SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-21193
SIGNATURE RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-458215-7
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1875 SOUTH GRANT STREET, SUITE 650
SAN MATEO, CALIFORNIA 94402
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 312-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $0.01 per value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sales price of the Common Stock on March
28, 1998 as reported on the New York Stock Exchange, was approximately $555
million. At March 28, 1998 there were 35,880,507 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Unless the context otherwise indicates, the "Company" refers to Signature
Resorts, Inc. and includes its corporate and partnership predecessors and
wholly-owned subsidiaries and affiliates including AVCOM International, Inc.
("AVCOM") and its subsidiaries, which were acquired in February 1997 (the "AVCOM
Acquisition"); Plantation Resorts Group, Inc. ("PRG") and its subsidiaries,
which were acquired in May 1997 (the "PRG Acquisition"); LSI Group Holdings, plc
("LSI") and its subsidiaries, which were acquired in August 1997 (the "LSI
Acquisition"); Marc Hotels & Resorts, Inc. ("Marc"), which was acquired in
October 1997 (the "Marc Acquisition"); Vacation Internationale, Ltd. ("VI") and
its subsidiaries, which were acquired in November 1997 (the "VI Acquisition");
and Global Development Ltd. and certain of its subsidiaries (the "Global
Group"), which was acquired in December 1997 (the "Global Acquisition").
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%.
5
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
6
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
9
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..................
10
(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.
11
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
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
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
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
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
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'
17
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
19
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
20
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
21
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.
22
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.
23
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
24
Company's operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future.
25
ACQUISITION STRATEGY AND RISKS RELATED TO RAPID GROWTH
A principal component of the Company's strategy is to continue to grow by
acquiring additional resort locations and/or vacation ownership operating
companies. The Company's future growth and financial success will depend upon a
number of factors, including its ability to identify attractive resort
acquisition opportunities, consummate the acquisitions of such resorts on
favorable terms, convert such resorts to use as vacation ownership resort
locations and profitably sell Vacation Intervals and Vacation Points at such
resort locations. There can be no assurance that the Company will be successful
with respect to such factors and any failure to be successful could have a
material adverse effect on the Company's results of operations. Acquisitions
involve a number of special risks, including the diversion of management's
attention to the assimilation of the operations from other business concerns,
difficulties in the integration of operations and systems, the assimilation and
retention of the personnel of the acquired companies and potential adverse
short-term effects on operating results. The Company's ability to execute its
growth strategy depends to a significant degree on the existence of attractive
acquisition opportunities (which, in the past, have included completed or nearly
completed resort properties), its ability both to consummate acquisitions on
favorable terms and to obtain additional debt and equity capital and to fund
such acquisitions and any necessary conversion and marketing expenditures.
Currently, there are potential buyers of resort real estate which are well
capitalized competing to acquire resort properties which the Company may
consider attractive resort acquisition opportunities. There can be no assurance
that the Company will be able to compete against such other buyers successfully
or that the Company will be successful in consummating any such future financing
transactions on terms favorable to the Company. The Company's ability to obtain
and repay any indebtedness at maturity may depend on refinancing, which could be
adversely affected if the Company cannot effect the sale of additional debt or
equity through public offerings or private placements on terms favorable to the
Company. Factors which could affect the Company's access to the capital markets,
or the cost of such capital, include changes in interest rates, general economic
conditions, the perception in the capital markets of the vacation ownership
industry and the Company's business, results of operations, leverage, financial
condition and business prospects.
RISKS RELATED TO DEVELOPMENT OF A POINTS-BASED VACATION EXCHANGE SYSTEM
The Company currently is developing its Club Sunterra points-based vacation
exchange system which will offer points-based exchanges throughout the Company's
worldwide network of resorts. The Company has not previously developed or
operated a company-wide points-based vacation exchange system and no assurance
can be given as to management's ability to efficiently develop or operate such a
company-wide system. Although management believes such system will be developed
and placed into operation in the second half of 1998, there can be no assurance
that such system will be developed and placed into operation by such time. Risks
associated with the development and operation of the Company's Club Sunterra
company-wide points-based vacation exchange system, and expansion of LSI's and
VI's existing points-based systems, may include the risks that: such development
and/or expansion may be abandoned; the North American and European points-based
vacation exchange systems cannot be efficiently combined or operated with the
Company's current vacation ownership operations; the North American and European
points-based vacation exchange systems may be or become subject to extensive
regulation by federal, state and local jurisdictions, or the equivalent thereof
in Europe, possibly making such points-based system uneconomical or
unprofitable; and financing may not be available on favorable terms for
development of a North American points-based vacation exchange system or the
expansion of a European points-based vacation exchange system.
RISKS RELATED TO CERTAIN ACQUISITIONS
Uncertainty as to Future Financial Results. The Company believes that the
acquisitions of AVCOM, PRG, LSI, Marc, VI and Global (collectively, the
"Acquisitions") each offer opportunities for long-term efficiencies in
operations that should positively affect future results of the combined
operations of the Company. However, until the Company is able to offset earnings
dilution resulting from the issuance of Common Stock in certain of the
Acquisitions with the positive effect of expected long-term efficiencies, the
Acquisitions may adversely affect the Company's financial performance in 1998
and future years. In addition, the combined companies will be more complex and
diverse than the Company prior to the Acquisitions, and
25
the combination and continued operation of their distinct business operations
present difficult challenges for the Company's management due to the increased
time and resources required in the management effort.
In order to maintain and increase profitability, the combined companies
will need to successfully integrate and streamline overlapping functions. There
can be no assurance that such integration will be successfully accomplished or,
if successfully accomplished, that such integration will not be more costly to
accomplish than contemplated by the Company. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separate organizations. The integration of certain operations (such as customer
service, loan servicing and loan processing) following the Acquisitions will
require the dedication of management resources which may distract attention from
the day-to-day business of the combined companies in the short and long term.
Failure to effectively accomplish the integration of the acquired company's
operations could have an adverse effect on the Company's results of operations
and financial condition.
Accounting Treatment. The AVCOM, PRG and LSI Acquisitions have been
accounted for by the Company by the pooling-of-interests method of accounting.
Under this method of accounting, the recorded assets and liabilities of the
Company, AVCOM, PRG and LSI have been carried forward at their book values to
the Company and the reported income of the Company, AVCOM, PRG and LSI for prior
periods has been combined and restated as income of the Company. Although the
Company has received an opinion from its independent public accountants that the
Acquisitions will qualify for pooling-of-interests accounting treatment,
opinions of accountants are not binding upon the Commission, and there can be no
assurance that the Commission will not successfully assert a contrary position.
In such case, the purchase method of accounting would be applicable. Under the
purchase method, the book value of AVCOM's, PRG's and LSI's assets would be
increased to their fair values, which could result in higher operating costs and
expenses as the excess of the purchase price over the fair value of AVCOM's,
PRG's and LSI's assets would be amortized and expensed over a period of years,
which would adversely affect the Company's future earnings. The VI, Marc and
Global Acquisitions have been accounted for using the purchase method of
accounting.
VARIABILITY OF QUARTERLY RESULTS, POSSIBLE VOLATILITY OF STOCK PRICE
The Company's earnings may be impacted by the timing of the implementation
of the Company's acquisition and development strategy. Additionally, the Company
has historically experienced and expects to continue to experience seasonal
fluctuations in its gross revenues and net income from the sale of Vacation
Intervals and Vacation Points. This seasonality may cause significant variations
in quarterly operating results. If sales of Vacation Intervals and Vacation
Points are below seasonal normalties during a particular period, the Company's
annual operating results could be materially adversely affected. In addition,
the combination of (i) the possible delay in generating revenue between the time
that the Company acquires an additional resort and the commencement of Vacation
Interval and Vacation Points sales and (ii) the expenses associated with
start-up unit or room-rental operations, interest expense, amortization and
depreciation expenses from such acquisitions may materially adversely impact
earnings.
Due to the foregoing and other factors, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied upon as indications of future performance. Because of the above factors,
it is possible that the Company's operating results will be below the
expectations of securities market analysts and investors, which could have an
adverse effect on the market value of the Company's Common Stock. Numerous
factors, including announcements of fluctuations in the Company's or its
competitors' operating results and market conditions for hospitality and
vacation ownership industry securities in general, could have a significant
impact on the future price of the Common Stock. In addition, the securities
market in recent years has experienced significant price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. These broad fluctuations may adversely affect the market price of
the Common Stock.
26
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The indenture pursuant to which the Notes will be issued will contain, and
the indenture for the Senior Subordinated Notes does contain, certain covenants
that, among other things, limit the ability of the Company and its Restricted
Subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make
other distributions with respect to capital stock of the Company and its
Restricted Subsidiaries, (iii) create certain liens, (iv) sell certain assets of
the Company or its Restricted Subsidiaries and (v) enter into certain mergers
and consolidations. In addition, certain of the Company's other Senior
Indebtedness contain other and more restrictive covenants that, among other
things, restrict the following: the making of investments, loans, and advances
and the paying of dividends and other restricted payments; the incurrence of
additional indebtedness; the granting of liens, other than certain permitted
liens; mergers, consolidations and sales of all or a substantial part of the
Company's business or property; the sale of assets; and the making of capital
expenditures.
Certain of the Company's other indebtedness that is not subordinated by its
terms in right of payment to any indebtedness or other obligation of the Company
("Senior Indebtedness"), including the Senior Credit Facility, also require the
Company to maintain certain financial ratios, including interest coverage,
leverage and fixed charge ratios. There can be no assurance that these
requirements will be met in the future. If they are not, the holders of the
indebtedness under certain of the Company's other Senior Indebtedness may be
entitled to declare such indebtedness immediately due and payable.
RISKS OF DEVELOPMENT AND CONSTRUCTION ACTIVITIES
Risks associated with the Company's development, construction and
redevelopment/conversion activities, and expansion activities may include the
risks that: acquisition and/or development opportunities may be abandoned;
construction costs of a resort may exceed original estimates, possibly making
the resort uneconomical or unprofitable; sales of Vacation Intervals at a newly
completed resort may not be sufficient to make the resort profitable; financing
may not be available on favorable terms for development of, or the continued
sales of Vacation Intervals at, a resort; and construction may not be completed
on schedule, resulting in decreased revenues and increased interest expense. The
failure of the Company to successfully complete its development, construction,
redevelopment, conversion and expansion activities may have a material adverse
effect on the Company's results of operations.
In addition, the Company's construction activities typically are performed
by third-party contractors, and, accordingly, the timing, quality and completion
of which cannot be controlled by the Company. Nevertheless, construction claims
may be asserted against the Company for construction defects and such claims may
give rise to liabilities. New development activities, regardless of whether or
not they are ultimately successful, typically require a substantial portion of
management's time and attention. Development activities are also subject to
risks relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental permits
and authorizations, the ability of the Company to coordinate construction
activities with the process of obtaining such permits and authorizations, and
the ability of the Company to obtain the financing necessary to complete the
necessary acquisition, construction, and/or conversion work at the resorts. The
Company currently does not have the financing available to complete all of its
planned expansion as set forth in "-- Description of the Company's Resort
Locations."
RISKS ASSOCIATED WITH PARTNERSHIP INVESTMENTS
The Company owns, and may in the future acquire, certain resorts through
partnerships or other joint ventures. Property ownership through a partnership
or other joint venture involves additional risks, including requirements of
partner or venturer consents for major decisions (including approval of
budgets), capital contributions and entry into material agreements. If the
Company and its partner or venturer are unable to agree on major decisions,
either partner or venturer may elect to invoke a buy/sell right, which could
require the Company to either sell its interest in such partnership or venture
or to buy out the interest of its partner or venturer at a time when the Company
is not prepared to do so. In addition, under certain circumstances, the other
partner or venturer can require the Company to purchase such partner's or
venturer's interest or sell its
27
interest to the other partner or venturer, and in either case, such purchase or
sale could have a material adverse effect on the Company. If a dispute arises
under these types of partnerships or joint ventures, an adverse
28
resolution could have a material adverse effect on the operations of the
Company. In addition, as a general partner or venturer, the Company will be
subject to certain fiduciary obligations which may obligate it to act in a
manner which is not necessarily in the best interest of the Company.
Additionally, as a matter of partnership law, if other partners or venturers
fail to honor their obligation (including as a result of insolvency), the
Company may incur losses in excess of its pro rata share of the partnership or
venture. See "-- Description of the Company's Resort Locations."
LIMITED OPERATING HISTORY
The Company was formed in May 1996 in order to effectuate the consolidation
of the Company's predecessor partnerships, limited liability companies and
corporations (the "Consolidation Transactions") and the Company's initial public
offering (the "Initial Public Offering"), each of which was consummated in
August 1996. Although predecessors of the Company have operating histories in
the vacation ownership and hospitality industries, the Company has limited
operating history as an integrated entity both prior to and following the
Acquisitions, has limited experience operating as a public company and no
experience operating a company-wide points-based vacation exchange system, any
of which could result in an adverse impact on the Company's operations and
future profitability. The Company conducts its management operations out of a
number of geographically diverse locations. As the Company grows and diversifies
into additional geographic markets, including new markets entered as a result of
the Acquisitions, no assurance can be given as to management's ability to
efficiently manage operations and control functions without a centrally located
management team.
GENERAL ECONOMIC CONDITIONS, CONCENTRATION IN VACATION OWNERSHIP INDUSTRY
Any downturn in economic conditions or any price increases (e.g., airfares)
related to the travel and tourism industry could depress discretionary consumer
spending and have a material adverse effect on the Company's business. Any such
economic conditions, including recession, may also adversely affect the future
availability of attractive financing rates for the Company or its customers and
may materially adversely affect the Company's business. Furthermore, adverse
changes in general economic conditions may adversely affect the collectibility
of the Company's loans to vacation interest buyers. Because the Company's
operations are conducted solely within the vacation ownership industry, any
adverse changes affecting the vacation ownership industry such as an oversupply
of vacation ownership units, a reduction in demand for vacation ownership units,
changes in travel and vacation patterns, changes in governmental regulations of
the vacation ownership industry and increases in construction costs or taxes, as
well as negative publicity for the vacation ownership industry, could have a
material adverse effect on the Company's operations.
RISKS ASSOCIATED WITH CUSTOMER FINANCING
The Company offers financing to the purchasers of vacation interests at the
Company's resort locations who make a down payment generally equal to at least
10% of the purchase price. This financing generally bears interest at fixed
rates and is collateralized by a first mortgage on the underlying vacation
interest. The Company has entered into agreements with lenders for the financing
of customer receivables. As of December 31, 1997, the Company had approximately
$199 million of additional borrowing capacity available thereunder.
Under these arrangements, the Company pledges as security promissory notes
to these lenders, who typically lend the Company 85% to 90% of the principal
amount of such promissory notes. Payments under these promissory notes are made
by the buyer/borrowers directly to a third-party payment processing center and
such payments are credited against the Company's outstanding balance with the
respective lenders. The Company does not presently have binding agreements to
extend the terms of such existing financing arrangements or for any replacement
financing arrangements upon the expiration of such funding commitments (which
have varying borrowing periods ranging from 18 to 20 months after the initial
commitment date), and there can be no assurance that alternative or additional
arrangements can be made on terms that are satisfactory to the Company.
Accordingly, future sales of vacation interests may be limited by both the
availability of funds to finance the initial negative cash flow that results
from sales that are financed by the
28
Company and by reduced demand which may result if the Company is unable to
provide financing through unaffiliated lenders to buyers of vacation interests.
If the Company is required to sell its customer receivables to lenders,
discounts from the face value of such receivables may be required by such
lenders, if lenders are available at all. The inability to finance the Company's
mortgages receivable on terms favorable to the Company or at all could have a
material adverse effect on the Company's results of operations.
The Company has historically derived income from its financing activities.
At December 31, 1997, the Company's mortgage portfolio included approximately
37,000 promissory notes totaling approximately $355 million, with a stated
maturity of typically seven to ten years and a weighted average interest rate of
14.4% per annum. Additionally, at December 31, 1997, the weighted average
maturity of all outstanding consumer loans was approximately 8.4 years and the
total borrowings secured by promissory notes were approximately $91 million,
bearing a weighted average interest rate of 10.3%. However, because the
Company's borrowings bear interest at variable rates and the Company's loans to
buyers of vacation interests bear interest at fixed rates (which, as of December
31, 1997, equal 14.4% per annum on a weighted average basis), the Company bears
the risk of increases in interest rates with respect to the loans it has from
its lenders. The promissory notes are prepayable at any time without penalty. To
the extent interest rates on the Company's borrowings decrease, the Company
faces an increased risk that customers will pre-pay their loans and reduce the
Company's income from financing activities. See "-- Customer Financing."
RISKS OF HEDGING ACTIVITIES AND EXCHANGE RATE FLUCTUATIONS
The Company does not engage in speculative or profit motivated hedging
activities. However, to manage risks associated with the Company's borrowings
bearing interest at variable rates, the Company may from time to time purchase
interest rate caps, interest rate swaps or similar instruments. As of and for
the fiscal year ending December 31, 1997, the Company was not engaging in any
interest rate hedging transactions. The nature and quantity of any future
hedging transactions for the variable rate debt will be determined by the
management of the Company based on various factors, including market conditions,
and there have been no limitations placed on management's use of certain
instruments in such hedging transactions. No assurance can be given that any
such hedging transactions will offset the risks of changes in interest rates, or
that the costs associated with hedging activities will not increase the
Company's operating costs.
The Company's international operations subject the Company to certain
risks, including increased exposure to currency exchange rate fluctuations.
Although the Company does not currently engage in foreign currency hedging
transactions, as it continues to expand its international operations, exposure
to losses in foreign currency transactions may increase or occur. The Company
may choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. However, there can be no assurance that
any currency hedging strategy would be successful in avoiding exchange-related
losses. In addition, there can be no assurance that such exchange-related losses
would not have a material adverse effect on the Company's future international
revenue and, consequently, on the Company's business, operating results and
financial condition.
RISKS ASSOCIATED WITH CUSTOMER LOAN DEFAULT
The Company bears the risk of defaults by buyers who financed the purchase
of their vacation interests through the Company. As of December 31, 1997,
approximately 4.6% of the Company's consumer loans were considered by the
Company to be delinquent (scheduled payment past due by 60 or more days). The
Company had completed or commenced foreclosure or deed-in-lieu of foreclosure
(which is typically commenced once a scheduled payment is more than 120 days
past due) on an additional approximately 2.2% of its consumer loans. As of
December 31, 1997, the Company's allowance for doubtful accounts as a percentage
of gross mortgages receivable was 6.5%, which management believes is an adequate
reserve for expected loan losses.
If a buyer of a vacation interest defaults on the consumer loan made by the
Company and the Company has pledged the mortgage receivable as collateral to a
lending institution, the Company generally must take back the mortgage with
respect to such vacation interest and replace it with a performing mortgage. In
29
connection with the Company taking back any such vacation interest, the
relatively substantial associated marketing costs, other than certain sales
commissions, will not have been recovered by the Company and they must be
incurred again after their vacation interest has been returned to the Company's
inventory for resale (commissions paid in connection with the sale of vacation
interests may be recoverable from the Company's sales personnel and from
independent contractors upon default in accordance with contractual arrangements
with the Company, depending upon the amount of time that has elapsed between the
sale and the default and the number of payments made prior to such default).
Although private mortgage insurance or its equivalent is available to cover
vacation interests, the Company has never purchased such insurance and has no
present intention of doing so. In addition, although the Company in many cases
may have recourse against vacation interest purchasers, sales personnel and
independent contractors for the purchase price paid and for commissions paid,
respectively, no assurance can be given that the vacation interest purchase
price or any commissions will be fully or partially recovered in the event of a
buyer default under such financing arrangements. The Company is subject to the
costs and delays associated with the foreclosure process and no assurance can be
given that the value of the underlying vacation interests being foreclosed upon
at the time of resale will exceed the purchase price of the defaulted loans,
taking into consideration the costs of foreclosure and resale or that the costs
of any such foreclosures will not have a material adverse effect on the
Company's results of operations. See "-- Customer Financing."
COMPETITION
The Company is subject to significant competition at each of its resorts
from other entities engaged in the business of resort development, sales and
operation, including vacation interest ownership, condominiums, hotels and
motels. Many of the world's most recognized lodging, hospitality and
entertainment companies have begun to develop and sell vacation interests in
resort properties. Other major companies that now operate or are developing or
planning to develop vacation ownership resorts include Marriott, Disney, Hilton,
Hyatt, Four Seasons, Inter-Continental and Westin. Many of these entities
possess significantly greater financial, marketing, personnel and other
resources than those of the Company and may be able to grow at a more rapid rate
or more profitably as a result. See "-- Competition."
The Company also competes with companies with non-branded resorts such as
CFI, Vistana, Fairfield, Silverleaf, Trendwest and ILX. Under the terms of an
exclusive five year agreement, Promus and Vistana will jointly acquire, develop
and manage and market vacation ownership resorts in North America under Promus
brand names. As part of the exclusive agreement, Promus and Vistana will
designate selected markets for development (which markets currently include
Kissimmee, Florida and Myrtle Beach, South Carolina, and in which markets
Vistana will have exclusive development rights). The Company is not precluded
from using the Embassy Vacation Resort name in connection with resorts acquired
during the term of the agreement in markets not otherwise exclusive to Vistana.
There can be no assurance that Promus will not grant other entities a license to
develop Embassy Vacation Resorts or that Promus will not exercise its rights to
terminate the Embassy Vacation Resort licenses. Promus has indicated that it
intends to expand its branded vacation ownership business only with the Company
and Vistana and that additional Embassy Vacation Resort properties to be
developed or acquired by the Company and licensed by Promus are under
discussion. See "-- Competition."
In addition, the Company also competes with the buyers of its Vacation
Intervals who subsequently decide to resell those intervals. While the Company
believes, based on experience at its resorts, that the market for resale of
Vacation Intervals by buyers is presently limited, such resales are typically at
prices substantially less than the original purchase price. The market price of
Vacation Intervals sold by the Company at a given resort or by its competitors
in the market in which each resort is located could be depressed by a
substantial number of Vacation Intervals offered for resale.
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; RISK OF INABILITY TO QUALIFY
RESORTS
The attractiveness of vacation interest ownership is enhanced significantly
by the availability of exchange networks that allow vacation interest owners to
exchange in a particular year the occupancy right in their vacation interest for
an occupancy right in another participating network resort. According to ARDA,
the
30
ability to exchange vacation interests was cited by buyers as a primary reason
for purchasing a vacation interest. Resort Condominiums International ("RCI")
and Interval International ("II") provide broad-based vacation interest exchange
services and the Company's resort locations are currently qualified for
participation in either the RCI and II exchange networks.
If such exchange networks cease to function effectively, or if the
Company's resorts are no longer included in such exchange networks, the
Company's sales of vacation interests could be materially adversely affected.
See "-- Participation in Vacation Interest Exchange Networks."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of Messrs. Osamu Kaneko, Andrew J. Gessow and Steven C. Kenninger (the
"Founders"), who serve as the Company's Chairman, Chief Executive Officer and
President, respectively, as well as the abilities of James E. Noyes and Michael
A. Depatie, the Company's Chief Operating Officer and Chief Financial Officer,
respectively. The Company's success in Europe depends to a large extent upon the
experience and abilities of Ian Ganney and Richard Harrington, LSI's founders,
who serve as LSI's Chairman and Chief Executive Officer, respectively.
The loss of the services of any of the Founders or Messrs. Noyes, Depatie,
Ganney or Harrington could have a material adverse effect on the Company, its
operations and its business prospects. The Company does not maintain "keyman"
life insurance with respect to any of the Founders or Messrs. Noyes, Depatie,
Ganney and Harrington. The Company's success is also dependent upon its ability
to attract and maintain qualified development, acquisition, marketing,
management, administrative and sales personnel for which there is keen
competition among the Company's competitors. In addition, the cost of retaining
such key personnel could escalate over time. There can be no assurance that the
Company will be successful in attracting and/or retaining such personnel.
APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION INTERVALS
It is possible that the vacation interests may be deemed to be a security
as defined in Section 2(1) of the Securities Act. If the vacation interests were
determined to be a security for such purpose, their sale would require
registration under the Securities Act. The Company has not registered the sale
of the vacation interests under the Securities Act and does not intend to do so
in the future. If the sale of the vacation interests were found to have violated
the registration provisions of the Securities Act, purchasers of the vacation
interests would have the right to rescind their purchases of vacation interests.
If a substantial number of purchasers sought rescission and were successful, the
Company's business, results of operations and financial condition could be
materially adversely affected. The Company has been advised by its vacation
ownership counsel, Schreeder, Wheeler & Flint, LLP, that in the opinion of such
counsel, based on its review of the Company's Vacation Interval programs and the
sales practices utilized in such program, the Vacation Intervals do not
constitute a security within the meaning of Section 2(1) of the Securities Act.
REGULATION OF MARKETING AND SALES OF VACATION INTERESTS; OTHER LAWS
The Company's marketing and sales of vacation interests and other
operations are subject to extensive regulation by the federal government and the
states and foreign jurisdictions in which its resorts are located and in which
vacation interests are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject appears in the Truth-in-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, Telephone Consumer Protection Act, Telemarketing and Consumer
Fraud and Abuse Prevention Act, Fair Housing Act and the Civil Rights Acts of
1964 and 1968. In addition, many states have adopted specific laws and
regulations regarding the sale of vacation ownership programs. The laws of most
states, including Florida, California, Arizona, South Carolina, Virginia and
Hawaii, require the Company to file with a designated state authority for its
approval a detailed offering statement describing the Company and all material
aspects of the project and sale of vacation
31
interests. Laws in each state where the Company sells vacation interests
generally grant the purchaser of a vacation interest the right to cancel a
contract of purchase at any time within a period ranging from three to fifteen
calendar days following the earlier of the date the contract was signed or the
date the purchaser has received the last of the documents required to be
provided by the Company. Most states have other laws which regulate the
Company's activities, such as real estate licensure; seller's of travel
licensure; anti-fraud laws; telemarketing laws; price, gift and sweepstakes
laws; and labor laws. The Company believes that it is in material compliance
with all federal, state, local and foreign laws and regulations to which it is
currently subject. However, no assurance can be given that the cost of
qualifying under vacation ownership regulations in all jurisdictions in which
the Company desires to conduct sales will not be significant or that the Company
is in fact in compliance with all applicable federal, state, local and foreign
laws and regulations. Any failure to comply with applicable laws or regulations
could have a material adverse effect on the Company. See "-- Governmental
Regulation."
Certain state and local laws may impose liability on property developers
with respect to construction defects discovered or repairs made by future owners
of such property. Pursuant to such laws, future owners may recover from the
Company amounts in connection with the repairs made to the developed property.
