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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-38283
PROSPECTUS
OFFER TO EXCHANGE
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
FOR ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
OF
SIGNATURE RESORTS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JANUARY 29,
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 3/4%
Senior Subordinated Notes due 2007 (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 3/4% Senior Subordinated Notes due 2007 (the "Private Notes"),
of which $200,000,000 in aggregate principal amount was issued on August 8,
1997 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 August 1, 1997 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 3/4% per annum and the interest thereon will be payable semi-
annually on April 1 and October 1 of each year, commencing October 1, 1997.
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 October 1, 2002, at the redemption prices set forth
herein, 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 Notes originally issued
with the net cash proceeds of one or more Equity Offerings (as defined herein)
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; 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 be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company and will be effectively
subordinated to all indebtedness and other obligations of the Company's
subsidiaries. At September 30, 1997, the Company had approximately $33.2
million of outstanding Senior Indebtedness and the indebtedness and other
liabilities (other than indebtedness to the Company) of the Company's
subsidiaries was approximately $141.1 million. The Notes are senior in right
of payment to 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 January 29,
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 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS IN THE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is December 30, 1997
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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. The Company has
agreed that during the Exchange Offer Registration Period (as defined in the
Registration Rights Agreement) it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. 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 "Depositary") 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 Depositary 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
Special Interest (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
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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 Securities and Exchange Commission (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 Exchange Act of 1934, as amended ("Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Copies of the Registration Statement and reports, proxy statements and other
information concerning the Company may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the public
reference section of the Commission at its Washington address upon payment of
the fees prescribed by the Commission or may be examined without charge at the
offices of the Commission. Electronic filings made through the Electronic Data
Gathering Analysis and Retrieval System are publicly available through the
Commission's Website (http://www.sec.gov). In addition, such reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of the Nasdaq National Market, Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006, on which the Common Stock of the Company
is quoted.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which the Company has filed with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference in, and
shall be deemed to be a part of, this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(c) The Company's amended Quarterly Report on Form 10-Q/A for the
quarter ended March 31, 1997, filed with the Commission on October
6, 1997;
(d) The Company's Proxy Statement dated April 11, 1997 related to the
Annual Meeting of Stockholders held on May 16, 1997;
(e) The Company's Current Report on Form 8-K filed with the Commission
on May 30, 1997;
(f) The Company's amended Current Report on Form 8-K/A filed with the
Commission on July 29, 1997;
(g) The Company's Current Report on Form 8-K filed with the Commission
on September 9, 1997;
(h) The Company's Current Report on Form 8-K filed with the Commission
on September 12, 1997;
(i) The Company's Current Report on Form 8-K filed with the Commission
on October 6, 1997;
(j) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 10, 1997;
(k) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 22, 1997;
(l) The Company's Current Report on Form 8-K filed with the Commission
on October 27, 1997; and
(m) The Company's Current Report on Form 8-K filed with the Commission
on December 24, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part thereof from
the respective dates of filing of such documents. Any statement contained in
this Prospectus or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference in this Prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus except as so modified or superseded.
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This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company will provide without charge to any
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the foregoing documents incorporated
herein by reference (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference therein). Requests should
be directed to the attention of Andrew D. Hutton, Vice President and General
Counsel, Signature Resorts, Inc., 1875 South Grant Street, Suite 650, San
Mateo, California 94402 (Telephone: (650) 312-7171).
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data,
included elsewhere or incorporated by reference in this Prospectus. Unless
the context otherwise indicates, the "Company" means Signature Resorts,
Inc. and includes its corporate and partnership predecessors and wholly-
owned subsidiaries and affiliates, including AVCOM International, Inc.
("AVCOM") and its subsidiaries, which were acquired by a subsidiary of
Signature Resorts, Inc. on February 7, 1997 in the merger with AVCOM (the
"AVCOM Merger"), Plantation Resorts Group, Inc. ("PRG") and its
subsidiaries, which were acquired by a subsidiary of Signature Resorts,
Inc. on May 15, 1997 (the "PRG Merger") and LSI Group Holdings Plc ("LSI")
and its subsidiaries, which were acquired by Signature Resorts, Inc. on
August 28, 1997 (the "LSI Acquisition"). This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors." Except
as indicated to the contrary, all information in this Prospectus has been
restated to reflect the Company's three-for-two stock split in the form of
a common stock dividend paid on October 27, 1997 to stockholders of record
on October 10, 1997. See "Recent Developments--Three-for-Two Stock Split."
THE COMPANY
The Company is one of the largest developers and operators of vacation
ownership resorts in North America, the Caribbean and Europe. The Company
is devoted exclusively to vacation ownership operations and, as of the date
of this Prospectus, the Company's properties consist of 69 vacation
ownership resort locations in a variety of popular resort destinations. In
addition, following the Company's recent acquisition of Marc Hotels &
Resorts, the Company manages an additional 22 resorts in Hawaii.
The Company's principal operations currently consist of (i) acquiring,
developing and operating vacation ownership resorts, (ii) marketing and
selling vacation ownership interests in its North American resorts, which
typically entitle the buyer to use a fully-furnished vacation residence,
generally for a one-week period each year in perpetuity ("Vacation
Intervals"), (iii) marketing and selling vacation points at its European
resort locations and the 21 North American resort locations recently
acquired by the Company through its November 1997 acquisition of Vacation
Internationale, Ltd. which may be redeemed for occupancy rights at
participating resorts ("Vacation Points") and (iv) providing consumer
financing to individual purchasers for the purchase of Vacation Intervals
at its resorts.The Company also provides resort management and maintenance
services at its resorts for which it receives fees paid by the resorts'
homeowners' associations.
The Company's principal executive offices are located at 1875 South Grant
Street, Suite 650, San Mateo, California 94402, and its telephone number is
(650) 312-7171.
RECENT DEVELOPMENTS
Acquisition of European Vacation Ownership Business of Global Development
Ltd. On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of Global Development Ltd. and certain of
its affiliated companies (the "Global Group") through an asset purchase for
cash consideration of approximately $18 million. The Global Group has 13 resort
locations in France (3), United Kingdom (4), Austria (1), mainland Spain (1),
and the Canary Islands (4). The Company assumed no long-term debt as part of
this transaction, but assumed approximately $7.0 million in current liabilities
and acquired assets valued at approximately $15.8 million. The Global Group
sells Vacation Intervals and vacation points at its resorts. Its Global
Vacation Club allows its members to use annual allotments of points as a
currency to reserve each year the specific resort, season, unit type and length
of stay at any of the club's 13 resorts. The asset purchase will be accounted
for using the purchase method of accounting.
Acquisition of Embassy Suites Resort at Kaanapali Beach, Maui. On
November 14, 1997, a partnership of which the Company is a managing general
partner consummated its acquisition of the Embassy Suites Resort at
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Kaanapali Beach, Maui, Hawaii for approximately $78 million. The acquiring
entity is a partnership formed by a wholly-owned subsidiary of the Company (as
the managing general partner), the Whitehall Street Real Estate Limited
Partnership VII and Apollo Real Estate Advisors, L.P. The Company's subsidiary
owns a 24% partnership interest in the acquiring entity. The Embassy Suites
Resort at Kaanapali Beach is a 413-suite, full service resort hotel located on
the beach in Kaanapali, Maui, Hawaii. Upon the receipt of necessary
governmental approvals, the Company intends to convert the first phase of hotel
suites to vacation ownership units. The Company expects to operate the resort
with approximately 256 hotel suites and approximately 157 one-bedroom and two-
bedroom vacation ownership units. Vacation ownership sales at the resort are
anticipated to commence in the first half of 1998.
Acquisition of Vacation Internationale, Ltd. On November 7, 1997, the Company
consummated its acquisition of 100% of the capital stock of Vacation
Internationale, Ltd. ("VI") for approximately $24.3 million, comprised of $8.0
million in cash and promissory notes and the assumption of approximately
$16.3 million of long-term indebtedness. Founded in 1974, VI is a Bellevue,
Washington based developer and operator of vacation ownership resorts. VI's
Vacation Time Share Program includes 21 owned, managed or affiliated resorts in
the Western United States, Hawaii, Mexico and Canada. The acquired assets
include VI's approximately $12.8 million mortgages receivable portfolio. VI's
club program allows its approximately 31,000 member families to use their
annual allotments of points as a currency to reserve each year the specific
resort, season, unit type and length of stay at any of the club's 21 resorts.
The VI acquisition will be accounted for using the purchase method of
accounting for business combinations.
Agreement with Westin Hotels & Resorts. The Company's exclusive Agreement
(the "Westin Agreement") with Westin Hotels & Resorts ("Westin") is terminable
by either the Company or Westin upon the merger of such party with a third
party. As a result of the pending closing of the merger of Westin into Starwood
Lodging Trust and Starwood Lodging Corp., the Company and Westin have begun
discussions regarding whether to modify the exclusive agreement between the
Company and Westin to acquire, develop and market four and five star vacation
ownership resorts in North America, Mexico and the Caribbean (the "Territory").
The discussions include whether to modify the agreement to make the
relationship a non-exclusive one, and whether to continue to have a
representative from the Company and Westin serve on each other's Board of
Directors. As written, the existing exclusive agreement limits the Company's
ability to develop four and five star vacation ownership resorts in the
Territory with hotel and resort companies that are competitors of Westin and
simultaneously limits Westin's ability to develop four and five star vacation
ownership resorts in the Territory with anyone other than the Company. If the
parties elect to modify the Westin Agreement to make it non-exclusive, the
Company and Westin will each be free to pursue four and five star vacation
ownership acquisition and development opportunities in the Territory either
alone, with each other or with other luxury hotel and resort companies. In that
event, it would be the Company's intention to continue to work to expand its
four and five star vacation ownership resorts in a variety of ownership
structures, including as Westin Vacation Clubs in joint venture with Westin
(subject to Westin's approval of the specific project); as Sunterra Resorts;
and as other luxury hotel and resort company brands. In any event, the parties
currently intend to continue their existing joint venture in St. John, U.S.
Virgin Islands. See "Risk Factors--Risks Related to Westin Agreement; limited
control of Resorts and Termination" and "Business--Westin Vacation Club
Resorts."
Three-for-Two Stock Split. On October 27, 1997, the Company effected a three-
for-two stock split in the form of a common stock dividend on the Company's
Common Stock, par value $.01 per share ("Common Stock"). Stockholders of record
on October 10, 1997 (the "Record Date") received one additional share of Common
Stock for every two shares owned on the Record Date. Fractional shares were
paid in cash.
Acquisition of Marc Hotels & Resorts. On October 10, 1997, the Company
consummated its acquisition (the "Marc Acquisition") of Hawaii-based Marc
Hotels & Resorts, Inc. ("Marc Resorts"), acquiring 100% of the capital stock of
Marc Resorts for 212,717 newly issued shares of the Company's Common Stock.
Marc Resorts is one of Hawaii's leading hospitality management companies and
operators of hotels, resort
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condominiums and all-suite resorts with 22 managed resort locations on Hawaii's
five major islands. The Marc Acquisition will be accounted for using the
purchase method of accounting for business combinations.
Creation of Sunterra Resorts Brand. On September 24, 1997, the Company
announced the creation of "Sunterra Resorts," the Company's new flagship brand
of vacation ownership resorts. Initially, 19 formerly non-branded properties
will assume the Sunterra Resorts name and will become the Company's third
vacation ownership brand in North America, joining the Embassy Vacation Resorts
and Westin Vacation Club brands. The introduction of the Sunterra Resorts brand
marks the first step in the evolution of the Company's planned "Club Sunterra"
points-based vacation club. The Company plans to continue its introduction of
the Sunterra brand to its owner families and the traveling public during 1997
and by year-end 1998 intends to create Club Sunterra, a complete points-based
vacation club with multiple worldwide products, internal exchange and flexible
lengths of stay.
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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
$200,000,000 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
August 8, 1997 (the "Note Offering") to the
Initial Purchasers pursuant to a Purchase
Agreement, dated August 5, 1997, 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
August 8, 1997 (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 January 29, 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."
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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
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 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 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 represent in the Letter of
Transmittal that it 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 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
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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."
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.
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THE EXCHANGE NOTES
The Exchange Offer applies to $200,000,000 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 Notes dated August 1, 1997 (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.......... $200,000,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes due 2007.
Maturity Date............... October 1, 2007.
Interest Payment Dates...... April 1 and October 1, commencing October 1,
1997.
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Company on or after
October 1, 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 October 1, 2000, 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
herein), 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 (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 aggregate principal amount of the Notes
originally issued remains outstanding after any
such redemption.
Change of Control........... Upon a Change of Control (as defined herein),
Holders (as defined herein) 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.
Ranking..................... The Notes will be unsecured senior subordinated
obligations of the Company and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company and
will be effectively subordinated to all
indebtedness and other obligations (including
trade payables) of the Company's subsidiaries. At
September 30, 1997, the Senior Indebtedness of
the Company was approximately $33.2 million, and
the indebtedness and other liabilities of the
Company's subsidiaries (other than indebtedness
to the Company) was approximately $141.1 million.
The Notes are senior in right of payment to the
Convertible Notes.
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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 herein) 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. See
"Description of the Notes--Certain Covenants."
RISK FACTORS
Prospective investors in the Notes should carefully consider the matters set
forth herein under "Risk Factors."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following material risk factors should be carefully considered in evaluating
the Company and its business before purchasing any of the 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 the Prospectus generally. In addition, when used
in the Prospectus the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below and the matters set forth in
the Prospectus generally. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances.
RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS
The Company will have significant interest expense and principal repayment
obligations under its indebtedness. As of September 30, 1997, the Company and
its consolidated subsidiaries had an aggregate of $445.9 million of long-term
debt. See "Consolidated Capitalization." Total debt to total capitalization
was 65.1% and 69.5% at December 31, 1996 and September 30, 1997, respectively.
Prior to the Note Offering, the Company financed Vacation Interval sales
through the hypothecation of its consumer mortgages receivable. Under such
hypothecation arrangements, third party lenders loaned the Company up to 90%
of the par value of its consumer mortgages receivable. Consumer mortgages
receivable payments, consisting of principal and interest, are paid to the
third party lenders. The Company's cash flows from consumer mortgages
receivable are sufficient to service the underlying hypothecated notes, which
totaled $81.2 million at September 30, 1997.
For the year ended December 31, 1996, the Company had $30.2 million in
negative cash flows from operations. Due to the significant growth of the
Company during the year ended December 31, 1996, cash flows from operations
included a use of cash for real estate and development costs totaling $71.9
million. In light of the foregoing, and after giving effect to the Note
Offering, cash flows from operations would not have been sufficient to service
the Company's debt with respect to the Convertible Notes and the Senior
Subordinated Notes. Excluding the real estate and development costs, however,
cash flows from operations would have been $41.7 million, and based on an
aggregate of $28.4 million in interest costs on the Convertible Notes and the
Senior Subordinated Notes, 68.1% of cash flows from operations would be
required to service the Company's debt under such notes.
Future development by the Company at its resorts will be financed with
existing cash, indebtedness obtained pursuant to the Company's existing credit
facilities or credit facilities obtained by the Company in the future. The
agreements with respect to such credit facilities do contain or in the future
could contain restrictive covenants, including covenants limiting capital
expenditures, incurrence of debt and sales of assets and requiring the Company
to achieve certain financial ratios, some of which could become more
restrictive over time. The Indenture also contains restrictive covenants,
including covenants limiting the incurrence of indebtedness, the payments of
dividends or other distributions and sales of assets. See "Description of
Notes--Certain Covenants." The Company is restricted from paying dividends by
certain of its debt agreements which require tangible net worth of at least
$140 million. The Indenture also limits the Company's ability to pay
dividends. See "Description of Notes--Certain Covenants--Limitation on
Restricted Payments." Subsequent acquisition activities will be financed
primarily by new financing arrangements. Portions of the Company's
indebtedness
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currently are, and in the future may be, secured by mortgages on the Company's
resorts, as well as other assets of the Company. Among other consequences, the
leverage of the Company and such restrictive covenants and other terms of the
Company's debt instruments could impair the Company's ability to obtain
additional financing in the future, to make acquisitions and to take advantage
of significant business opportunities that may arise. In addition, the
Company's leverage may increase its vulnerability to adverse general economic
and vacation ownership industry conditions and to increased competitive
pressures.
SUBORDINATION OF NOTES
The Notes will be unsecured senior subordinated obligations of the Company
and not of any of its subsidiaries and will be subordinated to the prior
payment in full of all Senior Indebtedness (as defined in the Indenture) of
the Company. The Notes will also be effectively subordinated to all
indebtedness and other liabilities (including trade payables incurred in their
ordinary course of business) of the Company's subsidiaries. In the event of
bankruptcy, liquidation, or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets to pay any interest, premium, if any, or principal due on any or all of
the Notes then outstanding. At September 30, 1997, the Senior Indebtedness of
the Company was approximately $33.2 million, and the indebtedness and other
liabilities of the Company's subsidiaries (other than indebtedness to the
Company) was approximately $141.1 million. 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. No
payment on account or principal, premium, if any, or interest on, or
redemption or repurchase of, the Notes may be made by the Company if (i) there
is a default in the payment of principal, premium, if any, or interest
(including a default under any repurchase or redemption obligation) with
respect to any Senior Indebtedness, or (ii) if any other event of default with
respect to any Senior Indebtedness permitting the holders thereof to
accelerate the maturity thereof shall have occurred and the Senior
Indebtedness in the respect of such default has been declared due and payable
in its entirety, until such a default has been cured or waived. In addition,
in the event of certain non-payment defaults with respect to the Senior
Indebtedness, where the Senior Indebtedness has not been declared to be due
and payable, no payments may be made until such default has been cured or
waived for a period of up to 179 days. Upon any acceleration of the principal
due on the Notes or payment or distribution of assets of the Company to
creditors upon any dissolution, winding-up, liquidation or reorganization, all
principal, premium, if any, and interest due on all Senior Indebtedness must
be paid in full before the holders of the Notes are entitled to receive any
payment. See "Description of Notes--Subordination."
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-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
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<PAGE>
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."
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
Growth by Acquisition. A principal component of the Company's strategy is to
continue to grow by acquiring additional resorts. The Company's future growth
and financial success will depend upon a number of factors, including its
ability to identify attractive resort acquisition opportunities, consummate
the acquisitions of such resorts on favorable terms, convert such resorts to
use as vacation ownership resorts and profitably sell Vacation Intervals at
such resorts. There can be no assurance that the Company will be successful
with respect to such factors. The Company's ability to execute its growth
strategy depends to a significant degree on the existence of attractive resort
acquisition opportunities (which, in the past, have included completed or
nearly completed resort properties), its ability both to consummate
acquisitions on favorable terms and to obtain additional debt and equity
capital and to fund such acquisitions and any necessary conversion and
marketing expenditures. Currently, there are numerous potential buyers of
resort real estate which are better capitalized than the Company competing to
acquire resort properties which the Company may consider attractive resort
acquisition opportunities. There can be no assurance that the Company will be
able to compete against such other buyers successfully or that the Company
will be successful in consummating any such future financing transactions or
equity offerings on terms favorable to the Company. The Company's ability to
obtain and repay any indebtedness at maturity may depend on refinancing, which
could be adversely affected if the Company cannot effect the sale of
additional debt or equity through public offerings or private placements on
terms favorable to the Company. Factors which could affect the Company's
access to the capital markets, or the cost of such capital, include changes in
interest rates, general economic conditions, the perception in the capital
markets of the vacation ownership industry and the Company's business, results
of operations, leverage, financial condition and business prospects.
Risks Related to the Growth of Embassy Vacation Resorts and Westin Vacation
Clubs. An important part of the Company's growth strategy is to acquire and
develop additional Embassy Vacation Resorts and Westin Vacation Club resorts.
See "Business--Embassy Vacation Resorts," and "--Westin Vacation Club
Resorts." Westin has not previously been active in the vacation ownership
market and may not devote the corporate resources to such projects at levels
which will make the projects successful. Moreover, there can be no assurance
that Promus will elect to continue licensing the Embassy Vacation Resort name
to the Company with respect to possible future resorts. Under the terms of an
exclusive five-year agreement, Promus and Vistana, Inc. will jointly acquire,
develop, manage and market vacation ownership resorts in North America under
Promus brand names. As part of the exclusive agreement, Promus and Vistana,
Inc. will designate selected markets for development (which markets currently
include Kissimmee, Florida and Myrtle Beach, South Carolina, and in which
markets Vistana, Inc. will have exclusive development rights). The Company is
not precluded from using the Embassy Vacation Resort name in connection with
resorts acquired during the term of the agreement in markets not otherwise
exclusive to Vistana, Inc. The Company has been identified by Promus as the
only other licensee to whom Promus may license the Embassy Vacation Resort
name. There can be no assurance that Promus will not grant other entities a
license to develop Embassy Vacation Resorts or that Promus will not exercise
its rights to terminate the Embassy Vacation Resort licensees. On January 7,
1997, Promus announced that it intended to expand its branded vacation
ownership business only with the Company and Vistana and that additional
Embassy Vacation Resort properties to be developed or acquired by the Company
and licensed by Promus are under discussion. See "--Competition."
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Risks Related to Development of a Points-Based Vacation Club System. The
Company intends to develop and operate a North American points-based vacation
club system and expand the European points-based Grand Vacation Club system
operated by LSI and acquired by the Company in the LSI Acquisition. The
Company has not previously developed or operated a points-based vacation club
system and no assurance can be given as to management's ability to efficiently
develop or operate such a system.
RISKS RELATED TO THE AVCOM MERGER, PRG MERGER AND LSI ACQUISITION
Uncertainty as to Future Financial Results. The Company believes that the
AVCOM Merger, PRG Merger and LSI Acquisition (collectively, the
"Acquisitions") offer opportunities for long-term efficiencies in operations
that should positively affect future results of the combined operations of the
Company, AVCOM, PRG and LSI. However, until the Company is able to offset
earnings dilution resulting from the issuance of Common Stock in the
Acquisitions with the positive effect of expected long-term efficiencies, the
Acquisitions may adversely affect the Company's financial performance in 1997
and future years. In addition, the combined companies will be more complex and
diverse than the Company prior to the Acquisitions, and the combination and
continued operation of their distinct business operations present difficult
challenges for the Company's management due to the increased time and
resources required in the management effort. While management and the Board of
Directors of the Company believe that the combinations can be effected in a
manner which will realize the value of the companies, management has limited
experience in combinations of this size.
