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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-46511
212,717 SHARES
[LOGO OF SIGNATURE RESORTS]
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 $37,000.
The Common Stock is listed on the New York Stock Exchange under the symbol
"OWN." Prior to February 6, 1998, the Common Stock was listed on the Nasdaq
National Market under the symbol "SIGR." On February 17, 1998, the last
reported sales price for the Company's Common Stock was $24 13/16 per share.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 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 New York Stock Exchange, 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 February 20, 1998
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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 New York Stock Exchange, 20 Broad Street, New
York, New York 10005 on which the Common Stock of the Company is traded.
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, June 30, 1997 and September 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;
(k) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 22, 1997;
(l) The Company's Current Report on Form 8-K filed with the Commission
on December 24, 1997;
(m) The Company's Current Report on Form 8-K filed with the Commission
on January 20, 1998; and
(n) The Company's Current Report on Form 8-K filed with the Commission
on February 5, 1998.
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 three-for-two stock split in the form of
a Common Stock dividend paid 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 the world's largest developer and operator of vacation
ownership resorts. The Company is devoted exclusively to vacation ownership
operations and, as of the date of this Prospectus, the Company's properties
consist of 77 vacation ownership resort locations in eight North American
and European countries. Through its Marc Hotels & Resorts subsidiary, the
Company manages an additional 22 resorts in Hawaii.
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
resort locations and the 21 North American resort locations acquired by the
Company through its acquisition of Vacation Internationale, Ltd. 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 also
provides resort management and maintenance services at its resorts for
which it receives fees paid by the resorts' homeowners' associations.
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 MMG Holding Corp. and Affiliated Companies. On February 3,
1998, the Company announced that it had acquired 100% of the capital stock of
MMG Holding Corp., MMG Development Corp. and certain affiliated companies for
approximately $26.5 million, comprised of $18.5 million in cash and the
assumption of approximately $8.0 million of indebtedness. The acquired assets
include MMG's approximately $6.6 million mortgages receivable portfolio. MMG is
an Orlando, Florida based developer, operator and manager of vacation ownership
resorts, with sales or management operations at six resorts in Orlando, Ft.
Lauderdale and Deerfield Beach, Florida; Banner Elk, North Carolina; and
Gatlinburg and Pigeon Forge, Tennessee. In addition, Signature has assumed
MMG's commitment to purchase an additional resort in Gatlinburg, Tennessee.
Fourth Quarter and 1997 Year End Results. On January 27, 1998, the Company
announced total revenues for the three months ended December 31, 1997 of $88.4
million, a 32% increase over the $66.9 million pro forma
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total revenues for the comparable period of 1996. Recurring net income for the
three months ended December 31, 1997 was $10.2 million, a 392% increase over
the $2.1 million pro forma recurring net income for the comparable period of
1996. Recurring net income margins for the quarter increased to 11.6% from 3.1%
pro forma recurring net income margins for the comparable period of 1996.
On a diluted per share basis, recurring net income increased 367% to $0.28
for the fourth quarter of 1997 from $0.06 pro forma recurring net income for
the fourth quarter of 1996. EBITDA for the fourth quarter of 1997 increased
183% to $23.6 million from pro forma EBITDA of $8.4 million for the fourth
quarter of 1996. EBITDA margins increased in the quarter to 26.7% from 12.5%
pro forma EBITDA margins for the comparable period of 1996.
Interval sales during the fourth quarter of 1997 increased to 3,666 intervals
sold from 3,573 intervals sold during the fourth quarter of 1996. The average
sales price for intervals sold increased 18% to $15,539 during the fourth
quarter of 1997 from $13,171 during the comparable period of 1996. The average
sales price will change from period to period depending upon the mix of resorts
in sales and the types of units sold (studio, one, two and three bedrooms).
Point sales revenue during the fourth quarter of 1997 increased 43% to $13.8
million from $9.7 million during the comparable period of 1996. The increase in
interval and point sales revenues is, in a large part, the result of continued
strong sales trends at the Company's resorts as well as the Company recording
points sales at the Vacation Internationale and Global Group resorts which the
Company acquired during the fourth quarter of 1997.
