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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CLUB REGINA RESORTS, INC.
CR RESORTS CAPITAL, S. DE R. L. DE C. V.*
(Exact name of registrant as specified in its charter)
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NEVADA 6552 76-0549149
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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10,000 MEMORIAL DRIVE
HOUSTON, TEXAS 77024
(713) 613-2800
(Address, including zip code, and telephone number including area code of
registrants' principal executive offices)
DOUGLAS Y. BECH
CHAIRMAN
10,000 MEMORIAL DRIVE
HOUSTON, TEXAS 77024
(713) 613-2800
(Name, address, including zip code, and telephone number, including area code of
agent for service)
Copies to:
JULIEN R. SMYTHE
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1900 PENNZOIL PLACE, SOUTH TOWER
711 LOUISIANA STREET
HOUSTON, TEXAS 77002
(713) 220-5800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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100,000 Senior Notes,
Series B, due 2004..... $100,000,000 100% $100,000,000 $29,500.00
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(1) Estimated solely for the purpose of calculating the registration fee.
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(*) CR Resorts Capital, S. de R.L. de C.V., a subsidiary of Club Regina Resorts,
Inc., is a co-registrant, formed under the laws of the United Mexican States
(Mexican tax identification number CRC970811E5A).
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CLUB REGINA RESORTS, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART I OF THE REGISTRATION STATEMENT
(FORM S-4) AND PROSPECTUS PURSUANT TO ITEM 501(B)
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ITEM OF FORM S-4 LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.......................... Facing Page of the Registration
Statement; Cross Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus;
Available Information; Outside Back
Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................. Summary Historical Financial Data;
Summary Pro Forma Financial Data;
Prospectus Summary; Risk Factors
4. Terms of the Transaction............................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Private Placement; Use of Proceeds;
The Exchange Offer; Description of
Notes; Transfer Restrictions of
Outstanding Notes; Plan of
Distribution
5. Pro Forma Financial Information..................... Unaudited Pro Forma Financial Data
6. Material Contracts with the Company Being
Acquired.......................................... *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters..... *
8. Interest of Named Experts and Counsel............... Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants......... *
11. Incorporation of Certain Information by Reference... *
12. Information with Respect to S-2 or S-3
Registrants....................................... *
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ITEM OF FORM S-4 LOCATION IN PROSPECTUS
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13. Incorporation of Certain Information by Reference... *
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants............................ Outside Front Cover Page; Available
Information; Prospectus Summary; Risk
Factors; Private Placement; Use of
Proceeds; Capitalization; Unaudited
Pro Forma Financial Data; Selected
Combined Historical Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operation; Business; Financial
Statements.
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies........... *
16. Information with Respect to S-2 or S-3 Companies.... *
17. Information with Respect to Companies other than S-2
or S-3 Companies.................................. *
18. Information if Proxies, Consents or Authorizations
are to be Solicited............................... *
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer...... Management; Principal Stockholders;
Certain Transactions; Description of
Capital Stock and Warrants
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* Not applicable
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
PROSPECTUS
$100,000,000
CLUB REGINA RESORTS, INC.
CR RESORTS CAPITAL, S. DE R. L. DE C. V.
OFFER TO EXCHANGE
13% SENIOR NOTES DUE 2004, SERIES B
FOR ALL OUTSTANDING 13% SENIOR NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
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Club Regina Resorts, Inc., a Nevada corporation ("CR US"), and CR Resorts
Capital, S. de R. L. de C. V., a Mexican Sociedad de Responsabilidad Limitada de
Capital Variable and an indirect wholly-owned subsidiary of CR US ("CR Mexico"
and together with CR US, the "Issuers") hereby offer, upon the terms and
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal," and together with this Prospectus, the
"Exchange Offer"), as required in accordance with the Indenture (as defined) and
the Registration Rights Agreement (as defined), to exchange $1,000 principal
amount of its 13% Senior Notes due 2004, Series B (the "Registered Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for each $1,000 principal amount of
its outstanding 13% Senior Notes due 2004, Series A (the "Outstanding Notes"),
of which $100.0 million principal amount is outstanding. The form and terms of
the Registered Notes are identical in all material respects to the form and
terms of the Outstanding Notes except for certain transfer restrictions and
registration rights relating to the Outstanding Notes. The Registered Notes will
evidence the same debt as the Outstanding Notes and will be issued under and be
entitled to the benefits of the Indenture (as defined herein). The Registered
Notes and the Outstanding Notes are collectively referred to herein as the
"Notes."
As required by the Indenture and the Registration Rights Agreement, the
Company will accept for exchange any and all Outstanding Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be , 1998, unless the Exchange Offer is
extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendment."
Tenders of Outstanding Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the business day prior to the Expiration Date (as defined
herein), unless previously accepted for exchange. The Exchange Offer is not
conditioned upon any minimum principal amount of Outstanding Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Issuers and to the terms and provisions of
the Registration Rights Agreement (as defined herein). Outstanding Notes may be
tendered only in denominations of $1,000 principal amount and integral multiples
thereof. The Issuers have agreed to pay the expenses of the Exchange Offer. See
"The Exchange Offer."
The Registered Notes will bear interest at the rate of 13% per annum,
payable semi-annually on June 1 and December 1 of each year, commencing June 1,
1998. Holders of Registered Notes of record on May 15, 1998 will receive
interest on June 1, 1998 from the date of issuance of the Registered Notes, plus
an amount equal to the accrued interest on the Outstanding Notes from the date
of issuance of the Outstanding Notes, December 5, 1997, to the date of exchange
thereof. Interest on the Outstanding Notes accepted for exchange will cease to
accrue upon issuance of the Registered Notes. The Notes will be redeemable at
the option of
(cover continued on next page)
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SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
NOTES.
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, 1998
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(Continued from cover page)
the Issuers, in whole or in part, on or after December 1, 2000, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, to the date of redemption.
Notwithstanding the foregoing, at any time prior to December 1, 2000, the
Issuers may redeem up to 35% of the original principal amount of the Notes at
the redemption price of 113% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, through the date of redemption,
with the net cash proceeds of a Public Equity Offering (as defined); provided,
that at least $65.0 million in aggregate principal amount of the Notes remain
outstanding immediately thereafter. Upon the occurrence of a Change of Control,
the Issuers are required to offer to repurchase all of the outstanding Notes at
101% of the principal amount thereof, together with accrued and unpaid interest
and Liquidated Damages, if any, to the date of repurchase. See "Description of
Notes."
The Notes are senior obligations of the Issuers and rank senior in right of
payment to all subordinated Indebtedness (as defined) of the Issuers, and pari
passu in right of payment with all existing and future unsecured senior
Indebtedness of the Issuers. Substantially all of the operations of CR US are
conducted through its subsidiaries (other than CR Mexico) (the "Operating
Subsidiaries") and, therefore, the Issuers are dependent upon the cash flow of
the Operating Subsidiaries to meet their obligations, including their
obligations under the Notes. The Notes are effectively subordinated to all
Indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of CR US's Operating Subsidiaries. At December 31, 1997, the
total amount of Indebtedness and other obligations of the Operating Subsidiaries
that effectively ranked senior in right of payment to the obligations of the
Issuers under the Notes was approximately $4.6 million.
The Outstanding Notes were sold by the Issuers on December 5, 1997 to the
Initial Purchaser (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The
Outstanding Notes were thereupon offered and sold by the Initial Purchaser only
to "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) and to a limited number of institutional "accredited investors"
(as defined in Rule 501(a)(1),(2),(3) or (7) under the Securities Act), each of
whom agreed to comply with certain transfer restrictions and other conditions.
Accordingly, the Outstanding Notes may not be offered, resold or otherwise
transferred unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Registered Notes are being offered hereunder to satisfy the obligations of
the Issuers under the Registration Rights Agreement entered into with the
Initial Purchaser in connection with the offering of the Outstanding Notes. See
"The Exchange Offer," "Description of Notes," and "Registration Rights;
Additional Interest."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991)
(the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Issuers believe that the Registered Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof (other than a "Restricted Holder,"
being (i) a broker-dealer who purchased Outstanding Notes exchanged for such
Registered Notes directly from the Issuers 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 Issuers 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 such Registered Notes are
acquired in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Registered
Notes. Eligible holders wishing to accept the Exchange Offer must represent to
the Issuers that such conditions have been met. Holders who tender Outstanding
Notes in the Exchange Offer with the intention to participate in a distribution
of the Registered Notes may not rely upon the Morgan Stanley Letter or similar
no-action letters. See "The Exchange Offer -- General." Each broker-dealer that
receives Registered 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 Registered Notes. A broker-dealer that delivers
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such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act and will
be bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations). 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 Registered Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Issuers have
agreed that they will make this Prospectus and any amendment or supplement to
this Prospectus available to any broker-dealer for use in connection with any
such resale for up to 180 days after consummation of the Exchange Offer. See
"Plan of Distribution."
The Issuers will not receive any proceeds from the Exchange Offer which is
being performed to satisfy the Issuers' obligations under the Indenture and the
Registration Rights Agreement.
The Registered Notes will constitute a new issue of securities pursuant to
the Indenture, and the Registration Rights Agreement and as described in the
Offering Circular with no established trading market, and there can be no
assurance as to the liquidity of any markets that may develop for the Registered
Notes or as to the ability of or price at which the holders of Registered Notes
would be able to sell their Registered Notes. Future trading prices of the
Registered Notes will depend on many factors, including, among others,
prevailing interest rates, the Issuers' operating results and the market for
similar securities. The Issuers do not intend to apply for listing of the
Registered Notes on any securities exchange. Jefferies & Company, Inc. (the
"Initial Purchaser") has informed the Issuers that it currently intends to make
a market for the Registered Notes. However, it is not so obligated, and any such
market making may be discontinued at any time without notice. Accordingly, no
assurance can be given that an active public or other market will develop for
the Registered Notes or as to the liquidity of or the trading market for the
Registered Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING 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.
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AVAILABLE INFORMATION
The Issuers have filed with the Commission a Registration Statement on Form
S-4 under the Securities Act, for the registration of the Registered Notes
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in the financial statement
schedules and exhibits to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information, please see the
Registration Statement, including the financial statement schedules and exhibits
filed as a part thereof. Statements made in this Prospectus concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to the
Registration Statement, please see the exhibit for a more complete description
of the matter involved and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
that the Issuers have filed with the Commission may be inspected and copied at
the public reference facilities the Commission maintains at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's following
regional offices: Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained by mail from the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition the Commission maintains a site on the
World Wide Web that contains reports, proxy and information statements and other
information filed electronically by the Company with the Commission which can be
accessed over the Internet at http://www.sec.gov.
As a result of this Exchange Offer the Issuers will be subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As long as the Issuers
are subject to such periodic reporting and informational requirements, the
Issuers will furnish all reports and other information required thereby to the
Commission and pursuant to the Indenture will furnish copies of such reports and
other information to the Trustee.
The Issuers have agreed that, whether or not they are required to do so by
the rules and regulations of the Commission, for so long as any of the Notes
remain outstanding, the Issuers will furnish to the Holders of Notes (excluding
exhibits, which will be available upon request) and file with the Commission
(unless the Commission will not accept such a filing) (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants, and
(ii) all reports that would be required to be filed with the SEC on Form 8-K if
the Company were required to file such reports. In addition, for so long as any
of the Notes remain outstanding, the Company has agreed to make available, upon
request, to any prospective purchaser of the Notes and beneficial owner of the
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act. Information may be obtained from the
Company at 10,000 Memorial Drive, Suite 480, Houston, Texas 77024 (telephone
number: (713) 613-2800), Attention: George D. Stroesenreuther.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND 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 OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH
TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
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OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
ENFORCEABILITY OF CIVIL OR CRIMINAL LIABILITIES
CR Mexico is a limited liability corporation with variable capital
(sociedad de responsabilidad limitada de capital variable) organized under the
laws of the United Mexican States ("Mexico"). One of its directors and officers
resides in Mexico, and all or a substantial portion of the assets of this person
and of CR Mexico and CR US are in Mexico. As a result, it may not be possible
for investors to effect service of process within the United States upon such
person or to enforce against him, or against CR Mexico in United States courts,
judgments predicated upon the civil or criminal liability provisions of the
federal securities laws of the Untied States. CR Mexico has been advised by its
Mexican counsel, Santamarina y Steta, S.C., that there is doubt as to the
enforceability, in original actions in Mexican courts, of civil or criminal
liabilities predicated solely on the U.S. federal securities laws and as to the
enforceability in Mexican courts of judgments of U.S. courts obtained in actions
predicated upon the civil or criminal liability provisions of the U.S. federal
securities laws.
The laws of Mexico require service of process to be made personally upon CR
Mexico or any process agent duly appointed by CR Mexico in order for a foreign
judgment to be enforceable by a Mexican court. Because service of process by
mail does not constitute personal service under the laws of Mexico, if for the
purpose of proceedings outside Mexico, service of process is made by mail, a
final judgment issued in connection with such proceedings may not be enforced by
the courts of Mexico. Enforceability is also subject to the satisfaction of
certain other specific requirements.
In any proceedings brought before the courts of Mexico (including
proceedings for the enforcement of a foreign judgment), Mexican courts would
apply Mexican procedural laws, including laws, statutes of limitations and
expiration (prescripcion). A Spanish translation of any documents originally
executed in any other language would be required to be prepared by a
court-approved translator, and approved by the court once the defendant had been
given an opportunity to be heard with respect to the accuracy of any such
translation, and proceedings would thereafter be based upon the translated
documents.
Covenants of CR Mexico, which purport or may purport to (i) bind it on
matters reserved by Mexican law to shareholders or partners, (ii) bind
shareholders or partners to vote or refrain from voting their shares or equity
interests, or (iii) bind CR Mexico on matters relating to its ability to
transfer, convey, sell or otherwise dispose of or encumber any of its assets to
any person, are not enforceable in Mexico through specific performance.
ON NOVEMBER 27, 1997, THE NOTES WERE REGISTERED (THE "NOTE REGISTRATION")
BY THE COMISION NACIONAL BANCARIA Y DE VALORES (THE MEXICAN NATIONAL BANKING AND
SECURITIES COMMISSION OR THE "CNBV") WITH THE SPECIAL SECTION OF THE NATIONAL
REGISTRY OF SECURITIES AND INTERMEDIARIES MAINTAINED BY THE CNBV (THE "RNVI").
REGISTRATION OF THE NOTES WITH THE RNVI DOES NOT IMPLY ANY CERTIFICATION AS TO
THE INVESTMENT QUALITY OF THE NOTES OR AS TO THE SOLVENCY OF EITHER ISSUER OR
THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN. THE NOTES MAY
NOT BE PUBLICLY OFFERED OR SOLD IN MEXICO.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise noted, (i) all information in this
Prospectus gives effect to the Purchase Transactions (as defined), the Offering
of the Outstanding Notes and the application of the proceeds thereof, (ii) all
references to the "Company" or "Club Regina" are to Club Regina Resorts, Inc.
and its subsidiaries and to the vacation ownership segment of the predecessor
business (the "Predecessor Business") that the Company purchased in the Purchase
Transactions, (iii) all references to "CR US" are to Club Regina Resorts, Inc.
and references to "CR Mexico" are to CR Resorts Capital, S. de R. L. de C. V.,
(iv) all references to "pesos" or "Ps." are to the lawful currency in Mexico and
all references to "dollars" or "$" are to U.S. dollars, and (v) all references
to the "Operating Subsidiaries" are to CR US's direct and indirect subsidiaries,
excluding CR Mexico. Certain industry, Company and other terms herein are
defined in "Defined Terms."
THE COMPANY
Club Regina owns and operates three luxury vacation ownership resorts on
prime beachfront sites at three of Mexico's most popular beach destinations:
Cancun, Puerto Vallarta and Los Cabos (the "Regina Resorts"). Club Regina
markets and sells Vacation Intervals in its resorts which generally entitle the
owner, or Member, to use a fully-furnished vacation residence typically for one
week each year until 2047. Prior to March 1998, Vacation Intervals had been sold
for a 30 year period. At each location, the Regina Resorts share common
facilities with, and are adjacent to, "five-star" Westin Regina Hotels (the
"Westin Hotels"). Starwood Lodging Corporation ("Starwood") indirectly owns the
Westin Hotels, which are managed by Westin Resorts & Hotels ("Westin"). The
Regina Resorts and the Westin Hotels are collectively referred to as the
"Combined Resorts." Together, the Combined Resorts contain 402 one- and
two-bedroom vacation ownership units and 908 luxury hotel rooms. The Company
intends to use the Regina Resorts as its flagship platform for expansion through
future acquisitions and internal growth in the United States, Canada, Mexico and
elsewhere. The Company believes it is one of the leading developers focused
primarily on the "luxury" level of the vacation ownership market, which is
characterized by elegant accommodations and personal service.
As part of the Mexican government's economic development program, Bancomer
S.A., Institucion de Banca Multiple, Grupo Financiero ("Bancomer"), the second
largest bank in Mexico (which was owned by the Mexican government until 1991),
developed the Combined Resorts between 1991 and 1996 as its luxury flagships for
tourism development. The vacation ownership units within the Regina Resorts were
developed to appeal to the most sophisticated segments of the vacation ownership
market throughout the world. In recognition of this fact, the Regina Resorts
have been awarded the "Gold Crown" resort designation by Resort Condominiums
International, Inc. ("RCI"), RCI's highest designation. According to RCI, the
Regina Resorts have consistently obtained among the highest rankings of guest
satisfaction among RCI members on all counts not only in Mexico but also in the
world.
The Company believes that its Vacation Interval business is particularly
attractive in the vacation ownership market in terms of appeal to more affluent
customers and profitability, because of the close association with and
availability of high quality, luxury resort amenities of a "five star" hotel
(such as restaurants and bars, maid and room service, recreational facilities,
health clubs and spas, and other luxury amenities) at the Regina Resorts and
because of the Company's flexible "floating time," "floating unit," and
"floating location" program. Under this program, each Member is entitled to stay
at any of the Regina Resorts currently operated by the Company. In addition,
depending on the type of Vacation Interval purchased, the program gives a Member
the flexibility to: (i) elect the time of year to vacation at the Regina
Resorts, (ii) stay at the Regina Resorts at different times during a single year
by dividing such Member's week-long Vacation Interval into more than one
segment, (iii) increase the number of weeks that such Member is entitled to stay
at the Regina Resorts by dividing such Member's unit into smaller units, and
(iv) buy an annual or bi-annual Vacation Interval. The price of a Vacation
Interval ranges from $27,000 for a two-bedroom "Holiday" annual interval to
$8,000 for a studio "Prime" annual interval. Members also benefit from
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<PAGE> 10
the Company's participation in the vacation interval exchange network operated
by RCI, the world's largest vacation interval exchange organization with more
than two million vacation interval owners as members. Membership in RCI entitles
Members, subject to availability, to exchange their Vacation Intervals for
occupancy at any of the approximately 3,100 other resorts participating in the
RCI network. The Company believes that the combination of these attributes makes
its vacation ownership product one of the more innovative vacation ownership
concepts in the world-wide vacation ownership market. The Company intends to
grow into other vacation ownership markets utilizing whenever possible the close
association with "five-star" hotels and the floating time, unit, and location
opportunities for its Members.
The Company's principal operations currently consist of (i) marketing and
selling Vacation Intervals, (ii) operating the Regina Resorts, for which it
receives an annual service fee from each Member, and (iii) providing financing
for the purchase of Vacation Intervals. In 1997, the Company sold approximately
4,200 Vacation Intervals, producing $53.9 million in Vacation Interval sales
revenue. The Company had an unsold inventory as of December 31, 1997 of
approximately 12,500 (approximately 6,000 annual and 6,500 biannual) Vacation
Intervals, and the Company has plans to develop approximately 20,000 Vacation
Intervals on land it has contracted to purchase that is adjacent to the Regina
Resort in Los Cabos, Mexico, at a new resort to be developed in Cozumel, Mexico,
and at the Villa Vera Hotel and Racquet Club in Acapulco, Mexico, the
acquisition of which is expected to be completed in April 1998. For the twelve
months ended December 31, 1997, the Company provided financing for approximately
70% of its buyers (or approximately 75% of its Vacation Interval revenue). For
such period, cash sales plus down payments on financed sales represented
approximately 46% of Vacation Interval revenue. Assuming an average sales rate
of 4,000 Vacation Intervals per year, the Company anticipates that the existing
Regina Resorts will provide sufficient inventory for approximately four years of
Vacation Interval sales and that the planned development at its resort property
development sites in Cozumel and Los Cabos will provide approximately four
additional years of inventory.
The Company believes that it has some of the most innovative marketing
programs in the vacation ownership industry. In addition to lead generation
points in airports or shopping centers, independently or in association with
other businesses such as auto rental companies and restaurants, the Company
operates "theme locations" which provide the Company with an innovative,
alternative marketing venue. These are retail businesses with a strong
contemporary appeal to affluent tourists, offering products associated with
ecological consciousness, wildlife, conservation and local culture, while at the
same time promoting the Regina Resorts and inviting customers to attend sales
presentations. A share of the profits of these stores is contributed to causes
related to the stores' themes. The Company also markets and sells Vacation
Intervals at off-site centers in eleven cities in Mexico. And finally, the
Company's access to guests staying at the Westin Hotels provides it with a
steady source of high quality sales leads for potential Members. These guests
are particularly attractive to the Company because they generally are from high
income households and, based on the Company's past experience, have lower
default rates. In 1997, approximately 16% of Vacation Interval sales were made
to persons frequenting the Westin Hotels, approximately 51% of Vacation Interval
sales were made at the Regina Resorts to non-hotel patrons (with approximately
9.5% of total sales being made to theme store visitors), and the remaining 33%
of the Vacation Intervals were sold at off-site sales offices.
The Company has historically provided financing for approximately 70% of
Vacation Interval buyers. Buyers who finance through the Company are required to
make a down payment of at least 15% of the Vacation Interval's sales price and
to pay the balance of the purchase price over a period of one to seven years.
For the twelve months ended December 31, 1997, the average down payment on a
financed Vacation Interval was approximately 28% of its purchase price. The
Company believes its high percentage of U.S., Canadian and other non-Mexican
Members (currently, approximately 56%) reduces the impact of downturns in the
Mexican economy both on sales of Vacation Intervals and on the collectibility of
vacation interval contract receivables ("Vacation Interval Receivables"). In
addition, the Company is able to mitigate the effects of Mexican inflation on
Vacation Interval Receivables payable by Mexican citizens because most of those
Vacation Interval Receivables are payable in Unidades de Inversion, or UDIs, an
obligation denominated in pesos which is adjusted for Mexican inflation. At
December 31, 1997, the Company had a portfolio of approximately 5,500 loans to
Vacation Interval buyers amounting to approximately $43.0 million in
2
<PAGE> 11
outstanding principal amount, and the Vacation Interval Receivables had a
weighted average maturity of approximately five years. As of December 31, 1997,
approximately (i) 64% of all of the Vacation Interval Receivables were U.S.
dollar denominated and had a weighted average interest rate of 12.8%, (ii) 32%
of all Vacation Interval Receivables were denominated in UDIs and had a weighted
average interest rate of 25.8%, and (iii) 4% of all Vacation Interval
Receivables were denominated in pesos and had a weighted average interest rate
of 19.2%.
BUSINESS STRATEGY
The Company's long-term growth strategy is to develop a world-wide brand
name vacation ownership club, providing its Members with vacation opportunities
of consistent quality and luxury and the amenities generally associated with
"five-star" hotels in destination resort or tourist locations. Accordingly, the
Company plans to acquire and develop other vacation ownership resorts or
vacation ownership clubs in other locations in the Western Hemisphere, as well
as other parts of the world that appeal to the luxury segment of the market.
Among other things, in the near-term, the Company's strategy includes:
- Mexican Expansion. The Company intends to capitalize on its management's
expertise in Mexico by implementing currently available expansion
opportunities as well as acquisition opportunities. This will include
expanding the existing Regina Resort in Los Cabos by approximately 20
units and developing a Regina Resort at the Company's property in Cozumel
containing approximately 220 units, for an aggregate of 10,192 annual and
5,720 biannual Vacation Intervals. Furthermore, the Company is evaluating
opportunities to purchase additional inventory in Cancun and selected
other top resort destinations in Mexico. Finally, the Company anticipates
completion of the acquisition of the land and facilities of the Villa
Vera Hotel & Racquet Club in Acapulco (the "Villa Vera") for $4.5 million
in April 1998. The Villa Vera, consisting of 74 hotel units, suites and
villas, is planned to be converted into 57 units consisting of 20 hotel
rooms, 34 one-bedroom suites and villas and three two-bedroom villas. The
Company estimates this conversion will cost approximately $2.5 million.
Also, included in this conversion, the Company plans to build eight
two-bedroom suites on land within the property. Upon completion of this
conversion, the Company's inventory of Vacation Intervals should increase
by approximately 4,000.
- International Expansion. The Company intends to add vacation ownership
resort locations in areas other than Mexico. Initially, the Company
intends to focus on adding a resort or resorts in mountain regions, such
as the western United States and Canada, that will cater to snowskiing in
the winter and golf, hiking, fishing and similar activities in the summer
as well as provide the availability of amenities of a "five-star" hotel.
The Company also plans to add vacation ownership clubs in urban
destinations, such as New York City, San Francisco, London and other
popular business and tourist locations worldwide, which would provide
Members with the opportunity to enjoy the many attractions that such
large cities have to offer.
- Marketing and Sales. The Company intends to continue upgrading its
marketing efforts by opening more theme stores, consolidating its
telemarketing operations, and enhancing its marketing and sales hardware
and software. The Company plans to accelerate the implementation of its
"universal salesman" program by which potential Members work with only
one employee of the Company from first contact with the Company through
the sale of the Vacation Interval. Furthermore, the Company intends to
establish sales offices in other locations in Mexico and the rest of the
Western Hemisphere. Finally, the Company intends to further exploit its
current Member base to (i) determine the best locations and strategic
relationships with "five-star" quality hotel operators to expand its
operations, (ii) provide referrals for potential new Members, (iii) sell
additional Vacation Intervals to such Members, and (iv) sell additional
days or weeks to such Members and their guests at both preferential and
standby rates.
- Improving Operating Margins. The Company believes that its current
administrative and marketing infrastructure in Mexico is sufficient to
support its growth plans in Mexico over the next several years.
3
<PAGE> 12
Accordingly, the Company expects to reduce its general and administrative
costs as a percentage of revenues. Additionally, the Company plans to
seek ways to reduce its borrowing costs as it grows.
The Company intends initially to fund its business strategy through the use
of a portion of the proceeds of the Offering and cash flow from operations.
THE VACATION OWNERSHIP INDUSTRY
The Company believes the luxury segment is the fastest growing and most
stable segment of the vacation ownership market. Management believes that
vacation ownership sales to this high-end segment, in terms of both units and
dollars, tend to fluctuate less with the general economy than does the industry
as a whole. On a broader level, the entry of major lodging and hospitality
companies, such as Marriott, Disney, Hilton, Hyatt, Four Seasons,
Intercontinental, and Westin (each as defined herein), into vacation ownership
operations in the past decade is a strong contributing influence to the growth
and stability of the industry.
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 the American Resort Development Association, a private
industry organization ("ARDA"), during the fifteen-year period ending in (the
most recent year for which worldwide ARDA statistics are available) 1994,
worldwide vacation ownership sales volume for the vacation ownership industry
increased from approximately $490 million in 1980 to approximately $4.8 billion
in 1994. In addition, according to Interval International, the number of
vacation ownership resorts worldwide has grown from 1,550 in 1985 to an
estimated 5,000 in 1996. This growth rate does not reflect the addition of units
within existing resorts. The Company expects the vacation ownership industry to
continue growing as consumer awareness of the attractiveness of vacation
ownership as a vacation alternative increases.
THE PURCHASE TRANSACTIONS
On December 20, 1996, the Company and Bancomer executed a definitive
purchase agreement pursuant to which the Company agreed to purchase the Regina
Resorts for approximately $121.5 million, subject to certain price adjustments,
and the Westin Hotels for approximately $110 million. In May 1997, the Company
agreed to sell the Westin Hotels and 20% of CR US's common stock to Starwood
Capital Group, L.L.C. ("Starwood Capital") for an aggregate of approximately
$133.5 million. On August 18, 1997, the Company consummated these transactions.
The consummation of these transactions involved a series of substantially
contemporaneous transactions (the "Purchase Transactions"), which included: (i)
Bancomer's segregation of each Combined Resort into two condominium units with
related common areas so that after the closing of the Purchase Transactions the
Regina Resorts and Westin Hotels would be able to be owned by separate
companies, (ii) the transfer of the condominium units with respect to the Regina
Resorts into three separate trusts, under which the Company has the right to use
the condominium units at the Regina Resorts for 30 years and a wholly-owned
subsidiary of CR Mexico has the right to use the condominium units at the Regina
Resorts after the expiration of such 30-year period (the "Remainder Rights)
which the Company may be required to dispose of, if necessary (the "Remainder
Interest Disposition") (see "Description of Notes -- Certain Covenants"), (iii)
the borrowing of approximately $83.0 million (the "Bancomer Loan") from
Bancomer, (iv) the Company's purchase of the ownership rights to the Regina
Resorts and the Westin Hotels and related operations for approximately $219.0
million ($231.5 million less price adjustments of approximately $12.5 million)
from Bancomer, (v) the separation of the Combined Resorts and related operations
into separate legal entities, (vi) the sale by the Company of the Westin Hotels
to an indirect wholly-owned subsidiary of Starwood, (vii) the issuance of 20% of
CR US's outstanding common stock to an affiliate of Starwood Capital ("GLLC"),
and (viii) the entry by Starwood and the Company into an Asset Management
Agreement (the "Asset Management Agreement") by which the Company will provide
certain advisory services to Starwood in return for which the Company will be
paid a management fee of up to 20% of the net cash flow (as defined in the Asset
Management Agreement) after certain adjustments, of the Westin Hotels.
4
<PAGE> 13
In connection with the Purchase Transactions, the Company and affiliates of
Starwood entered into various operating agreements (the "Operating Agreements")
related to the joint operation and ownership of certain common facilities at the
Combined Resorts as well as certain matters related to the conduct of vacation
ownership sales and marketing activities, the rental of excess Regina Resort
vacation ownership units by Starwood, the rental of available Westin Hotel rooms
by Club Regina, the continued use of hotel facilities and amenities by Members,
the management of the Westin Hotels and other related matters. The Company
believes that these Operating Agreements will allow it to provide its Members
with high quality amenities and services at prices lower to the Company than if
the Company were to arrange for such amenities and services on a separate basis.
The Company is also performing certain administrative services for Starwood
in Mexico until August 18, 1998. In addition, the Company is continuing to
provide certain asset management services to Bancomer with respect to other
hotel, resort and marina facilities owned or controlled by Bancomer. Although
the revenues from these activities are not material, the Company believes that
the continued relationship with Bancomer is beneficial. For a more complete
description of the Purchase Transactions and the Remainder Interest Disposition,
see "Business -- Description of Purchase Transactions," "Risk Factors -- Company
Risks -- Risk of New Venture and Recent Acquisition; Lack of Prior Operating
History" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Introduction."
RECENT EVENTS
The Company has executed a letter of intent to acquire the land and
facilities of the Villa Vera Hotel & Racquet Club in Acapulco (the "Villa Vera")
for $4.5 million. The Villa Vera, consisting of 74 hotel units, suites and
villas, is planned to be converted into 57 units consisting of 20 hotel rooms,
34 one-bedroom suites and villas and three two-bedroom villas. The Company
estimates this conversion will cost approximately $2.5 million. Also, included
in this conversion, the Company plans to build eight two-bedroom suites on land
within the property. Upon completion of this conversion, the Company's inventory
of Vacation Intervals should increase by approximately 4,000. The Villa Vera has
been operating on a limited basis during the year ended December 31, 1997 and
its unaudited revenues and net loss for 1997 were approximately $0.4 million and
$0.4 million respectively.
During 1997, amendments to Mexico's value added tax laws were enacted which
subject sales of vacation intervals such as those sold by the Company to a value
added tax of approximately 10% in Cancun and Los Cabos and 15% in Puerto
Vallarta. To counteract the imposition of this value added tax on sales of
Vacation Intervals, the Company has raised its prices, but by less than the
amount of such tax, thereby placing downward pressure on the Company's margins.
The Company's executive offices are located at 10,000 Memorial Drive, Suite
480, Houston, Texas 77024, and its telephone number is (713) 613-2800.
5
<PAGE> 14
STRUCTURE
The following chart shows generally the corporate structure of the Company
and its relationship with the Westin Hotels and Starwood.
CORPORATE STRUCTURE CHART
- ---------------
(1) Starwood and its affiliates and CR US and its Operating Subsidiaries have
executed Operating Agreements providing for the day-to-day operating
relationship between the Westin Hotels and the Regina Resorts. In addition,
Starwood and the Company have entered into an Asset Management Agreement
pursuant to which the Company is entitled to 20% of the net cash flow (as
defined in such agreement) of the Westin Hotels in excess of certain
priority returns to Starwood. See "Business -- Description of Purchase
Transactions -- Description of Starwood Agreements."
(2) The Westin Hotels are managed by Westin.
(3) CR US operates its business in Mexico through a series of direct and
indirect holding company subsidiaries and indirect wholly-owned operating
subsidiaries. CR Mexico is an indirect wholly-owned subsidiary organized
under Mexican law and a co-issuer with CR US of the Notes. Under the
Indenture, CR Mexico is required to maintain promissory notes with respect
to any funds transferred from CR Mexico to any other subsidiaries of CR US.
See "Use of Proceeds" and "Description of Notes -- Certain Covenants."
RISK FACTORS; RECENT DEVELOPMENT
An investment in the Notes involves a high degree of risk. For a discussion
of certain other matters that should be considered by prospective investors in
connection with the Exchange Offer, see "Risk Factors."
6
<PAGE> 15
SUMMARY OPERATING DATA
The following tables set forth certain information regarding the Company's
operations, including resort location, inauguration date, resort size, the
number of current and planned units at the Company's resort locations, the
Vacation Interval inventory, and the number and average price of Vacation
Intervals sold for the years ending December 31, 1995, 1996 and 1997. See
"Business -- The Company" and "Business -- The Resorts." There can be no
assurance that the Company's planned expansion will occur within the time
currently established for such expansion or that the number of Vacation
Intervals added to the Company's inventory from such development will equal the
estimates set forth below. See "Risk Factors -- Company Risks -- Development and
Construction Risks."
RESORT DATA
<TABLE>
<CAPTION>
COMBINED UNITS(2)
DATE RESORT ------------------
RESORT AND LOCATION OPENED PROPERTY SIZE(1) CURRENT PLANNED
------------------- ------ ---------------- ------- -------
<S> <C> <C> <C> <C>
Los Cabos......................................... 1/94 15 130 20
Puerto Vallarta................................... 6/92 21 203
Cancun............................................ 3/91 11 69
Cozumel........................................... 54 220
Villa Vera(3)..................................... 8 65
--- ---
Total................................... 402 240
</TABLE>
- ---------------
(1) Acres.
(2) A unit is an apartment in which a Member using his or her Vacation Interval
stays. Units may be studios, or may contain one or two bedrooms and a common
room with a kitchen.
(3) The Company has signed a letter of intent to purchase the Villa Vera which
is intended to close in April 1998.
VACATION INTERVAL INVENTORY
<TABLE>
<CAPTION>
AS OF DECEMBER 30, 1997 PLANNED
---------------------------------------------- ------------------------------------------------
2 1 1 2 1 2 1
BEDROOM BEDROOM STUDIO BEDROOM BEDROOM BEDROOM STUDIO BEDROOM BEDROOM
SEASONS(1) ANNUAL ANNUAL ANNUAL BIANNUAL TOTAL ANNUAL ANNUAL ANNUAL BIANNUAL BIANNUAL
---------- ------- ------- ------ -------- ------ ------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday.............. 41 1,170 1,211 377 1,050 100
Prime................ 304 407 603 5,803 7,117 2,168 3,854 1,181 165 4,161
Select............... 791 2,747 3 697 4,238 1,275 2,329 753 2,069
----- ----- --- ----- ------ ----- ----- ----- --- -----
Total......... 1,136 4,324 606 6,500 12,566 3,820 7,233 2,034 165 6,230
<CAPTION>
PLANNED
-----------------
STUDIO
SEASONS(1) BIANNUAL TOTAL
---------- -------- ------
<S> <C> <C>
Holiday.............. 1,527
Prime................ 300 11,829
Select............... 6,426
--- ------
Total......... 300 19,782
</TABLE>
- ---------------
(1) Vacation Intervals are sold for any one of three "seasons," Holiday, Prime
and Select, corresponding to varying levels of seasonal demand. See
"Business -- The Company -- The Product."
VACATION INTERVALS SOLD/AVERAGE PRICE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997(1)
---------------- ---------------- ----------------
# SOLD PRICE # SOLD PRICE # SOLD PRICE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
2 bedroom annual............................... 840 $12,008 1,003 $16,663 514 $17,324
1 bedroom annual............................... 942 9,568 1,214 12,514 2,478 12,871
Biannual & studio.............................. 1,014 5,862 582 9,210 1,261 8,331
----- ------- ----- ------- ----- -------
Total sold/average price.............. 2,796 $ 8,957 2,799 $13,313 4,253 $12,063
</TABLE>
- ---------------
(1) Includes Vacation Intervals sold by the Predecessor Business and the Company
for the period.
7
<PAGE> 16
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Issuers sold the Outstanding Notes on December 5, 1997 to the Initial
Purchaser, reflected in the offering circular dated December 5, 1997 (the
"Offering Circular") and the Initial Purchaser thereupon offered and sold them
only to certain qualified buyers. The $96 million of net proceeds the Issuers
received in connection with the sale of the Outstanding Notes, and warrants (the
"Warrants") to purchase an aggregate of 1,869,962 shares of CR US's $.001 par
value common stock, ("Common Stock"), as described in the Offering Circular,
were used as follows: (i) approximately $83.0 million to repay indebtedness owed
to Bancomer under the Bancomer Loan, (ii) approximately $7.5 million was
reserved for the first stage of development of a new resort at Cozumel and for
the development of additional units at Los Cabos and at other areas, (iv)
approximately $1.2 million to repay debt owed to affiliates (the "Affiliate
Debt") which the Company incurred in connection with the Purchase Transactions,
and (v) the remainder for working capital, certain advisory fees and other
general corporate purposes. See "Use of Proceeds." The Warrants have an exercise
price of $.01 per share, and are exercisable at any time prior to the maturity
date of the Notes. The Warrants are not being registered in the Exchange Offer,
but are subject to a registration rights agreement. See "Private Placement,"
"Capitalization" and "Description of Capital Stock and Warrants."
THE EXCHANGE OFFER
The Exchange Offer, the consummation of which is required by the Indenture
and Registration Rights Agreement (as defined herein) and described in the
Offering Circular, relates to the exchange of up to $100,000,000 principal
amount of Registered Notes for up to $100,000,000 principal amount of
Outstanding Notes. The form and terms of the Registered Notes are identical in
all material respects to the form and terms of the Outstanding Notes except that
the Registered Notes have been registered under the Securities Act and will not
contain certain transfer restrictions and hence are not entitled to registration
rights with respect to the Registered Notes. The Registered Notes will evidence
the same debt as the Outstanding Notes and will be issued under and be entitled
to the benefits of the Indenture governing the Outstanding Notes. See
"Description of Notes."
The Exchange Offer......... The registration rights agreement (the
"Registration Rights Agreement"), by and among the
Issuers and Initial Purchaser, provided that (i)
the Issuers will file a registration statement (the
"Exchange Offer Registration Statement") with the
Commission on or prior to the March 31, 1998, (ii)
the Issuers will use their best efforts to have the
Exchange Offer Registration Statement declared
effective by the Commission on or prior to May 31,
1998, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy,
the Issuers will commence the Exchange Offer and
use their best efforts to issue on or prior to 30
business days after the date on which the Exchange
Offer Registration Statement was declared effective
by the Commission, Registered Notes in exchange for
all Outstanding Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file a
registration statement (the "Shelf Registration
Statement"), the Issuers will use their best
efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after
such filing obligation arises (provided that the
Issuers shall not be obligated to file such Shelf
Registration Statement earlier than March 31, 1998)
and to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to
90 days after such obligation arises. If the
Issuers fail to satisfy these registration
obligations, they will be required to pay
liquidated damages ("Liquidated Damages") to the
Holders of the Notes under certain circumstances.
Each $1,000 principal amount of Registered Notes
will be issued in exchange for each $1,000
principal amount of outstanding Outstanding Notes.
As of the date hereof, $100,000,000
8
<PAGE> 17
principal amount of Outstanding Notes are issued
and outstanding. The Issuers will issue the
Registered Notes to tendering holders of
Outstanding Notes on or promptly after the
Expiration Date.
Resale..................... The Issuers believe that the Registered Notes
issued pursuant to the Exchange Offer generally
will be freely transferable by the holders thereof
without registration or any prospectus delivery
requirement under the Securities Act. See "The
Exchange Offer -- General" and "Plan of
Distribution."
The Outstanding Notes were not registered under the
Securities Act and unless so registered may not be
offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the
registration requirements of the Securities Act.
See "Transfer Restrictions on the Outstanding
Notes."
Expiration Date............ 5:00 p.m., New York City time, on March [ ], 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date to which the Exchange Offer is extended. See
"The Exchange Offer -- Expiration Date; Extensions;
Amendments."
Procedures for Tendering
Outstanding Notes........ Each Holder of Outstanding 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 the Outstanding Notes to be exchanged and any
other required documentation to the Exchange Agent
at the address set forth herein and therein or
effect a tender of Outstanding Notes pursuant to
the procedures for book-entry transfer as provided
for herein. See "The Exchange Offer -- Procedures
for Tendering."
Special Procedures for
Beneficial Holders......... Any beneficial holder whose Outstanding Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on
beneficial holder's behalf. If such beneficial
holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the
Letter of Transmittal and delivering the
Outstanding Notes, either make appropriate
arrangements to register ownership of the
Outstanding Notes in such holder's name or obtain a
properly completed bond power from the registered
holder. The transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery........ Procedures Holders of Outstanding Notes who wish to
tender their Outstanding Notes and whose
Outstanding Notes are not immediately available or
who cannot deliver their Outstanding Notes and a
properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely
basis, must tender their Outstanding Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
9
<PAGE> 18
Withdrawal Rights.......... Tenders of Outstanding Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on
the business day prior to the Expiration Date,
unless previously accepted for exchange. See "The
Exchange Offer -- Withdrawal of Tenders."
Termination of the Exchange
Offer.................... The Company may terminate the Exchange Offer if it
determines that the Exchange Offer violates any
applicable law or interpretation of the staff of
the SEC. Holders of Outstanding Notes have certain
rights against the Issuers under the Registration
Rights Agreement should the Issuers fail to
consummate the Exchange Offer. See "The Exchange
Offer -- Termination" and "Description of the
Notes -- Registration Rights; Additional Interest."
Acceptance of Outstanding
Notes and Delivery of
Registered Notes......... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange
Offer -- Termination"), the Company will accept for
exchange any and all Outstanding Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Registered Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange
Offer -- General."
Exchange Agent............. IBJ Schroder Bank & Trust Company is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing address of the
Exchange Agent is: IBJ Schroder Bank & Trust
Company, P. O. Box 84, Bowling Green Station, New
York, New York 10274-0084, Attention Reorganization
Operations Department; and hand and overnight
delivery: IBJ Schroder Bank & Trust Company, One
State Street, New York, New York 10004, Attention:
Securities Processing Window, Subcellar One,
(SC-1). For information with respect to the
Exchange Offer, the telephone number for the
Exchange Agent is (212) 858-2103 and the facsimile
number for the Exchange Agent is (212) 858-2611.
See "The Exchange Offer -- Exchange Agent."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Registered Notes
pursuant to the Exchange Offer. See "Use of
Proceeds." For a discussion of the use of the net
proceeds received by the Company from the sale of
the Outstanding Notes, see "Private Placement."
Transfer Restrictions...... The Securities may not be publicly issued, offered
or sold in Mexico.
THE NOTES
Notes Outstanding.......... $100 million principal amount of 13% Senior Notes
due 2004.
Maturity................... December 1, 2004.
Interest Rate and Payment
Dates.................... The Notes bear interest at the rate of 13% per
annum. Interest has accrued from the Issue Date and
will be payable semi-annually on June 1 and
December 1 of each year, commencing on June 1,
1998.
10
<PAGE> 19
Holders of the Exchange Notes of record on May 15,
1998 will receive interest on June 1, 1998 from the
date of issuance of the Exchange Notes, plus an
amount equal to the accrued interests on the
Outstanding Notes from the date of issuance of the
Outstanding Notes, December 5, 1997, to the date of
exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record
date in respect of the June 1, 1998 interest
payment for the Outstanding Notes, holders who
exchange their Outstanding Notes for Exchange Notes
will receive the same interest payment on June 1,
1998 that they would have received had they not
accepted the Exchange Offer. Interest on the
Outstanding Notes accepted for exchange will cease
to accrue upon issuance of the Exchange Notes. See
"The Exchange Offer -- Interest on the Exchange
Notes."
Optional Redemption........ The Notes are redeemable at the option of the
Issuers, in whole or in part, on or after December
1, 2000, at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated
Damages (as defined), if any, to the date of
redemption. Notwithstanding the foregoing, at any
time prior to December 1, 2000, the Issuers may
redeem up to 35% of the original principal amount
of the Notes at the redemption price of 113% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, through
the date of redemption, with net cash proceeds of a
Public Equity Offering (as defined); provided, that
at least $65.0 million in aggregate principal
amount of the Notes remain outstanding immediately
thereafter.
Change of Control.......... Upon the occurrence of a Change of Control (as
defined), the Issuers will be required to offer to
repurchase all of the outstanding Notes at 101% of
the principal amount thereof, together with accrued
and unpaid interest and Liquidated Damages, if any,
to the date of repurchase.
Ranking.................... The Notes are general unsecured obligations of the
Issuers. The Notes are pari passu in right of
payment with all existing and future unsecured
senior Indebtedness (as defined) of the Issuers and
senior in right of payment to all future
subordinated Indebtedness of the Issuers. However,
the Notes are effectively junior to all present and
future secured Indebtedness of the Issuers to the
extent of the assets securing such Indebtedness.
Substantially all of the operations of CR US are
conducted through the Operating Subsidiaries and,
therefore, the Issuers are dependent upon the cash
flow of the Operating Subsidiaries to meet their
obligations, including their obligations under the
Notes. The Notes are effectively subordinated to
all Indebtedness and other liabilities and
commitments (including trade payables and lease
obligations) of the Company's Operating
Subsidiaries.
Covenants.................. The indenture pursuant to which the Notes were
issued (the "Indenture") contains certain covenants
that, among other things, limit the ability of the
Issuers to incur additional Indebtedness and issue
preferred stock, pay dividends or make other
distributions, repurchase Equity Interests (as
defined) or subordinated Indebtedness, create
certain liens, enter into certain transactions with
affiliates, sell assets of the Issuers, issue or
sell Equity Interests of CR US's subsidiaries, or
enter into certain mergers and consolidations. In
addition, under certain circumstances, the Issuers
are required to offer to purchase Notes at a price
equal to 100% of the principal amount thereof, plus
accrued and unpaid
11
<PAGE> 20
interest and Liquidated Damages, if any, to the
date of purchase, with the proceeds of certain
Asset Sales (as defined). See "Description of
Notes -- Certain Covenants."
Additional Amounts......... Any payments in respect of the Notes will be made
free and clear of and without any withholding or
deduction for or on account of any present or
future taxes, duties, levies, imposts, assessments
or other governmental charges of whatever nature
imposed or levied by or on behalf of Mexico or any
subdivision thereof or by any authority or agency
therein or thereof having power to tax ("Taxes"),
unless such Taxes are required by law, rule or
regulation or by the interpretation or
administration thereof to be withheld or deducted,
in which case, subject to certain exceptions, the
Issuers will pay such additional amounts
("Additional Amounts") as may be necessary so that
the net amount received by holders (the "Holders")
of the Notes (including Additional Amounts) after
such withholding or deduction will not be less than
the amount that would have been received in the
absence of such withholding or deduction. See
"Description of Notes -- Additional Amounts."
Governing Law.............. The Notes and the Indenture are governed by the
laws of the State of New York.
12
<PAGE> 21
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The summary pro forma financial data for the year ended December 31, 1996
and for the period January 1, 1997 through August 18, 1997 have been derived
from the audited combined historical financial statements of the Predecessor
Business. These data include both vacation ownership and hotel operations. The
historical and pro forma income statement data shown below present only the data
relating to the vacation ownership segment of the Predecessor Business. The
Summary Pro Forma financial data for the year ended December 31, 1997 have been
derived from the audited historical financial statements of the Predecessor
Business for the period from January 1, 1997 through August 18, 1997 and the
audited historical financial statements of the Company for the period from
August 18, 1997 through December 31, 1997. The pro forma financial data do not
purport to (i) represent what the Company's results of operations would have
been had the Offering, the Purchase Transactions and the Remainder Interest
Disposition occurred on the assumed dates or (ii) project the Company's results
of operations for any future period. These data should be read in conjunction
with "Business -- Description of Purchase Transactions," "Selected Combined
Historical Financial Data," "Other Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of the Company and the Predecessor Business together
with the notes thereto included elsewhere herein.
PRO FORMA INCOME STATEMENTS FOR THE VACATION OWNERSHIP SEGMENT
UNAUDITED
<TABLE>
<CAPTION>
VACATION OWNERSHIP SEGMENT
OF THE PREDECESSOR BUSINESS
-------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31, 1996 SEVEN
------------------------------------ AND 1/2
MONTHS
ENDED TWELVE
PRO FORMA AUGUST 18, MONTHS
ADJUSTMENTS 1997 COMPANY'S ENDED
INCREASE ---------- RESULTS DECEMBER 31,
HISTORICAL (DECREASE) PRO FORMA HISTORICAL FOR 1997(1) 1997
---------- ----------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA INCOME
STATEMENT DATA:
Revenues --
Vacation Interval
sales............... $ 2,867 $34,396 $37,263 $ 2,476 $19,239 $21,715
Interest income on
Vacation Interval
Receivables......... 3,294 3,294 3,277 995 4,272
Rental of vacant
units............... 5,497 455 2,898 4,510 1,603 6,163
Service fee income.... 3,054 2,461 2,486 4,947
Other revenues........ 760 760 1,329 1,957 3,286
------- ------- ------- ------- -------
Total revenues.......... 12,418 47,269 14,103 26,280 40,383
------- ------- ------- ------- -------
Operating expenses --
Vacation Interval cost
of sales............ 7,512 7,512 5,667 5,667
Commission expense.... 1,604 5,504 7,108 412 2,194 2,606
Advertising, sales and
marketing........... 3,829 3,829 4,899 4,174 9,073
Maintenance and
energy.............. 3,798 3,400 3,798 4,669 1,846 6,515
Provision for
uncollectible
accounts............ -- 3,400 2,349 2,349
General and
administrative...... 5,400 1,500 6,900 4,503 6,394 10,897
------- ------- ------- ------- -------
Total operating
expenses.............. 14,631 32,547 14,483 22,624 37,107
------- ------- ------- ------- -------
Operating income
(loss)................ (2,213) 14,722 (380) 3,656 3,276
Depreciation and
amortization........ 78 78 61 61
Non-cash interest
expense............. 2,278 2,278 551 551
Cash interest
expense............. 3,108 10,542 13,650 2,827 3,726 6,553
Exchange and
translation loss,
net................. 75 992 1,067
------- ------- ------- ------- -------
Income (loss) before
provision for taxes... (5,321) (1,284) (3,282) (1,674) (4,956)
Mexican taxes......... 3,312 (12) 3,300 1,756 1,662 3,418
------- ------- ------- ------- -------
Net income (loss) before
preferred dividends... (8,633) (4,584) (5,038) (3,336) (8,374)
Preferred dividends..... 0 619 619 232 232
------- ------- ------- ------- -------
Net income (loss) to
common stockholders... $(8,633) $(5,620) $(5,038) $(3,568) $(8,606)
======= ======= ======= ======= =======
<CAPTION>
TWELVE
MONTHS
PRO FORMA ENDED
ADJUSTMENTS DECEMBER 31,
INCREASE 1997
(DECREASE) PRO FORMA
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PRO FORMA INCOME
STATEMENT DATA:
Revenues --
Vacation Interval
sales............... $29,003(2) $50,718
Interest income on
Vacation Interval
Receivables......... 4,272
Rental of vacant
units............... 6,163
Service fee income.... 4,947
Other revenues........ 3,286
-------
Total revenues.......... 69,386
-------
Operating expenses --
Vacation Interval cost
of sales............ 5,904(3) 11,571
Commission expense.... 5,100(2) 7,706
Advertising, sales and
marketing........... 9,073
Maintenance and
energy.............. 6,515
Provision for
uncollectible
accounts............ 2,611(4) 4,960
General and
administrative...... 283(5) 11,180
-------
Total operating
expenses.............. 51,005
-------
Operating income
(loss)................ 18,381
Depreciation and
amortization........ 49(6) 110
Non-cash interest
expense............. 1,708(7) 2,259
Cash interest
expense............. 6,697(7) 13,250
Exchange and
translation loss,
net................. 1,067
-------
Income (loss) before
provision for taxes... 1,695
Mexican taxes......... 920(8) 4,378
-------
Net income (loss) before
preferred dividends... (2,643)
Preferred dividends..... 387(9) 619
-------
Net income (loss) to
common stockholders... $(3,262)
=======
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
VACATION OWNERSHIP SEGMENT
OF THE PREDECESSOR BUSINESS
-------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31, 1996 SEVEN
------------------------------------ AND 1/2
MONTHS
ENDED TWELVE
PRO FORMA AUGUST 18, MONTHS
ADJUSTMENTS 1997 COMPANY'S ENDED
INCREASE ---------- RESULTS DECEMBER 31,
HISTORICAL (DECREASE) PRO FORMA HISTORICAL FOR 1997(1) 1997
---------- ----------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER PRO FORMA
FINANCIAL DATA:
Pro forma EBITDA(10).. $(2,213) $14,305 $ (455) $ 2,664 $ 2,209
Ratio of earnings to
fixed charges(11)... -- .9x -- 0.6x 0.3x
<CAPTION>
TWELVE
MONTHS
PRO FORMA ENDED
ADJUSTMENTS DECEMBER 31,
INCREASE 1997
(DECREASE) PRO FORMA
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OTHER PRO FORMA
FINANCIAL DATA:
Pro forma EBITDA(10).. $17,314
Ratio of earnings to
fixed charges(11)... 1.1x
</TABLE>
- ---------------
(1) Reflects the results of operations of the Company for the twelve months
ended December 31, 1997 including for the period from August 18, 1997
through December 31, 1997, and does not include results of operations of
the Predecessor Business.
(2) On August 18, 1997, in the Purchase Transactions, the Company acquired the
Combined Resorts, and the hotel portion of the Combined Resorts was sold to
Starwood. The pro forma income statement data give effect to the Offering
and application of the estimated net proceeds therefrom, the Purchase
Transactions, the Remainder Interest Disposition and certain stockholder
investments as if such transactions had occurred as of January 1st of each
period presented.
(3) Records the cost of the acquired inventory of Vacation Intervals to be sold
(as determined through an initial allocation of the acquisition purchase
price) and the related charge-off of these inventory costs as Vacation
Interval cost of sales.
(4) Provision for uncollectible accounts related to the revenues recognized
under the full accrual method for revenue recognition.
(5) Assumes increased expense of $1.5 million on an annual basis to provide for
the estimated additional cost of corporate staff, office and overhead which
the Company expects to incur as an independent corporate entity.
(6) Reflects depreciation of office furniture and equipment, not held for sale
as Vacation Intervals, assuming ten-year lives.
(7) Non-cash and cash interest expense represents total interest expense and
includes (i) non-cash interest expense of approximately $1.16 million
representing annual amortization of debt issuance costs, (ii) approximately
$0.65 million of annual withholding taxes, and (iii) non-cash interest
expenses of approximately $1.12 million representing annual amortization of
original issue discount of the Notes, as a portion of the issue price of
the Units offered hereby that has been allocated to the Warrants. Does not
include the pro forma net effect of interest income which would have been
earned on excess cash. On a pro forma basis the Company believes it would
have earned at least 5% interest income on excess cash (approximately $0.7
million interest income for the twelve months ended December 31, 1995 and
1996 and 1997.
(8) Reflects an estimate of the Mexican taxes that would have been incurred if
the pro forma results had been obtained and the Company's currently
existing legal structure had been in place during the periods presented.
(9) Represents dividends payable on Class A Preferred Stock of CR US. See
"Business -- Description of Purchase Transactions -- Description of Class A
Preferred Stock."
(10) EBITDA represents net income before interest expense, preferred dividends,
taxes, depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be construed as a
substitute for income from operations, net income or cash flows from
operating activities in analyzing the Company's operating performance,
financial position and cash flows. The EBITDA measure presented herein may
not be comparable to EBITDA as presented by other companies and is not the
same as "Consolidated Cash Flow" under the Indenture. See "Description of
Notes -- Certain Definitions."
