ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
THE COMPANY
Signature Resorts, Inc. is the world's largest vacation ownership company,
as measured by the number of resort locations. The Company currently has 81
resort locations in eight North American and European countries. The Company
also manages units at 22 resorts in Hawaii. The Company's resort locations are
in a variety of popular vacation destinations, including California, Hawaii,
Arizona, Florida, the Caribbean, Mexico, France, the United Kingdom, Spain and
the Canary Islands. Through both internal development and strategic
acquisitions, the Company has expanded the number of its resort locations and
its owner family base from nine resort locations and approximately 25,000 owner
families at the time of its August 1996 initial public offering to its current
81 resort locations and approximately 200,000 owner families. As a result of the
successful implementation of the Company's growth and operations strategy, the
Company's revenues have grown to $337.7 million in 1997 from $219.8 million in
1996 and $168.3 million in 1995. By taking advantage of synergies resulting from
the implementation of the Company's business strategy, the Company has increased
1997 EBITDA (as defined) by 91% over 1996 EBITDA and increased EBITDA as a
percentage of total revenues to 25.3% in 1997 from 20.3% in 1996.
The Company's operations consist of (i) marketing and selling vacation
ownership interests at its resort locations, which entitle the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year in
perpetuity ("Vacation Intervals"), and vacation points which may be redeemed for
occupancy rights at participating resort locations ("Vacation Points," and
together with Vacation Intervals, "vacation interests"), (ii) acquiring,
developing and operating vacation ownership resorts and (iii) providing consumer
financing to individual purchasers for the purchase of vacation interests at its
resort locations. The Company also provides resort management and maintenance
services for which it receives fees paid by the resorts' homeowners'
associations.
The Company markets resort locations as Sunterra Resorts, Embassy Vacation
Resorts and Westin Vacation Club Resorts and offers points-based vacation clubs
in Europe and North America. The Company's Sunterra Resorts are marketed under
the Company's Sunterra brand. The Company's Embassy Vacation Resorts and Westin
Vacation Club resort are operated under agreements with Promus Hotel Corporation
("Promus") (the owner of the Embassy Suites brand) and Westin Hotels & Resorts
("Westin"), respectively. The Company offers points-based vacation clubs in
Europe through its LSI and Global Group subsidiaries, and in North America
through its VI subsidiary.
The Company provides mortgage financing for approximately 75% of its
vacation ownership sales. In addition to enhancing the sales process, financing
customer receivables generates attractive profit margins and cash flows from the
spread between interest rates charged by the Company on its mortgage receivables
and the Company's cost of capital. This financing is typically collateralized by
the underlying Vacation Interval or Vacation Points.
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RECENT DEVELOPMENTS
Senior Notes. On March 30, 1998, the Company announced the proposed
offering of $125 million of its senior unsecured notes (the "Offering"). The
Company intends to use the net proceeds of the Offering to repay certain
existing indebtedness, for acquisitions and development and for general
corporate purposes.
Securitized Notes. On March 27, 1998, the Company announced that it intends
to securitize approximately $100 million of its mortgages receivable, of which
$50 million has been pre-committed. The Company expects to convey the mortgages
receivable to a bankruptcy remote subsidiary, which would issue notes secured by
such mortgages receivable (the "Securitized Notes"). The Securitized Notes would
be nonrecourse to the Company. The Company is finalizing negotiations and
expects to complete the securitization by May 1998. If completed, the
securitization would be treated as a financing transaction for accounting
purposes. The mortgages receivable and the Securitized Notes would remain on the
Company's balance sheet. The Company would recognize no gain or loss on the
Securitized Notes transaction.
Name Change. The Company's Board of Directors has approved, subject to
stockholder approval, a proposal to change the Company's corporate name to
"Sunterra Corporation." The name change proposal will be presented for
stockholder approval at the Company's May 15, 1998 annual meeting.
Senior Credit Facility. The Company's $100 million Senior Bank Credit
facility (the "Senior Credit Facility") was entered into on February 18, 1998.
The Senior Credit Facility has variable borrowing based on the percentage of the
Company's mortgage receivables pledged under such facility and the amount of
funds advanced thereunder. The interest rate under the Senior Credit Facility
will vary between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the
amount advanced against mortgage receivables. The Senior Credit Facility has a
three-year term and contains customary covenant representations and warranties
and conditions to borrow. As of March 20, 1998, approximately $87 million was
outstanding under the Senior Credit Facility. The Company is currently
negotiating with its bank syndicate to increase the amount available under the
Senior Credit Facility.
Acquisition of MMG Holding Corp. and Affiliated Companies. On February 3,
1998, the Company acquired 100% of the capital stock of MMG Holding Corp., MMG
Development Corp. and certain affiliated companies ("MMG") for approximately
$26.5 million, comprised of $18.5 million in cash and the assumption of
approximately $8.0 million of indebtedness (the "MMG Acquisition"). The acquired
assets include MMG's approximately $6.6 million mortgages receivable portfolio.
MMG is an Orlando, Florida based developer, operator and manager of vacation
ownership resorts, with sales or management operations at six resorts in the
southeastern United States. In addition, the Company assumed MMG's commitment to
purchase an additional resort in Gatlinburg, Tennessee, which the Company
purchased on February 18, 1998 and which the Company plans to convert to
vacation ownership.
Acquisition of Westin Carambola Beach Resort. On January 26, 1998, the
Company acquired the Westin Carambola Beach Resort (the "Carambola Beach
Resort") on the island of St. Croix, United States Virgin Islands for a purchase
price of approximately $13.0 million. The Carambola Beach Resort contains 156
one-bedroom suites and one two-bedroom suite located in 27 separate two-story
bungalows. The Company plans to begin vacation ownership sales and commence the
first phase of renovations at the Carambola Beach Resort during the second
quarter of 1998.
Development Agreement with Westin Hotels & Resorts. On January 19, 1998,
the Company and Westin modified their existing joint development agreement to
make their relationship non-exclusive. Under their modified relationship, the
Company and Westin each will be free to independently pursue all vacation
ownership development opportunities. Under the parties' prior exclusive
agreement, the Company and Westin each were restricted from developing four and
five star vacation ownership resorts with third parties. The Company and Westin,
however, will continue to jointly own and operate the Westin Vacation Club St.
John, located in the U.S. Virgin Islands. As part of the modification, the
Company's and Westin's representatives no longer serve on the other's board of
directors.
Additional Acquisitions and Developments. In addition to the MMG
Acquisition and the acquisition of the Carambola Beach Resort, on December 31,
1997, the Company acquired the 46 unit Coral Reef Resort in
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Miami, Florida, and, during the first quarter of 1998, acquired the 105 unit
Homewood Suites, located in Santa Fe, New Mexico, the 58 unit Club Mougins
Resort, located near Cannes, France and 10 units at the
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Sunset View Resort, located in Tenerife, Canary Islands, in individual
transactions with an aggregate purchase price of approximately $25.7 million.
The Company intends to begin vacation ownership sales at each of these
newly-acquired resorts during the second quarter of 1998. When added to the
Company's 70 resort locations at December 31, 1997, as well as the Carambola
Beach Resort and the seven resort locations acquired in the MMG Acquisition,
these acquisitions give the Company 81 current resort locations.
In addition, in March 1998, the Company received final planning, zoning and
development approval for the planned development of the 158 unit Westin Vacation
Club in Rancho Mirage, California, the Company's second joint venture with
Westin. In March 1998, the Company also received final planning, zoning and
development approval for the 58 unit Sunterra Harbor Lights Resort in San Diego,
California. The Company expects to complete the initial phase of development of
each of the Rancho Mirage and San Diego resorts and begin vacation ownership
sales at the resorts during 1999.
BUSINESS STRATEGY
The Company's objective is to capitalize on its position as the world's
largest vacation ownership company, as measured by resort locations, and its
base of approximately 200,000 owner families by continuing to (i) expand sales
at its resort locations, (ii) strategically acquire and develop resort inventory
and acquire operating companies and other vacation ownership-related assets,
(iii) improve operating margins by reducing operating costs through efficiencies
gained by operating as a large multi-resort system and (iv) develop and
introduce new vacation ownership products including its planned "Club Sunterra"
worldwide points-based vacation exchange system.
Signature has expanded to its current 81 resort locations from nine at the
time of its August 1996 initial public offering through the successful
implementation of its growth and operations strategy. The Company believes it
has achieved sufficient size to enable it to capitalize on the strategic
advantages of operating and purchasing leverage and the ability to provide
choice and flexibility to its customers. The key elements of the Company's
growth strategy are described below:
Expand Sales. The Company intends to expand sales of vacation ownership
interests at its existing resorts by adding additional inventory through the
construction of new development units and through broader marketing efforts. As
of December 31, 1997, the Company had available inventory of 29,168 Vacation
Intervals and 599,554 Vacation Points. The Company believes it is well
positioned to continue to expand its existing supply of inventory.
Acquisition and Development. Signature has achieved its leading position in
the industry by identifying and acquiring resorts in desirable locations at
prices which the Company believes will allow it to achieve excellent returns.
The Company's acquisition and development of new resort locations allows it to
add new vacation ownership inventory and increase the number of owner families
within the Company's resort system. The Company targets operating companies,
resort properties and other vacation ownership assets for potential acquisition
and development opportunities to replenish vacation ownership sales inventory
while entering new markets and creating a larger resort and customer base from
which to develop and market its products.
The Company evaluates each acquisition candidate based on certain criteria.
Each potential transaction is evaluated based on the strategic location of the
resort properties and consumer demand for vacation ownership inventory, in each
case taking into consideration the Company's existing locations and operations.
The Company analyzes the potential economic impact of each transaction to
maximize its return on investment, as well as potential strategic synergies.
Management believes that its proven acquisition and development record and
public company status give the Company a competitive advantage in acquiring
assets, businesses and operations in the fragmented vacation ownership industry.
Improve Operating Margins. As the Company continues to expand the number of
its resort locations as well as its owner family base, management believes that
it will be able to realize improved operating margins through the realization of
increased efficiencies, reduced on-site administrative requirements and reduced
operating costs through its multi-resort management system. In addition, the
Company believes that
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additional acquisitions will allow it to experience increased margins by
leveraging operating and corporate overhead costs over a larger revenue base.
Signature's base of approximately 200,000 owner families also provides an
established market to which to sell additional vacation and leisure products
which the Company believes will reduce marketing and advertising expenses as a
percentage of sales. Because existing owners of vacation ownership interests
are, in effect, a pre-screened pool of potential customers, repeat sales and
customer referrals increase sales while marketing expenses associated with these
sales are significantly reduced. As the Company's owner family base continues to
expand and these type of sales represent a larger percentage of overall sales,
the Company believes operating margins will continue to improve.