Reported net income of $4.2 million and reported diluted earnings per share
of $0.12 for the fourth quarter of 1997 differ from recurring net income of
$10.2 million and recurring diluted earnings per share of $0.28, reflecting a
one-time non-cash charge of $6.0 million during the fourth quarter of 1997 for
deferred taxes resulting from the change in tax status of PRG from a
partnership to a "C" Corporation for federal income tax purposes. Pro forma
reported net loss of ($6.1) million and pro forma reported diluted loss per
share of ($0.18) for the fourth quarter of 1996 differ from pro forma recurring
net income of $2.1 million and pro forma recurring earnings per share of $0.06,
reflecting non-recurring charges of $13.5 million ($8.2 net of tax) incurred in
the fourth quarter of 1996 due to the write down of certain AVCOM assets to net
realizable value, severance related costs and an increase in reserves for
mortgages receivable.
On January 27, 1998, the Company also announced total revenues for the twelve
months ended December 31, 1997 were $337.7 million, a 53% increase over the
$220.1 million pro forma total revenues for the twelve months ended December
31, 1996. Recurring net income for the twelve months ended December 31, 1997
was $32.2 million, a 128% increase over the $14.2 million pro forma recurring
net income for 1996. Recurring net income margins for 1997 increased to 9.5%
from 6.4% pro forma net income margins for 1996.
On a diluted per share basis, recurring net income increased 117% to $0.89
for 1997 from $0.41 pro forma recurring net income for 1996. EBITDA for 1997
increased 100% to $82.3 million from the pro forma EBITDA of $41.1 million for
1996. EBITDA margins increased for 1997 to 24.4% from 18.7% pro forma EBITDA
margins for 1996.
Interval sales during the twelve months ended December 31, 1997 increased 45%
to 17,271 intervals sold from 11,946 intervals sold during the twelve months
ended December 31, 1996. The average sales price for intervals sold increased
6% to $13,885 during 1997 from $13,146 during 1996. The average sales price
will change from period to period depending upon the mix of resorts in sales
and the types of units sold (studio, one, two and three bedrooms). Point sales
revenue during the twelve months ended December 31, 1997 increased 63% to $41.3
million from $25.3 million during 1996.
Reported net income of $19.5 million and reported diluted earnings per share
of $0.54 for the twelve months ended December 31, 1997 differ from recurring
net income of $32.2 million and recurring diluted earnings per share of $0.89,
reflecting (i) one-time merger-related charges of $10.0 million ($6.0 million
net of tax) incurred
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during 1997 in connection with the acquisitions of AVCOM and LSI, (ii) $6.0
million of deferred taxes resulting from the change in tax status of PRG from a
partnership to a "C" Corporation for federal income tax purposes and (iii) $0.7
million, net of tax, for costs associated with the early extinguishment of
debt. Pro forma reported net income for $6.6 million and pro forma reported
earnings per share of $0.19 for 1996 differ from pro forma recurring net income
and pro forma recurring diluted earnings per share of $14.2 million and $0.41,
respectively, reflecting net non-recurring charges of $14.4 million ($8.6
million net of tax) incurred during 1996 due to the write down of certain AVCOM
assets to net realizable value, severance related costs and an increase in
reserves for mortgage receivables. The Company also received non-recurring
revenue of $1.7 million ($1.0 million net of tax) in 1996 resulting from the
collection of a note receivable obtained in the Company's 1995 purchase of the
Flamingo Beach Club Resort.
The Company's total mortgage receivables balance at December 31, 1997 was
$354.7 million, an increase of 52.3% from $232.8 million in total mortgage
receivables at December 31, 1996. The Company's allowance for doubtful accounts
as a percentage of gross mortgages receivable decreased to 6.5% at December 31,
1997 from 7.4% at December 31, 1996. The Company reported an allowance for
doubtful accounts of 6.2% of gross mortgages receivable at December 31, 1996 in
its 1996 Form 10-K prior to the later adjustments required to restate the
Company's historical financial statements to reflect the pooling of interests
accounting treatment for the Company's acquisitions by merger of AVCOM, PRG and
LSI. The increased allowance at December 31, 1996 reported in the Company's
restated financials was largely the result of additional reserves reported by
these acquired entities prior to their acquisition by Signature.