In addition, from time to time, potential buyers of vacation interests
assert claims with applicable regulatory agencies against vacation interest
salespersons for unlawful sales practices. Such claims could have adverse
implications for the Company in negative public relations and potential
litigation and regulatory sanctions. However, the Company does not believe that
such claims will have a material adverse effect on the Company or its business.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state, local and foreign environmental, health,
safety and land use laws, ordinances, regulations and similar requirements
(collectively, "Environmental Laws"), the owner or operator of real property may
be liable for the costs of removal or remediation of certain hazardous or toxic
substances or wastes located on or in, or emanating from, such property, as well
as related costs of investigation and associated damages. Such laws may impose
liability without regard to whether the owner knew of, or caused, the presence
of such hazardous or toxic substances or wastes. The presence of such substances
or wastes, or the failure to properly remediate them, may adversely affect an
owner's ability to sell or lease a property or to borrow using such real
property as collateral. In addition, certain Environmental Laws impose liability
on prior owners or operators of property to the extent that hazardous or toxic
substances or wastes were present during or resulted from such owner's or
operator's prior ownership or operation. Transfer of the property may not
relieve an owner of such liability. Thus, a company could incur liability for
contamination at or from previously owned properties. Other Environmental Laws
may require the removal or encapsulation of asbestos-containing material when
such material is in poor condition or in the event of construction, demolition,
remodeling or renovation, or impose specific requirements pertaining to the
removal of underground storage tanks. Noncompliance with these and other
Environmental Laws could adversely impact operations at a property. Further, the
owner or operator of a site may be subject to common law claims by third parties
based on damages resulting from violations of Environmental Laws or from
contamination associated with the site. The Company is not aware of
environmental liability that would have a material adverse effect on the
Company's business, assets or results of operations, nor has the Company been
notified by any governmental authority or any third party, and is not otherwise
aware, of any material noncompliance, liability or other claim relating to
hazardous or toxic substance or petroleum products in connection with any of its
present or former properties. The Company believes that it is in compliance in
all material respects with all Environmental Laws. No assurance, however, can be
given that the Company is aware of all environmental liabilities or that no
prior owner, operator or third party caused a material environmental condition
at any such property not currently known to the Company. See "-- Governmental
Regulation -- Environmental Matters."
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO DISABLED
PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons on a variety of public
32
accommodations and facilities. These requirements did not become effective until
after January 1, 1991. Although the Company believes that its resorts are
substantially in compliance with laws governing the accessibility of its
facilities to disabled persons, a determination that the Company is not in
compliance with the ADA could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. The Company is
likely to incur additional costs of complying with the ADA; however, such costs
are not expected to have a material adverse effect on the Company's results of
operations or financial condition. Additional legislation may impose further
burdens or restrictions on property owners with respect to access by disabled
persons. If a homeowners' association at a resort was required to make
significant improvements as a result of non-compliance with the ADA, vacation
interests owners may default on their mortgages and/or cease making required
homeowners' association assessment payments. The Company is not aware of any
non-compliance with the ADA, the Fair Housing Act or similar laws that
management believes would have a material adverse effect on the Company's
business, assets or results of operations.
NATURAL DISASTERS; UNINSURED LOSS
In 1992, prior to the Company's purchase of an interest in the Embassy
Vacation Resort Poipu Point, the resort was substantially destroyed by Hurricane
Iniki. The resort was rebuilt with insurance proceeds before the Company
acquired its interest in the resort, but could suffer similar damage in the
future. In September 1995 and July 1996, the Company's St. Maarten resorts were
damaged by hurricanes and could suffer similar damage in the future. In
addition, the Company's other resorts which are or will be located in Hawaii,
Florida, Mexico and the Caribbean (including the St. John resort which was
damaged by Hurricane Marilyn in 1995) may be subject to hurricanes and damaged
as a result thereof. The Company's resorts located in California and Hawaii may
be subject to damage resulting from earthquakes. The Company currently maintains
insurance coverage which, in management's opinion, is at least as comprehensive
as the coverage maintained by other prudent entities in the Company's line of
business. However, there are certain types of losses (such as losses arising
from acts of war and civil unrest) that are not generally insured because they
are either uninsurable or not economically insurable and for which the Company
does not have insurance coverage. Should an uninsured loss or a loss in excess
of insured limits occur, the Company could lose its capital invested in a
resort, as well as the anticipated future revenues from such resort and would
continue to be obligated on any mortgage indebtedness or other obligations
related to the property. Any such loss could have a material adverse effect on
the Company.
EFFECTIVE VOTING CONTROL BY EXISTING STOCKHOLDERS
The Founders hold substantial amounts of shares of Common Stock (Messrs.
Kaneko, Gessow and Kenninger hold 9.7%, 10.1% and 3.1%, respectively, as of the
date hereof) which may allow them, collectively, to exert substantial influence
over the election of directors and the management and affairs of the Company.
Accordingly, if such persons vote their shares of Common Stock in the same
manner, they may have sufficient voting power to determine the outcome of
various matters submitted to the stockholders for approval, including mergers,
consolidations and the sale of substantially all of the Company's assets. Such
control may result in decisions which are not in the best interest of the
Company.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. Any payment of future cash dividends will be in the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions in respect of the payment of dividends
and other factors that the Company's Board of Directors deems relevant. On
October 27, 1997, the Company completed a three-for-two stock split in the form
of a Common Stock dividend.
RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company expects that international operations will account for an
increasingly significant percentage of the Company's operations. As a result,
the Company is subject to a number of risks, including, among other
33
things, difficulties relating to administering its business globally, managing
foreign operations, currency fluctuations, restrictions against the repatriation
of earnings, export requirements and restrictions and multiple and possibly
overlapping tax structures. These risks could have a material adverse effect on
the Company's business, results of operations and financial condition.
Additionally, changes in inflation, interest rates, taxation, regulation or
other social, political, economic or diplomatic developments affecting the
countries in which the Company has (or intends to have) international operations
could have a material adverse effect on the Company's business, operating
results and financial condition.
POTENTIAL CONFLICTS OF INTEREST
Because affiliates of Messrs. Kaneko and Kenninger have operations in the
lodging industry other than those with respect to the development and operation
of vacation ownership resorts, potential conflicts of interest exist. Affiliates
of KOAR Group, Inc. ("KOAR"), a Los Angeles based real estate acquisition and
development company and predecessor of the Company which is owned by Messrs.
Kaneko and Kenninger, have developed and currently act as the managing general
partner of partnerships which own hotels that are franchised as Embassy Suites
hotels (one of which, the Embassy Suites Lake Tahoe, is located in a market
served by the Company) and a residential condominium project overlooking the
ocean in Long Beach, California (a market in which the Company may operate in
the future). Messrs. Kaneko and Kenninger will continue to devote a portion of
their time to KOAR's hotel and other businesses and to meeting their duties and
responsibilities to investors in such entities. In addition, the Founders will
continue to devote a portion of their time to certain funds, limited liability
companies or partnerships with investments in commercial or residential real
estate developments that do not present a prospect for conversion to vacation
ownership or resort related use. The Company's Board of Directors (including the
Company's independent directors) has determined that the Company does not
presently intend to invest in such commercial or residential real estate
developments that do not present a prospect for conversion to vacation ownership
or resort related use.
Additionally, notwithstanding their covenants not to compete, the Founders
have the right to pursue certain activities which could divert their time and
attention from the Company's business and result in conflicts with the Company's
business. The Founders are evaluating the acquisition of other hotel properties
in Hawaii, which at a future date may be converted to accommodate vacation
ownership operations. However, any such acquisition from the Founders would be
subject to the approval of the Company's independent directors and the Founders
are prohibited from actively engaging in the vacation ownership business outside
of the Company.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S
CHARTER AND BYLAWS
Certain provisions of the Company's articles of incorporation, as amended,
(the "Charter") and bylaws, as amended, (the "Bylaws"), as well as Maryland
corporate law, may be deemed to have anti-takeover effects and may delay, defer
or prevent a takeover attempt that a stockholder might consider to be in the
stockholder's best interest. For example, such provisions may (i) deter tender
offers for Common Stock, which offers may be beneficial to stockholders or (ii)
deter purchases of large blocks of Common Stock, thereby limiting the
opportunity for stockholders to receive a premium for their Common Stock over
then-prevailing market prices. These provisions include the following:
Preferred Shares. The Charter authorizes the Board of Directors to issue
preferred stock in one or more classes and to establish the preferences and
rights (including the right to vote and the right to convert into Common Stock)
of any class of preferred stock issued. No preferred stock is issued or
outstanding.
Staggered Board. The Board of Directors of the Company has three classes of
directors each serving a staggered term so that the directors' terms currently
will expire in 1998, 1999 and 2000. Directors for each class will be chosen for
a three-year term upon the expiration of the term of the current class. The
affirmative vote of two-thirds of the outstanding Common Stock is required to
remove a director.
Maryland Business Combination Statute. Under the Maryland General
Corporation Law ("MGCL"), certain "business combinations" (including the
issuance of equity securities) between a Maryland corporation and any person who
owns, directly or indirectly, 10% or more of the voting power of the
corporation's shares of
34
capital stock (an "Interested Stockholder") must be approved by a supermajority
(i.e., 80%) of voting shares. In addition, an Interested Stockholder may not
engage in a business combination for five years following the date he or she
became an Interested Stockholder.
Maryland Control Share Acquisition. Maryland law provides that "Control
Shares" of a corporation acquired in a "Control Share Acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the votes
eligible under the statute to be cast on the matter. "Control Shares" are voting
shares of beneficial interest which, if aggregated with all other such shares of
beneficial interest previously acquired by the acquiror, would entitle the
acquiror directly or indirectly to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii) a
majority of all voting power. Control Shares do not include shares of beneficial
interest the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A "Control Share Acquisition" means
the acquisition of Control Shares, subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, the issuer may redeem any or all
of the Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at a
stockholders meeting and the acquiror becomes entitled to vote a majority of the
shares of beneficial interest entitled to vote, all other stockholders may
exercise appraisal rights.
RISK OF TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY
The Company sells vacation interests at its resort locations through
independent sales agents. Such independent sales agents provide services to the
Company under contract and, the Company believes, are not employees of the
Company. Accordingly, the Company does not withhold payroll taxes from the
amounts paid to such independent contractors. Although the Internal Revenue
Service has made inquiries regarding the Company's classification of its sales
agents at its Branson, Missouri resort, no formal action has been taken and the
Company has requested that the inquiry be closed. In the event the Internal
Revenue Service or any state or local taxing authority were to successfully
classify such independent sales agents as employees of the Company, rather than
as independent contractors, and hold the Company liable for back payroll taxes,
such reclassification may have a material adverse effect on the Company.
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next few years to address
this issue. The Company has several information system improvement initiatives
under way to determine the full scope and related costs to insure that the
Company's systems continue to meet its needs and those of its customers. These
initiatives include upgrading and replacing some computer systems and the
conversion of others to be Year 2000 compliant. Although final cost estimates
have yet to be determined, it is anticipated that these Year 2000 costs will
result in an increase to Company expenses during 1998 and 1999. Suppliers,
customers, mortgage receivable servicers and creditors of the Company also face
Year 2000 issues. Their failure to successfully address the Year 2000 issue
could have a material adverse effect on the Company's business or results of
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently subject to litigation and claims respecting
employment, tort, contract, construction and commissions, among others. In the
judgment of the Company's management, none of such lawsuits or claims against
the Company is likely to have a material adverse effect on the Company or its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's equity holders during
the fourth quarter of 1997.
35
PART II
ITEM 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "OWN." Prior to February 6, 1998, the Common Stock was quoted on the
Nasdaq National Market under the symbol "SIGR." The following table sets forth,
the high and low sale prices for the Common Stock for each quarter during the
fiscal year ended December 31, 1997 and for the third and fourth quarter during
the fiscal year ended December 31, 1996 (the Company's Initial Public Offering
was consummated in August 1996), in each case as adjusted for the Stock Split.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1997
Fourth Quarter..................................... $31.75 $20.75
Third Quarter...................................... $32.00 $20.92
Second Quarter..................................... $23.50 $13.00
First Quarter...................................... $25.08 $14.50
YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter..................................... $25.75 $17.17
Third Quarter...................................... $16.33 $ 9.25
On March 28, 1998, there were approximately 125 holders of record of the
Company's Common Stock and the approximate number of beneficial stockholders is
2,375.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock. The
Company currently intends to retain future earnings to finance its operations
and fund the growth of its business. Any payment of future dividends will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements level of indebtedness, contractual restrictions in respect of the
payment of dividends and other factors that the Company's Board of Directors
deems relevant.
In connection with the PRG Acquisition in May 1997, the Company issued
3,601,844 shares of its Common Stock to former PRG stockholders. Such securities
were issued by the Company in reliance upon an exemption from the registration
requirements of the Securities Act provided by Section 4(2) thereof.
Additionally, in connection with the LSI Acquisition in August 1997, the
Company issued 1,996,401 shares of its Common Stock to former LSI stockholders.
Such securities were issued by the Company in reliance upon an exemption from
the registration requirements of the Securities Act provided by Section 4(2)
thereof.
Finally, in connection with the Marc Acquisition in October 1997, the
Company issued 212,717 shares of Common Stock to former Marc stockholders. Such
securities were issued by the Company in reliance upon an exemption from the
registration requirements of the Securities Act prohibited by Section 4(2)
thereof.
36
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial data of the
Company. For all of the periods presented, the financial data presented below
gives effect to the AVCOM, PRG and LSI Acquisitions by combining the historical
information of AVCOM, PRG, LSI and the Company and restating the historical
financial data of the Company using the pooling-of-interests method of
accounting.
Prior to its acquisition by the Company on February 7, 1997, AVCOM
recognized a net loss of $12.4 million for the year ended December 31, 1996. As
a result of the pooling-of-interests accounting treatment, this net loss has
been reflected in the Company's consolidated financial statements for the year
ended December 31, 1996, reducing the Company's 1996 reported consolidated net
income. In addition, as a result of the Company's 1997 acquisitions, the Company
incurred $10.0 million of non-recurring merger-related costs, reducing the
Company's 1997 reported consolidated net income.
The financial data presented below includes the effect of the Consolidation
Transactions and the Initial Public Offering, both of which were consummated on
August 20, 1996. The following financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements for the Company and the
notes thereto, each of which are contained elsewhere in this 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
----------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues:
Vacation Interval and Vacation Point
sales................................. $68,867 $116,356 $139,426 $182,300 $281,063
Interest income.......................... 12,770 15,965 20,339 25,415 42,856
Other income............................. 1,110 1,547 8,553 12,132 13,774
------- -------- -------- -------- --------
Total revenues................... 82,747 133,868 168,318 219,847 337,693
------- -------- -------- -------- --------
Costs and operating expenses:
Vacation Interval and Vacation Point cost
of sales.............................. 18,548 33,082 39,810 48,218 71,437
Advertising, sales and marketing......... 32,711 54,098 62,258 89,040 126,739
Loan portfolio:
Interest expense -- treasury.......... 7,435 8,224 10,077 13,482 13,032
Other expenses........................ 840 1,466 2,034 4,523 5,522
Provision for doubtful accounts(a).... 1,703 2,045 3,666 8,311 8,579
General and administrative(a)............ 6,852 12,629 19,263 37,436 42,254
Resort property valuation allowance(a)... -- -- -- 2,620 --
Depreciation and amortization(a)......... 616 1,196 2,514 5,027 6,499
Merger-related costs(a)(b)............... -- -- -- -- 9,973
------- -------- -------- -------- --------
Total costs and operating
expenses....................... 68,705 112,740 139,622 208,657 284,035
------- -------- -------- -------- --------
Income from operations................... 14,042 21,128 28,696 11,190 53,658
Interest expense -- other, net........... 519 1,517 1,728 3,763 9,394
Equity loss on investment in joint
venture............................... -- 271 1,649 299 639
Minority interest in income of
consolidated limited partnership...... -- -- -- 199 181
------- -------- -------- -------- --------
Income before provision (benefit)
for income taxes and
extraordinary item............. 13,523 19,340 25,319 6,929 43,444
------- -------- -------- -------- --------
Provision (benefit) for income taxes from
continuing operations................. 3,064 2,768 4,020 (4,105) 17,196
Provision for deferred income taxes
resulting from the cumulative effect
of previously non-taxable acquired
entities.............................. -- -- -- -- 5,960
------- -------- -------- -------- --------
Total provision (benefit) for income
taxes................................. 3,064 2,768 4,020 (4,105) 23,156
------- -------- -------- -------- --------
Income before extraordinary item...... 10,459 16,572 21,299 11,034 20,288
Extraordinary item, net of tax........... -- -- -- -- 766
------- -------- -------- -------- --------
Net income....................... $10,459 $ 16,572 $ 21,299 $ 11,034 $ 19,522
======= ======== ======== ======== ========
Pro forma net income(c).................. $ 8,249 $ 11,954 $ 15,310 $ 4,380 $ 19,522
37
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICES)
OTHER DATA (UNAUDITED FOR ALL PERIODS):
EBITDA(d)................................. $ 22,622 $ 31,553 $ 41,553 $ 44,622 $ 85,424
Ratio of earnings to fixed charges(e)..... 2.5 2.4 2.7 1.1 2.3
Number of resorts at period end........... 5 16 20 31 70
Number of Vacation Intervals sold......... 5,917 10,695 10,024 11,946 17,271
Number of Vacation Intervals in inventory
at period end.......................... 2,830 6,915 23,439 30,399 29,168
Average price of Vacation Intervals
sold................................... $ 11,639 $ 10,078 $ 12,298 $ 13,146 $ 13,885
Number of Vacation Points in inventory at
period end............................. -- 233,802 205,943 291,674 599,554(f)
Number of Vacation Points sold............ -- 65,325 102,270 132,878 194,055(g)
Average price of Vacation Points sold..... $ -- $ 198 $ 181 $ 186 $ 213(h)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents, including
escrow................................. $ 16,451 $ 17,015 $ 22,779 $ 22,469 $ 47,972
Mortgages receivable, net................. 78,079 102,470 147,405 215,518 331,735
Total assets.............................. 136,607 210,218 295,771 445,884 761,145
Total debt................................ 87,839 123,009 177,032 236,122 435,208
Stockholders' equity...................... 34,232 61,187 75,448 126,425 207,910
(a) Non-recurring costs for the year ended December 31, 1997, are merger costs
relating to the AVCOM, PRG and LSI Acquisitions. Non-recurring costs for the
year ended December 31, 1996 include costs incurred at AVCOM for (i) an
increase in the provision for doubtful accounts of $2.0 million, (ii) $9.1
million in severance costs, lease cancellations, litigation reserves and
other integration costs and a reserve for losses associated with certain
property management and related contracts, (iii) a $2.6 million write-down
of certain property to estimated fair market value, and (iv) a $0.7 million
charge relating to amortization of start-up costs over a period of one year.
(b) Merger-related costs include expenses related to fees paid to financial
advisors, legal fees, and other transaction expenses in connection with the
AVCOM, PRG and LSI Acquisitions.
(c) Reflects the effect on the historical statement of operations data, assuming
the combined Company had been treated as a C corporation rather than as
individual limited partnerships and limited liability companies for federal
income tax purposes, and reflects actual net income for December 31, 1997.
(d) EBITDA represents net income before interest expense-treasury, interest
expense-other, income taxes, non-recurring costs and depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness.
However, EBITDA should not be construed as a substitute for income from
operations, net income or cash flows from operating activities in analyzing
the Company's operating performance, financial position and cash flows. The
EBITDA measure presented herein may not be comparable to EBITDA as presented
by other companies. The following table reconciles EBITDA to net income:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net income................................ $ 10,459 $ 16,572 $ 21,299 $ 11,034 $ 19,522
Interest expense-treasury................. 7,435 8,224 10,077 13,482 13,032
Interest expense-other.................... 519 1,517 1,728 3,763 9,394
Capitalized interest expense included in
Vacation Interval and Vacation Point
cost of sales........................... 529 1,276 1,915 1,718 3,082
Income taxes (benefit).................... 3,064 2,768 4,020 (4,105) 23,156
Non-recurring costs....................... -- -- -- 14,381(a) 9,973(a)
Depreciation and amortization............. 616 1,196 2,514 4,349(a) 6,499
Extraordinary item, net of tax............ -- -- -- -- 766
-------- -------- -------- -------- --------
EBITDA........................... $ 22,622 $ 31,553 $ 41,553 $ 44,622 $ 85,424
======== ======== ======== ======== ========
38
(e) The ratio of earnings to fixed charges has been computed by dividing
earnings before income tax, plus fixed charges (excluding capitalized
interest) and amortization of previously capitalized interest by fixed
charges. Fixed charges consist of interest and other finance expenses and
capitalized interest.
(f) Includes 461,473 Vacation Points in Grand Vacation Club and 138,081 Vacation
Points in VTS Program. Vacation Points assumed through the Global
Acquisition have been converted to the Grand Vacation Club at a rate of ten
to one.
(g) Includes 180,426 Vacation Points sold by the Grand Vacation Club and 13,629
Vacation Points sold by VTS Program. Vacation Points assumed through the
Global Acquisition have been converted into the Grand Vacation Club at a
rate of ten to one.
(h) Calculated as the weighted average price per Vacation Point of Grand
Vacation Club ($220 per Vacation Point) and VTS Program ($119 per Vacation
Point). Vacation Points assumed through the Global Acquisition have been
converted to the Grand Vacation Club at a rate of ten to one.
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the notes
thereto and the other financial data included elsewhere in this 10-K.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Business and Properties."
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the
Company's corporate and partnership predecessors and wholly-owned subsidiaries
and affiliates including AVCOM, PRG, LSI and their subsidiaries. The AVCOM, PRG
and LSI Acquisitions were accounted for using pooling-of-interests accounting
treatment for business combinations. Under such accounting treatment, the
results of operations are restated to include the operations of each acquired
entity of the years ended December 31, 1997, 1996 and 1995. The following
discussion also includes the results of operations for Marc, VI and the Global
Group. The Marc, VI and Global Acquisitions were each accounted for using the
purchase method of accounting for the business combinations.
Prior to its acquisition by the Company on February 7, 1997, AVCOM
recognized a net loss of $12.4 million for the year ended December 31, 1996. As
a result of applying pooling-of-interests accounting treatment to the AVCOM
Acquisition, this net loss has been reflected in the Company's consolidated
financial statements for the year ended December 31, 1996, reducing the
Company's 1996 reported consolidated net income. In addition, as a result of the
Company's 1997 acquisitions, the Company incurred $10.0 million of non-recurring
merger-related costs, reducing the Company's 1997 reported consolidated net
income. Therefore, to allow for a more meaningful comparison of the 1997 and
1996 financial results and management's discussion and analysis of such
financial results, reported total revenues and operating expenses have been
adjusted for non-recurring charges resulting from the AVCOM, PRG and the LSI
Acquisitions. The following table details the adjustments to reported total
revenues and costs and operating expenses for such non-recurring charges and
revenues:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(DOLLARS IN MILLIONS)
Total reported revenues..................................... $168.3 $219.8 $337.7
Other income(a)............................................. -- (1.7) --
------ ------ ------
Adjusted total revenues........................... $168.3 $218.1 $337.7
====== ====== ======
Total reported costs and expenses........................... $139.6 $208.7 $284.0
Provision for doubtful accounts(b).......................... -- (2.0) --
General and administrative expenses(b)...................... -- (9.1) --
Resort property valuation allowance(b)...................... -- (2.6) --
Merger-related costs(c)..................................... -- -- (10.0)
Amortization of start-up costs(b)........................... -- (0.7) --
------ ------ ------
Adjusted total costs and expenses................. $139.6 $194.3 $274.0
====== ====== ======
Adjusted operating income......................... $ 28.7 $ 23.8 $ 63.7
====== ====== ======
(a) For the year ended December 31, 1996, the Company recognized $1.7 million of
other income as the result of the settlement of certain receivables from the
former owners of the St. Maarten Resorts.
(b) As the result of the AVCOM Acquisition, the Company recognized the following
non-recurring charges for the year ended December 31, 1996: (i) $2.0 million
in the provision for doubtful accounts; (ii) $9.1 million in general and
administrative expenses for severance costs, lease cancellations, litigation
reserves, and a reserve for losses associated with certain property
management and related expenses; (iii) $2.6 million in resort property
valuation allowance for the write-down of certain property to fair
40
market value; and (iv) $0.7 million in depreciation and amortization for the
amortization of startup costs over a period of one year.
(c) For the year ended December 31, 1997, the Company recognized $10.0 million
in non-recurring merger costs for the AVCOM, PRG and LSI Acquisitions. These
charges include investment banking, legal, accounting and other professional
fees.
The following table sets forth certain operating information, as adjusted
for the non-recurring charges and revenues described above.
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
AS A PERCENTAGE OF TOTAL REVENUES:
Vacation Interval and Vacation Point sales.................. 82.8% 83.6% 83.2%
Interest income............................................. 12.1% 11.6% 12.7%
Other income................................................ 5.1% 4.8% 4.1%
------- ------- -------
Total revenues.............................................. 100.0% 100.0% 100.0%
AS A PERCENTAGE OF VACATION INTERVAL AND VACATION POINT
SALES:
Vacation Interval and Vacation Point cost of sales.......... 28.6% 26.4% 25.4%
Advertising, sales and marketing............................ 44.7% 48.8% 45.1%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative.................................. 11.4% 13.0% 12.5%
SELECTED OPERATING DATA:
Vacation Intervals sold..................................... 10,024 11,946 17,271
Vacation Points sold........................................ 102,270 132,878 194,055(a)
Average sales price per Vacation Interval................... $12,298 $13,146 $13,885
Average sales price per Vacation Point...................... $ 181 $ 186 $ 213(b)
Number of Vacation Intervals in inventory at end period..... 23,439 30,399 29,168
Number of Vacation Points in inventory at end period........ 205,943 291,674 599,554(c)
Number of resorts at period end(d).......................... 20 31 70
(a) Includes 180,426 Vacation Points sold by the Grand Vacation Club and 13,629
Vacation Points sold by the VTS Program. Vacation Points assumed through the
Global Acquisition have been converted into the Grand Vacation Club at a
rate of ten to one.
(b) Calculated as the weighted average price per Vacation Point of Grand
Vacation Club ($220 per Vacation Point) and the VTS Program ($119 per
Vacation Point). Vacation Points assumed through the Global Acquisition have
been converted to the Grand Vacation Club at a rate of ten to one.
(c) Includes 461,473 Vacation Points in Grand Vacation Club and 138,081 Vacation
Points in the VTS Program. Vacation Points assumed through the Global
Acquisition have been converted to the Grand Vacation Club at a rate of ten
to one.
(d) Includes resort locations of AVCOM, PRG and LSI acquired by the Company in
1997 and accounted for by the pooling-of-interests method.
COMPARISON OF 1996 TO 1997
The following discussion of financial results adjusts the reported
statement of operations data for the non-recurring charges incurred during the
years ended December 31, 1997 and 1996. For the year ended December 31, 1997,
the Company recognized $10.0 million in non-recurring merger-related expenses
for the acquisition by merger of AVCOM, PRG and LSI and a $6.0 million charge to
record deferred taxes related to cumulative temporary differences between
financial and tax reporting for entities acquired in the PRG Acquisition that
were previously taxed as partnerships at the partner level. For the year ended
December 31, 1996, the Company incurred the following non-recurring charges
related to the AVCOM Acquisition: (i) general and administrative expense
increased by $9.1 million for severance costs, lease cancellations,
41
litigation reserves, reserves for losses associated with certain property
management and related contracts; (ii) provision for doubtful accounts increased
by $2.0 million; (iii) resort property valuation allowance increased by $2.6
million to write down certain property to market value for projects initiated by
AVCOM which were subsequently abandoned; and (iv) depreciation and amortization
increased by $0.7 million related to the amortization of start-up costs over a
period of one year. Also, in 1996, the Company recognized $1.7 million of other
income as the result of a settlement of certain receivables from the former
owners of the St. Maarten resorts.
In 1997, total reported revenues were $337.7 million, compared with
adjusted total revenues of $218.1 million in 1996, an increase of $119.6
million, or 55%. This increase was due primarily to a 53% increase in Vacation
Interval sales, a 66% increase in Vacation Points sales, and a 69% increase in
interest income. The growth in Vacation Interval sales was due to both an
increase in the number of Vacation Intervals sold to 17,271 in 1997 from 11,946
in 1996, an increase of 45%, and an increase in the average price of Vacation
Intervals sold to $13,885 in 1997 from $13,146 in 1996, a 6% increase. The
average sales price will change from period to period depending upon the mix of
resorts in sales and the types of intervals sold.
