<PAGE> 1
This filing is made pursuant to
Rule 424(b)(3) under the Securities
Act of 1933 in connection with
Registration No. 333-51803
PROSPECTUS
OFFER TO EXCHANGE
9 1/4% SENIOR NOTES DUE 2006
FOR ALL OUTSTANDING 9 1/4% SENIOR NOTES DUE 2006
OF
SIGNATURE RESORTS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JUNE 11, 1998
UNLESS EXTENDED.
Signature Resorts, Inc., a Maryland corporation (the "Company") is hereby
offering (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 9 1/4%
Senior Notes due 2006 (the "Exchange Notes"), which exchange has been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a registration statement of which this Prospectus is a part (the "Registration
Statement"), for each $1,000 principal amount of its outstanding 9 1/4% Senior
Notes due 2006 (the "Private Notes"), of which $140,000,000 in aggregate
principal amount was issued on April 15, 1998 and is outstanding as of the date
hereof. The form and terms of the Exchange Notes are the same as the form and
terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act, and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement (as defined herein), which rights will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be entitled to the benefits of an indenture dated as of April 15, 1998
governing the Private Notes and the Exchange Notes (the "Indenture"). The
Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of
Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at the
rate of 9 1/4% per annum and the interest thereon will be payable semi-annually
on May 15 and November 15 of each year, commencing November 15, 1998. The
Exchange Notes will bear interest from the date of the last interest payment on
the Private Notes or if no interest has been paid, from the date of original
issuance of the Private Notes. Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the Private Notes.
The Notes will be redeemable, in whole or in part, at the option of the
Company on or after May 15, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, prior to May 15, 2001, the Company, at its option, may redeem up to
40% of the aggregate principal amount of the Notes originally issued with the
net cash proceeds of one or more Equity Offerings (as defined herein) at a
redemption price equal to 109.25% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption; provided that at least
60% of the aggregate principal amount of Notes originally issued remains
outstanding immediately after any such redemption. Upon a Change of Control (as
defined herein), each Holder (as defined herein) of the Notes will have the
right to require the Company to repurchase such Holder's 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 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. There can be no assurance
that in the event of a Change in Control the Company would have sufficient funds
to purchase all Notes tendered. See "Description of Notes."
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with existing and future unsubordinated
Indebtedness (as defined herein) of the Company and will rank senior in right of
payment to all subordinated Indebtedness of the Company. The Notes will be
effectively subordinated to all secured Indebtedness of the Company to the
extent of the security and to all Indebtedness and other obligations (including
trade payables) of the Company's subsidiaries. At December 31, 1997, after
giving pro forma effect to the offering of the Private Notes (the "Offering")
and the application of the estimated net proceeds therefrom and the incurrence
of an additional $111.1 million of secured Indebtedness subsequent to December
31, 1997, the Company and its subsidiaries would have had approximately $589.9
million of outstanding indebtedness (including trade payables of $25.2 million),
of which $108.2 million would have been secured or structurally senior in right
of payment to the Notes and $341.7 million would have been subordinated in right
of payment to the Notes. The Notes are senior in right of payment to the Senior
Subordinated Notes (as defined herein) and the Convertible Notes (as defined
herein).
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5.00 p.m. New York City time, on June 11, 1998,
unless the Exchange Offer is extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior
to the Expiration Date. Private Notes may be tendered only in integral multiples
of $1,000. The Exchange Offer is subject to certain customary conditions. See
"The Exchange Offer -- Conditions."
SEE "RISK FACTORS" ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS IN THE NOTES.
------------------------
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.
------------------------
The date of this Prospectus is May 12, 1998.
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Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that the holder is acquiring
the Exchange Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. The
Company has not sought and does not intend to seek its own no-action letter in
connection with the Exchange Offer and there can be no assurance that the
Commission would make a similar determination with respect to the Exchange
Offer.
Each broker-dealer that receives Exchange Notes for its own account must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities; provided such Private Notes do not constitute any portion of an
unsold allotment from the original sale of the Private Notes. To the extent
necessary to ensure that this Prospectus is available for sales of Exchange
Notes by broker-dealers, and notice is given by such broker-dealers to the
Company of such fact within 30 days of the effective date of the Registration
Statement, the Company has agreed to use its best efforts to keep the
Registration Statement continuously effective, supplemented and amended as
required by the Registration Rights Agreement, the Securities Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period of 180 days from the date the Exchange Offer is consummated,
or such shorter period as will terminate when all Private Notes covered by the
Registration Statement have been sold. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the Notes will develop. To the extent
that a market for the Notes does develop, the market value of the Notes will
depend on market conditions (such as yields on alternative investments), general
economic conditions, the Company's financial condition and certain other
factors. Such conditions might cause the Notes, to the extent that they are
traded, to trade at a significant discount from face value. See "Risk
Factors -- Absence of Public Market."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC" or
the "Depository") and registered in its name or in the name of Cede & Co., as
its nominee. Beneficial interests in the global note representing the Exchange
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by the Depository and its participants. So long as DTC or its
nominee is the registered owner or holder of the global note, DTC or such
nominee, as the case may be, will be considered the sole owner or holder of the
notes represented by such global note for all purposes under the Indenture.
Payments of the principal of, premium (if any), interest and liquidated damages
(if any) on, the global note will be made to DTC or its nominee, as the case may
be, as the registered owners thereof. None of the Company, the Trustee or any
Paying Agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest. After the initial
issuance of such global note, Exchange Notes in certificated form will be issued
in exchange for the global note only in accordance with the terms and conditions
set forth in the Indenture. See "Description of the Notes -- Book Entry."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Notes
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 Notes 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 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, 1997 filed with the Commission on March 30, 1998
(Commission file #001-13815);
(b) The Company's amended Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997 filed with the Commission on April 6, 1998
(Commission file #001-13815);
(c) The Company's Proxy Statement dated April 13, 1998 relating to the
Annual Meeting of Stockholders to be held on May 15, 1998 filed with
the Commission on April 13, 1998 (Commission file #001-13815); and
(d) The Company's Current Report on Form 8-K filed with the Commission on
April 21, 1998 (Commission file #001-13815).
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, General Counsel and
Secretary, 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, including
the financial statements and notes thereto, included elsewhere or incorporated
by reference in this Prospectus. Unless the context otherwise indicates, the
"Company" means Signature Resorts, Inc. and its subsidiaries and affiliates.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
Unless the context otherwise indicates, the "Company" refers to 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 in February 1997 (the "AVCOM
Acquisition"); Plantation Resorts Group, Inc. ("PRG") and its subsidiaries,
which were acquired in May 1997 (the "PRG Acquisition"); LSI Group Holdings, plc
("LSI") and its subsidiaries, which were acquired in August 1997 (the "LSI
Acquisition"); Marc Hotels & Resorts, Inc. ("Marc"), which was acquired in
October 1997 (the "Marc Acquisition"); Vacation Internationale, Ltd. ("VI") and
its subsidiaries, which were acquired in November 1997 (the "VI Acquisition");
and Global Development Ltd. and certain of its subsidiaries (the "Global Group")
which was acquired in December 1997 (the "Global Acquisition").
THE COMPANY
Signature Resorts, Inc. is the world's largest vacation ownership company,
as measured by the number of resort locations. The Company currently has 82
resort locations in eight North American and European countries. The Company
also manages units at an additional 22 resorts in Hawaii. The Company's resort
locations are in a variety of popular vacation destinations, including
California, Hawaii, Arizona, Florida, the Caribbean, Mexico, France, the United
Kingdom, Spain and the Canary Islands. Through both internal development and
strategic acquisitions, the Company has expanded the number of its vacation
ownership resort locations and its owner family base from nine resort locations
and approximately 25,000 owner families at the time of its August 1996 initial
public offering to its current 82 resort locations and approximately 200,000
owner families. As a result of the successful implementation of the Company's
growth and operations strategy, the Company's revenues have grown to $337.7
million in 1997 from $219.8 million in 1996 and $168.3 million in 1995. By
taking advantage of synergies resulting from the implementation of the Company's
business strategy, the Company has increased 1997 EBITDA (as defined) by 91%
over 1996 EBITDA and increased EBITDA as a percentage of total revenues to 25.3%
in 1997 from 20.3% in 1996.
The Company's operations consist of (i) marketing and selling vacation
ownership interests at its resort locations, which entitle the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year in
perpetuity ("Vacation Intervals"), and vacation points which may be redeemed for
occupancy rights at participating resort locations ("Vacation Points," and
together with Vacation Intervals, "vacation interests"), (ii) acquiring,
developing and operating vacation ownership resorts and (iii) providing consumer
financing to individual purchasers for the purchase of vacation interests at its
resort locations. The Company also provides resort management and maintenance
services for which it receives fees paid by the resorts' homeowners'
associations.
The Company markets resort locations as Sunterra Resorts, Embassy Vacation
Resorts and Westin Vacation Club Resorts and offers points-based vacation clubs
in Europe and North America. The Company's Sunterra Resorts are marketed under
the Company's Sunterra brand. The Company's Embassy Vacation Resorts and Westin
Vacation Club resort are operated under agreements with Promus Hotel Corporation
("Promus") (the owner of the Embassy Suites brand) and Westin Hotels & Resorts
("Westin"), respectively. The Company offers points-based vacation clubs in
Europe through its LSI and Global Group subsidiaries, and in North America
through its VI subsidiary.
The Company provides mortgage financing for approximately 75% of its
vacation ownership sales. In addition to enhancing the sales process, financing
customer receivables generates attractive profit margins and
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cash flows from the spread between interest rates charged by the Company on its
mortgage receivables and the Company's cost of capital. This financing is
typically collateralized by the underlying Vacation Interval or Vacation Points.
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.
BUSINESS STRATEGY
The Company's objective is to capitalize on its position as the world's
largest vacation ownership company, as measured by resort locations, and its
base of approximately 200,000 owner families by continuing to (i) expand sales
at its resort locations, (ii) strategically acquire and develop resort inventory
and acquire operating companies and other vacation ownership-related assets,
(iii) improve operating margins by reducing operating costs through efficiencies
gained by operating as a large multi-resort system and (iv) develop and
introduce new vacation ownership products including its planned "Club Sunterra"
worldwide points-based vacation exchange system.
Signature has expanded to its current 82 resort locations from nine at the
time of its August 1996 initial public offering through the successful
implementation of its growth and operations strategy. The Company believes it
has achieved sufficient size to enable it to capitalize on the strategic
advantages of operating and purchasing leverage and the ability to provide
choice and flexibility to its customers. The key elements of the Company's
growth strategy are described below:
Expand Sales. The Company intends to expand sales of vacation ownership
interests at its existing resorts by adding additional inventory through the
construction of new development units and through broader marketing efforts. As
of December 31, 1997, the Company had available inventory of 29,168 Vacation
Intervals and 599,554 Vacation Points. The Company believes it is well
positioned to continue to expand its existing supply of inventory.
Acquisition and Development. Signature has achieved its leading position in
the industry by identifying and acquiring resorts in desirable locations at
prices which the Company believes will allow it to achieve excellent returns.
The Company's acquisition and development of new resort locations allows it to
add new vacation ownership inventory and increase the number of owner families
within the Company's resort system. The Company targets operating companies,
resort properties and other vacation ownership assets for potential acquisition
and development opportunities to generate a high return on invested capital to
replenish vacation ownership sales inventory while entering new markets and
creating a larger resort and customer base from which to develop and market its
products.
The Company evaluates each acquisition candidate based on certain criteria,
including return on invested capital, the strategic location of the resort
properties and consumer demand for vacation ownership inventory, in each case
taking into consideration the Company's existing locations and operations. The
Company analyzes the potential economic impact of each transaction to maximize
its return on investment, as well as potential strategic synergies. Management
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.
Improve Operating Margins. As the Company continues to expand the number of
its resort locations as well as its owner family base, management believes that
it will be able to realize improved operating margins through the realization of
increased efficiencies, reduced on-site administrative requirements and reduced
operating costs through its multi-resort management system. In addition, the
Company believes that additional acquisitions will allow it to experience
increased margins by leveraging operating and corporate overhead costs over a
larger revenue base.
Signature's base of approximately 200,000 owner families also provides an
established market to which to sell additional vacation and leisure products
which the Company believes will reduce marketing and advertising expenses as a
percentage of sales. Because existing owners of vacation ownership interests
are, in
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effect, a pre-screened pool of potential customers, repeat sales and customer
referrals increase sales while marketing expenses associated with these sales
are significantly reduced. As the Company's owner family base continues to
expand and these type of sales represent a larger percentage of overall sales,
the Company believes operating margins will continue to improve.
Develop New Vacation Ownership Products. The Company believes its growing
resort portfolio and base of approximately 200,000 owner families will enable it
to offer a wider variety of vacation ownership products. The Company's planned
Club Sunterra worldwide points-based vacation exchange system is one such
product that will allow owners to create vacations custom tailored to their
individual needs. Member families will be able to purchase intervals entitling
them to an annual allotment of "points" to use as a currency to reserve the
specific resort location, season, unit type and length of stay they desire from
among Club Sunterra's resort locations throughout the world. This type of
points-based system will provide the consumer more flexibility in their vacation
plans compared to traditional one week intervals.
INDUSTRY OVERVIEW
The Market. The vacation ownership industry represents one of the fastest
growing segments of the lodging industry. According to the American Resort
Development Association ("ARDA") and other industry sources, during the
seventeen year period ending in 1997, worldwide vacation ownership sales volume
increased from $490 million in 1980 to an estimated $6.2 billion in 1997, a
compounded annual growth rate of 16.1%.
As shown in the following charts, according to ARDA, the worldwide vacation
ownership industry has expanded significantly since 1980 both in vacation
interest sales volume and in the number of vacation interest owners.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 80 81 82 83 84 85 86 87 88
Vacation Interest Sales Volume
($ in billions) 0.49 0.965 1.165 1.34 1.735 1.58 1.61 1.94 2.39
Year 80 81 82 83 84 85 86 87 88
No. of Vacation
Interest Owners 0.155 0.22 0.335 0.47 0.62 0.805 0.97 1.125 1.31
(in millions)
Year 89 90 91 92 93 94 95e 96e 97e
Vacation Interest Sales Volume
($ in billions) 2.97 3.24 3.74 4.25 4.505 4.76 5.2 5.7 5.95
Year 89 90 91 92 93 94 95e 96e 97e
No. of Vacation
Interest Owners 1.53 1.8 2.07 2.363 2.76 3.144 3.49 3.98 4.48
(in millions)
</TABLE>
Source: ARDA (includes, with respect to 1995, 1996 and 1997, unpublished
estimates provided by ARDA)
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.
The Consumer. According to the most recent information compiled by ARDA,
the three primary reasons cited by consumers for purchasing vacation interests
are (i) the ability to exchange vacation interests for accommodations at other
resorts through exchange networks (cited by 75% of vacation interest
purchasers), (ii) the money savings over traditional resort vacations (cited by
72% of purchasers), and (iii) the quality service and upkeep of the resort at
which they purchased vacation interests (cited by 80% of purchasers). According
to ARDA, vacation interest purchasers have a high rate of repeat purchases:
approximately 41% of all vacation interest owners own more than one vacation
interest representing approximately 65% of the industry inventory and
approximately 51% of all owners who bought their first vacation interest before
1985 have since purchased a second vacation interest. In addition, ARDA
indicates that customer satisfaction increases with length of ownership, age,
income, multiple location ownership and accessibility to vacation interest
exchange networks.
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RECENT DEVELOPMENTS
Securitized Notes. The Company expects to securitize approximately $100
million of its mortgages receivable, of which $50 million has been
pre-committed. The Company expects to convey the mortgages receivable to a
bankruptcy remote subsidiary, which would issue notes secured by such mortgages
receivable (the "Securitized Notes"). The Securitized Notes would be nonrecourse
to the Company. The Company is finalizing negotiations and expects to complete
the securitization by May 1998. If completed, the securitization would be
treated as a financing transaction for accounting purposes. The mortgages
receivable and the Securitized Notes would remain on the Company's balance
sheet. The Company would recognize no gain or loss on the Securitized Notes
transaction.
Name Change. The Company's Board of Directors has approved, subject to
stockholder approval, a proposal to change the Company's corporate name to
"Sunterra Corporation." The name change proposal will be presented for
stockholder approval at the Company's May 15, 1998 annual meeting.
Senior Credit Facility. On February 18, 1998, the Company entered into a
$100 million Senior Bank Credit facility (as amended from time to time, the
"Senior Credit Facility"). The Senior Credit Facility has variable borrowing
based on the percentage of the Company's mortgage receivables pledged under such
facility and the amount of funds advanced thereunder. The interest rate under
the Senior Credit Facility will vary between LIBOR plus 7/8% and LIBOR plus
1 3/8%, depending on the amount advanced against mortgage receivables. The
Senior Credit Facility has a three-year term and contains customary covenant
representations and warranties and conditions to borrow. On April 1, 1998, the
Company and its bank syndicate amended the Senior Credit Facility to increase
the amount available thereunder to $117.5 million. As of May 1, 1998, no amounts
were outstanding under the Senior Credit Facility.
Acquisition of MMG Holding Corp. and Affiliated Companies. On February 3,
1998, the Company acquired 100% of the capital stock of MMG Holding Corp., MMG
Development Corp. and certain affiliated companies ("MMG") for approximately
$26.5 million, comprised of $18.5 million in cash and the assumption of
approximately $8.0 million of indebtedness (the "MMG Acquisition"). 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 the
southeastern United States. In addition, the Company assumed MMG's commitment to
purchase an additional resort in Gatlinburg, Tennessee, which the Company
purchased on February 18, 1998 and which the Company plans to convert to
vacation ownership.
Acquisition of Westin Carambola Beach Resort. On January 26, 1998, the
Company acquired the Westin Carambola Beach Resort (the "Carambola Beach
Resort") on the island of St. Croix, United States Virgin Islands for a purchase
price of approximately $13.0 million. The Carambola Beach Resort contains 156
one-bedroom suites and one two-bedroom suite located in 27 separate 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 and Westin modified their existing joint development agreement to
make their relationship non-exclusive. 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 St.
John, located in the 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.
Additional Acquisitions and Developments. In addition to the MMG
Acquisition and the acquisition of the Carambola Beach Resort, on December 31,
1997, the Company acquired the 46 unit Coral Reef Resort in Miami, Florida, and,
during the first and second quarters of 1998, acquired the 105 unit Homewood
Suites located in Santa Fe, New Mexico, the 58 unit Club Mougins Resort, located
near Cannes, France, a 22 unit property located in the West End of London,
England and 10 units at the Sunset View Resort, located in
4
<PAGE> 8
Tenerife, Canary Islands, in individual transactions with an aggregate purchase
price of approximately $30.2 million. The Company intends to begin vacation
ownership sales at each of these newly-acquired resorts during the second
quarter of 1998. When added to the Company's 70 resort locations at December 31,
1997, as well as the Carambola Beach Resort and the seven resort locations
acquired in the MMG Acquisition, these acquisitions currently give the Company
82 resort locations.
In addition, in March 1998, the Company received final planning, zoning and
development approval for the planned development of the 158 unit Westin Vacation
Club in Rancho Mirage, California, the Company's second joint venture with
Westin. In March 1998, the Company also received final planning, zoning and
development approval for the 58 unit Sunterra Harbor Lights Resort in San Diego,
California. The Company expects to complete the initial phase of development of
each of the Rancho Mirage and San Diego resorts and begin vacation ownership
sales at the resorts during 1999.
5
<PAGE> 9
THE EXCHANGE OFFER
The Exchange Offer......... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or promptly after the Expiration
Date. As of the date hereof, there is $140,000,000
aggregate principal amount of Private Notes
outstanding. See "The Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be offered
for resale, resold and otherwise transferred by a
holder thereof (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act
or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of
the Securities Act; provided that the holder is
acquiring Exchange Notes in the ordinary course of
its business and is not participating, and had no
arrangement or understanding with any person to
participate, in the distribution of the Exchange
Notes. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Private
Notes, where such Private Notes were acquired by
such broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "The Exchange Offer -- Resale of the Exchange
Notes."
Registration Rights
Agreement.................. The Private Notes were sold by the Company on April
15, 1998 (the "Offering") to the Initial Purchasers
pursuant to a Purchase Agreement, dated April 9,
1998, between the Company and the Initial
Purchasers (the "Purchase Agreement"). Pursuant to
the Purchase Agreement, the Company and the Initial
Purchasers entered into a Registration Rights
Agreement, dated as of April 15, 1998 (the
"Registration Rights Agreement"), which grants the
holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such rights, which will terminate upon
the consummation of the Exchange Offer. The holders
of the Exchange Notes will not be entitled to any
exchange or registration rights with respect to the
Exchange Notes. See "The Exchange
Offer -- Termination of Certain Rights."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on June 11, 1998 unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the
Private Notes............ The Exchange Notes will bear interest from the date
of the last interest payment on the Private Notes
or if no interest has been paid, from the date of
original issuance of the Private Notes. Holders
whose Private Notes are accepted for exchange will
be deemed to have waived the right
6
<PAGE> 10
to receive any interest accrued on the Private
Notes. See "The Exchange Offer -- Interest on the
Exchange Notes."
Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions that may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer -- Conditions."
Procedures for Tendering
Private Notes............ Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Private Notes and any other required
documentation to Norwest Bank Minnesota, National
Association, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder
will represent to and agree with the Company that,
among other things, (i) the Exchange Notes to be
acquired by such holder of Private Notes in
connection with the Exchange Offer are being
acquired by such holder in the ordinary course of
its business, (ii) such holder is not engaged in,
and does not intend to engage in, and has no
arrangement or understanding with any person to
participate in, a distribution of the Exchange
Notes, (iii) that if such holder is a broker-dealer
registered under the Exchange Act or is
participating in the Exchange Offer for the
purposes of distributing the Exchange Notes, such
holder will comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such
person and cannot rely on the position of the staff
of the Commission set forth in no-action letters
(see "The Exchange Offer -- Resale of the Exchange
Notes"), (iv) such holder understands that a
secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes
obtained by such holder in exchange for Private
Notes acquired by such holder directly from the
Company should be covered by an effective
registration statement containing the selling
security holder information required by Item 507 or
Item 508, as applicable, of Regulation S-K of the
Commission and (v) such holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the holder is
not a broker-dealer, such holder will be required
to represent in the Letter of Transmittal that it
is not engaged in, and does not intend to engage
in, a distribution of the Exchange Notes. If the
holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for
Private Notes such holder will be required to
acknowledge in the Letter of Transmittal that the
Private Notes to be exchanged for New securities
were acquired by it as a result of market-making
activities or other trading activities and that
such holder will deliver a prospectus in connection
with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it is
an "underwriter" within the meaning of the
Securities Act. See "The Exchange
Offer -- Procedures for Tendering."
7
<PAGE> 11
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering such owner's Private Notes, either
make appropriate arrangements to register ownership
of the Private Notes in such owner's name or obtain
a properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth under "The Exchange Offer -- Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of
the Exchange Notes....... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Withdrawal Rights.......... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
Certain Federal Income
Tax Considerations....... The exchange of Private Notes for Exchange Notes
will be treated as a "non-event" for federal income
tax purposes because the Exchange Notes will not be
considered to differ materially from the Private
Notes. As a result, no material federal income tax
consequences will result to holders exchanging
Private Notes for Exchange Notes. See "Certain
Federal Income Tax Considerations" for a
discussion, which, in the opinion of Latham &
Watkins, counsel to the Company, describes the
material federal income tax consequences expected
to result to holders whose Private Notes are
exchanged for Exchange Notes in the Exchange Offer.
Exchange Agent............. Norwest Bank Minnesota, National Association is
serving as the Exchange Agent in connection with
the Exchange Offer.
8
<PAGE> 12
THE EXCHANGE NOTES
The Exchange Offer applies to $140,000,000 aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued under,
and be entitled to the benefits of, an indenture governing the Private Notes and
the Exchange Noes dated April 15, 1998 (the "Indenture") among the Company and
Norwest Bank Minnesota, National Association, as Trustee (the "Trustee"). The
Exchange Notes and the Private Notes are sometimes collectively referred to
herein as the "Notes." For further information and for definitions of certain
capitalized terms used below, see "Description of Notes."
SECURITIES OFFERED.............. $140 million aggregate principal amount of
the Company's 9 1/4% Senior Notes due 2006.
MATURITY DATE................... May 15, 2006.
INTEREST PAYMENT DATES.......... May 15 and November 15, commencing November
15, 1998.
RANKING......................... The Notes will be general unsecured
obligations of the Company and will rank pari
passu in right of payment with all existing
and future unsubordinated Indebtedness of the
Company and will rank senior in right of
payment to all subordinated Indebtedness of
the Company. The Notes will be effectively
subordinated to all secured Indebtedness of
the Company to the extent of the security and
to all Indebtedness and other obligations
(including trade payables) of the Company's
subsidiaries. At December 31, 1997, after
giving pro forma effect to the Offering and
the application of the estimated net proceeds
therefrom and the incurrence of an additional
$108 million of secured Indebtedness
subsequent to December 31, 1997, the Company
and its subsidiaries would have had
approximately $589.9 million of outstanding
indebtedness (including trade payables of
$25.2 million), of which $108.2 million would
have been secured or structurally senior in
right of payment to the Notes and $341.7
million would have been subordinated in right
of payment to the Notes. The Notes are senior
in right of payment to the Company's 9 3/4%
Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes") and the
Company's 5 3/4% Convertible Notes due 2007
(the "Convertible Notes").
OPTIONAL REDEMPTION............. The Notes will be redeemable, in whole or in
part, at the option of the Company on or
after May 15, 2002 at the redemption prices
(expressed as a percentage of principal
amount) set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption. In addition, prior to May 15,
2001, the Company may redeem up to 40% of the
aggregate principal amount of the Notes with
the proceeds of one or more Equity Offerings
(as defined), at a redemption price equal to
109.25% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
date of redemption (subject to the right of
holders of record on the relevant record date
to receive interest due on the relevant
interest payment date); provided, however,
that at least
9
<PAGE> 13
60% of the aggregate principal amount of the
Notes originally issued remains outstanding
after any such redemption.
CHANGE OF CONTROL............... Upon a Change of Control (as defined),
Holders of the Notes will have the right to
require the Company to repurchase all or a
portion of such Holder's Notes at a purchase
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of repurchase.
CERTAIN COVENANTS............... The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and its Restricted
Subsidiaries (as defined herein) to (i) incur
additional indebtedness, (ii) pay dividends
or make other distributions with respect to
Capital Stock (as defined) of the Company and
its Restricted Subsidiaries, (iii) create
certain liens, (iv) sell certain assets of
the Company or its Restricted Subsidiaries
and (v) enter into certain mergers and
consolidations. See "Description of the
Notes -- Certain Covenants."
USE OF PROCEEDS................. The Company will not receive any proceeds
from the issuance of the Exchange Noes
offered hereby. In consideration for issuing
the Exchange Notes as contemplated in this
Prospectus, the Company will receive in
exchange Private Notes in like principal
amount, the terms of which are identical to
the Exchange Notes. The issuance of the
Exchange Notes in exchange for the surrender
of the Private Notes will not result in any
increase in the indebtedness of the Company.
RISK FACTORS
Prospective investors in the Notes should carefully consider the matters
set forth herein under "Risk Factors."
10
<PAGE> 14
SUMMARY CONSOLIDATED AND UNAUDITED PRO FORMA
FINANCIAL DATA
The following table sets forth summary consolidated and unaudited pro forma
financial data of the Company. For all of the periods presented, the financial
data presented below gives effect to the AVCOM, PRG and LSI Acquisitions by
combining the historical information of AVCOM, PRG, LSI and the Company and
restating the historical financial data of the Company using the
pooling-of-interests method of accounting. Prior to its acquisition by the
Company on February 7, 1997, AVCOM recognized a net loss of $12.4 million for
the year ended December 31, 1996. As a result of the pooling-of-interests
accounting treatment, this net loss has been reflected in the Company's
consolidated financial statements for the year ended December 31, 1996, reducing
the Company's 1996 reported consolidated net income. In addition, as a result of
the Company's 1997 acquisitions, the Company incurred $10.0 million of
non-recurring merger-related costs, reducing the Company's 1997 reported
consolidated net income.
The financial data presented below includes the effect of the exchange of
direct and indirect interests in, and obligations of, certain predecessor
limited partnerships, limited liability companies and other corporations of the
Company for shares of common stock (the "Common Stock") of the Company (the
"Consolidation Transactions") and the Company's initial public offering of
shares of Common Stock (the "Initial Public Offering"), both of which were
consummated on August 20, 1996.
The following table also sets forth summary unaudited pro forma financial
data of the Company as of December 31, 1997, after giving effect to the
concurrent offerings of the Convertible Notes and 2,400,000 shares of Common
Stock sold by the Company in February 1997 (together, the "Concurrent
Offerings"), the Company's offering of the Senior Subordinated Notes in August
1997 (the "Senior Subordinated Note Offering") and the Offering, in each case
after giving effect to the application of the proceeds therefrom (excluding the
repayment of approximately $111 million due under the Senior Credit Facility,
which was incurred subsequent to December 31, 1997) as if such transactions had
taken place on January 1, 1997, with respect to the Income Statement Data and
Other Data and as of December 31, 1997 with respect to the Balance Sheet Data.
The pro forma data do not purport to represent what the consolidated results of
operations or consolidated financial position of the Company would have been had
the Offering, the Concurrent Offerings and the Senior Subordinated Note Offering
and the application of the net proceeds therefrom actually occurred at the
beginning of the relevant period, and do not purport to project the consolidated
financial position or the consolidated results of operations of the Company for
the current year or any future date or period.
The following financial data should be read in conjunction with "Use of
Proceeds," "Selected Financial Data," "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements for the Company and the
notes thereto, each of which are contained elsewhere in this Prospectus.
11
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
PRO FORMA
1995 1996 1997 1997
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Vacation Interval and Vacation Point sales... $139,426 $182,300 $281,063 $281,063
Interest income.............................. 20,339 25,415 42,856 42,856
Other income................................. 8,553 12,132 13,774 13,774
-------- -------- -------- --------
Total revenues....................... 168,318 219,847 337,693 337,693
-------- -------- -------- --------
Costs and operating expenses:
Vacation Interval and Vacation Point cost of
sales..................................... $ 39,810 $ 48,218 $ 71,437 $ 71,437
Advertising, sales, and marketing............ 62,258 89,040 126,739 126,739
Loan portfolio:
Interest expense -- treasury.............. 10,077 13,482 13,032 9,225
Other expenses............................ 2,034 4,523 5,522 5,522
Provision for doubtful accounts(a)........ 3,666 8,311 8,579 8,579
General and administrative(a)................ 19,263 37,436 42,254 42,254
Resort property valuation allowance(a)....... -- 2,620 -- --
Depreciation and amortization(a)............. 2,514 5,027 6,499 6,499
Merger-related costs(a)(b)................... -- -- 9,973 9,973
-------- -------- -------- --------
Total costs and operating expenses... 139,622 208,657 284,035 280,228
-------- -------- -------- --------
Income from operations....................... 28,696 11,190 53,658 57,465
Interest expense -- other, net............... 1,728 3,763 9,394 29,271
Equity loss on investment in joint
ventures.................................. 1,649 299 639 639
Minority interest in income of consolidated
limited partnership....................... -- 199 181 181
-------- -------- -------- --------
Income before provision (benefit) for
income taxes and extraordinary
item............................... $ 25,319 $ 6,929 $ 43,444 $ 27,374
======== ======== ======== ========
OTHER DATA:
EBITDA(c).................................... $ 41,553 $ 44,622 $ 85,424 $ 85,424
EBITDA margin................................ 24.7% 20.3% 25.3% 25.3%
Net interest expense......................... $ 15,120 $ 23,968 $ 28,698 $ 43,576(d)
Ratio of EBITDA to net interest expense...... 2.0
Ratio of net debt to EBITDA.................. 4.6
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL PRO FORMA
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, including
escrow.................................... $ 47,972 $167,641
Mortgages receivable, net.................... 331,735 331,735
Total assets................................. 761,145 885,614
Total debt................................... 435,208 559,677(e)
Stockholders' equity......................... 207,910 207,910
</TABLE>
12
<PAGE> 16
- ---------------
(a) Non-recurring costs for the year ended December 31, 1997, are merger costs
relating to the AVCOM, PRG and LSI Acquisitions. Non-recurring costs for the
year ended December 31, 1996 include costs incurred at AVCOM for (i) an
increase in the provision for doubtful accounts of $2.0 million, (ii) $9.1
million in severance costs, lease cancellations, litigation reserves, other
integration costs and a reserve for leases associated with certain property
management and related contracts, (iii) a $2.6 million write-down of certain
property to estimated fair market value and (iv) a $0.7 million charge
relating to amortization of start-up costs over a period of one year.
(b) Merger-related costs include expenses related to fees paid to financial
advisors, legal fees, and other transaction expenses in connection with the
AVCOM, PRG and LSI Acquisitions.
(c) EBITDA represents net income before interest expense-treasury, interest
expense-other, capitalized interest expense included in Vacation Interval
and Vacation Point cost of sales, income taxes, non-recurring costs,
depreciation and amortization and extraordinary item, net of tax. EBITDA is
presented because it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. However, EBITDA should not be
construed as a substitute for income from operations, net income or cash
flows from operating activities in analyzing the Company's operating
performance, financial position and cash flows. The EBITDA measure presented
herein may not be comparable to EBITDA as presented by other companies. The
following table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
PRO FORMA
1995 1996 1997 1997
------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.................................................. $21,299 $11,034 $19,522 $ 16,446
Interest expense-treasury................................... 10,077 13,482 13,032 9,225
Interest expense-other...................................... 1,728 3,763 9,394 29,271
Capitalized interest expense included in Vacation Interval
and Vacation Point cost of sales.......................... 1,915 1,718 3,082 3,082
Income taxes (benefit)...................................... 4,020 (4,105) 23,156 10,928
Non-recurring costs......................................... -- 14,381(a) 9,973(a) 9,973(a)
Depreciation and amortization............................... 2,514 4,349(a) 6,499 6,499
Extraordinary item, net of tax.............................. -- -- 766 --
------- ------- ------- ---------
EBITDA.............................................. $41,553 $44,622 $85,424 $ 85,424
======= ======= ======= =========
</TABLE>
(d) Net interest expense is defined as interest expense plus capitalized
interest less amortization of debt issuance costs. The 1997 pro forma amount
gives effect to interest income of approximately $6.3 million (based on an
assumed investment rate of 5.25% per annum) on the assumed investment of the
net excess proceeds from the Offering of approximately $120 million,
including approximately $111 million that the Company applied to the
repayment of indebtedness which was outstanding under the Senior Credit
Facility as of April 15, 1998 and that was incurred subsequent to December
31, 1997.
(e) Approximately $111 million of the net proceeds from the Offering were used
to retire indebtedness under the Senior Credit Facility which was
outstanding as of April 15, 1998. The amounts outstanding under the Senior
Credit Facility were incurred subsequent to the year ended December 31, 1997
primarily to finance the MMG Acquisition and the acquisition of resort
inventory and for other working capital purposes. As of May 1, 1998, no
amounts were outstanding under such facility.
13
<PAGE> 17
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Notes 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 this Prospectus generally. In addition, when used in this
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 this 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; LIQUIDITY
The Company has, and after giving effect to the Offering will continue to
have, significant levels of indebtedness. At December 31, 1997, after giving pro
forma effect to the Offering and the application of the estimated net proceeds
therefrom and the incurrence of an additional $111.1 million of secured
Indebtedness subsequent to December 31, 1997, the Company and its subsidiaries
would have had approximately $589.9 million of outstanding indebtedness
(including trade payables of $25.2 million), of which $108.2 million would have
been secured or structurally senior in right of payment to the Notes and $341.7
million would have been subordinated in right of payment to the Notes. In
addition, subject to the restrictions contained in documents governing the
Senior Credit Facility, the Notes, the Senior Subordinated Notes and the
Convertible Notes, the Company may incur additional senior or other indebtedness
from time to time to finance acquisitions or capital expenditures or for other
general corporate purposes.
For the year ended December 31, 1997, the Company had $50.0 million in
negative cash flows from operations. On a pro forma basis for the Offering, the
Concurrent Offerings and the Senior Subordinated Note Offering and the
application of the proceeds therefrom, cash flows from operations would have
been insufficient to service the Company's interest costs by an aggregate of
$53.1 million. Because the Company typically finances 90% of the purchase price
of the vacation interests it sells, it typically incurs significant operating
costs in excess of the actual cash proceeds initially received from the sale of
vacation interests. To meet the Company's cash requirements to finance these
customer receivables, the Company borrows funds available under its credit
facilities. The Company expects to repay its credit facilities with proceeds
from the issuance of pass-through mortgage-backed securities under which the
Company sells the mortgages receivable and principal and interest payments from
its portfolio of mortgages receivable. The Company may also sell or factor
additional mortgages receivable or borrow under existing or future lines of
credit. There can be no assurance that the Company will be able to successfully
securitize any of its mortgages receivable or otherwise sell, factor or finance
such mortgages receivable on terms favorable to the Company, if at all or that
the inability to do so would not have a material adverse effect on the Company's
results of operations.
The level of the Company's indebtedness could have important consequences
to the Holders of the Notes, including, but not limited to, the following: (i)
the Company's ability to obtain future financing for working capital, capital
expenditures, acquisitions, product development or other corporate purposes may
be materially limited or impaired; (ii) a significant portion of the Company's
cash flow from operations may be dedicated to the interest on its indebtedness,
thereby reducing the funds available to the Company to conduct its operations
and future business opportunities; (iii) significant amounts of the Company's
borrowings will bear interest at variable rates, which could result in higher
interest expense in the event of interest rate increases; (iv) the agreements
governing the Company's indebtedness contain financial and restrictive
14
<PAGE> 18
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company; (v) the indebtedness outstanding under the Senior Credit Facility is
secured and matures prior to the maturity of the Notes; (vi) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (vii) the Company's substantial
degree of leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures and make it
more vulnerable to a downturn in general economic conditions or in its business.
The Company's ability to make scheduled payments or to refinance its debt
obligations will depend upon its future financial and operating performance,
which may be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control, including interest
rates, increased operating costs, regulatory developments and the ability of the
Company to repatriate cash generated outside of the United States without
incurring a substantial tax liability. There can be no assurance that the
Company's operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future.
STRUCTURAL SUBORDINATION OF NOTES
The Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all existing and future unsubordinated
Indebtedness of the Company and will rank senior in right of payment to all
subordinated Indebtedness of the Company. The Notes will be effectively
subordinated to all secured Indebtedness of the Company to the extent of the
security and to all Indebtedness and other obligations (including trade
payables) of the Company's subsidiaries. In the event of bankruptcy,
liquidation, or reorganization of the Company, the assets serving as collateral
for the Company's secured Indebtedness will be available to pay obligations on
the Notes only after all secured Indebtedness has been paid to the full extent
of such security, and there may not be sufficient assets to pay any interest,
premium, if any, or principal due on any or all of the Notes then outstanding.