At December 31, 1997, approximately 4.0% of the Company's consumer loans were
considered by the Company to be delinquent (past due by 60 but not more than
120 days), which is comparable to the 4.1% delinquency rate at December 31,
1996. An additional approximately 2.0% of the Company's consumer loans were 120
days or more past due at December 31, 1997. At December 31, 1996, 1.2% of the
Company's consumer loans were more than 120 days past due.
Acquisition of Westin Carambola Beach Resort. On January 26, 1998, the
Company announced the consummation of its acquisition of the Westin Carambola
Beach Resort (the "Carambola Beach Resort") on the island of St. Croix, United
States Virgin Islands for a purchase price of $13 million. The Carambola Beach
Resort contains 156 one-bedroom suites and one two-bedroom suite located in 27
detached two-story bungalows. The Company plans to begin vacation ownership
sales and commence the first phase of renovations at the Carambola Beach Resort
during the second quarter of 1998.
Development Agreement with Westin Hotels & Resorts. On January 19, 1998, the
Company announced that it and Westin Hotels & Resorts ("Westin") had modified
their existing joint development agreement to make the relationship non-
exclusive between the parties. Under their modified relationship, the Company
and Westin each will be free to independently pursue all vacation ownership
development opportunities. Under the parties' prior exclusive agreement, the
Company and Westin each were restricted from developing four and five star
vacation ownership resorts with third parties. The Company and Westin, however,
will continue to jointly own and operate the Westin Vacation Club at St. John,
U.S. Virgin Islands. As part of the modification, the Company's and Westin's
representatives no longer serve on the other's board of directors. See "Risk
Factors--Risks Related to Westin Agreement; Limited Control of Resorts" and
"Business--Westin Vacation Club Resorts."
Acquisition of European Vacation Ownership Business of Global Development
Ltd. On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of Global Development Ltd. and certain of
its affiliated companies (the "Global Group") through an asset purchase for
cash consideration of approximately $18 million. The Global Group has 13 resort
locations in France (3),
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United Kingdom (4), Austria (1), mainland Spain (1), and the Canary Islands
(4). The Company assumed no long-term debt as part of this transaction, but
assumed approximately $7.0 million in current liabilities and acquired assets
valued at approximately $15.8 million. The Global Group sells Vacation
Intervals and vacation points at its resorts. Its Global Vacation Club allows
its members to use 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 13 resorts. The asset purchase will be accounted for using the purchase
method of accounting.
Acquisition of Embassy Suites Resort at Kaanapali Beach, Maui. On
November 14, 1997, a partnership of which the Company is a managing general
partner consummated its acquisition of the Embassy Suites Resort at Kaanapali
Beach, Maui, Hawaii for approximately $78 million. 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. Vacation ownership sales at the resort are
anticipated to commence in the first half of 1998.
Acquisition of Vacation Internationale, Ltd. On November 7, 1997, the Company
consummated its acquisition of 100% of the capital stock of Vacation
Internationale, Ltd. ("VI") for approximately $24.3 million, comprised of $8.0
million in cash and promissory notes and the assumption of approximately
$16.3 million of long-term indebtedness. Founded in 1974, VI is a Bellevue,
Washington based developer and operator of vacation ownership resorts. VI's
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. VI'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.
The VI acquisition will be accounted for using the purchase method of
accounting for business combinations.
Three-for-Two Stock Split. On October 27, 1997, the Company effected a three-
for-two stock split in the form of a common stock dividend on the Company's
Common Stock, par value $.01 per share ("Common Stock"). Stockholders of record
on October 10, 1997 (the "Record Date") received one additional share of Common
Stock for every two shares owned on the Record Date. Fractional shares were
paid in cash.