In order to maintain and increase profitability, the combined companies will
need to successfully integrate and streamline overlapping functions with
respect to AVCOM and PRG (LSI is operated as a separate European unit). There
can be no assurance that such integration will be successfully accomplished
or, if successfully accomplished, that such integration will not be more
costly to accomplish than contemplated by the Company. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separate organizations. The integration of certain operations
(such as customer service, loan servicing and loan processing) following the
Acquisitions will require the dedication of management resources which may
distract attention from the day-to-day business of the combined companies in
the short and long term. Failure to effectively accomplish the integration of
AVCOM's and PRG's operations could have an adverse effect on the Company's
results of operations and financial condition.
AVCOM Merger, PRG Merger and LSI Acquisition and Related
Expenses. Transaction costs relating to the negotiation of and preparation for
the Acquisitions and the anticipated combination of certain operations
resulted in a one-time charge to the Company's earnings of approximately $4.1
million and $10.0 million, respectively, for the three and nine months ended
September 30, 1997. These charges include fees and expenses payable to
financial advisors, lawyers, accountants and other transaction expenses
related to the Acquisitions. There can be no assurance that the Company will
not incur additional charges in subsequent quarters to reflect costs
associated with the Acquisitions.
Accounting Treatment. The Acquisitions have been accounted for by the
Company by the pooling-of-interests method of accounting. Under this method of
accounting, the recorded assets and liabilities of the Company, AVCOM, PRG and
LSI are carried forward at their book values to the Company, income of the
Company includes the income (or loss) of the Company, AVCOM, PRG and LSI for
the entire fiscal year in which the Acquisitions occurred, and the reported
income of the Company, AVCOM, PRG and LSI for prior periods has been combined
and restated as income of the Company. Although the Company has received an
opinion from its independent public accountants that the Acquisitions will
qualify for pooling-of-interests accounting treatment, opinions of accountants
are not binding upon the Commission, and there can be no assurance that the
Commission will not successfully assert a contrary position. In such case, the
purchase method of accounting would be applicable. Under the purchase method,
the book value of AVCOM's, PRG's and LSI's assets would be increased to their
fair values, which could result in higher operating costs and expenses as the
excess of the purchase price over the fair value of AVCOM's, PRG's and LSI's
assets would be amortized and expensed over a period of years, which would
adversely affect the Company's future earnings.
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VARIABILITY OF QUARTERLY RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's earnings may be impacted by the timing of the completion of
the acquisition and development of future resorts and the potential impact of
weather or other natural disasters at the Company's resort locations (e.g.,
hurricanes in Hawaii, St. Maarten and St. John and earthquakes in California).
See "--Natural Disasters; Uninsured Loss." Furthermore, the Company has
historically experienced and expects to continue to experience seasonal
fluctuations in its gross revenues and net income from the sale of Vacation
Intervals. This seasonality may cause significant variations in quarterly
operating results. If sales of Vacation Intervals are below seasonal
normalities during a particular period, the Company's annual operating results
could be materially adversely affected. In addition, the combination of (i)
the possible delay in generating revenue after the acquisition by the Company
of additional resorts prior to the commencement of Vacation Interval sales and
(ii) the expenses associated with start-up unit or room-rental operations,
interest expense, amortization and depreciation expenses from such
acquisitions may materially adversely impact earnings.
Due to the foregoing and other factors, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not
be relied upon as indications of future performance. Because of the above
factors, it is possible that the Company's operating results will be below the
expectations of stock market analysts and investors, which could have an
adverse effect on the market value of the Company's Common Stock. Numerous
factors, including announcements of fluctuations in the Company's or its
competitors' operating results and market conditions for hospitality and
vacation ownership industry stocks in general, could have a significant impact
on the future price of the Common Stock. In addition, the stock market in
recent years has experienced significant price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
companies. These broad fluctuations may adversely affect the market price of
the Common Stock.
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, and could create an event of default under other future
Senior Indebtedness. 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."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS; SENIOR CREDIT
FACILITY
The Indenture contains certain covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or make other distributions with respect to
capital stock of the Company and its Restricted Subsidiaries, (iii) create
certain liens, (iv) sell material assets of the Company or its Restricted
Subsidiaries and (v) enter into certain mergers and consolidations. In
addition, the Company's Senior Indebtedness may 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 liens created pursuant to the Company's Senior
Indebtedness and 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.
The Company's Senior Indebtedness may 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 the
Company's Senior Indebtedness may be entitled to declare such indebtedness
immediately due and payable.
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The Company has received a commitment from a bank lender to provide it with
the $100 million Senior Credit Facility. The Senior Credit Facility is
expected to have a variable borrowing rate based on the percentage of the
Company's mortgages receivable pledged to the lender under such facility and
the amount of funds advanced pursuant thereto. The interest rate will vary
between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount of
advances against mortgages receivable. It is expected that the Senior Credit
Facility will contain customary covenants, representations and warranties and
conditions to draw down on funds. No assurance can be given, however, that the
Company will be able to enter into definitive documents with respect to such
Senior Credit Facility.
ABSENCE OF PUBLIC MARKET
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 Company does not intend to list the Notes on
any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
The Company has been advised by the Initial Purchasers that they currently
intend to make a market in the Notes. However, the Initial Purchasers are not
obligated to do so and any market making may be discontinued at any time
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. If a trading market does not develop or is
not maintained, holders of the Notes may experience difficulty in reselling
the Notes or may be unable to sell them at all. If a market for the Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the Notes, future trading prices of the Notes will depend
on many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities.
RISKS OF DEVELOPMENT AND CONSTRUCTION ACTIVITIES
Risks Related to Development Activities. The Company intends to actively
continue development, construction, redevelopment/conversion and expansion of
vacation ownership resorts, and to develop a North American points-based
vacation club system and expand the European points-based vacation club system
operated by LSI. There can be no assurance that the Company will: complete
development, expansion and/or conversion of its resorts currently under
development or expansion; undertake additional expansion plans set forth in
"Business--Description of the Company's Resorts;" undertake to develop other
resorts or complete such development if undertaken; or complete development of
a North American points-based vacation club system or expansion of a European
points-based vacation club system. Risks associated with the Company's
development, construction and redevelopment/conversion activities, and
expansion activities may include the risks that: acquisition and/or
development opportunities may be abandoned; construction costs of a resort may
exceed original estimates, possibly making the resort uneconomical or
unprofitable; sales of Vacation Intervals at a newly completed resort may not
be sufficient to make the resort profitable; financing may not be available on
favorable terms for development of, or the continued sales of Vacation
Intervals at, a resort; and construction may not be completed on schedule,
resulting in decreased revenues and increased interest expense. Risks
associated with the Company's development of a North American points-based
vacation club system and expansion of LSI's European points-based Grand
Vacation Club system may include the risks that: such development and/or
expansion may be abandoned; the North American and European points-based
vacation club systems cannot be efficiently combined or operated with the
Company's current vacation ownership operations; the North American and
European points-based vacation club system may be or become subject to
extensive regulation by federal, state and local jurisdictions, or the
equivalent thereof in Europe, possibly making such points-based system
uneconomical or unprofitable; and financing may not be available on favorable
terms for development of a North American points-based vacation club system or
the expansion of a European points-based vacation club system.
Risks Related to Construction Activities. In addition, the Company's
construction activities typically are performed by third-party contractors,
and, accordingly, the timing, quality and completion of which cannot be
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controlled by the Company. Nevertheless, construction claims may be asserted
against the Company for construction defects and such claims may give rise to
liabilities. New development activities, regardless of whether or not they are
ultimately successful, typically require a substantial portion of management's
time and attention. Development activities are also subject to risks relating
to the inability to obtain, or delays in obtaining, all necessary zoning,
land-use, building, occupancy and other required governmental permits and
authorizations, the ability of the Company to coordinate construction
activities with the process of obtaining such permits and authorizations, and
the ability of the Company to obtain the financing necessary to complete the
necessary acquisition, construction, and/or conversion work at the resorts.
The Company currently does not have the financing available to complete all of
its planned expansion as set forth in "Business--The Resorts." The ability of
the Company to expand its business to include new resorts will in part depend
upon the availability of suitable properties at reasonable prices and the
availability of financing for the acquisition and development of such
properties. However, there can be no assurance that such preferential
purchases can be effected in the future. In addition, certain states and local
laws may impose liability on property developers with respect to construction
defects discovered or repairs made by future owners of such property. Pursuant
to such laws, future owners may recover from the Company amounts in connection
with any repairs made to the developed property. See "Business--Business
Strategy."
RISKS ASSOCIATED WITH PARTNERSHIP INVESTMENT IN THE POIPU PARTNERSHIP
The Embassy Vacation Resort Poipu Point is owned by the Poipu Partnership
(as defined), which consists of the Company and a third party. Property
ownership through a partnership involves additional risks, including
requirements of partner consents for major decisions (including approval of
budgets), capital contributions and entry into material agreements. If the
Company and its partner are unable to agree on major decisions, either partner
may elect to invoke a buy/sell right, which could require the Company to
either sell its interest in the Embassy Vacation Resort Poipu Point or to buy
out the interest of its partner at a time when the Company is not prepared to
do so. In addition, under certain circumstances, the other partner can require
the Company to purchase such partner's interest or sell its interest to the
partner. If a dispute arises under this partnership, an adverse resolution
could have a material adverse effect on the operations of the Company. In
addition, as a general partner, the Company will be subject to certain
fiduciary obligations which may obligate it to act in a manner which is not
necessarily in the best interest of the Company. The Company may elect to
purchase interests in future resorts through similar partnership arrangements.
See "--Risks Related to Westin Agreement; Limited Control of Resorts and
Termination" and "Business--the Resorts."
LIMITED OPERATING HISTORY
The Company was formed in May 1996 in order to effectuate the consolidation
of the Company's predecessor partnerships, limited liability companies and
corporations (the "Consolidation Transactions") and the Company's initial
public offering (the "Initial Public Offering"), each of which was consummated
in August 1996. Although predecessors of the Company have operating histories
in the vacation ownership and hospitality industries, the Company has limited
operating history as an integrated entity and limited experience operating as
a public company and no experience operating a points-based vacation club
system, any of which could have an adverse impact on the Company's operations
and future profitability. The Company has chosen to conduct its management
operations in (i) two locations in California primarily with respect to
acquisition, development, finance and legal (ii) Chicago, Illinois with
respect to marketing, (iii) Orlando, Florida with respect to sales, accounting
and property management operations and (iv) Carnforth, England with respect to
LSI's European resorts and its Grand Vacation Club system. However, as the
Company grows and diversifies into additional geographic markets, including
new markets entered as a result of the LSI Acquisition, no assurance can be
given as to management's ability to efficiently manage operations and control
functions without a centrally located management team.
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GENERAL ECONOMIC CONDITIONS; CONCENTRATION IN VACATION OWNERSHIP INDUSTRY;
GEOGRAPHIC CONCENTRATION OF INVESTMENTS
Any downturn in economic conditions or any price increases (e.g., airfares)
related to the travel and tourism industry could depress discretionary
consumer spending and have a material adverse effect on the Company's
business. Any such economic conditions, including recession, may also
adversely affect the future availability of attractive financing rates for the
Company or its customers and may materially adversely affect the Company's
business. Furthermore, adverse changes in general economic conditions may
adversely affect the collectibility of the Company's loans to Vacation
Interval buyers. Because the Company's operations are conducted solely within
the vacation ownership industry, any adverse changes affecting the vacation
ownership industry such as an oversupply of vacation ownership units, a
reduction in demand for vacation ownership units, changes in travel and
vacation patterns, changes in governmental regulations of the vacation
ownership industry and increases in construction costs or taxes, as well as
negative publicity for the vacation ownership industry, could have a material
adverse effect on the Company's operations.
RISKS ASSOCIATED WITH CUSTOMER FINANCING
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts who make a down payment generally equal to at least 10% of
the purchase price. This financing generally bears interest at fixed rates and
is collateralized by a first mortgage on the underlying Vacation Interval. The
Company has entered into agreements with lenders for the financing of these
customer receivables. As of September 30, 1997, these agreements provide an
aggregate of up to approximately $280.0 million of available financing to the
Company bearing interest at variable rates tied to LIBOR or the prime rate of
which, at September 30, 1997, the Company had approximately $198.8 million of
additional borrowing capacity available.
Under these arrangements, the Company pledges as security promissory notes
to these lenders, who typically lend the Company 85% to 90% of the principal
amount of such promissory notes. Payments under these promissory notes are
made by the buyer/borrowers directly to a third-party payment processing
center and such payments are credited against the Company's outstanding
balance with the respective lenders. The Company does not presently have
binding agreements to extend the terms of such existing financing arrangements
or for any replacement financing arrangements upon the expiration of such
funding commitments (which have varying borrowing periods ranging from 18 to
20 months after the initial commitment date), and there can be no assurance
that alternative or additional arrangements can be made on terms that are
satisfactory to the Company. Accordingly, future sales of Vacation Intervals
may be limited by both the availability of funds to finance the initial
negative cash flow that results from sales that are financed by the Company
and by reduced demand which may result if the Company is unable to provide
financing through unaffiliated lenders to buyers of Vacation Intervals. If the
Company is required to sell its customer receivables to lenders, discounts
from the face value of such receivables may be required by such lenders, if
lenders are available at all.
The Company has historically derived income from its financing activities.
At September 30, 1997, the Company's mortgage portfolio included approximately
34,485 consumer loans totaling approximately $315 million, with a stated
maturity of seven to ten years and a weighted average interest rate of 15% per
annum. Additionally, at September 30, 1997, the weighted average maturity of
all outstanding consumer loans was approximately 8.3 years and the total
borrowings secured by consumer loans were approximately $81.2 million, bearing
a weighted average interest rate of 10.1%. However, because the Company's
borrowings bear interest at variable rates (which, as of September 30, 1997,
equal 10.5% per annum on a weighted average basis) and the Company's loans to
buyers of Vacation Intervals bear interest at fixed rates (which, as of
September 30, 1997, equal 15% per annum on a weighted average basis), the
Company bears the risk of increases in interest rates with respect to the
loans it has from its lenders. To the extent interest rates on the Company's
borrowings decrease, the Company faces an increased risk that customers will
pre-pay their loans and reduce the Company's income from financing activities.
See "Business--Customer Financing."
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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 periods ending December 31, 1996 and September 30, 1997, the Company was
not engaging in any interest rate hedging transactions. The nature and
quantity of any future hedging transactions for the variable rate debt will be
determined by the management of the Company based on various factors,
including market conditions, and there have been no limitations placed on
management's use of certain instruments in such hedging transactions. No
assurance can be given that any such hedging transactions will offset the
risks of changes in interest rates, or that the costs associated with hedging
activities will not increase the Company's operating costs.
The Company's international operations subject the Company to certain risks,
including increased exposure to currency exchange rate fluctuations. Although
the Company does not currently engage in foreign currency hedging
transactions, as it continues to expand its international operations, exposure
to losses in foreign currency transactions may increase or occur. The Company
may choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. However, there can be no assurance
that any currency hedging strategy would be successful in avoiding exchange-
related losses. In addition, there can be no assurance that such exchange-
related losses would not have a material adverse effect on the Company's
future international revenue and, consequently, on the Company's business,
operating results and financial condition.
RISKS ASSOCIATED WITH CUSTOMER DEFAULT
The Company bears the risk of defaults by buyers who financed the purchase
of their Vacation Intervals. As of September 30, 1997, approximately 3.6% of
the Company's consumer loans were considered by the Company to be delinquent
(past due by 60 or more days). The Company had completed or commenced
foreclosure or deed-in-lieu of foreclosure (which is typically commenced once
a loan is more than 120 days past due) on an additional approximately 1.8% of
its consumer loans. As of September 30, 1997, the Company's allowance for
doubtful accounts as a percentage of gross mortgages receivable was 6.5%,
which management believes is an adequate reserve for expected loan losses.
If a buyer of a Vacation Interval defaults on the consumer loan made by the
Company and the Company has pledged the mortgage receivable as collateral to a
lending institution, the Company generally must take back the mortgage with
respect to such Vacation Interval and replace it with a performing mortgage.
In connection with the Company taking back any such Vacation Interval, the
relatively substantial associated marketing costs, other than certain sales
commissions, will not have been recovered by the Company and they must be
incurred again after their Vacation Interval has been returned to the
Company's inventory for resale (commissions paid in connection with the sale
of Vacation Intervals may be recoverable from the Company's sales personnel
and from independent contractors upon default in accordance with contractual
arrangements with the Company, depending upon the amount of time that has
elapsed between the sale and the default and the number of payments made prior
to such default). Although private mortgage insurance or its equivalent is
available to cover Vacation Intervals, the Company has never purchased such
insurance and has no present intention of doing so. In addition, although the
Company in many cases may have recourse against Vacation Interval buyers,
sales personnel and independent contractors for the purchase price paid and
for commissions paid, respectively, no assurance can be given that the
Vacation Interval purchase price or any commissions will be fully or partially
recovered in the event of a buyer default under such financing arrangements.
The Company purchased defaulted mortgage notes with respect to 900 Vacation
Intervals at the San Luis Bay Resort on which the Company is in the process of
foreclosing. The Company will be subject to the costs and delays associated
with such foreclosure process and no assurance can be given that the value of
the underlying Vacation Intervals being foreclosed upon at the time of resale
will exceed the purchase price of the defaulted loans, taking into
consideration the costs of foreclosure and resale. See "Business--Customer
Financing." Similarly, in March 1996, AVCOM purchased defaulted mortgage notes
with respect to 1,057 Vacation Intervals at the Tahoe Seasons Resort on which
AVCOM was then in the process of foreclosing. The Company continues to be
subject to the costs and delays associated with
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such foreclosure process and no assurance can be given that the value of the
underlying Vacation Intervals being foreclosed upon at the time of resale will
exceed the purchase price of the defaulted loans, taking into consideration
the costs of foreclosure and resale. See "Business--Description of the
Company's Resorts."
COMPETITION
The Company is subject to significant competition at each of its resorts
from other entities engaged in the business of resort development, sales and
operation, including Vacation Interval ownership, condominiums, hotels and
motels. Many of the world's most recognized lodging, hospitality and
entertainment companies have begun to develop and sell Vacation Intervals in
resort properties. Although the Company recently obtained the exclusive
development rights to Westin Vacation Clubs from Westin pursuant to the Westin
Agreement, other major companies that now operate or are developing or
planning to develop Vacation Interval resorts include Marriott Ownership
Resorts ("Marriott"), The Walt Disney Company ("Disney"), Hilton Hotels
Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Four Seasons Hotels &
Resorts ("Four Seasons") and Inter-Continental Hotels and Resorts ("Inter-
Continental"). Many of these entities possess significantly greater financial,
marketing, personnel and other resources than those of the Company and may be
able to grow at a more rapid rate or more profitably as a result. LSI competes
in Europe with certain other vacation ownership and points-based companies.
See "Business--Competition."
The Company also competes with companies with non-branded resorts such as
Westgate, Vistana, Inc. and Vacation Break USA, Inc., Fairfield Communities
and ILX Incorporated. Under the terms of a recently announced exclusive five-
year agreement, Promus and Vistana, Inc. will jointly acquire, develop and
manage and market vacation ownership resorts in North America under Promus
brand names. As part of the exclusive agreement, Promus and Vistana, Inc. will
designate selected markets for development (which markets currently include
Kissimmee, Florida and Myrtle Beach, South Carolina, and in which markets
Vistana, Inc. will have exclusive development rights). The Company is not
precluded from using the Embassy Vacation Resort name in connection with
resorts acquired during the term of the agreement in markets not otherwise
exclusive to Vistana, Inc. The Company has been identified by Promus as the
only other licensee to whom Promus may license the Embassy Vacation Resort
name. There can be no assurance that Promus will not grant other entities a
license to develop Embassy Vacation Resorts or that Promus will not exercise
its rights to terminate the Embassy Vacation Resort licenses. On January 7,
1997, Promus announced that it intended to expand its branded vacation
ownership business only with the Company and Vistana and that additional
Embassy Vacation Resort properties to be developed or acquired by the Company
and licensed by Promus are under discussion. See "Business--Competition."
In the event that the Westin Agreement becomes the subject of dispute
between the parties thereto, it is possible that the Company's interest in
pursuing acquisition and development opportunities at "four-star" and "five-
star" resorts located in North America, Mexico and the Caribbean through May
2001 could be barred pending the final resolution of such dispute.
Additionally, at the expiration or early termination of the Westin Agreement,
Westin could become a direct competitor with the Company in the vacation
ownership business, including in the markets most attractive to the Company.
See "--Risks Related to the Westin Agreement; Limited Control of Resorts and
Termination" and "Business--Westin Vacation Club Resorts." Subject to certain
covenants not to compete, the Founders could acquire resort and other hotel
properties that could compete with the Company's vacation ownership business.
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; RISK OF INABILITY TO
QUALIFY RESORTS
The attractiveness of Vacation Interval ownership is enhanced significantly
by the availability of exchange networks that allow Vacation Interval owners
to exchange in a particular year the occupancy right in their Vacation
Interval for an occupancy right in another participating network resort.
According to the American Resort Development Association ("ARDA"), the ability
to exchange Vacation Intervals was cited by buyers as a primary reason for
purchasing a Vacation Interval. Several companies, including Resort
Condominiums International ("RCI") and Interval International ("II"), provide
broad-based Vacation Interval exchange services, and the Company's resorts are
currently qualified for participation in the RCI and II exchange networks.