At December 31, 1997, after giving pro forma effect to the Offering and the
application of the estimated net proceeds therefrom and the incurrence of an
additional $108 million of secured Indebtedness subsequent to December 31, 1997,
the Company and its subsidiaries would have had approximately $589.9 million of
outstanding indebtedness (including trade payables of $25.2 million), of which
$108.2 million would have been secured or structurally senior in right of
payment to the Notes and $341.7 million would have been subordinated in right of
payment to the Notes. The incurrence of additional indebtedness and other
liabilities by the Company or its subsidiaries could adversely affect the
Company's ability to pay its obligations on the Notes. In addition, the cash
flow and ability of the Company to service debt, including the Notes, is
dependent in part upon the ability of its subsidiaries to make cash payments to
the Company. Any right of the Company and its creditors to participate in the
assets of any such subsidiary will be subject to the prior claims of the
subsidiaries and creditors, including trade creditors. Upon any acceleration of
the principal due on the Notes or payment or distribution of assets of the
Company to creditors upon any dissolution, winding-up, liquidation or
reorganization, all principal, premium, if any, and interest due on all secured
Indebtedness must be paid to the full extent of such security before the Holders
of the Notes are entitled to receive any payment as a result of such assets.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-
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dealer that receives Exchange Notes for its own account in exchange for Private
Notes, where such Private Notes were acquired by such broker-dealer as a result
of market-making activities or any other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Private Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Private Notes could be adversely affected due to the limited amount, or "float,"
of the Private Notes that are expected to remain outstanding following the
Exchange Offer. Generally, a lower "float" of a security could result in less
demand to purchase such security and could, therefore, result in lower prices
for such security. For the same reason, to the extent that a large amount of
Private Notes are not tendered or are tendered and not accepted in the Exchange
Offer, the trading market for the Exchange Notes could be adversely affected.
See "Plan of Distribution" and "The Exchange Offer."
LIMITATION ON REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control (as defined in the Indenture), each Holder of the
Notes will have certain rights, at the holder's option, to require the Company
to repurchase all or a portion of such Holder's Notes. If a Change of Control
were to occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all Notes tendered by the Holders thereof. In addition, the
Company's repurchase of Notes as a result of the occurrence of a Change of
Control may create an event of default under the Company's various credit
agreements. The Change of Control provision may not, in some instances, prevent
a decrease in the value of the Notes in the event the Company incurs additional
leverage through certain types of recapitalizations, leveraged buyouts, or
similar transactions. See "Description of Notes -- Change of Control."
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
A principal component of the Company's strategy is to continue to grow by
acquiring additional resort locations and/or vacation ownership operating
companies. 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 resort
locations and profitably sell Vacation Intervals and Vacation Points at such
resort locations. There can be no assurance that the Company will be successful
with respect to such factors and any failure to be successful could have a
material adverse effect on the Company's results of operations. Acquisitions
involve a number of special risks, including the diversion of management's
attention to the assimilation of the operations from other business concerns,
difficulties in the integration of operations and systems, the assimilation and
retention of the personnel of the acquired companies and potential adverse
short-term effects on operating results. The Company's ability to execute its
growth strategy depends to a significant degree on the existence of attractive
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 potential buyers of resort real estate which are well
capitalized 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 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 DEVELOPMENT OF A POINTS-BASED VACATION EXCHANGE SYSTEM
The Company currently is developing its Club Sunterra points-based vacation
exchange system which will offer points-based exchanges throughout the Company's
worldwide network of resorts. The Company has not previously developed or
operated a company-wide points-based vacation exchange system and no
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assurance can be given as to management's ability to efficiently develop or
operate such a company-wide system. Although management believes such a system
will be developed and placed into operation in the second half of 1998, there
can be no assurance that such a system will be developed and placed into
operation by such time. Risks associated with the development and operation of
the Company's Club Sunterra company-wide points-based vacation exchange system,
and expansion of LSI's and VI's existing points-based systems, may include the
risks that: such development and/or expansion may be abandoned; the North
American and European points-based vacation exchange systems cannot be
efficiently combined or operated with the Company's current vacation ownership
operations; the North American and European points-based vacation exchange
systems 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 exchange system or the expansion of a European points-based vacation
exchange system.
RISKS RELATED TO CERTAIN ACQUISITIONS
Uncertainty as to Future Financial Results. The Company believes that the
acquisitions of AVCOM, PRG, LSI, Marc, VI and Global (collectively, the
"Acquisitions") each offer opportunities for long-term efficiencies in
operations that should positively affect future results of the combined
operations of the Company. However, until the Company is able to offset earnings
dilution resulting from the issuance of Common Stock in certain of the
Acquisitions with the positive effect of expected long-term efficiencies, the
Acquisitions may adversely affect the Company's financial performance in 1998
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.
In order to maintain and increase profitability, the combined companies
will need to successfully integrate and streamline overlapping functions. 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 the acquired company's
operations could have an adverse effect on the Company's results of operations
and financial condition.
Accounting Treatment. The AVCOM, PRG and LSI 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 have been carried forward at their book values to
the Company 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. The VI, Marc and
Global Acquisitions have been accounted for using the purchase method of
accounting.
VARIABILITY OF QUARTERLY RESULTS; ABSENCE OF PUBLIC MARKET FOR THE NOTES;
POSSIBLE VOLATILITY OF NOTE PRICE
The Company's earnings may be impacted by the timing of the implemention of
the Company's acquisition and development strategy. Additionally, 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
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Intervals and Vacation Points. This seasonality may cause significant variations
in quarterly operating results. If sales of Vacation Intervals and Vacation
Points 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 between the time
that the Company acquires an additional resort and the commencement of Vacation
Interval and Vacation Points 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 securities market analysts and investors, which could have an
adverse effect on the market value of the Notes. Numerous factors, including
announcements of fluctuations in the Company's or its competitors' operating
results and market conditions for hospitality and vacation ownership industry
securities in general, could have a significant impact on the future price of
the Notes. In addition, the securities 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 Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Private Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Exchange Notes have no
established trading market. The Initial Purchasers have advised the Company that
they intend to make a market in the Notes. The Initial Purchasers are not
obligated, however, to make a market in the Notes and any such market making may
be discontinued at any time at the sole discretion of any such Initial Purchaser
without notice. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act, and may be limited
during the Exchange Offer. Accordingly, there can be no assurance that an active
market for the Notes will develop or be sustained after the Offering or that the
market price of the Notes will not decline. If an active market for the Notes
fails to develop or be sustained, the trading price of such Notes could be
materially adversely affected. The Notes will not be listed on any securities
exchange or quoted on the Nasdaq National Market.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will contain, and the Subordinated Notes Indenture does
contain, certain covenants that, among other things, limit the ability of the
Company and its Restricted Subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends or make other distributions with respect to capital stock of
the Company and its Restricted Subsidiaries, (iii) create certain liens, (iv)
sell certain assets of the Company or its Restricted Subsidiaries and (v) enter
into certain mergers and consolidations. In addition, certain of the Company's
other Senior Indebtedness contain other and more restrictive covenants that,
among other things, restrict the following: the making of investments, loans,
and advances and the paying of dividends and other restricted payments; the
incurrence of additional indebtedness; the granting of liens, other than certain
permitted liens; mergers, consolidations and sales of all or a substantial part
of the Company's business or property; the sale of assets; and the making of
capital expenditures.
Certain of the Company's other Senior Indebtedness, including the Senior
Credit Facility, also require the Company to maintain certain financial ratios,
including interest coverage, leverage and fixed charge ratios. There can be no
assurance that these requirements will be met in the future. If they are not,
the holders of the indebtedness under certain of the Company's other Senior
Indebtedness may be entitled to declare such indebtedness immediately due and
payable.
RISKS OF DEVELOPMENT AND CONSTRUCTION ACTIVITIES
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
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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. The failure of the Company to successfully complete its
development, construction, redevelopment, conversion and expansion activities
may have a material adverse effect on the Company's results of operations.
In addition, the Company's construction activities typically are performed
by third-party contractors, and, accordingly, the timing, quality and completion
of which cannot be controlled by the Company. Nevertheless, construction claims
may be asserted against the Company for construction defects and such claims may
give rise to liabilities. New development activities, regardless of whether or
not they are ultimately successful, typically require a substantial portion of
management's time and attention. Development activities are also subject to
risks relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental permits
and authorizations, the ability of the Company to coordinate construction
activities with the process of obtaining such permits and authorizations, and
the ability of the Company to obtain the financing necessary to complete the
necessary acquisition, construction, and/or conversion work at the resorts. The
Company currently does not have the financing available to complete all of its
planned expansion as set forth in "Business -- Description of the Company's
Resort Locations."
RISKS ASSOCIATED WITH PARTNERSHIP INVESTMENTS
The Company owns, and may in the future acquire, certain resorts through
partnerships or other joint ventures. Property ownership through a partnership
or other joint venture involves additional risks, including requirements of
partner or venturer consents for major decisions (including approval of
budgets), capital contributions and entry into material agreements. If the
Company and its partner or venturer are unable to agree on major decisions,
either partner or venturer may elect to invoke a buy/sell right, which could
require the Company to either sell its interest in such partnership or venture
or to buy out the interest of its partner or venturer at a time when the Company
is not prepared to do so. In addition, under certain circumstances, the other
partner or venturer can require the Company to purchase such partner's or
venturer's interest or sell its interest to the other partner or venturer, and
in either case, such purchase or sale could have a material adverse effect on
the Company. If a dispute arises under these types of partnerships or joint
ventures, an adverse resolution could have a material adverse effect on the
operations of the Company. In addition, as a general partner or venturer, 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.
Additionally, as a matter of partnership law, if other partners or venturers
fail to honor their obligation (including as a result of insolvency), the
Company may incur losses in excess of its pro rata share of the partnership or
venture. See "Business -- Description of the Company's Resort Locations."
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 both prior to and following the
Acquisitions, has limited experience operating as a public company and no
experience operating a company-wide points-based vacation exchange system, any
of which could result in an adverse impact on the Company's operations and
future profitability. The Company conducts its management operations out of a
number of geographically diverse locations. As the Company grows and diversifies
into additional geographic markets, including new markets entered as a result of
the Acquisitions, no assurance can be given as to management's ability to
efficiently manage operations and control functions without a centrally located
management team.
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GENERAL ECONOMIC CONDITIONS; CONCENTRATION IN VACATION OWNERSHIP INDUSTRY
Any downturn in economic conditions or any price increases (e.g., airfares)
related to the travel and tourism industry could depress discretionary consumer
spending and have a material adverse effect on the Company's business. Any such
economic conditions, including recession, may also adversely affect the future
availability of attractive financing rates for the Company or its customers and
may materially adversely affect the Company's business. Furthermore, adverse
changes in general economic conditions may adversely affect the collectibility
of the Company's loans to vacation interest 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 purchasers of vacation interests at the
Company's resort locations 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
interest. The Company has entered into agreements with lenders for the financing
of customer receivables. As of December 31, 1997, the Company had approximately
$199 million of additional borrowing capacity available thereunder.
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 interests 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 interests. 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 inability to finance the Company's mortgages receivable on terms favorable
to the Company or at all could have a material adverse effect on the Company's
results of operations.
The Company has historically derived income from its financing activities.
At December 31, 1997, the Company's mortgage portfolio included approximately
37,000 promissory notes totaling approximately $355 million, with a stated
maturity of typically seven to ten years and a weighted average interest rate of
14.4% per annum. Additionally, at December 31, 1997, the weighted average
maturity of all outstanding consumer loans was approximately 8.4 years and the
total borrowings secured by promissory notes were approximately $91 million,
bearing a weighted average interest rate of 10.3%. However, because the
Company's borrowings bear interest at variable rates and the Company's loans to
buyers of vacation interests bear interest at fixed rates (which, as of December
31, 1997, equal 14.4% 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. The promissory notes are prepayable at any time without penalty. 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."
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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 fiscal year ending December 31, 1997, the Company was not engaging in any
interest rate hedging transactions. The nature and quantity of any future
hedging transactions for the variable rate debt will be determined by the
management of the Company based on various factors, including market conditions,
and there have been no limitations placed on management's use of certain
instruments in such hedging transactions. No assurance can be given that any
such hedging transactions will offset the risks of changes in interest rates, or
that the costs associated with hedging activities will not increase the
Company's operating costs.
The Company's international operations subject the Company to certain
risks, including increased exposure to currency exchange rate fluctuations.
Although the Company does not currently engage in foreign currency hedging
transactions, as it continues to expand its international operations, exposure
to losses in foreign currency transactions may increase or occur. The Company
may choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. However, there can be no assurance that
any currency hedging strategy would be successful in avoiding exchange-related
losses. In addition, there can be no assurance that such exchange-related losses
would not have a material adverse effect on the Company's future international
revenue and, consequently, on the Company's business, operating results and
financial condition.
RISKS ASSOCIATED WITH CUSTOMER LOAN DEFAULT
The Company bears the risk of defaults by buyers who financed the purchase
of their vacation interests through the Company. As of December 31, 1997,
approximately 4.6% of the Company's consumer loans were considered by the
Company to be delinquent (scheduled payment 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 scheduled payment is more than 120 days
past due) on an additional approximately 2.2% of its consumer loans. As of
December 31, 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 interest 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 interest and replace it with a performing mortgage. In
connection with the Company taking back any such vacation interest, 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 interest has been returned to the Company's
inventory for resale (commissions paid in connection with the sale of vacation
interests 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 interests, 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 interest purchasers, sales personnel and
independent contractors for the purchase price paid and for commissions paid,
respectively, no assurance can be given that the vacation interest purchase
price or any commissions will be fully or partially recovered in the event of a
buyer default under such financing arrangements. The Company is subject to the
costs and delays associated with the foreclosure process and no assurance can be
given that the value of the underlying vacation interests 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 or that the costs
of any such foreclosures will not have a material adverse effect on the
Company's results of operations. See "Business -- Customer Financing."
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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 interest ownership, condominiums, hotels and
motels. Many of the world's most recognized lodging, hospitality and
entertainment companies have begun to develop and sell vacation interests in
resort properties. Other major companies that now operate or are developing or
planning to develop vacation ownership 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. 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. See "Business -- Competition."
The Company also competes with companies with non-branded resorts such as
Central Florida Investments, Inc. ("CFI"), Vistana, Inc. ("Vistana"), Fairfield
Communities, Inc. ("Fairfield"), Silverleaf Resorts, Inc. ("Silverleaf"),
Trendwest Resorts, Inc. ("Trendwest") and ILX Incorporated ("ILX"). Under the
terms of an exclusive five year agreement, Promus and Vistana 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 will designate selected markets for development (which markets currently
include Kissimmee, Florida and Myrtle Beach, South Carolina, and in which
markets Vistana 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. 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. Promus has indicated
that it intends to expand its branded vacation ownership business only with the
Company and Vistana and that additional Embassy Vacation Resort properties to be
developed or acquired by the Company and licensed by Promus are under
discussion. See "Business -- Competition."
In 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.
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; RISK OF INABILITY TO QUALIFY
RESORTS
The attractiveness of vacation interest ownership is enhanced significantly
by the availability of exchange networks that allow vacation interest owners to
exchange in a particular year the occupancy right in their vacation interest for
an occupancy right in another participating network resort. According to ARDA,
the ability to exchange vacation interests was cited by buyers as a primary
reason for purchasing a vacation interest. Resort Condominiums International
("RCI") and Interval International ("II") provide broad-based vacation interest
exchange services and the Company's resort locations are currently qualified for
participation in either the RCI and II exchange networks.
If such exchange networks cease to function effectively, or if the
Company's resorts are no longer included in such exchange networks, the
Company's sales of vacation interests could be materially adversely affected.
See "Business -- Participation in Vacation Interest 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 Chairman, Chief Executive Officer and
President, respectively, as well as the abilities of James E. Noyes and Michael
A. Depatie, the Company's Chief Operating Officer and Chief Financial Officer,
respectively. The Company's success in Europe depends 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.
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The loss of the services of any of the Founders or Messrs. Noyes, Depatie,
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. Noyes, Depatie,
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 INTERESTS
It is possible that the vacation interests may be deemed to be a security
as defined in Section 2(1) of the Securities Act. If the vacation interests 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 interests under the Securities Act and does not intend to do so
in the future. If the sale of the vacation interests were found to have violated
the registration provisions of the Securities Act, purchasers of the vacation
interests would have the right to rescind their purchases of vacation interests.
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 description of its Vacation
Interval programs 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 INTERESTS; OTHER LAWS
The Company's marketing and sales of vacation interests and other
operations are subject to extensive regulation by the federal government and the
states and foreign jurisdictions in which its resorts are located and in which
vacation interests 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 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 interests. Laws in each state where
the Company sells vacation interests generally grant the purchaser of a vacation
interest the right to cancel a contract of purchase at any time within a period
ranging from three to fifteen calendar days following the earlier of the date
the contract was signed or the date the purchaser has received the last of the
documents required to be provided by the Company. Most states have other laws
which regulate the Company's activities, such as real estate licensure; seller's
of travel licensure; anti-fraud laws; telemarketing laws; price, gift and
sweepstakes laws; and labor laws. The Company believes that it is in material
compliance with all federal, state, local and foreign laws and regulations to
which it is currently subject. However, no assurance can be given that the cost
of qualifying under vacation ownership regulations in all jurisdictions in which
the Company desires to conduct sales will not be significant or that the Company
is in fact in compliance with all applicable federal, state, local and foreign
laws and regulations. Any failure to comply with applicable laws or regulations
could have a material adverse effect on the Company. See
"Business -- Governmental Regulation."
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 interests
assert claims with applicable regulatory agencies against vacation interest
salespersons for unlawful sales practices. Such claims could have adverse
implications for the Company in negative public relations and potential
litigation and regulatory
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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, local and foreign environmental, health,
safety and land use laws, ordinances, regulations and similar requirements
(collectively, "Environmental Laws"), the owner or operator of real property may
be liable for the costs of removal or remediation of certain hazardous or toxic
substances or wastes located on or in, or emanating from, such property, as well
as related costs of investigation and associated damages. Such laws may impose
liability without regard to whether the owner knew of, or caused, the presence
of such hazardous or toxic substances or wastes. The presence of such substances
or wastes, or the failure to properly remediate them, may adversely affect an
owner's ability to sell or lease a property or to borrow using such real
property as collateral. In addition, certain Environmental Laws impose liability
on prior owners or operators of property to the extent that hazardous or toxic
substances or wastes were present during or resulted from such owner's or
operator's prior ownership or operation. Transfer of the property may not
relieve an owner of such liability. Thus, a company could incur liability for
contamination at or from previously owned properties. Other Environmental Laws
may 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, or impose specific requirements pertaining to the
removal of underground storage tanks. Noncompliance with these and other
Environmental Laws could adversely impact operations at a property. Further, the
owner or operator of a site may be subject to common law claims by third parties
based on damages resulting from violations of Environmental Laws or from
contamination associated with the site. The Company is not aware of
environmental liability that would have a material adverse effect on the
Company's business, assets or results of operations, nor has the Company been
notified by any governmental authority or any third party, and is not otherwise
aware, of any material noncompliance, liability or other claim relating to
hazardous or toxic substance or petroleum products in connection with any of its
present or former properties. The Company believes that it is in compliance in
all material respects with all Environmental Laws. No assurance, however, can be
given that the Company is aware of all environmental liabilities or that no
prior owner, operator or third party caused a material environmental condition
at any such property not currently known to the Company. See
"Business -- Governmental Regulation -- Environmental Matters."
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO DISABLED
PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons on a variety of public accommodations and
facilities. These requirements did not become effective until after January 1,
1991. Although the Company believes that its 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 with respect to access by disabled persons. If a homeowners'
association at a resort was required to make significant improvements as a
result of non-compliance with the ADA, vacation interest 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, Mexico and the Caribbean (including the St. John resort which was
damaged by Hurricane
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Marilyn in 1995) may be subject to hurricanes and damaged as a result thereof.
The Company's resorts located in California and Hawaii may be subject to damage
resulting from earthquakes. The Company currently maintains insurance coverage
which, in management's opinion, is at least as comprehensive as the coverage
maintained by other prudent entities in the Company's line of business. However,
there are certain types of losses (such as losses arising from acts of war and
civil unrest) that are not generally insured because they are either uninsurable
or not economically insurable and for which the Company does not have insurance
coverage. Should an uninsured loss or a loss in excess of insured limits occur,
the Company could lose its capital invested in a resort, as well as the
anticipated future revenues from such resort and would continue to be obligated
on any mortgage indebtedness or other obligations related to the property. Any
such loss could have a material adverse effect on the Company.
RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company expects that international operations will account for an
increasingly significant percentage of the Company's operations. As a result,
the Company is subject to a number of risks, including, among other things,
difficulties relating to administering its business globally, managing foreign
operations, currency fluctuations, restrictions against the repatriation of
earnings, export requirements and restrictions and multiple and possibly
overlapping tax structures. These risks could have a material adverse effect on
the Company's business, results of operations and financial condition.
Additionally, changes in inflation, interest rates, taxation, regulation or
other social, political, economic or diplomatic developments affecting the
countries in which the Company has (or intends to have) international operations
could have a material adverse effect on the Company's business, operating
results and financial condition.
POTENTIAL CONFLICTS OF INTEREST
Because affiliates of Messrs. Kaneko and Kenninger have operations in the
lodging industry other than those with respect to the development and operation
of vacation ownership resorts, potential conflicts of interest exist. Affiliates
of KOAR Group, Inc. ("KOAR"), a Los Angeles based real estate acquisition and
development company and predecessor of the Company which is owned by Messrs.
Kaneko and Kenninger, have developed and currently act as the managing general
partner of partnerships which own hotels that are franchised as Embassy Suites
hotels (one of which, the Embassy Suites Lake Tahoe, is located in a market
served by the Company) and a residential condominium project overlooking the
ocean in Long Beach, California (a market in which the Company may operate in
the future). Messrs. Kaneko and Kenninger will continue to devote a portion of
their time to KOAR's hotel and other businesses and to meeting their duties and
responsibilities to investors in such entities. In addition, the Founders will
continue to devote a portion of their time to certain funds, limited liability
companies or partnerships with investments in commercial or residential real
estate developments that do not present a prospect for conversion to vacation
ownership or resort related use. The Company's Board of Directors (including the
Company's independent directors) has determined that the Company does not
presently intend to invest in such commercial or residential real estate
developments that do not present a prospect for conversion to vacation ownership
or resort related use.
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 and the Founders
are prohibited from actively engaging in the vacation ownership business outside
of the Company.
RISK OF TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY
The Company sells vacation interests at its resort locations 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
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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.
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next few years to address
this issue. The Company has several information system improvement initiatives
under way to determine the full scope and related costs to insure that the
Company's systems continue to meet its needs and those of its customers. These
initiatives include upgrading and replacing some computer systems and the
conversion of others to be Year 2000 compliant. Although final cost estimates
have yet to be determined, it is anticipated that these Year 2000 costs will
result in an increase to Company expenses during 1998 and 1999. Suppliers,
customers, mortgage receivable servicers and creditors of the Company also face
Year 2000 issues. Their failure to successfully address the Year 2000 issue
could have a material adverse effect on the Company's business or results of
operations.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on April 15, 1998 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes (i) to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A and (ii) in offshore transactions in reliance
on Regulation S. As a condition to the sale of the Private Notes, the Company
and the Initial Purchasers entered into the Registration Rights Agreement on
April 15, 1998. Pursuant to the Registration Rights Agreement, the Company
agreed that, unless the Exchange Offer is not permitted by applicable law or
Commission policy, it would (i) file with the Commission a Registration
Statement under the Securities Act with respect to the Exchange Notes within 75
days after the Issue Date (as defined herein), (ii) cause such Registration
Statement to become effective under the Securities Act not later than 150 days
after the Issue Date, (iii) promptly commence the Exchange Offer upon the
effectiveness of the Registration Statement and (iv) keep the Exchange Offer
open for not less than 30 days (or longer if required by applicable law) after
the date notice thereof is mailed to Holders of the Private Notes. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Registration Statement is
intended to satisfy certain of the Company's obligations under the Registration
Rights Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for
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<PAGE> 30
the purpose of distributing or participating in the distribution of the Exchange
Notes or is a broker-dealer, such holder cannot rely on the position of the
staff of the Commission enumerated in certain no-action letters issued to third
parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-dealer
that receives Exchange Notes for its own account must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Private
Notes where such Private Notes were acquired by such broker-dealer as a result
of market-making or other trading activities; provided such Private Notes do not
constitute any portion of an unsold allotment from the original sale of the
Private Notes. To the extent necessary to ensure that this Prospectus is
available for sales of Exchange Notes by broker-dealers, and notice is given by
such broker-dealers to the Company of such fact within 30 days of the effective
date of the Registration Statement, the Company has agreed to use its best
efforts to keep the Registration Statement continuously effective, supplemented
and amended as required by the Registration Rights Agreement, the Securities Act
and the policies, rules and regulations of the Commission as announced from time
to time, for a period of 180 days from the date the Exchange Offer is
consummated, or such shorter period as will terminate when all Private Notes
covered by the Registration Statement have been sold. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral multiples
of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to any of the rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $140 million in aggregate principal
amount of the Private Notes are outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company (the "Depositary"). Only a
registered holder of the Private Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Private Notes entitled to participate in
the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to
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the exchange of Private Notes pursuant to the Exchange Offer. The Company has
agreed to pay all expenses incident to the Exchange Offer (including the
expenses of one counsel for the holders of the Private Notes, up to a maximum of
$35,000), other than commissions or concessions of any brokers or dealers and
certain taxes described below under "-- Fees and Expenses," and will indemnify
the holders of the Private Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act. See "-- Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on June
11, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "-- Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 9 1/4% per annum.
Interest on the Exchange Notes will be payable semi-annually on each May 15 and
November 15, commencing November 15, 1998. Holders of Exchange Notes will
receive interest on November 15, 1998 from the date of initial issuance of the
Exchange Notes, plus an amount equal to the accrued interest on the Private
Notes from the date of the last interest payment thereon or if no interest has
been paid, from the date of original issuance of the Private Notes (April 15,
1998) to the date of exchange thereof for Exchange Notes. Holders of Private
Notes that are accepted for exchange will be deemed to have waived the right to
receive any interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to
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<PAGE> 32
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all
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parties. Unless waived, any defects or irregularities in connection with tenders
of Private Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Private Notes, neither the Company, the Exchange Agent nor
any other person shall incur any liability for failure to give such
notification. Tenders of Private Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "-- Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder is
not engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the Exchange
Notes, (iii) such holder acknowledges and agrees that any person who is a
broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purposes of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (iv) such holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Private Notes acquired by
such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (v) such holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the holder is not a broker-dealer,
such holder will be required to acknowledge in the Letter of Transmittal that
such holder is not engaged in, and does not intend to engage in, a distribution
of Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for such holder's own account in exchange for Private Notes, such holder
will be required to acknowledge in the Letter of Transmittal that the Private
Notes to be exchanged for new securities were acquired by it as a result of
market-making activities or other trading activities and that such holder will
deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, such holder will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or
30
<PAGE> 34
facsimile thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "-- Exchange Agent" on or prior to
the Expiration Date or pursuant to the guaranteed delivery procedures described
below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Private
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer -- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
31
<PAGE> 35
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Private Notes (see "-- Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Private Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to use its
reasonable best efforts to keep the Registration Statement continuously
effective during the Exchange Offer and (iii) to provide copies of the latest
version of the Prospectus to broker-dealers upon their request during the
Exchange Offer.
SHELF REGISTRATION
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 45 days after the date on
which the Registration Statement of which this Prospectus is a part is declared
effective by the Commission, or, if any Initial Purchaser so requests with
respect to Private Notes not eligible to be exchanged for Exchange Notes in the
Exchange Offer, or if any Holder of Private Notes (other than an Initial
Purchaser) is not eligible to participate in the Exchange Offer, or in the case
of any Initial Purchaser that participates in but does not receive freely
tradeable (except for certain prospectus delivery requirements) Exchange Notes
in exchange for Private Notes constituting an unsold allotment from the original
sale of the Private Notes in the Exchange Offer, the Company will at its cost,
(a) as promptly as practicable (but in no event more than 75 days after so
required or requested), file a shelf registration statement covering resales of
the Notes (a "Shelf Registration Statement"), (b) use its best efforts to cause
such Shelf Registration Statements to be declared effective under the Securities
Act within the time period specified in the Registration Rights Agreement and
(c) use its best efforts to keep such Shelf Registration Statement effective
until one year after its effective date (or shorter period that will terminate
when all of the applicable Notes have been sold thereunder). The Company will,
in the event of the filing of a Shelf Registration Statement, provide to each
holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
Notes. A holder that sells its Notes pursuant to a Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations).
LIQUIDATED DAMAGES
If (i) within 75 days after the Issue Date, the Registration Statement has
not been filed with the Commission, or the Shelf Registration Statement has not
been filed with the Commission within 75 days after such obligation arises; (ii)
within 150 days after the Issue Date, the Registration Statement has not been
declared effective; (iii) within 45 days after the date on which the
Registration Statement is declared effective
32
<PAGE> 36
by the Commission, the Exchange Offer has not been consummated, or within the
time period specified in the Registration Rights Agreement, the Shelf
Registration Statement has not been declared effective; or (iv) after either the
Registration Statement or the Shelf Registration Statement has been declared
effective, such Registration Statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iv), a "Registration Default"), then the Company will pay liquidated
damages ("Liquidated Damages") from and including the date on which any such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. Liquidated Damages will accrue at a rate
of 0.25% per annum during the 90-day period immediately following the occurrence
of any Registration Default and shall increase by 0.25% per annum at the end of
each subsequent 90-day period, but in no event shall such rate exceed 1.00% per
annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which has been filed as an exhibit to the registration statement of which
this Prospectus is a part.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
By Hand: By Registered or Certified Mail: By Overnight Courier:
<S> <C> <C>
Northwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
</TABLE>
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$75,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
33
<PAGE> 37
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction. See "Risk Factors -- Failure to Exchange
Private Notes."
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
34
<PAGE> 38
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Noes offered hereby. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, the Company will receive in exchange Private
Notes in like principal amount, the terms of which are identical to the Exchange
Notes. The issuance of the Exchange Notes in exchange for the surrender of the
Private Notes will not result in any increase in the indebtedness of the
Company.
CONSOLIDATED CAPITALIZATION
The following table sets forth, as of December 31, 1997, the total
consolidated capitalization of the Company. The unaudited as adjusted
information gives effect to the Offering and the application of the net proceeds
therefrom (excluding the repayment of approximately $111 million due under the
Senior Credit Facility, which was incurred subsequent to December 31, 1997).
This table should be read in conjunction with the historical financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. See "Selected Financial Data."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------
(DOLLARS IN THOUSANDS)
AS ADJUSTED
ACTUAL THE OFFERING FOR THE OFFERING
-------- ------------ ----------------
<S> <C> <C> <C>
Cash and cash equivalents(a)............................. $ 47,972 $119,669 $167,641
======== ======== ========
Debt:
Notes payable(b)....................................... $ 97,208 $(15,531) $ 81,677
9 1/4% Senior Notes due 2006........................... -- 140,000 140,000
9 3/4% Senior Subordinated Notes due 2007.............. 200,000 -- 200,000
5 3/4% Convertible Notes due 2007...................... 138,000 -- 138,000
-------- -------- --------
Total debt(a).................................. 435,208 124,469 559,677
-------- -------- --------
Stockholders' equity..................................... 207,910 -- 207,910
-------- -------- --------
Total capitalization................................... $643,118 $124,469 $767,587
======== ======== ========
</TABLE>
- ------------------------------
(a) Approximately $111 million of the net proceeds from the Offering were used
to retire indebtedness under the Senior Credit Facility which was
outstanding as of April 15, 1998. The amounts outstanding under the Senior
Credit Facility were incurred subsequent to the year ended December 31, 1997
primarily to finance the MMG Acquisition and the acquisition of resort
inventory and for other working capital purposes. As of May 1, 1998, no
amounts were outstanding under such facility.
(b) Includes notes collateralized by mortgages receivable.
RATIO OF EARNINGS TO FIXED CHARGES
The following are the consolidated ratios of earnings to fixed charges for
the Company for each of the years ended December 31, 1997, 1996, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
2.3 1.1 2.5 2.4 2.4
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing
earnings before income tax, plus fixed charges (excluding capitalized interest)
and amortization of previously capitalized interest by fixed charges. Fixed
charges consist of interest and other finance expenses and capitalized interest.
35
<PAGE> 39
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data have been derived by the
application of pro forma adjustments to the Company's historical financial data
included elsewhere herein. The unaudited pro forma statements of operations data
for the year ended December 31, 1997, give effect, individually and in the
aggregate, to the Concurrent Offerings, the Senior Subordinated Note Offering
and the Offering, in each case after giving effect to the application of the net
proceeds therefrom (excluding the repayment of approximately $111 million due
under the Senior Credit Facility, which was incurred subsequent to December 31,
1997) as if each had occurred at the beginning of the period. The Company's
actual statement of operations data reflects the combined operations of the
Company, AVCOM, PRG and LSI using pooling-of-interests accounting for business
combinations for the period presented. The Company's actual statements of
operations data also give effect to the Marc, the VI and the Global Acquisitions
since their respective acquisition dates using purchase accounting for business
combinations. The unaudited pro forma data do not purport to represent what the
consolidated results of operations or consolidated financial position of the
Company would have been had the Offering, the Concurrent Offerings and the
Senior Subordinated Note Offering and the application of the net proceeds
therefrom actually occurred at the beginning of the relevant period, and do not
purport to project the consolidated financial position or the consolidated
results of operations of the Company for the current year or any future date or
period. The summary financial data set forth below should be read in conjunction
with "Use of Proceeds," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
CONCURRENT OFFERINGS/
SR. SUB. NOTE THE
ACTUAL OFFERING(A) OFFERING(B) PRO FORMA
-------- --------------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Vacation Interval and Vacation Point sales...... $281,063 $281,063
Interest income................................. 42,856 42,856
Other income.................................... 13,774 13,774
-------- -------- -------- --------
Total revenues........................... 337,693 -- -- 337,693
-------- -------- -------- --------
Costs and operating expenses:
Vacation Interval and Vacation Point cost of
sales 71,437 71,437
Advertising, sales, and marketing............... 126,739 126,739
Loan portfolio:
Interest expense-treasury..................... 13,032 $ (2,201) $ (1,606)(c) 9,225
Other expenses................................ 5,522 5,522
Provision for doubtful accounts............... 8,579 8,579
General and administrative...................... 42,254 42,254
Depreciation and amortization................... 6,499 6,499
Merger-related costs............................ 9,973 9,973
-------- -------- -------- --------
Total costs and operating expenses....... 284,035 (2,201) (1,606) 280,228
-------- -------- -------- --------
Income from operations.......................... 53,658 2,201 1,606 57,465
Interest expense-other, net..................... 9,394 12,610 7,267 29,271
Equity loss on investment in joint venture...... 639 639
Minority interest in income of consolidated
limited partnership........................... 181 181
-------- -------- -------- --------
Income before provision (benefit) for
income taxes and extraordinary item.... 43,444 (10,409) (5,661) 27,374
-------- -------- -------- --------
Provision (benefit) for income taxes from
continuing operations......................... 17,196 (4,060) (2,208) 10,928
Provision for deferred income taxes resulting
from the cumulative effect of previously
non-taxable acquired entities(d).............. 5,960 (5,960)(d)
-------- -------- -------- --------
Total provision (benefit) for income taxes...... 23,156 (10,020) (2,208) 10,928
-------- -------- -------- --------
Income before extraordinary item......... 20,288 (389) (3,453) 16,446
Extraordinary item, net of income taxes......... 766 (766)(d)
-------- -------- -------- --------
Net income............................... $ 19,522 $ 377 $ (3,453) $ 16,446
======== ======== ======== ========
OTHER DATA:
EBITDA(e)....................................... $ 85,424 $ 85,424
Net interest expense............................ 28,698 43,576(f)
</TABLE>
36
<PAGE> 40
- ---------------
(a) Reflects the Concurrent Offerings and the Senior Subordinated Note Offering
and the application of the proceeds therefrom as if such transactions had
occurred on January 1, 1997.
(b) Gives effect to the issuance of the Notes and the application of the net
proceeds therefrom (excluding the repayment of approximately $103 million
due under the Senior Credit Facility, which was incurred subsequent to
December 31, 1997) as if such transactions had occurred on January 1, 1997.
See footnote (f) below.
(c) Reflects the elimination or reduction of interest expense due to the
retirement of $15.5 million of indebtedness as if such transactions had
occurred on January 1, 1997.
(d) Reflects the elimination of a non-recurring provision for deferred income
taxes resulting from the cumulative effect of previously non-taxable
acquired entities and the extraordinary loss from the early extinguishment
of debt.
(e) EBITDA represents net income before capitalized interest expense included in
Vacation Interval and Vacation Point cost of sales, interest
expense-treasury, interest expense-other, income taxes, merger-related
costs, depreciation and amortization and extraordinary item, net of income
tax. EBITDA is presented because it is a widely accepted financial indicator
of a company's ability to service and/or incur indebtedness. However, EBITDA
should not be construed as a substitute for income from operations, net
income or cash flows from operating activities in analyzing the Company's
operating performance, financial position and cash flows. The EBITDA measure
presented herein may not be comparable to EBITDA as presented by other
companies. The following table reconciles actual and pro forma EBITDA to net
income.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-------------------------
(ACTUAL) (PRO FORMA)
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net income........................................... $19,522 $16,446
Capitalized interest expense included in Vacation
Interval and Vacation Point cost of sales.......... 3,082 3,082
Interest expense -- treasury......................... 13,032 9,225
Interest expense -- other............................ 9,394 29,271
Income taxes......................................... 23,156.. 10,928
Merger-related costs................................. 9,973(g) 9,973
Depreciation and amortization........................ 6,499 6,499
Extraordinary item, net of tax....................... 766 --
------- -------
EBITDA............................................. $85,424 $85,424
======= =======
</TABLE>
(f) Net interest expense is defined as interest expense plus capitalized
interest less amortization of debt issuance costs. The 1997 pro forma amount
gives effect to interest income of approximately $6.3 million (based on an
assumed investment rate of 5.25% per annum) on the assumed investment of the
net excess proceeds from the Offering of approximately $120 million,
including approximately $111 million that the Company applied to the
repayment of indebtedness which was outstanding under the Senior Credit
Facility as of April 15, 1998 and that was incurred subsequent to December
31, 1997.
(g) Merger-related costs include expenses related to fees paid to financial
advisers, legal fees, and other transaction expenses in connection with the
AVCOM, PRG and LSI Acquisitions.
37
<PAGE> 41
SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial data of the
Company. For all of the periods presented, the financial data presented below
gives effect to the AVCOM, PRG and LSI Acquisitions by combining the historical
information of AVCOM, PRG, LSI and the Company and restating the historical
financial data of the Company using the pooling-of-interests method of
accounting.
Prior to its acquisition by the Company on February 7, 1997, AVCOM
recognized a net loss of $12.4 million for the year ended December 31, 1996. As
a result of the pooling-of-interests accounting treatment, this net loss has
been reflected in the Company's consolidated financial statements for the year
ended December 31, 1996, reducing the Company's 1996 reported consolidated net
income. In addition, as a result of the Company's 1997 acquisitions, the Company
incurred $10.0 million of non-recurring merger-related costs, reducing the
Company's 1997 reported consolidated net income.
