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FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-30285
7,378,154 SHARES
[LOGO OF SIGNATURE RESORTS, INC.]
SIGNATURE RESORTS, INC.
COMMON STOCK
The shares of Common Stock, par value $0.01 per share ("Common Stock"), of
Signature Resorts, Inc., a Maryland corporation (the "Company" or
"Signature"), which may be offered hereby (the "Registered Offering") are held
by certain stockholders of the Company (the "Registering Stockholders"). See
"Registering Stockholders." The Company will not receive any of the proceeds
from the sale of any shares offered hereby. The Registering Stockholders
received such shares of Common Stock in private placement transactions and the
Company has agreed to file and maintain a shelf registration statement
relating to such shares in order to permit the Registering Stockholders to
resell such shares from time-to-time in public transactions. In connection
with this transaction, the Company will bear expenses estimated at $675,000.
The Common Stock is listed on the Nasdaq National Market under the symbol
"SIGR." Except as indicated to the contrary, all information in this
Prospectus has been restated to reflect the Company's announced three-for-two
stock split in the form of a Common Stock dividend payable on October 27, 1997
to stockholders of record on October 10, 1997. See "Recent Developments--
Three-for-Two Stock Split." On October 23, 1997, the last reported sales price
for the Company's Common Stock was $44.625 per share.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
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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.
Any distribution of the shares covered by this Prospectus may be effected
from time to time in one or more transactions (which may involve block
transactions) on the Nasdaq National Market, in negotiated transactions or in
a combination of such methods of sale, at fixed prices, at prices related to
the prevailing market prices or at negotiated prices. The Registering
Stockholders will effect any such transactions with or through one or more
broker-dealers which may act as agent or principal, and if required by the
Company, through block trades or offerings through underwriters. Any such
broker-dealer may receive compensation in the form of underwriting discounts,
concessions or commissions from the Registering Stockholders and/or the
purchaser of the shares for whom it may act as agent or to whom it may sell as
principals or both. With respect to any shares sold by a Registering
Stockholder, the Registering Stockholder and/or any broker-dealer effecting
the sales may be deemed to be an "underwriter" within the meaning of Section
2(11) of the Securities Act of 1933, as amended (the "Securities Act"), and
any commissions received by the broker-dealer and any profit on the resale of
shares as principal may be deemed to be underwriting discounts or commissions
under the Securities Act. Additionally, the Registering Stockholders may
pledge or make gifts of their shares and such shares may also be sold by the
pledgees or transferees. See "Plan of Distribution."
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The date of this Prospectus is October 24, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS REGISTERED OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (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, or in any document incorporated by reference
herein, 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 by such reference.
The Company is also subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("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). In addition, such reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of the Nasdaq National Market, Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006, on which the Common Stock of the Company
is quoted.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which the Company has filed with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference in, and
shall be deemed to be a part of, this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997;
(c) The Company's amended Quarterly Report on Form 10-Q/A for the
quarter ended March 31, 1997, filed with the Commission on October
6, 1997;
(d) The Company's Proxy Statement dated April 11, 1997 related to the
Annual Meeting of Stockholders held on May 16, 1997;
(e) The Company's Current Report on Form 8-K filed with the Commission
on May 30, 1997;
(f) The Company's amended Current Report on Form 8-K/A filed with the
Commission on July 29, 1997;
(g) The Company's Current Report on Form 8-K filed with the Commission
on September 9, 1997;
(h) The Company's Current Report on Form 8-K filed with the Commission
on September 12, 1997;
(i) The Company's Current Report on Form 8-K filed with the Commission
on October 6, 1997;
(j) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 10, 1997 and
(k) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 22, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part thereof from
the respective dates of filing of such documents. Any statement contained in
this Prospectus or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference in this Prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus except as so modified or superseded.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company will provide without charge to any
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the foregoing documents incorporated
herein by reference (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference therein). Requests should
be directed to the attention of Andrew D. Hutton, Vice President and General
Counsel, Signature Resorts, Inc., 1875 South Grant Street, Suite 650, San
Mateo, California 94402 (Telephone: (650) 312-7171).
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data,
included elsewhere or incorporated by reference in this Prospectus. Unless
the context otherwise indicates, the "Company" means Signature Resorts,
Inc. and includes its corporate and partnership predecessors and wholly-
owned subsidiaries and affiliates, including AVCOM International, Inc.
("AVCOM") and its subsidiaries, which were acquired by a subsidiary of
Signature Resorts, Inc. on February 7, 1997 in the merger with AVCOM (the
"AVCOM Merger"), Plantation Resorts Group, Inc. ("PRG") and its
subsidiaries, which were acquired by a subsidiary of Signature Resorts,
Inc. on May 15, 1997 (the "PRG Merger") and LSI Group Holdings Plc ("LSI")
and its subsidiaries, which were acquired by Signature Resorts, Inc. on
August 28, 1997 (the "LSI Acquisition"). 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." Except
as indicated to the contrary, all information in this Prospectus has been
restated to reflect the Company's announced three-for-two stock split in
the form of a Common Stock dividend payable on October 27, 1997 to
stockholders of record on October 10, 1997. See "Recent Developments--
Three-for-Two Stock Split."
THE COMPANY
The Company is one of the largest developers and operators of vacation
ownership resorts in North America and Europe. The Company is devoted
exclusively to vacation ownership operations and, as of the date of this
Prospectus, owns 34 vacation ownership resorts located in a variety of
popular resort destinations. The Company's North American resorts are
located in Arizona (six resorts), California (five resorts), Florida (three
resorts), Netherlands Antilles (two resorts), Virginia (two resorts),
Hawaii, Missouri, South Carolina, Texas and the U.S. Virgin Islands. The
Company's European resorts are located in England's Lake District and
Midlands (three resorts), Southern England, the sun coast of Spain (three
resorts), the Spanish island of Menorca (two resorts), Lanzarote in the
Canary Islands and the Austrian Alps. The Company acquired (i) its Arizona
resorts, three of its California resorts and its Texas resort as a result
of the AVCOM Merger (the "All Seasons Resorts"), (ii) its Virginia resorts
as a result of the PRG Merger (the "PRG Resorts") and (iii) its European
resorts as a result of the LSI Acquisition (the "LSI Resorts").
The Company's principal operations currently consist of (i) acquiring,
developing and operating vacation ownership resorts, (ii) marketing and
selling vacation ownership interests in its North American resorts, which
typically entitle the buyer to use a fully-furnished vacation residence,
generally for a one-week period each year in perpetuity ("Vacation
Intervals"), (iii) marketing and selling vacation points at its European
resorts which may be redeemed for occupancy rights at participating resorts
("Vacation Points") and (iv) providing consumer financing to individual
purchasers for the purchase of Vacation Intervals at its resorts. The
Company currently sells Vacation Intervals or Vacation Points at 30 of its
34 resorts; sales at three resorts have been substantially completed; and
sales at one resort have yet to commence. The Company also provides resort
management and maintenance services at its resorts for which it receives
fees paid by the resorts' homeowners' associations.
As part of its growth and acquisition strategy, in May 1997 the Company
consummated the PRG Merger, acquiring 100% of the capital stock of PRG in
exchange for the issuance of 3,601,844 shares of the Company's Common Stock.
PRG is a Williamsburg, Virginia based developer, owner and operator of two
vacation ownership resorts. Based upon the closing price of the Company's
Common Stock on the Nasdaq National Market on May 15, 1997, the
3,601,844 shares of Common Stock issued in the PRG Merger were valued at an
aggregate of approximately $59.1 million and represented on a pro forma basis
10.8% of the shares of Common Stock outstanding on such date.
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Additionally, in August 1997 the Company consummated the LSI Acquisition.
The Company acquired 100% of LSI's capital stock in exchange for the
issuance of 1,996,401 shares of the Company's Common Stock. LSI is a United
Kingdom-based developer, owner and operator of 11 vacation ownership
resorts and a European points-based vacation club system. Based on the
closing price of the Company's Common Stock on the Nasdaq National Market
on August 28, 1997, the 1,996,401 shares of Common Stock issued in the LSI
Acquisition were valued at our aggregate of approximately $48.2 million and
represented on a pro forma basis 5.6% of the shares of Common Stock
outstanding on such date. In addition to the Common Stock issued in the LSI
Acquisition, the Company paid cash consideration of approximately
$1,036,000 to a former LSI shareholder. See "Risk Factors--Risks Related to
the AVCOM Merger, PRG Merger and LSI Acquisition."
The Company's principal executive offices are located at 1875 South Grant
Street, Suite 650, San Mateo, California 94402, and its telephone number is
(650) 312-7171.
RECENT DEVELOPMENTS
Acquisition of Marc Hotels & Resorts. On October 10, 1997, the Company
consummated its acquisition (the "Marc Acquisition") of Hawaii-based Marc
Hotels & Resorts, Inc. ("Marc Resorts"), acquiring 100% of the capital stock of
Marc Resorts for 212,717 newly issued shares of the Company's Common Stock.
Marc Resorts is one of Hawaii's leading hospitality management companies and
operators of hotels, resort condominiums and all-suite resorts with 22 managed
resort locations on Hawaii's five major islands. The transaction is structured
to qualify for purchase accounting.
Three-for-Two Stock Split. On September 29, 1997, the Company announced that
its Board of Directors approved a three-for-two stock split in the form of a
Common Stock dividend on the Company's Common Stock. Stockholders of record on
October 10, 1997 (the "Record Date") will receive one additional share of
Common Stock for every two shares owned on the Record Date. The dividend shares
will be delivered October 27, 1997. Fractional shares will be paid in cash.
Creation of Sunterra Resorts Brand. On September 24, 1997, the Company
announced the creation of "Sunterra Resorts," the Company's new flagship brand
of vacation ownership resorts. Initially, 19 formerly non-branded properties
will assume the Sunterra Resorts name and will become the Company's third
vacation ownership brand in North America, joining the Embassy Vacation Resorts
and Westin Vacation Club brands. The introduction of the Sunterra Resorts brand
marks the first step in the evolution of the Company's planned "Club Sunterra"
points-based vacation club.
The Company plans to continue its introduction of the Sunterra brand to its
owner families and the traveling public during 1997 and by year-end 1998
intends to create Club Sunterra, a complete points-based vacation club with
multiple worldwide products, internal exchange and flexible lengths of stay.
Pending Acquisition of Vacation Internationale, Ltd. On September 23, 1997,
the Company announced the execution of a definitive agreement to acquire 100%
of the capital stock of Vacation Internationale, Ltd. ("VI") for approximately
$24.3 million, comprised of $8.0 million in cash and the assumption of
approximately $16.3 million of indebtedness. Founded in 1974, VI is a Bellevue,
Washington based developer and operator of vacation ownership resorts which has
sold over $275 million in vacation ownership products since its inception. Its
Vacation Time Share Program includes 21 owned, managed or affiliated resorts in
the Western United States, Hawaii, Mexico and Canada. The acquired assets
include VI's approximately $12.8 million mortgages receivable portfolio.
Vacation Internationale's club program allows its approximately 31,000 member
families to use their annual allotments of points as a currency to reserve each
year the specific resort, season, unit type and length of stay at any of the
club's 21 resorts which meets their needs.
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The Company's agreement to acquire VI is subject to the satisfaction of
customary closing conditions and is anticipated to close during the fourth
quarter of 1997.
Pending Acquisition of Embassy Suites Resort at Kaanapali Beach, Maui. On
July 28, 1997, the Company announced that a partnership of which it is a
managing general partner had entered into a definitive agreement to acquire the
Embassy Suites Resort at Kaanapali Beach, Maui, Hawaii (the "Kaanapali
Acquisition") for approximately $78 million from a Japanese partnership. The
acquiring entity is a partnership formed by a wholly-owned subsidiary of the
Company (as the managing general partner), the Whitehall Street Real Estate
Limited Partnership VII and Apollo Real Estate Advisors, L.P. The Company's
subsidiary owns a 24% partnership interest in the acquiring entity. The Embassy
Suites Resort at Kaanapali Beach is a 413-suite, full service resort hotel
located on the beach in Kaanapali, Maui, Hawaii. Upon the receipt of necessary
governmental approvals, the Company intends to convert the first phase of hotel
suites to vacation ownership units. The Company expects to operate the resort
with approximately 256 hotel suites and approximately 157 one-bedroom and two-
bedroom vacation ownership units. The Kaanapali Acquisition is anticipated to
close during the fourth quarter of 1997 and vacation ownership sales at the
resort are anticipated to commence in the first half of 1998.
THE REGISTERED OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Registering
Stockholders.............................. 7,378,154 shares
Common Stock to be outstanding after
the Registered Offering................... 35,833,486 shares(1)
Use of Proceeds............................ The Company will not receive any
proceeds from the sale of Common
Stock by the Registering
Stockholders in the Registered
Offering. See "Use of Proceeds."
Nasdaq National Market symbol.............. "SIGR"
</TABLE>
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(1) Does not include 4,536,990 shares of Common Stock initially issuable upon
conversion of the Company's 5 3/4% Convertible Subordinated Notes due 2007
(the "Convertible Notes"), 3,750,000 shares of Common Stock reserved for
issuance upon exercise of options granted pursuant to the Company's 1996
Equity Participation Plan and 750,000 shares of Common Stock reserved for
issuance pursuant to the Company's Employee Stock Purchase Plan. Holders of
shares of the Company's Common Stock are not entitled to vacation ownership
interests at any of the Company's resorts.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following material 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
material risk factors may not be exhaustive.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. 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.
RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS
The Company will have significant interest expense and principal repayment
obligations under its indebtedness. As of June 30, 1997, after giving effect
to the Company's offering (the "Note Offering") of its 9 3/4% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") and the
application of the net proceeds therefrom, the PRG Merger and the LSI
Acquisition, the Company and its consolidated subsidiaries would have had an
aggregate of approximately $438.9 million of long-term debt (net of original
issue discount of approximately $1.5 million). See "Consolidated
Capitalization." Total debt to total capitalization was 66% and 70.2% at
December 31, 1996 and pro forma June 30, 1997, respectively.
Prior to the Note Offering, the Company financed Vacation Interval sales
through the hypothecation of its consumer mortgages receivable. Under such
hypothecation arrangements, third party lenders loaned the Company up to 90%
of the par value of its consumer mortgages receivable. Consumer mortgages
receivable payments, consisting of principal and interest, are paid to the
third party lenders. The Company's cash flows from consumer mortgages
receivable are sufficient to service the underlying hypothecated notes, which
totaled $132 million at June 30, 1997.
For the year ended December 31, 1996, the Company had $30.2 million in
negative cash flows from operations. Due to the significant growth of the
Company during the year ended December 31, 1996, cash flows from operations
included a use of cash for real estate and development costs totaling $71.9
million. In light of the foregoing, and after giving effect to the Note
Offering, cash flows from operations would not have been sufficient to service
the Company's debt with respect to the Convertible Notes and the Senior
Subordinated Notes. Excluding the real estate and development costs, however,
cash flows from operations would have been $41.7 million, and based on an
aggregate of $28.4 million in interest costs on the Convertible Notes and the
Senior Subordinated Notes, 68.1% of cash flows from operations would be
required to service the Company's debt under such notes.
Future development by the Company at its resorts will be financed with
existing cash, 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 credit facilities do contain or in the future
could contain restrictive covenants, 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. The Indenture dated August 1, 1997 governing the
Company's Senior Subordinated Notes (the "Indenture") also contains
restrictive covenants, including covenants limiting the incurrence of
indebtedness, the payments of
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dividends or other distrubtions and sales of assets. The Company is restricted
from paying dividends by certain of its debt agreements which require tangible
net worth of at least $140 million. The Indenture also limits the Company's
ability to pay dividends. Subsequent acquisition activities will be financed
primarily by new financing arrangements. Portions of the Company's
indebtedness currently are, and in the future may be, secured by mortgages on
the Company's resorts, 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 vacation ownership industry conditions and to increased
competitive pressures.
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
Growth by Acquisition. 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 vacation ownership 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 vacation ownership industry and the Company's business, results
of operations, leverage, financial condition and business prospects.
Risks Related to the Growth of Embassy Vacation Resorts and Westin Vacation
Clubs. 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 vacation ownership
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. Under the terms of a
five-year agreement, Promus and Vistana, Inc. will jointly acquire, develop,
manage and market vacation ownership resorts in North America under Promus
brand names. As part of the agreement, Promus and Vistana, Inc. will designate
selected markets for development (which markets currently include Kissimmee,
Florida and Myrtle Beach, South Carolina, and in which markets Vistana, Inc.
will have exclusive developments rights). The Company is not precluded from
using the Embassy Vacation Resort name in connection with resorts acquired
during the term of the agreement in markets not otherwise exclusive to
Vistana, Inc. The Company has been identified by Promus as the only other
licensee to whom Promus may license the Embassy Vacation Resort name. 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 licensees. On January 7, 1997, Promus
announced that it intended to expand its branded vacation ownership business
only with the Company and Vistana and that additional Embassy Vacation Resort
properties to be developed or acquired by the Company and licensed by Promus
are under discussion. See "--Competition."
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Risks Related to Development of a Points-Based Vacation Club System. The
Company intends to develop and operate a North American points-based vacation
club system and expand the European points-based Grand Vacation Club system
operated by LSI and acquired by the Company in the LSI Acquisition. The
Company has not previously developed or operated a points-based vacation club
system and no assurance can be given as to management's ability to efficiently
develop or operate such a system.
RISKS RELATED TO THE AVCOM MERGER, PRG MERGER AND LSI ACQUISITION
Uncertainty as to Future Financial Results. The Company believes that the
AVCOM Merger, PRG Merger and LSI Acquisition (collectively, the
"Acquisitions") offer opportunities for long-term efficiencies in operations
that should positively affect future results of the combined operations of the
Company, AVCOM, PRG and LSI. However, until the Company is able to offset
earnings dilution resulting from the issuance of Common Stock in the
Acquisitions with the positive effect of expected long-term efficiencies, the
Acquisitions may adversely affect the Company's financial performance in 1997
and future years. In addition, the combined companies will be more complex and
diverse than the Company prior to the Acquisitions, and the combination and
continued operation of their distinct business operations present difficult
challenges for the Company's management due to the increased time and
resources required in the management effort. While management and the Board of
Directors of the Company believe that the combinations can be effected in a
manner which will realize the value of the companies, management has limited
experience in combinations of this size.
In order to maintain and increase profitability, the combined companies will
need to successfully integrate and streamline overlapping functions with
respect to AVCOM and PRG (LSI will be operated as a separate European unit).
There can be no assurance that such integration will be successfully
accomplished or, if successfully accomplished, that such integration will not
be more costly to accomplish than contemplated by the Company. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separate organizations. The integration of certain
operations (such as customer service, loan servicing and loan processing)
following the Acquisitions will require the dedication of management resources
which may distract attention from the day-to-day business of the combined
companies in the short and long term. Failure to effectively accomplish the
integration of AVCOM's and PRG's operations could have an adverse effect on
the Company's results of operations and financial condition.
PRG Merger and LSI Acquisition and Related Expenses. Transaction costs
relating to the negotiation of and preparation for the PRG Merger and the LSI
Acquisition, the consummation of the PRG Merger and the LSI Acquisition and
the anticipated combination of certain operations resulted in a one-time
charge to the Company's earnings of approximately $4.2 million in the second
quarter of 1997 and are expected to result in a one-time charge to earnings of
approximately $5.0 million in the third quarter of 1997. These charges will
include the fees and expenses payable to financial advisors, lawyers,
accountants and other transaction expenses related to the PRG Merger and the
LSI Acquisition. In addition, there can be no assurance that the Company will
not incur additional charges in subsequent quarters to reflect costs
associated with the PRG Merger and the LSI Acquisition and the integration of
the Company's and PRG's operations.
Accounting Treatment. The AVCOM Merger and PRG Merger have been, and the LSI
Acquisition will be, accounted for by the Company by the pooling-of-interests
method of accounting. Under this method of accounting, the recorded assets and
liabilities of the Company, AVCOM, PRG and LSI will be carried forward at
their book values to the Company, income of the Company will include the
income (or loss) of the Company, AVCOM, PRG and LSI for the entire fiscal year
in which the Acquisitions occurred, and the reported income of the Company,
AVCOM, PRG and LSI for prior periods will be combined and restated as income
of the Company. Although the Company has received an opinion from its
independent public accountants that the Acquisitions will qualify for pooling-
of-interests accounting treatment, opinions of accountants are not binding
upon the Commission, and there can be no assurance that the Commission will
not successfully assert a contrary position. In such case, the purchase method
of accounting would be applicable. Under the purchase method, the book value
of AVCOM's, PRG's and LSI's assets would be increased to their fair values,
which could result in higher operating costs and expenses as the excess of the
purchase price over the fair value of AVCOM's, PRG's and LSI's assets would be
amortized and expensed over a period of years, which would adversely affect
the Company's future earnings.
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Dilution to Existing Stockholders. As a result of the AVCOM Merger, the PRG
Merger, the LSI Acquisition and the Marc Acquisition, the Company issued
1,324,554, 3,601,844, 1,996,401, and 212,717 shares of its Common Stock,
respectively. Such shares represented approximately 4.4%, 10.7%, 5.6% and
0.6%, respectively, of the number of shares of Common Stock outstanding
following each such acquisition.
Shares Eligible for Public Sale. Sales of substantial amounts of the
Company's Common Stock issued in the Acquisitions in the public market could
adversely affect prevailing market prices. The shares of Common Stock issued
in the AVCOM Merger are eligible for sale in the public market. Upon the
effectiveness of the shelf registration statement of which this Prospectus is
a part, the shares of Common Stock issued in the PRG Merger and the Marc
Acquisition will be eligible for sale in the public market. Following the
release of the Company's and LSI's third quarter 1997 combined earnings,
373,054 of the shares of Common Stock issued in the LSI Acquisition will be
eligible for sale in the public market on or subsequent to the effectiveness
of the shelf registration statement of which this Prospectus is a part. The
Company is obligated to register the remaining 1,623,347 shares issued in the
LSI Acquisition in three equal annual installments over three years from
August 28, 1997.
VARIABILITY OF QUARTERLY RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's earnings may be impacted by the timing of the completion of
the acquisition 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." 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
normalities 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 an
adverse effect on the market value of the Company's Common Stock. Numerous
factors, including announcements of fluctuations in the Company's or its
competitors' operating results and market conditions for hospitality and
vacation ownership 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 broad fluctuations may adversely affect the market price of
the Common Stock.
RISKS OF DEVELOPMENT AND CONSTRUCTION ACTIVITIES
Risks Related to Development Activities. The Company intends to actively
continue development, construction, redevelopment/conversion and expansion of
vacation ownership resorts, and to develop a North American points-based
vacation club system and expand the European points-based vacation club system
operated by LSI. There can be no assurance that the Company will: complete
development, expansion and/or conversion of its resorts currently under
development or expansion; undertake additional expansion plans set forth in
"Business--Description of the Company's Resorts;" undertake to develop other
resorts or complete such development if undertaken; or complete development of
a North American points-based vacation club system or expansion of a European
points-based vacation club system. Risks associated with the Company's
development, construction and redevelopment/conversion activities, and
expansion activities may include the risks that: acquisition and/or
development opportunities may be abandoned; construction costs of a resort may
exceed original estimates, possibly making the resort uneconomical or
unprofitable; sales of Vacation Intervals
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at a newly completed resort may not be sufficient to make the resort
profitable; financing may not be available on favorable terms for development
of, or the continued sales of Vacation Intervals at, a resort; and
construction may not be completed on schedule, resulting in decreased revenues
and increased interest expense. Risks associated with the Company's
development of a North American points-based vacation club system and
expansion of LSI's European points-based Grand Vacation Club system may
include the risks that: such development and/or expansion may be abandoned;
the North American and European points-based vacation club systems cannot be
efficiently combined or operated with the Company's current vacation ownership
operations; the North American and European points-based vacation club system
may be or become subject to extensive regulation by federal, state and local
jurisdictions, or the equivalent thereof in Europe, possibly making such
points-based system uneconomical or unprofitable; and financing may not be
available on favorable terms for development of a North American points-based
vacation club system or the expansion of a European points-based vacation club
system.
Risks Related to Construction Activities. In addition, the Company's
construction activities typically are performed by third-party contractors,
and, accordingly, 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 at the resorts.
The Company currently does not have the financing available to complete all of
its planned expansion as set forth in "Business--The 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. However, there can be no assurance that such preferential
purchases can be effected in the future. 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."
RISKS ASSOCIATED WITH PARTNERSHIP INVESTMENT IN THE POIPU PARTNERSHIP
The Embassy Vacation Resort Poipu Point is owned by the Poipu Partnership
(as defined), 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" and "Business--the Resorts."
LIMITED OPERATING HISTORY
The Company was formed in May 1996 in order to effectuate the consolidation
of the Company's predecessor partnerships, limited liability companies and
corporations (the "Consolidation Transactions") and the Company's initial
public offering (the "Initial Public Offering"), each of which was consummated
in August
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1996. Although predecessors of the Company have operating histories in the
vacation ownership and hospitality industries, the Company has limited
operating history as an integrated entity and limited experience operating as
a public company and no experience operating a points-based vacation club
system, any of which could have an adverse impact on the Company's operations
and future profitability. The Company has chosen to conduct its management
operations in (i) two locations in California primarily with respect to
acquisition, development, finance and legal (ii) Chicago, Illinois with
respect to marketing, (iii) Orlando, Florida with respect to sales, accounting
and property management operations and (iv) Carnforth, England with respect to
LSI's European resorts and its Grand Vacation Club system. However, as the
Company grows and diversifies into additional geographic markets, including
new markets entered as a result of the LSI Acquisition, no assurance can be
given as to management's ability to efficiently manage operations and control
functions without a centrally located management team.
