could divert their time and
attention from the Company's business and result in conflicts with the
Company's business. The Founders are evaluating the acquisition of other hotel
properties in Hawaii, which at a future date may be converted to accommodate
timeshare operations. See "Management--Employment Agreements," "--Covenants
Not To Compete" and "Business--Future Acquisitions."
RISKS RELATED TO WESTIN AGREEMENT; LIMITED CONTROL OF RESORTS AND TERMINATION
The Westin Agreement may involve certain additional risks to the Company's
future operations. The Westin Agreement imposes certain restrictions on the
Company's ability to develop certain timeshare resorts in conjunction with
hotel operators other than Westin. Generally, the Company is required, subject
to certain exceptions involving Embassy Vacation Resorts and Promus, to submit
for Westin's consideration any "four-star" or "five-star" development
opportunity that the Company has determined to pursue. In the event Westin
determines not to proceed with the Company to develop such resort, the Company
would be free only to develop the resort as a "non-branded" property or as a
property branded as an Embassy Vacation Resort or in conjunction with other
upscale operators, but excluding specified operators of luxury hotels and
resorts. In addition, resorts acquired or developed pursuant to the Westin
Agreement, including the St. John resort, will be
28
<PAGE>
owned by partnerships, limited liability companies or similar entities in
which each of Westin and the Company will own a 50% equity interest and have
an equal voice in management. Accordingly, the Company will not be able to
control such resorts or the applicable entities. In addition, the Westin
Agreement will be terminable by either party if certain thresholds relating to
development or acquisitions of resorts are not met, in the event of certain
changes in management of Westin or the Company or in the event of an
acquisition or merger of either party. See "Business--Westin Vacation Club
Resorts" and "Risk Factors--Effective Voting Control of Existing Stockholders;
Westin Director Designation."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
CHARTER AND BYLAWS
Certain provisions of the Company's articles of incorporation (the
"Charter") and bylaws (the "Bylaws"), as well as Maryland corporate law, may
be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder might consider to be in the stockholder's
best interest. For example, such provisions may (i) deter tender offers for
Common Stock, which offers may be beneficial to stockholders or (ii) deter
purchases of large blocks of Common Stock, thereby limiting the opportunity
for stockholders to receive a premium for their Common Stock over then-
prevailing market prices. These provisions include the following:
Preferred Shares. The Charter authorizes the Board of Directors to issue
preferred stock in one or more classes and to establish the preferences and
rights (including the right to vote and the right to convert into Common
Stock) of any class of preferred stock issued. No preferred stock will be
issued or outstanding as of the closing of either of the Offerings. See
"Description of Capital Stock--Preferred Stock."
Staggered Board. The Board of Directors of the Company has three classes of
directors. The terms of the first, second and third classes will expire in
1997, 1998 and 1999, respectively. Directors for each class will be chosen for
a three-year term upon the expiration of the term of the current class,
beginning in 1997. The affirmative vote of two-thirds of the outstanding
Common Stock is required to remove a director.
Maryland Business Combination Statute. Under the Maryland General
Corporation Law ("MGCL"), certain "business combinations" (including the
issuance of equity securities) between a Maryland corporation and any person
who owns, directly or indirectly, 10% or more of the voting power of the
corporation's shares of capital stock (an "Interested Stockholder") must be
approved by a supermajority (i.e., 80%) of voting shares. In addition, an
Interested Stockholder may not engage in a business combination for five years
following the date he or she became an Interested Stockholder.
Maryland Control Share Acquisition. Maryland law provides that "Control
Shares" of a corporation acquired in a "Control Share Acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the
votes eligible under the statute to be cast on the matter. "Control Shares"
are voting shares of beneficial interest which, if aggregated with all other
such shares of beneficial interest previously acquired by the acquiror, would
entitle the acquiror directly or indirectly to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority or (iii) a majority of all voting power. Control
Shares do not include shares of beneficial interest the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "Control Share Acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at
a stockholders meeting and the acquiror becomes entitled to vote a majority of
the shares of beneficial interest entitled to vote, all other stockholders may
exercise appraisal rights. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
29
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Holders who received their shares of Common Stock as a result of the
Consolidation Transactions hold their shares subject to the limitations of
Rule 144 of the Securities Act ("Rule 144"). Such holders have been granted
certain registration rights pursuant to which the Company has agreed to file,
and use its best efforts to cause to become effective as soon as practicable
following February 17, 1997, a shelf registration statement with the
Commission for the purpose of registering the sale of such shares of Common
Stock. Each stockholder who received shares of Common Stock as a result of the
Consolidation Transactions has agreed, with certain exceptions, not to offer,
sell, contract to sell or otherwise dispose of any Common Stock, for a period
of 180 days after the closing of the Initial Public Offering (one year with
respect to the Founders) and 90 days after the closing of the Stock Offering
without the prior written consent of Montgomery Securities (which written
consent has been granted to the Selling Stockholders who are participating in
the Stock Offering); one of such exceptions allows the Founders to pledge
between $30 million and $50 million of their Common Stock to secure a margin
loan in a maximum amount of $10 million and another exception allows the
Founders to pledge approximately $5.8 million of their Common Stock in
connection with their buyout of a former partner. The Company and the officers
and directors of the Company who did not receive shares in the Consolidation
Transaction will also agree to a similar 90-day lock-up period. See "Shares
Eligible for Future Sale" and "Underwriting."
Future sales of substantial amounts of Common Stock, or the potential for
such sales, could adversely affect prevailing market prices. See "Shares
Eligible for Future Sale" and "Underwriting."
Sales of substantial amounts of Common Stock in the public market after the
consummation of the Merger could adversely affect prevailing market prices.
The estimated 843,942 shares of Common Stock to be issued in the Merger will
be eligible for immediate sale in the public market, subject to certain
limitations under the Securities Act applicable to affiliates of AVCOM.
Additionally, there are (i) outstanding stock options to purchase 1,750,000
shares of Common Stock which have been granted to executive officers, other
key employees, independent directors and a consultant of the Company under the
1996 Equity Participation Plan (less than 20% of which are presently
exercisable), (ii) up to 500,000 shares of Common Stock that may be sold
pursuant to the Company's Employee Stock Purchase Plan (none of which have
been sold to date) and (iii) shares of Common Stock issuable upon
conversion of the Convertible Notes.
CONCURRENT OFFERINGS
Concurrently with the offering of the Common Stock, the Company is
separately offering up to $100 million principal amount of its Convertible
Notes due 2007. The consummation of the Stock Offering is not conditioned upon
the consummation of the Convertible Offering. There can be no assurance that
the Convertible Offering will be consummated and, if so, on what terms.
Failure to consummate the Convertible Offering will adversely affect the
Company's ability to make the lower priority expenditures described under "Use
of Proceeds." See "Use of Proceeds."
30
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered by the Company hereby, based on an assumed public
offering price of $37.25 per share, and from the sale of the $100 million
aggregate principal amount of the % Convertible Subordinated Notes due 2007
offered by the Company in the Convertible Offering, based on an assumed public
offering price of 100% of the principal amount thereof, in each case after
deducting underwriting discounts and estimated expenses of the Stock Offering
and the Convertible Offering, are estimated to be $56.2 million and $96.7
million, respectively ($64.7 million and $111.3 million, respectively, if the
Underwriters' over-allotment options are exercised in full). The Stock
Offering and the Convertible Offering are not conditioned upon one another
and, therefore, one offering may be consummated, without the other offering
being consummated. See "Risk Factors--Concurrent Offerings."
The Company intends to use the net proceeds of the Offerings in the
following order of priority: (i) approximately $40.4 million to retire
existing indebtedness of the Company, (ii) approximately $21.1 million to
retire existing indebtedness of AVCOM that will be assumed by the Company in
the Merger, (iii) approximately $2.5 million to finance acquisition costs
related to the St. John Villas, and (iv) the balance to complete construction
and expansion at certain Existing Resorts and AVCOM Resorts, to finance the
acquisition and development of additional resorts and timeshare-related
assets, to finance sales of Vacation Intervals, and for working capital and
other general corporate purposes. Pending any such additional uses, the
Company will invest the excess proceeds in commercial paper, bankers'
acceptances, other short-term investment-grade securities and money-market
accounts.
Indebtedness to be repaid out of the net proceeds from the Offerings bear
interest at rates currently ranging between approximately 8.5% and 20% per
annum and maturities between February 1997 and January 2007. Indebtedness to
be repaid that was incurred within the last year was incurred for acquisitions
and development of timeshare resorts and for general corporate purposes. None
of the proceeds from the Offerings will be used to pay any delinquent
indebtedness.
The Company will not receive any of the proceeds of the sale of the
1,400,000 shares of Common Stock by the Selling Stockholders.
CONCURRENT OFFERINGS
The Stock Offering is being conducted concurrently with, but is not
conditioned upon, the public offering by the Company of $100 million aggregate
principal amount of its Convertible Notes (without giving effect to the
Underwriters' over-allotment option granted by the Company), at a price to the
public of % per Convertible Note.
This document does not constitute an offer to sell, or a solicitation of an
offer to buy, the Convertible Notes. The Convertible Notes will be registered
under the Securities Act and such securities will be offered only by means of
the related prospectus.
31
<PAGE>
COMMON STOCK PRICE RANGE
The Company's Initial Public Offering of Common Stock was consummated in
August 1996, at an initial public offering price of $14.00 per share. The
Company's Common Stock is quoted on Nasdaq National Market under the symbol
"SIGR." The following table sets forth, for the periods indicated, the high
and low sale prices for the Common Stock, as quoted on Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1996:
Third Quarter (commencing August 15, 1996).......... 24 5/8 13 5/8
Fourth Quarter (through December 17, 1996).......... 39 1/8 25
</TABLE>
A recent reported last sales price for the Company's Common Stock as quoted
on Nasdaq National Market is set forth on the cover of this Prospectus. On
December 17, 1996, there were approximately 71 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect of the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
32
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth, as of September 30, 1996, the total
consolidated capitalization of the Company on (i) an actual basis, (ii) pro
forma to give effect to the the Merger, (iii) as adjusted to give effect
to the sale of Common Stock offered in the Stock Offering and the application
of the estimated net proceeds to the Company therefrom, (iv) as adjusted to
give effect to the sale of the Convertible Notes offered in the Convertible
Offering and the application of the estimated net proceeds to the Company
therefrom and (v) as adjusted to give effect to both the Stock Offering and
the Convertible Offering. This table should be read in conjunction with the
historical and pro forma financial statements of the Company and the related
notes thereto included elsewhere in this Prospectus. See "Use of Proceeds,"
"Selected Consolidated Historical Financial Information of the Company" and
"Pro Forma Financial Information."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR AS ADJUSTED
PRO FOR STOCK CONVERTIBLE FOR THE
ACTUAL FORMA(1) OFFERING(2) OFFERING(3) OFFERINGS(4)
-------- -------- ----------- ----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt:
Notes payable to
financial
institutions(5)...... $ 81,145 $134,051 $112,951 $ 93,651 $ 72,551
% Convertible
Subordinated Notes
due 2007............. -- -- -- 100,000 100,000
-------- -------- -------- -------- --------
Total debt.......... 81,145 134,051 112,951 193,651 172,551
Stockholders' equity:
Common Stock, $0.01
par value;
shares issued and
outstanding(6)....... 174 182 198 182 198
Additional paid-in
capital.............. 98,515 100,747 156,944 100,747 156,944
Retained earnings..... 1,426 2,952 2,952 2,952 2,952
-------- -------- -------- -------- --------
Total stockholders'
equity............... 100,115 103,881 160,094 103,881 160,094
-------- -------- -------- -------- --------
Total
capitalization..... $181,260 $237,932 $273,045 $297,532 $332,645
======== ======== ======== ======== ========
</TABLE>
- --------
(1) The pro forma adjustments for the Merger represent the historical
financial statements of AVCOM. These adjustments assume the Merger will be
accounted for using the pooling-of-interests method of accounting. See
"Risk Factors--Rights Related to the Proposed Merger--Accounting
Treatment."
(2) Adjusted to give effect to the sale by the Company of 1,600,000 shares of
Common Stock offered in the Stock Offering at an assumed offering price of
$37.25 per share, less the underwriting discount and the payment by the
Company of the estimated offering expenses.
(3) Adjusted to give effect to the sale by the Company of $100 million of
Convertible Notes offered in the Convertible Offering at an assumed
offering price of 100% of their principal amount, less the underwriting
discount and the payment by the Company of the estimated offering
expenses.
(4) As adjusted to give effect to both the Stock Offering and the Convertible
Offering described in notes (2) and (3) above.
(5) Includes notes collateralized by notes receivable.
(6) Does not include an aggregate of 1,750,000 shares of Common Stock reserved
for issuance upon exercise of options granted pursuant to the Company's
1996 Equity Participation Plan, 500,000 shares of Common Stock reserved
for issuance pursuant to the Employee Stock Purchase Plan, 240,000 shares
of Common Stock which the Underwriters may purchase pursuant to the over-
allotment option granted to them by the Company and shares of Common
Stock issuable upon conversion of the Convertible Notes. See "Management--
1996 Equity Participation Plan" and "--Employee Stock Participation Plan"
and "Underwriting."
33
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated historical financial
information of the Company. For periods ending prior to September 30, 1996,
the financial information presented below combines each of the Company's
predecessor limited partnerships, limited liability companies and other
affiliated corporations that were combined into the Company in the
Consolidation Transactions. The following financial information does not give
effect to the proposed acquisition of AVCOM. Such information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
for the Company and the notes thereto which are contained elsewhere in this
Prospectus. Due to seasonality, other market factors and additions to the
number of the Company's resorts, the combined historical and pro forma results
for the nine months ended September 30, 1995 and 1996 are not necessarily
indicative of results for a full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ----------------------
1992 1993 1994 1995 1995 1996
------- -------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Vacation Interval
sales................. $11,328 $ 22,238 $ 40,269 $ 59,071 $ 46,385 $ 49,459
Interest income........ 402 1,825 3,683 6,929 4,669 6,627
Other income........... 115 373 338 6,608 2,641 7,646
------- -------- -------- -------- ---------- ----------
Total revenues......... 11,845 24,436 44,290 72,608 53,695 63,732
Costs and operating
expenses:
Vacation Interval cost
of sales.............. 2,999 5,708 12,394 15,650 12,547 11,255
Advertising, sales and
marketing............. 4,734 10,809 18,745 28,488 22,429 24,408
Loan portfolio
Interest expense--
treasury............. 168 674 1,629 3,586 2,533 4,022
Other expenses........ 50 208 851 1,189 758 1,048
Provisions for
doubtful accounts.... 555 619 923 1,787 1,471 1,372
General and
administrative
Resort-level.......... 665 2,346 2,864 4,947 2,760 4,961
Corporate............. 375 877 874 1,607 1,130 2,428
Depreciation and
amortization.......... 209 384 489 1,675 1,158 1,675
Interest expense--
other................. -- 518 959 476 344 1,868
------- -------- -------- -------- ---------- ----------
Total costs and
operating expenses.... 9,755 22,143 39,728 59,405 45,130 53,037
Net operating income... 2,090 2,293 4,562 13,203 8,565 10,695
Equity loss on
investment in joint
venture............... -- -- 271 1,649 1,293 95
------- -------- -------- -------- ---------- ----------
Net income before
taxes................. 2,090 2,293 4,291 11,554 7,272 10,600
Income taxes........... -- -- -- 641 210 539
------- -------- -------- -------- ---------- ----------
Net income............. $ 2,090 $ 2,293 $ 4,291 $ 10,913 $ 7,062 $ 10,061
======= ======== ======== ======== ========== ==========
Pro forma net
income(a)............. 1,301 1,414 2,674 7,206 4,533 6,608
Pro forma net income
per share of common
stock(a).............. -- -- -- -- .40 .54
Pro forma weighted
average number of
shares of common stock
outstanding........... -- -- -- -- 11,354,705 12,321,759
OTHER DATA:
Ratio of earnings to
fixed charges(b)....... 4.23 2.00 1.82 2.77 2.56 2.07
Pro forma ratio of
earnings to fixed
charges(c)............. -- -- -- 3.48 -- 2.27
EBITDA(d)............... $ 2,467 $ 3,869 $ 7,368 $ 17,291 $ 11,307 $ 18,165
Cash flows provided by
(used in)
Operating activities... (6,166) (3,262) (10,964) 2,304 4,345 (21,851)
Investing activities... (51) (10,776) (24,940) (36,919) (31,382) (27,390)
Financing activities... 5,146 15,341 36,134 37,102 30,121 54,744
Number of resorts at
period end............. 1 3 4 7 7 9
Number of Vacation
Intervals sold(e)...... 1,284 2,442 4,482 5,675 4,321 5,157
Numbers of Vacation
Intervals in
inventory(e)........... 1,164 1,233 2,401 9,917 18,122 22,509
Average price of
Vacation Intervals
sold(e)................ $ 8,822 $ 9,106 $ 8,985 $ 11,353 $ 11,196 $ 13,223
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash, including cash in
escrow................. $ 850 $ 2,567 $ 4,282 $ 6,288 $ 6,757 $ 11,339
Total assets............ 18,739 38,230 82,454 138,085 126,643 214,529
Long-term debt.......... 9,696 22,931 44,415 84,738 75,066 81,145
Stockholders' equity.... 7,439 11,838 30,780 38,470 37,312 100,115
</TABLE>
34
<PAGE>
- --------
(a) Reflects the effect on historical statement of operations data, assuming
the combined Company had been treated as a C corporation rather than as
individual limited partnerships and limited liability companies for
federal income tax purposes.
(b) The ratio of earnings to fixed charges has been computed by dividing
earnings before income tax plus fixed charges (excluding capitalized
interest) and amortization of previously capitalized interest by fixed
charges. Fixed charges consist of interest and other finance expenses and
capitalized interest.
(c) The pro forma ratio of earnings to fixed charges has been computed as
described in (b) above after giving effect to the net decrease in interest
expense resulting from the portion of the Convertible Offering used to
retire existing indebtedness of the Company. See "Use of Proceeds."
(d) As shown below, EBITDA represents net income before interest expense,
income taxes and depreciation and amortization. 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 an alternative to net income as a measure of the Company's
operating results or to operating cash flow as a measure of liquidity. The
following table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ---------------
1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income.................. $2,090 $2,293 $4,291 $10,913 $ 7,062 $10,061
Interest expense--treasury.. 168 674 1,629 3,586 2,533 4,022
Interest expense--other..... -- 518 959 476 344 1,868
Taxes....................... -- -- -- 641 210 539
Depreciation and
amortization............... 209 384 489 1,675 1,158 1,675
------ ------ ------ ------- ------- -------
EBITDA...................... $2,467 $3,869 $7,368 $17,291 $11,307 $18,165
====== ====== ====== ======= ======= =======
</TABLE>
(e) Includes the effect of sales or inventory of Vacation Intervals at the
Company's non-consolidated resort (the Embassy Vacation Resort Poipu
Point).
35
<PAGE>
SELECTED FINANCIAL DATA OF AVCOM INTERNATIONAL, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The statements of operations for the years ended December 31, 1993, 1994 and
1995 and the balance sheet data as of December 31, 1994 and 1995 are derived
from AVCOM's consolidated financial statements and notes thereto which have
been audited by Ernst & Young LLP, independent public accountants, and are
included elsewhere in this Prospectus. Balance sheet data as of December 31,
1993 is derived from AVCOM's consolidated financial statements which have been
audited by Ernst & Young LLP, independent public accountants, which are not
included in this Prospectus. The statements of operations and the balance
sheet data for and as of the nine months ended September 30, 1995 and 1996 and
the statements of operations and balance sheet data for and as of December 31,
1991 and December 31, 1992 have been derived from unaudited financial
statements that in the opinion of AVCOM's management reflects all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial information for such periods and of such dates. The selected
consolidated financial data presented below should be read in conjunction with
AVCOM's consolidated financial statements, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS:
Revenues:
Sales of Vacation
Intervals............ $6,416 $9,859 $ 14,481 $ 24,130 $ 33,231 $ 24,821 $ 30,411
Timeshare management.. -- -- 452 650 1,256 962 1,059
Contract commission
revenue.............. -- -- -- -- -- -- 497
Gain on sale of notes
receivable........... -- -- 167 571 566 564 77
Health club revenue... -- -- -- -- -- -- 375
Other................. -- -- 99 66 193 137 250
------ ------ --------- --------- --------- --------- ---------
Total revenues........ 6,416 9,859 15,199 25,417 35,246 26,484 32,669
Costs and operating
expenses:
Cost of Vacation
Intervals sold....... 1,676 2,641 3,548 6,792 11,081 7,682 8,744
Marketing and selling. 3,212 4,921 6,950 12,232 13,920 11,232 15,117
Timeshare management.. -- -- 547 743 1,571 1,023 1,769
Contract marketing and
selling.............. -- -- -- -- -- -- 974
Health club expenses.. -- -- -- -- -- -- 572
General and
administrative....... 323 715 1,621 3,034 4,780 3,256 6,229
Resort property
valuation allowance.. -- -- -- -- -- -- 839
Provision for doubtful
accounts............. 322 140 251 371 792 212 1,055
------ ------ --------- --------- --------- --------- ---------
Total costs and
operating expenses... 5,533 8,417 12,917 23,172 32,144 23,405 35,299
Operating income
(loss)............... 883 1,442 2,282 2,245 3,102 3,079 (2,630)
Minority interest in
consolidated limited
partnership.......... -- -- -- -- -- -- (112)
Interest and financing
costs................ (42) (299) (335) (809) (1,818) (1,122) (2,944)
Interest income....... 35 179 236 180 594 253 2,396
------ ------ --------- --------- --------- --------- ---------
Income (loss) before
income taxes......... 876 1,322 2,183 1,616 1,878 2,210 (3,290)
Income taxes
(benefit)............ 0 0 1,970 695 838 936 (1,316)
------ ------ --------- --------- --------- --------- ---------
Net income (loss)..... $ 876 $1,322 $ 213 $ 921 $ 1,040 $ 1,274 $ (1,974)
====== ====== ========= ========= ========= ========= =========
Cumulative preferred
stock dividends...... -- -- -- 105 105 79 79
------ ------ --------- --------- --------- --------- ---------
Net income (loss)
available for holders
of Common Stock...... -- -- -- 816 935 1,195 (2,053)
====== ====== ========= ========= ========= ========= =========
Earnings (loss) per
share of Common Stock
(pro forma in
1993)(a)............. -- -- 0.27 0.16 0.17 0.22 (0.41)
Weighted average
number of shares of
common stock and
common stock
equivalents (pro
forma in 1993)....... -- -- 4,682,507 4,942,759 5,554,089 5,530,669 4,987,080
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(b)............... $ 1,052 $ 1,738 $ 2,574 $ 2,571 $ 3,881 $ 3,463 $ 502
Cash flows provided by
(used in):
Operating activities... 291 (3,545) 2,907 291 3,564 3,101 1,327
Investing activities... (43) (120) (2,197) (1,926) (13,413) (9,009) (17,904)
Financing activities... (247) 3,636 (183) 1,046 11,378 6,164 15,735
Number of existing
resorts at period end.. 1 2 2 4 4 4 9
Number of Vacation
Intervals sold......... 605 922 1,061 1,987 2,304 1,809 1,994
Number of Vacation
Intervals in inventory. 1,078 2,196 1,211 3,948 1,995 2,322 8,888
Average price of
Vacation Intervals..... $10,609 $10,693 $13,650 $12,140 $ 14,420 $ 13,720 $ 15,600
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash, including cash in
escrow................. 64 35 589 1,026 1,807 486 687
Total assets............ 2,658 7,385 8,459 20,852 35,934 31,380 78,283
Long-term debt
(including capitalized
leases)................ 82 4,477 3,454 12,960 23,453 18,540 52,906
Stockholders' equity(c). 1,078 1,724 2,514 3,415 5,340 5,673 3,766
</TABLE>
- --------
(a) See Footnote 1 to AVCOM's consolidated financial statements.
(b) As shown below, EBITDA represents net income (loss) before interest
expense, income taxes and depreciation and amortization. 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 an alternative to net income as a measure of
AVCOM's operating results or to operating cash flow as a measure of
liquidity. The following table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........... $ 876 $1,322 $ 213 $ 921 $1,040 $1,274 $(1,974)
Interest and financing
costs...................... 42 299 335 809 1,818 1,122 2,944
Taxes....................... 0 0 1,970 695 838 936 (1,316)
Depreciation and
amortization............... 134 117 56 146 185 131 848
------ ------ ------ ------ ------ ------ -------
EBITDA...................... $1,052 $1,738 $2,574 $2,571 $3,881 $3,463 $ 502
====== ====== ====== ====== ====== ====== =======
</TABLE>
- --------
(c)Partners' capital for 1991 and 1992.
37
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma statements of operations data set forth below for the year
ended December 31, 1995 and for the nine month periods ended September 30,
1995 and 1996 give effect, individually and in the aggregate, to the
following: (i) the Consolidation Transactions and the Initial Public Offering
and (ii) the Merger, in each case, as if each had occurred at the beginning of
the period. The pro forma adjustments are based upon currently available
information and certain assumptions that management of the Company believes
are reasonable under current circumstances.
PRO FORMA STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------
CONSOLIDATION
TRANSACTIONS/
INITIAL
COMPANY PUBLIC THE COMPANY
ACTUAL OFFERING(A) MERGER(B) PRO FORMA
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue
Vacation Interval sales.... $ 59,071 $ -- $33,231 $ 92,302
Interest income............ 6,929 -- 594 7,523
Other income............... 6,608 320 (c) 444 7,372
---------- --------- ------- ----------
Total revenues........... 72,608 320 34,269 107,197
---------- --------- ------- ----------
Costs and Operating Expenses
Vacation Interval cost of
sales..................... 15,650 (64)(d) 11,081 26,667
Advertising, sales and
marketing................. 28,488 -- 13,920 42,408
Loan portfolio
Interest expense......... 3,586 (3,586)(d) 518 518
Other expenses........... 1,189 (115)(d) -- 1,074
Provision for doubtful
accounts................ 1,787 -- 792 2,579
General and administrative
Resort-level............. 4,947 -- -- 4,947
Corporate................ 1,607 -- 4,595 6,202
Depreciation and
amortization.............. 1,675 -- 185 1,860
Other interest expense..... 476 (476)(d) 1,300 1,300
---------- --------- ------- ----------
Total costs and operating
expenses................ 59,405 (4,241) 32,391 87,555
---------- --------- ------- ----------
Net Operating Income......... 13,203 4,561 1,878 19,642
Loss (Gain) on equity
investment................ 1,649 155 (e) -- 1,804
---------- --------- ------- ----------
Income Before Taxes 11,554 4,406 1,878 17,838
Income taxes............... 641 5,656 (f) 838 7,135
---------- --------- ------- ----------
Net income................... $ 10,913 $ (1,250) $ 1,040 $ 10,703
========== ========= ======= ==========
Pro forma net income per
share of Common Stock....... $ 0.96 $ 0.59
Pro forma weighted average
number of shares of Common
Stock outstanding........... 11,354,705 6,037,500 843,942(g) 18,236,147
</TABLE>
- -------
(a) Reflects the Initial Public Offering of 6,037,500 shares of Common Stock.
(b) The pro forma adjustments for the Merger assume pooling-of-interests
accounting and reflect the historical statement of operations of AVCOM for
the year ended December 31, 1995.
(c) Reflects increase in interest income due to the purchase of loans from
certain combining interests of $2.7 million relating to loans made by such
combining interests to the joint venture. The loans carry interest at 12%
per annum.
(d) Reflects the following: (i) the elimination or reduction of interest
expense due to the retirement of $53.5 million of debt; (ii) the reduction
of Vacation Interval cost of sales due to the reduction of capitalized
interest related to the retirement of debt; and (iii) the elimination of
financing fees on advances not required as a result of the debt
retirement. The average interest rate on the debt retired was 10.82%.
(e) Reflects the increase of goodwill amortization on the purchase of a joint
venture interest.
(f) Reflects the effect on 1995 historical statement of operations data of
(c)-(e) above and assumes the combined Company had been treated as a
C corporation rather than as limited partnerships and limited liability
companies for federal income tax purposes.
(g) Represents the number of shares estimated to be issued in connection with
the Merger using an assumed conversion ratio of 0.16.
38
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS DATA
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------------- ---------------------------------------------------
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS
------------------------- --------------------------
CONSOLIDATION
TRANSACTIONS/ CONSOLIDATION
INITIAL TRANSACTIONS/
COMPANY PUBLIC THE COMPANY COMPANY INITIAL PUBLIC THE COMPANY
ACTUAL OFFERING(A) MERGER(B) PRO FORMA ACTUAL OFFERING(A) MERGER(B) PRO FORMA
---------- ------------- --------- ---------- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue
Vacation Interval
sales................. $ 46,385 $ -- $24,821 $ 71,206 $ 49,459 $ -- $30,411 $ 79,870
Interest income........ 4,669 -- 253 4,922 6,627 -- 2,396 9,023
Other income........... 2,641 240 (c) 640 3,521 7,646 210 (c) (1,057) 6,799
---------- --------- ------- ---------- ---------- --------- ------- ----------
Total revenues......... 53,695 240 25,714 79,649 63,732 210 31,750 95,692
Costs and Operating
Expenses:
Vacation Interval cost
of sales.............. 12,547 (50)(d) 7,682 20,179 11,255 (50)(d) 8,744 19,949
Advertising, sales and
marketing............. 22,429 -- 11,232 33,661 24,408 -- 15,117 39,525
Loan portfolio
Interest expense..... 2,533 (2,533)(d) 78 78 4,022 (2,212)(d) 1,349 3,159
Other expenses....... 758 (90)(d) -- 668 1,048 (66)(d) -- 982
Provision for
doubtful accounts... 1,471 -- 212 1,683 1,372 -- 1,055 2,427
General and
administrative
Resort-level......... 2,760 -- -- 2,760 4,961 -- -- 4,961
Corporate............ 1,130 -- 3,125 4,255 2,428 -- 5,458 7,886
Depreciation and
amortization.......... 1,158 -- 131 1,289 1,675 -- 771 2,446
Other interest
expense............... 344 (344)(d) 1,044 1,044 1,868 (1,840)(d) 1,595 1,623
---------- --------- ------- ---------- ---------- --------- ------- ----------
Total costs and
operating expenses.... 45,130 (3,017) 23,504 65,617 53,037 (4,168) 34,089 82,958
Net Operating Income.... 8,565 3,257 2,210 14,032 10,695 4,378 (2,339) 12,734
Loss (Gain) on equity
investment ........... 1,293 62 (e) -- 1,355 95 390 (e) -- 485
Minority interest in
profits of limited
partnership........... -- -- -- -- -- -- 112 112
Resort property
valuation allowance... -- -- -- -- -- -- 839 839
---------- --------- ------- ---------- ---------- --------- ------- ----------
Income Before Taxes..... 7,272 3,195 2,210 12,677 10,600 3,988 (3,290) 11,298
Income taxes........... 210 3,925 (f) 936 5,071 539 5,296 (f) (1,316) 4,519
---------- --------- ------- ---------- ---------- --------- ------- ----------
Net income.............. $ 7,062 $ (730) $ 1,274 $ 7,606 $ 10,061 $ (1,308) $(1,974) $ 6,779
========== ========= ======= ========== ========== ========= ======= ==========
Pro forma net income per
share of Common Stock.. $ 0.62 $ 0.42 $ 0.82 $ 0.37
Pro forma weighted
average of number of
shares of Common Stock
outstanding............ 11,354,705 6,037,500 (g) 843,942(h) 18,236,147 12,321,759 5,173,077 (g) 843,942 (h) 18,338,778
</TABLE>
- -------
(a) The consolidated pro forma statements of operations all give effect to the
exchange of direct and indirect interest in, and obligations of, certain
predecessor limited partnerships, limited liability companies and
corporations for shares of the Company's Common Stock in the Consolidation
Transactions as if it had occurred at the beginning of the period
indicated. The Consolidation Transactions were consummated concurrently
with the Initial Public Offering in August 1996. The pro forma adjustments
are based upon currently available information and certain assumptions
that the Company's management believes are reasonable under current
circumstances.
(b) The pro forma adjustments for the Merger assume pooling-of-interests
accounting and reflect the historical statements of operations data for
AVCOM.
(c) Reflects increase in interest income due to the assumption of notes
receivable in the Consolidation Transactions of $2.7 million. Such notes
bear interest at a rate of 12% per annum.
(d) Reflects the following: (i) the elimination or reduction of interest
expense due to the retirement of $54.3 million of debt retirement with
respect to the period ended September 30, 1996; (ii) the reduction of
Vacation Interval cost of sales due to the reduction of capitalized
interest related to the retirement of construction debt; and (iii) the
elimination of financing fees on advances not required as a result of the
debt retirement. The average interest rate on a per annum basis on the
debt retired was 11.5% for the nine months ended September 30, 1996.
(e) Reflects the increase in goodwill amortization on the purchase of a joint
venture interest.
(f) Reflects the effects on historical statements of operations data of (c)-
(e) above and assumes the combined Company had been treated as a C
corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes.
(g) Reflects the Initial Public Offering of 6,037,500 shares and approximately
1,400,000 options granted to employees and directors to acquire shares
issued during the nine months ended September 30, 1996.
(h) Includes the estimated number of shares that will be issued in connection
with the Merger using an assumed conversion ratio of 0.16.
39
<PAGE>
The pro forma balance sheet data set forth below at September 30, 1996 give
effect to the Merger as if it had occurred on September 30, 1996. The pro
forma adjustments are based upon currently available information and certain
assumptions that management of the Company believes are reasonable under
current circumstances.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
PRO FORMA
COMPANY THE COMPANY
ACTUAL MERGER(A) PRO FORMA
-------- --------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 9,844 $ 687 $ 10,531
Cash in escrow................................ 1,495 -- 1,495
Mortgages receivable.......................... 87,956 36,659 124,615
Due from related parties...................... 4,567 1,320 5,887
Other receivables, net........................ 8,249 1,037 9,286
Prepaid expenses and other assets............. 2,275 5,225 7,500
Investment in joint venture................... 7,538 -- 7,538
Real estate and development costs............. 85,030 26,705 111,735
Property and equipment, net................... 2,733 5,580 8,313
Intangible assets, net........................ 4,842 470 5,312
Investment in common stock.................... -- 600 600
-------- ------- --------
Total assets.............................. $214,529 $78,283 $292,812
======== ======= ========
LIABILITIES AND EQUITY:
Accounts payable.............................. $ 7,903 $ 9,665 $ 17,568
Accrued liabilities........................... 11,766 8,383 20,149
Due to related parties........................ 1,632 354 1,986
Income taxes payable.......................... 569 -- 569
Deferred taxes................................ 11,399 1,597 12,996
Notes payable to financial institutions....... 81,145 52,906 134,051
-------- ------- --------
Total liabilities............................. 114,414 72,905 187,319
Minority interest in consolidated limited
partnership.................................. -- 1,612 1,612
Equity........................................ 100,115 3,766 103,881
-------- ------- --------
Total liabilities and equity.............. $214,529 $78,283 $292,812
======== ======= ========
</TABLE>
- --------
(a) The pro forma adjustments for the Merger represent the historical
financial statements of AVCOM. These adjustments assume that the Merger
will be accounted for using the pooling of interests method of accounting.
See "Risk Factors--Risks Related to the Proposed Merger--Accounting
Treatment."
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Signature Resorts, Inc. was formed in May 1996 to combine the ownership of
the Existing Resorts and the timeshare acquisition and development business of
the Company's predecessors. The Company generates revenues from the sale and
financing of Vacation Intervals in resorts, which typically entitle the buyer
to the use in perpetuity of a fully-furnished vacation resort in perpetuity,
generally for a one-week period each year. The Company generates additional
revenues from room rental operations, rentals of Vacation Intervals in Company
inventory and from fees associated with managing the resorts.
As part of its growth and acquisition strategy, the Company in September
1996 entered into the Merger Agreement to acquire AVCOM, the parent company of
All Seasons, a developer, marketer and operator of timeshare resorts in
Arizona, California and Texas. AVCOM currently operates nine resorts, which
include two under construction, and a tenth resort in which AVCOM holds a
partial interest. Five of AVCOM's resorts are located in Sedona, Arizona, two
are located in South Lake Tahoe, California and one resort is located in each
of Lake Arrowhead, California, Lake Conroe (near Houston), Texas, and
Scottsdale, Arizona. AVCOM currently sells Vacation Intervals at six of its
ten resorts, sales at three resorts have been substantially completed and
sales at one resort have yet to commence. The Company anticipates that the
Merger will be consummated in the first quarter of 1997, assuming all
conditions to closing are timely satisfied. See "The Proposed Merger" and
"Risk Factors--Risks Related to the Proposed Merger."
The Company recognizes sales of Vacation Intervals on an accrual basis after
a binding sales contract has been executed between the Company and the
proposed buyer, a 10% minimum down payment has been received, the rescission
period has expired, construction is substantially complete, and certain
minimum sales levels are achieved. If all the criteria are met, except that
construction is not substantially complete, revenues are recognized on the
percentage-of-completion basis. Costs associated with the acquisition and
development of timeshare resorts, including carrying costs such as interest
and taxes, are capitalized as real estate and development costs and allocated
as Vacation Interval cost of sales as the respective revenue is recognized.
The Company's investment in the Embassy Vacation Resort Poipu Point is
accounted for using the equity method and reflected on the balance sheet as
"Investment in joint venture" and on the income statement as "Equity loss on
investment in joint venture."
RESULTS OF OPERATIONS
The following discussion of the results of operations relates to entities
comprising the Company on a combined historical basis. The results of
operations only reflect operations of entities in existence for each
respective reporting year. The following table sets forth certain operating
information for the entities comprising the Company.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL
REVENUES
Vacation Interval sales......... 91.0% 90.9% 81.4% 86.4% 77.6%
Interest income................. 7.5% 8.3% 9.5% 8.7% 10.4%
Other income.................... 1.5% 0.8% 9.1% 4.9% 12.0%
-------- -------- -------- ------ ------
Total Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ====== ======
AS A PERCENTAGE OF VACATION
INTERVAL SALES
Vacation Interval cost of sales. 25.7% 30.8% 26.5% 27.1% 22.8%
Advertising, sales and
marketing...................... 48.6% 46.5% 48.2% 48.4% 49.4%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
----------------------- ------------------
1993 1994 1995 1995 1996
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF INTEREST INCOME
Loan Portfolio:
Interest expense--treasury...... 36.9% 44.2% 51.8% 54.2% 60.7%
Other expenses.................. 11.4% 23.1% 17.2% 16.2% 15.8%
AS A PERCENTAGE OF TOTAL REVENUES
Provision for doubtful accounts... 2.5% 2.1% 2.5% 2.7% 2.2%
General and administrative........ 13.2% 8.4% 9.0% 7.2% 11.6%
Depreciation and amortization..... 1.6% 1.1% 2.3% 2.2% 2.6%
Interest expense--other........... 2.1% 2.2% 0.7% 0.6% 2.9%
Equity loss on investment in joint
venture.......................... -- 0.6% 2.3% 2.4% 0.0%
------ ------ ------- -------- --------
Total costs and operating
expenses....................... 90.6% 90.3% 84.1% 83.4% 80.3%
====== ====== ======= ======== ========
SELECTED OPERATING DATA:
Vacation Intervals sold at
Existing Resorts(1).............. 2,442 4,482 5,675 4,321 5,157
Vacation Intervals sold at
Consolidated Resorts(2).......... 2,442 4,482 5,394 4,209 4,233
Vacation Intervals sold at non-
branded resorts(3)............... 2,442 4,482 3,871 2,961 3,226
Vacation Intervals sold at Embassy
Vacation Resorts(4).............. -- -- 1,804 1,360 1,931
Average sales price per Vacation
Interval at Consolidated
Resorts(5)....................... $9,106 $8,985 $10,953 $ 11,020 $ 11,684
Average sales price per Vacation
Interval at non-branded
resorts(6)....................... $9,106 $8,985 $10,120 $ 10,265 $ 10,757
Average sales price per Vacation
Interval at Embassy Vacation
Resorts(7)....................... -- -- $13,999 $ 13,222 $ 17,343
Number of Vacation Intervals in
inventory at period-end(8)....... 1,233 2,401 9,917 18,122 22,509
</TABLE>
- --------
(1) Reflects Vacation Intervals sold at the Company's Existing Resorts:
Cypress Pointe Resort, Plantation at Fall Creek, Royal Dunes Resort, Royal
Palm Beach Club, Flamingo Beach Club, San Luis Bay Resort, Embassy
Vacation Resort Grand Beach, and Embassy Vacation Resort Poipu Point.
Embassy Vacation Resort Lake Tahoe sales during the third quarter are not
presented because there were none eligible for accrual under the
percentage of completion method.
(2) Reflects Vacation Intervals sold at the Company's Existing Resorts, with
the exception of Vacation Intervals sold at the Embassy Vacation Resort at
Poipu Point in which the Company holds a partial interest and is accounted
for by the Company under the equity method (the "Consolidated Resorts").
(3) Reflects Vacation Intervals sold at the Company's non-branded resorts.
(4) Reflects Vacation Intervals sold at the Embassy Vacation Resort Grand
Beach and 112 Vacation Intervals sold at the non-consolidated Embassy
Vacation Resort Poipu Point for the nine months ended September 30, 1995
and 924 Vacation Intervals sold for the nine months ended September 30,
1996, respectively.
(5) Reflects average price achieved on sales of Vacation Intervals at
Consolidated Resorts.
(6) Reflects average price achieved on sales of Vacation Intervals at non-
branded resorts.
(7) Reflects average price achieved on sales of Vacation Intervals at Embassy
Vacation Resorts.
(8) Reflects Vacation Interval inventory at all Existing Resorts.
42
<PAGE>
Comparison of the nine months ended September 30, 1996 to the nine months
ended September 30, 1995. For the nine months ended September 30, 1996, the
Company achieved total revenue of $63.7 million compared to $53.7 million for
the nine months ended September 30, 1995, an increase of $10.0 million or 19%.
Total revenue grew primarily due to a 7% increase in Vacation Interval sales
to $49.5 million from $46.4 million, a 40% increase in interest income to $6.6
million from $4.7 million, and a 192% increase in resort operations and other
income to $7.6 million from $2.6 million during the nine months ended
September 30, 1996 as compared to the comparable period in 1995, respectively.
A complete nine months of Vacation Interval sales at Royal Palm and Flamingo
Beach Club, and the commencement of sales at the San Luis Bay Resort in June
1996 drove the 7% increase in Vacation Interval sales volume at the
Consolidated Resorts.
For the nine months ended September 30, 1996 Vacation Interval sales at the
Existing Resorts grew to $82.3 million from $55.7 million for the comparable
period in 1995, an increase of 48%. Vacation Interval sales at the
Consolidated Resorts increased 7% to $49.5 million and from $46.4 million for
the comparable period in 1995. The average price of Vacation Intervals sold at
the Consolidated Resorts, grew during the period to $11,684 from $11,020, an
increase of 6%. The number of Vacation Intervals sold at the Consolidated
Resorts increased during the period approximately 1% to 4,233 from 4,209.
Management attributes the increase in Vacation Intervals sold to commencement
of sales of Vacation Intervals at the San Luis Bay Resort and increasingly
more effective marketing programs.
Vacation Interval sales at non-branded resorts increased 9% to 3,226 for the
nine months ended September 30, 1996 from 2,961 for 1995. Average sales price
per Vacation Interval at non-branded resorts increased by 5% to $10,757 in
1996 from $10,265 in 1995. These increases are attributed to the commencement
of sales of Vacation Intervals at the San Luis Bay Resort in June 1996 and
increasingly more effective marketing programs.
Vacation Interval sales at Embassy Vacation Resorts, increased 42% to 1,931
in the first nine months of 1996 from 1,360 in the first nine months of 1995
while the average price per Vacation Interval increased 31% to $17,343 in the
first nine months of 1996 from $13,222 in the first nine months of 1995. These
increases primarily resulted from a full nine months of sales at the Embassy
Vacation Resort Poipu Point, as the resort was not in operation for the entire
nine months ended September 30, 1995.
Interest income increased by 40% to $6.6 million in the first nine months of
1996 from $4.7 million in the first nine months of 1995 due to a $19.7 million
increase in mortgages receivables, which grew to $88.0 million at September
30, 1996 from $68.3 million at December 31, 1995, an increase of 29% coupled
with increased interest rates and a full year of interest income on all
properties.
Other income increased by $5.0 million to $7.6 million during the nine
months ended September 30, 1996 from $2.6 million during the nine months ended
September 30, 1995. This increase was the result of rental income at the
resorts increasing to $1.2 million from $0.7 million in 1995, and the
acquisition of a mortgage receivable portfolio in July, 1995 on which the
Company earned $3.1 million during the 1996 nine months and $1.3 million
during the 1995 nine months.
Operating costs increased to $51.2 million for the nine months ended
September 30, 1996 from $44.8 million for the nine months ended September 30,
1995, an increase of 14%. However, as a percentage of revenues, operating
costs decreased to 80% during the nine months ended September 30, 1996 from
83% during the nine months ended September 30, 1995. Relative decreases in
Vacation Interval cost of sales and other expenses as a percentage of revenues
were offset by relative increases in advertising, sales, marketing, and
interest expense-treasury, depreciation and amortization and general and
administrative expenses. The Company was able to purchase and construct
Vacation Intervals at a discount to historical development costs, reducing the
unit cost on average for each Vacation Interval sold. This, coupled with an
increase in average sales price per unit, has resulted in a proportionate
decrease in costs of Vacation Intervals sold to 23% of Vacation Interval sales
during the nine months ended September 30, 1996 from 27% of Vacation Interval
sales during the nine months ended September 30, 1995.
Loan portfolio expenses consisting of interest expense, other expenses and
provision for doubtful accounts increased to $6.4 million during the nine
months ended September 30, 1996 from $4.8 million during the nine
43
<PAGE>
months ended September 30, 1995, an increase of 33%. This increase reflects
the 57% increase in average mortgages payable due to increased factoring of
mortgages receivable related to Vacation Interval sales growth, an increased
factoring rate, and acquisitions of resorts made by the Company during the
nine months ended September 30, 1996.
General and administrative expenses increased to $7.4 million during the
nine months ended September 30, 1996 from $3.9 million during the nine months
ended September 30, 1995, an increase of 90%. The increase in general and
administrative expenses was the result of (i) the addition of a number of
senior officers and key executives in connection with building the Company's
management and organizational infrastructure necessary to efficiently manage
the Company's future growth, (ii) the Company's expenses and reporting
obligations as a
public company, (iii) increased overhead due to the acquisition of additional
resorts, and (iv) added salary, travel, and office expenses attributable to
the current and planned growth in the size of the Company. Relative to
revenues, general and administrative expenses were higher during the nine
months ended September 30, 1996 at 12% of revenues versus 7% of revenues
during the nine months ended September 30, 1995.
Depreciation and amortization increased to $1.7 million during the nine
months ended September 30, 1996 from $1.2 million during the nine months ended
September 30, 1995, reflecting increased depreciation and amortization
resulting from an increase in capital expenditures and intangible assets.
Equity loss on joint venture decreased to $94,695 during the nine months
ended September 30, 1996 from $1.3 million during the nine months ended
September 30, 1995. The decrease in the equity loss is attributable to
increased Vacation Interval sales and higher hotel occupancy at Embassy
Vacation Poipu Point than during the comparable period in 1995.
Pre-tax net income increased 45% to $10.6 million, or 17% of total revenue,
during the nine months ended September 30, 1996 from $7.3 million, or 14% of
total revenues, during the nine months ended September 30, 1995.
Income taxes increased 61%, or $328,882, from $210,322 for the nine months
ended September 30, 1995 to $539,204 for the nine months ended September 30,
1996. The increase in income taxes is due to the change in the Company's
status to a Subchapter C corporation for approximately one month in the third
quarter. The Company completed the Consolidation Transactions in August 1996.
Previously, the Company's predecessor entities only incurred foreign taxes on
their properties located in the St. Maarten, Netherlands Antilles.
Net income increased 42% to $10.1 million for the nine months ended
September 30, 1996 from $7.1 million for the nine months ended September 30,
1995.
Comparison of the year ended December 31, 1995 to year ended December 31,
1994. For the year ended December 31, 1995 the Company achieved total revenue
of $72.6 million compared to $44.3 million for the year ended December 31,
1994, an increase of $28.3 million or 64%. Total revenue grew due to a 47%
increase in Vacation Interval sales from $40.3 million to $59.1 million, an
86% increase in interest income from $3.7 million to $6.9 million, and a $6.3
million increase in resort operations and other income. The commencement of
sales of Vacation Intervals at Royal Palm, Flamingo Beach Club, and Embassy
Vacation Resort Grand Beach drove Vacation Interval sales volume at the
consolidated resorts from 4,482 sold in 1994 to 5,394 sold in 1995, an
increase of 20%. These higher volumes, combined with price growth, drove the
47% increase in Vacation Interval sales revenue. Interest income increased due
to a $34.9 million increase in mortgage receivables, which grew from $33.4
million at the end of 1994 to $68.3 million at the end of 1995, an increase of
104%. Other income increased $6.3 million from $0.3 million in 1994 to $6.6
million in 1995. This increase was the result of rental income at the resorts
increasing from $0.2 million to $1.3 million from 1994 to 1995, and the
acquisition of a mortgage receivable portfolio of approximately $10.2 million
acquired with the two St. Maarten resorts on which the Company earned $2.2
million. In addition, the Company accrued $2.0 million of business
interruption insurance claims to compensate for loss revenues and profits
related to damages sustained from Hurricane Luis at the two St. Maarten
resorts.
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While operating costs increased from $40.0 million for the year ended
December 31, 1994 to $61.1 million for the year ended December 31, 1995, an
increase of 53%, as a percentage of revenues operating costs decreased from
90.3% in 1994 to 84.1% in 1995. Relative decreases in Vacation Interval cost
of sales and other expenses, as a percentage of revenues were offset by
relative increases in interest expense-treasury, provision for doubtful
accounts, depreciation and amortization and equity loss on investment in joint
venture. The Company was able to purchase and construct Vacation Intervals at
a relative discount to historical development costs, reducing the unit cost on
average of each Vacation Interval sold. This is reflected in a proportionate
decrease in cost of Vacation Intervals sold from 30.8% of Vacation Interval
sales in 1994 to 26.5% of Vacation Interval sales in 1995. Although
advertising, sales and marketing costs decreased as a percentage of total
revenues from 42.3% to 39.2%, these costs increased as a percentage of
Vacation Interval sales from 46.5% in 1994 to 48.2% in 1995. This was
primarily the result of $2.0 million in expenses in 1995 relating to research
and development associated with national marketing strategies and programs
related to "branded" and "non-branded" resorts. Excluding these expenses,
advertising, sales and marketing costs in 1995 were 44.8% of Vacation Interval
sales, slightly less than in 1994.
Loan portfolio expenses consisting of interest expense, other expenses and
provision for doubtful accounts increased from $3.4 million in total in 1994
to $6.6 million in total in 1995, an increase of 94%. This increase reflects
the 104% increase in mortgage receivables due to Vacation Interval sales
growth and acquisitions of resorts made by the Company in 1995.
General and administrative expenses increased 75% from $3.7 million in 1994
to $6.6 million in 1995. The increase in general and administrative expenses
was the result of increased salary expenses and overhead due to the
acquisition of additional resorts and growth in the size of the Company.
Relative to revenues, general and administrative expenses were slightly higher
in 1995 at 9.0% of revenues versus 8.4% of revenues in 1994.
Depreciation and amortization increased from $0.5 million in 1994 to $1.7
million in 1995, reflecting increased depreciation resulting from an increase
in capital expenditures of $1.8 million and acquisitions resulting in a $1.8
million increase in intangible assets.
The Company made its investment in the Embassy Vacation Resort Poipu Point
during the last quarter of 1994. The Embassy Vacation Resort Poipu Point has
experienced losses associated with the start-up operations of the related
resort, which is being converted to timeshare. Equity loss on joint venture
increased from $0.3 million in 1994 to $1.6 million in 1995 reflecting a full
year's operations at the resort in 1995.
Pre-tax net income increased 170% to $11.6 million, or 15.9% of total
revenue, in 1995 from $4.3 million, or 9.7% of total revenues, in 1994.
Income taxes increased to $641,545 for the year ended December 31, 1995 from
zero for the year ended December 31, 1994 due to the acquisition of Royal Palm
Beach Club and Flamingo Beach Club in St. Maarten, Netherlands Antilles. In
July and August, the Company acquired Royal Palm and Flamingo, respectively,
incurring foreign taxes related to income earned for the remainder of fiscal
year 1995.
Net income increased $6.6 million to $10.9 for the twelve months ended
December 31, 1995 from $4.3 million for the twelve months ended December 31,
1994.
Comparison of the year ended December 31, 1994 to year ended December 31,
1993. For the year ended December 31, 1994 the Company generated total revenue
of $44.3 million compared to $24.4 million in 1993, an increase of 82%. This
increase was due to an 82% growth in Vacation Interval sales revenues from
$22.2 million in 1993 to $40.3 million in 1994. The first full year of sales
at the Plantation at Fall Creek Resort and the addition of the Royal Dunes
Resort drove higher volume Vacation Interval sales from 2,442 Vacation
Intervals sold in 1993 to 4,482 Vacation Intervals sold in 1994. This volume
growth of 91% more than offset the 5.2% decrease in the average price of
Vacation Intervals sold to drive the 84% increase in Vacation Interval sales
revenues. Interest income increased due to a $16.0 million increase in
mortgage receivables from $17.4 million at the end of 1993 to $33.4 million at
the end of 1994, an increase of 92%.
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Operating costs increased from $22.1 million for the year ended December 31,
1993 to $40.0 million for the year ended December 31, 1993, an increase of
81%. However, as a percentage of revenues, operating costs decreased slightly
from 90.6% in 1993 to 90.3% in 1994. Increases in Vacation Interval cost of
sales as a percentage of revenue from 23.4% in 1993 to 28.0% in 1994 were more
than offset by decreases in other operating costs. From 1993 to 1994,
advertising, sales and marketing decreased from 44.2% of revenues to 42.3% of
revenues, general and administrative decreased from 13.2% of revenues to 8.4%
of revenues, and depreciation and amortization decreased from 1.6% of revenues
to 1.1% of revenues. Vacation Interval cost of sales increased as a percentage
of revenues due to relatively higher Vacation Interval cost associated with
the first year of operations at Royal Dunes. Advertising, sales and marketing
costs decreased as a percentage of Vacation Interval sales from 48.6% in 1993
to 46.5% in 1994. This reflects increased Vacation Interval sales volume at
Cypress Pointe, which increased from 1,784 Vacation Intervals in 1993 to 2,061
Vacation Intervals in 1994. Although decreasing in terms of a percentage of
revenue, due to expansion in the administrative costs necessary to support a
growing business, general and administrative expenses increased in absolute
terms from $3.2 million in 1993 to $3.7 in 1994, a 16.0% increase.
Depreciation and amortization was approximately consistent between 1993 and
1994 at $0.4 million and $0.5 million respectively reflecting capital
expenditures of $0.2 million, and the recording of intangibles at Grand Beach
in late 1994 with no related amortization. Equity loss on investment in joint
venture of $0.3 million in 1994 reflects the Company's share of losses
associated with the start-up operations at the Embassy Vacation Resort Poipu
Point.
Loan portfolio expenses consisting of interest expense, loan portfolio and
provision for doubtful accounts increased from $1.5 million in 1993 to $3.4
million in 1994, an increase of 127%. This reflects the increase in Vacation
Intervals sold in 1994 and a relative increase in borrowings made by the
Company secured by interval inventory. While loan portfolio expenses were
consistent as a percentage of total revenue, interest expense treasury
increased from 36.9% of interest income to 44.2%. Provision for doubtful
accounts decreased slightly from 2.5% of revenues to 2.1% of revenues. Other
loan portfolio expenses increased from $0.2 million in 1993 (0.9% of revenues)
to $0.9 million in 1994 (1.9% of revenues) reflecting additional costs from
portfolio management services started in 1994.
Pre-tax net income increased 87% from $2.3 million in 1993 to $4.3 million
in 1994.
MERGER WITH AVCOM INTERNATIONAL, INC.
On September 22, 1996, the Company signed the Merger Agreement to acquire
AVCOM for shares of the Company's Common Stock, plus the assumption of debt.
AVCOM is the parent company of All Seasons Resorts, Inc., a developer,
marketer and operator of timeshare resorts in Arizona, California, and Texas.
The Company believes that AVCOM maintains a strong presence in the Sedona,
Arizona market which should be enhanced by the development of its fifth
resort, The Ridge on Sedona Golf Resort. AVCOM is currently completing
development and selling of Vacation Intervals at its fourth Sedona resort,
Sedona Summit Resort, and will begin sales at The Ridge in the spring of 1997.
In addition to development in Sedona, AVCOM is developing and pre-selling
Vacation Intervals at the Scottsdale Villa Mirage Resort in Scottsdale,
Arizona. The Company believes the acquisition of AVCOM will give the Company a
stronger presence in the Southwest, complementing its existing presence in the
Southeastern United States and California. Vacation Intervals at All Seasons'
resorts generally sell for $9,000 to $18,000 and will be targeted to the same
market segment as the Company's non-branded resorts.
Over the year following consummation of the Merger, the Company anticipates
required capital expenditures for expansion and development of certain AVCOM
Resorts (Sedona Summit Resort, The Ridge on Sedona Golf Resort, Scottsdale
Villa Mirage Resort and Villas on the Lake) to be approximately $23.5 million.
The Company may also be required to expend additional amounts to fund certain
AVCOM guarantees relating to the North Bay Resort at Lake Arrowhead. See
"Business--Description of AVCOM's Resorts-- Partially Owned Resorts." The
Company plans to fund the foregoing expenditures primarily with the net
proceeds of the Offerings, available capacity on credit facilities and cash
generated from operations.
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The Company's management believes that the Merger represents a strategic
combination of two companies in the timeshare resort industry, offering
enhanced opportunities to better service this market. The Merger is viewed by
both management teams as providing both short and long-term potential benefits
to shareholders resulting from economies of scale and other operating
synergies made possible by the Merger. The Company's management believes the
Merger to be an appropriate combination due to several factors, including:
(i) AVCOM's strength in the Southwestern United States combines well with the
Company's presence in Florida, Missouri, California, South Carolina, Hawaii
and St. Maarten, Netherlands Antilles and (ii) the management strengths of the
two companies are generally complementary, allowing the combined company to
benefit from an enhanced overall level of management experience and operating
leverage.
The Company believes that the Merger may allow the Company to enhance its
sales potential by adding AVCOM's existing six resorts in sales (plus one
additional resort under construction to begin in sales during 1997) to the
Company's existing portfolio of nine resorts in sales and the recently
announced Westin Vacation Club resort in St. John (for a total of 17 resorts
in sales by the end of 1997) from which the combined company will be able to
sell Vacation Intervals. In particular, the management of the Company believes
that the Merger may allow the Company to have greater access to customers by
way of AVCOM's strong sales and marketing organization in the Southwestern
United States, in addition to benefiting from AVCOM's current base of
approximately 15,000 Vacation Interval owners. The Company believes that the
combined company will have access to greater financial resources and lower
borrowing costs. The Company believes that this lower cost of borrowing may
contribute to greater net interest income and lower development costs for the
Company going forward. The Merger is expected to provide the Company certain
administrative benefits and opportunities for cost reductions, including
reductions resulting from employee redundancies. AVCOM has certain
development, sales and marketing expertise that may enable the Company to
function more efficiently. Management of the Company believes that beyond cost
savings and efficiencies, there is also a long term potential benefit to
shareholders from leveraging the operating experiences of both management
teams to improve operations of resorts and, thereby, increasing the
profitability of the combined company. There is no assurance that such
potential will be realized.
Transaction costs relating to the negotiation of, preparation for, and
consummation of the Merger and the anticipated combination of certain
operations of the Company and AVCOM will result in a one-time charge to the
Company's earnings of approximately $1.7 million to $1.9 million in the
quarter in which the Merger is consummated (expected to be the first quarter
of 1997). This charge is expected to include the fees and expenses payable to
financial advisors, legal fees and other transaction expenses related to the
Merger. In addition, there can be no assurance that the Company will not incur
additional charges in subsequent quarters to reflect costs associated with the
Merger and the integration of the Company's and AVCOM's operations.
Additionally, transaction costs relating to the consummation of the Merger and
the anticipated combination of operations of the Company and AVCOM, along with
changes in AVCOM's accounting policies to conform to the Company's and the
write-down and write-off of certain AVCOM assets, will result in a one-time
charge to AVCOM's earnings of approximately $6 million to $8 million. This
charge is expected to include the estimated costs associated with workforce
reductions, contractual payment obligations and other restructuring
activities. While the exact timing of this charge cannot be determined at this
time, management anticipates that this charge to earnings will be recorded
primarily in the fourth quarter of 1996.
For the nine months ended September 30, 1996 AVCOM's total revenues grew 23%
from $26.5 million for the period in 1995 to $32.7 million for the period in
1996 while net income decreased from $1.3 million in 1995 to a loss of ($2.0)
million in 1996. The loss for the period in 1996 was due to either the growth
in AVCOM's business or the impact of the following events: (i) general and
administrative expenses increased $3.0 million during the period in 1996, from
12.3% of revenues to 19.1% of revenues reflecting increased corporate
infrastructure necessary to support five resorts in 1996 versus two resorts in
1995, and due to higher sales subject to the percentage of completion method
of revenue recognition which resulted in $7.0 million of Vacation Interval
sales deferred in 1996; (ii) during the period AVCOM commenced sales at three
resorts, two of which were in new geographic locations which caused
significant start-up costs and higher sales and marketing costs as
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a percentage of sales of timeshare interests; (iii) both start-up costs
associated with the initiation of AVCOM's contract marketing and selling
business and accounting timing differences between when contract marketing and
selling expenses are incurred and when contract commission revenue is
recognized resulted in contract marketing and selling expenses exceeding
contract commission revenues by $477,000; (iv) AVCOM incurred a one-time
charge of $620,000 associated with the cancellation of a third party services
contract in conjunction with the anticipation of conversion to an integrated
computer reservation system; and (v) commensurate with the announcement of the
merger with Signature Resorts, Inc., AVCOM wrote-off deposits and costs in
connection with a terminated purchase agreement for a property in South Lake
Tahoe for which the recovery of deposits and costs totaling $839,000 incurred
by AVCOM is conditioned upon finding a replacement purchaser.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations from the sale of Vacation
Intervals, the financing of the sales of Vacation Intervals, the rental of
unsold Vacation Interval units, and the receipt of management fees. With
respect to the sale of Vacation Intervals, the Company generates cash for
operations from cash sales of Vacation Intervals, from the receipt of down
payments from customers acquiring Vacation Intervals, and from the
hypothecation of mortgage receivables from purchasers equal to 85% to 90% of
the amount borrowed by such purchasers. The Company generates cash related to
the financing of Vacation Interval sales on the difference between the
interest charged on the mortgage receivables, which averaged 15.0% in 1995,
and the interest paid on the notes payable secured by such mortgage
receivables.
During the years ended December 31, 1995, 1994, and 1993 cash (used in)
provided by operating activities was $2.3 million, ($11.0) million and $3.3
million, respectively. Cash generated from operating activities was higher for
the year ended December 31, 1995 when compared to the same period in the prior
year primarily due to higher net income, decreases in the amount spent on
acquisition and development activities, and increases in payables outstanding
at the end of 1995 when compared to at the end of 1994. Cash generated from
operating activities was lower for the year ended December 31, 1994 when
compared to the same period in the prior year primarily due to accelerated
acquisition and development activities during the year of 1994 when compared
to the prior year.
During the nine months ended September 30, 1996 and 1995, cash (used in)
provided by operating activities was ($21.9) million, and $4.3 million,
respectively. Cash generated from operating activities was lower for the nine
months ended September 30, 1996 when compared to the comparable period in 1995
primarily due to a $28.3 million increase in expenditures on acquisition and
development activities associated with the acquisition and development of new
resorts and the expansion of existing resorts during the period.
Net cash used in investing activities for the years ended December 31, 1995,
1994 and 1993 was ($36.9) million, ($24.9) million, and ($10.8) million,
respectively. Net cash used by investing activities was higher for the year
ended December 31, 1995 when compared to the same period in 1994 principally
due to increases in mortgage receivables which resulted from both higher sales
of Vacation Intervals and the purchase of a mortgage receivable portfolio with
a book value of approximately $7.0 million related to the St. Maarten
properties. Net cash used in investing activities was higher for the year
ended December 31, 1994 when compared to the same period in the prior year due
to both expenditures for the investment in Embassy Vacation Resort Poipu Point
and increases in the mortgage receivables portfolio which resulted from higher
Vacation Interval sales in 1994.
Net cash used in investing activities for the nine months ended September
30, 1996, and 1995 was ($27.3) million and ($31.4) million, respectively. For
the nine months ended September 30, 1996, the change in net mortgage
receivables was $4.3 million lower than during the comparable period in 1995
due to more effective collection efforts in 1996. As of September 30, 1996,
approximately 8.1% of the Company's consumer loans were considered by the
Company to be delinquent (past due by 60 or more days) and the Company has
completed or commenced foreclosure or deed-in-lieu of foreclosure on
approximately 2.5% of its consumer loans. Of these delinquent loans,
approximately 90% were originated by the Company and the remaining 10% were
acquired by the Company as delinquent loans. If only the Company's originated
loans were considered, approximately 7.5% of them would be considered
delinquent as of September 30, 1996.
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For the years ended December 31, 1995, 1994 and 1993, net cash provided by
financing activities was $37.1 million, $36.1 million and $15.3 million,
respectively. These net cash figures were affected by the Company's increased
borrowings secured by mortgage receivables to fund operations and increased
payments on these borrowings due to amortizations on a larger portfolio. In
addition, year to year net cash provided by investing activities fluctuates as
a result of borrowing activities for acquisition and development, and from
equity investments as a result of resort acquisitions.
For the nine months ended September 30, 1996 and 1995, net cash provided by
financing activities was $54.7 million and $30.1 million, respectively. During
the quarter ended September 30, 1996, the Company issued 6,037,500 shares of
common stock in the Initial Public Offering in August 1996 resulting in
approximately $74.0 million of net proceeds. The proceeds of the Initial
Public Offering were used by the Company to repay debt, to fund expansion, and
for other corporate purposes. In addition, period to period net cash provided
by investing activities fluctuates as a result of borrowing activities for
acquisition and development, and from equity investments as a result of resort
acquisitions.
The Company requires funds to finance the future acquisition and development
of timeshare resorts and properties and to finance customer purchases of
Vacation Intervals. Such capital has been provided by secured financings on
Vacation Interval inventory, secured financings on mortgage receivables and
partner loans generally funded by third party lenders and capital
contributions. As of September 30, 1996, the Company had $18.9 million
outstanding under its notes payable secured by Vacation Interval inventory
(land), and $62.2 million outstanding under its notes payable secured by
mortgage receivables. In order to finance anticipated development costs at
Existing Resorts, the Company intends to rely on cash from operations and
borrowing capacity available on existing credit facilities.
During 1997, the Company anticipates spending approximately $33.0 million
for expansion and development activities at the Existing Resorts (excluding
Royal Palm Beach Club and Embassy Vacation Resort Poipu Point) and
approximately $23.5 million at certain of the AVCOM Resorts (Sedona Summit
Resort, The Ridge on Sedona Golf Resort, Scottsdale Villa Mirage Resort and
Villas on the Lake). The Company may also be required to expend additional
amounts to fund certain AVCOM guarantees relating to the North Bay Resort at
Lake Arrowhead. See "Business--Description of AVCOM's Resorts--Partially Owned
Resorts." The Company plans to fund these expenditures primarily with the net
proceeds of the Offerings, available capacity on credit facilities and cash
generated from operations. See "Use of Proceeds." In addition, during 1997,
the Company anticipates spending approximately $8.8 million to finance the
acquisition, development and conversion costs related to the St. John
acquisition. These expenditures are expected to be funded primarily with the
net proceeds of the Offerings, available borrowing capacity under lines of
credit and cash generated from operations.
In addition, the Company anticipates spending approximately $212.0 million
to complete its expansion plans at the Existing Resorts during the periods
following 1997 as described in "Business--The Resorts." The Company also plans
to spend $34.0 million to complete expansion plans at the AVCOM Resorts during
the periods following 1997 as described in "Business--The Resorts." The
Company anticipates financing the expansion plans of the Company's and AVCOM's
resorts through cash acquired from operations, future credit facilities and/or
future issuance of securities. While the Company has not entered into
commitments with respect to any new credit facilities or planned any
additional issuances of securities, it is not currently obligated to continue
with the planned expansion of the Existing Resorts and the AVCOM Resorts.
There can be no assurance that the Company will be able to obtain the
financing necessary to continue such expansion plans.
The Company intends to pursue a growth-oriented strategy. From time to time,
the Company may acquire, among other things, additional timeshare properties,
resorts and completed Vacation Intervals; land upon which additional timeshare
resorts may be built; management contracts (which may from time to time
require capital expenditures by the Company); loan portfolios of Vacation
Interval mortgages; portfolios which include properties or assets which may be
integrated into the Company's operations; and operating companies providing or
possessing management, sales, marketing, development, administration and/or
other expertise with respect to the Company's operations in the timeshare
industry. See "Business--Business Strategy."
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The Company is currently evaluating the acquisition and/or development of a
number of resort properties and of completed Vacation Intervals as inventory,
but, other than as disclosed in this Prospectus, currently has no material
contracts or capital commitments relating to any such potential property or
inventory acquisitions. In addition, the Company is currently evaluating
several timeshare asset and management and operating company acquisitions to
integrate into or to expand the operations of the Company, but, other than as
described in this Prospectus, currently has no material contracts or capital
commitments relating to any such potential timeshare asset or management and
operating company acquisitions.
The Company has entered into the Westin Agreement whereby the Company has
the exclusive right through May 2001 to jointly acquire, develop and market
with Westin "four-star" and "five-star" timeshare resorts located in North
America, Mexico and the Caribbean. See "Business--Westin Vacation Club
Resorts." In connection with its recently announced plans to acquire and
develop the first Westin Vacation Club resort at St. John, the Company will be
obligated to contribute $2.5 million in cash. The Westin Partnership will
borrow approximately $5.5 million of the remaining purchase price and
approximately $7.1 million to complete the conversion of the St. John Villas
to a Westin Vacation Club resort. See "Recent Developments."
The Company is currently evaluating the acquisition of several resort
properties to be branded as an Embassy Vacation Resort and several development
opportunities to be developed as an Embassy Vacation Resort, but currently has
no binding contracts or capital commitments relating to any potential Embassy
Vacation Resorts. The Company is also currently evaluating the acquisition of
several resort properties and of completed Vacation Intervals to be non-
branded timeshare resorts or inventory, but currently has no binding contracts
or capital commitments relating to any such potential property or inventory
acquisitions. See "Business--Future Acquisitions." In addition, the Company is
currently evaluating several asset and operating company acquisitions to
integrate into or to expand the operations of the Company, but currently has
no contracts or capital commitments relating to any such potential asset or
operating company acquisitions.
In the future, the Company may negotiate additional credit facilities, or
issue, in addition to the Convertible Notes, other corporate debt or equity
securities. Any debt incurred or issued by the Company may be secured or
unsecured, fixed or variable rate interest and may be subject to such terms as
management deems prudent. For a description of the Convertible Notes being
offered concurrently with the Common Stock, see "Concurrent Offerings."
The Company believes that, with respect to its current operations, the net
proceeds to the Company from the Offerings, together with cash generated from
operations and future borrowings, will be sufficient to meet the Company's
working capital and capital expenditure needs for the near future. However,
depending upon conditions in the capital and other financial markets and other
factors, the Company may from time to time consider the issuance of debt or
other securities, the proceeds of which would be used to finance acquisitions,
to refinance debt or for other general corporate purposes. The Company
believes that the Company's properties are adequately covered by insurance.
See "Business--Insurance" and "--Legal Proceedings."
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BUSINESS
OVERVIEW
The Company is one of the largest developers and operators of timeshare
resorts in North America, based on number of resorts in sales. The Company is
devoted exclusively to timeshare operations and owns eight timeshare resorts
currently in sales, which includes one under construction, and a ninth resort
in sales in which the Company holds a partial interest. The Existing Resorts
are located in a variety of popular resort destinations including Hilton Head
Island, South Carolina, Koloa, Kauai, Hawaii, the Orlando, Florida area (two
resorts), St. Maarten, Netherlands Antilles (two resorts), Branson, Missouri,
South Lake Tahoe, California, and Avila Beach, California. The Company's
principal operations currently consist of (i) acquiring, developing and
operating timeshare resorts, (ii) marketing and selling Vacation Intervals at
its resorts, which typically entitle the buyer to use a fully-furnished
vacation residence, generally for a one-week period each year and
(iii) providing financing for the purchase of Vacation Intervals at its
resorts.
As part of its growth and acquisition strategy, the Company in September
1996 entered into the Merger Agreement to acquire AVCOM, the parent company of
All Seasons, a developer, marketer and operator of timeshare resorts in
Arizona, California and Texas. AVCOM currently operates nine resorts, which
includes two under construction, and a tenth resort in which AVCOM holds a
partial interest. Five of the AVCOM Resorts are located in Sedona, Arizona,
two are located in South Lake Tahoe, California and one resort is located in
each of Lake Arrowhead, California, Lake Conroe (near Houston), Texas, and
Scottsdale, Arizona. AVCOM currently sells Vacation Intervals at six of its
ten resorts, sales at three resorts have been substantially completed and
sales at one resort have yet to commence. The Company anticipates that the
Merger will be consummated in the first quarter of 1997, assuming all
conditions to closing are timely satisfied. See "The Proposed Merger" and
"Risk Factors--Risks Related to the Proposed Merger."
For the twelve month period ended September 30, 1996, the Company sold 6,512
Vacation Intervals at the Existing Resorts, compared to 3,566 and 5,687 for
the same periods ended in 1994 and 1995, respectively. Total revenue from
Vacation Interval sales at the Existing Resorts for the same periods increased
from $36.6 million in 1994 to $57.2 million in 1995 to $84.2 million in 1996.
The number of existing resorts has increased during the same periods through
acquisitions and development from four in 1994, to seven in 1995 and to nine
in 1996. See "--The Resorts." As of September 30, 1996, the Company had an
existing inventory of 22,509 Vacation Intervals at the Existing Resorts and
the Company is in the process of developing or has current plans to develop an
additional 62,203 Vacation Intervals on land which the Company owns or has an
option to acquire at the Existing Resorts. The Company anticipates that the
existing inventory at its Existing Resorts (except the Company's Hilton Head
Island resort), including the planned expansion at these resorts, will provide
sufficient inventory for between three and ten years of Vacation Interval
sales at such resorts.
THE TIMESHARE INDUSTRY
The Market. The resort component of the leisure industry primarily is
serviced by two separate alternatives for overnight accommodations: commercial
lodging establishments and timeshare or "vacation ownership" resorts.
Commercial lodging consists of hotels and motels in which a room is rented on
a nightly, weekly or monthly basis for the duration of the visit and is
supplemented by rentals of privately-owned condominium units or homes. For
many vacationers, particularly those with families, a lengthy stay at a
quality commercial lodging establishment can be very expensive, and the space
provided to the guest relative to the cost (without renting multiple rooms) is
not economical for vacationers. In addition, room rates and availability at
such establishments are subject to change periodically. Timeshare presents an
economical alternative to commercial lodging for vacationers.
According to the ARDA, the timeshare industry experienced a record year in
1994 (the most recent year for which statistics are available) with 384,000
new owners purchasing 560,000 Vacation Intervals with a sales volume of $4.76
billion. First introduced in Europe in the mid-1960s, ownership of Vacation
Intervals has been one of the fastest growing segments of the hospitality
industry over the past two decades. As shown in the
51
<PAGE>
following charts, according to the ARDA the worldwide timeshare industry has
expanded significantly since 1980 both in Vacation Interval sales volume and
number of Vacation Interval owners.
[DOLLAR VOLUME OF VACATION INTERVAL SALES]
[CHART APPEARS HERE]
[NUMBER OF VACATION INTERVAL OWNERS]
[CHART APPEARS HERE]
Source: American Resort Development Association, The 1995 Worldwide Timeshare
Industry.
52
<PAGE>
The Company believes that, based on published industry data, the following
factors have contributed to the increased acceptance of the timeshare concept
among the general public and the substantial growth of the timeshare industry
over the past 15 years:
. Increased consumer confidence resulting from consumer protection
regulation of the timeshare industry and the entrance of brand name
national lodging companies to the industry;
. Increased flexibility of timeshare ownership due to the growth of
exchange organizations such as RCI;
. Improvement in the quality of both the facilities themselves and the
management of available timeshare resorts;
. Increased consumer awareness of the value and benefits of timeshare
ownership, including the cost savings relative to other lodging
alternatives; and
. Improved availability of financing for purchasers of Vacation Intervals.
The timeshare industry traditionally has been highly fragmented and
dominated by a very large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality.
The Company believes that one of the most significant factors contributing to
the current success of the timeshare industry is the entry into the market of
some of the world's major lodging, hospitality and entertainment companies.
Such major companies which now operate or are developing Vacation Interval
resorts include Marriott, Disney, Hilton, Hyatt, Four Seasons and Inter-
Continental, as well as Promus and Westin. Unlike the Company, however, the
timeshare operations of each of Marriott, Disney, Hilton, Hyatt, Four Seasons
and Inter-Continental comprise only a small portion of such companies' overall
operations.
Of the Company's major brand name lodging company competitors, the Company
believes that, based on industry consultant reports: (i) Marriott entered the
timeshare market in 1985, currently sells Vacation Intervals at 10 resorts
which it also owns and operates (Kauai, Hawaii; Palm Desert, California; Park
City, Utah; Breckenridge, Colorado; Williamsburg, Virginia; Hilton Head
Island, South Carolina; Orlando, Florida; Marabella, Spain; Boston,
Massachusetts; and Ft. Lauderdale, Florida) and directly competes with the
Company's Poipu Point, Hilton Head Island and Orlando area resorts;
(ii) Disney entered the market in 1991, currently sells Vacation Intervals at
three resorts which it also owns and operates (Lake Buena Vista and Vero
Beach, Florida; and Hilton Head Island, South Carolina) and directly competes
with the Company's Orlando area and Hilton Head Island resorts; (iii) Hilton
entered the market in 1993, currently sells Vacation Intervals at two resorts
which it owns and operates (Las Vegas, Nevada; and Orlando, Florida) and
directly competes with the Company's Orlando area resorts; (iv) Hyatt entered
the market in 1995, owns and operates one resort in Key West, Florida but does
not directly compete in any of the Company's existing markets (although Hyatt
has announced an intention to develop a timeshare resort in Orlando); (v) Four
Seasons is developing its first timeshare resort in Carlsbad, California but
does not currently directly compete in any of the Company's existing markets
and is not in sales of Vacation Intervals at any resorts; and (vi) Inter-
Continental announced its entry into the timeshare market in 1996, but has yet
to announce any specific projects and is not yet in sales of Vacation
Intervals at any resorts. See "--Competition."
The Economics. The Company believes that national lodging and hospitality
companies are attracted to the timeshare concept because of the industry's
relatively low product cost and high profit margins and the recognition that
Vacation Intervals provide an attractive alternative to the traditional hotel-
based vacation and allow the hotel companies to leverage their brands into
additional resort markets where demand exists for accommodations beyond
traditional hotels.
The Consumer. According to information compiled by the ARDA for the year
ended December 31, 1994, the prime market for Vacation Intervals is customers
in the 40-55 year age range who are reaching the peak of their earning power
and are rapidly gaining more leisure time. The median age of a Vacation
Interval buyer at the time of purchase is 46. The median annual household
income of current Vacation Interval owners in the United States is
approximately $63,000, with approximately 35% of all Vacation Interval owners
having annual
53
<PAGE>
household income greater than $75,000 and approximately 17% of such owners
having annual household income greater than $100,000. Despite the growth in
the timeshare industry as of December 31, 1994, Vacation Interval ownership
has achieved only an approximate 3.0% market penetration among United States
households with income above $35,000 per year and 3.9% market penetration
among United States households with income above $50,000 per year.
According to the ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Interval are (i) the ability to exchange the
Vacation Interval for accommodations at other resorts through exchange
networks such as RCI (cited by 82% of Vacation Interval purchasers), (ii) the
money savings over traditional resort vacations (cited by 61% of purchasers)
and (iii) the quality and appeal of the resort at which they purchased a
Vacation Interval (cited by 54% of purchasers). According to the ARDA study,
Vacation Interval buyers have a high rate of repeat purchases: approximately
41% of all Vacation Interval owners own more than one interval representing
approximately 65% of the industry inventory and approximately 51% of all
owners who bought their first Vacation Interval before 1985 have since
purchased a second Vacation Interval. In addition, customer satisfaction
increases with length of ownership, age, income, multiple location ownership
and accessibility to Vacation Interval exchange networks.
The Company believes it is well positioned to take advantage of these
demographics trends because of the quality of its resorts and locations, its
program to allow buyers to exchange intervals at several of the Company's
resorts and its participation in the RCI network. However, RCI is under no
obligation to continue to include the resorts or the AVCOM Resorts in its
exchange network. See "Risk Factors--Dependence on Vacation Interval Exchange
Networks; Risk of Inability to Qualify Resorts." The Company expects the
timeshare industry to continue to grow as the baby-boom generation continues
to enter the 40-55 year age bracket, the age group which purchased the most
Vacation Intervals in 1994.
BUSINESS STRATEGY
The Company's objective is to become North America's leading developer and
operator of timeshare resorts. To meet this objective, the Company intends to
(i) acquire, convert and develop additional resorts to be operated as Embassy
Vacation Resorts, Westin Vacation Club resorts and non-branded resorts,
capitalizing on the acquisition and marketing opportunities to be provided as
a result of its relationships with Promus, Westin, selected financial
institutions and its position in certain markets and the timeshare industry
generally, (ii) increase sales and financings of Vacation Intervals at the
Existing Resorts through broader-based marketing efforts and in certain
instances through the construction of additional Vacation Interval inventory,
(iii) improve operating margins by consolidating administrative functions,
reducing borrowing costs and reducing its sales and marketing expenses as a
percentage of revenues and (iv) acquire additional Vacation Interval
inventory, management contracts, Vacation Interval mortgage portfolios, and
properties or other timeshare-related assets that may be integrated into the
Company's operations.
The Company's merger with AVCOM and the recently-announced proposed
acquisition and development of the first Westin Vacation Club resort to be
located in St. John, U.S. Virgin Islands, which were announced in the third
and fourth quarters of 1996, respectively, are the result of the Company's
growth strategy. The key elements of the Company's strategy are described
below.
Acquisition and Development of New Resorts. The Company intends to acquire
and develop additional resorts to be operated as branded Embassy Vacation
Resorts, Westin Vacation Club resorts and as non-branded resorts. To implement
its growth strategy, the Company intends to pursue resort acquisitions and
developments in a number of vacation destinations that will complement the
Company's operations, including the California and Hawaii markets, which are
subject to barriers to entry and in which the Company's founders have
extensive acquisition and development experience. The Company believes that
its relationships with Promus, Westin and selected financial institutions that
control resort properties located in Hawaii and California will provide it
with
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<PAGE>
acquisition, development and hotel-to-timeshare conversion opportunities and
will allow it to take advantage of currently favorable market opportunities to
acquire resort and condominium properties to be operated as timeshare resorts.
