Table of Contents
As
filed with the Securities and Exchange Commission on March 11, 2011
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIAMOND RESORTS CORPORATION
(Exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
| Maryland (State or other jurisdiction of incorporation or organization) |
7011 (Primary Standard Industrial Classification Code Number) |
95-4582157 (I.R.S. Employer Identification Number) |
10600 West Charleston Boulevard
Las Vegas, Nevada 89135
Tel: (702) 684-8000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Elizabeth Brennan, Esq.
Executive Vice President and General Counsel
Diamond Resorts Corporation
10600 West Charleston Boulevard
Las Vegas, Nevada 89135
(702) 823-7550
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Executive Vice President and General Counsel
Diamond Resorts Corporation
10600 West Charleston Boulevard
Las Vegas, Nevada 89135
(702) 823-7550
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With a copy to:
Howard S. Lanznar, Esq.
Katten Muchin Rosenman LLP
525 West Monroe Street
Chicago, Illinois 60661
(312) 902-5200
Howard S. Lanznar, Esq.
Katten Muchin Rosenman LLP
525 West Monroe Street
Chicago, Illinois 60661
(312) 902-5200
Approximate date of commencement of proposed exchange offer: As soon as practicable after this
Registration Statement is declared effective.
If the securities being registered on this Form are being offered in connection with the formation
of a holding company and there is compliance with General Instruction G, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this
Form is a post–effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
| If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction: | ||
| Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) o | ||
| Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) o |
CALCULATION OF REGISTRATION FEE
| Amount | Proposed | Proposed | ||||||||||||
| Title of each class of | to be | maximum offering | maximum aggregate | Amount of | ||||||||||
| securities to be registered | registered | price per unit (1) | offering price (1) | registration fee | ||||||||||
12% Senior Secured Notes due 2018 |
$425,000,000 | 100% | $425,000,000 | $49,343 | ||||||||||
Guarantees of 12% Senior Secured Notes due
2018 (2) |
N/A | N/A | N/A | N/A (3) | ||||||||||
| (1) | Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f) under the Securities Act of 1933, as amended (the “Securities Act”). | |
| (2) | See inside facing page for table of registrant guarantors. | |
| (3) | Pursuant to Rule 457(n) under the Securities Act, no separate filing fee is required for the guarantees. |
The Registrants hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrants shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission, acting pursuant to
said Section 8(a), may determine.
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TABLE OF ADDITIONAL REGISTRANT GUARANTORS
| State or Other | I.R.S. | Industrial | ||||||||||
| Jurisdiction of | Employer | Classification | ||||||||||
| Exact Name of Registrant Guarantor as Specified in its Charter (or | Incorporation or | Identification | Code | |||||||||
| Other Organizational Document) (1) | Organization | Number | Number | |||||||||
Diamond Resorts Parent, LLC |
NV | 26-2349909 | 7011 | |||||||||
Diamond Resorts Holdings, LLC |
NV | 27-5181614 | 7011 | |||||||||
AKGI-St. Maarten N.V. |
DE | 59-3324734 | 7011 | |||||||||
Chestnut Farms, LLC |
NV | 01-0905882 | 7011 | |||||||||
Cumberland Gate, LLC |
DE | 61-1596179 | 7011 | |||||||||
Diamond Resorts California Collection Development, LLC |
DE | 20-0292225 | 7011 | |||||||||
Diamond Resorts Centralized Services Company |
DE | 82-0554601 | 7011 | |||||||||
Diamond Resorts Citrus Share Holding, LLC |
DE | 33-1014939 | 7011 | |||||||||
Diamond Resorts Coral Sands Development, LLC |
DE | 33-1014958 | 7011 | |||||||||
Diamond Resorts Cypress Pointe I Development, LLC |
DE | 33-1014959 | 7011 | |||||||||
Diamond Resorts Cypress Pointe II Development, LLC |
DE | 33-1014960 | 7011 | |||||||||
Diamond Resorts Cypress Pointe III Development, LLC |
DE | 33-1014961 | 7011 | |||||||||
Diamond Resorts Daytona Development, LLC |
DE | 33-1014956 | 7011 | |||||||||
Diamond Resorts Developer and Sales Holding Company |
DE | 86-0787595 | 7011 | |||||||||
Diamond Resorts Epic Mortgage Holdings, LLC |
DE | 33-1014921 | 7011 | |||||||||
Diamond Resorts Fall Creek Development, LLC |
DE | 33-1014962 | 7011 | |||||||||
Diamond Resorts Finance Holding Company |
DE | 82-0554621 | 7011 | |||||||||
Diamond Resorts Financial Services, Inc. |
NV | 88-0410455 | 7011 | |||||||||
Diamond Resorts Grand Beach I Development, LLC |
DE | 33-1014963 | 7011 | |||||||||
Diamond Resorts Grand Beach II Development, LLC |
DE | 33-1014965 | 7011 | |||||||||
Diamond Resorts Greensprings Development, LLC |
DE | 33-1014966 | 7011 | |||||||||
Diamond Resorts Hawaii Collection Development, LLC |
DE | 33-1014926 | 7011 | |||||||||
Diamond Resorts Hilton Head Development, LLC |
DE | 33-1014957 | 7011 | |||||||||
Diamond Resorts International Club, Inc. |
FL | 59-3510037 | 7011 | |||||||||
Diamond Resorts International Marketing, Inc. |
CA | 95-4484297 | 7011 | |||||||||
Diamond Resorts Las Vegas Development, LLC |
DE | 33-1014971 | 7011 | |||||||||
Diamond Resorts Management and Exchange Holding Company |
DE | 33-1014911 | 7011 | |||||||||
Diamond Resorts Management, Inc. |
AZ | 86-0713421 | 7011 | |||||||||
Diamond Resorts Mortgage Holdings, LLC |
DE | 82-0554625 | 7011 | |||||||||
Diamond Resorts Palm Springs Development, LLC |
DE | 33-1014935 | 7011 | |||||||||
Diamond Resorts Poco Diablo Development, LLC |
DE | 33-1014970 | 7011 | |||||||||
Diamond Resorts Poipu Development, LLC |
DE | 33-1014968 | 7011 | |||||||||
Diamond Resorts Polo Development, LLC |
NV | 26-0145739 | 7011 | |||||||||
Diamond Resorts Port Royal Development, LLC |
DE | 33-1014973 | 7011 | |||||||||
Diamond Resorts Powhatan Development, LLC |
DE | 33-1014974 | 7011 | |||||||||
Diamond Resorts Residual Assets Development, LLC |
DE | 33-1014975 | 7011 | |||||||||
Diamond Resorts Residual Assets Finance, LLC |
DE | 33-1014919 | 7011 | |||||||||
Diamond Resorts Residual Assets M&E, LLC |
DE | 33-1014914 | 7011 | |||||||||
Diamond Resorts Ridge on Sedona Development, LLC |
DE | 33-1014976 | 7011 | |||||||||
Diamond Resorts Ridge Pointe Development, LLC |
DE | 33-1014977 | 7011 | |||||||||
Diamond Resorts San Luis Bay Development, LLC |
DE | 33-1014978 | 7011 | |||||||||
Diamond Resorts Santa Fe Development, LLC |
DE | 33-1014979 | 7011 | |||||||||
Diamond Resorts Scottsdale Development, LLC |
DE | 33-1014954 | 7011 | |||||||||
Diamond Resorts Sedona Springs Development, LLC |
DE | 33-1014980 | 7011 | |||||||||
Diamond Resorts Sedona Summit Development, LLC |
DE | 33-1014981 | 7011 | |||||||||
Diamond Resorts St. Croix Development, LLC |
DE | 33-1014982 | 7011 | |||||||||
Diamond Resorts Steamboat Development, LLC |
DE | 33-1014984 | 7011 | |||||||||
Diamond Resorts Tahoe Beach & Ski Development, LLC |
DE | 33-1014986 | 7011 | |||||||||
Diamond Resorts U.S. Collection Development, LLC |
DE | 33-1014915 | 7011 | |||||||||
Diamond Resorts Villa Mirage Development, LLC |
DE | 33-1014985 | 7011 | |||||||||
Diamond Resorts Villas of Sedona Development, LLC |
DE | 33-1014987 | 7011 | |||||||||
Diamond Resorts West Maui Development, LLC |
DE | 33-1014927 | 7011 | |||||||||
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| State or Other | I.R.S. | Industrial | ||||||||||
| Jurisdiction of | Employer | Classification | ||||||||||
| Exact Name of Registrant Guarantor as Specified in its Charter (or | Incorporation or | Identification | Code | |||||||||
| Other Organizational Document) (1) | Organization | Number | Number | |||||||||
Foster Shores, LLC |
MO | 01-0905934 | 7011 | |||||||||
George Acquisition Subsidiary, Inc. |
NV | 58-2385599 | 7011 | |||||||||
Ginger Creek, LLC |
DE | 32-0262324 | 7011 | |||||||||
Grand Escapes, LLC |
DE | 20-1884181 | 7011 | |||||||||
International Timeshares Marketing, LLC |
DE | 33-1014941 | 7011 | |||||||||
Lake Tahoe Resort Partners, LLC |
CA | 95-4569152 | 7011 | |||||||||
Mazatlan Development Inc. |
WA | 91-1491324 | 7011 | |||||||||
MMG Development Corp. |
FL | 65-0530260 | 7011 | |||||||||
Poipu Resort Partners, L.P. |
HI | 95-4501724 | 7011 | |||||||||
Resort Management International, Inc. |
CA | 95-4582082 | 7011 | |||||||||
Resorts Development International, Inc. |
NV | 88-0198739 | 7011 | |||||||||
Walsham Lake, LLC |
MO | 01-0905847 | 7011 | |||||||||
West Maui Resort Partners, L.P. |
DE | 99-0327624 | 7011 | |||||||||
| (1) | The address and telephone number of each registrant guarantor’s principal executive offices is 10600 West Charleston Boulevard, Las Vegas, Nevada 89135, (702) 684-8000. |
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The information in this prospectus is not complete and may be changed. We may not exchange these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to exchange these securities and it is not soliciting an offer to exchange these securities in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED MARCH 11, 2011
PROSPECTUS
$425,000,000
Diamond Resorts Corporation
Diamond Resorts Corporation is offering to exchange all of its outstanding $425,000,000 12%
Senior Secured Notes due 2018 (the “outstanding notes”) for an equal amount of 12% Senior Secured
Notes due 2018 (the “exchange notes”), which have been registered under the Securities Act of 1933,
as amended (the “Securities Act”).
The Exchange Offer
| • | We will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradable. | ||
| • | You may withdraw tenders of outstanding notes at any time prior to the expiration date of the exchange offer. | ||
| • | The exchange offer expires at 11:59 p.m., New York City time, on , 2011, unless extended. We do not currently intend to extend the expiration date. | ||
| • | The exchange of outstanding notes for exchange in the exchange offer will not be a taxable event for U.S. federal income tax purposes. | ||
| • | We will not receive any proceeds from the exchange offer. |
The Exchange Notes
| • | The exchange notes are being offered in order to satisfy certain of our obligations under the registration rights agreement entered into in connection with the placement of the outstanding notes. | ||
| • | The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be freely tradable. | ||
| • | Each of Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC and all of Diamond Resorts Corporation’s existing and future direct or indirect U.S. restricted subsidiaries jointly and severally, irrevocably and unconditionally guarantee, on a secured senior basis, the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all obligations of Diamond Resorts Corporation under the outstanding notes, exchange notes and the indenture governing the notes. | ||
| • | The exchange notes and the guarantees will be secured by first-priority liens on all Diamond Resorts Corporation’s and the guarantors’ assets, other than real property and consumer loans, subject to certain exceptions and permitted liens. |
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Resales of Exchange Notes
| • | The exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. We do not plan to list the exchange notes on a national market. |
All untendered outstanding notes will continue to be subject to the restrictions on transfer
set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not
be offered or sold, unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable state securities laws.
Other than in connection with the exchange offer, we do not currently anticipate that we will
register the outstanding notes under the Securities Act.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange
offer must acknowledge that it will deliver a prospectus in connection with any resale of such
exchange notes. The letter of transmittal states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the
meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. We have agreed that, for a
period of 180 days after the expiration date (as defined herein), we will make this prospectus
available to any broker-dealer for use in connection with any such resale. See “Plan of
Distribution.”
You should consider carefully the risk factors beginning on page 17 of this prospectus before
participating in the exchange offer.
The
notes and related guarantees described in this prospectus have not been recommended by
or approved by the Securities and Exchange Commission, or the SEC, or any other federal or state
securities commission or regulatory authority, nor has the SEC or any other such federal or state
securities commission or regulatory authority passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2011.
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You should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with different information. The prospectus may be used only for
the purposes for which it has been published and no person has been authorized to give any
information not contained herein. If you receive any other information, you should not rely on it.
We are not making an offer of these securities in any state where the offer is not permitted. The
information in this prospectus may only be accurate as of the date hereof.
iii
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INDUSTRY AND MARKET DATA
Certain market and industry data included in this prospectus have been obtained from
third-party sources that we believe to be reliable, including the American Resort Development
Association, or ARDA. Market estimates are calculated by using independent industry publications
and other publicly available information in conjunction with our assumptions about our markets. We
have not independently verified such information and cannot assure you of its accuracy or
completeness. While we are not aware of any misstatements regarding any market, industry or similar
data presented herein, such data involves risks and uncertainties and are subject to change based
on various factors, including those discussed under the headings “Cautionary Statement Regarding
Forward-Looking Statements” and “Risk Factors” in this prospectus.
TRADEMARKS
As used in this prospectus, Diamond Resorts International® and THE Club®
are trademarks of the Company. This prospectus also refers to brand names, trademarks or service
marks of other companies. All brand names and other trademarks or service marks cited in this
prospectus are the property of their respective holders.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. You can identify these statements by the
fact that they do not relate strictly to historical or current facts. We have tried to identify
forward-looking statements in this prospectus by using words such as “anticipates,” “estimates,”
“expects,” “intends,” “plans” and “believes,” and similar expressions or future or conditional
verbs such as “will,” “should,” “would,” “may” and “could.” These forward-looking statements
include, among others, statements relating to our future financial performance, our business
prospects and strategy, anticipated financial position, liquidity and capital needs and other
similar matters. These forward-looking statements are based on management’s current expectations
and assumptions about future events, which are inherently subject to uncertainties, risks and
changes in circumstances that are difficult to predict.
Although we believe that our expectations are based on reasonable assumptions, our actual
results may differ materially from those expressed in, or implied by, the forward-looking
statements included in this prospectus as a result of various factors, including, among others:
| • | adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries; | ||
| • | adverse changes to, or interruptions in, relationships with our affiliates and other third parties, including our hospitality management contracts; | ||
| • | our ability to maintain a sufficient inventory of vacation ownership interests, or VOIs, for sale to customers without expending significant capital to develop or acquire additional resort properties; | ||
| • | our ability to sell, securitize or borrow against the consumer loans that we generate; | ||
| • | decreased demand from prospective purchasers of VOIs; | ||
| • | declines or disruptions in the travel industry; | ||
| • | adverse events or trends in vacation destinations and regions where our resorts are located; | ||
| • | changes in our senior management; | ||
| • | our ability to comply with regulations applicable to the vacation ownership industry; | ||
| • | the effects of our indebtedness and our compliance with the terms thereof; |
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| • | our ability to successfully implement our growth strategy; | ||
| • | our ability to compete effectively; and | ||
| • | other risks and uncertainties discussed in “Risk Factors” and elsewhere in this prospectus. |
Accordingly, before you decide to tender outstanding notes in the exchange offer, you should
read this prospectus completely and with the understanding that our actual future results may be
materially different from what we expect.
Forward-looking statements speak only as of the date of this prospectus. Except as expressly
required under federal securities laws and the rules and regulations of the SEC, we do not have any
intention, and do not undertake, to update any forward-looking statements to reflect events or
circumstances arising after the date of this prospectus, whether as a result of new information or
future events or otherwise. You should not place undue reliance on the forward-looking statements
included in this prospectus or that may be made elsewhere from time to time by us, or on our
behalf. All forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
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PROSPECTUS SUMMARY
The following summary highlights selected information contained elsewhere in this
prospectus but does not contain all the information that is important to you. You should read this
entire prospectus carefully, including the section titled “Risk Factors” and our consolidated
financial statements included elsewhere in this prospectus before you decide to tender outstanding
notes in the exchange offer. Except as otherwise stated or required by context, references in this
prospectus to the “Company,” “we,” “us” and “our” refer to Diamond Resorts Parent, LLC and its
subsidiaries, including Diamond Resorts Corporation. All financial information contained in this
prospectus is that of Diamond Resorts Parent, LLC.
Company Overview
We are one of the world’s largest companies in the vacation ownership industry, with an
ownership base of more than 380,000 families and a network of 196 resorts located in 28 countries
throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, Europe, Asia,
Australia and Africa. Our resort network includes 69 Diamond Resorts International-branded
properties, which we manage, and 127 affiliated resorts, which we do not manage and which do not
carry our brand, but are a part of our network and are consequently available for our members to
use as vacation destinations.
Our operations consist of three interrelated businesses that provide us with diversified and
stable cash flow: (i) hospitality and management services; (ii) marketing and sales of vacation
ownership interests, or VOIs; and (iii) consumer financing for purchasers of our VOIs.
| • | Hospitality and Management Services. We manage 69 branded resort properties, which are located in the continental United States, Hawaii, Mexico, the Caribbean and Europe. We also manage five multi-resort trusts or similar arrangements, which we refer to as our Collections. Each Collection holds real estate in our resort properties underlying the VOIs that we sell. As manager of our branded resorts and our Collections, we provide billing services, account collections, accounting and treasury functions and information technology services. In addition, for our branded resorts we also provide an online reservation system and customer service contact center, operate the front desks and amenities and furnish housekeeping, maintenance and human resources services. Our management contracts typically have an initial term of three to five years with automatic renewals and are structured on a cost-plus basis, thereby providing us with a recurring and stable revenue stream. In addition, we earn recurring fees by operating THE Club, our points-based exchange and member services program that enables our members to vacation at any of the 196 resorts in our network. | ||
| • | Marketing and Sales of VOIs. We market and sell VOIs in our resort network. We generate sales prospects by utilizing a variety of marketing programs and close substantially all of our VOI sales following presentations at our sales centers, which we refer to as tours. Currently, we sell our VOIs only in the form of points, which can be utilized for vacations for varying lengths of stay at any resort in our network. In the past, we also sold VOIs in the form of deeded intervals, which provide the right to vacation at a particular resort for a specified length of time, but we no longer sell intervals because we believe that points offer our members greater choice and flexibility in planning their vacations. The number of points required to stay at one of our resorts varies according to the resort, the type and size of accommodation, the season and the length of stay. In 2010, the average cost to purchase points equivalent to a one-week vacation at one of our resorts was $17,965. | ||
| • | Consumer Financing of VOIs. We provide loans to eligible customers who purchase VOIs through our U.S. sales centers and choose to finance their purchase. These loans are collateralized by the underlying VOIs and bear interest at a fixed rate. Our consumer finance servicing operations are vertically integrated and include underwriting, collection and servicing of our consumer loan portfolio. |
For financial reporting purposes, our business consists of two segments: Hospitality and
Management Services; and Vacation Interest Sales and Financing, which combines our marketing and
sales of VOIs with our consumer financing of VOIs. For the year ended December 31, 2010,
we generated revenue of $370.8
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million and Adjusted EBITDA of $85.7 million. Adjusted EBITDA is defined and discussed in
“Prospectus Summary—Summary Consolidated Financial and Operating Data.”
Our Resort Properties
The following table summarizes the broad global footprint of our resort network:
Managed and Branded Resorts |
||||
North America and the Caribbean |
||||
Arizona |
9 | |||
California |
2 | |||
Caribbean |
2 | |||
Colorado |
1 | |||
Florida |
2 | |||
Hawaii |
2 | |||
Indiana |
1 | |||
Mexico |
1 | |||
Missouri |
1 | |||
Nevada |
3 | |||
New Mexico |
1 | |||
Tennessee |
1 | |||
Virginia |
2 | |||
Subtotal |
28 | |||
Europe |
||||
Austria |
1 | |||
England |
12 | |||
France |
4 | |||
Germany |
1 | |||
Italy |
1 | |||
Malta |
1 | |||
Ireland |
3 | |||
Portugal |
1 | |||
Scotland |
1 | |||
Spain |
16 | |||
Subtotal |
41 | |||
Total Managed and Branded Resorts |
69 | |||
Affiliated Resorts |
||||
North America and the Caribbean |
||||
Arizona |
6 | |||
California |
12 | |||
Colorado |
1 | |||
Canada |
2 | |||
Dominican Republic |
2 | |||
Florida |
8 | |||
Hawaii |
10 | |||
Idaho |
1 | |||
Jamaica |
1 | |||
Massachusetts |
3 | |||
Mexico |
13 | |||
Nevada |
3 | |||
New Hampshire |
2 | |||
North Carolina |
1 | |||
Ohio |
1 | |||
Oregon |
2 | |||
South Carolina |
3 |
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Tennessee |
3 | |||
Texas |
2 | |||
Utah |
1 | |||
Washington |
4 | |||
Wisconsin |
1 | |||
Subtotal |
82 | |||
Europe and Africa |
||||
Austria |
4 | |||
Czech Republic |
1 | |||
England |
3 | |||
Germany |
2 | |||
Greece |
1 | |||
Hungary |
1 | |||
Italy |
2 | |||
Morocco |
1 | |||
Norway |
1 | |||
Portugal |
4 | |||
South Africa |
6 | |||
Spain |
2 | |||
Sweden |
1 | |||
Turkey |
1 | |||
Subtotal |
30 | |||
Asia and Australia |
||||
Australia |
3 | |||
India |
3 | |||
Indonesia |
2 | |||
Thailand |
7 | |||
Subtotal |
15 | |||
Total Affiliated Resorts |
127 | |||
Total Managed, Branded and Affiliated Resorts |
196 | |||
Industry Overview
There are two primary alternatives in the leisure industry for overnight resort
accommodations: commercial lodging establishments and vacation ownership resorts. Commercial
lodging establishments consist generally of hotels and motels in which a room is rented on a
nightly, weekly or monthly basis, and to a lesser degree includes rentals of privately owned
condominium units or homes. For many vacationers, particularly those with families, the amount of
space provided in a hotel or motel room, relative to its cost, is not economical. Vacation
ownership resorts are typically composed of condominium or apartment units that have a kitchen,
dining area, living room, one or more bedrooms and common area amenities, such as swimming pools,
playgrounds, restaurants and gift shops. Room rates and availability at commercial lodging
establishments are subject to periodic change, while much of the cost of a VOI is generally fixed
at the time of purchase. Consequently, vacation ownership is an attractive alternative to
commercial lodging for many vacationers.
Growth in the vacation ownership industry has been achieved through expansion of existing
resort companies as well as the entrance of well-known lodging and entertainment companies,
including Disney, Four Seasons, Hilton, Hyatt, Marriott, Starwood and Wyndham, which have developed
larger resorts as the vacation ownership resort industry has matured. The industry’s growth, as
reflected in the table below, can also be attributed to an increased market acceptance of vacation
ownership resorts, enhanced consumer protection laws and the evolution from a single fixed or
floating week product to multi-resort (often points-based) vacation networks, which offer a more
flexible vacation experience.
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According to ARDA, as of December 31, 2009, the U.S. vacation ownership community was
comprised of approximately 1,548 resorts, representing approximately 170,200 units and an estimated
7.2 million vacation ownership week equivalents. The following table reflects the growth in
ownership of VOI week equivalents since 1975:
| * | A change in ARDA’s definition of the study population resulted in a decrease in the number of resorts included in the ARDA study from 2004 to 2005, which also resulted in a decrease in the number of vacation ownership week equivalents. This change focused ARDA’s analysis on traditional VOIs, including intervals and points, by removing non-comparable entities such as fractionals, non-equity clubs, private residence clubs and vacation clubs. Prior years were not restated to give effect to this change. | |
| Source: Historical timeshare industry research conducted by Ragatz Associates, American Economic Group and Ernst & Young on behalf of the ARDA International Foundation, as of December 31, 2009. |
ARDA reported aggregate VOI sales in 2009 in the United States of $6.3 billion, reflecting a
decline of $3.4 billion, or 35%, from 2008. ARDA’s reported aggregate VOI sales in 2008 of $9.7
billion reflected a decline of $0.9 billion, or 8.5%, from 2007. ARDA has attributed this recent
sales decline to the fact that several of the larger VOI developers have intentionally slowed their
sales efforts through increased credit score requirements and larger down payment requirements in
the face of an overall tighter credit environment. ARDA also concluded that many developers have
reduced the scope of their sales operations and focused their sales efforts more on existing
owners.
Notwithstanding the recent downturn, we expect our industry to grow over the long term due to
more positive consumer attitudes and the low penetration of vacation ownership in North America.
According to ARDA’s 2010 Market Sizing Survey conducted in January 2010, less than 8% of U.S.
households own a VOI.
Competitive Strengths
Our competitive strengths include:
Stable cash flow from hospitality and management services. The management fees from our
“evergreen” hospitality management contracts are structured on a cost-plus basis. Most of our
current management contracts are priced at cost plus a range of 10% to 15%. These costs include an
allocation of a substantial portion of our overhead related to our provision of management
services. Because the cost component of these contracts is included in each of our managed resorts’
annual budgets, which are typically finalized in September of the prior year, our management fees
are highly predictable. In addition, unlike typical hospitality management companies, our fees are
not affected by average daily rate or occupancy at our resorts. Our management fees are paid with
funds that we collect on behalf of each resort’s homeowners’ association, or HOA, as part of an
annual maintenance fee billed to owners. These annual fees also include fees for our Collections
and THE Club. Because annual maintenance fees are paid in advance, the collection risk for our
management fees is substantially mitigated. No HOA or Collection has terminated any of our
management contracts during the past five years, with the exception
of one immaterial HOA management
contract.
Capital-light business model. We employ a capital-light business model that does not require
significant capital expenditures or investment in new inventory or substantial working capital
investment. Our focus on the hospitality management business is an essential aspect of this model.
Because the funds to pay our management fees are collected in advance and released to us as
services are provided, our hospitality and management services business consumes limited working
capital. Moreover, all resort level maintenance and improvements are paid for by the respective
HOAs. Our VOI sales and financing business is also managed in accordance with the capital-light
philosophy. During each of the past two years, we recovered approximately 3.1% of our previously
sold VOIs in the ordinary course of our business as a result of loan and association fee defaults
due to, among other things, death, divorce and other life-cycle events or lifestyle changes. These
defaulted points equated to approximately 10,700 weeks of inventory recovered annually. The
recovery of these points has enabled us to maintain our current sales level without needing to
acquire or build any new resorts because our inventory has effectively replenished itself. The
cost of recovering inventory is significantly less than the cost of building or buying new
inventory and is funded out of our operating capital. Our most recent development project was
completed in January 2008, and we do
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not believe we will need to make capital expenditures to acquire or build new resort properties in
the foreseeable future. Additionally, unlike certain other companies in our industry, we have no
project-specific debt requiring repayment with the proceeds of sales of VOIs at a given resort
project.
Flexible points-based vacation ownership structure. Our points-based structure, combined with
the exchange network provided by THE Club, offers our members the ability to stay at any of our
resorts. We believe this structure, combined with our broad resort network, gives us a significant
competitive advantage by allowing our members to travel where they want and when they want. Because
points are not tied to a specific vacation date or location, we can sell points to our members in a
wide variety of increments. In addition to using their points for vacation accommodations, members
of THE Club can use their points to pay for cruises, airline tickets and other vacation-related
activities. Furthermore, from an operational perspective, our points-based structure enables us to
efficiently manage our inventory and sales centers by selling points-based access to our global
network from any sales location, rather than being limited to selling intervals at a specific
resort. In addition, the recovery of points-based inventory from our members is easier than the
recovery of interval-based products, which are typically governed by local real estate foreclosure
laws that can significantly lengthen recovery periods and increase the cost of recovery.
High customer satisfaction drives significant repeat customers. Over the past three years, we
have enhanced our overall member experience by improving our reservations process and customer
communications program, upgrading appliances, furnishings, bedding and linens in many of our resort
units and refurbishing resort amenities, such as swimming facilities and fitness areas. We believe
that these improvements, combined with our diverse collection of resort locations and the variety
of vacation experiences that we offer (including golf, ski, beach and historic destination
experiences), have led to high customer satisfaction levels. In 2010, approximately 59% of our VOI
sales were made to existing members purchasing additional points, which enabled them to enjoy
longer stays and greater flexibility in their vacation choices. Sales to existing members typically
have significantly lower sales and marketing costs than sales to new customers.
High-quality loan originations and reduced reliance on receivables financing. Since 2000, we
have included credit scoring as part of our loan underwriting process, resulting in an established
history of originating higher credit-quality consumer loans. In October 2008, we responded to
deteriorating credit market conditions by taking measures to reduce our reliance on receivables
financing and improve the credit quality of our consumer loan portfolio. These measures included
reducing the purchase price for all-cash sales and increasing the interest rate on loans we
provided in order to incentivize all-cash sales and reduce the volume of new consumer loans
generated. As a result of these actions, the weighted average Fair Isaac and Company, or FICO,
score of our borrowers from October 2008 through December 2010 was 759, and during that period
approximately 67% of our sales were all-cash purchases, reflecting an increase in the percentage of
all-cash sales from 33% in the prior twelve months. From October 2008 through December 2010, our
average cash down payment was 13.5% and the average initial equity contribution for new VOI
purchases (which take into account the value of VOIs already held by purchasers and pledged to
secure a new consumer loan) was 32.2%, which resulted in an average combined equity contribution of
45.7% for new VOI purchases.
Strong management team. Since the acquisition of Sunterra Corporation in April 2007, our
leadership team, led by Stephen J. Cloobeck, our Chairman and CEO, and David F. Palmer, our
President and CFO, has taken a number of significant steps to change our strategic focus, build our
brand recognition and streamline our operations. We believe these actions have been instrumental
in our ability to maintain relatively stable financial performance, even in the face of challenging
economic conditions. These actions have included:
| • | implementing a new focus on service and hospitality to provide our members a premium experience; | ||
| • | introducing the Diamond Resorts International brand throughout our network of managed resorts; | ||
| • | renegotiating our hospitality management contracts to provide improved cost recovery; | ||
| • | implementing a capital-light business model that does not require capital-intensive acquisitions, development or construction and reduces working capital requirements; |
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| • | responding quickly to the credit crisis by substantially increasing our percentage of all-cash sales, thereby reducing our dependence on the receivables financing market; and | ||
| • | adjusting our marketing and sales efforts by closing low margin sales centers, eliminating certain incentive programs and implementing a reduced sales commission structure. |
Business Strategies
Our objective is to expand our core operations and become the leader in the vacation ownership
industry. To achieve this objective, we are pursuing the following strategies:
Capitalizing on current industry dynamics to grow fee-based services. Since the economic
downturn began in 2008, traditional lenders have significantly curtailed the availability of credit
to small and mid-market companies in the vacation ownership industry. Several such lenders have
announced their intention to exit the VOI finance business or discontinue new VOI financing
commitments for the foreseeable future. We believe this loss of traditional financing sources to
the industry provides us with opportunities to grow our fee-based revenue in the following three
ways: (i) assuming the management of resorts from operators facing financial distress; (ii)
managing the sales and marketing of portfolios of VOIs of these operators or financial
institutions; and (iii) servicing these operators’ and financial institutions’ consumer loan
portfolios. We intend to structure such opportunities in a manner consistent with our
capital-light business model. If we are successful in pursuing these opportunities, we will
increase the number of managed resorts in our network, expand our inventory of vacation interests
and broaden our membership base. In so doing, we will also increase our management services
revenue.
Diversify and increase revenue through new business initiatives. In addition to the
strategies outlined in the previous paragraph, we believe that we can increase and diversify our
revenue through new business initiatives, which may include: (i) expanding THE Club by adding new
affiliated resorts, thereby increasing its value to our members and driving more potential
customers to our resorts; (ii) entering into marketing arrangements with third parties whereby we
offer their products and services to our member base; (iii) pursuing management contracts and other
services arrangements for resorts that we do not currently manage; and (iv) expanding programs to
incentivize our members to refer their friends and family to us.
Strengthening our brand. Since the acquisition of Sunterra Corporation in 2007, we have
deployed the Diamond Resorts International brand across our managed resorts. Our goal is to
associate our brand with a premium hospitality experience that offers simplicity, choice and
comfort to our members. In pursuit of that goal, we will continue to take steps to improve our
members’ experience, including improving our reservations system and customer service contact
center, upgrading amenities in many of our resort units and common areas, and increasing the
quality and variety of vacation experiences available through THE Club. We believe that this will
generate improved brand loyalty, drive increased business from repeat customers, produce more
referrals from our member base and enable us to improve the efficiency and effectiveness of our
sales and marketing programs.
Certain Transactions
Guggenheim Transactions. In 2010, we entered into agreements with DRP Holdco, LLC (which we
refer to hereafter as DRP). DRP is an investment vehicle managed by an affiliate of Guggenheim
Partners, LLC, or Guggenheim, and has members that are clients or affiliates of Guggenheim.
Pursuant to these agreements, DRP made a $75 million investment in preferred and common equity
securities of Diamond Resorts Parent, LLC, our ultimate parent entity. The proceeds of this
investment were used to repurchase a portion of the equity securities then held by another minority
institutional investor in Diamond Resorts Parent, LLC, and, therefore, we did not retain any net
proceeds from this investment. We refer to these transactions, collectively, as the Guggenheim
Transactions.
Amendment and Restatement of 2008 Conduit Facility. On August 31, 2010, we further amended
and restated our 2008 conduit facility to provide for a revised $65 million 364-day facility that
is renewable annually at the election of the lenders. The amended 2008 conduit facility bears
interest at either LIBOR or the Commercial Paper rate (having a floor of 1.0%) plus 4.5% and has a
non-use fee of 2.0%. The principal amount outstanding under our 2008 conduit facility as of
December 31, 2010 was $39.5 million. For additional information regarding
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the amendment and restatement of our 2008 conduit facility, see “Description of Other
Indebtedness — Securitization and Other Receivables Transactions
— 2008 Conduit Facility and Diamond Resorts Owners Trust Series 2009-1.”
Corporate Structure
The following chart illustrates our corporate structure:
| (1) | Consists of approximately $85 million face value of (i) 16.5% preferred units and (ii) common units representing approximately 29% of Diamond Resorts Parent, LLC’s common equity. See Note 7 to the table under “Security Ownership of Certain Beneficial Owners and Management.” | |
| (2) | Does not include warrants exercisable for an aggregate of 4.8% of the fully-diluted equity of Diamond Resorts Corporation. Each warrant is exercisable until April 26, 2014 and has an exercise price of $0.01 per share. The number of shares subject to each warrant and the exercise price are subject to certain anti-dilution adjustments. | |
| (3) | Upstream guarantees provided by all of our direct and indirect domestic restricted subsidiaries, other than our special purpose vehicles (see footnote 4 below), including special purpose vehicles established in connection with certain acquisitions. See “Business—Business Strategies—Capitalizing on current industry dynamics to grow fee-based services.” | |
| (4) | Consists of special purpose vehicles created to issue non-recourse indebtedness secured by our VOI consumer loans. See “Description of Other Indebtedness.” |
Company Information
We were formed in April 2007 to effect the acquisition of Sunterra Corporation by an investor
group led by Stephen J. Cloobeck, our Chairman and CEO. In connection with the acquisition,
Sunterra Corporation, which was incorporated in Maryland on May 26, 1996 under the name KGK
Resorts, Inc., was renamed Diamond Resorts Corporation. We sometimes refer to Sunterra Corporation
and its operations prior to the acquisition as our “predecessor” or our “predecessor company.”
Our mailing address is 10600 West Charleston Boulevard, Las Vegas, Nevada 89135, and our
telephone number is (702) 684-8000. Our website is www.diamondresorts.com. The information on our
website is not part of this prospectus.
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The Exchange Offer
On August 13, 2010, we completed a private offering of $425,000,000 aggregate principal amount
of our 12% Senior Secured Notes due 2018, which we refer in this prospectus as the “outstanding
notes.” The term “exchange notes” refers to the 12% Senior Secured Notes due 2018 as registered
under the Securities Act. References to the “notes” in this prospectus are references to both the
outstanding notes and the exchange notes. This prospectus is part of a registration statement
covering the exchange of the outstanding notes for the exchange notes.
We and the guarantors entered into a registration rights agreement with the initial purchasers
in the private offering, pursuant to which we and the guarantors agreed to deliver to you this
prospectus as part of the exchange offer and agreed to use reasonable best efforts to have the
registration statement covering the exchange to be declared effective under the Securities Act
within 330 days after the closing of the private offering. You are entitled to exchange in the
exchange offer your outstanding notes for exchange notes which are identical in all material
respects to the outstanding notes except:
| • | the exchange notes have been registered under the Securities Act; | ||
| • | the exchange notes are not entitled to certain registration rights which are applicable to the outstanding notes under the registration rights agreement; and | ||
| • | certain special interest rate provisions are no longer applicable. |
The Exchange Offer
|
We are offering to exchange up to $425,000,000 aggregate principal amount of our 12% Senior Secured Notes due 2018, which have been registered under the Securities Act, for up to $425,000,000 aggregate principal amount of our existing 12% Senior Secured Notes due 2018. Outstanding notes may be exchanged only in denominations of $2,000 and integral multiples of $1,000 in excess of $2,000. | |
Resale
|
Based on an interpretation by the staff of the Securities and Exchange Commission (the “SEC”) set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offer in exchange for the outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: | |
• you are acquiring the
exchange notes in the
ordinary course of
your business; and • you have not engaged
in, do not intend to
engage in, and have
no arrangement or
understanding with
any person to
participate in, a
distribution of the
exchange notes. |
||
| If you are a broker-dealer and receive exchange
notes for your own account in exchange for
outstanding notes that you acquired as a result
of market-making activities or other trading
activities, you must acknowledge that you will
deliver this prospectus in connection with any
resale of the exchange notes. See “Plan of
Distribution.” Any holder of outstanding notes who: |
||
• is our affiliate; |
||
• does not acquire
exchange notes in the
ordinary course of
its business; or |
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• tenders its
outstanding notes in
the exchange offer
with the intention to
participate, or for
the purpose of
participating, in a
distribution of
exchange notes; |
||
| cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in Shearman & Sterling (available July 2, 1993), or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. | ||
Expiration Date; Withdrawal of Tender
|
The exchange offer will expire at 11:59 p.m., New York City time, on , 2011, unless extended by us. We do not currently intend to extend the expiration date. You may withdraw the tender of your outstanding notes at any time prior to the expiration of the exchange offer. We will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the exchange offer. | |
Conditions to the Exchange
Offer
|
The exchange offer is subject to customary conditions, which we may waive. See “The Exchange Offer—Conditions to the Exchange Offer” of this prospectus for more information. | |
Procedures for Tendering Outstanding Notes
|
If you wish to participate in the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a facsimile of such letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must then mail or otherwise deliver the letter of transmittal, or a facsimile of such letter of transmittal, together with your outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal. | |
| If you hold outstanding notes through The Depository Trust Company (“DTC”) and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC by which you will agree to be bound by the letter of transmittal. By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things: | ||
• you are not our
“affiliate” within
the meaning of Rule
405 under the
Securities Act; |
||
• you do not have an
arrangement or
understanding with
any person or entity
to participate in the
distribution of the
exchange notes; |
||
• you are acquiring the
exchange notes in the
ordinary course of
your business; and |
||
• if you are a
broker-dealer that
will receive exchange
notes for your own
account in exchange
for outstanding notes
that were acquired as
a result of
market-making
activities, you will
deliver a prospectus,
as required by law,
in connection with
any resale of such
exchange notes. |
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Table of Contents
Special Procedures for Beneficial Owners |
If you are a beneficial owner of outstanding notes which are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender such outstanding notes in the exchange offer, you should contact such registered holder promptly and instruct such registered holder to tender on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date. | |
Guaranteed Delivery Procedures |
If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents, or you cannot comply with the procedures under DTC’s Automated Tender Offer Program for transfer of book-entry interests prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer—Guaranteed Delivery Procedures.” | |
Effect on Holders of
Outstanding Notes
|
As a result of the making of, and upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we and the guarantors will have fulfilled a covenant contained in the registration rights agreement and, accordingly, there will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreement. If you are a holder of outstanding notes and you do not tender your outstanding notes in the exchange offer, you will continue to hold such outstanding notes and you will be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the indenture, except we and the guarantors will not have any further obligations to you to provide for the registration of untendered outstanding notes under the registration rights agreement. | |
| To the extent that outstanding notes are tendered and accepted in the exchange offer, the trading market for outstanding notes that are not so tendered and accepted could be adversely affected. | ||
Consequences of Failure to Exchange
|
All untendered outstanding notes will continue to be subject to the restrictions on transfer provided for in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we and the guarantors do not currently anticipate that we will register the outstanding notes under the Securities Act. | |
Certain United States Federal Tax Consequences
|
The exchange of outstanding notes in the exchange offer will not constitute a taxable event for United States federal income tax purposes. See “Certain United States Federal Tax Consequences.” | |
Accounting Treatment
|
We will record the exchange notes in our accounting records at the same carrying value as the outstanding notes, which is the aggregate principal amount as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of the exchange offer. We will record the expenses of the exchange offer as incurred. |
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Regulatory Approvals
|
Other than compliance with the Securities Act and qualification of the indenture governing the notes under the Trust Indenture Act, there are no federal or state regulatory requirements that must be complied with or approvals that must be obtained in connection with the exchange offer. | |
Use of Proceeds
|
We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer. See “Use of Proceeds.” | |
Exchange Agent
|
Wells Fargo Bank, National Association, is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth in the section captioned “The Exchange Offer—Exchange Agent” of this prospectus. |
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The Exchange Notes
The summary below describes the principal terms of the exchange notes. Certain of the terms
and conditions described below are subject to important limitations and exceptions. The
“Description of the Exchange Notes” section of this prospectus contains more detailed descriptions
of the terms and conditions of the exchange notes.
Issuer
|
Diamond Resorts Corporation | |
Securities Offered
|
$425,000,000 aggregate principal amount of 12% Senior Secured Notes due 2018. | |
Maturity
|
August 15, 2018. | |
Interest Payment Dates
|
February 15 and August 15, commencing on August 15, 2011. | |
Guarantees
|
The exchange notes will be guaranteed on a senior secured basis by Diamond Resorts Parent, LLC and Diamond Resorts Holdings, LLC, our indirect and direct parent companies, and all of our existing and future direct or indirect U.S. restricted subsidiaries other than our special purpose vehicles. | |
Collateral
|
The exchange notes and the guarantees will be secured by a first-priority lien (subject to certain permitted liens) on all the tangible and intangible assets of Diamond Resorts Corporation and the guarantors, other than real property and consumer loans, in each case held by Diamond Resorts Corporation and the guarantors, including the capital stock of any subsidiary held by Diamond Resorts Corporation and any guarantor (but limited to 100% of the non-voting stock (if any) and 66% of the voting stock of any such first-tier subsidiary that is a foreign subsidiary). See “Description of the Exchange Notes — Collateral.” | |
Ranking
|
The exchange notes and the guarantees will be our and the guarantors’ senior secured obligations. The indebtedness evidenced by the exchange notes and the guarantees will: | |
• rank senior in right of payment to any existing and future
subordinated indebtedness; |
||
• be effectively senior to all of our and the guarantors’
existing and future unsecured indebtedness to the extent of the
value of the collateral (after giving effect to any prior liens
on the collateral); and; |
||
• be effectively junior to all existing and future indebtedness
and other liabilities of our non-guarantor subsidiaries. |
||
Optional Redemption
|
We are entitled to redeem some or all of the exchange notes at our option, in whole or in part, at any time on or after August 15, 2014, at the redemption prices set forth in this prospectus, together with accrued and unpaid interest, if any, to the date of redemption. | |
| We are also entitled to redeem up to 35% of the aggregate principal amount of the exchange notes, at our option, with the net proceeds from certain equity offerings from time to time prior to August 15, 2013, at a redemption price of 112%, plus accrued and unpaid interest, if any, to the date of redemption. | ||
| We are also entitled to redeem some or all of the notes, at our option, at any time prior to August 15, 2014, at a redemption price equal to 100% of the principal amount of the notes plus a “make-whole” premium as of, and accrued and unpaid interest, if any, to, the date of redemption. | ||
Required Offers
|
Upon a change of control, we will be required to make an offer to purchase each holder’s notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. |
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| Subject to certain conditions and limitations, within 105 days of the end of each twelve-month period ended December 31 beginning with the twelve-month period ended December 31, 2011, we will be required to make an offer to purchase notes in an amount equal to 50% of the Excess Cash Flow (as defined herein) generated during such twelve-month period, at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase (provided that in the case of the twelve-month period ended December 31, 2011, the Excess Cash Flow generated during such twelve-month period shall be deemed to also include the Excess Cash Flow generated during the three-month period ended December 31, 2010). | ||
| We will also be required to make an offer to purchase notes in an amount equal to 25% of the net proceeds of certain equity offerings at the purchase prices set forth in this prospectus, together with accrued and unpaid interest, if any, to the date of purchase. | ||
Certain Covenants
|
The indenture governing the exchange notes contains covenants that will, among other things, limit our ability and the ability of our restricted subsidiaries to: | |
• incur additional indebtedness or issue certain preferred shares; |
||
• create liens; |
||
• pay dividends or make other equity distributions; |
||
• purchase or redeem capital stock or subordinated debt; |
||
• make certain investments; |
||
• sell assets; |
||
• consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets; and |
||
• engage in transactions with affiliates. |
||
| These limitations are subject to a number of important qualifications and exceptions. See “Description of the Exchange Notes—Certain Covenants.” | ||
Public Market
|
The exchange notes generally will be freely tradable but will also be a new issue of securities for which there is currently no established trading market. An active or liquid market may not develop for the exchange notes or, if developed, be maintained. We have not applied, and do not intend to apply, for the listing of the exchange notes on any exchange or automated dealer quotation system. | |
Use of Proceeds
|
There will be no cash proceeds to us from the exchange offer. | |
Risk Factors
|
See “Risk Factors” for a description of some of the risks relating to the exchange offer. |
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Summary Consolidated Financial and Operating Data
Set forth below is summary consolidated financial and operating data of Diamond Resorts
Parent, LLC at the dates and for the periods indicated. The summary consolidated statement of
operations data for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, and
summary balance sheet data as of December 31, 2010, have been derived from our audited consolidated
financial statements included elsewhere in this prospectus.
The summary consolidated financial and operating data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited and unaudited consolidated financial statements included elsewhere in
this prospectus.
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| ($ in thousands) | ||||||||||||
Statement of Operations Data: |
||||||||||||
Total revenues |
$ | 402,414 | $ | 410,961 | $ | 370,825 | ||||||
Total costs and expenses |
489,577 | 432,757 | 391,258 | |||||||||
Loss before provision (benefit) for income taxes |
(87,163 | ) | (21,796 | ) | (20,433 | ) | ||||||
Provision (benefit) for income taxes |
1,809 | (799 | ) | (1,274 | ) | |||||||
Net loss |
$ | (88,972 | ) | $ | (20,997 | ) | $ | (19,159 | ) | |||
Other Operating Data (Unaudited): |
||||||||||||
Adjusted EBITDA(1) |
$ | 97,685 | $ | 103,059 | $ | 85,689 | ||||||
Capital expenditures |
13,861 | 4,672 | 5,553 | |||||||||
Ratio of
earnings to fixed charges (2) |
(0.2 | )x | 0.7 | x | 0.7 | x | ||||||
Fixed charge
coverage ratio(3) |
2.1 | x | 2.1 | x | 1.7 | x | ||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 45,086 | $ | 87,792 | $ | 66,001 | ||||||
Investing activities |
(7,263 | ) | (4,250 | ) | (37,399 | ) | ||||||
Financing activities |
(60,024 | ) | (89,660 | ) | (18,271 | ) | ||||||
Other Operating Metrics: |
||||||||||||
Number of
branded resorts(4) |
56 | 62 | 70 | |||||||||
Number of
affiliated resorts(4) |
77 | 99 | 109 | |||||||||
Total number
of vacation interest sale transactions(5) |
27,144 | 23,571 | 22,719 | |||||||||
Average
vacation interest sale price per transaction(6) |
$ | 10,950 | $ | 9,712 | $ | 9,526 | ||||||
Total number
of tours(7) |
150,912 | 123,045 | 130,801 | |||||||||
Closing
percentage(8) |
18.0 | % | 19.2 | % | 17.4 | % | ||||||
Members in THE Club |
156,945 | 159,084 | 157,731 | |||||||||
| As of | ||||
| December 31, 2010 | ||||
| ($ in thousands) | ||||
Balance Sheet Data: |
||||
Cash and cash equivalents |
$ | 27,329 | ||
Mortgages and contracts receivable, net |
245,287 | |||
Unsold vacation interests, net |
190,564 | |||
Total assets |
680,751 | |||
Senior
secured notes, net of unamortized original issue discount |
414,722 | |||
Securitization notes and conduit facilities, net |
186,843 | |||
Total liabilities |
807,998 | |||
| (1) | We define Adjusted EBITDA as our net loss before provision (benefit) for income taxes, plus: (i) corporate |
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| interest expense; (ii) depreciation and amortization; (iii) vacation interest cost of sales; (iv) non-cash charges for change in estimated defaults on consumer loans originated in prior periods; (v) impairments and other non-cash write-offs; (vi) loss on extinguishment of debt; (vii) gain or loss on the sale of assets; (viii) amortization of loan origination costs; and (ix) amortization of portfolio discount; less non-cash revenue outside the ordinary course of business. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”). We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for a variety reasons as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Presentation of Certain Financial Metrics.” | ||
| The following table presents a reconciliation of Adjusted EBITDA to net loss before provision (benefit) for income taxes: |
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| ($ in thousands) | ||||||||||||
Loss before provision (benefit) for income taxes |
$ | (87,163 | ) | $ | (21,796 | ) | $ | (20,433 | ) | |||
Plus: Corporate interest expense(a) |
50,563 | 44,119 | 48,959 | |||||||||
Depreciation and amortization |
16,687 | 13,366 | 11,939 | |||||||||
Vacation interest cost of sales(b) |
67,551 | 55,135 | 39,730 | |||||||||
Estimated defaults on consumer loans originated in
prior periods(c) |
32,033 | — | — | |||||||||
Impairments and other write-offs |
17,168 | 1,125 | 3,330 | |||||||||
Loss on extinguishment of debt |
— | 10,903 | 1,081 | |||||||||
Gain on the sale of assets |
(1,007 | ) | (137 | ) | (1,923 | ) | ||||||
Amortization of loan origination costs |
(767 | ) | (648 | ) | (430 | ) | ||||||
Amortization of portfolio discount |
2,620 | 3,878 | 3,436 | |||||||||
Less: Non-cash revenue(d) |
— | (2,886 | ) | — | ||||||||
Adjusted EBITDA — Consolidated(e) |
$ | 97,685 | $ | 103,059 | $ | 85,689 | ||||||
Adjusted EBITDA — Diamond Resorts Parent, LLC and
Restricted Subsidiaries(e) |
N/A | N/A | 90,460 | |||||||||
Adjusted EBITDA — Unrestricted Subsidiaries(e) |
N/A | N/A | (4,771 | ) | ||||||||
| (a) | Excludes interest expense related to non-recourse indebtedness incurred by our special purpose vehicles. | |
| (b) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Use of Estimates — Vacation Interest Sales Revenue Recognition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Presentation of Certain Financial Metrics — Adjusted EBITDA.” | |
| (c) | Represents a one-time charge resulting from increased estimated defaults on our consumer loans originated prior to 2008. | |
| (d) | Consists of non-cash revenue outside the ordinary course of business, including VOI sales revenue recognized upon the completion of construction of certain units sold prior to the acquisition of Sunterra Corporation in April 2007. | |
| (e) | For purposes of certain covenants governing the exchange notes, the Company’s financial performance, including Adjusted EBITDA, is measured with reference to the Company and its Restricted Subsidiaries, and the performance of Unrestricted Subsidiaries is not considered. Therefore, we believe that this presentation of Adjusted EBITDA provides helpful information to investors in the exchange notes. See Note 22 of our audited financial statements included elsewhere in this prospectus. |
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| To properly and prudently evaluate our business, we encourage you to review our GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business. | ||
| (2) | For purposes of calculating this ratio, “earnings” consist of earnings (loss) before provision (benefit) for income taxes plus fixed charges, and “fixed charges” consist of interest expense, including amortization of deferred financing costs and amortization of original issue discount. See “Selected Consolidated Financial and Operating Data” for more information. | |
| (3) | This ratio is calculated as provided in the indenture governing the notes. See “Description of the Exchange Notes — Certain Definitions — Fixed Charge Coverage Ratio.” This ratio should not be viewed as a substitute for the ratio of earnings to fixed charges presented herein. | |
| (4) | As of the end of each period. | |
| (5) | Represents the number of VOI sale transactions during the period presented. | |
| (6) | Represents the average purchase price of VOIs sold during the period presented. | |
| (7) | Represents the number of sales presentations at our sales centers during the period presented. | |
| (8) | Represents the percentage of VOI sales closed relative to the total number of sales presentations at our sales centers during the period presented. |
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RISK FACTORS
Investing
in the notes involves risks. You should carefully consider the following
information about these risks, together with the other information
contained in this prospectus,
before you decide to tender outstanding notes in the exchange offer. The risks and uncertainties
described below are not the only risks facing us. Additional risks and uncertainties that we do not
currently know about or that we currently believe are immaterial may also adversely affect our
business operations. If any of the following risks actually occur, our business, financial
condition or results of operations would likely suffer. In such case, the trading price of the
notes could fall, and you may lose all or part of your original investment.
Risks Related to the Exchange Offer
If you choose not to exchange your outstanding notes, the present transfer restrictions will remain
in force and the market price of your outstanding notes could decline.
If you do not exchange your outstanding notes for exchange notes in the exchange offer, then
you will continue to be subject to the transfer restrictions on the outstanding notes as set forth
in the offering circular distributed in connection with the private offering of the outstanding
notes. In general, the outstanding notes may not be offered or sold unless they are registered or
exempt from registration under the Securities Act and applicable state securities laws. Except as
required by the registration rights agreement, we do not intend to register resales of the
outstanding notes under the Securities Act. You should refer to “Prospectus Summary—The Exchange
Offer” and “The Exchange Offer” for information about how to tender your outstanding notes.
The tender of outstanding notes under the exchange offer will reduce the principal amount of
the outstanding notes outstanding, which may have an adverse effect upon, and increase the
volatility of, the market price of the outstanding notes due to reduction in liquidity.
Certain persons who participate in the exchange offer must deliver a prospectus in connection with
resales of the exchange notes.
Based on interpretations of the staff of the SEC contained in Exxon Capital Holdings Corp.,
SEC no-action letter (April 13, 1988), Morgan Stanley & Co. Inc., SEC no-action letter (June 5,
1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983), we believe that you may offer
for resale, resell or otherwise transfer the exchange notes without compliance with the
registration and prospectus delivery requirements of the Securities Act. However, in some instances
described in this prospectus under “Plan of Distribution,” certain holders of exchange notes will
remain obligated to comply with the registration and prospectus delivery requirements of the
Securities Act to transfer the exchange notes. If such a holder transfers any exchange notes
without delivering a prospectus meeting the requirements of the Securities Act or without an
applicable exemption from registration under the Securities Act, such a holder may incur liability
under the Securities Act. We do not and will not assume, or indemnify such a holder against, this
liability.
Risks Related to Our Business
Unfavorable general economic conditions have adversely affected our business and could result in
decreased demand for VOIs and our ability to obtain future financing.
Over the past three years, our business has been adversely affected by unfavorable general
economic conditions, including effects of weak domestic and world economies, high unemployment, a
decrease in discretionary spending, a decline in housing and real estate values, limited
availability of financing and geopolitical conflicts. ARDA reported aggregate VOI sales in 2009 in
the United States of $6.3 billion, reflecting a decline of $3.4 billion, or 35%, from 2008. ARDA’s
reported aggregate VOI sales in 2008 of $9.7 billion reflected a decline of $0.9 billion, or 8.5%,
from 2007. If such conditions continue or deteriorate further, our business and results of
operations may be further adversely impacted, particularly if the availability of financing for us
or for our customers is limited or if changes in general economic conditions adversely affect our
customers’ ability to pay amounts owed under our consumer loans. In addition, because our
operations are conducted solely within the vacation ownership industry, any further adverse changes
affecting the industry, such as an oversupply of vacation ownership units, a reduction in demand
for such units, interruptions or changes in travel and vacation patterns, changes in
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governmental regulation of the industry, continued unavailability of financing for purchasers
of VOIs, the declaration of bankruptcy or credit defaults by other vacation ownership companies or
negative publicity about the industry, could have a material adverse effect on our business.
We derive a substantial portion of our revenue through contracts with HOAs to manage resort
properties and with our Collections. The expiration, termination or renegotiation of these
management contracts could adversely affect our business and results of operations.
We are party to management contracts relating to 69 properties and our five Collections, under
which we receive fees for providing hospitality management services. During the years ended
December 31, 2009 and December 31, 2010, we earned management fees under these contracts of $40.9
million and $48.1 million, respectively, representing approximately 10.0% and 13.0% of our total
consolidated revenue for such periods, respectively, and our hospitality and management services
business accounts for a significantly greater percentage of our Adjusted EBITDA. Although we
created the Collections and sell interests in them, the boards of directors of the HOAs and
collection associations are responsible for authorizing these agreements, and negotiate and enforce
the terms of these agreements as fiduciaries of their respective resort properties and Collections.
Furthermore, some state regulations impose limitations on the amount of fees that we may charge
HOAs and Collections for our hospitality management services. Our management contracts generally
have three to five year terms and are automatically renewable, but provide for early termination
rights in certain circumstances. To the extent our management contracts expire, are terminated or
are not renewed, or if the contract terms are renegotiated in a manner adverse to us, our business
and results of operations would be adversely affected.
In addition, our growth strategy contemplates our acquisition of and entry into new management
contracts. We face significant competition to secure new contracts, and may be unsuccessful in
doing so on favorable terms, if at all.
Our business plan historically has depended on our ability to sell, securitize or borrow against
the consumer loans that we generate, and our liquidity, financial condition and results of
operations would be adversely impacted if we are unable to do so in the future.
We offer financing of up to 90% of the purchase price to customers who purchase VOIs through
our U.S. sales centers. Since October 2008, approximately 33% of our purchasers of VOIs utilized
our in-house financing. Our ability to borrow against or sell our consumer loans has been an
important element of our continued liquidity, and our inability to do so in the future could have a
material adverse affect on our liquidity and cash flow. Furthermore, our ability to generate sales
of VOIs to customers who require financing may be impaired to the extent we are unable to borrow
against such loans on acceptable terms.
In the past, we have sold or securitized a substantial portion of the consumer loans we
generated from our customers. Since 2007, the markets for notes receivable facilities and
receivable securitization transactions have been negatively impacted by severe problems in the
residential mortgage markets and credit markets which, together with the associated reduction in
liquidity, have resulted in reduced availability of financing and less favorable pricing. Although
we completed a securitization transaction in 2009, if we are unable to continue to participate in
securitization transactions on acceptable terms, our liquidity and cash flows would be materially
and adversely affected. In response to the recent credit crisis, we sought to reduce our consumer
finance activities by, among other things, providing incentives for cash purchases of VOIs.
Although these initiatives reduced our reliance on the securitization markets, they have had a
negative impact on our VOI sales, profit margins and our net interest income from our consumer
loan activities. Moreover, if we cannot offer financing to our customers who purchase VOIs through
our U.S. sales centers, our sales will be adversely affected.
Additionally, we have historically relied on conduit financing to provide working capital for
our operations. While the initial maturities of our consumer loans are typically 10 years, the term
of our typical conduit facility has been 364 days. Our principal conduit facility is currently
scheduled to mature in August 2011. In the past, we have extended existing conduit facilities,
entered into new conduit facilities and refinanced all or a portion of our existing conduit
facilities by securitizing our consumer loan receivables. If we are unable to extend or refinance
our existing conduit indebtedness by securitizing our consumer loan receivables or entering into
new conduit facilities, our ability to access sufficient working capital to fund our operations may
be materially adversely affected.
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At the present time, we do not have a revolving line of credit in place to provide short-term
liquidity for our operations. As a result, to the extent that our conduit facilities and our
operating cash flow are not sufficient to meet our short-term working capital requirements, our
ability to sustain or expand our existing operations will be impaired.
Our revenues are highly dependent on the travel industry and declines in or disruptions to the
travel industry, such as those caused by adverse economic conditions, terrorism and acts of God,
may adversely affect us.
A substantial amount of our VOI sales activities occur at our resort locations, and the volume
of our sales correlates directly with the number of prospective customers who visit our resorts
each year. The number of visitors to our resorts depends upon a variety of factors, some of which
are out of our control, such as weather conditions and travel patterns generally. For example, we
experienced a decline in visitors to our European resorts as a result of the eruption of the
Eyjafjallajökull volcano in Iceland in May 2010. More generally, the travel industry has been hurt
by various events occurring over the last several years, including the effects of weak domestic and
global economies. A sustained downturn in travel patterns, including as a result of increases in
travel expenses such as higher airfares or gasoline prices, could cause a reduction in the number
of potential customers who visit our resorts. In addition, continuing concern about terrorist acts
directed against the United States and foreign citizens, transportation facilities and assets and
travelers’ fears of exposure to contagious diseases, such as the H1N1 virus, may reduce the number
of tourists willing to fly or travel to our resorts in the future, particularly if new significant
terrorist attacks or disease outbreaks occur. If we experience a substantial decline in visitors
to our resorts, our VOI sales would likely decline and our business and results of operations would
be adversely affected.
Our future success depends on our ability to market VOIs successfully and efficiently, including
sales of upgrades to our existing ownership base.
We compete for customers with hotel and resort properties and with other vacation ownership
resorts. The identification of sales prospects and leads, and the marketing of our products to
those leads, are essential to our success. We have incurred and will continue to incur significant
expenses associated with marketing programs in advance of closing sales to the leads that we
identify. If our lead identification and marketing efforts do not yield enough leads or we are
unable to successfully convert sales leads to a sufficient number of sales, we may be unable to
recover the expense of our marketing programs and our business and results of operations would be
adversely affected. In addition, a significant portion of our sales are upgrades purchased by
existing owners, and our results of operations depend in part on our ability to continue making
sales to our ownership base. While we expect to continue making sales of upgrades to our existing
ownership base, our recent rate of sales to existing owners may not be sustainable in future
periods. To the extent we are not able to maintain our sales of upgrades to existing owners, our
results of operations would be adversely affected.
If we experience a significant decline in our inventory of points available for sale, we may be
required to expend more capital to acquire or build new resorts, which would negatively impact our
financial condition and results of operations.
We
have entered into inventory recovery agreements with substantially all of
the HOAs we manage, together with similar agreements with all of our
Collections, pursuant to which
we recapture VOIs either in the form of points or intervals, and bring them into our inventory for
sale to customers. During the past two years, approximately 3.1% of our previously sold points or
intervals were recovered by us each year pursuant to these agreements. As a result, we have not had
to build or acquire new resort units in recent years because our inventory has effectively
replenished itself. However, the volume of points or intervals recovered by us could decline in the
future for a variety of reasons, including as a result of termination or non-renewal of our
inventory recovery agreements. For example, if the economy improves, our members may
be less likely to fail to pay their annual fees or default on their consumer loans. In addition,
if a viable VOI resale market were to develop in the future, our members may choose to resell their
interests to third parties. Further, in the event applicable state law makes it more difficult to
recover points or intervals, it could extend the time required to consummate a recovery or
otherwise make it more difficult to consummate such recoveries. An increased level of sales of VOIs
would also reduce our inventory available for sale. If our inventory available for sale were to
decline significantly, we may need to make significant capital expenditures to replenish our
inventory by purchasing points or intervals or building
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new resorts. Alternatively, we would need to substantially reduce the volume of our VOI sales.
Accordingly, our business and results of operations would be materially adversely affected.
A portion of our revenue is derived from our rental of resort units, and our future results may be
adversely impacted if we are unable to rent a sufficient number of available units at our resorts.
Under
our inventory recovery agreements, we are required to pay maintenance and
assessment fees to the HOAs and Collections, including any past due amounts, for any VOIs that we
have recovered. We are also obligated to pay to the HOAs and Collections cleaning fees for room
stays incurred by our customers. See “Business — Recovery of VOIs.” In order to offset these
expenses and generate revenue from VOIs in our inventory, we rent the available units. In 2009 and
2010, we generated approximately $35.3 million and $39.5 million in rental revenue, respectively.
Our ability to rent units is subject to a variety of risks common to the hospitality industry,
including competition from large and well-established hotels, changes in the number and occupancy
and room rates for hotel rooms, seasonality and changes in the desirability of geographic regions
of the resorts in our network. If we are less successful in obtaining customers to rent the
available units, our cash flow, results of operations and business will be adversely affected.
The disruption of the use by our members of THE Club reservation system could result in customer
dissatisfaction and harm our reputation and business.
Our ability to maintain a reservation system is essential to our business. Any disruption in
our ability to provide the use of our reservation system to the purchasers of our VOIs could result
in customer dissatisfaction and harm our reputation and business. In addition, without the
benefits of that reservation system, the resale value and marketability of our VOIs may decline,
and our members may choose to withhold payments or default on their VOIs or loans.
We rely on external exchange program affiliations as important sources of sales prospects and
leads, and our loss of any such affiliations in the future may adversely impact our results of
operations.
We have an affiliation agreement for an external exchange program with Interval International,
Inc., or Interval International, which complements our own internal vacation ownership exchange
program, THE Club. As a result of this affiliation, members of THE Club may use their points to
reserve the use of a vacation accommodation at the resorts we manage, our resorts affiliated with
THE Club as well as more than 2,500 resorts worldwide that participate in Interval International.
Similarly, interval owners at our managed resorts may join either Interval International or Resort
Condominiums International, LLC, or RCI, as their HOA constitutions dictate. Such interval owners
may then deposit their deeded intervals in exchange for an alternative vacation destination. When
our points and intervals are exchanged through Interval International or RCI, this inventory is
made available to owners from other resorts. These individuals are valuable potential customers
for our VOI sales. If we fail to maintain our external exchange program affiliations, or if the
number of individuals exchanging interests in other programs to stay at our resorts through these
programs decline substantially, our sales and results of operations may be adversely affected. In
addition, a loss of any such affiliations may result in customer dissatisfaction and have an
adverse impact on the value of our VOIs, as there would be fewer vacation accommodation options in
our network.
We are dependent on the managers of our affiliated resorts to ensure that those properties meet our
customers’ expectations.
The members of THE Club have access to the 127 affiliated resorts in our network. We do not
manage, own or operate these resorts and, while we have certain contractual rights under our
affiliation agreements, we have limited ability to control their management. Although we could
elect to terminate our affiliation with substantially all of these resorts if they fail to meet our
standards of quality, we may still retain VOIs in them for which we have incurred acquisition costs
and continue to incur maintenance costs. If the managers of a significant number of those
properties were to fail to maintain them in a manner consistent with our standards of quality, we
may be subject to customer complaints and our reputation and brand could be damaged.
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The resale market for VOIs could adversely affect our business.
Resales of VOIs generally are made at sales prices substantially below their original customer
purchase prices. The relatively lower sales prices are partly attributable to the high marketing
and sales costs associated with the initial sales of such VOIs. Accordingly, the initial purchase
of a VOI may be less attractive to prospective buyers. Also, buyers who seek to resell their VOIs
compete with our VOI sales efforts. While VOI resale clearing houses or brokers currently do not
have a material impact on our business, if a secondary market for VOIs were to become more
organized and liquid, the resulting availability of resale VOIs at lower prices could adversely
affect our sales and our sales prices. Furthermore, the volume of VOI inventory that we recapture
each year may decline if a viable secondary market develops, which could adversely affect our
business and results of operations.
We are subject to certain risks associated with our development and management of resort
properties.
Through our development and management of resorts and ownership of VOIs, we are subject to
certain risks related to the physical condition and operation of our resort properties. For
example, our financial condition and results of operations may be adversely impacted by:
| • | the presence of construction defects or other structural or building damage at any of our resorts, including resorts we may develop in the future; | ||
| • | any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements relating to our resorts; | ||
| • | any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms and from any increases in the frequency or severity of such occurrences due to climate change; | ||
| • | any losses arising from acts of war, civil unrest and terrorism; and | ||
| • | claims by employees, members and their guests for injuries sustained on our resort properties. |
With the exception of acts of war, civil unrest and terrorism, which generally are not
insurable on economically feasible terms, we, the HOAs and the Collections maintain insurance to
cover losses associated with the foregoing events. However, if an uninsured loss or a loss in
excess of insured limits occurs as a result of any of the foregoing, we or the HOAs or Collections
may be subject to significant costs. If an HOA or Collection is subject to any such loss, we will
also be responsible for a portion of such loss to the extent of our ownership of VOIs in the HOA or
Collection. As a result, any such uninsured losses could have a material adverse effect on our
results of operations. Furthermore, any substantial special assessments charged to the HOAs or
Collections as a result of any of these items could cause customer dissatisfaction and harm our
business and reputation. Additionally, for any resorts in which we own common areas, we maintain
insurance and are directly subject to the risks set forth above.
Our credit underwriting standards may prove to be inadequate, and we could incur substantial losses
if the customers we finance default on their obligations. In addition, we rely on a third-party
lender to provide financing to purchasers of our VOIs in Europe, and the loss of this customer
financing source could harm our business.
We offer financing of up to 90% of the purchase price to purchasers of VOIs sold through our
U.S. sales centers. We utilize a formal credit underwriting system as part of our domestic
consumer finance activities; however, there is no assurance that this system will result in
acceptable default rates or otherwise ensure the continued performance of our consumer loans. As of
December 31, 2010, approximately 7.5% of our VOI consumer loans that we held, or which third
parties held under sales transactions, were more than 30 days past due. Although in many cases we
may have personal recourse against a buyer for the unpaid purchase price, certain states have laws
that limit our ability to recover personal judgments against customers who have defaulted on their
loans. Even where permitted, the cost of doing so may not be justified. Historically, we have
generally not pursued personal recourse against our customers, even when available. If we are
unable to collect the defaulted amount due, we traditionally have foreclosed on the customer’s VOI
or terminated the underlying contract and remarketed the recovered VOI.
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Irrespective of our remedy in the event of a default, we cannot recover the often significant
marketing, selling and administrative costs associated with the original sale, and we may have to
incur a portion of such costs again to resell the VOI.
Currently, portions of our consumer loan portfolio are concentrated in certain geographic
regions within the United States. As of December 31, 2010, our loans to California residents
constituted 24.5% of our consumer loan portfolio, and our loans to Arizona residents constituted
13.9% of our consumer loan portfolio. No other state or foreign country concentration accounted
for in excess of 5% of our consumer loan portfolio. The deterioration of the economic condition
and financial well-being of the regions in which we have significant loan concentration, such as
California or Arizona, could adversely affect our consumer loan portfolio, our business and our
results of operations.
A significant increase in the delinquency rate applicable to our portfolio of consumer loans
could adversely affect our financial condition and results of operations. An increased level of
delinquencies could result from changes in economic or market conditions, increases in interest
rates, adverse employment conditions and other factors beyond our control. Increased delinquencies
could also result from our inability to evaluate accurately the credit worthiness of the customers
to whom we extend financing. If default rates for our borrowers were to increase, we may be
required to increase our provision for loan losses. In addition, it may cause buyers of, or
lenders whose loans are secured by, our consumer loans to reduce the amount of availability under
receivables purchase and credit facilities, or to increase the interest costs associated with such
facilities. In such an event, our cost of financing would increase, and we may not be able to
secure financing on terms acceptable to us, if at all, which would adversely affect our sales,
results of operations, financial position and liquidity.
Under the terms of our securitization facilities, we may be required, under certain
circumstances, to (i) repurchase or replace loans if we breach any of the representations and
warranties we made at the time we sold the receivables or (ii) include provisions that in the event
of defaults by customers in excess of stated thresholds would require substantially all of our cash
flow from our retained interest in the receivable portfolios sold to be paid to the parties who
purchased the receivables from us.
Finally, we rely on a third-party lender to provide consumer financing for sales of our VOIs
in Europe. If this lender discontinued providing such financing, or materially changed the terms
of such financing, we would be required to find an alternative means of financing for our customers
in Europe. If we failed to do so, our VOI sales in Europe may decline, and our results of
operations would be adversely affected.
Changes in interest rates may increase our borrowing costs and otherwise adversely affect our
business.
Our business is dependent on our ability to access the securitization markets to finance our
portfolio of consumer loans. Increases in interest rates, changes in the financial markets and
other factors could increase the costs of our securitization financings, prevent us from accessing
the securitization markets and otherwise reduce our ability to obtain the funds required for our
consumer financing operations. Our business and results of operations are dependent on the ability
of our customers to finance their purchase of VOIs, and in the United States we are currently one
of the only lending sources available to these customers. Limitations on our ability to provide
financing to our customers, or increases in the cost of such financing, could reduce our sales of
VOIs and adversely affect our results of operations.
Our international operations are subject to risks not generally applicable to our domestic
operations.
We manage resorts in 13 countries and have sales and marketing operations in seven countries.
Our operations in foreign countries are subject to a number of particular risks, including:
| • | exposure to local economic conditions; | ||
| • | potential adverse changes in the diplomatic relations of foreign countries with the United States; | ||
| • | hostility from local populations; |
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| • | restrictions and taxes on the withdrawal of foreign investment and earnings; | ||
| • | the imposition of government policies and regulations against business and real estate ownership by foreigners; | ||
| • | foreign investment restrictions or requirements; | ||
| • | limitations on our ability to legally enforce our contractual rights in foreign countries; | ||
| • | regulations restricting the sale of VOIs, as described in “Business — Governmental Regulation”; | ||
| • | foreign exchange restrictions and the impact of exchange rates on our business; | ||
| • | conflicts in local laws with U.S. laws; | ||
| • | withholding and other taxes on remittances and other payments by our subsidiaries; and | ||
| • | changes in and application of foreign taxation structures, including value added taxes. |
Fluctuations in foreign currency exchange rates may affect our reported results of operations.
We receive a portion of our revenues from our European managed resorts and European VOI sales,
and these revenues are primarily received in Euros and British pounds. Because our financial
results are reported in U.S. dollars, fluctuations in the value of the Euro and British pound
against the U.S. dollar have had and will continue to have an effect, which may be significant, on
our reported financial results. A decline in the value of the Euro or British pound against the
U.S. dollar will tend to reduce our reported revenues and expenses, while an increase in the value
of the Euro or British pound against the U.S. dollar will tend to increase our reported revenues
and expenses. Variations in exchange rates can significantly affect the comparability of our
financial results between financial periods.
Our industry is highly competitive and our business could be adversely affected by our inability to
compete effectively.
The vacation ownership industry is highly competitive. We compete with various high profile
and well-established operators, many of which have greater liquidity and financial resources than
we do. Many of the world’s most recognized lodging, hospitality and entertainment companies develop
and sell VOIs in resort properties. Major companies that now operate or are developing or planning
to develop vacation ownership resorts directly or through subsidiaries include Four Seasons
Resorts, Hilton Hotels Corporation, Hyatt Corporation, Marriott International, Inc., Starwood
Hotels and Resorts Worldwide, Inc., Walt Disney Company, Wyndham Worldwide Corporation and
Bluegreen Corporation. We also compete with numerous other smaller owners and operators of
vacation ownership resorts. If additional competitors adopt strategies and product offerings
comparable to ours, such as by offering points-based VOI systems, we may lose our competitive
advantage.
Our competitors could also seek to compete against us based on the pricing terms of our
current hospitality management contracts, or in our efforts to expand our fee based income streams
by pursuing new management contracts for resorts that are not currently part of our network. We
may not be able to compete successfully for customers, and increased competition could result in
price reductions and reduced margins, as well as adversely affect our efforts to maintain and
increase our market share. Such competition could materially affect our results of operations.
We are subject to extensive regulation relating to the marketing and sale of vacation interests and
the servicing and collection of customer mortgages and loans.
Our marketing and sale of VOIs and our other operations are subject to extensive regulation by
the federal government and the state timeshare laws and, in some cases, the foreign jurisdictions
where our VOIs are marketed
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and sold. Federal legislation that is or may be applicable to the sale, marketing and
financing of our VOIs includes the Federal Trade Commission Act, the Fair Housing Act, the
Truth-in-Lending Act and Regulation Z, the Home Mortgage Disclosure Act and Regulation C, the Equal
Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the
Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Gramm-Leach-Bliley Act, the Deceptive Mail Prevention and Enforcement Act, Section 501 of the
Depository Institutions Deregulation and Monetary Control Act of 1980 and the Civil Rights Acts of
1964, 1968 and 1991.
In addition, the majority of states and jurisdictions where our resorts are located
extensively regulate the creation and management of vacation ownership properties, the marketing
and sale of VOIs, the escrow of purchaser funds and other property prior to the completion of
construction and closing, the content and use of advertising materials and promotional offers, the
delivery of an offering memorandum describing the sale of VOIs and the creation and operation of
exchange programs and multi-site vacation interest plan reservation systems. For example, certain
state regulations applicable to the vacation ownership industry impose limitations on the amount of
fees that we may charge HOAs and Collections for hospitality management services. Many other states
and certain foreign jurisdictions have adopted similar legislation and regulations affecting the
marketing and sale of VOIs to persons located in those jurisdictions. In addition, the laws of
most states in which we sell VOIs grant the purchaser of an interest the right to rescind a
purchase contract during the specified recession period provided by law.
The Collections are required to register pursuant to applicable statutory requirements for the
sale of VOI plans in an increasing number of jurisdictions. For example, Diamond Resorts U.S.
Collection Development, LLC is required to register pursuant to the Florida Timesharing and
Vacation Plan Act, Florida Statutes Chapter 721. Such registrations, or any formal exemption
determinations, for the Collections confirm the substantial compliance with the filing and
disclosure requirements of the respective timeshare statutes by the applicable Collection. They do
not constitute the endorsement of the creation, sale, promotion or operation of the Collections by
the regulatory body, nor relieve us or of our affiliates of any duty or responsibility under other
statutes or any other applicable laws. Registration under a respective timeshare act is not a
guarantee or assurance of compliance with applicable law nor an assurance or guarantee of how any
judicial body may interpret the Collections’ compliance therewith. A determination that specific
provisions or operations of the Collections do not comply with relevant timeshare acts or
applicable law may have a material adverse effect on us, the Collections trustee, the related
collection association or the related consumer loans. Such noncompliance could also adversely
affect the operation of the Collections or the sale of points within the existing format of the
Collections, which would likely increase costs of operations or the risk of losses resulting from
defaulted consumer loans.
Furthermore, most states have other laws that apply to our activities, such as real estate
licensure laws, travel sales licensure laws, advertising laws, anti-fraud laws, telemarketing laws,
prize, gift and sweepstakes laws and labor laws. In addition, we subscribe to state Do Not Call,
or DNC, lists for every state into which we make telemarketing calls, as well as the federal DNC
list. Enforcement of the federal DNC provisions began in the fall of 2003, and the rule provides
for fines of up to $16,000 per violation. We also maintain an internal DNC list as required by
law. Our master DNC list is comprised of our internal list, the federal DNC list and the applicable
state DNC lists.
In addition to government regulation relating to the marketing and sales of VOIs, our
servicing and collection of consumer loans is subject to regulation by the federal government and
the states in which such activities are conducted. These regulations may include the federal Fair
Credit Reporting Act, the Florida Consumer Collection Practices Act, the Fair Debt Collections
Practice Act, the Electronic Funds Transfer Act and Regulation B, the Right to Financial Privacy
Act and similar legislation in other states.
In addition, from time to time, potential buyers of VOIs assert claims with applicable
regulatory agencies against vacation interest salespersons for unlawful sales practices. These
claims could have adverse implications for us that could result in negative public relations,
potential litigation and regulatory sanctions.
Since
October 2008, we have sold VOIs in the United States solely through our employees, with
the exception of two locations where we conduct sales through a
contractual relationship with a third-party operator. Prior to October 2008, a portion of our other
sales in the United States were made through independent sales agents who provided services to us
under independent contractor agreements. In Europe,
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we currently sell VOIs through employees and independent distributors. In December 2008, we
converted a large number of sales agents in Spain, the United Kingdom, Portugal and France from
independent contractors to employees. We did not withhold payroll taxes from the amounts paid to
such independent contractors. In the event the federal, state or local taxing authorities in the
United States or in foreign jurisdictions were to successfully classify such independent sales
agents as our employees, rather than as independent contractors, we could be liable for back
payroll taxes and termination indemnities as required by local law.
Depending on the provisions of applicable law and the specific facts and circumstances
involved, violations of these laws, policies or principles may limit our ability to collect all or
part of the principal or interest due on our consumer loans, may entitle certain customers to
refunds of amounts previously paid and could subject us to penalties, damages and administrative
sanctions, and may also impair our ability to commence cancellation and forfeiture proceedings on
our VOIs. If we are unable to collect all or part of the principal or interest of any consumer
loans because of a violation of the aforementioned laws, public policies or general principles of
equity, our businesses, results of operation and financial condition could be materially adversely
affected.
We are a party to certain litigation matters and are subject to additional litigation risk.
From time to time, we or our subsidiaries are subject to certain legal proceedings and claims
in the ordinary course of business, including claims or proceedings relating to our VOI sales and
consumer loan business.
One of our subsidiaries, FLRX, Inc., is a defendant in a lawsuit originally filed in July
2003, alleging the breach of certain contractual terms relating to the obligations under a stock
purchase agreement for the acquisition of FLRX in 1998, as well as certain violations under
applicable consumer protection acts. FLRX currently conducts no operations and has no material
assets other than an indirect interest in two undeveloped real estate parcels in Mexico. In
January 2010, following a jury trial, a Washington state court entered a judgment against FLRX,
awarded plaintiffs damages of $30.0 million plus attorney’s fees of approximately $1.5 million, and
ordered specific performance of certain ongoing contractual obligations pursuant to the breach of
contract claim. FLRX has appealed the verdict. Any liability in this matter would not be covered by
insurance and the ultimate liability of FLRX, if any, is uncertain at this time. Neither Diamond
Resorts Corporation nor any of its other subsidiaries are party to this lawsuit. Sunterra
Corporation was originally named as a defendant in this matter, but it was later dismissed from the
case. Depending upon developments in the lawsuit, it is possible that FLRX may at some point
determine to file for protection under the Federal Bankruptcy Code. Although we believe that we
will not have any material liability when this matter is ultimately resolved, there can be no
assurance that this will be the case.
Two separate cases have been filed in St. Maarten against AKGI St. Maarten NV, or AKGI, one of
our subsidiaries, challenging AKGI’s title to seven whole ownership units at the Royal Palm Resort,
and alleging the breach of certain agreements that existed prior to AKGI’s acquisition of the
resort. AKGI purchased the resort at auction in 1995. Each claimant alleges that, between 1989 and
1991, he purchased certain units from the prior owner of Royal Palm Resort, and that he holds, in
perpetuity, legal title to, or a leasehold interest in, the respective units and is entitled to a
refund of the purchase price and an annual 12% return on the purchase price (which totaled $1.2
million in one case and $1.3 million in the other case). Due to the nature of the AKGI purchase
and the underlying St. Maarten laws, we believe that the obligations to the claimants would only be
enforceable if the agreement between the claimant and AKGI’s predecessor was either a timeshare
agreement or a lease agreement. AKGI has answered that the claimants’ agreements were, in fact,
investment contracts, and therefore not enforceable under St. Maarten law. In February 2011, the
case that was pending in the highest and final court of appeal was dismissed as to all claims, with
the Company having no obligations, financial or otherwise, to claimant. The other case is currently
pending in the intermediate court of appeal. A lien has been placed on AKGI’s interest in the Royal
Palm Resort while the remaining action is pending.
An adverse outcome in any of the litigation described above or any other litigation involving
us or any of our affiliates could negatively impact our business, reputation and financial
condition. For additional information, see “Business — Legal Proceedings.”
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Failure to maintain the security of personally identifiable information could adversely affect us.
In connection with our business, we collect and retain significant volumes of personally
identifiable information, including credit card numbers of our customers and other personally
identifiable information of our customers and employees. Our customers and employees expect that we
will adequately protect their personal information, and the regulatory environment surrounding
information security and privacy is increasingly demanding, both in the United States and other
jurisdictions in which we operate. A significant theft, loss or fraudulent use of customer or
employee information could adversely impact our reputation and could result in significant costs,
fines and litigation.
Our reputation and financial condition may be harmed by system failures and computer viruses.
We maintain a proprietary hospitality management and sales system. The performance and
reliability of this system and our technology is critical to our reputation and ability to attract,
retain and service our customers. Any system error or failure may significantly delay response
times or even cause our system to fail, resulting in the unavailability of our services. Our
systems and operations are vulnerable to interruption or malfunction due to certain events beyond
our control, including natural disasters, such as earthquakes, fire and flood, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar events. Any interruption, delay or system failure could result in financial losses or
customer claims or litigation and damage our reputation.
Our intellectual property rights are valuable, and our failure to protect those rights could
adversely affect our business.
Our intellectual property rights, including existing and future trademarks, trade secrets and
copyrights, are and will continue to be valuable and important assets of our business. We believe
that our proprietary technology, as well as our other technologies and business practices, are
competitive advantages and that any duplication by competitors would harm our business. We have
taken measures to protect our intellectual property, but these measures may not be sufficient or
effective. For example, we seek to avoid disclosure or unauthorized use of our intellectual
property by requiring employees and consultants with access to our proprietary information to
execute confidentiality agreements. Intellectual property laws and contractual restrictions may
not prevent misappropriation of our intellectual property or deter others from developing similar
technologies. In addition, others may develop technologies that are similar or superior to our
technology. Our failure to protect, or any significant impairment to the value of, our intellectual
property rights could harm our business.
We are required to make a number of significant judgments in applying our accounting policies, and
our use of different estimates and assumptions in the application of these policies could result in
material changes to our reported financial condition and results of operations. In addition,
changes in accounting standards or their interpretation could significantly impact our reported
results of operations.
Our accounting policies are critical to the manner in which we present our results of
operations and financial condition. Many of these policies, including with respect to the
recognition of revenue and determination of vacation interest cost of sales under Accounting
Standards Codification (“ASC”) 978, are highly complex and involve many subjective assumptions,
estimates and judgments. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Critical Accounting Policies and Use of Estimates.” We are required to
review these estimates regularly and revise them when necessary. Our actual results of operations
may vary from period to period based on revisions to these estimates. In addition, the regulatory
bodies that establish accounting standards, including the SEC and the Financial Accounting
Standards Board, periodically revise or issue new financial accounting and reporting standards that
govern the preparation of our consolidated financial statements. Changes to these standards or
their interpretation could significantly impact our reported results in future periods.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate and
timely financial statements could be impaired, which could harm our operating results, our ability
to operate our business and our reputation.
Ensuring that we have adequate internal financial and accounting controls and procedures in
place so that we can produce accurate financial statements on a timely basis is a costly and
time-consuming effort that needs to be re-evaluated frequently. Upon registration of the exchange
notes, we will be required to document, review and improve our internal controls and procedures for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management and
independent registered public accounting firm assessments of the effectiveness of our internal
controls. We will need to retain additional finance and accounting personnel with the skill sets
that we will need as a public reporting company.
Implementing any appropriate changes to our internal controls may distract our officers and
employees, entail substantial costs and take significant time to complete. These changes may not,
however, be effective in achieving and maintaining adequate internal controls, and any failure to
achieve or maintain that adequacy could result in our being unable to produce accurate financial
statements on a timely basis. In addition, any perception that our internal controls are
inadequate or that we are unable to produce accurate financial statements on a timely basis or any
actual failure to do so could have a material adverse effect on our business and reputation.
To the extent we utilize unrestricted subsidiaries to pursue acquisitions and other growth
opportunities in the future, our consolidated financial statements may differ materially from the
financial position, results of operations and cash flows of us and our restricted subsidiaries for
purposes of determining our compliance with the indenture governing the notes.
Our consolidated financial statements include the financial statements of the Company and all
of its subsidiaries, including those entities that have been designated as unrestricted
subsidiaries pursuant to the indenture governing the notes. Consistent with our capital-light
business model, we intend to pursue growth opportunities through the acquisition of assets by
special purpose entities formed by us for that purpose. These entities will be deemed to be
unrestricted subsidiaries under the indenture. One example of this approach is our acquisition of
ILX through such an entity as described in “Business—Business Strategies—Capitalizing on current
industry dynamics to grow fee-based services.” We are in the preliminary stages of other
transactions that would also utilize unrestricted subsidiaries. The financial position, results of
operations and statements of cash flow of our unrestricted subsidiaries are excluded from our
financial results to determine whether we are in compliance with the financial covenants governing
the notes. Accordingly, our consolidated financial statements may differ materially from the
financial position, results of operations and cash flow of us and our restricted subsidiaries for
purposes of determining our ongoing compliance with the financial covenants in the indenture. The
financial statements of our unrestricted subsidiaries are presented separately in our consolidating
financial statements. See Note 22 of our audited financial statements included elsewhere in this
prospectus for additional information.
We are dependent upon our senior management.
Our success and future growth depends to a significant degree on the skills and continued
services of our senior management team, including Stephen J. Cloobeck, our Chairman and CEO, and
David F. Palmer, our President and CFO. We have purchased “key man” life insurance policies on
these individuals. Our future success also depends on our ability to attract, retain and motivate
highly skilled managerial, sales, marketing and service and support personnel. Competition for
sales, marketing and management personnel is particularly intense in our industry. As a result, we
may be unable to successfully attract or retain qualified personnel.
Messrs. Cloobeck and Palmer and certain other officers and employees are not employed directly
by us, but are rather employed by Hospitality Management and Consulting Service, LLC, or HM&C, a
company beneficially owned by Mr. Cloobeck. Pursuant to a services agreement with us that we
entered into on December 31, 2010, HM&C provides certain services to us, including the services of
Messrs. Cloobeck and Palmer, as well as those of certain other officers and employees previously
employed by us. This agreement has a five-year initial term and will be automatically renewed on an
annual basis unless either we or HM&C give notice of termination. The agreement will also
terminate automatically (i) in the event Mr. Cloobeck no longer serves as our CEO for any reason,
including as a result of his death or disability, or (ii) upon certain other events that may
constitute a change of
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control of the Company. In the event the agreement is terminated, there can be no assurance
that we will be able to enter into a new agreement with HM&C, to hire any or all of the HM&C
employees who provide services to the Company, or to otherwise effectively replace the services
provided by HM&C. If we are unable to replicate the services provided by HM&C, our business and
operations would be materially adversely affected.
Our growth strategy may not be successful and may divert our management’s attention and consume
significant resources.