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No assurance can be given that the Company will continue to be able to
qualify its resorts or will be able to qualify its future resorts, for
participation in the RCI or II exchange networks or any other exchange
network. RCI and II are under no obligation to include the Company's resorts
in their exchange networks. If such exchange networks cease to function
effectively, or if the Company's resorts are not accepted as exchanges for
other desirable resorts, the Company's sales of Vacation Intervals could be
materially adversely affected. See "Business--Participation in Vacation
Interval Exchange Networks."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of Messrs. Osamu Kaneko, Andrew J. Gessow and Steven C. Kenninger
(the "Founders"), who serve as the Company's Co-Chief Executive Officer,
President and Co-Chief Executive Officer and Chief Operating Officer,
respectively, as well as the abilities of James E. Noyes and Michael A.
Depatie, the Company's Executive Vice President, and Executive Vice President
and Chief Financial Officer, respectively. The Company's success in Europe
will depend to a large extent upon the experience and abilities of Ian Ganney
and Richard Harrington, LSI's founders, who serve as LSI's Chairman and Chief
Executive Officer, respectively.
The Founders have agreed to devote substantially full time to the business
of the Company and not engage in any competitive businesses. Historically,
each Founder has devoted more than 90% of his time to the Company. However,
the Founders' employment agreements do not specify an exact percentage of time
required to be provided by the Founders and no assurance can be given that the
Founders will continue to devote 90% or more of their time to the Company.
Notwithstanding their covenants not to compete, the Founders have the right to
pursue certain activities which could divert their time and attention from the
Company's business. See "--Potential Conflicts of Interest."
The loss of the services of any of the Founders or Messrs. Ganney or
Harrington could have a material adverse effect on the Company, its operations
and its business prospects. The Company does not maintain "keyman" life
insurance with respect to any of the Founders or Messrs. Ganney and
Harrington. The Company's success is also dependent upon its ability to
attract and maintain qualified development, acquisition, marketing,
management, administrative and sales personnel for which there is keen
competition among the Company's competitors. In addition, the cost of
retaining such key personnel could escalate over time. There can be no
assurance that the Company will be successful in attracting and/or retaining
such personnel.
APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION INTERVALS
It is possible that the Vacation Intervals may be deemed to be a security as
defined in Section 2(1) of the Securities Act. If the Vacation Intervals were
determined to be a security for such purpose, their sale would require
registration under the Securities Act. The Company has not registered the sale
of the Vacation Intervals under the Securities Act and does not intend to do
so in the future. If the sale of the Vacation Intervals were found to have
violated the registration provisions of the Securities Act, purchasers of the
Vacation Intervals would have the right to rescind their purchases of Vacation
Intervals. If a substantial number of purchasers sought rescission and were
successful, the Company's business, results of operations and financial
condition could be materially adversely affected. The Company has been advised
by its vacation ownership counsel, Schreeder, Wheeler & Flint, LLP, that in
the opinion of such counsel, based on its review of the Company's Vacation
Interval program and the sales practices utilized in such program, the
Vacation Intervals do not constitute a security within the meaning of Section
2(1) of the Securities Act.
REGULATION OF MARKETING AND SALES OF VACATION INTERVALS; OTHER LAWS
The Company's marketing and sales of Vacation Intervals and other operations
are, and any North American points-based vacation club system developed by the
Company will be, subject to extensive regulation by the federal government and
the states and foreign jurisdictions in which its resorts are located and in
which Vacation Intervals or Vacation Points are marketed and sold. On a
federal level, the Federal Trade Commission
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has taken the most active regulatory role through the Federal Trade Commission
Act, which prohibits unfair or deceptive acts or competition in interstate
commerce. Other federal legislation to which the Company is or may be subject
appears in the Truth-in-Lending Act and Regulation Z, the Equal Opportunity
Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act,
Telephone Consumer Protection Act, Telemarketing and Consumer Fraud and Abuse
Prevention Act, Fair Housing Act and the Civil Rights Acts of 1964 and 1968.
In addition, many states have adopted specific laws and regulations regarding
the sale of Vacation Interval ownership programs. The laws of most states,
including Florida, California, Arizona, South Carolina, Virginia and Hawaii,
require the Company to file with a designated state authority for its approval
a detailed offering statement describing the Company and all material aspects
of the project and sale of Vacation Intervals. Laws in each state where the
Company sells Vacation Intervals generally grant the purchaser of a Vacation
Interval the right to cancel a contract of purchase at any time within a
period ranging from three to fifteen calendar days following the earlier of
the date the contract was signed or the date the purchaser has received the
last of the documents required to be provided by the Company. Most states have
other laws which regulate the Company's activities, such as real estate
licensure; seller's of travel licensure; anti-fraud laws; telemarketing laws;
price, gift and sweepstakes laws; and labor laws. The Company believes that it
is in material compliance with all federal, state, local and foreign laws and
regulations to which it is currently subject. However, no assurance can be
given that the cost of qualifying under Vacation Interval ownership
regulations in all jurisdictions in which the Company desires to conduct sales
will not be significant or that the Company is in fact in compliance with all
applicable federal, state, local and foreign laws and regulations. Certain
European laws and regulations regulate LSI's vacation ownership operations.
Any failure to comply with applicable laws or regulations could have a
material adverse effect on the Company. See "Business--Governmental
Regulation."
Certain state and local laws may impose liability on property developers
with respect to construction defects discovered or repairs made by future
owners of such property. Pursuant to such laws, future owners may recover from
the Company amounts in connection with the repairs made to the developed
property.
In addition, from time to time, potential buyers of Vacation Intervals
assert claims with applicable regulatory agencies against Vacation Intervals
salespersons for unlawful sales practices. Such claims could have adverse
implications for the Company in negative public relations and potential
litigation and regulatory sanctions. However, the Company does not believe
that such claims will have a material adverse effect on the Company or its
business.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, the
owner of real property generally is liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in, or
emanating from, such property, as well as related costs of investigation and
property damage. Such laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner's
ability to sell or lease a property or to borrow using such real property as
collateral. Other federal and state laws require the removal or encapsulation
of asbestos-containing material when such material is in poor condition or in
the event of construction, demolition, remodeling or renovation. Other
statutes may require the removal of underground storage tanks. Noncompliance
with these and other environmental, health or safety requirements may result
in the need to cease or alter operations at a property.
As of the date of the Prospectus, Phase I environmental reports (which
typically involve inspection without soil sampling or ground water analysis)
have been prepared by independent environmental consultants for each of the
Company's owned resorts. In connection with the acquisition and development of
the Embassy Vacation Resort Lake Tahoe and the San Luis Bay Resort, the
independent environmental consultants have identified several areas of
environmental concern. The areas of concern at the Embassy Vacation Resort
Lake Tahoe relate to possible soil and water contamination that originated on
the resort site due to prior uses and to contamination that may migrate onto
the resort site from upgradient sources. California regulatory agencies have
been
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monitoring the resort site and have required or are in the process of
requiring the responsible parties (presently excluding the Company) to effect
remediation action. The Company has been indemnified by certain of such
responsible parties for certain costs and expenses in connection with
contamination at the Embassy Vacation Resort Lake Tahoe (including Chevron
(USA), Inc.) and does not anticipate incurring material costs in connection
therewith; however, there is no assurance that the indemnitor(s) will meet
their obligations in a complete and timely manner. In addition, the Company's
San Luis Bay Resort is located in an area of Avila Beach, California which has
experienced underground contamination resulting from leaking pipes at a nearby
oil refinery. California regulatory agencies have required the installation of
groundwater monitoring wells on the beach near the resort site, and no demand
or claim in connection with such contamination has been made on the Company,
however, there is no assurance that claims will not be asserted against the
Company with respect to this environmental condition. In addition, while
remodeling the Carson Building at the Tahoe Beach & Ski Club, one of the
resorts acquired in the AVCOM Merger, AVCOM's contractor informed AVCOM of the
possible presence of asbestos containing materials. AVCOM has given
governmental and private notification to various agencies and persons whom
AVCOM determined should receive notice. The Company has been advised by the
relevant regulatory agencies that civil and criminal penalties will not be
assessed in this matter.
With the exception of the above mentioned resorts, the Company is not aware
of any environmental liability that would have a material adverse effect on
the Company's business, assets or results of operations. No assurance,
however, can be given that these reports reveal all environmental liabilities
or that no prior owner created any material environmental condition not known
to the Company. The Company believes that it is in compliance in all material
respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances.
Certain environmental laws impose liability on a previous owner of property
to the extent that hazardous or toxic substances were present during the prior
ownership period. A transfer of the property does not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by its predecessors.
A variety of laws concerning the protection of the environment, health and
safety apply to the European operations, properties and other assets owned by
LSI. See "Business--Governmental Regulations--Environmental Matters."
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO
DISABLED PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons on a variety of public accommodations and
facilities. These requirements did not become effective until after January 1,
1991. Although the Company believes that its resorts are substantially in
compliance with laws governing the accessibility of its facilities to disabled
persons, a determination that the Company is not in compliance with the ADA
could result in a judicial order requiring compliance, imposition of fines or
an award of damages to private litigants. The Company is likely to incur
additional costs of complying with the ADA; however, such costs are not
expected to have a material adverse effect on the Company's results of
operations or financial condition. Additional legislation may impose further
burdens or restrictions on property owners (including homeowner associations
at the Existing Resorts) with respect to access by disabled persons. The
ultimate amount of the cost of compliance with such legislation is not
currently ascertainable, and, while such costs are not expected to have a
material effect on the Company, such costs could be substantial. Limitations
or restrictions on the completion of certain renovations may limit application
of the Company's growth strategy in certain instances or reduce profit margins
on the Company's operations. If a homeowners' association at a resort was
required to make significant improvements as a result of non-compliance with
the ADA, Vacation Interval owners may default on their mortgages and/or cease
making required homeowners' association assessment payments. The Company is
not aware of any non-compliance with the ADA, the Fair Housing Act or similar
laws that management believes would have a material adverse effect on the
Company's business, assets or results of operations.
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NATURAL DISASTERS; UNINSURED LOSS
In 1992, prior to the Company's purchase of an interest in the Embassy
Vacation Resort Poipu Point, the resort was substantially destroyed by
Hurricane Iniki. The resort was rebuilt with insurance proceeds before the
Company acquired its interest in the resort, but could suffer similar damage
in the future. In September 1995 and July 1996, the Company's St. Maarten
resorts were damaged by hurricanes and could suffer similar damage in the
future. In addition, the Company's other resorts which are or will be located
in Hawaii, Florida and the Caribbean (including the St. John resort which was
damaged by Hurricane Marilyn in 1995) may be subject to hurricanes and damaged
as a result thereof. The Company's resorts located in California and Hawaii
may be subject to damage resulting from earthquakes. The Company currently
maintains insurance coverage which, in management's opinion, is at least as
comprehensive as the coverage maintained by other prudent entities in the
Company's line of business. However, there are certain types of losses (such
as losses arising from acts of war and civil unrest) that are not generally
insured because they are either uninsurable or not economically insurable and
for which the Company does not have insurance coverage. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in a resort, as well as the anticipated future revenues from
such resort and would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. Any such loss could have a material
adverse effect on the Company. See "Business--Insurance, Legal Proceedings."
EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS; WESTIN DIRECTOR DESIGNATION
The Founders hold substantial amounts of shares of Common Stock (Messrs.
Kaneko, Gessow and Kenninger hold 9.8%, 10.1% and 3.4%, respectively, as of
the date of this Prospectus) which may allow them, collectively, to exert
substantial influence over the election of directors and the management and
affairs of the Company. Accordingly, if such persons vote their shares of
Common Stock in the same manner, they may have sufficient voting power to
determine the outcome of various matters submitted to the stockholders for
approval, including mergers, consolidations and the sale of substantially all
of the Company's assets. Pursuant to the Westin Agreement, during the term
thereof Westin generally will have the right to designate one member of the
Company's Board of Directors, irrespective of its share ownership in the
Company. See "Registering Stockholders," "Description of Capital Stock" and
"Business--Westin Vacation Club Resorts." Such control may result in decisions
which are not in the best interest of the Company. In addition, under certain
circumstances, in the event that the Founders collectively own less than 75%
of the shares of Common Stock owned by them immediately following the closing
of the Initial Public Offering and the consummation of the Consolidation
Transactions, and the Common Stock they own thereafter is less than 75% of the
market value of the Common Stock issued to them in the Initial Public
Offering, then the Company's partner in the Poipu Partnership will be entitled
to require the Company to either dispose of its interest or purchase such
partner's interest in the Poipu Partnership pursuant to the terms and
conditions of the partnership agreement.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. Any payment of future dividends will be in the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions in respect of the payment of dividends
and other factors that the Company's Board of Directors deems relevant.
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RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company expects that international operations will account for an
increasingly significant percentage of the Company's operations. As a result,
the Company is subject to a number of risks, including, among other things,
difficulties relating to administering its business globally, managing foreign
operations, currency fluctuations, restrictions against the repatriation of
earnings, export requirements and restrictions and multiple and possibly
overlapping tax structures. These risks could have a material adverse effect
on the Company's business, results of operations and financial condition.
Additionally, changes in inflation, interest rates, taxation, regulation or
other social, political, economic or diplomatic developments affecting the
countries in which the Company has (or intends to have) international
operations could have a material adverse effect on the Company's business,
operating results and financial condition.
POTENTIAL CONFLICTS OF INTEREST
Because affiliates of Messrs. Kaneko and Kenninger have operations in the
lodging industry other than those with respect to the development and
operation of vacation ownership resorts, potential conflicts of interest
exist. Affiliates of KOAR Group, Inc. ("KOAR"), a Los Angeles based real
estate acquisition and development company and predecessor of the Company
which is owned by Messrs. Kaneko and Kenninger, have developed and currently
act as the managing general partner of partnerships which own hotels that are
franchised as Embassy Suites hotels (one of which, the Embassy Suites Lake
Tahoe, is located in a market served by the Company) and a residential
condominium project overlooking the ocean in Long Beach, California (a market
in which the Company may operate in the future). Messrs. Kaneko and Kenninger
will continue to devote a portion of their time to KOAR's hotel business and
to meeting their duties and responsibilities to investors in such entities.
Additionally, notwithstanding their covenants not to compete, the Founders
have the right to pursue certain activities which could divert their time and
attention from the Company's business and result in conflicts with the
Company's business. The Founders are evaluating the acquisition of other hotel
properties in Hawaii, which at a future date may be converted to accommodate
vacation ownership operations. However, any such acquisition from the Founders
would be subject to the approval of the Company's Independent Directors.
RISKS RELATED TO WESTIN AGREEMENT; LIMITED CONTROL OF RESORTS AND TERMINATION
The Westin Agreement may involve certain additional risks to the Company's
future operations. The Westin Agreement imposes certain restrictions on the
Company's ability to develop certain vacation ownership resorts in conjunction
with hotel operators other than Westin. Generally, the Company is required,
subject to certain exceptions involving Embassy Vacation Resorts and Promus,
to submit for Westin's consideration any "four-star" or "five-star"
development opportunity that the Company has determined to pursue in North
America, Mexico and the Caribbean. In the event Westin determines not to
proceed with the Company to develop such resort, the Company would be free
only to develop the resort as a "Sunterra" property or as a property branded
as an Embassy Vacation Resort or in conjunction with other upscale operators,
but excluding specified operators of luxury hotels and resorts. In addition,
resorts acquired or developed pursuant to the Westin Agreement, including the
St. John resort, will be owned by partnerships, limited liability companies or
similar entities in which each of Westin and the Company will own a 50% equity
interest and have an equal voice in management. Accordingly, the Company will
not be able to control such resorts or the applicable entities. In addition,
the Westin Agreement will be terminable by either party if certain thresholds
relating to development or acquisitions of resorts are not met, in the event
of certain changes in management of Westin or the Company or in the event of
an acquisition or merger of either party. See "Business--Westin Vacation Club
Resorts" and "Risk Factors--Effective Voting Control of Existing Stockholders;
Westin Director Designation."
As a result of the pending closing of the merger of Westin into Starwood
Lodging Trust and Starwood Lodging Corp., the Company and Westin have begun
discussions regarding whether to modify the exclusive agreement between the
Company and Westin to acquire, develop and market four and five star vacation
ownership resorts in North America, Mexico and the Caribbean (the
"Territory"). The discussions include
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whether to modify the agreement to make the relationship a non-exclusive one,
and whether to continue to have a representative from the Company and Westin
serve on each other's Board of Directors. As written, the existing exclusive
agreement limits the Company's ability to develop four and five star vacation
ownership resorts in the Territory with hotel and resort companies that are
competitors of Westin and simultaneously limits Westin's ability to develop
four and five star vacation ownership resorts in the Territory with anyone
other than the Company. If the parties elect to modify the Westin Agreement to
make it non-exclusive, the Company and Westin will each be free to pursue four
and five star vacation ownership acquisition and development opportunities in
the Territory either alone, with each other or with other luxury hotel and
resort companies. In that event, it would be the Company's intention to
continue to work to expand its four and five star vacation ownership resorts
in a variety of ownership structures, including as Westin Vacation Clubs in
joint venture with Westin (subject to Westin's approval of the specific
project); as Sunterra Resorts; and as other luxury hotel and resort company
brands. In any event, the parties currently intend to continue their existing
joint venture in St. John, U.S. Virgin Islands. See "Business--Westin Vacation
Club Resorts" and "Risk Factors--Effective Voting Control of Existing
Stockholders; Westin Director Designation."
RISK OF TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY
The Company sells Vacation Intervals at its resorts through independent
sales agents. Such independent sales agents provide services to the Company
under contract and, the Company believes, are not employees of the Company.
Accordingly, the Company does not withhold payroll taxes from the amounts paid
to such independent contractors. Although the Internal Revenue Service has
made inquiries regarding the Company's classification of its sales agents at
its Branson, Missouri resort, no formal action has been taken and the Company
has requested that the inquiry be closed. In the event the Internal Revenue
Service or any state or local taxing authority were to successfully classify
such independent sales agents as employees of the Company, rather than as
independent contractors, and hold the Company liable for back payroll taxes,
such reclassification may have a material adverse effect on the Company.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on August 8, 1997 (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, (ii) to institutional accredited
investors in transactions exempt from registration under the Securities Act
not made in reliance on Rule 144A or Regulation S and (iii) 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 August 8, 1997. 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-
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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 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. Pursuant
to the Registration Rights Agreement, the Company has agreed that during the
Exchange Offer Registration Period it will make this Prospectus available to
broker-dealers for use in connection with any such resale. 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, $200 million in aggregate principal
amount of the Private Notes are outstanding, $197.5 million of which are
registered in the name of Cede & Co., as nominee for the Depository Trust
Company (the "Depositary") and $2.5 million of which are registered in the
name of certain institutional accredited investors. 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.
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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 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
January 29, 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 3/4% per annum.
Interest on the Exchange Notes will be payable semi-annually on each April 1
and October 1, commencing October 1, 1997. Holders of Exchange Notes will
receive interest on April 1, 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 (August 8,
1997) 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
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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 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.
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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 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 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.
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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 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
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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.
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
Registration Period and (iii) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request during the Exchange Offer
Registration Period.
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 30 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 Statement 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
34
<PAGE>
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).
SPECIAL INTEREST
If (i) within 75 days after the Issue Date, the Exchange Offer 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 Exchange
Offer Registration Statement has not been declared effective; (iii) within 30
days after the date on which the Exchange Offer Registration Statement is
declared effective by the Commission, the Registered 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 Exchange Offer 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 Agreement
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), interest ("Special Interest") will accrue on the Notes and the
Exchange Notes (in addition to the stated interest on the Notes and the
Exchange Notes) 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. Special Interest 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
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
</TABLE>
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.
35
<PAGE>
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.
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.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds of the issuance of the
Exchange Notes 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 September 30, 1997, the total
consolidated capitalization of the Company.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
---------------
(UNAUDITED)
(DOLLAR AMOUNTS
IN THOUSANDS)
---------------
<S> <C>
Cash and cash equivalents...................................... $126,369
========
Debt:
Notes payable to financial institutions(a)................... $107,864
9 3/4% Senior Subordinated Notes due 2007.................... 200,000
5 3/4% Convertible Subordinated Notes due 2007............... 138,000
--------
Total debt................................................. 445,864
--------
Stockholders' equity:
Common Stock, $0.01 par value; 35,620,769 issued and
outstanding(b).............................................. 356
Additional paid-in capital................................... 156,855
Retained earnings............................................ 38,073
Cumulative foreign currency translation adjustment........... 144
--------
Total stockholders' equity................................... 195,428
--------
Total capitalization....................................... $641,292
========
</TABLE>
- -------
(a) Includes notes collateralized by mortgages receivable.
(b) Does not include an aggregate of 3,442,820 shares of Common Stock reserved
for future issuance upon exercise of options granted pursuant to the
Company's 1996 Equity Participation Plan, as amended, 747,518 shares of
Common Stock reserved for issuance pursuant to the Employee Stock Purchase
Plan and 4,536,990 shares of Common Stock initially issuable upon
conversion of the Convertible Notes.
RATIO OF EARNINGS TO FIXED CHARGES
The following are the consolidated ratios of earnings to fixed charges for
the Company for the nine months ended September 30, 1997 and each of the years
ended December 31, 1996, 1995, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
2.16x 1.08x 2.52x 2.37x 2.40x 2.22x
</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.
37
<PAGE>
BUSINESS
OVERVIEW
The Company is one of the largest developers and operators of vacation
ownership resorts in North America, the Caribbean and Europe. The Company is
devoted exclusively to vacation ownership operations and, as of the date of
this Prospectus, the Company's properties consist of 69 vacation ownership
resort locations in a variety of popular resort destinations. In addition,
following the Company's recent acquisition of Marc Hotels and Resorts, the
Company manages an additional 22 resorts in Hawaii.
The Company's principal operations currently consist of (i) acquiring,
developing and operating vacation ownership resorts, (ii) marketing and
selling vacation ownership interests in its North American resorts, which
typically entitle the buyer to use a fully-furnished vacation residence,
generally for a one-week period each year in perpetuity, (iii) marketing and
selling Vacation Points at its European resorts and (iv) providing consumer
financing to individual purchasers for the purchase of Vacation Intervals at
its resort locations and the 21 North American resort locations recently
acquired by the Company through its November 1997 acquisition of Vacation
Internationale, Ltd. The Company also provides resort management and
maintenance services at its resorts for which it receives fees paid by the
resorts' homeowners' associations.