GENERAL ECONOMIC CONDITIONS; CONCENTRATION IN VACATION OWNERSHIP 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 vacation ownership industry, any adverse changes affecting the vacation
ownership industry such as an oversupply of vacation ownership units, a
reduction in demand for vacation ownership units, changes in travel and
vacation patterns, changes in governmental regulations of the vacation
ownership industry and increases in construction costs or taxes, as well as
negative publicity for the vacation ownership industry, could have a material
adverse effect on the Company's 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. As of June 30, 1997, these agreements provide an
aggregate of up to approximately $220 million of available financing to the
Company bearing interest at variable rates tied to LIBOR or the prime rate of
which, at June 30, 1997, the Company had approximately $88 million of
additional borrowing capacity available.
Under these arrangements, the Company pledges as security promissory notes
to these lenders, who typically lend the Company 85% to 90% of the principal
amount of such promissory notes. Payments under these promissory notes are
made by the buyer/borrowers directly to a third-party 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 arrangements
or for any replacement financing arrangements 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.
The Company has historically derived income from its financing activities.
At June 30, 1997, the Company's mortgage portfolio included approximately
34,406 consumer loans totaling approximately
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$278 million, with a stated maturity of seven to ten years and a weighted
average interest rate of 15% per annum. Additionally, at June 30, 1997, the
weighted average maturity of all outstanding consumer loans was approximately
8.4 years and the total borrowings secured by consumer loans were
approximately $140 million, bearing a weighted average interest rate of 9.7%.
However, because the Company's borrowings bear interest at variable rates
(which, as of June 30, 1997, equal 9.9% per annum on a weighted average basis)
and the Company's loans to buyers of Vacation Intervals bear interest at fixed
rates (which, as of June 30, 1997, equal 15% per annum on a weighted average
basis), the Company bears the risk of increases in interest rates with respect
to the 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 AND EXCHANGE RATE FLUCTUATIONS
The Company does not engage in speculative or profit motivated hedging
activities. However, to manage risks associated with the Company's borrowings
bearing interest at variable rates, the Company may from time to time purchase
interest rate caps, interest rate swaps or similar instruments. As of and for
the periods ending December 31, 1996 and June 30, 1997, the Company was not
engaging in any interest rate hedging transactions. The nature and quantity of
any future 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.
The Company's international operations subject the Company to certain risks,
including increased exposure to currency exchange rate fluctuations. Although
the Company does not currently engage in foreign currency hedging
transactions, as it continues to expand its international operations, exposure
to losses in foreign currency transactions may increase or occur. The Company
may choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. However, there can be no assurance
that any currency hedging strategy would be successful in avoiding exchange-
related losses. In addition, there can be no assurance that such exchange-
related losses would not have a material adverse effect on the Company's
future international revenue and, consequently, on the Company's business,
operating results and financial condition.
RISKS ASSOCIATED WITH CUSTOMER DEFAULT
The Company bears the risk of defaults by buyers who financed the purchase
of their Vacation Intervals. As of June 30, 1997, approximately 3.9% of the
Company's consumer loans were considered by the Company to be delinquent (past
due by 60 or more days). The Company had completed or commenced foreclosure or
deed-in-lieu of foreclosure (which is typically commenced once a loan is more
than 120 days past due) on an additional approximately 2.4% of its consumer
loans. As of June 30, 1997, the Company's allowance for doubtful accounts as a
percentage of gross mortgages receivable was 6.8%, which management believes
is an adequate reserve for expected loan losses.
If a buyer of a Vacation Interval defaults on the consumer loan made by the
Company and the Company has pledged the mortgage receivable as collateral to a
lending institution, 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
relatively substantial 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 and has no present intention of doing so. In addition,
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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 a buyer default 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 was then in the process of foreclosing. The Company
continues to 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 the
Company'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 Vacation 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 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-
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. LSI competes
in Europe with certain other vacation ownership and points-based companies.
See "Business--Competition."
The Company also competes with companies with non-branded resorts such as
Westgate, Vistana, Inc. and Vacation Break USA, Inc. (each of which competes
with the Company's Orlando area resorts), Fairfield Communities (which
recently announced plans to acquire Vacation Break USA, Inc. and which
currently competes with the Company's Orlando area, Williamsburg and Branson
resorts) and ILX Incorporated (which competes with the Company's Sedona,
Arizona resorts). Under the terms of a recently announced five-year agreement,
Promus and Vistana, Inc. will jointly acquire, develop and manage and market
vacation ownership resorts in North America under Promus brand names. As part
of the agreement, Promus and Vistana, Inc. will designate selected markets for
development (which markets currently include Kissimmee, Florida and Myrtle
Beach, South Carolina, and in which markets Vistana, Inc. will have exclusive
development rights). The Company is not precluded from using the Embassy
Vacation Resort name in connection with resorts acquired during the term of
the agreement in markets not otherwise exclusive to Vistana, Inc. The Company
has been identified by Promus as the only other licensee to whom Promus may
license the Embassy Vacation Resort name. 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. On January 7, 1997, Promus announced that it
intended to expand its branded vacation ownership business only with the
Company and Vistana and that additional Embassy Vacation Resort properties to
be developed or acquired by the Company and licensed by Promus are under
discussion. See "Business--Competition."
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 vacation
ownership business,
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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." Subject to certain covenants not to
compete, the Founders could acquire resort and other hotel properties that
could compete with the Company's vacation ownership business.
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 American Resort Development Association ("ARDA"), the ability
to exchange Vacation Intervals was cited by buyers as a primary reason for
purchasing a Vacation Interval. Several companies, including Resort
Condominiums International ("RCI") and Interval International ("II"), provide
broad-based Vacation Interval exchange services, and the Company's resorts are
currently qualified for participation in the RCI and II exchange networks.
No assurance can be given that the Company will continue to be able to
qualify its resorts or will be able to qualify its future resorts, for
participation in the RCI or II exchange networks or any other exchange
network. RCI and II are under no obligation to include the Company's resorts
in their exchange networks. 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 affected. 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. Osamu Kaneko, Andrew J. Gessow and Steven C. Kenninger
(the "Founders"), who serve as the Company's Co-Chief Executive Officer,
President and Co-Chief Executive Officer 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 Company's success in Europe
will depend to a large extent upon the experience and abilities of Ian Ganney
and Richard Harrington, LSI's founders, who serve as LSI's Chairman and Chief
Executive Officer, respectively.
The Founders have agreed to devote substantially full time to the business
of the Company and not engage in any competitive businesses. Historically,
each Founder has devoted more than 90% of his time to the Company. However,
the Founders' employment agreements do not specify an exact percentage of time
required to be provided by the Founders and no assurance can be given that the
Founders will continue to devote 90% or more of their time to the Company.
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. See "--Potential Conflicts of Interest."
The loss of the services of any of the Founders or Messrs. Ganney or
Harrington could have a material adverse effect on the Company, its operations
and its business prospects. The Company does not maintain "keyman" life
insurance with respect to any of the Founders or Messrs. Ganney and
Harrington. 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.
APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION INTERVALS
It is possible that the Vacation Intervals may be deemed to be a security as
defined in Section 2(1) of the Securities Act. If the Vacation Intervals were
determined to be a security for such purpose, their sale would require
registration under the Securities Act. The Company has not registered the sale
of the Vacation Intervals under the Securities Act and does not intend to do
so in the future. If the sale of the Vacation Intervals were
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found to have violated the registration provisions of the Securities Act,
purchasers of the Vacation Intervals would have the right to rescind their
purchases of Vacation Intervals. If a substantial number of purchasers sought
rescission and were successful, the Company's business, results of operations
and financial condition could be materially adversely affected. The Company
has been advised by its vacation ownership counsel, Schreeder, Wheeler &
Flint, LLP, that in the opinion of such counsel, based on its review of the
Company's Vacation Interval program and the sales practices utilized in such
program, the Vacation Intervals do not constitute a security within the
meaning of Section 2(1) of the Securities Act.
REGULATION OF MARKETING AND SALES OF VACATION INTERVALS; OTHER LAWS
The Company's marketing and sales of Vacation Intervals and other operations
are, and any North American points-based vacation club system developed by the
Company will be, subject to extensive regulation by the federal government and
the states and foreign jurisdictions in which its resorts are located and in
which Vacation Intervals or Vacation Points 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, 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
Vacation Interval ownership programs. The laws of most states, including
Florida, California, Arizona, South Carolina, Virginia 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. 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. Certain
European laws and regulations regulate LSI's vacation ownership operations.
Any failure to comply with applicable laws or regulations could have a
material adverse effect on the Company. See "Business--Governmental
Regulation."
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 addition, from time to time, potential buyers of Vacation Intervals
assert claims with applicable regulatory agencies against Vacation Intervals
salespersons for unlawful sales practices. Such claims could have adverse
implications for the Company in negative public relations and potential
litigation and regulatory sanctions. However, the Company does not believe
that such claims will have a material adverse effect on the Company or its
business.
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
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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 of the
Company's 34 resorts. 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
resorts acquired in the AVCOM Merger, 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 should receive notice. The Company has been advised by the
relevant regulatory agencies that civil and criminal penalties will not be
assessed in this matter.
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 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. The Company believes that it is in compliance in all material
respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances.
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.
A variety of laws concerning the protection of the environment, health and
safety apply to the European operations, properties and other assets owned by
LSI. See "Business--Governmental Regulations--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 resorts are substantially in
compliance with laws governing the accessibility of its facilities to disabled
persons, a determination that the Company is not in compliance with the ADA
could result
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in a judicial order requiring compliance, imposition of fines or an award of
damages to private litigants. The Company is likely to incur additional costs
of complying with the ADA; however, such costs are not expected to have a
material adverse effect on the Company's results of operations or financial
condition. Additional legislation may impose further burdens or restrictions
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 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. The Company currently
maintains insurance coverage which, in management's opinion, is at least as
comprehensive as the coverage maintained by other prudent entities in the
Company's line of business. However, there are certain types of losses (such
as losses arising from acts of war and civil unrest) 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."
EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS; WESTIN DIRECTOR DESIGNATION
The Founders hold substantial amounts of shares of Common Stock (Messrs.
Kaneko, Gessow and Kenninger hold 11.2%, 11.8% and 4.7%, respectively, as of
the date of this Prospectus) 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 "Registering 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.
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DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. 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.
RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company expects that international operations will account for an
increasingly significant percentage of the Company's operations. As a result,
the Company is subject to a number of risks, including, among other things,
difficulties relating to administering its business globally, managing foreign
operations, currency fluctuations, restrictions against the repatriation of
earnings, export requirements and restrictions and multiple and possibly
overlapping tax structures. These risks could have a material adverse effect
on the Company's business, results of operations and financial condition.
Additionally, changes in inflation, interest rates, taxation, regulation or
other social, political, economic or diplomatic developments affecting the
countries in which the Company has (or intends to have) international
operations could have a material adverse effect on the Company's business,
operating results and financial condition.
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 vacation ownership resorts, potential conflicts of interest
exist. Affiliates of KOAR Group, Inc. ("KOAR"), a Los Angeles based real
estate acquisition and development company and predecessor of the Company
which is owned by Messrs. Kaneko and Kenninger, have developed and currently
act as the managing general partner of partnerships which own 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.
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
vacation ownership operations. However, any such acquisition from the Founders
would be subject to the approval of the Company's Independent Directors.
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 vacation ownership 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 North
America, Mexico and the Caribbean. 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 "Sunterra" 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 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
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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. Pursuant to the Westin Agreement,
Westin and the Company intend to enter into detailed definitive agreements to
implement the Westin Agreement, including operating agreements. There can be
no assurance that the parties will be able to reach such definitive
agreements. 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.
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock, or the potential for
such sales, could adversely affect prevailing market prices. The shares of
Common Stock issued in the Consolidation Transactions, the PRG Merger and the
LSI Acquisition are subject to the limitations of Rule 144 of the Securities
Act ("Rule 144"). The holders of the shares issued in the Consolidation
Transactions, the PRG Merger and the LSI Acquisition have been granted certain
registration rights pursuant to which the Company has agreed to file the shelf
registration statement of which this Prospectus is a part with the Commission
for the purpose of registering the sale of such shares of Common Stock.
Sales in the public market of substantial amounts of the Company's Common
Stock issued in the Acquisitions could also adversely affect prevailing market
prices. Additionally, sales of substantial amounts of the Company's Common
Stock pursuant to this Prospectus could adversely affect prevailing market
prices.
The Founders have only elected to register a portion of their shares in the
shelf registration statement of which this Prospectus is a part pursuant to
such registration rights. However, they reserve the right to register their
remaining shares pursuant to another shelf registration statement.
As of the date of this Prospectus, there were (i) outstanding stock options
to purchase approximately 3,600,000 shares of Common Stock which have been
granted to executive officers, other key employees, independent directors and
independent contractors of the Company under the 1996 Equity Participation
Plan (less than 20% of which are presently exercisable), (ii) up to 750,000
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) 4,536,990
shares of Common Stock initially issuable upon conversion of the Convertible
Notes.
RISK OF TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY
The Company sells Vacation Intervals at its 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.
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USE OF PROCEEDS
The Company will not receive any of the proceeds of the sale of Common Stock
by the Registering Stockholders. In connection with the filing of the shelf
registration of which this Prospectus is a part, the Company will bear the
estimated expenses set forth on the cover of this Prospectus.