Vacation Points sales during 1997 increased 66% to $41.1 million from $24.7
million in 1996. The number of Vacation Points sold in 1997 increased 46%, to
194,055, from 132,878 in 1996, while the average price per Vacation Point sold
increased 15% to $213 from $186 in 1996. The increase in the number of Vacation
Points sold in 1997 is the result of a 57% increase in Vacation Points sold in
LSI, along with the addition of Vacation Points sales by VI, which was acquired
in November 1997, and the Global Group, which was acquired in December 1997. The
decrease in average price per Vacation Point sold reflects a lower sales price
per point in the Global Group and VI compared with LSI. The average price per
Vacation Point sold at LSI remained essentially unchanged from 1996 to 1997.
Interest income increased 69% to $42.9 million from $25.4 million in 1996.
The increase is the result of an increase in portfolio interest income from
increased gross mortgages receivable, and interest income from investments.
Gross mortgages receivable increased $121.9 million, or 52%, to $354.7 million
in 1997 from $232.8 million in 1996. Interest income from investments increased
by $4.9 million in 1997. Other income, which includes rental income, management
fees, commissions on the sale of European receivables, and other interest
income, increased $3.4 million to reported other income of $13.8 million in 1997
from adjusted other income of $10.4 million in 1996, an increase of 33%.
Vacation Interval and Vacation Point cost of sales, as a percentage of
Vacation Interval and Vacation Point sales, was 25% for 1997, compared with 26%
for the prior year as the Company continued to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost on
average for each vacation interest sold.
Advertising, sales and marketing expenses increased $37.7 million to $126.7
million for 1997 from $89.0 million for 1996. As a percentage of Vacation
Interval and Vacation Point sales, advertising, sales and marketing expenses
decreased to 45% for 1997 from 49% for 1996. The decrease resulted primarily
from decreased expenses at the resorts acquired in the AVCOM Acquisition as well
as from the company-wide application of best marketing practices taken from the
Company's best performing resorts.
Interest expense-treasury decreased as a percentage of reported total
revenues to 4% in 1997 from 6% of adjusted total revenues in the prior year. The
Company began financing mortgages receivable with the proceeds from the
Concurrent Offerings and the Senior Subordinated Note Offering, rather than with
hypothecation debt. Interest expense relating to these offerings is classified
as interest expense-other. Other loan portfolio expenses increased $1.0 million
during 1997 to $5.5 million from $4.5 million during the prior year. However, as
a percentage of gross mortgages receivable, other loan portfolio expense
decreased to 1.6% in 1997 from 1.9% in 1996.
The provision for doubtful accounts increased $2.3 million during 1997 to
$8.6 million at year end from an adjusted $6.3 million at the end of 1996. The
allowance for doubtful accounts as a percentage of gross mortgages receivable
decreased to a reported 6.5% at December 31, 1997 from an adjusted 6.6% at
42
December 31, 1996. The charge off rate as a percentage of the average mortgages
receivable loan balance was 0.7% for 1997 compared to 2.1% for 1996.
General and administrative expenses increased to a reported $42.3 million
in 1997 from adjusted general and administrative expenses of $28.3 million in
1996, an increase of 49%. General and administrative expenses were 13% of 1997
reported total revenues and 1996 adjusted total revenues. The increase in
general and administrative expenses was the result of (i) the addition of a
number of senior officers and key executives in order to build the management
and organizational infrastructure necessary to efficiently manage the Company's
growth, (ii) increased overhead due to the acquisition of additional resorts,
and (iii) added salary, travel and office expenses attributable to the growth in
the size of the Company.
Depreciation and amortization increased $2.2 million, or 51%, to a reported
$6.5 million during 1997 from adjusted depreciation and amortization of $4.3
million in 1996, reflecting an increase in capital expenditures and intangible
assets. Depreciation and amortization was 1.9% of reported total revenues in
1997 and 2.0% of adjusted total revenues in 1996.
Interest expense-other, reported net of capitalized interest of $6.8
million and $6.7 million at December 31, 1997 and 1996, respectively, increased
$5.6 million, or 147%, to $9.4 million for 1997 from $3.8 million in 1996. The
increase was due primarily to the interest on the Convertible Notes and the
Senior Subordinated Notes issued in 1997.
As a result of the factors discussed above and the $2.6 million resort
property valuation allowance, total costs and operating expenses increased by
$79.7 million, or 41%, to an adjusted $274.0 million in 1997 from an adjusted
$194.3 million in 1996. Total adjusted costs and operating expenses as a
percentage of reported total revenues was 81% in 1997. This represents a
decrease of 8% from adjusted total costs and operating expenses as a percentage
of adjusted total revenues of 89% in 1996.
In addition, as a result of the factors discussed above, adjusted income
before provision for income taxes and extraordinary item and non-recurring costs
increased 172% to $53.4 million in 1997 from $19.6 million for 1996. An
extraordinary item of $0.8 million, net of income taxes, was charged to net
income in 1997 as the result of the early retirement of notes payable to
financial institutions.
For 1997, income taxes increased $27.3 million over 1996, reflecting a
change in the Company's status to a C corporation subsequent to its August 1996
initial public offering, as well as a $6.0 million charge to income tax expense
taken in the fourth quarter resulting from recording deferred taxes for
previously non-taxable entities acquired in the PRG Acquisition. Previously, the
Company's predecessor entities only incurred federal income taxes with regard to
AVCOM and foreign income taxes with respect to LSI and the Company's
wholly-owned subsidiaries located in St. Maarten, Netherlands Antilles.
Income before extraordinary item and non-recurring charges (net of taxes)
was $20.3 million for 1997, an increase of $9.3 million, or 85%, from $11.0
million in 1996. Net income was $19.5 million for 1997, compared with $11.0
million for 1996, an increase of $8.5 million or 77%. Assuming the Company had
been taxed as a C corporation in 1996, pro forma net income would have been $4.4
million, compared with $19.5 million net income for 1997, an increase of 343%.
COMPARISON OF 1995 TO 1996
The following discussion of financial results adjusts the reported
statement of operations data for the following non-recurring charges and
revenues. In 1996, the Company incurred the following non-recurring charges
related to the AVCOM Acquisition: (i) general and administrative expense
increased by $9.1 million for severance costs, lease cancellations, litigation
reserves, reserves for losses associated with certain property management and
related contracts; (ii) provision for doubtful accounts increased by $2.0
million; (iii) resort property valuation allowance increased by $2.6 million to
write down certain property to market value for projects initiated by AVCOM
which were subsequently abandoned; and (iv) depreciation and amortization
increased by $0.7 million related to the amortization of startup costs over a
period of one year. Also, in 1996, the Company recognized $1.7 million of other
income as the result of a settlement of certain receivables from the former
owners of the St. Maarten resorts.
43
For 1996, the Company achieved adjusted total revenues of $218.1 million,
compared with reported total revenues of $168.3 million for 1995, an increase of
$49.8 million or 30%. The increase was due to the growth of Vacation Intervals
sold to 11,946 in 1996 from 10,024 in 1995, a 19% increase, coupled with a 7%
increase in the average sales price to $13,146 in 1996 from $12,298 in 1995. The
growth in Vacation Intervals sold was due to the commencement of sales at
Sunterra Resorts San Luis Bay, Sedona Summit and Scottsdale Villa Mirage and
Embassy Vacation Resort Lake Tahoe, combined with a full year of Vacation
Interval sales at Sunterra Resorts Royal Palm Beach and Flamingo Beach. The
average price per Vacation Point sold at the Company's European resorts
increased 3% to $186 for 1996 from $181 in 1995. In addition, Vacation Point
sales at the Company's European resorts increased 30% to 132,878 sold in 1996
from 102,270 sold in 1995.
Interest income increased $5.1 million, or 25%, due to an increase in gross
mortgages receivable to $232.8 million in 1996 from $160.7 million in 1995.
Other income, which includes rental income, management fees, other interest
income, commission on the sale of European receivables, and portfolio income
from the $10.2 million portfolio acquired with the two St. Maarten resorts in
1995, increased $1.8 million to an adjusted $10.4 million in 1996 from a
reported $8.6 million in 1995.
As a percentage of Vacation Interval and Vacation Point sales, Vacation
Interval and Vacation Point cost of sales decreased to 26% in 1996, compared
with 29% in 1995, as the Company was able to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost and
points cost on average for each Vacation Interval and Vacation Point sold.
Advertising sales and marketing expenses increased $26.7 million to $89.0
million in 1996 from $62.3 million in 1995. As a percentage of Vacation Interval
and Vacation Point sales, advertising, sales and marketing expenses increased to
49% for 1996 from 45% in 1995. The increase was primarily due to advertising,
sales and marketing expenses incurred at AVCOM which were 58% and 42% of total
Vacation Interval and Vacation Point sales in 1996 and 1995, respectively.
Interest expense-treasury increased $3.4 million to $13.5 million in 1996
from $10.1 million in 1995, as the result of notes payable to financial
institutions and notes payable to related parties increasing from $177.0 million
to $236.1 million, or 33%, and the prime rate increasing during the year. Other
expenses increased 125% to $4.5 million in 1996 from $2.0 million in 1995. Other
expenses increased to 2% of adjusted total revenues in 1996 from 1% of reported
total revenues in 1995. The provision for doubtful accounts increased by $2.6
million to an adjusted $6.3 million from a reported $3.7 million in 1995.
General and administrative expenses increased $9.0 million to an adjusted
$28.3 million in 1996 from reported general and administrative expenses of $19.3
million in 1995. As a percentage of adjusted total revenues, adjusted general
and administrative expenses were 13% in 1996. This amount compares to reported
general and administrative expenses as a percentage of reported total revenues
of 11% in 1995. The increase in adjusted general and administrative expenses was
the result of (i) the addition of a number of senior officers and key executives
in connection with building the Company's management and organizational
infrastructure necessary to efficiently manage the Company's future growth, (ii)
the Company's expenses and reporting obligations as a public company, (iii)
increased overhead due to the acquisition and development of additional resorts,
and (iv) added salary, travel, and office expenses attributable to the then
current and planned growth of the Company.
Depreciation and amortization increased $1.8 million, or 72%, to an
adjusted $4.3 million in 1996 from a reported depreciation and amortization of
$2.5 million in 1995, reflecting an increase in capital expenditures and
intangible assets.
As a result of the factors discussed above, costs and operating expenses
for 1996 increased by $54.7 million to an adjusted $194.3 million in 1996 from a
reported $139.6 million in 1995. Adjusted costs and operating expenses increased
to 89% of adjusted total revenues in 1996, compared with 83% of reported costs
and operating expenses as a percentage of reported total revenues in 1995.
Equity loss on investment in joint venture decreased to $0.3 million in
1996 from $1.6 million in 1995 due to increased Vacation Interval sales and
higher hotel occupancy at Embassy Vacation Poipu Point during
44
1996. In 1996, 1,146 Vacation Intervals were sold at the Embassy Vacation Poipu
Point, while 281 Vacation Intervals were sold at the Embassy Vacation Poipu
Point in 1995.
Income before provision for income taxes decreased to $6.9 million in 1996
from $25.3 million in 1995, primarily due to the significant charges incurred by
AVCOM during the fourth quarter of 1996, as discussed previously. However,
income before provision for taxes for the Company (excluding AVCOM) increased
17%, to $27.3 million in 1996, from $23.4 million in 1995. AVCOM's (loss) income
before provision for taxes decreased to $(20.4) million in 1996 from $1.9
million in 1995, primarily as a result of $13.6 million of non-recurring charges
related to accrued expenses and the write-down and write-off of certain assets
of AVCOM.
Provision (benefit) for income taxes changed from an expense of $4.0
million in 1995 to a tax benefit of $4.1 million in 1996. The 1996 tax benefit
results from the recognition of AVCOM's operating loss carryforward. Previously,
the Company's predecessor entities incurred federal income taxes only with
respect to AVCOM, as well as foreign income taxes with respect to LSI and the
Company's wholly-owned subsidiaries in St. Maarten, Netherlands Antilles.
As a result of the factors discussed above, net income decreased 48% to
$11.0 million in 1996 from $21.3 million in 1995.
The Company has grown significantly from its August 1996 Initial Public
Offering from nine to 70 resort locations at December 31, 1997. This growth has
been achieved in part through the acquisition for cash of individual properties
and operating companies and by the issuance of Common Stock for operating
companies which were accounted for using the pooling-of-interests method of
accounting for business combinations. An indication of the change in the
financial results of the Company as a result of these acquisitions is shown in
the table below which reconciles the Company's total revenues, EBITDA and income
before provision for income taxes as reported for the years ended December 31,
1996 and 1995 in its Annual Reports on Form 10-K to the restated and combined
amounts for the same periods reflecting pooling-of-interests accounting:
EFFECT OF REPORTED
FORM 10-K POOLING TRANSACTIONS HEREIN
--------- -------------------- --------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
Total revenues....................................... $95,054 $124,793 $219,847
EBITDA............................................... 27,678 16,944 44,622
Income before provision for income taxes............. 17,243 (10,314) 6,929
YEAR ENDED DECEMBER 31, 1995
Total revenues....................................... $72,608 $ 95,710 $168,318
EBITDA............................................... 19,057 22,496 41,553
Income before provision for income taxes............. 11,554 13,765 25,319
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations from the sale of vacation
ownership interests, the financing of the sales of vacation interest units, the
rental of unsold vacation interests, and the receipt of management fees. With
respect to the sale of vacation interests, the Company generates cash from (i)
vacation ownership interests, (ii) the receipt of down payments from customers,
and (iii) the financing of mortgages receivable ranging from 85% to 90% of the
amount borrowed. The Company generates cash from the financing of vacation
interests from the interest charged on mortgages receivable, which averaged
approximately 14.4% for the year ended December 31, 1997.
The Company's $100 million Senior Credit Facility was entered into on
February 18, 1998. The Senior Credit Facility has a variable borrowing rate
based on the percentage of the Company's mortgages receivable pledged under such
facility and the amount of funds advanced thereunder. The interest rate will
vary between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount of
advances against mortgages receivable. The Senior Credit Facility has a
three-year term and contains customary covenants, representations and
45
warranties and conditions to borrow the funds. 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.
The Company expects to securitize approximately $100 million of its
mortgages receivable, of which $50 million has been pre-committed. The Company
expects to convey the mortgages receivable to a bankruptcy remote subsidiary,
which would issue the Securitized Notes. The Securitized Notes would be
nonrecourse to the Company. The Company is finalizing negotiations and expects
to complete the securitization by May 1998. If completed, the securitization
would be treated as a financing transaction for accounting purposes. The
mortgages receivable and the Securitized Notes would remain on the Company's
balance sheet. The Company would recognize no gain or loss on the Securitized
Notes transaction.
For the year ended December 31, 1997, the Company had $50.0 million in
negative cash flows from operations. Because the Company typically finances 90%
of the purchase price of the vacation interests it sells, it typically incurs
significant operating costs in excess of the actual cash proceeds initially
received from the sale of a vacation interest. To meet the Company's cash
requirements to finance these customer receivables, the Company borrows funds
available under its credit facilities. The Company expects to repay its credit
facilities with proceeds from the issuance of pass-through mortgage-backed
securities under which the Company sells the mortgages receivable and principal
or interest payments from its portfolio of mortgages receivable. The Company may
also sell or factor additional mortgages receivable or borrow under existing or
future lines of credit.
In August 1997, the Company consummated the $200.0 million Senior
Subordinated Note Offering. After deducting underwriters discounts and expenses,
and giving effect to original issue discount of approximately $1.5 million, the
net proceeds to the Company were $191.0 million. The Company has exchanged new
registered notes (the "Senior Subordinated Exchange Notes") for the
privately-issued Senior Subordinated Notes, such exchange being registered with
the Securities and Exchange Commission. The form and terms of the Senior
Subordinated Exchange Notes are identical to the Senior Subordinated Notes,
except that the Senior Subordinated Exchange Notes are registered under the
Securities Act of 1933, as amended.
In February 1997, the Company consummated its public offering of $138.0
million aggregate principal amount of Convertible Notes and its offering of 6.0
million shares of Common Stock (comprised of 2.4 million newly-issued shares
sold by the Company and 3.6 million secondary shares sold by certain selling
stockholders). The net proceeds to the Company from the sale of the 2.4 million
newly-issued shares of Common Stock and from the sale of the $138.0 million
aggregate principal amount of Convertible Notes, based on a public price of 100%
of the principal amount thereof, in each case after deducting underwriting
discounts and expenses, were $53.2 million and $134.9 million, respectively. The
Convertible Notes may be exchanged for shares of the Company's Common Stock at
any time prior to maturity on January 15, 2007 at a conversion price of $30.417
per share, subject to adjustment under certain circumstances as stated in the
related indenture.
The Company requires funds to finance the future acquisition and
development of vacation ownership resorts and properties and to finance customer
purchases of vacation interests. Such capital has been provided by secured
financings on vacation ownership inventory, secured financings on mortgages
receivable generally funded by third-party lenders and unsecured notes
(including the Convertible Notes and the Senior Subordinated Notes issued in
1997). As of December 31, 1997, the Company had approximately $199 million of
additional borrowing capacity under certain third-party lending agreements. As
of December 31, 1997, the Company had $91.0 million outstanding under its notes
payable secured by mortgages receivable and $6.2 million outstanding under its
notes payable secured by unsold vacation interest inventory or other assets.
During 1997, the Company spent approximately $137 million for expansion and
development activities at the Company's resort locations. The Company funded
these expenditures primarily with the net proceeds of the Concurrent Offerings,
the Senior Subordinated Note Offering, available capacity on credit facilities,
and cash generated from operations.
46
The Company expects to incur approximately $20 million in 1998 to complete
projects currently under construction. For a description of potential expansion
plans, see "Business and Properties -- Description of the Company's Resort
Locations."
The Company intends to pursue a growth-oriented strategy. From time to
time, the Company may acquire, among other things, additional vacation ownership
properties, resorts and completed vacation interests; land upon which additional
vacation ownership resorts may be built; management contracts; loan portfolios
of vacation interval mortgages; portfolios which include properties or assets
which may be integrated into the Company's operations; and operating companies
providing or possessing management, sales, marketing, development,
administration and/or other expertise with respect to the Company's operations
in the vacation ownership industry.
In the future, in addition to the financing activities described, the
Company may issue corporate debt, equity securities, or collateralized
mortgage-backed securities to finance its acquisition activities. Any debt
incurred or issued by the Company may be secured or unsecured, fixed or variable
rate interest, and may be subject to such terms as management deems prudent.
The Company believes that, with respect to its current operations, the
Senior Credit Facility and borrowing capacity under certain third-party lending
agreements, together with cash generated from operations, future borrowings, and
securities offerings, will be sufficient to meet the Company's working capital
and capital expenditure needs for the period ended December 31, 1998. However,
depending upon conditions in the capital and other financial markets, other
factors and the Company's growth, development and expansion plans, the Company
may from time to time consider the issuance of other debt or equity securities,
the proceeds of which would be used to finance acquisitions, refinance debt,
finance mortgage receivables or for other purposes.
AVCOM ACQUISITION AND RELATED EXPENSES
In February 1997, the Company consummated the AVCOM Acquisition, acquiring
AVCOM for 1,324,554 shares of the Company's Common Stock, representing on a pro
forma basis approximately 4.4% of the shares of the Company's Common Stock
outstanding following such acquisition. Based upon the closing price of the
Common Stock on February 7, 1997, the 1,324,554 shares issued in the AVCOM
Acquisition were valued at an aggregate of approximately $32.2 million. The
Company also assumed approximately $68.3 million in debt and $53.7 million of
mortgages receivable in the AVCOM Acquisition. The Company has accounted for the
AVCOM Acquisition under the pooling-of-interests method of accounting for
business combinations.
Transaction costs relating to the negotiation of, preparation for, and
consummation of the AVCOM Acquisition and the combination of certain operations
of the Company and AVCOM resulted in a one-time charge to the Company's earnings
of $1.7 million in the first quarter of 1997. This charge includes the fees and
expenses payable to financial advisors, legal fees and other transaction
expenses related to the AVCOM Acquisition.
PRG ACQUISITION AND RELATED EXPENSES
On May 15, 1997, the Company consummated its merger with PRG, a developer,
marketer and operator of two vacation ownership resorts in Williamsburg,
Virginia. The PRG Acquisition was consummated through the issuance of 3,601,844
shares of the Company's Common Stock, representing on a pro forma basis
approximately 10.7% of the shares of the Company's Common Stock outstanding
following such merger. Based upon the closing price of the Common Stock on May
15, 1997, the shares issued in the PRG Acquisition were valued at an aggregate
of $59.1 million. The Company also assumed approximately $58.4 million of debt,
$66.0 million of mortgages receivable and $5.7 million in cash in the PRG
Acquisition. The Company has accounted for the PRG Acquisition under the
pooling-of-interests method of accounting for business combinations.
47
The Company recorded a one-time charge of $4.2 million during the second
quarter 1997 for charges related to the PRG Acquisition including fees paid to
financial advisors, legal, and other transaction-related expenses. Certain
entities acquired in the PRG Acquisition were taxed as partnerships at the
partner level. As a result of the PRG Acquisition, the Company recorded a
deferred tax liability for cumulative temporary differences between financial
and tax reporting. This liability was established through a charge to the
Company's provision for income taxes in 1997.
LSI ACQUISITION AND RELATED EXPENSES
On August 28, 1997, the Company consummated the LSI Acquisition, acquiring
100% of LSI's capital stock in exchange for 1,996,401 newly issued shares of the
Company's Common Stock, representing on a pro forma basis approximately 5.6% of
the shares of the Company's Common Stock outstanding as of June 30, 1997. Based
upon the closing price of the Common Stock on August 28, 1997, the 1,996,401
shares issued in the LSI Acquisition were valued at an aggregate of
approximately $48.2 million. In addition to the Common Stock issued in the LSI
Acquisition, the Company also assumed $0.5 million in debt, $1.7 million of
mortgages receivable and $6.0 million in cash. The Company also paid cash
consideration of approximately $1 million to a former LSI shareholder. The
Company has accounted for the LSI Acquisition under the pooling-of-interests
method of accounting for business combinations.
Transaction costs relating to the negotiation of and preparation for the
LSI Acquisition and the anticipated combination of certain operations resulted
in a one-time charge to the Company's earnings of $4.1 million in the third
quarter of 1997. These charges include the fees and expenses payable to
financial advisors, legal fees and other transaction expenses related to the LSI
Acquisition.
MARC HOTELS & RESORTS ACQUISITION
On October 10, 1997, the Company consummated the Marc Acquisition acquiring
100% of the capital stock of Marc Resorts for 212,717 newly issued shares of the
Company's Common Stock. The Company has accounted for the Marc Acquisition using
the purchase method of accounting for business combinations.
VACATION INTERNATIONALE ACQUISITION
On November 7, 1997, the Company consummated its acquisition of 100% of the
capital stock of VI for approximately $24.3 million, comprised of $8.0 million
in cash and promissory notes and the assumption of approximately $16.3 million
of long-term indebtedness. The Company has accounted for the VI Acquisition
using the purchase method of accounting for business combinations.
ACQUISITION OF EMBASSY SUITES RESORT AT KAANAPALI BEACH
On November 14, 1997, a partnership of which the Company is a managing
general partner consummated its acquisition of the Embassy Suites Resort at
Kaanapali Beach, Maui, Hawaii for approximately $78 million. The acquiring
entity is a partnership formed by a wholly-owned subsidiary of the Company (as
the managing general partner), the Whitehall Street Real Estate Limited
Partnership VII and Apollo Real Estate Advisors, L.P. The Company's subsidiary
owns a 24% partnership interest in the acquiring entity.
ACQUISITION OF GLOBAL GROUP
On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of the Global Group through an asset
purchase for cash consideration of approximately $18 million. The Company
assumed no debt as part of this transaction, but assumed approximately $7.0
million in current liabilities and acquired assets valued at approximately $15.8
million. The Company has accounted for the Global Acquisition using the purchase
method of accounting.
48
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next few years to address
this issue. The Company has several information system improvement initiatives
under way to determine the full scope and related costs to insure that the
Company's systems continue to meet its needs and those of its customers. These
initiatives include upgrading and replacing some computer systems and the
conversion of others to be Year 2000 compliant. Although final cost estimates
have yet to be determined, it is anticipated that these Year 2000 costs will
result in an increase to Company expenses during 1998 and 1999. Suppliers,
customers, mortgages receivable servicers and creditors of the Company also face
Year 2000 issues. Their failure to successfully address the Year 2000 issue
could have a material adverse effect on the Company's business or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Financial Statements appearing on
page F-1 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 12, 1996, Ernst & Young LLP advised the Company that it was
resigning as independent auditors for the Company. Ernst & Young LLP had been
retained since the Company's inception and there have been no disagreements
between the Company and Ernst & Young LLP with respect to accounting principles
or practices, financial statement disclosure, auditing scope or procedures,
which if not resolved to Ernst & Young LLP's satisfaction, would have resulted
in a reference to the subject matters of the disagreement in its audit report.
Since the Company's inception, Ernst & Young LLP's report on the Company's
financial statements did not contain an adverse opinion or a disclaimer of
opinion, nor were the opinions qualified or modified as to uncertainty, audit
scope, or accounting principles, nor were there any events of the type requiring
disclosure under Item 304(a)(l)(v) of Regulation S-K under the Securities Act.
On September 17, 1996, the Company retained the accounting firm of Arthur
Andersen LLP as auditors for the fiscal year ending December 31, 1996 following
Board of Directors approval, which was obtained on September 16, 1996. The
decision to retain Arthur Andersen LLP was based upon the prior relationship
with a predecessor of the Company as auditors for the fiscal year ending
December 31, 1994 and Arthur Andersen LLP's experience in the Company's
industry, and was not motivated by any disagreements between the Company and
Ernst & Young LLP concerning any accounting principles and/or policy matters.
From the Company's inception to September 17, 1996, the Company did not consult
with Arthur Andersen LLP with respect to the matters described in Item 304(a)(2)
of Regulation S-K.
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of March 31, 1998,
concerning each person who is a director or executive officer of the Company.
NAME AGE POSITION
---- --- --------
Osamu Kaneko......................... 50 Chairman of the Board
Andrew J. Gessow..................... 40 Director and Chief Executive Officer
Steven C. Kenninger.................. 45 Director and President
Michael A. Depatie................... 41 Director, Executive Vice President and Chief
Financial Officer
James E. Noyes....................... 51 Director and Chief Operating Officer
Charles C. Frey...................... 43 Senior Vice President, Accounting and Administration
Loren V. Gallagher................... 51 Senior Vice President, Asia
Genevieve Giannoni................... 34 Senior Vice President, Operations
Michael V. Paulin.................... 56 Senior Vice President, Hospitality Management
Dewey W. Chambers.................... 40 Vice President and Treasurer
Andrew D. Hutton..................... 33 Vice President, General Counsel and Secretary
Timothy D. Levin..................... 41 Vice President, Architecture
David D. Philp....................... 36 Vice President, Acquisitions
Peter J. Shoobridge.................. 32 Vice President, Business Development
James D. Wheat....................... 40 Vice President and Corporate Controller
Adam M. Aron......................... 43 Director
Sanford R. Climan.................... 42 Director
J. Taylor Crandall................... 43 Director
Joshua S. Friedman................... 42 Director
W. Leo Kiely III..................... 51 Director
OSAMU KANEKO has served as a Chairman of the Board of the Company since
June 1996, previously serving as Chief Executive Officer of the Company from
June 1996 to July 1997 and as Co-Chief Executive Officer from July 1997 to
February 1998. Mr. Kaneko, a Japanese national, received a B.A. degree from
Indiana State University in 1971. From 1974 to 1986, Mr. Kaneko was the
Executive Vice President of Hasegawa Komuten (USA) Inc., the American subsidiary
of Hasegawa Komuten Ltd., a Japanese real estate development company. In this
capacity, Mr. Kaneko was responsible for the development of income producing
properties in Hawaii, including resort condominiums and hotels. In 1985, Mr.