Since the inception of the resort acquisition and development business by the
Company's predecessor in 1992, the Company believes it has been able to
purchase hotel, condominium and resort properties and/or entitled land at less
than either their initial development cost or replacement cost and remodel or
convert such properties for sale and use as timeshare resorts. In addition to
acquiring existing resort and hotel-to-timeshare conversion properties, the
Company also seeks to develop resorts located in destinations where it
discerns a strong demand, which the Company anticipates will enable it to
achieve attractive rates of return.
The Company considers the potential acquisition or development of timeshare
resorts in locations based on existing timeshare competition in the area as
well as existing overall demand for accommodations. In evaluating whether to
acquire, convert or develop a timeshare resort in a particular location, the
Company analyzes relevant demographic, economic and financial data.
Specifically, the Company considers the following factors, among others, in
determining the viability of a potential new timeshare resort in a particular
location: (i) supply/demand ratio for the purchase of Vacation Intervals in
the relevant market and for Vacation Interval exchanges into the relevant
market by other Vacation Interval owners, (ii) the market's growth as a
vacation destination, (iii) the ease of converting a hotel or condominium
property into a timeshare resort from a regulatory and construction point of
view, (iv) the availability of additional land at the property for potential
future development and expansion, (v) competitive accommodation alternatives
in the market, (vi) uniqueness of location, and (vii) barriers to entry that
would tend to limit competition.
The Company believes that its relationships with Promus and Westin will
provide it with attractive acquisition, conversion, development and marketing
opportunities and uniquely position the Company to offer Vacation Intervals at
a variety of attractive resort destinations to multiple demographic groups in
the timeshare market. Capitalizing on two of its Founders' relationship with
Promus as a developer and owner of Embassy Suites hotels, in 1994 the Company
and Promus established Embassy Vacation Resorts, and the Company is currently
the only licensee of the Embassy Vacation Resorts name. However, the Company
has no ownership of or rights to the "Embassy Vacation Resorts" name or
servicemark, both of which are owned exclusively by Promus, except as set
forth in the Company's license agreements with Promus with respect to the
Company's Embassy Vacation Resorts. Furthermore, Promus has created a new
timeshare division to expand its Embassy Vacation Resort timeshare operations.
Through the Westin Agreement, the Company has the exclusive right through
May 2001, to jointly acquire, develop and market with Westin "four-star" and
"five-star" timeshare resorts located in North America, Mexico and the
Caribbean. The Company's rights also cover the conversion of Westin hotels to
timeshare resorts. In addition, pursuant to the Westin Agreement, it is
expected that Westin will provide the Company with lead generation assistance
and marketing support and Promus currently provides such assistance at Embassy
Vacation Resorts. The five KOAR-owned Embassy Suites hotels also provide lead
generation assistance and support to the Company with respect to the marketing
of the Company's resorts.
The Company's relationships with Promus and Westin also provide it with a
competitive advantage in the timeshare industry by allowing it to offer two
separate branded products in both the upscale and luxury market segments. The
Company believes that brand affiliation is becoming an important
characteristic in the timeshare industry as it provides the consumer an
important element of reliability and image in a fragmented industry. Through
its Embassy Vacation Resorts and Westin Vacation Club resorts the Company
believes it will be able to provide Vacation Interval buyers with quality and
consistency in their timeshare purchases. In addition, through its non-branded
resorts the Company will be able to appeal to the value-conscious consumer who
seeks the best value for his or her money and does not seek affiliation with
brand-name lodging companies.
Sales and Expansion at Existing Resorts and AVCOM Resorts. The Company
intends to continue sales of Vacation Intervals at the Existing Resorts and
the AVCOM Resorts by adding Vacation Interval inventory
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<PAGE>
through the construction of new development units and by broadening marketing
efforts. The Company believes it is well positioned to expand sales of
Vacation Intervals at the Existing Resorts and the AVCOM Resorts as a result
of its existing supply of Vacation Intervals in inventory as well as planned
expansion. As of September 30, 1996, the Company had existing inventory of
22,509 Vacation Intervals at the Existing Resorts and currently is in the
process of developing, or has plans to develop, units to accommodate an
additional 84,235 Vacation Intervals at the Existing Resorts, including
construction in progress for 10,710 Vacation Intervals at the Embassy Vacation
Resort Lake Tahoe, the addition of approximately 3,162 Vacation Intervals at
the San Luis Bay Resort and 816 Vacation Intervals at the Plantation at Fall
Creek. See "--Description of the Company's Resorts." As of September 30, 1996,
AVCOM had existing inventory of 4,618 Vacation Intervals and currently is in
the process of developing, or has plans to develop, units to accommodate an
additional 19,584 Vacation Intervals at its resorts, including construction in
progress for 8,568 Vacation Intervals at the Scottsdale Villa Mirage Resort
and 6,120 Vacation Intervals at the Ridge on Sedona Golf Resort and the
addition of approximately 2,448 Vacation Intervals at Sedona Summit Resort and
2,448 Vacation Intervals at the Villas on the Lake. See "--Description of the
Company's Resorts."
Based on information received from the Company's customers and sales agents,
the Company believes that in addition to basic quality, expanded resort
amenities and larger, multi-purpose units, current and potential buyers want
enhanced flexibility in scheduling their vacations, a broader distribution of
quality exchange locations and the availability of other value-priced
services. As a major developer and operator of timeshare resorts in North
America, the Company believes that it has acquired skill and expertise both in
the development and operation of timeshare resorts and in the marketing and
sales of Vacation Intervals and that it has acquired the breadth of resorts
which give it a competitive advantage among Vacation Interval purchasers.
Improvement of Operating Margins. As the Company grows, management believes
it will be able to reduce operating costs as a percentage of revenues by
consolidating administrative functions and reducing borrowing costs by virtue
of its consolidated operations. The Company believes that its larger number of
resorts relative to its competitors will provide it with additional revenue
opportunities and economies of scale which will allow it the potential for
significant cost savings. Benefitting from economies of scale both internally
and through its relationships with Promus and Westin, the Company plans to
centralize many of the administrative functions currently performed at
individual resorts, such as accounting, reservations and marketing, resulting
in a reduction in labor costs throughout the Company's Existing Resorts. The
Company believes that increased efficiency, reduction in on-site
administrative requirements and a multi-resort management system will reduce
operating costs and allow the Company to experience increased margins by
spreading operating and corporate overhead costs over a larger revenue base.
In addition, operating margins at a resort tend to improve over time as a
greater percentage of Vacation Intervals are sold, resulting in lower selling,
marketing and advertising expenses. The Company believes that it will reduce
sales and marketing expenses as a result of the lead generation assistance
provided or to be provided by Westin and Promus (including marketing and lead
generation assistance from KOAR's five Embassy Suites hotels) and by targeting
potential buyers through Westin and Embassy Suites hotels.
Acquisition of Timeshare Assets, Management Contracts and Operating
Companies. As a result of the Company's relationships in the timeshare and
financial communities, the size and geographic diversity of its portfolio of
properties and position in the timeshare industry, the Company has access to a
variety of acquisition opportunities related to the Company's business. The
Company's business strategy includes pursuing growth by expanding or
supplementing the Company's existing timeshare business through acquisitions.
The recently announced proposed acquisition of AVCOM is a recent example of
the implementation of the Company's business strategy. The Company believes
that its record of acquiring resort properties gives the Company credibility
and, the Company's status as a public company may make the acquisition by the
Company of businesses or operations more attractive to potential sellers. The
Company believes that these collective factors will help the Company acquire
attractive assets, operations and companies in the fragmented timeshare
industry. Acquisitions which the Company may consider, in addition to those
disclosed herein, include acquiring
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additional Vacation Intervals as inventory, management contracts, Vacation
Interval mortgage portfolios and properties or other timeshare-related assets
which may be integrated into the Company's operations.
DESCRIPTION OF THE COMPANY'S RESORTS
The Company believes that, based on published industry data, it is the only
developer and operator of timeshare resorts in North America that will offer
Vacation Intervals in each of the three principal price segments of the market
(value, upscale (characterized by high quality accommodations and service) and
luxury (characterized by elegant accommodations and personalized service)).
Since the inception of the timeshare development and acquisition business of
the Company's predecessors, the Company has developed or acquired eight
timeshare resorts currently in sales, which include one under construction,
and a ninth resort in sales in which the Company holds a partial interest,
located in a variety of popular resort destinations including Lake Buena Vista
(Orlando area), Florida (developed in 1992); Branson, Missouri (developed in
1993); Hilton Head Island, South Carolina (developed in 1994); Koloa, Hawaii
(acquired in 1994 and in which the Company holds an approximately 30%
interest); Orlando, Florida (developed in 1995); two resorts located in St.
Maarten, Netherlands Antilles (each acquired in 1995); Avila Beach, California
(acquired in 1996); and South Lake Tahoe, California (currently under
construction). The Company expects that its resorts will operate in the
following three general categories, each differentiated by price range, brand
affiliation and quality of accommodations:
. NON-BRANDED RESORTS. Vacation Intervals at the Company's six non-branded
resorts, which are not affiliated with any hotel chain, generally sell
for $6,000 to $15,000 and are targeted to buyers with annual incomes
ranging from $35,000 to $80,000. The Company believes its non-branded
resorts offer buyers an economical alternative to branded timeshare
resorts (such as Embassy Vacation Resorts and Westin Vacation Club
resorts) or traditional vacation lodging alternatives. Upon consummation
of the proposed Merger with AVCOM, the Company will acquire six
additional resorts currently in timeshare sales. Vacation Intervals at
these AVCOM resorts generally sell for $9,000 to $18,000 and are
targeted to buyers in the same non-branded market segment.
. EMBASSY VACATION RESORTS. Vacation Intervals at the Company's three
Embassy Vacation Resorts generally sell for $14,000 to $20,000 and are
targeted to buyers with annual incomes ranging from $60,000 to $150,000.
Embassy Vacation Resorts are designed to provide timeshare
accommodations that offer the high quality and value that is represented
by the more than 135 Embassy Suites hotels throughout North America.
. WESTIN VACATION CLUB RESORTS. Through the Westin Agreement the Company
has the exclusive right through May 2001 to jointly acquire, develop and
market with Westin "four-star" and "five-star" timeshare resorts located
in North America, Mexico and the Caribbean. The Company anticipates that
Vacation Intervals at Westin Vacation Club resorts generally will sell
for $18,000 to $25,000 and will be targeted to buyers with annual
incomes ranging from $80,000 to $250,000. The Westin Agreement
represents Westin's entry into the timeshare market. The Company and
Westin recently announced plans for the acquisition and development of
the first Westin Vacation Club resort to be located in St. John, U.S.
Virgin Islands. See "--Westin Vacation Club Resorts."
Innovation in the design and quality of the resorts developed by the
Company, as well as the branded product image of its Embassy Vacation Resorts
and Westin Vacation Club resorts, has and will continue to result in
differentiation of the Company's resorts from those of its competitors. The
Company believes feedback from its Vacation Interval owners and property
management enhances the Company's product acquisition, development and design
process. The resorts designed and developed by the Company have been
recognized by major industry groups and publications for excellence in
architectural and landscape design and overall development quality. Each of
the Company's resorts and nine of AVCOM's resorts have been designated a "Gold
Crown" resort by RCI.
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THE RESORTS
The following table sets forth certain information as of September 30, 1996
regarding each of the Existing Resorts, the Westin Vacation Club at St. John
and the AVCOM Resorts to be acquired in the pending Merger, including
location, date acquired or to be acquired by the Company, the number of
existing and total potential units at the resort, and the number of Vacation
Intervals currently available for sale and occupancy and additional expansion
potential. Of the 20 resorts set forth below, the Embassy Vacation Resort
Poipu Point is partially owned by the Company, the Westin Vacation Club Resort
at St. John will be partially owned by the Company when acquired and the North
Bay Resort at Lake Arrowhead is partially owned by AVCOM. The exact number of
units and Vacation Intervals ultimately constructed may differ from the
following estimates based on future land planning and site layout
considerations.
<TABLE>
<CAPTION>
VACATION
UNITS AT RESORT INTERVALS AT RESORT
DATE ----------------------- -------------------------
ACQUIRED/TO BE TOTAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED(a) CURRENT(b) POTENTIAL(c) INVENTORY(d) EXPANSION(e)
------ -------- -------------- ---------- ------------ ------------ ------------
<C> <S> <C> <C> <C> <C> <C>
NON-BRANDED
RESORTS:
Cypress Pointe Lake Buena Vista, November 1992 224 500(f) 3,111 14,076(f)
Resort Florida
Plantation at Branson, Missouri July 1993 98 400(g) 690 15,402(g)
Fall Creek
Royal Dunes Hilton Head Island, April 1994 40 55(h) 641 765(h)
Resort South Carolina
Royal Palm Beach St. Maarten, Netherlands July 1995 140 140(i) 1,937 -- (i)
Club Antilles
Flamingo Beach St. Maarten, Netherlands August 1995 172 257(j) 2,584 4,420(j)
Club Antilles
San Luis Bay Avila Beach, California June 1996 68 130(k) 907(l) 3,162(k)
Resort
EMBASSY VACATION
RESORTS:
Poipu Point(m) Koloa, Kauai, Hawaii November 1994 219 219(n) 9,966(n) --
Grand Beach Orlando, Florida January 1995 102 370(o) 2,673 13,668(o)
Lake Tahoe South Lake Tahoe, May 1996 -- 210(p) -- 10,710(p)
California
WESTIN VACATION
CLUB:
St. John(q) St. John, U.S. Virgin First Quarter 1997 48 96(r) 1,715(r) 4,448(r)
Islands
AVCOM RESORTS:
Scottsdale Villa Scottsdale, Arizona First Quarter 1997 -- 168(s) -- 8,568(s)
Mirage Resort
The Ridge on Sedona, Arizona First Quarter 1997 -- 120(t) -- 6,120(t)
Sedona Golf
Resort
Sedona Springs Sedona, Arizona First Quarter 1997 40 40 62 --
Resort
Sedona Summit Sedona, Arizona First Quarter 1997 12 60(u) -- (u) 2,448(u)
Resort
Villas of Poco Sedona, Arizona First Quarter 1997 33 33 78 --
Diablo
Villas of Sedona Sedona, Arizona First Quarter 1997 40 40 104 --
North Bay Resort Lake Arrowhead, First Quarter 1997 13 13(v) 429 -- (v)
at Lake California
Arrowhead(v)
Tahoe Beach & South Lake Tahoe, First Quarter 1997 140 140 1,195 --
Ski Club California
Tahoe Seasons South Lake Tahoe, First Quarter 1997 21 21(w) 943(w) --
Resort California
Villas on the Lake Conroe, Texas First Quarter 1997 37 85(x) 1,807 2,448(x)
Lake
----- ----- ------ ------
TOTAL......................................................... 1,447 3,097 28,842 86,235
===== ===== ====== ======
</TABLE>
- --------
(a) The dates listed below with respect to the Existing Resorts represent the
date of acquisition or, if later, the date of completion of development of
the first phase of the resort by the Company and the dates listed below
with respect to the Westin Vacation Club at St. John and AVCOM Resorts
represent the anticipated closing dates of the pending acquisitions. See
"The Proposed Merger" and "Business--Westin Vacation Club Resorts."
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<PAGE>
(b) Current units at each resort represents only those units that have
received their certificate of occupancy as of September 30, 1996.
(c) Total potential units at each resort includes, as of September 30, 1996,
(i) units which have received their certificate of occupancy, (ii) units
currently under development that have not yet received their certificate
of occupancy and (iii) units planned to be developed on land currently
owned by the Company or AVCOM.
(d) Current inventory of Vacation Intervals at each resort represents only
those unsold intervals that have received their certificate of occupancy
as of September 30, 1996.
(e) Potential expansion of Vacation Intervals at each resort includes, as of
September 30, 1996, (i) intervals currently under development that have
not yet received their certificate of occupancy and (ii) intervals planned
to be developed on land currently owned by the Company or AVCOM.
(f) Includes an estimated 276 units, which will accommodate an additional
estimated 14,076 Vacation Intervals, which the Company plans to construct
on land which it owns at the Cypress Pointe Resort and for which all
necessary governmental approvals and permits (except building permits)
have been obtained. Should the Company elect to construct a higher
percentage of three bedroom units, rather than its current planned mix of
one, two and three bedroom units, the actual number of planned units and
Vacation Intervals will be lower than is indicated above.
(g) Includes 16 units, which will accommodate an additional 816 Vacation
Intervals, on which the Company commenced construction in June 1996 and
for which all necessary discretionary governmental approvals and permits
have been received by the Company. Also includes an additional estimated
286 units, which will accommodate an additional estimated 14,586 Vacation
Intervals, which the Company plans to construct on land which it owns or
is currently subject to a contract to purchase at the Plantation at
Fall Creek.
(h) Includes 15 units, which will accommodate 765 Vacation Intervals,
construction of which is planned to begin in the second quarter of 1997
and for which all necessary governmental approvals and permits have been
received by the Company.
(i) The Company has not committed to any expansion of the Royal Palm Beach
Club. The Company is considering the acquisition of additional land
adjacent to the Royal Palm Beach Club for the addition of an estimated 60
units, which will accommodate an estimated 3,060 Vacation Intervals, but
has yet to enter into an agreement with respect to such additional land or
to obtain the necessary governmental approvals and permits for such
expansion.
(j) In May 1996 the Company acquired a five-acre parcel of land adjacent to
the Flamingo Beach Club on which the Company plans to develop
approximately 85 units which will accommodate an estimated 4,420 Vacation
Intervals. The Company is in the process of seeking to obtain the
necessary governmental approvals and permits for such proposed expansion.
(k) Includes 62 units, which will accommodate an estimated 3,162 Vacation
Intervals, for which all necessary governmental approvals and permits have
been received by the Company. Construction of the first 31 units began in
October 1996. In addition, the Company is considering the acquisition of
additional land near the San Luis Bay Resort for the addition of an
estimated 100 units which will accommodate an estimated 5,100 Vacation
Intervals, but has yet to enter into an agreement with respect to such
land or to obtain the necessary governmental approvals and permits for
such proposed expansion.
(l) The Company in June 1996 acquired approximately 130 Vacation Intervals at
the San Luis Bay Resort out of the bankruptcy estate of Glen Ivy Resorts,
Inc. In addition, the Company acquired promissory notes in default that
are secured by approximately 900 Vacation Intervals. The Company intends
to foreclose upon and acquire clear title to such Vacation Intervals and
intends to complete such foreclosure procedures (or deed-in-lieu
procedures) during the second quarter of 1997. These 900 Vacation
Intervals are included in the above table as Current Inventory.
(m) The Company acquired a 30.4% partnership interest in the Embassy Vacation
Resort Poipu Point in November 1994. The Company owns, directly or
indirectly, 100% of the partnership interests in one of the two co-
managing general partners of the Poipu Partnership, the partnership which
owns the Embassy Vacation Resort Poipu Point. The managing general partner
owned by the Company holds a 0.5% partnership interest for purposes of
distributions, profits and losses. The Company also holds, directly or
indirectly, a 29.93% limited partnership interest in the Poipu Partnership
for purposes of distributions, profits and losses, for a total partnership
interest of 30.43%. In addition, following repayment of any outstanding
partner loans, the Company, directly or indirectly, is entitled to receive
a 10% per annum return on the Founders' and certain former limited
partners' initial capital investment of approximately $4.6 million in the
Poipu Partnership. After payment of such preferred return and the return
of approximately $4.6 million of capital to the Company, directly or
indirectly, on a pari passu basis with the other general partner in the
partnership, the Company, directly or indirectly, is entitled to receive
approximately 50% of the net profits of the Poipu Partnership. In the
event certain internal rates of return specified in the Poipu Partnership
agreement are achieved, the Company, directly or indirectly, is entitled
to receive approximately 55% of the net profits of the Poipu Partnership.
(n) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(o) Includes at least 24 units, which will accommodate an additional 1,224
Vacation Intervals, on which the Company commenced construction in the
fourth quarter of 1996 and for which all necessary discretionary
governmental approvals and permits (excluding building permits which have
not yet been applied for by the Company) have been received by the
Company. The Company has also received all necessary discretionary
governmental approvals and permits to construct an additional estimated
244 units on land which it owns at the Embassy Vacation Resort Grand
Beach, which will accommodate an additional estimated 12,444 Vacation
Intervals (excluding building permits which have not yet been applied for
by the Company). The Company plans to apply for and obtain these building
permits on a building-by-building basis.
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(p) Includes 62 units, which will accommodate 3,162 Vacation Intervals, on
which construction began in May 1996 and for which all necessary
discretionary governmental approvals and permits have been received by the
Company. Twenty-seven units, which will accommodate 1,377 Vacation
Intervals, are scheduled for completion in February 1997 and 35 units,
which will accommodate 1,785 Vacation Intervals, are scheduled for
completion in March 1997. Of this total, the Company is obligated to
convey four Vacation Intervals to the former owners of the land on which
the Embassy Vacation Resort Lake Tahoe is being developed. Such conveyance
will be made upon completion of the first phase of development. The
Company has also received all necessary discretionary governmental
approvals and permits to construct an additional estimated 148 units
(excluding building permits which have not yet been applied for by the
Company and which will be applied for and obtained on a phase-by-phase
basis) on land that it owns at the Embassy Vacation Resort Lake Tahoe,
which will accommodate an estimated 7,548 Vacation Intervals, and, subject
to market demand, currently plans to construct 40 of such units commencing
in May of each year from 1997 through 1999 and the remaining 28 units
commencing in May 2000. The Company commenced sales of Vacation Intervals
at the Embassy Vacation Resort Lake Tahoe in June 1996, although the
Company will not be able to close any of such sales until the completion
of the first units. The Company currently is pre-selling Vacation
Intervals at the Embassy Vacation Resort Lake Tahoe prior to receipt of
certificates of occupancy.
(q) As described under "Business--Westin Vacation Club Resorts," the Company
will own 50% of the entity which will acquire the unsold Vacation
Intervals at this resort. The acquisition is anticipated to close during
the first quarter of 1997 and commencement of Vacation Interval sales is
anticipated to begin by the fourth quarter of 1997.
(r) Includes 48 units, which will accommodate approximately 1,715 unsold
Vacation Intervals, which are ready for immediate occupancy. With respect
to such 48 units, 36 of such units have received all necessary
discretionary governmental approvals and permits necessary to commence
Vacation Interval sales and, upon closing of the pending acquisition, the
Company plans to file the necessary documentation to receive such
approvals with respect to the remaining 12 of such units. Also includes an
additional 48 units, which will accommodate an additional approximately
2,448 Vacation Intervals, which will require the installation of
utilities, furniture, fixtures and equipment and interior finishes before
occupancy. Upon closing of the pending acquisition, the Company currently
anticipates completing the renovation of such 48 additional units by the
fourth quarter of 1997. Upon closing of the pending acquisition, the
Company also will have acquired adjacent land at the St. John resort which
will accommodate the development of additional units. The Company has not
yet determined the amount of potential additional units which may be
constructed on such adjacent land or the timing of such potential
development. See "Business--Westin Vacation Club Resorts."
(s) Scottsdale Villa Mirage Resort is in the final stages of construction of
the 64 units which constitute Phase I of the resort. Such 64 units will
accommodate approximately 3,264 Vacation Intervals and are scheduled for
completion in January, 1997. The 40 units in Phase II, which will
accommodate approximately 2,040 Vacation Intervals, and the 64 units in
Phase III, which will accommodate approximately 3,264 Vacation Intervals,
are scheduled for completion in the first quarters of 1998 and 1999,
respectively. All necessary discretionary approvals and permits have been
received by AVCOM for the Scottsdale Villa Mirage Resort. AVCOM currently
is pre-selling Vacation Intervals at the Scottsdale Villa Mirage Resort
prior to receipt of certificates of occupancy.
(t) Construction began in December 1996 on The Ridge on Sedona Golf Resort,
which upon completion will consist of 120 units. The first 12 units, which
will accommodate approximately 612 Vacation Intervals, and clubhouse are
scheduled for completion in April 1997, for which all necessary
discretionary governmental approvals and permits have been received by
AVCOM. Governmental approvals and permits have not been received for the
additional planned 108 units, which will accommodate approximately 5,508
Vacation Intervals.
(u) The Sedona Summit Resort is being developed by an affiliated entity,
Sedona Summit Development, L.P. of which All Seasons, a wholly owned
subsidiary of AVCOM, is the sole general partner. Sales and construction
commenced in February 1996 and the Sedona Summit is in the final stages of
construction of the final 48 units, which will accommodate approximately
2,448 Vacation Intervals, at which point no further expansion is planned.
Construction of the final 48 units is scheduled for completion in the
second quarter of 1997. All necessary discretionary governmental approvals
and permits have been received by AVCOM. AVCOM currently is pre-selling
Vacation Intervals in the final 48 units at the Sedona Summit Resort prior
to receipt of certificates of occupancy. All Vacation Intervals at the
initial 12 units have been sold as of September 30, 1996. See "Business--
Description of AVCOM's Resorts."
(v) All Seasons owns 40% of Trion Capital Corporation, and has the power to
vote another 40% of Trion, the General Partner of Arrowhead Capital
Partners, L.P., the developer of North Bay Resort at Lake Arrowhead. The
General Partner is entitled to receive 1% of the profits of Arrowhead
Capital Partners, L.P., but under certain circumstances, is entitled to
receive substantially higher profits. All Seasons has an exclusive sales
and marketing contract for sales at North Bay, and is the property manager
of the resort. Although Arrowhead Capital Partners, L.P. owns undeveloped
land and buildings under construction at the North Bay Resort at Lake
Arrowhead, no definitive expansion plans have been made.
(w) AVCOM purchased a portfolio of 1,057 defaulted consumer notes at the Tahoe
Seasons Resort in March 1996 which are secured by Vacation Intervals. Of
the notes purchased, 414 notes have been converted to inventory of which
114 Vacation Intervals have been sold and 41 of the notes have been
reaffirmed by the original buyers. AVCOM intends to foreclose on the
remaining notes and acquire clear title to the intervals. These remaining
602 notes are included in the above table as Current Inventory.
(x) Villas on the Lake consists of 37 existing units purchased in February
1996 currently in the final phase of renovation. Land included in the
initial purchase is able to accommodate construction of an additional 48
units, which will accommodate an additional approximately 2,448 Vacation
Intervals. The phase II construction start date has not yet been
determined. All necessary discretionary governmental approvals and permits
(excluding building permits which have not yet been applied for by AVCOM)
have been received by AVCOM.
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NON-BRANDED RESORTS
The Cypress Pointe Resort. Cypress Pointe Resort, the Company's first
timeshare resort, opened in November 1992 and is located in Lake Buena Vista,
Florida, approximately one-half mile from the entrance of Walt Disney World
and is an approximately 10 minute drive from all major Orlando attractions.
The resort is being developed in two phases. Phase I sits on 9.7 acres of land
and consists of nine buildings, eight of which currently are complete. Phase
II sits on 12.5 acres of land and will consist of seven buildings, the first
and second of which were completed in April and September 1996, respectively.
Styled with a Caribbean theme, upon completion of the nine buildings, Phase
I will contain 192 three bedroom 1,460 square foot units. Each unit
comfortably accommodates up to eight people with its two large master
bedrooms, three bathrooms, living room with sleeper sofa, and full kitchen.
The three bedroom units in Phase I also offer a jacuzzi tub, a roman tub,
three color televisions (including one 460 screen), a video cassette player, a
complete stereo system, a washer/dryer and elegant interior details such as
nine-foot ceilings, crown moldings, interior ceiling fans, imported ceramic
tile, oversized sliding-glass doors and rattan and pine furnishings. With the
completion of Phase II, the resort will be equipped with three pools including
a 4,000 gallon heated pool with a volcano, two spas, two poolside cafes, two
tennis courts, a sand volleyball court, a basketball court, an exercise
facility, a kiddie pool, a gift shop, a lakeside gazebo, a shuffleboard court,
a picnic area and a video arcade. The resort also contains a full children's
playground and a new 17,000 square foot clubhouse.
Upon completion of Phases I and II, the resort will contain approximately
500 units. Upon completion of seven buildings in Phase II, Phase II will
contain a total of approximately 308 units consisting of one, two and three
bedroom units of up to 1,850 square feet and accommodating up to ten people.
Phase I consists of 168 existing units, with 24 units scheduled to be built
upon the completion of Phase II.
The resort currently contains 11,424 total Vacation Intervals of which 3,111
remained for sale as of September 30, 1996. Vacation Intervals at the Cypress
Pointe Resort are currently priced from $6,000 to $16,000 for one-week
Vacation Intervals, 1,824 of which were sold in 1995. Vacation Intervals at
the resort can be exchanged for Vacation Intervals at other locations through
RCI, which awarded the resort its Gold Crown Resort Designation. The resort
won the ARDA National Award for its overall owner package in 1993.
The Plantation at Fall Creek. The Plantation at Fall Creek, which opened in
March 1993, is located on the shores of Lake Taneycomo, a fishing lake near
the heart of Branson, Missouri, the capital of country music theaters. The
resort currently contains 98 units each consisting of 2 bedrooms and 2 baths
and up to 1,417 square feet, built in a country style on approximately 130
acres of land. The Company currently plans to continue to expand the resort to
accommodate a total of 400 units. Each unit features two large master
bedrooms/baths, queen sized sofa-sleeper, full kitchen, three color
televisions, video cassette player, washer/dryer, cherry wood furnishings,
ceiling fans and jacuzzi or roman tub. The resort is equipped with 4 swimming
pools, a fishing dock, a shuffleboard court, a game room, a children's
playground, a health club, a tennis court, a miniature golf course, a sand
volleyball court, barbecue areas and a basketball court.
As of September 30, 1996, the resort contained 4,998 total Vacation
Intervals of which 690 remained for sale. Vacation Intervals at the Plantation
at Fall Creek are currently priced from $7,295 to $10,295 for one-week
Vacation Intervals, 1,094 of which were sold in 1995. Vacation Intervals at
the resort can be exchanged for Vacation Intervals at other locations through
RCI, which awarded the resort its Gold Crown Resort Designation.
The Royal Dunes Resort at Port Royal Plantation. The Royal Dunes Resort at
Port Royal Plantation opened in April 1994 and is located in Port Royal
Plantation on Hilton Head Island, South Carolina, only 400 yards from the
beach. The resort presently contains 40 units consisting of three bedrooms and
three bath units and upon completion scheduled for late 1997, will be expanded
to include a total of 55 units. The units can comfortably accommodate eight
people in their 1,460 square feet of living area with two master suites with
private bath, one guest bedroom with bath, a living room with a sofa sleeper,
a full kitchen and an outside deck.
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Each unit features a jacuzzi tub, a roman tub, a washer/dryer, four color
televisions, a video cassette player, an entertainment center and elegant
interior details such as nine-foot ceilings, crown moldings, interior ceiling
fans and rattan and pine furnishings. The resort offers a heated swimming
pool, outdoor whirlpool spa, kiddie pool, sand volleyball court, barbecue
grill and picnic area. The Royal Dunes is conveniently located for golf,
tennis, fishing, shopping, boating, biking and croquet and adjacent to Royal
Dunes is the Westin Hotel and Resort at Port Royal, Hilton Head Island.
The resort currently contains 2,040 total Vacation Intervals of which 641
remained for sale as of September 30, 1996. Vacation Intervals at the Royal
Dunes are currently priced from $8,250 to $13,250 for one-week Vacation
Intervals, 577 of which were sold in 1995. Vacation Intervals at the resort
can be exchanged for Vacation Intervals at other locations through RCI, which
awarded the resort its Gold Crown Resort Designation.
The Royal Palm Beach Club. The Royal Palm Beach Club, originally opened in
1990 and acquired by the Company in July 1995, is located at Simpson Bay in
St. Maarten, Netherlands Antilles. Located approximately one mile from the
island's major airport and ten minutes from local shopping and dining, the
resort is surrounded by the Caribbean on three sides. The resort contains 140
units consisting either of two bedrooms, two baths or three bedrooms, three
baths. Each unit is equipped with a full kitchen, complete with microwave and
dishwasher, color television, VCR and private lanai. The resort is equipped
with a private beach, an overflowing style pool located on the beach, a large
sun deck and a picnic area with barbecue grills. The Royal Palm Beach Club is
also conveniently located for water sports, boating, health club workouts and
tennis, and is located adjacent to a retail center, including an outdoor cafe,
dance clubs, market, hair salon, gift shop, mini-market and restaurants. Each
unit at the resort, as well as the resort grounds and common areas, recently
received a complete renovation in connection with repairs following the
September 1995 hurricane which damaged the resort.
The resort currently contains 7,280 total Vacation Intervals of which 1,937
remained for sale as of September 30, 1996. Units at the Royal Palm Beach
Club, are currently priced from $9,450 to $12,900 for one-week Vacation
Intervals, 272 of which were sold by the Company in 1995. Vacation Intervals
at the resort can be exchanged for Vacation Intervals at other locations
through RCI, which awarded the resort its Gold Crown Resort Designation and
through Interval International, the other major exchange company in the
industry, which awarded the resort a "five-star" designation, the highest
quality level in the II system.
The Flamingo Beach Club. The Flamingo Beach Club, originally opened in
January 1991 and acquired by the Company in July 1995, is located on "the
Point" of the Pelican Key Peninsula in St. Maarten, Netherlands Antilles,
directly on the beach of the Caribbean. The resort is located approximately
two miles from the island's major airport and is within walking distance of
shopping and dining facilities. The resort is surrounded by the Caribbean
Ocean on three sides and contains 172 units consisting of beachfront studio
and one bedroom, one bath units. Each unit is equipped with two color
televisions, a video cassette player, air conditioning, a balcony suitable for
outside dining and a fully equipped kitchen complete with microwave oven and
dishwasher. The resort features water sports, a beach palapa bar and grill, a
mini-market, tennis facilities and a beach house bar. Each unit at the resort,
as well as the resort grounds and common areas, recently received a complete
renovation in connection with repairs following the September 1995 hurricanes
which damaged the resort.
The resort currently contains 8,944 total Vacation Intervals of which 2,584
remained for sale as of September 30, 1996. Vacation Intervals at the Flamingo
Beach Club are currently priced from $6,500 to $8,900 for one-week Vacation
Intervals, 104 of which were sold in 1995. Vacation Intervals at the resort
can be exchanged for Vacation Intervals at other locations through RCI, which
awarded the resort its Gold Crown Resort Designation.
The San Luis Bay Resort. The San Luis Bay Resort, located on 16 oceanview
acres in Avila Beach, California, near San Luis Obispo, was originally opened
in 1969 as a hotel club and in June 1996 was acquired by the Company from the
bankruptcy estate of Glen Ivy Resorts, Inc., which had converted the property
to a timeshare resort in 1989. The resort is adjacent to a championship golf
course and is well located for visiting local wineries and historical
attractions. At present, a total of 68 studio and one bedroom units are
completed at
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the resort. The Company currently intends to commence construction of the
phase I addition of 30 units in the fourth quarter of 1996. Upon completion of
the addition, units will be available in one and two bedroom configurations
(some with lock-off capability) and will offer a king size bed, a queen size
sofa sleeper, a porch, a full kitchen, two color televisions, a video cassette
player and a stereo. The phase II addition of 32 units is scheduled to
commence construction following the completion of phase I. The resort features
a swimming pool, a spa, four tennis courts, exercise facilities, a full
service salon, a video game room, a basketball court and a barbecue area. The
resort is also well located for windsurfing, boating, fishing and surfing.
The Company's inventory at the resort contains 907 available Vacation
Intervals (including 900 Vacation Intervals which the Company is in the
process of acquiring through foreclosure). Vacation Intervals at the San Luis
Bay Inn are currently priced from $8,500 to $16,000 for one-week Vacation
Intervals. Vacation Intervals at the resort can be exchanged for Vacation
Intervals at other locations through RCI.
EMBASSY VACATION RESORTS
The Embassy Vacation Resort Grand Beach. The Embassy Vacation Resort Grand
Beach opened in January 1995 and is located along nearly 2,000 feet of the
south shore of Lake Bryan, a 450-acre spring-fed lake in Lake Buena Vista,
Florida. The 1920's Florida architectural style resort sits on 18 acres and
upon its projected completion by the year 2000 will offer approximately 370
units in 14 four and five story buildings. Despite the resort's remote, lake
front ambiance, it is only minutes from International Drive which provides
access to Orlando, Florida's major attractions. All current units offer three
bedrooms and three bathrooms with approximately 1,550 square feet of living
area, including a large screened-in deck and a full-size, well-equipped
kitchen. With two master suites, a third bedroom, and a sleeper sofa in the
living room, units can comfortably accommodate four couples. Each unit
features air-conditioning, a whirlpool tub, a washer/dryer, three cable
televisions, a video cassette player, a stereo and elegant interior details
such as nine-foot ceilings, crown molding, wooden venetian blinds, imported
ceramic tile and slate flooring. Upon full completion, the Company expects
that the resort will include 5,000 square feet of sand beaches, four gazebo-
covered docks that stretch out over Lake Bryan and easy access to water
skiing, jetskiing, parasailing, sailboating, wind surfing and fishing on Lake
Bryan. The Grand Beach resort will provide two outdoor pools, two spas, two
kiddie pools, two lighted tennis courts, sand volleyball courts, shuffleboard
courts, a putting green, a children's playground, barbecue and picnic areas
and a fitness complex with two clubhouses containing exercise rooms, kitchens
and a video arcade. In 1995, the resort was featured in both RCI Perspective
Magazine and Resort Development and Operations Magazine.
The resort currently contains 5,202 total Vacation Intervals of which 2,673
remained for sale as of September 30, 1996. Vacation Intervals at the Embassy
Vacation Resort Grand Beach are currently priced from $12,500 to $14,000 for
one-week Vacation Intervals, 1,523 of which were sold in 1995. Vacation
Intervals at the resort can be exchanged for Vacation Intervals at other
locations through RCI, which awarded the resort its Gold Crown Resort
Designation.
The Embassy Vacation Resort Poipu Point. The Embassy Vacation Resort Poipu
Point was reconstructed in 1993 after being substantially destroyed by
Hurricane Iniki and was acquired by the Company in November 1994. The resort
is located at the most southern point on the Poipu Sun Coast of Kauai, Hawaii,
offering a natural, open setting in an architectural style designed to blend
with the land. The resort spans 10 buildings on 22 acres with a total of 219
units. The units, one of which has one bedroom and one bathroom, 216 of which
have two bedrooms and two bathrooms and 2 of which have three bedrooms and
three bathrooms, range in size from 1,363 to 2,629 square feet. Each unit
either overlooks the ocean or one of the many gardens maintained on the
grounds. All units feature air-conditioning, two telephones with voice mail,
two cable televisions, video cassette player, stereo, washer/dryer, whirlpool
tub, full kitchen and a spacious lanai. Units can accommodate up to six people
and are appointed with designer furnishings, custom fabrics, and custom-
designed ceramic tile. The resort is equipped with a spectacular lagoon-like
freshwater swimming pool with a sandy beach entry and its own beach,
waterfalls, fish ponds, lush garden walkways, a kiddie pool and a health club
with weight and aerobic equipment, two hydrospas, sauna and steamroom. The
property is adjacent to a large sandy beach and is well
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located for scuba diving, wind surfing, golf, tennis, surfing, horseback
riding, fishing, boating and exploring the island's rain forests, fern grottos
and waterfalls.
The resort currently contains 11,169 total Vacation Intervals of which 9,966
remained for sale as of September 30, 1996. Units at the Embassy Vacation
Resort Poipu Point are currently priced from $13,700 (one bedroom) to $25,600
(three bedrooms) for one-week Vacation Intervals, 281 of which were sold in
1995. Vacation Intervals at the resort can be exchanged for Vacation Intervals
at other locations through RCI, which featured the resort in RCI Perspective
Magazine in 1995 and awarded it the RCI, Gold Crown Resort Designation.
The Embassy Vacation Resort Lake Tahoe. Construction on the Embassy Vacation
Resort Lake Tahoe began in May 1996. The resort is located in South Lake
Tahoe, California, and is situated on nine acres near the shores of Lake Tahoe
adjoining the Lake Tahoe Marina in one of the world's most beautiful resort
areas. The architectural design of the resort connotes the rustic elegance
known as "Old Tahoe." Approximately one mile from the casinos and 1/2 mile
from the base lift of Heavenly Ski Resort, upon completion the resort will
contain 210 two bedroom/two bath units offering lake and mountain views. The
resort will feature a restaurant, an indoor/outdoor heated swimming pool, a
spa, a sunning deck, lakefront activities, bike rentals, ski valet, sundry
shop, convenience store and delicatessen.
The Company plans to complete construction of the first phase of the resort
in February 1997. Upon completion of all planned phases, the Company expects
that the resort will contain units for 10,710 total Vacation Intervals.
Vacation Intervals at the Embassy Vacation Resort Lake Tahoe are priced from
$17,000 to $25,000 for one-week Vacation Intervals. RCI has indicated that
Vacation Intervals at the resort may be exchanged for Vacation Intervals at
other locations through RCI.
WESTIN VACATION CLUB RESORTS
The Company and Westin have entered into the Westin Agreement pursuant to
which the Company has acquired the exclusive right to jointly acquire, develop
and sell with Westin "four-star" and "five-star" Westin Vacation Club resorts
in North America, Mexico and the Caribbean for a five year term expiring May
3, 2001. Pursuant to the Westin Agreement, each of the Company and Westin will
own a 50% equity interest in such resorts and have an equal voice in their
management. The primary focus of the Westin Agreement is (i) developing
vacation ownership villas surrounding existing Westin hotel resort properties
and (ii) acquiring or developing hotels which can be operated under the Westin
hotel brand while at the same time being converted to vacation ownership
properties. Pursuant to the Westin Agreement, each of the Company and Westin
has agreed that, subject to certain exceptions, including certain Embassy
Vacation Resort acquisition and development opportunities, it will present to
the other party all "four-star" and "five-star" hotel and resort acquisition
and development opportunities (e.g., properties that are flagged by brands
such as Disney, Marriott, Omni, Ritz Carlton, Four Seasons/Regent, Inter-
Continental and Meridien) that it has determined to pursue and such other
party has a right of first refusal to determine whether to jointly develop
such opportunities with the other party subject to the foregoing exclusions.
Pursuant to the Westin Agreement, Westin and the Company will form a separate
partnership, limited liability company or similar entity to develop and
operate each Westin Vacation Club resort, of which Westin and the Company
shall be co-general partners or co-managers, as applicable. Each of the
Company and Westin will contribute 50% of the equity needed to develop and
operate each Westin Vacation Club resort. Pursuant to the Westin Agreement,
Westin has the right to manage all Westin Vacation Club resorts and the
Company and Westin will share the profits from such management activity. In
addition, Westin will promote the Westin Vacation Club concept by utilizing
its customer base for sales and marketing programs, arranging for on-site
sales desks and other in-house marketing programs, in exchange for which the
Company has agreed to reimburse Westin predetermined marketing and advertising
costs incurred by Westin. Under certain circumstances, either party may
terminate the Westin Agreement upon failure to reach specified development
goals. See "Risk Factors--Risks Related to the Westin Agreement; Limited
Control of Resorts and Termination."
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Pursuant to the Westin Agreement, the Company has agreed to make available
to Westin one voting seat on the Company's Board of Directors and has agreed
to use maximum reasonable efforts to cause the nomination and election of
Westin's designee. Westin has agreed to make available to the Company one non-
voting seat on its Board of Directors which will be filled by one of the
Founders. Following any public offering of equity securities by Westin, the
Company's seat on Westin's board will become a voting seat, entitled to all
reciprocal provisions granted by the Company to Westin. See "Risk Factors--
Effective Voting Control by Existing Stockholders; Westin Director
Designation."
In December 1996, the Company and Westin announced plans to acquire and
develop the first Westin Vacation Club resort in St. John, U.S. Virgin
Islands. The "four-star" Westin Vacation Club at St. John will involve a
conversion of the existing St. John Villas, located adjacent to the Great Cruz
Bay Resort Hotel (formerly known as the Hyatt Regency St. John) which will be
operated as the St. John Hotel. Pursuant to a purchase and sale agreement with
subsidiaries of Skopbank, a Finnish corporation, Westin will acquire a 100%
interest in the St. John Hotel and the Company and Westin will form the Westin
Partnership owned 50% by each of the Company and Westin to acquire an interest
in the 96 units at the St. John Villas, representing 4,163 Vacation Intervals
(the number of unsold Vacation Intervals remaining at the St. John Villas),
which will be operated as the Westin Vacation Club resort at St. John. Of the
$10.5 million purchase price for the remaining unsold Vacation Intervals at
St. John Villas, each of the Company and Westin is obligated to contribute
approximately $2.5 million in cash, with the remaining $5.5 million of the
acquisition price to be paid by the Westin Partnership. In addition, the
Westin Partnership will borrow approximately $7.1 million to complete the
conversion of the St. John Villas to a Westin Vacation Club resort.
The acquisition of the St. John resort is anticipated to close during the
first quarter of 1997 and commencement of Vacation Interval sales is
anticipated to begin by the fourth quarter of 1997. Located adjacent to the
beachfront hotel, the St. John Villas consist of 96 studio, one bedroom, two
bedroom and three bedroom units located on 12.3 hillside acres, of which 48
units are completed and ready for immediate occupancy. The additional 48 units
currently require construction of all interior finishes and installation of
furniture, fixtures and equipment prior to occupancy. The renovation, which
repaired damage sustained during Hurricane Marilyn in September 1995, has been
completed.
DESCRIPTION OF AVCOM'S RESORTS
AVCOM owns nine timeshare resorts, including two under construction, and a
tenth resort in which AVCOM holds a partial interest. Of these resorts, six
are currently in sales (including the partially-owned North Bay Resort at Lake
Arrowhead), one resort is pending development and AVCOM has completed sales at
three resorts (Villas at Poco Diablo, Villas of Sedona and Sedona Springs
Resort) and provides homeowners' association management and resale services at
these three locations.
Resorts in Current Sales
Tahoe Beach & Ski Club. The Tahoe Beach & Ski Club is a beach front resort
located in the City of South Lake Tahoe, California on approximately eight
acres at the end of Ski Run Boulevard which was purchased by AVCOM in March
1994. The project includes a total of 140 units, of which 110 were renovated
as timeshare units at the date acquired. Thirty units have since been
renovated for sale as timeshare units and are being marketed. At the time of
purchase, 4,533 Vacation Intervals related to the 110 renovated units of the
resort had been previously sold. The homeowners' association engaged RPM
Management, Inc. ("RPM"), a wholly-owned subsidiary of All Seasons, to operate
the property.
Sedona Summit Resort. In May 1995, AVCOM purchased approximately three acres
in Sedona, Arizona for development of a 60 unit timeshare resort.
Additionally, in May, 1996, AVCOM exercised an option to acquire an adjacent
parcel consisting of approximately four acres. Timeshare interest sales
commenced in February 1996.
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AVCOM is developing the Sedona Summit Resort through an affiliated entity,
Sedona Summit Development Limited Partnership ("SSDLP"), of which All Seasons
is the sole general partner. The activities of SSDLP are consolidated in
AVCOM's financial statements. SSDLP sold limited partnership interests in
March 1996 of approximately $1,500,000 representing a 99% ownership interest.
AVCOM has secured a revolving construction loan of $2,500,000 which has been
guaranteed by SSDLP for the development of the Sedona Summit Resort. AVCOM has
contracted to purchase completed units in phases from SSDLP for an aggregate
of $14,084,000. Sales and construction commenced in February 1996.
Scottsdale Villa Mirage Resort. The Scottsdale Villa Mirage Resort is a 168
unit resort currently under construction located on 10 acres in Scottsdale,
Arizona at the Scottsdale Princess Resort development, within proximity of the
Scottsdale Princess Hotel. The units will be two bedroom condominium type
units consisting of approximately 1,200 square feet. Construction and sales of
Phase I began in March 1996, and is planned to be open for occupancy in
February 1997. Amenities are anticipated to include a clubhouse with an
exercise facility, swimming pool and spas and tennis and volleyball courts.
Villas on the Lake. AVCOM acquired an existing condominium project adjacent
to Lake Conroe in Montgomery County, Texas in April 1996. The project consists
of 37 completed units and existing approvals and land for the construction of
48 additional units. AVCOM has contracted with the April Sound Country Club
for use of its facilities by the project's homeowner's association. Renovation
of existing units began in February 1996 and sales began in June 1996.
Tahoe Seasons Resort. During February 1996, AVCOM acquired a portfolio of
approximately 1,057 non-performing timeshare receivables generated from the
sale of timeshare intervals at Tahoe Seasons Resort in South Lake Tahoe,
California. The purchase price of approximately $1.5 million was funded by a
loan. AVCOM has also agreed to purchase other receivables generated from sales
at Tahoe Seasons Resort that subsequently become delinquent. AVCOM will
convert non-performing loans into timeshare inventory which will be sold.
Resorts Under Development
The Ridge on Sedona Golf Resort. AVCOM has acquired an approximate 12 acre
parcel in Sedona, Arizona for approximately $5.5 million. The facility
comprising The Ridge Spa & Racquet Club has been acquired as a portion of this
development. The parcel is located on the 18th fairway of the golf course at
the Sedona Golf Resort. AVCOM anticipates developing the property into a 120
unit timeshare resort in phases. Amenities are anticipated to include a 12,000
square foot club house, three swimming pools and six spas in addition to
privileges at The Ridge Spa and Racquet Club.
Partially Owned Resorts
North Bay Resort at Lake Arrowhead. The North Bay Resort at Lake Arrowhead
is located in San Bernardino County, California. AVCOM entered into a series
of agreements in January 1996 whereby AVCOM provided guarantees for $12.7
million of the developer's financing in return for a fee of $450,000
(evidenced by a note payable), a right of first refusal to offer Vacation
Interval receivable financing to the developer after expiration of the
developer's present $10.0 million financing commitment, received an option to
assume property management for the resort's homeowners association and
purchased a 40% equity position in Trion Capital Corporation, the corporate
general partner of Arrowhead Capital Partners L.P., the developer of the
resort. The general partner is entitled to receive 1% of the profits of the
developer partnership, but under certain circumstances is entitled to receive
substantially higher profits. The 40% equity position was acquired for
$600,000. The proposed resort contemplates the consolidation of two adjacent
developments. One development consists of two completed condominium buildings
converted to Vacation Interval and additional undeveloped land. The second
parcel consists of a combination of three existing condominium buildings in
various stages of construction and pads for two additional condominium
buildings. The developer has been provided with a $2.7 million construction
and operating loan commitment and a $10.0 million commitment for Vacation
Interval receivable financing from a financing company, subject to operational
involvement and financial guarantees of AVCOM.
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Resorts At Which Sales Have Been Completed
AVCOM has substantially completed sales of Vacation Intervals at the
following three resorts. AVCOM provides homeowners' association management and
resale services at these locations.
Villas at Poco Diablo. The Villas at Poco Diablo resort is a 33 unit, 1,683
Vacation Interval condominium conversion of studios and one-bedroom units
located in Sedona, Arizona. The one-bedroom units have frontage to Oak Creek
and the studio units have frontage to the golf course owned by the Poco Diablo
Resort. During the period 1988 through 1992, the resort was renovated by
AVCOM, and the units were refurbished with new furniture, fixtures and
equipment, new paint, new roofs and interiors and a remodeled outdoor pool and
spa area.
Villas of Sedona. The Villas of Sedona resort is a 40 unit, 2,040 Vacation
Interval townhouse conversion of one and two bedroom units located in west
Sedona, Arizona. The property was purchased in 1992 and has been remodeled by
AVCOM since then. The resort has new furniture, fixtures and equipment, new
paint, a new outdoor pool and custom spa area and major landscaping. In
addition, a new building encloses an outdoor pool which adjoins a 4,000 square
foot clubhouse and fitness center.
Sedona Springs Resort. Sedona Springs is a 40-unit, 2,040 Vacation Interval
two bedroom suite resort located in Sedona, Arizona on four acres adjacent to
the Villas of Sedona resort. Common areas include a 5,000 sq. ft. clubhouse,
two outdoor spas, a pool facility and spa area. This resort was the first
"purpose built" development construction by AVCOM. Construction of this
project commenced in the first quarter of 1994. Phase one consisted of 13
units and was completed in the third quarter of 1994. Phase two, consisting of
14 units and common areas, was completed in the second quarter of 1995. Phase
three, consisting of 13 units was completed in November 1995. The clubhouse is
completed and being used temporarily as a sales center. Sales at this project
were substantially completed by January 1996.
CUSTOMER FINANCING
A typical Vacation Interval entitles the buyer to a one-week per year stay
at one of the Company's resorts and ranges in price from approximately $4,000
to $8,000 for a studio residence to approximately $12,000 to $26,000 for a
three bedroom residence. The Company offers financing to the purchasers of
Vacation Intervals in the Company's resort properties who make a down payment
generally equal to at least 10% of the purchase price. This financing
generally bears interest at fixed rates and is collateralized by a first
mortgage on the underlying Vacation Interval. A portion of the proceeds of
such financing is used to obtain releases of the Vacation Interval unit from
any underlying debt. The Company has entered into agreements with lenders for
the financing of customer receivables. These agreements provide an aggregate
of up to approximately $178 million of available financing to the Company
bearing interest at variable rates tied to either the prime rate or LIBOR of
which the Company had, at September 30, 1996, approximately $116 million of
additional borrowing capacity available. Under these arrangements, the Company
pledges as security qualified purchaser promissory notes to these lenders, who
typically lend the Company 80% to 90% of the principal amount of such notes.
Payments under these promissory notes are made by the purchaser borrowers
directly to a payment processing center and such payments are credited against
the Company's outstanding balance with the respective lenders. These
arrangements currently have varying borrowing periods ranging from 18 to 20
months after the initial commitment date. The Company does not presently have
binding agreements to extend the terms of such existing financing or for any
replacement financing upon the expiration of such funding commitments, and
there can be no assurance that alternative or additional arrangements can be
made on terms that are satisfactory to the Company. Accordingly, future sales
of Vacation Intervals may be limited by both the availability of funds to
finance the initial negative cash flow that results from sales that are
financed by the Company and by reduced demand which may result if the Company
is unable to provide financing to purchasers of Vacation Intervals. If the
Company is required to sell its customer receivables, discounts from the face
value of such receivables may be required by buyers, or the Company may be
unable to locate buyers.
At September 30, 1996, the Company had a portfolio of approximately 12,800
loans to Vacation Interval buyers amounting to approximately $90.8 million
with respect to the Company's consolidated resorts. The
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Company's consumer loans had a weighted average maturity of approximately
seven years and a weighted average interest rate of 15% compared to a weighted
average cost of funds of 10.25% on the Company's borrowings secured by such
customer loans. As of September 30, 1996, approximately 8.1% of the Company's
consumer loans were considered by the Company to be delinquent (past due by 60
or more days) and the Company has completed or commenced foreclosure or deed-
in-lieu of foreclosure on approximately 2.5% of its consumer loans. The
Company has historically derived income from its financing activities. Of
these delinquent loans, approximately 90% were originated by the Company and
the remaining 10% were acquired by the Company as delinquent loans. If only
the Company's originated loans were considered, approximately 7.5% of them
would be considered delinquent as of September 30, 1996. However, because the
Company's borrowings bear interest at variable rates and the Company's loans
to purchasers of Vacation Intervals bear interest at fixed rates, the Company
bears the risk of increases in interest rates with respect to the loans it has
from its lenders. The Company intends to continue to engage in interest rate
hedging activities from time to time in order to reduce the risk and impact of
increases in interest rates with respect to such loans, but there can be no
assurance that any such hedging activity will be adequate at any time to fully
protect the Company from any adverse changes in interest rates. See "Risk
Factors--Risk of Hedging Activities."
The Company also 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, commences foreclosure proceedings
and, upon obtaining title, 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. See "Risk Factors--
Risks Associated with Customer Financing" and "--Risks Associated with
Customer Default."
SALES AND MARKETING
The Company. As one of the leading developers and operators of timeshare
resorts in North America, the Company believes that it has acquired the skill
and expertise in the development, management and operation of timeshare
resorts and in the marketing of Vacation Intervals. The Company's primary
means of selling Vacation Intervals is through on-site salesforces at each of
its Existing Resorts. A variety of marketing programs are employed to generate
prospects for these sales efforts, which include targeted mailings, overnight
mini-vacation packages, certificate programs, seminars and various
destination-specific local marketing efforts. Additionally, incentive premiums
are offered to guests to encourage resort tours, 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, and either include or will include Westin and Embassy Suites hotel
guests and current owners of timeshare. Cross-marketing targets current owners
of intervals at the Company's existing resorts, both to sell additional
intervals at the owner's home resort, or to sell an interval at another of the
Company's resorts. The Company also sells Vacation Intervals through off-site
sales centers.
The Company seeks to attract potential Vacation Interval buyers at its
Embassy Vacation Resorts by targeting past and present Embassy Suites' hotel
guests with in-hotel marketing and direct marketing programs. These marketing
efforts offer this target audience of Embassy Suites hotel guests value priced
vacation packages which include resort tours and the opportunity to purchase
complete vacations, including accommodations, airfare and other vacation
components such as car rental. Additionally, the Company has the ability to
generate resort tours through Embassy Suites' central reservation system (and
through the five KOAR-owned Embassy Suites hotels) by offering a premium for a
resort tour at the time a consumer books an Embassy Suites hotel in the
vicinity of an Embassy Vacation Resort property. The Company believes its
access to the Embassy Suites customer base allows it to generate Vacation
Interval sales from these prospective customers at a lower cost than through
other lead generation methods. Because a high percentage of such customers
already have a preference for the Embassy brand, the Company believes it
achieves relatively high sales closing percentages among these customers.
Pursuant to the Westin Agreement, the Company intends to use similar marketing
strategies at its
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Westin Vacation Club resorts. The Company's six non-branded resorts also
provide it the opportunity to cross-market customers among resorts and give
owners and prospective buyers the ability to visit and own Vacation Intervals
in multiple destinations. These cross-marketing programs may also help to
create a meaningful identity for the non-branded properties.
AVCOM. Upon consummation of the Merger, all sales and marketing operations
with respect to the AVCOM Resorts will be conducted by the Company.
ACQUISITION PROCESS
The Company obtains information with respect to resort acquisition
opportunities through interaction by the Company's management team with resort
operators, real estate brokers, lodging companies or financial institutions
with which the Company has established business relationships. From time to
time the Company is also contacted by lenders and property owners who are
aware of the Company's development, management, operations and sales expertise
with respect to Vacation Interval properties.
The Company has expertise in all areas of resort development including, but
not limited to, architecture, construction, finance, management, operations
and sales. With relatively little lead time and with minimal outside
consultant expense, the Company is able to analyze potential acquisition and
development opportunities. After completing an analysis of the prospective
market and the general parameters of the property or the site, the Company
generates a conceptual design to determine the extent of physical construction
or renovation that can occur on the site in accordance with the requirements
of the local governing agencies. For most properties, the predominant factors
in determining the physical design of the site include density of units,
maximum construction height, land coverage and parking requirements. Following
the preparation of such a conceptual design, the Company analyzes other
aspects of the development process, such as construction cost and phasing, to
match the projected sales flow in the relevant market. At this stage of
analysis, the Company undertakes to compare sales, construction cost and
phasing, debt and equity structure, cash flow, financing and overall project
cost to the acquisition cost. The Company's procedures when considering a
potential acquisition are set forth below.
Economic and Demographic Analysis. To evaluate the primary economic and
demographic indicators for the resort area, the Company considers the
following factors, among others, in determining the viability of a potential
new timeshare resort in a particular location: (i) supply/demand ratio for
Vacation Intervals in the relevant market, (ii) the market's growth as a
vacation destination, (iii) the ease of converting a hotel or condominium
property into a timeshare resort, (iv) the availability of additional land at
the property for future development and expansion, (v) competitive
accommodation alternatives in the market, (vi) uniqueness of location, and
(vii) barriers to entry that would limit competition. The Company examines the
competitive environment in which the proposed resort is located and all
existing or to-be-developed resorts. In addition, information respecting
characteristics, amenities and financial information at competitive resorts is
collected and organized. This information is used to assess the potential to
increase revenues at the resort by making capital improvements.
Pro Forma Operating Budget. The Company develops a comprehensive pro forma
budget for the resort, utilizing available financial information in addition
to the other information collected from a variety of sources. The estimated
sales of units are examined, including the management fees associated with
such unit. Finally, the potential for overall capital appreciation of the
resort is reviewed, including the prospects for liquidity through sale or
refinancing of the resort.
Environmental and Legal Review. In conjunction with each prospective
acquisition or development, the Company conducts real estate and legal due
diligence on the property. This due diligence includes an environmental
investigation and report by a reputable environmental consulting firm similar
to that undertaken and prepared in connection with the Offering, including
tests on identified underground storage tanks. If recommended by the
environmental consulting firm, additional testing is generally conducted. The
Company also
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obtains a land survey of the property and inspection reports from licensed
engineers or contractors on the physical condition of the resort. In addition,
the Company conducts customary real estate due diligence, including review of
title documents, operating leases and contracts, zoning, and governmental
permits and licenses and a determination of whether the property is in
compliance with applicable laws.
OTHER OPERATIONS
Room Rental Operations. In order to generate additional revenue at certain
of the Existing Resorts that have an excess inventory of Vacation Intervals,
the Company rents units with respect to such unsold or unused Vacation
Intervals for use as a hotel. The Company offers these unoccupied units both
through direct consumer sales, travel agents or package vacation wholesalers.
In addition to providing the Company with supplemental revenue, the Company
believes its room-rental operations provide it with a good source of lead
generation for the sale of Vacation Intervals. As part of the management
services provided by the Company to Vacation Interval owners, the Company
receives a fee for services provided to rent an owner's Vacation Interval in
the event the owner is unable to use or exchange the Vacation Interval. In
addition, the Embassy Vacation Resort Poipu Point (acquired in November 1994)
and the Westin Vacation Club at St. John (plans for acquisition and
development announced in December 1996) were both acquired or proposed to be
acquired as a traditional hotel with the intention of converting each such
resort to a timeshare property. Until such time as a unit at each resort is
sold as Vacation Intervals, the Company continues (or will continue) to rent
such unit on a nightly basis. In the future, other acquired resorts may be
operated in this fashion during the start-up of Vacation Interval sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Resort Management. The Company's Existing Resorts are (i) generally managed
by the Company itself pursuant to management agreements with homeowner
associations with respect to each of the Company's non-branded resorts, (ii)
managed by Promus pursuant to management agreements with the Company with
respect to the Company's Grand Beach and Lake Tahoe Embassy Vacation Resorts
or (iii) managed by Aston Hotels & Resorts ("Aston") with respect to the
Embassy Vacation Resort Poipu Point. The Company pays Promus a licensing fee
of 2% of Vacation Interval sales at the Embassy Vacation Resorts.
At each of the Company's non-branded resorts, the Company enters into a
management agreement with an association comprised of owners of vacation
interests at the resort to provide for management and maintenance of the
resort. Pursuant to each such management agreement the Company is paid a
monthly management fee equal to 10% to 12% of monthly maintenance fees. The
management agreements are typically for a three year period, renewable
annually automatically unless notice of non-renewal is given by either party.
Pursuant to each management agreement the Company has sole responsibility and
exclusive authority for all activities necessary for the day-to-day operation
of the non-branded resorts, including administrative services, procurement of
inventories and supplies and promotion and publicity. With respect to each
resort the Company also obtains comprehensive and general public liability
insurance, all-risk property insurance, business interruption insurance and
such other insurance as is customarily obtained for similar properties. See
"Business--Insurance; Legal Proceedings." The Company also provides all
managerial and other employees necessary for the non-branded resorts,
including review of the operation and maintenance of the resorts, preparation
of reports, budgets and projections, employee training, and the provision of
certain in-house legal services. At the Company's Grand Beach and Lake Tahoe
Embassy Vacation Resorts, Promus provides (or will provide with respect to
Lake Tahoe), at the Embassy Vacation Resort Poipu Point, Aston provides
management and maintenance services to the Company pursuant to a management
agreement and assumes responsibility of such day-to-day operation of the
Embassy Vacation Resorts.
VACATION INTERVAL OWNERSHIP
The purchase of a Vacation Interval typically entitles the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year,
in perpetuity. Typically, the buyer acquires an ownership interest in the
vacation residence, which is often held as tenant in common with other buyers
of interests in the property.
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The owners of Vacation Intervals manage the property through a non-profit
homeowners' association, which is governed by a Board consisting of
representatives of the developer and owners of Vacation Intervals at the
resort. The Board hires an agent, delegating many of the rights and
responsibilities of the homeowners' association to a management company, as
described above, including grounds landscaping, security, housekeeping and
operating supplies, garbage collection, utilities, insurance, laundry and
repair and maintenance.
Each Vacation Interval owner is required to pay the homeowners' association
a share of all costs of maintaining the property. These charges can consist of
an annual maintenance fee (generally $400 to $550 per owner) and special
assessments, assessed on an as-needed basis. If the owner does not pay such
charges, the owner's use rights may be suspended and the homeowners'
association may foreclose on the owner's Vacation Interval.
AVCOM OPERATIONS
Overview
AVCOM develops and markets interests in timeshare resorts, finances and
services timeshare sales and receivables at its timeshare resorts, provides
homeowners' association and property management services and produces
marketing data for itself and third parties. AVCOM currently owns or holds
interests in properties in Scottsdale and Sedona, Arizona, South Lake Tahoe,
California, Lake Arrowhead, California, and Lake Conroe, Texas (near Houston),
held for the purpose of developing, marketing, selling, financing and managing
timeshare interests. AVCOM's businesses are conducted through its wholly-owned
subsidiary, All Seasons Resorts, Inc. All Seasons has several wholly-owned
subsidiaries of which RPM, All Seasons Realty, Inc. ("All Seasons Realty"),
All Seasons Construction, Inc. ("AS Construction") and The Ridge Spa and
Racquet Club, Inc. ("RSR Club") have employees or significant activities. All
Seasons conducts the executive, management, accounting, consumer financing and
development activities. RPM directs the resort homeowners associations and
resort management, housekeeping, maintenance, guest services and other resort
operations. All Seasons Realty engages licensed real estate agents as
independent contractors who sell timeshare interests to consumers and conduct
the marketing, sales and administrative functions in Sedona and South Lake
Tahoe. In addition to timeshare interests at resorts developed by AVCOM, All
Seasons Realty markets timeshare interests in other resort properties not
developed by AVCOM from the marketing centers located at its developed
resorts. AS Construction performs development and construction activities for
certain of AVCOM's projects. RSR Club operates The Ridge Spa and Racquet Club
at Sedona, Arizona, which serves as an amenity to AVCOM's developments in
Sedona and is also open to the public.
Administrative and Operating Facilities
AVCOM's administrative offices are located in Sedona, Arizona. The main
facility is owned by AVCOM, has approximately 9,000 square feet of space. In
addition to AVCOM's main administrative office, in January 1996, AVCOM
purchased an additional office building in Sedona, Arizona. This facility has
approximately 9,000 square feet of space.
AVCOM utilizes additional facilities for its marketing and sales activities,
including sales facilities located at its developments at Sedona, Arizona and
South Lake Tahoe, California and marketing centers located at the Village of
Oak Creek (in proximity to Sedona), Phoenix and Scottsdale, Arizona. The
facilities at the Village of Oak Creek, Phoenix and Scottsdale, Arizona are
leased by AVCOM under short-term leases and the sales facilities at Sedona and
South Lake Tahoe are a part of AVCOM's developments at such locations.
As discussed above, AVCOM owns an approximate 19,000 square foot facility
which is operated as The Ridge Spa & Racquet Club. The facility is located at
the Sedona Golf Resort development.
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORKS
The Company believes that its Vacation Intervals are made more attractive by
the Company's participation in Vacation Interval exchange networks operated by
RCI and Interval International with respect to the Royal Palm Beach Club. In a
recent 1995 study sponsored by the Alliance for Timeshare Excellence and ARDA,
the
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exchange opportunity was cited by purchasers of Vacation Intervals as one of
the most significant factors in determining whether to purchase a Vacation
Interval. Participation in RCI allows the Company's customers to exchange in a
particular year their occupancy right in the unit in which they own a Vacation
Interval for an occupancy right at the same time or a different time 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 his 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. RCI assigns a rating
to each listed Vacation 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 Vacation Interval is available, and attempts to satisfy the
exchange request by providing an occupancy right in another Vacation Interval
with a similar rating. If RCI is unable to meet the member's initial request,
it suggests alternative resorts based on availability.
Founded in 1974, RCI has grown to be the world's largest Vacation Interval
exchange organization, which has a total of more than 2,900 participating
resort facilities and over 2.0 million members worldwide. During 1995 RCI
processed over 1.5 million Vacation Interval exchanges. The cost of the annual
membership fee in RCI, which typically is at the option and expense of the
owner of the Vacation Interval, is $65 per year, plus an exchange fee of $89
and $119 for domestic and international exchanges, respectively. RCI has
assigned high ratings to the Vacation Intervals in the Company's resort
properties which are operational, and such Vacation Intervals have in the past
been exchanged for Vacation Intervals at other highly-rated member resorts.
During 1995, approximately 97% of all exchange requests were fulfilled by RCI,
and approximately 58% of all exchange requests are confirmed on the day of the
request. 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. In November 1996, HFS
Incorporated consummated the acquisition of RCI for cash and securities. See
"Risk Factors--Dependence on Vacation Interval Exchange Networks; Risk of
Inability to Qualify Resorts."
FUTURE ACQUISITIONS
The Company intends to expand its timeshare business by acquiring or
developing resorts located in attractive resort destinations, including Hawaii
and California, and is in the process of evaluating strategic acquisitions in
a variety of locations. Such future acquisition and development of resorts
could have a substantial and material impact on the Company's operations and
prospects. The Company currently is evaluating possible acquisitions of
resorts and development opportunities, including opportunities located in
Southern and Northern California, the Hawaiian islands of Hawaii, Maui and
Oahu, the Caribbean, Mexico, the Western, Southwestern and Southeastern United
States (including Florida, Arizona and Utah) and in various Westin resorts
throughout North America. Other than as described in this Prospectus under
"Recent Developments" with respect to the St. John resort, the Company has not
entered into any definitive acquisition agreement with respect to any such
resort or development opportunity and there can be no assurance that such an
agreement will be negotiated or that any such acquisition will be consummated.
In addition, the Company has also explored the acquisition of and may consider
acquiring existing management companies, timeshare developers and marketers,
loan portfolios or other industry related operations or assets in the
fragmented timeshare development, marketing, finance and management industry.
See "Management--Employment Agreements" and "Certain Relationships and Related
Transactions--Founders' Other Business Interests."
COMPETITION
Although major lodging and hospitality companies such as Marriott, Disney,
Hilton, Hyatt, Four Seasons and Inter-Continental, as well as Promus and
Westin, have established or declared an intention to establish timeshare
operations in the past decade, the industry remains highly fragmented, with a
vast majority of North America's approximately 2,000 timeshare resorts being
owned and operated by smaller, regional companies. Of the Company's major
brand name lodging company competitors, the Company believes, based on
published
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industry data and reports, that Marriott currently sells Vacation Intervals at
10 resorts which it also owns and operates (Kauai, Hawaii; Palm Desert,
California; Park City, Utah; Breckenridge, Colorado; Williamsburg, Virginia;
Hilton Head Island, South Carolina; Orlando, Florida; Marabella, Spain;
Boston, Massachusetts, and Ft. Lauderdale, Florida) and directly competes with
the Company's Poipu Point, Hilton Head Island and Orlando area resorts; Disney
currently sells Vacation Intervals at three resorts which it also owns and
operates (Lake Buena Vista and Vero Beach, Florida; and Hilton Head Island,
South Carolina) and directly competes with the Company's Orlando area and
Hilton Head Island resorts; Hilton currently sells Vacation Intervals at two
resorts which it also owns and operates (Las Vegas, Nevada; and Orlando,
Florida) and directly competes with the Company's Orlando area resorts; Hyatt
owns and operates one resort in Key West, Florida but does not directly
compete in any of the Company's existing markets (although Hyatt has announced
an intention to develop a timeshare resort in Orlando, Florida); Four Seasons
currently is developing its first timeshare resort in Carlsbad, California but
is not yet in sales of Vacation Intervals at any resorts; and Inter-
Continental announced its entry into the timeshare market in 1996, but has yet
to announce any specific projects and is not yet in sales of Vacation
Intervals at any resorts. Many of these entities possess significantly greater
financial, marketing, personnel and other resources than those of the Company
and may be able to grow at a more rapid rate as result.
Direct competition in the Sedona, Arizona area currently is from ILX
Incorporated which is converting the Los Abrigados Resort Hotel to a timeshare
resort and selling various product configurations. ILX's product is a
combination of studios, one bedroom and two bedroom units. AVCOM competes
directly with The Ridge at Lake Tahoe for timeshare sales in the Lake Tahoe
market. The Ridge is a large condominium development with extensive on-site
amenities. AVCOM competes with the Orange Tree Resort, located in Scottsdale,
Arizona and developed by the Shell Group, with respect to its Scottsdale Villa
Mirage project. At present, the only timeshare resort in competition with
AVCOM's planned Lake Conroe project is a project located 15 miles away
developed by Silverleaf Corporation.
The Company also competes with companies with unbranded resorts such as
Westgate, Vistana and Vacation Break, each of which competes with the
Company's Orlando area resorts, and Fairfield, which competes with the
Company's Orlando area and Branson resorts. Vacation Break announced in
November 1996 that it had agreed to purchase the Berkley Group, another
timeshare resort developer, for stock worth $225.8 million at the time of the
announcement. The transaction will leave Berkley shareholders with control of
the combined company. Vacation Break markets and finances time-sharing
interests in Florida and Bahamas resorts, and the combined company will have
resort properties in Virginia, Florida and the Bahamas. Both are based in Fort
Lauderdale, Fla.
The Company believes, based on published industry data and reports, that its
experience and exclusive focus on the timeshare industry, together with its
portfolio of resorts located in a wide range of resort destinations and at a
variety of price points, distinguish it from each of its competitors and that
the Company is uniquely positioned for future growth.
GOVERNMENTAL REGULATION
General. The Company's Vacation Interval marketing and sales are subject to
extensive regulations by the federal government and the states and foreign
jurisdictions in which its resort properties are located and in which Vacation
Intervals are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role 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 appears on the Truth-In-Lending Act and Regulation Z, the Equal
Credit Opportunity Act and Regulation B, the Interstate and Land Sales Full
Disclosure Act, Real Estate Standards Practices Act, Telephone Consumer
Protection Act, Telemarketing and Consumer Fraud and Abuse Prevention Act,
Fair Housing Act and the Civil Rights Act of 1964 and 1968. In addition, many
states have adopted specific laws and regulations regarding the sale of
interval ownerships programs. The laws of most states, including Florida,
South Carolina and Hawaii require the Company to file with a designated state
authority for its approval a detailed offering statement describing the
Company and all material aspects of the project and sale of Vacation
Intervals. The laws of California require
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the Company to file numerous documents and supporting information with the
California Department of Real Estate, the agency responsible for the
regulation of Vacation Intervals. When the California Department of Real
Estate determines that a project has complied with California law, it will
issue a public report for the project. The Company is required to deliver an
offering statement or public report to all prospective purchaser of a Vacation
Interval, together with certain additional information concerning the terms of
the purchase. The laws of Illinois, Florida and Hawaii impose similar
requirements. Laws in each state where the Company sells Vacation Intervals
generally grant the purchaser of a Vacation Interval the right to cancel a
contract of purchase at any time within a period ranging from three to 15
calendar days following the earlier of the date the contract was signed or the
date the purchaser has 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; sellers of travel
licensure; anti-fraud laws; telemarketing laws; price gift and sweepstakes
laws; and labor laws. The Company believes that it is in material compliance
with all federal, state, local and foreign laws and regulations to which it is
currently or may be subject. However, no assurance can be given that the cost
of qualifying under 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 material
adverse effect on the Company. See "Risk Factors--Regulation of Sales of
Vacation Intervals."
In connection with the resorts to be acquired in the Merger with AVCOM, the
California Department of Real Estate has conducted an audit with respect to
AVCOM timeshare operations at the Tahoe Beach & Ski Club and has informed
AVCOM of several discrepancies it claims to have discovered during such audit.
AVCOM has responded to the Department of Real Estate's request for additional
information and disputes the claimed discrepancies. The final results of the
audit are pending. In addition, the Arizona Department of Real Estate is
investigating AVCOM and its Scottsdale Villa Mirage and Sedona Summit Resorts
with respect to the alleged failure of John R. Stevens, AVCOM's Director of
Marketing and New Projects, to disclose certain events from his prior
development history in Colorado on timeshare registration applications filed
in Arizona and certain other of AVCOM's timeshare-related activities. As a
result of the Arizona investigation, Mr. Stevens agreed to voluntarily resign
his position as an officer and director of AVCOM, and AVCOM and Mr. Stevens
are cooperating with the Arizona Department of Real Estate. AVCOM and Mr.
Stevens believe that they have satisfied all applicable requirements and the
Arizona Department of Real Estate has lifted its request for additional
disclosure regarding Mr. Stevens in public timeshare resorts filed in Arizona.
The Texas Real Estate Commission also has investigated AVCOM, but has
determined that, based upon the information it has gathered to date, and Mr.
Stevens' resignation as an officer of AVCOM's Texas subsidiaries, it will not
take any further action.
Environmental Matters. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and
for investigation and clean-up costs incurred by such parties in connection
with the contamination. Such laws typically impose clean-up responsibility and
liability without regard to whether the owner knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The cost of investigation, remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances at a disposal
or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, the Company may be potentially
liable for such costs.
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Certain Federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws
may impose liability for release of ACMs and may provide for third parties to
seek recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no
state or federal requirements regarding the monitoring for, presence of, or
exposure to, radon in indoor air, the EPA and the Surgeon General recommend
testing residences for the presence of radon in indoor air, and the EPA
further recommends that concentrations of radon in indoor air be limited to
less than 4 picocuries per liter of air (Pci/L) (the "Recommended Action
Level"). The presence of radon in concentrations equal to or greater than the
Recommended Action Level in one or more of the Company's properties may
adversely affect the Company's ability to sell Vacation Intervals at such
properties and the market value of such property. Recently-enacted federal
legislation will eventually require the Company to disclose to potential
purchasers of Vacation Intervals at the Company's resorts that were
constructed prior to 1978 any known lead-paint hazards and will impose treble
damages for failure to so notify.
Electric transmission lines are located in the vicinity of the Company's
properties. Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic
fields emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the
Company understands that lawsuits have, on occasion, been filed (primarily
against electric utilities) alleging personal injuries resulting from exposure
as well as fear of adverse health effects. In addition, fear of adverse health
effects from transmission lines has been a factor considered in determining
property values in obtaining financing and in condemnation proceedings in
eminent domain brought by power companies seeking to construct transmission
lines. Therefore, there is a potential for the value of a property to be
adversely affected as a result of its proximity to a transmission line and for
the Company to be exposed to damage claims by persons exposed to EMFs.
The Company has conducted Phase I assessments at each of its Existing
Resorts in order to identify potential environmental concerns. These Phase I
assessments have been carried out in accordance with accepted industry
practices and consisted of non-invasive investigations of environmental
conditions at the properties, including a preliminary investigation of the
sites and identification of publicly known conditions concerning properties in
the vicinity of the sites, physical site inspections, review of aerial
photographs and relevant governmental records where readily available,
interviews with knowledgeable parties, investigation for the presence of above
ground and underground storage tanks presently or formerly at the sites, a
visual inspection of potential lead-based paint and suspect friable ACMs where
appropriate, a radon survey, and the preparation and issuance of written
reports. The Company's assessments of its properties have not revealed any
environmental liability that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations, nor
is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. The Company does not believe that compliance
with applicable environmental laws or regulations will have a material adverse
effect on the Company or its financial condition or results of operations.
In connection with the acquisition and development of the Embassy Vacation
Resort Lake Tahoe and the San Luis Bay Resort, the Company's environmental
consultant has identified several areas of environmental concern. The areas of
concern at the Embassy Vacation Resort Lake Tahoe relate to possible
contamination that originated on the resort site due to prior uses and to
contamination that may migrate onto the resort site from upgradient sources.
California regulatory agencies have been monitoring the resort site and have
required or is in the process of requiring the responsible parties (presently
excluding the Company) to effect remediation action. The Company has been
indemnified by certain of the responsible parties for certain costs and
expenses in
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connection with contamination at the Embassy Vacation Resort Lake Tahoe
(including Chevron (USA), Inc.) and does not anticipate incurring material
costs in connection therewith, however, there is no assurance that the
indemnitor(s) will meet their obligations in a complete and timely manner. In
addition, the Company's San Luis Bay Resort is located in an area of Avila
Beach, California which has experienced underground contamination resulting
from leaking pipes at a nearby oil refinery. California regulatory agencies
have required the installation of groundwater monitoring wells on the beach
near the resort site, and no demand or claim in connection with such
contamination has been made on the Company, however, there is no assurance
that claims will not be asserted against the Company with respect to this
environmental condition.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances. Except as described above with
respect to the Embassy Vacation Resort Lake Tahoe and the San Luis Bay Resort,
the Company has not been notified by any governmental authority or any third
party, and is not otherwise aware, of any material noncompliance, liability or
claim relating to hazardous or toxic substances or petroleum products in
connection with any of its present properties.
Other Regulations. Under various state and federal laws governing housing
and places of public accommodation the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities are substantially in
compliance with present requirements of such laws, and the Company may incur
additional costs of compliance. Additional legislation may impose further
burdens or restriction on owners with respect to access by disabled persons.
The ultimate amount of the cost of compliance with such legislation is not
currently ascertainable, and, while such costs are not expected to have a
material effect on the Company, such costs could be substantial. Limitations
or restrictions on the completion of certain renovations may limit application
of the Company's growth strategy in certain instances or reduce profit margins
on the Company's operations.
EMPLOYEES
The Company. As of September 30, 1996, the Company employed approximately
650 full-time employees. The Company believes that its employee relations are
good. Except for certain employees located in the St. Maarten, Netherlands
Antilles properties, none of the Company's employees is represented by a labor
union. The Company sells Vacation Intervals at its resorts through 376
independent sales agents. Such independent sales agents provide services to
the Company under contract and are not employees of the Company. See "Risk
Factors--Risk of Tax Re-Classification of Independent Contractors and
Resulting Tax Liability; Cost of Compliance with Applicable Laws."
AVCOM. As of September 30, 1996, AVCOM had approximately 430 full-time
employees. AVCOM's employees are not represented by a labor union and AVCOM
has no knowledge of any current organization activities. AVCOM has never
suffered a work stoppage and considers its relations with employees to be
good. Additionally, AVCOM primarily utilizes independent contractors as its
sales representatives. As of September 30, 1996, AVCOM engaged approximately
190 independent contractors in this capacity.