We intend to pursue opportunities to take over the management of resorts from operators facing
financial distress and to manage portfolios of vacation interests and consumer loans from such
operators or financial institutions. The successful execution of this strategy will depend on our
ability to identify and negotiate management agreements and other arrangements with respect to such
potential opportunities. We may not be able to do so successfully. In addition, our management may
be required to devote substantial time and resources to pursue these opportunities, which may
impact their ability to manage our operations effectively. Furthermore, although it is not a
current focus of our growth strategy, we may pursue acquisitions of vacation interest or related
companies in the future. Acquisitions involve numerous risks, including difficulties in integrating
the operations of acquired companies, diversion of management’s attention from daily operations,
responsibility for the liabilities of acquired businesses, inability to maintain our internal
standards, controls, procedures and policies, and the potential loss of key employees of acquired
companies. To the extent we pursue transactions similar to the ILX acquisition and the potential
Tempus transaction described in “Business—Business Strategies—Capitalizing on current industry
dynamics to grow fee-based services,” we may be subject to additional risks, including risks and
uncertainties associated with bankruptcy proceedings, our potential exposure to adverse
developments in the receivable portfolios that we acquire or agree to manage, and limitations on
our ability to finance such transactions through the use of unrestricted subsidiaries. We cannot
assure you that our growth strategy will be successful and our failure to manage and successfully
integrate acquired businesses could harm our business.
Risks Related to the Exchange Notes
Our substantial level of indebtedness could adversely affect us.
As of December 31, 2010, we had total principal
indebtedness of $636.0 million, including $425 million of principal under the outstanding notes.
Our substantial indebtedness could have important consequences to you, including the
following:
| • | our level of indebtedness could make it more difficult for us to satisfy our obligations with respect to the exchange notes, including any repurchase obligations that may arise thereunder; | ||
| • | our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets; | ||
| • | we must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available to us for operations and other purposes; | ||
| • | our level of indebtedness could place us at a competitive disadvantage to competitors that may have proportionately less debt; | ||
| • | our flexibility in planning for, or reacting to, changes in our business and industry may be limited; and | ||
| • | our level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business. |
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Any of the foregoing could have a material adverse effect on our business, financial
condition, results of operations and ability to satisfy our obligations under the exchange notes.
We may incur substantially more debt following this exchange offer, and any such future
indebtedness could increase the risks that we face.
Despite our current level of indebtedness, we will be able to incur substantial additional
indebtedness, including additional secured indebtedness, in the future. The terms of the indenture
governing the notes place restrictions on, but do not prohibit, us from doing so. In addition,
the indenture governing the notes allows us to issue additional notes or incur other indebtedness
under certain circumstances which will also be guaranteed by the guarantors and will share in the
collateral that will secure the exchange notes and guarantees. The indenture governing the notes
also allows our foreign subsidiaries and our special purpose vehicles to incur additional debt,
which would be structurally senior to the notes. The indebtedness of our special purpose vehicles
is, and is expected to continue to be, substantial. In addition, the indenture governing the notes
does not prevent us from incurring other liabilities that do not constitute “Indebtedness,” as such
term is defined in the indenture. See “Description of the Exchange Notes — Certain Covenants —
Incurrence of Indebtedness.” If new debt or other liabilities are added to our current debt
levels, the related risks that we and our subsidiaries now face could intensify.
We may not be able to generate sufficient cash to service all of our indebtedness, including the
exchange notes, and may be forced to take other actions to satisfy our obligations under our
indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations depends on our
future financial and operating performance, which is subject to prevailing economic and competitive
conditions and to certain financial, business, regulatory and other factors beyond our control. We
may not be able to maintain a level of cash flow from operating activities sufficient to permit us
to pay the principal, premium, if any, and interest on the exchange notes and our other
indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations,
we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or
seek to restructure or refinance our indebtedness, including the exchange notes. These alternative
measures may not be successful and may not permit us to meet our scheduled debt service
obligations. In the absence of such operating results and resources, we could face substantial
liquidity problems and might be required to sell material assets or operations to attempt to meet
our debt service and other obligations, which might not be successful.
Repayment of our debt, including required principal and interest payments on the exchange notes, is
dependent on cash flow generated by our subsidiaries.
We are a holding company, and all of our tangible assets, VOIs and consumer loans are owned by
our subsidiaries. Repayment of our indebtedness is dependent on the generation of cash flow by our
subsidiaries and their ability to make such cash available to us by dividend, debt repayment or
otherwise. Each of our subsidiaries is a distinct legal entity and, under certain circumstances,
legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries.
While the terms of the indenture governing the notes limit the ability of our subsidiaries to incur
consensual restrictions on their ability to pay dividends or make other distributions to us, these
limitations are subject to important qualifications and exceptions. In the event that we do not
receive distributions from our subsidiaries, we may be unable to make required principal and
interest payments on the exchange notes and our other indebtedness.
The terms of our debt covenants could limit how we conduct our business and our ability to raise
additional funds.
The indenture that governs the notes contains, and the agreements that govern our future
indebtedness may contain, covenants that restrict our ability and the ability of our subsidiaries
to:
| • | incur additional indebtedness or issue certain preferred shares; |
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| • | create liens on our assets; | ||
| • | pay dividends or make other equity distributions; | ||
| • | purchase or redeem equity interests or subordinated debt; | ||
| • | make certain investments; | ||
| • | sell assets; | ||
| • | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and | ||
| • | engage in transactions with affiliates. |
As a result of these covenants, we could be limited in the manner in which we conduct our
business, and we may be unable to engage in favorable business activities or finance future
operations or capital needs.
Claims of noteholders will be structurally subordinate to claims of creditors of all of our
non-guarantor subsidiaries, and, in addition, certain of our subsidiaries will not be subject to
the restrictive covenants in the indenture governing the notes.
The exchange notes will not be guaranteed by any of our non-U.S. subsidiaries, any U.S.
subsidiaries that we designate as unrestricted subsidiaries in accordance with the indenture
governing the notes or our special purpose vehicles. Accordingly, claims of holders of the exchange
notes will be structurally subordinate to the claims of creditors of these non-guarantor
subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will
have to be satisfied before any of the assets of such subsidiaries would be available for
distribution, upon a liquidation or otherwise, to us or a guarantor of the exchange notes.
Our non-guarantor subsidiaries accounted for $110.1 million and $104.9 million, or 26.8% and
28.3%, of our revenues, and generated Adjusted EBITDA of $18.7 million and $15.3 million, for the
years ended December 31, 2009 and December 31, 2010, respectively. Our non-guarantor subsidiaries
accounted for $439.1 million and $446.5 million, or 65.3% and 65.6%, of our assets, and
$377.4 million and $414.4 million, or 48.6% and 51.3%, of our liabilities as of December 31, 2009 and
December 31, 2010, respectively.
The indenture governing the notes permits us to designate certain of our subsidiaries as
unrestricted subsidiaries, which subsidiaries would not be subject to the restrictive covenants in
the indenture governing the notes. This means that these entities would be able to engage in many
of the activities the indenture governing the notes restricts for us and our restricted
subsidiaries, such as incurring substantial additional debt (secured or unsecured), securing assets
in priority to the claims of the holders of the exchange notes, paying dividends, making
investments, selling, encumbering or disposing of substantial assets, entering into transactions
with affiliates and entering into mergers or other business combinations. For example, we
established a special purpose entity to acquire certain assets and assume certain liabilities in
connection with the ILX acquisition. This entity has been designated as an unrestricted subsidiary
for purposes of the indenture governing the notes. We intend to
pursue transactions similar to the ILX acquisition, including the
potential Tempus transaction described in “Business - Business
Strategies - Capitalizing on current industry dynamics to grow
fee-based revenue”. These actions could be detrimental to our
ability to make payments of principal and interest when due and to comply with their other
obligations under the exchange notes, and could reduce the amount of our assets that would be
available to satisfy your claims should we default on the exchange notes. In addition, the
initiation of bankruptcy or insolvency proceedings or the entry of a judgment against these
entities, or their default under their other credit arrangements, will not result in a default
under the exchange notes.
In addition, the indenture governing the notes permits us to incur indebtedness in connection
with certain permitted securitization transactions through our special purpose vehicles. While
these subsidiaries will be restricted subsidiaries subject to the covenants in the indenture, they
will be permitted to incur an unlimited amount of non-recourse indebtedness secured by consumer
loans in connection with such permitted securitization transactions.
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The value of the collateral securing the exchange notes may not be sufficient to satisfy our
obligations under the exchange notes.
No appraisal of the value of the collateral has been made in connection with this exchange
offer, and the fair market value of the collateral is subject to fluctuations based on factors that
include, among others, general economic conditions and similar factors. The amount to be received
upon a sale of the collateral would be dependent on numerous factors, including, but not limited
to, the actual fair market value of the collateral at such time, the timing and the manner of the
sale and the availability of buyers. By its nature, a substantial majority of the collateral,
including the points held as inventory, is illiquid and may have no readily ascertainable market
value. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, the
collateral may not be sold in a timely or orderly manner and the proceeds from any sale or
liquidation of the collateral may not be sufficient to pay our obligations under the exchange
notes.
To the extent that pre-existing liens (including, for example, tax or bankruptcy liens), liens
permitted under the indenture and other rights, including liens on excluded assets, encumber any of
the collateral securing the exchange notes and the guarantees, parties holding such liens have or
may exercise rights and remedies with respect to the collateral that could adversely affect the
value of the collateral and the ability of the collateral agent, the trustee under the indenture or
the holders of the exchange notes to realize or foreclose on the collateral.
The security interests in the collateral also will be subject to practical problems generally
associated with the realization of security interests in collateral. For example, the consent of a
third party may be required to obtain or enforce a security interest in a contract, and we cannot
assure you that the consents of any third parties will be given when and if required to facilitate
a foreclosure on such assets. Accordingly, the collateral agent may not have the ability to
foreclose upon those assets and the value of the collateral may be significantly impaired. In
addition, because a portion of the collateral will consist of pledges of the capital stock of
certain of our foreign subsidiaries, the validity of those pledges under local law, if applicable,
and the ability of the holders of the exchange notes to realize upon that collateral under local
law, to the extent applicable, may be limited by such local law, which limitations may or may not
affect the liens securing the exchange notes. Furthermore, our business requires compliance with
numerous federal, state and local license and permit requirements. Continued operation of our
properties that serve as collateral for the exchange notes will depend on the continued compliance
with such license and permit requirements, and our business may be adversely affected if we fail to
comply with these requirements or changes in these requirements. In the event of foreclosure, the
transfer of such permits and licenses may be prohibited or may require us to incur significant cost
and expense. Further, we cannot assure you that the applicable governmental authorities will
consent to the transfer of all such permits. If the regulatory approvals required for such
transfers are not obtained or are delayed, the foreclosure may be delayed, a temporary shutdown of
operations may result and the value of the collateral may be significantly impaired.
In addition, the indenture governing the notes permits us, subject to compliance with certain
financial tests, to issue additional debt secured equally and ratably by the same assets pledged
for the benefit of the holders of the exchange notes. This would reduce amounts payable to holders
of the exchange notes from the proceeds of any sale of the collateral, and there may not be
sufficient collateral to pay off any additional amounts we may borrow under any additional notes we
may issue together with the exchange notes. Furthermore, our conduit financings and receivables
securitizations will be secured by consumer loans not subject to senior note liens.
Consequently, liquidating the collateral securing the exchange notes and the guarantees may
not result in proceeds in an amount sufficient to pay any amounts due under the exchange notes
after also satisfying the obligations to pay any creditors with prior liens. If the proceeds of
any sale of collateral are not sufficient to repay all amounts due on the exchange notes, the
holders of the exchange notes (to the extent not repaid from the proceeds of the sale of the
collateral) would have only an unsecured, unsubordinated claim against our and the subsidiary
guarantors’ remaining assets.
We will in most cases have control over the collateral, and the sale of particular assets by us
could reduce the pool of assets securing the exchange notes and the guarantees.
The collateral documents allow us to remain in possession of, retain exclusive control over,
freely operate, and collect, invest and dispose of any income from, the collateral securing the
exchange notes and the guarantees.
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In addition, we will not be required to comply with all or any portion of Section 314(d) of
the Trust Indenture Act of 1939 if we determine, in good faith based on advice of counsel, that,
under the terms of that section and/or any interpretation or guidance as to the meaning thereof of
the SEC and its staff, including “no action” letters or exemptive orders, all or such portion of
Section 314(d) of the Trust Indenture Act is inapplicable to the released collateral. For example,
so long as no default or event of default under the indenture would result therefrom and such
transaction would not violate the Trust Indenture Act, we may, among other things, without any
release or consent by the indenture trustee or holders of the exchange notes, conduct ordinary
course activities with respect to the collateral, such as selling, factoring, abandoning or
otherwise disposing of collateral and making ordinary course cash payments (including repayments of
indebtedness).
There are circumstances other than repayment or discharge of the exchange notes under which the
collateral securing the exchange notes and guarantees will be released automatically, without your
consent or the consent of the trustee.
Under various circumstances, all or a portion of the collateral may be released, including:
| • | to enable the sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture, including the sale of any entity in its entirety that owns or holds such collateral; and | ||
| • | with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee. |
The guarantee of a subsidiary guarantor will be released in connection with a sale of such
subsidiary guarantor in a transaction not prohibited by the indenture.
The indenture also permits us to designate one or more of our restricted subsidiaries that is
a guarantor of the exchange notes as an unrestricted subsidiary. If we designate a subsidiary
guarantor as an unrestricted subsidiary, all of the liens on any collateral owned by such
subsidiary or any of its subsidiaries and any guarantees of the exchange notes by such subsidiary
or any of its subsidiaries will be released under the indenture. Designation of an unrestricted
subsidiary will reduce the aggregate value of the collateral securing the exchange notes to the
extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released.
In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a senior
claim on the assets of such unrestricted subsidiary and its subsidiaries.
The exchange notes and the guarantees will not be secured by liens on our inventory of intervals or
consumer loans.
Although the indenture governing the notes includes certain negative covenants with respect to
our inventory of intervals and consumer loans, the exchange notes and the guarantees will not be
secured by liens on such intervals or loans. Our inventory of intervals is routinely converted to
points and resold to new customers as described elsewhere in this prospectus. As a result of this
constant turnover, it is unduly burdensome to create liens on such intervals to secure the exchange
notes and the guarantees. Further, the exchange notes and the guarantees will not be secured by
liens on any other real estate interests held by us. The exchange notes and the guarantees will be
secured by liens on the points that we hold as inventory in the U.S. We held approximately $373
million of points in inventory in the U.S. at retail value as of December 31, 2010. We held
approximately $334 million of intervals in inventory in the U.S. at retail value as of the same
date. Furthermore, the liens on any points that we hold as inventory will be released
automatically upon such points being sold to customers.
Our consumer loans are routinely transferred to our special purpose vehicles and used in
securitization transactions. As of December 31, 2010, we had approximately $293.3 million of gross
consumer loans (including $247.4 million of consumer loans owned by our special purpose vehicles).
Since our inventory of intervals and our consumer loans are not included in the collateral for
the exchange notes, if an event of default occurs and the exchange notes are accelerated, the
exchange notes and the guarantees will rank equally with holders of other unsubordinated and
unsecured indebtedness of the relevant entity with respect to those assets. In the case of
consumer loans that have been transferred to one of our special purpose
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vehicles, the claims of the exchange note holders will be structurally subordinated to the
claims of all other direct obligations of our special purpose vehicles.
There are certain other categories of our property that are also excluded from the collateral.
Certain other categories of assets are excluded from the collateral securing the exchange
notes and the guarantees. In addition to our inventory of intervals or consumer loans, excluded
assets also include certain equity interests in our foreign subsidiaries, interests in real
property, any property to the extent that a grant of a security interest in such property is
prohibited by law, any contracts (other than certain material contracts) that may not be encumbered
without the consent of the other party to such contract, certain vehicles and payroll accounts,
employee trust accounts, tax accounts, escrow accounts and certain other accounts. See
“Description of the Exchange Notes — Collateral.” If an event of default occurs and the exchange
notes are accelerated, the exchange notes and the guarantees will rank equally with the holders of
other unsubordinated and unsecured indebtedness of the relevant entity with respect to such
excluded property.
Rights of holders of the exchange notes in the collateral may be adversely affected by the failure
to perfect security interests in the collateral.
Applicable law requires that a security interest in certain tangible and intangible assets can
only be properly perfected and its priority retained through certain actions undertaken by the
secured party. The liens on the collateral securing the exchange notes may not be perfected with
respect to the claims of the exchange notes if the collateral agent does not take the actions
necessary to perfect any of these liens. There can be no assurance that the collateral agent will
have taken all actions necessary to create properly perfected security interests, which may result
in the loss of the priority of the security interest in favor of the holders of the exchange notes
to which they would otherwise have been entitled. In addition, applicable law requires that
certain property and rights acquired after the grant of a general security interest, such as
equipment subject to a certificate of title and certain proceeds, can only be perfected at the time
such property and rights are acquired and identified. We and the guarantors have limited
obligations to perfect the security interest of the holders of the exchange notes in specified
collateral. There can be no assurance that the trustee or the collateral agent will monitor, or
that we will inform such trustee or collateral agent of, the future acquisition of property and
rights that constitute collateral, and that the necessary action will be taken to properly perfect
the security interest in such after-acquired collateral. Neither the trustee nor the collateral
agent has an obligation to monitor the acquisition of additional property or rights that constitute
collateral or the perfection of any security interest. Such failure may result in the loss of the
security interest in the collateral or the priority of the security interest in favor of the
exchange notes against third parties.
The pledge of the capital stock and other securities of our subsidiaries that secure the exchange
notes will automatically be released from the lien on them and no longer constitute collateral for
so long as the pledge of such capital stock or such other securities would require the filing of
separate financial statements with the SEC for that subsidiary.
The exchange notes and the guarantees will be secured by a pledge of the stock of
substantially all of our subsidiaries. Under the SEC regulations in effect as of the date of this
prospectus, if the par value, book value as carried by us or market value (whichever is greatest)
of the capital stock, other securities or similar items of a subsidiary pledged as part of the
collateral is greater than or equal to 20% of the aggregate principal amount of the exchange notes
then outstanding, such subsidiary would be required to provide separate financial statements to the
SEC. Therefore, the indenture and the collateral documents provide that any capital stock and
other securities of any of our subsidiaries will be excluded from the collateral for so long as the
pledge of such capital stock or other securities would cause such subsidiary to be required to file
separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect
from time to time). As a result, holders of the exchange notes could lose a portion or all of their
security interest in the capital stock or other securities of those subsidiaries during such
period. It may be more difficult, costly and time-consuming for holders of the exchange notes to
foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities,
so the proceeds realized upon any such foreclosure could be significantly less than those that
would have been received upon any sale of the capital stock or other securities of such subsidiary.
See “Description of the Exchange Notes — Collateral.”
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If we default on our obligations to pay our other indebtedness, we may not be able to make payments
on the exchange notes.
Any default under the agreements governing our outstanding indebtedness that is not waived by
the required lenders, and the remedies sought by the holders of such indebtedness could make us
unable to pay principal, premium, if any, and interest on the exchange notes and substantially
decrease the market value of the exchange notes. If we are unable to generate sufficient cash flow
and are otherwise unable to obtain funds necessary to meet required payments of principal, premium,
if any, and interest on our indebtedness, or we otherwise fail to comply with the various
covenants, including financial and operating covenants, in the instruments governing our
indebtedness, we could be in default under the terms of the agreements governing such indebtedness.
In the event of such default, the holders of such indebtedness could elect to declare all the
funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, or
could elect to terminate their commitments, cease making further loans and institute foreclosure
proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our
operating performance declines, we may in the future need to seek to obtain waivers from the
holders of such indebtedness to avoid being in default. If we breach our covenants under our
indebtedness, and seek a waiver, we may not be able to obtain a waiver from the holders of such
indebtedness. If this occurs, we would be in default under indebtedness, the holders of such
indebtedness could exercise their rights as described above, and we could be forced into bankruptcy
or liquidation.
We may not be able to satisfy our obligations to holders of the exchange notes upon a change of
control.
Upon the occurrence of a “change of control,” as defined in the indenture that governs the
notes, each holder of the exchange notes will have the right to require us to purchase the exchange
notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
Our failure to purchase the exchange notes would be a default under the indenture and any such
default could result in a default under certain of our other indebtedness. If a change of control
occurs, we may not have the financial resources needed to purchase all of the exchange notes that
may be tendered to us. Upon the occurrence of a change of control, we could seek to refinance the
exchange notes and our other outstanding indebtedness, or obtain a waiver from you as a holder of
the exchange notes and the holders of our other indebtedness. However, we may not be able to obtain
such waivers or refinance our indebtedness, including the exchange notes, on commercially
reasonable terms, if at all. Furthermore, the definition of change of control in the indenture
governing the notes includes a phrase relating to the sale of “all or substantially all” of our
assets. There is no precise established definition of the phrase “substantially all” under
applicable law. Accordingly, the ability of a holder of exchange notes to require us to repurchase
its exchange notes as a result of a sale of less than all our assets to another person may be
uncertain.
The collateral is subject to casualty risks and potential environmental liabilities.
We intend to maintain insurance or otherwise insure against hazards in a manner appropriate
and customary for our business. There are, however, certain losses that may be either uninsurable
or not economically insurable, in whole or in part. Insurance proceeds may not compensate us fully
for our losses. If there is a complete or partial loss of any of the collateral securing the
exchange notes and the guarantees, the insurance proceeds may not be sufficient to satisfy all of
the secured obligations, including the exchange notes and the guarantees. In the event of a
complete or partial loss to any of our facilities, certain items of equipment and inventory may not
be easily replaced. Accordingly, even though there may be insurance coverage, the extended period
needed to obtain replacement units or inventory could cause significant delays.
Any future pledge of collateral or guarantee might be avoidable in bankruptcy.
The indenture governing the notes provides that any of our subsequently acquired or organized
direct or indirect subsidiaries will guarantee the exchange notes and secure their guarantees with
liens on their assets. The indenture also requires us and the guarantors to grant liens on certain
assets that we or the guarantors acquire after the exchange notes are issued. If the entity
granting an additional lien or guarantee were insolvent at the time of the grant and if such grant
was made within 90 days before that entity commenced a bankruptcy case (or one year before
commencement of a bankruptcy case if the creditor that benefited from the lien or guarantee is an
“insider” under the U.S. Bankruptcy Code, or the Bankruptcy Code), and the granting of the lien or
additional guarantee enabled the noteholders to receive more than they would if the debtor were
liquidated under Chapter 7 of the
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Bankruptcy Code, then the additional lien or guarantee could be avoided (that is, cancelled)
as a preferential transfer.
In the event of our bankruptcy, the ability of the holders of the exchange notes to realize upon
the collateral will be subject to certain bankruptcy law limitations.
The ability of holders of the exchange notes to realize upon the collateral will be subject to
certain bankruptcy law limitations in the event of our bankruptcy. Under the Bankruptcy Code,
secured creditors are prohibited from, among other things, repossessing their security from a
debtor in a bankruptcy case without bankruptcy court approval and may be prohibited from retaining
security repossessed by such creditor without bankruptcy court approval. Moreover, the Bankruptcy
Code generally permits the debtor to continue to retain collateral, including cash collateral, even
though the debtor is in default under the applicable debt instruments, provided that the secured
creditor is given “adequate protection.”
The secured creditor is entitled to “adequate protection” to protect the value of the secured
creditor’s interest in the collateral as of the commencement of the bankruptcy case but the
adequate protection actually provided to a secured creditor may vary according to the
circumstances. Adequate protection may include cash payments or the granting of additional security
if and at such times as the court, in its discretion and at the request of such creditor,
determines after notice and a hearing that the collateral has diminished in value as a result of
the imposition of the automatic stay of repossession of such collateral or the debtor’s use, sale
or lease of such collateral during the pendency of the bankruptcy case. In view of the lack of a
precise definition of the term “adequate protection” and the broad discretionary powers of a U.S.
bankruptcy court, we cannot predict whether or when the collateral agent could foreclose upon or
sell the collateral or whether or to what extent holders of exchange notes would be compensated for
any delay in payment or loss of value of the collateral through the requirement of “adequate
protection.”
Federal and state fraudulent transfer laws may permit a court to void the guarantees, and, if that
occurs, you may not receive any payments on the exchange notes.
The issuance of the guarantees and the related security interests granted by the subsidiary
guarantors may be subject to review under federal and state fraudulent transfer and conveyance
statutes. While the relevant laws may vary from state to state, under such laws the incurrence of a
guarantee obligation and grant of related collateral will be a fraudulent conveyance if any
guarantor received less than reasonably equivalent value or fair consideration in exchange for
issuing such guarantee and granting such collateral, and one of the following is also true:
| • | the guarantor was insolvent or rendered insolvent by reason of the incurrence of the indebtedness; | ||
| • | the guarantor was left with an unreasonably small amount of capital to carry on its business; or | ||
| • | the guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature. |
If a court were to find that the issuance of a guarantee was a fraudulent conveyance, the
court could void the payment obligations under such guarantee and enforcement of the related
collateral or subordinate such guarantee to presently existing and future indebtedness of such
guarantor, or require the holders of the exchange notes to repay any amounts received with respect
to such guarantee.
Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:
| • | the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets; | ||
| • | the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and mature; or | ||
| • | it could not pay its debts as they become due. |
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We cannot be certain as to the standards a court would use to determine whether or not a
guarantor was solvent at the relevant time, or regardless of the standard that a court uses, that
the guarantees would not be subordinated to other obligations or any guarantor.
Each subsidiary guarantee will contain a provision designed to limit the guarantor’s liability
to the maximum amount that it could incur without causing the incurrence of obligations under its
guarantee to be a fraudulent transfer. However, there is some question as to whether this provision
will be effective to protect the guarantees from being voided under fraudulent transfer law. For
example, in a recent Florida bankruptcy case, a similar provision was found to be ineffectual to
protect the guarantee. In addition, this provision may reduce the guarantor’s obligations to an
amount that effectively makes the guarantee worthless.
Because each guarantor’s liability under its guarantee may be reduced to zero, avoided or released
under certain circumstances, you may not receive any payments from some or all of the guarantors.
You have the benefit of the guarantees of the guarantors. However, the guarantee by each
subsidiary guarantor is limited by its terms to the maximum amount that such subsidiary guarantor
is permitted to guarantee under applicable law. As a result, a subsidiary guarantor’s liability
under its guarantee could be reduced to zero, depending on the amount of other obligations of such
guarantor. Further, under the circumstances as discussed above, a court under Federal or state
fraudulent conveyance and transfer statutes could void the obligations under a guarantee or further
subordinate it to all other obligations of the guarantor. In addition, you will lose the benefit
of a particular guarantee if it is released as permitted by the indenture securing the exchange
notes. See “Description of the Exchange Notes — Guarantees.”
In the event of a bankruptcy of us or any of the guarantors, holders of the exchange notes may be
deemed to have an unsecured claim to the extent that our obligations in respect of the exchange
notes exceed the fair market value of the collateral securing the exchange notes.
In any bankruptcy proceeding with respect to us or any of the guarantors, it is possible that
the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair
market value of the collateral with respect to the exchange notes on the date of the bankruptcy
filing was less than the then-current principal amount of the exchange notes. Upon a finding by the
bankruptcy court that the exchange notes are under-collateralized, the claims in the bankruptcy
proceeding with respect to the exchange notes would be bifurcated between a secured claim in an
amount equal to the value of the collateral and an unsecured claim with respect to the remainder of
its claim which would not be entitled to the benefits of security in the collateral. Other
consequences of a finding of under-collateralization would be, among other things, a lack of
entitlement on the part of the exchange notes to receive post-petition interest and a lack of
entitlement on the part of the unsecured portion of the exchange notes to receive “adequate
protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest
had been made at any time prior to such a finding of under-collateralization, those payments would
be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured
claim with respect to the exchange notes. Regardless of whether the exchange notes were fully
secured, the noteholders could be compelled to exchange their exchange notes for other securities
that may have less favorable terms than the exchange notes.
Your ability to transfer the exchange notes may be limited by the absence of an active trading
market, and there is no assurance that any active trading market will develop for the exchange
notes and you may not be able to sell them quickly or at the price you paid.
There is no established public market for the exchange notes. We do not intend to apply for
the exchange notes to be listed on any securities exchange or to arrange for their quotation on any
automated dealer quotation system. The initial purchasers in the private offering of the
outstanding notes have advised us that they intend to make a market in the exchange notes as
permitted by applicable laws and regulations; however, these initial purchasers are not obligated
to make a market in the exchange notes and they may discontinue their market-making activities at
any time without notice. Therefore, an active market for the exchange notes may not develop or, if
developed, it may not continue. Historically, the markets for non-investment grade debt have been
subject to disruptions that have caused substantial volatility in the prices of securities similar
to the exchange notes. The
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market, if any, for the exchange notes may experience similar disruptions and any such
disruptions may adversely affect the prices at which you may sell your exchange notes.
Changes in our credit rating could adversely affect the market price or liquidity of the exchange
notes.
Credit rating agencies continually revise their ratings for the companies that they follow,
including us. The credit rating agencies also evaluate our industry as a whole and may change
their credit ratings for us based on their overall view of our industry. We cannot be sure that
credit rating agencies will maintain their ratings on the exchange notes. A negative change in our
ratings could have an adverse effect on the price of the exchange notes.
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange notes pursuant to
the exchange offer. In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of
which are identical in all material respects to the exchange notes, except that the exchange notes
are registered under the Securities Act, are not entitled to the registration rights which are
applicable to the outstanding notes, and are not subject to certain special interest rate
provisions applicable to the outstanding notes. The outstanding notes surrendered in exchange for
the exchange notes will be retired and canceled and cannot be reissued. Accordingly, issuance of
the exchange notes will not result in any material change in our capitalization.
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CAPITALIZATION
The following table sets forth the cash and cash equivalents and capitalization of
Diamond Resorts Parent, LLC, our indirect parent company, as of December 31, 2010.
You should read this table in conjunction with “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial
statements included elsewhere in this prospectus.
| As of | ||||
| December 31, 2010 | ||||
| ($ in thousands) | ||||
Cash and cash equivalents |
$ | 27,329 | ||
Debt: |
||||
$425 million principal amount of senior secured notes
offered hereby (net of unamortized original issue
discount of $10.3 million) |
$ | 414,722 | ||
Securitization notes and conduit facilities (1) |
186,843 | |||
Notes payable (2) |
23,273 | |||
Total debt |
624,838 | |||
Total member capital (deficit) |
(211,749 | ) | ||
Total capitalization |
$ | 413,089 | ||
| (1) | Consists of certain non-recourse indebtedness related to our consumer financing business incurred by our special purpose vehicles. See “Description of Other Indebtedness” for additional information. | |
| (2) | Consists primarily of (a) the ILXA Inventory Loan and the Tempus Acquisition Loan described in “Description of Other Indebtedness” and (b) financed premiums on certain insurance policies under unsecured notes. For additional information, see “Description of Other Indebtedness.” |
We have a $65 million conduit facility which is scheduled to terminate on August 30, 2011 and
is annually renewable at the election of the lenders. We also have a $40 million loan sale
facility with Quorum with an initial maturity date of April 30, 2012. As of December 31, 2010, the
principal amounts outstanding under this conduit facility and the Quorum loan sale facility were
$39.5 million and $12.9 million, respectively. Future borrowings under these facilities are subject
to the availability of eligible consumer loans to collateralize the related borrowings. See
“Description of Other Indebtedness — Securitization and
Other Receivables Transactions.”
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Set forth below is selected consolidated financial and operating data of Diamond Resorts
Parent, LLC at the dates and for the periods indicated. The selected consolidated statement of
operations data for the period from April 27, 2007 to December 31, 2007 and the years ended
December 31, 2008, December 31, 2009 and December 31, 2010, and the selected consolidated balance
sheet data as of December 31, 2009 and December 31, 2010 have been derived from
our audited consolidated financial statements included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 2007 and
December 31, 2008 have been derived from our audited
consolidated balance sheets as of December 31, 2007 and December
31, 2008, which are not included in this prospectus. The
selected consolidated statement of operations data for the twelve months ended September 30, 2006
and the period from October 1, 2006 to April 26, 2007, and the selected consolidated balance sheet
data as of September 30, 2006 and April 26, 2007, have been derived from the unaudited condensed
consolidated financial statements of Sunterra Corporation, our predecessor company, which are not
included in this prospectus.
The Company acquired Sunterra Corporation on April 27, 2007, at which time we applied purchase
accounting pursuant to which all of the assets and liabilities of Sunterra Corporation were
adjusted to their then-fair market value. Due to the application of purchase accounting and the
businesses owned by us before the acquisition (which are not reflected in our predecessor’s
financial information), the financial results for the periods before the acquisition are not
comparable to the financial results for the periods after the acquisition. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Presentation of Certain
Financial Metrics” for additional information.
All financial information for Sunterra Corporation for periods prior to April 27, 2007
presented in this prospectus has not been audited by our independent registered public accounting
firm. This financial information was derived by combining our predecessor’s U.S. financial
information with our predecessor’s European financial information, after recasting such European
financial information on a GAAP basis (rather than a statutory basis).
The selected consolidated financial and operating data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited and unaudited consolidated financial statements included elsewhere in
this prospectus.
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| Predecessor | Company | |||||||||||||||||||||||
| Year | October 1, | |||||||||||||||||||||||
| Ended | 2006- | April 27- | Year Ended | |||||||||||||||||||||
| September 30, | April 26, | December 31, | December 31 | |||||||||||||||||||||
| 2006 | 2007 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
| (Unaudited) | (Unaudited) | (Audited) | (Audited) | (Audited) | (Audited) | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
Statement of Operations
Data: |
||||||||||||||||||||||||
Total revenues |
$ | 406,865 | $ | 226,479 | $ | 263,969 | $ | 402,414 | $ | 410,961 | $ | 370,825 | ||||||||||||
Total costs and expenses |
396,656 | 230,500 | 309,595 | 489,577 | 432,757 | 391,258 | ||||||||||||||||||
Income (loss) before
provision (benefit) for
income taxes, discontinued operations and cumulative effect of change in accounting principle |
10,209 | (4,021 | ) | (45,626 | ) | (87,163 | ) | (21,796 | ) | (20,433 | ) | |||||||||||||
Provision (benefit) for
income taxes |
4,534 | (3,061 | ) | 1,594 | 1,809 | (799 | ) | (1,274 | ) | |||||||||||||||
Income (loss) before
discontinued operations
and cumulative effect
of change in accounting
principle |
5,675 | (960 | ) | (47,220 | ) | (88,972 | ) | (20,997 | ) | (19,159 | ) | |||||||||||||
Loss on discontinued
operations |
— | (2,559 | ) | — | — | — | — | |||||||||||||||||
Cumulative effect of
change in accounting
principle |
(21,010 | ) | — | — | — | — | — | |||||||||||||||||
Net loss |
$ | (15,335 | ) | $ | (3,519 | ) | $ | (47,220 | ) | $ | (88,972 | ) | $ | (20,997 | ) | $ | (19,159 | ) | ||||||
Ratio of
Earnings to Fixed Charges: |
||||||||||||||||||||||||
Ratio of
earnings to fixed charges(1) |
1.4 | x | 0.6 | x | 0.2 | x | (0.2)x | 0.7 | x | 0.7 | x | |||||||||||||
| As of | As of | |||||||||||||||||||||||
| September 30, | April 26, | As of December 31 | ||||||||||||||||||||||
| 2006 | 2007 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
| (Unaudited) | (Unaudited) | (Audited) | (Audited) | (Audited) | (Audited) | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||||||
Mortgages and contracts receivable, net |
$ | 236,522 | $ | 240,469 | $ | 325,254 | $ | 300,795 | $ | 263,556 | $ | 245,287 | ||||||||||||
Unsold vacation interests, net |
226,442 | 215,759 | 246,639 | 218,116 | 203,225 | 190,564 | ||||||||||||||||||
Total assets |
666,292 | 759,356 | 891,129 | 749,318 | 672,118 | 680,751 | ||||||||||||||||||
Borrowings under line of credit agreements |
175,343 | 196,858 | 412,250 | 389,000 | 393,954 | — | ||||||||||||||||||
Securitization notes and conduit facilities |
83,542 | 69,113 | 316,557 | 291,965 | 222,913 | 186,843 | ||||||||||||||||||
Convertible
bonds(2) |
95,000 | 95,000 | — | — | — | — | ||||||||||||||||||
Senior
secured notes, net of unamortized original issue discount |
— | — | — | — | — | 414,722 | ||||||||||||||||||
Total liabilities |
464,241 | 486,271 | 867,986 | 837,066 | 775,979 | 807,998 | ||||||||||||||||||
| (1) | For purposes of calculating this ratio, “earnings” consist of earnings (loss) before provision (benefit) for income taxes plus fixed charges, and “fixed charges” consist of interest expense, including amortization of deferred financing costs and amortization of original issue discount. For the years ended December 31, 2010, 2009, 2008 and 2007, our earnings were insufficient to cover fixed charges, and the amount of additional earnings needed to cover fixed charges for such periods were $20.4 million, $21.8 million, $87.5 million and $47.4 million, respectively. | |
| (2) | Convertible bonds that were issued in March 2004. These bonds were repaid in full in connection with the acquisition of Sunterra Corporation. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with “Selected Consolidated
Financial and Operating Data” and our consolidated financial statements and other financial
information included elsewhere in this prospectus. The statements in this discussion regarding
market conditions and outlook, our expectations regarding our future performance, liquidity and
capital resources and other non-historical statements are subject to numerous risks and
uncertainties, including, but not limited to, the risks and uncertainties described under
“Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.” Our actual results
may differ materially from those contained in or implied by any forward-looking statements.
Overview
We are one of the world’s largest companies in the vacation ownership industry, with an
ownership base of more than 380,000 families and a network of 196 resorts located in 28 countries
throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, Europe, Asia,
Australia and Africa. Our operations consist of three interrelated businesses that provide us with
diversified and stable cash flow: (i) hospitality and management services; (ii) marketing and sales
of VOIs; and (iii) consumer financing for purchasers of our VOIs. For financial reporting purposes,
our business consists of two segments: Hospitality and Management Services, which is composed of
our hospitality and management services operations, including our operations related to the
management of our resort properties, the Collections and THE Club; and Vacation Interest Sales and
Financing, which is composed of our marketing and sales of VOIs and the consumer financing of those
interests.
Optimization of Operations
Since the acquisition of Sunterra Corporation in April 2007, our leadership team, led by
Stephen J. Cloobeck, our Chairman and CEO, and David F. Palmer, our President and CFO, has taken a
number of significant steps to change our strategic focus, build our brand recognition and
streamline our operations. We believe these actions have enabled us to maintain relatively stable
financial performance, even in the face of challenging economic and industry conditions. These
actions have included: (i) implementing a new focus throughout our resorts on service and
hospitality to provide our members a premium experience; (ii) introducing the Diamond Resorts
International brand throughout our network of managed resorts; and (iii) renegotiating our
hospitality management agreements to provide improved cost recovery.
The economic recession, the global credit crisis and the erosion of consumer confidence have
contributed to a difficult business environment since 2007. These factors have had an impact on
sales of our VOIs, the performance of our consumer loans portfolio, the terms under which we have
been able to securitize our consumer loans and our access to external financing. In response to
these conditions, since October 2008 we have sought to improve our operating results by:
| • | improving selling and marketing efficiencies through the elimination of certain sales incentives and the marketing programs that relied upon these incentives to motivate purchasers of VOIs; |
| • | maximizing our fee-for-service revenue, primarily in our hospitality and management services business; |
| • | closing three low margin sales centers; and |
| • | reducing head count in our sales force and related staffing at the corporate level. |
We also reduced our reliance on the capital markets through a decrease in the volume of
consumer loans, which we accomplished by:
| • | implementing incentive programs to increase cash sales; |
| • | increasing interest rates on new consumer loans; and |
| • | tightening credit requirements. |
We believe these efforts have enabled us to maintain relatively stable financial performance.
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Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with GAAP. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we
evaluate our estimates and assumptions, including those related to revenue, bad debts and income
taxes. These estimates are based on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results of our analysis form the basis for
making assumptions about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences may be material to our consolidated
financial statements.
Critical accounting policies are those policies that, in management’s view, are most important
in the portrayal of our financial condition and results of operations. The methods, estimates and
judgments that we use in applying our accounting policies have a significant impact on the results
that we report in our financial statements. These critical accounting policies require us to make
difficult and subjective judgments, often as a result of the need to make estimates regarding
matters that are inherently uncertain. Those critical accounting policies and estimates that
require the most significant judgment are discussed further below.
Vacation Interest Sales Revenue Recognition. With respect to our recognition of revenue from
VOI sales, we follow the guidelines included in ASC 978, “Real Estate-Time-Sharing Activities.”
Under ASC 978, vacation interest sales revenue is divided into separate components that include the
revenue earned on the sale of the VOI and the revenue earned on the sales incentive given to the
customer as motivation to purchase the VOI. Each component is treated as a separate transaction and
recorded in different line items of our statement of operations. In order to recognize revenue on
the sale of VOIs, ASC 978 requires a demonstration of a buyer’s commitment (generally a cash
payment of 10% of the purchase price plus the value of any sales incentives provided). A buyer’s
down payment and subsequent mortgage payments are adequate to demonstrate a commitment to pay for
the VOI once 10% of the purchase price plus the value of the incentives provided to consummate a
VOI transaction has been covered. We recognize sales of VOIs on an accrual basis after (i) a
binding sales contract has been executed; (ii) the buyer has adequately demonstrated a commitment
to pay for the VOI; (iii) the rescission period required under applicable law has expired; (iv)
collectibility of the receivable representing the remainder of the sales price is reasonably
assured; and (v) we have completed substantially all of our obligations with respect to any
development related to the real estate sold (i.e., construction has been substantially completed
and certain minimum project sales levels have been met). If the buyer’s commitment has not met ASC
978 guidelines, the VOI sales revenue and related vacation interest cost of sales and direct
selling costs are deferred and recognized under the installment method until the buyer’s commitment
is satisfied, at which time the full amount of the sale is recognized. The net deferred revenue is
included in mortgages and contracts receivable on our balance sheet. Under ASC 978, the provision
for uncollectible vacation interest sales revenue is recorded as a reduction of vacation interest sales
revenue.
Vacation Interest Cost of Sales. We record vacation interest cost of sales using the relative
sales value method in accordance with ASC 978, which requires us to make significant estimates
which are subject to significant uncertainty. In determining the appropriate amount of costs using
the relative sales value method, we rely on complex, multi-year financial models that incorporate a
variety of inputs, most of which are management estimates. These amounts include, but are not
limited to, estimated costs to build or acquire any additional VOIs, estimated total revenues
expected to be earned on a project, including estimated sales price per point and estimated number
of points sold, related estimated provision for uncollectible
vacation interest sales revenue and sales
incentives, and estimated projected future cost and volume of recoveries of VOIs. These models are
reviewed on a regular basis, and the relevant estimates used in the models are revised based upon
historical results and management’s new estimates. Any changes in the estimates we use to determine
the vacation interest cost of sales are recorded in the current period, and these changes can be
material. Small changes in any of the numerous assumptions in the model can have a significant
financial statement impact as ASC 978 requires a retroactive adjustment back to the time of the
Sunterra Corporation acquisition in the current period. Much like depreciation or amortization,
for us vacation interest cost of sales is essentially a non-cash expense item.
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Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses. We account for
mortgages (for the financing of intervals) and contracts receivable (for the financing of points)
under ASC 310, “Receivables.”
Mortgages
and contracts receivable that we originate or acquire are recorded net of (i) deferred loan and
contract costs, (ii) the discount or premium on the acquired mortgage pool
and (iii) the related allowance for
loan and contract losses. Loan and contract origination costs incurred in connection with providing
financing for VOIs are capitalized and amortized over the term of the related mortgages or
contracts receivable as an adjustment to interest revenue using the effective interest method.
Because we currently sell VOIs only in the form of points, we are not currently originating any new
mortgages. We record a sales provision for estimated mortgage and contracts receivable losses as a
reduction to vacation interest sales revenue. This provision is calculated as projected gross
losses for originated mortgages and contracts receivable, taking into account estimated VOI
recoveries. If actual mortgage and contracts receivable losses differ materially from these
estimates, our future results of operations may be adversely impacted.
We apply our historical default percentages based on credit scores of the individual customers
to our mortgage and contracts receivable population to analyze the adequacy of the allowance and
evaluate other factors such economic conditions, industry trends, defaults and past due agings. Any
adjustments to the allowance for mortgage and contracts receivable loss are also recorded within
vacation interest sales revenue.
We charge off mortgages and contracts receivable upon the earliest of (i) the initiation of
cancellation or foreclosure proceedings or (ii) the customer’s account becoming 180 days
delinquent. Once a customer has made six timely payments following the event leading to the charge
off, the charge off is reversed. A default in a customer’s initial payment results in a rescission
of the sale. All collection and foreclosure costs are expensed as incurred.
The mortgages we acquired on April 27, 2007 in connection with the Sunterra Corporation
acquisition are accounted for separately as an acquired pool of loans. Any discount or premium
associated with this pool of loans is amortized using an amortization method that approximates the
effective interest method.
Unsold Vacation Interests, Net. Unsold VOIs are valued at the lower of cost or fair market
value. The cost of unsold VOIs includes acquisition costs, hard and soft construction costs, the
cost incurred to recover inventory and other carrying costs (including interest, real estate taxes
and other costs incurred during the construction period). Costs are expensed to vacation interest
cost of sales under the relative sales value method described above. In accordance with ASC 978,
the costs capitalized for recovered intervals differ based on a variety of factors, including the
method of recovery and the timing of the original sale and/or loan origination.
Income Taxes. We are subject to income taxes in the United States (including federal and
state) and numerous foreign jurisdictions in which we operate. We record income taxes under the
asset and liability method, whereby deferred tax assets and liabilities are recognized based on the
future tax consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases, and
attributable to operating loss and tax credit carry-forwards. Accounting standards regarding income
taxes require a reduction of the carrying amounts of deferred tax assets by a valuation allowance,
if based on the available evidence, it is more likely than not that such assets will not be
realized. Accordingly, the need to establish valuation allowances for deferred tax assets is
assessed periodically based on a more-likely-than-not realization threshold. This assessment
considers, among other matters, the nature, frequency and severity of current and cumulative
losses, forecasts of future profitability, the duration of statutory carry-forward periods, our
experience with operating loss and tax credit carry forwards not expiring unused, and tax planning
alternatives.
We recorded a deferred tax asset as a result of net operating losses incurred, and as part of
our financial reporting process, we must assess the likelihood that our deferred tax assets can be
recovered. During this process, certain relevant criteria are evaluated, including the existence of
deferred tax liabilities against which deferred tax assets can be applied, and taxable income in
future years. Unless recovery is more likely than not, a reserve in the form of a valuation
allowance is established as an offset to the deferred tax asset. As a result of uncertainties
regarding our ability to generate sufficient taxable income to utilize our net operating loss
carry forwards, we maintain a valuation allowance against the balance of our deferred tax assets.
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Accounting standards regarding uncertainty in income taxes provide a two-step approach to
recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount
which is more than 50% likely, based solely on the technical merits, of being sustained on
examinations. We consider many factors when evaluating and estimating our tax positions and tax
benefits, which may require periodic adjustments and which may not accurately anticipate actual
outcomes.
Segment Reporting
For financial reporting purposes, we present our results of operations and financial condition
in two business segments. The first business segment is Hospitality and Management Services, which
includes our operations related to the management of our resort
properties, the Collections and revenue from our operation of THE
Club and the provision of other services. The second business segment, Vacation Interest Sales and Financing, includes our operations
relating to the marketing and sales of our VOIs, as well as our consumer financing activities
related to such sales. While certain line items reflected on our statement of operations fall
completely into one of these business segments, other line items relate to revenues or expenses
which are applicable to both segments. For line items that are applicable to both segments,
revenues or expenses are allocated by management as described under “Key Revenue and Expense
Items,” which involves significant estimates. Certain expense items (principally
corporate interest expense and depreciation and amortization) are not, in management’s view,
allocable to either of our business segments as they apply to the entire Company. In addition,
general and administrative expenses are not allocated to either of these business segments because
historically management has not allocated these expenses for purposes
of evaluating our
different operational divisions. Accordingly, these expenses are presented under Corporate and
Other.
Management
believes that it is impracticable to allocate specific assets and liabilities related to
each business segment. In addition, management does not review balance sheets by business segment as part of
their evaluation of operating segment performance. Consequently, no balance sheet segment reports
have been presented.
We also operate our business in two geographic areas, which are described below in
“Information Regarding Geographic Areas of Operation” and the notes to our consolidated financial
statements included elsewhere in this prospectus.
Key Revenue and Expense Items
Vacation
Interest Revenue, Net. Vacation interest revenue, net,
is comprised of vacation interest sales, net of a provision for
uncollectable vacation interest revenue. Vacation interest sales
consist of revenue from the
sale of points, which can be utilized for vacations at any of the resorts in our network for
varying lengths of stay, and from the sale of intervals, which provide the right to vacation at a
particular resort for a specified length of time, net of the expense
associated with certain sales incentives. Since October 1, 2007, we have sold VOIs
primarily in the form of points. All
of our vacation interest revenue, net, is allocated to our Vacation Interest Sales and Financing
business segment.
Management, Member and Other Services Revenue. Management, member and other services revenue
includes resort management fees charged to HOAs and Collections that hold our members’ VOIs, as
well as revenues from our operation of THE Club and the provision of other services. These revenues
are recorded and recognized as follows:
| • | Management fee revenues are recognized in accordance with the terms of our management contracts. We collect maintenance fees from our HOAs and Collections under our management agreements, which are recognized ratably throughout the year as earned. All of these revenues are allocated to our Hospitality and Management Services business segment. |
| • | We charge an annual fee for membership in THE Club, our internal exchange, reservation and membership service organization. In addition to annual dues associated with THE Club, we earn revenue associated with customer conversions into THE Club, which involve the payment of a one-time fee by interval owners who wish to retain their intervals but also participate in THE Club. We also earn revenue through our provision of travel-related services and other affinity programs. All of these revenues are allocated to our Hospitality and Management Services business segment. |
| • | Other services revenue includes (i) collection fees paid by owners when they bring their accounts current after collection efforts have been made by us on behalf of HOAs; (ii) travel services revenue from our European travel operations, which we discontinued during the second quarter of 2008; (iii) reservation protection plan revenue, which is an optional fee paid by customers when making a reservation to protect their points should they need to cancel their reservation; (iv) closing costs on sales of VOIs; (v) revenue associated with certain sales incentives given to customers as motivation to purchase a VOI, which is recorded upon recognition of the related VOI sales revenue; and (vi) late/impound fees assessed on delinquent consumer loans. Revenues associated with items (i), (ii) and (iii) above are allocated to our Hospitality and Management Services business segment, and revenues associated with items (iv), (v) and (vi) above are allocated to our Vacation Interest Sales and Financing business segment. |
Consolidated
Resort Operations Revenue. Consolidated resort operations revenue
consists of the following:
| • | For our properties located in the Caribbean, we provide services traditionally administered by an HOA. Consolidated resort operations revenue includes the maintenance fees billed to owners and the Collections by our St. Maarten HOAs, which are recognized ratably over the year. In addition, these HOAs also bill the owners for capital project assessments to repair and replace the amenities of these resorts, as well as special assessments to reserve the out-of-pocket deductibles for hurricanes and other natural disasters. These assessments are deferred until refurbishment activity occurs, at which time the amounts collected are recognized as a direct reduction to refurbishment expense in consolidated resort operations expense. All operating revenues and expenses associated with these |
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| properties are consolidated within our financial statements, except for intercompany transactions, such as maintenance fees for our owned inventory and management fees, which are eliminated. |
| • | Food and beverage revenue at certain resorts whose restaurants we manage directly; |
| • | Greens fees, equipment rental and operation of food services at the golf courses owned and managed by us at certain resorts; |
| • | Revenue from providing cable, telephone, and technology services to HOAs; and |
| • | Other incidental revenues generated at the resorts including, but not limited to, retail and gift shops, activity fees for arts and crafts, sport equipment rental, and safe rental. |
Interest Revenue. Our interest revenue consists primarily of interest earned on consumer
loans. Interest earned on consumer loans is accrued based on the contractual provisions of the loan
documents. Interest accruals on consumer loans are suspended at the earliest of (i) a first payment
default; (ii) the initiation of cancellation or foreclosure proceedings; or (iii) the customer’s
account becoming 180 days delinquent. If payments are received while a consumer loan is considered
delinquent, interest is recognized on a cash basis. Interest accrual resumes once a customer has
made six timely payments on the loan. All interest revenue is allocated to our Vacation Interest
Sales and Financing business segment, with the exception of interest revenue earned on bank account
balances, which is reported in Corporate and Other.
Vacation
Interest Cost of Sales. At the time we record related vacation
interest sales revenue, we
record vacation interest cost of sales. See “— Critical Accounting Policies and Use of Estimates
— Vacation Interest Cost of Sales” for further explanation of the determination of this expense.
All of these costs are allocated to our Vacation Interest Sales and Financing business segment.
Advertising, Sales and Marketing Costs. Advertising, sales and marketing costs are expensed as
incurred, except for costs directly related to VOI sales that are not eligible for revenue
recognition under ASC 978, as described under “— Critical Accounting Policies and Use of Estimates
— Vacation Interest Sales Revenue Recognition,” which are deferred along with related revenue
until the buyer’s commitment requirements are satisfied. Advertising, sales and marketing costs are
allocated to our Vacation Interest Sales and Financing business segment.
Vacation Interest Carrying Cost, Net. We are responsible for paying HOA annual maintenance
fees and reserves on our unsold VOIs. Vacation interest carrying cost, net, includes amounts paid
for delinquent maintenance fees related to VOIs acquired pursuant to our inventory recovery
agreements, except for amounts that are capitalized to unsold vacation interests, net. In addition,
we historically entered into subsidy agreements to fund negative cash flows of certain HOAs. These
subsidy agreements were discontinued as of December 31, 2008. All subsidy-related costs were
expensed as incurred.
To offset our vacation interest carrying cost, we rent VOIs controlled by us to third parties
on a short-term basis. We also generate revenue on sales of one-week rentals and mini-vacations,
which allow prospective owners to sample a resort property. This revenue and the associated
expenses are deferred until the vacation is used by the customer or the expiration date, whichever
is earlier. Revenue from resort rentals, one-week rentals and mini-vacations is recognized as a
reduction to vacation interest carrying cost, with the exception of our European sampler product,
which is three years in duration and is treated as vacation interest sales revenue. Vacation
interest carrying cost, net, is allocated to our Vacation Interest Sales and Financing business
segment.
Management,
Member and Other Services Expense. Currently, substantially all
direct expenses related to the provision of services to the HOAs (other than
for our Caribbean resorts, for which we provide services traditionally administered by an HOA) and the Collections
are recovered through our management agreements, and
consequently are not recorded as expenses. We pass through to the
HOAs certain overhead charges incurred to operate the resorts.
In accordance with guidance included in ASC 605-45, “Revenue Recognition — Principal Agent
Considerations” (“ASC 605-45”) reimbursements from the HOAs relating to pass-through
costs are recorded net of the related expenses.
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Expenses associated with our operation of THE Club include costs of our customer service
contact centers, fees paid to an external exchange provider and other items. In addition, we also
incur selling costs associated with customer conversions into THE Club. These expenses
are allocated to our Hospitality and Management Services business segment.
Other services expenses include costs related to our travel operations, which were
discontinued during the second quarter of 2008. Other expenses associated with certain sales
incentives given to customers as motivation to purchase a VOI are expensed as the related vacation
interest sales revenue is recognized. These expenses are allocated to our Vacation Interest Sales
and Financing business segment.
Consolidated
Resort Operations Expense. With respect to the Caribbean resorts,
we
record expenses associated with housekeeping, front desk, maintenance, landscaping and other
similar activities, which are recovered by the maintenance fees recorded in consolidated resort
operations revenue. In addition, consolidated resort operations expense includes the costs related
to food and beverage operations at certain resorts whose restaurants
we manage directly.
Similarly, the expenses of operating the golf courses and retail and gift shops are included in
consolidated resort operations expense.
Loan Portfolio Expense. Loan portfolio expense includes payroll and administrative costs of
our finance operations as well as loan servicing fees paid to third parties. These costs are
expensed as incurred with the exception of mortgages and contract receivable origination costs,
which are capitalized and amortized over the term of the related mortgages and contracts receivable
as an adjustment to interest revenue using the effective interest method in accordance with
guidelines issued under ASC 310, “Receivables.” This expense is allocated to our Vacation Interest
Sales and Financing business segment.
General and Administrative Expense. General and administrative expense includes payroll and
benefits, legal, audit and other professional services, travel costs, system-related costs and
corporate facility expense. This expense is reported under Corporate and Other.
Depreciation and Amortization. Depreciation and amortization is not allocated to our business
segments,
but rather is reported in Corporate and Other.
Interest Expense. Interest expense is comprised of corporate-level indebtedness, which is
reported in Corporate and Other, and interest expense related to our securitizations and consumer
loan financings, which are allocated to our Vacation Interest Sales and Financing business segment.
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Factors That May Affect Our Future Financial Presentation
We intend to pursue opportunities to grow fee-based revenue in the following three areas: (i)
assuming the management of resorts from operators facing financial distress; (ii) managing the
sales and marketing of VOIs and consumer loans from these operators or financial institutions; and
(iii) servicing the consumer loan portfolios. We intend to structure these opportunities in a
manner consistent with our capital-light business model, including through the acquisition of
assets by special purpose entities. One example of this strategy is our acquisition of ILX
described below in “Business — Business Strategies — Capitalizing on current industry dynamics to
grow fee-based services.” That transaction was structured such that we now hold certain of ILX’s
assets and have assumed related ILX liabilities through a special purpose entity. The lender of the
ILX indebtedness assumed by the special purpose entity has recourse only to the ILX assets that
were acquired. Although the Company and its consolidated subsidiaries have not assumed the
indebtedness of the ILX special purpose entity, and such entity is deemed an unrestricted
subsidiary for purposes of the indenture governing the notes, GAAP requires that we consolidate
such non-recourse liabilities on our financial statements for financial reporting purposes. We
intend to pursue other transactions (such as the potential Tempus transaction described below in
“Business — Business Strategies — Capitalizing on current industry dynamics to grow fee-based
services.”) that may use similar special purpose entities in similar structures, and these entities
may also be required to be consolidated on our financial statements. In that circumstance, our
future consolidated financial statements may reflect substantially higher levels of debt and
interest expense than our historical consolidated financial statements included in this prospectus.
See Note 22 of our audited financial statements included elsewhere in this prospectus for
additional information.
In addition, as a result of our registration of the notes pursuant to the exchange offer, we
will become a public reporting company. As a public reporting company, we will be subject to
certain SEC regulations, including various provisions of the Sarbanes-Oxley Act of 2002. Our
compliance with these regulations has required us to incur additional legal, accounting and
information technology expense related to the creation and implementation of accounting and
internal control systems. We have also been required to hire additional employees to ensure that
we have appropriate staffing for ongoing compliance with these requirements.
Presentation of Certain Financial Metrics
Adjusted EBITDA. In addition to the discussion of our statement of operations data, we also
present and analyze Adjusted EBITDA for each of the periods presented in this prospectus. We define
Adjusted EBITDA as our net income (loss) before provision (benefit) for income taxes, plus: (i)
corporate interest expense; (ii) depreciation and amortization; (iii) vacation interest cost of
sales; (iv) non-cash charges for change in estimated defaults on consumer loans originated in prior
periods; (v) impairments and other noncash write-offs; (vi) loss on extinguishment of debt; (vii)
gain or loss on the sale of assets; (viii) amortization of loan origination costs; and (ix)
amortization of portfolio discount; less non-cash revenue outside the ordinary course of business.
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to
net income, operating income or any other measure of financial performance calculated and presented
in accordance with GAAP.
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for
the following reasons:
| • | it and similar non-GAAP measures are widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, capital structures and the methods by which assets were acquired; |
| • | by comparing Adjusted EBITDA in different historical periods, we can evaluate our operating results without the additional variations of interest income (expense), income tax provision (benefit), depreciation and amortization expense and the vacation interest cost of sales expense; and |
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| • | several of the financial covenants governing the exchange notes and 2008 conduit facility, including the limitation on our ability to incur additional indebtedness, are determined by reference to our EBITDA as defined in the notes, which definition approximates Adjusted EBITDA as presented here. |
Our management uses Adjusted EBITDA: (i) as a measure of our operating performance, because it
does not include the impact of items that we do not consider indicative of our core operating
performance; (ii) for planning purposes, including the preparation of our annual operating budget;
(iii) to allocate resources to enhance the financial performance of our business; and (iv) to
evaluate the effectiveness of our business strategies.
We understand that, although measures similar to Adjusted EBITDA are frequently used by
investors and securities analysts in their evaluation of companies, it has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute for analysis of our
results of operations as reported under GAAP. Some of these limitations are:
| • | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or VOI inventory; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted EBITDA does not reflect cash requirements for income taxes; |
| • | Adjusted EBITDA does not reflect interest expense for our corporate indebtedness; |
| • | Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and |
| • | Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
To properly and prudently evaluate our business, we encourage you to review our GAAP financial
statements included elsewhere in this prospectus, and not to rely on any single financial measure
to evaluate our business.
See “Prospectus Summary—Summary Consolidated Financial and Operating Data” and “Selected
Consolidated Financial and Operating Data” for a reconciliation of Adjusted EBITDA to net loss
before provision (benefit) for income taxes.
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Results of Operations
The following tables set forth our results of operations for the specified periods.
Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009
(In thousands)
| Year Ended December 31, 2010 | Year Ended December 31, 2009 | |||||||||||||||||||||||||||||||
| Hospitality | Vacation | Hospitality | Vacation | |||||||||||||||||||||||||||||
| and | Interest | and | Interest | |||||||||||||||||||||||||||||
| Management | Sales and | Corporate | Management | Sales and | Corporate | |||||||||||||||||||||||||||
| Services | Financing | and Other | Total | Services | Financing | and Other | Total | |||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Vacation Interest sales |
$ | — | $ | 214,764 | $ | — | $ | 214,764 | $ | — | $ | 248,643 | $ | — | $ | 248,643 | ||||||||||||||||
Provision for uncollectible
Vacation Interest sales revenue |
— | (12,655 | ) | — | (12,655 | ) | — | (14,153 | ) | — | (14,153 | ) | ||||||||||||||||||||
Vacation Interest, net |
— | 202,109 | — | 202,109 | — | 234,490 | — | 234,490 | ||||||||||||||||||||||||
Management, member and other
services |
91,156 | 11,495 | — | 102,651 | 93,431 | 14,772 | — | 108,203 | ||||||||||||||||||||||||
Consolidated resort operations |
26,547 | — | — | 26,547 | 23,814 | — | — | 23,814 | ||||||||||||||||||||||||
Interest |
— | 39,150 | 177 | 39,327 | — | 43,200 | 972 | 44,172 | ||||||||||||||||||||||||
Gain on mortgage repurchase |
— | 191 | — | 191 | — | 282 | — | 282 | ||||||||||||||||||||||||
Total revenues |
117,703 | 252,945 | 177 | 370,825 | 117,245 | 292,744 | 972 | 410,961 | ||||||||||||||||||||||||
Costs and Expenses: |
||||||||||||||||||||||||||||||||
Vacation Interest cost of sales |
— | 39,730 | — | 39,730 | — | 55,135 | — | 55,135 | ||||||||||||||||||||||||
Advertising, sales and marketing |
— | 114,029 | — | 114,029 | — | 116,098 | — | 116,098 | ||||||||||||||||||||||||
Vacation Interest carrying
cost, net |
— | 29,821 | — | 29,821 | — | 32,992 | — | 32,992 | ||||||||||||||||||||||||
Management, member and other
services |
21,916 | 1,730 | — | 23,646 | 26,449 | 4,714 | — | 31,163 | ||||||||||||||||||||||||
Consolidated resort operations |
23,972 | — | — | 23,972 | 22,456 | — | — | 22,456 | ||||||||||||||||||||||||
Loan portfolio |
1,025 | 9,541 | — | 10,566 | 954 | 8,881 | — | 9,835 | ||||||||||||||||||||||||
General and administrative |
— | — | 67,905 | 67,905 | — | — | 71,306 | 71,306 | ||||||||||||||||||||||||
Gain on sale of assets |
— | — | (1,923 | ) | (1,923 | ) | — | — | (137 | ) | (137 | ) | ||||||||||||||||||||
Depreciation and amortization |
— | — | 11,939 | 11,939 | — | — | 13,366 | 13,366 | ||||||||||||||||||||||||
Interest, net of capitalized
interest |
— | 18,203 | 48,959 | 67,162 | — | 24,396 | 44,119 | 68,515 | ||||||||||||||||||||||||
Loss on extinguishment of debt |
— | — | 1,081 | 1,081 | — | — | 10,903 | 10,903 | ||||||||||||||||||||||||
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| Year Ended December 31, 2010 | Year Ended December 31, 2009 | |||||||||||||||||||||||||||||||
| Hospitality | Vacation | Hospitality | Vacation | |||||||||||||||||||||||||||||
| and | Interest | and | Interest | |||||||||||||||||||||||||||||
| Management | Sales and | Corporate | Management | Sales and | Corporate | |||||||||||||||||||||||||||
| Services | Financing | and Other | Total | Services | Financing | and Other | Total | |||||||||||||||||||||||||
Impairments and other write-offs |
— | — | 3,330 | 3,330 | — | — | 1,125 | 1,125 | ||||||||||||||||||||||||
Total costs and expenses |
46,913 | 213,054 | 131,291 | 391,258 | 49,859 | 242,216 | 140,682 | 432,757 | ||||||||||||||||||||||||
Income (loss) before benefit for
income taxes |
70,790 | 39,891 | (131,114 | ) | (20,433 | ) | 67,386 | 50,528 | (139,710 | ) | (21,796 | ) | ||||||||||||||||||||
Benefit for income taxes |
— | — | (1,274 | ) | (1,274 | ) | — | — | (799 | ) | (799 | ) | ||||||||||||||||||||
Net income (loss) |
70,790 | 39,891 | (129,840 | ) | (19,159 | ) | 67,386 | 50,528 | (138,911 | ) | (20,997 | ) | ||||||||||||||||||||
Adjusted EBITDA — Diamond
Resorts Parent, LLC and
Restricted Subsidiaries |
90,460 | N/A | ||||||||||||||||||||||||||||||
Adjusted EBITDA —
Unrestricted Subsidiaries |
(4,771 | ) | N/A | |||||||||||||||||||||||||||||
Adjusted
EBITDA — Consolidated |
85,689 | 103,059 | ||||||||||||||||||||||||||||||
Revenues
Total revenues decreased $40.2 million, or 9.8%, to $370.8 million for the year ended December
31, 2010 from $411.0 million for the year ended December 31, 2009. This decrease was primarily
attributable to a decrease in vacation interest, net, management, member and other services
revenue and interest revenue in our Vacation Interest Sales and Financing segment. Total revenues
in our Vacation Interest Sales and Financing segment decreased $39.8 million, or 13.6%, to $252.9
million for the year ended December 31, 2010 from $292.7 million for the year ended December 31,
2009.
Vacation
Interest, Net. Vacation interest, net, in our Vacation Interest Sales and Financing
segment decreased $32.4 million, or 13.8%, to $202.1 million for the year ended December 31, 2010
from $234.5 million for the year ended December 31, 2009. The decrease in vacation interest, net
was attributable to a $33.9 million decrease in vacation interest sales revenue, partially offset
by a $1.5 million decrease in our provision for uncollectible vacation interest sales revenue.
The $33.9 million decline in vacation interest sales revenue was primarily due to a decline in
our recognition of deferred sales revenue pursuant to ASC 978 in the year ended December 31, 2010,
relative to the year ended December 31, 2009. We recognized a greater amount of deferred sales
revenue of financed purchases originated prior to our shift in October 2008 to increased cash sales
and lower sales incentives given at the time of purchase during the year ended December 31, 2009,
as more customers met the buyer’s commitment test under ASC 978 during that period. The majority
of the deferred revenue originated prior to the shift was recognized during the year ended December
31, 2009.
The remaining decline in vacation interest sales revenue was due to a decline in the number of
vacation interest transactions, average price per transaction and closing percentage. We closed a total of 22,719 VOI sales transactions during the year ended
December 31, 2010, compared to 23,571 transactions during the year ended December 31, 2009. Our
average VOI sale price per transaction decreased to $9,526 for the year ended December 31, 2010
from $9,712 for the year ended December 31, 2009. Our total number of tours increased to 130,801
for the year ended December 31, 2010 from 123,045 for the year ended December 31, 2009, primarily
as a result of our expansion of certain marketing programs. Our closing percentage (which
represents the percentage of VOI sales closed relative to the total number of sales presentations
at our sales centers during the period presented) decreased to 17.4% in the year ended December 31,
2010 from 19.2% in the year ended December
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31, 2009.
Provision for uncollectible vacation interest sales revenue decreased $1.5 million, or 10.6%,
to $12.7 million for the year ended December 31, 2010 from $14.2 million for the year ended
December 31, 2009. The decrease was due to a decrease in sales volume, a decrease in provision
associated with a decline in our recognition of deferred sales revenue pursuant to ASC 978 and
changes in estimates based on the current performance of our consumer loan receivable portfolio.
Provision for uncollectible vacation interest sales revenue as a percentage of vacation interest
sales revenue increased to 5.9% in the year ended December 31, 2010 from 5.7% in the year ended
December 31, 2009.
Management, Member and Other Services. Total management, member and other services revenue
decreased $5.5 million, or 5.1%, to $102.7 million for the year ended December 31, 2010 from $108.2
million for the year ended December 31, 2009.
Management, member and other services revenue in our Hospitality and Management Services
segment decreased $2.2 million, or 2.4%, to $91.2 million for the year ended December 31, 2010 from
$93.4 million for the year ended December 31, 2009. This decrease was primarily due to a $7.4
million construction defect litigation settlement paid to us relating to our Lake Tahoe Vacation
Resort recorded in the year ended December 31, 2009. In addition, we experienced lower club
revenue due to fewer purchases of memberships in THE Club by interval owners in the year ended
December 31, 2010 compared to the year ended December 31, 2009. These decreases were partially
offset by higher management fees on certain management contracts that we renegotiated to include
standardized cost-plus fee rates, as well as increases in operating costs at the resort level,
which generated higher management fee revenue under our cost-plus management agreements.
Management, member and other services revenue in our Vacation Interest Sales and Financing
segment decreased $3.3 million, or 22.2%, to $11.5 million for the year ended December 31, 2010
from $14.8 million for the year ended December 31, 2009. Non-cash incentives decreased $2.8
million, or 70.3%, to $1.2 million for the year ended December 31, 2010 from $4.0 million for the
year ended December 31, 2009. As a percentage of vacation interest sales revenue, non-cash
incentives were 0.6% for the year ended December 31, 2010, compared to 1.6% for the year ended
December 31, 2009. This decrease was primarily due to the implementation of certain cost reduction
strategies in 2010, including a reduction in usage of vouchers and tickets.
Consolidated Resort Operations. Consolidated resort operations revenue, which is recorded in
our Hospitality and Management Services segment, increased $2.7 million, or 11.5%, to $26.5 million
for the year ended December 31, 2010 from $23.8 million for the year ended December 31, 2009. The
increase was primarily due to increased maintenance fee revenue in our St. Maarten resorts to
recover prior year fund deficits and reserves for future projects. In addition, we earned higher
revenue at certain food and beverage operations.
Interest Revenue. Interest revenue decreased $4.9 million, or 11.0%, to $39.3 million for the
year ended December 31, 2010 from $44.2 million for the year ended December 31, 2009. This
decrease was primarily due to a reduction in the amount of outstanding consumer loan receivables
for the year ended December 31, 2010 as compared to the year ended December 31, 2009. The amount of
consumer loans outstanding decreased primarily due to a slower sales pace and a decline in financed
VOI sales following our implementation of all-cash sales incentives in October 2008. This decrease
was partially offset by higher interest revenue associated with consumer loan receivables acquired
in the ILX acquisition during the year ended December 31, 2010.
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Costs and Expenses
Total costs and expenses decreased $41.5 million, or 9.6%, to $391.3 million for the year
ended December 31, 2010 from $432.8 million for the year ended December 31, 2009.
Vacation Interest Cost of Sales. Vacation interest cost of sales related to our Vacation
Interest Sales and Financing segment decreased $15.4 million, or 27.9%, to $39.7 million for the
year ended December 31, 2010 from $55.1 million for the year ended December 31, 2009. This decrease
was due to a decline in the volume of VOI sales in the year ended December 31, 2010 relative to the
year ended December 31, 2009. Vacation interest cost of sales as a percentage of vacation interest
sales revenue was 18.5% for the year ended December 31, 2010, compared to 22.2% for the year ended
December 31, 2009. The decrease was mainly due to an increase in the projected price per point, one
of the multiple estimates used in the calculation of vacation interest cost of sales under the
relative sale value model discussed in
“Critical Accounting Policies and Use of Estimates —
Vacation Interest Cost of Sales”.
Advertising, Sales and Marketing. Advertising, sales and marketing (ASM) costs decreased $2.1
million, or 1.8%, to $114.0 million for the year ended December 31, 2010 from $116.1 million for
the year ended December 31, 2009. As a percentage of vacation interest sales revenue, ASM costs
were 53.1% for the year ended December 31, 2010, compared to 46.7% for the year ended December 31,
2009. The increase of such costs as a percentage of vacation interest sales revenue was due
primarily to support personnel and direct marketing costs incurred to generate the additional tour
flow, partially offset by a decline in our recognition of deferred sales revenue pursuant to ASC
978. As revenue is deferred under ASC 978, we only defer the related commission expense and all
other ASM is recognized in the current period. We recognized less deferred sales revenue under ASC
978 during the year ended December 31, 2010 compared to the year ended December 31, 2009. See
“Vacation Interest, Net” above for further information. Accordingly, ASM increased as a percentage
of vacation interest sales revenue.
Vacation Interest Carrying Cost, Net. Net vacation interest carrying cost decreased $3.2
million, or 9.6%, to $29.8 million for the year ended December 31, 2010 from $33.0 million for the
year ended December 31, 2009, primarily due to an increase in rental revenue, which reduces carry
costs. The increase in rental revenue is primarily due to more occupied room nights, partially
offset by a decrease in average daily rate (ADR) and a reduction in revenue recognized from sampler
programs.
Management, Member and Other Services Expense. Total management, member and other services
expense decreased $7.6 million, or 24.1%, to $23.6 million for the year ended December 31, 2010
from $31.2 million for the year ended December 31, 2009.
Management, member and other services expense in our Hospitality and Management Services
segment decreased $4.5 million, or 17.1%, to $21.9 million for the year ended December 31, 2010
from $26.4 million for the year ended December 31, 2009. The decrease primarily related to a
decrease in the expense associated with exchange fees and purchases of memberships in THE Club by
interval owners and an increase in allocations of our resort management expenses to the HOAs that
we manage, thereby reducing our resort management expense.
Management, member and other services expense in our Vacation Interest Sales and Financing
segment decreased $3.0 million, or 63.3%, to $1.7 million for the year ended December 31, 2010 from
$4.7 million for the year ended December 31, 2009. Non-cash incentives decreased $2.8 million, or
70.3%, to $1.2 million for the year ended December 31, 2010 from $4.0 million for the year ended
December 31, 2009. As a percentage of vacation interest sales revenue, non-cash incentives were
0.6% for the year ended December 31, 2010, compared to 1.6% for the year ended December 31, 2009.
This decrease was primarily due to the implementation of certain cost reduction strategies in 2010,
including the reduction in usage of vouchers and tickets.
Consolidated
Resort Operations Expense. Consolidated resort operations expense,
which is recorded in
our Hospitality and Management Services segment, increased $1.5 million, or 6.8%, to $24.0 million
for the year ended December 31, 2010 from $22.5 million for the year ended December 31, 2009. This
increase was primarily due to higher operating expenses at our St. Maarten resorts.
Loan Portfolio Expense. Loan portfolio expense increased $0.8 million, or 7.4%, to $10.6
million for the year ended December 31, 2010 compared to $9.8 million for the year ended December
31, 2009. In accordance with
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ASC 310, we capitalize certain costs incurred in connection with consumer loan originations
which are then amortized over the life of the related consumer loans. Fewer loans were originated
in the year ended December 31, 2010, which resulted in a decrease in the amount of capitalized loan
origination costs relative to the year ended December 31, 2009. Because a portion of our loan
origination costs is fixed, this decrease in capitalized costs resulted in a net increase in loan
portfolio expense recognized for the year ended December 31, 2010.
General and Administrative Expense. General and administrative expense decreased $3.4 million,
or 4.8%, to $67.9 million for the year ended December 31, 2010 from $71.3 million for the year
ended December 31, 2009. This decrease was primarily related to a reduction in employee severance
expense, an increase in allocations of certain hospitality-related corporate general and
administrative expenses to the HOAs that we manage, thereby reducing our corporate-level general
and administrative expense, and a reduction of certain VAT provision accruals in our European
operations recognized in December 2010. This decrease was partially offset by an increase in legal
and professional fees incurred related to the ILX acquisition in the year ended December 31, 2010.
Gain on sale of assets. Gain on sale of assets increased $1.8 million, or 1,303.6%, to $1.9
million for the year ended December 31, 2010 from $0.1 million for the year ended December 31,
2009. During the year ended December 31, 2009, we disposed of certain units at one of our resorts.
During the year ended December 31, 2010, we recognized gain resulting from the sale of certain
units at one of our resorts, which resulted in higher gain than the previous year.
Depreciation and Amortization. Depreciation and amortization decreased $1.5 million, or 10.7%,
to $11.9 million for the year ended December 31, 2010 from $13.4 million for the year ended
December 31, 2009. This decrease was primarily attributable to a reduction in the amortization of
the purchase price at the time of the Sunterra Corporation acquisition. We recorded significantly
higher amortization expense associated with these assets in earlier years in accordance with the
accelerated amortization schedule established at the time of the Sunterra Corporation acquisition.
Interest Expense, Net of Capitalized Interest. Interest expense decreased $1.3 million, or
2.0%, to $67.2 million for the year ended December 31, 2010 from $68.5 million for the year ended
December 31, 2009. This decrease was partially related to a change in fair market value of our
interest rate swap and caps and the difference in debt issuance cost
and original issue discount amortization, and paid-in-kind interest on our second lien facility.
After removing non-cash interest items, interest expense
totaled $61.3 million for the year ended December 31, 2010, and $66.0 million for the year ended
December 31, 2009. This decrease was primarily related to the termination of a derivative
instrument on our first and second lien facility in June 2009, which incurred significantly more
cash settlement payments during the year ended December 31, 2009 compared to the year ended
December 31, 2010.
Loss on Extinguishment of Debt. Loss on extinguishment of debt, which is recorded in
Corporate and Other, was $1.1 million for the year ended December 31, 2010 compared with $10.9
million for the year ended December 31, 2009. On August 13, 2010, we completed our offering of
$425 million of principal amount of the outstanding notes. The proceeds from the outstanding notes
were used primarily to repay all of the outstanding indebtedness under our existing revolving line
of credit and first and second lien facilities. The write-off of the capitalized debt issuance
costs related to these credit facilities resulted in a $1.1 million loss on extinguishment of debt
for the year ended December 31, 2010. In March 2009, we amended our revolving line of credit and
first and second lien facilities, which included substantial modification of terms and was
accounted for in the same manner as extinguishment. The write-off of the capitalized debt issuance
costs related to the original issuance and the fees paid to the lenders for executing the amendment
were recorded as loss on extinguishment of debt of $10.9 million during the year ended December 31,
2009.
Impairments and Other Write-offs. Impairments and other write-offs increased $2.2 million to
$3.3 million for the year ended December 31, 2010 from $1.1 million for the year ended December 31,
2009. This increase was primarily due to the write-down of a receivable related to an HOA
management contract that we terminated and the write-down of resorts in our European operations to
their estimated net realizable value. These impairment expenses in the year ended December 31, 2010
were partially offset by the write-down of obsolete construction costs that were no longer
consistent with our development plans in the year ended December 31, 2009. The impairments and
other write-offs are included in Corporate and Other.
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Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008
(In thousands)
| Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||||||||||||||||||
| Hospitality | Vacation | Hospitality | Vacation | |||||||||||||||||||||||||||||
| and | Interest | and | Interest | |||||||||||||||||||||||||||||
| Management | Sales and | Corporate | Management | Sales and | Corporate | |||||||||||||||||||||||||||
| Services | Financing | and Other | Total | Services | Financing | and Other | Total | |||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Vacation Interest sales |
$ | — | $ | 248,643 | $ | — | $ | 248,643 | $ | — | $ | 285,442 | $ | — | $ | 285,442 | ||||||||||||||||
Provision for uncollectible
Vacation Interest sales revenue |
— | (14,153 | ) | — | (14,153 | ) | — | (51,166 | ) | — | (51,166 | ) | ||||||||||||||||||||
Vacation Interest, net |
— | 234,490 | — | 234,490 | — | 234,276 | — | 234,276 | ||||||||||||||||||||||||
Management, member and other
services |
93,431 | 14,772 | — | 108,203 | 76,570 | 16,671 | — | 93,241 | ||||||||||||||||||||||||
Consolidated resort operations |
23,814 | — | — | 23,814 | 21,006 | — | — | 21,006 | ||||||||||||||||||||||||
Interest |
— | 43,200 | 972 | 44,172 | 1,812 | 49,979 | 1,835 | 53,626 | ||||||||||||||||||||||||
Gain on mortgage repurchase |
— | 282 | — | 282 | — | 265 | — | 265 | ||||||||||||||||||||||||
Total revenues |
117,245 | 292,744 | 972 | 410,961 | 99,388 | 301,191 | 1,835 | 402,414 | ||||||||||||||||||||||||
Costs and Expenses: |
||||||||||||||||||||||||||||||||
Vacation Interest cost of sales |
— | 55,135 | — | 55,135 | — | 67,551 | — | 67,551 | ||||||||||||||||||||||||
Advertising, sales and
marketing |
— | 116,098 | — | 116,098 | — | 148,565 | — | 148,565 | ||||||||||||||||||||||||
Vacation Interest carrying
cost, net |
— | 32,992 | — | 32,992 | — | 22,831 | — | 22,831 | ||||||||||||||||||||||||
Management, member and other
services |
26,449 | 4,714 | — | 31,163 | 28,747 | 6,599 | — | 35,346 | ||||||||||||||||||||||||
Consolidated resort operations |
22,456 | — | — | 22,456 | 23,685 | — | — | 23,685 | ||||||||||||||||||||||||
Loan portfolio |
954 | 8,881 | — | 9,835 | 661 | 8,092 | — | 8,753 | ||||||||||||||||||||||||
General and administrative |
— | — | 71,306 | 71,306 | — | — | 78,618 | 78,618 | ||||||||||||||||||||||||
Gain on sale of assets |
— | — | (137 | ) | (137 | ) | — | — | (1,007 | ) | (1,007 | ) | ||||||||||||||||||||
Depreciation and amortization |
— | — | 13,366 | 13,366 | — | — | 16,687 | 16,687 | ||||||||||||||||||||||||
Interest, net of capitalized
interest |
— | 24,396 | 44,119 | 68,515 | — | 20,817 | 50,563 | 71,380 | ||||||||||||||||||||||||
Loss on extinguishment of debt |
— | — | 10,903 | 10,903 | — | — | — | — | ||||||||||||||||||||||||
Impairments and other
write-offs |
— | — | 1,125 | 1,125 | — | — | 17,168 | 17,168 | ||||||||||||||||||||||||
Total costs and expenses |
49,859 | 242,216 | 140,682 | 432,757 | 53,093 | 274,455 | 162,029 | 489,577 | ||||||||||||||||||||||||
Income (loss) before (benefit) provision
for income taxes |
67,386 | 50,528 | (139,710 | ) | (21,796 | ) | 46,295 | 26,736 | (160,194 | ) | (87,163 | ) | ||||||||||||||||||||
(Benefit) provision for income
taxes |
— | — | (799 | ) | (799 | ) | — | — | 1,809 | 1,809 | ||||||||||||||||||||||
Net income (loss) |
$ | 67,386 | $ | 50,528 | $ | (138,911 | ) | $ | (20,997 | ) | $ | 46,295 | $ | 26,736 | $ | (162,003 | ) | $ | (88,972 | ) | ||||||||||||
Adjusted EBITDA |
$ | 103,059 | $ | 97,685 | ||||||||||||||||||||||||||||
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Revenues
Total revenues increased $8.6 million, or 2.1%, to $411.0 million for the year ended December
31, 2009 from $402.4 million for the year ended December 31, 2008. This increase was primarily
attributable to an increase in management revenues in our Hospitality and Management Services
segment, partially offset by a decrease in revenue in our Vacation Interest Sales and Financing
segment. Revenues in our Hospitality and Management Services segment increased $17.8 million, or
18.0%, to $117.2 million for the year ended December 31, 2009 from $99.4 million for the year ended
December 31, 2008. Revenues in our Vacation Interest Sales and Financing segment decreased $8.5
million, or 2.8%, to $292.7 million for the year ended December 31, 2009 from $301.2 million for
the year ended December 31, 2008.
Vacation
Interest, Net. Vacation interest, net, in our Vacation Interest Sales and Financing
segment increased $0.2 million, or 0.1%, to $234.5 million for the year ended December 31, 2009
from $234.3 million for the year ended December 31, 2008. This increase was attributable to a $37.0
million decrease in our provision for uncollectible vacation interest sales revenue partially
offset by a $36.8 million reduction in vacation interest sales revenue.
The $36.8 million decline in vacation interest sales revenue was due to declines in tour flow, number of
vacation interest transactions and average price per transaction. We closed a total of 23,571 VOI sales transactions
during the year ended December 31, 2009, compared to 27,144 transactions during the year ended December 31,
2008. Our average VOI sale price per transaction decreased to $9,712 for the year ended December 31, 2009 from
$10,950 for the year ended December 31, 2008 primarily as a result of increased sales to our existing member base,
which sales consisted of lower priced incremental additions to their existing VOIs. Our total number of tours
decreased to 123,045 for the year ended December 31, 2009 from 150,912 for the year ended December 31, 2008,
primarily as a result of our elimination of low efficiency tours. However, our closing percentage (which represents
the percentage of VOI sales closed relative to the total number of sales presentations at our sales centers during the
period presented) increased to 19.2% in the year ended December 31, 2009 from 18.0% in the year ended December
31, 2008.
This reduction was partially offset by a decrease in sales incentives given to customers as motivation to purchase a vacation interest and an adjustment related to deferred revenue recognition under ASC 978. The adjustment was the result of a shift to increased cash sales and lower sales incentives given at the time of purchase for the year ended December 31, 2009. The shift to increased cash sales and lower sales incentives led to more customers meeting the buyer’s commitment test under ASC 978 and, therefore, more net revenue being recognized in 2009.
This reduction was partially offset by a decrease in sales incentives given to customers as motivation to purchase a vacation interest and an adjustment related to deferred revenue recognition under ASC 978. The adjustment was the result of a shift to increased cash sales and lower sales incentives given at the time of purchase for the year ended December 31, 2009. The shift to increased cash sales and lower sales incentives led to more customers meeting the buyer’s commitment test under ASC 978 and, therefore, more net revenue being recognized in 2009.
The $37.0 million decrease in our provision for uncollectible vacation interest sales revenue
was primarily attributable to a one-time charge of $32.0 million we recorded in the year ended
December 31, 2008 relating to increased estimated defaults on consumer loans originated prior to
2008. The decrease was also attributable to a decline in VOI sales and an anticipated decline in
receivable defaults resulting from an increase in the average customer FICO score on
newly-originated consumer loans. These favorable variances were partially offset by an increase in
the provision related to an adjustment to deferred revenue recognition (and related costs) under
ASC 978.
In 2009, we recognized $2.9 million in vacation interest sales revenue upon the completion of
construction of certain pre-sold units prior to the Sunterra Corporation acquisition in April 2007.
This revenue was considered non-cash and outside of the ordinary course of business and,
therefore, is deducted from Adjusted EBITDA.
Management, Member and Other Services. Total management, member and other services revenue
increased $15.0 million, or 16.0%, to $108.2 million for the year ended December 31, 2009 from
$93.2 million for the year ended December 31, 2008.
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Management, member and other services revenue in our Hospitality and Management Services
segment increased $16.8 million, or 22.0%, to $93.4 million for the year ended December 31, 2009
from $76.6 million for the year ended December 31, 2008. This increase primarily related to higher
management fees on certain management contracts that we renegotiated to include standardized
cost-plus fee rates, as well as increases in operating costs at the resort level which generated
higher management fee revenue under our cost-plus management agreements. A $7.4 million
construction defect litigation settlement paid to us relating to our Lake Tahoe Vacation Resort was
recorded in the year ended December 31, 2009, and a $2.7 million settlement paid to us relating to
our Ka’anapali Beach Club property was recorded in the year ended December 31, 2008. Furthermore,
THE Club revenues increased as a result of an increase in club dues from 2008 to 2009 combined with
an expansion of our membership base. There was also an increase in revenue associated with
purchases of memberships in THE Club by interval owners. In addition, revenue from late fees
increased due to slower customer maintenance fee payment patterns. These increases were partially
offset by a decrease in travel revenue following the discontinuance of our travel agency business
in the second quarter of 2008.
Management, member and other services revenue in our Vacation Interest Sales and Financing
segment decreased $1.9 million, or 11.4%, to $14.8 million for the year ended December 31, 2009
from $16.7 million for the year ended December 31, 2008. This decrease was primarily due to a
reduction in vacation interest sales revenue. As a percentage of vacation interest sales revenue,
non-cash incentives were 1.6% for the year ended December 31, 2009, compared to 2.0% for the year
ended December 31, 2008. This decrease was primarily due to the implementation of certain cost
reduction strategies throughout 2009, including the elimination of certain sales incentives and the
marketing programs that relied upon these incentives. There was also a decrease in closing costs
revenue due the decline in VOI sales.
Consolidated
Resort Operations. Consolidated resort operations revenue,
which is recorded in our
Hospitality and Management Services segment, increased $2.8 million, or 13.4%, to $23.8 million for
the year ended December 31, 2009 from $21.0 million for the
year ended December 31, 2008. The increase was primarily
due to increased maintenance fee revenues in St. Maarten resorts to recover prior year fund
deficits and reserve for future projects. This increase was partially offset by a reduction in
volume relating to certain food and beverage operations.
Interest Revenue. Interest revenue decreased $9.4 million, or 17.6%, to $44.2 million for the
year ended December 31, 2009 from $53.6 million for the year ended December 31, 2008.