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 Marc Acquisition will be
accounted for using the purchase method of accounting for business
combinations.
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 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.
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THE REGISTERED OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Registering
Stockholders.............................. 212,717 shares
Common Stock to be outstanding after
the Registered Offering................... 35,880,086 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."
New York Stock Exchange symbol............. "OWN"
</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"), 3,496,220 shares of Common Stock reserved for
issuance upon exercise of options granted pursuant to the Company's 1996
Equity Participation Plan and 747,518 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 September 30, 1997, the Company and
its consolidated subsidiaries had an aggregate of $445.9 million of long-term
debt. See "Consolidated Capitalization." Total debt to total capitalization
was 65.1% and 69.5% at December 31, 1996 and September 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 $81.2 million at September 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 also contains restrictive covenants,
including covenants limiting the incurrence of indebtedness, the payments of
dividends or other distributions and sales of assets. See "Description of
Notes--Certain Covenants." 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. See "Description of Notes--Certain Covenants--Limitation on
Restricted Payments." Subsequent acquisition
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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. An important part
of the Company's growth strategy is to acquire and develop additional Embassy
Vacation Resorts. See "Business--Embassy Vacation Resorts." 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 an exclusive 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 exclusive agreement,
Promus and Vistana, Inc. will designate selected markets for development
(which markets 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
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."
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
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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 is 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.
AVCOM Merger, PRG Merger and LSI Acquisition and Related Expenses. Transaction
costs relating to the negotiation of and preparation for the Acquisitions and
the anticipated combination of certain operations resulted in a one-time charge
to the Company's earnings of approximately $4.1 million and $10.0 million,
respectively, for the three and nine months ended September 30, 1997. These
charges include fees and expenses payable to financial advisors, lawyers,
accountants and other transaction expenses related to the Acquisitions. There
can be no assurance that the Company will not incur additional charges in
subsequent quarters to reflect costs associated with the Acquisitions.
Accounting Treatment. The Acquisitions have been 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 are carried forward at their book values to the Company, income of the
Company includes 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 has been 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.
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
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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 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,
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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 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
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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 September 30, 1997, these agreements provide an
aggregate of up to approximately $280.0 million of available financing to the
Company bearing interest at variable rates tied to LIBOR or the prime rate of
which, at September 30, 1997, the Company had approximately $198.8 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 September 30, 1997, the Company's mortgage portfolio included approximately
34,485 consumer loans totaling approximately $315 million, with a stated
maturity of seven to ten years and a weighted average interest rate of 15% per
annum. Additionally, at September 30, 1997, the weighted average maturity of
all outstanding consumer loans was approximately 8.3 years and the total
borrowings secured by consumer loans were approximately $81.2 million, bearing
a weighted average interest rate of 10.1%. However, because the Company's
borrowings bear interest at variable rates (which, as of September 30, 1997,
equal 10.5% 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
September 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 September 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
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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 September 30, 1997, approximately 3.6% 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 1.8% of
its consumer loans. As of September 30, 1997, the Company's allowance for
doubtful accounts as a percentage of gross mortgages receivable was 6.5%,
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, 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,
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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. 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"), Inter-Continental Hotels and Resorts ("Inter-
Continental") and Westin Hotels & Resorts ("Westin"). 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., Fairfield Communities
and ILX Incorporated. Under the terms of a recently announced exclusive 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 exclusive 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."
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
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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 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
16
<PAGE>
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 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 owned 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
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<PAGE>
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 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
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<PAGE>
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
The Founders hold substantial amounts of shares of Common Stock (Messrs.
Kaneko, Gessow and Kenninger hold 9.5%, 9.8% and 3.0%, 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. See "Description of Capital Stock." Such control may
result in decisions which are not in the best interest of the Company. In
addition, under certain circumstances, in the event that the Founders
collectively own less than 75% of the shares of Common Stock owned by them
immediately following the closing of the Initial Public Offering and the
consummation of the Consolidation Transactions, and the Common Stock they own
thereafter is less than 75% of the market value of the Common Stock issued to
them in the Initial Public Offering, then the Company's partner in the Poipu
Partnership will be entitled to require the Company to either dispose of its
interest or purchase such partner's interest in the Poipu Partnership pursuant
to the terms and conditions of the partnership agreement.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. 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
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<PAGE>
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.