The financial data presented below includes the effect of the Consolidation
Transactions and the Initial Public Offering, both of which were consummated on
August 20, 1996. The following financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements for the Company and the
notes thereto, each of which are contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
----------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Vacation Interval and Vacation Point
sales................................. $68,867 $116,356 $139,426 $182,300 $281,063
Interest income.......................... 12,770 15,965 20,339 25,415 42,856
Other income............................. 1,110 1,547 8,553 12,132 13,774
------- -------- -------- -------- --------
Total revenues................... 82,747 133,868 168,318 219,847 337,693
------- -------- -------- -------- --------
Costs and operating expenses:
Vacation Interval and Vacation Point cost
of sales.............................. 18,548 33,082 39,810 48,218 71,437
Advertising, sales and marketing......... 32,711 54,098 62,258 89,040 126,739
Loan portfolio:
Interest expense -- treasury.......... 7,435 8,224 10,077 13,482 13,032
Other expenses........................ 840 1,466 2,034 4,523 5,522
Provision for doubtful accounts(a).... 1,703 2,045 3,666 8,311 8,579
General and administrative(a)............ 6,852 12,629 19,263 37,436 42,254
Resort property valuation allowance(a)... -- -- -- 2,620 --
Depreciation and amortization(a)......... 616 1,196 2,514 5,027 6,499
Merger-related costs(a)(b)............... -- -- -- -- 9,973
------- -------- -------- -------- --------
Total costs and operating
expenses....................... 68,705 112,740 139,622 208,657 284,035
------- -------- -------- -------- --------
Income from operations................... 14,042 21,128 28,696 11,190 53,658
Interest expense -- other, net........... 519 1,517 1,728 3,763 9,394
Equity loss on investment in joint
venture............................... -- 271 1,649 299 639
Minority interest in income of
consolidated limited partnership...... -- -- -- 199 181
------- -------- -------- -------- --------
Income before provision (benefit)
for income taxes and
extraordinary item............. 13,523 19,340 25,319 6,929 43,444
------- -------- -------- -------- --------
Provision (benefit) for income taxes from
continuing operations................. 3,064 2,768 4,020 (4,105) 17,196
Provision for deferred income taxes
resulting from the cumulative effect
of previously non-taxable acquired
entities.............................. -- -- -- -- 5,960
------- -------- -------- -------- --------
Total provision (benefit) for income
taxes................................. 3,064 2,768 4,020 (4,105) 23,156
------- -------- -------- -------- --------
Income before extraordinary item...... 10,459 16,572 21,299 11,034 20,288
Extraordinary item, net of tax........... -- -- -- -- 766
------- -------- -------- -------- --------
Net income....................... $10,459 $ 16,572 $ 21,299 $ 11,034 $ 19,522
======= ======== ======== ======== ========
Pro forma net income(c).................. $ 8,249 $ 11,954 $ 15,310 $ 4,380 $ 19,522
</TABLE>
38
<PAGE> 42
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICES)
<S> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED FOR ALL PERIODS):
EBITDA(d)................................. $ 22,622 $ 31,553 $ 41,553 $ 44,622 $ 85,424
Ratio of earnings to fixed charges(e)..... 2.4 2.4 2.5 1.1 2.3
Number of resorts at period end........... 5 16 20 31 70
Number of Vacation Intervals sold......... 5,917 10,695 10,024 11,946 17,271
Number of Vacation Intervals in inventory
at period end.......................... 2,830 6,915 23,439 30,399 29,168
Average price of Vacation Intervals
sold................................... $ 11,639 $ 10,078 $ 12,298 $ 13,146 $ 13,885
Number of Vacation Points in inventory at
period end............................. -- 233,802 205,943 291,674 599,554(f)
Number of Vacation Points sold............ -- 65,325 102,270 132,878 194,055(g)
Average price of Vacation Points sold..... $ -- $ 198 $ 181 $ 186 $ 213(h)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents, including
escrow................................. $ 16,451 $ 17,015 $ 22,779 $ 22,469 $ 47,972
Mortgages receivable, net................. 78,079 102,470 147,405 215,518 331,735
Total assets.............................. 136,607 210,218 295,771 445,884 761,145
Total debt................................ 87,839 123,009 177,032 236,122 435,208
Stockholders' equity...................... 34,232 61,187 75,448 126,425 207,910
</TABLE>
- ---------------
(a) Non-recurring costs for the year ended December 31, 1997, are merger costs
relating to the AVCOM, PRG and LSI Acquisitions. Non-recurring costs for the
year ended December 31, 1996 include costs incurred at AVCOM for (i) an
increase in the provision for doubtful accounts of $2.0 million, (ii) $9.1
million in severance costs, lease cancellations, litigation reserves and
other integration costs and a reserve for losses associated with certain
property management and related contracts, (iii) a $2.6 million write-down
of certain property to estimated fair market value and (iv) a $0.7 million
charge relating to amortization of start-up costs over a period of one year.
(b) Merger-related costs include expenses related to fees paid to financial
advisors, legal fees, and other transaction expenses in connection with the
AVCOM, PRG and LSI Acquisitions.
(c) Reflects the effect on the historical statement of operations data, assuming
the combined Company had been treated as a C corporation rather than as
individual limited partnerships and limited liability companies for federal
income tax purposes, and reflects actual net income for December 31, 1997.
(d) EBITDA represents net income before interest expense-treasury, interest
expense-other, capitalized interest expense included in Vacation Interval
and Vacation Point cost of sales, income taxes, non-recurring costs,
depreciation and amortization and extraordinary item, net of tax. EBITDA is
presented because it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. However, EBITDA should not be
construed as a substitute for income from operations, net income or cash
flows from operating activities in analyzing the Company's operating
performance, financial position and cash flows. The EBITDA measure presented
herein may not be comparable to EBITDA as presented by other companies. The
following table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income................................ $ 10,459 $ 16,572 $ 21,299 $ 11,034 $ 19,522
Interest expense-treasury................. 7,435 8,224 10,077 13,482 13,032
Interest expense-other.................... 519 1,517 1,728 3,763 9,394
Capitalized interest expense included in
Vacation Interval and Vacation Point
cost of sales........................... 529 1,276 1,915 1,718 3,082
Income taxes (benefit).................... 3,064 2,768 4,020 (4,105) 23,156
Non-recurring costs....................... -- -- -- 14,381(a) 9,973(a)
Depreciation and amortization............. 616 1,196 2,514 4,349(a) 6,499
Extraordinary item, net of tax............ -- -- -- -- 766
-------- -------- -------- -------- --------
EBITDA........................... $ 22,622 $ 31,553 $ 41,553 $ 44,622 $ 85,424
======== ======== ======== ======== ========
</TABLE>
39
<PAGE> 43
(e) The ratio of earnings to fixed charges has been computed by dividing
earnings before income tax, plus fixed charges (excluding capitalized
interest) and amortization of previously capitalized interest by fixed
charges. Fixed charges consist of interest and other finance expenses and
capitalized interest.
(f) Includes 461,473 Vacation Points in Grand Vacation Club and 138,081 Vacation
Points in the Vacation Time Share Program (the "VTS Program"). Vacation
Points assumed through the Global Acquisition have been converted to the
Grand Vacation Club at a rate of ten to one.
(g) Includes 180,426 Vacation Points sold by the Grand Vacation Club and 13,629
Vacation Points sold by the VTS Program. Vacation Points assumed through the
Global Acquisition have been converted into the Grand Vacation Club at a
rate of ten to one.
(h) Calculated as the weighted average price per Vacation Point of Grand
Vacation Club ($220 per Vacation Point) and the VTS Program ($119 per
Vacation Point). Vacation Points assumed through the Global Acquisition have
been converted to the Grand Vacation Club at a rate of ten to one.
40
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the notes
thereto and the other financial data included elsewhere in this Prospectus.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the
Company's corporate and partnership predecessors and wholly-owned subsidiaries
and affiliates including AVCOM, PRG, LSI and their subsidiaries. The AVCOM, PRG
and LSI Acquisitions were accounted for using pooling-of-interests accounting
treatment for business combinations. Under such accounting treatment, the
results of operations are restated to include the operations of each acquired
entity of the years ended December 31, 1997, 1996 and 1995. The following
discussion also includes the results of operations for Marc, VI and the Global
Group. The Marc, VI and Global Acquisitions were each accounted for using the
purchase method of accounting for the business combinations.
Prior to its acquisition by the Company on February 7, 1997, AVCOM
recognized a net loss of $12.4 million for the year ended December 31, 1996. As
a result of applying pooling-of-interests accounting treatment to the AVCOM
Acquisition, this net loss has been reflected in the Company's consolidated
financial statements for the year ended December 31, 1996, reducing the
Company's 1996 reported consolidated net income. In addition, as a result of the
Company's 1997 acquisitions, the Company incurred $10.0 million of non-recurring
merger-related costs, reducing the Company's 1997 reported consolidated net
income. Therefore, to allow for a more meaningful comparison of the 1997 and
1996 financial results and management's discussion and analysis of such
financial results, reported total revenues and operating expenses have been
adjusted for non-recurring charges resulting from the AVCOM, PRG and the LSI
Acquisitions. The following table details the adjustments to reported total
revenues and costs and operating expenses for such non-recurring charges and
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Total reported revenues..................................... $168.3 $219.8 $337.7
Other income(a)............................................. -- (1.7) --
------ ------ ------
Adjusted total revenues........................... $168.3 $218.1 $337.7
====== ====== ======
Total reported costs and expenses........................... $139.6 $208.7 $284.0
Provision for doubtful accounts(b).......................... -- (2.0) --
General and administrative expenses(b)...................... -- (9.1) --
Resort property valuation allowance(b)...................... -- (2.6) --
Merger-related costs(c)..................................... -- -- (10.0)
Amortization of start-up costs(b)........................... -- (0.7) --
------ ------ ------
Adjusted total costs and expenses................. $139.6 $194.3 $274.0
====== ====== ======
Adjusted operating income......................... $ 28.7 $ 23.8 $ 63.7
====== ====== ======
</TABLE>
- ---------------
(a) For the year ended December 31, 1996, the Company recognized $1.7 million of
other income as the result of the settlement of certain receivables from the
former owners of the St. Maarten Resorts.
(b) As the result of the AVCOM Acquisition, the Company recognized the following
non-recurring charges for the year ended December 31, 1996: (i) $2.0 million
in the provision for doubtful accounts; (ii) $9.1 million in general and
administrative expenses for severance costs, lease cancellations, litigation
reserves, and a reserve for losses associated with certain property
management and related expenses;
41
<PAGE> 45
(iii) $2.6 million in resort property valuation allowance for the write-down
of certain property to fair market value; and (iv) $0.7 million in
depreciation and amortization for the amortization of startup costs over a
period of one year.
(c) For the year ended December 31, 1997, the Company recognized $10.0 million
in non-recurring merger costs for the AVCOM, PRG and LSI Acquisitions. These
charges include investment banking, legal, accounting and other professional
fees.
The following table sets forth certain operating information, as adjusted
for the non-recurring charges and revenues described above.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Vacation Interval and Vacation Point sales.................. 82.8% 83.6% 83.2%
Interest income............................................. 12.1% 11.6% 12.7%
Other income................................................ 5.1% 4.8% 4.1%
------- ------- -------
Total revenues.............................................. 100.0% 100.0% 100.0%
AS A PERCENTAGE OF VACATION INTERVAL AND VACATION POINT
SALES:
Vacation Interval and Vacation Point cost of sales.......... 28.6% 26.4% 25.4%
Advertising, sales and marketing............................ 44.7% 48.8% 45.1%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative.................................. 11.4% 13.0% 12.5%
SELECTED OPERATING DATA:
Vacation Intervals sold..................................... 10,024 11,946 17,271
Vacation Points sold........................................ 102,270 132,878 194,055(a)
Average sales price per Vacation Interval................... $12,298 $13,146 $13,885
Average sales price per Vacation Point...................... $ 181 $ 186 $ 213(b)
Number of Vacation Intervals in inventory at end period..... 23,439 30,399 29,168
Number of Vacation Points in inventory at end period........ 205,943 291,674 599,554(c)
Number of resorts at period end(d).......................... 20 31 70
</TABLE>
- ---------------
(a) Includes 180,426 Vacation Points sold by the Grand Vacation Club and 13,629
Vacation Points sold by the VTS Program. Vacation Points assumed through the
Global Acquisition have been converted into the Grand Vacation Club at a
rate of ten to one.
(b) Calculated as the weighted average price per Vacation Point of Grand
Vacation Club ($220 per Vacation Point) and the VTS Program ($119 per
Vacation Point). Vacation Points assumed through the Global Acquisition have
been converted to the Grand Vacation Club at a rate of ten to one.
(c) Includes 461,473 Vacation Points in Grand Vacation Club and 138,081 Vacation
Points in the VTS Program. Vacation Points assumed through the Global
Acquisition have been converted to the Grand Vacation Club at a rate of ten
to one.
(d) Includes resort locations of AVCOM, PRG and LSI acquired by the Company in
1997 and accounted for by the pooling-of-interests method.
COMPARISON OF 1996 TO 1997
The following discussion of financial results adjusts the reported
statement of operations data for the non-recurring charges incurred during the
years ended December 31, 1997 and 1996. For the year ended December 31, 1997,
the Company recognized $10.0 million in non-recurring merger-related expenses
for the acquisition by merger of AVCOM, PRG and LSI and a $6.0 million charge to
record deferred taxes related to cumulative temporary differences between
financial and tax reporting for entities acquired in the PRG Acquisition that
were previously taxed as partnerships at the partner level. For the year ended
December 31, 1996, the Company incurred the following non-recurring charges
related to the AVCOM Acquisition:
42
<PAGE> 46
(i) general and administrative expense increased by $9.1 million for severance
costs, lease cancellations, litigation reserves, reserves for losses associated
with certain property management and related contracts; (ii) provision for
doubtful accounts increased by $2.0 million; (iii) resort property valuation
allowance increased by $2.6 million to write down certain property to market
value for projects initiated by AVCOM which were subsequently abandoned; and
(iv) depreciation and amortization increased by $0.7 million related to the
amortization of startup costs over a period of one year. Also, in 1996, the
Company recognized $1.7 million of other income as the result of a settlement of
certain receivables from the former owners of the St. Maarten resorts.
In 1997, total reported revenues were $337.7 million, compared with
adjusted total revenues of $218.1 million in 1996, an increase of $119.6
million, or 55%. This increase was due primarily to a 53% increase in Vacation
Interval sales, a 66% increase in Vacation Points sales, and a 69% increase in
interest income. The growth in Vacation Interval sales was due to both an
increase in the number of Vacation Intervals sold to 17,271 in 1997 from 11,946
in 1996, an increase of 45%, and an increase in the average price of Vacation
Intervals sold to $13,885 in 1997 from $13,146 in 1996, a 6% increase. The
average sales price will change from period to period depending upon the mix of
resorts in sales and the types of intervals sold.
Vacation Points sales during 1997 increased 66% to $41.1 million from $24.7
million in 1996. The number of Vacation Points sold in 1997 increased 46%, to
194,055, from 132,878 in 1996, while the average price per Vacation Point sold
increased 15% to $213 from $186 in 1996. The increase in the number of Vacation
Points sold in 1997 is the result of a 30% increase in Vacation Points sold in
LSI, along with the addition of Vacation Points sales by VI, which was acquired
in November 1997, and the Global Group, which was acquired in December 1997.
Interest income increased 69% to $42.9 million from $25.4 million in 1996.
The increase is the result of an increase in portfolio interest income from
increased gross mortgages receivable, and interest income from investments.
Gross mortgages receivable increased $121.9 million, or 52%, to $354.7 million
in 1997 from $232.8 million in 1996. Interest income from investments increased
by $4.9 million in 1997. Other income, which includes rental income, management
fees, commissions on the sale of European receivables, and other interest
income, increased $3.4 million to reported other income of $13.8 million in 1997
from adjusted other income of $10.4 million in 1996, an increase of 33%.
Vacation Interval and Vacation Point cost of sales, as a percentage of
Vacation Interval and Vacation Point sales, was 25% for 1997, compared with 26%
for the prior year as the Company continued to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost on
average for each vacation interest sold.
Advertising, sales and marketing expenses increased $37.7 million to $126.7
million for 1997 from $89.0 million for 1996. As a percentage of Vacation
Interval and Vacation Point sales, advertising, sales and marketing expenses
decreased to 45% for 1997 from 49% for 1996. The decrease resulted primarily
from decreased expenses at the resorts acquired in the AVCOM Acquisition as well
as from the company-wide application of best marketing practices taken from the
Company's best performing resorts.
Interest expense-treasury decreased as a percentage of reported total
revenues to 4% in 1997 from 6% of adjusted total revenues in the prior year. The
Company began financing mortgages receivable with the proceeds from the
Concurrent Offerings and the Senior Subordinated Note Offering, rather than with
hypothecation debt. Interest expense relating to these offerings is classified
as interest expense-other. Other loan portfolio expenses increased $1.0 million
during 1997 to $5.5 million from $4.5 million during the prior year. However, as
a percentage of gross mortgages receivable, other loan portfolio expense
decreased to 1.6% in 1997 from 1.9% in 1996.
The provision for doubtful accounts increased $2.3 million during 1997 to
$8.6 million at year end from an adjusted $6.3 million at the end of 1996. The
allowance for doubtful accounts as a percentage of gross mortgages receivable
decreased to a reported 6.5% at December 31, 1997 from an adjusted 6.6% at
December 31, 1996. The charge off rate as a percentage of the average mortgages
receivable loan balance was 0.7% for 1997 compared to 2.1% for 1996.
43
<PAGE> 47
General and administrative expenses increased to a reported $42.3 million
in 1997 from adjusted general and administrative expenses of $28.3 million in
1996, an increase of 49%. General and administrative expenses were 13% of 1997
reported total revenues and 1996 adjusted total revenues. The increase in
general and administrative expenses was the result of (i) the addition of a
number of senior officers and key executives in order to build the management
and organizational infrastructure necessary to efficiently manage the Company's
growth, (ii) increased overhead due to the acquisition of additional resorts,
and (iii) added salary, travel and office expenses attributable to the growth in
the size of the Company.
Depreciation and amortization increased $2.2 million, or 51%, to a reported
$6.5 million during 1997 from adjusted depreciation and amortization of $4.3
million in 1996, reflecting an increase in capital expenditures and intangible
assets. Depreciation and amortization was 1.9% of reported total revenues in
1997 and 2.0% of adjusted total revenues in 1996.
Interest expense-other, reported net of capitalized interest of $6.8
million and $6.7 million at December 31, 1997 and 1996, respectively, increased
$5.6 million, or 147%, to $9.4 million for 1997 from $3.8 million in 1996. The
increase was due primarily to the interest on the Convertible Notes and the
Senior Subordinated Notes issued in 1997.
As a result of the factors discussed above and the $2.6 million resort
property valuation allowance, total costs and operating expenses increased by
$79.7 million, or 41%, to an adjusted $274.0 million in 1997 from an adjusted
$194.3 million in 1996. Total adjusted costs and operating expenses as a
percentage of reported total revenues was 81% in 1997. This represents a
decrease of 8% from adjusted total costs and operating expenses as a percentage
of adjusted total revenues of 89% in 1996.
In addition, as a result of the factors discussed above, adjusted income
before provision for income taxes and extraordinary item and non-recurring costs
increased 172% to $53.4 million in 1997 from $19.6 million for 1996. An
extraordinary item of $0.8 million, net of income taxes, was charged to net
income in 1997 as the result of the early retirement of notes payable to
financial institutions.
For 1997, income taxes increased $27.3 million over 1996, reflecting a
change in the Company's status to a C corporation subsequent to its August 1996
initial public offering, as well as a $6.0 million charge to income tax expense
taken in the fourth quarter resulting from recording deferred taxes for
previously non-taxable entities acquired in the PRG Acquisition. Previously, the
Company's predecessor entities only incurred federal income taxes with regard to
AVCOM and foreign income taxes with respect to LSI and the Company's
wholly-owned subsidiaries located in St. Maarten, Netherlands Antilles.
Income before extraordinary item and non-recurring charges (net of taxes)
was $20.3 million for 1997, an increase of $9.3 million, or 85%, from $11.0
million in 1996. Net income was $19.5 million for 1997, compared with $11.0
million for 1996, an increase of $8.5 million or 77%. Assuming the Company had
been taxed as a C corporation in 1996, pro forma net income would have been $4.4
million, compared with $19.5 million net income for 1997, an increase of 343%.
COMPARISON OF 1995 TO 1996
The following discussion of financial results adjusts the reported
statement of operations data for the following non-recurring charges and
revenues. In 1996, the Company incurred the following non-recurring charges
related to the AVCOM Acquisition: (i) general and administrative expense
increased by $9.1 million for severance costs, lease cancellations, litigation
reserves, reserves for losses associated with certain property management and
related contracts; (ii) provision for doubtful accounts increased by $2.0
million; (iii) resort property valuation allowance increased by $2.6 million to
write down certain property to market value for projects initiated by AVCOM
which were subsequently abandoned; and (iv) depreciation and amortization
increased by $0.7 million related to the amortization of startup costs over a
period of one year. Also, in 1996, the Company recognized $1.7 million of other
income as the result of a settlement of certain receivables from the former
owners of the St. Maarten resorts.
For 1996, the Company achieved adjusted total revenues of $218.1 million,
compared with reported total revenues of $168.3 million for 1995, an increase of
$49.8 million or 30%. The increase was due to the growth of
44
<PAGE> 48
Vacation Intervals sold to 11,946 in 1996 from 10,024 in 1995, a 19% increase,
coupled with a 7% increase in the average sales price to $13,146 in 1996 from
$12,298 in 1995. The growth in Vacation Intervals sold was due to the
commencement of sales at Sunterra Resorts San Luis Bay, Sedona Summit and
Scottsdale Villa Mirage and Embassy Vacation Resort Lake Tahoe, combined with a
full year of Vacation Interval sales at Sunterra Resorts Royal Palm Beach and
Sunterra Resorts Flamingo Beach. The average price per Vacation Point sold at
the Company's European resorts increased 3% to $186 for 1996 from $181 in 1995.
In addition, Vacation Point sales at the Company's European resorts increased
30% to 132,878 sold in 1996 from 102,270 sold in 1995.
Interest income increased $5.1 million, or 25%, due to an increase in gross
mortgages receivable to $232.8 million in 1996 from $160.7 million in 1995.
Other income, which includes rental income, management fees, other interest
income, commission on the sale of European receivables, and portfolio income
from the $10.2 million portfolio acquired with the two St. Maarten resorts in
1995, increased $1.8 million to an adjusted $10.4 million in 1996 from a
reported $8.6 million in 1995.
As a percentage of Vacation Interval and Vacation Point sales, Vacation
Interval and Vacation Point cost of sales decreased to 26% in 1996, compared
with 29% in 1995, as the Company was able to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost and
points cost on average for each Vacation Interval and Vacation Point sold.
Advertising sales and marketing expenses increased $26.7 million to $89.0
million in 1996 from $62.3 million in 1995. As a percentage of Vacation Interval
and Vacation Point sales, advertising, sales and marketing expenses increased to
49% for 1996 from 45% in 1995. The increase was primarily due to advertising,
sales and marketing expenses incurred at AVCOM which were 58% and 42% of total
Vacation Interval and Vacation Point sales in 1996 and 1995, respectively.
Interest expense-treasury increased $3.4 million to $13.5 million in 1996
from $10.1 million in 1995, as the result of notes payable to financial
institutions and notes payable to related parties increasing from $177.0 million
to $236.1 million, or 33%, and the prime rate increasing during the year. Other
expenses increased 125% to $4.5 million in 1996 from $2.0 million in 1995. Other
expenses increased to 2% of adjusted total revenues in 1996 from 1% of reported
total revenues in 1995. The provision for doubtful accounts increased by $2.6
million to an adjusted $6.3 million from a reported $3.7 million in 1995.
General and administrative expenses increased $9.0 million to an adjusted
$28.3 million in 1996 from reported general and administrative expenses of $19.3
million in 1995. As a percentage of adjusted total revenues, adjusted general
and administrative expenses were 13% in 1996. This amount compares to reported
general and administrative expenses as a percentage of reported total revenues
of 11% in 1995. The increase in adjusted general and administrative expenses was
the result of (i) the addition of a number of senior officers and key executives
in connection with building the Company's management and organizational
infrastructure necessary to efficiently manage the Company's future growth, (ii)
the Company's expenses and reporting obligations as a public company, (iii)
increased overhead due to the acquisition and development of additional resorts,
and (iv) added salary, travel, and office expenses attributable to the then
current and planned growth of the Company.
Depreciation and amortization increased $1.8 million, or 72%, to an
adjusted $4.3 million in 1996 from a reported depreciation and amortization of
$2.5 million in 1995, reflecting an increase in capital expenditures and
intangible assets.
As a result of the factors discussed above, costs and operating expenses
for 1996 increased by $54.7 million to an adjusted $194.3 million in 1996 from a
reported $139.6 million in 1995. Adjusted costs and operating expenses increased
to 89% of adjusted total revenues in 1996, compared with 83% of reported costs
and operating expenses as a percentage of reported total revenues in 1995.
Equity loss on investment in joint venture decreased to $0.3 million in
1996 from $1.6 million in 1995 due to increased Vacation Interval sales and
higher hotel occupancy at Embassy Vacation Poipu Point during 1996. In 1996,
1,146 Vacation Intervals were sold at the Embassy Vacation Poipu Point, while
281 Vacation Intervals were sold at the Embassy Vacation Poipu Point in 1995.
45
<PAGE> 49
Income before provision for income taxes decreased to $6.9 million in 1996
from $25.3 million in 1995, primarily due to the significant charges incurred by
AVCOM during the fourth quarter of 1996, as discussed previously. However,
income before provision for taxes for the Company (excluding AVCOM) increased
17%, to $27.3 million in 1996, from $23.4 million in 1995. AVCOM's (loss) income
before provision for taxes decreased to $(20.4) million in 1996 from $1.9
million in 1995, primarily as a result of $13.6 million of non-recurring charges
related to accrued expenses and the write-down and write-off of certain assets
of AVCOM.
Provision (benefit) for income taxes changed from an expense of $4.0
million in 1995 to a tax benefit of $4.1 million in 1996. The 1996 tax benefit
results from the recognition of AVCOM's operating loss carryforward. Previously,
the Company's predecessor entities incurred federal income taxes only with
respect to AVCOM, as well as foreign income taxes with respect to LSI and the
Company's wholly-owned subsidiaries in St. Maarten, Netherlands Antilles.
As a result of the factors discussed above, net income decreased 48% to
$11.0 million in 1996 from $21.3 million in 1995.
The Company has grown significantly from its August 1996 Initial Public
Offering from nine to 70 resort locations at December 31, 1997. This growth has
been achieved in part through the acquisition for cash of individual properties
and operating companies and by the issuance of Common Stock for operating
companies which were accounted for using the pooling-of-interests method of
accounting for business combinations. An indication of the change in the
financial results of the Company as a result of these acquisitions is shown in
the table below which reconciles the Company's total revenues, EBITDA and income
before provision for income taxes as reported for the years ended December 31,
1996 and 1995 in its Annual Reports on Form 10-K to the restated and combined
amounts for the same periods reflecting pooling-of-interests accounting:
<TABLE>
<CAPTION>
EFFECT OF REPORTED
FORM 10-K POOLING TRANSACTIONS HEREIN
--------- -------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Total revenues....................................... $95,054 $124,793 $219,847
EBITDA............................................... 27,678 16,944 44,622
Income before provision for income taxes............. 17,243 (10,314) 6,929
YEAR ENDED DECEMBER 31, 1995
Total revenues....................................... $72,608 $ 95,710 $168,318
EBITDA............................................... 19,057 22,496 41,553
Income before provision for income taxes............. 11,554 13,765 25,319
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations from the sale of vacation
ownership interests, the financing of the sales of vacation interest units, the
rental of unsold vacation interests, and the receipt of management fees. With
respect to the sale of vacation interests, the Company generates cash from (i)
vacation ownership interests, (ii) the receipt of down payments from customers,
and (iii) the financing of mortgages receivable ranging from 85% to 90% of the
amount borrowed. The Company generates cash from the financing of vacation
interests from the interest charged on mortgages receivable, which averaged
approximately 14.4% for the year ended December 31, 1997.
The Company entered into a $100 million Senior Credit Facility on February
18, 1998. On April 1, 1998, the Senior Credit Facility was amended to increase
the amount available thereunder to $117.5 million. The Senior Credit Facility
has a variable borrowing rate based on the percentage of the Company's mortgages
receivable pledged under such facility and the amount of funds advanced
thereunder. The interest rate will vary between LIBOR plus 7/8% and LIBOR plus
1 3/8%, depending on the amount of advances against mortgages receivable. The
Senior Credit Facility has a three-year term and contains customary covenants,
representations and warranties and conditions to borrow the funds. As of May 1,
1998, no amounts were outstanding under the Senior Credit Facility.
46
<PAGE> 50
The Company expects to securitize approximately $100 million of its
mortgages receivable, of which $50 million has been pre-committed. The Company
expects to convey the mortgages receivable to a bankruptcy remote subsidiary,
which would issue the Securitized Notes. The Securitized Notes would be
nonrecourse to the Company. The Company is finalizing negotiations and expects
to complete the securitization by May 1998. If completed, the securitization
would be treated as a financing transaction for accounting purposes. The
mortgages receivable and the Securitized Notes would remain on the Company's
balance sheet. The Company would recognize no gain or loss on the Securitized
Notes transaction.
For the year ended December 31, 1997, the Company had $50.0 million in
negative cash flows from operations. Because the Company typically finances 90%
of the purchase price of the vacation interests it sells, it typically incurs
significant operating costs in excess of the actual cash proceeds initially
received from the sale of a vacation interest. To meet the Company's cash
requirements to finance these customer receivables, the Company borrows funds
available under its credit facilities. The Company expects to repay its credit
facilities with proceeds from the issuance of pass-through mortgage-backed
securities under which the Company sells the mortgages receivable and principal
or interest payments from its portfolio of mortgages receivable. The Company may
also sell or factor additional mortgages receivable or borrow under existing or
future lines of credit.
In August 1997, the Company consummated the $200.0 million Senior
Subordinated Note Offering. After deducting underwriters discounts and expenses,
and giving effect to original issue discount of approximately $1.5 million, the
net proceeds to the Company were $191.0 million. The Company has exchanged new
registered notes (the "Senior Subordinated Exchange Notes") for the
privately-issued Senior Subordinated Notes, such exchange being registered with
the Securities and Exchange Commission. The form and terms of the Senior
Subordinated Exchange Notes are identical to the Senior Subordinated Notes,
except that the Senior Subordinated Exchange Notes are registered under the
Securities Act of 1933, as amended.
In February 1997, the Company consummated its public offering of $138.0
million aggregate principal amount of Convertible Notes and its offering of 6.0
million shares of Common Stock (comprised of 2.4 million newly-issued shares
sold by the Company and 3.6 million secondary shares sold by certain selling
stockholders). The net proceeds to the Company from the sale of the 2.4 million
newly-issued shares of Common Stock and from the sale of the $138.0 million
aggregate principal amount of Convertible Notes, based on a public price of 100%
of the principal amount thereof, in each case after deducting underwriting
discounts and expenses, were $53.2 million and $134.9 million, respectively. The
Convertible Notes may be exchanged for shares of the Company's Common Stock at
any time prior to maturity on January 15, 2007 at a conversion price of $30.417
per share, subject to adjustment under certain circumstances as stated in the
related indenture.
The Company requires funds to finance the future acquisition and
development of vacation ownership resorts and properties and to finance customer
purchases of vacation interests. Such capital has been provided by secured
financings on vacation ownership inventory, secured financings on mortgages
receivable generally funded by third-party lenders and unsecured notes
(including the Convertible Notes and the Senior Subordinated Notes issued in
1997). As of December 31, 1997, the Company had approximately $199 million of
additional borrowing capacity under certain third-party lending agreements. As
of December 31, 1997, the Company had $91.0 million outstanding under its notes
payable secured by mortgages receivable and $6.2 million outstanding under its
notes payable secured by unsold vacation interest inventory or other assets.
During 1997, the Company spent approximately $137 million for expansion and
development activities at the Company's resort locations. The Company funded
these expenditures primarily with the net proceeds of the Concurrent Offerings,
the Senior Subordinated Note Offering, available capacity on credit facilities,
and cash generated from operations.
The Company expects to incur approximately $20 million in 1998 to complete
projects currently under construction. For a description of potential expansion
plans, see "Business -- Description of the Company's Resort Locations."
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<PAGE> 51
The Company intends to pursue a growth-oriented strategy. From time to
time, the Company may acquire, among other things, additional vacation ownership
properties, resorts and completed vacation interests; land upon which additional
vacation ownership resorts may be built; management contracts; loan portfolios
of vacation interval mortgages; portfolios which include properties or assets
which may be integrated into the Company's operations; and operating companies
providing or possessing management, sales, marketing, development,
administration and/or other expertise with respect to the Company's operations
in the vacation ownership industry.
In the future, in addition to the financing activities described, the
Company may issue corporate debt, equity securities, or collateralized
mortgage-backed securities to finance its acquisition activities. Any debt
incurred or issued by the Company may be secured or unsecured, fixed or variable
rate interest, and may be subject to such terms as management deems prudent.
The Company believes that, with respect to its current operations, the
Senior Credit Facility and borrowing capacity under certain third-party lending
agreements, together with cash generated from operations, future borrowings, and
securities offerings, will be sufficient to meet the Company's working capital
and capital expenditure needs for the period ended December 31, 1998. However,
depending upon conditions in the capital and other financial markets, other
factors and the Company's growth, development and expansion plans, the Company
may from time to time consider the issuance of other debt or equity securities,
the proceeds of which would be used to finance acquisitions, refinance debt,
finance mortgage receivables or for other purposes.
AVCOM ACQUISITION AND RELATED EXPENSES
In February 1997, the Company consummated the AVCOM Acquisition, acquiring
AVCOM for 1,324,554 shares of the Company's Common Stock, representing on a pro
forma basis approximately 4.4% of the shares of the Company's Common Stock
outstanding following such acquisition. Based upon the closing price of the
Common Stock on February 7, 1997, the 1,324,554 shares issued in the AVCOM
Acquisition were valued at an aggregate of approximately $32.2 million. The
Company also assumed approximately $68.3 million in debt and $53.7 million of
mortgages receivable in the AVCOM Acquisition. The Company has accounted for the
AVCOM Acquisition under the pooling-of-interests method of accounting for
business combinations.
Transaction costs relating to the negotiation of, preparation for, and
consummation of the AVCOM Acquisition and the combination of certain operations
of the Company and AVCOM resulted in a one-time charge to the Company's earnings
of $1.7 million in the first quarter of 1997. This charge includes the fees and
expenses payable to financial advisors, legal fees and other transaction
expenses related to the AVCOM Acquisition.
PRG ACQUISITION AND RELATED EXPENSES
On May 15, 1997, the Company consummated its merger with PRG, a developer,
marketer and operator of two vacation ownership resorts in Williamsburg,
Virginia. The PRG Acquisition was consummated through the issuance of 3,601,844
shares of the Company's Common Stock, representing on a pro forma basis
approximately 10.7% of the shares of the Company's Common Stock outstanding
following such merger. Based upon the closing price of the Common Stock on May
15, 1997, the shares issued in the PRG Acquisition were valued at an aggregate
of $59.1 million. The Company also assumed approximately $58.4 million of debt,
$66.0 million of mortgages receivable and $5.7 million in cash in the PRG
Acquisition. The Company has accounted for the PRG Acquisition under the
pooling-of-interests method of accounting for business combinations.
The Company recorded a one-time charge of $4.2 million during the second
quarter 1997 for charges related to the PRG Acquisition including fees paid to
financial advisors, legal, and other transaction-related expenses. Certain
entities acquired in the PRG Acquisition were taxed as partnerships at the
partner level. As a result of the PRG Acquisition, the Company recorded a
deferred tax liability for cumulative temporary
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<PAGE> 52
differences between financial and tax reporting. This liability was established
through a charge to the Company's provision for income taxes in 1997.
LSI ACQUISITION AND RELATED EXPENSES
On August 28, 1997, the Company consummated the LSI Acquisition, acquiring
100% of LSI's capital stock in exchange for 1,996,401 newly issued shares of the
Company's Common Stock, representing on a pro forma basis approximately 5.6% of
the shares of the Company's Common Stock outstanding as of June 30, 1997. Based
upon the closing price of the Common Stock on August 28, 1997, the 1,996,401
shares issued in the LSI Acquisition were valued at an aggregate of
approximately $48.2 million. In addition to the Common Stock issued in the LSI
Acquisition, the Company also assumed $0.5 million in debt, $1.7 million of
mortgages receivable and $6.0 million in cash. The Company also paid cash
consideration of approximately $1 million to a former LSI shareholder. The
Company has accounted for the LSI Acquisition under the pooling-of-interests
method of accounting for business combinations.
Transaction costs relating to the negotiation of and preparation for the
LSI Acquisition and the anticipated combination of certain operations resulted
in a one-time charge to the Company's earnings of $4.1 million in the third
quarter of 1997. These charges include the fees and expenses payable to
financial advisors, legal fees and other transaction expenses related to the LSI
Acquisition.
MARC HOTELS & RESORTS ACQUISITION
On October 10, 1997, the Company consummated the Marc Acquisition acquiring
100% of the capital stock of Marc Resorts for 212,717 newly issued shares of the
Company's Common Stock. The Company has accounted for the Marc Acquisition using
the purchase method of accounting for business combinations.
VACATION INTERNATIONALE ACQUISITION
On November 7, 1997, the Company consummated its acquisition of 100% of the
capital stock of 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. The Company has accounted for the VI Acquisition
using the purchase method of accounting for business combinations.
ACQUISITION OF EMBASSY SUITES RESORT AT KAANAPALI BEACH
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.
ACQUISITION OF GLOBAL GROUP
On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of the Global Group through an asset
purchase for cash consideration of approximately $18 million. The Company
assumed no 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 Company has accounted for the Global Acquisition using the purchase
method of accounting.
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next few years to
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<PAGE> 53
address this issue. The Company has several information system improvement
initiatives under way to determine the full scope and related costs to insure
that the Company's systems continue to meet its needs and those of its
customers. These initiatives include upgrading and replacing some computer
systems and the conversion of others to be Year 2000 compliant. Although final
cost estimates have yet to be determined, it is anticipated that these Year 2000
costs will result in an increase to Company expenses during 1998 and 1999.
Suppliers, customers, mortgages receivable servicers and creditors of the
Company also face Year 2000 issues. Their failure to successfully address the
Year 2000 issue could have a material adverse effect on the Company's business
or results of operations.
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BUSINESS
THE COMPANY
Signature Resorts, Inc. is the world's largest vacation ownership company,
as measured by the number of resort locations. The Company currently has 82
resort locations in eight North American and European countries. The Company
also manages units at an additional 22 resorts in Hawaii. The Company's resort
locations are in a variety of popular vacation destinations, including
California, Hawaii, Arizona, Florida, the Caribbean, Mexico, France, the United
Kingdom, Spain and the Canary Islands. Through both internal development and
strategic acquisitions, the Company has expanded the number of its resort
locations and its owner family base from nine resort locations and approximately
25,000 owner families at the time of its August 1996 initial public offering to
its current 82 resort locations and approximately 200,000 owner families. As a
result of the successful implementation of the Company's growth and operations
strategy, the Company's revenues have grown to $337.7 million in 1997 from
$219.8 million in 1996 and $168.3 million in 1995. By taking advantage of
synergies resulting from the implementation of the Company's business strategy,
the Company has increased 1997 EBITDA (as defined) by 91% over 1996 EBITDA and
increased EBITDA as a percentage of total revenues to 25.3% in 1997 from 20.3%
in 1996.