Develop New Vacation Ownership Products. The Company believes its growing
resort portfolio and base of approximately 200,000 owner families will enable it
to offer a wider variety of vacation ownership products. The Company's planned
Club Sunterra worldwide points-based vacation exchange system is one such
product that will allow owners to create vacations custom tailored to their
individual needs. Member families will be able to purchase an annual allotment
of "points" to use as a currency to reserve the specific resort location,
season, unit type and length of stay they desire from among Club Sunterra's
resort locations throughout the world. This type of points-based system will
provide the consumer more flexibility in their vacation plans compared to
traditional one week intervals.
In general, under a points-based vacation exchange system, members purchase
an annual allotment of points which can be redeemed for occupancy rights at the
club's participating resorts. Compared to other vacation ownership arrangements,
the points-based system provides members significant flexibility in planning
vacations as the number of points that are required for a stay at any one resort
varies depending upon a variety of factors, including the resort location, the
size of the unit, the vacation season and the length of stay. Under this system,
members can select vacations according to their schedules, space needs and
available points. Subject to certain restrictions, members are typically allowed
to carry over for one year any unused points and to "borrow" points from the
forthcoming year. In addition, members are required to pay annual fees for
certain maintenance and management costs associated with the operation of the
resorts based on the number of points to which they are entitled.
THE VACATION OWNERSHIP INDUSTRY
The Market. The resort component of the leisure industry primarily is
serviced by two separate alternatives for overnight accommodations: commercial
lodging establishments and vacation ownership resorts. Commercial lodging
consists of hotels and motels in which a room is rented on a nightly, weekly or
monthly basis for the duration of the visit and is supplemented by rentals of
privately-owned condominium units or homes. For many vacationers, particularly
those with families, a lengthy stay at a quality commercial lodging
establishment can be very expensive, and the space provided to the guest
relative to the cost (without renting multiple rooms) is not economical for some
vacationers. Also, room rates and availability at such establishments are
subject to change periodically. In addition to providing improved lifestyle
benefits to owners, vacation ownership presents an economical alternative to
commercial lodging for vacationers.
The vacation ownership industry represents one of the fastest growing
segments of the lodging industry. According to ARDA and other industry sources,
during the seventeen year period ending in 1997, worldwide vacation ownership
sales volume increased from $490 million in 1980 to an estimated $6.0 billion in
1997, a compounded annual growth rate of 15.9%.
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As shown in the following charts, according to ARDA, the worldwide vacation
ownership industry has expanded significantly since 1980 both in vacation
interest sales volume and number of vacation interest owners.
[CHARTS]
Source: ARDA (includes, with respect to 1995, 1996 and 1997, unpublished
estimates provided by ARDA)
ARDA reports and other industry data indicate that during the past decade
the following factors have contributed to the increased acceptance of the
vacation ownership concept among the general public and the substantial growth
of the vacation ownership industry:
- increased consumer awareness of the value and benefits of vacation
ownership, including the cost savings relative to other lodging
alternatives;
- increased flexibility of vacation ownership due to the growth of
international exchange organizations;
- improvement in the quality of accommodations and management of vacation
ownership resorts;
- increased consumer confidence resulting from new consumer protection
regulations and the entrance of brand name national lodging companies to
the industry; and
- increased availability of consumer financing for purchasers of vacation
interests.
The vacation ownership industry traditionally has been highly fragmented
and dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality. The
Company believes that one of the most significant factors contributing to the
current success of the vacation ownership industry is the entry into the market
of some of the world's major lodging, hospitality and entertainment companies.
Such major companies which now operate or are developing Vacation Interval
resorts include Marriott Ownership Resorts ("Marriott"), The Walt Disney Company
("Disney"), Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"),
Four Seasons Hotels & Resorts ("Four Seasons"), Inter-Continental Hotels and
Resorts ("Inter-Continental"), Promus and Westin. Unlike the Company, however,
the vacation ownership operations of each of Marriott, Disney, Hilton, Hyatt,
Four Seasons, Inter-Continental, Westin and Promus comprise only a small portion
of such companies' overall operations.
The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's relatively
rapid recent growth rate and relatively high profit margins. In addition, such
companies recognize that Vacation Intervals provide an attractive alternative to
the traditional hotel-based vacation and allow the hotel companies to leverage
their brands into additional resort markets where demand exists for
accommodations beyond traditional hotels.
The Consumer. According to the most recent information compiled by ARDA,
the three primary reasons cited by consumers for purchasing vacation interests
are (i) the ability to exchange vacation interests for accommodations at other
resorts through exchange networks (cited by 75% of vacation interest
purchasers), (ii) the money savings over traditional resort vacations (cited by
72% of purchasers) and (iii) the quality service and upkeep of the resort at
which they purchased a vacation interest (cited by 80% of
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purchasers). According to ARDA, vacation interest purchasers have a high rate of
repeat purchases: approximately 41% of all vacation interest owners own more
than one vacation interest representing approximately 65% of the industry
inventory and approximately 51% of all owners who bought their first vacation
interest before 1985 have since purchased a second vacation interest. In
addition, ARDA indicates that customer satisfaction increases with length of
ownership, age, income, multiple location ownership and accessibility to
vacation interest exchange networks.
The Company believes it is well positioned to take advantage of current
demographic trends, primarily because of the variety and quality of its resort
locations and its participation in the RCI and II exchange networks. The Company
expects the vacation ownership industry to continue to grow as the baby-boom
generation continues to enter the 40-55 year age bracket, according to ARDA, the
age group most likely to purchase Vacation Intervals and Vacation Points.
DESCRIPTION OF THE COMPANY'S RESORT LOCATIONS
The Company has 81 resort locations, which include 35 resort locations sold
as Vacation Intervals and 46 resort locations sold in points-based vacation
exchange systems. Of the 35 resort locations sold as Vacation Intervals, 22
resort locations are currently in sales, sales have yet to begin at four resort
locations, and sales at nine resort locations have been substantially completed.
Of the 46 resort locations sold in points-based vacation exchange systems, the
Company owns or has sold, in the aggregate, all of the unit inventory at 25 of
the resort locations and owns a portion of the unit inventory at the other 21
resort locations.
Through its primary resort brands, the Company offers Vacation Intervals in
each of the three principal price segments of the market (value, upscale
(characterized by high quality accommodations and service) and luxury
(characterized by elegant accommodations and personalized service)). In
addition, the Company operates points-based vacation clubs in North America and
Europe.
Sunterra Resorts. The Company's Sunterra Resorts, includes resorts in both
the value and upscale price segments which are not affiliated with any hotel
chain. Vacation Intervals at the Company's Sunterra Resorts generally sell for
$6,000 to $25,000 and are targeted to buyers with annual incomes ranging from
$35,000 to $80,000. The Company believes its Sunterra Resorts offer buyers an
economical alternative to resorts affiliated with brand-name lodging companies
(such as Embassy Vacation Resorts and Westin Vacation Club resorts) and
traditional vacation lodging alternatives.
Embassy Vacation Resorts. The Company's Embassy Vacation Resorts are
positioned in the upscale price segment of the market and are characterized by
high quality accommodations and service. Vacation Intervals at the Company's
four Embassy Vacation Resorts generally sell for $14,000 to $20,000 and are
targeted to buyers with annual incomes ranging from $60,000 to $150,000. Embassy
Vacation Resorts are designed to provide vacation ownership accommodations that
offer the same high quality and value that is represented by the more than 140
Embassy Suites hotels throughout North America. The Company is one of two
licensees and operators of Embassy Vacation Resorts, and is currently evaluating
additional resorts that could be operated as Embassy Vacation Resorts.
Westin Vacation Club Resort. The Company's Westin Vacation Club resort is
positioned in the luxury price segment of the market and is characterized by
elegant accommodations and personalized service. Vacation Intervals at Westin
Vacation Club resort generally sell for $16,000 to $25,000 and are targeted to
buyers with annual incomes ranging from $80,000 to $250,000.
LSI's Grand Vacation Club. As a result of the LSI Acquisition, the Company
acquired LSI's Grand Vacation Club points-based system and as a result of the
Global Acquisition, the Company acquired the Global Group's Global Vacation
Club, which it is integrating into the LSI system. Grand Vacation Club allows
members to purchase an annual allotment of points that can be redeemed for
occupancy rights at Grand Vacation Club's European resorts and at other
participating resorts. The Company markets the Grand Vacation Club in the United
Kingdom, Spain, France and Austria. Points in the Grand Vacation Club can
typically be purchased for approximately $220 a point. A typical one week stay
at a Grand Vacation Club
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resort requires approximately 46 points. Each Grand Vacation Club member
receives a new allotment of points each year throughout the term of its
membership in the club.
VI's Vacation Time Share Program. As a result of the VI Acquisition, the
Company acquired VI's Vacation Time Share Program (the "VTS Program") which it
markets to buyers in the United States, Canada and Mexico. The VTS Program is a
points-based system much like LSI's Grand Vacation Club in that it allows
members to purchase points that are redeemed for occupancy rights at
participating VTS Program resorts. Points in the VTS Program typically can be
purchased for approximately $119 a point. A typical one week stay at a VI resort
requires approximately 91 points. Each VTS Program member receives a new
allotment of points each year throughout the term of its membership in the
program.
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The following tables set forth certain information, as of December 31,
1997, regarding each of the Company's 70 resort locations on such date,
including location, date acquired by the Company, the number of existing and
total potential units at the resort and, where applicable, the number of
Vacation Intervals or Vacation Points currently available for sale and occupancy
and additional expansion potential. Of the resorts set forth below, the Embassy
Vacation Resorts Poipu Point and Kaanapali Beach, the Sunterra Resorts NorthBay
at Lake Arrowhead, the Westin Vacation Club St. John, five Grand Vacation Club
Resorts and 16 Vacation Internationale Resorts are partially owned by the
Company. The exact number of units Vacation Intervals and Vacation Points
ultimately achieved may differ from the following estimates based on future land
planning and site layout considerations, as well as other factors described
under "Business and Properties."