CONSOLIDATED CAPITALIZATION
The following table sets forth, as of June 30, 1997, the total consolidated
capitalization of the Company. The as adjusted information gives effect to the
(i) the LSI Acquisition and (ii) the Note Offering and the application of the
net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------------
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
AS ADJUSTED
FOR THE
THE NOTE LSI ACQUISITION/
ACTUAL LSI OFFERING NOTE OFFERING
-------- ------ -------- ----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 44,361 $7,619 $111,593 $163,573
======== ====== ======== ========
Debt:
Notes payable to financial
institutions(a).................. $154,280 $ 516 $(52,375) $102,421
9 3/4% Senior Subordinated Notes
due 2007(b)...................... -- -- 198,468 198,468
5 3/4% Convertible Subordinated
Notes due 2007................... 138,000 -- -- 138,000
-------- ------ -------- --------
Total debt...................... 292,280 516 146,093 438,889
Stockholders' equity:
Common Stock, $0.01 par value;
33,438,105 issued and
outstanding; as adjusted for the
LSI Acquisition, 35,434,506
shares issued and outstanding(c). 334 20 -- 354
Additional paid-in capital........ 155,034 128 -- 155,162
Retained earnings................. 23,047 7,659 -- 30,706
-------- ------ -------- --------
Total stockholders' equity........ 178,415 7,807 -- 186,222
-------- ------ -------- --------
Total capitalization............ $470,695 $8,323 $146,093 $625,111
======== ====== ======== ========
</TABLE>
- --------
(a) Includes notes collateralized by mortgages receivable.
(b) Net of original issue discount of $1,532,000.
(c) Does not include an aggregate of 3,750,000 shares of Common Stock reserved
for issuance upon exercise of options granted pursuant to the Company's
1996 Equity Participation Plan, as amended, 750,000 shares of Common Stock
reserved for issuance pursuant to the Employee Stock Purchase Plan and
4,536,990 shares of Common Stock initially issuable upon conversion of the
Convertible Notes.
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BUSINESS
OVERVIEW
The Company is one of the largest developers and operators of vacation
ownership resorts in North America and Europe. The Company is devoted
exclusively to vacation ownership operations and, as of the date of this
Prospectus owns 34 vacation ownership resorts located in a variety of popular
resort destinations. The Company's North American resorts are located in
Arizona (six resorts), California (five resorts), Florida (three resorts),
Netherlands Antilles (two resorts), Virginia (two resorts), Hawaii, Missouri,
South Carolina, Texas and the U.S. Virgin Islands. The Company's European
resorts are located in England's Lake District and Midlands (three resorts),
Southern England, the sun coast of Spain (three resorts), the Spanish island
of Menorca (two resorts), Lanzarote in the Canary Islands and the Austrian
Alps.
The Company's principal operations currently consist of (i) acquiring,
developing and operating vacation ownership resorts, (ii) marketing and
selling vacation ownership interests in its North American resorts, which
typically entitle the buyer to use a fully-furnished vacation residence,
generally for a one-week period each year in perpetuity, (iii) marketing and
selling Vacation Points at its European resorts and (iv) providing consumer
financing to individual purchasers for the purchase of Vacation Intervals at
its resorts. The Company currently sells Vacation Intervals at 30 of these 34
resorts; sales at three resorts have been substantially completed; and sales
at one resort have yet to commence. The Company also provides resort
management and maintenance services at its resorts for which it receives fees
paid by the resorts' homeowners' associations.
As part of its growth and acquisition strategy, in May 1997 the Company
consummated the PRG Merger, acquiring 100% of the capital stock of PRG in
exchange for the issuance of 3,601,844 shares of the Company's Common Stock.
PRG is a Williamsburg, Virginia based developer, owner and operator of two
vacation ownership resorts. Based upon the closing price of the Company's
Common Stock on the Nasdaq National Market on May 15, 1997, the
3,601,844 shares of Common Stock issued in the PRG Merger were valued at an
aggregate of approximately $59.1 million and represented on a pro forma basis
10.8% of the shares of Common Stock outstanding on such date.
Additionally, in August 1997 the Company consummated the LSI Acquisition.
The Company acquired 100% of LSI's capital stock in exchange for the issuance
of 1,996,401 shares of the Company's Common Stock. LSI is a United Kingdom-
based developer, owner and operator of 11 vacation ownership resorts and a
European points-based vacation club system. Based on the closing price of the
Company's Common Stock on the Nasdaq National Market on August 28, 1997, the
1,996,401 shares of Common Stock issued in the LSI Acquisition were valued at
an aggregate of approximately $48.2 million and represented on a pro forma
basis 5.6% of the shares of Common Stock outstanding on such date. In addition
to the Common Stock issued in the LSI Acquisition, the Company paid cash
consideration of approximately $1,036,000 to a former LSI shareholder. See
"Risk Factors--Risks Related to the AVCOM Merger, PRG Merger and LSI
Acquisition."
On a pro forma basis, giving effect to the Acquisitions, the Company sold
14,997 Vacation Intervals and 159,953 Vacation Points at its resorts for the
twelve month period ended June 30, 1997, an increase of 48.9% and 50.8%,
respectively, compared to 10,073 Vacation Intervals and 106,040 Vacation
Points for the twelve month period ended June 30, 1996. The pro forma number
of resorts increased through acquisitions and development to 34 at June 30,
1997 from 28 at June 30, 1996.
THE VACATION OWNERSHIP INDUSTRY
The Market. The resort component of the leisure industry primarily is
serviced by two separate alternatives for overnight accommodations: commercial
lodging establishments and 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
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economical for vacationers. Also, room rates and availability at such
establishments are subject to change periodically. In addition to providing
improved lifestyle benefits to owners, vacation ownership presents an
economical alternative to commercial lodging for vacationers.
First introduced in Europe in the mid-1960's, vacation ownership has been
one of the fastest growing segments of the hospitality industry over the past
two decades. According to ARDA, during the fifteen year period ending in 1994
(the most recent year for which ARDA statistics are available), worldwide
vacation ownership sales volume for the vacation ownership industry increased
from $490 million in 1980 to $4.8 billion in 1994, representing a 17%
compounded annual growth rate. A year-by-year presentation of annual vacation
ownership sales volume follows. Based on industry data, the Company believes
that the total Vacation Interval sales volume for the vacation ownership
industry exceeded $5.5 billion in 1995 and $6.0 billion in 1996.
According to RCI Consulting, the United States and Europe are the largest
and second largest vacation ownership markets in the world, respectively.
Approximately 50% of the world's vacation owners have purchased Vacation
Intervals or vacation points at resorts or clubs in the United States and
approximately 19% of the world's vacation owners purchased in Europe.
As shown in the following charts, according to ARDA the worldwide vacation
ownership industry has expanded significantly since 1980 both in Vacation
Interval sales volume and number of Vacation Interval owners.
NUMBER OF VACATION OWNERS
(in millions)
1980.......... 0.155
1981.......... 0.22
1982.......... 0.335
1983.......... 0.47
1984.......... 0.62
1985.......... 0.805
1986.......... 0.97
1987.......... 1.125
1988.......... 1.31
1989.......... 1.53
1990.......... 1.8
1991.......... 2.07
1992.......... 2.363
1993.......... 2.76
1994.......... 3.144
DOLLAR VOLUME OF VACATION
OWNERSHIP SALES
(in billions)
1980.......... $0.49
1981.......... 0.965
1982.......... 1.165
1983.......... 1.34
1984.......... 1.735
1985.......... 1.58
1986.......... 1.61
1987.......... 1.94
1988.......... 2.39
1989.......... 2.97
1990.......... 3.24
1991.......... 3.74
1992.......... 4.25
1993.......... 4.505
1994.......... 4.76
Source: American Resort Development Association, The 1995 Worldwide Timeshare
Industry.
ARDA reports and other industry data indicate that during the past decade
the following factors have contributed to the increased acceptance of the
vacation ownership concept among the general public and the substantial growth
of the vacation ownership industry:
. increased consumer awareness of the value and benefits of vacation
ownership, including the cost savings relative to other lodging
alternatives;
. increased flexibility of vacation ownership due to the growth of
international exchange organizations;
. improvement in the quality of accommodations and management of vacation
ownership resorts;
. increased consumer confidence resulting from new consumer protection
regulations and the entrance of brand name national lodging companies to
the industry; and
. increased availability of consumer financing for purchasers of Vacation
Intervals.
The vacation ownership industry traditionally has been highly fragmented and
dominated by a 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
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vacation ownership 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 vacation
ownership operations of each of Marriott, Disney, Hilton, Hyatt, Four Seasons,
Inter-Continental and Westin comprise only a small portion of such companies'
overall operations.
The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's
relatively rapid recent growth rate and relatively high profit margins. In
addition, such companies recognize 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 ARDA for 1994 (the most
recent year for which statistics are available), 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 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 household incomes greater than $75,000 and approximately 17% of
such owners having annual household incomes greater than $100,000. However,
despite the growth in the vacation ownership industry by 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. In addition, as of such date, the industry had achieved only
a 1.0% market penetration among European households with income above $30,000
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 (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 Vacation 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, the ARDA study indicates
that 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 current
demographic trends, primarily because of the variety and quality of its resort
locations and its participation in the RCI and II exchange networks. However,
neither RCI nor II is under any obligation to continue to include the
Company's resorts in its exchange network. The Company expects the vacation
ownership 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 the world's leading developer and
operator of vacation ownership resorts. To meet this objective, the Company
intends to (i) increase sales and financing of Vacation Intervals at its
resorts through broader-based marketing efforts and through the construction
of additional Vacation Interval inventory, (ii) acquire, convert and develop
additional resorts to be operated as Embassy Vacation Resorts, Westin Vacation
Club resorts and Sunterra 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 vacation ownership industry generally, (iii) improve operating
margins by reducing borrowing costs and reducing its sales and marketing
expenses as a percentage of revenues over time, (iv) acquire additional
Vacation Interval inventory, operating companies, management contracts,
Vacation Interval mortgage
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<PAGE>
portfolios or other vacation ownership-related assets that may be integrated
into the Company's operations and (v) develop and operate a North American
points-based vacation club system, as well as expand LSI's existing points-
based vacation club in Europe. The key elements of the Company's strategy are
described below.
Sales and Expansion at the Company's Resorts. The Company intends to
continue sales of Vacation Intervals at its resorts by adding Vacation
Interval inventory through the construction of new development units and by
broadening marketing efforts. As of June 30, 1997 and after giving effect to
the LSI Acquisition, (i) the Company had a current inventory of 29,225
Vacation Intervals and 244,633 Vacation Points, (ii) the Company was in the
process of developing or had plans to develop an additional 107,355 Vacation
Intervals at its resorts and (iii) LSI was in the process of developing or has
plans to develop additional units to accommodate an additional 276,000 points
in LSI's Grand Vacation Club system. In light of the foregoing, the Company
believes it is well-positioned to expand sales of Vacation Intervals at its
resorts as a result of its existing supply of Vacation Intervals in inventory,
as well as planned expansion. 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 vacation
ownership resorts in North America, the Company believes that it has acquired
skill and expertise both in the development and operation of vacation
ownership 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.
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 Sunterra Resorts. To implement
its business strategy, the Company intends to pursue resort acquisitions and
developments in a number of vacation destinations that will complement the
Company's operations. The Company believes that its relationships with Promus,
Westin and selected financial institutions that control resort properties will
provide it with acquisition, development and hotel-to-vacation ownership
conversion opportunities and will allow it to take advantage of currently
favorable market opportunities to acquire resort and condominium properties to
be operated as vacation ownership resorts. Since the 1992 inception of the
Company's predecessor's resort acquisition and development business, 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 vacation ownership resorts. However, there can be no assurance that
such preferential purchases can be effected in the future. See "Risk Factors--
Risks of Development and Construction Activities." In addition to acquiring
existing resort and hotel-to-vacation ownership 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 vacation
ownership resorts in locations based on existing vacation ownership
competition in the area as well as existing overall demand for accommodations.
In evaluating whether to acquire, convert or develop a vacation ownership
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
vacation ownership 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 vacation ownership resort
from a regulatory and construction point of view, (iv) the availability of
additional land at or nearby 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
25
<PAGE>
Vacation Intervals at a variety of attractive resort destinations to multiple
demographic groups in the vacation ownership market.
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" vacation ownership resorts located in North America, Mexico and
the Caribbean. The Company's rights also cover the conversion of Westin hotels
to vacation ownership resorts. In addition, pursuant to the Westin Agreement,
it is expected that Westin will provide the Company with lead generation
assistance and marketing support at the Westin Vacation Club resorts and
Promus currently provides such assistance at Embassy Vacation Resorts. The
Embassy Suites hotels owned by two of the Company's Founders 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 vacation ownership 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 vacation ownership industry as it provides the consumer
an important element of reliability and image in a fragmented and largely non-
branded industry. Through its Embassy Vacation Resorts and Westin Vacation
Club resorts, the Company believes it will be able to provide Vacation
Interval buyers with consistent quality in their vacation ownership purchases.
In addition, through its Sunterra Resorts the Company will be able to appeal
to the value-conscious consumer who seeks the best value for the vacation
dollar and does not seek affiliation with brand-name lodging companies.