Interest revenue in our Vacation Interest Sales and Financing segment decreased $6.8 million,
or 13.6%, to $43.2 million for the year ended December 31, 2009 from $50.0 million for the year
ended December 31, 2008. This decrease was primarily due to a reduction in the amount of
outstanding consumer loans from 2008 to 2009. In addition, the amortization of deferred mortgage
origination revenue decreased for the year ended December 31, 2009 as compared to the year ended
December 31, 2008 as a result of the reduction in outstanding consumer loans.
Interest revenue in our Hospitality Management segment decreased $1.8 million, or 100%, to
zero for the year ended December 31, 2009 from $1.8 million for the year ended December 31, 2008.
This decrease was primarily attributable to a reallocation of interest earned on maintenance fee
bank account balances of certain HOAs at the beginning of 2009.
In Corporate and Other, interest and dividends earned on our corporate bank accounts decreased
$0.8 million, or 47.0%, to $1.0 million for the year ended December 31, 2009 from $1.8 million for
the year ended December 31, 2008 due to lower deposit balances combined with lower interest rates
earned.
Costs and Expenses
Total costs and expenses decreased $56.8 million, or 11.6%, to $432.8 million for the year
ended December 31, 2009 from $489.6 million for the year ended December 31, 2008. This decrease
was primarily attributable to a reduction in vacation interest cost of sales and ASM costs as a
result of reduction in VOI sales and decreases in management, member and other services expense,
general and administrative expense, and impairments and other write-offs. These decreases were
partially offset by an increase in net vacation interest carrying cost and loss on extinguishment
of debt.
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Vacation Interest Cost of Sales. Vacation interest cost of sales in our Vacation Interest
Sales and Financing segment decreased $12.5 million, or 18.4%, to $55.1 million for the year ended
December 31, 2009 from $67.6 million for the year ended December 31, 2008. This decrease was due to
a decline in the volume of VOI sales in 2009 relative to 2008. Vacation interest cost of sales as a
percentage of vacation interest sales revenue was 22.2% for the year ended December 31, 2009,
compared to 23.7% for the year ended December 31, 2008. The decrease in vacation interest cost of
sales as a percentage of vacation interest sales revenue was primarily attributable to a change in
the mix of inventory sold among our five Collections, each of which has a different cost basis.
Advertising, Sales and Marketing. ASM costs decreased $32.5 million, or 21.9%, to $116.1
million for the year ended December 31, 2009 from $148.6 million for the year ended December 31,
2008. As a percentage of vacation interest sales revenue, ASM costs were 46.7% for the year ended
December 31, 2009, compared to 52.0% for the year ended December 31, 2008. The decrease of such
costs as a percentage of vacation interest sales revenue was due to our elimination of higher cost
tours, closure of low margin sales centers, a reduction in sales and support personnel and
implementation of a lower commission structure for sales personnel.
Vacation Interest Carrying Cost, Net. Net vacation interest carrying cost increased $10.2
million, or 44.5%, to $33.0 million for the year ended December 31, 2009 from $22.8 million for the
year ended December 31, 2008, primarily due to an increase in the annual maintenance fees on unsold
inventory as a result of higher operating expenses at the underlying HOAs. This was partially
offset by an increase in rental revenue resulting from higher ADR and more available rental room
nights as a result of lower tour occupancy.
Management, Member and Other Services Expense. Total management, member and other services
expense decreased $4.1 million, or 11.8%, to $31.2 million for the year ended December 31, 2009
from $35.3 million for the year ended December 31, 2008.
Management, member and other services expense in our Hospitality and Management Services
segment decreased $2.3 million, or 8.0%, to $26.4 million for the year ended December 31, 2009 from
$28.7 million for the year ended December 31, 2008. The decrease primarily related to a reduction
in operating costs for our call centers and THE Club magazine publishing costs resulting from
cost-cutting initiatives, and a decrease in travel expenses following the discontinuance of our
travel agency business in the second quarter of 2008. These decreases were partially offset by
higher expense associated with purchases of memberships in THE Club by interval owners.
Management, member and other services expenses in our Vacation Interest Sales and Financing
segment decreased $1.9 million, or 28.6%, to $4.7 million for the year ended December 31, 2009 from
$6.6 million for the year ended December 31, 2008. This decrease was primarily due to a reduction
in vacation interest sales revenue. As a percentage of vacation interest sales revenue, non-cash
incentives were 1.6% for the year ended December 31, 2009, compared to 2.0% for the year ended
December 31, 2008. This decrease was primarily due to the implementation of certain cost reduction
strategies throughout 2009, including the elimination of certain sales incentives and the marketing
programs that relied upon these incentives.
Consolidated
Resort Operations Expense. Consolidated resort operations
expense which is recorded in
our Hospitality and Management Services segment, decreased $1.2 million, or 5.2%, to $22.5 million
for the year ended December 31, 2009 from $23.7 million for the year ended December 31, 2008. This
decrease was primarily due to a reduction in volume and associated costs relating to food and
beverage operations at one of our resorts.
Loan Portfolio Expense. Loan portfolio expense increased $1.0 million, or 12.4%, to $9.8
million for the year ended December 31, 2009 from $8.8 million for the year ended December 31,
2008. In accordance with ASC 310, we capitalize certain costs incurred in connection with consumer
loan originations which are then amortized over the life of the related consumer loans. Fewer
loans were originated in the year ended December 31, 2009, which resulted in a decrease in the
amount of capitalized loan origination costs relative to the year ended December 31, 2008. Because
a portion of our loan origination costs is fixed, this decrease in capitalized costs resulted in a
net increase in loan portfolio expense recognized for the year ended December 31, 2009. This
increase was partially offset by a decrease in credit card fees due to fewer credit card
transactions in 2009 relative to 2008.
General and Administrative Expense. General and administrative expense, which is recorded in
Corporate and Other, decreased $7.3 million, or 9.3%, to $71.3 million for the year ended December
31, 2009 from $78.6 million for the year ended December 31, 2008. This decrease was primarily
related to our recovery of a greater percentage of certain hospitality management-related corporate
general and administrative expenses from the HOAs
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that we manage, thereby reducing our corporate-level general and administrative expense, and a
reduction related to Diamond Resorts International rebranding expense. This decrease was
partially offset by an increase in legal and professional expenses related certain legal matters,
the registration of our U.S. Collection in California and an increase in employee severance
expense.
Depreciation and Amortization. Depreciation and amortization decreased $3.3 million, or 19.9%,
to $13.4 million for the year ended December 31, 2009 from $16.7 million for the year ended
December 31, 2008. This decrease was primarily attributable to a reduction in amortization of the
allocation of the purchase price at the time of the Sunterra Corporation acquisition. We recorded
significantly higher amortization expense associated with these assets in earlier years in
accordance with the amortization schedule established at the time of the Sunterra Corporation
acquisition. This decrease was partially offset by an increase in depreciation expense associated
with leasehold improvements to our new corporate headquarters in Las Vegas, Nevada.
Interest Expense, Net of Capitalized Interest. Interest expense decreased $2.9 million, or
4.0%, to $68.5 million for the year ended December 31, 2009 from $71.4 million for the year ended
December 31, 2008. This decrease was largely related to a change in fair market value of our
interest rate swaps and 2007 cap and the difference in debt issuance cost amortization. After
removing these non-cash interest items, interest expense increased $7.5 million, or 12.8%, to $66.0
million for the year ended December 31, 2009 from $58.5 million for the year ended December 31,
2008. This increase was primarily related to increased borrowing costs under our amended first and
second lien credit facilities.
Loss on Extinguishment of Debt. Loss on extinguishment of debt, which is recorded in Corporate
and Other, was $10.9 million for the year ended December 31, 2009 compared with zero for the year
ended December 31, 2008. The amendment of our first and second lien credit facilities in March 2009
was considered to include substantial modification of terms and was accounted for in the same
manner as an extinguishment. Accordingly, the capitalized debt issuance costs related to the
original issuance and the fees paid to the lenders for executing the amendment were recorded as
loss on extinguishment of debt of $10.9 million for the year ended December 31, 2009.
Impairments and Other Write-offs. Impairments and other write-offs decreased $16.1 million,
or 93.4%, to $1.1 million for the year ended December 31, 2009 from $17.2 million for the year
ended December 31, 2008. In 2008, impairments and other write-offs related to parcels of land held
for sale near one of our resorts, unsold vacation interests in one of our resorts, goodwill related
to the acquisition of a call center for our European operations, slow-moving consumable inventory
(such as branded apparel and office supplies), uncollectible notes receivable related to the sale
of our Carlton Court resort in London, and abandoned merger and acquisition expenses. In 2009,
write-offs related to abandoned construction project costs and slow-moving consumable inventory
were partially offset by a recovery of notes receivable related to sale of our Carlton Court resort
written off during 2008. The impairments and other write-offs are included in Corporate and Other.
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Liquidity and Capital Resources
Overview. Historically, our business has depended on the availability of credit to finance the
consumer loans we have provided to our customers for the purchase of their VOIs. Typically, these
loans have required a minimum cash down payment of 10% of the purchase price at the time of sale.
However, selling, marketing and administrative expenses attributable to VOI sales are primarily
cash expenses and often exceed the buyer’s minimum down payment requirement. Accordingly, the
availability of financing facilities for the sale or pledge of these receivables to generate
liquidity is a critical factor in our ability to meet our short- and long-term cash needs. We have
historically relied upon our ability to sell receivables in the securitization market in order to
generate liquidity and create capacity on our conduit facilities.
Additionally, the terms of the consumer loans we seek to finance are generally longer than the
facilities through which we seek to finance such loans. While the term of our consumer loans is
typically ten years, our conduit facilities typically have a term of 364 days. If we are unable to
refinance conduit borrowings in the term securitization markets, we are required to refinance our
conduit facilities on an annual basis in order to provide adequate liquidity for our consumer
finance business.
The economic recession and the global credit crisis have contributed to a difficult business
environment, beginning in 2008. These factors have impacted our sales, the performance of our
consumer loan portfolio, our ability to securitize loans and overall borrowing capabilities and
costs. In response to these conditions, our management took a number of actions as described in “—
Optimization of Operations” above, which served to reduce our reliance on external financing
sources.
Since 2008, the disruption in the credit markets has made obtaining renewals of existing
credit facilities or the negotiation of additional credit facilities more difficult and expensive.
Several lenders to the vacation ownership industry, including one of our lenders, announced that
they were exiting the business of VOI financing or would not enter into new financing commitments
for the foreseeable future. While the securitization market has been severely limited since 2008,
we completed a $182 million securitization in October 2009 that was composed of A and BBB+ rated
notes backed by vacation ownership loans. The proceeds of the securitization were used to pay down
our conduit facilities. Although we completed this securitization, we may not be successful in
completing similar transactions in the future and, if we are unable to continue to participate in
securitization transactions on acceptable terms, our liquidity and cash flows would be materially
and adversely affected.
While our vacation ownership business was historically capital-intensive, we have
significantly reduced our capital requirements by eliminating resort acquisition and development,
relying instead on recovering inventory from our member base and emphasizing cash sales. As a
result of this capital-light strategy, we expect to be less dependent upon third-party financing
for the foreseeable future. Nonetheless, we still require access to the capital markets in order to
fund our operations and may, in the implementation of our growth strategy, become more reliant on
third-party financing. There can be no assurances that any such financing will be available to
allow us to implement our growth strategy and sustain and improve our results of operations.
We spent $1.2 million, $1.9 million and $21.6 million to purchase VOI inventory on the open
market during the years ended December 31, 2010, 2009 and 2008, respectively. There was no
construction of new inventory during the years ended December 31, 2010 and 2009. We spent $5.5
million on the construction of new inventory during the year ended December 31, 2008.
At December 31, 2010, we had $27.3 million in cash and cash equivalents. Our primary sources
of liquidity have historically come from cash from operations and borrowings. We believe there will
be sufficient existing cash resources and cash flow from operations, in addition to refinancing
activities, to meet the anticipated debt maturities and other cash requirements during 2011. If
cash flows from operations are less than expected, we would need to curtail our spending or raise
additional capital.
Cash Flow From Operating Activities. During the year ended December 31, 2010, net cash
provided by operating activities was $66.0 million and was the result of a net loss of $19.2
million, non-cash expenses totaling $31.8 million and other changes in operating assets and
liabilities of $53.4 million. The significant non-cash expenses included (i) $11.9 million in
depreciation and amortization, (ii) $3.0 million in amortization of capitalized
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deferred loan and contract origination costs, (iii) $12.7 million in the provision for
uncollectible vacation interest sales revenue, (iv) $2.5 million in amortization of capitalized
financing costs and original issue discount, (v) $1.1 million loss on extinguishment of debt, and (vi) $3.3 million in
impairment of assets, offset by $1.9 million in gain on sale of
assets, $0.3 million in
unrealized gain on derivative instruments, $0.4 million reduction of
deferred income tax liability and $0.2 million gain on mortgage
repurchase.
Cash Flow From Investing Activities. During the year ended December 31, 2010, net cash used in
investing activities was $37.4 million, comprised of $30.7 million used in connection with the ILX
acquisition, $5.6 million used to purchase furniture, fixtures, computer software and equipment,
and $3.0 million issuance of the note receivable for the Tempus
transaction described below, offset by $1.9 million in proceeds from
the sale of assets in our European operations. In addition to the $30.7 million cash consideration
paid in the ILX acquisition, we assumed $4.2 million of liabilities in that transaction. The fair
value of the acquired assets was $34.9 million based on the valuation report provided by a
third-party firm.
Cash Flow From Financing Activities. During the year ended December 31, 2010, net cash used in
financing activities was $18.3 million. Cash used in financing activities consisted of net payments
of (i) $397.6 million on our first and second lien term loans and revolving credit facilities, (ii)
$85.9 million on our securitizations, (iii) $4.3 million on our 2008 conduit facility, (iv) $8.2
million on notes payable, (v) $19.1 million of debt issuance costs, (vi) $75.0 million to
repurchase equity previously held by another minority institutional investor, (vii) $2.9 million in
payments related to the 2010 equity recapitalization, and (viii) $0.1 million in payments for a
derivative asset. These amounts were offset by cash generated from financing activities of (i)
$414.4 million from our issuance of the outstanding notes, (ii) $25.5 million from our issuance of
debt under our 2008 conduit facility, (iii) $16.7 million from issuance of debt under the Quorum
Facility, (iv) $75.0 million in equity investment received from Guggenheim, (v) $11.9 million from
issuance of debt under the ILX Receivables Loan, (vi) $17.5 million from issuance of other
long-term debt under the ILXA Inventory Loan, (vii) $3.3 million from issuance of debt under the
Tempus Acquisition Loan, and (viii) $10.5 million due to a decrease in cash in escrow and
restricted cash.
Senior Secured Notes. On August 13, 2010, we completed the issuance of $425 million of
principal amount of outstanding notes. The outstanding notes carry an interest rate of 12.0% and
were issued with an original issue discount of 2.5%, or $10.6 million. Interest payments will be
made in arrears on February 15 and August 15 of each year, commencing February 15, 2011. The
proceeds from the outstanding notes were used primarily to repay all of the outstanding
indebtedness under our existing revolving line of credit and first and second lien facilities.
First and Second Lien Facilities. On April 26, 2007, we entered into our first lien facility
and second lien facility. Our first lien facility included a $250.0 million term loan and a $25.0
million revolving line of credit, with maturity dates of April 26, 2012 and April 26, 2011,
respectively, and was secured by our capital and assets. The second lien facility, which was
secured by the same assets as our first lien facility but on a second lien basis, had a maturity
date of April 26, 2013.
On
August 13, 2010, we used the net proceeds from our sale of the outstanding notes and other
general-purpose funds to repay the $395.7 million of then-outstanding indebtedness under our
revolving line of credit and first and second lien facilities.
Conduit Facilities and 2009 Securitization. On September 25, 2007, we entered into an
agreement for our 2007 conduit facility. The term of the facility was originally 364 days. We
issued secured consumer loan-backed variable funding notes designated Sunterra Issuer 2007 LLC,
Variable Funding Notes, or the 2007 funding notes, in an aggregate principal amount not to exceed
$225.0 million, which was increased to $325.0 million in November 2007. We borrowed $212.4 million
against the 2007 conduit facility on September 25, 2007. Upon maturity of the original 2007 conduit
facility agreements, we entered into a series of amendments extending the maturity date. This
facility was paid off and terminated in October 2009.
On November 3, 2008, we entered into agreements for our 2008 conduit facility, pursuant to
which we issued secured VOI receivable-backed variable funding notes designated Diamond Resorts
Issuer 2008 LLC, Variable Funding Notes (the “2008 Funding Notes”), in an aggregate principal
amount not to exceed $215.4 million, which was decreased to $200.0 million, $73.4 million, and
$64.6 million on March 27, 2009, October 15, 2009, and August 31, 2010, respectively. On July 16,
2010, we amended our 2008 conduit facility to extend the maturity date to
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January 10, 2011. On August 31, 2010, we further amended the 2008 conduit facility to extend
the maturity date to August 30, 2011.
At December 31, 2010, the 2008 conduit facility bears interest at either LIBOR (as adjusted)
or the Commercial Paper rate as determined by each purchaser of the 2008 Funding Notes plus a
spread of 4.50%. If either LIBOR or the Commercial Paper rate is less than 1.0% at any given time,
then the interest rate is deemed to be 1.0%. There is also a non-use fee of 2.0%.
On October 15, 2009, we completed our 2009 securitization transaction and issued two consumer
loan backed notes designated as Diamond Resorts Owners Trust Series 2009-1 Class A (the “DROT 2009
Class A Notes”), and Series 2009-1 Class B, (the “DROT 2009 Class B Notes” and together with the
DROT 2009 Class A Notes, the “DROT 2009 Notes”). The Class A notes carry an interest rate of 9.3%
and had an initial face value of $169.2 million. The Class B notes carry an interest rate of 12.0%
and had an initial face value of $12.8 million. The DROT 2009 Notes have a maturity date of March
20, 2026. The net proceeds received were $181.1 million compared to the $182.0 million face value
and we recorded the $0.9 million difference as an original issue discount on the securitization
notes payable. Also on October 15, 2009, we used the proceeds from the DROT 2009 Notes to pay off
in full the $35.4 million outstanding principal balance under our 2007 conduit facility and to pay
down the $148.9 million outstanding principal balance under our 2008 conduit facility, along with
requisite accrued interest and fees associated with both conduit facilities.
The 2008 conduit facility is subject to covenants including the maintenance of specific
financial ratios. The financial ratio covenants consist of a minimum consolidated interest coverage
ratio of at least 1.5 to 1.0 as of the measurement date and a maximum consolidated leverage ratio
not to exceed 5.0 to 1.0 on each measurement date. The consolidated interest coverage ratio is
calculated by dividing Consolidated EBITDA (as defined in the credit agreement) by Consolidated
Interest Expense (as defined in the credit agreement), both as measured on a trailing 12 month
basis preceding the measurement date. As of December 31, 2010,
our interest coverage
ratio was 1.9. The consolidated leverage ratio is calculated by dividing Total Funded Debt (as
defined in the credit agreement) minus unrestricted cash and cash equivalents as of the measurement
date by Consolidated EBITDA as measured on a trailing 12 month basis preceding the measurement
date. As of December 31, 2010, our leverage ratio was 4.9. Covenants in the 2008 conduit
facility also include limitations on liquidity. The total liquidity covenant stipulates that our
aggregate unrestricted cash and cash equivalents as of the measurement date must exceed $10 million
through December 31, 2010 and must exceed $15 million as of the measurement dates from January 1,
2011 through the Commitment Expiration Date. As of December 31, 2010, our unrestricted cash and
cash equivalents was $27.3 million. As of December 31, 2010, we were in compliance with all of
these covenants.
Sunterra SPE 2004-LLC. In September 2004, our predecessor company, Sunterra Corporation,
completed a $151.7 million private offering and sale of vacation ownership receivable-backed notes
(“2004 Securitization Notes”). The 2004 Securitization
Notes carried various fixed interest rates
ranging from 3.6% to 4.9% with a maturity date of October 20, 2020. On October 20, 2010, we
elected to redeem the 2004 Securitization notes by repaying $15.4 million of then-outstanding note
balance.
Polo Towers Lines of Credit and Securitization Notes Payable. In connection with the
acquisition of Sunterra Corporation in April 2007, a subsidiary formerly owned by Stephen J.
Cloobeck assigned revolving lines of credit to Diamond Resorts
Parent, LLC. The lines of credit were collateralized by retail contracts receivable and related VOIs. The revolving feature of the lines
of credit expired when they were assigned. The final maturity dates
of the lines of credit were July
31, 2010 and December 31, 2012. One of the lines of credit was paid off and terminated on July 30,
2010 upon its final maturity date, and the remaining line of credit was paid off and terminated January
3, 2011. These lines of credit carried an interest rate of three-month LIBOR plus 4.25%, but the
interest rate shall never be less than 4.75%. If the interest rate was less than 4.75% at any given
time, then the interest rate at such time for the purposes of
interest rate calculation was deemed
to be 4.75%.
Securitized loans that were collateralized by consumer contracts and related VOIs were also
assigned in April 2007 by a company controlled by
Mr. Cloobeck. These notes carried fixed interest
rates of 7.26% and 7.65% with a maturity date of January 20, 2013. These loans were paid in full
and terminated on March 4, 2011.
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Quorum Facility. Our subsidiary DRI Quorum, entered into a Loan Sale and Security Agreement
(the “LSSA”), dated as of April 30, 2010 with Quorum Federal Credit Union (“Quorum”), as purchaser,
Wells Fargo, National Association, as back-up servicer, and another one of our wholly owned
subsidiaries, Diamond Resorts Financial Services, Inc., as servicer. The LSSA and related documents
provide for an aggregate minimum $40 million loan sale facility and joint marketing venture (the
“Quorum Facility”) where DRI Quorum may sell eligible consumer loans and in-transit loans to Quorum
on a non-recourse, permanent basis, provided that the underlying consumer obligor is a Quorum
credit union member. The joint marketing venture has a minimum term of two years and the LSSA
provides for a purchase period of two years. The purchase price payment and the program purchase
fee are each determined at the time that the loan is sold to Quorum,
and the current purchase
price payment is 85% of the obligor loan amount and the program purchase fee
is 8.0%. To the extent excess
funds remain after payment of the sold loans at Quorum’s purchase price, such excess funds shall be
remitted to us as a deferred purchase price payment. As of December
31, 2010, the outstanding balance under the Quorum Facility was $12.9
million. This transaction did not qualify as a loan sale
under GAAP.
Tempus Acquisition Loan. On November 23, 2010, Tempus Acquisition, LLC, a wholly-owned
subsidiary of the Company, entered into the Tempus Acquisition Loan with
an affiliate of Guggenheim,
as the lender, and Guggenheim Corporate Funding, LLC, as administrative agent.
The Tempus Acquisition Loan is a revolving loan facility with a maximum principal amount of $8
million, the proceeds of which shall be used exclusively for the following purposes: (i) to provide
Tempus Acquisition, LLC with funds to lend to Tempus Resorts International, Ltd. and certain of its
affiliates, pursuant to a debtor-in-possession financing order entered by the United States
Bankruptcy Court for the Middle District of Florida (“DIP Financing” or “Tempus Note Receivable”),
for general working capital purposes and other lawful purposes as permitted under the agreements
governing the DIP Financing; and (ii) to provide $1.5 million for the “Deposit,” as defined and
provided in the Agreement for Purchase and Sale of Assets to purchase certain assets of Tempus
Resorts International, Ltd. and its affiliates. As of December 31, 2010, the outstanding balance of
the Tempus Acquisition Loan was $3.3 million and the balance of the Tempus Note Receivable was $3.0
million.
The maturity date of the Tempus Acquisition Loan is the earliest of (i) the occurrence of an
event of default if amounts outstanding under the loan documents and other obligations under the
Tempus Acquisition Loan are due and payable as a result thereof as required pursuant to the Tempus
Acquisition Loan, (ii) the lender’s demand of payment of amounts outstanding under the Tempus
Acquisition Loan, and (iii) the date occurring 180 days after the first business day after the
interim financing order is approved by the bankruptcy court.
The term of the Tempus Note Receivable ended on February 18, 2011; however, the bankruptcy
court approved the extension of the term through March 27, 2011.
ILXA Receivables Loan and Inventory Loan. On August 31, 2010, we completed the ILX
acquisition through our wholly-owned subsidiary, ILXA. In connection with the ILX acquisition, ILXA
entered into an Inventory Loan and Security Agreement (“ILXA Inventory Loan”) and a Receivables
Loan and Security Agreement (“ILXA Receivables Loan”) with Textron Financial Corporation. The ILXA
Inventory Loan is a non-revolving credit facility in the maximum principal amount of $23.0 million
with an interest rate of 7.5%. The ILXA Receivables Loan is a
receivables facility with an initial principal amount of $11.9 million
with an interest rate of 10% and is collateralized by mortgages and contracts
receivable of ILXA. Both loans mature on August 31, 2015. The proceeds from these loans were used
to fund the ILX acquisition.
Notes
Payable. We finance premiums on certain insurance policies under unsecured notes.
One of the notes matured in January 2011 and carried an interest rate
of 4.0% per annum. The other note will mature in Auguest 2011 and
carries an interest rate of 3.65% per annum.
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The following table presents selected information on our borrowings as of December 31, 2010
(dollars in thousands):
| Weighted | ||||||||||||
| Average | ||||||||||||
| Principal | Interest | |||||||||||
| Balance | Rate | Maturity | ||||||||||
Senior Secured Notes |
$ | 425,000 | 12.0 | % | 8/15/18 | |||||||
Original issue discount related to Senior Secured Notes |
(10,278 | ) | ||||||||||
2008 Conduit Facility |
39,467 | 5.5 | % | 8/30/11 | ||||||||
Diamond Resorts Owners Trust Series 2009-1 |
121,843 | 9.5 | % | 3/20/26 | ||||||||
Original issue discount related to Diamond Resorts
Owners Trust Series 2009-1 |
(899 | ) | ||||||||||
Quorum Facility |
12,942 | 8.0 | % | 4/30/12 | ||||||||
Polo Towers Lines of Credit |
2,060 | 4.8 | % | 12/31/12 | ||||||||
Polo Towers Securitization Notes Payable |
1,138 | 7.4 | % | 1/20/13 | ||||||||
ILXA Receivables Loan |
10,292 | 10.0 | % | 8/31/15 | ||||||||
ILXA Inventory Loan |
18,541 | 7.5 | % | 8/31/15 | ||||||||
Tempus Acquisition Loan |
3,300 | 10.0 | % | Less than one year | ||||||||
Notes payable-insurance policies |
1,366 | 3.7 | % | Various | ||||||||
Notes payable-other |
66 | 3.4 | % | Various | ||||||||
Total borrowings |
$ | 624,838 | ||||||||||
Future Capital Requirements. We intend to fund our growth over the next 12 months with funds
generated from operations and our conduit financing and loan sales. Our future capital requirements
will depend on many factors, including the growth of our consumer financing activities and the
expansion of our hospitality management operations. Our ability to secure short-term and long-term
financing in the future will depend on a variety of factors, including our future profitability,
the performance of our consumer loan receivable portfolio, our relative levels of debt and equity
and the overall condition of the credit and securitization markets.
Deferred Taxes. At December 31, 2010, we had available approximately $223.8 million of unused
federal net operating loss carry-forwards, $204.6 million of unused state net operating loss
carry-forwards, and $100.4 million of foreign net operating loss carry-forwards with expiration
dates from 2011 through 2029 (except for certain foreign net operating loss carry-forwards that do
not expire) that may be applied against future taxable income, subject to certain limitations.
Even
with the limitation, $69.2 million of federal net operating loss is currently available
for unlimited use and an additional $13.5 million becomes available each year. Similarly, use of
the state net operating loss carry forward is also available. Although our future cash tax
liabilities cannot be entirely eliminated through the application of these net operating loss
carry-forwards due to a 90% statutorily imposed limitation on offsetting U.S. alternative minimum
taxable income with net operating loss carry-forwards, we believe that the availability of these
net operating loss carry-forwards to offset future taxable income will result in minimal cash tax
obligations in future periods.
Off-Balance Sheet Financing Arrangements. As of December 31, 2010, we did not have any
off-balance sheet financing arrangements.
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Contractual Obligations. The following table presents obligations and commitments to make
future payments under contracts and under contingent commitments as of December 31, 2010 (in
thousands):
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Contractual Obligations | Total | 1 year | years | years | 5 years | |||||||||||||||
Senior
secured notes, including interest payable |
$ | 813,875 | $ | 51,000 | $ | 102,000 | $ | 102,000 | $ | 558,875 | ||||||||||
Securitization notes payable, including
interest payable |
169,913 | 73,066 | 73,023 | 23,824 | — | |||||||||||||||
Conduit facilities, including interest payable |
40,914 | 40,914 | — | — | — | |||||||||||||||
Notes payable , including interest payable (1) |
25,943 | 10,120 | 10,241 | 5,582 | — | |||||||||||||||
Purchase obligations |
283 | 283 | — | — | — | |||||||||||||||
Operating lease obligations |
38,794 | 7,480 | 10,451 | 9,150 | 11,713 | |||||||||||||||
Total |
$ | 1,089,722 | $ | 182,863 | $ | 195,715 | $ | 140,556 | $ | 570,588 | ||||||||||
| (1) | Assumes certain estimates for payments and cancellations on collateralized outstanding mortgage receivables. |
Inflation. Inflation and changing prices have not had a material impact on our revenues,
income (loss) from operations, and net income (loss) during any of our three most recent fiscal
years. However, to the extent inflationary trends affect short-term interest rates, a portion of
our debt service costs may be affected as well as the rates we charge on our consumer loans.
Interest Rate Risk. Historically, we have been exposed to interest rate risk through our
variable rate indebtedness, including our first and second lien facilities, lines of credit and
conduit facilities discussed above, which we have attempted to manage through the use of derivative
financial instruments. For example, we are required to hedge 90% of the outstanding note balance
under our 2008 conduit facility. We do not hold or issue financial instruments for trading purposes
and do not enter into derivative transactions that would be considered speculative positions. Our
derivative financial instruments currently consist of an interest rate swap and two caps, which do
not qualify for hedge accounting. Interest differentials resulting from these agreements are
recorded on an accrual basis as an adjustment to interest expense. To manage exposure to
counterparty credit risk in interest rate swaps and caps, we enter into agreements with highly
rated institutions that can be expected to fully perform under the terms of such agreements.
To the extent we assume variable rate indebtedness in the future, any increase in interest
rates beyond amounts covered under any corresponding derivative financial instruments, particularly
if sustained, could have an adverse effect on our results of operations, cash flows and financial
position. We cannot assure you that any hedging transactions we enter into will adequately mitigate
the adverse effects of interest rate increases or that counterparties under these agreements will
honor their obligations.
Additionally, we derive net interest income from our consumer financing activities to the
extent the interest rates we charge our customers who finance their purchases of VOIs exceed the
variable interest rates we pay to our lenders. Because our mortgages and contracts receivable bear
interest at fixed rates, future increases in interest rates may result in a decline in our net
interest income.
Foreign Currency Translation Risk. We receive a portion of our revenues from our European
resorts, the operations of which are primarily conducted in Euros and British pounds. Because our
financial results are reported in U.S. dollars, fluctuations in the value of the Euro and British
pound against the U.S. dollar have had and will continue to have an effect, which may be
significant, on our reported financial results. A decline in the value of the Euro or British pound
against the U.S. dollar will tend to reduce our reported revenues and expenses, while an increase
in the value of the Euro or British pound against the U.S. dollar will tend to increase our
reported revenues and expenses. Variations in exchange rates can significantly affect the
comparability of our financial results between financial periods.
Information Regarding Geographic Areas of Operation. We conduct our Hospitality and Management
Services and Vacation Interest Sales and Financing operations in two geographic areas: North
America and Europe.
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Our North America operations include our branded resorts in the continental United States,
Hawaii, Mexico, Canada and the Caribbean, and our Europe operations include our branded resorts in
the United Kingdom, Ireland, Italy, Spain, Portugal, Austria, Norway, Malta, Germany and France. The
following table reflects our total revenue and assets by geographic area for the periods presented
(in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Revenue |
||||||||||||
North America |
$ | 325,710 | $ | 359,790 | $ | 348,129 | ||||||
Europe |
45,115 | 51,171 | 54,285 | |||||||||
Total Revenues |
$ | 370,825 | $ | 410,961 | $ | 402,414 | ||||||
| As of December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Mortgages and contracts receivable, net |
||||||||||||
North America |
$ | 244,541 | $ | 263,007 | $ | 300,364 | ||||||
Europe |
746 | 549 | 431 | |||||||||
Total mortgages and contracts receivable, net |
$ | 245,287 | $ | 263,556 | $ | 300,795 | ||||||
Unsold vacation interest, net |
||||||||||||
North America |
$ | 174,642 | $ | 174,675 | $ | 193,088 | ||||||
Europe |
15,922 | 28,550 | 25,028 | |||||||||
Total unsold vacation interest, net |
$ | 190,564 | $ | 203,225 | $ | 218,116 | ||||||
Property and equipment, net |
||||||||||||
North America |
$ | 24,248 | $ | 19,794 | $ | 21,864 | ||||||
Europe |
4,849 | 5,914 | 6,648 | |||||||||
Total property and equipment, net |
$ | 29,097 | $ | 25,708 | $ | 28,512 | ||||||
Intangible assets, net |
||||||||||||
North America |
$ | 40,926 | $ | 35,664 | $ | 40,287 | ||||||
Europe |
4,787 | 6,969 | 7,665 | |||||||||
Total intangible assets, net |
$ | 45,713 | $ | 42,633 | $ | 47,952 | ||||||
Total long-term assets, net |
||||||||||||
North America |
$ | 484,357 | $ | 493,140 | $ | 555,603 | ||||||
Europe |
26,304 | 41,982 | 39,772 | |||||||||
Total long-term assets, net |
$ | 510,661 | $ | 535,122 | $ | 595,375 | ||||||
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New Accounting Pronouncements
In June 2009, the FASB issued guidance which is included in ASC 860, “Transfers and
Servicing,” which eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional disclosures in order to
enhance information reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and an entity’s
continuing involvement in and exposure to the risks related to transferred financial assets. ASC
860 is effective for interim or annual reporting periods beginning after November 15, 2009. We
adopted ASC 860 on January 1, 2010, as required, which did not have a material impact on our
financial condition and results of operations.
In June 2009, the FASB issued guidance which is included in ASC 810, “Consolidation,” which
modifies how a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. ASC 810 clarifies that the
determination of whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. ASC 810 requires an
ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity,
additional disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The amendment is effective for
interim or annual reporting periods beginning after November 15, 2009. We adopted the amendment to
ASC 810 on January 1, 2010, as required, which did not have a material impact on our financial
condition and results of operations.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Improving
Disclosures about Fair Value Measurements, which, among other things, amends ASC 820, “Fair Value
Measurements and Disclosures” to require entities to separately present purchases, sales, issuances
and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such
items on a gross basis rather than on a net basis), and which clarifies existing disclosure
requirements provided by ASC 820 regarding the level of disaggregation and the inputs and valuation
techniques used to measure fair value for measurements that fall within either Level 2 or Level 3
of the fair value hierarchy. ASU No. 2010-06 is effective for interim and annual periods beginning
after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements
in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal years. The
adoption did not have a material impact on our consolidated financial statements or its
disclosures, as we did not have any transfers between Level 1 and Level 2 fair value measurements
and did not have material classes of assets and liabilities that required additional disclosure.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and
Disclosure Requirements, which amends ASC 855, “Subsequent Events.” ASU No. 2010-09 removes the
requirement for a public company to disclose a date in both issued and revised financial statements.
Revised financial statements include financial statements revised as a result of either correction
of an error or retrospective application of U.S. GAAP. Additionally, FASB clarified that if the
financial statements have been revised, then an entity that is not a
public company should disclose
both the date that the financial statements were issued or available to be issued and the date the
revised financial statements were issued or available to be issued. ASU No. 2010-09 is effective
for the first reporting period after issuance. We adopted ASU No. 2010-09 on June 30, 2010, which
did not have a material impact on our financial condition or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. This standard amends existing guidance
by requiring additional disclosures that will provide greater transparency about an entity’s
allowance for credit losses and the credit quality of our financing receivables. These
disclosures are designed to provide additional information about (i) the nature of credit risk
inherent in the entity’s portfolio of financing receivables; (ii) how that risk is analyzed and
assessed in arriving at the allowance for credit losses; and (iii) the changes and reasons for
those changes in the allowance for credit losses. For public entities, the disclosures are
effective for interim and annual reporting periods ending on or after December 15, 2010. We adopted ASU No.
2010-20 as of December 31, 2010. The adoption of this update primarily resulted in increased notes
receivable disclosures, but did not have any other impact on our financial statements.
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In December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The amendments in this update modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. For public entities, the amendments in this update are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. We will adopt ASU 2010-28 as of January 1, 2011. We believe that the
adoption of this update will not have a material impact on our financial statements.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations. The amendments in this update
specify that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments also expand the supplemental pro forma disclosures to include
a description of the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
The amendments affect any public entity as defined by Topic 805 that enters into business
combinations that are material on an individual or aggregate basis. The amendments in this update
are effective prospectively for business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. We will adopt ASU 2010-29 for all business combinations for which the
acquisition date is on or after January 1, 2011. We believe that the adoption of this update will
primarily result in increased disclosures, but will not have a material impact on our financial
statements.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The
amendments in this update temporarily delay the effective date of the disclosures about troubled
debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board
time to complete its deliberations on what constitutes a troubled debt restructuring. The effective
date of the new disclosures about troubled debt restructurings for public entities and the guidance
for determining what constitutes a troubled debt restructuring will then be coordinated. Currently,
that guidance is anticipated to be effective for interim and annual periods ending after June 15,
2011. The amendments in this update apply to all public-entity creditors that modify financing
receivables within the scope of the disclosure requirements about troubled debt restructurings in
ASU 2010-20. We will adopt ASU 2011-01 as of our interim period ending June 30, 2011. We believe
that the adoption of this update will not have a material impact on our financial statements.
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BUSINESS
Company Overview
We are one of the world’s largest companies in the vacation ownership industry, with an
ownership base of more than 380,000 families and a network of 196 resorts located in 28 countries
throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, Europe, Asia,
Australia and Africa. Our resort network includes 69 Diamond Resorts International-branded
properties, which we manage, and 127 affiliated resorts, which we do not manage and which do not
carry our brand, but are a part of our network and are consequently available for our members to
use as vacation destinations.
Our operations consist of three interrelated businesses that provide us with diversified and
stable cash flow: (i) hospitality and management services; (ii) marketing and sales of VOIs; and
(iii) consumer financing for purchasers of our VOIs.
| • | Hospitality and Management Services. We manage 69 branded resort properties, which are located in the continental United States, Hawaii, Mexico, the Caribbean and Europe. We also manage our five Collections, which hold real estate in our resort properties underlying the VOIs that we sell. As manager of our branded resorts and our Collections, we provide billing services, account collections, accounting and treasury functions and information technology services. In addition, for our branded resorts we also provide an online reservation system and customer service contact center, operate the front desks and amenities and furnish housekeeping, maintenance and human resources services. Our management contracts typically have an initial term of three to five years with automatic renewals and are structured on a cost-plus basis, thereby providing us with a recurring and stable revenue stream. In addition, we earn recurring fees by operating THE Club, our points-based exchange and member services program that enables our members to vacation at any of the 196 resorts in our network. |
| • | Marketing and Sales of VOIs. We market and sell VOIs in our resort network. We generate sales prospects by utilizing a variety of marketing programs, including targeted mailings, telemarketing, gift certificates, presentations at our resorts targeted to current members, guests and renters, overnight mini-vacation packages and various destination-specific marketing efforts. We close substantially all of our VOI sales following tours. Currently, we sell our VOIs only in the form of points, which can be utilized for vacations for varying lengths of stay at any resort in our network. In the past, we also sold VOIs in the form of deeded intervals, which provide the right to vacation at a particular resort for a specified length of time, but we no longer sell intervals because we believe that points offer our members greater choice and flexibility in planning their vacations. The number of points required to stay at one of our resorts varies according to the resort, the type and size of accommodation, the season and the length of stay. In 2010, the average cost to purchase points equivalent to a one-week vacation at one of our resorts was $17,965. |
| • | Consumer Financing of VOIs. We provide loans to eligible customers who purchase VOIs through our U.S. sales centers and choose to finance their purchase. These loans are collateralized by the underlying VOI and bear interest at a fixed rate. Our consumer finance servicing operations are vertically integrated and include underwriting, collection and servicing of our consumer loan portfolio. The liquidity to support our consumer finance program is provided through conduit and securitization financings. |
Our Market
There are two primary alternatives in the leisure industry for overnight resort
accommodations: commercial lodging establishments and vacation ownership resorts. Commercial
lodging establishments consist generally of hotels and motels in which a room is rented on a
nightly, weekly or monthly basis, and to a lesser degree includes rentals of privately owned
condominium units or homes. For many vacationers, particularly those with families, the amount of
space provided in a hotel or motel room, relative to its cost, is not economical. Vacation
ownership resorts are typically composed of condominium or apartment units that have a kitchen,
dining area, living room, one or more bedrooms and common area amenities, such as swimming pools,
playgrounds, restaurants and gift shops. Room rates and availability at commercial lodging
establishments are subject to periodic change, while much of the
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cost of a VOI is generally fixed at the time of purchase. Consequently, vacation ownership is
an attractive alternative to commercial lodging for many vacationers.
Growth in the vacation ownership industry has been achieved through expansion of existing
resort companies as well as the entrance of well-known lodging and entertainment companies,
including Disney, Four Seasons, Hilton, Hyatt, Marriott, Starwood and Wyndham, which have developed
larger resorts as the vacation ownership resort industry has matured. The industry’s growth, as
reflected in the table below, can also be attributed to an increased market acceptance of vacation
ownership resorts, enhanced consumer protection laws and the evolution from a single fixed or
floating week product to multi-resort (often points-based) vacation networks, which offer a more
flexible vacation experience.
According to ARDA, as of December 31, 2009, the U.S. vacation ownership community was
comprised of approximately 1,548 resorts representing approximately 170,200 units and an estimated
7.2 million vacation ownership week equivalents. The following table reflects the growth in
ownership of VOI week equivalents since 1975:
| * | A change in ARDA’s definition of the study population resulted in a decrease in the number of resorts included in the ARDA study from 2004 to 2005, which also resulted in a decrease in the number of vacation ownership week equivalents. This change focused ARDA’s analysis on traditional VOIs, including intervals and points, by removing non-comparable entities such as fractionals, non-equity clubs, private residence clubs and vacation clubs. Prior years were not restated to give effect to this change. |
| Source: Historical timeshare industry research conducted by Ragatz Associates, American Economic Group and Ernst & Young on behalf of the ARDA International Foundation, as of December 31, 2009. | |||
ARDA reported aggregate VOI sales in 2009 in the United States of $6.3 billion, reflecting a
decline of $3.4 billion, or 35%, from 2008. ARDA’s reported aggregate VOI sales in 2008 of $9.7
billion reflected a decline of $0.9 billion, or 8.5%, from 2007. ARDA has attributed this recent
sales decline to the fact that several of the larger VOI developers have intentionally slowed their
sales efforts through increased credit score requirements and larger down payment requirements in
the face of an overall tighter credit environment. ARDA also concluded that many developers have
reduced the scope of their sales operations and focused their sales efforts more on existing
owners.
The following table reflects total sales in the vacation ownership industry since 1975:
| Source: Historical timeshare industry research conducted by Ragatz Associates, American Economic Group and Ernst & Young on behalf of the ARDA International Foundation, as of December 31, 2009. | |||
Notwithstanding the recent downturn, we expect our industry to grow over the long term due to
more positive consumer attitudes and the low penetration of vacation ownership in North America.
According to ARDA’s 2010 Market Sizing Survey conducted in January 2010, less than 8% of U.S.
households own a VOI.
Management of vacation ownership resorts is typically provided either by the developers of the
resorts or by third-party management companies. A significant number of hospitality management
service providers have experienced economic distress since the start of the economic downturn in
2008. Some developers that manage their resorts have found that their highly-leveraged,
development-focused business models have been difficult to sustain in the current economic climate,
as both project-based development financing and conventional financing have become both more
difficult to obtain and more expensive. Some third-party management companies are compensated based
in whole or in part on occupancy and or rental rates, and have seen their fees reduced due to
decreased travel and reduced occupancy of resorts they manage. Unlike us, most third-party resort
management companies do not have the expertise and infrastructure to manage the sales and marketing
of VOIs and service portfolios of consumer loans.
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In addition, the vacation ownership industry has historically relied on the credit markets to
finance consumer loans to purchase VOIs. Since the economic downturn began in 2008, traditional
lenders have significantly curtailed the availability of credit. Several such lenders have
announced intentions to exit the finance business or discontinue new financings for the foreseeable
future. This has led to a decrease in access to capital, resulting in financial distress, for many
small- to mid-sized vacation ownership companies. Further, many of the well-known lodging and
entertainment companies with vacation ownership divisions have significantly reduced current and
future development plans.
Competitive Strengths
Our competitive strengths include:
Stable cash flow from hospitality and management services. The management fees from our
“evergreen” hospitality management contracts are structured on a cost-plus basis. Most of our
current management contracts are priced at cost plus a range of 10% to 15%. These costs include an
allocation of a substantial portion of our overhead related to our provision of management
services. Because the cost component of these contracts is included in each of our managed resorts’
annual budgets, which are typically finalized in September of the prior year, our management fees
are highly predictable. In addition, unlike typical hospitality management companies, our fees are
not affected by average daily rate or occupancy at our resorts. Our management fees are paid with
funds that we collect on behalf of each resort’s HOA as part of an annual maintenance fee billed to
owners. These annual fees also include fees for our Collections and THE Club. Because annual
maintenance fees are paid in advance, the collection risk for our management fees is substantially
mitigated. No HOA or Collection has terminated any of our management contracts during the past
five years, with the exception of one immaterial HOA management contract.
Capital-light business model. We employ a capital-light business model that does not require
significant capital expenditures or investment in new inventory or substantial working capital
investment. Our focus on the hospitality management business is an essential aspect of this model.
Because the funds to pay our management fees are collected in advance and released to us as
services are provided, our hospitality and management services business consumes limited working
capital. Moreover, all resort level maintenance and improvements are paid for by the respective
HOAs. Our VOI sales and financing business is also managed in accordance with the capital-light
philosophy. During each of the past two years, we recovered approximately 3.1% of our previously
sold VOIs in the ordinary course of our business as a result of loan and association fee defaults
due to, among other things, death, divorce and other life-cycle events or lifestyle changes. These
defaulted points equated to approximately 10,700 weeks of inventory recovered annually. The
recovery of these points has enabled us to maintain our current sales level without needing to
acquire or build any new resorts because our inventory has effectively replenished itself. The
cost of recovering inventory is significantly less than the cost of building or buying new
inventory and is funded out of our operating capital. Our most recent development project was
completed in January 2008, and we do not believe we will need to make capital expenditures to
acquire or build new resort properties in the foreseeable future. Additionally, unlike certain
other companies in our industry, we have no project-specific debt requiring repayment with the
proceeds of sales of VOIs at a given resort project.
Flexible points-based vacation ownership structure. Our points-based structure, combined with
the exchange network provided by THE Club, offers our members the ability to stay at any of our
resorts. We believe this structure, combined with our broad resort network, gives us a significant
competitive advantage by allowing our members to travel where they want and when they want. Because
points are not tied to a specific vacation date or location, we can sell points to our members in a
wide variety of increments. In addition to using their points for vacation accommodations, members
of THE Club can use their points to pay for cruises, airline tickets and other vacation-related
activities. Furthermore, from an operational perspective, our points-based structure enables us to
efficiently manage our inventory and sales centers by selling points-based access to our global
network from any sales location, rather than being limited to selling intervals at a specific
resort. In addition, the recovery of points-based inventory from our members is easier than the
recovery of interval-based products, which are typically governed by local real estate foreclosure
laws that can significantly lengthen recovery periods and increase the cost of recovery.
High customer satisfaction drives significant repeat customers. Over the past three years, we
have enhanced our overall member experience by improving our reservations process and customer
communications
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program, upgrading appliances, furnishings, bedding and linens in many of our resort units and
refurbishing resort amenities, such as swimming facilities and fitness areas. We believe that
these improvements, combined with our diverse collection of resort locations and the variety of
vacation experiences that we offer (including golf, ski, beach and historic destination
experiences), have led to high customer satisfaction levels. In 2010, approximately 59% of our VOI
sales were made to existing members purchasing additional points, which enabled them to enjoy
longer stays and greater flexibility in their vacation choices. Sales to existing members typically
have significantly lower sales and marketing costs than sales to new customers.
High-quality loan originations and reduced reliance on receivables financing. Since 2000, we
have included credit scoring as part of our loan underwriting process, resulting in an established
history of originating higher credit-quality consumer loans. In October 2008, we responded to
deteriorating credit market conditions by taking measures to reduce our reliance on receivables
financing and improve the credit quality of our consumer loan portfolio. These measures included
reducing the purchase price for all-cash sales and increasing the interest rate on loans we
provided in order to incentivize all-cash sales and reduce the volume of new consumer loans
generated. As a result of these actions, the weighted average FICO score of our borrowers from
October 2008 through December 2010 was 759, and during that period approximately 67% of our sales
were all-cash purchases, reflecting an increase in the percentage of all-cash sales from 33% in the
prior twelve months. From October 2008 through December 2010, our average cash down payment was
13.5% and the average initial equity contribution for new VOI purchases (which take into account
the value of VOIs already held by purchasers and pledged to secure a new consumer loan) was 32.2%,
which resulted in an average combined equity contribution of 45.7% for new VOI purchases.
Strong management team. Since the acquisition of Sunterra Corporation in April 2007, our
leadership team, led by Stephen J. Cloobeck, our Chairman and CEO, and David F. Palmer, our
President and CFO, has taken a number of significant steps to change our strategic focus, build our
brand recognition and streamline our operations. We believe these actions have been instrumental
in our ability to maintain relatively stable financial performance, even in the face of challenging
economic conditions. These actions have included:
| • | implementing a new focus on service and hospitality to provide our members a premium experience; |
| • | introducing the Diamond Resorts International brand throughout our network of managed resorts; |
| • | renegotiating our hospitality management contracts to provide improved cost recovery; |
| • | implementing a capital-light business model that does not require capital-intensive acquisitions, development or construction; |
| • | responding quickly to the credit crisis by substantially increasing our percentage of all-cash sales, thereby reducing our dependence on the receivables financing market; and |
| • | adjusting our marketing and sales efforts by closing low margin sales centers, eliminating certain incentive programs and implementing a reduced sales commission structure. |
Business Strategies
Our objective is to expand our core operations and become the leader in the vacation ownership
industry. To achieve this objective, we are pursuing the following strategies:
Capitalizing on current industry dynamics to grow fee-based services. Since the economic
downturn began in 2008, traditional lenders have significantly curtailed the availability of credit
to small and mid-market companies in the vacation ownership industry. Several such lenders have
announced their intention to exit the VOI finance business or discontinue new VOI financing
commitments for the foreseeable future. We believe this loss of traditional financing sources to
the industry provides us with opportunities to grow our fee-based revenue in the following three
ways: (i) assuming the management of resorts from operators facing financial distress; (ii)
managing the sales and marketing of portfolios of VOIs of these operators or financial
institutions; and (iii) servicing these operators’ and financial institutions’ consumer loan
portfolios. We intend to structure such opportunities in a
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manner consistent with our
capital-light business model. If we are successful in pursuing these opportunities, we
will increase the number of managed resorts in our network, expand our inventory of VOIs and
broaden our membership base. In so doing, we will also increase our management services revenue.
For example, we obtained the rights to manage certain assets of ILX Resorts Incorporated and
its affiliates (which we refer to collectively as ILX), an Arizona-based vacation ownership company
currently operating under Chapter 11 of the Bankruptcy Code. On July 23, 2010, bankruptcy court
approval was obtained for a newly-formed special purpose entity to purchase ILX’s management
agreements for ten resorts, ILX’s unsold VOIs and the rights to recover and resell such interests,
ILX’s consumer loans, and certain real property and other assets. On August 31, 2010, a special
purpose entity formed by us acquired these assets in exchange for a cash payment of approximately
$6.9 million and the assumption of approximately $23.8 million of debt owing to ILX’s senior first
lien lender. We entered into management agreements with the special purpose entity under which we
will, on behalf of the special purpose entity, manage its resort operations, the marketing and sale
of its VOI inventory and its consumer loan portfolio.
We have an agreement in principle to acquire, through a special purpose subsidiary,
substantially all of the business operations of Tempus Resorts International, Ltd. and its
affiliates, a Florida-based vacation ownership company operating resorts in Florida and South
Carolina. In pursuit of this transaction, our subsidiary has extended debtor-in-possession
financing to Tempus Resorts, which is currently operating under the jurisdiction of the United
States Bankruptcy Court for the Middle District of Florida. If this transaction (which is subject
to bankruptcy court approval and other conditions) is consummated, we will obtain the rights to
manage the Tempus Resorts International properties and its portfolio of consumer loans, as well as
the right to acquire and re-sell its VOI inventory.
Diversify and increase revenue through new business initiatives. In addition to the
strategies outlined in the previous paragraph, we believe that we can increase and diversify our
revenue through new business initiatives, which may include:
| • | Expanding THE Club by adding new affiliated resorts, thereby increasing its value to our members and driving more potential customers to our resorts. Through new and expanded affiliation agreements, we have launched 89 new resort destinations worldwide since the beginning of 2007. |
| • | Entering into marketing arrangements with third parties whereby we offer their products and services to our member base. We currently offer our members the opportunity to purchase products and services (such as consumer electronics, home appliances and identity theft protection services) at discounted prices using our global purchasing platform, and we receive a percentage of the related sales revenue from those transactions. We intend to expand these initiatives in the future to enhance the value proposition to our membership base and increase our revenue. |
| • | Pursuing management contracts and other services arrangements with resorts that we do not currently manage. For example, we may seek to leverage our affiliate resort network to identify and enter into new management contracts for these resorts. In addition, we intend to pursue discussions with vacation ownership and hotel operators to provide a suite of services, including billing and collections, purchasing, rental management and other services. |
| • | Expanding programs to incentivize our members to refer their friends and family. As a result of our large ownership base, high levels of customer satisfaction and brand recognition, we believe there is an opportunity to grow revenues by referrals from our existing members. |
| • | Strengthening our brand. Since the acquisition of Sunterra Corporation in 2007, we have deployed the Diamond Resorts International brand across our managed resorts. Our goal is to associate our brand with a premium hospitality experience that offers simplicity, choice and comfort to our members. In pursuit of that goal, we will continue to take steps to improve our members’ experience, including improving our reservations system and customer service contact center, upgrading amenities in many of our resort units and common areas, and increasing the quality and variety of vacation experiences available through THE |
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Club. We believe that this will generate improved brand loyalty, drive increased business
from repeat customers, produce more referrals from our member base and enable us to improve the
efficiency and effectiveness of our sales and marketing programs.
Our Customers
Our customers are typically families seeking a flexible vacation experience. A majority of our
new customers stay at one of our resorts, either by renting a unit or through an external exchange
service, prior to purchasing a VOI. We have also generated significant additional sales to our
existing customers, who wish to purchase additional points and thereby increase their vacation
options within our network.
A majority of our customers are baby boomers, between 46 and 65 years old. The baby boomer
generation is the single largest population segment in the United States and Europe and is our
target market. According to ThirdAge Inc., an online media company, U.S. baby boomers spend
approximately $500 million on vacations per year and account for approximately 80% of all annual
leisure travel in the United States. With our premium resorts, we believe we are well-positioned to
target an affluent subsection of the baby boomer population. Compared to the average U.S.
household, our members are two times more likely to have incomes of at least $100,000 and three
times more likely to have a net worth of at least $2 million.
Our Resort Network
Our resort network consists of 196 properties, which includes 69 Diamond Resorts
International-branded properties, which we manage, and 127 affiliated resorts, which we do not
manage and which do not carry our brand name but are a part of our network and consequently are
available for our members to use as vacation destinations. Affiliated resorts are resorts with
which we have contractual arrangements to use a certain number of vacation intervals or units in
exchange for our providing similar usage of intervals or units at our managed resorts.
We identify and select affiliated resorts based on a variety of factors, including location,
amenities and preferences of our members. We have established standards of quality that we require
each of our affiliates to meet, including with respect to the maintenance of their properties and
level of guest services. Our affiliate agreements permit us to terminate our relationship with an
affiliate if it fails to meet our standards. In addition, we own, through one or more of the
Collections, intervals at a few of our affiliated resorts.
Our portfolio of resorts includes a wide variety of locations and geographic diversity,
including beach, mountain, ski and major city locations, as well as locations near major theme
parks and historical sites. The accommodations at our resorts are fully furnished and typically
include kitchen and dining facilities, a living room and a combination of bedroom types including
studios and one-, two- and three-bedroom units with multiple bathrooms. Resort amenities are
appropriate for the type of resort and may include an indoor and/or outdoor swimming pool, hot tub,
children’s pool, fitness center, golf course, children’s play area and tennis courts. Further,
substantially all of our branded resorts in Europe and certain of our branded resorts in North
America include onsite food and beverage operations, the majority of which are operated by third
party vendors.
The following is a list, by geographic location, of our branded and managed resorts, with a
brief description and the number of units at each such branded and managed resort, together with a
list of our affiliated resorts:
Branded and Managed Resorts
NORTH AMERICA AND THE CARIBBEAN
| Resort | Location | Units | ||||
Scottsdale Villa Mirage
|
Scottsdale, Arizona | 154 | ||||
| Located 25 minutes from the Phoenix airport, this 154 unit resort has a heated outdoor pool, children’s pool, whirlpools, tennis courts, playground, fitness center and games room to provide for guests and families of all ages. | ||||||
Scottsdale Links Resort
|
Scottsdale, Arizona | 217 | ||||
| This 217 unit resort with one-, two- and three-bedroom accommodations is located between the TPC Desert Golf | ||||||
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| Resort | Location | Units | ||||
| Course and the McDowell Mountains in Scottsdale, within easy reach of Phoenix. With a spa, fitness center, outdoor heated pool and spacious units, this resort is ideal for families making it a base for exploring the area. | ||||||
Sedona Summit
|
Sedona, Arizona | 278 | ||||
| Sedona Summit is located four miles from Sedona town centre, and within easy reach of Grand Canyon National Park. The 278 units are spread across 39 two-story buildings with six pools and whirlpools located throughout the resort complex. | ||||||
The Ridge on Sedona Golf Resort
|
Sedona, Arizona | 175 | ||||
| Situated 15 minutes away from Sedona town center, The Ridge on Sedona Golf Resort has 175 units surrounding five whirlpools and pools with a fitness center, games room and clubhouse. | ||||||
Lake Tahoe Vacation Resort
|
South Lake Tahoe, California | 181 | ||||
| Located on the edge of Lake Tahoe, America’s largest alpine lake and only a mile away from the Heavenly Mountain Resort base lodge, Lake Tahoe Vacation Resort is ideally placed for a winter skiing vacation as well as for summer activities such as hiking, horseback riding and water sports. The resort has 181 units with both indoor and outdoor pools and hot tubs, fitness center and game room. | ||||||
Flamingo Beach Resort
|
St. Maarten, Caribbean | 208 | ||||
| Located on the Dutch side of St. Maarten, this resort is situated on a private beachfront with 208 studio and one-bedroom units. The resort offers a restaurant and snack bar, as well as an outdoor pool and tennis courts. | ||||||
Royal Palm Beach Resort
|
St. Maarten, Caribbean | 140 | ||||
| Located on the Dutch side of the island, all 140 of the one-, two- and three-bedroom units at this resort face the beach and have balconies or terraces. Facilities at the resort include a restaurant, swimming pool and poolside bar, gym and beauty salon. | ||||||
Daytona Beach Regency
|
Daytona Beach, Florida | 87 | ||||
| This resort is situated on beachfront of the world famous Daytona Beach. Close to the Speedway attractions, it provides 87, one- and two-bedroom units, indoor and outdoor pools with slides and hot tubs, poolside bar, fitness center, volleyball courts and games room. | ||||||
Grand Beach
|
Orlando, Florida | 192 | ||||
| Located minutes from Florida’s Walt Disney World, SeaWorld and Universal Studios, this 192 unit resort is located on the edge of Lake Bryan. All units contain three bedrooms, three bathrooms, and fully-equipped kitchens, which provide spacious family accommodations, as well as an outdoor pool, whirlpool, children’s pool, playground, game room and fitness center. | ||||||
The Point at Poipu
|
Kauai, Hawaii | 215 | ||||
| Located on the island of Kauai, this resort offers 215 units with lush garden or ocean views across Shipwreck Beach to every suite. The resort has an outdoor beach entry pool as well as a children’s pool, hot tub, fitness center, spa and sauna. | ||||||
Ka’anapali Beach Club
|
Maui, Hawaii | 411 | ||||
| With 411 units in a 12 story building, Ka’anapali Beach Club is located on the beach front of Maui’s famous North Shore. The resort has a newly opened restaurant and pool bar, newly refurbished pools, as well as a fitness center, spa, sauna, hair salon and gift shop. | ||||||
The Suites at Fall Creek
|
Branson, Missouri | 214 | ||||
| This resort offers 214 units, many with lake views over Lake Taneycomo. Ten minutes away from Branson town center, the resort is ideally located to explore this destination, while providing a selection of amenities onsite, including a fitness center, basketball courts, boating, fishing, indoor and outdoor pools, hot tubs, mini golf, playground, shuffle board and tennis courts. | ||||||
Desert Paradise Resort
|
Las Vegas, Nevada | 142 | ||||
| This Las Vegas resort is tucked away from The Strip but provides a good base to explore the area. The resort has 142 | ||||||
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| Resort | Location | Units | ||||
| units across two-story buildings, all with balconies or terraces. It also has two central pool areas equipped with hot tubs and children’s pools, as well as barbeque areas and a fitness center. | ||||||
Polo Towers Suites
|
Las Vegas, Nevada | 300 | ||||
| This resort is located in the heart of the Las Vegas Strip and shares facilities with Polo Towers Villas. With 300 units, the resort offers a new and comprehensive fitness center, and two outdoor pool areas including a roof top pool. | ||||||
Polo Towers Villas
|
Las Vegas, Nevada | 208 | ||||
| This resort has 208 units and shares facilities with Polo Towers Suites, including a new fitness center, outdoor pools and spa. | ||||||
Villas de Santa Fe
|
Santa Fe, New Mexico | 105 | ||||
| This resort is situated in Santa Fe, halfway between Taos and Albuquerque. With 105 one- and two-bedroom units, the resort offers a base to explore the surrounding area, which is rich in culture, as well as providing a heated outdoor pool and hot tub, fitness center, game room and clubhouse. | ||||||
Bent Creek Golf Village
|
Gatlinburg, Tennessee | 47 | ||||
| A combination of 47 one- and two- bedroom units and cabins make up Bent Creek Golf Village situated amid a Gary Player golf course. Located 11 miles away from the center of Gatlinburg and the Great Smoky Mountains National Park, this resort offers indoor and outdoor heated pools, fitness center, games room, and volleyball and basketball courts. | ||||||
Greensprings Vacation Resort
|
Williamsburg, Virginia | 147 | ||||
| Offering 147, two- and four- bedroom units this resort is ideally placed to explore the historical town of Colonial Williamsburg as well as the areas theme parks. The resort is equipped with indoor and outdoor pools, hot tubs, a fitness center, playgrounds, sauna and tennis, volleyball and basketball courts. | ||||||
The Historic Powhatan Resort
|
Williamsburg, Virginia | 443 | ||||
| Amid 256 acres of woodland and located a short drive to Colonial Williamsburg and the area’s theme parks, this resort offers one-, two- and three-bedroom accommodations totaling 443 units. Amenities include indoor and outdoor pools and hot tubs, two restaurants open for breakfast, lunch and dinner and a gift shop. | ||||||
Bell Rock Inn and Suites
|
Sedona, Arizona | 85 | ||||
| Framed by extraordinary views along the Red Rock Scenic Byway with its sandstone formations and rich red landscape of Arizona’s backcountry, this resort is set amid the natural beauty of Sedona and provides easy access to the sights, sounds and wonder of the Coconino National Forest. In addition to a laid-back and friendly ambience, the resort offers a poolside barbeque and in-suite fireplaces. | ||||||
Los Abrigados Resort & Spa
|
Sedona, Arizona | 193 | ||||
| Nestled against the banks of the famous Oak Creek in Sedona, Arizona, and rests upon twenty-two acres filled with winding walkways, cascading fountains and shady nooks in the foothills of Arizona’s Red Rock Country, this resort is within walking distance to many restaurants, galleries, shops and hiking trails. From the scenic and quaint Oak Creek to the stunning red rock formations and new age energy of Sedona, Los Abrigados Resort & Spa provides a comfortable, quiet and relaxing selection of accommodation styles with easy access to many outdoor adventure and activities. | ||||||
Kohl’s Ranch Lodge
|
Payson, Arizona | 66 | ||||
| Located on the Banks of Tonto Creek in the largest Ponderosa Pine Forest in the world, Kohl’s Ranch Lodge is historically famous for its western hospitality. Situated at the base of the Mogollon Rim in the area that author Zane Grey made famous with his popular adventures of the Old West, the friendly and casual atmosphere of Kohl’s Ranch Lodge makes each stay an inviting experience where guests can enjoy a classic stay in Arizona’s back country. | ||||||
Premier Vacation Club at Round House
|
Pine Top, Arizona | 20 | ||||
| Nestled in eastern Arizona’s White Mountains where Pinetop-Lakeside’s motto is “Celebrate the Seasons” and where guests can enjoy year-round adventures, The log-sided mountain homes at this resort feature fireplaces, jetted spa, large fully equipped kitchens, covered porches and private yards and are a perfect getaway for family cabin fun. After a day of outdoor play, guests can look forward to a relaxing master suite spa retreat. | ||||||
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| Resort | Location | Units | ||||
Varsity Club of America — Tucson
|
Tucson, Arizona | 59 | ||||
| This resort provides all-suite guest accommodations with convenient proximity to the University of Arizona and a number of golf courses, including a variety of municipal and championship style luxurious courses. Tucson affords travelers an oasis under the Sonoran Sun. Affectionately known as Old Pueblo, Tucson is built upon a deep Native American, Spanish, Mexican and Old West foundation and the Varsity Clubs of America-Tucson affords a relaxing getaway whether traveling for business, game day, family and friends, or just a little down time. | ||||||
The Historic Crags Lodge
|
Estes Park, Colorado | 33 | ||||
| Nestled quietly on the north shoulder of Prospect Mountain, The Historic Crags Lodge offers breathtaking and majestic views of the Continental Divide to the west and a bird’s eye view of downtown Estes Park to the east. The Historic Crags Lodge is everything you would imagine from a quiet Colorado mountain retreat. The Historic Crags Lodge is set high amid the mountain pines of the Colorado Rockies and boasts comfortable guest suites complete with dining and group services suitable for families, couples, weddings and conferences, all within easy access of the Estes Park Aerial Tramway and the spectacular Rocky Mountain National Park. | ||||||
Varsity Club of America — South Bend
|
Mishawaka, Indiana | 86 | ||||
| Located in Mishawaka, Indiana, this all-suite hotel offers unique and convenient accommodations in the heart of a college town. With its close proximity and easy access to the University of Notre Dame, the Varsity Clubs of America — South Bend provides comfortable guest suites, indoor and outdoor swimming pools, a spacious indoor billiards parlor and plenty of outdoor barbeque grills for game days and family fun. The South Bend/Mishawaka area boasts a variety of enriching and entertaining attractions from outdoor recreation and sports to museums, nightlife and shopping. | ||||||
Sea of Cortez Beach Club
|
Sonora, Mexico | 24 | ||||
| The Sea of Cortez, with its laid back seaside havens dotted along the coast, provides a soothing escape in any season. Stroll pristine soft sand beaches that hug the deep blue waters of the Sea of Cortez along the Baja coast and enjoy the Sea of Cortez Beach Club. Oceanfront, the Sea of Cortez Beach Club offers luxurious suites with private patios or balconies and is the perfect starting point to soak in the sunshine filled days of the Baja surf. Water sport excitement abounds with spectacular diving and snorkeling adventures, calm open sea kayaking, deep sea fishing or taking it slow with a relaxing poolside escape, whale and dolphin sightings or long and lazy beach strolls. | ||||||
Marquis Villa **
|
Palm Springs, California | 101 | ||||
| Located in the heart of Palm Springs with a spectacular mountain setting at the base of the beautiful San Jacinto Mountains in Palm Springs, California, Marquis Villas Resort provides elegantly furnished, oversized accommodations satisfying the most discriminating traveler’s expectations with fully equipped kitchens and private patios or balconies. | ||||||
North America and Caribbean Subtotal
|
4,531 | |||||
EUROPE
| Resort | Location | Units | ||||
The Alpine Club
|
Schladming, Austria | 69 | ||||
| Overlooking the town of Schladming, this resort is located amidst stunning scenery one hour from Salzburg, Austria and two and a half hours from Munich, Germany. With accommodation choices across 69 units The Alpine Club also offers a sauna and solarium, tennis, badminton and game room. | ||||||
Alvechurch Marina *
|
Alvechurch, England | 2 | ||||
| With three-, four- and six-berth canal boats based at this marina in Worcestershire, there are many round trip routes through the Black Country that can be followed. As a unique way to see the English countryside, visits to Birmingham city center, Worcester Cathedral, historic houses and theme parks can also be incorporated into a vacation itinerary. | ||||||
Anderton Marina *
|
Cheshire, England | 3 | ||||
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| Resort | Location | Units | ||||
| Anderton Marina is based on the Trent and Mersey canals and has three boats available. From this location routes include a journey to the old city of Chester as well as Middlewich. | ||||||
Gayton Marina *
|
Cheshire, England | 3 | ||||
| Four- and six-berth canal boats are available to navigate through Warwick to Warwick Castle or the university city of Chester. Whichever route is taken, these boats provide the easiest access to the rolling English countryside in the midlands. | ||||||
Woodford Bridge Country Club
|
Devon, England | 103 | ||||
| Originally an old coaching inn from the 15th century this resort in Devon has 103 units, the majority of which have either a terrace or balcony. With a heated indoor pool and whirlpool and a restaurant and bar onsite, this resort offers a base to explore the Devonshire countryside with Dartmoor and Exmoor, which are short drives away along with the well known Eden Project. | ||||||
Blackwater Marina *
|
Ellesmere, England | 2 | ||||
| This marina is located in Shropshire in the heart of the English countryside and has one four-berth and one six-berth canal boat based there. Numerous itineraries include visits to Wales, Chirk Castle, and navigating across Chirk Viaduct standing over 70 feet above the ground. | ||||||
Broome Park Golf and Country Club
|
Kent, England | 14 | ||||
| The resort is located on the grounds of a Grade I listed manor house in the county of Kent and is 15 minutes from the historic city of Canterbury, famous for its cathedral and historic buildings. With 14 two-bedroom lodges, this resort offers an 18 hole golf course onsite, as well as a restaurant and bar in the mansion house. Other resort amenities include a newly constructed gym, indoor pool, solarium, sauna and squash courts, as well as tennis courts and croquet. The resort is 10 minutes away from the coast and the cliffs of Dover and provides easy access to the Euro Star train. | ||||||
Pine Lake Resort
|
Lancashire, England | 124 | ||||
| Based on the edge of the Lake District and the Lune Valley, this resort is surrounded by superb English countryside and based around a lake. The resort is made up of 124 Scandinavian style two-bedroom lodges and a selection of studio apartments with a central reception building that includes the restaurant, bar, entertainment and meeting rooms, with a separate indoor heated pool and whirlpool. | ||||||
Thurnham Hall
|
Lancaster, England | 51 | ||||
| With 51 accommodation choices located either in the 12th century mansion house or in buildings within the 30 acre grounds, this resort is offers a large indoor swimming pool and state of the art fitness center. The restaurant is located in the old mansion house along with a member’s lounge and a restored chapel house providing huge fireplaces and original exposed stone walls. | ||||||
Thurnham Hall Tarnbrook
|
Lancaster, England | 10 | ||||
| This building is located within the grounds of Thurnham Hall and shares the amenities there. It is a newly built building with 10 spacious two-bedroom apartments. | ||||||
Cromer Country Club
|
Norfolk, England | 85 | ||||
| This resort has 85 units, all with balconies or terraces that provide views over the gardens and woodlands. This resort is less than one mile from the sea and marina in Cromer, and includes an indoor heated pool and whirlpool, a gym, spa, sauna, steam room, badminton courts and a game room. | ||||||
Wychnor Park Country Club
|
Staffordshire, England | 44 | ||||
| This resort is situated within the 55 acre estate of Wychnor Park which dates from the time of Queen Anne in the 17th century. The main mansion house is a grade II listed building and houses some of the 44 units that are available, most of which have a terrace or balcony. The resort has a restaurant and member lounge bar, as well as a heated indoor pool, sauna, solarium and spa. | ||||||
Worcester Marina *
|
Worcester, England | 2 | ||||
| Based at the southern end of the Worcester Birmingham canal, two four- and six-berth canal boats are available for | ||||||
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| Resort | Location | Units | ||||
| itineraries that include Worcester Cathedral, the Royal Worcester Porcelain factory and the home of Shakespeare: Stratford-upon-Avon. | ||||||
La Manoir des Deux Amants
|
Connelles, France | 35 | ||||
| Set amid the stunning landscaped parkland in the heart of Normandy countryside, the resort is one and a half hours from Paris and 100 kilometers from Le Havre. The resort offers 35 units situated on the banks of the famous River Seine and includes an onsite restaurant, a leisure centre and an indoor swimming pool. | ||||||
Le Résidence Normande
|
Connelles, France | 14 | ||||
| This resort has 14 units and is situated next to Le Manoir des Deux Amants and shares its facilities. | ||||||
Le Club Mougins
|
Mougins, France | 58 | ||||
| Located 10 minutes from the beautiful beaches of Cannes and a half hour from Nice on the French Riviera, this resort has 58 units and a restaurant and bar and lounge onsite, as well as an outdoor pool, gymnasium and sauna. | ||||||
Royal Regency
|
Paris, France | 51 | ||||
| Located 20 minutes from the centre of Paris on the Metro Line, this resort is ideally suited to exploring this beautiful European city. The resort has 51 units. | ||||||
AlpenClub Schliersee
|
Schliersee, Germany | 95 | ||||
| Located in the foothills of the Bavarian Alps outside of Munich and close to Lake Schliersee, the resort offers many recreational amenities including a spa, sauna, steam room, solarium, gymnasium, and bowling alley. With 95 accommodation choices, including studio, one- and two-bedroom units, this is an ideal base for a ski or mountain walking vacation. | ||||||
Palazzo Catalani
|
Soriano, Italy | 20 | ||||
| This resort is a hideaway in the Italian countryside. Located in the medieval village of Soriano nel Cimino, this 17th century building perched on the top of a hill and now housing 20 units was once the mansion of a nobleman. The onsite restaurant specializes in Italian cuisine and features a bar and lounge. | ||||||
Dangan Lodge Cottages
|
Ennis, Ireland | 6 | ||||
| Converted from an original farmhouse and associated farm buildings, this small resort of six units provides unusual, but traditional, Irish accommodations with exposed stone walls, solid fuel stoves and inglenook fireplaces. | ||||||
East Clare Golf Village
|
Bodyke, Ireland | 51 | ||||
| With 51 two-bedroom units, this recently constructed resort is located next to East Clare Golf course in County Clare, Ireland, approximately one hour outside of Shannon. The resort provides a great base to explore the neighbouring countryside and tourist attractions of Bunnratty Castle and the Cliffs of Moher. | ||||||
Fisherman’s Lodge
|
Scarriff, Ireland | 6 | ||||
| Located on the edge of the shores of Lough Derg in County Clare, the largest lake in Ireland, this resort is made up of six split level open plan studio units with spiral staircases to the upper floor. | ||||||
Diamond Suites on Malta
|
St Julians, Malta | 46 | ||||
| Located within the luxury five-star Intercontinental Malta Hotel, this resort offers 46 accommodation choices, most with balconies or terraces. The resort is situated in St Georges Bay in St Julians and is less than five miles from the capital of Valletta. | ||||||
Vilar Do Golf
|
Loulé, Portugal | 61 | ||||
| Located on the southern coast of Portugal, this resort has 61, one- and two-bedroom units situated around a golf course all with balconies or terraces. Located two kilometers from the beach in the Algarve, the resort amenities include indoor and outdoor pools, gymnasium, sauna, badminton, basketball, volleyball, game room and an onsite restaurant as well as a poolside bar and grill. | ||||||
The Kenmore Club
|
Perthshire, Scotland | 58 | ||||
| With 58 cottage style units located on the shores of Loch Tay, this is a special resort at the heart of the Scottish | ||||||
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| Resort | Location | Units | ||||
| highlands, with easy access to explore the local whisky distilleries, 90-minute drive from Dundee and less than two hours from the historic city of Edinburgh. | ||||||
Garden Lago
|
Majorca, Spain | 85 | ||||
| Situated at the north of the island of Majorca, this resort offers 85 accommodation choices in two- and three-bedroom units. It is located one kilometer from the beach and includes an outdoor pool and whirlpool, gymnasium and sauna, onsite restaurant as well as many amenities nearby. | ||||||
White Sands Beach Club
|
Menorca, Spain | 77 | ||||
| This resort has 77 units on a beachfront location built up into the hillside situated on the island of Menorca. With a central infinity edge pool and convenient snack bar restaurant onsite, this destination is a relaxing place to vacation and is available 44 weeks of the year, but is closed during the winter season. | ||||||
White Sands Country Club
|
Menorca, Spain | 51 | ||||
| Built in a traditional Spanish style, this resort has 51 units, all with balconies or terraces many of which surround a central pool area. This resort is available 42 weeks of the year, but closed during the winter season. | ||||||
Cala Blanca
|
Gran Canaria, Spain | 93 | ||||
| Situated on Gran Canaria in the Canary Islands this resort provides 93, one- and two-bedroom units. Built on a beautiful hillside every room has a seaview and a sunny balcony or terrace. The resort is located 10 minutes away from Puerto de Mogan (known as Canarian Little Venice) and includes an outdoor pool and pool bar and grill, as well as an onsite restaurant. | ||||||
Club del Carmen
|
Lanzarote, Spain | 66 | ||||
| Located on Puerto del Carmen, this resort is perfectly situated two minutes from the beaches of Playa Grande and Playa Chica. With 66 units, this resort offers an outdoor pool and poolside bar, extensive sun terraces and rooftop deck and onsite restaurant. | ||||||
Jardines del Sol
|
Lanzarote, Spain | 48 | ||||
| Situated on the southern tip of Lanzarote near Playa Blanca, this resort has been built in the style of a Spanish pueblo blanco or white village. Offering 48 two-bedroom bungalows, this resort also provides an onsite restaurant and outdoor pool. | ||||||
Royal Sunset Beach Club
|
Tenerife, Spain | 126 | ||||
| Located conveniently close to Playa de las Americas abundant shops, restaurants and nightlife, this resort has a range of facilities situated in sub-tropical gardens and a beautifully landscaped outdoor pool. This resort has 126 units with a private clubhouse with a bar, lounge, restaurant, gymnasium, squash courts and sauna. | ||||||
Royal Tenerife Country Club
|
Tenerife, Spain | 77 | ||||
| Set amid the greens of the challenging Golf del Sur course, with a focal point of a central landscaped swimming pool and the beach six kilometers away, the resort includes 77 one- and two-bedroom units, tennis courts, a gym, restaurant and supermarket. | ||||||
Santa Barbara Golf & Ocean Club
|
Tenerife, Spain | 279 | ||||
| This resort exhibits Moorish inspired architecture and includes 279 units, most of which have a sea view. The resort amenities include a central pool and whirlpool, two onsite restaurants, a poolside bar and grill, gymnasium, sauna, spa and solarium. | ||||||
Sunset Bay Club
|
Tenerife, Spain | 206 | ||||
| This village-style resort of 206 units is situated at Torviscas on the outskirts of Playa de las Americas, and is a 10 minute walk from the beach. It has two outdoor pools and a children’s pool, and there are several local shops and restaurants on the property. | ||||||
Sunset Harbour Club
|
Tenerife, Spain | 124 | ||||
| This resort has been built in the traditional style of an Andalusian pueblo blanco or white village. Situated on the | ||||||
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| Resort | Location | Units | ||||
| outskirts of Playa de las Americas, this resort is located near nightlife and many local restaurants and bars. The resort has 124 units, including studio, one- and two-bedroom accommodation choices. | ||||||
Sunset View Club
|
Tenerife, Spain | 52 | ||||
| With panoramic views of the ocean and a backdrop of the snow capped Mount Teide volcano, this resort offers 52 one-and two-bedroom units, with easy access to the golf courses of the Golf del Sur and numerous local shops and restaurants. | ||||||
Los Amigos Beach Club
|
Costa del Sol, Spain | 140 | ||||
| This resort has 140 units and is situated 300 meters from the beach. It is a short drive to the beautiful cities of Malaga, Marbella, Granada and Seville. Amenities include two outdoor and one indoor swimming pools, tennis courts, mini-golf, as well as two restaurants onsite, a supermarket and a gift shop. | ||||||
Royal Oasis Club at Benal Beach
|
Costa del Sol, Spain | 108 | ||||
| Built around one of the largest privately owned outdoor swimming pool complexes in Europe, this resort includes 108 units and is located 200 meters from the beach. In addition, the resort has an indoor swimming pool, fitness center and sauna. | ||||||
Royal Oasis Club at Pueblo Quinta
|
Costa del Sol, Spain | 58 | ||||
| This resort is situated in lush gardens and contrasts with the hotel blocks of the Costa del Sol, with 58 one- and two-bedroom units, many of which have balconies or terraces. This resort also offers a central outdoor pool, indoor pool, gym and onsite restaurant. | ||||||
Sahara Sunset
|
Costa del Sol, Spain | 150 | ||||
| Styled with Moorish architecture, this resort offers 150 units, all with a balcony or terrace. With a feature landscaped pool, this resort also features an additional outdoor pool, an indoor pool, an onsite restaurant, and newly constructed gym, sauna, spa and steamroom. | ||||||
Europe Subtotal
|
2,753 | |||||
Total Branded and Managed Resorts
|
7,284 | |||||
| * | Denotes canal boat marinas; number of units denotes number of boats managed. |
Affiliated Resorts
NORTH AMERICA AND CARIBBEAN
| Resort | Location | |
London Bridge Resort
|
Lake Havasu City, Arizona | |
The Roundhouse Resort
|
Pinetop, Arizona | |
Sedona Springs Resort
|
Sedona, Arizona | |
Villas at Poco Diablo
|
Sedona, Arizona | |
Villas of Sedona
|
Sedona, Arizona | |
Scottsdale Camelback
|
Scottsdale, Arizona | |
Mountain Retreat
|
Arnold, Arizona | |
San Luis Bay Inn
|
Avila Beach, California | |
Grand Pacific at Carlsbad Seapoint Resort
|
Carlsbad, California | |
Grand Pacific at Carlsbad Inn Beach Resort
|
Carlsbad, California |
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| Resort | Location | |
Grand Pacific Palisades Resort and Hotel
|
Palisades, California | |
RVC’s Cimarron Golf Resort, Palm Springs
|
Cathedral City, California | |
Grand Pacific at Coronado Beach Resort
|
Coronado, California | |
Grand Pacific at RiverPointe Napa Valley
|
Napa, California | |
Grand Pacific at Red Wolf Lodge
|
Olympic Valley, California | |
Oasis Resort
|
Palm Springs, California | |
Lodge at Lake Tahoe
|
South Lake Tahoe, California | |
Tahoe Beach and Ski Club
|
South Lake Tahoe, California | |
The Village at Steamboat Springs
|
Steamboat Springs, Colorado | |
Clock Tower
|
Whistler, British Columbia, Canada | |
RVC at Whiski Jack Whistler
|
Whistler, British Columbia, Canada | |
Lifestyle at Crown Residences
|
Puerto Plata, Dominican Republic | |
Lifestyle at Presidential Suites
|
Puerto Plata, Dominican Republic | |
Coconut Mallory Resort and Marina
|
Key West, Florida | |
Polynesian Isles
|
Kissimmee, Florida | |
Westgate at South Beach
|
Miami Beach, Florida | |
Coconut Palms Beach Resort
|
New Smyrna Beach, Florida | |
Ocean Beach Club
|
New Smyrna Beach, Florida | |
Ocean Sands Beach Club
|
New Smyrna Beach, Florida | |
Sea Villas
|
New Smyrna Beach, Florida | |
Cypress Pointe Resort and Grande Villas
|
Orlando, Florida | |
Sea Mountain
|
Big Island, Hawaii | |
Sea Village
|
Big Island, Hawaii | |
Grand Pacific at Alii Kai Resort
|
Kauai, Hawaii | |
Kapaa Shore
|
Kauai, Hawaii | |
Pono Kai
|
Kauai, Hawaii | |
RVC at Kona Reef, Hawaii
|
Kona, Hawaii | |
Papakea Resort
|
Maui, Hawaii | |
Valley Isle
|
Maui, Hawaii | |
Fairway Villa
|
Oahu, Hawaii | |
Royal Kuhio
|
Oahu, Hawaii | |
Elkhorn Resort
|
Sun Valley, Idaho | |
Grand Palladium Jamaica Resort and Spa
|
Lucea, Jamaica | |
Edgewater Beach Resort
|
Dennis Port, Massachusetts | |
Beachside Village Resort
|
Falmouth, Massachusetts | |
Cove at Yarmouth
|
Yarmouth, Massachusetts | |
RVC’s Villa Vera, Acapulco
|
Acapulco, Mexico | |
Cabo Villas Beach Resort
|
Cabo San Lucas, Mexico | |
El Dorado Royale
|
Cancun, Mexico |
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| Resort | Location | |
RVC’s Club Regina Cancun
|
Cancun, Mexico | |
RVC’s Villa Vera Puerto Isla Mujeres
|
Isla Mujeres, Mexico | |
RVC’s Club Regina Los Cabos
|
San Jose del Cabo, Mexico | |
RVC’s Las Cupúlas Oaxaca
|
Oaxaca, Mexico | |
RVC’s Villa Vera Oaxaca
|
Oaxaca, Mexico | |
RVC’s Club Regina Puerto Vallarta
|
Puerto Vallarta, Mexico | |
El Dorado Seaside
|
Riviera, Mexico | |
Grand Palladium Kantenah Resort and Spa
|
Riviera Maya, Mexico | |
Grand Palladium Riviera Resort and Spa
|
Riviera Maya, Mexico | |
RVC’s Villa Vera Puerto Mio, Zihuatanejo
|
Zihuatenajo, Mexico | |
The Carriage House
|
Las Vegas, Nevada | |
Kingsbury of Tahoe
|
Stateline, Nevada | |
The Ridge Pointe
|
Stateline, Nevada | |
Village of Loon Mountain
|
Lincoln, New Hampshire | |
The Valley Inn at Waterville Valley
|
Waterville Valley, New Hampshire | |
Great Wolf Lodge Charlotte-Concord
|
Concord, North Carolina | |
Great Wolf Lodge Cincinnati-Mason
|
Mason, Ohio | |
Embarcadero
|
Newport, Oregon | |
The Pines at Sunriver
|
Sunriver, Oregon | |
Island Links Resort
|
Hilton Head Island, South Carolina | |
Royal Dunes
|
Hilton Head Island, South Carolina | |
Ellington at Wachesaw Plantation
|
Murrells Inlet, South Carolina | |
Gatlinburg Town Square
|
Gatlinburg, Tennessee | |
Gatlinburg Town Village
|
Gatlinburg, Tennessee | |
Mountain Meadows
|
Pigeon Forge, Tennessee | |
Great Wolf Lodge Grapevine
|
Grapevine, Texas | |
Villas on Lake at Lake Conroe
|
Montgomery, Texas | |
RVC’s The Miner’s Club, Park City
|
Park City, Utah | |
RVC’s Sandcastle, Birch Bay
|
Birch Bay, Washington | |
Great Wolf Lodge Grand Mound
|
Grand Mound, Washington | |
Blackbird Lodge
|
Leavenworth, Washington | |
Point Brown
|
Ocean Shores, Washington | |
Great Wolf Lodge Wisconsin Dells
|
Wisconsin Dells, Wisconsin |
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EUROPE AND AFRICA
| Resort | Location | |
MondiHoliday Siesta
|
Austria | |
MondiHoliday Schloesslhof
|
Austria | |
MondiHoliday Grundlsee
|
Austria | |
MondiHoliday Bellevue
|
Austria | |
Hapimag Prague
|
Prague, Czech Republic | |
Broome Park Mansion House
|
Kent, England | |
Burnside Park
|
Bowness-on-Windermere, England | |
Stouts Hill
|
Uley, England | |
MondiHoliday Oberstaufen
|
Germany | |
MondiHoliday Mitterfels
|
Germany | |
Hapimag Damnoni
|
Crete, Greece | |
Hapimag Budapest
|
Budapest, Hungary | |
MondiHoliday Breitenbergerhof
|
Italy | |
MondiHoliday Tirolensis
|
Italy | |
Hapimag Palmeraie Marrakech
|
Marrakech, Morocco | |
Gålå Fjellgrend
|
Gudbrandsdalen, Norway | |
Pestana Alvor Park
|
Alvor, Portugal | |
Pestana Grand
|
Funchal, Portugal | |
Pestana Miramir
|
Funchal, Portugal | |
Pestana Porches
|
Porches, Portugal | |
The Peninsula
|
Cape Town, South Africa | |
Avalon Springs
|
Montagu, Garden Route, South Africa | |
Wilderness Dunes
|
Wilderness, Garden Route, South Africa | |
Breakers Resort
|
KwaZulu-Natal, South Africa | |
Champagne Sports
|
Kwazulu-Natal, South Africa | |
Jackalberry Ridge
|
Mpumalanga, South Africa | |
Hapimag Mas Nou
|
Girona, Spain | |
Cala de Mar
|
Majorca, Spain | |
Blajfell Village
|
Kabdalis, Sweden | |
Hapimag Sea Garden Village
|
Yaliciftlik, Turkey |
ASIA AND AUSTRALIA
| Resort | Location | |
Beach House Seaside Resort
|
Coolangatta, Australia | |
Vacation Village Resort
|
Port Macquarie, Australia | |
Tiki Village International Resort
|
Surfer’s Paradise, Australia | |
Royal Bali Beach Club at Candidasa
|
Bali, Indonesia |
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| Resort | Location | |
Royal Bali Beach Club at Jimbaran Bay
|
Bali, Indonesia | |
Royal Goan Beach Club at MonteRio
|
Goa, India | |
Royal Goan Beach Club at Royal Palms
|
Goa, India | |
Royal Goan Beach Club at Haathi Mahal
|
Goa, India | |
Royal Bella Vista Country Club at Chiang Mai
|
Chiang Mai, Thailand | |
Absolute at Q Signature Samui Spa and Resort
|
Koh Samui, Thailand | |
MTC at View Talay Holidays
|
Pattaya, Thailand | |
Absolute at Nirvana Place
|
Pattaya, Thailand | |
Absolute Bangla Suites
|
Phuket, Thailand | |
Absolute Sea Pearl Beach Resort
|
Phuket, Thailand | |
Royal Lighthouse Villas at Boat Lagoon
|
Phuket, Thailand |
Our Flexible Points-Based Vacation Ownership System and THE Club
Our Points-Based System. Our customers become members of our points-based vacation ownership
system by purchasing points, which act as an annual currency that is exchangeable for occupancy
rights in accommodations at our branded and affiliated resorts and for other benefits available to
members of THE Club, which are described below in “— THE Club.” In 2010, the average cost to
purchase points equivalent to a one-week vacation at one of our resorts was $17,965.