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. In September 1995 and July 1996, the Company's St. Maarten resorts
were damaged by a hurricane. With respect to such September 1995 damage, the
Company has recovered amounts from its insurance carriers sufficient to cover
100% of the property damage losses and is in the process of recovering amounts
for business interruption. The Company has agreed to provide approximately
2,700 replacement weeks to owners who were unable to use their Vacation
Interval as a result of such September 1995 hurricane. Such provision of
replacement Vacation Intervals will have the short
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term effect of reducing the number of Vacation Intervals available for sale or
alternative rental as hotel rooms at the St. Maarten resorts. Additionally,
the St. Maarten resorts sustained relatively minor damage in 1996 as the
result of Hurricane Bertha; management estimates that such damage is
approximately $100,000, which is less than the applicable insurance
deductibles and, accordingly, the expense to repair the damage will be borne
by the Company. There are, however, certain types of losses (such as losses
arising from acts of war) that are not generally 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. See "Risk Factors--Natural Disasters; Uninsured
Loss."
LEGAL PROCEEDINGS
The Company is currently subject to litigation and claims respecting
employment, tort, contract, construction and commissions, disputes, among
others. In the judgment of management, none of such lawsuits or claims against
the Company is likely to have a material adverse effect on the Company or its
business. See "The Proposed Merger--Legal Proceedings Against AVCOM" for a
discussion of lawsuits or claims against AVCOM that AVCOM deems material.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On September 12, 1996, Ernst & Young LLP advised the Company that it was
resigning as independent auditors for the Company. Ernst & Young LLP had been
retained since the Company's inception and there have been no disagreements
between the Company and Ernst & Young LLP with respect to accounting
principles or practices, financial statement disclosure, auditing scope or
procedures, which if not resolved to Ernst & Young LLP's satisfaction, would
have resulted in a reference to the subject matters of the disagreement in its
audit report. Since the Company's inception, Ernst & Young LLP's report on the
Company's financial statements did not contain an adverse opinion or a
disclaimer of opinion, nor were the opinions qualified or modified as to
uncertainty, audit scope, or accounting principles, nor were there any events
of the type requiring disclosure under Item 304(a)(l)(v) of Regulation S-K
under the Securities Act.
On September 17, 1996, the Company retained the accounting firm of Arthur
Andersen LLP as auditors for the fiscal year ending December 31, 1996
following Board of Directors approval, which was obtained on September 16,
1996. The decision to retain Arthur Andersen LLP was based upon the prior
relationship with a predecessor of the Company as auditors for the fiscal year
ending December 31, 1994 and Arthur Andersen LLP's experience in the Company's
industry, and was not motivated by any disagreements between the Company and
Ernst & Young LLP concerning any accounting principles and/or policy matters.
From the
Company's inception to September 17, 1996, the Company did not consult with
Arthur Andersen LLP with respect to the matters described in Item 304(a)(2) of
Regulation S-K.
TRADEMARKS AND COMPANY NAME
While the Company owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights and other intellectual
property rights which, in the aggregate, are of material importance to its
business, it is believed that the Company's business, as a whole, is not
materially dependent upon any one intellectual property or related group of
such properties. The Company is licensed to use certain technology and other
intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other intellectual
property rights owned and controlled by the Company.
The Company is considering a proposal to change its corporate name following
closing of the Merger.
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THE PROPOSED MERGER
GENERAL DESCRIPTION OF MERGER
Pursuant to the Merger Agreement, on the closing date of the Merger (the
"Closing Date"), ASP Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of the Company, will merge with and into AVCOM. Upon
consummation of the Merger, each share of Common Stock of AVCOM, except shares
held in treasury and shares owned by shareholders who have taken all required
steps to exercise their appraisal rights under Delaware law, will be converted
into consideration of $5.00, subject to adjustment to a maximum of $6.00 or a
minimum of $4.00. The consideration will consist of shares of the Company's
Common Stock. The Company will not be required to issue more than $34.6
million nor less than $23.1 million in value of its Common Stock at the
closing of the Merger. The value of the Company's Common Stock for purposes of
determining the number of shares issuable as the merger consideration will be
equal to the mean average of the high and low trading prices of the Company's
Common Stock as reported on the Nasdaq National Market for each the ten
consecutive trading days immediately preceding the ten days prior to the
Closing Date.
If stock options granted by AVCOM are outstanding as of the Closing Date and
converted into shares of the Company's Common Stock, the holders thereof will
receive merger consideration calculated on the basis of the number of shares
underlying options having the same exercise price multiplied by a fraction,
the denominator of which is $5.00 (subject to adjustment, as described below)
and the numerator of which is the excess of the denominator over the exercise
price of the underlying options. There are, in the aggregate, 750,000 shares
of AVCOM Stock reserved for issuance pursuant to an AVCOM stock option plan,
of which stock options for 300,000 shares of AVCOM Stock are outstanding.
Options granted outside of the AVCOM stock option plan to acquire an
additional 100,000 shares of AVCOM Stock are also outstanding. In addition,
there is an option to acquire 350,000 shares of AVCOM Stock, the validity of
which is being challenged by AVCOM. All valid outstanding options will, as of
the effective time of the Merger be converted into the right to receive shares
of the Company Common Stock in accordance with the foregoing calculation.
The Merger Agreement provides that the consideration of $5.00 per share of
Common Stock of AVCOM to be received by AVCOM shareholders is subject to
adjustment to a maximum of $6.00 or a minimum of $4.00, based upon the
Conversion Share Value of the Company Common Stock as of the Closing Date. As
of the last trading day immediately preceding the date of the execution of the
Merger Agreement, the average sale price of a share of the Company Common
Stock was $19.44. The parties agreed to a value of $5.00 per share for Common
Stock of AVCOM, yielding the initial conversion ratio of 0.26. This initial
conversion ratio is fixed, and will not adjust, unless the market price of the
Company Common Stock as of the Closing Date is in excess of $23.33, or less
than $15.55. The "Conversion Share Value" pursuant to the Merger Agreement of
a share of the Company Common Stock shall be equal to the mean average of the
high and low trading prices of the Company Common Stock as reported on the
Nasdaq National Market System for each of the ten consecutive trading days
immediately preceding ten days prior to the Closing Date. Consequently, in the
event that the Conversion Share Value should equal $23.33, the effective
Merger consideration received by a holder of a share of Common Stock of AVCOM
would be $6.00 based upon the conversion ratio of .26. If the Conversion Share
Value is $15.55, a holder of a share of Common Stock of AVCOM would receive
Merger consideration of $4.00, based upon the conversion ratio of .26. In the
event, however, that the Conversion Share Value should exceed $23.33, the
conversion ratio would be reduced so as to reduce the Merger consideration per
share of Common Stock of AVCOM to $6.00. Likewise, should the Conversion Share
Value be less than $15.55, the conversion ratio would be increased so as to
insure that a share of Common Stock of AVCOM would receive Merger
consideration of $4.00.
The aggregate amount of the Merger consideration to be received by AVCOM
shareholders is also subject to adjustment in the event that AVCOM incurs in
excess of $250,000 in fees and expenses with consultants, attorneys, and
accountants in connection with the Merger and the due diligence conducted in
regard to the Merger, unless a higher amount is agreed to by the Company, such
agreement not to be unreasonably withheld. Adjustment also can occur if any
amount is paid by AVCOM or a subsidiary of AVCOM in excess of certain
projected litigation expenses. Any adjustments arising out of these provisions
would be borne pro rata by all shares of Common Stock of AVCOM being converted
in the Merger.
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ESCROW AGREEMENT AND INDEMNITY
Terms of Indemnity and Escrow
In order to establish a procedure for the satisfaction of any claims by the
Company for indemnification pursuant to the Merger Agreement, AVCOM has agreed
in the Merger Agreement that 10% of the aggregate shares of the Company Stock
to be received by AVCOM shareholders upon consummation of the Merger will be
deposited into escrow and governed by the Escrow Agreement. Pursuant to the
Escrow Agreement, all stock splits or dividends payable in stock or other
securities of the Company that are made by the Company with respect to the
escrowed shares, will be deposited into escrow and governed by the Escrow
Agreement. The escrowed shares and such stock or other dividends deposited in
escrow are collectively referred to herein as the "Escrow Deposit."
AVCOM, along with Gary L. Hughes and John R. Stevens, the Chief Executive
Officer and Director of Marketing and New Products of AVCOM, respectively, has
agreed to indemnify the Company from and against all expenses and damages
(including, without limitation, all related counsel and paralegal fees and
expenses) arising out of any breach of a representation or warranty made by
AVCOM in the Merger Agreement, any breach of the covenants or agreements made
by AVCOM in the Merger Agreement, or any inaccuracy in any certificate
delivered by AVCOM pursuant to the Merger Agreement. The Company shall have a
right, pursuant to the indemnification provisions, to be put in the same pre-
tax consolidated financial condition as it would have been in had each of the
representations and warranties of AVCOM been true and correct and had the
covenants and agreements of AVCOM been performed in full. The Merger Agreement
and the Escrow Agreement provide that the Escrow Deposit shall be held by the
Company for a period of one year following the Closing Date, unless there
remains any unresolved claim for indemnifiable damages in which event any
Escrow Deposit remaining after such claim shall have been satisfied shall be
returned to shareholders promptly after the time of satisfaction; provided,
however, that if any litigation or disputes disclosed in the Merger Agreement
has not been settled and dismissed with prejudice, the Escrow Deposit (or as
much as does not exceed the Company's claims with respect to such
indemnification) shall be held until the earlier of the settlement of all such
litigation or five years following the Closing Date. Partial releases of the
Escrow Deposit occur upon determination that the remaining Escrow Deposit
exceeds the estimated litigation exposure. No claim may be made by the Company
under the indemnification provisions of the Merger Agreement unless the amount
of the individual claim exceeds $25,000, or the aggregate of all claims made
from the Closing Date shall exceed $100,000. Once such limitations are met,
however, whether individually or in the aggregate, the entire claim shall be
subject to indemnification. This limitation provision does not provide for a
deductible and shall not apply, in any event that the claim arises out of
fraud or intentional or willful misconduct on the part of the breaching party.
In addition, pursuant to the Merger Agreement, Signature is indemnified for
any expenses, costs, deficiencies, liabilities and damages with respect to any
litigation or claims disclosed by AVCOM in an exhibit to the Merger Agreement
to the extent that such expenses, costs, deficiencies, liabilities and
damages, subsequent to September 22, 1996, exceed $1,000,000, in the
aggregate.
The shares of the Company Common Stock to be issued pursuant to the Merger,
other than those deposited in the Escrow Deposit, will be freely transferable
except by certain shareholders of AVCOM who are deemed to be "affiliates" of
AVCOM. The shares of the Company Common Stock issued to such affiliates will
be restricted in their transferability in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations promulgated thereunder by the Securities and Exchange Commission.
Shares of the Company Common Stock will not be transferable while they remain
in the Escrow Deposit.
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LEGAL PROCEEDINGS AGAINST AVCOM
AVCOM or its affiliates are presently involved in the following litigation
that AVCOM management has deemed material.
AVCOM International, Inc., et al. v. Needham, et al., filed January 13, 1995
in the United States District Court of the District of Arizona. AVCOM filed
this action against its former director, William C. Needham, Jr. and Cannon
Time for damages relating to the merger of Cannon Time into AVCOM and
cancellation of AVCOM stock and options claimed by Mr. Needham. The action is
based upon allegations of breach of contract, fraud, securities fraud, breach
of fiduciary duty, and other alleged wrongful conduct of Mr. Needham based
upon allegations of misrepresentation and omissions to disclose material facts
in connection with the merger of Cannon Time into AVCOM. This suit is also
based upon allegations that Mr. Needham failed to perform certain services on
behalf of AVCOM. Mr. Needham has filed a counter-claim against AVCOM, All
Seasons, Gary L. and Sandra G. Hughes and John R. Stevens alleging defamation,
interference with business relations, breach of contract and indemnification.
AVCOM intends to vigorously prosecute this litigation for the benefit of
AVCOM. Additionally, AVCOM intends to vigorously defend the counter-claim on
behalf of AVCOM and its officers and directors.
All Seasons Development, Inc., et al. v. Eng-Chye Low, et ux., filed on
February 24, 1995 in Maricopa County Superior Court; Eng-Chye Low v.
Villashare Partners Limited Partnership, et al., filed on April 7, 1995 in the
Verde Valley Judicial District of the Yavapai County, Arizona Superior Court.
All Seasons and Gary L. and Sandra G. Hughes filed the initial action against
Eng-Chye and Vivian Low seeking damages for conversion, breach of fiduciary
duty and breach of contract. The suit arises out of a claim by All Seasons and
Mr. Hughes related to a loan to or investment with Mr. Low. In response to the
suit, Mr. Low sued All Seasons under two promissory notes issued by VPLP, of
which All Seasons was the sole general partner, to Mr. Low under a separate
obligation which was secured by certain consumer receivables, alleging breach
of contract under the promissory notes and breach of the implied covenant of
good faith and fair dealing and sought the appointment of a receiver.
Additionally, Mr. Low has demanded 200,000 shares of Common Stock of AVCOM
which he claims were promised in connection with a previous business
arrangement, although no suit has been filed on this claim. On June 2, 1995,
the Court denied Low's request for appointment of a receiver without prejudice
to reassert such motion. AVCOM intends to vigorously defend this action.
Success Marketing, Inc., et al. v. All Seasons Resorts, Inc., filed on
August 3, 1995 in the Maricopa County, Arizona Superior Court; Success
Marketing, Inc., et al. v. All Seasons Resorts, Inc., filed on August 3, 1995
with the American Arbitration Association in Phoenix, Arizona. Success
Marketing, Inc. and its affiliate Success Ventures, Inc. (collectively
"Success") filed suit, made demand for arbitration against All Seasons
alleging breach of contract, loss of compensation, failure to negotiate in
good faith and promissory fraud. Success seeks contract and punitive damages.
The suit is a result of a prior marketing and sales agreement between the
parties and negotiations for a new agreement which were not consummated. AVCOM
has filed a counter-claim for damages and intends to vigorously defend these
actions. Additionally, Success has recently made written demand to exercise an
alleged option for 150,000 shares of AVCOM stock at a per share exercise price
of $2.50, although no suit has been filed on this claim. AVCOM disputes the
existence of these options.
AVCOM is presently advancing legal fees on behalf of the Messrs. Hughes and
Stevens with respect to the defense of the counter-claim asserted by Mr.
Needham in the AVCOM International, Inc., et al. litigation, and on behalf of
Mr. Hughes with respect to prosecution of the All Seasons Development, Inc.,
et al. v. Eng-Chye Low, et ux. litigation.
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CONDITIONS OF THE MERGER
The respective obligations of the Company and AVCOM to consummate the Merger
are subject to the satisfaction or waiver of certain conditions, including the
following: (a) all required governmental, regulatory and third party
approvals, consents and/or waiting periods shall have been obtained or shall
have expired; (b) there shall be no injunction, restraining order or decree of
any nature of any court or governmental agency or body in effect that
restrains or prohibits the consummation of transactions contemplated by the
Merger; and (c) the Merger Agreement is approved by the holders of a majority
of the outstanding shares of Common Stock of AVCOM at the Special Meeting.
AVCOM's obligations to consummate the Merger are subject to the
satisfaction, unless waived, of certain other conditions, including the
following: AVCOM's lenders shall have consented to the Merger to the extent
that proceeding without such consent would allow any such lender to accelerate
its indebtedness.
The Company's obligations to consummate the Merger are subject to the
satisfaction, unless waived, of certain other conditions, including the
following: (a) AVCOM shareholders holding more than 10% of the Common Stock of
AVCOM shall not have dissented or exercised appraisal rights under applicable
law in connection with the transactions contemplated by the Merger Agreement;
(b) the Company's lender shall have consented to the transactions contemplated
by the Merger Agreement, and such lender shall have received such documents
and instruments as it may reasonably require; (c) the Company shall have
received a letter, dated as of the Closing Date, in a form and substance
reasonably acceptable to the Company, from its independent certified public
accountants to the effect that the Merger shall qualify for a pooling of
interest accounting treatment; (d) the Conversion Share Value for a share of
the Company Common Stock shall not be less than $15.55, subject to appropriate
adjustment; (e) there shall not have occurred any material adverse change in
the assets, business, condition or prospects of AVCOM or any of its
subsidiaries; and (f) all outstanding shares of AVCOM Preferred shall have
been converted into shares of common stock of AVCOM.
THE COMPANY LOAN TO AVCOM
In connection with the Merger Agreement, the Company has agreed to loan
AVCOM up to $4.0 million, of which $2.5 million had been loaned as of
September 30, 1996 and which was used by AVCOM for working capital purposes.
The proceeds of such loan will be used by AVCOM to fund, by way of
illustration, accounts payable, release fees due to construction lenders and
payments of assessments or subsidies to timeshare associations. Interest
accrues at twelve percent (12%) per annum. The loan is secured by (i) a second
priority pledge of approximately 38% of the Common Stock of AVCOM, (ii) a
negative pledge of all the All Seasons common stock with an obligation to
grant a security interest in the All Seasons stock upon receipt of any
applicable third party consents, (iii) an assignment of (a) All Seasons'
interest in Tunlii, L.L.C. and (b) All Seasons' rights to distributions from
the sale of property owned by Tunlii, L.L.C., (iv) an assignment of All
Seasons' right to acquire timeshare intervals at the Sedona Summit Resort, and
(v) a second priority deed of trust on All Seasons' interest in the Sedona
Summit Resort. The loan will be paid from the proceeds of sale of the Tunlii,
L.L.C. property and release prices paid from the sale of intervals at the
Sedona Summit Resort. The loan was funded in September 1996 and has a maturity
date of not later than December 31, 1997 but can mature sooner if, e.g., the
Company validly terminates the Merger Agreement. Since September 30, 1996, the
Company has loaned AVCOM an additional $525,000, resulting in a total loan as
of the date of this Prospectus of approximately $3.0 million.
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Closing Date
by the mutual consent of the parties. In addition, either of the parties may
terminate the Merger Agreement in the event that the Merger has not been
consummated by June 30, 1997, or if any court of competent jurisdiction or
governmental body shall have issued an order, decree or ruling or taken any
other final action restraining, enjoining or otherwise prohibiting the Merger
with the acceptance and payment for the Common Stock of AVCOM and such order,
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<PAGE>
decree, ruling or other action is or shall have become non-appealable. The
Merger Agreement may also be terminated by the Company for various other
reasons, including, but not limited to, the AVCOM Board materially modifying
its authorization, approval or recommendation with respect to the Merger, if
any party shall have commenced a tender offer for a majority of the
outstanding shares of Common Stock of AVCOM at a price in excess of $5.00 per
share, if the Company shall not have resolved to its full satisfaction any
issues arising in its due diligence investigation, or if the Conversion Share
Value shall at any time subsequent to the date of the Merger Agreement be less
than $15.55, subject to appropriate adjustments. The Merger Agreement is also
terminable by AVCOM for certain events, including, but not limited to, the
Company's Board of Directors having materially modified its authorization or
approval of the Merger.
If the Merger is not consummated or the Merger Agreement is terminated by
the Company due to a change in control of AVCOM, a material breach of the
Merger Agreement by AVCOM, or certain events described in the Merger
Agreement, AVCOM shall be required to reimburse the Company for all expenses
incurred, plus the payment to the Company of a cancellation fee of $1,800,000,
as liquidated damages. In addition, the Company would have the right to
acquire shares of Common Stock of AVCOM equal to 19.9% of the total
outstanding AVCOM shares, on a fully-diluted basis at an option price of $5.00
per share. If the Merger is not consummated or the Merger Agreement is
terminated by AVCOM pursuant to a material breach by the Company, or in the
event of a withdrawal or material modification of approval by the Company's
Board of Directors, then the Company shall reimburse AVCOM for all expenses
incurred, and shall pay to AVCOM a cancellation fee of
$900,000, as liquidated damages. The Merger Agreement, including all material
terms thereof, may be amended or modified in writing by the parties at any
time before or after the Special Meeting.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each person
who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Osamu Kaneko 49 Chairman of the Board and Chief Executive Officer
Andrew J. Gessow 39 Director and President
Steven C. Kenninger 44 Director, Chief Operating Officer and Secretary
James E. Noyes 50 Director and Executive Vice President
Michael A. Depatie 39 Executive Vice President and Chief Financial
Officer
Charles C. Frey 40 Senior Vice President and Treasurer
Genevieve Giannoni 33 Senior Vice President of Operations
Andrew D. Hutton 31 Vice President and General Counsel
Timothy D. Levin 40 Vice President--Architecture
Juergen Bartels 56 Director
Sanford R. Climan 40 Director
Joshua S. Friedman 40 Director
W. Leo Kiely III 49 Director
</TABLE>
OSAMU KANEKO has served as a Director, Chairman of the Board and Chief
Executive Officer of the Company since its inception. Mr. Kaneko, a Japanese
national, was born in Tokyo, Japan and received his B.A. degree from Indiana
State University in 1971. From 1974 to 1986 Mr. Kaneko was the Executive Vice
President of Hasegawa Komuten (USA) Inc., the American subsidiary of Hasegawa
Komuten Ltd., a large Japanese development company based in Tokyo. In this
capacity, Mr. Kaneko was responsible for the development of over $500 million
of income producing properties in Hawaii including approximately 2,000 resort
condominiums and three resort hotels. Mr. Kaneko co-founded KOAR with Mr.
Kenninger in 1985, which over the following seven years developed and acquired
over $400 million in commercial and hospitality properties, including five
Embassy Suites hotels. Pursuant to the Westin Agreement, Mr. Kaneko serves as
the Founder's designee on the Board of Directors of Westin Hotels & Resorts.
ANDREW J. GESSOW has served as a Director and President of the Company since
its inception. Mr. Gessow founded Argosy Group Inc. in 1990 and served as
President since inception. Mr. Gessow served as a Partner with Trammell Crow
Company from 1987 to 1990, and was President of Trammell Crow Residential
Services, Florida and West Coast, and Founder and President of NuMarket Cable.
From 1981 through 1987, Mr. Gessow was Founder and President of Travel, Inc.
and Home Search, Inc. which he co-founded with Citicorp Venture Capital. Mr.
Gessow received his B.B.A. degree in Finance from Emory University in 1978 and
a M.B.A. degree from Harvard Business School in 1980.
STEVEN C. KENNINGER has served as a Director, Chief Operating Officer and
Secretary of the Company since its inception. Mr. Kenninger co-founded KOAR
with Mr. Kaneko in 1985 and served as its President. Mr. Kenninger was a
practicing attorney at Paul, Hastings, Janofsky & Walker, Los Angeles,
California from 1977 through 1981 and at Riordan & McKinzie, Los Angeles,
California from 1981 through 1985, where he was a partner. Mr. Kenninger
graduated with highest distinction from Purdue University with a B.S. degree
in Mechanical Engineering in 1974, and received a J.D. degree from Stanford
Law School in 1977. Mr. Kenninger is a licensed real estate broker in
California and has been a member of the State Bar of California since 1977.
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JAMES E. NOYES has served as a Director and Executive Vice President of the
Company since July 1996 and has overall responsibility for the daily operation
of the Company's sales, marketing and resort/hotel management divisions. Prior
to joining the Company, from 1989 through June 1996 Mr. Noyes served as
President of The Trase Miller Group, the parent company of MTI Vacations,
Inc., with interests in vacation packaging, travel technology and specialized
teleservices, and previously served as its Vice President of Marketing and
Sales since 1980. Mr. Noyes served in various management positions for Wilson
Sporting Goods from 1976 to 1980. Mr. Noyes was named as one of the travel
industry's Top 25 Most Influential Executives in 1995 by Tour and Travel News.
Mr. Noyes is a director of Premier Yachts, Ltd., Preview Travel, Inc. and Ball
Horticultural, Inc. Mr. Noyes received a B.A. degree in 1970 from Dartmouth
College and received a M.B.A. degree in 1974 from Stanford Business School.
MICHAEL A. DEPATIE has served as Executive Vice President and Chief
Financial Officer of the Company commencing November 1996, and has served as a
consultant to the Company since September 10, 1996. Prior to joining the
Company, Mr. Depatie was Senior Vice President of Finance and Chief Financing
Officer of La Quinta Inns, Inc. from July 1992 to August 1996. From April 1989
through June 1992, Mr. Depatie was co-founder and Senior Vice President of
Finance of Summerfield Hotel Corporation. From April 1988 through April 1989,
Mr. Depatie was founder and Managing General Partner of Pacwest Capital
Partners. From June 1984 through April 1988, Mr. Depatie served as Senior Vice
President of Finance and Development of The Residence Inn Company. Mr. Depatie
received a B.A. degree with highest honors from Michigan State University in
1979 and a M.B.A. degree from Harvard Business School in 1983.
CHARLES C. FREY has served as Senior Vice President and Treasurer of the
Company since November 1996. Previously, he served as Chief Financial Officer
and Treasurer of the Company since July 1996 and prior thereto had served as
Senior Vice President of Administration and Treasurer of the Company and its
predecessor since 1992. Mr. Frey has overall responsibility for accounting,
operating systems and resort administration. Prior to joining the Company, Mr.
Frey was Vice President and Chief Financial Officer of Trammell Crow
Residential Services-Florida from 1986 to 1992 where his responsibilities
included control and administration of real estate tax, insurance and payroll
for over 65 residential communities. Mr. Frey is a Certified Public
Accountant, is a licensed real estate broker in Florida and received a B.S.
degree in Accounting and Economics from the Indiana University of Pennsylvania
in 1977.
GENEVIEVE GIANNONI has served as Senior Vice President of Operations of the
Company since 1995 and has overall responsibility for operations at all of the
Company's resorts. Ms. Giannoni joined Argosy in May 1992 as Director of
Marketing and became a Vice President of the Company's predecessor in 1993.
Prior to joining Argosy, Ms. Giannoni was a marketing director at Trammell
Crow Residential Services-Florida from 1987 to 1992 where her responsibilities
included marketing new residential communities. Ms. Giannoni is a licensed
real estate agent in Florida. She received her B.A. degree from Rollins
College in 1985 and graduated from the Crummer Management Program at Rollins
College in 1990.
ANDREW D. HUTTON has served as Vice President and General Counsel of the
Company since October 1996. Prior to joining the Company, Mr. Hutton practiced
corporate securities and finance law with the law firm of Latham & Watkins,
located in Los Angeles, California. Mr. Hutton had been a practicing attorney
with Latham & Watkins since receiving a J.D. degree with honors from the
University of Minnesota Law School in 1991. Mr. Hutton received both B.S. and
B.A. degrees from the University of Kansas in 1988. Mr. Hutton has been a
member of the State Bar of California since 1991.
TIMOTHY D. LEVIN has served as Vice President--Architecture of the Company
since its inception and of the Company's predecessor since December 1995. From
1989 through December 1995, Mr. Levin was the President of Sevelex
Consultants, Inc., a project management and design consulting firm affiliated
with Messrs. Kaneko and Kenninger. Prior thereto, Mr. Levin was the senior
design and production manager at Carl Wahlquist AIA Architects, Inc. from 1983
through 1988 and was instrumental in the design and construction of more than
ten Embassy Suites Hotels nationwide. Mr. Levin is a member of the American
Institute of
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Architects. Mr. Levin received his Bachelor of Architecture degree from
Southern California Institute of Architecture in 1986. Mr. Levin has been a
licensed General Contractor in the State of California since 1980.
JUERGEN BARTELS has served as a Director of the Company since August 1996.
Mr. Bartels has been Chairman and Chief Executive Officer of Westin Hotels &
Resorts since May 1995. From 1983 through April 1995, Mr. Bartels was
President and Chief Executive Officer of Carlson Hospitality Group, Inc.
("Carlson"), where he directed Carlson's Radisson Hotels International,
Radisson Seven Seas Cruises and several restaurant companies, including the
T.G.I. Friday's chain. Prior to joining Carlson, Mr. Bartels held executive
positions with Holiday Inn and Ramada and was the founder of Ramada
Renaissance Hotels.
SANFORD R. CLIMAN has served as a Director of the Company since August 1996.
Mr. Climan has been Executive Vice President of MCA Inc. ("MCA") since October
1995. Prior to joining MCA, Mr. Climan was a member of the senior executive
team at Creative Artists Agency, Inc. ("CAA"), a leading literary and talent
agency, from June 1986 to September 1995. At CAA, Mr. Climan participated in a
range of corporate advisory activities, including mergers and acquisitions,
and financial restructurings. From 1979 to 1986, Mr. Climan held various
positions in the entertainment industry. Mr. Climan also serves as a director
of PointCast Inc. Mr. Climan received a B.A. degree from Harvard College in
1977, a M.B.A. degree from Harvard Business School in 1979 and a Master of
Science in Health Policy and Management from the Harvard School of Public
Health in 1979.
JOSHUA S. FRIEDMAN has served as a Director of the Company since August
1996. Mr. Friedman is a founder of Canyon Partners Incorporated, a private
merchant banking firm and an affiliate of Canpartners Incorporated, and has
been a Managing Partner of Canyon Partners Incorporated since its inception in
1990. From 1984 through 1990, Mr. Friedman was Executive Vice President and
Co-Director, Capital Markets of Drexel Burnham Lambert Incorporated. Mr.
Friedman also serves as a director of Yale International, Inc., a publicly
traded diversified industrial company, and several privately held companies
and charitable organizations. Mr. Friedman received a B.A. degree from Harvard
College in 1976, a M.A. degree from Oxford University in 1978, a J.D. degree
from Harvard Law School in 1982 and a M.B.A. degree from Harvard Business
School in 1982.
W. LEO KIELY III has served as a Director of the Company since August 1996.
Mr. Kiely has been President and Chief Operating Officer of Coors Brewing
Company since 1993. From 1982 through 1993, Mr. Kiely held various executive
positions with Frito-Lay Inc. ("Frito-Lay"), a subsidiary of PepsiCo, most
recently serving as President of Frito-Lay's Central Division since 1991.
Prior to joining Frito-Lay, Mr. Kiely was President of Ventura Coastal
Corporation, a division of Seven-Up Corporation, from 1979 through 1982 and
prior thereto held various positions with the Wilson Sporting Goods Company
and with the Proctor & Gamble Company. Mr. Kiely also serves as a director of
Bell Sports, Inc. He is also on the advisory boards of the National
Association of Manufacturers and several educational and charitable
organizations. Mr. Kiely received a B.A. degree from Harvard College in 1969
and a M.B.A. degree from the Wharton School of Business at the University of
Pennsylvania in 1971.
On August 5, 1996, an action was filed in California state court against
KEN/KOAR LAX Partners, L.P. (the "LAX Partnership"), the owner of the Embassy
Suites hotel located at Los Angeles International Airport, by the secured
lender on the hotel. The complaint sought judicial foreclosure of the loan,
appointment of a receiver and certain other relief. On August 7, 1996, the
court set a hearing on a motion for the appointment of a receiver for August
26, 1996 and entered a temporary restraining order restricting certain actions
pending such hearing. Prior to the hearing on August 26, the LAX Partnership
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
Such Chapter 11 proceeding is pending and the LAX Partnership currently is
operating the hotel as debtor-in-possession. The LAX Partnership is
negotiating to sell a majority interest in the Embassy Suites hotel, and in
connection therewith, has filed a motion seeking dismissal of the Chapter 11
proceeding effective concurrently with closing of such transaction. An
affiliate of Messrs. Kaneko and Kenninger controls and is the co-general
partner of the LAX Partnership, with an approximately 5% profits and capital
interest therein. The hotel is managed by Promus Hotels. The Company has no
interest in the hotel or the LAX Partnership. Following the consummation of
the proposed sale, neither Mr. Kaneko nor Mr. Kenniger will hold any interest
in or obligation related to the hotel.
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COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The Board of Directors has established an executive
committee (the "Executive Committee"), which will be granted such authority as
may be determined from time to time by a majority of the Board of Directors.
The Executive Committee consists of Messrs. Gessow, Kenninger and Friedman.
All actions by the Executive Committee will require the unanimous vote of all
of its members.
Audit Committee. The Board of Directors has established an audit committee
(the "Audit Committee"), which consists of Messrs. Bartels, Friedman and
Kenninger. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, review with the independent public
accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
Compensation Committee. The Board of Directors has established a
compensation committee (the "Compensation Committee"), which consists of
Messrs. Kiely and Climan, to determine compensation for the Company's senior
executive officers, determine awards under the Company's 1996 Equity
Participation Plan and administer the Company's Employee Stock Purchase Plan.
The Board of Directors of the Company does not have a nominating committee.
CLASSIFIED BOARD OF DIRECTORS
The Charter provides for the Company's Board of Directors to be divided into
three classes serving staggered terms so that directors' initial terms will
expire either at the 1997, 1998 or 1999 annual meeting of stockholders.
Starting with the 1997 annual meeting of stockholders, one class of directors
will be elected each year for three-year terms. The classification of
directors makes it more difficult for a significant stockholder to change the
composition of the Board of Directors in a relatively short period of time
and, accordingly, provides the Board of Directors and stockholders time to
review any proposal that a significant stockholder may make and to pursue
alternative courses of action which are fair to all the stockholders of the
Company. Messrs. Kenninger, Bartels and Noyes have been classified as Class I
directors of the Company whose initial terms will expire at the 1997 annual
meeting of stockholders. Messrs. Gessow, Friedman and Kiely have been
classified as Class II directors whose initial terms will expire at the 1998
annual meeting of stockholders. Messrs. Kaneko and Climan have been classified
as Class III directors whose initial terms will expire at the 1999 annual
meeting of stockholders.
DIRECTOR COMPENSATION
The Company pays its directors who are not officers of the Company
("Independent Directors") a fee of $1,000 per meeting of the Board of
Directors and any committee thereof (including telephonic meetings) for their
services as directors. In addition, the Company has granted options to
purchase 15,000 shares of Common Stock at the initial public offering price to
each such Independent Director to vest in equal portions over a term of three
years. Each Independent Director who is still a member of the Board of
Directors at the end of the three year vesting period of the initial grant of
options will receive a grant of additional options to purchase 15,000 shares
of Common Stock at the fair market value of the Common Stock on the date of
the grant, with such options to vest over an additional three year period. In
addition to such option grants, the Independent Directors will be reimbursed
for expenses of attending each meeting of the Board of Directors. Officers of
the Company who are directors will not be paid any director fees but will be
reimbursed for expenses of attending meetings of the Board of Directors.
DIRECTORS AND OFFICERS INSURANCE
The Company has purchased a directors and officers liability insurance
policy with coverage typical for a public company. The directors and officers
liability insurance policy insures (i) the officers and directors of the
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Company from any claim arising out of an alleged wrongful act by such person
while acting as officers and directors of the Company, (ii) the Company to the
extent it has indemnified the officers and directors for such loss and (iii)
the Company for losses incurred in connection with claims made against the
Company for covered wrongful acts.
INDEMNIFICATION
The Charter provides for the indemnification of the Company's officers and
directors against certain liabilities to the fullest extent permitted under
applicable law. The Charter also provides that the directors and officers of
the Company be exculpated from monetary damages to the fullest extent
permitted under applicable law. It is the position of the Securities and
Exchange Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and
unenforceable pursuant to Section 14 of the Securities Act.
EXECUTIVE COMPENSATION
Summary Compensation Table. The Company was incorporated as a Maryland
corporation in May 1996. Accordingly, the Company did not pay any cash
compensation to its executive officers for the year ended December 31, 1995.
The following table sets forth the annual base salary and other annual
compensation which the Company expects to pay in 1996 to the Company's chief
executive officer and each of the other four most highly compensated executive
officers whose cash compensation on an annualized basis is expected to exceed
$100,000 (salary and bonus) (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ---------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR(1) SALARY BONUS(2) COMPENSATION(3) OPTIONS/SARS(4)
------------------ ------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Osamu Kaneko............ 1996 $280,000 $ -- $2,500 150,000
Chairman of the Board
and
Chief Executive Officer
Andrew J. Gessow........ 1996 280,000 -- 2,500 150,000
Director and President
Steven C. Kenninger..... 1996 280,000 -- 2,500 150,000
Director, Chief
Operating Officer and
Secretary
James E. Noyes.......... 1996 280,000 120,000 14,500 375,000
Director and Executive
Vice President
Michael A. Depatie...... 1996 280,000 -- 2,500 375,000
Executive Vice
President and Chief
Financial Officer
</TABLE>
- --------
(1) Amounts given are annualized projections for the year ending December 31,
1996.
(2) See "--Incentive Compensation Plan" and "--Employment Agreements" below
for a discussion of annual performance bonuses payable to key employees
and executive officers.
(3) Represents automobile lease payments and insurance premiums.
(4) Options to purchase an aggregate of 1,750,000 shares of Common Stock have
been granted to directors, executive officers and other employees of the
Company. See "--1996 Equity Participation Plan."
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Option Grants in 1996. The following table contains information concerning
the grant of stock options under the Company's 1996 Equity Participation Plan
expected to be made for the year ended December 31, 1996 to the Named
Executive Officers. The table also lists potential realizable values of such
options on the basis of assumed annual compounded stock appreciation rates of
5% and 10% over the life of the options which are set for a maximum of ten
years.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES PERCENT OF RATES OF SHARE
UNDERLYING TOTAL OPTIONS EXERCISE PRICE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERM(3)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
- ---- ---------- -------------- -------- -------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Osamu Kaneko............ 150,000 8.6% $14 August 2006 $1,321 $ 3,347
Andrew J. Gessow........ 150,000 8.6% $14 August 2006 $1,321 $ 3,347
Steven C. Kenninger..... 150,000 8.6% $14 August 2006 $1,321 $ 3,347
James E. Noyes.......... 375,000 21.4% $12 June 2006 $2,830 $ 7,172
Michael A. Depatie...... 110,000 6.3% $18.13 September 2006 $ 1,247 $ 3,148
Michael A. Depatie...... 265,000 15.1% $24.13 November 2006 $ 2,499 $ 6,296
</TABLE>
- --------
(1) The options granted to Messrs. Kaneko, Gessow, and Kenninger will vest in
three equal installments on the first, second, and third anniversaries of
the date of the grant. The options granted to Mr. Depatie vested with
respect to 22,000 shares at $18.13 per share and with respect to 53,000
shares at $24.13 per share upon the date of the respective grant, with the
balance of such shares vesting in four equal annual installments beginning
on the first anniversary of the date of grant. The options granted to Mr.
Noyes vested with respect to 75,000 shares on the date of the grant and
with respect to the remaining 300,000 shares will vest in 48 equal
installments at the end of each of the first 48 months that Mr. Noyes is
employed by the Company.
(2) The Company estimates that during 1996 it will issue options to employees
and directors of the Company to purchase an aggregate of 1,750,000 shares
of Common Stock.
(3) The potential realizable value (in thousands of dollars) is reported net
of the option price, but before income taxes associated with exercise.
These amounts represent assumed annual compounded rates of appreciation at
5% and 10% only from the date of grant to the expiration date of the
option.
INCENTIVE COMPENSATION PLAN
The Company has established an incentive compensation plan for officers and
key employees of the Company after the closing of the Offering. This plan
provides for payment of a cash bonus to participating officers and key
employees if certain performance objectives established for each individual
are achieved. Pursuant to such plan, each of Messrs. Kaneko, Gessow, Kenninger
and Depatie shall be entitled to receive a cash bonus of up to 100% of their
respective base compensation, respectively, upon the achievement by the
Company of specified targets of growth in revenues, earnings per share and
other key operating factors as determined by the Compensation Committee.
Pursuant to his employment agreement, Mr. Noyes shall be entitled to receive a
cash bonus of $30,000 per quarter for each quarter that he is employed by the
Company. The amount of the bonus to other participating officers and key
employees will be based on a formula to be determined for each employee by the
Compensation Committee, and is expected to be based on growth in earnings per
share and other factors.
1996 EQUITY PARTICIPATION PLAN
The Company has established an equity participation plan (the "1996 Equity
Participation Plan") to enable executive officers, other key employees,
Independent Directors and consultants of the Company to participate in the
ownership of the Company. The 1996 Equity Participation Plan is designed to
attract and retain executive officers, other key employees, Independent
Directors and consultants of the Company and to provide incentives to such
persons to maximize the Company's performance. The 1996 Equity Participation
Plan provides for the
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award to executive officers, other key employees, Independent Directors and
consultants of the Company of a broad variety of stock-based compensation
alternatives such as nonqualified stock options, incentive stock options,
restricted stock and performance awards and provides for the grant to
executive officers, other key employees, Independent Directors and consultants
of nonqualified stock options. Awards under the 1996 Equity Participation Plan
may provide participants with rights to acquire shares of Common Stock.
The 1996 Equity Participation Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The members of the
Compensation Committee who are not affiliated with the Company will select
from among the eligible participants the individuals to whom nonqualified
stock options are to be granted, except as set forth below, and will determine
the number of shares to be subject thereto and the terms and conditions
thereof. The Compensation Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the 1996 Equity Participation
Plan.
Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options
may be granted for any reasonable term.
Incentive stock options will be designed to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code") and will be subject
to restrictions contained in the Code, including exercise prices equal to at
least 100% of fair market value of Common Stock on the grant date and a ten
year restriction on their term, but may be subsequently modified to disqualify
them from treatment as an incentive stock option.
Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions
are not met. In general, restricted stock may not be sold, or otherwise
transferred or hypothecated, until restrictions are removed or expire.
Purchasers of restricted stock, unlike recipients of options, will have voting
rights and will receive dividends prior to the time when the restrictions
lapse.
Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Company's
Common Stock over a predetermined period. Performance awards may also include
bonuses which may be granted by the Compensation Committee on an individual or
group basis and which may be payable in cash or in Common Stock or in a
combination of cash and Common Stock.
There are 1,750,000 shares of Common Stock reserved for issuance pursuant to
the 1996 Equity Participation Plan. The Company has issued to executive
officers, other key employees, Independent Directors and consultants of the
Company options to purchase 1,750,000 shares of Common Stock pursuant to the
1996 Equity Participation Plan. In addition, the Company currently intends to
request Board of Directors and stockholder approval to increase the authorized
number of shares of Common Stock reserved for issuance pursuant to the 1996
Equity Participation Plan from 1,750,000 shares to approximately 2,575,000
shares, effective following the Company's 1997 Annual Meeting of Stockholders.
EMPLOYEE STOCK PURCHASE PLAN
The Company has established the Signature Resorts, Inc. Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") to assist employees of the
Company in acquiring a stock ownership interest in the Company and to
encourage them to remain in the employment of the Company. The Employee Stock
Purchase Plan is neither a qualified pension, profit sharing or stock bonus
plan under Section 401(a) of the Code, nor an
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"employee benefit plan" subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended. The following discussion is a general
summary of the material U.S. federal income tax consequences to U.S.
participants in the Employee Stock Purchase Plan. The discussion is based on
the Code, regulations thereunder, rulings and decisions now in effect, all of
which are subject to change. The summary does not discuss all aspects of
federal income taxation that may be relevant to a particular participant in
light of such participant's personal investment circumstances.
The Employee Stock Purchase Plan is intended to meet the requirements of an
"employee stock purchase plan" under Section 423 of the Code. Neither the
grant of the right to purchase shares, nor the purchase of shares, under the
Employee Stock Purchase Plan has a federal income tax effect on employees or
the Company. Any United States tax liability to the employee and the tax
deductions to the Company are deferred until the employee sells the shares,
disposes of the shares by gift or dies. Under the Employee Stock Purchase
Plan, shares are generally purchased for 85% of the fair market value thereof,
as permitted by the Code.
In general, if shares are held for more than one year after they are
purchased and for more than two years from the beginning of the enrollment
period in which they are purchased or if the employee dies while owning the
shares, gain on the sale or other disposal of the shares constitutes ordinary
income to and employee (with no corresponding deduction to the Company) to the
extent of the lesser of (i) 15% of the fair market value of the shares at the
beginning of the enrollment period or (ii) the gain on sale of the amount by
which the market value of the shares on the date of sale, gift or death,
exceeds the purchase price. Any additional gain is capital gain. If the shares
are sold or disposed of within either or both of the holding periods, an
employee recognizes ordinary income (and the Company receives a corresponding
deduction subject to Section 162(m) of the Code) to the extent that the fair
market value of the shares at the date of exercise of the option exceeds the
option price. Any appreciation or depreciation after the date of purchase is
capital gain or loss.
A maximum of 500,000 shares of Common Stock will be reserved for issuance
under the Employee Stock Purchase Plan. The Employee Stock Purchase Plan will
be administered by the Compensation Committee.
401(K) PLAN
The Company intends to establish a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Code (the
"401(k) Plan"). The 401(k) Plan will permit the employees of the Company to
defer a portion of their compensation in accordance with the provisions of
Section 401(k) of the Code. The 401(k) Plan will allow participants to defer
up to ten percent of their eligible compensation on a pre-tax basis subject to
certain maximum amounts. Matching contributions may be made in amounts and at
times determined by the Company. The 401(k) Plan provides for Company matching
contributions, if determined by the Company to be made, in an amount equal to
fifty-cents for each one dollar of participant contributions up to a maximum
of three percent of the participant's salary per year. No other Company
matching contributions are contemplated at this time. Certain other statutory
limitations with respect to the Company's contribution under the 401(k) Plan
also apply. Participants will receive service credit for employment with the
predecessors of the Company and affiliates. Amounts contributed by the Company
for a participant will vest over five years and will be held in trust until
distributed pursuant to the terms of the 401(k) Plan.
Employees of the Company will be eligible to participate in the 401(k) Plan
if they meet certain requirements concerning minimum age and period of
credited service. All contributions to the 401(k) Plan will be invested in
accordance with participant elections among certain investment options.
Distributions from participant accounts will not be permitted before age 59
1/2, except in the event of death, disability, certain financial hardships or
termination of employment.
EMPLOYMENT AGREEMENTS
Each of Messrs. Kaneko, Gessow, Kenninger, Noyes and Depatie have entered
into an employment agreement with the Company for a term of two years. The
employment agreement for each of such executives
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provides for an annual salary of $280,000 per year, with annual performance
bonuses determined by the independent directors in connection with the
achievement of performance criteria to be determined (except with respect to
Mr. Noyes, who will receive a quarterly bonus of $30,000 for each quarter he
is employed by the Company). In addition, each of Messrs. Kaneko, Gessow,
Kenninger, Noyes and Depatie have received options to purchase shares of
Common Stock as described in "--1996 Equity Participation Plan." In addition,
each of Messrs. Kaneko, Gessow, Kenninger, Noyes and Depatie shall receive
severance payments equal to base compensation and bonus at the most recent
annual amount for the longer of the balance of the employment term or two
years upon the death, disability, termination or resignation of such
executive, unless such executive resigns without "good cause" or unless the
Company terminates such executive as a result of gross negligence, willful
misconduct, fraud or a material breach of the employment agreement. Each such
executive will have "good cause" to terminate his employment with the Company
in the event of any reduction in his compensation or benefits, material breach
or material default by the Company under his employment agreement or following
the merger or change in control of the Company.
Additionally, it is anticipated that upon the consummation of the Merger
with AVCOM, a subsidiary of the Company will employ Gary L. Hughes and John R.
Stevens pursuant to Employment Agreements to be executed by the parties.
Pursuant to such agreements, the term of employment shall be for a period of
three years. The Company may terminate their employment, with or without
cause, at any time. The initial base salary shall be $225,000 with increases
and potential bonuses and fringe benefits tied to performance and
profitability. Messrs. Hughes and Stevens will primarily perform duties
related to the operation of AVCOM as a wholly-owned subsidiary of the Company.
Upon consummation of the Merger, the Company will also grant Messrs. Hughes
and Stevens options to purchase up to 250,000 shares of Common Stock of the
Company, in the aggregate, in consideration for their continued employment.
Options to purchase 150,000 of such shares are contingent upon AVCOM achieving
certain net income targets in 1997. This option will vest and become
exercisable in three annual installments assuming continued employment;
provided, however, that the options will cease to be exercisable following a
termination of employment. The exercise price will be the fair market value of
the stock on the date of grant.
COVENANTS NOT TO COMPETE
The Founders and Messrs. Noyes and Mr. Depatie have agreed (and upon
commencement of their employment with the Company, Messrs. Hughes and Stevens
will agree) to devote substantially full time to the business of the Company
and not engage in any competitive businesses. In particular, the foregoing
individuals are prohibited from managing, consulting or participating in any
way in any timeshare business or from acquiring any property with the intent
to convert the property to a timeshare operation, unless the Independent
Directors of the Company determine that such investment is in the best
interest of the Company. Such noncompetition provisions shall survive for two
years following any termination of employment. Such individuals are not,
however, prohibited from acquiring hotels, including hotels which may compete
directly with properties of the Company. See "Certain Relationships and
Related Transactions--Founders' Other Business Interests."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FOUNDERS' OTHER BUSINESS INTERESTS
Affiliates of Messrs. Kaneko and Kenninger currently have managing general
partner or similar interests in entities which own investment properties which
the Company does not consider to be competitive with its timeshare business
(the "KOAR Interests"). These properties include a 225-unit condominium
project in Long Beach, California which is being marketed for whole share unit
sales or long-term residential use rather than vacation use (and with respect
to which the KOAR Interests currently own 74 of the total 225 units, the
balance having been sold to third parties); and several retail centers and a
proposed office development project. Messrs. Kaneko and Kenninger are also
currently the constituent general partners of a number of partnerships in
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which they owe fiduciary duties to limited partners who invested over $80
million of equity therein (which partnerships include five Embassy Suites
hotels which are still owned by partnerships controlled by Affiliates of
Messrs. Kaneko and Kenninger (the "Prior Partnerships")). Messrs. Kaneko and
Kenninger are authorized by the Company to meet their duties and
responsibilities to the Prior Partnerships pursuant to the terms thereof,
including the sale, refinancing, restructuring and packaging of the Prior
Partnerships, and including with respect to the formation of public or private
entities for such purpose, including a public real estate investment trust
("REIT") for one or all of the Embassy Suites hotels in the Prior Partnerships
(provided, that Messrs. Kaneko and Kenninger agree not to serve as an officer
or employee of such REIT). Messrs. Kaneko and Kenninger agree to continue to
retain third party management companies to manage these properties (e.g.,
Promus Hotels manages all five Embassy Suites hotels), and to employ personnel
not employed by the Company to carry out the day-to-day responsibilities of
managing and overseeing these properties. However, Messrs. Kaneko and
Kenninger reserve the right to do what is reasonably necessary within these
constraints to carry out their duties and responsibilities to the Prior
Partnerships pursuant to the terms thereof. The Company does not believe that
such activities will detract materially from Messrs. Kaneko's and Kenninger's
services to the Company.
PAYMENTS TO AFFILIATES
A total of $15.7 million of the net proceeds from the Initial Public
Offering were used to repay outstanding debt to affiliates of the Founders. Of
the $15.7 million of the funds paid to the affiliates of the Founders,
$15.3 million was used to pay off existing debt to third party financial
institutions or other third party financing sources or to pay tax liabilities.
The proceeds from the loans were previously either invested in or loaned
either to the Company or its predecessors or to acquire or develop the
Existing Resorts.
In addition, pursuant to the Consolidation Transactions, during the three
months ended September 30, 1996 Founders also received $2.3 million of
distributions from certain predecessor partnerships of the Company to fund
income tax obligations which had accrued through the date of the Offering and
with respect to whom no pre-Offering profits of the Company had been
distributed.
In addition, $12.2 million of the net proceeds of the Initial Public
Offering were used to repay outstanding indebtedness owed to partnerships in
which an affiliate of Mr. Friedman, a director of the Company, is a general
partner. Of such repayment, approximately $3.0 million was repaid directly to
Mr. Friedman or his affiliates.
CONSOLIDATION TRANSACTIONS
The Company's Existing Resorts were previously owned and operated by the
Property Partnerships, each affiliated with the Founders. The Property
Partnerships consisted of Grand Beach Resort, L.P., a Georgia limited
partnership (Embassy Vacation Resort Grand Beach); AKGI-Flamingo C.V., a
Netherlands Antilles limited partnership (Flamingo Beach Club); AKGI-Royal
Palm C.V., a Netherlands Antilles limited partnership (Royal Palm Beach Club);
Port Royal Resort, L.P., a South Carolina limited partnership (Royal Dunes
Resort); an approximately 30% interest in Poipu Resort Partners, L.P., a
Hawaii limited partnership (Embassy Vacation Resort Poipu Point); Fall Creek
Resort, L.P., a Georgia limited partnership (Plantation at Fall Creek);
Cypress Pointe Resort, L.P., a Delaware limited partnership (Cypress Pointe
Resort); Lake Tahoe Resort Partners, LLC, a California limited liability
company (Embassy Vacation Resort Lake Tahoe); and San Luis Resort Partners,
LLC, a Georgia limited liability company (San Luis Bay Resort). Affiliates of
the Founders were previously the sole general partners or the sole members of
each of the Property Partnerships. Each of the Property Partnerships (other
than the Embassy Vacation Resort Poipu Beach) which remained in existence
following the Consolidation Transactions and the Initial Public Offering are
wholly owned by the Company.
As a result of the consummation of the Consolidation Transactions described
below, the partnership and limited liability company interests in each of the
Property Partnerships, certain of the stock of certain other corporations
affiliated therewith held by "accredited investors" (as defined pursuant to
Regulation D under the
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Securities Act) and certain debt obligations of the Property Partnerships and
affiliates (and, as a result, ownership of each of the Existing Resorts) have
been directly or indirectly transferred to the Company and in exchange the
holders of such partnership interests and certain of such stock will receive
shares of Common Stock in the Company. Holders of any such partnership
interests who are not "accredited investors" received cash at a price
commensurate with the value received by the accredited investors to be
determined prior to the Consent Solicitation. All financial and share
information presented in this Prospectus reflects the consummation of the
Consolidation Transactions and reflects the issuance of an aggregate of
11,354,705 shares of Common Stock to the holders of partnership interests in
the Property Partnerships and to certain stockholders of the Affiliated
Companies. The Affiliated Companies include Argosy/KOAR Group, Inc., Resort
Management International, Inc., Resort Marketing International, Inc., RMI-
Royal Palm C.V.o.a., RMI-Flamingo C.V.o.a., AK-St. Maarten, LLC, Premier
Resort Management, Inc., Resort Telephone & Cable of Orlando, Inc., Kabushiki
Gaisha Kei, LLC, Vacation Ownership Marketing Company and Vacation Resort
Marketing of Missouri, Inc., each of which are controlled by the Founders and
previously provided administrative, utility, management and/or marketing
services to certain of the Property Partnerships.
Signature Resorts, Inc. was incorporated in Maryland in May 1996 by the
Founders to effect the Consolidation Transactions and the Initial Public
Offering. Pursuant to a Private Placement Memorandum dated as of May 28, 1996,
the Company in the Consent Solicitation solicited and received on or before
June 13, 1996 the consent and agreement of the ultimate owners of interests in
the Property Partnerships, the stockholders of the Affiliated Companies and
the holders of certain debt obligations to exchange their partnership
interests or shares in, and obligations of, the Property Partnerships or
Affiliated Companies (or their direct or indirect interests in the owners
thereof), as applicable, for shares of Common Stock in the Company. Such
exchange occurred simultaneously with the closing of the Initial Public
Offering. The Consent Solicitation and exchange of direct and indirect
interests in, and obligations of, the Property Partnerships and the Affiliate
Companies, as applicable, for shares of Common Stock in the Company are
referred to herein as the "Consolidation Transactions." Direct and indirect
holders of interests in, and obligations of, certain Property Partnerships
received, upon consummation of the Consolidation Transactions, shares of
Common Stock in the Company equal to a predetermined dollar value based on
agreement between the Company and such holders as set forth in the Private
Placement Memorandum for the Consent Solicitation. The balance of the shares
of Common Stock issued in the Consolidation Transactions were issued to the
holders of interests in the remaining Property Partnerships and to the holders
of interests in the Affiliated Companies, which are comprised solely of the
Founders or their affiliates. As a result of the Consolidation Transactions
and the Initial Public Offering, the ultimate owners of interests in the
Property Partnerships and stockholders of the Affiliated Companies own, in the
aggregate, approximately 68.4% (approximately 59.8% after giving effect to the
Stock Offering) of the outstanding Common Stock in the Company, with
approximately 41.4% (approximately 37.4% after giving effect to the Stock
Offering) of the outstanding Common Stock in the Company being held by the
Founders, or affiliates thereof. For additional information regarding the
Property Partnerships and the Affiliated Companies as well as the
Consolidation Transactions and resulting effect thereof, see "Principal and
Selling Stockholders" and "Certain Relationships and Related Transactions."
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PRINCIPAL AND SELLING STOCKHOLDERS
The information in the following table sets forth information regarding the
beneficial ownership of the Common Stock of the Company, as adjusted to
reflect the sale of shares offered in the Stock Offering, with respect to (i)
each person known by the Company to beneficially owns 5% or more of the
outstanding shares of Common Stock, (ii) each person who is a director, or
Named Executive Officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each of the Selling Stockholders.
Applicable percentage ownership is based on 17,392,205 shares of Common Stock
outstanding as of the date of this Prospectus and 18,992,205 shares of Common
Stock outstanding following completion of the Offerings. The 210,000 shares
covering the Underwriters' over-allotment option granted by the Selling
Stockholders will be sold by the Selling Stockholders pro rata in accordance
with the number of shares being offered as set forth below.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERINGS AFTER THE OFFERINGS
------------------------------ -----------------------
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(a) SHARES PERCENTAGE BEING OFFERED SHARES PERCENTAGE
- ------------------- ------------- ----------------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS, NAMED
EXECUTIVE OFFICERS AND
5% STOCKHOLDERS
Osamu Kaneko(b)......... 2,667,903 15.3% -- 2,667,903 14.0%
Andrew J. Gessow(c)..... 3,056,704 17.6% -- 3,056,704 16.1%
Steven C.
Kenninger(b)(d)........ 1,371,779 7.9% -- 1,371,779 7.2%
James E. Noyes.......... 118,750(j) * -- 118,750(j) *
Michael A. Depatie...... 82,400(k) * -- 82,400(k) *
Juergen Bartels......... -- -- -- -- --
Sanford R. Climan....... 3,250 * -- 3,250 *
Joshua S.
Friedman(f)(h)......... -- -- -- -- --
W. Leo Kiely, III....... -- -- -- -- --
Putnam Investments, Inc.
(g).................... 1,765,970 10.2% -- 1,765,970 9.3%
One Post Office Square
Boston, Massachusetts
02109
Canpartners
Incorporated(e)(f)..... 1,474,511 8.5% 641,554 832,957 4.4%
Beth Friedman(f)(h)... 286,688 1.6% 124,736 161,952 *
Loretta Evensen(f)(h). 286,688 1.6% 124,736 161,952 *
Mitchell R.
Julis(f)(h).......... 286,688 1.6% 124,736 161,952 *
------------- -------- --------- ---------
Total (as a group)... 2,334,575 13.4% 1,015,762 1,318,813 6.9%
All directors and
executive officers as a
group (13 persons)(i).. 7,476,134 43.0% -- 7,476,134 39.4%
OTHER SELLING
SHAREHOLDERS
J.C. Investment &
Realty, Inc............ 328,219 1.9% 43,509 284,710 1.5%
Peach Tree, Ltd. ....... 327,154 1.9% 100,000 227,154 1.2%
Shinko Sangyou Co. Ltd.
....................... 120,001 * 52,212 67,789 *
Dennis H. Vaughn(l)..... 101,513 * 44,169 57,344 *
Kenpoh, Inc. ........... 90,001 * 39,159 50,842 *
Brains-Heart, Ltd. ..... 54,494 * 23,710 30,784 *
EKC Corporation......... 54,494 * 826 53,668 *
The California Community
Foundation(m).......... 45,000 * 19,579 25,421 *
James W. Geisz(n)....... 37,158 * 13,889 23,269 *
Tadaaki Chigusa......... 27,247 * 11,855 15,392 *
William S. Waldo........ 17,985 * 7,825 10,160 *
Ethan Lipsig(o)......... 17,980 * 7,824 10,156 *
Michael B. Reeves(p).... 14,376 * 2,601 11,775 *
Charles V. Thornton(q).. 11,980 * 2,237 9,743 *
Sook Ja Kim............. 10,899 * 4,742 6,157 *
Randall Wooster......... 10,329 * 4,494 5,835 *
James A. Hamilton....... 7,143 * 1,088 6,055 *
Paul Grossman........... 5,990 * 2,607 3,383 *
Charles H. Reeves(r).... 2,995 * 868 2,127 *
Raymond M. Bukaty....... 2,396 * 1,044 1,352 *
</TABLE>
- --------
* Less than 1%
(a) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all shares of Common Stock owned by
such beneficial owner.
(b) The address of such person is 5933 West Century Blvd., Suite 210, Los
Angeles, California 90045.
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(c) The address of such person is 2934 Woodside Road, Woodside, California
94062.
(d) The shares indicated are held by Mr. Kenninger through trusts, pension
plans and profit sharing plans, under which Mr. Kenninger may be deemed to
have, or to share, beneficial ownership of such shares.
(e) The address of such entity is 9665 Wilshire Boulevard, Suite 200, Beverly
Hills, California 90210.
(f) Canpartners Incorporated ("Canyon") is the beneficial owner of 123,269
shares and is the sole general partner of CPI Securities L.P. (which holds
927,274 shares), Canpartners Investments II, L.P. (which holds 380,003
shares) and Canpartners Investments V, L.P. (which holds 43,965 shares).
Of the 641,553 shares indicated to be sold by such entities in the Stock
Offering, 53,635 shares will be sold by Canpartners Incorporated, 403,453
shares will be sold by CPI Securities L.P., 165,337 shares will be sold by
Canpartners Investments II, L.P., and 19,129 shares will be sold by
Canpartners Investments V, L.P. Mr. Friedman (a director of the Company),
Mitchell R. Julis and R. Christian B. Evensen are the sole shareholders
and directors of Canyon and may be deemed to share beneficial ownership of
the shares shown as owned by Canyon and the indicated limited
partnerships. Such persons disclaim beneficial ownership of such shares.
The 1,474,511 shares shown as beneficially owned by Canyon do not include
286,688 shares owned by Mr. Friedman's wife, 286,688 shares owned by Mr.
Julis and 286,688 shares owned by Mr. Evensen's wife, the beneficial
ownership of which is disclaimed by Canyon.
(g) Information based solely on a Schedule 13G filed with the Securities and
Exchange Commission by, among others, Putnam Investments, Inc. ("PI"). Of
the shares beneficially owned by PI, Putnam Investment Management, Inc.
("PIM") beneficially owns 1,260,370 (or 7.25%) of the outstanding shares
of Common Stock and The Putnam Advisory Company, Inc. ("PAC") beneficially
owns 505,600 (or 2.9%) of the outstanding shares of Common Stock. The
shares of Common Stock reported as being beneficially owned by PI consist
of securities beneficially owned by subsidiaries of PI which are
registered investment advisers, which in turn include securities
beneficially owned by clients of such investment advisers, which clients
may include investment companies registered under the Investment Company
Act and/or employee benefit plans, pension funds, endowment funds or other
institutional clients. PI, which is a wholly-owned subsidiary of Marsch &
McLennan Companies, Inc. ("M&MC"), wholly owns two registered investment
advisers: PIM, which is the investment adviser to the Putnam family of
mutual funds and PAC, which is the investment adviser to Putnam's
institutional clients. Both subsidiaries have dispository power over the
shares as investment managers, but each of the mutual fund's trustees have
voting power over the shares held by each fund, and PAC has shared voting
power over the shares held by the institutional clients. M&MC and PI
disclaim beneficial ownership of the shares of Common Stock reported as
being beneficially owned by PI.
(h) Beth Friedman is the wife of Joshua S. Friedman, a director of the
Company. Loretta Evensen is the wife of R. Christian B. Evensen, a
shareholder and director of Canyon. Mitchell R. Julis is a shareholder and
director of Canyon.
(i) Includes 353,750 shares which may be acquired upon exercise of presently
exercisable options or options which will become exercisable within 60
days of the date of this Prospectus.
(j) Represents presently exercisable options to acquire shares of Common Stock
or options which will become exercisable within 60 days of the date of
this Prospectus.
(k) Includes (i) presently exercisable options to acquire 75,000 shares of
Common Stock, (ii) 6,400 shares of Common Stock held through trusts and
retirement plans and (iii) 1,000 shares of Common Stock held by a
corporation in which Mr. Depatie is a director and a 7.2% shareholder.
(l) Includes (i) 45,320 shares held by The Vaughn Family Trust, of which Mr.
Vaughn is a co-trustee, (ii) 41,203 shares held by the Dennis H. Vaughn
Individual Retirement Account, of which Mr. Vaughn is beneficiary,
(iii) 9,000 shares held by the Paul, Hastings, Janofsky & Walker
Retirement Plan FBO Dennis H. Vaughn, of which Mr. Vaughn is beneficiary
and (iv) 5,990 shares held by the Dennis Vaughn Subtrust, of which
Mr. Vaughn is trustee. Of the 44,169 shares indicated to be sold by Mr.
Vaughn in the Stock Offering, 41,203 shares will be sold by the Dennis H.
Vaughn Individual Retirement Account and 2,966 shares will be sold by the
Paul, Hastings, Janofsky & Walker Retirement Plan FBO Dennis H. Vaughn.
(m) The California Community Foundation holds 15,000 shares of Common Stock in
each of the Friedman Family Fund, the Evensen Family Fund and the Julis
Family Fund, charitable funds over which Mr. and Mrs. Friedman, Mr. and
Mrs. Evensen and Mr. Julis have no dispositive or voting power and with
respect to which such individuals disclaim beneficial ownership of such
shares.
(n) Includes 11,990 shares held by MLPF&S Inc. Custodian FPO James W. Geisz
SEP, of which Mr. Geisz is beneficiary. Of the 13,889 shares indicated to
be sold by Mr. Geisz in the Stock Offering, 5,217 shares will be sold by
such retirement plan.
(o) Includes 11,980 shares held by the Paul, Hastings, Janofsky & Walker
Retirement Plan FBO Ethan Lipsig, of which Mr. Lipsig is beneficiary. The
7,824 shares indicated to be sold by Mr. Lipsig in the Stock Offering will
be sold by the Paul, Hastings, Janofsky & Walker Retirement Plan FBO Ethan
Lipsig.
(p) Includes 11,980 shares held by The CCN&M Revocable Trust, of which Mr.
Reeves is co-trustee. The 2,601 shares indicated to be sold by Mr. Reeves
will be sold by The CCN&M Revocable Trust.
(q) Includes 5,990 shares held by the Paul, Hastings, Janofsky & Walker
Retirement Plan FBO Charles V. Thornton. Of the 2,237 shares indicated to
be sold by Mr. Thornton in the Stock Offering, 1,527 shares will be sold
by such retirement plan.
(r) The shares indicated are held by a trust of which Mr. Reeves is co-
trustee.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 50,000,000
shares of Common Stock, par value $0.01 per share, 17,392,205 shares of which
are outstanding as of the date of this Prospectus and 18,992,205 shares of
which will be outstanding after the Stock Offering and (ii) 25,000,000 shares
of Preferred Stock, par value $0.01 per share, none of which will be
outstanding after the Offerings. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Charter and Bylaws of the Company, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus is a part. See "Additional
Information."
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by
the Board of Directors with respect to any series of Preferred Stock
establishing the designation, powers, preferences and relative, participating,
option or other special rights and powers of such series of Preferred Stock,
the holders of shares of Common Stock exclusively possess all voting power.
The Charter does not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to such
distributions as may be declared from time to time by the Board of Directors
from funds available therefor, and upon liquidation are entitled to receive
pro rata all assets of the Company available for distribution to such holders.
All shares of Common Stock issued in the Offering will be fully paid and
nonassessable and the holders thereof will not have preemptive rights.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more classes, as
authorized by the Board of Directors. Prior to issuance of shares of each
class, the Board of Directors is required by the MGCL and the Company's
Charter to fix for each such class, the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption, as
are permitted by Maryland law. The Board of Directors could authorize the
issuance of Preferred Stock with terms and conditions which could have the
effect of discouraging a takeover or other transaction which holders of some,
or a majority, of the Company's outstanding shares might believe to be in
their best interests or in which holders of some, or a majority, of shares
might receive a premium for their shares over the market price of such shares.
No Preferred Stock will be outstanding following the closing of the Offering.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services, L.L.C.
(successor in interest to Wells Fargo Bank) as its transfer agent and
registrar.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Company's
Charter and Bylaws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part, as described in "Additional Information,"
and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Charter provides that the number of directors of the Company
shall be established by the Bylaws but shall not be less than the minimum
number required by the MGCL, which in the case of the Company is three. The
Bylaws currently provide that the Board of Directors will consist of not fewer
than seven nor more than 13 members. Any vacancy on the Board of Directors
will be filled, at any regular meeting or at any special meeting called for
that purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors will be filled by a
majority of the entire board of directors. The Charter provides for a
staggered Board of Directors consisting of three classes as nearly equal in
size as practicable. One class will hold office initially for a term expiring
at the annual meeting of stockholders to be held in 1997, another class will
hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1998 and another class will hold office initially
for a term expiring at the annual meeting of stockholders to be held in 1999.
As the term of each class expires, directors in that class will be elected for
a term of three years and until their successors are duly elected and qualify.
The Company believes that classification of the Board of Directors will help
to assure the continuity and stability of the Company's business strategies
and policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the elections of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of outstanding shares of Common Stock
will be able to elect all of the successors of the class of directors whose
term expires at that meeting.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed with or without cause by
the affirmative vote of at least two-thirds of the votes entitled to be cast
in the election of directors, and by the vote required to elect a director,
the stockholders may fill a vacancy on the Board of Directors resulting from
removal. This provision, when coupled with the provision in the Bylaws
authorizing the Board of Directors to fill vacant directorships, could
preclude stockholders from removing incumbent directors except upon a
substantial affirmative vote and filling the vacancies created by such removal
with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "Business Combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the then-
outstanding voting stock of the corporation (an "Interested Stockholder") or
an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any
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<PAGE>
such Business Combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least (i) 80% of
the votes entitled to be cast by holders of outstanding voting shares of the
corporation and (ii) 66 2/3% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom the Business Combination is to be effected,
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to Business Combinations that are approved or exempted by the Board
of Directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Board of Directors of the
Company has exempted from these provisions of the MGCL any Business
Combination involving the Executive Officers and certain persons and entities
affiliated therewith.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "Control Shares" of a Maryland corporation acquired
in a "Control Share Acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by such person, or in respect of which such person is able
to exercise or direct the exercise of voting power, would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority of all voting
power. Control Shares do not include shares the acquiring person is then
entitled to voter as a result of having previously obtained stockholder
approval. A "Control Share Acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for control shares, as of the date of the last
Control Share Acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares are
determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the Control Share Acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a Control Share Acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the Charter or Bylaws
of the corporation. The Company in its Bylaws has exempted from the Control
Share Acquisition statute the Executive Officers and certain persons and
entities affiliated therewith.
AMENDMENT TO THE COMPANY'S CHARTER AND BYLAWS
The Company's Charter, including its provisions on classification of the
Board of Directors and removal of directors, may be amended only by the
affirmative vote of the holders of at least 66 2/3% of the capital stock
entitled to vote. The Company's Bylaws may be amended by the affirmative vote
of holders of at least 66 2/3% of the capital stock entitled to vote on the
matter. Subject to the right of stockholders to adopt, alter and repeal the
Bylaws, the Board of Directors is authorized to adopt, alter or repeal the
Bylaws.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by the Board of
Directors, or (c) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws, and
(ii) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders, or provided that the Board of Directors has determined that
directors shall be elected at such meeting, nominations of persons for
election to the Board of Directors may be brought by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
STOCKHOLDER MEETINGS AND ACTION BY WRITTEN CONSENT
In order for stockholders to call special meetings, the Bylaws require the
written request of holders of shares entitled to cast not less than 25% of all
votes entitled to be cast at such meeting. Such provisions do not, however,
affect the ability of stockholders to submit a proposal to the vote of all
stockholders of the Company in accordance with the Bylaws, which provide for
the additional notice requirements for stockholder nominations and proposals
at the annual meetings of stockholders as described above.
The Bylaws provide that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each stockholders entitled to notice of the meeting
but not entitled to vote at it.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter limits the liability of the Company's directors and
officers to the Company and its stockholders to the fullest extent permitted
from time to time by Maryland law. Maryland law presently permits the
liability of directors and officers to a corporation or its stockholders for
money damages to be limited, except (i) to the extent that it is proved that
the director or officer actually received an improper benefit or profit, or
(ii) if a judgment or other final adjudication is entered in a preceding based
on a finding that the director's or officers' action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding. This provision does not limit the
ability of the Company or its stockholders to obtain other relief, such as an
injunction or rescission.
The Company's Charter and Bylaws require the Company to indemnify its
directors, officers and certain other parties to the fullest extent permitted
from time to time by Maryland law. The MGCL presently permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service to the corporation, unless it is established that (i)
the act or omission of the indemnified party was material to the matter giving
rise to the proceeding, and (1) was committed in bad faith or (2) was the
result of active and deliberate dishonest; or (ii) the indemnified party
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the indemnified party had
reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made
with respect to any proceeding in which the director or officer has been
adjudged to be liable to the corporation. In addition, a director or officer
may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer
was adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation prior
to judgment, creates a rebuttable presumption that the director or officer did
not meet the requisite
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standard of conduct required for indemnification to be permitted. The Company
has applied for directors and officers insurance which will become effective
upon the effectiveness of the Registration Statement.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
holders of not less than a majority of all of the votes entitled to be cast on
the matter.
SHARES ELIGIBLE FOR FUTURE SALE
As a result of the Initial Public Offering and the Consolidation
Transactions and prior to the consummation of the Offerings, the Company has
outstanding 17,392,205 shares of Common Stock. Of these shares, the 6,037,500
shares sold in the Initial Public Offering are freely tradable in the public
market without restriction or further registration under the Securities Act.
The shares offered in the Stock Offering are also freely tradable in the
public market without restriction or further registration under the Securities
Act.
The remaining 11,354,705 outstanding shares of Common Stock were issued upon
consummation of the Consolidation Transactions and are "restricted securities"
as that term is defined under Rule 144 and may be sold only pursuant to
registration under the Securities Act or pursuant to an exemption therefrom,
such as that provided by Rule 144. In general, under Rule 144 as currently in
effect, if two years have elapsed since the later of the date of acquisition
of shares of Common Stock from the Company or the date of acquisition of
shares of Common Stock from any "affiliate" of the Company, as that term is
defined under the Securities Act, the acquiror or subsequent holder is
entitled to sell within any three-month period a number of shares of Common
Stock that do not exceed the greater of 1% of the then-outstanding shares of
Common Stock or the average weekly trading volume of shares of Common Stock on
all exchanges and reported through the automated quotation system of a
registered securities association during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under
Rule 144 are also subject to certain restrictions on the manner of sales,
notice requirements and the availability of current public information about
the Company. If three years have elapsed since the date of acquisition of
shares of Common Stock from the Company or from any "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares of Common Stock in the
public market under Rule 144(i) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
Pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement") the Company has agreed to file and use its best efforts to have
declared effective within six months following the Offering, a shelf
registration statement with the Commission for the purpose of registering the
shares of Common Stock (the "Registrable Shares") issuable to holders of
restricted shares. The Company will use its best efforts to have the shelf
registration statement kept effective for a period of 18 months. Upon the
effectiveness of such shelf registration statement, and as provided in the
Registration Rights Agreement, the holders of the Registrable Shares will be
subject to the volume restrictions of Rule 144. The Company will bear the
expenses incident to the registration requirements of the Registrable Shares,
except that such expenses shall not include any underwriting discounts or
commissions, Securities and Exchange Commission or state securities
registration fees or transfer taxes relating to such shares.
Under the Registration Rights Agreement, the holders of the Registrable
Shares will also be entitled to include within any registration statement
under the Securities Act filed by the Company with respect to any underwritten
public offering of Common Stock (either of its own account or the account of
other security holders) at any time within three years following the Offering,
the shares of Registrable Shares held by such holders, subject to certain
conditions and restrictions. See "Underwriting." The existence of the
Registration Rights Agreement may adversely affect the terms upon which the
Company can obtain additional equity financing in the future.
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The Company may require in its sole discretion that the Registrable Shares
be sold in block trades through underwriters or broker-dealers or that the
Registrable Shares be underwritten by investment banking firms selected by the
Company.
The Registration Rights Agreement also provides that each stockholder who
received its shares of Common Stock as a result of the Consolidation
Transactions has agreed, with certain exceptions, not to offer, sell, contract
to sell or otherwise dispose of any Common Stock, for a period of 180 days
after the closing of the Initial Public Offering (one year with respect to the
Founders) and 90 days after the closing of the Stock Offering without the
prior written consent of Montgomery Securities (which waiver has been granted
to the Selling Stockholders participating in the Stock Offering); one of such
exceptions allows the Founders to pledge between $30 million and $50 million
of their Common Stock to secure a margin loan in a maximum amount of $10
million and another exception allows the Founders to pledge approximately $5.8
million of their Common Stock in connection with their buyout of a former
partner. In November 1996, Mr. Kenninger pledged 300,000 shares of Common
Stock to secure a margin loan obtained from Swiss Bank Corporation, New York
Branch, permitting advances not to exceed the aggregate amount of $2 million
at any time during a two year term. Messrs. Kaneko and Gessow currently are
negotiating with an affiliate of Merrill Lynch to each obtain a margin loan in
the amount of $4 million, each to be secured by a pledge of shares of Common
Stock owned by them.
The Company and those officers and directors of the Company that are not a
party to the Registration Rights Agreement have also agreed that, except under
certain circumstances, for a period of 90 days after the date of this
Prospectus, they will not, without the consent of Montgomery Securities,
issue, sell or dispose of any shares of Common Stock or any shares convertible
or exchangeable into any shares of Common Stock.
Prior to the Initial Public Offering, there had been no public market for
the Common Stock and the effect, if any, that future market sales of Common
Stock or the availability of such Common Stock for sale will have on the
market price of the Common Stock prevailing from time to time cannot be
predicted. Nevertheless, sales of substantial amounts of Common Stock in the
public market (or the perception that such sales could occur) might adversely
affect market prices for the Common Stock.
Sales of substantial amounts of Common Stock in the public market after the
consummation of the Merger could adversely affect prevailing market prices.
The estimated 843,942 shares of Common Stock issuable in connection with the
Merger will be eligible for immediate sale in the public market, subject to
certain limitations under the Securities Act, applicable to affiliates of
AVCOM.
Additionally, there are (i) outstanding stock options to purchase 1,750,000
shares of Common Stock which have been granted to executive officers, other
key employees, Independent Directors and consultants of the Company under the
1996 Equity Participation Plan, (ii) up to 500,000 shares of Common Stock that
may be sold pursuant to the Company's Employee Stock Purchase Plan and (iii)
shares issuable upon conversion of the % Convertible Subordinated
Notes due , 2007.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities and Goldman, Sachs & Co. (the "Representatives"), have severally
agreed, subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") by and among the Company, the Selling Stockholders
and the Underwriters to purchase from the Company and the Selling Stockholders
the number of shares of Common Stock indicated below opposite their respective
names, at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters are committed to purchase all
of the shares of Common Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITER PURCHASED
- ----------- ---------
<S> <C>
Montgomery Securities................................................
Goldman, Sachs & Co. ................................................
Smith Barney Inc.....................................................
---------
Total........................................................ 3,000,000
=========
</TABLE>
The Underwriters, through the Representatives, have advised the Company that
the Underwriters propose initially to offer the shares of Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus. The Underwriters may allow selected dealers a concession of not
more than $ per share; the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other dealers.
After the initial public offering, the public offering price and other selling
terms may be changed by the Representatives.
The Company and the Selling Stockholders have granted options to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 240,000 and 210,000, respectively,
additional shares of Common Stock to cover over-allotments, if any, at the
initial offering price less the underwriting discount. To the extent that the
Underwriters exercise this option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with the Stock
Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Stock Offering, the Underwriters may engage in
passive market-making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in the Offering, in
accordance with Rule 10b-6A under the Exchange Act. Passive market-making
consists of displaying bids on the Nasdaq National Market limited by the bid
prices of independent market-makers and purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market-maker on
each day are limited to a specified prior percentage of the passive market-
maker's average daily trading volume in the Common Stock during a specified
prior period and must be discontinued when such limit is reached. Passive
market-making may stabilize the market price of the Common Stock at a level
above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
Pursuant to the Registration Rights Agreement, if holders of the Registrable
Securities elect to sell shares of Registrable Securities in a non-publicly
underwritten offering, the timing of sales and the volume sold shall be
managed in a manner consistent with the best interests of the Company. See
"Shares Eligible for Future Sale."
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The Registration Rights Agreement also provides that each stockholder who
received its shares of Common Stock as a result of the Consolidation
Transactions has agreed, with certain exceptions, not to offer, sell, contract
to sell or otherwise dispose of any Common Stock, for a period of 180 days
after the closing (which occurred on August 20, 1996) of the Initial Public
Offering (one year with respect to the Founders) and 90 days after the closing
of the Stock Offering without the prior written consent of Montgomery
Securities (which waiver has been granted to the Selling Stockholders
participating in the Stock Offering); one of such exceptions allows the
Founders to pledge between $30 million and $50 million of their Common Stock
to secure a margin loan in a maximum amount of $10 million and another
exception allows the Founders to pledge approximately $5.8 million of their
Common Stock in connection with their buyout of a former partner.
The Company and those officers and directors of the Company that are not a
party to the Registration Rights Agreement have also agreed that, except under
certain circumstances, for a period of 90 days after the date of this
Prospectus, they will not, without the consent of Montgomery Securities,
issue, sell or dispose of any shares of Common Stock or any shares convertible
or exchangeable into any shares of Common Stock.
Investment funds managed by Goldman, Sachs & Co. are major shareholders in
Westin. The Company and Westin have entered into the Westin Agreement. See
"Business--Westin Vacation Club Resorts." Pursuant to the Westin Agreement,
Westin has certain rights to designate a member of the Company's Board of
Directors.
Montgomery Securities has provided certain investment banking services to
the Company, including rendering a fairness opinion in connection with the
Merger, for which the Company has agreed to pay usual and customary fees upon
the closing of the Merger.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, Los Angeles, California and, as to matters of
Maryland law, by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
Certain matters of California real estate and timeshare law will be passed
upon for the Company by Paul, Hastings, Janofsky & Walker, LLP, Los Angeles,
California and certain matters of Florida real estate and timeshare law will
be passed upon for the Company by Schreeder, Wheeler & Flint, Atlanta,
Georgia. Certain partners of Paul, Hastings, Janofsky & Walker, LLP, members
of their families and related persons own approximately 1% of the Common Stock
of the Company prior to the Stock Offering and certain partners of Schreeder,
Wheeler & Flint own less than 1% of the Common Stock of the Company. Certain
matters will be passed upon for the Underwriters by O'Melveny & Myers LLP, San
Francisco, California in reliance, as to matters of Maryland law, on the
opinion of Ballard Spahr Andrews & Ingersoll.
EXPERTS
The consolidated financial statements of Signature Resorts, Inc. and
subsidiaries as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said report.