Improvement of Operating Margins. As the Company grows, management believes
that its larger number of resorts relative to its competitors will provide it
with additional revenue opportunities and the potential for cost savings. 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 also believes that it will
reduce sales and marketing expenses over time as a result of the lead
generation assistance provided or to be provided by Westin and Promus and by
targeting potential buyers through Westin Vacation Club resorts and Embassy
Suites hotels.
Acquisition of Vacation Ownership Assets, Management Contracts and Operating
Companies. The Company's relationships in the vacation ownership and financial
communities and the size and geographic diversity of its portfolio of
properties provide the Company access to a variety of acquisition
opportunities. The Company believes that its proven acquisition and
development record and public company status give the Company a competitive
advantage in acquiring assets, businesses and operations in the fragmented
vacation ownership industry. Examples of such acquisitions may include
acquiring additional Vacation Interval inventory, operating companies,
management contracts, Vacation Interval mortgage portfolios and properties
which may be integrated into the Company's operations. The acquisitions of
AVCOM, PRG and LSI are recent examples of this aspect of the Company's
business strategy.
Development of Points-Based Vacation Club System. The Company does not
currently operate a points-based vacation club system. However, as a result of
the LSI Acquisition, the Company acquired LSI's European points-based Grand
Vacation Club system. The Company intends to expand this system in Europe and
develop the Club Sunterra points-based vacation club system in North America.
In general, under a points-based vacation club system, members purchase an
annual allotment of points which can be redeemed for occupancy rights at the
club's participating resorts. Compared to other vacation ownership
arrangements, the points-based system provides members significant flexibility
in planning vacations as the number of points that are required for a stay at
any one resort varies depending upon a variety of factors, including the
resort location, the size of the unit, the vacation season and the days of the
week used. Under this system, members can select vacations according to their
schedules, space needs and available points. Subject to certain restrictions,
members are typically allowed
26
<PAGE>
to carry over for one year any unused points and to "borrow" points from the
forthcoming year. In addition, members are required to pay annual fees for
certain maintenance and management costs associated with the operation of the
resorts based on the number of points to which they are entitled. See "Risk
Factors--Risks Related to the AVCOM Merger, PRG Merger and LSI Acquisition."
DESCRIPTION OF THE COMPANY'S RESORTS
The Company believes that, based on ARDA and Vacation Ownership World
reports and the Company's extensive knowledge of the industry, it is the only
developer and operator of vacation ownership resorts that offers 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 vacation ownership development and acquisition business of
the Company's predecessors, the Company has developed or acquired 34 vacation
ownership resorts in North America and Europe, of which 30 are currently in
sales. Of the 34 resorts currently owned and operated by the Company, three
resorts are partially-owned by the Company. In addition, as a result of the
LSI Acquisition, the Company now operates a points-based vacation club in
Europe. Each of the Company's four resort types is described below:
Sunterra Resorts. The Company's Sunterra Resorts, which are not affiliated
with any hotel chain, are positioned in the value price segment of the market.
Vacation Intervals at the Company's 19 Sunterra Resorts (which include the All
Seasons Resorts and the PRG Resorts) 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 Sunterra Resorts offer buyers an economical
alternative to resorts affiliated with brand-name lodging companies (such as
Embassy Vacation Resorts and Westin Vacation Club resorts) and traditional
vacation lodging alternatives.
Embassy Vacation Resorts. The Company's Embassy Vacation Resorts are
positioned in the upscale price segment of the market and are characterized by
high quality accommodations and service. 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 vacation ownership
accommodations that offer the same high quality and value that is represented
by the more than 135 Embassy Suites hotels throughout North America. Under the
terms of a five-year agreement, Promus and Vistana, Inc. will jointly acquire,
develop, manage and market vacation ownership resorts in North America under
Promus brand names. As part of the agreement, Promus and Vistana, Inc. will
designate selected markets for development (which markets currently include
Kissimmee, Florida and Myrtle Beach, South Carolina, and in which markets
Vistana, Inc. will have exclusive development rights). The Company is not
precluded from using the Embassy Vacation Resort name in connection with
resorts acquired during the term of the agreement in markets not otherwise
exclusive to Vistana, Inc. The Company is one of two licensees and operators
of Embassy Vacation Resorts, and is currently evaluating additional resorts
that could be operated as Embassy Vacation Resorts.
Westin Vacation Club Resorts. The Company's Westin Vacation Club resorts are
positioned in the luxury price segment of the market and are characterized by
elegant accommodations and personalized service. 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" vacation ownership
resorts located in North America, Mexico and the Caribbean. Vacation Intervals
at Westin Vacation Club resorts generally will sell for $16,000 to $25,000 and
will be targeted to buyers with annual incomes ranging from $80,000 to
$250,000. The Westin Agreement represented Westin's entry into the vacation
ownership market.
LSI's Grand Vacation Club. As a result of the LSI Acquisition, the Company
acquired LSI's Grand Vacation Club points-based system which LSI currently
markets to buyers principally in the United Kingdom. LSI's Grand Vacation Club
allows members to purchase an annual allotment of points that can be redeemed
for occupancy rights at LSI's 11 European resorts and at the club's other
participating resorts. Points in LSI's Grand Vacation Club can typically be
purchased for approximately $215 a point. A typical one week stay at an LSI
Resort requires approximately 46 points.
27
<PAGE>
THE RESORTS
The following tables set forth certain information, as of June 30, 1997,
regarding each of the Company's 34 existing resorts, including location, date
acquired by the Company, the number of existing and total potential units at
the resort and, where applicable, the number of Vacation Intervals currently
available for sale and occupancy and additional expansion potential. Of the
resorts set forth below, the Embassy Vacation Resort Poipu Point and the North
Bay Resort at Lake Arrowhead and the Westin Vacation Club at St. John are
partially owned by the Company. The exact number of units, Vacation Intervals
and Vacation Points ultimately achieved may differ from the following
estimates based on future land planning and site layout considerations.
<TABLE>
<CAPTION>
UNITS AT RESORT VACATION INTERVALS AT RESORT
------------------------------ ----------------------------------
DATE POTENTIAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(a) EXPANSION(b) TOTAL INVENTORY(c) EXPANSION(d) TOTAL
------ -------- -------- ---------- ------------ ----- ------------ ------------ -------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
SUNTERRA RESORTS:
Cypress Pointe Resort Lake Buena November 1992 224 276(e) 500 1,461 14,076(e) 15,537
Vista, Florida
Plantation at Fall Creek Branson, July 1993 114 286(f) 400 554 14,586(f) 15,140
Missouri
Royal Dunes Resort Hilton Head April 1994 40 15(g) 55 374 765(g) 1,139
Island, South
Carolina
Royal Palm Beach Club St. Maarten, July 1995 140 (h) 140 1,296 (h) 1,296
Netherlands
Antilles
Flamingo Beach Club St. Maarten, July 1995 172 85(i) 257 1,715 4,335(i) 6,050
Netherlands
Antilles
San Luis Bay Resort Avila Beach, June 1996 68 62(j) 130 316 3,162(j) 3,478
California
The Savoy at Miami Beach, August 1997 -- 68(k) 68 -- 3,468(k) 3,468
South Beach Florida
Scottsdale Villa Mirage Scottsdale,
Resort Arizona February 1997 64 104(l) 168 1,289 5,304(l) 6,593
The Ridge on Sedona
Golf Resort Sedona, Arizona February 1997 12 108(m) 120 219 5,508(m) 5,727
Sedona Springs Resort Sedona, Arizona February 1997 40 -- 40 52 -- 52
Sedona Summit Resort Sedona, Arizona February 1997 60 -- 60 933 -- 933
Villas of Poco Diablo Sedona, Arizona February 1997 33 -- 33 58 -- 58
Villas of Sedona Sedona, Arizona February 1997 40 -- 40 197 -- 197
North Bay Resort(n) Lake Arrowhead, February 1997 13 -- 13 85 -- 85
California
Tahoe Beach & Ski Club South Lake Tahoe, February 1997 140 -- 140 900 -- 900
California
Tahoe Seasons Resort South Lake Tahoe, February 1997 21(o) -- 21 808 -- 808
California
Villas on the Lake Lake Conroe,
Texas February 1997 37 64(p) 101 1,523 3,264(p) 4,787
Powhatan Plantation Williamsburg,
Virginia May 1997 405 95(q) 500 636 4,845(q) 5,481
Greensprings Plantation Williamsburg,
Virginia May 1997 58 442(r) 500 728 22,542(r) 23,270
----- ----- ----- ------ ------- -------
TOTAL............................................... 1,681 1,605 3,286 13,144 81,855 94,999
----- ----- ----- ------ ------- -------
EMBASSY VACATION RESORTS:
Poipu Point(s) Koloa, Kauai, November 1994 219(t) -- 219 9,138 -- 9,138
Hawaii
Grand Beach Orlando, Florida January 1995 126 304(u) 430 2,817 15,504(u) 18,321
Lake Tahoe South Lake Tahoe,
California May 1996 62 148(v) 210 2,411 7,548(v) 9,959
----- ----- ----- ------ ------- -------
TOTAL............................................... 407 452 859 14,366 23,052 37,418
WESTIN VACATION CLUB:
St. John(w) St. John, U.S.
Virgin Islands May 1997 48 48(x) 96 1,715 2,448(x) 4,163
----- ----- ----- ------ ------- -------
TOTAL............................................... 48 48 96 1,715 2,448 4,163
----- ----- ----- ------ ------- -------
TOTAL UNITS AND
VACATION INTERVALS...................................... 2,136 2,105 4,241 29,225 107,355 136,580
===== ===== ===== ====== ======= =======
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
UNITS AT RESORT VACATION POINTS IN SYSTEM
----------------------------- -----------------------------------
DATE POTENTIAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(y) EXPANSION(z) TOTAL INVENTORY(aa) EXPANSION(bb) TOTAL
- ------ -------- -------- ---------- ------------ ----- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LSI RESORTS:
Pine Lake Resort Lake District, England August 1997 112 -- 112
Woodford Bridge
Country
Club Devon, England August 1997 72 50 122
Wychnor Park
Country Club Midlands, England August 1997 44 20 64
Flanesford
Priory Midlands, England August 1997 16 -- 16
Los Amigos Beach
Club Costa Del Sol, Spain August 1997 140 50 190
Royal Oasis Club
at La Quinta Costa Del Sol, Spain August 1997 68 -- 68 244,633 276,000 520,633
Royal Oasis Club
at Benal Beach Costa Del Sol, Spain August 1997 108 -- 108
White Sands
Beach Club Menorca, Spain August 1997 48 -- 48
White Sands
Country Club Menorca, Spain August 1997 51 -- 51
Club del Carmen Lanzarote, Canary Islands August 1997 67 -- 67
Alpine Club Schladming, Austria August 1997 69 -- 69
--- --- ---
TOTAL UNITS AND
VACATION POINTS...................................... 795 120 915
=== === ===
</TABLE>
- -------
(a) Current units at each resort represents only those units that have
received their certificate of occupancy as of June 30, 1997. The Company
generally is able to sell 51 Vacation Intervals with respect to each unit
at its resorts (the 52nd week is generally utilized for maintenance).
(b) Potential expansion units at each resort includes, as of June 30, 1997,
(i) units currently under construction that have not yet received their
certificate of occupancy and (ii) units planned to be developed on land
currently owned by the Company or under option to be acquired which have
not yet received their certificate of occupancy and which are not
currently under construction.
(c) Current inventory of Vacation Intervals at each resort represents only
those unsold Vacation Intervals that have received their certificate of
occupancy as of June 30, 1997.
(d) Potential expansion of Vacation Intervals at each resort includes, as of
June 30, 1997, (i) Vacation Intervals currently under development that
have not yet received their certificate of occupancy and (ii) Vacation
Interval development potential on land currently owned by the Company or
under option to be acquired which have not yet received their certificate
of occupancy and which are not currently under construction.
(e) Includes an estimated 276 units 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 will
be lower than is indicated above.
(f) Includes an estimated 286 units 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.
(g) Includes 15 units construction of which commenced in the second quarter of
1997 and for which all necessary governmental approvals and permits have
been received by the Company.
(h) 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 (and a corresponding number of 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.
(i) 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 (and create a corresponding number of Vacation
Intervals). The Company is in the process of seeking to obtain the
necessary governmental approvals and permits for such proposed expansion.
(j) Includes 62 units for which all necessary governmental approvals and
permits have been received by the Company (except building permits).
Construction of the first of such 30 units was completed and such units
received their certificate of occupancy during the third quarter of 1997.
In addition, the Company is considering the acquisition of
29
<PAGE>
additional land near the San Luis Bay Resort for the addition of an
estimated 100 units, but has yet to enter into an agreement with respect to
such land or to obtain any of the necessary governmental approvals and
permits for such proposed expansion. In June 1996 the Company 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 1997.
(k) Includes 68 units that the Company currently rents on a nightly basis,
pending the Company's commencement of Vacation Interval sales at the
resort.
(l) Includes 40 units and 64 units which are scheduled for completion in the
first quarter of 1998 and 1999, respectively. All necessary discretionary
approvals and permits have been received for all units to be constructed
at the Scottsdale Villa Mirage Resort.