The principal advantage of our points-based system is the flexibility it gives to members with
respect to the use of their points versus the use of traditional intervals. With traditional
intervals, an owner has the “fixed” use of a specific accommodation type for a one-week time period
at a specific resort or has the “floating” use of a specific type of accommodation for a week to be
selected for a particular season at that same resort. An owner may alter his or her vacation usage
by exchanging the interval through an external VOI exchange program with which the resort is
affiliated, such as Interval International or RCI, for which a fee is charged by the exchange
company. Unlike intervals, our points holders can redeem their points for one or more vacation
stays in any of the resorts included in our vacation network (subject to availability and the
number of points required) without having to use an external exchange company and without having to
pay any exchange fees. Because points function as currency within our network, our members have
flexibility to choose the location, season, duration and size of accommodation for their vacation
based on their annual points allocations, limited only by the range of accommodations within our
network and subject to availability. Our members may also “save” their points from prior years and
“borrow” points from future years for additional flexibility with respect to reserving vacations at
peak times, in larger accommodations or for longer periods of time.
THE Club. THE Club operates as an internal VOI exchange program that enables its members to
use their points or intervals at any resort within our resort network. Membership in THE Club is
mandatory for all purchasers of points, except for those persons who purchased their points in the
states of California or Florida, for whom membership is optional. To date, only a minimal number of
purchasers in California and Florida have opted out of THE Club.
In addition to the internal exchange program, THE Club offers a global array of other member
benefits, discounts, offers and promotions that allow members to exchange points for a wide variety
of products and travel services, including airfare, cruises and excursions. All members of THE
Club, irrespective of ownership of points or intervals, have access to an external VOI exchange
program for vacation stays at resorts outside THE Club resort network if they desire, as the annual
THE Club membership fee currently also includes annual membership in the Interval International
external exchange program. The annual membership fee for THE Club is approximately $264 per member
for 2011. Exchanges through the Interval International external exchange program typically require
payment of an additional exchange fee.
As a result of our acquisition of ILX, we now manage a Collection that includes all of the
resorts acquired from ILX. Members of this Collection do not participate directly in THE Club.
However, we are offering all of
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these members the opportunity to purchase membership in a limited version of THE Club, which
entitles them to use their points at a range of selected resorts in our system.
Operation and Management of the Collections
Purchasers of points acquire interests in one of our five Collections that holds the real
estate underlying the VOIs that we sell. These VOIs represent beneficial interests in a trust or
similar arrangement. The trustee of each Collection holds legal title to the deeded fee simple
real estate interests or, in some cases, leasehold real estate interests, on behalf of each
Collection’s members. Through THE Club, members may use their points for accommodations at any of
the 69 resorts that are within any of our five Collections or at any of our 127 affiliated resorts,
as described above in “— Our Flexible Points-Based Ownership System and THE Club — The Club.”
Title to the properties included in our U.S., California and Hawaii Collections has been
transferred into the applicable trust in perpetuity. For each of these Collections, we hold as
inventory for sale a significant number of unsold points in the Collections. Further, in North
America, we hold title to certain intervals which have not yet been transferred to a Collection.
When these intervals are transferred to a Collection, we will receive an allocation of points. The
majority of the common areas for resorts located in North America are owned by the related HOA. At
certain locations, we own commercial space which we utilize for sales centers as well as other
guest services, such as a gift shop, mini-market or a food and beverage facility.
Legal title to substantially all of our resort properties in Europe is generally held in one
or more land-holding trusts for our benefit and the benefit of our interval owners, as applicable.
A substantial portion of our beneficial interest in the resort properties is held by the European
Collection for the benefit of the European Collection points owners through either leases or other
contractual arrangements. For the most part, these leases and other contractual arrangements, as
well as the use rights of our interval owners, have terms that expire beginning in 2054, at which
point we generally regain full use of the underlying resort properties. In addition, we hold
leasehold interests in five of our branded European resorts. We lease units for the exclusive use
of the European Collection at two of these resorts under long-term leases expiring in 2054 and
2055, and we lease the other three of these resorts under a lease which expires in 2018 with two
five-year renewal periods at our option.
Each Collection member is required to pay to the respective Collection a share of the overall
cost of that Collection’s operations, which includes that Collection’s share of the costs of
maintaining and operating the component resort units within that Collection. A specific resort
property may have units that are included in more than one Collection, or have a combination of
units owned by a Collection and by individual interval owners. To the extent that an entire resort
property is not held completely within a specific Collection, each Collection pays only the portion
of operating costs attributable to its interval ownership in that resort. Each Collection member’s
annual maintenance fee is composed of a base fee, a fee for THE Club and a per point fee based on
the number of points owned by the member. The annual maintenance fee is intended to cover all applicable operating
costs of the resort properties and other services, including, but not limited to, reservations and
customer service, reception, housekeeping, maintenance and repairs, real estate taxes, insurance,
rental expense, accounting, legal, human resources, information technology, Interval International
external exchange fees and funding of replacement and refurbishment reserves for the underlying
resorts. As an example, the average maintenance fee for a holder of points equivalent to one week
at one of our resorts is approximately $1,000. Special assessments may be billed if insufficient
operating funds are available or if planned capital improvements exceed the amount of replacement
and refurbishment reserves available. If the member does not pay annual maintenance fees or any
special assessment, the member’s use rights may be suspended, and the Collection may enforce its
lien and recover the member’s points, subject to the rights of the member’s lender, if any. See
“— Recovery of VOIs.”
Interval Ownership
In addition to points, we have historically marketed and sold intervals. We generally
discontinued selling intervals in October 2007. An interval typically entitles the owner to use a
fully-furnished vacation accommodation for a one-week period, generally during each year or in
alternate years, usually in perpetuity. Typically, the owner holds either a fee simple ownership
interest in a specific vacation accommodation or an undivided fee simple ownership interest in an
entire resort.
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Each interval owner is required to pay an annual maintenance fee to the related HOA to cover
the owner’s share of the cost of maintaining the property. The annual maintenance fee is intended
to cover the owner’s share of all operating costs of the resort and other related services,
including, but not limited to, reservations and customer service, reception, housekeeping,
maintenance and repairs, real estate taxes, insurance, rental expense, accounting, legal, human
resources and information technology. In addition, the annual maintenance fee includes an amount
for the funding of replacement and refurbishment reserves for the related resort to provide for
future improvements when necessary. Special assessments may be billed if insufficient operating
funds are available or if planned capital improvements exceed the amount of replacement and
refurbishment reserves available. Annual maintenance fees for interval owners generally average
between $800 and $1,000 per year for a one-week interval. If the owner does not pay the annual
maintenance fees or any special assessment, the owner’s use rights may be suspended, and the HOA
may enforce its lien on the owner’s intervals, subject to the rights of the owner’s lender, if any.
See “— Recovery of VOIs.”
We have a number of programs in place to encourage and facilitate owners of our intervals to
convert their intervals to points and to join THE Club.
Recovery of VOIs
In the ordinary course of our business, we recover VOIs from our members as a result of (i)
defaults on our members’ consumer loans for the purchase of their VOIs and (ii) failures by our
members to pay their annual maintenance fee or any special assessment, which failures may be due
to, among other things, death or divorce and other life-cycle events or lifestyle changes. With
respect to consumer loan defaults, we are able to exercise our rights as a secured lender to
foreclose upon the VOI subject to our lien.
With respect to members who fail to pay their annual maintenance fee or any special
assessment, we have entered into inventory recovery agreements with each of our
Collections and substantially all of our HOAs (other than those located in Europe). Each agreement
provides that in the event that a member fails to pay these amounts, we have the option to enforce
the rights of the HOA or Collection with respect to the subject VOI, which includes preventing
members from using their points or intervals and, if the delinquency continues, recovering the
property in the name of the HOA or Collection. We are responsible for
payment of certain fees, ranging from 50% to 100% of the annual maintenance fees relating to
defaulted intervals or points. Depending upon whether the VOI in default is
intervals or points, recovery is effected through a foreclosure proceeding or by contract
termination. The recovery of points is more efficient than the recovery of intervals, because the
recovery of intervals is governed by local real estate foreclosure laws that significantly lengthen
recovery periods and increase the cost of recovery. Under the terms
of our inventory recovery agreements, we are granted full use of delinquent properties for rental and marketing
purposes, and we are under no obligation to commence recovery proceedings. Generally, when we recover intervals we pay from approximately one to two years’
worth of annual maintenance fees on such intervals. Upon recovery, the HOA or Collection transfers
title to the VOI to us, and we are responsible for all annual maintenance fees and special
assessments thereafter. We have oral agreements with most of our European HOAs that provide us
similar rights with respect to recovering delinquent VOIs.
After recovery, VOIs are returned to our inventory and become available for sale. Although we
recover inventory in the form of intervals as well as points, all inventory recovered is sold in
the form of points. Recovered intervals are transferred to one of our Collections and become part
of our points-based system. We recovered approximately 3.1% of our previously sold VOIs in the
ordinary course of our business over each of the past two years.
Our Services
Hospitality and Management Services. We manage 69 branded resort properties, which are
located in the continental United States, Hawaii, Mexico, the Caribbean and Europe, as well as the
Collections. As the manager of our branded resorts and our Collections, we provide billing
services, account collections, accounting and treasury functions, and information technology
services. In addition, for our branded resorts we also provide an online reservation system and
customer service contact center, operate the front desks and amenities and furnish housekeeping,
maintenance and human resources services.
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HOAs. Each of our branded resorts, other than certain resorts in our European Collection, is
typically operated through an HOA, which is administered by a board of directors. Directors are
elected by the owners of intervals at the resort (which may include one or more of our Collections)
and may also include representatives appointed by us as the developer of the resort. As a result,
we may be entitled to voting rights with respect to directors of a given HOA by virtue of (i) our
ownership of intervals at the related resort, (ii) our control of the Collections that hold
intervals at the resort and/or (iii) our status as the developer of the resort. The board of
directors of each HOA hires a management company to provide the services described above, which in
the case of all branded resorts, is us. The European Collection manages the 20 European branded
resorts that do not have an HOA.
Our management fees are based on a cost-plus structure and are calculated based on the direct
and indirect costs (including an allocation of a substantial portion of our overhead related to the
provision of management services) incurred by the HOA. Most of our current management agreements
are priced at cost plus a range of 10% to 15%. Unlike typical commercial lodging management
contracts, our management fees are not impacted by changes in a resort’s ADR or occupancy level.
Our management fees are included in the budgets prepared by each HOA, which determine the annual
maintenance fee charged to each owner. One of the management services we provide to the HOA is the
billing and collection of annual maintenance fees on the HOA’s behalf. Annual maintenance fees for
a given year are generally billed during the previous November, collected by January and deposited
in a segregated or restricted account we maintain on behalf of the HOA. As a result, a substantial
portion of our fees for February through December of each year are collected from owners in
advance. In each of the past two years, over 80% of annual maintenance fees have been collected by
the end of February of such year. Funds are released to us from these accounts on a monthly basis
for the payment of management fees as we provide our management services.
Our HOA management contracts typically have initial terms of three to five years with
automatic one-year renewals. These contracts can generally only be terminated by the HOA upon a
vote of the owners (which may include one or more of our Collections) prior to each renewal period,
other than in some limited circumstances involving cause. No HOA has terminated any of our
management contracts during the past five years, with the exception
of one immaterial HOA management
contract. We generally have the right to terminate our HOA management contracts at any time upon
notice to the HOA.
Collections. Each of our Collections is operated through a collection association, which is
administered by a board of directors. Directors are elected by the Collection’s points holders. We
own a significant number of points in each of the Collections, which we hold as inventory. The
board of directors of each Collection hires a company to provide management services, which in each
case is us.
As with our HOA management contracts, management fees charged to the Collections are based on
a cost-plus structure and are calculated based on the direct and indirect costs (including an
allocation of our overhead) incurred by the Collection. All of our current Collection management
agreements are priced at cost plus 15%. Our management fees are included in the budgets prepared by
each collection association, which determines the annual maintenance fee charged to each owner. One
of the management services we provide to our Collections is the billing and collection of annual
maintenance fees on the Collection’s behalf. Annual maintenance fees for a given year are generally
billed during the previous November, collected by January and deposited in a segregated account we
maintain on behalf of each Collection. As a result, a substantial portion of our fees for February
through December of each year are collected from owners in advance. In each of the past two years,
over 80% of annual maintenance fees have been collected by the end of February of such year. Funds
are released to us from these accounts on a monthly basis for the payment of management fees as we
provide our management services.
Our Collection management contracts also have initial terms of three to five years, with
automatic three to five year renewals. These contracts can generally only be terminated by the
Collection upon a vote of the Collection’s members prior to each renewal period, other than in some
limited circumstances involving cause. No Collection has terminated any of our management
contracts during the past five years. We generally have the right to terminate our Collection
management contracts at any time upon notice to the Collection.
Sales and Marketing of VOIs. We market and sell VOIs that provide access to our network of 69
branded and 127 affiliated resorts. Since October 1, 2007, we have marketed and sold VOIs primarily
in the form of points.
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We currently employ an in-house sales and marketing team and also maintain agency agreements
with independent sales organizations at 12 locations. Our sales representatives utilize a variety
of marketing programs to generate prospects for our sales efforts, including targeted mailing,
telemarketing, gift certificates, presentations at our resorts targeted to current members, guests
and renters, overnight mini-vacation packages and various destination-specific local marketing
efforts. Additionally, we offer incentive premiums in the form of
tickets to local attractions and activities, hotel
stays, gift certificates or free meals to guests and other potential customers to encourage
attendance at sales presentations. We also offer volume discounts for purchasers of a large number
of points.
We close our VOI sales primarily through in-person sales presentations, or tours. These
presentations occur at sales centers (most of which are located in our branded resorts) and include
a tour of our resort properties, and an in-depth explanation of our points-based VOI system and the
value proposition it offers our members. In 2010, our sales personnel conducted over 130,000 sales
presentations, which translated into approximately 23,000 VOI sales transactions. During the years
ended December 31, 2008, 2009 and 2010, our closing percentage was 18.0%, 19.2% and 17.4%,
respectively, of tours.
Purchases are completed through tours by our onsite salespeople at selected resorts, our sales
centers and our call centers. A relatively small portion of our sales, principally sales of
additional points to existing members, are closed through our call centers. We have 34 sales
centers across the globe, 32 of which are located at our branded resorts, one of which is located
at one of our affiliated resorts and one of which is located off-site. The sales representatives we
employ receive base compensation plus variable compensation determined by performance.
Our marketing efforts are principally directed at the following channels:
| • | our existing member base; | ||
| • | participants in third-party vacation ownership exchange programs, such as Interval International or RCI, who stay at our resorts; | ||
| • | renters who stay at our resorts; | ||
| • | member referrals; | ||
| • | off property contacts who are solicited from the premises of hospitality, entertainment, gaming and retail locations; and | ||
| • | other people who we target through the various marketing programs described above. |
Although the principal goal of our marketing activities is the sale of points, in order to
generate additional revenue and offset the carrying cost of our VOI inventory, we use a portion of
the points and intervals which we own to rent accommodations. We generate rentals through direct
consumer marketing, travel agents, websites and vacation package wholesalers. We believe that our
rental operations, in addition to providing us with supplemental revenue, provide us with a good
source of potential customers for the purchase of points.
Commencing in the fourth quarter of 2008, we took a number of steps to reduce our sales levels
in response to the reduction of available consumer loan financing and to reduce our marketing and
sales cost structure to match the reduction in VOI sales revenue.
Consumer Financing of VOIs. We provide loans to eligible customers who purchase VOIs through
our U.S. sales centers and choose to finance their purchase. These loans are collateralized by the
underlying VOI, generally bear interest at a fixed rate, have a typical term of 10 years and are
generally made available to consumers who make a down payment within established credit guidelines.
Our minimum required down payment is 10%. Since October 2008, our average cash down payment has
been 13.5% and the average initial equity contribution for new VOI purchases (which take into
account the value of VOIs already held by purchasers and pledged to secure a new consumer loan)
32.2%, which has resulted in an average combined equity contribution of 45.7% for new VOI
purchases. As of December 31, 2010, our loan portfolio (which includes loans that have been written
off for financial reporting purposes due to payment defaults and delinquencies but which we
continue to administer) was comprised of approximately 38,000 loans with an outstanding aggregate
loan balance of approximately
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$336.9 million. As of such date, approximately 9% of our approximately 380,000 owner-families had a
loan outstanding with us.
We underwrite each loan application to assess the prospective buyer’s ability to pay through
the credit evaluation score methodology developed by FICO based on credit files compiled and
maintained by Experian (for U.S. residents) and Equifax (for Canadian residents). We were one of
the first major vacation ownership companies to institute credit underwriting, and we have a
history of generating high quality consumer loan portfolios. As of December 31, 2010, the weighted
average FICO score for our borrowers across our existing loan portfolio was 706, and the weighted
average FICO score for our borrowers on loans originated since October 2008 was 759.
We have a vertically integrated consumer finance servicing division, which includes
underwriting, collection and servicing of our consumer loan portfolio. Collections and
delinquencies are managed utilizing current technology to minimize account delinquencies and
maximize cash flow. We generally sell or securitize a substantial portion of the consumer loans we
generate from our customers through conduit and securitization financings. We also act as servicer
for consumer loan portfolios, including those sold or securitized through conduit or securitization
financings, for which we receive a fee.
Through an arrangement with a leading financial institution in the United Kingdom, we broker
financing for qualified customers who purchase points through our European sales centers.
During the 12 month period prior to October 2008, approximately 67% of the sales of our VOIs
were financed by us. In response to the current economic downturn, in October 2008 we implemented
a sales strategy to increase the cash sales of VOIs, which included offering discounts for
purchases paid in cash and raising the interest rates applicable to financed purchases. As a result
of these changes, the percentage of sales we financed from October 2008 through December 2010 was
reduced to approximately 33%.
Competition
In our hospitality and management services business, we face competition from established real
estate and hospitality management companies, as well as the management operations of the VOI
companies noted below. Our competitors may seek to compete against us based on the pricing terms of
our current hospitality management contracts. Our competitors may also compete against us in our
efforts to expand our fee-based income streams by pursuing new management contracts for resorts
that are not currently part of our network.
In our VOI marketing and sales business, we compete for prospects, sales leads and personnel
from established, highly visible vacation ownership resort operators, as well as a fragmented array
of smaller operators and owners. In developing, marketing and selling VOIs, we compete against the
vacation ownership divisions of several established and respected hospitality companies. These
include Bluegreen Corporation, Disney (Disney Vacation Club), Four Seasons Resorts and Hotels,
Hilton (Hilton Grand Vacations), Marriott (which operates Marriott Vacation Club, the Ritz-Carlton
Club, Horizons by Marriott and Marriott Grand Residence Club), Starwood (Starwood Vacation
Ownership) and Wyndham Worldwide (which operates Fairfield Resorts and Trendwest Resorts). In
addition, in certain markets, we also compete with many established companies focused primarily on
vacation ownership, and it is possible that other potential competitors may develop properties near
our current resorts and compete with us in the future. The industry has experienced consolidation
and entry of established hospitality companies in recent years, and we believe that the vacation
ownership industry will continue to consolidate in the future, with such consolidation driven in
part by the contraction of financing sources to the industry as described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital
Resources.” In our rental of VOIs, we compete not only with all of the foregoing companies, but
also with traditional hospitality providers such as hotels and resorts.
In our consumer financing business, we compete with numerous subsets of financial
institutions, including mortgage companies, credit card issuers and other providers of
direct-to-consumer financing. These services permit purchasers to utilize a home equity line of
credit, mortgage, credit card or other instrument to finance their purchase. We believe that we
provide a convenient and competitive financing package to customers.
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Governmental Regulation
Our marketing and sale of VOIs and other operations are subject to extensive regulation by the
federal government and state timeshare laws and, in some cases, by the foreign jurisdictions where
we market and sell VOIs. Federal legislation that is or may be applicable to the sale, marketing
and financing of VOIs includes the Federal Trade Commission Act, the Fair Housing Act, the
Truth-in-Lending Act and Regulation Z, the Home Mortgage Disclosure Act and Regulation C, the Equal
Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the
Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Gramm-Leach-Bliley Act, the Deceptive Mail Prevention and Enforcement Act, Section 501 of the
Depository Institutions Deregulation and Monetary Control Act of 1980 and the Civil Rights Acts of
1964, 1968 and 1991.
In addition, the majority of states and jurisdictions where our resorts are located
extensively regulate the creation and management of vacation ownership resorts, the marketing and
sale of VOIs, the escrow of purchaser funds and other property prior to the completion of
construction and closing, the content and use of advertising materials and promotional offers, the
delivery of an offering memorandum describing the sale of VOIs and the creation and operation of
exchange programs and multi-site reservation systems. Many other states and certain foreign
jurisdictions have adopted similar legislation and regulations affecting the marketing and sale of
VOIs to persons located in those jurisdictions. In addition, the laws of most states in which we
sell VOIs grant the purchaser of the interest the right to rescind a purchase contract during the
specified recession period provided by law. Rescission periods vary by jurisdiction in which we
operate, but typically are five to 15 days from the date of sale.
The Collections are required to register pursuant to applicable statutory requirements for the
sale of VOI plans in an increasing number of jurisdictions. For example, Diamond Resorts U.S.
Collection Development, LLC is required to register pursuant to the Florida Timesharing and
Vacation Plan Act, Florida Statutes Chapter 721. Such registrations, or any formal exemption
determinations, for the Collections confirm the substantial compliance with the filing and
disclosure requirements of the respective timeshare statutes by the applicable Collection. They do
not constitute the endorsement of the creation, sale, promotion or operation of the Collections by
the regulatory body, nor relieve us or of our affiliates of any duty or responsibility under other
statutes or any other applicable laws. Registration under a respective timeshare act is not a
guarantee or assurance of compliance with applicable law nor an assurance or guarantee of how any
judicial body may interpret the Collections’ compliance therewith. A determination that specific
provisions or operations of the Collections do not comply with relevant timeshare acts or
applicable law may have a material adverse effect on us, the Collections trustee, the related
collection association or the related consumer loans. Such noncompliance could also adversely
affect the operation of the Collections or the sale of points within the existing format of the
Collections, which would likely increase costs of operations or the risk of losses resulting from
defaulted timeshare loans.
Furthermore, most states have other laws that apply to our activities, such as real estate
licensure laws, travel sales licensure laws, advertising laws, anti-fraud laws, telemarketing laws,
prize, gift and sweepstakes laws and labor laws. In addition, we subscribe to state Do Not Call,
or DNC, lists for every state into which we make telemarketing calls, as well as the federal DNC
list. Enforcement of the federal DNC provisions began in the fall of 2003, and the rule provides
for fines of up to $16,000 per violation. We also maintain an internal DNC list as required by
law. Our master DNC list is comprised of our internal list, the federal DNC list and the applicable
state DNC lists.
In addition to government regulation relating to the marketing and sales of VOIs, the
servicing and collection of consumer loans is subject to regulation by the federal government and
the states in which such activities are conducted. These regulations may include the federal Fair
Credit Reporting Act, the Florida Consumer Collection Practices Act, the Fair Debt Collections
Practice Act, the Electronic Funds Transfer Act and Regulation B, the Right to Financial Privacy
Act and similar legislation in other states.
Certain state and local laws may also impose liability on property developers with respect to
construction defects discovered by future owners of such property. Under these laws, future owners
of VOIs may recover amounts in connection with repairs made to a resort as a consequence of defects
arising out of the development of the property.
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In addition, from time to time, potential buyers of VOIs assert claims with applicable
regulatory agencies against VOI salespersons for unlawful sales practices. These claims could have
adverse implications for us in negative public relations, potential litigation and regulatory
sanctions.
A number of U.S. federal, state and local laws, including the Fair Housing Amendments Act of
1988 and the Americans with Disabilities Act, impose requirements related to access to and use by
disabled persons of a variety of public accommodations and facilities. A determination that our
resorts are public accommodations and that we are not in compliance with these accessibility laws
could result in a judicial order requiring compliance, imposition of fines or an award of damages
to private litigants. Because some accessibility laws impose ongoing obligations, we are likely to
incur additional costs to improve the accessibility of our resorts based upon our percentage
ownership. These costs, however, are not expected to have a material adverse effect on our
business, results of operations or financial condition. Any new legislation may impose further
burdens or restrictions on property owners with respect to access by disabled persons. If an HOA
at a resort was required to make significant improvements as a result of non-compliance with these
accessibility laws, special assessments might be needed to fund such improvements, which additional
costs might cause vacation interest owners to default on their mortgages or cease making required
HOA assessment payments. In addition, the HOA under these circumstances may pursue the resort
developer to recover the cost of any corrective measures. We are not aware of any noncompliance
with accessibility laws that management believes would have a material adverse effect on our
business, results of operations or financial condition.
Since
October 2008, we have sold VOIs in the United States solely
through our employees, with the
exception of two locations, where we conduct sales through a
contractual relationship with a third-party operator. Prior to October
2008, a portion of our other sales in the United States were made through independent sales agents
who provided services to us under independent contractor agreements. In Europe, we currently sell
VOIs through employees and independent distributors. In December 2008, we converted a large number
of sales agents in Spain, the United Kingdom, Portugal and France from independent contractors to
employees. We did not withhold payroll taxes from the amounts paid to such persons during the time
they were independent contractors. In the event the federal, state or local taxing authorities in
the United States or in foreign jurisdictions were to successfully classify such independent sales
agents as our employees, rather than as independent contractors, we could be liable for back
payroll taxes and termination indemnities as required by local law.
The marketing and sale of our points-based VOIs and our other operations in Europe are subject
to national and European regulation and legislation. Within the European Community (which includes
all the European countries in which we conduct our operations), the European Timeshare Directive of
1994 (94/47/EC), or the Directive, regulates vacation ownership activities. The existing terms of
the Directive require us to issue a disclosure statement providing specific information about our
resorts, require a 10-day “cooling off” rescission period and prohibit the acceptance of payments
prior to the expiration of that rescission period. Member states are permitted to introduce
legislation that is more protective of the consumer when implementing the Directive. Most of our
purchasers in Europe are residents of the United Kingdom, where the Directive has been implemented
by an amendment to the Timeshare Act 1992. In the United Kingdom, a 14-day rescission period is
mandatory.
Directive 2008/122/ED of the European Parliament and of the Counsel, or the New Directive, was
adopted by the European Parliament in October 2008 and passed on January 14, 2009 and this new
legislation must be transposed into domestic legislation by members of the European community no
later than February 23, 2011. It is anticipated that the United Kingdom will implement the New
Directive legislation near the February 2011 deadline. The primary changes introduced by the New
Directive include: (i) the sale of vacation ownership rights exercisable for a period of more than
one year will be regulated; (ii) the “cooling off” rescission period will be extended in all member
states to 14 calendar days; and (iii) advance payments will be prohibited in all member states.
Other United Kingdom laws which are applicable to us include the Consumer Credit Act 1974 as
amended by the Consumer Credit Act 2006, the Consumer Credit Regulations 1983, the Consumer Credit
Regulations 2007, the Misrepresentation Act 1967, the Unfair Contract Terms Act 1977, the Unfair
Terms in Consumer Contracts Regulations 1999 (as amended), the Consumer Protection from Unfair
Trading Regulations 2008, the Package Travel, Package Holidays and Package Tours Regulations 1992
and various amending legislation, the Data Protection Act 1998 and the Privacy and Electronic
Communications (EC) Regulations 2003, the Disability
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Discrimination Act 1995 as amended, the Race Relations Act 1976, the Employment Rights Act
1996, the Environmental Protection Act 1990, the Clear Air Act 1993, the Companies Act 2006 and the
Trade Descriptions Act 1968. The Timeshare Act 1992 has an extra-territorial effect when United
Kingdom residents purchase VOIs in accommodations located in other European Economic Area states.
All of the countries in which we operate have consumer and other laws that regulate our activities
in those countries.
Seasonality
Historically, our fiscal quarter ended September 30 has produced the strongest operating
results because this period coincides with the typical summer seasonality of the vacation ownership
industry and the greater number of families vacationing. Our fiscal quarter ended March 31 has
historically produced the weakest operating results primarily due to the effects of reduced leisure
travel.
Insurance
We generally carry commercial general liability insurance. With respect to resort locations
that we manage and for corporate offices, we and the HOAs carry manuscript all-risk property
insurance policies with fire, flood, windstorm and earthquake coverage as well as additional
coverage for business interruption arising from insured perils. Further, we carry pollution
insurance on all branded resort and administrative locations, which covers multiple perils,
including exposure to legionnaires disease. We believe that the insurance policy specifications,
insured limits and deductibles are similar to those carried by other resort owners and operators.
There are certain types of losses, such as losses arising from acts of war or terrorism, that are
not generally insured because they are either uninsurable or not economically insurable.
Intellectual Property
We own and control a number of trade secrets, trademarks, service marks, trade names,
copyrights and other intellectual property rights, including, but not limited to Diamond Resorts
International®, THE Club®, Polo Towers®, Relaxation . . .
simplified® and Diamond Resorts®, which, in the aggregate, are of material
importance to our business. We are licensed to use technology and other intellectual property
rights owned and controlled by others, and we license other companies to use technology and other
intellectual property rights owned and controlled by us. In addition, we have developed certain
proprietary software applications that provide functionality to manage lead acquisition, marketing,
tours, gifting, sales, contracts, member profiles, maintenance fee billing, property management,
inventory management, yield management and reservations.
Environmental Matters
The resort properties that we manage are subject to federal, state and local laws and
regulations relating to the protection of the environment, natural resources and worker health and
safety, including laws and regulations governing and creating liability relating to the management,
storage and disposal of hazardous substances and other regulated materials and the cleanup of
contaminated sites. The resorts are also subject to various environmental laws and regulations
that govern certain aspects of their ongoing operations. These laws and regulations control such
things as the nature and volume of wastewater discharges, quality of water supply and waste
management practices. The costs of complying with these requirements are generally covered by the
HOAs that operate the affected resort property, and each of the HOAs maintains insurance policies
to insure against such costs and potential environmental liabilities. If an HOA is subject to any
such loss, we may be responsible for a portion of such loss as a result of our ownership of VOIs in
the HOA. As a result, any such uninsured losses could have a material adverse effect on our results
of operations. Furthermore, any substantial special assessments charged to the HOAs as a result of
any of these items could cause customer dissatisfaction and harm our business and reputation.
Additionally, for any resorts in which we own common areas, we maintain insurance and are directly
responsible for the costs and liabilities described above.
We have been made aware of possible soil and groundwater contamination that has migrated onto
our Lake Tahoe Vacation Resort site from an underground petroleum storage tank on an adjacent
upgradient property. We have been indemnified by the former owner of the upgradient property for
certain costs and expenses in connection with the off-site contamination. California regulatory
authorities are monitoring the off-site contaminations and the responsible parties have taken
action to comply with a remedial action plan put in place by the Lahontan Regional Water Quality
Control Board. Residual contamination exists on the resort site as a result of past leaks from
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underground storage tanks that were removed prior to our predecessor’s acquisition of the
resort site. An in-situ groundwater remediation system was installed to enhance remediation
effectiveness, which pumped groundwater from the aquifer under the property, treated the
groundwater via a carbon filtration system, and pumped it back into the aquifer. We do not believe
that we will be held liable for this contamination, and we do not anticipate incurring material
costs in connection with this site. On May 5, 2009, the Lahontan Regional Water Quality Control
Board confirmed that the site investigation and corrective action was in compliance with their
requirements and informed us that no further action was required.
We are also aware that the area around our San Luis Bay Inn property, which is located in
Avila Beach, California, has experienced soil and groundwater contamination resulting from nearby
oil storage facilities. California regulatory authorities have required the installation of
groundwater monitoring wells on the beach near the resort site, among other locations. Remediation
has been completed at the resort and the area surrounding the resort. We do not believe that we
are liable for this contamination, and we do not anticipate incurring material costs in connection
with this site. There can be no assurance, however, that claims will not be asserted against us
with respect to this matter.
Company Owned and Leased Property
In addition to the owned and leased properties described above, we lease certain properties in
North America and Europe that are utilized in our administrative and sales and marketing functions.
These leases include:
| • | our global corporate headquarters located in Las Vegas, Nevada, which is approximately 80,000 square feet; | ||
| • | our European headquarters located in Lancaster, United Kingdom, which is approximately 32,400 square feet; | ||
| • | a telemarketing call center located in Wakefield, United Kingdom, which is approximately 6,200 square feet; | ||
| • | an off-site sales center in Lanzarote, Canary Islands, Spain, which is approximately 1,600 square feet; and | ||
| • | an administrative office in Mougin, France, which is approximately 1,200 square feet. |
We also own certain real estate, the majority of which is held for sale or future development,
including 2.1 acres of vacant land located on the Costa del Sol, Spain, 6.2 acres of vacant land
located in Mazatlan and Puerto Vallarta, Mexico and 19.4 acres of vacant land located in Orlando,
Florida.
Employees
As of December 31, 2010, we had approximately 4,553 full and part-time employees. Our
employees are not represented by a labor union, with the exception of 134 employees in St. Maarten
and 197 employees in Hawaii. Certain of our employees in Europe are also represented by unions. In
addition, we are aware of an ongoing effort to unionize by certain employees at The Point at Poipu
resort in Kauai, Hawaii. Other than these matters, we are not aware of any union organizational
efforts with respect to our employees at any other locations.
Company History
Diamond Resorts Corporation, formerly Sunterra Corporation, was incorporated under the name
KGK Resorts, Inc. in May 1996, completed an initial public offering in August 1996 and became known
as Sunterra Corporation in 1998. Sunterra Corporation sought protection under Chapter 11 of the
Bankruptcy Code in May 2000 as a result of defaults on its senior unsecured notes and its secured
credit facilities. Sunterra Corporation fulfilled the conditions to the effectiveness of its plan
of reorganization and emerged from Chapter 11 in July 2002.
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In 2006, Sunterra Corporation’s common stock was delisted from The NASDAQ Stock Market as a
result of, among other things, the resignation of the company’s auditors and the withdrawal of
their certification of Sunterra Corporation’s financial statements. In addition, Sunterra
Corporation became subject to an SEC civil investigation and was named as defendant in two
securities class action lawsuits. The SEC investigation was concluded without further action and
both lawsuits have been settled.
In April 2007, Diamond Resorts Parent, LLC, through a wholly-owned subsidiary, acquired
Sunterra Corporation by merger. Sunterra Corporation’s existing equity was cancelled and it became
a wholly-owned indirect subsidiary of Diamond Resorts Parent, LLC. In addition, Sunterra
Corporation changed its name to Diamond Resorts Corporation.
Legal Proceedings
From time to time, we or our subsidiaries are subject to certain legal proceedings and claims
in the ordinary course of business, including claims or proceedings relating to our VOI sales and
consumer finance business.
One of our subsidiaries, FLRX, Inc., is a defendant in a lawsuit originally filed in July
2003, alleging the breach of certain contractual terms relating to the obligations under a stock
purchase agreement for the acquisition of FLRX in 1998, as well as certain violations under
applicable consumer protection acts. FLRX currently conducts no operations and has no material
assets other than an indirect interest in two undeveloped real estate parcels in Mexico. In
January 2010, following a jury trial, a Washington state court entered a judgment against FLRX,
awarded plaintiffs damages of $30.0 million plus attorney’s fees of approximately $1.5 million, and
ordered specific performance of certain ongoing contractual obligations pursuant to the breach of
contract claim. FLRX has appealed the verdict. Any liability in this matter would not be covered by
insurance and the ultimate liability of FLRX, if any, is uncertain at this time. Neither Diamond
Resorts Corporation nor any of its other subsidiaries are party to this lawsuit. Sunterra
Corporation was originally named as a defendant in this matter, but it was later dismissed from the
case. Depending upon developments in the lawsuit, it is possible that FLRX may at some point
determine to file for protection under the Federal Bankruptcy Code. Although we believe that we
will not have any material liability when this matter is ultimately resolved, there can be no
assurance that this will be the case.
Two separate cases have been filed in St. Maarten against AKGI St. Maarten NV, or AKGI, one of
our subsidiaries, challenging AKGI’s title to seven whole ownership units at the Royal Palm Resort,
and alleging the breach of certain agreements that existed prior to AKGI’s acquisition of the
resort. AKGI purchased the resort at auction in 1995. Each claimant alleges that, between 1989 and
1991, he purchased certain units from the prior owner of Royal Palm Resort, and that he holds, in
perpetuity, legal title to, or a leasehold interest in, the respective units and is entitled to a
refund of the purchase price and an annual 12% return on the purchase price (which totaled $1.2
million in one case and $1.3 million in the other case). Due to the nature of the AKGI purchase
and the underlying St. Maarten laws, we believe that the obligations to the claimants would only be
enforceable if the agreement between the claimant and AKGI’s predecessor was either a timeshare
agreement or a lease agreement. AKGI has answered that the claimants’ agreements were, in fact,
investment contracts, and therefore not enforceable under St. Maarten law. In February 2011, the
case that was pending in the highest and final court of appeal was dismissed as to all claims, with
the Company having no obligations, financial or otherwise, to claimant. The other case is currently
pending in the intermediate court of appeal. A lien has been placed on AKGI’s interest in the Royal
Palm Resort while the remaining action is pending.
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MANAGEMENT
Managers and Executive Officers
Each of Diamond Resorts Parent, LLC, our indirect parent company, and Diamond Resorts
Holdings, LLC, our direct parent company, is a Nevada limited liability company managed by a board
of managers. Diamond Resorts Corporation has a single director designated by Diamond Resorts
Holdings, LLC. The following table contains information with respect to the board of managers and
executive officers of Diamond Resorts Parent, LLC as of the date of this prospectus:
| Name | Age | Principal Position | ||||
Stephen J. Cloobeck
|
49 | Chief Executive Officer and Chairman of the Board | ||||
David F. Palmer
|
49 | President, Chief Financial Officer and Manager | ||||
Lowell D. Kraff
|
50 | Manager | ||||
B. Scott Minerd
|
51 | Manager | ||||
Zachary Warren
|
37 | Manager | ||||
Stephen J. Cloobeck has served as Chairman and Chief Executive Officer and chairman of the
board of managers of Diamond Resorts Parent, LLC since April 2007. Mr. Cloobeck has over 25 years
of experience in the vacation ownership industry, development, construction, management,
operations, marketing and sales of real estate properties including vacation ownership resorts,
hotels, retail shopping centers, office and apartment buildings. Mr. Cloobeck coordinated the
development of the Polo Towers Resort and spearheaded the design of Marriott’s Grand Chateau
vacation ownership resort, through Diamond Resorts, LLC, a group of affiliated companies, that was
founded in 1999. Mr. Cloobeck is a member of the American Resort Development Association (ARDA)
and is active in a wide range of community affairs on the local, state and national levels. In
September 2010, Mr. Cloobeck was appointed by the United States Secretary of Commerce Gary Locke
as a Director to the Corporation for Travel Promotion for the United States and was elected
Chairman of the Board in October 2010. Mr. Cloobeck was also a member of the Board of Directors
for the Nevada Cancer Institute from 2003 — 2010, serving as Chairman of the Board for the last
year that he was on the Board. In addition, Mr. Cloobeck has worked with many charities and civic
organizations, including the Prostate Cancer Foundation, Kids Charities.org, the Police Athletic
League, Boy Scouts of America, Inner City Games, the Alzheimer’s Association, the Andre Agassi
Charitable Foundation, Autism Speaks and is a founder of the Brent Shapiro Foundation for Drug
Awareness. Mr. Cloobeck received a B.A. in Psychobiology from Brandeis University.
David F. Palmer has served as President and Chief Financial Officer since September 20, 2010,
and is a member of the board of managers of Diamond Resorts Parent, LLC. He served as our
Executive Vice President and Chief Financial Officer from April 2007 until his promotion to
President in September 2010. Mr. Palmer has over 20 years of experience as a private
equity/financial professional. Mr. Palmer served as a managing director of Trivergance, LLC from
its formation in June 2006 to July 2010. From September 2002 to December 2006, he served as a
member of Onyx Capital Ventures, LLC, a private equity firm and minority business enterprise that
specialized in investing in middle-market minority business enterprises. From 1996 to 2002, he was
a principal of Vision Capital Partners, LLC, and was a founder of Velocity Capital, LLC, both
merchant banking partnerships focused on early stage venture capital and private equity
investments. From 1989 to 1999, Mr. Palmer served as vice president of corporate development for
Farley Industries, Inc., a diversified holding company with interests in the automotive, industrial
and apparel industries. From 2003 to 2006, Mr. Palmer served as Chairman of the Board of Directors
of CiDRA Corporation, an industrial and optical services provider to the oilsands, minerals
processing and pulp and paper industries. Mr. Palmer received an A.B. in Physical Chemistry from
Hamilton College and an M.B.A. from the J.L. Kellogg Graduate School of Management at Northwestern
University.
Lowell D. Kraff has served as a member of the board of managers of Diamond Resorts Parent, LLC
since April 2007. Mr. Kraff has spent his career in the private equity, merchant banking and
investment banking fields. He has been a principal equity investor for over 13 years, participating
in leveraged buyouts, growth equity and early stage venture capital transactions. Mr. Kraff
co-founded Trivergance, LLC in June 2006, and has served as a managing member since its formation.
From July 2001 to June 2006, Mr. Kraff was a founding principal of
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Connecting Capital & Partners, LLC, a merchant banking company organized to make principal
investments in alternative assets and provide limited strategic investment banking advice. From
June 1996 to July 2001, Mr. Kraff also served as a founding principal of Vision Capital Partners,
LLC. At Vision Capital, Mr. Kraff and his partners sourced proprietary deals and invested in
several early stage and growth capital opportunities. He currently is a member of the Board of
Directors of Smart Pack Solutions, LLC, an internet- based retail sales firm. Mr. Kraff received a
B.S. from The Wharton School, University of Pennsylvania and an M.B.A. from the University of
Chicago.
B. Scott Minerd has served as a member of the board of managers of Diamond Resorts Parent, LLC
since August 2010. Mr. Minerd joined Guggenheim Partners in 1998. Mr. Minerd is Chief Investment
Officer of Guggenheim Partners Asset Management and its affiliate, Guggenheim Investment
Management, LLC, and a managing partner of Guggenheim Partners. He was formerly a Managing Director
with Credit Suisse First Boston in charge of trading and risk management for the Fixed Income
Credit Trading Group. Mr. Minerd has also held capital markets positions with Morgan Stanley,
Merrill Lynch and Continental Bank and was a Certified Public Accountant for Price Waterhouse. Mr.
Minerd holds a B.S. degree in Economics from The Wharton School, University of Pennsylvania, and
has completed graduate work at the University of Chicago Graduate School of Business and The
Wharton School, University of Pennsylvania.
Zachary D. Warren has served as a member of the board of managers of Diamond Resorts Parent,
LLC since June 2010. Mr. Warren has over 15 years of experience in the equity and corporate debt
markets, with a focus on making direct debt investments in middle-market companies. Mr. Warren is
a managing director of Guggenheim Partners, where he has participated in numerous financings. Mr.
Warren received a B.A. in Economics from the College of William and Mary and an M.B.A. from the
Anderson School at UCLA.
Audit Committee Matters
Our board of managers has an audit committee that is responsible for, among other things,
overseeing our accounting and financial reporting processes and audits of our financial statements.
The audit committee is comprised of Messrs. Kraff and Warren. Our audit committee does not include
a “financial expert” as that term is defined in applicable regulations. The members of our audit
committee have substantial experience in assessing the performance of companies and in
understanding financial statements, accounting issues, financial reporting and audit committee
functions. However, neither member has comprehensive professional experience with generally accepted
accounting principles and financial statement preparation and analysis and, accordingly, the board
of managers does not consider either of them to be a “financial expert” as that term is defined in
applicable regulations. Nevertheless, the board of managers believes that the members of our audit
committee have the necessary expertise and experience to perform the functions required of the
audit committee.
Board of Manager Compensation
Members of the board of managers receive no compensation from us for their services as members
of the board or for attendance at board meetings. Members of the board of managers are reimbursed
for their expenses incurred in connection with attendance at board meetings.
Executive Officer Compensation
Mr. Cloobeck receives no direct remuneration from us. Rather, Hospitality Management and
Consulting Service, LLC, or HM&C, a company which Mr. Cloobeck beneficially owns, receives an
annual management fee pursuant to a management services agreement with us. Similarly, Mr. Palmer
also receives no direct remuneration from us, but rather is compensated pursuant to an employment
agreement with HM&C. For a description of the HM&C management services agreement, see “Certain
Relationships and Related Transactions — HM&C Management Services Agreement.”
Mr. Kraff receives no direct remuneration from us. Rather, Praesumo Partners, LLC, a company
he beneficially owns, has received consulting fees pursuant to an independent contractor agreement.
For a description of this agreement, see “Certain Relationships and Related Transactions —
Praesumo Engagement Agreements.”
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of
common equity units of Diamond Resorts Parent, LLC, our indirect parent company, as of March 1,
2011, for:
| • | each of its managers; | ||
| • | each of its named executive officers; | ||
| • | each person or group known to us to beneficially own 5% or more of such units; and | ||
| • | all of its executive officers and managers as a group. |
The percentages of common equity units beneficially owned are reported on the basis of
regulations of the SEC governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or to direct the voting of such security, or
investment power, which includes the power to dispose of or to direct the disposition of such
security. Subject to the assumption set forth in the immediately succeeding sentence, except as
otherwise indicated, to our knowledge each beneficial owner named in the table below has sole
voting and sole investment power with respect to all units beneficially owned. Unless otherwise
indicated in the footnotes, the address of each beneficial owner is 10600 West Charleston
Boulevard, Las Vegas, Nevada 89135.
| Amount and Nature of | ||||||||
| Beneficial Ownership of | Percentage of Common Units | |||||||
| Beneficial Owner | Common Units | Outstanding(1) | ||||||
Managers and Executive Officers |
||||||||
Stephen J. Cloobeck(2) |
788.0 | 70.7 | % | |||||
David F. Palmer(3) |
— | — | ||||||
Lowell D. Kraff(4) |
— | — | ||||||
B. Scott Minerd(5) |
— | — | ||||||
Zachary Warren(6) |
— | — | ||||||
All managers and executive officers as a group |
788.0 | 70.7 | % | |||||
5% Beneficial Owners |
||||||||
Cloobeck Diamond Parent, LLC(2) |
788.0 | 70.7 | % | |||||
DRP Holdco, LLC(7) |
269.3 | 24.2 | % | |||||
| (1) | Represents the percentage of total voting power and the percentage ownership of common equity units beneficially owned by each identified unitholder and all managers and executive officers as a group. As of March 1, 2010, there were 1,115.1 common equity units outstanding. | |
| (2) | Mr. Cloobeck controls two entities which hold 100% of the outstanding voting securities of Cloobeck Diamond Parent, LLC, a Nevada limited liability company, or CDP, and a majority of the outstanding non-voting equity securities (which have the same economic rights as the voting securities). Mr. Cloobeck and certain trusts, of which Mr. Cloobeck is trustee, beneficially own all outstanding equity interests in such entities. As a result, Mr. Cloobeck has sole power to vote and dispose of all common units of Diamond Resorts Parent, LLC held by CDP. | |
| (3) | Mr. Palmer holds equity interests in Trivergance Diamond Holdings, LLC, a Delaware limited liability company, or TDH, which in turn holds non-voting equity interests in CDP. Mr. Palmer also directly holds non-voting equity interests in CDP. Although Mr. Palmer does not beneficially own the common equity units of Diamond Resorts Parent, LLC held by CDP (see Note 2 above), by virtue of his ownership of equity interests of CDP and TDH, Mr. Palmer will receive economic benefits relating to up to 10.0% of Diamond Resorts Parent, LLC pursuant to the respective operating agreements of CDP and TDH. | |
| (4) | Mr. Kraff holds equity interests in TDH, which in turn holds non-voting interests in CDP. Although Mr. Kraff |
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| does not beneficially own the common units of Diamond Resorts Parent, LLC held by CDP (see Note 2 above), by virtue of his ownership of equity interests of TDH, Mr. Kraff receives economic benefits relating to approximately 4.0% of Diamond Resorts Parent, LLC pursuant to the respective operating agreements of CDP and TDH. | ||
| (5) | Mr. Minerd is a managing partner of Guggenheim Partners. Clients of and funds managed by affiliates of Guggenheim Partners beneficially own 269.3 of the common units, as well as all of the outstanding preferred units, of Diamond Resorts Parent, LLC. See Note 7 below. | |
| (6) | Mr. Warren is a managing director of Guggenheim Partners. Clients of and funds managed by affiliates of Guggenheim Partners beneficially own 269.3 of the common units, as well as all of the outstanding preferred units, of Diamond Resorts Parent, LLC. See Note 7 below. | |
| (7) | The address for DRP Holdco, LLC, or DRP, is 135 East 57th Street, New York, NY 10022. DRP is an investment vehicle managed by an affiliate of Guggenheim, and has members that are clients of affiliates of Guggenheim. In addition to the 269.3 common units held by DRP, DRP is also the beneficial owner of outstanding preferred units of Diamond Resorts Parent, LLC, which have an initial face value of $75 million. The preferred units have a priority return of 16.5% per annum, compounded quarterly, as well as a liquidation preference with respect to the common units. The preferred units do not provide to the holder any participation or conversion rights. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Asset Contribution Agreement
In April 2007, in connection with the acquisition of Sunterra Corporation, companies
controlled by Stephen J. Cloobeck, our Chairman and CEO, entered into an asset contribution
agreement with us. Pursuant to this agreement, the Cloobeck-controlled companies contributed
certain assets to us in exchange for approximately 79% of our common equity interests. The assets
contributed included VOI resort management agreements, VOI inventory, consumer loan portfolios and
certain other assets. In addition, we assumed certain liabilities related to the assets
contributed, including revolving lines of credit collateralized by
consumer loans and related VOIs, which have been paid in full.
The value ascribed to the assets
contributed pursuant to this agreement was not determined pursuant to an appraisal or other
independent analysis; however, this value was the result of negotiations between Mr. Cloobeck and
the institutional investor that purchased the balance of our common equity securities and preferred
equity securities concurrently with the asset contribution.
DR Management HOA Executive Oversight, Consulting and Services Agreement
In April 2007, we entered into a Homeowner Association Executive Oversight, Consulting and
Services Agreement with Diamond Resorts, LLC, or DR Management, a Nevada limited liability company
that is beneficially owned by Mr. Cloobeck. Pursuant to this agreement, DR Management provided
executive and strategic oversight of services we provided to our HOAs, including management and
supervision of all aspects of the operations, planning and financing of the HOAs. In consideration
of these services, we paid management fees to DR Management of $5.0 million in 2008, approximately
$5.0 million per year in 2009 and approximately $7.0 million in 2010, plus reimbursement of DR
Management’s expenses, in accordance with the terms of the agreement. The agreement had an initial
term of seven years, with automatic annual renewals thereafter unless either party provided notice
of nonrenewal at least 60 days prior to the end of the term. This agreement was terminated
effective December 31, 2010, in connection with our entry into the HM&C agreement described below.
Trivergance Services Agreement
In April 2007, we entered into a Services Agreement with Trivergance, a Delaware limited
liability company beneficially owned by David Palmer, our President
and CFO, and Lowell Kraff, a member of our board of managers. Pursuant to this agreement,
Trivergance provides management, consulting and advisory services to us, including management and
supervision of all aspects of our financial operations and planning. In consideration of these
services, we paid management fees to Trivergance of approximately $1.2 million in 2009 and
approximately $1.2 million in 2010, plus reimbursement of Trivergance’s expenses, in accordance
with the terms of the agreement. This agreement was terminated effective December 31, 2010, in
connection with our entry into the HM&C agreement described below.
Praesumo Engagement Agreements
In June 2008, we entered into a Terms of Engagement Agreement for Individual Independent
Contractor, or Engagement Agreement, with Praesumo Partners, LLC, or Praesumo, a limited liability
company of which Lowell Kraff, a member of our board of managers, is a beneficial owner and a
controlling party. In June 2009, we terminated the original Engagement Agreement and entered into
a new Engagement Agreement on substantially similar terms. Pursuant to the new agreement, Praesumo
provides Mr. Kraff as an independent contractor to us to provide acquisition, development and
finance consulting services. In consideration of these services, we paid management fees to
Praesumo of approximately $0.7 million in 2008, approximately $1.2 million in 2009 and
approximately $1.2 million in 2010. In June 2010, we renewed this agreement for an additional
26-month term, effective as of the date of the expiration of the initial term of the agreement and
in January 2011, we further amended this agreement. In January 2011, we entered into an additional
Engagement Agreement with Praesumo under which Mr. Kraff is to provide certain additional
consulting services as requested by us. This agreement terminates at the end of 2011.
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HM&C Management Services Agreement
Effective December 31, 2010, we entered into a Homeowner Association Oversight, Consulting and
Executive Management Services agreement with HM&C, a Nevada limited liability company that is
beneficially owned by Mr. Cloobeck. Pursuant to this agreement, HM&C provides two categories of
management services to us: (i) executive and strategic oversight of the services we provide to HOAs
through our hospitality and management services operations, for the benefit of us and of the HOAs,
or HOA Management Services; and (ii) executive, corporate and strategic oversight of our operations
and certain other administrative services.
Pursuant to this agreement, HM&C agreed to cause Mr. Cloobeck to serve as our CEO, and Mr.
Palmer to serve as our CFO, and for each to fulfill the duties of their respective positions,
during the term of the agreement. HM&C also provides us with services of certain other officers and
employees, each of which devotes his or her full business time and attention to the Company.
Pursuant to the agreement, HM&C is to receive (i) an annual management fee for HOA Management
Services, and (ii) an annual incentive payment based on performance metrics determined by our board
of managers. The management fee and minimum bonus payable under the agreement are not materially
different than the cost which we would incur if the employees of HM&C were employed by us. These
payments will be reviewed on an annual basis and may be adjusted as agreed to by our board of
managers
The agreement has an initial term of five years, and will be automatically renewed on an
annual basis unless either we or HM&C gives notice of termination. The agreement will also
terminate automatically (i) in the event that Mr. Cloobeck no longer serves as our CEO for any
reason, including his death or disability or (ii) upon certain events that may constitute a change
of control of the Company. The agreement provides that, upon Mr. Cloobeck’s death or disability,
we will pay HM&C three annual payments of $5.0 million per annum which will then be paid to Mr.
Cloobeck or his estate. We have arranged for the purchase of insurance to fund these payments.
HM&C provides, and in the future may provide, services to other companies, including companies
controlled by Mr. Cloobeck, provided, however, that under the new agreement, (i) HM&C is obligated
to provide to us the full business time and attention of Messrs. Cloobeck, Palmer and any other
employees who are or may in the future be employed by HM&C, (ii) HM&C is prohibited from competing
with us, and (iii) HM&C is prohibited from providing services to our direct competitors. In the
event that HM&C provides material services to other companies in the future, current or future
employees of HM&C may devote substantial time and attention to these other companies (provided they
comply with the restrictions described in the prior sentence), as well as to us. However, HM&C
currently has no such plans.
Settlement Payment
On June 10, 2010, we paid approximately $4.4 million to a former employee, who is a relative
of Mr. Cloobeck, in full settlement of an arbitration demand obtained by the former employee
against us relating to an employment contract dispute. For more information about this matter, see
Note 6 of our audited financial statements included elsewhere in this prospectus.
Guggenheim Relationship
DRP owns common and preferred equity securities of Diamond Resorts Parent, LLC, as described
in “Prospectus Summary — Certain Transactions.” After completion of the Guggenheim Transactions,
which occurred concurrently with the consummation of the private offering of the outstanding notes
that closed on August 13, 2010, DRP has the right to appoint two of the five members of the board
of directors of Diamond Resorts Parent, LLC. DRP is an investment vehicle managed by an affiliate
of Guggenheim and has members that are clients of affiliates of Guggenheim. In addition, prior to
August 31, 2010, clients of affiliates of Guggenheim were lenders under our amended and restated
2008 conduit facility. For additional information regarding our amended and restated 2008 conduit
facility, see “Description of Other Indebtedness —
Securitization and Other Receivables Transanctions — 2008 Conduit Facility and Diamond Resorts
Owners Trust Series 2009-1.”
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DESCRIPTION OF OTHER INDEBTEDNESS
Set forth below is a summary of our other indebtedness, including indebtedness that will
be outstanding after completion of this exchange offer. Other than as described under “Other Notes
Payable” below, all of the indebtedness that will be outstanding after completion of this exchange
offer constitutes either (i) non-recourse indebtedness of our Unrestricted Subsidiaries or (ii)
receivables financings or sales transactions that are non-recourse obligations of our affiliates.
These affiliates were formed for the sole purpose of facilitating the financing or sale of consumer
loans. Payments of the notes evidenced thereby are payable solely from the proceeds of the
receivables collateralizing such notes. Each financing contains certain standard limited recourse
undertakings applicable to us regarding the substitution or replacement of underlying receivable
loans in the event of breach of representation or warranty.
The following summary is qualified in its entirety by reference to the agreements and
instruments governing each of the obligations described below. You should consult such agreements
and instruments for more detailed information regarding these obligations. For information
regarding where you can obtain such agreements and instruments, see “Where You Can Find Additional
Information.”
Securitization and Other Receivables Transactions
2008 Conduit Facility and Diamond Resorts Owners Trust Series 2009-1 On November 3, 2008, we
entered into agreements for our 2008 conduit facility, pursuant to which we issued secured consumer
loan backed variable funding notes designated Diamond Resorts Issuer 2008 LLC, Variable Funding
Notes, or the 2008 Funding Notes, in an aggregate principal amount not to exceed $215.4 million,
which was decreased to $200.0 million and $73.4 million on March 27, 2009 and October 15, 2009,
respectively. We paid $1.8 million in debt issuance costs associated with this facility. The
initial borrowing amount under this facility was $195.0 million, which was used to reduce the
outstanding note balance of the 2007 conduit facility.
Pursuant to an amendment of the 2008 conduit facility which occurred on August 31, 2010, the
maturity date of the 2008 conduit facility was extended to August 30, 2011. This amended and
restated the 2008 conduit facility and provides for a $65 million 364-day facility that is annually
renewable at the election of the lenders. The amended 2008 conduit facility bears interest at
either LIBOR or the Commercial Paper rate (having a floor of 1.0%) plus 4.5% and has a non-use-fee
of 2.0%. Pursuant to the terms of the amended 2008 conduit facility, the advance rates on loans
receivable in the portfolio are limited to 70% of the face value of eligible loans.
On October 15, 2009, we completed our 2009 securitization transaction and issued the DROT 2009
Class A Notes and DROT 2009 Class B Notes. The Class A notes carry an interest rate of 9.3% and
had an initial face value of $169.2 million. The Class B notes carry an interest rate of 12.0% and
had an initial face value of $12.8 million. The net proceeds received were $181.1 million compared
to the $182.0 million face value and we recorded the $0.9 million difference as a discount on the
securitization notes payable. We incurred $5.5 million in placement and structuring fees. In
addition, we paid $1.4 million in legal and professional fees in connection with this transaction.
In total, $6.9 million of debt issuance costs were capitalized and will be amortized over the term
of the DROT 2009 Notes. As of December 31, 2010, the outstanding principal balance under the Class
A notes and the Class B notes was $113.3 million and $8.6 million, respectively, and the gross
amount of the mortgages and contracts receivable collateralizing such debt was $160.2 million.
Also on October 15, 2009, we used the proceeds from the DROT 2009 Notes to pay off in full the
$35.4 million outstanding principal balance under our 2007 conduit facility and to pay down the
$148.9 million outstanding principal balance under the 2008 conduit facility, along with requisite
accrued interest and fees
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associated with both conduit facilities. The payoff of the 2007 conduit facility and paydown
of the 2008 conduit facility resulted in a $0.3 million loss on extinguishment of debt of the
conduit facilities as we wrote off $0.1 million and $0.2 million of unamortized debt issuance costs
associated with the 2007 conduit facility and the 2008 conduit facility, respectively. The 2007
conduit facility was terminated on October 15, 2009.
Loan Sale Facility. On April 30, 2010,
our subsidiary DRI Quorum 2010 LLC, or DRI Quorum,
entered into a Loan Sale and Security Agreement, or LSSA, dated as of April 30, 2010, with Quorum,
as purchaser, Wells Fargo, National Association, as back-up servicer, and Diamond Resorts Financial
Services, Inc., as servicer. The LSSA and related documents provide for an aggregate minimum $40
million loan sale facility and joint marketing venture, or the Quorum Facility, where DRI Quorum
may sell eligible consumer loans and in-transit loans to Quorum on a non-recourse, permanent basis,
provided that the underlying consumer obligor is a Quorum credit union member. The joint marketing
venture has a minimum term of two years and the LSSA provides for a purchase period of two years.
The purchase price payment and the program purchase fee are each determined at the time that the
loan is sold to Quorum. The current purchase price payment is 85% of
the obligor loan, and the program purchase fee is 8.0%. To the extent excess
funds remain after
payment of the sold loans at Quorum’s
purchase price, such
excess funds shall be remitted to us as a deferred purchase price payment.
This transaction did not qualify as a loan sale
under GAAP.
ILXA Receivables Loan and Inventory Loan
On August 31, 2010, we completed the ILX acquisition through our wholly-owned subsidiary,
ILXA. In connection with the ILX acquisition, ILXA entered into the ILXA Inventory Loan and the
ILXA Receivables Loan with Textron Financial Corporation. The ILXA Inventory Loan is a
non-revolving credit facility in the maximum principal amount of $23.0 million with an interest
rate of 7.5%. The ILXA Receivables Loan is a receivables facility with
an initial principal amount of $11.9 million, and
an interest rate of 10%, and was collateralized by $12.0 million of ILXA mortgages and contracts
receivable at December 31, 2010. Both loans mature on August 31, 2015. The proceeds from these
loans were used to fund the ILX acquisition.
During the year ended December 31, 2010, ILXA incurred $0.8 million in debt issuance costs
related to these loans, which will be amortized over the term of the loans. Amortization of $0.1
million of debt issuance costs related to these loans was recorded and is included in interest
expense in the accompanying consolidated statement of operations for the year ended December 31,
2010.
Tempus Acquisition Loan
On November 23, 2010, Tempus Acquisition, LLC, one of our wholly-owned subsidiaries, entered
into the Tempus Acquisition Loan with an affiliate of Guggenheim, as the lender, and
Guggenheim Corporate Funding, LLC, as administrative agent. The Tempus Acquisition Loan is a
revolving loan facility with a maximum principal amount of $8 million, the proceeds of which shall
be used exclusively for the following purposes: (i) to provide Tempus Acquisition, LLC with funds
to lend to Tempus Resorts International, Ltd. and certain of its
affiliates, pursuant to debtor in possession
financing, for general working capital purposes and other lawful purposes as permitted under the
agreements governing the debtor in possession financing; and (ii) to provide $1.5 million for the “Deposit,” as
defined and provided in the Agreement for Purchase and Sale of Assets to purchase certain assets of
Tempus Resorts International, Ltd. and its affiliates. As of December 31, 2010, the outstanding
balance of the Tempus Acquisition Loan was $3.3 million and the balance of the Tempus Note
Receivable was $3.0 million.
Other Notes Payable
We financed premiums on
certain insurance policies under unsecured notes. One of the notes matured in January 2011 and
carried an interest rate of 4.0% per annum. The other note will mature in August 2011 and carries
an interest rate of 3.65% per annum.
Borrowing Restrictions and Limitations
All of our borrowings under line of credit agreements, securitization notes and conduit
facilities contain various restrictions and limitations that may affect our business and affairs.
These include, but may not be limited
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to, restrictions and limitations relating to our ability to incur indebtedness and other
obligations, to make investments and acquisitions and to pay dividends. We are also required to
maintain certain financial ratios and comply with other financial and performance covenants. We
were in compliance with all financial covenants under these instruments as of December 31, 2010.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
We and the guarantors have entered into a registration rights agreement with the initial
purchasers of the outstanding notes pursuant to which we have agreed that, we will, subject to
certain exceptions:
(i) within 210 days after August 13, 2010, file a registration statement (the “Exchange Offer
Registration Statement”) with the SEC with respect to a registered offer to exchange the
outstanding notes for exchange notes having terms substantially identical in all material respects
to those of the outstanding notes (except that the exchange notes will not contain terms with
respect to transfer restrictions);
(ii) use our reasonable best efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act within 330 days after August 13, 2010;
(iii) as soon as practicable after the effectiveness of the Exchange Offer Registration
Statement, offer the exchange notes in exchange for surrender of the outstanding notes; and
(iv) keep the exchange offer open for not less than 20 days (or longer if required by
applicable law) after the date notice of the exchange offer is mailed to the holders of the
outstanding notes.
For each outstanding note validly tendered to us and not withdrawn pursuant to the exchange
offer, we will issue to the holder of such outstanding note an exchange note having a principal
amount equal to that of the surrendered outstanding note. Interest on each exchange note will
accrue from the last interest payment date on which interest was paid on the outstanding note
surrendered in exchange therefor, or, if no interest has been paid on such outstanding note, from
the date of its original issue.
In the event that:
(i) applicable interpretations of the staff of the SEC do not permit us to effect such an
exchange offer; or
(ii) for any other reason we do not consummate the exchange offer within 365 days of the Issue
Date; or
(iii) an initial purchaser of outstanding notes shall notify us following consummation of the
exchange offer that outstanding notes held by it are not eligible to be exchanged for exchange
notes in the exchange offer; or
(iv) certain holders are prohibited by law or SEC policy from participating in the exchange
offer or may not resell the exchange notes acquired by them in the exchange offer to the public
without delivering a prospectus,
then, we will, subject to certain exceptions,
(i) within 30 days after the time such obligation to file arises file a shelf registration
statement (the “Shelf Registration Statement”) with the SEC covering resales of the outstanding
notes or the exchange notes, as the case may be;
(ii) use our reasonable best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act on or prior to the 90th day after the date on which the Shelf
Registration Statement is required to be filed; and
(iii) keep the Shelf Registration Statement effective until the earlier of (1) three years
from August 13, 2010 and (2) the date on which all notes registered thereunder are disposed of in
accordance therewith.
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We will, in the event a Shelf Registration Statement is filed, among other things, provide to
each holder for whom such Shelf Registration Statement was filed copies of the prospectus which is
a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to permit
unrestricted resales of the outstanding notes or the exchange notes, as the case may be. A holder
selling such outstanding notes or exchange notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by the provisions of the
registration rights agreement that are applicable to such holder (including certain indemnification
obligations).
We may require each holder requesting to be named as a selling security holder to furnish to
us such information regarding the holder and the distribution of the outstanding notes or exchange
notes by the holder as we may from time to time reasonably require for the inclusion of the holder
in the Shelf Registration Statement, including requiring the holder to properly complete and
execute such selling security holder notice and questionnaires, and any amendments or supplements
thereto, as we may reasonably deem necessary or appropriate. We may refuse to name any holder as a
selling security holder that fails to provide us with such information.
We will pay additional cash interest on the outstanding notes and exchange notes, subject to
certain exceptions:
(i) if we fail to file an Exchange Offer Registration Statement with the SEC on or prior to
the 210th day after August 13, 2010,
(ii) if the Exchange Offer Registration Statement has been filed, but is not declared
effective by the SEC on or prior to the 330th day after August 13, 2010,
(iii) if the Exchange Offer is not consummated on or before the earlier of (1) the 30th
business day after the Exchange Offer Registration Statement is declared effective or (2) the 365th
day after August 13, 2010,
(iv) if obligated to file the Shelf Registration Statement pursuant to the provisions
described above, we fail to file the Shelf Registration Statement with the SEC on or prior to the
30th day (the “Shelf Filing Date”) after the date on which the obligation to file a Shelf
Registration Statement arises,
(v) if obligated to file a Shelf Registration Statement pursuant to the provisions described
above, the Shelf Registration Statement is not declared effective on or prior to the 90th day after
the Shelf Filing Date, or
(vi) after the Exchange Offer Registration Statement or the Shelf Registration Statement, as
the case may be, is declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) (each such event referred to in the preceding
clauses (i) through (vi) a “Registration Default”);
from and including the date on which any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured.
The rate of the additional interest will be 0.25% per annum for the first 90-day period
immediately following the occurrence of a Registration Default, and such rate will increase by an
additional 0.25% per annum with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum additional interest rate of 1.00% per annum. We will pay
such additional interest on regular interest payment dates. Such additional interest will be in
addition to any other interest payable from time to time with respect to the outstanding notes and
the exchange notes.
We will be entitled to close the exchange offer promptly after the expiration thereof;
provided, however, that we have accepted all outstanding notes theretofore validly tendered in
accordance with the terms of the exchange offer.
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If you wish to exchange your outstanding notes for exchange notes in the exchange offer, you
will be required to make the following written representations:
| • | you are not our affiliate or an affiliate of any guarantor within the meaning of Rule 405 of the Securities Act; | ||
| • | you have no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of the exchange notes in violation of the provisions of the Securities Act; | ||
| • | you are not engaged in, and do not intend to engage in, a distribution of the exchange notes; and | ||
| • | you are acquiring the exchange notes in the ordinary course of your business. |
Each broker-dealer that receives exchange notes for its own account in exchange for
outstanding notes, where the broker-dealer acquired the outstanding notes as a result of
market-making activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”
Resale of Exchange Notes
Based on interpretations by the SEC set forth in no-action letters issued to third parties, we
believe that you may resell or otherwise transfer exchange notes issued in the exchange offer
without complying with the registration and prospectus delivery provisions of the Securities Act
if:
| • | you are not our affiliate or an affiliate of any guarantor within the meaning of Rule 405 under the Securities Act; | ||
| • | you do not have an arrangement or understanding with any person to participate in a distribution of the exchange notes; | ||
| • | you are not engaged in, and do not intend to engage in, a distribution of the exchange notes; and | ||
| • | you are acquiring the exchange notes in the ordinary course of your business. |
If you are our affiliate or an affiliate of any guarantor, or are engaging in, or intend to
engage in, or have any arrangement or understanding with any person to participate in, a
distribution of the exchange notes, or are not acquiring the exchange notes in the ordinary course
of your business:
| • | you cannot rely on the position of the SEC set forth in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling, dated July 2, 1993, or similar no-action letters; and | ||
| • | in the absence of an exception from the position stated immediately above, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. |
This prospectus may be used for an offer to resell, resale or other transfer of exchange notes
only as specifically set forth in this prospectus. With regard to broker-dealers, only
broker-dealers that acquired the outstanding notes as a result of market-making activities or other
trading activities may participate in the exchange offer. Each broker-dealer that receives exchange
notes for its own account in exchange for outstanding notes, where such outstanding notes were
acquired by such broker-dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale of the exchange
notes. Please read “Plan of Distribution” for more details regarding the transfer of exchange
notes.
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Terms of the Exchange Offer
On the terms and subject to the conditions set forth in this prospectus and in the letter of
transmittal, we will accept for exchange in the exchange offer any outstanding notes that are
properly tendered and not withdrawn prior to the expiration date. Outstanding notes may only be
tendered in minimum denominations of $2,000 and integral multiples of $1,000 in excess of $2,000.
We will issue exchange notes in principal amount identical to outstanding notes surrendered in the
exchange offer.
The form and terms of the exchange notes will be substantially identical to the form and terms
of the outstanding notes except the exchange notes will be registered under the Securities Act,
will not bear legends restricting their transfer and will not provide for any special interest upon
our failure to fulfill our obligations under the registration rights agreement to complete the
exchange offer, or file, and cause to be effective, a registration statement, if required thereby,
within the specified time period described above. The exchange notes will evidence the same debt
as the outstanding notes. The exchange notes will be issued under and entitled to the benefits of
the same indenture that authorized the issuance of the outstanding notes. Consequently, the
outstanding notes and the exchange notes will be treated as a single class of debt securities under
the indenture. For a description of the indenture, see “Description of the Exchange Notes.”
The exchange offer is not conditioned upon any minimum aggregate principal amount of
outstanding notes being tendered for exchange.
As of the date of this prospectus, $425 million aggregate principal amount of the 12% Senior
Secured Notes due 2018 are outstanding. This prospectus and a letter of transmittal are being sent
to all registered holders of outstanding notes. There will be no fixed record date for determining
registered holders of outstanding notes entitled to participate in the exchange offer. We intend
to conduct the exchange offer in accordance with the provisions of the registration rights
agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and the rules and regulations of the SEC. Outstanding notes
that are not tendered for exchange in the exchange offer will remain outstanding and continue to
accrue interest and will be entitled to the rights and benefits the holders have under the
indenture relating to the outstanding and the registration rights agreement, except for any rights
under the registration rights agreement that by their terms terminate upon the consummation of the
exchange offer.
We will be deemed to have accepted for exchange properly tendered outstanding notes when we
have given oral or written notice of the acceptance to the exchange agent. The exchange agent will
act as agent for the tendering holders for the purposes of receiving the exchange notes from us and
delivering exchange notes to holders. Subject to the terms of the registration rights agreement, we
expressly reserve the right to amend or terminate the exchange offer and to refuse to accept for
exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of
the conditions specified below under “—Conditions to the Exchange Offer.”
If you tender your outstanding notes in the exchange offer, you will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of transmittal,
transfer taxes with respect to the exchange of outstanding notes. We will pay all charges and
expenses, other than certain applicable taxes described below in connection with the exchange
offer. It is important that you read “—Fees and Expenses” below for more details regarding fees
and expenses incurred in the exchange offer.
Expiration Date, Extensions and Amendments
As used in this prospectus, the term “expiration date” means 11:59 p.m., New York City time,
on , 2011. However, if we, in our sole discretion, extend the period of
time for which the exchange offer is open, the term “expiration date” will mean the latest time and
date to which we shall have extended the expiration of the exchange offer.
To extend the period of time during which the exchange offer is open, we will notify the
exchange agent of any extension by oral or written notice, followed by notification by press
release or other public announcement to the registered holders of the outstanding notes no later
than 9:00 a.m., New York City time, on the next business day after the previously scheduled
expiration date.
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We reserve the right, in our sole discretion:
| • | to delay accepting for exchange any outstanding notes (only in the case that we amend or extend the exchange offer); | ||
| • | to extend the exchange offer or to terminate the exchange offer and refuse to accept outstanding notes not previously accepted if any of the conditions set forth below under “—Conditions to the Exchange Offer” have not been satisfied, by giving oral or written notice of such delay, extension or termination to the exchange agent; and | ||
| • | subject to the terms of the registration rights agreement, to amend the terms of the exchange offer in any manner. In the event of a material change in the exchange offer, including the waiver of a material condition, we will extend the offer period, if necessary, so that at least five business days remain in such offer period following notice of the material change. |
Any delay in acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice to the registered holders of the outstanding notes. If we
amend the exchange offer in a manner that we determine to constitute a material change, we will
promptly disclose the amendment in a manner reasonably calculated to inform the holders of the
outstanding notes of that amendment.
Without limiting the manner in which we may choose to make public announcements of any delay
in acceptance, extension, termination or amendment of the exchange offer, we will have no
obligation to publish, advertise, or otherwise communicate any public announcement, other than by
making a timely release to a financial news service.
Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to accept for exchange,
or to issue exchange notes in exchange for, any outstanding notes and we may terminate or amend the
exchange offer as provided in this prospectus prior to the expiration date if in our reasonable
judgment:
| • | the exchange offer or the making of any exchange by a holder violates any applicable law or interpretation of the SEC; or | ||
| • | any action or proceeding has been instituted or threatened in writing in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer. | ||
| In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us: | |||
| • | the representations described under “—Purpose and Effect of the Exchange Offer,” “—Procedures for Tendering Outstanding Notes” and “Plan of Distribution”; or | ||
| • | any other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act. | ||
We expressly reserve the right at any time or at various times to extend the period of time
during which the exchange offer is open. Consequently, we may delay acceptance of any outstanding
notes by giving oral or written notice of such extension to their holders. We will return any
outstanding notes that we do not accept for exchange for any reason without expense to their
tendering holder promptly after the expiration or termination of the exchange offer.
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We expressly reserve the right to amend or terminate the exchange offer and to reject for
exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of
the conditions of the exchange offer specified above. We will give oral or written notice of any
extension, amendment, non-acceptance or termination to the holders of the outstanding notes as
promptly as practicable. In the case of any extension, such notice will be issued no later than
9:00 a.m., New York City time, on the next business day after the previously scheduled expiration
date.
These conditions are for our sole benefit, and we may assert them regardless of the
circumstances that may give rise to them or waive them in whole or in part at any or at various
times prior to the expiration date in our sole discretion. If we fail at any time to exercise any
of the foregoing rights, this failure will not constitute a waiver of such rights. Each such right
will be deemed an ongoing right that we may assert at any time or at various times prior to the
expiration date.
In addition, we will not accept for exchange any outstanding notes tendered, and will not
issue exchange notes in exchange for any such outstanding notes, if at such time any stop order is
threatened or in effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939 (the
“TIA”).
Procedures for Tendering Outstanding Notes
To tender your outstanding notes in the exchange offer, you must comply with any of the
following:
| • | complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, have the signature(s) on the letter of transmittal guaranteed if required by the letter of transmittal and mail; or | ||
| • | deliver such letter of transmittal or facsimile thereof to the exchange agent at the address set forth below under “—Exchange Agent” prior to the expiration date; or | ||
| • | comply with DTC’s Automated Tender Offer Program procedures described below. | ||
| In addition, either: | |||
| • | the exchange agent must receive certificates for the outstanding notes along with the letter of transmittal prior to the expiration date; | ||
| • | the exchange agent must receive a timely confirmation of book-entry transfer of the outstanding notes into the exchange agent’s account at DTC according to the procedures for book-entry transfer described below or a properly transmitted agent’s message prior to the expiration date; or | ||
| • | you must comply with the guaranteed delivery procedures described below. |
Your tender, if not withdrawn prior to the expiration date, constitutes an agreement between
us and you upon the terms and subject to the conditions described in this prospectus and in the
letter of transmittal.
The method of delivery of outstanding notes, letter of transmittal and all other required
documents to the exchange agent is at your election and risk. We recommend that instead of
delivery by mail, you use an overnight or hand delivery service, properly insured. In all cases,
you should allow sufficient time to assure timely delivery to the exchange agent before the
expiration date. You should not send letters of transmittal or certificates representing
outstanding notes to us. You may request that your broker, dealer, commercial bank, trust company
or nominee effect the above transactions for you.
If you are a beneficial owner whose outstanding notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding
notes, you should promptly contact the registered holder and instruct the registered holder to
tender on your behalf. If you wish to
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tender the outstanding notes yourself, you must, prior to completing and executing the letter
of transmittal and delivering your outstanding notes, either:
| • | make appropriate arrangements to register ownership of the outstanding notes in your name; or | ||
| • | obtain a properly completed bond power from the registered holder of outstanding notes. |
The transfer of registered ownership may take considerable time and may not be able to be
completed prior to the expiration date.
Signatures on the letter of transmittal or a notice of withdrawal, as the case may be, must be
guaranteed by a member firm of a registered national securities exchange or of the Financial
Industry Regulatory Authority, Inc., a commercial bank or trust company having an office or
correspondent in the United States or another “eligible guarantor institution” within the meaning
of Rule 17A(d)-15 under the Exchange Act unless the outstanding notes surrendered for exchange are
tendered:
| • | by a registered holder of the outstanding notes who has not completed the box entitled “Special Registration Instructions” or “Special Delivery Instructions” on the letter of transmittal; or |
| • | for the account of an eligible guarantor institution. |
If the letter of transmittal is signed by a person other than the registered holder of any
outstanding notes listed on the outstanding notes, such outstanding notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by the registered
holder as the registered holder’s name appears on the outstanding notes, and an eligible guarantor
institution must guarantee the signature on the bond power.
If the letter of transmittal, any certificates representing outstanding notes or bond powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those persons should also
indicate when signing and, unless waived by us, they should also submit evidence satisfactory to us
of their authority to so act.
The exchange agent and DTC have confirmed that any financial institution that is a participant
in DTC’s system may use DTC’s Automated Tender Offer Program to tender outstanding notes.
Participants in the program may, instead of physically completing and signing the letter of
transmittal and delivering it to the exchange agent, electronically transmit their acceptance of
the exchange by causing DTC to transfer the outstanding notes to the exchange agent in accordance
with DTC’s Automated Tender Offer Program procedures for transfer. DTC will then send an agent’s
message to the exchange agent. The term “agent’s message” means a message transmitted by DTC,
received by the exchange agent and forming part of the book-entry confirmation, which states that:
| • | DTC has received an express acknowledgment from a participant in its Automated Tender Offer Program that is tendering outstanding notes that are the subject of the book-entry confirmation; | ||
| • | the participant has received and agrees to be bound by the terms of the letter of transmittal, or in the case of an agent’s message relating to guaranteed delivery, that such participant has received and agrees to be bound by the notice of guaranteed delivery; and | ||
| • | we may enforce that agreement against such participant. DTC is referred to herein as a “book-entry transfer facility.” |
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Acceptance of Exchange Notes
In all cases, we will promptly issue exchange notes for outstanding notes that we have
accepted for exchange under the exchange offer only after the exchange agent timely receives:
| • | outstanding notes or a timely book-entry confirmation of such outstanding notes into the exchange agent’s account at the book-entry transfer facility; and | ||
| • | a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message. |
By tendering outstanding notes pursuant to the exchange offer, you will represent to us that,
among other things:
| • | you are not our affiliate or an affiliate of any guarantor within the meaning of Rule 405 under the Securities Act; | ||
| • | you do not have an arrangement or understanding with any person or entity to participate in a distribution of the exchange notes; and | ||
| • | you are acquiring the exchange notes in the ordinary course of your business. |
In addition, each broker-dealer that is to receive exchange notes for its own account in
exchange for outstanding notes must represent that such outstanding notes were acquired by that
broker-dealer as a result of market-making activities or other trading activities and must
acknowledge that it will deliver a prospectus that meets the requirements of the Securities Act in
connection with any resale of the exchange notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an “underwriter” within the meaning of the Securities Act. See “Plan of Distribution.”
We will interpret the terms and conditions of the exchange offer, including the letter of
transmittal and the instructions to the letter of transmittal, and will resolve all questions as to
the validity, form, eligibility, including time of receipt and acceptance of outstanding notes
tendered for exchange. Our determinations in this regard will be final and binding on all parties.
We reserve the absolute right to reject any and all tenders of any particular outstanding notes not
properly tendered or to not accept any particular outstanding notes if the acceptance might, in its
or its counsel’s judgment, be unlawful. We also reserve the absolute right to waive any defects or
irregularities as to any particular outstanding notes prior to the expiration date.
Unless waived, any defects or irregularities in connection with tenders of outstanding notes
for exchange must be cured within such reasonable period of time as we determine. Neither we, the
exchange agent nor any other person will be under any duty to give notification of any defect or
irregularity with respect to any tender of outstanding notes for exchange, nor will any of them
incur any liability for any failure to give notification. Any outstanding notes received by the
exchange agent that are not properly tendered and as to which the irregularities have not been
cured or waived will be returned by the exchange agent to the tendering holder, unless otherwise
provided in the letter of transmittal, promptly after the expiration date.
Book-Entry Delivery Procedures
Promptly after the date of this prospectus, the exchange agent will establish an account with
respect to the outstanding notes at DTC and, as the book-entry transfer facility, for purposes of
the exchange offer. Any financial institution that is a participant in the book-entry transfer
facility’s system may make book-entry delivery of the outstanding notes by causing the book-entry
transfer facility to transfer those outstanding notes into the exchange agent’s account at the
facility in accordance with the facility’s procedures for such transfer. To be timely, book-entry
delivery of outstanding notes requires receipt of a confirmation of a book-entry transfer, a
“book-entry confirmation,” prior to the expiration date. In addition, although delivery of
outstanding notes may be effected through book-entry transfer into the exchange agent’s account at
the book-entry transfer facility, the letter of transmittal or a manually signed facsimile thereof,
together with any required signature guarantees and any other
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required documents, or an “agent’s message,” as defined below, in connection with a book-entry
transfer, must, in any case, be delivered or transmitted to and received by the exchange agent at
its address set forth on the cover page of the letter of transmittal prior to the expiration date
to receive exchange notes for tendered outstanding notes, or the guaranteed delivery procedure
described below must be complied with. Tender will not be deemed made until such documents are
received by the exchange agent. Delivery of documents to the book-entry transfer facility does not
constitute delivery to the exchange agent.
Holders of outstanding notes who are unable to deliver confirmation of the book-entry tender
of their outstanding notes into the exchange agent’s account at the book-entry transfer facility or
all other documents required by the letter of transmittal to the exchange agent on or prior to the
expiration date must tender their outstanding notes according to the guaranteed delivery procedures
described below.
Guaranteed Delivery Procedures
If you wish to tender your outstanding notes but your outstanding notes are not immediately
available or you cannot deliver your outstanding notes, the letter of transmittal or any other
required documents to the exchange agent or comply with the procedures under DTC’s Automatic Tender
Offer Program in the case of outstanding notes, prior to the expiration date, you may still tender
if:
| • | the tender is made through an eligible guarantor institution; | ||
| • | prior to the expiration date, the exchange agent receives from such eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery, by facsimile transmission, mail, or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery, that (1) sets forth your name and address, the certificate number(s) of such outstanding notes and the principal amount of outstanding notes tendered; (2) states that the tender is being made thereby; and (3) guarantees that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal, or facsimile thereof, together with the outstanding notes or a book-entry confirmation, and any other documents required by the letter of transmittal, will be deposited by the eligible guarantor institution with the exchange agent; and | ||
| • | the exchange agent receives the properly completed and executed letter of transmittal or facsimile thereof, as well as certificate(s) representing all tendered outstanding notes in proper form for transfer or a book-entry confirmation of transfer of the outstanding notes into the exchange agent’s account at DTC and all other documents required by the letter of transmittal within three New York Stock Exchange trading days after the expiration date. |
Upon request, the exchange agent will send to you a notice of guaranteed delivery if you wish
to tender your outstanding notes according to the guaranteed delivery procedures.
Withdrawal Rights
Except as otherwise provided in this prospectus, you may withdraw your tender of outstanding
notes at any time prior to 11:59 p.m., New York City time, on the expiration date.
For a withdrawal to be effective:
| • | the exchange agent must receive a written notice, which may be by telegram, telex, facsimile or letter, of withdrawal at its address set forth below under “—Exchange Agent”; or | ||
| • | you must comply with the appropriate procedures of DTC’s Automated Tender Offer Program system. | ||
| Any notice of withdrawal must: | |||
| • | specify the name of the person who tendered the outstanding notes to be withdrawn; | ||
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| • | identify the outstanding notes to be withdrawn, including the certificate numbers and principal amount of the outstanding notes; and | ||
| • | where certificates for outstanding notes have been transmitted, specify the name in which such outstanding notes were registered, if different from that of the withdrawing holder. |
If certificates for outstanding notes have been delivered or otherwise identified to the
exchange agent, then, prior to the release of such certificates, you must also submit:
| • | the serial numbers of the particular certificates to be withdrawn; and | ||
| • | a signed notice of withdrawal with signatures guaranteed by an eligible institution unless you are an eligible guarantor institution. |
If outstanding notes have been tendered pursuant to the procedures for book-entry transfer
described above, any notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn outstanding notes and otherwise
comply with the procedures of the facility. We will determine all questions as to the validity,
form and eligibility, including time of receipt of notices of withdrawal, and our determination
will be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer. Any outstanding notes
that have been tendered for exchange but that are not exchanged for any reason will be returned to
their holder, without cost to the holder, or, in the case of book-entry transfer, the outstanding
notes will be credited to an account at the book-entry transfer facility, promptly after
withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn
outstanding notes may be retendered by following the procedures described under “—Procedures for
Tendering Outstanding Notes” above at any time on or prior to the expiration date.
Exchange Agent
Wells Fargo Bank, National Association has been appointed as the exchange agent for the
exchange offer. You should direct all executed letters of transmittal and all questions and
requests for assistance, requests for additional copies of this prospectus or of the letter of
transmittal and requests for notices of guaranteed delivery to the exchange agent addressed as
follows:
By Regular, Registered or Certified Mail, Overnight Courier or Hand Delivery: Wells Fargo Bank, National Association 608 2nd Avenue South, 12th Floor MAC: N9303-121 Minneapolis, MN 55402 Attn: Bondholder Communications Telephone: 800-344-5128 |
By Facsimile Transmission (eligible institutions only): 866-969-1290 Telephone Inquiries: 800-344-5128 |
If you deliver the letter of transmittal to an address other than the one set forth above or
transmit instructions via facsimile to a number other than the one set forth above, that delivery
or those instructions will not be effective.
Fees and Expenses
We will bear all expenses in connection with
the performance of our obligations relating to the registration of the exchange notes and the
conduct of the exchange offer. These expenses include registration and filing fees, accounting and
legal fees and printing costs, among others. We will pay the exchange agent reasonable and
customary fees for its services and reasonable out-of-pocket expenses. We will also reimburse
brokerage houses and other custodians, nominees and fiduciaries for customary
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mailing and handling expenses incurred by them in forwarding this prospectus and related
documents to their clients that are holders of outstanding notes and for handling or tendering for
such clients.
We have not retained any dealer-manager in connection with the exchange offer and will not pay
any fee or commission to any broker, dealer, nominee or other person, other than the exchange
agent, for soliciting tenders of outstanding notes pursuant to the exchange offer.
Accounting Treatment
We will record the exchange notes in our accounting records at the same carrying value as the
outstanding notes, which is the aggregate principal amount as reflected in our accounting records
on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes upon the consummation of the exchange offer. We will record the expenses of the exchange
offer as incurred.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of outstanding notes under
the exchange offer. The tendering holder, however, will be required to pay any transfer taxes,
whether imposed on the registered holder or any other person, if:
| • | certificates representing outstanding notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of outstanding notes tendered; | ||
| • | tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal; or | ||
| • | a transfer tax is imposed for any reason other than the exchange of outstanding notes under the exchange offer. |
If satisfactory evidence of payment of such taxes is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed to that tendering holder.