UNITS AT RESORT
---------------------------------
DATE POTENTIAL
RESORT LOCATION ACQUIRED CURRENT(a) EXPANSION(b) TOTAL
------------------------------ ---------------------------- -------------- ---------- ------------ -----
SUNTERRA RESORTS
Sunterra Resorts Cypress
Pointe....................... Lake Buena Vista, Florida November 1992 224 276(e) 500
Sunterra Resorts The
Plantation at Fall Creek..... Branson, Missouri July 1994 130 286(f) 416
Sunterra Resorts Royal
Dunes........................ Hilton Head, S. Carolina April 1994 40 15(g) 55
Sunterra Resorts San Luis
Bay.......................... Avila Beach, California June 1995 98 32(h) 130
Sunterra Resorts Royal Palm
Beach........................ St. Maarten, Netherlands July 1995 140 --(i) 140
Antilles
Sunterra Resorts Flamingo
Beach........................ St. Maarten, Netherlands July 1995 172 85(j) 257
Antilles
Sunterra Resorts Scottsdale
Villa Mirage................. Scottsdale, Arizona February 1997 64 104(k) 168
Sunterra Resorts The Ridge on
Sedona Golf.................. Sedona, Arizona February 1997 12 106(l) 118
Sunterra Resorts Sedona
Springs...................... Sedona, Arizona February 1997 40 -- 40
Sunterra Resorts Sedona
Summit....................... Sedona, Arizona February 1997 60 -- 60
Sunterra Resorts Villas at
Poco Diablo.................. Sedona, Arizona February 1997 33 -- 33
Sunterra Resorts Villas of
Sedona....................... Sedona, Arizona February 1997 40 -- 40
Sunterra Resorts NorthBay at
Lake Arrowhead(m)............ Lake Arrowhead, California February 1997 13 -- 13
Sunterra Resorts Tahoe Beach
& Ski........................ South Lake Tahoe, California February 1997 140 -- 140
Sunterra Resorts Villas on
the Lake..................... Montgomery, Texas February 1997 37 64(n) 101
Sunterra Resorts Powhatan
Plantation................... Williamsburg, Virginia May 1997 419 81(o) 500
Sunterra Resorts Greensprings
Plantation................... Williamsburg, Virginia May 1997 76 424(p) 500
Sunterra Resorts The Savoy on
South Beach.................. Miami Beach, Florida August 1997 40 28(q) 68
Sunterra Resorts Bent Creek
Golf Village................. Gatlinburg, Tennessee September 1997 -- 217(r) 217
Sunterra Resorts Coral
Reef......................... Miami Beach, Florida December 1997 -- 46(s) 46
TOTAL................................................................ ----- ----- -----
OTHER SUNTERRA AFFILIATED 1,778 1,764 3,542
RESORTS
Tahoe Seasons(t)............. South Lake Tahoe, California February 1997 21 -- 21
Other(u)..................... -- -- --
----- ----- -----
TOTAL................................................................ 21 -- 21
EMBASSY VACATION RESORTS
Embassy Vacation Resort Poipu
Point(v)..................... Kauai, Hawaii November 1994 219(w) -- 219
Embassy Vacation Resort Grand
Beach........................ Orlando, Florida January 1995 126 248(x) 374
Embassy Vacation Resort Lake
Tahoe........................ South Lake Tahoe, California May 1996 102 108(y) 210
Embassy Vacation Resort
Kaanapali Beach(z)........... Maui, Hawaii November 1997 -- 157(z) 157
TOTAL................................................................ ----- ----- -----
WESTIN VACATION CLUB 447 513 960
Westin Vacation Club St.
John(aa)..................... St. John, U.S. Virgin May 1997 48 48 96(bb)
Islands
----- ----- -----
TOTAL................................................................ 48 48 96
----- ----- -----
TOTAL VACATION UNITS AND VACATION INTERVALS................................ 2,294 2,325 4,619
VACATION INTERVAL
INVENTORY AT RESORT
-------------------------------------
CURRENT POTENTIAL
RESORT INVENTORY(C) EXPANSION(D) TOTAL
------------------------------ ------------ ------------ -------
SUNTERRA RESORTS
Sunterra Resorts Cypress
Pointe....................... 779 14,076(e) 14,855
Sunterra Resorts The
Plantation at Fall Creek..... 1,116 14,586(f) 15,702
Sunterra Resorts Royal
Dunes........................ 165 765(g) 930
Sunterra Resorts San Luis
Bay.......................... 1,443 1,632(h) 3,075
Sunterra Resorts Royal Palm
Beach........................ 842 -- 842
Sunterra Resorts Flamingo
Beach........................ 1,337 4,335(j) 5,672
Sunterra Resorts Scottsdale
Villa Mirage................. 446 5,304(k) 5,750
Sunterra Resorts The Ridge on
Sedona Golf.................. 90 5,406(l) 5,496
Sunterra Resorts Sedona
Springs...................... 61 -- 61
Sunterra Resorts Sedona
Summit....................... 602 -- 602
Sunterra Resorts Villas at
Poco Diablo.................. 71 -- 71
Sunterra Resorts Villas of
Sedona....................... 220 -- 220
Sunterra Resorts NorthBay at
Lake Arrowhead(m)............ 92 -- 92
Sunterra Resorts Tahoe Beach
& Ski........................ 634 -- 634
Sunterra Resorts Villas on
the Lake..................... 1,111 3,264(n) 4,375
Sunterra Resorts Powhatan
Plantation................... 913 4,131(o) 5,044
Sunterra Resorts Greensprings
Plantation................... 819 21,624(p) 22,443
Sunterra Resorts The Savoy on
South Beach.................. 2,040 1,428(q) 3,468
Sunterra Resorts Bent Creek
Golf Village................. -- 11,067(r) 11,067
Sunterra Resorts Coral
Reef......................... -- 2,346(s) 2,346
------ ------ -------
TOTAL.................. 12,781 89,964 102,745
OTHER SUNTERRA AFFILIATED
RESORTS
Tahoe Seasons(t)............. 201 -- 201
Other(u)..................... 62 -- 62
------ ------ -------
TOTAL.................. 263 -- 263
EMBASSY VACATION RESORTS
Embassy Vacation Resort Poipu
Point(v)..................... 8,512 -- 8,512
Embassy Vacation Resort Grand
Beach........................ 1,913 12,648(x) 14,561
Embassy Vacation Resort Lake
Tahoe........................ 3,984 5,508(y) 9,492
Embassy Vacation Resort
Kaanapali Beach(z)........... -- 8,007(z) 8,007
------ ------ -------
TOTAL.................. 14,409 26,163 40,572
WESTIN VACATION CLUB
Westin Vacation Club St.
John(aa)..................... 1,715 2,448 4,163
------ ------ -------
TOTAL.................. 1,715 2,448 4,163
TOTAL VACATION UNITS AND ------ ------ -------
VACATION INTERVALS......... 29,168 118,575 147,743
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VACATION POINTS
UNITS AT RESORT AT RESORT
----------------------------------- -------------
DATE POTENTIAL CURRENT
RESORT LOCATION ACQUIRED CURRENT(dd) EXPANSION(ee) TOTAL INVENTORY(ff)
------------------------------ ---------------------------- -------------- ----------- ------------- ----- -------------
GRAND VACATION CLUB RESORTS(cc)
The Alpine Club.............. Schladming, Austria August 1997 68 -- 68
Club del Carmen.............. Lanzarote, Canary Islands August 1997 67 -- 67
Flanesford Priory Country
Estate....................... Herefordshire, England August 1997 16 -- 16
Los Amigos Beach Club........ Costa del Sol, Spain August 1997 140 50 190
Pine Lake Resort............. Lancashire, England August 1997 100 -- 100
Royal Oasis Club at Benal
Beach........................ Costa del Sol, Spain August 1997 108 -- 108
Royal Oasis Club at La
Quinta....................... Costa del Sol, Spain August 1997 68 -- 68
White Sands Beach Club....... Menorca, Balearic Islands August 1997 48 -- 48
White Sands Country Club..... Menorca, Balearic Islands August 1997 51 -- 51
Woodford Bridge Country
Club......................... North Devon, England August 1997 72 50 122
Wychnor Park Country Club.... Stratfordshire, England August 1997 44 20 64 461,473
Burnside Park Owners Club.... Lancashire, England December 1997 14 -- 14
Kenmore Club................. Perthshire, Scotland December 1997 26 -- 26
Los Claveles................. Tenerife, Canary Islands December 1997 5 -- 5
Le Moulin de Connelles....... Normandy, France December 1997 3 -- 3
Playa Paraiso................ Mallorca, Spain December 1997 3 -- 3
Royal Sunset Beach Club...... Tenerife, Canary Islands December 1997 126 -- 126
Royal Tenerife Country
Club......................... Tenerife, Canary Islands December 1997 77 -- 77
Sahara Sunset Club........... Costa del Sol, Spain December 1997 150 -- 150
Sunset Bay Club.............. Tenerife, Canary Islands December 1997 206 -- 206
Sunset Harbour Club.......... Tenerife, Canary Islands December 1997 124 -- 124
Malibu Village............... Roussilon, France December 1997 3 -- 3
Marina Baie des Anges........ Nice, France December 1997 22 -- 22
----- ----- -----
TOTAL.................. 1,541 120 1,661
VACATION INTERNATIONALE
RESORTS
Clock Tower.................. Whistler, British Columbia November 1997 15 -- 15
Sea Mountain................. Big Island, Hawaii November 1997 28 -- 28
Elkhorn Village.............. Sun Valley, Idaho November 1997 20 -- 20
Embarcadero.................. Newport, Oregon November 1997 41 -- 41
Fairway Villa................ Oahu, Hawaii November 1997 19 -- 19
Hololani..................... Maui, Hawaii November 1997 9 -- 9
Kapaa Shore.................. Kauai, Hawaii November 1997 14 -- 14
Kihei Kai Nani............... Maui, Hawaii November 1997 6 -- 6
Kingsbury.................... Stateline, Nevada November 1997 20 -- 20
Oasis Resort................. Palm Springs, California November 1997 116 -- 116
Marina Inn................... Oceanside, California November 1997 7 -- 7 138,081
Papakea...................... Maui, Hawaii November 1997 25 -- 25
Point Brown Resort........... Ocean Shores, Washington November 1997 24 -- 24
Pono Kai..................... Kauai, Hawaii November 1997 22 -- 22
Royal Kuhio.................. Oahu, Hawaii November 1997 14 -- 14
Sea Village.................. Big Island, Hawaii November 1997 51 -- 51
The Pines.................... Sunriver, Oregon November 1997 68 -- 68
The Village at Steamboat..... Steamboat Springs, Colorado November 1997 26 263 289
Torres Mazatlan.............. Mazatlan, Mexico November 1997 126 -- 126
Vallarta Torre............... Puerto Vallarta, Mexico November 1997 64 -- 64
Valley Isle.................. Maui, Hawaii November 1997 21 -- 21
----- ----- -----
TOTAL.................. 736 263 999
VACATION POINTS
AT RESORT
-----------------------
POTENTIAL
RESORT EXPANSION(GG) TOTAL
------------------------------ ------------- -------
GRAND VACATION CLUB
RESORTS(CC)
The Alpine Club..............