(m) Construction began in December 1996 on The Ridge on Sedona Golf Resort,
which upon completion will consist of 120 units. The first 12 units and
clubhouse are scheduled for occupancy in the fourth quarter of 1997 and
have received all necessary discretionary governmental approvals and
permits. Governmental approvals and permits have not been sought or
received for the additional planned 108 units. Vacation Interval sales
began in May 1997.
(n) The Company owns or has the power to vote 80% of the partnership interests
of Trion Capital Corporation. Trion is the General Partner of Arrowhead
Capital Partners, L.P., which is 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.
(o) Prior to being acquired by the Company, 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 160 Vacation Intervals have been
sold by the Company and 41 of the notes have been reaffirmed by the
original buyers. The Company intends to foreclose on the remaining notes
and acquire clear title to the applicable Vacation Intervals.
(p) 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
64 units in Phase II. The Phase II construction start date has not yet
been determined, however, all necessary discretionary governmental
approvals and permits (excluding building permits which have not yet been
applied for) have been received for such additional 64 units.
(q) Includes 14 units which are currently under construction and are scheduled
for occupancy during the first quarter of 1998. The Company has received
all necessary discretionary governmental approvals and permits with
respect to such 14 units, excepting certificates of occupancy. The
Company's development schedule for the remaining 81 units will be
determined based on market demand and other factors.
(r) Includes 30 units which are currently under construction and are scheduled
for occupancy during the first quarter of 1998. The Company has received
all necessary discretionary governmental approvals and permits with
respect to such 30 units, excepting certificates of occupancy. The
Company's development schedule for the remaining 412 units will be
determined based on market demand and other factors.
(s) The Company acquired a 30.43% 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
30
<PAGE>
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.
(t) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(u) The Company has received all necessary discretionary governmental approvals
and permits to construct an additional estimated 304 units on land which it
owns at the Embassy Vacation Resort Grand Beach (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.
(v) The Company has received all necessary discretionary governmental approvals
and permits (excluding building permits which the Company intends to apply
for and obtain on a phase-by-phase basis) to construct an additional
estimated 148 units on land that it owns at the Embassy Vacation Resort
Lake Tahoe. The Company commenced construction on 40 of such units in the
first quarter of 1997 and, subject to market demand, currently plans to
construct an additional 40 of such units commencing in the second quarter
of each year from 1998 through 1999 and the remaining 28 units commencing
in May 2000.
(w) The Company owns 50% of the entity which has acquired the unsold Vacation
Intervals at this resort. The acquisition closed in May of 1997 and
commencement of Vacation Interval sales is anticipated to begin by the
fourth quarter of 1997.
(x) Includes 48 units which are currently available for 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 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 require the
installation of utilities, furniture, fixtures and equipment and interior
finishes before occupancy. The Company currently anticipates completing the
renovation of such 48 additional units by the fourth quarter of 1997. The
Company also owns adjacent land at the St. John resort which will
accommodate the development of additional units but with respect to which
no permits or approvals have been sought or obtained. The Company has not
yet determined the number of potential additional units which may be
constructed on such adjacent land or the timing of such potential
development.
(y) Current units at each resort represents only those units that have received
their certificate of occupancy (or other equivalent certificate) as of June
30, 1997. LSI generally is able to sell points representing 50 weeks with
respect to each unit at its resorts (the 51st and 52nd weeks are generally
utilized for maintenance).
(z) Potential expansion units at each resort includes, as of June 30, 1997, (i)
units currently under construction that have not yet received their
certificate of occupancy (or other equivalent certificate) and (ii) units
planned to be developed on land currently owned by LSI or under option to
be acquired which have not yet received their certificate of occupancy (or
other equivalent certificate) and which are not currently under
construction.
(aa) Current inventory of Vacation Points represents, as of June 30, 1997, the
number of unsold Vacation Points in LSI's vacation club system, as well
as the number of points allocable to current unit inventory owned by LSI
but not yet contributed to LSI's vacation club system.
(bb) Potential expansion Vacation Points represents, as of June 30, 1997, the
estimated number of Vacation Points assignable to potential expansion
units at the 11 existing LSI Resorts.
31
<PAGE>
The following table sets forth certain information, as of June 30, 1997,
with respect to the Company's resorts. All of the units are fully-furnished,
including telephones, televisions, VCRs and stereos, and all but the studio
units feature full kitchens. Most of the units contain a washer and dryer,
microwave and private outdoor barbecue grill. Many units also include a
private deck.
<TABLE>
<CAPTION>
RESORT AMENITIES
--------------------------------------
TYPES OF UNITS
OFFERED
------------------- SWIMMING WHIRLPOOL/ RESTAURANT/
RESORTS LOCATION S 1BR 2BR 3BR 4BR TENNIS POOL JACUZZI LOUNGE
- ------- ------------------------- --- --- --- --- --- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUNTERRA RESORTS:
Cypress Pointe Resort Lake Buena Vista, Florida X X X X X X X
Plantation at Fall
Creek Branson, Missouri X X X X X X X
Royal Dunes Resort Hilton Head Island,
South Carolina X X X
Royal Palm Beach Club St. Maarten, Netherlands
Antilles X X X X X
Flamingo Beach Club St. Maarten, Netherlands
Antilles X X X X X
San Luis Bay Resort Avila Beach, California X X X X X
The Savoy at South
Beach Miami Beach, Florida X X X X X
Scottsdale Villa Mirage
Resort Scottsdale, Arizona X X X X X X
The Ridge on Sedona
Golf Resort Sedona, Arizona X X X X X X X
Sedona Springs Resort Sedona, Arizona X X X X X
Sedona Summit Resort Sedona, Arizona X X X X X
Villas of Paco Diablo Sedona, Arizona X X X X
Villas of Sedona Sedona, Arizona X X X X X
North Bay Resort Lake Arrowhead,
California X X X X X
Tahoe Beach and Ski South Lake Tahoe,
Club California X X X X X X X
Tahoe Seasons Resort South Lake Tahoe,
California X X X X
Villas on the Lake Lake Conroe, Texas X X X
Powhatan Plantation Williamsburg, Virginia X X X X X X X
Greensprings Plantation Williamsburg, Virginia X X X X X
EMBASSY VACATION
RESORTS: X X X
Poipu Point Koloa, Kauai, Hawaii X X X X X
Grand Beach Orlando, Florida X X X
Lake Tahoe South Lake Tahoe,
California X X X X X
WESTIN VACATION CLUB:
St. John St. John, U.S. Virgin
Islands X X X X X X X X
LSI RESORTS:
Pine Lake Resort Lake District, England X X X X X X
Woodford Bridge Country
Club Devon, England X X X X X X
Wychnor Park Country
Club Midlands, England X X X X X X
Flanesford Priory Midlands, England X X X X
Los Amigos Beach Club Costa Del Sol, Spain X X X X X X X X
Royal Oasis Club at La
Quinta Costa Del Sol, Spain X X X X X
Royal Oasis Club at
Benal Beach Costa Del Sol, Spain X X X X X
White Sands Beach Club Menorca, Spain X X X X X X
White Sands Country
Club Menorca, Spain X X X X
Club del Carmen Lanzarote, Canary Islands X X X X X
Alpine Club Schladming, Austria X X X X X X X
</TABLE>
EMBASSY VACATION RESORTS
Capitalizing on two of the Company's Founders' relationship with Promus as a
developer and owner of Embassy Suites hotels, in 1994 the Company and Promus
established Embassy Vacation Resorts. 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
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respect to the Company's Embassy Vacation Resorts. Under Promus's development
agreement with Vistana, Inc., Promus has identified the Company as the only
other licensee to whom Promus may license the Embassy Vacation Resort name.
There can be no assurance that Promus will license the Embassy Vacation Resort
name to the Company with respect to possible future resorts. On January 7,
1997, Promus announced that it intended to expand its branded vacation
ownership business with only the Company and Vistana and that additional
Embassy Vacation Resort properties to be developed or acquired by the Company
and licensed by Promus are under discussion.
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 by
offering a premium for a resort tour at the time a guest reserves 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.
The Embassy Vacation Resort Poipu Point is owned by the Poipu Partnership,
which consists of the Company and a third party. The Poipu Partnership
requires 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.
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, Westin and the Company intend to
enter into detailed definitive agreements to implement the Westin Agreement,
including operating agreements. There can be no assurance that the parties
will be able to reach such definitive agreements. Pursuant to the Westin
Agreement, each of the Company and Westin will own a 50% equity interest in
the ventures that own such resorts and have an equal voice in the management
of such ventures. 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 intend to 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
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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.
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 and is presently filled by Osamu Kaneko. 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.
In May 1997, the Company and Westin jointly acquired the Westin Vacation
Club resort in St. John, U.S. Virgin Islands. The "four-star" Westin Vacation
Club at St. John involves 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 a Westin Hotel. Pursuant to
a purchase and sale agreement with subsidiaries of Skopbank, a Finnish
corporation, Westin acquired a 100% interest in the hotel and the Company and
Westin formed 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 the 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 (which amount was loaned to the partnership by the
Company in the first quarter of 1997). 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.
Commencement of Vacation Interval sales began in September 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.
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 $6,000
to $8,000 for a studio residence to approximately $12,000 to $26,000 for a
three bedroom residence. The Company offers consumer financing to the
purchasers of Vacation Intervals in 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. A portion of the proceeds of
such financing is used to obtain releases of the Vacation Interval unit from
outstanding construction loans, if any.
The Company has entered into agreements with lenders for the Company's
financing of customer receivables. At June 30, 1997, these agreements provided
an aggregate of up to approximately $220 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 June 30, 1997 approximately $88 million of
additional borrowing capacity available.
At June 30, 1997, the Company's mortgage portfolio included approximately
34,406 consumer loans totaling approximately $278 million, with a stated
maturity of seven to ten years and a weighted average interest rate of 15% per
annum. As of June 30, 1997, approximately 3.9% of the Company's consumer loans
were considered by the Company to be delinquent (past due by 60 or more days).
The Company had completed or commenced foreclosure or deed-in-lieu of
foreclosure (which is typically commenced once a loan is more than
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120 days past due) on an additional approximately 2.4% of its consumer loans.
As of June 30, 1997, the Company's allowance for doubtful accounts as a
percentage of gross mortgages receivable was 6.8%, which management believes
is an adequate reserve for expected loan losses. The Company has historically
derived income from its financing activities. 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 may 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.
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 (which is generally
120 days after the date such loans are due), 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.
LSI currently contracts with a third-party bank to provide financing to
purchasers of points in its Grand Vacation Club. LSI is paid an upfront
commission of approximately 13% of the principal amount of eligible consumer
loans.
SALES AND MARKETING
As one of the leading developers and operators of vacation ownership resorts
in North America, the Company believes that it has acquired the skill and
expertise in the development, management and operation of vacation ownership
resorts and in the marketing of Vacation Intervals. The Company's primary
means of selling Vacation Intervals is through on-site sales forces at each of
its resorts. A variety of marketing programs are employed to generate
prospects for these sales efforts, which include targeted mailings, overnight
mini-vacation packages, gift certificates, 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 are intended to include Westin Vacation Club and Embassy Suites
hotel guests and current owners of vacation ownerships. Cross-marketing
targets current owners of Vacation Intervals at the Company's resorts, both to
sell additional Vacation Intervals at the owner's home resort, or to sell a
Vacation Interval at another of the Company's resorts. The Company also sells
Vacation Intervals through off-site sales centers.
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, 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
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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 compares 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 generally 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 vacation ownership 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 vacation ownership resort, (iv) the availability of additional
land at or nearby 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 obtaining 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,
including tests on identified underground storage tanks. If recommended by the
environmental consulting firm, additional testing is generally conducted. The
Company also 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
the 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 its resorts that have rentable 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 vacation package 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) was acquired as a
traditional hotel with the intention of converting each such resort to a
vacation ownership 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.
Resort Management. The Company's resorts are (i) generally managed by the
Company pursuant to management agreements with homeowner associations with
respect to each of the Company's Sunterra 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")
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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. Westin will manage Westin Vacation Club resorts.
At each of the Company's Sunterra Resorts, the Company enters into a
management agreement with an association comprised of owners of Vacation
Intervals 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 Sunterra 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. The
Company also provides all managerial and other employees necessary for the
Sunterra 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 these services.
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.
LSI manages each resort in its Grand Vacation Club pursuant to contracts
which typically provide for a management fee of 15% of monthly maintenance
fees to be paid to LSI.
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.
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 plus applicable real estate taxes (generally $300 to
$700 per interval) 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.
For a description of the general terms of a points-based vacation club
system, see "--Business Strategy-- Development of Points-Based Vacation Club
System."
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 II. In addition, LSI's Grand Vacation Club points system is affiliated
with II. In a 1995 study sponsored by the Alliance for Timeshare Excellence
and ARDA, the 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 and II allows the Company's
customers to exchange in a particular year their occupancy right in the unit
in which they own a Vacation Interval
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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. Both RCI and II assign ratings
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 or II 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, 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. In November 1996, HFS Incorporated consummated the acquisition of RCI
for cash and securities.