Holders who tender their outstanding notes for exchange will not be required to pay any
transfer taxes. However, holders who instruct us to register exchange notes in the name of, or
request that outstanding notes not tendered or not accepted in the exchange offer be returned to, a
person other than the registered tendering holder will be required to pay any applicable transfer
tax.
Consequences of Failure to Exchange
If you do not exchange your outstanding notes for exchange notes under the exchange offer,
your outstanding notes will remain subject to the restrictions on transfer of such outstanding
notes:
| • | as set forth in the legend printed on the outstanding notes as a consequence of the issuance of the outstanding notes pursuant to the exemption from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws; and | ||
| • | as otherwise set forth in the offering memorandum distributed in connection with the private offering of the outstanding notes. |
In general, you may not offer or sell your outstanding notes unless they are registered under
the Securities Act or if the offer or sale is exempt from registration under the Securities Act and
applicable state securities laws. Except as required by the registration rights agreement, we do
not intend to register resales of the outstanding notes under the Securities Act.
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Participating in the exchange offer is voluntary, and you should carefully consider whether to
accept. You are urged to consult your financial and tax advisors in making your own decision on
what action to take.
We may in the future seek to acquire untendered outstanding notes in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans
to acquire any outstanding notes that are not tendered in the exchange offer or to file a
registration statement to permit resales of any untendered outstanding notes.
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DESCRIPTION OF THE EXCHANGE NOTES
General
Certain terms used in this “Description of the Exchange Notes” section have the meanings set
forth in the section “— Certain Definitions.” As used in this section, “we,” “us” and “our” mean
Diamond Resorts Parent, LLC and its Subsidiaries, the “Issuer” refers only to Diamond Resorts
Corporation and not to any of its Subsidiaries, and the “Company” refers only to Diamond Resorts
Parent, LLC and not to any of its Subsidiaries. For purposes of this
section only, the term “Notes” refers to the exchange notes only.
The outstanding notes were, and the exchange notes will be, issued under an indenture dated as
of August 13, 2010 (the “Indenture”), by and among the Issuer, Diamond Resorts Parent, LLC, the
Intermediate Holdco, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as
trustee (in such capacity, the “Trustee”). Except as set forth herein, the terms of the Notes are
substantially identical and include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act.
The following summary of certain provisions of the Indenture, the Notes, the Security
Documents and the Intercreditor Agreements does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of those agreements, including the
definitions of certain terms therein. We urge you to read the agreements because they, not this
description, will define your rights as holders of the Notes.
Brief Description of the Notes and the Note Guarantees
| The Notes: | |||
| • | will be senior obligations of the Issuer; | ||
| • | will be secured by a first-priority security interest in the Collateral owned by the Issuer; | ||
| • | will be guaranteed on a senior secured basis by the Company, the Intermediate Holdco and each Subsidiary Guarantor; | ||
| • | will rank senior in right of payment to any future Subordinated Obligations of the Issuer; | ||
| • | will be effectively subordinated to any existing and future Indebtedness of the Issuer that is secured with property or assets that do not constitute the Collateral to the extent of the value of the assets securing such Indebtedness; | ||
| • | will be effectively subordinated to any existing and future Indebtedness of Subsidiaries of the Issuer that are not Guarantors (including obligations under the 2008 Conduit Facility, the Quorum Facility, and the DROT 2009 Notes); and | ||
| • | will be subject to registration with the SEC pursuant to the Registration Rights Agreement. | ||
| The Guarantee of the Notes by each Guarantor: | |||
| • | will be a senior obligation of such Guarantor; | ||
| • | will be secured by a first priority security interest in the Collateral owned by such Guarantor; | ||
| • | will rank senior in right of payment to any future Subordinated Obligations of such Guarantor; and | ||
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| • | will be effectively subordinated to any existing and future Indebtedness of such Guarantor that is secured with property or assets that do not constitute Collateral to the extent of the value of the assets securing such Indebtedness. |
Principal, Maturity and Interest
The
Issuer issued $425,000,000 aggregate principal amount of outstanding
notes in a private offering that
was not subject to the registration requirements of the Securities Act. The Issuer may issue
additional notes from time to time after this exchange offer (“Additional Notes”). Any issuance of
Additional Notes is subject to the covenants described under “— Certain Covenants — Incurrence of
Indebtedness” and “— Certain Covenants — Liens.” The Notes offered hereby and any Additional
Notes subsequently issued under the Indenture will be treated as a single class for all purposes
under the Indenture, including waivers, amendments, redemptions and offers to purchase. Unless the
context otherwise requires, for all purposes of the Indenture and this “Description of the Exchange
Notes,” references to the Notes include any Additional Notes actually issued.
The Notes will mature on August 15, 2018. Interest on the Notes will accrue at the rate of
12% per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing
on August 15, 2011, to Holders of record on the immediately preceding February 1 and August 1.
Interest on the Notes will accrue from the most recent date to which
interest has been paid (or, in the case of any Additional Notes, from the
date specified in such Additional Notes).
Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the office or agency of
the Company maintained for such purpose within the City of Minneapolis and State of Minnesota or,
at the option of the Issuer, payment of interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of Notes; provided,
however, that all payments of principal, premium and interest with respect to Notes the Holders of
which have given wire transfer instructions to the Issuer will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Issuer, the Issuer’s office or agency in Minneapolis, Minnesota will be
the office of the Trustee maintained for such purpose. The Notes will be issued in minimum
denominations of $2,000 and any integral multiples of $1,000 in excess thereof.
Optional Redemption
At any time and from time to time prior to August 15, 2014, the Notes may be redeemed at the
Issuer’s option, in whole or in part, at a redemption price equal to 100% of the principal amount
of the Notes redeemed, plus accrued and unpaid interest thereon, if any, to but excluding the
applicable date of redemption (the “Redemption Date”), subject to the rights of Holders of Notes on
the relevant record date to receive interest due on the relevant interest payment date, plus the
Applicable Premium as of the applicable Redemption Date.
On and after August 15, 2014, the Notes may be redeemed, at the Issuer’s option, in whole or
in part, at any time and from time to time, at the redemption prices set forth below. The Notes
will be redeemable at the redemption prices (expressed as percentages of principal amount of the
Notes to be redeemed) set forth below plus accrued and unpaid interest thereon, if any, to but
excluding the applicable Redemption Date, subject to the right of Holders of Notes on the relevant
record date to receive interest due on the relevant interest payment date, if redeemed during the
12-month period beginning on August 15 of each of the years indicated below:
| Year | Percentage | |||
2014 |
106.000 | % | ||
2015 |
103.000 | % | ||
2016 and thereafter |
100.000 | % | ||
In addition, at any time on or prior to August 15, 2013, the Issuer may on any one or more
occasions redeem up to an aggregate of 35% of the aggregate principal amount of the Notes at a
redemption price equal to 112% of the principal amount of the Notes redeemed, plus accrued and
unpaid interest thereon, if any, to but
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excluding the applicable Redemption Date, subject to the rights of Holders of Notes on the
relevant record date to receive interest due on the relevant interest payment date, with the Net
Cash Proceeds of a public offering of common stock of the Issuer; provided, however, that (i) the
Issuer shall have previously made and consummated any Public Offering Offer required to be made in
connection with such public offering, (ii) at least 65% in aggregate principal amount of the Notes
originally issued remains outstanding immediately after the occurrence of such redemption and (iii)
such redemption occurs within 90 days of the date of the closing of such public offering.
If the Redemption Date with respect to a Note to be redeemed is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid interest on that
Note will be payable to the Person that was, at the close of business on such record date, the
Holder of that Note, and no additional interest for the period to which that interest record date
relates will be payable with respect to that Note.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of Notes for
redemption will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate (in any case subject to the rules and procedures of the applicable depositary);
provided, however, that no Notes of $2,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first-class mail (in the case held in book-entry form by electronic
transmission) at least 30 but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at its registered address. The Issuer may provide in such notice that payment
of the redemption price and performance of the Issuer’s obligations with respect thereto may be
performed by another Person. Notices of redemption may not be conditional; provided, however, that
notice of any redemption in connection with a redemption pursuant to the provisions described in
the third paragraph under “— Optional Redemption” may be given prior to the completion of the
related public offering, and any such redemption or notice may, at the Issuer’s discretion, be
subject to one or more conditions precedent, including completion of the related public offering.
If any Note is to be redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. Notes called for redemption become due on the Redemption
Date. On and after the Redemption Date, interest ceases to accrue on Notes or portions of them
called for redemption unless the Issuer defaults on its obligation to redeem such Notes.
Mandatory Redemption; Offers to Purchase; Open Market Purchases
The Issuer is not required to make any mandatory redemption or sinking fund payments with
respect to the Notes. However, under certain circumstances, the Issuer may be required to offer to
purchase Notes as described under “— Change of Control”, “— Offer to Purchase with Excess Cash
Flow”, “— Offer to Purchase with Proceeds of Certain Equity Offerings” and “— Certain Covenants
— Asset Sales.” We may at any time and from time to time purchase Notes in the open market or
otherwise.
Ranking
The Notes and the Notes Guarantees will be senior secured obligations of the Issuer and the
Guarantors and will rank pari passu in right of payment with all of the Issuer’s and the
Guarantors’ senior obligations, including senior secured obligations under Permitted Future Secured
Indebtedness, and will rank senior in right of payment with all of the Issuer’s and the Guarantors’
obligations, if any, that are subordinated to the Notes or the Notes Guarantees. The Notes and the
Notes Guarantees will be effectively subordinated to any existing or future Indebtedness of the
Issuer and the Guarantors that is secured with property or assets that do not constitute the
Collateral to the extent of the value of the assets securing such Indebtedness and effectively
subordinated to any existing or future Indebtedness of their Subsidiaries unless such Subsidiary is
a Subsidiary Guarantor.
At December 31, 2010:
(i) the Issuer and the Guarantors had $425.0 million of outstanding Indebtedness
secured by a first priority Lien on the Collateral, consisting of Indebtedness represented
by the outstanding notes;
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(ii) Special Purpose Subsidiaries of the Issuer had $208.7 million of outstanding
Indebtedness secured by other assets, consisting of amounts outstanding under the 2008
Conduit Facility, the DROT
2009 Notes, the Quorum Facility, the ILXA Inventory Loan, the ILXA Receivables Loan and the
Tempus Acquisition Loan; and
(iii) other than the Special Purpose Subsidiaries of the Issuer, the Subsidiaries of
the Issuer that are not Guarantors had no outstanding Indebtedness.
Collateral
Description of Collateral
The Notes and Guarantees will be secured by first-priority security interests (subject to
Permitted Collateral Liens) in the Collateral. Subject to the terms described below under “—
Release,” the Collateral consists of the following assets of the Company, the Intermediate Holdco,
the Issuer and the Subsidiary Guarantors, in each case whether now owned or hereafter acquired,
other than the Excluded Property (the “Collateral”):
(i) all unsold Points;
(ii) all of the equity interests of the Domestic Subsidiaries and 66% of the equity
interests of the first-tier Foreign Subsidiaries held by the Company, the Issuer or any
Subsidiary Guarantor;
(iii) all accounts (as defined in the Uniform Commercial Code of the State of Delaware
(the “UCC”));
(iv) all chattel paper, documents and instruments (each as defined in the UCC);
(v) all general intangibles (as defined in the UCC) and deposit accounts, commercial
tort claims and letter of credit rights;
(vi) all equipment and inventory (each as defined in the UCC);
(vii) certain leases;
(viii) all trademarks, trade names, patents, copyrights and other intellectual property
and computer records and software, subject to the rights of any non-affiliated licensee of
software;
(ix) certain intercompany notes; and
(x) proceeds (as defined in the UCC) of the foregoing.
The Collateral excludes the following assets of the Company, the Intermediate Holdco, the
Issuer and the Subsidiary Guarantors (the “Excluded Property”):
(i) fee simple and leasehold interests in real estate property;
(ii) any equity interests in Foreign Subsidiaries other than as described in clause
(ii) of the preceding paragraph;
(iii) any Timeshare Loan and related rights;
(iv) any property to the extent that a grant of a security interest in such property is
prohibited by any law; provided, however, that such security interest in such property shall
be included in the Collateral immediately at such time it is no longer prohibited by any
such law;
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(v) any rights or interests under any contract or agreement (other than certain
material contracts) to the extent that such rights or interests are not assignable or
capable of being encumbered under the terms of the contract or agreement without the consent
of the other party to such contract and such consent has not been obtained; provided,
however, that such security interest shall attach immediately at such time as such contract
or agreement may be assigned or is capable of being so encumbered or such consent has been
obtained, as the case may be;
(vi) certain vehicles; and
(vii) payroll accounts, employee trust accounts, tax accounts, escrow accounts, cash
collateral accounts for credit card companies, certain accounts containing rental payments
collected on behalf of homeowners’ associations or individual unit owners and certain
accounts containing amounts collected on behalf of business partners that may not be
controlled without the consent of such business partners.
The security interests securing the Notes and Guarantees are subject to all Permitted
Collateral Liens, certain of which, such as Liens arising as a matter of law, would or may have
priority over the security interests securing the Notes and the Guarantees.
The Issuer and the Guarantors will be able to incur additional Indebtedness in the future that
could equally and ratably share in the Collateral. The amount of such Indebtedness will be limited
by the covenants described under “— Certain Covenants — Incurrence of Indebtedness” and “—
Certain Covenants — Liens”. Under certain circumstances, the amount of such Indebtedness could be
significant.
After-Acquired Property
Subject to certain limitations, if the Issuer or any
Guarantor acquires any property which is of a type constituting Collateral under the Security
Agreement or any other Security Document (excluding, for the avoidance of doubt, any Excluded
Property), it shall as soon as practicable after the acquisition thereof execute and deliver such
security instruments, financing statements and such certificates and opinions of counsel as are
required under the Indenture and the Security Agreement to vest in the Collateral Agent a perfected
security interest (subject only to Permitted Collateral Liens) in such after-acquired property and
to have such after-acquired property added to the Collateral, and thereupon all provisions of the
Indenture relating to the Collateral shall be deemed to relate to such after-acquired property to
the same extent and with the same force and effect. If granting a security interest in such
property requires the consent of a third party, the Issuer or the applicable Guarantor will use
commercially reasonable efforts to obtain such consent with respect to the first-priority security
interest for the benefit of the Collateral Agent on behalf of the Holders of the Notes. If such
third party does not consent to the granting of the first-priority security interest after the use
of such commercially reasonable efforts, the applicable entity will not be required to provide such
security interest.
Security Documents
The Issuer, the Guarantors and the Collateral Agent have entered into the Security Agreement
and one or more other Security Documents defining the terms of the security interests that secure
the Notes and the Guarantees. These security interests secure the payment and performance when due
of all of the Obligations of the Issuer and the Guarantors under the Notes, the Indenture, the
Guarantees and the Security Documents, as provided in the Security Documents. The Company used its
commercially reasonable efforts to complete or cause to be completed on or prior to the Issue Date
all filings and other similar actions required on its part in connection with the perfection of
such security interests.
Below is a description of certain provisions of the Security Documents. To the extent any Pari
Passu Indebtedness (as defined below) is incurred by the Issuer or a Guarantor, as applicable,
following the Issue Date, the Collateral Agent and the authorized representative of such Pari Passu
Indebtedness will enter into certain intercreditor agreements substantially in the forms attached
to the Indenture and described below under the captions “— Pari Passu Intercreditor Arrangements”
and “— Junior Lien Intercreditor Arrangements”, in which case the terms of such intercreditor
agreements will govern certain actions permitted to be taken by the Collateral Agent with respect
to the Collateral. Holders will be deemed to have agreed and accepted the terms of the Pari Passu
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Intercreditor Agreement (as defined below) and the Junior Lien Intercreditor Agreement (as
defined below) by their acceptance of the Notes.
So long as no Event of Default shall have occurred and be continuing, and subject to certain
terms and conditions, the Issuer and the Guarantors will be entitled to exercise any voting and
other consensual rights pertaining to all Capital Stock pledged pursuant to the Security Documents
and to remain in possession and retain exclusive control over the Collateral (other than as set
forth in the Security Documents), to operate the Collateral, to alter the Collateral and to
collect, invest and dispose of any income thereon. The Security Documents do, however, generally
require the Issuer and the Guarantors to deliver to the Collateral Agent and for the Collateral
Agent to maintain in its possession certificates evidencing pledges of Capital Stock to the extent
such Capital Stock is certificated and to use commercially reasonable efforts to subject all
applicable deposit accounts and securities accounts to a control agreement in favor of the
Collateral Agent. Subject to the intercreditor provisions described below, upon the occurrence and
during the continuance of an Event of Default, to the extent permitted by law and subject to the
provisions of the Security Documents:
(i) all of the rights of the Issuer and the Guarantors to exercise voting or other
consensual rights with respect to all Capital Stock included in the Collateral shall cease,
and all such rights shall become vested in the Collateral Agent, which, to the extent
permitted by law, shall have the sole right to exercise such voting and other consensual
rights; and
(ii) the Collateral Agent may take possession of and sell the Collateral or any part
thereof in accordance with the terms of applicable law and the Security Documents.
Upon the occurrence and during the continuance of an Event of Default, the Security Documents
provide that the Trustee or the Holders of a majority in principal amount of the Notes may direct
the Collateral Agent to foreclose upon and sell the applicable Collateral and to distribute the net
proceeds of any such sale to the Trustee and the Holders of the Notes, subject to any Permitted
Collateral Liens, applicable laws and the intercreditor arrangements described below. In the event
of the enforcement of the security interests following an Event of Default, the Collateral Agent,
in accordance with the provisions of the Indenture, the Security Documents and, if applicable, the
intercreditor arrangements described below, will determine the time and method by which the
security interests in the Collateral will be enforced and, if applicable, will distribute all cash
proceeds (after payment of the costs of enforcement and collateral administration) of the
Collateral received by it under the Security Documents for the ratable benefit of the Holders of
the Notes and holders of other Obligations secured by Permitted Collateral Liens. Accordingly, any
proceeds received upon a realization of the Collateral securing the Notes and such other
Obligations will be applied, subject to the intercreditor arrangements described below, as follows:
first, to the payment of all costs, expenses and unpaid fees incurred by the Trustee
and the Collateral Agent in connection with the collection of proceeds or sale of any
Collateral or otherwise in connection with the Indenture and the Security Documents,
including all court costs and the fees and expenses of its agents and legal counsel, the
repayment of all advances made by the Trustee and the Collateral Agent on behalf of the
Issuer or a Guarantor and any other costs or expenses incurred in connection with the
exercise of any right or remedy of the Holders of the Notes and such other Obligations;
second, to pay the Notes, any accrued and unpaid interest thereon and such other
Obligations on a pro rata basis based on the respective amounts of the Notes and such other
Obligations then outstanding; and
third, to the extent of the balance of such proceeds after application in accordance
with the foregoing, to the Issuer or such Guarantor, as applicable, their successors or
assigns, or as a court of competent jurisdiction may otherwise direct.
Pari Passu Intercreditor Arrangements
If the Issuer or any Guarantor incurs any Indebtedness which is permitted to be secured by the
Collateral on a pari passu basis with the Notes (“Pari Passu Indebtedness”), the Collateral Agent
and the representative of the holders of the Pari Passu Indebtedness will enter into a pari passu
intercreditor agreement (the “Pari Passu Intercreditor Agreement”) in substantially the form
attached as an exhibit to the Indenture, which Pari Passu
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Intercreditor Agreement may be amended as necessary as additional Pari Passu Indebtedness is
incurred. Under the Pari Passu Intercreditor Agreement, the Holders of the Notes will be
represented by the Collateral Agent and the holders of each class of Pari Passu Indebtedness will
be represented by their designated agent (each, an “Authorized Representative”). The Pari Passu
Intercreditor Agreement provides for the priorities and other relative rights among the Holders of
the Notes and the holders of the Pari Passu Indebtedness, including, among other things, that:
(1) notwithstanding the date, time, method, manner or order of grant, attachment or
perfection of any Liens on the Collateral securing the Notes and the Pari Passu
Indebtedness, the Liens securing all such Indebtedness shall be of equal priority; and
(2) the Obligations in respect of the Notes and the Pari Passu Indebtedness may be
increased, extended, renewed, replaced, restated, supplemented, restructured, refunded,
refinanced or otherwise amended from time to time, in each case, to the extent permitted by
the Indenture and the documentation governing the Pari Passu Indebtedness.
The Pari Passu Intercreditor Agreement will also provide that only the “Applicable Authorized
Representative” has the right to direct foreclosures and take other actions with respect to the
Collateral. The Collateral Agent for the Notes will be the Applicable Authorized Representative
unless the Notes do not represent the largest principal amount outstanding of any then-outstanding
Indebtedness secured on a pari passu basis by the Collateral. The Applicable Authorized
Representative at any given time will continue to be the Applicable Authorized Representative until
the applicable Indebtedness ceases to represent the largest principal amount outstanding of any
then-outstanding Indebtedness secured on a pari passu basis by the Collateral (a “Larger Holder
Event”). Following a Larger Holder Event, the designated agent under the largest principal amount
outstanding of any such Indebtedness will become the Applicable Authorized Representative. The
Applicable Authorized Representative will remain as such until the earlier of (i) the occurrence of
a subsequent Larger Holder Event and (ii) the Non-Controlling Authorized Representative Enforcement
Date (as defined below) (such earlier date, the “Applicable Authorized Agent Date”). After the
Applicable Authorized Agent Date, the Applicable Authorized Representative will be the Authorized
Representative of the Indebtedness that constitutes the second largest outstanding principal amount
of any then-outstanding Indebtedness secured on a pari passu basis by the Collateral (the “Major
Non-Controlling Authorized Representative”).
The “Non-Controlling Authorized Representative Enforcement Date” is the date that is 90 days
(throughout which 90-day period the applicable Authorized Representative was the Major
Non-Controlling Authorized Representative) after the occurrence of both (a) an event of default
under the terms of that Indebtedness and (b) the Collateral Agent’s and each other Authorized
Representative’s receipt of written notice from that Authorized Representative certifying that (i)
such Authorized Representative is the Major Non-Controlling Authorized Representative and that an
event of default with respect to such Indebtedness has occurred and is continuing and (ii) such
Indebtedness is currently due and payable in full (whether as a result of acceleration thereof or
otherwise) in accordance with the terms of that Indebtedness; provided, however, that the
Non-Controlling Authorized Representative Enforcement Date shall be stayed and shall not occur and
shall be deemed not to have occurred with respect to any Collateral (1) at any time the Applicable
Authorized Representative has commenced and is pursuing any enforcement action with respect to such
Collateral with reasonable diligence in light of the then-existing circumstances or (2) at any time
the Issuer or the Guarantor that has granted a security interest in such Collateral is then a
debtor under or with respect to (or otherwise subject to) any insolvency or liquidation proceeding.
The Applicable Authorized Representative under the Pari Passu Intercreditor Agreement will
have the sole right to instruct the Collateral Agent to act or refrain from acting with respect to
the Collateral, and the Collateral Agent will not follow any instructions with respect to such
Collateral from any other Person. No Authorized Representative of any Indebtedness secured by the
Collateral (other than the Applicable Authorized Representative) will instruct the Collateral Agent
to commence any judicial or non-judicial foreclosure proceedings with respect to, seek to have a
trustee, receiver, liquidator or similar official appointed for or over, attempt any action to take
possession of, exercise any right, remedy or power with respect to, or otherwise take any action to
enforce its interests in or realize upon, or take any other action available to it in respect of,
the Collateral. Subject to the foregoing, notwithstanding the equal priority of the Liens, the
Collateral Agent, acting on the instructions of the Applicable Authorized Representative, may deal
with the Collateral as if such Collateral Agent had a senior Lien on such Collateral. No
Authorized Representative of any Indebtedness (other than the Applicable Authorized
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Representative) may contest, protest or object to any foreclosure proceeding or action brought
by the Collateral Agent (acting on the instructions of the Applicable Authorized Representative) or
Applicable Authorized Representative. The Collateral Agent and each other Authorized
Representative will agree that it will not accept any Lien on any Collateral for the benefit of the
Holders of the Notes (other than funds deposited for the discharge or defeasance of the Notes)
other than pursuant to the Security Documents. Each holder of such Indebtedness, including the
Holders of the Notes by acceptance thereof, will be deemed to have agreed that it will not contest
or support any other Person in contesting, in any proceeding (including any insolvency or
liquidation proceeding), the perfection, priority, validity or enforceability of a Lien held by or
on behalf of any other holder of such Indebtedness in all or any part of the Collateral, or any of
the provisions of the Pari Passu Intercreditor Agreement.
If an event of default has occurred and is continuing under any Indebtedness covered by the
Pari Passu Intercreditor Agreement, and the Collateral Agent is taking action to enforce rights in
respect of any Collateral, or any distribution is made with respect to any Collateral in any
bankruptcy case of the Issuer or any Guarantor, the proceeds of any sale, collection or other
liquidation of any such Collateral by the Collateral Agent or any other holder of such
Indebtedness, as applicable, will be applied among the Indebtedness covered by the Pari Passu
Intercreditor Agreement to the payment in full of such Indebtedness on a ratable basis, after
payment of all amounts owing to the Collateral Agent and the other Authorized Representatives, in
their capacities as such.
None of the holders of Indebtedness covered by the Pari Passu Intercreditor Agreement may
institute any suit or assert in any suit, bankruptcy, insolvency or other proceeding any claim
against the Collateral Agent or any other holder of such Indebtedness seeking damages from or other
relief by way of specific performance, instructions or otherwise with respect to any Collateral.
In addition, none of the holders of such Indebtedness may seek to have any Collateral or any part
thereof marshaled upon any foreclosure or other disposition of such Collateral. If any holder of
such Indebtedness obtains possession of any Collateral or realizes any proceeds or payment in
respect thereof, in each case, as a result of the enforcement of remedies, at any time prior to the
discharge of each of such Indebtedness covered by the Pari Passu Intercreditor Agreement, then it
must hold such Collateral, proceeds or payment in trust for the other holders of such Indebtedness
and promptly transfer such Collateral, proceeds or payment to the Collateral Agent to be
distributed in accordance with the Security Documents.
Junior Lien Intercreditor Arrangements
If the Company, the Issuer or any Subsidiary Guarantor incurs any Indebtedness which is
permitted to be secured by the Collateral on a junior basis to the Liens securing the Notes
(“Junior Lien Indebtedness”), the representative of the holders of the Junior Lien Indebtedness
will enter into a junior lien intercreditor agreement (a “Junior Lien Intercreditor Agreement”, and
each Junior Lien Intercreditor Agreement and the Pari Passu Intercreditor Agreement, an
“Intercreditor Agreement”), in substantially the form attached as an exhibit to the Indenture.
The Junior Lien Intercreditor Agreement provides, among other things, that (i) the Liens on
the Collateral securing the Junior Lien Indebtedness will be junior to the Liens in favor of the
Collateral Agent securing the Obligations under the Notes, the Indenture and the Security
Documents, and, consequently, the Holders of the Notes will be entitled to receive the proceeds
from the disposition of any Collateral prior to the holders of any Junior Lien Indebtedness, (ii)
during any insolvency proceedings, the Collateral Agent and the agents for any Junior Lien
Indebtedness will coordinate their efforts to give effect to the relative priority of their
security interests in the Collateral and (iii) certain procedures for enforcing the Liens of the
Collateral will be followed. Pursuant to the terms of the Junior Lien Intercreditor Agreement,
prior to the discharge of the Liens pursuant to the Security Documents, the Collateral Agent will
determine the time and method by which the security interest in the Collateral will be enforced
(subject to any then-applicable Pari Passu Intercreditor Agreement). The agents for any Junior
Lien Indebtedness will not be permitted to enforce the security interest and certain other rights
related to the Junior Lien Indebtedness on the Collateral even if an event of default under such
Junior Lien Indebtedness has occurred or such Junior Lien Indebtedness has been accelerated, except
in any insolvency or liquidation proceeding as necessary to file a claim or statement of interest
with respect to such Junior Lien Indebtedness.
Certain Limitations on the Collateral
No appraisals of any of the Collateral have been prepared by or on behalf of the Issuer or any
Guarantor in connection with the issuance and sale of the Notes. The value of the Collateral in
the event of liquidation will
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depend on many factors. Consequently, liquidating the Collateral may not produce proceeds in
an amount sufficient to pay any amounts due on the Notes. See “Risk Factors — Risks Related to
the Exchange Notes — The value of the collateral securing the notes may not be sufficient to
satisfy our obligations under the notes.”
The fair market value of the Collateral is subject to fluctuations based on a number of
factors, including, among others, prevailing interest rates, the ability to sell the Collateral in
an orderly sale, general economic conditions, the availability of buyers and similar factors. The
amount to be received upon a sale of the Collateral will be dependent on numerous factors,
including the actual fair market value of the Collateral at such time and the timing and the manner
of the sale. By its nature, some of the Collateral may be illiquid and may have no readily
ascertainable market value. In the event of a foreclosure, liquidation, bankruptcy or similar
proceeding, we cannot assure you that the proceeds from any sale or liquidation of the Collateral
will be sufficient to pay the Issuer’s and the Guarantors’ Obligations under the Notes. Any claim
for the difference between the amount, if any, realized by Holders of the Notes from the sale of
Collateral securing the Notes and the Obligations under the Notes will rank equally in right of
payment with all of the Issuer’s and the Guarantors’ other unsecured senior debt and other
unsubordinated obligations, including trade payables. To the extent that third parties establish
Liens on the Collateral, such third parties could have rights and remedies with respect to the
assets subject to such Liens that, if exercised, could adversely affect the value of the Collateral
or the ability of the Collateral Agent or the Holders of the Notes to realize or foreclose on the
Collateral. The Issuer may also issue Additional Notes as described above or otherwise incur
Obligations which would be secured by the Collateral, the effect of which would be to increase the
amount of Indebtedness secured equally and ratably by the Collateral. The ability of the Holders
to realize on the Collateral may also be subject to certain bankruptcy law limitations in the event
of a bankruptcy. See “— Certain Bankruptcy Limitations.”
Further Assurances
The Security Documents and the Indenture provide that the Issuer and the Guarantors shall, at
their sole expense, do all acts which may be reasonably necessary to confirm that the Collateral
Agent holds, for the benefit of the Holders of the Notes and the Trustee, duly created, enforceable
and perfected first-priority Liens in the Collateral, subject only to Permitted Collateral Liens.
As necessary, the Issuer and the Guarantors shall, at their sole expense, execute, acknowledge and
deliver such documents and instruments and take such other actions which may be necessary to
assure, perfect, transfer and confirm the rights conveyed by the Security Documents, to the extent
permitted by applicable law.
Limitation on Collateral Consisting of Subsidiary Securities
Upon registration of any Notes, we will become subject to Rule 3-16 of Regulation S-X
under the Securities Act. In such an event, the stock, other equity interests and other securities
of a Subsidiary of the Company otherwise constituting Collateral will constitute Collateral for the
benefit of the Holders of the Notes only to the extent that such stock, equity interests and other
securities can secure the Notes without Rule 3-16 of Regulation S-X under the Securities Act (or
any other U.S. federal law, rule or regulation) requiring separate financial statements of such
Subsidiary to be filed with the SEC (or any other U.S. federal government agency). In the event
that Rule 3-16 of Regulation S-X under the Securities Act (or any such other U.S. federal law, rule
or regulation) is then applicable to us and requires or is amended, modified or interpreted by the
SEC to require (or is replaced with another rule or regulation, or any other law, rule or
regulation is adopted, which would require) the filing with the SEC (or any other governmental
agency) of separate financial statements of any Subsidiary due to the fact that such Subsidiary’s
stock, equity interests or other securities secure the Notes, then the stock, equity interests and
other securities of such Subsidiary shall automatically be deemed not to be part of the Collateral
for the benefit of the Holders of the Notes (but only to the extent necessary to not be subject to
such requirement).
However, if Rule 3-16 of Regulation S-X under the Securities Act is thereafter amended,
modified or interpreted by the SEC to permit (or is replaced with another rule or regulation, or
any law, rule or regulation is adopted, which would permit) such Subsidiary’s stock, equity
interests and other securities to secure the Notes in excess of the amount then pledged without
filing with the SEC (or any other U.S. federal governmental agency) of separate financial
statements of such Subsidiary, then the stock, equity interests and other securities of such
Subsidiary shall automatically be deemed to be a part of the Collateral for the benefit of the
Holders of the Notes (but only to the extent necessary to not be subject to any such financial
statement requirement).
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In accordance with the limitations described in the two immediately-preceding paragraphs, if
Rule 3-16 of Regulation S-X under the Securities Act becomes applicable to us, the Collateral for
the benefit of the Holders of the Notes will include stock, other equity interests and other
securities of certain existing and future significant domestic Subsidiaries of the Company only to
the extent that the applicable value of such stock, other equity interests and other securities (on
a Subsidiary-by-Subsidiary basis) is less than 20% of the aggregate principal amount of the Notes
outstanding. As a result, the portion of the stock, other equity interests and other securities of
Subsidiaries constituting Collateral for the benefit of the Holders of the Notes may decrease or
increase as described above. The Liens on such stock, other equity interest and other securities
of such Subsidiaries for the benefit of Permitted Future Secured Creditors may not be, subject to
the limitations described under “— Limitation on Collateral Consisting of Subsidiary Securities.”
See “Risk Factors — Risks Related to the Exchange Notes — The pledge of the capital stock, other
securities and similar items of our subsidiaries that secure the notes will automatically be
released from the lien on them and no longer constitute collateral for so long as the pledge of
such capital stock or such other securities would require the filing of separate financial
statements with the SEC for that subsidiary.”
Impairment of Security Interest
The Security Documents provide that the Issuer and the Guarantors will not take or omit to
take any action which would adversely affect or impair in any material respect the Liens in favor
of the Holders of the Notes with respect to the Collateral. The Issuer and the Guarantors will not
be permitted to grant to any Person, or permit any Person to retain (other than the Collateral
Agent), any security interest or Lien whatsoever in the Collateral, other than Permitted Collateral
Liens. The Issuer and the Guarantors will not enter into any agreement that requires the proceeds
received from any sale of Collateral to be applied to repay, redeem, defease or otherwise acquire
or retire any Indebtedness of any Person, other than as permitted by the Indenture, the Notes, the
Security Documents and any applicable Intercreditor Agreement.
Certain Bankruptcy Limitations
In addition to the limitations described above, the right of the Collateral Agent to obtain
possession, exercise control over or dispose of the Collateral following an Event of Default is
likely to be significantly impaired by applicable bankruptcy law if the Company, the Issuer or any
Subsidiary Guarantor were to have become a debtor under the U.S. Bankruptcy Code prior to the
Collateral Agent having obtained possession, exercised control over or disposed of the Collateral.
Under the U.S. Bankruptcy Code, a secured creditor is prohibited by the automatic stay from
obtaining possession of its collateral from a debtor in a bankruptcy case, or from exercising
control over or disposing of collateral taken from such debtor, without bankruptcy court approval.
Moreover, the U.S. Bankruptcy Code permits the debtor in certain circumstances to continue to
retain and to use collateral owned as of the date of the bankruptcy filing (and the proceeds,
products, offspring, rents or profits of such collateral) even though the debtor is in default
under the applicable debt instruments, provided that the secured creditor is given “adequate
protection.”
The term “adequate protection” is not defined in the U.S. Bankruptcy Code, but it includes
making periodic cash payments, providing an additional or replacement Lien or granting other
relief, in each case to the extent that the collateral decreases in value during the pendency of
the bankruptcy case as a result of, among other things, the imposition of the automatic stay, the
use, sale or lease of such collateral or any grant of a “priming Lien” in connection with
debtor-in-possession financing (a “DIP Financing”). The type of adequate protection provided to a
secured creditor will vary according to the circumstances. In view of the lack of a precise
definition of the term “adequate protection” and the broad discretionary powers of a bankruptcy
court, it is impossible to predict whether or when the Collateral Agent could repossess or dispose
of the Collateral, or whether or to what extent Holders would be compensated for any delay in
payment or decrease in value of the Collateral through the requirement of “adequate protection.”
Furthermore, in the event a bankruptcy court determines the value of the Collateral (after
giving effect to any prior or pari passu Liens) is not sufficient to repay all amounts due on the
Notes, the Holders of the Notes would hold secured claims to the extent of the value of the
Collateral and would hold unsecured claims with respect to any shortfall. Under the U.S. Bankruptcy
Code, a secured creditor’s claim includes interest and any reasonable fees, costs or charges
provided for under the agreement under which such claim arose if the claims are oversecured. In
addition, if the Issuer or the Guarantors were to become the subject of a bankruptcy case, the
bankruptcy court, among other things, may void certain prepetition transfers made by the entity
that is the subject of the bankruptcy
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filing, including, without limitation, transfers held to be preferences or fraudulent
conveyances. See “Risk Factors — Risks Related to the Exchange Notes— Federal and state
fraudulent transfer laws may permit a court to void the exchange notes and the guarantees, and, if
that occurs, you may not receive any payments on the exchange notes.”
In the event the Issuer or any Guarantor becomes a debtor in a bankruptcy case, the Issuer or
such Guarantor may enter into DIP Financing in such case. As a result of such DIP Financing, the
Liens on the Collateral securing the Notes and the Guarantees may, without any further action or
consent by the Trustee, the Collateral Agent or the Holders, be made junior and subordinated to
Liens granted to secure such DIP Financing so long as the Issuer or the applicable Guarantor can
show that (i) it could not obtain credit otherwise and (ii) there is adequate protection of the
interest of the holder of the Lien on the assets on which such priming Lien is proposed to be
granted. See “Risk Factors — Risks Related to the Exchange Notes — In the event of our
bankruptcy, the ability of the holders of the exchange notes to realize upon the collateral will be
subject to certain bankruptcy law limitations.”
Release
The Liens on the Collateral will be released with respect to the Notes and the Guarantees:
(i) in whole, upon payment in full of the principal of, accrued and unpaid interest, if
any, and premium, if any, on, the Notes;
(ii) in whole, upon satisfaction and discharge of the Indenture as described under “—
Satisfaction and Discharge”;
(iii) in whole, upon a legal defeasance or covenant defeasance as described under “—
Defeasance”;
(iv) in part, as to any property or asset constituting Collateral (A) that is sold or
otherwise disposed of or deemed disposed of in a transaction permitted by “— Certain
Covenants — Asset Sales”, (B) that is owned by a Subsidiary Guarantor to the extent such
Subsidiary Guarantor has been released from its Subsidiary Guarantee in accordance with the
Indenture, (C) to the extent that such Collateral is composed of Points that are held as
inventory, upon the sale of any such Points in the ordinary course of business or (D)
otherwise in accordance with, and as expressly provided for under, the Indenture; or
(v) as described under “— Amendments and Waivers.”
Upon any sale or disposition of Collateral in compliance with the Indenture and the Security
Documents, the Liens in favor of the Collateral Agent on such Collateral and (subject to the
covenant described under “— After-Acquired Property”) all proceeds thereof shall automatically
terminate and be released and the Collateral Agent will execute and deliver such documents and
instruments as the Issuer and the Guarantors may request to evidence such termination and release
(without recourse or warranty) without the consent of the Holders of the Notes.
To the extent required, the Company will furnish to the Collateral Agent and the Trustee (if
not the Collateral Agent), prior to each proposed release of Collateral pursuant to the Security
Documents and the Indenture, an Officers’ Certificate and Opinion of Counsel and such other
documentation as is required by the Indenture.
Notes Guarantees
The Guarantors will jointly and severally guarantee, on a senior secured basis, all
obligations of the Issuer under the Notes. The obligations of each Subsidiary Guarantor under its
Guarantee will be limited as necessary to prevent that Guarantee from constituting a fraudulent
conveyance under applicable law. If a Guarantee were rendered avoidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent liabilities) of the
applicable Guarantor, and, depending on the amount of such indebtedness, a Guarantor’s liability on
its Guarantee could be reduced to zero. See “Risk Factors — Risks Related to the Exchange Notes
— Federal and state fraudulent transfer laws may permit a court to void the exchange notes and the
guarantees, and, if that occurs, you may not receive any payments on the exchange notes.”
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Each Subsidiary Guarantor that makes a payment under its Guarantee will be entitled upon
payment in full of all guaranteed obligations under the Indenture to a contribution from each other
Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor’s pro rata portion of such payment based on
the respective net assets of all the Subsidiary Guarantors at the time of such payment determined
in accordance with GAAP.
Pursuant to the Indenture, (A) a Subsidiary Guarantor may consolidate with, merge with or
into, or transfer all or substantially all its assets to any other Person to the extent described
under “— Certain Covenants — Merger, Consolidation or Sale of All or Substantially All Assets”
and (B) the Equity Interests of a Subsidiary Guarantor may be sold or otherwise disposed of to
another Person to the extent described below under “— Certain Covenants — Asset Sales”; provided,
however, that in the case of the consolidation, merger or transfer of all or substantially all the
assets of such Guarantor, if such other Person is not the Company, the Issuer or a Guarantor, such
Guarantor’s obligations under its Guarantee must be expressly assumed by such other Person, except
that such assumption will not be required in the case of:
(i) the sale or other disposition (including by way of consolidation or merger) of a
Guarantor (including the sale or disposition of Equity Interests of a Subsidiary Guarantor)
following which such Subsidiary Guarantor is no longer a Subsidiary of the Company; or
(ii) the sale or disposition of all or substantially all the assets of a Subsidiary
Guarantor;
in each case other than to the Company or an Affiliate of the Company and as permitted by the
Indenture and if in connection therewith the Company provides an Officers’ Certificate to the
Trustee to the effect that the Company will comply with its obligations under the covenant
described under “— Certain Covenants — Asset Sales” in respect of such disposition. Upon any sale
or disposition described in clause (i) or (ii) above, the obligor on the related Guarantee will be
released from its obligations thereunder.
The Guarantee of a Subsidiary Guarantor also will be released:
(i) upon the designation of such Guarantor as an Unrestricted Subsidiary to the extent
permitted by the Indenture; or
(ii) if we exercise our legal defeasance option or our covenant defeasance option as
described under “— Defeasance” or if our obligations under the Indenture are discharged in
accordance with the terms of the Indenture as described under “— Satisfaction and
Discharge.”
The Guarantee of the Company and the Intermediate Holdco will be released if we exercise our legal
defeasance option or covenant defeasance option as described under “— Defeasance” or if our
obligations under the Indenture are discharged in accordance with the terms of the Indenture as
described under “— Satisfaction and Discharge.”
Change of Control
The Notes provides that if a Change of Control occurs, unless the Issuer has previously or
concurrently mailed a redemption notice with respect to all the outstanding Notes as described
under “— Optional Redemption,” the Issuer will make an offer to purchase all of the Notes pursuant
to the offer described below (the “Change of Control Offer”) at a price in cash (the “Change of
Control Payment”) equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest to the date of purchase, subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date. Within 30 days following any
Change of Control, the Issuer will send notice of such Change of Control Offer, with a copy to the
Trustee, to each Holder of Notes by first-class mail to the address of such Holder appearing in the
security register or otherwise in accordance with the procedures of DTC, with the following
information:
(i) that a Change of Control Offer is being made pursuant to the covenant entitled
“Change of Control” and the circumstances and relevant facts regarding such Change of
Control;
(ii) the purchase price and the purchase date, which will be no earlier than 30 days
nor later than 60 days from the date of such notice (the “Change of Control Payment Date”);
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(iii) that all Notes properly tendered pursuant to such Change of Control Offer will be
accepted for payment by us, that any Note not properly tendered will remain outstanding and
continue to accrue interest, and that unless the Issuer defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control
Offer will cease to accrue interest on the Change of Control Payment Date; and
(iv) the instructions, as determined by us, consistent with the covenant described
hereunder, that a Holder must follow in connection with the Change of Control Offer.
The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws or regulations are
applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with the provisions of
the Indenture, the Issuer will comply with the applicable securities laws and regulations and shall
not be deemed to have breached its obligations described in the Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to the extent permitted by law,
(i) accept for payment all Notes or portions thereof properly tendered pursuant to the
Change of Control Offer,
(ii) no later than 10:00 am New York City time, deposit with the paying agent an amount
equal to the aggregate Change of Control Payment in respect of all Notes or portions thereof
so tendered, and
(iii) deliver, or cause to be delivered, to the Trustee for cancellation the Notes so
accepted together with an Officer’s Certificate to the Trustee stating that such Notes or
portions thereof have been tendered to and purchased by us.
Future credit agreements or debt instruments to which we become a party may provide that
certain change of control events (including a Change of Control under the Indenture) would
constitute a default thereunder. If we experience a change of control that triggers a default
under any such agreement or instrument, we could seek a waiver of such default or seek to refinance
the related obligations. In the event we do not obtain such a waiver or refinance the related
obligations, such default could result in amounts outstanding under any such agreement or
instrument being declared due and payable.
Our ability to pay cash to the Holders of Notes following the occurrence of a Change of
Control may be limited by our then existing financial resources. Sufficient funds may not be
available when necessary to make any required repurchases.
The Change of Control purchase feature of the Notes may in certain circumstances make more
difficult or discourage a sale or takeover of the Company and, thus, the removal of incumbent
management. The Change of Control purchase feature is a result of negotiations among the Initial
Purchasers, the Company and the Issuer. The Company and the Issuer have no present intention to
engage in a transaction involving a Change of Control, although it is possible that the Company or
the Issuer could decide to do so in the future. Subject to the limitations discussed below, the
Company or the Issuer could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of indebtedness outstanding at such
time or otherwise affect the Company’s or the Issuer’s capital structure or credit ratings.
Restrictions on our ability to incur additional Indebtedness are contained in the covenants
described under “— Certain Covenants — Incurrence of Indebtedness” and “— Certain Covenants —
Liens.” Such restrictions in the Indenture can be waived only with the consent of the Holders of a
majority in principal amount of the Notes then outstanding. Except for the limitations contained in
such covenants, however, the Indenture does not contain any covenants or provisions that may afford
Holders of the Notes protection in the event of a highly leveraged transaction.
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The Issuer will not be required to make a Change of Control Offer following a Change of
Control if a third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of
Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer. Notwithstanding anything to the contrary herein, a Change of Control
Offer may be made in advance of a Change of Control, conditional upon completion of the transaction
constituting such Change of Control, if a definitive agreement is in place for the Change of
Control at the time of making of the Change of Control Offer.
The definition of “Change of Control” includes a disposition of all or substantially all of
the Company’s assets to any Person. Although there is a limited body of case law interpreting the
phrase “substantially all,” there is no precise established definition of the phrase under
applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to
whether a particular transaction would involve a disposition of “all or substantially all” of the
Company’s assets. As a result, it may be unclear as to whether a Change of Control has occurred and
whether a Holder of Notes may require the Issuer to make an offer to repurchase the Notes as
described above.
The provisions under the Indenture relative to the Issuer’s obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or modified with the written
consent of the Holders of a majority in principal amount of the Notes.
Offer to Purchase with Excess Cash Flow
(a) The Issuer shall be required within 105 days (the “Offer Date”) after the end of each
twelve-month period ended December 31 beginning with the twelve-month period ended December 31,
2011, to the extent of 50% of the Excess Cash Flow for the twelve-month period then ended (the
“Excess Cash Flow Offer Amount”), to make an offer (an “Excess Cash Flow Offer”) to each Holder of
Notes to purchase such Holder’s Notes on a pro rata basis, in whole or in part, at a price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of
purchase; provided, however, that in the case of the twelve-month period ended December 31, 2011
only, for purposes of determining the Excess Cash Flow Offer Amount for such twelve-month period,
50% of the Excess Cash Flow for the three-month period ended December 31, 2010 shall be added to
the amount that would otherwise be the Excess Cash Flow Offer Amount for the twelve-month period
ended December 31, 2011; provided, further, that the Issuer shall not be required to make an Excess
Cash Flow Offer in accordance with this covenant unless the Excess Cash Flow Offer Amount exceeds
$5.0 million (with any lesser amount being carried forward and added to the Excess Cash Flow Amount
for purposes of determining whether the $5.0 million threshold has been met for any future Excess
Cash Flow Offer). Upon completion of each Excess Cash Flow Offer, the Excess Cash Flow Offer Amount
shall be reset at zero.
(b) In the event of an Excess Cash Flow Offer pursuant to this covenant, the Issuer shall
purchase Notes tendered in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of the Notes
tendered exceeds the Excess Cash Flow Offer Amount allotted to its purchase, the Issuer shall
select the Notes to be purchased on a pro rata basis but in round denominations of $2,000 principal
amount or integral multiples of $1,000 in excess thereof. Upon completion of an Excess Cash Flow
Offer, any remaining Excess Cash Flow Offer Amount may be applied by the Company for any purpose
otherwise permitted by the Indenture.
(c) The Issuer shall comply, to the extent applicable, with the requirements of Section 14(e)
of the Exchange Act and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuer shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its obligations under this
covenant by virtue of its compliance with such securities laws or regulations.
Offer to Purchase with Proceeds of Certain Equity Offerings
(a) The Issuer shall be required within 30 days (the “Public Offering Offer Date”) of the
closing of any public offering of equity securities of the Issuer, any Guarantor or any direct or
indirect parent entity of the Issuer, to the extent of 25% of the Net Cash Proceeds of such public
offering received by the Issuer, such Guarantor or any such parent entity or by Stephen J. Cloobeck
or David F. Palmer, their estates, descendants and legal representatives and any Person that they
control (the “Public Offering Offer Amount”), to make an offer (a “Public
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Offering Offer”) to each Holder of Notes to purchase such Holder’s Notes on a pro rata basis,
in whole or in part, at a price in cash equal to (i) in the case of any such public offering
consummated prior to August 15, 2014, 112% of the principal amount thereof plus accrued and unpaid
interest to the date of purchase or (ii) in the case of any such public offering consummated on or
after August 15, 2014, the price set forth in the table included in the second paragraph of “—
Optional Redemption” above that would be applicable on such date of consummation, plus accrued and
unpaid interest to the date of purchase.
(b) In the event of a Public Offering Offer pursuant to this covenant, the Issuer shall
purchase Notes tendered in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of the Notes
tendered exceeds the Public Offering Offer Amount allotted to its purchase, the Issuer shall select
the Notes to be purchased on a pro rata basis but in round denominations of $2,000 principal amount
or integral multiples of $1,000 in excess thereof.
(c) The Issuer shall comply, to the extent applicable, with the requirements of Section 14(e)
of the Exchange Act and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuer shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its obligations under this
covenant by virtue of its compliance with such securities laws or regulations.
Certain Covenants
Incurrence of Indebtedness
(a) The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to (collectively, “incur”)
any Indebtedness; provided, however, that the Company, the Issuer or any Subsidiary Guarantor will
be entitled to incur Indebtedness if, on the date of such incurrence and after giving effect
thereto on a pro forma basis, the Fixed Charge Coverage Ratio exceeds 2.0 to 1.0 (any Indebtedness
incurred pursuant to the provisions described in this paragraph (a) being herein referred to as
“Ratio Indebtedness”).
(b) The provisions described in the immediately preceding paragraph (a) will not apply to the
incurrence of any of the following items of Indebtedness (collectively, “Permitted Indebtedness”):
(i) Indebtedness incurred pursuant to any Credit Facility, including the Guarantees
thereof by the Guarantors, in an aggregate amount outstanding at any time not to exceed
$25.0 million (any Indebtedness incurred pursuant to the provisions described in this clause
(i) being herein referred to as “Credit Facility Indebtedness”);
(ii) Indebtedness represented by the Notes issued on the Issue Date and the related
Notes Guarantees;
(iii) Nonrecourse Indebtedness incurred by a Special Purpose Subsidiary under a
Permitted Securitization and any Refinancing Indebtedness of such Special Purpose Subsidiary
with respect thereto that is Nonrecourse Indebtedness;
(iv) Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date (other than Indebtedness described in clauses (i), (ii) and (iii) of this paragraph
(b));
(v) Refinancing Indebtedness incurred by the Company or any Restricted Subsidiaries to
Refinance any Indebtedness that was incurred as Ratio Indebtedness or as Permitted
Indebtedness pursuant to the provisions described in clause (ii), (iv) or (v) of this
paragraph (b);
(vi) Indebtedness owing to and held by the Company or any Restricted Subsidiaries;
provided, however, that (A) if the Company or the Guarantor is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in
cash of all Notes Obligations and
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(B)(1) any subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being owed to or held by a Person other than the Company or a Restricted
Subsidiary and (2) any sale or other transfer of any such Indebtedness to a Person that is
neither the Company nor a Restricted Subsidiary shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by the provisions described in this clause (vi);
(vii) Hedging Obligations incurred in the ordinary course of business and not for
speculative purposes;
(viii) Guarantees of the Notes and Guarantees of Indebtedness that was incurred as
Ratio Indebtedness or as Permitted Indebtedness pursuant to the provisions described in
clause (v) (to the extent the Refinanced Indebtedness was so guaranteed), (vii), (ix), (x),
(xi), (xiii) or (xv) of this paragraph (b); provided, however, that if the Indebtedness
being Guaranteed is subordinated in right of payment to the Notes or a Notes Guarantee, then
such Guarantee shall be subordinated in right of payment to the Notes or such Notes
Guarantee to the same extent as the Indebtedness guaranteed;
(ix) Indebtedness constituting reimbursement obligations with respect to letters of
credit issued in the ordinary course of business, including letters of credit in respect of
workers’ compensation claims, health, disability or other employee benefits or property,
casualty or liability insurance or self-insurance, or other Indebtedness with respect to
obligations in the nature of reimbursement obligations regarding workers’ compensation
claims;
(x) Indebtedness arising from agreements of the Company or any Restricted Subsidiary
providing for indemnification, adjustment of purchase price or similar obligations, in each
case incurred in connection with the disposition of any business, assets or a Subsidiary;
(xi) obligations in respect of performance, bid, appeal, surety and similar bonds and
completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary
course of business;
(xii) Indebtedness arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument drawn against insufficient funds in the ordinary
course of business; provided, however, that such Indebtedness is extinguished within five
Business Days of its incurrence;
(xiii) Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of property, plant or
equipment used or useful in a Related Business (where, in the case of a purchase, such
purchase may be effected either directly or through the purchase of the Capital Stock of the
Person owning such property, plant or equipment), and any Indebtedness incurred to Refinance
such Indebtedness, in an aggregate amount at any time outstanding not in excess of $10.0
million;
(xiv) Acquired Indebtedness; provided, however, that, after giving effect to the merger
or acquisition giving rise to the incurrence thereof, immediately after such merger or
acquisition the Company would be permitted to incur at least $1.00 of additional Ratio
Indebtedness pursuant to the provisions described in the immediately-preceding paragraph
(a); and
(xv) Additional Indebtedness of the Company, the Issuer or any Subsidiary Guarantor in
an aggregate amount at any time outstanding not in excess $10.0 million.
(c) The Indenture also provides that the Company and the Issuer will not, and will not permit
any Subsidiary Guarantor to, incur any Indebtedness that is contractually subordinated to any
Indebtedness of the Company, the Issuer or such Guarantor unless such Indebtedness is also
contractually subordinated to the Notes or the applicable Notes Guarantee on substantially
identical terms; provided, however, that no Indebtedness shall be
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deemed to be contractually subordinated to any other Indebtedness solely by virtue of being
unsecured or having a junior security interest in shared collateral.
(d) For purposes of determining compliance with this covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than one of
the categories of Permitted Indebtedness described in paragraph (b) or is entitled to be
incurred as Ratio Indebtedness, the Company shall, in its sole discretion, classify such
item of Indebtedness (or any portion thereof) in any manner that complies with this
covenant, and such item of Indebtedness (or any portion thereof) will be treated as having
been incurred pursuant to the provisions described in only one of such clauses or pursuant
to the provisions described in paragraph (a); provided, however, that the Notes issued on
the Issue Date shall be deemed to have been incurred as Permitted Indebtedness pursuant to
the provisions described in clause (ii) of paragraph (b) above;
(ii) the Company will be entitled to divide and classify an item of Indebtedness in
more than one of the types of Indebtedness described above; and
(iii) any Permitted Indebtedness originally classified as incurred pursuant to the
provisions described in one of the clauses in paragraph (b) above (other than pursuant to
clause (i), (ii) or (iii) of such paragraph (b)) may later be reclassified by the Company
such that it will be deemed to have been incurred as Ratio Indebtedness pursuant to the
provisions described in paragraph (a) or as Permitted Indebtedness pursuant to the
provisions described in another clause in paragraph (b), as applicable, to the extent that
such reclassified Indebtedness could be incurred pursuant to the provisions described in
such paragraph or clause at the time of such reclassification.
Accrual of interest, the accretion of accreted value, the payment of interest or dividends in
the form of additional Indebtedness of the same instrument, accretion of original issue discount or
liquidation preference and increases in the amount of Indebtedness outstanding solely as a result
of fluctuations in interest rates or in the exchange rate of currencies will not be deemed to be an
incurrence of Indebtedness for purposes of the Indenture. Guarantees of, or obligations in respect
of letters of credit relating to, Indebtedness that is otherwise included in the determination of a
particular amount of Indebtedness shall not be included in the determination of such amount of
Indebtedness; provided, however, that the incurrence of the Indebtedness underlying such Guarantee
or letter of credit, as the case may be, was subject to and in compliance with the covenant
described under “— Incurrence of Indebtedness.”
For purposes of determining compliance with any U.S. dollar restriction on the incurrence of
Indebtedness where the Indebtedness incurred is denominated in a different currency, the amount of
such Indebtedness will be the U.S. Dollar Equivalent determined on the date of the incurrence of
such Indebtedness; provided, however, that if any such Indebtedness denominated in a different
currency is subject to a currency agreement with respect to U.S. dollars covering all principal,
premium, if any, and interest payable on such Indebtedness, the amount of such Indebtedness
expressed in U.S. dollars will be as provided in such currency agreement. The maximum amount of
Indebtedness that the Company and the Restricted Subsidiaries may incur pursuant to the covenant
described under “— Incurrence of Indebtedness” shall not be deemed to be exceeded, with respect to
any outstanding Indebtedness, solely as a result of fluctuations in interest rates or the exchange
rate of currencies.
Restricted Payments
(a) The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly,
(i) declare or pay any dividends or make any other distributions of any sort in respect
of its Equity Interests (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or indirect holders of
its Equity Interests (other than (A) dividends or distributions payable solely in Qualified
Equity Interests of the Company, (B) dividends or distributions payable solely to the
Company or a Restricted Subsidiary and (C) pro rata dividends or other distributions
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made by a Subsidiary that is not a Wholly-Owned Restricted Subsidiary to minority
stockholders (or owners of minority interests in the case of a Subsidiary that is an entity
other than a corporation));
(ii) purchase, repurchase, redeem, defease or make any other acquisition or retirement
for value of any Equity Interests of the Company held by any Person (other than by a
Restricted Subsidiary) or of any Equity Interests of a Restricted Subsidiary held by any
Affiliate of the Company (other than by a Restricted Subsidiary), including in connection
with any merger or consolidation and including the exercise of any option to exchange any
Equity Interests (other than into Qualified Equity Interests of the Company);
(iii) purchase, repurchase, redeem, defease or make any other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment, principal installment or
scheduled sinking fund payment of any Subordinated Obligations of the Company, the Issuer or
any Subsidiary Guarantor (other than (A) from the Company or a Restricted Subsidiary or (B)
the purchase, repurchase, redemption, defeasance or other acquisition or retirement of
Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the date of
such purchase, repurchase, redemption, defeasance or other acquisition or retirement); or
(iv) make any Investment (other than a Permitted Investment) in any Person, (all such
payments and other actions set forth in clauses (i) through (iv) of this paragraph (a) being
collectively referred to as “Restricted Payments”)
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default shall have occurred and be continuing (or would result therefrom);
(2) the Company is entitled to Incur an additional $1.00 of Ratio Indebtedness
pursuant to the covenant described under “— Incurrence of Indebtedness”; and
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would not exceed the sum of (without duplication):
(A) 50% of the Consolidated Net Income accrued during the period (treated as
one accounting period) from April 1, 2010 to the end of the most recent fiscal
quarter ending immediately prior to the date of such Restricted Payment (or, in case
such Consolidated Net Income shall be a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds or Fair Market Value of any asset
(other than cash) received by the Company either (x) from the issuance or sale of
its Qualified Equity Interests subsequent to the Issue Date (but excluding the
issuance or sale of Qualified Equity Interests in the Concurrent Equity Transaction)
or (y) as a contribution in respect of its Qualified Equity Interests from its
equity holders subsequent to the Issue Date, but excluding in each case any Net Cash
Proceeds that are used to redeem Notes in accordance with the third paragraph under
“— Optional Redemption” or used to purchase Notes in accordance with a Public
Offering Offer; plus
(C) the amount by which the principal amount of Indebtedness of the Company
(other than Nonrecourse Indebtedness and Indebtedness owing to a Subsidiary) is
reduced upon the conversion or exchange subsequent to the Issue Date of any
Indebtedness of the Company converted or exchanged for Qualified Equity Interests of
the Company (less the amount of any cash, or the fair value of any other property,
distributed by the Company upon such conversion or exchange); provided, however,
that the foregoing amount shall not exceed the gross proceeds (prior to fees and
transaction expenses) received by the Company or any Restricted Subsidiary from the
sale of such Indebtedness (excluding such gross proceeds from sales to a Subsidiary
of the Company or to a Company Equity Plan); plus
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(D) an amount equal to the sum of (x) the aggregate amount of cash and the Fair
Market Value of any asset (other than cash) received by the Company or any
Restricted Subsidiary subsequent to the Issue Date with respect to Investments
(other than Permitted Investments) made by the Company or any Restricted Subsidiary
in any Person subsequent to the Issue Date and resulting from repurchases,
repayments, liquidations or redemptions of such Investments by such Person, proceeds
realized on the sale of such Investment and proceeds representing the return of
capital, and (y) in the event that the Company redesignates an Unrestricted
Subsidiary to be a Restricted Subsidiary, the portion (proportionate to the
Company’s equity interest in such Subsidiary) of the Fair Market Value of the net
assets of such Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the foregoing sum shall
not exceed, in the case of any such Person or Unrestricted Subsidiary, the amount of
Investments (excluding Permitted Investments) previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
(b) The foregoing provisions will not prohibit:
(i) any Restricted Payment made out of the Net Cash Proceeds of the substantially
concurrent sale of, or made in exchange for, Qualified Equity Interests of the Company or a
substantially concurrent cash capital contribution received by the Company from its equity
holders with respect to its Qualified Equity Interests, including the Concurrent Equity
Transaction; provided, however, that (A) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such
sale or such cash capital contribution (to the extent so used for such Restricted Payment)
shall be excluded from the calculation of amounts under the provisions described in clause
(3)(B) of the immediately preceding paragraph (a);
(ii) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations of a Person made in exchange for, or out of
the proceeds of the substantially concurrent incurrence of, Indebtedness of such Person
which is permitted to be incurred pursuant to the covenant described under “— Incurrence of
Indebtedness”; provided, however, that such purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value shall be excluded in the calculation of the amount
of Restricted Payments;
(iii) the payment of any dividend, distribution or redemption of any Equity Interests
or Subordinated Indebtedness within 60 days after the date of declaration thereof or call
for redemption if, at such date of declaration or call for redemption, such payment or
redemption was permitted by the provisions described in the immediately preceding paragraph
(a) (the declaration of such payment will be deemed a Restricted Payment under such
paragraph (a) as of the date of declaration and the payment itself will be deemed to have
been paid on such date of declaration and will not also be deemed a Restricted Payment under
such paragraph (a)); provided, however, that any Restricted Payment made in reliance on the
provisions described in this clause (iii) shall reduce the amount available for Restricted
Payments pursuant to the provisions described in clause (3) of the immediately preceding
paragraph (a) only once;
(iv) the declaration and payments of dividends on Disqualified Stock issued pursuant to
the covenant described under “— Incurrence of Indebtedness”; provided, however, that such
dividends shall be excluded in the calculation of the amount of Restricted Payments;
(v) repurchases of Equity Interests deemed to occur upon exercise of stock options if
such Equity Interests represents a portion of the exercise price of such options; provided,
however, that such Restricted Payments shall be excluded in the calculation of the amount of
Restricted Payments;
(vi) cash payments in lieu of the issuance of fractional shares in connection with the
exercise of warrants, options or other securities convertible into or exchangeable for
Equity Interests of the Company in an aggregate amount not in excess of $500,000; provided,
however, that any such cash payment shall not be for the purpose of evading the limitation
of the covenant described under this subheading (as determined in good faith by the Board of
Directors); provided further, however, that such payments shall be excluded in the
calculation of the amount of Restricted Payments;
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(vii) in the event of a Change of Control, and if no Default shall have occurred and be
continuing, the payment, purchase, redemption, defeasance, discharge, cash-collateralization
or other acquisition or retirement of Subordinated Obligations, in each case, at a purchase
price not greater than 101% of the principal amount of such Subordinated Obligations, plus
any accrued and unpaid interest thereon; provided, however, that prior to such payment,
purchase, redemption, defeasance, discharge, cash-collateralization or other acquisition or
retirement, the Company (or a third party to the extent permitted by the Indenture) has made
a Change of Control Offer with respect to the Notes as a result of such Change of Control
and has repurchased (or deposited with the Trustee funds sufficient to repurchase) all Notes
validly tendered and not withdrawn in connection with such Change of Control Offer; provided
further, however, that such payments, purchases, redemptions, defeasances, discharges,
cash-collateralizations or other acquisitions or retirements shall be included in the
calculation of the amount of Restricted Payments;
(viii) payments of intercompany subordinated Permitted Indebtedness, the incurrence of
which was permitted by the provisions described in clause (vi) of paragraph (b) under “—
Incurrence of Indebtedness”; provided, however, with respect to payments other than to the
Company or a Guarantor, that no Default has occurred and is continuing or would otherwise
result therefrom; provided further, however, that such payments shall be excluded in the
calculation of the amount of Restricted Payment;
(ix) for each taxable year, distributions to each direct or indirect equity owner of
the Company (each, a “Company Holder”) to satisfy U.S. Federal, state and local income tax
obligations of such Company Holder for such taxable year in an amount not to exceed the
lesser of:
(A) the amount of tax distributions provided for in the limited liability
company agreement of the Company as in effect on the Issue Date; and
(B) an amount which, when combined with all other tax distributions to such
Company Holder in the current and all preceding taxable years, equals the product of
the highest combined U.S. Federal, state and local marginal income tax rate
applicable to any Company Holder (taking into account the deductibility of state and
local income taxes for U.S. Federal income tax purposes) and the excess, if any, of
(i) the aggregate net taxable income attributable to the Company and allocated to
such Company Holder in the current and all preceding taxable years over (ii) the
aggregate net taxable loss attributable to the Company and allocated to such Company
Holder in all preceding taxable years;
provided, however, that the Company may make such distributions after the end of the taxable
year or may make quarterly distributions during the taxable year (subject to adjustment
after the end of the year) to reflect estimated tax obligations of the Company Holders
provided that such quarterly distributions shall not, when taken together, exceed the annual
limitations set forth in this clause (ix); and provided further, however, that any amounts
distributed to a Company Holder pursuant to this clause (ix) shall be excluded in the
calculation of the amount of Restricted Payments; or
(x) other Restricted Payments in an amount which, when taken together with all other
Restricted Payments made pursuant to the provisions described in this clause (x), does not
exceed $5.0 million; provided, however, that such Restricted Payment shall be excluded in
the calculation of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the Fair Market Value on the
date of the Restricted Payment of the assets (other than cash) proposed to be transferred. In the
event that a Restricted Payment meets the criteria of more than one of the exceptions described in
clauses (i) through (x) of this paragraph (b) or is permitted to be made by the provisions
described in paragraph (a) the Company, in its sole discretion, may divide and classify such
Restricted Payment in any manner that complies with this covenant.
Asset Sales
(a) The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, consummate an Asset Sale unless:
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(i) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the Fair Market Value of the
assets or Equity Interests issued or sold or otherwise disposed of;
(ii) at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash or Cash Equivalents;
(iii) an amount equal to 100% of the Net Cash Proceeds from such Asset Sale is applied
by the Company (or such Restricted Subsidiary, as the case may be):
(A) to the extent the Company elects, to acquire Replacement Assets within one year
from the later of the date of such Asset Sale or the receipt of such Net Cash Proceeds;
and
(B) to the extent of the balance of such Net Cash Proceeds after application in
accordance with clause (A) above, to make an offer to the Holders of the Notes (and to
holders of other Applicable Senior Indebtedness designated the Company) to purchase Notes
(and such other Applicable Senior Indebtedness) pursuant to and subject to the conditions
contained in the Indenture; provided, however, that in connection with any purchase of
Indebtedness pursuant to this clause (B), the Company or such Restricted Subsidiary shall
permanently retire such Indebtedness and shall cause the related loan commitment (if any)
to be permanently reduced in an amount equal to the principal amount so purchased; and
(iv) on a pro forma basis after giving effect to such Asset Sale, no Default shall have
occurred and be continuing (or would result therefrom).
Notwithstanding the foregoing provisions of this covenant, the Company and the Restricted
Subsidiaries will not be required to apply any Net Cash Proceeds in accordance with this covenant
except to the extent that the aggregate Net Cash Proceeds from all Asset Sales which are not
applied in accordance with this covenant exceeds $10.0 million. Pending application of Net Cash
Proceeds pursuant to this covenant, such Net Cash Proceeds shall be invested in cash or Cash
Equivalents or applied to temporarily reduce revolving credit Indebtedness.
For the purposes of this covenant, the following are deemed to be cash or Cash Equivalents:
(1) the assumption or discharge of Applicable Senior Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Sale;
(2) any securities received by the Company or any Restricted Subsidiary from the
transferee that are converted by the Company or such Restricted Subsidiary into cash within
180 days of receipt thereof, to the extent of the cash received in that conversion; and
(3) any Designated Non-cash Consideration received by the Company or any Restricted
Subsidiary in such Asset Sale having an aggregate Fair Market Value, taken together with all
other Designated Non-cash Consideration received pursuant to this clause (3) that is at that
time outstanding, not to exceed an amount equal to $10.0 million at the time of the receipt
of such Designated Non-cash Consideration (with the Fair Market Value of each item of
Designated Non-cash Consideration being measured at the time received and without giving
effect to subsequent changes in value).
The requirement of clause (a)(iii)(A) above will be deemed to be satisfied if an agreement
committing to make the acquisitions or expenditures referred to therein is entered into by the
Company or a Restricted Subsidiary within the time period specified in such clause and such Net
Cash Proceeds is subsequently applied in accordance with such agreement within six months following
the date of such agreement.
(b) In the event of an Asset Sale that requires the purchase of Notes (and other Applicable
Senior Indebtedness) pursuant to clause (a)(iii)(B) above, the Issuer will purchase Notes tendered
pursuant to an offer by
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the Issuer for the Notes (and such other Applicable Senior Indebtedness) at a purchase price
of 100% of their principal amount (or, in the event such other Applicable Senior Indebtedness was
issued with significant original issue discount, 100% of the accreted value thereof), without
premium, plus accrued but unpaid interest (or, in respect of such other Applicable Senior
Indebtedness, such lesser price, if any, as may be provided for by the terms of such Applicable
Senior Indebtedness) in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of the Indebtedness
tendered exceeds the Net Cash Proceeds allotted to its purchase, the Issuer will select the
Indebtedness to be purchased on a pro rata basis but in round denominations, which in the case of
the Notes will be denominations of $2,000 principal amount or integral multiples of $1,000 in
excess thereof. The Issuer shall not be required to make such an offer to purchase Notes (and
other Applicable Senior Indebtedness) pursuant to this covenant if the Net Cash Proceeds available
therefor is less than $15.0 million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Cash Proceeds from any
subsequent Asset Sale). Upon completion of such an offer to purchase, any remaining Net Cash
Proceeds may be applied by the Company for any purpose otherwise permitted by the Indenture, and
the amount of Net Cash Proceeds shall be reduced by the aggregate amount of the offer made pursuant
to this paragraph (b).
(c) The Issuer will comply, to the extent applicable, with the requirements of Section 14(e)
of the Exchange Act and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its obligations under this
covenant by virtue of its compliance with such securities laws or regulations.
Impairment of Security Interest
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, take, or knowingly omit to take, any action, which action or omission would have the
effect of causing a Lien to be created on any property or assets of the type that would constitute
Collateral for the benefit of any Person (other than the Collateral Agent) unless a Lien exists or
is created in favor of the Collateral Agent for the benefit of the Holders of the Notes with
respect to such property or assets; provided, however, that no such Lien will be required to the
extent that it would be inconsistent with the provisions described under “— Collateral —
Limitation on Collateral Consisting of Subsidiary Securities.” Such Lien in favor of the Collateral
Agent shall at all times be in accordance with any applicable provisions of the Indenture and the
Security Documents.
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, take, or knowingly omit to take, any action that would have the result of materially
impairing the security interest with respect to the Collateral (it being understood that Permitted
Securitizations, Restricted Payments permitted under the covenant described under “— Restricted
Payments,” Asset Sales permitted under the covenant described under “— Asset Sales,” other
dispositions of assets in the ordinary course of business and the incurrence of Permitted
Collateral Liens will be deemed not to materially impair the security with respect to the
Collateral) for the benefit of the Collateral Agent and the Holders of the Notes, and the Company
will not, and will not permit any Restricted Subsidiary to, grant to any person other than the
Collateral Agent, any interest whatsoever in any of the Collateral, except that the Company and any
Restricted Subsidiary may incur Permitted Collateral Liens, and the Collateral and the Liens
thereon may be discharged and released in accordance with the Indenture, the Security Documents and
any applicable Intercreditor Agreements.
Liens
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume or otherwise cause or suffer to exist
or become effective any Lien of any kind upon any of their assets, now owned or hereafter acquired,
other than:
(i) in the case of any asset that does not constitute Collateral, Permitted Liens;
provided, however, that any Lien on such asset shall be permitted notwithstanding that it is
not a Permitted Lien if all payments due under the Indenture and the Notes are secured on an
equal and ratable basis with the obligations so secured until such time as such obligations
are no longer secured by a Lien; and
(ii) in the case of any asset that constitutes Collateral, Permitted Collateral Liens.
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In the case of the proviso in clause (i), if the obligations so secured are expressly
subordinated by their terms to the Notes, the Lien securing such obligations will also be so
subordinated by its terms at least to the same extent.
Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction with respect to any property unless:
(i) the Company or such Restricted Subsidiary would be entitled to (A) incur
Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback
Transaction pursuant to the covenant described under “— Incurrence of Indebtedness” and (B)
create a Lien on such property securing such Attributable Debt without equally and ratably
securing the Notes pursuant to the covenant described under “— Liens”;
(ii) the net proceeds received by the Company or any Restricted Subsidiary in
connection with such Sale/Leaseback Transaction are at least equal to the Fair Market Value
of such property; and
(iii) the Company applies the proceeds of such transaction in compliance with the
covenant described under “— Asset Sales”.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted Subsidiary to:
(i) (1) pay dividends or make any other distributions to the Company or any Restricted
Subsidiaries on its Equity Interests or with respect to any other interest or participation
in, or measured by, its profits, or
(2) pay any Indebtedness owed to the Company or any Restricted Subsidiaries,
(ii) make loans or advances to the Company or any Restricted Subsidiaries, or
(iii) transfer any of its properties or assets to the Company or any Restricted
Subsidiaries,
except, in each case, for such encumbrances or restrictions existing under or by reason
of:
(1) the Indenture, the Notes and the Security Documents;
(2) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date;
(3) applicable law;
(4) any instrument governing Acquired Indebtedness or Equity Interests of a
Person acquired by the Company or any Restricted Subsidiary as in effect at the time
of such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so acquired;
provided, however, that, in the case of an instrument governing Acquired
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be
incurred;
(5) other Indebtedness of Restricted Subsidiaries that are not Subsidiary
Guarantors pursuant to an agreement governing such Indebtedness, incurred by such
Restricted Subsidiary
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and permitted to be incurred subsequent to the Issue Date pursuant to the
provisions of the covenant described under “— Incurrence of Indebtedness”, (i) if
the encumbrances and restrictions contained in any such agreement taken as a whole
are not materially more restrictive to the applicable Restricted Subsidiary than the
encumbrances and restrictions contained in the agreements described in clause (1) or
(2) of this paragraph (as determined in good faith by the Company), or (ii) if such
encumbrance or restriction is not materially more restrictive to the applicable
Restricted Subsidiary than is customary in comparable financings (as determined in
good faith by the Company) and either (x) the Company determines in good faith that
such encumbrance or restriction will not materially affect the Issuer’s ability to
make the principal or interest payments on the Notes or (y) such encumbrance or
restriction applies only if a default occurs in respect of a payment or financial
covenant relating to such Indebtedness;
(6) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices;
(7) purchase money obligations for property or assets acquired in the ordinary
course of business that impose restrictions of the nature described in clause (iii)
of this paragraph on the property or assets so acquired;
(8) any encumbrance or restriction in an agreement effecting a Refinancing of
Indebtedness incurred pursuant to an agreement referred to in clause (1), (2), (4)
or (5) of this paragraph or this clause (8) or contained in any amendment to an
agreement referred to in such clause (1), (2), (4) or (5) or this clause (8);
provided, however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not materially less favorable to the Company
(as determined by the Board of Directors in its reasonable and good faith judgment)
than encumbrances and restrictions contained in such predecessor agreements;
(9) the requirements of any Permitted Securitization that are exclusively
applicable to any bankruptcy remote Special Purpose Subsidiary formed in connection
therewith;
(10) the requirements of any Standard Securitization Undertakings;
(11) in the case of clause (iii) of this paragraph, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such restrictions restrict the transfer of the property subject to the
Liens created thereby, or to the extent not constituting Collateral, the Equity
Interests of the Person whose assets consist, directly or indirectly, primarily of
the real property securing such Indebtedness; provided, however, that such Liens
were otherwise permitted to be incurred under the Indenture;
(12) restrictions with respect to any Investment imposed in connection with the
making of such Investment;
(13) any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement entered into for the sale or disposition of all or substantially all
of the Equity Interests or assets of such Restricted Subsidiary pending the closing
of such sale or disposition; or
(14) assignment provisions and provisions with respect to the distribution of
assets or property or joint venture or partnership interests in joint venture or
partnership agreements and other similar agreements entered into in the ordinary
course of business that are customary for such agreements; provided, however, that
such provisions in the aggregate, in the opinion of the management of the Company,
do not materially and adversely affect the ability of the Issuer to make principal
or interest payments on the Notes.
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Merger, Consolidation or Sale of All or Substantially All Assets
(a) The Indenture provides that neither the Company, the Intermediate Holdco nor the Issuer
may consolidate or merge with or into (whether or not the Company, the Intermediate Holdco or the
Issuer is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of its properties or assets in one or more related transactions to,
another Person unless:
(i) the Company, the Intermediate Holdco or the Issuer, as the case may be, is the
surviving entity (which in the case of the Issuer must be a corporation) or the Person
formed by or surviving any such consolidation or merger (if other than the Company, the
Intermediate Holdco or the Issuer, as the case may be,) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is organized or
existing under the laws of the United States, any state thereof or the District of Columbia;
(ii) the Person formed by or surviving any such consolidation or merger (if other than
the Company, the Intermediate Holdco or the Issuer, as the case may be) or the Person to
which such sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the Company, the Intermediate Holdco or the Issuer,
as the case may be, under the Indenture and with respect to the Notes or its Notes
Guarantee, as the case may be, pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee;
(iii) except in the case of a merger or consolidation of the Company, the Intermediate
Holdco or the Issuer with or into a Wholly-Owned Restricted Subsidiary of the Company,
immediately before and after such transaction no Default has occurred and is continuing; and
(iv) except in the case of a merger or consolidation of the Company, the Intermediate
Holdco or the Issuer with or into a Wholly-Owned Restricted Subsidiary of the Company, the
Person formed by or surviving any such consolidation or merger (if other than the Company,
the Intermediate Holdco or the Issuer, as the case may be), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been made will, at
the time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the end of the applicable fiscal quarter, either (A) be
permitted to incur at least $1.00 of additional Ratio Indebtedness, pursuant to the covenant
described under “— Incurrence of Indebtedness” or (B) have a Fixed Charge Coverage Ratio no
less than that of the Company at such time without giving such pro forma effect thereto.
Upon the consummation of any transaction effected in accordance with the provisions described
in this paragraph (a), if the Company, the Intermediate Holdco or the Issuer, as the case may be,
is not the continuing Person, the resulting, surviving or transferee Person will succeed to, and be
substituted for, and may exercise every right and power of, the Company, the Intermediate Holdco or
the Issuer, as applicable, under the Indenture and with respect to the Notes or its Notes
Guarantee, as the case may be, with the same effect as if such successor Person had been named as
the Company, the Intermediate Holdco or the Issuer, as applicable, in the Indenture. Upon such
substitution the Company, the Intermediate Holdco or the Issuer, as applicable, except in the case
of a lease, will be released from its obligations under the Indenture, and with respect to the
Notes or its Notes Guarantee, as the case may be, and the Security Documents.
(b) Each Subsidiary Guarantor (other than any Guarantor whose Notes Guarantee is to be
released in accordance with the terms of the Notes Guarantee and the Indenture in connection with
any transaction complying with the provisions of the covenant described under “— Asset Sales”)
will not, and the Company will not cause or permit any such Subsidiary Guarantor to, consolidate
with or merge with or into any Person other than the Company, the Issuer or another Subsidiary
Guarantor unless:
(i) the Person formed by or surviving any such consolidation or merger or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have been made is
organized and existing under the laws of the United States, any State thereof or the
District of Columbia;
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(ii) the Person formed by or surviving any such consolidation or merger or to which
such sale, assignment, transfer, lease, conveyance or other disposition shall have been made
assumes all of the obligations of the applicable Guarantor under its Notes Guarantee;
(iii) immediately before and after giving effect to such transaction, no Default has
occurred and is continuing; and
(iv) except in the case of a merger or consolidation of a Guarantor with or into a
Wholly-Owned Restricted Subsidiary of the Company, immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis, the Company
could satisfy the provisions described in clause (iv) of the immediately-preceding paragraph
(a).
(c) The following additional conditions will apply to each transaction described in paragraphs
(a) and (b) under “— Merger, Consolidation or Sale of All or Substantially Assets”:
(i) the Company, the Intermediate Holdco, the Issuer, the Subsidiary Guarantor or the
relevant surviving entity, as applicable, will cause such amendments or other instruments to
be filed and recorded in such jurisdictions as may be required by applicable law to preserve
and protect the Lien of the Security Documents on the Collateral owned by or transferred to
such Person, together with such financing statements as may be required to perfect any
security interests in such Collateral which may be perfected by the filing of a financing
statement under the Uniform Commercial Code of the relevant states;
(ii) the Collateral owned by or transferred to the Company, the Intermediate Holdco,
the Issuer, the Subsidiary Guarantor or the relevant surviving entity, as applicable, shall
(A) continue to constitute Collateral under the Security Documents and the
Indenture;
(B) be subject to the Lien in favor of the Collateral Agent (to the extent that such
Lien is not prohibited by any related Acquired Indebtedness that is secured by such
assets); and
(C) not be subject to any Lien other than Liens permitted by the Security Documents
and the Indenture;
(iii) the assets of the Person which is merged or consolidated with or into the
relevant surviving entity, to the extent that they are assets of the types which would
constitute Collateral under the Security Documents and which would be required to be pledged
thereunder, shall be treated as after acquired property and such surviving entity shall take
such action as may be reasonably necessary to cause such assets to be made subject to the
Lien of the Security Documents in the manner and to the extent required in the Security
Documents and the Indenture; and
(iv) the Company shall have delivered to the Trustee an officers’ certificate and an
opinion of counsel, each stating that such transaction and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and, with respect to the officers’ certificate only,
that all conditions precedent in the Indenture relating to such transaction have been
satisfied and, with respect to the opinion of counsel only, that such supplemental indenture
and Security Documents are legal, valid, binding and enforceable, subject to customary
qualifications;
provided, however, that clauses (iii) and (iv) of each of paragraph (a) and paragraph (b) under “—
Merger, Consolidation or Sale of All or Substantially All Assets” will not be applicable to the
Company or a Restricted Subsidiary merging with an Affiliate of the Company solely for the purpose
of reincorporating the Company or such Restricted Subsidiary in another permitted jurisdiction.
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Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, lease
or exchange of any property, employee compensation arrangements or the rendering of any service)
with, or for the benefit of, any Affiliate of the Company (an “Affiliate Transaction”) unless:
(1) the terms of the Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary than those that could be obtained at the time of the Affiliate
Transaction in arm’s-length dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $1.0 million, the
terms of the Affiliate Transaction are set forth in writing and a majority of the
non-employee members of the Board of Directors of the Company disinterested with respect to
such Affiliate Transaction have determined in good faith that the criteria set forth in
clause (1) are satisfied and have approved the relevant Affiliate Transaction as evidenced
by a resolution of such Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of $2.5 million, the
Board of Directors of the Company shall also have received a written opinion from an
Independent Qualified Party to the effect that such Affiliate Transaction is fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries or is not less
favorable to the Company and its Restricted Subsidiaries than could reasonably be expected
to be obtained at the time in an arm’s-length transaction with a Person who was not an
Affiliate; provided, however, that such an opinion shall not be required for (x) a
management contract entered into between the Company or a Restricted Subsidiary and an
Unrestricted Subsidiary pursuant to which the Company or such Restricted Subsidiary provides
services to such Unrestricted Subsidiary for a fee or other consideration so long as the
owners of any other equity interests in such Unrestricted Subsidiary are not Affiliates
(other than a Restricted Subsidiary) of the Company or any Restricted Subsidiary (any such
Unrestricted Subsidiary being herein referred to as a “Special Unrestricted Subsidiary”) or
(y) transactions with Guggenheim providing for any financial advisory, financing,
underwriting or placement services or in respect of other lending or investment banking
activities.
The provisions described in the immediately preceding paragraph will not apply to the
following:
(A) any employment, consulting, service, indemnification, termination or severance
agreement or compensation plan or arrangement entered into by the Company or any
Restricted Subsidiary, and the transactions customarily provided for by any such
agreement, plan or arrangement;
(B) reasonable compensation (including bonuses) and other benefits (including
retirement, health, stock option and other benefit plans and transactions contemplated
thereby) for directors, officers, employees and consultants of the Company and its
Subsidiaries;
(C) transactions between or among the Company and/or any Restricted Subsidiaries;
(D) any transaction with any non-Affiliate that becomes an Affiliate as a result of
such transaction;
(E) (x) any agreement existing on the Issue Date, as in effect on the Issue Date, or
as modified, amended, amended and restated, supplemented or replaced so long as the terms
of such agreement as modified, amended, amended and restated, supplemented or replaced,
taken as a whole, are not materially more disadvantageous to the Company and the
Restricted Subsidiaries, taken as a whole, than the terms of such agreement as in effect
on the Issue Date, as determined in good faith by the Board of Directors, and (y) any
transaction provided for by any such agreement;
(F) loans or advances to employees or consultants (other than to a Permitted Holder)
in the ordinary course of business or approved by the Board of Directors, but in any
event not to exceed
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$2.0 million in the aggregate outstanding at any one time, and cancellation or
forgiveness or modification of the terms of such loans or advances;
(G) the issuance or sale of any Equity Interests (other than Disqualified Stock) of
the Company;
(H) transactions with a Person that is an Affiliate of the Company or a Restricted
Subsidiary solely because the Company directly or indirectly owns Equity Interests in, or
controls, such Affiliate, other than transactions with Unrestricted Subsidiaries;
(I) the transfer of Timeshare Loans and related rights and assets in connection with
any Permitted Securitization, and any other transaction effected in the ordinary course
as part of a Permitted Securitization;
(J) any Investment (other than a Permitted Investment) or other Restricted Payment,
in each case permitted to be made pursuant to (but only to the extent included in the
calculation of the amount of Restricted Payments made pursuant to) paragraph (a)(3) of
the covenant described under “— Restricted Payments”; and
(K) the acquisition of Vacation Interests and any related rights from a Special
Unrestricted Subsidiary; provided, however, that the entire consideration for such
acquisition consists of cash proceeds that have been received from the sale by the
Company or a Restricted Subsidiary of Vacation Interests representing the Vacation
Interests being so acquired.
Additional Guarantors
The Indenture provides that if any of the Company’s Restricted Subsidiaries (other than the
Issuer) that is not a Guarantor issues a Guarantee of, or grants a security interest in any of its
assets to secure, any Indebtedness of the Company or any other Restricted Subsidiary, then the
Company shall cause such Restricted Subsidiary to:
(i) execute and deliver a supplemental indenture providing for such Restricted
Subsidiary’s Notes Guarantee on the terms described under “— Notes Guarantees” and execute
and deliver such documentation mutatis mutandis with respect to collateral as shall be
necessary to provide for Liens on such Restricted Subsidiary’s assets constituting
Collateral to secure such Notes Guarantee on the terms described under “— Security” and “—
Notes Guarantees”; and
(ii) deliver to the Trustee an opinion of counsel that such Notes Guarantee has been
duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a
legal, valid, binding and enforceable obligation of such Restricted Subsidiary, in each case
subject to customary qualifications.
Thereafter, such Restricted Subsidiary shall be a Subsidiary Guarantor for all purposes of the
Indenture until released from its Notes Guarantee in accordance with the Indenture.
The foregoing shall not require a Special Purpose Subsidiary that only has Nonrecourse
Indebtedness outstanding to guarantee the Notes.
Business Activities
The Indenture provides that the Company will not, and will not permit any Restricted
Subsidiary to, engage in any business other than Related Businesses.
Reports
The Indenture provides that whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the SEC
(subject to the next sentence) and provide the Trustee and Holders with such annual and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such reports to be so filed and provided
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at the
times specified for the filings of such reports under such Sections and containing all the
information, audit reports and exhibits required for such reports. If, at any time, the Company is
not subject to the periodic reporting requirements of the Exchange Act for any reason, the Company
will nevertheless continue filing the reports specified in the preceding sentence with the SEC
within the time periods required unless the SEC will not accept such a filing. The Company agrees
that it will not take any action for the purpose of causing the SEC not to accept such filings.