The consolidated financial statements of AVCOM International, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and the
related Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Company is also subject to the informational requirements
of the Exchange Act, and in accordance therewith files reports and other
information with the Commission. Copies of the Registration Statement and
reports, proxy statements and other information concerning the Company may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the public reference section of the Commission at its
Washington address upon payment of the fees prescribed by the Commission or
may be examined without charge at the offices of the Commission. Electronic
filings made through the Electronic Data Gathering Analysis and Retrieval
System are publicly available through the Commission's Website
(http://www.sec.gov).
The Company intends to furnish its stockholders with annual reports
containing combined financial statements audited by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited combined financial information.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SIGNATURE RESORTS, INC.
Report of Independent Certified Public Accountants........................ F-2
Consolidated Financial Statements (Amounts as of September 30, 1995 and
1996
and for the nine month periods then ended are unaudited)
Consolidated Balance Sheets at December 31, 1994 and 1995 and September
30, 1995 and 1996...................................................... F-3
Consolidated Statements of Income for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1995 and
1996................................................................... F-4
Consolidated Statements of Equity for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1996..... F-5
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1995 and
1996................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
AVCOM INTERNATIONAL, INC.
Report of Independent Auditors............................................ F-21
Consolidated Financial Statements (Amounts as of September 30, 1995 and
1996
and for the nine month periods then ended are unaudited)
Consolidated Balance Sheets at December 31, 1994 and 1995 and September
30, 1996............................................................... F-22
Consolidated Statements of Operations for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1995 and
1996................................................................... F-23
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1995 and for the nine months ended September
30, 1995 and 1996...................................................... F-24
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1995 and for the nine months ended September 30, 1995 and
1996................................................................... F-25
Notes to Consolidated Financial Statements................................ F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Signature Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of Signature
Resorts, Inc. (a Maryland Corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, equity and
cash flows for each of the three years in the period ended December 31, 1995.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Signature Resorts, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Orlando, Florida,
December 11, 1996
F-2
<PAGE>
SIGNATURE RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------------------ -------------------------
1994 1995 1995 1996
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ 1,854,572 $ 4,341,591 $ 4,937,932 $ 9,844,097
Cash in escrow.............. 2,427,190 1,945,856 1,819,112 1,494,906
Mortgages receivable, net of
an allowance of $1,570,886
and $5,589,527 at December
31, 1994 and 1995,
respectively, $6,463,470
and $5,693,022 at September
30, 1995 and 1996,
respectively............... 33,437,116 65,099,612 60,511,155 87,955,723
Due from affiliates......... -- 2,700,820 2,949,419 4,567,335
Other receivables, net...... 1,019,673 6,383,134 3,222,218 8,249,342
Prepaid expenses and other
assets..................... 1,676,348 2,125,118 888,148 2,274,542
Investment in joint
venture.................... 4,293,525 2,644,449 3,000,101 7,537,754
Real estate and development
costs...................... 33,452,751 46,757,151 43,341,935 85,030,279
Property and equipment,
net........................ 437,092 1,863,579 729,741 2,732,399
Intangible assets, net...... 3,856,571 4,223,834 5,243,380 4,842,175
----------- ------------ ------------ ------------
Total assets................ $82,454,838 $138,085,144 $126,643,141 $214,528,552
=========== ============ ============ ============
LIABILITIES AND EQUITY
Accounts payable............ $ 1,190,072 $ 4,599,000 $ 3,614,842 $ 7,902,938
Accrued liabilities......... 5,931,911 8,854,772 10,181,227 11,765,984
Due to affiliates........... 138,245 1,422,098 469,654 1,631,848
Income taxes payable........ -- -- -- 569,451
Deferred taxes.............. -- -- -- 11,398,787
Notes payable to financial
institutions............... 34,439,558 72,395,704 63,398,732 81,144,879
Notes payable to related
parties.................... 9,975,454 12,343,518 11,667,302 --
----------- ------------ ------------ ------------
Total liabilities........... 51,675,240 99,615,092 89,331,757 114,413,887
Commitments (Note 11).......
Equity...................... 30,779,598 38,470,052 37,311,384 100,114,665
----------- ------------ ------------ ------------
Total liabilities and
equity..................... $82,454,838 $138,085,144 $126,643,141 $214,528,552
=========== ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SIGNATURE RESORTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Vacation Interval
sales.................. $22,237,812 $40,269,401 $59,070,917 $46,384,993 $49,458,553
Interest income......... 1,825,483 3,683,302 6,928,862 4,668,436 6,626,609
Other income............ 372,697 337,487 6,607,999 2,641,418 7,646,518
----------- ----------- ----------- ----------- -----------
Total revenues.......... 24,435,992 44,290,190 72,607,778 53,694,847 63,731,680
----------- ----------- ----------- ----------- -----------
COSTS AND OPERATING
EXPENSES
Vacation Interval cost
of sales............... 5,707,542 12,393,647 15,649,805 12,547,235 11,254,793
Advertising, sales, and
marketing.............. 10,808,680 18,744,828 28,488,178 22,429,056 24,408,031
Loan portfolio:
Interest expense--
treasury............. 673,706 1,629,283 3,585,927 2,532,436 4,021,948
Other expenses........ 208,258 850,661 1,188,502 757,809 1,048,497
Provision for doubtful
accounts............. 618,650 923,129 1,786,811 1,470,640 1,371,926
General and
administrative:
Resort-level.......... 2,346,043 2,863,833 4,946,525 2,759,876 4,960,842
Corporate............. 877,134 874,137 1,607,413 1,130,266 2,428,228
Depreciation and
amortization........... 384,470 489,160 1,675,515 1,158,337 1,674,822
----------- ----------- ----------- ----------- -----------
Total costs and
operating expenses..... 21,624,483 38,768,678 58,928,676 44,785,655 51,169,087
----------- ----------- ----------- ----------- -----------
Net operating income.... 2,811,509 5,521,512 13,679,102 8,909,192 12,562,593
Interest expense--
other.................. 518,612 958,628 475,693 343,796 1,867,765
Equity loss on
investment in joint
venture................ -- 271,475 1,649,076 1,293,424 94,695
----------- ----------- ----------- ----------- -----------
Net income before
taxes.................. 2,292,897 4,291,409 11,554,333 7,271,972 10,600,133
Income taxes............ -- -- 641,545 210,322 539,204
----------- ----------- ----------- ----------- -----------
Net income.............. $ 2,292,897 $ 4,291,409 $10,912,788 $ 7,061,650 $10,060,929
=========== =========== =========== =========== ===========
PRO FORMA INCOME DATA
(UNAUDITED)
Net income before
taxes.................. $ 2,292,897 $ 4,291,409 $11,554,333 $ 7,271,972 $10,600,133
Pro forma provision for
income taxes........... 878,966 1,617,913 4,348,822 2,738,904 3,992,505
----------- ----------- ----------- ----------- -----------
Pro forma net income.... $ 1,413,931 $ 2,673,496 $ 7,205,511 $ 4,533,068 $ 6,607,628
=========== =========== =========== =========== ===========
Pro forma net income per
common share........... -- -- $ 0.63 $ -- $ 0.54
Pro forma weighted
average common shares
outstanding............ -- -- 11,354,705 -- 12,321,759
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SIGNATURE RESORTS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
ADDITIONAL RETAINED MEMBERS'
PAID-IN EARNINGS EQUITY GENERAL LIMITED
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) PARTNERS PARTNERS TOTAL
---------- --------- ------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1993.......... -- $ -- $ -- $ -- $ -- $ 77,124 $ 7,361,649 $ 7,438,773
Issuance of Common
Stock............ -- -- -- -- -- -- -- --
Contributions..... -- -- -- -- -- 1,010 2,500,890 2,501,900
Distributions..... -- -- -- -- -- (154,488) (240,890) (395,378)
Net income........ -- -- -- -- -- 17,269 2,275,628 2,292,897
---------- --------- ------------ ----------- ----------- ----------- ------------ ------------
Balance at
December 31,
1993............. -- -- -- -- -- (59,085) 11,897,277 11,838,192
Issuance of Common
Stock............ -- -- -- -- -- -- -- --
Contributions..... -- -- -- -- -- 3,204,997 12,315,000 15,519,997
Distributions..... -- -- -- -- -- -- (870,000) (870,000)
Net (loss) income. -- -- -- (271,475) -- 183,363 4,379,521 4,291,409
---------- --------- ------------ ----------- ----------- ----------- ------------ ------------
Balance at
December 31,
1994............. -- -- -- (271,475) -- 3,329,275 27,721,798 30,779,598
Issuance of Common
Stock............ 200 22,000 -- -- -- -- -- 22,000
Contributions..... -- 155,000 -- 656,133 1,000 374,000 -- 1,186,133
Distributions..... -- -- -- -- (2,438,000) (42,467) (1,950,000) (4,430,467)
Net income........ -- -- -- 2,050,680 1,004,385 515,536 7,342,187 10,912,788
---------- --------- ------------ ----------- ----------- ----------- ------------ ------------
Balance at
December 31,
1995............. 200 177,000 0 2,435,338 (1,432,615) 4,176,344 33,113,985 38,470,052
1996 activity
(unaudited):
Proceeds from the
sale of 6,037,500
shares of common
stock to the
public, net of
offering costs of
$9,864,811....... 16,845,205 171,452 74,488,737 0 0 0 0 74,660,189
Goodwill from the
acquisition of
investment in
Joint Venture in
exchange for
stock............ 547,000 5,470 4,982,530 -- -- -- -- 4,988,000
Acquisition of
minority limited
partners'
interests........ -- -- (6,751,037) -- -- -- -- (6,751,037)
Deferred taxes
recorded in
connection with
the Consolidation
Transactions..... -- -- (11,227,504) -- -- -- -- (11,227,504)
Interest accrued
on deferred
installment
gains............ -- -- (517,993) -- -- -- -- (517,993)
Distributions of
partnership
equity........... (200) (11,735) -- (2,541,257) (5,382,314) -- (1,632,665) (9,567,971)
Net income........ -- -- -- 2,901,998 3,568,304 (164,269) 3,754,896 10,060,929
Reclassification
of partners'
equity in
connection with
the Consolidation
Transactions..... -- (168,261) 37,540,424 (1,370,497) 3,246,625 (4,012,075) (35,236,216) --
---------- --------- ------------ ----------- ----------- ----------- ------------ ------------
Balance at
September 30,
1996 (unaudited). 17,392,205 $ 173,926 $ 98,515,157 $ 1,425,582 $ 0 $ 0 $ 0 $100,114,665
========== ========= ============ =========== =========== =========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SIGNATURE RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 2,292,897 $ 4,291,409 $ 10,912,788 $ 7,061,650 $ 10,060,929
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities:
Depreciation and
amortization.......... 384,470 489,160 1,675,515 1,158,337 1,674,822
Provision for bad debt
expense............... 618,650 923,129 1,786,811 1,470,640 1,371,926
Equity loss on
investment in joint
venture............... -- 271,475 1,649,076 1,293,424 94,695
Changes in operating
assets and
liabilities:
Cash in escrow....... (413,591) (1,484,501) 481,334 608,078 450,950
Due from affiliates.. -- -- (2,700,820) (2,949,419) (1,866,515)
Prepaid expenses and
other assets........ (642,680) (1,033,668) (448,770) 788,200 (149,423)
Real estate and
development costs... (7,270,978) (17,671,125) (13,304,400) (9,889,184) (38,273,128)
Other receivables.... (87,870) (549,041) (5,363,461) (2,202,545) (1,866,208)
Accounts payable..... 358,896 24,486 3,408,928 2,424,770 3,303,938
Accrued liabilities.. 1,451,996 3,682,475 2,922,861 4,249,316 2,396,218
Income taxes payable. -- -- -- -- 569,451
Deferred taxes....... -- -- -- -- 171,283
Due to affiliates.... 45,730 92,515 1,283,853 331,409 209,750
------------ ------------ ------------ ------------ ------------
Net cash (used in)
provided by operating
activities............. (3,262,480) (10,963,686) 2,303,715 4,344,676 (21,851,312)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Expenditures for
investment in joint
venture................ -- (4,565,000) -- -- --
Expenditures for
property and equipment. (255,156) (221,248) (1,764,253) (380,431) (1,149,402)
Expenditures for
intangible assets...... (722,923) (3,146,546) (1,705,012) (2,457,364) (2,012,581)
Mortgages receivable.... (9,797,740) (17,007,472) (33,449,307) (28,544,679) (24,228,037)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities... (10,775,819) (24,940,266) (36,918,572) (31,382,474) (27,390,020)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from notes
payable................ 16,478,302 35,266,249 71,062,122 52,984,364 76,759,011
Payments on notes
payable................ (7,591,261) (16,358,188) (33,105,976) (24,025,190) (68,009,836)
Proceeds from notes
payable to related
parties................ 6,120,971 5,145,454 3,711,005 3,141,193 5,606,208
Payments on notes
payable to related
parties................ (1,773,209) (2,569,224) (1,342,941) (1,449,345) (17,949,726)
Equity contributions.... 2,501,900 15,519,997 1,208,133 970,136 --
Proceeds from Initial
Public Offering........ -- -- -- -- 74,657,189
Acquisition of minority
limited partners'
interests.............. -- -- -- -- (6,751,037)
Equity distributions.... (395,378) (870,000) (4,430,467) (1,500,000) (9,567,971)
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities... 15,341,325 36,134,288 37,101,876 30,121,158 54,743,838
------------ ------------ ------------ ------------ ------------
Net increase in cash and
cash equivalents....... 1,303,026 230,336 2,487,019 3,083,360 5,502,506
Cash and cash
equivalents, beginning
of period.............. 321,210 1,624,236 1,854,572 1,854,572 4,341,591
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
period................. $ 1,624,236 $ 1,854,572 $ 4,341,591 $ 4,937,932 $ 9,844,097
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
period for interest.... $ 1,352,000 $ 3,646,117 $ 5,413,502 $ 4,753,739 $ 9,156,703
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF NON-CASH INFORMATION
Acquisition of
Investment in Joint
Venture in exchange for
stock recorded in
connection with the
Consolidation
Transactions........... $ 7,658,000
============
Deferred taxes recorded
in connection with the
Consolidation
Transactions........... $ 11,227,504
============
Interest accrued on
deferred installment
gains recorded in
connection with the
Consolidation
Transactions........... $ 517,993
============
Net assets of
predecessor
partnerships acquired
in exchange for stock,
net of cash transferred
of approximately $4.5
million recorded in
connection with the
Consolidation
Transactions........... $ 35,324,920
============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
1. NATURE OF BUSINESS
Signature Resorts, Inc. and its wholly-owned subsidiaries (the Company)
generate revenues from the sale and financing of timeshare interests in its
resorts, which typically entitle the owner to use a fully furnished vacation
resort [in perpetuity,] typically for a one-week period each year (each, a
Vacation Interval). The Company's principal operations consist of
(1) developing and acquiring 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 Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its common stock (the
Initial Public Offering). Concurrently with the Initial Public Offering,
certain predecessor limited partnerships, limited liability companies and
corporations (the Entities) exchanged their direct or indirect interest in,
and obligations of, for shares of the Company's common stock (the
Consolidation Transactions).
For periods ended prior to September 30, 1996, the Entities were as follows:
<TABLE>
<CAPTION>
RESORT PROPERTY DATE ACQUIRED/OPENED
--------------- --------------------
<C> <S> <C>
Signature Resorts, Inc.
Cypress Pointe Resorts, L.P. Cypress Pointe Resort November 1992
Vacation Ownership Marketing Company Cypress Pointe Resort November 1992
Fall Creek Resort, L.P. Plantation at Fall Creek July 1993
Vacation Resort Marketing of Missouri,
Inc. Plantation at Fall Creek July 1993
Port Royal Resort, L.P. Royal Dunes Resort April 1994
Grand Beach Resort, Limited Embassy Vacation Resort
Partnership Grand Beach January 1995
Resort Marketing International-- Embassy Vacation Resort
Orlando Grand Beach January 1995
AKGI-Royal Palm, C.V.o.a. Royal Palm Beach Club July 1995
AKGI-Flamingo, C.V.o.a. Flamingo Beach Club August 1995
Premier Resort Management, Inc.
Resort Telephone & Cable of Orlando,
Inc.
USA Vacation Investors, L.P.
Kabushiki Gaisha Kei, LLC
Argosy/KOAR Group, Inc.
</TABLE>
For the year ended December 31, 1994, AKGI-Royal Palm, C.V.o.a., AKGI-
Flamingo, C.V.o.a., Premier Resort Management, Inc., Resort Telephone & Cable
of Orlando, Inc., USA Vacation Investors, L.P., Argosy/KOAR Group, Inc. and
Kabushiki Gaisha Kei, LLC had not been formed and, accordingly, did not form
part of the combined 1994 financial statements. For the year ended December
31, 1993, Grand Beach Resort, Limited Partnership, and Vacation Resort
Marketing of Missouri, Inc. had not been formed and, accordingly, did not form
part of the combined 1993 financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Prior to August 20, 1996, the accompanying financial statements include the
combined accounts of Signature Resorts, Inc. and the companies listed in Note
1, which became wholly-owned by common interests. As a result, the combined
accounts are now referred to as consolidated financial statements for the
historical periods presented. All significant intercompany transactions and
balances have been eliminated from these consolidated financial statements.
F-7
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Consolidation Transactions have been accounted for as a reorganization
of entities under common control. Accordingly, the net assets of the
predecessor entities were recorded at the predecessor entities' basis. In
addition, the accompanying financial statements reflect the historical results
of operations of the predecessor partnerships on a combined basis.
Interim Financial Statements
The accompanying unaudited interim financial statements at September 30,
1995 and 1996 and for the nine months ended September 30, 1995 and 1996 do not
include all disclosures provided in the annual combined financial statements.
These interim financial statements should be read in conjunction with the
accompanying annual audited combined financial statements and the footnotes
thereto. Results for the 1996 interim period are not necessarily indicative of
the results to be expected for the year ending December 31, 1996. However, the
accompanying interim financial statements reflect all adjustments which are,
in the opinion of management, of a normal and recurring nature necessary for a
fair presentation of the financial position and results of operations of the
Company. Unless otherwise stated, all information subsequent to December 31,
1995, is unaudited.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments purchased
with an original maturity of three months or less. Cash and cash equivalents
consist of cash and money market funds.
Cash in Escrow
Cash in escrow is restricted cash consisting of deposits received on sales
of Vacation Intervals that are held in escrow until a certificate of occupancy
is obtained or the legal recission period has expired.
Real Estate and Development Costs
Real estate is valued at the lower of cost or net realizable value.
Development costs include both hard and soft construction costs and together
with real estate costs are allocated to Vacation Intervals based upon their
relative sales values. Interest, taxes, and other carrying costs incurred
during the construction period are capitalized. The amount of interest
capitalized during 1994 and 1995 was $2,040,544 and $2,088,382, respectively.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement 121
in the first quarter of 1996 and there has been no material impact on the
Company's operations or financial position.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of 3 to 7 years.
Depreciation and amortization expense related to property and equipment was
$25,562, $59,710 and $337,765 in 1993, 1994, and 1995, respectively. For the
nine months ended September 30, 1995 and 1996, depreciation and amortization
expense was $87,783 and $280,582, respectively.
F-8
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
Start-up costs and organizational costs incurred in connection with the
formation of the Company have been capitalized and are being amortized on a
straight-line basis over a period of one year. Start-up costs relate to costs
incurred to develop a marketing program prior to receiving regulatory approval
to market the related property.
Financing and loan origination fees incurred in connection with obtaining
funding for the Company have been capitalized and are being amortized on a
straight-line basis over the life of the respective loans.
Goodwill recorded in connection with the acquisition of the Investment in
Joint Venture is being amortized by a fixed amount per Interval as Intervals
are sold.
Revenue Recognition
The Company recognizes sales of Vacation Intervals on an accrual basis after
a binding sales contract has been executed, a 10% minimum down payment has
been received, the recision period has expired, construction is substantially
complete, and certain minimum sales levels have been achieved. If all the
criteria are met except that construction is not substantially complete, then
revenues are recognized on the percentage-of-completion (cost to cost) basis.
For sales that do not qualify for either accrual or percentage-of-completion
accounting, all revenue is deferred using the deposit method.
Revenues from resort management and maintenance services are recognized on
an accrual basis as earned.
Income Taxes
Prior to August 20, 1996, the predecessor entities were taxed as regular
corporations at the corporate level, as S corporations taxable at the
shareholder level, or as partnerships taxable at the partner level. Due to the
Initial Public Offering, the Company became subject to federal, state, and
foreign income taxes from the effective date of the Initial Public Offering.
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.
Reclassifications
Certain reclassifications were made to the 1995 financial statements to
conform to the 1996 presentation.
3. ACCOUNTS RECEIVABLE
The Company has accrued insurance claims as a result of hurricane damage to
its Royal Palm and Flamingo properties located in St. Maarten, Netherlands
Antilles of $3.8 million and $1.5 million at December 31, 1995 and September
30, 1996, respectively. The receivable at September 30, 1996 consists of
business interruption insurance claims. The Company has submitted additional
claims above the amounts accrued for business interruption insurance and is in
negotiations with its carriers regarding these claims.
4. MORTGAGES RECEIVABLE
The Company provides financing to the purchasers of Vacation Intervals which
are collateralized by their interest in such Vacation Intervals. The mortgages
receivable bear interest at the time of issuance of between 12% and 17% and
remain fixed over the term of the loan, which is seven to ten years. The
weighted average rate of interest on outstanding mortgages receivable is 15%.
F-9
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1995, mortgages in the amount of $823,251 and
$1,796,060, respectively, are noninterest bearing. These mortgages have not
been discounted as management has determined that the effect would not be
material on the combined financial statements.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $415,127 and $860,776 at December 31, 1994 and 1995,
respectively, and $627,139 and $1,132,916 at September 30, 1995 and
September 30, 1996, respectively. The accrued interest receivable at December
31, 1995 and September 30, 1996 is net of an allowance for doubtful accounts
of $151,201 and $145,319, respectively.
The following schedule reflects the principal maturities of mortgages
receivable:
<TABLE>
<S> <C>
Year ending December 31:
1996...................................................... $ 6,347,717
1997...................................................... 7,230,664
1998...................................................... 8,422,516
1999...................................................... 9,778,920
2000...................................................... 11,315,961
Thereafter................................................ 27,593,361
-----------
Total principal maturities of mortgages receivable........ 70,689,139
Less allowance for doubtful accounts...................... (5,589,527)
-----------
Net principal maturities of mortgages receivable.......... $65,099,612
===========
</TABLE>
The Company considers all mortgages receivable past due more than 60 days to
be delinquent. At December 31, 1995, $6,700,000 of mortgages receivable were
delinquent.
At December 31, 1995, the Company estimated that $1,560,000 of additional
costs would be incurred related to Vacation Intervals sold or Vacation
Intervals currently available for sale. Obligations related to such
improvements are insignificant.
The activity in the mortgages receivable allowance for doubtful accounts is
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of the peri-
od............................. $ 798,441 $1,570,886 $1,570,886 $5,589,527
Increase (Decrease) in allowance
for purchased mortgage
receivables.................... -- $3,156,166 $3,412,276 (729,633)
Provision....................... 923,129 1,786,811 1,470,640 1,371,926
Receivables (charged off) recov-
ery............................ (150,684) (924,336) 9,668 (538,798)
---------- ---------- ---------- ----------
Balance, end of the period...... $1,570,886 $5,589,527 $6,463,470 $5,693,022
========== ========== ========== ==========
</TABLE>
During September 1995, the Company recorded an allowance for doubtful
accounts of $3,412,276 for certain mortgage portfolios acquired in conjunction
with the acquisition of the two properties in St. Maarten.
F-10
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated cost of sales consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land.................... $ 18,102,052 $ 19,734,459 $ 18,451,761 $ 29,049,291
Development costs, ex-
cluding capitalized
interest............... 33,718,050 57,969,594 54,632,946 96,035,101
Capitalized interest.... 2,730,363 5,300,400 4,667,789 8,260,858
------------ ------------ ------------ ------------
Total real estate and
development costs...... 54,550,465 83,004,453 77,752,496 133,345,250
Less accumulated cost of
sales.................. (21,097,714) (36,247,302) (34,410,561) (48,314,971)
------------ ------------ ------------ ------------
Net real estate and de-
velopment costs........ $ 33,452,751 $ 46,757,151 $ 43,341,935 $ 85,030,279
============ ============ ============ ============
</TABLE>
6. INVESTMENT IN JOINT VENTURE
The Company owns 100% of the partnership interests in one of the co-managing
general partners of the Poipu Partnership, the partnership which directly owns
the Embassy Vacation Resort at Poipu Point, a venture that acquired a 219 unit
condominium project situated on 22 acres of oceanfront land at Koloa, Kauai,
Hawaii (the "Property"). The sole purpose of the venture is to hold the
Property for sale in phases as Vacation Intervals while generating revenues
from transient rentals as the Vacation Intervals are being sold. As co-
managing general partner, the Company holds a 0.5% partnership interest for
purposes of distributions, profits and losses. The Company is also a limited
partner of the Poipu Partnership and holds a 29.93% partnership interest for
purposes of distributions, profits and losses, for a total partnership
interest of 30.43%. In addition, following repayment of any outstanding
partner loans, the Company is entitled to receive a 10% per annum return on
the Founders' and certain former limited partners' initial capital investment
of approximately $4.6 million in the Poipu Partnership. After payment of such
preferred return and the return of approximately $4.6 million of capital to
the Company on a pari passu basis with the other partner in the partnership,
the Company is entitled to receive approximately 50% of the net profits of the
Poipu Partnership. In the event certain internal rates of return specified
under the partnership agreement are achieved, the Company is entitled to
receive approximately 55% of the net profits of the Poipu Partnership.
Summarized financial information as of December 31 relating to the Company's
investment is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Mortgages receivable........................................ $ -- $ 3,474
Timeshare inventory......................................... -- 3,248
Net property and equipment.................................. 42,188 39,287
Total assets................................................ 45,553 50,696
Notes payable............................................... 30,300 35,494
Advances from partners...................................... -- 4,000
Partners' capital........................................... 14,108 8,688
Revenues.................................................... 491 10,119
Net loss.................................................... 892 5,419
</TABLE>
Concurrently with the Initial Public Offering, the Company exchanged 547,000
shares of stock with the former holders of interests in the Poipu Partnership
for a 30.43% interest in the joint venture. As a result of this exchange,
$4,988,000 of goodwill was recorded and is being amortized on a per Interval
basis as Intervals are
F-11
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sold. The amortization of such goodwill for the nine months ended September
30, 1996 was $76,371. The Company also acquired a $2,546,513 note receivable
from the partnership in connection with the exchange on which the Company has
accrued approximately $30,000 of interest. This note bears interest at a rate
of 12% per annum.
7. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
----------------------- ------------------------
1994 1995 1995 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Organizational costs........ $3,200,510 $ 3,884,581 $ 2,528,256 $ 3,134,066
Start-up costs.............. 538,364 713,319 2,849,615 2,471,200
Loan origination fees....... 349,380 522,378 422,380 422,379
Financing fees.............. 698,229 1,444,242 1,304,859 2,356,035
---------- ----------- ----------- -----------
Total intangible assets..... 4,786,483 6,564,520 7,105,110 8,383,680
Less accumulated
amortization............... (929,912) (2,340,686) (1,861,730) (3,541,505)
---------- ----------- ----------- -----------
Net intangible assets....... $3,856,571 $ 4,223,834 $ 5,243,380 $ 4,842,175
========== =========== =========== ===========
</TABLE>
Amortization expense related to intangible assets was $358,908, $429,450,
and $1,337,750 in 1993, 1994 and 1995, respectively. For the nine months ended
September 30, 1995 and 1996, amortization expense was $1,070,555 and
$1,394,240, respectively.
F-12
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
Notes payable to financial institutions consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
----------------------- -----------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Construction loans payable not
to exceed $49 million in the
aggregate, interest payable
monthly at prime plus 2%
(10.5% and 10.65% at December
31, 1994 and 1995,
respectively, and 11% and
10.25% at September 30, 1995
and 1996, respectively),
principal and all accrued
interest due on dates ranging
from February 1996 to May
1998, collateralized by
substantially all the assets
of the certain combined
entities..................... $ 4,573,849 $ 9,267,391 $ 6,359,756 $ --
Construction and acquisition
loan payable, due October
31,1998 with interest payable
monthly at LIBOR plus 4.25%
(9.94% at December 31, 1995
and 10.75% and 10.25% at
September 30, 1995 and 1996,
respectively), secured by
land, improvements and
timeshare interests.......... -- 1,897,716 1,698,511 --
Revolving lines of credit not
to exceed $145 million in the
aggregate (limited by
eligible collateral), with
interest payable monthly at
rates ranging from prime plus
2% to prime plus 3% (10.5% to
11.5% and 10.65% to 11.65% at
December 31, 1994 and 1995,
respectively, and 10.25% to
11.75% and 10.25% to 11.25%
at September 30, 1995 and
1996, respectively), payable
in monthly installments of
principal and interest equal
to 100% of all proceeds of
the receivables collateral
collected during the month
but not less than the accrued
interest, with any remaining
principal due seven to ten
years after the date of the
last advance related to
mortgages receivable,
collateralized by specific
mortgages receivable......... 19,357,724 37,858,352 30,597,567 48,411,823
Revolving line of credit of
$10 million, collateralized
by certain mortgages
receivable with interest
payable at LIBOR plus 4.25%
(9.94% at December 31, 1995
and 10.38% and 9.75% at
September 30, 1995 and 1996,
respectively), payable in
monthly installments of
principal and interest equal
to 100% of all proceeds of
the receivables collateral
collected during the month
but not less than the accrued
interest, with any remaining
principal due October 31,
2003......................... -- 1,571,070 3,737,910 4,154,852
Revolving line of credit of
$11 million, with interest
payable at prime plus 2.5%
(11% and 10.75% at
December 31, 1994 and
September 30, 1995,
respectively), and prime plus
2% (10.65% and 10.25% at
December 31, 1995 and
September 30, 1996,
respectively), secured by
specific mortgages
receivable, due ten years
after the date on which the
last advance related to the
mortgages receivable is made. $ 2,287,245 $ 4,058,306 $ 3,923,614 $ 3,807,138
</TABLE>
F-13
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
----------------------- -----------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revolving line of credit of
$6.0 million, with interest
payable at prime plus 3%
(11.65% and 11.25% at
December 31, 1995 and
September 30, 1996,
respectively), maturing seven
years after the date of the
last advance, secured by
mortgages receivable......... $ -- $ 3,873,513 $ -- $ 2,889,328
Working capital loan payable,
due September 30, 1995, with
interest payable monthly at
prime plus 2.5% (11% at
December 31, 1994), secured
by time-share interests and
with total borrowings
allowable of $2,425,000...... 1,046,080 -- -- --
Working capital notes payable
of $5.5 million, with
interest payable at rates
ranging from prime plus 2% to
prime plus 2.5%, (10.65% to
11.15% at December 31, 1995),
due on dates ranging from
July 1997 to November 1997,
collateralized by certain
mortgage receivables......... -- 521,397 1,121,656 2,955,815
Acquisition loans payable of
$9.85 million, with interest
payable at prime plus 3%
(11.65% and 11.25% at
December 31, 1995 and
September 30, 1996,
respectively), due on dates
ranging from January 1998 to
April 1998, payable with a
portion of the proceeds
received on the sale of
Vacation Intervals,
collateralized by specific
mortgages receivable......... -- 5,998,283 9,846,289 2,735,530
Acquisition/construction loan
payable of $9 million, with
interest payable at prime
plus 2% (10.25% at
September 30, 1996), due by
June 13, 1999, payable with a
portion of the proceeds
received on the sale of
Vacation Intervals........... -- -- -- 2,363,539
Land loan payable of $2.3
million, $1.8 million with
interest payable at 18% and
$0.5 million at a 0% interest
rate, payable with a portion
of the proceeds received on
the sale of Vacation
Intervals.................... -- -- -- 5,443,833
Land purchase obligation at
the Fall Creek Plantation
property (see note 9 for
further discussion).......... -- 1,500,000 -- 639,626
Noninterest bearing land loan
of $500,000 payable at
$54 per interval sold with
remaining balance due May 1,
1991......................... 500,000
Notes payable to certain
investors and former owners,
with monthly principle
payments of $100,000, plus
interest at 12%, with
additional interest of $325
per interval sold............ 2,000,000
Noninterest bearing purchase
money mortgage note, payable
in annual installments of $2
million with final payment
due November 5, 1997, net of
a discount of $825,340 and
$411,577 at December 31, 1994
and 1995, respectively....... 7,174,660 5,588,423 6,000,000 4,000,000
Other notes payable........... -- 261,253 113,429 1,243,395
----------- ----------- ----------- -----------
Total notes payable........... $34,439,558 $72,395,704 $63,398,732 $81,144,879
=========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the revolving lines of credit agreements, the Company may
typically borrow from 85% to 90% of the balances of the pledged mortgages
receivable. Of the aggregate of $178 million borrowings available under these
certain agreements at September 30, 1996, the borrowing capacity expires seven
to ten years after the date on which the last advance related to mortgages
receivable was executed.
Of the aggregate of $49 million available in construction loans payable,
$2.0 million expires on January 31, 1997, $8.0 million expires January 14,
1998, $8.0 million expires on May 9, 1998, $3.0 million expires on October 31,
1998 and $28.0 million expires on April 30, 2000.
The loans contain certain covenants, the most restrictive of which requires
certain of the combined affiliates to maintain a minimum net worth, as defined
in the related loan agreement. In addition, the loan agreements contain
certain covenants restricting distributions to partners and additional
borrowings. At December 31, 1995, $18.4 million of equity was specifically
restricted from payment of distributions.
At December 31, 1995, contractual maturities of mortgages and other notes
payable over the next five years and thereafter, excluding first mortgage
notes payable and revolving lines of credit totaling $54,859,524 as these
amounts are payable based on established release prices or from excess cash
flows related to certain timesharing week sales, are as follows:
<TABLE>
<CAPTION>
Due in fiscal year
<S> <C>
1996....................................................... $ 8,906,686
1997....................................................... 4,886,527
1998....................................................... 3,655,080
1999....................................................... 29,129
2000....................................................... 32,227
Thereafter................................................. 26,531
-----------
$17,536,180
===========
</TABLE>
9. LAND PURCHASE AGREEMENT AND RELATED DEBT
The Company has entered into an agreement to purchase approximately 140
acres of land (the Property) at its Fall Creek Resort in Branson, Missouri,
upon which it intends to construct Vacation Intervals. The property is to be
acquired in four phases in four separate closings at a total purchase price of
$6 million. The first closing has occurred with the Company acquiring the land
for its first stage of development for $2 million. The second closing will
occur upon the settlement of a noninterest bearing land purchase obligation of
$1.5 million which will be paid as units are sold. The Company has the right
but not the obligation to acquire the other two phases under similar land
purchase obligations totaling $2.5 million.
10. RELATED-PARTY TRANSACTIONS
The Company accrued $652,164 and $1,418,022 as a receivable and payable,
respectively, at December 31, 1995 with the homeowners' associations at its
resorts. The related party payable to the homeowners' associations at December
31, 1995 included $1,029,900 of a special assessment fee charged to the
Company. At September 30, 1996, the Company, had accrued $2,903,873 and
$1,631,856 as a receivable and payable, respectively, with the various
homeowners' associations at its resorts. All amounts are classified as due
from and due to related parties in the accompanying consolidated balance
sheets.
The Company recorded a receivable of $1,153,829 and $120,697 from two of its
predecessor partnerships at December 31, 1995 for pre-development costs
incurred by the Company at its Embassy Vacation Resort
F-15
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lake Tahoe and San Luis Bay Resorts. Such predecessor partnerships were
consolidated into the Company on August 20, 1996 as a result of the
Consolidation Transactions.
Included in due from related parties at December 31, 1995 and September 30,
1996 are approximately $310,000 and $1,549,555, respectively, relating to
expenses paid on behalf of related parties to be subsequently reimbursed to
the Company by such related party. Subsequent to September 30, 1996, the
Company collected $739,458 of this amount.
The Company also made payments of $295,001 during the twelve months ended
December 31, 1995 to an affiliate of the Company for construction consulting
and expense reimbursement. For the three months and nine months ended
September 30, 1996, no such payments were made.
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------------- ----------------
1994 1995 1995 1996
---------- ----------- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Notes payable to CPI Securities, L.P.,
an affiliate of a limited partner,
with interest at 10%, payable monthly
and the entire principal balance and
all accrued interest due on January
4, 1995.............................. $ 182,513 $ -- $ -- $--
Notes payable to CPI Securities, L.P.,
an affiliate of a limited partner,
with interest at 12%, payable monthly
and the entire principal balance and
all accrued interest due on December
31, 1996 [see (a) below]............. 2,722,250 2,722,250 2,722,250 --
Notes payable to Grace Investments,
Ltd. one of the limited partners,
with interest at 12% payable monthly,
due on December 31, 1996 [see (a)
below]............................... 1,666,650 1,666,650 1,666,650 --
Notes payable to Dickstein & Company,
L.P., a limited partner, with
interest payable monthly at 12%, due
on December 31, 1996 [see (a) below]. 1,111,100 1,111,100 1,111,100 --
Notes payable to certain employees,
investors, and partners, with monthly
principal payments of $100,000, plus
interest at 12%, with additional
interest of $325 per interval sold... 4,000,000 2,900,000 3,200,000 --
Acquisition loan payable with interest
payable at 12%, due on December 31,
1996................................. -- 1,495,000 -- --
Notes payable to partners, with
interest accrued at 16%, payable on
demand............................... -- 2,157,018 2,947,302 --
Other................................. 292,941 291,500 20,000 --
---------- ----------- ----------- ----
Total notes payable to related
parties.............................. $9,975,454 $12,343,518 $11,667,302 $--
========== =========== =========== ====
</TABLE>
F-16
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS
The Company entered into a license agreement in April 1994 with Embassy
Vacation Resorts, a division of Embassy Suites, Inc. (ESI), to franchise the
Grand Beach property. The license allows the resort to be operated and
marketed as an "Embassy Vacation Resort." It provides for ESI to be paid a
percentage of net sales of the Embassy Vacation Resort property. Additional
terms are stated in the related license agreement.
On September 23, 1996, the Company announced the signing of a merger
agreement to acquire AVCOM for approximately $34.6 million of the Company's
common stock plus the assumption of net debt. AVCOM is the parent company of
All Seasons, Resorts, Inc., a developer, marketer and operator of timeshare
resorts in Arizona, California and Texas.
Under the terms of the merger agreement, the Company has agreed to issue
approximately 1,480,000 shares of its common stock in exchange for all
outstanding capital stock of AVCOM, based on the average high and low trading
prices of the Company's common stock on September 20, 1996 of $19.44 per
share. The actual number of its shares of the Company's common stock to be
issued is subject to adjustment if the price of the Company's common stock on
the NASDAQ National Market System exceeds $23.33 per share, or falls below
$15.55 per share and under certain other circumstances. In addition, if the
merger had taken place, as of September 30, 1996, the Company would have
assumed approximately $22.6 million of AVCOM's net debt. Also, pursuant to the
merger agreement, the Company committed to loan AVCOM $2.5 million. Management
expects the merger will qualify for pooling accounting treatment. The Company
has received an opinion from its independent financial advisor that the
consideration paid by the Company in the proposed merger is fair from a
financial point of view. It is anticipated that the acquisition will be
consummated in the first quarter of 1997, subject to the occurrence of all
conditions to closing.
AVCOM Resorts, Inc. develops, markets and operates timeshare resorts in the
western United States, with four existing resorts in Sedona, Arizona, one at
Lake Arrowhead, California, one at South Lake Tahoe, California and one at
Houston, Texas. In addition, All Seasons has resorts currently under
development in Scottsdale, Arizona, and South Lake Tahoe, California, and has
purchased twelve acres of land in Sedona, Arizona for future development.
The proposed merger is subject to the approval of the stockholders of AVCOM,
the satisfactory completion of due diligence by the Company, the expiration of
the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and other customary conditions.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Company disclose estimated
fair values for its financial instruments. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Cash and cash equivalents and cash in escrow: The carrying amount reported
in the balance sheet for cash and cash equivalents and cash in escrow
approximates its fair value.
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable and notes payable to related parties: The carrying amount
reported in the balance sheet for notes payable approximates its fair value
because the interest rates on these instruments approximate current interest
rates charged on similar current borrowings.
F-17
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1994 1995
----------------------- -----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents... $ 1,854,572 $ 1,854,572 $ 4,341,591 $ 4,341,591
Cash in escrow.............. 2,427,190 2,427,190 1,945,856 1,945,856
Mortgages receivable........ 33,437,116 33,437,116 65,099,612 65,099,612
Notes payable............... 34,439,558 34,439,558 72,395,704 72,395,704
Notes payable to related
parties.................... 9,975,454 9,975,454 12,343,518 12,343,518
</TABLE>
13. OTHER INCOME
Other income for the year ended December 31, 1995 primarily consists of
business interruption insurance proceeds of $2,000,000, income from purchased
mortgages receivable of $2,180,000, rental income of $1,293,000 and management
fees of $841,000. Included in other income for the nine months ended
September 30, 1996 is $2,940,490 of income from purchased mortgages
receivable, $1.7 million of income related to the settlement of certain
receivables from the former owners of the St. Martin properties, $1,215,374 of
rental income and $769,253 of management fees.
14. PRO FORMA DISCLOSURES (UNAUDITED)
On August 20, 1996 the Company consummated a public offering which made it
subject to federal, state, and foreign income taxes from the effective date of
the Initial Public Offering. In addition, the Company is now required to
record a deferred tax liability for cumulative temporary differences between
financial reporting and tax reporting following the effective date of the
Initial Public Offering. During the nine months ended September 30, 1996, the
Company recorded approximately $315,000 of current income tax expense and
approximately $171,000 of deferred income tax expense. Additionally, the
Company recorded deferred taxes of $11,227,504 related to deferred taxes from
previous years that were assumed as part of the Initial Public Offering. The
total current tax liability and deferred tax liability at September 30, 1996
was $569,451 and $11,398,787, respectively. Both the deferred tax assets,
deferred tax liabilities, and the current tax provision were estimated based
on management's most recent information as of September 30, 1996.
The Company has recorded $517,993 of accrued interest related to deferred
installment gains from previous years that were assumed as part of the Initial
Public Offering.
F-18
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma provision for income taxes represents the estimated
income taxes that would have been reported had the Company filed federal,
state and foreign income tax returns as a regular C corporation. The following
summarizes the unaudited pro forma provision for income taxes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------ ---------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............... $405,552 $ 361,290 $1,579,424 $1,358,974 $2,242,039
States................ 41,148 -- 4,934 151,183 233,882
Foreign............... -- -- 662,288 122,618 49,186
-------- ---------- ---------- ---------- ----------
446,700 361,290 2,246,646 1,632,775 2,525,107
Deferred:
Federal............... 346,393 1,018,602 1,476,865 860,317 1,080,838
States................ 85,873 238,021 633,808 245,812 344,819
Foreign............... -- -- (8,497) -- 41,741
-------- ---------- ---------- ---------- ----------
432,266 1,256,623 2,102,176 1,106,129 1,467,398
-------- ---------- ---------- ---------- ----------
Unaudited pro forma
provision for income
taxes.................. $878,966 $1,617,913 $4,348,822 $2,738,904 $3,992,505
======== ========== ========== ========== ==========
</TABLE>
The reconciliation between the unaudited pro forma statutory provision for
income taxes and the unaudited pro forma actual provision for income taxes is
shown as follows for the year ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate...... $779,585 $1,459,079 $3,928,474
State tax, net of federal benefit......... 97,521 156,862 422,336
Foreign tax, net of federal benefit....... -- -- (8,497)
Nondeductible expenses.................... 1,860 1,972 6,509
-------- ---------- ----------
Unaudited pro forma provision for income
taxes.................................... $878,966 $1,617,913 $4,348,822
======== ========== ==========
</TABLE>
F-19
<PAGE>
SIGNATURE RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The significant
components of the pro forma net deferred tax liabilities were as follows for
the year ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Book over tax depreciation....... $ -- $ -- $ 28,142
Book over tax amortization....... 16,870 -- 218,340
Allowance for doubtful accounts.. 258,859 621,128 1,355,617
Gain on foreclosure.............. -- -- 203,716
Start-up costs................... 96,794 96,794 96,794
Net operating loss carryforward.. -- 1,048,417 --
Federal benefit of state deferred
tax............................. 67,830 148,712 364,207
Foreign tax credit carryover..... -- -- 632,007
Minimum tax credit carryover..... 561,679 922,969 2,502,393
----------- ----------- -----------
Total deferred tax assets.......... 1,002,032 2,838,020 5,401,216
Deferred tax liabilities:
Tax over book depreciation....... (20,374) (29,334) --
Tax over book amortization....... -- (40,033) --
Installment sales................ (1,771,627) (4,124,917) (8,586,188)
Marketing and commissions........ (18,443) (456,322) (568,394)
Deferred sales................... -- (281,931) (82,903)
Interest capitalization, net of
recovery........................ -- 56,688 (453,097)
Other............................ 14,141 (13,065) 127,799
----------- ----------- -----------
Total deferred tax liabilities..... (1,796,303) (4,888,914) (9,562,783)
----------- ----------- -----------
Pro forma net deferred tax
liabilities....................... $ (794,271) $(2,050,894) $(4,161,567)
=========== =========== ===========
</TABLE>
Additionally, certain of the Company's combined affiliates include foreign
corporations which are taxed at a regular rate of 45%. The Company has filed a
request for a tax holiday for AKGI-Royal Palm C.V.o.a. This request has been
verbally approved by the Chairman of the Tax Facility which effectively
reduces the tax to 2%. This 2% tax liability rate will be in effect up to and
including the fiscal year 1997. Generally, a foreign tax credit is allowed for
any taxes paid on foreign income up to the amount of U.S. tax.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AVCOM International, Inc.
We have audited the accompanying consolidated balance sheets of AVCOM
International, Inc. (Company) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 consolidated financial position
of AVCOM International, Inc. as of December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Phoenix, Arizona
May 31, 1996, except for Note 12,
as to which the date is July 1, 1996
F-21
<PAGE>
AVCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash ($1,026,000, $278,000 and $0
restricted at December 31, 1994 and
1995 and September 30, 1996,
respectively)......................... $ 1,026,000 $ 1,807,000 $ 687,000
Notes receivable, net.................. 5,939,000 18,659,000 36,659,000
Receivables from related parties....... 734,000 690,000 1,320,000
Other receivables...................... 386,000 626,000 1,037,000
Resort property held for timeshare
sales and under development........... 10,643,000 10,827,000 26,705,000
Property and equipment, net............ 1,906,000 2,188,000 5,580,000
Prepaid loan commitment fees........... -- 199,000 414,000
Deferred marketing and selling costs... 40,000 759,000 4,143,000
Capitalized start-up costs, net........ -- -- 470,000
Investment in common stock............. -- -- 600,000
Other assets........................... 178,000 179,000 668,000
----------- ----------- -----------
Total assets........................... $20,852,000 $35,934,000 $78,283,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued
liabilities........................... $ 989,000 $ 2,524,000 $ 9,665,000
Deferred revenue....................... 80,000 -- 7,055,000
Commissions payable.................... 442,000 1,009,000 1,328,000
Amounts due to related parties......... 387,000 484,000 354,000
Income taxes payable................... 403,000 500,000 --
Deferred income taxes payable.......... 2,176,000 2,624,000 1,597,000
Capitalized leases payable............. 378,000 761,000 1,586,000
Notes payable.......................... 12,582,000 22,692,000 51,320,000
----------- ----------- -----------
Total liabilities...................... 17,437,000 30,594,000 72,905,000
----------- ----------- -----------
Minority interest in consolidated lim-
ited partnership...................... -- -- 1,612,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par
value; 1,400,000 shares authorized,
1,310,700 shares issued and
outstanding; liquidation preference
of $1,521,000 at December 31, 1995
and $1,600,000 at September 30,
1996................................ 13,000 13,000 13,000
Common stock, $.01 par value;
10,000,000 shares authorized,
3,290,300 and 3,653,936 shares
issued and outstanding at December
31, 1994 and 1995, respectively, and
3,963,936 shares at September 30,
1996................................ 33,000 38,000 41,000
Paid-in capital...................... 939,000 1,819,000 2,216,000
Retained earnings.................... 2,460,000 3,500,000 1,526,000
----------- ----------- -----------
3,445,000 5,370,000 3,796,000
Less treasury stock, 12,000 shares of
common stock, at cost............... (30,000) (30,000) (30,000)
----------- ----------- -----------
Total stockholders' equity............. 3,415,000 5,340,000 3,766,000
----------- ----------- -----------
Total liabilities and stockholders'
equity................................ $20,852,000 $35,934,000 $78,283,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
AVCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales of timeshare
interests.............. $14,481,000 $24,130,000 $33,231,000 $24,821,000 $30,411,000
Timeshare management.... 452,000 650,000 1,256,000 962,000 1,059,000
Contract commission
revenue................ -- -- -- -- 497,000
Gain on sale of notes
receivable............. 167,000 571,000 566,000 564,000 77,000
Health club revenue..... -- -- -- -- 375,000
Other................... 99,000 66,000 193,000 137,000 250,000
----------- ----------- ----------- ----------- -----------
15,199,000 25,417,000 35,246,000 26,484,000 32,669,000
COST OF SALES AND
OPERATING EXPENSES
Cost of timeshare
interests sold......... 3,548,000 6,792,000 11,081,000 7,682,000 8,744,000
Marketing and selling... 6,950,000 12,232,000 13,920,000 11,232,000 15,117,000
Timeshare management.... 547,000 743,000 1,571,000 1,023,000 1,769,000
Contract marketing and
selling................ -- -- -- -- 974,000
Health club expenses.... -- -- -- -- 572,000
General and
administrative......... 1,621,000 3,034,000 4,780,000 3,256,000 6,229,000
Resort property
valuation allowance.... -- -- -- -- 839,000
Provision for doubtful
accounts............... 251,000 371,000 792,000 212,000 1,055,000
----------- ----------- ----------- ----------- -----------
12,917,000 23,172,000 32,144,000 23,405,000 35,299,000
----------- ----------- ----------- ----------- -----------
Operating income (loss). 2,282,000 2,245,000 3,102,000 3,079,000 (2,630,000)
Minority interest in
consolidated limited
partnership............ -- -- -- -- (112,000)
Interest and financing
costs.................. (335,000) (809,000) (1,818,000) (1,122,000) (2,944,000)
Interest income......... 236,000 180,000 594,000 253,000 2,396,000
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 2,183,000 1,616,000 1,878,000 2,210,000 (3,290,000)
Provision for (benefit
from) income taxes..... 1,970,000 695,000 838,000 936,000 (1,316,000)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 213,000 921,000 1,040,000 1,274,000 (1,974,000)
===========
Cumulative preferred
stock dividends........ 105,000 105,000 79,000 79,000
----------- ----------- ----------- -----------
Net income (loss)
available for common
stockholders........... $ 816,000 $ 935,000 $ 1,195,000 $(2,053,000)
=========== =========== =========== ===========
Earnings (loss) per
share.................. $ 0.16 $ 0.17 $ 0.22 $ (0.41)
=========== =========== =========== ===========
Pro forma earnings per
share (unaudited)...... $ 0.27
===========
Weighted average common
shares and common share
equivalents (pro forma
in 1993--unaudited).... 4,682,507 4,942,759 5,554,089 5,530,669 4,987,080
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
AVCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------- ----------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- ------- --------- ------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 1,310,700 $13,000 2,890,300 $29,000 $ 451,000 $ 1,326,000 $ -- $ 1,819,000
Issuance of common
stock.................. -- -- 400,000 4,000 496,000 -- -- 500,000
Redemption of
partnership interests.. -- -- -- -- (18,000) -- -- (18,000)
Net income.............. -- -- -- -- -- 213,000 -- 213,000
--------- ------- --------- ------- ---------- ----------- -------- -----------
Balance at December 31,
1993................... 1,310,700 13,000 3,290,300 33,000 929,000 1,539,000 -- 2,514,000
Repurchase of common
stock.................. -- -- -- -- -- -- (30,000) (30,000)
Payment for stock held
in escrow.............. -- -- -- -- 10,000 -- -- 10,000
Net income.............. -- -- -- -- -- 921,000 -- 921,000
--------- ------- --------- ------- ---------- ----------- -------- -----------
Balance at December 31,
1994................... 1,310,700 13,000 3,290,300 33,000 939,000 2,460,000 (30,000) 3,415,000
Issuance of common
stock, net of issuance
costs of $114,999...... -- -- 363,636 5,000 880,000 -- -- 885,000
Net income.............. -- -- -- -- 1,040,000 -- 1,040,000
--------- ------- --------- ------- ---------- ----------- -------- -----------
Balance at December 31,
1995................... 1,310,700 13,000 3,653,936 38,000 1,819,000 3,500,000 (30,000) 5,340,000
Conversion of
subordinated debt
(unaudited)............ 310,000 3,000 397,000 400,000
Net (loss) (unaudited).. -- -- -- -- -- (1,974,000) -- (1,974,000)
--------- ------- --------- ------- ---------- ----------- -------- -----------
Balance at September 30,
1996 (unaudited)....... 1,310,700 $13,000 3,963,936 $41,000 $2,216,000 $ 1,526,000 $(30,000) $3,766,000
========= ======= ========= ======= ========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
AVCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ 213,000 $ 921,000 $ 1,040,000 $ 1,274,000 $(1,974,000)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Gain on sale of notes
receivable............. (167,000) (571,000) (566,000) (564,000) (77,000)
Deferred income taxes... 1,658,000 506,000 448,000 571,000 (1,027,000)
Provision for doubtful
accounts............... 251,000 371,000 792,000 212,000 1,055,000
Depreciation and
amortization........... 56,000 146,000 185,000 131,000 848,000
Write-off of resort
property............... -- -- -- -- 839,000
Changes in operating
assets and liabilities:
Restricted cash......... -- (1,026,000) 748,000 796,000 278,000
Receivables from related
parties................ (382,000) (328,000) 44,000 (169,000) (630,000)
Other receivables....... (71,000) (195,000) (240,000) (100,000) (411,000)
Resort property held for
timeshare sales........ 1,684,000 (1,013,000) (184,000) (629,000) (6,623,000)
Prepaid loan commitment
fee.................... -- -- (199,000) -- (493,000)
Deferred marketing and
selling costs.......... -- -- (719,000) -- (3,384,000)
Capitalized start-up
costs.................. -- -- -- -- (470,000)
Other assets............ 139,000 -- (1,000) (135,000) (489,000)
Accounts payable and
other accrued
liabilities............ (402,000) 720,000 1,535,000 887,000 7,141,000
Commissions payable..... (463,000) 361,000 567,000 521,000 319,000
Amounts due to related
parties................ 79,000 308,000 97,000 (44,000) (130,000)
Deferred revenue........ -- -- (80,000) 7,055,000
Income taxes payable.... 312,000 91,000 97,000 350,000 (500,000)
----------- ------------ ------------ ----------- -----------
Net cash provided by
operating activities... 2,907,000 291,000 3,564,000 3,101,000 1,327,000
CASH FLOWS FROM
INVESTING ACTIVITIES
Additions to notes
receivable............. (9,472,000) (20,539,000) (26,843,000) (19,512,000) (30,004,000)
Proceeds from sales of
notes receivable....... 7,211,000 18,425,000 11,645,000 10,009,000 6,210,000
Collections of notes
receivable............. 300,000 740,000 2,252,000 571,000 6,571,000
Purchases of property
and equipment.......... (236,000) (552,000) (467,000) (77,000) (631,000)
Investment in common
stock.................. -- -- -- -- (50,000)
----------- ------------ ------------ ----------- -----------
Net cash used by
investing activities... (2,197,000) (1,926,000) (13,413,000) (9,009,000) (17,904,000)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from notes
payable................ 1,115,000 4,413,000 22,410,000 10,144,000 34,632,000
Principal payments on
notes payable.......... (1,874,000) (3,542,000) (12,301,000) (4,991,000) (20,178,000)
Proceeds from
capitalized leases
payable................ 238,000 315,000 604,000 189,000 --
Principal payments on
capitalized leases
payable................ (65,000) (110,000) (220,000) (162,000) (331,000)
Minority interest in
limited partnership.... -- 1,612,000
Redemptions of partners. (18,000) -- -- -- --
Payments to redeeming
partners............... (79,000) -- -- -- --
Purchase of treasury
stock.................. -- (30,000) -- -- --
Issuance of common
stock, net of issuance
costs.................. 500,000 -- 885,000 984,000 --
----------- ------------ ------------ ----------- -----------
Net cash provided (used)
by financing
activities............. (183,000) 1,046,000 11,378,000 6,164,000 15,735,000
----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash................ 527,000 (589,000) 1,529,000 256,000 (842,000)
Cash, excluding
restricted cash, at
beginning of period.... 62,000 589,000 -- -- 1,529,000
----------- ------------ ------------ ----------- -----------
Cash, excluding
restricted cash, at end
of period.............. $ 589,000 $ -- $ 1,529,000 $ 256,000 $ 687,000
=========== ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Income taxes paid....... $ -- $ 127,000 $ 367,000 $ 33,000 $ 353,000
=========== ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURE
OF NONCASH ACTIVITY
Acquisition of resort
property through
origination of notes
payable................ $ -- $ 7,275,000 $ 805,000 $ 805,000 $10,094,000
Acquisition of office
building and land
through origination of
note payable........... -- 1,165,000 -- -- 2,098,000
Payment received for
stock held in escrow
through forgiveness of
note payable to
stockholder............ -- 10,000 -- -- --
Acquisition of stock in
Trion through
origination of note
payable................ 550,000
Acquisition of notes
receivable through
origination of note
payable................ 1,832,000
Acquisition of equipment
through origination of
capitalized leases..... 1,156,000
Conversion of note
payable to common
stock.................. 400,000
</TABLE>
See accompanying notes.
F-25
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Combination
American Vacation Company, Inc., a Delaware corporation, was incorporated on
August 16, 1993. On August 20, 1993, Cannon Time Corp. (Cannon) was merged
with and into the Company. Cannon was formed on March 16, 1988 and had not
conducted business operations since 1990. On September 27, 1993, American
Vacation Company, Inc. changed its name to AVCOM International, Inc.
(Company).
Effective September 1, 1993, the Company exchanged 1,531,300 shares of
common stock and 1,310,700 shares of preferred stock for 100 percent of the
partners equity of Villashare Partners Limited Partnership (Villashare
Partners) and the common stock of its general partner, All Seasons Resorts,
Inc. (formerly All Seasons Development, Incorporated) (All Seasons). The
merger has been accounted for as a reverse merger with Villashare Partners as
the acquirer for accounting purposes.
On September 30, 1995, the Company purchased all of the outstanding stock of
All Seasons Properties, Inc. (ASP) and Great Western Financial, Inc. (GWFI)
for $100,000, by issuing promissory notes to the shareholders of ASP and GWFI.
ASP and GWFI were wholly-owned by the chief executive officer and the
president of the Company and had liabilities in excess of assets on an
historical cost basis of approximately $177,000 at the date of the
acquisition. ASP's assets, which aggregated approximately $580,000, consisted
primarily of resort property held for timeshare sales and timeshare notes
receivable at the date of acquisition. The acquisition has been accounted for
as a purchase and the results of the operations of ASP and GWFI are included
in the Company's consolidated financial statements from the date of
acquisition.
Prior to June 20, 1995, the Company utilized one company at its projects to
provide all marketing and selling services which were paid solely on a
commission basis. The Company terminated its relationship with the marketing
company and acquired All Seasons Realty, Inc. in June 1995, for $1,000. As a
result, the Company is currently performing the selling and marketing of its
projects through All Seasons Realty, Inc. All Seasons Realty, Inc. did not
have material activity prior to the acquisition, which has been accounted for
as a purchase.
In January 1996, the Company purchased 40 percent of the common stock of
Trion Capital Corporation (Trion), the general partner of Arrowhead Capital
Partners developing North Bay Resort at Lake Arrowhead (see Note 3).
Business Activities
The Company develops resort properties for timeshare sales, finances
ownership interests in such properties, and manages the operations of the
resort properties and their related homeowners associations. The Company's
capital requirements related to the development of future projects and the
financing of notes receivables have been and will continue to be significant.
In addition, the Company's level of general and administrative costs is based
on the level of sales and development activity which occurred in 1995 and
which is anticipated in 1996. Further, the Company has and will continue to
incur initial start-up sales and marketing costs in anticipation of future
projects and transactions. To date, the Company has been substantially
dependent upon loans from banks and private lenders and the sale or pledge of
notes receivable to finance its developments and operations. The Company will
be required to seek significant amounts of additional debt and/or equity
capital to continue to finance or sell its notes receivable, develop its
proposed projects and carry the current level of overhead. There is no
assurance that the Company can continue to obtain adequate financing from
lenders for its financing or sale
F-26
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of notes receivable or its project developments and operations if and when
required, or on terms acceptable to the Company.
In the event the Company is unsuccessful in obtaining additional funds
necessary for these purposes, management may need to take steps to continue to
operate within the available cash flow. Such steps may include, among others,
postponement or abandonment of certain timeshare projects and transactions,
reduction of general and administrative costs, or reduction of selling and
marketing costs.
Principles of Consolidation
The consolidated financial statements include the accounts of AVCOM
International, Inc. and its wholly-owned subsidiaries and a majority owned
limited partnership. All significant intercompany transactions and balances
have been eliminated in consolidation. Investments in joint ventures and the
Company's investment in 40 percent of the common stock of Trion Capital
Corporation are accounted for on the equity method.
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. These estimates and assumptions include expected default
rates on notes receivable, resale value of the timeshare interests received
through foreclosure, total construction and other costs to develop projects
and the resulting cost per interval, and recoverability of costs incurred on
projects, particularly those projects which are in the early stages. Actual
results could differ from those estimates.
Resort Property Held for Timeshare Sales and Underdevelopment
Resort property held for timeshare sales and under development is recorded
at historical cost less amounts charged to cost of sales for timeshare sales.
As timeshare interests are sold, the Company amortizes to cost of sales the
average carrying cost of the respective timeshare interest, which includes an
estimate of future completion costs related to remodeling and/or construction.
Timeshare interests received in exchange for timeshare interests in property
which were not developed by the Company are recorded at the fair value of the
timeshare interest received. Timeshare interests received in exchange for
timeshare interests at properties developed by the Company or through
foreclosure are recorded at the average carrying cost of timeshare interests
for the related project, which management believes approximates fair value.
In addition to direct construction costs, interest and indirect product
costs are capitalized as part of the cost of the property during the periods
of qualifying activities. Indirect product costs include the allocation of
certain payroll and administrative costs attributed to personnel directly
involved with the development and construction of the respective properties
and estimated subsidies of the homeowners' association related to the
property.
Recognition of Revenue
Generally, timeshare interests are sold under contracts which provide a cash
down payment and a deferred payment balance evidenced by a promissory note
secured by a deed of trust or mortgage on the timeshare interest. Sales of
timeshare interests are recognized using the percentage of completion method
after a binding sales contract has been executed, a 10 percent minimum down
payment has been received, and certain minimum sales and construction levels
have been obtained. Under the percentage of completion method, the portion of
revenue applicable to costs incurred, as compared to total estimated
development costs, is recognized in the period of sale. Sales which do not
meet these criteria are deferred using the deposit method.
F-27
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Until a contract for sale qualifies for revenue recognition, all payments
received are accounted for as deposits. Commissions and other selling costs,
attributable to the sale, are deferred until the sale is recorded. If a
contract is canceled before qualifying as a sale, nonrecoverable selling
expenses are charged to expense and deposits forfeited are credited to income.
Contract commission revenues are earned and recognized upon close of escrow
of the related sale. Contract marketing and selling costs are expensed when
incurred.
The deferred revenue resulting from the percentage of completion method was
approximately $80,000, $0 and $6,980,000 at December 31, 1994 and 1995, and
September 30, 1996, respectively.
Timeshare management revenue represents daily room rentals and fees for
management of the resorts. Such revenues are net of amounts due to timeshare
interval owners, if any, and are recorded as the rooms are rented or the
services are performed.
Health club initiation fees are deferred and amortized to revenue over three
years.
The present value of the difference between the stated interest rate of
notes receivable sold and the yield to the purchaser (interest rate
differential) is recognized as a gain at the time the notes receivable are
sold, less an allowance for estimated prepayments and notes receivable
repurchased pursuant to the recourse provisions.
Allowances for Losses
The Company provides for losses on notes receivable, including notes
receivable owned by the Company and notes sold with recourse, by a charge
against earnings at the time of sale, at a rate based on historical default
experience.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method based on the following estimated lives:
<TABLE>
<S> <C>
Equipment...................................................... 5 years
Furniture and fixtures......................................... 7 years
Building improvements.......................................... 10 years
Buildings...................................................... 40 years
</TABLE>
Income Taxes
Prior to the merger, Villashare Partners was taxed as a partnership.
Accordingly, Villashare Partners did not pay federal or state income taxes on
its income. Instead, the partners were liable for individual federal and state
income taxes based on their respective partnership interests.
On September 1, 1993, the assets, liabilities and operations of Villashare
Partners were transferred to All Seasons as a result of the merger. Deferred
income taxes were established at that time for temporary differences between
the financial reporting basis and the tax basis of the assets and liabilities.
The Company follows Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes," which uses the liability method in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when differences are expected to reverse.
F-28
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized Start-Up Costs
It is the Company's policy to capitalize as start-up costs all marketing and
selling expenses incurred at new resort projects up to sixty days after sales
begin. Capitalized start-up costs are then amortized over one year.
Advertising Expense
The cost of advertising is expensed as incurred. The Company did not incur
any significant amounts of advertising costs during the years ended December
31, 1993, 1994 and 1995, and the nine months ended September 30, 1995 and
1996, respectively.
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 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.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, which provides an alternative to APB Opinion No. 25 in
accounting for stock-based compensation issued to employees. Statement No. 123
allows for a fair value based method of accounting for employee stock options
and similar equity instruments. The Company applies the recognition and
measurement provisions of APB Opinion No. 25 to all employee stock options and
similar equity instruments awarded after December 31, 1995.
Fair Value of Financial Instruments
The carrying value of cash, receivables, and accounts payable and other
accrued liabilities approximate fair value due to the short-term nature of
these assets and liabilities. The fair value of notes receivable held with a
carrying value of $15,357,000 is approximately $15,900,000 at December 31,
1995. The fair value of debt approximates its carrying value since the current
rates reflect the rates at which the Company could borrow funds with similar
maturities.
Concentration of Credit Risks
Most of the Company's notes receivable held and notes receivable sold on a
recourse basis originated from sales of timeshare interests of Tahoe Beach and
Ski Club in Lake Tahoe, California, Sedona Summit Resort, Sedona Springs
Resort, Villas of Sedona and Villas at Poco Diablo resorts in Sedona, Arizona
and Scottsdale Villa Mirage Resort in Scottsdale, Arizona. The sales have been
primarily made to residents of California and Arizona. The Company performs
credit evaluations prior to timeshare sales. The timeshare deed of trust
serves as collateral on the note receivable.
The Company's development of timeshare projects through September 30, 1996
has been limited to Sedona and Scottsdale, Arizona, Lake Tahoe, California and
Houston, Texas. This lack of geographic diversification results in a high
correlation between the profitability of such operations and the local market,
economy and legislative conditions of such locations and generally the states
of Arizona, California and Texas. While management of the Company intends to
expand operations and to engage in timeshare development projects at other
locations, there is no assurance that significant geographic diversification
of the timeshare operations can be achieved.
F-29
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings (Loss) Per Share and Pro Forma Earnings Per Share
Earnings (loss) per share for the years ended December 31, 1994 and 1995 and
the nine months ended September 30, 1995 and 1996 is based on net income
(loss), adjusted for cumulative and unpaid dividends on convertible preferred
stock, and on the outstanding weighted average shares (less treasury shares),
common stock equivalents and convertible preferred stock outstanding. Common
stock held in escrow has been considered to
be outstanding and stock options are considered common stock equivalents.
Common stock equivalents, which are antidilutive, were not included in the
computation of the net loss per share for the nine months ended September 30,
1996.
Pro forma earnings per share for the year ended December 31, 1993 gives
effect to the reorganization, as if it occurred at the beginning of the period
and is based on income before income taxes, adjusted for cumulative and unpaid
dividends on convertible preferred stock and adjusted for a pro forma income
tax provision at the rate of 40 percent, and on the outstanding weighted
average shares (less treasury stock), common stock equivalents and convertible
preferred stock.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of,
including resort property held for timeshare sales. The Company adopted
Statement No. 121 in 1996 which did not have a material effect.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Company plans to adopt Statement No. 125 in 1997 and the
Company has yet to determine its impact.
Interim Financial Information
The financial information at September 30, 1996 and for the nine month
periods ended September 30, 1995 and 1996 is unaudited, but includes all
adjustments that the Company considered necessary for a fair presentation of
the financial information set forth therein, in accordance with generally
accepted accounting principles. The results for the nine months ended
September 30, 1996 are not considered indicative of the results to be expected
for any future period or for the entire year.
Reclassifications
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform them to the current year presentation.
F-30
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
----------------------- 30,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Timeshare notes receivable............. $2,751,000 $15,357,000 $35,017,000
Holdbacks on notes receivable sold..... 3,177,000 3,197,000 2,046,000
Accrued interest rate differential..... 678,000 921,000 823,000
Other notes receivable................. -- 202,000 131,000
---------- ----------- -----------
6,606,000 19,677,000 38,017,000
Less allowance for possible losses..... (667,000) (1,018,000) (1,358,000)
---------- ----------- -----------
$5,939,000 $18,659,000 $36,659,000
========== =========== ===========
</TABLE>
Notes receivable from the sale of timeshare interests bear interest at
annual rates ranging generally from 9.9 percent to 14.9 percent and have terms
of generally seven years. The notes are collateralized by first deeds of trust
on the timeshare interests sold.
The Company has outstanding commitments under which the Company may sell its
notes receivable under certain terms and conditions. At September 30, 1996,
the remaining commitments aggregated approximately $4,885,000, expiring
primarily in 1996. In connection with one commitment, Fletcher Financial, Inc.
(Fletcher Financial), which is owned by one of the stockholders of the Company
(see Note 9), has guaranteed $5,000,000 of notes receivable sold. In exchange,
therefore, the Company has agreed to share 50 percent of the interest rate
differential with Fletcher Financial resulting from the sale of these notes
receivable.
The Company's obligations pursuant to these agreements are generally
guaranteed by the Company's president and chief executive officer, and are
secured by the related holdbacks. The commitments also contain various
restrictive financial covenants which the Company must meet. Among the most
restrictive are covenants prohibiting the payment of dividends and requiring
the maintenance of at least $3,000,000 of tangible net worth and no more than
a 15-to-1 debt-to-equity ratio. The Company was not in compliance with the
debt-to-equity ratio covenants at September 30, 1996; however, a waiver from
the lender was obtained.
The agreements which provide for sales of the notes receivable are on a
recourse basis with a percentage (generally 10 percent) of the amount sold
held back by the purchaser as additional collateral, which is released to the
Company as the notes receivable are paid down. The Company is paid interest on
the holdback at generally a money market rate. At December 31, 1994 and 1995
and September 30, 1996, the Company had approximately $32,844,000, $32,449,000
and $29,009,000, respectively, of outstanding notes receivable sold on a
recourse basis.
The activity in the allowance for possible losses consisted of the
following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- -------- ---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $ 300,000 $300,000 $ 667,000 $667,000 $ 1,018,000
Provisions.............. 251,000 371,000 792,000 212,000 1,055,000
Charge offs............. (251,000) (4,000) (441,000) -- (715,000)
--------- -------- ---------- -------- -----------
Balance, end of period.. $ 300,000 $667,000 $1,018,000 $879,000 $ 1,358,000
========= ======== ========== ======== ===========
</TABLE>
F-31
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. RESORT PROPERTY HELD FOR TIMESHARE SALES AND UNDER DEVELOPMENT
Resort property held for timeshare sales and under development consists of
the following projects:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER
1994 1995 30, 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Held for timeshares sales:
Villas of Sedona/ Poco Diablo............ $ 458,000 $ 301,000 $ 357,000
Sedona Springs Resort.................... 1,287,000 233,000 226,000
Tahoe Beach & Ski Club................... 7,635,000 6,367,000 4,852,000
Villas on The Lake....................... -- 56,000 2,676,000
Other.................................... 91,000 573,000 505,000
Tahoe Seasons............................ -- -- 450,000
Under development:
Scottsdale Villa Mirage Resort........... 238,000 1,095,000 7,061,000
Sedona Summit............................ -- 1,220,000 3,411,000
Park Plaza Resort........................ 833,000 833,000 --
Sedona Golf Resort....................... -- 62,000 4,594,000
Tunlii................................... -- 61,000 2,402,000
Other.................................... 101,000 26,000 171,000
----------- ----------- -----------
$10,643,000 $10,827,000 $26,705,000
=========== =========== ===========
</TABLE>
Completed Developments
The Villas at Poco Diablo and Villas of Sedona resorts are 33-unit and 40-
unit townhouse projects, respectively, located in Sedona, Arizona.
Sales were substantially complete at the Villas at Poco Diablo in October
1992 and at Villas of Sedona in June 1994. The current balance consists of
timeshare interests available for sale that were received in trade for
timeshare interests at other developments of the Company.
Sedona Springs Resort. Sedona Springs Resort (Sedona Springs) is a 40-unit
resort located in Sedona, Arizona adjacent to the Villas of Sedona resort.
Sales at the project began in 1994 and were substantially completed in January
1996.
Current Developments
Tahoe Beach & Ski Club. The Tahoe Beach & Ski Club is located in South Lake
Tahoe, California and was purchased in March 1994 for approximately
$6,400,000. The project includes a total of 140 units of which 110 were
renovated as timeshare units at the date acquired. Renovation of the remaining
30 units was completed in April 1996. At the time of purchase by the Company,
4,533 timeshare interests related to the 110 renovated units of the resort had
been sold. As part of the purchase, the Company acquired approximately
$9,245,000 of notes receivable related to these prior sales, which were
concurrently resold. Further, the Company provided approximately $875,000 to
the homeowners association for reserves for current and future renovation and
refurbishing, which was recorded as part of the acquisition cost.
Under Development
Scottsdale Villa Mirage Resort. The Scottsdale Villa Mirage Resort is a
planned 176 unit resort located in Scottsdale, Arizona. The Company entered
into an agreement with Desert Princess Resort L.L.C. (Princess) to
F-32
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
develop the project for the Company in three phases of 64, 48, and 64 units,
respectively. The Company has a construction loan commitment for $4,350,000
and a take-out commitment for $8,800,000. Construction of phase one and sales
began in March 1996.
The Company had advanced approximately $1,000,000 as of December 31, 1995 in
construction and development costs and in January 1996 paid an additional
$1,600,000 to pay off prior encumbrances. The Company purchased on February
28, 1996 substantially all of the outstanding interests in Princess for a
total of $550,000. The purchase price consists of $285,000 paid at closing,
and a note payable of $265,000 payable in 12 monthly installments.
Princess has a construction contract for Phase I of $8,389,000 and for
Phases II and III of $9,563,000. The construction contractor has a right to
$500,000 of the profits, as defined, and the construction lender has a right
to 15% of the profits, as defined.
Park Plaza Resort. In October 1993, the Company acquired the timeshare
development rights for approximately 195 units in South Lake Tahoe from a
third-party developer (the Developer). The project is a component of a major
area redevelopment program sponsored in part by the South Lake Tahoe
Redevelopment Agency (the Agency). The purchase price is $2,500,000, of which
the Company has made a deposit of $750,000 and the balance of $1,750,000 is
due upon issuance of certain building permits anticipated in 1998. The
Developer has a right to 9% of the gross project sales as additional
consideration. The Company is further required to pay a developers fee to be
determined by the Agency, but not to exceed $1,500,000. The Company is
currently negotiating the termination of this agreement and does not
anticipate proceeding with this project. It is anticipated that the proposed
termination will provide for a partial refund of the Company's $750,000
deposit conditioned on the Developer or the Agency finding a replacement
developer should the existing Developer decide not to proceed with its
development rights. Notwithstanding the proposed termination agreement,
pursuant to the current purchase agreement, the Company's recovery would be
limited to $600,000 conditioned on the Developer or Agency finding a
replacement purchaser of the Company's development rights. Under either
circumstance, since recovery is conditioned on a future event, the Company has
written-off the full amount of its deposit, together with costs previously
capitalized with regard to this project.
Sedona Summit. In May, 1995, the Company purchased approximately three acres
in Sedona, Arizona for $1,067,000, which is planned for development of 26
timeshare units. The Company made additional payments of $52,000 through
December 31, 1995 and $52,000 thereafter, which does not apply toward the
purchase price. Additionally, the Company purchased in May 1996 an adjacent
parcel consisting of approximately four acres for $1,220,000, which is planned
for development of 34 timeshare units. Development of the property includes
the start-up and operation of a private waste water treatment facility, which
has been leased by the Company. The start-up costs of the waste water
treatment facility is estimated at approximately $30,000.
The Company is developing the property through an affiliated entity, Sedona
Summit Development Limited Partnership (SSDLP), which was formed on May 1,
1996 and All Seasons is the sole general partner. The activities of SSDLP are
consolidated in the financial statements. SSDLP sold limited partnership
interests in March 1996 of approximately $1,500,000 representing a 99%
ownership interest. The Company has secured a revolving construction loan of
$2,500,000 which has been guaranteed by SSDLP for the development of the
project. The Company has contracted to purchase completed units in phases from
SSDLP for an aggregate of $14,084,000. Sales and construction commenced in
February 1996.
Tahoe Seasons Resort. In February 1996, the Company acquired a portfolio of
1,057 non-performing timeshare receivables generated from the sale of
timeshare interests at Tahoe Seasons Resort in South Lake Tahoe, California.
The purchase price of $1,548,000 was funded by a loan. The Company has also
agreed to purchase other receivables generated from sales at Tahoe Seasons
Resort that subsequently become delinquent.
F-33
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company will convert non-performing loans into timeshare interest
inventory which will be sold by the Company's marketing group at Lake Tahoe.
Villas on the Lake. In February 1996, the Company acquired an existing
condominium project in Lake Conroe, Texas for $1,860,000. The project consists
of 37 completed units and existing approvals and land for the construction of
48 additional units. The Company obtained a $2,400,000 loan for acquisition
and renovation of the project. Renovation of existing units began in February
1996 and sales commenced in June 1996.
Future Developments
The Ridge on Sedona Golf Resort. In October 1995, the Company entered into a
purchase agreement to acquire an approximately 12 acre parcel in Sedona,
Arizona for $5,500,000, including the Ridge Spa & Racquet Club, an existing,
though inactive facility. The Company anticipates developing the property into
a 120 unit timeshare resort in phases. The Company closed this transaction in
February 1996 with a $1,000,000 cash payment and notes payable of $700,000 due
on March 15, 1996 which was paid, and $500,000 due on October 31, 1996. The
remaining purchase price of $3,300,000 is payable in quarterly installments of
principal and interest of $79,800 with the balance due in February 1999. The
Company obtained a short-term loan of $1,307,000 to fund the acquisition
payment.
Main Street Pier. The Company entered into a letter of intent in November
1995 whereby the Company agreed to purchase 80 condominium units located in
Huntington Beach, California for a total cost not to exceed $17,176,000. The
seller is to acquire the property and construct the condominium units. The
Company has deposited $50,000 earnest money in escrow. The seller has not
timely obtained the necessary governmental approvals for the project. The
Company has informed the seller of its intent to terminate the letter of
intent and close the purchase escrow. The Company anticipates full recovery of
its earnest money.
Tunlii (formerly known as Cherry Creek Country Club). In February 1996, the
Company acquired a 68.4 acre parcel of land in Camp Verde, Arizona,
approximately 100 miles north of Phoenix. This parcel is contiguous to a 127
acre tract owned by an independent party with cooperative intent to jointly
develop the properties. At the same time, the Company contracted to purchase
an additional 99.2 acres and 263 acres adjacent to the development parcels.
The purchase of the 99.2 acre tract closed in May 1996. The acquisition cost
of the 68.4 acres and the 99.2 acres was $547,000 and $843,000, respectively,
which includes seller financing of $447,000 and $632,000, respectively. The
263 acre tract is under contract for $790,000 with an earnest money deposit of
$40,000, and seller financing of $552,000.
During March 1996, the Company entered into a limited liability company
operating agreement (LLC) with the independent land owner whereby the
respective parties will contribute their respective land holdings
(approximately 557 acres) and liabilities related to this project into a
limited liability company in exchange for an 82.5% and 17.5% ownership,
respectively. During September 1996, the LLC entered into a sale agreement for
the bulk sale of the LLC's land holdings contingent upon certain land use
approvals being obtained. The LLC Operating Agreement provides for a 76.5% and
23.5% allocation, respectively, in the event of a bulk sale.
North Bay Resort at Lake Arrowhead. The North Bay Resort at Lake Arrowhead,
located in San Bernardino County, California, is the first "affiliated
property" of the Company. The Company entered into a series of agreements in
January 1996 whereby the Company provided guarantees for $12,650,000 of the
developer's financing for a fee of $450,000 (evidenced by a note payable),
received a right of first refusal to offer timeshare receivable financing to
the developer after expiration of the developer's present $10,000,000
financing commitment, received an option to assume property management for the
project's homeowners' association and
F-34
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchased a 40% equity position in the corporate general partner of the
developer partnership. The equity position was acquired for $600,000, of which
$550,000 is financed by a note payable due in installments of $150,000 in May
1996 (which has been paid) and $400,000 in January 1998. The proposed project
contemplates the consolidation of two adjacent developments. One development
consists of two completed condominium buildings converted to timeshare use and
additional undeveloped land. The second parcel consists of a combination of
three existing condominium buildings in various stages of construction and
pads for two additional condominium buildings. The developer has been provided
with a $2,650,000 construction and operating loan commitment and a $10,000,000
commitment for timeshare receivable financing from a financing company,
subject to operational involvement and financial guarantees of the Company.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and building........................ $1,200,000 $1,200,000 $3,403,000
Building improvements.................... 172,000 430,000 961,000
Computer equipment....................... 335,000 464,000 896,000
Office equipment, furniture and fixtures. 306,000 330,000 1,005,000
Sales center............................. 104,000 91,000 135,000
---------- ---------- ----------
2,117,000 2,515,000 6,400,000
Accumulated depreciation and amortiza-
tion.................................... (211,000) (327,000) (820,000)
---------- ---------- ----------
$1,906,000 $2,188,000 $5,580,000
========== ========== ==========
</TABLE>
F-35
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
----------------------- 30,
TERM NOTES 1994 1995 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Warehouse note payable secured by
timeshare notes receivable, interest
at LIBOR plus 3 percent, personally
guaranteed by the president and chief
executive officer.................... $ -- $12,277,000 $29,165,000
Notes payable secured by unsold
timeshare interests and common area
of Tahoe Beach & Ski Club:
Interest at 13.5 percent, payable
through a release price of the
greater of 10 percent of the selling
price of the timeshare interest or
$1,200, plus 5 percent of net
profits, as defined, due in April
1997................................. 2,246,000 1,408,000 615,000
Interest at 10 percent payable
monthly, principal payable at the
greater of 13 percent of the selling
price of the timeshare interest or
$1,200, balance due in March 1997,
personally guaranteed by the
president and the chief executive
officer, subordinate to the 13.5
percent note payable................. 3,677,000 1,921,000 711,000
Construction notes payable, secured by
unsold timeshare interests and common
area of Sedona Springs, principal
payable by release prices of $2,375
per annual sale and $1,188 per
biannual sale, interest at the prime
rate (8.8 percent at December 31,
1995) plus 3.5 percent payable
monthly, due April, 1996. The loan is
guaranteed by the president and chief
executive officer.................... 1,654,000 174,000 --
Notes payable, secured by deed of
trust on Sedona Summit land:
Interest at 15.0 percent, monthly
installments of interest only, due
June, 1996........................... -- 307,000 --
Interest of 13.0 percent, quarterly
installments of interest only, due
June, 1996........................... -- 500,000 --
Unsecured note payable, interest at 5
percent, due in equal monthly
principal and interest installments
of $1,946, due June, 1997............ -- 33,000 17,000
Convertible subordinated note payable,
monthly installments of interest
only, interest at 9.0 percent,
convertible into 310,000 shares of
common stock at $3 per share. On
April 30, 1996, the Company paid down
the principal balance to $580,000 and
received an extension until August
31, 1996. As part of the extension
agreement, interest changed to
$10,000 per month. An additional
extension was granted until December
31, 1996 when a principal payment of
$94,000 was made in September, 1996
and $86,000 is due in December, 1996.