Established in 1976, II has more than 1,400 participating resort facilities
and over 750,000 members worldwide. The cost of the annual membership fee in
II, which typically is at the option and expense of the owner of the Vacation
Interval, is $66 per year, plus an exchange fee of $94 and $104 for domestic
and international exchanges, respectively. II has assigned high ratings to the
Vacation Intervals in the Company's resort properties, and such Vacation
Intervals have in the past been exchanged for Vacation Intervals at other
highly-rated member resorts.
FUTURE ACQUISITIONS
The Company intends to expand its vacation ownership business by acquiring
or developing resorts located in attractive resort destinations, and is in the
process of evaluating strategic acquisitions in a variety of locations. Such
future acquisitions 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, Utah and Colorado) and in various Westin resorts throughout
North America, as well as in Europe and Asia. In addition, the Company has
also explored the acquisition of and may consider acquiring existing
management companies, vacation ownership developers and marketers, loan
portfolios or other industry related operations or assets in the fragmented
vacation ownership development, marketing, finance and management industry.
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 vacation
ownership operations in the past decade, the industry remains largely
unbranded and highly fragmented, with a vast majority of North America's
approximately 2,000 vacation ownership resorts being owned and operated by
smaller, regional companies. Of the Company's major brand name lodging company
competitors, the Company believes, based on RCI reports and the Company's
extensive knowledge of the industry, that Marriott currently sells Vacation
Intervals at 12 resorts which it also owns and operates and directly competes
with the Company's Poipu Point, Hilton Head Island, Williamsburg and Orlando
area resorts; Disney currently sells Vacation Intervals at four resorts which
it also owns and operates and directly competes with the Company's
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Orlando area and Hilton Head Island resorts; Hilton currently sells Vacation
Intervals at two resorts which it also owns and operates and directly competes
with the Company's Orlando area resorts; Hyatt owns and operates two resorts
in Key West, Florida and one in Beaver Creek, Colorado, but does not directly
compete in any of the Company's existing markets; Four Seasons began sales of
Vacation Interval at its first vacation ownership resort in Carlsbad,
California; and Inter-Continental has announced its entry into the vacation
ownership market but has yet to commence sales of Vacation Intervals. 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 than the Company as result.
The Company also competes with companies with non-branded resorts such as
Westgate, Vistana, Inc. and Vacation Break USA, Inc. (each of which competes
with the Company's Orlando area resorts), Fairfield Communities (which
recently announced plans to acquire Vacation Break USA, Inc. and which
currently competes with the Company's Orlando area, Williamsburg and Branson
resorts) and ILX Incorporated (which competes with the Company's Sedona,
Arizona resorts). Under the terms of a five-year agreement, Promus and
Vistana, Inc. will jointly acquire, develop, manage and market vacation
ownership resorts in North America under Promus brand names. As part of the
agreement, Promus and Vistana, Inc. will designate selected markets for
development (which markets currently include Kissimmee, Florida and Myrtle
Beach, South Carolina and in which markets Vistana, Inc. will have exclusive
development rights). The Company is not precluded from using the Embassy
Vacation Resort name in connection with resorts acquired during the term of
the agreement in markets not otherwise exclusive to Vistana, Inc. The Company
has been identified by Promus as the only other licensee to whom Promus may
license the Embassy Vacation Resort name. 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.
As a result of the LSI Acquisition, the Company is also subject to
competition in the European vacation ownership market, which is very
fragmented. In addition to LSI, there are two other operators in Europe
operating multi-resort points clubs -- Global Group and Club la Costa. LSI
also has competition from individual vacation ownership resorts (including
Marriott) in several of the areas in which it operates.
In addition, the Company also competes with the buyers of its Vacation
Intervals who subsequently decide to resell those intervals. While the Company
believes, based on experience at its resorts, that the market for resale of
Vacation Intervals by buyers is presently limited, such resales are typically
at prices substantially less than the original purchase price. 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.
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 vacation
ownership resort business, including in the markets most attractive to the
Company. In addition, the Embassy Suites hotels owned or controlled by
affiliates of the Company's Founders may compete with certain of the Company's
vacation ownership resorts; however, the Company anticipates that such Embassy
Suites hotels could be a significant source of lead generation for its
marketing activities. Subject to certain covenants not to compete, the
Company's Founders could acquire resort and other hotel properties that could
compete with the Company's vacation ownership business.
The Company believes, based on ARDA and RCI reports and the Company's
extensive knowledge of the industry, that its experience and exclusive focus
on the vacation ownership 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.
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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, 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 Vacation 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 require 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, Hawaii and Virginia 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 3 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 Vacation 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.
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.
The marketing and sales of LSI's points system and its other operations are
subject to national and European regulation and legislation. Within the
European Community (which includes all the countries in which LSI conducts its
operations), the European Timeshare Directive of 1994 regulates vacation
ownership activities. For it to have direct effect, the European Timeshare
Directive must be implemented by European Community Member States and the
Directive required such implementation to have taken place prior to May 1997.
The terms of the Directive require LSI to issue a disclosure statement
providing specific information about its resorts and its vacation ownership
operations as well as making mandatory a 10 day rescission period and a
prohibition on the taking of advance payments prior to the expiration of that
rescission period. Member States are permitted to introduce legislation which
is more protective of the consumer when implementing the European Timeshare
Directive. In the United Kingdom, where the majority of LSI's marketing and
sales operations take place, the Directive has been implemented by way of an
amendment to the Timeshare Act 1992. In the United Kingdom a 14 day rescission
period is mandatory. There are other United Kingdom laws which LSI is or may
be subject to including the Consumer Credit Act 1974, the Unfair Terms in
Consumer Contracts Regulations 1995 and the Package Travel, Package Holidays
and Package Tours Regulations 1992. While Spain has no specific timeshare
legislation, it is expected that it will implement the Timeshare Directive in
the near future. Until it does so, however, the European Timeshare Directive
has no direct effect in Spain. The Timeshare Act 1992 does appear to have
extra-territorial effect in that United Kingdom resident purchasers buying
timeshare in other European Economic Area States may rely upon it. All the
countries in which LSI operates have consumer and other laws which regulate
its activities in those countries. LSI is member of the Timeshare Council
which is the
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United Kingdom self regulating trade body for vacation ownership companies. As
a member it is obligated to comply with all laws as well as with certain codes
of conduct (including a code of conduct for the operating of points systems)
promulgated by the Timeshare Council.
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.
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 and operation 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 resorts may adversely
affect the Company's ability to sell Vacation Intervals at such resorts and
the market value of such resort. 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.
The Company has conducted Phase I assessments at each of its 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 and
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 resorts 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
41
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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 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.
A variety of laws concerning the protection of the environment, health and
safety apply to the operations, properties and other assets owned by LSI.
These laws originate at the European Union, national, state and local level.
As a result of the consummation of the LSI Acquisition, the Company has
effectively assumed the pre-existing liabilities of LSI under these laws, some
of which impose liability in respect of operations no longer carried out and
properties or assets no longer owned by LSI as well as existing operations,
properties and assets. These environmental laws govern, among other things,
the discharge of substances into waterways and the quality of water. Liability
can attach to a person who causes or permits the discharge of substances to
such waterways without a permit authorizing such discharges or beyond the
scope of the applicable permit. Criminal sanctions can be imposed for any such
violations and any persons violating these laws can be held responsible for
the cost of remedying the consequences of an unauthorized discharge. In
addition, certain laws restrict the use of property and the construction of
buildings and other structures. Carrying out development without the
appropriate consent or beyond the scope of the consent can result in
regulatory authorities taking action to require the unauthorized use to cease
or unauthorized building or structure to be removed or modified. Criminal
sanctions are available if the authority's requirements are not satisfied.
As of the date of this Prospectus, Phase I environmental reports (which
typically involve inspection without soil sampling or groundwater analysis)
have been prepared by independent environmental consultants for each of the
resorts currently owned by LSI. The Company is not aware of any environmental
liability which it is acquiring as a result of the purchase of LSI that would
have a material adverse effect on the Company's business, assets or results of
operations. No assurance, however, can be given that these reports reveal all
potential environmental liabilities.
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,
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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
As of June 30, 1997, the Company employed approximately 1,700 full-time
employees and approximately 500 part-time employees. The Company believes that
its employee relations are good. Except for certain employees located at the
St. Maarten, Netherlands Antilles resorts, none of the Company's employees is
represented by a labor union.
The Company sells Vacation Intervals at its resorts through approximately
770 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.
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 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.
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.
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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's Board of Directors has approved, subject to stockholder
approval, a proposal to change the Company's corporate name.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BACKGROUND
Signature Resorts, Inc. was incorporated in Maryland in May 1996 by the
Founders to effect the Consolidation Transactions and 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."
The Company's predecessor commenced its vacation ownership resort
acquisition and development business 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 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
Argosy 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.
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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 vacation ownership
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, as of the date of this
Prospectus, own 42 of the total 225 units, the balance having been sold to
third parties); and several retail centers. Messrs. Kaneko and Kenninger are
also currently the constituent general partners of a number of partnerships in
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 of the KOAR Interests' 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 Consolidation
Transactions and 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 certain of the Company's resorts.
In addition, pursuant to the Consolidation Transactions, during the three
months ended September 30, 1996, the 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 Initial
Public Offering and with respect to which no pre-Initial Public 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.
The Company generally receives management fees and certain other expenses
from homeowners' associations at the resorts it manages. Payables to such
homeowners' associations consist mostly of maintenance fees for units owned by
the Company. At December 31, 1996, the Company had accrued $4,405,000 and
$1,590,000 as a receivable and payable, respectively, with the various
homeowners' associations that it manages at its resorts. The Company accrued
$1,220,000 and $1,771,000 as a receivable and payable, respectively, at
December 31, 1995 with the homeowners' associations that it manages at its
resorts. The related party payable to the homeowners' associations that it
manages at December 31, 1995, included $1,030,000 of a special assessment fee
charged to the Company.
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CONSOLIDATION TRANSACTIONS
The Company's nine vacation ownership resorts existing prior to the
Consolidation Transactions were previously owned and operated by partnerships,
each affiliated with the Founders. Such 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) (collectively the "Property Partnerships"). 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, the
partnership and limited liability company interests in each of the Property
Partnerships, certain of the stock of certain other corporations affiliated
therewith (the "Affiliated Companies") held by "accredited investors" (as
defined pursuant to Regulation D under the Securities Act) and certain debt
obligations of the Property Partnerships and affiliates (and, as a result,
ownership of certain of the Company's resorts) have been directly or
indirectly transferred to the Company and in exchange the holders of such
partnership interests and certain of such stock received 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. As a result of the Consolidation Transactions, 17,032,057 shares
of Common Stock were issued 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.
The Company 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. 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.
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REGISTERING STOCKHOLDERS
All shares indicated below have been registered pursuant to the Company's
previously announced obligations under registration rights agreements entered
into in connection with the Consolidation Transactions, the PRG Merger and the
LSI Acquisition. An aggregate of 7,378,154 shares of Common Stock may be
offered by the Registering Stockholders from time-to-time. The following table
sets forth, as of the date of this Prospectus, the name of each Registering
Stockholder, and for each, the number of shares of Common Stock which may be
offered for sale and, unless otherwise indicated, the number of shares to be
owned beneficially after the Registered Offering (assumes all shares available
for offer will be sold). Applicable percentage ownership is based on
35,833,486 shares of Common Stock outstanding as of the date of this
Prospectus.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE AFTER THE
REGISTERED OFFERING REGISTERED OFFERING
----------------------- -----------------------
NAME AND ADDRESS OF NUMBER OF SHARES
REGISTERING STOCKHOLDER SHARES PERCENTAGE BEING REGISTERED SHARES PERCENTAGE
----------------------- --------- ---------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Osamu Kaneko(a)......... 3,977,855(c) 11.2% 450,000 3,527,855(c) 9.9%
Andrew J. Gessow(a)..... 4,206,306(c) 11.8% 600,000 3,606,306(c) 10.1%
Steven C. Kenninger(a).. 1,658,669(c) 4.7% 450,000 1,208,669(c) 3.4%
Canpartners
Incorporated(b)........ 757,517 2.1% 757,517 -- --
Beth Friedman(b)(d)... 129,282 * 129,282 -- --
Loretta Evensen(b).... 129,282 * 129,282 -- --
Mitchell R. Julis(b).. 129,282 * 129,282 -- --
--------- ---- --------- --------- -----
Total (as a group)... 1,145,363 3.2% 1,145,363 -- --
Robert T. Gow and Kay F.