Club del Carmen..............
Flanesford Priory Country
Estate.......................
Los Amigos Beach Club........
Pine Lake Resort.............
Royal Oasis Club at Benal
Beach........................
Royal Oasis Club at La
Quinta.......................
White Sands Beach Club.......
White Sands Country Club.....
Woodford Bridge Country
Club.........................
Wychnor Park Country Club.... 276,000 737,473
Burnside Park Owners Club....
Kenmore Club.................
Los Claveles.................
Le Moulin de Connelles.......
Playa Paraiso................
Royal Sunset Beach Club......
Royal Tenerife Country
Club.........................
Sahara Sunset Club...........
Sunset Bay Club..............
Sunset Harbour Club..........
Malibu Village...............
Marina Baie des Anges........
TOTAL..................
VACATION INTERNATIONALE
RESORTS
Clock Tower..................
Sea Mountain.................
Elkhorn Village..............
Embarcadero..................
Fairway Villa................
Hololani.....................
Kapaa Shore..................
Kihei Kai Nani...............
Kingsbury....................
Oasis Resort.................
Marina Inn................... 1,192,626 1,330,707
Papakea......................
Point Brown Resort...........
Pono Kai.....................
Royal Kuhio..................
Sea Village..................
The Pines....................
The Village at Steamboat.....
Torres Mazatlan..............
Vallarta Torre...............
Valley Isle..................
TOTAL..................
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(a) Current units at each resort represents only those units that have received
their certificate of occupancy as of December 31, 1997. The Company
generally is able to sell 51 Vacation Intervals with respect to each unit
at its resorts (the 52nd week is generally utilized for maintenance).
(b) Potential expansion units at each resort includes, as of December 31, 1997,
(i) units then under construction that have not yet received their
certificate of occupancy and (ii) units planned to be developed on land
then owned by the Company or under option to be acquired which have not yet
received their certificate of occupancy and which were not then under
construction.
(c) Current inventory of Vacation Intervals at each resort represents only
those unsold Vacation Intervals that have received their certificate of
occupancy as of December 31, 1997.
(d) Potential expansion of Vacation Intervals at each resort includes, as of
December 31, 1997, (i) Vacation Intervals then under development that have
not yet received their certificate of occupancy and (ii) Vacation Interval
development potential on land then owned by the Company or under option to
be acquired which have not yet received their certificate of occupancy and
which were not then under construction.
(e) Includes an estimated 276 units which the Company plans to construct on
land which it owns at the Sunterra Resorts Cypress Pointe and for which all
necessary governmental approvals and permits (except building permits) have
been obtained. Should the Company elect to construct a higher percentage of
three bedroom units, rather than its current planned mix of one, two and
three bedroom units, the actual number of planned units will be lower than
is indicated above.
(f) Includes an estimated 270 units which the Company plans to construct on
land that it acquired in September 1997. An additional 16 units were
completed during the first quarter 1998.
(g) Includes the construction of 15 units that were completed in the first
quarter 1998.
(h) Includes an estimated 32 units currently under construction which should be
completed during the third quarter of 1998. The Company is considering the
acquisition of additional land near the Sunterra Resorts San Luis Bay for
the addition of an estimated 100 units, but has yet to enter into an
agreement with respect to such land or to obtain any of the necessary
governmental approvals and permits for such proposed expansion.
(i) The Company has not committed to any expansion of the Sunterra Resorts
Royal Palm Beach. The Company is considering the acquisition of additional
land adjacent to the Sunterra Resorts Royal Palm Beach for the addition of
an estimated 60 units (and a corresponding number of Vacation Intervals)
but has yet to enter into an agreement with respect to such additional land
or to obtain the necessary governmental approvals and permits for such
expansion.
(j) In May 1996, the Company acquired a five-acre parcel of land adjacent to
the Sunterra Resorts Flamingo Beach on which, as of December 31, 1997, the
Company planned to develop approximately 85 units (and create a
corresponding number of Vacation Intervals). During the first quarter of
1998, the Company increased the number of units to be developed on such
land from 85 to 127. The Company plans to begin construction on 10 units
during the second quarter 1998.
(k) Includes 64 units currently under construction and scheduled to be
completed during the second quarter of 1998. The Company plans to commence
construction on an additional 40 units during 1999. All necessary
discretionary approvals and permits have been received for all units to be
constructed at the resort.
(l) Construction began in December 1996 on Sunterra Resorts The Ridge on Sedona
Golf, which, upon completion, will consist of 118 units. The first 12 units
received certificates of occupancy during the fourth quarter 1997.
Currently, 22 of the additional 106 units are under construction and
scheduled to be completed during the third quarter of 1998. Governmental
approvals and permits have not been sought or received for the remaining
planned 84 units. Vacation Interval sales began in May 1997.
(m) The Company owns or has the power to vote 80% of the partnership interests
of Trion Capital Corporation. Trion is the General Partner of Arrowhead
Capital Partners, L.P., which is the developer of Sunterra Resorts NorthBay
at Lake Arrowhead. The General Partner is entitled to receive 1% of the
profits of Arrowhead Capital Partners, L.P., but under certain
circumstances, is entitled to receive substantially higher profits. AVCOM
has an exclusive sales and marketing contract for sales at Sunterra Resorts
NorthBay at Lake Arrowhead, and is the property manager of the resort.
Although Arrowhead Capital Partners, L.P. owns undeveloped land and
buildings under construction at the Sunterra Resorts NorthBay at Lake
Arrowhead, no definitive expansion plans have been made.
(n) Sunterra Resorts Villas on the Lake consists of 37 existing units purchased
in February 1996 currently in the final phase of renovation. Land included
in the initial purchase is able to accommodate construction of an
additional 64 units in Phase II. The Phase II construction is scheduled to
begin during the second quarter of 1998 and all necessary discretionary
government approvals and permits have been received for the additional 64
units.
(o) Includes 14 units that were completed during the fourth quarter of 1997 but
did not receive certificates of occupancy until the first quarter of 1998.
The Company's development schedule for the remaining 67 units will be
determined based on market demand and other factors.
(p) Includes 30 units that were completed and received certificates of
occupancy during the first quarter 1998. The Company's development schedule
for the remaining 394 units will be determined based on market demand and
other factors.
(q) Construction of an additional 28 units is scheduled to begin during the
second quarter of 1998.
(r) The Company acquired the Sunterra Resorts Bent Creek Golf Village and
surrounding property in September 1997. The Company plans to convert the
property into 108 units and develop an additional 109 units. Construction
of four units is in process and sales are expected to begin in the second
quarter of 1998.
(s) In December 1997, the Company purchased a 46 unit apartment complex which
it plans to convert to vacation ownership. The property is already
registered and renovations are scheduled to begin during the second quarter
of 1998.
(t) Prior to being acquired by the Company, AVCOM purchased a portfolio of
1,057 defaulted consumer notes at the Tahoe Seasons Resort in March 1996
which are secured by Vacation Intervals. Of the notes purchased, 414 notes
have been converted to inventory of which 160 Vacation Intervals have been
sold by the Company and 41 of the notes have been reaffirmed by the
original buyers. The Company intends to continue foreclosing on the
remaining notes and acquiring clear title to the applicable Vacation
Intervals.
(u) Includes weekly intervals owned by the Company at three additional
properties that are not owned or managed by the Company.
(v) The Company acquired a 30.43% partnership interest in the Embassy Vacation
Resort Poipu Point in November 1994. The Company owns, directly or
indirectly, 100% of the partnership interests in one of the two co-managing
general partners of Poipu Resort Partners L.P., a Hawaii limited
partnership ("Poipu Partnership"), the partnership which owns the Embassy
Vacation Resort Poipu Point. The managing general partner owned by the
Company holds a 0.5% partnership interest for purposes of distributions,
profits and losses. The Company also holds a 29.93% limited partnership
interest in the Poipu Partnership for purposes of distributions, profits
and losses, for a total partnership interest of 30.43%. In addition,
following repayment of any outstanding partner loans, the Company is
entitled to receive a 10% per annum return on the Founders' and certain
former limited partners' initial capital investment of approximately $4.6
million in the Poipu Partnership.
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13
After payment of such preferred return and the return of approximately
$4.6 million of capital to the Company on a pari passu basis with the
other general partner in the partnership, the Company is entitled to
receive approximately 50% of the net profits of the Poipu Partnership. In
the event certain internal rates of return specified in the Poipu
Partnership agreement are achieved, the Company is entitled to receive
approximately 55% of the net profits of the Poipu Partnership.
(w) Includes 179 units that the Company currently rents on a nightly basis,
pending their sale as Vacation Intervals.
(x) The Company is currently constructing 30 units which are expected to be
completed during the third quarter of 1998. The Company has received all
necessary governmental approvals and permits to construct an additional
218 units on land which it owns at the Embassy Vacation Resort Grand Beach
(excluding building permits which have not yet been applied for by the
Company). The Company plans to apply for and obtain these building permits
on a building-by-building basis.
(y) The Company has received all necessary governmental approvals and permits
(excluding building permits which the Company intends to apply for and
obtain on a phase-by-phase basis) to construct an additional estimated 108
units on land that it owns at the Embassy Vacation Resort Lake Tahoe. The
Company, subject to market demand, currently plans to commence
construction of an additional 40 of such units in the second quarter of
each of 1998 and 1999 and the remaining 28 units commencing in May 2000.
(z) In November 1997, a partnership of which the Company is a managing general
partner acquired the Embassy Suites Resort at Kaanapali Beach, Maui,
Hawaii. A subsidiary of the Company owns a 24% partnership interest in the
acquiring entity. The Company intends to convert 157 of the 413 suites at
the resort into vacation ownership units. Sales are expected to commence
during the second quarter of 1998.
(aa) The Company owns 50% of the entity which has acquired the unsold Vacation
Intervals at this resort. The acquisition closed in May of 1997 and sales
of Vacation Intervals commenced in the fourth quarter of 1997.
(bb) Includes 48 units which are completed and in sales. Also includes an
additional 48 units which will require the installation of utilities,
furniture, fixtures and equipment, and interior finishes before occupancy.