The remaining $400,000 principal
balance was converted into 310,000
shares of the Company's common stock. -- 930,000 86,000
Note payable, secured by office
building, interest at 8.5 percent,
due in equal monthly principal and
interest installments of $8,112,
balance due March, 2001.............. 1,054,000 1,046,000 1,040,000
</TABLE>
F-36
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
TERM NOTES 1994 1995 1996
---------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, secured by unsold timeshare
interests, principal payable by release
price of $1,000 per timeshare interval
sold, and monthly installments of
interest only, interest at 17.5 percent. $ -- $ 185,000 $ 138,000
Unsecured note payable with Fletcher
Financial, Inc., interest at
20.0 percent due monthly, principal due
December 1996, personally guaranteed by
the president and chief executive
officer................................. 650,000 650,000 650,000
Unsecured notes payable to chief
executive officer and president,
interest at 12.5 percent, due September
2000.................................... -- 100,000 100,000
Note payable to Glaser Capital, interest
at prime plus 1 percent, paid January
1995.................................... 500,000 -- --
Note payable, secured by office building,
interest at 12.0 percent, due in equal
monthly principal and interest
installments of $8,239, balance due
January, 1999........................... -- -- 752,000
Note payable secured by stock in Trion
Capital Corporation, interest at 10.0
percent, interest payable in quarterly
installments, balance due January, 1998. -- -- 400,000
Note payable secured by deed of trust,
interest at 15.0 percent, installments
of $16,000 including interest, due
monthly, balance due July, 1997......... -- -- 973,000
Note payable secured by deed of trust,
interest at 9.0 percent, principal
payment of $500,000 plus accrued and
unpaid interest due August, 1996,
thereafter interest and principal
installments of $79,774 due quarterly,
balance due May, 1999................... -- -- 3,800,000
Note payable secured by deed of trust,
due in monthly payments of $4,500
including interest at 9.0 percent,
balance due March, 2001................. -- -- 440,000
Construction note payable, secured by
unsold timeshare interests and common
area of Scottsdale Villa Mirage,
principal payable by release price,
interest at prime rate (8.5 percent at
September 30, 1996) plus 3 percent
payable monthly, due April, 1997........ -- -- 2,614,000
Construction note payable, secured by
unsold timeshare interests and common
area of Sedona Summit, principal payable
by release price, interest at prime (8.5
percent at September 30, 1996) plus
3 percent payable monthly, due
September, 1997......................... -- -- 614,000
Note payable, secured by unsold timeshare
interests, principal payable by release
price, interest at prime plus 4.5
percent payable monthly, due February,
1999.................................... -- -- 1,523,000
Note payable secured by deed of trust,
due in monthly installments of $5,000
including interest at 10.0 percent,
balance due February, 1997.............. -- -- 234,000
</TABLE>
F-37
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
TERM NOTES 1994 1995 1996
---------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Other................................... $ 231,000 $ $ --
Notes payable secured by deed of trust
on Tunlii land: Interest at 8.0
percent, monthly installments of
principal and interest of $6,052.
$315,000 due December 15, 2000 and
remaining balance due January, 2001.... -- -- 623,000
Interest at 6.8 percent, quarterly
installments of $9,320, due June, 1999. -- -- 552,000
Note payable secured by deed of trust on
Sedona Golf Resort land, interest at
15.0 percent, monthly installments of
principal and interest of $4,952, due
April, 1997............................ -- -- 303,000
Note payable secured by deed of trust
and lien on real property and
improvements, due in monthly
installments of principal and interest
at prime rate (8.5 percent at September
30, 1996) plus 2.5 percent, balance due
August, 1997........................... -- -- 2,047,000
Note payable secured by deed of trust on
Sedona Golf Resort land, interest at
15.0 percent, monthly installments of
principal and interest of $4,030, due
July 31, 1997.......................... -- -- 247,000
Warehouse note payable secured by
timeshare notes receivable, interest at
prime plus 1.75 percent................ -- -- 403,000
----------- ----------- -----------
Total term notes........................ 10,012,000 19,531,000 48,047,000
<CAPTION>
DEMAND NOTES
------------
<S> <C> <C> <C>
Subordinated notes payable secured by
notes receivable from sales of
timeshare interests, interest ranging
from 12.5 percent to 15.5 percent:
Stockholders, due on demand........... 1,557,000 1,742,000 1,509,000
Others, due on demand or five years
from origination..................... 1,013,000 1,356,000 1,355,000
Notes payable, secured by a collateral
assignment of beneficial interest,
monthly installments of interest only,
interest at 15 percent, due on 60 day
demand or June 1998.................... -- 63,000 63,000
Note payable, secured by contract
commissions, monthly installments of
$50,000, interest at 15.0 percent, due
on demand.............................. -- -- 225,000
Note payable, secured by contract
commissions, interest at 15.0 percent,
due on demand.......................... -- -- 121,000
----------- ----------- -----------
$12,582,000 $22,692,000 $51,320,000
=========== =========== ===========
</TABLE>
The warehouse loan agreement provides for borrowings up to an aggregate of
$25,000,000 and in September 1996 it was increased to $40,000,000 and was
extended to September 1997. The Company has an additional warehouse line of
credit available up to an aggregate of $5,000,000 of which $4,597,000 is
unused at September 30, 1996. These loan agreements and certain other of the
notes payable contain various restrictive covenants prohibiting the payment of
dividends and requiring the maintenance of at least $3,000,000 of tangible net
worth and no more than a 15-to-1 debt to equity ratio. The Company was not in
compliance with the debt-to-equity ratio covenants at September 30, 1996;
however, a waiver from the lender was obtained.
F-38
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule by year of principal payments of the term notes
payable as of December 31, 1995 and September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 30,
31, 1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
1996.............................................. $16,988,000 $33,212,000
1997.............................................. 1,416,000 7,185,000
1998.............................................. 10,000 1,098,000
1999.............................................. 11,000 4,521,000
2000 and thereafter............................... 1,106,000 2,031,000
----------- -----------
Total term notes.................................. $19,531,000 $48,047,000
=========== ===========
</TABLE>
Interest and finance costs capitalized and expensed for the years ended
December 31 and for the nine months ended September 30, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Capitalized, beginning
of period.............. $ 142,000 $ 227,000 $ 508,000 $ 508,000 $ 597,000
Capitalized........... 411,000 755,000 745,000 612,000 996,000
Expensed as cost of
sales................ (326,000) (474,000) (656,000) (568,000) (426,000)
--------- --------- --------- --------- ----------
Capitalized, end of pe-
riod................... $ 227,000 $ 508,000 $ 597,000 $ 552,000 $1,167,000
========= ========= ========= ========= ==========
</TABLE>
Interest and finance costs paid aggregated $766,000, $1,406,000 and
$2,563,000 during the years ended December 31, 1993, 1994 and 1995,
respectively and $1,734,000 and $3,940,000 for the nine months ended September
30, 1995 and 1996, respectively. Included in interest and finance costs paid
is interest paid to related parties of $128,000, $192,000, and $232,000 for
the years ended December 31, 1993, 1994 and 1995, respectively and $175,000
and $169,000 for the nine months ended September 30, 1995 and 1996,
respectively.
6. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Current
Federal.......................................... $ 262,000 $183,000 $360,000
State............................................ 50,000 6,000 30,000
Deferred
Federal.......................................... 1,409,000 430,000 381,000
State............................................ 249,000 76,000 67,000
---------- -------- --------
$1,970,000 $695,000 $838,000
========== ======== ========
</TABLE>
F-39
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal and state income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Expected federal income tax provision............ $ 743,000 $549,000 $639,000
State income taxes............................... 131,000 97,000 113,000
Other............................................ 95,000 49,000 86,000
Establishment of deferred tax liability at Sep-
tember 1, 1993.................................. 1,380,000 -- --
Reduction in allowance........................... (40,000) -- --
Villashare Partners Limited Partnership income
taxed to partners............................... (339,000) -- --
---------- -------- --------
$1,970,000 $695,000 $838,000
========== ======== ========
</TABLE>
The net deferred tax liability results from the tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes are
shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets
Allowance for losses................................... $ 267,000 $ 407,000
Net operating loss carryforward........................ 514,000 1,383,000
Prepaid interest....................................... 182,000 62,000
Uniform capitalization costs........................... 94,000 94,000
Credit carryforwards................................... 319,000 592,000
---------- ----------
Total deferred tax assets................................ 1,376,000 2,538,000
---------- ----------
Deferred tax liabilities
Other.................................................. 368,000 371,000
Percentage of completion............................... 271,000 --
Deferred sales expense................................. -- 304,000
Interest rate differential............................. 272,000 368,000
Installment sales...................................... 2,161,000 3,879,000
Cash to accrual adjustment............................. 480,000 240,000
---------- ----------
Total deferred tax liabilities........................... 3,552,000 5,162,000
---------- ----------
Net deferred tax liability............................... $2,176,000 $2,624,000
========== ==========
</TABLE>
At December 31, 1995, the Company has a minimum tax credit carryforward of
approximately $592,000 for income tax purposes available to offset future
income taxes payable to the extent regular income taxes payable exceeds
alternative minimum taxes payable. Minimum tax credits can be carried forward
indefinitely. The Company has a net operating loss carryforward at December
31, 1995 of approximately $3,211,000 for state and federal income tax
purposes. The state net operating loss carryforward will begin to expire in
1999 and the federal net operating loss carryforward will begin to expire in
2009.
F-40
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
Capital Leases
The Company leases furnishings and equipment under capital leases with a
cost of approximately $284,000, $470,000 and $1,550,000 at December 31, 1994
and 1995 and September 30, 1996, respectively, and accumulated amortization of
approximately $48,000, $119,000 and $281,000, respectively, and such amounts
are included with property and equipment. The amortization of the costs of the
furnishings and equipment is included with depreciation expense.
The Company also leases furniture and equipment under capital leases which
it subleases to the homeowner associations at the projects under financing
leases. The balance of the lease receivables from the homeowners associations
are included in receivables from related parties and were $275,000, $675,000
and $514,000 at December 31, 1994 and 1995 and September 30, 1996,
respectively.
The following is a schedule by year of future minimum lease payments under
the capital leases together with the present value of the payments as of
September 30, 1996.
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
1996......................................................... $ 206,000
1997......................................................... 727,000
1998......................................................... 558,000
1999......................................................... 286,000
2000......................................................... 117,000
2001......................................................... 15,000
----------
Total minimum lease payments................................. 1,909,000
Less interest................................................ (323,000)
----------
Present value of net minimum lease payments.................. $1,586,000
==========
</TABLE>
The scheduled future sublease receivables related to the furniture and
equipment subleased to the homeowners associations approximates the following
at September 30, 1996 (including interest of $152,000): 1996--$63,000; 1997--
$153,000; 1998--$153,000; 1999--$153,000; and 2000 and thereafter $144,000.
These sublease receivables vary in amount from the future minimum lease
payments under the capital leases as the result of differing lease maturities
and lease commencement dates.
OPERATING LEASES
The Company leases offices and equipment under operating leases expiring at
various dates through 2001. Future minimum annual rental payments required
under operating leases with initial or remaining noncancelable terms of one
year or more consisted of the following at September 30, 1996:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
1996.......................................................... $ 189,000
1997.......................................................... 382,000
1998.......................................................... 354,000
1999.......................................................... 220,000
2000.......................................................... 53,000
2001.......................................................... 12,000
----------
$1,210,000
==========
</TABLE>
F-41
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense, including short-term rentals, was approximately
$35,000, $167,000, and $279,000, for the years ended December 31, 1993, 1994
and 1995, respectively, and $240,000 and $391,000 for the nine months ended
September 30, 1995 and 1996.
8. STOCKHOLDERS' EQUITY
Common Stock
The Company has 10,000,000 shares of $.01 par value common stock authorized,
of which 3,653,936 are outstanding at December 31, 1995, including 12,000
shares held as treasury stock. On all matters voted upon by stockholders, each
outstanding share of common stock is entitled to one vote. No dividends may be
declared on the common stock unless all cumulative dividends on preferred
stock have been declared and paid as of the declaration date. The terms of
certain of the agreements for the sale or financing of notes receivable
prohibit payment of dividends (see Note 2). Substantially all of the Company's
operations and assets are held by its wholly-owned subsidiary All Seasons,
which is also prohibited from paying dividends by virtue of these agreements.
In connection with the stock exchange discussed in Note 1, 500,000 shares of
common stock issued to Sangar Investment Company, L.L.C. (jointly owned by the
chief executive officer and the president) and 65,000 shares issued to an
individual are subject to the terms of an escrow agreement which provides that
the shares are to be released upon the Company attaining earnings per share on
a fully diluted basis of at least $0.20. If the shares are not released prior
to December 31, 2000, the shares shall be redeemed by the Company at $0.02 per
share.
During 1993, the Company issued 400,000 shares of common stock pursuant to
Rule 504 of Regulation D for $1.25 per share.
During 1994, the Company repurchased 12,000 shares of its common stock, to
be held as treasury stock, from stockholders for $30,000.
In January 1995, the Company issued 363,636 shares of common stock pursuant
to Rule 504 of Regulation D at $2.75 per share for net proceeds of
approximately $885,000.
In August 1996, the Company issued 310,000 shares of common stock pursuant
to an agreement to modify a convertible note payable and subscription
agreement. Under the agreement, the convertible note payable was reduced
by$400,000 in exchange for the stock (see Note 5).
CONVERTIBLE PREFERRED STOCK
The Company has 1,400,000 shares of convertible preferred stock authorized
of which 1,310,700 shares are issued and outstanding at December 31, 1995 and
September 30, 1996. The preferred stock may be issued by action of the board
of directors without further shareholder approval. Holders of preferred stock
do not have preemptive rights. Each share of preferred stock is entitled to
one vote on all matters submitted to a vote of shareholders, including the
election of directors. The holders of the preferred stock also vote and must
approve as a class any material changes to the Company's articles of
incorporation or to the rights and preferences of the preferred stock.
Dividends may be paid to the holders of preferred stock out of funds legally
available for dividends when and if declared by the board of directors. Each
share of preferred stock is entitled to a cumulative dividend of $.08 per
share per annum, which shall be declared and paid before any dividend is
payable to holders of the common stock. The $.08 dividend shall accrue on July
1, 1994 and each July 1st thereafter. In the event of a liquidation,
dissolution or winding-up of the affairs of the Company, the holders of the
preferred stock will
F-42
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
be entitled to receive $1.00 per share plus all accrued but unpaid dividends
before any liquidation proceeds are distributed to the holders of any other
class of Company stock. The preferred stock is convertible into common stock
as a class, by affirmative vote of the holders of 66.67 percent of the
preferred stock, on a one-for-one basis, subject to adjustment for stock
dividends, stock splits, mergers and similar changes of the Company's capital
structure. The Company has no obligation to pay accrued but unpaid dividends
on the shares of preferred stock converted. The accumulated but unpaid and
undeclared dividends on preferred stock was $210,000 at December 31, 1995 and
$289,000 at September 30, 1996. The terms of certain of the agreements for the
sale or financing of notes receivable prohibit payment of dividends (see Note
2). Subsequent to September 30, 1996, all holders of the convertible preferred
stock converted their shares into common stock and forfeited their rights to
cumulative dividends.
STOCK OPTIONS
In connection with the merger with Cannon described in Note 1, the Company
issued an option to purchase up to 350,000 shares of common stock with an
exercise price of $.02 per share to an individual. The option is currently
exercisable and expires August 1998. The option (or the common stock received
upon exercise of the option) vests and becomes nonforfeitable if the common
stock trades in a public market for at least $4.00 for 120 consecutive trading
days prior to the expiration date. If the option is exercised prior to vesting
and the vesting criteria is not met prior to the expiration date of the
option, the shares issued upon exercise of the option shall be repurchased by
the Company for $0.02 per share. The option has not vested and has not been
exercised as of September 30, 1996. The Company has made a claim against the
individual for cancellation of the 371,500 outstanding shares of common stock
held by the individual and of this option (see Note 10) which, if successful,
would reduce the number of outstanding shares and impact the calculation of
earnings per share.
The Company granted 100,000 options on January 5, 1995 to an employee to
purchase common stock at $2.75 per share exercisable for up to 10 years.
Although the options are immediately exercisable, the employee is restricted
from selling any shares in 1995 and shares in excess of 25,000 in 1996. No
options have been exercised as of September 30, 1996.
Effective October 1, 1995, the Company's Board of Directors adopted a non-
statutory stock option plan and an incentive stock option plan under a single
stock option plan (Stock Option Plan). The Stock Option Plan was approved by
the stockholders in June 1996. Under the terms of the Stock Option Plan, both
qualified incentive stock options (ISOs) and non-qualified stock options may
be granted. ISOs may be granted to the officers and key personnel of the
Company. Non-qualified stock options may be granted to the Company's directors
and key personnel, and to providers of various services to the Company.
Under the Stock Option Plan, options to purchase a maximum of 750,000 shares
of the Company's common stock may be granted. The exercise price for any
option granted under the Stock Option Plan may not be less than 100% (110% if
the option is granted to a stockholder who at the time the option is granted
owns stock comprising more than 10% of the total combined voting power of all
classes of stock of the Company) of the fair market value of the common stock
at the time the option is granted. The option holder may pay the exercise
price in cash or by delivery of previously acquired shares of common stock of
the Company. Each option granted must terminate no more than 10 years from the
date it is granted.
The Stock Option Plan will terminate in September 2005, but any option
granted thereunder will continue throughout the terms of such option.
Pursuant to the Stock Option Plan, 250,000 options were issued on December
19, 1995 and 50,000 options were issued in July 1996 at an exercise price of
$3.44, and vest ratably over five years. No options had been exercised through
September 30, 1996.
F-43
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
At December 31, 1994, ASP owed the Company $454,000 in advances, including
accrued interest, to facilitate resale of timeshare interests which is
included in receivables from related parties. At December 31, 1994, the
Company owed the executive officers of ASP $78,000, included in amounts due to
related parties, and $130,000 included in notes payable to stockholders
relating to the issuance of subordinated notes payable (see Note 5).
As discussed in Note 1, the Company purchased all of the outstanding stock
of ASP and GWFI on September 30, 1995 from the chief executive officer and the
president of the Company. The Company received commissions of $37,000 from ASP
through September 30, 1995 related to the sale of ASP timeshare interests.
Fletcher Financial, a company owned by one of the stockholders of the
Company, has guaranteed up to $5,000,000 of timeshare notes receivable sold
(see Note 2). In addition, Fletcher Financial has an unsecured note payable
(see Note 5).
The Company provides management services to the homeowners associations of
its developments. Certain officers of the Company are members of the board of
directors and officers of the homeowners associations. The homeowners
associations board of directors is responsible for presenting the annual
budget to each homeowners association and supervising the daily operations of
each resort. The Company has provided covenants in its debt agreements and
note receivable sale and financing agreements that it will support the
operations of the homeowners associations, if required, until substantially
sold-out. The Company has receivables, including lease receivables (Note 7),
from the homeowners' association of $280,000, $675,000 and $568,000 at
December 31, 1994 and 1995 and September 30, 1996, respectively, and payables
of $309,000, $484,000 and $353,000, respectively, included in receivables from
and amounts due to related parties.
10. CONTINGENCIES
The stockholders approved the removal of one of the Company's directors in
February 1995. The Company has initiated litigation against this former
director and Cannon for damages and rescission of the merger of Cannon into
the Company based upon breach of contract, fraud, securities fraud and
violations of the Arizona Racketeering Act. The director has filed a counter-
claim alleging defamation, interference with business relations, breach of
contract and indemnification.
The Company is a defendant in several lawsuits filed by its former marketing
company, Success Marketing, Inc. (Success). On September 20, 1995 Success gave
the Company notice of termination of their sales agreement. On August 3, 1995
Success filed suit and made demand for arbitration alleging breach of
contract, loss of compensation, failure to negotiate in good faith and
promissory fraud. Success seeks contract and punitive damages. The suit is a
result of a prior marketing and sales agreement between the parties and
negotiations of a new agreement which was not consummated. The Company is
vigorously defending these actions and has filed counterclaims. The Company
has withheld commissions related to sales prior to termination of the sales
agreement and has paid various costs subsequent to termination of the sales
agreement which it believes are recoverable through offset against the
commissions and has established a receivable. The ultimate resolution of this
commission payable and receivable is dependent upon the resolution of the
litigation.
The Company is a defendant in other litigation arising in the course of the
operations. Management intends to vigorously defend these and the foregoing
actions and does not believe such lawsuits will have a material effect on the
Company's consolidated financial position, results of operations or cash
flows.
F-44
<PAGE>
AVCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. DEFINED CONTRIBUTION PLAN
The Company adopted a 401(k) defined contribution plan (Plan) covering all
employees who elect to participant in the Plan effective January 1, 1995. Each
participant may make pretax contributions to the Plan up to 10 percent of such
participant's earnings with a maximum of approximately $9,240 in 1995.
12. SUBSEQUENT EVENT
The Company received an extension and modification of the warehouse loan
agreement (Note 5) on July 1, 1996. The loan was extended to August 13, 1996
and the aggregate maximum amount of advances was increased to $28,000,000. The
loan was further modified as discussed in Note 5.
13. PROPOSED MERGER (UNAUDITED)
Pursuant to a merger agreement entered into in September, 1996, ASP
Acquisition Corp., a wholly owned subsidiary of Signature Resorts, Inc.
(Signature), will merge with and into AVCOM. Upon consummation of the merger,
each share of AVCOM Stock, except shares held in treasury and shares owned by
dissenting shareholders who have taken all required steps to exercise their
appraisal rights, will be converted into shares of Signature Stock. As part of
the Merger, Signature agreed to make a working capital loan to the Company up
to $4.0 million to accommodate the Company's working capital needs in lieu of
the Company otherwise continuing its capital raising activities during the due
diligence period contemplated by the Merger. The outstanding loan amount is
$3.0 million as of December 18, 1996 with an interest rate of 12 percent. The
loan will be paid from the proceeds of sale of the Tunlii, L.L.C. property and
release prices and paid from the sale of intervals at the Sedona Summit Resort
with a maturity date of not later than December 31, 1997 but can mature sooner
if, e.g., Signature validly terminates the Merger Agreement.
Separately, should the Merger fail to be consummated, the Company will grant
Signature an irrevocable option exercisable through December 31, 1998 to
acquire a number of shares of AVCOM Stock equal to 19.9 percent of the total
issued and outstanding AVCOM Stock, on a fully diluted basis, at an exercise
price of $5.00 per share. Additionally, if the Merger Agreement is terminated
by Signature under certain circumstances, the Company would be required to pay
Signature a termination fee of $1,800,000 plus certain expenses.
F-45
<PAGE>
The following photos and charts are depicted:
Photo 7 Plantation at Fall Creek - Branson, Missouri
- ------- Photo of exterior resort structure from parking area of Plantation at
Fall Creek - Branson, Missouri
Photo 8 Photo of riverboat near plantation at Fall Creek - Branson, Missouri
- -------
Photo 9 Flamingo Beach Club - St. Maarten, Netherlands, Antilles
- ------- Interior photo from living room at kitchen and balcony --
overlooking ocean
Photo 10 Flamingo Beach Club - St. Maarten, Netherlands, Antilles
- -------- Beach perspective photo of resort set against ocean
Photo 11 Embassy Vacation Resort Grand Beach - Orlando, Florida
- -------- Balcony perspective photo overlooking water
Photo 12 Embassy Vacation Resort Grand Beach - Orlando, Florida
- -------- Pier perspective photo of resort set adjacent to water
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the registered
securities to which this Prospectus relates or any offer to any person in any
jurisdiction where such an offer would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 31
Concurrent Offerings...................................................... 31
Common Stock Price Range.................................................. 32
Dividend Policy........................................................... 32
Consolidated Capitalization............................................... 33
Selected Consolidated Historical Financial Information of the Company..... 34
Selected Financial Data of AVCOM International, Inc....................... 36
Pro Forma Financial Information........................................... 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Business.................................................................. 51
The Proposed Merger....................................................... 78
Management................................................................ 83
Certain Relationships and Related Transactions............................ 91
Principal and Selling Stockholders........................................ 94
Description of Capital Stock.............................................. 96
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 97
Shares Eligible for Future Sale........................................... 100
Underwriting.............................................................. 102
Legal Matters............................................................. 103
Experts................................................................... 103
Available Information..................................................... 104
Index to Combined Financial Statements.................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF SIGNATURE RESORTS]
SIGNATURE RESORTS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
$100,000,000
[LOGO OF SIGNATURE RESORTS]
SIGNATURE RESORTS, INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2007
-----------
The Notes offered hereby (the "Convertible Offering") will be convertible
into Common Stock, $0.01 par value (the "Common Stock"), of Signature Resorts,
Inc. ("Signature" or the "Company") at any time after 60 days following the
latest date of original issuance thereof and prior to maturity, unless
previously redeemed, at a conversion price of $ per share, subject to
adjustment in certain events. See "Description of Notes--Conversion Rights" for
a description of events that may cause an adjustment to the conversion price.
The Common Stock of the Company is quoted on the Nasdaq National Market under
the symbol "SIGR." On December 17, 1996, the last reported sale price of the
Common Stock on the Nasdaq was $37.25 per share. See "Price Range of Common
Stock."
Interest on the Notes is payable on January and July of each year,
commencing on July , 1997. The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after January , 2007, at the
redemption prices set forth herein, plus accrued interest, if any, to the
redemption date. If a Change in Control (as defined herein) occurs, each holder
of Notes will have the right, subject to certain conditions and restrictions,
to require the Company to offer to repurchase all outstanding Notes, in whole
or in part, owned by such holder at 100% of their principal amount, plus
accrued interest, if any, to the date of repurchase. See "Description of Notes"
for a more complete description of the Indenture's provisions. The Notes are
subordinated to all existing and future Senior Indebtedness (as defined herein)
of the Company and will be effectively subordinated to all indebtedness and
other obligations of the Company's subsidiaries. At September 30, 1996, after
giving effect to the transactions described herein, including the proposed
Merger with AVCOM International Inc. described herein, the Company would have
had approximately $137.2 million of outstanding Senior Indebtedness, and the
subsidiaries of the Company would have had approximately $59.9 million of
indebtedness and other liabilities (other than indebtedness to the Company).
The Indenture governing the Notes does not restrict the ability of the Company
or its subsidiaries to incur additional indebtedness, including Senior
Indebtedness.
The Notes will be represented by a global note registered in the name of the
nominee of The Depository Trust Company ("DTC"), which will act as depositary.
Beneficial interests in the global note will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its direct and
indirect participants. Except as described herein, Notes in definitive form
will not be issued. The Notes will be issued in registered form in
denominations of $1,000 and integral multiples thereof. See "Description of
Notes--Book-Entry."
Concurrently with this Convertible Offering, the Company is offering
3,000,000 shares of Common Stock (including 1,400,000 shares for the account of
certain selling stockholders) by a separate prospectus. The consummation of the
Convertible Offering and the Common Stock offering are not conditioned upon
each other.
SEE "RISK FACTORS" COMMENCING ON PAGE OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
NOTES OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(1) (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................... 100.00%
Total(4)............................... $100,000,000 $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(3) Before deducting expenses payable by the Company, estimated at $ .
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $15,000,000 aggregate principal amount of Notes at the Price
to Public, less the Underwriting Discount, solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $115,000,000, the Underwriting Discount will total
$ , and the Proceeds to Company will total $ . See
"Underwriting."
The Notes are offered by the Underwriters when, as and if delivered to and
accepted by the Underwriters and subject to the right to reject any order in
whole or in part. It is expected that the Notes will be ready for delivery in
book-entry form only through the facilities of DTC in New York, New York on or
about , 1997 against payment thereof in immediately available funds.
-----------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
, 1997
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[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
THE OFFERING
Securities Offered........ $100,000,000 aggregate principal amount of %
Convertible Subordinated Notes due , 2007 (the
"Notes").
Interest Payment Dates.... January and July commencing July , 1997.
Maturity.................. , 2007.
Conversion Rights......... The Notes are convertible into shares of the
Company's common stock, par value $0.01 per share
(the "Common Stock"), at any time after 60 days
following the latest date of original issuance
thereof and prior to the close of business on the
last trading day prior to maturity, unless
previously redeemed, at a conversion price of $
per share, subject to adjustment under certain
circumstances as described herein (the "Conversion
Price"). Accordingly, each $1,000 principal amount
of Notes is convertible into shares of Common
Stock, subject to adjustment in certain
circumstances, initially for an aggregate of
shares. See "Capitalization."
Optional Redemption....... The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after
January , 2000, at the redemption prices
(expressed as a percentage of principal amount)
set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption.
Repurchase at Option of
Holders Upon a Change in
Control................... Upon a Change of Control (as herein defined), the
Company will be required to offer to purchase the
Notes for cash or, at the Company's option, Common
Stock (valued at 95% of the average of the closing
prices for any five trading days during the 10
trading day period immediately following the
Change of Control or public announcement of the
Change in Control) at a repurchase price of 100%
of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase.
Subordination............. The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to
all existing and future Senior Indebtedness of the
Company and will be effectively subordinated to
all indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries. At
September 30, 1996, as adjusted to give effect to
the proposed Merger (as herein defined) and the
issuance and sale of the Notes and the Common
Stock in the Offerings (as herein defined) and the
application of the estimated net proceeds
therefrom, the Senior Indebtedness of the Company
would have aggregated approximately $137.2
million, and the Company's subsidiaries had
approximately $59.9 million of trade payables and
accrued liabilities (other than indebtedness to
the Company). The Indenture will not restrict the
incurrence of Senior Indebtedness or other
indebtedness by the Company or any of its
subsidiaries.
Use of Proceeds........... The Company will use the net proceeds of the
Offerings primarily in the following order of
priority: (i) approximately $40.4 million to
retire existing indebtedness of the Company,
(ii) approximately $21.1 million to retire
existing indebtedness of AVCOM that will be
assumed by the Company in the Merger, (iii)
approximately $2.5 million to finance acquisition
costs related to the St. John Villas and (iv) the
balance to complete construction and expansion at
certain Existing Resorts and
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[ALTERNATE PAGE FOR CONVERTIBLE NOTE OFFERING]
AVCOM Resorts, to finance the acquisition and
development of additional resorts and timeshare-
related assets, to finance sales of Vacation
Intervals and for working capital and other
general corporate purposes. See "Use of
Proceeds."
Listing..................... The Notes will not be listed on any national
market.
Common Stock................ The Common Stock is quoted on the Nasdaq National
Market under the symbol "SIGR." See "Price Range
of Common Stock."
Concurrent Offerings........ Concurrently with the Convertible Offering, the
Company is offering (the "Stock Offering")
3,000,000 shares of its Common Stock (including
1,400,000 shares for the account of certain
selling stockholders) (without giving effect to
the Underwriters' over-allotment option). The
Convertible Offering and the Stock Offering (the
"Offerings") are not conditioned upon one another
and, therefore, one offering may be consummated
without the other offering being consummated. See
"Concurrent Offerings" and "Use of Proceeds."
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[ALTERNATE PAGE FOR CONVERTIBLE NOTE OFFERING]
RISK FACTORS
[CONTINUED FROM "RISK FACTORS" IN COMMON STOCK PROSPECTUS.]
CONCURRENT OFFERINGS
Concurrently with the offering of the Notes, the Company is separately
offering up to 3,000,000 shares of its Common Stock pursuant to the Stock
Offering (including 1,400,000 shares for the account of certain selling
stockholders) (without giving effect to the Underwriters over-allotment
options). The consummation of the Convertible Offering is not conditioned upon
the consummation of the Stock Offering. There can be no assurance that the
Stock Offering will be consummated and, if so, on what terms. Because the
Company is relying, in part, on proceeds from the Stock Offering to finance the
acquisition and development of additional resorts and timeshare-related assets,
the failure to consummate the Stock Offering may have an adverse effect on the
Company's future growth and financial success and its ability to make the lower
priority expenditures described under "Use of Proceeds." See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF PRICE
Prior to the Convertible Offering, there has been no public market for the
Notes. Certain of the Underwriters have advised the Company that they intend to
make a market in the Notes. The Underwriters are not obligated, however, to
make a market in the Notes and any such market making may be discontinued at
any time at the sole discretion of any such Underwriter without notice.
Accordingly, there can be no assurance that an active market for the Notes will
develop or be sustained after the Convertible Offering or that the market price
of the Notes will not decline. If an active market for the Notes fails to
develop or be sustained, the trading price of such Notes could be materially
adversely affected. Various factors such as changes in prevailing interest
rates or changes in perceptions of the Company's creditworthiness could cause
the market price of the Notes to fluctuate significantly. The trading price of
the Notes also could be significantly affected by the market price of the
Common Stock, which could be subject to wide fluctuations in response to a
number of factors, including quarterly variations of operating results,
investor perceptions of the Company and other timeshare companies and general
economic and market conditions. The Notes will not be listed on any securities
exchange or quoted on the Nasdaq National Market.
SUBORDINATION OF NOTES
The Notes will be unsecured subordinated obligations of the Company and not
of any of its subsidiaries and will be subordinated to the prior payment in
full of all Senior Indebtedness (as defined in the Indenture) of the Company.
The Notes will also be effectively subordinated to all indebtedness and other
liabilities (including trade payables incurred in the ordinary course of
business) of the Company's subsidiaries. In the event of bankruptcy,
liquidation, or reorganization of the Company, the assets of the Company will
be available to pay obligations on the Notes only after all Senior Indebtedness
has been paid in full, and there may not be sufficient assets to pay any
interest, premium, if any, or principal due on any or all of the Notes then
outstanding. As of September 30, 1996, after giving effect to the Offerings and
the anticipated use of proceeds thereof, and after giving effect to the
proposed Merger, the Company would have had approximately $137.2 million of
outstanding indebtedness which constituted Senior Indebtedness (excluding
Senior Indebtedness constituting liabilities of a type not required to be
reflected as a liability on the balance sheet of the Company in accordance with
generally accepted accounting principles). In addition, as of September 30,
1996, after giving effect to the Offerings and the anticipated use of proceeds
thereof, and after giving effect to the proposed Merger, subsidiaries of the
Company would have had outstanding an aggregate of approximately $59.9 million
of indebtedness and other liabilities (other than to the Company) to which the
Notes are effectively subordinated. The Indenture will not limit the amount of
additional indebtedness, including Senior Indebtedness, which the Company or
any of its
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<PAGE>
subsidiaries can create, incur, assume or guaranty. The incurrence of
additional indebtedness and other liabilities by the Company or its
subsidiaries could adversely affect the Company's ability to pay its
obligations on the Notes. In addition, the cash flow and ability of the Company
to service debt, including the Notes, is dependent in part upon the ability of
its subsidiaries to make cash payments to the Company. Any right of the Company
and its creditors to participate in the assets of any such subsidiary will be
subject to the prior claims of the subsidiaries, creditors, including trade
creditors. No payment on account or principal, premium, if any, or interest on,
or redemption or repurchase of, the Notes may be made by the Company if (i)
there is a default in the payment of principal, premium, if any, or interest
(including a default under any repurchase or redemption obligation) with
respect to any Senior Indebtedness, or (ii) if any other event of default with
respect to any Senior Indebtedness permitting the holders thereof to accelerate
the maturity thereof shall have occurred and the Senior Indebtedness in respect
of such default has been declared due and payable in its entirety, until such a
default has been cured or waived. In addition, in the event of certain non-
payment defaults with respect to the Senior Indebtedness, where the Senior
Indebtedness has not been declared to be due and payable, no payments may be
made until such default has been cured or waived for a period of up to 179
days. Upon any acceleration of the principal due on the Notes or payment or
distribution of assets of the Company to creditors upon any dissolution,
winding-up, liquidation or reorganization, all principal, premium, if any, and
interest due on all Senior Indebtedness must be paid in full before the holders
of the Notes are entitled to receive any payment. See "Description of Notes--
Subordination."
LIMITATION ON REPURCHASE OF CONVERTIBLE NOTES UPON A CHANGE IN CONTROL
Upon a Change in Control (as defined in the Indenture), each holder of the
Notes will have certain rights, at the holder's option, to require the Company
to repurchase all or a portion of such holder's Notes. If a Change in Control
were to occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all Notes tendered by the holders thereof. In addition,
the Company's repurchase of Notes as a result of the occurrence of a Change in
Control may create an event of default under the Company's various credit
agreements, and could create an event of default under other future Senior
Indebtedness. The Change in Control provision may not, in some instances,
prevent a decrease in the value of the Notes in the event the Company incurs
additional leverage through certain types of recapitalizations, leveraged
buyouts, or similar transactions. The Indenture excludes from the definition of
Change in Control transactions that would otherwise constitute a Change in
Control if (i) the trading price of the Common Stock during specified periods
equals or exceeds 105% of the conversion price of the Notes or (ii) at least
90% of the consideration in the transaction consists of shares of common stock
or securities convertible into common stock that are traded on a national
securities exchange or quoted on the Nasdaq National Market and as a result of
such transaction or transactions the Notes become convertible solely into such
common stock. See "Description of Notes--Repurchase at Option of Holders Upon a
Change in Control."
ABSENCE OF FINANCIAL COVENANTS
The Indenture does not contain any financial performance covenants.
Consequently, the Company is not required under the Indenture to meet any
financial tests such as those that measure the Company's working capital,
interest coverage, fixed charge coverage, net worth, or other tests in order to
maintain compliance with the terms of the Indenture. See "Description of
Notes--Events of Default."
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<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
CONCURRENT OFFERINGS
The Convertible Offering is being conducted concurrently with, but is not
conditioned upon, the public offering by the Company of 3,000,000 shares of its
Common Stock (including 1,400,000 shares for the account of certain selling
stockholders) (without giving effect to the Underwriters' over-allotment
options), at a price to the public of $ per share. The last reported closing
sales price of the Common Stock on the Nasdaq National Market (trading symbol
"SIGR") on December 17, 1996 was $37.25 per share. The Convertible Offering and
the Stock Offering are not conditioned upon one another and therefore one
offering may be consummated without the other offering being consummated. See
"Use of Proceeds."
This document does not constitute an offer to sell, or a solicitation of an
offer to buy, the Common Stock. The Common Stock will be registered under the
Securities Act and such securities will be offered only by means of the related
prospectus.
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<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of January ,
1997 (the "Indenture"), between the Company and Norwest Bank Minnesota,
National Association, as Trustee (the "Trustee"), a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The following summaries of certain provisions of the Indenture do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Indenture, including the definitions
therein of certain terms. Reference in italics are to the Indenture. Whenever
particular Sections, Articles or defined terms of the Indenture are referred
to, such Sections, Articles or defined terms are incorporated herein by
reference. As used in this "Description of Notes," the "Company" refers to
Signature Resorts, Inc. and does not include its subsidiaries or affiliates.
GENERAL
The Notes will be unsecured convertible subordinated obligations of the
Company, will be limited to an aggregate principal amount of $100,000,000
(subject to increase in the event of the exercise of the Underwriters'
overallotment option) and will mature on , 2007. The Notes will
bear interest at the rate per annum shown on the front cover of this
Prospectus from the date of initial issuance or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, payable
semiannually on January and July of each year, commencing on
, 1997, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding
January or July as the case may be. Principal of, and premium, if any, and
interest on the Notes will be payable at, and the transfer of Notes will be
registrable at, the office of the Trustee currently located in Minneapolis,
Minnesota. In addition, payment of interest may, at the option of the Company,
be made by check mailed to the address of the person entitled thereto as it
appears in the Security Register. Interest will be calculated on the basis of
a 360-day year consisting of twelve 30-day months.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
CONVERSION RIGHTS
The Holder of any Note will have the right, at the Holder's option, to
convert any portion of the principal amount thereof that is an integral
multiple of $1,000 into shares of Common Stock at any time after 60 days
following the latest date of original issuance thereof and prior to the close
of business on the last trading day prior to maturity (unless earlier redeemed
or repurchased) at the conversion price set forth on the cover page hereof
(subject to adjustment as described below). The right to convert a Note called
for redemption or delivered for repurchase will terminate at the close of
business on the fifth Business Day prior to the Redemption Date or the fifth
Business Day prior to the Repurchase Date, as the case may be.
Any Note (except Notes called for redemption) surrendered for conversion
during the period from the close of business on any Regular Record Date to the
opening of business of the next succeeding Interest Payment Date must be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of Notes being surrendered for
conversion. In the case of any Note which has been converted after any Regular
Record Date but before the next Interest Payment Date, interest, the Stated
Maturity of which is due on such Interest Payment Date, shall be payable on
such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note on such Regular Record Date. As a
result, Holders that surrender Notes for conversion on a date that is not an
Interest Payment Date will not receive any interest for the period from the
Interest Payment Date next preceding the date of conversion to the date of
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<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
conversion or for any later period, even if the Notes are surrendered after a
notice of redemption (except for the payment of interest on Notes called for
redemption on a Redemption Date between a Regular Record Date and the Interest
Payment Date to which it relates). No fractional shares will be issued upon
conversion but, in lieu thereof, an appropriate amount will be paid in cash by
the Company based on the market price of Common Stock at the close of business
on the day of conversion.
The conversion price is subject to adjustment in certain events, including:
(a) dividends (and other distributions) payable in Common Stock on shares of
capital stock of the Company, (b) the issuance to all holders of Common Stock
of rights, options or warrants entitling them to subscribe for or purchase
Common Stock at less than the then current market price (determined as
provided in the Indenture) of Common Stock as of the record date for
shareholders entitled to receive such rights, options or warrants,
(c) subdivisions, combinations and reclassifications of Common Stock, (d)
distributions to all holders of Common Stock of evidences of indebtedness of
the Company, shares of capital stock, cash or assets (including securities,
but excluding those dividends, rights, options, warrants and distributions
referred to above, dividends and distributions paid exclusively in cash and
mergers and consolidations to which the third succeeding paragraph applies),
(e) distributions consisting exclusively of cash (excluding any cash portion
of distributions referred to in (d) above, or cash distributed upon a merger
or consolidation to which the third succeeding paragraph applies) to all
holders of Common Stock in an aggregate amount that, combined together with
(i) other such all-cash distributions made within the preceding 12 months in
respect of which no adjustment has been made, and (ii) any cash and the fair
market value of other consideration payable in respect of any tender offer by
the Company or any of its subsidiaries for Common Stock concluded within the
preceding 12 months in respect of which no adjustment has been made, exceeds
15% of the Company's market capitalization (being the product of the then
current market price of the Common Stock and the number of shares of Common
Stock then outstanding) on the record date for such distribution, and (f) the
completion of a tender offer made by the Company or any of its subsidiaries
for Common Stock which involves an aggregate consideration that, together with
(i) any cash and other consideration payable in a tender offer by the Company
or any of its subsidiaries for Common Stock expiring within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustment has been made, and (ii) the aggregate amount of any such all-cash
distributions referred to in (e) above to all holders of Common Stock within
the 12 months preceding the expiration of such tender offer in respect of
which no adjustments have been made, exceeds 15% of the Company's market
capitalization on the expiration of such tender offer. The Company reserves
the right to make such reductions in the conversion price in addition to those
required in the foregoing provisions as it considers to be advisable, which
determination shall be conclusive. No adjustment of the conversion price will
be required to be made until the cumulative adjustments amount to 1.0% or more
of the conversion price as last adjusted.
Notwithstanding the foregoing, (i) if the options, rights or warrants
described in clause (b) of the preceding paragraph are exercisable only upon
the occurrence of certain triggering events, then the conversion price will
not be adjusted until such triggering events occur, and (ii) if such options,
rights or warrants expire unexercised, the conversion price will be readjusted
to take into account only the actual number of such options, rights or
warrants which were exercised. In addition, the provisions of the preceding
paragraph will not apply to the issuance of Common Stock or the issuance or
exercise of options to purchase Common Stock under any stock-based employee
compensation plan now existing or hereafter adopted.
In the event of a pro rata distribution to holders of Common Stock of rights
to subscribe for additional shares of Common Stock (other than those referred
to in clause (b) above) or of evidences of indebtedness or assets as provided
in clause (d) above, the Company may, instead of making any adjustment in the
conversion price, make proper provision so that each holder of a Note who
converts such Note (or a portion thereof) after the record date for such
distribution and prior to the expiration or redemption of such rights shall be
entitled to receive upon conversion, in addition to the shares of Common Stock
issuable upon conversion, an appropriate number of such rights, evidences of
indebtedness or assets, as the case may be, as if such holders had converted
the Notes immediately before the record date for any such distribution.
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[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
In case of any consolidation or merger of the Company with or into another
Person or any merger of another Person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all
or substantially all of the assets of the Company, each Note then outstanding
will, without the consent of any Holder of any such Note, become convertible
only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of
the number of shares of Common Stock into which such Note was convertible
immediately prior thereto (assuming such holder of Common Stock failed to
exercise any rights of election and received per share the kind and amount
received per share by a plurality of non-electing shares and assuming that
such Note was then convertible).
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g., distributions of evidences of indebtedness
or assets of the Company, but generally not stock dividends on Common Stock or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the number of shares into which Notes are
convertible is increased, such increase may be deemed for federal income tax
purposes to be the payment of a taxable dividend to Holders of Notes. Holders
of Notes could, therefore, have taxable income as a result of an event
pursuant to which they receive no cash or property that could be used to pay
the related income tax. See "Certain Federal Income Tax Considerations."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on (including
any amounts payable upon the redemption or repurchase of the Notes permitted
by the Indenture), the Notes will be subordinated in right of payment, to the
extent set forth in the Indenture, to the prior payment in full of the
principal of (and premium, if any), interest on and other amounts in respect
of all Senior Indebtedness of the Company. "Senior Indebtedness" includes (a)
all indebtedness of the Company, including the principal of and premium, if
any, and interest on such indebtedness (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding,
whether or not a claim for post-petition interest is allowable as a claim in
such proceeding) and all fees and other amounts payable in connection with,
the following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed: (i) indebtedness of the Company, other than the Notes,
(including obligations of the Company arising from its guarantee of the
indebtedness of others) to banks, insurance companies and other financial
institutions evidenced by credit or loan agreements, notes or other written
obligations, (ii) all other indebtedness of the Company (including obligations
of the Company arising from its guarantee of the indebtedness of others) other
than the Notes, whether outstanding on the date of the Indenture or thereafter
created, incurred or assumed, which is (1) for money borrowed, or (2)
evidenced by a note, security, debenture, bond or similar instrument or
guarantee thereof, (iii) obligations of the Company as lessee under leases
required to be capitalized on the balance sheet of the lessee under generally
accepted accounting principles or in respect of any lease or related document
(including a purchase agreement) which provides that the Company is
contractually obligated to purchase or cause a third party to purchase the
leased property and thereby effectively guarantees a minimum residual value of
the leased property to the landlord and the obligations of the Company under
such lease or related document to purchase or cause a third party to purchase
such leased property, (iv) obligations of the Company under interest rate and
currency swaps, caps, floors, collars or similar agreements or arrangements,
(v) all obligations of the Company issued or assumed as the deferred purchase
price of property (but excluding any portion thereof constituting trade
accounts payable arising in the ordinary course of business), (vi) all
obligations of the Company for the reimbursement of any letters of credit (1)
to the extent the obligations underlying such letters of credit are Senior
Indebtedness under clauses (i) through (iv) above or (2) that secure the
Company's obligations to clearing institutions arising out of its merchant
processing business to the extent such obligations are incurred in the
ordinary course of business in amounts consistent with the Company's past
practices, and (vii) renewals, extensions, modifications, restatements and
refundings of, and any amendments,
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[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
modifications or supplements to, or any indebtedness or obligation issued in
exchange for, any such indebtedness or obligation described in clauses (i)
through (vi) of this paragraph; provided, however, that Senior Indebtedness
shall not include any such indebtedness or obligation if the terms of such
indebtedness or obligation (or the terms of the instrument under which, or
pursuant to which, it is issued) expressly provide that such indebtedness or
obligation shall not be senior in right of payment to the Notes. "Designated
Senior Indebtedness" means any particular Senior Indebtedness in which the
instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Senior Indebtedness shall be "Designated Senior
Indebtedness" for purposes of the Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the right
of such Senior Indebtedness to exercise the rights of Designated Senior
Indebtedness).
Upon any acceleration of the principal due on the Notes or payment or
distribution of assets of the Company to creditors upon any dissolution,
winding up, liquidation or reorganization, whether voluntary or involuntary,
or in bankruptcy, insolvency, receivership or other similar proceedings of the
Company, all principal, premium, if any, and interest or other amounts due on
all Senior Indebtedness must be paid in full before the Holders of the Notes
are entitled to receive any payment (other than in Junior Securities). The
Indenture will further require that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default. The Company also may not make any payment upon or in respect of
the Notes (other than in Junior Securities) if (i) a default in the payment of
the principal of, premium, if any, interest or other amounts due on any Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate the maturity thereof and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from
any lender of Designated Senior indebtedness (or agent bank on behalf of such
lender) or other person permitted to give such notice under the Indenture.
Payments on the Notes may and shall be resumed (a) in the case of a payment
default or a non-payment default pursuant to which the Senior Indebtedness has
been declared due and payable in its entirety, upon the date on which such
default is cured or waived in accordance with the agreements evidencing such
Senior Indebtedness, and (b) in case of a nonpayment default, the earlier of
the date on which such nonpayment default is cured or waived in accordance
with the agreements evidencing such Senior Indebtedness or 179 days after the
date on which the applicable Payment Blockage Notice is received. No new
period of payment blockage may be commenced unless and until (i) 365 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice, and (ii) all scheduled payments of principal, premium, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice. "Junior Securities" of any person means
any [Qualified Capital Stock] and any indebtedness of such person that is
subordinated in right of payment to the Notes and has no scheduled installment
of principal due, by redemption, sinking fund payment or otherwise, on or
prior to the Stated Maturity of the Notes.
As a result of the foregoing subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its Subsidiaries or a marshaling of assets or liabilities of the
Company and its subsidiaries, creditors of the Company who are holders of
Senior Indebtedness are likely to recover more, ratably, than the Holders of
the Notes. Furthermore, the subordination of the Notes may, upon the
occurrence of one or more of the circumstances described in the preceding
sentence, result in a reduction or elimination of payments to the Holders of
the Notes.
The Indenture does not limit the Company's ability to incur Senior
Indebtedness or any other indebtedness or the ability of any subsidiary of the
Company to incur any indebtedness or other liabilities.
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As of September 30, 1996, after giving effect to the Offerings and the
anticipated use of proceeds thereof, and after giving effect to the proposed
Merger, the principal amount of outstanding Senior Indebtedness was
approximately $137.2 million (excluding Senior Indebtedness constituting
liabilities of a type not required to be reflected as a liability on the
balance sheet of the Company in accordance with generally accepted accounting
principles, such as contingent obligations, forward foreign exchange contracts
and interest rate swap agreements, which are senior to the Notes).
The Company conducts certain of its operations through its subsidiaries.
Accordingly, the Company's ability to meet its cash obligations is dependent
upon the ability of its subsidiaries to make cash distributions to the
Company. The ability of its Subsidiaries to make distributions to the Company
is and will continue to be restricted by, among other limitations, applicable
legal requirements and contractual provisions. The Indenture will not limit
the ability of the Company's Subsidiaries to incur such restrictions in the
future. The right of the Company to participate in the assets of any
Subsidiary (and thus the ability of Holders of the Notes to benefit indirectly
from such assets) is generally subject to the prior claims of creditors,
including trade creditors, of that Subsidiary except to the extent that the
Company is recognized as a creditor of such Subsidiary, in which case the
Company's claims would still be subject to any security interest of other
creditors of such Subsidiary. The Notes, therefore, will be structurally
subordinated to creditors, including trade creditors, of Subsidiaries of the
Company with respect to the assets of the Subsidiaries against which such
creditors have a claim.
As of September 30, 1996, after giving effect to the Offerings and the
anticipated use of proceeds thereof, and after giving effect to the proposed
Merger, there was outstanding approximately $59.9 million of indebtedness and
other liabilities of subsidiaries of the Company (excluding (i) intercompany
liabilities, (ii) indebtedness included in Senior Indebtedness because it is
guaranteed directly or indirectly by the Company, and (iii) liabilities of a
type not required to be reflected as a liability on the balance sheet of such
subsidiaries in accordance with generally accepted accounting principles), as
to which the Notes would have been structurally subordinated.
OPTIONAL REDEMPTION
The Notes may not be redeemed at the option of the Company prior to January
, 2000. Thereafter, the Notes may be redeemed, in whole or in part, at the
option of the Company, upon not less than 30 nor more than 60 days' notice by
mail.
The Redemption Prices (expressed as a percentage of principal amount), and
in each case plus accrued and unpaid interest to the date of redemption, and
subject to the rights of Holders of record on the relevant Regular Record Date
to receive interest due on an Interest Payment Date, are as follows for the
12-month period (unless otherwise noted) beginning on January of the
following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000........................................................... %
2001........................................................... %
2002........................................................... %
2003........................................................... %
2004........................................................... %
2005........................................................... %
2006 and thereafter............................................ 100.00%
</TABLE>
If less than all of the Notes are to be redeemed, the Trustee will select
the particular Notes (or the portions thereof) to be redeemed either by lot,
pro rata or by such other method as the Trustee shall deem fair or
appropriate.
No sinking fund is provided for the Notes.
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REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a Change in Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require the Company to repurchase all of
such Holder's Notes, or any portion thereof that is an integral multiple of
$1,000, on the date (the "Repurchase Date") that is 45 days after the date of
the Company Notice (as defined), at a price equal to 100% of the principal
amount of the Notes to be repurchased (the "Repurchase Price"), together with
accrued interest to the Repurchase Date.
The Company may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in Common Stock valued at 95% of the average of
the last reported sale price of the Common Stock for the five consecutive
trading days ending on and including the third trading day preceding the
Repurchase Date; provided that payment may not be made in Common Stock of the
Company unless the Company satisfies certain conditions with respect to such
payment as provided in the Indenture.
Within 30 days after the occurrence of a Change in Control, the Company is
obligated to mail to all Holders of record of the Notes a notice (the "Company
Notice") of the occurrence of such Change in Control and of the repurchase
right arising as a result thereof. The Company must also deliver a copy of the
Company Notice to the Trustee. To exercise the repurchase right, a Holder of
Notes must deliver on or before the 30th day after the date of the Company
Notice irrevocable written notice to the Trustee of the Holder's exercise of
such right, together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer to the Company.
A Change in Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such Person to exercise 50% or more
of the total voting power of all shares of capital stock of the Company
entitled to vote generally in elections of directors (other than (a) any
such acquisition by the Company, any subsidiary of the Company or any
employee benefit plan of the Company, or (b) the acquisition by any Person
that constitutes a group consisting of at least two of the Founders and
their affiliates); or
(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or
any conveyance, sale, transfer or lease, in one transaction or a series of
related transactions, of all or substantially all of the assets (other than
to a wholly owned subsidiary of the Company) of the Company to any other
Person (other than (a) any such transaction pursuant to which the holders
of 50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in elections of directors
immediately prior to such transaction have, directly or indirectly, at
least 50% or more of the total voting power of all shares of capital stock
of the continuing or surviving corporation entitled to vote generally in
elections of directors of the continuing or surviving corporation
immediately after such transaction, (b) a merger (x) which does not result
in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock, or (y) which is effected solely to
change the jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Common
Stock into solely shares of common stock, and (c) any such transaction with
any Person that constitutes a group consisting of at least two of the
Founders and their affiliates);
(iii) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the 12-month period immediately preceding such change
(together with any other director whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of at least a majority
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of the directors then in office either who were directors at the beginning
of such period or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of the directors
then in office;
provided, however, that a Change in Control shall not be deemed to have
occurred if either (i) the closing price per share of the Common Stock for any
five trading days within the period of ten consecutive trading days ending
immediately after the later of the Change in Control or the public
announcement of the Change in Control (in the case of a Change in Control
under clause (i) above) or ending immediately before the Change in Control (in
the case of a Change in Control under clause (ii) above) shall equal or exceed
105% of the conversion price of the Notes in effect on each such trading day,
or (ii) at least 90% of the consideration (excluding cash payments for
fractional shares) in the transaction or transactions constituting the Change
in Control consists of shares of
common stock or securities convertible into common stock that are traded on a
national securities exchange or quoted on the Nasdaq National Market (or which
will be so traded or quoted when issued or exchanged in connection with such
change in control) and as a result of such transaction or transactions the
Notes become convertible solely into such common stock. "Beneficial owner"
shall be determined in accordance with Rule 13d-3 promulgated by the
Commission under the Exchange Act, as in effect on the date of execution of
the Indenture.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Change in Control would create an event of default under the
Company's existing Senior Indebtedness and could create an event of default
under future Senior Indebtedness of the Company. As a result, any repurchase
would, absent a waiver, be blocked by the subordination provisions of the
Notes. See "Subordination." Failure by the Company to repurchase the Notes
when required would result in an Event of Default with respect to the Notes
whether or not such repurchase is permitted by the subordination provisions.
See "Events of Default."
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time and with Rule 14e-1 and all other applicable federal and state
securities laws in connection with such repurchase option.
The right to require the Company to repurchase Notes as a result of a Change
of Control could have the effect of delaying, deferring or preventing a Change
of Control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all the Notes
at the Repurchase Date. Consequently, this right may render more difficult or
discourage a merger, consolidation or tender offer (even if such transaction
is supported by the Company's Board of Directors or is favorable to the
stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction involving the Company
that may adversely affect Holders.
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Company may not consolidate with or merge into any other Person or
transfer or lease all or substantially all of its properties and assets to any
Person unless (a) the Person formed by such consolidation or into which the
Company is merged or the Person to which the properties and assets of the
Company are so transferred or leased, (i) shall be a corporation, partnership
or trust organized and existing under the laws of the United States, any State
thereof or the District of Columbia and (ii) shall expressly assume the
payment of the principal of (and premium, if any) and interest on the Notes
and the performance of the other covenants of the Company under the Indenture,
and (b) immediately after giving effect to such transaction, no Event of
Default,
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and no event which, after notice or lapse of time or both, would become an
Event of Default, shall have occurred and be continuing.
Upon any consolidation, merger of, or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the
successor corporation formed by such consolidation or into which the Company
is merged or to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and the Company will be released from its
obligations under the Indenture and the Notes.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal or premium, if any, on any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (b)
failure to pay any interest on any Note when due, continuing for 30 days,
whether or not such payment is prohibited by the subordination provisions of
the Indenture; (c) default in the Company's obligation to provide a Company
Notice of Change in Control, (d) failure to perform any other covenant of the
Company in the Indenture, continuing for 60 days after written notice as
provided in the Indenture; (e) failure of the Company or any Significant
Subsidiary to make payment in respect of indebtedness, which term as used in
the Indenture means obligations (other than Non-Recourse Debt) of, or
guaranteed or assumed by, the Company or any subsidiary for borrowed money
("Indebtedness"), in an amount in excess of $15,000,000 and continuance of
such failure for at least 90 days; (f) default by the Company or any
Significant Subsidiary with respect to any Indebtedness, which default results
in the acceleration of Indebtedness in an amount in excess of $15,000,000
without such Indebtedness having been discharged or such acceleration having
been cured, waived, rescinded or annulled within 90 days of such acceleration;
(g) a final judgment or judgments for payment of money against the Company or
any Significant Subsidiary which remains undischarged for a period ending on
the later of (i) 60 days after the entry of such judgment, as extended by any
effective stay of its execution; or (ii) the date on which any payment is or
becomes due and payable pursuant to such judgment in accordance with its
terms, other than final judgments with respect to Non-recourse Debt of the
Company or any of its Significant Subsidiaries provided that the aggregate of
all such outstanding judgments exceeds $15 million (excluding any amounts
covered by insurance as to which the insurer has not denied liability); and
(h) certain events in bankruptcy, insolvency or reorganization with respect to
the Company or any of its significant subsidiaries. Subject to the provisions
of the Indenture relating to the duties of the Trustee in case an Event of
Default shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
"Subsidiary," with respect to any person, means a corporation a majority of
whose Capital Stock with voting power normally entitled to vote in the
election of directors is at the time, directly or indirectly, owned by such
person, by such person and one or more Subsidiaries of such person, or by one
or more Subsidiaries of such person. "Significant Subsidiary" means any
Subsidiary which is a "significant subsidiary" of the Company within the
meaning of Rule 1.02(w) of Regulation S-X promulgated by the SEC as in effect
as of the date of the Indenture. "Non-recourse Debt" means indebtedness of a
person to the extent that under the terms thereof and pursuant to applicable
law, no personal recourse could be had against such person for the payment of
the principal of or interest or premium or any other amounts with respect to
such indebtedness or for any claim based on such indebtedness and that
enforcement of obligations on such indebtedness is limited solely to recourse
against interests in specified assets.
If an Event of Default (other than an event of default specified in
subsection (h) above) shall occur and be continuing, either the Trustee or the
Holders of at least 25% in principal amount of the Outstanding Notes may
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accelerate the maturity of all Notes; provided, however, that after such
acceleration, the Holders of a majority in aggregate principal amount of
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration after all Events of Default, other than the non-payment of
accelerated principal and interest, have been cured or waived as provided in
the Indenture. If an Event of Default specified in subsection (h) occurs and
is continuing, the principal and any accrued interest on all of the then
Outstanding Notes shall ipso facto become due and payable immediately without
any declaration or other act on the part of the Trustee or any Holder. For
information as to waiver of defaults, see "Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a
majority in aggregate principal amount of the Outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of a Note for the enforcement of payment of the
principal of and premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note or of the right to
convert such Note in accordance with the Indenture.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, or the premium or interest on, any Note, (c) reduce the
amount payable upon an optional redemption or the consideration payable to any
Holder converting after a notice of redemption has been given, (d) modify the
provisions with respect to the repurchase right of the Holders in a manner
adverse to the Holders, (e) change the place or currency of payment of
principal of, or premium or interest on, any Note, (f) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Note, (g) adversely affect the right to convert the Notes, (h) modify the
subordination provisions in a manner adverse to the Holders of the Notes, (i)
reduce the above-stated percentage of Outstanding Notes necessary to modify or
amend the Indenture, or (j) reduce the percentage of aggregate principal
amount of Outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults.
The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture. The Holders of a majority in aggregate principal amount of
the Outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while Notes
remain Outstanding if (i) all Outstanding Notes will become due and payable at
their scheduled maturity within one year, (ii) or all Outstanding Notes are
scheduled for redemption within one year, or (iii) all Outstanding Notes are
delivered to the Trustee for conversion in accordance with the Indenture, and,
in the case of clause (i) or (ii), the Company has deposited with the Trustee
an amount sufficient to pay and discharge all Outstanding Notes on the date of
their scheduled maturity or the scheduled date of redemption.
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GOVERNING LAW
The Indenture and the Notes provide that they are to be governed in
accordance with the laws of the State of New York.
THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee, in
the event it becomes a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, that if it acquires any conflicting
interest (as defined), it must eliminate such conflict or resign.
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
BOOK-ENTRY
The Notes will be issued in the form of a global note or notes (together,
the "Global Note") deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in the name of Cede & Co. as DTC's nominee.
Owners of beneficial interests in the Notes represented by the Global Note
will hold such interests pursuant to the procedures and practices of DTC and
must exercise any rights in respect of their interests (including any right to
convert or require repurchase of their interests) in accordance with those
procedures and practices. Such beneficial owners will not be Holders, and will
not be entitled to any rights under the Global Note or the Indenture, with
respect to the Global Note and the Company and the Trustee, and any of their
respective agents, may treat DTC as the sole Holder and owner of the Global
Note.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers (including Montgomery Securities), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks, and trust companies that clear through or maintain
a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.
Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form as set forth below, the Global Note may not be
transferred except as a whole by DTC to a nominee of DTC, or by a nominee of
DTC to DTC or another nominee of DTC.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if (i) DTC is at any time unwilling, unable
or ineligible to continue as depositary or (ii) there shall have occurred
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and be continuing an Event of Default with respect to the Notes represented by
the Global Note, the Company will issue individual Notes in definitive form in
exchange for the Global Note. In addition, the Company may at any time and in
its sole discretion determine not to have a Global Note, and, in such event,
will issue individual Notes in definitive form in exchange for the Global Note
previously representing all such Notes. In such instances, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery of
Notes in definitive form equal in principal amount to such beneficial interest
and to have such Notes registered in its name. Individual Notes so issued in
definitive form will be issued in denominations of $1,000 and any larger
amount that is an integral multiple of $1,000 and will be issued in registered
form only, without coupons.
Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will
credit the accounts of the related participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global Note as shown on the records of DTC. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note will be governed by standing customer instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
Holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with
its procedures on a form required by DTC and provided to participants. In
order to ensure that DTC's nominee will timely exercise a right to repayment,
or the right of conversion, with respect to a particular Note, the beneficial
owner of such Notes must instruct the broker or other participant through
which it holds an interest in such Notes to notify DTC of its desire to
exercise a right to repayment, or the right of conversion. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a Note in order to ascertain
the cut-off time by which such an instruction must be given in order for
timely notice to be delivered to DTC. The Company will not be liable for any
delay in delivery of such notice to DTC.
NO PERSONAL LIABILITY OF SHAREHOLDERS, OFFICERS, DIRECTORS
No shareholder, officer or director, as such, past, present or future of the
Company or any successor corporation shall have any personal liability in
respect of the obligations of the Company under the Indenture or the Notes by
reason of his or its status as such shareholder, officer or director.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to holders of the Notes. This discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations. This discussion does not purport to deal
with all aspects of federal income taxation that may be relevant to a
particular investor's decision to purchase the Notes, and it is not intended
to be wholly applicable to all categories of investors, some of which, such as
dealers in securities, banks, insurance companies, tax-exempt organizations
and non-United States persons, may be subject to special rules. In addition,
this discussion is limited to persons that purchase the Notes in the Offering
and hold the Notes as a "capital asset" within the meaning of Section 1221 of
the Code.
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE COMMON STOCK.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on a conversion of the Notes into shares of Common Stock. However,
cash paid in lieu of a fractional share of Common Stock will result in taxable
gain (or loss), which will be capital gain (or loss) to the extent that the
amount of such cash exceeds (or is exceeded by) the portion of the adjusted
basis of the Note allocable to such fractional share. The adjusted basis of
shares of Common Stock received on conversion will equal the adjusted basis of
the Note converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
The conversion price of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes--Conversion Rights." Section 305 of
the Code and the Treasury Regulations issued thereunder may treat the holders
of the Notes as having received a constructive distribution, resulting in
ordinary income to the extent of the Company's current earnings and profits if
and to the extent that certain adjustments in the conversion price that may
occur in limited circumstances (particularly an adjustment to reflect a
taxable dividend to holders of Common Stock) increase the proportionate
interest of a holder of Notes in the fully diluted Common Stock, whether or
not such holder ever exercises its conversion privilege. Moreover, if there is
not a full adjustment to the conversion price of the Notes to reflect a stock
dividend or other event increasing the proportionate interest of the holders
of outstanding Common Stock in the assets or earnings and profits of the
Company, then such increase in the proportionate interest of the holders of
the Common Stock generally will be treated as a distribution to such holders,
taxable as ordinary income to the extent of the Company earnings and profits.
MARKET DISCOUNT
Investors acquiring Notes pursuant to this Prospectus should note that the
resale of those Notes may be adversely affected by the market discount
provisions of sections 1276 through 1278 of the Code. Under the market
discount rules, if a holder of a Note purchases it at market discount (i.e.,
at a price below its stated redemption price at maturity) in excess of a
statutorily-defined de minimis amount and thereafter recognizes gain upon a
disposition or retirement of the Note, then the lesser of the gain recognized
or the portion of the market discount that accrued on a ratable basis (or, if
elected, on a constant interest rate basis) generally will be treated as
ordinary income at the time of the disposition. Moreover, any market discount
on a Note may be taxable to an investor to the extent of appreciation at the
time of certain otherwise non-taxable transactions (e.g., gifts). Any
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accrued market discount not previously taken into income prior to a conversion
of a Note, however, should (under Treasury Regulations not yet issued) carry
over to the Common Stock received on conversion and be treated as ordinary
income upon a subsequent disposition of such Common Stock to the extent of any
gain recognized on such disposition. In addition, absent an election to
include market discount in income as it accrues, a holder of a market discount
debt instrument may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such debt instrument until the holder disposes of the debt
instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Each holder of Notes generally will recognize gain or loss upon the sale,
exchange, redemption, repurchase, retirement, or other disposition of those
Notes measured by the difference (if any) between (i) the amount of cash and
the fair market value of any property received (except to the extent that such
cash or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary
income) and (ii) the holder's adjusted tax basis in those Notes (including any
market discount previously included in income by the holder). Each holder of
Common Stock into which the Notes are converted, in general, will recognize
gain or loss upon the sale, exchange, or other disposition of the Common Stock
measured under rules similar to those described in the preceding sentence for
the Notes. Any such gain or loss recognized on the sale, exchange, repurchase,
retirement, or other disposition of a Note or share of Common Stock should be
capital gain or loss (except as discussed under "--Market Discount" above),
and would be long-term capital gain or loss if the Note or the Common Stock
had been held for more than one year at the time of the sale or exchange. An
investor's initial basis in a Note will be the cash price paid therefor.
BACKUP WITHHOLDING
A holder of Notes or Common Stock may be subject to "back-up withholding" at
a rate of 31% with respect to certain "reportable payments," including
interest payments, dividend payments and, under certain circumstances,
principal payments on the Notes. These backup withholding rules apply if the
holder, among other things, (i) fails to furnish a social security number or
other taxpayer identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to backup withholding. A holder who does not
provide the Company with its correct TIN also may be subject to penalties
imposed by the IRS. Any amount withheld from a payment to a holder under the
backup withholding rules is creditable against the holder's federal income tax
liability, provided the required information is furnished to the IRS. Backup
withholding will not apply, however, with respect to payments made to certain
holders, including corporations, tax-exempt organizations and certain foreign
persons, provided their exemption from backup withholding is properly
established.
The Company will report to the holders of Notes and Common Stock and to the
IRS the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to such payments.
ALT-19
<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities and Goldman, Sachs & Co. (the "Representatives"), have severally
agreed, subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") by and among the Company and the Underwriters to
purchase from the Company the principal amount of Notes indicated below
opposite their respective names, at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of the Notes if they purchase any.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
- ----------- ------------
<S> <C>
Montgomery Securities.............................................
Goldman, Sachs & Co. .............................................
Smith Barney Inc. ................................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
------------
Total..................................................... $100,000,000
============
</TABLE>
The Underwriters, through the Representatives, have advised the Company that
the Underwriters propose initially to offer the Notes to the public at the
public offering price set forth on the cover page of this Prospectus. The
Underwriters may allow selected dealers a concession of not more than % of
the principal amount thereof; the Underwriters may allow, and such dealers may
reallow, a concession of not more than % to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representatives.
The Company has granted the option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional $15.0 million aggregate principal amount of the Notes to cover
over-allotments, if any, at the initial offering price less the underwriting
discount. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase
such additional amount in approximately the same proportion as set forth in
the above table. The Underwriters may purchase such amount only to cover over-
allotments made in connection with the Convertible Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
An affiliate of Goldman, Sachs & Co. is a major shareholder in Westin. The
Company and Westin have entered into the Westin Agreement. See "Business--
Westin Vacation Club Resorts." Pursuant to the Westin Agreement, Westin has
certain rights to designate a member of the Company's Board of Directors.
Montgomery Securities has provided certain investment banking services to
the Company, including rendering a fairness opinion in connection with the
Merger, for which the Company has agreed to pay usual and customary fees upon
the closing of the Merger.
Each stockholder who received shares of Common Stock as a result of the
Consolidation Transactions has agreed, with certain exceptions, not to offer,
sell, contract to sell or otherwise dispose of any Common Stock, or any
securities convertible into, or exchangeable for shares of Common Stock, for a
period of 180 days after the closing (which occurred on August 20, 1996) of
the Initial Public Offering (one year with respect to the
ALT-20
<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTES PROSPECTUS]
Founders) and 90 days after the closing of the Stock Offering without the
prior written consent of Montgomery Securities; one of such exceptions allows
the Founders to pledge between $30 million and $50 million of their Common
Stock to secure a margin loan in a maximum amount of $10 million and another
exception allows the Founders to pledge approximately $5.8 million of their
Common Stock in connection with their buyout of a former partner.
The Company and those officers and directors of the Company that are not a
party to the Registration Rights Agreement have also agreed that, except under
certain circumstances, for a period of 90 days after the date of this
Prospectus, they will not, without the written consent of Montgomery
Securities, issue, sell or dispose of any shares of Common Stock or any shares
convertible or exchangeable into any shares of Common Stock.
The Notes are a new issue of securities for which there is currently no
public market. Certain of the Underwriters have advised the Company that they
intend to make a market in the Notes, however, they are not obligated to make
a market in the Notes. If such market making is undertaken it may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters relating to the issuance and sale of the Notes and the
validity of the Common Stock issuable upon conversion of the Notes will be
passed upon for the Company by Latham & Watkins, Los Angeles, California and,
as to matters of Maryland law, by Ballard Spahr Andrews & Ingersoll,
Baltimore, Maryland. Certain matters of California real estate and timeshare
law will be passed upon for the Company by Paul, Hastings, Janofsky & Walker,
LLP, Los Angeles, California and certain matters of Florida real estate and
timeshare law will be passed upon for the Company by Schreeder, Wheeler &
Flint, Atlanta, Georgia. Certain partners of Paul, Hastings, Janofsky &
Walker, LLP, members of their families and related persons own approximately
1% of the Common Stock of the Company prior to the Stock Offering and certain
partners of Schreeder, Wheeler & Flint own less than 1% of the Common Stock of
the Company. Certain matters will be passed upon for the Underwriters by
O'Melveny & Myers LLP, San Francisco, California in reliance, as to matters of
Maryland law, on the opinion of Ballard Spahr Andrews & Ingersoll.
EXPERTS
The consolidated financial statements of Signature Resorts, Inc. and
subsidiaries as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The consolidated financial statements of AVCOM International, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and the
related Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ALT-21
<PAGE>
[ALTERNATE PAGE FOR CONVERTIBLE NOTE PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the registered
securities to which this Prospectus relates or any offer to any person in any
jurisdiction where such an offer would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 31
Concurrent Offerings...................................................... 31
Common Stock Price Range.................................................. 32
Dividend Policy........................................................... 32
Consolidated Capitalization............................................... 33
Selected Consolidated Historical Financial Information of the Company..... 34
Selected Financial Data of AVCOM International, Inc....................... 36
Pro Forma Financial Information........................................... 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Business.................................................................. 51
The Proposed Merger....................................................... 78
Management................................................................ 83
Certain Relationships and Related Transactions............................ 91
Principal and Selling Stockholders........................................ 94
Description of Capital Stock.............................................. 96
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 97
Shares Eligible for Future Sale........................................... 100
Description of Notes......................................................
Certain Federal Income Tax Considerations.................................
Underwriting..............................................................
Legal Matters.............................................................
Experts...................................................................
Additional Information.................................................... 104
Index to Combined Financial Statements.................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
[LOGO OF SIGNATURE RESORTS]
SIGNATURE RESORTS, INC.
% CONVERTIBLE SUBORDINATED NOTES
DUE 2007
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, in connection with the sale and
distribution of the shares of Common Stock being registered hereby.
<TABLE>
<S> <C>
Commission Registration Fee...................................... $70,918
NASD filing fee.................................................. 23,903
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Legal fees and expenses.......................................... *
Printing and engraving expenses.................................. *
Transfer Agent fees.............................................. *
Trustee fees and expenses........................................ *
Miscellaneous expenses........................................... *
-------
TOTAL.......................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Maryland corporation. Section 2-418 of the Maryland General
Corporation Law empowers the Company to indemnify, subject to the standards
set forth therein, any person who is a party in any action in connection with
any action, suit or proceeding brought or threatened by reason of the fact
that the person was a director, officer, employee or agent of such company, or
is or was serving as such with respect to another entity at the request of
such company. The Maryland General Corporation Law also provides that the
Company may purchase insurance on behalf of any such director, officer,
employee or agent.
The Company's Charter and Bylaws provide in effect for the indemnification
by the Company of each director and officer of the Company to the fullest
extent permitted by applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Consolidation Transactions in June 1996, investors in
the Property Partnerships and the Affiliated Entities agreed to contribute
their interests in such entities to the Company in return for the issuance of
11,354,705 shares of the Company's common stock, $.01 par value. Such
securities were issued by the Company in reliance upon an exemption from the
registration requirements of the Securities Act provided by Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement (Common Stock) among Signature Resorts,
Inc., the Selling Stockholders and Montgomery Securities and Goldman,
Sachs & Co. dated as of , 1997
*1.2 Form of Underwriting Agreement (Convertible Notes) among Signature
Resorts, Inc., Montgomery Securities and Goldman, Sachs & Co. dated
as of , 1997
2. Plan and Agreement of Merger as amended (by reference to Exhibit 2 to
Registrant's Registration Statement on Form S-4 (No. 333-16339))
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Charter of Signature Resorts, Inc. (incorporated by reference to
Exhibit 3.1 to Registrant's Registration Statement on Form S-1 (No.
333-06027))
3.2 Bylaws of Signature Resorts, Inc. (incorporated by reference to
Exhibit 3.2 to Registrant's Registration Statement on Form S-1 (No.
333-06027))
*4 Form of Indenture by and between the Company and Norwest Bank
Minnesota, National Association, as trustee, for the %
Convertible Subordinated Notes of the Company due 2007.
+5.1 Form of Opinion of Ballard Spahr Andrews & Ingersoll regarding the
validity of the Common Stock being registered (including consent)
+5.2 Form of Opinion of Latham & Watkins regarding the validity of the
Convertible Subordinated Notes being registered (including consent)
10.1 Form of Registration Rights Agreement among Signature Resorts, Inc.
and the persons named therein (incorporated by reference to Exhibit
10.1 to Registrant's Registration Statement on Form S-1 (No. 333-
06027))
10.2.1 Form of Employment Agreements between Signature Resorts, Inc. and each
of Osamu Kaneko, Andrew J. Gessow and Steven C. Kenninger
(incorporated by reference to Exhibit 10.2.1 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.2.2 Employment Agreement between Signature Resorts, Inc. and James E.
Noyes (incorporated by reference to Exhibit 10.2.2 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.2.3 Form of Employment Agreement between Signature Resorts, Inc. and Gary
L. Hughes (incorporated by reference to Exhibit 10.2.3 to
Registrant's Registration Statement on Form S-4 (No. 333-16339))
10.2.4 Form of Employment Agreement between Signature Resorts, Inc. and John
R. Stevens (incorporated by reference to Exhibit 10.2.4 to
Registrant's Registration Statement on Form S-4 (No. 333-16339))
10.2.5 Employment Agreement between Signature Resorts, Inc. and Michael A.
Depatie (incorporated by reference to Exhibit 10.2.5 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.2.6 Form of Option Agreement between Signature Resorts, Inc. and Gary L.
Hughes (incorporated by reference to Exhibit 10.2.6 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.2.7 Form of Option Agreement between Signature Resorts, Inc. and John R.
Stevens (incorporated by reference to Exhibit 10.2.7 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.3 1996 Equity Participation Plan of Signature Resorts, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.4 Agreement of Limited Partnership of Pointe Resort Partners, L.P.
(subsequently renamed Poipu Resort Partners L.P.) dated October 11,
1994 (incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.5 Signature Resorts, Inc. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.5 to Registrant's Registration Statement on
Form S-1 (No. 333-06027))
10.6 Agreement between W&S Hotel L.L.C. and Argosy/KOAR Group, Inc. dated
as of May 3, 1996 (incorporated by reference to Exhibit 10.6 to
Registrant's Registration Statement on Form S-1 (No. 333-06027))
10.7 Conti-Trade Financial Warehouse Line Agreement (incorporated by
reference to Exhibit 10.7 to Registrant's Registration Statement on
Form S-4 (No. 333-16339))
10.8.1 Lender's Certification and Consent from Resort Capital Corporation to
Signatures Resorts, Inc. dated as of August 15, 1996 (incorporated by
reference to Exhibit 10.8.1 to Registrant's Registration Statement on
Form S-4 (No. 333-16339))
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.8.2 Lender's Certification and Consent from FINOVA Capital Corporation to
Signature Resorts, Inc. dated as of August 15, 1996 (incorporated by
reference to Exhibit 10.8.2 to Registrant's Registration Statement on
Form S-4 (No. 333-16339))
10.8.3 Assumption Agreement between FINOVA Capital Corporation and Signature
Resorts, Inc. dated as of August 15, 1996 (incorporated by reference
to Exhibit 10.8.3 to Registrant's Registration Statement on Form S-4
(No. 333-16339))
10.8.4 Assumption Agreement between Resort Capital Corporation and Signature
Resorts, Inc. dated as of August 15, 1996 (incorporated by reference
to Exhibit 10.8.4 to Registrant's Registration Statement on Form S-4
(No. 333-16339))
10.8.5 Assumption Agreement between FINOVA Capital Corporation and AKGI-Sint
Maarten, N.V. dated as of August 15, 1996 (incorporated by reference
to Exhibit 10.8.5 to Registrant's Registration Statement on Form S-4
(No. 333-16339))
*11 Statement re Computation of Per Share Earnings
*12 Statement re Computation of Ratios of Earnings to Fixed Charges
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant (incorporated by reference to Exhibit 16.1 to Registrant's
current report on Form 8-K filed with the Commission on September 18,
1996)
*21 Subsidiaries of Signature Resorts, Inc.