THE WESTIN AGREEMENT; LIMITED CONTROL OF RESORTS
On January 19, 1998, the Company announced that it and Westin had modified
their existing joint development agreement to make the relationship non-
exclusive between the parties (such agreement, as modified, the "Westin
Agreement"). Under their modified relationship, the Company and Westin each
will be free to independently pursue all vacation ownership development
opportunities. Under the parties' prior exclusive agreement, the Company and
Westin each were restricted from developing four and five star vacation
ownership resorts with third parties. The Company and Westin, however, will
continue to jointly own and operate the Westin Vacation Club at St. John, U.S.
Virgin Islands. This resort, and any additional resorts acquired or developed
pursuant to the Westin Agreement, 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. As part of the modification, the Company's and Westin's
representatives no longer serve on the other's board of directors. See
"Business--Westin Vacation Club Resorts."
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, as amended,
(the "Charter") and bylaws, as amended, (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.
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<PAGE>
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.
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, the LSI
Acquisition and the Marc Acquisition are subject to the limitations of Rule
144 of the Securities Act ("Rule 144"). The holders of the shares issued in
the Marc 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.
As of the date of this Prospectus, there were (i) outstanding stock options
to purchase approximately 3,496,220 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 747,518
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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<PAGE>
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 September 30, 1997, the total
consolidated capitalization of the Company.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
---------------
(UNAUDITED)
(DOLLAR AMOUNTS
IN THOUSANDS)
---------------
<S> <C>
Cash and cash equivalents...................................... $126,369
========
Debt:
Notes payable to financial institutions(a)................... $107,864
9 3/4% Senior Subordinated Notes due 2007.................... 200,000
5 3/4% Convertible Subordinated Notes due 2007............... 138,000
--------
Total debt................................................. 445,864
--------
Stockholders' equity:
Common Stock, $0.01 par value; 35,620,769 issued and
outstanding(b).............................................. 356
Additional paid-in capital................................... 156,855
Retained earnings............................................ 38,073
Cumulative foreign currency translation adjustment........... 144
--------
Total stockholders' equity................................... 195,428
--------
Total capitalization....................................... $641,292
========
</TABLE>
- --------
(a) Includes notes collateralized by mortgages receivable.
(b) Does not include an aggregate of 3,542,820 shares of Common Stock reserved
for future issuance upon exercise of options granted pursuant to the
Company's 1996 Equity Participation Plan, as amended, 747,518 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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<PAGE>
BUSINESS
OVERVIEW
The Company is the world's largest developer and operator of vacation
ownership resorts. The Company is devoted exclusively to vacation ownership
operations and, as of the date of this Prospectus, the Company's properties
consist of 77 vacation ownership resort locations in eight North American and
European countries. Through its Marc Hotels & Resorts subsidiary, the Company
manages an additional 22 resorts in Hawaii.
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 resort locations and the 21 North American resort locations acquired by
the Company through its acquisition of Vacation Internationale, Ltd. The
Company also provides resort management and maintenance services at its
resorts for which it receives fees paid by the resorts' homeowners'
associations.
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 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.
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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
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 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
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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 strategic
relationships 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
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 September 30, 1997 (i) the Company had a
current inventory of 29,149 Vacation Intervals and 133,907 Vacation Points,
(ii) the Company was in the process of developing or had plans to develop an
additional 100,929 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
25
<PAGE>
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 strategic relationships
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 strategic relationships provide it with
attractive acquisition, conversion, development and marketing opportunities
and uniquely position the Company to offer Vacation Intervals at a variety of
attractive resort destinations to multiple demographic groups in the vacation
ownership market. 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 separate branded products in 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,
26
<PAGE>
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.
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 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)).