As part of its growth and acquisition strategy, in May 1997 the Company
consummated the PRG Merger, acquiring 100% of the capital stock of PRG in
exchange for the issuance of 3,601,844 shares of the Company's Common Stock.
PRG is a Williamsburg, Virginia based developer, owner and operator of two
vacation ownership resorts. Based upon the closing price of the Company's
Common Stock on the Nasdaq National Market on May 15, 1997, the
3,601,844 shares of Common Stock issued in the PRG Merger were valued at an
aggregate of approximately $59.1 million and represented on a pro forma basis
10.8% of the shares of Common Stock outstanding on such date.
Additionally, in August 1997 the Company consummated the LSI Acquisition.
The Company acquired 100% of LSI's capital stock in exchange for the issuance
of 1,996,401 shares of the Company's Common Stock. LSI is a United Kingdom-
based developer, owner and operator of 11 vacation ownership resorts and a
European points-based vacation club system. Based on the closing price of the
Company's Common Stock on the Nasdaq National Market on August 28, 1997, the
1,996,401 shares of Common Stock issued in the LSI Acquisition were valued at
an aggregate of approximately $48.2 million and represented on a pro forma
basis 5.6% of the shares of Common Stock outstanding on such date. In addition
to the Common Stock issued in the LSI Acquisition, the Company paid cash
consideration of approximately $1,036,000 to a former LSI shareholder. See
"Risk Factors--Risks Related to the AVCOM Merger, PRG Merger and LSI
Acquisition."
THE VACATION OWNERSHIP INDUSTRY
The Market. The resort component of the leisure industry primarily is
serviced by two separate alternatives for overnight accommodations: commercial
lodging establishments and vacation ownership resorts. Commercial lodging
consists of hotels and motels in which a room is rented on a nightly, weekly
or monthly basis for the duration of the visit and is supplemented by rentals
of privately-owned condominium units or homes. For many vacationers,
particularly those with families, a lengthy stay at a quality commercial
lodging establishment can be very expensive, and the space provided to the
guest relative to the cost (without renting multiple rooms) is not economical
for vacationers. Also, room rates and availability at such establishments are
subject to change periodically. In addition to providing improved lifestyle
benefits to owners, vacation ownership presents an economical alternative to
commercial lodging for vacationers.
First introduced in Europe in the mid-1960's, vacation ownership has been
one of the fastest growing segments of the hospitality industry over the past
two decades. According to ARDA, during the fifteen year period ending in 1994
(the most recent year for which ARDA statistics are available), worldwide
vacation ownership sales volume for the vacation ownership industry increased
from $490 million in 1980 to $4.8 billion in 1994, representing a 17%
compounded annual growth rate. A year-by-year presentation of annual vacation
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ownership sales volume follows. Based on industry data, the Company believes
that the total Vacation Interval sales volume for the vacation ownership
industry exceeded $5.5 billion in 1995 and $6.0 billion in 1996.
According to RCI Consulting, the United States and Europe are the largest
and second largest vacation ownership markets in the world, respectively.
Approximately 50% of the world's vacation owners have purchased Vacation
Intervals or vacation points at resorts or clubs in the United States and
approximately 19% of the world's vacation owners purchased in Europe.
As shown in the following charts, according to ARDA the worldwide vacation
ownership industry has expanded significantly since 1980 both in Vacation
Interval sales volume and number of Vacation Interval owners.
[CHART OF NUMBER OF VACATION OWNER APPEARS HERE]
(in millions)
1980.......... 0.155
1981.......... 0.22
1982.......... 0.335
1983.......... 0.47
1984.......... 0.62
1985.......... 0.805
1986.......... 0.97
1987.......... 1.125
1988.......... 1.31
1989.......... 1.53
1990.......... 1.8
1991.......... 2.07
1992.......... 2.363
1993.......... 2.76
1994.......... 3.144
[CHART DOLLAR VOLUME OF VACATION OWNERSHIP SALES APPEARS HERE]
(in billions)
1980.......... $0.49
1981.......... 0.965
1982.......... 1.165
1983.......... 1.34
1984.......... 1.735
1985.......... 1.58
1986.......... 1.61
1987.......... 1.94
1988.......... 2.39
1989.......... 2.97
1990.......... 3.24
1991.......... 3.74
1992.......... 4.25
1993.......... 4.505
1994.......... 4.76
Source: American Resort Development Association, The 1995 Worldwide Timeshare
Industry.
ARDA reports and other industry data indicate that during the past decade
the following factors have contributed to the increased acceptance of the
vacation ownership concept among the general public and the substantial growth
of the vacation ownership industry:
. increased consumer awareness of the value and benefits of vacation
ownership, including the cost savings relative to other lodging
alternatives;
. increased flexibility of vacation ownership due to the growth of
international exchange organizations;
. improvement in the quality of accommodations and management of vacation
ownership resorts;
. increased consumer confidence resulting from new consumer protection
regulations and the entrance of brand name national lodging companies to
the industry; and
. increased availability of consumer financing for purchasers of Vacation
Intervals.
The vacation ownership industry traditionally has been highly fragmented and
dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality.
The Company believes that one of the most significant factors contributing to
the current success of the vacation ownership industry is the entry into the
market of some of the world's major lodging, hospitality and entertainment
companies. Such major companies which now operate or are developing Vacation
Interval resorts include Marriott, Disney, Hilton, Hyatt, Four Seasons and
Inter-Continental, as well as Promus and Westin. Unlike the Company, however,
the vacation ownership operations of each of Marriott, Disney, Hilton, Hyatt,
Four Seasons, Inter-Continental and Westin comprise only a small portion of
such companies' overall operations.
The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's
relatively rapid recent growth rate and relatively high profit margins. In
addition, such companies recognize that Vacation Intervals provide an
attractive alternative to the traditional hotel-based vacation and allow the
hotel companies to leverage their brands into additional resort markets where
demand exists for accommodations beyond traditional hotels.
39
<PAGE>
The Consumer. According to information compiled by ARDA for 1994 (the most
recent year for which statistics are available), the prime market for Vacation
Intervals is customers in the 40-55 year age range who are reaching the peak
of their earning power and are gaining more leisure time. The median age of a
Vacation Interval buyer at the time of purchase is 46. The median annual
household income of current Vacation Interval owners in the United States is
approximately $63,000, with approximately 35% of all Vacation Interval owners
having annual household incomes greater than $75,000 and approximately 17% of
such owners having annual household incomes greater than $100,000. However,
despite the growth in the vacation ownership industry by December 31, 1994
Vacation Interval ownership has achieved only an approximate 3.0% market
penetration among United States households with income above $35,000 per year
and 3.9% market penetration among United States households with income above
$50,000 per year. In addition, as of such date, the industry had achieved only
a 1.0% market penetration among European households with income above $30,000
per year.
According to the ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Interval are (i) the ability to exchange the
Vacation Interval for accommodations at other resorts through exchange
networks (cited by 82% of Vacation Interval purchasers), (ii) the money
savings over traditional resort vacations (cited by 61% of purchasers) and
(iii) the quality and appeal of the resort at which they purchased a Vacation
Interval (cited by 54% of purchasers). According to the ARDA study, Vacation
Interval buyers have a high rate of repeat purchases: approximately 41% of all
Vacation Interval owners own more than one Vacation Interval representing
approximately 65% of the industry inventory and approximately 51% of all
owners who bought their first Vacation Interval before 1985 have since
purchased a second Vacation Interval. In addition, the ARDA study indicates
that customer satisfaction increases with length of ownership, age, income,
multiple location ownership and accessibility to Vacation Interval exchange
networks.
The Company believes it is well positioned to take advantage of current
demographic trends, primarily because of the variety and quality of its resort
locations and its participation in the RCI and II exchange networks. However,
neither RCI nor II is under any obligation to continue to include the
Company's resorts in its exchange network. The Company expects the vacation
ownership industry to continue to grow as the baby-boom generation continues
to enter the 40-55 year age bracket, the age group which purchased the most
Vacation Intervals in 1994.
BUSINESS STRATEGY
The Company's objective is to become the world's leading developer and
operator of vacation ownership resorts. To meet this objective, the Company
intends to (i) increase sales and financing of Vacation Intervals at its
resorts through broader-based marketing efforts and through the construction
of additional Vacation Interval inventory, (ii) acquire, convert and develop
additional resorts to be operated as Embassy Vacation Resorts, Westin Vacation
Club resorts and Sunterra Resorts, capitalizing on the acquisition and
marketing opportunities to be provided as a result of its strategic
relationships and its position in certain markets and the vacation ownership
industry generally, (iii) improve operating margins by reducing borrowing
costs and reducing its sales and marketing expenses as a percentage of
revenues over time, (iv) acquire additional Vacation Interval inventory,
operating companies, management contracts, Vacation Interval mortgage
portfolios or other vacation ownership-related assets that may be integrated
into the Company's operations and (v) develop and operate a North American
points-based vacation club system, as well as expand LSI's existing points-
based vacation club in Europe. The key elements of the Company's strategy are
described below.
Sales and Expansion at the Company's Resorts. The Company intends to
continue sales of Vacation Intervals at its resorts by adding Vacation
Interval inventory through the construction of new development units and by
broadening marketing efforts. As of September 30, 1997 (i) the Company had a
current inventory of 29,149 Vacation Intervals and 133,907 Vacation Points,
(ii) the Company was in the process of developing or had plans to develop an
additional 100,929 Vacation Intervals at its resorts and (iii) LSI was in the
process of developing or has plans to develop additional units to accommodate
an additional 276,000 points in LSI's Grand Vacation Club system. In light of
the foregoing, the Company believes it is well-positioned to expand sales of
Vacation Intervals at its resorts as a result of its existing supply of
Vacation Intervals in inventory, as well as
40
<PAGE>
planned expansion. Based on information received from the Company's customers
and sales agents, the Company believes that in addition to basic quality,
expanded resort amenities and larger, multi-purpose units, current and
potential buyers want enhanced flexibility in scheduling their vacations, a
broader distribution of quality exchange locations and the availability of
other value-priced services. As a major developer and operator of vacation
ownership resorts in North America, the Company believes that it has acquired
skill and expertise both in the development and operation of vacation
ownership resorts and in the marketing and sales of Vacation Intervals and
that it has acquired the breadth of resorts which give it a competitive
advantage.
Acquisition and Development of New Resorts. The Company intends to acquire
and develop additional resorts to be operated as branded Embassy Vacation
Resorts, Westin Vacation Club resorts and as Sunterra Resorts. To implement
its business strategy, the Company intends to pursue resort acquisitions and
developments in a number of vacation destinations that will complement the
Company's operations. The Company believes that its strategic relationships
provide it with acquisition, development and hotel-to-vacation ownership
conversion opportunities and will allow it to take advantage of currently
favorable market opportunities to acquire resort and condominium properties to
be operated as vacation ownership resorts. Since the 1992 inception of the
Company's predecessor's resort acquisition and development business, the
Company believes it has been able to purchase hotel, condominium and resort
properties and/or entitled land at less than either their initial development
cost or replacement cost and remodel or convert such properties for sale and
use as vacation ownership resorts. However, there can be no assurance that
such preferential purchases can be effected in the future. See "Risk Factors--
Risks of Development and Construction Activities." In addition to acquiring
existing resort and hotel-to-vacation ownership conversion properties, the
Company also seeks to develop resorts located in destinations where it
discerns a strong demand, which the Company anticipates will enable it to
achieve attractive rates of return.
The Company considers the potential acquisition or development of vacation
ownership resorts in locations based on existing vacation ownership
competition in the area as well as existing overall demand for accommodations.
In evaluating whether to acquire, convert or develop a vacation ownership
resort in a particular location, the Company analyzes relevant demographic,
economic and financial data. Specifically, the Company considers the following
factors, among others, in determining the viability of a potential new
vacation ownership resort in a particular location: (i) supply/demand ratio
for the purchase of Vacation Intervals in the relevant market and for Vacation
Interval exchanges into the relevant market by other Vacation Interval owners,
(ii) the market's growth as a vacation destination, (iii) the ease of
converting a hotel or condominium property into a vacation ownership resort
from a regulatory and construction point of view, (iv) the availability of
additional land at or nearby the property for potential future development and
expansion, (v) competitive accommodation alternatives in the market, (vi)
uniqueness of location and (vii) barriers to entry that would tend to limit
competition.
The Company believes that its strategic relationships provide it with
attractive acquisition, conversion, development and marketing opportunities
and uniquely position the Company to offer Vacation Intervals at a variety of
attractive resort destinations to multiple demographic groups in the vacation
ownership market. The Company's relationships with Promus and Westin also
provide it with a competitive advantage in the vacation ownership industry by
allowing it to offer two separate branded products in both the upscale and
luxury market segments. The Company believes that brand affiliation is
becoming an important characteristic in the vacation ownership industry as it
provides the consumer an important element of reliability and image in a
fragmented and largely non-branded industry. Through its Embassy Vacation
Resorts and Westin Vacation Club resorts, the Company believes it will be able
to provide Vacation Interval buyers with consistent quality in their vacation
ownership purchases. In addition, through its Sunterra Resorts the Company
will be able to appeal to the value-conscious consumer who seeks the best
value for the vacation dollar and does not seek affiliation with brand-name
lodging companies.
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<PAGE>
Improvement of Operating Margins. As the Company grows, management believes
that its larger number of resorts relative to its competitors will provide it
with additional revenue opportunities and the potential for cost savings. The
Company believes that increased efficiency, reduction in on-site
administrative requirements and a multi-resort management system will reduce
operating costs and allow the Company to experience increased margins by
spreading operating and corporate overhead costs over a larger revenue base.
In addition, operating margins at a resort tend to improve over time as a
greater percentage of Vacation Intervals are sold, resulting in lower selling,
marketing and advertising expenses.
Acquisition of Vacation Ownership Assets, Management Contracts and Operating
Companies. The Company's relationships in the vacation ownership and financial
communities and the size and geographic diversity of its portfolio of
properties provide the Company access to a variety of acquisition
opportunities. The Company believes that its proven acquisition and
development record and public company status give the Company a competitive
advantage in acquiring assets, businesses and operations in the fragmented
vacation ownership industry. Examples of such acquisitions may include
acquiring additional Vacation Interval inventory, operating companies,
management contracts, Vacation Interval mortgage portfolios and properties
which may be integrated into the Company's operations. The acquisitions of
AVCOM, PRG and LSI are recent examples of this aspect of the Company's
business strategy.
Development of Points-Based Vacation Club System. The Company does not
currently operate a points-based vacation club system. However, as a result of
the LSI Acquisition, the Company acquired LSI's European points-based Grand
Vacation Club system. The Company intends to expand this system in Europe and
develop the Club Sunterra points-based vacation club system in North America.
In general, under a points-based vacation club system, members purchase an
annual allotment of points which can be redeemed for occupancy rights at the
club's participating resorts. Compared to other vacation ownership
arrangements, the points-based system provides members significant flexibility
in planning vacations as the number of points that are required for a stay at
any one resort varies depending upon a variety of factors, including the
resort location, the size of the unit, the vacation season and the days of the
week used. Under this system, members can select vacations according to their
schedules, space needs and available points. Subject to certain restrictions,
members are typically allowed to carry over for one year any unused points and
to "borrow" points from the forthcoming year. In addition, members are
required to pay annual fees for certain maintenance and management costs
associated with the operation of the resorts based on the number of points to
which they are entitled. See "Risk Factors--Risks Related to the AVCOM Merger,
PRG Merger and LSI Acquisition."
DESCRIPTION OF THE COMPANY'S RESORTS
The Company believes that, based on ARDA and Vacation Ownership World
reports and the Company's extensive knowledge of the industry, it is the only
developer and operator of vacation ownership resorts that offers Vacation
Intervals in each of the three principal price segments of the market (value,
upscale (characterized by high quality accommodations and service) and luxury
(characterized by elegant accommodations and personalized service)).
Sunterra Resorts. The Company's Sunterra Resorts, which are not affiliated
with any hotel chain, are positioned in the value price segment of the market.
Vacation Intervals at the Company's Sunterra Resorts (which include the All
Seasons Resorts and the PRG Resorts) generally sell for $6,000 to $15,000 and
are targeted to buyers with annual incomes ranging from $35,000 to $80,000.
The Company believes its Sunterra Resorts offer buyers an economical
alternative to resorts affiliated with brand-name lodging companies (such as
Embassy Vacation Resorts and Westin Vacation Club resorts) and traditional
vacation lodging alternatives.
Embassy Vacation Resorts. The Company's Embassy Vacation Resorts are
positioned in the upscale price segment of the market and are characterized by
high quality accommodations and service. Vacation Intervals at the Company's
three Embassy Vacation Resorts generally sell for $14,000 to $20,000 and are
targeted to buyers with annual incomes ranging from $60,000 to $150,000.
Embassy Vacation Resorts are designed to provide vacation ownership
accommodations that offer the same high quality and value that is represented
by the more
42
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than 135 Embassy Suites hotels throughout North America. Under the terms of an
exclusive five-year agreement, Promus and Vistana, Inc. will jointly acquire,
develop, manage and market vacation ownership resorts in North America under
Promus brand names. As part of the exclusive agreement, Promus and Vistana,
Inc. will designate selected markets for development (which markets currently
include Kissimmee, Florida and Myrtle Beach, South Carolina, and in markets
which Vistana, Inc. will have exclusive development rights). The Company is
not precluded from using the Embassy Vacation Resort name in connection with
resorts acquired during the term of the agreement in markets not otherwise
exclusive to Vistana, Inc. The Company is one of two licensees and operators
of Embassy Vacation Resorts, and is currently evaluating additional resorts
that could be operated as Embassy Vacation Resorts.
Westin Vacation Club Resorts. The Company's Westin Vacation Club resorts are
positioned in the luxury price segment of the market and are characterized by
elegant accommodations and personalized service. Vacation Intervals at Westin
Vacation Club resorts generally will sell for $16,000 to $25,000 and will be
targeted to buyers with annual incomes ranging from $80,000 to $250,000.
LSI's Grand Vacation Club. As a result of the LSI Acquisition, the Company
acquired LSI's Grand Vacation Club points-based system which LSI currently
markets to buyers principally in the United Kingdom. LSI's Grand Vacation Club
allows members to purchase an annual allotment of points that can be redeemed
for occupancy rights at LSI's 11 European resorts (the "LSI Resorts") and at
the club's other participating resorts. Points in LSI's Grand Vacation Club
can typically be purchased for approximately $215 a point. A typical one week
stay at an LSI Resort requires approximately 46 points.
43
<PAGE>
THE RESORTS
The following tables set forth certain information, as of September 30, 1997
regarding each of the Company's resorts owned at such date, including
location, date acquired by the Company, the number of existing and total
potential units at the resort and, where applicable, the number of Vacation
Intervals currently available for sale and occupancy and additional expansion
potential. Of the resorts set forth below, the Embassy Vacation Resort Poipu
Point and the North Bay Resort at Lake Arrowhead and the Westin Vacation Club
at St. John are partially owned by the Company. The exact number of units,
Vacation Intervals and Vacation Points ultimately achieved may differ from the
following estimates based on future land planning and site layout
considerations.
<TABLE>
<CAPTION>
VACATION INTERVAL
UNITS AT RESORT INVENTORY AT RESORT
------------------------------ ----------------------------------
DATE POTENTIAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(A) EXPANSION(B) TOTAL INVENTORY(C) EXPANSION(D) TOTAL
------ -------- -------- ---------- ------------ ----- ------------ ------------ -------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
SUNTERRA RESORTS:
Cypress Pointe Resort Lake Buena November 1992 224 276(e) 500 753 14,076(e) 14,829
Vista, Florida
Plantation at Fall Creek Branson, July 1993 114 286(f) 400 3 14,586(f) 14,589
Missouri
Royal Dunes Resort Hilton Head April 1994 40 15(g) 55 281 765(g) 1,046
Island, South
Carolina
Royal Palm Beach Club St. Maarten, July 1995 140 (h) 140 1,043 (h) 1,043
Netherlands
Antilles
Flamingo Beach Club St. Maarten, July 1995 172 85(i) 257 1,484 4,335(i) 5,819
Netherlands
Antilles
San Luis Bay Resort Avila Beach, June 1996 98 32(j) 130 1,546 1,632(j) 3,178
California
The Savoy at Miami Beach, August 1997 40 28(k) 68 2,040 1,428(k) 3,468
South Beach Florida
Scottsdale Villa Mirage Scottsdale,
Resort Arizona February 1997 64 104(l) 168 895 5,304(l) 6,199
The Ridge on Sedona
Golf Resort Sedona, Arizona February 1997 12 108(m) 120 246 5,508(m) 5,754
Sedona Springs Resort Sedona, Arizona February 1997 40 -- 40 21 -- 21
Sedona Summit Resort Sedona, Arizona February 1997 60 -- 60 792 -- 792
Villas of Poco Diablo Sedona, Arizona February 1997 33 -- 33 54 -- 54
Villas of Sedona Sedona, Arizona February 1997 40 -- 40 181 -- 181
North Bay Resort(n) Lake Arrowhead, February 1997 13 -- 13 34 -- 34
California
Tahoe Beach & Ski Club South Lake Tahoe, February 1997 140 -- 140 735 -- 735
California
Tahoe Seasons Resort South Lake Tahoe, February 1997 21(o) -- 21 210 -- 210
California
Villas on the Lake Lake Conroe,
Texas February 1997 37 64(p) 101 1,229 3,264(p) 4,493
Powhatan Plantation Williamsburg,
Virginia May 1997 405 95(q) 500 398 4,845(q) 5,243
Greensprings Plantation Williamsburg,
Virginia May 1997 58 442(r) 500 312 22,542(r) 22,854
----- ----- ----- ------ ------- -------
TOTAL............................................... 1,751 1,535 3,286 12,257 78,285 90,542
----- ----- ----- ------ ------- -------
EMBASSY VACATION RESORTS:
Poipu Point(s) Koloa, Kauai, November 1994 219(t) -- 219 8,826 -- 8,826
Hawaii
Grand Beach Orlando, Florida January 1995 126 248(u) 374 2,255 12,648(u) 14,903
Lake Tahoe South Lake Tahoe,
California May 1996 62 148(v) 210 2,074 7,548(v) 9,622
----- ----- ----- ------ ------- -------
TOTAL............................................... 407 396 803 13,155 20,196 33,351
WESTIN VACATION CLUB:
St. John(w) St. John, U.S.