The Company's operations consist of (i) marketing and selling Vacation
Intervals and Vacation Points, (ii) acquiring, developing and operating vacation
ownership resorts and (iii) providing consumer financing to individual
purchasers for the purchase of vacation interests at its resort locations. The
Company also provides resort management and maintenance services for which it
receives fees paid by the resorts' homeowners' associations.
The Company markets resort locations as Sunterra Resorts, Embassy Vacation
Resorts and Westin Vacation Club Resorts and offers points-based vacation clubs
in Europe and North America. The Company's Sunterra Resorts are marketed under
the Company's Sunterra brand. The Company's Embassy Vacation Resorts and Westin
Vacation Club resort are operated under agreements with Promus (the owner of the
Embassy Suites brand) and Westin, respectively. The Company offers points-based
vacation clubs in Europe through its LSI and Global Group subsidiaries, and in
North America through its VI subsidiary.
The Company provides mortgage financing for approximately 75% of its
vacation ownership sales. In addition to enhancing the sales process, financing
customer receivables generates attractive profit margins and cash flows from the
spread between interest rates charged by the Company on its mortgage receivables
and the Company's cost of capital. This financing is typically collateralized by
the underlying Vacation Interval or Vacation Points.
BUSINESS STRATEGY
The Company's objective is to capitalize on its position as the world's
largest vacation ownership company, as measured by resort locations, and its
base of approximately 200,000 owner families by continuing to (i) expand sales
at its resort locations, (ii) strategically acquire and develop resort inventory
and acquire operating companies and other vacation ownership-related assets,
(iii) improve operating margins by reducing operating costs through efficiencies
gained by operating as a large multi-resort system and (iv) develop and
introduce new vacation ownership products including its planned "Club Sunterra"
worldwide points-based vacation exchange system.
Signature has expanded to its current 82 resort locations from nine at the
time of its August 1996 initial public offering through the successful
implementation of its growth and operations strategy. The Company believes it
has achieved sufficient size to enable it to capitalize on the strategic
advantages of operating and purchasing leverage and the ability to provide
choice and flexibility to its customers. The key elements of the Company's
growth strategy are described below:
Expand Sales. The Company intends to expand sales of vacation ownership
interests at its existing resorts by adding additional inventory through the
construction of new development units and through broader marketing efforts. As
of December 31, 1997, the Company had available inventory of 29,168 Vacation
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Intervals and 599,554 Vacation Points. The Company believes it is well
positioned to continue to expand its existing supply of inventory.
Acquisition and Development. Signature has achieved its leading position in
the industry by identifying and acquiring resorts in desirable locations at
prices which the Company believes will allow it to achieve excellent returns.
The Company's acquisition and development of new resort locations allows it to
add new vacation ownership inventory and increase the number of owner families
within the Company's resort system. The Company targets operating companies,
resort properties and other vacation ownership assets for potential acquisition
and development opportunities to generate a high return on invested capital to
replenish vacation ownership sales inventory while entering new markets and
creating a larger resort and customer base from which to develop and market its
products.
The Company evaluates each acquisition candidate based on certain criteria
including return on invested capital, the strategic location of the resort
properties and consumer demand for vacation ownership inventory, in each case
taking into consideration the Company's existing locations and operations. The
Company analyzes the potential economic impact of each transaction to maximize
its return on investment, as well as potential strategic synergies. Management
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.
Improve Operating Margins. As the Company continues to expand the number of
its resort locations as well as its owner family base, management believes that
it will be able to realize improved operating margins through the realization of
increased efficiencies, reduced on-site administrative requirements and reduced
operating costs through its multi-resort management system. In addition, the
Company believes that additional acquisitions will allow it to experience
increased margins by leveraging operating and corporate overhead costs over a
larger revenue base.
Signature's base of approximately 200,000 owner families also provides an
established market to which to sell additional vacation and leisure products
which the Company believes will reduce marketing and advertising expenses as a
percentage of sales. Because existing owners of vacation ownership interests
are, in effect, a pre-screened pool of potential customers, repeat sales and
customer referrals increase sales while marketing expenses associated with these
sales are significantly reduced. As the Company's owner family base continues to
expand and these type of sales represent a larger percentage of overall sales,
the Company believes operating margins will continue to improve.
Develop New Vacation Ownership Products. The Company believes its growing
resort portfolio and base of approximately 200,000 owner families will enable it
to offer a wider variety of vacation ownership products. The Company's planned
Club Sunterra worldwide points-based vacation exchange system is one such
product that will allow owners to create vacations custom tailored to their
individual needs. Member families will be able to purchase intervals entitling
them to an annual allotment of "points" to use as a currency to reserve the
specific resort location, season, unit type and length of stay they desire from
among Club Sunterra's resort locations throughout the world. This type of
points-based system will provide the consumer more flexibility in their vacation
plans compared to traditional one week intervals.
In general, under a points-based vacation exchange 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 length of stay. 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.
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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 some
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.
The vacation ownership industry represents one of the fastest growing
segments of the lodging industry. According to ARDA and other industry sources,
during the seventeen year period ending in 1997, worldwide vacation ownership
sales volume increased from $490 million in 1980 to an estimated $6.2 billion in
1997, a compounded annual growth rate of 16.1%.
As shown in the following charts, according to ARDA, the worldwide vacation
ownership industry has expanded significantly since 1980 both in vacation
interest sales volume and in the number of vacation interest owners.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 80 81 82 83 84 85 86 87 88
Vacation Interest Sales Volume
($ in billions) 0.49 0.965 1.165 1.34 1.735 1.58 1.61 1.94 2.39
Year 80 81 82 83 84 85 86 87 88
No. of Vacation
Interest Owners 0.155 0.22 0.335 0.47 0.62 0.805 0.97 1.125 1.31
(in millions)
Year 89 90 91 92 93 94 95e 96e 97e
Vacation Interest Sales Volume
($ in billions) 2.97 3.24 3.74 4.25 4.505 4.76 5.2 5.7 5.95
Year 89 90 91 92 93 94 95e 96e 97e
No. of Vacation
Interest Owners 1.53 1.8 2.07 2.363 2.76 3.144 3.49 3.98 4.48
(in millions)
</TABLE>
Source: ARDA (includes, with respect to 1995, 1996 and 1997, unpublished
estimates provided by ARDA)
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
interests.
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,
Inter-Continental, Promus and Westin. Unlike the Company, however, the vacation
ownership operations of each of Marriott, Disney,
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<PAGE> 57
Hilton, Hyatt, Four Seasons, Inter-Continental, Westin and Promus 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 the most recent information compiled by ARDA,
the three primary reasons cited by consumers for purchasing vacation interests
are (i) the ability to exchange vacation interests for accommodations at other
resorts through exchange networks (cited by 75% of vacation interest
purchasers), (ii) the money savings over traditional resort vacations (cited by
72% of purchasers) and (iii) the quality service and upkeep of the resort at
which they purchased a vacation interest (cited by 80% of purchasers). According
to ARDA, vacation interest purchasers have a high rate of repeat purchases:
approximately 41% of all vacation interest owners own more than one vacation
interest representing approximately 65% of the industry inventory and
approximately 51% of all owners who bought their first vacation interest before
1985 have since purchased a second vacation interest. In addition, ARDA
indicates that customer satisfaction increases with length of ownership, age,
income, multiple location ownership and accessibility to vacation interest
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. 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, according to ARDA, the
age group most likely to purchase Vacation Intervals and Vacation Points.
DESCRIPTION OF THE COMPANY'S RESORT LOCATIONS
The Company has 82 resort locations, which include 35 resort locations sold
as Vacation Intervals and 47 resort locations sold in points-based vacation
exchange systems. Of the 35 resort locations sold as Vacation Intervals, 22
resort locations are currently in sales, sales have yet to begin at four resort
locations, and sales at nine resort locations have been substantially completed.
Of the 47 resort locations sold in points-based vacation exchange systems, the
Company owns or has sold, in the aggregate, all of the unit inventory at 26 of
the resort locations and owns a portion of the unit inventory at the other 21
resort locations.
Through its primary resort brands, the Company 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)). In
addition, the Company operates points-based vacation clubs in North America and
Europe.
Sunterra Resorts. The Company's Sunterra Resorts, includes resorts in both
the value and upscale price segments which are not affiliated with any hotel
chain. Vacation Intervals at the Company's Sunterra Resorts generally sell for
$6,000 to $25,000 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
four 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 140
Embassy Suites hotels throughout North America. 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.
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Westin Vacation Club Resort. The Company's Westin Vacation Club resort is
positioned in the luxury price segment of the market and is characterized by
elegant accommodations and personalized service. Vacation Intervals at Westin
Vacation Club resort generally sell for $16,000 to $25,000 and are 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 and as a result of the
Global Acquisition, the Company acquired the Global Group's Global Vacation
Club, which it is integrating into the LSI system. Grand Vacation Club allows
members to purchase an annual allotment of points that can be redeemed for
occupancy rights at Grand Vacation Club's European resorts and at other
participating resorts. The Company markets the Grand Vacation Club in the United
Kingdom, Spain, France and Austria. Points in the Grand Vacation Club can
typically be purchased for approximately $220 a point. A typical one week stay
at a Grand Vacation Club resort requires approximately 46 points. Each Grand
Vacation Club member receives a new allotment of points each year throughout the
term of its membership in the club.
VI's Vacation Time Share Program. As a result of the VI Acquisition, the
Company acquired VI's VTS Program which it markets to buyers in the United
States, Canada and Mexico. The VTS Program is a points-based system much like
LSI's Grand Vacation Club in that it allows members to purchase points that are
redeemed for occupancy rights at participating VTS Program resorts. Points in
the VTS Program typically can be purchased for approximately $119 a point. A
typical one week stay at a VI resort requires approximately 91 points. Each VTS
Program member receives a new allotment of points each year throughout the term
of its membership in the program.
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The following tables set forth certain information, as of December 31,
1997, regarding each of the Company's 70 resort locations on 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 or Vacation Points currently available for sale and occupancy
and additional expansion potential. Of the resort locations set forth below, the
Embassy Vacation Resorts Poipu Point and Kaanapali Beach, the Sunterra Resorts
NorthBay at Lake Arrowhead and the Westin Vacation Club St. John are partially
owned by the Company. In addition, the Company only owns a portion of the units
comprising five of the Grand Vacation Club Resorts and 16 of the Vacation
Internationale Resorts. 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, as well as other
factors described under "Risk Factors."
<TABLE>
<CAPTION>
UNITS AT RESORT
---------------------------------
DATE POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(A) EXPANSION(B) TOTAL
- ------------------------------ ---------------------------- -------------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
SUNTERRA RESORTS
Sunterra Resorts Cypress November 1992 224 276(e) 500
Pointe....................... Lake Buena Vista, Florida
Sunterra Resorts The July 1993 130 286(f) 416
Plantation at Fall Creek..... Branson, Missouri
Sunterra Resorts Royal April 1994 40 15(g) 55
Dunes........................ Hilton Head, S. Carolina
Sunterra Resorts Royal Palm July 1995 140 --(h) 140
Beach........................ St. Maarten, Netherlands
Antilles
Sunterra Resorts Flamingo July 1995 172 85(i) 257
Beach........................ St. Maarten, Netherlands
Antilles
Sunterra Resorts San Luis June 1996 98 32(j) 130
Bay.......................... Avila Beach, California
Sunterra Resorts Scottsdale February 1997 64 104(k) 168
Villa Mirage................. Scottsdale, Arizona
Sunterra Resorts The Ridge on February 1997 12 106(l) 118
Sedona Golf.................. Sedona, Arizona
Sunterra Resorts Sedona February 1997 40 -- 40
Springs...................... Sedona, Arizona
Sunterra Resorts Sedona February 1997 60 -- 60
Summit....................... Sedona, Arizona
Sunterra Resorts Villas at February 1997 33 -- 33
Poco Diablo.................. Sedona, Arizona
Sunterra Resorts Villas of February 1997 40 -- 40
Sedona....................... Sedona, Arizona
Sunterra Resorts NorthBay at February 1997 13 -- 13
Lake Arrowhead(m)............ Lake Arrowhead, California
Sunterra Resorts Tahoe Beach February 1997 140 -- 140
& Ski........................ South Lake Tahoe, California
Sunterra Resorts Villas on February 1997 37 64(n) 101
the Lake..................... Montgomery, Texas
Sunterra Resorts Powhatan May 1997 419 81(o) 500
Plantation................... Williamsburg, Virginia
Sunterra Resorts Greensprings May 1997 76 424(p) 500
Plantation................... Williamsburg, Virginia
Sunterra Resorts The Savoy on August 1997 40 28(q) 68
South Beach.................. Miami Beach, Florida
Sunterra Resorts Bent Creek September 1997 -- 217(r) 217
Golf Village................. Gatlinburg, Tennessee
Sunterra Resorts Coral December 1997 -- 46(s) 46
Reef......................... Miami Beach, Florida
----- ----- -----
TOTAL................................................................ 1,778 1,764 3,542
OTHER SUNTERRA AFFILIATED
RESORTS
Tahoe Seasons(t)............. South Lake Tahoe, California February 1997 21 -- 21
Other(u)..................... -- -- --
----- ----- -----
TOTAL................................................................ 21 -- 21
EMBASSY VACATION RESORTS
Embassy Vacation Resort Poipu November 1994 219(w) -- 219
Point(v)..................... Kauai, Hawaii
Embassy Vacation Resort Grand January 1995 126 248(x) 374
Beach........................ Orlando, Florida
Embassy Vacation Resort Lake May 1996 102 108(y) 210
Tahoe........................ South Lake Tahoe, California
Embassy Vacation Resort November 1997 -- 157(z) 157
Kaanapali Beach(z)........... Maui, Hawaii
----- ----- -----
TOTAL................................................................ 447 513 960
WESTIN VACATION CLUB
Westin Vacation Club St. May 1997 48 48 96(bb)
John(aa)..................... St. John, U.S. Virgin
Islands
----- ----- -----
TOTAL................................................................ 48 48 96
----- ----- -----
TOTAL VACATION UNITS AND VACATION INTERVALS................................ 2,294 2,325 4,619
<CAPTION>
VACATION INTERVAL
INVENTORY AT RESORT
-------------------------------------
CURRENT POTENTIAL
RESORT INVENTORY(C) EXPANSION(D) TOTAL
- ------------------------------ ------------ ------------ -------
<S> <C> <C> <C>
SUNTERRA RESORTS
Sunterra Resorts Cypress 779 14,076(e) 14,855
Pointe.......................
Sunterra Resorts The 1,116 14,586(f) 15,702
Plantation at Fall Creek.....
Sunterra Resorts Royal 165 765(g) 930
Dunes........................
Sunterra Resorts Royal Palm 842 -- 842
Beach........................
Sunterra Resorts Flamingo 1,337 4,335(i) 5,672
Beach........................
Sunterra Resorts San Luis 1,443 1,632(j) 3,075
Bay..........................
Sunterra Resorts Scottsdale 446 5,304(k) 5,750
Villa Mirage.................
Sunterra Resorts The Ridge on 90 5,406(l) 5,496
Sedona Golf..................
Sunterra Resorts Sedona 61 -- 61
Springs......................
Sunterra Resorts Sedona 602 -- 602
Summit.......................
Sunterra Resorts Villas at 71 -- 71
Poco Diablo..................
Sunterra Resorts Villas of 220 -- 220
Sedona.......................
Sunterra Resorts NorthBay at 92 -- 92
Lake Arrowhead(m)............
Sunterra Resorts Tahoe Beach 634 -- 634
& Ski........................
Sunterra Resorts Villas on 1,111 3,264(n) 4,375
the Lake.....................
Sunterra Resorts Powhatan 913 4,131(o) 5,044
Plantation...................
Sunterra Resorts Greensprings 819 21,624(p) 22,443
Plantation...................
Sunterra Resorts The Savoy on 2,040 1,428(q) 3,468
South Beach..................
Sunterra Resorts Bent Creek -- 11,067(r) 11,067
Golf Village.................
Sunterra Resorts Coral -- 2,346(s) 2,346
Reef.........................
------ ------ -------
TOTAL.................. 12,781 89,964 102,745
OTHER SUNTERRA AFFILIATED
RESORTS
Tahoe Seasons(t)............. 201 -- 201
Other(u)..................... 62 -- 62
------ ------ -------
TOTAL.................. 263 -- 263
EMBASSY VACATION RESORTS
Embassy Vacation Resort Poipu 8,512 -- 8,512
Point(v).....................
Embassy Vacation Resort Grand 1,913 12,648(x) 14,561
Beach........................
Embassy Vacation Resort Lake 3,984 5,508(y) 9,492
Tahoe........................
Embassy Vacation Resort -- 8,007(z) 8,007
Kaanapali Beach(z)...........
------ ------ -------
TOTAL.................. 14,409 26,163 40,572
WESTIN VACATION CLUB
Westin Vacation Club St. 1,715 2,448 4,163
John(aa).....................
------ ------ -------
TOTAL.................. 1,715 2,448 4,163
------ ------ -------
TOTAL VACATION UNITS AND VACA 29,168 118,575 147,743
</TABLE>
56
<PAGE> 60
<TABLE>
<CAPTION>
VACATION POINTS
UNITS AT RESORT AT RESORT
----------------------------------- -------------
DATE POTENTIAL CURRENT
RESORT LOCATION ACQUIRED CURRENT(DD) EXPANSION(EE) TOTAL INVENTORY(FF)
- ------------------------------ ---------------------------- -------------- ----------- ------------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
GRAND VACATION CLUB
RESORTS(CC)
The Alpine Club.............. Schladming, Austria August 1997 68 -- 68E
Club del Carmen.............. Lanzarote, Canary Islands August 1997 67 -- 67G
Flanesford Priory Country August 1997 16 -- 16G
Estate....................... Herefordshire, England
Los Amigos Beach Club........ Costa del Sol, Spain August 1997 140 50 190G
Pine Lake Resort............. Lancashire, England August 1997 100 -- 100G
Royal Oasis Club at Benal August 1997 108 -- 108G
Beach........................ Costa del Sol, Spain
Royal Oasis Club at La August 1997 68 -- 68G
Quinta....................... Costa del Sol, Spain
White Sands Beach Club....... Menorca, Balearic Islands August 1997 48 -- 48G
White Sands Country Club..... Menorca, Balearic Islands August 1997 51 -- 51G
Woodford Bridge Country August 1997 72 50 122G
Club......................... North Devon, England
Wychnor Park Country Club.... Stratfordshire, England August 1997 44 20 64F 461,473
Burnside Park Owners Club.... Lancashire, England December 1997 14 -- 14G
Kenmore Club................. Perthshire, Scotland December 1997 26 -- 26G
Los Claveles................. Tenerife, Canary Islands December 1997 5 -- 5G
Le Moulin de Connelles....... Normandy, France December 1997 3 -- 3G
Playa Paraiso................ Mallorca, Spain December 1997 3 -- 3G
Royal Sunset Beach Club...... Tenerife, Canary Islands December 1997 126 -- 126G
Royal Tenerife Country December 1997 77 -- 77G
Club......................... Tenerife, Canary Islands
Sahara Sunset Club........... Costa del Sol, Spain December 1997 150 -- 150G
Sunset Bay Club.............. Tenerife, Canary Islands December 1997 206 -- 206G
Sunset Harbour Club.......... Tenerife, Canary Islands December 1997 124 -- 124G
Malibu Village............... Roussilon, France December 1997 3 -- 3G
Marina Baie des Anges........ Nice, France December 1997 22 -- 22G
----- ----- -----
TOTAL.................. 1,541 120 1,661H
VACATION INTERNATIONALE
RESORTS
Clock Tower.................. Whistler, British Columbia November 1997 15 -- 15E
Sea Mountain................. Big Island, Hawaii November 1997 28 -- 28G
Elkhorn Village.............. Sun Valley, Idaho November 1997 20 -- 20G
Embarcadero.................. Newport, Oregon November 1997 41 -- 41G
Fairway Villa................ Oahu, Hawaii November 1997 19 -- 19G
Hololani..................... Maui, Hawaii November 1997 9 -- 9G
Kapaa Shore.................. Kauai, Hawaii November 1997 14 -- 14G
Kihei Kai Nani............... Maui, Hawaii November 1997 6 -- 6G
Kingsbury.................... Stateline, Nevada November 1997 20 -- 20G
Oasis Resort................. Palm Springs, California November 1997 116 -- 116G
Marina Inn................... Oceanside, California November 1997 7 -- 7F 138,081
Papakea...................... Maui, Hawaii November 1997 25 -- 25G
Point Brown Resort........... Ocean Shores, Washington November 1997 24 -- 24G
Pono Kai..................... Kauai, Hawaii November 1997 22 -- 22G
Royal Kuhio.................. Oahu, Hawaii November 1997 14 -- 14G
Sea Village.................. Big Island, Hawaii November 1997 51 -- 51G
The Pines.................... Sunriver, Oregon November 1997 68 -- 68G
The Village at Steamboat..... Steamboat Springs, Colorado November 1997 26 263 289G
Torres Mazatlan.............. Mazatlan, Mexico November 1997 126 -- 126G
Vallarta Torre............... Puerto Vallarta, Mexico November 1997 64 -- 64G
Valley Isle.................. Maui, Hawaii November 1997 21 -- 21G
----- ----- -----
TOTAL.................. 736 263 999H
<CAPTION>
VACATION POINTS
AT RESORT
-----------------------
POTENTIAL
RESORT EXPANSION(GG) TOTAL
- ------------------------------ ------------- -------
<S> <C> <C>
GRAND VACATION CLUB
RESORTS(CC)
The Alpine Club..............
Club del Carmen..............
Flanesford Priory Country
Estate.......................
Los Amigos Beach Club........
Pine Lake Resort.............
Royal Oasis Club at Benal
Beach........................
Royal Oasis Club at La
Quinta.......................
White Sands Beach Club.......
White Sands Country Club.....
Woodford Bridge Country
Club.........................
Wychnor Park Country Club.... 276,000 737,473
Burnside Park Owners Club....
Kenmore Club.................
Los Claveles.................
Le Moulin de Connelles.......
Playa Paraiso................
Royal Sunset Beach Club......
Royal Tenerife Country
Club.........................
Sahara Sunset Club...........
Sunset Bay Club..............
Sunset Harbour Club..........
Malibu Village...............
Marina Baie des Anges........
TOTAL..................
VACATION INTERNATIONALE
RESORTS
Clock Tower..................
Sea Mountain.................
Elkhorn Village..............
Embarcadero..................
Fairway Villa................
Hololani.....................
Kapaa Shore..................
Kihei Kai Nani...............
Kingsbury....................
Oasis Resort.................
Marina Inn................... 1,192,626 1,330,707
Papakea......................
Point Brown Resort...........
Pono Kai.....................
Royal Kuhio..................
Sea Village..................
The Pines....................
The Village at Steamboat.....
Torres Mazatlan..............
Vallarta Torre...............
Valley Isle..................
TOTAL..................
</TABLE>
57
<PAGE> 61
- ---------------
(a) Current units at each resort represents only those units that have received
their certificate of occupancy as of December 31, 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 December 31, 1997,
(i) units then under construction that have not yet received their
certificate of occupancy and (ii) units planned to be developed on land
then owned by the Company or under option to be acquired which have not yet
received their certificate of occupancy and which were not then 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 December 31, 1997.
(d) Potential expansion of Vacation Intervals at each resort includes, as of
December 31, 1997, (i) Vacation Intervals then under development that have
not yet received their certificate of occupancy and (ii) Vacation Interval
development potential on land then owned by the Company or under option to
be acquired which have not yet received their certificate of occupancy and
which were not then under construction.
(e) Includes an estimated 276 units which the Company plans to construct on
land which it owns at the Sunterra Resorts Cypress Pointe 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 270 units which the Company plans to construct on
land that it acquired in September 1997. An additional 16 units were
completed during the first quarter 1998.
(g) Includes the construction of 15 units that were completed in the first
quarter 1998.
(h) The Company has not committed to any expansion of the Sunterra Resorts
Royal Palm Beach. The Company is considering the acquisition of additional
land adjacent to the Sunterra Resorts Royal Palm Beach 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 Sunterra Resorts Flamingo Beach on which, as of December 31, 1997, the
Company planned to develop approximately 85 units (and create a
corresponding number of Vacation Intervals). During the first quarter of
1998, the Company increased the number of units to be developed on such
land from 85 to 127. The Company plans to begin construction on 10 units
during the second quarter 1998.
(j) Includes an estimated 32 units currently under construction which should be
completed during the third quarter of 1998. The Company is considering the
acquisition of additional land near the Sunterra Resorts San Luis Bay 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.
(k) Includes 64 units currently under construction and scheduled to be
completed during the second quarter of 1998. The Company plans to commence
construction on an additional 40 units during 1999. All necessary
discretionary approvals and permits have been received for all units to be
constructed at the resort.
(l) Construction began in December 1996 on Sunterra Resorts The Ridge on Sedona
Golf, which, upon completion, will consist of 118 units. The first 12 units
received certificates of occupancy during the fourth quarter 1997.
Currently, 22 of the additional 106 units are under construction and
scheduled to be completed during the third quarter of 1998. Governmental
approvals and permits have not been sought or received for the remaining
planned 84 units. Vacation Interval sales began in May 1997.
(m) 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 Sunterra Resorts NorthBay
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. AVCOM
has an exclusive sales and marketing contract for sales at Sunterra Resorts
NorthBay at Lake Arrowhead, and is the property manager of the resort.
Although Arrowhead Capital Partners, L.P. owns undeveloped land and
buildings under construction at the Sunterra Resorts NorthBay at Lake
Arrowhead, no definitive expansion plans have been made.
(n) Sunterra Resorts 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 is scheduled to
begin during the second quarter of 1998 and all necessary discretionary
government approvals and permits have been received for the additional 64
units.
(o) Includes 14 units that were completed during the fourth quarter of 1997 but
did not receive certificates of occupancy until the first quarter of 1998.
The Company's development schedule for the remaining 67 units will be
determined based on market demand and other factors.
(p) Includes 30 units that were completed and received certificates of
occupancy during the first quarter 1998. The Company's development schedule
for the remaining 394 units will be determined based on market demand and
other factors.
(q) Construction of an additional 28 units is scheduled to begin during the
second quarter of 1998.
(r) The Company acquired the Sunterra Resorts Bent Creek Golf Village and
surrounding property in September 1997. The Company plans to convert the
property into 108 units and develop an additional 109 units. Construction
of four units is in process and sales are expected to begin in the second
quarter of 1998.
(s) In December 1997, the Company purchased a 46 unit apartment complex which
it plans to convert to vacation ownership. The property is already
registered and renovations are scheduled to begin during the second quarter
of 1998.
(t) 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 continue foreclosing on the
remaining notes and acquiring clear title to the applicable Vacation
Intervals.
(u) Includes weekly intervals owned by the Company at three additional
properties that are not owned or managed by the Company.
(v) 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 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 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.
58
<PAGE> 62
After payment of such preferred return and the return of approximately $4.6
million of capital to the Company on a pari passu basis with the other
general partner in the partnership, the Company is entitled to receive
approximately 50% of the net profits of the Poipu Partnership. In the event
certain internal rates of return specified in the Poipu Partnership
agreement are achieved, the Company is entitled to receive approximately
55% of the net profits of the Poipu Partnership.
(w) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(x) The Company is currently constructing 30 units which are expected to be
completed during the third quarter of 1998. The Company has received all
necessary governmental approvals and permits to construct an additional 218
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.
(y) The Company has received all necessary 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 108
units on land that it owns at the Embassy Vacation Resort Lake Tahoe. The
Company, subject to market demand, currently plans to commence construction
of an additional 40 of such units in the second quarter of each of 1998 and
1999 and the remaining 28 units commencing in May 2000.
(z) In November 1997, a partnership of which the Company is a managing general
partner acquired the Embassy Suites Resort at Kaanapali Beach, Maui,
Hawaii. A subsidiary of the Company owns a 24% partnership interest in the
acquiring entity. The Company intends to convert 157 of the 413 suites at
the resort into vacation ownership units. Sales are expected to commence
during the second quarter of 1998.
(aa) 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.
(bb) Includes 48 units which are completed and in sales. 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 beginning the renovation of such 48
additional units during the second quarter of 1998 and completing all
renovations by year-end 1998. The Company also owns adjacent land at the
St. John resort which may 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.
(cc) Includes resorts acquired as a result of the Global Acquisition.
(dd) Represents the aggregate number of units and Vacation Intervals (as opposed
to Vacation Points) within the Company's Grand Vacation Club system and the
VTS Program. Certain of these resorts are not wholly-owned by the Company
and current units at these resorts represent only those units owned by the
Company.
(ee) Potential expansion units at each resort includes, as of December 31,
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 Grand Vacation
Club or VI 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.
(ff) Current inventory of Vacation Points represents, as of December 31, 1997,
the number of unsold Vacation Points in the Grand Vacation Club system and
VTS Program, as well as the number of points allocable to current unit
inventory owned by LSI or VI but not yet contributed to the Grand Vacation
Club system or VTS Program, respectively.
(gg) Potential expansion of Vacation Points represents, as of December 31,
1997, the estimated number of Vacation Points assignable to potential
expansion units within the Grand Vacation Club system and the VTS Program.
59
<PAGE> 63
The following table sets forth certain information, as of December 31,
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:
Sunterra Resorts Cypress Lake Buena Vista, Florida X X X X X X X
Pointe
Sunterra Resorts The Branson, Missouri X X X X X X X
Plantation at Fall
Creek
Sunterra Resorts Royal Hilton Head, South X X X
Dunes Carolina
Sunterra Resorts Royal St. Maarten, Netherlands X X X X X
Palm Beach Antilles
Sunterra Resorts Flamingo St. Maarten, Netherlands X X X X X
Beach Antilles
Sunterra Resorts San Luis Avila Beach, California X X X X X
Bay
Sunterra Resorts Scottsdale, Arizona X X X X X X
Scottsdale Villa Mirage
Sunterra Resorts The Sedona, Arizona X X X X X X X
Ridge on Sedona Golf
Sunterra Resorts Sedona Sedona, Arizona X X X X X
Springs
Sunterra Resorts Sedona Sedona, Arizona X X X X X
Summit
Sunterra Resorts Villas Sedona, Arizona X X X X
at Poco Diablo
Sunterra Resorts Villas Sedona, Arizona X X X X X
of Sedona
Sunterra Resorts NorthBay Lake Arrowhead, X X X X X
at Lake Arrowhead California
Sunterra Resorts Tahoe South Lake Tahoe, X X X X
Beach and Ski California
Sunterra Resorts Villas Lake Conroe, Texas X X X
on the Lake
Sunterra Resorts Powhatan Williamsburg, Virginia X X X X X X X
Plantation
Sunterra Resorts Williamsburg, Virginia X X X X X
Greensprings Plantation
Sunterra Resorts The Miami Beach, Florida X X X X X
Savoy on South Beach
Sunterra Resorts Bent Gatlinburg, Tennessee X X X X
Creek Golf Village
Sunterra Resorts Coral Miami Beach, Florida X X X
Reef
OTHER SUNTERRA AFFILIATED
RESORTS:
Tahoe Seasons South Lake Tahoe, X X X X X X X
California
EMBASSY VACATION RESORTS:
Embassy Vacation Resort Kauai, Hawaii X X X X X
Poipu Point
Embassy Vacation Resort Orlando, Florida X X X
Grand Beach
Embassy Vacation Resort South Lake Tahoe, X X X X X
Lake Tahoe California
Embassy Vacation Resort Maui, Hawaii, X X X X X
Kaanapali Beach
WESTIN VACATION CLUB:
Westin Vacation Club St. St. John, U.S. Virgin X X X X X X X X
John Islands
</TABLE>
60
<PAGE> 64
<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>
GRAND VACATION CLUB RESORTS:
The Alpine Club Schladming, Austria X X X X X X X
Burnside Park Owners Club Lancashire, England
Club del Carmen Lanzarote, Canary Islands X X X X X
Flanesford Priory Country Herefordshire, England X X X X
Estate
Kenmore Club Loch Tay, Scotland X X X X X X X
Los Claveles Tenerife, Canary Islands X X X X X
Le Moulin de Connelles Normandy, France X X X X X X
Los Amigos Beach Club Costa del Sol, Spain X X X X X X X X
Malibu Village Roussilon, France
Marina Baie des Anges Nice, France X X X X X X
Pine Lake Resort Lancashire, England X X X X X X
Playa Paraiso Mallorca, Spain X
Royal Oasis Club at Benal Costa del Sol, Spain X X X X X
Beach
Royal Oasis Club at La Costa del Sol, Spain X X X X X
Quinta
Royal Sunset Beach Club Tenerife, Canary Islands X X X X X X
Royal Tenerife Country Tenerife, Canary Islands X X X X X
Club
Sahara Sunset Club Costa del Sol, Spain X X X X X X
Sunset Bay Club Tenerife, Canary Islands X X X X X X
Sunset Harbor Club Tenerife, Canary Islands 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
Woodford Bridge Country North Devon, England X X X X X X
Club
Wychnor Park Country Club Stratfordshire, England X X X X X X X
VACATION INTERNATIONALE:
Clock Tower Village Whistler, British X X
Columbia
Sea Mountain Big Island, Hawaii X X X X X X
Elkhorn Village Sun Valley, Idaho X X X X X X X
Embarcadero Newport, Oregon X X X X X X
Fairway Villa Oahu, Hawaii X X X X
Hololani Maui, Hawaii X X
Kapaa Shore Kauai, Hawaii X X X X X
Kihei Kai Nani Maui, Hawaii X X
Kingsbury of Tahoe Stateline, Nevada X X X X
The Oasis Resort Palm Springs, California X X X X X X
Marina Inn Oceanside, California X X X X
Papakea Maui, Hawaii X X X X X
Point Brown Resort Ocean Shores, Washington X X X X X
Pono Kai Kauai, Hawaii X X X X X
Royal Kuhio Oahu, Hawaii X X
Sea Village Big Island, Hawaii X X X X X
The Pines Sunriver, Oregon X X X X X X
The Village at Steamboat Steamboat Springs, X X X X X X
Colorado
Torres Mazatlan Mazatlan, Mexico X X X X X X X
Vallarte Torre Puerto Vallarta, Mexico X X X X X X
Valley Isle Maui, Hawaii X X X X X
</TABLE>
61
<PAGE> 65
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 $25,000 for a three
bedroom residence. The Company offers consumer financing to the purchasers of
vacation interests at the Company's resort locations 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 interest.
The Company has entered into agreements with lenders for the Company's
financing of customer receivables. At December 31, 1997, the Company had
approximately $199 million of additional borrowing capacity available.
At December 31, 1997, the Company's mortgage portfolio included
approximately 37,000 promissory notes totaling approximately $355 million, with
a stated maturity of typically seven to ten years and a weighted average
interest rate of 14.4% per annum. As of December 31, 1997, approximately 4.6% of
the Company's consumer loans were considered by the Company to be delinquent
(scheduled payment 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 scheduled payment is more than 120 days past due) on an
additional approximately 2.2% of its consumer loans. During 1997, the Company
charged off approximately 0.7% of the average outstanding principal balance of
its consumer loans. As of December 31, 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 a scheduled payment is due), at which point it
expenses the interest accrued on such loan, commences foreclosure proceedings
and, upon obtaining title, returns the Vacation Interval or Vacation Points 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 14% (which includes a 1% commission contingent on
the Company meeting certain volume thresholds) of the principal amount of
eligible consumer loans on a non-recourse basis.
SALES AND MARKETING
As the world's largest vacation ownership company, as measured by the
number of resort locations, 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 and Vacation Points. The
Company's primary means of selling Vacation Intervals and Vacation Points 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
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of profiling, and are intended to include current owners of Vacation Intervals
and Vacation Points. Cross-marketing targets current owners of Vacation
Intervals and Vacation Points at the Company's resort locations, both to sell
additional Vacation Intervals and Vacation Points at the owner's home resort, or
to sell a Vacation Interval or Vacation Points at another of the Company's
resort locations. The Company also sells Vacation Points through 13 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 and Vacation Point 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
ownership resorts 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 location and the resulting demand for the converted
units, (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 location, utilizing available financial information in
addition to the other information collected from a variety of sources. The
estimated sales of units are examined, including the management fees associated
with such unit. Finally, the potential for overall capital appreciation and
alternate uses of the resort are considered, including the prospects for
obtaining liquidity through sale or refinancing of the resort location.
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 environmental consulting firms. 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.
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OTHER OPERATIONS
Room Rental Operations. In order to generate additional revenue at certain
of its resorts that have rentable inventory of Vacation Intervals and Vacation
Points, the Company rents units with respect to such unsold or unused Vacation
Intervals and Vacation Points for use as a hotel. The Company offers these
unoccupied units both through direct consumer sales, travel agents and/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 and
Vacation Points. As part of the management services provided by the Company to
Vacation Interval and Vacation Points 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 was acquired as a traditional resort condominium and
the Sunterra Resorts Carambola Beach and Embassy Vacation Resort Kaanapali Beach
were acquired as traditional hotels, with the intention of converting each such
resort location to a vacation ownership property. Until such time as a unit at
each resort is sold as Vacation Intervals, the Company continues (or will
continue) to rent such unit on a nightly basis. In the future, other acquired
resorts may be operated in this fashion during the start-up of Vacation Interval
sales.
Resort Management. The Company's resorts are (i) generally managed by the
Company pursuant to management agreements with homeowner associations with
respect to each of the Company's Sunterra Resorts, (ii) managed by Promus
pursuant to management agreements with the Company with respect to the Company's
Grand Beach and Lake Tahoe Embassy Vacation Resorts are managed by Westin with
respect to the Westin Vacation Club resort. The Company manages 27 of its
Sunterra Resorts, two of its Embassy Vacation Resorts, 19 of its VI resorts and
18 of its Grand Vacation Club resorts. The Company's Marc Resorts subsidiary
manages units at an additional 22 resorts in Hawaii. The remaining resort
locations are managed by third party management companies. The Company pays
Promus a licensing fee of 2% of Vacation Interval sales at the Embassy Vacation
Resorts.
At each of the Company's managed resort locations, the Company enters into
a management agreement to provide for management and maintenance of the resort.
Pursuant to each such management agreement the Company is typically paid a
monthly management fee equal to 10% of monthly maintenance fees (15% of monthly
maintenance fees with respect to its Grand Vacation Club resorts). 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
managed resort locations, including administrative services, procurement of
inventories and supplies and promotion and publicity. With respect to each
managed resort location, 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 managed resort locations, 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.
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.
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Each vacation interest 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.