+23.1 Consent of Ballard Spahr Andrews & Ingersoll (included as part of
Exhibit 5.1)
+23.2 Consent of Latham & Watkins (included as part of Exhibit 5.2)
*23.3 Consent of Arthur Andersen LLP
*23.4 Consent of Ernst & Young LLP
*24 Power of Attorney (included as part of page II-5 of this Registration
Statement)
*25 Statement of Eligibility of Trustee on Form T-1 for the %
Convertible Subordinated Notes of the Company due 2007
*27 Amended Financial Data Schedule
</TABLE>
- --------
* Filed herewith
+ To be filed by amendment
(b) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-3
<PAGE>
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Signature Resorts, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Los Angeles, State of California, on December 20, 1996.
SIGNATURE RESORTS, INC.
By: /s/ Andrew D. Hutton
-----------------------------------
Name: Andrew D. Hutton
Title: Vice President and General
Counsel
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Andrew J.
Gessow, Steven C. Kenninger, Michael A. Depatie and Andrew D. Hutton, and each
of them, with full power to act without the other, such person's true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, and any and all amendments
thereto (including pre- and post-effective amendments) or any registration
statement for the same offering that is to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, and to file the
same, with exhibits and schedules thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Osamu Kaneko Chairman of the Board and December 20, 1996
____________________________________ Chief Executive Officer
Osamu Kaneko (Principal Executive
Officer)
/s/ Andrew J. Gessow Director and President December 20, 1996
____________________________________
Andrew J. Gessow
/s/ Steven C. Kenninger Director, Chief Operating December 20, 1996
____________________________________ Officer and Secretary
Steven C. Kenninger
/s/ Michael A. Depatie Executive Vice President and December 20, 1996
____________________________________ Chief Financial Officer
Michael A. Depatie (Principal Financial
Officer)
/s/ James E. Noyes Executive Vice President and December 20, 1996
____________________________________ Director
James E. Noyes
/s/ Charles C. Frey Senior Vice President and December 20, 1996
____________________________________ Treasurer (Principal
Charles C. Frey Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Juergen Bartels Director December 20, 1996
____________________________________
Juergen Bartels
/s/ Sanford R. Climan Director December 20, 1996
____________________________________
Sanford R. Climan
/s/ Joshua S. Friedman Director December 20, 1996
____________________________________
Joshua S. Friedman
/s/ W. Leo Kiely III Director December 20, 1996
____________________________________
W. Leo Kiely III
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement (Common Stock) among Signature
Resorts, Inc., the Selling Stockholders and Montgomery
Securities and Goldman, Sachs & Co. dated as of , 1997
*1.2 Form of Underwriting Agreement (Convertible Notes) among
Signature Resorts, Inc., Montgomery Securities and Goldman,
Sachs & Co. dated as of , 1997
2. Plan and Agreement of Merger as amended (incorporated by
reference to Exhibit 2 to Registrant's Registration Statement
on Form S-4 (No. 333-16339))
3.1 Charter of Signature Resorts, Inc. (incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement on Form
S-1 (No. 333-06027))
3.2 Bylaws of Signature Resorts, Inc. (incorporated by reference to
Exhibit 3.2 to Registrant's Registration Statement on Form S-1
(No. 333-06027))
*4 Form of Indenture by and between the Company and Norwest Bank
Minnesota, National Association, as trustee, for the %
Convertible Subordinated Notes of the Company due 2007.
+5.1 Form of Opinion of Ballard Spahr Andrews & Ingersoll regarding
the validity of the Common Stock being registered (including
consent)
+5.2 Form of Opinion of Latham & Watkins regarding the validity of
the Convertible Subordinated Notes being registered (including
consent)
10.1 Form of Registration Rights Agreement among Signature Resorts,
Inc. and the persons named therein (incorporated by reference
to Exhibit 10.1 to Registrant's Registration Statement on Form
S-1 (No. 333-06027))
10.2.1 Form of Employment Agreements between Signature Resorts, Inc.
and each of Osamu Kaneko, Andrew J. Gessow and Steven C.
Kenninger (incorporated by reference to Exhibit 10.2.1 to
Registrant's Registration Statement on Form S-1 (No. 333-
06027))
10.2.2 Employment Agreement between Signature Resorts, Inc. and James
E. Noyes (incorporated by reference to Exhibit 10.2.2 to
Registrant's Registration Statement on Form S-1 (No. 333-
06027))
10.2.3 Form of Employment Agreement between Signature Resorts, Inc.
and Gary L. Hughes (incorporated by reference to Exhibit
10.2.3 to Registrant's Registration Statement on Form S-4 (No.
333-16339))
10.2.4 Form of Employment Agreement between Signature Resorts, Inc.
and John R. Stevens (incorporated by reference to Exhibit
10.2.4 to Registrant's Registration Statement on Form S-4 (No.
333-16339))
10.2.5 Employment Agreement between Signature Resorts, Inc. and
Michael A. Depatie (incorporated by reference to Exhibit
10.2.5 to Registrant's Registration Statement on Form S-4 (No.
333-16339))
10.2.6 Form of Option Agreement between Signature Resorts, Inc. and
Gary L. Hughes (incorporated by reference to Exhibit 10.2.6 to
Registrant's Registration Statement on Form S-4 (No. 333-
16339))
10.2.7 Form of Option Agreement between Signature Resorts, Inc. and
John R. Stevens (incorporated by reference to Exhibit 10.2.7
to Registrant's Registration Statement on Form S-4 (No. 333-
16339))
10.3 1996 Equity Participation Plan of Signature Resorts, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
</TABLE>
<PAGE>
INDEX TO EXHIBITS--(CONTINED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.4 Agreement of Limited Partnership of Pointe Resort Partners,
L.P. (subsequently renamed Poipu Resort Partners L.P.) dated
October 11, 1994 (incorporated by reference to Exhibit 10.4 to
Registrant's Registration Statement on Form S-1 (No. 333-
06027))
10.5 Signature Resorts, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.6 Agreement between W&S Hotel L.L.C. and Argosy/KOAR Group, Inc.
dated as of May 3, 1996 (incorporated by reference to Exhibit
10.6 to Registrant's Registration Statement on Form S-1 (No.
333-06027))
10.7 Conti-Trade Financial Warehouse Line Agreement (incorporated by
reference to Exhibit to Registrant's Registration Statement
on Form S-4 (No. 333-16339))
10.8.1 Lender's Certification and Consent from Resort Capital
Corporation to Signatures Resorts, Inc. dated as of August 15,
1996 (incorporated by reference to Exhibit 10.8.1 to
Registrant's Registration Statement on Form S-4 (No. 333-
16339))
10.8.2 Lender's Certification and Consent from FINOVA Capital
Corporation to Signature Resorts, Inc. dated as of August 15,
1996 (incorporated by reference to Exhibit 10.8.2 to
Registrant's Registration Statement on Form S-4 (No. 333-
16339))
10.8.3 Assumption Agreement between FINOVA Capital Corporation and
Signature Resorts, Inc. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.3 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.8.4 Assumption Agreement between Resort Capital Corporation and
Signature Resorts, Inc. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.4 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.8.5 Assumption Agreement between FINOVA Capital Corporation and
AKGI-Sint Maarten, N.V. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.5 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
*11 Statement re Computation of Per Share Earnings
*12 Statement re Computation of Ratios of Earnings to Fixed Charges
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant (incorporated by reference to Exhibit 16.1 to
Registrant's current report on Form 8-K filed with the
Commission on September 18, 1996)
*21 Subsidiaries of Signature Resorts, Inc.
+23.1 Consent of Ballard Spahr Andrews & Ingersoll (included as part
of Exhibit 5.1)
+23.2 Consent of Latham & Watkins (included as part of Exhibit 5.2)
*23.3 Consent of Arthur Andersen LLP
*23.4 Consent of Ernst & Young LLP
*24 Power of Attorney (included as part of page II-5 of this
Registration Statement)
*25 Statement of Eligibility of Trustee on Form T-1 for the %
Convertible Subordinated Notes of the Company due 2007
*27 Amended Financial Data Schedule
</TABLE>
- --------
* Filed herewith
+ To be filed by amendment
<PAGE>
EXHIBIT 1.1
3,000,000 SHARES
SIGNATURE RESORTS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_________, 1997
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Signature Resorts, Inc., a Maryland
------------
corporation (the "Company"), proposes to issue and sell 1,600,000 shares of its
authorized but unissued common stock, $.01 par value (the "Common Stock"), and
the several stockholders of the Company listed in Schedule A annexed hereto (the
"Selling Stockholders"), propose to sell 1,400,000 shares of the Company's
issued and outstanding Common Stock to the several underwriters named in
Schedule B annexed hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"). Said aggregate of 3,000,000 shares are
herein called the "Firm Common Shares." In addition, the Company and the
Selling Stockholders propose to grant to the Underwriters an option to purchase
up to 450,000 additional shares (the "Option Common Shares") as provided in
Section 6 hereof. The Firm Common Shares and, to the extent such option is
exercised, the Option Common Shares are hereinafter collectively referred to as
the "Common Shares."
Concurrently with the offering of the Common Shares, the Company
proposes to issue and sell an aggregate of
<PAGE>
$100,000,000 principal amount of its _____% Convertible Subordinated Notes Due
2007 (the "Notes").
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the Registration Statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. There have been delivered to you two
signed copies of such registration statement and any amendments thereto,
together with two copies of each exhibit filed therewith. Conformed copies
of such registration statement and amendments (but without exhibits) and of
the related preliminary prospectus have been delivered to you in such
reasonable quantities as you have requested for each of the Underwriters.
The Company will next file with the Commission one of the following: (i)
prior to effectiveness of such registration statement, a further amendment
thereto, including the form of final prospectus, or (ii) a final prospectus
in accordance with Rules 430A and 424(b) of the Rules and Regulations. As
filed, such amendment and form of final prospectus, or such final
prospectus, shall include all Rule 430A Information (as hereinafter
defined) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
you prior to the date and time that this Agreement was executed and
delivered by the parties hereto, or, to the extent not completed at such
date and time, shall contain only such specific additional information and
other
<PAGE>
changes (beyond that contained in the latest Preliminary Prospectus) as the
Representatives shall have approved.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date, shall also mean such
registration statement as so amended; provided, however, that such term
shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations. The term
"Preliminary Prospectus" shall mean any preliminary prospectus referred to
in the preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule
430A Information. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Common Shares in the form in which it
is first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final prospectus included
in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date (as hereinafter defined), the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
<PAGE>
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this Section
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any
such amendment or supplement in reliance upon and in conformity with
written information furnished pursuant to Section 5 of this Agreement to
the Company by or on behalf of any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof.
(c) The Company has been duly formed and is validly existing as a
corporation, is in good standing under the laws of the State of Maryland,
with full power and authority (corporate and other) to conduct its business
as currently conducted or as described in the Prospectus.
(d) Each of the Significant Subsidiaries (as defined in the Indenture
dated as of January __, 1997 by and between the Company and Norwest Bank
Minnesota, National Association) has been duly formed and is validly
existing as a partnership,
<PAGE>
limited liability company or corporation, as applicable, in good standing
under the laws of its jurisdiction of formation, with full power and
authority (partnership and other) to own and lease its properties and
conduct its respective businesses as currently conducted or described in
the prospectus.
(e) The Company and each of Significant Subsidiaries are in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders material to the
conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of the Significant Subsidiaries are
duly qualified to do business and in good standing as a foreign
corporation, partnership or limited liability company, as applicable, in
each jurisdiction in which the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
and in good standing would not have a material adverse effect on the
condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and the Significant Subsidiaries,
considered as one entity (a "Material Adverse Effect"); and to the
Company's knowledge no proceeding has been instituted or threatened in any
such jurisdiction revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(f) The Company has an authorized and outstanding capital stock as
set forth under the column captioned "Actual" under the heading
"Consolidated Capitalization" in the Prospectus; the issued and outstanding
shares of Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or
purchase securities and will conform to the description thereof contained
in the Registration Statement and the Prospectus. The form of certificate,
if any, evidencing the Common Stock complies with all applicable
requirements of Maryland law. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related
notes thereto, as of the First Closing Date the Company does not have
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or
<PAGE>
to purchase such securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock,
partnership interests or limited liability company interests, as the case
may be, or any such options, rights, convertible securities or obligations.
(g) The Common Shares to be sold by the Company in the public offering
contemplated by this Agreement, when issued, delivered and paid for in the
manner set forth in this Agreement, will be duly authorized and validly
issued, fully paid and nonassessable, will be registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), have been duly authorized for quotation by the Nasdaq
National Market upon official notice of issuance and will conform to the
description thereof contained in the Prospectus. No preemptive rights or
other rights to subscribe for or purchase Common Stock exist with respect
to the issuance and sale of the Common Shares by the Company pursuant to
this Agreement. Except for the Selling Stockholders, no shareholder of the
Company has any right which has not been waived to require the Company to
register the sale of any Common Stock owned by such shareholder under the
Act in the public offering contemplated by this Agreement. No further
approval or authority of the shareholders or the Board of Directors of the
Company will be required for the issuance and sale of the Common Shares to
be sold by the Company as contemplated herein. No further approval or
authority of the Board of Directors of the Company will be required for the
transfer and sale of the Common Shares to be sold by the Selling
Stockholders as contemplated herein. The description of the Company's share
option, share bonus and other share plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(h) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated, will
not violate any provisions of any partnership agreement, certificate of
partnership, charter, bylaws or other organizational documents, as
applicable, of the Company or any of the
<PAGE>
Significant Subsidiaries and will not conflict with, result in the breach
or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under (i) any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company or any of the Significant Subsidiaries is a party or
by which the Company, any of the Significant Subsidiaries or any of the
Existing Resorts (as defined in the Prospectus) may be bound or affected or
(ii) any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company, any of the Significant
Subsidiaries or any of the Existing Resorts, in each case except as would
not have a Material Adverse Effect. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required, including the satisfaction of any
requirements pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, for the execution and delivery of this Agreement or
the consummation of the transactions contemplated by this Agreement, except
for compliance with the Act, the Exchange Act, the Blue Sky and Canadian
securities laws applicable to the public offering of the Common Shares by
the several Underwriters, the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD"), and except for any
such consent, approval, authorization or other order as has been or will be
obtained prior to the First Closing Date.
(i) Ernst and Young LLP ("E & Y") and Arthur Andersen LLP ("Arthur
Andersen") who have expressed their opinion with respect to the financial
statements and schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act
and the Rules and Regulations.
(j) The consolidated financial statements of the Company, together
with the related notes thereto, set forth in the Registration Statement and
the Prospectus fairly present the financial condition of such entities as
of the dates indicated and the results of operations and changes in
financial position for the periods presented. The pro forma financial
statements included in the Registration Statement and the Prospectus comply
in all material respects with the
<PAGE>
applicable requirements of Rule 11-02 of Regulation S-X of the Commission
and the pro forma adjustments have been properly applied to the historical
amounts in the compilation of such statements. Such statements, schedules
and related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in Section 2(h). No other financial
statements or schedules are required to be included in the Registration
Statement. The selected financial data set forth in the Prospectus under
the captions "Consolidated Capitalization", "Selected Combined Historical
Financial Information of the Company" and "Summary Consolidated Historical
and Pro Forma Financial Information" fairly present the information set
forth therein on the basis stated in the Registration Statement.
(k) Except as disclosed in the Prospectus, the Company is not in
violation of any of its articles of organization or by-laws, and is not in
breach or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it
or any of its properties are bound, or to which any of the property or
assets of the Company is subject except for any such violation, breach or
default that could not have a Material Adverse Effect.
(l) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required.
(m) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which
the Company or any of the Significant Subsidiaries are a party or of which
any Resort owned or leased by the Significant Subsidiaries is the subject,
or related to environmental or discrimination matters, which actions, suits
or proceedings could reasonably be anticipated to
<PAGE>
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or have a Material Adverse
Effect. Neither the Company nor any of the Significant Subsidiaries is a
party or subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body, administrative agency or
other governmental body.
(n) Except as set forth in the Prospectus, the Company or the
Significant Subsidiaries have good and marketable title to all of the
Existing Resorts, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in the financial statements
or elsewhere in the Prospectus. Except as disclosed in the Prospectus, the
Company and each of the Significant Subsidiaries owns or leases all such
properties as are necessary to operate the Existing Resorts as now
conducted or as proposed to be conducted, except with respect to the Poipu
Resort and the San Luis Bay intervals.
(o) From September 30, 1996 through the date hereof, and except as
described in or specifically contemplated by the Prospectus: (i) the
Company has not incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of
business or which could result in a material reduction in the future
earnings of the Company; (ii) the Company has not sustained any loss or
interference with its respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not
<PAGE>
covered by insurance, that would have a Material Adverse Effect; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock, shares or interests, as applicable (other
than such dividends or distributions paid to shareholders to satisfy tax
liabilities) and the Company is not in arrears or default in the payment of
principal or interest on any outstanding material debt obligations; (iv)
there has not been any change (excluding transfers) in the capital stock
(other than the sale of the Common Shares under this Agreement) of the
Company, or indebtedness material to the Company (other than in the
ordinary course of business); and (v) there has not been any material
adverse change in the condition (financial or otherwise), business,
properties, or results of operations of the Company and its Subsidiaries,
considered as one entity (a "Material Adverse Change"); provided that the
representations and warranties contained in this section 2(o) shall not
apply to either the offering and sale of the Notes or the Company's
execution and performance of the registration statement (File No.333-06027,
the prospectus related thereto, the underwriting agreement, dated as of
August 14, 1996, by and between the Company and the Representatives or the
consummation (or the effects thereof) of the transactions contemplated
therein.
(p) Except as specifically disclosed in or specifically contemplated
by the Prospectus, the Company will have sufficient trademarks, trade
names, patent rights, copyrights, licenses or other similar rights and
proprietary knowledge (collectively, "Intangibles"), approvals and
governmental authorizations to conduct its businesses; the expiration of
any Intangibles, approvals or governmental authorizations will not have a
Material Adverse Effect; and the Company has no knowledge of any material
infringement by of any of the Significant Subsidiaries of any Intangibles,
and there is no claim being made against the Company or any of the
Significant Subsidiaries regarding any Intangible or other infringement
which could have a Material Adverse Effect.
(q) Neither the Company nor any of the Significant Subsidiaries has
been advised, or has reason to believe, that the Company or any of the
Significant Subsidiaries is not conducting its businesses in compliance
with all applicable laws, rules and regulations of the jurisdictions in
which any of them
<PAGE>
is, including, without limitation, all applicable local, state and federal
environmental laws and regulations, in each case except as would not have a
Material Adverse Effect.
(r) The Company and each of the Significant Subsidiaries has filed all
necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown as due thereon; and the Company has no knowledge
of any tax deficiency which has been or might be asserted or threatened
against the Company in each case except as would not have a Material
Adverse Effect.
(s) [Intentionally Omitted]
(t) Neither the Company nor any of the Significant Subsidiaries has at
any time during the last five years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any
contribution in violation of law or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(u) Neither the Company nor any of the Significant Subsidiaries has
taken or will take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) The Company and the Significant Subsidiaries have and will
maintain liability, property and casualty insurance (insured by insurers of
recognized financial responsibility) in favor of the
<PAGE>
Company, or the Significant Subsidiaries, with respect to each of the
Existing Resorts (except with respect to the Poipu Resort, such insurance
therefor being obtained and/or maintained by the Poipu Partnership), in an
amount and on such terms as is reasonable and customary for businesses of
the type proposed to be conducted by the Company, including, among other
things, insurance against theft, damage, destruction and acts of vandalism.
The Company has not received from any insurance company notice of any
material defects or deficiencies affecting the insurability of any such
Existing Resort.
(w) Title insurance in favor of the Company or the Significant
Subsidiaries is in force with respect to each of the Existing Resorts in an
amount reasonably acceptable to the Representatives (except with respect to
the St. Maarten Resorts).
(x) The mortgages and deeds of trust encumbering the Existing Resorts
and Merger Properties are not convertible nor does the Company hold a
participating interest therein and such mortgages and deeds of trust are
not cross-defaulted or cross-collateralized to any Existing Resort not to
be owned directly or indirectly by the Company.
(y) The Company and each of the Significant Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local
rules, laws and regulations relating to the protection of human health and
safety, the environment or any Hazardous Material (as hereinafter defined)
("Environmental Laws"), (ii) has received, or will have received, as of the
Closing Date, as the case may be, all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) is or will be, as of the Closing Date, as
the case may be, in compliance with all terms and conditions of any such
permit, license or approval, in each case except as would not have a
Material
<PAGE>
Adverse Effect. As used herein, "Hazardous Material" shall mean (a) any
"hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"),
(b) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (c) any petroleum or petroleum product, (d) any
polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous,
dangerous, or toxic chemical, material, waste or substance regulated under
or within the meaning of any other Environmental Law.
(z) To the Company's knowledge, there is no liability, alleged
liability or potential liability (including, without limitation, liability,
alleged liability or potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resources damages, property
damages, personal injuries or penalties), of the Company arising out of,
based on or resulting from (a) the presence or release into the environment
of any Hazardous Material at any location, whether or not owned by the
Company, or (b) any violation or alleged violation of any Environmental
Law, which liability, alleged liability or potential liability is required
to be disclosed in the Registration Statement, other than as disclosed
therein.
(aa) The Company is not, nor will it conduct its business in a manner
in which it would become an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(bb) The assets of neither the Company nor any of the Significant
Subsidiaries constitute, nor will such assets, as of the Closing Date,
constitute "plan assets" under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
(cc) The Company and each of the Significant Subsidiaries maintain and
will maintain a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to
<PAGE>
maintain accountability for assets; (iii) access to financial and corporate
books and records is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(dd) Neither the Company nor any of the Significant Subsidiaries has
incurred any liability for a fee, commission or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement other than as disclosed in the
Registration Statement.
(ff) To the Company's knowledge, no labor problem exists or is
imminent with respect to the employees of any of the Existing Resorts, the
Company or any of the Significant Subsidiaries which could have a Material
Adverse Effect.
(gg) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company as to the matters
covered thereby.
(hh) The Company is in compliance with all federal, state, local and
foreign laws and regulations regarding the marketing, offers to sell and
sales of vacation intervals in each state in which the Company is doing
business, including but not limited to the Federal Trade Commission Act,
Regulation Z (the truth-in-lending act), Equity Opportunity Credit Act and
Regulation B, Interstate Land Sales Full Disclosure Act, Real Estate
Standards Practices Act, Telephone Consumer Protection Act, Telemarketing
and Consumer Fraud and Abuse Prevention Act, Fair Housing Act and Civil
Rights Acts of 1964 and 1968, in each case except as would not have a
Material Adverse Effect. The Company has filed all required documents and
supporting information
<PAGE>
in compliance with federal, state, local and foreign laws and regulations,
and the Company is in compliance with all licensure, anti-fraud,
telemarketing, price, gift and sweepstakes and labor laws to which it is or
may become subject, in each case except as would not have a Material
Adverse Effect. The Company and each of the Significant Subsidiaries has,
or upon the First Closing Date will have, all permits and licenses which
are required to sell vacation intervals in each state and foreign
jurisdiction where it conducts business, in each case except as would not
have a Material Adverse Effect.
(ii) Except as set forth in the Prospectus, no person has an option
or right of first refusal to purchase all or part of any of the Existing
Resorts (other than the Poipu Resort) or any interest therein. Each of the
Existing Resorts complies with all applicable codes, laws and regulations
(including, without limitation, building and zoning codes and laws relating
to handicapped access), except as would not have a Material Adverse Effect.
The Company has no knowledge of any pending or threatened condemnation
proceedings, zoning changes, or other proceedings or actions that will in
any manner affect the size of, number of vacation intervals planned for,
the use of any improvements on, or access to, the Existing Resorts.
(jj) To the Company's knowledge, no dispute exists or is imminent
between the Company and Promus Hotels, Inc. or between the Company and
Westin Hotels & Resorts and no officer or director of the Company has any
agreement or understanding (verbally or in writing) with Westin Hotels &
Resorts except as set forth in the Prospectus.
(kk) The Common Shares have been approved for listing on the NASDAQ
National Market, subject to official notice of issuance.
(ll) The Company has full legal right, power and authority to enter
into the Agreement and Plan of Merger dated as of September 22, 1996 by and
between the Company and AVCOM International, Inc., as amended (the "Merger
Agreement") and perform the transactions contemplated thereby. The Merger
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms. The making and performance of the Merger Agreement by the
Company and the consummation of the transactions therein contemplated, will
not violate any provisions of any partnership agreement, certificate of
partnership, charter, bylaws or other
<PAGE>
organizational documents, as applicable, of the Company or any of the
Significant Subsidiaries and will not conflict with, result in the breach
or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under (i) any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company or any of the Significant Subsidiaries is a party or
by which the Company, any of the Significant Subsidiaries or any of the
Existing Resorts may be bound or affected or (ii) any statute or any
authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body
applicable to the Company, any of the Significant Subsidiaries or any of
the Existing Resorts, in each case except as would not have a Material
Adverse Effect. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body is
required, including the satisfaction of any requirements pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for the
execution and delivery of the Merger Agreement or the consummation of the
transactions contemplated by the Merger Agreement, except for compliance
with the Act, the Exchange Act, the Blue Sky and Canadian securities laws
applicable to the transactions contemplated by the Merger Agreement, and
except for any such consent, approval, authorization or other order as has
been or will be obtained prior to the First Closing Date.
<PAGE>
Agreement, and affirms that the Company has performed all the covenants to
be performed by it contained therein.]
[(mm) The Company has received from its independent certified public
accountants a letter opining that the Merger Agreement and the consummation
of the transactions contemplated therein will qualify for pooling of
interest treatment in accordance with Opinion No. 16 of the Financial
Accounting Principles Board.]
<PAGE>
SECTION 3. Representations and Warranties of the Selling Stockholders.
----------------------------------------------------------
Each of the Selling Stockholders hereby reaffirms each of its representations,
warranties and covenants set forth in the Power of Attorney for sale of Common
Stock of Signature Resorts, Inc. by such Selling Stockholder dated as of
January , 1997.
<PAGE>
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and the Selling Stockholders that the information set forth (i) on
the cover page of the Prospectus with respect to price, underwriting discounts
and commissions and terms of offering and (ii) under "Underwriting" in the
Prospectus was furnished to the Company by and on behalf of the Underwriters for
use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects. The Representatives
represent and warrant that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on their behalf
and to act for each Underwriter in the manner herein provided.
SECTION 6. Purchase, Sale and Delivery of Common Shares. On the
--------------------------------------------
basis of the representations, warranties and agreements set forth herein, and
subject to the terms and conditions set forth herein, (i) the Company agrees to
issue and sell to the Underwriters 1,600,000 of the Firm Common Shares; (ii)
each of the Selling Stockholders agrees to sell to the Underwriters the number
of Firm Common Shares set forth opposite the name of such Selling Stockholder in
Schedule A annexed hereto; and (iii) the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Stockholders the number of
Firm Common Shares set forth opposite the name of such Underwriter in Schedule B
annexed hereto. The purchase price per share to be paid by the several
Underwriters to the Company and the Selling Stockholders shall be [$_____] per
share.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at such place as set forth
below at such time and date, not later than the third (or, if the Firm Common
Shares are priced as contemplated by Rule 15c6-1(c) of the Securities Exchange
Act of 1934, after 4:30 p.m. Washington, D.C. time, the fourth) full business
day following the first date that any of the Common Shares are released by you
for sale to the public, as you shall
<PAGE>
designate by at least 48 hours prior notice to the Company (or at such other
time and date, not later than one week after such third full business day as may
be agreed upon by the Company and the Representatives) (the "First Closing
Date"); provided, however, that if the Prospectus is at any time prior to the
First Closing Date recirculated to the public, the First Closing Date shall
occur upon the later of the third or fourth, as the case may be, full business
day following the later of the first date that any of the Common Shares are
released by you for sale to the public and the date that is 48 hours after the
date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Stockholders to you, for the
respective accounts of the Underwriters against payment by you, for the accounts
of the several Underwriters, by wire transfer of immediately available funds in
proportion to the number of Firm Common Shares to be sold by the Company and the
Selling Stockholders, respectively,to the order of (i) the Company or other
agent designated by the Company and (ii) the Custodian. The certificates for
the Firm Common Shares shall be registered in such names and denominations as
you shall have requested at least two full business days prior to the First
Closing Date, and shall be made available for checking and packaging on the
business day preceding the First Closing Date at a location in New York, New
York or such other location, as may be designated by you. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements set forth herein, and subject to the terms and conditions set forth
herein, the Company and the Selling Stockholders hereby grant an option to the
several Underwriters to purchase, severally and not jointly, up to an aggregate
of 450,000 Option Common Shares, from the Company and the Selling Stockholders
in proportion to the number of Firm Common Shares to be sold by the Company and
each of the Selling Stockholders, respectively, at the purchase price per share
to be paid for the Firm Common Shares, for use solely in covering any over-
allotments made by you for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the first
date that any of the Common Shares are released by you for sale to the public,
<PAGE>
upon written notice by you to the Company and the Selling Stockholders setting
forth the aggregate number of Option Common Shares as to which the Underwriters
are exercising the option, the names and denominations in which the certificates
for such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," shall be determined by you, but if at any time other than the First
Closing Date shall not be earlier than three nor later than five full business
days after delivery of such notice of exercise. References herein to "Closing
Date" shall mean the First Closing Date and/or the Second Closing Date, as the
context requires. The number of Option Common Shares to be purchased by each
Underwriter from the Company shall be determined by multiplying the number of
Option Common Shares to be sold by the Company pursuant to such notice of
exercise by a fraction, the numerator of which is the number of Firm Common
Shares to be purchased by such Underwriter as set forth opposite its name in
Schedule B and the denominator of which is 3,000,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). The number of Optional Common Shares to be purchased from
each of the Selling Stockholders shall be determined by multiplying the number
of Optional Common Shares to be sold by such Selling Stockholder pursuant to
such notice of exercise by a fraction, the numerator of which is the number of
Firm Common Shares to be purchased by such Underwriter as set forth opposite its
name in Schedule B and the denominator of which is 3,000,000. Certificates for
the Option Common Shares will be made available for checking and packaging on
the business day preceding the Second Closing Date at a location in New York,
New York or such other location, as may be designated by you. Payment for the
Option Common Shares shall be the same as for the Firm Common Shares purchased
from the Company and the Selling Stockholders as specified in the two preceding
paragraphs. At any time before lapse of the option, you may cancel such option
by giving written notice of such cancellation to the Company and the Selling
Stockholders. If the option is cancelled or expires unexercised in whole or in
part, the Company will deregister under the Act the number of Option Shares as
to which the option has not been exercised.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to issue a receipt therefor. You, individually and not as the
<PAGE>
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the Prospectus.
SECTION 7. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing
of the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed,
pursuant to the applicable paragraph of Rule 424(b) of the Rules and
Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly
advise you in writing (i) of the receipt of any comments of the Commission,
(ii) of any request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information,
(iii) when the Registration Statement shall have become effective and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will
not file any amendment or supplement to the Registration Statement (either
before or after it becomes
<PAGE>
effective), any Preliminary Prospectus or the Prospectus of which you have
not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and
the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or
advisable to enable the several Underwriters to continue the distribution
of the Common Shares and will use its best efforts to cause the same to
become effective as promptly as possible. The Company will fully and
completely comply with the provisions of Rule 430A of the Rules and
Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) If at any time within the applicable period referred to in Section
10(a)(3) of the Act or Rule 174 of the Rules and Regulations during which a
prospectus relating to the Common Shares is required to be delivered under
the Act any event occurs, as a result of which the Prospectus, including
any amendments or supplements, would include an untrue statement of a
material fact, or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or if
it is necessary at any time to amend the Prospectus, including any
amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts
to cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after the applicable time
period, the Company upon request, but at the expense of such Underwriter,
will promptly prepare such amendment or amendments to the Registration
Statement and such Prospectus or Prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Act and Rule
174 of the Rules and Regulations, as applicable.
(d) As soon as practicable, but not later than 45 days (or 90 days if
such quarter is the fiscal year end) after
<PAGE>
the end of the first quarter ending after one year following the effective
date of the Registration Statement (as defined in Rule 158(c) of the Rules
and Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the applicable period referred to in
Section 10(a)(3) of the Act or Rule 174 of the Rules and Regulations, will
furnish to you or mail to your order copies of the Registration Statement,
the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in
such quantities as you may reasonably request, for the purposes
contemplated by the Act and the Rules and Regulations.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky and Canadian securities laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications, registrations and exemptions in effect so
long as reasonably required for the distribution of the Common Shares. The
Company will not be required to qualify as a foreign corporation or to file
a general consent to service of process in any such jurisdiction where it
is not presently qualified or where it would be subject to taxation as a
corporation. The Company will advise you promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering; sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its
best efforts to obtain the withdrawal thereof.
(g) During the period of five years after the date of this Agreement,
the Company will furnish to the
<PAGE>
Representatives and their counsel and, upon request of the Representatives,
to each of the other Underwriters: (i) as soon as practicable after the end
of each fiscal year, copies of the Annual Report of the Company containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, shareholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any of
the Common Shares are released by you for sale to the public, without your
prior written consent (which consent may be withheld at your sole
discretion), the Company will not, other than as disclosed in the
Prospectus, issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security of the Company, except, in each case, to grant options or to sell
shares of Common Stock pursuant to the Company's 1996 Equity Participation
Plan or the Company's Employee Stock Option Plan, each as described in the
Prospectus, to grant options or to sell shares of Common Stock in
connection with the offering and sale of the Notes or to grant options or
to sell or issue shares of Common Stock in connection with the Merger
Agreement.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it in accordance with the statements under the caption "Use
of Proceeds" in the Prospectus.
(j) As necessary, the Company will use its best efforts to qualify or
register its Common Shares for sale in non-issuer transactions under (or
obtain exemptions from the application of) the Blue Sky laws of the State
of California and the provincial laws of Canada as specified by the
Representatives (and thereby permit market making transactions and
secondary trading in the Company's Common Shares in California and such
Canadian provinces as
<PAGE>
specified by the Representatives), will comply with such Blue Sky or
Canadian provincial laws and continue such qualifications, registrations
and exemptions in effect for a period of five years after the date hereof.
(k) The Company will use its best efforts to continue the quotation
of the Common Shares as a national market system security on the Nasdaq
National Market.
(l) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of formation of the Company, a registrar (which may
be the same entity as the transfer agent).
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 8. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Shares,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Underwriters' Power of Attorney and the
preliminary and final Blue Sky memoranda, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common
<PAGE>
Shares for offer and sale under the Blue Sky laws or the provincial securities
laws of Canada, (vii) the filing fee of the NASD and the fees and expenses
related to the inclusion of the Common Shares on the Nasdaq National Market, and
(viii) all other fees, costs and expenses referred to in Item 13 of Part II of
the Registration Statement. Except as provided in this Section 8, Section 10 and
Section 12 hereof, the Underwriters and the Selling Stockholders shall pay all
of their own expenses, including the fees and disbursements of their counsel
(excluding those relating to qualification, registration or exemption under the
Blue Sky and Canadian provincial securities laws and the preliminary and final
Blue Sky memoranda, which fees shall be paid on the First Closing Date or the
Second Closing Date, as applicable).
This Section 8 shall not affect any agreement between the Company and
the Selling Stockholders relating to the payment of expenses. This Section 8
shall not affect any agreement to which the Company is a party relating to the
payment of expenses incurred in connection with the issuance and sale of the
Notes.
SECTION 9. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Option Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company set forth herein as of the date hereof and
as of the First Closing Date or the Second Closing Date, as the case may be, to
the accuracy of the statements of the Company's officers and the Selling
Stockholders made pursuant to the provisions hereof, to the performance of the
Company and the Selling Stockholders of their respective obligations hereunder,
and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares,
not later than 10:00 P.M.), Washington, D.C. Time, on the date of this
Agreement, or at such later time as shall have been consented to by you; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall
have been filed in the manner and within the time period required by Rule
424(b) of the Rules and Regulations; and prior to such
<PAGE>
Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge
of the Company or you, shall be contemplated by the Commission; and any
request of the Commission for inclusion of additional information in the
Registration Statement, or otherwise, shall have been complied with to your
satisfaction.
(b) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Latham & Watkins, counsel for the Company
(exclusive of environmental matters, matters relating to real property
ownership and condition, indebtedness of the Company, regulation of
the Company's business and property, the Company's
<PAGE>
relationship with Promus Hotels Corporation and Westin Hotels &
Resorts and any matters relating to AVCOM International, Inc. and its
subsidiaries and affiliates) addressed to the Underwriters and dated
the First Closing Date, or the Second Closing Date, as the case may
be, to the effect that:
(1) The description of the Common Stock contained in the
section entitled "Description of Capital Stock" in the Prospectus
is an accurate summary in all material respects of the
information required therein by Form S-1;
(2) Except as disclosed in or specifically contemplated by
the Prospectus and except for the Notes, such counsel is not
aware of any outstanding options, warrants or other rights
calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company
or any security convertible into or exchangeable for capital
stock of the Company;
(3)(a)(i) The Registration Statement has become effective
under the Act; (ii) to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued; (iii) to
such counsel's knowledge, no proceedings for that purpose have
been instituted or are pending or contemplated by the Commission;
and (iv) any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and Regulations has
been made in the manner and within the time period required by
such Rule 424(b);
(b) The Registration Statement and the Prospectus comply as
to form in all material respects with the applicable requirements
for registration statements on Form S-1 under the Act and the
Rules and Regulations, it being understood
<PAGE>
that such counsel need not express any opinion with respect to
the financial statements, schedules and other financial and
statistical data included in the Registration Statement or the
Exhibits thereto;
(c) To such counsel's knowledge, there are no contracts,
agreements, documents, franchises, leases or licenses of a
character required to be disclosed in the Registration Statement
or Prospectus or required to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as
required; and
(d) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened
against the Company which are required to be described in the
Prospectus which are not described as required;
(4) The Company has the corporate power and authority to
enter into this Agreement, to sell and deliver the Common Shares
to be sold by it to the several Underwriters and to consummate
the other transactions contemplated herein; this Agreement has
been duly and validly authorized by all necessary action by the
Company, has been duly and validly executed and delivered by and
on behalf of the Company, and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable
<PAGE>
principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except as to
those provisions relating to indemnity or contribution for
liabilities arising under the Act as to which no opinion need be
expressed;
(5) No approval, authorization, order, consent,
registration, filing, qualification, license or permit of or with
any court, regulatory, administrative or other governmental body
is required for the execution and delivery of this Agreement by
the Company or the consummation of the transactions contemplated
by this Agreement, except (i) such as have been obtained and are
in full force and effect under the Act, (ii) such as may be
required under applicable Blue Sky or Canadian securities laws in
connection with the purchase and distribution of the Common
Shares by the Underwriters; (iii) clearing of such offering with
the NASD; and (iv) such as to which the failure to so obtain
would not have a Material Adverse Effect;
(6) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company is a party or by which the Company
may be bound or affected which is material to the Company;
violate any of the provisions of the partnership certificate,
partnership agreement, charter or bylaws, or other organizational
documents, as applicable, of the Company, in each case except as
would not have a Material Adverse Effect;
(7) Except for the Selling Stockholders and except as
otherwise set forth in the Prospectus, no holders of securities
of the Company have rights to register shares of Common Stock or
other securities because of the filing of the Registration
Statement by the Company or the
<PAGE>
offering or other transactions contemplated hereby; and
(8) The Company will not be an "investment company" within
the meaning of the 1940 Act;
<PAGE>
Such counsel shall also include a statement to the effect that
nothing has come to such counsel's attention that would lead such
counsel to believe that either at the effective date of the
Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, it being
understood that, in addition to the matters excluded in paragraph
(b)(i) above, such counsel express no belief as to the financial
statements, schedules and other financial and statistical data
included in the Registration Statement or Prospectus or in the
exhibits to the Registration Statement.
In rendering such opinion, such counsel may rely as to matters of
fact, on certificates of the Company and the Significant
Subsidiaries, officers of the Company and the Significant
Subsidiaries, and governmental officials, in which case their opinion
is to state that they are so doing and that the Underwriters are
justified in relying on such opinions or certificates and copies of
each of said opinions or certificates are to be attached to the
opinion.
(ii) An opinion of Ballard, Spahr, Andrews & Ingersoll, local
counsel for the Company, on matters of Maryland law, addressed to the
Underwriters and dated the First Closing Date, or the Second Closing
Date, as the case may be, to the effect that:
<PAGE>
(1) The Company has been duly formed and is validly
existing as a corporation, is in good standing under the laws of
the State of Maryland, and is duly qualified to do business as a
foreign corporation and is in good standing in those
jurisdictions where the conduct of the Company's business
requires it to be qualified, and has the requisite corporate
power and authority to own its Resorts and conduct its business
as described in the Registration Statement;
[(2) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus; all outstanding
shares of Common Stock (including the Common Shares), have been
duly and validly issued, are fully paid and nonassessable, have
been issued in compliance with federal and state securities laws,
were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase any
securities; and the certificates representing the Common Shares
to be delivered hereunder are in due and proper form under
Maryland law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon your
order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Common
Shares represented thereby will be duly authorized and validly
issued, fully paid and nonassessable, will not have been issued
in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities granted under the
laws of the State of Maryland, the Articles of Incorporation or
Bylaws of the Company or any agreement or instrument filed with
the Commission as an exhibit to the Registration Statement; and
will conform in all material respects to the description thereof
contained in the Registration Statement;]
(3) The information set forth in the Prospectus under the
headings "Description of
<PAGE>
Capital Stock", "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws" and "Shares Eligible for Future
Sale" to the extent that such information constitutes matters of
Maryland law or legal conclusions involving Maryland law, has
been reviewed by such counsel and is correct in all material
respects.
(ii) Opinions of Paul, Hastings, Janofsky & Walker and/or
Schreeder, Wheeler & Flint, each a special real estate and timeshare
counsel for the Company, addressed to the Underwriters and dated as of
the First Closing Date, or the Second Closing Date, which opinions
shall state to the effect that (it being understood that such counsel
shall only have to opine as to the laws of the jurisdictions in which
it is duly licensed to pratice law in):
(1) The Company has obtained the material approvals and
permits from the timeshare authority of the state in which the
subject Resort is located ("Home State") necessary to offer for
sale and sell timeshare interests and offer purchase money
financing in connection with such sales ("Home State Approvals")
in accordance with the applicable laws and regulations of the
state in which the Resort is located specifically governing the
marketing and sale of timeshare interests in real property ("Home
State Timeshare Laws");
(2) All of the permits and/or approvals issued by timeshare
authorities of states other than the state where each applicable
Resort is located ("Foreign State") for the offering for sale and
sale of timeshare interests in such Resort (collectively, the
"Foreign State Approvals"), constitute the material approvals and
permits necessary to be issued by such Foreign State to permit
the offering for sale and sale of timeshare interests in such
Resort in accordance with the laws and regulations of the Foreign
State specifically governing the offering for sale and sale of
timeshare interests in real property located outside of the
Foreign State ("Foreign State Timeshare Laws");
(3) To such counsel's knowledge and based upon its review of
certificates and letters from state timeshare authorities, the
Company and other
<PAGE>
pertinent parties (collectively, "Reliance Certificates and
Letters"), the Company has not received any written notice from
any regulatory authority that it is in violation of any
applicable federal or state law or regulation regarding the
offering for sale and sale of timeshare interests in the Existing
Resorts, the violation of which would have a Material Adverse
Effect on the ownership or operation of the Existing Resorts;
(4) To such counsel's knowledge, there are no material
franchises, licenses, leases, contracts, agreements or other
documents (collectively, the "Material Agreements") entered into
by the Company outside the ordinary course of business, which
involve matters relating to the ownership, purchase money
financing and/or use of real property and/or the offering for
sale or sale of timeshare interests in the Existing Resorts,
which are of a character required to be disclosed in the
Registration Statement or to be filed as exhibits to the
Registration Statement which are not disclosed or filed;
(5) To such counsel's knowledge and based upon such
counsel's review of Reliance Certificates and Letters, there are
no real estate or timeshare related governmental actions,
governmental suits or governmental proceedings pending or
threatened against the Company with respect to the business and
property relating to the Existing Resorts except (a) those which
have been disclosed in the Registration Statement, and (b) those
which would not have a Material Adverse Effect;
(6) The consummation by the Company of the transactions
contemplated by the Underwriting Agreement do not require the
consent, approval, authorization, registration or qualification
of (i) any governmental agency or authority of the timeshare
authority of the states where each of the Existing Resorts are
located, (ii) any lender which has a recorded security interest
in the Existing Resorts, (iii) Westin Hotels & Resorts or any
related entities under that certain agreement by and between W &
S
<PAGE>
Hotel L.L.C. and Argosy/Koar Group, Inc., dated May 3, 1996
("Westin Agreement"), (iv) Promus Hotels, Inc. (or any subsidiary
or affiliate of Promus Hotels, Inc.) under any Licensee
Agreements and Management Agreements with Promus Hotels, Inc. (or
any of its subsidiaries or affiliates) (collectively, the
"Embassy License Agreements and Management Agreements"), except
those which have been obtained and are in full force and effect
and those as to which the failure to so obtain would not have a
Material Adverse Effect;
(7) The consummation by the Company of the transactions
contemplated by the Underwriting Agreement as they relate to the
Existing Resorts do not conflict with or result in a material
breach or violation by the Company of: (i) any of the terms and
provisions of any loans which encumber the Existing Resorts, (ii)
any terms or provisions of the Home State Approvals where each of
the Existing Resorts are located; (iii) any terms or provisions
of the Foreign State Approvals; (iv) the Westin Agreement; (v)
the Embassy License Agreements and Management Agreements, or if
such transactions would have constituted such a breach, violation
or default had the necessary consents or approvals not been
obtained, consents or approvals have been obtained and are in
full force and effect;
(8) The owner of each of the Existing Resorts, if required
by law, has obtained a brokerage or sales license from the state
timeshare authority in order to offer purchase money financing in
connection with the sale of timeshare interests in the applicable
Resorts. The owner of each of the Existing Resorts, if required
by law, has obtained a brokerage or sales license from the state
timeshare authority in order to offer for sale and sell timeshare
interests in the State of California or has contracted with a
licensed broker to provide any of the aforementioned services;
and
(9) A statement to the effect that although such counsel is
not passing upon, and does not assume any responsibility for, the
accuracy,
<PAGE>
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus and has not made any
independent check or verification thereof, during the course of
such participation (relying as to the factual matters upon the
Reliance Certificates and Letters), no facts came to the
Counsel's attention that have caused it to believe that the
Registration Statement at the time it became effective and as of
the date hereof or the Prospectus contained an untrue statement
of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; provided, however, that this statement is limited
solely to the statements or omissions relating to (i)
indebtedness secured by the Existing Resorts (it being understood
that the counsel's review of the Registration Statement has been
limited to legal and other non-financial matters with respect
thereto), (ii) ownership of the Existing Resorts (it being
understood that our review thereof has been limited to the review
of certain title reports), (iii) regulation by each Home State
and each Foreign State with respect to the issuance of the Home
State Approvals and the Foreign State Approvals, (iv) the
Property Partnerships' and the Company's contractual
relationships with Promus or Westin, and (v) the statements in
the Prospectus under the caption "Business - Governmental
Regulation," to the extent that such information constitutes
matters of law or legal conclusions as it pertains to the
ownership, operation, sale and
<PAGE>
offering of sale of timeshare interests in the Existing Resorts;
In rendering such opinions, each such counsel may rely as to
matters of local law, on opinions of local counsel, and as to
matters of fact, on certificates of officers of the Company as
applicable, and of governmental officials, in which case their
opinion is to state that they are doing so and certificates and
copies of each of said opinions or certificates are attached to
the opinion.
(iii) Opinion of Schreeder, Wheeler & Flint, in addition to the
opinion set forth above in section 8(c)(ii), as counsel for the
Company in connection with the Merger Agreement, addressed to the
Underwriters and dated as of the First Closing Date, or the Second
Closing Date, which opinions shall state to the effect that:
(1) The Company had the corporate power and authority to
enter into the Merger Agreement and to consummate the
transactions contemplated therein; the Merger Agreement has been
duly and validly authorized by all necessary action by the
Company, has been duly and validly executed and delivered by and
on behalf of the Company, and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be expressed;
<PAGE>
(2) The registration statement and the prospectus filed
with the Commission on November 20, 1996, and the Merger
Agreement were duly and validly authorized by all necessary
action by the Company and conformed in all material respects with
the applicable requirements for registration statements on Form
S-4 under the Act and the Rules and Regulations.
(iv) Such opinion or opinions of O'Melveny & Myers LLP, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case
<PAGE>
may be, with respect to the formation of the Company and other legal
matters relating to this Agreement, the validity of the Common Shares,
the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company shall have
furnished to such counsel such documents and shall have exhibited to
them such papers and records as they may reasonably request for the
purpose of enabling them to pass upon such matters. In connection with
such opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental officials, as
applicable.
(v) A certificate of the Company, executed by the Chairman of
the Board or President and the chief financial or accounting officer
of the Company, dated the First Closing Date or the Second Closing
Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with each of the agreements and satisfied all of the
conditions on its part to be performed or satisfied on or prior
to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the knowledge
of the Company no proceedings for that purpose have been
instituted or are pending or contemplated under the Act;
(3) Each of the respective signers of each certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the knowledge of the Company, the
Registration Statement and the Prospectus and any amendments or
supplements thereto contain all
<PAGE>
statements required to be stated therein; and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided, however, that such certificate does not
require any representation concerning statements in, or omissions
from, the Registration Statement or Prospectus, which are based
upon and conform to information furnished by the Underwriters
pursuant to Section 5 hereof;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as specifically disclosed in or contemplated by the
Prospectus and except for Note Offering, there has not been any
Material Adverse Change or a development involving a Material
Adverse Change; and no legal or governmental action, suit or
proceeding is pending or threatened against the Company, or, to
the knowledge of the Company, any of the Existing Resorts which
would have a Material Adverse Effect; since such dates and except
as so disclosed, the Company has not entered into any verbal or
written agreement or other transaction which is not in the
ordinary course of business, incurred any liability or
obligation, direct, contingent or indirect, made any change in it
capital stock, made any change in its short-term debt or funded
debt or repurchased or otherwise acquired any of the Company's
capital stock which could be reasonably expected to have a
Material Adverse Effect; and the Company has not declared or paid
any dividend, or made any other distribution (other than
dividends or distributions paid to shareholders to satisfy tax
<PAGE>
liabilities), upon its capital stock payable to shareholders of
record on a date prior to the First Closing Date or the Second
Closing Date, as the case may be; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, none of the
Resorts has sustained a material loss or damage by strike, fire,
flood, windstorm, hurricane, typhoon, accident or other calamity
(whether or not insured).
(vi) On the date that this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from E & Y and Arthur
Andersen, as applicable, independent accountants, the first one to be
dated the day of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a Second Closing) to
be dated the Second Closing Date, in form and substance satisfactory
to the Representatives, to the effect that:
(1) E & Y and Arthur Andersen are independent certified
public accountants with respect to the Company within the meaning
of the Act and the Rules and Regulations;
(2) It is their opinion that the financial statements,
historical summaries and any supplementary financial information
and supporting schedule included in the Registration Statement
and the Prospectus examined by them comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Rules and Regulations;
(3) The financial statements of each of the Existing
Resorts for the three years ended December 31, 1995 and the nine
months ended September 30, 1996 and the nine months ended
September 30, 1995, to the extent applicable, were reviewed by
them in
<PAGE>
accordance with the standards established by the American
Institute of Certified Public Accountants and based upon their
review they are not aware of any material modifications that
should be made to such financial statements or historical
summaries for them to be in conformity with generally accepted
accounting principles currently in effect in the United States
and such financial statements comply as to form in all material
respects with the applicable requirements of the Act and the
Rules and Regulations;
(4) Based upon procedures set forth in detail in such
letter, including a reading of the latest available interim
financial statements of the Company and inquiries of officials of
the Company responsible for financial and accounting matters,
nothing has come to their attention which causes them to believe
that:
(a) the unaudited financial information with respect to the
results of operations for and at the end of each of the three
years (or such lesser period, if applicable) in the period ended
December 31, 1995 and any subsequent quarters included in the
Registration Statement under the captions "Summary" and "Selected
Combined Historical Financial Information of the Company" do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations
or are not presented in conformity with generally accepted
accounting principles currently in effect in the United States
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement, or do not agree with the corresponding amounts in the
audited financial statements for each of the years then ended, or
that with respect to the unaudited pro forma financial
statements, such financial statements do not comply as to form in
all material respects with the applicable accounting requirements
of the Act and the Rules and Regulations and the pro forma
adjustments have
<PAGE>
not been properly applied to the historical amounts in the
compilation of such statements, or
(b) at a specified date not more than five days prior to the
date of this Agreement, other than changes resulting from the
offering and sale of the Notes or the Merger Agreement, (i) there
has been any change in the assets or shareholders' equity of the
Company as compared with the amounts shown in the September 30,
1996 balance sheet of the Company included in the Registration
Statement, (ii) there has been any increase in indebtedness or
other liabilities related to the Existing Resorts as compared
with the amounts shown in the September 30, 1995 historical or
pro forma balance sheets related to the Existing Resorts or
during the period September 30, 1996 to a specified date not more
than five days prior to the date of this Agreement, or (iii)
there were any decreases, as compared with the corresponding
period in the preceding year, in combined revenues or net income
of the Existing Resorts, except in all instances for changes,
increases or decreases which the Registration Statement and the
Prospectus disclose have occurred or may occur; and
(5) In addition to the examination referred to in their
opinions and the procedures referred to above, they have carried
out certain specified procedures, not constituting an audit, with
respect to certain amounts, percentages and financial information
which are included in the Registration Statement and Prospectus
and which were specified by you, and have found such amounts,
percentages and financial information to be in agreement with, or
derived from, the relevant accounting, financial and other
records of the Company and each of the Property Partnerships.
(d) The Firm Common Shares and the Option Common Shares shall have
been approved for listing on the Nasdaq National Market, subject to
official notice of issuance, and the NASD, upon review of the terms of the
public offering, shall not have objected to such offering, such terms or
the Underwriters' participation in the same.
<PAGE>
(e) The Company shall have furnished to you such further certificates
and documents as you shall have reasonably requested.
(f) There shall have been delivered to you the Firm Common Shares
and, if any Option Common Shares are purchased, the Option Common Shares in
the manner required pursuant to Section 6 hereof.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to O'Melveny & Myers LLP, counsel for the Underwriters. The Company shall
furnish you with such manually signed or conformed copies of such opinions,
certificates, letters and documents as you request. Any certificate signed by
any officer of the Company and delivered to the Representatives or to counsel
for the Underwriters shall be deemed to be a representation and warranty by the
Company to the Underwriters as to each of the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Stockholders without liability on
the part of any Underwriter, the Company or the Selling Stockholders, except for
the expenses to be paid or reimbursed by the Company pursuant to Sections 8 and
10 hereof and except to the extent provided in Section 12 hereof.
SECTION 10. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 15, or if the sale to the Underwriters of the Common Shares
at the First Closing is not consummated because of any willful refusal,
inability or failure on the part of the Company or any Selling Stockholder to
perform any agreement herein or to comply with any provision hereof without
reasonable justification therefor, the Company agrees to reimburse you and the
other Underwriters upon demand for all out-of-pocket expenses that shall have
been reasonably incurred by you and them in connection with the proposed
purchase and the sale of the Common Shares, including but not limited to fees
and disbursements of counsel relating directly to the offering contemplated by
the Prospectus. Any such termination shall be
<PAGE>
without liability of any party to any other party except that the
provisions of this Section 10, Section 8 and Section 12 shall at all times be
effective and shall apply.
SECTION 11. Effectiveness of Registration Statement. You and the
---------------------------------------
Company will use your and its best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 12. Indemnification. (a) The Company agrees to indemnify
---------------
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act, the Exchange Act or other
federal, state or Canadian statutory laws or regulations, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise out
of or are based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law and will reimburse each
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any
<PAGE>
Preliminary Prospectus, the Prospectus or as a result of or any amendment or
supplement thereto in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 5 hereof; and provided the
indemnity agreement contained in this Section 12(a) shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Common Shares concerned
to the extent that any such loss, claim, damage liability or expense of such
Underwriter results from the fact that a copy of the Prospectus was not sent or
given to such person at or prior to the written confirmation of sale of such
Common Shares to such person as required by the Act. In addition to their other
obligations under this Section 12(a) the Company agrees that they will reimburse
expenses as provided in this Section 12(a) as incurred, but no less frequently
than quarterly, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligations to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America NT&SA, San Francisco, California (the
"Prime Rate"). Any such interim reimbursement payments which are not made to an
Underwriter within 30 days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Act, against any losses, claims, damages, liabilities or expenses to which
the Company, any such director,
<PAGE>
officer, or controlling person may become subject under the Act, the Exchange
Act or other federal or state statutory laws or regulations, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 5 hereof; and will reimburse the Company, or any such director, officer
or any controlling person of the Company for any legal and other expense
reasonably incurred by the Company, any such director, officer or controlling
person of the Company in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. In addition to its other obligations under this Section 12(b), each
Underwriter severally agrees that it will reimburse expenses as provided in this
Section 12(b) as incurred, but no less frequently than quarterly,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters, obligation to reimburse the Company (and, to
the extent applicable, each officer, director or controlling person of the
Company) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer, director or
controlling person of the Company) shall promptly return it to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in
<PAGE>
addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for contribution or
otherwise under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel representing all indemnified parties who are parties to such
action or set of related actions) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a
<PAGE>
reasonable time after notice of commencement of the action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) If the indemnification provided for in this Section is required by
its terms, but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under Sections 12(a), 12(b)
or 12(c) hereof in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company and the Underwriters shall be deemed to be in the same proportion,
in the case of the Company as the total price paid to the Company for the Common
Shares sold by it to the Underwriters (net of underwriting commissions, but
before deducting expenses), and in the case of the Underwriters as the
underwriting commissions received by them bears to the total of such amounts
paid to the Company and received by the Underwriters as underwriting
commissions. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact or the inaccurate or the alleged inaccurate representation
and/or warranty relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the
<PAGE>
limitations set forth in Section (c) of this Section, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section (c) of this
Section with respect to notice of commencement of any action shall apply if a
claim for contribution is to be made under this Section (d); provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section (c) of this Section for purposes of
indemnification. The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section, no
Underwriter shall be required to contribute any amount in excess of the amount
of the total underwriting commissions received by such Underwriter in connection
with the Common Shares underwritten by it and distributed to the public. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section are several in proportion to their
respective underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 12(a) or 12(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 12(a) and 12(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 12(a) or 12(b) hereof.
<PAGE>
SECTION 13. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company and each of the Selling Stockholders
to sell and deliver the Common Shares hereunder, and of each Underwriter to
purchase the Common Shares in the manner as described herein, that, except as
hereinafter in this Section provided, each of the Underwriters shall purchase
and pay for all the Common Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in its or
their obligations to purchase the Common Shares hereunder on either the First or
Second Closing Date and the aggregate number of Common Shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase on such
Closing Date does not exceed 10% of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Common Shares which such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of Common Shares
with respect to which such default occurs is more than 10% of the total number
of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, and arrangements satisfactory to the Representatives and the
Company for the purchase of such Common Shares or Notes by other persons are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriters, the Company or the
Selling Stockholders except for the expenses to be paid by the Company and the
Selling Stockholders pursuant to Section 8 hereof and except to the extent
provided in Section 12 hereof.
In the event that the Common Shares to which a default relates are to
be purchased by the non-defaulting Underwriters or by another party or parties,
the Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, for not more than
five business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
<PAGE>
SECTION 14. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 8, 10, 12, 15 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 14, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering or
(ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 15. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company and the Selling
Stockholders to any Underwriter (except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 8 and 10 hereof and except
to the extent provided in Section 12 hereof) or of any Underwriter to the
Company and the Selling Stockholders (except to the extent provided in
Section 12 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over
<PAGE>
the counter market by the NASD, or trading in securities generally shall
have been suspended on either such Exchange or in the over the counter
market by the NASD, or a general banking moratorium shall have been
established by federal, New York or California authorities; (ii) if an
outbreak of major hostilities or other national or international calamity
or any substantial change in political, financial or economic conditions
shall have occurred or shall have accelerated or escalated to such an
extent, as, in the judgment of the Representatives, to affect adversely the
marketability of the Common Shares; (iii) if any adverse event shall have
occurred or shall exist which makes untrue or incorrect in any material
respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration
Statement or Prospectus but should be reflected therein in order to make
the statements or information contained therein not misleading in any
material respect; or (iv) if there shall be any action, suit or proceeding
pending or threatened, or there shall have been any development involving
particularly the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in the reasonable
judgment of the Representatives, may materially and adversely affect the
Company's business or earnings and makes it impracticable or inadvisable to
offer or sell the Common Shares. Any termination pursuant to this Section
15(b) shall be without liability on the part of any Underwriter to the
Company or the Selling Stockholders or on the part of the Company or the
Selling Stockholder to any Underwriter (except for expenses to be paid or
reimbursed by the Company and the Selling Stockholders pursuant to Sections
8 and 10 hereof and except to the extent provided in Section 12 hereof).
SECTION 16. Failure of the Selling Stockholders to Sell and Deliver.
--------------------------------------------------------
If any of the Selling Stockholders shall fail to sell and deliver to the
Underwriters the Common Shares to be sold and delivered by such Selling
Stockholder under the terms of this Agreement, then the Underwriters may at
their option, by written notice from you to the Company and such Selling
Stockholder, either (i) terminate this Agreement without any liability on the
part of any Underwriter or, except as provided in Sections 8, 10 and 12 thereof,
the Company or the Selling Stockholders, or (ii) purchase the shares which the
Company and the non-defaulting Selling Stockholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a
<PAGE>
failure by a Selling Stockholder to sell and deliver as referred to in this
Section, either you or the company shall have the right to postpone the Closing
Date for a period not exceeding seven business days in order that the necessary
changes in the Registration Statement, the Prospectus and any other documents,
as well as any other arrangements, may be effected.
SECTION 17. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of the Company's officers, of the Selling
Stockholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, or the
Selling Stockholders as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 18. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered,
telecopied or telegraphed and confirmed to Montgomery Securities at 600
Montgomery Street, San Francisco, California 94111, Telecopier: (415) 249-
5513, Attention: Karl L. Matthies, and Goldman, Sachs & Co. at 85 Broad Street,
New York, New York 10044, Telecopier: (212) 902-3000, Attention: John S.
Barakat with a copy to O'Melveny & Myers LLP, Embarcadero Center West 275
Battery Street, San Francisco, California 94111, Telecopier: (415) 984-8701,
Attention: Peter T. Healy, Esq.; and if sent to the Company or the Selling
Stockholders shall be mailed, delivered or telegraphed and confirmed to the
Company or the Selling Stockholder, as applicable at 5933 West Century
Boulevard, Suite 210, Los Angeles, California 90045 Telecopier: (310) 348-1000
Attention: Andrew D. Hutton with a copy to Latham & Watkins, 633 W. Fifth
Street, Suite 4000, Los Angeles, California 90071 Telecopier: (213) 891-8763,
Attention: Edward Sonnenschein, Jr., Esq. The Company, the Selling Stockholder
or you may change the address for receipt of communications hereunder by giving
notice to the others.
SECTION 19. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 13 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 13, and in each case their
respective successors, personal representatives and assigns, and no other
<PAGE>
person will have any right or obligation hereunder. No such assignment shall
relieve any party of its obligations hereunder. The term "successors" shall not
include any purchaser of the Common Shares as such from any of the Underwriters
merely by reason of such purchase.
SECTION 20. Underwriters' Representatives. You will act as
-----------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you, as
Representatives, will be binding upon all of the Underwriters.
SECTION 21. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other section, paragraph or
provision hereof. If any section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 22. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 23. Knowledge. As used in this Agreement, the term knowledge
---------
or best knowledge on the part of an entity shall include the knowledge of such
entity's officers and any other employees with managerial responsibilities and
such entity shall only make such statement after conducting a diligent
investigation on the subject matter thereof.
SECTION 24. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
<PAGE>
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholder and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Stockholders and
the several Underwriters, including you, all in accordance with its terms.
[Signature Page to Follow]
<PAGE>
Very truly yours,
SIGNATURE RESORTS, INC.
By:___________________________
Its______________________
______________________________
As Attorney-In-Fact for each of the Selling
Stockholders named in the attached Schedule A
The foregoing Underwriting Agreement is hereby
confirmed and accepted by us in San Francisco,
California as of the date first above written.
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:________________________
Managing Director
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares
Selling Stockholder to be Sold
- ------------------- ----------------
<S> <C>
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Amount of
Securities
to be
Underwriter Purchased
- ----------- ---------
<S> <C>
Montgomery Securities [_______]
Goldman, Sachs & Co. [_______]
Smith Barney Inc. [_______]
</TABLE>
<PAGE>
EXHIBIT 1.2
$100,000,000
SIGNATURE RESORTS, INC.
____ CONVERTIBLE SUBORDINATED NOTES DUE 2007
UNDERWRITING AGREEMENT
----------------------
___________, 1997
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Signature Resorts, Inc., a Maryland
------------
corporation (the "Company"), proposes to issue and sell an aggregate of
$100,000,000 principal amount of its ____% Convertible Subordinated Notes Due
2007 (the "Firm Notes") to be issued under an indenture, to be dated as of
__________, 199_ (the "Indenture"), between the Company and Norwest Bank
Minnesota, National Association as Trustee (the "Trustee"), to the several
underwriters named in Schedule A annexed hereto (the "Underwriters") for whom
you are acting as representatives (the "Representatives"). In addition, the
Company proposes to grant to the Underwriters an option to purchase up to an
aggregate of $15,000,000 principal amount of the Securities (the "Option Notes")
as provided in Section 5 hereof. The Firm Notes and, to the extent such option
is exercised, the Option Notes are hereinafter collectively referred to as the
"Notes."
Concurrently with the offering of the Notes, the Company proposed to
issue and sell 1,600,000 shares of its authorized but unissued common stock,
$.01 par value (the "Common Stock"), and several stockholders of the Company
(the "Selling Stockholders") propose to sell 1,400,000 shares of the Company's
issued and outstanding Common Stock. (the "Common Shares")
You have advised the Company that the Underwriters propose to make a
public offering of their respective portions of the Notes on the effective date
of the Registration Statement hereinafter referred to, or as soon thereafter as
in your judgment is advisable.
1
<PAGE>
The Company hereby confirms its respective agreements with respect to
the purchase of the Notes by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Notes has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder and has been filed
with the Commission. The Company has also taken such actions as are
necessary to qualify the Indenture under the Trust Indenture Act. There
have been delivered to you two signed copies of such registration statement
and any amendments thereto, together with two copies of each exhibit filed
therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for
each of the Underwriters. The Company will next file with the Commission
one of the following: (i) prior to effectiveness of such registration
statement, a further amendment thereto, including the form of final
prospectus, or (ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations. As filed, such amendment and form of
final prospectus, or such final prospectus, shall include all Rule 430A
Information (as hereinafter defined) and, except to the extent that you
shall agree in writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the
extent not completed at such date and time, shall contain only such
specific additional information and other changes (beyond that contained in
the latest Preliminary Prospectus) as the Representatives shall have
approved.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date, shall also mean such
registration statement as so amended; provided, however, that such term
shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations. The term
"Preliminary Prospectus" shall mean any preliminary
2
<PAGE>
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used
in this Agreement shall mean the prospectus relating to the Notes in the
form in which it is first filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information"
means information with respect to the Notes and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act, the
Rules and Regulations and the Trust Indenture Act and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time
the Registration Statement becomes effective, and at all times subsequent
thereto up to and including each Closing Date (as hereinafter defined), the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, will contain all material statements and information
required to be included therein by the Act, the Rules and Regulations and
the Trust Indenture Act and will in all material respects conform to the
requirements of the Act, the Rules and Regulations and the Trust Indenture
Act, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this Section
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any
such amendment or supplement in reliance upon and in conformity with
written information furnished pursuant to Section 3 of this Agreement to
the Company by or on behalf of any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof.
3
<PAGE>
(c) The Company has been duly formed and is validly existing as a
corporation, is in good standing under the laws of the State of Maryland,
with full power and authority (corporate and other) to conduct its business
as currently conducted or as described in the Prospectus.
(d) Each of the Significant Subsidiaries (as defined in the Indenture)
has been duly formed and is validly existing as a partnership, limited
liability company or corporation, as applicable, in good standing under the
laws of its jurisdiction of formation, with full power and authority
(partnership and other) to own and lease its properties and conduct its
respective businesses as currently conducted or described in the
Prospectus.
(e) The Company and each of the Significant Subsidiaries are in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders material to the
conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of the Significant Subsidiaries are
duly qualified to do business and in good standing as a foreign
corporation, partnership or limited liability company, as applicable, in
each jurisdiction in which the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
and in good standing would not have a material adverse effect on the
condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and the Significant Subsidiaries,
considered as an entity (a "Material Adverse Effect"); and to the Company's
knowledge no proceeding has been instituted or threatened in any such
jurisdiction revoking, limiting or curtailing, or seeking to
4
<PAGE>
revoke, limit or curtail, such power and authority or qualification.
(f) The Company has an authorized and outstanding capital stock as
set forth under the column captioned "Actual" under the heading
"Consolidated Capitalization" in the Prospectus; the issued and outstanding
shares of common stock, par value $.01 per share of the Company (the
"Common Stock"), have been duly authorized and validly issued, are fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, are duly listed on the Nasdaq National Market, were
not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities and conform to the
description thereof contained in the Registration Statement and the
Prospectus. All of the shares of Common Stock issuable upon conversion of
the Notes have been duly authorized and duly reserved for issuance upon
such conversion and, when issued upon conversion of the Notes pursuant to
the terms of the Indenture, will be validly issued and outstanding, fully
paid and nonassessable with no personal liability attached to the ownership
thereof. None of the shares of Common Stock issuable upon conversion of the
Notes when delivered will be subject to any lien, claim, encumbrance,
restriction upon voting or transfer, preemptive right or any other claim of
any third party except such as are described in the Prospectus. Except as
disclosed in or contemplated by the Prospectus and the financial statements
of the Company and the related notes thereto, as of the First Closing Date
the Company does not have outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase such
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock, partnership interests or
limited liability company interests, as the case may be, or any such
options, rights, convertible securities or obligations. The description of
the Company's share option, share bonus and other share plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(g) The Notes have been duly authorized and, when issued, delivered
and paid for in the manner set forth in this Agreement, will be duly
executed, authenticated and delivered and will constitute valid and legally
binding obligations of the Company entitled to the benefits provided by the
Indenture under which they are to be issued, which will be in substantially
the form filed as an exhibit to the Registration Statement subject, as to
enforcement, to bankruptcy, insolvency, fraudulent transfer, moratorium,
5
<PAGE>
reorganization and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles; the Indenture
has been duly authorized and duly qualified under the Trust Indenture Act
and, when executed and delivered by the Company and the Trustee, the
Indenture will constitute a valid and legally binding instrument
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles, and the Notes and the Indenture
will conform to the descriptions thereof in the Prospectus.
(h) The Company has full legal right, power and authority to enter
into this Agreement, the Notes and the Indenture and perform the
transactions contemplated hereby and thereby. The Company has all necessary
corporate power and authority to issue the Common Stock issuable upon
conversion of the Notes. This Agreement, the Notes and the Indenture have
been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company in accordance with its terms.
The making and performance of this Agreement, the Notes and the Indenture
by the Company and the consummation of the transactions herein and therein
contemplated (including the issuance of Common Stock upon the conversion of
the Notes), will not violate any provisions of any partnership agreement,
certificate of partnership, charter, bylaws or other organizational
documents, as applicable, of the Company or any of the Significant
Subsidiaries and will not conflict with, result in the breach or violation
of, or constitute, either by itself or upon notice or the passage of time
or both, a default under (i) any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the
Company or any of the Significant Subsidiaries is a party or by which the
Company, any of the Significant Subsidiaries or any of the Existing Resorts
(as defined in the Prospectus) may be bound or affected or (ii) any statute
or any authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other governmental
body applicable to the Company, any of the Significant Subsidiaries or any
of the Existing Resorts, in each case except as would not have a Material
Adverse Effect. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body is
required, including the satisfaction of any requirements pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for the
execution and delivery of this Agreement, the Notes and the Indenture or
the consummation of the transactions contemplated by this Agreement and the
Indenture, except for
6
<PAGE>
compliance with the Act, the Exchange Act, the Trust Indenture Act, the
Blue Sky and Canadian securities laws applicable to the public offering of
the Notes by the several Underwriters, the clearance of such offering with
the National Association of Securities Dealers, Inc. (the "NASD") and
except for any such consent, approval, authorization or other order as has
been or will be obtained prior to the First Closing Date.
(i) Ernst and Young LLP ("E & Y") and Arthur Andersen LLP ("Arthur
Andersen") who have expressed their opinion with respect to the financial
statements and schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act
and the Rules and Regulations.
(j) The consolidated financial statements of the Company, together
with the related notes thereto, set forth in the Registration Statement and
the Prospectus fairly present the financial condition of such entities as
of the dates indicated and the results of operations and changes in
financial position for the periods presented. The pro forma financial
statements, included in the Registration Statement and the Prospectus
comply in all material respects with the applicable requirements of Rule
11-02 of Regulation S-X of the Commission and the pro forma adjustments
have been properly applied to the historical amounts in the compilation of
such statements. Such statements, schedules and related notes have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis as certified by the independent accountants
named in Section 2(i). No other financial statements or schedules are
required to be included in the Registration Statement. The selected
financial data set forth in the Prospectus under the captions "Consolidated
Capitalization", "Selected Combined Historical Financial Information of the
Company" and "Summary Consolidated Historical and Pro Forma Financial
Information" fairly present the information set forth therein on the basis
stated in the Registration Statement.
(k) Except as disclosed in the Prospectus, the Company is not in
violation of any of its articles of organization or by-laws, and is not in
breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound, or to which any of the
property or assets of the Company is subject except for any such violation,
breach or default that could not have a Material Adverse Effect.
(l) There are no contracts or other documents required to be described
in the Registration Statement or to be filed
7
<PAGE>
as exhibits to the Registration Statement by the Act or by the Rules and
Regulations which have not been described or filed as required.
(m) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which
the Company or any of the Significant Subsidiaries are a party or of which
any Resort owned or leased by Company or Signficant Subsidiaries is the
subject, or related to environmental or discrimination matters, which
actions, suits or proceedings could reasonably be anticipated to
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or have a Material Adverse
Effect on the Company. The Company is not a party or subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body.
(n) Except as set forth in the Prospectus, the Company or the
Significant Subsidiaries have good and marketable title to all of the
Existing Resorts, subject to no lien, mortgage, pledge, charge or
encumbrance or any kind except those reflected in the financial statements
or elsewhere in the Prospectus. Except as disclosed in the Prospectus, the
Company and each of the Significant Subsidiaries owns or leases all such
properties as are necessary to operate the Existing Resorts as now
conducted or as proposed to be conducted, except with respect to the Poipu
Resort and the San Luis Bay intervals.
(o) From September 30, 1996 through the date hereof, and except as
described in or specifically contemplated by
8
<PAGE>
the Prospectus: (i) the Company has not incurred any material liabilities
or obligations, indirect, direct or contingent, or entered into any
material verbal or written agreement or other transaction which is not in
the ordinary course of business or which could result in a material
reduction in the future earnings of the Company; (ii) the Company has not
sustained any loss or interference with its respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether
or not covered by insurance, that would have a Material Adverse Effect;
(iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock, shares or interests, as
applicable (other than such dividends or distributions paid to shareholders
to satisfy tax liabilities) and the Company is not in arrears or default in
the payment of principal or interest on any outstanding material debt
obligations; (iv) there has not been any change (excluding transfers) in
the capital stock (other than the sale of the Common Shares under this
Agreement) of the Company, or indebtedness material to the Company (other
than in the ordinary course of business); and (v) there has not been any
material adverse change in the condition (financial or otherwise),
business, properties, or results of operations of the Company and its
Subsidiaries, considered as one entity (a "Material Adverse Change");
provided that the representation and warranty contained in this section
2(o) shall not apply to either the offering and sale of the Common Shares
or the Company's performance and execution of the registration statement
([File No. 333-06027), dated as of _____, 1996, the prospectus attached
thereto, the underwriting agreement, dated as of August 14, 1996, by and
between the Company and the Representatives or the consummation (or the
effects thereof) of the transactions contemplated therein.
(p) Except as specifically disclosed in or specifically contemplated
by the Prospectus, the Company will have sufficient trademarks, trade
names, patent rights, copyrights, licenses or other similar rights and
proprietary knowledge (collectively, "Intangibles"), approvals and
governmental authorizations to conduct its businesses; the expiration of
any Intangibles, approvals or governmental authorizations will not have a
Material Adverse Effect; and the Company has no knowledge of any material
infringement by it or any of the Significant Subsidiaries of any
Intangibles, and there is no claim being made against the Company or any of
the Significant Subsidiaries regarding any Intangible or other infringement
which could have a Material Adverse Effect.
(q) Neither the Company nor any of the Significant Subsidiaries has
been advised, or has reason to believe, that the Company or any of the
Significant Subsidiaries is not conducting its businesses in
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compliance with all applicable laws, rules and regulations of the
jurisdictions in which any of them is, including, without limitation, all
applicable local, state and federal environmental laws and regulations, in
each case except as would not have a Material Adverse Effect.
(r) The Company and each of the Significant Subsidiaries has
filed all necessary federal, state and foreign income and franchise tax
returns and has paid all taxes shown as due thereon; and the Company has no
knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company in each case except as would not have a
Material Adverse Effect.
(s) [Intentionally omitted.]
(t) Neither the Company nor any of the Significant Subsidiaries has at
any time during the last five years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any
contribution in violation of law or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(u) Neither the Company nor any of the Significant Subsidiaries has
taken or will take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Notes.
(v) The Company and the Significant Subsidiaries have and will
maintain liability, property and casualty insurance (insured by insurers of
recognized financial responsibility) in favor of the Company, or the
Significant Subsidiaries with respect to each of the Existing Resorts
(except with respect to the Poipu Resort, such insurance therefor being
obtained and/or maintained by the Poipu Partnership), in an amount and on
such terms as is reasonable and customary for businesses of
10
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the type proposed to be conducted by the Company, including, among other
things, insurance against theft, damage, destruction and acts of vandalism.
The Company has not received from any insurance company notice of any
material defects or deficiencies affecting the insurability of any such
Resort.
(w) Title insurance in favor of the Company or the Significant
Subsidiaries, is in force with respect to each of the Existing Resorts in
an amount reasonably acceptable to the Representatives (except with respect
to the St. Maarten Resorts).
(x) The mortgages and deeds of trust encumbering the Existing Resorts
and the Merger Properties are not convertible nor does the Company hold a
participating interest therein and such mortgages and deeds of trust are
not cross-defaulted or cross-collateralized to any Existing Resort not to
be owned directly or indirectly by the Company.
(y) The Company and each of the Significant Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local
rules, laws and regulations relating to the protection of human health and
safety, the environment or any Hazardous Material (as hereinafter defined)
("Environmental Laws"), (ii) has received, or will have received, as of the
Closing Date, as the case may be, all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) is or will be, as of the Closing Date, as
the case may be, in compliance with all terms and conditions of any such
permit, license or approval, in each case except as would not have a
Material Adverse Effect. As used herein, "Hazardous Material" shall mean
(a) any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"),
(b) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (c) any petroleum or petroleum product, (d) any
polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous,
dangerous, or toxic chemical, material, waste or substance regulated under
or within the meaning of any other Environmental Law.
(z) To the Company's knowledge, there is no liability, alleged
liability or potential liability (including, without limitation, liability,
alleged liability or potential
11
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liability for investigatory costs, cleanup costs, governmental response
costs, natural resources damages, property damages, personal injuries or
penalties), of the Company arising out of, based on or resulting from (a)
the presence or release into the environment of any Hazardous Material at
any location, whether or not owned by the Company, or (b) any violation or
alleged violation of any Environmental Law, which liability, alleged
liability or potential liability is required to be disclosed in the
Registration Statement, other than as disclosed therein.
(aa) The Company is not, nor will it conduct its business in a manner
in which it would become an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(bb) The assets of neither the Company nor any of the Significant
Subsidiaries constitute, nor will such assets, as of the Closing Date,
constitute "plan assets" under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
(cc) The Company and each of the Significant Subsidiaries maintains
and will maintain a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain accountability for assets; (iii) access to financial and
corporate books and records is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(dd) Neither the Company nor any of the Significant Subsidiaries has
incurred any liability for a fee, commission or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement other than as disclosed in the
Registration Statement.
(ee) [Intentionally omitted.]
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(ff) To the Company's knowledge, no labor problem exists or is
imminent with respect to the employees of any of the Existing Resorts, the
Company or any of the Significant Subsidiaries which could have a Material
Adverse Effect.
(gg) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company, as the case may
be, as to the matters covered thereby.
(hh) The Company is in compliance with all federal, state, local and
foreign laws and regulations regarding the marketing, offers to sell and
sales of vacation intervals in each state in which the Company is doing
business, including but not limited to the Federal Trade Commission Act,
Regulation Z (the truth-in-lending act), Equity Opportunity Credit Act and
Regulation B, Interstate Land Sales Full Disclosure Act, Real Estate
Standards Practices Act, Telephone Consumer Protection Act, Telemarketing
and Consumer Fraud and Abuse Prevention Act, Fair Housing Act and Civil
Rights Acts of 1964 and 1968, in each case except as would not have a
Material Adverse Effect. The Company has filed all required documents and
supporting information in compliance with federal, state, local and foreign
laws and regulations, and the Company is in compliance with all licensure,
anti-fraud, telemarketing, price, gift and sweepstakes and labor laws to
which it is or may become subject, in each case except as would not have a
Material Adverse Effect. The Company, or entities all of the ownership
interests in which are directly or indirectly owned by the Company, has, or
upon the First Closing Date will have, all permits and licenses which are
required to sell vacation intervals in each state and foreign jurisdiction
where it conducts business, in each case except as would not have a
Material Adverse Effect.
(ii) Except as set forth in the Prospectus, no person has an option or
right of first refusal to purchase all or part of any of the Existing
Resorts (other than the Poipu Resort), or any interest therein. Each of the
Existing Resorts complies with all applicable codes, laws and regulations
(including, without limitation, building and zoning codes and laws relating
to handicapped access), except as would not have a Material Adverse Effect.
The Company has no knowledge of any pending or threatened condemnation
proceedings, zoning changes, or other proceedings or actions that will in
any manner affect the size of, number of vacation intervals planned for,
the use of any improvements on, or access to, the Existing Resorts.
(jj) To the Company's knowledge, no dispute exists or is imminent
between the Company and Promus Hotels, Inc. or
13
<PAGE>
between the Company and Westin Hotels & Resorts and no officer or director
of the Company has any agreement or understanding (verbally or in writing)
with Westin Hotels & Resorts except as set forth in the Prospectus.
(kk) The Common Stock into which the Notes are convertible have been
approved for listing on the NASDAQ National Market, subject to notice of
official issuance.