The Company currently anticipates beginning the renovation of such 48
additional units during the second quarter of 1998 and completing all
renovations by year-end 1998. The Company also owns adjacent land at the
St. John resort which may accommodate the development of additional units
but with respect to which no permits or approvals have been sought or
obtained. The Company has not yet determined the number of potential
additional units which may be constructed on such adjacent land or the
timing of such potential development.
(cc) Includes resorts acquired as a result of the Global Acquisition.
(dd) Represents the aggregate number of units and Vacation Intervals (as
opposed to Vacation Points) within the Company's Grand Vacation Club
system and the VTS Program. Certain of these resorts are not wholly-owned
by the Company and current units at these resorts represent only those
units owned by the Company.
(ee) Potential expansion units at each resort includes, as of December 31,
1997, (i) units currently under construction that have not yet received
their certificate of occupancy (or other equivalent certificate) and (ii)
units planned to be developed on land currently owned by Grand Vacation
Club or VI or under option to be acquired which have not yet received
their certificate of occupancy (or other equivalent certificate) and which
are not currently under construction.
(ff) Current inventory of Vacation Points represents, as of December 31, 1997,
the number of unsold Vacation Points in the Grand Vacation Club system and
VTS Program, as well as the number of points allocable to current unit
inventory owned by LSI or VI but not yet contributed to the Grand Vacation
Club system or VTS Program, respectively.
(gg) Potential expansion of Vacation Points represents, as of December 31,
1997, the estimated number of Vacation Points assignable to potential
expansion units within the Grand Vacation Club system and the VTS Program.
12
14
The following table sets forth certain information, as of December 31,
1997, with respect to the Company's resorts owned on such date. All of the units
are fully-furnished, including telephones, televisions, VCRs and stereos, and
all but the studio units feature full kitchens. Most of the units contain a
washer and dryer, microwave and private outdoor barbecue grill. Many units also
include a private deck.
RESORT AMENITIES
TYPES OF UNITS OFFERED --------------------------------------------
-------------------------- SWIMMING WHIRLPOOL/ RESTAURANT/
RESORTS LOCATION S 1BR 2BR 3BR 4BR TENNIS POOL JACUZZI LOUNGE
------- -------- --- --- --- --- --- ------ -------- ---------- -----------
SUNTERRA RESORTS:
Sunterra Resorts Cypress Lake Buena Vista, Florida X X X X X X X
Pointe
Sunterra Resorts The Branson, Missouri X X X X X X X
Plantation at Fall
Creek
Sunterra Resorts Royal Hilton Head, South X X X
Dunes Carolina
Sunterra Resorts San Luis Avila Beach, California X X X X X
Bay
Sunterra Resorts Royal St. Maarten, Netherlands X X X X X
Palm Beach Antilles
Sunterra Resorts Flamingo St. Maarten, Netherlands X X X X X
Beach Antilles
Sunterra Resorts Scottsdale, Arizona X X X X X X
Scottsdale Villa Mirage
Sunterra Resorts The Sedona, Arizona X X X X X X X
Ridge on Sedona Golf
Sunterra Resorts Sedona Sedona, Arizona X X X X X
Springs
Sunterra Resorts Sedona Sedona, Arizona X X X X X
Summit
Sunterra Resorts Villas Sedona, Arizona X X X X
at Poco Diablo
Sunterra Resorts Villas Sedona, Arizona X X X X X
of Sedona
Sunterra Resorts NorthBay Lake Arrowhead, X X X X X
at Lake Arrowhead California
Sunterra Resorts Tahoe South Lake Tahoe, X X X X
Beach and Ski California
Sunterra Resorts Villas Lake Conroe, Texas X X X
on the Lake
Sunterra Resorts Powhatan Williamsburg, Virginia X X X X X X X
Plantation
Sunterra Resorts Williamsburg, Virginia X X X X X
Greensprings Plantation
Sunterra Resorts The Miami Beach, Florida X X X X X
Savoy on South Beach
Sunterra Resorts Bent Gatlinburg, Tennessee X X X X
Creek Golf Village
Sunterra Resorts Coral Miami Beach, Florida X X X
Reef
OTHER SUNTERRA AFFILIATED
RESORTS:
Tahoe Seasons South Lake Tahoe, X X X X X X X
California
EMBASSY VACATION RESORTS:
Embassy Vacation Resort Kauai, Hawaii X X X X X
Poipu Point
Embassy Vacation Resort Orlando, Florida X X X
Grand Beach
Embassy Vacation Resort South Lake Tahoe, X X X X X
Lake Tahoe California
Embassy Vacation Resort Maui, Hawaii, X X X X X
Kaanapali Beach
WESTIN VACATION CLUB:
Westin Vacation Club St. St. John, U.S. Virgin X X X X X X X X
John Islands
13
15
RESORT AMENITIES
TYPES OF UNITS OFFERED --------------------------------------------
-------------------------- SWIMMING WHIRLPOOL/ RESTAURANT/
RESORTS LOCATION S 1BR 2BR 3BR 4BR TENNIS POOL JACUZZI LOUNGE
------- -------- --- --- --- --- --- ------ -------- ---------- -----------
GRAND VACATION CLUB RESORTS:
The Alpine Club Schladming, Austria X X X X X X X
Burnside Park Owners Club Lancashire, England
Club del Carmen Lanzarote, Canary Islands X X X X X
Flanesford Priory Country Herefordshire, England X X X X
Estate
Kenmore Club Loch Tay, Scotland X X X X X X X
Los Claveles Tenerife, Canary Islands X X X X X
Le Moulin de Connelles Normandy, France X X X X X X
Los Amigos Beach Club Costa del Sol, Spain X X X X X X X X
Malibu Village Roussilon, France
Marina Baie des Anges Nice, France X X X X X X
Pine Lake Resort Lancashire, England X X X X X X
Playa Paraiso Mallorca, Spain X
Royal Oasis Club at Benal Costa del Sol, Spain X X X X X
Beach
Royal Oasis Club at La Costa del Sol, Spain X X X X X
Quinta
Royal Sunset Beach Club Tenerife, Canary Islands X X X X X X
Royal Tenerife Country Tenerife, Canary Islands X X X X X
Club
Sahara Sunset Club Costa del Sol, Spain X X X X X X
Sunset Bay Club Tenerife, Canary Islands X X X X X X
Sunset Harbor Club Tenerife, Canary Islands X X X X X
White Sands Beach Club Menorca, Spain X X X X X X
White Sands Country Club Menorca, Spain X X X X
Woodford Bridge Country North Devon, England X X X X X X
Club
Wychnor Park Country Club Stratfordshire, England X X X X X X X
VACATION INTERNATIONALE:
Clock Tower Village Whistler, British X X
Columbia
Sea Mountain Big Island, Hawaii X X X X X X
Elkhorn Village Sun Valley, Idaho X X X X X X X
Embarcadero Newport, Oregon X X X X X X
Fairway Villa Oahu, Hawaii X X X X
Hololani Maui, Hawaii X X
Kapaa Shore Kauai, Hawaii X X X X X
Kihei Kai Nani Maui, Hawaii X X
Kingsbury of Tahoe Stateline, Nevada X X X X
The Oasis Resort Palm Springs, California X X X X X X
Marina Inn Oceanside, California X X X X
Papakea Maui, Hawaii X X X X X
Point Brown Resort Ocean Shores, Washington X X X X X
Pono Kai Kauai, Hawaii X X X X X
Royal Kuhio Oahu, Hawaii X X
Sea Village Big Island, Hawaii X X X X X
The Pines Sunriver, Oregon X X X X X X
The Village at Steamboat Steamboat Springs, X X X X X X
Colorado
Torres Mazatlan Mazatlan, Mexico X X X X X X X
Vallarte Torre Puerto Vallarta, Mexico X X X X X X
Valley Isle Maui, Hawaii X X X X X
14
16
CUSTOMER FINANCING
A typical Vacation Interval entitles the buyer to a one-week per year stay
at one of the Company's resorts and ranges in price from approximately $6,000 to
$8,000 for a studio residence to approximately $12,000 to $25,000 for a three
bedroom residence. The Company offers consumer financing to the purchasers of
vacation interests at the Company's resort locations who make a down payment
generally equal to at least 10% of the purchase price. This financing generally
bears interest at fixed rates and is collateralized by a first mortgage on the
underlying vacation interest.
The Company has entered into agreements with lenders for the Company's
financing of customer receivables. At December 31, 1997, the Company had
approximately $199 million of additional borrowing capacity available.
At December 31, 1997, the Company's mortgage portfolio included
approximately 37,000 promissory notes totaling approximately $355 million, with
a stated maturity of typically seven to ten years and a weighted average
interest rate of 14.4% per annum. As of December 31, 1997, approximately 4.6% of
the Company's consumer loans were considered by the Company to be delinquent
(scheduled payment past due by 60 or more days). The Company had completed or
commenced foreclosure or deed-in-lieu of foreclosure (which is typically
commenced once a scheduled payment is more than 120 days past due) on an
additional approximately 2.2% of its consumer loans. As of December 31, 1997,
the Company's allowance for doubtful accounts as a percentage of gross mortgages
receivable was 6.5%, which management believes is an adequate reserve for
expected loan losses.
The Company has historically derived income from its financing activities.
Because the Company's borrowings bear interest at variable rates and the
Company's loans to purchasers of Vacation Intervals bear interest at fixed
rates, the Company bears the risk of increases in interest rates with respect to
the loans it has from its lenders. The Company may engage in interest rate
hedging activities from time to time in order to reduce the risk and impact of
increases in interest rates with respect to such loans, but there can be no
assurance that any such hedging activity will be adequate at any time to fully
protect the Company from any adverse changes in interest rates.
The Company also bears the risk of purchaser default. The Company's
practice has been to continue to accrue interest on its loans to purchasers of
Vacation Intervals until such loans are deemed to be uncollectible (which is
generally 120 days after the date a scheduled payment is due), at which point it
expenses the interest accrued on such loan, commences foreclosure proceedings
and, upon obtaining title, returns the Vacation Interval or Vacation Points to
the Company's inventory for resale. The Company closely monitors its loan
accounts and determines whether to foreclose on a case-by-case basis.
LSI currently contracts with a third-party bank to provide financing to
purchasers of points in its Grand Vacation Club. LSI is paid an upfront
commission of approximately 14% (which includes a 1% commission contingent on
the Company meeting certain volume thresholds) of the principal amount of
eligible consumer loans on a non-recourse basis.