The following table reconciles pro forma EBITDA to pro forma net income (loss)
applicable to common stockholders:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Pro forma net income (loss) applicable to common
stockholders.............................................. $(5,620) $(3,262)
Non-cash interest expense................................... 2,278 2,259
Cash interest expense....................................... 13,650 13,250
Mexican taxes............................................... 3,300 4,338
Depreciation and amortization............................... 78 110
Preferred dividends......................................... 619 619
------- -------
Pro forma EBITDA............................................ $14,305 $17,314
======= =======
</TABLE>
(11) The ratio of earnings to fixed charges has been computed by dividing
earnings before taxes plus fixed charges by fixed charges. Fixed charges
consist of interest and preferred stock dividends. Fixed charges exceed
earnings by approximately $5.3 million for the historical twelve months
ended December 31, 1996 and $3.3 million for the historical seven and a
half months ended August 18, 1997.
14
<PAGE> 23
SUMMARY COMBINED HISTORICAL FINANCIAL DATA
The Summary Combined Historical Financial Data presented below reflect (i)
the combined historical income statement data of the Predecessor Business and
(ii) the historical financial data of the vacation ownership segment of the
Predecessor Business. The historical income statement data presented below were
derived from the combined historical financial statements of the Predecessor
Business and prepared in accordance with U.S. GAAP. These data include the use
of the installment method of accounting for the vacation ownership sales margins
reported by the Combined Resorts, because the Remainder Interest was owned by
the Predecessor Business.
The Company believes that the installment method of accounting does not
properly reflect its economic earnings and believes that the full accrual method
of accounting better reflects the economic earnings of the vacation ownership
segment of the Company and of the Predecessor Business. Because the Company has
completed a disposition of the Remainder Interest the Company will use the full
accrual method of accounting on a going-forward basis from August 18, 1997.
Accordingly, the Company has also presented elsewhere in this Prospectus
Unaudited Pro Forma Financial Data of the vacation ownership segment of the
Predecessor Business which eliminates the effect of the installment method of
accounting and instead recognizes vacation ownership revenues and related direct
costs of sales in the period that the sales agreement was executed (and reflect
other pro forma adjustments as discussed in the related notes thereto). See
"Unaudited Pro Forma Financial Data."
The following summary combined financial data for the years ended December
31, 1995 and 1996 are derived from the audited consolidated financial statements
of the Predecessor Business. The Summary Combined Financial Data for the year
ended December 31, 1997 have been derived from the consolidated financial
statements of the Predecessor Business for the period January 1, 1997 through
August 18, 1997 and the consolidated financial statements of the Company for the
period from August 18, 1997 through December 31, 1997.
These data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Description of Purchase Transactions" and the financial statements
of the Company and the Predecessor Business and the notes thereto included
elsewhere in this Prospectus.
15
<PAGE> 24
HISTORICAL INCOME STATEMENT DATA OF THE PREDECESSOR BUSINESS
<TABLE>
<CAPTION>
SEVEN AND
ONE-HALF MONTHS
YEAR ENDED DECEMBER 31, ENDED AUGUST 18,
----------------------------------------------------- -------------------------
1995 1996 1997
------------------------- ------------------------- -------------------------
VACATION VACATION VACATION
OWNERSHIP OWNERSHIP OWNERSHIP
COMBINED(1) SEGMENT(2) COMBINED(1) SEGMENT(2) COMBINED(1) SEGMENT(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL INCOME STATEMENT DATA:
Vacation ownership revenues:
Vacation Interval sales.................. $ 25,034 $ 25,034 $37,263 $37,263 $31,479 $31,479
Less amounts deferred(3)............... (24,461) (24,461) (36,435) (36,435) (30,653) (30,653)
Plus amounts recognized(3)............. 1,131 1,131 2,039 2,039 1,650 1,650
Interest income on Vacation Interval
Receivables............................ 1,839 1,839 3,294 3,294 3,277 3,277
Rental of vacant units................... 2,043 2,043 2,898 2,898 4,560 4,560
Service fee income....................... 2,062 2,062 2,599 2,599 2,461 2,461
Other revenues........................... 690 690 760 760 1,329 1,329
-------- -------- ------- ------- ------- -------
Total vacation ownership
revenues................................. 8,338 8,338 12,418 12,418 14,103 14,103
Total hotel revenues less direct hotel
expenses................................. 23,368 30,718 24,977
Other operating expenses:
Commissions paid......................... 4,919 4,919 7,108 7,108 5,512 5,512
Less amounts deferred(3)............... (4,824) (4,824) (5,807) (5,807) (5,413) (5,413)
Plus amounts recognized(3)............. 178 178 303 303 313 313
Advertising, sales and marketing......... 8,526 4,128 7,928 3,829 7,863 4,899
Maintenance and energy................... 8,475 3,183 9,209 3,798 9,517 4,669
General and administrative............... 12,023 6,052 13,086 5,745 10,274 3,963
Other expenses........................... 1,473 585 485 (345) 1,517 541
-------- -------- ------- ------- ------- -------
Total operating expenses................... 30,770 14,221 32,312 14,631 29,583 14,484
-------- -------- ------- ------- ------- -------
Operating income (loss).................... 936 (5,883) 10,824 (2,213) 9,497 (381)
Depreciation and amortization(4)......... 0 0 0 0 0 0
Interest expense......................... 10,357 3,884 8,287 3,108 7,539 2,827
Exchange and translation loss, net....... 75
-------- -------- ------- ------- ------- -------
Income (loss) before provision for taxes... (9,421) (9,767) 2,537 (5,321) 1,958 (3,283)
Mexican taxes............................ 5,294 3,356 4,633 3,312 4,694 1,756
-------- -------- ------- ------- ------- -------
Net income (loss).......................... $(14,715) $(13,123) $(2,096) $(8,633) $(2,736) $(5,039)
======== ======== ======= ======= ======= =======
OTHER HISTORICAL FINANCIAL DATA:
EBITDA(5)................................ $ (5,883) $(2,213) $ (455)
Ratio of earnings to fixed charges(6).... -1.5x -0.6x -0.2x
</TABLE>
16
<PAGE> 25
SUMMARY HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
VACATION OWNERSHIP SEGMENT OF PREDECESSOR BUSINESS
-------------------------------------------------------
SEVEN AND
1/2 MONTHS
ENDED
OCTOBER 18 COMPANY
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Vacation ownership revenues:
Vacation intervals sales............ $ 6,329 $ 24,500 $ 25,034 $ 37,263 $31,479 $ 19,239
Less amounts deferred............. (6,277) (24,064) (24,461) (36,435) (30,653)
Plus amounts recognized........... 196 1,131 2,039 1,650
Interest income on Vacation Interval
Receivables....................... 197 1,042 1,839 3,294 3,277 995
Rental of vacant units.............. 546 1,313 2,043 2,898 4,560 3,142
Service fee income.................. 2,062 2,599 2,461 1,987
Other revenues...................... 1,521 2,631 690 760 1,329 917
-------- -------- -------- -------- ------- --------
Total vacation ownership revenues..... 2,316 5,618 8,338 12,418 14,103 26,280
-------- -------- -------- -------- ------- --------
Cost of vacation intervals sales.... 5,667
Commissions paid.................... 972 4,782 4,919 7,108 5,512
Less amounts deferred............. (965) (4,697) (4,824) (5,807) (5,413)
Plus amounts recognized........... 31 178 303 313
Advertising, sales and marketing.... 8,611 15,407 4,129 3,829 4,899 6,368
Maintenance and energy.............. 1,493 3,969 3,183 3,798 4,669
General and administrative.......... 6,985 12,333 6,062 5,400 3,963 8,240
Other expenses...................... 2,064 3,355 585 541 2,349
-------- -------- -------- -------- ------- --------
Total operating expenses.............. 19,160 35,180 14,232 14,631 14,484 22,624
-------- -------- -------- -------- ------- --------
Operating income (loss)............... (16,844) (29,562) (5,894) (2,213) (381) 3,656
Depreciation and amortization....... 7,733 10,118 612
Interest expense.................... 3,884 3,108 2,827 3,726
Exchange and translation loss....... 381 4,266 75 992
-------- -------- -------- -------- ------- --------
Income (loss) before provision for
Mexican taxes....................... (24,958) (43,946) (9,778) (5,321) (3,283) (1,674)
Provision for Mexican taxes......... 2,414 5,881 3,356 3,312 1,756 1,662
-------- -------- -------- -------- ------- --------
Net income (loss)..................... $(27,372) $(49,827) $(13,134) $ (8,633) $(5,039) $ (3,336)
======== ======== ======== ======== ======= ========
</TABLE>
- ---------------
(1) The Company's Historical Consolidated Statement of Operations for the year
ended December 31, 1997 includes the operations of the purchased Club Regina
Resorts only for the period August 19, 1997 through December 31, 1997. Pro
forma unaudited Statements of Operatings, which combine the operations of
the Predecessor Businesses for the period January 1, 1997 through August 18,
1997, using the full accrual method of accounting, with the Company's 1997
historical results are presented elsewhere herein in order to provide pro
forma operating data for the full year ended December 31, 1997 along with
comparative pro forma operating data of the Predecessor Business for the
year ended December 31, 1996. The 1996 pro forma operating data has been
provided, using the full accrual method of accounting in order to provide
relevant comparative operating information.
34.1
<PAGE> 26
- ---------------
(1) These financial data were derived from the Combined Historical Financial
Statements of the Predecessor Business which were prepared in accordance
with U.S. GAAP. See the Historical Combined Financial Statements of the
Predecessor Business. The historical combined financial data includes the
combined results of both the vacation ownership and hotel segments of the
Predecessor Business which, prior to August 18, 1997, were owned by
Bancomer.
(2) The historical vacation ownership segment information was prepared by
identifying the direct vacation ownership revenues and expenses and
allocating the hotel and vacation ownership shared expenses based on the
relative number of total rooms at the beginning of each period.
(3) Because the Company acquired perpetual ownership of the Regina Resorts and
only sells a 30-year membership to its customers, the historical financial
information has been prepared by using the installment method of accounting
as required by U.S. GAAP, which requires the Company to recognize annually
only 1/30th of cumulative vacation ownership revenues, net of cumulative
provisions for doubtful accounts and cumulative commission expenses. Because
the Company intends to effect the Remainder Interest Disposition if it is
required to do so under the Indenture, for periods after August 18, 1997
financial data are presented using the full accrual method of accounting in
accordance with SFAS No. 66 rather than the installment method of
accounting. See "Description of Notes -- Certain Covenants" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Depreciation was not recognized by the Predecessor Business during the
periods presented because the prior owner had recorded a significant
impairment loss in 1994 and the assets of the Combined Resorts were held for
sale from then until their sale on August 18, 1997.
(5) EBITDA represents net income before interest expense, taxes, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. However, EBITDA should not be construed as a substitute for
income from operations, net income or cash flows from operating activities
in analyzing the Company's operating performance, financial position and
cash flows. The EBITDA measure presented herein may not be comparable to
EBITDA as presented by other companies and is not the same as "Consolidated
Cash Flow" under the Indenture. See "Description of Notes -- Certain
Definitions."
(6) The ratio of earnings to fixed charges has been computed by dividing
earnings before Mexican tax plus fixed charges by fixed charges. Fixed
charges consist of interest and preferred stock dividends.
The following table reconciles historical EBITDA to historical net
income (loss) reported for the vacation ownership segment:
<TABLE>
<CAPTION>
SEVEN AND
ONE-HALF
MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- AUGUST 18,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)........................................... $(13,123) $(8,633) $(3,474)
Interest expense............................................ 3,884 3,108 2,827
Mexican taxes............................................... 3,356 3,312 1,336
Depreciation and amortization(5)............................ 0 0 0
-------- ------- -------
EBITDA...................................................... $ (5,883) $(2,213) $ 689
======== ======= =======
</TABLE>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
BALANCE
BALANCE SHEET DATA
SHEET DATA AT DECEMBER 31,
AT AUGUST 18, 1997 1997
------------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and temporary investments.............................. $ 2,056 $ 8,995
Vacation ownership and trade receivables.................... 37,180 39,952
Land, office furniture and equipment........................ 13,014 13,798
Total assets................................................ 95,749 118,164
Long-term debt, net of unamortized original issue
discount.................................................. 87,854 90,780
Stockholders' investment (deficit).......................... (315) 14,352
</TABLE>
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<PAGE> 27
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") which represent the Issuers'
expectations and beliefs concerning future events that involve risks and
uncertainties, including those associated with the effects of national and
regional economic conditions. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Discussions containing such
forward-looking statements may be found in the material set forth under
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Unaudited Pro Forma Financial Statements," "Business" and "Description of
Notes," as well as elsewhere herein. Actual results may differ materially from
those projected in the forward-looking statements. Although the Issuers believe
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. Important factors that could cause actual
results to differ materially from the Issuers' expectations are disclosed in
this Prospectus. Considering the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Issuers or any other person
that the objectives and plans of the Issuers will be achieved. The reader should
note that initial public offerings are excluded from Section 27A of the
Securities Act and Section 21E of the Exchange Act.
RISK FACTORS
Prior to making an investment decision, prospective investors in the
Registered Notes offered hereby should carefully consider all the information
herein and, in particular, the following risk factors. The following information
was derived in part from the Form 18-K, as amended, filed by the United Mexican
States with the Commission on June 20, 1997. The Company does not warrant the
accuracy or completeness of such information.
FACTORS RELATING TO MEXICO
Adverse Mexican Economic Conditions and Government Policies. Because each
Regina Resort is located in Mexico and a significant percentage of the owners of
Vacation Intervals are Mexican nationals (approximately 44% as of December 31,
1997), the Company's financial condition and results of operations are greatly
affected by the strength of the Mexican economy.
During the late 1980s and early 1990s, as a result of Mexican government
initiatives and the attendant increase in foreign investment, Mexico's growth
rate increased, the inflation rate was reduced significantly and the U.S.
dollar/peso exchange rate was relatively stable. During 1994, however, Mexico
experienced an economic crisis caused in part by a series of internal
disruptions and political events, including a large current account deficit
(8.0% of gross domestic product in 1994), reduced level of domestic savings (15%
of gross domestic product in 1994), civil unrest in the southern state of
Chiapas, the assassination of two prominent political figures and significant
devaluation of the peso. These events undermined the confidence of investors in
Mexico during 1994 and, combined with an increase in interest rates, led to a
substantial outflow of capital. The weaker value of the peso relative to the
dollar increased the cost, in peso terms, of imported goods and services, and
thereby increased the rate of inflation in Mexico to 52.0% in 1995 (as compared
to 7.1% in 1994). To the extent that employers adjusted wages upward to
compensate for the decline in purchasing power resulting from the devaluation of
the peso, and then adjusted prices to reflect increased wage costs, additional
inflationary pressures arose. The devaluation of the peso also led to a lack of
confidence on the part of investors in Mexico's ability to repay its short-term
obligations and, consequently, a reluctance of investors to reinvest in Mexico's
maturing government bonds. As a result, Mexico experienced a liquidity crisis
closely linked to the $29.2 billion of short-term government bonds (Tesobonos)
outstanding at the end of 1994 and maturing in 1995.
Since 1995, the Mexican government has instituted programs which sought to
(i) stabilize the exchange rate and maintain the current floating rate exchange
policy, (ii) stabilize the Mexican banking sector,
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<PAGE> 28
(iii) establish tax incentives for business to increase productivity and
employment, (iv) increase exports, (v) reform the pension system to encourage
private domestic savings, (vi) control inflation by decreasing public spending
and implementing a restrictive monetary policy, (vii) increase private sector
investment through privatization of transportation and telecommunications and
(viii) increase public-sector revenues, in part through increases in the general
rate of the value-added tax for certain goods and services from 10% to 15%
(except for certain "free zones" such as Cancun, Cozumel and Los Cabos, where
the rate continues to be 10%), increases in prices of fuel oil, natural gas and
electricity and increases in the minimum wage. In addition, the Mexican
government sought to minimize inflation by promoting the gradual implementation
of price increases.
Economic conditions in Mexico improved somewhat in 1996, with gross
domestic product in 1996 5.1% higher than gross domestic product in 1995, and
interest rates on 28-day Cetes declining to an average of 31.4% (from an average
of 48.4% in 1995). According to preliminary figures, in the first quarter of
1997, gross domestic product increased by 5.1% as compared to the same period in
1996. On January 15, 1997, the Mexican government repaid the remaining balance
that it borrowed on the line of credit extended by the United States and Canada.
There can be no assurance that the economic plan of the Mexican government will
achieve its stated goals or the improvement of the Mexican economy in 1996 will
continue in future periods.
The future performance of the Mexican economy may be adversely affected by
political instability in Mexico. On August 28, 1996, a little-known group
calling itself the Ejercito Popular Revolucionario (the Popular Revolutionary
Army, or "EPR") initiated attacks in various parts of Mexico, concentrating on
military and police targets, and since that date has claimed responsibility for
a number of other attacks and has been involved in direct skirmishes with
Mexican government troops. Although the extent of popular support enjoyed by the
EPR is not known, and none of the attacks occurred within 600 miles of any of
the Regina Resorts, the attacks adversely affected Mexico's foreign exchange and
securities markets. No assurance can be given that attacks in the future by the
EPR or any other insurgent group will not have a similar, or worse, effect on
such markets.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Accordingly, Mexican
governmental actions could have a significant effect on companies with Mexican
operations (including the Company), market conditions, prices and returns on
securities of companies with significant Mexican operations (including those of
the Company). On July 6, 1997, national elections were held in Mexico in which
parties opposed to the ruling Institutional Revolutionary Party ("PRI")
increased their representation in the Mexican legislature and captured the
mayoralty of Mexico City and the governorship of several states of Mexico.
Although the term of President Ernesto Zedillo, a member of the PRI, is
scheduled to continue until the year 2000, there can be no assurance that the
increased political power of parties opposed to the PRI will not result in a
change in Mexico's economic policies or the ability of President Zedillo to
implement plans or agreements similar to those referred to above. Any change in
Mexico's economic policies could have a material adverse effect on the Company's
business, results of operations, financial condition, ability to obtain
financing and prospects.
Future declines in the gross domestic product of Mexico, continued high
rates of inflation in Mexico or other adverse social, political or economic
developments in or affecting Mexico or other emerging market countries could
have a generally adverse effect on the Mexican economy, which could result in a
material adverse effect on the Company's business, results of operations,
financial condition, ability to obtain financing and prospects and on the market
price of the Issuers' securities. Finally, Mexican securities such as the Notes
are, to varying degrees, influenced by economic and market conditions in other
emerging market countries. Although economic conditions are different in each
country, investors' reactions to developments in one country may have effects on
the securities of issuers in other countries, including Mexico. There can be no
assurance that the trading price of the Notes or the Issuers' ability to meet
their obligations under the Notes would not be adversely affected by events
elsewhere, especially in emerging market countries.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Currency Fluctuations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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<PAGE> 29
Exchange Rates. The value of the peso has been subject to significant
fluctuations with respect to the U.S. dollar in the past and may be subject to
significant fluctuations in the future. The value of the peso declined by 60.8%
against the U.S. dollar, from Ps.3.33 at December 31, 1993 to Ps.5.00 at
December 31, 1994. Significant fluctuations in the value of the peso in short
time periods included a major decline in March 1994 (following the assassination
of a leading candidate in Mexico's presidential elections) of that year and a
decline by 42.9% from December 19, 1994 to December 31, 1994. See "-- Factors
Relating to Mexico -- Adverse Mexican Economic Conditions and Government
Policies." Between January 1, 1995 and March 31, 1996, the Mexican peso
depreciated an additional 50.8% to Ps.7.54 per U.S. dollar and fluctuated from a
high, relative to the U.S. dollar, of Ps.5.00 to a low, relative to the U.S.
dollar, of Ps.8.14. From March 31, 1996 to September 30, 1996, the peso/U.S.
dollar exchange rate was relatively stable, although the peso did depreciate
from Ps.7.55 per U.S. dollar at September 30, 1996 to Ps.8.06 per U.S. dollar at
December 30, 1997. At March 20, 1998, the peso/U.S. dollar exchange rate was
Ps.8.55 per U.S. dollar. No assurance can be given that the peso will not
further depreciate in value relative to the U.S. dollar in the future. See
"Exchange Rates" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Currency Fluctuations."
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves. While the Mexican government does not currently
restrict the ability of Mexican or foreign persons or entities to convert pesos
to U.S. dollars, no assurance can be given that the Mexican government will not
institute a restrictive exchange control policy in the future. Any such
restrictive exchange control policy could adversely affect the Issuers' ability
to convert dividends or other payments received in pesos into U.S. dollars for
purposes of making payments to the Holders of the Notes, and could also have a
material adverse effect on the Company's business and financial condition.
COMPANY RISKS
Risk of New Venture and Recent Acquisition; Lack of Prior Operating
History. Club Regina was organized in August 1996, but started operations as of
the closing of the Purchase Transactions on August 18, 1997. Prior to such
closing, the Combined Resorts were under common ownership of Bancomer, but the
Regina Resorts were operated separately from the Westin Hotels. There can be no
assurance that the Company will be able to operate the Regina Resorts on a
profitable basis or that the Regina Resorts can be operated as effectively under
separate ownership from the Westin Hotels as they were operated while Bancomer
owned the Regina Resorts and the Westin Hotels. Accordingly, the Company and
Starwood and Westin will be required to cooperate in the provision of such
services because the Regina Resorts and the Westin Hotels rely on certain common
and shared facilities to provide required services to Members and hotel guests,
respectively. To effect such cooperation, the Company and Starwood have entered
into the Operating Agreements by which their relationship is governed. Although
the Company believes that its relations with Starwood and Westin are good, there
can be no assurance that operating issues will not arise that could affect such
relationship or that if a third party were to succeed to the interests of
Starwood or Westin that the same level of cooperation between the Company and
any such successor would continue. See "Business -- Description of Purchase
Transactions."
Prior to the closing of the Purchase Transactions, the Combined Resorts had
been operating as a division of Bancomer, the second largest bank in Mexico, and
as such has systems in place for accounting and financial reporting under
Mexican generally accepted accounting principles ("Mexican GAAP"). The Company
has adapted such systems to comply with accounting and financial reporting
required for U.S. companies using U.S. GAAP.
In connection with the Purchase Transactions, it was determined that there
were certain irregularities in title to the Combined Resort at Cancun and that
certain formalities were required to be taken with respect to the deeds to the
Company's property at Cozumel and additional property adjacent to the Regina
Resort at Los Cabos. The Company does not expect the correction and
formalization of these matters to have a material impact, if any, on its
business although there can be no assurance that this will be the case. See
"Business -- Description of Purchase Transactions -- Description of Stock
Purchase Agreement." For a description of certain contingencies that may arise
in connection with the Purchase Transactions, see Note 2 to the
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<PAGE> 30
Consolidated Balance Sheet of CR US as of August 18, 1997 included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Acquisition."
A portion of the Company's management group, located in both Houston, Texas
and Mexico City, Mexico has been assembled only recently, and there can be no
assurance that the management group will be able to operate the Regina Resorts
or implement the Company's acquisition and internal growth strategy effectively.
The combined historical financial results of the vacation ownership segment of
the Predecessor Business cover periods when it was not under control or
management of the Company and, therefore, may not be indicative of the Company's
future financial or operating results. The prospects for the Company's success
must be considered in light of the risks, expenses and difficulties often
encountered in the establishment of a new business in a continually evolving
industry characterized by an increasing number of market competitors. See
"Business -- Business Strategy" and "Management."
Development and Construction Risks. The Company intends to construct,
redevelop, convert and expand additional resorts. There can be no assurance that
the Company will complete the expansion plans set forth in "Business -- The
Resorts" and "Business -- Business Strategy" or undertake to develop other
resorts or complete such development if undertaken. Risks associated with the
Company's development, construction and redevelopment/conversion activities may
include the risks that: (i) acquisition and/or development opportunities may be
abandoned; (ii) construction costs of a property may exceed original estimates,
possibly making the resort uneconomical or unprofitable; (iii) sales of Vacation
Intervals at a newly completed property may be insufficient to make the property
profitable; (iv) financing may not be available on favorable terms for the
development of, or the continued sales of Vacation Intervals at, a property; and
(v) construction may not be completed on schedule, resulting in decreased
revenues and increased interest expense. In addition, the Company's construction
activities will typically be performed by third-party contractors, the timing,
quality and completion of which the Company will be unable to control.
Furthermore, 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 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 Company's
inability to: (i) obtain, or avoid delays in obtaining, all necessary zoning,
land-use, building, occupancy and other required governmental permits and
authorizations, (ii) coordinate construction activities with the process of
obtaining such permits and authorizations, and (iii) obtain the financing
necessary to complete the necessary acquisition, construction, and/or conversion
work. In addition, 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. Finally,
to the extent the Company elects to develop properties adjacent to luxury hotels
to provide Members with service offered to guests of such hotels, the Company
will need to negotiate the terms by which such hotels would provide services to
the Company and the Members. There can be no assurance that the Company will be
able to negotiate such terms on a basis that is favorable to the Company,
including negotiations for its planned developments in Los Cabos and Cozumel, if
at all. See "-- Risk of New Venture and Recent Acquisition; Lack of Prior
Operating History," "Business -- Business Strategy," and "Management's
Discussion and Analysis of Financing Condition and Results of Operations."
Acquisition Strategy Risks. The Company intends to grow primarily through
the development and acquisition of additional resorts, including locations
outside of Mexico. 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. In addition, to the extent
the Company acquires and develops resorts outside of Mexico, the Company's
management will face the challenge of conducting operations in countries where
the Company has not previously operated. Increased competition for acquisition
candidates may develop, in which event there may be fewer acquisition
opportunities available to the Company as well as higher acquisition prices.
There can be no assurance that the Company will be able to finance, identify,
acquire or profitably manage additional businesses, or successfully
39
<PAGE> 31
integrate acquired businesses, if any, into the Company without substantial
costs, delays or other operational or financial problems. Further, acquisitions
involve a number of special risks, including (i) possible adverse effects on the
Company's operating results, (ii) diversion of management's attention, (iii)
lack of local market knowledge and experience, (iv) inability to hire, train and
retain key acquired personnel, (v) inability to secure sufficient marketing
relationships with local hospitality, retail and tourist attraction operators,
(vi) risks associated with unanticipated events or liabilities, and (vii)
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on the reputation of the
Company and render ineffective the Company's sales and marketing initiatives. In
addition, there can be no assurance that the Company or other businesses
acquired in the future will achieve anticipated revenues and earnings. See
"Business -- Business Strategy."
Customer Financing Risks. The Company offers financing to the buyers of
Vacation Intervals who make a down payment of at least 15% of the purchase price
of each Vacation Interval under title retention agreements. This financing
generally bears interest at fixed rates and is effectively collateralized by the
purchased Vacation Interval. To obtain future financing, the Company may seek to
enter into agreements with lenders pursuant to which the Company would pledge,
as collateral, its Vacation Interval Receivables from the financing that the
Company offers its customers. There can be no assurance that any such financing
will be available on terms that are acceptable to the Company or otherwise.
Moreover, if, in connection with any such financing, the Company is required to
sell its Vacation Interval Receivables to lenders, discounts from the face value
of such receivables may be required by such lenders. At December 31, 1997, the
Company had a portfolio of approximately 5,500 Vacation Interval Receivables
amounting to approximately $43.0 million in outstanding principal amount. At
December 31, 1997, the Vacation Interval Receivables had a weighted average
maturity of approximately four years. At December 31, 1997, approximately (i)
64% of all of the Vacation Interval Receivables were U.S. dollar denominated and
had a weighted average interest rate of 12.8%, (ii) 32% of all Vacation Interval
Receivables were denominated in UDIs, an obligation denominated in pesos which
is adjusted for Mexican inflation, and had a weighted average interest rate of
25.8%, and (iii) 4% of all Vacation Interval Receivables were denominated in
Mexican pesos and had a weighted average interest rate of 19.2%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Customer Default Risks. The Company bears the risk of defaults by buyers
who financed the purchase of their Vacation Intervals. If a Member defaults on a
Vacation Interval Receivable, the Company generally will terminate the
underlying conditional sale agreement and return the promissory note with
respect thereto to the customer. In connection with the Company terminating such
sale agreements, the relatively substantial associated marketing costs other
than certain sales commissions will not be recovered by the Company, and they
must be incurred again after the 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 the Company in many cases may have recourse against
buyers of Vacation Intervals, sales personnel and independent contractors for
the purchase price paid and for commissions paid, respectively, no assurance can
be given that the Vacation Interval purchase price or any commissions will be
fully or partially recovered in the event of buyer defaults on Vacation Interval
Receivables. See "Business -- The Company -- Customer Financing."
Regulation of Marketing and Sales of Vacation Intervals; Other Laws. The
Company is not currently subject to Mexican "timeshare" laws and regulations;
however, there can be no assurance that the Company will not become subject to
such laws and regulations. The Company does not believe that becoming subject to
such laws and regulations would have a material adverse effect on its business.
The Company's marketing and sales of Vacation Intervals and other operations are
subject to other regulations under Mexican law. Other laws, such as real estate
licensure; travel agent licensure; anti-fraud laws; telemarketing laws; price,
gift and sweepstakes laws; and labor laws, also affect the Company's business.
The Company believes that it is in
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<PAGE> 32
material compliance with all laws and regulations to which it is currently
subject. However, no assurance can be given that the Company is in fact in
compliance with all applicable laws and regulations.
During 1997 amendments to Mexico's value added tax laws were enacted which
subject sales of vacation intervals such at those sold by the Company to a value
added tax of approximately 10% in Cancun and Los Cabos and 15% in Puerto
Vallarta. To counteract the imposition of this value added tax on sales of
Vacation Intervals, the Company has raised its prices, but by less than the
amount of such tax, thereby placing downward pressure on the Company's margins.
In addition, the Company's operations are subject to a number of other
Mexican and U.S. federal, state and local laws, regulations and taxation
regimes. The Company believes that it is currently in material compliance with
all such laws, regulations and regimes; however, there can be no assurance that
such laws, regulations and regimes may not change, that interpretations with
respect thereto may not be modified, or that the Company is in fact in
compliance with all such laws, regulations and regimes. Any failure to comply
with applicable laws, regulations or taxation regimes could have a material
adverse effect on the Company. See "Business -- Governmental Regulation."
Expansion and Regulation of Company's Business Outside of Mexico. Club
Regina may expand its business, including Vacation Interval marketing and sales
and acquisition and development of additional resorts outside of Mexico. See
"Business -- Business Strategy -- Future Acquisitions." These activities would
be subject to extensive regulation by the applicable jurisdictions in which its
resort properties were located and in which Vacation Intervals were marketed and
sold. While the Company will use its best efforts to be in material compliance
with all foreign laws and regulations to which it may become subject, no
assurance can be given that the cost of qualifying under vacation interval
ownership regulations and other regulations in any jurisdiction in which the
Company desires to conduct sales and operate its business would not be
significant. Any failure to comply with applicable laws or regulations could
have a material adverse effect on the Company. See also "-- Company
Risks -- Regulation of Marketing and Sales of Vacation Intervals; Other Laws."
Hedging Activities. The Company does not engage in speculative or
profit-motivated hedging activities. However, to reduce the risks associated
with peso inflation, the Company denominates many of its Vacation Interval
Receivables in UDIs. See "Business -- The Company -- Customer Financing."
Although the Company believes that its UDI program protects it from peso
inflation, it does not insulate the Company from foreign currency risk, and
there can be no assurance that the rate of return on the Company's UDI
denominated loans will not be adversely affected by a change in dollar/peso
exchange rates. In addition the Company may engage in other hedging transactions
to manage currency risks. To manage risks associated with any future borrowings
of the Company bearing interest at variable rates, the Company may from time to
time purchase interest rate caps, interest rate swaps or similar instruments.
The nature and quantity of the hedging transactions for the variable rate debt
will be determined by the management of the Company based on various factors,
including market conditions, and there have been no limitations placed on
management's use of certain instruments in such hedging transactions. No
assurance can be given that any such hedging transactions will offset the risks
of changes in interest rates or currency fluctuations, or that the costs
associated with hedging activities will not increase the Company's operating
costs.
Seasonality. In general, the Mexican vacation ownership industry tends to
follow seasonal buying patterns with peak sales occurring during the peak
travel/tourism seasons, usually December through April and July through August.
The timing of these purchases, however, may be affected by weather conditions
and general or local economic conditions. Seasonal influences may also affect
the Company's earnings in a manner that could limit the ability of the Company
to fund its capital and debt service requirements, including making payments of
interest on the Notes, during off-peak seasons. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality."
General Economic Conditions; Concentration in Vacation Ownership
Industry. Any downturn in economic conditions or any price increases (e.g.,
airfares) related to the travel and tourism industry could depress discretionary
consumer spending and have a material adverse effect on the Company's business.
Any such economic conditions, including recessions, may also adversely affect
the future availability of attractive
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<PAGE> 33
financing for the Company or its customers and may materially adversely affect
the Company's business, financial condition and results of operations.
Furthermore, adverse changes in general economic conditions may adversely affect
the collectibility of the Vacation Interval Receivables. Because the Company's
operations are conducted almost entirely 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, could have a
material adverse effect on the Company's operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Sales Volume Risks. The Company depends on sales leads generated from
guests of the Westin Hotels, other local offices and off-site offices. With
respect to off-site offices, as the number of potential customers in the
geographic area of a sales office who have attended a sales presentation
increases, the Company may have increasing difficulty in attracting additional
potential customers to a sales presentation at that office, and it may become
increasingly difficult for the Company to maintain current sales levels at its
existing sales offices. Accordingly, the Company anticipates that a substantial
portion of its future sales growth will depend on opening additional off-site
sales offices which may be subject to local taxes and compliance with additional
registration and other requirements. There can be no assurance, however, that
sales from existing or new off-site sales offices will meet the Company's
expectations. If the Company does not open additional sales offices or if
existing or new sales offices do not perform as expected, the Company's
business, results of operations and financial condition could be materially
adversely affected. See "Business -- The Company -- Sales and Marketing."
Geographic Concentration in Mexico; Concentration of Customers in North
America. The Company currently sells Vacation Intervals only in Mexico, and at
December 31, 1997 approximately 44% of Members reside in Mexico. The Company
intends to continue to sell Vacation Intervals in Mexico and to initiate
registration to permit sales in selected locations in the United States. Since
all of the Company's sales offices are currently located in Mexico, any economic
downturn in Mexico could have a disproportionate material adverse effect on the
Company's business, results of operations and financial condition. See
"-- Factors Relating to Mexico." In addition, at September 30, 1997,
approximately 48% and 5% of the Company's Members resided in the United States
and Canada, respectively, and, as a result, the Company may be vulnerable to
downturns in the U.S. and Canadian economies as well. See "Business -- The
Company."
Competition. The Company is subject to significant competition from other
entities engaged in the business of resort development, sales and operation,
including vacation interval ownership, condominiums, hotels and motels. Some of
the world's most recognized lodging, hospitality and entertainment companies
have begun to develop and sell vacation intervals in resort properties. Major
companies that now operate or are developing or planning to develop vacation
ownership resorts include Marriott International, Inc., The Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts,
Inc., Intercontinental Hotels and Resorts, Inc., and Westin. In addition, other
publicly-traded companies in the vacation ownership industry, such as Signature
Resorts, Inc., Fairfield Communities, Inc., Vistana, Inc., Trendwest Resorts,
Inc. and SilverLeaf, Inc. currently compete, or may compete, with the Company.
Many of these entities possess significantly greater financial, marketing and
other resources than those of the Company. Management believes that recent and
potential future consolidation in the vacation interval industry will increase
industry competition. See "Business -- Competition."
Vacation Interval Exchange Networks. The attractiveness of Vacation
Interval ownership is enhanced significantly by the availability of exchange
networks that allow Members to exchange in a particular year the occupancy right
in their Vacation Interval for an occupancy right in another participating
network resort. According to the ARDA, buyers cited the ability to exchange a
vacation interval as a primary reason for purchasing a vacation interval.
Several companies, including RCI, provide broad-based vacation interval exchange
services, and the Regina Resorts are currently qualified for participation in
the RCI exchange network. However, no assurance can be given that the Company
will continue to be able to qualify the Regina Resorts, or will be able to
qualify its future resorts, for participation in the RCI network or any other
exchange network. Moreover, if such exchange networks cease to function
effectively, or if the Company's resorts are
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<PAGE> 34
not accepted as exchanges for other desirable resorts, the Company's Vacation
Interval sales could be materially adversely effected. See "Business -- The
Company -- Participation in Vacation Interval Exchange Networks."
Resale Market for Vacation Intervals. The Company sells Vacation Intervals
to buyers for leisure and not for investment purposes. The Company believes that
the market for resale of Vacation Intervals by Members is limited, and that any
resales of Vacation Intervals are typically at prices substantially less than
the original purchase price. These factors may make ownership of Vacation
Intervals less attractive to prospective buyers, and attempts by Members to
resell their Vacation Intervals will compete with sales of Vacation Intervals by
the Company. In addition, the market price of Vacation Intervals sold by the
Company or by its competitors in the market could be depressed by a substantial
number of Vacation Intervals offered for resale. See "Business -- The
Company -- Participation in Vacation Interval Exchange Networks."
Possible Environmental Liabilities. The Company's activities are subject to
Mexican environmental laws and regulations, which consist mostly of the Mexican
General Law of Ecological Balance and Environmental Protection ("Ley General del
Equilibrio Ecologico y la Proteccion del Ambiente") and the regulations enacted
thereunder. Under such laws and regulations, the Regina Resorts are subject to
the regulatory jurisdiction of the Mexican Ministry of the Environment, Natural
Resources and Fishing ("Secretaria de Medio Ambiente, Recursos Naturales y
Pesca"), which has broad discretion in executing its statutory mandate. Although
the Company believes it is in compliance in all material respects with all
applicable environmental laws and regulations to which the Regina Resorts are
subject, no assurance can be given that the Regina Resorts will not be subject
to inspections, sanctions, fines, or temporary or definitive suspensions that
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Government
Regulation -- Environmental Matters."
Independent Contractors. A portion of the Company's sales force has been
comprised of independent contractors. From time to time, Mexican federal and
state authorities have asserted that independent contractors are employees,
rather than independent contractors. If, as a result of any such assertion the
Company were required to pay for and administer added benefits and taxes related
to the time such persons have been classified as independent contractors, the
Company's operating costs would increase. See "Business -- Employees and
Independent Contractors."
Natural Disasters; Uninsured Loss. The Company's resorts may be subject to
hurricanes, earthquakes and adverse weather patterns such as "El Nino" and
damages as a result thereof. There are certain types of losses for which the
Company does not have insurance coverage because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in a resort,
as well as the anticipated future revenues from such resort and would continue
to be obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could have a material adverse effect on the Company. See
"-- Factors Relating to Mexico -- Adverse Mexican Economic Conditions and
Government Policies" and "Business -- Insurance; Legal Proceedings."
Dependence on Key Personnel. The Company's success depends to a large
extent upon the experience and abilities of John McCarthy, the Company's
President. The loss of the services of Mr. McCarthy could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company has entered into an employment agreement with Mr.
McCarthy. The Company's success is also dependent upon its ability to attract
and retain qualified development, acquisition, marketing, management,
administrative and sales personnel for which there is keen competition. 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
retaining such personnel. See "Management."
Control by Existing Stockholders. CR US is a closely-held private company
under the control of its directors and executive officers and their affiliates.
These persons, if acting in concert, will be able to continue to exercise
control over the Company's affairs and to elect the entire board of directors of
CR US and its subsidiaries. See "Principal Stockholders."
43
<PAGE> 35
Limited Inventory. The Company believes that its remaining inventory of
Vacation Intervals at the Regina Resorts will provide it with sufficient cash
flow to fund its capital and debt service requirements for approximately four
years assuming a sales rate of 4,000 Vacation Intervals per year. There can be
no assurance that the Company will be able to implement its internal growth and
acquisition strategy successfully and thereby increase its inventory of Vacation
Intervals. If the Company is unable to acquire or develop additional inventory,
the Company's ability to fund its capital and debt service requirements will be
materially impaired. See "Business -- Business Strategy."
Real Estate Investment Risks. The Company is subject to varying degrees of
risk incident to the ownership of real estate. Income of the Company may be
adversely affected by adverse changes in zoning laws, ongoing need for capital
improvements, changes in real estate tax rates and other operating expenses, and
other factors beyond the control of the Company.
FACTORS RELATED TO THE SECURITIES
Leverage; Net Capital Investment. The Company has substantial indebtedness
and debt service obligations. As of December 31, 1997, the Company's total
consolidated indebtedness was $103.8 million, its consolidated total assets were
$118.2 million, and its stockholders' equity was $14.4 million. In addition,
subject to the restrictions under the Indenture, the Issuers and their
subsidiaries may incur additional indebtedness from time to time. See
"Summary -- The Offering," "Description of Other Debt," "Use of Proceeds,"
"Capitalization," and "Description of Notes -- Certain Covenants."
The level of the Company's indebtedness could have important consequences
to the Holders, including: (i) a substantial portion of the Company's cash flow
from operations will have to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, capital expenditures, research
and development or acquisitions may be limited; and (iii) the Company's level of
indebtedness could increase its vulnerability to general adverse economic and
industry conditions and limit its flexibility to react to changes in its
operating environment and in economic conditions generally. In addition, the
Indenture contains financial and other restrictive covenants that limit the
ability of the Issuers and the Operating Subsidiaries to, among other things,
borrow additional funds. Failure by the Issuers to comply with such covenants
could result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company.
To the extent that cash flow from operations is insufficient to cover the
Company's fixed charges and fund the Company's capital expenditure requirements,
the Company, to pay such expenses, may use the remaining net proceeds, if any,
from the Offering, may obtain funds from additional borrowings, if permitted,
and may seek to sell a portion of its business or other assets, engage in
sale/leaseback transactions, raise additional equity capital and/or acquire
other businesses that would provide additional positive cash flow. No assurance
can be given as to the availability or accessibility of sufficient financing
from these or other similar transactions, or that these or other similar
transactions could be accomplished on terms favorable to the Company.
The ability of the Issuers to pay principal, interest or Liquidated
Damages, if any, on the Notes and to meet their other debt service obligations
will depend on the future operating performance and financial results of the
Company, which will be subject in part to factors beyond the Company's control,
such as prevailing economic conditions and financial, business, and other
factors. For the years ended December 31, 1995 and 1996, the Company's vacation
ownership segment of the Predecessor Business realized a net loss applicable to
common stockholders (giving pro forma effect to the separation of the vacation
ownership business and the hotel business) of approximately $13.1 million and
$8.6 million, respectively. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that anticipated
revenue growth and operating improvements will be realized in an amount
sufficient to enable the Issuers to service their indebtedness, including the
Notes, or to fund the Company's other liquidity needs. The Indenture contains
certain restrictive covenants, including, but not limited to, limitations on the
Company's ability to incur debt, issue preferred stock and effect asset
dispositions. The highly leveraged position of the Company and the restrictive
covenants contained in the Indenture could significantly limit its ability to
withstand competitive
44
<PAGE> 36
pressures or adverse economic conditions, make acquisitions, or take advantage
of business opportunities that may arise. See "Description of Notes."
Ranking of the Notes. The Notes are effectively subordinated to all secured
senior indebtedness of the Issuers, to the extent of the assets which secure
such indebtedness. Upon any distribution or payment of the assets of the Issuers
in any foreclosure, dissolution, winding-up, liquidation, reorganization, or
other bankruptcy proceeding, holders of secured indebtedness will have a prior
claim to the assets of the Issuers that constitute their collateral. Holders
will participate ratably with all holders of unsecured indebtedness of the
Issuers that is deemed to be of the same class as the Notes, and potentially
with all other general creditors of the Issuers, based upon the respective
amounts owed to each holder or creditor, in the remaining assets of the Issuers.
In any of the foregoing events, there can be no assurance that there would be
sufficient assets to pay amounts due on the Notes. As a result, Holders may
receive less, ratably, than holders of secured indebtedness. The Indenture
permits the Company to incur additional indebtedness, including secured
indebtedness of CR US's Operating Subsidiaries, subject to certain limitations.
See "-- Fraudulent Transfer and Bankruptcy Considerations" and "Description of
Notes -- Certain Covenants."
Holding Company Structure; Dependence on Subsidiaries; Limitations on
Access to Cash Flow of the Subsidiaries. CR US is structured as a holding
company which owns all of the capital stock of Canarias Future, SRL ("Canarias")
which, in turn, holds the equity interests, directly and indirectly, of the
Company's Operating Subsidiaries and CR Mexico. CR US's current operations are
conducted exclusively through its Operating Subsidiaries, and its only
significant asset is the capital stock of Canarias which, in turn, owns,
directly and indirectly, the capital stock of the other Operating Subsidiaries
and CR Mexico. As a holding company, CR US is dependent on dividends or other
intercompany transfers of funds from its Operating Subsidiaries to meet its debt
service and other liquidity needs. CR Mexico is a wholly-owned subsidiary of
Canarias. CR Mexico's major asset is approximately $86.9 million of intercompany
notes owed to it by the Company's Operating Subsidiaries, which subsidiaries are
not direct or indirect subsidiaries of CR Mexico. Under the terms of the
Indenture, such indebtedness is required to be assumed by other Operating
Subsidiaries of the Company, which subsidiaries are also not direct or indirect
subsidiaries of CR Mexico. CR Mexico is therefore dependent (and will continue
to be dependent) on interest payments under such intercompany obligations to
meet its debt service and other liquidity needs. The Notes are obligations
exclusively of the Issuers and guaranteed by any of the Issuers' Operating
Subsidiaries. Consequently, the Issuers' cash flow and ability to service their
debt, including the Notes, are dependent upon the earnings of the Operating
Subsidiaries and the distribution of those earnings to CR US, or upon loans,
advances or other payments made by the Operating Subsidiaries to the Issuers.
The Notes are effectively subordinated to all Indebtedness and other liabilities
and commitments (including trade payables and lease obligations) of the
Operating Subsidiaries. Furthermore, the terms of the permitted indebtedness and
other agreements of CR US's subsidiaries may have the effect of limiting the
ability of CR US's subsidiaries to pay dividends or other payments to either
Issuer. See "Description of Notes -- Certain Covenants." At December 31, 1997,
the total amount of Indebtedness and other obligations of the Operating
Subsidiaries that effectively ranked senior in right of payment to the
obligations of the Issuers under the Notes was approximately $4.6 million.
Fraudulent Transfer and Bankruptcy Considerations. The obligations of each
Issuer under the Indenture may be subject to review under applicable fraudulent
transfer or similar laws in the event of the bankruptcy or other financial
difficulty of an Issuer. In the United States, under such laws, if a court in a
lawsuit by an unpaid creditor or representative of creditors of any such person,
such as a trustee in bankruptcy or any such person as debtor-in-possession, were
to find that at the time such person incurred its obligations, it (i) received
less than fair consideration or reasonably equivalent value therefor; and (ii)
either (a) was insolvent, (b) was rendered insolvent by such guarantee or
pledge, (c) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital, or (d) intended to
incur or believed that it would incur debts beyond its ability to pay such debts
as they matured, such court could void such obligations under its guarantee
and/or the security interest in its assets and direct the return of any amounts
paid with respect thereto. Moreover, regardless of the factors identified in the
foregoing clauses (i) and (ii), a court could take such action if it found that
the guarantee was entered into or the security interest granted with actual
intent to hinder, delay, or defraud creditors. The measure of insolvency for
purposes of the foregoing
45
<PAGE> 37
will vary depending on the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if the sum of its debts
(including contingent or unliquidated debts) is greater than all of its property
at a fair valuation or if the present fair salable value of its assets is less
than the amount that would be required to pay its probable liability on its
existing debts as they become absolute and matured.
The enforceability of the rights and obligations of CR Mexico under the
Indenture may be subject to limitations imposed by bankruptcy, insolvency,
liquidation, suspension of payments, moratorium, or similar laws relating to or
affecting the enforcement of creditors' rights generally. In any bankruptcy
proceeding initiated in Mexico pursuant to the laws of Mexico, labor claims,
claims of tax authorities for unpaid taxes, social security quota, workers'
housing fund quota, and retirement fund quota will have priority over claims of
the Holders of the Notes.
Payment of Judgments in Pesos; Currency Conversions in Bankruptcy. If
proceedings are brought in Mexico seeking to enforce obligations of CR Mexico
under the Notes, CR Mexico may not be required to discharge such obligations in
a currency other than Mexican currency. Under the Mexican Monetary Law ("Ley
Monetaria de los Estados Unidos Mexicanos"), an obligation in a currency other
than Mexican currency, which is payable in Mexico, may be satisfied in Mexican
currency at the rate of exchange in effect on the date on which payment is made.
This rate is currently determined by Banco de Mexico every business banking day
in Mexico and published the following business banking day in the Diario Oficial
de la Federacion. Upon declaration of bankruptcy or suspension of payments of CR
Mexico in Mexico, the obligations of CR Mexico under the Notes (i) would be
converted into pesos at the exchange rate prevailing at the time of such
declaration, and payment would occur at the time claims of the unsecured
creditors of CR Mexico are satisfied, (ii) would be dependent upon the outcome
of the bankruptcy proceedings, and (iii) would not be adjusted to consider
depreciation of the peso against the U.S. dollar occurring after such
declaration of bankruptcy. To the extent there is a deficiency in the amount
paid to Holders in a Mexican bankruptcy, CR US would still be liable for any
such deficiency.
Certain Tax Considerations. The Notes were issued with original issue
discount for U.S. federal income tax purposes in an amount equal to the excess
of the principal amount due at maturity on the Notes over their deemed "issue
price" (as described in "Taxation -- United States Federal Income Taxation
Considerations -- Allocation of Purchase Price Among Notes and Warrants" and
"Taxation -- United States Federal Income Taxation Considerations -- Original
Issue Discount"). Each U.S. Holder of a Note is required to include in taxable
income for any particular taxable year a portion of such original issue discount
in advance of the receipt of the cash to which such original issue discount is
attributable. For additional information regarding the original issue discount
associated with the Notes, as well as certain other federal income tax
considerations relevant to the purchase, ownership and disposition of the Notes,
Warrants and Warrant Shares, see "Taxation -- United States Federal Income
Taxation Considerations."
Potential Inability to Fund a Change of Control Offer. Upon a Change of
Control, the Issuers will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of repurchase. However, there can be
no assurance that sufficient funds will be available at the time of any Change
of Control to make any required repurchases of Notes tendered or that
restrictions in any new credit facility will allow the Issuers to make such
required repurchases. Notwithstanding these provisions, the Issuers could enter
into certain transactions, including certain recapitalizations, that would not
constitute a Change of Control but would increase the amount of debt outstanding
at such time. See "Description of Notes -- Repurchase at the Option of Holders."
EXCHANGE RATES
Effective January 1, 1993, the Mexican peso replaced its former currency
(also called the "peso") at a rate of one new peso per one thousand old pesos.
During the transition period from January 1, 1993 through December 31, 1995, the
new currency was referred to as the "nuevo peso," and from January 1, 1996 is
referred to as the "peso." All amounts set forth herein in Mexican currency are
stated in pesos, even if such amounts relate to a period before January 1, 1996,
with respect to which the amounts are restated herein to reflect the value of
the new currency relative to the old.
46
<PAGE> 38
From November 11, 1991 to December 21, 1994, Banco de Mexico maintained a
policy pursuant to which the peso-U.S. dollar exchange rate was kept within a
range prescribed by the Mexican government through intervention in the foreign
exchange market. Within a specified band, Banco de Mexico generally intervened
to reduce day-to-day fluctuations in the exchange rate. From November 11, 1991
through October 20, 1992, the upper limit of the prescribed range, expressed in
terms of pesos per U.S. dollar, rose by Ps.0.0002 per day, equivalent to a
maximum devaluation of the peso with respect to the U.S. dollar of approximately
2.4% per year. From October 20, 1992 until December 19, 1994, the upper limit of
the prescribed band increased by Ps.0.0004 per day, equivalent to a maximum
devaluation of the peso of approximately 4.5% per year. On December 20, 1994,
the Mexican government increased the ceiling of the trading band by Ps.0.53,
equivalent to an effective devaluation of the peso of 15.3%.
On December 21, 1994, the Mexican government announced its decision to
suspend intervention by Banco de Mexico and to allow the peso to float freely
against the U.S. dollar. By December 31, 1994, the exchange rate was Ps.5.00 per
U.S. dollar, as compared to Ps.3.47 per U.S. dollar on December 19, 1994 (a
devaluation of the peso of approximately 42.4%). The peso was highly volatile
throughout 1995, fluctuating between Ps.5.00 and Ps.8.20 per U.S. dollar. The
Mexican government has indicated that the band will not be reinstated and that
the exchange rate will be permitted to fluctuate according to supply and demand.
There can be no assurance that the Mexican government will maintain its current
policies with regard to the peso or that the peso will not further depreciate or
appreciate significantly in the future. See "Risk Factors -- Factors Relating to
Mexico -- Exchange Rates."
The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rate for the purchase and sale of U.S.
dollars (presented in each case as the average between such purchase and sale
rates), expressed in pesos per U.S. dollar.
<TABLE>
<CAPTION>
FREE MARKET RATE
------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, HIGH LOW AVERAGE(1) END
----------------------- ---- ---- ---------- ------
<S> <C> <C> <C> <C>
1992............................................... 3.12 3.08 3.10 3.12
1993............................................... 3.33 3.12 3.17 3.33
1994............................................... 5.75 3.11 3.39 5.00
1995............................................... 8.05 5.27 6.42 7.69
1996............................................... 8.05 7.33 7.61 7.88
1997............................................... 8.43 7.71 8.07 8.06
1998 (through March 20)............................ 8.65 8.03 8.34 8.55
</TABLE>
- ---------------
(1) Average exchange rates represent the annual average of the daily free
exchange rates.
Source: Banco de Mexico until November 5, 1993, with the free market rate
representing the average of the buy and sell rates on the relevant
dates. Commencing November 8, 1993, the free market rate is the Noon
Buying Rate for Mexican pesos reported by the Federal Reserve of the
United States.
47
<PAGE> 39
PRIVATE PLACEMENT
The Issuers sold the Outstanding Notes on December 5, 1997 to the Initial
Purchaser and the Initial Purchaser thereupon offered and sold them only to
certain qualified buyers. The $96 million of net proceeds the Issuers received
in connection with the sale of the Outstanding Notes and Warrants were used as
follows: (i) approximately $83.0 million to repay indebtedness owed to Bancomer
under the Bancomer Loan, (ii) approximately $7.5 million was reserved for the
first stage of development of a new resort at Cozumel and for the development of
additional units at Los Cabos and at other areas, (iv) approximately $1.2
million to repay debt owed to affiliates (the "Affiliate Debt") which the
Company incurred in connection with the Purchase Transactions, and (v) the
remainder for working capital, certain advisory fees and other general corporate
purposes. See "Use of Proceeds." The Warrants have an exercise price of $.01 per
share, and are exercisable at any time prior to the maturity date of the Notes.
The Warrants are not being registered in the Exchange Offer, but are subject to
a registration rights agreement. See "Capitalization" and "Description of
Capital Stock and Warrants."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Registered Notes offered hereby. In consideration for issuing the Registered
Notes as contemplated in this Prospectus, the Company will receive in exchange a
like principal amount of Outstanding Notes, the terms of which are identical in
all material respects to the Registered Notes. The Outstanding Notes surrendered
in exchange for the Registered Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Registered Notes will not result in any
change in capitalization of the Company. The Exchange Offer is being implemented
to satisfy the Issuers obligations under the Registration Rights Agreement and
the Indenture and for the fulfillment of the Offering as described in the
Offering Circular.
48
<PAGE> 40
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization as of December 31, 1997 of CR US. See "Selected
Historical Financial Data" and "Use of Proceeds." This table should be read in
conjunction with "Summary Pro Forma Financial Data" and Audited Consolidated
Financial Statements of the Company as of December 31, 1997 and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Bank loans under lines of credit............................ $ 1,000(1)(2)
Stockholder loans........................................... --
Current maturities of long-term obligations................. --
Long term obligations, less current maturities.............. 100,000
Less -- original issue discount............................. (9,220)
--------
Total debt, net of original issue discount........ 91,780
Stockholders' investment:
Preferred Stock: $.001 par value, 5,000,000 shares
authorized; 37,500 shares issued and outstanding....... --(3)
Common Stock; $.001 par value, 45,000,000 shares
authorized; 14,375,000 shares issued and outstanding... 11(3)
Warrants to purchase 1,869,962 shares of Common Stock for
$.01 per share......................................... 9,331(4)
Additional paid-in capital................................ 7,046(3)
Accumulated deficit....................................... (3,336)
--------
Total stockholders' investment.................... 13,052(3)(4)
--------
Total capitalization.............................. $104,832
========
</TABLE>
- ---------------
(1) The Company has received approval from Bancomer for the extension of a line
of credit of $20.0 million. This line of credit requires an upfront payment
of a 2% fee and is secured by all of the Accounts Receivable of CR Resorts
Puerto Vallarta both present and future. It is for a period of four years
with an annual interest rate of 13%.
(2) The Company has also received approval from Bancomer for the extension of an
additional line of credit of $6.0 million. These funds are required to be
used to complete the purchase of the Villa Vera Hotel & Racquet Club ("Villa
Vera") and for the conversion cost of 62 units into vacation ownership
units. This line of credit will be secured by a Mortgage Trust on the Villa
Vera property and by the Accounts Receivable of CR Resorts Puerto Vallarta
both present and future. This line of credit also requires a 2% fee to be
paid to the bank before the funds may be borrowed.