Gow.................... 1,280,591 3.6% 1,280,591 -- --
Offsite International,
Inc. .................. 1,160,627 3.3% 1,160,627 -- --
Ian K. Ganney........... 998,201 2.8% 186,527 811,674 2.3%
Richard Harrington...... 998,201 2.8% 186,527 811,674 2.3%
Plantation Group,
L.L.C. ................ 696,377 2.0% 696,377 -- --
Bush Construction
Corporation............ 464,250 1.3% 464,250 -- --
Peach Tree, Ltd. ....... 235,731 * 235,731 -- --
EKC Corporation......... 80,301 * 80,301 -- --
First Capital Investment
Fund................... 65,238 * 65,238 -- --
Centaur Corp. .......... 62,912 * 62,912 -- --
KPI Realty, Inc. ....... 53,984 * 53,984 -- --
Genevieve Giannoni(a)... 38,970(e) * 4,500 34,470(e) *
Dennis H. Vaughn(f)..... 38,490 * 38,490 -- --
James C. Anderson....... 35,940 * 35,940 -- --
Charles C. Frey(a)...... 32,850(e) * 9,000 23,850(e) *
James W. Geisz.......... 24,038 * 24,038 -- --
Michael C. Ross(g)...... 20,970 * 20,970 -- --
Arai Development Co.,
Inc. .................. 20,435 * 20,435 -- --
Kumagai El Paseo, Inc. . 20,435 * 20,435 -- --
Martin A. Flannes....... 16,617 * 16,617 -- --
Susan K. Kenninger...... 13,490 * 13,490 -- --
Michael B. Reeves(h).... 12,594 * 12,594 -- --
Charles V. Thornton(i).. 10,260 * 10,260 -- --
Timothy D. Levin(a)..... 9,657(j) * 6,522 3,000(j) *
David M. Roberts........ 8,985 * 8,985 -- --
Ruth L. Kenninger....... 8,985 * 8,985 -- --
James A. Hamilton....... 6,965 * 6,965 -- --
Charles H. Reeves(k).... 1,500 * 1,500 -- --
</TABLE>
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*Less than 1%
47
<PAGE>
(a) Such person is a director and/or executive officer of the Company.
(b) Canpartners Incorporated ("Canyon") is the beneficial owner of 63,329
shares and is the sole general partner of CPI Securities L.P. (which holds
476,379 shares). Canpartners Investments II, L.P. (which holds 151,862
shares) and Canpartners Investments V, L.P. (which holds 65,948 shares).
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 757,517 shares shown as
beneficially owned by Canyon do not include 147,282 shares owned by Mr.
Friedman's wife, 147,282 shares owned by Mr. Julis and 147,282 shares
owned by Mr. Evensen's wife, the beneficial ownership of which is
disclaimed by Canyon.
(c) Includes presently exercisable options to purchase 75,000 shares of Common
Stock.
(d) 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.
(e) Includes presently exercisable options to purchase 23,850 shares of Common
Stock with respect to Mr. Frey and 34,470 shares of Common Stock with
respect to Ms. Giannoni.
(f) Includes 33,990 shares held by The Vaughn Family Trust, of which Mr.
Vaughn is a co-trustee and 4,500 shares held by the Dennis Vaughn
Subtrust, of which Mr. Vaughn is trustee.
(g) Includes 25,170 shares held by the Ross Revocable Trust, of which Mr. Ross
is a co-trustee and 10,800 shares held by the Latham & Watkins Pension
Plan FBO Michael C. Ross, of which Mr. Ross is beneficiary.
(h) Includes 9,000 shares held by The CCN&M Revocable Trust, of which Mr.
Reeves is co-trustee.
(i) Includes 2,340 shares held by the Paul, Hastings, Janofsky & Walker
Retirement Plan FBO Charles V. Thornton, of which Mr. Thornton is
beneficiary.
(j) Includes presently exercisable options to purchase 3,000 shares of Common
Stock.
(k) The shares indicated are held by a trust of which Mr. Reeves is co-
trustee.
48
<PAGE>
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, 35,833,486 shares of which
are outstanding as of the date of this Prospectus and (ii) 25,000,000 shares
of Preferred Stock, par value $0.01 per share, none of which will be
outstanding after the Registered Offering. The following summary description
of the material features of the Company's capital stock is qualified 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.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services, L.L.C. as its
transfer agent and registrar.
49
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company's indebtedness at June 30, 1997 consists of hypothecated notes,
the Convertible Notes, construction loans and other indebtedness, with
balances of $132 million, $138.0 million, $3.6 million and $18.6 million,
respectively. Subsequent to June 30, 1997, the Company consummated a private
placement of $200.0 million in aggregate principal amount of 9.75% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") and has also
received a commitment from a bank lender to provide it with the $100 million
Senior Credit Facility. The material terms of such indebtedness are summarized
below.
HYPOTHECATED NOTES
The Company has entered into hypothecation agreements with lenders for the
Company's financing of customer receivables. The hypothecated notes, which
totaled $132 million at June 30, 1997, bear interest from LIBOR plus 3% to the
prime rate plus 3% and mature three to seven years from the date of the last
advance. Under the Company's hypothecated note arrangements, the Company
pledges as security qualified purchaser promissory notes to these lenders, who
typically lend the Company 85% to 90% of the principal amount of such
promissory notes. Payments under these promissory notes are made by the
Vacation Interval purchaser directly to an unaffiliated 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, with corresponding maturities ranging from five to seven years. The
Company does not presently have binding agreements to extend the terms of such
existing financing arrangements or for any replacement financing arrangements
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.
CONVERTIBLE NOTES
In February 1997, the Company consummated its offering of $138.0 million
aggregate principal amount of its Convertible Notes. The Convertible Notes are
convertible into Common Stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $30.417 per share, subject to adjustment in
certain events. The Convertible Notes mature on January 15, 2007 and bear
interest at an annual rate of 5.75%, which interest is payable on January 15
and July 15 of each year, commencing on July 15, 1997. The Convertible Notes
are redeemable, in whole or in part, at the option of the Company at any time
on or after January 15, 2000, at certain redemption prices, plus accrued
interest, if any, to the redemption date. If a change in control of the
Company occurs, each holder of Convertible Notes will have the right, subject
to certain conditions and restrictions, to require the Company to offer to
repurchase for cash (subject to the Company's right to make such offer in
Common Stock under certain circumstances) all outstanding Convertible 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. The Convertible
Notes are subordinated to all existing and future senior indebtedness of the
Company and will be effectively subordinated to all indebtedness and other
obligations of the Company's subsidiaries. The Convertible Notes are also
subordinated to the Senior Subordinated Notes. The indenture pursuant to which
the Convertible Notes were issued does not restrict the incurrence of senior
indebtedness or other indebtedness by the Company or any of its subsidiaries.
CONSTRUCTION LOANS
At June 30, 1997, the Company's construction loans totaled $3.6 million.
Such loans are secured by real property, bear interest at rates ranging from
LIBOR plus 4.25% to the prime rate plus 2% and are generally repaid at a fixed
amount as the underlying security interests in real property is sold to a
consumer in the form of a vacation ownership interval. Final maturities range
from January 1998 to April 2004.
50
<PAGE>
OTHER INDEBTEDNESS
At June 30, 1997, the Company's other indebtedness totaled $18.6 million.
Other indebtedness is secured by land ($5.3 million), bears interest at rates
ranging from 7.75% to 9.00% and has final maturities ranging from 1999 to
2014. Also includes $13.4 million which is primarily secured by consumer
mortgages bearing interest at 7.75% and maturing April 2004. This debt has
been sold to a trust with recourse to the Company and is therefore not
classified as hypothecated debt.
SENIOR SUBORDINATED NOTES
In August 1997, the Company consummated its private placement of $200.0
million aggregate principal amount of its Senior Subordinated Notes. The
Senior Subordinated Notes bear interest at an annual rate of 9 3/4%, which
interest is payable on April 1 and October 1 of each year, commencing on
October 1, 1997. The Senior Subordinated Notes are redeemable, in whole or in
part, at the option of the Company at any time on or after October 1, 2002, at
certain redemption prices, plus accrued interest, if any, to the redemption
date. In addition, subject to certain limitations, prior to October 1, 2000,
the Company may redeem up to 40% of the aggregate principal amount of the
Senior Subordinated Notes with the proceeds of one or more equity offerings,
at a redemption price equal to 109.75% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption. If a change in
control of the Company occurs, each holder of Senior Subordinated Notes will
have the right, subject to certain conditions and restrictions, to require the
Company to offer to repurchase for cash all outstanding Senior Subordinated
Notes, in whole or in part, owned by such holder at 101% of their principal
amount, plus accrued interest, if any, to the date of repurchase. The Senior
Subordinated Notes are unsecured senior subordinated obligations of the
Company and are subordinated to all existing and future senior indebtedness of
the Company and will be effectively subordinated to all indebtedness and other
obligations of the Company's subsidiaries. The Senior Subordinated Notes are
senior to the Convertible Notes. The indenture pursuant to which the Senior
Subordinated Notes were issued contains certain covenants that, among other
things, limit the ability of the Company and its restricted subsidiaries to
(i) incur additional indebtedness, (ii) pay dividends or make other
distributions with respect to capital stock of the Company and its restricted
subsidiaries, (iii) create certain liens, (iv) sell material assets of the
Company or its restricted subsidiaries and (v) enter into certain mergers and
consolidations.
CREDIT FACILITY
The Company has received a commitment from a bank lender to provide it with
the $100 million Senior Credit Facility. The Senior Credit Facility is
expected to have a variable borrowing rate based on the percentage of the
Company's mortgages receivable pledged to the lender under such facility and
the amount of funds advanced pursuant thereto. The interest rate will vary
between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount of
advances against mortgages receivable. It is expected that the Senior Credit
Facility will contain customary covenants, representations and warranties and
conditions to draw down on funds. No assurance can be given, however, that the
Company will be able to enter into definitive documents with respect to such
Senior Credit Facility.
PLAN OF DISTRIBUTION
The Company is registering the shares of Common Stock offered hereby
pursuant to a Registration Rights Agreement dated August 20, 1996 between the
Company and certain of the Registering Stockholders which was executed in
connection with the Initial Public Offering (the "Initial Registration Rights
Agreement"), a Registration Rights Agreement dated May 15, 1997 between the
Company and certain of the Registering Stockholders which was executed in
connection with the PRG Merger (the "PRG Registration Rights Agreement") and a
Registration Rights Agreement dated August 28, 1997 between the Company and
certain of the Registering Stockholders which was executed in connection with
the LSI Acquisition (the "LSI Registration Rights Agreement").
51
<PAGE>
Any distribution of the shares covered by this Prospectus may be effected from
time to time in one or more transactions (which may involve block
transactions) on the Nasdaq National Market, in negotiated transactions or in
a combination of such methods of sale, at fixed prices, at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices or at negotiated prices. The Registering Stockholders will effect any
such transactions with or through one or more broker-dealers which may act as
agent or principal, and if required by the Company, through block trades or
offerings through underwriters. Any such broker-dealer may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Registering Stockholders and/or the purchaser of the shares for whom
it may act as agent or to whom it may sell as principals or both. With respect
to any shares sold by a Registering Stockholder, the Registering Stockholder
and/or any broker-dealer effecting the sales may be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by the broker-dealer and any profit on the resale of
shares as principal may be deemed to be underwriting discounts or commissions
under the Securities Act. Additionally, the Registering Stockholders may
pledge or make gifts of their shares and the shares may also be sold by the
pledgee or transferees. Pursuant to the Initial Registration Rights Agreement,
the PRG Registration Rights Agreement and the LSI Registration Rights
Agreement, the Company shall (i) pay substantially all of the expenses
incurred by the Company and the Registering Stockholders incident to the sale
of the shares offered hereby, excluding any fees and disbursements of counsel
to such Registering Stockholders, (ii) provide customary indemnification to
each Registering Stockholder and (iii) keep the Registration Statement
continuously effective for the periods of time provided therein.
The shares of Common Stock offered hereby are not, but ultimately may be,
offered on an underwritten basis. If such shares are offered on an
underwritten basis, certain underwriters may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M promulgated by the Commission,
pursuant to which such persons may bid for or purchase Common Stock for the
purpose of stabilizing its market price. In addition, the underwriters may
overallot any such underwritten offering, creating a syndicate short position.
These activities may result in the maintenance of the price of the Common
Stock at a level above that which might otherwise prevail in the open market.
If the transactions described in this paragraph are undertaken, they may be
discontinued at any time.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain
other legal matters will be passed upon for the Company by Latham & Watkins,
Los Angeles, California.
52
<PAGE>
EXPERTS
The consolidated financial statements of Signature Resorts, Inc. and
subsidiaries incorporated by reference herein have been audited by Arthur
Andersen LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included 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 for each of the two years in the
period ended December 31, 1995, not presented separately in this Prospectus
and the related Registration Statement or the documents incorporated by
reference herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report with respect thereto, given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of LSI Group Holdings Plc and
subsidiaries as of December 31, 1995 and 1996 and for each of the three years
in the period ended December 31, 1996, not presented separately in this
Prospectus and the related Registration Statement or the documents
incorporated by reference herein, have been audited by KPMG, chartered
accountants and registered auditors, as set forth in their report with respect
thereto, given upon the authority of said firm as experts in accounting and
auditing.
53
<PAGE>
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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.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary.................................................................... 3
Risk Factors............................................................... 6
Use of Proceeds............................................................ 21
Consolidated Capitalization................................................ 21
Business................................................................... 22
Certain Relationships and Related Transactions............................. 44
Registering Stockholders................................................... 47
Description of Capital Stock............................................... 49
Description of Certain Indebtedness........................................ 50
Plan of Distribution....................................................... 51
Legal Matters.............................................................. 52
Experts.................................................................... 53
</TABLE>
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7,378,154 SHARES
[LOGO OF SIGNATURE RESORTS, INC.]
SIGNATURE RESORTS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
October 24, 1997
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