Virgin Islands May 1997 48 48(x) 96 1,715 2,448(x) 4,163
----- ----- ----- ------ ------- -------
TOTAL............................................... 48 48 96 1,715 2,448 4,163
----- ----- ----- ------ ------- -------
LSI RESORTS -- -- 717 -- 717 1,915 -- 1,915(y)
MISCELLANEOUS N/A N/A -- -- -- 107 -- 107(z)
----- ----- ----- ------ ------- -------
TOTAL UNITS AND
VACATION INTERVALS...................................... 2,923 1,979 4,902 29,149 100,929 130,078
===== ===== ===== ====== ======= =======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
UNITS AT RESORT VACATION POINTS IN SYSTEM
------------------------------- -----------------------------------
DATE POTENTIAL CURRENT POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(aa) EXPANSION(bb) TOTAL INVENTORY(cc) EXPANSION(dd) TOTAL
- ------ -------- -------- ----------- ------------- ----- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LSI RESORTS:
Pine Lake Resort Lake District, England August 1997 112 -- 112
Woodford Bridge
Country
Club Devon, England August 1997 72 50 122
Wychnor Park
Country Club Midlands, England August 1997 44 20 64
Flanesford
Priory Midlands, England August 1997 16 -- 16
Los Amigos Beach
Club Costa Del Sol, Spain August 1997 140 50 190
Royal Oasis Club
at
La Quinta Costa Del Sol, Spain August 1997 68 -- 68 133,907 276,000 409,907
Royal Oasis Club
at
Benal Beach Costa Del Sol, Spain August 1997 108 -- 108
White Sands
Beach Club Menorca, Spain August 1997 48 -- 48
White Sands
Country Club Menorca, Spain August 1997 51 -- 51
Club del Carmen Lanzarote, Canary Islands August 1997 67 -- 67
Alpine Club Schladming, Austria August 1997 69 -- 69
--- --- ---
TOTAL UNITS AND
VACATION POINTS...................................... 795 120 915
=== === ===
</TABLE>
- -------
(a) Current units at each resort represents only those units that have
received their certificate of occupancy as of September 30, 1997. The
Company generally is able to sell 51 Vacation Intervals with respect to
each unit at its resorts (the 52nd week is generally utilized for
maintenance).
(b) Potential expansion units at each resort includes, as of September 30,
1997, (i) units currently under construction that have not yet received
their certificate of occupancy and (ii) units planned to be developed on
land currently owned by the Company or under option to be acquired which
have not yet received their certificate of occupancy and which are not
currently under construction.
(c) Current inventory of Vacation Intervals at each resort represents only
those unsold Vacation Intervals that have received their certificate of
occupancy as of September 30, 1997.
(d) Potential expansion of Vacation Intervals at each resort includes, as of
September 30, 1997, (i) Vacation Intervals currently under development
that have not yet received their certificate of occupancy and (ii)
Vacation Interval development potential on land currently owned by the
Company or under option to be acquired which have not yet received their
certificate of occupancy and which are not currently under construction.
(e) Includes an estimated 276 units which the Company plans to construct on
land which it owns at the Cypress Pointe Resort and for which all
necessary governmental approvals and permits (except building permits)
have been obtained. Should the Company elect to construct a higher
percentage of three bedroom units, rather than its current planned mix of
one, two and three bedroom units, the actual number of planned units will
be lower than is indicated above.
(f) Includes an estimated 286 units which the Company plans to construct on
land which it owns or is currently subject to a contract to purchase at
the Plantation at Fall Creek.
(g) Includes 15 units construction of which commenced in the second quarter of
1997 and for which all necessary governmental approvals and permits have
been received by the Company.
(h) The Company has not committed to any expansion of the Royal Palm Beach
Club. The Company is considering the acquisition of additional land
adjacent to the Royal Palm Beach Club for the addition of an estimated 60
units (and a corresponding number of Vacation Intervals) but has yet to
enter into an agreement with respect to such additional land or to obtain
the necessary governmental approvals and permits for such expansion.
(i) In May 1996 the Company acquired a five-acre parcel of land adjacent to
the Flamingo Beach Club on which the Company plans to develop
approximately 85 units (and create a corresponding number of Vacation
Intervals). The Company is in the process of seeking to obtain the
necessary governmental approvals and permits for such proposed expansion.
(j) The Company is considering the acquisition of additional land near the San
Luis Bay Resort for the addition of an estimated 100 units, but has yet to
enter into an agreement with respect to such land or to obtain any of the
necessary governmental approvals and permits for such proposed expansion.
In June 1996 the Company acquired approximately
45
<PAGE>
130 Vacation Intervals at the San Luis Bay Resort out of the bankruptcy
estate of Glen Ivy Resorts, Inc. In addition, the Company acquired
promissory notes in default that are secured by approximately 900 Vacation
Intervals. The Company intends to foreclose upon and acquire clear title to
such Vacation Intervals and intends to complete such foreclosure procedures
(or deed-in-lieu procedures) during 1997.
(k) Construction of an additional 28 units is scheduled for completion by the
second quarter of 1998.
(l) Includes 40 units and 64 units which are scheduled for completion in the
first quarter of 1998 and 1999, respectively. All necessary discretionary
approvals and permits have been received for all units to be constructed
at the Scottsdale Villa Mirage Resort.
(m) Construction began in December 1996 on The Ridge on Sedona Golf Resort,
which upon completion will consist of 120 units. The first 12 units and
clubhouse are scheduled for occupancy in the fourth quarter of 1997 and
have received all necessary discretionary governmental approvals and
permits. Governmental approvals and permits have not been sought or
received for the additional planned 108 units. Vacation Interval sales
began in May 1997.
(n) The Company owns or has the power to vote 80% of the partnership interests
of Trion Capital Corporation. Trion is the General Partner of Arrowhead
Capital Partners, L.P., which is the developer of North Bay Resort at Lake
Arrowhead. The General Partner is entitled to receive 1% of the profits of
Arrowhead Capital Partners, L.P., but under certain circumstances, is
entitled to receive substantially higher profits. All Seasons has an
exclusive sales and marketing contract for sales at North Bay, and is the
property manager of the resort. Although Arrowhead Capital Partners, L.P.
owns undeveloped land and buildings under construction at the North Bay
Resort at Lake Arrowhead, no definitive expansion plans have been made.
(o) Prior to being acquired by the Company, AVCOM purchased a portfolio of
1,057 defaulted consumer notes at the Tahoe Seasons Resort in March 1996
which are secured by Vacation Intervals. Of the notes purchased, 414 notes
have been converted to inventory of which 160 Vacation Intervals have been
sold by the Company and 41 of the notes have been reaffirmed by the
original buyers. The Company intends to foreclose on the remaining notes
and acquire clear title to the applicable Vacation Intervals.
(p) Villas on the Lake consists of 37 existing units purchased in February
1996 currently in the final phase of renovation. Land included in the
initial purchase is able to accommodate construction of an additional
64 units in Phase II. The Phase II construction start date has not yet
been determined, however, all necessary discretionary governmental
approvals and permits (excluding building permits which have not yet been
applied for) have been received for such additional 64 units.
(q) Includes 14 units which are currently under construction and are scheduled
for occupancy during the first quarter of 1998. The Company has received
all necessary discretionary governmental approvals and permits with
respect to such 14 units, excepting certificates of occupancy. The
Company's development schedule for the remaining 81 units will be
determined based on market demand and other factors.
(r) Includes 30 units which are currently under construction and are scheduled
for occupancy during the first quarter of 1998. The Company has received
all necessary discretionary governmental approvals and permits with
respect to such 30 units, excepting certificates of occupancy. The
Company's development schedule for the remaining 412 units will be
determined based on market demand and other factors.
(s) The Company acquired a 30.43% partnership interest in the Embassy Vacation
Resort Poipu Point in November 1994. The Company owns, directly or
indirectly, 100% of the partnership interests in one of the two co-
managing general partners of Poipu Resort Partners L.P., a Hawaii limited
partnership ("Poipu Partnership"), the partnership which owns the Embassy
Vacation Resort Poipu Point. The managing general partner owned by the
Company holds a 0.5% partnership interest for purposes of distributions,
profits and losses. The Company also holds, directly or indirectly, a
29.93% limited partnership interest in the Poipu Partnership for purposes
of distributions, profits and losses, for a total partnership interest of
30.43%. In addition, following repayment of any outstanding partner loans,
the Company, directly or indirectly, is entitled to receive a 10% per
annum return on the Founders' and certain former limited partners' initial
capital investment of approximately $4.6 million in the Poipu Partnership.
After payment of such preferred return and the return of approximately
$4.6 million of capital to the Company, directly or indirectly, on a
46
<PAGE>
pari passu basis with the other general partner in the partnership, the
Company, directly or indirectly, is entitled to receive approximately 50%
of the net profits of the Poipu Partnership. In the event certain internal
rates of return specified in the Poipu Partnership agreement are achieved,
the Company, directly or indirectly, is entitled to receive approximately
55% of the net profits of the Poipu Partnership.
(t) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(u) The Company has received all necessary discretionary governmental
approvals and permits to construct an additional estimated 248 units on
land which it owns at the Embassy Vacation Resort Grand Beach (excluding
building permits which have not yet been applied for by the Company). The
Company plans to apply for and obtain these building permits on a
building-by-building basis.
(v) The Company has received all necessary discretionary governmental
approvals and permits (excluding building permits which the Company
intends to apply for and obtain on a phase-by-phase basis) to construct an
additional estimated 148 units on land that it owns at the Embassy
Vacation Resort Lake Tahoe. The Company commenced construction on 40 of
such units in the first quarter of 1997 and, subject to market demand,
currently plans to construct an additional 40 of such units commencing in
the second quarter of each year from 1998 through 1999 and the remaining
28 units commencing in May 2000.
(w) The Company owns 50% of the entity which has acquired the unsold Vacation
Intervals at this resort. The acquisition closed in May of 1997 and
commencement of Vacation Interval sales is anticipated to begin by the
fourth quarter of 1997.
(x) Includes 48 units which are currently available for occupancy. With
respect to such 48 units, 36 of such units have received all necessary
discretionary governmental approvals and permits necessary to commence
Vacation Interval sales and the Company plans to file the necessary
documentation to receive such approvals with respect to the remaining 12
of such units. Also includes an additional 48 units which will require the
installation of utilities, furniture, fixtures and equipment and interior
finishes before occupancy. The Company currently anticipates completing
the renovation of such 48 additional units by the fourth quarter of 1997.
The Company also owns adjacent land at the St. John resort which will
accommodate the development of additional units but with respect to which
no permits or approvals have been sought or obtained. The Company has not
yet determined the number of potential additional units which may be
constructed on such adjacent land or the timing of such potential
development.
(y) Represents the aggregate number of units and Vacation Intervals (as
opposed to Vacation Points) at the Company's LSI Resorts.
(z) Represents vacation intervals at resorts not owned by the Company which
were received by the Company in exchange for Vacation Intervals at the
Company's resorts. The Company intends to sell such vacation intervals.
(aa) Current units at each resort represents only those units that have
received their certificate of occupancy (or other equivalent certificate)
as of September 30, 1997. LSI generally is able to sell points
representing 50 weeks with respect to each unit at its resorts (the 51st
and 52nd weeks are generally utilized for maintenance).
(bb) Potential expansion units at each resort includes, as of September 30,
1997, (i) units currently under construction that have not yet received
their certificate of occupancy (or other equivalent certificate) and
(ii) units planned to be developed on land currently owned by LSI or
under option to be acquired which have not yet received their certificate
of occupancy (or other equivalent certificate) and which are not
currently under construction.
(cc) Current inventory of Vacation Points represents, as of September 30,
1997, the number of unsold Vacation Points in LSI's vacation club system,
as well as the number of points allocable to current unit inventory owned
by LSI but not yet contributed to LSI's vacation club system.
(dd) Potential expansion Vacation Points represents, as of September 30, 1997,
the estimated number of Vacation Points assignable to potential expansion
units at the 11 existing LSI Resorts.
47
<PAGE>
The following table sets forth certain information, as of September 30, 1997
with respect to the Company's resorts. All of the units are fully-furnished,
including telephones, televisions, VCRs and stereos, and all but the studio
units feature full kitchens. Most of the units contain a washer and dryer,
microwave and private outdoor barbecue grill. Many units also include a
private deck.
<TABLE>
<CAPTION>
TYPES OF UNITS RESORT AMENITIES
OFFERED --------------------------------------
------------------- SWIMMING WHIRLPOOL/ RESTAURANT/
RESORTS LOCATION S 1BR 2BR 3BR 4BR TENNIS POOL JACUZZI LOUNGE
- ------- ------------------------- --- --- --- --- --- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUNTERRA RESORTS:
Cypress Pointe Resort Lake Buena Vista, Florida X X X X X X X
Plantation at Fall
Creek Branson, Missouri X X X X X X X
Royal Dunes Resort Hilton Head Island,
South Carolina X X X
Royal Palm Beach Club St. Maarten, Netherlands
Antilles X X X X X
Flamingo Beach Club St. Maarten, Netherlands
Antilles X X X X X
San Luis Bay Resort Avila Beach, California X X X X X
The Savoy at South
Beach Miami Beach, Florida X X X X X
Scottsdale Villa Mirage
Resort Scottsdale, Arizona X X X X X X
The Ridge on Sedona
Golf Resort Sedona, Arizona X X X X X X X
Sedona Springs Resort Sedona, Arizona X X X X X
Sedona Summit Resort Sedona, Arizona X X X X X
Villas of Paco Diablo Sedona, Arizona X X X X
Villas of Sedona Sedona, Arizona X X X X X
North Bay Resort Lake Arrowhead,
California X X X X X
Tahoe Beach and Ski South Lake Tahoe,
Club California X X X X X X X
Tahoe Seasons Resort South Lake Tahoe,
California X X X X
Villas on the Lake Lake Conroe, Texas X X X
Powhatan Plantation Williamsburg, Virginia X X X X X X X
Greensprings Plantation Williamsburg, Virginia X X X X X
EMBASSY VACATION
RESORTS:
Poipu Point Koloa, Kauai, Hawaii X X X X X
Grand Beach Orlando, Florida X X X
Lake Tahoe South Lake Tahoe,
California X X X X X
WESTIN VACATION CLUB:
St. John St. John, U.S. Virgin
Islands X X X X X X X X
LSI RESORTS:
Pine Lake Resort Lake District, England X X X X X X
Woodford Bridge Country
Club Devon, England X X X X X X
Wychnor Park Country
Club Midlands, England X X X X X X
Flanesford Priory Midlands, England X X X X
Los Amigos Beach Club Costa Del Sol, Spain X X X X X X X X
Royal Oasis Club at La
Quinta Costa Del Sol, Spain X X X X X
Royal Oasis Club at
Benal Beach Costa Del Sol, Spain X X X X X
White Sands Beach Club Menorca, Spain X X X X X X
White Sands Country
Club Menorca, Spain X X X X
Club del Carmen Lanzarote, Canary Islands X X X X X
Alpine Club Schladming, Austria X X X X X X X
</TABLE>
EMBASSY VACATION RESORTS
Capitalizing on two of the Company's Founders' relationship with Promus as a
developer and owner of Embassy Suites hotels, in 1994 the Company and Promus
established Embassy Vacation Resorts. However, the Company has no ownership of
or rights to the "Embassy Vacation Resorts" name or servicemark, both of which
are owned exclusively by Promus, except as set forth in the Company's license
agreements with Promus with respect to the Company's Embassy Vacation Resorts.
Under Promus's exclusive development agreement with Vistana, Inc., Promus has
identified the Company as the only other licensee to whom Promus may license
the
48
<PAGE>
Embassy Vacation Resort name. There can be no assurance that Promus will
license the Embassy Vacation Resort name to the Company with respect to
possible future resorts. On January 7, 1997, Promus announced that it intended
to expand its branded vacation ownership business with only the Company and
Vistana and that additional Embassy Vacation Resort properties to be developed
or acquired by the Company and licensed by Promus are under discussion.
The Company seeks to attract potential Vacation Interval buyers at its
Embassy Vacation Resorts by targeting past and present Embassy Suites' hotel
guests with in-hotel marketing and direct marketing programs. These marketing
efforts offer this target audience of Embassy Suites hotel guests value-priced
vacation packages which include resort tours and the opportunity to purchase
complete vacations, including accommodations, airfare and other vacation
components such as car rental. Additionally, the Company has the ability to
generate resort tours through Embassy Suites' central reservation system by
offering a premium for a resort tour at the time a guest reserves an Embassy
Suites hotel in the vicinity of an Embassy Vacation Resort property. The
Company believes its access to the Embassy Suites customer base allows it to
generate Vacation Interval sales from these prospective customers at a lower
cost than through other lead generation methods. Because a high percentage of
such customers already have a preference for the Embassy brand, the Company
believes it achieves relatively high sales closing percentages among these
customers.
The Embassy Vacation Resort Poipu Point is owned by the Poipu Partnership,
which consists of the Company and a third party. The Poipu Partnership
requires partner consents for major decisions including approval of budgets,
capital contributions and entry into material agreements. If the Company and
its partner are unable to agree on major decisions, either partner may elect
to invoke a buy/sell right, which could require the Company to either sell its
interest in the Embassy Vacation Resort Poipu Point or to buy out the interest
of its partner at a time when the Company is not prepared to do so. In
addition, under certain circumstances, the other partner can require the
Company to purchase such partner's interest or sell its interest to the
partner.
WESTIN VACATION CLUB RESORTS
The Company and Westin have entered into the Westin Agreement pursuant to
which the Company has acquired the exclusive right to jointly acquire, develop
and sell with Westin "four-star" and "five-star" Westin Vacation Club resorts
in North America, Mexico and the Caribbean for a five year term expiring May
3, 2001. Pursuant to the Westin Agreement, each of the Company and Westin will
own a 50% equity interest in the ventures that own such resorts and have an
equal voice in the management of such ventures. Each of the Company and Westin
has agreed that, subject to certain exceptions, including certain Embassy
Vacation Resort acquisition and development opportunities, it will present to
the other party all "four-star" and "five-star" hotel and resort acquisition
and development opportunities (e.g., properties that are flagged by brands
such as Disney, Marriott, Omni, Ritz Carlton, Four Seasons/Regent, Inter-
Continental and Meridien) that it has determined to pursue and such other
party has a right of first refusal to determine whether to jointly develop
such opportunities with the other party, subject to the foregoing exclusions.
Westin and the Company intend to form a separate partnership, limited
liability company or similar entity to develop and operate each Westin
Vacation Club resort, of which Westin and the Company shall be co-general
partners or co-managers, as applicable. Each of the Company and Westin will
contribute 50% of the equity needed to develop and operate each Westin
Vacation Club resort. Pursuant to the Westin Agreement, Westin has the right
to manage all Westin Vacation Club resorts and the Company and Westin will
share the profits from such management activity.
49
<PAGE>
Pursuant to the Westin Agreement, the Company has agreed to make available
to Westin one voting seat on the Company's Board of Directors and has agreed
to use maximum reasonable efforts to cause the nomination and election of
Westin's designee. Westin has agreed to make available to the Company one non-
voting seat on its Board of Directors which will be filled by one of the
Founders and is presently filled by Osamu Kaneko. Following any public
offering of equity securities by Westin, the Company's seat on Westin's board
will become a voting seat, entitled to all reciprocal provisions granted by
the Company to Westin.
In May 1997, the Company and Westin jointly acquired the Westin Vacation
Club resort in St. John, U.S. Virgin Islands. The "four-star" Westin Vacation
Club at St. John involves a conversion of the existing St. John Villas,
located adjacent to the Great Cruz Bay Resort Hotel (formerly known as the
Hyatt Regency St. John) which will be operated as a Westin Hotel. Pursuant to
a purchase and sale agreement with subsidiaries of Skopbank, a Finnish
corporation, Westin acquired a 100% interest in the hotel and the Company and
Westin formed the Westin Partnership owned 50% by each of the Company and
Westin to acquire an interest in the 96 units at the St. John Villas,
representing 4,163 Vacation Intervals (the number of unsold Vacation Intervals
remaining at the St. John Villas), which will be operated as the Westin
Vacation Club resort at St. John. Of the $10.5 million purchase price for the
remaining unsold Vacation Intervals at the St. John Villas, each of the
Company and Westin is obligated to contribute approximately $2.5 million in
cash, with the remaining $5.5 million of the acquisition price to be paid by
the Westin Partnership (which amount was loaned to the partnership by the
Company in the first quarter of 1997). In addition, the Westin Partnership
will borrow approximately $7.1 million to complete the conversion of the St.
John Villas to a Westin Vacation Club resort.
Commencement of Vacation Interval sales began in September 1997. Located
adjacent to the beachfront hotel, the St. John Villas consist of 96 studio,
one bedroom, two bedroom and three bedroom units located on 12.3 hillside
acres, of which 48 units are completed and ready for immediate occupancy. The
additional 48 units currently require construction of all interior finishes
and installation of furniture, fixtures and equipment prior to occupancy.