POINTS-BASED VACATION OWNERSHIP PROGRAMS
In general, under a points-based system, owners (usually referred to as
members) purchase points which act as an annual currency entitlement for
occupancy rights at any of the club's participating resorts. The Company's Club
Sunterra points-based system will operate on a basis very similar to the
standard vacation interval ownership structure in that members have a home
resort, and have a deeded, fee-simple interest in a particular unit at that home
resort. The advantages of a points-based system relate to the flexibility given
to members with respect to the usage of their points versus the usage of a
traditional interval. In traditional interval ownership, owners can generally
only use their interval for a one week stay in a specific unit size in a
specific resort or exchange through an external exchange organization (i.e. RCI
or II). Under a points-based system, members can select vacations according to
their schedules and space needs, based on their available points. Owners can
"spend" their points as they wish, for example using them all for one extended
stay or dividing them up into multiple shorter stays. Owners may also choose
between larger or smaller units which have different point values. (The number
of points required for a stay varies depending upon a variety of factors,
including the resort location, the size of the unit, the vacation season and the
length of stay.) Additionally, in a points-based system, owners can redeem their
points for a stay in any one of the resorts included in the club without having
to exchange through an external exchange company such as RCI or II. Members of
the proposed Club Sunterra points system will, however, be able to exchange
through RCI or II for vacation stays at resorts outside of their club systems if
they desire.
The Company currently operates two points-based vacation ownership
programs: the Grand Vacation Club (consisting of the Company's 26 European
resorts) and the VTS Program (consisting of 21 resorts in North America). Over
time, the Company intends to continue its expansion of the Grand Vacation Club
system in Europe. It also intends to integrate the VTS Program and the Company's
29 Sunterra Resorts into Club Sunterra. Club Sunterra will operate as an
umbrella points-based vacation exchange program for its European and North
American operations. In addition to attracting new owners, the Company will
market Club Sunterra to its existing base of owner families.
PARTICIPATION IN VACATION INTEREST EXCHANGE NETWORKS
The Company believes that its vacation interests are made more attractive
by the Company's participation in vacation interest exchange networks operated
by RCI and II. In a 1997 study sponsored by ARDA, the exchange opportunity was
cited by purchasers of vacation interests as one of the most significant factors
in determining whether to purchase a vacation interest. 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 interest 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.
Members may exchange their vacation interests for occupancy rights in another
participating resort by listing their vacation interests 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
interest, 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
interest is available, and attempts to satisfy the exchange request by providing
an occupancy right in another vacation interest 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 interest
exchange organization, which has a total of more than 3,000 participating resort
facilities and over 2.2 million members worldwide. The cost of the annual
membership fee in RCI, which typically is at the option and expense of the owner
of the vacation
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interest, is $78 per year, plus an exchange fee of $110 and $145 for domestic
and international exchanges, respectively. RCI has assigned high ratings to the
vacation interests in the Company's resort locations, and such vacation
interests have in the past been exchanged for vacation interests at other
highly-rated member resorts. Established in 1976, II has more than 1,500
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 interest, is $68 per year, plus an exchange fee of $99
and $119 for domestic and international exchanges, respectively. II has assigned
high ratings to the vacation interests in the Company's resort properties, and
such vacation interests have in the past been exchanged for vacation interests
at other highly-rated member resorts.
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. 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
CFI, Vistana, Fairfield, Silverleaf, Trendwest and ILX. Under the terms of a
five-year agreement, Promus and Vistana 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 will designate selected markets for
development (which markets currently include Kissimmee, Florida and Myrtle
Beach, South Carolina and in which markets Vistana 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. 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 and Global Acquisitions, the Company is also subject
to competition in the European vacation ownership market, which is highly
fragmented. In addition to LSI and the Global Group, there is one other operator
in Europe operating multi-resort points clubs -- Club la Costa. LSI and the
Global Group also have 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.
GOVERNMENTAL REGULATION
General. The Company's marketing and sales of vacation interests 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 interests 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
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1964 and 1968. In addition, many states have adopted specific laws and
regulations regarding the sale of vacation interest 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 interests. 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 interests.
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 purchasers of vacation interests, 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 interests generally grant the purchaser of a vacation
interest 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. The Company is in the process of
determining whether it must offer rescission rights to purchasers of up to 227
Vacation Intervals at the San Luis Bay Resort in order to comply with California
Department of Real Estate regulations. Although these sales currently remain in
escrow, if any such purchaser exercises a rescission right, the Company would
refund the purchaser's deposit and will take the subject Vacation Interval back
into inventory to be resold at a later date. No assurance can be given that the
cost of qualifying under vacation interest ownership regulations in all
jurisdictions in which the Company desires to conduct sales will not be
significant. Any failure to comply with applicable laws or regulations could
have material adverse effect on the Company.
In addition, certain state and local laws may impose liability on property
developers with respect to construction defects discovered or repairs made by
future owners of such property. Pursuant to such laws, future owners may recover
from the Company amounts in connection with the repairs made to the developed
property.
The marketing and sales of the Company's Grand Vacation Club 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 the Company conducts its operations), the European Timeshare Directive of
1994 regulates vacation ownership activities. For it to have direct effect, the
European Timeshare Directive must have been implemented by European Community
Member States prior to May 1997. As of the date of this Offering Memorandum,
Spain and France have not implemented the Directive. The terms of the Directive
require the Company 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 the Company'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 the Company is or may be
subject to including the Consumer Credit Act 1974, the Unfair Terms in Consumer
Contracts Regulations 1994, the Unfair Contract Terms Act 1977, the Data
Protection Act 1984 and the Package Travel, Package Holidays and Package Tours
Regulations 1992. While Spain and France have no specific timeshare legislation,
it is expected that they will implement the Timeshare Directive in the near
future. Until they do so, however, the European Timeshare Directive has no
direct effect in Spain or France. 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 the Company operates have consumer and other laws which
regulate its activities in those countries. The Company is member of the
Timeshare Council which is the United Kingdom's self regulating trade body for
vacation ownership companies. As a member, it is obligated to comply with all
laws as well as with certain
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codes of conduct (including a code of conduct for the operating of points
systems) promulgated by the Timeshare Council.
Environmental Matters. Under various Environmental Laws, a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances or wastes or releases of petroleum
products or wastes at such property, and may be held liable to a governmental
entity or to third parties for associated damages and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws may 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. In addition, 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 or wastes 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 statutory or 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 potentially may be liable for such
costs. In addition, as a result of the consummation of the Acquisitions, the
Company could be held liable for the pre-existing environmental and other
liabilities of the acquired companies, if any.
Certain Environmental Laws 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 operators of real
properties for personal injury associated with ACMs. In connection with its
ownership and operation of its properties, the Company potentially may be liable
for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (pCi/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's resorts may adversely affect the
Company's ability to sell vacation interests at such resorts and the market
value of such resort. In addition, the Company is required to disclose to
potential purchasers and owners of vacation interests at the Company's resorts
that were constructed prior to 1978 any known lead-paint hazards and failure to
so notify could impose damages on the Company.
The Company has conducted Phase I environmental assessments (which
typically involve inspection without soil sampling or groundwater analysis)
performed by independent environmental consultants at each of the resort
locations at which it has sold or owns a material amount of inventory in order
to identify potential environmental concerns. These Phase I assessments have
been carried out in accordance with accepted industry practices, and generally
have included a preliminary investigation of the sites and identification of
publicly known conditions concerning properties in the vicinity of the sites,
physical site inspections, review of aerial photographs and relevant
governmental records where readily available, interviews with knowledgeable
parties, investigation for the presence of above ground and underground storage
tanks presently or formerly at the sites, a visual inspection of potential
lead-based paint and suspect friable ACMs where appropriate, 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
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Company's assessments do not reveal all environmental liabilities or that there
are material environmental liabilities of which the Company is unaware. The
Company believes that its properties are in compliance in all material respects
with all Environmental Laws regarding hazardous or toxic substances or wastes.
The Company does not believe that continued 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 Sunterra Resorts San Luis Bay, several areas of
environmental concern have been identified. The areas of concern at the Embassy
Vacation Resort Lake Tahoe relate to possible soil and groundwater contamination
that has migrated onto the resort site from an upgradient source; in addition,
residual contamination may exist on the resort site as a result of leaking
underground storage tanks that were removed prior to the Company's acquisition
of the resort site. California regulatory authorities are monitoring the
off-site contamination and have required or are in the process of requiring the
responsible parties to undertake remedial action. The Company has been
indemnified by Chevron (USA), Inc. for certain costs and expenses in connection
with the off-site contamination. The Company does not believe that it will be
held liable for this contamination and does not anticipate incurring material
costs in connection therewith; however, there can be no assurance that the
indemnitor will meet its obligations in a complete and timely manner. Sunterra
Resorts San Luis Bay is located in an area of Avila Beach, California which has
experienced soil and groundwater contamination resulting from a nearby oil
refinery. California regulatory authorities have required the installation of
groundwater monitoring wells on the beach near the resort site (among other
locations). As of the present time, the Company does not believe that any
remedial action has been undertaken. It is possible that the Company's
operations could be adversely impacted, including possible temporary
interference with access to the resort site, once remediation is underway. The
Company does not believe that it is liable for this contamination and does not
anticipate incurring material costs in connection therewith; however, there can
be no assurance that claims will not be asserted against the Company with
respect to this matter. In addition, the Company is evaluating whether any
remediation or corrective action may be necessary at its Malaga Bay resorts.
The Company is not aware of environmental liability that would have a
material adverse effect on the Company's business, assets or results of
operations, nor has the Company been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or other claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present or former properties. The Company
believes that it is in compliance in all material respects with all
Environmental Laws. No assurance, however, can be given that the Company is
aware of all environmental liabilities or that no prior owner, operator or third
party caused a material environmental condition at such property not currently
known to the Company. See "Risk Factors -- Possible 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 December 31, 1997, the Company had approximately 4,150 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 are represented by a labor union.
The Company sells Vacation Intervals and Vacation Points at its resorts
through approximately 1,250 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
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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 locations, with policy specifications, insured limits and deductibles
customarily carried for similar properties which the Company believes are
adequate. In September 1995 and July 1996, the Company's St. Maarten resorts
were damaged by a hurricane. With respect to such September 1995 damage, the
Company has recovered amounts from its insurance carriers sufficient to cover
100% of the property damage losses and is in the process of recovering amounts
for business interruption. 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.
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, including the "Sunterra" and "Own Your World" service marks 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 to "Sunterra
Corporation." The name change proposal will be presented for stockholder
approval at the Company's May 15, 1998 annual meeting.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of March 31, 1998,
concerning each person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Osamu Kaneko......................... 50 Chairman of the Board
Andrew J. Gessow..................... 40 Director and Chief Executive Officer
Steven C. Kenninger.................. 45 Director and President
Michael A. Depatie................... 41 Director, Executive Vice President and Chief
Financial Officer
James E. Noyes....................... 51 Director and Chief Operating Officer
Charles C. Frey...................... 43 Senior Vice President, Accounting and Administration
Loren V. Gallagher................... 51 Senior Vice President, Asia
Genevieve Giannoni................... 34 Senior Vice President, Operations
Michael V. Paulin.................... 56 Senior Vice President, Hospitality Management
Dewey W. Chambers.................... 40 Vice President and Treasurer
Andrew D. Hutton..................... 33 Vice President, General Counsel and Secretary
Timothy D. Levin..................... 41 Vice President, Architecture
David D. Philp....................... 36 Vice President, Acquisitions
Peter J. Shoobridge.................. 32 Vice President, Business Development
James D. Wheat....................... 40 Vice President and Corporate Controller
Adam M. Aron......................... 43 Director
Sanford R. Climan.................... 42 Director
J. Taylor Crandall................... 43 Director
Joshua S. Friedman................... 42 Director
W. Leo Kiely III..................... 51 Director
</TABLE>
OSAMU KANEKO has served as a Chairman of the Board of the Company since
June 1996, previously serving as Chief Executive Officer of the Company from
June 1996 to July 1997 and as Co-Chief Executive Officer from July 1997 to
February 1998. Mr. Kaneko, a Japanese national, received a B.A. degree from
Indiana State University in 1971. From 1974 to 1986, Mr. Kaneko was the
Executive Vice President of Hasegawa Komuten (USA) Inc., the American subsidiary
of Hasegawa Komuten Ltd., a Japanese real estate development company. In this
capacity, Mr. Kaneko was responsible for the development of income producing
properties in Hawaii, including resort condominiums and hotels. In 1985, Mr.
Kaneko co-founded KOAR Group, Inc. ("KOAR") (a real estate acquisition and
development company) with Mr. Kenninger and since that time has served as its
Chief Executive Officer.
ANDREW J. GESSOW has served as a Director of the Company since its
inception in May 1996 and as Chief Executive Officer since February 1998,
previously serving as Co-Chief Executive Officer since July 1997 and as
President since June 1996. Mr. Gessow founded Argosy Group Inc. ("Argosy")(a
real estate acquisition and development company and one of the Company's
predecessor entities) in 1990 and served as its President from 1990 through
August 1996. Prior thereto, Mr. Gessow served as a Partner with Trammell Crow
Company (a real estate development, management and investment company) and was
President of Trammell Crow Residential Services, Florida and West Coast from
1987 to 1990. From 1981 through 1987, Mr. Gessow was Founder and President of
Travel, Inc., and Home Search, Inc. which he co-founded with Citicorp Venture
Capital. Mr. Gessow received a B.B.A. degree in Finance from Emory University in
1978 and a M.B.A. degree from Harvard Business School in 1980.
STEVEN C. KENNINGER has served as a Director of the Company since its
inception and as President of the Company since February 1998. Previously, Mr.
Kenninger served as Chief Operating Officer and Secretary of the Company from
June 1996 to February 1998. Mr. Kenninger co-founded KOAR with Mr. Kaneko in
1985 and most recently served as its President. Mr. Kenninger was a practicing
attorney at the law firm of Paul,
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<PAGE> 75
Hastings, Janofsky & Walker, located in Los Angeles, California from 1977
through 1981 and at the law firm of Riordan & McKinzie, located in Los Angeles,
California from 1981 through 1985, where he was a partner. Mr. Kenninger
received a B.S. degree in Mechanical Engineering from Purdue University in 1974
and received a J.D. degree from Stanford Law School in 1977. Mr. Kenninger is a
member of the Board of Visitors of the Stanford Law School and has been a member
of the State Bar of California since 1977.
MICHAEL A. DEPATIE has served as a Director of the Company since October
1997 and as Executive Vice President and Chief Financial Officer of the Company
since November 1996. Prior to joining the Company, Mr. Depatie was Senior Vice
President of Finance and Chief Financing Officer of La Quinta Inns, Inc. (a
hotel operating company) from July 1992 to August 1996. From April 1989 through
June 1992, Mr. Depatie was co-founder and Senior Vice President of Finance of
Summerfield Hotel Corporation (a hotel operating company). From April 1988
through April 1989, Mr. Depatie was founder and Managing General Partner of
Pacwest Capital Partners. From June 1984 through April 1988, Mr. Depatie served
as Senior Vice President of Finance and Development of The Residence Inn
Company. Mr. Depatie received a B.A. degree from Michigan State University in
1979 and a M.B.A. degree from Harvard Business School in 1983.
JAMES E. NOYES has served as a Director of the Company since July 1996 and
as Chief Operating Officer since February 1998. Previously, Mr. Noyes served as
Executive Vice President of the Company since July 1996. Prior to joining the
Company, from 1989 through June 1996 Mr. Noyes served as President of The Trase
Miller Group (a travel technology services company), the parent company of MTI
Vacations, Inc., with interests in vacation packaging, travel technology and
specialized teleservices, and previously served as its Vice President of
Marketing and Sales since 1980. Mr. Noyes served in various management positions
for Wilson Sporting Goods from 1976 to 1980. Mr. Noyes is a director of Preview
Travel, Inc. and Ball Horticultural, Inc. (a horticultural supply company). Mr.
Noyes received a B.A. degree in 1970 from Dartmouth College and received a
M.B.A. degree in 1974 from Stanford Business School.
CHARLES C. FREY has served as Senior Vice President, Accounting and
Administration of the Company since January 1997. Previously, he served as
Senior Vice President and Treasurer of the Company since July 1996. Prior
thereto, Mr. Frey had served as Senior Vice President of Administration and
Treasurer of Argosy (one of the Company's predecessor entities) since 1992.
Prior thereto, Mr. Frey was Vice President and Chief Financial Officer of
Trammell Crow Residential Services-Florida from 1986 to 1992. Mr. Frey is a
Certified Public Accountant and a licensed real estate broker in Florida. He
received a B.S. degree in Accounting and Economics from the Indiana University
of Pennsylvania in 1977.
LOREN V. GALLAGHER has served as Senior Vice President, Asia of the Company
since January 1997. Prior to joining the Company, Mr. Gallagher held executive
management positions with Vacation Resorts International (a vacation ownership
management company) from 1979 through December 1996, most recently serving as
its President and Chief Operating Officer. In addition, Mr. Gallagher was a
practicing attorney from 1983 to 1996, specializing in real estate acquisition
and vacation ownership. Prior thereto, he was an independent real estate broker
in California from 1977 to 1979 and was a licensed real estate sales associate
at Coldwell-Banker from 1975 to 1977. He is a licensed real estate broker in
California and is a member of the State Bar of California. Mr. Gallagher
received a B.A. degree from Winona State University, M.A. degrees from San Diego
State University and National Chengchi University in Taiwan (Chinese language)
and a J.D. degree from Loyola Law School.
GENEVIEVE GIANNONI has served as Senior Vice President, Operations of the
Company since July 1996. Ms. Giannoni joined Argosy (one of the Company's
predecessor entities) in May 1992 as Director of Marketing, became a Vice
President in 1993, and Senior Vice President, Operations in 1994. Prior to
joining Argosy, Ms. Giannoni was a marketing director at Trammell Crow
Residential Services-Florida from 1987 to 1992. Ms. Giannoni is a licensed real
estate agent in Florida. She received a B.A. degree from Rollins College in 1985
and graduated from the Crummer Management Program at Rollins College in 1990.
MICHAEL V. PAULIN has served as Senior Vice President, Hospitality
Management of the Company since January 1998. Mr. Paulin also serves as
President of the Company's Marc Hotels & Resorts subsidiary which he founded in
1987 and the Company acquired in October 1997. Prior to forming Marc Hotels &
Resorts, Mr. Paulin served as Senior Vice President of Aston Hotels & Resorts
form 1978 to 1987 and Vice President
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<PAGE> 76
of Colony Hotels from 1970 to 1978. From 1964 to 1970, Mr. Paulin was President
and Founder of World Wide Living, Inc., a tourist apartment, home, and yacht
rentals provider. Mr. Paulin has served as Chairman of the Hawaii Hotel
Association and Chairman of the Pacific Asia Travel Association. Mr. Paulin
received a B.S. degree in Business Economics and International Trade from the
University of Southern California in 1963.
DEWEY W. CHAMBERS has served as Vice President and Treasurer of the Company
since January 1997. Prior to joining the Company, Mr. Chambers served as Vice
President -- Treasurer of La Quinta Inns, Inc. from 1992 through December 1996.
Prior thereto, Mr. Chambers served with the accounting firm of KPMG Peat
Marwick, L.L.P. from 1983 to 1992, most recently as Senior Manager. Mr. Chambers
is a Certified Public Accountant. Mr. Chambers received a B.B.A. degree in
Finance from the University of Oklahoma in 1980 and a B.B.A. degree in
Accounting from the University of Texas at San Antonio in 1983.
ANDREW D. HUTTON has served as Vice President and General Counsel of the
Company since October 1996 and as Secretary of the Company since February 1998.
Prior to joining the Company, from 1991 through October 1996, Mr. Hutton
practiced corporate securities and finance law with the law firm of Latham &
Watkins, located in Los Angeles, California. Mr. Hutton received a J.D. degree
from the University of Minnesota Law School in 1991 and received B.S. and B.A.
degrees from the University of Kansas in 1988. Mr. Hutton has been a member of
the State Bar of California since 1991.
TIMOTHY D. LEVIN has served as Vice President, Architecture of the Company
since July 1996. Prior thereto, Mr. Levin was Vice President, Architecture, of
KOAR since December 1995. From 1989 through December 1995, Mr. Levin was
President of Sevelex Consultants, Inc., a project management and design
consulting firm affiliated with Messrs. Kaneko and Kenninger. Mr. Levin was the
senior design and production manager at Carl Wahlquist AIA Architects, Inc. from
1983 through 1988. Mr. Levin is a member of the American Institute of Architects
and has been a licensed General Contractor in the State of California since
1980. Mr. Levin received his Bachelor of Architecture degree from Southern
California Institute of Architecture in 1986.
DAVID D. PHILP has served as Vice President, Acquisitions of the Company
since September 1997, previously serving as Senior Director of Acquisitions
since February 1996. Prior to joining the Company, Mr. Philp was a Director of
Development for Doubletree Hotels Corporation from October 1994 through August
1995 and from 1991 through September 1994 was a Director of the Hospitality
Consulting Group for Kenneth Leventhal & Company. Prior thereto, Mr. Philp was a
Manager of Development for IDG Development (a real estate development company)
from 1990 to 1991, was a Senior Consultant for the accounting firm of Pannell
Kerr Forster from 1987 to 1990 and held operations management positions with
Hyatt Hotels Corporation from 1984 to 1987. He received a B.A. degree from the
Cornell University School of Hotel Administration in 1984.
PETER J. SHOOBRIDGE has served as Vice President of Business Development of
the Company since September 1997. From January 1994 to September 1997 he served
as Chief Financial Officer and from July 1996 to September 1997, as Director of
Business Development of LSI Group Holdings Plc, which was acquired by the
Company in August 1997. Prior to joining LSI, Mr. Shoobridge served with the
accounting firm of BDO Sloy Hayward in London, England from January 1984 to
August 1987, most recently as manager in the Corporate Finance department. Mr.
Shoobridge holds a degree in music from the Royal Northern College of Music in
Manchester, England, and is a member of the Institute of Chartered Accountants
in England and Wales.
JAMES D. WHEAT has served as Vice President and Corporate Controller of the
Company since November 1997. Prior to joining the Company, Mr. Wheat served with
Raychem Corporation (a materials science manufacturing company) from 1991 to
November 1997 as internal auditor, division controller and external reporting
manager. Mr. Wheat is a Certified Public Accountant, Certified Management
Accountant, Certified Internal Auditor and is a licensed real estate broker in
California. He received a B.B.A. degree from the University of Michigan in 1980
and a M.B.A. degree from The Wharton School of Business at the University of
Pennsylvania in 1985.
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<PAGE> 77
ADAM M. ARON has served as Director of the Company since October 1997. Mr.
Aron has served as Chairman of the Board and Chief Executive Officer of Vail
Resorts, Inc. since July 1996. Prior to joining Vail Resorts, Mr. Aron served as
President and Chief Executive Officer of Norwegian Cruise Line Ltd. from July
1993 to July 1996, as Senior Vice President of Marketing for United Airlines
from November 1990 to July 1993 and as Senior Vice President of Marketing for
Hyatt Hotels Corporation from 1987 to 1990. Mr. Aron also serves as a director
of Florsheim Group, Inc. Mr. Aron holds a B.A. degree from Harvard College and a
M.B.A. degree from Harvard Business School.
SANFORD R. CLIMAN has served as a Director of the Company since August
1996. In June 1997, Mr. Climan returned to Creative Artists Agency, Inc.
("CAA"), a leading literary and talent agency, as a member of its senior
executive team. Mr. Climan was formerly a member of CAA's senior executive team
from June 1986 to September 1995. From October 1995 through May 1997, Mr. Climan
was Executive Vice President and President Worldwide Business Development of
Universal Studios, Inc. From 1979 to 1986, Mr. Climan held various positions in
the entertainment industry. Mr. Climan also serves as a director of PointCast,
Inc. (an internet computer software company). Mr. Climan received a B.A. degree
from Harvard College in 1977, a M.B.A. degree from Harvard Business School in
1979 and a Master of Science in Health Policy and Management from the Harvard
School of Public Health in 1979.
J. TAYLOR CRANDALL has served as a Director of the Company since October
1997. Mr. Crandall has served as Vice President and Chief Financial Officer of
Keystone, Inc., the principal investment vehicle of Robert M. Bass of Fort
Worth, Texas since October 1996 and as President, Director and sole stockholder
of Acadia MGP, Inc. (managing general partner of Acadia Investment Partners,
L.P., the sole general partner of Acadia Partners, L.P. (an investment
partnership)) since 1992. Mr. Crandall also serves as a director of Bell &
Howell Company, Quaker State, Specialty Foods Corporation and Washington Mutual.
Mr. Crandall holds a B.A. degree from Bowdoin College, where he has served as a
trustee.
JOSHUA S. FRIEDMAN has served as a Director of the Company since August
1996. Mr. Friedman is a founder of Canyon Partners Incorporated, a private
merchant banking firm and an affiliate of Canpartners Incorporated, and has been
a Managing Partner of Canyon Partners Incorporated since its inception in 1990.
From 1984 through 1990, Mr. Friedman served with Drexel Burnham Lambert
Incorporated (an investment banking firm), most recently as Executive Vice
President and Co-Director, Capital Markets. Mr. Friedman also serves as a
director of First Aviation Services, Inc. (an aircraft services supplier) and
several privately held companies and charitable organizations. Mr. Friedman
received a B.A. degree from Harvard College in 1976, a M.A. degree from Oxford
University in 1978, a J.D. degree from Harvard Law School in 1982 and a M.B.A.
degree from Harvard Business School in 1982.
W. LEO KIELY III has served as a Director of the Company since August 1996.
Mr. Kiely has been President and Chief Operating Officer of Coors Brewing
Company since 1993. From 1982 through 1993, Mr. Kiely held various executive
positions with Frito-Lay Inc., a subsidiary of PepsiCo, most recently serving as
President of Frito-Lay's Central Division. Prior to joining Frito-Lay, Mr. Kiely
was President of Ventura Coastal Corporation, a division of Seven-Up
Corporation, from 1979 through 1982. Mr. Kiely also serves as a director of Bell
Sports, Inc. (a bicycle helmet manufacturer). He is also on the advisory boards
of the National Association of Manufacturers and several educational and
charitable organizations. Mr. Kiely received a B.A. degree from Harvard College
in 1969 and a M.B.A. degree from the Wharton School of Business at the
University of Pennsylvania in 1971.
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<PAGE> 78
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company's indebtedness at December 31, 1997 consists principally of the
Senior Subordinated Notes, the Convertible Notes, hypothecated notes and other
indebtedness with balances of $200.0 million, $138.0 million, $74.6 million and
$22.6 million, respectively. The Company has also entered into a $117.5 million
Senior Credit Facility. As of May 1, 1998, no amounts were outstanding under the
Senior Credit Facility. The Company is also in negotiations to issue up to
approximately $100 million of Securitized Notes. The material terms of such
indebtedness are summarized below.
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 million 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 (including the Notes) 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.
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 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
including the Notes and the Senior Subordinated Notes and will be effectively
subordinated to all indebtedness and other obligations of the Company's
subsidiaries.
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HYPOTHECATED NOTES
The Company has entered into hypothecation agreements with lenders for the
Company's financing of customer receivables. The hypothecated notes, which
totaled $74.6 million at December 31, 1997, typically 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 interest 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 interests 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
interests.
OTHER INDEBTEDNESS
At December 31, 1997, the Company's other indebtedness totaled $22.6
million. Of this total, $11.6 million 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. An additional $6.2 million of indebtedness is secured by land
and other assets and bears interest at rates ranging from 7.75% to 9.00% and has
final maturities ranging from 1999 to 2014. The Company also has $4.8 million in
advances on mortgages sold with recourse to a third party. The principal and
interest on the mortgages receivable sold with recourse are remitted directly to
the purchaser and are therefore not classified as hypothecated debt.
SENIOR CREDIT FACILITY
The Company entered into a $100 million Senior Credit Facility on February
18, 1998. On April 1, 1998, the Senior Credit Facility was amended to increase
the amount available thereunder to $117.5 million. The Senior Credit Facility
has variable borrowing based on the percentage of the Company's mortgage
receivables pledged under such facility and the amount of funds advanced
thereunder. The interest rate under the Senior Credit Facility will vary between
LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount advanced against
mortgages receivable. The Senior Credit Facility has a three-year term and
contains covenants such as, but not limited to, limits on maximum total
indebtedness to total capitalization, limits on maximum total senior debt to
total capitalization, minimum tangible net worth requirements, minimum interest
coverage ratio requirements, as well as restrictions on dividends and
investments, covenants, representations and warranties and conditions to borrow
the funds. As of May 1, 1998, no amounts were outstanding under the Senior
Credit Facility.
SECURITIZED NOTES
The Company expects to securitize approximately $100 million of its
mortgages receivable, of which $50 million has been pre-committed. The Company
expects to convey the mortgages receivable to a bankruptcy remote subsidiary,
which would issue the Securitized Notes. The Securitized Notes would be
nonrecourse to the Company. The Company is finalizing negotiations and expects
to complete the securitization by May 1998. If completed, the securitization
would be treated as a financing transaction for accounting purposes. The
mortgages receivable and the Securitized Notes would remain on the Company's
balance sheet. The Company would recognize no gain or loss on the Securitized
Notes transaction.
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DESCRIPTION OF NOTES
The Private Notes were, and the Exchange notes will be, issued under an
Indenture dated as of April 15, 1998, between the Company and Norwest Bank
Minnesota, National Association, as Trustee (the "Trustee"), a copy of which is
available as set forth under "Available Information." The following summaries of
certain provisions of the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions therein of certain terms.
Whenever particular Sections, Articles or defined terms of the Indenture are
referred to, such Sections, Articles or defined terms are incorporated herein by
reference. As used in this "Description of Notes," the "Company" refers to
Signature Resorts, Inc. and does not include its subsidiaries or affiliates.
GENERAL
The Notes are general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future unsubordinated
Indebtedness of the Company and will rank senior in right of payment to all
subordinated Indebtedness of the Company. The Notes are effectively subordinated
to all secured Indebtedness of the Company to the extent of the security and to
all Indebtedness and other obligations (including trade payables) of the
Company's subsidiaries. In addition, the operations of the Company are conducted
in part through its Subsidiaries and, therefore, the Company is dependent in
part upon the cash flow of its Subsidiaries to meet its obligations, including
its obligations under the Notes. The Company's Subsidiaries will not guarantee
the Company's payment of obligation under the Notes. See "Risk
Factors -- Structural Subordination of Notes." The Notes are limited to an
aggregate principal amount of $140.0 million and will mature on May 15, 2006.
The Notes will bear interest at the rate per annum shown on the front cover of
this Prospectus from the date of initial issuance or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
payable semiannually on May 15 and November 15 of each year, commencing on
November 15, 1998, to the Person in whose name the Note (or any predecessor
Note) is registered at the close of business on the preceding May 1 or November
1, as the case may be. Principal of and interest on the Notes will be payable
at, and the transfer of Notes will be registrable at, the office of the
Trustee's agent in New York, New York. In addition, payment of interest may, at
the option of the Company, be made by check mailed to the address of the person
entitled thereto as it appears in the Security Register. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
The Company may be required to pay liquidated damages in certain
circumstances if the Company does not file a registration statement relating to
the Registered Exchange Offer on a timely basis, if the registration statement
is not declared effective on a timely basis or if certain other conditions are
not satisfied, all as further described under "Exchange Offer -- Liquidated
Damages."
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes may not be
redeemed at the option of the Company prior to May 15, 2002. Thereafter, the
Notes may be redeemed, in whole or in part, at the option of the Company, upon
not less than 30 nor more than 60 days' notice by mail.
The Redemption Prices (expressed as a percentage of principal amount), and
in each case plus accrued and unpaid interest to the date of redemption, and
subject to the rights of Holders of record on the relevant
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<PAGE> 81
Regular Record Date to receive interest due on an Interest Payment Date, are as
follows for the 12-month period (unless otherwise noted) beginning on May 15 of
the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.............................. 104.625%
2003.............................. 103.083%
2004.............................. 101.542%
2005 and thereafter............... 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 15, 2001, the
Company may redeem in the aggregate up to 40% of the original principal amount
of the Notes with the proceeds of one or more Equity Offerings, at a redemption
price (expressed as a percentage of principal amount) of 109.25% plus accrued
and unpaid interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least 60% of the
original aggregate principal amount of the Notes must remain outstanding after
each such redemption.
If less than all of the Notes are to be redeemed, the Trustee will select
the particular Notes (or the portions thereof) to be redeemed either by lot, pro
rata or by such other method as the Trustee shall deem fair or appropriate.
No sinking fund is provided for the Notes.
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of Notes shall have the right,
at the Holder's option, to require the Company to repurchase all of such
Holder's Notes, or any portion thereof that is an integral multiple of $1,000,
on the date (the "Repurchase Date") that is 45 days after the date of the
Company Notice (as defined), at a price equal to 101% of the principal amount of
the Notes to be repurchased (the "Repurchase Price"), together with accrued
interest to the Repurchase Date.
Within 30 days after the occurrence of a Change of Control, the Company is
obligated to mail to all Holders of record of the Notes a notice (the "Company
Notice") of the occurrence of such Change of Control and of the repurchase right
arising as a result thereof. The Company must also deliver a copy of the Company
Notice to the Trustee. To exercise the repurchase right, a Holder of Notes must
deliver on or before the 30th day after the date of the Company Notice
irrevocable written notice to the Trustee of the holder's exercise of such
right, together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer to the Company.
The Company's Credit Agreements contain, and future indebtedness of the
Company may contain, restrictions on certain transactions that could constitute
a Change of Control. In addition, the financial effect on the Company of the
exercise by the Holders of the Notes of their right to require the Company to
repurchase the Notes could cause a default under outstanding Indebtedness, even
if the Change of Control itself does not. In addition, the Company's ability to
pay cash to the Holders of the Notes upon a repurchase may be limited by the
Company's then existing financial resources.
The Company will comply with Rule 14e-1 and all other applicable federal
and state securities laws in connection with such repurchase option. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of the covenant described hereunder, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the covenant described hereunder by virtue
thereof.
The right to require the Company to repurchase Notes as a result of a
Change of Control could have the effect of delaying, deferring or preventing a
Change of Control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all the Notes at
the Repurchase Date. Consequently, this right may render more difficult or
discourage a merger, consolidation or tender offer (even if such transaction is
supported by the Company's Board of Directors or is favorable to the
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stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction involving the Company
that may adversely affect Holders of the Notes.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
Except as set forth below, the Exchange Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof.
The Exchange Notes initially will be represented by one or more Exchange
Notes in registered, global form without interest coupons (collectively, the
"Global Note"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures. DTC has advised the issuers that DTC is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Direct Participants") and to facilitate the
clearance and settlement of transactions in those securities between Direct
Participants through electronic book-entry changes in accounts of Participants.
The Direct Participants include securities brokers and dealers (including the
Initial Purchasers), banks, trust companies, clearing corporation and certain
other organizations, including Euroclear and CEDEL. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants"). DTC may hold securities beneficially owned by other
persons only through the Direct Participants or Indirect Participants and such
other persons' ownership interest and transfer or ownership interest will be
recorded only on the records of the Direct Participant and/or Indirect
Participant, and not on the records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Notes allocated by the Exchange Agent to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interest in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes see "-- Transfers of Interests in Global Notes for
Certificated Notes."
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EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF THE
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Notes are registered (including Notes represented
by Global Notes) as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that their current payment practice (for
payments of principal, interest and the like) with respect to securities such as
the Notes is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, or the Company. Neither the Company, nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes. An entire
Global Note may be exchanged for definitive Notes in registered, certificated
form without interest coupons ("Certificated Notes") if (i) DTC (x) notifies the
Company that it is unwilling or unable to continue as depositary for the Global
Notes and the Company thereupon fails to appoint a successor depositary within
90 days or (y) has ceased to be a clearing agency registered under the Exchange
Act, (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Certificated Notes or (iii) there shall have
occurred and be continuing a Default or an Event of Default with respect to the
Notes. In any such case, the Company will notify the Trustee in writing that,
upon surrender by the Direct and Indirect Participants of their interest in such
Global Note, Certificated Notes will be issued to each person that such Direct
and Indirect Participants and the DTC identify as being the beneficial owner of
the related Notes.
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Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
Neither the Company nor the Trustee will be liable for any delay by the
holder of the Global Notes or DTC in identifying the beneficial owners of Notes,
and the Company and the Trustee may conclusively rely on, and will be protected
in relying on, instructions from the holder of the Global Note or DTC for all
purposes.
Transfers of Certificated Notes for Interests in Global Notes. Certificated
Notes may only be transferred if the transferor first delivers to the Trustee a
written certificate (and in certain circumstances, an opinion of counsel)
confirming that, in connection with such transfer, it has complied with the
restrictions on transfer described under "-- Notice to Investors."
Same Day Settlement and Payment. The Indenture requires that payments in
respect of the Notes represented by the Global Notes (including principal,
premium, if any, interest and Liquidated Damages, if any) be made by wire
transfer of immediately available same day funds to the accounts specified by
the holder of interests in such Global Note. With respect to Certificated Notes,
the Company will make all payments of principal, premium, if any, interest and
Liquidated Damages, if any, by wire transfer of immediately available same day
funds to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. The
Company expects that secondary trading in the Certificated Notes will also be
settled in immediately available funds.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness
unless, immediately after giving effect to such Incurrence, the Consolidated
Coverage Ratio exceeds 2.0 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1)
Indebtedness Incurred pursuant to the Credit Agreements; provided, however,
that, after giving effect to any such Incurrence, the aggregate principal amount
of such Indebtedness then outstanding does not exceed the greater of (i) $200
million and (ii) 90% of the Mortgages Receivable of the Company and its
Restricted Subsidiaries; (2) Indebtedness represented by the Notes issued in the
Offering (and the Exchange Notes); (3) Indebtedness outstanding pursuant to the
Senior Subordinated Notes and the Convertible Notes, or, in the event that all
or any portion of the Convertible Notes have been converted into the Capital
Stock of the Company, other Indebtedness of the Company which is subordinated to
the Notes at least to the same extent that the Convertible Notes are
subordinated to the Notes, in a principal amount not to exceed the principal
amount of the Convertible Notes that have been so converted; (4) Indebtedness of
the Company owed to and held by any Restricted Subsidiary, or Indebtedness of a
Restricted Subsidiary owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case,
to constitute the Incurrence of such Indebtedness by the issuer thereof; (5)
Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) or pursuant to clause (2), (3) or this clause (5); (6)
Indebtedness in respect of performance bonds, bankers' acceptances, letters of
credit and surety or appeal bonds entered into by the Company and the Restricted
Subsidiaries in the ordinary course of their business; (7) Hedging Obligations
consisting of Interest Rate Agreements and Currency Agreements entered into in
the ordinary course of business and not for the purpose of speculation; (8)
Purchase Money Indebtedness and Capital Lease Obligations Incurred to finance
the acquisition, lease or improvement, either directly or indirectly
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through the purchase of Capital Stock, by the Company or a Restricted Subsidiary
of any assets in the ordinary course of business and which do not exceed $25
million in the aggregate at any time outstanding; (9) Indebtedness arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of daylight overdrafts)
drawn against insufficient funds in the ordinary course of business, provided
that such Indebtedness is extinguished within five business days of Incurrence;
(10) Indebtedness of the Company and its Restricted Subsidiaries arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, in any case Incurred in connection with the disposition of
any assets of the Company or any Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such assets
for the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition; (11) Indebtedness incurred by
the Company or any of its Restricted Subsidiaries constituting reimbursement
obligations with respect to letters of credit issued in the ordinary course of
business, including without limitation, letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims; provided,
however, that upon the drawing of such letters of credit or the incurrence of
such Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence; (12) Indebtedness or Disqualified Capital Stock of
Persons that are acquired by the Company or any of its Restricted Subsidiaries
or merged into the Company or a Restricted Subsidiary in accordance with the
terms of the Indenture; provided that such Indebtedness or Disqualified Capital
Stock is not incurred in contemplation of such acquisition or merger; and
provided further that after giving effect to such acquisition, either (i) the
Company would be permitted to incur at least $1.00 of additional Indebtedness or
(ii) the Consolidated Coverage Ratio is greater than immediately prior to such
acquisitions; (13) Finance Subsidiary Indebtedness and (14) Indebtedness in an
aggregate principal amount which, together with all other Indebtedness of the
Company and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1) through (13) above
or paragraph (a)), does not exceed $25 million.