If, notwithstanding the foregoing, the SEC will not accept such filings for any reason, the Company
will post such reports on its website within the time periods that would apply if the Company were
required to file those reports with the SEC. In addition, to the extent not satisfied by the
foregoing, the Company will agree that, for so long as any Notes are outstanding, it will furnish
to Holders and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Notwithstanding the foregoing, such requirements to file such reports shall be deemed
satisfied prior to the first anniversary of the Issue Date (1) to the extent the information
required by such reports is contained in the exchange offer registration statement or shelf
registration statement required by the Registration Rights Agreement then on file with the SEC,
including amendments thereto, or (2) by posting on its website within 15 days of the time periods
after the Company would have been required to file such reports with the SEC, the financial
information (including a “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section) that would be required to be included in such reports, subject to
exceptions consistent with the presentation of financial information in the Offering Circular.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of Default:
(i) default in the payment when due of interest on the Notes, which default continues
for 30 consecutive days;
(ii) default in payment of the principal of or premium, if any, on the Notes when due,
at Stated Maturity, upon optional redemption, upon required repurchase or otherwise;
(iii) default by the Company, the Issuer or Intermediate Holdco in the performance of
its obligations in paragraph (a) of the covenant described under “— Certain Covenants —
Merger, Consolidation or Sale of All or Substantially All Assets”;
(iv) the Company or the Issuer defaults in the performance of or breaches any other
covenant or agreement of the Company or the Issuer in the Indenture, the Security Documents
or any other collateral agreement or under the Notes (other than a default specified in
clause (i), (ii) or (iii) above), and such default or breach continues for a period of 60
consecutive days after written notice by the Trustee to the Company or by the holders of 25%
or more in aggregate principal amount of the Notes to the Company (with a copy to the
Trustee);
(v) (A) failure by the Company or any Restricted Subsidiary (other than a Special
Purpose Subsidiary with respect to Nonrecourse Indebtedness) to make a principal payment on
any Indebtedness at or prior to the expiration of the applicable grace period after the
final (but not any interim) fixed maturity of such Indebtedness, where the amount of such
unpaid principal exceeds $10.0 million or (B) acceleration of Indebtedness of the Company or
any Restricted Subsidiary (other than Nonrecourse Indebtedness of a Special Purpose
Subsidiary) because of a default thereunder, where the total amount of such Indebtedness
accelerated exceeds $10.0 million;
(vi) one or more judgments, orders, decrees or arbitration awards (other than those
existing on the Issue Date and disclosed in the Offering Circular) are entered against the
Company or any Restricted Subsidiaries involving in the aggregate a liability (to the extent
not paid when due or covered by insurance) of $10.0 million or more and all such judgments,
orders, decrees or arbitration awards have not been paid and satisfied, vacated, discharged,
stayed or fully bonded pending appeal within 90 days from the entry thereof;
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(vii) except as permitted by the Indenture, any Notes Guarantee of a Significant
Subsidiary of the Company, or the Notes Guarantees of a group of Subsidiary Guarantors that,
taken together, would constitute a Significant Subsidiary of the Company, is held in a
judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full
force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, denies
or disaffirms its obligations under its Notes Guarantee;
(viii) certain events of bankruptcy or insolvency with respect to the Company, the
Issuer, Intermediate Holdco or any Significant Subsidiary or any group of Subsidiaries that,
taken together, would constitute a Significant Subsidiary; and
(ix) (1) default by the Company, the Issuer, Intermediate Holdco or any Subsidiary
Guarantor in the performance of the Security Documents which adversely affects the
enforceability, validity, perfection or priority of the Collateral Agent’s Lien on the
Collateral in any material respect, (2) repudiation or disaffirmation by the Company, the
Issuer, Intermediate Holdco or any Subsidiary Guarantor of its obligations under the
Security Documents or (3) the determination in a judicial proceeding that the Security
Documents are unenforceable or invalid against the Company, the Issuer, Intermediate Holdco
or any Subsidiary Guarantor for any reason except to the extent any such unenforceability or
invalidity is caused by the failure of the Collateral Agent to make filings, renewals and
continuations (or other equivalent filings) which the Company has indicated in the
perfection certificate are required to be made or the failure of the Collateral Agent to
maintain possession of certificates actually delivered to it representing securities pledged
under the Security Documents.
If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25%
in principal amount of the then outstanding Notes may declare all the Notes to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default arising under
clause (viii) above, all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default (except a Default relating to
the payment of principal or interest) if it determines that withholding notice is in their
interest.
In the event of a declaration of acceleration because an Event of Default set forth in clause
(v) above has occurred and is continuing, such declaration of acceleration shall be automatically
rescinded and annulled if the event of default triggering such Event of Default pursuant to such
clause (v) shall be remedied or cured or waived by the holders of the relevant Indebtedness within
30 days after the declaration of acceleration with respect thereto.
The Holders of a majority in aggregate principal amount of the Notes then outstanding by
written notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing
Default and its consequences under the Indenture except a continuing Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a written statement regarding
compliance with the Indenture, and the Company is required upon becoming aware of any Default, to
deliver to the Trustee a written statement specifying such Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company or the Issuer, and
no director, trustee, officer, employee, incorporator or shareholder (other than the Company or a
Restricted Subsidiary) of any Subsidiary, as such, shall have any liability for any obligations of
the Company or the Issuer under the Indenture or the Registration Rights Agreement or with respect
to the Notes or the Notes Guarantee or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal securities laws and it is
the view of the SEC that such a waiver is against public policy.
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Defeasance
The Issuer may, at its option and at any time, elect to have all of its obligations discharged
with respect to the outstanding Notes (“Legal Defeasance”) except for:
(i) the rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are due from
the trust referred to below;
(ii) the Issuer’s obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance
of an office or agency for payment and money for security payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuer’s obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have the obligations of
the Issuer released with respect to certain covenants that are described in the Indenture
(“Covenant Defeasance”) and thereafter any omission to comply with such obligations shall not
constitute a Default with respect to the Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment and bankruptcy events) described under “— Events of Default and
Remedies” will no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable government securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of, premium, if any,
and interest due on the outstanding Notes on the stated maturity date or on the applicable
redemption date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee confirming
that, subject to customary assumptions and exclusions, (1) the Issuer has received from, or
there has been published by, the Internal Revenue Service a ruling or (2) since the Issue
Date, there has been a change in the applicable U.S. federal income tax law, in either case
to the effect that, and based thereon such opinion of counsel shall confirm that, the
Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a
result of such Legal Defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Issuer shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that, subject to customary assumptions and exclusions, the Holders will not
recognize income, gain or loss for U.S. federal income tax purposes as a result of such
Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default shall have occurred and be continuing on the date of such deposit
(other than a Default resulting from the borrowing of funds to be applied to such deposit);
(v) such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
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(vi) the Issuer shall have delivered to the Trustee an Officers’ Certificate stating
that the deposit was not made by the Issuer with the intent of preferring the Holders of
Notes over the other creditors of the Issuer or the Guarantors with the intent of defeating,
hindering, delaying or defrauding creditors of the Issuer or any Guarantor or others; and
(vii) the Issuer shall have delivered to the Trustee an Officers’ Certificate and an
opinion of counsel (which opinion may be subject to customary assumptions and exclusions),
each stating that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance, as the case may be, have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture. The registrar and
the Trustee may require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or exchange any Note selected
for redemption. Also, the Issuer is not required to transfer or exchange any Note for a period of
15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be
treated as the owner of it for all purposes.
Amendments and Waivers
Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with
the consent of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes), and any existing default or compliance with any provision of the Indenture or the
Notes may be waived with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a purchase of, or tender offer or
exchange offer for, Notes).
Without the consent of each Holder affected thereby, an amendment or waiver may not, among
other things:
(i) reduce the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Note;
(iii) reduce the rate of or change the time for payment of interest on any Note;
(iv) waive a Default in the payment of, principal of or premium, if any, or interest on
the Notes (except a rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration);
(v) (A) release any Guarantor from any of its obligations under its Notes Guarantee
other than in accordance with the terms of the Indenture or (B) adversely change any Notes
Guarantee or the priority of the Liens in the Collateral or release all or substantially all
of the Collateral from the Liens created by the Security Documents, except in each case as
specially provided for in the Indenture and the Security Documents;
(vi) make any Note payable in money other than that stated in the Notes;
(vii) make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Notes to receive payments of principal of or premium,
if any, or interest on the Notes or to institute suit for the enforcement of any such
payment;
(viii) make any change to the provisions applicable to the redemption of any Note as
described under “— Optional Redemption”;
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(ix) make any change in the ranking or priority of any Note that would adversely affect
the Holders; or
(x) make any change in the amendment and waiver provisions.
In addition, without the consent of the Holders of at least 66% in aggregate principal amount
of Notes then outstanding, an amendment or waiver may not (with respect to any Notes held by a
non-consenting Holder):
(i) modify any Security Document or the provisions of the Indenture dealing with the
Security Documents or application of trust moneys, or otherwise release any Collateral from
the Lien of the Security Documents, in any manner adverse to such Holder other than in
accordance with the Indenture, the Security Documents and any Intercreditor Agreement; or
(ii) modify any Intercreditor Agreement in any manner adverse to such Holder other than
in accordance with the Indenture, the Security Documents and such Intercreditor Agreement.
Notwithstanding the foregoing, without the consent of any Holder of Notes, the Issuer and the
Trustee may amend or supplement the Indenture, the Notes, any Security Document or any
Intercreditor Agreement:
(i) to cure any ambiguity, omission, defect or inconsistency;
(ii) to provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code);
(iii) to provide for the assumption by a successor corporation of the obligations of
the Issuer or a Guarantor to Holders under the Indenture in the case of a merger or
consolidation;
(iv) to make any change that would provide any additional rights or benefits to the
Holders of Notes or that does not adversely affect the legal rights under the Indenture of
any such Holder;
(v) to comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act;
(vi) to evidence and provide for the acceptance of appointment under the Indenture of a
successor trustee;
(vii) to add one or more Guarantors under the Indenture;
(viii) to add any additional assets to the Collateral;
(ix) to release Collateral from the Lien of the Security Documents when permitted or
required by the Indenture and the Security Documents;
(x) to conform the text of the Indenture, the Notes or any Guarantee to any provision
of this “Description of the Exchange Notes” to the extent that such provision in this
“Description of the Exchange Notes” was intended to be a verbatim recitation of a provision
of the Indenture, the Notes or such Guarantee;
(xi) as necessary to conform the Indenture to any exceptive orders under the Trust
Indenture Act received by the Issuer or any Guarantor; or
(xii) to make any amendment to the provisions of the Indenture relating to the transfer
and legending of Notes; provided, however, that (A) compliance with the Indenture as so
amended would not
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result in Notes being transferred in violation of the Securities Act or any other
applicable securities law and (B) such amendment does not materially and adversely affect
the rights of Holders to transfer Notes.
The consent of the Holders is not necessary under the Indenture to approve the particular form
of any proposed amendment. It is sufficient if such consent approves the substance of the proposed
amendment.
After an amendment under the Indenture becomes effective, we are required to mail to the
Holders of the Notes a notice briefly describing such amendment. However, the failure to give such
notice to all holders of the Notes, or any defect therein, will not impair or affect the validity
of the amendment.
Neither the Company nor any Affiliate of the Company may, directly or indirectly, pay or cause
to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as
an inducement to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to all Holders and is paid to all
Holders that so consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect (except as to
surviving rights and immunities of the Trustee and rights of registration or transfer or exchange
of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when:
(i) either:
(1) all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes that have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the Issuer and
thereafter repaid to the Issuer or discharged from such trust) have been delivered to the
Trustee for cancellation; or
(2) all Notes not theretofore delivered to the Trustee for cancellation (a) have
become due and payable, (b) will become due and payable at their stated maturity within
one year or (c) if redeemable at the option of the Issuer, are to be called for
redemption within one year under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the expense, of the Issuer,
and the Issuer has irrevocably deposited or caused to be deposited with the Trustee funds
in an amount sufficient or government securities, the principal of and interest on which
will be sufficient, or a combination thereof sufficient, to pay and discharge the entire
Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Issuer directing the Trustee to apply such funds
to the payment thereof at maturity or redemption, as the case may be;
(ii) the Issuer has paid all other sums payable under the Indenture by the Issuer; and
(iii) the Issuer has delivered to the Trustee an officers’ certificate and an opinion
of counsel stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee, should it become a
creditor of the Issuer or any Guarantor, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign.
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The Holders of a majority in principal amount of the then outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the conduct of his or her
own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Book-Entry, Delivery and Form
The Notes initially will be represented by one or more global notes in registered form without
interest coupons (collectively, the “Global Notes”). The Global Notes will be deposited upon
issuance with the Trustee as custodian for The Depository Trust Company (“DTC”), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global
Notes may not be exchanged for Notes in certificated form except in the limited circumstances
described below. See “— Exchange of Global Notes for Certificated Notes.” Except in the limited
circumstances described below, owners of beneficial interests in the Global Notes will not be
entitled to receive physical delivery of Notes in certificated form.
Depositary Procedures
The following description of the operations and procedures of DTC is provided solely as a
matter of convenience. These operations and procedures are solely within the control of the
respective settlement systems and are subject to changes by them. We take no responsibility for
these operations and procedures and urge investors to contact the system or their participants
directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company organized under the laws of the
State of New York, a “banking organization” within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform
Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participating organizations (collectively,
the “Participants”) and to facilitate the clearance and settlement of transactions in those
securities between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers (including the initial
purchasers), banks, trust companies, clearing corporations and certain other organizations. Access
to DTC’s system is also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, the “Indirect Participants”). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants. DTC has also advised us that, pursuant to procedures
established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with portions of the principal amount of the Global
Notes; and
(2) ownership of these interests in the Global Notes will be shown on, and the transfer of
ownership of these interests will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes).
Investors in the Global Notes who are Participants in DTC’s system may hold their interests
therein directly through DTC. Investors in the Global Notes who are not Participants may hold their interests
therein indirectly through organizations which are Participants in such system. All interests in a
Global Note may be subject to the procedures and requirements of DTC. The laws of some states
require that certain Persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note
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to such Persons will be limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants, the ability of a Person having beneficial
interests in a Global Note to pledge such interests to Persons that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.
Except as described below, owners of an interest in the Global Notes will not have Notes
registered in their names, will not receive physical delivery of Notes in certificated form and
will not be considered the registered owners or “Holders” thereof under the Indenture for any
purpose.
Payments in respect of the principal of, and interest and premium and additional interest, if
any, on a Global Note registered in the name of DTC or its nominee will be payable to DTC in its
capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Issuer
and the Trustee will treat the Persons in whose names the Notes, including the Global Notes, are
registered as the owners of the Notes for the purpose of receiving payments and for all other
purposes. Consequently, neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee
has or will have any responsibility or liability for:
| (1) | any aspect of DTC’s records or any Participant’s or Indirect Participant’s records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any of DTC’s records or any Participant’s or Indirect Participant’s records relating to the beneficial ownership interests in the Global Notes; or | ||
| (2) | any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. |
DTC has advised the Issuer that
its current practice, upon receipt of any payment in respect of
securities such as the Notes (including principal and interest), is to credit the accounts of the
relevant Participants with the payment on the payment date unless DTC has reason to believe it will
not receive payment on such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount of the relevant
security as shown on the records of DTC. Payments by the Participants and the Indirect Participants
to the beneficial owners of Notes will be governed by standing instructions and customary practices
and will be the responsibility of the Participants or the Indirect Participants and will not be the
responsibility of DTC, the Trustee or the Issuer. Neither the Issuer nor the Trustee will be liable
for any delay by DTC or any of its Participants in identifying the beneficial owners of the Notes,
and the Issuer and the Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance with DTC’s procedures,
and will be settled in same-day funds.
DTC has advised the Issuer that it will take any action permitted to be taken by a Holder of
Notes only at the direction of one or more Participants to whose account DTC has credited the
interests in the Global Notes and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the right to exchange the
Global Notes for Notes in certificated form, and to distribute such Notes to its Participants.
Although DTC has agreed to the foregoing procedures in order to facilitate transfers of
interests in the Global Notes among participants, it is under no obligation to perform such
procedures, and such procedures may be discontinued or changed at any time. Neither the Issuer nor
the Trustee nor any of their respective agents will have any responsibility for the performance by
DTC or its participants or indirect participants of their respective obligations under the rules
and procedures governing their operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for Certificated Notes if:
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| (1) | DTC (a) notifies the Issuer that it is unwilling or unable to continue as depositary for the Global Notes or (b) has ceased to be a clearing agency registered under the Exchange Act and, in each case, a successor depositary is not appointed; | ||
| (2) | the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated Notes; or | ||
| (3) | there has occurred and is continuing a Default with respect to the Notes. |
In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes
upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the
Indenture. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial
interests in Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with its customary
procedures).
Exchange of Global Notes for Certificated Notes
The Issuer will make payments in respect of the Notes represented by the Global Notes
(including principal, premium, if any, interest and additional interest, if any) by wire transfer
of immediately available funds to the accounts specified by the Global Note Holder. The Issuer will
make all payments of principal, interest and premium and additional interest, if any, with respect
to Certificated Notes by wire transfer of immediately available funds to the accounts specified by
the Holders of the Certificated Notes or, if no such account is specified, by mailing a check to
each such Holder’s registered address. The Notes represented by the Global Notes are expected to be
eligible to trade in the PORTAL market and to trade in DTC’s Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such notes will, therefore, be required by DTC
to be settled in immediately available funds. The Issuer expects that secondary trading in any
Certificated Notes will also be settled in immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference is made to the
Indenture for a full disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
“2008 Conduit Facility” means the borrowing facilities, as amended from time to time, pursuant
to which Diamond Resorts Issuer 2008 LLC is able to obtain borrowings evidenced by its secured
vacation interest receivable-backed variable funding notes designated Diamond Resorts Issuer 2008
LLC, Variable Funding Notes.
“Acquired Indebtedness” means, with respect to any specified Person, (i) Indebtedness of any
other Person existing at the time such other Person is merged with or into or became a Subsidiary
of such specified Person, including Indebtedness incurred in connection with, or in contemplation
of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.
“Adjusted EBITDA” for any period means the sum of Consolidated Net Income, plus the following
to the extent deducted in calculating such Consolidated Net Income:
(i) all income tax provision (benefit) for such period, including any applicable
amounts distributed to a Company Holder pursuant to clause (b)(ix) of the covenant described
under “— Certain Covenants — Restricted Payments” so deducted; plus
(ii) consolidated Interest Expense for such period; plus
(iii) depreciation and amortization for such period; plus
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(iv) vacation interest cost of sales for such period; plus
(v) loss on extinguishment of debt for such period; plus
(vi) impairments and other write-offs for such period; plus
(vii) loss on the sale of assets for such period; plus
(viii) amortization of loan origination costs for such period; plus
(ix) amortization of portfolio discount for such period; plus
(x) all other non-cash charges for such period (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve for cash expenditures in any future
period); less
(xi) gain on the sale of assets for such period; less
(xii) amortization of portfolio premium for such period; less
(xiii) all non-cash items of income for such period (excluding any non-cash accruals of
revenue in the ordinary course of business to the extent required by accrual-based
accounting).
Notwithstanding the foregoing, items specified in clauses (i) and (iii) through (xiii) above
that are attributable to a Restricted Subsidiary shall be added to Consolidated Net Income to
compute Adjusted EBITDA only to the extent (and in the same proportion, including by reason of
minority interests) that such items of such Restricted Subsidiary were included in calculating
Consolidated Net Income and only, with respect to items (i) and (iii) through (x), if a
corresponding amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant
to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders.
“Affiliate” of any Person means (i) any other Person which directly, or indirectly through one
or more intermediaries, controls such Person or (ii) any other Person which directly, or indirectly
through one or more intermediaries, is controlled by or is under common control with such Person.
As used herein, the term “control” means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether through the ownership of
voting securities, by contract or otherwise. For purposes of the covenant described under “—
Certain Covenants — Transactions with Affiliates”, no (1) homeowners’ association at a property at
which the Company or its Subsidiaries either have sold Vacation Interests or acts as management
company or (2) collection holding real estate interests underlying Points shall be deemed to be an
Affiliate of the Company or any Restricted Subsidiary.
“Applicable Premium” means, with respect to any Note on any Redemption Date, the greater of:
(i) 1.0% of the principal amount of such Note; and
(ii) the excess, if any, of (1) the present value at such Redemption Date of (x) the
redemption price of such Note on August 15, 2014 (such redemption price being set forth in
the second paragraph under “— Optional Redemption”), plus (y) all required remaining
interest payments due on such Note through August 15, 2014 (but excluding accrued but unpaid
interest to the Redemption Date), computed using a discount rate equal to the Treasury Rate
as of such Redemption Date plus 50 basis points; over (2) the principal amount of such Note.
“Applicable Senior Indebtedness” means
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(i) in respect of any asset that is the subject of an Asset Sale at a time when such
asset is included in the Collateral, other Indebtedness that is secured at such time by a
Permitted Collateral Lien on such asset;
(ii) in respect of any asset that is the subject of an Asset Sale at a time when such
asset is owned, directly or indirectly, by a Restricted Subsidiary that is not a Subsidiary
Guarantor but the Capital Stock of which is included in the Collateral, other Indebtedness
that is secured at such time by a Permitted Collateral Lien on such Capital Stock; or
(iii) in respect of any other asset (including any asset previously constituting
Collateral that has been released from the Liens securing the Notes and Guarantees),
Indebtedness that is not a Subordinated Obligation.
“Asset Sale” means
(i) the sale, lease, conveyance or other disposition of any assets or rights (including
by way of a sale and leaseback) by the Company or any Restricted Subsidiary to any Person
other than the Company or any Restricted Subsidiary other than in the ordinary course of
business (provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and the Restricted Subsidiaries, taken as a
whole, will be governed by the provisions of the Indenture described under “— Change of
Control” or the provisions described under “— Certain Covenants — Merger, Consolidation or
Sale of All or Substantially All Assets” and not by the provisions of the Asset Sale
covenant);
(ii) the issue or sale by the Company or any Restricted Subsidiaries to any Person
(other than the Company or any Restricted Subsidiaries) of Equity Interests of any of the
Company’s Subsidiaries, and
(iii) the issue or sale by the Company or any Restricted Subsidiaries to any Person
(other than the Company or any Restricted Subsidiaries) of Equity Interests of the Issuer or
any Subsidiary Guarantor;
in the case of either clause (i) or (ii), whether in a single transaction or a series of
related transactions that have a Fair Market Value in excess of $1.0 million or for net proceeds in
excess of $1.0 million.
Notwithstanding the foregoing, the term “Asset Sale” shall not include:
(i) a disposition that constitutes a Restricted Payment (or would constitute a
Restricted Payment but for the exclusions from the definition thereof) and that is not
prohibited by the covenant described under “— Certain Covenants — Restricted Payments”;
(ii) the transfer of Timeshare Loans and related rights and assets in connection with
any Permitted Securitization;
(iii) the disposition of cash or Cash Equivalents;
(iv) terminations of Hedging Obligations;
(v) any financing transaction with respect to assets or rights of the Company or any
Restricted Subsidiary, including any sale and leaseback of assets or rights not prohibited
by the covenant described under “— Certain Covenants — Incurrence of Indebtedness” or the
covenant described under “— Certain Covenants — Liens”;
(vi) any surrender or waiver of contract rights or a settlement, release or surrender
of contract, tort or other claims of any kind; and
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(vii) the grant of any Lien not prohibited by the Indenture and any foreclosure or
exercise in respect thereof.
“Attributable Debt” in respect of a Sale/Leaseback Transaction means, as at the time of
determination, the present value (discounted at the interest rate borne by the Notes, compounded
annually) of the total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for which such lease
has been extended); provided, however, that if such Sale/Leaseback Transaction results in a Capital
Lease Obligation, the amount of Indebtedness represented thereby will be determined in accordance
with the definition of “Capital Lease Obligation.”
“Average Life” means, as of the date of determination, with respect to any Indebtedness, the
quotient obtained by dividing:
(i) the sum of the products of the number of years from the date of determination to
the date of each successive scheduled principal payment of or redemption or similar payment
with respect to such Indebtedness multiplied by the amount of such payment by
(ii) the sum of all such payments.
“Banking Product Obligations” means any obligations of the Company or any Restricted
Subsidiary owed to any Person in respect of treasury management services (including services in
connection with operating, collections, payroll, trust or other depository or disbursement
accounts, including automated clearinghouse, e-payable, electronic funds transfer, wire transfer,
controlled disbursement, overdraft, depositary, information reporting, lock-box and stop payment
services), commercial credit card and merchant card services, stored valued card services, other
cash management services, lock-box leases and other banking products or services related to any of
the foregoing.
“Board of Directors” means, as to any Person, the board of managers, board of directors or
other similar body or Person performing a similar function or any duly authorized committee
thereof. Unless otherwise specified, “Board of Directors” will mean the Board of Directors of the
Company.
“Business Day” means each day that is not a Saturday, Sunday or other day on which banking
institutions in New York, New York are authorized or required by law to close.
“Capital Expenditures” means, for any period, the additions to property, plant and equipment
and other capital expenditures (including acquisitions) of the Company and its Restricted
Subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of the
Company for such period prepared in accordance with GAAP.
“Capital Lease Obligation” means, at the time any determination thereof is to be made, the
amount of the liability in respect of a capital lease that would at such time be required to be
capitalized on a balance sheet in accordance with GAAP.
“Capital Stock” means (i) in the case of a corporation, corporate stock, (ii) in the case of
an association or business entity, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
“Cash Equivalents” means:
(i) obligations (1) issued or directly and unconditionally guaranteed as to interest
and principal by the United States government or (2) issued by any agency of the United
States government the obligations of which are backed by the full faith and credit of the
United States, in each case maturing
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within 12 months after acquisition thereof, or certificates representing an ownership
interest in any such obligations;
(ii) securities issued or fully guaranteed by any state of the United States or any
political subdivision of any such state or any public instrumentality thereof, in each case
maturing within one year after acquisition thereof and having, at the time of acquisition, a
rating of at least A-1 from S&P or at least P-1 from Moody’s;
(iii) demand and time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued by a bank or
trust company which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of America, and which bank or
trust company has capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding debt which is rated
“A” (or such similar equivalent rating) or higher by at least one of Moody’s or S&P or any
money market fund sponsored by a registered broker dealer or mutual fund distributor;
(iv) repurchase obligations for underlying securities of the type described in clauses
(ii) and (iii) of this definition entered into with any financial institution meeting the
qualifications specified in such clause (iii);
(v) commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time at which any investment therein is made
of “P-1” (or higher) according to Moody’s or “A-1” (or higher) according to S&P;
(vi) interests in any investment company or money market fund that invests
substantially all of its assets in instruments of the types described in clauses (i) through
(v) of this definition; and
(vii) to the extent held by a Foreign Subsidiary, other short-term Investments utilized
by such Foreign Subsidiary in accordance with normal investment practices for cash
management in Investments of a type analogous to those described in clauses (i) through (vi)
of this definition.
“Change of Control” means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and the Restricted Subsidiaries taken as a
whole to any “person” (as such term is used in Section 13(d)(3) of the Exchange Act) other
than in the ordinary course of business;
(ii) the adoption of a plan relating to the liquidation or dissolution of the Company;
(iii) any “person” (as defined above), other than one or more Permitted Holders, is or
becomes the “beneficial owner” (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have “beneficial ownership” of all
securities that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent condition), directly
or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares); or
(iv) the Company consolidates with, or merges with or into, any Person (other than a
Permitted Holder), or any Person (other than a Permitted Holder) consolidates with, or
merges with or into, the Company, in any such event pursuant to a transaction in which any
of the outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the Voting Stock of the
Company outstanding immediately prior to such transaction is
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converted into or exchanged for Voting Stock (other than Disqualified Stock) of the
surviving or transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving effect to such
issuance).
“Collateral Agent” means the Trustee, in its capacity as the collateral agent under the
Security Documents, and any successor thereto in such capacity.
“Company” means Diamond Resorts Parent, LLC and its successors and assigns.
“Company Equity Plan” means any management equity or stock option or ownership plan or any
other management or employee benefit plan of the Company or any Subsidiary of the Company.
“Concurrent Equity Transaction” means the transaction described in the Offering Circular and
anticipated to close on the Issue Date pursuant to which an equity investment is made in the
Company and the proceeds therefrom are used to acquire and retire another equity interest in the
Company.
“Consolidated Change in Working Capital” means, for any period, (i) the provision for
uncollectible vacation interest sales revenue as set forth in a consolidated statement of operations for
such period, less (ii) vacation interest cost of sales as set forth in a consolidated statement of
operations for such period, plus (iii) the provision of income taxes as set forth in a consolidated
statement of operations for such period, if any, less (iv) the benefit for income taxes as set
forth in a consolidated statement of operations for such period, if any, less (v) payments on notes
payable as set forth in a consolidated statement of cash flows for such period, plus (vi)
borrowings on notes payable as set forth in a consolidated statement of cash flows for such period,
plus (vii) the aggregate change, if positive, in (a) mortgages and contracts receivable, (b) unsold
vacation interests, net, (c) due from related parties, net, (d) other receivables, net, (e) prepaid
expenses and other assets, net, (f) accounts payable, (g) due to related parties, net, (h) accrued
liabilities, (i) income taxes payable (receivable), (j) deferred revenues and (k) changes in cash
in escrow and restricted cash, in the case of each of (a) through (k) as set forth in a
consolidated statement of cash flows for such period, less (viii) the aggregate change, if
negative, in (1) mortgages and contracts receivable, (2) unsold vacation interests, net, (3) due
from related parties, net, (4) other receivables, net, (5) prepaid expenses and other assets, net,
(6) accounts payable, (7) due to related parties, net, (8) accrued liabilities, (9) income taxes
payable (receivable), (10) deferred revenues and (11) changes in cash in escrow and restricted
cash, in the case of each of (1) through (11) as set forth in a consolidated statement of cash
flows for such period, in the case of each of (i) through (viii) of the Company and its Restricted
Subsidiaries as determined on a consolidated basis in accordance with GAAP.
“Consolidated Interest Expense” means, for any period, the total interest expense of the
Company and the Restricted Subsidiaries, computed on a consolidated basis, in accordance with GAAP
(other than non-cash interest expense attributable to convertible indebtedness under Accounting
Practices Bulletin 14-1 or any successor provision), plus, to the extent not included in such total
interest expense, and to the extent incurred by the Company or any Restricted Subsidiaries, without
duplication:
(i) interest expense attributable to Capital Lease Obligations, the interest portion of
rent expense associated with Attributable Debt in respect of the relevant lease giving rise
thereto, determined as if such lease were a capitalized lease in accordance with GAAP, and
the interest component of any deferred payment obligations;
(ii) amortization of debt discount (including the amortization of original issue
discount resulting from the issuance of Indebtedness at less than par) and debt issuance
cost; provided, however, that any amortization of bond premium will be credited to reduce
Consolidated Interest Expense unless, pursuant to GAAP, such amortization of bond premium
has otherwise reduced Consolidated Interest Expense;
(iii) capitalized interest;
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(iv) non-cash interest expense; provided, however, that any non-cash interest expense
or income attributable to the movement in the mark to mark valuation of Hedging Obligations
or other derivative instruments pursuant to GAAP shall be excluded from the calculation of
Consolidated Interest Expense;
(v) commissions, discounts and other fees and charges owed with respect to letters of
credit and bankers’ acceptance financing;
(vi) net payments pursuant to Hedging Obligations;
(vii) the product of (1) all dividends accrued in respect of all Disqualified Stock of
the Company and all Preferred Stock of any Restricted Subsidiary, in each case, held by
Persons other than the Company or a Restricted Subsidiary (other than dividends payable
solely in Capital Stock (other than Disqualified Stock) of the Company), times (2) a
fraction of the numerator of which is one and the denominator of which is one minus the
effective combined tax rate of the issuer of such Preferred Stock (expressed as a decimal)
for such period (as estimated by the chief financial officer of the Company in good faith);
(viii) interest incurred in connection with Investments in discontinued operations; and
(ix) interest accruing on any Indebtedness of any other Person to the extent such
Indebtedness is Guaranteed by (or secured by a Lien on the assets of) the Company or any
Restricted Subsidiary;
provided, however, there shall be excluded from Consolidated Interest Expense the interest expense
(including the expenses described in (i) through (ix)) with respect to Nonrecourse Indebtedness
incurred in connection with Permitted Securitizations.
“Consolidated Net Income” means, for any period, net income (or loss) of the Company and the
Restricted Subsidiaries, computed on a consolidated basis for such Persons, in accordance with
GAAP; provided, however, these shall be excluded therefrom the following:
(i) net income (or loss) of any Person accrued prior to the date it became a Restricted
Subsidiary or was merged with or into or consolidated with the Company or a Restricted
Subsidiary or the date such Person’s assets were acquired by the Company or a Restricted
Subsidiary;
(ii) any gain (net of tax effects attributable thereto) arising from any reappraisal or
write-up of assets;
(iii) any portion of the net income of any Restricted Subsidiary that for any reason is
unavailable for payment of dividends or similar distributions to the Company or any other
Restricted Subsidiary;
(iv) the cumulative effect of any changes in accounting principles; and
(v) net income of any Person (other than a Restricted Subsidiary) in which the Company
or any Restricted Subsidiary shall have an ownership interest unless such net income shall
actually have been received by the Company or such Restricted Subsidiary in the form of cash
dividends or similar distributions,
provided, however, that any amounts distributed to a Company Holder pursuant to clause (b)(x) of
the covenant described under “— Certain Covenants — Restricted Payments” are treated as an income
tax expense by the Company and will be deducted in computing net income (loss) of the Company.
“Credit Facility” means any credit agreement providing for revolving credit including any
related notes, guarantees, collateral documents, instruments and agreement executed in connection
therewith, and, in each case, as
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amended, restated, replaced (whether upon or after termination or
otherwise), Refinanced, supplemented, modified
or otherwise changed (in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time.
“DROT 2009 Notes” means the 9.31% Timeshare Loan Backed Notes, Series 2009-1, Class A and the
12.00% Timeshare Loan Backed Notes, Series 2009-1, Class B of Diamond Resorts Owner Trust 2009-1.
“Default” means any event that is or, with the passage of time or the giving of notice or
both, would be an Event of Default.
“Designated Non-cash Consideration” means the Fair Market Value of non-cash consideration
received by the Company or one of its Restricted Subsidiaries in connection with an Asset Sale that
is so designated as Designated Non-cash Consideration pursuant to an Officer’s Certificate setting
forth the basis of such valuation, less the amount of cash and Cash Equivalents received in
connection with a subsequent sale of such Designated Non-cash Consideration.
“Disqualified Stock” means, with respect to any Person, any Capital Stock which by its terms
(or by the terms of any security into which it is convertible or for which it is exchangeable at
the option of the holder) or upon the happening of any event:
(i) matures or is mandatorily redeemable (other than redeemable only for Capital Stock
of such Person which is not itself Disqualified Stock) pursuant to a sinking fund obligation
or otherwise;
(ii) is convertible or exchangeable at the option of the holder for Indebtedness or
Disqualified Stock; or
(iii) is mandatorily redeemable or must be purchased upon the occurrence of certain
events or otherwise, in whole or in part;
in each case on or prior to 91 days after the Stated Maturity of the Notes; provided, however, that
any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an “asset sale” or “change of control” occurring prior to 91 days after the Stated
Maturity of the Notes shall not constitute Disqualified Stock if:
(i) the “asset sale” or “change of control” provisions applicable to such Capital Stock
are not more favorable to the holders of such Capital Stock than the terms applicable to the
Notes and described under “— Certain Covenants — Asset Sales” or “— Change of Control”,
respectively; and
(ii) any such requirement only becomes operative after compliance with such terms
applicable to the Notes, including the purchase of any Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption, repayment or
repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were redeemed, repaid or repurchased on any date on which the amount of
such Disqualified Stock is to be determined pursuant to the Indenture; provided, however, that if
such Disqualified Stock could not be required to be redeemed, repaid or repurchased at the time of
such determination, the redemption, repayment or repurchase price will be the book value of such
Disqualified Stock as reflected in the most recent financial statements of such Person.
“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire
Capital Stock (but excluding any debt security that is convertible into, or exchangeable for,
Capital Stock).
“Excess Cash Flow” means, for any fiscal period of the Company, an amount equal to:
(i) Adjusted EBITDA for such period; less
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(ii) Capital Expenditures for such period; provided, that, for purposes of this
calculation, Capital Expenditures shall not exceed $10.0 million in any twelve-month period
(or, if applicable, $2.5 million in any three-month period); less
(iii) Consolidated Interest Expense paid in cash for such period; less
(iv) the aggregate amount of cash distributed as Restricted Payments during such period
as permitted by clause (ix) of paragraph (b) of the covenant described under “— Certain
Covenants — Restricted Payments”; less
(v) any mandatory payments by the Company and its Restricted Subsidiaries on any
Permitted Securitization (other than the 2008 Conduit Facility, the Quorum Facility or any
similar facility) made during such period, except to the extent that any such payments were
financed by the proceeds received from the incurrence of any other Indebtedness (net of any
fees, expenses and Hedging Obligation breakage costs or benefits associated with such
incurrence); plus
(vi)
the amount of the increase, if any, in the aggregate amount
outstanding on the 2008
Conduit Facility, the Quorum Facility or any similar facility during such period (provided,
that for purposes of determining such amount, any changes during such period attributable to
any voluntary prepayments on such facilities or any payments on such facilities financed by
the proceeds received from the incurrence of any other Indebtedness (net of any fees,
expenses and Hedging Obligation breakage costs or benefits associated with such incurrence)
shall be disregarded); less
(vii)
the amount of the decrease, if any, in the aggregate amount
outstanding on the 2008
Conduit Facility, the Quorum Facility or any similar facility during such period (provided,
that for purposes of determining such amount, any changes during such period attributable to
any voluntary prepayments on such facilities or any payments on such facilities financed by
the proceeds received from the incurrence of any other Indebtedness (net of any fees,
expenses and Hedging Obligation breakage costs or benefits associated with such incurrence)
shall be disregarded); plus
(viii) Consolidated Change in Working Capital for such period, if positive; plus
(ix) Consolidated Change in Working Capital for such period, if negative.
“Exchange Notes” means the debt securities of the Issuer issued pursuant to the Indenture in
exchange for, and in an aggregate principal amount equal to, the Notes exchanged therefor, in
compliance with the terms of the Registration Rights Agreement.
“Fair Market Value” means, with respect to any asset or property, the price which could be
negotiated in an arm’s length, free market transaction, for cash, between a willing seller and a
willing and able buyer, neither of whom is under undue pressure or compulsion to complete the
transaction. Fair Market Value of the property or assets in question will be determined in good
faith by an appropriate financial officer of the Company unless such Fair Market Value (excluding
the Fair Market Value of any portion of such asset or property consisting of cash or Cash
Equivalents) is determined to be in excess of $15.0 million, in which case it will be determined in
good faith by the Board of Directors, whose determination will be conclusive and, in the case of
any determination made by the Board of Directors, evidenced by a resolution of the Board of
Directors; provided, however, that if the Fair Market Value of the property or assets in question
(excluding any portion of such property or assets consisting of cash or Cash Equivalents) is so
determined to be in excess of $30.0 million in the case of any determination of Fair Market Value
required by the provisions described in clause (a)(3)(B) under “— Certain Covenants — Restricted
Payments” or $20.0 million in the case of any determination of Fair Market Value required by any
other provisions described under “— Certain Covenants — Restricted Payments,” such determination
must be confirmed by an Independent Qualified Party.
“Fixed Charge Coverage Ratio” as of any date of determination means the ratio of (x) the
aggregate amount of Adjusted EBITDA for the period of the most recent four consecutive fiscal
quarters for which financial
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statements of the Company are available to (y) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that:
(i) if the Company or any Restricted Subsidiary has incurred any Indebtedness since the
beginning of such period that remains outstanding or if the transaction giving rise to the
need to calculate the Fixed Charge Coverage Ratio is an incurrence of Indebtedness, or both,
Adjusted EBITDA and Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been
incurred on the first day of such period;
(ii) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or
otherwise discharged any Indebtedness since the beginning of such period or if any
Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case
other than Indebtedness incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the date of the
transaction giving rise to the need to calculate the Fixed Charge Coverage Ratio, Adjusted
EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma
basis as if such discharge had occurred on the first day of such period and as if the
Company or such Restricted Subsidiary had not earned the interest income actually earned
during such period in respect of cash or Cash Equivalents used to repay, repurchase, defease
or otherwise discharge such Indebtedness;
(iii) if since the beginning of such period the Company or any Restricted Subsidiary
shall have made any Asset Sale, Adjusted EBITDA for such period shall be reduced by an
amount equal to Adjusted EBITDA (if positive) directly attributable to the assets which are
the subject of such Asset Sale for such period, or increased by an amount equal to Adjusted
EBITDA (if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the Consolidated
Interest Expense directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company
and its continuing Restricted Subsidiaries in connection with such Asset Sale for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale);
(iv) if since the beginning of such period the Company or any Restricted Subsidiary (by
merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any
Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a calculation to
be made hereunder, which constitutes all or substantially all of an operating unit of a
business, Adjusted EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the incurrence of any
Indebtedness) as if such Investment or acquisition had occurred on the first day of such
period; and
(v) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Sale, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause (iii) or
(iv) above if made by the Company or a Restricted Subsidiary during such period, Adjusted
EBITDA and Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Sale, Investment or acquisition had occurred on
the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or accounting Officer of
the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date
of determination had been the applicable rate for the entire period (taking into account any
interest rate hedging agreement applicable to such Indebtedness if such agreement has a remaining
term in excess of 12 months). If any Indebtedness is incurred under a revolving credit facility
and is being given pro forma effect, the interest on such Indebtedness shall be calculated based on
the average daily balance of such Indebtedness for the four fiscal quarters
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subject to the pro forma calculation to the extent that such Indebtedness was incurred solely
for working capital purposes.
“Foreign Subsidiary” means any Restricted Subsidiary of the Company that is not organized
under the laws of the United States of America or any State thereof or the District of Columbia.
“GAAP” means accounting principles generally accepted in the United States of America set
forth in the opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as have been approved
by a significant segment of the accounting profession, which are in effect on the Issue Date and
consistently applied.
“Guarantee” means a guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, in any manner (including
letters of credit and reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
“Guarantor” means
(i) the Company;
(ii) the Intermediate Holdco; and
(iii) each other Subsidiary of the Company that Guarantees the Notes in accordance with
the provisions of the Indenture,
in each case until such Person is released from its Notes Guarantee in accordance with the
Indenture.
“Guggenheim” means Guggenheim Partners, LLC, Guggenheim Securities, LLC and their respective
affiliates.
“Hedging Obligations” means, with respect to any Person, the obligations of such Person under
(i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements
and (ii) other agreements or arrangements designed to protect such Person against fluctuations in
interest or currency exchange rates.
“Holder” means any registered holder, from time to time, of the Notes.
“ILXA Inventory Loan” means that certain inventory loan facility between ILX Acquisition, Inc.
and Textron Financial Corporation dated August 31, 2010.
“ILXA Receivables Loan” means that certain receivables loan facility between ILX Acquisition,
Inc. and Textron Financial Corporation dated August 31, 2010.
“Indebtedness” means, with respect to any Person on any date of determination (without
duplication):
(i) the principal in respect of (1) indebtedness of such Person for money borrowed and
(2) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable, including, in each case, any premium
on such indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect
of Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred purchase price
of property, all conditional sale obligations of such Person and all obligations of such
Person under any title
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retention agreement (but excluding any accounts payable or other liability to trade
creditors arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any obligor on any letter
of credit, bankers’ acceptance or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day following
payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock of such Person or, with respect to
any Preferred Stock of any Subsidiary of such Person, the principal amount of such Preferred
Stock to be determined in accordance with the Indenture (but excluding, in each case, any
accrued dividends);
(vi) all Guarantees by such Person of obligations of the type referred to in clauses
(i) through (v) or dividends of other Persons;
(vii) all obligations of the type referred to in clauses (i) through (vi) of other
Persons secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being deemed to be the
lesser of the Fair Market Value of such property or assets and the amount of the obligation
so secured; and
(viii) to the extent not otherwise included in this definition, Hedging Obligations of
such Person.
Indebtedness of a Person includes Acquired Indebtedness of such Person.
Notwithstanding the foregoing, the term “Indebtedness” will exclude (i) in connection with the
purchase by the Company or any Restricted Subsidiary of any business, post-closing payment
adjustments to which the seller may become entitled to the extent such payment is determined by a
final closing balance sheet or such payment depends on the performance of such business after the
closing; provided, however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and determined, the amount is
paid within 30 days thereafter and (ii) obligations of the Company and the Restricted Subsidiaries
under Standard Securitization Undertakings.
The amount of Indebtedness of any Person at any date shall be the outstanding balance at such
date of all obligations as described above; provided, however, that in the case of Indebtedness
sold at a discount, the amount of such Indebtedness at any time will be the accreted value thereof
at such time.
“Independent Qualified Party” means an investment banking firm, accounting firm or appraisal
firm of national standing; provided, however, that such firm is not an Affiliate of the Company.
“Initial Purchasers” means Credit Suisse Securities (USA) LLC, Banc of America Securities LLC
and Guggenheim Securities, LLC.
“Intermediate Holdco” means Diamond Resorts Holdings, LLC and its successors and assigns.
“Investment” in any Person means any direct or indirect advance, loan (other than advances to
customers in the ordinary course of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such
Person. If the Company or any Restricted Subsidiary issues, sells or otherwise disposes of any
Capital Stock of a Person that is a Restricted Subsidiary such that, after giving effect thereto,
such Person is no longer a Restricted
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Subsidiary, any Investment by the Company or any Restricted Subsidiary in such Person
remaining after giving effect thereto will be deemed to be a new Investment at such time. The
acquisition by the Company or any Restricted Subsidiary of a Person that holds an Investment in a
third Person will be deemed to be an Investment by the Company or such Restricted Subsidiary in
such third Person at such time. Except as otherwise provided for herein, the amount of an
Investment shall be its Fair Market Value at the time the Investment is made and without giving
effect to subsequent changes in value.
For purposes of the definition of “Unrestricted Subsidiary” and the covenant described under
“— Certain Covenants — Restricted Payments”:
(i) “Investment” shall include the portion (proportionate to the Company’s equity
interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of
the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent “Investment” in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (1) the Company’s “Investment” in such
Subsidiary at the time of such redesignation less (2) the portion (proportionate to the
Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of
such Subsidiary at the time of such redesignation; and
(ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at
its Fair Market Value at the time of such transfer.
“Issue Date” means August 13, 2010.
“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest
or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title retention agreement
or any lease in the nature thereof); provided, however, that in no event shall an operating lease
be deemed to constitute a Lien. The term “Lien” does not include negative pledge clauses in
agreements relating to the borrowing of money or the obligation of the Company or any Subsidiary
(a) to remit monies held by it in connection with dealer holdbacks, claims or refunds under
insurance policies, or claims or refunds under service contracts or (b) to make deposits in trust
or otherwise as required under reinsurance agreements or pursuant to state regulatory requirements,
unless the Company or such Subsidiary has encumbered its interest in such monies or deposits or in
other property of the Company or such Subsidiary to secure such obligations.
“Moody’s” means Moody’s Investors Service, Inc., or any successor thereto.
“Net Cash Proceeds” means (i) with respect to any issuance or sale of Capital Stock or
Indebtedness, the cash proceeds of such issuance or sale net of attorneys’ fees, accountants’ fees,
underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof and (ii) with respect to an Asset Sale, the payments received in the
form of cash or the value of Cash Equivalents therefrom (including any such payments received by
way of deferred payment of principal pursuant to a note or installment receivable or otherwise and
proceeds from the sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form of assumption by
the acquiring Person of Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form), in each case net of:
(1) all legal, accounting and investment banking fees, title and recording tax
expenses, commissions and other fees and expenses incurred, and all federal, state,
provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Sale;
(2) all payments made on any Indebtedness which is secured by any assets subject to
such Asset Sale, in accordance with the terms of any Lien upon or other security agreement
of any kind with
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respect to such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such
Asset Sale;
(3) all distributions and other payments required to be made to minority interest
holders in Restricted Subsidiaries as a result of such Asset Sale;
(4) the deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Sale and retained by the Company or any Restricted Subsidiary after
such Asset Sale; and
(5) any portion of the purchase price from an Asset Sale placed in escrow, whether as a
reserve for adjustment of the purchase price, for satisfaction of indemnities in respect of
such Asset Sale or otherwise in connection with that Asset Disposition; provided, however,
that upon the termination of that escrow, Net Cash Proceeds will be increased by any portion
of funds in the escrow that are released to the Company or any Restricted Subsidiary.
“Nonrecourse Indebtedness” means, with respect to any Special Purpose Subsidiary, Indebtedness
of such Special Purpose Subsidiary:
(i) as to which neither the Company nor any Restricted Subsidiary (other than such
Special Purpose Subsidiary) (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness other than Standard
Securitization Undertakings), (b) is directly or indirectly liable as a guarantor or
otherwise or (c) constitutes the lender;
(ii) no default with respect to which (including any rights that the holders of the
Indebtedness may have to take enforcement action against such Special Purpose Subsidiary)
would permit upon notice, lapse of time or both any holder of any other Indebtedness of the
Company or any Restricted Subsidiary (other than such Special Purpose Subsidiary) to declare
a default on such other Indebtedness or cause the payment of the Indebtedness to be
accelerated or payable prior to its Stated Maturity; and
(iii) as to which (a) the explicit terms provide that there is no recourse against any
assets of the Company or any Restricted Subsidiary or (b) the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the Company or any
Restricted Subsidiary;
provided, however, that the Company or a Restricted Subsidiary may grant a Lien on the Capital
Stock of such Special Purpose Subsidiary to the creditors thereof which is not recourse to any
other assets of the Company or any Restricted Subsidiary.
“Notes Guarantee” means the Guarantee on the terms set forth in the Indenture by a Guarantor
of the Issuer’s obligations with respect to the Notes.
“Notes Obligations” means the Obligations of the Company and the Guarantors with respect to
the Notes.
“Obligations” means any principal, interest, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation governing any
Indebtedness.
“Offering Circular” means the confidential Offering Circular dated August 10, 2010, pursuant
to which the initial Notes were offered and sold.
“Officer” means the Chairman of the Board, the Chief Executive Officer, the President, the
Chief Financial Officer, the Chief Accounting Officer, the Treasurer or any Executive Vice
President (or any such other officer that performs similar duties) of the Company.
“Officers’ Certificate” of the Company means a certificate signed on behalf of the Company by
two Officers.
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“Permitted Collateral Liens” means:
(i) (a) any Lien on the Collateral to secure
(1) any Indebtedness incurred as Permitted Indebtedness pursuant to the
provisions described in clause (b)(i) under “— Certain Covenants — Incurrence of
Indebtedness”;
(2) the Notes (or any Guarantees thereof) incurred as Permitted Indebtedness
pursuant to the provisions described in clause (b)(ii) under “— Certain Covenants
— Incurrence of Indebtedness”;
(3) any other Indebtedness incurred pursuant to the covenant described under
“— Certain Covenants — Incurrence of Indebtedness”; provided, however, that (x) no
Default shall have occurred and be continuing at the time of the incurrence of such
Indebtedness or after giving effect thereto and (y) the Secured Debt Ratio of the
Company, calculated on a pro forma basis after giving effect to the incurrence of
such Indebtedness, would be no greater than 2.5 to 1.0;
(4) any Refinancing Indebtedness of Indebtedness described in the foregoing
clauses (2) or (3) or this clause (4); or
(5) Banking Product Obligations to the extent that the provider of such Banking
Product Obligations has agreed to be bound by the terms of an Intercreditor
Agreement or such provider’s interest in the Collateral is subject to the terms of
an Intercreditor Agreement,
in each case which are subject to the terms of an Intercreditor Agreement; or
(b) any Lien on the Collateral that is a statutory Lien arising by operation of law; provided,
however, that such Lien either ranks:
(1) equal to all other Liens on such Collateral securing unsubordinated
Indebtedness of the Company or the relevant Restricted Subsidiary, if the Lien
secures unsubordinated Indebtedness; or
(2) junior to the Liens securing the Notes, and
(ii) any Permitted Lien described in clauses (i), (iii), (iv), (v), (vi), (vii),
(viii), (ix), (x), (xii), (xiv), (xv), (xvi), (xvii), (xviii), (xix), (xx), (xxi) and (xxii)
of the definition of “Permitted Lien”; provided, however, that (A) such Permitted Lien
(other than any Lien described in clauses (iii), (ix), (xiv), (xv), (xvi) and (xvii) of such
definition) is not a Lien on any of the Points and (B) such Permitted Lien (other than any
Lien described in clauses (iii), (vii) and (ix) of such definition) is not a Lien on any
cash or Cash Equivalents constituting Collateral and held by the Collateral Agent.
“Permitted Future Secured Creditors” means the holders or lenders (and their representatives
and trustees), as the case may be, of Permitted Future Secured Indebtedness.
“Permitted Future Secured Indebtedness” means Secured Indebtedness (other than any Secured
Indebtedness with respect to the Notes) incurred after the Issue
Date in compliance with the Indenture, to the extent the Company, the Issuer and the Subsidiary
Guarantors are permitted to create a Permitted Collateral Lien for the benefit of the holders or
lenders thereof or their representatives and trustees, as the case may be, without violating the
covenant described under “— Certain Covenants — Liens”.
“Permitted Holder” means (i) Stephen J. Cloobeck and David F. Palmer, their estates,
descendants and legal representatives and any Person that they control; (ii) any Person acting in
the capacity of an underwriter (solely to the extent that and for so long as such Person is acting
in such capacity) in connection with a public or private
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offering of Capital Stock of the Company; and (iii) any “person” (as such term is used in
Section 13(d)(3) of the Exchange Act) whose status as a “beneficial owner” (as defined in Rules
13d-3 and 13d-5 under the Exchange Act) constitutes or results in a Change of Control in respect of
which a Change of Control Offer has been made and completed in accordance with the requirements of
this Indenture, together with its Affiliates.
“Permitted Investments” means:
(i) any Investment in the Company or in a Wholly-Owned Restricted Subsidiary of the
Company other than a Special Purpose Subsidiary;
(ii) any Investment in cash or Cash Equivalents;
(iii) any Investment by the Company or any Subsidiary of the Company in a Person, if as
a result of such Investment (1) such Person becomes a Wholly-Owned Restricted Subsidiary of
the Company other than a Special Purpose Subsidiary and a Guarantor that is engaged in a
Related Business or (2) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly-Owned Restricted Subsidiary of the Company other than a Special Purpose
Subsidiary that is a Guarantor and that is engaged in a Related Business;
(iv) any Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant described under “—
Certain Covenants — Asset Sales”;
(v) any acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company;
(vi) any Investment in Timeshare Loans generated in the ordinary course of business by
the Company and the Restricted Subsidiaries;
(vii) any Investment existing on the Issue Date;
(viii) loans and advances to officers, directors and employees (other than to a
Permitted Holder) for payroll, business-related travel, moving expenses and similar purposes
to, and Guarantees issued to support the obligations of officers, directors and employees,
in each case in the ordinary course of business;
(ix) Hedging Obligations otherwise permitted under the Indenture;
(x) receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and endorsements for collection or deposit in
the ordinary course of business;
(xi) any Investment acquired by the Company or any Restricted Subsidiary (A) in
exchange for any other Investment held by the Company or any Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of such other Investment, (B) as a result of a foreclosure by the Company or
any Restricted Subsidiary with respect to any secured Investment or other transfer of title
with respect to any secured Investment in default or (C) in satisfaction of claims or
judgments; and
(xii) other Investments by the Company or any Restricted Subsidiary in any Person
(other than an Affiliate of the Company that is not also a Subsidiary of the Company) that
do not exceed $10.0 million in the aggregate at any one time outstanding (measured as of the
date made and without giving effect to subsequent changes in value).
“Permitted Liens” means:
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(i) Liens existing on the Issue Date;
(ii) Liens on Timeshare Loans, and related rights and assets and the proceeds thereof
incurred in connection with Permitted Securitizations;
(iii) Liens for taxes, assessments, charges or other governmental levies not yet due or
as to which the period of grace, if any, related thereto has not expired or which are being
contested in good faith by appropriate proceedings; provided, however, that, in the case of
contested taxes, adequate reserves with respect thereto are maintained on the books of the
applicable Person in conformity with GAAP;
(iv) statutory Liens such as carriers’, warehousemen’s, mechanics’, materialmen’s,
landlords’, repairmen’s or other like Liens arising in the ordinary course of business that
are not overdue for a period of more than 30 days or which are being contested in good faith
by appropriate proceedings;
(v) pledges or deposits in connection with workers’ compensation, unemployment
insurance and other social security or welfare legislation and deposits securing liability
to insurance carriers under insurance or self-insurance arrangements;
(vi) easements, rights of way, restrictions, covenants and other similar encumbrances
affecting real property and minor imperfections of title that would not in any case
reasonably be expected to have a material adverse effect on the present or future use of the
property to which it relates or a material adverse effect on the sale or lease of such
property;
(vii) rights of setoff or bankers’ liens upon deposits of cash in favor of banks or
other depository institutions, including Liens of a collection bank arising under Section
4-210 of the Uniform Commercial Code on items in the course of collection in favor of
banking institutions arising as a matter of law encumbering deposits (including the right of
set-off) within general parameters customary in the banking industry;
(viii) Liens incurred on deposits to secure (1) the performance of tenders, bids, trade
contracts, licenses and leases, fee and expense arrangements with trustees and fiscal
agents, statutory obligations, and other obligations of a like nature incurred in the
ordinary course of business and not in connection with the borrowing of money, or (2)
indemnification obligations entered into in the ordinary course of business relating to any
disposition permitted hereunder;
(ix) Liens securing judgments, awards or orders for the payment of money that do not
constitute an Event of Default pursuant to clause (viii) of the definition thereof;
(x) leases, subleases and other occupancy agreements with respect to real property
owned or leased by the Company or any Restricted Subsidiary not interfering in any material
respect with the business of the Company or any Restricted Subsidiary;
(xi) Permitted Collateral Liens, including Liens created under the Security Documents;
(xii) non-exclusive licenses of patents, trademarks, copyrights, and other intellectual
property rights in the ordinary course of business;
(xiii) Liens in favor of the Company or any Restricted Subsidiary (other than a Special
Purpose Subsidiary);
(xiv) Liens securing any Refinancing Indebtedness which is incurred to Refinance any
Indebtedness that has been secured by a Lien permitted under the Indenture and that has been
incurred in accordance with the provisions of the Indenture; provided, however, that such
Liens do not extend to or cover any property or assets of the Company or any Restricted
Subsidiary that would not have secured the Indebtedness so Refinanced had such Indebtedness
not been Refinanced;
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(xv) Liens securing Acquired Indebtedness incurred in accordance with the covenant
described under “— Certain Covenants — Incurrence of Indebtedness” covenant; provided,
however, that:
(a) such Liens secured such Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and
were not granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary; and
(b) such Liens do not extend to or cover any property or assets of the Company or of
any Restricted Subsidiary other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the
Company or a Restricted Subsidiary and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary as determined by the management of
the Company in their reasonable and good faith judgment;
(xvi) Liens securing performance, bid, appeal, surety and similar bonds and completion
guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of
business;
(xvii) Liens securing Capital Lease Obligations, mortgage financings or purchase money
obligations securing Indebtedness described in clause (xiii) of paragraph (b) under “—
Certain Covenants — Incurrence of Indebtedness”; provided, however, that any such Lien (A)
covers only the assets acquired, constructed or improved with such Indebtedness and (B) is
created within 180 days of such acquisition, construction or improvement;
(xviii) Liens on property existing at the time of acquisition thereof by the Company or
any Restricted Subsidiary; provided, however, that such Liens were in existence prior to,
and were not incurred in connection with or in contemplation of, such acquisition and do not
extend to any property other than the property so acquired by the Company or the Restricted
Subsidiary;
(xix) deposits made in the ordinary course of business to secure liability to insurance
carriers;
(xx) Liens on cash or cash equivalents securing permitted Hedging Obligations;
(xxi) Liens on rights of beneficiaries under trust arrangements to secure trust fees
and other related fees and expenses; or
(xxii) Liens other than any of the foregoing incurred by the Company or any Restricted
Subsidiary with respect to Indebtedness or other obligations that do not, in the aggregate,
exceed $10.0 million.
“Permitted Securitization” means each transfer or encumbrance (each a “disposition”) of (A)
Timeshare Loans, in each case by the Company or any Restricted Subsidiary to one or more Special
Purpose Subsidiaries or by one Special Purpose Subsidiary to another Special Purpose Subsidiary,
conducted in accordance with the following requirements:
(i) each disposition in clause (A) shall identify with reasonable certainty the
specific Timeshare Loans;
(ii) the only Indebtedness of the Company or any Restricted Subsidiary resulting from
such disposition shall be Nonrecourse Indebtedness of one or more Special Purpose
Subsidiaries; and
(iii) both immediately before and after such disposition, no Default has occurred and
is continuing.
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“Person” means an individual, partnership, corporation, limited liability company,
unincorporated organization, trust, joint venture, or government or any agency or political
subdivision thereof or any other entity.
“Points” means vacation points which confer on an owner thereof the right to use a residential
unit.
“Polo Towers Lines of Credit and Securitization Notes Payable” means the (i) variable rate
lines of credit and (ii) the securitized loans
that were collateralized by retail contracts and related vacation ownership interests which carry
fixed interest rates of 7.26% and 7.65%, each of which were contributed to the Company on April 26,
2007.
“Preferred Stock”, as applied to the Capital Stock of any Person, means Capital Stock of any
class or classes (however designated) which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of such Person.
“Qualified Equity Interests” of a Person means Equity Interests of such Person other than:
(i) any Disqualified Stock;
(ii) any Equity Interests sold to a Subsidiary of such Person or a Company Equity Plan;
or
(iii) any Equity Interests financed, directly or indirectly, using funds borrowed from
such Person, a Subsidiary of such Person or any Company Equity Plan or contributed,
extended, advanced or guaranteed by such Person, a Subsidiary of such Person or any Company
Equity Plan.
Unless otherwise specified, Qualified Equity Interests refer to Qualified Equity Interests of
the Company.
“Quorum Facility” means that certain loan sale facility in a minimum aggregate amount of $40
million as evidenced by that Loan Sale and Security Agreement dated as of April 30, 2010 by and
among Quorum Federal Credit Union, as buyer, DRI Quorum 2010 LLC, as seller, Wells Fargo, National
Association, as back-up servicer and Diamond Resorts Financial Services, Inc., as servicer, and the
other transaction documents related thereto.
“Refinance” means, in respect of any Indebtedness, to refinance, restructure, extend, renew,
refund, pay, repay, prepay, redeem, defease, discharge or retire, or to issue a security or
Indebtedness in exchange or replacement for, such Indebtedness in whole or in part. “Refinanced”
and “Refinancing” shall have correlative meanings.
“Refinancing Indebtedness” means Indebtedness that Refinances any Indebtedness of the Company
or any Restricted Subsidiary existing on the Issue Date or incurred in compliance with the
Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however,
that:
(i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced;
(ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the Average Life of the
Indebtedness being Refinanced;
(iii) such Refinancing Indebtedness has an aggregate principal amount (or if incurred
with original issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if incurred with original issue discount, the aggregate
accreted value) then outstanding (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; and
(iv) if the Indebtedness being Refinanced is subordinated in right of payment to the
Notes, such Refinancing Indebtedness is subordinated in right of payment to the Notes at
least to the same extent as the Indebtedness being Refinanced;
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provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.
“Registration Rights Agreement” means the Registration Rights Agreement, dated as of August
13, 2010, among the Company, the Guarantors and Credit Suisse Securities (USA) LLC, as
representative of the Initial Purchasers.
“Related Business” means any business in which the Company or any of the Restricted
Subsidiaries was engaged on the Issue Date and any business related, ancillary or complementary to
such business.
“Replacement Assets” means, in connection with an Asset Sale, properties and assets that
replace the properties and assets that were the subject of such Asset Sale, or properties and
assets that will be used in the business of the Company and the Restricted Subsidiaries as existing
on the Issue Date or in a Related Business, including Capital Stock of a Person primarily engaged
in a Related Business that becomes a Restricted Subsidiary.
“Restricted Subsidiary” means, at any time, any direct or indirect Subsidiary of the Company
(including the Issuer) that is not then an Unrestricted Subsidiary; provided, however, that, upon
an Unrestricted Subsidiary ceasing to be an Unrestricted Subsidiary, such Subsidiary shall, to the
extent that it remains a Subsidiary of the Company at such time, be a Restricted Subsidiary.
“S&P” means Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc., and any
successor thereto.
“Sale/Leaseback Transaction” means an arrangement relating to property owned by the Company or
a Restricted Subsidiary on the Issue Date or thereafter acquired by the Company or a Restricted
Subsidiary whereby the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or a Restricted Subsidiary substantially concurrently leases it from such Person.
“SEC” means the Securities and Exchange Commission and any successor agency.
“Secured Debt Ratio”, as of any date of determination, means the ratio of (1) Total
Indebtedness of the Company and its Restricted Subsidiaries that is secured by Liens on any of the
Collateral as of the end of the most recent fiscal quarter for which internal financial statements
are available immediately preceding the date on which such event for which such calculation is
being made shall occur to (2) Adjusted EBITDA for the most recently ended four full fiscal quarters
or which internal financial statements are available immediately preceding the date on which such
event for which such calculation is being made shall occur, in each case with such pro forma
adjustments to Total Indebtedness and Adjusted EBITDA as are appropriate and consistent with the
pro forma adjustment provisions set forth in the definition of Fixed Charge Coverage Ratio.
“Secured Indebtedness” means any Indebtedness secured by a Lien.
“Secured Obligations” means the Notes Obligations and the obligations of the Company, the
Issuer and the Subsidiary Guarantors with respect to any Permitted Future Secured Creditors to the
extent those obligations are then subject to an Intercreditor Agreement.
“Securities Act” means the Securities Act of 1933, as amended.
“Securitization” means a public or private transfer of Timeshare Loans in the ordinary course
of business and by which the Company or any of the Restricted Subsidiaries directly or indirectly
securitizes a pool of specified Timeshare Loans including any such transaction involving the sale
of specified Timeshare Loans to a Special Purpose Subsidiary.
“Security Agreement” means the Collateral Agreement dated the Issue Date, among the Company,
Intermediate Holdco, the Issuer, the Subsidiary Guarantors and the Collateral Agent.
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“Security Documents” means the Security Agreement and all other agreements or instruments
evidencing or creating any security interest or Lien in favor of the Collateral Agent or Trustee,
for the benefit of the Holders, in any or all of the Collateral, in each case, as amended from time
to time in accordance with their respective terms.
“Significant Subsidiary” means any Subsidiary that would be a “significant subsidiary” as
defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as
such Regulation is in effect from time to time.
“Special Purpose Subsidiary” means any wholly-owned direct or indirect Subsidiary of the
Company established for the sole purpose of conducting one or more Permitted Securitizations and
otherwise established and operated in accordance with customary industry practices.
“Standard Securitization Undertakings” means representations, warranties, covenants,
indemnities and guarantees of performance entered into by the Company or any Subsidiary of the
Company that the Company has determined in good faith to be customary in a Securitization,
including those relating to the servicing of the assets of a Special Purpose Subsidiary.
“Stated Maturity” means, with respect to any installment of interest or principal on any
series of Indebtedness, the date on which such payment of interest or principal was scheduled to be
paid in the original documentation governing such Indebtedness, including any date upon which a
repurchase at the option of holders of such Indebtedness is required to be consummated, but
excluding any contingent obligations to repay, redeem or repurchase any such interest or principal
prior to the date originally scheduled for the payment thereof so long as such obligations remain
contingent.
“Subordinated Obligation” means, with respect to a Person, any Indebtedness of such Person
(whether outstanding on the Issue Date or thereafter incurred) which is subordinate or junior in
right of payment to the Notes or a Guarantee of such Person, as the case may be, pursuant to a
written agreement to that effect.
“Subsidiary” means, with respect to any Person, (i) any corporation, association or other
business entity of which more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof)
and (ii) any partnership (1) the sole general partner or the managing general partner of which is
such Person or a Subsidiary of such Person or (2) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination thereof). Unless otherwise
qualified, all references to a “Subsidiary” or to “Subsidiaries” in the Indenture will refer to a
Subsidiary or Subsidiaries of the Company.
“Subsidiary Guarantor” means each Subsidiary of the Company that Guarantees the Notes as
provided for in the Indenture.
“Sunterra SPE 2004 Notes” means the Class A notes, Class B notes, Class C notes and Class D
notes issued by Sunterra Owner Trust 2004-1.
“Tempus
Acquisition Loan” means that certain credit facility among
Tempus Acquisition, LLC; an affiliate of Guggenheim, as the lender; and Guggenheim Corporate Funding, LLC,
as administrative agent.
“Timeshare Loans” means loans made by the Company or one of its Subsidiaries to finance the
purchase of Vacation Interests from the Company or one of its Subsidiaries and evidenced by a
promissory note secured by Points or a fee simple interest in a residential unit.
“Total Indebtedness” means, as at any date of determination, an amount equal to the sum of the
aggregate amount of all outstanding Indebtedness of the Company and its Restricted Subsidiaries on
a consolidated basis (and excluding, for the avoidance of doubt, all Nonrecourse Indebtedness of
Special Purpose Subsidiaries relating to Permitted Securitizations).
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“Treasury Rate” means, as of any Redemption Date, the yield to maturity as of such Redemption
Date of United States Treasury securities with a constant maturity (as compiled and published in
the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available
at least two Business Days prior to the Redemption Date (or, if such Statistical Release is no
longer published, any publicly available source of similar market data)) most nearly equal to the
period from the Redemption Date to August 15, 2014; provided, however, that if the period from the
Redemption Date to August 15, 2014 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one year will be used.
“Trust Monies” means all cash and Cash Equivalents received by the Trustee:
(i) upon the release of Collateral, whether pursuant to an Asset Sale or otherwise;
(ii) as compensation for or proceeds of the sale of all or any part of the Collateral
taken by eminent domain or purchased by or sold pursuant to any order of a governmental
authority or otherwise disposed of;
(iii) as net insurance proceeds; and
(iv) pursuant to the Security Documents and any Intercreditor Agreement.
“Unrestricted Subsidiary” means (i) any Subsidiary of the Company which at the time of
determination is an Unrestricted Subsidiary (as designated by the Company, as provided below) and
(ii) any Subsidiary of an Unrestricted Subsidiary; provided, however, that the Issuer cannot be an
Unrestricted Subsidiary.
FLRX, Inc. and its Subsidiaries shall each be Unrestricted Subsidiaries on the Issue Date
without further action. The Company may designate any Restricted Subsidiary (including any newly
acquired or newly formed Subsidiary) of the Company to be an Unrestricted Subsidiary unless such
Subsidiary owns any of the Capital Stock of the Company or any Restricted Subsidiary or owns or
holds any Indebtedness of or Lien on any property of the Company or any Restricted Subsidiary;
provided, however, that
(i) any Guarantee or other credit support by the Company or any Restricted Subsidiary
of any Indebtedness of the Subsidiary being so designated shall be deemed an incurrence of
such Indebtedness and an “Investment” by the Company or such Restricted Subsidiary at the
time of such designation;
(ii) either (1) the Restricted Subsidiary to be so designated has total assets of
$1,000 or less or (2) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under the covenant described under “— Certain Covenants — Restricted
Payments”; and
(iii) after giving pro forma effect to the incurrence of Indebtedness and the
Investment referred to in clause (i) of this proviso, (1) such Indebtedness would be
permitted to be incurred as Ratio Indebtedness, (2) such Investment would be in compliance
with the covenant described under “— Certain Covenants — Restricted Payments” and (3) no
Default shall have occurred and be continuing.
The Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that
(i) no Default shall have occurred and be continuing at the time of or after giving
effect to such designation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately
after such designation would, if incurred at such time, have been permitted to be incurred
(and shall be deemed to have been incurred) for all purposes of the Indenture.
Any such designation by the Company shall be evidenced to the Trustee by promptly filing with
the Trustee an Officers’ Certificate certifying that such designation complied with the foregoing
provisions.
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“U.S. Dollar Equivalent” means with respect to any monetary amount in a currency other than
U.S. dollars, at any time for determination thereof, the amount of U.S. dollars obtained by
converting such foreign currency involved in such computation into U.S. dollars at the spot rate
for the purchase of U.S. dollars with the applicable foreign currency as published in The Wall
Street Journal in the “Exchange Rates” column under the heading “Currency Trading” on the date two
(2) Business Days prior to such determination.
“Vacation Interests” means a timeshare interest or interval, however defined in the applicable
condominium or timeshare declaration, trust agreement or other relevant document or instrument
pursuant to which such timeshare interest or interval is created, whether or not coupled with a fee
simple interest in real estate, together with all rights, benefits, privileges and interests
appurtenant thereto, including the right to use and occupy a residential unit within the applicable
residential real estate property and the common areas and common furnishings appurtenant to such
unit for a specified period of time, on an annual or biennial basis, as more specifically described
in the applicable declaration or other relevant document or instrument. Vacation Interests shall
include Points.
“Voting Stock” of any Person as of any date means the Capital Stock of such Person that (i) if
such Person is a corporation, is at the time entitled to vote in the election of such corporation’s
board of directors or any committee thereof duly authorized to act on behalf of such board or (ii)
if such Person is an entity other than a corporation, is at the time entitled to vote in the
election of the group or individual exercising the authority with respect to such Person generally
vested in a board of directors of a corporation.
“Wholly-Owned Restricted Subsidiary” of any Person means a Restricted Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of which (other than
directors’ qualifying shares) shall at the time be owned by such Person or by one or more
Wholly-Owned Restricted Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The exchange of outstanding notes for exchange notes in the exchange offer will not
constitute a taxable event to holders for United States federal income tax purposes. Consequently,
you will not recognize gain or loss upon receipt of an exchange note, the holding period of the
exchange note will include the holding period of the outstanding note exchanged therefor and the
basis of the exchange note will be the same as the basis of the outstanding note immediately before
the exchange.
In any event, persons considering the exchange of outstanding notes for exchange notes should
consult their own tax advisors concerning the United States federal income tax consequences in
light of their particular situations as well as any consequences arising under the laws of any
other taxing jurisdiction.
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CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the receipt, holding
or transfer of exchange notes by employee benefit plans that are subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual retirement accounts
and other arrangements that are subject to Section 4975 of the Code or provisions under any
federal, state, local, non-U.S. or other laws, rules or regulations that are similar to such
provisions of ERISA or the Code (collectively, “Similar Laws”), and entities whose underlying
assets are considered to include “plan assets” (within the meaning of ERISA) of such plans,
accounts and arrangements (each, a “Plan”).
General Fiduciary Matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to
Title I of ERISA or Section 4975 of the Code (an “ERISA Plan”) and prohibit certain transactions
involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA
and the Code, any person who exercises any discretionary authority or control over the
administration of such an ERISA Plan or the management or disposition of the assets of such an
ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan,
is generally considered to be a fiduciary of the ERISA Plan.
In considering whether to receive, hold or transfer exchange notes, a Plan fiduciary should
determine whether such receipt, holding or transfer is in accordance with the documents and
instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law
relating to the fiduciary’s duties to the Plan including, without limitation, the prudence,
diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and
any other applicable Similar Laws.
Prohibited Transaction Laws
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from engaging in
specified transactions involving plan assets with persons or entities who are “parties in
interest,” within the meaning of Section 3(14) of ERISA, or “disqualified persons,” within the
meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or
disqualified person who engages in a non-exempt prohibited transaction may be subject to excise
taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of
the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to penalties
and liabilities under ERISA and the Code.
The receipt, holding or transfer of exchange notes by an ERISA Plan with respect to which the
issuer or any of its affiliates are considered a party in interest or a disqualified person may
constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA
and/or Section 4975 of the Code, unless the receipt, holding or transfer complies with an
applicable statutory, class or individual prohibited transaction exemption. In this regard, the
U.S. Department of Labor has issued prohibited transaction class exemptions (“PTCEs”) that may
apply to the receipt, holding or transfer of exchange notes. These class exemptions include,
without limitation, PTCE 84-14 respecting transactions determined by independent qualified
professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE
91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company
general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers,
although there can be no assurance that all of the conditions of any such exemptions will be
satisfied. There can be no assurance that any class exemption or any other exemption will be
available with respect to any particular transaction involving the exchange notes, or that if an
exemption is available, it will cover all aspects of any particular transaction.
Because of the foregoing, the exchange notes should not be received, held or transferred by
any person investing “plan assets” of any Plan, unless such receipt, holding or transfer will not
constitute a non-exempt prohibited transaction under ERISA and the Code or a violation of any
applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to
the complexity of these rules and the penalties that may be imposed upon persons involved in
non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons
considering receiving, holding or transferring exchange
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notes on behalf of, or with the assets of, any Plan, consult with their counsel regarding the
potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such
transactions and whether an exemption would be applicable to the receipt, holding or transfer of
the exchange notes.
The sale or issuance of notes to a Plan is in no respect a representation by the Issuer that
such an investment meets all relevant legal requirements with respect to investments by Plans
generally or any particular Plan, or that such an investment is appropriate for Plans generally or
any particular Plan.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant to the
exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of exchange notes received in exchange for
outstanding notes where such outstanding notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of 180 days after the
expiration date, we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In
addition, until , 2011,
all dealers effecting transactions in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange
notes received by broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any exchange notes. Any broker-dealer that resells
exchange notes that were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such exchange notes may be deemed to be an
“underwriter” within the meaning of the Securities Act, and any profit on any such resale of
exchange notes and any commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an “underwriter” within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send additional copies of
this prospectus and any amendment or supplement to this prospectus to any broker-dealer that
requests such documents in the letter of transmittal. We have agreed to pay all expenses incident
to the exchange offer (including the expenses of one counsel for the holders of outstanding notes)
other than commissions or concessions of any brokers or dealers and will indemnify the holders of
outstanding notes (including any broker-dealers) against certain liabilities, including liabilities
under the Securities Act.
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LEGAL MATTERS
The validity of the exchange notes and the related guarantees offered hereby will be
passed upon for us by Katten Muchin Rosenman LLP, Chicago, Illinois.
EXPERTS
The financial statements and schedules as of December 31, 2010 and 2009 and for each of
the three years in the period ended December 31, 2010 included in this registration statement have
been so included in reliance on the report of BDO USA, LLP, an independent registered public
accounting firm, appearing elsewhere herein, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The indenture governing the notes provides that, regardless of whether we are at any time
required to file reports with the SEC, we will file with the SEC and furnish to the holders of the
notes all such reports and other information as we would be required to be filed with the SEC if we
were subject to the reporting requirements of the Exchange Act, provided that, until the first
anniversary of the issue date of the notes, such filing obligation will be deemed satisfied (i) to
the extent the information required by such Exchange Act reports is contained in the exchange offer
registration statement or shelf registration statement required by the registration rights
agreement or (ii) by us posting on our website, within 15 days of the time periods after which we
would have been required to file such reports with the SEC, the financial information that would be
required to be included in such Exchange Act reports. While any notes remain outstanding, we will
make available upon request to any holder and any prospective purchaser of notes the information
required pursuant to Rule 144A(d)(4) under the Securities Act during any period in which we are not
subject to Section 13 or 15(d) of the Exchange Act. This prospectus contains summaries, believed to
be accurate in all material respects, of certain terms of certain agreements regarding this
exchange offer and the exchange notes (including, but not limited to, the indenture governing the
notes and the registration rights agreement), but, where such contract or other document is an
exhibit to the registration statement, reference is hereby made to the actual agreements for
complete information with respect thereto, and all such summaries are qualified in their entirety
by this reference. Any such request for the agreements summarized herein should be directed to:
Diamond Resorts Corporation
10600 West Charleston Boulevard
Las Vegas, Nevada 89135
Tel: (702) 684-8000
Attn: Ms. Yanna Huang, Treasurer
10600 West Charleston Boulevard
Las Vegas, Nevada 89135
Tel: (702) 684-8000
Attn: Ms. Yanna Huang, Treasurer
180
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
| PAGE | ||||
| NUMBER | ||||
| F-2 | ||||
Consolidated Financial Statements: |
||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-9 | ||||
F-1
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
To the Members of
Diamond Resorts Parent, LLC and Subsidiaries
Las Vegas, Nevada
Diamond Resorts Parent, LLC and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Diamond Resorts Parent, LLC and
Subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of
operations, changes in member capital and comprehensive loss, and cash flows for each of the three
years in the period ended December 31, 2010. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 Diamond Resorts Parent, LLC at December 31, 2010 and
2009, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010 in conformity with accounting principles generally accepted in the
United States of America.
/s/ BDO USA, LLP
BDO USA, LLP
Las Vegas, Nevada
March 11, 2011
Las Vegas, Nevada
March 11, 2011
F-2
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
(In thousands, except share data)
| 2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 27,329 | $ | 17,186 | ||||
Cash in escrow and restricted cash |
30,048 | 40,544 | ||||||
Mortgages and contracts receivable, net of allowance of $55,151 and $60,911, respectively |
245,287 | 263,556 | ||||||
Due from related parties, net |
20,958 | 15,378 | ||||||
Other receivables, net |
35,980 | 33,884 | ||||||
Income tax receivable |
10 | 1,176 | ||||||
Prepaid expenses and other assets, net |
46,248 | 28,828 | ||||||
Unsold Vacation Interests, net |
190,564 | 203,225 | ||||||
Property and equipment, net |
29,097 | 25,708 | ||||||
Assets held for sale |
9,517 | — | ||||||
Intangible assets, net |
45,713 | 42,633 | ||||||
Total assets |
$ | 680,751 | $ | 672,118 | ||||
LIABILITIES AND MEMBER CAPITAL (DEFICIT) |
||||||||
Accounts payable |
$ | 7,655 | $ | 10,956 | ||||
Due to related parties, net |
36,251 | 36,695 | ||||||
Accrued liabilities |
69,583 | 51,498 | ||||||
Income taxes payable |
3,936 | 441 | ||||||
Deferred income taxes |
— | 389 | ||||||
Deferred revenues |
65,656 | 56,877 | ||||||
Senior secured notes, net of unamortized original issue discount of $10,278 and $0, respectively |
414,722 | — | ||||||
Borrowings under line of credit agreements |
— | 393,954 | ||||||
Securitization notes and conduit facilities, net |
186,843 | 222,913 | ||||||
Derivative liabilities |
79 | 464 | ||||||
Notes payable |
23,273 | 1,792 | ||||||
Total liabilities |
807,998 | 775,979 | ||||||
Commitments and contingencies |
||||||||
Redeemable preferred units (1,000 shares authorized, issued and outstanding) |
84,502 | 103,528 | ||||||
Member capital (deficit): |
||||||||
Member capital (authorized 1,090 common units, no par value; issued 1,090 and 1,000 common
units, respectively) |
7,335 | 7,335 | ||||||
Accumulated deficit |
(201,338 | ) | (198,317 | ) | ||||
Accumulated other comprehensive loss |
(17,746 | ) | (16,407 | ) | ||||
Total member capital (deficit) |
(211,749 | ) | (207,389 | ) | ||||
Total liabilities and member capital (deficit) |
$ | 680,751 | $ | 672,118 | ||||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
| 2010 | 2009 | 2008 | ||||||||||
Revenues: |
||||||||||||
Vacation Interest sales |
$ | 214,764 | $ | 248,643 | $ | 285,442 | ||||||
Provision
for uncollectible Vacation Interest sales revenue |
(12,655 | ) | (14,153 | ) | (51,166 | ) | ||||||
Vacation Interest, net |
202,109 | 234,490 | 234,276 | |||||||||
Management, member and other services |
102,651 | 108,203 | 93,241 | |||||||||
Consolidated resort operations |
26,547 | 23,814 | 21,006 | |||||||||
Interest |
39,327 | 44,172 | 53,626 | |||||||||
Gain on mortgage repurchase |
191 | 282 | 265 | |||||||||
Total revenues |
370,825 | 410,961 | 402,414 | |||||||||
Costs and Expenses: |
||||||||||||
Vacation Interest cost of sales |
39,730 | 55,135 | 67,551 | |||||||||
Advertising, sales and marketing |
114,029 | 116,098 | 148,565 | |||||||||
Vacation Interest carrying cost, net |
29,821 | 32,992 | 22,831 | |||||||||
Management, member and other services |
23,646 | 31,163 | 35,346 | |||||||||
Consolidated resort operations |
23,972 | 22,456 | 23,685 | |||||||||
Loan portfolio |
10,566 | 9,835 | 8,753 | |||||||||
General and administrative |
67,905 | 71,306 | 78,618 | |||||||||
Gain on sale of assets |
(1,923 | ) | (137 | ) | (1,007 | ) | ||||||
Depreciation and amortization |
11,939 | 13,366 | 16,687 | |||||||||
Interest, net of capitalized interest of $0, $0 and $352, respectively |
67,162 | 68,515 | 71,380 | |||||||||
Loss on extinguishment of debt |
1,081 | 10,903 | — | |||||||||
Impairments and other write-offs |
3,330 | 1,125 | 17,168 | |||||||||
Total costs and expenses |
391,258 | 432,757 | 489,577 | |||||||||
Loss before (benefit) provision for income taxes |
(20,433 | ) | (21,796 | ) | (87,163 | ) | ||||||
(Benefit) provision for income taxes |
(1,274 | ) | (799 | ) | 1,809 | |||||||
Net loss |
$ | (19,159 | ) | $ | (20,997 | ) | $ | (88,972 | ) | |||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBER CAPITAL (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2010, 2009 and 2008
($ in thousands)
| Temporary Member Capital | Permanent Member Capital | |||||||||||||||||||||||||||||||
| Accumulated | Total | |||||||||||||||||||||||||||||||
| Preferred Redeemable | Common | Other | Member | |||||||||||||||||||||||||||||
| Units | Units | Member | Accumulated | Comprehensive | Capital | Comprehensive | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Capital | Deficit | Income (Loss) | (Deficit) | Loss | |||||||||||||||||||||||||
Balance at December 31, 2007 |
1,000 | $ | 72,047 | 1,000 | $ | 7,149 | $ | (56,867 | ) | $ | 814 | $ | (48,904 | ) | ||||||||||||||||||
Net loss for the year ended December 31, 2008 |
(88,972 | ) | (88,972 | ) | $ | (88,972 | ) | |||||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||
Currency translation adjustments, net of tax of $0 |
(21,917 | ) | (21,917 | ) | (21,917 | ) | ||||||||||||||||||||||||||
Priority returns and redemption premiums |
13,051 | (13,051 | ) | (13,051 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2008 |
1,000 | 85,098 | 1,000 | 7,149 | $ | (158,890 | ) | (21,103 | ) | (172,844 | ) | |||||||||||||||||||||
Comprehensive loss for the year ended December 31, 2008 |
$ | (110,889 | ) | |||||||||||||||||||||||||||||
Second Lien warrants |
186 | 186 | ||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2009 |
(20,997 | ) | (20,997 | ) | $ | (20,997 | ) | |||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Currency translation adjustments, net of tax of $0 |
4,696 | 4,696 | 4,696 | |||||||||||||||||||||||||||||
Priority returns and redemption premiums |
18,430 | (18,430 | ) | (18,430 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2009 |
1,000 | 103,528 | 1,000 | 7,335 | (198,317 | ) | (16,407 | ) | (207,389 | ) | ||||||||||||||||||||||
Comprehensive loss for the year ended December 31, 2009 |
$ | (16,301 | ) | |||||||||||||||||||||||||||||
Guggenheim equity investment |
1,000 | 75,000 | 269.3 | |||||||||||||||||||||||||||||
Repurchase of equity previously held by another minority institutional investor |
(1,000 | ) | (111,680 | ) | (179.3 | ) | 36,680 | 36,680 | ||||||||||||||||||||||||
Costs related to issuance of common and preferred units |
(2,888 | ) | (2,888 | ) | ||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2010 |
(19,159 | ) | (19,159 | ) | $ | (19,159 | ) | |||||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||
Currency translation adjustments, net of tax of $0 |
(1,339 | ) | (1,339 | ) | (1,339 | ) | ||||||||||||||||||||||||||
Priority returns and redemption premiums |
17,654 | (17,654 | ) | (17,654 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2010 |
1,000 | $ | 84,502 | 1,090 | $ | 7,335 | $ | (201,338 | ) | $ | (17,746 | ) | $ | (211,749 | ) | |||||||||||||||||
Comprehensive loss for the year ended December 31, 2010 |
$ | (20,498 | ) | |||||||||||||||||||||||||||||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
| 2010 | 2009 | 2008 | ||||||||||
Operating activities: |
||||||||||||
Net loss |
$ | (19,159 | ) | $ | (20,997 | ) | $ | (88,972 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
11,939 | 13,366 | 16,687 | |||||||||
Provision
for uncollectible Vacation Interest sales revenue |
12,655 | 14,153 | 51,166 | |||||||||
Amortization of capitalized financing costs and original issue discount |
2,521 | 1,989 | 8,860 | |||||||||
Amortization of capitalized loan origination costs and portfolio discount |
3,007 | 3,230 | 1,853 | |||||||||
Loss (gain) on foreign currency exchange |
42 | 182 | (487 | ) | ||||||||
Gain on disposal of assets |
(1,923 | ) | (137 | ) | (1,007 | ) | ||||||
Gain on mortgage repurchase |
(191 | ) | (282 | ) | (265 | ) | ||||||
Loss on extinguishment of debt |
1,081 | 10,903 | — | |||||||||
Deferred income taxes |
(377 | ) | 7 | (566 | ) | |||||||
Unrealized (gain) loss on derivative instruments |
(314 | ) | (3,885 | ) | 4,032 | |||||||
Impairments and other write-offs |
3,330 | 1,125 | 17,168 | |||||||||
Changes in operating assets and liabilities excluding acquisitions: |
||||||||||||
Mortgages and contracts receivable |
12,190 | 19,495 | (29,235 | ) | ||||||||
Due from related parties, net |
(5,776 | ) | 8,968 | 22,625 | ||||||||
Other receivables, net |
3,041 | 1,657 | (1,077 | ) | ||||||||
Prepaid expenses and other assets, net |
(116 | ) | 2,517 | 1,871 | ||||||||
Unsold Vacation Interests, net |
10,308 | 19,236 | 20,731 | |||||||||
Accounts payable |
(3,224 | ) | 2,518 | (11,799 | ) | |||||||
Due to related parties, net |
5,255 | 7,589 | 19,567 | |||||||||
Accrued liabilities |
17,987 | 3,810 | (3,236 | ) | ||||||||
Income taxes payable (receivable) |
4,632 | (1,925 | ) | 2,085 | ||||||||
Deferred revenues |
9,093 | 4,273 | 15,085 | |||||||||
Net cash provided by operating activities |
66,001 | 87,792 | 45,086 | |||||||||
Investing activities: |
||||||||||||
Property and equipment capital expenditures |
(5,553 | ) | (4,672 | ) | (13,861 | ) | ||||||
Purchase of assets from ILX Resorts, Inc. |
(30,722 | ) | — | — | ||||||||
Disbursement of Tempus Acquisition note receivable |
(3,005 | ) | — | — | ||||||||
Acquisition of Sunterra Corporation |
— | — | (2,910 | ) | ||||||||
Intangible assets acquired by Diamond Europe |
— | — | (1,358 | ) | ||||||||
Proceeds from sale of assets |
1,881 | 422 | 10,866 | |||||||||
Net cash used in investing activities |
$ | (37,399 | ) | $ | (4,250 | ) | $ | (7,263 | ) | |||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS —Continued
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
| 2010 | 2009 | 2008 | ||||||||||
Financing activities: |
||||||||||||
Changes in cash in escrow and restricted cash |
$ | 10,526 | $ | 8,455 | $ | (445 | ) | |||||
Proceeds from issuance of Senior Secured Notes, net of original issue discount
of $10,570, $0 and $0, respectively |
414,430 | — | — | |||||||||
Proceeds
from issuance of Quorum Facility |
16,697 | — | — | |||||||||
Proceeds from issuance of Tempus Acquisition Loan |
3,300 | — | — | |||||||||
Proceeds from issuance of Diamond Resorts Owners Trust 2009-1 |
— | 181,012 | — | |||||||||
Proceeds from issuance of 2008 Conduit Facility |
25,533 | 29,033 | 16,520 | |||||||||
Proceeds from issuance of 2007 Conduit Facility |
— | — | 32,669 | |||||||||
Proceeds from issuance of ILXA Receivables Loan |
11,870 | — | — | |||||||||
Proceeds from issuance of ILXA Inventory Loan |
17,513 | — | — | |||||||||
Proceeds from issuance of First and Second Lien Facilities |
— | — | 23,500 | |||||||||
Payments on Quorum Facility |
(3,755 | ) | — | — | ||||||||
Payments on Diamond Resorts Owners Trust 2009-1 |
(47,855 | ) | (12,303 | ) | — | |||||||
Payments on 2008 Conduit Facility |
(4,307 | ) | (192,469 | ) | (34,572 | ) | ||||||
Payments on 2007 Conduit Facility |
— | (51,153 | ) | (8,296 | ) | |||||||
Payments on ILXA Receivables Loan |
(1,578 | ) | — | — | ||||||||
Payments on First and Second Lien Facilities |
(397,609 | ) | (1,139 | ) | (46,750 | ) | ||||||
Payments on Polo lines of credit agreements and securitization note |
(11,009 | ) | (9,955 | ) | (12,530 | ) | ||||||
Payment on 2004 Securitization Notes |
(21,722 | ) | (13,251 | ) | (18,383 | ) | ||||||
Payments on notes payable |
(8,221 | ) | (9,638 | ) | (7,962 | ) | ||||||
Payments of debt issuance costs |
(19,125 | ) | (9,428 | ) | (3,775 | ) | ||||||
Proceeds from Guggenheim equity investment |
75,000 | — | — | |||||||||
Repurchase of equity previously held by another minority institutional investor |
(75,000 | ) | — | — | ||||||||
Payments of costs related to issuance of common and preferred units |
(2,888 | ) | — | — | ||||||||
Payments for derivative instrument |
(71 | ) | (8,824 | ) | — | |||||||
Net cash used in financing activities |
(18,271 | ) | (89,660 | ) | (60,024 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
10,331 | (6,118 | ) | (22,201 | ) | |||||||
Effect of changes in exchange rates on cash and cash equivalents |
(188 | ) | 597 | (4,295 | ) | |||||||
Cash and cash equivalents, beginning of period |
17,186 | 22,707 | 49,203 | |||||||||
Cash and cash equivalents, end of period |
$ | 27,329 | $ | 17,186 | $ | 22,707 | ||||||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS —Continued
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
For the years ended December 31, 2010, 2009 and 2008
(In thousands)
| 2010 | 2009 | 2008 | ||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid for interest |
$ | 44,633 | $ | 63,297 | $ | 58,735 | ||||||
Cash paid for taxes, net of tax refunds |
$ | (5,514 | ) | $ | 1,239 | $ | (482 | ) | ||||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
||||||||||||
Priority returns and redemption premiums on preferred units |
$ | 17,654 | $ | 18,430 | $ | 13,051 | ||||||
Insurance premiums financed through issuance of note payable |
$ | 7,897 | $ | 8,573 | $ | 7,416 | ||||||
Assets held for sale reclassified to unsold Vacation Interests |
$ | — | $ | 4,220 | $ | — | ||||||
Unsold Vacation Interests reclassified to assets held for sale |
$ | 10,064 | $ | — | $ | — | ||||||
Property and equipment reclassified to assets to be disposed
but not actively marketed (prepaid expenses and other assets) |
$ | 588 | $ | — | $ | — | ||||||
Management contracts reclassified to assets held for sale |
$ | 587 | $ | — | $ | — | ||||||
Proceeds from issuance of ILXA Inventory Loan in transit |
$ | 1,028 | $ | — | $ | — | ||||||
Purchase of assets from ILX Resorts, Inc.: |
||||||||||||
Fair value of assets acquired |
$ | 34,876 | $ | — | $ | — | ||||||
Cash paid |
(30,722 | ) | — | — | ||||||||
Liabilities assumed |
$ | 4,154 | $ | — | $ | — | ||||||
Certain prior year balances have been reclassified to conform to current year presentation.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Background, Business and Basis of Presentation
Business and Background
Diamond Resorts Parent, LLC is a Nevada limited liability company created on March 28, 2007
through the contribution of $62.4 million cash by a third-party investor and $7.1 million of net
assets from Cloobeck Diamond Parent, LLC, the Company’s majority equity holder. The third-party
investor was issued common and preferred units with a liquidation preference as well as a priority
return of 17% per annum, compounded quarterly, payable upon certain events. The preferred units do
not provide to the holder any participation or conversion rights. The common and preferred members’
liability is limited to their respective capital contributions. Diamond Resorts Parent, LLC
(“DRP”), together with its wholly-owned subsidiaries, is hereafter referred to as “Diamond Resorts”
or the “Company.” The capitalization of the Company occurred on April 27, 2007 simultaneously with
the acquisition of and merger with Sunterra Corporation (“Sunterra” or the “Predecessor Company”)
and cancellation of Sunterra’s outstanding common stock for $16.00 per share (“the Merger” or “the
April 27, 2007 Merger”).