The Westin Agreement will be terminable by either party if certain
thresholds relating to development or acquisitions of resorts are not met, in
the event of certain changes in management of Westin or the Company or in the
event of an acquisition or merger of either party. As a result of the pending
closing of the merger of Westin into Starwood Lodging Trust and Starwood
Lodging Corp., the Company and Westin have begun discussions regarding whether
to modify the exclusive agreement between the Company and Westin to acquire,
develop and market four and five star vacation ownership resorts in North
America, Mexico and the Caribbean (the "Territory"). The discussions include
whether to modify the agreement to make the relationship a non-exclusive one,
and whether to continue to have a representative from the Company and Westin
serve on each other's Board of Directors. As written, the existing exclusive
agreement limits the Company's ability to develop four and five star vacation
ownership resorts in the Territory with hotel and resort companies that are
competitors of Westin and simultaneously limits Westin's ability to develop
four and five star vacation ownership resorts in the Territory with anyone
other than the Company. If the parties elect to modify the Westin Agreement to
make it non-exclusive, the Company and Westin will each be free to pursue four
and five star vacation ownership acquisition and development opportunities in
the Territory either alone, with each other or with other luxury hotel and
resort companies. In that event, it would be the Company's intention to
continue to work to expand its four and five star vacation ownership resorts
in a variety of ownership structures, including as Westin Vacation Clubs in
joint venture with Westin (subject to Westin's approval of the specific
project); as Sunterra Resorts; and as other luxury hotel and resort company
brands. In any event, the parties currently intend to continue their existing
joint venture in St. John, U.S. Virgin Islands. See "Risk Factors--Risks
Related to Westin Agreement; limited control of Resorts and Termination."
CUSTOMER FINANCING
A typical Vacation Interval entitles the buyer to a one-week per year stay
at one of the Company's resorts and ranges in price from approximately $6,000
to $8,000 for a studio residence to approximately $12,000 to $26,000 for a
three bedroom residence. The Company offers consumer financing to the
purchasers of Vacation Intervals in the Company's resorts who make a down
payment generally equal to at least 10% of the purchase price. This financing
generally bears interest at fixed rates and is collateralized by a first
mortgage on the
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<PAGE>
underlying Vacation Interval. A portion of the proceeds of such financing is
used to obtain releases of the Vacation Interval unit from outstanding
construction loans, if any.
The Company has entered into agreements with lenders for the Company's
financing of customer receivables. At September 30, 1997, these agreements
provided an aggregate of up to approximately $280.0 million of available
financing to the Company bearing interest at variable rates tied to either the
prime rate or LIBOR of which the Company had at September 30, 1997
approximately $198.8 million of additional borrowing capacity available.
At September 30, 1997, the Company's mortgage portfolio included
approximately 34,485 consumer loans totaling approximately $315 million, with
a stated maturity of seven to ten years and a weighted average interest rate
of 15% per annum. As of September 30, 1997, approximately 3.6% of the
Company's consumer loans were considered by the Company to be delinquent (past
due by 60 or more days). The Company had completed or commenced foreclosure or
deed-in-lieu of foreclosure (which is typically commenced once a loan is more
than 120 days past due) on an additional approximately 1.8% of its consumer
loans. As of September 30, 1997, the Company's allowance for doubtful accounts
as a percentage of gross mortgages receivable was 6.5%, which management
believes is an adequate reserve for expected loan losses. The Company has
historically derived income from its financing activities. Because the
Company's borrowings bear interest at variable rates and the Company's loans
to purchasers of Vacation Intervals bear interest at fixed rates, the Company
bears the risk of increases in interest rates with respect to the loans it has
from its lenders. The Company may engage in interest rate hedging activities
from time to time in order to reduce the risk and impact of increases in
interest rates with respect to such loans, but there can be no assurance that
any such hedging activity will be adequate at any time to fully protect the
Company from any adverse changes in interest rates.
The Company also bears the risk of purchaser default. The Company's practice
has been to continue to accrue interest on its loans to purchasers of Vacation
Intervals until such loans are deemed to be uncollectible (which is generally
120 days after the date such loans are due), at which point it expenses the
interest accrued on such loan, commences foreclosure proceedings and, upon
obtaining title, returns the Vacation Interval to the Company's inventory for
resale. The Company closely monitors its loan accounts and determines whether
to foreclose on a case-by-case basis.
LSI currently contracts with a third-party bank to provide financing to
purchasers of points in its Grand Vacation Club. LSI is paid an upfront
commission of approximately 13% of the principal amount of eligible consumer
loans.
SALES AND MARKETING
As one of the leading developers and operators of vacation ownership resorts
in North America, the Company believes that it has acquired the skill and
expertise in the development, management and operation of vacation ownership
resorts and in the marketing of Vacation Intervals. The Company's primary
means of selling Vacation Intervals is through on-site sales forces at each of
its resorts. A variety of marketing programs are employed to generate
prospects for these sales efforts, which include targeted mailings, overnight
mini-vacation packages, gift certificates, seminars and various destination-
specific local marketing efforts. Additionally, incentive premiums are offered
to guests to encourage resort tours, in the form of entertainment tickets,
hotel stays, gift certificates or free meals. The Company's sales process is
tailored to each prospective buyer based upon the marketing program that
brought the prospective buyer to the resort for a sales presentation.
Prospective target customers are identified through various means of
profiling, and are intended to include Westin Vacation Club and Embassy Suites
hotel guests and current owners of vacation ownerships. Cross-marketing
targets current owners of Vacation Intervals at the Company's resorts, both to
sell additional Vacation Intervals at the owner's home resort, or to sell a
Vacation Interval at another of the Company's resorts. The Company also sells
Vacation Intervals through off-site sales centers.
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ACQUISITION PROCESS
The Company obtains information with respect to resort acquisition
opportunities through interaction by the Company's management team with resort
operators, real estate brokers, lodging companies or financial institutions
with which the Company has established business relationships. From time to
time the Company is also contacted by lenders and property owners who are
aware of the Company's development, management, operations and sales expertise
with respect to Vacation Interval properties.
The Company has expertise in all areas of resort development including, but
not limited to, architecture, construction, finance, management, operations
and sales. With relatively little lead time, the Company is able to analyze
potential acquisition and development opportunities. After completing an
analysis of the prospective market and the general parameters of the property
or the site, the Company generates a conceptual design to determine the extent
of physical construction or renovation that can occur on the site in
accordance with the requirements of the local governing agencies. For most
properties, the predominant factors in determining the physical design of the
site include density of units, maximum construction height, land coverage and
parking requirements. Following the preparation of such a conceptual design,
the Company analyzes other aspects of the development process, such as
construction cost and phasing, to match the projected sales flow in the
relevant market. At this stage of analysis, the Company compares sales,
construction cost and phasing, debt and equity structure, cash flow, financing
and overall project cost to the acquisition cost. The Company's procedures
when considering a potential acquisition are generally set forth below.
Economic and Demographic Analysis. To evaluate the primary economic and
demographic indicators for the resort area, the Company considers the
following factors, among others, in determining the viability of a potential
new vacation ownership resort in a particular location: (i) supply/demand
ratio for Vacation Intervals in the relevant market, (ii) the market's growth
as a vacation destination, (iii) the ease of converting a hotel or condominium
property into a vacation ownership resort, (iv) the availability of additional
land at or nearby the property for future development and expansion, (v)
competitive accommodation alternatives in the market, (vi) uniqueness of
location, and (vii) barriers to entry that would limit competition. The
Company examines the competitive environment in which the proposed resort is
located and all existing or to-be-developed resorts. In addition, information
respecting characteristics, amenities and financial information at competitive
resorts is collected and organized. This information is used to assess the
potential to increase revenues at the resort by making capital improvements.
Pro Forma Operating Budget. The Company develops a comprehensive pro forma
budget for the resort, utilizing available financial information in addition
to the other information collected from a variety of sources. The estimated
sales of units are examined, including the management fees associated with
such unit. Finally, the potential for overall capital appreciation of the
resort is reviewed, including the prospects for obtaining liquidity through
sale or refinancing of the resort.
Environmental and Legal Review. In conjunction with each prospective
acquisition or development, the Company conducts real estate and legal due
diligence on the property. This due diligence includes an environmental
investigation and report by a reputable environmental consulting firm,
including tests on identified underground storage tanks. If recommended by the
environmental consulting firm, additional testing is generally conducted. The
Company also obtains a land survey of the property and inspection reports from
licensed engineers or contractors on the physical condition of the resort. In
addition, the Company conducts customary real estate due diligence, including
the review of title documents, operating leases and contracts, zoning, and
governmental permits and licenses and a determination of whether the property
is in compliance with applicable laws.
OTHER OPERATIONS
Room Rental Operations. In order to generate additional revenue at certain
of its resorts that have rentable inventory of Vacation Intervals, the Company
rents units with respect to such unsold or unused Vacation Intervals for use
as a hotel. The Company offers these unoccupied units both through direct
consumer sales,
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travel agents or vacation package wholesalers. In addition to providing the
Company with supplemental revenue, the Company believes its room-rental
operations provide it with a good source of lead generation for the sale of
Vacation Intervals. As part of the management services provided by the Company
to Vacation Interval owners, the Company receives a fee for services provided
to rent an owner's Vacation Interval in the event the owner is unable to use
or exchange the Vacation Interval. In addition, the Embassy Vacation Resort
Poipu Point (acquired in November 1994) was acquired as a traditional hotel
with the intention of converting each such resort to a vacation ownership
property. Until such time as a unit at each resort is sold as Vacation
Intervals, the Company continues (or will continue) to rent such unit on a
nightly basis. In the future, other acquired resorts may be operated in this
fashion during the start-up of Vacation Interval sales.
Resort Management. The Company's resorts are (i) generally managed by the
Company pursuant to management agreements with homeowner associations with
respect to each of the Company's Sunterra Resorts or (ii) managed by Promus
pursuant to management agreements with the Company with respect to the
Company's Grand Beach and Lake Tahoe Embassy Vacation Resorts. The Company
pays Promus a licensing fee of 2% of Vacation Interval sales at the Embassy
Vacation Resorts. Westin manages Westin Vacation Club resorts.
At each of the Company's Sunterra Resorts, the Company enters into a
management agreement with an association comprised of owners of Vacation
Intervals at the resort to provide for management and maintenance of the
resort. Pursuant to each such management agreement the Company is paid a
monthly management fee equal to 10% to 12% of monthly maintenance fees. The
management agreements are typically for a three year period, renewable
annually automatically unless notice of non-renewal is given by either party.
Pursuant to each management agreement the Company has sole responsibility and
exclusive authority for all activities necessary for the day-to-day operation
of the Sunterra Resorts, including administrative services, procurement of
inventories and supplies and promotion and publicity. With respect to each
resort the Company also obtains comprehensive and general public liability
insurance, all-risk property insurance, business interruption insurance and
such other insurance as is customarily obtained for similar properties. The
Company also provides all managerial and other employees necessary for the
Sunterra Resorts, including review of the operation and maintenance of the
resorts, preparation of reports, budgets and projections, employee training,
and the provision of certain in-house legal services. At the Company's Grand
Beach and Lake Tahoe Embassy Vacation Resorts, Promus provides these services.
At the Embassy Vacation Resort Poipu Point, Aston provides management and
maintenance services to the Company pursuant to a management agreement and
assumes responsibility of such day-to-day operation of the Embassy Vacation
Resorts.
LSI manages each resort in its Grand Vacation Club pursuant to contracts
which typically provide for a management fee of 15% of monthly maintenance
fees to be paid to LSI.
VACATION INTERVAL OWNERSHIP
The purchase of a Vacation Interval typically entitles the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year,
in perpetuity. Typically, the buyer acquires an ownership interest in the
vacation residence, which is often held as tenant in common with other buyers
of interests in the property.
The owners of Vacation Intervals manage the property through a non-profit
homeowners' association, which is governed by a Board consisting of
representatives of the developer and owners of Vacation Intervals at the
resort. The Board hires an agent, delegating many of the rights and
responsibilities of the homeowners' association to a management company, as
described above, including grounds landscaping, security, housekeeping and
operating supplies, garbage collection, utilities, insurance, laundry and
repair and maintenance.
Each Vacation Interval owner is required to pay the homeowners' association
a share of all costs of maintaining the property. These charges can consist of
an annual maintenance fee plus applicable real estate taxes (generally $300 to
$700 per interval) and special assessments, assessed on an as-needed basis. If
the owner does not pay such charges, the owner's use rights may be suspended
and the homeowners' association may foreclose on the owner's Vacation
Interval.
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For a description of the general terms of a points-based vacation club
system, see "--Business Strategy-- Development of Points-Based Vacation Club
System."
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORKS
The Company believes that its Vacation Intervals are made more attractive by
the Company's participation in Vacation Interval exchange networks operated by
RCI and II. In addition, LSI's Grand Vacation Club points system is affiliated
with II. In a 1995 study sponsored by the Alliance for Timeshare Excellence
and ARDA, the exchange opportunity was cited by purchasers of Vacation
Intervals as one of the most significant factors in determining whether to
purchase a Vacation Interval. Participation in RCI and II allows the Company's
customers to exchange in a particular year their occupancy right in the unit
in which they own a Vacation Interval for an occupancy right at the same time
or a different time in another participating resort, based upon availability
and the payment of a variable exchange fee. A member may exchange his Vacation
Interval for an occupancy right in another participating resort by listing his
Vacation Interval as available with the exchange organization and by
requesting occupancy at another participating resort, indicating the
particular resort or geographic area to which the member desires to travel,
the size of the unit desired and the period during which occupancy is desired.
Both RCI and II assign ratings to each listed Vacation Interval, based upon a
number of factors, including the location and size of the unit, the quality of
the resort and the period during which the Vacation Interval is available, and
attempts to satisfy the exchange request by providing an occupancy right in
another Vacation Interval with a similar rating. If RCI or II is unable to
meet the member's initial request, it suggests alternative resorts based on
availability.
Founded in 1974, RCI has grown to be the world's largest Vacation Interval
exchange organization, which has a total of more than 2,900 participating
resort facilities and over 2.0 million members worldwide. During 1995 RCI
processed over 1.5 million Vacation Interval exchanges. The cost of the annual
membership fee in RCI, which typically is at the option and expense of the
owner of the Vacation Interval, is $65 per year, plus an exchange fee of $89
and $119 for domestic and international exchanges, respectively. RCI has
assigned high ratings to the Vacation Intervals in the Company's resort
properties, and such Vacation Intervals have in the past been exchanged for
Vacation Intervals at other highly-rated member resorts. During 1995,
approximately 97% of all exchange requests were fulfilled by RCI, and
approximately 58% of all exchange requests are confirmed on the day of the
request. In November 1996, HFS Incorporated consummated the acquisition of RCI
for cash and securities.
Established in 1976, II has more than 1,400 participating resort facilities
and over 750,000 members worldwide. The cost of the annual membership fee in
II, which typically is at the option and expense of the owner of the Vacation
Interval, is $66 per year, plus an exchange fee of $94 and $104 for domestic
and international exchanges, respectively. II has assigned high ratings to the
Vacation Intervals in the Company's resort properties, and such Vacation
Intervals have in the past been exchanged for Vacation Intervals at other
highly-rated member resorts.
FUTURE ACQUISITIONS
The Company intends to expand its vacation ownership business by acquiring
or developing resorts located in attractive resort destinations, and is in the
process of evaluating strategic acquisitions in a variety of locations. Such
future acquisitions and development of resorts could have a substantial and
material impact on the Company's operations and prospects. The Company
currently is evaluating possible acquisitions of resorts and development
opportunities, including opportunities located in Southern and Northern
California, the Hawaiian islands of Hawaii, Maui and Oahu, the Caribbean,
Mexico, the Western, Southwestern and Southeastern United States (including
Florida, Arizona, Utah and Colorado) as well as in Europe and Asia. In
addition, the Company has also explored the acquisition of and may consider
acquiring existing management companies, vacation ownership developers and
marketers, loan portfolios or other industry related operations or assets in
the fragmented vacation ownership development, marketing, finance and
management industry.
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COMPETITION
Although major lodging and hospitality companies such as Marriott, Disney,
Hilton, Hyatt, Four Seasons and Inter-Continental, as well as Promus and
Westin, have established or declared an intention to establish vacation
ownership operations in the past decade, the industry remains largely
unbranded and highly fragmented, with a vast majority of North America's
approximately 2,000 vacation ownership resorts being owned and operated by
smaller, regional companies. Of the Company's major brand name lodging company
competitors, the Company believes, based on RCI reports and the Company's
extensive knowledge of the industry, that Marriott currently sells Vacation
Intervals at 12 resorts which it also owns and operates and directly competes
with the Company's Poipu Point, Hilton Head Island, Williamsburg and Orlando
area resorts; Disney currently sells Vacation Intervals at four resorts which
it also owns and operates and directly competes with the Company's Orlando
area and Hilton Head Island resorts; Hilton currently sells Vacation Intervals
at two resorts which it also owns and operates and directly competes with the
Company's Orlando area resorts; Hyatt owns and operates two resorts in Key
West, Florida and one in Beaver Creek, Colorado, but does not directly compete
in any of the Company's existing markets; Four Seasons began sales of Vacation
Interval at its first vacation ownership resort in Carlsbad, California; and
Inter-Continental has announced its entry into the vacation ownership market
but has yet to commence sales of Vacation Intervals. Many of these entities
possess significantly greater financial, marketing, personnel and other
resources than those of the Company and may be able to grow at a more rapid
rate than the Company as result.
The Company also competes with companies with non-branded resorts such as
Westgate, Vistana, Inc. and Vacation Break USA, Inc. (each of which competes
with the Company's Orlando area resorts), Fairfield Communities (which
recently announced plans to acquire Vacation Break USA, Inc. and which
currently competes with the Company's Orlando area, Williamsburg and Branson
resorts) and ILX Incorporated (which competes with the Company's Sedona,
Arizona resorts). Under the terms of a recently announced exclusive five-year
agreement, Promus and Vistana, Inc. will jointly acquire, develop, manage and
market vacation ownership resorts in North America under Promus brand names.
As part of the exclusive agreement, Promus and Vistana, Inc. will designate
selected markets for development (which markets currently include Kissimmee,
Florida and Myrtle Beach, South Carolina, and in which markets Vistana, Inc.
will have exclusive development rights). The Company is not precluded from
using the Embassy Vacation Resort name in connection with resorts acquired
during the term of the agreement in markets not otherwise exclusive to
Vistana, Inc. The Company has been identified by Promus as the only other
licensee to whom Promus may license the Embassy Vacation Resort name. There
can be no assurance that Promus will not grant other entities a license to
develop Embassy Vacation Resorts or that Promus will not exercise its rights
to terminate the Embassy Vacation Resort licenses.
As a result of the LSI Acquisition, the Company is also subject to
competition in the European vacation ownership market, which is very
fragmented. In addition to LSI, there are two other operators in Europe
operating multi-resort points clubs -- Global Group and Club la Costa. LSI
also has competition from individual vacation ownership resorts (including
Marriott) in several of the areas in which it operates.
In addition, the Company also competes with the buyers of its Vacation
Intervals who subsequently decide to resell those intervals. While the Company
believes, based on experience at its resorts, that the market for resale of
Vacation Intervals by buyers is presently limited, such resales are typically
at prices substantially less than the original purchase price. The market
price of Vacation Intervals sold by the Company at a given resort or by its
competitors in the market in which each resort is located could be depressed
by a substantial number of Vacation Intervals offered for resale.
In the event that the Westin Agreement becomes the subject of dispute
between the parties thereto, it is possible that the Company's interest in
pursuing acquisition and development opportunities at "four-star" and "five-
star" resorts located in North America, Mexico and the Caribbean through May
2001 could be barred pending the final resolution of such dispute.
Additionally, at the expiration or early termination of the Westin Agreement,
Westin could become a direct competitor with the Company in the vacation
ownership resort business, including in the markets most attractive to the
Company. See "Risk Factors--Risks Related to Westin Agreement; Limited Control
of Resorts and Termination." In addition, the Embassy Suites hotels owned or
controlled by
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affiliates of the Company's Founders may compete with certain of the Company's
vacation ownership resorts; however, the Company anticipates that such Embassy
Suites hotels could be a significant source of lead generation for its
marketing activities. Subject to certain covenants not to compete, the
Company's Founders could acquire resort and other hotel properties that could
compete with the Company's vacation ownership business.
The Company believes, based on ARDA and RCI reports and the Company's
extensive knowledge of the industry, that its experience and exclusive focus
on the vacation ownership industry, together with its portfolio of resorts
located in a wide range of resort destinations and at a variety of price
points, distinguish it from each of its competitors and that the Company is
uniquely positioned for future growth.
GOVERNMENTAL REGULATION
General. The Company's Vacation Interval marketing and sales are subject to
extensive regulations by the federal government and the states and foreign
jurisdictions in which its resort properties are located and in which Vacation
Intervals are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may
be subject appears on the Truth-In-Lending Act and Regulation Z, the Equal
Credit Opportunity Act and Regulation B, the Interstate and Land Sales Full
Disclosure Act, Telephone Consumer Protection Act, Telemarketing and Consumer
Fraud and Abuse Prevention Act, Fair Housing Act and the Civil Rights Act of
1964 and 1968. In addition, many states have adopted specific laws and
regulations regarding the sale of Vacation Interval ownership programs. The
laws of most states, including Florida, South Carolina and Hawaii require the
Company to file with a designated state authority for its approval a detailed
offering statement describing the Company and all material aspects of the
project and sale of Vacation Intervals. The laws of California require the
Company to file numerous documents and supporting information with the
California Department of Real Estate, the agency responsible for the
regulation of Vacation Intervals. When the California Department of Real
Estate determines that a project has complied with California law, it will
issue a public report for the project. The Company is required to deliver an
offering statement or public report to all prospective purchaser of a Vacation
Interval, together with certain additional information concerning the terms of
the purchase. The laws of Illinois, Florida, Hawaii and Virginia impose
similar requirements. Laws in each state where the Company sells Vacation
Intervals generally grant the purchaser of a Vacation Interval the right to
cancel a contract of purchase at any time within a period ranging from 3 to 15
calendar days following the earlier of the date the contract was signed or the
date the purchaser has received the last of the documents required to be
provided by the Company. Most states have other laws which regulate the
Company's activities such as real estate licensure; sellers of travel
licensure; anti-fraud laws; telemarketing laws; price gift and sweepstakes
laws; and labor laws. The Company believes that it is in material compliance
with all federal, state, local and foreign laws and regulations to which it is
currently or may be subject. However, no assurance can be given that the cost
of qualifying under Vacation Interval ownership regulations in all
jurisdictions in which the Company desires to conduct sales will not be
significant. Any failure to comply with applicable laws or regulations could
have material adverse effect on the Company.