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 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 an exclusive 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 exclusive agreement,
Promus and Vistana, Inc. will designate selected markets for development
(which markets currently include Kissimmee, Florida and Myrtle Beach, South
27
<PAGE>
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. 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.
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.
28
<PAGE>
THE RESORTS
The following tables set forth certain information, as of September 30, 1997
regarding each of the Company's resorts owned at such date, 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>
VACATION INTERVAL
UNITS AT RESORT INVENTORY 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) 500 753 14,076(e) 14,829
Vista, Florida
Plantation at Fall Creek Branson, July 1993 114 286(f) 400 3 14,586(f) 14,589
Missouri
Royal Dunes Resort Hilton Head April 1994 40 15(g) 55 281 765(g) 1,046
Island, South
Carolina
Royal Palm Beach Club St. Maarten, July 1995 140 (h) 140 1,043 (h) 1,043
Netherlands
Antilles
Flamingo Beach Club St. Maarten, July 1995 172 85(i) 257 1,484 4,335(i) 5,819
Netherlands
Antilles
San Luis Bay Resort Avila Beach, June 1996 98 32(j) 130 1,546 1,632(j) 3,178
California
The Savoy at Miami Beach, August 1997 40 28(k) 68 2,040 1,428(k) 3,468
South Beach Florida
Scottsdale Villa Mirage Scottsdale,
Resort Arizona February 1997 64 104(l) 168 895 5,304(l) 6,199
The Ridge on Sedona
Golf Resort Sedona, Arizona February 1997 12 108(m) 120 246 5,508(m) 5,754
Sedona Springs Resort Sedona, Arizona February 1997 40 -- 40 21 -- 21
Sedona Summit Resort Sedona, Arizona February 1997 60 -- 60 792 -- 792
Villas of Poco Diablo Sedona, Arizona February 1997 33 -- 33 54 -- 54
Villas of Sedona Sedona, Arizona February 1997 40 -- 40 181 -- 181
North Bay Resort(n) Lake Arrowhead, February 1997 13 -- 13 34 -- 34
California
Tahoe Beach & Ski Club South Lake Tahoe, February 1997 140 -- 140 735 -- 735
California
Tahoe Seasons Resort South Lake Tahoe, February 1997 21(o) -- 21 210 -- 210
California
Villas on the Lake Lake Conroe,
Texas February 1997 37 64(p) 101 1,229 3,264(p) 4,493
Powhatan Plantation Williamsburg,
Virginia May 1997 405 95(q) 500 398 4,845(q) 5,243
Greensprings Plantation Williamsburg,
Virginia May 1997 58 442(r) 500 312 22,542(r) 22,854
----- ----- ----- ------ ------- -------
TOTAL............................................... 1,751 1,535 3,286 12,257 78,285 90,542
----- ----- ----- ------ ------- -------
EMBASSY VACATION RESORTS:
Poipu Point(s) Koloa, Kauai, November 1994 219(t) -- 219 8,826 -- 8,826
Hawaii
Grand Beach Orlando, Florida January 1995 126 248(u) 374 2,255 12,648(u) 14,903
Lake Tahoe South Lake Tahoe,
California May 1996 62 148(v) 210 2,074 7,548(v) 9,622
----- ----- ----- ------ ------- -------
TOTAL............................................... 407 396 803 13,155 20,196 33,351
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
----- ----- ----- ------ ------- -------
LSI RESORTS -- -- 717 -- 717 1,915 -- 1,915(y)
MISCELLANEOUS N/A N/A -- -- -- 107 -- 107(z)
----- ----- ----- ------ ------- -------
TOTAL UNITS AND
VACATION INTERVALS...................................... 2,923 1,979 4,902 29,149 100,929 130,078
===== ===== ===== ====== ======= =======
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
UNITS AT RESORT VACATION POINTS IN SYSTEM
------------------------------- -----------------------------------
DATE POTENTIAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(aa) EXPANSION(bb) TOTAL INVENTORY(cc) EXPANSION(dd) 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 -- 68 133,907 276,000 409,907
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 September 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 September 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 September 30, 1997.