Kaneko co-founded KOAR Group, Inc. ("KOAR") (a real estate acquisition and
development company) with Mr. Kenninger and since that time has served as its
Chief Executive Officer.
ANDREW J. GESSOW has served as a Director of the Company since its
inception in May 1996 and as Chief Executive Officer since February 1998,
previously serving as Co-Chief Executive Officer since July 1997 and as
President since June 1996. Mr. Gessow founded Argosy Group Inc. ("Argosy")(a
real estate acquisition and development company and one of the Company's
predecessor entities) in 1990 and served as its President from 1990 through
August 1996. Prior thereto, Mr. Gessow served as a Partner with Trammell Crow
Company (a real estate development, management and investment company) and was
President of Trammell Crow Residential Services, Florida and West Coast from
1987 to 1990. From 1981 through 1987, Mr. Gessow was Founder and President of
Travel, Inc., and Home Search, Inc. which he co-founded with Citicorp Venture
Capital. Mr. Gessow received a B.B.A. degree in Finance from Emory University in
1978 and a M.B.A. degree from Harvard Business School in 1980.
STEVEN C. KENNINGER has served as a Director of the Company since its
inception and as President of the Company since February 1998. Previously, Mr.
Kenninger served as Chief Operating Officer and Secretary of the Company from
June 1996 to February 1998. Mr. Kenninger co-founded KOAR with Mr. Kaneko in
1985
50
and most recently served as its President. Mr. Kenninger was a practicing
attorney at the law firm of Paul, Hastings, Janofsky & Walker, located in Los
Angeles, California from 1977 through 1981 and at the law firm of Riordan &
McKinzie, located in Los Angeles, California from 1981 through 1985, where he
was a partner. Mr. Kenninger received a B.S. degree in Mechanical Engineering
from Purdue University in 1974 and received a J.D. degree from Stanford Law
School in 1977. Mr. Kenninger is a member of the Board of Visitors of the
Stanford Law School and has been a member of the State Bar of California since
1977.
MICHAEL A. DEPATIE has served as a Director of the Company since October
1997 and as Executive Vice President and Chief Financial Officer of the Company
since November 1996. Prior to joining the Company, Mr. Depatie was Senior Vice
President of Finance and Chief Financing Officer of La Quinta Inns, Inc. (a
hotel operating company) from July 1992 to August 1996. From April 1989 through
June 1992, Mr. Depatie was co-founder and Senior Vice President of Finance of
Summerfield Hotel Corporation (a hotel operating company). From April 1988
through April 1989, Mr. Depatie was founder and Managing General Partner of
Pacwest Capital Partners. From June 1984 through April 1988, Mr. Depatie served
as Senior Vice President of Finance and Development of The Residence Inn
Company. Mr. Depatie received a B.A. degree from Michigan State University in
1979 and a M.B.A. degree from Harvard Business School in 1983.
JAMES E. NOYES has served as a Director of the Company since July 1996 and
as Chief Operating Officer since February 1998. Previously, Mr. Noyes served as
Executive Vice President of the Company since July 1996. Prior to joining the
Company, from 1989 through June 1996 Mr. Noyes served as President of The Trase
Miller Group (a travel technology services company), the parent company of MTI
Vacations, Inc., with interests in vacation packaging, travel technology and
specialized teleservices, and previously served as its Vice President of
Marketing and Sales since 1980. Mr. Noyes served in various management positions
for Wilson Sporting Goods from 1976 to 1980. Mr. Noyes is a director of Preview
Travel, Inc. and Ball Horticultural, Inc. (a horticultural supply company). Mr.
Noyes received a B.A. degree in 1970 from Dartmouth College and received a
M.B.A. degree in 1974 from Stanford Business School.
CHARLES C. FREY has served as Senior Vice President, Accounting and
Administration of the Company since January 1997. Previously, he served as
Senior Vice President and Treasurer of the Company since July 1996. Prior
thereto, Mr. Frey had served as Senior Vice President of Administration and
Treasurer of Argosy (one of the Company's predecessor entities) since 1992.
Prior thereto, Mr. Frey was Vice President and Chief Financial Officer of
Trammell Crow Residential Services-Florida from 1986 to 1992. Mr. Frey is a
Certified Public Accountant and a licensed real estate broker in Florida. He
received a B.S. degree in Accounting and Economics from the Indiana University
of Pennsylvania in 1977.
LOREN V. GALLAGHER has served as Senior Vice President, Asia of the Company
since January 1997. Prior to joining the Company, Mr. Gallagher held executive
management positions with Vacation Resorts International (a vacation ownership
management company) from 1979 through December 1996, most recently serving as
its President and Chief Operating Officer. In addition, Mr. Gallagher was a
practicing attorney from 1983 to 1996, specializing in real estate acquisition
and vacation ownership. Prior thereto, he was an independent real estate broker
in California from 1977 to 1979 and was a licensed real estate sales associate
at Coldwell-Banker from 1975 to 1977. He is a licensed real estate broker in
California and is a member of the State Bar of California. Mr. Gallagher
received a B.A. degree from Winona State University, M.A. degrees from San Diego
State University and National Chengchi University in Taiwan (Chinese language),
and a J.D. degree from Loyola Law School.
GENEVIEVE GIANNONI has served as Senior Vice President, Operations of the
Company since July 1996. Ms. Giannoni joined Argosy (one of the Company's
predecessor entities) in May 1992 as Director of Marketing, became a Vice
President in 1993, and Senior Vice President, Operations in 1994. Prior to
joining Argosy, Ms. Giannoni was a marketing director at Trammell Crow
Residential Services-Florida from 1987 to 1992. Ms. Giannoni is a licensed real
estate agent in Florida. She received a B.A. degree from Rollins College in 1985
and graduated from the Crummer Management Program at Rollins College in 1990.
MICHAEL V. PAULIN has served as Senior Vice President, Hospitality
Management of the Company since January 1998. Mr. Paulin also serves as
President of the Company's Marc Hotels & Resorts subsidiary which he founded in
1987 and the Company acquired in October 1997. Prior to forming Marc Hotels &
Resorts,
51
Mr. Paulin served as Senior Vice President of Aston Hotels & Resorts form 1978
to 1987 and Vice President of Colony Hotels from 1970 to 1978. From 1964 to
1970, Mr. Paulin was President and Founder of World Wide Living, Inc., tourist
apartment, home, and yacht rentals provider. Mr. Paulin has served as Chairman
of the Hawaii Hotel Association and Chairman of the Pacific Asia Travel
Association. Mr. Paulin received a B.S. degree in Business Economics and
International Trade from the University of Southern California in 1963.
DEWEY W. CHAMBERS has served as Vice President and Treasurer of the Company
since January 1997. Prior to joining the Company, Mr. Chambers served as Vice
President -- Treasurer of La Quinta Inns, Inc. from 1992 through December 1996.
Prior thereto, Mr. Chambers served with the accounting firm of KPMG Peat
Marwick, L.L.P. from 1983 to 1992, most recently as Senior Manager. Mr. Chambers
is a Certified Public Accountant. Mr. Chambers received a B.B.A. degree in
Finance from the University of Oklahoma in 1980 and a B.B.A. degree in
Accounting from the University of Texas at San Antonio in 1983.
ANDREW D. HUTTON has served as Vice President and General Counsel of the
Company since October 1996 and as Secretary of the Company since February 1998.
Prior to joining the Company, from 1991 through October 1996, Mr. Hutton
practiced corporate securities and finance law with the law firm of Latham &
Watkins, located in Los Angeles, California. Mr. Hutton received a J.D. degree
from the University of Minnesota Law School in 1991 and received B.S. and B.A.
degrees from the University of Kansas in 1988. Mr. Hutton has been a member of
the State Bar of California since 1991.
TIMOTHY D. LEVIN has served as Vice President, Architecture of the Company
since July 1996. Prior thereto, Mr. Levin was Vice President, Architecture, of
KOAR since December 1995. From 1989 through December 1995, Mr. Levin was
President of Sevelex Consultants, Inc., a project management and design
consulting firm affiliated with Messrs. Kaneko and Kenninger. Mr. Levin was the
senior design and production manager at Carl Wahlquist AIA Architects, Inc. from
1983 through 1988. Mr. Levin is a member of the American Institute of Architects
and has been a licensed General Contractor in the State of California since
1980. Mr. Levin received his Bachelor of Architecture degree from Southern
California Institute of Architecture in 1986.
DAVID D. PHILP has served as Vice President, Acquisitions of the Company
since September 1997, previously serving as Senior Director of Acquisitions
since February 1996. Prior to joining the Company, Mr. Philp was a Director of
Development for Doubletree Hotels Corporation from October 1994 through August
1995 and from 1991 through September 1994 was a Director of the Hospitality
Consulting Group for Kenneth Leventhal & Company. Prior thereto, Mr. Philp was a
Manager of Development for IDG Development (a real estate development company)
from 1990 to 1991, was a Senior Consultant for the accounting firm of Pannell
Kerr Forster from 1987 to 1990 and held operations management positions with
Hyatt Hotels Corporation from 1984 to 1987. He received a B.A. degree from the
Cornell University School of Hotel Administration in 1984.
PETER J. SHOOBRIDGE has served as Vice President of Business Development of
the Company since September 1997. From January 1994 to September 1997 he served
as Chief Financial Officer and from July 1996 to September 1997, as Director of
Business Development of LSI Group Holdings Plc, which was acquired by the
Company in August 1997. Prior to joining LSI, Mr. Shoobridge served with the
accounting firm of BDO Sloy Hayward in London, England from January 1984 to
August 1987, most recently as manager in the Corporate Finance department. Mr.
Shoobridge holds a degree in music from the Royal Northern College of Music in
Manchester, England, and is a member of the Institute of Chartered Accountants
in England and Wales.
JAMES D. WHEAT has served as Vice President and Corporate Controller of the
Company since November 1997. Prior to joining the Company, Mr. Wheat served with
Raychem Corporation (a materials science manufacturing company) from 1991 to
November 1997 as internal auditor, division controller and external reporting
manager. Mr. Wheat is a Certified Public Accountant, Certified Management
Accountant, Certified Internal Auditor and is a licensed real estate broker in
California. He received a B.B.A. degree from the University of Michigan in 1980
and a M.B.A. degree from The Wharton School of Business at the University of
Pennsylvania in 1985.
52
ADAM M. ARON has served as Director of the Company since October 1997. Mr.
Aron has served as Chairman of the Board and Chief Executive Officer of Vail
Resorts, Inc. since July 1996. Prior to joining Vail Resorts, Mr. Aron served as
President and Chief Executive Officer of Norwegian Cruise Line Ltd. from July
1993 to July 1996, as Senior Vice President of Marketing for United Airlines
from November 1990 to July 1993 and as Senior Vice President of Marketing for
Hyatt Hotels Corporation from 1987 to 1990. Mr. Aron also serves as a director
of Florsheim Group, Inc. Mr. Aron holds a B.A. degree from Harvard College and a
M.B.A. degree from Harvard Business School.
SANFORD R. CLIMAN has served as a Director of the Company since August
1996. In June 1997, Mr. Climan returned to Creative Artists Agency, Inc.
("CAA"), a leading literary and talent agency, as a member of its senior
executive team. Mr. Climan was formerly a member of CAA's senior executive team
from June 1986 to September 1995. From October 1995 through May 1997, Mr. Climan
was Executive Vice President and President Worldwide Business Development of
Universal Studios, Inc. From 1979 to 1986, Mr. Climan held various positions in
the entertainment industry. Mr. Climan also serves as a director of PointCast,
Inc. (an internet computer software company). Mr. Climan received a B.A. degree
from Harvard College in 1977, a M.B.A. degree from Harvard Business School in
1979 and a Master of Science in Health Policy and Management from the Harvard
School of Public Health in 1979.
J. TAYLOR CRANDALL has served as a Director of the Company since October
1997. Mr. Crandall has served as Vice President and Chief Financial Officer of
Keystone, Inc., the principal investment vehicle of Robert M. Bass of Fort
Worth, Texas since October 1996 and as President, Director and sole stockholder
of Acadia MGP, Inc. (managing general partner of Acadia Investment Partners,
L.P., the sole general partner of Acadia Partners, L.P. (an investment
partnership)) since 1992. Mr. Crandall also serves as a director of Bell &
Howell Company, Quaker State, Specialty Foods Corporation and Washington Mutual.
Mr. Crandall holds a B.A. degree from Bowdoin College, where he has served as a
trustee.
JOSHUA S. FRIEDMAN has served as a Director of the Company since August
1996. Mr. Friedman is a founder of Canyon Partners Incorporated, a private
merchant banking firm and an affiliate of Canpartners Incorporated, and has been
a Managing Partner of Canyon Partners Incorporated since its inception in 1990.
From 1984 through 1990, Mr. Friedman served with Drexel Burnham Lambert
Incorporated (an investment banking firm), most recently as Executive Vice
President and Co-Director, Capital Markets. Mr. Friedman also serves as a
director of First Aviation Services, Inc. (an aircraft services supplier) and
several privately held companies and charitable organizations. Mr. Friedman
received a B.A. degree from Harvard College in 1976, a M.A. degree from Oxford
University in 1978, a J.D. degree from Harvard Law School in 1982 and a M.B.A.
degree from Harvard Business School in 1982.
W. LEO KIELY III has served as a Director of the Company since August 1996.
Mr. Kiely has been President and Chief Operating Officer of Coors Brewing
Company since 1993. From 1982 through 1993, Mr. Kiely held various executive
positions with Frito-Lay Inc., a subsidiary of PepsiCo, most recently serving as
President of Frito-Lay's Central Division. Prior to joining Frito-Lay, Mr. Kiely
was President of Ventura Coastal Corporation, a division of Seven-Up
Corporation, from 1979 through 1982. Mr. Kiely also serves as a director of Bell
Sports, Inc. (a bicycle helmet manufacture). He is also on the advisory boards
of the National Association of Manufacturers and several educational and
charitable organizations. Mr. Kiely received a B.A. degree from Harvard College
in 1969 and a M.B.A. degree from the Wharton School of Business at the
University of Pennsylvania in 1971.
On August 5, 1996, an action was filed in California state court against
KEN/KOAR LAX Partners, L.P., which was affiliated with Messrs. Kaneko and
Kenninger (the "LAX Partnership"), the owner of the Embassy Suites hotel located
at Los Angeles International Airport, by the secured lender on the hotel. The
complaint sought judicial foreclosure of the loan, appointment of a receiver and
certain other relief. The LAX Partnership subsequently sold its interest in the
Embassy Suites hotel, and the Chapter 11 proceeding was dismissed concurrently
with the closing of such transaction. The Company has no interest in the hotel
or the LAX Partnership. Following the consummation of the sale, neither Mr.
Kaneko nor Mr. Kenninger holds any interest in or obligation related to the
hotel.
53
COMPLIANCE WITH SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires certain of the Company's directors and officers, and
persons who own more than 10% of a registered class of the Company's equity
securities ("Insiders"), to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock. Insiders are required by the Commission's regulations
to furnish the Company with copies of all Section 16(a) reports filed by such
persons.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company and written representations from the
Insiders that no other reports were required, during the year ended December 31,
1997, all Section 16(a) filing requirements applicable to Insiders were complied
with.
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth the annual base salary and
other annual compensation which the Company paid in 1997 and would have paid in
1996 on an annualized basis to the Company's Chief Executive Officer and each of
the other four most highly compensated executive officers whose cash
compensation exceeded $100,000 in salary and bonus (the "Named Executive
Officers").
ANNUAL COMPENSATION LONG-TERM
----------------------------------------------------- COMPENSATION
FISCAL OTHER ANNUAL SECURITIES UNDERLYING
NAME AND CURRENT PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($)(2) COMPENSATION($)(3) OPTIONS/SARS(#)(4)
-------------------------------------- ------ --------- ----------- ------------------ ---------------------
Osamu Kaneko, Chairman of the Board... 1997 $280,000 $280,000 $ 2,500 --
1996 $280,000 $ 0 $ 2,500 225,000
Andrew J. Gessow, Director and Chief
Executive Officer................ 1997 $280,000 $280,000 $ 2,500 --
1996 $280,000 $ 0 $ 2,500 225,000
Steven C. Kenninger, Director and
President........................ 1997 $280,000 $280,000 $ 2,500 --
1996 $280,000 $ 0 $ 2,500 225,000
James E. Noyes, Director and Chief
Operating Officer................ 1997 $289,000 $271,000 $14,500 --
1996 $280,000 $120,000 $14,500 562,500
Michael A. Depatie, Director,
Executive Vice President and Chief
Financial Officer................ 1997 $280,000 $200,000 $ 2,500 --
1996 $280,000 $ 0 $ 2,500 562,500
(1) Certain Named Executive Officers served the Company in different capacities
during 1996 and 1997. For a description of the various positions held by
Messrs. Gessow, Kaneko, Kenninger and Noyes, see "Directors and Executive
Officers of the Registrant" above.
(2) Amounts stated include bonus amounts earned in 1997 by the Named Executive
Officers and paid in 1998. See "Employment Agreements and Covenants Not to
Compete" below for a discussion of annual performance bonuses payable to key
employees and executive officers.
(3) Represents automobile lease payments ($12,000 with respect to Mr. Noyes) and
insurance premiums for customary life and health benefits ($2,500 with
respect to each of Messrs. Kaneko, Gessow, Kenninger, Noyes and Depatie).
(4) The indicated options to purchase 1,800,000 shares of Common Stock were
granted to the Named Executive Officers in 1996. No options were granted to
any of the Named Executive Officers in 1997.
54
The following table contains information concerning the value of stock
options issued under the Company's 1996 Equity Participation Plan and held by
the Named Executive Officers as of December 31, 1997. No stock options were
granted to or exercised by any of the Named Executive Officers during 1997.
DECEMBER 31, 1997 OPTION YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME AND PRINCIPAL OCCUPATION EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------------- ------------------------- -------------------------
Osamu Kaneko, Chairman of the Board.... 75,000/150,000 $940,875/$1,881,750
Andrew J. Gessow, Director and Chief
Executive Officer.................... 75,000/150,000 $940,875/$1,881,750
Steven C. Kenninger, Director and
President............................ 75,000/150,000 $940,875/$1,881,750
James E. Noyes, Director and
Chief Operating Officer.............. 281,250/281,250 $3,902,344/$3,902,344
Michael A. Depatie, Director, Executive
Vice President and
Chief Financial Officer.............. 225,000/337,500 $1,567,875/$2,351,813
COMPENSATION OF DIRECTORS
The Company pays its directors who are not officers of the Company
("Independent Directors") a fee of $1,000 per meeting of the Board of Directors
and any committee thereof (including telephonic meetings) for their services as
directors. In addition, the Company grants options to purchase 15,000 shares of
Common Stock (subject to adjustment) at a price equal to fair market value on
the date of grant to each such Independent Director to vest in equal portions
over a term of three years from the date of election as an Independent Director.
Each Independent Director who is still a member of the Board of Directors at the
end of the three year vesting period of the initial grant of options will
receive a grant of additional options to purchase 15,000 shares of Common Stock
at the fair market value of the Common Stock on the date of the grant, with such
options to vest over an additional three year period. In addition to such option
grants, the Independent Directors will be reimbursed for expenses of attending
each meeting of the Board of Directors. Officers of the Company who are
directors will not be paid any director fees but will be reimbursed for expenses
of attending meetings of the Board of Directors.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
In 1996, each of Messrs. Kaneko, Gessow, Kenninger, Noyes and Depatie
entered into an employment agreement with the Company for a term of two years,
subject to extension. The employment agreement for each of such executives
provides for an annual salary of $280,000 per year for the first year and at
such salary as may be determined by the Compensation Committee thereafter, with
annual performance bonuses determined by the Compensation Committee in
connection with the achievement of performance criteria to be determined (except
with respect to Mr. Noyes, who will receive a guaranteed quarterly bonus of
$30,000 for each quarter he is employed by the Company). In 1996, pursuant to
their employment agreement each of Messrs. Kaneko, Gessow, Kenninger, Noyes and
Depatie received options to purchase 225,000, 225,000, 225,000, 562,500 and
562,500 shares of Common Stock, respectively. In addition, pursuant to their
employment agreement each of Messrs. Kaneko, Gessow, Kenninger, Noyes and
Depatie shall receive severance payments equal to base compensation and bonus at
the most recent annual amount for the longer of the balance of the employment
term or two years upon the death, disability, termination or resignation of such
executive, unless such executive resigns without "good cause" or unless the
Company terminates such executive as a result of gross negligence, willful
misconduct, fraud or a material breach of the employment agreement. Each such
executive will have "good cause" to terminate his employment with the Company in
the event of any reduction in his compensation or benefits, material breach or
material default by the Company under his employment agreement or following the
merger or change in control of the Company.
55
Each of Messrs. Gessow, Kenninger, Noyes and Depatie have agreed to devote
substantially full time to the business of the Company and not engage in any
competitive businesses. In particular, the foregoing individuals are prohibited
from managing, consulting or participating in any way in any vacation ownership
business or from acquiring any property with the intent to convert the property
to a vacation ownership operation, unless the Independent Directors of the
Company determine that such investment is in the best interest of the Company.
Such noncompetition provisions shall survive for two years following any
termination of employment. Such individuals are not, however, prohibited from
investing in residential or commercial real estate with no prospect to be
converted to vacation ownership or resort related use or, acquiring hotels,
including hotels which may compete directly with properties of the Company.
In March 1998, in connection with Mr. Kaneko's new status as non-executive
Chairman of the Board, the Company amended its employment agreement with Mr.
Kaneko to provide that he shall devote at least 50% of his time to the Company's
business. Correspondingly, Mr. Kaneko's annual salary was reduced to $140,000
per year. Mr. Kaneko is allowed to devote the remainder of his time to acquire,
develop or manage other investments in non-resort residential or commercial real
estate that do not present a prospect for conversion to vacation ownership or
resort-related use.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of the
Company's Common Stock as of March 28, 1998 for all current directors, the Named
Executive Officers, all directors and executive officers as a group and
beneficial holders of more than 5% of the Company's Common Stock. Pursuant to
the rules of the Securities Exchange Commission, in calculating percentage
ownership, each person is deemed to beneficially own his own shares subject to
options exercisable within 60 days, but options owned by others (even if
exercisable within 60 days) are deemed not to be outstanding shares. Percentage
ownership is based on 35,880,507 shares of Common Stock outstanding on March 28,
1998 in addition to shares acquirable pursuant to options which will become
exercisable within 60 days of March 28, 1998.
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER(A) POSITION OWNED CLASS
--------------------------- -------- ------------ --------
Directors and Named Executive
Officers:
Osamu Kaneko(b).................... Chairman of the Board 3,487,855(c) 9.7%
Andrew J. Gessow(d)................ Director and Chief Executive 3,606,306(c) 10.1%
Officer
Steven C. Kenninger(b)............. Director and President 1,092,867(c)(e) 3.1%
Michael A. Depatie................. Director, Executive Vice President 237,682(f) *
and Chief Financial Officer
James E. Noyes..................... Director and Chief Operating 318,750(g) *
Officer
Adam M. Aron....................... Director -- *
Sanford R. Climan.................. Director 12,375(h) *
J. Taylor Crandall................. Director -- *
Joshua S. Friedman(i).............. Director 7,500(j) *
W. Leo Kiely, III.................. Director 7,500(j) *
All directors and executive
officers as a
group (19 persons)............... 9,149,529(k) 25.5%
5% Beneficial Owners:
Putnam Investments, Inc.(l)........ N/A 4,161,207 11.6%
One Post Office Square
Boston, Massachusetts 02109
Pilgrim Baxter & Associates,
Ltd.(m).......................... N/A 3,219,680 9.0%
825 Duportail Road
Wayne, Pennsylvania 19087
* Less than 1%.
56
(a) Except as otherwise indicated, each beneficial owner has the sole power to
vote and to dispose of all shares of Common Stock owned by such beneficial
owner.
(b) The address of such person is 5933 West Century Blvd., Suite 210, Los
Angeles, California 90045.
(c) Includes presently exercisable options to purchase 75,000 shares of Common
Stock.
(d) The address of such person is 2934 Woodside Road, Woodside, California
94062.
(e) With the exception of presently exercisable options to purchase 75,000
shares of Common Stock, the shares indicated are held by Mr. Kenninger
through a trust under which Mr. Kenninger may be deemed presently to share
beneficial ownership with his co-trustee spouse.
(f) Includes (i) presently exercisable options to acquire 225,000 shares of
Common Stock and (ii) 12,682 shares of Common Stock which Mr. Depatie
presently may be deemed to have, or to share, beneficial ownership with an
affiliated corporation he controls.
(g) Represents presently exercisable options to purchase shares of Common Stock
and options which will become exercisable within 60 days of March 28, 1998.
(h) Includes presently exercisable options to purchase 7,500 shares of Common
Stock.
(i) Canpartners Incorporated ("Canyon") holds 65,507 shares and is the sole
general partner of CPI Securities L.P. ("CPI"), which holds 426,643 shares.
Mr. Friedman, Mitchell R. Julis and R. Christian B. Evensen are the sole
shareholders and directors of Canyon and may be deemed to share beneficial
ownership of the shares held by Canyon and CPI. Such persons disclaim
beneficial ownership of the shares. The 492,150 shares held by Canyon and
CPI do not include 154,035 shares held by Mr. Friedman's wife, 154,035
shares held by Mr. Julis, 154,035 shares held by Mr. Evensen's wife, 10,771
shares held by an irrevocable trust for the benefit of Mr. Evensen's
children, 10,771 shares held by an irrevocable trust for the benefit of Mr.
Friedman's children and 10,771 shares held by Mr. Julis' son. The beneficial
ownership of such shares is disclaimed by Canyon. Taken as a group, the
entities and persons named in this note hold an aggregate of 1,018,361
shares, or 2.8% of the Common Stock outstanding.
(j) Represents presently exercisable options to purchase shares of Common Stock.
(k) Includes 842,570 shares which may be acquired upon the exercise of presently
exercisable options or options which will become exercisable within 60 days
of March 28, 1998.
(l) Information based solely on a Schedule 13G filed with the Commission on
January 27, 1998 by, among others, Putnam Investments, Inc. ("PI"). Of the
shares beneficially owned by PI, Putnam Investment Management, Inc. ("PIM")
beneficially owns 3,730,005 (or 10.4%) of the outstanding shares of Common
Stock and The Putnam Advisory Company, Inc. ("PAC") beneficially owns
431,202 (or 1.2%) of the outstanding shares of Common Stock. The shares of
Common Stock reported as being beneficially owned by PI consist of
securities beneficially owned by subsidiaries of PI which are registered
investment advisers, which in turn include securities beneficially owned by
clients of such investment advisers, which clients may include investment
companies registered under the Investment Company Act and/or employee
benefit plans, pension funds, endowment funds or other institutional
clients. PI, which is a wholly-owned subsidiary of Marsch & McLennan
Companies, Inc. ("M&MC"), wholly owns two registered investment advisers:
PIM, which is the investment adviser to the Putnam family of mutual funds
and PAC, which is the investment adviser to Putnam's institutional clients.
Both subsidiaries have dispository power over the shares as investment
managers, but each of the mutual fund's trustees have voting power over the
shares held by each fund, and PAC has shared voting power over the shares
held by the institutional clients. M&MC and PI disclaim beneficial ownership
of the shares of Common Stock reported as being beneficially owned by PI.