The Company operates in the vacation ownership industry, with an ownership base of more than
380,000 families and a network of 196 resorts located in 28 countries including the United States,
Canada, Mexico, and throughout the Caribbean, Europe, Asia, Australia and Africa. The Company’s
resort network includes 69 Diamond Resorts International-branded and managed properties and 127
affiliated resorts, which are a part of the Company’s network and available for its members to use
as vacation destinations, although the Company does not manage them. As referenced in these
financial statements, Diamond Resorts International® and THE Club® are trademarks of the Company.
The Company’s operations consist of three interrelated businesses: (i) hospitality and
management services; (ii) marketing and sales of Vacation Ownership Interests (“VOI” or “Vacation
Interests”); and (iii) consumer financing for purchasers of the Company’s Vacation Interests.
| • | Hospitality and Management Services. The Company manages 69 branded resort properties, which are located in the continental United States, Hawaii, the Caribbean and Europe. The Company also manages five multi-resort trusts (the “Collections”). Each Collection holds real estate in the Company’s resort properties underlying the Vacation Interests that the Company sells. As manager of the Company’s branded resorts and Collections, it provides billing services, account collections, accounting and treasury functions and information technology services. In addition, for branded resorts, the Company also provides an online reservation system and customer service contact center, operates the front desks and amenities and furnishes housekeeping, maintenance and human resources services. Management contracts typically have an initial term of three to five years with automatic renewals and are structured on a cost-plus basis, thereby providing the Company with a recurring and stable revenue stream. In addition, the Company earns recurring fees by operating THE Club, the points-based exchange and member services program that enables members to vacation at any of the 196 resorts in the Company’s network. These items are included in management, member and other services revenue and expense in the accompanying consolidated statements of operations. | ||
| In addition, the Company serves as the HOA for its two resorts in St. Maarten and earns maintenance fees and incurs operating expenses at these two resorts. At certain resorts, the Company also operates golf courses, food and beverage venues, retail shops, a campground and a marina and earns incidental revenue and incurs operating expense. Finally, the Company provides cable, telephone, and technology services to HOAs. These items are included in consolidated resort operations revenue and expense in the accompanying consolidated statements of operations. | |||
| • | Marketing and Sales of Vacation Interests. The Company markets and sells Vacation Interests in its resort network. Sales prospects are generated by utilizing a variety of marketing programs. Currently, the Company sells Vacation Interests only in the form of points, which can be utilized for vacations for varying lengths of stay at any resort in its network. In the past, the Company also sold Vacation Interests in the |
F-9
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| form of deeded intervals, which provide the right to vacation at a particular resort for a specified length of time. | |||
| • | Consumer Financing of Vacation Interests. The Company provides loans to eligible customers who purchase Vacation Interests through sales centers and choose to finance their purchase. These loans are collateralized by the underlying Vacation Interests and bear interest at a fixed rate. The Company’s consumer finance servicing operations are vertically integrated and include underwriting, collection and servicing of its consumer loan portfolio. |
Basis of Presentation
The following is a list of entities included in the accompanying consolidated financial
statements:
AKGI St. Maarten, NV and subsidiaries
Citrus Insurance Company, Inc.
DRI Quorum 2010 LLC
Diamond Resorts (Europe) Ltd. and subsidiaries
Diamond Resorts Centralized Services Company
Diamond Resorts Corporation
Diamond Resorts Developer and Sales Holding Company and subsidiaries
Diamond Resorts Finance Holding Company and subsidiaries
Diamond Resorts Holdings, LLC
Diamond Resorts Issuer 2008, LLC
Diamond Resorts Management and Exchange Holding Company and subsidiaries
Diamond Resorts Owner Trust 2009-1
Diamond Resorts Polo Development, LLC
Diamond Resorts Services, LLC
FLRX, Inc. and subsidiaries
George Acquisition Subsidiary, Inc.
ILX Acquisition, Inc. and subsidiaries
Sunterra Owner Trust 2004-1
Tempus Acquisition, LLC
Citrus Insurance Company, Inc.
DRI Quorum 2010 LLC
Diamond Resorts (Europe) Ltd. and subsidiaries
Diamond Resorts Centralized Services Company
Diamond Resorts Corporation
Diamond Resorts Developer and Sales Holding Company and subsidiaries
Diamond Resorts Finance Holding Company and subsidiaries
Diamond Resorts Holdings, LLC
Diamond Resorts Issuer 2008, LLC
Diamond Resorts Management and Exchange Holding Company and subsidiaries
Diamond Resorts Owner Trust 2009-1
Diamond Resorts Polo Development, LLC
Diamond Resorts Services, LLC
FLRX, Inc. and subsidiaries
George Acquisition Subsidiary, Inc.
ILX Acquisition, Inc. and subsidiaries
Sunterra Owner Trust 2004-1
Tempus Acquisition, LLC
Some of the above entities, which include corporations, limited liability companies and
partnerships, each have several subsidiaries. On August 31, 2010, the Company acquired a majority
of the assets and assumed certain liabilities of ILX Resorts, Inc. (the “ILX Acquisition”) through
its wholly-owned subsidiary, ILX Acquisition, Inc. (“ILXA”). See Note 20—Business Combination for
further details.
The Company intends to acquire Tempus Resorts International, Ltd. and certain of its
affiliates through Tempus Acquisition, LLC (“Tempus Acquisition”), a wholly-owned subsidiary of the
Company. As part of the plan of acquisition, Tempus Acquisition entered into the Credit and
Security Agreement on November 23, 2010 for the revolving loan facility (“Tempus Loan”) as the
borrower and the Post-Petition Term Credit and Security Agreement for the debtor-in-possession
financing (“Tempus Note Receivable”) as the lender. See Note 7—Other Receivables, Net and Note
12—Borrowings for further details.
Reclassifications
Certain prior year balances were reclassified from previously issued reports to conform to
current year presentation.
Liquidity
Vacation Interest receivables collateralizing the Company’s borrowings were $247.4 million at
December 31, 2010. The Company believes it will be able to complete a transaction that will allow
it to either pay down or refinance its 2008 Conduit Facility prior to the August 30, 2011 maturity date.
There is no assurance, however, that the Company will be successful in completing such a
transaction, in which case the lenders would likely take recourse
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
on the collateral resulting in a decrease in net interest income. At December 31, 2010, the
Company had $39.5 million outstanding under its conduit facility. Cash provided by operations was
$66.0 million for the year ended December 31, 2010, compared to $87.8 million for the year ended
December 31, 2009 and $45.1 million for the year ended December 31, 2008. Cash and cash
equivalents were $27.3 million and $17.2 million as of December 31, 2010 and 2009, respectively.
The Company believes there will be sufficient existing cash resources and cash flows from
operations, in addition to future refinancing activities, to meet the anticipated debt maturities
and the Company’s other cash requirements during 2011. If cash flows from operations are less than
expected, the Company would need to curtail its spending or raise additional capital.
Note 2—Summary of Significant Accounting Policies
Principles of Consolidation—The accompanying consolidated financial statements include all
subsidiaries of the Company. With the exception of the hotel properties in Europe that the Company
owns and provides to an off-balance sheet trust in Europe under a rental agreement, the Company
does not have any interests in any variable interest entities for which the Company is considered
the primary beneficiary under Accounting Standards Codification (“ASC”) 810, “Consolidation.” All
significant intercompany transactions and balances have been eliminated from the accompanying
consolidated financial statements.
Use of Estimates—The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires the Company 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. Significant estimates were
used by the Company to estimate the fair value of the assets acquired and liabilities assumed in
the ILX Acquisition. These estimates included projections of future cash flows derived from sales
of vacation interests in the form of points, mortgages and contracts receivable, management
services revenue and rental income. Additionally, the Company made significant estimates of costs
associated with such projected revenues including but not limited to loan defaults, recoveries and
discount rates.
In preparation of its consolidated financial statements, the Company also made significant
estimates which include: (1) mortgages and contracts receivable, allowance for loan and contract
losses, and provision for uncollectible Vacation Interest revenue; (2) useful lives of property and
equipment; (3) estimated useful lives of intangible assets acquired; (4) estimated costs to build
or acquire any additional Vacation Interests, estimated total revenues expected to be earned on a
project, related estimated provision for uncollectible Vacation Interest revenue and sales
incentives, estimated projected future cost and volume of recoveries of Vacation Interests,
estimated sales price per point and estimated number of points sold used to allocate certain unsold
Vacation Interests to Vacation Interest cost of sales under the relative sales value method; and
(5) the valuation allowance recorded against deferred tax assets. It is at least reasonably
possible that a material change in one of these estimates may occur in the near term and cause
actual results to differ materially.
Vacation Interest Sales Revenue Recognition—With respect to the Company’s recognition of
revenue from Vacation Interest sales, the Company follows the guidelines included in ASC 978, “Real
Estate-Time-Sharing Activities.” Under ASC 978, Vacation Interest sales revenue is divided into
separate components that include the revenue earned on the sale of the Vacation Interest and the
revenue earned on the sales incentive given to the customer as motivation to purchase the Vacation
Interest. In order to recognize revenue on the sale of Vacation
Interests, ASC 978 requires a demonstration of a buyer’s commitment (generally a cash payment of
10% of the purchase price plus the value of any sales incentives provided). A buyer’s down payment
and subsequent mortgage payments are adequate to demonstrate a commitment to pay for the Vacation
Interest once 10% of the purchase price plus the value of the incentives provided to consummate a
Vacation Interest transaction has been covered. The Company recognizes sales of Vacation Interests
on an accrual basis after (i) a binding sales contract has been executed; (ii) the buyer has
adequately demonstrated a commitment to pay for the Vacation Interest; (iii) the rescission period
required under applicable law has expired; (iv) collectibility of the receivable representing the
remainder of the sales price is reasonably assured; and (v) the Company has completed substantially
all of the Company’s obligations with respect to any development related to the real estate sold
(i.e., construction has been substantially completed and certain minimum project sales levels have
been met). If the buyer’s commitment has not met ASC 978 guidelines, the Vacation Interest sales
revenue and related Vacation Interest cost of sales and direct
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
selling costs are deferred and recognized under the installment method until the buyer’s commitment
is satisfied, at which time the full amount of the sale is recognized. The net deferred revenue is
included in mortgages and contracts receivable on the Company’s balance sheet. Under ASC 978, the
provision for uncollectible vacation interest sales revenue is recorded as a reduction of Vacation
Interest sales revenue.
Management, Member and Other Services Revenue Recognition—Management, member and other
services revenue includes resort management fees charged to homeowners’ associations (“HOAs”) and
Collections that hold members’ Vacation Interests, as well as revenues from the Company’s operation
of THE Club and the provision of other services. THE Club membership annual dues are recognized
ratably over the year.
| • | Management fee revenues are recognized in accordance with the terms of the Company’s management contracts. The Company collects maintenance fees from the HOAs and Collections under the Company’s management agreements, which are recognized ratably throughout the year as earned. | ||
| • | The Company charges an annual fee for membership in THE Club, an internal exchange, reservation and membership service organization. In addition to annual dues associated with THE Club, the Company earns revenue associated with customer conversions into THE Club, which involve the payment of a one-time fee by interval owners who wish to retain their intervals but also participate in THE Club. The Company also earns revenue through the Company’s travel-related services and other affinity programs. | ||
| • | Other services revenue includes (1) closing costs on sales of Vacation Interests; (2) collection fees paid by owners when they bring their accounts current after collection efforts have been made by the Company on behalf of HOAs; (3) reservation protection plan revenue, which is an optional fee paid by customers when making a reservation to protect their points should they need to cancel their reservation; (4) travel services revenue from the Company’s European travel operations, which the Company discontinued during the second quarter of 2008; (5) revenue associated with certain sales incentives given to customers as motivation to purchase a Vacation Interest, which is recorded upon recognition of the related Vacation Interest sales revenue; and (6) late/impound fees assessed on delinquent customer accounts. |
Consolidated Resort Operations Revenue Recognition— Consolidated resort operations revenue
consists of the following:
| • | For the Company’s properties located in the Caribbean, the Company provides services traditionally administered by an HOA. Consolidated resort operations revenue includes the maintenance fees billed to owners and the Collections by the Company’s St. Maarten HOAs, which are recognized ratably over the year. In addition, these HOAs also bill the owners for capital project assessments to repair and replace the amenities of these resorts, as well as special assessments to reserve the out-of-pocket deductibles for hurricanes and other natural disasters. These assessments are deferred until refurbishment activity occurs, at which time the amounts collected are recognized as a direct reduction to refurbishment expense in consolidated resort operations expense. All operating revenues and expenses associated with these properties are consolidated within the Company’s financial statements, except for intercompany transactions, such as maintenance fees for the Company’s owned inventory and management fees, which are eliminated. | ||
| • | Food and beverage revenue at certain resorts whose restaurants the Company manages directly; | ||
| • | Greens fees, equipment rental and operation of food services at the golf courses owned and managed by the Company at certain resorts; | ||
| • | Revenue from providing cable, telephone, and technology services to HOAs; and | ||
| • | Other incidental revenues generated at the resorts including, but not limited to, retail and gift shops, activity fees for arts and crafts, sport equipment rental, and safe rental. |
Interest Revenue—The Company’s interest revenue consists primarily of interest earned on
consumer loans. Interest earned on consumer loans is accrued based on the contractual provisions
of the loan documents. Interest
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accruals on consumer loans are suspended at the earliest of (i) a first payment default; (ii) the
initiation of cancellation or foreclosure proceedings; or (iii) the customer’s account becoming 180
days delinquent. If payments are received while a consumer loan is considered delinquent, interest
is recognized on a cash basis. Interest accrual resumes once a customer has made six timely
payments on the loan. All interest revenue is allocated to our Vacation Interest Sales and Financing
business segment, with the exception of interest revenue earned on bank account balances, which is
reported in Corporate and Other.
Vacation Interest Cost of Sales—The Company records Vacation Interest cost of sales using the
relative sales value method in accordance with ASC 978, which requires the Company to make
significant estimates.
At
the time the Company records related Vacation Interest sales revenue, the Company records
Vacation Interest cost of sales. In determining the appropriate amount of costs using the relative
sales value method, the Company relies on complex, multi-year financial models that incorporate a
variety of inputs, most of which are management estimates. These amounts include, but are not
limited to, estimated costs to build or acquire any additional Vacation Interests, estimated total
revenues expected to be earned on a project, including estimated sales price per point and
estimated number of points sold, related estimated provision for uncollectible Vacation Interest
sales revenue and sales incentives, and estimated projected future cost and volume of recoveries of
Vacation Interests. Any changes in the estimates the Company uses to determine the Vacation
Interest cost of sales are recorded in the current period.
Advertising, Sales and Marketing Costs—Advertising, sales and marketing costs are expensed as
incurred, except for costs directly related to sales associated with contracts not eligible for
revenue recognition under ASC 978, as described above, which are deferred along with related
revenue until the buyer’s commitment requirements are satisfied. Advertising expense was $1.9
million, $1.6 million and $2.8 million for the years ended December 31, 2010, 2009 and 2008,
respectively.
Vacation Interest Carrying Cost, net— The Company is responsible for paying HOA annual
maintenance fees and reserves on the Company’s unsold Vacation Interests. Vacation Interest
carrying cost, net, includes amounts paid for delinquent maintenance fees related to Vacation
Interests acquired pursuant to the Company’s inventory recovery agreements, except for amounts that
are capitalized to unsold Vacation Interests, net. In addition, the Company historically entered
into subsidy agreements to fund negative cash flows of certain HOAs. These subsidy agreements
ceased as of December 31, 2008. All subsidy-related costs were expensed as incurred.
To offset the Company’s Vacation Interest carrying cost, the Company rents Vacation Interests
controlled by the Company to third parties on a short-term basis. The Company also generates
revenue on sales of one-week rentals and mini-vacations, which allow prospective owners to sample a
resort property. This revenue and the associated expenses are deferred until the vacation is used
by the customer or the expiration date, whichever is earlier. Revenue from resort rentals, one-week
rentals and mini-vacations is recognized as a reduction to Vacation Interest carrying cost in
accordance with ASC 978, with the exception of the Company’s European sampler product, which is
three years in duration and is treated as Vacation Interest sales revenue.
Management,
Member and Other Services Expenses—Currently,
substantially all direct expenses related
to the provision of services to the HOAs (other than for the Company’s Caribbean resorts, for which
the Company provides services traditionally administered by an HOA) and the Collections are
recovered through the Company’s management agreements, and consequently are not recorded as
expenses. The Company passes through to the HOAs certain overhead charges incurred to operate the resorts.
In accordance
with guidance included in ASC 605-45, “Revenue Recognition — Principal Agent Considerations”
(“ASC 605-45”) reimbursements from the HOAs relating to pass-through costs are recorded net of the related
expenses.
Expenses associated with the Company’s operation of THE Club include costs of the Company’s
customer service contact centers, fees paid to an external exchange provider and other items. In
addition, the Company incurs selling costs associated with customer conversions into THE Club.
Other services expenses include costs associated with the Company’s travel operations, which
were discontinued during the second quarter of 2008. Other expenses associated with certain sales
incentives given to customers as motivation to purchase a Vacation Interest are expensed as the
related Vacation Interest sales revenue
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is recognized. The Company also passes through to the HOAs certain charges incurred to operate the
resorts. These expenditures relate to payroll and other direct costs and are mainly associated with
housekeeping, front desk, maintenance, landscaping and other similar activities. In accordance with
guidance included in ASC 605-45, reimbursements from the HOAs relating to direct pass-through costs
are recorded net of the related expenses.
Consolidated Resort Operations Expenses—With respect to the Caribbean resorts, the Company
records expenses associated with housekeeping, front desk, maintenance, landscaping and other
similar activities, which are recovered by the maintenance fees recorded in consolidated resort
operations revenue. In addition, consolidated resort operations expense includes the costs related
to food and beverage operations at certain resorts whose restaurants the Company manages directly.
Similarly, the expenses of operating the golf courses and retail and gift shops are included in
consolidated resort operations expense.
Loan Portfolio Expenses—Loan portfolio expenses include payroll and administrative costs of
the finance operations as well as loan servicing fees paid to third parties. These costs are
expensed as incurred with the exception of mortgage and contract receivable origination costs,
which are capitalized and amortized over the term of the related mortgages and contracts receivable
as an adjustment to interest revenue using the effective interest method in accordance with
guidelines issued under ASC 310, “Receivables.”
General and Administrative Expenses—General and administrative expenses include payroll and
benefits, legal, audit and other professional services, travel costs, system-related costs and
corporate facility expense incurred in relation to the corporate office. The Company passes through to the HOAs certain payroll and other direct costs
incurred by corporate staff related to HOA operations. In accordance with guidance included in ASC 605-45, reimbursements
from the HOAs relating to direct pass-through costs are recorded net of the related expenses.
Income Taxes—The Company is subject to income taxes in the United States (including federal
and state) and numerous foreign jurisdictions in which the Company operates. The Company records
income taxes under the asset and liability method, whereby deferred tax assets and liabilities are
recognized based on the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases, and attributable to operating loss and tax credit carry forwards. Accounting standards
regarding income taxes require a reduction of the carrying amounts of deferred tax assets by a
valuation allowance if, based on the available evidence, it is more likely than not that such
assets will not be realized. Accordingly, the need to establish valuation allowances for deferred
tax assets is assessed periodically based on a more-likely-than-not realization threshold. This
assessment considers, among other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the duration of statutory carry forward
periods, the Company’s experience with operating loss and tax credit carry forwards not expiring
unused, and tax planning alternatives.
Accounting standards regarding uncertainty in income taxes provide a two-step approach to
recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount
which is more than 50% likely, based solely on the technical merits, of being sustained on
examinations. The Company considers many factors when evaluating and estimating the Company’s tax
positions and tax benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes.
We recorded a deferred tax asset as a result of net operating losses incurred, and as part of
our financial reporting process, we must assess the likelihood that our deferred tax assets can be
recovered. During this process, certain relevant criteria are evaluated, including the existence of
deferred tax liabilities against which deferred tax assets can be applied, and taxable income in
future years. Unless recovery is more likely than not, a reserve in the form of a valuation
allowance is established as an offset to the deferred tax asset. As a result of uncertainties
regarding our ability to generate sufficient taxable income to utilize our net operating loss
carry-forwards, we maintain a valuation allowance against the balance of our deferred tax assets.
Foreign Currency Translation—Assets and liabilities in foreign locations are translated into
U.S. dollars using rates of exchange in effect at the end of the reporting period. Income and
expense accounts are translated into U.S. dollars using average rates of exchange. The net gain or
loss is shown as a translation adjustment and is included in other comprehensive income (loss) in
the consolidated statement of member capital (deficit) and comprehensive income (loss). Holding
gains and losses from foreign currency transactions are included in the consolidated statement of
operations.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Comprehensive Income—Other comprehensive income includes all changes in member capital
(net assets) from non-owner sources such as foreign currency translation adjustments. The Company
accounts for other comprehensive income in accordance with ASC 220, “Comprehensive Income.”
Cash and Cash Equivalents—Cash and cash equivalents consist of cash, money market funds, and
all highly-liquid investments purchased with an original maturity date of three months or less.
Cash in Escrow and Restricted Cash—Cash in escrow consists of deposits received on sales of
Vacation Interests that are held in escrow until the legal rescission period has expired.
Restricted cash consists primarily of reserve cash held for the benefit of the secured note holders
and cash collections on certain mortgages receivable that secure collateralized notes. See Note
12—Borrowings. Additionally, in its capacity as resort manager, the Company collects cash on
overnight rental operations on behalf of owners and HOAs, which are captioned “Rental trust” in
Note 4—Cash in Escrow and Restricted Cash.
Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses—The Company
accounts for mortgages (for the financing of intervals) and contracts receivable (for the financing
of points) under ASC 310, “Receivables.”
Mortgages and contracts receivable that the Company originates or acquires are recorded net of (i)
deferred loan and contract costs, (ii) the discount or premium on the acquired mortgage pool and (iii) the
related allowance for loan and contract losses. Loan and contract origination costs incurred in
connection with providing financing for Vacation Interests are capitalized and amortized over the
term of the related mortgages or contracts receivable as an adjustment to interest revenue using
the effective interest method. Because the Company sells Vacation Interests only in the form of
points, the Company currently originates contracts receivables, instead of mortgage receivables.
The Company records a sales provision for estimated mortgage and contracts receivable losses as a
reduction to Vacation Interest sales revenue. This provision is calculated as projected gross
losses for originated mortgages and contracts receivable, taking into account estimated Vacation
Interest recoveries. If actual mortgage and contracts receivable losses differ materially from
these estimates, the Company’s future results of operations may be adversely impacted.
The Company applies its historical default percentages based on credit scores of the
individual customers to its mortgage and contracts receivable population to analyze the adequacy of
the allowance and evaluate other factors such as economic conditions, industry trends, defaults and
past due agings. Any adjustments to the allowance for mortgage and contracts receivable loss are
also recorded within Vacation Interest sales revenue.
The Company charges off mortgages and contracts receivable upon the earliest of (i) the
initiation of cancellation or foreclosure proceedings; or (ii) the customer’s account becoming 180
days delinquent. Once a customer has made six timely payments following the event leading to the
charge off, the charge off is reversed. A default in a customer’s initial payment results in a
rescission of the sale. All collection and foreclosure costs are
expensed as incurred.
The mortgages the Company acquired on April 27, 2007 in connection with the Sunterra
Corporation acquisition are accounted for separately as an acquired pool of loans. Any discount or
premium associated with this pool of loans is amortized using an amortization method that
approximates the effective interest method.
Due from Related Parties, Net and Due to Related Parties, Net— Amounts due from related
parties, net, and due to related parties, net consist primarily of transactions with HOAs at
properties at which the Company acts as the management company or Collections that hold the real
estate underlying the Vacation Interests that the Company sells. See Note 6—Transactions with
Related Parties for further detail. Due to the fact that the right of offset exists between the
Company and the HOAs, the Company evaluates amounts due to and from each HOA at each reporting
period to present the balances as either a net due to or a net due from related parties in
accordance with the requirements of ASC 210-20, “Balance Sheet — Offsetting.”
Assets Held for Sale—Assets held for sale are recorded at the lower of cost or their
estimated fair value less costs to sell and are not subject to depreciation. Sale of the assets
classified as such is probable, and transfer of the assets is expected to qualify for recognition
as a completed sale, within one year of the balance sheet date. During
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2008, the Company sold a resort in London, England that had been recorded as an asset held for
sale. During the year ended December 31, 2008, due to a depressed Florida real estate market, the
Company recorded a $7.0 million impairment charge related to raw land adjacent to a managed
timeshare resort property in Orlando, Florida that was classified as assets held for sale. During
the year ended December 31, 2009, the raw land was transferred to unsold Vacation Interests as the
Company was no longer actively marketing it for sale due to the lack of potential buyers during
this economic downturn. There were no assets held for sale as of December 31, 2009. During 2010,
the Company made the decision to sell certain resorts and certain units in our European operations.
A portion of the units were sold by December 31, 2010. The $9.5 million balance in assets held for
sale as of December 31, 2010 consisted of $8.9 million in unsold units and points equivalent and
$0.6 million of management contracts at these European resorts.
Unsold Vacation Interests, Net—Unsold Vacation Interests are valued at the lower of cost or
fair market value. The cost of unsold Vacation Interests includes acquisition costs, hard and soft
construction costs, the cost incurred to recover inventory and other carrying costs (including
interest, real estate taxes and other costs incurred during the construction period). Costs are
expensed to Vacation Interest cost of sales under the relative sales value method. In accordance
with ASC 978, the costs capitalized for recovered intervals differ based on a variety of factors,
including the method of recovery and the timing of the original sale and/or loan origination.
Interest, real estate taxes and other carrying costs incurred during the construction period are
capitalized and such costs incurred on completed Vacation Interests are expensed.
Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued guidance included in ASC 860, “Transfers and Servicing,” which
eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency about transfers of
financial assets, including securitization transactions, and an entity’s continuing involvement in
and exposure to the risks related to transferred financial assets. ASC 860 is effective for interim
or annual reporting periods beginning after November 15, 2009. The Company adopted ASC 860 on
January 1, 2010, as required, which did not have a material impact on its financial condition and
results of operations.
In June 2009, the FASB issued amended guidance included in ASC 810, “Consolidation,” which
modifies how a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. ASC 810 clarifies that the
determination of whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. This amendment requires an
ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity,
additional disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The amendment is effective for
interim or annual reporting periods beginning after November 15, 2009. The Company adopted the
amendment to ASC 810 on January 1, 2010, as required, which did not have a material impact on its
financial condition and results of operations.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Improving
Disclosures about Fair Value Measurements, which, among other things, amends ASC 820, “Fair Value
Measurements and Disclosures” to require entities to separately present purchases, sales,
issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to
present such items on a gross basis rather than on a net basis), and which clarifies existing
disclosure requirements provided by ASC 820 regarding the level of disaggregation and the inputs
and valuation techniques used to measure fair value for measurements that fall within either Level
2 or Level 3 of the fair value hierarchy. ASU No. 2010-06 is effective for interim and annual
periods beginning after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value measurements which
are effective for fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. The adoption did not have a material impact on the Company’s consolidated
financial statements or the disclosures, as the Company did not have any transfers between Level 1
and Level 2 fair value measurements and did not have material classes of assets and liabilities
that required additional disclosure.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and
Disclosure Requirements, which amends ASC 855, “Subsequent Events.” ASU No. 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised financial statements.
Revised financial statements include financial statements revised as a result of either correction
of an error or retrospective application of U.S. GAAP. Additionally, FASB clarified that if the
financial statements have been revised, then an entity that is not an SEC filer should disclose
both the date that the financial statements were issued or available to be issued and the date the
revised financial statements were issued or available to be issued. ASU No. 2010-09 is effective
for the first reporting period after issuance. The Company adopted ASU No. 2010-09 on June 30,
2010, which did not have a material impact on the Company’s financial condition or results of
operations.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. This standard amends existing guidance
by requiring additional disclosures that will provide greater transparency about an entity’s
allowance for credit losses and the credit quality of the Company’s financing receivables. These
disclosures are designed to provide additional information about (i) the nature of credit risk
inherent in the entity’s portfolio of financing receivables; (ii) how that risk is analyzed and
assessed in arriving at the allowance for credit losses; and (iii) the changes and reasons for
those changes in the allowance for credit losses. For public entities, the disclosures are
effective for interim and annual reporting periods ending on or after December 15, 2010. The Company adopted
ASU No. 2010-20 as of December 31, 2010. The adoption of this update primarily resulted in
increased disclosures, but did not have any other impact on the financial statements.
In December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The amendments in this update modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. For public entities, the amendments in
this update are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. The Company will adopt ASU 2010-28 as of January 1, 2011. The Company
believes that the adoption of this update will not have a material impact on the Company’s
financial statements.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations.
The amendments in this update
specify that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments also expand the supplemental pro forma disclosures to include
a description of the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
The amendments affect any public entity as defined by Topic 805 that enters into business
combinations that are material on an individual or aggregate basis.
The amendments in this update
are effective prospectively for business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. The Company will adopt ASU 2010-29 for all business combinations for which
the acquisition date is on or after January 1, 2011. The Company believes that the adoption of this
update will primarily result in increased disclosures, but will not have a material impact on the
Company’s financial statements.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The
amendments in this update temporarily delay the effective date of the disclosures about troubled
debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB
time to complete its deliberations on what constitutes a troubled debt restructuring. The effective
date of the new disclosures about troubled debt restructurings for public entities and the guidance
for determining what constitutes a troubled debt restructuring will then be coordinated. Currently,
that guidance is anticipated to be effective for interim and annual periods ending after June 15,
2011. The amendments in this update apply to all public-entity creditors that modify
financing receivables within the scope of the disclosure requirements about troubled debt
restructurings in ASU 2010-20. The Company will adopt ASU 2011-01 as of the Company’s interim
period ending June 30, 2011. The Company believes that the adoption of this update will not have a
material impact on the Company’s financial statements.
F-17
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3—Concentrations of Risk
Credit Risk—The Company is exposed to on-balance sheet credit risk related to its mortgages
and contracts receivable. The Company offers financing to the buyers of Vacation Interests at the
Company’s resorts. The Company bears the risk of defaults on promissory notes delivered to it by
buyers of Vacation Interests. If a buyer of Vacation Interest defaults, the Company generally must
attempt to resell it by exercise of a power of sale. The associated marketing, selling, and
administrative costs from the original sale are not recovered, and such costs must be incurred
again to resell the Vacation Interests. Although in many cases the Company may have recourse
against a buyer of Vacation Interests for the unpaid price, certain states have laws that limit the
Company’s ability to recover personal judgments against customers who have defaulted on their
loans. Accordingly, the Company has generally not pursued this remedy.
The Company maintains cash, cash equivalents, cash in escrow, and restricted cash with various
financial institutions. These financial institutions are located throughout Europe and North
America. A significant portion of the unrestricted cash is maintained with a select few banks and
is, accordingly, subject to credit risk. Periodic evaluations of the relative credit standing of
financial institutions maintaining the deposits are performed to evaluate and mitigate, if
necessary, any credit risk.
Availability of Funding Sources—The Company has historically funded mortgages and contracts
receivable and unsold Vacation Interests with borrowings through its financing facilities, sales of
mortgages and contracts receivable and internally generated funds. Borrowings are in turn repaid
with the proceeds received by the Company from repayments of such mortgages and contracts
receivable. To the extent that the Company is not successful in maintaining or replacing existing
financings, it would have to curtail its operations or sell assets, thereby resulting in a material
adverse effect on the Company’s results of operations, cash flows, and financial condition.
Geographic Concentration—At December 31, 2010, borrowers residing in the United States
accounted for approximately 96.1% of the Company’s loan portfolio. With the exception of California
and Arizona, which represented 24.5% and 13.9%, respectively, no state or foreign country
concentration accounted for in excess of 5.0% of the portfolio. The credit risk inherent in such
concentrations is dependent upon regional and general economic stability, which affects property
values and the financial well being of the borrowers.
Interest Rate Risk— Since the Company’s indebtedness bears interest at variable rates, any
increase in interest rates beyond amounts covered under the Company’s interest rate swap and
interest rate caps, particularly if sustained, could have a material adverse effect on the
Company’s results of operations, cash flows and financial position.
On June 29, 2007, the Company entered into a two-year interest rate swap contract with JP
Morgan Chase Bank, N.A. to manage its exposure to fluctuations in interest rates (“JP Morgan
Swap”). The contract had a notional value of $195.0 million and required the Company to pay
interest at a fixed rate of 5.3% in exchange for a floating rate payment from JP Morgan Chase Bank,
N.A. The contract was terminated on June 29, 2009 at maturity. See Note 12—Borrowings for
further detail.
The Company derives net interest income from its financing activities because the interest
rates it charges its customers who finance the purchase of their Vacation Interests exceed the
interest rates the Company pays to its lenders. Since the Company’s customer receivables bear
interest at fixed rates, increases in interest rates will erode the spread in interest rates that
the Company has historically obtained.
In September 2007, the Company entered into an interest rate swap (“Credit Suisse Swap”) and
an interest rate cap (“2007 Cap”) that mature on March 20, 2011 to manage its exposure to the
fluctuation in interest rates on its conduit facilities completed in 2007 and 2008 (“2007 Conduit
Facility” and “2008 Conduit Facility”). The Company is required to hedge at least 90.0% of the
outstanding notes payable balances on a monthly basis. The Credit Suisse Swap required the Company
to pay interest at a fixed rate of 4.7% in exchange for a floating rate payment from a
counterparty. In addition, the 2007 interest rate cap limited the interest rate the Company pays
to 5.5%. Upon termination of the 2007 Conduit Facility in October 2009, the notional amount of the
Credit Suisse Swap was reduced to $10.0 million.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In July 2010, the Company took additional measures to limit its exposure to interest rate
increases by entering into a second interest rate cap (“2010 Cap”) that terminates on July 20,
2013. The 2010 Cap bears a strike rate of 5.5% and a one-month LIBOR based on a notional amount of
$30 million. During the year ended and as of December 31, 2010, the fair value of this derivative
asset was calculated to be zero based on the discounted cash flow model.
At December 31, 2010, the Company had $39.5 million outstanding under its 2008 Conduit
Facility, of which $10.0 million was covered by the Credit Suisse Swap and the remainder was
covered by the 2007 Cap and the 2010 Cap. See Note 12—Borrowings and Note 18—Fair Value
Measurements for further details.
Note 4—Cash in Escrow and Restricted Cash
Cash in escrow and restricted cash consisted of the following as of December 31 (in
thousands):
| 2010 | 2009 | |||||||
Securitization and conduit collection and reserve cash |
$ | 14,040 | $ | 26,953 | ||||
Escrow |
4,615 | 5,152 | ||||||
Bonds and deposits |
2,229 | 5,025 | ||||||
Rental trust |
3,717 | 2,023 | ||||||
Collected on behalf of HOAs and other |
5,447 | 1,391 | ||||||
Total cash in escrow and restricted cash |
$ | 30,048 | $ | 40,544 | ||||
Note 5—Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses
The Company provides financing to purchasers of Vacation Interests at U.S. sales centers that
is collateralized by their Vacation Interests. Eligibility for this financing is determined based
on the customers’ Fair Isaac Corporation (“FICO”) credit scores. The mortgages and contracts,
excluding those held by the Company’s unrestricted subsidiaries (principally ILXA as of December
31, 2010) (“Diamond Resorts mortgages and contracts”), bear interest at fixed rates between 6.0%
and 17.9%. The term of the Diamond Resorts mortgages and contracts are from five years to fifteen
years and may be prepaid at any time without penalty. The weighted average interest rate of
outstanding Diamond Resorts mortgages and contracts receivable was 15.4% and 15.1% at December 31,
2010 and 2009, respectively. Diamond Resorts mortgages and contracts receivable in excess of 90
days past due at December 31, 2010 and 2009 were 3.6% and 3.3%, respectively, of gross Diamond
Resorts mortgages and contracts receivable.
Prior to 2009, the Company offered six and twelve month zero percent interest financing to
qualified customers. Interest was imputed on these loans at a rate of 12.3%. Approximately $0.8
million and $1.6 million were amortized into interest revenue during the years ended December 31,
2009 and 2008, respectively. All zero percent interest loans were paid off during the year ended
December 31, 2009.
The mortgages and contracts receivable of the unrestricted subsidiaries bear interest at fixed
rates between 0% and 17.9% and had an aggregate balance of $13.8 million on August 31, 2010, the
date of the ILX Acquisition. The term of the mortgages and contracts under the unrestricted
subsidiaries are from nine months to ten years, and may be prepaid at any time without penalty.
The weighted average interest rate of mortgages and contracts receivable of the unrestricted
subsidiaries was 15.5% at December 31, 2010. Mortgages and contracts receivable of the unrestricted
subsidiaries in excess of 90 days past due at December 31, 2010 were 8.9% of gross mortgages and
contracts receivable of the unrestricted subsidiaries.
At December 31, 2010, 3.9% of the combined portfolios of all of the Company’s mortgages and
contracts receivable was in excess of 90 days past due.
Mortgages and contracts receivable originated by the Company are recorded at amortized cost,
including deferred loan and contract origination costs, less the related allowance for loan and
contract losses. Loan and contract origination costs incurred in connection with providing
financing for Vacation Interests are capitalized and
amortized over the estimated life of the mortgages or contracts receivable based on historical
prepayments as a
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
decrease to interest revenue using the effective interest method. Amortization of
deferred loan and contract origination costs charged to interest revenue was $3.4 million, $3.9
million and $2.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company recorded a $3.3 million discount at April 27, 2007 on the acquired mortgage pool,
which is being amortized over the life of the related acquired mortgage pool. At December 31, 2010
and 2009, the net unamortized discount was $0.8 million and $1.2 million, respectively. During the
years ended December 31, 2010, 2009 and 2008, amortization of $0.4 million, $0.7 million and $0.7
million, respectively, was recorded as an increase to interest revenue.
Mortgages and contracts receivable, net, consisted of the following as of December 31 (in
thousands):
| 2010 | 2009 | |||||||
Mortgages and contracts receivable, acquired —
April 27, 2007 Merger |
$ | 71,200 | $ | 106,682 | ||||
Mortgages and contracts receivable, contributed |
11,125 | 18,672 | ||||||
Mortgages and contracts receivable, originated |
198,959 | 191,478 | ||||||
Mortgages and contracts receivable, purchased
(unrestricted subsidiaries) |
12,043 | — | ||||||
Mortgages and contracts receivable, gross |
293,327 | 316,832 | ||||||
Allowance for Loan and Contract Losses |
(51,551 | ) | (60,911 | ) | ||||
Allowance for Loan and Contract Losses
(unrestricted subsidiaries) |
(3,600 | ) | — | |||||
Deferred profit on Vacation Interest transactions |
(2,349 | ) | (2,693 | ) | ||||
Deferred loan and contract origination costs,
net of accumulated amortization |
2,823 | 3,672 | ||||||
Inventory value of defaulted mortgages that were
previously contributed and acquired |
7,439 | 7,888 | ||||||
Discount on mortgages and contracts receivable,
net of accumulated amortization |
(802 | ) | (1,232 | ) | ||||
Mortgages and contracts receivable, net |
$ | 245,287 | $ | 263,556 | ||||
At December 31, 2010 and 2009, $235.4 million and $275.2 million, respectively, of the gross
amount of the Diamond Resorts mortgages and contracts receivable were collateralized against the
Company’s various debt instruments. At December 31, 2010, the $12.0 million of mortgages and
contracts receivable of the unrestricted subsidiaries served as collateral for the $10.3 million
non-revolving credit facility of the unrestricted subsidiaries, which is included in
“Securitization notes and conduit facility” caption in the accompanying consolidated balance
sheets. See Note 12—Borrowings for further detail.
Deferred profit on Vacation Interest transactions represents the revenues less the related
direct costs (sales commissions, sales incentives, cost of revenues and allowance for loan losses)
related to sales that do not qualify for revenue recognition under the provisions of ASC 978, “Real
Estate-Time-Sharing Activities.” See Note 2—Summary of Significant Accounting Policies for
description of revenue recognition criteria.
Inventory value of defaulted mortgages that were previously contributed and acquired
represents the inventory underlying mortgages that have defaulted. Upon recovery of the inventory,
the value is transferred to unsold Vacation Interests, net.
The following reflects the contractual principal maturities of originated and acquired mortgages and
contracts receivable as of December 31 (in thousands):
2011 |
$ | 47,205 | ||
2012 |
44,141 | |||
2013 |
40,785 | |||
2014 |
37,123 |
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2015 |
34,075 | |||
2016 and thereafter |
89,998 | |||
| $ | 293,327 | |||
Activity in the allowance for
loan and contract losses associated with Diamond Resorts mortgages and contracts
for the years ended December 31, 2010 and 2009 is as follows (in thousands):
| 2010 | 2009 | |||||||
Balance, beginning of period |
$ | 60,911 | $ | 71,467 | ||||
Provision on purchased loans |
— | 57 | ||||||
Provision
for uncollectible Vacation Interest sales revenue |
7,272 | 10,214 | ||||||
Mortgages and contracts receivable charged off |
(25,837 | ) | (28,518 | ) | ||||
Recoveries |
4,169 | 7,505 | ||||||
Change in estimate for prior years’ sales |
5,095 | — | ||||||
Effect of translation rate |
(59 | ) | 186 | |||||
Balance, end of period |
$ | 51,551 | $ | 60,911 | ||||
Activity in the allowance for the loan and contract losses under the unrestricted subsidiaries
during the year ended December 31, 2010 is as follows (in thousands):
Balance, beginning of period |
$ | — | ||
Allowance on purchased loans acquired |
4,414 | |||
Mortgages and contracts receivable charged off |
(814 | ) | ||
Balance, end of period |
$ | 3,600 | ||
The
provision for uncollectible Vacation Interest sales revenue in the allowance schedule above
does not include ASC 978 adjustments. The ASC 978 adjustments offset the provision for
uncollectible Vacation Interest sales revenue by $0.3 million and $3.9 million for the years ended
December 31, 2010 and 2009, respectively.
| A summary of credit quality as of December 31, 2010 is as follows (in thousands): |
| Diamond | Unrestricted | |||||||||||
| Resorts | Subsidiaries | |||||||||||
| Mortgages and | Mortgages and | |||||||||||
| FICO Scores | Contracts | Contracts | Total | |||||||||
| >799 | $ | 17,055 | $ | 90 | $ | 17,145 | ||||||
| 700 – 799 | 123,558 | 2,888 | 126,446 | |||||||||
| 600 – 699 | 96,087 | 3,977 | 100,064 | |||||||||
| <600 | 38,373 | 2,128 | 40,501 | |||||||||
| No FICO Scores | 6,211 | 2,960 | 9,171 | |||||||||
| $ | 281,284 | $ | 12,043 | $ | 293,327 | |||||||
Excluding the mortgages and contracts of the unrestricted subsidiaries, FICO credit scores
were updated in January 2011 for existing mortgages and contracts or obtained during 2010 for new
loans.
Note 6—Transactions with Related Parties
Due from Related Parties, Net and Due to Related Parties, Net
Amounts due from related parties, net and due to related parties, net consist primarily of
transactions with HOAs at properties at which the Company acts as the management company or
Collections that hold the real estate underlying the Vacation Interests that the Company sells.
Due from related parties, net transactions include
management fees for the Company’s role as the management company, certain expenses reimbursed
by HOAs, and
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the allocation of a portion of the Company’s resort management and general and
administrative expenses according to a pre-determined schedule approved by the board of directors
at each HOA. Due to related parties, net transactions include (1) the amounts due to HOAs under
inventory recovery agreements the Company enters into regularly with certain HOAs
and similar agreements with the Collections pursuant to which the Company recaptures Vacation
Interests, either in the form of vacation points or vacation intervals, and brings them into the
Company’s inventory for sale to customers; (2) the maintenance fee and special assessment fee
liability owed to HOAs for Intervals or to the Collections for points owned by the Company; (3)
cleaning fees owed to HOAs for room stays incurred by the Company’s customers; and (4) subsidy
liabilities owed to certain HOAs to fund the negative cash flows at these HOAs according to certain
subsidy agreements, which ceased as of December 31, 2008. Amounts due from related parties and
due to related parties are due on demand and carry no interest. Due to the fact that the right of
offset exists between the Company and the HOAs, the Company evaluates amounts due to and from each
HOA at each reporting period to present the balances as either a net due to or a net due from
related parties in accordance with the requirements of ASC 210-20, “Balance Sheet -
Offsetting.”
In 2008, an arbitration demand was filed against the Company for enforcement of a $4.0
million settlement agreement entered into by the Company and a Board of Director’s family member.
On October 2, 2009, the arbitrator entered an arbitration award against the Company in the amount
of $4.0 million plus interest. On December 8, 2009, a court in District Court, Clark County,
Nevada confirmed the arbitration award plus pre-judgment interest and costs. During the year ended December 31, 2008, the Company recorded a $4.0 million increase to general and
administrative expense with a corresponding increase to due to related parties. During the year ended December 31, 2009, the Company recorded a $0.5 million increase to general
and administrative expense with a corresponding increase to due to related parties for accrued
interest and costs associated with the arbitration award. On June 10, 2010, the award was paid in
full for $4.4 million.
Due from related parties, net consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
Amounts due from HOAs |
$ | 19,941 | $ | 14,871 | ||||
Amounts due from off-balance sheet trusts |
1,017 | 507 | ||||||
Total due from related parties, net |
$ | 20,958 | $ | 15,378 | ||||
Due to related parties, net consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
Amounts owed to HOAs |
$ | 30,377 | $ | 27,565 | ||||
Amounts owed to off-balance sheet trusts |
5,874 | 4,630 | ||||||
Other |
— | 4,500 | ||||||
Total due to related parties, net |
$ | 36,251 | $ | 36,695 | ||||
Inventory Recovery Agreements
The Company entered into inventory recovery agreements with substantially all
HOAs and similar agreements with all of its Collections pursuant to which it recaptures Vacation
Interests, either in the form of points or intervals, and brings them into its inventory for sale
to customers. Under these agreements, the Company is required to pay maintenance and assessment
fees to the HOAs and Collections, including any past due amounts, for any Vacation Interests that
it has recovered. These agreements automatically renew for additional one-year terms unless
expressly terminated by either party in advance of the agreement period. These agreements were
renewed for 2010, 2009 and 2008. Such agreements contain provisions for the Company to utilize the
Vacation Interests associated with such maintenance fees and to reclaim such Vacation Interests in
the future. Each agreement provides for an initial June 30 settlement date and adjustments
thereafter.
The Company’s obligation under the 2010 agreements as of the June 30, 2010 settlement date
totaled approximately $8.1 million, including approximately $3.5 million related to the fiscal year
ended December 31,
2010 usage rights of the underlying Vacation Interests (expensed during 2010 as a component of
Vacation Interest
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
carrying cost) and approximately $4.6 million that will either be collected from
the owners or, if uncollected, will remain on the Company’s balance sheet as the cost basis of the
reclaimed underlying Vacation Interests.
The Company’s obligation under the 2009 agreements as of the June 30, 2009 settlement date
totaled approximately $8.6 million, including approximately $5.7 million related to the fiscal year
ended December 31, 2009 usage rights of the underlying Vacation Interests (expensed during 2009 as
a component of Vacation Interest carrying cost) and approximately $2.9 million that will either be
collected from the owners or, if uncollected, will remain on the Company’s balance sheet as the
cost basis of the reclaimed underlying Vacation Interests.
The Company’s obligation under the 2008 agreements as of the June 30, 2008 settlement date
totaled approximately $7.0 million, including approximately $3.9 million related to the fiscal year
ended December 31, 2008 usage rights of the underlying Vacation Interests (expensed during 2008 as
a component of Vacation Interest carrying cost) and approximately $3.1 million that will either be
collected from the owners or, if uncollected, will remain on the Company’s balance sheet as the
cost basis of the reclaimed underlying Vacation Interests.
The Company has renewed these agreements for 2011. No amounts have been recorded under the
2011 agreements as of December 31, 2010.
Management Services
Included within the amounts reported as management, member and other services revenue are
revenues from resort management services provided to the HOAs, which totaled $31.3 million, $29.3
million and $26.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. See
“Due from Related Parties, Net and Due to Related Parties, Net” section above for detail of these
services performed.
Also included within the amount reported as management, member and other services revenue are
revenues earned from managing the off-balance sheet trusts which hold legal title to the vacation
property real estate out of which the Company conveys vacation points to its customers. These
amounts total $16.8 million, $11.6 million and $11.5 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Allocation of Expenses
In addition to management services revenues, the Company also has entered into agreements with
the HOAs to be reimbursed for a portion of the Company’s resort management and general and
administrative expenses to the HOAs. The following table presents the amounts passed through to the
HOAs for the years ended December 31, 2010, 2009 and 2008, respectively (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
Reduction of
management, member, and other services expenses |
$ | 6,701 | $ | 5,222 | $ | 4,696 | ||||||
Reduction of general and administrative expenses |
24,065 | 19,245 | 9,947 | |||||||||
Total allocation of expenses |
$ | 30,766 | $ | 24,467 | $ | 14,643 | ||||||
Note 7—Other Receivables, Net
Other receivables, net consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
THE Club dues receivable |
$ | 29,534 | $ | 26,076 | ||||
Mortgage interest receivable |
3,651 | 3,925 | ||||||
Rental receivables and other resort
management-related receivables |
2,893 | 2,686 | ||||||
THE Club conversion receivable |
1,409 | 2,101 | ||||||
Owner maintenance fee receivable |
2,097 | 1,647 | ||||||
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 2010 | 2009 | |||||||
Mini-vacations and sampler program receivables |
1,060 | 976 | ||||||
Insurance claims receivable |
533 | 598 | ||||||
Tempus Note Receivable |
3,005 | — | ||||||
Proceeds from ILXA Inventory Loan in transit |
1,028 | — | ||||||
Other receivables |
2,970 | 3,884 | ||||||
Total other receivables, gross |
48,180 | 41,893 | ||||||
Provision for doubtful accounts |
(12,200 | ) | (8,009 | ) | ||||
Total other receivables, net |
$ | 35,980 | $ | 33,884 | ||||
On November 23, 2010, Tempus Acquisition entered into the Tempus Note Receivable with Tempus
Resorts International, Ltd. and certain of its affiliates (the “Borrower”) to provide
debtor-in-possession financing. The Tempus Note Receivable is a term loan facility with a maximum
principal amount of $6.5 million. The Borrower shall use the proceeds for general working capital
purposes and other purposes as permitted under the Tempus Note Receivable Agreement. The term of
the Tempus Note Receivable ended on February 18, 2011; however, the bankruptcy court approved the
extension of the term through March 27, 2011. As of December 31, 2010, the outstanding balance of
the Tempus Note Receivable was $3.0 million. See Note 12—Borrowings for details related
to the Tempus Loan.
Note 8—Prepaid Expenses and Other Assets, Net
The nature of selected balances included in prepaid expenses and other assets, net of the
Company includes:
Unamortized maintenance fees—unamortized portion of annual maintenance fees billed by the
homeowners associations on unsold Vacation Interests owned by the Company, which are charged to
expense ratably over the year.
Deferred commissions—commissions paid to sales agents related to deferred mini-vacations
and sampler program revenue, which are charged to expense as the associated revenue is
recognized.
Vacation Interest purchases in transit—open market purchases of vacation points from
prior owners for which the titles have not been officially transferred to the Company. These
Vacation Interest purchases in transit are reclassified to unsold Vacation Interest, net, upon
successful transfer of title.
Prepaid rent—portion of rent paid in advance and charged to expense in accordance with
lease agreements.
Prepaid expenses and other assets, net consisted of the following as of December 31 (in
thousands):
| 2010 | 2009 | |||||||
Debt issuance costs, net |
$ | 24,098 | $ | 8,227 | ||||
Unamortized maintenance fees |
5,663 | 6,035 | ||||||
Other inventory/consumables |
3,019 | 2,543 | ||||||
Prepaid insurance |
2,061 | 2,461 | ||||||
Deferred commissions |
2,494 | 2,334 | ||||||
Assets to be disposed (not actively marketed) |
2,169 | 1,628 | ||||||
Deposits and advances |
2,457 | 1,462 | ||||||
Vacation Interest purchases in transit |
1,099 | 1,384 | ||||||
Prepaid rent |
255 | 254 | ||||||
Prepaid sales and marketing costs |
239 | 232 | ||||||
Other |
2,694 | 2,268 | ||||||
Total prepaid expenses and other assets, net |
$ | 46,248 | $ | 28,828 | ||||
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
With the exception of Vacation Interest purchases in transit, prepaid expenses are expensed as
the underlying assets are used or amortized. Debt issuance costs incurred in connection with
obtaining funding for the Company have been capitalized and are being amortized over the lives of
the related funding agreements as a component of interest expense using a method which approximates
the effective interest method. Amortization of capitalized debt issuance costs included in interest
expense was $2.5 million, $2.0 million and $8.9 million for the years ended December 31, 2010, 2009
and 2008, respectively. See Note 12—Borrowings for more detail.
Debt issuance costs, net of amortization recorded utilizing the effective interest method, as
of December 31, 2010 was comprised of $15.5 million related to the senior secured notes, $6.5
million related to the Diamond Resorts Owners Trust Series 2009-1 Class A and Class B Notes, $1.1
million related to the 2008 Conduit Facility, $0.8 million related to the ILXA loans and $0.2
million related to the Quorum Facility.
Note 9—Unsold Vacation Interests, Net
Unsold Vacation Interests, net consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
Completed unsold Vacation Interests, net |
$ | 157,491 | $ | 170,443 | ||||
Undeveloped land |
32,159 | 31,970 | ||||||
Vacation Interest construction in progress |
914 | 812 | ||||||
Unsold Vacation Interests, net |
$ | 190,564 | $ | 203,225 | ||||
Note 10—Property and Equipment, Net
Property and equipment are recorded at historical cost. The costs of improvements that extend
the useful life of property and equipment are capitalized when incurred. These capitalized costs
may include structural costs, equipment, fixtures, floor, and wall coverings. All repair and
maintenance costs are expensed as incurred.
Buildings and leasehold improvements are depreciated using the straight-line method over the
lesser of the estimated useful lives, which range from four to forty years, or the remainder of the
lease terms, respectively. Furniture, office equipment, computer software and computer equipment
are depreciated using the straight-line method over their estimated useful lives, which range from
three to seven years.
Property and equipment, net consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
Land and improvements |
$ | 4,021 | $ | 1,140 | ||||
Buildings and leasehold improvements |
18,468 | 16,800 | ||||||
Furniture and office equipment |
8,674 | 7,714 | ||||||
Computer software |
9,110 | 6,972 | ||||||
Computer equipment |
4,776 | 4,290 | ||||||
Construction in progress |
433 | 610 | ||||||
Property and equipment, gross |
45,482 | 37,526 | ||||||
Less accumulated depreciation |
(16,385 | ) | (11,818 | ) | ||||
Property and equipment, net |
$ | 29,097 | $ | 25,708 | ||||
Depreciation expense related to property and equipment was $7.0 million, $6.9 million and $4.6
million for the years ended December 31, 2010, 2009 and 2008, respectively.
Note 11—Intangible Assets, Net
Intangible assets, net consisted of the following as of December 31, 2010 (in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Gross Carrying | Accumulated | Net Book | ||||||||||
| Cost | Amortization | Value | ||||||||||
Management contracts |
$ | 48,700 | $ | (9,239 | ) | $ | 39,461 | |||||
Member relationships |
26,953 | (21,753 | ) | 5,200 | ||||||||
Distributor relationships and other |
1,227 | (175 | ) | 1,052 | ||||||||
| $ | 76,880 | $ | (31,167 | ) | $ | 45,713 | ||||||
Intangible assets, net consisted of the following as of December 31, 2009 (in thousands):
| Gross Carrying | Accumulated | Net Book | ||||||||||
| Cost | Amortization | Value | ||||||||||
Management contracts |
$ | 42,745 | $ | (6,690 | ) | $ | 36,055 | |||||
Member relationships |
25,923 | (19,839 | ) | 6,084 | ||||||||
Distributor relationships and other |
626 | (132 | ) | 494 | ||||||||
| $ | 69,294 | $ | (26,661 | ) | $ | 42,633 | ||||||
In connection with the ILX Acquisition in August 2010, the Company recorded $8.9 million
of intangible assets. See Note 20— Business Combination for further details. In addition, $0.6
million of management contracts related to certain European resorts were reclassified to assets
held for sale in 2010. The Company did not acquire or dispose of any intangible assets during the
year ended December 31, 2009.
Amortization expense for management contracts is recognized on a straight-line basis over the
estimated useful lives ranging from five to twenty-five years. Amortization expense for management
contracts was $3.0 million, $2.5 million and $2.6 million for the years ended December 31, 2010,
2009 and 2008, respectively. Amortization expense for member relationships, distributor
relationships and other is amortized over the period of time that the relationships are expected to
produce cash flows. Amortization expense for member relationships, distributor relationships and
other intangibles was $2.0 million, $4.0 million and $9.4 million for the years ended December 31,
2010, 2009 and 2008, respectively. Membership relationships and distributor relationships have
estimated useful lives ranging from ten to thirty years. However, the Company expects to generate
significantly more cash flows during the earlier years of the relationships than the later years.
Consequently, amortization expenses on these relationships decrease significantly over the lives of
the relationships.
The estimated aggregate amortization expense for intangible assets is expected to be $5.6
million, $5.0 million, $4.6 million, $4.5 million and $3.9 million for the years ending December
31, 2011 through 2015, respectively.
Note 12—Borrowings
Senior Secured Notes
On August 13, 2010, the Company completed the issuance of its $425 million senior secured
notes due 2018 (“2010 Notes”). The 2010 Notes carry an interest rate of 12.0% and were issued with
an original issue discount of 2.5%, or $10.6 million. Interest payments will be made in arrears on
February 15 and August 15 of each year, commencing February 15, 2011. The proceeds from the 2010
Notes were used primarily to repay all of the outstanding indebtedness under the Company’s existing
revolving line of credit and First and Second Lien Facilities.
The 2010 Notes are secured by a first-priority lien (subject to certain permitted liens) on
all the tangible and intangible assets of the Company, other than real property and consumer loans.
The 2010 Notes are also guaranteed on a senior secured basis by substantially all of the Company’s
domestic subsidiaries.
The Company is entitled to redeem some or all of the 2010 Notes at its option, in whole or in
part, at any time on or after August 15, 2014, at a predetermined redemption price, together with
accrued and unpaid interest, if any, to the date of redemption. The Company may also redeem up to
35% of the aggregate principal amount of the 2010 Notes, at its option, with the net proceeds from
certain equity offerings from time to time prior to August 15, 2013, at a redemption price of 112%,
plus accrued and unpaid interest, if any, to the date of redemption. The Company is
also entitled to redeem some or all of the 2010 Notes, at its option, at any time prior to
August 15, 2014, at a
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
redemption price equal to 100% of the principal amount of such notes plus a
“make-whole” premium as of, and accrued and unpaid interest, if any, to the date of redemption.
Upon a change of control, the Company will be required to make an offer to purchase the 2010
Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. In addition, subject to certain conditions and limitations, within 105
days of the end of each twelve-month period ended December 31 beginning with the twelve-month
period ending December 31, 2011, the Company is required to make an offer to purchase the 2010
Notes in an amount equal to 50% of the excess cash flow, as defined in the indenture for the 2010
Notes (“2010 Note Indenture”), generated during such twelve-month period, at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of
purchase. The Company is also required to make an offer to purchase the 2010 Notes in an amount
equal to 25% of the net proceeds of certain equity offerings at a predetermined purchase price,
together with accrued and unpaid interest, if any, to the date of purchase.
During the year ended December 31, 2010, the Company incurred $16.0 million in debt issuance
costs related to the 2010 Notes, which will be amortized over the term of the 2010 Notes.
Amortization of $0.4 million of debt issuance costs and $0.3 million of debt discount related to
the 2010 Notes was recorded and is included in interest expense in the accompanying consolidated
statement of operations for the year ended December 31, 2010.
First and Second Lien Facilities
On April 26, 2007, the Company entered into a $275.0 million senior secured first lien credit
agreement (”First Lien Facility”) and a $140.0 million senior secured second lien credit agreement
(“Second Lien Facility”). The First Lien Facility included a $250.0 million term loan and a $25.0
million revolving line of credit, with maturity dates of April 26, 2012 and April 26, 2011,
respectively, and was secured by the Company’s capital and assets. The Second Lien Facility, which
was secured by the same assets as the First Lien Facility but on a second lien basis, had a
maturity date of April 26, 2013.
Under each of the First Lien Facility and the Second Lien Facility, the Company had the right,
at any time upon prior irrevocable notice to the administrative agent, to convert or continue a
borrowing as a Eurodollar borrowing or an ABR borrowing. From inception to March 26, 2009, the
interest rate with respect to a Eurodollar borrowing was 1, 2, 3 or 6 month London Inter-Bank
Offering Rate (“LIBOR”), computed on the basis of the actual number of days elapsed over a year of
360 days plus a spread (the “applicable percentage”). The interest rate with respect to an ABR
Borrowing is the greater of (1) the Prime Rate in effect on such day or (2) the Fed Funds Effective
Rate in effect on such day plus 1/2 of 1.0% (computed on the basis of the actual number of days
elapsed over a year of 365 or 366 days when the Prime Rate is used and over a year of 360 days when
the Fed Funds Effective Rate is used) plus a spread. The Eurodollar spread ranged from 3.0% to
3.5% and the ABR spread ranged from 2.0% to 2.5% under the First Lien Facility. The Eurodollar
spread ranged from 7.0% to 7.5% and the ABR spread ranged from 6.0% to 6.5% under the Second Lien
Facility.
Furthermore, the Company issued non-detachable warrants to the Second Lien Facility lenders
representing a 10.0% equity interest in the Company. At December 31, 2009, the warrants were
valued at $0.2 million based on the valuation report prepared by a third-party firm. Due to the
immaterial nature of the value, the warrants were recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2009 instead of being
amortized over the term of the Second Lien Facility. The Company also recorded a corresponding
increase to member capital in the accompanying consolidated balance sheet as of December 31, 2009.
The March 27, 2009 amendment of the First Lien and Second Lien Facility was determined to be
an extinguishment of debt and, consequently, the Company was required to write off $8.7 million of
unamortized debt issuance costs and $1.9 million of debt modification fees paid to Credit Suisse
and other lenders, which are included in loss on extinguishment of debt in the accompanying
consolidated statement of operations for the year ended December 31, 2009.
In February 2010, the Company notified its lenders under the First and Second Lien Facilities
and the 2008 Conduit Facility that a default had occurred because a judgment of approximately $30.0
million had been entered
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
against FLRX, Inc., a subsidiary of the Company, and that such judgment
was neither insured nor bonded. On March 1, 2010, the Company entered into a waiver and consent
agreement with the First and Second Lien Facility lenders waiving the default. The judgment against
FLRX, Inc. is presently being appealed. See Note 17—Commitments and Contingencies for further
details.
The Company was required to repay principal in the amount of $0.6 million per quarter on the
First Lien Facility with the final payment of the remaining principal balance due upon maturity on
April 26, 2012. The entire principal balance under the Second Lien Facility was due upon maturity
on April 26, 2013.
On August 13, 2010, the Company used the net proceeds of the 2010 Notes and other
general-purpose funds to repay the $395.7 million of then-outstanding indebtedness under the
revolving line of credit and First and Second Lien Facilities. As a result, the Company wrote off
$1.1 million in unamortized debt issuance costs related to these facilities, which are included in
loss on extinguishment of debt in the accompanying consolidated statement of operations for the
year ended December 31, 2010.
Amortization of $0.4 million, $1.2 million
and $2.8 million of debt issuance costs and original issue discount related to
the First and Second Lien Facilities was recorded and is included in interest expense in the
accompanying consolidated statements of operations for the years ended December 31, 2010, 2009 and
2008, respectively.
Conduit Facilities and 2009 Securitization
On September 25, 2007, the Company entered into an agreement for the 2007 Conduit Facility.
The term of the facility was originally for 364 days. The Company issued secured Vacation Interest
receivable-backed variable funding notes designated Sunterra Issuer 2007 LLC, Variable Funding
Notes (the “2007 Funding Notes”), in an aggregate principal amount not to exceed $225.0 million,
which was increased to $325.0 million in November 2007. The Company borrowed $212.4 million
against the 2007 Conduit Facility on September 25, 2007.
The 2007 Conduit Facility bore interest at either LIBOR (as adjusted) or the Commercial Paper
rate as determined by each purchaser of the 2007 Funding Notes plus a spread of 1.50%. The Company
was also required to pay a non-use fee of 2%. Between November 2008 and March 2009, the Company
was required to pay a 3.0% additional spread as the Company and its lenders discussed amending
certain covenants in the credit agreements and extending the commitment expiration date. On March
27, 2009, the Company amended the 2007 Conduit Facility to change certain covenants in the credit
agreements as well as extending the commitment expiration date to February 25, 2010. The 2007
Conduit Facility was paid off and terminated in October 2009. Amortization of $0.1 million and $3.6
million of debt issuance costs related to the 2007 Conduit Facility was recorded and is included in
interest expense in the accompanying consolidated statement of operations for the years ended
December 31, 2009 and 2008, respectively.
On November 3, 2008, the Company entered into agreements for the 2008 Conduit Facility,
pursuant to which the Company issued secured VOI receivable-backed variable funding notes
designated Diamond Resorts Issuer 2008, LLC Variable Funding Notes (the “2008 Funding Notes”), in
an aggregate principal amount not to exceed $215.4 million, which was decreased to $200.0 million,
$73.4 million, and $64.6 million on March 27, 2009, October 15, 2009, and August 31, 2010,
respectively. The Company paid $1.8 million in debt issuance costs associated with the 2008
Conduit Facility. The initial borrowing amount under this facility was $195.0 million, which was
the outstanding note balance of the extending purchasers under the 2007 Conduit Facility. Under
the original agreement, the 2008 Conduit Facility bore interest at either LIBOR (as adjusted) or
Commercial Paper rate as determined by each purchaser of the 2008 Funding Notes plus a spread of
4.50%. If either LIBOR or the Commercial Paper rate is less than 2.0% at any given time, then the
interest rate at such time is deemed to be 2.0%. The Company was also required to pay a non-use
fee of 2%. Between November 2008 and March 2009, the Company was required to pay a 6.0% additional
spread during the pendency of negotiations with the lenders regarding extension amendments and the
resolution of the covenant issues under the First Lien Facility and Second Lien Facility. See
“Covenant Issues Affecting First and Second Lien Facilities and 2007 and 2008 Conduit Facilities”
below for further discussions.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On March 27, 2009, the Company amended the 2008 Conduit Facility to change certain covenants
in the credit agreements as well as extending the commitment expiration date to February 25, 2010.
Upon expiration of the 2008 Conduit Facility, the Company had the option to extend the facility for
90 days whereby all cash flows generated from the underlying mortgages and contracts receivables
would go directly toward reducing the outstanding principal balance. Alternatively, the Company
could have elected to pay down the advance rate in exchange for an additional 364-day commitment.
On July 16, 2010, the Company amended its 2008 Conduit Facility to extend the maturity date to
January 10, 2011. On August 31, 2010, the Company further amended the 2008 Conduit Facility to
extend the maturity date to August 30, 2011. The Company paid $1.9 million in debt issuance costs
associated with the 2010 extensions. Amortization of $0.8 million, $0.4 million and $1.8 million of
debt issuance costs related to the 2008 Conduit Facility was recorded and is included in interest
expense in the accompanying consolidated statement of operations for the years ended December 31,
2010, 2009 and 2008, respectively.
At December 31, 2010, the 2008 Conduit facility bears interest at either LIBOR (as adjusted)
or the Commercial Paper rate as determined by each purchaser of the 2008 Funding Notes plus a
spread of 4.50%. If either LIBOR or the Commercial Paper rate is less than 1.0% at any given time,
then the interest rate at such time is deemed to be 1.0%. There is also a non-use fee of 2.0%. The
gross amount of the mortgages and contracts receivable collateralizing the 2008 Conduit Facility
was $56.2 million as of December 31, 2010.
On October 15, 2009, the Company completed its 2009 securitization transaction and issued two
consumer loan backed notes labeled as Diamond Resorts Owners Trust Series 2009-1 Class A (the “DROT
2009 Class A Notes”), and Series 2009-1 Class B, (the “DROT 2009 Class B Notes” and together with
the DROT 2009 Class A Notes, the “DROT 2009 Notes”). The Class A notes carry an interest rate of
9.3% and had an initial face value of $169.2 million. The Class B notes carry an interest rate of
12.0% and had an initial face value of $12.8 million. The DROT 2009 Notes have a maturity date of
March 20, 2026. The net proceeds received were $181.1 million compared to the $182.0 million face
value and the Company recorded the $0.9 million difference as an original issue discount on the
securitization notes payable. The Company incurred $5.5 million in placement and structuring fees,
$3.5 million of which was paid upon closing of the DROT 2009 Notes and $2.0 million was paid in
2010. In addition, the Company paid $1.4 million in legal and professional fees in connection with
this transaction. In total, $0.1 million and $6.9 million of debt issuance costs were capitalized
during the years ended December 31, 2010 and 2009, respectively, and will be amortized over the
term of the DROT 2009 Notes. Amortization of $0.5 million and $0.1 million of debt issuance costs
and debt discount related to the DROT 2009 Notes was recorded and is included in interest expense
in the accompanying consolidated statement of operations for the years ended December 31, 2010 and
2009, respectively. The gross amount of the mortgages and contracts receivable collateralizing the
DROT 2009 Notes was $160.2 million as of December 31, 2010.
Also on October 15, 2009, the Company used the proceeds from the DROT 2009 Notes to pay in
full the $35.4 million outstanding principal balance under the 2007 Conduit Facility and to pay
down the $148.9 million outstanding principal balance under its 2008 Conduit Facility, along with
requisite accrued interest and fees associated with both conduit facilities. The Company wrote off
$0.1 million and $0.2 million of unamortized debt issuance costs associated with the 2007 Conduit
Facility and the 2008 Conduit Facility, respectively, which are included in loss on extinguishment
of debt in the accompanying consolidated statement of operations for the year ended December 31,
2009.
Covenant Issues Affecting First and Second Lien Facilities and 2007 and 2008 Conduit Facilities
In accordance with the First Lien Facility and the Second Lien Facility, the Company was
required to maintain certain financial ratios and comply with other financial and performance
covenants. During the second and third quarters of 2008, the Company entered into a series of
discussions with the lender groups involved in the First Lien Facility, Second Lien Facility, 2007
Conduit Facility, and 2008 Conduit Facility regarding its anticipated inability to meet the maximum
total leverage ratio and the maximum first lien debt leverage ratio in the First Lien Facility
measured as of the end of third quarter 2008. The same anticipated inability to meet the maximum
total leverage ratio extended to the Second Lien Facility and the Company’s 2007 and 2008 Conduit
Facilities, which included the same covenant. In early November 2008, the Company entered into the
first of a series of forbearance agreements
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and amendments with its lenders concerning the First Lien Facility and the Second Lien
Facility, as well as the 2007 Conduit Facility and 2008 Conduit Facility while the Company
discussed amending certain covenants in the respective credit, note, and indenture funding
agreements. In exchange, the Company agreed, among other things, to pay an additional 2.0% spread
on the interest rates on the First and Second Lien Facilities, an additional 3.0% spread on the
2007 Conduit Facility, and an additional 6.0% spread on the 2008 Conduit Facility, which were all
paid through March 26, 2009.
On March 27, 2009, the Company entered into amended and restated agreements with the lenders
of the First Lien Facility and the Second Lien Facility to resolve the covenant compliance issues
discussed above by, among other things, amending certain financial and performance covenants,
clarifying or changing certain definitions and providing additional reports to all lenders on a
monthly and quarterly basis. Under the terms of the amended and restated agreements, the interest
rate of the First Lien Facility with respect to a Eurodollar borrowing was 1, 2, 3 or 6 month
LIBOR, computed on the basis of the actual number of days elapsed over a year of 360 days plus an
applicable percentage of 7.0% to 7.5%. If LIBOR was less than 2.0% at any given time, then the
LIBOR at such time for the purposes of interest rate calculation was deemed to be 2.0%. The
interest rate with respect to an ABR Borrowing is the greater of (1) the Prime Rate in effect on
such day or (2) the Fed Funds Effective Rate in effect on such day plus 1/2 of 1.0% (computed on
the basis of the actual number of days elapsed over a year of 365 or 366 days when the Prime Rate
is used and over a year of 360 days when the Fed Funds Effective Rate is used) plus an applicable
percentage of 6.0% to 6.5%. In addition, the Company was required to accrue 4% of the outstanding
principal balance under the Second Lien Facility in the form of paid-in-kind interest (“PIK
Interest”), which was paid by increasing the outstanding principal balance of the Second Lien
Facility in the amount of such accrued interest.
Sunterra SPE 2004 LLC
In September 2004, the Predecessor Company completed a $151.7 million private offering and
sale of vacation ownership receivable-backed notes (“2004 Securitization Notes”). The $171.4
million (including $17.0 million in aggregate principal of vacation ownership receivables sold
during the ninety-day period commencing September 30, 2004) in aggregate principal of vacation
ownership receivables that collateralized the notes were initially sold to Sunterra SPE 2004-1 LLC
(“SPE 2004-1”), a wholly-owned special purpose entity that deposited the vacation ownership
receivables into the Sunterra Owner Trust 2004-1, which issued the notes and is included within the
Company’s consolidated financial statements. The notes were without recourse to the Company or to
SPE 2004-1, except for breaches of certain representations and warranties at the time of sale. The
2004 Securitization Notes were secured by a first priority lien on the mortgages and contracts
receivable sold to Sunterra Owner Trust 2004-1.
The 2004 Securitization Notes offering consisted of: $66.0 million class A notes “AAA”, $18.4
million class B notes “AA”, $17.6 million class C notes ”A” and $49.7 million class D notes “BBB”,
and collectively carried a weighted average interest rate of 4.14%. The notes carried various
fixed interest rates ranging from 3.6% to 4.9% and had legal stated maturities of October 20, 2020.
Under the terms of the 2004 Securitization Notes indenture, Diamond Resorts Financial
Services, Inc., a wholly-owned subsidiary of the Company, in exchange for a monthly fee, serviced
and administered the vacation ownership receivables in Sunterra Owner Trust 2004-1. All monthly
fees are eliminated as part of the Company’s consolidation of the Sunterra Owner Trust 2004-1. The
Company also retained a subordinated interest in future cash flows from the 2004 Securitization
Notes.
On October 20, 2010, the Company elected to redeem the 2004 Securitization Notes causing the
early repayment of the notes prior to their stated maturity date of October 20, 2020. Under the
terms of the indenture governing such notes, the Company was allowed to redeem all of the notes
when the aggregate outstanding principal balance of the mortgages and contracts receivable securing
the notes was less than or equal to 10.0% of the original principal balance of $171.4 million. The
outstanding principal balance of the mortgages and contracts receivable was $16.6 million and the
outstanding note balance was $15.4 million as of October 20, 2010. The $12.0 million cash reserves
and remaining mortgages and contracts receivable securing the notes were released back to the
Company upon the notes’ full and final payment in October 2010.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 2009, the outstanding principal balance under the 2004 Securitization Notes
was $21.7 million. The gross amount of the mortgages and contracts receivable collateralizing such
debt was $23.5 million as of December 31, 2009. Amortization of zero, $0.3 million and $0.6
million of debt issuance costs related to the 2004 Securitization Notes was recorded and is
included in interest expense in the accompanying consolidated statement of operations, for the
years ended December 31, 2010, 2009 and 2008, respectively.
Polo Towers Lines of Credit and Securitization Notes Payable
In connection with the acquisition of Sunterra Corporation in April 2007, a subsidiary
formerly owned by Stephen J. Cloobeck assigned revolving lines of credit to Diamond Resorts Parent,
LLC. The lines of credit are collateralized by retail contracts receivable and related VOIs. The
revolving feature of the lines of credit expired when they were assigned.
One of the lines of credit was paid off and terminated on July 30, 2010 upon its final
maturity date. The final maturity date of the remaining line of credit is December 31, 2012. These
lines of credit carried a variable rate of Prime Rate plus 1.5% to 2.0% depending on the note. The
terms of the loan agreements were amended on October 28, 2009, and at that time the interest rate
changed to three-month LIBOR plus 4.25%, but the interest rate shall never be less than 4.75%. If
the interest rate is less than 4.75% at any given time, then the interest rate at such time for the
purposes of interest rate calculation is deemed to be 4.75%.
The actual maturity date of the notes could be significantly earlier than the stated maturity
and the average life of the notes could be significantly shorter than anticipated, in the event of
certain circumstances. The outstanding principal balance on these lines of credit at December 31,
2010 and 2009 was $2.1 million and $9.6 million, respectively. At December 31, 2010 and 2009, the
gross amount of the mortgages and contracts receivable collateralizing such debt was $2.9 million
and $11.6 million, respectively.
Securitized loans that were collateralized by consumer contracts and related VOIs were also
assigned in April 2007 by a company controlled by Mr. Cloobeck. These notes carry fixed interest
rates of 7.26% and 7.65% with a maturity date of January 20, 2013. The actual maturity date of the
notes could be significantly earlier than the stated maturity and the average life of the notes
could be significantly shorter than anticipated under certain circumstances. The outstanding
principal balance on these notes at December 31, 2010 and 2009 was $1.1 million and $4.6 million,
respectively. The gross amount of the mortgages and contracts receivable collateralizing such debt
was $2.2 million and $7.1 million as of December 31, 2010 and 2009, respectively.
Polo Towers lines of credit and securitization notes payable are included in securitization
notes and conduit facilities in the accompanying consolidated balance sheets.
On January 3, 2011, the second of the Polo Towers lines of credit was paid off and terminated
prior to its maturity date of December 31, 2012. On March 4, 2011, the Polo Towers securitization
notes were paid off and terminated prior to their maturity date of January 20, 2013.
Quorum Facility
One of the Company’s wholly owned subsidiaries, DRI Quorum 2010 LLC (“DRI Quorum”), entered
into a Loan Sale and Security Agreement (the “LSSA”), dated as of April 30, 2010 with Quorum
Federal Credit Union (“Quorum”), as purchaser, Wells Fargo, National Association, as back-up
servicer, and another one of the Company’s wholly owned subsidiaries, Diamond Resorts Financial
Services, Inc., as servicer. The LSSA and related documents provide for an aggregate minimum $40
million loan sale facility and joint marketing venture (the “Quorum Facility”) where DRI Quorum may
sell eligible consumer loans and in-transit loans to Quorum on a non-recourse, permanent basis,
provided that the underlying consumer obligor is a Quorum credit union member. The joint marketing
venture has a minimum term of two years and the LSSA provides for a purchase period of two years.
The purchase price payment and the program purchase fee are each determined at the time that the
loan is sold to Quorum, and the current purchase amount was 85% of
the obligor loan amount and the
program purchase fee was 8.0%. To the extent excess funds remain after payment of the sold loans at
Quorum’s purchase price, such excess funds shall be remitted to the Company as a deferred purchase
price payment. This transaction did not qualify as a loan sale under GAAP.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended December 31, 2010, the Company incurred a total of $0.3 million in debt
issuance costs related to the Quorum Facility, which will be amortized over the term of the
facility. Amortization of $0.1 million of debt issuance costs related to the Quorum Facility was
recorded and is included in interest expense in the accompanying consolidated statement of
operations for the year ended December 31, 2010. The gross amount of the mortgages and contracts
receivable collateralizing the Quorum Facility was $13.9 million as of December 31, 2010.
ILXA Receivables Loan and Inventory Loan
On August 31, 2010, the Company completed the ILX Acquisition through the Company’s
wholly-owned subsidiary, ILXA. In connection with the ILX Acquisition, ILXA entered into an
Inventory Loan and Security Agreement (“ILXA Inventory Loan”) and a Receivables Loan and Security
Agreement (“ILXA Receivables Loan”) with Textron Financial Corporation (“ Textron”). The ILXA
Inventory Loan is a non-revolving credit facility in the maximum principal amount of $23.0 million
with an interest rate of 7.5%. The ILXA Receivables Loan is a receivables facility loan with an initial principal amount of
$11.9 million with an interest rate of 10% and was collateralized by $12.0 million of ILXA
mortgages and contracts receivable at December 31, 2010. Both loans mature on August 31, 2015. The
proceeds from these loans were used to fund the ILX Acquisition.
During the year ended December 31, 2010, ILXA incurred $0.8 million in debt issuance costs
related to these loans, which will be amortized over the term of the loans. Amortization of $0.1
million of debt issuance costs related to these loans was recorded and is included in interest
expense in the accompanying consolidated statement of operations for the year ended December 31,
2010.
On December 29, 2010, the Company submitted a borrowing notice in the amount of $1.0 million
to Textron against the ILXA Inventory Loan. Even though the Company did not receive the funds
until January 2011, it recorded a $1.0 million increase to the outstanding principal balance on the
ILXA Inventory Loan with a corresponding increase in other receivables, net at December 31, 2010
due to the fact the funds had been released by Textron and held in escrow pending the submission of
certain supporting documentation from the Company.
Tempus Acquisition Note Payable
On November 23, 2010,
Tempus Acquisition entered into the Tempus Loan with an affiliate of Guggenheim, as the lender, and Guggenheim Corporate Funding, LLC, as administrative
agent. The Tempus Loan is a revolving loan facility with a maximum principal amount of $8 million,
the proceeds of which shall be used exclusively for the following purposes: (i) to provide Tempus
Acquisition with funds to lend to Tempus Resorts International, Ltd. and certain of its affiliates,
pursuant to that certain debtor-in-possession financing order entered by the United States
Bankruptcy Court for the Middle District of Florida (“DIP Financing” or “Tempus Note Receivable”),
for general working capital purposes and other lawful purposes as permitted under the agreements
governing the DIP Financing; and (ii) to provide $1.5 million for the “Deposit,” as defined and
provided in the Agreement for Purchase and Sale of Assets to purchase certain assets of Tempus
Resorts International and its affiliates. As of December 31, 2010, the outstanding balance of the
Tempus Loan was $3.3 million.
The maturity date of the Tempus Loan shall be the earliest of (i) the occurrence of an Event
of Default if amounts outstanding under the Loan Documents and other Obligations shall be due and
payable as a result thereof as required by the Tempus Acquisition Loan Agreement, (ii) the lender’s
demand of payment of amounts outstanding under the Tempus Loan, and (iii) the date occurring 180
days after the first business day after the interim financing order is approved by the bankruptcy
court. See Note 7—Other Receivables, Net for further details.
Notes Payable
The Company had notes payable relating to the purchase of certain land at a rate of 8.0% per
annum. These notes matured in September 2009 and were paid in full.
The Company finances premiums on certain insurance policies under unsecured notes. The notes
will mature in January 2011 and August 2011 and carry interest rates of 4.0% and 3.65% per annum,
respectively.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents selected information on the Company’s borrowings as of
December 31, 2010 and 2009 (dollars in thousands):
| December 31, | ||||||||||||||
| December 31, 2010 | 2009 | |||||||||||||
| Weighted | ||||||||||||||
| Average | ||||||||||||||
| Principal | Interest | Principal | ||||||||||||
| Balance | Rate | Maturity | Balance | |||||||||||
Senior Secured Notes |
$ | 425,000 | 12.0 | % | 8/15/18 | $ | — | |||||||
Unamortized original issue discount related to Senior
Secured Notes |
(10,278 | ) | — | |||||||||||
First and Second Lien Facilities |
— | 393,954 | ||||||||||||
2008 Conduit Facility |
39,467 | 5.5 | % | 8/30/11 | 18,241 | |||||||||
Diamond Resorts Owners Trust Series 2009-1 |
121,843 | 9.5 | % | 3/20/26 | 169,698 | |||||||||
Unamortized original issue discount related to
Diamond Resorts Owners Trust Series
2009-1 |
(899 | ) | (954 | ) | ||||||||||
2004 Securitization Notes |
— | 21,721 | ||||||||||||
Quorum Facility |
12,942 | 8.0 | % | 4/30/12 | — | |||||||||
Polo Towers Lines of Credit |
2,060 | 4.8 | % | 12/31/12 | 9,591 | |||||||||
Polo Towers Securitization Notes Payable |
1,138 | 7.4 | % | 1/20/13 | 4,616 | |||||||||
ILXA Receivables Loan |
10,292 | 10.0 | % | 8/31/15 | — | |||||||||
ILXA Inventory Loan |
18,541 | 7.5 | % | 8/31/15 | — | |||||||||
Tempus Acquisition Loan |
3,300 | 10.0 | % | Less than one year | — | |||||||||
Notes payable-insurance policies |
1,366 | 3.7 | % | Various | 1,232 | |||||||||
Notes payable-other |
66 | 3.4 | % | Various | 560 | |||||||||
Total borrowings |
$ | 624,838 | $ | 618,659 | ||||||||||
Derivative Instruments
Pursuant to the requirement of the First and Second Lien Facilities, the Company entered into
the JP Morgan Swap on June 29, 2007 to manage its exposure to fluctuations in interest rates. The
JP Morgan Swap had a term of two years and was terminated on June 29, 2009 upon maturity. The
contract had a notional value of $195.0 million and required the Company to pay interest at a fixed
rate of 5.3% each month and received interest based on one-month LIBOR. The Company paid $4.8
million and $4.7 million to JP Morgan in cash settlements for the years ended December 31, 2009 and
2008, respectively, which is included under interest expense, net in the accompanying consolidated
statements of operations.