SALES AND MARKETING
As the world's largest vacation ownership company, as measured by the
number of resort locations, the Company believes that it has acquired the skill
and expertise in the development, management and operation of vacation ownership
resorts and in the marketing of Vacation Intervals and Vacation Points. The
Company's primary means of selling Vacation Intervals and Vacation Points is
through on-site sales forces at each of its resorts. A variety of marketing
programs are employed to generate prospects for these sales efforts, which
include targeted mailings, overnight mini-vacation packages, gift certificates,
seminars and various destination-specific local marketing efforts. Additionally,
incentive premiums are offered to guests to encourage resort tours, in the form
of entertainment tickets, hotel stays, gift certificates or free meals. The
Company's sales process is tailored to each prospective buyer based upon the
marketing program that brought the prospective buyer to the resort for a sales
presentation. Prospective target customers are identified through various means
of profiling, and are intended to include current owners of Vacation Intervals
and Vacation Points. Cross-
15
17
marketing targets current owners of Vacation Intervals and Vacation Points at
the Company's resort locations, both to sell additional Vacation Intervals and
Vacation Points at the owner's home resort, or to sell a Vacation Interval or
Vacation Points at another of the Company's resort locations. The Company also
sells Vacation Points through 13 off-site sales centers.
ACQUISITION PROCESS
The Company obtains information with respect to resort acquisition
opportunities through interaction by the Company's management team with resort
operators, real estate brokers, lodging companies or financial institutions with
which the Company has established business relationships. From time to time, the
Company is also contacted by lenders and property owners who are aware of the
Company's development, management, operations and sales expertise with respect
to Vacation Interval and Vacation Point properties.
The Company has expertise in all areas of resort development including, but
not limited to, architecture, construction, finance, management, operations and
sales. With relatively little lead time, the Company is able to analyze
potential acquisition and development opportunities. After completing an
analysis of the prospective market and the general parameters of the property or
the site, the Company generates a conceptual design to determine the extent of
physical construction or renovation that can occur on the site in accordance
with the requirements of the local governing agencies. For most properties, the
predominant factors in determining the physical design of the site include
density of units, maximum construction height, land coverage and parking
requirements. Following the preparation of such a conceptual design, the Company
analyzes other aspects of the development process, such as construction cost and
phasing, to match the projected sales flow in the relevant market. At this stage
of analysis, the Company compares sales, construction cost and phasing, debt and
equity structure, cash flow, financing and overall project cost to the
acquisition cost. The Company's procedures when considering a potential
acquisition are generally set forth below.
Economic and Demographic Analysis. To evaluate the primary economic and
demographic indicators for the resort area, the Company considers the following
factors, among others, in determining the viability of a potential new vacation
ownership resort in a particular location: (i) supply/demand ratio for vacation
ownership resorts in the relevant market, (ii) the market's growth as a vacation
destination, (iii) the ease of converting a hotel or condominium property into a
vacation ownership resort location and the resulting demand for the converted
units, (iv) the availability of additional land at or nearby the property for
future development and expansion, (v) competitive accommodation alternatives in
the market, (vi) uniqueness of location, and (vii) barriers to entry that would
limit competition. The Company examines the competitive environment in which the
proposed resort is located and all existing or to-be-developed resorts. In
addition, information respecting characteristics, amenities and financial
information at competitive resorts is collected and organized. This information
is used to assess the potential to increase revenues at the resort by making
capital improvements.
Pro Forma Operating Budget. The Company develops a comprehensive pro forma
budget for the resort location, utilizing available financial information in
addition to the other information collected from a variety of sources. The
estimated sales of units are examined, including the management fees associated
with such unit. Finally, the potential for overall capital appreciation and
alternate uses of the resort are considered, including the prospects for
obtaining liquidity through sale or refinancing of the resort location.
Environmental and Legal Review. In conjunction with each prospective
acquisition or development, the Company conducts real estate and legal due
diligence on the property. This due diligence includes an environmental
investigation and report by environmental consulting firms. The Company also
obtains a land survey of the property and inspection reports from licensed
engineers or contractors on the physical condition of the resort. In addition,
the Company conducts customary real estate due diligence, including the review
of title documents, operating leases and contracts, zoning, and governmental
permits and licenses and a determination of whether the property is in
compliance with applicable laws.
16
18
OTHER OPERATIONS
Room Rental Operations. In order to generate additional revenue at certain
of its resorts that have rentable inventory of Vacation Intervals and Vacation
Points, the Company rents units with respect to such unsold or unused Vacation
Intervals and Vacation Points for use as a hotel. The Company offers these
unoccupied units both through direct consumer sales, travel agents and/or
vacation package wholesalers. In addition to providing the Company with
supplemental revenue, the Company believes its room-rental operations provide it
with a good source of lead generation for the sale of Vacation Intervals and
Vacation Points. As part of the management services provided by the Company to
Vacation Interval and Vacation Points owners, the Company receives a fee for
services provided to rent an owner's Vacation Interval in the event the owner is
unable to use or exchange the Vacation Interval. In addition, the Embassy
Vacation Resort Poipu Point was acquired as a traditional resort condominium and
the Sunterra Resorts Carambola Beach and Embassy Vacation Resort Kaanapali Beach
were acquired as traditional hotels, with the intention of converting each such
resort location to a vacation ownership property. Until such time as a unit at
each resort is sold as Vacation Intervals, the Company continues (or will
continue) to rent such unit on a nightly basis. In the future, other acquired
resorts may be operated in this fashion during the start-up of Vacation Interval
sales.
Resort Management. The Company's resorts are (i) generally managed by the
Company pursuant to management agreements with homeowner associations with
respect to each of the Company's Sunterra Resorts, (ii) managed by Promus
pursuant to management agreements with the Company with respect to the Company's
Grand Beach and Lake Tahoe Embassy Vacation Resorts are managed by Westin with
respect to the Westin Vacation Club resort. The Company manages 27 of its
Sunterra Resorts, two of its Embassy Vacation Resorts, 19 of its VI resorts and
17 of its Grand Vacation Club resorts. The Company's Marc Resorts subsidiary
manages units at an additional 22 resorts in Hawaii. The remaining resort
locations are managed by third party management companies. The Company pays
Promus a licensing fee of 2% of Vacation Interval sales at the Embassy Vacation
Resorts.
At each of the Company's managed resort locations, the Company enters into
a management agreement to provide for management and maintenance of the resort.
Pursuant to each such management agreement the Company is typically paid a
monthly management fee equal to 10% of monthly maintenance fees. The management
agreements are typically for a three-year period, renewable annually
automatically unless notice of non-renewal is given by either party. Pursuant to
each management agreement, the Company has sole responsibility and exclusive
authority for all activities necessary for the day-to-day operation of the
managed resort locations, including administrative services, procurement of
inventories and supplies and promotion and publicity. With respect to each
managed resort location, the Company also obtains comprehensive and general
public liability insurance, all-risk property insurance, business interruption
insurance and such other insurance as is customarily obtained for similar
properties. The Company also provides all managerial and other employees
necessary for the managed resort locations, including review of the operation
and maintenance of the resorts, preparation of reports, budgets and projections,
employee training, and the provision of certain in-house legal services. At the
Company's Grand Beach and Lake Tahoe Embassy Vacation Resorts, Promus provides
these services.
LSI manages each resort in its Grand Vacation Club pursuant to contracts
which typically provide for a management fee of 15% of monthly maintenance fees
to be paid to LSI.
VACATION INTERVAL OWNERSHIP
The purchase of a Vacation Interval typically entitles the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year,
in perpetuity. Typically, the buyer acquires an ownership interest in the
vacation residence, which is often held as tenant in common with other buyers of
interests in the property.
The owners of Vacation Intervals manage the property through a non-profit
homeowners' association, which is governed by a board consisting of
representatives of the developer and owners of Vacation Intervals at the resort.
The board hires an agent, delegating many of the rights and responsibilities of
the homeowners'
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association to a management company, as described above, including grounds
landscaping, security, housekeeping and operating supplies, garbage collection,
utilities, insurance, laundry and repair and maintenance.
Each vacation interest owner is required to pay the homeowners' association
a share of all costs of maintaining the property. These charges can consist of
an annual maintenance fee plus applicable real estate taxes (generally $300 to
$700 per interval) and special assessments, assessed on an as-needed basis. If
the owner does not pay such charges, the owner's use rights may be suspended and
the homeowners' association may foreclose on the owner's Vacation Interval.
POINTS-BASED VACATION OWNERSHIP PROGRAMS
In general, under a points-based system, owners (usually referred to as
members) purchase points which act as an annual currency entitlement for
occupancy rights at any of the club's participating resorts. The Company's Club
Sunterra points-based system will operate on a basis very similar to the
standard vacation interval ownership structure in that members have a home
resort, and have a deeded, fee-simple interest in a particular unit at that home
resort. The advantages of a points-based system relate to the flexibility given
to members with respect to the usage of their points versus the usage of a
traditional interval. In traditional interval ownership, owners can generally
only use their interval for a one week stay in a specific unit size in a
specific resort or exchange through an external exchange organization (i.e. RCI
or II). Under a points-based system, members can select vacations according to
their schedules and space needs, based on their available points. Owners can
"spend" their points as they wish, for example using them all for one extended
stay or dividing them up into multiple shorter stays. Owners may also choose
between larger or smaller units which have different point values. (The number
of points required for a stay varies depending upon a variety of factors,
including the resort location, the size of the unit, the vacation season and the
length of stay.) Additionally, in a points-based system, owners can redeem their
points for a stay in any one of the resorts included in the club without having
to exchange through an external exchange company such as RCI or II. Members of
the proposed Club Sunterra points system will, however, be able to exchange
through RCI or II for vacation stays at resorts outside of their club systems if
they desire.
The Company currently operates two points-based vacation ownership
programs: the Grand Vacation Club (consisting of the Company's 25 European
resorts) and the VTS Program (consisting of 21 resorts in North America). Over
time, the Company intends to continue its expansion of the Grand Vacation Club
system in Europe. It also intends to integrate the VTS Program and the Company's
29 Sunterra Resorts into Club Sunterra. Club Sunterra will operate as an
umbrella points-based vacation exchange program for its European and North
American operations. In addition to attracting new owners, the Company will
market Club Sunterra to its existing base of owner families.