(d) Potential expansion of Vacation Intervals at each resort includes, as of
September 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) The Company is considering the acquisition of 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
30
<PAGE>
130 Vacation Intervals at the San Luis Bay Resort out of the bankruptcy
estate of Glen Ivy Resorts, Inc. In addition, the Company acquired
promissory notes in default that are secured by approximately 900 Vacation
Intervals. The Company intends to foreclose upon and acquire clear title to
such Vacation Intervals and intends to complete such foreclosure procedures
(or deed-in-lieu procedures) during the first quarter of 1998.
(k) Construction of an additional 28 units is scheduled for completion by the
second quarter of 1998.
(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 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
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<PAGE>
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 248 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 sales
of Vacation Intervals commenced in 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 first quarter of 1998.
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) Represents the aggregate number of units and Vacation Intervals (as
opposed to Vacation Points) at the Company's LSI Resorts.
(z) Represents vacation intervals at resorts not owned by the Company which
were received by the Company in exchange for Vacation Intervals at the
Company's resorts. The Company intends to sell such vacation intervals.
(aa) Current units at each resort represents only those units that have
received their certificate of occupancy (or other equivalent certificate)
as of September 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).
(bb) Potential expansion units at each resort includes, as of September 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.
(cc) Current inventory of Vacation Points represents, as of September 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.
(dd) Potential expansion Vacation Points represents, as of September 30, 1997,
the estimated number of Vacation Points assignable to potential expansion
units at the 11 existing LSI Resorts.
32
<PAGE>
The following table sets forth certain information, as of September 30,
1997, with respect to the Company's resorts owned on such date. 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
On January 19, 1998, the Company announced that it and Westin had modified
their existing joint development agreement to make the relationship non-
exclusive between the parties. Under their modified relationship, the Company
and Westin each will be free to independently pursue all vacation ownership
development opportunities. Under the parties' prior exclusive agreement, the
Company and Westin each were restricted from developing four and five star
vacation ownership resorts with third parties. The Company and Westin,
however, will continue to jointly own and operate the Westin Vacation Club at
St. John, U.S. Virgin Islands. This resort, and any additional resorts
acquired or developed pursuant to the Westin Agreement, 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. As part of the modification, the Company's
and Westin's representatives no longer serve on the other's board of
directors.
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
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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 September 30, 1997, these agreements
provided an aggregate of up to approximately $280.0 million of available
financing to the Company bearing interest at variable rates tied to either the
prime rate or LIBOR of which the Company had at September 30, 1997
approximately $198.8 million of additional borrowing capacity available.
At September 30, 1997, the Company's mortgage portfolio included
approximately 34,485 consumer loans totaling approximately $315 million, with
a stated maturity of seven to ten years and a weighted average interest rate
of 15% per annum. As of September 30, 1997, approximately 3.6% 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 1.8% of its consumer
loans. As of September 30, 1997, the Company's allowance for doubtful accounts
as a percentage of gross mortgages receivable was 6.5%, 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.
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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 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
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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, or (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. 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.
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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 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
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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) 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 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 recently announced 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
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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.
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.
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.
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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 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.
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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 owned 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 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
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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, 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 September 30, 1997, the Company employed approximately 1,900 full-time
employees and approximately 600 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
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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.
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.
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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.
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.
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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.
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.
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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 certain
registration rights granted by the Company. An aggregate of 212,717 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 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 35,880,086
shares of Common Stock outstanding as of the date of this Prospectus.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL
PRIOR TO THE OWNERSHIP 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>
Michael V. Paulin....... 136,351 * 136,351 -- --
Rosemarie Paulin........ 32,716 * 32,716 -- --
Maya Paulin............. 21,825 * 21,825 -- --
AnneMarie Paulin........ 21,825 * 21,825 -- --
</TABLE>
- --------
*Less than 1%
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, 35,880,086 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.