(c) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above. Notwithstanding anything contained in clause
(b)(1) above, the amount of Indebtedness permitted to be Incurred pursuant to
clause (b)(1) above will be reduced by the amount of any Indebtedness of the
Company owed to and held by any Restricted Subsidiary that is not a Wholly Owned
Subsidiary if such Indebtedness was Incurred pursuant to clause (b)(4) above.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment together with all other Restricted Payments (the amount of any payments
made in property other than cash to be valued at the fair market value of such
property, as determined in good faith by the Board of Directors) declared or
made since August 1, 1997 would exceed the sum of: (A) 50% of the Consolidated
Net Income accrued during the period (treated as one accounting period) from
August 1, 1997 to the end of the most recent fiscal quarter prior to the date of
such Restricted Payment for which financial statements are available (or, in
case such Consolidated Net Income accrued during such period (treated as one
accounting period) shall be a deficit, minus 100% of such deficit); (B) the
aggregate Net Cash Proceeds received by the Company from the issuance or sale of
its Capital Stock (other than Disqualified Stock) subsequent to August 1, 1997
(other than an issuance or sale to a Subsidiary of the Company); (C) the amount
by which Indebtedness of the Company or its Restricted Subsidiaries is reduced
on the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company unless such Subsidiary is a Finance Subsidiary)
subsequent to August 1, 1997, of any Indebtedness (issued subsequent to
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August 1, 1997) of the Company or its Restricted Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Capital Stock) of the
Company (less the amount of any cash, or the fair market value of any other
property, distributed by the Company or any Restricted Subsidiary upon such
conversion or exchange); (D) an amount equal to the sum of (i) the reduction in
Investments in Unrestricted Subsidiaries resulting from dividends, repayments of
loans or advances or other transfers of assets subsequent to August 1, 1997, in
each case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that the foregoing sum shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary; and (E) $15 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company or any Restricted Subsidiary made in exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Capital Stock and other than Capital Stock issued or
sold to a Subsidiary of the Company); provided, however, that (A) such purchase
or redemption shall be excluded from the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale (to the extent used for
such purchase or redemption) shall be excluded from the calculation of amounts
under clause (3)(B) of paragraph (a) above; (ii) any purchase or redemption of
Subordinated Obligations of the Company made in exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of the Company
which is permitted to be Incurred pursuant to paragraphs (a), (b) or (c) of the
covenant described under "-- Limitation on Indebtedness;" provided, however, any
such Indebtedness shall be subordinated to the Notes, to at least the same
extent as such Subordinated Obligations; provided, further, that such purchase
or redemption shall be excluded from the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Disqualified Capital Stock of the
Company made in exchange for, or out of the proceeds of the substantially
concurrent sale of, Disqualified Capital Stock of the Company; provided,
however, that (1) at the time of such exchange, no Default or Event of Default
shall have occurred and be continuing or would result therefrom and (2) such
purchase or redemption will be excluded from the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments; (v)
repurchases of Capital Stock of the Company from current or former directors,
officers or employees, employee benefit plans or 401(k) plans of the Company;
provided, that such repurchases shall not exceed $1 million in any year plus any
amounts available for such repurchases under this clause (v) since August 1,
1997 which have not been used for such purpose but in no event shall such
repurchases exceed $5 million in any year; provided, further, that (1) at the
time of such repurchase no Default or Event of Default shall have occurred and
be continuing or result therefrom, and (2) such repurchases shall be included in
the calculation of the amount of the Restricted Payments; (vi) repurchases of
Capital Stock deemed to occur upon exercise of stock options if such Capital
Stock represents a portion of the exercise price of such options; (vii) the
payment of any dividend by a Subsidiary of the Company to the holders of its
Capital Stock; provided, however, that any such payment of any dividend made to
holders of the Capital Stock of any Subsidiary of the Company on a pro rata
basis or on a basis that results in the receipt by the Company or a Restricted
Subsidiary of dividends or distributions of greater value than it would receive
on a pro rata basis will be excluded from the calculation of the amount of
Restricted Payments or (viii) the payment of any dividend or distribution by a
Finance Subsidiary to the holders of its Capital Stock.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or consensual restriction on the ability of any
Restricted Subsidiary: (a) to pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the Company, (b) to make any loans or advances to the
Company or (c) transfer any of its property or assets to the Company, except, in
each case, (i) any encumbrance or restriction pursuant to the Senior Credit
Agreements, or any other agreement in effect at or entered into on
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the Issue Date, including without limitation, the Senior Subordinated Notes
Indenture, the Senior Subordinated Notes, the Notes, the Indenture and the
Credit Agreements, if any; (ii) any encumbrance or restriction with respect to a
Person acquired by the Company or any Restricted Subsidiary pursuant to an
agreement relating to any Indebtedness Incurred by such Person which was entered
into on or prior to the date on which such Person was acquired by the Company or
such Restricted Subsidiary (other than as consideration in, or to provide all or
any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Person was
acquired by the Company or such Restricted Subsidiary) and outstanding on such
date; (iii) any encumbrance or restriction pursuant to any agreement effecting
Refinancing Indebtedness Incurred pursuant to an agreement referred to in
clauses (i)-(xi) of this covenant (or effecting a Refinancing of such
Refinancing Indebtedness pursuant to this clause (iii)) or contained in any
amendment, modification, restatement, renewal, or supplement to an agreement
referred to in clauses (i)-(xi) of this covenant or this clause (iii); provided,
however, that the encumbrances or restrictions with respect to such Restricted
Subsidiary contained in any such agreements or amendments effecting Refinancing
Indebtedness are no more restrictive in any material respect than the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements or amendments; (iv) any such encumbrance or
restriction consisting of customary provisions in leases governing leasehold
interests or other agreements entered into in the ordinary course of business;
(v) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements or mortgages; (vi) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; (vii) any
restriction imposed by applicable law, rule, regulation or order; (viii) any
encumbrance or restriction pursuant to Purchase Money Indebtedness for property
acquired in the ordinary course of business that imposes restrictions of the
nature discussed in clause (c) above on the property so acquired; (ix)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business; (x) any encumbrance
or restriction pursuant to other Indebtedness of Receivables Subsidiaries
permitted to be incurred subsequent to the Issue Date pursuant to the provisions
of the covenant described under "-- Limitation on Indebtedness;" (xi) any
encumbrance or restriction pursuant to customary provisions in joint venture
agreements and other similar agreements entered into in the ordinary course of
business and (xii) any encumbrance or restriction relating to a Finance
Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock. The Company shall not,
and shall not permit any Restricted Subsidiary to, consummate any Asset
Disposition unless the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors, of the shares and assets
subject to such Asset Disposition and at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
cash equivalents. For the purposes of this covenant, the following are deemed to
be cash or cash equivalents: (x) the assumption of Indebtedness of the Company
or any Restricted Subsidiary, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash within 180 days after receipt thereof and
(z) any Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Sale having an aggregate fair market
value, taken together with all other Designated Noncash Consideration received
pursuant to this clause (z) that is at that time outstanding and taken together
with all Permitted Investments made pursuant to clause (ix)(l) of the definition
of "Permitted Investment" that are at that time outstanding, not to exceed 10%
of the Company's Total Assets at the time of the receipt of such Designated
Noncash Consideration (with the fair market value of each item of Designated
Noncash Consideration being measured at the time received and without giving
effect to subsequent changes in value), shall be deemed to be cash or cash
equivalents for the purposes of this provision.
With respect to any Asset Disposition occurring on or after the Issue Date
from which the Company or any Restricted Subsidiary receives Net Available Cash,
the Company or such Restricted Subsidiary shall (i) within 360 days after the
date such Net Available Cash is received and to the extent the Company or such
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Restricted Subsidiary elects (or is required) to (A) apply an amount equal to
such Net Available Cash to prepay, repay or purchase Indebtedness under the
Senior Credit Agreements or Indebtedness secured by a Permitted Lien, in each
case owing to a Person other than the Company or any Affiliate of the Company,
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A), in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary) and (ii) apply such excess Net
Available Cash (to the extent not applied pursuant to clause (i)) as provided in
the following paragraphs of the covenant described hereunder; provided, however,
that in connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) above, the Company or such Restricted Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. The amount of Net Available Cash required to be applied
pursuant to clause (ii) above and not theretofore so applied shall constitute
"Excess Proceeds." Pending application of Net Available Cash pursuant to this
provision, such Net Available Cash shall be invested in Temporary Cash
Investments.
If at any time the aggregate amount of Excess Proceeds not theretofore
subject to an Excess Proceeds Offer (as defined below) totals at least $15
million the Company shall, not later than 30 days after the end of the period
during which the Company is required to apply such Excess Proceeds pursuant to
clause (i) of the immediately preceding paragraph (or, if the Company so elects,
at any time within such period), make an offer (an "Excess Proceeds Offer") to
purchase from the Holders on a pro rata basis an aggregate principal amount of
Notes equal to the Excess Proceeds (rounded down to the nearest multiple of
$1,000) on such date, at a purchase price equal to 100% of the principal amount
of such Notes, plus, in each case, accrued interest (if any) to the date of
purchase (the "Excess Proceeds Payment"). Upon completion of an Excess Proceeds
Offer the amount of Excess Proceeds remaining after application pursuant to such
Excess Proceeds Offer (including payment of the purchase price for Notes duly
tendered), may be used by the Company for any corporate purpose (to the extent
not otherwise prohibited by the Indenture).
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations thereunder in the event that such Excess Proceeds are received by
the Company under the covenant described hereunder and the Company is required
to repurchase Notes as described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction or series of related transactions (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with any Affiliate of the Company (an "Affiliate
Transaction") unless the terms thereof (1) are materially no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained at
the time of such transaction in arm's-length dealings with a Person who is not
such an Affiliate, (2) if such Affiliate Transaction (or series of related
Affiliate Transactions) involve aggregate payments in an amount in excess of $5
million in any one year, (i) comply with clause (1) and (ii) have been approved
by a majority of the disinterested members of the Board of Directors and (3) if
such Affiliate Transaction (or series of related Affiliate Transactions) involve
aggregate payments in an amount in excess of $10 million in any one year, (i)
comply with clause (2) and (ii) have been determined by a nationally recognized
investment banking, accounting or qualified appraisal firm to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise, pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans in the ordinary course of business and approved by the Board of
Directors, (iii) the grant of stock options or similar rights to employees,
officers and directors of the Company or any Subsidiary in the ordinary course
of business and pursuant to
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plans approved by the Board of Directors, (iv) loans or advances to employees,
officers or directors in the ordinary course of business of the Company or its
Subsidiaries, (v) fees, compensation or employee benefit arrangements paid to
and indemnity provided for the benefit of directors, officers or employees of
the Company or any Subsidiary in the ordinary course of business, (vi) any
Affiliate Transaction (including any purchase of Receivables and Related Assets)
between the Company and a Subsidiary or Joint Venture, or between Subsidiaries
or Joint Ventures, in the ordinary course of business (so long as the other
stockholders of any participating Subsidiaries or Joint Ventures which are not
Wholly Owned Restricted Subsidiaries are not themselves Affiliates of the
Company), (vii) any transactions effected pursuant to agreements in effect on
the Issue Date provided, that such transactions are effected pursuant to the
terms of such agreements as in effect on the Issue Date and (viii) any Affiliate
Transactions between the Company and any Finance Subsidiary.
Limitation on Liens. The Company shall not, directly or indirectly, Incur
or permit to exist any Lien of any nature whatsoever on any property of the
Company or any Restricted Subsidiary (including Capital Stock of a Restricted
Subsidiary), whether owned at the Issue Date or thereafter acquired, which
secures Indebtedness that ranks pari passu with or is subordinated to the Notes
unless (i) such lien is a Permitted Lien, (ii) if such Lien secures Indebtedness
that ranks pari passu with the Notes, the Notes are secured on an equal and
ratable basis with the obligation so secured until such time as such obligation
is no longer secured by a Lien or (iii) if such Lien secures Indebtedness that
is subordinated to the Notes, such Lien shall be subordinated to a Lien granted
to the Holders on the same collateral as that securing such Lien to the same
extent as such subordinated Indebtedness is subordinated to the Notes.
Merger and Consolidation. The Company may not consolidate with or merge
into any other Person or transfer or lease all or substantially all of its
properties and assets to any Person unless (a) the Person formed by such
consolidation or into which the Company is merged or the Person to which the
properties and assets of the Company are so transferred or leased (the
"Successor Company") (i) shall be a corporation, partnership or trust organized
and existing under the laws of the United States, any State thereof or the
District of Columbia and (ii) shall expressly assume the payment of the
principal of and interest on the Notes and the performance of the other
covenants of the Company under the Indenture; (b) immediately after giving
effect to such transaction, no Event of Default, and no event which, after
notice or lapse of time or both, would become an Event of Default, shall have
occurred and be continuing; and (c) except in the case of a merger, the sole
purpose of which is to change the Company's jurisdiction of incorporation,
immediately after such transaction the Successor Company would be able to Incur
an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Limitation on Indebtedness."
Upon any consolidation, merger of, or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the Successor
Company shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture with the same effect as if such
Successor Company had been named therein as the Company, and the Company will be
released from its obligations under the Indenture and the Notes.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the Trustee and Noteholders
and prospective Noteholders (upon request) with such annual reports and such
information, documents and other reports as are specified in such Sections and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided within 15 days after the
times specified for the filing of such information, documents and reports under
such Sections; provided, however, that the Company shall not be required to file
any report, document or other information with the SEC if the SEC does not
permit such filing.
DEFAULTS
The following will be Events of Default under the Indenture: (a) failure to
pay principal on any Note when due, (b) failure to pay any interest on any Note
when due, continuing for 30 days, (c) failure to perform any other covenant of
the Company in the Indenture, continuing for 30 days after written notice as
provided in the Indenture; (d) failure of the Company or any Significant
Subsidiary to make payment in respect of
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Indebtedness (other than Non-Recourse Debt) in an amount in excess of $15
million and continuance of such failure for at least 90 days; (e) default by the
Company or any Significant Subsidiary with respect to any Indebtedness, which
default results in the acceleration of Indebtedness in an amount in excess of
$15 million without such Indebtedness having been discharged or such
acceleration having been cured, waived, rescinded or annulled within 90 days of
such acceleration; (f) a final judgment or judgments for payment of money
against the Company or any Significant Subsidiary which remains undischarged for
a period ending on the later of (i) 60 days after the entry of such judgment, as
extended by any effective stay of its execution, or (ii) the date on which any
payment is or becomes due and payable pursuant to such judgment in accordance
with its terms, other than final judgments with respect to Non-recourse Debt of
the Company or any of its Significant Subsidiaries, provided that the aggregate
of all such outstanding judgments exceeds $15 million (excluding any amounts
covered by insurance as to which the insurer has not denied liability); and (g)
certain events in bankruptcy, insolvency or reorganization with respect to the
Company or any of its Significant Subsidiaries. Subject to the provisions of the
Indenture relating to the duties of the Trustee in the case of an Event of
Default shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
If an Event of Default (other than an Event of Default specified in
subsection (g) above with respect to the Company) shall occur and be continuing,
either the Trustee or the Holders of at least 25% in principal amount of the
Outstanding Notes may accelerate the maturity of all Notes; provided, however,
that after such acceleration, the Holders of a majority in aggregate principal
amount of Outstanding Notes may, under certain circumstances, rescind and annul
such acceleration after all Events of Default, other than the non-payment of
accelerated principal and interest, have been cured or waived as provided in the
Indenture. If an Event of Default specified in subsection (g) with respect to
the Company occurs and is continuing, the principal and any accrued interest on
all of the then Outstanding Notes shall ipso facto become due and payable
immediately without any declaration or other act on the part of the Trustee or
any Holder. For information as to waiver of defaults, see "-- Modification and
Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder of
a Note for the enforcement of payment of the principal of or interest on such
Note on or after the respective due dates expressed in such Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, or interest on, any Note, (c) reduce the amount payable
upon an optional redemption, (d) modify the provisions with respect to the
repurchase rights of the Holders in a manner adverse to the Holders, (e) change
the place or currency of payment of principal of, or interest on, any Note, (f)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Note, (g) reduce the percentage of aggregate principal amount of
outstanding Notes necessary
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for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults, or (h) reduce the above stated percentage of Outstanding
Notes necessary to modify or amend the Indenture.
The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of the
Outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal or interest.
TRANSFER
Certificated Notes will be issued in registered form and will be
transferable only upon the surrender of the Notes being transferred for
registration of transfer. The Company may require payment of a sum sufficient to
cover any tax, assessment or other governmental charge payable in connection
with certain transfers and exchanges.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the Outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of Outstanding Notes to
receive payments in respect of the principal of, and interest on such Notes when
such payments are due from the trust described below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties, and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and its
Restricted Subsidiaries, released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. Dollars, U.S. Government Obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal and interest on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, of such principal or installment
of principal or interest on the outstanding Notes; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel (which counsel may be an employee of the Company or any Subsidiary of
the Company) reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling or (B) since the Issuance Date, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel (which counsel may be an employee of the Company or any
Subsidiary of the Company) reasonably acceptable to the Trustee confirming that
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds applied to such deposit) or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time the period ending on the 91st day after the date of deposit (or greater
period of time in which any such deposit of
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trust funds may remain subject to bankruptcy or insolvency laws insofar as those
apply to the deposit by the Company); (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under, any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound; (vi) the Company shall have delivered to the
Trustee an opinion of counsel to the effect that, as of the date of such
opinion, (A) the trust funds will not be subject to any rights of holders of
Indebtedness other than the Notes and (B) assuming no intervening bankruptcy of
the Company between the date of deposit and the 91st day following the deposit
and assuming no Holder of Notes is an insider of the Company, after the 91st day
following the deposit, the trust funds will not be subject to the effects of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors rights generally under any applicable United States or state law;
(vii) the Company shall have delivered to the Trustee an officers certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the Company
or others; and (viii) the Company shall have delivered to the Trustee an
officers certificate and an opinion of counsel (which counsel may be an employ
ee of the Company), each stating, that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee, in
the event it becomes a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest
(as defined), it must eliminate such conflict or resign. In addition to serving
as Trustee under the Notes, Norwest Bank Minnesota, National Association, serves
as trustee under the Senior Subordinated Notes and the Convertible Notes.
GOVERNING LAW
The Indenture and the Notes provide that they are to be governed in
accordance with the laws of the State of New York.
NO PERSONAL LIABILITY OF SHAREHOLDERS, OFFICERS, DIRECTORS
No shareholder, officer or director, as such, past, present or future of
the Company or any successor corporation shall have any personal liability in
respect of the obligations of the Company under the Indenture or the Notes by
reason of his or its status as such shareholder, officer or director.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; provided,
however, that any such Restricted Subsidiary is primarily engaged in a Related
Business; (iii) additions to property, plant and equipment of the Company and
its Restricted Subsidiaries; and (iv) investments in Receivables and Related
Assets.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying
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shares and, to the extent required by local ownership laws in foreign countries,
shares owned by foreign shareholders), (ii) all or substantially all the assets
of any division, business segment or comparable line of business of the Company
or any Restricted Subsidiary or (iii) any other assets of the Company or any
Restricted Subsidiary outside of the ordinary course of business of the Company
or such Restricted Subsidiary. Notwithstanding the foregoing, the term "Asset
Disposition" shall not include (w) sales, in the ordinary course of business, of
Vacation Intervals, points in a points based vacation club system or Receivables
and Related Assets, (x) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Restricted Subsidiary, (y) for
purposes of the covenant described under "Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock," a disposition that constitutes a
Permitted Investment or a Restricted Payment permitted by the covenant described
under "Certain Covenants -- Limitation on Restricted Payments", and (z) a
disposition of assets having a fair market value of less than $1 million.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in such transactions in accordance with GAAP) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition, issued, fully guaranteed or insured by the United
States Government or any agency thereof, (b) certificates of deposit, time
deposits, overnight bank deposits, bankers' acceptances and repurchase
agreements issued by a Qualified Issuer having maturities of 270 days or less
from the date of acquisition, (c) commercial paper of an issuer rated at least
A-2 by Standard & Poor's Corporation or P-2 by Moody's Investors Service, Inc.,
or carrying an equivalent rating by a nationally recognized rating agency if
both of the two named rating agencies cease publishing ratings of investments,
and having maturities of 270 days or less from the date of acquisition, and (d)
money market accounts or funds with or issued by Qualified Issuers.
"Change of Control" means the occurrence of any of the following events:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such Person to exercise 50% or more
of the total voting power of all shares of capital stock of the Company
entitled to vote generally in elections of directors (other than any such
acquisition by the Company, any Subsidiary of the Company or any employee
benefit plan of the Company); or
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(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or
any conveyance, sale, transfer or lease, in one transaction or a series of
related transactions, of all or substantially all of the assets (other than
to a Restricted Subsidiary of the Company) of the Company to any other
Person (other than (a) any such transaction pursuant to which the holders
of 50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in elections of directors
immediately prior to such transaction have, directly or indirectly, at
least 50% or more of the total voting power of all shares of capital stock
of the continuing or surviving corporation entitled to vote generally in
elections of directors of the continuing or surviving corporation
immediately after such transaction, and (b) a merger (x) which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock, or (y) which is effected solely to
change the jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Common
Stock into solely shares of common stock); or
(iii) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the 12-month period immediately preceding such change
(together with any other director whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of at least a majority of the directors then
in office either who were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days (or, if less, the
number of days after the end of such fiscal quarter as the consolidated
financial statements of the Company shall be available) prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding on such date of determination or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence
of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period and the discharge of any other Indebtedness repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period (except that, in the case
of Indebtedness used to finance working capital needs incurred under a revolving
credit or similar arrangement, the amount thereof shall be deemed to be the
average daily balance of such Indebtedness during such four-fiscal-quarter
period), (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative)
directly attributable thereto for such period, and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased, assumed by a third person
(to the extent the Company and its Restricted Subsidiaries are no longer liable
for such Indebtedness) or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company shall
have consummated an Equity Offering, Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
the Company and its Restricted Subsidiaries in connection with such Equity
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Offering for such period, (4) if since the beginning of such period the Company
or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets, which acquisition
constitutes all or substantially all of an operating unit of a business,
including any such Investment or acquisition occurring in connection with a
transaction requiring a calculation to be made hereunder, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto (including the Incurrence of any Indebtedness) as if
such Investment or acquisition occurred on the first day of such period and (5)
if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset
Disposition, any Investment or acquisition of assets that would have required an
adjustment pursuant to clause (3) or (4) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition occurred on the
first day of such period. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest of such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount,
(iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, and (viii) interest actually paid on any Indebtedness
of any other Person that is Guaranteed by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (or loss) of
any Person if such Person is not a Restricted Subsidiary, except that the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution; (ii) for purposes of
subclause (a)(3)(A) of the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" only, any net income (or loss)
of any Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income of any Restricted Subsidiary if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been distributed by
such Restricted Subsidiary consistent with such restriction during such period
to the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income; (iv)
any gain (or loss) realized upon the sale or other disposition of any assets of
the Company or its consolidated Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (or loss) realized upon the sale or
other disposition of any Capital Stock of any Person; (v) extraordinary gains or
losses; and (vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the
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extent such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Convertible Notes" means the 5 3/4% Convertible Notes due 2007 issued by
the Company, as the same may be amended, waived, modified or replaced from time
to time, provided such amendment, waiver, modification or replacement does not
shorten the maturity, increase the principal amount outstanding, or change the
subordination provisions in a manner that makes them less subordinated.
"Credit Agreements" means the Senior Credit Facility and any credit
agreement or similar facility or any other agreement governing Indebtedness
entered into by the Company or any Restricted Subsidiary, as any of the same may
be amended, waived, modified, Refinanced or replaced from time to time (except
to the extent that any such amendment, waiver, modification, replacement or
Refinancing would be prohibited by the terms of the Indenture).
"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Disposition that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, which sets forth the basis
of such valuation and is executed by the principal executive officer and the
principal financial officer of the Company, less the amount of cash or Cash
Equivalents received in connection with a sale of such Designated Noncash
Consideration.
"Disqualified Capital Stock" means with respect to any Person, Capital
Stock of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by such person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Notes; provided, however, that any Preferred Stock issued by a Finance
Subsidiary shall not constitute Disqualified Capital Stock.
"EBITDA" for any period means the sum of Consolidated Net Income plus
Consolidated Interest Expense plus, without duplication, the following to the
extent deducted in calculating such Consolidated Net Income: (i) income tax
expense, (ii) depreciation expense, (iii) amortization expense, (iv)
non-recurring charges incurred as a result of business combinations and (v) all
other non-cash items reducing Consolidated Net Income (other than items that
will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be made), less all non-cash items increasing Consolidated
Net Income, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary of the Company shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion) that
the net income of such Subsidiary was included in calculating Consolidated Net
Income.
"Equity Offering" means a primary offering (either public or private) of
any Capital Stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended and
the rules and regulations promulgated thereunder.
"Exchange Notes" means another series of Senior Indebtedness of the Company
registered under the Securities Act with terms substantially identical to the
terms of the Senior Notes due 2006 of the Company offered hereby which will be
exchanged pursuant to a registration statement.
"Finance Subsidiary" means any Subsidiary of the Company organized for the
sole purpose of issuing Capital Stock and loaning the proceeds thereof to the
Company and which engages in no other transactions except those incidental
thereto.
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"Finance Subsidiary Indebtedness" means Indebtedness of the Company owed to
and held by a Finance Subsidiary which Indebtedness (a) has a maturity date
after the maturity date of the Convertible Notes and (b) is subordinated in
right of payment to the Convertible Notes.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board and (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession.
"Guarantee" means (a) any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person, and (b) any obligation, direct or indirect, contingent or
otherwise, of any Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) any Indebtedness or other obligation of any other
Person (whether arising by virtue of partnership arrangements, or by agreements
to keep-well, to purchase assets, goods, securities or services, to take-or-pay
or to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner any Indebtedness or other
obligation (for the payment thereof) of any other Person or to protect any other
Person against loss in respect thereof (in whole or in part); provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning. The term "Guarantor" shall mean any Person
Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Note Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary; provided, further, however, that
in the case of a discount security, neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness, but the entire face amount of such security shall be deemed
Incurred upon the issuance of such security. The term "Incurrence" when used as
a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property or
services, all conditional sale obligations of such Person and all obligations of
such Person under any title retention agreement (but excluding trade accounts
payables arising in the ordinary course of business and which are not more than
90 days past due and not in dispute), which purchase price or obligation is due
more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services (provided
that, in the case of obligations of an acquired Person assumed in connection
with an acquisition of such Person, such obligations would constitute
Indebtedness of such Person); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Capital Stock or, with respect to any Subsidiary of such Person (other than a
Finance Subsidiary), any Preferred Stock (but
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excluding, in each case, any accrued dividends); (vi) all obligations of the
type referred to in clauses (i) through (v) of other Persons and all dividends
of other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; (vii) all obligations of the
type referred to in clauses (i) through (vi) of other Persons secured by any
Lien on any property or asset of such Person (whether or not such obligation is
assumed by such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the obligation
so secured; and (viii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. Notwithstanding the foregoing, (i) any
Guarantee of any obligations of a Joint Venture or a Finance Subsidiary given by
or entered into by any Person shall not constitute, or be deemed to be the
Incurrence of, any Indebtedness of such Person, provided, such Guarantee would
be permitted under the covenant described under "Covenants -- Limitation on
Restricted Payments" and (ii) any obligation, contingent or otherwise, of any
Person arising as a result of such Person's ownership of, or control over, the
Capital Stock of another Person, shall not constitute, or be deemed to be the
Incurrence of, Indebtedness of such Person, provided, the Incurrence of such
obligation would be permitted under the covenant described under
"Covenants -- Limitation on Restricted Payments." The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations as described above at such date; provided, however, that the amount
outstanding at any time of any Indebtedness issued with original issue discount
shall be deemed to be the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances or loans to customers or other Persons in the ordinary
course of business that are recorded as accounts or mortgages receivable on the
balance sheet of such Person) or other extensions of credit (including by way of
Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by, such Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment" and the covenant described under "Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Joint Venture" means a corporation, partnership or other entity engaged in
a Related Business as to which the Company (directly or through one or more
Restricted Subsidiaries) owns any Capital Stock.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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"Mortgages Receivable" means the gross mortgages receivable of the Company
and its Restricted Subsidiaries (including any mortgages receivable acquired as
a result of any business combination) determined on a consolidated basis in
accordance with GAAP.
"Net Available Cash" from an Asset Disposition means cash payments received
by the Company or any of its Subsidiaries therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received, but
excluding any other consideration received in the form of assumption by the
acquiring Person of Indebtedness or other obligations relating to such
properties or assets or received in any other noncash form) in each case net of
(i) all legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all Federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or Joint
Ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition, including without limitation
liabilities under any indemnification obligations associated with such Asset
Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys fees,
accountants fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-recourse Debt" means Indebtedness of a Person to the extent that under
the terms thereof and pursuant to applicable law, no personal recourse could be
had against such Person for the payment of the principal of or interest or
premium or any other amounts with respect to such Indebtedness or for any claim
based on such Indebtedness and that enforcement of obligations on such
Indebtedness is limited solely to recourse against interests in specified
assets.
"Notes" means the Senior Notes due 2006 of the Company offered hereby and
the Exchange Notes, as the case may be.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, (ii) a Restricted Subsidiary or a Person that
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Subsidiary is a Related
Business; (iii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iv) Temporary Cash Investments; (v) purchases or acquisitions of mortgage
receivables by the Company or any Restricted Subsidiary created or acquired in
the ordinary course of business; (vi) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (ix)
Persons other than Restricted Subsidiaries that are primarily engaged in a
Related Business, in an aggregate amount (taken together with all Designated
Noncash Consideration at that time outstanding) not to exceed the sum of (1) 10%
of the Total Assets of the Company and its Restricted Subsidiaries determined on
a consolidated basis in accordance with GAAP and (2) the fair market value of
assets (other than Net Cash Proceeds) received by the Company, as determined in
good faith by the Board of Directors of the Company at the time of such receipt,
from the issuance of its Capital Stock (other than Disqualified Capital Stock)
subsequent to the Issue Date (to the
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extent utilized for an Investment, such aggregate amount will be reinstated to
the extent that the Company or any Restricted Subsidiary receives dividends,
repayments of loans or other transfers of assets as a return of such
Investment); and (x) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock," (xi) any
Investment existing as of the Issue Date, (xii) any Investment acquired by the
Company or any of its Restricted Subsidiaries (i) in exchange for any other
Investment or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment or
accounts receivable or (ii) as a result of a foreclosure (or deed in lieu of) by
the Company or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured Investment in
default; or (xiii) Hedging Obligations permitted under clause (7) of the
"Limitations on Indebtedness" covenant.
"Permitted Liens" means any (i) Liens on assets securing Indebtedness and
related obligations incurred under clauses (2), (6), (7), (8), (9), (10), (11)
and (13) of the second paragraph of the covenant described under the caption
"-- Certain Covenants -- Limitation on Indebtedness"; (ii) Liens arising by
reason of (1) operation of law in favor of carriers, warehousemen, landlords,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business for sums which are not yet delinquent or are being
contested in good faith by negotiations or by appropriate proceedings which
suspend the collection thereof or (2) any interest or title of a lessor under
any lease; (iii) Liens in favor of the Company; (iv) Liens on property of a
Person existing at the time such Person is acquired by, merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such acquisition,
merger or consolidation and do not extend to any assets other than those of the
Person acquired by, merged into or consolidated with the Company; (v) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such acquisition; (vi) Liens arising on any of the property
described in either clause (iv) or (v) above, or on any other property of the
Company or any Restricted Subsidiary, in each case securing Indebtedness and
related obligations incurred pursuant to any development or construction
agreement or any other similar agreement relating to such property, provided
that, such Liens secure Indebtedness (except, with respect to property not
described in either clause (iv) or (v) above, Indebtedness that would constitute
a security) permitted to be incurred under the covenant described under the
caption "-- Certain Covenants -- Limitation on Indebtedness"; (vii) Liens
existing on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
Liens on assets securing Indebtedness and related obligations incurred under the
Senior Credit Agreements; (x) Liens on assets securing Refinancing Indebtedness
and related obligations in respect of Indebtedness represented by the Notes and
any subsequent Refinancing Indebtedness thereof; (xi) easements, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances not interfering in any material respect with the business of the
Company or any of its Restricted Subsidiaries; (xii) Liens pursuant to any
judgment, attachment, decree or order of any court provided that, such Liens do
not give rise to an Event of Default; (xiii) Liens on any Receivables and
Related Assets and (xiv) Liens on any asset securing Non-recourse Debt of the
Company or any Restricted Subsidiary; provided that, such Non-recourse Debt does
not exceed, in the aggregate at any time outstanding, $50 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation or
the equity securities of any trust, means Capital Stock of any class or classes
(however designated) which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such corporation or trust, over shares
of Capital Stock of any other class of such corporation or trust.
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"principal" of any Indebtedness (including a Note) means the principal of
such Indebtedness plus the premium, if any, payable on such Indebtedness which
is due or overdue or is to become due at the relevant time.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement, other purchase money obligations or similar
Indebtedness, in each case where the maturity of such Indebtedness does not
exceed the anticipated useful life of the asset being financed, and (ii)
incurred to finance the acquisition by the Company or a Restricted Subsidiary of
such asset, including additions and improvements; provided, however, that any
Lien arising in connection with any such Indebtedness shall be limited to the
specified asset being financed or, in the case of real property or fixtures,
including additions and improvements, the real property on which such asset is
attached; and provided, further, however, that such Indebtedness is Incurred
within 90 days after such acquisition of such asset by the Company or Restricted
Subsidiary.
"Qualified Issuer" means (A) any lender that is a party to any Credit
Agreement and (B) any commercial bank (i) which has capital and surplus in
excess of $100,000,000, and (ii) the outstanding short-term debt securities of
which are rated at least A-2 by Standard & Poor's Corporation or at least P-2 by
Moody's Investors Service, Inc., or carry an equivalent rating by a nationally
recognized rating agency if both the two named rating agencies cease publishing
ratings of investments.
"Receivables and Related Assets" means Mortgages Receivable and
instruments, chattel paper, obligations, general intangibles and other similar
assets, in each case relating to such Mortgages Receivable.
"Receivables Subsidiary" means a Restricted Subsidiary which is established
for the limited purpose of acquiring and financing Receivables and Related
Assets.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture; provided, however, that (i)
in the case of Indebtedness that has a Stated Maturity after the Stated Maturity
of the Notes, such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) in the case
of Indebtedness that has a Stated Maturity after the Stated Maturity of the
Notes, such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced and (iii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means, at any time, any business related, ancillary or
complementary (as determined in good faith by the Board of Directors) to the
businesses conducted by the Company and the Restricted Subsidiaries at such
time.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" means, with respect to any Person, (i) the declaration
or payment of any dividends or any other distributions on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the holders of its
Capital Stock, except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Capital Stock) and except dividends or
distributions payable to the Company or a Restricted Subsidiary, (ii) the
purchase,
98
<PAGE> 102
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any Person including the exercise of any option to exchange
any Capital Stock (other than into Capital Stock of the Company that is not
Disqualified Capital Stock), (iii) the purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations of the Company (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Credit Agreements" means the Company's $117.5 million senior bank
credit facility dated February 18, 1998, as amended to date and any other senior
bank credit agreement or bank credit facility entered into by the Company or any
Restricted Subsidiary, as any of the same may be amended, waived or modified
from time to time (except to the extent that any such amendment, waiver or
modification would be prohibited by the terms of the Indenture).
"Senior Indebtedness" of the Company means the Notes and any other
Indebtedness of the Company that is not subordinated by its terms in right of
payment to any Indebtedness or other obligation of the Company.
"Senior Subordinated Notes" means the Company's 9 3/4% Senior Subordinated
Notes due October 1, 2007, as amended, waived, modified or replaced from time to
time, provided such amendment, waiver, modification or replacement does not
shorten the maturity, increase the principal amount outstanding, or change the
subordination provisions in a manner that makes them less subordinated.
"Senior Subordinated Notes Indenture" means the Indenture between Norwest
Bank Minnesota, National Association, as trustee, and the Company relating to
the Senior Subordinated Notes, as amended, waived, modified or replaced from
time to time, provided such amendment, waiver, modification or replacement does
not shorten the maturity, increase the principal amount outstanding, or change
the subordination provisions in a manner that makes them less subordinated.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any instrument, the date specified
in such instrument as the fixed date on which the final payment of principal of
such instrument is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase,
redemption or repayment of such instrument at the option of the holder thereof
upon the happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
99
<PAGE> 103
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by an registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America, any
state thereof or the District of Columbia or any foreign country recognized by
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet (excluding
the footnotes thereto) of the Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "Certain Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be notified by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
and/or one or more Wholly Owned Subsidiaries.
100
<PAGE> 104
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Latham & Watkins, counsel to the Company, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. Such opinion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought with
respect to the Exchange Offer. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or may
not be retroactive and could affect the tax consequences to holders. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes because the Exchange Notes will not
be considered to differ materially in kind or extent from the Private Notes. As
a result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities; provided such Private
Notes do not constitute any portion of an unsold allotment from the original
sale of the Private Notes. To the extent necessary to ensure that this
Prospectus is available for sales of Exchange Notes by broker-dealers, and
notice is given by such broker-dealers to the Company of such fact within 30
days of the effective date of the Registration Statement, the Company has agreed
to use its best efforts to keep the Registration Statement continuously
effective, supplemented and amended as required by the Registration Rights
Agreement, the Securities Act and the policies, rules and regulation of the
Commission as announced from time to time, for a period of 180 days from the
date the Exchange Offer is consummated, or such shorter period as will terminate
when all Private Notes covered by the Registration Statement have been sold.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. During the
Exchange Offer, the Company will promptly send additional copies of this
Prospectus and any amendment or
101
<PAGE> 105
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes, up to a maximum of $35,000) other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the Exchange Notes offered hereby will be
passed upon for the Company by Latham & Watkins, Los Angeles, California and,
with respect to certain matters of Maryland law, by Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Signature Resorts, Inc. and
subsidiaries as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997, appearing in this Prospectus and the related
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report appearing elsewhere
herein 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 the year then ended, 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 appearing elsewhere
herein, 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, independent chartered
accountants and registered auditors, as indicated in their report appearing
elsewhere herein, given upon the authority of such firm as experts in accounting
and auditing.