In addition, certain state and local laws may impose liability on property
developers with respect to construction defects discovered or repairs made by
future owners of such property. Pursuant to such laws, future owners may
recover from the Company amounts in connection with the repairs made to the
developed property.
The marketing and sales of LSI's points system and its other operations are
subject to national and European regulation and legislation. Within the
European Community (which includes all the countries in which LSI conducts its
operations), the European Timeshare Directive of 1994 regulates vacation
ownership activities. For it to have direct effect, the European Timeshare
Directive must be implemented by European Community Member States and the
Directive required such implementation to have taken place prior to May 1997.
The terms of the Directive require LSI to issue a disclosure statement
providing specific information about its resorts and its vacation ownership
operations as well as making mandatory a 10 day rescission period and a
prohibition on the taking of advance payments prior to the expiration of that
rescission period. Member States are permitted to introduce legislation which
is more protective of the consumer when implementing the European Timeshare
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Directive. In the United Kingdom, where the majority of LSI's marketing and
sales operations take place, the Directive has been implemented by way of an
amendment to the Timeshare Act 1992. In the United Kingdom a 14 day rescission
period is mandatory. There are other United Kingdom laws which LSI is or may
be subject to including the Consumer Credit Act 1974, the Unfair Terms in
Consumer Contracts Regulations 1995 and the Package Travel, Package Holidays
and Package Tours Regulations 1992. While Spain has no specific timeshare
legislation, it is expected that it will implement the Timeshare Directive in
the near future. Until it does so, however, the European Timeshare Directive
has no direct effect in Spain. The Timeshare Act 1992 does appear to have
extra-territorial effect in that United Kingdom resident purchasers buying
timeshare in other European Economic Area States may rely upon it. All the
countries in which LSI operates have consumer and other laws which regulate
its activities in those countries. LSI is member of the Timeshare Council
which is the United Kingdom self regulating trade body for vacation ownership
companies. As a member it is obligated to comply with all laws as well as with
certain codes of conduct (including a code of conduct for the operating of
points systems) promulgated by the Timeshare Council.
Environmental Matters. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and
for investigation and clean-up costs incurred by such parties in connection
with the contamination. Such laws typically impose clean-up responsibility and
liability without regard to whether the owner knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The cost of investigation, remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances at a disposal
or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, the Company may be potentially
liable for such costs.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws
may impose liability for release of ACMs and may provide for third parties to
seek recovery from owners and operation of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no
state or federal requirements regarding the monitoring for, presence of, or
exposure to, radon in indoor air, the EPA and the Surgeon General recommend
testing residences for the presence of radon in indoor air, and the EPA
further recommends that concentrations of radon in indoor air be limited to
less than 4 picocuries per liter of air (Pci/L) (the "Recommended Action
Level"). The presence of radon in concentrations equal to or greater than the
Recommended Action Level in one or more of the Company's resorts may adversely
affect the Company's ability to sell Vacation Intervals at such resorts and
the market value of such resort. Recently-enacted federal legislation will
eventually require the Company to disclose to potential purchasers of Vacation
Intervals at the Company's resorts that were constructed prior to 1978 any
known lead-paint hazards and will impose treble damages for failure to so
notify.
The Company has conducted Phase I assessments at each of its resorts in
order to identify potential environmental concerns. These Phase I assessments
have been carried out in accordance with accepted industry practices and
consisted of non-invasive investigations of environmental conditions at the
properties, including a
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preliminary investigation of the sites and identification of publicly known
conditions concerning properties in the vicinity of the sites, physical site
inspections, review of aerial photographs and relevant governmental records
where readily available, interviews and knowledgeable parties, investigation
for the presence of above ground and underground storage tanks presently or
formerly at the sites, a visual inspection of potential lead-based paint and
suspect friable ACMs where appropriate, a radon survey, and the preparation
and issuance of written reports.
The Company's assessments of its resorts have not revealed any environmental
liability that the Company believes would have a material adverse effect on
the Company's business, assets or results of operations, nor is the Company
aware of any such material environmental liability. Nevertheless, it is
possible that the Company's assessments do not reveal all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. The Company does not believe that compliance with
applicable environmental laws or regulations will have a material adverse
effect on the Company or its financial condition or results of operations.
In connection with the acquisition and development of the Embassy Vacation
Resort Lake Tahoe and the San Luis Bay Resort, the Company's environmental
consultant has identified several areas of environmental concern. The areas of
concern at the Embassy Vacation Resort Lake Tahoe relate to possible
contamination that originated on the resort site due to prior uses and to
contamination that may migrate onto the resort site from upgradient sources.
California regulatory agencies have been monitoring the resort site and have
required or is in the process of requiring the responsible parties (presently
excluding the Company) to effect remediation action. The Company has been
indemnified by certain of the responsible parties for certain costs and
expenses in connection with contamination at the Embassy Vacation Resort Lake
Tahoe (including Chevron (USA), Inc.) and does not anticipate incurring
material costs in connection therewith, however, there is no assurance that
the indemnitor(s) will meet their obligations in a complete and timely manner.
In addition, the Company's San Luis Bay Resort is located in an area of Avila
Beach, California which has experienced underground contamination resulting
from leaking pipes at a nearby oil refinery. California regulatory agencies
have required the installation of groundwater monitoring wells on the beach
near the resort site, and no demand or claim in connection with such
contamination has been made on the Company, however, there is no assurance
that claims will not be asserted against the Company with respect to this
environmental condition.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances. Except as described above with
respect to the Embassy Vacation Resort Lake Tahoe and the San Luis Bay Resort,
the Company has not been notified by any governmental authority or any third
party, and is not otherwise aware, of any material noncompliance, liability or
claim relating to hazardous or toxic substances or petroleum products in
connection with any of its present properties.
A variety of laws concerning the protection of the environment, health and
safety apply to the operations, properties and other assets owned by LSI.
These laws originate at the European Union, national, state and local level.
As a result of the consummation of the LSI Acquisition, the Company has
effectively assumed the pre-existing liabilities of LSI under these laws, some
of which impose liability in respect of operations no longer carried out and
properties or assets no longer owned by LSI as well as existing operations,
properties and assets. These environmental laws govern, among other things,
the discharge of substances into waterways and the quality of water. Liability
can attach to a person who causes or permits the discharge of substances to
such waterways without a permit authorizing such discharges or beyond the
scope of the applicable permit. Criminal sanctions can be imposed for any such
violations and any persons violating these laws can be held responsible for
the cost of remedying the consequences of an unauthorized discharge. In
addition, certain laws restrict the use of property and the construction of
buildings and other structures. Carrying out development without the
appropriate consent or beyond the scope of the consent can result in
regulatory authorities taking action to require the unauthorized use to cease
or unauthorized building or structure to be removed or modified. Criminal
sanctions are available if the authority's requirements are not satisfied.
As of the date of this Prospectus, Phase I environmental reports (which
typically involve inspection without soil sampling or groundwater analysis)
have been prepared by independent environmental consultants for each
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of the resorts currently owned by LSI. The Company is not aware of any
environmental liability which it is acquiring as a result of the purchase of
LSI that would have a material adverse effect on the Company's business,
assets or results of operations. No assurance, however, can be given that
these reports reveal all potential environmental liabilities.
Other Regulations. Under various state and federal laws governing housing
and places of public accommodation the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities are substantially in
compliance with present requirements of such laws, and the Company may incur
additional costs of compliance. Additional legislation may impose further
burdens or restriction on owners with respect to access by disabled persons.
The ultimate amount of the cost of compliance with such legislation is not
currently ascertainable, and, while such costs are not expected to have a
material effect on the Company, such costs could be substantial. Limitations
or restrictions on the completion of certain renovations may limit application
of the Company's growth strategy in certain instances or reduce profit margins
on the Company's operations.
EMPLOYEES
As of September 30, 1997, the Company employed approximately 1,900 full-time
employees and approximately 600 part-time employees. The Company believes that
its employee relations are good. Except for certain employees located at the
St. Maarten, Netherlands Antilles resorts, none of the Company's employees is
represented by a labor union.
The Company sells Vacation Intervals at its resorts through approximately
770 independent sales agents. Such independent sales agents provide services
to the Company under contract and, the Company believes, are not employees of
the Company. Accordingly, the Company does not withhold payroll taxes from the
amounts paid to such independent contractors. Although the Internal Revenue
Service has made inquiries regarding the Company's classification of its sales
agents at its Branson, Missouri resort, no formal action has been taken and
the Company has requested that the inquiry be closed. In the event the
Internal Revenue Service or any state or local taxing authority were to
successfully classify such independent sales agents as employees of the
Company, rather than as independent contractors, and hold the Company liable
for back payroll taxes, such reclassification may have a material adverse
effect on the Company.
INSURANCE
The Company carries comprehensive liability, fire, hurricane, storm,
earthquake and business interruption insurance with respect to the Company's
resorts, with policy specifications, insured limits and deductibles
customarily carried for similar properties which the Company believes are
adequate. In September 1995 and July 1996, the Company's St. Maarten resorts
were damaged by a hurricane. With respect to such September 1995 damage, the
Company has recovered amounts from its insurance carriers sufficient to cover
100% of the property damage losses and is in the process of recovering amounts
for business interruption. The Company has agreed to provide approximately
2,700 replacement weeks to owners who were unable to use their Vacation
Interval as a result of such September 1995 hurricane. Such provision of
replacement Vacation Intervals will have the short term effect of reducing the
number of Vacation Intervals available for sale or alternative rental as hotel
rooms at the St. Maarten resorts. Additionally, the St. Maarten resorts
sustained relatively minor damage in 1996 as the result of Hurricane Bertha;
management estimates that such damage is approximately $100,000, which is less
than the applicable insurance deductibles and, accordingly, the expense to
repair the damage will be borne by the Company. There are, however, certain
types of losses (such as losses arising from acts of war) that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its capital invested in a resort, as well as the
anticipated future revenues from such resort and would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could have a material adverse effect on the Company.
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LEGAL PROCEEDINGS
The Company is currently subject to litigation and claims respecting
employment, tort, contract, construction and commissions, disputes, among
others. In the judgment of management, none of such lawsuits or claims against
the Company is likely to have a material adverse effect on the Company or its
business.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On September 12, 1996, Ernst & Young LLP advised the Company that it was
resigning as independent auditors for the Company. Ernst & Young LLP had been
retained since the Company's inception and there have been no disagreements
between the Company and Ernst & Young LLP with respect to accounting
principles or practices, financial statement disclosure, auditing scope or
procedures, which if not resolved to Ernst & Young LLP's satisfaction, would
have resulted in a reference to the subject matters of the disagreement in its
audit report. Since the Company's inception, Ernst & Young LLP's report on the
Company's financial statements did not contain an adverse opinion or a
disclaimer of opinion, nor were the opinions qualified or modified as to
uncertainty, audit scope, or accounting principles, nor were there any events
of the type requiring disclosure under Item 304(a)(l)(v) of Regulation S-K
under the Securities Act.
On September 17, 1996, the Company retained the accounting firm of Arthur
Andersen LLP as auditors for the fiscal year ending December 31, 1996
following Board of Directors approval, which was obtained on September 16,
1996. The decision to retain Arthur Andersen LLP was based upon the prior
relationship with a predecessor of the Company as auditors for the fiscal year
ending December 31, 1994 and Arthur Andersen LLP's experience in the Company's
industry, and was not motivated by any disagreements between the Company and
Ernst & Young LLP concerning any accounting principles and/or policy matters.
From the Company's inception to September 17, 1996, the Company did not
consult with Arthur Andersen LLP with respect to the matters described in Item
304(a)(2) of Regulation S-K.
TRADEMARKS AND COMPANY NAME
While the Company owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights and other intellectual
property rights which, in the aggregate, are of material importance to its
business, it is believed that the Company's business, as a whole, is not
materially dependent upon any one intellectual property or related group of
such properties. The Company is licensed to use certain technology and other
intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other intellectual
property rights owned and controlled by the Company.
The Company's Board of Directors has approved, subject to stockholder
approval, a proposal to change the Company's corporate name.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BACKGROUND
Signature Resorts, Inc. was incorporated in Maryland in May 1996 by the
Founders to effect the Consolidation Transactions and the Initial Public
Offering. The exchange of direct and indirect interests in, and obligations
of, certain limited partnerships, limited liability companies and other
corporations affiliated with the Founders for shares of Common Stock in the
Company are referred to herein as the "Consolidation Transactions."
The Company's predecessor commenced its vacation ownership resort
acquisition and development business in 1992 to take advantage of the unique
real estate development, financing and travel industry expertise of the
Founders. Mr. Kaneko, who is a Japanese national and was educated in the
United States, has more than 24 years of experience in resort real estate
acquisition and development. Prior to forming the Company, Mr. Kaneko co-
founded KOAR with Mr. Kenninger in 1985 and was previously the executive vice-
president of the Hawaii-based United States operations of a Japanese publicly-
traded real estate developer. Mr. Kenninger, a
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former business attorney for the seven years prior to co-founding KOAR, has
had overall responsibility for the development, acquisition, licensing,
branding and legal operations of the Company since 1993. Prior to forming the
Company, Mr. Gessow in 1990 formed Argosy and, prior to forming Argosy, was
previously president of both the Florida and west coast offices of Trammell
Crow Residential Services, a real estate development company.
FOUNDERS' OTHER BUSINESS INTERESTS
Affiliates of Messrs. Kaneko and Kenninger currently have managing general
partner or similar interests in entities which own investment properties which
the Company does not consider to be competitive with its vacation ownership
business (the "KOAR Interests"). These properties include a 225-unit
condominium project in Long Beach, California which is being marketed for
whole share unit sales or long-term residential use rather than vacation use
(and with respect to which the KOAR Interests, as of the date of this
Prospectus, own 42 of the total 225 units, the balance having been sold to
third parties); and several retail centers. Messrs. Kaneko and Kenninger are
also currently the constituent general partners of a number of partnerships in
which they owe fiduciary duties to limited partners who invested over $80
million of equity therein (which partnerships include five Embassy Suites
hotels which are still owned by partnerships controlled by Affiliates of
Messrs. Kaneko and Kenninger (the "Prior Partnerships")). Messrs. Kaneko and
Kenninger are authorized by the Company to meet their duties and
responsibilities to the Prior Partnerships pursuant to the terms thereof,
including the sale, refinancing, restructuring and packaging of the Prior
Partnerships, and including with respect to the formation of public or private
entities for such purpose, including a public real estate investment trust
("REIT") for one or all of the Embassy Suites hotels in the Prior Partnerships
(provided that Messrs. Kaneko and Kenninger agree not to serve as an officer
or employee of such REIT). Messrs. Kaneko and Kenninger agree to continue to
retain third party management companies to manage these properties (e.g.,
Promus Hotels manages all of the KOAR Interests' Embassy Suites hotels), and
to employ personnel not employed by the Company to carry out the day-to-day
responsibilities of managing and overseeing these properties. However, Messrs.
Kaneko and Kenninger reserve the right to do what is reasonably necessary
within these constraints to carry out their duties and responsibilities to the
Prior Partnerships pursuant to the terms thereof. The Company does not believe
that such activities will detract materially from Messrs. Kaneko's and
Kenninger's services to the Company.
PAYMENTS TO AFFILIATES
A total of $15.7 million of the net proceeds from the Consolidation
Transactions and the Initial Public Offering were used to repay outstanding
debt to affiliates of the Founders. Of the $15.7 million of the funds paid to
the affiliates of the Founders, $15.3 million was used to pay-off existing
debt to third-party financial institutions or other third-party financing
sources or to pay tax liabilities. The proceeds from the loans were previously
either invested in or loaned either to the Company or its predecessors or to
acquire or develop certain of the Company's resorts.
In addition, pursuant to the Consolidation Transactions, during the three
months ended September 30, 1996, the Founders also received $2.3 million of
distributions from certain predecessor partnerships of the Company to fund
income tax obligations which had accrued through the date of the Initial
Public Offering and with respect to which no pre-Initial Public Offering
profits of the Company had been distributed.
In addition, $12.2 million of the net proceeds of the Initial Public
Offering were used to repay outstanding indebtedness owed to partnerships in
which an affiliate of Mr. Friedman, a director of the Company, is a general
partner. Of such repayment, approximately $3.0 million was repaid directly to
Mr. Friedman or his affiliates.
The Company generally receives management fees and certain other expenses
from homeowners' associations at the resorts it manages. Payables to such
homeowners' associations consist mostly of maintenance fees for units owned by
the Company. At December 31, 1996, the Company had accrued $4,405,000 and
$1,590,000 as a receivable and payable, respectively, with the various
homeowners' associations that it manages at its resorts. The Company accrued
$1,220,000 and $1,771,000 as a receivable and payable, respectively, at
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December 31, 1995 with the homeowners' associations that it manages at its
resorts. The related party payable to the homeowners' associations that it
manages at December 31, 1995, included $1,030,000 of a special assessment fee
charged to the Company.
CONSOLIDATION TRANSACTIONS
The Company's nine vacation ownership resorts existing prior to the
Consolidation Transactions were previously owned and operated by partnerships,
each affiliated with the Founders. Such partnerships consisted of Grand Beach
Resort, L.P., a Georgia limited partnership (Embassy Vacation Resort Grand
Beach); AKGI-Flamingo C.V., a Netherlands Antilles limited partnership
(Flamingo Beach Club); AKGI-Royal Palm C.V., a Netherlands Antilles limited
partnership (Royal Palm Beach Club); Port Royal Resort, L.P., a South Carolina
limited partnership (Royal Dunes Resort); an approximately 30% interest in
Poipu Resort Partners, L.P., a Hawaii limited partnership (Embassy Vacation
Resort Poipu Point); Fall Creek Resort, L.P., a Georgia limited partnership
(Plantation at Fall Creek); Cypress Pointe Resort, L.P., a Delaware limited
partnership (Cypress Pointe Resort); Lake Tahoe Resort Partners, LLC, a
California limited liability company (Embassy Vacation Resort Lake Tahoe); and
San Luis Resort Partners, LLC, a Georgia limited liability company (San Luis
Bay Resort) (collectively the "Property Partnerships"). Affiliates of the
Founders were previously the sole general partners or the sole members of each
of the Property Partnerships. Each of the Property Partnerships (other than
the Embassy Vacation Resort Poipu Beach) which remained in existence following
the Consolidation Transactions and the Initial Public Offering are wholly
owned by the Company.
As a result of the consummation of the Consolidation Transactions, the
partnership and limited liability company interests in each of the Property
Partnerships, certain of the stock of certain other corporations affiliated
therewith (the "Affiliated Companies") held by "accredited investors" (as
defined pursuant to Regulation D under the Securities Act) and certain debt
obligations of the Property Partnerships and affiliates (and, as a result,
ownership of certain of the Company's resorts) have been directly or
indirectly transferred to the Company and in exchange the holders of such
partnership interests and certain of such stock received shares of Common
Stock in the Company. Holders of any such partnership interests who are not
"accredited investors" received cash at a price commensurate with the value
received by the accredited investors to be determined prior to the Consent
Solicitation. As a result of the Consolidation Transactions, 17,032,057 shares
of Common Stock were issued to the holders of partnership interests in the
Property Partnerships and to certain stockholders of the Affiliated Companies.
The Affiliated Companies include Argosy/KOAR Group, Inc., Resort Management
International, Inc., Resort Marketing International, Inc., RMI-Royal Palm
C.V.o.a., RMI-Flamingo C.V.o.a., AK-St. Maarten, LLC, Premier Resort
Management, Inc., Resort Telephone & Cable of Orlando, Inc., Kabushiki Gaisha
Kei, LLC, Vacation Ownership Marketing Company and Vacation Resort Marketing
of Missouri, Inc., each of which are controlled by the Founders and previously
provided administrative, utility, management and/or marketing services to
certain of the Property Partnerships.
The Company was incorporated in Maryland in May 1996 by the Founders to
effect the Consolidation Transactions and the Initial Public Offering.
Pursuant to a Private Placement Memorandum dated as of May 28, 1996, the
Company in the Consent Solicitation solicited and received on or before June
13, 1996 the consent and agreement of the ultimate owners of interests in the
Property Partnerships, the stockholders of the Affiliated Companies and the
holders of certain debt obligations to exchange their partnership interests or
shares in, and obligations of, the Property Partnerships or Affiliated
Companies (or their direct or indirect interests in the owners thereof), as
applicable, for shares of Common Stock in the Company. Such exchange occurred
simultaneously with the closing of the Initial Public Offering. Direct and
indirect holders of interests in, and obligations of, certain Property
Partnerships received, upon consummation of the Consolidation Transactions,
shares of Common Stock in the Company equal to a predetermined dollar value
based on agreement between the Company and such holders as set forth in the
Private Placement Memorandum for the Consent Solicitation. The balance of the
shares of Common Stock issued in the Consolidation Transactions were issued to
the holders of interests in the remaining Property Partnerships and to the
holders of interests in the Affiliated Companies, which are comprised solely
of the Founders or their affiliates.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company's indebtedness at September 30, 1997 consists of hypothecated
notes, the Convertible Notes, construction loans and other indebtedness and
the Notes, with balances of $81.2 million, $138.0 million, $3.0 million,
$23.7 million and $200 million, respectively. The Company has received a
commitment from a bank lender to provide it with the $100 million Senior
Credit Facility. The material terms of such indebtedness are summarized below.