PARTICIPATION IN VACATION INTEREST EXCHANGE NETWORKS
The Company believes that its vacation interests are made more attractive
by the Company's participation in vacation interest exchange networks operated
by RCI and II. In a 1997 study sponsored by ARDA, the exchange opportunity was
cited by purchasers of vacation interests as one of the most significant factors
in determining whether to purchase a vacation interest. Participation in RCI and
II allows the Company's customers to exchange in a particular year their
occupancy right in the unit in which they own a vacation interest for an
occupancy right at the same time or a different time in another participating
resort, based upon availability and the payment of a variable exchange fee.
Members may exchange their vacation interests for occupancy rights in another
participating resort by listing their vacation interests as available with the
exchange organization and by requesting occupancy at another participating
resort, indicating the particular resort or geographic area to which the member
desires to travel, the size of the unit desired and the period during which
occupancy is desired. Both RCI and II assign ratings to each listed vacation
interest, based upon a number of factors, including the location and size of the
unit, the quality of the resort and the period during which the vacation
interest is available, and attempts to satisfy the exchange request by providing
an occupancy right in another vacation interest with a similar rating. If RCI or
II is unable to meet the member's initial request, it suggests alternative
resorts based on availability.
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Founded in 1974, RCI has grown to be the world's largest vacation interest
exchange organization, which has a total of more than 3,000 participating resort
facilities and over 2.2 million members worldwide. The cost of the annual
membership fee in RCI, which typically is at the option and expense of the owner
of the vacation interest, is $78 per year, plus an exchange fee of $110 and $145
for domestic and international exchanges, respectively. RCI has assigned high
ratings to the vacation interests in the Company's resort locations, and such
vacation interests have in the past been exchanged for vacation interests at
other highly-rated member resorts. Established in 1976, II has more than 1,500
participating resort facilities and over 750,000 members worldwide. The cost of
the annual membership fee in II, which typically is at the option and expense of
the owner of the vacation interest, is $68 per year, plus an exchange fee of $99
and $119 for domestic and international exchanges, respectively. II has assigned
high ratings to the vacation interests in the Company's resort properties, and
such vacation interests have in the past been exchanged for vacation interests
at other highly-rated member resorts.
COMPETITION
Although major lodging and hospitality companies such as Marriott, Disney,
Hilton, Hyatt, Four Seasons and Inter-Continental, as well as Promus and Westin,
have established or declared an intention to establish vacation ownership
operations in the past decade, the industry remains largely unbranded and highly
fragmented, with a vast majority of North America's approximately 2,000 vacation
ownership resorts being owned and operated by smaller, regional companies. Many
of these entities possess significantly greater financial, marketing, personnel
and other resources than those of the Company and may be able to grow at a more
rapid rate than the Company as result.
The Company also competes with companies with non-branded resorts such as
Central Florida Investments, Inc. ("CFI"), Vistana, Inc. ("Vistana"), Fairfield
Communities, Inc. ("Fairfield"), Silverleaf Resorts, Inc. ("Silverleaf"),
Trendwest Resorts, Inc. ("Trendwest") and ILX Incorporated ("ILX"). Under the
terms of a five-year agreement, Promus and Vistana will jointly acquire,
develop, manage and market vacation ownership resorts in North America under
Promus brand names. As part of the agreement, Promus and Vistana will designate
selected markets for development (which markets currently include Kissimmee,
Florida and Myrtle Beach, South Carolina and in which markets Vistana will have
exclusive development rights). The Company is not precluded from using the
Embassy Vacation Resort name in connection with resorts acquired during the term
of the agreement in markets not otherwise exclusive to Vistana. The Company has
been identified by Promus as the only other licensee to whom Promus may license
the Embassy Vacation Resort name. There can be no assurance that Promus will not
grant other entities a license to develop Embassy Vacation Resorts or that
Promus will not exercise its rights to terminate the Embassy Vacation Resort
licenses.
As a result of the LSI and Global Acquisitions, the Company is also subject
to competition in the European vacation ownership market, which is highly
fragmented. In addition to LSI and the Global Group, there is one other operator
in Europe operating multi-resort points clubs -- Club la Costa. LSI and the
Global Group also have competition from individual vacation ownership resorts
(including Marriott) in several of the areas in which it operates.
In addition, the Company also competes with the buyers of its Vacation
Intervals who subsequently decide to resell those intervals. While the Company
believes, based on experience at its resorts, that the market for resale of
Vacation Intervals by buyers is presently limited, such resales are typically at
prices substantially less than the original purchase price. The market price of
Vacation Intervals sold by the Company at a given resort or by its competitors
in the market in which each resort is located could be depressed by a
substantial number of Vacation Intervals offered for resale.
GOVERNMENTAL REGULATION
General. The Company's marketing and sales of vacation interests are
subject to extensive regulations by the federal government and the states and
foreign jurisdictions in which its resort properties are located and in which
vacation interests are marketed and sold. On a federal level, the Federal Trade
Commission has
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taken the most active regulatory role through the Federal Trade Commission Act,
which prohibits unfair or deceptive acts or competition in interstate commerce.
Other federal legislation to which the Company is or may be subject appears on
the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and
Regulation B, the Interstate and Land Sales Full Disclosure Act, Telephone
Consumer Protection Act, Telemarketing and Consumer Fraud and Abuse Prevention
Act, Fair Housing Act and the Civil Rights Act of 1964 and 1968. In addition,
many states have adopted specific laws and regulations regarding the sale of
vacation interest ownership programs. The laws of most states, including
Florida, South Carolina and Hawaii require the Company to file with a designated
state authority for its approval a detailed offering statement describing the
Company and all material aspects of the project and sale of vacation interests.
The laws of California require the Company to file numerous documents and
supporting information with the California Department of Real Estate, the agency
responsible for the regulation of vacation interests. When the California
Department of Real Estate determines that a project has complied with California
law, it will issue a public report for the project. The Company is required to
deliver an offering statement or public report to all prospective purchasers of
vacation interests, together with certain additional information concerning the
terms of the purchase. The laws of Illinois, Florida, Hawaii and Virginia impose
similar requirements. Laws in each state where the Company sells vacation
interests generally grant the purchaser of a vacation interest the right to
cancel a contract of purchase at any time within a period ranging from 3 to 15
calendar days following the earlier of the date the contract was signed or the
date the purchaser has received the last of the documents required to be
provided by the Company. Most states have other laws which regulate the
Company's activities such as real estate licensure; sellers of travel licensure;
anti-fraud laws; telemarketing laws; price gift and sweepstakes laws; and labor
laws. The Company believes that it is in material compliance with all federal,
state, local and foreign laws and regulations to which it is currently or may be
subject. However, no assurance can be given that the cost of qualifying under
vacation interest ownership regulations in all jurisdictions in which the
Company desires to conduct sales will not be significant. Any failure to comply
with applicable laws or regulations could have material adverse effect on the
Company.
In addition, certain state and local laws may impose liability on property
developers with respect to construction defects discovered or repairs made by
future owners of such property. Pursuant to such laws, future owners may recover
from the Company amounts in connection with the repairs made to the developed
property.
The marketing and sales of the Company's Grand Vacation Club points system
and its other operations are subject to national and European regulation and
legislation. Within the European Community (which includes all the countries in
which the Company conducts its operations), the European Timeshare Directive of
1994 regulates vacation ownership activities. For it to have direct effect, the
European Timeshare Directive must have been implemented by European Community
Member States prior to May 1997. As of the date of this 10-K, Spain and France
have not implemented the Directive. The terms of the Directive require the
Company to issue a disclosure statement providing specific information about its
resorts and its vacation ownership operations as well as making mandatory a 10
day rescission period and a prohibition on the taking of advance payments prior
to the expiration of that rescission period. Member States are permitted to
introduce legislation which is more protective of the consumer when implementing
the European Timeshare Directive. In the United Kingdom, where the majority of
the Company's marketing and sales operations take place, the Directive has been
implemented by way of an amendment to the Timeshare Act 1992. In the United
Kingdom, a 14 day rescission period is mandatory. There are other United Kingdom
laws which the Company is or may be subject to including the Consumer Credit Act
1974, the Unfair Terms in Consumer Contracts Regulations 1995 and the Package
Travel, Package Holidays and Package Tours Regulations 1992. While Spain and
France have no specific timeshare legislation, it is expected that they will
implement the Timeshare Directive in the near future. Until they do so, however,
the European Timeshare Directive has no direct effect in Spain or France. The
Timeshare Act 1992 does appear to have extra-territorial effect in that United
Kingdom resident purchasers buying timeshare in other European Economic Area
States may rely upon it. All the countries in which the Company operates have
consumer and other laws which regulate its activities in those countries. The
Company is member of the Timeshare Council which is the United Kingdom's self
regulating trade body for vacation ownership companies. As a member, it is
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obligated to comply with all laws as well as with certain codes of conduct
(including a code of conduct for the operating of points systems) promulgated by
the Timeshare Council.
Environmental Matters. Under various Environmental Laws, a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances or wastes or releases of petroleum
products or wastes at such property, and may be held liable to a governmental
entity or to third parties for associated damages and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws may impose clean-up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The cost of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. In addition, persons who arrange for the disposal or
treatment of hazardous or toxic substances at a disposal or treatment facility
also may be liable for the costs of removal or remediation of a release of
hazardous or toxic substances or wastes at such disposal or treatment facility,
whether or not such facility is owned or operated by such person. In addition,
some Environmental Laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Finally, the owner of a site may be subject to statutory or common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site. In connection with its ownership and
operation of its properties, the Company potentially may be liable for such
costs. In addition, as a result of the consummation of the Acquisitions, the
Company could be held liable for the pre-existing environmental and other
liabilities of the acquired companies, if any.
Certain Environmental Laws govern the removal, encapsulation or disturbance
of asbestos-containing materials ("ACMs") when such materials are in poor
condition or in the event of construction, remodeling, renovation or demolition
of a building. Such laws may impose liability for release of ACMs and may
provide for third parties to seek recovery from owners and operators of real
properties for personal injury associated with ACMs. In connection with its
ownership and operation of its properties, the Company potentially may be liable
for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (pCI/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's resorts may adversely affect the
Company's ability to sell vacation interests at such resorts and the market
value of such resort. In addition, the Company is required to disclose to
potential purchasers and owners of vacation interests at the Company's resorts
that were constructed prior to 1978 any known lead-paint hazards and failure to
so notify could impose damages on the Company.