102
<PAGE> 106
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Signature Resorts, Inc. and Subsidiaries
Report of Independent Certified Public Accountants.......... F-2
Report of Independent Auditors.............................. F-3
Independent Auditors' Report................................ F-4
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-5
Consolidated Statements of Income for each of the three
years ended December 31, 1997............................. F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1997............................. F-7
Consolidated Statements of Equity for each of the three
years ended December 31, 1997............................. F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 107
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Signature Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of Signature
Resorts, Inc. (a Maryland Corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996 and 1995 financial statements of LSI
Group Holdings plc and the 1995 financial statements of AVCOM International,
Inc. and subsidiaries, both companies acquired during 1997 in transactions
accounted for as pooling of interests, as discussed in Note 1. Such statements
are included in the consolidated financial statements of Signature Resorts, Inc.
and subsidiaries, and reflect total assets and total revenues of 5 percent and
13 percent in 1996, respectively, and total revenues of 34 percent in 1995, of
the related consolidated totals. These statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to amounts included for LSI Group Holdings plc and AVCOM International, Inc. and
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Signature Resorts, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida
January 26, 1998 (except with respect
to the matters discussed in Note 6, as to which
the date is February 18, 1998, and Note 13, as
to which the dates are February 3 and February 18, 1998)
F-2
<PAGE> 108
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AVCOM International, Inc.
We have audited the consolidated balance sheet of AVCOM International, Inc.
(Company) as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented separately herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AVCOM International, Inc. as of December 31, 1995, and the consolidated results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
May 31, 1996, except for
Note 12, as to which the
date is July 1, 1996
F-3
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
LSI Group Holdings Plc
We have audited the consolidated balance sheet of LSI Group Holdings Plc
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 (not presented separately herein).
These financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LSI Group
Holdings Plc and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles in the United States of America.
KPMG
Chartered Accountants
Registered Auditors
Preston, England
March 27, 1997
F-4
<PAGE> 110
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 38,487 $ 20,757
Cash in escrow.............................................. 9,485 1,712
Mortgages receivable, net of an allowance of $22,916 and
$17,328 at December 31, 1997 and 1996, respectively....... 331,735 215,518
Due from related parties.................................... 25,576 11,897
Other receivables, net...................................... 17,669 11,847
Income tax refund receivable................................ 4,719 --
Prepaid expenses and other assets........................... 13,047 14,738
Investment in joint ventures................................ 15,657 7,397
Real estate and development costs........................... 219,299 142,870
Property and equipment, net................................. 35,024 14,612
Intangible assets, net...................................... 50,447 4,536
-------- --------
Total assets...................................... $761,145 $445,884
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 25,196 $ 24,418
Accrued liabilities......................................... 68,047 49,198
Due to related parties...................................... 1,032 1,656
Income taxes payable........................................ -- 3,268
Deferred taxes.............................................. 23,752 3,259
Notes payable............................................... 435,208 236,122
-------- --------
Total liabilities................................. 553,235 317,921
-------- --------
Commitments and Contingencies (Note 8)......................
Minority interest in consolidated limited partnership....... -- 1,538
-------- --------
Stockholders' equity:
Preferred stock (25,000,000 shares authorized; none issued
or outstanding)........................................ -- --
Common stock ($0.01 par value, 50,000,000 shares
authorized; 35,875,287 and 33,011,106 shares
outstanding at December 31, 1997 and 1996,
respectively).......................................... 359 330
Additional paid-in capital................................ 162,969 101,978
Retained earnings......................................... 43,797 23,544
Cumulative foreign currency translation adjustment........ 785 573
-------- --------
Total stockholders' equity........................ 207,910 126,425
-------- --------
Total liabilities and stockholders' equity........ $761,145 $445,884
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 111
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Vacation Interval and Vacation Point sales.................. $281,063 $182,300 $139,426
Interest income............................................. 42,856 25,415 20,339
Other income................................................ 13,774 12,132 8,553
-------- -------- --------
Total revenues..................................... 337,693 219,847 168,318
-------- -------- --------
COSTS AND OPERATING EXPENSES:
Vacation Interval and Vacation Point cost of sales.......... 71,437 48,218 39,810
Advertising, sales, and marketing........................... 126,739 89,040 62,258
Loan portfolio:
Interest expense-treasury................................. 13,032 13,482 10,077
Other expenses............................................ 5,522 4,523 2,034
Provision for doubtful accounts........................... 8,579 8,311 3,666
General and administrative.................................. 42,254 37,436 19,263
Resort property valuation allowance......................... -- 2,620 --
Depreciation and amortization............................... 6,499 5,027 2,514
Merger-related costs........................................ 9,973 -- --
-------- -------- --------
Total costs and operating expenses................. 284,035 208,657 139,622
-------- -------- --------
Income from operations...................................... 53,658 11,190 28,696
Interest expense-other (net of capitalized interest of
$6,774, $6,723, and $3,315 in 1997, 1996 and 1995,
respectively)............................................. 9,394 3,763 1,728
Equity loss on investment in joint ventures................. 639 299 1,649
Minority interest in income of consolidated limited
partnership............................................... 181 199 --
-------- -------- --------
Income before provision (benefit) for income taxes and
extraordinary item........................................ 43,444 6,929 25,319
-------- -------- --------
Provision (benefit) for income taxes from continuing
operations................................................ 17,196 (4,105) 4,020
Provision for deferred income taxes resulting from the
cumulative effect of previously non-taxable acquired
entities.................................................. 5,960 -- --
-------- -------- --------
Total provision (benefit) for income taxes.................. 23,156 (4,105) 4,020
-------- -------- --------
Income before extraordinary item............................ 20,288 11,034 21,299
Extraordinary item, net of income taxes..................... 766 -- --
-------- -------- --------
Net income.................................................. $ 19,522 $ 11,034 $ 21,299
======== ======== ========
Pro forma income data (unaudited):
Income before provision for income taxes.................... -- $ 6,929 $ 25,319
Pro forma provision for income taxes........................ -- 2,549 10,009
-------- -------- --------
Pro forma net income........................................ -- $ 4,380 $ 15,310
======== ======== ========
EARNINGS PER SHARE:
Basic:
Income before extraordinary item..................... $ 0.57 $ 0.41 $ 0.89
Extraordinary item, net of income taxes.............. (0.02) -- --
-------- -------- --------
Net income........................................... $ 0.55 $ 0.41 $ 0.89
======== ======== ========
Diluted:
Income before extraordinary item..................... $ 0.56 $ 0.40 $ 0.89
Extraordinary item, net of income taxes.............. (0.02) -- --
-------- -------- --------
Net income........................................... $ 0.54 $ 0.40 $ 0.89
======== ======== ========
Pro forma earnings per share: (unaudited)
Basic..................................................... -- $ 0.16 $ 0.64
Diluted................................................... -- $ 0.16 $ 0.64
Weighted average number of common shares outstanding........ 35,373 27,232 23,955
Weighted average number of common and potentially dilutive
common shares outstanding................................. 36,180 27,640 23,955
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 112
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 19,522 $ 11,034 $ 21,299
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 6,499 5,027 2,514
Provision for doubtful accounts......................... 8,579 8,311 3,666
Resort property valuation allowance..................... -- 2,620 --
Equity loss on investment in joint venture.............. 639 299 1,649
Minority interest in income of consolidated limited
partnership............................................ 181 199 --
Other................................................... -- 573 (566)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Cash in escrow..................................... (6,916) 1,037 473
Due from related parties........................... (12,504) (1,712) (4,083)
Prepaid expenses and other assets.................. 2,068 (5,878) (3,753)
Real estate and development costs.................. (65,595) (73,086) (19,012)
Other receivables, net............................. (4,448) (2,017) (5,797)
Accounts payable and accrued liabilities........... (10,398) 36,499 14,204
Income taxes....................................... (6,518) 1,653 353
Deferred income taxes.............................. 19,481 (8,605) 497
Due to related parties............................. (636) (250) 1,267
--------- --------- --------
Net cash (used in) provided by operating activities......... (50,046) (24,296) 12,711
--------- --------- --------
INVESTING ACTIVITIES:
Cash (paid) received for acquisition of subsidiaries........ (31,296) -- 129
Investment in joint venture................................. (8,899) (63) --
Property and equipment...................................... (19,973) (8,214) (4,601)
Intangible assets........................................... (1,637) (2,206) (2,608)
Mortgages receivable........................................ (108,942) (76,424) (48,601)
--------- --------- --------
Net cash used in investing activities....................... (170,747) (86,907) (55,681)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable................................. 28,088 170,394 98,733
Payments on notes payable................................... (167,229) (101,436) (46,890)
Proceeds from subordinated and convertible notes, net of
debt issuance costs....................................... 325,176 -- --
Proceeds from notes payable to related parties.............. -- 5,606 3,711
Payments on notes payable to related parties................ -- (15,074) (1,343)
Proceeds from stock offerings............................... 52,643 73,324 885
Acquisition of minority limited partners' interests......... -- (7,465) --
Distributions............................................... (738) (14,413) (9,241)
Other....................................................... 648 420 2,447
--------- --------- --------
Net cash provided by financing activities................... 238,588 111,356 48,302
--------- --------- --------
Net increase in cash and cash equivalents................... 17,795 153 5,332
Effect of exchange rates on cash and cash equivalents....... (65) 574 (41)
Cash and cash equivalents, beginning of period.............. 20,757 20,030 14,739
--------- --------- --------
Cash and cash equivalents, end of period.................... $ 38,487 $ 20,757 $ 20,030
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 18,508 $ 24,127 $ 14,466
Cash paid for taxes......................................... $ 7,918 $ 1,629 $ 2,753
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Stock issued in connection with acquisition of Marc
Resorts................................................... $ 6,010 -- --
Costs incurred in conjunction with debt issuances........... $ 12,824 -- --
Tax benefit resulting from exercise of common stock
options................................................... $ 1,469 -- --
Stock issued and goodwill recorded in connection with the
acquisition of investment in joint venture................ -- $ 4,989 --
Deferred taxes recorded in connection with the Consolidation
Transactions.............................................. -- $ 9,464 --
Interest accrued on deferred installment gains in connection
with the Consolidation Transactions....................... -- $ 820 --
Net assets of predecessor partnership acquired in exchange
for 17,032,058 shares of common stock in connection with
the Consolidation Transactions............................ -- $ 37,380 --
Assignment to venturers of receivable due from related party
recorded as a reduction of venturers' equity.............. -- $ 3,449 --
Write-off of receivable from related party recorded as a
reduction of stockholders' equity......................... -- $ 3,890 --
Conversion of convertible notes payable to AVCOM common
stock..................................................... -- $ 400 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 113
CONSOLIDATED STATEMENTS OF EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL GENERAL LIMITED
SHARES PAID-IN RETAINED MEMBERS PARTNERS' PARTNERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY (DEFICIT) EQUITY EQUITY
----------- ------ ---------- -------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............ 6,923 $ 69 $ 2,703 $27,326 $ -- $3,329 $ 27,722
------ ---- -------- ------- ------- ------ --------
Issuance of Common Stock................ -- 20 157 -- -- -- --
Distributions........................... -- -- -- (4,811) (2,437) (43) (1,950)
Net income.............................. -- -- -- 12,437 1,004 516 7,342
Other................................... -- -- 1,035 655 1 374 --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1995............ 6,923 89 3,895 35,607 (1,432) 4,176 33,114
------ ---- -------- ------- ------- ------ --------
Distributions of partnership equity and
other equity interests................ -- -- -- (7,191) (5,394) -- (1,633)
Conversion of convertible notes payable
to AVCOM common stock................. -- -- 400 -- -- -- --
Proceeds from the sale of common stock
to the public, net of offering costs,
including 16,212 shares issued in
exchange for partners' and members'
equity................................ 25,268 253 73,071 -- -- -- --
Stock issued and goodwill recorded in
connection with the acquisition of
investment in joint venture........... 820 8 4,981 -- -- -- --
Acquisition of minority limited
partners' interests................... -- -- (7,465) -- -- -- --
Deferred taxes recorded in connection
with the Consolidation Transactions... -- -- (9,464) -- -- -- --
Net income (loss)....................... -- -- -- 3,875 3,568 (164) 3,755
Exchange of partners' and members'
equity for stock in connection with
the Consolidation Transactions........ -- (20) 37,380 (1,370) 3,258 (4,012) (35,236)
Assignment to venturers' of receivable
due from related party................ -- -- -- (3,449) -- -- --
Write-off of receivable from related
party................................. -- -- -- (3,890) -- -- --
Other................................... -- -- (820) (38) -- -- --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1996............ 33,011 330 101,978 23,544 -- -- --
------ ---- -------- ------- ------- ------ --------
Net income.............................. -- -- -- 19,522 -- -- --
Proceeds from the sale of common stock,
net of offering costs................. 2,400 24 52,619 -- -- -- --
Common stock issued in connection with
purchase of subsidiary................ 213 2 6,008 -- -- -- --
Distributions........................... -- -- -- (738) -- -- --
Other................................... 251 3 2,364 1,469 -- -- --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1997............ 35,875 $359 $162,969 $43,797 $ -- $ -- $ --
====== ==== ======== ======= ======= ====== ========
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATIONS
ADJUSTMENTS TOTAL EQUITY
------------ ------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994............ $ 40 $ 61,189
---- --------
Issuance of Common Stock................ -- 177
Distributions........................... -- (9,241)
Net income.............................. -- 21,299
Other................................... (41) 2,024
---- --------
BALANCE AT DECEMBER 31, 1995............ (1) 75,448
---- --------
Distributions of partnership equity and
other equity interests................ -- (14,218)
Conversion of convertible notes payable
to AVCOM common stock................. -- 400
Proceeds from the sale of common stock
to the public, net of offering costs,
including 16,212 shares issued in
exchange for partners' and members'
equity................................ -- 73,324
Stock issued and goodwill recorded in
connection with the acquisition of
investment in joint venture........... -- 4,989
Acquisition of minority limited
partners' interests................... -- (7,465)
Deferred taxes recorded in connection
with the Consolidation Transactions... -- (9,464)
Net income (loss)....................... -- 11,034
Exchange of partners' and members'
equity for stock in connection with
the Consolidation Transactions........ -- --
Assignment to venturers' of receivable
due from related party................ -- (3,449)
Write-off of receivable from related
party................................. -- (3,890)
Other................................... 574 (284)
---- --------
BALANCE AT DECEMBER 31, 1996............ 573 126,425
---- --------
Net income.............................. -- 19,522
Proceeds from the sale of common stock,
net of offering costs................. -- 52,643
Common stock issued in connection with
purchase of subsidiary................ -- 6,010
Distributions........................... -- (738)
Other................................... 212 4,048
---- --------
BALANCE AT DECEMBER 31, 1997............ $785 $207,910
==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS
Signature Resorts, Inc. and its wholly-owned subsidiaries ("the Company")
generate revenues from the sale and financing of vacation ownership interests in
its resorts, which entitle the buyer to use a fully-furnished vacation
residence, generally for a one-week period each year, in perpetuity (Vacation
Intervals). The Company's principal operations consist of (i) acquiring,
developing and operating vacation ownership resort locations, (ii) marketing and
selling Vacation Intervals in certain of its resorts, (iii) marketing and
selling vacation points at certain of its resort locations which may be redeemed
for occupancy rights at participating resorts ("Vacation Points") and (iv)
providing consumer financing to individual purchasers of Vacation Intervals and
Vacation Points 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' associates.
The Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its Common Stock (the
"Initial Public Offering") by offering 9,056,250 shares to the public. The gross
proceeds from the public offering were $84.5 million. The Company incurred $11.2
million of costs associated with this offering. Concurrent with the Initial
Public Offering, certain predecessor limited partnerships, limited liability
companies and corporations (the "Entities") exchanged their direct or indirect
interest in, and obligations of the entities, for 16,211,558 shares of the
Company's common stock (the "Consolidation Transactions"). The accompanying
consolidated financial statements reflect the financial position and results of
operations of the Entities since the date they were acquired or formed, which
range from November 1986 to June 1996. Concurrent with the Initial Public
Offering, the Company exchanged 820,500 shares of Common Stock with the former
holders of interests in the Embassy Vacation Resort at Poipu Point, Koloa,
Kauai, Hawaii.
On February 7, 1997 the Company consummated its acquisition by merger of
AVCOM International, Inc. ("AVCOM") and its subsidiaries (the "AVCOM
Acquisition"). AVCOM is the parent company of All Seasons Resorts, Inc., a
developer, marketer and operator of vacation ownership resorts in Arizona,
California and Texas. Under the terms of the AVCOM merger agreement, the Company
issued 1,324,554 shares of its common stock in exchange for all the outstanding
capital stock of AVCOM. The AVCOM Acquisition has been treated as a
pooling-of-interests and is reflected in the accompanying consolidated financial
statements as if it took place at the beginning of the earliest period
presented.
On May 15, 1997, the Company consummated its acquisition by merger ("the
PRG Acquisition") of Plantation Resorts Group, Inc. ("PRG"), a Williamsburg,
Virginia, based developer, owner and operator of vacation ownership resorts in
Williamsburg, Virginia. PRG was incorporated in April 1997 through a private
placement of its common stock in which certain predecessor joint ventures and
corporations (the "PRG Entities") exchanged their interests for shares of PRG's
common stock (the "PRG Exchange"). The PRG Acquisition was consummated through
the issuance of 3,601,844 shares of the Company's common stock. The PRG
Acquisition has been treated as a pooling-of-interests and is reflected in the
accompanying consolidated financial statements as if it took place at the
beginning of the earliest period presented.
On August 28, 1997, the Company consummated its acquisition by merger of
100% of the capital stock of LSI Group Holdings plc ("LSI"), in exchange for
1,996,401 newly-issued shares of the Company's common stock and approximately
$1.0 million in cash (the "LSI Acquisition"). United Kingdom-based LSI is a
developer, owner and operator of vacation ownership resorts located in Europe.
Through its Grand Vacation Club, LSI operates a points-based club system. The
LSI Acquisition has been treated as a pooling-of-interests and is reflected in
the accompanying consolidated financial statements as if it took place at the
beginning of the earliest period presented.
F-9
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Total revenues and net income for the Company, AVCOM, PRG, and LSI are
shown in the following table (amounts in millions) for the years ended 1996 and
1995, which represent the periods prior to the poolings, which occurred in 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues
Consolidated......................................... $219.8 $168.3
AVCOM................................................ 48.4 34.3
PRG.................................................. 48.4 38.8
LSI.................................................. 27.9 22.6
Net income (loss)
Consolidated......................................... $ 11.0 $ 21.3
AVCOM................................................ (12.4) 1.0
PRG.................................................. 7.0 7.5
LSI.................................................. 2.3 1.8
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying financial statements
include the combined accounts of Signature Resorts, Inc., AVCOM, PRG, LSI and
the Company's wholly-owned subsidiaries that were acquired or formed prior to
August 20, 1996, which became wholly-owned subsidiaries in connection with the
Consolidation Transactions. As a result, the combined accounts are now referred
to as consolidated financial statements for the historical periods presented.
All significant intercompany transactions and balances have been eliminated from
these consolidated financial statements.
The Consolidation Transactions have been accounted for as a reorganization
of entities under common control. Accordingly, the net assets of the Entities
were recorded at the Entities' historical cost. In addition, the accompanying
consolidated financial statements reflect the historical results of operations
of the predecessor partnerships on a combined basis.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash,
money market, and all highly liquid investments purchased with an original
maturity of three months or less.
Cash in Escrow -- Cash in escrow is restricted cash consisting of deposits
received on sales of vacation intervals and vacation points that are held in
escrow until a certificate of occupancy is obtained or the legal rescission
period has expired.
Real Estate and Development Costs -- Real estate is valued at the lower of
cost or net realizable value. Development costs include both hard and soft
construction costs and together with real estate costs are allocated to Vacation
Intervals and Vacation Points. Interest, taxes, and other carrying costs
incurred during the construction period are capitalized.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful life of 3
to 7 years. Buildings are amortized over the estimated useful life of 39 to 40
years.
Depreciation and amortization expense related to property and equipment was
$2.8 million, $1.5 million and $1.0 million in 1997, 1996 and 1995,
respectively.
Intangible Assets -- Organizational costs incurred in connection with the
formation of the Company have been capitalized and are being amortized on a
straight-line basis over a period of three to five years. Start-up
F-10
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
costs relate to costs incurred to develop marketing programs prior to receiving
regulatory approval to market the related property and are being amortized on a
straight-line basis over a period of one year.
Financing and loan origination fees incurred in connection with obtaining
funding for the Company have been capitalized and are being amortized over the
life of the respective loans. Debt issuance costs in connection with the 9.75%
Senior Subordinated Notes due 2007 (the "Senior Notes") and the 5.75%
Convertible Subordinated Notes due 2007 (the "Convertible Notes") are being
amortized on the effective interest method over the 10 year life of the notes.
Goodwill recorded in connection with the acquisition of the Investment in
Joint Venture is being amortized by a fixed amount per interval as intervals are
sold. Goodwill in connection with the acquisition of subsidiaries is being
amortized over the estimated useful lives of 10 to 40 years.
At each balance sheet date, the Company evaluates the realizability of its
goodwill based upon expectations of nondiscounted cash flows and operating
income. Based upon its most recent analysis, the Company believes that no
material impairment of its goodwill exists at December 31, 1997.
Foreign Currency Translation -- Financial statements for the Company's
subsidiaries outside the United States are translated into U.S. dollars at
year-end exchange rates for assets and liabilities and weighted average exchange
rates for income and expenses. The resulting translation adjustments are
recorded as a separate component of equity.
Revenue Recognition -- The Company recognizes sales of Vacation Intervals
and Vacation Points on an accrual basis after a binding sales contract has been
executed, a 10% minimum down payment has been received, the rescission period
has expired, construction is substantially complete, and certain minimum sales
levels have been achieved. If all the criteria are met except that construction
is not substantially complete, then revenues are recognized on the
percentage-of-completion (cost to cost) basis. For sales that do not qualify for
either accrual or percentage-of-completion accounting, all revenue is deferred
using the deposit method.
Income Taxes -- Prior to August 20, 1996, the Entities were taxed either as
a corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level. The Company
became subject to federal, state, and foreign income taxes from the effective
date of the Initial Public Offering. The pro forma net income per common and
common equivalent share uses the historical net income of the Company as
adjusted by the unaudited pro forma provision for income taxes to reflect the
net income per common and common equivalent share, as if the Company had been
treated as a C corporation rather than as individual limited partnerships and
limited liability companies for federal income tax purposes for the years ended
December 31, 1996 and 1995.
As a result of the AVCOM Acquisition, AVCOM's results of operations have
been included in the accompanying consolidated financial statements under the
pooling-of-interests method of accounting. During each period presented, AVCOM
was taxed as a C corporation.
Prior to the PRG Acquisition, certain of the PRG Entities were not subject
to federal and state income taxes at the consolidated level for all periods
presented. In connection with the PRG Exchange and the PRG Acquisition, the PRG
Entities became subject to federal and state income taxes from the date of
incorporation. As a result, the pro forma provision for income taxes assumes the
PRG Entities were treated as C corporations for federal income tax purposes.
As a result of the LSI Acquisition, LSI's results have been included in the
accompanying consolidated financial statements under the pooling-of-interests
method of accounting. During each period presented, LSI was subject to income
taxes levied by the various local and country taxing authorities in the foreign
countries in which it operates.
F-11
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax assets and liabilities are measured by applying enacted statutory
tax rates applicable to the future years in which the related deferred tax
assets or liabilities are expected to be settled or realized. Income tax expense
consists of the taxes payable for the current period and the change during the
period in deferred tax assets and liabilities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Long-Lived Assets -- In March 1995, the Financial Accounting Standards
Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS 121), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for the expected disposition of long-lived
assets. The Company adopted SFAS 121 during the year ended December 31, 1996.
The impact of adopting SFAS 121 was to reduce net income by $2.6 million in 1996
and has been recorded as a resort property valuation allowance to reduce real
estate and development costs. During 1997, there was no change in the resort
property valuation allowance.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 was adopted during the year ended December 31, 1996. SFAS
123 requires that the Company's financial statements include certain disclosures
about stock-based employee compensation arrangements and permits the adoption of
a change in accounting for such arrangements. Changes in accounting for
stock-based compensation are optional and the Company has adopted only the
disclosure requirements (see Note 10, "Stock Options").
Newly Issued Accounting Standards -- During February 1997, the Financial
Accounting Standards Board issued SFAS No. 128 (SFAS 128), Earnings Per Share.
The statement establishes standards for computing and presenting earnings per
share (EPS) and applies to publicly held common stock or potential common stock.
The statement simplifies the standards for computing EPS previously found in APB
Opinion No. 15, Earnings Per Share (Opinion 15). It replaces presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. The Company implemented SFAS No. 128 in the
fourth quarter of 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 establishes standards for reporting and the display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosures prescribed by SFAS 130 must be made beginning with the first quarter
of fiscal 1999.
F-12
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The company is in the process of reassessing current business segment reporting
to determine if changes in reporting will be required in adopting this new
standard. Any required disclosures prescribed by SFAS 131 will first be adopted
in the Company's 1999 annual report.
In February 1998, the FASB issued Statement No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132). This statement
establishes standards for footnote disclosure requirements relating to pension
and other retiree benefits. The Company is currently in the process of
reassessing current retiree benefit disclosures to determine if changes in
footnote disclosure will be required in adopting this new standard. The new
standard will not have a financial impact on the company. Any required
disclosures prescribed by SFAS 132 will first be adopted in the Company's 1998
annual report.
Reclassifications -- Certain reclassifications were made to the 1996 and
1995 accompanying consolidated financial statements to conform to the 1997
presentation.
3. MORTGAGES RECEIVABLE, NET
The Company provides financing to the purchasers of Vacation Intervals and
Vacation Points which are collateralized by their interest in such Vacation
Intervals and Vacation Points. The mortgages receivable generally bear interest
at the time of issuance of between 12% and 17%, which remain fixed over the term
of the loan, which typically averages seven to ten years. The mortgages
receivable may be prepaid at any time without penalty. The weighted average rate
of interest on outstanding mortgages receivable is 14.4% as of December 31,
1997.
As of December 31, 1997, approximately 4.6% of the Company's consumer loans
were considered by the Company to be delinquent (scheduled payment past due 60
or more days). In addition, the Company had commenced deed-in-lieu of
foreclosure or foreclosure action on approximately 2.2% of its consumer loans as
of December 31, 1997.
At December 31, 1997 and 1996, approximately $5.8 million and $4.4 million,
respectively, of mortgages receivable are non-interest bearing. These mortgages,
which generally have a stated maturity of one to three years, have not been
discounted as management has determined that the effect would not be material to
the accompanying consolidated financial statements.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $4.1 million and $2.5 million at December 31, 1997 and
1996, respectively. The accrued interest receivable at December 31, 1997 and
1996 is net of an allowance for doubtful accounts of $1.0 million and $0.2
million, respectively, and is included in other receivables, net.
F-13
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The following schedule reflects the scheduled principal maturities of
mortgages receivable (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1998........................................................ $ 50,564
1999........................................................ 46,367
2000........................................................ 44,615
2001........................................................ 43,907
2002........................................................ 41,760
Thereafter.................................................. 127,438
--------
Total principal maturities of mortgages receivable.......... 354,651
Less allowance for doubtful accounts........................ (22,916)
--------
Net principal maturities of mortgages receivable............ $331,735
========
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts is
as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Balance, beginning of the period......................... $17,328 $13,271
Decrease in allowance for purchased mortgages
receivable............................................. (718) (400)
Increase in allowance for company acquired............... 1,265 --
Provision for mortgages receivable doubtful accounts..... 7,234 8,311
Receivables charged off.................................. (2,193) (3,854)
------- -------
Balance, end of the period..................... $22,916 $17,328
======= =======
</TABLE>
The provision for doubtful accounts for 1997 includes $1,345,000 for other
receivables.
4. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated Vacation Interval and
Vacation Point cost of sales consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Land................................................. $ 74,527 $ 54,614
Development costs, excluding capitalized interest.... 370,151 248,972
Capitalized interest................................. 20,050 13,276
--------- ---------
Total real estate and development costs.... 464,728 316,862
Less accumulated Vacation Interval and Vacation Point
cost of sales...................................... (242,809) (171,372)
Less resort property valuation allowance............. (2,620) (2,620)
--------- ---------
Net real estate and development costs...... $ 219,299 $ 142,870
========= =========
</TABLE>
As of December 31, 1997, the Company commenced sales of Vacation Intervals
at certain properties, or phases of certain properties, that are expected to be
completed during 1998. The estimated cost to complete the projects, or the
specific phases of the projects, is approximately $20 million.
F-14
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following
(amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Organizational costs..................................... $ 2,569 $ 2,569
Start-up costs........................................... 1,933 2,433
Debt issuance costs...................................... 15,257 933
Loan origination fees.................................... 1,265 2,712
Financing fees........................................... 1,704 1,620
Goodwill................................................. 35,227 41
------- -------
Total intangible assets.................................. 57,955 10,308
Less accumulated amortization............................ (7,508) (5,772)
------- -------
Net intangible assets.................................. $50,447 $ 4,536
======= =======
</TABLE>
Amortization expense was $3.7 million, $3.5 million and $1.6 million in
1997, 1996 and 1995, respectively. In addition, $2.0 million of amortized
intangibles were retired from the related asset and accumulated amortization
accounts in 1997.
6. NOTES PAYABLE
Notes payable consists of the following at December 31 (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revolving lines of credit not to exceed $241 million in the
aggregate (limited by eligible collateral), with interest
payable monthly at prime plus 2% to prime plus 3% (10.5% to
11.5% at December 31, 1997), payable in monthly installments
of principal and interest equal to 100% of all proceeds of
the receivables collateral collected during the month but
not less than the accrued interest, with any remaining
principal due seven to ten years after the date of the last
advance related to mortgages receivable, collateralized by
specific mortgages receivable............................... $ 62,676 $ 91,617
Revolving line of credit not to exceed $20 million,
collateralized by certain mortgages receivable with interest
payable at prime plus 1.5% to prime plus 1.75% (10.0% to
10.25% at December 31, 1997) or LIBOR plus 4.25% (9.97% at
December 31, 1997), payable in monthly installments of
principal and interest equal to 100% of all proceeds of the
receivables collateral collected during the month but not
less than the accrued interest, with any remaining principal
from September 2000 to October 2003......................... 11,931 14,654
Revolving line of credit of $100.0 million and $40 million
during 1997 and 1996, respectively, with interest payable
monthly at LIBOR plus 2.75% (8.47% at December 31, 1997)
payable in monthly installments of principal and interest
equal to 100% of all proceeds of the receivables collateral
collected during the month but not less than the accrued
interest, with any remaining principal due June 1998........ -- 37,226
</TABLE>
F-15
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Construction loan payable not to exceed $47 million in the
aggregate, with monthly interest payable at prime plus 2%
(10.5% at December 31, 1997) principal payable with a
portion of the proceeds received on the sale of Vacation
Intervals, collateralized by specific land and unsold
interval inventory, due from January 1998 to April 2004..... 2,694 16,476
Mortgages receivable, sold with option to repurchase,
collateralized by certain mortgages receivable.............. 4,823 6,281
Bonds payable, due April 2004 with interest at 7.75%,
payable from collections of mortgages receivable,
collateralized by mortgages receivable...................... 11,572 17,460
Endpaper loan, due dates from December 2002 to June 2005
with interest at prime plus 1.25% (9.75% at December 31,
1997), payable from collections of mortgages receivable,
collateralized by mortgages receivable...................... -- 5,259
Various acquisition notes payable with interest rates
ranging from 6.75% to 11.5% and due dates ranging from
January 1998 to February 2014, collateralized by certain
real property and proceeds from the sale of Vacation
Intervals................................................... -- 5,999
Noninterest bearing land loans payable from proceeds of
Vacation Intervals sold with final maturity of May 1999..... 433 3,995
Other notes payable......................................... 3,079 37,155
9.75% Senior Subordinated Notes with semi-annual interest
payments due April and October and principal due October
2007........................................................ 200,000 --
5.75% Convertible Subordinated Notes with semi-annual
interest payments due January and July and principal due
January 2007................................................ 138,000 --
-------- --------
Total notes payable......................................... $435,208 $236,122
======== ========
</TABLE>
On February 18, 1998, the Company consummated a $100.0 million Senior Bank
Credit Facility (the "Credit Facility"). The Credit Facility has a variable
borrowing rate based on the percentage of the Company's mortgages receivable
pledged under such facility and the amount of funds advanced thereunder. The
interest rate will vary between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending
on the amount of advances against mortgages receivable. The Credit Facility has
a three year term and contains covenants, representations and warranties and
conditions to borrow on the funds.
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 under certain events.
At December 31, 1997, under the terms of the revolving lines of credit
agreements, the Company may typically borrow from 85% to 90% of the balances of
the pledged mortgages receivable. A total of approximately $199 million is
available under these certain agreements.
The loans contain certain covenants, the most restrictive of which require
certain of the consolidated entities to maintain a minimum net worth and require
certain expenses to not exceed certain percentages of sales. At December 31,
1997, the Company was in compliance with all covenants.
F-16
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Dividends are restricted by certain of the Company's debt agreements which
require tangible net worth of at least $140 million.
The expected maturities of the remaining notes payable are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
DUE IN FISCAL YEAR
------------------
<S> <C>
1998..................... $ 29,537
1999..................... 28,794
2000..................... 18,108
2001..................... 11,503
2002..................... 9,223
2003 and thereafter...... 338,043
--------
$435,208
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, respectively, the Company, had accrued $7.0
million and $4.4 million as a receivable from various homeowners' associations
at its resorts. At December 31, 1997 and 1996, respectively, the Company had
accrued $1.0 million and $1.6 million as a payable to the homeowners'
associations at its resorts. The Company generally accrues receivables from
homeowners' associations for management fees and certain other expenses.
Payables to the homeowners' associations consist primarily of maintenance fees
for units owned by the Company. All of these amounts are classified as due from
and due to related parties in the accompanying consolidated balance sheets.
As of December 31, 1997, the Company had accounts receivable and notes
receivable of $2.7 million and $11.8 million, respectively, from the Company's
joint ventures in Poipu Point, Hawaii, Kaanapali, Hawaii and St. John, U.S.
Virgin Islands. As of December 31, 1996, these accounts receivable and notes
receivable balances were $0.3 million and $2.0 million, respectively. The
accounts receivable relate to certain reimbursable operating and development
expenses. The notes receivable represent loans made to the projects for start-up
and development activities.
8. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to litigation and claims regarding
employment, tort, contract, construction, and commission disputes, among others.
In the judgment of management, none of such litigation or claims against the
Company is likely to have a material adverse effect on the Company's financial
statements or its business.
The Company owns a partnership interest in the Embassy Vacation Resort at
Poipu Point, Koloa, Kauai, Hawaii. Under the terms of the partnership agreement,
the Company could be required to purchase the other partner's interest. At
December 31, 1997, the Company does not believe that the events requiring such
purchase are likely to occur.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and cash in escrow: The carrying amount reported
in the balance sheet for cash and cash equivalents and cash in escrow
approximates their fair value because of the short maturity of these
instruments.
F-17
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable: The carrying amount reported in the balance sheet for notes
payable approximates its fair value because the interest rates on these
instruments approximate current interest rates charged on similar current
borrowings.
10. STOCK OPTIONS
The Company issued 1,054,500 and 2,653,500 stock options during 1997 and
1996, respectively. The Company accounts for these options under APB Opinion No.
25, Accounting for Stock Issued to Employees, under which no compensation cost
has been recognized. Under SFAS 123, the Company's net income would have been
$16.9 million and basic and diluted earnings per share would have been, $0.48
and $0.47, respectively, on an unaudited pro forma basis for the year ended
December 31, 1997. The Company's unaudited, pro forma net income would have been
$1.6 million, and basic and diluted unaudited earnings per share would have been
$0.06 on an unaudited pro forma basis for the year ended December 31, 1996. SFAS
123 would not have affected the Company's net income and earnings per share for
the year ended December 31, 1995. A summary of the Company's stock options for
the years ended December 31, 1997 and 1996 is presented in the following table:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding options, beginning
of year...................... 2,653,500 $10.29 --
Granted........................ 1,054,500 23.99 2,653,500 $10.29
Exercised...................... (250,180) 9.33 -- --
Forfeited...................... (168,413) 16.42 -- --
Expired........................ -- -- -- --
---------- ------ ---------- ------
Outstanding options, end of
year......................... 3,289,407 $14.45 2,653,500 $10.29
Exercisable at end of year..... 817,528 $10.50 522 $10.18
========== ====== ========== ======
Weighted average fair value of
options granted.............. $ 5.32 $ 4.23
</TABLE>
All stock options issued by the Company were issued to employees at fair
market value on the grant date. The options range from 3 to 5 years for full
maturity and the exercise prices range from $8.00 to $28.25.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 6.0%, expected dividend yield of zero, expected
volatility of 35%, and expected lives of 4.1 years in 1997 and 5 years in 1996.
Options to purchase an aggregate of 2,653,500 shares of Common stock were
granted to directors, executive officers and other employees of the Company in
1996 and were outstanding on January 1, 1997. The number of options granted
exceeded the limit of 2,625,000 shares approved under the 1996 Equity
Participation Plan by 28,500 shares. The options that were granted in excess of
the limit were granted subject to the approval of the Company's stockholders of
an amendment to such plan increasing the number of shares of Common stock
reserved for issuance thereunder from 2,625,000 shares to 3,750,000 shares.
On May 16, 1997, shareholders approved a new limit of 3,750,000 total
shares reserved for issuance under the Company's 1996 Equity Participation Plan.
As of December 31, 1997 the number of shares available for option grants was
460,593 under the plan.
F-18
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
11. EMPLOYEE BENEFIT PLANS
The Company has established the Signature Resorts, Inc. Employee Stock
Purchase Plan to assist eligible employees to acquire stock ownership in the
Company and to encourage them to remain in the employment of the Company. The
Employee Stock Purchase Plan is intended to meet the requirements of an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended, and generally allows eligible employees to purchase common
stock at 85% of fair market value, subject to dollar limitations. The Company
has reserved a maximum of 750,000 shares of Common Stock for issuance pursuant
to the Employee Stock Purchase Plan. As of December 31, 1997 and 1996, an
aggregate of 2,482 and no shares, respectively, had been issued pursuant to the
Employee Stock Purchase Plan.
The Company also has established a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended. Subject to certain limitations, the 401(k) Plan allows
participating employees to defer up to 10% of their eligible compensation on a
pre-tax basis. Although the 401(k) Plan allows the Company to make discretionary
matching contributions of up to 50% of employee contributions, the Company did
not make any such matching contributions during 1997 or 1996.