HYPOTHECATED NOTES
The Company has entered into hypothecation agreements with lenders for the
Company's financing of customer receivables. The hypothecated notes, which
totaled $132 million at June 30, 1997, bear interest from LIBOR plus 3% to the
prime rate plus 3% and mature three to seven years from the date of the last
advance. Under the Company's hypothecated note arrangements, the Company
pledges as security qualified purchaser promissory notes to these lenders, who
typically lend the Company 85% to 90% of the principal amount of such
promissory notes. Payments under these promissory notes are made by the
Vacation Interval purchaser directly to an unaffiliated payment processing
center and such payments are credited against the Company's outstanding
balance with the respective lenders. These arrangements currently have varying
borrowing periods ranging from 18 to 20 months after the initial commitment
date, with corresponding maturities ranging from five to seven years. The
Company does not presently have binding agreements to extend the terms of such
existing financing arrangements or for any replacement financing arrangements
upon the expiration of such funding commitments, and there can be no assurance
that alternative or additional arrangements can be made on terms that are
satisfactory to the Company. Accordingly, future sales of Vacation Intervals
may be limited by both the availability of funds to finance the initial
negative cash flow that results from sales that are financed by the Company
and by reduced demand which may result if the Company is unable to provide
financing to purchasers of Vacation Intervals.
CONVERTIBLE NOTES
In February 1997, the Company consummated its offering of $138.0 million
aggregate principal amount of its Convertible Notes. The Convertible Notes are
convertible into Common Stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $30.417 per share, subject to adjustment in
certain events. The Convertible Notes bear interest at an annual rate of
5.75%, which interest is payable on January 15 and July 15 of each year,
commencing on July 15, 1997. The Convertible Notes are redeemable, in whole or
in part, at the option of the Company at any time on or after January 15,
2000, at certain redemption prices, plus accrued interest, if any, to the
redemption date. If a change in control of the Company occurs, each holder of
Convertible Notes will have the right, subject to certain conditions and
restrictions, to require the Company to offer to repurchase for cash (subject
to the Company's right to make such offer in Common Stock under certain
circumstances) all outstanding Convertible Notes, in whole or in part, owned
by such holder at 100% of their principal amount, plus accrued interest, if
any, to the date of repurchase. The Convertible Notes are subordinated to all
existing and future Senior Indebtedness of the Company and will be effectively
subordinated to all indebtedness and other obligations of the Company's
subsidiaries. The Convertible Notes are also subordinated to the Senior
Subordinated Notes.
CONSTRUCTION LOANS
At September 30, 1997, the Company's construction loans totaled $3.0
million. Such loans are secured by real property, bear interest at rates
ranging from LIBOR plus 4.25% to the prime rate plus 2% and are generally
repaid at a fixed amount as the underlying security interests in real property
is sold to a consumer in the form of a vacation ownership interval. Final
maturities range from January 1998 to April 2004.
OTHER INDEBTEDNESS
At September 30, 1997, the Company's other indebtedness totaled $23.7
million. Other indebtedness is secured by land ($4.7 million), bears interest
at rates ranging from 7.75% to 9.00% and has final maturities
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ranging from 1999 to 2014. Also includes $13.5 million which is primarily
secured by consumer mortgages bearing interest at 7.75% and maturing April
2004. This debt has been sold to a trust with recourse to the Company and is
therefore not classified as hypothecated debt.
The Company also has $5.5 million in advances on mortgages sold with
recourse to a third party. The principal and interest on the mortgage
receivables sold with recourse are remitted directly to the purchaser and are
therefore not classified as hypothecated debt.
CREDIT FACILITY
The Company has received a commitment from a bank lender to provide it with
the $100 million Senior Credit Facility. The Senior Credit Facility is
expected to have a variable borrowing rate based on the percentage of the
Company's mortgages receivable pledged to the lender under such facility and
the amount of funds advanced pursuant thereto. The interest rate will vary
between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount of
advances against mortgages receivable. It is expected that the Senior Credit
Facility will contain customary covenants, representations and warranties and
conditions to draw down on funds. No assurance can be given, however, that the
Company will be able to enter into definitive documents with respect to such
Senior Credit Facility.
DESCRIPTION OF NOTES
The Private Notes were, and the Exchange Notes will be, issued under an
Indenture dated as of August 1, 1997 (the "Indenture"), 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 material 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 unsecured senior subordinated obligations of the Company, are
limited to an aggregate principal amount of $200,000,000 and will mature on
October 1, 2007. The 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 April 1 and October 1 of each year,
commencing on October 1, 1997, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding
March 15 or September 15 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 currently located in Minneapolis, Minnesota. In
addition, payment of interest may, at the option of the Company, be made by
check mailed to the address of the person entitled thereto as it appears in
the Security Register. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
The interest rate on the Notes is subject to increase in certain
circumstances if the Company does not file a registration statement relating
to the 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 "The Exchange Offer--Special
Interest."
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes may not be
redeemed at the option of the Company prior to October 1, 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 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 October 1 of the
following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................................... 104.875%
2003........................................................... 103.250%
2004........................................................... 101.625%
2005 and thereafter............................................ 100.000%
</TABLE>
In addition, at any time and from time to time prior to October 1, 2000, 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 109.75%
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.
SUBORDINATION
The payment of the principal of and interest on (including any amounts
payable upon the redemption or repurchase of the Notes permitted by the
Indenture), the Notes will be subordinated in right of payment, to the extent
set forth in the Indenture, to the prior payment in full of the principal of,
interest on and other amounts in respect of all Senior Indebtedness of the
Company. "Senior Indebtedness" includes all Indebtedness of the Company,
including the principal of and interest on such Indebtedness (including all
interest accruing subsequent to the commencement of any bankruptcy or similar
proceeding, whether or not a claim for post-petition interest is allowable as
a claim in such proceeding) and all fees and other amounts payable in
connection with such Indebtedness; provided, however, that Senior Indebtedness
shall not include (A) indebtedness to a Subsidiary or other Affiliate of the
Company, (B) any such indebtedness or obligation if the terms of such
indebtedness or obligation (or the terms of the instrument under which, or
pursuant to which, it is issued) expressly provides that such indebtedness or
obligation shall not be senior in right of payment to the Notes, (C) accounts
payable of the Company to trade creditors, and (D) the Convertible Notes.
"Designated Senior Indebtedness" means any particular Senior Indebtedness
having an aggregate principal amount of $25 million or more in which the
instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Senior Indebtedness shall be "Designated Senior
Indebtedness" for purposes of the Indenture, provided that such instrument,
agreement or other document may place limitations and conditions on the right
of such Senior Indebtedness to exercise the rights of Designated Senior
Indebtedness.
Upon any acceleration of the principal due on the Notes or payment or
distribution of assets of the Company to creditors upon any dissolution,
winding up, liquidation or reorganization, whether voluntary or involuntary,
or in bankruptcy, insolvency, receivership or other similar proceedings of the
Company, all principal and interest or other amounts due on all Senior
Indebtedness must be paid in full before the Holders of the Notes are entitled
to receive any payment (other than in Junior Securities). The Indenture
requires that the Company promptly notify holders of Senior Indebtedness if
payment of the Notes is accelerated because of an Event of Default. The
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Company also may not make any payment upon or in respect of the Notes (other
than in Junior Securities) if (i) a default in the payment of principal, of
interest or other amounts due on any Senior Indebtedness occurs and is
continuing beyond any applicable period of grace, or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness that
permits holders of the Designated Senior Indebtedness as to which such default
relates to accelerate the maturity thereof and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from any lender of Designated
Senior Indebtedness (or agent bank on behalf of such lender) or other person
permitted to give such notice under the Indenture. Payments on the Notes may
and shall be resumed (a) in the case of a payment default or a non-payment
default pursuant to which the Senior Indebtedness has been declared due and
payable in its entirety, upon the date on which such default is cured or
waived in accordance with the agreements evidencing such Senior Indebtedness,
or (b) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived in accordance with the agreements
evidencing such Senior Indebtedness or 179 days after the date on which the
applicable Payment Blockage Notice is received. No new period of payment
blockage may be commenced unless and until (i) 365 days have also elapsed
since the effectiveness of the immediately prior Payment Blockage Notice, and
(ii) all scheduled payments of principal and interest on the Notes that have
come due have been paid in full in cash. No nonpayment default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice. "Junior Securities" of any person means any Capital Stock (other than
Disqualified Capital Stock) and any indebtedness of such person that is
subordinated in right of payment to the Notes and has no scheduled installment
of principal due, by redemption, sinking fund payment or otherwise, on or
prior to the Stated Maturity of the Notes.
As a result of the foregoing subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its Subsidiaries or a marshaling of assets or liabilities of the
Company and its Subsidiaries, creditors of the Company who are holders of
Senior Indebtedness are likely to recover more, ratably, than the Holders of
the Notes. Furthermore, the subordination of the Notes may, upon the
occurrence of one or more of the circumstances described in the preceding
sentence, result in a reduction or elimination of payments to the Holders of
the Notes.
As of September 30, 1997, the principal amount of outstanding Senior
Indebtedness of the Company was approximately $33.2 million (excluding Senior
Indebtedness of a type not required to be reflected as a liability on the
balance sheet of the Company in accordance with generally accepted accounting
principles, such as contingent obligations, forward foreign exchange contracts
and interest rate swap agreements, which are senior to the Notes).
The Company conducts certain of its operations through its Subsidiaries.
Accordingly, the Company's ability to meet its cash obligations is dependent
upon the ability of its Subsidiaries to make cash distributions to the
Company. The ability of its Subsidiaries to make distributions to the Company
is and will continue to be restricted by, among other limitations, applicable
legal requirements and contractual provisions. See "Risk Factors--
Subordination of Notes." The right of the Company to participate in the assets
of any Subsidiary (and thus the ability of Holders of the Notes to benefit
indirectly from such assets) is generally subject to the prior claims of
creditors, including trade creditors, of that Subsidiary except to the extent
that the Company is recognized as a creditor of such Subsidiary, in which case
the Company's claims would still be subject to any security interest of other
creditors of such Subsidiary. The Notes, therefore, will be structurally
subordinated to creditors, including trade creditors, of Subsidiaries of the
Company with respect to the assets of the Subsidiaries against which such
creditors have a claim.
As of September 30, 1997 there was outstanding approximately $141.1 million
of indebtedness and other liabilities of Subsidiaries of the Company
(excluding (i) intercompany liabilities, (ii) indebtedness included in Senior
Indebtedness because it is guaranteed directly or indirectly by the Company
and (iii) liabilities of a type not required to be reflected as a liability on
the balance sheet of such Subsidiaries in accordance with generally accepted
accounting principles, such as contingent obligations, forward foreign
exchange contracts and interest rate swap agreements), as to which the Notes
would have been structurally subordinated.
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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 right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control would create an event of default under the
Company's existing Senior Indebtedness and could create an event of default
under future Senior Indebtedness of the Company. As a result, any repurchase
would, absent a waiver, be blocked by the subordination provisions of the
Notes. See "Subordination." Failure by the Company to repurchase the Notes
when required would result in an Event of Default with respect to the Notes
whether or not such repurchase is permitted by the subordination provisions.
See "Events of Default."
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time and with Rule 14e-1 and all other applicable federal and state
securities laws in connection with such repurchase option.
The right to require the Company to repurchase Notes as a result of a Change
of Control could have the effect of delaying, deferring or preventing a Change
of Control or other attempts to acquire control of the Company unless
arrangements have been made to enable the Company to repurchase all the Notes
at the Repurchase Date. Consequently, this right may render more difficult or
discourage a merger, consolidation or tender offer (even if such transaction
is supported by the Company's Board of Directors or is favorable to the
stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of 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 AND FORM
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.
Except as set forth 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. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes." Transfer
of beneficial interests in the Global Notes will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants, which may
change from time to time.
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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 Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest on a Global Note
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Notes, including the Global Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. 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 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 Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Notes or
(ii) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company that
its current practice, upon receipt of any payment in respect of securities
such as the Notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants 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 any of its 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 for all
purposes.
Interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interest will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
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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 Participants
to whose account with DTC 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 Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form,
and to distribute such Notes to its Participants.
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.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary 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 the
Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the Notes. In all
cases, certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
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
Private Notes issued in the Note Offering and the Exchange Notes; (3)
Indebtedness outstanding pursuant to 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 Wholly Owned
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
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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 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; and (13) 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.
(d) Notwithstanding paragraphs (a) and (b) above, the Company shall not
Incur any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness of the Company unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness.
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 the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Notes are originally issued 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
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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 the Issue Date (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) subsequent to the Issue Date, of any Indebtedness
(issued subsequent to the Issue Date) 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 the Issue Date, 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 Indebtedness incurred pursuant to this
clause (ii) 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 the
Issue Date 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;
or (vii) the payment of any dividend by a Subsidiary of the Company to the
holders of its Capital Stock on a pro rata basis.
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
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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:
(i) any encumbrance or restriction pursuant to the Senior Credit Facility or
any other agreement in effect at or entered into on the Issue Date, including
without limitation, the Indenture, the Notes 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;"
and (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.
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
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360 days after the date such Net Available Cash is received and to the extent
the Company or such Restricted Subsidiary elects (or is required by the terms
of any Senior Indebtedness) to (A) apply an amount equal to such Net Available
Cash to prepay, repay or purchase Senior Indebtedness of the Company or such
Restricted Subsidiary, 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 Senior Indebtedness pursuant to clause
(A) above, the Company or such Restricted Subsidiary shall retire such Senior
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
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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 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 Mortgages Receivable 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) and (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.
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) 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 (ii) 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 (other than Liens
pursuant to Indebtedness of Persons that are acquired by the Company or any of
its Restricted Subsidiaries or merged into the Company or a Restricted
Subsidiary, provided such Indebtedness is not incurred in contemplation of
such acquisition or merger).
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 at
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.
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DEFAULTS
The following will be Events of Default under the Indenture: (a) failure to
pay principal on any Note when due, whether or not such payment is prohibited
by the subordination provisions of the Indenture; (b) failure to pay any
interest on any Note when due, continuing for 30 days, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (c)
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 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.
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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) modify the subordination
provisions in a manner adverse to the Holders of the Notes, (h) reduce the
percentage of aggregate principal amount of outstanding Notes necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, or (i) 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, (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
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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 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 employee 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.
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
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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 Mortgages Receivable.
"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 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 Mortgages Receivable, (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
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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
(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
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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 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
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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 extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"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.
"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.
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"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 Subordinated Indebtedness of
the Company registered under the Securities Act with terms substantially
identical to the terms of the Notes which will be exchanged for the Notes
pursuant to a registration statement.
"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
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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,
any Preferred Stock (but 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 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.
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"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).
"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.
"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
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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 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.
"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, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"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" mean 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
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.
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"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 solely to the Company or a Restricted Subsidiary (and,
if such Restricted Subsidiary is not wholly owned, to its other shareholders
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), (ii) the purchase, 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 Subordinated Indebtedness" of the Company means the Notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Notes in right of payment and is
not subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
"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.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the
repurchase, redemption or repayment of such security 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.
"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
87
<PAGE>
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.
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 Notes
where such Notes were acquired as a result of market-making activities or
other trading activities; provided such Notes do not constitute any portion of
an unsold allotment from the original sale of the Notes. The Company has
agreed that during the Exchange Offer Registration Period, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until February 9, 1998, all
dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
88
<PAGE>
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 Registration Period, the Company
will promptly send additional copies of this Prospectus and any amendment or
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 with respect to the Exchange Notes offered hereby will
be passed upon for the Company by Latham & Watkins, Los Angeles, California
and Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Signature Resorts, Inc. and
subsidiaries incorporated by reference herein have been audited by Arthur
Andersen LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included in reliance upon the authority
of said firm as experts in accounting and auditing in giving said report.
The consolidated financial statements of AVCOM International, Inc. and
subsidiaries as of December 31, 1995, and for each of the two years in the
period ended December 31, 1995, not presented separately in this Prospectus
and the related Registration Statement or the documents incorporated by
reference herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report with respect thereto, given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of LSI Group Holdings Plc and
subsidiaries as of December 31, 1995 and 1996 and for each of the three years
in the period ended December 31, 1996 not presented separately in this
Prospectus and the related Registration Statement or the documents
incorporated by reference herein, have been audited by KPMG, chartered
accountants and registered auditors, as set forth in their report with respect
thereto, given upon the authority of said firm as experts in accounting and
auditing.
89
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any 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 herein is
correct as of any time subsequent to the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...................................................... 3
Incorporation of Certain Documents by Reference............................ 3
Summary.................................................................... 5
Risk Factors............................................................... 13
The Exchange Offer......................................................... 28
Use of Proceeds............................................................ 37
Consolidated Capitalization................................................ 37
Ratio of Earnings to Fixed Charges......................................... 37
Business................................................................... 38
Certain Relationships and Related Transactions............................. 60
Description of Certain Indebtedness........................................ 63
Description of Notes....................................................... 64
Certain Federal Income Tax Consequences.................................... 88
Plan of Distribution....................................................... 88
Legal Matters.............................................................. 89
Experts.................................................................... 89
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF SIGNATURE RESORTS, INC.]
SIGNATURE RESORTS, INC.
$200,000,000
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2007
---------------
PROSPECTUS
---------------
December 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-38283
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
OF
SIGNATURE RESORTS, INC.
PURSUANT TO THE PROSPECTUS DATED DECEMBER 30, 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JANUARY 29, 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>
<CAPTION>
<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 December 30,
1997 (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 3/4% Senior
Subordinated Notes due 2007 (the "Exchange Notes") for each $1,000 principal
amount of its outstanding 9 3/4% Senior Subordinated Notes due 2007 (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
<PAGE>
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."
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>
DESCRIPTION OF PRIVATE NOTES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2) (3) (4)
<S> <C> <C> <C>
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S) OF
PRIVATE
NOTE(S), PRINCIPAL
EXACTLY AS AMOUNT
NAME(S) TENDERED
APPEAR(S) ON PRIVATE NOTE FOR EXCHANGE
PRIVATE NOTE NUMBER(S) AGGREGATE (MUST BE IN
CERTIFICATE(S) (ATTACH SIGNED PRINCIPAL AMOUNT INTEGRAL
(PLEASE FILL LIST REPRESENTED BY MULTIPLES
IN, IF BLANK) IF NECESSARY) CERTIFICATE(S)(A) 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 3/4% Senior Subordinated Notes due 2007 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 3/4%
Senior Subordinated Notes due 2007. All other tenders must be in integral
multiples of $1,000.
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED PRIVATE NOTES ARE ENCLOSED HEREWITH.
[_] 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>
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 To be completed ONLY if the
Exchange Notes issued in exchange Exchange Notes issued in exchange
for Private Notes, certificates for for Private Notes, certificates for
Private Notes in a principal amount Private Notes in a principal amount
not exchanged for Exchange Notes, not exchanged for Exchange Notes,
or Private Notes (if any) not or Private Notes (if any) not
tendered for exchange, are to be tendered for exchange, are to be
issued in the name of someone other mailed or delivered (i) to someone
than the undersigned or (ii) if other than the undersigned or (ii)
Private Notes tendered by book- to the undersigned at an address
entry transfer which are not other than the address shown below
exchanged are to be returned by the undersigned's signature.
credit to an account maintained at
DTC.
Mail or deliver to:
Name _______________________________
Issue to: (PLEASE TYPE OR PRINT)
Address ____________________________
Name _______________________________ ____________________________________
(PLEASE TYPE OR PRINT) ____________________________________
Address ____________________________ (INCLUDE ZIP CODE)
____________________________________ ____________________________________
____________________________________ (TAX IDENTIFICATION OR SOCIAL
(INCLUDE ZIP CODE) 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)
4
<PAGE>
- -------------------------------------------------------------------------------
BENEFICIAL OWNER(S)--RESIDENCE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATE OF DOMICILE/PRINCIPAL PLACE OF PRINCIPAL AMOUNT OF PRIVATE NOTES
BUSINESS OF EACH BENEFICIAL OWNER HELD FOR ACCOUNT OF BENEFICIAL
OF PRIVATE NOTES OWNER(S)
<S> <C>
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
</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 December 30, 1997 (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 3/4% Senior Subordinated Notes due 2007 (the
"Exchange Notes") for each $1,000 principal amount of its outstanding 9 3/4%
Senior Subordinated Notes due 2007 (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.
5
<PAGE>
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.
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 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 intend 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 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>
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>
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 tendered 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"), as 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 numbers(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 a
facsimile thereof), 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.
8
<PAGE>
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.
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 being 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
thereafter 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 alternation, 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.
9
<PAGE>
(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.
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 the 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 THEREOF, 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.
10
<PAGE>
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 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 3/4% SENIOR SUBORDINATED NOTES DUE 2007 OF SIGNATURE RESORTS, INC.
The undersigned hereby acknowledges receipt of the Prospectus dated December
30, 1997 (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 3/4% Senior
Subordinated Notes due 2007 (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
11
<PAGE>
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 a 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, (vii) if the undersigned is not a
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 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; (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>
- --------------------------------------------------------------------------------
PAYER'S NAME:
- --------------------------------------------------------------------------------
SUBSTITUTE Social Security
FORM W-9 Number
PART I--PLEASE PROVIDE ____________________
DEPARTMENT OF THE YOUR TIN IN THE BOX AT OR
TREASURY RIGHT AND CERTIFY BY Employer
INTERNAL REVENUE SIGNING AND DATING Identification
SERVICE BELOW. Number
____________________
PAYER'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER
(TIN)
- --------------------------------------------------------------------------------
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 2 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 receive 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 3 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 such 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.
SIGNATURE ___________________________________________ DATE ___________________
- --------------------------------------------------------------------------------
13
<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-38283
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
- --------------------------------------------------------------------------------
THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY
HOLDER OF 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007 (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 DECEMBER 30, 1997 (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
1
<PAGE>
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 or 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.
If Private Notes will be tendered by SIGN HERE
book-entry transfer: --------------------------------------
Name of Tendering Institution: SIGNATURE(S)
- -------------------------------------- ______________________________________
The Depository Trust Company Account ______________________________________
No.: NAME(S) (PLEASE PRINT)
- -------------------------------------- ______________________________________
______________________________________
ADDRESS
______________________________________
ZIP CODE
______________________________________
AREA CODE AND TELEPHONE NO.
DATE: ________________________________
2
<PAGE>
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.
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