(ll) The Company has full legal right, power and authority to enter
into the Merger Agreement (as defined in the Prospectus) and perform the
transactions contemplated thereby. The Merger Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid
and binding obligation of the Company in accordance with its terms. The
making and performance of the Merger Agreement by the Company and the
consummation of the transactions therein contemplated, will not violate any
provisions of any partnership agreement, certificate of partnership,
charter, bylaws or other organizational documents, as applicable, of the
Company or any of the Significant Subsidiaries and will not conflict with,
result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under (i) any
agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company or any of the Significant
Subsidiaries is a party or by which the Company, any of the Significant
Subsidiaries or any of the Existing Resorts may be bound or affected or
(ii) any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company, any of the Significant
Subsidiaries or any of the Existing Resorts, in each case except as would
not have a Material Adverse Effect. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required, including the satisfaction of any
requirements pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, for the execution and delivery of the Merger Agreement
or the consummation of the transactions contemplated by the Merger
Agreement, except for compliance with the Act, the Exchange Act, the Blue
Sky and Canadian securities laws applicable to the public offering of the
Common Shares by the several Underwriters, the clearance of such offering
with the National Association of Securities Dealers, Inc. (the "NASD")
approval, authorization or other order as has been or will be obtained
prior to the First Closing Date.
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[(mm) The Company has received from its independent certified public
accountants a letter opining that the Merger Agreement and the consummation
of the transactions contemplated therein will qualify for pooling of
interest treatment in accordance with Opinion No. 16 of the Financial
Accounting Principles Board.]
SECTION 3. [Intentionally omitted.]
15
<PAGE>
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company by and on behalf of the Underwriters for use in connection with
the preparation of the Registration Statement and the Prospectus and is correct
in all material respects. The Representatives represent and warrant that they
have been authorized by each of the other Underwriters as the Representatives to
enter into this Agreement on their behalf and to act for each Underwriter in the
manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Notes. On the basis of the
------------------------------------
representations, warranties and agreements set forth herein, and subject to the
terms and conditions set forth herein, the Company agrees to issue and sell to
the Underwriters an aggregate of $100,000,000 principal amount of the Firm
Notes; each Underwriter agrees, severally and not jointly, to purchase
16
<PAGE>
from the Company the respective principal amount of Firm Notes set forth
opposite the name of such Underwriter in Schedule A annexed hereto. The
purchase price for the Firm Notes to be paid by the several Underwriters to the
Company shall be _____% of the principal amount thereof.
Delivery of certificates for the Firm Notes to be purchased by the
Underwriters and payment therefor shall be made at such place as set forth below
at such time and date, not later than the third full business day following the
first date that any of the Notes are released by you for sale to the public, as
you shall designate by at least 48 hours prior notice to the Company (or at such
other time and date, not later than one week after such third full business day
as may be agreed upon by the Company and the Representatives) (the "First
Closing Date"); provided, however, that if the Prospectus is at any time prior
to the First Closing Date recirculated to the public, the First Closing Date
shall occur upon the later of the third full business day following the later of
the first date that any of the Notes are released by you for sale to the public
and the date that is 48 hours after the date that the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Notes shall be made by or on
behalf of the Company to you, for the respective accounts of the Underwriters
against payment by you, for the accounts of the several Underwriters, by wire
transfer of immediately available funds to the order of the Company or other
agent designated by the Company. The Notes shall be registered in such names
and denominations as you shall have requested at least two full business days
prior to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location in
New York, New York or such other location, as may be designated by you. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements set forth herein, and subject to the terms and conditions set forth
herein, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of $15,000,000 principal
amount of the Option Notes at the purchase prices to be paid for the Firm Notes,
for use solely in covering any over-allotments made by you for the account of
the Underwriters in the sale and distribution of the Firm Notes. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the first date that any of the Notes are released by you for sale
to the public, upon written notice by you to the Company setting forth the
aggregate number of Option Notes as to which the Underwriters are exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and place at which such certificates will
17
<PAGE>
be delivered. Such Option Notes shall be purchased for the account of each
Underwriter in the same proportion as the principal amount of Firm Notes set
forth opposite such Underwriter's name on Schedule A hereto bears to the total
amount of Firm Notes (subject to adjustment by the Underwriters to round
purchases to the nearest $1,000 principal amount). Such time of delivery (which
may not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but if at any time other than
the First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. References herein to
"Closing Date" shall mean the First Closing Date and/or the Second Closing Date,
as the context requires. The Option Notes will be made available for checking
and packaging on the business day preceding the Second Closing Date at a
location in New York, New York or such other location, as may be designated by
you. Payment for the Option Notes shall be the same as for the Firm Notes
purchased from the Company as specified in the two preceding paragraphs. At any
time before lapse of the option, you may cancel such option by giving written
notice of such cancellation to the Company. If the option is cancelled or
expires unexercised in whole or in part, the Company will deregister under the
Act the number of Option Notes as to which the option has not been exercised.
You have advised the Company that each Underwriter has authorized you
to accept delivery of its Notes, to make payment and to issue a receipt
therefor. You, individually and not as the Representatives of the Underwriters,
may (but shall not be obligated to) make payment for any Notes to be purchased
by any Underwriter whose funds shall not have been received by you by the First
Closing Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Notes as soon
after the effective date of the Registration Statement as in the judgment of the
Representatives is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and
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<PAGE>
Regulations, or the filing of the Prospectus is otherwise required under
Rule 424(b) of the Rules and Regulations, the Company will file the
Prospectus, properly completed, pursuant to the applicable paragraph of
Rule 424(b) of the Rules and Regulations within the time period prescribed
and will provide evidence satisfactory to you of such timely filing. The
Company will promptly advise you in writing (i) of the receipt of any
comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus
or for additional information, (iii) when the Registration Statement shall
have become effective and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose. If the Commission
shall enter any such stop order at any time, the Company will use its best
efforts to obtain the lifting of such order at the earliest possible
moment. The Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not been
furnished with a copy a reasonable time prior to such filing or to which
you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or
advisable to enable the several Underwriters to continue the distribution
of the Notes and will use its best efforts to cause the same to become
effective as promptly as possible. The Company will fully and completely
comply with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in reliance
upon such Rule.
(c) If at any time within the applicable period referred to in Section
10(a)(3) of the Act or Rule 174 of the Rules and Regulations during which a
prospectus relating to the Notes is required to be delivered under the Act
any event occurs, as a result of which the Prospectus, including any
amendments or supplements, would include an untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is
necessary at any time to amend the Prospectus, including any amendments or
supplements, to comply with the Act or the Rules and Regulations, the
Company will promptly advise you thereof and will promptly prepare and file
with the Commission, at its own expense, an amendment or supplement which
will
19
<PAGE>
correct such statement or omission or an amendment or supplement which will
effect such compliance and will use its best efforts to cause the same to
become effective as soon as possible; and, in case any Underwriter is
required to deliver a prospectus after the applicable time period, the
Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act and Rule 174 of the Rules
and Regulations, as applicable.
(d) As soon as practicable, but not later than 45 days (or 90 days if
such quarter is the fiscal year end) after the end of the first quarter
ending after one year following the effective date of the Registration
Statement (as defined in Rule 158(c) of the Rules and Regulations), the
Company will make generally available to its security holders an earnings
statement (which need not be audited) covering a period of 12 consecutive
months beginning after the effective date of the Registration Statement
which will satisfy the provisions of the last paragraph of Section 11(a) of
the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the applicable period referred to in
Section 10(a)(3) of the Act or Rule 174 of the Rules and Regulations, will
furnish to you or mail to your order copies of the Registration Statement,
the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in
such quantities as you may reasonably request, for the purposes
contemplated by the Act and the Rules and Regulations.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Notes for sale under (or obtain exemptions from the
application of) the Blue Sky and Canadian securities laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications, registrations and exemptions in effect so
long as reasonably required for the distribution of the Notes, except that
the Company will not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not presently qualified or where it would be subject to taxation as a
corporation. The Company will advise you promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Notes for offering; sale or trading in any jurisdiction or any initiation
or threat of any proceeding for any such purpose, and in the event of the
issuance of
20
<PAGE>
any order suspending such qualification, registration or exemption, the
Company, with your cooperation, will use its best efforts to obtain the
withdrawal thereof.
(g) During the period of five years after the date of this Agreement,
the Company will furnish to the Representatives and their counsel and, upon
request of the Representatives, to each of the other Underwriters: (i) as
soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, shareholders' equity
and cash flows for the year then ended and the opinion thereon of the
Company's independent public accountants; (ii) as soon as practicable after
the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common
Stock.
(h) During the period of 90 days after the first date that any of the
Notes are released by you for sale to the public, without your prior
written consent (which consent may be withheld at your sole discretion),
the Company will not, other than as disclosed in the Prospectus, issue,
offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities convertible into or
exchangeable with its Common Stock or other equity security of the Company,
except, in each case, to grant options or to sell shares of Common Stock
pursuant to the Company's 1996 Equity Participation Plan or the Company's
Employee Stock Option Plan, each as described in the Prospectus, to grant
options or sell Common Stock in connection with the offering and sale of
the Common Shares or to grant options or to sell or issue shares of Common
Stock in connection wiht the Merger Agreement.
(i) The Company will apply the net proceeds of the sale of the Notes
sold by it in accordance with the statements under the caption "Use of
Proceeds" in the Prospectus.
(j) The Company will use its best efforts to cause the Notes to be
sold by it to be listed as a national market system security on the Nasdaq
National Market.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
21
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SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Notes (including all printing and engraving costs), (ii) all
fees and expenses of the Trustee and any agent of the Trustee, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Notes to the Underwriters, (iv) all fees and expenses of the
Company's counsel and the Company's independent accountants incurred in
connection the offering of the Notes, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire,
the Underwriters' Power of Attorney and the preliminary and final Blue Sky
memoranda, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Notes for offer and sale under the Blue Sky laws or the provincial
securities laws of Canada, (vii) the filing fee of the NASD and the fees and
expenses related to the inclusion of the Notes on the Nasdaq National Market,
and (viii) all other fees, costs and expenses referred to in Item 13 of Part II
of the Registration Statement. Except as provided in this Section 7, Section 9
and Section 11 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky and Canadian
provincial securities laws and the preliminary and final Blue Sky memoranda,
which fees shall be paid on the First Closing Date or the Second Closing Date,
as applicable).
This Section 7 shall not affect any agreement to which the Company is
a party relating to the payment of expenses incurred in connection with the
separate issuance of 3,000,000 shares of the Company's Common Stock as described
in the Registration Statement (the "Stock Offering").
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Notes
on the First Closing Date and the Option Notes on the Second Closing Date shall
be subject to the accuracy of the representations and warranties on the part of
the Company set forth herein as of the date hereof and as of the First Closing
Date or the Second Closing Date, as the case may
22
<PAGE>
be, to the accuracy of the statements of the Company's officers made pursuant to
the provisions hereof, to the performance of the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Washington, D.C. Time, on the date of this Agreement, or at
such later time as shall have been consented to by you; if the filing of
the Prospectus, or any supplement thereto, is required pursuant to Rule
424(b) of the Rules and Regulations, the Prospectus shall have been filed
in the manner and within the time period required by Rule 424(b) of the
Rules and Regulations; and prior to such Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company or you, shall be
contemplated by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to your satisfaction.
(b) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
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(i) An opinion of Latham & Watkins, counsel for the Company
(exclusive of environmental matters, matters relating to real property
ownership and condition, indebtedness of the Company, regulation of
the Company's business and property, the Company's relationship with
Promus Hotels Corporation and Westin Hotels & Resorts and matters
related to AVCOM International, Inc. and its subsidiaries and
affiliates) addressed to the Underwriters and dated the First Closing
Date, or the Second Closing Date, as the case may be, to the effect
that:
(1) [The Indenture and the Notes have been duly authorized
by the Company, the Indenture has been duly qualified under the
Trust Indenture Act and when duly executed and delivered will
constitute, and the Notes, when duly executed, authenticated,
issued and delivered as contemplated hereby and by the Indenture,
will constitute, valid and legally binding obligations of the
Company, enforceable in accordance with their terms and, in the
case of the Notes, entitled to the benefits of the Indenture,
subject, as to enforcement, to bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to
general equity principles.]
(2) Except as disclosed in or specifically contemplated by
the Prospectus and except for the Common Shares, such counsel is
not aware of any outstanding options, warrants or other rights
calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company
or any security convertible into or exchangeable for capital
stock of the Company;
(3)(a)(i) The Registration Statement has become effective
under the Act; (ii) to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued; (iii) to
such counsel's knowledge, no proceedings for that purpose have
been instituted or are pending or contemplated by the Commission;
and (iv) any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and Regulations has
been made in the manner and within the time period required by
such Rule 424(b);
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(b) The Registration Statement and the Prospectus comply as to form in all
material respects with the applicable requirements for
registration statements on Form S-1 under the Act, the Trust
Indenture Act and the Rules and Regulations, it being understood
that such counsel need not express any opinion with respect to
the financial statements, schedules and other financial and
statistical data included in the Registration Statement or the
Exhibits thereto;
(c) To such counsel's knowledge, there are no contracts,
agreements, documents, franchises, leases or licenses of a
character required to be disclosed in the Registration Statement
or Prospectus or required to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as
required; and
(d) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened
against the Company which are required to be described in the
Prospectus which are not described as required;
(4) The Company has the corporate power and authority to
enter into this Agreement, to sell and deliver the Notes to be
sold by it to the several Underwriters and to consummate the
other transactions contemplated herein; this Agreement has been
duly and validly authorized by all necessary action by the
Company, has been duly and validly executed and delivered by and
on behalf of the Company, and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and
25
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except as to those provisions relating to indemnity or
contribution for liabilities arising under the Act as to which no
opinion need be expressed;
(5) No approval, authorization, order, consent,
registration, filing, qualification, license or permit of or with
any court, regulatory, administrative or other governmental body
is required for the execution and delivery of this Agreement by
the Company or the consummation of the transactions contemplated
by this Agreement, except (i) such as have been obtained and are
in full force and effect under the Act and the Trust Indenture
Act, (ii) such as may be required under applicable Blue Sky or
Canadian securities laws in connection with the purchase and
distribution of the Notes by the Underwriters; (iii) clearance of
such offering with the NASD; and (iv) such as to which the
failure to so obtain would not have a Material Adverse Effect;
(6) The execution and performance of this Agreement, the
Notes and the Indenture and the consummation of the transactions
herein and therein contemplated will not conflict with, result in
the breach of, or constitute, either by itself or upon notice or
the passage of time or both, a default under, any agreement,
mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument known to such counsel to which the
Company is a party or by which the Company may be bound or
affected which is material to the Company; violate any of the
provisions of the partnership certificate, partnership agreement,
charter or bylaws, or other organizational documents, as
applicable, of the Company, in each case except as would not have
a Material Adverse Effect;
(7) Except for the Selling Stockholders and except as
otherwise set forth in the Prospectus, no holders of securities
of the Company have rights to register shares of Common Stock or
other securities because of the filing of the Registration
Statement or other transactions contemplated hereby;
(8) The Company will not be an "investment company" within
the meaning of the 1940 Act;
Such counsel shall also include a statement to the effect that
nothing has come to such counsel's attention that would lead such
counsel to believe that
26
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either at the effective date of the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, it being understood that in addition to the
matters excluded in paragraph (b)(i) above, such counsel express no
belief as to the financial statements, schedules and other financial
and statistical data included in the Registration Statement or
Prospectus or in the exhibits to the Registration Statement.
In rendering such opinion, such counsel may rely as to matters of
fact, on certificates of the officers of the Company and the
Significant Subsidiaries and of governmental officials, in which case
their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates
and copies of each of said opinions or certificates are to be attached
to the opinion.
(ii) An opinion of Ballard, Spahr, Andrews & Ingersoll, local
counsel for the Company, on matter of Maryland law, addressed to the
Underwriters and dated the First Closing Date, or the Second Closing
Date, as the case may be, to the effect that:
(1) The Company has been duly formed and is validly
existing as a corporation, is in good standing under the laws of
the State of Maryland, and is duly qualified to do business as a
foreign corporation and is in good standing in those
jurisdictions where the conduct of the Company's business
requires it to be qualified, and has the requisite corporate
power and authority to own its Resorts and conduct its business
as described in the Registration Statement;
[(2) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued and outstanding
shares of Common Stock of the Company have been duly authorized;
the Notes are convertible into Common Stock of the Company in
accordance with the terms of the Indenture; the shares of such
Common Stock initially issuable upon conversion of the Notes have
been duly authorized and reserved for issuance upon such
conversion and, when issued upon such conversion in accordance
with the terms of the Indenture, will be validly issued and
outstanding, fully paid and nonassessable and will conform in all
material respects to the
27
<PAGE>
description thereof contained in the Prospectus; other than as
described in the prospectus, the stockholders of the Company have
no preemptive or other rights to subscribe for or to purchase,
and no restrictions exist upon the voting or transfer of, any
shares of the Common Stock issuable upon conversion of the Notes,
pursuant to the laws of the State of Maryland, the Articles of
Incorporation or Bylaws of the Company or any agreement or
instrument filed with the Commission as an exhibit to the
Registration Statement or any document incorporated therein; and
neither the filing of the Registration Statement, the offering or
sale of the Notes nor the conversion of the Notes as contemplated
by this Agreement gives rise under any agreement or instrument
filed with the Commission as an exhibit to the Registration
Statement to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares
of Common Stock;]
(3) The information set forth in the Prospectus under the
headings "Description of Capital Stock", "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws" and "Shares
Eligible for Future Sale" to the extent such information
constitutes matters of Maryland law or legal conclusions
involving Maryland law, has been reviewed by such counsel and is
correct in all material respects.
(iii) Opinions of Paul, Hastings, Janofsky & Walker and/or
Schreeder, Wheeler & Flint, each a special real estate and timeshare
counsel for the Company, addressed to the Underwriters and dated as of
the First Closing Date, or the Second Closing Date, which opinions
shall state to the effect that (it being understood that such counsel
shall only have to opine as to the laws of the jurisdiction in which
it is duly licensed to practice law in):
(1) The Company has obtained the material approvals and
permits from the timeshare authority of the state in which the
subject Resort is located ("Home State") necessary to offer for
sale and sell timeshare interests and offer purchase money
financing in connection with such sales ("Home State Approvals")
in accordance with the applicable laws and regulations of the
state in which the Resort is located specifically governing the
marketing and sale of timeshare interests in real property ("Home
State Timeshare Laws");
(2) All of the permits and/or approvals issued by timeshare
authorities of states other
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than the state where each applicable Resort is located ("Foreign
State") for the offering for sale and sale of timeshare interests
in such Resort (collectively, the "Foreign State Approvals"),
constitute the material approvals and permits necessary to be
issued by such Foreign State to permit the offering for sale and
sale of timeshare interests in such Resort in accordance with the
laws and regulations of the Foreign State specifically governing
the offering for sale and sale of timeshare interests in real
property located outside of the Foreign State ("Foreign State
Timeshare Laws");
(3) To such counsel's knowledge and based upon its review of
certificates and letters from state timeshare authorities, the
Company and other pertinent parties (collectively, "Reliance
Certificates and Letters"), the Company has not received any
written notice from any regulatory authority that it is in
violation of any applicable federal or state law or regulation
regarding the offering for sale and sale of timeshare interests
in the Existing Resorts, the violation of which would have a
Material Adverse Effect on the ownership or operation of the
Existing Resorts;
(4) To such counsel's knowledge, there are no material
franchises, licenses, leases, contracts, agreements or other
documents (collectively, the "Material Agreements") entered into
by the Company outside the ordinary course of business, which
involve matters relating to the ownership, purchase money
financing and/or use of real property and/or the offering for
sale or sale of timeshare interests in the Existing Resorts,
which are of a character required to be disclosed in the
Registration Statement or to be filed as exhibits to the
Registration Statement which are not disclosed or filed;
(5) To such counsel's knowledge and based upon such
counsel's review of Reliance Certificates and Letters, there are
no real estate or timeshare related governmental actions,
governmental suits or governmental proceedings pending or
threatened against the Company with respect to the business and
property relating to the Existing Resorts except (a) those which
have been disclosed in the Registration Statement, and (b) those
which would not have a Material Adverse Effect;
29
<PAGE>
(6) The consummation by the Company of the transactions
contemplated by the Underwriting Agreement do not require the
consent, approval, authorization, registration or qualification
of (i) any governmental agency or authority of the timeshare
authority of the states where each of the Existing Resorts are
located, (ii) any lender which has a recorded security interest
in the Existing Resorts, (iii) Westin Hotels & Resorts or any
related entities under that certain agreement by and between W &
S Hotel L.L.C. and Argosy/Koar Group, Inc., dated May 3, 1996
("Westin Agreement"), (iv) Promus Hotels, Inc. (or any subsidiary
or affiliate of Promus Hotels, Inc.) under any Licensee
Agreements and Management Agreements with Promus Hotels, Inc. (or
any of its subsidiaries or affiliates) (collectively, the
"Embassy License Agreements and Management Agreements"), except
those which have been obtained and are in full force and effect
and those as to which the failure to so obtain would not have a
Material Adverse Effect;
(7) The consummation by the Company of the transactions
contemplated by the Underwriting Agreement as they relate to the
Existing Resorts do not conflict with or result in a material
breach or violation by the Company of: (i) any of the terms and
provisions of any loans which encumber the Existing Resorts, (ii)
any terms or provisions of the Home State Approvals where each of
the Existing Resorts are located; (iii) any terms or provisions
of the Foreign State Approvals; (iv) the Westin Agreement; (v)
the Embassy License Agreements and Management Agreements, or if
such transactions would have constituted such a breach, violation
or default had the necessary consents or approvals not been
obtained, consents or approvals have been obtained and are in
full force and effect;
(8) The owner of each of the Existing Resorts, if required
by law, has obtained a brokerage or sales license from the state
timeshare authority in order to offer purchase money financing in
connection with the sale of timeshare interests in the applicable
Resorts. The owner of each of the Existing Resorts, if required
by law, has obtained a brokerage or sales license from the state
timeshare authority in order to offer for sale and sell timeshare
interests in the State of California or has contracted with a
licensed broker to provide any of the aforementioned services;
and
30
<PAGE>
(9) A statement to the effect that although such counsel is
not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in
the Registration Statement or the Prospectus and has not made any
independent check or verification thereof, during the course of
such participation (relying as to the factual matters upon the
Reliance Certificates and Letters), no facts came to the
counsel's attention that have caused it to believe that the
Registration Statement at the time it became effective and as of
the date hereof or the Prospectus contained an untrue statement
of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; provided, however, that this statement is limited
solely to the statements or omissions relating to (i)
indebtedness secured by the Existing Resorts (it being understood
that the counsel's review of the Registration Statement has been
limited to legal and other non-financial matters with respect
thereto), (ii) ownership of the Existing Resorts (it being
understood that our review thereof has been limited to the review
of certain title reports), (iii) regulation by each Home State
and each Foreign State with respect to the issuance of the Home
State Approvals and the Foreign State Approvals, (iv) the
Property Partnerships' and the Company's contractual
relationships with Promus or Westin, and (v) the statements in
the Prospectus under the caption "Business - Governmental
Regulation," to the extent that such information constitutes
matters of law or legal conclusions as it pertains to the
ownership, operation, sale and offering of sale of timeshare
interests in the Existing Resorts.
In rendering such opinions, each such counsel may rely as to
matters of local law, on opinions
31
<PAGE>
of local counsel, and as to matters of fact, on certificates of
officers of the Company as applicable, and of governmental
officials, in which case their opinion is to state that they are
doing so and certificates and copies of each of said opinions or
certificates are attached to the opinion.
(iv) An opinion of Schreeder, Wheeler & Flint, in addition to
the opinion set forth above in section 8(c)(iii), as counsel for the
Company in connection with the Merger Agreement, addressed to the
Underwriter and dated as of the First Closing Date, or the Second
Closing Date, which opinions shall state to the effect that:
(1) The Company had the corporate power and authority to
enter into the Merger Agreement and to consummate the
transactions contemplated therein; the Merger Agreement has been
duly and validly authorized by all necessary action by the
Company, has been duly and validly executed and delivered by and
on behalf of the Company, and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be expressed;
(2) The registration statement and the prospectus filed with
the Commission on November 18, 1996, and the Merger Agreement
were duly and validly authorized by all necessary action by the
Company and conformed in all material respects with the
applicable requirements for registration statements on Form S-4
under the Act and the Rules and Regulations.
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<PAGE>
(v) Such opinion or opinions of O'Melveny & Myers LLP, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the formation of the
Company and other legal matters relating to this Agreement, the
validity of the Notes, the Registration Statement and the Prospectus
and other related matters as you may reasonably require, and the
Company shall have furnished to such counsel such documents and shall
have exhibited to them such papers and records as they may reasonably
request for the purpose of enabling them to pass upon such matters. In
connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials, as applicable.
(vi) A certificate of the Company, executed by the Chairman of
the Board or President and the chief financial or accounting officer
of the Company, dated the First Closing Date or the Second Closing
Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of
33
<PAGE>
this Agreement and as of the First Closing Date or the Second
Closing Date, as the case may be, and the Company has complied
with each of the agreements and satisfied all of the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the knowledge
of the Company no proceedings for that purpose have been
instituted or are pending or contemplated under the Act;
(3) Each of the respective signers of each certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the knowledge of the Company, the
Registration Statement and the Prospectus and any amendments or
supplements thereto contain all statements required to be stated
therein; and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided, however, that
such certificate does not require any representation concerning
statements in, or omissions from, the Registration Statement or
Prospectus, which are based upon and conform to information
furnished by the Underwriters pursuant to Section 3 hereof;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
for the Stock Offering, and except as specifically disclosed in
or contemplated by the Prospectus, there has not been any
Material Adverse Change or a development involving a Material
Adverse Change; and no legal
34
<PAGE>
or governmental action, suit or proceeding is pending or
threatened against the Company, or, to the knowledge of the
Company, any of the Existing Resorts which would have a Material
Adverse Effect; since such dates and except as so disclosed, the
Company has not entered into any verbal or written agreement or
other transaction which is not in the ordinary course of
business, incurred any liability or obligation, direct,
contingent or indirect, made any change in its capital stock,
made any change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital
stock which could be reasonably expected to have a Material
Adverse Effect; and the Company has not declared or paid any
dividend, or made any other distribution (other than dividends or
distributions paid to shareholders to satisfy tax liabilities),
upon its capital stock payable to shareholders of record on a
date prior to the First Closing Date or the Second Closing Date,
as the case may be; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, none of the
Existing Resorts has sustained a material loss or damage by
strike, fire, flood, windstorm, hurricane, typhoon, accident or
other calamity (whether or not insured).
(vii) On the date that this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from E & Y and Arthur
Andersen, as applicable, independent accountants, the first one to be
dated the day of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a Second Closing) to
be dated the Second Closing Date, in form and substance satisfactory
to the Representatives, to the effect that:
(1) E & Y and Arthur Andersen are independent certified
public accountants with respect to the Company within the meaning
of the Act and the Rules and Regulations;
(2) It is their opinion that the financial statements,
historical summaries and any supplementary financial information
and supporting schedule included in the Registration
35
<PAGE>
Statement and the Prospectus examined by them comply as to form
in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations;
(3) The financial statements of each of the Existing
Resorts for the three years ended December 31, 1995 and the nine
months ended September 30, 1996 and the nine months ended
September 30, 1995, to the extent applicable, were reviewed by
them in accordance with the standards established by the American
Institute of Certified Public Accountants and based upon their
review they are not aware of any material modifications that
should be made to such financial statements or historical
summaries for them to be in conformity with generally accepted
accounting principles currently in effect in the United States
and such financial statements comply as to form in all material
respects with the applicable requirements of the Act and the
Rules and Regulations;
(4) Based upon procedures set forth in detail in such
letter, including a reading of the latest available interim
financial statements of the Company and inquiries of officials of
the Company responsible for financial and accounting matters,
nothing has come to their attention which causes them to believe
that:
(a) the unaudited financial information with respect to the
results of operations for and at the end of each of the three
years (or such lesser period, if applicable) in the period ended
December 31, 1995 and any subsequent quarters included in the
Registration Statement under the captions "Summary" and "Selected
Combined Historical Financial Information of the Company" do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations
or are not presented in conformity with generally accepted
accounting principles currently in effect in the United States
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement, or do not agree with the corresponding amounts in the
audited financial statements for each of the years then ended, or
that with respect to the unaudited pro forma financial
statements, such financial statements do not comply as to form in
all material respects with the applicable
36
<PAGE>
accounting requirements of the Act and the Rules and Regulations
and the pro forma adjustments have not been properly applied to
the historical amounts in the compilation of such statements, or
(b) at a specified date not more than five days prior to
the date of this Agreement, other than the offering and sale of
the Common Shares or the Merger Agreement, (i) there has been any
change in the assets or shareholders' equity of the Company as
compared with the amounts shown in the September 30, 1996 balance
sheet of the Company included in the Registration Statement, (ii)
there has been any increase in indebtedness or other liabilities
related to the Existing Resorts as compared with the amounts
shown in the September 30, 1995 historical or pro forma balance
sheets related to the Existing Resorts or during the period
September 30, 1996 to a specified date not more than five days
prior to the date of this Agreement, or (iii) there were any
decreases, as compared with the corresponding period in the
preceding year, in combined revenues or net income of the
Existing Resorts, except in all instances for changes, increases
or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur; and
(5) In addition to the examination referred to in their
opinions and the procedures referred to above, they have carried
out certain specified procedures, not constituting an audit, with
respect to certain amounts, percentages and financial information
which are included in the Registration Statement and Prospectus
and which were specified by you, and have found such amounts,
percentages and financial information to be in agreement with, or
derived from, the relevant accounting, financial and other
records of the Company and each of the Property Partnerships.
(c) The Firm Notes and the Option Notes shall have been approved for
listing on the Nasdaq National Market, subject to official notice of
issuance, and the NASD, upon review of the terms of the public offering,
shall not have objected to such offering, such terms or the Underwriters'
participation in the same.
(d) The Company shall have furnished to you such further certificates
and documents as you shall have reasonably requested.
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<PAGE>
(e) There shall have been delivered to you the Firm Notes, and if any
Option Notes are purchased, the Option Notes in the manner required
pursuant to Section 6, hereof.
All such opinions, certificates, letters and documents
shall be in compliance with the provisions hereof only if they are satisfactory
to you and to O'Melveny & Myers LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and warranty
by the Company to the Underwriters as to each of the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company without liability on the part of any Underwriter
or the Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 7 and 9 hereof and except to the extent provided in Section
11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 8, or if the sale to the Underwriters of the Notes at the
First Closing is not consummated because of any willful refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof without reasonable justification therefor, the Company
agrees to reimburse you and the other Underwriters upon demand for all out-of-
pocket expenses that shall have been reasonably incurred by you and them in
connection with the proposed purchase and the sale of the Notes, including but
not limited to fees and disbursements of counsel relating directly to the
offering contemplated by the Prospectus. Any such termination shall be without
liability of any party to any other party except that the provisions of this
Section 9, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. Effectiveness of Registration Statement. You and the
---------------------------------------
Company will use your and its best efforts to cause the Registration Statement
to become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification. (a) The Company agrees to indemnify
---------------
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims, damages,
liabilities or expenses,
38
<PAGE>
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act, the Exchange Act, the Trust Indenture Act, or
other federal, state or Canadian statutory laws or regulations, or at common law
or otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company) insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise out
of or are based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its or his obligations hereunder or under law, and will reimburse each
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or as a result of or any amendment or supplement thereto in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 4 hereof; and provided the indemnity agreement contained in this Section
11(a) shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the Notes, as the case may be, concerned to the extent that any such loss,
claim, damage liability or expense of such Underwriter results from the fact
that a copy of the Prospectus was not sent or given to such person at or prior
to the written confirmation of sale of such Common Shares or Notes to such
person as required by the Act. In addition to their other obligations under
this Section 11(a) the Company agrees that it will reimburse expenses as
provided in this Section 11(a) as incurred, but no less frequently than
quarterly, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligations to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company, together
with interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit
39
<PAGE>
standing) announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments which
are not made to an Underwriter within 30 days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, any such director, officer or controlling person may become
subject under the Act, the Exchange Act, the Trust Indenture Act, or other
federal or state statutory laws or regulations, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as contemplated
below) arise out of or are based upon any untrue or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof; and will reimburse the Company, or any such director, officer or any
controlling person of the Company for any legal and other expense reasonably
incurred by the Company, or any such director, officer or controlling person of
the Company in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or action. In
addition to its other obligations under this Section 11(b), each Underwriter
severally agrees that it will reimburse expenses as provided in this Section
11(b) as incurred, but no less frequently than quarterly, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters, obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person of the Company) for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director or controlling person of
the Company) shall promptly return it to the Underwriters together with
interest, compounded
40
<PAGE>
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for contribution or
otherwise under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel representing all indemnified parties who are parties to such
action or set of related actions) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be at
the expense of the indemnifying party.
41
<PAGE>
(d) If the indemnification provided for in this Section is required by
its terms, but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under Sections 11(a), 11(b)
or 11(c) hereof in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Underwriters from the offering of the Notes or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Underwriters in connection with the statements or omissions or inaccuracies
in the representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion, in
the case of the Company as the total price paid to the Company for the Notes
sold by them to the Underwriters (net of underwriting commissions, but before
deducting expenses), and in the case of the Underwriters as the underwriting
commissions received by them bears to the total of such amounts paid to the
Company and received by the Underwriters as underwriting commissions. The
relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
or the inaccurate or the alleged inaccurate representation and/or warranty
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Section (c) of this Section, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in Section (c) of this Section
with respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section (d); provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section (c) of this Section for purposes of
indemnification. The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding
42
<PAGE>
paragraph. Notwithstanding the provisions of this Section, no Underwriter shall
be required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Notes underwritten by it and distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a) or 11(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and 11(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 11(a) or 11(b) hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company to sell and deliver the and Notes
hereunder, and of each Underwriter to purchase the Notes in the manner as
described herein, that, except as hereinafter in this Section provided, each of
the Underwriters shall purchase and pay for all the Notes agreed to be purchased
by such Underwriter hereunder upon tender to the Representatives of all such
shares in accordance with the terms hereof. If any Underwriter or Underwriters
so default in their obligation to purchase Notes hereunder on either the First
or Second Closing Date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Notes by other persons are not made within
48 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company except for the
expenses to be paid by the Company pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that the Notes to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company
43
<PAGE>
shall have the right to postpone the First Closing Date or the Second Closing
Date, as the case may be, for not more than five business days in order that the
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Notes for sale to the public. For the purposes of
this Section 13, the Notes shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the Notes or
upon the release by you of telegrams (i) advising Underwriters that the Notes
are released for public offering or (ii) offering the Notes for sale to
securities dealers, whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed by the
Company pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof) or of any Underwriter to the Company (except
to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities
44
<PAGE>
generally shall have been suspended on either such Exchange or in the over
the counter market by the NASD, or a general banking moratorium shall have
been established by federal, New York or California authorities; (ii) if an
outbreak of major hostilities or other national or international calamity
or any substantial change in political, financial or economic conditions
shall have occurred or shall have accelerated or escalated to such an
extent, as, in the judgment of the Representatives, to affect adversely the
marketability of the Notes; (iii) if any adverse event shall have occurred
or shall exist which makes untrue or incorrect in any material respect any
statement or information contained in the Registration Statement or
Prospectus or which is not reflected in the Registration Statement or
Prospectus but should be reflected therein in order to make the statements
or information contained therein not misleading in any material respect; or
(iv) if there shall be any action, suit or proceeding pending or
threatened, or there shall have been any development involving particularly
the business or properties or securities of the Company or the transactions
contemplated by this Agreement, which, in the reasonable judgment of the
Representatives, may materially and adversely affect the Company's business
or earnings and makes it impracticable or inadvisable to offer or sell the
Notes. Any termination pursuant to this Section 14(b) shall be without
liability on the part of any Underwriter to the Company or on the part of
the Company to any Underwriter (except for expenses to be paid or
reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to
the extent provided in Section 11 hereof).
SECTION 15. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, the Company's officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Notes sold hereunder and any termination of this
Agreement.
SECTION 16. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered,
telecopied or telegraphed and confirmed to Montgomery Securities at 600
Montgomery Street, San Francisco, California 94111, Telecopier: (415) 249-
5513, Attention: Karl L. Matthies, and Goldman, Sachs & Co. at 85 Broad Street,
New York, New York 10044, Telecopier: (212) 902-3000, Attention: John S.
Barakat with a copy to O'Melveny & Myers LLP, Embarcadero Center West 275
Battery Street, San Francisco, California 94111, Telecopier: (415) 984-8701,
Attention: Peter T. Healy, Esq.; and
45
<PAGE>
if sent to the Company shall be mailed, delivered or telegraphed and confirmed
to the Company, as applicable at 5933 West Century Boulevard, Suite 210, Los
Angeles, California 90045 Telecopier: (310) 348-1000 Attention: Andrew D.
Hutton with a copy to Latham & Watkins, 633 W. Fifth Street, Suite 4000, Los
Angeles, California 90071 Telecopier: (213) 891-8763, Attention: Edward
Sonnenschein, Jr., Esq. The Company or you may change the address for receipt
of communications hereunder by giving notice to the other.
SECTION 17. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Notes as such from any of the Underwriters merely by reason
of such purchase.
SECTION 18. Underwriters' Representatives. You will act as
-----------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you, as
Representatives, will be binding upon all of the Underwriters.
SECTION 19. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other section, paragraph or
provision hereof. If any section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 21. Knowledge. As used in this Agreement, the term knowledge
---------
or best knowledge on the part of an entity shall include the knowledge of such
entity's officers and any other employees with managerial responsibilities and
such entity shall only make such statement after conducting a diligent
investigation on the subject matter thereof.
SECTION 22. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the
46
<PAGE>
subject matter hereof. This Agreement may be executed in several counterparts,
each one of which shall be an original, and all of which shall constitute one
and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholder and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
[Signature Page to Follow]
47
<PAGE>
Very truly yours,
SIGNATURE RESORTS, INC.
By:
Its______________________
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
San Francisco, California as of the date first above written.
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:
Managing Director
48
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Underwriter Principal
- ------------------------------- Amount of
Notes to be
Purchased
<S> <C>
Montgomery Securities
Goldman, Sachs & Co.
- -------------------------------
Smith Barney Inc.
Donaldson, Lufkin & Jenrette
</TABLE>
49
<PAGE>
EXHIBIT 4
SIGNATURE RESORTS, INC.
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Trustee
____________________
INDENTURE
Dated as of
January __, 1997
$100,000,000
(With an Over-Allotment option for an
Additional $15,000,000)
% Convertible Subordinated Notes due 2007
<PAGE>
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of January __,1997
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
--------------- ---------
<S> <C> <C>
[SECTION] 310 (a)(1)..................................... 6.9
(a)(2)..................................... 6.9
(a)(3)..................................... Not Applicable
(a)(4)..................................... Not Applicable
(b)........................................ 6.8
6.1
[SECTION] 311 (a)........................................ 6.13
(b)........................................ 6.13
[SECTION] 312 (a)........................................ 7.1
7.2(a)
(b)........................................ 7.2(b)
(c)........................................ 7.2(c)
[SECTION] 313 (a)........................................ 7.3(a)
(b)........................................ 7.3(a)
(c)........................................ 7.3(a)
(d)........................................ 7.3(b)
[SECTION] 314 (a)........................................ 7.4
(b)........................................ Not Applicable
(c)(1)..................................... 1.2
(c)(2)..................................... 1.2
(c)(3)..................................... Not Applicable
(d)........................................ Not Applicable
(e)........................................ 1.2
[SECTION] 315 (a)........................................ 6.1(a)
(b)........................................ 6.2
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
7.3(a)(6)
(c)..................................... 6.1(b)
(d)..................................... 6.1(c)
(d)(1).................................. 6.1(a)(1)
(d)(2).................................. 6.1(c)(2)
(d)(3).................................. 6.1(c)(3)
(e)..................................... 5.14
[SECTION] 316 (a)(1)(A)............................... 5.12
(a)(1)(B)............................... 5.13
(a)(2).................................. Not Applicable
(b)..................................... 5.8
[SECTION] 317 (a)(1).................................. 5.3
(a)(2).................................. 5.4
(b)..................................... 10.3
[SECTION] 318 (a)..................................... 1.7
</TABLE>
____________________
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
ii
<PAGE>
TABLE OF CONTENTS*
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION.................... 1
Section 1.1 Definitions............................................ 1
Section 1.2 Compliance Certificates and Opinions................... 9
Section 1.3 Form of Documents Delivered to Trustee................. 10
Section 1.4 Acts of Holders........................................ 10
Section 1.5 Notices, Etc., to Trustee and Company.................. 13
Section 1.6 Notice to Holders; Waiver.............................. 13
Section 1.7 Conflict with Trust Indenture Act...................... 13
Section 1.8 Book-Entry System...................................... 14
Section 1.9 Effect of Headings and Table of Contents............... 14
Section 1.10 Successors and Assigns................................. 14
Section 1.11 Separability Clause.................................... 14
Section 1.12 Benefits of Indenture.................................. 14
Section 1.13 Governing Law.......................................... 14
Section 1.14 Legal Holidays......................................... 14
ARTICLE 2
NOTE FORMS 15
Section 2.1 Forms Generally........................................ 15
Section 2.2 Form of Face of Note................................... 15
Section 2.3 Form of Reverse of Note................................ 17
Section 2.4 Form of Trustee's Certificate of Authentication........ 22
Section 2.5 Form of Conversion Notice.............................. 22
Section 2.6 Form of Assignment..................................... 23
ARTICLE 3
THE NOTES 24
Section 3.1 Title and Terms........................................ 24
Section 3.2 Denominations.......................................... 25
Section 3.3 Execution, Authentication, Delivery and Dating......... 25
Section 3.4 Temporary Notes........................................ 25
ARTICLE 4
SATISFACTION AND DISCHARGE................................................. 31
Section 4.1 Satisfaction and Discharge of Indenture................ 31
Section 4.2 Application of Trust Money............................. 32
ARTICLE 5
REMEDIES................................................................... 33
Section 5.1 Events of Default...................................... 33
Section 5.2 Acceleration of Maturity; Rescission and Annulment..... 34
Section 5.3 Collection of Indebtedness and Suits for Enforcement
by Trustee............................................. 35
Section 5.4 Trustee May File Proofs of Claim....................... 36
Section 5.5 Trustee May Enforce Claims Without Possession of
Notes.................................................. 37
Section 5.6 Application of Money Collected......................... 37
Section 5.7 Limitation on Suits.................................... 38
Section 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert.................... 38
Section 5.9 Restoration of Rights and Remedies..................... 39
Section 5.10 Rights and Remedies Cumulative......................... 39
Section 5.11 Delay or Omission Not Waiver........................... 39
Section 5.12 Control by Holders..................................... 39
Section 5.13 Waiver of Past Defaults................................ 40
Section 5.14 Undertaking for Costs.................................. 40
Section 5.15 Waiver of Stay or Extension Laws....................... 41
ARTICLE 6
THE TRUSTEE................................................................ 41
Section 6.1 Certain Duties and Responsibilities.................... 41
Section 6.2 Notice of Defaults..................................... 42
Section 6.3 Certain Rights of Trustee.............................. 42
Section 6.4 Not Responsible for Recitals or Issuance of Notes...... 44
Section 6.5 May Hold Notes......................................... 44
Section 6.6 Money Held in Trust.................................... 44
Section 6.7 Compensation and Reimbursement......................... 44
Section 6.8 Disqualification; Conflicting Interests................ 45
Section 6.9 Corporate Trustee Required; Eligibility................ 45
Section 6.10 Resignation and Removal Appointment of Successor....... 45
Section 6.11 Acceptance of Appointment by Successor................. 47
Section 6.12 Merger, Conversion, Consolidation or Succession to
Business............................................... 47
Section 6.13 Preferential Collection of Claims Against Company...... 47
Section 6.14 Appointment of Authenticating Agent................... 48
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY........................ 49
Section 7.1 Company to Furnish Trustee Names and Addresses
of Holders........................................... 49
Section 7.2 Preservation of Information; Communications to Holders 50
Section 7.3 Reports by Trustee................................... 50
Section 7.4 Reports by Company................................... 50
ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE..................... 51
Section 8.1 Company May Consolidate, Etc., Only on Certain Terms. 51
Section 8.2 Successor Substituted................................ 52
ARTICLE 9
SUPPLEMENTAL INDENTURES.................................................. 52
Section 9.1 Supplemental Indentures Without Consent of Holders... 52
Section 9.2 Supplemental Indentures with Consent of Holders...... 53
Section 9.3 Execution of Supplemental Indentures................. 54
Section 9.4 Effect of Supplemental Indentures.................... 54
Section 9.5 Conformity with Trust Indenture Act.................. 54
Section 9.6 Reference in Notes to Supplemental Indentures........ 54
Section 9.7 Notice of Supplemental Indentures.................... 55
ARTICLE 10
COVENANTS................................................................ 55
Section 10.1 Payment of Principal, Premium and
Interest........................................................... 55
Section 10.2 Maintenance of Office or Agency...................... 55
Section 10.3 Money for Note Payments to be Held in Trust.......... 56
Section 10.4 Statement by Officers as to Default.................. 57
Section 10.5 Existence............................................ 58
Section 10.6 Maintenance of Properties............................ 58
Section 10.7 Payment of Taxes and Other Claims.................... 58
Section 10.8 Waiver of Certain Covenants.......................... 59
ARTICLE 11
REDEMPTION OF NOTES...................................................... 59
Section 11.1 Right of Redemption.................................. 59
Section 11.2 Applicability of Article............................. 59
Section 11.3 Election to Redeem; Notice to Trustee................ 59
Section 11.4 Selection by Trustee of Notes to Be Redeemed......... 60
Section 11.5 Notice of Redemption................................. 60
Section 11.6 Deposit of Redemption Price.......................... 61
Section 11.7 Notes Payable on Redemption Date..................... 61
Section 11.8 Notes Redeemed in Part............................... 62
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Section 11.8 Notes Redeemed in Part................................. 62
ARTICLE 12
CONVERSION OF NOTES........................................................ 62
Section 12.1 Conversion Privilege and Conversion Price.............. 62
Section 12.2 Exercise of Conversion Privilege....................... 63
Section 12.3 Fractions of Shares.................................... 64
Section 12.4 Adjustment of Conversion Price......................... 64
Section 12.5 Notice of Adjustments of Conversion Price.............. 69
Section 12.6 Notice of Certain Corporate Action..................... 70
Section 12.7 Company to Reserve Common Stock........................ 71
Section 12.8 Taxes on Conversions................................... 71
Section 12.9 Covenant as to Common Stock............................ 71
Section 12.10 Cancellation of Converted Notes........................ 71
Section 12.11 Provisions in Case of Consolidation, Merger or
Sale of Assets......................................... 71
ARTICLE 13
SUBORDINATION OF NOTES..................................................... 73
Section 13.1 Securities Subordinate to Senior Indebtedness.......... 73
Section 13.2 No Payments in Certain Circumstances; Payment
Over of Proceeds Upon Dissolution, Etc................. 73
Section 13.3 Prior Payment to Senior Indebtedness Upon
Acceleration of Notes.................................. 76
Section 13.4 Payment Permitted if No Default........................ 76
Section 13.5 Subrogation to Rights to Holders of Senior
Indebtedness........................................... 77
Section 13.6 Provisions Solely to Define Relative Rights............ 77
ARTICLE 14
REPURCHASE OF NOTES AT THE OPTION
OF THE HOLDER UPON A CHANGE IN CONTROL..................................... 81
Section 14.1 Right to Require Repurchase............................ 81
Section 14.2 Conditions to the Company's Election to Pay the
Repurchase Price in Common Stock....................... 82
Section 14.3 Notices; Method of Exercising Repurchase Right, Etc.... 83
Section 14.4 Certain Definitions.................................... 86
</TABLE>
v
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INDENTURE, dated as of January ____, 1997, between Signature Resorts,
Inc., a corporation duly organized and existing under the laws of the State of
Maryland (herein called the "Company"), having its principal office at Los
Angeles, California, and Norwest Bank Minnesota, National Association, as
Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its _____%
Convertible Subordinated Notes due _________, 2007 (herein called the "Notes")
of substantially the tenor an amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary to make the Notes, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company, and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1 Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such
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accounting principles as are generally accepted at the date of this
instrument; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Articles Six, Twelve and Fourteen,
are defined in that Article.
"Act", when used with respect to any Holder, has the meaning specified
in Section 1.4.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agent Member" means any member of, or participant in, the Depositary.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Note or beneficial interest therein, the rules
and procedures of the Depositary for such Global Note to the extent applicable
to such transaction and as in effect from time to time.
"Authenticating Agent" means any Person authorized by the Trustee to
act on behalf of the Trustee to authenticate Notes.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in the City of New York
or the city in which the Corporate Trust Office of the Trustee is located are
authorized or obligated by law or executive order to close.
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"Closing Price" for any security for any day means the last reported
sale price of such security regular way on such day or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices regular way on such day, in either case on the New York Stock Exchange
or, if the security is not listed or admitted to trading on such exchange, on
the principal national securities exchange on which the security is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq National Market or Nasdaq or, if the security
is not listed or admitted to trading on any national securities exchange or
quoted on such National Market or Nasdaq, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm selected from time to time by the Company for that purpose.
If the security is not listed or admitted to trading on any national securities
exchange, quoted on such National Market or Nasdaq or listed in any list of bid
and asked prices in the over-the-counter market, "Closing Price" shall mean the
fair market value of the security as determined in good faith by the Board of
Directors and evidenced by Board Resolution.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or,
if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
"Common Stock" includes any stock of any class of the Company which
has no preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Company and which is not subject to redemption by the Company. However, subject
to the provisions of Section 12.11, shares issuable on conversion of Notes and
shares used to pay the Repurchase Price pursuant to Section 14.1 shall include
only shares of the class designated as Common Stock of the Company at the date
of this instrument or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; provided that if at any time there
shall be more than one such resulting class, the shares of each such class then
so issuable shall be substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument unless and until a successor Person shall have
become such pursuant to the
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applicable provisions of this Indenture and thereafter "Company" shall mean such
successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by (i) its Chairman of the Board, its
President or a Vice President, and (ii) by its Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary, and delivered to the
Trustee.
"Conversion Agent" has the meaning specified in Section 10.2.
"Conversion Price" has the meaning specified in Section 12.1.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be administered.
Initially, the Corporate Trust Office of the Trustee is located
at_______________________ ______________________________________________________
Attn: Corporate Trust Department.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Depositary" means, with respect to any Global Notes, a clearing
agency that is registered as such under the Exchange Act and is designated by
the Company to act as a Depositary for such Global Notes (or any successor notes
clearing agency so registered).
"Designated Senior Indebtedness" means any particular Senior
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture (provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness).
"Disqualified Capital Stock" means, with respect to any person,
Capital Stock of such person that, by its terms or by the terms of any security
into which it is convertible, exercisable or exchangeable, is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased (including at the option of the holder thereof) by such person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Securities.
"DTC" means the Depositary Trust Company, a New York Corporation.
"Event of Default" has the meaning specified in Section 5.1.
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"Exchange Act" means the United States Securities Exchange Act of 1934
(or any successor statute), as amended from time to time.
"Expiration Date" has the meaning specified in Section 1.4(f).
"Founders" means Osamu Kaneko, Andrew J. Gessow and Steven C.
Kenninger.
"Global Note" means a Note that is registered in the Note Registrar in
the name of a Depositary or nominee thereof.
"Holder" means a Person in whose name a Note is registered in the Note
Register.
"Indebtedness" has the meaning specified in Section 5.1(e).
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Junior Securities" means any Qualified Capital Stock or any other
indebtedness of the Company which is subordinated in right of payment to all
Senior Indebtedness which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Notes are so subordinated as provided in Article Thirteen.
"Maturity", when used with respect to any Note, means the date on
which the principal of such Note becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption, obligation to repurchase or otherwise.
"Non-Recourse Debt" means indebtedness of a Person to the extent that
under the terms thereof and pursuant to applicable law, no personal recourse
could be had against such person for the payment of principal of or interest or
premium or any other amounts with respect to such indebtedness or for any claim
based on such indebtedness and that enforcement of obligations on such
indebtedness is limited solely to recourse against interests in specified
assets.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 3.5.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the President or a Vice President, and by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, of the Company, and
delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, and who shall be acceptable to the Trustee.
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<PAGE>
"Outstanding", when used with respect to Notes, means, as of the date
of determination, all Notes theretofore authenticated and delivered under this
Indenture, except:
(i) Notes theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Notes; PROVIDED that, if such Notes are to be redeemed,
notice of such redemption has been duly given pursuant to this Indenture or
provision therefore satisfactory to the Trustee has been made; and
(iii) Notes which have been paid pursuant to Section 3.5 or in
exchange for or in lieu of which other Notes have been authenticated and
delivered pursuant to this Indenture, other than any such Notes in respect
of which there shall have been presented to the Trustee proof satisfactory
to it that such Notes are held by a bona fide purchaser in whose hands such
Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the
requisite principal amount of the Outstanding Notes have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, Notes
owned by the Company or any other obligor upon the Notes or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only securities which the Trustee knows to be so owned shall
be so disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such securities and that
the pledgee is not the Company or any other obligor upon the Notes or any
Affiliate of the Company or of such other obligor. The Trustee may require, and
may conclusively rely upon, an Officers' Certificate as to whether or not any
Notes are so owned.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Notes on behalf of the
Company.
"Person" means any individual, corporation, partnership, joint
venture, trust, unincorporated organization or government or any agency or
political subdivision thereof.
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"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.6 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Qualified Capital Stock" means any Capital Stock of the Company that
is not Disqualified Capital Stock.
"Redemption Date", when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the January __ or July __ (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Repurchase Date" has the meaning specified in Section 14.1
"Responsible Officer", when used with respect to the Trustee, means
any officer assigned to and working in the corporate trust department of the
Trustee, or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
means, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of his or her knowledge of and familiarity
with the particular subject.
"Senior Indebtedness" means
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(a) all indebtedness of the Company, including the principal of and premium, if
any, and interest on such indebtedness (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding, whether
or not a claim for post-petition interest is allowable as a claim in such
proceeding) and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed: (i) indebtedness of the Company, other than the Notes,
(including obligations of the Company arising from its guarantee of the
indebtedness of others) to banks, insurance companies and other financial
institutions evidenced by credit or loan agreements, notes or other written
obligations, (ii) all other indebtedness of the Company (including obligations
of the Company arising from its guarantee of the indebtedness of others) other
than the Notes, whether outstanding on the date of the Indenture or thereafter
created, incurred or assumed, which is (1) for money borrowed, or (2) evidenced
by a note, security, debenture, bond or similar instrument or guarantee thereof,
(iii) obligations of the Company as lessee under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles or in respect of any lease or related document (including
a purchase agreement) which provides that the Company is contractually obligated
to purchase or cause a third party to purchase the leased property and thereby
effectively guarantees a minimum residual value of the leased property to the
landlord and the obligations of the Company under such lease or related document
to purchase or cause a third party to purchase such leased property, (iv)
obligations of the Company under interest rate and currency swaps, caps, floors,
collars or similar agreements or arrangements, (v) all obligations of the
Company issued or assumed as the deferred purchase price of property (but
excluding any portion thereof constituting trade accounts payable arising in the
ordinary course of business), (vi) all obligations of the Company for the
reimbursement of any letters of credit (1) to the extent the obligations
underlying such letters of credit are Senior Indebtedness under clauses (i)
through (iv) above or (2) that secure the Company's obligations to clearing
institutions arising out of its merchant processing business to the extent such
obligations are incurred in the ordinary course of business in amounts
consistent with the Company's past practices, and (vii) renewals, extensions,
modifications, restatements and refundings of, and any amendments, modifications
or supplements to, or any indebtedness or obligation issued in exchange for, any
such indebtedness or obligation described in clauses (i) through (vi) of this
paragraph; provided that Senior Indebtedness shall not include (i) indebtedness
to a Subsidiary or other Affiliate of the Company, (ii) any such indebtedness or
obligation if the terms of such indebtedness or obligation (or the terms of the
instrument under which, or pursuant to which, it is issued) expressly provided
that such indebtedness or obligation shall not be senior in right of payment to
the Notes, and (iii) accounts payable of the Company to trade creditors.
"Significant Subsidiary means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S-X
promulgated by the SEC as in effect as of the date of this Indenture.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 3.7.
"Stated Maturity", when used with respect to any Note or any
installment of interest thereon, means the date specified in such Note as the
fixed date on which the principal of such Note or such installment of interest
is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors,
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whether at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.
"Trading Day" means, with respect to any security, each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are not traded on the exchange or market on which such security is traded.
"Trustee" means the person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed, except as provided
in Section 9.5.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
Section 1.2 Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable him to
express an informed opinion as
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to whether or not such covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 1.3 Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1.4 Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as otherwise expressly provided herein, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of
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execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 6.1)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such Note.
(e) Except for matters arising under Article Five (in which event any
record date shall be set by the Trustee), the Company may set any day as a
record date for the purpose of determining the Holders of Outstanding Notes
entitled to give, make or take any request, demand, authorization, direction,
notice, consent, waiver or other action provided or permitted by this Indenture
to be given, made or taken by Holders of Notes. If any record date is set
pursuant to this paragraph, the Holders of Outstanding Notes on such record
date, and no other Holders, shall be entitled to take the relevant action,
whether or not such Holders remain Holders after such record date; provided that
no such action shall be effective hereunder unless taken on or prior to the
applicable Expiration Date (as defined below) by Holders of the requisite
principal amounts of Outstanding Notes on such record date. Nothing in this
paragraph shall be construed to prevent the Trustee from setting a new record
date for any action for which a record date has previously been set pursuant to
this paragraph (whereupon the record date previously set shall automatically and
with no action by any Person be cancelled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Notes on the date such action
is taken. Promptly after receiving written notice of
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a record date set by the Company pursuant to this paragraph, the Trustee, at the
Company's expense, shall cause notice of such
record date, the proposed action by Holders and the applicable Expiration Date
to be given to the Company in writing and to each Holder of Notes in the manner
set forth in Section 1.6.
The Trustee may set any day as a record date for the purpose of
determining the Holders entitled to join in the giving or making of (i) any
Notice of Default, (ii) any declaration of acceleration referred to in Section
5.2, (iii) any request to institute proceedings referred to in Section 5.7(b),
or (iv) any direction referred to in Section 5.12. If any record date is set
pursuant to this Section 1.4(e), the Holders on such record date, and only such
Persons, shall be entitled to join in such notice, declaration, request or
direction, whether or not such Holders remain Holders after such record date;
provided that no such action be effective hereunder unless taken on or prior to
the applicable Expiration Date by Holders of the requisite principal amount of
Notes on such record date. Nothing in this Section 1.4(e) shall be construed to
prevent the Trustee from setting a new record date for any action for which a
record date has previously been set pursuant to this Section 1.4(e) (whereupon
the record date previously set shall automatically and with no action by any
Person be cancelled and of no effect), and nothing in this Section 1.4(e) shall
be construed to render ineffective any action taken by Holders of the requisite
principal amount of Notes on the date such action is taken. Promptly after any
record date is set pursuant to this Section 1.4(e), the Trustee, at the
Company's expense, shall cause notice of such record date, the proposed action
by Holders and the applicable Expiration Date to be given to the Company in
writing and to each Holder of Notes in the manner set forth in Section 1.6.
(f) With respect to any record date set pursuant to these Sections
1.4(e) or 1.4(f), the party hereto which sets such record date may designate any
day as the "Expiration Date" and from time to time may change the Expiration
Date to any earlier or later day; provided that no such change shall be
effective unless notice of the proposed new Expiration Date is given to the
other party hereto in writing, and to each Holder of Notes in the manner set
forth in Section 1.6, on or prior to the existing Expiration Date. If an
Expiration Date is not designated with respect to any record date set pursuant
to this Section 1.4(e), the party hereto which set such record date shall be
deemed to have initially designated the 180th day after such record date as the
Expiration Date with respect thereto, subject to its right to change the
Expiration Date as provided in this Section 1.4(f). Notwithstanding the
foregoing, no Expiration Date shall be later than the 180th day after the
applicable record date.
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Section 1.5 Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with, (i) the Trustee by any
Holder or by the Company, shall be sufficient for every purpose hereunder if
made, given, furnished or filed in writing to or with the Trustee at its
Corporate Trust Office, Attention: __________________, or (ii) the Company by
the Trustee or by any Holder shall be sufficient for every purpose hereunder
(unless otherwise herein expressly provided) if in writing and mailed, first-
class postage prepaid, to the Company addressed to it at the address of its
principal office specified in the first paragraph of this instrument or at any
other address previously furnished in writing to the Trustee by the Company.
Section 1.6 Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Note Register, not later than
the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Holders is given by mail,
neither the failure to mail such notice, nor any defect in any notice so mailed,
to any particular Holder shall affect the sufficiency of such notice with
respect to other Holders. Where this Indenture provides for notice in any
manner, such notice may be waived in writing by the Person entitled to receive
such notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 1.7 Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Indenture by any of
the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or to be
excluded, as the case may be.
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Section 1.8 Book-Entry System.
If the Securities cease to trade in DTC's book-entry settlement
system, the Company covenants and agrees that it shall use reasonable efforts to
make such other book-entry arrangements that it determines are reasonable for
the Notes.
Section 1.9 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not effect the construction hereof.
Section 1.10 Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 1.11 Separability Clause.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 1.12 Benefits of Indenture.
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder, the holders of Senior Indebtedness and the Holders of Notes, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
Section 1.13 Governing Law.
This Indenture and the Notes shall be governed by and construed in
accordance with the laws of the State of New York.
Section 1.14 Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any security or the last date on which a Holder has the right to
convert his Notes shall not be a Business Day, then (notwithstanding any other
provision of this Indenture or of the Notes) payment of interest or principal
(and premium, if any) or conversion of the Notes need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the Interest Payment Date, Redemption Date or at the stated
maturity, or on such last day for conversion, provided that no interest shall
accrue for the period from and after such Interest Payment Date, Redemption
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Date, Stated Maturity or last day of conversion, as the case may be.
ARTICLE 2
NOTE FORMS
Section 2.1 Forms Generally.
The Notes and the Trustee's certificates of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange, the Internal
Revenue Code of 1986, as amended, and the regulations thereunder, or as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of the Notes.
The definitive Notes shall be printed, lithographed or engraved or
produced by any combination of these methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any Notes exchange on
which the Notes may be listed, all as determined by the officers executing such
Notes, as evidenced by their execution of such Notes.
Section 2.2 Form of Face of Note.
The following legend shall also appear on the face of each Global
Note:
THIS SECURITY IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
REFERRED TO BELOW AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OF A NOMINEE
OF THE DEPOSITARY, WHICH MAY BE TREATED BY THE COMPANY, THE TRUSTEE AND ANY
AGENT THEREOF AS OWNER AND HOLDER OF THIS SECURITY FOR ALL PURPOSES.
The following legend shall also appear on the face of each Global Note
for which the Depository Trust Company is to be the Depositary:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC") TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS
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WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR REGISTERED
SECURITIES IN DEFINITIVE REGISTERED FORM IN THE LIMITED CIRCUMSTANCES REFERENCED
IN THE INDENTURE, THIS GLOBAL NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY
THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY
OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO
A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
Signature Resorts, Inc.
_________% Convertible Subordinated Note due _____________, 2007
Signature Resorts, Inc., a corporation duly organized and existing
under the laws of Maryland (herein called the "Company", which term includes any
successor person under the Indenture hereinafter referred to), for value
received hereby promises to pay to _____________, or registered assigns, the
principal sum of _______________ Dollars on _________, 2007, and to pay interest
thereon from ____________, 1997 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, semiannually on January __
and July __ in each year, commencing July __, 1997, at the rate of ________% per
annum, until the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest, which shall be the
January __ or July __ (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Except as otherwise provided in the
Indenture, any such interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and may
either be paid to the Person in whose name this Note (or one or more Predecessor
Notes) is registered at the close of business on a Special Record Date for the
payment of such Defaulted Interest to be fixed by the Trustee, notice whereof
shall be given to Holders of Notes not less than 10 days prior to such Special
Record Date, or be paid at any time in any other lawful manner, all as more
fully provided in said Indenture. Payment of the principal of (and premium, if
any) and interest on this Note will be made at the office or agency of the
Company maintained for that purpose in New York, New York or the city in which
the Corporate Trust Office of the Trustee is located, in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that at the option of
the Company payment of interest may be made by check mailed to the
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address of the Person entitled thereto as such address shall appear in the Note
Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place. Unless the certificate of
authentication hereon has been executed by the Trustee referred to on the
reverse hereof by manual signature, this Note shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: SIGNATURE RESORTS, INC.
Attest: __________________ By: __________________
Section 2.3 Form of Reverse of Note.
This Note is one of a duly authorized issue of securities of the
Company designated as its _______% Convertible Subordinated Notes due
_____________, 2007 (herein called the "Notes"), limited in aggregate principal
amount to $100,000,000 (except for such additional principal amounts, not to
exceed $15,000,000, of Notes issued to cover over-allotments in the initial
public offering of the Notes) issued and to be issued under an Indenture, dated
as of January _____, 1997 (herein called the "Indenture"), between the Company
and Norwest Bank Minnesota, National Association, as Trustee (herein called the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee, the holders of Senior
Indebtedness and the Holders of the Notes and of the terms upon which the Notes
are, and are to be, authenticated and delivered. the Securities are issuable in
registered form only without coupons in denominations of $1,000 and any integral
multiple thereof.
Subject to and upon compliance with the provisions of the Indenture,
the Holder of this Note is entitled, at his option, at any time after 60 days
from the latest date of original issuance of the Notes and on or before the
close of business on the last Trading Day prior to _________, 2007, (except
that (i) if this Note or a portion hereof is called for redemption, then the
right of conversion in respect of this Note or such portion hereof shall
terminate (unless the Company defaults in making the payment due upon
redemption) on, the close of business on the fifth Business Day prior to the
Redemption
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Date, and (ii) if the Seller hereof has exercised his right to require the
Company to repurchase this Note or a portion hereof, then the right of
conversion in respect of this Note shall terminate at the close of business on
the fifth Business Day prior to the Repurchase Date) to convert this Note (or
any portion of the principal amount hereof which is $1,000 or an integral
multiple thereof), at the principal amount hereof, or of such portion, into
fully paid and non-assessable shares (calculated as to each conversion to the
nearest 1/100 of a share) of Common Stock of the Company at a conversion price
equal to $_________ for each share of Common Stock (or at the current adjusted
conversion price if an adjustment has been made as provided in the Indenture) by
surrender of this Note, duly endorsed or assigned to the Company or in blank, to
the Company at its office or agency in New York, New York or the city in which
the Corporate Trust Office of the Trustee is located, accompanied by written
notice to the Company that the Holder hereof elects to convert this Note, or if
less than the entire principal amount hereof is to be converted, the portion
hereof to be converted, and, in case such surrender shall be made during the
period from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on such Interest Payment Date
(the "Interest Period"), also accompanied by payment in New York Clearing House
Funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount of this
Note then being converted; except that in the case of Notes or portions thereof
that have been called for redemption and, pursuant to Section 11.1 of the
Indenture, as a result of such redemption the right to convert such Notes
terminates during the Interest Period, any such Notes surrendered for conversion
during such Interest Period need not be accompanied by payment in an amount
equal to such interest. Subject to the aforesaid requirement for payment and,
in the case of a conversion after the Regular Record Date next preceding any
Interest Payment Date and on or before such Interest Payment Date, to the right
of the Holder of Record of this Note (or any Predecessor Note) at such Regular
Record Date to receive an installment of interest (with certain exceptions
provided in the Indenture), no payment or adjustment is to be made on conversion
for interest accrued hereon or for dividends on the Common Stock issued on
conversion. No fractions of shares or scrip representing fractions of shares
will be issued on conversion, but instead of any fractional interest the Company
shall pay a cash adjustment as provided in the Indenture. The conversion price
is subject to adjustment as provided in the Indenture. In addition, the
Indenture provides that in case of certain consolidations or mergers to which
the Company is a party or the transfer of substantially all of the assets of the
Company, the Indenture shall be amended, without the consent of any Holders of
Notes, so that this Note, if then outstanding, will be convertible thereafter,
during the period this Note shall be convertible as specified above, only into
the kind and amount of securities, cash and other property receivable
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upon the consolidation, merger or transfer by a holder of the number of shares
of Common stock into which this Note might have been converted immediately prior
to such consolidation, merger or transfer (assuming such holder of Common Stock
failed to exercise any rights of election and received per share the kind and
amount received per share by a plurality of non-electing shares and assuming
that such note was then convertible).
The Notes are subject to redemption upon not less than 30 days' nor
more than 60 days' notice by mail, at any time on or after January ___, 2000, as
a whole or in part, at the election of the Company. The Redemption Prices
(expressed as percentages of the principal amount), and in each case, plus
accrued and unpaid interest to the date of Redemption, and subject to the rights
of Holders of record on the relevant Regular Record Date to receive interest due
on an interest payment date, are as follows for the 12-month period (unless
otherwise noted) beginning on January ___ of the following years:
Year Redemption Price
---- ----------------
2000 _____%
2001 _____%
2002 _____%
2003 _____%
2004 _____%
2005 _____%
2006 100%
2007 100%
Interest installments whose Stated Maturity is on or prior to such Redemption
Date will be payable to the Holders of such Notes, or one or more Predecessor
Notes, of record at the close of business on the relevant Record Dates referred
to on the face hereof, all as provided in the Indenture.
Upon a Change in Control (as defined in the Indenture), the Company
will be required to offer to repurchase all or part of the Notes at 100% of
their principal amount plus accrued interest. The Company may pay the
repurchase price in cash, or at its option, in lieu of paying the Repurchase
Price in cash, may pay the Repurchase Price in Common Stock valued at 95% of the
average of the last reported sale price of the Common Stock for the five
consecutive Trading Days ending on and including the third trading day preceding
the Repurchase Date; provided that payment may not be made in common stock of
the Company unless the
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Company satisfied certain conditions with respect to such payment as provided in
the Indenture.
In the event of redemption or conversion of this Note in part only, a
new Note or Notes for the unredeemed or unconverted portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.
The indebtedness evidenced by this Note is, to the extent provided in
the Indenture, subordinate and subject in right of payment to the prior payment
in full of all Senior Indebtedness, and this Note is issued subject to the
provisions of the Indenture with respect thereto. Each holder of this Note, by
accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee as his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of not less
than a majority in aggregate principal amount of the Notes at the time
outstanding. The Indenture also contains provisions permitting the Holders of a
majority in aggregate principal amount of the Notes at the time Outstanding, on
behalf of the Holders of all the Notes, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange hereof or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed or to convert this Note as provided in the Indenture.
As provided in and subject to the provisions of the Indenture, the
Holder of this Note shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy
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thereunder, unless (i) such Holder shall have previously given the Trustee
written notice of a continuing Event of Default, (ii) the Holders of not less
than 25% in principal amount of the Outstanding Notes shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity with respect
thereto, and the Trustee shall not have received from the Holders of a majority
in principal amount of the Notes Outstanding a direction inconsistent with such
request, and (iv) the Trustee shall have failed to institute any such
proceeding, for 60 days after receipt of such notice, request and offer of
indemnity. The foregoing shall not apply to any suit instituted by the Holder
of this Note for the enforcement of any payment of principal hereof, premium, if
any, or interest hereon on or after the respective due dated expressed herein or
for the enforcement of the right to convert this Note as provided in the
Indenture.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable in the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company in the city of New York, New York, or the city in which
the Corporate Trust Office of the Trustee is located, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Note Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made to a Holder for any such registration
of transfer or exchange, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note is overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary. All
terms used in this Note which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
The Indenture and the Notes shall be governed by and construed in
accordance with the laws of the State of New York,
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without regards to the conflicts of law principles as applied in such state.
All terms used in this Note that are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
Section 2.4 Form of Trustee's Certificate of Authentication.
This is one of the Notes referred to in the within-mentioned
Indenture.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
____________________________
By: Authorized signatory
--------------------
Section 2.5 Form of Conversion Notice.
To Signature Resorts, Inc.:
The undersigned owner of this Note hereby irrevocably exercises the
option to convert this Note, or portion hereof (which is $1,000 or an integral
multiple thereof) below designated, into shares of Common Stock of Signature
Resorts, Inc., in accordance with the terms of the Indenture referred to in this
Note, and directs that the certificate or certificates for the shares issuable
and deliverable upon the conversion, together with any check in payment for
fractional shares and any Notes representing any unconverted principal amount
hereof, be issued in the name of and delivered to the undersigned, unless a
different name has been indicated below. If shares of common stock are to be
issued in the name of a person other than the undersigned, the undersigned will
pay any transfer taxes payable with respect thereto. Any amount required to be
paid by the undersigned on account of interest accompanies this Note.
Principal Amount to be converted (in an integral multiple of $1,000,
if less than all): $_______________________
FILL IN FOR REGISTRATION OF SHARES:
----------------------------------
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Please print name and address (including zip code)
Name: _______________________________
Address: _______________________________
_______________________________
Please Insert Social Security or Other Taxpayer Identifying
Number:__________________
Fill in for registration of shares of Common stock and Securities if
to be issued otherwise than to the Holder:
<TABLE>
<CAPTION>
______________________ _____________________
<S> <C>
(Name) Social Security or other Taxpayer
Identifying Number
______________________
(Signature(s)
</TABLE>
Signature(s) must be guaranteed by an Eligible Guarantor Institution with
membership in an approved signature guarantee program pursuant to Rule 17Ad-15
under the Securities Exchange Act of 1934.
______________________
Signature Guaranteed
Section 2.6 Form of Assignment
For value received_________________ hereby sell(s), assign(s) and
transfer(s) unto _________________ (please insert name and social security or
other identifying number of assignee) the within Note, and hereby irrevocably
constitutes and appoints ________________________ as attorney to transfer the
said Note on the books of the Company, with full power of substitution in the
premises.
Dated: _____________________________
Signature(s)
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Signature(s) must be guaranteed by an Eligible Guarantor Institution with member
ship in an approved signature guarantee program pursuant to Rule 17Ad-15 under
the Securities Exchange Act of 1934.
_____________________________
Signature Guaranteed
ARTICLE 3
THE NOTES
Section 3.1 Title and Terms.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $100,000,000 (except for such
additional principal amounts, not to exceed $15,000,000, of Notes issued to
cover over-allotments in the initial public offering of the Notes), except for
Notes authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Notes pursuant to Section 3.4, 3.5, 3.6, 9.6,
11.8, 12.2 or 14.2.
The Notes shall be known and designated as the "______% Convertible
Subordinated Notes due ____________, 2007" of the Company. Their final Stated
Maturity shall be ______________, 2007, and they shall bear interest at the rate
of _____% per annum, from January ____, 1997 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, as the case
may be, payable semi-annually on January __ 1 and July __, commencing July __,
1997 until the principal thereof is paid or made available for payment.
The principal of (and premiums if any) and interest on the Notes shall
be payable at the office or agency of the Company in New York, New York or the
city in which the Corporate Trust Office of the Trustee is located for such
purpose and at any other office or agency maintained by the Company for such
purpose; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
The Notes shall be redeemable as provided in Article Eleven.
The Notes shall be convertible as provided in Article Twelve.
The Notes shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Thirteen.
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The Notes shall be subject to repurchase at the option of the Holder
as provided in Article Fourteen.
The Notes are not entitled to the benefit of any sinking fund.
Section 3.2 Denominations.
The Notes shall be issuable only in registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof.
Section 3.3 Execution, Authentication, Delivery and Dating.
The Notes shall be executed on behalf of the Company by its Chairman
of the Board, its President or one of its Vice Presidents, under its corporate
seal reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Notes may be manual
or facsimile.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Notes executed by the Company to the
Trustee for authentication, together with a Company Order for the authentication
and delivery of such Notes; and the Trustee in accordance with such Company
Order shall authenticate and deliver such Notes as in this Indenture provided
and not otherwise.
Each Note shall be dated the date of its authentication. No Note
shall be entitled to any benefit under this Indenture or be valid or obligatory
for any purpose unless there appears on such Note a certificate of
authentication substantially in the form provided for herein executed by the
Trustee by manual signature, and such certificate upon any Note shall be
conclusive evidence, and the only evidence, that such Note has been duly
authenticated and delivered hereunder.
Section 3.4 Temporary Notes.
Pending the preparation of definitive Notes, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Notes which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
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definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as evidenced by their execution of such
Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at any office or agency of the Company
designated pursuant to Section 10.2, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
like principal amount of definitive Notes of authorized denominations. Until so
exchanged the temporary Notes shall in all respects be entitled to the same
benefits under this Indenture as definitive Notes.
For purposes of this Section 3.4 each Global Note shall be considered
a definitive Note.
Section 3.5 Registration; Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agent designated pursuant to Section 10.2 being herein sometimes
collectively referred to as the "Note Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Notes and of transfers of Notes. The Trustee is hereby
appointed "Note Registrar" for the purpose of registering Notes and transfers of
Notes as herein provided.
Upon surrender for registration of transfer of any Note at an office
or agency of the Company designated pursuant to Section 10.2 for such purpose,
the Company shall execute, and the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Notes of
any authorized denominations and of a like aggregate principal amount.
At the option of the Holder, Notes may be exchanged for other Notes of
any authorized denominations and of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such office or agency. Whenever any
Notes are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Notes which the Holder making the
exchange is entitled to receive.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under
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<PAGE>
this Indenture, as the Notes surrendered upon such registration of transfer or
exchange.
Every Note presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed, by the Holder
thereof or his attorney duly authorized in writing.
No service charge shall be made to a Holder for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 3.4, 9.6, 11.8, 12.2, 14.2 or 14.3(e) not
involving any transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Note during a period beginning at the opening of business 15
days before the day of the mailing of a notice of redemption of Notes selected
for redemption under Section 11.4 and ending at the close of business on the day
of such mailing, or (ii) to register the transfer of or exchange any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part.
The provisions of Clauses (1), (2), (3), (4) and (5) below shall apply
only to Global Notes:
(1) Each Global Note authenticated under this Indenture shall be
registered in the name of the Depositary designated for such Global Note or a
nominee thereof and delivered to such Depositary or a nominee thereof or
Custodian therefor, and each such Global Note shall constitute a single Note for
all purposes of this Indenture.
(2) Notwithstanding any other provision in this Indenture, no Global
Note may be exchanged in whole or in part for Notes registered, and no transfer
of a Global Note in whole or in part may be registered, in the name of any
Person other than the Depositary for such Global Note or a nominee thereof
unless (A) such Depositary (i) has notified the Company that it is unwilling or
unable to continue as Depositary for such Global Note or (ii) has ceased to be a
clearing agency registered under the Exchange Act, or (B) there shall have
occurred and be continuing an Event of Default with respect to such Global Note.
(3) Subject to Clause (2) above, any exchange of a Global Note for
other Notes may be made in whole or in part, and all Notes issued in exchange
for a Global Note or any portion
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thereof shall be registered in such names as the Depositary for such Global Note
shall direct.
(4) Every Note authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Note or any portion
thereof, whether pursuant to this Article Three or otherwise, shall be
authenticated and delivered in the form of, and shall be, a global note, unless
such Note is registered in the name of a Person other than the Depositary for
such Global Note or a nominee thereof.
(5) The Depositary or its nominee, as registered owner of a Global
Note, shall be the Holder of such Global Note for all purposes under the
Indenture and the Notes, and owners of beneficial interests in a Global Note
shall hold such interests pursuant to the Applicable Procedures. Accordingly,
any such owner's beneficial interest in a Global Note will be shown only on, and
the transfer of such interest shall be effected only through, records maintained
by the Depositary or its nominee or its Agent Members and such owners of
beneficial interests in a Global Note will not be considered the owners or
holders thereof. Neither the Company nor the Trustee will have any
responsibility or obligation to the Depositary or any of its Agent Members with
respect to (i) the accuracy of any records maintained by the Depositary, (ii)
the payment by the Depositary or any Agent Members of any amount due to any
owner of beneficial interests in a Global Note in respect of any Notes, (iii)
the delivery of any notice by the Depositary or any Agent Member, or (v) any
other action taken by the Depositary or any Agent Members.
Section 3.6 Mutilated, Destroyed, Lost and Stolen Notes.
If any mutilated Note is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Note of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Note and
(ii) such security or indemnity as may be required by them to save each of them
and any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen Note, a
new Note of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, the
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Company in its discretion may, instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.7 Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the Holder on the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in clause (i) or (ii) below:
(i) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Note and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
in this clause
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provided. Thereupon the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date and, in
the name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at his address as it appears
in the Note Register, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the Special Record
Date therefor having been so mailed, such Defaulted Interest shall be paid to
the Persons in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on such Special Record Date and shall no
longer be payable pursuant to the following clause (2).
(ii) The Company may make payment of any Defaulted Interest in any other
lawful manner, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section 3.7, each Note
delivered under this Indenture upon registration of, transfer of, or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
In the case of any Note which is converted after any Regular Record
Date but on or before the next Interest Payment Date, interest whose Stated
Maturity is on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
that Note (or one or more Predecessor Notes) is registered at the close of
business on such Regular Record Date.
Section 3.8 Persons Deemed Owners.
Prior to due presentment of a Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Note is registered as the owner of such Note for the
purpose of receiving payment of principal of (and premium, if any) and (subject
to Section 3.6) interest on such Note and for all other purposes whatsoever,
whether or not such Note be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
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Section 3.9 Cancellation.
All Notes surrendered for payment, redemption, registration of
transfer or exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Notes previously authenticated and delivered hereunder which the Company may
have acquired in any manner whatsoever, and all Notes so delivered shall be
promptly cancelled by the Trustee. No Notes shall be authenticated in lieu of
or in exchange for any Notes cancelled as provided in this Section, except as
expressly permitted by this Indenture. All cancelled Notes held by the Trustee
shall be disposed of in accordance with the Trustee's usual document destruction
procedures.
Section 3.10 Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
ARTICLE 4
SATISFACTION AND DISCHARGE
Section 4.1 Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of conversion, registration of transfer or exchange of Notes
herein expressly provided for), and the Trustee, on demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(a) either
(i) all Notes theretofore authenticated and delivered (other than (1) Notes
which have been destroyed, lost or stolen and which have been replaced or paid
as provided in Section 3.6 and (2) Notes for whose payment money has theretofore
been deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as provided in
Section 10.3) have been delivered to the Trustee for cancellation; or
(ii) all such Notes not theretofore delivered to the Trustee for
cancellation (1) have become due and payable, (2) will become due and payable at
their Stated Maturity within one year, or (3) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Company, and, the Company, in the case of (1), (2) or (3) above, has deposited
---
or caused to be deposited with
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the Trustee as trust funds in trust for the purpose an amount sufficient to pay
and discharge the entire indebtedness on such Notes not theretofore delivered to
the Trustee for cancellation for principal (and premium, if any) and interest to
the date of such deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be; or
(iii) all outstanding Notes are delivered to the Trustee for conversion in
accordance with the provisions of this Indenture; and
(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.7, the obligations of
the Trustee to any Authenticating Agent under Section 6.14 and, if money shall
have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of
this Section, the obligations of the Trustee under Section 4.2 and the last
paragraph of Section 10.3 shall survive. Except as specifically agreed in
writing, the Trustee shall not be responsible for the payment of interest upon
money deposited with it under this Indenture.