12. INCOME TAXES
Prior to August 20, 1996, the Entities were taxed either as a corporation
at the corporate level, as an S corporation taxable at the shareholder level, or
as a partnership taxable at the partner level. In addition, PRG entities were
taxed as a corporation at the corporate level or as a partnership at the partner
level. Accordingly, the table below summarizes the unaudited pro forma provision
for income taxes that would have been reported had the Company been treated as a
C corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes for the years ended December
31, 1996 and 1995. AVCOM's and LSI's actual deferred income taxes and provision
for income taxes are included in the pro forma schedules and 1996 actual
schedule on the next page. The Company's actual income tax provision is
presented for the periods subsequent to August 20, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1996 1995
------- ------- ------------ ------------
(PRO FORMA) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ 2,194 $ 2,785 $ 4,990 $ 5,654
State...................................... 461 481 846 711
Foreign.................................... 2,533 1,240 1,233 1,645
------- ------- ------- -------
Total current provision for income taxes..... 5,188 4,506 7,069 8,010
------- ------- ------- -------
Deferred:
Federal.................................... 16,125 (7,182) (3,675) 1,363
State...................................... 1,843 (1,393) (809) 594
Foreign.................................... -- (36) (36) 42
------- ------- ------- -------
Total deferred provision (benefit) for income
taxes...................................... 17,968 (8,611) (4,520) 1,999
------- ------- ------- -------
Provision (benefit) for income taxes......... $23,156 $(4,105) $ 2,549 $10,009
======= ======= ======= =======
</TABLE>
F-19
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The reconciliation between the statutory provision for income taxes and the
actual provision (benefit) for income taxes is shown as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1996 1995
------- ------- ------------ ------------
(PRO FORMA) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Income tax at U.S. federal statutory
rate............................... $15,205 $ 2,357 $2,357 $ 8,862
State tax, net of federal benefit.... 1,738 163 163 1,037
Difference in foreign tax rates...... (994) (34) (34) (56)
Write-off of receivable from related
party.............................. -- (1,478) -- --
Non-deductible expenses.............. 3,192 598 63 166
Deferred income taxes recorded upon
acquisition of previously
non-taxable entities............... 5,960 -- -- --
Other................................ (895) -- -- --
Non-taxable income from entities..... (1,050) (5,711) -- --
------- ------- ------ -------
Provision (benefit) for income
taxes........................... $23,156 $(4,105) $2,549 $10,009
======= ======= ====== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax liabilities were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 8,867 $ 5,659
Fixed assets and inventory................................ 1,305 3,389
Accrued expenses.......................................... 4,152 2,386
Adjustment to basis of partnership property............... 3,474 --
Net operating loss carryover.............................. 29,439 15,763
Capital loss carryover.................................... 367 --
Federal benefit of state deferred tax..................... -- --
Foreign tax credit carryover.............................. 62 332
Minimum tax credit carryover.............................. 5,776 1,629
-------- --------
Total gross deferred tax assets................... 53,442 29,158
-------- --------
Valuation Allowance......................................... (2,367) --
-------- --------
Total net deferred tax asset...................... 51,075 29,158
-------- --------
Deferred tax liabilities:
Installment sales......................................... (73,818) (27,191)
Percentage of completion.................................. (160) (4,370)
Other..................................................... (849) (856)
-------- --------
Total deferred tax liabilities.................... (74,827) (32,417)
-------- --------
Net deferred taxes..................................... $(23,752) $ (3,259)
======== ========
</TABLE>
At December 31, 1997, the Company has available approximately $79 million
of unused net operating loss carryforwards (the "NOLs") that may be applied
against future taxable income. These NOLs expire on various dates from 2004
through 2012.
F-20
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
During the fourth quarter of 1997, the Company changed its estimate
regarding its tax provision by $6.0 million or $0.17 per share to reflect the
tax effects of certain acquired entities, primarily PRG, that were either
previously non-taxable or were taxed in foreign jurisdictions.
13. SUBSEQUENT EVENTS
On February 3, 1998, the Company 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 debt. 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 addition on
February 18, 1998, the Company consummated MMG's commitment to purchase an
additional resort in Gatlinburg, Tennessee. The Company will account for the
acquisition using the purchase method of accounting for business combinations.
In January 1998, the Company acquired the Westin Carambola Beach Resort
(the "Carambola Beach Resort") on the island of St. Croix, United States Virgin
Islands for a cash purchase price of $13 million. The Carambola Beach Resort
contains 156 one-bedroom suites and one two-bedroom suite. The Company will
account for the acquisition using the purchase method of accounting for business
combinations.
In January 1998, the Company announced that it and Westin Hotels & Resorts
("Westin") 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 St. John located in the 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.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment, which includes the
development, acquisition, marketing, sales, financing and management of vacation
ownership resorts. The Company's areas of operation outside of the United States
include Mexico, Canada, Netherlands Antilles, United Kingdom, Spain, Austria and
France. The Company's customers are not concentrated in any specific geographic
region and no single customer accounts for a significant amount of the Company's
sales.
F-21
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Information about the Company's operations in different geographic
locations is shown below (amounts in thousands):
<TABLE>
<CAPTION>
UNITED STATES FOREIGN TOTAL
------------- ------- --------
<S> <C> <C> <C>
1997
Total revenues.................................. $270,296 $67,397 $337,693
Income before provision for income taxes........ 31,177 12,267 43,444
Identifiable assets............................. 701,509 59,636 761,145
1996
Total revenues.................................. $179,003 $40,844 $219,847
Income before provision for income taxes........ 356 6,573 6,929
Identifiable assets............................. 412,339 33,545 445,884
1995
Total revenues.................................. $138,925 $29,393 $168,318
Income before provision for income taxes........ 18,162 7,157 25,319
Identifiable Assets............................. 267,162 28,609 295,771
</TABLE>
NOTE 15. ACQUISITIONS
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 a Hawaiian hospitality
management company and operator of hotels, resort condominiums and all-suite
resorts with 22 managed resort locations on Hawaii's five major islands. The
Company accounted for the Marc Acquisition using the purchase method of
accounting for business combinations.
On November 7, 1997, the Company consummated its acquisition of 100% of the
capital stock of Vacation Internationale, Ltd. ("VI") and its subsidiaries 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 (the "VI Acquisition"). VI is a Bellevue, Washington based
developer and operator of vacation ownership resorts. VI's vacation time share
program includes 21 resort locations in the Western United States, Hawaii,
Mexico and Canada. The Company accounted for the VI Acquisition using the
purchase method of accounting for business combinations.
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 Company accounts
for this investment under the equity method of accounting.
On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of Global Development Ltd. ("Global") and
certain of its affiliated companies through an asset purchase for cash
consideration of approximately $18 million. Global has 13 resort locations in
Europe. The Company assumed no long-term debt as part of this transaction, but
assumed approximately $7.0 million in liabilities and acquired assets valued at
approximately $15.8 million. The Company accounted for the asset purchase using
the purchase method of accounting.
F-22
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Assets acquired and liabilities assumed in connection with the Company's
acquisitions are as follows (amounts in thousands):
<TABLE>
<S> <C>
Assets acquired in acquisitions:
Cash in escrow............................................ $ 857
Mortgages receivable, net................................. 14,509
Due from related parties.................................. 1,175
Other receivables, net.................................... 2,719
Prepaid expenses and other................................ 377
Real estate and development costs......................... 10,834
Property and equipment, net............................... 3,202
Goodwill in conjunction with acquisitions................. 35,186
-------
Total assets acquired in acquisitions............. $68,859
=======
Liabilities assumed in acquisitions:
Accounts payable.......................................... $ 8,666
Accrued liabilities....................................... 21,359
Due to related parties.................................... 12
Deferred income taxes..................................... 1,012
Notes payable............................................. 227
Cumulative translation adjustments........................ 277
-------
Total liabilities assumed in acquisitions......... $31,553
=======
</TABLE>
The following tables sets forth certain unaudited pro forma information for
the Company's acquisitions as if they had occurred as of the beginning of 1997
and 1996 (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS TOTAL
--------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Year ended December 31, 1997
Total revenues................................. $337,693 $ 53,094 $390,787
Net Income..................................... 19,522 (2,951) 16,571
Basic EPS...................................... $ 0.55 $ 0.47
Diluted EPS.................................... $ 0.54 $ 0.46
Year ended December 31, 1996
Total revenues................................. $219,847 $ 74,014 $293,861
Net Income..................................... 11,034 261 11,295
Basic EPS...................................... $ 0.41 $ 0.41
Diluted EPS.................................... $ 0.40 $ 0.41
</TABLE>
F-23
<PAGE> 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 16. EARNINGS PER SHARE
Basic earnings per share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing the sum of the weighted average
number of common shares outstanding plus all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued. The
following table reconciles the number of shares utilized in the earnings per
share calculations for each of the three years in the period ended December 31,
1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................ $19,522 $11,034 $21,299
======= ======= =======
Net income available to common stockholders after
assumed conversion of dilutive securities(a)........ $19,522 $11,034 $21,299
======= ======= =======
Weighted average number of common shares used in basic
EPS................................................... 35,373 27,232 23,955
Effect of dilutive stock options...................... 807 408 --
------- ------- -------
Weighted average number of common shares and dilutive
potential common shares used in diluted EPS(a)...... 36,180 27,640 23,955
======= ======= =======
</TABLE>
(a) The potential effect on net income and on common stock shares related
to the Convertible Notes have not been included in the calculation of net income
or weighted average number of common shares and dilutive potential common shares
outstanding used in diluted EPS because the effect would be anti-dilutive.
F-24
<PAGE> 130
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. 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
EXCHANGE OF EXCHANGE NOTES FOR PRIVATE NOTES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary............................... 1
Risk Factors.......................... 14
The Exchange Offer.................... 26
Use of Proceeds....................... 35
Consolidated Capitalization........... 35
Ratio of Earnings to Fixed Charges.... 35
Unaudited Pro Forma Financial Data.... 36
Selected Financial Data............... 38
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business.............................. 51
Management............................ 71
Description of Certain Indebtedness... 75
Description of Notes.................. 77
Certain Federal Income Tax
Consequences........................ 101
Plan of Distribution.................. 101
Legal Matters......................... 102
Independent Auditors.................. 102
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$140,000,000
LOGO
SIGNATURE RESORTS, INC.
9 1/4% SENIOR NOTES DUE 2006
------------------------------------------
PROSPECTUS
------------------------------------------
MAY 12, 1998
======================================================
<PAGE> 131
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-51803
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
9 1/4% SENIOR NOTES DUE 2006
OF
SIGNATURE RESORTS, INC.
PURSUANT TO THE PROSPECTUS DATED MAY 12, 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON JUNE 11, 1998 (THE "EXPIRATION DATE"), UNLESS THE
EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION, IN WHICH
CASE THE TERM "EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME TO
WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY TIME
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT IS:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<TABLE>
<S> <C> <C>
By Hand: By Registered or Certified Mail: By Overnight Courier:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
</TABLE>
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus dated May 12, 1998
(the "Prospectus"), of Signature Resorts, Inc., a Maryland corporation (the
"Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which
together with the Prospectus constitutes the Company's offer (the "Exchange
Offer") to exchange $1,000 principal amount of its 9 1/4% Senior Notes due 2006
(the "Exchange Notes") for each $1,000 principal amount of its outstanding
9 1/4% Senior Notes due 2006 (the "Private Notes"). Recipients of the Prospectus
should read the requirements described in such Prospectus with respect to
eligibility to participate in the Exchange Offer. Capitalized terms used but not
defined herein have the meaning given to them in the Prospectus.
The undersigned hereby tenders the Private Notes described in the box
entitled "Description of Private Notes" below pursuant to the terms and
conditions described in the Prospectus and this Letter of Transmittal. The
undersigned is the registered owner of all the Private Notes and the undersigned
represents that it has received from each beneficial owner of Private Notes
("Beneficial Owners") a duly completed and executed form of "Instruction to
Registered Holder from Beneficial Owner" accompanying this Letter of
Transmittal, instructing the undersigned to take the action described in this
Letter of Transmittal.
This Letter of Transmittal is to be used by a holder of Private Notes (i)
if certificates representing Private Notes are to be forwarded herewith, (ii) if
delivery of Private Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer -- Procedures for Tendering," or (iii) if a tender is made pursuant to the
guaranteed delivery procedures in the section of the Prospectus entitled "The
Exchange Offer -- Guaranteed Delivery Procedures."
The undersigned hereby represents and warrants that the information
received from the beneficial owners is accurately reflected in the boxes
entitled "Beneficial Owner(s) -- Purchaser Status" and "Beneficial Owner(s) --
Residence."
<PAGE> 132
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder of Private Notes promptly and
instruct such registered holder of Private Notes to tender on behalf of the
beneficial owner. If such beneficial owner wishes to tender on its own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering its Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such beneficial
owner's name or obtain a properly completed bond power from the registered
holder of Private Notes. The transfer of record ownership may take considerable
time.
In order to properly complete this Letter of Transmittal, a holder of
Private Notes must (i) complete the box entitled "Description of Private Notes,"
(ii) complete the boxes entitled "Beneficial Owner(s) -- Purchaser Status" and
"Beneficial Owner(s) -- Residence," (iii) if appropriate, check and complete the
boxes relating to book-entry transfer, guaranteed delivery, Special Issuance
Instructions and Special Delivery Instructions, (iv) sign the Letter of
Transmittal by completing the box entitled "Sign Here" and (v) complete the
Substitute Form W-9. Each holder of Private Notes should carefully read the
detailed instructions below prior to completing the Letter of Transmittal.
Holders of Private Notes who desire to tender their Private Notes for
exchange and (i) whose Private Notes are not immediately available or (ii) who
cannot deliver their Private Notes, this Letter of Transmittal and all other
documents required hereby to the Exchange Agent on or prior to the Expiration
Date, must tender the Private Notes pursuant to the guaranteed delivery
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2.
Holders of Private Notes who wish to tender their Private Notes for
exchange must complete columns (1) through (3) in the box below entitled
"Description of Private Notes," complete the boxes entitled and sign the box
below entitled "Sign Here." If only those columns are completed, such holder of
Private Notes will have tendered for exchange all Private Notes listed in column
(3) below. If the holder of Private Notes wishes to tender for exchange less
than all of such Private Notes, column (4) must be completed in full. In such
case, such holder of Private Notes should refer to Instruction 5.
2
<PAGE> 133
DESCRIPTION OF PRIVATE NOTES
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
NAME(S) AND ADDRESS(ES) OF REGISTERED PRIVATE NOTE AGGREGATE PRINCIPAL AMOUNT
HOLDER(S) OF PRIVATE NOTE(S), EXACTLY AS NAME(S) NUMBER(S) PRINCIPAL AMOUNT TENDERED FOR EXCHANGE
APPEAR(S) ON PRIVATE NOTE CERTIFICATE(S) (ATTACH SIGNED LIST REPRESENTED BY (MUST BE IN INTEGRAL
(PLEASE FILL IN, IF BLANK) IF NECESSARY) CERTIFICATE(S)(A) MULTIPLES OF $1,000)(B)
- ------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL PRINCIPAL
AMOUNT OF NOTES
TENDERED
</TABLE>
- --------------------------------------------------------------------------------
A. Unless indicated in the column "Principal Amount Tendered For Exchange,"
any tendering Holder of 9 1/4% Senior Notes due 2006 will be deemed to
have tendered the entire aggregate principal amount represented by the
column labelled "Aggregate Principal Amount Represented by
Certificate(s)."
B. The minimum permitted tender is $1,000 in principal amount of 9 1/4%
Senior Notes due 2006. All other tenders must be integral multiples of
$1,000.
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER
DEFINED) ONLY):
Name of Tendering Institution:
Account Number:
Transaction Code Number:
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Registered Holder of Private Note(s):
Date of Execution of Notice of Guaranteed Delivery:
Window Ticket Number (if available):
Name of Institution which Guaranteed Delivery:
Account Number (if delivered by book-entry transfer):
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
Address:
3
<PAGE> 134
============================================================
<TABLE>
<S> <C>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8) (SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY (i) if the Exchange To be completed ONLY if the Exchange Notes
Notes issued in exchange for Private Notes, issued in exchange for Private Notes,
certificates for Private Notes in a principal certificates for Private Notes in a principal
amount not exchanged for Exchange Notes, or amount not exchanged for Exchange Notes, or
Private Notes (if any) not tendered for Private Notes (if any) not tendered for
exchange, are to be issued in the name of exchange, are to be mailed or delivered (i) to
someone other than the undersigned or (ii) if someone other than the undersigned or (ii) to
Private Notes tendered by book-entry transfer the undersigned at an address other than the
which are not exchanged are to be returned by address shown below the undersigned's
credit to an account maintained at DTC. signature.
Issue to: Mail or deliver to:
Name Name
(PLEASE TYPE OR PRINT) (PLEASE TYPE OR PRINT)
Address Address
(INCLUDE ZIP CODE) (INCLUDE ZIP CODE)
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.) (TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
Credit Private Notes not exchanged and
delivered by book-entry transfer to DTC
account set forth below:
(ACCOUNT NUMBER)
</TABLE>
============================================================
4
<PAGE> 135
- --------------------------------------------------------------------------------
BENEFICIAL OWNER(S) -- RESIDENCE
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
STATE OF DOMICILE/PRINCIPAL PLACE OF BUSINESS OF PRINCIPAL AMOUNT OF PRIVATE NOTES
EACH BENEFICIAL OWNER OF PRIVATE NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER(S)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BENEFICIAL OWNER(S) -- PURCHASER STATUS
- --------------------------------------------------------------------------------
The beneficial owner of each of the Private Notes described herein is (check
the box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act)
that purchased the Private Notes outside the United States in accordance
with Rule 904 of the Securities Act
[ ] Other (describe)
- --------------------------------------------------------------------------------
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the offer by Signature Resorts, Inc., a Maryland corporation
(the "Company"), upon the terms and subject to the conditions set forth in the
Prospectus dated May 12, 1998 (the "Prospectus") and this Letter of Transmittal
(the "Letter of Transmittal"), which together with the Prospectus constitutes
the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount
of its 9 1/4% Senior Notes due 2006 (the "Exchange Notes") for each $1,000
principal amount of its outstanding 9 1/4% Senior Notes due 2006 (the "Private
Notes"), the undersigned hereby tenders to the Company for exchange the Private
Notes indicated above.
By executing this Letter of Transmittal and subject to and effective upon
acceptance for exchange of the Private Notes tendered for exchange herewith, the
undersigned will have irrevocably sold, assigned, transferred and exchanged, to
the Company, all right, title and interest in, to and under all of the Private
Notes tendered for exchange hereby, and hereby will have appointed the Exchange
Agent as the true and lawful agent and attorney-in-fact (with full knowledge
that the Exchange Agent also acts as agent of the Company) of such holder of
Private Notes with respect to such Private Notes, with full power of
substitution to (i) deliver certificates representing such Private Notes, or
transfer ownership of such Private Notes on the account books maintained by DTC
(together, in any such case, with all accompanying evidences of transfer and
authenticity), to the Company, (ii) present and deliver such Private Notes for
transfer on the books of the Company and (iii) receive all benefits and
otherwise exercise all rights and incidents of beneficial ownership with respect
to such Private Notes, all in accordance with the terms of the Exchange Offer.
The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (i) the undersigned is
the owner; (ii) has a net long position within the meaning of Rule 14e-4 under
the Securities Exchange Act as amended ("Rule 14e-4") equal to or greater than
the principal amount of Private Notes tendered hereby; (iii) the tender of such
Private Notes complies with Rule 14e-4 (to the extent that Rule 14e-4 is
applicable to such exchange); (iv) the undersigned has full power and authority
to tender, exchange, assign and transfer the Private Notes and (v) that when
such Private Notes are accepted for exchange by the Company, the Company will
acquire good and marketable title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claims.
The undersigned will, upon receipt, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the exchange, assignment and transfer of the Private Notes tendered for
exchange hereby.
5
<PAGE> 136
By tendering, the undersigned hereby further represents to the Company that
(i) the Exchange Notes to be acquired by the undersigned in exchange for the
Private Notes tendered hereby and any beneficial owner(s) of such Private Notes
in connection with the Exchange Offer will be acquired by the undersigned and
such beneficial owner(s) in the ordinary course of business of the undersigned,
(ii) the undersigned is not engaged in, and does not intend to engage in, and
has no arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes, (iii) the undersigned and each beneficial
owner acknowledge and agree that any person who is a broker-dealer registered
under the Exchange Act or is participating in the Exchange Offer for the purpose
of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes acquired by such person and
cannot rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) the undersigned and each beneficial owner understand
that a secondary resale transaction described in clause (iii) above and any
resales of Exchange Notes obtained by the undersigned in exchange for the
Private Notes acquired by the undersigned directly from the Company should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) neither the undersigned nor any
beneficial owner is an "affiliate," as defined under Rule 405 under the
Securities Act, of the Company. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intent to engage
in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that
will receive Exchange Notes for its own account in exchange for Private Notes,
it represents that the Private Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted for exchange, and to have exchanged, validly tendered Private Notes,
if, as and when the Company gives oral or written notice thereof to the Exchange
Agent. Tenders of Private Notes for exchange may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders" in the Prospectus. Any Private Notes tendered by
the undersigned and not accepted for exchange will be returned to the
undersigned at the address set forth above unless otherwise indicated in the box
above entitled "Special Delivery Instructions" as promptly as practicable after
the Expiration Date.
The undersigned acknowledges that the Company's acceptance of Private Notes
validly tendered for exchange pursuant to any one of the procedures described in
the section of the Prospectus entitled "The Exchange Offer" and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Private Notes not tendered for exchange in the
name(s) of the undersigned. Similarly, unless otherwise indicated in the box
entitled "Special Delivery Instructions," please mail any certificates for
Private Notes not tendered or exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Issuance Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the Exchange Notes issued in exchange for the Private Notes
accepted for exchange in the name(s) of, and return any Private Notes not
tendered for exchange or not exchanged to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Private Notes from the name of the holder of Private Note(s) thereof if the
Company does not accept for exchange any of the Private Notes so tendered for
exchange or if such transfer would not be in compliance with any transfer
restrictions applicable to such Private Note(s).
6
<PAGE> 137
IN ORDER TO VALIDLY TENDER PRIVATE NOTES FOR EXCHANGE, HOLDERS OF PRIVATE
NOTES MUST COMPLETE, EXECUTE, AND DELIVER THIS LETTER OF TRANSMITTAL.
Except as stated in the Prospectus, all authority herein conferred or
agreed to be conferred shall survive the death, incapacity, or dissolution of
the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Private Notes is irrevocable.
SIGN HERE
- --------------------------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
Dated: , 1998
(Must be signed by the registered holder(s) of Private Notes exactly as name(s)
appear(s) on certificate(s) representing the Private Notes or on a security
position listing or by person(s) authorized to become registered Private Note
holder(s) by certificates and documents transmitted herewith. If signature is by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, please
provide the following information. (See Instruction 6).
Name(s):
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
(INCLUDE ZIP CODE)
Principal place of business (if different from address listed above):
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone No. (____)
Tax Identification or Social Security Nos:
- --------------------------------------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9
GUARANTEE OF SIGNATURE(S)
(SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 1)
Authorized Signature:
Dated:
Name and Title:
(PLEASE PRINT)
Name and Title:
7
<PAGE> 138
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
which is (1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., (2) a commercial bank or
trust company having an office or correspondent in the United States, or (3) an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934 which is a member of one of the following
recognized Signature Guarantee Programs (an "Eligible Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b. The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if this
Letter of Transmittal is signed by the registered holder(s) of the Private Notes
entered herewith and such registered holder(s) have not completed the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) if such Private Notes are
tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND PRIVATE NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders of
Private Notes (i) if certificates are to be forwarded herewith or (ii) if
tenders are to be made pursuant to the procedures for tender by book-entry
transfer or guaranteed delivery set forth in the section of the Prospectus
entitled "The Exchange Offer." Certificates for all physically tendered Private
Notes or any timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation"), a well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof, and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent at its
address set forth on the cover of this Letter of Transmittal prior to 5:00 p.m.,
New York City time, on the Expiration Date. Holders of Private Notes who elect
to tender Private Notes and (i) whose Private Notes are not immediately
available or (ii) who cannot deliver the Private Notes, this Letter of
Transmittal or other required documents to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date, must tender their Private
Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Holders may have such tender effected if: (a) such tender is made
through an Eligible Institution; (b) prior to 5:00 p.m., New York City time, on
the Expiration Date, the Exchange Agent has received from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery, setting forth the name and address of the holder of such Private
Notes, the certificate number(s) of such Private Notes and the principal amount
of Private Notes tendered for exchange, stating that tender is being made
thereby and guaranteeing that, within five New York Stock Exchange trading days
after the Expiration Date, this Letter of Transmittal (or facsimile hereof),
together with the certificate(s) representing such Private Notes (or a
Book-Entry Confirmation), in proper form for transfer, and any other documents
required by this Letter of Transmittal, will be deposited by such Eligible
Institution with the Exchange Agent; and (c) a properly executed Letter of
Transmittal (or a facsimile hereof), as well as the certificate(s) for all
tendered Private Notes in proper form for transfer or a Book-Entry Confirmation,
together with any other documents required by this Letter of Transmittal, are
received by the Exchange Agent within five New York Stock Exchange trading days
after the Expiration Date.
THE METHOD OF DELIVERY OF PRIVATE NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NEITHER THIS LETTER OF TRANSMITTAL NOR ANY PRIVATE NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Private Notes, by execution of this Letter of Transmittal
(or facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Private Notes for exchange.
8
<PAGE> 139
3. INADEQUATE SPACE. If the space provided in the box entitled "Description
of Private Notes" above is inadequate, the certificate numbers and principal
amounts of the Private Notes tendered should be listed on a separate signed
schedule affixed hereto.
4. WITHDRAWALS. A tender of Private Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date by delivery of
written or facsimile notice of withdrawal to the Exchange Agent at the address
set forth on the cover of this Letter of Transmittal. To be effective, a notice
of withdrawal of Private Notes must (i) specify the name of the person who
tendered the Private Notes to be withdrawn (the "Depositor"), (ii) identify the
Private Notes to be withdrawn (including the certificate number or numbers and
aggregate principal amount of such Private Notes), and (iii) be signed by the
holder of Private Notes in the same manner as the original signature on the
Letter of Transmittal by which such Private Notes were tendered (including any
required signature guarantees). All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Private Notes so withdrawn will therefore be deemed
not validly tendered for purposes of the Exchange Offer and no Exchange Notes
will be issued with respect thereto unless the Private Notes so withdrawn are
validly retendered. Properly withdrawn Private Notes may be retendered by
following one of the procedures described in the section of the Prospectus
entitled "The Exchange Offer -- Procedures for Tendering" at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
5. PARTIAL TENDERS. Tenders of Private Notes will be accepted only in
integral multiples of $1,000 principal amount. If a tender for exchange is to be
made with respect to less than the entire principal amount of any Private Notes,
fill in the principal amount of Private Notes which are tendered for exchange in
column (4) of the box entitled "Description of Private Notes," as more fully
described in the footnotes thereto. In case of a partial tender for exchange, a
new certificate, in fully registered form, for the remainder of the principal
amount of the Private Notes, will be sent to the holders of Private Notes unless
otherwise indicated in the appropriate box on this Letter of Transmittal as
promptly as practicable after the expiration or termination of the Exchange
Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, ASSIGNMENT AND ENDORSEMENTS.
(a) The signature(s) of the holder of Private Notes on this Letter of
Transmittal must correspond with the name(s) as written on the face of the
Private Notes without alteration, enlargement or any change whatsoever.
(b) If tendered Private Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
(c) If any tendered Private Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal and any necessary or required
documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of the Private
Notes listed and transmitted hereby, no endorsements of Private Notes or bond
powers are required. If, however, Private Notes not tendered or not accepted,
are to be issued or returned in the name of a person other than the holder of
Private Notes, then the Private Notes transmitted hereby must be endorsed or
accompanied by a properly completed bond power, in a form satisfactory to the
Company, in either case signed exactly as the name(s) of the holder of Private
Notes appear(s) on the Private Notes. Signatures on such Private Notes or bond
powers must be guaranteed by an Eligible Institution (unless signed by an
Eligible Institution).
(e) If this Letter of Transmittal or Private Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with this Letter of Transmittal.
(f) If this Letter of Transmittal is signed by a person other than the
registered holder of Private Notes listed, the Private Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder exactly as the name(s) of the registered holder of Private
Notes appear(s) on the certificates. Signatures on such Private Notes or bond
powers must be guaranteed by an Eligible Institution (unless signed by an
Eligible Institution).
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company
will pay all transfer taxes, if any, applicable to the exchange of Private Notes
pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the Private Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemptions therefrom is not
submitted with this Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
9
<PAGE> 140
8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the Exchange Notes are to
be issued, or if any Private Notes not tendered for exchange are to be issued or
sent to someone other than the holder of Private Notes or to an address other
than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed. Holders of Private Notes tendering Private Notes by
book-entry transfer may request that Private Notes not accepted be credited to
such account maintained at DTC as such holder of Private Notes may designate.
9. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), compliance with conditions, acceptance and
withdrawal of tendered Private Notes will be determined by the Company in its
sole discretion, which determination will be final and binding. The Company
reserves the absolute right to reject any and all Private Notes not properly
tendered or any Private Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Private Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
amend or modify certain of the specified conditions as described under "The
Exchange Offer -- Conditions" in the Prospectus in the case of any Private Notes
tendered (except as otherwise provided in the Prospectus).
11. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES. Any tendering
Holder whose Private Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address listed below for further instructions:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
CORPORATE TRUST OPERATIONS
P.O. BOX 1517
MINNEAPOLIS, MN 55480-1517
12. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for information
or for additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover of this Letter of Transmittal.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF, IF
APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE
NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED
BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
IMPORTANT TAX INFORMATION
Under current federal income tax law, a holder of Private Notes whose
tendered Private Notes are accepted for exchange may be subject to backup
withholding unless the holder provides the Company (as payor), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Private Notes
is awaiting a TIN) and that (A) the holder of Private Notes has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of a failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder of Private Notes that he or
she is no longer subject to backup withholding; or (ii) an adequate basis for
exemption from backup withholding. If such holder of Private Notes is an
individual, the TIN is such holder's social security number. If the Exchange
Agent is not provided with the correct taxpayer identification number, the
holder of Private Notes may be subject to certain penalties imposed by the
Internal Revenue Service.
Certain holders of Private Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Private Notes should indicate their
exempt status on Substitute Form W-9. A foreign individual may qualify as an
exempt recipient by submitting to the Exchange Agent a properly completed
Internal Revenue Service Form W-8 (which the Exchange Agent will provide upon
request) signed under penalty of perjury, attesting to the holder's exempt
status. See the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 (the "Guidelines") for additional instructions.
If backup withholding applies, the Company is required to withhold 31% of
any payment made to the holder of Private Notes or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax
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liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
The holder of Private Notes is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Private Notes. If the Private Notes are held in more than one name
or are not held in the name of the actual owner, consult the enclosed Guidelines
for additional guidance regarding which number to report.
INSTRUCTION TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF 9 1/4% SENIOR NOTES DUE 2006 OF SIGNATURE RESORTS, INC.
The undersigned hereby acknowledges receipt of the Prospectus dated May 12,
1998 (the "Prospectus") of Signature Resorts, Inc., a Maryland corporation (the
"Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer"). Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the 9 1/4% Senior Notes
due 2006 (the "Private Notes") held by you for the account of the undersigned.
The aggregate face amount of the Private Notes held by you for the account
of the undersigned is (fill in amount):
$
-------------------------------- of the Private Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Private Notes held by you for the account
of the undersigned (insert principal amount of Private Notes to be
tendered, if any):
$
-------------------------------- of the Private Notes.
[ ] NOT to TENDER any Private Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Private Notes held by you
for the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
beneficial owner of the Private Notes, including but not limited to the
representations that (i) the undersigned's principal residence is in the state
of (fill in state) , (ii) the undersigned is acquiring the Exchange
Notes in the ordinary course of business of the undersigned, (iii) the
undersigned has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iv) the undersigned acknowledges
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the Exchange
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended, in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the Staff of the Securities and Exchange Commission set forth in
certain no-action letters (See the section of the Prospectus entitled "The
Exchange Offer -- Resale of the Exchange Notes"), (v) the undersigned
understands that a secondary resale transaction described in clause (iv) above
and any resales of Exchange Notes obtained by the undersigned in exchange for
the Private Notes acquired by the undersigned directly from the Company should
be covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, if applicable, of
Regulation S-K of the Commission, (vi) the undersigned is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company, and (vii) if the
undersigned is a not broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of Exchange Notes
and, (viii) if the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in the exchange for Private Notes, it represents that
the Private Notes to be exchanged for the Exchange Notes were acquired by it as
a result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the
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<PAGE> 142
Securities Act; (b) to agree, on behalf of the undersigned, as set forth in the
Letter of Transmittal; and (c) to take such other action as necessary under the
Prospectus or the Letter of Transmittal to effect the valid tender of Private
Notes.
The purchaser status of the undersigned is (check the box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that
purchased the Private Notes outside the United States in accordance with
Rule 904 of the Securities Act
[ ] Other (describe)
SIGN HERE
Name of Beneficial Owner(s):
Signature(s):
Name(s)(please print):
Address:
Principal place of business (if different from address listed above):
Telephone Number(s):
Taxpayer Identification or Social Security Number(s):
Date:
12
<PAGE> 143
- --------------------------------------------------------------------------------
PAYER'S NAME:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
Social Security Number
----------------------------
OR
Employer Identification
Number
----------------------------
PART II -- CERTIFICATIONS -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my current taxpayer identification number
(or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTION -- You must cross out item (2) in Part II above if
you have been notified by the IRS that you are subject to backup withholding
because of underreporting interest or dividends on your tax return. However,
if after being notified by the IRS that you are subject to backup withholding
you received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
PART III -- Awaiting TIN [ ]
- --------------------------------------------------------------------------------
Name
(Please Print)
Address
(Including Zip Code)
Signature Date
----------------------------------------
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECK THE BOX IN PART III OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
PAYOR'S NAME: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification
Number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a Taxpayer Identification Number within
sixty (60) days, 31% of all reportable payments made to me thereafter will be
withheld until I provide such a number.
<TABLE>
<S> <C>
SIGNATURE DATE
</TABLE>
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<PAGE> 144
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-51803
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
9 1/4% SENIOR NOTES DUE 2006
THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY HOLDER OF
9 1/4% SENIOR NOTES DUE 2006 (THE "PRIVATE NOTES") OF SIGNATURE RESORTS, INC., A
MARYLAND CORPORATION (THE "COMPANY"), WHO WISHES TO TENDER PRIVATE NOTES
PURSUANT TO THE COMPANY'S EXCHANGE OFFER, AS DEFINED IN THE PROSPECTUS DATED
MAY, 12, 1998 (THE "PROSPECTUS") AND (i) WHOSE PRIVATE NOTES ARE NOT IMMEDIATELY
AVAILABLE OR (ii) WHO CANNOT DELIVER SUCH PRIVATE NOTES OR ANY OTHER DOCUMENTS
REQUIRED BY THE LETTER OF TRANSMITTAL ON OR BEFORE THE EXPIRATION DATE (AS
DEFINED IN THE PROSPECTUS) OR (iii) WHO CANNOT COMPLY WITH THE BOOK-ENTRY
TRANSFER PROCEDURE ON A TIMELY BASIS. SUCH FORM MAY BE DELIVERED BY FACSIMILE
TRANSMISSION, MAIL OR HAND DELIVERY TO THE EXCHANGE AGENT. SEE "THE EXCHANGE
OFFER -- GUARANTEED DELIVERY PROCEDURES" IN THE PROSPECTUS.
SIGNATURE RESORTS, INC.
NOTICE OF GUARANTEED DELIVERY
TO: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<TABLE>
<S> <C> <C>
By Hand: By Registered or Certified Mail: By Overnight Courier:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
</TABLE>
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
<PAGE> 145
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
THE UNDERSIGNED, A PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTEE MEDALLION
PROGRAM, GUARANTEES DEPOSIT WITH THE EXCHANGE AGENT OF THE LETTER OF TRANSMITTAL
(OR FACSIMILE THEREOF), TOGETHER WITH THE PRIVATE NOTES TENDERED HEREBY IN
PROPER FORM FOR TRANSFER, OR CONFIRMATION OF THE BOOK-ENTRY TRANSFER OF SUCH
PRIVATE NOTES INTO THE EXCHANGE AGENT'S ACCOUNT AT THE DEPOSITORY TRUST COMPANY,
PURSUANT TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN THE PROSPECTUS,
AND ANY OTHER REQUIRED DOCUMENTS, ALL BY 5:00 P.M., NEW YORK CITY TIME, ON THE
FIFTH NEW YORK STOCK EXCHANGE TRADING DAY FOLLOWING THE EXPIRATION DATE (AS
DEFINED IN THE PROSPECTUS).
SIGN HERE
----------------------------------------------------------
NAME OF FIRM
----------------------------------------------------------
AUTHORIZED SIGNATURE
----------------------------------------------------------
NAME (PLEASE PRINT)
----------------------------------------------------------
ADDRESS
----------------------------------------------------------
ZIP CODE
----------------------------------------------------------
AREA CODE AND TELEPHONE NO.
DATE:
----------------------------------------------------------
DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS FORM, ACTUAL SURRENDER
OF CERTIFICATES FOR PRIVATE NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL.
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY;. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at one of its addresses set forth on the cover hereof prior to
the Expiration Date. The method of delivery of this Notice of Guaranteed
Delivery and all other required documents to the Exchange Agent is at the
election and risk of the Holder but, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
Instead of delivery by mail, it is recommended that Holders use an overnight or
hand delivery service, properly insured. If such delivery is by mail, it is
recommended that the Holder use properly insured, registered mail with return
receipt requested. For a full description of the guaranteed delivery procedures,
see the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." In all cases, sufficient time should be allowed to assure timely
delivery. No Notice of Guaranteed Delivery should be sent to the Company.
2. SIGNATURE ON THIS NOTICE OF GUARANTEED DELIVERY; GUARANTEE OF
SIGNATURES. If this Notice of Guaranteed Delivery is signed by the registered
Holder(s) of the Private Notes referred to herein, then the signature must
correspond with the name(s) as written on the face of the Private Notes without
alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered Holder(s) of any Private Notes listed, this Notice of Guaranteed
Delivery must be accompanied by a properly completed bond power signed as the
name of the registered Holder(s) appear(s) on the face of the Private Notes
without alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing, and, unless waived by the Company, evidence satisfactory
to the Company of their authority so to act must be submitted with this Notice
of Guaranteed Delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
Exchange Offer or the procedure for consenting and tendering as well as requests
for assistance or for additional copies of the Prospectus, the Letter of
Transmittal and this Notice of Guaranteed Delivery, may be directed to the
Exchange Agent at the address set forth on the cover hereof or to your broker,
dealer, commercial bank or trust company.
<PAGE> 146
Ladies and Gentlemen:
The undersigned hereby tenders to the Company upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Private Notes specified below pursuant to the guaranteed delivery procedures set
forth under the caption "The Exchange Offer -- Guaranteed Delivery Procedures"
in the Prospectus. By so tendering, the undersigned does hereby make, at and as
of the date hereof, the representations and warranties of a tendering Holder of
Private Notes set forth in the Letter of Transmittal. The undersigned hereby
tenders the Private Notes listed below:
- --------------------------------------------------------------------------------
CERTIFICATE NUMBERS
(IF AVAILABLE) PRINCIPAL AMOUNT TENDERED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the
death, incapacity, or dissolution of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
<TABLE>
<S> <C>
If Private Notes will be tendered by book-entry transfer: SIGN HERE
-----------------------------------------------------------
SIGNATURE(S)
Name of Tendering Institution: -----------------------------------------------------------
-----------------------------------------------------------
NAME(S) (PLEASE PRINT)
- ----------------------------------------------------------- -----------------------------------------------------------
-----------------------------------------------------------
ADDRESS
The Depository Trust Company Account No.: -----------------------------------------------------------
ZIP CODE
-----------------------------------------------------------
- ----------------------------------------------------------- AREA CODE AND TELEPHONE NO.
Date: -----------------------------------------------------
</TABLE>