(3) Reflects as of December 31, 1997 (i) the conversion of $3.75 million of
stockholder subordinated loans into 37,500 shares of Class A Preferred Stock
with the corresponding increase in stockholders' investment of $3.75
million, (ii) the proceeds to the Company of $1.0 million from a private
issuance of shares of Common Stock in October, 1997, (iii) the issuance of
258,450 shares of the Common Stock with an estimated value of $1.29 million
in exchange for investment banking services related to the Offering (reduced
by an allocable portion of the Offering expenses), and (iv) the issuance of
142,850 shares of Common Stock to the Initial Purchaser in connection with
the liquidation of liabilities of $1.0 million for fees recorded in
connection with the Purchase Transactions and certain other advisory
services.
(4) Reflects the allocation of a portion of the net offering proceeds to the
Warrants to purchase 1,869,962 shares of Common Stock for $.01 per share
based on the Company's estimate of the fair value of the Warrants on the
issue date of $9.3 million (reduced by an allocable portion of the Offering
expenses). Such amount is treated as original issue discount. In addition,
in connection with the Offering, CR US has agreed to issue the Initial
Purchaser Warrants to the Initial Purchaser. The number of shares of Common
Stock to be issued upon exercise of the Initial Purchaser Warrants will be
determined pursuant to a formula. Such formula currently results in the
Initial Purchaser having a warrant to purchase 571,429 shares of Common
Stock with an exercise price of $7.00 per share. See "Plan of Distribution."
49
<PAGE> 41
UNAUDITED PRO FORMA FINANCIAL DATA
The summary pro forma financial data for the year ended December 31, 1996
and for the period January 1, 1997 through August 18, 1997 have been derived
from the audited combined historical financial statements of the Predecessor
Business. These data include both vacation ownership and hotel operations. The
historical and pro forma income statement data shown below present only the data
relating to the vacation ownership segment of the Predecessor Business. The
Summary Pro Forma financial data for the year ended December 31, 1997 have been
derived from the audited historical financial statements of the Predecessor
Business for the period from January 1, 1997 through August 18, 1997 and the
audited historical financial statements of the Company for the period from
August 18, 1997 through December 31, 1997. The pro forma financial data do not
purport to (i) represent what the Company's results of operations would have
been had the Offering, the Purchase Transactions and the Remainder Interest
Disposition occurred on the assumed dates or (ii) project the Company's results
of operations for any future period. These data should be read in conjunction
with "Business -- Description of Purchase Transactions," "Selected Combined
Historical Financial Data," "Other Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of the Company and the Predecessor Business together
with the notes thereto included elsewhere herein.
PRO FORMA INCOME STATEMENTS FOR THE VACATION OWNERSHIP SEGMENT
UNAUDITED
<TABLE>
<CAPTION>
VACATION OWNERSHIP SEGMENT
OF THE PREDECESSOR BUSINESS
-------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31, 1996 SEVEN
------------------------------------ AND 1/2
MONTHS
ENDED TWELVE
PRO FORMA AUGUST 18, MONTHS
ADJUSTMENTS 1997 COMPANY'S ENDED
INCREASE ---------- RESULTS DECEMBER 31,
HISTORICAL (DECREASE) PRO FORMA HISTORICAL FOR 1997(1) 1997
---------- ----------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA INCOME STATEMENT DATA:
Revenues --
Vacation Interval sales........... $ 2,867 $34,396 $37,263 $ 2,476 $19,239 $21,715
Interest income on Vacation
Interval
Receivables..................... 3,294 3,294 3,277 995 4,272
Rental of vacant units............ 5,497 455 2,898 4,510 1,603 6,163
Service fee income................ 3,054 2,461 2,486 4,947
Other revenues.................... 760 760 1,329 1,957 3,286
------- ------- ------- ------- -------
Total revenues...................... 12,418 47,269 14,103 26,280 40,383
------- ------- ------- ------- -------
Operating expenses --
Vacation Interval cost of sales... 7,512 7,512 5,667 5,667
Commission expense................ 1,604 5,504 7,108 412 2,194 2,606
Advertising, sales and
marketing....................... 3,829 3,829 4,899 4,174 9,073
Maintenance and energy............ 3,798 3,400 3,798 4,669 1,846 6,515
Provision for uncollectible
accounts........................ -- 3,400 2,349 2,349
General and administrative........ 5,400 1,500 6,900 4,503 6,394 10,897
------- ------- ------- ------- -------
Total operating expenses............ 14,631 32,547 14,483 22,624 37,107
------- ------- ------- ------- -------
Operating income (loss)............. (2,213) 14,722 (380) 3,656 3,276
Depreciation and amortization..... 78 78 61 61
Non-cash interest expense......... 2,278 2,278 551 551
Cash interest expense............. 3,108 10,542 13,650 2,827 3,726 6,553
Exchange and translation loss,
net............................. 75 992 1,067
------- ------- ------- ------- -------
Income (loss) before provision for
taxes............................. (5,321) (1,284) (3,282) (1,674) (4,956)
Mexican taxes..................... 3,312 (12) 3,300 1,756 1,662 3,418
------- ------- ------- ------- -------
Net income (loss) before preferred
dividends......................... (8,633) (4,584) (5,038) (3,336) (8,374)
Preferred dividends................. 0 619 619 232 232
------- ------- ------- ------- -------
Net income (loss) to common
stockholders...................... $(8,633) $(5,620) $(5,038) $(3,568) $(8,606)
======= ======= ======= ======= =======
OTHER PRO FORMA FINANCIAL DATA:
Pro forma EBITDA(10).............. $(2,213) $14,305 $ (455) $ 2,664 $ 2,209
Ratio of earnings to fixed
charges(11)..................... -- .9x -- 0.6x 0.3x
<CAPTION>
TWELVE
MONTHS
PRO FORMA ENDED
ADJUSTMENTS DECEMBER 31,
INCREASE 1997
(DECREASE) PRO FORMA
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PRO FORMA INCOME STATEMENT DATA:
Revenues --
Vacation Interval sales........... $29,003(2) $50,718
Interest income on Vacation
Interval
Receivables..................... 4,272
Rental of vacant units............ 6,163
Service fee income................ 4,947
Other revenues.................... 3,286
-------
Total revenues...................... 69,386
-------
Operating expenses --
Vacation Interval cost of sales... 5,904(3) 11,571
Commission expense................ 5,100(2) 7,706
Advertising, sales and
marketing....................... 9,073
Maintenance and energy............ 6,515
Provision for uncollectible
accounts........................ 2,611(4) 4,960
General and administrative........ 283(5) 11,180
-------
Total operating expenses............ 51,005
-------
Operating income (loss)............. 18,381
Depreciation and amortization..... 49(6) 110
Non-cash interest expense......... 1,708(7) 2,259
Cash interest expense............. 6,697(7) 13,250
Exchange and translation loss,
net............................. 1,067
-------
Income (loss) before provision for
taxes............................. 1,695
Mexican taxes..................... 920(8) 4,378
-------
Net income (loss) before preferred
dividends......................... (2,643)
Preferred dividends................. 387(9) 619
-------
Net income (loss) to common
stockholders...................... $(3,262)
=======
OTHER PRO FORMA FINANCIAL DATA:
Pro forma EBITDA(10).............. $17,314
Ratio of earnings to fixed
charges(11)..................... 1.1x
</TABLE>
- ---------------
31
<PAGE> 42
(1) Reflects the results of operations of the Company for the twelve months
ended December 31, 1997 including for the period from August 18, 1997
through December 31, 1997, and does not include results of operations of
the Predecessor Business.
(2) On August 18, 1997, in the Purchase Transactions, the Company acquired the
Combined Resorts, and the hotel portion of the Combined Resorts was sold to
Starwood. The pro forma income statement data give effect to the Offering
and application of the estimated net proceeds therefrom, the Purchase
Transactions, the Remainder Interest Disposition and certain stockholder
investments as if such transactions had occurred as of January 1st of each
period presented.
(3) Records the cost of the acquired inventory of Vacation Intervals to be sold
(as determined through an initial allocation of the acquisition purchase
price) and the related charge-off of these inventory costs as Vacation
Interval cost of sales.
(4) Provision for uncollectible accounts related to the revenues recognized
under the full accrual method for revenue recognition.
(5) Assumes increased expense of $1.5 million on an annual basis to provide for
the estimated additional cost of corporate staff, office and overhead which
the Company expects to incur as an independent corporate entity.
(6) Reflects depreciation of office furniture and equipment, not held for sale
as Vacation Intervals, assuming ten-year lives.
(7) Non-cash and cash interest expense represents total interest expense and
includes (i) non-cash interest expense of approximately $1.16 million
representing annual amortization of debt issuance costs, (ii) approximately
$0.65 million of annual withholding taxes, and (iii) non-cash interest
expenses of approximately $1.12 million representing annual amortization of
original issue discount of the Notes, as a portion of the issue price of
the Units offered hereby that has been allocated to the Warrants. Does not
include the pro forma net effect of interest income which would have been
earned on excess cash. On a pro forma basis the Company believes it would
have earned at least 5% interest income on excess cash (approximately $0.7
million interest income for the twelve months ended December 31, 1995 and
1996 and 1997.
(8) Reflects an estimate of the Mexican taxes that would have been incurred if
the pro forma results had been obtained and the Company's currently
existing legal structure had been in place during the periods presented.
(9) Represents dividends payable on Class A Preferred Stock of CR US. See
"Business -- Description of Purchase Transactions -- Description of Class A
Preferred Stock."
(10) EBITDA represents net income before interest expense, preferred dividends,
taxes, depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be construed as a
substitute for income from operations, net income or cash flows from
operating activities in analyzing the Company's operating performance,
financial position and cash flows. The EBITDA measure presented herein may
not be comparable to EBITDA as presented by other companies and is not the
same as "Consolidated Cash Flow" under the Indenture. See "Description of
Notes -- Certain Definitions."
The following table reconciles pro forma EBITDA to pro forma net income (loss)
applicable to common stockholders:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Pro forma net income (loss) applicable to common
stockholders.............................................. $(5,620) $(3,262)
Non-cash interest expense................................... 2,278 2,259
Cash interest expense....................................... 13,650 13,250
Mexican taxes............................................... 3,300 4,338
Depreciation and amortization............................... 78 110
Preferred dividends......................................... 619 619
------- -------
Pro forma EBITDA............................................ $14,305 $17,314
======= =======
</TABLE>
(11) The ratio of earnings to fixed charges has been computed by dividing
earnings before taxes plus fixed charges by fixed charges. Fixed charges
consist of interest and preferred stock dividends. Fixed charges exceed
earnings by approximately $5.3 million for the historical twelve months
ended December 31, 1996 and $3.3 million for the historical seven and a
half months ended August 18, 1997.
32
<PAGE> 43
COMBINED HISTORICAL FINANCIAL DATA
The Selected Combined Historical Financial Data presented below reflect (i)
the combined historical income statement data of the Predecessor Business and
(ii) the historical financial data of the vacation ownership segment of the
Predecessor Business. The historical income statement data presented below were
derived from the combined historical financial statements of the Predecessor
Business and prepared in accordance with U.S. GAAP. These data include the use
of the installment method of accounting for the vacation ownership sales margins
reported by the Combined Resorts, because the Remainder Interest was owned by
the Predecessor Business.
The Company believes that the installment method of accounting does not
properly reflect its economic earnings and believes that the full accrual method
of accounting better reflects the economic earnings of the vacation ownership
segment of the Company and of the Predecessor Business. Because the Company has
completed a disposition of the Remainder Interest the Company will use the full
accrual method of accounting on a going-forward basis from August 18, 1997.
Accordingly, the Company has also presented elsewhere in this Prospectus
Unaudited Pro Forma Financial Data of the vacation ownership segment of the
Predecessor Business which eliminates the effect of the installment method of
accounting and instead recognizes vacation ownership revenues and related direct
costs of sales in the period that the sales agreement was executed (and reflect
other pro forma adjustments as discussed in the related notes thereto). See
"Unaudited Pro Forma Financial Data."
The following selected combined financial data for the years ended December
31, 1995 and 1996 are derived from the audited consolidated financial statements
of the Predecessor Business. The Selected Combined Financial Data for the year
ended December 31, 1997 have been derived from the consolidated financial
statements of the Predecessor Business for the period January 1, 1997 through
August 18, 1997 and the consolidated financial statements of the Company for the
period from August 18, 1997 through December 31, 1997.
These data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Description of Purchase Transactions" and the financial statements
of the Company and the Predecessor Business and the notes thereto included
elsewhere in this Prospectus.
33
<PAGE> 44
HISTORICAL INCOME STATEMENT DATA OF THE PREDECESSOR BUSINESS
<TABLE>
<CAPTION>
SEVEN AND
ONE-HALF MONTHS
YEAR ENDED DECEMBER 31, ENDED AUGUST 18,
----------------------------------------------------- -------------------------
1995 1996 1997
------------------------- ------------------------- -------------------------
VACATION VACATION VACATION
OWNERSHIP OWNERSHIP OWNERSHIP
COMBINED(1) SEGMENT(2) COMBINED(1) SEGMENT(2) COMBINED(1) SEGMENT(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(AUDITED) (UNAUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL INCOME STATEMENT DATA:
Vacation ownership revenues:
Vacation Interval sales.................. $ 25,034 $ 25,034 $37,263 $37,263 $31,479 $31,479
Less amounts deferred(3)............... (24,461) (24,461) (36,435) (36,435) (30,653) (30,653)
Plus amounts recognized(3)............. 1,131 1,131 2,039 2,039 1,650 1,650
Interest income on Vacation Interval
Receivables............................ 1,839 1,839 3,294 3,294 3,277 3,277
Rental of vacant units................... 2,043 2,043 2,898 2,898 4,560 4,560
Service fee income....................... 2,062 2,062 2,599 2,599 2,461 2,461
Other revenues........................... 690 690 760 760 1,329 1,329
-------- -------- ------- ------- ------- -------
Total vacation ownership
revenues................................. 8,338 8,338 12,418 12,418 14,103 14,103
Total hotel revenues less direct hotel
expenses................................. 23,368 30,718 24,977
Other operating expenses:
Commissions paid......................... 4,919 4,919 7,108 7,108 5,512 5,512
Less amounts deferred(3)............... (4,824) (4,824) (5,807) (5,807) (5,413) (5,413)
Plus amounts recognized(3)............. 178 178 303 303 313 313
Advertising, sales and marketing......... 8,526 4,128 7,928 3,829 7,863 4,899
Maintenance and energy................... 8,475 3,183 9,209 3,798 9,517 4,669
General and administrative............... 12,023 6,052 13,086 5,745 10,274 3,963
Other expenses........................... 1,473 585 485 (345) 1,517 541
-------- -------- ------- ------- ------- -------
Total operating expenses................... 30,770 14,221 32,312 14,631 29,583 14,484
-------- -------- ------- ------- ------- -------
Operating income (loss).................... 936 (5,883) 10,824 (2,213) 9,497 (381)
Depreciation and amortization(4)......... 0 0 0 0 0 0
Interest expense......................... 10,357 3,884 8,287 3,108 7,539 2,827
Exchange and translation loss, net....... 75
-------- -------- ------- ------- ------- -------
Income (loss) before provision for taxes... (9,421) (9,767) 2,537 (5,321) 1,958 (3,283)
Mexican taxes............................ 5,294 3,356 4,633 3,312 4,694 1,756
-------- -------- ------- ------- ------- -------
Net income (loss).......................... $(14,715) $(13,123) $(2,096) $(8,633) $(2,736) $(5,039)
======== ======== ======= ======= ======= =======
OTHER HISTORICAL FINANCIAL DATA:
EBITDA(5)................................ $ (5,883) $(2,213) $ (455)
Ratio of earnings to fixed charges(6).... -1.5x -0.6x -0.2x
</TABLE>
34
<PAGE> 45
HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
VACATION OWNERSHIP SEGMENT OF PREDECESSOR BUSINESS
-------------------------------------------------------
SEVEN AND
1/2 MONTHS
ENDED
OCTOBER 18 COMPANY
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Vacation ownership revenues:
Vacation intervals sales............ $ 6,329 $ 24,500 $ 25,034 $ 37,263 $31,479 $ 19,239
Less amounts deferred............. (6,277) (24,064) (24,461) (36,435) (30,653)
Plus amounts recognized........... 196 1,131 2,039 1,650
Interest income on Vacation Interval
Receivables....................... 197 1,042 1,839 3,294 3,277 995
Rental of vacant units.............. 546 1,313 2,043 2,898 4,560 3,142
Service fee income.................. 2,062 2,599 2,461 1,987
Other revenues...................... 1,521 2,631 690 760 1,329 917
-------- -------- -------- -------- ------- --------
Total vacation ownership revenues..... 2,316 5,618 8,338 12,418 14,103 26,280
-------- -------- -------- -------- ------- --------
Cost of vacation intervals sales.... 5,667
Commissions paid.................... 972 4,782 4,919 7,108 5,512
Less amounts deferred............. (965) (4,697) (4,824) (5,807) (5,413)
Plus amounts recognized........... 31 178 303 313
Advertising, sales and marketing.... 8,611 15,407 4,129 3,829 4,899 6,368
Maintenance and energy.............. 1,493 3,969 3,183 3,798 4,669
General and administrative.......... 6,985 12,333 6,062 5,400 3,963 8,240
Other expenses...................... 2,064 3,355 585 541 2,349
-------- -------- -------- -------- ------- --------
Total operating expenses.............. 19,160 35,180 14,232 14,631 14,484 22,624
-------- -------- -------- -------- ------- --------
Operating income (loss)............... (16,844) (29,562) (5,894) (2,213) (381) 3,656
Depreciation and amortization....... 7,733 10,118 612
Interest expense.................... 3,884 3,108 2,827 3,726
Exchange and translation loss....... 381 4,266 75 992
-------- -------- -------- -------- ------- --------
Income (loss) before provision for
Mexican taxes....................... (24,958) (43,946) (9,778) (5,321) (3,283) (1,674)
Provision for Mexican taxes......... 2,414 5,881 3,356 3,312 1,756 1,662
-------- -------- -------- -------- ------- --------
Net income (loss)..................... $(27,372) $(49,827) $(13,134) $ (8,633) $(5,039) $ (3,336)
======== ======== ======== ======== ======= ========
</TABLE>
- ---------------
(1) The Company's Historical Consolidated Statement of Operations for the year
ended December 31, 1997 includes the operations of the purchased Club Regina
Resorts only for the period August 19, 1997 through December 31, 1997. Pro
forma unaudited Statements of Operatings, which combine the operations of
the Predecessor Businesses for the period January 1, 1997 through August 18,
1997, using the full accrual method of accounting, with the Company's 1997
historical results are presented elsewhere herein in order to provide pro
forma operating data for the full year ended December 31, 1997 along with
comparative pro forma operating data of the Predecessor Business for the
year ended December 31, 1996. The 1996 pro forma operating data has been
provided, using the full accrual method of accounting in order to provide
relevant comparative operating information.
34.1
<PAGE> 46
- ---------------
(1) These financial data were derived from the Combined Historical Financial
Statements of the Predecessor Business which were prepared in accordance
with U.S. GAAP. See the Historical Combined Financial Statements of the
Predecessor Business. The historical combined financial data includes the
combined results of both the vacation ownership and hotel segments of the
Predecessor Business which, prior to August 18, 1997, were owned by
Bancomer.
(2) The historical vacation ownership segment information was prepared by
identifying the direct vacation ownership revenues and expenses and
allocating the hotel and vacation ownership shared expenses based on the
relative number of total rooms at the beginning of each period.
(3) Because the Company acquired perpetual ownership of the Regina Resorts and
only sells a 30-year membership to its customers, the historical financial
information has been prepared by using the installment method of accounting
as required by U.S. GAAP, which requires the Company to recognize annually
only 1/30th of cumulative vacation ownership revenues, net of cumulative
provisions for doubtful accounts and cumulative commission expenses. Because
the Company intends to effect the Remainder Interest Disposition if it is
required to do so under the Indenture, for periods after August 18, 1997
financial data are presented using the full accrual method of accounting in
accordance with SFAS No. 66 rather than the installment method of
accounting. See "Description of Notes -- Certain Covenants" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Depreciation was not recognized by the Predecessor Business during the
periods presented because the prior owner had recorded a significant
impairment loss in 1994 and the assets of the Combined Resorts were held for
sale from then until their sale on August 18, 1997.
(5) EBITDA represents net income before interest expense, taxes, depreciation
and amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. However, EBITDA should not be construed as a substitute for
income from operations, net income or cash flows from operating activities
in analyzing the Company's operating performance, financial position and
cash flows. The EBITDA measure presented herein may not be comparable to
EBITDA as presented by other companies and is not the same as "Consolidated
Cash Flow" under the Indenture. See "Description of Notes -- Certain
Definitions."
(6) The ratio of earnings to fixed charges has been computed by dividing
earnings before Mexican tax plus fixed charges by fixed charges. Fixed
charges consist of interest and preferred stock dividends.
The following table reconciles historical EBITDA to historical net
income (loss) reported for the vacation ownership segment:
<TABLE>
<CAPTION>
SEVEN AND
ONE-HALF
MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- AUGUST 18,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)........................................... $(13,123) $(8,633) $(3,474)
Interest expense............................................ 3,884 3,108 2,827
Mexican taxes............................................... 3,356 3,312 1,336
Depreciation and amortization(5)............................ 0 0 0
-------- ------- -------
EBITDA...................................................... $ (5,883) $(2,213) $ 689
======== ======= =======
</TABLE>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
BALANCE
BALANCE SHEET DATA
SHEET DATA AT DECEMBER 31,
AT AUGUST 18, 1997 1997
------------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and temporary investments.............................. $ 2,056 $ 8,995
Vacation ownership and trade receivables.................... 37,180 39,952
Land, office furniture and equipment........................ 13,014 13,798
Total assets................................................ 95,749 118,164
Long-term debt, net of unamortized original issue
discount.................................................. 87,854 90,780
Stockholders' investment (deficit).......................... (315) 14,352
</TABLE>
35
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Unaudited
Pro Forma Financial Data" and the "Selected Combined Historical Financial Data"
and related notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
CR US was organized in August 1996 to seek acquisition opportunities within
the vacation ownership industry. On August 18, 1997, the Company acquired the
Regina Resorts. The Company generates revenue from the sale and financing of
Vacation Intervals which generally entitle the Member to use a fully-furnished
vacation residence typically for one week annually for 30 years. The Company
generates additional revenues from the service fees it collects from Members and
earns revenues from Starwood relating to the rental of certain vacant vacation
ownership units. The Company's operating expenses consist primarily of sales and
marketing expenses, Vacation Interval cost of sales, maintenance, energy and
general and administrative expenses. General and administrative expenses consist
primarily of compensation and related benefits, office leases, communications,
customer service and professional fees. On a pro forma basis the Company
anticipates that it will normally incur an additional expense of approximately
$1.5 million per year for the estimated cost of corporate staff, office and
overhead which the Company expects to incur as an independent corporate entity.
In connection with the Purchase Transactions, the Company placed the
property underlying each Regina Resort into three separate trusts. See
"Business -- Description of Purchase Transactions -- Description of Trusts." At
August 18, 1997, under the applicable original trust agreements, the Operating
Subsidiaries had the right to use the Regina Resorts for 30 years until August
18, 2027. A subsidiary of CR Mexico owned rights (the "Remainder Interests")
pursuant to which it had the right to use the Regina Resorts as of after August
19, 2027. Subsequent to August 18, 1997 these trust agreements were amended to
extend the rights to the Regina Resorts for an additional 20 years until August
18, 2047. Because at August 18, 1997 the Company owned a perpetual interest in
the Regina Resorts but sold 30-year Memberships, U.S. GAAP would have required
the Company to use the installment method of accounting for the recognition of
sales margins (gross revenues less the direct cost to sell Vacation Intervals).
Under these circumstances, the installment method of accounting would have
required the Company to recognize vacation ownership revenues, Vacation Interval
costs of sale, provisions for doubtful accounts and commission expenses in equal
amounts over 30 years instead of recognizing such revenues and expenses in the
period that the sale of a Vacation Interval is made. The Company believes that
the installment method of accounting does not properly reflect its economic
earnings and believes that the full accrual method of accounting better reflects
the economic earnings of the Predecessor Business. In accordance with the
Indenture, CR US effected the disposition of the Remainder Interests by
contributing all of the outstanding stock of the subsidiary holding only the
Remainder Interests to an unaffiliated charitable institution. Accordingly the
Company will not be required to use the installment method of accounting with
respect to the presentation of its consolidated financial statements under GAAP
for periods after August 18, 1997 and may use the full accrual method of
accounting in its audited financial statements.
The following discussion relates to the financial condition and results of
operations of the Company and the vacation ownership segment of the Predecessor
Business giving pro forma effect to the adoption of the full accrual method of
accounting as discussed above. In addition, the discussion below is based on the
"Unaudited Pro forma Financial Data" contained elsewhere in this Prospectus,
which apply the full accrual method of accounting, rather than the installment
method of accounting used to develop the financial information included in
"Selected Combined Historical Financial Data." The pro forma data discussed
below does not purport to represent what the Company's results of operations
would have been had the Purchase Transactions, the Offering, the Remainder
Interest Disposition and certain stockholder investments occurred on the assumed
dates. See "Description of Notes -- Certain Covenants," "Unaudited Pro Forma
Financial Data," and "Selected Historical Combined Financial Data."
36
<PAGE> 48
RESULTS OF OPERATIONS
Comparison of the pro forma year ended December 31, 1997 to the pro forma year
ended December 31, 1996.
PRO FORMA INCOME STATEMENT PERCENTAGES
OF THE VACATION SEGMENT OF THE PREDECESSOR BUSINESS
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT DATA 1995 1996 1997
AS A PERCENTAGE OF TOTAL REVENUES ------ ------ ------
<S> <C> <C> <C> <C>
Vacation Interval sales............................ 79.1% 78.8% 73.1%
Interest income.................................... 5.8% 7.0% 6.2%
Rental income...................................... 6.5% 6.1% 7.1%
Service fee income................................. 6.5% 6.5% 8.9%
Other income....................................... 2.2% 1.6% 4.7%
Total vacation ownership revenues.................. 100.0% 100.0% 100.0%
PRO FORMA INCOME STATEMENT DATA
AS A PERCENTAGE OF VACATION INTERVAL SALES
Vacation Interval cost of sales.................... 25.8% 20.2% 22.8%
Commissions expenses............................... 19.6% 19.1% 15.2%
Advertising, sales and marketing expenses.......... 16.5% 10.3% 17.9%
PRO FORMA INCOME STATEMENT DATA
AS A PERCENTAGE OF TOTAL REVENUES
General and administrative expenses................ 23.8% 14.6% 16.1%
Maintenance and energy expenses.................... 10.1% 8.0% 9.4%
Provision for doubtful accounts.................... 7.2% 7.2% 7.1%
</TABLE>
Comparison of the pro forma twelve months ended December 31, 1997 to the pro
forma twelve months ended December 31, 1996.
Total revenue increased $22.1 million, or 46.8%, from $47.3 million for the
twelve months ended December 31, 1996, to $69.4 million for the twelve months
ended December 31, 1997. This increase was primarily due to a 36.1% increase in
Vacation Interval sales, a 29.7% increase in interest income, a 62.0% increase
in service fee income, a 112.7% increase in rental income and a 332.4% increase
in other income. Vacation Interval sales grew $13.5 million, or 36.1%, from
$37.3 million for the twelve months ended December 31, 1996, to $50.7 million
for the twelve months ended December 31, 1997. The number of Vacation Intervals
sold increased 51.9% from 2,799 for the twelve months ended December 31, 1996,
to 4,253 for the same period in 1997. The average price of Vacation Intervals
sold decreased $1,250, or 9.4%, from $13,313 for the twelve months ended
December 31, 1996, to $12,063 for the twelve months ended December 31, 1997, due
to an increase in sales of alternating year (or biannual) Vacation Intervals.
Management attributes the increase in the number of Vacation Intervals sold to
improved marketing efforts, stronger demand and the introduction of the lower
cost biannual product. Interest income grew primarily due to a corresponding
increase in Vacation Interval Receivables from $30.0 million at December 31,
1996 to approximately $43.0 million at December 31, 1997. Service fee income
increased $1.9 million, or 62.3%, for the twelve months ended December 31, 1997
over the same period in 1996 which increase resulted from the overall increase
in the number of Members during the 1997 period. Rental income increased $3.3
million, or 120.7% from $2.9 million in 1996 to $6.2 million in 1997. This
increase was due to an overall increase in vacation ownership units which were
available to the Company to rent because of the late 1996 completion of an
expansion of units at the Los Cabos location, and to an improved rental market
demand. Other revenues increased $2.5 million, or 332.4%, from $0.8 million in
1996 to $3.3 million in 1997, due to the additional revenue stream provided by
retail business of the Company's theme stores.
37
<PAGE> 49
Operating costs increased $18.5 million, or 56.7%, from $31.5 million in
1996, to $51.0 million in 1997. As a percentage of total revenues, operating
costs decreased from 68.9% to 72.1% in 1997 periods. Vacation Interval cost of
sales increased $4.1 million, or 54.0%, from $7.5 million for 1996 to $11.6
million in 1997. Pro forma Vacation Interval cost of sales was calculated each
period for the Predecessor Business by multiplying the estimated average cost of
unsold inventory of Vacation Intervals ($2,684) by the number of Vacation
Intervals sold during each period by the Predecessor Business. Commission
expenses decreased as a percentage of Vacation Interval sales from 19.1% in 1996
to 15.2% in 1997. This decrease was due, in part, to the reduced commissions
amount paid in connection with the increasing level of alternating year
(biannual) interval sales, and because of an overall reduction in the commission
structure related to new marketing programs started in 1997. Advertising, sales
and marketing costs increased as a percentage of Vacation Interval sales from
10.3% to 17.9%, reflecting the increased investment in marketing programs which
enabled the Predecessor Business to report significant growth in Vacation
Interval sales during 1997.
As a percentage of total revenues, maintenance and energy expenses
increased from 8.0% to 9.4% reflecting the 1997 increased usage of the vacation
ownership facilities by an increasing number of members and because of the
effects of inflation.
Provision for doubtful accounts increased $1.6 million, or 47.1%, from $3.4
million in 1996, to $5.0 million in 1997. This increase is related to the
increased Vacation Interval sales during the 1997 period.
General and administrative expenses increased $4.3 million, or 62.0%, from
$6.9 million for 1996, to $11.2 million in 1997. As a percentage of total
revenues, general and administrative expenses grew from 14.6% in 1996, to 16.1%
in 1997. The increase in general and administrative expenses was the result of
the increased level of support necessary to serve the larger number of members,
the related growth in the number of Vacation Intervals used by such Members, and
the increased number of sales and marketing programs in the 1997 period. These
expenses also reflect some general inflationary increases during the 1997
period.
Pro forma depreciation and amortization was not material in any of the
periods presented. Depreciation and amortization is attributable to the office
furniture and equipment of the marketing and administrative functions only.
The pro forma level of interest expense decreased $0.4 million in 1997
because of the capitalization of interest during the period August 19, through
December 31, 1997 related to Cozumel land under development.
Mexican taxes represent value added taxes for these periods and were
estimated to be $3.3 million and $4.3 million for the 1996 and 1997 periods,
respectively.
The actual net exchange loss of $1.1 million during the period August 19
through December 31, 1997 resulted because of the decline in the peso exchange
rate relative to U.S. dollar during this period. The pro forma financial
statements of the Predecessor Business do not reflect any exchange or
translation gains or losses.
As a result of the changes in revenues and expenses discussed above, the
pro forma net income increased $1.3 million, from a loss of $5.6 million in 1996
to a loss of $3.3 million in 1997.
Comparison of the pro forma year ended December 31, 1996 to the pro forma year
ended December 31, 1995.
Total revenue increased $15.6 million, or 49.2%, from $31.7 million for the
year ended December 31, 1995, to $47.3 million for the year ended December 31,
1996. This increase was primarily due to a 48.9% increase in Vacation Interval
sales, a 79.1% increase in interest income, a 48.1% increase in service fee
income, and a 33.9% increase in rental and other income. Vacation Interval sales
increased $12.3 million, or 49.2%, from $25.0 million for the year ended
December 31, 1995, to $37.3 million for the year ended December 31, 1996. This
increase was the result of a 48.6% increase in the average price of Vacation
Intervals for 1996, while the number of Vacation Intervals sold was nearly the
same at 2,796 for the year ended December 31, 1995 and 2,799 for the year ended
December 31, 1996. This increase in average price was due to a reduction in
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the number of relatively low priced biannual and studio Vacation Intervals sold
and a general increase in Vacation Interval sales prices. The increase in
interest income was due to the growth in the level of Vacation Interval
Receivables outstanding from $25.9 million in 1995 to $31.7 million in 1996.
Service fee income increased $1.0 million, or 47.6%, from $2.1 million for the
year ended December 31, 1995, to $3.1 million for the year ended December 31,
1996. This increase reflects the overall increase in the average number of
Members during 1996. Rental and other income increased $0.9 million or 33.3%,
from $2.7 million in 1995, to $3.6 million in 1996 due to an increase in
available vacation ownership units resulting from the expansion of units at the
Los Cabos location during the latter half of 1996.
Operating costs increased $3.4 million, or 11.7%, from $29.1 million for
the year ended December 31, 1995, to $32.5 million for the year ended December
31, 1996. However, as a percentage of total revenues, operating costs decreased
from 91.9% of total revenues for the year ended December 31, 1995, to 68.8% of
total revenues for the year ended December 31, 1996. These decreases in cost
percentages in relation to total revenues resulted from the impact of the higher
revenues earned in 1996, while the pro forma operating expenses were semi-fixed
in nature. Vacation Interval cost of sales increased from $6.5 million at
December 31, 1995 to $7.5 million at December 31, 1996. Pro forma Vacation
Interval cost of sales is calculated for each period by multiplying the average
cost of unsold inventory of Vacation Intervals ($2,684) by the number of
Vacation Intervals sold during each period. Commission expenses decreased as a
percentage of Vacation Interval sales from 19.6% for the year ended December 31,
1995 to 19.1% for the year ended December 31, 1996. Commission expenses
decreased slightly in 1996 because of the mix of sales and due to improved 1996
marketing programs. Advertising, sales and marketing costs decreased as a
percentage of Vacation Interval sales from 16.5% for the year ended December 31,
1995 to 10.3% for the year ended December 31, 1996. The relative increases in
maintenance and energy expenses resulted from increases in the number of Members
using the vacation ownership facilities during 1996.
General and administrative expenses decreased 9.2%, from $7.6 million for
the year ended December 31, 1995, to $6.9 million for the year ended December
31, 1996. The reduction in general and administrative expenses in 1996 was due
to cost cutting measures taken by management and because the 1995 expense levels
included certain one time expenses related to management activities regarding
the attempts to sell the Predecessor Business.
Pro forma depreciation and amortization remained constant for both periods
and was not significant. Depreciation and amortization is that attributable to
the office furniture and equipment of the marketing and administrative functions
only.
Interest expense on a pro forma basis (which gives effect to this Offering)
remained constant for both periods. The interest expense pro forma adjustment
gives effect to the portion of the proceeds of the Offering allocated to the
Warrants based on their estimated fair value. Such amount has been recorded as
original issue discount and has been amortized as non-cash interest expense,
along with deferred Offering costs, over the Notes' lives.
Mexican taxes represent value added taxes for these periods and were
estimated to be $3.1 million and $3.3 million for the 1995 and 1996 periods,
respectively.
As a result of the changes in revenues and expenses discussed above, pro
forma net loss decreased to $5.2 million in 1996 from a loss of $17.1 million in
1995.
SEASONALITY
The Mexican vacation ownership industry in general tends to follow seasonal
buying patters with peak sales occurring during the peak travel/tourism seasons,
usually December through April and July through August. Seasonal influences also
affect the Company's earnings so that net income is typically higher in the
first and fourth calendar quarters. American tourists tend to vacation in the
destinations where the Regina Resorts are located in the December through April
season while Mexican tourists tend to travel to these destinations more
frequently during the summer months.
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LIQUIDITY AND CAPITAL RESOURCES
The Company will generate cash for operations from the sale of Vacation
Intervals, financing activities related to the sales of Vacation Intervals,
rental of unsold Vacation Interval units to Starwood, and from the receipt of
service fees charged to Members. With respect to the sale of Vacation Intervals,
the Company generates cash from the receipt of down payments from new Members
acquiring Vacation Intervals. The Company generates profits related to the
financing of Vacation Interval sales based on the interest charged on the
Vacation Interval Receivables. At December 31, 1997, approximately (i) 64% of
all of the Vacation Interval Receivables were U.S. dollar denominated and had a
weighted average interest rate of interest of 12.8%, (ii) 32% of all Vacation
Interval Receivables were denominated in UDIs, an obligation denominated in
pesos which is adjusted for Mexican inflation, and had a weighted average
interest rate of interest of 25.8%, and (iii) 4% of all Vacation Interval
Receivables were denominated in pesos and had a weighted average interest rate
of interest of 19.2%. See "Risk Factors -- Company Risks -- Customer Financing
Risks" and "Risk Factors -- Company Risks -- Customer Default Risks."
The Company requires funds to finance the future acquisition and
development of vacation ownership resorts and properties and to finance customer
purchases of Vacation Intervals. To finance anticipated development costs at the
Regina Resorts, the Company intends to rely on cash generated from operations,
borrowing capacity available on existing $26 million of credit facilities, the
proceeds of this Offering, and possible additional construction financing.
Over the next twelve months, the Company anticipates spending approximately
$7.5 million for expansion and development activities at Cozumel, Los Cabos and
other locations. The Company plans to fund these expenditures with the net
proceeds of the Offering, cash generated from operations, and construction
financing. See "Risk Factors -- Company Risks -- Risk of New Venture and Recent
Acquisition; Lack of Prior Operating History." If the Company fails to obtain
title to its land adjacent to the Los Cabos Regina Resort, the Company will have
an additional $4.0 million in cash available as a result of this Offering. In
such event, the Company intends to invest such funds in a manner consistent with
its business strategy as discussed herein. See "Business -- Business Strategy."
The Company intends to pursue a growth-oriented strategy. From time to
time, the Company may acquire, among other things, additional vacation ownership
properties, resorts and completed vacation ownership intervals, land upon which
additional vacation ownership resorts may be built (which may require capital
expenditures by the Company) and/or other operations in the vacation ownership
industry. The Company is evaluating certain resort asset acquisition or
development opportunities, but it currently has no contracts or capital
commitments relating to any potential acquisitions or developments other than
the agreement to acquire and make certain conversions to the Villa Vera
representing commitments of approximately $6.5 million, for which the financing
has been arranged. In addition, the Company is evaluating several strategic
partnership opportunities, but it likewise has no agreements relating to any
such potential strategic partnership opportunities. The Company is highly
leveraged. Under the Indenture, there are limitations on the Company's ability
to borrow funds to finance its expansion plans. See "Risk Factors -- Factors
Relating to the Securities -- Leverage; Net Capital Deficiency."
The Company believes that, with respect to its current operations, the net
proceeds to the Company from the Offering, together with cash to be generated
from operations and future borrowings, are sufficient to meet the Company's
working capital and capital expenditure needs for the near future. However,
depending upon conditions in the capital and other financial markets and other
factors, the Company may from time to time consider the issuance of debt, equity
or other securities, the proceeds of which would be used to finance
acquisitions, to refinance debt or for other general corporate purposes. The
Company believes that its properties are adequately covered by insurance. See
"Business -- Insurance; Legal Proceedings."
IMPACT OF YEAR 2000
The Company utilizes RCI's System to manage all of its timeshare
operations. In contrast with traditional software run on mainframe systems, the
RCI software was developed in the late 1980's, and has
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been Year 2000 compliant since 1994. Additionally, the Company has initiated
discussions with all significant suppliers including the Westin Hotel
properties. No significant Year 2000 issues have been identified.
The Company believes that there are no significant Year 2000 issues and
that this conclusion is based on a comprehensive study of this issue.
Accordingly, management has concluded that no significant costs will be incurred
to address this issue.
CURRENCY FLUCTUATIONS
Since December 1994, Mexico has experienced difficult economic conditions,
including significant devaluation and volatility of the peso with respect to the
U.S. dollar, reduced economic activity, higher inflation, and high interest
rates. See "Risk Factors -- Factors Relating to Mexico -- Adverse Mexican
Economic Conditions and Government Policies." The effects of the Mexican
economic crisis on the Company have been tempered because a significant portion
of the Company's revenues is in U.S. dollars. The principal effects are
summarized below.
Effect of Devaluation and Inflation on Revenues, Costs, Operating Margins
and Vacation Interval Receivables. Because the Company sells certain of its
Vacation Intervals for U.S. dollars and adjusts the price of Vacation Intervals
sold for pesos to keep the revenue from such sales constant in dollar terms,
historically the Company's revenue from customers who purchase Vacation
Intervals without financing them has not been affected by devaluations and
inflation of the peso. Approximately 70% of the Company's customers elect to
finance their purchase of Vacation Intervals through the Company. Approximately
32% of the Vacation Interval Receivables are denominated in UDIs. The effect of
such receivables being denominated in UDIs is to insulate the Company from
effects of peso inflation over extended time periods with respect to those
receivables. However, the Company is not insulated from the effect of changes in
the dollar/peso exchange rate with respect to those receivables. Accordingly, to
the extent the rate of Mexican inflation exceeds the rate of devaluation of the
peso during any period, the Company's rate of return in constant dollar terms on
UDI denominated Vacation Interval Receivables will increase during such period.
Conversely, to the extent the rate of peso inflation is less than the rate of
devaluation of the peso, the Company's rate of return in constant dollar terms
on UDI denominated Vacation Interval Receivables will decrease during such
period. See "Risk Factors -- Company Risks -- Customer Financing Risks," "Risk
Factors -- Company Risks -- Customer Default Risks," and "Business -- The
Company -- Customer Financing."
Because only 4% of the Vacation Interval Receivables are denominated in
pesos, the effect of inflation and deflation of the peso on the Company's
Vacation Interval Receivables and the Company is immaterial.
When the rate of devaluation of the peso in any fiscal period exceeds the
rate of inflation of the peso for such period, the cost of the Company's other
transactions (such as labor expenses and general and administrative expense in
Mexico) denominated in pesos will decrease when translated into constant
dollars. During 1995, the effects of the sharply lower value of the peso against
the U.S. dollar decreased the Company's general and administrative costs
compared to prior fiscal periods. In contrast, in fiscal periods when the rate
of inflation exceeds the rate of devaluation, as occurred during most of 1994
until the onset of the crisis, and again during most of 1995 and 1996, peso
denominated expenses increase when translated into constant dollars.
RECENT ACQUISITIONS
In the Purchase Transactions the Company purchased from Bancomer the
capital stock of the entity which, in turn, owned through various subsidiaries
the combined hotel and vacation ownership operations, and the Company
immediately sold the hotel facilities and related hotel operations to an
indirect wholly-owned subsidiary of Starwood. In connection with the Purchase
Transactions, the Company and Starwood have entered into various agreements
which provide, among other things, for the sharing of various acquisition costs
and also provide a framework for these two strategic partners to divide up
certain segments of the net working capital assets that the Company acquired
from Bancomer. The Company has developed its initial determination of the
allocation of its net purchase price paid to acquire the vacation ownership net
assets and has recorded various accounts receivable which it believes are owed
by Starwood in accordance with the various
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contracts and agreements. Starwood has not yet fully evaluated the Company's
proposed allocation and it is possible that certain changes in the Company's
initial allocation of the net purchase price may be necessary after further
discussions and negotiations are held with Starwood and as additional
information regarding the value of the various assets acquired may become
available. U.S. GAAP provides that the Company should adjust its initial
determination of the allocation of the purchase price for a period of up to
twelve months after the acquisition if new facts are found to exist that bear on
such determination. To the extent that the amounts reported as assets in the
accompanying consolidated balance sheet of CR US should change because of final
settlement with Starwood and/or because the value information becomes available,
the Company will adjust the intangible asset "Cost of Unsold Vacation Ownership
Intervals and Related Club Memberships."
Finally, the Company anticipates completing the acquisition of the Villa
Vera Hotel & Raquet Club ("The Villa Vera") located in Acapulco, Mexico from
Bancomer for $4.5 million during April 1998. The Villa Vera was built over a 30
year period and consists of 74 hotel units which the Company plans to convert
into 34 one-bedroom and 3 two-bedroom vacation ownership units plus new
construction of eight two-bedroom units that will increase the Company's
inventory by approximately 4,000 vacation intervals. The Company estimates
conversion costs to be $2.5 million. See "Risks Factors -- Company Risks -- Risk
of New Venture and Recent Acquisition; Lack of Prior Operating History,"
"Business -- Description of Purchase Transactions."
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BUSINESS
Club Regina owns and operates three luxury vacation ownership resorts on
prime beachfront sites at three of Mexico's most popular beach destinations:
Cancun, Puerto Vallarta and Los Cabos. Club Regina markets and sells Vacation
Intervals at its resorts which generally entitle the owner, or Member, to use a
fully-furnished vacation residence typically for one week each year for thirty
years. At each location, the Regina Resorts share common facilities with, and
are adjacent to, the "five-star" Westin Hotels. Starwood owns the Westin Hotels,
which are managed by Westin. The Company believes that its Vacation Interval
business is particularly attractive in the vacation ownership market, in terms
of appeal to more affluent customers and profitability, because of the close
association with and availability of high quality, luxury resort amenities of a
"five star" hotel (such as restaurants and bars, maid and room service,
recreational facilities, health clubs and spas, and other luxury amenities) at
the Regina Resorts and because of the Company's flexible "floating time,"
"floating unit," and "floating location" program. Together, the Combined Resorts
contain 402 one-and two-bedroom vacation ownership units and 908 luxury hotel
rooms. The Company intends to use the Regina Resorts as its flagship platform
for expansion through future acquisitions and internal growth in the United
States, Canada, Mexico and elsewhere. The Company believes it is one of the
leading developers focused primarily on the "luxury" level of the vacation
ownership market, which is characterized by elegant accommodations and personal
service.
As part of the Mexican government's economic development program, Bancomer,
the second largest bank in Mexico (which was owned by the Mexican government
until 1991), developed the Combined Resorts between 1991 and 1996 as its luxury
flagships for tourism development. The vacation ownership units within the
Regina Resorts were developed to appeal to the most sophisticated segments of
the market for vacation ownership properties throughout the world. In
recognition of this fact, the Regina Resorts have been awarded RCI's highest
designation as "Gold Crown" resorts. Furthermore, according to RCI, the Regina
Resorts have consistently obtained among the highest rankings of guest
satisfaction among RCI members on all counts not only in Mexico but also in the
world.
The Company's principal operations currently consist of (i) marketing and
selling Vacation Intervals, (ii) operating the Regina Resorts, for which it
receives an annual service fee from each Member, and (iii) providing financing
for the purchase of Vacation Intervals. In 1997, the Company sold approximately
4,200 Vacation Intervals, producing $53.9 million in Vacation Interval sales
revenue. The Company had unsold inventory as of December 31, 1997 of
approximately 12,500 (approximately 6,000 annual and 6,500 biannual) Vacation
Intervals, and the Company has plans to develop an aggregate of approximately
20,000 Vacation Intervals at the Villa Vera in Acapulco, Mexico, on land it
plans to purchase that is adjacent to the Regina Resort in Los Cabos, Mexico and
at a new resort to be developed in Cozumel, Mexico. For the twelve months ended
December 31, 1997, the Company provided financing for approximately 70% of its
buyers (or approximately 75% of its Vacation Interval revenue). For such period,
cash sales plus down payments on financed sales represented approximately 50% of
Vacation Interval revenue. Assuming an average sales rate of 4,000 Vacation
Intervals per year, the Company anticipates that the existing Regina Resorts
will provide sufficient inventory for approximately four years of Vacation
Interval sales and that the planned development at its resort property
development sites in Cozumel and Los Cabos will provide approximately four
additional years of inventory.
THE COMPANY
The Product. Club Regina offers each customer who purchases a club
membership the flexibility to use a specific type of unit, during any week
within a specific seasonal category, in any of the Regina Resorts at Cancun,
Puerto Vallarta and Los Cabos. During the year ended December 31, 1997, a
Vacation Interval ranged in price from approximately $8,000 for a studio unit
with a maximum occupancy of two, $6,000 to $17,500 for a one-bedroom unit with a
maximum occupancy of four, to approximately $13,000 to $27,000 for a two-bedroom
unit with a maximum occupancy of six. Each one- and two-bedroom unit contains a
separate living room and kitchen area. Vacation Intervals can be purchased for
any one of three seasons: Holiday, Prime and Select. Holiday Vacation Intervals
allow Members to use the Regina Resorts during any time of
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the year including the five weeks of highest demand. Prime Vacation Intervals
allow Members to use the Regina Resorts during any time of the year except the
five weeks of highest demand, while Select Vacation Intervals allow Members to
use the Regina Resorts during 17 weeks of traditionally lower demand. Vacation
Intervals are sold under the Company's flexible "floating time," "floating
unit," and "floating location" program. This program allows a Member to use his
or her Vacation Interval at any time during the season to which it relates, or
any less expensive season. Furthermore, Members may divide their Vacation
Intervals into three split-week segments and thereby spend a portion of a week
at a resort at one time and the other two portions at the same or other resorts
at other times. Finally, Members with Vacation Intervals representing one- and
two-bedroom units can divide their Vacation Intervals and use a single module
within any such unit over two weeks. For example, under this program, subject to
availability, a Member that purchased a two-bedroom unit could divide that unit
into six different split week stays (three in one-bedroom accommodations and
three in studio accommodations) over the year. Members who are at least 55 years
of age have the option, subject to availability, to accelerate the use of their
Vacation Interval up to one extra week during the "Prime" season or two extra
weeks during the "Select" season so long as such Members pay an additional
service fee for each year that is accelerated.
Currently the Company sells a 50-year contractual right to use Vacation
Interval units. Until March 13, 1998, purchasers of Memberships, with the
corresponding rights to use the Vacation Intervals, were formally issued a share
(a "Class B Share") of Class B Common Stock of Club Regina, S.A. de C.V. ("Club
Regina Mexico") a subsidiary of the Company. The Company retains voting control
of Club Regina Mexico by virtue of its ownership of all of the outstanding
shares of Class A Common Stock which represent voting control of Club Regina
Mexico under its charter. Club Regina Mexico has contractual arrangements with
the subsidiaries of the Company that operate the Regina Resorts and, through
those arrangements, by paying his or her annual service fee, each Member
purchasing before such date holding a Class B Share has the right to stay at the
Regina Resorts operated by those subsidiaries under the circumstances described
above. Prior to using the Class B Share as a means to sell Vacation Intervals,
the Company used a different means for evidencing Vacation Intervals which
approximately 15% of current Vacation Interval owners continue to hold.
Sales and Marketing. As a leading developer and operator of vacation
ownership resorts in Mexico, the Company believes that it has acquired extensive
skill and expertise in developing, managing and operating vacation ownership
resorts and in marketing Vacation Intervals. The Company sells Vacation
Intervals through both on-site sales personnel at each of its resorts and at
sales offices in eight major Mexican cities. A variety of marketing programs are
employed to generate prospects for these sales efforts, which include
presentations to Westin Hotel guests, as well as overnight mini-vacation
packages, certificate programs, theme stores, travel agencies, telemarketing,
owner referrals 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.
Approximately 67% of all Vacation Interval sales are made from leads
generated locally in the Los Cabos, Cancun and Puerto Vallarta areas.
Approximately one third of such sales, or 16% of total sales, are made to guests
of the Westin Hotels. Programs directed to these guests have been consistently
successful both in the number of prospects generated and in the closing rate,
due to the direct experience of such guests with the quality of the
installations and the likelihood that such guests, who typically belong to high
income households, will prequalify to purchase Vacation Intervals. Also these
guests have historically lower default rates on Vacation Interval Receivables.
The remainder of local sales, or 51% of total sales, are made through
Company-owned theme stores, travel agencies and ground operators and other lead
generation points located in airports or shopping centers, independently or in
association with other businesses such as auto rental companies and restaurants.
The Company's theme stores, which generate leads resulting in approximately 9.5%
of its total sales, are retail businesses with a strong contemporary appeal to
affluent tourists, offering products associated with ecological consciousness,
wildlife, conservation and local culture, while at the same time promoting the
resort and inviting customers to attend sales presentations. A share of these
stores' profits is contributed to causes related
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to the stores' themes. There are theme locations in Los Cabos, Puerto Vallarta,
and Cancun. The Company also operates travel agencies in Los Cabos, Cancun and
Puerto Vallarta which provide traditional travel services to Westin Hotel guests
and potential members and also encourage their customers to attend a Club Regina
presentation. Under the Company's ground operator program, the Company provides
local transport and other services in each of Los Cabos, Puerto Vallarta and
Cancun to visitors of many different resorts in these destinations and
encourages those visitors to attend a Club Regina presentation. In Los Cabos,
prospects are also generated through the offer of "day passes" allowing tourists
lodged elsewhere in the city to spend the day at the Combined Resort, using its
recreational and public facilities like any guest.
Approximately 34% of all Vacation Intervals are sold through off-site sales
centers in eleven of Mexico's largest urban centers. The proportion of off-site
sales is gradually increasing, reflecting the growing prestige of the Regina
Resorts, the increased efficacy of the Company's off-site marketing and sales
techniques, and gradual improvement in the Mexican economy. Off-site sales
programs center on sales offices in eight of Mexico's largest cities: Mexico
City, Guadalajara, Monterrey, Morelia, Hermosillo, Torreon, Leon and Tijuana.
Using sophisticated data base -- based marketing approaches including
telemarketing, qualified prospects are offered mini-vacations, fly-in and
drive-in programs as a method to introduce the benefits of membership and the
Regina Resorts to potential Members. Members are also contacted for referrals.
Most recently, the "universal salesman" program has been instituted whereby
potential Members are contacted by one representative of the Company, who is the
potential Member's only contact with the Company through closing of the
purchase. The Company believes that this program solves a significant problem in
traditional vacation ownership marketing approaches which is the lack of
continuity in a customer's relationship with the seller.
Finally, the Company believes that one of its best marketing resources is
its current Members. Accordingly, the Company directs programs at these Members
to encourage them to recommend Club Regina Memberships. These programs include a
points-based program by which Members who refer potential Members to the Company
are given awards, and its bonus week program whereby every new buyer is given a
week to give to a friend or relative. The Company also markets upgrades, either
in the size of the unit to which the Member has access or the time of year the
Member may use that unit. Finally, the Company markets the opportunity to stay
at the resort for additional days or weeks to Members as well as the right to
rent additional units for guests accompanying the Member to the resort.
Because the Company permits Vacation Interval purchasers to cancel their
purchases within five days of purchase, all successful sales presentations
conclude with a careful verification of the customer's understanding of his
rights and obligations, and of the benefits of the product, by a non-sales staff
member. See "Risk Factors -- Company Risks -- Sales Volume Risks."
Customer Financing. The Company has historically provided financing for
approximately 70% of its Vacation Interval buyers and approximately 30% of all
Vacation Interval buyers either pay cash at or within 60 days of closing. Buyers
who finance through the Company are required to make a down payment of at least
15% of the Vacation Interval's sales price and pay the balance of the purchase
price over a period of one to seven years. For the year ended December 31, 1997,
the average down payment on a financed Vacation Interval was approximately 28%
of its purchase price. At December 31, 1997, the Company had a portfolio of
approximately 5,500 Vacation Interval Receivables amounting to approximately
$43.0 million in outstanding principal amount, as compared to 3,750 Vacation
Interval Receivables amounting to approximately $29.0 million in outstanding
principal amount at December 31, 1996. At December 31, 1997, the outstanding
loans had a weighted average maturity of approximately four years. At December
31, 1997, approximately (i) 64% of all of the Vacation Interval Receivables were
U.S. dollar denominated and had a weighted average interest rate of interest of
12.8%, (ii) 32% of all Vacation Interval Receivables were denominated in UDIs
and had a weighted average interest rate of 25.8%, and (iii) 4% of all Vacation
Interval Receivables were denominated in pesos and had a weighted average
interest rate of 19.2%. Because approximately 57% of Vacation Intervals have
been sold to U.S. citizens, Canadians and other foreigners and approximately 64%
of all Vacation Interval Receivables are U.S. dollar denominated, the Company
believes its foreign exchange risk with respect to the Mexican economy is
mitigated.
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Due to its ownership of Vacation Interval Receivables, the Company bears
the risk of purchaser default. The Company's practice has been to continue to
accrue interest on its loans to purchasers of Vacation collectible, at which
point it expenses the interest accrued on such loan, terminates the underlying
conditional sale agreement and 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. As of December 31,
1997, approximately 3.5% of the Company's Vacation Interval Receivables were
more than 60 days overdue. At that date, approximately 2.2% of the principal
amount of the Company's outstanding Vacation Interval Receivables were more than
120 days past due. See "Risk Factors -- Company Risks -- Customer Financing
Risks" and "Risk Factors -- Company Risks -- Risk of Customer Defaults."