(m) Information based solely on Schedule 13G filed with the Commission of
February 13, 1998 by Pilgram Baxter & Associates, Ltd.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Affiliates of Messrs. Kaneko and Kenninger currently have managing general
partner or similar interests in entities which own investment properties which
the Company does not consider to be competitive with its
57
timeshare business (the "KOAR Interests"). These properties include a 225-unit
condominium project in Long Beach, California which is being marketed for whole
share unit sales or long-term residential use rather than vacation use (and with
respect to which the KOAR Interests currently own 74 of the total 225 units, the
balance having been sold to third parties); and several retail centers and a
proposed office development project. Messrs. Kaneko and Kenninger are also
currently the constituent general partners of a number of partnerships in which
they owe fiduciary duties to limited partners who invested over $80 million of
equity therein (which partnerships include certain Embassy Suites hotels which
are still owned by partnerships controlled by Affiliates of Messrs. Kaneko and
Kenninger (the "Prior Partnerships")). Messrs. Kaneko and Kenninger are
authorized by the Company to meet their duties and responsibilities to the Prior
Partnerships pursuant to the terms thereof, including the sale, refinancing,
restructuring and packaging of the Prior Partnerships, and including with
respect to the formation of public or private entities for such purpose,
including a public real estate investment trust ("REIT") for one or all of the
Embassy Suites hotels in the Prior Partnerships (provided, that Messrs. Kaneko
and Kenninger agree not to serve as an officer or employee of such REIT).
Messrs. Kaneko and Kenninger agree to continue to retain third party management
companies to manage these properties (e.g., Promus Hotels manages all such
Embassy Suites hotels), and to employ personnel not employed by the Company to
carry out the day-to-day responsibilities of managing and overseeing these
properties. However, Messrs. Kaneko and Kenninger reserve the right to do what
is reasonably necessary within these constraints to carry out their duties and
responsibilities to the Prior Partnerships pursuant to the terms thereof. The
Company does not believe that such activities detract materially from Messrs.
Kaneko's and Kenninger's services to the Company. See "Employment Agreements and
Covenants Not To Compete" for additional information regarding such persons'
obligations to the Company.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
2.1 Plan and Agreement of Merger dated as of September 22, 1996
by and between Signature Resorts, Inc. and AVCOM
International, Inc. as amended (incorporated by reference to
Exhibit 2 to Registrant's Registration statement on Form S-4
(No. 333-16339))
2.2 Agreement and Plan of Merger dated as of May 15, 1997 by and
among Signature Resorts, Inc., Primavera Acquisition Corp.
and Plantation Resorts Group, Inc. (incorporated by
reference to Exhibit 2.1 to Registrant's current report on
Form 8-K filed with the Commission on May 29, 1997)
2.3 Agreement for Purchase and Sale of the Entire Issued Share
Capital of LSI Group Holdings plc dated as of June 5, 1997
between Signature Resorts, Inc. and shareholders of LSI
Group Holdings plc (incorporated by reference to Exhibit 2.3
to Amendment No. 1 on Form S-3 to Registrant's Registration
Statement on Form S-1 (No. 333-30285))
58
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
2.4 Amendment to the Agreement for Purchase and Sale of the
Entire Issued Share Capital of LSI Group Holdings plc dated
as of August 28, 1997 between Signature Resorts, Inc. and
shareholders of LSI Group Holdings plc (incorporated by
reference to Exhibit 2.2 to Registrant's current report on
Form 8-K filed with the Commission on September 12, 1997)
3.1 Articles of Incorporation, as amended, of Signature Resorts,
Inc. (incorporated by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form S-1 (No.
333-06027))
3.2 Bylaws of Signature Resorts, Inc., as amended (incorporated
by reference to Exhibit 3.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996)
4.1 Indenture dated as of January 15, 1997 by and between
Signature Resorts, Inc. and Norwest Bank Minnesota, National
Association, as trustee, for the 5 3/4% Convertible
Subordinated Notes of Signature Resorts, Inc. due 2007
(incorporated by reference to Exhibit 4 to Registrant's
Registration Statement on Form S-1 (No. 333-30285))
4.2 Indenture dated as of August 1, 1997 by and between
Signature Resorts, Inc. and Norwest Bank Minnesota, National
Association, as trustee, for the 9 3/4% Senior Subordinated
Notes of Signature Resorts, Inc. due 2007 (incorporated by
reference to Exhibit 4.2 to Amendment No. 1 on Form S-3 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.1.1 Registration Rights Agreement dated as of August 20, 1996 by
and among Signature Resorts, Inc. and the persons named
therein (incorporated by reference to Exhibit 10.1 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.1.2 Registration Rights Agreement dated as of May 15, 1997 by
and among Signature Resorts Inc. and the persons named
therein (incorporated by reference to Exhibit 4 to
Registrant's current report on Form 8-K filed with the
Commission on May 29, 1997)
10.1.3 Registration Rights Agreement dated as of August 28, 1997 by
and among Signature Resorts, Inc. and Ian K. Ganney and
Richard Harrington (incorporated by reference to Exhibit
10.10 to Amendment No. 1 on Form S-3 to Registrant's
Registration Statement on Form S-1 (No. 333-30285))
10.1.4 Registration Rights Agreement dated as of August 8, 1997 by
and among Signature Resorts, Inc. and the persons named
therein relating to the 9 3/4% Senior Subordinated Notes due
2007 of Signature Resorts, Inc. (incorporated by reference
to Exhibit 10.11 to Amendment No. 1 on Form S-3 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
*10.1.5 Registration Rights Agreement dated as of October 10, 1997
by and among Signature Resorts, Inc. and Michael V. Paulin,
Rosemarie Paulin, Maya K. Paulin and Annemarie H. Paulin.
10.2.1 Employment Agreement between Signature Resorts, Inc. and
Osamu Kaneko (incorporated by reference to Exhibit 10.2.1 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.2.2 Employment Agreement between Signature Resorts, Inc. and
Andrew J. Gessow (incorporated by reference to Exhibit
10.2.2 to Registrant's Registration Statement on Form S-1
(No. 333-30285))
10.2.3 Employment Agreement between Signature Resorts, Inc. and
Steven C. Kenninger (incorporated by reference to Exhibit
10.2.3 to Registrant's Registration Statement on Form S-1
(No. 333-30285))
10.2.4 Employment Agreement between Signature Resorts, Inc. and
James E. Noyes (incorporated by reference to Exhibit 10.2.4
to Registrant's Registration Statement on Form S-1 (No.
333-06027))
10.2.5 Employment Agreement between Signature Resorts, Inc. and
Michael A. Depatie (incorporated by reference to Exhibit
10.2.5 to Registrant's Registration Statement on Form S-4
(No. 333-16339))
10.2.6 Option Agreement between Signature Resorts, Inc. and Osamu
Kaneko (incorporated by reference to Exhibit 10.2.6 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
59
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.2.7 Option Agreement between Signature Resorts, Inc. and Andrew
J. Gessow (incorporated by reference to Exhibit 10.2.7 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.2.8 Option Agreement between Signature Resorts, Inc. and Steven
C. Kenninger (incorporated by reference to Exhibit 10.2.8 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.2.9 Option Agreement between Signature Resorts, Inc. and James
E. Noyes (incorporated by reference to Exhibit 10.2.9 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
10.2.10 Option Agreement between Signature Resorts, Inc. and Michael
A. Depatie (incorporated by reference to Exhibit 10.2.10 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
*10.2.11 Form of Amendment No. 1 to Employment Agreement between
Signature Resorts, Inc. and Osamu Kaneko
10.3.1 1996 Equity Participation Plan of Signature Resorts, Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.3.2 First Amendment to 1996 Equity Participation Plan of
Signature Resorts, Inc. dated as of May 16, 1997
(incorporated by reference to Exhibit 10.3.2 to Registrant's
Registration Statement on Form S-1 (No. 333-30285))
10.3.3 Second Amendment to 1996 Equity Participation Plan of
Signature Resorts, Inc. dated as of October 24, 1997
(incorporated by reference to Exhibit 10.1 to Registrant's
Registration statement on Form S-8 (No. 333-15361))
10.3.4 Signature Resorts, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement on Form S-1 (No. 333-06027))
10.3.5 First Amendment to Employee Stock Plan of Signature Resorts,
Inc. effective as of November 1, 1997 (incorporated by
reference to Exhibit 10.2 to Registrant's Registration
Statement on Form S-8 (No. 333-15361))
10.4 Agreement of Limited Partnership of Pointe Resort Partners,
L.P. (subsequently renamed Poipu Resort Partners L.P.) dated
October 11, 1994 (incorporated by reference to Exhibit 10.4
to Registrant's Registration Statement on Form S-1 (No.
333-06027))
10.5 Joint Development Agreement dated as of January 16, 1998
between Westin Hotel Company and Signature Resorts, Inc.
(incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 20, 1998))
10.6.1 Loan and Security Agreement between Port Royal Resort, L.P.,
and FINOVA Capital Corporation (as successor in interest to
Greyhound Capital Corporation) dated as of October 7, 1993
and as amended by the First Amendment to Loan and Security
Agreement dated as of April 26, 1995 (incorporated by
reference to Exhibit 10.8.1 to Registrant's Registration
Statement on Form S-1 (No. 333-18447))
10.6.2 Loan and Security Agreement between Signature Resorts, Inc.
(as successor in interest to Cypress Pointe Resorts, L.P.),
and FINOVA Capital Corporation (as successor in interest to
Greyhound Real Estate Finance Company) dated as of December
19, 1991 and as amended by (i) the First Amendment to Loan
and Security Agreement and Consent and Agreement of
Guarantors dated as of November 9, 1992, (ii) the Second
Amendment to Loan and Security Agreement dated as of January
13, 1993, (iii) the Third Amendment to Loan and Security
Agreement dated as of April 7, 1993, (iv) the Fourth
Amendment to Loan and Security Agreement dated as of
December 16, 1993, (v) the Fifth Amendment to Loan and
Security Agreement dated as of June 28, 1994, (vi) the Sixth
Amendment to Loan and Security Agreement dated December 16,
1994, and (vii) the Seventh Amendment to Loan and Security
Agreement dated as of November 6, 1995 (incorporated by
reference to Exhibit 10.8.2 to Registrant's Registration
Statement on Form S-1 (No. 333-18447))
60
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.6.3 Loan and Security Agreement between Signature Resorts, Inc.
(as successor in interest to San Luis Resort Partners, LLC),
and FINOVA Capital Corporation dated as of June 6, 1996
(incorporated by reference to Exhibit 10.8.3 to Registrant's
Registration Statement on Form S-1 (No. 333-18447))
10.6.4 Loan and Security Agreement between Grand Beach Resort,
Limited Partnership, and FINOVA Capital Corporation (as
successor in interest to Greyhound Financial Corporation)
dated as of October 7, 1994 and as amended by the First
Amendment to Loan and Security Agreement dated as of July 5,
1995 (incorporated by reference to Exhibit 10.8.4 to
Registrant's Registration Statement on Form S-1 (No.
333-18447))
10.6.5 Loan and Security Agreement (Receivables) between Signature
Resorts, Inc. (as successor in interest to Fall Creek
Resort, L.P.), and Heller Financial, Inc., dated as of
October 9, 1995 (incorporated by reference to Exhibit 10.8.5
to Registrant's Registration Statement on Form S-1 (No.
333-18447))
10.6.6 Loan and Security Agreement between AKGI-St. Maarten NV (as
successor in interest to AKGI-Royal Palm C.V.o.a.), and
FINOVA Capital Corporation dated as of July 12, 1995
(incorporated by reference to Exhibit 10.8.6 to Registrant's
Registration Statement on Form S-1 (No. 333-18447))
10.6.7 Loan and Security Agreement between Lake Tahoe Resort
Partners, LLC, and FINOVA Capital Corporation dated as of
April 29, 1996 (incorporated by reference to Exhibit 10.8.7
to Registrant's Registration Statement on Form S-1 (No.
333-18447))
10.6.8 Construction Loan Agreement between Lake Tahoe Resort
Partners, LLC, and FINOVA Capital Corporation dated as of
April 29, 1996 (incorporated by reference to Exhibit 10.8.8
to Registrant's Registration Statement on Form S-1 (No.
333-18447))
10.6.9 Lender's Certification and Consent from Resort Capital
Corporation to Signature Resorts, Inc. dated as of August
15, 1996 (incorporated by reference to Exhibit 10.8.1 to
Registrant's Registration Statement on Form S-4 (No.
333-16339))
10.6.10 Lender's Certification and Consent from FINOVA Capital
Corporation to Signature Resorts, Inc. dated as of August
15, 1996 (incorporated by reference to Exhibit 10.6.2 to
Registrant's Registration Statement on Form S-4 (No.
333-16339))
10.6.11 Assumption Agreement between FINOVA Capital Corporation and
Signature Resorts, Inc. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.3 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.6.12 Assumption Agreement between Resort Capital Corporation and
Signature Resorts, Inc. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.4 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
10.6.13 Assumption Agreement between FINOVA Capital Corporation and
AKGI-Sint Maarten, N.V. dated as of August 15, 1996
(incorporated by reference to Exhibit 10.8.5 to Registrant's
Registration Statement on Form S-4 (No. 333-16339))
*10.6.14 Credit Agreement dated as of February 18, 1998 by and among
Signature Resorts, Inc., certain lender parties thereto,
NationsBank of Texas, N.A., as administrative lender and
Societe Generale, as document agent
*10.6.15 Amendment to Various Loan and Commitment Agreements dated as
of February 18, 1998, by and between FINOVA Capital
Corporation, the Company, Lake Tahoe Resort Partners, LLC,
Grand Beach Resort, Limited Partnership, Port Royal Resort
L.P., AKGI-Sint Maarten, N.V., All Seasons Resorts, Inc.,
AVCOM International, Inc. and Kabushiki Gaisha Kei, L.L.C.
*10.6.16 Loan Agreement between Powhatan Associates and Marine
Midland Bank dated as of June 28, 1995
*10.6.17 Loan and Security Agreement dated as of December 17, 1990,
as amended, between Greyhound Real Estate Finance Company
and Powhatan Associates
61
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
*10.6.18 Development and Receivables Loan and Security Agreement by
and between FINOVA Capital Corporation and Greensprings
Associates dated as of June 30, 1995 and as amended by the
Amendment to Development and Receivables Loan and Security
Agreement dated as of July 15, 1996
62
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.7 Amended Consulting Agreement dated as of August 1, 1997 by
and between Signature Resorts, Inc., Resort Services, Inc.
and Dr. Kay F. Gow and Robert T. Gow (incorporated by
reference to Exhibit 10.12 to Amendment No. 1 on Form S-3 to
Registrant's Registration Statement on Form S-1 (No.
333-30285))
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant (incorporated by reference to Exhibit 16.1 to
Registrant's current report on Form 8-K filed with the
Commission on September 18, 1996)
21 Subsidiaries of Signature Resorts, Inc. (incorporated by
reference to Exhibit 21 to Registrant's Registration
Statement on Form S-3 (No. 333-46511))
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Ernst & Young LLP
*23.3 Consent of KPMG
*23.4 Consent of Schreeder, Wheeler & Flint, LLP
*27.1 Financial Data Schedule (for the fiscal year ended December
31, 1997)
*27.2 Financial Data Schedule (for the fiscal quarters ended March
31, June 30 and September 30, 1997)
*27.3 Financial Data Schedule (for the fiscal quarter ended
September 30, 1996 and for the fiscal year ended December
31, 1996)
* Filed herewith
(b) Reports on Form 8-K.
(i) The Company's Current Report on Form 8-K filed with the Commission
on October 6, 1997;
(ii) The Company's amended Current Report on Form 8-K/A filed with the
Commission on October 10, 1997;
(iii) The Company's amended Current Report on Form 8-K/A filed with
the Commission on October 22, 1997; and
(iv) The Company's Current Report on Form 8-K filed with the
Commission on December 24, 1997;
(c) The exhibits required by Item 601 of Regulation S-K have been listed
above.
(d) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the financial statements or the notes thereto.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SIGNATURE RESORTS, INC.
(Registrant)
By: /s/ ANDREW D. HUTTON
------------------------------------
Andrew D. Hutton
Vice President, General Counsel and
Secretary
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the Registrant in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ OSAMU KANEKO Chairman of the Board March 30, 1998
--------------------------------------------------------
Osamu Kaneko
/s/ ANDREW J. GESSOW Director and Chief Executive March 30, 1998
-------------------------------------------------------- Officer (Principal Executive
Andrew J. Gessow Officer)
/s/ STEVEN C. KENNINGER Director and President March 30, 1998
--------------------------------------------------------
Steven C. Kenninger
/s/ MICHAEL A. DEPATIE Director, Executive Vice March 30, 1998
-------------------------------------------------------- President and Chief Financial
Michael A. Depatie Officer (Principal Financial
Officer)
/s/ JAMES E. NOYES Chief Operating Officer and March 30, 1998
-------------------------------------------------------- Director
James E. Noyes
/s/ CHARLES C. FREY Senior Vice President and March 30, 1998
-------------------------------------------------------- Chief Accounting Officer
Charles C. Frey (Principal Accounting
Officer)
/s/ ADAM M. ARON Director March 30, 1998
--------------------------------------------------------
Adam M. Aron
/s/ SANFORD R. CLIMAN Director March 30, 1998
--------------------------------------------------------
Sanford R. Climan
/s/ J. TAYLOR CRANDALL Director March 30, 1998
--------------------------------------------------------
J. Taylor Crandall
63
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOSHUA S. FRIEDMAN Director March 30, 1998
--------------------------------------------------------
Joshua S. Friedman
/s/ W. LEO KILEY III Director March 30, 1998
--------------------------------------------------------
W. Leo Kiley III
64
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Signature Resorts, Inc. and Subsidiaries
Report of Independent Certified Public Accountants.......... F-2
Report of Independent Auditors.............................. F-3
Independent Auditors' Report................................ F-4
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-5
Consolidated Statements of Income for each of the three
years ended December 31, 1997............................. F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1997............................. F-7
Consolidated Statements of Equity for each of the three
years ended December 31, 1997............................. F-8
Notes to Consolidated Financial Statements.................. F-9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Signature Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of Signature
Resorts, Inc. (a Maryland Corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996 and 1995 financial statements of LSI
Group Holdings plc and the 1995 financial statements of AVCOM International,
Inc. and subsidiaries, both companies acquired during 1997 in transactions
accounted for as pooling of interests, as discussed in Note 1. Such statements
are included in the consolidated financial statements of Signature Resorts, Inc.
and subsidiaries, and reflect total assets and total revenues of 5 percent and
13 percent in 1996, respectively, and total revenues of 34 percent in 1995, of
the related consolidated totals. These statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to amounts included for LSI Group Holdings plc and AVCOM International, Inc. and
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Signature Resorts, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida
January 26, 1998 (except with respect
to the matters discussed in Note 6, as to which the
date is February 18, 1998, and Note 13, as to which
the dates are February 3 and February 18, 1998)
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AVCOM International, Inc.
We have audited the consolidated balance sheet of AVCOM International, Inc.
(Company) as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
separately presented herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AVCOM International, Inc. as of December 31, 1995, and the consolidated results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
May 31, 1996, except for
Note 12, as to which the
date is July 1, 1996
F-3
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
LSI Group Holdings Plc
We have audited the consolidated balance sheet of LSI Group Holdings Plc
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 (not presented separately herein).
These financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LSI Group
Holdings Plc and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles in the United States of America.
KPMG
Chartered Accountants
Registered Auditors
Preston, England
March 27, 1997
F-4
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
1997 1996
-------- --------
Cash and cash equivalents................................... $ 38,487 $ 20,757
Cash in escrow.............................................. 9,485 1,712
Mortgages receivable, net of an allowance of $22,916 and
$17,328 at December 31, 1997 and 1996, respectively....... 331,735 215,518
Due from related parties.................................... 25,576 11,897
Other receivables, net...................................... 17,669 11,847
Income tax refund receivable................................ 4,719 --
Prepaid expenses and other assets........................... 13,047 14,738
Investment in joint ventures................................ 15,657 7,397
Real estate and development costs........................... 219,299 142,870
Property and equipment, net................................. 35,024 14,612
Intangible assets, net...................................... 50,447 4,536
-------- --------
Total assets...................................... $761,145 $445,884
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 25,196 $ 24,418
Accrued liabilities......................................... 68,047 49,198
Due to related parties...................................... 1,032 1,656
Income taxes payable........................................ -- 3,268
Deferred taxes.............................................. 23,752 3,259
Notes payable............................................... 435,208 236,122
-------- --------
Total liabilities................................. 553,235 317,921
-------- --------
Commitments and Contingencies (Note 8)......................
Minority interest in consolidated limited partnership....... -- 1,538
-------- --------
Stockholders' equity:
Preferred stock (25,000,000 shares authorized; none issued
or outstanding)........................................ -- --
Common stock ($0.01 par value, 50,000,000 shares
authorized; 35,875,287 and 33,011,106 shares
outstanding at December 31, 1997 and 1996,
respectively).......................................... 359 330
Additional paid-in capital................................ 162,969 101,978
Retained earnings......................................... 43,797 23,544
Cumulative foreign currency translation adjustment........ 785 573
-------- --------
Total stockholders' equity........................ 207,910 126,425
-------- --------
Total liabilities and stockholders' equity........ $761,145 $445,884
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
REVENUES:
Vacation Interval and Vacation Point sales.................. $281,063 $182,300 $139,426
Interest income............................................. 42,856 25,415 20,339
Other income................................................ 13,774 12,132 8,553
-------- -------- --------
Total revenues..................................... 337,693 219,847 168,318
-------- -------- --------
COSTS AND OPERATING EXPENSES:
Vacation Interval and Vacation Point cost of sales.......... 71,437 48,218 39,810
Advertising, sales, and marketing........................... 126,739 89,040 62,258
Loan portfolio:
Interest expense-treasury................................. 13,032 13,482 10,077
Other expenses............................................ 5,522 4,523 2,034
Provision for doubtful accounts........................... 8,579 8,311 3,666
General and administrative.................................. 42,254 37,436 19,263
Resort property valuation allowance......................... -- 2,620 --
Depreciation and amortization............................... 6,499 5,027 2,514
Merger-related costs........................................ 9,973 -- --
-------- -------- --------
Total costs and operating expenses................. 284,035 208,657 139,622
-------- -------- --------
Income from operations...................................... 53,658 11,190 28,696
Interest expense-other (net of capitalized interest of
$6,774, $6,723, and $3,315 in 1997, 1996 and 1995,
respectively)............................................. 9,394 3,763 1,728
Equity loss on investment in joint ventures................. 639 299 1,649
Minority interest in income of consolidated limited
partnership............................................... 181 199 --
-------- -------- --------
Income before provision (benefit) for income taxes and
extraordinary item........................................ 43,444 6,929 25,319
-------- -------- --------
Provision (benefit) for income taxes from continuing
operations................................................ 17,196 (4,105) 4,020
Provision for deferred income taxes resulting from the
cumulative effect of previously non-taxable acquired
entities.................................................. 5,960 -- --
-------- -------- --------
Total provision (benefit) for income taxes.................. 23,156 (4,105) 4,020
-------- -------- --------
Income before extraordinary item............................ 20,288 11,034 21,299
Extraordinary item, net of income taxes..................... 766 -- --
-------- -------- --------
Net income.................................................. $ 19,522 $ 11,034 $ 21,299
======== ======== ========
Pro forma income data (unaudited):
Income before provision for income taxes.................... -- $ 6,929 $ 25,319
Pro forma provision for income taxes........................ -- 2,549 10,009
-------- -------- --------
Pro forma net income........................................ -- $ 4,380 $ 15,310
======== ======== ========
EARNINGS PER SHARE:
Basic:
Income before extraordinary item..................... $ 0.57 $ 0.41 $ 0.89
Extraordinary item, net of income taxes.............. (0.02) -- --
-------- -------- --------
Net income........................................... $ 0.55 $ 0.41 $ 0.89
======== ======== ========
Diluted:
Income before extraordinary item..................... $ 0.56 $ 0.40 $ 0.89
Extraordinary item, net of income taxes.............. (0.02) -- --
-------- -------- --------
Net income........................................... $ 0.54 $ 0.40 $ 0.89
======== ======== ========
Pro forma earnings per share: (unaudited)
Basic..................................................... -- $ 0.16 $ 0.64
Diluted................................................... -- $ 0.16 $ 0.64
Weighted average number of common shares outstanding........ 35,373 27,232 23,955
Weighted average number of common and potentially dilutive
common shares outstanding................................. 36,180 27,640 23,955
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- --------
OPERATING ACTIVITIES:
Net income.................................................. $ 19,522 $ 11,034 $ 21,299
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 6,499 5,027 2,514
Provision for doubtful accounts......................... 8,579 8,311 3,666
Resort property valuation allowance..................... -- 2,620 --
Equity loss on investment in joint venture.............. 639 299 1,649
Minority interest in income of consolidated limited
partnership............................................ 181 199 --
Other................................................... -- 573 (566)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Cash in escrow..................................... (6,916) 1,037 473
Due from related parties........................... (12,504) (1,712) (4,083)
Prepaid expenses and other assets.................. 2,068 (5,878) (3,753)
Real estate and development costs.................. (65,595) (73,086) (19,012)
Other receivables, net............................. (4,448) (2,017) (5,797)
Accounts payable and accrued liabilities........... (10,398) 36,499 14,204
Income taxes....................................... (6,518) 1,653 353
Deferred income taxes.............................. 19,481 (8,605) 497
Due to related parties............................. (636) (250) 1,267
--------- --------- --------
Net cash (used in) provided by operating activities......... (50,046) (24,296) 12,711
--------- --------- --------
INVESTING ACTIVITIES:
Cash (paid) received for acquisition of subsidiaries........ (31,296) -- 129
Investment in joint venture................................. (8,899) (63) --
Property and equipment...................................... (19,973) (8,214) (4,601)
Intangible assets........................................... (1,637) (2,206) (2,608)
Mortgages receivable........................................ (108,942) (76,424) (48,601)
--------- --------- --------
Net cash used in investing activities....................... (170,747) (86,907) (55,681)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable................................. 28,088 170,394 98,733
Payments on notes payable................................... (167,229) (101,436) (46,890)
Proceeds from subordinated and convertible notes, net of
debt issuance costs....................................... 325,176 -- --
Proceeds from notes payable to related parties.............. -- 5,606 3,711
Payments on notes payable to related parties................ -- (15,074) (1,343)
Proceeds from stock offerings............................... 52,643 73,324 885
Acquisition of minority limited partners' interests......... -- (7,465) --
Distributions............................................... (738) (14,413) (9,241)
Other....................................................... 648 420 2,447
--------- --------- --------
Net cash provided by financing activities................... 238,588 111,356 48,302
--------- --------- --------
Net increase in cash and cash equivalents................... 17,795 153 5,332
Effect of exchange rates on cash and cash equivalents....... (65) 574 (41)
Cash and cash equivalents, beginning of period.............. 20,757 20,030 $ 14,739
--------- --------- --------
Cash and cash equivalents, end of period.................... $ 38,487 $ 20,757 $ 20,030
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 18,508 $ 24,127 $ 14,466
Cash paid for taxes......................................... $ 7,918 $ 1,629 $ 2,753
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Stock issued in connection with acquisition of Marc
Resorts................................................... $ 6,010 -- --
Costs incurred in conjunction with debt issuances........... $ 12,824 -- --
Tax benefit resulting from exercise of common stock
options................................................... $ 1,469 -- --
Stock issued and goodwill recorded in connection with the
acquisition of investment in joint venture................ -- $ 4,989 --
Deferred taxes recorded in connection with the Consolidation
Transactions.............................................. -- $ 9,464 --
Interest accrued on deferred installment gains in connection
with the Consolidation Transactions....................... -- $ 820 --
Net assets of predecessor partnership acquired in exchange
for 17,032,058 shares of common stock in connection with
the Consolidation Transactions............................ -- $ 37,380 --
Assignment to venturers of receivable due from related party
recorded as a reduction of venturers' equity.............. -- $ 3,449 --
Write-off of receivable from related party recorded as a
reduction of stockholders' equity......................... -- $ 3,890 --
Conversion of convertible notes payable to AVCOM common
stock..................................................... -- $ 400 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CONSOLIDATED STATEMENTS OF EQUITY
(AMOUNTS IN THOUSANDS)
ADDITIONAL GENERAL LIMITED
SHARES PAID-IN RETAINED MEMBERS PARTNERS' PARTNERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS EQUITY (DEFICIT) EQUITY EQUITY
----------- ------ ---------- -------- ---------------- --------- ---------
BALANCE AT DECEMBER 31, 1994............ 6,923 $ 69 $ 2,703 $27,326 $ -- $3,329 $ 27,722
------ ---- -------- ------- ------- ------ --------
Issuance of Common Stock................ -- 20 157 -- -- -- --
Distributions........................... -- -- -- (4,811) (2,437) (43) (1,950)
Net income.............................. -- -- -- 12,437 1,004 516 7,342
Other................................... -- -- 1,035 655 1 374 --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1995............ 6,923 89 3,895 35,607 (1,432) 4,176 33,114
------ ---- -------- ------- ------- ------ --------
Distributions of partnership equity and
other equity interests................ -- -- -- (7,191) (5,394) -- (1,633)
Conversion of convertible notes payable
to AVCOM common stock................. -- -- 400 -- -- -- --
Proceeds from the sale of common stock
to the public, net of offering costs,
including 16,212 shares issued in
exchange for partners' and members'
equity................................ 25,268 253 73,071 -- -- -- --
Stock issued and goodwill recorded in
connection with the acquisition of
investment in joint venture........... 820 8 4,981 -- -- -- --
Acquisition of minority limited
partners' interests................... -- -- (7,465) -- -- -- --
Deferred taxes recorded in connection
with the consolidation transactions... -- -- (9,464) -- -- -- --
Net income (loss)....................... -- -- -- 3,875 3,568 (164) 3,755
Exchange of partners' and members'
equity for stock in connection with
the consolidation transactions........ -- (20) 37,380 (1,370) 3,258 (4,012) (35,236)
Assignment to venturers' of receivable
due from related party................ -- -- -- (3,449) -- -- --
Write-off of receivable from related
party................................. -- -- -- (3,890) -- -- --
Other................................... -- -- (820) (38) -- -- --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1996............ 33,011 330 101,978 23,544 -- -- --
------ ---- -------- ------- ------- ------ --------
Net income.............................. -- -- -- 19,522 -- -- --
Proceeds from the sale of common stock,
net of offering costs................. 2,400 24 52,619 -- -- -- --
Common stock issued in connection with
purchase of subsidiary................ 213 2 6,008 -- -- -- --
Distributions........................... -- -- -- (738) -- -- --
Other................................... 251 3 2,364 1,469 -- -- --
------ ---- -------- ------- ------- ------ --------
BALANCE AT DECEMBER 31, 1997............ 35,875 $359 $162,969 $43,797 $ -- $ -- $ --
====== ==== ======== ======= ======= ====== ========
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATIONS
ADJUSTMENTS TOTAL EQUITY
------------ ------------
BALANCE AT DECEMBER 31, 1994............ $ 40 $ 61,189
---- --------
Issuance of Common Stock................ -- 177
Distributions........................... -- (9,241)
Net income.............................. -- 21,299
Other................................... (41) 2,024
---- --------
BALANCE AT DECEMBER 31, 1995............ (1) 75,448
---- --------
Distributions of partnership equity and
other equity interests................ -- (14,218)
Conversion of convertible notes payable
to AVCOM common stock................. -- 400
Proceeds from the sale of common stock
to the public, net of offering costs,
including 16,212 shares issued in
exchange for partners' and members'
equity................................ -- 73,324
Stock issued and goodwill recorded in
connection with the acquisition of
investment in joint venture........... -- 4,989
Acquisition of minority limited
partners' interests................... -- (7,465)
Deferred taxes recorded in connection
with the consolidation transactions... -- (9,464)
Net income (loss)....................... -- 11,034
Exchange of partners' and members'
equity for stock in connection with
the consolidation transactions........ -- --
Assignment to venturers' of receivable
due from related party................ -- (3,449)
Write-off of receivable from related
party................................. -- (3,890)
Other................................... 574 (284)
---- --------
BALANCE AT DECEMBER 31, 1996............ 573 126,425
---- --------
Net income.............................. -- 19,522
Proceeds from the sale of common stock,
net of offering costs................. -- 52,643
Common stock issued in connection with
purchase of subsidiary................ -- 6,010
Distributions........................... -- (738)
Other................................... 212 4,048
---- --------
BALANCE AT DECEMBER 31, 1997............ $785 $207,910
==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS
Signature Resorts, Inc. and its wholly-owned subsidiaries ("the Company")
generate revenues from the sale and financing of vacation ownership interests in
its resorts, which entitle the buyer to use a fully-furnished vacation
residence, generally for a one-week period each year, in perpetuity (Vacation
Intervals). The Company's principal operations consist of (i) acquiring,
developing and operating vacation ownership resort locations, (ii) marketing and
selling Vacation Intervals in certain of its resorts, (iii) marketing and
selling vacation points at certain of its resort locations which may be redeemed
for occupancy rights at participating resorts ("Vacation Points") and (iv)
providing consumer financing to individual purchasers of Vacation Intervals and
Vacation Points at its resorts. The Company also provides resort management and
maintenance services at its resorts for which it receives fees paid by the
resorts' homeowners' associates.
The Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its Common Stock (the
"Initial Public Offering") by offering 9,056,250 shares to the public. The gross
proceeds from the public offering were $84.5 million. The Company incurred $11.2
million of costs associated with this offering. Concurrent with the Initial
Public Offering, certain predecessor limited partnerships, limited liability
companies and corporations (the "Entities") exchanged their direct or indirect
interest in, and obligations of the entities, for 16,211,558 shares of the
Company's common stock (the "Consolidation Transactions"). The accompanying
consolidated financial statements reflect the financial position and results of
operations of the Entities since the date they were acquired or formed, which
range from November 1986 to June 1996. Concurrent with the Initial Public
Offering, the Company exchanged 820,500 shares of Common Stock with the former
holders of interests in the Embassy Vacation Resort at Poipu Point, Koloa,
Kauai, Hawaii.
On February 7, 1997 the Company consummated its acquisition by merger of
AVCOM International, Inc. ("AVCOM") and its subsidiaries (the "AVCOM
Acquisition"). AVCOM is the parent company of All Seasons Resorts, Inc., a
developer, marketer and operator of vacation ownership resorts in Arizona,
California and Texas. Under the terms of the AVCOM merger agreement, the Company
issued 1,324,554 shares of its common stock in exchange for all the outstanding
capital stock of AVCOM. The AVCOM Acquisition has been treated as a
pooling-of-interests and is reflected in the accompanying consolidated financial
statements as if it took place at the beginning of the earliest period
presented.
On May 15, 1997, the Company consummated its acquisition by merger ("the
PRG Acquisition") of Plantation Resorts Group, Inc. ("PRG"), a Williamsburg,
Virginia, based developer, owner and operator of vacation ownership resorts in
Williamsburg, Virginia. PRG was incorporated in April 1997 through a private
placement of its common stock in which certain predecessor joint ventures and
corporations (the "PRG Entities") exchanged their interests for shares of PRG's
common stock (the "PRG Exchange"). The PRG Acquisition was consummated through
the issuance of 3,601,844 shares of the Company's common stock. The PRG
Acquisition has been treated as a pooling-of-interests and is reflected in the
accompanying consolidated financial statements as if it took place at the
beginning of the earliest period presented.
On August 28, 1997, the Company consummated its acquisition by merger of
100% of the capital stock of LSI Group Holdings plc ("LSI"), in exchange for
1,996,401 newly-issued shares of the Company's common stock and approximately
$1.0 million in cash (the "LSI Acquisition"). United Kingdom-based LSI is a
developer, owner and operator of vacation ownership resorts located in Europe.
Through its Grand Vacation Club, LSI operates a points-based club system. The
LSI Acquisition has been treated as a pooling-of-interests and is reflected in
the accompanying consolidated financial statements as if it took place at the
beginning of the earliest period presented.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Total revenues and net income for the Company, AVCOM, PRG, and LSI are
shown in the following table (amounts in millions) for the years ended 1996 and
1995, which represent the periods prior to the poolings, which occurred in 1997:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
-------- --------
Revenues
Consolidated......................................... $219.8 $168.3
AVCOM................................................ 48.4 34.3
PRG.................................................. 48.4 38.8
LSI.................................................. 27.9 22.6
Net income (loss)
Consolidated......................................... $ 11.0 $ 21.3
AVCOM................................................ (12.4) 1.0
PRG.................................................. 7.0 7.5
LSI.................................................. 2.3 1.8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying financial statements
include the combined accounts of Signature Resorts, Inc., AVCOM, PRG, LSI and
the Company's wholly-owned subsidiaries that were acquired or formed prior to
August 20, 1996, which became wholly-owned subsidiaries in connection with the
Consolidation Transactions. As a result, the combined accounts are now referred
to as consolidated financial statements for the historical periods presented.
All significant intercompany transactions and balances have been eliminated from
these consolidated financial statements.
The Consolidation Transactions have been accounted for as a reorganization
of entities under common control. Accordingly, the net assets of the Entities
were recorded at the Entities' historical cost. In addition, the accompanying
consolidated financial statements reflect the historical results of operations
of the predecessor partnerships on a combined basis.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash,
money market, and all highly liquid investments purchased with an original
maturity of three months or less.
Cash in Escrow -- Cash in escrow is restricted cash consisting of deposits
received on sales of vacation intervals and vacation points that are held in
escrow until a certificate of occupancy is obtained or the legal rescission
period has expired.
Real Estate and Development Costs -- Real estate is valued at the lower of
cost or net realizable value. Development costs include both hard and soft
construction costs and together with real estate costs are allocated to Vacation
Intervals and Vacation Points. Interest, taxes, and other carrying costs
incurred during the construction period are capitalized.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful life of 3
to 7 years. Buildings are amortized over the estimated useful life of 39 to 40
years.
Depreciation and amortization expense related to property and equipment was
$2.8 million, $1.5 million and $1.0 million in 1997, 1996 and 1995,
respectively.
Intangible Assets -- Organizational costs incurred in connection with the
formation of the Company have been capitalized and are being amortized on a
straight-line basis over a period of three to five years. Start-up
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
costs relate to costs incurred to develop marketing programs prior to receiving
regulatory approval to market the related property and are being amortized on a
straight-line basis over a period of one year.
Financing and loan origination fees incurred in connection with obtaining
funding for the Company have been capitalized and are being amortized over the
life of the respective loans. Debt issuance costs in connection with the 9.75%
Senior Subordinated Notes due 2007 (the "Senior Notes") and the 5.75%
Convertible Subordinated Notes due 2007 (the "Convertible Notes") are being
amortized on the effective interest method over the 10 year life of the notes.
Goodwill recorded in connection with the acquisition of the Investment in
Joint Venture is being amortized by a fixed amount per interval as intervals are
sold. Goodwill in connection with the acquisition of subsidiaries is being
amortized over the estimated useful lives of 10 to 40 years.
At each balance sheet date, the Company evaluates the realizability of its
goodwill based upon expectations of nondiscounted cash flows and operating
income. Based upon its most recent analysis, the Company believes that no
material impairment of its goodwill exists at December 31, 1997.
Foreign Currency Translation -- Financial statements for the Company's
subsidiaries outside the United States are translated into U.S. dollars at
year-end exchange rates for assets and liabilities and weighted average exchange
rates for income and expenses. The resulting translation adjustments are
recorded as a separate component of equity.
Revenue Recognition -- The Company recognizes sales of Vacation Intervals
and Vacation Points on an accrual basis after a binding sales contract has been
executed, a 10% minimum down payment has been received, the rescission period
has expired, construction is substantially complete, and certain minimum sales
levels have been achieved. If all the criteria are met except that construction
is not substantially complete, then revenues are recognized on the
percentage-of-completion (cost to cost) basis. For sales that do not qualify for
either accrual or percentage-of-completion accounting, all revenue is deferred
using the deposit method.
Income Taxes -- Prior to August 20, 1996, the Entities were taxed either as
a corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level. The Company
became subject to federal, state, and foreign income taxes from the effective
date of the Initial Public Offering. The pro forma net income per common and
common equivalent share uses the historical net income of the Company as
adjusted by the unaudited pro forma provision for income taxes to reflect the
net income per common and common equivalent share, as if the Company had been
treated as a C corporation rather than as individual limited partnerships and
limited liability companies for federal income tax purposes for the years ended
December 31, 1996 and 1995.
As a result of the AVCOM Acquisition, AVCOM's results of operations have
been included in the accompanying consolidated financial statements under the
pooling-of-interests method of accounting. During each period presented, AVCOM
was taxed as a C corporation.
Prior to the PRG Acquisition, certain of the PRG Entities were not subject
to federal and state income taxes at the consolidated level for all periods
presented. In connection with the PRG Exchange and the PRG Acquisition, the PRG
Entities became subject to federal and state income taxes from the date of
incorporation. As a result, the pro forma provision for income taxes assumes the
PRG Entities were treated as C corporations for federal income tax purposes.
As a result of the LSI Acquisition, LSI's results have been included in the
accompanying consolidated financial statements under the pooling-of-interests
method of accounting. During each period presented, LSI was subject to income
taxes levied by the various local and country taxing authorities in the foreign
countries in which it operates.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax assets and liabilities are measured by applying enacted statutory
tax rates applicable to the future years in which the related deferred tax
assets or liabilities are expected to be settled or realized. Income tax expense
consists of the taxes payable for the current period and the change during the
period in deferred tax assets and liabilities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Long-Lived Assets -- In March 1995, the Financial Accounting Standards
Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS 121), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for the expected disposition of long-lived
assets. The Company adopted SFAS 121 during the year ended December 31, 1996.
The impact of adopting SFAS 121 was to reduce net income by $2.6 million in 1996
and has been recorded as a resort property valuation allowance to reduce real
estate and development costs. During 1997, there was no change in the resort
property valuation allowance.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 was adopted during the year ended December 31, 1996. SFAS
123 requires that the Company's financial statements include certain disclosures
about stock-based employee compensation arrangements and permits the adoption of
a change in accounting for such arrangements. Changes in accounting for
stock-based compensation are optional and the Company has adopted only the
disclosure requirements (see Note 10, "Stock Options").
Newly Issued Accounting Standards -- During February 1997, the Financial
Accounting Standards Board issued SFAS No. 128 (SFAS 128), Earnings Per Share.
The statement establishes standards for computing and presenting earnings per
share (EPS) and applies to publicly held common stock or potential common stock.
The statement simplifies the standards for computing EPS previously found in APB
Opinion No. 15, Earnings Per Share (Opinion 15). It replaces presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. The Company implemented SFAS No. 128 in the
fourth quarter of 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 establishes standards for reporting and the display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosures prescribed by SFAS 130 must be made beginning with the first quarter
of fiscal 1999.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The company is in the process of reassessing current business segment reporting
to determine if changes in reporting will be required in adopting this new
standard. Any required disclosures prescribed by SFAS 131 will first be adopted
in the Company's 1999 annual report.
In February 1998, the FASB issued Statement No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132). This statement
establishes standards for footnote disclosure requirements relating to pension
and other retiree benefits. The Company is currently in the process of
reassessing current retiree benefit disclosures to determine if changes in
footnote disclosure will be required in adopting this new standard. The new
standard will not have a financial impact on the company. Any required
disclosures prescribed by SFAS 132 will first be adopted in the Company's 1998
annual report.
Reclassifications -- Certain reclassifications were made to the 1996 and
1995 accompanying consolidated financial statements to conform to the 1997
presentation.
3. MORTGAGES RECEIVABLE, NET
The Company provides financing to the purchasers of Vacation Intervals and
Vacation Points which are collateralized by their interest in such Vacation
Intervals and Vacation Points. The mortgages receivable generally bear interest
at the time of issuance of between 12% and 17%, which remain fixed over the term
of the loan, which typically averages seven to ten years. The mortgages
receivable may be prepaid at any time without penalty. The weighted average rate
of interest on outstanding mortgages receivable is 14.4% as of December 31,
1997.
As of December 31, 1997, approximately 4.6% of the Company's consumer loans
were considered by the Company to be delinquent (scheduled payment past due 60
or more days). In addition, the Company had commenced deed-in-lieu of
foreclosure or foreclosure action on approximately 2.2% of its consumer loans as
of December 31, 1997.
At December 31, 1997 and 1996, approximately $5.8 million and $4.4 million,
respectively, of mortgages receivable are non-interest bearing. These mortgages,
which generally have a stated maturity of one to three years, have not been
discounted as management has determined that the effect would not be material to
the accompanying consolidated financial statements.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $4.1 million and $2.5 million at December 31, 1997 and
1996, respectively. The accrued interest receivable at December 31, 1997 and
1996 is net of an allowance for doubtful accounts of $1.0 million and $0.2
million, respectively, and is included in other receivables, net.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The following schedule reflects the scheduled principal maturities of
mortgages receivable (amounts in thousands):
YEAR ENDING DECEMBER 31:
1998........................................................ $ 50,564
1999........................................................ 46,367
2000........................................................ 44,615
2001........................................................ 43,907
2002........................................................ 41,760
Thereafter.................................................. 127,438
--------
Total principal maturities of mortgages receivable.......... 354,651
Less allowance for doubtful accounts........................ (22,916)
--------
Net principal maturities of mortgages receivable............ $331,735
========
The activity in the mortgages receivable allowance for doubtful accounts is
as follows (amounts in thousands):
DECEMBER 31,
------------------
1997 1996
------- -------
Balance, beginning of the period......................... $17,328 $13,271
Decrease in allowance for purchased mortgages
receivable............................................. (718) (400)
Increase in allowance for company acquired............... 1,265 --
Provision for mortgages receivable doubtful accounts..... 7,234 8,311
Receivables charged off.................................. (2,193) (3,854)
------- -------
Balance, end of the period..................... $22,916 $17,328
======= =======
The provision for doubtful accounts for 1997 includes $1,345,000 for other
receivables.
4. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated Vacation Interval and
Vacation Point cost of sales consist of the following (amounts in thousands):
DECEMBER 31,
----------------------
1997 1996
--------- ---------
Land................................................. $ 74,527 $ 54,614
Development costs, excluding capitalized interest.... 370,151 248,972
Capitalized interest................................. 20,050 13,276
--------- ---------
Total real estate and development costs.... 464,728 316,862
Less accumulated Vacation Interval and Vacation Point
cost of sales...................................... (242,809) (171,372)
Less resort property valuation allowance............. (2,620) (2,620)
--------- ---------
Net real estate and development costs...... $ 219,299 $ 142,870
========= =========
As of December 31, 1997, the Company commenced sales of Vacation Intervals
at certain properties, or phases of certain properties, that are expected to be
completed during 1998. The estimated cost to complete the projects, or the
specific phases of the projects, is approximately $20 million.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following
(amounts in thousands):
Amortization expense was $3.7 million, $3.5 million and $1.6 million in
1997, 1996 and 1995, respectively. In addition, $2.0 million of amortized
intangibles were retired from the related asset and accumulated amortization
accounts in 1997.
6. NOTES PAYABLE
Notes payable consists of the following at December 31 (amounts in
thousands):
1997 1996
-------- --------
Revolving lines of credit not to exceed $241 million in the
aggregate (limited by eligible collateral), with interest
payable monthly at prime plus 2% to prime plus 3% (10.5% to
11.5% at December 31, 1997), payable in monthly installments
of principal and interest equal to 100% of all proceeds of
the receivables collateral collected during the month but
not less than the accrued interest, with any remaining
principal due seven to ten years after the date of the last
advance related to mortgages receivable, collateralized by
specific mortgages receivable............................... $ 62,676 $ 91,617
Revolving line of credit not to exceed $20 million,
collateralized by certain mortgages receivable with interest
payable at prime plus 1.5% to prime plus 1.75% (10.0% to
10.25% at December 31, 1997) or LIBOR plus 4.25% (9.97% at
December 31, 1997), payable in monthly installments of
principal and interest equal to 100% of all proceeds of the
receivables collateral collected during the month but not
less than the accrued interest, with any remaining principal
from September 2000 to October 2003......................... 11,931 14,654
Revolving line of credit of $100.0 million and $40 million
during 1997 and 1996, respectively, with interest payable
monthly at LIBOR plus 2.75% (8.47% at December 31, 1997)
payable in monthly installments of principal and interest
equal to 100% of all proceeds of the receivables collateral
collected during the month but not less than the accrued
interest, with any remaining principal due June 1998........ -- 37,226
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
1997 1996
-------- --------
Construction loan payable not to exceed $47 million in the
aggregate, with monthly interest payable at prime plus 2%
(10.5% at December 31, 1997) principal payable with a
portion of the proceeds received on the sale of Vacation
Intervals, collateralized by specific land and unsold
interval inventory, due from January 1998 to April 2004..... 2,694 16,476
Mortgages receivable, sold with option to repurchase,
collateralized by certain mortgages receivable.............. 4,823 6,281
Bonds payable, due April 2004 with interest at 7.75%,
payable from collections of mortgages receivable,
collateralized by mortgages receivable...................... 11,572 17,460
Endpaper loan, due dates from December 2002 to June 2005
with interest at prime plus 1.25% (9.75% at December 31,
1997), payable from collections of mortgages receivable,
collateralized by mortgages receivable...................... -- 5,259
Various acquisition notes payable with interest rates
ranging from 6.75% to 11.5% and due dates ranging from
January 1998 to February 2014, collateralized by certain
real property and proceeds from the sale of Vacation
Intervals................................................... -- 5,999
Noninterest bearing land loans payable from proceeds of
Vacation Intervals sold with final maturity of May 1999..... 433 3,995
Other notes payable......................................... 3,079 37,155
9.75% Senior Subordinated Notes with semi-annual interest
payments due April and October and principal due October
2007........................................................ 200,000 --
5.75% Convertible Subordinated Notes with semi-annual
interest payments due January and July and principal due
January 2007................................................ 138,000 --
-------- --------
Total notes payable......................................... $435,208 $236,122
======== ========
On February 18, 1998, the Company consummated a $100.0 million Senior Bank
Credit Facility (the "Credit Facility"). The Credit Facility has a variable
borrowing rate based on the percentage of the Company's mortgages receivable
pledged under such facility and the amount of funds advanced thereunder. The
interest rate will vary between LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending
on the amount of advances against mortgages receivable. The Credit Facility has
a three year term and contains covenants, representations and warranties and
conditions to borrow on the funds.
The Convertible Notes are convertible into Common Stock at any time prior
to maturity, unless previously redeemed, at a conversion price of $30.417 per
share, subject to adjustment under certain events.
At December 31, 1997, under the terms of the revolving lines of credit
agreements, the Company may typically borrow from 85% to 90% of the balances of
the pledged mortgages receivable. A total of approximately $199 million is
available under these certain agreements.
The loans contain certain covenants, the most restrictive of which require
certain of the consolidated entities to maintain a minimum net worth and require
certain expenses to not exceed certain percentages of sales. At December 31,
1997, the Company was in compliance with all covenants.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Dividends are restricted by certain of the Company's debt agreements which
require tangible net worth of at least $140 million.
The expected maturities of the remaining long-term debt are as follows
(amounts in thousands):
DUE IN FISCAL YEAR
------------------
1998..................... $ 29,537
1999..................... 28,794
2000..................... 18,108
2001..................... 11,503
2002..................... 9,223
2003 and thereafter...... 338,043
--------
$435,208
========
7. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, respectively, the Company, had accrued $7.0
million and $4.4 million as a receivable from various homeowners' associations
at its resorts. At December 31, 1997 and 1996, respectively, the Company had
accrued $1.0 million and $1.6 million as a payable to the homeowners'
associations at its resorts. The Company generally accrues receivables from
homeowners' associations for management fees and certain other expenses.
Payables to the homeowners' associations consist primarily of maintenance fees
for units owned by the Company. All of these amounts are classified as due from
and due to related parties in the accompanying consolidated balance sheets.
As of December 31, 1997, the Company had accounts receivable and notes
receivable of $2.7 million and $11.8 million, respectively, from the Company's
joint ventures in Poipu Point, Hawaii, Kaanapali, Hawaii and St. John, U.S.
Virgin Islands. As of December 31, 1996, these accounts receivable and notes
receivable balances were $0.3 million and $2.0 million, respectively. The
accounts receivable relate to certain reimbursable operating and development
expenses. The notes receivable represent loans made to the projects for start-up
and development activities.
8. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to litigation and claims regarding
employment, tort, contract, construction, and commission disputes, among others.
In the judgment of management, none of such litigation or claims against the
Company is likely to have a material adverse effect on the Company's financial
statements or its business.
The Company owns a partnership interest in the Embassy Vacation Resort at
Poipu Point, Koloa, Kauai, Hawaii. Under the terms of the partnership agreement,
the Company could be required to purchase the other partner's interest. At
December 31, 1997, the Company does not believe that the events requiring such
purchase are likely to occur.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and cash in escrow: The carrying amount reported
in the balance sheet for cash and cash equivalents and cash in escrow
approximates their fair value because of the short maturity of these
instruments.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable: The carrying amount reported in the balance sheet for notes
payable approximates its fair value because the interest rates on these
instruments approximate current interest rates charged on similar current
borrowings.
10. STOCK OPTIONS
The Company issued 1,054,500 and 2,653,500 stock options during 1997 and
1996, respectively. The Company accounts for these options under APB Opinion No.
25, Accounting for Stock Issued to Employees, under which no compensation cost
has been recognized. Under SFAS 123, the Company's net income would have been
$16.9 million and basic and diluted earnings per share would have been, $0.48
and $0.47, respectively, on an unaudited pro forma basis for the year ended
December 31, 1997. The Company's unaudited, pro forma net income would have been
$1.6 million, and basic and diluted unaudited earnings per share would have been
$0.06 on an unaudited pro forma basis for the year ended December 31, 1996. SFAS
123 would not have affected the Company's net income and earnings per share for
the year ended December 31, 1995. A summary of the Company's stock options for
the years ended December 31, 1997 and 1996 is presented in the following table:
1997 1996
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
Outstanding options, beginning
of year...................... 2,653,500 $10.29 --
Granted........................ 1,054,500 23.99 2,653,500 $10.29
Exercised...................... (250,180) 9.33 -- --
Forfeited...................... (168,413) 16.42 -- --
Expired........................ -- -- -- --
---------- ------ ---------- ------
Outstanding options, end of
year......................... 3,289,407 $14.45 2,653,500 $10.29
Exercisable at end of year..... 817,528 $10.50 522 $10.18
========== ====== ========== ======
Weighted average fair value of
options granted.............. $ 5.32 $ 4.23
All stock options issued by the Company were issued to employees at fair
market value on the grant date. The options range from 3 to 5 years for full
maturity and the exercise prices range from $8.00 to $28.25.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 6.0%, expected dividend yield of zero, expected
volatility of 35%, and expected lives of 4.1 years in 1997 and 5 years in 1996.
Options to purchase an aggregate of 2,653,500 shares of Common stock were
granted to directors, executive officers and other employees of the Company in
1996 and were outstanding on January 1, 1997. The number of options granted
exceeded the limit of 2,625,000 shares approved under the 1996 Equity
Participation Plan by 28,500 shares. The options that were granted in excess of
the limit were granted subject to the approval of the Company's stockholders of
an amendment to such plan increasing the number of shares of Common stock
reserved for issuance thereunder from 2,625,000 shares to 3,750,000 shares.
On May 16, 1997, shareholders approved a new limit of 3,750,000 total
shares reserved for issuance under the Company's 1996 Equity Participation Plan.