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TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services, L.L.C. as its
transfer agent and registrar.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company's indebtedness at September 30, 1997 consists of hypothecated
notes, the Convertible Notes, construction loans and other indebtedness and
the 9 3/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes"), with balances of $81.2 million, $138.0 million, $3.0 million,
$23.7 million and $200 million, respectively. The Company has 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 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.
CONSTRUCTION LOANS
At September 30, 1997, the Company's construction loans totaled $3.0
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
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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.
OTHER INDEBTEDNESS
At September 30, 1997, the Company's other indebtedness totaled $23.7
million. Other indebtedness is secured by land ($4.7 million), bears interest
at rates ranging from 7.75% to 9.00% and has final maturities ranging from
1999 to 2014. Also includes $13.5 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.
The Company also has $5.5 million in advances on mortgages sold with
recourse to a third party. The principal and interest on the mortgage
receivables sold with recourse are remitted directly to the purchaser and are
therefore not classified as hypothecated debt.
THE SENIOR SUBORDINATED NOTES
In August 1997, the Company consummated its offering of the Senior
Subordinated Notes. The Senior Subordinated Notes are unsecured senior
subordinated obligations of the Company, are limited to an aggregate principal
amount of $200,000,000 and will mature on October 1, 2007. The Senior
Subordinated Notes bear interest at a rate of 9 3/4% per annum, payable
semiannually on April 1 and October 1 of each year. The Senior Subordinated
Notes are redeemable, in whole or in part, at the option of the Company on or
after October 1, 2002, at certain redemption prices plus accrued and unpaid
interest, if any, to the date of redemption. In addition, prior to October 1,
2000 the Company, at its option, may redeem up to 40% of the aggregate
principal amount of the Senior Subordinated Notes originally issued with the
net cash 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. Upon a change of control, each holder of
the Senior Subordinated Notes will have the right to require the Company to
repurchase such holder's Senior Subordinated Notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase. In addition, in certain circumstances, the Company will be
obligated to offer to repurchase the Senior Subordinated Notes at 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase in the event of certain asset sales.
The Senior Subordinated Notes are subordinated in right of payment to all
existing and future senior indebtedness of the Company and are effectively
subordinated to all indebtedness and other obligations of the Company's
subsidiaries. The Senior Subordinated Notes are senior in right of payment to
the Convertible Notes. The indenture governing the Senior Subordinated Notes
contains 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 NationsBank of Texas, N.A., as
administrative lender, to provide it with the $100 million Senior Credit
Facility. The Senior Credit Facility has 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 varies between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending
on the amount of advances against mortgages receivable. The Senior Credit
Facility contains customary covenants, representations and warranties and
conditions to draw down on funds.
The Senior Credit Facility will close through a two-step process. In January
1998, the Company closed the first $50 million portion of the Senior Credit
Facility which will roll into the full $100 million Senior Credit Facility
upon the closing of the second step in February 1998.
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PLAN OF DISTRIBUTION
The Company is registering the shares of Common Stock offered hereby
pursuant to a Registration Rights Agreement dated October 10, 1997 between the
Company and the Registering Stockholders which was executed in connection with
the Marc Acquisition (the "Registration Rights Agreement").
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 New York Stock Exchange, 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, under the provisions of Rule 145(c)
under the Securities Act, Mr. and Mrs. Paulin may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act. The Registering
Stockholders may also pledge or make gifts of their shares and the shares may
also be sold by the pledgee or transferees. Pursuant to the 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.
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<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.
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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............................................................... 8
Use of Proceeds............................................................ 22
Consolidated Capitalization................................................ 22
Business................................................................... 23
Certain Relationships and Related Transactions............................. 45
Registering Stockholders................................................... 48
Description of Capital Stock............................................... 48
Description of Certain Indebtedness........................................ 49
Plan of Distribution....................................................... 51
Legal Matters.............................................................. 51
Experts.................................................................... 52
</TABLE>
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212,717 SHARES
[LOGO OF SIGNATURE RESORTS]
SIGNATURE RESORTS, INC.
COMMON STOCK
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PROSPECTUS
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February 20, 1998
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