Approximately 32%, or $14.5 million, of the Company's Vacation Interval
Receivables at December 31, 1997 were denominated in UDIs. The UDI (Unidad de
Inversion, or Unit of Investment) is an obligation denominated in pesos which is
adjusted for Mexican inflation. The value of the UDI is tied to the Consumer
Price Index of Mexico (Indice Nacional de Precios al Consumidor). The proceeds
of loans denominated in UDI's are paid to a borrower in pesos at the applicable
UDI-peso conversion ratio on the day of the loan. Payments of both principal and
interest to the lender are made in pesos. The amount of payments in pesos to be
made as of any date depend on the applicability of the UDI-peso conversion ratio
at that date. The effect of denominating Vacation Interval Receivables in UDIs
is to protect the Company from inflation in Mexico, but not from variations in
the exchange rate between the peso and the U.S. dollar. An additional effect is
that when Mexican inflation is high, that inflation rate is effectively added to
the Company's Vacation Interval Receivable income, thereby increasing the
Company's Mexican peso revenue. Conversely, if the Mexican inflation rate should
decline, Vacation Interval Receivable interest rates would decline. At September
30, 1997, UDI denominated Vacation Intervals carried an interest rate of
approximately 26%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Currency Fluctuations" and "Risk
Factors -- Company Risks -- Customer Financing Risks."
Room Rental Operations. To generate additional revenue at the Los Cabos and
Puerto Vallarta Regina Resorts, the Company rents units of excess inventory to
Starwood for use as hotel rooms. The Company has entered into a lease agreement
with Starwood, whereby Club Regina has leased 54 rooms at Los Cabos and 60 rooms
at Puerto Vallarta to Starwood. This lease runs for one year from August 18,
1997 and provides for payment of $1.2 million. The Operating Agreements between
the Company and Starwood with respect to Los Cabos and Puerto Vallarta provide
that the parties will negotiate to enter into a new lease with respect to units
constituting excess inventory for the period commencing August 18, 1998. There
can be no assurance that such a lease will be negotiated, or if negotiated, will
be on favorable terms. In addition, the Company can, subject to significant
limitations set forth in the Operating Agreement, rent unsold units that are not
covered by the lease arrangement with Starwood to Members and guests as well as,
under limited circumstances, third parties. 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 the Company sells its existing inventory of Vacation Intervals, it
will have fewer rooms to rent to Starwood or to other parties. See
"-- Description of Purchase Transactions -- Description of Operating Agreements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Participation in Vacation Interval Exchange Networks. The Company believes
that its Vacation Intervals are made more attractive by the Company's
participation in interval exchange networks operated by RCI. This is
particularly true because the Regina Resorts have been rated "Gold Crown" by
RCI, thus giving Members superior interval exchange opportunities. 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 ownership
interval. This is particularly true given most vacation interval owners'
propensity to travel. According to RCI, its members in the United States engage
in an average of 25.7 personal travel days per year and an average of 6.2
domestic trips per year with an average duration of 4.2 days. Membership in RCI
allows the Company's customers to exchange one or more years of their Vacation
Interval for an occupancy right 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
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and by requesting occupancy at another participating resort, indicating the
particular resort or geographic area to which the Member desires to travel, the
size of the unit desired and the period during which occupancy is desired. RCI
assigns a rating to each listed 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 interval is available, and attempts to satisfy the
exchange request by providing an occupancy right in another interval with a
similar rating. If RCI is unable to meet the member's initial request, it
suggests alternative resorts based on availability.
Founded in 1974, RCI has grown to be the world's largest interval exchange
organization, with a total of more than 3,100 participating resort facilities
and over two million members worldwide. During 1995, RCI processed over 2.0
million interval exchanges. The cost of the annual membership fee in RCI, which
typically is at the option and expense of the interval owner, ranges from $74 to
$90 per year depending on the country of residence. In the past, Vacation
Intervals have been exchanged for intervals at other highly-rated member
resorts. According to RCI, during 1996, approximately 98% of exchange requests
of all RCI Members were fulfilled by RCI. See "Risk Factors -- Company
Risks -- Vacation Interval Exchange Networks."
Other Operations. The Company provides Bancomer with certain asset
management services for its hotel, resort and marina facilities. Although the
Company receives minimal revenue with respect to these services, it believes
that the continued relationship with Bancomer is beneficial.
BUSINESS STRATEGY
The Company's long-term growth strategy is to develop a world-wide brand
name vacation ownership club, providing its Members with vacation opportunities
of consistent quality and luxury and the amenities generally associated with
"five-star" hotels in destination resort or tourist locations. Accordingly, the
Company plans to acquire and develop other vacation ownership resorts or
vacation ownership clubs in other locations in the Western Hemisphere, as well
as other parts of the world that appeal to the luxury segment of the market.
Among other things, in the near-term, the Company's strategy includes:
- Mexican Expansion. The Company intends to capitalize on its management's
expertise in Mexico by implementing currently available expansion
opportunities as well as acquisition opportunities. This will include
expanding the existing Regina Resort in Los Cabos by approximately 20
units and developing a Regina Resort at the Company's property in Cozumel
containing approximately 220 units, for an aggregate of 10,192 annual and
5,720 biannual Vacation Intervals. Furthermore, the Company is evaluating
opportunities to purchase additional inventory in Cancun and selected
other top resort destinations in Mexico. Finally, the Company anticipates
completion of the acquisition of the land and facilities of the Villa Vera
for $4.5 million in April 1998. The Villa Vera, consisting of 74 hotel
units, suites and villas is planned to be converted into 57 units
consisting of 20 hotel rooms, 34 one-bedroom suites and villas and three
two-bedroom villas. The Company estimates this conversion will cost
approximately $2.5 million. Also, included in this conversion, the Company
plans to build eight two-bedroom suites on land within the property. Upon
completion of this conversion, the Company's inventory of Vacation
Intervals should increase by approximately 4,000.
- International Expansion. The Company intends to add vacation ownership
resort locations in areas other than Mexico. Initially, the Company
intends to focus on adding a resort or resorts in mountain regions, such
as the western United States and Canada, that will cater to snowskiing in
the winter and golf, hiking, fishing and similar activities in the summer
as well as provide the availability of amenities of a "five-star" hotel.
The Company also plans to add vacation ownership clubs in urban
destinations, such as New York City, San Francisco, London and other
popular business and tourist locations worldwide, which would provide
Members with the opportunity to enjoy the many attractions that such large
cities have to offer.
- Marketing and Sales. The Company intends to continue upgrading its
marketing efforts by opening more theme stores, consolidating its
telemarketing operations, and enhancing its marketing and sales hardware
and software. The Company plans to accelerate the implementation of its
"universal salesman" program by which potential Members work with only one
employee of the Company from first contact with the Company through the
sale of the Vacation Interval. Furthermore, the Company
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intends to establish sales offices in other locations in Mexico and the
rest of the Western Hemisphere. Finally, the Company intends to further
exploit its current Member base to (i) determine the best locations and
strategic relationships with "five-star" quality hotel operators to expand
its operations, (ii) provide referrals for potential new Members, (iii)
sell additional Vacation Intervals to such Members, and (iv) sell
additional days or weeks to such Members and their guests at both
preferential and standby rates.
- Improving Operating Margins. The Company believes that its current
administrative and marketing infrastructure in Mexico is sufficient to
support its growth plans in Mexico over the next several years.
Accordingly, the Company expects to reduce its general and administrative
costs as a percentage of revenues. Additionally, the Company plans to seek
ways to reduce its borrowing costs as it grows.
The Company intends initially to fund its business strategy through the use
of a portion of the proceeds of the Offering and cash flow from operations.
Development. The Company intends to develop additional units on land it
intends to purchase adjacent to the Los Cabos Regina Resort and owns in Cozumel.
In Los Cabos, the Company intends to develop 20 additional units contiguous to
the existing vacation ownership units. At Cozumel, the Company intends to
develop an entirely new resort which is planned to include 220 vacation
ownership units. In addition, the Company intends to structure an arrangement
similar to that at the Combined Resorts by which a third party would develop an
adjacent hotel accessible to Members. See "-- Description of Purchase
Transactions," "Risk Factors -- Company Risks -- Development and Construction
Risks" and "Risk Factors -- Company Risks -- Risk of New Venture and Recent
Acquisition; Lack of Prior Operating History."
Finally, the Company plans to complete the above-described acquisition of
the Villa Vera which is expected to increase the Company's inventory by
approximately 4,000 Vacation Intervals.
Future Acquisitions. In addition to its development plans on the Company's
land acquired by the Company in the Purchase Transactions, the Company intends
to expand its business by acquiring resorts in other attractive resort
destinations and is in the process of evaluating strategic acquisitions in a
variety of locations. Such future acquisition and development of resorts could
have a substantial and material impact on the Company's operations and
prospects. The Company currently is evaluating possible acquisitions of resorts
and development opportunities in Mexico, Canada and the United States. The
Company has not entered into any definitive acquisition agreement with respect
to any such resort or development opportunity, and there can be no assurance
that such an agreement will be negotiated or that any such acquisition will be
consummated. In addition, the Company has also explored the acquisition of
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.
There can be no assurance that the Company will be able to implement its
acquisition strategy effectively. See "Risk Factors -- Company
Risks -- Acquisition Strategy Risks."
THE VACATION OWNERSHIP INDUSTRY
The Worldwide Market. The resort component of the leisure industry is
primarily served 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 can be uneconomical. In addition, room rates and
availability at such establishments are subject to change periodically. Vacation
ownership presents an economical alternative to commercial lodging for
vacationers.
First introduced in Europe in the mid-1960s, vacation ownership has been
one of the fastest growing segments of the hospitality industry over the past
two decades. RCI has estimated that, world-wide, approximately 10 million
tourists travel to vacation ownership resorts each year, spending approximately
20 million roomnights in lodging accommodations. These tourists are part of an
estimated three million plus
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families who own at least one vacation ownership week. According to the ARDA,
during the fifteen-year period ending in 1994 (the most recent year for which
worldwide ARDA statistics are available), worldwide sales volume for the
vacation ownership industry increased from approximately $490 million to
approximately $4.8 billion, and the industry has had a 17% compounded annual
growth rate over the last 15 years. Based on industry data, the Company believes
that the total vacation interval sales volume for the vacation ownership
industry exceeded approximately $6.0 billion in 1996. In addition, according to
Interval International, the number of vacation ownership resorts worldwide has
grown from 1,550 in 1985 to an estimated 5,000 in 1996, an annualized increase
of 11.2%. This growth rate does not reflect the addition of units within
existing resorts. Also, according to ARDA, in 1995 revenues of vacation
ownership companies with annual sales in excess of $20 million grew 28% to $1.33
billion whereas the entire industry grew 16%.
The Company believes that the following factors have contributed to the
increased acceptance of vacation ownership among the general public and the
substantial growth of the vacation ownership industry over the past 15 years:
- increased consumer confidence resulting from consumer protection regulation
of the industry and the entrance of brand name national lodging companies
to the industry;
- increased flexibility of ownership due to the growth of exchange
organizations such as RCI;
- improvement in the quality of the facilities and the management of vacation
ownership resorts;
- increased consumer awareness of the value and benefits of vacation
ownership, including the cost savings relative to other lodging
alternatives; and
- increased availability of financing for purchasers of intervals.
The vacation ownership industry traditionally has been highly fragmented
with 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 industry is the entry into the market of some of the world's
major lodging, hospitality and entertainment companies. These major companies
include Marriott, Disney, Hilton, Hyatt, Four Seasons and Intercontinental, as
well as Westin. Unlike the Company, however, the vacation ownership operations
of each of Marriott, Disney, Hilton, Hyatt, Four Seasons and Intercontinental
comprise only a small portion of such companies' overall operations. See "Risk
Factors -- Company Risks -- Competition."
The Mexican Market. During the last two decades, the Mexican government,
both directly and through government entities such as Bancomer, prior to its
privatization, promoted the growth of the tourism industry. Through the Fondo
Nacional de Fomento al Turismo, the Mexican government established tourist
centers in numerous locations, including Cancun and Cabo San Lucas. Mexico has
increased its hotel and other lodging capacity from approximately 132,700 rooms
in 1970 to an estimated 374,031 in 1996.
Tourism is Mexico's second largest contributor of foreign exchange. During
1996, revenues from international travelers (including both tourists and
visitors who enter and leave the country on the same day) totaled approximately
$6.9 billion, a 12.2% increase from 1995. The number of overnight tourists in
1996, approximately 9.0 million, was 15.6% higher than the level for 1995, while
the average expenditure per tourist decreased by 1.6%. The Company believes that
resort lodging investment will continue to be favored by the Mexican government
because tourism is a rapid and efficient generator of jobs, foreign exchange
income and regional economic development. Since Mexican public policy toward
resort lodging investment has been consistent for over 20 years, the sector has
been relatively stable even during major shocks in the Mexican economic and
political landscape.
Based on industry sources, the Company believes that Mexico ranks third in
the world, following the United States and the combined countries of Europe, in
the number of viable vacation ownership developments, the number of owners in
those projects, and the number of in-country citizens owning vacation ownership
intervals. Vacation interval ownership appeared very early in Mexico, at the end
of 1972. By 1980, several dozen vacation interval ownership sales programs had
been planned or initiated. Commencing in the
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mid-1980s, the Company believes that approximately 20 to 30 new programs entered
the market every year. According to RCI, by the end of 1995, an estimated 372
vacation interval ownership projects were operating in Mexico.
According to RCI, tourists visiting Mexico from abroad and
upper-middle-income Mexican families have accepted vacation ownership, buying an
average of almost 100,000 intervals per year between 1991 and 1995. Of the
vacation intervals with respect to Mexican vacation interval ownership resorts
sold since 1990, Mexicans purchased approximately 55% and non-Mexicans purchased
approximately 45%. However, certain Mexican resorts, including the Regina
Resorts, have a higher percentage of non-Mexican owners. The percentage of the
Company's on-site sales at the applicable Regina Resort to non-Mexicans,
primarily Americans, were as follows: Cancun -- 75.5%, Los Cabos -- 97.4% and
Puerto Vallarta -- 76%.
The demographics of Mexican and U.S. owners of vacation intervals are
similar. According to industry sources, U.S. owners of Mexican vacation
intervals are slightly older and more affluent than the average while Mexican
owners are younger and have larger families than U.S. owners. The Company
believes based on industry surveys, that owner satisfaction in Mexico is
comparable to that reported in the rest of the world. According to ARDA, 75.3%
of all U.S. vacation ownership owners stated that they were satisfied or very
satisfied with their purchase.
Mexico, like most other countries, experienced past problems related to
aggressive vacation ownership sales practices and under-financed or poorly
planned vacation ownership developments. Utilizing the experience of other
countries, professional Mexican vacation ownership industry participants joined
forces in 1987 to create AMDETUR. AMDETUR, whose code of ethics and many of
whose statutes are modeled on those of ARDA, has actively promoted the
professionalization of the vacation ownership industry and policed the
activities of the industry. AMDETUR is believed to have significant influence in
the vacation ownership sector and in the tourism and travel industry in general.
Club Regina is an active member of AMDETUR and ARDA, with John McCarthy, the
Company's President, having served as president and currently serving as
secretary of AMDETUR. See "Management."
AMDETUR has worked closely with the Mexican government in the formulation
of the laws and regulations governing vacation ownership. In Mexico, vacation
ownership is positioned legally as part of the hospitality business rather than
as real estate. Regulatory emphasis is on operational quality as well as on
sales. Mexican governmental regulation of the vacation ownership industry is
less comprehensive than in the United States. The Company, because it sells
Class B Shares in Club Regina Mexico instead of ownership rights with respect to
a specific property, is not currently subject to Mexican vacation ownership
regulation. There can be no assurance that the Company will continue not to be
subject to such regulation. The Company believes that if it should become
subject to such regulation, it would be able to comply with it without a
materially adverse impact on its business or operations. See "Risk
Factors -- Company Risks -- Regulation of Marketing and Sales of Vacation
Intervals; Other Laws."
The Consumer. According to information compiled by ARDA for the year ended
December 31, 1994 for U.S. consumers, the prime market for vacation intervals is
customers in the 40-55 year age range who are reaching the peak of their earning
power and are rapidly gaining more leisure time. The median age of an interval
buyer at the time of purchase is 46. The median annual household income of
current interval owners in the United States is approximately $63,000, with
approximately 35% of all interval owners having annual household income greater
than $75,000 and approximately 17% of such owners having annual household income
greater than $100,000. Despite the growth in the vacation ownership industry, as
of December 31, 1994, interval ownership has achieved only an approximate 3.0%
market penetration among United States households with income above $35,000 per
year and 3.8% market penetration among United States households with income
above $50,000 per year.
According to the ARDA study, the three primary reasons cited by consumers
in the United States for purchasing a vacation interval are (i) the ability to
exchange the interval for accommodations at other resorts through exchange
networks such as RCI (cited by approximately 82% of purchasers), (ii) the
ability to save money on future vacation costs (cited by 61% of purchasers) and
(iii) the quality and appeal of the resort at which they purchased an interval
(cited by approximately 54% of purchasers). According to the ARDA study,
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vacation interval buyers have a high rate of repeat purchases: approximately 41%
of all interval owners owning more than one interval represent approximately 65%
of the industry inventory and approximately 51% of all owners who bought their
first interval before 1985 have since purchased a second interval. In addition,
customer satisfaction increases with length of ownership, age, income, multiple
location ownership and accessibility to interval exchange networks.
The Company believes it is well positioned to take advantage of these
demographic trends because of the quality of its resorts and locations and
because its program allows buyers to exchange intervals at the Company's resorts
and the Company's membership in RCI.
THE RESORTS
The Regina Resort at Cancun. Inaugurated in March 1991, the Regina Resort
at Cancun is a design of the architect Ricardo Legorreta, is on an 11-acre site
at Punta Nizuc and is the first landmark tourists see after arriving in the
Cancun hotel zone from the airport. The Combined Resort consists of eight
buildings and all rooms offer views of either the Caribbean or the Nichupte
Lagoon. The total accommodations in the Regina Resort in Cancun consist of 56
one bedroom and 13 two bedroom units.
The Club Regina units are in a self-contained section of three buildings.
This area has its own bar, snack bar, multi-purpose recreation room,
delicatessen, swimming pool and jacuzzi. Of the total of 69 apartments, 56 are
one-bedroom, two-bath units with a maximum occupancy of four, and 13 have two
bedrooms and three baths, with a maximum occupancy of six people. The units all
have views of either the sea or lagoon, fully equipped kitchens, with stoves,
dishwashers, microwave ovens, terraces with small jacuzzis, televisions in both
the living room and bedrooms, and other decorations and furnishings of a home.
Amenities include restaurants and bars, five swimming pools, four
whirlpools, two lighted tennis courts, a fitness center, a business center and
several lobby shops including a boutique, a beauty salon and a sundries shop
with magazines, books, tobacco goods and similar items. Members have priority
access to a nearby Robert Trent Jones, Jr. 18-hole golf course. Additionally,
there are 14,000 square feet of meeting, conference and banquet facilities in
modular design permitting highly varied configurations. The Westin Hotel, open
to Members, contains a ballroom (1,200 person capacity), and 11 multi-purpose
meeting rooms.
The Regina Resort at Puerto Vallarta. The Regina Resort at Puerto Vallarta
was inaugurated in June 1992 on a 21-acre site in the Marina Vallarta
master-planned resort in Puerto Vallarta. Architect Javier Sordo Madaleno
designed the Combined Resort within the framework of Puerto Vallarta's
architectural tradition. The total accommodations in the Regina Resort in Puerto
Vallarta consist of 161 one bedroom and 42 two bedroom vacation ownership units.
All of these facilities are distributed along an 875-foot beach facing the
Pacific Ocean.
The 203 Regina Resort units are distributed among the seven buildings in
the complex. All have views of either the beach or the marina. Of the total, 161
are one-bedroom, two-bath units with a maximum occupancy of four; and 42 have
two bedrooms and three baths, with a maximum occupancy of six. Each unit has a
fully equipped kitchen (including stove, dishwasher, microwave oven) and its own
jacuzzi on a private terrace. Furnishings and decorations are consistent with
the quality of the complex and the idea of a Regina Resort vacation home. In the
Regina Resort area there is a bar, snack bar, multi-purpose recreational room
and delicatessen.
Other amenities include five restaurants and bars, four swimming pools,
three lighted tennis courts, a fitness center, a business center and shops. The
surrounding Marina Vallarta community includes an 18-hole golf course, a marina
with specialty shopping, and a separate large shopping center.
The Regina Resort at Los Cabos. The Combined Resort at Los Cabos was
completed in January 1994 under the direction of architect Javier Sordo Madaleno
on a 15-acre site on the beach where the Pacific Ocean meets the Sea of Cortez.
The two buildings of the Westin Hotel feature a curvilinear design connecting
two hills. Inspired in color and form by the surrounding desert, this eight
story structure was constructed in native red stone. Bright, bold accents of hot
pink, yellow and green highlight the garden oasis of tropical foliage. The
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130 Regina Resort apartments are housed in neighboring two-story structures. The
total accommodations in the Regina Resort at Los Cabos consist of 104
one-bedroom and 26 two-bedroom apartments.
The 130 Regina Resort vacation ownership units have been distributed in
small buildings over the hilly topography to offer views of the beach and ocean.
Of the total, 104 are one-bedroom, two-bath units with a maximum occupancy of
four; and 26 have two bedrooms and three baths, with a maximum occupancy of six
people. Each unit has a fully equipped kitchenette and its own jacuzzi on a
private balcony. Amenities include four restaurants and bars, three swimming
pools, two lighted tennis courts, a fitness center, a business center and shops.
There are four championship golf courses in the area, designed by Pete Dye,
Robert Trent Jones, Jr., and Jack Nicklaus. Nearby, Cabo San Lucas has a marina
with specialty shopping.
As part of the use of proceeds from this Offering, the Company intends to
construct 20 more two-bedroom units, for 1,040 annual Vacation Intervals, at its
property adjacent to the Regina Resort at Los Cabos for approximately $4.0
million. There can be no assurance that such development will occur within the
time contemplated therefore or that the number of Vacation Intervals added to
the Company's inventory from such development will equal what is presently
contemplated. See "Risk Factors -- Company Risks -- Development and Construction
Risks" and "Risk Factors -- Company Risks -- Risk of New Venture and Recent
Acquisition; Lack of Prior Operating History."
Planned Regina Resort at Cozumel. The Company intends to build a 220 unit
vacation ownership resort on the Company's 54-acre property in Cozumel. For the
Company to provide the services to Members that they currently receive, the
Company intends to also arrange for the development of a hotel at such location.
The Company either intends to enter into an agreement with a hotel owner to
develop such a hotel, or, if necessary, the Company will develop such hotel
itself. There can be no assurance that such development will occur within the
time contemplated or that the number of Vacation Intervals added to the
Company's inventory from such development will equal what is presently
contemplated. See "Risk Factors -- Company Risks -- Development Risks."
Regina Resort at Acapulco. The Company anticipates completion of the
acquisition of the land and facilities of the Villa Vera for $4.5 million in
April 1998. The Villa Vera, consisting of 74 hotel units, suites and villas, is
planned to be converted into 57 units consisting of 20 hotel rooms, 34
one-bedroom suites and villas and three two-bedroom villas. The Company
estimates this conversion will cost approximately $2.5 million. Also, included
in this conversion, the Company plans to build eight two-bedroom suites on land
within the property. Upon completion of this conversion, the Company's inventory
of Vacation Intervals should increase by approximately 4,000.
DESCRIPTION OF PURCHASE TRANSACTIONS
On December 20, 1996, the Company and Bancomer executed a definitive
purchase agreement pursuant to which the Company agreed to purchase the Regina
Resorts for approximately $121.5 million subject to certain price adjustments,
and the Westin Hotels for approximately $110 million. In May 1997, the Company
agreed to sell the Westin Hotels to Starwood and 20% of CR US's common stock to
Starwood Capital for an aggregate of approximately $133.5 million. The
consummation of the Purchase Transactions involved a series of substantially
contemporaneous transactions, which included: (i) Bancomer's segregation of each
Combined Resort into two condominium units with related common areas so that
after the closing of the Purchase Transactions the Regina Resorts and Westin
Hotels would be able to be owned by separate companies, (ii) the transfer of the
condominium units with respect to the Regina Resorts into three separate trusts,
under which the Company has the right to use the condominium units at the Regina
Resorts for 30 years and a wholly-owned subsidiary of CR Mexico has the
Remainder Rights which the Company may be required to dispose of in the
Remainder Interest Disposition, (iii) the borrowing of approximately $83.0
million under the Bancomer Loan, (iv) the Company's purchase of the Combined
Resorts and related operations for approximately $219.0 million ($231.5 million
less price adjustments of approximately $12.5 million) from Bancomer, (v) the
separation of the Combined Resorts and related operations into separate legal
entities, (vi) the sale by the Company of the Westin Hotels to an indirect
wholly-owned subsidiary of Starwood, (vii) the issuance of 20% of CR US's
outstanding common stock to GLLC, and (viii) the entry by Starwood and the
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Company into the Asset Management Agreement by which the Company will provide
certain advisory services to Starwood in return for which the Company will be
paid a management fee of up to 20% of the net cash flow (as defined in the Asset
Management Agreement) after certain adjustments, of the Westin Hotels.
In connection with the Purchase Transactions, the Company and an affiliate
of Starwood have entered into the Operating Agreements related to the joint
operation and ownership of certain common facilities at the Combined Resorts as
well as certain matters related to the conduct of vacation interval sales and
marketing activities, the rental of vacation interval units by Starwood, the
rental of Westin Hotel rooms by Club Regina from Starwood, the continued use of
hotel facilities and amenities by Members, the management of the Westin Hotels
and other related matters. The Company believes that these Operating Agreements
allow it to provide its Members with high quality amenities and services at
prices lower than if the Company were to arrange for such amenities and services
on a separate basis.
Description of Stock Purchase Agreement. Pursuant to a Second Amended and
Restated Stock Purchase Agreement (the "Stock Purchase Agreement"), dated August
18, 1997 (amending and restating a purchase agreement originally executed on
December 20, 1996), the Company purchased all of the stock of the entities
owning the Combined Resorts for approximately $219.0 million, after giving
effect to approximately $12.5 million in purchase price adjustments. This
agreement contains customary representations and warranties and indemnification
provisions including an indemnity subject to certain limitations, from Bancomer
for breaches of the representations and warranties and all liabilities arising
from operations of the business prior to the closing date. For a description of
certain contingencies arising in connection with the Stock Purchase Agreement,
see "Risk Factors -- Company Risks -- Risk of New Venture and Recent
Acquisition; Lack of Prior Operating History" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Acquisition."
In connection with the Purchase Transactions the Company engaged in
customary diligence with respect to the Predecessor Business and the Combined
Resorts. Such diligence included an extensive review of various title and other
real estate matters at the Combined Resorts. In connection with such diligence,
the Company decided to purchase title insurance with respect to the Combined
Resorts, a precaution that the Company believes is typically not taken in
Mexico. Accordingly, the Company has purchased title insurance for the Puerto
Vallarta and Los Cabos Regina Resorts.
Prior to the closing of the transactions contemplated by the Stock Purchase
Agreement, it was determined that the recorded title to the Combined Resort at
Cancun was subject to certain irregularities. Prior to the closing, the Company
and Bancomer contacted the Fondo Nacional de Fomento al Turismo ("Fonatur"), the
Mexican governmental public trust which established the tourist center in Cancun
and the public trust from which Bancomer had purchased the site of the Combined
Resort at Cancun. Fonatur informed the Company and Bancomer that such title
irregularity was inadvertent and agreed to execute corresponding correction
deeds. In addition, Bancomer agreed with the Company to indemnify the Company
for the potential liability created by such irregularity. The Company, Fonatur
and Bancomer are currently working to correct such irregularity, and the Company
does not expect the correction to cause a material impact on the Company. An
internationally recognized title insurance company has issued a commitment to
issue a title insurance policy with respect to the Combined Resort at Cancun
upon the filing of such correction deeds. See "Risk Factors -- Company
Risks -- Risk of New Venture and Recent Acquisition; Lack of Prior Operating
History."
Finally, the Company is considering the purchase for approximately
$250,000, of certain land adjacent to the Regina Resort at Los Cabos for the
development of 20 additional vacation ownership units. If the Company purchases
such land it intends to formalize and record title and purchase title insurance
with respect to such land. See "Business -- The Resorts," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Description of Starwood Agreements. On May 9, 1997, CR US entered into an
agreement (the "Original Agreement") with Starwood Capital pursuant to which
Starwood Capital agreed to purchase the Westin Hotels (which were to be acquired
by CR US from Bancomer under the Asset Purchase Agreement) (subject to the
Company's 20% subordinated interest in the Westin Hotels to which the Company is
entitled under the
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Asset Management Agreement) and 20% of the capital stock of CR US for $133.5
million. On May 20, 1997, the Original Agreement was superseded by two separate
agreements between CR US and Starwood Capital and CR US and SLT Realty Limited
Partnership ("Starwood Realty"). Pursuant to one of these agreements, CR US
agreed to sell the Westin Hotels to Starwood Realty, instead of Starwood
Capital, for $132.75 million. In connection with the sale of the Westin Hotels
to Starwood Realty, the Company made certain representations and warranties to
Starwood Realty. The Company and Starwood Realty have entered into an agreement
by which Starwood Realty receives the benefit of Bancomer's representations and
warranties to the Company (with respect to the Westin Hotels) under the Stock
Purchase Agreement. Pursuant to the other agreement, CR US agreed to sell 20% of
its capital stock to Starwood Capital and provided that the balance of the
original purchase price of $133.5 million, or $750,000, was paid to CR US by
Starwood Capital. GLLC has assumed Starwood Capital's rights and obligations
under that agreement. See "-- Description of Purchase
Transactions -- Description of Class A Preferred Stock" and "Principal
Stockholders." The closing of the agreements with Starwood Realty and GLLC, as
assignee of Starwood Capital, occurred simultaneously with the closing of the
Stock Purchase Agreement, through a transfer of the stock of the entities
holding the Westin Hotels to an affiliate of Starwood Realty. In addition, CR US
and Starwood Realty agreed on the form of Operating Agreement and entered into
the Asset Management Agreement. See "-- Description of Operating Agreements" and
"-- Description of Asset Management Agreement."
Additionally, the agreement with GLLC provides, among other matters, that
(i) each of Raintree and GLLC has a right of first offer with respect to any
sale of CR US's stock by the other party, (ii) CR US's board of directors will
be comprised of one representative of GLLC, three representatives of Raintree,
John McCarthy and two additional directors selected by Raintree and (iii) GLLC
will have the right to consent to certain affiliated transactions prior to an
initial public offering of CR US's stock. For a description of certain
contingencies arising in connection with the transactions with Starwood, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Recent Acquisition." In addition, the Company has been informed by
Starwood and GLLC that Starwood and GLLC have agreed that an amount equal to
GLLC's deemed share (based on its stock ownership in the Company) of any income
of the Company which is attributable to the Asset Management Agreement will be
paid by GLLC to Starwood, pursuant to an agreement between Starwood and GLLC.
Description of Condominium Regimes. Prior to the closing of the Purchase
Transactions, Bancomer established condominium regimes which run with the land
at each of the Combined Resorts to facilitate the division of the vacation
ownership and hotel businesses upon closing of the Purchase Transactions. The
condominium regime at each Combined Resort divides the property into two
units -- a Westin Hotel unit and a Regina Resort unit. Each unit has an interest
in the common facilities at the Combined Resort. The Regina Resort and Westin
Hotel units each consist primarily of buildings and grounds, pools, and other
associated areas, while the common facilities primarily include roads and beach
areas.
Description of Operating Agreements. As of August 18, 1997, the Company and
an affiliate of Starwood entered into an Operating Agreement for each of the
Combined Resorts establishing the day-to-day operating relationship between the
Westin Hotels and Regina Resorts, including operating standards, plans, budgets,
allocation of services, expansion and construction of additional facilities, and
of allocation labor and other expenses. The Company and Starwood have agreed
that condominium regulations of each condominium regime relating to the Combined
Resorts will be amended to incorporate each Operating Agreement (upon
translation into Spanish and execution) as part of such regulations. To effect
such amendments, the Company and Starwood have agreed to register each Operating
Agreement in the appropriate local Mexican public registry. Upon such
registration, each Operating Agreement will become binding on any future owners
of any Westin Hotel or Regina Resort. The Operating Agreement provides that the
applicable Combined Resort must be operated as a "first class" resort and
establishes a procedure by which a joint operating plan and budget will be
maintained by Starwood and the Company for the applicable Combined Resort.
Additionally, Starwood must provide the same services to each Regina Resort as
it provides to the adjacent Westin Hotel and additional services may be
contracted for, subject to the first class standard and appropriate allocation
of costs between the applicable Westin Hotel and Regina Resort. The form of
Operating Agreement prohibits the applicable Regina Resort from renting, selling
or marketing any units on a transient basis except with
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<PAGE> 66
respect to: (i) the provision of complimentary accommodations to prospective
members that participate in marketing presentations arranged by such resort,
(ii) the rental of units to wholesalers specifically targeting potential
purchasers, (iii) the rental of units to persons accompanied by Members, and
(iv) the rental of units to vacation ownership operators experiencing overflow
in their facilities. If any Regina Resort rents or sells a unit on a transient
basis not described above, then (without limiting Starwood's right to exercise
any other legal or equitable remedies available to it) the Company will be
subject to significant penalties. In addition, Starwood has rented 54 rooms at
Los Cabos and 60 rooms at Puerto Vallarta for a one-year period ending August
18, 1998 for $1.25 million. In addition, Starwood paid the Company an aggregate
finder's fee at closing of $1.95 million and the Company agreed to provide
certain services to Starwood for one year. The parties have agreed to enter into
negotiations in September of 1998 and in September of each subsequent year to
provide for satisfactory rental terms for excess Regina Resort inventory, if
any, to the Westin Hotels. There can be no assurance, however, that the Company
and Starwood will agree on the number of, if any, or the rate for, rooms to be
rented to Starwood.
Description of Asset Management Agreement. On August 18, 1997, Starwood and
the Company entered into an Asset Management Agreement whereby Starwood retained
the Company as its asset manager due to the Company's expertise in the
investment management of hotel properties located within Mexico and specifically
with respect to the properties held by Starwood. Under the Asset Management
Agreement, which has a term of 50 years, the Company is entitled to payments
equal to 20% of the net cash flow (as defined in the Asset Management Agreement)
of the Westin Hotels in excess of $18.0 million per year (the "Base Amount").
After December 31, 2000, the Base Amount under the Asset Management Agreement
will decrease pursuant to a formula. The Company expects to recognize minimal,
if any, revenue from the Asset Management Agreement over the next three years.
Description of Trusts. On August 18, 1997, three separate trust agreements
(the "Trust Agreements") were entered into among the Operating Subsidiaries, a
subsidiary of CR Mexico and Bancomer, as trustee, pursuant to which title to the
Regina Resorts was transferred to Bancomer, acting solely in its capacity as
trustee. Originally, under the Trust Agreements, the Operating Subsidiaries had
the right to use and exploit the vacation ownership condominium units until
August 18, 2027 (the "Initial Term"), and a subsidiary of CR Mexico has the
right to hold direct title to the vacation ownership condominium units after
August 19, 2027. In March 1998, the Trust Agreements were modified to extend the
Initial Term from 30 to 50 years.
Disposition of Remainder Interest. In accordance with the Indenture, CR US
contributed the Remainder Interest to an unaffiliated charitable institution
such that CR US is not required to use the installment method of accounting with
respect to the presentation of its consolidated financial statements under GAAP.
Description of Bancomer Loan. The Company financed the acquisition of the
Regina Resorts primarily with the proceeds of the Bancomer Loan in the
approximate aggregate principal amount of approximately $83.0 million which was
repaid in full on December 5, 1997. For a description of the material terms of
the Bancomer Loan, see "Private Offering -- Use of Proceeds."
Description of Class A Preferred Stock. At the closing of the Purchase
Transactions CR Mexico issued an aggregate of $3.75 million of non-negotiable
subordinated exchangeable promissory notes to GLLC and CR Management Company. In
October, 1997, GLLC and CR Management exchanged all the subordinated promissory
notes for an aggregate of 37,500 shares of Class A Redeemable Convertible
Preferred Stock (the "Class A Preferred"). Each share of Class A Preferred has a
liquidation preference of $100 and accrues dividends from August 18, 1997, at
the rate of 16.5% per year and 20% per year after August 18, 2002. Cumulated
dividends accrue dividends at the rate of 12% per year. No cash dividends are
required to be paid prior to an initial public offering of the CR US's common
stock or the sale of the Company. Under the Class A Preferred, upon an initial
public offering or stock merger by CR US, CR US may force the redemption of all
cumulated dividends in exchange for either cash or stock of CR US valued at 85%
of the initial public offering price or 100% of the merger consideration value,
as the case may be. Furthermore, in such event, the holders of the Class A
Preferred have the right to convert the liquidation preference of each share of
Class A Preferred into stock of the CR US valued at 85% of the IPO price or 100%
of the merger consideration value, as the case may be.
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<PAGE> 67
So long as any shares of the Class A Preferred are outstanding, no dividend
is permitted to be declared or paid or set apart for payment on any other series
of stock rankings on a parity with the Class A Preferred as to dividends, unless
all unpaid dividends on the Class A Preferred are paid. Furthermore, if all
accrued dividends on the Class A Preferred Stock have not been paid, CR US is
not permitted to declare or pay or set apart for payment any dividends or make
any other distributions on its Common Stock or any other class of stock or
series thereof of CR US ranking, as to distributions in the event of a
liquidation, dissolution or winding up of CR US, voluntary or involuntary (a
"Liquidation"), junior to the Class A Preferred until such dividends on the
Class A Preferred and any redemption obligations due and owing under the
Certificate of Designations governing the Class A Preferred (the "Certificate of
Designation") have been paid. Upon any Liquidation of CR US, the holders of the
Class A Preferred are entitled to receive, out of assets of CR US which remain
after satisfaction in full of all valid claims of creditors of CR US and which
are available for payment to stockholders, and subject to the rights of the
holders of any stock of CR US ranking senior to or on a parity with the Class A
Preferred in respect of distributions upon Liquidation, before any amount shall
be paid to or distributed among the holders of Common Stock or any other shares
ranking junior to the Class A Preferred in respect of distributions upon
Liquidation, liquidating distributions per share of the Class A Preferred in the
amount of $100 per share, plus an amount equal to the accrued and unpaid
dividends thereon.
The Class A Preferred has no voting rights other than those required under
the Nevada General Corporation Law. It requires an 85% of vote of the Class A
Preferred to amend the provisions of the Certificate of Designations. Under the
Certificate of Designations, CR US may authorize additional classes and series
of preferred stock with rights senior to those of the Class A Preferred.
COMPETITION
Although major lodging and hospitality companies such as Marriott, Disney,
Hilton, Hyatt, Four Seasons and Intercontinental, as well as Westin and
Signature, Fairfield and other vacation ownership only companies, have
established or declared an intention to establish vacation ownership operations
in the past decade, the industry remains highly fragmented, with a vast majority
of North America's approximately 4,100 vacation ownership resorts being owned
and operated by smaller, regional companies. Currently none of the large
international hospitality companies offer vacation intervals in Cancun, Puerto
Vallarta or Los Cabos. The largest resorts with which the Company competes in
those markets are Cancun Sunset Club, Hacienda del Mar Resort, and U.V.C. at
Villa del Palmar. See "Risk Factors -- Company Risks -- Competition."
GOVERNMENT REGULATION
General. The Mexican Ministry of Tourism (Secretaria de Turismo) is the
principal regulator of the Company's activities in the tourism services area.
The Company believes that it has obtained from the Mexican Ministry of Tourism,
and registered in the Mexican National Tourism Registry, all material permits
required for the operation of the Regina Resorts. In order to maintain
registration under the Mexican National Tourism Registry, services such as
restaurants and bars must be provided at the Regina Resorts. The Company expects
to cause these services to be rendered by Starwood and Westin pursuant to the
Operating Agreements. See "Risk Factors -- Company Risks -- Risk of New Venture
and Recent Acquisition; Lack of Prior Operating History." The Company also
believes that it is in material compliance with all federal, state, local and
foreign laws and regulations to which it and its Vacation Intervals marketing
and sale activities are 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 a material adverse effect on the Company. See "Risk Factors -- Company
Risks -- Regulations of Sales of Vacation Intervals; Other Laws."
Environmental Matters. CR Mexico's operations are subject to Mexican
federal, state and local laws and regulations relating to the protection of the
environment, including those concerning water supply, wastewater, noise, soil
pollution and generation and handling of hazardous waste and materials and
environmental impact. The possibility exists that in the future the company and
its facilities and operations will encounter (i) newer and stricter federal,
state or local environmental laws and regulations, (ii) more rigorous
interpretations of
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existing environmental laws and regulations, and/or (iii) stricter enforcement
of federal, state and local environmental law regulations.
The Company believes that the Regina Resorts are in compliance in all
material respects with all federal, state and local laws and regulations
relating water, atmospheric pollution, hazardous wastes or substances. The
Company has not been notified by any environmental authority or any third party,
of any material noncompliance, liability or claim related to those environmental
matters in connection with any of its present properties. See "Risk
Factors -- Company Risks -- Possible Environmental Liabilities."
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of December 31, 1997, the Company employed approximately 107 full-time
employees. The Company believes that its employee relations are good. The
Company sells Vacation Intervals at its resorts through 648 independent sales
agents and contractors. Such independent sales agents and contractors provide
services to the Company under contract and are not employees of the Company. See
"Risk Factors -- Company Risks -- Independent Contractors."
INSURANCE; LEGAL PROCEEDINGS
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. There
are, however, certain types of losses that are generally not insured because
they are either uninsurable or not economically insurable. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in a resort, as well as the anticipated future revenues from
such resort and would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. Any such loss could have a material
adverse effect on the Company. See "Risk Factors -- Company Risks -- Natural
Disasters; Uninsured Loss."
The Company is currently subject to litigation with respect to claims that
arose prior to August 18, 1997 respecting employment, contract, construction and
commissions, disputes, among others. In the judgment of management, none of such
lawsuits against the Company is likely to have a material adverse effect on the
Company or its business. Moreover, pursuant to the Stock Purchase Agreement with
Bancomer, the Company is entitled to indemnification for all such claims against
it. In addition, the Company is subject to litigation with respect to a limited
number of claims that arose on or after August 18, 1997. In the judgment of
management, none of such lawsuits against the Company are likely to have a
material adverse effect against the Company. See "-- Description of Purchase
Transactions -- Description of Stock Purchase Agreement."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS; OTHER KEY EMPLOYEES
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of CR US or its Operating
Subsidiaries and CR Mexico. A summary of the background and experience of each
of these individuals is set forth after the table. [UPDATE AGES AND PERSONNEL
SUMMARIES]
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Douglas Y. Bech................ 52 Chairman of the Board of Directors of CR US and Manager
and Secretary of CR Mexico
John McCarthy.................. 42 President and Director of CR US and chairman of the Board
of Managers of CR Mexico
Mario Muro..................... 51 Senior Vice President -- Operations, Sales and Marketing
Gustavo Ripol.................. 34 Senior Vice President -- Club Administration
George D. Stroesenreuther...... 43 Senior Vice President -- Finance and Accounting
Brian R. Tucker................ 35 Vice President -- Planning and Development
Christopher W. Allick.......... 44 Director
Christel DeHaan................ 55 Director
Walker G. Harman............... 50 Director
Merrick Kleeman................ 34 Director
Thomas R. Powers............... 59 Director
</TABLE>
Douglas Y. Bech is a founding principal of Raintree Capital Company, LLC
("Raintree") and the principal promoter in organizing the Company and effecting
the Purchase Transactions. At the closing of the Purchase Transactions, Mr. Bech
became Chairman of the Board of Directors of CR US and a manager and officer of
CR Mexico. From 1994 through October 1997, Mr. Bech was a partner in the Houston
office of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. From
1993-1994, Mr. Bech was a partner in the Houston office of the law firm of
Gardere & Wynne, L.L.P. Mr. Bech was associated with and a senior partner of
Andrews & Kurth, L.L.P. from 1970 until 1993. Mr. Bech serves as a director of
Wainoco Oil Corporation, a New York Stock Exchange company, Pride Companies,
L.P., a New York Stock Exchange master limited partnership, Jetfax, Inc., a
Nasdaq company, and several private companies. Mr. Bech serves as an advisory
director of The Salvation Army, Houston Metropolitan Area.
John McCarthy has been the President of the Company and a manager and
officer of CR Mexico since August 1997. Mr. McCarthy has been the principal
executive officer of the Regina Resorts since 1992. From 1992 until August 18,
1997, he served first as Vacation Ownership Director and beginning 1993 as
Director General of Bancomer's Tourism Division. During most of this period Mr.
McCarthy was responsible for development and management of the Combined Resorts
as well as the sale of The Westin Regina Resorts for Bancomer. From 1983 to 1992
Mr. McCarthy held several positions in Grupo Los Remedios, a large Construction
and Development Group, where among other projects, he developed The Pacifica
Project in Ixtapa Mexico, where he developed, sold and operated some 6,000
vacation intervals. Mr. McCarthy's previous experience was with the Babcock
International Group and the Tolteca Group where he obtained experience in
Finance, Personnel, Administration and product development. He is the past
President and current Secretary of the Asociacion Mexicana de Desarrolladores
Turisticos (AMDETUR), the Mexican equivalent of ARDA; he is also the past
Secretary and present adviser of the Consejo Nacional Empresarial Turistico,
Mexico's Tourism Board. He serves on the boards of Hoteles Presidente
Intercontinental Mexico (five Hotels) and Complejos Turistico Huatulco (Club Med
Huatulco). Mr. McCarthy acted as an adviser on Tourism to President Zedillo
during his campaign. He is the Treasurer of Brimex, a charitable foundation
funded by the British Government and members of the British community for the
poor, the sick and those who have suffered because of natural disasters.
Mario Muro is Senior Vice President -- Operations. Prior to the closing of
the Purchase Transactions, Mr. Muro was Project Manager, Regional Director of
Bancomer Tourism Division from 1993 to 1997. He was Director of the Los Remedios
Tourism Division from 1992 to 1993, and Director of the Grand Baja Club B.C.
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Project from 1991 to 1992. Mr. Muro was President of the Association of
Commercializers of TimeSharing in Puerto Vallarta, First President of the
Association of Tourist Developers in Ixtapa Zihuatanajo and WILL BE the
President of the AMDETUR until the year 2000. Mr. Muro, who has 25-years
experience in the vacation ownership and tourism industry, has developed various
vacation ownership marketing techniques including theme stores, marketing
through travel agencies, and the Club Regina Referral Program. Mr. Muro
graduated from the Instituto Tecnologico Autonomo de Mexico, with a degree in
accounting in 1970.
Gustavo Ripol rejoined the Company in October 1997 as Senior Vice
President -- Finance and Marketing. From 1995 to 1997, he was RCI's Marketing
and Communications Director for Latin America, where he was also responsible for
developing new business units in the region for the marketing, sale and
implementation of vacation ownership services. In 1993 he joined Bancomer's
Tourism Division as Planning Director, where he served until the end of 1994.
While there he was responsible for all short, medium and long term strategic
planning for both the hotel and vacation ownership business units, as well as
for developing and implementing the Club Regina product and its administrative
and operating infrastructure. He served in Grupo los Remedios as Manager of
Planning & Systems, Director of Finance and Administration and Director of
Planning and Business Development from 1987 to 1992. Mr. Ripol graduated from
the Universidad Anahuac with a degree in Engineering, and received a graduate
degree in Finance at the Instituto Tecnologico Autonomo de Mexico.
George D. Stroesenreuther joined the Company in 1998 as Senior Vice
President Finance. From 1996 through early 1998, Mr. Stroesenreuther served as
the Chief Financial Officer for Bethesda, Maryland based U S Assist, Inc., a
provider of international travel related services. In this position, Mr.
Stroesenreuther had financial oversight responsibility for the US business as
well as numerous subsidiaries located throughout Latin America, including
Mexico. Prior to working at U S Assist Mr. Stroesenreuther was employed by Elsag
Bailey Process Automation, NV in various financial positions from 1992 through
1995. Mr. Stroesenreuther received his Bachelor's degree in accounting from the
University of Wisconsin.
Brian R. Tucker has been Vice President -- Planning and Development of the
Company since August 1997. From 1995 through 1997, Mr. Tucker was an associate
of Raintree. Prior to joining Raintree, Mr. Tucker was employed for five years
at Deloitte & Touche Management Consulting Group where he advised clients in
various industries concerning mergers, acquisitions and bankruptcy. Mr. Tucker
also worked for British Petroleum as a drilling and production engineer for
three years prior to receiving an M.B.A. from the Wharton School of Finance in
1990.
Christopher W. Allick has been a Director of the Company since January
1998. He has been a Director and Executive Vice President of Jefferies &
Company, Inc., a registered broker-dealer, since May 1993.
Christel DeHaan has been a director of the Company since January, 1998. She
currently serves as CEO of CD Enterprises, Ltd. and the Christel DeHaan Family
Foundation, Inc. Ms. DeHaan co-founded Resort Condominiums International, Inc.,
("RCI") the world's largest timeshare exchange company, in 1974, and became its
Chairman, CEO and sole shareholder in 1989. In November, 1996 she sold RCI to
Cendant Corporation (formerly known as HFS, Incorporated), and served on its
Board of Directors until January, 1998. She is a founding director of the
International Timeshare Foundation and was elected twice to the American Resort
Development Association Board of Directors. She was appointed by President
Clinton in 1995 to the White House Conference Task Force on Travel and Tourism,
and was named to the British Tourism Hall of Fame in 1997. Ms. DeHaan is
Chairman of the Board of Trustees of the University of Indianapolis, president
of the American Pianists Association and serves on the boards of the Indiana
Symphony Society and Dance Kaleidoscope.
Walker G. Harman has been a director of the Company since 1997. Mr. Harman
has been the President and Chief Executive Officer of Metro Hotels, Inc.
("Metro") since 1978, and has been its sole owner since 1985. Metro owns,
develops and operates hotels and resorts including franchises such as Hilton,
Radisson, Omni, Holiday Inn and Embassy Suites. Mr. Harman also owns and
operates Sonny Bryan's Smokehouse, which has 11 locations in the Dallas, Texas
area. Mr. Harman currently serves as a member of board of directors of the
Baylor Health Care System, the Board of Regents of Baylor University, and the
board of directors of the Interfaith Housing Coalition. Mr. Harman is a member
of the World Presidents Organization
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and the American Hotel Motel Management Association and was president of the
Baylor Development Council from 1993 to 1994.
Merrick R. Kleeman has been a managing director of Starwood Capital Group
since 1992, responsible for acquisitions. He serves as a director of ITT
Financial Educational Services, Inc., a New York Stock Exchange Company, and
Starwood Financial Trust, an American Stock Exchange Company.
Thomas R. Powers has been a director of the Company since 1997. Mr. Powers
is a founding principal of Raintree where he has been engaged since 1994. He
served as Chairman, President and CEO of Transamerica Fund Management Company
and its predecessor companies ("TFM") from 1976 to 1993. TFM was the investment
advisor and underwriter for a complex of 21 mutual funds. In 1995, he completed
a three year term as a member of the Board of Governors of the National
Association of Securities Dealers where he also served on the Executive
Committee as well as Chairman of the Audit Committee and the Investment
Companies Committee. For almost 20 years Mr. Powers served on the Board of
Governors of the Investment Company Institute, the national association of
mutual funds. During that time he served on the Executive Committee and was
elected Chairman in 1989 to 1990. From 1988 to 1997, Mr. Powers was a member and
past Chairman of the Board of Regents of Baylor University. Mr. Powers is also a
member of the Baylor University Foundation, a Trustee and member of the Finance
Committee for the Memorial Healthcare System of Houston, Texas and a member and
past President of the Houston Chapter of the Financial Executives Institute as
well as a member of the Texas Society of C.P.A.'s and the American Institute of
C.P.A.'s.
GLLC and the Initial Purchaser each exercised the right to designate one
person for appointment to the Board of Directors including Merrick Kleeman and
Christopher Allick, respectively. Raintree exercised its right to select two
independent directors in 1998 by appointing Christel DeHaan and Christopher
Allick. See "Certain Transactions" and "Business -- Description of Purchase
Transactions -- Starwood Agreements."
Messrs. Bech, Powers and McCarthy, in their individual capacity, have
fulfilled their agreement to take all action necessary (including, without
limitation, voting the shares of common stock directly or indirectly owned by
any of them) to ensure that Christopher Allick was appointed to CR US's Board of
Directors, pursuant to an agreement dated December 5, 1997 by and among
Jefferies, CR US, and Messrs. Bech, Powers and McCarthy.
CR US's Board of Directors currently consists of seven members and is
divided into three classes, one class of which is elected each year to hold
office for a three-year term and until successors are elected and qualified. The
terms of the initial Class A, Class B and Class C directors of the Company will
expire at the 1998, 1999 and 2000 annual meetings, respectively. Thomas R.
Powers and Walker Harman serve in Class A, Chris Allick, Christel DeHaan and
Merrick Kleeman in Class B and Douglas Y. Bech and John McCarthy in Class C.
Successors to the directors whose terms have expired are required to be elected
by stockholder vote while vacancies in unexpired terms and any additional
positions created by board action are filled by action of the existing Board of
Directors. The executive officers named above were elected to serve in such
capacities until the next annual meeting of the Board of Directors, or until
their respective successors have been duly elected and have been qualified, or
until their earlier death, resignation, disqualification or removal from office.
No family relationships exist among the executive officers or directors of CR
US.
DIRECTOR COMPENSATION
Directors will not receive compensation for serving as directors prior to
the earlier of January 1, 1999 or the CR US's initial public offering. After
that date directors' fees customary and usual for comparable companies may be
paid. Directors will be reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof incurred in
their capacity as directors. See "-- 1997 Non-Employee Directors' Stock Plan."
COMMITTEES OF THE BOARD OF DIRECTORS
It is intended that CR US will have an Executive Committee, an Audit
Committee and a Compensation Committee. Currently only the Audit Committee has
been appointed.
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The Audit Committee reviews and reports to the Board of Directors the scope
and results of audits by the Company's outside auditor. The committee also
recommends the firm of certified public accountants to serve as the Company's
independent public accountants, subject to nomination by the Board of Directors
and approval of the stockholders, authorize all audit and other professional
services rendered by the auditor and periodically review the independence of the
auditor. Membership of the Audit Committee is restricted to those directors who
are not active or retired officers or employees of the Company. Messrs. Harman
and Powers are members of the Audit Committee.
EXECUTIVE COMPENSATION
CR US was incorporated in December 1996, and conducted limited operations
until August 18, 1997. Accordingly, CR US did not pay any of its executive
officers compensation during 1996.
The following table sets forth certain compensation information for CR US's
highly compensated executive officers (the "Named Executive Officers").
Compensation information is shown for the period from August 19, 1997 to
December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION SECURITIES
--------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
----------------------- ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Y Bech............. 1997 $ 90,000(1) -- -- -- --
Chairman
John McCarthy.............. 1997 87,179(2) -- 20,000
President
Mario Muro................. 1997 39,649(3) -- 6,000 --
Senior Vice President --
Operations and Sales
Gustavo Ripol.............. 1997 23,687(3) 18,000 6,000 --
Senior Vice President --
Finance and Marketing
Brian Tucker............... 1997 45,000(4) 7,500 -- 6,000 --
Vice
President -- Planning
and Development
</TABLE>
- ---------------
(1) Mr. Bech's compensation for 1997 was paid at an annual rate of $240,000.
(2) Mr. McCarthy's compensation for 1997 was paid at an annual rate of
$250,000. See "-- Employment Agreements."
(3) Messrs. Muro's and Ripol's base salary for 1997 was paid at an annual rate
of $115,000.
(4) Mr. Tucker's base salary for 1997 was paid at an annual rate of $120,000.
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OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding the number of
stock options to purchase shares of the Company's Common Stock granted pursuant
to the Plan to the Named Executive Officers during the year ended December 31,
1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED IN PER SHARE OPTION TERM
OPTIONS FISCAL YEAR EXERCISE OR EXPIRATION ----------------------
NAME GRANTED(1) 1997 BASE PRICE DATE 5% 10%
---- ---------- ---------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John McCarthy(2)............ 20,000 100% $2.00 8/15/2007 $25,156 $63,750
Mario Muro.................. 6,000 100% $5.00 8/18/2007 18,867 47,812
Gustavo Ripol............... 6,000 100% $5.00 8/18/2007 18,867 47,812
</TABLE>
- ---------------
(1) Except as otherwise noted, these options were issued pursuant to CR US's
1997 Long Term Incentive Plan. See "-- 1997 Long Term Incentive Plan."
(2) Issued pursuant to an option agreement dated August 15, 1997 between CR US
and Mr. McCarthy, CR US issued to Mr. McCarthy 100,000 stock options, 20,000
of which have vested and the remainder shall vest at the rate of 20,000 per
year over four years at an option price of $2 per share.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END* AT FISCAL YEAR-END*
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John McCarthy........ -- -- 20,000 80,000 $100,000 $400,000
Mario Muro........... -- -- 6,000 24,000 $ 12,000 $ 28,000
Gustavo Ripol........ -- -- 6,000 24,000 $ 12,000 $ 28,000
</TABLE>
- ---------------
* Computed based upon a fair market value of $7.00 per share on December 31,
1997 as determined by the Company
1997 LONG TERM INCENTIVE PLAN
No stock options were granted to, or exercised by or held by an executive
officer in 1996. In August 1997, the Board of Directors of CR US approved CR
US's 1997 Long-Term Incentive Plan (the "Plan"). The purpose of the Plan is to
provide directors, officers, key employees, consultants and other service
providers with additional incentives by increasing their ownership interests in
CR US. Individual awards under the Plan may take the form of one or more of: (i)
either incentive stock options or non-qualified stock options ("NQSOs"), (ii)
stock appreciation rights, (iii) restricted or deferred stock, (iv) dividend
equivalents and (v) other awards not otherwise provided for, the value of which
is based in whole or in part upon the value of the common stock.