As of December 31, 1997 the number of shares available for option grants was
460,593 under the plan.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
11. EMPLOYEE BENEFIT PLANS
The Company has established the Signature Resorts, Inc. Employee Stock
Purchase Plan to assist eligible employees to acquire stock ownership in the
Company and to encourage them to remain in the employment of the Company. The
Employee Stock Purchase Plan is intended to meet the requirements of an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended, and generally allows eligible employees to purchase common
stock at 85% of fair market value, subject to dollar limitations. The Company
has reserved a maximum of 750,000 shares of Common Stock for issuance pursuant
to the Employee Stock Purchase Plan. As of December 31, 1997 and 1996, an
aggregate of 2,482 and no shares, respectively, had been issued pursuant to the
Employee Stock Purchase Plan.
The Company also has established a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended. Subject to certain limitations, the 401(k) Plan allows
participating employees to defer up to 10% of their eligible compensation on a
pre-tax basis. Although the 401(k) Plan allows the Company to make discretionary
matching contributions of up to 50% of employee contributions, the Company did
not make any such matching contributions during 1997 or 1996.
12. INCOME TAXES
Prior to August 20, 1996, the Entities were taxed either as a corporation
at the corporate level, as an S corporation taxable at the shareholder level, or
as a partnership taxable at the partner level. In addition, PRG entities were
taxed as a corporation at the corporate level or as a partnership at the partner
level. Accordingly, the table below summarizes the unaudited pro forma provision
for income taxes that would have been reported had the Company been treated as a
C corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes for the years ended December
31, 1996 and 1995. AVCOM's and LSI's actual deferred income taxes and provision
for income taxes are included in the pro forma schedules and 1996 actual
schedule on the next page. The Company's actual income tax provision is
presented for the periods subsequent to August 20, 1996.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1996 1995
------- ------- ------------ ------------
(PRO FORMA) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS)
Current:
Federal.................................... $ 2,194 $ 2,785 $ 4,990 $ 5,654
State...................................... 461 481 846 711
Foreign.................................... 2,533 1,240 1,233 1,645
------- ------- ------- -------
Total current provision for income taxes..... 5,188 4,506 7,069 8,010
------- ------- ------- -------
Deferred:
Federal.................................... 16,125 (7,182) (3,675) 1,363
State...................................... 1,843 (1,393) (809) 594
Foreign.................................... -- (36) (36) 42
------- ------- ------- -------
Total deferred provision (benefit) for income
taxes...................................... 17,968 (8,611) (4,520) 1,999
------- ------- ------- -------
Provision (benefit) for income taxes......... $23,156 $(4,105) $ 2,549 $10,009
======= ======= ======= =======
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The reconciliation between the statutory provision for income taxes and the
actual provision (benefit) for income taxes is shown as follows (amounts in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1996 1995
------- ------- ------------ ------------
(PRO FORMA) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
Income tax at U.S. federal statutory
rate............................... $15,205 $ 2,357 $2,357 $ 8,862
State tax, net of federal benefit.... 1,738 163 163 1,037
Difference in foreign tax rates...... (994) (34) (34) (56)
Write-off of receivable from related
party.............................. -- (1,478) -- --
Non-deductible expenses.............. 3,192 598 63 166
Deferred income taxes recorded upon
acquisition of previously
non-taxable entities............... 5,960 -- -- --
Other................................ (895) -- -- --
Non-taxable income from entities..... (1,050) (5,711) -- --
------- ------- ------ -------
Provision (benefit) for income
taxes........................... $23,156 $(4,105) $2,549 $10,009
======= ======= ====== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax liabilities were as follows (amounts in
thousands):
DECEMBER 31,
--------------------
1997 1996
-------- --------
Deferred tax assets:
Allowance for doubtful accounts........................... $ 8,867 $ 5,659
Fixed assets and inventory................................ 1,305 3,389
Accrued expenses.......................................... 4,152 2,386
Adjustment to basis of partnership property............... 3,474 --
Net operating loss carryover.............................. 29,439 15,763
Capital loss carryover.................................... 367 --
Federal benefit of state deferred tax..................... -- --
Foreign tax credit carryover.............................. 62 332
Minimum tax credit carryover.............................. 5,776 1,629
-------- --------
Total gross deferred tax assets................... 53,442 $ 29,158
-------- --------
Valuation Allowance......................................... (2,367) --
-------- --------
Total net deferred tax asset...................... $ 51,075 $ 29,158
-------- --------
Deferred tax liabilities:
Installment sales......................................... (73,818) (27,191)
Percentage of completion.................................. (160) (4,370)
Other..................................................... (849) (856)
-------- --------
Total deferred tax liabilities.................... $(74,827) $(32,417)
-------- --------
Net deferred taxes..................................... $(23,752) $ (3,259)
======== ========
At December 31, 1997, the Company has available approximately $79 million
of unused net operating loss carryforwards (the "NOLs") that may be applied
against future taxable income. These NOLs expire on various dates from 2004
through 2012.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
During the fourth quarter of 1997, the Company changed its estimate
regarding its tax provision by $6.0 million or $0.17 per share to reflect the
tax effects of certain acquired entities, primarily PRG, that were either
previously non-taxable or were taxed in foreign jurisdictions.
13. SUBSEQUENT EVENTS
On February 3, 1998, the Company acquired 100% of the capital stock of MMG
Holding Corp., MMG Development Corp. and certain affiliated companies for
approximately $26.5 million, comprised of $18.5 million in cash and the
assumption of approximately $8.0 million of debt. The acquired assets include
MMG's approximately $6.6 million mortgages receivable portfolio. MMG is an
Orlando, Florida based developer, operator and manager of vacation ownership
resorts, with sales or management operations at six resorts. In addition, on
February 18, 1998, the Company consummated MMG's commitment to purchase an
additional resort in Gatlinburg, Tennessee. The Company will account for the
acquisition using the purchase method of accounting for business combinations.
In January 1998, the Company acquired the Westin Carambola Beach Resort
(the "Carambola Beach Resort") on the island of St. Croix, United States Virgin
Islands for a cash purchase price of $13 million. The Carambola Beach Resort
contains 156 one-bedroom suites and one two-bedroom suite. The Company will
account for the acquisition using the purchase method of accounting for business
combinations.
In January 1998, the Company announced that it and Westin Hotels & Resorts
("Westin") modified their existing joint development agreement to make the
relationship non-exclusive between the parties. Under their modified
relationship, the Company and Westin each will be free to independently pursue
all vacation ownership development opportunities. Under the parties' prior
exclusive agreement, the Company and Westin each were restricted from developing
four and five star vacation ownership resorts with third parties. The Company
and Westin, however, will continue to jointly own and operate the Westin
Vacation Club St. John located in the U.S. Virgin Islands. As part of the
modification, the Company's and Westin's representatives no longer serve on the
other's board of directors.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment, which includes the
development, acquisition, marketing, sales, financing and management of vacation
ownership resorts. The Company's areas of operation outside of the United States
include Mexico, Canada, Netherlands Antilles, United Kingdom, Spain, Austria and
France. The Company's customers are not concentrated in any specific geographic
region and no single customer accounts for a significant amount of the Company's
sales.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Information about the Company's operations in different geographic
locations is shown below (amounts in thousands):
UNITED STATES FOREIGN TOTAL
------------- ------- --------
1997
Total revenues.................................. $270,296 $67,397 $337,693
Income before provision for income taxes........ 31,177 12,267 43,444
Identifiable assets............................. 701,509 59,636 761,145
1996
Total revenues.................................. $179,003 $40,844 $219,847
Income before provision for income taxes........ 356 6,573 6,929
Identifiable assets............................. 412,339 33,545 445,884
1995
Total revenues.................................. $138,925 $29,393 $168,318
Income before provision for income taxes........ 18,162 7,157 25,319
Identifiable Assets............................. 267,162 28,609 295,771
NOTE 15. ACQUISITIONS
On October 10, 1997, the Company consummated its acquisition (the "Marc
Acquisition") of Hawaii-based Marc Hotels & Resorts, Inc. ("Marc Resorts"),
acquiring 100% of the capital stock of Marc Resorts for 212,717 newly issued
shares of the Company's Common Stock. Marc Resorts is a Hawaiian hospitality
management company and operator of hotels, resort condominiums and all-suite
resorts with 22 managed resort locations on Hawaii's five major islands. The
Company accounted for the Marc Acquisition using the purchase method of
accounting for business combinations.
On November 7, 1997, the Company consummated its acquisition of 100% of the
capital stock of Vacation Internationale, Ltd. ("VI") and its subsidiaries for
approximately $24.3 million, comprised of $8.0 million in cash and promissory
notes and the assumption of approximately $16.3 million of long-term
indebtedness (the "VI Acquisition"). VI is a Bellevue, Washington based
developer and operator of vacation ownership resorts. VI's vacation time share
program includes 21 resort locations in the Western United States, Hawaii,
Mexico and Canada. The Company accounted for the VI Acquisition using the
purchase method of accounting for business combinations.
On November 14, 1997, a partnership of which the Company is a managing
general partner consummated its acquisition of the Embassy Suites Resort at
Kaanapali Beach, Maui, Hawaii for approximately $78 million. The acquiring
entity is a partnership formed by a wholly-owned subsidiary of the Company (as
the managing general partner), the Whitehall Street Real Estate Limited
Partnership VII and Apollo Real Estate Advisors, L.P. The Company's subsidiary
owns a 24% partnership interest in the acquiring entity. The Company accounts
for this investment under the equity method of accounting.
On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of Global Development Ltd. ("Global") and
certain of its affiliated companies through an asset purchase for cash
consideration of approximately $18 million. Global has 13 resort locations in
Europe. The Company assumed no long-term debt as part of this transaction, but
assumed approximately $7.0 million in liabilities and acquired assets valued at
approximately $15.8 million. The Company accounted for the asset purchase using
the purchase method of accounting.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Assets acquired and liabilities assumed in connection with the Company's
acquisitions are as follows (amounts in thousands):
Assets acquired in acquisitions:
Cash in escrow............................................ $ 857
Mortgages receivable, net................................. 14,509
Due from related parties.................................. 1,175
Other receivables, net.................................... 2,719
Prepaid expenses and other................................ 377
Real estate and development costs......................... 10,834
Property and equipment, net............................... 3,202
Goodwill in conjunction with acquisitions................. 35,186
-------
Total assets acquired in acquisitions............. $68,859
=======
Liabilities assumed in acquisitions:
Accounts payable.......................................... $ 8,666
Accrued liabilities....................................... 21,359
Due to related parties.................................... 12
Deferred income taxes..................................... 1,012
Notes payable............................................. 227
Cumulative translation adjustments........................ 277
-------
Total liabilities assumed in acquisitions......... $31,553
=======
The following tables sets forth certain unaudited pro forma information for
the Company's acquisitions as if they had occurred as of the beginning of 1997
and 1996 (amounts in thousands, except per share amounts):
PRO FORMA
ACTUAL ADJUSTMENTS TOTAL
--------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Year ended December 31, 1997
Total revenues......................... $337,693 $ 53,094 $390,787
Net Income............................. 19,522 (2,951) 16,571
Basic EPS.............................. $ 0.55 $ 0.47
Diluted EPS............................ $ 0.54 0.46
Year ended December 31, 1996
Total revenues......................... $219,847 $ 74,014 $293,861
Net Income............................. 11,034 261 11,295
Basic EPS.............................. $ 0.41 $ 0.41
Diluted EPS............................ $ 0.40 0.41
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 16. EARNINGS PER SHARE
Basic earnings per share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing the sum of the weighted average
number of common shares outstanding plus all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued. The
following table reconciles the number of shares utilized in the earnings per
share calculations for each of the three years in the period ended December 31,
1997.
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(AMOUNT IN THOUSANDS)
Net income............................................ $19,522 $11,034 $21,299
======= ======= =======
Net income available to common stockholders after
assumed conversion of dilutive securities(a)........ $19,522 $11,034 $21,299
======= ======= =======
Weighted average number of common shares used in basic
EPS................................................... 35,373 27,232 23,955
Effect of dilutive stock options...................... 807 408 --
------- ------- -------
Weighted average number of common shares and dilutive
potential common shares used in diluted EPS(a)...... 36,180 27,640 23,955
======= ======= =======
(a) The potential effect on net income and on common stock shares related
to the Convertible Notes have not been included in the calculation of net income
or weighted average number of common shares and dilutive potential common shares
outstanding used in diluted EPS because the effect would be anti-dilutive.
F-24
Page 1
EXHIBIT 10.1.5
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into as of October 10, 1997, by and among Michael V. Paulin, Rosemarie
Paulin, Maya K. Paulin and Annemarie H. Paulin (collectively, the "Holders") and
Signature Resorts, Inc., a Maryland corporation (the "Company").
This Agreement is made in connection with the acquisition by the
Company of 100% of the capital stock of Marc Hotels & Resorts, Inc., a Hawaii
corporation ("Marc"), pursuant to an Agreement and Plan of Merger, dated August
21, 1997 (the "Merger Agreement"), under which a wholly-owned subsidiary of the
Company will merge with and into Marc (the "Merger"). As a result of the Merger,
the Holders will exchange of their interests in Marc for an aggregate number of
shares of common stock, $0.01 par value per share (the "Common Stock"), of the
Company as determined pursuant to section 1.3 of the Merger Agreement. As used
herein the term "Registrable Shares" shall refer to such number of shares of
Common Stock upon original issuance thereof, and at all times subsequent
thereto, until the earlier to occur of such time as (i) a registration statement
of the Company that covers such Registrable Shares has been declared effective
and any such Registrable Shares have been disposed of in accordance with such
effective registration statement and (ii) such earlier time as all such shares
are tradeable without restriction under any applicable rules and regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
"Merger Date" shall be the closing date of the Merger.
The parties hereby agree as follows:
1. Shelf Registration.
(a) The Company shall prepare or amend and file with the
Securities and Exchange Commission (the "Commission"), a registration statement
for an offering to be made on a continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), covering the
Registrable Shares (the "Shelf Registration"). The Shelf Registration shall be
on Form S-1 or another appropriate form (e.g. Form S-3 after having established
eligibility therefor) permitting registration of the Registrable Shares for
resale by the Holders in the manner or manners designated by them (including,
without limitation, one or more underwritten offerings). The Company shall use
commercially reasonable efforts (subject in all cases to any procedures and
limitations which may be imposed by the staff of the Commission) to (i) file the
Shelf Registration with the Commission within 30 days following the Merger Date,
(ii) cause the Shelf Registration to be declared effective under the Securities
Act as soon as practicable following the Merger Date, and (iii) keep the Shelf
Registration continuously effective under the Securities Act for a period (the
"Effectiveness Period") of the shorter of (A) two years from the Merger Date,
(B) the date when all Registrable Shares are tradeable without restriction under
any applicable rules and regulations under the Exchange Act and (C) the date
when all Registrable Shares covered by the Shelf Registration have been disposed
of in accordance with the Shelf Registration.
(b) The Company may require in its sole discretion that
Registrable Shares proposed to be sold pursuant to the Shelf Registration
effected pursuant to this Section 1 be sold in trades, which shall be block
trades if requested by the approved underwriter(s) or broker-dealer, through
approved underwriter(s), or broker-dealers, selected by the Company. In the
event that the Company has either given Notice or at such time gives Notice of
an
Page 2
Underwritten Offering (each as defined in Section 2 below) in which the Holder
is offered the opportunity to participate and the Company provides with such
Notice a statement signed in the name of the Company that the Company reasonably
anticipates the completion of such Underwritten Offering within 45 days of the
date of the Notice, the Company may require that the Holders discontinue public
sales of such Holder's Registrable Securities (other than through such
Underwritten Offering) for the shorter of the 45-day period set forth in such
Notice or the period ending on the date of the closing of such Underwritten
Offering. In the event any of the Registrable Shares covered by the Shelf
Registration effected pursuant to this Section 1 are sold in such an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will manage such offering will be selected in accordance with
Section 6 below.
(c) The Company may include in any such Shelf Registration
referred to in this Section 1 other shares of Common Stock of the Company held
by other security holders of the Company who have registration rights.
2. Incidental Registration. If, at any time or from time to time
during a period of two years following the Merger Date, the Company shall
propose to file a registration statement (a "Registration Statement") with the
Commission with respect to the proposed sale by the Company of shares of its
Common Stock (or securities exchangeable or convertible therefor) to an
underwriter(s) for reoffering to the public (an "Underwritten Offering") (other
than in connection with an offering on Form S-4 or Form S-8 or successor forms
of such registration statements under the Act) and the Shelf Registration has
not been declared effective, then the Company shall in each case give written
notice (the "Notice") of such proposed filing to the Holders not less than 30
days before the anticipated filing date, which shall offer to the Holders the
opportunity to include in such Registration Statement such number of Registrable
Shares as each Holder may request. Upon written request by any Holder given
within 15 days after the giving of the Notice, the Company shall include in any
Registration Statement relating to the Common Stock of the Company all or such
portion of the Registrable Shares as the Holders may request. Neither the
delivery of the Notice by the Company nor of such request by the Holders shall
obligate the Company to file such Registration Statement and, notwithstanding
the filing of such Registration Statement, the Company may, at any time prior to
the effective date thereof, determine not to offer the securities to which such
Registration Statement relates, without liability or obligation to the Holders.
As a condition to any Holder including any Registrable Shares in any
Registration Statement pursuant to this Section 2, such Holder agrees to effect
sales of such Registrable Shares thereunder solely under the plan of
distribution established by the Company and set forth therein.
3. Company's Obligations. In connection with the Company's
obligation to effect a Shelf Registration pursuant to Section 1, or in the event
the Company files a Registration Statement in connection with an Underwritten
Offering pursuant to Section 2, it shall:
(a) Notify the Holders as to the filing thereof and of all
amendments or supplements thereto filed prior to the effective date of such
Shelf Registration or Registration Statement;
(b) Notify the Holders, promptly after the Company shall
receive notice thereof, of the time when such Shelf Registration or Registration
Statement became
Page 3
effective or any amendment or supplement to any prospectus forming a part of
such Shelf Registration or Registration Statement has been filed;
(c) Notify the Holders promptly of any request by the
Commission for the amending or supplementing of such Shelf Registration or
Registration Statement or prospectus or for additional information;
(d) Prepare and file with the Commission any amendments or
supplements to such Shelf Registration or Registration Statement and the
prospectus which may be necessary or advisable to keep such Registration
Statement effective and to comply with the provisions of the Securities Act with
respect to the offer of the Registrable Shares covered by such Registration
Statement during the period required for the distribution of such securities,
which, in the case of a Registration Statement filed pursuant to Section 2 in
connection with an Underwritten Offering, such period shall not be in excess of
120 days from the effective date of the Registration Statement or post-effective
amendment pursuant to which such Registrable Shares may be sold;
(e) Prepare and promptly file with the Commission and
promptly notify the Holders of the filing of such amendment or supplement to
such Shelf Registration or Registration Statement and the prospectus as may be
necessary to correct any statements therein or omission therefrom if, at any
time when a prospectus relating to such Registrable Shares is required to be
delivered under the Securities Act, any event with respect to the Company shall
have occurred as a result of which any prospectus would include an untrue
statement of material fact or omit to state any material fact necessary to make
the statements therein not misleading;
(f) In case the Holders or any underwriter(s) for the
Holders are required to deliver a prospectus, prepare promptly upon request such
amendment or amendments to such Shelf Registration or Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 9(a)(3) of the Securities Act;
(g) Advise the Holders promptly after the Company shall
receive notice or obtain knowledge of the issuance of any stop order by the
Commission suspending the effectiveness of any such Shelf Registration or
Registration Statement or amendment thereto or of the initiation or threatening
of any proceedings for that purpose, and promptly use its maximum reasonable
efforts to prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued;
(h) Use its maximum reasonable efforts to qualify such
Registrable Shares for sale under the securities or blue sky laws of such states
within the United States as the Holders may reasonably designate, except that
the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business in any such state or to take any action which
would subject it to general service of process in any such jurisdiction where it
is not then so subject; and
(i) Furnish to the Holders, as soon as available, copies
of any such Shelf Registration or Registration Statement and each preliminary or
final prospectus, or supplement or amendment required to be prepared thereto,
all in such quantities required as
Page 4
they may from time to time reasonably request.
Each Holder of Registrable Shares agrees by acquisition of
such Registrable Shares that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(e) hereof, such Holder
will forthwith discontinue disposition of Registrable Shares until such Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 3(e) hereof, or until it is advised in writing by the Company that the
use of the prospectus may be resumed, and has received copies of any additional
or supplemental filings that are incorporated by reference in the prospectus,
and, if so directed by the Company, such Holder will deliver to the Company all
copies, other than permanent file copies, then in such Holder's possession of
the prospectus covering such Registrable Shares current at the time of receipt
of such notice.
4. Holders' Obligation to Furnish Information. In connection with
the Company's obligation to effect a Shelf Registration pursuant to Section 1,
or in the event the Company files a Registration Statement in connection with an
Underwritten Offering pursuant to Section 2, each Holder shall furnish
information to the Company concerning such Holder's holdings of securities of
the Company and the proposed method of sale or other disposition of the
Registrable Shares and such other information and undertakings as shall be
required in connection with the preparation and filing of the Shelf
Registration, any Registration Statement or any post-effective amendment
covering all or part of the Registrable Shares in order to insure full
compliance with the Securities Act and the Exchange Act. Each Holder further
agrees to enter into such undertakings and take such other action relating to
the conduct of the proposed offering which the Company or the underwriter(s) may
reasonably request as being necessary to ensure compliance with the federal and
state securities laws and the rules or other requirements of the National
Association of Securities Dealers, Inc. ("NASD") or otherwise to effectuate the
offering.
5. Expenses. The Company shall pay all expenses (the
"Registration Expenses") incident to each registration of the Registrable Shares
under Sections 1 and 2, including, without limitation, all registration, filing
and NASD fees, all fees and expenses of complying with state securities or blue
sky laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, the fees and disbursements of counsel for the Company and of
its independent public accountants, including the expenses of any special audits
or "cold comfort" letters required by or incident to such performance and
compliance, premiums and other costs of policies of insurance purchased by the
Company at its option against liabilities arising out of the public offering of
such Registrable Shares, but excluding underwriting discounts and commissions
and fees and expenses of underwriter(s), selling brokers, dealer managers or
similar securities industry professionals relating to the distribution of the
Registrable Shares, transfer taxes, fees and disbursements of counsel for any
selling shareholder(s) and other selling expenses, if any.
6. Selection of Underwriter. In the event of any Registration
Statement filed in connection with an Underwritten Offering pursuant to Section
2 and in the event any of the Registrable Shares covered by the Shelf
Registration effected pursuant to Section 1 are to be sold in an Underwritten
Offering, the investment banker or investment bankers and manager or managers
that will manage the offering will be selected by the Company.
7. Priority in Incidental Registration. If in connection with an
Underwritten
Page 5
Offering registered pursuant to Section 2, the managing underwriter(s) of such
Underwritten Offering informs the Company and the Holders by letter of its
belief that the number of securities requested to be included in such
Registration Statement exceeds the number which should be sold in such
Underwritten Offering, then the Company will include in such Registration
Statement, to the extent of the number which the Company is so advised should be
sold in such Underwritten Offering, (i) first, all shares of Common Stock
proposed to be sold by the Company for its own account and (ii) second, the
number of Registrable Shares proposed by the Holders to be included in the
registration that, in the opinion of such managing underwriter(s), can be sold
without adversely affecting the price or probability of success of such
Underwritten Offering, allocated pro rata among such Holders, on the basis of
the relative amount of Registrable Shares requested to be included in such
Registration Statement; provided that in all cases the Holders of Registrable
Shares shall be entitled to include in any such registration an aggregate of up
to 25% of the total number of shares sold in any such Underwritten Offering.
8. Underwritten Offerings. In the event that Registrable Shares
are to be distributed through an Underwritten Offering, each Holder offering
Registrable Shares in such Underwritten Offering shall be a party to the
underwriting agreement between the Company and such underwriter(s) and may, at
its option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriter(s) shall also be made to and for the benefit of such Holder.
Holders shall not be required to make any representations or warranties to or
agreements with the Company or the underwriter(s), other than representations,
warranties or agreements regarding the Holders, the Registrable Shares, and the
Holders' intended method of distribution and any other representations required
by law. Any representations or warranties to or agreements with the
underwriter(s) made by the Holders shall also be made to and for the benefit of
the Company.
9. Indemnification.
(a) By the Company. In the event of any registration of
the Registrable Shares of the Company under the Securities Act, the Company
will, and hereby does, indemnify and hold harmless the Holders with respect to
the Registrable Shares included in such registration, its directors, officers,
underwriters and each other person, if any, who controls any Holder within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which the Company or such Holder or any such
director or officer or underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in which
they were made not misleading, and the Company will reimburse such Holder and
each such director, officer, underwriter and controlling person for any legal or
any other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, liability, action or proceeding; provided
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability (or action or
Page 6
proceeding in respect thereof) or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such Registration Statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such underwriter or such Holder, as the case may be, specifically for use in the
preparation thereof and; provided further that the Company shall not be liable
to any person in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises out of
such person's failure to send or give a copy of the final prospectus, as the
same may be then supplemented or amended, to the person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to written confirmation of the sale of the Registrable Shares to such
person if such statement or omission was corrected in such final prospectus as
amended or supplemented. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such underwriter or such
Holder or any such director, official, underwriter or controlling person and
shall survive the transfer of such securities by such Holder.
(b) Indemnification by the Holders. Each Holder agrees
that, as a condition to including any Registrable Shares in any Registration
Statement filed pursuant to Section 1 or 2, that each such Holder with
Registrable Shares included in such Registration Statement will and hereby does,
indemnify and hold harmless (in the same manner and to the same extent as set
forth in paragraph (a) of this Section 9) the Company, each director of the
Company, each officer of the Company, each other person who participates as an
underwriter in the offering or sale of such securities and each other person, if
any, who controls the Company or any such underwriter within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of such Holder
specifically for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement. Such indemnity shall remain in full force and effect, regardless of
any investigation made by or on behalf of the Company or any such director,
officer or controlling person and shall survive the transfer of such securities
by such Holder.
The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such persons
specifically for inclusion in any prospectus or registration statement or any
amendment or supplement thereto, or any preliminary prospectus.
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 9,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action; provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding paragraphs of this Section 9, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an
Page 7
indemnified party, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim, the indemnifying party shall be entitled to
participate in and to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by the party in connection
with the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof, the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(d) Other Indemnification. Indemnification similar to that
specified in paragraphs (a) through (c) of this Section 9 (with appropriate
modifications) shall be given by the Company and the Holders with respect to any
required registration or other qualification of securities under any Federal or
state law or regulation or any governmental authority other than the Act.
(e) Indemnification Payment. The indemnification required
by this Section 9 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
(f) Contribution. If the indemnification provided for in
this Agreement shall for any reason be unavailable or insufficient (other than
by reason of exceptions provided in those sections) to an indemnified party
under paragraphs (a), (b) and (d) of this Section 9 in respect to any loss,
claim, damage or liability, or any action in respect thereof, or referred to
therein, then each indemnifying party shall, in lieu of indemnifying such party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, in such
proportion as shall be appropriate to reflect the relative fault of the Company
on the one hand and any Holder on the other, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the Company
or such Holder, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 9 were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to in this Section 9 shall be deemed to
include, for purposes of this Section 9, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
10. Rule 144. So long as the Company has any securities
registered under
Page 8
Section 12 of the Exchange Act, the Company will file the reports required to be
filed by it under the Exchange Act and the rules and regulations adopted by the
Commission thereunder (or, if the Company is not required to file such reports,
will upon the request of Holders of a majority of the Registrable Shares, make
publicly available other information for a period of up to four months) and will
take such further action as such Holders may reasonably request, all to the
extent required from time to time to enable the Holders to sell Registrable
Shares without registration under the Securities Act within the limitation of
the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the Commission. Upon the request of such Holders, the
Company will deliver to such Holders a written statement as to whether it has
complied with such requirements.
11. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of Holders of a
majority of the Registrable Shares.
12. Notices. Any notice from one party to the other shall be in
writing and either delivered personally or by certified or registered mail,
postage prepaid, or by telegram, telecopier, or by overnight mail delivery by a
nationally recognized courier, and shall be deemed given when so delivered
personally or, if mailed or given by telegram or telecopier or overnight mail,
upon receipt thereof by the addressees, as follows:
If to the Company:
Signature Resorts, Inc.
Attention: Andrew D. Hutton, Esq.
5933 Century Boulevard, Suite 210
Los Angeles, California 90045
Telephone: (310) 348-1000
Telecopy: (310) 348-1010
with a copy to:
Edward H. Brown, Esq.
Schreeder, Wheeler & Flint
1600 Candler Building
127 Peachtree Street, N.E.
Atlanta, Georgia 30303
If to any Holder:
At its address as it appears on the register of holders of
Common Stock maintained by the Company.
13. Assignment. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns as hereinafter set forth in this Section 13. In
addition, and whether or not any express assignment shall have been made, the
provisions of this Agreement which are for the
benefit of the Holders shall also be for the benefit of and enforceable by any
subsequent holder ("Subsequent Holders") of any Registrable Shares, except any
Subsequent Holder with respect to Registrable Shares acquired in a public
offering pursuant to a Registration Statement or an exemption from registration
under Rule 144 under the Securities Act.
14. Descriptive Headings. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
15. Governing Law. The validity of this Agreement and all matters
relating to its interpretation and performance shall be interpreted in
accordance with the laws of the State of California applicable to contracts made
and fully performed therein, but without regard to principles of conflicts of
law. The courts in Los Angeles, California shall have exclusive jurisdiction
over any controversy arising under this Agreement and venue in Los Angeles is
appropriate.
16. Counterparts. This Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed an original, but
all such counterparts shall together constitute one and the same instrument.
17. Entire Agreement; Amendment. This Agreement contains all of
the terms agreed upon by the parties with respect to the subject matter herein
and there are no representations or understandings between the parties except as
provided in this Agreement. This Agreement may not be amended or modified in any
way except by a written amendment duly executed by each of the parties.
IN WITNESS WHEREOF, the parties have caused this Registration
Rights Agreement to be executed and delivered as of the date first above
written.
SIGNATURE RESORTS, INC.
By /s/ DEWEY W. CHAMBERS
--------------------------------
Title: Vice President and Treasurer
HOLDERS
/s/ MICHAEL V. PAULIN
-----------------------------------
Michael V. Paulin
/s/ ROSEMARIE PAULIN
-----------------------------------
Rosemarie Paulin
/s/ MAYA K. PAULIN
-----------------------------------
Maya K. Paulin
/s/ ANNEMARIE PAULIN
-----------------------------------
Annemarie Paulin
Page 1
EXHIBIT 10.2.11
FORM OF AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the
"Amendment") is dated as of _________, 1998, between Signature Resorts, Inc., a
Maryland corporation (the "Company"), and Osamu Kaneko (the "Executive").
WHEREAS, the Company and the Executive previously have entered
into that Employment Agreement, dated August 20, 1996 (the "Agreement"),
pursuant to which the Company currently employs the Executive pursuant to the
terms and conditions of the Agreement; and
WHEREAS, the Company and the Executive each have determined that
it would be to the advantage and best interest of the Company and the Executive
to enter into the Amendment and modify certain of the Executive's and the
Company's obligations and responsibilities under the Agreement; and
WHEREAS, this Amendment amends and restates the Agreement in its
entirey and shall supersede the Agreement in all respects;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The employment of the Executive by the Company as provided in
Section 1 will commence on ________, 1998 and will terminate at 12:01 a.m. on
________, 2000 (the "Expiration Date") unless automatically extended or sooner
terminated as hereinafter provided (such period, the "Employment Period").
Unless terminated by the Executive or the Company prior to ________, 2000,
this Agreement shall automatically renew on the terms set forth herein for a
second two-year period. If so renewed, no later than ________, 2002, the
Company shall notify the Executive with written notice as to whether the Company
intends to further renew or extend the Agreement (including proposals for such
further renewal which the Executive may accept, reject or negotiate, at his
discretion).
3. Position, Duties and Responsibilities.
(a) Position. The Executive hereby agrees to serve as Chief
Executive Officer of the Company's wholly-owned Japanese subsidiary, created or
to be created by the Company to conduct the Company's resort acquisition,
development and operations business in Japan and other Asian countries. The
Executive shall devote his best efforts and at least 50% of his full business
time and attention to the performance of services to the Company in his capacity
as Chief Executive Officer of
Page 2
the Company's wholly-owned Japanese subsidiary and as may reasonably be
requested by the Company's Board of Directors. The Company shall retain full
direction and control of the means and methods by which the Executive performs
the above services.
(b) Place of Employment. During the term of this Agreement, the
Executive shall perform the services required by this Agreement at the Company's
place of business in the Tokyo, Japan and/or the Los Angeles, California
metropolitan area; provided, however, that the Company will require the
Executive to travel extensively to other locations on the Company's business.
(c) Other Activities. Except with the prior written approval of
the Board (which the Board may grant or withhold in its sole and absolute
discretion), the Executive during the Employment Period, will not (i) accept any
other employment, (ii) serve on the board of directors or similar body of any
other business entity (except as otherwise set forth below), or (iii) engage,
directly or indirectly, in any other business activity (whether or not pursued
for pecuniary advantage) that is or may be competitive with, or that might place
him in a competing position to, that of the Company or any of its affiliates.
Notwithstanding the foregoing, the Company agrees that the Executive (or
affiliates of the Executive) shall be permitted (i) to undertake the activities
set forth in Section 8 and (ii) to make any other passive personal investment
that is not in a business activity that is directly or indirectly competitive
with the Company.
4. Compensation and Related Matters.
(a) Salary. During the Employment Period, the Company shall pay
the Executive a salary of not less than $140,000 during the first full year and
at such salary as determined by the Compensation Committee of the Board during
the second and subsequent years of the Executive's employment with the Company.
All salary is to be paid consistent with the standard payroll practices of the
Company (e.g., timing of payments and standard employee deductions, such as
income tax withholdings, social security, etc.). The Executive's performance and
salary shall be subject to review at the end of each fiscal year and increase
consistent with the standard practices of the Company.
(b) Business Expenses. The Company shall reimburse the Executive
in connection with the conduct of the Company's business upon presentation of
sufficient evidence of such expenditures consistent with the Company's policies
as in place from time to time.
(c) Other Benefits. The Executive shall be entitled to
participate in or receive health, welfare, life insurance, long-term disability
insurance, bonus plan and similar benefits as the Company provides generally
from time to time to its executives. Except as otherwise set forth in this
Section 4 and except with respect to the Company's obligations under any stock
option agreements previously entered into with the Executive, nothing herein
is intended, or shall be construed to require the Company to
Page 3
institute or continue any, or any particular, plan or benefits.
(d) Bonus. The Compensation Committee of the Board shall
establish, monitor, and oversee an incentive bonus program for the Executive
which will provide for payment of a cash bonus to the Executive in an amount up
to 100% of the Executives then current base annual salary if certain performance
objectives established by the Compensation Committee for the Executive (such as
specified targets of growth in revenues and earnings per share) are achieved.
The Executive shall have the opportunity to be considered for additional
performance-based bonus compensation at the sole and absolute discretion of the
Board, upon notification to the Executive; however, the Company makes no
commitment to the Executive that any performance-based bonus compensation will
be paid to the Executive.
(e) Fringe Benefits. The Executive will be entitled to fringe
benefits as may be determined or granted from time-to-time by the Board.
(f) Vacation. The Executive shall be entitled to four vacation
weeks (20 days) in each calendar year on a pro-rated basis. The Executive will
be entitled to all Company holidays.
(g) Performance Reviews. At the end of each fiscal year, the
Board will review the Executive's job performance and will provide the Executive
a written review of the Executive's job performance during the prior year and
implement any Board determined revisions to the Executive's base salary, the
Executive's merit bonus, the Executive's title and/or the Executive's
responsibility at the Company; provided, however, that the provisions set forth
in this Agreement with respect to the Executive's compensation and the terms and
conditions of the Executive's employment at the Company cannot be modified by
the Board in a manner which would result in less favorable or beneficial terms
or conditions thereof being imposed on the Executive without the Executive's
full concurrence and consent.
5. Termination. The Executive's employment hereunder shall be, or may
be, as the case may be, terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
upon his death.
(b) Disability. The Executive's employment hereunder shall
terminate on the Executive's physical or mental disability or infirmity which,
in the opinion of a competent physician selected by the Board, renders the
Executive unable to perform his duties under this Agreement for more than 120
days during any 180-day period.
(c) Cause. The Company may terminate the Executive's employment
hereunder for "Cause." Cause shall mean (i) Employee's material breach of any of
the terms of this Agreement, (ii) his conviction of a crime involving moral
turpitude or constituting a felony under the laws of any state, the District of
Columbia or of the
Page 4
United States, or (iii) his gross negligence, willful misconduct or fraud in the
performance of his duties hereunder.
(d) Employment-At-Will/Termination for Any Reason.
Notwithstanding the term of this Agreement having a duration of two years and
Sections 2 and 4 hereof referring to extensions of this Agreement and the annual
salary to be paid to the Executive during each of the first five full years of
his employment with the Company, nothing in this Agreement should be construed
as to confer any right of the Executive to be employed by the Company for a
fixed or definite term. Subject to Section 6 hereof, the Executive hereby agrees
that the Company may dismiss him under this Section 5(d) without regard (i) to
any general or specific policies (whether written or oral) of the Company
relating to the employment or termination of its employees, or (ii) to any
statements made to the Executive, whether made orally or contained in any
document, pertaining to the Executive's relationship with the Company.
Notwithstanding anything to the contrary contained herein, including Sections 2
and 4, the Executive's employment with the Company is not for any specified
term, is at will and may be terminated by the Company at any time by delivery of
a notice of termination to the Executive, for any reason, with or without cause,
without liability except with respect to the payments provided for by Section 6.
(e) Voluntary Resignation. The Executive may voluntarily resign
his position and terminate his employment with the Company at any time by
delivery of a written notice of resignation to the Company (the "Notice of
Resignation"). The Notice of Resignation shall set forth the date such
resignation shall become effective (the "Date of Resignation"), which date
shall, in any event, be at least ten (10) days and no more than thirty (30) days
from the date the Notice of Resignation is delivered to the Company. At its
option, the Company may reduce such notice period to any length, upon thirty
(30) days written notice to the Executive.
(f) Notice. Any termination of the Executive's employment by the
Company shall be communicated by written Notice of Termination to the Executive.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
that shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
(g) "Date of Termination" shall mean (i) if the Executive's
employment is terminated by his death, the date of his death, (ii) if the
Executive's employment is terminated by reason of his disability, the date of
the opinion of the physician referred to in Section 5(b), above, (iii) if the
Executive's employment is terminated by the Company for Cause pursuant to
subsection 5(c) above, or without Cause by the Company pursuant to subsection
5(d) above, the date specified in the Notice of Termination and (iv) if the
Executive voluntarily resigns pursuant to subsection 5(e) above, the date of the
Notice of Resignation.
Page 5
(h) Termination Obligations.
(i) The Executive hereby acknowledges and agrees that all
personal property and equipment furnished to or prepared by the
Executive in the course of or incident to his employment, belongs to the
Company and shall be promptly returned to the Company upon termination
of the Employment Period. "Personal property" includes, without
limitation, all books, manuals, records, reports, notes, contracts,
lists, blueprints, and other documents, or materials, or copies thereof
(including computer files), and all other proprietary information
relating to the business of the Company. Following termination, the
Executive will not retain any written or other tangible material
containing any proprietary information of the Company.
(ii) Upon termination of the Employment Period, the
Executive shall be deemed to have resigned from all offices and
directorships then held with the Company or any affiliate.
(iii) The representations and warranties contained herein
and the Executive's obligations under Sections 5(h), 7, 8, 9 and 15
through 18 shall survive termination of the Employment Period and the
expiration of this Agreement.
(i) Release. In exchange for the Company entering into the
Agreement, the Executive agrees that, at the time of his resignation or
termination from the Company, he will resign from the Board and will execute a
release acceptable to the Company of all liability of the Company and its
officers, shareholders, employees and directors to the Executive in connection
with or arising out of his employment with the Company, except with respect to
any then-vested rights under any stock option agreement and except with respect
to any Severance Payments which may be payable to him under the terms of the
Agreement.
6. Compensation Upon Termination.
(a) Death. If the Executive's employment shall be terminated
pursuant to Section 5(a), the Company shall pay the Executive monthly his base
salary payable pursuant to Section 4(a) and one-twelfth of any bonus payable
pursuant to Section 4(d) at the most recent annual amount received, or entitled
to be received, by the Executive (the "Severance Payment") for a period of two
years following the Date of Termination. At the Executive's own expense, the
Executive's dependents shall also be entitled to any continuation of health
insurance coverage rights under any applicable law.
(b) Disability. If the Executive's employment shall be terminated
by reason of disability pursuant to Section 5(c), the Executive shall receive
the Severance Payment for the lesser of two years or the duration of such
disability; provided that payments so made to the Executive during the
disability shall be reduced by the sum of the amounts, if any, payable to the
Executive at or prior to the time of any such payment under any
Page 6
disability benefit plan of the Company. At the Executive's own expense, the
Executive and his dependents shall also be entitled to any continuation of
health insurance coverage rights under any applicable law.
(c) Cause. If the Executive's employment shall be terminated for
Cause pursuant to Section 5(c) hereof, the Company shall pay the Executive his
salary and any bonus then payable pursuant to Section 4(d)) through the Date of
Termination. At the Executive's own expense, the Executive and his dependents
shall also be entitled to any continuation of health insurance coverage rights
under any applicable law.
(d) Other Terminations by the Company. If the Company shall
terminate the Executive's employment without cause pursuant to Section 5(d)
hereof, the Company shall pay the Executive the Severance Payment for a period
of two (2) years from the Date of Termination. The Executive and his dependents
shall also be entitled to any continuation of health insurance coverage rights
under any applicable law.
(e) Voluntary Resignation. If the Executive terminates his
employment with the Company pursuant to Section 5(g) hereof for "Good Cause",
the Company shall pay the Executive the Severance Payment for a period of two
years from the Date of Resignation. If the Executive terminates his employment
with the Company pursuant to Section 5(g) hereof without "Good Cause," the
Company shall have no obligation to compensate the Executive following the Date
of Resignation. In any event, at the Executive's own expense, the Executive and
his dependents shall be entitled to any continuation of health insurance
coverage rights under any applicable law.
For purposes of this Agreement, "Good Cause" shall mean, without
the express written consent of Executive, the occurrence of any of the following
events unless such events are substantially corrected within 30 days following
written notification by Executive to the Company that he intends to terminate
his employment hereunder for one of the reasons set forth below:
(i) Any material alteration, reduction or diminution in the
duties, responsibilities and status of Executive's
position;
(ii) a material breach by the Company of any provision of this
Agreement; and
(iii) the occurrence of a "Change in Control."
As used in this Agreement, "Change in Control" means the
occurrence of any of the following: (i) the adoption of a plan relating to the
liquidation or dissolution of the Company, (ii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than any of Osamu Kaneko,
Andrew J. Gessow and Steven C. Kenninger or their affiliates (the "Principals"),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of
Page 7
more than 50% of the total voting power of the total outstanding voting stock of
the Company on a fully diluted basis or (iii) the consummation of the first
transaction (including, without limitation, any merger or consolidation) the
result of which is that any person or group, other than the Principals, becomes
the beneficial owner (as defined above), directly or indirectly, of more than
50% of the total voting power of the total outstanding voting stock of the
Company.
The Executive understands that any voluntary resignation by him
as a result of any personal or family reasons not otherwise set forth in this
Section 6(e) shall not constitute "Good Cause."
(f) The Company will be entitled to offset and reduce each month
the amount of the monthly Severance Payment otherwise payable to the Executive
hereunder by the amount of the Executive's prior month's earnings (if any) from
post-Company full time employment (including both salary, bonus and other cash
or cash equivalent compensation) at a subsequent full time employer or in
connection with a full time consulting practice or other self-employment or any
full time venture founded by the Executive; provided, however, that the Company
shall not be entitled to any Severance Payment offset or reduction as a result
of any earnings or income generated by the Executive from part-time consulting
work, unless and until such consulting work becomes a full time endeavor.
(g) In the event of any Termination pursuant to Section 5, the
Executive shall be entitled to retain any and all options to purchase capital
stock of the Company granted to the Executive pursuant to the terms and
conditions of any stock option agreement between the Company and the Executive
that have vested as of the date of such Termination.
(h) Any Severance Payment made pursuant to this Section 6 shall
be payable in equal monthly installments over the required duration set forth in
Sections 6(a) through 6(e).
(i) The continuing obligation of the Company to make the
Severance Payment to the Executive is expressly conditioned upon the Executive
complying and continuing to comply with his obligations and covenants under
Sections 7 and 8 of this Agreement following termination of employment with the
Company.
7. Confidentiality and Non-Solicitation Covenants.
(a) Confidentiality. In addition to the agreements set forth in
Section 5(h)(i), the Executive hereby agrees that the Executive will not, during
the Employment Period or at any time thereafter directly or indirectly disclose
or make available to any person, firm, corporation, association or other entity
for any reason or purpose whatsoever, any Confidential Information (as defined
below). The Executive agrees that, upon termination of his employment with the
Company, all Confidential Information in his possession that is in written or
other tangible form (together with all copies or duplicates
Page 8
thereof, including computer files) shall be returned to the Company and shall
not be retained by the Executive or furnished to any third party, in any form
except as provided herein; provided, however, that the Executive shall not be
obligated to treat as confidential, or return to the Company copies of any
Confidential Information that (i) was publicly known at the time of disclosure
to the Executive, (ii) becomes publicly known or available thereafter other than
by any means in violation of this Agreement or any other duty owed to the
Company by any person or entity or (iii) is lawfully disclosed to the Executive
by a third party. As used in this Agreement the term "Confidential Information"
means: information disclosed to the Executive or known by the Executive as a
consequence of or through his relationship with the Company, about the owners,
customers, employees, business methods, public relations methods, organization,
procedures or finances, including, without limitation, information of or
relating to owner or customer lists of the Company and its affiliates.
(b) Non-Solicitation. In addition, the Executive hereby agrees
that during the Employment Period and at all times thereafter, regardless of the
reason or circumstances of termination of employment with the Company, the
Executive will not, either on his own account or jointly with or as a manager,
agent, officer, employee, consultant, partner, joint venturer, owner or
shareholder or otherwise on behalf of any other person, firm or corporation, (i)
carry on or be engaged or interested directly or indirectly in, or solicit, the
manufacture or sale of goods or provision of services to any person, firm or
corporation which, at any time during the Employment Period has been or is a
customer of or in the habit of dealing with the Company in its business, (ii)
endeavor directly or indirectly to canvas or solicit in competition with Company
or to interfere with the supply of orders for goods or services from or by any
person, firm or corporation which during the Employment Period has been or is a
supplier of goods or services to Company or (iii) directly or indirectly solicit
or attempt to solicit away from Company any of its officers or employees or
offer employment to any person who, on or during the 6 months immediately
preceding the date of such solicitation or offer, is or was an officer or
employee of Company.
8. Covenant Not to Compete.
(a) The Executive agrees that during the Employment Period he
will devote at least 50% of his full business time to the business of the
Company and not engage in any competitive businesses. Subject to such full-time
requirement and the restrictions set forth below in this Section 8 and Section
3(c) above, the Executive shall be permitted to continue his existing business
investments and activities and may pursue additional business investments;
provided that the Executive not serve as officer of any public company resulting
from such business investments. The Executive agrees that he shall not (i)
invest in, manage, consult or participate in any way in any other timeshare
business (in either an active or passive manner), (ii) participate in or advise
any business wherein timeshare is a relevant business segment or (iii) act for
or on behalf of any business that intends to enter or participate in the
timeshare business, in each case unless the independent members of the Company's
Board of Directors determine that such action is in the best interest of the
Company. Notwithstanding the
Page 9
foregoing, the Executive may purchase stock as a stockholder in any publicly
traded company, including any company which is involved in the timeshare
business; provided that the Executive does not own (together or separately or
through his affiliates) more than 5% of any company (other than the Company) in
the timeshare business. In addition, the Executive shall not invest (directly or
indirectly) in any timeshare property in the hospitality business (including any
condominium project) or any property where the business plan therefor includes
an intention to convert the property to timeshare, unless the independent
members of the Company's Board of Directors determine that such an investment is
in the best interest of the Company.
(b) Notwithstanding anything to the contrary in this Section 8 or
elsewhere in this Agreement, the Executive and/or affiliates thereof is
permitted, at his option, to pursue the development of a timeshare resort on
that certain property located on Harbor Island, San Diego, California, owed by
the Port of San Diego. In the event the Executive or affiliate thereof so
acquires such an interest, the Company has the option, at its election (which
the Company may exercise at any time), to require the Executive or affiliate
thereof to sell such interest to the Company at a price not to exceed 50% of the
cumulative actual, direct cost incurred by the Executive or affiliate thereof in
pursuing the development or acquisition of such property. In addition, at the
direction of the independent members of the Company's Board of Directors, at any
time following the decision by the Company not to acquire such interest, the
Executive agrees to sell his interest in such property, and to divest himself of
any interest in any affiliate possessing any controlling or managing interest
therein, within six months after receipt of notice from the Company to do so,
unless the independent members of the Board determine that such investment by or
interest held by the Executive is in the best interest of the Company.
(c) The provisions of this Section 8 shall survive for two years
following any termination of employment, regardless of whether the termination
is for "Good Cause" or otherwise.
9. Injunctive Relief and Enforcement. In the event of breach by the
Executive of the terms of Sections 5(h)(i), 7 or 8, and only following mediation
or attempted mediation as set forth in Section 16 below (unless the Company is
suffering irreparable injury, in which case Section 16 will not prevent the
Company from seeking injunctive relief against the Executive in any court or
forum), the Company shall be entitled to institute legal proceedings to enforce
the specific performance of this Agreement by the Executive and to enjoin the
Executive from any further violation of Sections 5(h)(i), 7 or 8 and to exercise
such remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement. The Executive
acknowledges, however, that the remedies at law for any breach by him of the
provisions of Sections 5(h)(i), 7 or 8 may be inadequate. In addition, in the
event the agreements set forth in Sections 5(h)(i), 7 or 8 shall be determined
by any court of competent jurisdiction to be unenforceable by reason of
extending for too great a period of time or over too great a geographical area
or by reason of being too extensive in any other respect, each such agreement
shall be
Page 10
interpreted to extend over the maximum period of time for which it may be
enforceable and to the maximum extent in all other respects as to which it may
be enforceable, and enforced as so interpreted, all as determined by such court
in such action.
10. Notice. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered when
transmitted by telecopy with receipt confirmed, or one day after delivery to an
overnight air courier guaranteeing next day delivery, addressed as follows:
If to the Executive: Osamu Kaneko
c/o Signature Resorts, Inc.
5933 West Century Boulevard, Suite 210
Los Angeles, California 90045
If to the Company: Signature Resorts, Inc.
1875 South Grant Street, Suite 650
San Mateo, California 94402
Attention: Andrew D. Hutton
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms contained in
Sections 5(h), 7 or 8 hereto shall for any reason be held to be excessively
broad with regard to time, duration, geographic scope or activity, that term
shall not be deleted but shall be reformed and constructed in a manner to enable
it to be enforced to the extent compatible with applicable law.
12. Assignment. This Agreement may not be assigned by the Executive, but
may be assigned by the Company to any successor to its business and will inure
to the benefit and be binding upon any such successor.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Headings. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
15. Choice of Law. This Agreement shall be construed, interpreted and
the
Page 11
rights of the parties determined in accordance with the laws of the State of
Maryland (without reference to the choice of law provisions of Maryland), except
with respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.
16. Mediation. Subject to any irreparable injury being suffered by the
Company giving rise to the right of the Company to seek injunctive relief
against the Executive pursuant to Section 9 hereof, in the event that there
shall be a dispute among the parties arising out of or relating to this
Agreement, or the breach thereof, the parties agree that such dispute shall be
resolved by final and binding mediation in Los Angeles, California, before a
mediator and on terms and conditions mutually acceptable to the parties;
provided, however, that if the parties cannot agree on the terms and conditions
of such mediation, such terms and conditions shall be established by the
mediator. Any award issued as a result of such mediation shall be final and
binding between the parties thereto, and shall be enforceable by any court
having jurisdiction over the party against whom enforcement is sought. The fees
and expenses relating to such mediation (with the exception of the Executive's
attorneys' fees, if any) or any action to enforce a mediation award shall be
paid by the Company.
17. LIMITATION ON LIABILITIES. IF EITHER THE EXECUTIVE OR THE COMPANY IS
AWARDED ANY DAMAGES AS COMPENSATION FOR ANY BREACH OR ACTION RELATED TO THIS
AGREEMENT, A BREACH OF ANY COVENANT CONTAINED IN THIS AGREEMENT (WHETHER EXPRESS
OR IMPLIED BY EITHER LAW OR FACT), OR ANY OTHER CAUSE OF ACTION BASED IN WHOLE
OR IN PART ON ANY BREACH OF ANY PROVISION OF THIS AGREEMENT, SUCH DAMAGES SHALL
BE LIMITED TO CONTRACTUAL DAMAGES AND SHALL EXCLUDE (I) PUNITIVE DAMAGES, AND
(II) CONSEQUENTIAL AND/OR INCIDENTAL DAMAGES (E.G., LOST PROFITS AND OTHER
INDIRECT OR SPECULATIVE DAMAGES). THE MAXIMUM AMOUNT OF DAMAGES THAT THE
EXECUTIVE MAY RECOVER FOR ANY REASON SHALL BE THE AMOUNT EQUAL TO ALL AMOUNTS
OWED (BUT NOT YET PAID) TO THE EXECUTIVE PURSUANT TO THIS AGREEMENT THROUGH ITS
NATURAL TERM OR THROUGH ANY SEVERANCE PERIOD, PLUS INTEREST ON ANY DELAYED
PAYMENT AT THE MAXIMUM RATE PER ANNUM ALLOWABLE BY APPLICABLE LAW FROM AND AFTER
THE DATE(S) THAT SUCH PAYMENTS WERE DUE.
18. WAIVER OF JURY TRIAL. TO THE EXTENT APPLICABLE, EACH OF THE PARTIES
TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
19. Entire Agreement. This Agreement contains the entire agreement and
understanding between the Company and the Executive with respect to the
employment of the Executive by the Company as contemplated hereby, and no
Page 12
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Executive and the Board of
Directors of the Company.
20. The Executive's Acknowledgment. The Executive acknowledges (a) that
he has had the opportunity to consult with independent counsel of his own choice
concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
IN WITNESS WHEREOF, the parties have executed this Amendment to
the Agreement as of the date and year first above written.
SIGNATURE RESORTS, INC.
Name:
Title:
EXECUTIVE
Osamu Kaneko
EXHIBIT 10.6.14
Execution Counterpart
$100,000,000
CREDIT AGREEMENT
AMONG
SIGNATURE RESORTS, INC.,
CERTAIN LENDERS PARTY HERETO,
NATIONSBANK OF TEXAS, N.A., AS ADMINISTRATIVE LENDER,
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