The Company has conducted Phase I environmental assessments (which
typically involve inspection without soil sampling or groundwater analysis)
performed by independent environmental consultants at each of the resort
locations at which it has sold or owns a material amount of inventory in order
to identify potential environmental concerns. These Phase I assessments have
been carried out in accordance with accepted industry practices, and generally
have included a preliminary investigation of the sites and identification of
publicly known conditions concerning properties in the vicinity of the sites,
physical site inspections, review of aerial photographs and relevant
governmental records where readily available, interviews with knowledgeable
parties, investigation for the presence of above ground and underground storage
tanks presently or formerly at the sites, a visual inspection of potential
lead-based paint and suspect friable ACMs where appropriate, and the preparation
and issuance of written reports.
The Company's assessments of its resorts have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is
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the Company aware of any such material environmental liability. Nevertheless, it
is possible that the Company's assessments do not reveal all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. The Company believes that its properties are in compliance
in all material respects with all Environmental Laws regarding hazardous or
toxic substances or wastes. The Company does not believe that continued
compliance with applicable Environmental Laws or regulations will have a
material adverse effect on the Company or its financial condition or results of
operations.
In connection with the acquisition and development of the Embassy Vacation
Resort Lake Tahoe and the Sunterra Resorts San Luis Bay, several areas of
environmental concern have been identified. The areas of concern at the Embassy
Vacation Resort Lake Tahoe relate to possible soil and groundwater contamination
that has migrated onto the resort site from an upgradient source; in addition,
residual contamination may exist on the resort site as a result of leaking
underground storage tanks that were removed prior to the Company's acquisition
of the resort site. California regulatory authorities are monitoring the
off-site contamination and have required or are in the process of requiring the
responsible parties to undertake remedial action. The Company has been
indemnified by Chevron (USA), Inc. for certain costs and expenses in connection
with the off-site contamination. The Company does not believe that it will be
held liable for this contamination and does not anticipate incurring material
costs in connection therewith; however, there can be no assurance that the
indemnitor will meet its obligations in a complete and timely manner. Sunterra
Resorts San Luis Bay is located in an area of Avila Beach, California which has
experienced soil and groundwater contamination resulting from a nearby oil
refinery. California regulatory authorities have required the installation of
groundwater monitoring wells on the beach near the resort site (among other
locations). As of the present time, the Company does not believe that any
remedial operations action has been undertaken with this matter. It is possible
that the Company's operations could be adversely impacted, including possible
temporary interference with access to the resort site, once remediation is
underway. The Company does not believe that it is liable for this contamination
and does not anticipate incurring material costs in connection therewith;
however, there can be no assurance that claims will not be asserted against the
Company with respect to this matter.
The Company is not aware of environmental liability that would have a
material adverse effect on the Company's business, assets or results of
operations, nor has the Company been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or other claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present or former properties. The Company
believes that it is in compliance in all material respects with all
Environmental Laws. No assurance, however, can be given that the Company is
aware of all environmental liabilities or that no prior owner, operator or third
party caused a material environmental condition at such property not currently
known to the Company. See "-- Possible Environmental Liabilities."
Other Regulations. Under various state and federal laws governing housing
and places of public accommodation the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities are substantially in
compliance with present requirements of such laws, and the Company may incur
additional costs of compliance. Additional legislation may impose further
burdens or restriction on owners with respect to access by disabled persons. The
ultimate amount of the cost of compliance with such legislation is not currently
ascertainable, and, while such costs are not expected to have a material effect
on the Company, such costs could be substantial. Limitations or restrictions on
the completion of certain renovations may limit application of the Company's
growth strategy in certain instances or reduce profit margins on the Company's
operations.
EMPLOYEES
As of December 31, 1997, the Company had approximately 4,150 employees. The
Company believes that its employee relations are good. Except for certain
employees located at the St. Maarten, Netherlands Antilles resorts, none of the
Company's employees are represented by a labor union.
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The Company sells Vacation Intervals and Vacation Points at its resorts
through approximately 1,250 independent sales agents. Such independent sales
agents provide services to the Company under contract and, the Company believes,
are not employees of the Company. Accordingly, the Company does not withhold
payroll taxes from the amounts paid to such independent contractors. Although
the Internal Revenue Service has made inquiries regarding the Company's
classification of its sales agents at its Branson, Missouri resort, no formal
action has been taken and the Company has requested that the inquiry be closed.
In the event the Internal Revenue Service or any state or local taxing authority
were to successfully classify such independent sales agents as employees of the
Company, rather than as independent contractors, and hold the Company liable for
back payroll taxes, such reclassification may have a material adverse effect on
the Company.
INSURANCE
The Company carries comprehensive liability, fire, hurricane, storm,
earthquake and business interruption insurance with respect to the Company's
resorts locations, with policy specifications, insured limits and deductibles
customarily carried for similar properties which the Company believes are
adequate. In September 1995 and July 1996, the Company's St. Maarten resorts
were damaged by a hurricane. With respect to such September 1995 damage, the
Company has recovered amounts from its insurance carriers sufficient to cover
100% of the property damage losses and is in the process of recovering amounts
for business interruption. There are, however, certain types of losses (such as
losses arising from acts of war) that are not generally insured because they are
either uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its capital
invested in a resort, as well as the anticipated future revenues from such
resort and would continue to be obligated on any mortgage indebtedness or other
obligations related to the property. Any such loss could have a material adverse
effect on the Company.
TRADEMARKS AND COMPANY NAME
While the Company owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights and other intellectual property
rights, including the "Sunterra" and "Own Your World" service marks which, in
the aggregate, are of material importance to its business, it is believed that
the Company's business, as a whole, is not materially dependent upon any one
intellectual property or related group of such properties. The Company is
licensed to use certain technology and other intellectual property rights owned
and controlled by others, and, similarly, other companies are licensed to use
certain technology and other intellectual property rights owned and controlled
by the Company.
The Company's Board of Directors has approved, subject to stockholder
approval, a proposal to change the Company's corporate name to "Sunterra
Corporation." The name change proposal will be presented for stockholder
approval at the Company's May 15, 1998 annual meeting.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Certain statements in this
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the
"10-K") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing such forward-looking statements may be found in the
material set forth under "Business and Properties," as well as within this 10-K
generally. In addition, when used in this 10-K the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth below
and the matters set forth in this 10-K generally. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
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RISK OF INCREASING LEVERAGE; LIQUIDITY
The Company has, and after giving effect to the Offering will continue to
have, significant levels of indebtedness. At December 31, 1997, after giving pro
forma effect to the Offering and the application of the estimated net proceeds
therefrom and the incurrence of an additional $92 million of secured
indebtedness subsequent to December 31, 1997, the Company and its subsidiaries
would have had approximately $574.9 million of outstanding indebtedness
(including trade payables of $25.2 million), of which $108.2 million would have
been secured or structurally senior in right of payment to the Notes and $341.7
million would have been subordinated in right of payment to the notes offered in
the Offering (the "Notes"). In addition, subject to the restrictions contained
in documents governing the Senior Credit Facility, the Notes, the Company's
9 3/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and
the Company's 5 3/4% Convertible Notes due 2007 (the "Convertible Notes"), the
Company may incur additional senior or other indebtedness from time to time to
finance acquisitions or capital expenditures or for other general corporate
purposes.
For the year ended December 31, 1997, the Company had $50.0 million in
negative cash flows from operations. On a pro forma basis for the Offering, the
Company's concurrent offerings of the Convertible Notes and 2,400,000 shares of
common stock of the Company (the "Common Stock") sold in February 1997
(together, the "Concurrent Offerings") and the Company's offering of the Senior
Subordinated Notes in August 1997 (the "Senior Subordinated Note Offering") and
the application of the proceeds therefrom, cash flows from operations would have
been insufficient to service the Company's interest costs by an aggregate of
$52.4 million. Because the Company typically finances 90% of the purchase price
of the vacation interests it sells, it typically incurs significant operating
costs in excess of the actual cash proceeds initially received from the sale of
vacation interests. To meet the Company's cash requirements to finance these
customer receivables, the Company borrows funds available under its credit
facilities. The Company expects to repay its credit facilities with proceeds
from the issuance of pass-through mortgage-backed securities under which the
Company sells the mortgages receivable and principal and interest payments from
its portfolio of mortgages receivable. The Company may also sell or factor
additional mortgages receivable or borrow under existing or future lines of
credit. There can be no assurance that the Company will be able to successfully
securitize any of its mortgages receivable or otherwise sell, factor or finance
such mortgages receivable on terms favorable to the Company, if at all or that
the inability to do so would not have a material adverse effect on the Company's
results of operations.
The level of the Company's indebtedness could have important consequences
to the holders of the Notes, including, but not limited to, the following: (i)
the Company's ability to obtain future financing for working capital, capital
expenditures, acquisitions, product development or other corporate purposes may
be materially limited or impaired; (ii) a significant portion of the Company's
cash flow from operations may be dedicated to the interest on its indebtedness,
thereby reducing the funds available to the Company to conduct its operations
and future business opportunities; (iii) significant amounts of the Company's
borrowings will bear interest at variable rates, which could result in higher
interest expense in the event of interest rate increases; (iv) the agreements
governing the Company's indebtedness contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company; (v) the indebtedness outstanding under the Senior Credit Facility is
secured and matures prior to the maturity of the Notes; (vi) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (vii) the Company's substantial
degree of leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures and make it
more vulnerable to a downturn in general economic conditions or in its business.
The Company's ability to make scheduled payments or to refinance its debt
obligations will depend upon its future financial and operating performance,
which may be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control, including interest
rates, increased operating costs, regulatory developments and the ability of the
Company to repatriate cash generated outside of the United States without
incurring a substantial tax liability. There can be no assurance that the
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Company's operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future.
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ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
A principal component of the Company's strategy is to continue to grow by
acquiring additional resort locations and/or vacation ownership operating
companies. The Company's future growth and financial success will depend upon a
number of factors, including its ability to identify attractive resort
acquisition opportunities, consummate the acquisitions of such resorts on
favorable terms, convert such resorts to use as vacation ownership resort
locations and profitably sell Vacation Intervals and Vacation Points at such
resort locations. There can be no assurance that the Company will be successful
with respect to such factors and any failure to be successful could have a
material adverse effect on the Company's results of operations. Acquisitions
involve a number of special risks, including the diversion of management's
attention to the assimilation of the operations from other business concerns,
difficulties in the integration of operations and systems, the assimilation and
retention of the personnel of the acquired companies and potential adverse
short-term effects on operating results. The Company's ability to execute its
growth strategy depends to a significant degree on the existence of attractive
acquisition opportunities (which, in the past, have included completed or nearly
completed resort properties), its ability both to consummate acquisitions on
favorable terms and to obtain additional debt and equity capital and to fund
such acquisitions and any necessary conversion and marketing expenditure |