The Compensation Committee, or such other committee as the Board of
Directors designates, will administer the Plan and select the individuals who
will receive awards and establish the terms and conditions of those awards. The
maximum number of shares of Common Stock that may be subject to outstanding
awards, determined immediately after the grant of any award, may not exceed the
greater of 800,000 shares or 8% of the aggregate number of shares of Common
Stock outstanding at the time of such grant. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of CR US, except that any amendment, although effective when made,
will be subject to stockholder approval if required by any federal or state law
or
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<PAGE> 74
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted; provided, however, that,
without the consent of any affected participant in the Plan, no such action may
materially impair the rights of such participant under any award granted to him.
There are currently options to purchase 163,000 shares of the CR US's
Common Stock at a purchase price of $5.00 per share and 30,000 shares of CR US's
Common Stock at a purchase price of $7.00 per share outstanding under the Plan.
EMPLOYMENT AGREEMENTS
CR US has entered into an employment agreement with John McCarthy pursuant
to which he serves as the President of CR US. The employment agreement provides
for a three-year employment term commencing August 18, 1997, at the end of which
it extends for successive one-year terms. The employment agreement provides that
as compensation for all services rendered by Mr. McCarthy thereunder, he will
receive an annual salary of $250,000 plus a bonus of up to 50% of his base pay.
In addition to any other payments to be made to Mr. McCarthy under his
employment agreement, he will be entitled to his salary for one year, earned
bonuses, vested stock options and any other sums due him, if his employment is
terminated thereunder for any reason other than "cause" (as defined in the
employment agreement), resignation, death or disability. Mr. McCarthy is subject
to a one-year non-competition agreement with CR US.
Additionally, CR US has entered into an employment agreement with George D.
Stroesenreuther pursuant to which he serves as the Senior Vice
President -- Finance of CR US. The employment agreement provides for a
three-year employment term commencing February 23, 1998, at the end of which it
extends for successive one-year terms. The employment agreement provides that as
compensation for all services rendered by Mr. George Stroesenreuther, he will
receive an annual salary of $115,000 plus a bonus of up to 50% of his base pay.
In addition to any other payments to be made to Mr. Stroesenreuther under his
employment agreement, he will be entitled to his salary for up to one year,
earned bonuses, vested stock options and any other sums due him, if his
employment is terminated thereunder for any reason other than "cause" (as
defined in the employment agreement), resignation, death or disability. CR US
issued to Mr. Stroesenreuther options to purchase 30,000 shares of Common Stock,
1,500 of which have vested and the remainder shall vest at the rate of 6,000 per
year for four years at an option price of $7 per share. Mr. Stroesenreuther is
subject to a two-year non-competition agreement with CR US.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
CR US's 1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"),
which was adopted by the Board of Directors, becomes effective upon an initial
public offering of CR US's stock. The Director Plan has reserved 200,000 shares
of common stock for issuance. An option to purchase 5,000 shares of Common
Stock, subject to certain adjustments, will be automatically granted to each
non-employee director at the closing of the initial public offering, and
thereafter at the effective date of a non-employee director's initial election
to the Board of Directors. In addition, an option to purchase 5,000 shares of
Common Stock, subject to certain adjustments, will be automatically granted to
each non-employee director at the conclusion of each annual meeting of
stockholders, unless such annual meeting is held within three months of such
person's initial election as a director. All options are immediately vested,
will have an exercise price per share equal to the fair market value of the
Common Stock on the date of grant, and expire on the earlier of ten years from
the date of grant or one year after termination of service as a director.
EXCULPATORY CHARTER PROVISION; LIABILITY AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS
CR US has included in its Amended and Restated Articles of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty; provided, however, that
such provision does not eliminate liability for (i) acts or omissions not in
good faith or which involve intentional misconduct, fraud, or a knowing
violation of law, or (ii) violations under Section 78.300 of the NGCL concerning
unlawful distributions to shareholders. However, these provisions will
63
<PAGE> 75
not limit the liability of CR US's directors under the federal securities laws.
CR US believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH CRMC AND AFFILIATES
During 1997, partners (or affiliates) of CR Management Company ("CRMC"), a
partnership controlled by Raintree, contributed or advanced more than $4.0
million to the Company. On August 18, 1997, the Company issued to CRMC a demand
promissory note for $1.15 million bearing an annual interest rate of 8% which
was repaid with the proceeds of this Offering. See "Use of Proceeds" and "Risk
Factors -- Company Risks -- Benefits to Existing Stockholders and other Persons;
Repayment of Indebtedness to Affiliates." In addition, the Company has issued
30,000 shares of its Class A Preferred to CRMC in consideration of $3.0 million
of the original $4.0 million in advances by CRMC. See "Business -- Description
of Purchase Transactions -- Description of Class A Preferred Stock."
TRANSACTIONS WITH STARWOOD AND ITS AFFILIATES
The Company has entered into a series of transactions with Starwood and its
affiliates in connection with the Purchase Transactions including the issuance
of 7,500 shares of Class A Preferred. These transactions are further described
under "Business -- Description of Purchase Transactions."
EMPLOYMENT AGREEMENTS
Mr. McCarthy and Mr. Stroesenreuther have entered into employment
agreements with the Company. See "Management -- Executive Compensation."
INDEMNITY AGREEMENTS
The Company has entered into indemnification agreements with each of its
directors and certain of its executive officers. The indemnification agreements
provide that the Company shall indemnify these individuals against certain
liabilities (including settlements) and expenses actually and reasonably
incurred by them in connection with any threatened or pending legal action,
proceeding or investigation (other than actions brought by or in the right of
the Company) to which any of them is, or is threatened to be, made a party by
reason of their status as a director, officer or agent of the Company; provided
that, with respect to a civil, administrative or investigative (other than
criminal) action, such individual acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal proceedings, he or she had no
reasonable cause to believe his or her conduct was unlawful. With respect to any
action brought by or in the right of the Company, such individuals may be
indemnified, to the extent not prohibited by applicable laws or as determined by
a court of competent jurisdiction, against expenses actually and reasonably
incurred by them in connection with such action if they acted in good faith and
in a manner they reasonably believed to be in, or not opposed to, the best
interests of the Company. The agreements also require indemnification of such
individuals for all reasonable expenses incurred in connection with the
successful defense of any action or claim and provide for partial
indemnification in the case of any partially successful defense.
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<PAGE> 76
PRINCIPAL STOCKHOLDERS
Except as disclosed below, the following table sets forth certain
information regarding the beneficial ownership of CR US's Common Stock as of
March 31, 1998 by (i) each person known by CR US to beneficially own more than
5% of such shares, (ii) the directors of CR US, (iii) the Named Executive
Officers and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each person's address is 10,000 Memorial Drive, Suite 480,
Houston, Texas 77024.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OWNED(1) OF CLASS
---- ------------ --------
<S> <C> <C>
Douglas Y. Bech(2).......................................... 1,534,912 14.3
John McCarthy............................................... 215,367 2.0
Mario Muro(3)............................................... * *
Gustavo Ripol(3)............................................ * *
George Stroesenreuther(3)................................... * *
Christopher Allick(4)....................................... 972,720 9.1
Christel DeHaan............................................. 583,333 5.5
1990 Market Tower
10 West Market Street
Indianapolis, IN 46204
Walker G. Harman(5)......................................... 1,900,000 17.8
Merrick R. Kleeman(6)....................................... 2,000,000 18.7
Thomas R. Powers(2)......................................... 890,213 8.3
William T. Criswell(7)...................................... 1,077,440 10.1
Bert Wollen................................................. 637,062 5.9
All directors and officers as a group (10 people)........... 7,981,420 74.6
</TABLE>
- ---------------
* Less than 1%
(1) To the Company's knowledge, such person has sole voting and investment
power with respect to all Common Stock shown as beneficially owned by such
person, unless otherwise indicated. Common Stock that is not outstanding
but that may be acquired by a person upon exercise of options or warrants
within 60 days of the date of this Prospectus are deemed outstanding for
the purpose of computing the percentage of outstanding shares beneficially
owned by such person. However, such shares are not deemed to be outstanding
for the purpose of computing the percentage of outstanding shares
beneficially owned by any other person.
(2) Includes 30,000 of a total of 60,000 shares of Common Stock to be acquired
in August 1998 from Walker Harman.
(3) Messrs. Muro, Ripol and Stroesenreuther each have options to purchase
30,000 shares of Common Stock at $5.00, $5.00, and $7.00 per share,
respectively, of which at March 31, 1998, options for 6,000, 6,000, and
1,500 shares, respectively, were vested and currently exercisable.
(4) Includes currently exercisable warrants to purchase 571,420 shares of
Common Stock for $7 per share and 401,300 shares of Common Stock that
Jefferies & Company, Inc. ("Jefferies") holds. Mr. Allick is an Executive
Vice President of Jefferies and, as such, can be deemed to have beneficial
ownership of the shares Jefferies holds. Mr. Allick expressly disclaims
beneficial ownership of such shares.
(5) Includes 60,000 shares of Common Stock to be acquired by Messrs. Bech and
Powers in August 1998.
(6) Includes 2,000,000 shares of Common Stock Greenmex, LLC ("Greenmex") holds.
Mr. Kleeman is an executive officer of Greenmex and, as such, can be deemed
to have beneficial ownership of the shares Greenmex holds.
(7) Includes 673,400 shares of Common Stock that Criswell Associates, LLC
("CALLC") holds, subject to the claims of two other persons. Mr. Criswell
has the power to vote and direct the disposition of Common Stock CALLC
holds and, as such, is shown as the beneficial owner of those shares.
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<PAGE> 77
THE EXCHANGE OFFER
GENERAL
The Issuers have filed this Prospectus to consummate the Exchange Offer as
required by the Registration Rights Agreement and the Indenture and as described
in the Offering Circular for the fulfillment of the Offering. In connection with
the sale of the Outstanding Notes, the purchasers thereof became entitled to the
benefits of certain registration rights under the Registration Rights Agreement.
The Registered Notes are being offered hereunder to satisfy the obligations of
the Company under the Registration Rights Agreement. See "Description of
Notes -- Registration Rights; Additional Interest."
For each $1,000 principal amount of Outstanding Notes surrendered to the
Company pursuant to the Exchange Offer, the holder of such Outstanding Notes
will receive $1,000 principal amount of Registered Notes. Upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal, the Company will accept all Outstanding Notes properly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Holders
may tender some or all of their Outstanding Notes pursuant to the Exchange Offer
in integral multiples of $1,000 principal amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989)
("Exxon"), the Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(Available June 5, 1991) (the "Morgan Stanley Letter") and Mary Kay Cosmetics,
Inc. ("Mary Kay"), SEC No-Action Letter (available June 5, 1991), the Company
believes that the Registered Notes would in general be freely transferable after
the Exchange Offer without further registration under the Securities Act by the
respective holders thereof (other than a "Restricted Holder," being (i) a
broker-dealer who purchased Outstanding Notes exchanged for such Registered
Notes directly from the Company to resell pursuant o 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 such Registered Notes are
acquired in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Registered
Notes. Eligible holders wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Any holder of Outstanding Notes
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Registered Notes could not rely on the interpretation by the
staff of the SEC enunciated in the Morgan Stanley Letter and similar no-action
letters, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each holder of Outstanding Notes who wishes to exchange Outstanding Notes
for Registered Notes in the Exchange Offer will be required to make certain
representations, including that (i) it is not an affiliate of the Issuers, (ii)
any Registered Notes to be received by it are being acquired in the ordinary
course of its business and (iii) it is not engaged in, and does not intend to
engage in, and has no understanding with any person to participate in, a
distribution of the Registered Notes. In addition, each Holder using the
Exchange Offer to participate in a distribution of the Series B Notes hereby
acknowledges and agrees that, if the resales are of Series B Notes obtained by
such Holder in exchange for Series A Notes acquired directly from the Issuers or
an Affiliate thereof, it (i) could not, under Commission policy as in effect on
December 5, 1997, rely on the position of the Commission enunciated in the
Morgan Stanley Letter as interpreted in the Commission's letter to Shearman &
Sterling (available July 2, 1993) ("Shearman & Sterling"), and similar no-action
letters (including, if applicable, any no-action letter obtained by the
Issuers), and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K. The
staff of the SEC has taken the position in no-action letters issued to third
parties including Shearman & Sterling, that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Registered
Notes (other than a resale of an unsold allotment from the original sale of
Outstanding Notes) with this Prospectus, as it may be amended or supplemented
from time to
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<PAGE> 78
time. Under the Registration Rights Agreements, the Issuers are required to
effect such exchange and to permit the resale of Registered Notes by
Broker-Dealers that tendered in the Exchange Offer Outstanding Notes and that
such Broker-Dealer acquired for its own account as a result of its market making
activities or other trading activities (other than Outstanding Notes acquired
directly from the Issuers or any of their Affiliates) being sold in accordance
with the intended method or methods of distribution thereof. See "Plan of
Distribution."
The Exchange Offer shall be deemed to have been consummated upon the
earlier to occur of (i) the Company having exchanged Registered Notes for all
outstanding Outstanding Notes (other than Outstanding Notes held by a Restricted
Holder) pursuant to the Exchange Offer and (ii) the Company having exchanged,
pursuant to the Exchange Offer, Registered Notes for all Outstanding Notes that
have been tendered and not withdrawn on the date that is 30 days following the
commencement of the Exchange Offer. In such event, holders of Outstanding Notes
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act.
As of the date of this Prospectus, $100 million principal amount of
Outstanding Notes are issued and outstanding. In connection with the issuance of
the Outstanding Notes, the Company arranged for the Outstanding Notes to be
eligible for trading in the Private Offering, Resale and Trading through
Automated Linkages (PORTAL) Market, the National Association of Securities
Dealers' screen based, automated market trading of securities eligible for
resale under Rule 144A.
The Issuers shall be deemed to have accepted for exchange validly tendered
Outstanding Notes when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will
act as agent for the tendering holders of Outstanding Notes for the purpose of
receiving Registered Notes from the Company and delivering Registered Notes to
such holders. If any tendered Outstanding Notes are not accepted for exchange
because of an invalid tender or the occurrence of certain other events set forth
herein, certificates for any such unaccepted Outstanding Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date. Holders of Outstanding Notes who tender 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 Outstanding Notes pursuant to the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable taxes,
in connection with the Exchange Offer. See "-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means , 1998 unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" means the latest date to which the Exchange Offer is extended.
To extend the Expiration Date, the Company will notify the Exchange Agent of any
extension by oral or written notice and will mail to the record holders of
Outstanding Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that the Company is extending the Exchange
Offer for a specified period of time. The Company reserves the right (i) to
delay acceptance of any Outstanding Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Outstanding Notes not
previously accepted, if any of the conditions set forth herein under
"-- Termination" have occurred and not have been waived by the Company (if
permitted to be so waived), by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, and (ii) to amend the terms of
the Exchange Offer in any manner it deems by it to be advantageous to the
holders of the Outstanding Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. 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 in a manner reasonably calculated to inform the holders
of the Outstanding Notes of such amendment. Without limiting the manner in which
the Company may choose to make public announcements of any delay in acceptance,
extension,
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<PAGE> 79
termination or amendment of the Exchange Offer, the Company will have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE REGISTERED NOTES
The Registered Notes will bear interest payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 1998. Holders of Registered Notes of
record on May 15, 1998, will receive interest on June 1, 1998 from the date of
issuance of the Registered Notes, plus an amount equal to the accrued interest
on the Outstanding Notes from the date of issuance of the Outstanding Notes,
December 5, 1997, to the date of exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of the June 1,
1998 interest payment for the Outstanding Notes, holders who exchange their
Outstanding Notes for Registered Notes will receive the same interest payment on
June 1, 1998 that they would have received had they not accepted the Exchange
Offer. Interest on the Outstanding Notes accepted for exchange will cease to
accrue upon issuance of the Registered Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile or an Agent's message,
together with the Outstanding Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder of Outstanding Notes 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. Delivery of all
documents must be made to the Exchange Agent at its address set forth herein.
Holders may also request that their respective brokers, dealers, commercial
banks, trust companies or nominees effect such tender for such holders. The
method of delivery of Outstanding Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Outstanding Notes
should be sent to the Company. Only a holder of Outstanding Notes may tender
such Outstanding Notes in the Exchange Offer. The term "holder" with respect to
the Exchange Offer means any person in whose name Outstanding Notes are
registered on the books of the Issuers or any other person who has obtained a
properly completed stock power from the registered holder.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Outstanding Notes which are the subject of such
Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
Any beneficial holder whose Outstanding Notes are registered in the name of
such holder's broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on behalf of the registered holder. If
such beneficial holder wishes to tender directly, such beneficial holder must,
prior to completing and executing the Letter of Transmittal and delivering his
Outstanding Notes, either make appropriate arrangements to register ownership of
the Outstanding Notes in such holder's name or obtain a properly completed bond
power from the registered holder. The transfer of record ownership may take
considerable time. If the Letter of Transmittal is signed by the record
holder(s) of the Outstanding Notes tendered thereby, the signature must
correspond with the name(s) written on the face of the Outstanding Notes without
alteration, enlargement or any change whatsoever. If the Letter of Transmittal
is signed by a participant in the Depository, the signature must correspond with
the name as it appears on the security position listing as the holder of the
Outstanding Notes. Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
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<PAGE> 80
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 (an "Eligible Institution")
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered holder (or by a participant in the Depository whose name appears on a
security position listing as the owner) who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal and the Registered Notes are being issued directly to such
registered holder (or deposited into the participant's account at the
Depository) or (ii) for the account of an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder of any
Outstanding Notes listed therein, such Outstanding Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender the
Outstanding Notes on behalf of the registered holder, in either case signed as
the name of the registered holder or holders appears on the Outstanding Notes.
If the Letter of Transmittal or any Outstanding 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 Issuers,
evidence satisfactory to the Issuers of their authority to so act must be
submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Outstanding
Notes (or a timely confirmation received of a book-entry transfer of Outstanding
Notes into the Exchange Agent's account at the Depository with an Agent's
Message) or a Notice of Guaranteed Delivery from an Eligible Institution is
received by the Exchange Agent. Issuances of Registered Notes in exchange for
Outstanding Notes tendered pursuant to a Notice of Guaranteed Delivery by an
Eligible Institution will be made only against delivery of the Letter of
Transmittal (and any other required documents) and the tendered Outstanding
Notes (or a timely confirmation received of a book-entry transfer of Outstanding
Notes into the Exchange Agent's account at the Depository) with the Exchange
Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by the Issuers in their sole discretion, which determination will be
final and binding. The Issuers reserve the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Issuers'
acceptance of which would, in the opinion of the Issuers or their counsel, be
unlawful. The Issuers also reserve the absolute right to waive any conditions of
the Exchange Offer or defects or irregularities in tender as to particular
Outstanding Notes. The Issuers' interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Issuers shall determine. Neither the Issuers, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Outstanding Notes nor
shall any of them incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Outstanding Notes the Exchange
Agent receives that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Outstanding Notes unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date. In addition, the Issuers reserve the right in its
sole discretion to (i) purchase or make offers for any Outstanding Notes that
remain outstanding subsequent to the Expiration Date, or, as set forth
under"-- Termination," to terminate the Exchange Offer and (ii) to the extent
permitted by applicable law, purchase Outstanding Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the
Outstanding Notes at the Depository within two business days after the date of
this Prospectus, and any financial institution which is a participant in the
Depository may make book-entry delivery of the Outstanding Notes by causing the
Depositary to transfer such Outstanding Notes into the Exchange Agent's account
in accordance with the Depositary's procedure for
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<PAGE> 81
such transfer. Although delivery of Outstanding Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depository, and
Agent's Message must be transmitted to an received by the Exchange Agent on or
prior to the Expiration Date at one of its addresses set forth below under "B
Exchange Agent", or the guaranteed delivery procedure described below must be
complied with. DELIVERY OF DOCUMENTS TO THE DEPOSITORY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT. All references in this Prospectus to deposit or
delivery of Outstanding Notes shall be deemed to include the Depositary's
book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and whose Outstanding
Notes are not immediately available or who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, or who cannot complete the procedure for
book-entry transfer on a timely basis and deliver an Agent's Message, may effect
a tender if: (i) the tender is made by or through an Eligible Institution; (ii)
prior to the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder of the Outstanding Notes, the registration number or
numbers of such Outstanding Notes (if applicable), and the total principal
amount of Outstanding Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the Expiration
Date, the Letter of Transmittal, together with the Outstanding Notes in proper
form for transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Depository) and any other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal, together with the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of such a
book-entry transfer) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days after
the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each Holder who participates in the Exchange Offer will be required to
represent that any Registered Notes received by it will be acquired in the
ordinary course of its business, that such Holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Registered Notes, and that such holder
is not a Restricted Holder.
Outstanding Notes tendered in exchange for Registered Notes (or a timely
confirmation of a book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Depository) must be received by the Exchange
Agent, with the Letter of Transmittal and any other required documents, by the
Expiration Date or within the time periods set forth above pursuant to a Notice
of Guaranteed Delivery from an Eligible Institution. Each holder tendering the
Outstanding Notes for exchange must sell, assign and transfer the Outstanding
Notes to the Exchange Agent, as agent of the Company, and will irrevocably
constitute and appoint the Exchange Agent as the holder's agent and
attorney-in-fact to cause the Outstanding Notes to be transferred and exchanged.
The holder warrants that it has full power and authority to tender, exchange,
sell, assign and transfer the Outstanding Notes and to acquire the Registered
Notes issuable upon the exchange of such tendered Outstanding Notes, that the
Exchange Agent, as agent of the Company, will acquire good and unencumbered
title to the tendered Outstanding Notes, free and clear of all liens,
restrictions, charges and encumbrances, and that the Outstanding Notes tendered
for exchange are not subject to any adverse claims when accepted by the Exchange
Agent, as agent of the Issuers. The holder also warrants and agrees that it
will, upon request, execute and deliver any additional documents deemed by the
Issuers or the Exchange Agent to be necessary or desirable to complete the
exchange, sale, assignment and transfer of the Outstanding Notes. All authority
conferred or agreed to be conferred in the Letter of Transmittal by the holder
will survive
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the death, incapacity or dissolution of the holder and any obligation of the
holder shall be binding upon the heirs, personal representatives, successors and
assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the business
day prior to the Expiration Date, unless previously accepted for exchange. To
withdraw a tender of Outstanding 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 5:00 p.m., New York City time, on
the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by the Issuers. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Outstanding Notes to be withdrawn
(the "Depositor"), (ii) identify the Outstanding Notes to be withdrawn
(including, if applicable, the registration number or numbers and total
principal amount of such Outstanding Notes), (iii) be signed by the Depositor in
the same manner as the original signature on the Letter of Transmittal by which
such Outstanding Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to permit the
Trustee with respect to the Outstanding Notes to register the transfer of such
Outstanding Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Outstanding Notes are to be registered, if
different from that of the Depositor and (v) if applicable because the
Outstanding Notes have been tendered pursuant to the book-entry procedures,
specify the name and number of the participant's account at the Depository to be
credited, if different than that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Issuers, whose determination shall be final
and binding on all parties. Any Outstanding Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Registered Notes will be issued with respect thereto unless the Outstanding
Notes so withdrawn are validly retendered. Any Outstanding Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Outstanding Notes may be retendered by following one of the procedures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, and may terminate the Exchange Offer if it determines
that the Exchange Offer violates any applicable law or interpretation of the
staff of the SEC.
If the Issuers determine that they may terminate the Exchange Offer, as set
forth above, the Issuers may (i) refuse to accept any Outstanding Notes and
return any Outstanding Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Outstanding Notes tendered prior
to the Expiration of the Exchange Offer, subject to the rights of such holders
of tendered Outstanding Notes to withdraw their tendered Outstanding Notes or
(iii) waive such termination event with respect to the Exchange Offer and accept
all properly tendered Outstanding Notes that have not been withdrawn. If such
waiver constitutes a material change in the Exchange Offer, the Company will
disclose such change by means of a supplement to this Prospectus that will be
distributed to each registered holder of Outstanding 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 of the Outstanding Notes, if the Exchange Offer would
otherwise expire during such period. Holders of Outstanding Notes will have
certain rights against the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange Offer.
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<PAGE> 83
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
Mailing Address:
IBJ Schroder Bank & Trust Company
P. O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attention Reorganization Operations Department
Telephone: (212) 858-2103
Facsimile: (212) 858-2611
Hand and Overnight Delivery:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Securities Processing Window, Subcellar One, (SC-1)
Telephone number for the Exchange Agent: (212) 858-2103
Facsimile number for the Exchange Agent: (212) 858-2611.
FEES AND EXPENSES
The Issuers will bear the expenses of soliciting tenders pursuant to the
Exchange Offer. The principal solicitation for tenders pursuant to the Exchange
Offer is being made by mail. Additional solicitations may be made by officers
and regular employees of the Issuers and their affiliates in person, by
telegraph or telephone. The Issuers will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Issuers, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Issuers may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Outstanding Notes and in handling or forwarding tenders for exchange.
The Issuer will pay other expenses incurred in connection with the Exchange
Offer including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees. The Issuers will pay all transfer taxes, if any,
applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer.
If, however, Registered Notes or Outstanding Notes not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Outstanding Notes
tendered, or if tendered Outstanding Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Outstanding 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.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Issuers
upon the consummation of the Exchange Offer. The Company will amortize expenses
of the Exchange Offer over the term of the Registered Notes under generally
accepted accounting principles.
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<PAGE> 84
DESCRIPTION OF NOTES
GENERAL
The Registered Notes will be issued, and the Outstanding Notes were issued,
pursuant to the indenture (the "Indenture") among the Issuers and IBJ Schroder
Bank & Trust Company, as trustee (the "Trustee"), dated December 5, 1997. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"). The Notes are subject to all such terms, and Holders are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the proposed form of Indenture and Registration Rights Agreement are
available as set forth under "Available Information." The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions."
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
currently is the Trustee's corporate trust office. The Company may change any
Paying Agent and Registrar without notice to Holders of the Notes. The Company
pays principal (and premium, if any) on the Notes at the Trustee's corporate
office in New York, New York. In addition, in the event the Notes do not remain
in book-entry form, interest may be paid at the Company's option, by wire
transfer or check mailed to the registered address of the Holders as shown on
the Note Register.
Any Outstanding Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, are be treated as a single class of securities under the
Indenture.
The Notes are general unsecured obligations of the Issuers and rank pari
passu in right of payment with all current and future unsecured senior
Indebtedness of the Issuers. As of December 31, 1997 on a pro forma basis after
giving effect to the Offering and the application of estimated net proceeds
therefrom, to the Remainder Disposition and certain shareholder investments, the
total amount of Indebtedness of CR US and its subsidiaries that would
effectively rank senior in right of payment to the obligations of the Issuers
under the Notes would have been approximately $4.6 million. The Indenture
permits borrowings under Credit Agreements, which borrowings may be secured by a
first priority Lien on the assets of CR US and its Subsidiaries. See "Risk
Factors -- Factors Related to the Securities."
The operations of CR US are conducted through its Operating Subsidiaries
and, therefore, the Issuers are dependent upon the cash flow of the Operating
Subsidiaries to meet their obligations, including their obligations under the
Notes. As of the date hereof, all of CR US's Operating Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, CR US may
designate current or future Operating Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries are not be subject to many of the restrictive
covenants set forth in the Indenture.
The Notes are effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Operating Subsidiaries. Any right of the Issuers to receive assets of any of
the Operating Subsidiaries upon the latter's liquidation or reorganization (and
the consequent right of the Holders to participate in those assets) are
effectively subordinated to the claims of that Operating Subsidiary's creditors,
except to the extent that either of the Issuers is itself recognized as a
creditor of such Operating Subsidiary, in which case the claims of such Issuer
would still be subordinate to any security in the assets of such Operating
Subsidiary and any Indebtedness of such Operating Subsidiary. See "Risk
Factors -- Factors Related to the Securities -- Holding Company Structure;
Dependence on Subsidiaries; Limitations on Access to Cash Flow of the
Subsidiaries."
To the extent any provision of the Indenture requires the approval of the
Board of Directors of CR US, such requirement may be satisfied if the matter in
question is approved by the Board of Directors of a Wholly
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<PAGE> 85
Owned Restricted Subsidiary of CR US, but only if the members of the Board of
Directors of such Restricted Subsidiary are identical to the members
constituting the entire Board of Directors of CR US on the date that the
applicable resolution is adopted.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million and
will mature on December 1, 2004. Interest on the Notes accrues at the rate of
13% per annum and is payable semi-annually in arrears on June 1 and December 1,
commencing on June 1, 1998, to Holders of record on the immediately preceding
May 15 and November 15 (whether or not a Business Day). Interest on the Notes
accrues from the most recent date to which interest has been paid or, if no
interest has been paid, from the Issue Date. Interest is computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest and Liquidated Damages on the Notes is payable at the office or
agency of the Issuers maintained for such purpose within the City and State of
New York or, at the option of the Issuers, payment of interest and Liquidated
Damages may be made by check mailed to the Holders at their respective addresses
set forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Liquidated Damages with respect to Notes the
Holders of which have given written wire transfer instructions to the Trustee by
no later than the record date for an interest payment is required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Issuers, the Issuers' office
or agency in New York is the office of the Trustee maintained for such purpose.
ADDITIONAL AMOUNTS
Any payments made by the Issuers under or with respect to the Notes are
made free and clear of and without withholding or deduction for or on account of
any present or future tax, duty, levy, impost, assessment or other governmental
charge of whatever nature imposed or levied by or on behalf of Mexico or of any
subdivision thereof or by any authority or agency therein or thereof having
power to tax (hereinafter "Taxes"), unless either Issuer is required to withhold
or deduct Taxes by law, rule or regulation or by the interpretation or
administration thereof. If either Issuer is so required to withhold or deduct
any amount for or on account of Taxes from any payment made under or with
respect to the Notes then the Issuers will pay such additional amounts
("Additional Amounts") as may be necessary, so that the net amount received on
the respective due dates of such amounts by each Holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
such Holder would have received if such Taxes had not been withheld or deducted.
Notwithstanding the foregoing, no such Additional Amounts shall be payable
with respect to:
(a) any Taxes which are imposed on, or deducted or withheld from,
payments made to the Holder or beneficial owner of a Note because of the
existence of any present or former connection between the Holder or
beneficial owner of the Notes (or between a fiduciary, settlor,
beneficiary, member of, or possessor of a power over, such Holder or
beneficial owner, if such Holder or beneficial owner is an estate, a trust
or a partnership) and Mexico, except for a connection relating to or
otherwise arising from the mere ownership of, or receipt of payment under,
such Note or the exercise of rights under such Note or the Indenture
(personally or through the Trustee);
(b) any Taxes that are imposed on, or withheld or deducted from,
payments made to the Holder or beneficial owner of a Note to the extent
such Taxes would not have been so imposed, deducted or withheld but for the
failure by such Holder or beneficial owner of such Note to comply with any
certification, identification, information, documentation or other
reporting requirement concerning the nationality, residence or identity of
the Holder or beneficial owner of such Note if (i) such compliance is
required or imposed by a statute, treaty, regulation, ruling or
administrative practice to make any claim for exemption from, or reduction
in the rate of, the imposition, withholding or deduction of any Taxes; and
(ii) at least 60 days prior to the first payment date with respect to which
the Issuers shall apply this clause (b), the Issuers shall have notified
such Holders or beneficial owners of the Notes in writing that such Holders
and beneficial owners of the Notes will be required to provide such
information or
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documentation; provided, however, that CR US's obligation to pay Additional
Amounts shall apply and the limitation set forth in this clause (b) shall
not apply if such Holder or beneficial owner of the Notes, as the case may
be, satisfies the certification or reporting requirement described in this
clause (b) within 30 days of the payment date unless CR US has already
irrevocably paid to the relevant taxing authority or agency the withheld or
deducted amount of Tax in respect of which such Additional Amounts would
have been payable;
(c) any Taxes that would not have been imposed but for the
presentation by such Holder for payment of such Holder's Note (where
presentation for payment is requirement) on a date more than 30 days after
the date on which such payment became due and payable or the date on which
payment thereof is duly provided for and notice thereof given to Holders to
the extent required by the Indenture, whichever occurs later, but only to
the extent that the Holder of such Note would have been entitled to
Additional Amounts in respect of such Taxes on presenting such Note for
payment on any date during such 30-day period;
(d) any Taxes that would not have been imposed if the beneficial owner
of, or person ultimately entitled to obtain an interest in, such Notes had
been the Holder of such Notes; or
(e) Taxes imposed because of any estate, inheritance, gift, sale,
transfer, personal property or similar taxes, duties, assessments or
charges that are payable otherwise than by withholding from a payment of
(or in respect of) principal of, or interest or Liquidated Damages on, the
Notes; or
(f) any combination of (a), (b), (c), (d) or (e) above (the Taxes
described in clauses (a) through (f) for which no Additional Amounts are
payable are hereinafter referred to as "Excluded Taxes").
Notwithstanding the foregoing, the limitations on the Issuers' obligation
to pay Additional Amounts set forth in clause (b) above shall not apply if (i)
the provision of information, certification or other evidence described in such
clause (b) would be materially more onerous, in form, in procedure or in the
substance of information disclosed, to a Holder or beneficial owner of a Note
(taking into account any relevant differences between U.S. and Mexican law,
regulation or administrative practice) than comparable information or other
reporting requirements imposed under U.S. tax law, regulation or administrative
practice (such as IRS Forms 1001, W-8 and W-9) or (ii) Rule 3.32.9 issued by the
Secretaria de Hacienda y Credito Publico (Ministry of Finance and Public Credit)
on March 31, 1998, unless the provision of the information, documentation or
other evidence described in clause (b) is expressly required by statute, rule or
regulation, to apply Rule 3.32.9, the Issuers cannot obtain such information,
documentation or other evidence on their own through reasonable diligence and
the Issuers otherwise would meet the requirements for application of Rule
3.32.9. In addition, such clause (b) shall not be construed to require that a
non-Mexican pension or retirement fund or a non-Mexican financial institution or
any other Holder register with the Ministry of Finance and Public Credit to
establish eligibility for an exemption from or reduction of Mexican withholding
tax or to require that a Holder or beneficial owner certify or provide
information concerning whether it is or is not a tax-exempt pension or
retirement fund.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Issuers will be obligated to pay
Additional Amounts with respect to such payment, the Issuers will deliver to the
relevant Trustee and the Paying Agent an Officers' Certificate stating the fact
that such Additional Amounts will be payable and the amounts so payable and will
set forth such other information as is necessary to enable the Trustee or the
Paying Agent, as the case may be, to pay such Additional Amounts to Holders on
the payment date.
Whenever either in the Indenture or in this Prospectus there is mentioned,
in any context, the payment of principal, interest, Liquidated Damages or any
other amount payable under or with respect to any Note, such mention shall be
deemed to include mention of the payment of Additional Amounts to the extent
that, in such context, Additional Amounts are, were or would be payable in
respect thereof.
The Issuers will provide the Trustee, within 20 business days after the
receipt thereof, with an official receipt of such payment, or, if such receipt
is unavailable, with documentation evidencing the payment of
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Mexican taxes in respect of which the Issuers have paid any Additional Amounts.
Copies of such documentation will be made available to the Holders or the Paying
Agent, as applicable, upon request therefor.
In addition, the Issuers will pay any stamp, issue, registration,
documentary or other similar taxes and other duties (including interest and
penalties and fees payable to the RNVI) (i) payable in Mexico or the United
States (or any political subdivision of either jurisdiction) in respect of the
creation, issue and offering of the Notes and (ii) payable in Mexico (or any
political subdivision thereof) in respect of the subsequent redemption or
retirement of the Notes other than, in the case of any subsequent redemption or
retirement, Excluded Taxes.
REDEMPTION
Optional Redemption
The Notes are not redeemable at the Issuers' option prior to December 1,
2000. Thereafter, the Notes are subject to redemption at any time at the option
of the Issuers, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000........................................................ 107.429%
2001........................................................ 105.571%
2002........................................................ 103.714%
2003........................................................ 101.857%
</TABLE>
Notwithstanding the foregoing, until December 1, 2000, either or both of
the Issuers may redeem up to 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price of 113% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of a
Public Equity Offering, provided that at least $65.0 million in aggregate
principal amount of Notes remain outstanding immediately after the occurrence of
such redemption (excluding Notes held by CR US and its Subsidiaries); and
provided, further, that the call for such redemption shall occur within 45 days
of the date of the closing of such Public Equity Offering.
Redemption for Tax Reasons
The Notes may be redeemed, at the option either or both of the Issuers, in
whole but not in part, at any time, upon giving not less than 30 nor more than
60 days' notice to the Holders of the Notes, at a redemption price equal to 100%
of the principal amount thereof, together with accrued interest and Liquidated
Damages, if any, to the date fixed for redemption and Additional Amounts, if
any, if the Issuers determine and certify to the Trustee immediately prior to
the giving of such notice (which certification shall include an Opinion of
Mexican Counsel) that (i) as a result of any change in, or amendment to, the
laws (or any rules or regulations promulgated thereunder) of Mexico, or any
political subdivision thereof or any taxing authority thereof or therein
affecting taxation, or any amendment to, change in or expiration of an official
interpretation or application regarding such laws, treaties, rules or
regulations which are of general applicability, which change, amendment,
application, expiration or interpretation becomes effective on or after the
Closing Date, either Issuer would be obligated, for reasons outside its control,
to pay Additional Amounts in respect of interest payments on the Notes pursuant
to the terms and conditions thereof in excess of those attributable to Mexican
withholding tax on the basis of a rate of 15% imposed on interest payments, (ii)
such obligation cannot be avoided by the Issuers after taking reasonable
measures available to them to avoid it, and (iii) such obligation (or a separate
tax obligation of equal or greater magnitude that arises from the structuring
contemplated by this clause (iii)) cannot be avoided by structuring the interest
payments in such manner that they are paid solely by CR US (rather than CR
Mexico); provided that (a) no such notice of redemption shall be given earlier
than 90 days prior to the earliest date on which either Issuer would be
obligated to pay such Additional
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Amounts and (b) at the time such notice is given, the Issuers' obligation to pay
such Additional Amounts remains in effect.
Before any notice of redemption pursuant to this provision is given to the
Trustee or the Holders, the Issuers shall deliver to the Trustee (i) an
Officers' Certificate to the effect that the Issuers' obligation to pay such
Additional Amounts in respect of the Notes cannot be avoided by either or both
of the Issuers taking reasonable measures available to them and (ii) an Opinion
of Mexican Counsel to the effect that either or both the Issuers would be
obligated to pay Additional Amounts in respect of interest payments on the Notes
pursuant to the terms and conditions thereof in excess of those attributable to
Mexican withholding tax on the basis of a rate of 15% imposed on interest
payments to Holders because of a change, amendment, application, expiration or
interpretation regarding laws, rules or regulations of the kind referred to
above. The Trustee shall accept such certificate and opinion as sufficient
evidence of the satisfaction of the conditions precedent set forth in clauses
(i) and (ii) described in the preceding paragraph (subject to the proviso
thereto), in which event it will be conclusive and binding on the Trustee and
the Holders. Such notice of redemption, once given by the Issuers to the Trustee
or Holders, is irrevocable.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder to be redeemed at its registered address.
Notices of redemption may not be conditional. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
Mandatory Redemption
CR US is not required to make mandatory redemption or sinking fund payments
with respect to the Notes. Repurchase at the Option of Holders
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder has the right to
require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Issuers will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Issuers will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Issuers must, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an
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Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Issuers. The Paying Agent will promptly
mail to each Holder of Notes so tendered the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Issuers will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders to require that the Issuers repurchase or
redeem the Notes in the event of a takeover, recapitalization or similar
transaction.
Any future senior Indebtedness of CR US and its Restricted Subsidiaries may
contain prohibitions of certain events that would constitute a Change of
Control. In addition, the exercise by the Holders of their right to require the
Issuers to repurchase the Notes could cause a default under such other senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Issuers. Finally, the Issuers'
ability to pay cash to the Holders upon a repurchase may be limited by the
Issuers' then existing financial resources. See "Risk Factors -- Factors Related
to the Securities -- Potential Inability to Fund a Change of Control Offer."
The Issuers are required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Issuers and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of CR US and its Restricted Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than a Principal or a Related Party of a Principal (as
defined below), (ii) the adoption of a plan relating to the liquidation or
dissolution of CR US, (iii) the consummation of any transaction (including,
without limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of CR US (measured by voting power rather than number of
shares) or (iv) the first day on which a majority of the members of the Board of
Directors of CR US are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of CR US and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder to require the
Issuers to repurchase Notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of CR US and its Restricted
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of CR US who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"Principals" means Douglas Y. Bech, Thomas R. Powers and Walker G. Harman.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or
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(B) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (A).
Asset Sales
The Indenture provides that CR US may not, and may not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) CR US (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 80% of the consideration therefor
received by CR US or such Restricted Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on CR
US's or such Restricted Subsidiary's most recent balance sheet), of CR US or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that are
assumed in connection with such Asset Sale by the transferee of any such assets
pursuant to a novation agreement that releases CR US or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by CR US or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary settlement periods)
converted by CR US or such Restricted Subsidiary into cash or Cash Equivalents
(to the extent of the cash received), shall be deemed to be cash for purposes of
this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuers may apply such Net Proceeds to (i) the acquisition of a majority of
the assets of, or a majority of the Voting Stock of, another business that is a
Permitted Business, (ii) the making of a capital expenditure or the acquisition
of other long-term assets that are used or useful in a Permitted Business or
(iii) the payment, redemption, defeasance or other acquisition or retirement for
value of senior Indebtedness of either Issuer or any Restricted Subsidiary in a
manner that results in the permanent retirement of such Indebtedness and, if
applicable, the permanent reduction of the related loan commitment. Pending the
final application of any such Net Proceeds, the Issuers may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $5.0 million, the Issuers are required to make an offer
to all Holders of Notes and, if the Company is required to do so under the terms
of any other Indebtedness that ranks pari passu to the Notes, to the holders of
such other senior Indebtedness (an "Asset Sale Offer"), to purchase the maximum
principal amount of Notes and principal of such other senior Indebtedness on a
pro rata basis that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture. To
the extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Issuers may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes tendered
into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
Notwithstanding anything to the contrary contained in the Indenture, CR US
or any of its Restricted Subsidiaries may engage in transactions in which (i)
vacation ownership, hotel or other resort properties, parcel(s) of raw land or
the Asset Management Agreement is transferred in exchange for one or more other
vacation ownership, hotel or other resort properties, or (ii) one or more
parcels of raw land owned by CR US or any Subsidiary are transferred in exchange
for one or more other parcels of raw land; provided that if the fair market
value of the assets to be transferred by CR US or such Restricted Subsidiary,
plus the fair market value of any other consideration paid or credited by CR US
or such Restricted Subsidiary (the "Transaction Value") exceeds $1.0 million,
such transaction requires approval of the Board of Directors of CR US. In
addition, each such transaction shall be valued at an amount equal to all
consideration received by CR US or such Restricted Subsidiary in such
transaction, other than the assets received pursuant to such exchange (the
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"Other Consideration") for purposes of determining whether an Asset Sale has
occurred. The Indenture requires that the Other Consideration be in the form of
cash or Cash Equivalents to the extent required by clause (ii) of the first
paragraph of this covenant. If the Other Consideration is of an amount and
character such that such transaction constituted an Asset Sale, then the first
paragraph of this covenant is applicable to any Net Proceeds of such Other
Consideration.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that CR US may not, and may not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of CR US's or any
of its Restricted Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving CR US or
any of its Restricted Subsidiaries) or to the direct or indirect holders of CR
US's or any of its Restricted Subsidiaries' Equity Interests in their capacity
as such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of CR US or to CR US or a Restricted Subsidiary
of CR US); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving CR US) any Equity Interests of CR US or any direct or indirect parent
of CR US or other Affiliate of CR US that is not a Restricted Subsidiary of CR
US (other than any such Equity Interests owned by CR US or any Wholly Owned
Restricted Subsidiary of CR US); (iii) make any payment on or with respect to,
or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except a payment of interest or
principal at Stated Maturity; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) CR US would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by CR US and its Restricted Subsidiaries
after the Issue Date (excluding Restricted Payments permitted by clauses
(ii), (iii) and (iv) of the next succeeding paragraph), is less than the
sum, without duplication, of (i) 50% of the Consolidated Net Income of CR
US for the period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the Issue Date to the end of CR
US's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by CR US since the Issue Date as a contribution to its common equity
capital or from the issue or sale of Equity Interests of CR US (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of CR US that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of CR US), plus (iii) to the extent that
any Restricted Investment that was made after the Issue Date is sold for
cash or Cash Equivalents or otherwise liquidated or repaid for cash or Cash
Equivalents, the lesser of (A) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (B)
the initial amount of such Restricted Investment, plus (iv) to the extent
that any Unrestricted Subsidiary is redesignated as a Restricted Subsidiary
after the Issue Date, the lesser of (A) the fair market value of CR US's or
its Restricted Subsidiary's Investment in such Subsidiary as of the date of
such redesignation or (B) such fair market value as of the date on which
such Subsidiary was originally designated as an Unrestricted Subsidiary.
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The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of CR US in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of CR US) of, other Equity Interests
of CR US (other than any Disqualified Stock) or a substantially concurrent
capital contribution; provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Subsidiary of CR US to the holders of its common Equity Interests on a pro rata
basis; (v) so long as no Default or Event of Default is continuing, loans made
to current officers, directors and employees of CR US or any Restricted
Subsidiary thereof at any one time outstanding not to exceed $2.0 million; and
(vi) repurchases of Capital Stock deemed to occur upon exercise of stock options
to the extent such Capital Stock represents a portion of the price of such
options.
The amount of all Restricted Payments (other than cash) is the fair market
value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by CR US or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment. The fair market value of
any non-cash Restricted Payment shall be determined by the Board of Directors
whose resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
Payment, CR US shall deliver to the Trustee an Officers' Certificate of each
Issuer stating that such Restricted Payment is permitted and setting forth the
basis upon which the calculations required by the covenant "Restricted Payments"
were computed, together with a copy of any fairness opinion or appraisal
required by the Indenture as of the Issue Date.
The Board of Directors of CR US may designate any Restricted Subsidiary to
be an Unrestricted Subsidiary if such designation would not cause a Default;
provided that in no event shall the business operated by CR US or its
Subsidiaries (including the planned development of a new resort at Cozumel,
Mexico and additional vacation ownership units in Los Cabos, Mexico) as of the
Issue Date be transferred to or held by an Unrestricted Subsidiary. For purposes
of making such determination, all outstanding Investments by CR US and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that CR US may not, and may not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt) and that CR US may not issue any Disqualified Stock and may not permit any
of its Subsidiaries to issue any shares of preferred stock; provided, however,
that CR US may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock and CR US's Subsidiaries may incur Indebtedness or issue
preferred stock if the Fixed Charge Coverage Ratio for CR US's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock or preferred stock is issued would have
been at least 1.75 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock or preferred stock had been issued,
as the case may be, at the beginning of such four-quarter period. The Indenture
also provides that CR US may not incur any Indebtedness that is contractually
subordinated in right of payment to any other Indebtedness of
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CR US unless such Indebtedness is also contractually subordinated in right of
payment to the Notes on substantially identical terms; provided, however, that
no Indebtedness of CR US shall be deemed to be contractually subordinated in
right of payment to any other Indebtedness of CR US solely by virtue of being
unsecured.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by CR US or any of its Restricted Subsidiaries of
Indebtedness (including the Cozumel Tranche) under Credit Agreements;
provided that the aggregate principal amount of all Indebtedness (with
letters of credit, guarantees, bid, surety and performance bonds or other
obligations under any Credit Agreement being deemed to have a principal
amount equal to the maximum potential liability of CR US and its Restricted
Subsidiaries thereunder) outstanding under all Credit Agreements after
giving effect to such incurrence does not exceed an amount equal to the
greater of (i) $40.0 million and (ii) 90% of the Vacation Interval
Receivables of CR US and its Restricted Subsidiaries;
(ii) the incurrence by CR US and CR Mexico of Indebtedness represented
by the Notes;
(iii) the incurrence by CR US or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in a Permitted Business,
in an aggregate principal amount, together with any Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (iii), not to exceed $7.5 million at any
time outstanding;
(iv) the incurrence by CR US or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such Restricted Subsidiary prior to such
acquisition by CR US or one of its Restricted Subsidiaries and was not
incurred in connection with, or in contemplation of, such acquisition by CR
US or one of it Restricted Subsidiaries; and provided further that after
giving effect to such acquisition, CR US would be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
this covenant;
(v) the incurrence by CR US or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred (a) under the first paragraph of this covenant or under clauses
(iii), (iv) and (x) of this paragraph or (b) under clause (ii) of this
paragraph, but only to the extent that the net proceeds of such Permitted
Refinancing Indebtedness incurred pursuant to this clause (b) are used to
refund, refinance or replace Notes that are repurchased by the Issuers
under the provisions of the covenant described under the caption
"-- Repurchase at the Option of Holders -- Change of Control";
(vi) the incurrence by CR US or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among CR US and any of its Wholly
Owned Restricted Subsidiaries; provided, however, that (i) if either Issuer
is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes, and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than CR US or a Restricted Subsidiary thereof and (B) any sale
or other transfer of any such Indebtedness to a Person that is not either
CR US or a Wholly Owned Restricted Subsidiary thereof shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by CR US or
such Restricted Subsidiary, as the case may be, that was not permitted by
this clause (vi);
(vii) the incurrence by CR US or any of its Restricted Subsidiaries of
Hedging Obligations incurred in the ordinary course of business for the
purpose of fixing or hedging interest rate risk or currency risk and not
for the purpose of speculation;
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(viii) the guarantee by CR US or any of the Subsidiaries of
Indebtedness of CR US or a Restricted Subsidiary of CR US that was
permitted to be incurred by another provision of this covenant (other than
by clauses (x) or (xi) of this covenant);
(ix) Indebtedness in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds, in each case,
issued in favor of governmental bodies or quasi-governmental bodies and
entered into in the ordinary course of business consistent with past
practice of CR US and its Subsidiaries (or of the vacation ownership
segment of the Predecessor Business), and not in connection with the
borrowing of money or the obtaining of advances or credit;
(x) the incurrence by CR US or CR Mexico of additional Indebtedness in
an aggregate principal amount (or accreted value, as applicable) at any
time outstanding, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any Indebtedness incurred pursuant to this
clause (x), not to exceed $7.5 million; or
(xi) the incurrence by CR US's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of CR US that was not permitted by this clause (xi).
For purposes of determining compliance with this covenant, if an item of
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (i) through (x) above or is entitled to be incurred
pursuant to the first paragraph of this covenant, CR US shall, in its sole
discretion, classify such item of Indebtedness in any manner that complies with
this covenant. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Stock in the form of additional shares of the same class of Disqualified Stock
is not be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Stock for purposes of this covenant; provided, in each such case,
that the amount thereof is included in Fixed Charges of CR US as accrued.
Notwithstanding any of the provisions of this covenant described above, CR
US may not permit any of its Operating Subsidiaries to, directly or indirectly,
incur any Indebtedness in excess of $3.0 million or issue any shares of
preferred stock (whether or not otherwise permitted by this covenant) until such
time as the Regina Operating Subsidiaries have assumed in full the existing
$86.7 million of intercompany indebtedness owed by a separate Operating
Subsidiary to CR Mexico and issued Mirror Notes in favor of CR Mexico in respect
thereof.
Liens
The Indenture provides that CR US may not, and may not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens, unless all payments due under the Notes or the Indenture
are equally and ratably secured with the obligations so secured, in each case,
until such time as such obligations are no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that CR US may not, and may not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other
distributions to CR US or any of its Restricted Subsidiaries (1) on its Capital
Stock or (2) with respect to any other interest or participation in, or measured
by, its profits, or (b) pay any indebtedness owed to CR US or any of its
Restricted Subsidiaries, (ii) make loans or advances to CR US or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to CR
US or any of its Restricted Subsidiaries. However, the foregoing restrictions do
not apply to encumbrances or restrictions existing under or by reason of (a) the
Indenture and the Notes, (b) applicable laws, or governmental regulations or
orders, (c) any instrument
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governing Indebtedness or Capital Stock of a Person acquired by CR US or any of
its Restricted Subsidiaries as in effect at the time of such acquisition (except
to the extent such Indebtedness or Capital Stock was incurred in connection with
or in contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (d) customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices, (e) Capital Lease Obligations or purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired, (f) any
agreement for the sale of a Restricted Subsidiary that restricts distributions
by that Restricted Subsidiary pending its sale, (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being refinanced, (h) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption
"-- Liens" that limits the right of the debtor to dispose of the assets securing
such Indebtedness, (i) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements (or
organizational documents established in connection with a joint venture) and
other similar agreements entered into in the ordinary course of business, (j)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business, or (k) any
encumbrance or restriction pursuant to Indebtedness of Receivables Subsidiaries
that is permitted to be incurred subsequent to the Issue Date pursuant to the
provisions of the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock."
Merger, Consolidation, or Sale of Assets
The Indenture provides that CR US may not consolidate or merge with or into
(whether or not CR US is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another corporation, Person or
entity unless (i) CR US is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than CR US) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than CR US) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of CR US under the Registration Rights Agreement, the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) except in the case of a merger of CR US
with or into a Wholly Owned Restricted Subsidiary of CR US, CR US or the entity
or Person formed by or surviving any such consolidation or merger (if other than
CR US), or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of CR US immediately preceding the transaction and (B) will, at the time
of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that CR US may not, and may not permit any of its
Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
CR US or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by
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CR US or such Restricted Subsidiary with an unrelated Person and (ii) CR US
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders (or to CR US and its Subsidiaries, taken as a whole) of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing. Notwithstanding the
foregoing, the following items shall not be deemed to be Affiliate Transactions:
(i) any employment agreement entered into by CR US or any of its Restricted
Subsidiaries in the ordinary course of business and having terms consistent with
industry practice for reasonably similar companies, (ii) transactions between or
among CR US and/or its Restricted Subsidiaries, (iii) payment of reasonable
directors fees to Persons who are not otherwise Affiliates of CR US, (iv)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "-- Restricted Payments," and (v) sales of
Capital Stock (other than Disqualified Stock or preferred stock) of CR US.
Restrictions on Preferred Stock of Subsidiaries
The Indenture provides that CR US may not permit any of its Restricted
Subsidiaries to issue any preferred stock, or permit any Person to own or hold
an interest in any preferred stock of any such Subsidiary, except for preferred
stock issued to CR US or a Wholly Owned Restricted Subsidiary of CR US.
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Restricted Subsidiaries
The Indenture provides that except as contemplated in clause (viii) of the
definition of Asset Sales, CR US (i) may not, and may not permit any Wholly
Owned Restricted Subsidiary of CR US to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Wholly Owned Restricted
Subsidiary of CR US to any Person (other than CR US or a Wholly Owned Restricted
Subsidiary of CR US), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests in such Wholly Owned Restricted
Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in accordance with the covenant described
above under the caption "-- Asset Sales," (ii) may not permit any Wholly Owned
Restricted Subsidiary of CR US to issue any of its Equity Interests (other than,
if necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to CR US or a Wholly Owned Restricted
Subsidiary of CR US, and (iii) may not transfer, convey, sell, lease or
otherwise dispose of any Equity Interest in CR Mexico.
Business Activities
CR US must, and must cause its Subsidiaries to, conduct its and their
respective businesses such that CR US and its Subsidiaries, taken as a whole,
will at all times remain a Permitted Business.
Limitations on CR Mexico
Notwithstanding anything in the Indenture to the contrary, the Indenture
provides that (i) CR Mexico must at all times continue to be a Wholly Owned
Restricted Subsidiary of CR US, (ii) CR Mexico may not consolidate or merge with
or into any Person other than a Wholly Owned Restricted Subsidiary, (iii) CR US
must cause the Regina Operating Subsidiaries to (a) assume, no later than April
30, 1998, the $86.7 million of intercompany indebtedness owed to CR Mexico by a
separate Operating Subsidiary and (b) issue Mirror Notes in favor of CR Mexico
in respect thereof and (iv) CR Mexico must at all times maintain the Mirror
Notes in aggregate principal amount equal to the amount of outstanding loans
from CR Mexico to the Operating Subsidiaries (to the extent such loans have not
been repaid) and must not incur or suffer to exist any Lien on the Mirror Notes;
provided, however, that this clause (iv) shall cease to apply if CR Mexico
merges with (and the successor entity of such merger is) a Wholly Owned
Restricted Subsidiary that owns,
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either directly or indirectly, substantially all of the assets located in Mexico
of CR US and its Restricted Subsidiaries, taken as a whole.