Section 4.2 Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.3, all
money deposited with the Trustee pursuant to Section 4.1 shall be held in trust
and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee. All moneys deposited with the Trustee pursuant to Section 4.1 (and
held by it or any Paying Agent) for the payment of Notes subsequently converted
shall be returned to the Company upon Company Request.
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ARTICLE 5
REMEDIES
Section 5.1 Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Thirteen or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of any interest upon any Note when it becomes
due and payable, and continuance of such default for a period of 30 days whether
or not such payment is prohibited by the subordination provisions contained in
Article Thirteen; or
(b) default in the payment of the principal of (or premium, if any, on) any
Note at its Maturity whether or not such payment is prohibited by the
subordination provisions contained in Article Thirteen; or
(c) failure by the Company to provide a Company Notice of Change in
Control;
(d) default in the performance, or breach, of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty a default in
whose performance or whose breach is elsewhere in this Section 5.1 specifically
dealt with), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least [25%]
in principal amount of the Outstanding Notes, a written notice specifying such
default or breach and requiring it to be remedied and stating that such notice
is a "Notice of Default" hereunder; or
(e) a failure by the Company or any Significant Subsidiary to make any
payment at maturity in respect of any obligations (other than Non-Recourse Debt)
of, or guaranteed or assumed by, the Company or any Significant Subsidiary, for
borrowed money ("Indebtedness") in an amount in excess of $15,000,000 and
continuance of such failure for ninety (90) days, or a default by the Company or
any Significant Subsidiary with respect to any Indebtedness, which default
results in the acceleration of the Indebtedness in an amount in excess of
$15,000,000, and such acceleration not having been cured, waived, rescinded or
annulled within 90 days of such acceleration; or
(f) a final judgment or judgments for payment of money against the Company
or any Significant Subsidiary which remains
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undischarged for a period ending on the later of (a) 60 days after the entry of
such judgment, as extended by any effective stay of its execution; or (b) the
date on which any payment is or becomes due pursuant to such judgment in
accordance with its terms, other than final judgments with respect to Non-
recourse Debt of the Company or any of its significant Subsidiaries, provided
--------
that the aggregate of all such outstanding judgments exceed $15 million
(excluding any amounts covered by insurance as to which the insurer has not
denied liability); or
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law or (ii) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order for relief or any such other decree or order unstayed
and in effect for a period of 60 consecutive days; or
(h) the commencement by the Company of a voluntary case or proceeding under
any applicable Federal or state bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by it to the entry of a decree or order for relief in
respect of the Company in an involuntary case or proceeding under any applicable
Federal or state bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or state law, or the
consent by it to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator
or similar official of the Company or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as they
become due, or the taking of corporate action by the Company in substantial
furtherance of any such action.
Section 5.2 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 5.1(g) or 5.1(h) occurs and is continuing, then and in every such case
the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Notes may declare the principal of all the Notes to be due and
payable immediately, by a notice in writing to the Company (and to the
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Trustee if given by Holders), and upon any such declaration such principal shall
become immediately due and payable. If an Event of Default specified in Section
5.1(g) or 5.1(h) occurs and is continuing, the principal and any accrued
interest thereon, of all Outstanding Notes shall become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
At any time after such a declaration of acceleration has been made,
the Holders of a majority in principal amount of the Outstanding Notes, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (i) the Company has paid or deposited with
the Trustee a sum sufficient to pay
(a) all overdue interest on all Notes,
(b) the principal of (and premium, if any, on) any Notes which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate of [Note interest rate] _______% per annum,
(c) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate of [Note interest rate] ________% per annum,
and
(d) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel; and
(ii) all Events of Default, other than the non-payment of the principal of
Notes which have become due solely by such declaration of acceleration, have
been cured or waived (as provided in Section 5.13.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Section 5.3 Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(a) default is made in the payment of any interest on any Note when such
interest becomes due and payable and such default continues for a period of 30
days; or
(b) default is made in the payment of the principal of (or premium, if any,
on) any Note at the Maturity thereof, the Company will, upon demand of the
Trustee, pay to it, for the benefit of the Holders of such Notes, the whole
amount then due and payable on such Notes for principal (and premium, if any)
and
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interest, and, to the extent that payment of such interest shall be legally
enforceable, interest on any overdue principal (and premium, if any) and on any
overdue interest, at a rate of [Note interest rate] _____% per annum, and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may (i)
institute a judicial proceeding for the collection of the sums so due and
unpaid, (ii) prosecute such proceeding to judgment or final decree and may (iii)
enforce the same against the Company or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company or any other obligor upon the Notes,
wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
Section 5.4 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Notes and take
such other actions, including participating as a member, voting or otherwise, of
any official committee of creditors appointed in such matter and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including, without limitation, any claim for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel) and of the Holders of Notes allowed in such judicial
proceeding; and
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(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding; provided, however, that the
Trustee may, on behalf of such Holders, vote for the election of a trustee in
bankruptcy or similar official and may serve on a creditor's committee.
Section 5.5 Trustee May Enforce Claims Without Possession of Notes.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name as trustee
of an express trust, and any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, be for the ratable benefit of the Holders
of the Notes in respect of which such judgment has been recovered.
Section 5.6 Application of Money Collected.
Subject to Article Thirteen, any money collected by the Trustee
pursuant to this Article shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal (or premium, if any) or interest, upon presentation of the
Notes and the notation thereon of the payment if only partially paid, and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due to the Trustee under
Section 6.7; and
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes in respect of which
or for the benefit of which such money
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has been collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Notes for principal (and
premium, if any) and interest, respectively.
THIRD: Any remaining amounts, if any, shall be repaid to the Company,
its successors or assigns, or to whomever may be lawfully entitled to the same,
or as a court of competent jurisdiction may determine.
Section 5.7 Limitation on Suits.
No Holder of any Note shall have any right to institute any action,
suit or proceeding, judicial or otherwise, with respect to this Indenture, or
for the appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(b) the Holders of not less than 25% in principal amount of the Outstanding
Notes shall have made written request to the Trustee to institute proceedings in
respect of such Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request;
(d) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such action, suit or proceeding;
and
(e) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in principal
amount of the Outstanding Notes; it being understood and intended that no one or
more Holders shall have any right in any manner whatever by virtue of, or by
availing itself of, any provision of this Indenture to affect, disturb or
prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all the Holders.
Section 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert.
Notwithstanding any other provision in this Indenture, but subject to
the provisions of Article Thirteen, the Holder of any Note shall have the right,
which is absolute and unconditional, to receive payment of the principal of (and
premium, if any) and (subject to Section 3.7) interest on such Note on the
respective Stated Maturities expressed in such Note
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(or, in the case of redemption, on the Redemption Date) and to convert such Note
in accordance with Article Twelve and to institute suit for the enforcement of
any such payment and right to convert, and such rights shall not be impaired
without the prior written consent of such Holder.
Section 5.9 Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 5.10 Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 5.11 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
Section 5.12 Control by Holders.
The Holders of a majority in principal amount of the Outstanding Notes
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that (i) such direction shall not be in
conflict with any rule of law or with this Indenture, and
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(ii) the Trustee may take any other action deemed proper by the Trustee which is
not inconsistent with such direction.
Section 5.13 Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default hereunder and its consequences, except a default
(a) in the payment of the principal of (or premium, if any) or interest on
any Note, or
(b) in respect of a covenant or provision hereof which under Article Nine
cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected; provided, however, that no such waiver shall be
effected until all amounts then due to the Trustee under Section 6.7 have been
paid.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Section 5.14 Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Notes, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of (or premium, if any) or interest on any Note on or after the
respective Stated Maturities expressed in such Note (or, in the case of
redemption, on or after the Redemption Date) or for the enforcement of the right
to convert any Note in accordance with Article Twelve, or to require the Company
to repurchase any Notes in accordance with the provisions of Article Fourteen.
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Section 5.15 Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 6
THE TRUSTEE
Section 6.1 Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(i) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture, but need not verify the accuracy of the contents thereof.
(b) In case an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own wilful misconduct, except that
(i) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section 6.1;
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(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the Outstanding
Notes relating to the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture; and
(iv) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
Section 6.2 Notice of Defaults.
Within 90 days after the occurrence of any default hereunder, the
Trustee shall transmit by mail to all Holders, as their names and addresses
appear in the Note Register, notice of such default hereunder known to the
Trustee, unless such default shall have been cured or waived; provided, however,
that, except in the case of a default in the payment of the principal of (or
premium, if any) or interest on any Note, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of directors or Responsible Officers of the
Trustee in good faith determines that the withholding of such notice is in the
interest of the Holders. For the purpose of this Section, the term "default"
means any event which is, or after notice or lapse of time or both would become,
an Event of Default.
Section 6.3 Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be
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genuine and to have been signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking, suffering
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely upon
an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction;
(f) the Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;
(h) the permissive right of the Trustee to take or refrain from taking any
actions enumerated in this Indenture shall not be construed as a duty and the
Trustee shall not be answerable in such actions other than for its own
negligence or bad faith; and
(i) the Trustee shall not be deemed to know of any fact or event upon the
occurrence of which it may be required to take
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action hereunder (except with respect to monetary defaults) unless one of its
Responsible Officers shall have actual knowledge thereof.
Section 6.4 Not Responsible for Recitals or Issuance of Notes.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Notes. The Trustee shall not be accountable for the use or application
by the Company Notes or the proceeds thereof.
Section 6.5 May Hold Notes.
The Trustee, any Authenticating Agent, any Paying Agent, any Note
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Notes and, subject to Sections 6.8
and 6.13, may otherwise deal with the Company with the same rights it would have
if it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or
such other agent.
Section 6.6 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company in writing.
Section 6.7 Compensation and Reimbursement.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust);
(b) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
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(c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of this
trust, including the costs, expenses and reasonable attorneys' fees of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder.
Section 6.8 Disqualification; Conflicting Interests.
If the Trustee has or shall acquire any conflicting interest, within
the meaning of the Trust Indenture Act, it shall, within 90 days after
ascertaining that it has such conflicting interest, either eliminate such
conflicting interest or resign in accordance with the provisions of the Trust
Indenture Act.
Section 6.9 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America, any State thereof or the District of Columbia, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by Federal and
State or District of Columbia authority. If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article and a
successor shall be appointed pursuant to Section 6.10.
Section 6.10 Resignation and Removal Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
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(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Notes, delivered to the Trustee
and to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 6.8 after written
request therefor by the Company or by any Holder who has been a bona fide Holder
of a Note for at least six months, or
(ii) the Trustee shall cease to be eligible under Section 6.9 and
shall fail to resign after written request therefor by the Company or by any
such Holder (as described in the preceding paragraph), or
(iii) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation then, in any such case, (1) the Company by a Board
Resolution may remove the Trustee, or (2) subject to Section 5.14, any Holder
who has been a bona fide Holder of a Note for at least six months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Board Resolution, shall promptly appoint a successor Trustee. If, within
one year after such resignation, removal or incapability, or the occurrence of
such vacancy, a successor Trustee shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Notes delivered to the Company
and the retiring Trustee, the successor Trustee so appointed shall, forthwith
upon its acceptance of such appointment, become the successor Trustee and
supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to all Holders as
their names and addresses appear in the Note Register. Each notice shall
include
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the name of the successor Trustee and the address of its Corporate Trust Office.
Section 6.11 Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee,
the Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article Six.
Section 6.12 Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Notes shall have been authenticated, but
not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Notes so authenticated with the same effect as if
such successor Trustee had itself authenticated such Notes.
Section 6.13 Preferential Collection of Claims Against Company.
If the Trustee shall be or shall become a creditor, directly or
indirectly, secured or unsecured, of the Company or any other obligor on the
Notes, the Trustee shall be subject to and comply with the provisions of the
Trust Indenture Act
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regarding the collection of claims against the Company or such other obligor.
Section 6.14 Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents which shall
be authorized to act on behalf of the Trustee to authenticate Notes issued upon
original issue and upon exchange, registration of transfer, partial conversion
or partial redemption or pursuant to Section 3.6, and Notes so authenticated
shall be entitled to the benefits of this Indenture and shall be valid and
obligatory for all purposes as if authenticated by the Trustee hereunder.
Wherever reference is made in this Indenture to the authentication and delivery
of Notes by the Trustee or the Trustee's certificate of authentication, such
reference shall be deemed to include authentication and delivery on behalf of
the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be subject to acceptance by the Company and shall at
all times be a corporation organized and doing business under the laws of the
United States of America, any State thereof or The District of Columbia,
authorized under such laws to act as Authenticating Agent, having a combined
capital and surplus of not less than $50,000,000 and subject to supervision or
examination by Federal or State authority. If such Authenticating Agent
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Authenticating Agent
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time an Authenticating Agent
shall cease to be eligible in accordance with the provisions of this Section,
such Authenticating Agent shall resign immediately in the manner and with the
effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice
of resignation or upon such a termination, or in case at
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any time such Authenticating Agent shall cease to be eligible in accordance with
the provisions of this Section, the Trustee may appoint a successor
Authenticating Agent which shall be subject to acceptance by the Company and
shall mail written notice of such appointment by first-class mail, postage
prepaid, to all Holders as their names and addresses appear in the Note
Register. Any successor Authenticating Agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
Authenticating Agent. No successor Authenticating Agent shall be appointed
unless eligible under the provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 6.7.
If an appointment is made pursuant to this Section 6.14, the Notes may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternate certificate of authentication in the following
form:
This is one of the Notes described in the within-mentioned Indenture.
Norwest Bank Minnesota, National Association
As Trustee
By: ______________________________
Authorized Officer
By: _______________________________
As Authenticating Agent
By: _________________________________
Authorized Officer
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1 Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each Regular Record Date, a
list, in such form as the Trustee may
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reasonably require, of the names and addresses of the Holders as of such Regular
Record Date, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;
Excluding from any such list names and addresses received by the
Trustee in its capacity as Note Registrar.
Section 7.2 Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.1 and the names and
addresses of Holders received by the Trustee in its capacity as Note Registrar.
The Trustee may destroy any list furnished to it as provided in Section 7.1 upon
receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Notes, and the corresponding
rights and privileges of the Trustee, shall be as provided in the Trust
Indenture Act.
(c) Every Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that neither the Company nor the Trustee nor any
agent of either of them shall be held accountable by reason of the disclosure of
any such information as to the names and addresses of the Holders made pursuant
to the Trust Indenture Act.
Section 7.3 Reports by Trustee.
(a) On or about each July ______, the Trustee shall transmit to Holders
such reports, if any, dated as of April __________, concerning the Trustee and
its actions under this Indenture as may be required pursuant to the Trust
Indenture Act in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which the Notes
are listed (if applicable), with the Commission and with the Company. The
Company will notify the Trustee when the Notes are listed on any stock exchange
(if applicable).
Section 7.4 Reports by Company.
The Company shall file with the Trustee and the Commission, and
transmit to the Holders, such information,
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documents and other reports, and such summaries thereof, as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant to the Trust Indenture Act; provided that any such information,
documents or reports required to be filed with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within
15 days after the same is so required to be filed with the Commission.
ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 8.1 Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other
Person or transfer or lease all or substantially all of its properties and
assets to any Person, unless:
(i) in case the Company shall consolidate with or merge into another
Person or transfer or lease all or substantially all of its properties and
assets to any Person, the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by transfer, or which leases the
properties and assets of the Company substantially as an entirety shall be a
corporation, partnership or trust, shall be organized and validly existing under
the laws of the United States of America, any State thereof or the District of
Columbia and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, the
due and punctual payment of the principal of (and premium, if any) and interest
on all the Notes and the performance of every covenant of this Indenture on the
part of the Company to be performed or observed and shall have provided for
conversion rights in accordance with Article Twelve hereof;
(ii) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing; and
(iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, transfer or lease and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, complies with
this
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Article, and that all conditions precedent herein provided relating to such
transaction have been complied with.
Section 8.2 Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any transfer or lease of all or substantially all of
the properties and assets of the Company in accordance with Section 8.1 the
successor Person formed by such consolidation or into which the Company is
merged or to which such transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein, and thereafter, except in the case of a lease, the
Company shall be relieved of all obligations and covenants under this Indenture
and the Notes.
ARTICLE 9
SUPPLEMENTAL INDENTURES
Section 9.1 Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company and the
assumption by any such successor of the covenants of the Company herein and in
the Notes; or
(b) to add to the covenants of the Company for the benefit of the Holders,
or to surrender any right or power herein conferred upon the Company; or
(c) to secure the Notes; or
(d) to make provision with respect to the conversion rights of Holders
pursuant to the requirements of Article Twelve; or the repurchase obligations of
the Company pursuant to the requirements of Article Fourteen; or
(e) to add any additional Events of Default; or
(f) to evidence and provide for the acceptance of appointment hereunder by
a successor Trustee with respect to the Notes; or
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(g) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any other
provisions with respect to matters or questions arising under this Indenture,
provided such action pursuant to this clause (g) shall not adversely affect the
interests of the Holders.
Section 9.2 Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Notes, by Act of said Holders delivered to
the Company and the Trustee, the Company, when authorized by a Board Resolution,
and the Trustee may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders under this Indenture; provided, however, that
no such supplemental indenture shall, without the consent of the Holder of each
Outstanding Note affected thereby:
(a) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or reduce
the amount payable upon an optional redemption or the consideration payable to
any Holder converting after a notice of redemption has been given, or modify the
provisions of Article Fourteen in a manner adverse to the Holders, or change the
place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or in the case of redemption, on or after the Redemption Date), or
modify the provisions of Article Twelve in a manner adverse to the Holders, or
modify the provisions of Article Thirteen in a manner adverse to the Holders, or
(b) reduce the percentage in principal amount of the Outstanding Notes the
consent of whose Holders is required for any such supplemental indenture, or the
consent of whose Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture, or
(c) modify the obligation of the Company to maintain an office or agency in
the city of ________________, pursuant to Section 10.2, or
(d) modify any of the provisions of this Section 9.2, Section 5.13 or
Section 10.8, except to increase any such percentage or to provide that certain
other provisions of this
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Indenture cannot be modified or waived without the consent of the Holder of each
Outstanding Note affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
Section 9.3 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 6.1) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which, in the Trustee's
sole discretion, affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
Section 9.4 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
Section 9.5 Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.6 Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee in exchange for
Outstanding Notes.
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Section 9.7 Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 9.1 or Section 9.2,
the Company shall give notice to all Holders of Securities of such fact, setting
forth in general terms the substance of such supplemental indenture, in the
manner provided in Section 1.6. Any failure of the Company to give such notice,
or any defect therein, shall not in any way impair or affect the validity of any
such supplemental indenture.
ARTICLE 10
COVENANTS
Section 10.1 Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and
premium, if any) and interest on the Notes in accordance with the terms of the
Notes and this Indenture.
Section 10.2 Maintenance of Office or Agency.
The Company hereby appoints the corporate trust office of the Trustee,
as its agent in the city of [___________________] where Notes may be presented
or surrendered for payment where Notes may be surrendered for registration of
transfer or exchange, where conversion notices, certificates and other items
required to be delivered to effect conversion may be delivered and where notices
and demands to or upon the Company in respect of the Notes and this Indenture
may be served.
The Company hereby also appoints the Corporate Trust Office of the
Trustee as Paying Agent for the payment of principal of (and premium, if any),
and interest on the Securities and as "Conversion Agent" for the Conversion of
any of the Notes in accordance with Article Twelve, and appoints the Corporate
Trust Office of the Trustee as transfer agent where Notes may be surrendered for
registration of transfer or exchange.
The Company may at any time and from time to time vary or terminate
the appointment of any such Conversion Agent or appoint any additional
Conversion Agents with or without cause for any or all of such purposes;
provided, however, that until all of the Notes have been delivered to the
Trustee for cancellation, or moneys sufficient to pay the principal of and
interest on Notes have been made available for payment and either paid or
returned to the Company pursuant to the provisions of Section 10.3, the Company
will maintain in the city of ___________, an office or agency where Notes may be
presented or surrendered for payment, where Notes may be surrendered for
registration of transfer or exchange, where Notes may be
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surrendered for conversion and where notices and demand to or upon the Company,
in respect of the Notes and this Indenture may be served. The Company will give
prompt written notice to the Trustee, and will give notice to Holders of Notes
in the manner specified in Section 1.6 of the appointment or termination of any
such agents and of the location and any change in the location of any such
office or agency.
If at any time the Company shall fail to maintain any such required
office or agency, or shall fail to furnish the Trustee with the address thereof,
presentations and surrenders may be made and notice and demands may be served on
and Notes may be surrendered for conversion to the Corporate Trust Office of the
Trustee, and the Company hereby appoints the same as its agent to receive such
respective presentations, surrenders, notices and demands.
Section 10.3 Money for Note Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any) or interest
on any of the securities, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure so to act. Whenever the Company shall have one or more
Paying Agents, it will, prior to each due date of the principal of (and premium,
if any) or interest on any Notes, deposit with a Paying Agent a sum sufficient
to pay the principal (and premium, if any) or interest so becoming due, such sum
to be held in trust for the benefit of the Persons entitled to such principal,
premium or interest, and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(i) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Notes in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(ii) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal (and
premium, if any) or interest; and
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(iii) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (and premium, if
any) or interest on any Note and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall,
subject to applicable escheat and abandoned property law, be paid to the Company
on Company Request, or (if then held by the Company) shall be discharged from
such trust; and the Holder of such Note shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may, at the expense of the Company, cause to be
published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation in The City of
______________ and in the city in which the Corporate Trust Office of the
Trustee is located, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
Section 10.4 Statement by Officers as to Default.
The Company shall deliver to the Trustee, within 60 days after the end
of each fiscal year of the Company, an Officer's Certificate stating whether or
not to the knowledge of the signers thereof the Company is in compliance with
all conditions and covenants under the Indenture (without regard to any period
of grace or requirement of notice provided hereunder).
The Company will deliver to the Trustee, within 3 Business Days after
becoming aware of any default or Event of Default under this Indenture, an
Officers' Certificate specifying with particularity such default or Event of
Default and further stating what action the Company has taken, is taking or
proposes to take with respect thereto. For the purpose of this Section,
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the term "default" means any event which is, or after notice or lapse of time or
both would become, and Event of Default.
Any notice required to be given under this Section 10.4 shall be
delivered to the Trustee at its Corporate Trust Office.
Section 10.5 Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises; provided, however, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall reasonably determine that the preservation thereof is
no longer desirable in the conduct of the business of the Company [and that the
loss thereof is not disadvantageous in any material respect to the Holders.]
Section 10.6 Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of
its business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section 10.6 shall prevent the Company from discontinuing the
operation or maintenance of any of such properties if such discontinuance is, in
the reasonable judgment of the Company, desirable in the conduct of its business
or the business of any Subsidiary [and not disadvantageous in any material
respect to the Holders.]
Section 10.7 Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary, and (ii)
all lawful claims for labor, materials and supplies which, if unpaid, might by
law become a lien upon the real or personal property of the Company or any
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which disputed amounts adequate reserves in
accordance with generally accepted accounting principles have been made.
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Section 10.8 Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Sections 10.1 to 10.6, inclusive (excluding
Sections 10.1 and 10.4), if before the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Notes shall, by Act
of such Holders, either waive such compliance in such instance or generally
waive compliance with such covenant or condition, but no such waiver shall
extend to or affect such covenant or condition except to the extent so expressly
waived, and, until such waiver shall become effective, the obligations of the
Company and the duties of the Trustee in respect of any such covenant or
condition shall remain in full force and effect.
Section 10.9 Book-Entry System
If the Notes cease to trade in DTC's book-entry settlement system, the
Company covenants and agrees that it shall use reasonable efforts to make such
other book-entry arrangements that it determines are reasonable for the
Securities.
ARTICLE 11
REDEMPTION OF NOTES
Section 11.1 Right of Redemption.
The Notes may be redeemed at the election of the Company, as a whole
or from time to time in part, at any time on or after _______________, 2000, at
the Redemption Prices specified in the form of Note hereinbefore set forth,
together with accrued interest to the Redemption Date.
Section 11.2 Applicability of Article.
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article Eleven.
Section 11.3 Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Notes pursuant to Section
11.1 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company of less than all the Notes, the Company shall, at least
60 days prior to the Redemption Date fixed by the Company (unless a shorter
notice shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Notes to be redeemed.
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Section 11.4 Selection by Trustee of Notes to Be Redeemed.
If less than all the Notes are to be redeemed, the particular Notes to
be redeemed shall be selected not more than 30 days prior to the Redemption Date
by the Trustee, from the Outstanding Notes not previously called for redemption,
by such method as the Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions (equal to $1,000 or any
integral multiple thereof) of the principal amount of Notes of a denomination
larger than $1,000.
If any Note selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Note so selected, the converted portion of such Note shall be deemed (so far as
may be) to be the portion selected for redemption. Notes which have been
converted during a selection of Notes to be redeemed shall be treated by the
Trustee as Outstanding for the purpose of such selection.
The Trustee shall promptly notify the Company and each Note Registrar
in writing of the Notes selected for redemption and, in the case of any Notes
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Notes shall relate, in
the case of any Notes redeemed or to be redeemed only in part, to the portion of
the principal amount of such Notes which has been or is to be redeemed.
Section 11.5 Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at such Holder's address appearing
in the Note Register.
All notices of redemption shall state:
(a) the Redemption Date and accrued interest, if any,
(b) the Redemption Price and accrued interest, if any,
(c) if less than all the Outstanding Notes are to be redeemed, the
identification (and, in the case of partial redemption, the principal amounts)
of the particular Notes to be redeemed,
(d) that on the Redemption Date the Redemption Price will become due and
payable upon each such Note to be redeemed
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and that interest thereon will cease to accrue on and after said date,
(e) the conversion price, the date on which the right to convert the
principal of the Notes to be redeemed will terminate and the place or places
where such Notes may be surrendered for conversion, and
(f) the place or places where such Notes are to be surrendered for payment
of the Redemption Price and accrued interest, if any.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
Section 11.6 Deposit of Redemption Price.
Not less than one Business Day prior to any Redemption Date, the
Company shall deposit with the Trustee or with a Paying Agent (or, if the
Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.3) an amount of money (which shall be in immediately
available funds on such Redemption Date) sufficient to pay the Redemption Price
of, and (except if the Redemption Date shall be an Interest Payment Date)
accrued interest on, all the Notes which are to be redeemed on that date other
than any Notes called for redemption on that date which have been converted
prior to the date of such deposit.
If any Note called for redemption is converted, any money deposited
with the Trustee or with any Paying Agent or so segregated and held in trust for
the redemption of such Note shall (subject to any right of the Holder of such
Note or any Predecessor Note to receive interest as provided in the last
paragraph of Section 3.7) be paid to the Company upon Company Request or, if
then held by the Company, shall be discharged from such trust.
Section 11.7 Notes Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any such
Note for redemption in accordance with said notice, such Note shall be paid by
the Company at the Redemption Price, together with accrued interest to the
Redemption Date; provided, however, that installments of interest whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such
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Notes, or one or more Predecessor Notes, registered as such at the close of
business on the relevant Record Dates according to their terms and the
provisions of Section 3.7.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate of [insert rate of Note]
_______%.
Section 11.8 Notes Redeemed in Part.
Any Note which is to be redeemed only in part shall be surrendered at
an office or agency of the Company designated for that purpose pursuant to
Section 10.2 (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the Holder thereof or his attorney duly authorized
in writing), and the Company shall execute, and the Trustee shall authenticate
and deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder, in aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Note so surrendered.
ARTICLE 12
CONVERSION OF NOTES
Section 12.1 Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Article
Twelve, at the option of the Holder thereof, at any time after sixty (60) days
following the latest date of original issuance of the Notes, any Note or any
portion of the principal amount thereof which is $1,000 or an integral multiple
of $1,000, may be converted at the principal amount thereof, or of such portion
thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock of the Company, at
the Conversion Price, determined as hereinafter provided, in effect at the time
of conversion. In case a Note or portion thereof is called for redemption or is
delivered for repurchase, such conversion right in respect of the Note or
portion so called shall expire at the close of business on the fifth Business
Day prior to the Redemption Date, or the fifth Business Day preceding the
Repurchase Date (as defined in Article Fourteen), as the case may be, unless the
Company defaults in making the payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "Conversion Price") shall be initially $______ per
share of Common Stock. The
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Conversion Price shall be adjusted in certain instances as provided in Section
12.4.
Section 12.2 Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any Note
to be converted shall surrender such Note, duly endorsed or assigned to the
Company or in blank, at any office or agency of the Company maintained for that
purpose pursuant to Section 10.2, accompanied by written notice to the Company
at such office or agency that the Holder elects to convert such Note or, if less
than the entire principal amount thereof is to be converted, the portion thereof
to be converted. In the case of any Note that has been converted during the
period from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on such Interest Payment Date,
interest whose Stated Maturity is on such Interest Payment Date shall be payable
on such Interest Payment Date notwithstanding such conversion and such interest
shall be paid to the Holder of such Note on such Regular Record Date. Notes
surrendered for conversion during the period from the close of business on any
Regular Record Date next preceding any Interest Payment Date to the opening of
business on such Interest Payment Date (the "Interest Period") shall be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of Notes being surrendered for
conversion; except that in the case of Notes or portions thereof that have been
called for redemption and, pursuant to Section 12.1 hereof, as a result of such
redemption, the right to convert such Notes terminates during the Interest
Period, any such Notes surrendered for conversion during such Interest Period
need not be accompanied by payment of an amount equal to such interest. Except
as provided in the second preceding sentence and subject to the sixth paragraph
of Section 3.7, no payment or adjustment shall be made upon any conversion on
account of any interest accrued on the Notes surrendered for conversion or on
account of any dividends on the Common Stock issued upon conversion. All
payments required by this paragraph to be made by the Holder upon the surrender
of Notes for conversion shall be made in New York Clearing House Funds or other
funds acceptable to the Company.
Notes shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Notes for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of such Notes as Holders shall cease, and the Person or Persons entitled
to receive the Common Stock issuable upon conversion shall be treated for all
purposes as the record holder or holders of such Common Stock at such time. As
promptly as practicable on or after the conversion date, the Company shall issue
and shall deliver at such office or agency a certificate or certificates for the
number of full shares of Common Stock issuable upon
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conversion, together with payment in lieu of any fraction of a share, as
provided in Section 12.3.
In the case of any Note which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Note or
Notes of authorized denominations in aggregate principal amount equal to the
unconverted portion of the principal amount of such Note.
Section 12.3 Fractions of Shares.
No fractional shares of Common Stock shall be issued upon conversion
of Notes. If more than one Note shall be surrendered for conversion at one time
by the same Holder, the number of full shares which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate principal
amount of the Notes (or specified portions thereof) so surrendered. Instead of
any fractional share of Common Stock which would otherwise be issuable upon
conversion of any Note or Notes (or specified portions thereof), the Company
shall pay a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the market price per share of Common Stock as reasonably
determined by the Board of Directors at the close of business on the day of
conversion.
Section 12.4 Adjustment of Conversion Price.
The Conversion Price shall be subject to adjustments from time to
time as follows:
(a) In case the Company shall pay or make a dividend or other distribution
on any class of capital stock of the Company in Common Stock, the Conversion
Price in effect at the opening of business on the day following the date fixed
for the determination of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination and the
denominator shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day following
the date fixed for such determination. For the purposes of this paragraph (a),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of shares of Common
Stock. The Company will not pay any dividend or make any distribution on shares
of Common Stock held in the treasury of the Company.
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(b) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the current market price per
share (determined as provided in paragraph (h) of this Section 12.4) of the
Common Stock on the record date fixed for the determination of stockholders
entitled to receive such rights, options or warrants, the Conversion Price in
effect at the opening of business on the day following the date fixed for such
determination shall be reduced by multiplying such Conversion Price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such current market price and the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the number of shares of
Common Stock so offered for subscription or purchase, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. For the purposes of this paragraph (b), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of shares of Common
Stock. The Company will not issue any rights, options or warrants in respect of
shares of Common Stock held in the treasury of the Company.
(c) In case outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(d) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock evidences of its indebtedness, shares of any class
of capital stock, cash or assets (including Notes, but excluding any (i) rights,
options or warrants referred to in paragraph (b) of this Section 12.4, (ii) any
dividend or distribution paid exclusively in cash, (iii) any dividend or
distribution referred to in paragraph (a) of this Section 12.4 and (iv) any
merger or consolidation to which Section 12.11 applies), the Conversion Price
shall be
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adjusted so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on the
date fixed for the determination of stockholders entitled to receive such
distribution by a fraction of which the numerator shall be the current market
price per share (determined as provided in paragraph (h) of this Section 12.4)
of the Common Stock on the date fixed for such determination less the then fair
market value (as determined by the Board of Directors, whose determination shall
be conclusive and described in a Board Resolution filed with the Trustee) of the
portion of the assets, shares or evidences of indebtedness so distributed
applicable to one share of Common Stock and the denominator shall be such
current market price per share of the Common Stock, such adjustment to become
effective immediately prior to the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
distribution. Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants (other than those referred to in paragraph (b) of
this Section 12.4) ("Rights") pro rata to holders of Common Stock, the Company
shall make proper provision so that each Holder of a Note who converts such Note
(or any portion thereof) after the record date for such distribution and prior
to the expiration or redemption of the Rights shall be entitled to receive upon
such conversion, in addition to the shares of Common Stock issuable upon such
conversion (the "Conversion Shares"), a number of Rights to be determined as
follows: (i) if such conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
Rights (the "Distribution Date"), the same number of Rights to which a holder of
a number of shares of Common Stock equal to the number of Conversion Shares is
entitled at the time of such conversion in accordance with the terms and
provisions of and applicable to the Rights; and (ii) if such conversion occurs
after the Distribution Date, the same number of Rights to which a holder of the
number of shares of Common Stock into which the principal amount of the Note so
converted was convertible immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
(e) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock cash (excluding any cash that is distributed upon a
merger or consolidation to which Section 12.11 applies or as part of a
distribution referred to in paragraph (d) of this Section 12.4) in an aggregate
amount that, combined together with (i) the aggregate amount of any other
distributions to all holders of its Common Stock made exclusively in cash within
the 12 months preceding the date of payment of such distribution and in respect
of which no adjustment pursuant to this paragraph (e) has been made and (ii) the
aggregate of any cash plus the fair market value (as reasonably determined by
the Board of Directors, whose determination shall be described in a
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Board Resolution) of consideration payable in respect of any tender offer by the
Company or any of its subsidiaries for all or any portion of the Common Stock
concluded within the 12 months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to paragraph (f) of
this Section 12.4 has been made, exceeds 15% of the product of the current
market price per share of the Common Stock on the date for the determination of
holders of shares of Common Stock entitled to receive such distribution
multiplied by the number of shares of Common Stock outstanding on such date,
then, and in each such case, immediately after the close of business on such
date for determination, the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for determination
of the stockholders entitled to receive such distribution by a fraction (1) the
numerator of which shall be equal to the current market price per share
(determined as provided in paragraph (h) of this Section 12.4) of the Common
Stock on the date fixed for such determination less an amount equal to the
quotient of (x) the excess of such combined amount over such 15% and (y) the
number of shares of Common Stock outstanding on such date for determination and
(2) the denominator of which shall be equal to the current market price per
share (determined as provided in paragraph (h) of this Section 12.4) of the
Common Stock on such date for determination.
(f) In case a tender offer made by the Company or any Subsidiary for all
or any portion of the Common Stock shall expire and such tender offer (as
amended upon the expiration thereof) shall require the payment to stockholders
(based on the acceptance, up to any maximum specified in the terms of the tender
offer, of Purchased Shares as defined below) of an aggregate consideration
having a fair market value (as reasonably determined by the Board of Directors,
whose determination shall be described in a Board Resolution) that combined
together with (i) the aggregate of the cash plus the fair market value (as
reasonably determined by the Board of Directors, whose determination shall be
described in a Board Resolution), as of the expiration of such tender offer, of
consideration payable in respect of any other tender offer by the Company or any
Subsidiary for all or any portion of the Common Stock expiring within the 12
months preceding the expiration of such tender offer and in respect of which no
adjustment pursuant to this paragraph (f) has been made and (ii) the aggregate
amount of any distributions to all holders of the Company's Common Stock made
exclusively in cash within 12 months preceding the expiration of such tender
offer and in respect of which no adjustment pursuant to paragraph (e) of this
Section has been made, exceeds 15% of the product of the current market price
per share of the Common Stock (determined as provided in paragraph (h) of this
Section 12.4) as of the last time (the "Expiration Time") tenders could have
been made pursuant to such tender offer (as it may be
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amended) times the number of shares of Common Stock outstanding (including any
tendered shares) as of the Expiration Time, then, and in each such case,
immediately prior to the opening of business on the day after the date of the
Expiration Time, the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price immediately prior
to close of business on the date of the Expiration Time by a fraction (1) the
numerator of which shall be equal to (x) the product of (A) the current market
price per share of the Common Stock (determined as provided in paragraph (h) of
this Section) on the date of the Expiration Time and (B) the number of shares of
Common Stock outstanding (including any tendered shares) on the Expiration Time
less the amount of cash plus the fair market value (determined as aforesaid) of
the aggregate consideration payable to stockholders based on the acceptance (up
to any maximum specified in the terms of the tender offer) of Purchased Shares,
and (2) the denominator of which shall be equal to the product of (q) the
current market price per share of the Common Stock (determined as provided in
paragraph (h) of this Section) as of the Expiration Time and (r) the number of
shares of Common Stock outstanding (including any tendered shares) as of the
Expiration Time less the number of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted up to any such maximum,
being referred to as the "Purchased Shares").
(g) The reclassification of Common Stock into securities including other
than Common Stock (other than any reclassification upon a consolidation or
merger to which Section 12.11 applies) shall be deemed to involve (i) a
distribution of such securities other than Common Stock to all holders of Common
Stock (and the effective date of such reclassification shall be deemed to be
"the date fixed for the determination of stockholders entitled to receive such
distribution" and "the date fixed for such determination" within the meaning of
paragraph (d) of this Section 12.4), and (ii) a subdivision or combination, as
the case may be, of the number of shares of Common Stock outstanding immediately
prior to such reclassification into the number of shares of Common Stock
outstanding immediately thereafter (and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective,"
as the case may be, and "the day upon which such subdivision or combination
becomes effective" within the meaning of paragraph (c) of this Section 12.4).
(h) For the purpose of any computation under paragraphs (b), (d), (e) and
(f) of this Section 12.4, the current market price per share of Common Stock on
any date shall be deemed to be the average of the daily Closing Prices for the
five consecutive Trading Days selected by the Company commencing not more than
ten Trading Days before the day in question.
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(i) The Company may make such reductions in the Conversion Price, in
addition to those required by paragraphs (a), (b), (c), (d), (e) and (f) of this
Section, as it considers to be advisable, which determination shall be
conclusive.
(j) Notwithstanding the foregoing, (i) if the options, rights or warrants
described in Section 12.4(b) above are exercisable only upon the occurrence of
certain triggering events, then the conversion price will not be adjusted until
such triggering events occur and (ii) if such options, rights or warrants expire
unexercised, the conversion price will be readjusted to take into account only
the actual number of such options, rights or warrants which were exercised. In
addition, the provisions of Section 12.4(a), (b), (c), (d), (e) and (f) will not
apply to the issuance of Common Stock or the issuance or exercise of options to
purchase Common Stock under any stock-based employee compensation plan now
existing or hereafter adopted.
(k) In the event of a pro rata distribution to holders of Common Stock of
rights to subscribe for additional shares of Common Stock (other than those
referred to in Section 12.4(b) above) or of evidences of indebtedness or assets
as provided in Section 12.4(d) above, the Company may, instead of making any
adjustment in the Conversion Price, make proper provision so that each Holder of
a Note who converts such Note (or a portion thereof) after the record date for
such distribution and prior to the expiration or redemption of such rights shall
be entitled to receive upon conversion, in addition to the shares of Common
Stock issuable upon conversion, an appropriate number of such rights, evidences
of indebtedness or assets, as the case may be, as if such Holders had converted
the Notes immediately before the Record Date for any such distribution.
(l) Notwithstanding any other provision of this Section 12.4, the Company
shall not be required to make any adjustment of the Conversion Price unless such
adjustment (together with any prior adjustments that were not made as a result
of this clause (j)) would require an increase or decrease of at least 1% of such
Conversion Price.
Section 12.5 Notice of Adjustments of Conversion Price.
Whenever the Conversion Price is adjusted as herein provided:
(i) the Company shall compute the adjusted Conversion Price in accordance
with Section 12.4 and shall prepare a certificate signed by the Treasurer of the
Company setting forth the adjusted Conversion Price and showing in reasonable
detail the facts upon which such adjustment is based, and such certificate shall
forthwith be filed with the Trustee and at each office or agency maintained for
the purpose of conversion of Notes pursuant to Section 10.2; and
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(ii) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be required, and as
soon as practicable after it is required, such notice shall be mailed by the
Company to all Holders at their last addresses as they shall appear in the Note
Register.
Section 12.6 Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable (i) otherwise than exclusively in cash or (ii)
exclusively in cash in an amount that would require any adjustment pursuant to
Section 12.4; or
(b) the Company shall authorize the granting to the holders of its Common
Stock of rights, options or warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(c) of any reclassification of the Common Stock of the Company (other than
a subdivision or combination of its outstanding shares of Common Stock), or of
any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required, or of the sale or
transfer of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company; or
(e) the Company or any Subsidiary shall commence a tender offer for all or
a portion of the Company's outstanding shares of Common Stock (or shall amend
any such tender offer);
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Notes pursuant to Section 10.2, and shall cause to
be mailed to all Holders at their last addresses as they shall appear in the
Note Register, at least 20 days (or 10 days in any case specified in clause (a)
or (b) above) prior to the applicable record or effective date hereinafter
specified, a notice stating (i) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights, options or warrants, or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights, options or
warrants are to be determined, or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or
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other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up.
Section 12.7 Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Notes, the full number of shares of
Common Stock then issuable upon the conversion of all Outstanding Notes.
Section 12.8 Taxes on Conversions.
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on conversion of Notes
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Note or Notes to be converted, and no such issue or delivery shall be made
unless and until the Person requesting such issue has paid to the Company the
amount of any such tax, or has established to the satisfaction of the Company
that such tax has been paid.
Section 12.9 Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Notes will upon issue be fully paid and nonassessable
and, except as provided in Section 12.8, the Company will pay all taxes, liens
and charges with respect to the issue thereof.
Section 12.10 Cancellation of Converted Notes.
All Notes delivered for conversion shall be delivered to the Trustee
to be cancelled by or at the direction of the Trustee, which shall dispose of
the same as provided in Section 3.9.
Section 12.11 Provisions in Case of Consolidation, Merger or Sale of
Assets.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any sale or transfer of all or substantially all of the assets of the
Company, the Person formed by such consolidation or resulting from such merger
or which acquires such assets, as the case may be, shall execute and deliver to
the
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Trustee a supplemental indenture providing that the Holder of each Note then
outstanding shall have the right thereafter, during the period such Note shall
be convertible as specified in Section 12.1, to convert such Note only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company into which such Note might have been converted
immediately prior to such consolidation, merger, sale or transfer, assuming such
holder of Common Stock of the Company (i) is not a Person with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be ("Constituent
Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise
his rights of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is not the same for
each share of Common Stock of the Company held immediately prior to such
consolidation, merger, sale or transfer by others than a Constituent Person or
an Affiliate thereof and in respect of which such rights of election shall not
have been exercised ("non-electing share"), then for the purpose of this Section
the kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing shares). Such supplemental indenture shall provide for adjustments
which, for events subsequent to the effective date of such supplemental
indenture, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article. The above provisions of this Section
shall similarly apply to successive consolidations, mergers, sales or transfers.
Section 12.12 Responsibility of Trustee for Conversion Provisions.
The Trustee, subject to the provisions of Section 6.1 and any
Conversion Agent shall not at any time be under any duty or responsibility to
any Holder of Securities to determine whether any facts exist which may require
any adjustment of the Conversion Price, or with respect to the nature or extent
of any such adjustment when made, or with respect to the method employed, or
herein or in any supplement indenture provided to be employed, in making the
same, or whether a supplemental indenture need to be entered into. Neither the
Trustee, subject to the provisions of Section 6.1, nor any Conversion Agent
shall be accountable with respect to the validity or value (or the kind or
amount) of any Common Stock, or of any other securities or property or cash,
which may at any time be issued or delivered upon the conversion of any
Security; and it or they do not make any representation with respect thereto.
Neither the Trustee,
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subject to the provisions of Section 6.1, nor any Conversion Agent shall be
responsible for any failure of the Company to make or calculate any cash payment
or to issue, transfer, or deliver any shares of Common Stock or share
certificates or other securities or property or cash upon the surrender of any
Security for the purpose of conversion; and the Trustee, subject to the
provisions of Section 6.1, and any Conversion Agent shall not be responsible for
any failure of the Company to comply with any of the covenants of the Company
contained in this Article Twelve. The Trustee may conclusively rely upon the
last Treasurer's certificate filed with it pursuant to Section 11.6(a) as to the
Conversion Price then in effect.
ARTICLE 13
SUBORDINATION OF NOTES
Section 13.1 Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by
his acceptance thereof, likewise covenants and agrees, that, to the event and in
the manner hereinafter set forth in this Article Thirteen (subject to the
provisions of Article Four), the indebtedness represented by the Securities and
the payment of the principal of (premium, if any) and interest on each and all
of the Securities are hereby expressly made subordinate and subject in right of
payment to the prior payment in full of all Senior Indebtedness. Whenever in
this Article Thirteen there is a reference, in any context, to the principal of
any Security as of any time, such reference shall be deemed to include reference
to the Repurchase Price or Redemption Price payable in cash in respect of such
Security to the event that such Repurchase Price or Redemption Price payable in
cash is, was or would be so payable at such time, and express mention of the
Repurchase Price and the Redemption Price in any provision of this Article
Thirteen shall not be construed as excluding the Repurchase Price or Redemption
Price payable in cash in those provisions of this Article Thirteen when such
express mention is not made. This Article Thirteen is made for the benefit of
existing and future holders of Senior Indebtedness, and such holders are made
obligees hereunder and they or each of them may enforce such provisions.
Section 13.2 No Payments in Certain Circumstances; Payment Over of
Proceeds Upon Dissolution, Etc.
No payment [(with the exception of payment in Junior Securities, if
acceptable to the Note Holders in their individual discretion)] on account of
principal of, premium, if any, or interest on, or redemption or repurchase of,
the Securities shall be made if, at the time of such payment or immediately
after giving effect thereto: (i) a default in the payment of
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principal, premium, if any, or interest or other amounts due on any Senior
Indebtedness occurs and is continuing (or, in the case of Senior Indebtedness
for which there is a period of grace, in the event of such a default that
continues beyond the period of grace specified in the instrument or lease
evidencing such Senior Indebtedness), unless and until such default shall have
been cured or waived in accordance with the agreements evidencing such Senior
Indebtedness or shall have otherwise ceased to exist; or (ii) a default, other
than a payment default, on any Designated Senior Indebtedness occurs and is
continuing that then permits holders of such Designated Senior Indebtedness to
accelerate the maturity thereof and the Trustee receives a notice of the default
(a "Payment blockage Notice") from any lender of such Designated Senior
Indebtedness (or agent bank on behalf of such lender). Notwithstanding the
foregoing, the Company may make, and the Trustee may receive and shall apply,
any payment in respect of the Notes (for principal, premium, if any, or interest
or redemption or repurchase) if such payment was made prior to the occurrence of
any of the contingencies specified in clauses (i) and (ii) above.
If the Trustee receives any Payment Blockage Notice pursuant to clause
(ii) above, no subsequent Payment Blockage Notice shall be effective for
purposes of this Section 13.2 unless and until (A) at least 365 days shall have
elapsed since the effectiveness of the immediately prior Payment Blockage
notice, and (B) all scheduled payments of principal, premium, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions in
respect of the Notes upon the earlier of: (i) in the case of a payment default,
the date upon which the default is cured or waived in accordance with the
agreements evidencing the Senior Indebtedness with respect to which such payment
default occurred, or (ii) in the case of a nonpayment default, the earlier of
the date on which such default is cured or waived in accordance with the
agreements evidencing the Senior Indebtedness with respect to which such default
occurred or 179 days after the applicable Payment Blockage Notice is received.
In the event of (i) any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, or (ii) any liquidation, dissolution or other winding
up of the Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any other marshaling of assets and liabilities of the Company, then and in any
such
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event the holders of Senior Indebtedness shall be entitled to receive payment in
full of all amounts due or to become due on or in respect of all Senior
Indebtedness in cash or other immediately available funds, or provision shall be
made for such payment in cash or other immediately available funds or otherwise
in a manner satisfactory to each holder of Senior Indebtedness with respect to
its indebtedness, before the Holders of the Securities are entitled to receive
any payment [(with the exception of payment in Junior Securities, if acceptable
to the Holders in their individual discretion)] on account of principal or (or
premium, if any) or interest on the Notes, and to that end the holders of Senior
Indebtedness shall be entitled to receive, for any application to the payment
thereof, any payment or distribution of any kind or character, whether in cash,
property or securities, which may be payable or deliverable in respect of the
Notes in any such case.
In the event that, notwithstanding the foregoing provisions of this
Section 13.2, the Trustee or the Holder of any Note shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, securities or other property, before all Senior Indebtedness is
paid in full or payment thereof provided for, and if such fact shall, at or
prior to the time of such payment or distribution, have been made known to the
Trustee or, as the case may be, such Holder, then in such event such payment or
distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words, "cash, securities or
other property" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment which shares of stock
are subordinated in right of payment to all then outstanding Senior Indebtedness
to substantially the same extent as, or to a greater event than, the Securities
are so subordinated as provided in this Article Thirteen.
The consolidation of the Company with, or the merger of the Company
into, another Person or the liquidation or dissolution of the company following
the transfer of all or substantially all of its properties and assets to another
Person upon the terms and conditions set forth in Article Eight shall not be
deemed a dissolution, winding up, liquidation, reorganization, assignment for
the benefit of creditors or marshaling of assets and liabilities, of the Company
for the purposes of this Section 13.2 if the Person formed by such
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consolidation or into which the Company is merged or which acquires by
conveyance or transfer such properties and assets substantially as an entirety,
as the case may be, shall, as a part of such consolidation, merger, conveyance
or transfer, comply with the conditions set forth in Article Eight.
Section 13.3 Prior Payment to Senior Indebtedness Upon Acceleration of
Notes.
In the event that any Notes are declared due and payable before their
Stated Maturity, then and in such event the holders of the Senior Indebtedness
outstanding at the time such Note so become due and payable shall be entitled to
receive payment in full of all amounts due or to become due on or in respect of
such Senior Indebtedness, or provision shall be made for such payment in money
or money's worth, before the Holders of the Notes are entitled to receive any
payment [(with the exception of payment in Junior Securities, if acceptable to
the Note Holders in their individual discretion)] by the Company on account of
the principal of (or premium, if any) or interest on the Notes or on account of
the purchase or other acquisition of Notes.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Note prohibited by the
foregoing provisions of this Section 13.3 of such fact shall, at or prior to the
time of such payment, have been made known to the Trustee, or, as the case may
be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the holders of Senior Indebtedness, or as a court of
competent jurisdiction shall direct, for application to the payment of any due
and unpaid Senior Indebtedness, to the extent necessary to pay all such due and
unpaid Senior Indebtedness in cash or other immediately available funds, after
giving effect to any concurrent payment to or for the holders of Senior
Indebtedness.
The provisions of this Section shall not apply to any payment with
respect to which Section 13.2 would be applicable.
Section 13.4 Payment Permitted if No Default.
Nothing contained in this Article Thirteen or elsewhere in this
Indenture or in any of the Notes shall prevent (a) the Company, at any time
except during the pendency of any case, proceeding, dissolution, liquidation or
other winding up, assignment for the benefit of creditors or other marshaling of
assets and liabilities of the Company referred to in Section 13.2 or under the
conditions described in Section 13.3, from making payments at any time of
principal of (premium, if any) or interest on the Notes, or (b) the application
by the Trustee of any money deposited with it hereunder to the payment of or on
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account of the principal of (and premium, if any) or interest on the Notes or
the retention of such payment by the Holders, if, at the time of such
application by the Trustee, it did not have knowledge that such payment would
have been prohibited by the provisions of this Article Thirteen.
Section 13.5 Subrogation to Rights to Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holders
of the Notes shall be subrogated to the extent of the payments or distributions
made to the holders of such Senior Indebtedness pursuant to the provisions of
this Article Thirteen to the rights of the holders of such Senior Indebtedness
to receive payments and distributions of cash, property and securities
applicable to the Senior Indebtedness until the principal of (and premium, if
any) and interest on the Notes shall be paid in full. For purposes of such
subrogation, no payment or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders of the
Notes or the Trustee would be entitled except for the provisions of this Article
Thirteen, and no payments over pursuant to the provisions of this Article
Thirteen to the holders of Senior Indebtedness by Holders of the Notes or the
Trustee, shall, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Notes, be deemed to be a payment or
distribution by the Company to or on account of the Senior Indebtedness.
Section 13.6 Provisions Solely to Define Relative Rights.
The provisions of this Article Thirteen are and are intended solely
for the purpose of defining the relative rights of the Holders of the Notes on
the one hand and the holders of Senior Indebtedness son the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Notes is
intended to or shall (a) impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the obligation
of the Company, which is absolute and unconditional, to pay to the Holders of
the Notes the principal of (premium, if any) and interest on the Notes as and
when the same shall become due and payable in accordance with their terms; or
(b) affect the relative rights against the Company of the Holders of the Notes
and creditors of the Company other than the holders of Senior Indebtedness; or
(c) prevent the trustee or the Holder of any Note from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture, subject
to the rights, if any, under this Article Thirteen of the holders of Senior
Indebtedness to receive cash, property, and securities otherwise payable or
deliverable to the Trustee or such Holder.
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Section 13.7 Trustee to Effectuate Subordination.
Each holder of a Security by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article and appoints the
Trustee his attorney-in-fact for any and all such purposes.
Section 13.8 No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder of any Senior
Indebtedness, or by any non-compliance by the Company with the terms, provisions
and covenants of this Indenture, regardless of any knowledge thereof any such
holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Indebtedness may, at any time and from time to time, without
the consent of or notice to the Trustee or the Holders of the Notes, without
incurring responsibility to the Holders of the Notes or the obligations
hereunder of the Holders of the Securities to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment, or the amount of interest, fees or other amounts payable in
respect of, or extend the time of payment of, or renew, increase, or otherwise
alter, Senior Indebtedness, or otherwise amend or supplement in any manner
Senior Indebtedness or any instrument evidencing the same or any agreement under
which Senior Indebtedness is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any Person liable in any manner for the payment or
collection of Senior Indebtedness; (iv) exercise or refrain from exercising any
rights or remedies against the Company or any other Person; (v) give or fail to
give any notice, or take or fail to take any other action, required by law, by
agreement or otherwise to preserve the rights of any holder of Senior
Indebtedness against the Company or any other Person liable in respect of Senior
Indebtedness or with respect to any property pledged, mortgaged, or otherwise
subject to a security interest or lien securing Senior Indebtedness; (vi)
perform or fail to perform any obligation of such holders of Senior Indebtedness
under any instrument or agreement evidencing, guaranteeing, securing or
otherwise affecting or relating to Senior Indebtedness; or (vii) take or fail to
take any action that might otherwise constitute a defense available to, or a
discharge of, the Company or any other Person liable in respect of Senior
Indebtedness.
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Section 13.9 Notice to Trustee
The Company shall give prompt written notice to the Trustee of any
insolvency or bankruptcy proceeding in respect of the Company, of and
proceedings for voluntary liquidation, dissolution, or other winding up of the
Company (whether or not involving insolvency or bankruptcy), or of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Notes. Notwithstanding the provisions of this Article
Thirteen or any other provisions of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of or payment to or by the Trustee in respect of the Notes, unless and
until the Trustee shall have received written notice thereof from the Company or
a holder of Senior Indebtedness or from any trustee therefor; and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Section 6.1, shall be entitled in all respects to assume that no such facts
exist; provided that if the Trustee shall not have received the notice provided
for in this Section 13.9 at least two Business Days prior to the date upon which
by the terms hereof any money may become payable for any purpose (including,
without limitation, the payment of the principal of (premium, if any) or
interest on any Security), then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive such
money and to apply the same to the purpose for which such money was received and
shall not be affected by any notice to the contrary which may be received by it
within two Business Days prior to such date.
Notwithstanding anything in this Article Thirteen to the contrary, nothing
shall prevent any payment by the Trustee to the Holders of monies deposited with
it pursuant to Section 4.1, and any such payment shall not be subject to the
provisions of Section 13.2 or 13.3.
Subject to the provision of Section 6.1, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a Person representing himself
to be a holder of Senior Indebtedness (or an agent bank or a trustee therefor)
to establish that such notice has been given by a holder of Senior Indebtedness
(or any agent bank or a trustee therefor). In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Indebtedness to participate in any
payment or distribution pursuant to this Article, the Trustee may request such
Person to furnish evidence to the reasonable satisfaction of the Trustee as to
the amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such Person under this Article Thirteen, and if
such evidence is not furnished, the Trustee may
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defer any payment to such Person pending judicial determination as to the right
of such Person to receive such payment.
Section 13.10 Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article Thirteen, the Trustee, subject to the provisions of Section 6.1,
and the Holders of the Notes shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Notes, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
Thirteen.
Section 13.11 Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Indebtedness and shall not be liable to any such holders if it shall in
good faith mistakenly pay over or distribute to Holders of Securities or to the
Company or to any other Person cash, property or securities to which any holders
of Senior Indebtedness shall be entitled by virtue of this Article or otherwise.
Section 13.12 Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article Thirteen with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder.
Nothing in this Article Thirteen shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 6.7.
Section 13.13 Article Applicable to Paying Agents
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the contest otherwise requires)
be construed as
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<PAGE>
extending to and including such Paying Agent within its meaning as fully for all
intents and purposes as if such Paying Agent were named in this Article in
addition to or in place of the Trustee; provided that Section 13.12 shall not
apply to the Company or any Affiliate of this Company if it or such Affiliate
acts as Paying Agent.
Section 13.14 Certain Conversions Deemed Payment
For the purposes of this Article Thirteen only: (1) the issuance and
delivery of Junior Securities upon conversion of Notes in accordance with
Article Thirteen or upon the repurchase of Notes in accordance with Article
Fourteen shall not be deemed to constitute a payment or distribution on account
of the principal of or premium or interest on Notes or on account of the
purchase or other acquisition of Notes, and (2) the payment, issuance or
delivery of cash, property or securities (other than Junior Securities) upon
conversion of a Note shall be deemed to constitute payment on account of the
principal of such Note.
Nothing contained in this Article Thirteen or elsewhere in this
Indenture or in the Notes is intended to or shall impair, as among the Company,
its creditors (other than holders of Senior Indebtedness) and the Holders of the
Notes, the right, which is absolute and unconditional, of the Holder of any Note
to convert such Note in accordance with Article Thirteen or to exchange such
Note for Common Stock in accordance with Article Fourteen, if the Company elects
to satisfy its obligation under Article Fourteen by the Delivery of Common
Stock.
ARTICLE 14
REPURCHASE OF NOTES AT THE OPTION
OF THE HOLDER UPON A CHANGE IN CONTROL
Section 14.1 Right to Require Repurchase.
In the event that a Change in Control (as hereinafter defined) shall
occur, then each Holder shall have the right, at the Holder's option, to require
the Company to repurchase, and upon the exercise of such right the Company shall
repurchase, all of such Holder's Notes, or any portion of the principal amount
thereof that is an integral multiple of $1,000, on the date (the "Repurchase
Date") that is 45 days after the date of the Company Notice (as defined in
Section 14.2) at a purchase price equal to 100% of the principal amount of the
Notes to be repurchased (the
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<PAGE>
"Repurchase Price"), together in each case with accrued interest to the
Repurchase Date. Such right to require the repurchase of the Notes shall not
continue after a discharge of the Company from its obligations with respect to
the Notes in accordance with Article Four, unless a Change in Control shall have
occurred prior to such discharge. At the option of the Company, the Repurchase
Price may be paid, subject to the fulfillment by the Company of the conditions
set forth below, by delivery of shares of Common Stock. However, the failure of
the Company to pay the Repurchase Price on the Repurchase Date either in cash or
by delivery of shares of Common Stock shall constitute an Event of Default for
purposes of Section 5.1(a) hereof notwithstanding the Company's inability to
comply with provisions of or satisfy any conditions set forth in this Section
14.1. Whenever in this Indenture (including Sections 2.2, 3.1, 5.1(b) and 5.8)
there is a reference, in any context, to the principal of any Note as of any
time, such reference shall be deemed to include reference to the Repurchase
Price payable in respect of such Note to the extent that such Repurchase Price
is, was or would be so payable at such time, and express mention of the
Repurchase Price in any provision of this Indenture shall not be construed as
excluding the Repurchase Price in those provisions of this Indenture when such
express mention is not made; provided that for the purposes of Article Twelve
such reference shall be deemed to include reference to the Repurchase Price only
to the extent the Repurchase Price is payable in cash.
Section 14.2 Conditions to the Company's Election to Pay the Repurchase
Price in Common Stock.
The Company may elect to pay the Repurchase Price by delivery of
shares of Common Stock pursuant to Section 14.1 if and only if the following
conditions shall have been satisfied.
(a) The shares of Common Stock deliverable in payment of the Repurchase
Price shall have a fair market value as of the Repurchase Date of not less than
the Repurchase Price. For purposes of this Section 14.1, the fair market value
of shares of Common Stock shall be determined by the Company and shall be equal
to 95% of the average of the Closing Prices Per Share for the five consecutive
Trading Days ending on and including the third Trading Day immediately preceding
the Repurchase Date.
(b) The shares of Common Stock deliverable in payment of the Repurchase
Price are, or shall have been listed on the New York Stock Exchange or other
national securities exchange or are, or shall have been, approved for quotation
on the Nasdaq National Market, in either case, prior to the Repurchase Date; and
(c) All shares of Common Stock deliverable in payment of the Repurchase
Price shall be issued out of the Company's authorized but unissued Common Stock
and, will upon issue, be
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<PAGE>
duly and validly issued and fully paid and nonassessable and free of any
preemptive rights.
If all of the conditions set forth in this Section 14.1 are not satisfied
in accordance with the terms thereof, the Repurchase Price shall be paid by the
Company only in cash.
Section 14.3 Notices; Method of Exercising Repurchase Right, Etc.
(a) Unless the Company shall have theretofore called for redemption all the
outstanding Notes, on or before the 30th day after the occurrence of a Change in
Control, the Company or, at the written request of the Company, the Trustee,
shall mail to all Holders a notice (the "Company Notice") as prepared by the
Company of the occurrence of the Change in Control and of the repurchase right
set forth herein arising as a result thereof. The Company shall also deliver a
copy of such notice of a repurchase right to the Trustee.
(b) Each notice of a repurchase right shall state:
(i) the Repurchase Date,
(ii) the date by which the repurchase right must be exercised,
(iii) the Repurchase Price,
(iv) a description of the procedure which a Holder must follow to
exercise a repurchase right, and
(v) the Conversion Price then in effect, the date on which the right
to convert the principal amount of the Notes to be repurchased will terminate,
and the place or places where such Notes may be surrendered for conversion or
repurchase.
No failure of the Company to give the foregoing notices or defect
therein shall limit any Holder's right to exercise a repurchase right or affect
the validity of the proceedings for the repurchase of Notes.
If any of the foregoing provisions are inconsistent with applicable
law, such law shall govern.
(c) To exercise a repurchase right, a Holder shall deliver to the Trustee
on or before the 30th day after the date of the
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<PAGE>
Company Notice (i) written notice of the Holder's exercise of such right, which
notice shall set forth the name of the Holder, the principal amount of the Notes
to be repurchased, and a statement that an election to exercise the repurchase
right is being made thereby, and (ii) the Notes with respect to which the
repurchase right is being exercised, duly endorsed for transfer to the Company.
Such written notice shall be executed by the Holder and shall be irrevocable,
except that the right of the Holder to convert the Notes with respect to which
the repurchase right is being exercised shall continue until the close of
business on the fifth Business Day preceding the Repurchase Date.
(d) In the event a repurchase right shall be exercised in accordance with
the terms hereof, the Company shall pay or cause to be paid the Repurchase Price
in cash as provided above, to the Holder on the Repurchase Date or as promptly
after the Repurchase Date as practicable, together with accrued and unpaid
interest to the Repurchase Date payable with respect to the Notes as to which
the repurchase right has been exercised; provided, however, that installments of
interest that mature on or prior to the Repurchase Date shall be payable in cash
to the Holders of such Notes, or one or more predecessor Notes, registered as
such at the close of business on the relevant Regular Record Date according to
the terms and provisions of Article Three.
(e) If any Note surrendered for repurchase shall not be so paid on the
Repurchase Date, the principal shall, until paid, bear interest to the extent
permitted by applicable law from the Repurchase Date at the rate of [insert Note
Rate] _____% and each Note shall then remain convertible into Common Stock until
the principal of such Note shall have been paid or duly provided for.
(f) Any Note which is to be repurchased only in part shall be surrendered
to the Trustee (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the holder thereof or his attorney duly authorized
in writing), and the Company shall execute, and the Trustee shall authenticate
and deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder in aggregate
principal amount equal to and in exchange for the unrepurchased portion of the
principal of the Note so surrendered.
(g) Any issuance of shares of Common Stock in respect of the Repurchase
Price shall be deemed to have been effected immediately prior to the close of
business on the Repurchase Date and the Person or Persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such repurchase shall be deemed to have become on the Repurchase Date the
holder or holders of record of the shares represented thereby; provided that any
surrender for repurchase on a date when the stock transfer books of the Company
shall be closed
84
<PAGE>
shall constitute the Person or Persons in whose name or names the certificate or
certificates for such shares are to be issued as the record holder or holders
thereof for all purposes at the opening of business on the next succeeding day
on which such stock transfer books are open. No payment or adjustment shall be
made for dividends or distributions on any Common Stock issued upon repurchase
of any Security declared prior to the Repurchase Date.
(h) No fractional shares shall be issued upon repurchase of Notes. If more
than one Note shall be repurchased from the same Holder and the Repurchase Price
shall be payable in shares of Common Stock, the number of full shares which
shall be issuable upon such repurchase shall be computed on the basis of the
aggregate principal amount of the Notes so repurchased. Instead of any
fractional share of Common Stock which would otherwise be issuable on the
repurchase of any Note or Notes, the Company will deliver to the applicable
Holder its check for the current market value of such fractional share. The
current market value of a fraction of a share is determined by multiplying the
current market price of a full share by the fraction, and rounding the result to
the nearest cent. For purposes of this Section 14.2, the current market price
of a share of Common Stock is the Closing Price Per Share of the Common Stock on
the Trading Day immediately preceding the Repurchase Date.
(i) Any issuance and delivery of certificates for shares of Common Stock on
repurchase of Notes shall be made without charge to the Holder of Notes being
repurchased for such certificates or for any tax or duty in respect of the
issuance or delivery of such certificates or the securities represented thereby;
provided, however, that the Company shall not be required to pay any tax or duty
which may be payable in respect of (x) income of the Holder or (y) any transfer
involved in the issuance or delivery of certificates for shares of Common Stock
in a name other than that of the Holder of the Notes being repurchased, and no
such issuance or delivery shall be made unless and until the Person requesting
such issuance or delivery has paid to the Company the amount of any such tax or
duty or has established to the satisfaction of the Company, that such tax or
duty has been paid.
(j) All Notes delivered for repurchase shall be delivered to the Trustee,
the Paying Agent or any other agents (as shall be set forth in the Company
Notice) to be cancelled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 3.9.
85
<PAGE>
Section 14.4 Certain Definitions.
For purposes of this Article:
(a) the term "beneficial owner" shall be determined in accordance with Rule
13d-3, as in effect on the date of the original execution of this Indenture,
promulgated by the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended;
(b) the term "Common Stock" shall mean capital stock of the Company that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of the Company, to shares of capital stock of any other class of the Company;
(c) a "Change in Control" shall be deemed to have occurred at such time
after the original issuance of the Notes as there shall occur:
(i) the acquisition by any Person of beneficial ownership, directly or
indirectly, through a purchase, merger or other acquisition transaction or
series of transactions, of shares of capital stock of the Company entitling such
Person to exercise 50% or more of the total voting power of all shares of
capital stock of the Company entitled to vote generally in the elections of
directors (any shares of voting stock of which such Person is the beneficial
owner that are not then outstanding being deemed outstanding for purposes of
calculating such percentage) (other than (x) any such acquisition by the
Company, any subsidiary of the Company or any employee benefit plan of the
Company, or (y) the acquisition of any Person that constitutes a group
consisting of at least two of the Founders and their affiliates); or
(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or any
conveyance, sale, transfer or lease, in one transaction or a series of related
transactions, of all or substantially all of the assets (other than to a wholly
owned subsidiary of the Company) of the Company to any other Person (other than
(a) any such transaction pursuant to which the holders of 50% or more of the
total voting power of all shares of capital stock of the Company entitled to
vote generally in elections of directors immediately prior to such transaction
have, directly or indirectly, at least 50% or more of the total voting power of
all shares of capital stock of the continuing or surviving corporation entitled
to vote generally in elections of directors of the continuing or surviving
corporation immediately after such transaction, (b) a merger (I) which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or (II) which
86
<PAGE>
is effected solely to change the jurisdiction of incorporation of the Company
and results in a reclassification, conversion or exchange of outstanding shares
of Common Stock into solely shares of common stock and (c) any such transaction
with any Person that constitutes a group consisting of at least two of the
Founders and their Affiliates); or
(iii) a change in the Board of Directors of the Company in
which the individuals who constituted the Board of Directors of the Company at
the beginning of the 12-month period immediately preceding such change (together
with any other director whose election by the Board of Directors of the Company
or whose nomination for election by the stockholders of the Company was approved
by a vote of at least a majority of the directors then in office either who were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the directors then in office;
provided, however, that a Change in Control shall not be deemed to
have occurred if either (i) the Closing Price on any five Trading Days within
the period of 10 consecutive Trading Days ending immediately after the later of
the date of the Change in Control or the date of the public announcement of the
Change in Control (in the case of a Change in Control under clause (a) above) or
the period of 10 consecutive Trading Days ending immediately prior to the date
of the Change in Control (in the case of a Change in Control under clause (b)
above) shall equal or exceed 105% of the Conversion Price in effect on each such
Trading Day or (ii) at least 90% of the consideration (excluding cash payments
for fractional shares) to be paid for the Common Stock in the transaction or
transactions constituting the Change in Control consists of shares of common
stock traded on a national securities exchange or quoted on the Nasdaq National
Market (or which will be so traded or quoted when issued or exchanged in
connection with such Change in Control) (such securities being referred to as
"Publicly Traded Securities") and as a result of such transaction or
transactions the Notes become convertible solely into such Publicly Traded
Securities;
(i) the term "Person" shall include any syndicate or group which would be
deemed to be a "person" under Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, as in effect on the date of the original execution of this
Indenture.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
87
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
COMPANY
Attestation as to SIGNATURE RESORTS, INC.
the Corporate Seal:
By:__________________ By:__________________
Its: ________________ Its: ________________
TRUSTEE:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:__________________
Its: ________________
88
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------
NINE MONTHS ENDED
----------------------------------------
DECEMBER 31, SEPTEMBER 31, SEPTEMBER 31,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET INCOME:
As reported....... $ 10,913 $ 7,062 $ 10,061
PRO FORMA
ADJUSTMENTS:
Consolidation
Transactions/
Initial Public
Offering..........
The Merger........
Pro forma net
income..........
APPLICABLE COMMON
SHARES:
Average
outstanding
common shares
during the
period............ 11,354,705 11,354,705 12,219,128
Outstanding stock
options (a)....... 102,631
Conversion of
AVCOM common
shares upon
Merger at .16.....
---------- ---------- ----------
Adjusted
weighted average
number of common
and common share
equivalents
outstanding..... 11,354,705 11,354,705 12,321,759
---------- ---------- ----------
NET INCOME PER
COMMON SHARE....... $ 0.96 $ 0.62 $ 0.82
========== ========== ==========
PRO FORMA NET
INCOME PER COMMON
SHARE..............
<CAPTION>
PRO FORMA (UNAUDITED)
--------------------------------------------------------------------------------
NINE MONTHS ENDED
-----------------------------------------------------
DECEMBER 31, 1995 SEPTEMBER 31, 1995 SEPTEMBER 31, 1996
-------------------------- -------------------------- --------------------------
CONSOLIDATION CONSOLIDATION CONSOLIDATION
TRANSACTIONS/ TRANSACTIONS/ TRANSACTIONS/
INITIAL PUBLIC INITIAL PUBLIC INITIAL PUBLIC
OFFERING THE MERGER OFFERING THE MERGER OFFERING THE MERGER
-------------- ----------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME:
As reported....... $ 10,913 $ 10,913 $ 7,062 $ 7,062 $ 10,061 $ 10,061
PRO FORMA
ADJUSTMENTS:
Consolidation
Transactions/
Initial Public
Offering.......... (1,250) (1,250) (730) (730) (1,308) (1,308)
The Merger........ 1,040 1,274 (1,974)
-------------- ----------- -------------- ----------- -------------- -----------
Pro forma net
income.......... $ 9,663 $ 10,703 $ 6,332 $ 7,606 $ 8,753 $ 6,779
-------------- ----------- -------------- ----------- -------------- -----------
APPLICABLE COMMON
SHARES:
Average
outstanding
common shares
during the
period............ 17,392,205 17,392,205 17,392,205 17,392,205 17,392,205 17,392,205
Outstanding stock
options (a)....... 102,631 102,631
Conversion of
AVCOM common
shares upon
Merger at .16..... 843,942 843,942 843,942
-------------- ----------- -------------- ----------- -------------- -----------
Adjusted
weighted average
number of common
and common share
equivalents
outstanding..... 17,392,205 18,236,147 17,392,205 18,236,147 17,494,836 18,338,778
-------------- ----------- -------------- ----------- -------------- -----------
NET INCOME PER
COMMON SHARE.......
PRO FORMA NET
INCOME PER COMMON
SHARE.............. $ 0.56 $ 0.59 $ 0.36 $ 0.42 $ 0.50 $ 0.37
============== =========== ============== =========== ============== ===========
</TABLE>
- ----
(a)Based on the treasury stock method.
<PAGE>
EXHIBIT 12
STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30 PRO FORMA(a)
------------------------------- ---------------- --------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1992 1993 1994 1995 1995 1996 1996 1995
------ ------ ------ ------- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
Pretax Income.......... $2,090 $2,293 $4,291 $11,554 $ 7,272 $10,600 $10,600 $11,554
------ ------ ------ ------- ------- ------- ------- -------
Plus:
Interest Charges...... 514 1,706 4,609 6,632 4,814 8,850 7,350 4,632
Less: Amounts
Capitalized.......... 346 514 2,021 2,570 1,937 2,960 2,960 2,570
------ ------ ------ ------- ------- ------- ------- -------
Net Interest
Expense............ 168 1,192 2,588 4,062 2,877 5,890 4,390 2,062
------ ------ ------ ------- ------- ------- ------- -------
Amortization of Debt
Expense.............. 49 323 194 372 318 415 415 372
Amortization of
Previously
Capitalized Interest. 76 259 1,384 1,766 1,382 2,150 2,150 1,766
Less: JV Profit/(Loss). 0 0 (271) (1,649) (1,293) (95) (95) (1,649)
------ ------ ------ ------- ------- ------- ------- -------
TOTAL EARNINGS.......... $2,383 $4,067 $8,728 $19,403 $13,142 $19,150 $17,650 $17,403
====== ====== ====== ======= ======= ======= ======= =======
Fixed Charges
Interest Charges....... $ 514 $1,706 $4,609 $ 6,632 $ 4,814 $ 8,850 $ 7,350 $ 4,632
Amortization of Debt
Expense............... 49 323 194 372 318 415 415 372
------ ------ ------ ------- ------- ------- ------- -------
TOTAL FIXED CHARGES..... $ 563 $2,029 $4,803 $ 7,004 $ 5,132 $ 9,265 $ 7,765 $ 5,004
====== ====== ====== ======= ======= ======= ======= =======
RATIO................... 4.23x 2.00x 1.82x 2.77x 2.56x 2.07x 2.27x 3.48x
</TABLE>
- -------
(a) Adjusted to give effect to the net decrease in interest expense resulting
form the portion of the Convertible Offering used to retire existing
indebtedness of the Company, as if such transactions had occurred at the
beginning of the period presented. See "Use of Proceeds."
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SIGNATURE RESORTS, INC.
<TABLE>
<CAPTION>
NAME JURISDICTION OF ORGANIZATION
---- ----------------------------
<S> <C>
Premier Resort Management,
Inc. ..................... Georgia
KGI Port Royal, Inc. ...... California
Argosy Hilton Head, Inc. .. Georgia
Argosy/KGI Port Royal
Partners.................. South Carolina (general partnership)
Port Royal Resort, L.P. ... South Carolina
KGI Grand Beach
Investments, Inc. ........ California
Argosy Grand Beach, Inc. .. Georgia
Argosy Partners, Inc. ..... Georgia
Argosy/KGI Grand Beach
Investment Partnership.... California (general partnership)
Grand Beach Partners,
L.P. ..................... California
Grand Beach Resort, Limited
Partnership............... Georgia
AKGI Lake Tahoe
Investments, Inc. ........ California
KGK Lake Tahoe Development,
Inc. ..................... California
Lake Tahoe Resort Partners,
LLC....................... California
Resort Marketing
International, Inc. ...... California
AKGI--St. Maarten NV....... Delaware/Netherlands Antilles (dually incorporated)
Resort Management
International, Inc. ...... Georgia
Resort Management
International, Inc. ...... California
AKGI Poipu Investments,
Inc. ..................... California
Argosy/KGI Poipu Investment
Partners, L.P. ........... Hawaii
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report (and to all references to our firm) included in or made a part of
the Form S-1 Registration Statement filed by Signature Resorts, Inc. on
December 20, 1996, under the Securities Act of 1933 to register 3,450,000
shares of Common Stock, $0.01 par value and $115,000,000 of Convertible
Subordinated Notes.
ARTHUR ANDERSEN LLP
December 20, 1996,
Orlando, Florida
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 31, 1996, except for Note 12, as to which the
date is July 1, 1996, with respect to the consolidated financial statements of
AVCOM International, Inc. included in the Registration Statement (Form S-1 No.
333- ) and related Prospectus of Signature Resorts, Inc. for the
registration of 3,450,000 shares of its common stock and $115 million of
convertible subordinated notes.
ERNST & YOUNG LLP
Phoenix, Arizona
December 18, 1996
<PAGE>
EXHIBIT 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
----------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b) (2) [_]
----------------------------
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
A U.S. NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
SIXTH STREET AND MARQUETTE AVENUE
Minneapolis, Minnesota 55479
(Address of principal executive offices) (Zip code)
STANLEY S. STROUP, GENERAL COUNSEL
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
SIXTH STREET AND MARQUETTE AVENUE
MINNEAPOLIS, MINNESOTA 55479
(612) 667-1234
(AGENT FOR SERVICE)
----------------------------
SIGNATURE RESORTS, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4582157
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5933 WEST CENTURY BOULEVARD, SUITE 210
LOS ANGELES, CA 90045
(Address of principal executive offices) (Zip code)
----------------------------
% CONVERTIBLE SUBORDINATED NOTES DUE 2007
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor. If the obligor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the
obligor is not in default as provided under Item 13.
Item 15. Foreign Trustee. Not applicable.
Item 16. List of Exhibits. List below all exhibits filed as a part of this
Statement of Eligibility. Norwest Bank incorporates by reference into this
Form T-1 the exhibits attached hereto.
<TABLE>
<C> <C> <S>
Exhibit 1. a. A copy of the Articles of Association of the trustee now in
effect.*
Exhibit 2. a. A copy of the certificate of authority of the trustee to
commence business issued June 28, 1872, by the Comptroller
of the Currency to The Northwestern National Bank of
Minneapolis.*
b. A copy of the certificate of the Comptroller of the Currency
dated January 2, 1934, approving the consolidation of The
Northwestern National Bank of Minneapolis and The Minnesota
Loan and Trust Company of Minneapolis, with the surviving
entity being titled Northwestern National Bank and Trust
Company of Minneapolis.*
c. A copy of the certificate of the Acting Comptroller of the
Currency dated January 12, 1943, as to change of corporate
title of Northwestern National Bank and Trust Company of
Minneapolis to Northwestern National Bank of Minneapolis.*
d. A copy of the letter dated May 12, 1983 from the Regional
Counsel, Comptroller of the Currency, acknowledging receipt
of notice of name change effective May 1, 1983 from
Northwestern National Bank of Minneapolis to Norwest Bank
Minneapolis, National Association.*
e. A copy of the letter dated January 4, 1988 from the
Administrator of National Banks for the Comptroller of the
Currency certifying approval of consolidation and merger
effective January 1, 1988 of Norwest Bank Minneapolis,
National Association with various other banks under the
title of "Norwest Bank Minnesota, National Association."*
</TABLE>
<PAGE>
Exhibit 3. A copy of the authorization of the trustee to exercise corporate
trust powers issued January 2, 1934, by the Federal Reserve
Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b) of the Act.
Exhibit 7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or
examining authority.**
Exhibit 8. Not applicable.
Exhibit 9. Not applicable.
- --------
* Incorporated by reference to exhibit number 25 filed with registration
statement number 33-66026.
** Incorporated by reference to exhibit number 25 filed with registration
statement number 333-16583.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended,
the trustee, Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and State of Minnesota on the 16th day of December, 1996.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Raymond S. Haverstock
-------------------------------------
Raymond S. Haverstock
Vice President
<PAGE>
EXHIBIT 6
December 16, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal, State, Territorial, or District authorities
authorized to make such examination may be furnished by such authorities to
the Securities and Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Raymond S. Haverstock
-------------------------------------
Raymond S. Haverstock
Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS AMENDED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 6,287,447 11,339,003
<SECURITIES> 0 0
<RECEIVABLES> 70,689,139 93,648,745
<ALLOWANCES> 2,433,361 5,693,022
<INVENTORY> 46,757,151 85,030,279
<CURRENT-ASSETS> 0 0
<PP&E> 1,863,579 2,732,399
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 141,241,310 214,528,552
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 173,922
<OTHER-SE> 38,470,052 99,940,743
<TOTAL-LIABILITY-AND-EQUITY> 141,241,310 214,528,552
<SALES> 59,070,917 49,458,553
<TOTAL-REVENUES> 72,607,778 63,731,680
<CGS> 15,649,805 11,254,793
<TOTAL-COSTS> 16,838,307 12,303,290
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,786,811 1,371,926
<INTEREST-EXPENSE> 4,061,620 5,889,713
<INCOME-PRETAX> 11,554,333 10,600,133
<INCOME-TAX> 641,545 539,204
<INCOME-CONTINUING> 10,912,788 10,060,929
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,912,788 10,060,929
<EPS-PRIMARY> .63 .82
<EPS-DILUTED> .63 .82
</TABLE>