Payments for Consent
The Indenture provides that neither CR US nor any of its Subsidiaries may,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Issuers must furnish to the Holders (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K with respect to
quarterly periods ending after the Issue Date if the Issuers were required to
file such Forms (including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition and
results of operations of CR US and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of CR US and its Restricted Subsidiaries separate from the financial
condition and results of operations of the Unrestricted Subsidiaries of CR US)
and, with respect to the annual information only, a report thereon by the
Issuers' certified independent accountants and (ii) all current reports that
would be required to be filed with the Commission on Form 8-K if the Issuers
were required to file such reports, in each case within the time periods
specified in the Commission's rules and regulations. In addition, following the
consummation of the exchange offer contemplated by the Notes Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Issuers must file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Issuers have agreed that,
for so long as any Notes remain outstanding, they must furnish to the Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Disposition of Remainder Interest
In accordance with the Indenture, CR US contributed the Remainder Interest
to an unaffiliated charitable institution such that CR US is not required to use
the installment method of accounting with respect to the presentation of its
consolidated financial statements under GAAP.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages or Additional Amounts with respect to, the Notes; (ii)
default in payment when due of the principal of or premium, if any, on the
Notes; (iii) failure by CR US or any of its Subsidiaries to comply with the
provisions described under the captions "-- Repurchase at the Option of
Holders -- Change of Control" (relating to offers to repurchase Notes),
"-- Repurchase at the Option of Holders -- Asset Sales" (relating to offers to
repurchase Notes), "-- Repurchase at the Option of Holders -- Restricted
Payments" or "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
(iv) failure by CR US or any of its Subsidiaries for 60 days after notice to
comply with any of its other covenants or agreements in the Indenture or the
Notes; (v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
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for money borrowed by CR US or any of its Subsidiaries (or the payment of which
is guaranteed by CR US or any of its Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates more than the lesser of (a) the amount of stockholder's
equity on CR US's most recent quarterly balance sheet and (b) $10.0 million;
(vi) failure by CR US or any of its Subsidiaries to pay final, non-appealable
judgments (to the extent not covered by insurance for which there is no dispute
as to coverage) aggregating in excess of the lesser of (a) the amount of
stockholders' equity on CR US's most recent quarterly balance sheet and (b)
$10.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; and (vii) certain events of bankruptcy or insolvency in the United
States or Mexico with respect to CR US or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to CR US, CR Mexico, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of either Issuer with
the intention of avoiding payment of the premium that the Issuers would have had
to pay if the Issuers then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 1, 2000 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of either Issuer with the intention of avoiding the
prohibition on redemption of the Notes prior to December 1, 2000, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporation or stockholder of either
Issuer, as such, shall have any liability for any obligations of the Issuers
under the Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of
their 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, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Issuers' 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 Issuers' obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Issuers may, at their option and at any time, elect to have the
obligations of the Issuers released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any failure 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" no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as are sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest, Liquidated Damages and
Additional Amounts on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Issuers must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Issuers shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Issuers have received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the Issue
Date, there has been a change in the applicable U.S. federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. 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
Issuers shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to U.S. 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 to be applied to such deposit and the
granting of Liens to secure such Indebtedness) or insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) except as contemplated by
clause (iv), such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which CR US or any of its Subsidiaries
is a party or by which CR US or any of its Subsidiaries is bound; (vi) the
Issuers must have delivered to the Trustee an opinion of counsel to the effect
that, assuming no intervening bankruptcy of either Issuer between the date of
deposit and the 91st day following the deposit and assuming no Holder of Notes
is an insider of either Issuer, after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Issuers must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuers with the intent
of preferring the Holders over the other creditors of the Issuers with the
intent of defeating, hindering, delaying or defrauding creditors of CR US or
others; and (viii) the Issuers must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers are not required to transfer or exchange any Note
selected for redemption. Also, the Issuers are not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed. See "Exchange Offer."
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders"), (iii) reduce the rate of or change
the time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder, the
Issuers and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the Issuers' obligations to Holders in the case of a merger or consolidation
or sale of all or substantially all of CR US's assets, to make any change that
would provide any additional rights or benefits to the Holders or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of CR US, 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 is permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default shall occur
(which shall
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not be cured), the Trustee is required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
On December 5, 1997, the Issuers and the Initial Purchaser entered into the
Registration Rights Agreement. Pursuant to the Registration Rights Agreement,
the Issuers agreed, as a part of the offering process, to file with the
Commission this Registration Statement on the appropriate form under the
Securities Act with respect to the Registered Notes. Upon the effectiveness of
this Registration Statement, the Issuers will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for Registered Notes. If (i) the Issuers are not required to file
this Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Transfer Restricted Securities notifies the Issuers
prior to the 20th day following consummation of the Exchange Offer that (A) it
is prohibited by law or Commission policy from participating in the Exchange
Offer (other than through its own acts or omissions constituting gross
negligence or willful misconduct) or (B) that it may not resell the Registered
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in this Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Notes acquired directly from the Issuers or an affiliate of the Issuers,
the Issuers will file with the Commission a Shelf Registration Statement (the
"Shelf Registration Statement") to cover resales of the Notes by the Holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the Notes Shelf Registration Statement. The Issuers must use
their best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a Person other than a broker-dealer for
a Registered Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for a Registered Note, the date on
which such Registered Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in this Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Notes Shelf Registration Statement or (iv) the date on which
such Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Issuers must file
an Exchange Offer Registration Statement with the Commission on or prior to
March 31, 1998, (ii) the Issuers must use their best efforts to have this
Registration Statement declared effective by the Commission on or prior to May
31, 1998, (iii) unless the Exchange Offer would not be permitted by applicable
law or Commission policy, the Issuers must commence the Exchange Offer and use
their best efforts to issue on or prior to 30 business days after the date on
which this Registration Statement was declared effective by the Commission,
Registered Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Issuers must use their best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(provided that the Issuer shall not be obligated to file such Shelf Registration
Statement earlier than March 31, 1998) and to cause the Shelf Registration
Statement to be declared effective by the Commission on or prior to 90 days
after such obligation arises. If (a) the Issuers fail to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Issuers fail to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to this Registration Statement, or (d)
the Shelf Registration Statement or this Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration
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Default"), then the Issuers must pay Liquidated Damages to each Holder of Notes,
with respect to the first 90-day period immediately following the occurrence of
the first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages for all
Registration Defaults of $.25 per week per $1,000 principal amount of Notes. All
accrued Liquidated Damages will be paid by the Issuers on each Damages Payment
Date to the Global Note Holder by wire transfer of immediately available funds
or by federal funds check and to Holders of Certificated Securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes must make certain representations to the Issuers (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and must deliver certain information to be used in connection
with the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Notes included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set forth
above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness, Disqualified Stock or preferred stock incurred
in connection with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness,
Disqualified Stock or preferred stock secured by a Lien encumbering any asset
acquired by such specified Person.
"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 purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control; further provided that GLLC shall not be deemed to be an
Affiliate of CR US and its Subsidiaries so long as GLLC does not own more than
20% of the Capital Stock of CR US and does not own any Capital Stock of a
Subsidiary of CR US.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) (a "Disposition") other than sales of inventory in the ordinary
course of business consistent with industry practice for reasonably similar
companies (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of CR US and its Subsidiaries taken as a
whole are governed by the provisions of the Indenture described above under the
caption "-- Change of Control" and/or the provisions described above under the
caption "-- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by CR US or any of its
Subsidiaries of Equity Interests of any of CR US's Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing, the following items shall not be deemed to be Asset Sales: (i) a
Disposition of assets by CR US to a Wholly Owned Restricted Subsidiary or by a
Wholly Owned Restricted Subsidiary to CR US or to another Wholly Owned
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned
Restricted
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Subsidiary to CR US or to another Wholly Owned Restricted Subsidiary, (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "-- Restricted Payments," (iv) the Disposition of the Remainder
Interest, (v) any Disposition of Cash Equivalents, (vi) any Disposition of
defaulted Vacation Interval Receivables for collection purposes, (vii) the grant
of any Lien securing Indebtedness to the extent such Lien is granted in
compliance with the covenant set forth under "-- Certain Covenants, Liens,"
(viii) the sale of Class B shares of CR S.A. to customers of CR US and its
Subsidiaries consistent with past practices (or similar sales of non-controlling
equity interests in any Restricted Subsidiary that is formed to serve the same
purpose as is served by CR S.A. on the Issue Date so long as such sales are
effected for the same reasons that sales of Class B shares of CR S.A. are made
as of the Issue Date); or (ix) the sales of Vacation Intervals in the ordinary
course of business.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association, sociedad de responsabilidad limitada, or
business entity, any and all shares, partes sociales, interests, participations,
rights or other equivalents (however designated) of corporate stock, (iii) in
the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than twelve months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of twelve months or less
from the date of acquisition, bankers' acceptances with maturities not exceeding
six months and overnight bank deposits, in each case with any domestic
commercial bank having capital and surplus in excess of $500 million and a
Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation and in each case maturing within
six months after the date of acquisition, (vi) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
clauses (i)-(v) of this definition, (vii) Certificados de la Tesoreria de la
Federacion (Cetes) or Bonos de Desarrollo del Gobierno Federal(Bondes) issued by
the Mexican government and maturing not more than 365 days after the acquisition
thereof, (viii) direct obligations of the Mexican government or obligations
fully and unconditionally guaranteed by the Mexican government, (ix)
certificates of deposit, bank promissory notes and bankers' acceptances
denominated in pesos maturing not more than 365 days after the acquisition
thereof and issued or guaranteed by (a) any one of the five largest banks (based
on assets as of the immediately preceding December 31) organized under the laws
of Mexico and (b) one or more other banks organized under the laws of Mexico,
provided that the aggregate amount of certificates of deposit, bank promissory
notes and banker's acceptances issued or guaranteed by any one such bank
referred to in clause (b) shall not exceed $3.0 million at any one time) and, in
each case, which is not under intervention by the CNBV or controlled by the
Fondo Bancario de Proteccion al Ahorro or by any other governmental body or
agency and (x) Mexican pesos; provided that the aggregate amount of Cash
Equivalents held by CR US and its Restricted Subsidiaries at any one time under
clauses (vii), (viii), (ix) and (x) of this definition is limited to $4.0
million.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus the sum, without
duplication of (i) an amount equal to any extraordinary loss plus any net loss,
together with any related provisions for taxes arising on such loss, realized in
connection with an Asset Sale (to the extent such losses (and provisions for
taxes) were deducted in computing such Consolidated Net Income), plus (ii)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, to the extent that such provision for taxes was
included in
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computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Subsidiaries for such period, whether paid or accrued and
whether or not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) Consolidated Lease Expense but only to the
extent such expense exceeds $0.5 million for any four quarter period of such
Person and its Subsidiaries for such period, plus (v) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period), and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (vi) non-cash items increasing
such Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary CR US shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same proportion)
that the Net Income of such Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to CR US or paid to
CR Mexico by such Subsidiary without prior approval (that has not been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Lease Expense" means, with respect to any Person for any
period, the aggregate rental obligations (other than Capital Lease Obligations)
of such Person and its consolidated Restricted Subsidiaries determined on a
consolidated basis in accordance with GAAP payable in respect of such period
under leases of real and/or personal property (net of income from subleases
thereof, but including taxes, insurance, maintenance and similar expenses that
the lessee is obligated to pay under the terms of such leases), whether or not
such obligations are reflected as liabilities or commitments on a consolidated
balance sheet of such Person and its Restricted Subsidiaries or in the notes
thereto.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income (but not loss) of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to CR US or one of its
Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of
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such preferred stock, less (x) all write-ups (other than write-ups resulting
from foreign currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such business)
subsequent to the date of the Indenture in the book value of any asset owned by
such Person or a consolidated Subsidiary of such Person, (y) all investments as
of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CR S.A." means Club Regina S.A. de C.V.
"Credit Agreements" means any credit agreement or similar facility
governing Indebtedness entered into by CR US or any Subsidiary, as any such
agreement or facility may be amended, modified, refinanced or replaced from time
to time (except to the extent that any such amendment, modification, refinancing
or replacement 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 that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require CR US to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that CR US may not repurchase or redeem
any such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"fair market value" means the price that would be paid in an arm's length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests that are paid in
Equity Interests of CR US (other than Disqualified Stock) or to CR US or a
Restricted Subsidiary of CR US, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP and (v) the
Consolidated Lease Expense of such Person and its Restricted Subsidiaries for
such period, but only to the extent such expense exceeds $0.5 million for any
four quarter period.
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"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. If the referent Person or any of
its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by CR US or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under any Interest Rate Agreement or Currency Agreement.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect CR US or any Subsidiary against fluctuation in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other
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obligations), advances or capital contributions (excluding commission, travel
and similar advances to directors, officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If CR US or any Restricted Subsidiary of CR US sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of CR US such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of CR US, CR US shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "-- Restricted Payments."
"Issue Date" means the date of original issuance of the Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Mirror Notes" means, (i) the notes outstanding on the Issue Date that are
issued by a certain Operating Subsidiary in favor of CR Mexico, representing
senior obligations of such Operating Subsidiary, in aggregate principal amount
equal to approximately $86.7 million, (ii) the notes to be issued in replacement
of the Mirror Note specified in clause (i) pursuant to the covenant described
under the caption "Certain Covenants -- Limitations on CR Mexico" and (iii) such
other promissory notes issued by Operating Subsidiaries to CR Mexico in exchange
for future advances from CR Mexico to such Operating Subsidiaries.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities (other than sales of Equity Interests of a
Restricted Subsidiary described in clause (viii) of the definition of Asset
Sale) by such Person or any of its Restricted Subsidiaries or the extinguishment
of any Indebtedness of such Person or any of its Restricted Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"Net Proceeds" means the aggregate cash proceeds received by CR US or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither CR US nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness, other than Indebtedness ("Non-Recourse Indebtedness"), the
incurrence of which also constitutes an Investment permitted to be made under
the covenant "Restricted Payments" or pursuant to clause (k) of the definition
of "Permitted Investments"), (b) is directly or indirectly liable (as a
guarantor or otherwise, other than pursuant to a Guarantee (a "Non-Recourse
Guarantee"), the incurrence of which also constitutes an Investment permitted to
be made under the covenant "Restricted Payment" or pursuant to clause (k) of the
definition of "Permitted Investments"), or (c) constitutes the lender, other
than pursuant to loans ("Non-Recourse Loans") that also constitute an Investment
permitted to be made under the covenant entitled "Restricted Payments" or
pursuant to clause (k) of the definition of "Permitted
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Investments"; and (ii) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of CR US or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity; and (iii) as to which
the lenders have been notified in writing (and, in the case of any Non-Recourse
Indebtedness, Non-Recourse Guarantee or Non-Recourse Loan, have agreed in
writing) that they will not have any recourse to the stock or assets of CR US or
any of its Restricted Subsidiaries (other than the Capital Stock of one or more
Unrestricted Subsidiaries).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means, with respect to a Person, a certificate
signed by two Officers of such Person.
"Opinion of Mexican Counsel" means a written opinion of independent Mexican
counsel admitted to practice in Mexico and of recognized standing in Mexico who
may be counsel to CR US and who shall be reasonably acceptable to Trustee.
"Permitted Business" means, at any time, any business that is primarily in
the vacation ownership business.
"Permitted Investments" means (a) any Investment in CR US or in a Wholly
Owned Restricted Subsidiary of CR US that is engaged in a Permitted Business;
(b) any Investment in Cash Equivalents; (c) any Investment by CR US or any
Subsidiary of CR US in a Person, if as a result of such Investment (i) such
Person becomes a Wholly Owned Restricted Subsidiary of CR US that is engaged in
a business that is related, ancillary or complementary to, and supportive of,
the vacation ownership business or (ii) such Person is engaged in a business
that is related, ancillary or complementary to, and supportive of, the vacation
ownership business and is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
CR US or a Wholly Owned Restricted Subsidiary of CR US that is engaged in a
business that is related, ancillary or complementary to, and supportive of, the
vacation ownership business; (d) any Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock) of
CR US; (f) any Investment in a Receivables Subsidiary of Vacation Interval
Receivables and Related Assets in connection with a Receivables Financing; (g)
accounts receivable created or acquired, and prepaid expenses arising, in the
ordinary course of business; (h) the endorsements of negotiable instruments for
collection or deposit in the ordinary course of business; (i) the incurrence,
assumption or creation of Hedging Obligations that CR US or a Restricted
Subsidiary of CR US enters into in the ordinary course of business; (j) a
promissory note or other payment obligation in the original principal amount of
up to $1.8 million to be received in connection with the disposition of the
Remainder Interest; and (k) other Investments in Equity Interests of any Person
engaged in a business that is related to, ancillary or complementary to, and
supportive of, the vacation ownership business having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (k) that are at the time outstanding,
not to exceed $7.5 million.
"Permitted Liens" means (i) Liens securing the Credit Agreements (including
the Cozumel Tranche); provided that the principal amount of Indebtedness secured
by such Liens is not greater than the principal amount of Indebtedness permitted
to be incurred by clause (i) of the second paragraph of the covenant entitled
"-- Incurrence of Indebtedness and Issuance of Preferred Stock"; (ii) Liens in
favor of CR US or its Wholly Owned Restricted Subsidiaries; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with CR US or any Subsidiary of CR US; provided that such Liens
were in existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of the Person merged into or
consolidated with CR US; (iv) Liens on property existing at the time of
acquisition thereof by CR US or any Subsidiary of CR US, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or
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appeal bonds, performance bonds or other obligations of a like nature incurred
in the ordinary course of business; (vi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clauses (iii), (v) (but only to the
extent the Indebtedness refinanced pursuant to such clause (v) was secured by
Liens), (vii) and (ix) of the second paragraph of the covenant entitled
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" covering only
the assets acquired with such Indebtedness; (vii) Liens existing on the Issue
Date; (viii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (ix) Liens incurred in the ordinary course
of business of CR US or any Subsidiary of CR US with respect to obligations that
do not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by CR US or such
Subsidiary; (x) Liens on assets of or Capital Stock of Unrestricted Subsidiaries
that secure Non-Recourse Debt of Unrestricted Subsidiaries; (xi) Liens in favor
of the Trustee under the Indenture; (xii) judgment Liens with respect to
judgments that do not cause an Event of Default under clause (vi) of the
provision of the Indenture described under "-- Events of Default"; and (xiii)
Liens securing guarantees that are permitted to be incurred under clause (viii)
of the second paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock," but only if the
guarantee proposed to be secured by a Lien relates to Indebtedness which (a)
would be permitted to be secured by a Lien under the terms of the Indenture and
(b) is permitted to be incurred under clauses (i), (iii), (iv), (v), (vii) and
(ix) of the second paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
"Permitted Refinancing Indebtedness" means any Indebtedness of CR US or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of CR US or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that: (i) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Indebtedness does not exceed
the principal amount of (or accreted value, if applicable), plus accrued
interest on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
CR US or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Public Equity Offering" means an underwritten public offering of common
Capital Stock of CR US registered under the Securities Act (other than a public
offering registered on Form S-8 under the Securities Act).
"Receivables Financing" means a financing by CR US or a Restricted
Subsidiary of CR US of Vacation Interval Receivables.
"Receivables Subsidiary" means a Subsidiary which is established for the
limited purpose of acquiring and financing Vacation Interval Receivables and
Related Assets.
"Regina Operating Subsidiaries" means CR Resorts Cabo, S. de R.L. de C.V.,
CR Resorts Puerto Vallarta, S. de R.L. de C.V., CR Resorts Cancun, S. de R.L. de
C.V. and Desarollos Turisticos Integrales Cozumel, S. de R.L. de C.V.
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"Remainder Interest" means the rights under the Trust Agreements to own the
Regina Resorts after August 18, 2027.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock 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 such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of CR US (other than CR
Mexico or any other Subsidiary of CR US that exists on the Issue Date) or any
successor to any of them that is designated by the Board of Directors of CR US
as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the
extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse
Debt; (b) is not party to any agreement, contract, arrangement or understanding
with CR US or any Restricted Subsidiary of CR US unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to CR US
or such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of CR US; (c) is a Person with respect to which
neither CR US nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and (d) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
CR US or any of its Restricted Subsidiaries. Any such designation by the Board
of Directors of CR US shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution of CR US giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Certain Covenants -- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of CR
US as of such date (and, if such Indebtedness is not permitted to be incurred as
of such date under the covenant described under the caption "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," CR US
shall be in default of such covenant). The Board of Directors of CR US may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of CR US of any outstanding Indebtedness
of such Unrestricted Subsidiary and such designation shall only be permitted if
(i) such Indebtedness is permitted under the covenant described under the
caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
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"Vacation Interval Receivables" means the gross receivables of CR US and
its Restricted Subsidiaries arising from sales by CR US and its Restricted
Subsidiaries of Vacation Intervals (but excluding any receivables for service or
other fees in respect of such Vacation Intervals) determined on a consolidated
basis in accordance with GAAP.
Vacation Interval Receivables and Related Assets" means Vacation Interval
Receivables and instruments, chattel paper, obligations, general intangibles and
other similar assets, in each case relating to Vacation Interval Receivables.
"Vacation Intervals" means, for purposes of this "Description of Notes,"
the right to use (whether arising by virtue of a club membership or a deeded
interest in real property or otherwise) a fully-furnished vacation residence for
a specified period each year or otherwise.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares or other
shares or other ownership interests required by applicable law to be held by
third parties (but only to the extent of such legal requirement)) shall at the
time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Registered Notes will be
issued in the form of one or more registered global Notes (collectively, the
"Global Note"). The Global Note will be deposited with, or on behalf of, The
Depositary Trust Company (the "Depositary"), in New York, New York, and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "Global Note Holder").
Notes (i) originally purchased by or transferred to Accredited Investors
who are not qualified institutional buyers (as defined in "Transfer
Restrictions"), or (ii) held by qualified institutional buyers which elect to
take physical delivery of their certificates instead of holding their interest
through the Global Note (and which are thus ineligible to trade through the
Depositary) (collectively referred to herein as the "Non-Global Purchasers")
will be issued, in registered certificated form ("Certificated Securities").
Upon the transfer to a qualified institutional buyer of any Certificated
Security initially issued to a Non-Global Purchaser, such Certificated Security
will, unless the transferee requests otherwise or the Global Note has previously
been exchanged in whole for Certificated Securities, be exchanged for an
interest in the Global Note, subject to the transfer restrictions set forth in
the Indenture.
The Global Note. The Issuers expect that pursuant to procedures established
by the Depositary (i) upon deposit of the Global Note, the Depositary or its
custodian will credit, on its internal system, portions of the Global Note which
shall be comprised of the corresponding respective principal amount of the
Global Note to the respective accounts of persons who have accounts with such
depositary and (ii) ownership of the Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Such accounts initially will be designated by or on behalf of the
Initial Purchaser and ownership of beneficial interests in the, Global Note will
be limited to
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persons who have accounts with the Depositary ("participants") or persons who
hold interests through participants. Qualified institutional buyers may hold
their interests in the Global Note directly through the Depositary if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as the Depositary, or its nominee, is the registered owner or
holder of the Notes, the Depositary or such nominee will be considered the sole
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note will
be able to transfer such interest except in accordance with the Depositary's
applicable procedures, in addition to those provided for under the Indenture
with respect to the Notes.
Payments of the principal of, premium, if any, interest and Liquidated
Damages, if any, on the Global Note will be made to the Depositary or its
nominee, as the case may be, as the registered owner thereof. None of the
Issuers, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interest in the Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Issuers expect that the Depositary or its nominee, upon receipt of any
payment of the principal of, premium, if any, interest and Liquidated Damages,
if any, on the Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Note as shown on the records of the Depositary or its
nominee. The Issuers also expect that payments by participants to owners of
beneficial interests in the Global Note held through such participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in the Depository will be effected in the
ordinary way in accordance with the Depositary rules and be settled in
accordance with the Depository rules in same day funds. If a holder requires
physical delivery of a Certificated Security for any reason, including to sell
Notes to persons in states which require physical delivery of such securities or
to pledge such securities, such holder must transfer its interest in the Global
Note in accordance with the normal procedures of the Depository and with the
procedures set forth in the Indenture.
The Depositary has advised the Issuers that the Depositary will take any
action permitted to be taken by a holder of Notes (including the presentation of
Notes for exchange as described below) only at the direction of one or more
participants to whose account the Depository interests in the Global Note are
credited and only in respect to such portion of Notes, the aggregate principal
amount of Notes as to which such participant or participants have given such
direction. However, if there is an Event of Default under the Indenture, the
Depositary will exchange the Global Note for Certificated Securities, which it
will distribute to its participants.
The Depositary has advised the Issuers as follows: the Depositary is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depositary
was created to hold securities for its participants and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the Depositary's system is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuers or the Trustee
will have any
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responsibility for the performance by the Depositary or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
If the Depositary is at any time unwilling or unable to continue as a
depository for the Global Note and a successor depository is not appointed by
the Company, within 90 days, the Company will issue Certificated Securities in
exchange for the Global Note.
Certificated Securities. If the Depositary is at any time unwilling or
unable to continue as a depositary for the Global Note and a successor
depositary is not appointed by the Issuers, within 90 days, the Issuers will
issue Certificated Securities in exchange for the Global Note.
Same Day Settlement and Payment. The Indenture requires that payments in
respect of the Notes represented by the Global Note (including principal,
premium, if any, interest and Liquidated Damages, if any) be made by wire
transfer of immediately available next day funds to the accounts specified by
the Global Note Holder. With respect to Certificated Securities, the Issuers
will make all payments of principal, premium, if any, interest and Liquidated
Damages, if any, by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. The Issuers expect that
secondary trading in the Certificated Securities will also be settled in
immediately available funds.
TRANSFER RESTRICTIONS ON OUTSTANDING NOTES
The Outstanding Notes have not been registered under the Securities Act and
may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act.
Accordingly, the Outstanding Notes were offered and sold by the Initial
Purchaser only (i) to a limited number of "qualified institutional buyers" (as
defined in Rule 144A promulgated under the Securities Act) ("QIBs") in
compliance with Rule 144A; and (ii) to a limited number of other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7)
promulgated under the Securities Act) ("Accredited Investors") that prior to
their purchase of any Notes delivered to the Initial Purchaser a letter
containing certain representations and agreements.
Each purchaser of Outstanding Notes, by its acceptance thereof, will be
deemed to have acknowledged represented and agreed as follows:
1. It is purchasing the Outstanding Notes for its own account or an
account with respect to which it exercises sole investment discretion and
that it and any such account is (i) a QIB, and is aware that the sale to it
is being made in reliance on Rule 144A; or (ii) an Accredited Investor.
2. It acknowledges that the Outstanding Notes have not been registered
under the Securities Act and may not be offered or sold except as set forth
below.
3. It shall not resell or otherwise transfer the Outstanding Notes
except (i) to the Company or any subsidiary thereof, (ii) to a QIB in
compliance with Rule 144A, (iii) to an Accredited Investor that, prior to
such transfer, furnishes (or has furnished on its behalf by a U.S.
broker-dealer) to the Trustee, a signed letter containing certain
representations and agreements relating to the restrictions on transfer of
the Outstanding Notes (the form of which letter can be obtained from the
Trustee), (iv) pursuant to the exemption from registration provided by Rule
144 promulgated under the Securities Act (if available), or (v) pursuant to
an effective registration under the Securities Act. Each Accredited
Investor that is not a QIB and that is an original purchaser of the
Outstanding Notes will be required to sign an agreement to the foregoing
effect.
4. It agrees that it will give to each person to whom it transfers
Outstanding Notes notice of any restrictions on transfer of Outstanding
Notes.
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5. It understands that the Outstanding Note will bear a legend
substantially to the following effect unless otherwise agreed by the
Company and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF,
THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A PROMULGATED UNDER THE SECURITIES ACT) OR
(B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501
(a)(1), (2), (3) OR (7) PROMULGATED UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER THEREOF OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A PROMULGATED UNDER THE SECURITIES ACT, (C) TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHED (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO
THE TRUSTEE OR WARRANT AGENT A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS SECURITY), (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT (IF AVAILABLE)
OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM
THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN
THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY, IF THE
PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE OR WARRANT AGENT
AND THE ISSUER SUCH CERTIFICATIONS, WRITTEN LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
6. It acknowledges that the Trustee will not be required to accept for
registration of transfer any Outstanding Note acquired by it, except upon
presentation of evidence satisfactory to the Company and the Trustee that
the restrictions set forth herein have been complied with.
7. It acknowledges that the Company, the Initial Purchaser and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that if any of the
acknowledgments, representations or agreements deemed to have been made by
its purchase of Outstanding Notes are no longer accurate, it shall promptly
notify the Company and Initial Purchaser. If it is acquiring any
Outstanding Notes as a fiduciary or agent for one or more investor
accounts, it represents that it has sole investment discretion with respect
to each such account and it has full power to make the foregoing
acknowledgments, representations and agreements on behalf of each account.
The Outstanding Notes may not be sold or transferred to, and each purchaser
by its purchase of the Outstanding Notes shall be deemed to have represented and
covenanted that it is not acquiring the Outstanding Notes for or on behalf of,
any pension or welfare plan (as defined in Section 3 of the Employee Retirement
Income Security Act of 1974 ("ERISA")), except that such a purchase for or on
behalf of a pension or welfare plan shall be permitted:
(1) to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchase in which no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total assets in such
collective
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investment fund and the applicable conditions of Prohibited Transaction
exemption 91-38 issued by the Department of Labor are satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchase in
which, at any time while the Outstanding Notes are outstanding, no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total of all assets
in such pooled separate account and the applicable conditions of Prohibited
Transaction Exemption 90-1 issued by the Department of Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by (A) an
investment advisor registered under the Investment Advisers Act of 1940
that had as of the last day of its most recent fiscal year total assets
under its management and control in excess of $50,000,000 and had
shareholders' or partners' equity in excess of $750,000, as shown in its
most recent balance sheet prepared in accordance with generally accepted
accounting principles, (B) a bank as defined in Section 202(a) of the
Investment Advisers Act of 1940 with equity capital in excess of $1,000,000
as of the last day of its most recent fiscal year or (C) an insurance
company which is qualified under the laws of more than on state to manage,
acquire or dispose of any assets of a plan, which company had, as of the
last day of its most recent fiscal year, net worth in excess of $1,000,000
and which is subject to supervision and examination by a state authority
having supervision over insurance companies, in each case, such investment
advisor, bank or insurance company is otherwise a qualified professional
asset manager, as such term is used in the Prohibited Transaction Exemption
84-14 issued by the Department of Labor, and the assets of such plan when
combined with the assets of other plans established or maintained by the
same employer (or affiliate thereof) or employee organization and managed
by such investment advisor, bank or insurance company, do not represent
more than 20% of the total client assets managed by such investment
advisor, bank or insurance company and the applicable conditions or
Prohibited Transaction Exemption 84-14 are otherwise satisfied; or
(4) to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title 1 of
ERISA or Section 4975 of the Code.
Each purchaser by its purchase of the Outstanding Notes shall also be
deemed to have represented that (a) if it is an insurance company, no part of
the funds to be used to purchase the Outstanding Notes to be purchased by it
constitutes assets allocated to any separate account maintained by it such that
the use of such funds constitutes a transaction in violation of Section 406 of
ERISA or a Prohibited Transaction, as such term is defined in Section 4975 of
the Code, which could be subject to, respectively, a civil penalty assessed
pursuant to Section 502 of ERISA or a tax imposed by Section 4975 of the Code
and (b) if it is not an insurance company, that no part of the funds to be used
to purchase the Outstanding Notes to be purchased by it constitutes assets
allocated to any trust, plan or account which contains the assets of any
employee pension benefit plan, welfare plan or account prohibited pursuant to
the preceding paragraph of these "Transfer Restrictions."
Purchasers are advised that the Prohibited Transaction Exemptions described
above do not relieve a fiduciary or other party from all prohibited transaction
provisions of the Code and ERISA and from ERISA's general fiduciary
responsibilities including, but not limited to, a fiduciary's obligation to
discharge his or her duties solely in the interests of participants and
beneficiaries.
DESCRIPTION OF OTHER DEBT
Bancomer informed the Company that it would make a line of credit of up to
$20.0 million available to the Company. The availability of such line of credit
will be subject to negotiation of its terms, conditions and covenants, and the
receipt of any required approvals. There can be no assurance that the Company
will be able to enter into such revolving credit agreement on favorable terms,
if at all.
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DESCRIPTION OF CAPITAL STOCK AND WARRANTS
The following summary description of the CR US's capital stock does not
purport to be complete and is qualified in its entirety by reference to the CR
US's Amended and Restated Articles of Incorporation (the "Articles") and
By-Laws.
GENERAL
The authorized capital stock of CR US consists of 45 million shares of
Common Stock, par value $0.001 per share ("Common Stock"), of which 10,701,300
are issued and outstanding, and five million shares of Preferred Stock, par
value $0.001 per share ("Preferred Stock"), of which 37,500 shares of Class A
Preferred are issued and outstanding.
COMMON STOCK
Subject to the rights of holders of Preferred Stock then outstanding,
holders of Common Stock are entitled to receive such dividends as may from time
to time be declared by the Board of Directors of CR US. Holders of Common Stock
are entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote. Because holders of Common Stock do not have
cumulative voting rights, the holders of a majority of the shares of Common
Stock represented at a meeting can select the directors, except to the extent
that any future class of Preferred Stock confers the right to elect directors on
the holders of such Preferred Stock. In addition, super majority voting
requirements apply in respect of certain stockholder actions.
Holders of Common Stock have no preemptive rights to subscribe for any
additional securities that CR US may issue and there are no redemption
provisions or sinking fund provisions applicable to the Common Stock, nor is the
Common Stock subject to calls or assessments by CR US. All shares of Common
Stock are legally issued, fully paid and nonassessable. Upon the liquidation,
dissolution or winding up of CR US, holders of the shares of Common Stock are
entitled to share equally, share-for-share, in the assets available for
distribution after payment to all creditors of CR US, subject to the rights, if
any, of the holders of any outstanding shares of Preferred Stock.
PREFERRED STOCK
Pursuant to the Articles, the Board of Directors of CR US is authorized,
subject to any limitations prescribed by law, to provide for the issuance of
shares of Preferred Stock from time to time in one or more series and to
establish the number of shares to be included in each such series and to fix the
designation, powers, preferences, and relative participating, optional and other
special rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. Because the Board of Directors has such
power to establish the powers, preferences and rights of each series, it may
afford the holders of Preferred Stock preferences, powers and rights (including
voting rights) senior to the rights of the holders of Common Stock. Although CR
US has no current intention to issue shares of Preferred Stock other than the
shares of Class A Preferred that have already been issued, the issuance of such
shares, or the issuance of rights to purchase such shares, could be used to
discourage an unsolicited acquisition proposal.
For a description of the 37,500 shares Class A Preferred outstanding, see
"Business -- Description of Purchase Transactions -- Description of Class A
Preferred Stock."
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECTS
The Articles and the Bylaws of CR US contain provisions that could have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of CR
US. The provisions are designed to reduce the vulnerability of CR US to an
unsolicited proposal for a takeover of CR US that does not contemplate the
acquisition of all of its outstanding shares or an unsolicited proposal for the
restructuring
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or sale of all or part of CR US. The provisions are also intended to discourage
certain tactics that may be used in proxy contests. Set forth below is a
description of such provisions in the Articles and the Bylaws. The Board of
Directors has no current plant to formulate or effect additional measures that
could have an anti-takeover effect.
Pursuant to the Articles, directors, other than those, if any, elected by
the holders of Preferred Stock, can be removed from office by the affirmative
vote of the holders of 66 2/3% of the voting power of the then outstanding
shares of capital stock entitled to vote thereon ("Voting Stock"). Vacancies on
the Board of Directors may be filled by the remaining directors without
stockholder approval.
The Articles provide for the Board of Directors to be divided into three
classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders of CR US with
the other classes continuing for the remainder of their respective three-year
term. The classification of the Board of Directors makes it more difficult to
replace the Board of Directors as well as for another party to obtain control of
the CR US by replacing the Board of Directors. Since the Board of Directors has
the power to retain and discharge officers of CR US, these provisions could also
make it more difficult for existing stockholders or another party to effect a
change in management.
CR US is subject to the provisions of Sections 78.411 -- 78.444 of the
NGCL. In general, Section 78.439 prohibits a publicly-held Nevada corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination in which
the person became an interested stockholder is approved in a prescribed manner.
A "business combination" generally includes, without limitation, a merger,
assets or stock sale, or a transaction resulting in a financial benefit to the
interested stockholder. An "interested stockholder" generally is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 10% or more of the corporation's outstanding voting stock.
The Articles provide that, except as otherwise provided for with respect to
the rights of holders of Preferred Stock, no action that is required or
permitted to be taken by the stockholders of CR US at any annual or special
meeting of the stockholders may be effected by written consent of the
stockholders in lieu of a meeting of stockholders, unless the action to be
effected by written consent of the stockholders and the taking of such action by
such written consent has been expressly approved in advance by the Board of
Directors. This provision makes it difficult for stockholders to initiate or
effect an action by written consent, and thereby effect an action opposed by the
Board of Directors. The Articles and Bylaws also provide that special meetings
of stockholders may be called only by the Chairman of the Board of CR US or a
majority of the Board of Directors of CR US. In addition, the Bylaws set forth
an advance notice procedure with regard to business to be brought before an
annual meeting of stockholders of CR US.
The Articles further provide that the Board of Directors, by a majority
vote, may adopt, alter, amend or repeal provisions of the Bylaws. However,
stockholders may only adopt, alter, amend or repeal provisions of the Bylaws by
a vote of 66 2/3% or more of the combined voting power of the then outstanding
Voting Stock. In addition, the Articles provide that whenever any vote of Voting
Stock is required by law to amend, alter, repeal or rescind (a "Change") any
provision of the Articles, then, in addition to any affirmative vote required by
law and any vote of the holders of Preferred Stock, a Change must be approved by
at least a majority of the then-outstanding shares of Voting Stock, voting
together as a single class; provided, however, that (i) the affirmative vote of
66 2/3% or more of the combined voting power of the then-outstanding shares of
Voting Stock is required to Change certain provisions of the Articles, including
the provisions referred to above relating to interested stockholder
transactions, the filling of vacancies on the Board of Directors, the removal of
directors, the limitations on stockholder action by written consent, the calling
of special meetings by stockholders and the approval of amendments to CR US's
Bylaws (unless such Change was first approved by at least two-thirds of the
then-authorized number of directors) and (ii) if at such time there exists one
or more interested stockholders, such Change must also be approved by the
affirmative vote of the holders of at least a majority of the combined voting
power of the outstanding shares of Voting Stock beneficially owned by persons
other than the interested stockholder or any affiliate or associate thereof.
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Before a change of control of CR US may occur, the Articles require a
stockholder vote. Any Business Combination requires the affirmative vote of the
holders of shares representing at least 66 2/3% of the outstanding shares of
capital stock of CR US entitled to vote on the election of directors. The
provisions of the previous sentence do not apply to any Business Combination if
(1) the Business Combination is approved by majority of the Continuing
Directors; or (2) the Business Combination is with another corporation, a
majority of the outstanding shares of stock of which is owned of record or
beneficially, directly or indirectly, by CR US or its subsidiaries and none of
which is owned by a Related Person; or (3) the form of consideration and minimum
price requirements described below are satisfied: (i) in a Business Combination,
the cash or consideration to be paid to CR US's stockholders is either cash or
the same type of consideration used by the Related Person in acquiring the
largest portion of its shares of CR US's voting capital stock prior to the first
public announcement of the proposed Business Combination; and (ii) the fair
market value per share of such payments to CR US's stockholders in a Business
Combination is at least equal in value to the higher of (x) the highest per
share price (including brokerage commissions, soliciting dealers' fees,
dealer-manager compensation and other expenses, and as appropriately adjusted to
take account of stock splits, reverse stock splits, stock dividends and similar
transactions) paid or agreed to be paid by the Related Person to acquire any
shares of CR US's voting capital stock during the two years prior to the first
public announcement of the proposed Business Combination (the "Announcement
Date") or in the transaction in which the Related Person first became a Related
Person (the date of such transaction herein referred to as the "Determination
Date"), whichever is higher, or (y) the fair market value per share of the
Common Stock on the Announcement Date or on the Determination Date, whichever is
higher.
Pursuant to the Articles, the Board of Directors is also authorized to
issue shares of "blank check" preferred stock that may have the effect of
discouraging an unsolicited acquisition proposal.
SHAREHOLDERS AGREEMENT
On January [ ]1998, CR US and stockholders of CR US entered into a
shareholders agreement (the "Shareholders Agreement"), which the Board of
Directors of CR US had approved in January 1998. The Shareholders Agreement has
terms and conditions related to affiliated transactions, management of the
Company and transfers of Common Stock by the holders of such stock that are
subject to such agreement. The Shareholders Agreement terminates upon the
occurrence of any of the following: (i) upon the written agreement of certain of
the parties to the Shareholders Agreement, (ii) the date CR US closes a firm
underwritten, public offering of its voting equity securities, (iii) the
bankruptcy or insolvency of CR US or (iv) the merger, consolidation or sale of
all or substantially all assets of CR US with or to an unaffiliated third party.
REGISTRATION RIGHTS AGREEMENT
On January [ ]1998, CR US and stockholders of CR US entered into a
registration rights agreement (the "Registration Rights Agreement"), which the
Board of Directors of CR US had approved in January 1998. The Registration
Rights Agreement grants stockholders "piggyback" registration rights,
terminating two years after the initial public offering of CR US's Common Stock,
which contain the customary terms and conditions and exceptions including an
underwriters' cutback. The Registration Rights Agreement also grants the
stockholders demand registration rights whereby one demand to register such
stockholders' shares may be made after 180 days after an initial public offering
of CR US's Common Stock, which demand could be initiated by a vote of 51% of the
outstanding shares of Common Stock of CR US that are subject to the Registration
Rights Agreement. The terms of such agreement not related to registration rights
will terminate upon an initial public offering of the Common Stock.
WARRANTS
The Warrants were issued pursuant to a Warrant Agreement (the "Warrant
Agreement"), dated December 5, 1997, between CR US and IBJ Schroder Bank & Trust
Company, as warrant agent (the "Warrant Agent"). A copy of the form of Warrant
Agreement is available to prospective investors as provided under "Available
Information." The following summary of certain provisions of the Warrant
Agreement does
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not purport to be complete and is qualified in its entirety by reference to the
Warrant Agreement, including the definitions therein of certain terms used
below.
General. Each Warrant, when exercised, entitles the holder thereof to
receive fully paid and non-assessable shares of Common Stock of CR US, par value
$.001 per share (the "Warrant Shares") at an exercise price of $.01 per share,
subject to adjustment (the "Exercise Price"). The Exercise Price and the number
of Warrant Shares are both subject to adjustment in certain cases referred to
below. The Warrants entitle the holders thereof to purchase in the aggregate
1,869,962 Warrant Shares, representing approximately 15% of CR US's Common Stock
on a fully diluted basis as of the consummation of the Private Offering (without
giving effect to the Initial Purchaser Warrants and the Stock Payment). See
"Private Offering."
The Warrants are exercisable at any time on or after the earlier to occur
of (i) June 30, 2000, (ii) the occurrence of a Change of Control and (iii) the
date that is 180 days after the consummation of a Public Equity Offering (the
"Exercise Commencement Date"). Notwithstanding the foregoing, if the Company
consummates a Public Equity Offering prior to June 30, 2000, the Exercise
Commencement Date shall be the earlier of the occurrence of a Change of Control
or the date that is 180 days after the consummation of such Public Equity
Offering. Unless exercised, the Warrants will automatically expire on December
1, 2004 (the "Expiration Date"). CR US will give notice of expiration not less
than 90 and not more than 120 days prior to the Expiration Date to the
registered holders of the then outstanding Warrants. If CR US fails to give such
notice, the Warrants will not expire until 90 days after CR US gives such
notice.
The Warrants may be exercised by surrendering to CR US the warrant
certificates evidencing the Warrants to be exercised with the accompanying form
of election to purchase properly completed and executed, together with payment
of the Exercise Price. Payment of the Exercise Price may be made (i) in the form
of cash or by certified or official bank check payable to the order of CR US,
(ii) by tendering Notes having a principal amount at the time of tender equal to
the Exercise Price, (iii) by tendering Warrants having a fair market value equal
to the Exercise Price, or (iv) any combination of cash, Notes or Warrants. Upon
surrender of the Warrant certificate and payment of the Exercise Price, CR US
will deliver or cause to be delivered, to or upon the written order of such
holder, stock certificates representing the number of whole Warrant Shares to
which such holder is entitled. If less than all of the Warrants evidenced by a
warrant certificate are to be exercised, a new warrant certificate will be
issued for the remaining number of Warrants.
No fractional Warrant Shares will be issued upon exercise of the Warrants.
CR US will pay to the holder of the Warrant at the time of exercise an amount in
cash equal to the current market value of any such fractional Warrant Share less
a corresponding fraction of the Exercise Price.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of CR US and have no right to receive dividends. The holders of
the Warrants are not entitled to share in the assets of CR US in the event of
the liquidation, dissolution or winding up of CR US. In the event a bankruptcy
or reorganization is commenced by or against CR US, a bankruptcy court may hold
that unexercised Warrants are executory contracts which may be subject to
rejection by CR US with approval of the bankruptcy court, and the holders of the
Warrants may, even if sufficient funds are available, receive nothing or a
lesser amount as a result of any such bankruptcy case than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such case.
In the event of taxable distribution to holders of Common Stock that
results in an adjustment to the number of Warrant Shares or other consideration
for which a Warrant may be exercised, the holders of the Warrants may, in
certain circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. See "Taxation -- United States
Federal Income Tax Considerations."
Adjustments. The number of Warrant Shares purchasable upon exercise of
Warrants and the Exercise Price are subject to adjustment in certain events
including: (i) the issuance by CR US of dividends (and other distributions) on
its Common Stock payable in Common Stock, (ii) subdivisions, combinations and
reclassifications of Common Stock, (iii) the issuance to all holders of Common
Stock of rights, options or warrants entitling them to subscribe for Common
Stock or securities convertible into, or exchangeable or exercisable for, Common
Stock within 60 days after the record date for such issuance of rights, options
or
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warrants at an offering price (or with an initial conversion, exchange or
exercise price plus such offering price) which is less than the current market
price per share (as defined) of Common Stock, (iv) the distribution to all
holders of Common Stock of any of CR US's assets (including cash), debt
securities, preferred stock or any rights or warrants to purchase any such
securities (excluding those rights and warrants referred to in clause (iii)
above), (v) the issuance of shares of Common Stock for a consideration per share
less than the current market price per share (excluding securities issued in
transactions referred to in clauses (i) through (iv) above), (vi) the issuance
of securities convertible into or for Common Stock for a conversion or exchange
price less than the current market price for a share of Common Stock (excluding
securities issued in transactions referred to in clauses (iii) or (iv) above),
and (vii) certain other events that could have the effect of depriving holders
of the Warrants of the benefit of all or a portion of the purchase rights
evidenced by the Warrants.
No adjustment in the Exercise Price is required unless such adjustment
would require an increase or decrease of at least 1% in the Exercise Price;
provided, however, that any adjustment that is not made will be carried forward
and taken into account in any subsequent adjustment. In addition, CR US may at
any time reduce the Exercise Price to any amount (but not less than the par
value of the Common Stock) for any period of time (but not less than 20 business
days) deemed appropriate by the Board of Directors of CR US.
In the case of certain consolidations or mergers of CR US, or the sale of
all or substantially all of the assets of CR US to another corporation, each
Warrant will thereafter be exercisable for the right to receive the kind and
amount of shares of stock or other securities or property to which such holder
would have been entitled as a result of such consolidation, merger or sale had
the Warrants been exercised immediately prior thereto.
Amendment. From time to time, CR US and the Warrant Agent, without the
consent of the holders of the Warrants, may amend or supplement the Warrant
Agreement for certain purposes, including curing defects or inconsistencies or
making any change that does not materially adversely affect the rights of any
holder. Any amendment or supplement to the Warrant Agreement that has a material
adverse effect on the interests of the holders of the Warrants will require the
written consent of the holders of a majority of the then outstanding Warrants
(excluding Warrants held by CR US or any of its Affiliates). The consent of each
holder of the Warrants affected will be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided in the Warrant Agreement).
Reservation of Shares. CR US has authorized and reserved for issuance and
will at all times keep available such number of Warrant Shares as will be
issuable upon the exercise of all outstanding Warrants. Such shares of Common
Stock, when paid for and issued, will be duly and validly issued, fully paid and
non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issuance thereof.
Registration Rights; Liquidated Damages. Subject to applicable federal and
state securities laws, CR US is required under the terms of a warrant shares
registration rights agreement (the "Warrant Shares Registration Rights
Agreement") to file and use its best efforts to make effective by the Exercise
Commencement Date a shelf registration statement (the "Warrant Shares Shelf
Registration Statement") on the appropriate form covering the issuance of the
Warrant Shares upon the exercise of Warrants and to keep such registration
statement effective for a period of 180 days; provided, however, that CR US
shall not be required to make effective the Warrant Shares Shelf Registration
Statement until the date that is one year after the Issue Date, and any holders
desiring to exercise their Warrants prior to such date (to the extent they are
permitted to do so under the terms of the Warrant Agreement) will be able to
effect such exercise only if an exemption from the registration requirements of
the Securities Act is available to such holders. In addition, CR US, under
certain circumstances, is required under the terms of the Warrant Shares
Registration Rights Agreement to file and use its best efforts to make effective
a shelf registration statement on an appropriate form under the Securities Act
covering the resale of Warrant Shares upon the exercise of the Warrants by
broker-dealers. Holders of the Initial Purchaser Warrants are entitled to
registration rights under the Warrant Shares Registration Rights Agreement.
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If CR US does not comply with its registration obligations under the
Warrant Shares Registration Rights Agreement, it are required to pay liquidated
damages to holders of the Warrants under certain circumstances. Notwithstanding
the foregoing, in no event shall the Warrant Shares Registration Statement be
filed prior to the date on which the Exchange Offer Registration Statement is
declared effective.
Purchasers of Units will be able to exercise the Warrants only if a
registration statement relating to the Warrant Shares underlying the Warrants is
then in effect or if the exercise of such Warrant is exempt from registration
requirements of the Act and only if such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of the Warrants reside. CR US is unable to issue
Warrant Shares to those persons desiring to exercise their Warrants if a
registration statement covering the securities issuable upon the exercise of the
Warrants is not effective (unless the sale and issue of shares upon the exercise
of such Warrant is exempt from the registration requirements of the Act) or if
such securities are not qualified or exempt from qualification in the states in
which the holders of the Warrants reside. See "Risk Factors -- Factors Relating
to the Securities -- Current Registration Required to Exercise Warrants."
In addition, if CR US proposes after the Exercise Commencement Date to
register any of its Common Stock under the Securities Act, either for its own
account or for the account of other security holders, the holders of the
Warrants and the Warrant Shares are entitled to notice of the registration and
are entitled to include, at CR US's sole expense (excluding underwriter
discounts), all or any portion of their Warrants and/or Warrant Shares therein,
subject to pro rata cut-back provisions in the event that the managing
underwriter in any underwritten offering determines that the inclusion of such
Warrants and/or Warrant Shares and any other securities entitled to piggyback
registration rights would adversely affect the offering being registered.
TAXATION
The following summary is based on tax laws of the United States and Mexico
as in effect on the date of this Prospectus, and is subject to changes in United
States or Mexican law, including changes that could have retroactive effect. The
following summary does not take into account or discuss the tax laws of any
country other than the United States or Mexico and does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase the Units. Prospective purchasers in all jurisdictions
are advised to consult their own tax advisors as to the United States, Mexican
or other tax consequences of the purchase, ownership and disposition of the
Securities.
MEXICAN TAX CONSIDERATIONS
Interest. Under Mexico's income tax law, payments of interest made by CR
Mexico in respect of the Notes (including payments of principal in excess of the
issue price of such Notes, which, under Mexican law are deemed to be interest)
to a Holder that is not resident in Mexico (as described below) for tax purposes
(a "non-resident Holder"), will generally be subject to a Mexican withholding
tax assessed at a rate of 15%, if as expected, the Notes are registered in the
Special Section of the Mexican National Registry of Securities and
Intermediaries (the "Special Section of the Registry") maintained by the Mexican
National Banking and Securities Commission. Pursuant to current legislation,
such rate has been reduced to 4.9% (the "Reduced Rate") for payments of interest
made to a non-resident Holder, if (i) the Notes are registered in the Special
Section of the Registry, (ii) the non-resident Holder is the effective
beneficiary of the interest paid, (iii) such non-resident Holder resides in a
country with which Mexico has entered a treaty for the avoidance of double
taxation which is in effect, and (iv) all the requirements specified in such
treaty for the application of lower tax rates therein set-forth are satisfied.
Under Administrative Rule 3.32.11(the "Reduced Rate Rule," which Rule will
become Rule 3.32.9 beginning April 1, 1998, is expected to remain in effect
until March 31, 1999, payments of interest made by CR Mexico in respect of the
Notes to a non-resident Holder, regardless of the place of residence or the tax
regime applicable to said non-resident Holder ultimate beneficiary of the
interest, will be subject to withholding taxes imposed at the Reduced Rate, if
(i) the Notes, as expected, are registered in the Special
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Section of the Registry and copies of approval of such registration and other
information of the Offering are provided to the Ministry of Finance and Public
Credit, (ii) CR Mexico timely files with the Ministry of Finance and Public
Credit, after completion of the transaction described in this Prospectus,
certain information relating to the Offering of the Notes, (iii) CR Mexico
quarterly files with the Ministry of Finance and Public Credit, information
regarding interest paid in the immediately preceding quarter, representing that
no party related to CR Mexico (as such terms are detailed in the Reduced Rate
Rule), jointly or individually, directly or indirectly, is the effective
beneficiary of more than 5% of the aggregate amount of each such interest
payment, and (iv) CR Mexico maintains records which evidence compliance with
item (iii) above. CR Mexico expects that such conditions will be met and,
accordingly, expects to withhold Mexican tax from interest payments on the Notes
made to non-resident Holder at the Reduced Rate during the effectiveness of the
Reduced Rate Rule. Although no assurances can be given that the Reduced Rate
Rule will be extended beyond March 31, 1999, or that an equivalent rule will be
issued and become effective. Under such circumstance, the tax rate described
above should be applicable since the Reduced Rate would be in effect until
January 7, 1999.
Under an income tax treaty between the United States and Mexico (the "Tax
Treaty"), the Mexican withholding tax rate applicable to interest payments on
the Notes made to U.S. Holders (as defined below) which are eligible for
benefits under the Tax Treaty, generally will be limited to either (i) 15%
generally or (ii) 10% if the Notes are considered to be "regularly and
substantially traded on a recognized securities market" or "loans granted by
banks, including investment banks and savings banks, and insurance companies"
within the meaning of the Tax Treaty (which 10% rate will be reduced to 4.9%
beginning on January 1, 1999). However, as of the date of this Prospectus, the
Tax Treaty is not expected generally to have any material effect on the Mexican
tax consequences described herein, because, as described above, under the Law as
currently in effect with respect to a U.S. Holder that meets the Reduced Rate
Requirements described above, CR Mexico will be entitled to withhold taxes in
connection with interest payments under the Notes at the Reduced Rate. From 1999
and beyond, prospective purchasers should consult his/her tax advisor as to the
application of the Tax Treaty.
Payments of interest made by CR Mexico with respect to the Notes to
non-Mexican pension or retirement funds will be exempt from Mexican withholding
taxes, provided that any such fund is (i) duly incorporated pursuant to the laws
of its country of origin, (ii) exempt from income tax in such country, (iii)
registered with the Ministry of Finance and Public Credit for that purpose and
(iv) if Mexican pensions or retirement funds are reciprocally exempt from the
payment of withholding taxes in the jurisdiction of incorporation, of any such
fund.
The Issuers have agreed, subject to specified exceptions and limitations,
to pay Additional Amounts to the Holders of the Notes in respect of the Mexican
withholding taxes mentioned above. If the Issuers pay Additional Amounts in
respect of such Mexican withholding taxes, any refunds of such Additional
Amounts will generally be for the account of the Company. See "Description of
Notes -- Additional Amounts."
Holders or beneficial owners of Notes may be requested, subject to
specified exceptions and limitations, to provide certain information or
documentation necessary to enable the Issuers to establish the appropriate
Mexican withholding tax rate applicable to such Holder or beneficial owners. If
the specified information or documentation concerning the Holder or beneficial
owners when requested, is not provided on a timely basis, the obligations of the
Issuers to pay Additional Amounts will be limited as set forth under
"Description of Notes -- Additional Amounts."
Principal. Under existing Mexican law and regulations, a non-resident
Holder will not be subject to any Mexican taxes in respect of payments of
principal made by the Issuers in connection with the Notes.
Taxation of the Capital Gains. The sale or other disposition of Notes by a
non-resident Holder will not be subject to Mexican taxes.
Other Mexican Taxes. A non-resident Holder will not be liable for estate,
gift, inheritance or similar taxes with respect to its holdings of the Notes.
There are no Mexican stamp, issue, registration or similar taxes payable by a
non-resident Holder with respect to the Notes.
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Tax Definitions. For purposes of Mexican taxation, an individual is a
resident of Mexico if he or she has established his or her residence in Mexico,
unless he or she has resided in another country for more than 183 days, whether
consecutive or not, during a calendar year and can demonstrate that he or she
became a resident of that other country for tax purposes. A Mexican national is
presumed to be a resident of Mexico unless he or she demonstrates the contrary.
A legal entity is a resident of Mexico if it is incorporated under Mexican law.
If a foreign legal entity or individual is deemed to have a permanent
establishment or fixed base in Mexico for tax purposes, all income attributable
to such permanent establishment or fixed base will be subject to Mexican taxes,
in accordance with applicable tax laws.
UNITED STATES FEDERAL INCOME TAXATION CONSIDERATIONS
The following is a summary of the principal U.S. Federal income tax
consequences of the acquisition, ownership and disposition of Units by a U.S.
holder thereof. For purposes of this summary, a "U.S. Holder" is a holder of
Units who is a citizen or resident of the United States, a corporation or
partnership organized in or under the laws of the United States or any political
subdivision thereof or therein, an estate the income of which is subject to U.S.
Federal income taxation regardless of its source or a trust (i) the
administration over which a U.S. court can exercise primary supervision and (ii)
all of the substantial decisions of which one or more U.S. persons have the
authority to control. This summary does not address any U.S. Federal income tax
consequences of the acquisition, ownership and disposition of Units by any
holder of Units that is not a U.S. Holder, and any such prospective holder
should consult its tax advisor with respect to such tax consequences. This
summary applies only to Notes and Warrants held as capital assets and does not
address aspects of U.S. Federal income taxation that may be applicable to
holders that are subject to special tax rules, such as insurance companies,
tax-exempt organizations, banks or dealers in securities or currencies or to
holders that will hold a Unit as a position in a "straddle" or as part of a
"hedging" or "conversion" transaction for U.S. Federal income tax purposes or
that have a "functional currency" other than the U.S. dollar. In addition, this
summary assumes that a U.S. holder will not elect to treat a Unit and a hedge or
combination of hedges with respect thereto as an integrated transaction for U.S.
Federal income tax purposes. Each prospective purchaser should consult its tax
advisor with respect to the U.S. Federal, state, local and foreign tax
consequences of acquiring, holding and disposing of Units.
Allocation of Purchase Price Among Notes and Warrants. For U.S. federal
income tax purposes, each Unit will be treated as an investment unit, consisting
of a Note and a Warrant. The issue price of the Unit will be the first price at
which a substantial portion of the Units are sold in the Offering (excluding
sales to bond houses, brokers or similar persons acting in the capacity of
underwriter, placement agent or wholesaler). The issue price of each Unit is
required to be allocated between the Notes and Warrants based upon their
relative fair market values. That allocation will be used to determine the U.S.
holders' initial tax basis in the Notes, and (as described below) the issue
price of the Notes. Based on the estimate of the relative fair market values of
the Notes and Warrants on the date the Offering was priced, the Company has
determined that $906.50 of the issue price of each Unit is allocable to the Note
and $93.50 of such price is allocable to the Warrant comprising each Unit. The
Company's allocation will not be binding on the IRS, which may challenge such
allocation. However, a U.S. Holder is bound by the Company's allocation, unless
a disclosure statement is attached to the timely filed U.S. federal income tax
return of the U.S. Holder for its taxable year in which it acquires the Units.
EXCHANGE OFFER
The Company believes this offer to exchange Outstanding Notes for Exchange
Notes pursuant to the Exchange Offer should not constitute a material
modification of the terms of the Outstanding Notes. Thus, pursuant to the
Exchange Offer U.S. holders of the Notes should not recognize taxable gain or
loss upon the exchange of the Notes for the Registered Notes. For purposes of
determining gain or loss upon the subsequent sale or exchange of the Notes, a
Holder's basis in the Notes should be the same as such Holder's basis in the
Registered Notes exchanged therefor. In addition, Holders should be considered
to have held the Notes from the time of the original acquisition of the
Registered Notes.
112
<PAGE> 124
Effect of Change of Control. Upon a Change of Control, the Company is
required to offer to redeem all outstanding Notes for a price equal to 101% of
the principal amount thereof plus accrued and unpaid interest. Under the
Regulations, such Change of Control redemption requirements will not affect the
yield or maturity date of the Notes unless, based on all the facts and
circumstances of the Issue Date, it was more likely than not that a Change of
Control giving rise to the redemption would occur. The Company will not treat
the Change of Control redemption provisions of the Notes as affecting the
calculation of the yield to maturity of any Note.
Optional Redemption. The Company, at its option, may redeem part or all of
the Notes at any time on or after December 1, 2000, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of redemption. In addition, the Company may, at its option, redeem
up to 35% of the aggregate principal amount of the Notes at a redemption price
equal to 113% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, from the net cash proceeds of a Public Equity
Offering, provided that at least $65.0 million in principal amount of the Notes
remains outstanding. The Regulations provide that, for purposes of calculating
yield and maturity, an issuer will be treated as exercising any such option if
its exercise would lower the yield of the debt instrument. A redemption of Notes
at the optional redemption prices, however, would increase the effective yield
of the debt instrument as calculated from the Issue Date. The Company does not
currently intend to exercise such options with respect to the Notes and, in
accordance with the Regulations, as of the Issue Date, the optional redemption
provisions will not be taken in account in calculating the yield to maturity of
the Notes.
Original Issue Discount. The Notes will be issued with original issue
discount ("OID") for U.S. federal income tax purposes. The amount of OID on a
Note will equal the excess of the principal amount due at maturity on the Note
over its "issue price." The "issue price" of a Note will be that portion of the
issue price of the Unit that is allocable to the Note under the rules described
in "-- Allocation of Purchase Among Notes and Warrants," above.
Each U.S. Holder (whether reporting on the cash or accrual basis of
accounting for tax purposes) will be required to include in taxable income for
any particular taxable year the daily portion of the OID described in the
preceding paragraph that accrues on the Note for each day during the taxable
year on which such U.S. Holder holds the Note, and in advance of the receipt of
the cash to which such OID is attributable. The daily portion is determined by
allocating to each day of an accrual period (generally, in the case of the
Notes, the initial period beginning on the Issue Date and ending on June 1, 1998
and each subsequent six-month period thereafter ending on June 1 and December 1)
a pro rata portion of the OID allocable to such accrual period. The amount of
OID allocable to an accrual period equals the excess of (i) the product of the
"adjusted issue price" of the Note at the beginning of the accrual period and
the Note's "yield to maturity" over (ii) the amount of any stated interest
payments allocable to such accrual period. The "yield to maturity" of the Notes
is the discount rate that, when applied to all payments due under the Notes
(including stated interest payments), results in a present value equal to the
issue price of the Notes. The "adjusted issue price" of a Note at the beginning
of an accrual period will equal its issue price, increased by the aggregate
amount of OID that has accrued on the Note in all prior accrual periods, and
decreased by any principal payments made on the Note during all prior accrual
periods.
Interest. Stated interest paid on a Note will be includible in a U.S.
Holder's gross income as ordinary interest income in accordance with U.S.
Holder's usual method of tax accounting. If Liquidated Damages are paid,
although not free from doubt, such payment should be taxable to a U.S. Holder as
ordinary income at the time it accrues or is received in accordance with such
holder's regular method of accounting. It is possible, however, that the
Internal Revenue Service may take a different position, in which case the timing
and amount of income inclusion may be different. For purposes of the following
discussion, the term "interest" includes Liquidated Damages.
Although not free from doubt, interest (including any OID and market
discount for the same accrued period) paid by CR Mexico with respect to the
Notes will likely be treated as foreign source income for U.S. Federal income
tax purposes. If interest (including any OID and market discount for the same
accrued period) on the Notes is paid by CR US, although not free from doubt, it
will likely be treated as U.S. source
113
<PAGE> 125
income, unless CR US meets the Active Foreign Business Test. The "Active Foreign
Business Test" is met if at least 80% of the gross income of CR US and its
direct or indirect subsidiaries during a certain testing period is non-U.S.
source income attributable to the active conduct of a trade or business outside
the United States. Because of the factual nature of the Active Foreign Business
Test, it cannot be predicted with certainty whether or not such test would be
met in the future. Each holder of a Note is urged to consult its own tax advisor
regarding the sourcing of the interest paid by CR US or CR Mexico, as the case
may be.
Market Discount. If a U.S. Holder purchases a Note for less than the stated
redemption price at maturity (the sum of all payments on the Note other than
qualified stated interest), the difference is considered "market discount,"
unless such difference is de minimis. A discount will be considered de minimis
if it is less than one-fourth ( 1/4) of one percent of the Note Issue Price
multiplied by the number of complete years to maturity (after the Holder
acquires the Note). Under the market discount rules, any gain realized by the
U.S. Holder on a taxable disposition of a Note having "market discount," as well
as on any partial principal payment made with respect to such Note, will be
treated as ordinary income to the extent of the then "accrued market discount"
of the Note. An overview of the rules concerning the calculation of "accrued
market discount" is set forth in the paragraph immediately below. In addition,
the U.S. Holder of such Note may be required to defer the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry a Note.
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Note, unless the U.S. Holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the U.S. Holder's acquisition of the Note through the
maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by
the U.S. Holder. Accrual of market discount will not cause the accrued amounts
to be included currently in a U.S. Holder's taxable income, in the absence of a
disposition of, or principal payment on, the Note. However, a U.S. Holder of a
Note may elect to include market discount in income currently as it accrues on
either a ratable or constant interest rate method. In such event, interest
expense relating to the acquisition of a Note which would otherwise be deferred
would be currently deductible to the extent otherwise permitted by the Code. The
election to include market discount in income currently, once made, applies to
all market discount obligations acquired by such holder on or after the first
day of the first taxable year to which the election applies, and may not be
revoked without the consent of the Internal Revenue Service. Accrued market
discount which is included in a U.S. Holder's gross income will increase the
adjusted tax basis of the Note in the hands of the U.S. Holder.
Amortization of Bond Premium. If a subsequent U.S. Holder acquires a Note
for an amount which is greater than the amount payment at maturity, such holder
will be considered to have purchased such Note with "amortizable bond premium"
equal to the amount of such excess. The U.S. Holder may elect to amortize the
premium, using a constant yield method employing six-month compounding, over the
period from the acquisition date to the maturity date of the Note. The "amount
payable at maturity" will be determined as of an earlier call date, using the
call price payable on such earlier date, if the combination of such earlier date
and call price will produce a smaller amortizable bond premium than would result
from using the scheduled maturity date and its amount payable. If an earlier
call date is used and the Note is not called, the Note will be treated as having
matured on such earlier call date and then as having been reissued on such date
for the amount so payable. Amortized amounts may be offset only against interest
payments due under the Note and will reduce the U.S. Holder's adjusted tax basis
in the Note to the extent so used.
Once made, an election to amortize and offset interest on bonds, such as
the Notes, will apply to all bonds in respect of which the election was made
that were owned by the taxpayer on the first day of the taxable year to which
the election relates and to all bonds of such class or classes subsequently
acquired by such taxpayer. Such election may only be revoked with the consent of
the Service. If a U.S. Holder of a Note does not elect to amortize the premium,
the premium will decrease the gain or increase the loss which would otherwise be
recognized upon disposition of the Note.
114
<PAGE> 126
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of a
Note, a U.S. Holder will recognize taxable gain or loss equal to the difference,
if any, between the amount realized on the sale, exchange or retirement (other
than amounts attributable to accrued but unpaid interest or OID) and the U.S.
Holder's adjusted tax basis in such Note. A U.S. Holder's adjusted tax basis in
a Note generally will equal the issue price of such Note, increased by any OID
on the Notes previously included in such Holder's income, and reduced by any
payments (other than payments of qualified stated interest) previously made on
such Note. Such gain or loss generally will be capital gain or loss, and will be
long-term capital gain or loss if the Note has been held for more than one year
at the time of such sale, exchange or retirement. Long-term capital gain
realized by an individual U.S. Holder is generally subject to a maximum tax rate
of 28% in respect of property held for more than one year and to the maximum
rate of 20% in respect of property held in excess of 18 months. Any gain on a
sale, exchange or retirement of a Note generally will be treated as U.S. source
income. It is currently unclear whether any loss realized by a U.S. Holder would
be treated as U.S. source or foreign source.
Effect of Mexican Withholding Taxes. As described above under "-- Mexican
Tax Considerations," the payment of interest by CR Mexico with respect to the
Notes currently will be subject to a Mexican withholding tax. U.S. Holders of
Notes will be required for U.S. Federal income tax purposes to include in their
U.S. taxable income (in accordance with their usual method of tax accounting)
the amount of all Mexican taxes being withheld by the Issuers, along with
payments of interest with respect to the Notes. In addition, the Additional
Amounts that the Issuers are required to pay in respect of such Mexican
withholding taxes must also be included in the U.S. Holder's taxable income (in
accordance with its usual method of tax accounting). Mexican withholding taxes
paid by the Issuers on behalf of a U.S. Holder will be eligible for credit
against such U.S. Holder's U.S. Federal income tax liability, subject to
generally applicable limitations and, at the election of the U.S. Holder, for
deduction in computing such U.S. Holder's taxable income. For purposes of
computing the foreign tax credit, interest paid on a Note generally will
constitute "passive income" or, in the case of certain holders, "financial
services income," unless Mexican withholding taxes are imposed at a rate of 5%
or more, in which case interest paid on a Note generally will be considered
"high withholding tax interest." U.S. Holders are urged to consult their tax
advisors regarding the effect of Mexican withholding taxes and of the payment of
Additional Amounts on the amounts includible in the U.S. taxable income, as
described above, and the availability and the amount of any tax credit
attributable to such Mexican taxes.
Tax Treatment of Warrants. A. U.S. Holder will recognize gain or loss upon
the sale, redemption, lapse or other taxable disposition of a Warrant in an
amount equal to the difference between the amount of cash and the fair market
value of other property received (if any) by the U.S. Holder and the U.S.
Holder's tax basis in the Warrant. A U.S. Holder's tax basis in a Warrant will
equal that portion of the issue price of the unit that is allocated to the
Warrant under the rules described in "-- Allocation of Purchase Price Among
Notes and Warrants," above.
The cash exercise of a Warrant will not be taxable to the exercising U.S.
Holder, except with respect to cash, if any, received in lieu of a fractional
share. Although the law is not entirely clear, the surrender of one or more
Warrants in payment of the exercise price of another Warrant will likely result
in taxable gain or loss to the U.S. Holder in an amount equal to the difference
between (i) the amount of the exercise price so paid and (ii) the U.S. Holder's
tax basis in the Warrants used to pay the exercise price. A U.S. Holder will
have a tax basis in the shares of Common Stock received upon exercise of a
Warrant which equals such U.S. Holder's tax basis in the warrant exercised, plus
the amount of cash and the U.S. Holder's tax basis in any Warrants used to pay
the exercise price, plus the amount of gain (or minus the amount of loss)
recognized by the U.S. Holder on any Warrants used to pay the exercise price, as
adjusted for cash (if any) received in lieu of a fractional share. A U.S. holder
will have a holding period in shares of Common Stock acquired upon exercise of a
Warrant which commences on the day after the date of exercise of the Warrant.
An adjustment to the exercise price or conversion ratio of the Warrants, or
the failure to make such adjustments, may in certain circumstances result in
constructive distributions to the holders of the Warrants which could be taxable
as dividends under Section 305 of the Code. In such event, a holder's tax basis
in the Warrant would be increased by the amount of any such dividend.
115
<PAGE> 127
If the exercise price of the Warrants is a nominal amount, it may be
possible that the Warrants will be considered to be constructively exercised for
federal income tax purposes on the day on which the Warrants first become
exercisable or possibly on the day of issuance. In that event, (i) no gain or
loss will be recognized to a holder on such deemed exercise or upon actual
exercise of the Warrants; (ii) the adjusted basis of the common stock deemed
received for federal income tax purposes on the constructive exercise of the
Warrants will be equal to the adjusted basis in the Warrants until the Warrants
are actually exercised (and the exercise price paid) at which time such basis
would be increased by the exercise price of the Warrants; and (iii) the holding
period of the Common Stock deemed received for federal income tax purposes on
the constructive exercise of the Warrants will begin on the day following the
day of such constructive exercise.
U.S. Backup Withholding Tax and Information Reporting. A 31% backup
withholding tax and information reporting requirement applies to certain
payments of principal of, and interest on, an obligation and to proceeds of the
sale or redemption of an obligation, to certain non-corporate U.S. Holders. The
payor will be required to withhold 31% of any such payment on a Note within the
United States to a U.S. Holder (other than an "exempt recipient," such as a
corporation) if such U.S. Holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with, or establish an
exemption from, such backup withholding requirements.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE NOTEHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES TO THE PROSPECTIVE NOTEHOLDER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR NON-U.S. INCOME TAX LAWS AND
ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
LEGAL MATTERS
Certain legal matters regarding the Notes will be passed upon for the
Issuers by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Houston, Texas. Julien R.
Smythe, an associate of Akin, Gump, Strauss, Hauer & Feld, L.L.P. owns 10,000
shares of CR US Common Stock. Certain other matters in connection with Mexican
law will be passed upon by Santamarina y Steta, S.C. for the Issuers.
EXPERTS
The consolidated balance sheets of Club Regina Resorts, Inc. of December
31, 1997 and August 18, 1997 and the consolidated statements of operations,
shareholders' investment and cash flows for the year ended December 31, 1997,
for the period from January 1, 1997 through August 18, 1997 and for the period
August 19, through December 31, 1997; the consolidated balance sheets of Club
Regina Resorts Capital, S. de R.L. de C.V. at December 31, 1997 and August 18,
1997 and the consolidated statements of income and retained earnings and cash
flows for the period August 19, 1997 through December 31, 1997; the statements
of operations and cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V.
and Subsidiaries for the years ended December 31, 1996 and 1995; and the
statements of operations and cash flows of Desarrollos Turisticos Bancomer, S.A.
de C.V. and Subsidiaries for the period January 1, 1997 to August 18, 1997,
appearing in this Registration Statement have been audited by Ernst & Young LLP,
independent certified public accountants, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
116
<PAGE> 128
DEFINED TERMS
ARDA -- the American Resort Development Association.
Member -- an owner of a Vacation Interval.
RCI -- Resort Condominiums International, Inc.
Remainder Rights -- the interests in the Company's vacation ownership
condominium units held under the Trust Agreements which allow the owners of such
interest to use such condominium units after the 50 year right to use period
held by the Operating Subsidiaries. See "The Business -- Description of Purchase
Transactions -- Description of Trusts."
Remainder Disposition -- CR US's contribution of the Remainder Rights to an
unaffiliated charitable institution such that the audited consolidated financial
statements of the Company for the period ended December 31, 1997 and for future
periods use the full accrual method of accounting in accordance with Statement
of Financial Accounting Standards No. 66 "Accounting for Sales of Real Estate"
rather than the installment method of accounting. See "Description of Notes --
Disposition of Remainder Interest."
Vacation Interval -- the right to use a fully-furnished vacation residence
for one week each year or in alternating years, which right may only be
exercised by Class B shareholders of Club Regina, S.A. de C.V., a Mexican
corporation and an indirect subsidiary of CR US ("CR"), upon payment of an
annual service fee to CR.
UDI -- an obligation denominated in pesos, the value of which is adjusted
by the same percentage as the percentage change of the Indice Nacional de
Precios al Consumidor, or the Mexican Consumer Price Index. Upon the
establishment of the UDI, one UDI was worth one Peso.
Vacation Interval Receivable -- the obligation to pay the remaining portion
of the purchase price of a Vacation Interval. Almost all Vacation Interval
Receivables are evidenced by a promissory note. Upon repayment of such note, the
Member is entitled to receive a Class B Share of CR.
117
<PAGE> 129
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CLUB REGINA RESORTS, INC.
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets as of December 31, 1997 and
August 18, 1997........................................ F-3
Consolidated Statement of Operations for the year ended
December 31, 1997, for the period January 1, 1997
through August 18, 1997 and for the period August 19,
1997 and December 31, 1997............................. F-4
Consolidated Statement of Shareholders' Investment for the
year ended December 31, 1997, for the period January 1,
1997 through August 18, 1997 and for the period August
19, 1997 and December 31, 1997......................... F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1997...................................... F-6
Notes to Consolidated Financial Statements................ F-7
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A FINANCE
SUBSIDIARY)
Report of Independent Certified Public Accountants........ F-18
Consolidated Balance Sheets as of December 31, 1997 and
August 18, 1997........................................ F-19
Consolidated Statement of Income and Retained Earnings for
the period August 19, 1997 through December 31, 1997... F-20
Consolidated Statement of Cash Flows for the period August
19, 1997 through December 31, 1997..................... F-21
Notes to Consolidated Financial Statements................ F-22
FINANCIAL STATEMENTS OF PREDECESSOR BUSINESS -- DESARROLLOS
TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Report of Independent Certified Public Accountants........ F-26
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995............................. F-27
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995............................. F-28
Notes to Consolidated Financial Statements................ F-29
Report of Independent Certified Public Accountants........ F-35
Consolidated Statement of Operations for the Period
January 1, 1997 through August 18, 1997................ F-36
Consolidated Statement of Cash Flows for the Period
January 1, 1997 through August 18, 1997................ F-37
Notes to Consolidated Financial Statements................ F-38
</TABLE>
F-1
<PAGE> 130
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
Club Regina Resorts, Inc.
We have audited the accompanying consolidated balance sheets of Club Regina
Resorts, Inc. and subsidiaries (the Company) as of December 31 and August 18,
1997 and the related consolidated statements of operations, shareholder's equity
and cash flows for the year ended December 31, 1997, for the period January 1,
1997 through August 18, 1997 and for the period August 19, 1997 through December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Club Regina
Resorts, Inc. and subsidiaries at December 31, 1997 and August 18, 1997, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, for the period January 1, 1997 through August 18, 1997 and
for the period August 19, 1997 through December 31, 1997 in conformity with
generally accepted accounting principles.
Miami, Florida
March 20, 1998 except for
the second and third paragraphs
of Note 10 as to which the
date is March 27, 1998
F-2
<PAGE> 131
CLUB REGINA RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 18,
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 8,994,591 $ 2,055,799
Vacation interval receivables and other trade receivables,
net....................................................... 39,951,550 37,180,278
Reimbursements receivable from Starwood Lodging Corporation
for shared acquisition costs.............................. 1,876,956 1,300,000
Inventories................................................. 964,301 806,519
Refundable Mexican taxes.................................... 3,716,381 742,227
Office furniture and equipment.............................. 1,518,194 776,240
Land held for vacation ownership development................ 12,279,821 12,237,328
Investment in a 50% held company............................ 2,474,947 2,486,956
Cost of unsold vacation ownership intervals and related club
memberships............................................... 31,611,780 33,804,862
Hotel asset management agreement............................ 4,000,000 4,000,000
Deferred loan costs, net of $440,348 of accumulated
amortization.............................................. 7,900,315 --
Prepaid and other assets.................................... 1,575,085 359,201
------------ -----------
Total assets $116,863,921 $95,749,410
============ ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
LIABILITIES
Accounts payable and accrued liabilities.................... $ 7,654,211 $ 3,412,477
Payable to a bank........................................... 1,000,000 82,953,633
Senior Notes Payable, due 2004, net of unamortized original
issue discount of $9,220,025.............................. 90,779,975 --
Notes payable to shareholder................................ -- 1,150,000
Mexican taxes payable....................................... 1,319,079 2,945,873
Unearned services fees...................................... 3,058,883 1,852,852
Subordinated notes payable to shareholders.................. -- 3,750,000
------------ -----------
Total liabilities........................................... 103,812,148 96,064,835
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT (DEFICIT)
Common stock, par value $.001, 45,000,000 shares authorized,
shares issued and outstanding 10,701,000 and 10,100,000,
respectively.............................................. 10,701 10,100
Preferred stock, par value $.001, 5,000,000 shares
authorized, shares issued and outstanding 37,500.......... 38 --
Paid-in capital............................................. 7,045,885 4,275
Common Stock Warrants to purchase 1,869,962 Common shares... 9,331,110 --
Accumulated deficit......................................... (3,335,961) (329,800)
------------ -----------
Total shareholders' investment (deficit).................... 13,051,773 (315,425)
------------ -----------
Total liabilities and shareholders' investment (deficit).... $116,863,921 $95,749,410
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 132
CLUB REGINA RESORTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR AUGUST 19, 1997 JANUARY 1, 1997
ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, AUGUST 18,
1997 1997 1997
------------ ----------------- ---------------
<S> <C> <C> <C>
REVENUES:
Vacation interval sales......................... $19,239,499 $19,239,499
Rental and service fee income................... 5,129,427 5,129,427
Interest income on vacation interval
receivables................................... 994,897 994,897
Other interest income........................... 731,873 731,873
Other income.................................... 184,596 184,596
----------- -----------
Total revenues........................ 26,280,292 26,280,292
COST AND OPERATING EXPENSES:
Cost of vacation interval sales................. 5,667,161 5,667,161
Provision for doubtful accounts................. 2,348,960 2,348,960
Advertising, sales and marketing................ 6,367,571 6,367,571
Operating, general and administrative........... 8,240,652 7,987,142 $ 253,510
Financing Expenses:
Interest...................................... 3,726,276 3,649,986 76,290
Amortization of deferred loan costs........... 551,433 551,433
Depreciation.................................... 60,540 60,540
----------- ----------- ---------
Total costs and operating expenses.... 26,962,593 26,632,793 329,800
----------- ----------- ---------
Loss from operations............................ (682,301) (352,501) (329,800)
Exchange gains (losses), net.................... (991,879) (991,879)
----------- ----------- ---------
Loss before taxes............................... (1,674,180) (1,344,380) (329,800)
U.S. Income taxes............................... -- -- --
Foreign taxes................................... 1,661,781 1,661,781
----------- ----------- ---------
Net loss before preferred dividends............. (3,335,961) (3,006,161) (329,800)
Preferred stock dividends....................... 232,031 232,031
----------- ----------- ---------
Loss attributable to common shareholders........ $(3,567,992) $(3,238,192) $(329,800)
=========== =========== =========
Basic and diluted loss per share................ $ (.40)
===========
Weighted average number of common shares
outstanding................................... 8,840,751
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 133
CLUB REGINA RESORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS INVESTMENT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WARRANTS TOTAL
ADDITIONAL TO PURCHASE SHAREHOLDERS'
COMMON PREFERRED PAID-IN COMMON ACCUMULATED INVESTMENT
STOCK STOCK CAPITAL STOCK DEFICIT (DEFICIT)
------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issue of 10,100,000 common
shares................... $10,100 $ 4,275 $ 14,375
Net loss for the period
January 1, 1997
through August 18,
1997.................. $ (329,800) (329,800)
------- ------ ---------- ---------- ----------- -----------
Balance, August 18, 1997... 10,100 4,275 (329,800) (315,425)
Issue of 37,500 preferred
shares in exchange for
stockholder loans of
$3,750,000............ $ 38 3,749,962 3,750,000
Issue of 200,000 common
shares................ 200 999,800 1,000,000
Issue of 258,450 common
shares in connection
with Senior note
offering, net of issue
costs................. 258 1,291,991 1,292,249
Issue of 142,850 common
shares as
consideration for
purchase transaction
fees.................. 143 999,857 1,000,000
Issue of warrants to
purchase 1,819,962
common shares, net of
issue costs........... $9,331,110 9,331,110
Net loss for the period
August 18, 1997
through December 31,
1997.................. (3,006,161) (3,006,161)
------- ------ ---------- ---------- ----------- -----------
Balance, end of year....... $10,701 $ 38 $7,045,885 $9,331,110 $(3,335,961) $13,051,773
======= ====== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 134
CLUB REGINA RESORTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 19, JANUARY 1,
YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, AUGUST 18,
1997 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Capital contributions..................................... $ 1,014,375 $ 1,000,000 $ 14,375
Proceeds from shareholder loans........................... 4,900,000 4,900,000
Proceeds from issuance of notes payable to a bank in
connection with the Purchase Transactions............... 82,953,633 82,953,633
Additional bank loan...................................... 1,000,000 1,000,000
Repayment of bank loan.................................... (82,953,633) (82,953,633)
Issuance of Senior Notes, less related expenses........... 93,951,586 93,951,586
Repayment of shareholder loans............................ (1,150,000) (1,150,000)
------------ ------------ -----------
Net cash provided by financing activities................. 99,715,961 11,847,953 87,868,008
INVESTING ACTIVITIES
Purchase of Vacation Ownership business, net of cash
acquired................................................ (85,482,409) (85,482,409)
Land held for vacation ownership development.............. (442,493) (442,493)
Additions to office furniture, equipment and new leasehold
improvements............................................ (802,494) (802,494)
------------ ------------ -----------
Net cash used in investing activities..................... (86,727,396) (1,244,987) (85,482,409)
OPERATING ACTIVITIES
Net loss.................................................. (3,335,961) (1,706,161) (329,800)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization............................. 611,973 611,973
Provision for doubtful accounts......................... 2,348,960 2,348,960
Equity loss in investment............................... 12,009 12,009
Changes in other operating assets and liabilities:
Vacation interval receivables and other trade
receivables........................................... (5,120,232) (5,120,232)
Reimbursement receivable from Starwood Lodging Corp..... (576,956) (576,956)
Inventories............................................. (157,782) (157,782)
Refundable Mexican taxes................................ (2,974,154) (2,974,154)
Cost of unsold vacation ownership intervals and related
club memberships...................................... 2,193,082 893,082
Prepaid and other assets................................ (815,884) (815,884)
Accounts payable and accrued liabilities................ 4,241,734 4,241,734
Mexican taxes payable................................... (1,626,794) (1,626,794)
Unearned services fees.................................. 1,206,031 1,206,031
------------ ------------ -----------
Net cash used in operating activities....................... (3,993,974) (3,664,174) (329,800)
Increase in cash and cash equivalents..................... 8,994,591 6,938,792 2,055,799
Cash and cash equivalents, at beginning of the period..... -- 2,055,799 --
------------ ------------ -----------
Cash and cash equivalents at end of the period.............. $ 8,994,591 $ 8,994,591 $ 2,055,799
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.................. $ 2,782
============
Cash paid during the period for taxes..................... $ 316
============
NON-CASH INVESTING ACTIVITIES
Issuance of warrants in conjunction with debt offering.... $ 9,331,110
============
Issuance of common stock in conjunction with debt
offering................................................ $ 1,292,249
============
Issuance of common stock in settlement of financial
advisory fees........................................... $ 1,000,000
============
Conversion of shareholder loans to preferred stock........ $ 3,750,000
============
</TABLE>
See accompanying notes.
F-6
<PAGE> 135
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
On August 18, 1997, Club Regina Resorts, Inc. (the "Company" and "Ultimate
Parent"), which was incorporated in August 1996, purchased all of the stock of
Desarrollos Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the
"Predecessor Business"). In summary, the Company acquired net vacation ownership
assets of approximately $90 million from a Mexican Bank (Bancomer) using
shareholder loans of approximately $5.0 million and seller financing of
approximately $83 million. The initial allocation of the purchase price was to
the following net assets (in thousands):
<TABLE>
<S> <C>
Receivables................................................. $37.2
Land held for development................................... 12.2
Cost of unsold inventory and employee housing, etc.......... 36.6
Hotel asset management contract............................. 4.0
-----
$90.0
=====
</TABLE>
Contemporaneous with the purchase, the real property of the Predecessor
Business was segregated into condominium regimes so that the Regina Resorts and
Westin Hotels would be able to be owned by separate companies. The Westin Hotels
were then sold to SLT Realty Limited Partnership, an affiliate of Starwood
Lodging Trust and Starwood Lodging Corporation (collectively "Starwood") on
August 18, 1997. These transactions are referred to herein as the Purchase
Transactions.
As a result of the Purchase Transactions, the Company now owns and operates
three luxury Mexican vacation ownership resorts in Cancun, Puerto Vallarta and
Cabo San Lucas, Mexico. The Company's principal operations consist of (1)
acquiring vacation ownership resorts, (2) marketing and selling vacation
ownership intervals, (3) providing consumer financing for the purchase of
vacation ownership intervals at its resorts and (4) managing the operations of
its resorts. Prior to August 18, 1997 the Company did not have significant
operations or revenues. Accordingly, the financial statements present results of
operations for the year ended December 31, 1997, the period from January 1, 1997
through August 18, 1997 and the period from August 19, 1997 through December 31,
1997. Prior to April 1997 the Company was inactive.
The following unaudited pro forma consolidated results of operations for
the year ended December 31, 1997 assume the acquisition occurred as of January
1, 1997:
<TABLE>
<S> <C>
Net revenues................................................ $50,718
Net loss.................................................... $(2,643)
Net loss attributable to common shareholders................ $(3,262)
Basic and diluted loss per common share..................... $(.37)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. The Company reports its 50% interest
in a company which owns and rents housing to both employees of the Company and
employees of Starwood, using the equity method of accounting. All significant
intercompany balances have been eliminated in consolidation.
TRANSLATION OF FOREIGN CURRENCY
The Company maintains its Mexican accounting records and prepares its
financial statements for its Mexican subsidiaries in Mexican Pesos. The balance
sheet accounts of the Mexican subsidiaries have been remeasured into U.S.
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation. Accordingly, the Mexican Pesos are
translated to US Dollars for
F-7
<PAGE> 136
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
financial reporting purposes in using the US Dollar as the functional currency
and exchange gains and losses as well as translation gains and losses are
reported in income and expense. The resulting net exchange and translation loss
for the period August 19, 1997 through December 31, 1997 was $991,879. This net
loss was primarily related to the change in the exchange rate of the Peso to the
U.S. dollar during the period August 18, 1997 through December 31, 1997 as
follows:
<TABLE>
<CAPTION>
EXCHANGE RATES PESOS U.S. DOLLAR
-------------- ----- -----------
<S> <C> <C> <C>
August 18, 1997............................................. 7.766 = $1.00
December 31, 1997........................................... 8.083 = $1.00
</TABLE>
On March 20, 1998 the exchange rate had declined to 8.550 Pesos per $1.00
and this additional decline in the Peso has resulted in additional net exchange
losses which will be reported in the quarter ended March 31, 1998. The future
valuation of the Peso related to the U.S. dollar cannot be determined, estimated
or projected.
CASH AND CASH EQUIVALENTS
The Company considers demand accounts and short-term investments with
maturities of three months or less when purchased to be cash equivalents.
VACATION INTERVAL CONTRACTS RECEIVABLE AND CONCENTRATION OF GEOGRAPHIC AND
CREDIT RISK
Substantially all of the Company's vacation ownership contracts receivable
relate to sales of a special Class B shares of Club Regina, S.A. de C.V. (a
Mexican subsidiary owned and controlled by the Company) which entitles the owner
of such Class B shares, upon payment of a service fee, a defined right to use
vacation ownership facilities at the Company's Regina Resorts. While the Company
does not obtain collateral for such vacation ownership contracts, the Company
does not believe it has significant credit risk with regard to its vacation
ownership contracts receivable, because in the instance of uncollectibility of a
contract, the Company retains the right to recover and resell the underlying
defaulted Vacation Interval. Historically, the Predecessor Business was able to
resell such intervals at prices in excess of the defaulted receivable balances.
Management believes the allowance for uncollectible accounts is adequate to
cover probable losses inherent in the contracts receivable portfolio at December
31, 1997.
The Company estimates that at December 31, 1997 approximately 64% of all of
the Vacation Interval receivables were U.S. dollar denominated, 32% of all
Vacation Interval receivables were denominated in UDIs, an obligation
denominated in pesos which is adjusted for Mexican inflation, and 4% of all
Vacation Interval receivables were denominated in Mexican pesos.
A significant portion of the Company's customers reside in Mexico and the
Company intends to continue to offer Club Regina Class B shares in Mexico. All
of the Company's sales offices are currently located in Mexico and any economic
downturn in Mexico, which has a history of economic instability, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of vacation interval receivables and other trade
receivables, reimbursements receivable from Starwood for shared acquisition
costs, notes payable to a bank, and notes payable to shareholders approximate
their estimated fair market value because of the short-term maturity of those
instruments and/or because they bear market interest rates as of December 31,
1997. The carrying value of the Senior Notes, due to their recent issue, also
approximate their fair value.
F-8
<PAGE> 137
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories, which include supplies, other consumables, and items held for
sale in the Company's retail shops are stated at the lower of cost (FIFO method)
or estimated market.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment is stated at cost and is related to assets
used by the Company in its administration and marketing functions and is
depreciated using the straight line method over the estimated useful lives of
five to seven years .
COSTS OF UNSOLD VACATION OWNERSHIP INTERVALS AND RELATED CLUB MEMBERSHIPS
The Company is the beneficiary of trusts which hold fee simple title to the
vacation ownership facilities at the three Regina Resorts. The Company reports
its allocated acquisition costs related to these trust rights to use these
facilities, to the extent that such Vacation Intervals were unsold, within the
balance sheet as "cost of unsold Vacation Intervals and related club
memberships."
On August 18, 1997, the Company acquired the trust rights to use the
vacation ownership facilities at the three Regina Resorts including the separate
trust rights that cover the rights to use such facilities in the year 2027 and
thereafter which are referred to as the "Remainder Interests." These trust
rights have been amended to provide that the three Regina Resorts hold the
rights to use the related facilities through August 18, 2047. The amended
separate trust rights that take effect after this date were contributed by the
Company to a Mexican corporation and all of the outstanding stock of that
corporation was contributed to a charitable not-for-profit foundation pursuant
to an agreement with the foundation executed on December 31, 1997.
DEFERRED LOAN COSTS
The costs incurred in connection with the issue of the Senior Notes, due
2004, have been deferred in the balance sheet and are being amortized over the
seven year term of the Senior Notes using the interest method.
REVENUE RECOGNITION
The Company recognizes sales of B shares on an accrual basis after a
binding sales contract has been executed, a 15% minimum down payment has been
received, construction is substantially complete, and certain minimum sales
levels have been achieved. For sales that do not qualify for either accrual or
percentage-of-completion accounting, all revenue is deferred using the deposit
method.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share also includes the assumed
conversion of all securities, such as options, warrants, convertible debt and
convertible preferred stock, if dilutive.
F-9
<PAGE> 138
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
LAND HELD FOR VACATION OWNERSHIP DEVELOPMENT
The Company owns parcel of undeveloped beachfront property located in
Cozumel, Mexico. In addition the Company has a letter of intent to purchase a
parcel of land adjacent to its Regina Resort located in Cabo San Lucas, Mexico.
The Company plans to construct additional vacation ownership facilities on these
parcels of land. Although preliminary architectural and engineering planning has
commenced, no commitments have been made as of March 20, 1998 regarding these
planned expansion projects. Interest of $400,000 during 1997 has been
capitalized related to these developmental properties.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CURRENCY FLUCTUATIONS
The Company's operations are currently located in Mexico. The Peso, the
currency of Mexico, has fluctuated in value relative to the U.S. dollar in
recent years. On December 31, 1997, and March 20, 1998 the exchange rate of
Pesos to U.S. dollars was 8.0833 Pesos equal to one U.S. dollar and 8.550 Pesos
equal to one U.S. dollar respectively. The future valuation of the Peso related
to the U.S. dollar cannot be determined, estimated or projected.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES
Vacation Interval receivables and other trade receivables were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AUGUST 18, 1997
----------------- ---------------
<S> <C> <C>
Vacation Interval receivables........................ $43,968,564 $38,652,202
Service fee receivables.............................. 1,382,458 999,906
Other trade receivables.............................. 1,646,111 3,028,270
Less -- allowances for uncollectable accounts........ (7,045,583) (5,550,000)
----------- -----------
Total...................................... $39,951,550 $37,180,278
=========== ===========
</TABLE>
The weighted average interest rate earned on Vacation Interval receivables
is in excess of 14%. These receivables are collected in monthly installments
over periods ranging from 12 months to 7 years. Approximately 66% of Vacation
Interval receivables at December 31, 1997 were U.S. dollar denominated.
F-10
<PAGE> 139
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES -- (CONTINUED)
The following table reflects the principal maturities of Vacation Interval
receivables as of December 31, 1997:
<TABLE>
<S> <C>
PERIOD ENDED DECEMBER 31:
- ------------------------------------------------------------
1998........................................................ $ 8,197,000
1999........................................................ 9,871,000
2000........................................................ 9,807,000
2001........................................................ 8,425,000
Thereafter.................................................. 7,668,564
-----------
$43,968,564
===========
</TABLE>
The activity in the vacation interval receivables and other trade
receivables for the year ended December 31, 1997 is as follows:
<TABLE>
<S> <C>
Amount recorded in connection with Purchase Transaction..... $ 5,500,000
Adjustment to purchase price allocation..................... 850,000
Provision charged to expense................................ 2,348,680
Receivables charged off..................................... (190,000)
Cancellation of contracts................................... (1,463,097)
-----------
Balance, end of the year.................................... $ 7,045,583
===========
</TABLE>
4. SENIOR NOTES PAYABLE, DUE 2004
On December 5, 1997, the Company and its indirect wholly-owned Mexican
financial subsidiary jointly issued $100,000,000 of Senior Notes due December 1,
2004. In connection with this offering the Company incurred deferred loan costs
of $8,340,663. The Company also issued warrants to the Noteholders to purchase
1,869,962 common shares. The estimated fair market value of the warrants on the
date that the warrants were issued was $4.99 per warrant or $9,331,110 in total.
This amount was recorded as an increase in shareholders' investment and original
issue discount in the Company's balance sheet. The original issue discount is
being amortized to expense over the warrant exercise period of 84 months. A
portion of net proceeds ($82,953,633) was used to repay the outstanding loans
and related accrued interest payable to the Company's lender bank (Bancomer).
The Senior Notes are payable in US Dollars and bear interest at 13% with
interest payable semi-annually on June 1st and December 1st. The Notes are
general unsecured obligations of the Issuers.
The indenture pursuant to which the Notes were issued (the "Indenture")
contains certain covenants that, among other things, limit the ability of the
Issuers to incur certain additional Indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase Equity Interests (as defined)
or subordinated Indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Issuers, issue or sell Equity
interests of CR US's subsidiaries, or enter into certain mergers and
consolidations. In addition, under certain circumstances, the Issuers will be
required to offer to purchase Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of certain Asset Sales (as defined).
Any payments (interest or principal) in respect of the Notes will be made
free and clear of and without any withholding or deduction for or on account of
any present or future taxes, duties, levies, imposts, assessments or other
governmental charges of whatever nature imposed or levied by or on behalf of
Mexico or any subdivision thereof or by any authority or agency therein or
thereof having power to tax ("Taxes"), unless
F-11
<PAGE> 140
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SENIOR NOTES PAYABLE, DUE 2004 -- (CONTINUED)
such taxes are required by law, rule or regulation or by the interpretation or
administration thereof to be withheld or deducted, in which case, subject to
certain exceptions, the Issuers will pay such additional amounts ("Additional
Amounts") as may be necessary so that the net amount received by holders (the
"Holders") of the Notes (including Additional Amounts) after such withholding or
deduction will not be less than the amount that would have been received in the
absence of such withholding or deduction.
5. NOTES PAYABLE TO A BANK
See Note 11 regarding lines of credit arrangements entered into subsequent
to December 31, 1997. The note payable to a bank at December 31, 1997
represented a $1,000,000 loan with interest payable at 11% per annum which was
initially due on January 19, 1998 and has been extended to April 19, 1998.
Notes payable to a bank at August 18, 1997 consisted of the following.
These notes were fully repaid on December 5, 1997 from the net proceeds of the
Senior Note Offering which is discussed in Note 4.
<TABLE>
<S> <C>
TRANCHE A:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 11% with quarterly principal
payments beginning in March, 1998 based on the rates at
which down payments are made on Vacation Intervals and
Vacation Interval receivables payments are collected, with
the remaining balance, if any, payable on August 18,
2003...................................................... $45,000,000
TRANCHE B:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 10% through August 18, 1999
and thereafter at 11% with quarterly principal payments
beginning in March, 1998 based on the rates at which down
payments are made on Vacation Intervals and Vacation
Interval receivables payments are collected, with the
remaining balance, if any, payable on August 18, 2003..... 17,453,633
TRANCHE C:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 10%, due in August 1999,
secured by the Company's property in Cozumel with a
carrying value of $12,000,000 and the stock of one of the
Company's subsidiaries which holds this property.......... 8,000,000
TRANCHE D:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 10%, due December 18,
1998...................................................... 12,500,000
-----------
Total....................................................... $82,953,633
===========
</TABLE>
Tranches A, B and D were collateralized by the rights in the trusts which
own the land on which effectively all the Company's operations are located, as
discussed above. The debt agreements also included restrictive covenants
relating to, among other things, maximum leverage, minimum net worth, and
payments of dividends.
Substantially all office furniture and equipment and inventories as well as
the shares of the Company's subsidiaries collateralized these bank loans.
F-12
<PAGE> 141
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS AND AGREEMENTS
OTHER NOTES PAYABLE
At August 18, 1997, the Company had a $1,150,000 note payable to C.R.
Management Company (a shareholder) which accrued interest at 8%. The note plus
accrued interest was paid in full in December 1997.
AGREEMENTS
In connection with the Purchase Transactions, the Company and Starwood
entered into various operating agreements related to the joint operation and
ownership of certain common facilities at the Combined Resorts. Starwood has
rented specified rooms at two of the Company's Regina Resorts for a one-year
period ending August 18, 1998 for $1,250,000 which is being recognized into
income along with related fees of $1,950,000 over the term of the agreements.
The operating agreements provide for certain operating standards at the Combined
Resorts and prohibit the Company from renting vacant vacation ownership units on
a transient basis. The Company will be liable for significant penalties should
it violate certain provisions of these operating agreements.
On August 18, 1997, Starwood and the Company also entered into an Asset
Management Agreement which is operative until August 18, 2047, whereby Starwood
retained the Company as its asset manager for the three hotels that are included
in the Combined Resorts. In return for the Company's services, Starwood agreed
to pay the Company various defined advisory fees based upon the financial
performance of the hotel assets which Starwood acquired. This agreement
provides, among other things, for the Company to receive 20% of the cash flow,
as defined, including cash flow from any future refinancing and/or sale of the
hotel facilities. The Company has allocated a value of $4,000,000 to this asset
management agreement in the balance sheet as of August 18, 1997 which will be
amortized against the income expected to be recognized under this agreement.
7. SHAREHOLDERS' (DEFICIT) INVESTMENT AND A SUBSEQUENT EXCHANGE OF SHAREHOLDER
LOANS FOR PREFERRED STOCK
PREFERRED STOCK
The Company had obtained shareholder loans of $3,750,000 which were
subordinated to other indebtedness and provided for interest to accrue at the
annual rate of 16.5%. On October 29, 1997, the shareholders waived all interest
and exchanged these loans for 37,500 shares of Class A Preferred Stock which
provide for preferential annual dividends of $618,750 (16.5% of $3,750,000),
accruing from and after August 18, 1997. The dividend rate shall be 20% after
August 18, 2002. Cumulated dividends accrue dividends at the rate of 12% per
year. No cash dividends are required to be paid prior to an initial public
offering of the CR US's common stock or the sale of the Company. Under the Class
A Preferred, upon an initial public offering or stock merger by CR US, CR US may
force the redemption of all cumulated dividends in exchange for either cash or
stock of CR US valued at 85% of the IPO price or 100% of the merger
consideration value, as the case may be. Furthermore, in such event, the holders
of the Class A Preferred have the right to convert the liquidation preference of
each share of Class A Preferred into stock of the CR US valued at 85% of the IPO
price or 100% of the merger consideration value, as the case may be.
So long as any shares of the Class A Preferred are outstanding, no dividend
is permitted to be declared or paid or set apart for payment on any other series
of stock ranking on a parity with the Class A Preferred as to dividends, unless
all unpaid dividends on the Class A Preferred are paid. Furthermore, if all
accrued dividends on the Class A Preferred Stock have not been paid, CR US is
not permitted to declare or pay or set apart for payment any dividends or make
any other distributions on its Common Stock or any other class of stock or
series thereof of CR US ranking, as to distributions in the event of a
liquidation, dissolution or winding up of CR US, voluntary or involuntary (a
"Liquidation"), junior to the Class A Preferred until such dividends on
F-13
<PAGE> 142
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' (DEFICIT) INVESTMENT AND A SUBSEQUENT EXCHANGE OF SHAREHOLDER
LOANS FOR PREFERRED STOCK -- (CONTINUED)
the Class A Preferred and any redemption obligations due and owing under the
Certificate of Designations governing the Class A Preferred (the "Certificate of
Designation") have been paid. Upon any Liquidation of CR US, the holders of the
Class A Preferred are entitled to receive, out of assets of CR US which remain
after satisfaction in full of all valid claims of creditors of CR US and which
are available for payment to stockholders, and subject to the rights of the
holders of any stock of CR US ranking senior to or on a parity with the Class A
Preferred in respect of distributions upon Liquidation, before any amount shall
be paid to or distributed among the holders of Common Stock or any other shares
ranking junior to the Class A Preferred in respect of distributions upon
Liquidation, liquidating distributions per share of the Class A Preferred in the
amount of $100 per share, plus an amount equal to the accrued and unpaid
dividends thereon. Preferred shares also provide that dividends will accrue
monthly whether paid currently or not. Dividends may be paid by the Company, at
its option in shares of common stock. The preferred stock is redeemable at the
Company's option and is convertible at the holders option into shares of common
stock. The accrued and unpaid dividends were $232,031, or, $6.19 per preferred
share, as of December 31, 1997.
1997 LONG TERM INCENTIVE PLAN
On August 18, 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long Term Incentive Plan (the Plan). The purpose of
the Plan is to provide directors, officers, key employees, consultants and other
service providers with additional incentives by increasing their ownership
interest in the Company. Individual awards under the Plan may take the form of
one or more of (i) either incentive stock options or non-qualified stock
options; (ii) stock appreciation rights; (iii) restricted or deferred stock;
(iv) dividend equivalents and (v) other awards not otherwise provided for, the
value of which is based in whole or in part upon the value of the common stock.
The maximum number of shares of common stock that may be subject to
outstanding awards, determined immediately after the grant of any award, may not
exceed the greater of 808,000 shares or 8% of the aggregate number of shares of
common stock outstanding.
As of December 31, 1997, stock options covering 163,000 common shares had
been granted under this plan with an exercise price of $5.00 to $7.00 per common
share representing the fair value at the date of grant. These options are
generally exercisable over a period of ten years from the date of grant.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan, which was adopted by
the Board of Directors provided for an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of shareholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. All options will have an exercise
price per share equal to the fair market value of the Common Stock on the date
of grant and are immediately vested and expire on the earlier of ten years from
the date of grant or one year after termination of service as a director.
As of December 31, 1997, no options had been granted under this plan.
OTHER
On August 15, 1997, the Company issued stock options covering 100,000
shares of Common Stock to the Company's president at an exercise price of $2 per
share, the estimated fair market value of the common stock on the date of grant.
A total of 20,000 of these options vested immediately; the remainder vest at the
rate of 20,000 per year for four years.
F-14
<PAGE> 143
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' (DEFICIT) INVESTMENT AND A SUBSEQUENT EXCHANGE OF SHAREHOLDER
LOANS FOR PREFERRED STOCK -- (CONTINUED)
As allowed by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (FAS 123), the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) in accounting for its stock option plans.
Under APB 25, the Company does not recognize compensation expense on the
issuance of its stock options because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date. As required by FAS 123, the Company has determined the pro forma
information as if the Company had accounted for stock options granted since
January 1, 1995, under the fair value method of FAS 123. The Black-Scholes
option pricing model was used with the following weighted-average assumptions;
risk-free interest rate of 7%; dividend yield of 0%; expected Common Stock
market price volatility factor of .001; and a weighted-average expected life of
the options of five years. The weighted-average fair value of options granted in
1997 was not material. Therefore, the pro forma effect of these options on
operations basic and diluted earnings per share was not material.
8. INCOME TAXES
The Company, a Nevada Corporation, will file an annual U.S. Federal income
tax return. The Company incurred net losses for the period ended December 31,
1997 in Mexico as well as the United States. Accordingly no provision for income
taxes was made during 1997.
For the period ended December 31, 1997, the Mexican subsidiaries of the
Company will file separate Mexican income tax returns. An application has been
made to file certain of the income tax returns of the Company's Mexican
operations on a consolidated basis beginning in 1998.
In connection with the Purchase Transactions of August 18, 1997, the
Company and Starwood will be allocated a portion of the net operating losses of
the Predecessor Businesses. The Company anticipates that it has received
approximately $60 million of Mexican net operating losses, which will begin to
expire in the year 2000. For financial statement purposes, a valuation allowance
of $20 million has been recognized to offset the estimated $20 million of
deferred tax assets related to those carryforwards.
The U.S. Federal income tax regulations may, under certain circumstances
cause income transactions in Mexico to give rise to U.S. income taxes. Subject
to an adjustment for foreign tax credits. The Company's Mexican operations
subsequent to August 18, 1997 have resulted in losses and no provision for U.S.
income taxes is necessary for the period ended December 31, 1997.
9. CONTINGENCIES AND COMMITMENTS
As of November 17, 1994, Club Regina, S.A. de C.V., currently a wholly
owned subsidiary of the Company, applied to the Mexican tax authorities to
reconfirm that the sale of Class B shares, which give a Member, after paying an
annual service fee, the right to use certain Vacation Intervals, is a tax free
event with respect to Mexican value added taxes. On February 9, 1995, the tax
authorities concluded that the Predecessor Businesses should pay Mexican value
added tax regarding its sales of Class B shares. On February 19, 1997, the
attorneys for the Company received an informal letter from the Quinta Sala
Regional Metropolitana de la Federacion (the Fifth Federal Metropolitan Regional
Tax Court) stating that the Company was not required to pay Mexican value added
taxes on sales of Class B shares. Consistent with this letter, the Company did
not collect and remit value added taxes on the sale of Class B shares. In
December, 1997, amendments to Mexico's value added tax laws were enacted which
subject sales of vacation intervals such as those sold by the Company to a value
added tax of approximately 10% in Cancun and Los Cabos and 15% in other Mexican
locations. To counteract the imposition of a value added tax on sales of
Vacation Intervals, the Company decreased its prices effective January 1, 1998,
but by less than the amount of such tax.
F-15
<PAGE> 144
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CONTINGENCIES AND COMMITMENTS -- (CONTINUED)
The Company is subject to various claims arising in the ordinary course of
business, and is a party to various legal proceedings which constitute ordinary
routine litigation incidental to the Company's business. In the opinion of
management, all such matters are either adequately covered by insurance or are
not expected to have a material adverse effect on the Company.
The Company has agreed to pay an investment banking firm a fee for general
financial advice of $125,000 monthly for the period August 1997 through June 15,
1998. This fee has been charged to expense in the periods that the services were
rendered and at December 31, 1997 the remaining prepaid financial advisory fee
of $687,500 was included in prepaid assets.
The agreement with the investment banking firm provides that if the Company
completes an initial public offering of its common stock, the Company will be
required to issue to that firm warrants to purchase 5% of the common stock of
the Company having a term of 5 years and an exercise price of 120% of the
initial public offering price.
The Company leases administrative and sales office space and certain
equipment under noncancellable lease agreements. Total rent expense for the year
ended December 31, 1997 was approximately $317,000. These operating leases
expire in various years in the future. Some of these leases may be renewed.
Future minimum payments under all of the Company's noncancellable operating
leases with initial terms of one year or more were as follows at December 31,
1997:
<TABLE>
<S> <C>
1998........................................................ $1,649,834
1999........................................................ 1,242,473
2000........................................................ 1,003,072
2001........................................................ 566,890
2002........................................................ 521,146
----------
Total....................................................... $4,983,415
==========
</TABLE>
10. SUBSEQUENT EVENTS
ACQUISITIONS -- The Company has executed a letter of intent to acquire the land
and facilities of the Villa Vera Hotel & Racquet Club (the "Villa Vera") for
$4.5 million. The Villa Vera is in Acapulco, Mexico and has 74 hotel units, 62
of which the Company plans to convert into vacation ownership units that should
increase the Company's inventory by approximately 4,000 Vacation Intervals.
These Vacation Intervals are expected to be priced on average slightly lower
than the Company's intervals at the current Regina Resorts. The Company
estimates this conversion will cost $2.5 million. Closing of this acquisition is
expected in April 1998. The Villa Vera has been operating on a limited basis
during the year ended December 31, 1997 and its unaudited revenues and net loss
for 1997 were approximately $400,000 and $400,000 respectively.
LINES OF CREDIT -- On March 27, 1998, the Company entered into an agreement with
Bancomer, expiring in March 2002, which provides the Company with a line of
credit of $20 million. All borrowings and interest under the line will be
payable in U.S. dollars and any loans will bear interest at 13%. Loans under the
line will be secured by all of the present and future accounts receivable of an
indirect wholly-owned subsidiary (CR Resorts Puerto Vallarta). The Company has
also agreed to pay the bank a one time fee of 2% of the line of credit.
The Company has also received approval from Bancomer for the extension of
an additional line of credit of $6.0 million. These funds are required to be
used to complete the purchase of the Villa Vera Hotel & Racquet Club ('Villa
Vera") and for the conversion cost of 62 units into vacation ownership units.
This line of
F-16
<PAGE> 145
CLUB REGINA RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit will be secured by a Mortgage Trust on the Villa Vera property and by the
Accounts Receivable of CR Resorts Puerto Vallarta both present and future. This
line of credit also requires a 2% fee be paid to the bank before the funds may
be borrowed.
AMENDMENT TO MEXICAN VALUE ADDED TAX LAW -- In December 1997, the Mexican Value
Added Tax Law was amended to make all vacation ownership operations, regardless
of the structure subject to the Value Added Tax, effective January 1, 1998. This
would have caused a new Club Regina member to pay 10 to 15% more for each
vacation interval depending on the sales location. In response to these events,
the Company decreased its Vacation Interval prices on an average of five percent
to compensate in part for the tax charged to the customer. The Company will
benefit, however, from the fact that the Company is now able to recover all of
the Value Added Tax paid as part of the marketing efforts to sell the Vacation
Intervals against the Value Added Tax collected at the time sales are made. The
Company believes that because of these changes in the tax law it will have
valued foreign tax expenses equivalent to six percent of the revenue from the
sale of Vacation Intervals.
NEW PRODUCT STRUCTURE -- Effective March 13, 1998, the Company put into effect a
new product structure to sell its Vacation Intervals under a right-of-use
membership sold by either the Los Cabos or the Cancun based companies, thus
subject to a rate of 10% for the Value Added Tax. This new membership has a term
of 50 years instead of the 30 years under the prior marketing structure. On the
same date, an increase in the prices of the Vacation Intervals of five percent
on average was announced. In the opinion of management, these changes in product
structure and the actions taken to adjust prices will enable the Company to
offset the loss of revenue due to the Value Added Tax law changes.
F-17
<PAGE> 146
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholder
CR Resorts Capital, S. de R.L. de C.V.
We have audited the accompanying consolidated balance sheets of CR Resorts
Capital, S. de R.L. de C.V. (Capital) as of December 31 and August 18, 1997 and
the related consolidated statements of income and retained earnings and cash
flows for the period August 19, 1997 through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CR Resorts
Capital, S. de R.L. de C.V. at December 31, 1997 and August 18, 1997 and the
consolidated results of their operations and their cash flows for the period
August 19, 1997 through December 31, 1997 in conformity with generally accepted
accounting principles.
Miami, Florida
March 20, 1998,
except for note 6
as to which the date is
March 27, 1998
F-18
<PAGE> 147
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (CAPITAL) AND SUBSIDIARY
(A WHOLLY OWNED FINANCE SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 18,
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 8,010 $ 385
Loans and related accrued interest receivable from
affiliates............................................. 91,960,716 86,703,633
Assets held for sale representing Remainder Interests..... -- 1,600,000
Deferred loan costs, net of $58,446 of accumulated
amortization........................................... 7,113,570 --
Other assets.............................................. 99,111 --
------------ -----------
Total assets................................................ $ 99,181,407 $88,304,018
============ ===========
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Accrued expenses.......................................... $ 32,107 $ --
Due to Club Regina Resorts, Inc. (Ultimate Parent)........ 15,564,508 --
Notes payable to a bank................................... 1,000,000 82,953,633
Senior Notes due 2004, bearing interest at 13%, net of
unamortized original issue discount of $8,298,023...... 81,701,977 --
Accrued interest payable.................................. 881,110 --
Notes payable to Shareholders of Club Regina Resorts,
Inc.................................................... -- 3,750,000
Note payable to Capital's parent.......................... -- 1,600,000
------------ -----------
Total liabilities........................................... 99,179,902 88,303,633
SHAREHOLDER'S INVESTMENT
Capital stock............................................. 385 385
Retained earnings......................................... 1,320 --
------------ -----------
Total shareholder's investment.................... 1,705 385
------------ -----------
Total liabilities and shareholder's investment.............. $ 99,181,407 $88,304,018
============ ===========
</TABLE>
See accompanying notes.
F-19
<PAGE> 148
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (CAPITAL) AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE PERIOD AUGUST 19, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues, representing interest and related fees charged to
affiliates................................................ $4,033,454
EXPENSES
Interest expenses on bank loans and Senior Notes.......... 3,794,187
Interest expense on notes payable to the Ultimate
Parent................................................. 109,359
Amortization of deferred loan costs....................... 58,446
General and administrative, including $50,475 of
management fees charged by an affiliate for accounting
and administrative services............................ 60,256
Exchange and translation loss, net........................ 9,886
----------
4,032,134
----------
Net income for the period and retained earnings since
inception.............................................. $1,320
==========
</TABLE>
See accompanying notes.
F-20
<PAGE> 149
C.R. RESORTS CAPITAL, S. DE R.L. DE C.V. (CAPITAL) AND SUBSIDIARIES
(A WHOLLY OWNED FINANCE SUBSIDIARY)
OTHER FINANCIAL INFORMATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 19, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C>
FINANCING ACTIVITIES
Capital contributions..................................... $ 385
Proceeds from shareholder loans and loans from
affiliates............................................. 3,750,000
Proceeds from issuance of notes payable to a bank in
connection with the Purchase Transactions.............. 82,953,633
Repayment of Bank loans................................... (82,953,633)
Proceeds from issue of $90,000,000 of Senior Notes........ 86,400,000
Payments for debt issuance costs.......................... (3,572,036)
Proceeds from a bank loan................................. 1,000,000
------------
Net cash provided by financing activities................. 87,578,349
INVESTING ACTIVITIES
Loans to affiliates....................................... (86,703,633)
------------
Cash used in investing activities........................... (86,703,633)
OPERATING ACTIVITIES
Net income for the period................................. 1,320
Adjustments to reconcile net income to cash used in
operating activities:
Amortization........................................... 158,442
Changes in operating assets and liabilities
Other assets.............................................. (99,111)
Due to affiliates......................................... 3,416,509
Due from affiliates....................................... (5,257,083)
Accrued expenses and accrued interest..................... 913,217
------------
Net cash used in operating activities..................... (866,706)
------------
Cash at end of period....................................... $ 8,010
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................. $ 2,913,077
============
Non-cash financing activities
Increase in due to affiliate resulting from debt
discount............................................... $ 8,397,999
============
</TABLE>
See accompanying notes.
F-21
<PAGE> 150
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A WHOLLY OWNED FINANCE SUBSIDIARY)
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
1. ORGANIZATION
CR Resorts Capital, S. de R.L. de C.V. (Capital), which is 100% owned by
Canarias Future SRL, a wholly-owned subsidiary of the Club Regina Resorts, Inc.
(the Ultimate Parent), was formed in August, 1997 for purposes of obtaining
financing of the Ultimate Parent's Mexican operations.
On August 18, 1997, the Ultimate Parent purchased all of the stock of
Desarrollos Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the
Predecessor Businesses). Contemporaneous with the purchase, the real property
was segregated into condominium regimes so that the Regina Resorts and Westin
Hotels would be able to be owned by separate companies. The Westin Hotels were
then sold to SLT Realty Limited Partnership, an affiliate of Starwood Capital
Group, L.L.C. (Starwood). These transactions are referred to herein as the
Purchase Transactions.
On August 18, 1997, Capital obtained bank loans aggregating $82,953,633 as
well as other related party loans which were used to make loans to the operating
subsidiaries of the Ultimate Parent. See Note 4.
On December 5, 1997, Capital and its Ultimate Parent jointly issued
$100,000,000 of Senior Notes due December 1, 2004 and Capital recorded
$90,000,000 of such debt along with the related deferred loan costs of
$7,506,597. The Company also issued warrants to the Noteholders to purchase
1,869,962 common shares. These warrants were estimated to have a value of $4.99
per warrant or $9,331,110 in total. This amount was recorded as an increase in
shareholders' investment and original issue discount in the amount of $8,397,999
on Capital's balance sheet. The original issue discount is being amortized to
expense over the warrant exercise period of 84 months. Substantially, all of the
net proceeds of the Senior Note offering were used to repay the outstanding
loans and related accrued interest payable by Capital to its lender bank
(Bancomer).
The Senior Notes are payable in US Dollars and bear interest at 13% with
interest payable semi-annually on June 1st and December 1st. The Notes are
general unsecured obligations of the Issuers.
The indenture pursuant to which the Notes will be issued (the "Indenture")
contains certain covenants that, among other things, limit the ability of the
Issuers to incur additional Indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase Equity Interests (as defined)
or subordinated Indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Issuers, issue or sell Equity
Interests of CR US's subsidiaries, or enter into certain mergers and
consolidations. In addition, under certain circumstances, the Issuers will be
required to offer to purchase Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of certain Asset Sales (as defined).
Any payments (interest or principal) in respect of the Notes will be made
free and clear of and without any withholding or deduction for or on account of
any present or future taxes, duties, levies, imposts, assessments or other
governmental charges of whatever nature imposed or levied by or on behalf of
Mexico or any subdivision thereof or by any authority or agency therein or
thereof having power to tax ("Taxes"), unless such Taxes are required by law,
rule or regulation or by the interpretation or administration thereof to be
withheld or deducted, in which case, subject to certain exceptions, the Issuers
will pay such additional amounts ("Additional Amounts") as may be necessary so
that the net amount received by holders (the "Holders") of the Notes (including
Additional Amounts) after such withholding or deduction will not be less than
the amount that would have been received in the absence of such withholding or
deduction.
F-22
<PAGE> 151
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A WHOLLY OWNED FINANCE SUBSIDIARY)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
\2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEFERRED LOAN COSTS
The costs incurred in connection with the issue of the Senior Notes, due
2004, have been deferred in the balance sheet and are being amortized over the
seven year term of these Senior Notes using the interest method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION AND TRANSLATION POLICY
The consolidated balance sheet includes the accounts of Capital and its
wholly owned subsidiary. All significant intercompany balances have been
eliminated in consolidation. The accounts of the Company are maintained in
Mexican Pesos which are translated to US Dollars for financial reporting
purposes in accordance with Statement of Financial Accounting Standards No. 52
Foreign Currency Translation using the US Dollar as the functional currency.
Exchange gains and losses as well as translation gains and losses are reported
in income and expense. The resulting net gain for the period August 19, 1997
through December 31, 1997 was approximately $9,900.
This net gain was primarily related to the change in the exchange rate of
the Peso to the U.S. dollar during the period August 18, 1997 through December
31, 1997 as follows:
<TABLE>
<CAPTION>
EXCHANGE RATES PESOS U.S. DOLLAR
-------------- ----- -----------
<S> <C> <C> <C>
August 18, 1997............................................. 7.766 = $1.00
December 31, 1997........................................... 8.083 = $1.00
</TABLE>
On March 20, 1998, the Exchange rate had declined to 8.550 Pesos per $1.00
and this additional decline in the Peso has resulted in net exchange losses
which will be reported in the quarter ended March 31, 1998.
3. LOANS RECEIVABLE FROM AFFILIATES
Loans receivable from Affiliates are payable in US Dollars upon demand and
bear interest at 16%.
Loans receivable from affiliates and associated interest income are
eliminated in the consolidation of Capital into the consolidated financial
statements of the Ultimate Parent.
F-23
<PAGE> 152
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A WHOLLY OWNED FINANCE SUBSIDIARY)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
4. NOTES PAYABLE TO A BANK
The note payable to a bank at December 31, 1997 represented a $1,000,000
loan with interest at 11% per annum which was initially due on January 19, 1998
and has been extended to April 19, 1998.
Notes payable to a bank at August 18, 1997 consisted of the following.
These loans were paid in full on December 5, 1997 from the proceeds of the
Senior Note Offering.
<TABLE>
<S> <C>
TRANCHE A:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 11% with quarterly principal
payments based on the rates at which down payments are
made on the Ultimate Parent's Vacation Intervals and
Vacation Interval receivables collections are received by
the Company, maturing on August 18, 2003.................. $45,000,000
TRANCHE B:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 10% through August 18, 1999,
and thereafter at 11% with quarterly principal payments of
principal payments based on the rates at which down
payments are made on the Ultimate Parent's Vacation
Intervals and Vacation Interval receivables collections
are received by the Company, maturing on August 18,
2003...................................................... 17,453,633
TRANCHE C:
Promissory note payable in U.S. dollars, interest payable
quarterly at 10%, due in August 1999, secured by the
Company's property in Cozumel with a carrying value of
$12,000,000 and the stock of one of the Company's
subsidiaries, which holds this property................... 8,000,000
TRANCHE D:
Promissory note payable, denominated in U.S. dollars,
interest payable quarterly at 10%, due December 18,
1998(B)................................................... 12,500,000
-----------
$82,953,633
===========
</TABLE>
5. NOTES PAYABLE TO RELATED PARTIES
At both August 18,1997 and December 31, 1997, Capital had $3.75 million of
notes payable to the Ultimate Parent which bear interest at 8% and are payable
upon demand. At August 18, 1997 Capital had $1,600,000 of notes payable to its
immediate parent which financed Capital's investment in the Remainder Interests.
On December 31, 1997, this loan had been liquidated and the restated Remainder
Interests, which value was reduced to $10,000 due to the changes in the trusts
which delayed the Remainder Interests effective date by 20 years until August
18, 2047, were contributed to an unaffiliated charitable not-for-profit
foundation.
Notes payable to related parties and the associated interest expense are
eliminated in the consolidation of Capital into the consolidated financial
statements of the Ultimate Parent.
6. SUBSEQUENT EVENTS
On March 27, 1998, the Company entered into an agreement with Bancomer,
expiring in March 2002, which provides the Company with a line of credit of $20
million. All borrowings and interest under the line will be payable in U.S.
dollars and any loans will bear interest at 13%. Loans under the line will be
secured by all the present and future accounts receivable of an indirect
wholly-owned subsidiary, CR Resorts Puerto Vallarta ("CRPV"). The Company has
also agreed to pay the bank a one time fee of 2% of the line of credit.
F-24
<PAGE> 153
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A WHOLLY OWNED FINANCE SUBSIDIARY)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
6. SUBSEQUENT EVENTS -- (CONTINUED)
The Company has also received approval from Bancomer for the extension of
an additional line of credit of $6.0 million. These funds are required to be
loaned to CRPV in order that CRPV may complete the purchase of the Villa Vera
Hotel & Racquet Club (Villa Vera) for $4.5 million and have additional funds for
the conversion cost of 62 hotel units into vacation ownership units. This line
of credit will be secured by a Mortgage Trust on the Villa Vera property and by
the accounts receivable of CRPV both present and future. This line of credit
also requires a 2% fee to be paid to the bank before the funds may be borrowed.
F-25
<PAGE> 154
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Desarrollos Turisticos Bancomer, S.A. de C.V.
Mexico City
We have audited the accompanying consolidated statements of operations and
cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V. and Subsidiaries
(the "Company"), for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations and cash flows
referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of Desarrollos Turisticos Bancomer, S.A. de
C.V. and Subsidiaries for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
Houston, Texas
June 5, 1997 except for Note 11
as to which the date is August 18, 1997
F-26
<PAGE> 155
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenue from hotel operations:
Rooms..................................................... $ 27,328 $ 20,937
Food and beverage......................................... 13,606 10,884
Other departmental........................................ 3,950 2,519
Miscellaneous............................................. 178 536
-------- --------
Total revenue from hotel operations............... 45,062 34,876
Hotel operating expenses:
Rooms..................................................... 4,903 3,995
Food and beverage......................................... 7,547 6,499
Other departmental........................................ 1,894 1,014
-------- --------
Total hotel operating expenses.................... 14,344 11,508
-------- --------
Hotel gross profit................................ 30,718 23,368
Revenue from vacation ownership operations:
Sales of vacation ownership interests..................... 37,263 25,034
Less: amounts deferred to future periods.................. (36,435) (24,461)
Add: amounts recognized from prior sales.................. 2,039 1,131
-------- --------
2,867 1,704
Interest income on vacation ownership contracts
receivable................................................ 3,294 1,839
Rental of unsold units...................................... 2,898 2,043
Maintenance fee income...................................... 2,599 2,062
Other....................................................... 760 690
-------- --------
Total revenue from vacation ownership
operations...................................... 12,418 8,338
Vacation ownership operating expenses:
Commissions paid to salespeople........................... 7,108 4,919
Less amounts deferred to future periods................... (5,807) (4,824)
Add amounts recognized from prior sales................... 303 178
Maintenance of unsold units............................... 188 189
-------- --------
Total vacation ownership operating expenses,
net............................................. 1,792 462
-------- --------
Vacation ownership gross profit............................. 10,626 7,876
-------- --------
Hotel and vacation ownership gross profit................... 41,344 31,244
Advertising, sales, and marketing........................... 7,928 8,526
General and administrative.................................. 13,085 12,023
Maintenance................................................. 9,021 8,286
Interest expense............................................ 8,287 10,357
Other expense............................................... 485 1,473
-------- --------
Income (loss) before taxes........................ 2,537 (9,421)
Income taxes................................................ -- 79
Asset taxes................................................. 2,110 2,970
Other taxes................................................. 2,523 2,245
-------- --------
Net (loss)........................................ $ (2,096) $(14,715)
======== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 156
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........................................... $(2,096) $(14,715)
Changes in operating assets and liabilities:
Accounts receivable....................................... (3,004) 5,225
Vacation ownership contracts receivable................... (7,024) (9,328)
Inventory................................................. (364) 337
Taxes to be recovered..................................... (2,067) 1,158
Deferred vacation ownership costs......................... (5,504) (2,010)
Other assets.............................................. (1,017) 2,442
Accounts payable.......................................... 399 (2,889)
Reservations deposits..................................... 145 1,023
Other liabilities......................................... (838) 6,235
Unearned deposits......................................... 1,030 --
Deferred vacation ownership revenue....................... 31,100 12,435
------- --------
Net cash provided by (used in) operating activities......... 10,760 (87)
INVESTING ACTIVITIES
(Acquisition) sale of property, plant, and equipment........ (5,728) 4,489
FINANCING ACTIVITIES
Proceeds from (payments on) notes payable to related
parties................................................... 50,112 (3,216)
Distribution to stockholders................................ (54,620) --
------- --------
Net cash used in financing activities....................... (4,508) (3,216)
Increase in cash and cash equivalents....................... 524 1,186
Cash and cash equivalents at beginning of period............ 4,094 2,908
------- --------
Cash and cash equivalents at end of period.................. $ 4,618 $ 4,094
======= ========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................... $ 7,725 $ 10,640
Income and asset taxes paid................................. $ 2,138 $ 3,048
======= ========
</TABLE>
See accompanying notes.
F-28
<PAGE> 157
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to August 18, 1997, Desarrollos Turisticos Bancomer, S.A. de C.V.
(the "Company"), was a wholly owned subsidiary of Bancomer, S.A. de C.V.
("Bancomer"), a Mexican banking and financial services institution. The Company
owns and operates certain hospitality assets of Bancomer, which comprise
primarily deluxe resort hotels and vacation ownership properties in Cancun,
Puerto Vallarta, and Cabo San Lucas, Mexico. The Company's principal operations
consist of (1) developing and acquiring hotel and vacation ownership resorts,
(2) marketing and selling vacation intervals at its resorts, (3) providing
consumer financing for the purchase of vacation intervals at its resorts, and
(4) managing the operations of its resorts.
The consolidated financial statements include the accounts of Desarrollos
Turisticos Bancomer, S.A. de C.V., and all of its majority owned subsidiaries,
which are listed below:
Club Regina, S.A. de C.V.
Servicios Turisticos Integrales Cobamex, S.A. de C.V.
Corporacion Habitacional Mexicana, S.A. de C.V.
Corporacion Mexitur, S.A. de C.V.
Promotora y Desarrolladora Pacifico, S.A. de C.V.
Promotora Turistica Nizuc, S.A. de C.V.
Desarrollos Turisticos Integrales Cabo San Lucas, S.A. de C.V.
Desarrollos Turisticos Integrales de Cozumel, S.A. de C.V.
All significant intercompany balances and transactions have been
eliminated.
TRANSLATION OF FOREIGN CURRENCY
The Company maintains its accounting records and prepares its financial
statements for domestic purposes in Mexican pesos. The accompanying financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP") in thousands of U.S.
dollars ("$") and, accordingly, differ from those used for domestic purposes in
Mexico.
Peso-denominated transactions are translated into U.S. dollars using
average exchange rates for revenue and expense transactions and year-end
exchange rates for assets and liabilities expected to be realized/satisfied
within one year. The effect of changes in the peso/dollar exchange rates on such
assets and liabilities is immaterial. Real estate and certain other long-term
assets and dollar-denominated transactions and balances (which include certain
vacation interval sales, vacation ownership contracts receivable, and borrowings
from related parties) are reported in the financial statements at their
historical dollar equivalent amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-29
<PAGE> 158
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VACATION OWNERSHIP CONTRACTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Substantially all contracts receivable relate to sales of vacation
ownership interests. While the Company does not obtain collateral for such
contracts, the Company does not believe it has significant concentrations of
credit risk in its contracts receivable because in the instance of
uncollectibility of a contract, the Company retains the right to recover and
resell the defaulted interval. Historically, the Company has been able to resell
such intervals at prices in excess of the defaulted receivable balances.
A significant portion of the Company's customers reside in Mexico and the
Company intends to continue to conduct business in Mexico. All of the Company's
sales offices are currently located in Mexico and any economic downturn in
Mexico, which has a history of economic instability, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
REVENUE RECOGNITION
Vacation Ownership Revenue
The Company sells shares of Class B stock in a majority-owned subsidiary to
vacation ownership buyers. The rights associated with the Class B shares allow
the buyers to use a specified type of accommodation (one-bedroom, two-bedroom,
etc.) during a specified season at any of the Company's resorts on a first-come,
first-serve basis annually for approximately thirty years. The sales price of
such Class B shares is recognized ratably over the thirty-year right to use
period and the costs of selling the Class B shares, which include brokerage
commissions, commissions to sales personnel, and marketing costs directly
associated with successful sales, are deferred and recognized ratably over the
right-to-use period.
Interest income from contracts receivable is recognized when received.
Maintenance fees are billed to Class B shareholders annually and recognized
as earned over 12 months. Maintenance expenses are recognized when incurred.
A provision for uncollectible contracts receivable is accrued for contracts
which become more than 180 days past due. Deferred revenue related to contracts
cancelled in any year subsequent to the year of sale is recognized to the extent
of cumulative cash collections in excess of costs. Deferred costs are recognized
in their entirety. Contracts which are canceled in the year of sale are treated
as a reduction of revenue.
Hotel Revenue
The Company has entered into a hotel management agreement with Westin
Hotels whereby Westin operates the hotels at each of the Company's resort
locations. Revenue is recognized when earned.
ADVERTISING EXPENSE
Advertising costs, which include solicitations of prospective timeshare
buyers, are expensed as incurred to the extent they cannot be directly
associated with a successful sale of Class B shares to a timeshare buyer.
Additionally, advertising costs include the costs of print and broadcast media
associated with the hotel operations. Advertising expenses in 1996 and 1995
totaled $4,098, and $4,398, respectively, and are included in advertising, sales
and marketing expenses.
2. VACATION OWNERSHIP CONTRACTS RECEIVABLE AND CREDIT LOSSES
Vacation ownership contracts receivables are originated when vacation
ownership buyers elect to finance their purchases through the Company. The
Company requires a minimum 15% down payment; a majority of purchasers are
citizens of the United States and Canada. Vacation ownership contracts
receivable bear interest from 14% to 15% and are collected in monthly
installments over periods ranging from 12 months to
F-30
<PAGE> 159
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 years. Approximately 71% of timeshare contracts receivable were U.S.
dollar-denominated at December 31, 1996.
Changes in the allowance for uncollectible accounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
($000) ($000)
------- -------
<S> <C> <C>
Balance at beginning of year................................ $ 3,014 $ 6,710
Provisions for uncollectible accounts....................... 2,895 1,242
Cancellations and write-offs of uncollectible accounts...... (4,134) (4,938)
------- -------
Balance at end of year...................................... $ 1,775 $ 3,014
======= =======
</TABLE>
Because the Company collects non-refundable cash from vacation ownership
buyers in excess of deferred profit, and because the Company has historically
been able to resell vacation ownership intervals at prices in excess of canceled
receivable balances, the Company does not provide for credit losses related to
doubtful contracts.
4. IMPAIRMENT LOSS
Management concluded that at December 31, 1994, the hotel and vacation
ownership assets were impaired and an impairment adjustment of $130,000,000 was
recorded as of that date. Management's estimate of the impairment loss was based
on its negotiations to sell the assets of the Company.
The Company was the beneficiary of certain trusts established to retain
title to beachfront property in accordance with Mexican law. The property held
in trust consists of the real estate upon which the Company has constructed
hotels and vacation ownership buildings in Cancun, Puerto Vallarta, and Cabo San
Lucas. The trusts are for an original term of 33 years and expire from 2017
through 2023. The Trusts can be renewed for an additional thirty years.
7. INCOME TAXES
The subsidiaries of the Company generally file separate Mexican income tax
returns. Because operations of the Company and each of its subsidiaries have
resulted in losses, only nominal amounts of income taxes have become payable.
The Company pays the greater of its income tax liability or a tax on net
assets. The amount of asset tax paid in excess of income taxes is available to
reduce future income tax payments.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are deferred timeshare revenue
and costs, inventories, and tax loss carryforwards.
F-31
<PAGE> 160
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
($000) ($000)
--------- ---------
<S> <C> <C>
Deferred vacation ownership costs........................... $ (5,200) $ (3,500)
Inventories................................................. (1,800) (1,500)
Deferred vacation ownership revenue......................... 26,000 16,000
Net operating losses........................................ 99,000 100,000
--------- ---------
Net deferred taxes before valuation allowance............... 118,000 111,000
Valuation allowance......................................... (118,000) (111,000)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company's shareholder is the principal owner or has substantial
ownership interests in other entities with which the Company transacts business.
The following table summarizes transactions with related parties:
<TABLE>
<CAPTION>
1996 1995
($000) ($000)
-------- -------
<S> <C> <C>
Liabilities:
Notes payable............................................. $119,016 $67,736
Accounts payable.......................................... $ -- $ 340
Interest payable.......................................... $ 2,264 $ 1,168
Expenses:
Interest expense.......................................... $ 8,287 $10,357
Lease expense............................................. $ 161 $ 148
Fees...................................................... $ -- $ --
</TABLE>
9. COMMITMENTS
Certain subsidiaries of the Company entered into an operation and
administrative agreement with Westin Mexico, S.A. de C.V. ("Westin"), through
December 2003. The Company believes it has the right to terminate the agreement
pursuant to provisions related to change of control of Westin, but has not
asserted that right. Under the agreement, the subsidiaries are obligated to pay
certain cost and expense reimbursements related to promotion, marketing,
reservations, and sales.
Additionally, the subsidiaries are obligated to pay 0.9% of total operating
revenues for technical services provided by Westin. Technical services expense
was $867,000 and $367,000 for the years ended December 31, 1996 and 1995,
respectively.
Additionally, Westin is entitled to management fees based on a percentage
of the total operating revenues of the hotels (ranging from 1% to 2% over the
life of the contract), as well as additional fees for maintaining certain
percentages related to gross margin operations (calculated as a percentage of
total operating revenues and ranging from 2.5% to 6%). Management fees were
$764,000 and $422,000 and gross margin fees were $437,000 and $281,000 for the
years ended December 31, 1996 and 1995, respectively.
10. CONTINGENCIES
The Company is subject to various claims arising in the ordinary course of
business, and is a party to various legal proceedings which constitute
litigation incidental to the Company's business. In the opinion of management,
all such matters are either adequately covered by insurance or are not expected
to have a material adverse effect on the Company.
F-32
<PAGE> 161
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
On August 18, 1997, Bancomer sold its interest in the Company to Club
Regina Resorts, Inc. In connection with such sale, the Bancomer affiliate
provided financing to Club Regina Resorts, Inc.
12. SEGMENT INFORMATION
Based on management's belief and knowledge, allocations of certain income,
expense, assets, and liabilities items are based on the following percentages
for each subsidiary included in the DTB's consolidated financial statements:
<TABLE>
<CAPTION>
VACATION
SUBSIDIARY OWNERSHIP HOTEL
---------- --------- -----
<S> <C> <C>
Corporacion Mexitur, S.A. de C.V............................ 100%
Club Regina, S.A. de C.V.................................... 100%
D.T.I. de Cozumel, S.A. de C.V.............................. 100%
S.T.I. Cobamex, S.A. de C.V................................. 39% 61%
Corporacion Habitacianal Mexicana, S.A. de C.V.............. 50% 50%
DTB Holding................................................. 39% 61%
Promotora y Desarrolladora Pacifico, S.A. de C.V............ 52% 48%
D.T.I. Cabo San Lucas, S.A. de C.V.......................... 45% 55%
Promotora Turistica Nizuc, S.A. de C.V...................... 21% 79%
</TABLE>
For the year ended December 31, 1996
Following is management's estimate of 1996 revenues and expenses allocable
to each of the Company's business segments.
<TABLE>
<CAPTION>
VACATION
HOTEL OWNERSHIP CONSOLIDATED
($000) ($000) ($000)
-------- --------- ------------
<S> <C> <C> <C>
Revenue from operations........................... $ 45,062 $ 12,418 $ 57,480
Allocable operating expenses...................... 14,344 1,792 16,136
-------- -------- --------
Gross profit...................................... 30,718 10,626 41,344
Allocable other expenses.......................... 17,681 12,839 30,520
-------- -------- --------
Income (loss)before interest and allocable
taxes........................................... 13,037 (2,213) 10,824
Interest expense.................................. 5,179 3,108 8,287
Allocable taxes................................... 1,321 3,312 4,633
-------- -------- --------
Net income (loss)................................. $ 6,537 $ (8,633) $ (2,096)
======== ======== ========
</TABLE>
For the year ended December 31, 1995
Following is management's estimate of 1995 revenues and expenses allocable
to each of the Company's business segments.
F-33
<PAGE> 162
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
VACATION
HOTEL OWNERSHIP CONSOLIDATED
($000) ($000) ($000)
------ --------- ------------
<S> <C> <C> <C>
Revenue from operations..................................... $34,876 $ 8,338 $ 43,214
Allocable operating expenses................................ 11,508 462 11,970
------- -------- --------
Gross profit................................................ 23,368 7,876 31,244
Allocable other expenses.................................... 16,549 13,759 30,308
------- -------- --------
Income (loss) before interest and allocable taxes........... 6,819 (5,883) 936
Interest expense............................................ 6,473 3,884 10,357
Allocable taxes............................................. 1,938 3,356 5,294
------- -------- --------
Net income (loss)................................. $(1,592) $(13,123) $(14,715)
======= ======== ========
</TABLE>
F-34
<PAGE> 163
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Desarrollos Turisticos Bancomer, S.A. de C.V.
Mexico City
We have audited the accompanying consolidated statements of operations and
cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V. and Subsidiaries
(the "Company"), for the period January 1, 1997 through August 18, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations and cash flows
referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of Desarrollos Turisticos Bancomer, S.A. de
C.V. and Subsidiaries for the period from January 1, 1997 through August 18,
1997 in conformity with generally accepted accounting principles.
Miami, Florida
March 20, 1998
F-35
<PAGE> 164
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1997
THROUGH
AUGUST 18, 1997
----------------
<S> <C>
Revenue from hotel operations:
Rooms..................................................... $ 20,832
Food and beverage......................................... 11,342
Other departmental........................................ 2,297
Miscellaneous............................................. 242
----------------
Total revenue from hotel operations............... 34,713
Hotel operating expenses:
Rooms..................................................... 2,952
Food and beverage......................................... 6,038
Other departmental........................................ 746
----------------
Total hotel operating expenses.................... 9,736
----------------
Hotel gross profit................................ 24,977
Revenue from vacation ownership operations:
Sales of vacation ownership interests..................... 31,479
Less: amounts deferred to future periods.................. (30,653)
Add: amounts recognized from prior sales.................. 1,650
----------------
2,476
----------------
Interest income on vacation ownership contracts
receivable................................................ 3,277
Rental of unsold units...................................... 4,560
Maintenance fee income...................................... 2,461
Other....................................................... 1,329
----------------
Total revenue from vacation ownership
operations....................................... 14,103
Vacation ownership operating expenses:
Commissions paid to salespeople........................... 5,512
Less amounts deferred to future periods................... (5,413)
Add amounts recognized from prior sales................... 313
Maintenance of unsold units............................... 110
----------------
Total vacation ownership operating expenses,
net.............................................. 522
----------------
Vacation ownership gross profit............................. 13,581
----------------
Hotel and vacation ownership gross profit................... 38,558
Advertising, sales, and marketing........................... 7,863
General and administrative.................................. 10,274
Maintenance................................................. 9,407
Interest expense............................................ 7,539
Other expense............................................... 1,360
Exchange loss............................................... 157
----------------
Income before taxes............................... 1,958
Asset taxes................................................. 2,010
Other taxes................................................. 2,684
----------------
Net loss.......................................... $ (2,736)
================
</TABLE>
See accompanying notes.
F-36
<PAGE> 165
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1997
THROUGH
AUGUST 18, 1997
----------------
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (2,736)
Changes in operating assets and liabilities:
Accounts receivable....................................... (2,377)
Vacation ownership contracts receivable................... (9,547)
Inventory................................................. (372)
Taxes to be recovered..................................... 1,205
Deferred vacation ownership costs......................... (5,100)
Other assets.............................................. (1,436)
Accounts payable.......................................... 4,108
Reservations deposits..................................... 1,764
Other liabilities......................................... (2,122)
Unearned deposits......................................... (1,030)
Deferred vacation ownership revenue....................... 26,269
--------
Net cash provided by operating activities................... 8,626
INVESTING ACTIVITIES
Acquisition of property, plant, and equipment............... (849)
FINANCING ACTIVITIES
Proceeds from notes payable to related parties.............. 1,727
Distribution to stockholders................................ (11,000)
--------
Net cash used in financing activities....................... (9,273)
Decrease in cash and cash equivalents....................... (1,496)
Cash and cash equivalents at beginning of period............ 4,618
--------
Cash and cash equivalents at end of period.................. $ 3,122
========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................... $ 7,197
Income and asset taxes paid................................. $ 1,752
Non-cash financing activity:
Conversion of debt to equity.............................. $120,743
========
</TABLE>
See accompanying notes.
F-37
<PAGE> 166
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 18, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to August 18, 1997, Desarrollos Turisticos Bancomer, S.A. de C.V.
(the "Company"), was a wholly owned subsidiary of Bancomer, S.A. de C.V.
("Bancomer"), a Mexican banking and financial services institution. The Company
owns and operates certain hospitality assets of Bancomer, which comprise
primarily deluxe resort hotels and vacation ownership properties in Cancun,
Puerto Vallarta, and Cabo San Lucas, Mexico. The Company's principal operations
consist of (1) developing and acquiring hotel and vacation ownership resorts,
(2) marketing and selling vacation intervals at its resorts, (3) providing
consumer financing for the purchase of vacation intervals at its resorts, and
(4) managing the operations of its resorts.
The consolidated financial statements include the accounts of Desarrollos
Turisticos Bancomer, S.A. de C.V., and all of its majority owned subsidiaries,
which are listed below:
Club Regina, S.A. de C.V.
Servicios Turisticos Integrales Cobamex, S.A. de C.V.
Corporacion Habitacional Mexicana, S.A. de C.V.
Corporacion Mexitur, S.A. de C.V.
Promotora y Desarrolladora Pacifico, S.A. de C.V.
Promotora Turistica Nizuc, S.A. de C.V.
Desarrollos Turisticos Integrales Cabo San Lucas, S.A. de C.V.
Desarrollos Turisticos Integrales de Cozumel, S.A. de C.V.
All significant intercompany balances and transactions have been
eliminated.
TRANSLATION OF FOREIGN CURRENCY
The Company maintains its accounting records and prepares its financial
statements for domestic purposes in Mexican pesos. The accompanying financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP") in thousands of U.S.
dollars ("$") and, accordingly, differ from those used for domestic purposes in
Mexico.
Peso-denominated transactions are translated into U.S. dollars using
average exchange rates for revenue and expense transactions and year-end
exchange rates for assets and liabilities expected to be realized/satisfied
within one year. The effect of changes in the peso/dollar exchange rates on such
assets and liabilities is immaterial. Real estate and certain other long-term
assets and dollar-denominated transactions and balances (which include certain
vacation interval sales, vacation ownership contracts receivable, and borrowings
from related parties) are reported in the financial statements at their
historical dollar equivalent amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-38
<PAGE> 167
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VACATION OWNERSHIP CONTRACTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Substantially all contracts receivable relate to sales of vacation
ownership interests. While the Company does not obtain collateral for such
contracts, the Company does not believe it has significant concentrations of
credit risk in its contracts receivable because in the instance of
uncollectibility of a contract, the Company retains the right to recover and
resell the defaulted interval. Historically, the Company has been able to resell
such intervals at prices in excess of the defaulted receivable balances.
A significant portion of the Company's customers reside in Mexico and the
Company intends to continue to conduct business in Mexico. All of the Company's
sales offices are currently located in Mexico and any economic downturn in
Mexico, which has a history of economic instability, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
REVENUE RECOGNITION
Vacation Ownership Revenue
The Company sells shares of Class B stock in a majority-owned subsidiary to
vacation ownership buyers. The rights associated with the Class B shares allow
the buyers to use a specified type of accommodation (one-bedroom, two-bedroom,
etc.) during a specified season at any of the Company's resorts on a first-come,
first-serve basis annually for approximately thirty years. The sales price of
such Class B shares is recognized ratably over the thirty-year right to use
period and the costs of selling the Class B shares, which include brokerage
commissions, commissions to sales personnel, and marketing costs directly
associated with successful sales, are deferred and recognized ratably over the
right-to-use period.
Interest income from contracts receivable is recognized when received.
Maintenance fees are billed to Class B shareholders annually and recognized
as earned over 12 months. Maintenance expenses are recognized when incurred.
A provision for uncollectible contracts receivable is accrued for contracts
which become more than 180 days past due. Deferred revenue related to contracts
cancelled in any year subsequent to the year of sale is recognized to the extent
of cumulative cash collections in excess of costs. Deferred costs are recognized
in their entirety. Contracts which are canceled in the year of sale are treated
as a reduction of revenue.
Hotel Revenue
The Company has entered into a hotel management agreement with Westin
Hotels whereby Westin operates the hotels at each of the Company's resort
locations. Revenue is recognized when earned.
ADVERTISING EXPENSE
Advertising costs, which include solicitations of prospective timeshare
buyers, are expensed as incurred to the extent they cannot be directly
associated with a successful sale of Class B shares to a timeshare buyer.
Additionally, advertising costs include the costs of print and broadcast media
associated with the hotel operations. Advertising expenses in the period January
1, 1997 through August 18, 1997 totaled $2,965, and are included in advertising,
sales and marketing expenses.
2. VACATION OWNERSHIP CONTRACTS RECEIVABLE AND CREDIT LOSSES
Vacation ownership contracts receivables are originated when vacation
ownership buyers elect to finance their purchases through the Company. The
Company requires a minimum 15% down payment; a majority of purchasers are
citizens of the United States and Canada. Vacation ownership contracts
receivable bear interest from 14% to 15% and are collected in monthly
installments over periods ranging from 12 months to
F-39
<PAGE> 168
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 years. Approximately 66% of timeshare contracts receivable were U.S.
dollar-denominated at August 18, 1997.
Because the Company collects non-refundable cash from vacation ownership
buyers in excess of deferred profit, and because the Company has historically
been able to resell vacation ownership intervals at prices in excess of canceled
receivable balances, the Company does not provide for credit losses related to
doubtful contracts.
4. IMPAIRMENT LOSS
Management concluded that at December 31, 1994, the hotel and vacation
ownership assets were impaired and an impairment adjustment of $130,000,000 was
recorded as of that date. Management's estimate of the impairment loss was based
on its negotiations to sell the assets of the Company.
Accordingly, the assets are carried at the lower of cost or fair market
value less costs of disposal. No depreciation expense has been recorded on the
hotel and vacation ownership assets.
7. INCOME TAXES
The subsidiaries of the Company generally file separate Mexican income tax
returns. Because operations of the Company and each of its subsidiaries have
resulted in losses, only nominal amounts of income taxes have become payable.
The Company pays the greater of its income tax liability or a tax on net
assets. The amount of asset tax paid in excess of income taxes is available to
reduce future income tax payments.
8. RELATED PARTY TRANSACTIONS
The Company's shareholder is the principal owner or has substantial
ownership interests in other entities with which the Company transacts business.
The following table summarizes transactions with related parties for the period
January 1, 1997 through August 18, 1997:
<TABLE>
<S> <C> <C>
Expenses for the period:
Interest expense.......................................... $ 7,539
Lease expense............................................. $ 244
</TABLE>
9. COMMITMENTS
Certain subsidiaries of the Company entered into an operation and
administrative agreement with Westin Mexico, S.A. de C.V. ("Westin"), through
December 2003. The Company believes it has the right to terminate the agreement
pursuant to provisions related to change of control of Westin, but has not
asserted that right. Under the agreement, the subsidiaries are obligated to pay
certain cost and expense reimbursements related to promotion, marketing,
reservations, and sales.
Additionally, the subsidiaries are obligated to pay 0.9% of total operating
revenues for technical services provided by Westin. Technical services expense
was $1,564 for the period.
Additionally, Westin is entitled to management fees based on a percentage
of the total operating revenues of the hotels (ranging from 1% to 2% over the
life of the contract), as well as additional fees for maintaining certain
percentages related to gross margin operations (calculated as a percentage of
total operating revenues and ranging from 2.5% to 6%). Management fees were $756
and gross margin fees were $1,564 for the period, respectively.
F-40
<PAGE> 169
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CONTINGENCIES
The Company is subject to various claims arising in the ordinary course of
business, and is a party to various legal proceedings which constitute
litigation incidental to the Company's business. In the opinion of management,
all such matters are either adequately covered by insurance or are not expected
to have a material adverse effect on the Company.
11. SUBSEQUENT EVENTS
On August 18, 1997, Bancomer sold its interest in the Company to Club
Regina Resorts, Inc. In connection with such sale, the Bancomer affiliate
provided financing to Club Regina Resorts, Inc.
12. SEGMENT INFORMATION
For the period January 1, 1997 through August 18, 1997
Based on management's belief and knowledge, allocations of certain income,
expense, assets, and liabilities items are based on the following percentages
for each subsidiary included in the DTB's consolidated financial statements:
<TABLE>
<CAPTION>
VACATION
SUBSIDIARY OWNERSHIP HOTEL
---------- --------- -----
<S> <C> <C>
Corporacion Mexitur, S.A. de C.V............................ 100%
Club Regina, S.A. de C.V.................................... 100%
D.T.I. de Cozumel, S.A. de C.V.............................. 100%
S.T.I. Cobamex, S.A. de C.V................................. 39% 61%
Corporacion Habitacianal Mexicana, S.A. de C.V.............. 50% 50%
DTB Holding................................................. 39% 61%
Promotora y Desarrolladora Pacifico, S.A. de C.V............ 52% 48%
D.T.I. Cabo San Lucas, S.A. de C.V.......................... 45% 55%
Promotora Turistica Nizuc, S.A. de C.V...................... 21% 79%
</TABLE>
Following is management's estimate of revenues, expenses, allocable to each
of the Company's business segments.
<TABLE>
<CAPTION>
VACATION
HOTEL OWNERSHIP CONSOLIDATED
($000) ($000) ($000)
------- --------- ------------
<S> <C> <C> <C>
Revenue from operations............................ $34,713 $14,103 $48,816
Allocable operating expenses....................... 9,736 522 10,258
------- ------- -------
Gross profit....................................... 24,977 13,581 38,558
Allocable other expenses........................... 15,026 14,036 29,062
------- ------- -------
Income (loss)before interest & allocable taxes..... 9,951 (455) 9,496
Interest expense................................... 4,712 2,827 7,539
Allocable taxes.................................... 2,938 1,756 4,694
------- ------- -------
Net income (loss).................................. $ 2,301 $(5,038) $(2,737)
======= ======= =======
</TABLE>
F-41
<PAGE> 170
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUERS OR THE INITIAL PURCHASER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................
Enforceability of Civil or Criminal
Liabilities............................
Summary..................................
Risk Factors.............................
Exchange Rates...........................
Use of Proceeds..........................
Dividend Policy..........................
Capitalization...........................
Unaudited Pro Forma Financial Data.......
Selected Combined Historical Financial
Data...................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................
Business.................................
Management...............................
Certain Transactions.....................
Principal Stockholders...................
Description of Units.....................
Description of Notes.....................
Description of Warrants..................
Provisions Applicable to All
Securities.............................
Description of Other Debt................
Description of Capital Stock.............
Plan of Distribution.....................
Taxation.................................
Notice to Investors......................
Legal Matters............................
Independent Certified Public
Accountants............................
Defined Terms............................
Index to Financial Statements............ F-1
Annex A -- Form of Accredited Investor
Letter................................. A-1
</TABLE>
$100,000,000
CLUB REGINA RESORTS, INC.
CR RESORTS CAPITAL,
S. DE R. L. DE C. V.
100,000 UNITS CONSISTING OF
13% SENIOR NOTES DUE 2004
--------------------
PROSPECTUS
--------------------
March [ ], 1998
<PAGE> 171
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is empowered by Section 78.751 of the Nevada General
Corporation Law (the "NGCL"), subject to the procedures and limitations stated
therein, to indemnify any person who was or is a party or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director or officer, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the proceeding if he acted in good faith and
in a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In
accordance with Section 78.751, the Company must indemnify a director or officer
to the extent that the officer or director has been successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under the articles of
incorporation, or any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. The bylaws of the Company provide for indemnification
by the Company of its directors and officers to the fullest extent permitted by
the NGCL. In addition, the Company has provided in its Articles of Incorporation
that, to the fullest extent permitted by applicable law, no director or officer
shall be personally liable to the Company or stockholder for damages for breach
of fiduciary duty as a director or officer, except for act or omissions that
involve intentional misconduct, fraud, or a knowing violation of law or the
payment of dividends in violation of Section 78.300 of the NGCL.
The Company intends to obtain an insurance policy providing for
indemnification of officers and directors of the Company and certain other
persons against liabilities and expenses incurred by any of them in certain
stated proceedings and under certain stated conditions. The Company has entered
into separate indemnification agreements with each of its directors which may
require the Company, among other things, to indemnify such directors against
certain liabilities that may arise by reason of their status or service as
directors to the maximum extent permitted under Nevada law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
The following instruments and documents are included as Exhibits to this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1+ -- Purchase Agreement, dated November 26, 1997, among the
Issuers and the Initial Purchaser.
3.1+ -- Amended and Restated Articles of Incorporation of Club
Regina Resorts, Inc. ("CR US"), dated August 12, 1997.
3.2+ -- Articles of Incorporation of C.R. Resorts Capital, S. de
R.L. de C.V., dated August 11, 1997 (English Translation
which includes by-laws).
3.3+ -- By-Laws of Club Regina Resorts, Inc., effective April 15,
1997.
3.4+ -- Certificate of Designations of Class A Redeemable
Convertible Preferred Stock of CR US.
4.1+ -- Indenture (including Forms of Registered Note and
Outstanding Note), dated December 5, 1997, among the
Issuers and IBJ Schroder Bank & Trust Company.
</TABLE>
II-1
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.2+ -- Series B Warrant Agreement (including form of warrant),
dated December 5, 1997, between CR US and Jefferies &
Company, Inc. (Initial Purchaser).
4.3+ -- Warrant Agreement (including form of warrant), dated
December 5, 1997, between CR US and the Warrant Agent.
5.1+ -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
5.2+ -- Opinion of Santamarina y Steta.
10.1+ -- Second Amended and Restated Stock Purchase Agreement,
dated August 18, 1997, by and among Bancomer, CR US,
Desarrollos Turisticos Bancomer, S.A. de C.V. and CR
Hotel Acquisition Company, L.L.C.
10.2+ -- Cross Indemnity Agreement, dated August 18, 1997 by and
among Bancomer, CR US and others named therein.
10.3+ -- Post-Closing Agreement, dated August 19 ,1997, by and
among Bancomer, CR US and others named therein.
10.4+ -- Asset Management Agreement, dated August 18, 1997, by and
among Starwood Lodging Corporation and CR US.
10.5+ -- Form of Operating Agreement by and among Starwood and
subsidiaries of CR US (English translation).
10.6+ -- Warrant Shares Registration Rights Agreement, dated
December 5, 1997, between CR US and the Initial
Purchaser.
10.7+ -- A/B Exchange Registration Rights Agreement, dated
December 5, 1997, among the Issuers and the Initial
Purchaser.
10.8+ -- Series B Warrant Registration Rights Agreement, dated
December 5, 1997, between CR US and the Initial
Purchaser.
10.9+ -- 1997 Non-Employee Directors' Stock Option Plan.
10.10+ -- Form of Indemnity Agreement.
10.11+ -- Form of Registration Rights Agreement, by and among CR US
and stockholders of CR US.
10.12+ -- Form of Shareholders Agreement, by and among CR US and
stockholders of CR US.
10.13+ -- 1997 Long-Term Incentive Plan.
10.14+ -- Tax Allocation Agreement dated August 18, 1997, by and
among Starwood Lodging Corporation and CR US.
10.15+ -- Agreement dated May 20, 1996 by and among Starwood
Capital Group, L.L.C., CR US and Raintree Capital
Company, LLC.
10.16+ -- Agreement dated May 20, 1996 by and among SLT Realty
Limited Partnership, CR US and Raintree Capital Company,
LLC.
21.1+ -- List of Subsidiaries of CR US.
23.1+ -- Consents of Akin, Gump (included in Exhibit 5.1).
23.2+ -- Consent of Santa Marina y Steta (included in Exhibit
5.2).
23.3* -- Consent of Ernst & Young LLP.
25.1+ -- Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939, made by the
Trustee under the Indenture.
25.2+ -- Report of Financial Condition of Trustee (included as
Exhibit T-1.6 to Statement of Eligibility filed as
Exhibit -- 25.1).
</TABLE>
II-2
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1+ -- Financial Data Schedule.
99.1+ -- Form of Letter of Transmittal for Exchange Offer.
</TABLE>
- ---------------
* filed herewith
+ to be filed
(b) Financial Statement Schedules:
None. All Schedules are omitted because the required information is not
present in amounts sufficient to require submission of the Schedule or because
the information required is included in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless, in the opinion of its counsel, the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
B. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
C. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Registration Statement or Amendment to be signed on their
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
the State of Texas, on March 27, 1998.
CLUB REGINA RESORTS, INC.
By: /s/ DOUGLAS Y. BECH
----------------------------------
Chairman
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas Y. Bech and George D. Stroesenreuther,
and each of them (with full power to each of them to act alone), his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign on his behalf individually and in each capacity stated below
any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS Y. BECH Chairman (principal executive March 27, 1998
- ----------------------------------------------------- officer)
Douglas Y. Bech
/s/ JOHN MCCARTHY President and Chief Operating March 27, 1998
- ----------------------------------------------------- Officer
John McCarthy
/s/ GEORGE STROESENREUTHER Senior Vice President -- Finance March 27, 1998
- ----------------------------------------------------- and Accounting (principal
George Stroesenreuther accounting officer)
/s/ CHRISTOPHER ALLICK Director March 27, 1998
- -----------------------------------------------------
Christopher Allick
/s/ CHRISTEL DEHAAN Director March 27, 1998
- -----------------------------------------------------
Christel DeHaan
/s/ WALKER HARMAN Director March 27, 1998
- -----------------------------------------------------
Walker Harman
/s/ MERRICK KLEEMAN Director March 27, 1998
- -----------------------------------------------------
Merrick Kleeman
/s/ THOMAS POWERS Director March 27, 1998
- -----------------------------------------------------
Thomas Powers
</TABLE>
CR RESORTS CAPITAL, S. DE R.L. DE
C.V.
By: /s/ JOHN MCCARTHY
----------------------------------
President
II-4
<PAGE> 175
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas Y. Bech and John McCarthy, and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign on
his behalf individually and in each capacity stated below any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN MCCARTHY Chairman of the Board of Managers March 27, 1998
- -----------------------------------------------------
John McCarthy
/s/ DOUGLAS Y. BECH Secretary and Manager March 27, 1998
- -----------------------------------------------------
Douglas Y. Bech
</TABLE>
II-5
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1+ -- Purchase Agreement, dated November 26, 1997, among the
Issuers and the Initial Purchaser.
3.1+ -- Amended and Restated Articles of Incorporation of Club
Regina Resorts, Inc. ("CR US"), dated August 12, 1997.
3.2+ -- Articles of Incorporation of C.R. Resorts Capital, S. de
R.L. de C.V., dated August 11, 1997 (English Translation
which includes by-laws).
3.3+ -- By-Laws of Club Regina Resorts, Inc., effective April 15,
1997.
3.4+ -- Certificate of Designations of Class A Redeemable
Convertible Preferred Stock of CR US.
4.1+ -- Indenture (including Forms of Registered Note and
Outstanding Note), dated December 5, 1997, among the
Issuers and IBJ Schroder Bank & Trust Company.
4.2+ -- Series B Warrant Agreement (including form of warrant),
dated December 5, 1997, between CR US and Jefferies &
Company, Inc. (Initial Purchaser).
4.3+ -- Warrant Agreement (including form of warrant), dated
December 5, 1997, between CR US and the Warrant Agent.
5.1+ -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
5.2+ -- Opinion of Santamarina y Steta.
10.1+ -- Second Amended and Restated Stock Purchase Agreement,
dated August 18, 1997, by and among Bancomer, CR US,
Desarrollos Turisticos Bancomer, S.A. de C.V. and CR
Hotel Acquisition Company, L.L.C.
10.2+ -- Cross Indemnity Agreement, dated August 18, 1997 by and
among Bancomer, CR US and others named therein.
10.3+ -- Post-Closing Agreement, dated August 19 ,1997, by and
among Bancomer, CR US and others named therein.
10.4+ -- Asset Management Agreement, dated August 18, 1997, by and
among Starwood Lodging Corporation and CR US.
10.5+ -- Form of Operating Agreement by and among Starwood and
subsidiaries of CR US (English translation).
10.6+ -- Warrant Shares Registration Rights Agreement, dated
December 5, 1997, between CR US and the Initial
Purchaser.
10.7+ -- A/B Exchange Registration Rights Agreement, dated
December 5, 1997, among the Issuers and the Initial
Purchaser.
10.8+ -- Series B Warrant Registration Rights Agreement, dated
December 5, 1997, between CR US and the Initial
Purchaser.
10.9+ -- 1997 Non-Employee Directors' Stock Option Plan.
10.10+ -- Form of Indemnity Agreement.
10.11+ -- Form of Registration Rights Agreement, by and among CR US
and stockholders of CR US.
10.12+ -- Form of Shareholders Agreement, by and among CR US and
stockholders of CR US.
10.13+ -- 1997 Long-Term Incentive Plan.
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.14+ -- Tax Allocation Agreement dated August 18, 1997, by and
among Starwood Lodging Corporation and CR US.
10.15+ -- Agreement dated May 20, 1996 by and among Starwood
Capital Group, L.L.C., CR US and Raintree Capital
Company, LLC.
10.16+ -- Agreement dated May 20, 1996 by and among SLT Realty
Limited Partnership, CR US and Raintree Capital Company,
LLC.
21.1+ -- List of Subsidiaries of CR US.
23.1+ -- Consents of Akin, Gump (included in Exhibit 5.1).
23.2+ -- Consent of Santa Marina y Steta (included in Exhibit
5.2).
23.3* -- Consent of Ernst & Young LLP.
25.1+ -- Statement of Eligibility and Qualification on Form T-1
under the Trust Indenture Act of 1939, made by the
Trustee under the Indenture.
25.2+ -- Report of Financial Condition of Trustee (included as
Exhibit T-1.6 to Statement of Eligibility filed as
Exhibit -- 25.1).
27.1* -- Financial Data Schedule. Use format in Edgar Filer
manual.
99.1+ -- Form of Letter of Transmittal for Exchange Offer.
</TABLE>
- ---------------
* filed herewith
+ to be filed
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of (a) our report dated March 20, 1998 (except for the second and third
paragraphs of Note 10 as to which the date is March 27, 1998) with respect to
the consolidated balance sheets of Club Regina Resorts, Inc. as of December 31,
1997 and August 18, 1997 and the consolidated statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1997, for
the period January 1, 1997 through August 18, 1997 and for the period August 19,
1997 through December 31, 1997; (b) our report dated March 20, 1998 (except for
Note 6 as to which the date is March 27, 1998) with respect to the consolidated
balance sheets of CR Resorts Capital, S. de R.L. de C.V. as of December 31, 1997
and August 18, 1997 and the consolidated statements of income and retained
earnings and cash flows for the period August 18, 1997 through December 31,
1997; (c) our report dated June 5, 1997 (except for Note 11 as to which the date
is August 18, 1997) with respect to the consolidated statements of operations
and cash flows of Desarrollos Turisticos Bancomer, S.A. de C.V. for the years
ended December 31, 1996 and 1995; and (d) our report dated March 20, 1998 with
respect to the consolidated statements of operations and cash flows of
Desarrollos Turisticos Bancomer, S.A. de C.V. for the period January 1, 1997
through August 18, 1997; all of which are included in the Registration Statement
on Form S-4 of Club Regina Resorts, Inc. and CR Resorts Capital, S. de R.L. de
C.V. for the registration of 13% Senior Notes due 2004, Series B.
/s/ Ernst & Young LLP
Miami, Florida
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
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0
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