Pursuant to the requirement of the 2007 Conduit Facility, the Company entered into the Credit
Suisse Swap on September 25, 2007 to manage its exposure to the fluctuation in interest rates. The
Credit Suisse Swap matures on March 20, 2011 and the Company pays interest at a fixed rate of
4.7% and receives interest based on one-month LIBOR. In addition, the Company paid $0.1 million
for an interest rate cap (“2007 Cap”) on the same date to further limit its exposure to interest
rate increases. The 2007 Cap bears a strike rate of 5.5% and a one-month LIBOR and carries a
variable notional amount according to a pre-determined amortization schedule. The Company novated
the 2007 Cap to the 2008 Conduit Facility in November 2008 and a portion of the Credit Suisse Swap
during the year ended December 31, 2009. The Company paid $6.7 million and $3.8 million in cash
settlements related to these swaps under the 2007 Conduit Facility for the years ended
December 31, 2009 and 2008, respectively. In addition, the Company paid $0.5 million, $0.6
million, and zero in cash settlements under the 2008 Conduit Facility for the years ended December
31, 2010, 2009 and 2008, respectively.
In connection with the termination of the 2007 Conduit Facility and paydown of the 2008 Conduit
Facility on October 15, 2009, the Company was required to pay the liability associated with a
majority of the Credit Suisse Swap by delivering $8.8 million in cash to the counterparty of the
swaps.
At December 31, 2009, the Credit Suisse Swap had a notional amount of
$10.0 million remaining under the 2008 Conduit Facility, which was valued at $0.5 million. The
2007 Cap had no value at December 31, 2009.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In July 2010, the Company took additional measures to limit its exposure to interest rate
increases by entering into the 2010 Cap. The 2010 Cap bears a strike
rate of 5.5% and a one-month LIBOR and carries a notional amount of $30 million. The Company paid
$71,000 for the 2010 Cap, which will terminate on July 20, 2013. During the year ended and as of
December 31, 2010, the fair value of the derivative asset was calculated to be zero based on the
discounted cash flow model.
The swaps and the interest rate caps did not qualify for hedge accounting under ASC 815,
“Derivatives and Hedging.” Consequently, for the years ended December 31, 2010 and 2009, the
Company recorded $0.3 million and $3.9 million in reduction of interest expense, respectively,
associated with the fair value adjustment of the derivative instruments with a corresponding decrease
in derivative liabilities or assets. For the year ended December 31, 2008, the Company recorded
$4.0 million in interest expense related to the fair value adjustment of the derivative instruments with a
corresponding increase in derivative liabilities.
At December 31, 2010, the derivative liabilities associated with the Credit Suisse Swap, the
2007 Cap and the 2010 Cap were $0.1 million, zero and zero, respectively.
Borrowing Restrictions and Limitations
All of the Company’s borrowing under the 2010 Notes, securitization notes, and 2008 Conduit
Facility contain various restrictions and limitations that may affect its business and affairs.
These include, but are not limited to, restrictions and limitations relating to its ability to
incur indebtedness and other obligations, to make investments and acquisitions and to pay
dividends. The Company is also required to maintain certain financial ratios and comply with other
financial and performance covenants. The failure of the Company to comply with any of these
provisions, or to pay its obligations, could result in foreclosure by the lenders of their security
interests in the Company’s assets, and could otherwise have a material adverse effect on the
Company. The Company was in compliance with all financial covenants as of December 31, 2010.
The anticipated maturities of the Company’s borrowings under the 2010 Notes, securitization
notes, conduit facility and notes payable are as follows (in thousands) and not including the use
of any proceeds from potential debt or equity transactions during 2011 to pay down borrowings:
Due in the year ending December 31:
2011 |
$ | 110,349 | ||
2012 |
47,670 | |||
2013 |
25,389 | |||
2014 |
19,126 | |||
2015 |
8,481 | |||
2016 and thereafter |
425,000 | |||
Total contractual obligations |
636,015 | |||
Unamortized original issue discount, net |
(11,177 | ) | ||
Total borrowings at December 31, 2010 |
$ | 624,838 | ||
The above debt maturity schedule assumes certain estimates for payments and cancellations on
collateralized outstanding mortgage receivables.
Capitalized Interest
The interest cost associated with major development and construction projects is capitalized
and included in the cost of the project. Interest capitalization ceases once a project is
substantially complete or no longer under construction to prepare for its intended use. When no
debt is specifically identified as being incurred in connection
with a construction project, the Company capitalizes interest on amounts expended on the
project at the Company’s
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
weighted average cost of borrowed money. No interest was capitalized
during the years ended December 31, 2010 and 2009. The Company capitalized $0.4 million of
interest related to ongoing construction projects during the year ended December 31, 2008.
Note 13—Accrued Liabilities
The Company records estimated amounts for certain accrued liabilities at each period end.
Accrued liabilities are obligations to transfer assets or provide services to other entities in the
future as a result of past transactions or events. The nature of selected balances included in
accrued liabilities of the Company includes:
Accrued marketing expenses—expenses for travel vouchers and certificates used as sales
incentives to buyers as well as attraction tickets as tour incentives.
Accrued contingent considerations related to business combinations—estimated liability
related to business combinations in accordance with ASC 805. As part of the ILX
Acquisition, the Company recorded a $3.7 million estimated liability related to
certain parcels of land owned by a third party. Upon the sale of the parcels, ILXA is
obligated to pay approximately $3.7 million to the seller.
Accrued exchange company fees—estimated liability owed to an exchange company.
Accrued contingent litigation liabilities—estimated settlement costs for existing
litigation cases.
Accrued operating lease liabilities—difference between straight-line operating lease
expenses and cash payments associated with any equipment, furniture, or facilities
leases classified as operating leases.
Accrued call center cost—expenses associated with the out-sourced customer service call
center operations.
Accrued construction costs—estimated remaining costs accrued for construction renovation
projects.
Accrued liabilities consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
Accrued interest |
$ | 20,365 | $ | 3,699 | ||||
Accrued payroll and related |
14,953 | 13,599 | ||||||
Accrued marketing expenses |
5,405 | 6,080 | ||||||
Accrued commissions |
4,787 | 4,029 | ||||||
Accrued other taxes |
3,299 | 5,763 | ||||||
Accrued contingent considerations related to business
combinations |
3,744 | — | ||||||
Accrued exchange company fees |
3,256 | 4,107 | ||||||
Accrued contingent litigation liabilities |
2,642 | 2,889 | ||||||
Accrued operating lease liabilities |
2,046 | 1,917 | ||||||
Accrued insurance |
2,766 | 1,475 | ||||||
Accrued professional fees |
2,648 | 2,708 | ||||||
Accrued call center cost |
1,114 | 1,196 | ||||||
Accrued construction costs |
247 | 1,050 | ||||||
Other |
2,311 | 2,986 | ||||||
Total accrued liabilities |
$ | 69,583 | $ | 51,498 | ||||
Note 14—Deferred Revenues
The Company records deferred revenues for payments received or billed but not earned for
various activities.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
THE Club deferred revenue—THE Club annual membership fees paid or billed to members and
amortized ratably over a one-year period and optional reservation protection fees recognized over
an approximate life of the member’s reservation (approximately six months on average).
Deferred maintenance and reserve fee revenue—maintenance fees billed as of January first of
each year and earned ratably over the year in the Company’s capacity as the HOA for the two resorts
in St. Maarten. In addition, the HOA will periodically bill the owners for capital project
assessments to repair and replace the amenities or to reserve the out-of-pocket deductibles for
hurricanes and other natural disasters. These assessments are deferred until refurbishment activity
occurs, at which time the amounts collected are recognized as a direct reduction to refurbishment
expense in consolidated resort operations expense. See Note 6—Transactions with Related Parties
for further discussion.
Deferred mini-vacations and sampler programs revenue—sold but unused trial Vacation
Interests, ranging from three days to one week. This revenue is recognized when the purchaser
completes their respective stay at one of the Company’s resorts or the trial period expires,
whichever is earlier. Such revenue is recorded as a reduction to Vacation Interest carrying cost in
accordance with ASC 978, with the exception of the Company’s European sampler product, which is
three years in duration and is treated as Vacation Interest sales revenue.
Deferred revenue from an exchange company—in consideration for several agreements entered
into with an exchange company in 2008, the Company received $5 million. This amount is being
amortized over ten years, the term of the agreements.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred revenues consisted of the following as of December 31 (in thousands):
| 2010 | 2009 | |||||||
THE Club deferred revenue |
$ | 34,485 | $ | 30,970 | ||||
Deferred maintenance and reserve fee revenue |
13,491 | 11,759 | ||||||
Deferred mini-vacations and sampler programs revenue |
11,465 | 9,029 | ||||||
Deferred revenue from an exchange company |
3,246 | 3,742 | ||||||
Other |
2,969 | 1,377 | ||||||
Total deferred revenues |
$ | 65,656 | $ | 56,877 | ||||
Note 15—Employee Benefit Plans
The Company has a qualified retirement plan (the “401(k) Plan”) with a salary deferral feature
designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. Subject
to certain limitations, the 401(k) Plan allows participating North America employees to defer up to
60% of their eligible compensation on a pre-tax basis. The 401(k) Plan allows the Company to make
discretionary matching contributions of up to 50% of the first 6% of employee compensation.
During the years ended December 31, 2010, 2009 and 2008, the Company made matching
contributions to its 401(k) plan of $0.8 million, $0.7 million and $1.0 million, respectively.
In addition, the Company has a self-insured health plan that covers substantially all of its
full-time employees in the United States. The health plan uses employee and employer contributions
to pay eligible claims. To supplement this plan, the Company has a stop-loss insurance policy to
cover individual claims in excess of $0.2 million. At December 31, 2010, 2009 and 2008, the
Company accrued $1.3 million, $0.9 million, and $0.5 million, respectively, for claims that have
been incurred but not reported. During the years ended December 31, 2010, 2009 and 2008, the
Company recorded $8.6 million, $7.5 million and $3.9 million, respectively, in expenses associated
with its health plans.
With certain exceptions, the Company’s European subsidiaries do not offer private health plans
or retirement plans or a 401(k) plan. The government in each country offers national health
services and retirement benefits, which are funded by employee and employer contributions.
Note 16—Income Taxes
The components of the (benefit) provision for income taxes are summarized as follows for the
years ended December 31, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 268 | $ | (1,307 | ) | $ | 891 | |||||
State |
210 | 89 | 249 | |||||||||
Foreign |
(1,752 | ) | 419 | 973 | ||||||||
Total
current (benefit) provision for income taxes |
(1,274 | ) | (799 | ) | 2,113 | |||||||
Deferred: |
||||||||||||
Federal |
5,016 | (7,918 | ) | (34,972 | ) | |||||||
State |
674 | (2,552 | ) | (2,696 | ) | |||||||
Foreign |
(9,644 | ) | (4,387 | ) | (11,864 | ) | ||||||
| (3,954 | ) | (14,857 | ) | (49,532 | ) | |||||||
Change in valuation allowance |
3,954 | 14,857 | 49,228 | |||||||||
Total deferred benefit for income taxes |
— | — | (304 | ) | ||||||||
(Benefit) provision for income taxes |
$ | (1,274 | ) | $ | (799 | ) | $ | 1,809 | ||||
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reconciliation between the statutory provision for income taxes and the actual (benefit)
provision for income taxes is shown as follows for the years ended December 31, 2010, 2009 and 2008
(in thousands):
| 2010 | 2009 | 2008 | ||||||||||
Income tax benefit at U.S.
federal statutory rate of
35% |
$ | (1,333 | ) | $ | (7,032 | ) | $ | (30,507 | ) | |||
State tax
provision (benefit),
net of federal tax effect |
574 | (647 | ) | (1,446 | ) | |||||||
Income of pass-through
entities not taxed at
corporate level |
(138 | ) | (1,818 | ) | 6,124 | |||||||
Adjustment to NOL carry
forwards as a result of IRS
Examination |
— | — | (11,886 | ) | ||||||||
Tax impact of non-U.S.
disregarded entities |
(1,055 | ) | (1,216 | ) | (1,867 | ) | ||||||
Differences between U.S. and
foreign jurisdictions |
(887 | ) | 249 | 719 | ||||||||
Foreign currency and rate
change adjustment |
(8,792 | ) | 7 | (7,236 | ) | |||||||
Meals and entertainment |
159 | — | — | |||||||||
Alternative minimum tax |
1,251 | — | — | |||||||||
Change in deferred tax asset |
5,016 | — | — | |||||||||
Other |
(23 | ) | (5,199 | ) | (1,320 | ) | ||||||
Change in valuation allowance |
3,954 | 14,857 | 49,228 | |||||||||
(Benefit) provision for income taxes |
$ | (1,274 | ) | $ | (799 | ) | $ | 1,809 | ||||
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 Company’s deferred tax assets and liabilities are as follows as of
December 31 (in thousands):
| 2010 | 2009 | |||||||
Allowance for losses |
$ | 34,481 | $ | 28,747 | ||||
Unsold vacation interests adjustments |
19,439 | 17,580 | ||||||
Net operating loss carryover |
115,171 | 123,631 | ||||||
Accruals, expenses and prepaid assets |
14,335 | 15,268 | ||||||
Other |
21,957 | 19,662 | ||||||
Total gross deferred tax assets |
205,383 | 204,888 | ||||||
Valuation allowance |
(108,990 | ) | (105,036 | ) | ||||
Total net deferred tax assets |
96,393 | 99,852 | ||||||
Installment sales |
91,971 | 95,351 | ||||||
Other |
4,422 | 4,890 | ||||||
Total deferred tax liabilities |
96,393 | 100,241 | ||||||
Net deferred tax liabilities |
$ | — | $ | 389 | ||||
| Valuation | ||||
| Allowance | ||||
Balance at January 1, 2008 |
$ | 40,951 | ||
Additions — Increases |
58,363 | |||
Deductions — Recoveries |
(9,135 | ) | ||
Balance at December 31, 2008 |
90,179 | |||
Additions — Increases |
38,012 | |||
Deductions — Recoveries |
(23,155 | ) | ||
Balance at December 31, 2009 |
105,036 | |||
Additions — Increases |
13,487 | |||
Deductions — Recoveries |
(9,533 | ) | ||
Balance at December 31, 2010 |
$ | 108,990 | ||
ASC 740-10, “Income Taxes” requires that the tax benefit of net operating losses, temporary
differences and credit carry forwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of the future tax benefits is
dependent on the Company’s ability to generate sufficient taxable income within the carry forward
period. Because of the Company’s history of operating losses, management believes that recognition
of the deferred tax assets arising from the above-mentioned future tax benefits is currently not
likely to be realized and, accordingly, has provided a valuation allowance. The majority of the
valuation allowance change during 2010 is primarily due to bad debt allowance and treatment of
installment sales.
At December 31, 2010, the Company had available approximately $223.8 million of unused federal
net operating loss carry forwards, $204.6 million of unused state net operating loss carry
forwards, and $100.4 million of foreign net operating loss carry forwards (the “NOLs”), with
expiration dates from 2011 through 2029 (except for certain foreign net operating loss carry
forwards that do not expire) that may be applied against future taxable income subject to certain
limitations.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As a result of the Company’s acquisition of Sunterra Corporation in 2007, use of the Company’s
net operating loss carry forward is limited under Internal Revenue Code Section 382 and comparable
state laws. Even with the limitation, $69.2 million of federal net operating loss is currently
available for unlimited use and an additional $13.5 million becomes available each year.
Similarly, use of the state net operating loss carry forward is also available. Although the
Company’s future cash tax liabilities cannot be entirely eliminated through the application of
these net operating loss carry-forwards due to a 90% statutorily imposed limitation on offsetting
U.S. alternative minimum taxable income with net operating loss carry-forwards, the Company
believes the availability of these net operating loss carry-forwards to offset future taxable
income will result in minimal cash tax obligations in future periods.
As a result of
uncertainties regarding the Company's ability to generate sufficient taxable income to utilize
its net operating loss carry forwards, the Company maintains a valuation allowance
against the balance of its deferred tax assets as of December 31,
2010 and 2009.
No deferred tax liabilities have been provided for U.S. taxes on the undistributed earnings
(if any) of foreign subsidiaries as of December 31, 2010, 2009 and 2008. Those earnings have been
and expect to be reinvested in the foreign subsidiaries. The amount of those undistributed
earnings has not been determined as it is impracticable at this time to determine the amount.
In 2007, the Company’s wholly-owned subsidiary, Diamond Resorts (Europe) Ltd., filed a claim
for refund with the United Kingdom income tax authority in the amount of $10.7 million (£7.4
million) with respect to its income tax return for the years ended December 31, 1999 to 2004. In
accordance with ASC 450, the Company recorded an income tax receivable of $3.5 million (£2.4
million) in the accompanying consolidated balance sheet for the year ended December 31, 2008.
During 2009, the Company received a partial refund from the United Kingdom income tax authority in
the amount of $1.6 million (£1.0 million). In January 2010, the Company received an additional
partial refund in the amount of $3.2 million (£2.0 million), plus interest of $0.6 million (£0.4
million). An additional benefit of $1.0 million (£0.6 million) was recorded in 2009 to reflect the
amount of refund received in excess of the receivable balance at December 31, 2008. An additional
partial refund of $3.2 million (£2 million) was received in October 2010, all of which was recorded
as a benefit in 2010.
Effective January 1, 2009, the Company adopted guidance included in ASC 740. This guidance
clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial
statements. ASC 740 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The evaluation of a tax position in accordance with ASC 740 is a two-step process. The
first step is recognition: the Company determines whether it is “more-likely-than-not” that a tax
position will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. In evaluating whether a tax
position has met the “more-likely-than-not” recognition threshold, the Company presumes that the
position will be examined by the appropriate taxing authority that would have full knowledge of all
relevant information. The second step is measurement: a tax position that meets the
“more-likely-than-not” recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely to be realized upon ultimate settlement. The
adoption of ASC 740 did not result in material impact on the Company’s financial condition or
results of operations.
The Company does not currently anticipate that any significant increase or decrease to
unrecognized tax benefits will be recorded during the next twelve months.
The Company’s continuing practice is to recognize potential interest and/or penalties related
to income tax matters in income tax provision. As of December 31, 2010, the Company has no amount
accrued for the payment of interest and penalties in the accompanying balance sheet.
The Company operates in multiple tax jurisdictions, both within the United States and outside
of the United States. The Company is no longer subject to income tax examinations by tax
authorities in its major tax jurisdictions as follows:
| Tax Jurisdiction | Tax Years No Longer Subject to Examination | |
United States
|
2006 and prior | |
United Kingdom
|
2002 and prior | |
Spain
|
Generally 2005 and prior* |
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| * | although several Spanish entities are subject to examination for 2001-2005 |
Note 17—Commitments and Contingencies
Lease Agreements
The Company conducts a significant portion of its operations from leased facilities, which
include regional and global administrative facilities as well as off-premise booths and tour
centers near active sales centers. The longest of these obligations extends into 2019. Many of
these agreements have renewal options, subject to adjustments for inflation. In most cases, the
Company expects that in the normal course of business, such leases will be renewed or replaced by
other leases. Typically, these leases call for a minimum lease payment that increases over the
life of the agreement by a fixed percentage or an amount based upon the change in a designated
index. All of the facilities lease agreements are classified as operating leases.
In addition, the Company leases office and other equipment under both long-term and short-term
lease arrangements, which are generally classified as operating leases.
Rental expense recognized for all operating leases during the years ended December 31, 2010,
2009 and 2008 totaled $13.9 million, $12.0 million, and $12.1 million, net of sublease rental
revenue of $0.5 million, $0.5 million and $0.4 million, respectively.
At December 31, 2010, future minimum lease payments on operating leases were as follows (in
thousands):
Year Ending December 31
2011 |
$ | 7,480 | ||
2012 |
5,480 | |||
2013 |
4,971 | |||
2014 |
4,638 | |||
2015 |
4,512 | |||
2016 and thereafter |
11,713 | |||
Total minimum lease payments |
$ | 38,794 | ||
Minimum rental payments to be received in the future under non-cancelable sublease agreements
totaled $0.8 million at December 31, 2010.
Purchase Obligations
The Company has entered into various purchase obligations relating to sales center remodeling
and property amenity improvement projects. The total remaining commitment was $0.3 million as of
December 31, 2010.
Litigation and Other
From time to time, the Company or its subsidiaries are subject to certain legal proceedings
and claims in the ordinary course of business, including claims or proceedings relating to the
Company’s Vacation Interest sales and consumer loan business.
One of the Company’s subsidiaries, FLRX, Inc. (formerly Diamond Resorts Pacific, Inc. and
Sunterra Pacific, Inc.) is a defendant in a lawsuit originally filed in July 2003, alleging the
breach of certain contractual terms relating to the obligations under a stock purchase agreement
for the 1998 acquisition of FLRX (which operated resorts in Mexico and Palm Springs, California),
as well as certain violations under applicable consumer protection acts. The contractual terms
alleged to be breached included requirements for the transfer of remainder interests in the resorts
to the plaintiff. In January 2010, following a jury trial, a Washington state court returned a
judgment against FLRX, awarded plaintiffs damages of $30.0 million plus attorney’s fees of
approximately $1.5 million, and ordered specific performance of certain ongoing contractual
obligations pursuant to the breach of contract claim. FLRX has appealed the verdict. Any liability
in this matter would not be covered by insurance and the ultimate liability of FLRX, if any,
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is uncertain at this time. Neither Diamond Resorts Corporation nor any of its other
subsidiaries are party to this lawsuit. Sunterra Corporation was originally named as a defendant in
this matter, but it was later dismissed from the case. Depending upon developments in the lawsuit,
it is possible that FLRX may at some point determine to file for protection under the Federal
Bankruptcy Code. During the year ended December 31, 2009, the Company
recorded a $1.5 million estimated litigation accrual under accrued liabilities in the accompanying
consolidated balance sheet with a corresponding increase to general and administrative expense in
the statement of operations. During the year ended December 31, 2010, the Company increased the
estimated litigation accrual by an additional $0.2 million. At December 31, 2010, the $1.7 million
charge represents the write-down of FLRX’s investment in subsidiaries to zero.
In 2004, the Predecessor Company filed a lawsuit as the plaintiff regarding construction
defects at the Lake Tahoe Vacation Resort in the United State District Court, Eastern District of
California (Sacramento Division), Civil Action No. 04-CV-00784 entitled Sunterra Corporation Et Al
vs. Perini Et Al. Perini Building Company (“Perini”) is the primary defendant and served as the
Company’s general contractor. The case was later amended to add over 30 sub-contractors and
suppliers as cross-defendants, and those cross-defendants have added what appears to be every
supplier and sub-contractor. It was the Company’s position that there are serious deficiencies in
the roof system, the exterior cladding and windows, decks and balconies, interior bathtubs and
hallways, fireplaces, the parking garage, and elsewhere. The judge held a mandatory meeting of all
parties on May 31, 2008, at which time he set deadlines in the case, including discovery and expert
reports. The Company sought damages in excess of $40.0 million, which includes damages for cost of
repair as well as economic loss while the Lake Tahoe Vacation Resort is being repaired. The case
was settled in 2009 with defendants paying the Company
$25.0 million. The Company recorded $7.3
million in other revenue during the year ended December 31, 2009. The homeowners association for Lake Tahoe Vacation Resort
received the remaining settlement proceeds, which will be used to fund the repairs needed resulting
from the construction defects.
Two separate cases have been filed in St. Maarten against AKGI St. Maarten NV, or AKGI, one of
the Company’s subsidiaries, challenging AKGI’s title to seven whole ownership units at the Royal
Palm Resort, and alleging the breach of certain agreements that existed prior to AKGI’s acquisition
of the resort. AKGI purchased the resort at auction in 1995. Each claimant alleges that, between
1989 and 1991, he purchased certain units from the prior owner of Royal Palm Resort, and that he
holds, in perpetuity, legal title to, or a leasehold interest in, the respective units and is
entitled to a refund of the purchase price and an annual 12% return on the purchase price (which
totaled $1.2 million in one case and $1.3 million in the other case). Due to the nature of the
AKGI purchase and the underlying St. Maarten laws, the Company believes that the obligations to the
claimants would only be enforceable if the agreement between the claimant and AKGI’s predecessor
was either a timeshare agreement or a lease agreement. AKGI has answered that the claimants’
agreements were, in fact, investment contracts, and therefore not enforceable under St. Maarten
law. In February 2011, the case that was pending in the highest and final court of appeal was
dismissed as to all claims, with the Company having no obligations, financial or otherwise, to
claimant. The other case is currently pending in the intermediate court of appeal. A lien has been
placed on AKGI’s interest in the Royal Palm Resort while the remaining action is pending.
In 1989, the Predecessor Company paid an advance deposit to acquire buildings/common areas on
a resort owned by it in Europe. The seller of the property subsequently raised promissory notes in
favor of two other entities (‘the Mansilla Companies’) which the Company believes are related to
the seller. Having asserted that the seller had breached its obligations by failing to honor the
promissory notes, the Mansilla Companies then obtained a charge against the buildings forming the
subject matter of the 1989 agreement. In 1994, the Predecessor Company filed two sets of civil
proceedings against the seller and the Mansilla Companies opposing the charge based on its belief
that the seller had agreed to transfer ownership to the Predecessor Company in accordance with the
1989 sales agreement. The Predecessor Company also commenced criminal proceedings against the owner
and officers of the seller. These criminal proceedings concluded without a conviction despite the
Predecessor Company’s unequivocal belief that the promissory notes between the seller and the
Mansilla companies had been falsified and had not been executed by the seller. The rulings in both
cases were affirmed on appeal. Both cases have now been concluded.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company remains in occupation of the premises, which occupation has not been challenged by
the new owners who allegedly acquired the property at auction. The Company intends to acquire the
property by adverse possession after the passage of the time as required by law. The Company
recorded the $0.9 million and $1.0 million remaining balance of the purchase price as an accrued
liability in the accompanying consolidated balance sheets as of December 31, 2010 and December 31,
2009, respectively.
The Company has entered into contracts with individual contractors and certain key management
employees that specify severance payments upon termination of the contracts.
In 2008, an arbitration demand was
filed against the Company for enforcement of a $4.0 million settlement agreement entered into by the Company and a Board
of Director’s family member. On October 2, 2009, the arbitrator entered an arbitration award against the Company in
the amount of $4.0 million plus interest. On December 8, 2009, a court in District Court, Clark County, Nevada confirmed
the arbitration award plus pre-judgment interest and costs. During the year ended December 31, 2008, the Company
recorded a $4.0 million increase to general and administrative
expense with a corresponding increase to due to
related parties. During the year ended December 31, 2009, the Company recorded a $0.5 million increase to general
and administrative expense with a corresponding increase to due to related parties for accrued interest and costs
associated with the arbitration award. On June 10, 2010, the award was paid in full for $4.4 million.
In addition, the Company is also currently subject to litigation and claims regarding
employment, tort, contract, construction, sales taxes and commission disputes, among others. The
Company believes that none of these actions, including the actions described above, will have a
material adverse effect on the consolidated financial position or results of operations of the
Company.
Note 18—Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value in accordance
with accounting principles generally accepted in the United States, and expands disclosures about
fair value measurements. ASC 820 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Financial assets and liabilities carried at fair value are classified and
disclosed in one of the following three categories:
| • | Level 1: Quoted prices for identical instruments in active markets. | ||
| • | Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. | ||
| • | Level 3: Unobservable inputs used when little or no market data is available. |
As of December 31, 2010 and 2009, the Company’s derivative instruments were the only financial
assets and liabilities that were measured at fair value on a recurring basis. One interest rate
swap was terminated in 2009 and the notional amount on another interest rate swap was significantly
reduced in October 2009. See Note 12—Borrowings for further details.
At December 31, 2010, the swap derivative instruments and the cap derivative instruments were
valued internally due to the immateriality of the balances based on cash flow models that discount
the future cash flows based on a discount rate that factors in a credit risk premium and the
volatility of forward rates. At December 31, 2009, the swap derivative instruments and the cap
derivative instrument were valued by a third-party firm based on cash flow models that discount the
future cash flows based on a discount rate that factors in a credit risk premium and the volatility
of forward rates. These instruments are classified as Level 3, based on the fact that the credit
risk data used for the valuation is not directly observable and cannot be corroborated by
observable market data. The Company’s assessment of the significant inputs to the fair value
measurement in its entirety requires judgment and considers factors specific to the asset or
liability.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the effects of the changes in the mark-to-market valuations of
the derivative instruments (in thousands):
| Derivative | Derivative | |||||||
| Assets | Liabilities | |||||||
Balance at December 31, 2007 |
$ | 36 | $ | 9,177 | ||||
Total loss included in interest expense |
(25 | ) | 4,007 | |||||
Balance at December 31, 2008 |
11 | 13,184 | ||||||
Total (loss) gain included in interest expense |
(11 | ) | (3,896 | ) | ||||
Total cash paid |
— | (8,824 | ) | |||||
Balance at December 31, 2009 |
— | 464 | ||||||
Cash paid for 2010 Cap |
71 | — | ||||||
Total (loss)
gain included in interest
expense |
(71 | ) | (385 | ) | ||||
Balance at December 31, 2010 |
$ | — | $ | 79 | ||||
A pool of mortgages and contracts receivable were acquired and recorded at fair value in
connection with the April 27, 2007 Merger. The allowance for loan and contract losses as of
December 31, 2010 and 2009 against this pool of loans is derived using a static pool analysis to
develop historical default percentages to apply to the mortgage population. The Company further
evaluates other factors such as the credit scores of the individual customers, economic conditions,
industry trends, default rates and past due aging reports. Since there was no securitization market
for these loans as of December 31, 2010 and 2009, the fair value of the mortgage portfolio is not
reasonably determinable as of those dates.
The borrowings under the 2010 Notes are classified as Level 2 as they are not actively traded
on the open market. At December 31, 2010, the fair value of the 2010 Notes was $454.8 million
based on its quoted price of 107.0 on a restricted bond market.
At
December 31, 2010, all of the Company’s securitization
notes and 2008 Conduit Facility are
classified as Level 2 since they are either recently-completed transactions or measured using other
significant observable inputs including the current refinancing activities.
At December 31, 2010, the DROT 2009 Notes, the Quorum Facility, the ILXA Receivables Loan, and
the ILXA Inventory Loan, had an aggregate balance of $162.7 million (net of unamortized original issue
discount) in the accompanying consolidated balance sheet, which the Company believes approximates
their fair value due to the fact that these transactions were recently completed. DROT 2009 Notes
were issued in October 2009, the Quorum Facility in April 2010, and the ILXA Receivables Loan and
ILXA Inventory Loan in August 2010.
At December 31, 2010, the 2008 Conduit Facility had an outstanding balance of $39.5 million,
which the Company believes is its approximate fair value due to the fact that it was recently
amended in August 2010.
The Polo Towers lines of credit and securitization notes payable had a combined carrying value
of $3.2 million at December 31, 2010. The Company believes the book value approximates its fair
value due to the fact that the notes are secured by consumer loans that have a fixed value.
As of December 31, 2009, the borrowings under the First and Second Lien Facilities, the 2008
Conduit Facility, and the Polo Towers lines of credit and securitization notes payable were
classified as Level 2 since they are measured using other significant observable inputs including
the current refinancing activities. As of December 31, 2009, the Company believes the fair value
of these liabilities approximates their carrying amount of $426.4 million. At December 31, 2009,
DROT 2009 Notes had a balance of $168.7 million (net of unamortized original issue discount) in the
accompanying consolidated balance sheet, which the Company believes approximates its fair value due
to the fact the transaction had recently been completed in October 2009.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying amount of the 2004-1 Securitization notes as reported in the accompanying
consolidated balance sheet as of December 31, 2009 was $21.7 million. The Company believes the
book value approximates its fair value because Fitch Ratings, an independent rating agency,
reaffirmed their ratings on October 14, 2009. In addition, the Company had $12.0 million in
reserves related to the 2004-1 Securitization notes (included in cash in escrow and restricted cash
of the accompanying consolidated balance sheet as of December 31, 2009 representing 55.2% of the
carrying amount as of such date. The 2004-1 Securitization notes were paid in full on October 20,
2010.
The carrying value related to the notes payable balance, excluding the ILXA Inventory Loan,
was $4.7 million and $1.8 million as of December 30, 2010 and 2009, respectively. The fair value
was not calculated based on the fact that the components of the notes payable were either due
within one year or were immaterial.
In accordance with ASC 820-10, the Company also applied the provisions of fair value
measurement to various non-recurring measurements for the Company’s financial and non-financial
assets and liabilities and recorded the impairment charges, which are detailed in Note
24—Impairments and Other Write-offs. The Company’s non-financial assets consist of property and
equipment, which are measured at fair value based on a periodic impairment assessment, and assets
held for sale, which are recorded at estimated net realizable value.
Note 19 — Preferred Units
On April 26, 2007, the Company entered into agreements with an institutional investor
(“Investor”). Pursuant to the agreements, the Investor contributed an initial capital contribution
of $62.4 million to the Company in exchange for 212 common units and 1,000 preferred units.
These agreements also contained a provision to allow the Company, at its discretion, to redeem
the preferred units at redemption premiums that vary depending on the redemption date. In
addition, these agreements allowed the Investor to require the Company to redeem all or any portion
of the preferred units it held under the following circumstances: (1) simultaneously with the
Company’s initial public stock offering; (2) at any time after 78 months after the Closing Date;
(3) upon the acceleration of payment of principal by any lender of senior indebtedness; and (4) in
the event of certain uncured breaches of the agreements governing the preferred units. The
redemption price varied depending on the event leading to the redemption.
The Company applied the guidance enumerated in ASC 480-10, “Distinguishing Liabilities from
Equity,” when determining the classification and measurement of preferred stock. In addition, the
Company classified the $62.4 million of conditionally redeemable preferred shares as temporary
member capital due to the fact that the preferred shares contained redemption rights that were
either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control. Furthermore, the preferred units had a priority
return of 17.0% per annum, compounded quarterly, as well as a redemption preference with respect to
the common equity securities.
In accordance with ASC 480-10, the Company was required to record the redemption premiums and
accrete for the priority returns periodically as it was probable that the preferred units would be
redeemed by the Investor. Both the redemption premiums and the priority returns were recorded as an
increase to accumulated deficits and a corresponding increase to redeemable preferred units in
temporary member capital.
On June 17, 2010, the Company and the Investor entered into a redemption agreement whereby the
Investor redeemed 70.67 common units and 333.33 preferred units for $25 million on the same date
and 108.63 common units and 666.67 preferred units for $50 million on August 13, 2010. Upon these
redemptions, the recorded value of the equity investment, including the accumulated priority
returns and redemption premiums, totaled $111.7 million. The difference between the recorded value
and the $75 million that was paid to the Investor was recorded as a credit to the accumulated
deficit account in the accompanying consolidated balance sheet.
Also on June 17, 2010, the Company entered into agreements with DRP Holdco, LLC, an investment
vehicle managed by an affiliate of Guggenheim Partners, LLC (“Guggenheim”). These agreements
provide for Guggenheim to make a $75 million investment in common and preferred units of the
Company. An initial investment of $25 million was made on June 17, 2010 and the remaining
investment of $50 million was received on August 13, 2010. The proceeds of this investment were
used to repurchase the equity securities previously held by
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the Investor and, therefore, the Company did not retain any net proceeds from these
transactions. At December 31, 2010, costs associated with this transaction totaled $2.9 million
and have been recorded to the accumulated deficit account in the accompanying consolidated balance
sheet.
These agreements also contain a provision to allow the Company, at its discretion, to redeem
any of the preferred units at any time after August 13, 2012, for any reason or no reason, at
optional redemption premiums ranging from 100% to 103% depending on the redemption date. In
addition, Guggenheim may require the Company to redeem all or any portion of the preferred units it
holds under the following circumstances: (1) simultaneously with the Company’s initial public stock
offering; (2) at any time after August 13, 2019; (3) upon the acceleration of payment of principal
by any lender of senior indebtedness; and (4) in the event of certain uncured breaches of the
agreements governing the preferred units. The preferred redemption premiums vary from 100% to 105%
depending on the event leading to the redemption.
The Company applies the guidance enumerated in ASC 480-10 when determining the classification
and measurement of preferred stock. In addition, the Company classifies the $75 million of
conditionally redeemable preferred shares as temporary member capital due to the fact that the
preferred shares contain redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s
control.
Furthermore, the preferred units had a priority return of 17.0% per annum from June 17, 2010
to August 13, 2010 and have a priority return of 16.5% per annum from August 14, 2010 through
redemption, compounded quarterly, as well as a liquidation preference with respect to the common
equity securities.
In accordance with ASC 480-10, the Company is required to record the redemption premiums and
accrete for the priority returns periodically as it is probable that the preferred units will be
redeemed by Guggenheim. Both the redemption premiums and the priority returns are recorded as an
increase to accumulated deficits and a corresponding increase to redeemable preferred units in
temporary member capital.
Prior to any distributions to the common unitholders, the holders of the preferred units will
be entitled to receive from the Company the product of (a) an amount equal to the sum of (i) such
holder’s contribution with respect to the preferred units reduced by any distributions to such
holders, and (ii) accrued but unpaid distributions of priority returns, and (b) the relevant
redemption premiums based on the date of redemption. Once the sum of any unpaid priority returns
and the unreturned contributions with respect to the preferred units is reduced to zero, the
preferred units shall be deemed cancelled. The balance, if any, shall be distributed to the common
unitholders on a pro rata basis.
Note 20—Business Combination
On
August 31, 2010, ILXA acquired a majority of the assets of ILX Resorts, Inc. for an
aggregate cash purchase price of $30.7 million. The ILX Acquisition added ten additional resorts
and more than 25,000 owners to the Diamond Resorts family. These assets complement Diamond
Resorts’ existing resort network and are expected to increase the Company’s value proposition to
its owner base. The ILX Acquisition was financed through the ILXA Inventory Loan and the ILXA
Receivables Loan. See Note 12—Borrowings for additional detail. In addition, ILXA assumed $4.2
million in liabilities as part of the purchase price. The acquisition resulted in no goodwill or
gain from business combinations due to the fact the fair value of assets acquired and liabilities
assumed equals the purchase price.
The Company accounted for this acquisition under the purchase method in accordance with ASC
805, “Business Combinations” (“ASC 805”). The following table summarizes the consideration paid and
the amounts of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration: |
||||
Cash |
$ | 30,722 | ||
Fair value of total consideration transferred |
$ | 30,722 | ||
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recognized amounts of identifiable assets and liabilities assumed
as of August 31, 2010: |
||||
Cash in escrow and restricted cash |
$ | 54 | ||
Mortgages and contracts receivable |
9,802 | |||
Other receivables |
184 | |||
Prepaid expenses and other assets |
181 | |||
Unsold Vacation Interests |
10,100 | |||
Property and equipment |
5,705 | |||
Intangible assets |
8,850 | |||
Total assets |
34,876 | |||
Current liabilities |
4,154 | |||
Total identifiable net assets |
$ | 30,722 | ||
Acquired intangible assets consist of the following (dollar amounts in thousands):
| Weighted | Estimated Fair | |||||||
| Average | Market Value | |||||||
| Useful Life in | at August 31, | |||||||
| Years | 2010 | |||||||
Member relationships |
10 | $ | 1,100 | |||||
Management contracts |
5 | 7,120 | ||||||
Trade name |
5 | 600 | ||||||
Domain name |
5 | 30 | ||||||
Total acquired intangible
assets |
$ | 8,850 | ||||||
The ILX management contracts have automatic renewals for a weighted average term of
approximately ten years. The weighted average period before the next renewal or extension is
approximately five years.
These notes to the consolidated financial statements do not present supplemental pro forma
information to include revenue and earnings of ILX for all periods presented, as the Company deems
that it is impracticable to obtain this information. The historical ILX financial statements
include segments of operations that were not acquired by the Company. These financial statements
co-mingle all activities. As such, management cannot reasonably estimate and carve out the amounts
related to the assets acquired and the liabilities assumed by the Company. Additionally, based on
the criteria included in ASC 805, the ILX Acquisition is not material in relation to the total
assets included on the consolidated balance sheets and the net loss reported on the consolidated
statements of operations.
Note 21—Segment Reporting
The Company presents its results of operations in two segments: (1) Hospitality and Management
Services, which includes operations related to the management of resort properties, the Collections
and revenue from our operation of THE Club and the provision of other
services; and (2) Vacation Interest Sales and Financing, which includes operations relating to
the marketing and sales of Vacation Interests, as well as the consumer financing activities related
to such sales. While certain line items reflected on the statement of operations fall completely
into one of these business segments, other line items relate to revenues or expenses which are
applicable to more than one segment. For line items that are applicable to more than one segment,
revenues or expenses are allocated by management, which involves significant estimates. Certain
expense items (principally corporate interest expense and depreciation and amortization) are not,
in management’s view, allocable to either of these business segments as they apply to the entire
Company. In addition, general and administrative expenses are not allocated to either of these
business segments because historically management has not allocated these expenses for purposes of
evaluating the Company’s different operational divisions. Accordingly, these expenses are
presented under Corporate and Other.
Management
believes that it is impracticable to allocate specific assets and liabilities
related to each business segment. In addition, management does not review balance sheets by business segment
as part of their evaluation of operating segment performances. Consequently, no balance sheet
segment reports have been presented.
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information about the Company’s operations in different business segments is as follows:
CONSOLIDATING STATEMENT OF OPERATIONS BY BUSINESS SEGMENT
For the year ended December 31, 2010
(In thousands)
For the year ended December 31, 2010
(In thousands)
| Hospitality and | Vacation | |||||||||||||||
| Management | Interest Sales | Corporate and | ||||||||||||||
| Services | and Financing | Other | Total | |||||||||||||
Revenues: |
||||||||||||||||
Vacation Interest sales |
$ | — | $ | 214,764 | $ | — | $ | 214,764 | ||||||||
Provision for uncollectible Vacation
Interest sales revenue |
— | (12,655 | ) | — | (12,655 | ) | ||||||||||
Vacation Interest, net |
— | 202,109 | — | 202,109 | ||||||||||||
Management, member and other services |
91,156 | 11,495 | — | 102,651 | ||||||||||||
Consolidated resort operations |
26,547 | — | — | 26,547 | ||||||||||||
Interest |
— | 39,150 | 177 | 39,327 | ||||||||||||
Gain on mortgage repurchase |
— | 191 | — | 191 | ||||||||||||
Total revenues |
117,703 | 252,945 | 177 | 370,825 | ||||||||||||
Costs and Expenses: |
||||||||||||||||
Vacation Interest cost of sales |
— | 39,730 | — | 39,730 | ||||||||||||
Advertising, sales and marketing |
— | 114,029 | — | 114,029 | ||||||||||||
Vacation Interest carrying cost, net |
— | 29,821 | — | 29,821 | ||||||||||||
Management, member and other services |
21,916 | 1,730 | — | 23,646 | ||||||||||||
Consolidated resort operations |
23,972 | — | — | 23,972 | ||||||||||||
Loan portfolio |
1,025 | 9,541 | — | 10,566 | ||||||||||||
General and administrative |
— | — | 67,905 | 67,905 | ||||||||||||
Gain on sale of assets |
— | — | (1,923 | ) | (1,923 | ) | ||||||||||
Depreciation and amortization |
— | — | 11,939 | 11,939 | ||||||||||||
Interest |
— | 18,203 | 48,959 | 67,162 | ||||||||||||
Loss on extinguishment of debt |
— | — | 1,081 | 1,081 | ||||||||||||
Impairments and other write-offs |
— | — | 3,330 | 3,330 | ||||||||||||
Total costs and expenses |
46,913 | 213,054 | 131,291 | 391,258 | ||||||||||||
Income (loss) before benefit for
income taxes |
70,790 | 39,891 | (131,114 | ) | (20,433 | ) | ||||||||||
Benefit for income taxes |
— | — | (1,274 | ) | (1,274 | ) | ||||||||||
Net income (loss) |
$ | 70,790 | $ | 39,891 | $ | (129,840 | ) | $ | (19,159 | ) | ||||||
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF OPERATIONS BY BUSINESS SEGMENT
For the year ended December 31, 2009
(In thousands)
For the year ended December 31, 2009
(In thousands)
| Hospitality and | Vacation | |||||||||||||||
| Management | Interest Sales | Corporate and | ||||||||||||||
| Services | and Financing | Other | Total | |||||||||||||
Revenues: |
||||||||||||||||
Vacation Interest sales |
$ | — | $ | 248,643 | $ | — | $ | 248,643 | ||||||||
Provision for uncollectible Vacation
Interest sales revenue |
— | (14,153 | ) | — | (14,153 | ) | ||||||||||
Vacation Interest, net |
— | 234,490 | — | 234,490 | ||||||||||||
Management, member and other services |
93,431 | 14,772 | — | 108,203 | ||||||||||||
Consolidated resort operations |
23,814 | — | — | 23,814 | ||||||||||||
Interest |
— | 43,200 | 972 | 44,172 | ||||||||||||
Gain on mortgage repurchase |
— | 282 | — | 282 | ||||||||||||
Total revenues |
117,245 | 292,744 | 972 | 410,961 | ||||||||||||
Costs and Expenses: |
||||||||||||||||
Vacation Interest cost of sales |
— | 55,135 | — | 55,135 | ||||||||||||
Advertising, sales and marketing |
— | 116,098 | — | 116,098 | ||||||||||||
Vacation Interest carrying cost, net |
— | 32,992 | — | 32,992 | ||||||||||||
Management, member and other services |
26,449 | 4,714 | — | 31,163 | ||||||||||||
Consolidated resort operations |
22,456 | — | — | 22,456 | ||||||||||||
Loan portfolio |
954 | 8,881 | — | 9,835 | ||||||||||||
General and administrative |
— | — | 71,306 | 71,306 | ||||||||||||
Gain on sale of assets |
— | — | (137 | ) | (137 | ) | ||||||||||
Depreciation and amortization |
— | — | 13,366 | 13,366 | ||||||||||||
Interest, net of capitalized interest |
— | 24,396 | 44,119 | 68,515 | ||||||||||||
Loss on extinguishment of debt |
— | — | 10,903 | 10,903 | ||||||||||||
Impairments and other write-offs |
— | — | 1,125 | 1,125 | ||||||||||||
Total costs and expenses |
49,859 | 242,216 | 140,682 | 432,757 | ||||||||||||
Income (loss) before benefit for
income taxes |
67,386 | 50,528 | (139,710 | ) | (21,796 | ) | ||||||||||
Benefit for income taxes |
— | — | (799 | ) | (799 | ) | ||||||||||
Net income (loss) |
$ | 67,386 | $ | 50,528 | $ | (138,911 | ) | $ | (20,997 | ) | ||||||
F-48
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF OPERATIONS BY BUSINESS SEGMENT
For the year ended December 31, 2008
(In thousands)
For the year ended December 31, 2008
(In thousands)
| Hospitality and | Vacation Interest | |||||||||||||||
| Management | Sales and | Corporate and | ||||||||||||||
| Services | Financing | Other | Total | |||||||||||||
Revenues: |
||||||||||||||||
Vacation Interest sales |
$ | — | $ | 285,442 | $ | — | $ | 285,442 | ||||||||
Provision for uncollectible Vacation
Interest sales revenue |
— | (51,166 | ) | — | (51,166 | ) | ||||||||||
Vacation Interest, net |
— | 234,276 | — | 234,276 | ||||||||||||
Management, member and other services |
76,570 | 16,671 | — | 93,241 | ||||||||||||
Consolidated resort operations |
21,006 | — | — | 21,006 | ||||||||||||
Interest |
1,812 | 49,979 | 1,835 | 53,626 | ||||||||||||
Gain on mortgage repurchase |
— | 265 | — | 265 | ||||||||||||
Total revenues |
99,388 | 301,191 | 1,835 | 402,414 | ||||||||||||
Costs and Expenses: |
||||||||||||||||
Vacation Interest cost of sales |
— | 67,551 | — | 67,551 | ||||||||||||
Advertising, sales and marketing |
— | 148,565 | — | 148,565 | ||||||||||||
Vacation Interest carrying cost, net |
— | 22,831 | — | 22,831 | ||||||||||||
Management, member and other services |
28,747 | 6,599 | — | 35,346 | ||||||||||||
Consolidated resort operations |
23,685 | — | — | 23,685 | ||||||||||||
Loan portfolio |
661 | 8,092 | — | 8,753 | ||||||||||||
General and administrative |
— | — | 78,618 | 78,618 | ||||||||||||
Gain on sale of assets |
— | — | (1,007 | ) | (1,007 | ) | ||||||||||
Depreciation and amortization |
— | — | 16,687 | 16,687 | ||||||||||||
Interest, net of capitalized interest |
— | 20,817 | 50,563 | 71,380 | ||||||||||||
Impairments and other write-offs |
— | — | 17,168 | 17,168 | ||||||||||||
Total costs and expenses |
53,093 | 274,455 | 162,029 | 489,577 | ||||||||||||
Income (loss) before provision for
income taxes |
46,295 | 26,736 | (160,194 | ) | (87,163 | ) | ||||||||||
Provision for income taxes |
— | — | 1,809 | 1,809 | ||||||||||||
Net income (loss) |
$ | 46,295 | $ | 26,736 | $ | (162,003 | ) | $ | (88,972 | ) | ||||||
Note 22—Consolidating Financial Statements
The following consolidating financial statements present, on a supplemental basis, the
financial position, results of operations, and statements of cash flow for (1) those subsidiaries
of the Company which have been designated “Unrestricted Subsidiaries” for purposes of the 2010 Note
Indenture; and (2) the Company and all of its other subsidiaries. As of December 31, 2010, the
only such Unrestricted Subsidiaries were ILX Acquisition and its subsidiaries and Tempus
Acquisition. For purposes of the 2010 Note Indenture, the financial position, results of
operations, and statements of cash flow of Unrestricted Subsidiaries are excluded from the
Company’s financial results to determine whether the Company is in compliance with the financial
covenants governing the 2010 Notes. Accordingly, management believes that the following
presentation is helpful to current and potential investors in the 2010 Notes as well as others.
F-49
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
December 31, 2010
(In thousands)
December 31, 2010
(In thousands)
| Diamond | ||||||||||||||||
| Resorts Parent, | ||||||||||||||||
| LLC and | ||||||||||||||||
| Restricted | Unrestricted | |||||||||||||||
| Subsidiaries | Subsidiaries | Elimination | Total | |||||||||||||
ASSETS |
||||||||||||||||
Cash and cash equivalents |
$ | 27,163 | $ | 166 | $ | — | $ | 27,329 | ||||||||
Cash in escrow and restricted cash |
29,868 | 180 | — | 30,048 | ||||||||||||
Mortgages and contracts receivable, net
of allowance of $51,551, $3,600 and $0,
respectively |
236,845 | 8,442 | — | 245,287 | ||||||||||||
Due from related parties, net |
27,855 | 223 | (7,120 | ) | 20,958 | |||||||||||
Other receivables, net |
31,650 | 4,330 | — | 35,980 | ||||||||||||
Income tax receivable |
10 | — | — | 10 | ||||||||||||
Prepaid expenses and other assets, net |
45,261 | 987 | — | 46,248 | ||||||||||||
Unsold Vacation Interests, net |
180,464 | 10,100 | — | 190,564 | ||||||||||||
Property and equipment, net |
23,468 | 5,629 | — | 29,097 | ||||||||||||
Assets held for sale |
9,517 | — | — | 9,517 | ||||||||||||
Intangible assets, net |
37,411 | 8,302 | — | 45,713 | ||||||||||||
Total assets |
$ | 649,512 | $ | 38,359 | $ | (7,120 | ) | $ | 680,751 | |||||||
LIABILITIES AND MEMBER
CAPITAL (DEFICIT) |
||||||||||||||||
Accounts payable |
$ | 7,409 | $ | 246 | $ | — | $ | 7,655 | ||||||||
Due to related parties, net |
36,263 | 7,108 | (7,120 | ) | 36,251 | |||||||||||
Accrued liabilities |
64,416 | 5,167 | — | 69,583 | ||||||||||||
Income taxes payable |
3,936 | — | — | 3,936 | ||||||||||||
Deferred revenues |
65,656 | — | — | 65,656 | ||||||||||||
Senior secured notes, net of original
issue discount of $10,278, $0 and $0,
respectively |
414,722 | — | — | 414,722 | ||||||||||||
Securitization notes and conduit
facility, net |
176,551 | 10,292 | — | 186,843 | ||||||||||||
Derivative liabilities |
79 | — | — | 79 | ||||||||||||
Notes payable |
1,432 | 21,841 | — | 23,273 | ||||||||||||
Total liabilities |
770,464 | 44,654 | (7,120 | ) | 807,998 | |||||||||||
Redeemable preferred units |
84,502 | — | — | 84,502 | ||||||||||||
Member capital |
7,335 | — | — | 7,335 | ||||||||||||
Accumulated deficit |
(195,043 | ) | (6,295 | ) | — | (201,338 | ) | |||||||||
Accumulated other comprehensive loss |
(17,746 | ) | — | — | (17,746 | ) | ||||||||||
Total member capital (deficit) |
(205,454 | ) | (6,295 | ) | — | (211,749 | ) | |||||||||
Total liabilities and member
capital (deficit) |
$ | 649,512 | $ | 38,359 | $ | (7,120 | ) | $ | 680,751 | |||||||
F-50
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2010
(In thousands)
For the Year Ended December 31, 2010
(In thousands)
| Diamond Resorts | ||||||||||||||||
| Parent, LLC and | ||||||||||||||||
| Restricted | Unrestricted | |||||||||||||||
| Subsidiaries | Subsidiaries | Elimination | Total | |||||||||||||
Revenues: |
||||||||||||||||
Vacation Interest sales |
$ | 214,764 | $ | — | $ | — | $ | 214,764 | ||||||||
Provision for uncollectible Vacation
Interest sales revenue |
(12,655 | ) | — | — | (12,655 | ) | ||||||||||
Vacation Interest, net |
202,109 | — | — | 202,109 | ||||||||||||
Management, member and other services |
102,630 | 1,173 | (1,152 | ) | 102,651 | |||||||||||
Consolidated resort operations |
26,163 | 384 | — | 26,547 | ||||||||||||
Interest |
38,720 | 607 | — | 39,327 | ||||||||||||
Gain on mortgage repurchase |
191 | — | — | 191 | ||||||||||||
Total revenues |
369,813 | 2,164 | (1,152 | ) | 370,825 | |||||||||||
Costs and Expenses: |
||||||||||||||||
Vacation Interest cost of sales |
39,730 | — | — | 39,730 | ||||||||||||
Advertising, sales and marketing |
113,520 | 509 | — | 114,029 | ||||||||||||
Vacation Interest carrying cost, net |
30,226 | (405 | ) | — | 29,821 | |||||||||||
Management, member and other services |
23,339 | 1,459 | (1,152 | ) | 23,646 | |||||||||||
Consolidated resort operations |
23,547 | 425 | — | 23,972 | ||||||||||||
Loan portfolio |
9,918 | 648 | — | 10,566 | ||||||||||||
General and administrative |
63,982 | 3,923 | — | 67,905 | ||||||||||||
Gain on sale of assets |
(1,923 | ) | — | — | (1,923 | ) | ||||||||||
Depreciation and amortization |
11,249 | 690 | — | 11,939 | ||||||||||||
Interest |
65,952 | 1,210 | — | 67,162 | ||||||||||||
Loss on extinguishment of debt |
1,081 | — | — | 1,081 | ||||||||||||
Impairments and other write-offs |
3,330 | — | — | 3,330 | ||||||||||||
Total costs and expenses |
383,951 | 8,459 | (1,152 | ) | 391,258 | |||||||||||
Loss before benefit for income taxes |
(14,138 | ) | (6,295 | ) | — | (20,433 | ) | |||||||||
Benefit for income taxes |
(1,274 | ) | — | — | (1,274 | ) | ||||||||||
Net loss |
$ | (12,864 | ) | $ | (6,295 | ) | $ | — | $ | (19,159 | ) | |||||
F-51
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2010
(In thousands)
Year Ended December 31, 2010
(In thousands)
| Diamond Resorts | ||||||||||||||||
| Parent, LLC and | ||||||||||||||||
| Restricted | Unrestricted | |||||||||||||||
| Subsidiaries | Subsidiaries | Elimination | Total | |||||||||||||
Operating activities: |
||||||||||||||||
Net loss |
$ | (12,864 | ) | $ | (6,295 | ) | $ | — | $ | (19,159 | ) | |||||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||||||||||
Depreciation and amortization |
11,249 | 690 | — | 11,939 | ||||||||||||
Provision
for uncollectible Vacation Interest sales revenue |
12,655 | — | — | 12,655 | ||||||||||||
Amortization of capitalized financing costs and original issue discount |
2,465 | 56 | — | 2,521 | ||||||||||||
Amortization of capitalized loan origination costs
and portfolio discount |
3,007 | — | — | 3,007 | ||||||||||||
Loss on foreign currency exchange |
42 | — | — | 42 | ||||||||||||
Gain on disposal of assets |
(1,923 | ) | — | — | (1,923 | ) | ||||||||||
Gain on mortgage repurchase |
(191 | ) | — | — | (191 | ) | ||||||||||
Loss on extinguishment of debt |
1,081 | — | — | 1,081 | ||||||||||||
Deferred income taxes |
(377 | ) | — | — | (377 | ) | ||||||||||
Unrealized gain on derivative instruments |
(314 | ) | — | — | (314 | ) | ||||||||||
Impairments and other write-offs |
3,330 | — | — | 3,330 | ||||||||||||
Changes in operating assets and liabilities excluding
acquisitions: |
||||||||||||||||
Mortgages and contracts receivable |
10,830 | 1,360 | — | 12,190 | ||||||||||||
Due from related parties, net |
(12,673 | ) | (223 | ) | 7,120 | (5,776 | ) | |||||||||
Other receivables, net |
3,154 | (113 | ) | — | 3,041 | |||||||||||
Prepaid expenses and other assets, net |
(92 | ) | (24 | ) | — | (116 | ) | |||||||||
Unsold Vacation Interests, net |
10,308 | — | — | 10,308 | ||||||||||||
Accounts payable |
(3,470 | ) | 246 | — | (3,224 | ) | ||||||||||
Due to related parties, net |
5,267 | 7,108 | (7,120 | ) | 5,255 | |||||||||||
Accrued liabilities |
16,974 | 1,013 | — | 17,987 | ||||||||||||
Income taxes payable (receivable) |
4,632 | — | — | 4,632 | ||||||||||||
Deferred revenues |
9,093 | — | — | 9,093 | ||||||||||||
Net cash provided by operating activities |
62,183 | 3,818 | — | 66,001 | ||||||||||||
Investing activities: |
||||||||||||||||
Property and equipment capital expenditures |
(5,487 | ) | (66 | ) | — | (5,553 | ) | |||||||||
Purchase of assets from ILX Resorts, Inc. |
— | (30,722 | ) | — | (30,722 | ) | ||||||||||
Disbursement of Tempus Acquisition note receivable |
— | (3,005 | ) | — | (3,005 | ) | ||||||||||
Proceeds from sale of assets |
1,881 | — | — | 1,881 | ||||||||||||
Net cash used in investing activities |
$ | (3,606 | ) | $ | (33,793 | ) | $ | — | $ | (37,399 | ) | |||||
F-52
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS — Continued
Year Ended December 31, 2010
(In thousands)
Year Ended December 31, 2010
(In thousands)
| Diamond Resorts | ||||||||||||||||
| Parent, LLC and | ||||||||||||||||
| Restricted | Unrestricted | |||||||||||||||
| Subsidiaries | Subsidiaries | Elimination | Total | |||||||||||||
Financing activities: |
||||||||||||||||
Changes in cash in escrow and restricted cash |
$ | 10,652 | $ | (126 | ) | $ | — | $ | 10,526 | |||||||
Proceeds from issuance of Senior Secured Notes, net
of original issue discount of $10,468 $0 and $0,
respectively |
414,430 | — | — | 414,430 | ||||||||||||
Proceeds
from issuance of Quorum Facility |
16,697 | — | — | 16,697 | ||||||||||||
Proceeds from issuance of Tempus Acquisition Loan |
— | 3,300 | — | 3,300 | ||||||||||||
Proceeds from issuance of 2008 Conduit Facility |
25,533 | — | — | 25,533 | ||||||||||||
Proceeds from issuance of ILXA Receivables Loan |
— | 11,870 | — | 11,870 | ||||||||||||
Proceeds from issuance of ILXA Inventory Loan |
— | 17,513 | — | 17,513 | ||||||||||||
Payments on Quorum Facility |
(3,755 | ) | — | — | (3,755 | ) | ||||||||||
Payments on Diamond Resorts Owners Trust 2009-1 |
(47,855 | ) | — | — | (47,855 | ) | ||||||||||
Payments on 2008 Conduit Facility |
(4,307 | ) | — | — | (4,307 | ) | ||||||||||
Payments on ILXA Receivables Loan |
— | (1,578 | ) | — | (1,578 | ) | ||||||||||
Payments on First and Second Lien Facilities |
(397,609 | ) | — | — | (397,609 | ) | ||||||||||
Payments on Polo lines of credit agreements and
securitization note |
(11,009 | ) | — | — | (11,009 | ) | ||||||||||
Payments on 2004 Securitization Notes |
(21,722 | ) | — | — | (21,722 | ) | ||||||||||
Payments on notes payable |
(8,221 | ) | — | — | (8,221 | ) | ||||||||||
Payments of debt issuance costs |
(18,287 | ) | (838 | ) | — | (19,125 | ) | |||||||||
Proceeds from Guggenheim equity investment |
75,000 | 75,000 | ||||||||||||||
Repurchase of equity previously held by another
minority institutional investor |
(75,000 | ) | — | — | (75,000 | ) | ||||||||||
Payments of costs related to issuance of common and
preferred units |
(2,888 | ) | — | — | (2,888 | ) | ||||||||||
Payments for derivative instrument |
(71 | ) | — | — | (71 | ) | ||||||||||
Net cash (used in) provided by financing activities |
(48,412 | ) | 30,141 | — | (18,271 | ) | ||||||||||
Net increase in cash and cash equivalents |
10,165 | 166 | — | 10,331 | ||||||||||||
Effect of changes in exchange rates on cash and cash
equivalents |
(188 | ) | — | — | (188 | ) | ||||||||||
Cash and cash equivalents, beginning of period |
17,186 | — | — | 17,186 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 27,163 | $ | 166 | $ | — | $ | 27,329 | ||||||||
F-53
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS — Continued
Year Ended December 31, 2010
(In thousands)
Year Ended December 31, 2010
(In thousands)
| Diamond Resorts | ||||||||||||||||
| Parent, LLC and | ||||||||||||||||
| Restricted | Unrestricted | |||||||||||||||
| Subsidiaries | Subsidiaries | Elimination | Total | |||||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||||||
Cash paid for interest |
$ | 44,183 | $ | 450 | $ | — | $ | 44,633 | ||||||||
Cash paid for taxes, net of tax refunds |
$ | (5,514 | ) | $ | — | $ | — | $ | (5,514 | ) | ||||||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES: |
||||||||||||||||
Priority returns and redemption premiums on preferred
units |
$ | 17,654 | $ | — | $ | — | $ | 17,654 | ||||||||
Insurance premiums financed through issuance of note
payable |
$ | 7,897 | $ | — | $ | — | $ | 7,897 | ||||||||
Unsold Vacation Interests reclassified to assets held
for sale |
$ | 10,064 | $ | — | $ | — | $ | 10,064 | ||||||||
Property and equipment reclassified to assets to be
disposed but not actively marketed (prepaid expenses and
other assets) |
$ | 588 | $ | — | $ | — | $ | 588 | ||||||||
Management contracts (intangible assets) reclassified
to assets held for sale |
$ | 587 | $ | — | $ | — | $ | 587 | ||||||||
Proceeds from issuance of ILXA Inventory Loan in transit |
$ | — | $ | 1,028 | $ | — | $ | 1,028 | ||||||||
Purchase of assets from ILX Resorts, Inc.: |
||||||||||||||||
Fair value of assets acquired |
$ | — | $ | 34,876 | — | $ | 34,876 | |||||||||
Cash paid |
— | (30,722 | ) | — | (30,722 | ) | ||||||||||
Liabilities assumed |
$ | — | $ | 4,154 | $ | — | $ | 4,154 | ||||||||
F-54
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 23—Geographic Financial Information
The Company conducts its Hospitality and Management Services and Vacation Interest Sales and
Financing operations in two geographic areas: North America and Europe. The Company’s North
America operations include the Company’s branded resorts in the continental United States, Hawaii,
Mexico, Canada and the Caribbean, and the Company’s Europe operations include the Company’s branded
resorts in the United Kingdom, Ireland, Italy, Spain, Portugal, Austria, Norway, Malta, Germany and France.
The following table reflects total revenue and assets by geographic area for the periods presented
(in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Revenue |
||||||||||||
North America |
$ | 325,710 | $ | 359,790 | $ | 348,129 | ||||||
Europe |
45,115 | 51,171 | 54,285 | |||||||||
Total Revenues |
$ | 370,825 | $ | 410,961 | $ | 402,414 | ||||||
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
Mortgages and contracts receivable, net |
||||||||
North America |
$ | 244,541 | $ | 263,007 | ||||
Europe |
746 | 549 | ||||||
Total mortgages and contracts
receivable, net |
$ | 245,287 | $ | 263,556 | ||||
Unsold vacation interest, net |
||||||||
North America |
$ | 174,642 | $ | 174,675 | ||||
Europe |
15,922 | 28,550 | ||||||
Total unsold vacation interest, net |
$ | 190,564 | $ | 203,225 | ||||
Property and equipment, net |
||||||||
North America |
$ | 24,248 | $ | 19,794 | ||||
Europe |
4,849 | 5,914 | ||||||
Total property and equipment, net |
$ | 29,097 | $ | 25,708 | ||||
Intangible assets, net |
||||||||
North America |
$ | 40,926 | $ | 35,664 | ||||
Europe |
4,787 | 6,969 | ||||||
Total intangible assets, net |
$ | 45,713 | $ | 42,633 | ||||
Total long-term assets, net |
||||||||
North America |
$ | 484,357 | $ | 493,140 | ||||
Europe |
26,304 | 41,982 | ||||||
Total long-term assets, net |
$ | 510,661 | $ | 535,122 | ||||
Note 24—Impairments and Other Write-offs
F-55
Table of Contents
DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully recoverable.
Impairments and other write-offs consist of the following as of December 31 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
European resorts held for sale (lower of cost or net
realizable value) |
$ | 2,319 | $ | — | $ | — | ||||||
Write-down of an inventory recovery receivable related
to a terminated HOA management contract |
942 | — | — | |||||||||
Land held
for sale adjacent to a managed timeshare resort property (lower of
cost or net realizable value) |
— | — | 6,984 | |||||||||
Unsold Vacation Interests at one of our resorts |
— | — | 3,122 | |||||||||
Abandoned construction project costs |
— | 1,636 | — | |||||||||
Goodwill related to a call center acquisition in Europe |
— | — | 873 | |||||||||
Slow moving consumables inventory |
— | 138 | 774 | |||||||||
Uncollectible notes receivable related to sale of a
resort in London, England (recovered) |
— | (649 | ) | 596 | ||||||||
Abandoned merger and acquisition expenses |
— | — | 4,699 | |||||||||
Other |
69 | — | 120 | |||||||||
Total impairments and other write-offs |
$ | 3,330 | $ | 1,125 | $ | 17,168 | ||||||
For the year ended December 31, 2010, $2.3 million of the impairment charges is attributable
to the write down of two European resorts held for sale to their net realizable value based on
accepted offers. The impairment relates to a downturn in the real estate market. Additionally, $0.9
million of the 2010 impairment charge is attributable to a receivable
associated with an inventory
recovery agreement that terminated in conjunction with the termination of the
respective management contract.
For the year ended December 31, 2009, $1.0 million of the impairment charges is related to
abandoned construction projects that were no longer consistent with the Company’s development
plans.
For the year ended December 31, 2008, the $12.5 million of impairment charges is primarily due
to: (i) $7.0 million write down of the land held for sale near one of our resorts to its net
realizable value based on comparable sales; (ii) $3.1 million write down of unsold Vacation
Interests at one of our resorts based on revised estimated discounted cash flows; and (iii) $0.9
million impairment of goodwill related to a call center acquisition in Europe based on lower
discounted cash flows than originally anticipated at the time of the acquisition. These impairments
relate to the depressed real estate market and the overall economic downturn. In addition, the
Company abandoned its efforts to pursue certain merger and acquisitions during 2008 and,
accordingly, wrote off $4.7 million in legal and professional fees associated with these abandoned
projects that were previously capitalized during the year ended December 31, 2008.
Note 25—Subsequent Events
On February 18, 2011, DRP entered into various agreements with four new equity investors to
issue an aggregate of 25.1 common units and 133.33 preferred units in exchange for $10.1 million.
This transaction brings the total number of issued and outstanding common units to 1,115.1 and
issued and outstanding preferred units to 1,133.33.
These agreements also contain a provision to allow DRP, at its discretion, to redeem any of
the preferred units at any time after August 13, 2012, for any reason or no reason, at optional
redemption premiums ranging from 100% to 103% depending on the redemption date. In addition, the
new investors may require DRP to redeem all or any portion of the preferred units they hold under
the following circumstances: (1) simultaneously with DRP’s initial public stock offering; (2) at
any time after August 13, 2019; (3) upon the acceleration of payment of principal by any lender of
senior indebtedness; and (4) in the event of certain uncured breaches of the agreements governing
the
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DIAMOND RESORTS PARENT, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
preferred units. The preferred redemption premiums vary from 100% to 105% depending on the
event leading to the redemption.
Also on February 18, 2011, DRP entered into a warrant purchase agreement to purchase certain
warrants issued by Diamond Resorts Corporation from various holders of the warrants. These
warrants were originally issued to holders of DRP’s Second Lien Facility but became detached and
transferrable to other parties when the Second Lien Facility was extinguished in August 2010. DRP
purchased warrants that are exercisable into 5.8175 shares of common stock of Diamond Resorts
Corporation in exchange for $10.1 million.
On January 3, 2011, the second of the Polo Towers lines of credit was paid off and terminated
prior to its maturity date of December 31, 2012. On March 4, 2011, the Polo Towers securitization
notes were paid off and terminated prior to their maturity date of January 20, 2013.
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PROSPECTUS
Offer to exchange
Offer to exchange
$425,000,000 principal amount of our 12% Senior Notes due 2018, which have been registered
under the Securities Act of 1933, for any and all of our outstanding 12% Senior Notes due 2018.
Until
, 2011, all dealers that effect transactions in these securities, whether
or not participating in the exchange offer, may be required to deliver a prospectus. This is in
addition to the dealers’ obligation to deliver a prospectus when acting as underwriters with
respect to their unsold allotments or subscriptions.
Table of Contents
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Arizona Registrant
Diamond Resorts Management, Inc., is incorporated under the laws of Arizona.
Section 10-851 of the Arizona Revised Statutes (the “ARS”) authorizes a corporation to
indemnify a director made a party to a proceeding in such capacity, provided that the individual’s
conduct was in good faith and, when serving in an official capacity with the corporation, the
individual reasonably believed that the conduct was in the best interests of the corporation, or in
all other cases, that the conduct was at least not opposed to the corporation’s best interests. In
the case of any criminal proceedings, indemnification is allowed if the individual had no
reasonable cause to believe the conduct was unlawful. A corporation may also indemnify a director
for conduct for which broader indemnification has been made permissible or obligatory under a
provision of the articles of incorporation pursuant to section 10-202, subsection B, paragraph 2 of
the ARS. Section 10-851 of the ARS also provides that a corporation may not indemnify a director in
connection with a proceeding by, or in the right of, the corporation to procure a judgment in its
favor in which the director was adjudged liable to the corporation or in connection with any other
proceeding charging improper financial benefit to the director in which the director was adjudged
liable on the basis that financial benefit was improperly received by the director. Indemnification
permitted under Section 10-851 in connection with a proceeding by, or in the right of, the
corporation to procure a judgment in its favor is limited to reasonable expenses incurred in
connection with the proceeding.
Pursuant to Section 10-852 of the ARS, unless otherwise limited by the corporation’s articles
of incorporation, a corporation shall indemnify (i) a director who was the prevailing party, on the
merits or otherwise, in the defense of any proceeding to which the director was a party, because
the director is or was a director of the corporation, against reasonable expenses incurred by the
director in connection with such a proceeding, and (ii) an outside director, provided the
proceeding (1) is not one by, or in the right of, the corporation to procure a judgment in its
favor in which the director was adjudged liable to the corporation, or (2) does not charge improper
financial benefit to the director, whether or not involving action in the director’s official
capacity, in which the director was adjudged liable on the basis that financial benefit was
improperly received by the director. Section 10-856 of the ARS provides that a corporation may
indemnify and advance expenses to an officer of the corporation who is a party to a proceeding
because the individual is or was an officer of the corporation to the same extent as a director.
The articles of incorporation of Diamond Resorts Management, Inc. provide that no director
shall have personal liability to the corporation or its shareholders, or to any other person, for
monetary damages for a breach of his or her fiduciary duty as a director, to the fullest extent
allowable under governing laws, except for liability for any of the following: (i) where there has
been a breach of the director’s duty of loyalty to the corporation or its shareholders; (ii) acts
or omissions which are not in good faith, or which involve intentional misconduct or a knowing
violation of law; (iii) authorization of the unlawful payment of a dividend or other distribution
on the corporation’s capital stock, or the unlawful purchase of its capital stock; (iv) any
transaction from which the director derived an improper personal benefit; or (v) any contract or
other transaction involving the director’s conflicts of interests in violation of applicable
provisions of the ARS.
The bylaws of Diamond Resorts Management, Inc. indemnify directors and officers against any
and all claims and liabilities to which he or she may have become subject by reason of serving as a
director or officer. Such indemnification excludes any expense or payments incurred in connection
with any claim or liability that is established to have arisen out of the director’s or officer’s
own willful misconduct or gross negligence.
California Registrants
Resort Management International, Inc. and Diamond Resorts International Marketing, Inc. are
incorporated under the laws of California.
Section 317 of the California General Corporation Law sets forth the provisions pertaining to
the indemnification of corporate “agents.” For purposes of this law, an agent is any person who is
or was a director, officer, employee or other agent of a corporation, or is or was serving at the
request of the corporation in such
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capacity with respect to any other corporation, partnership, joint venture, trust or other
enterprise. Indemnification for expenses, including amounts paid on settling or otherwise
disposing of a threatened or pending action or defending against the same, can be made in certain
circumstances by action of the company through:
(i) a majority vote of a quorum of the corporation’s board of directors consisting of
directors who are not party to the proceedings;
(ii) approval of the shareholders, with the shares owned by the person to be indemnified not
being entitled to vote thereon; or
(iii) such court in which the proceeding is or was pending upon application by designated
parties.
Under certain circumstances, an agent can be indemnified even when found liable.
Indemnification is mandatory where the agent’s defense is successful on the merits. The law allows
a corporation to make advances of expenses for certain actions upon the receipt of an undertaking
that the agent will reimburse the corporation if the agent is found liable. The indemnification
provided by Section 317 for acts while serving as a director or officer of the corporation, but not
involving breach of duty to the corporation and its shareholders, shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under any bylaw to the
extent authorized by each corporation’s articles of the corporation.
The articles of incorporation of each of Resort Management International, Inc. and Diamond
Resorts International Marketing, Inc. eliminate the liability of the directors of the corporation
for monetary damages and authorize the corporation to indemnify the directors and officers of the
corporation to the fullest extent permissible under California law.
The bylaws of Diamond Resorts International Marketing, Inc. empower the corporation to
indemnify any person who is or was a director, officer, employee or other agent of the corporation
or of its predecessor, at the request of the corporation against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection with any threatened,
pending or completed action or proceeding, whether civil, criminal, administrative or
investigative, to the fullest extent permitted under law.
The bylaws of Resort Management International, Inc. empower the corporation to indemnify any
agent of the corporation if such agent acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful.
The termination of any proceeding, whether by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, will not, of itself, create a presumption that the
person did not act in good faith and in a manner which he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and with respect to any criminal action or
proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful.
The corporation will also indemnify any person who is or was party to any proceeding by, or in the
right of, the corporation to procure a judgment in its favor because such person is or was an agent
of the corporation. Any indemnification shall be made by the corporation, unless a determination
is reasonably and promptly made by the board of directors by majority vote of a quorum consisting
of directors who were not parties to such proceeding, or, if such quorum is not obtainable, by
independent legal counsel or by the stockholders, that such person acted in bad faith and in a
manner that such person did not believe to be in, or not opposed to, the best interests of the
corporation. Costs, charges and expenses incurred by any agent in any proceeding shall be paid in
advance of the final disposition of such matter if the agent undertakes to repay such amount in the
event that it is ultimately determined that he or she is not entitled to indemnification. Any
indemnification shall be made promptly, and in any event within (90) ninety days, upon the written
request of the agent, unless a determination is reasonably and promptly made by the board of
directors that such agent acted in a manner as to justify the corporation not indemnifying or
making an advance to the agent.
Lake Tahoe Resort Partners, LLC is a limited liability company organized under the laws of
California.
Section 17155 of the California Beverly-Killea Limited Liability Company Act
provides that, except for a breach of a manager’s fiduciary duties of loyalty and care owed to the
limited liability company and to its members, the articles of organization or written operating
agreement of a California limited liability company may provide for indemnification of any person,
including, without limitation, any manager, member, officer, employee, or agent of
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the limited liability company, against judgments, settlements, penalties, fines, or expenses
of any kind incurred as a result of acting in that capacity.
Delaware Registrants
AKGI-St. Maarten N.V., Diamond Resorts Finance Holding Company, Diamond Resorts Developer and
Sales Holding Company, Diamond Resorts Management & Exchange Holding Company and Diamond Resorts
Centralized Services Company are incorporated under the laws of Delaware.
Section 145 of the Delaware General Corporation Law (the “DGCL”) grants each corporation
organized thereunder the power to indemnify any person who is or was a director, officer, employee
or agent of a corporation or enterprise, against expenses, including attorneys’ fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or her in connection
with any threatened, pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by, or in the right of, the corporation, by
reason of being or having been in any such capacity, if he or she acted in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct
was unlawful. Section 145 of the DGCL further provides that a corporation may indemnify any person
who is or was a director, officer, employee or agent of a corporation or enterprise, against
expenses, including attorneys’ fees, actually and reasonably incurred by such person in connection
with the defense or settlement of any threatened, pending or completed action, suit or proceeding
by, or in the right of, the corporation to procure a judgment in its favor to procure a judgment in
its favor, by reason of being or having been in any such capacity, if such person acted in good
faith in a manner reasonably believed by such person to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
The Certificate of Incorporation of each of Diamond Resorts Finance Holding Company, Diamond
Resorts Centralized Services Company and Diamond Resorts Management & Exchange Holding Company and
the bylaws of each of Diamond Resorts Developer and Sales Holding Company provides that the
respective corporation will indemnify officers, directors, employees and agents to the fullest
extent permitted by the DGCL.
The bylaws of AKGI-St. Maarten N.V. provide that the corporation will indemnify and hold
harmless, to the fullest extent permitted by the applicable law, any officer or director of the
corporation. The corporation will be required to indemnify an indemnitee, in connection with a
proceeding commenced by such indemnitee, only if the commencement of such proceeding by the
indemnitee was authorized by the board of directors. The corporation will pay the expenses
(including attorneys’ fees) incurred by an indemnitee in defending any proceeding in advance of its
final disposition; provided, however, that the payment of expenses incurred by a director or
officer in advance of the final disposition of the proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified. If a claim for
indemnification or payment of expenses is not paid in full within sixty (60) days after a written
claim therefore by the indemnitee has been received by the corporation, the indemnitee may file a
suit to recover the unpaid amount of such claim and, if successful, will be entitled to be paid the
expenses of prosecuting such claim. The corporation’s obligation to indemnify may be reduced by
any amount an indemnitee may collect as indemnification or advancement of expenses from any other
corporation, partnership joint venture or enterprise.
The bylaws of each of Diamond Resorts Finance Holding Company, Diamond Resorts Centralized
Services Company and Diamond Resorts Management & Exchange Holding Company provide that the
respective corporation may indemnify any director, officer, employee or agent of the corporation
who is or was party to, or is threatened to be made a party to, any threatened, pending completed
action, suit or proceeding, whether civil, criminal, administrative or investigative, if he or she
acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, and had no reasonable cause to believe that his or her conduct
was unlawful. The corporation may also indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action or suit by, or in the
right of, the
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corporation to procure a judgment in its favor by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation, if he or she acted in good faith and in
a manner he or she reasonably believed to be in, or not opposed to, the best interests of the
corporation. If a director or officer of the corporation has been successful on the merits or
otherwise in the defense of any action, he or she shall be indemnified against expenses actually
and reasonably incurred in connection therewith. Any indemnification will be made by the
corporation only as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he or she has met the applicable
standard of conduct Such determination shall be made by a majority vote of the directors who are
not parties to such action, or by a committee of such directors designated by majority vote of such
directors, even though less than a quorum, or if there are not such directors, or if such directors
so direct, by independent legal counsel in a written opinion or by the stockholders. Expenses
incurred may be paid by the corporation in advance of the final disposition of any action upon
receipt of any undertaking by or on behalf of the director or officer to repay such amount, if it
is ultimately determined that such person is not entitled to be indemnified by the corporation.
Such expenses incurred by former directors or officers or other employees and agents may be so paid
upon such terms and conditions as the board of directors deems appropriate.
Cumberland Gate, LLC, Diamond Resorts California Collection Development, LLC, Diamond Resorts
Coral Sands Development, LLC, Diamond Resorts Cypress Pointe I Development, LLC, Diamond Resorts
Cypress Pointe II Development, LLC, Diamond Resorts Cypress Pointe III Development, LLC, Diamond
Resorts Fall Creek Development, LLC, Diamond Resorts Grand Beach I Development, LLC, Diamond
Resorts Grand Beach II Development, LLC, Diamond Resorts Greensprings Development, LLC, Diamond
Resorts Hilton Head Development, LLC, Diamond Resorts Mortgage Holdings, LLC, Diamond Resorts Poco
Diablo Development, LLC, Diamond Resorts Port Royal Development, LLC, Diamond Resorts Powhatan
Development, LLC, Diamond Resorts Residual Assets Development, LLC, Diamond Resorts Residual Assets
Finance, LLC, Diamond Resorts Residual Assets M&E, LLC, Diamond Resorts Ridge on Sedona
Development, LLC, Diamond Resorts Ridge Pointe Development, LLC, Diamond Resorts San Luis Bay
Development, LLC, Diamond Resorts Santa Fe Development, LLC, Diamond Resorts Sedona Springs
Development, LLC, Diamond Resorts Sedona Summit Development, LLC, Diamond Resorts St. Croix
Development, LLC, Diamond Resorts Steamboat Development, LLC, Diamond Resorts Tahoe Beach & Ski
Development, LLC, Diamond Resorts Hawaii Collection Development, LLC, Diamond Resorts U.S.
Collection Development, LLC, Diamond Resorts Villa Mirage Development, LLC, Diamond Resorts Villas
of Sedona Development, LLC, Diamond Resorts West Maui Development, LLC, Ginger Creek, LLC, Grand
Escapes, LLC, International Timeshares Marketing, LLC, Diamond Resorts Scottsdale Development, LLC,
Diamond Resorts Poipu Development, LLC, Diamond Resorts Palm Springs Development, LLC, Diamond
Resorts Las Vegas Development, LLC, Diamond Resorts Citrus Share Holding, LLC, Diamond Resorts Epic
Mortgage Holdings, LLC, and Diamond Resorts Daytona Development, LLC are limited liability
companies organized under the laws of Delaware.
Section 18-108 of the Delaware Limited Liability Company Act empowers a Delaware limited
liability company to indemnify and hold harmless any member or manager of the limited liability
company from and against any and all claims and demands whatsoever.
The limited liability company operating agreement of each of Cumberland Gate, LLC, Diamond
Resorts Coral Sands Development, LLC, Diamond Resorts Cypress Pointe I Development, LLC, Diamond
Resorts Cypress Pointe II Development, LLC, Diamond Resorts Cypress Pointe III Development, LLC,
Diamond Resorts Fall Creek Development, LLC, Diamond Resorts Grand Beach I Development, LLC,
Diamond Resorts Grand Beach II Development, LLC, Diamond Resorts Greensprings Development, LLC,
Diamond Resorts Hilton Head Development, LLC, Diamond Resorts Mortgage Holdings, LLC, Diamond
Resorts Poco Diablo Development, LLC, Diamond Resorts Port Royal Development, LLC, Diamond Resorts
Powhatan Development, LLC, Diamond Resorts Residual Assets Development, LLC, Diamond Resorts
Residual Assets Finance, LLC, Diamond Resorts Residual Assets M&E, LLC, Diamond Resorts Ridge on
Sedona Development, LLC, Diamond Resorts Ridge Pointe Development, LLC, Diamond Resorts San Luis
Bay Development, LLC, Diamond Resorts Santa Fe Development, LLC, Diamond Resorts Sedona Springs
Development, LLC, Diamond Resorts Sedona Summit Development, LLC, Diamond Resorts St. Croix
Development, LLC, Diamond Resorts Steamboat Development, LLC, Diamond Resorts Tahoe Beach & Ski
Development, LLC, Diamond Resorts Villa Mirage Development, LLC, Diamond Resorts Villas of Sedona
Development, LLC, Diamond Resorts West Maui Development, LLC, Ginger Creek, LLC, Grand Escapes,
LLC, International Timeshares Marketing, LLC, Diamond Resorts Scottsdale Development, LLC, Diamond
Resorts Poipu Development, LLC, Diamond Resorts Palm Springs Development, LLC, Diamond Resorts
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Las Vegas Development, LLC, Diamond Resorts Citrus Share Holding, LLC, Diamond Resorts Epic
Mortgage Holdings, LLC and Diamond Resorts Daytona Development, LLC provides for indemnification of
the managers and members from and against any loss, expense, damage or injury suffered or sustained
in connection with the business of the company to the fullest extent provided or permitted by the
Delaware Limited Liability Company Act.
The limited liability company operating agreements of Diamond Resorts California Collection
Development, LLC, Diamond Resorts U.S. Collection Development, LLC and Diamond Resorts Hawaii
Collection Development, LLC provide that managing members, affiliates and members of the company
will be indemnified to the fullest extent permitted by the Delaware Limited Liability Company Act;
provided, however, that such persons will not be indemnified against any judgments, penalties,
fines or settlements which arise in connection with any providing if such proceeding arises from
bad faith, gross negligence or willful misconduct by such person.
West Maui Resort Partners, L.P. is a limited partnership organized under the laws of Delaware.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act provides that, subject
to such standards and restrictions, if any, as are set forth in its partnership agreement, a
limited partnership may, and shall have the power to, indemnify and hold harmless any partner or
other person from and against any and all claims and demands whatsoever. Section 17-303 provides
that a limited partner is not liable for the obligations of a limited partnership unless he or she
is also a general partner or, in addition to the exercise of the rights and powers of a limited
partner, he or she participates in the control of the business. However, if the limited partner
does participate in the control of the business, he or she is liable only to persons who transact
business with the limited partnership reasonably believing, based upon such limited partner’s
conduct, that such limited partner is a general partner of the company.
Florida Registrants
Diamond Resorts International Club, Inc. and MMG Development Corp. are incorporated under the
laws of Florida.
Under Section 607.0831 of the Florida Business Corporation Act (the “FBCA”), a director is not
personally liable for monetary damages to the corporation or any other person for any statement,
vote, decision, or failure to act regarding corporate management or policy unless (1) the director
breached or failed to perform his or her duties as a director and (2) the director’s breach of, or
failure to perform, those duties constitutes (a) a violation of the criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or had no reasonable cause
to believe his or her conduct was unlawful, (b) a transaction from which the director derived an
improper personal benefit, either directly or indirectly, (c) a circumstance under which the
liability provisions of Section 607.0834 of the FBCA are applicable, (d) in a proceeding by, or in
the right of, the corporation to procure a judgment in its favor or by, or in the right of, a
shareholder, conscious disregard for the best interest of the corporation, or willful misconduct,
or (e) in a proceeding by, or in the right of, someone other than the corporation or a shareholder,
recklessness or an act or omission which was committed in bad faith or with malicious purpose or in
a manner exhibiting wanton and willful disregard of human rights, safety, or property. A judgment
or other final adjudication against a director in any criminal proceeding for a violation of the
criminal law estops that director from contesting the fact that his or her breach, or failure to
perform, constitutes a violation of the criminal law; but does not estop the director from
establishing that he or she had reasonable cause to believe that his or her conduct was lawful or
had no reasonable cause to believe that his or her conduct was unlawful.
Section 607.0850 of the FBCA provides that a corporation shall have the power to indemnify any
person who was or is a party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust or other enterprise
against liability incurred in connection with such proceeding, if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. A corporation may indemnify officers and directors in an
action by, or in the right of, the corporation, under the same conditions set forth in the
preceding sentence against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to conclusion,
actually and
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reasonably incurred in connection with the defense or settlement of such proceeding, including
any appeal thereof, except that no indemnification shall be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable unless judicially approved.
Section 607.0850 of the FBCA also provides that to the extent that a director, officer, employee,
or agent of a corporation has been successful on the merits or otherwise in defense of any
proceeding, claim, issue or matter referred to above, he or she shall be indemnified against
expenses actually and reasonably incurred.
The articles of incorporation of Diamond Resorts International Club, Inc. provide that a
director of the corporation shall not be personally liable to the corporation or its shareholders
for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for
any appropriation, in violation of his or her duties, of any business opportunity of the
corporation; (ii) for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) for unlawful distributions as set forth in Section 607.0834 of
the FBCA; or (iv) for any transaction from which the director derived an improper personal benefit.
The bylaws of Diamond Resorts International Club, Inc. indemnify directors and officers
against liability incurred in a proceeding if the director or officer acted in a manner he or she
believed in good faith to be in, or not opposed to, the best interests of the corporation and, in
the case of any criminal proceedings, he or she had no reasonable cause to believe the conduct was
unlawful. The termination of a proceeding by judgment, settlement or conviction, or upon a plea of
nolo contendere or its equivalent is not, of itself, determinative that the proposed indemnitee did
not meet the standard of conduct necessary to obtain indemnification. The corporation will not
indemnify a person in connection with a proceeding by, or in the right of, the corporation in which
such person was adjudged liable to the corporation, or any proceeding in which such person was
adjudged liable on the basis that he or she improperly received a personal benefit unless, and then
only to the extent that, a court of competent jurisdiction determines that in view of the
circumstances of the proceeding, such person is fairly and reasonably entitled to indemnification.
Indemnification is limited to reasonable expenses incurred in connection with the proceeding.
Furthermore, the corporation shall pay for or reimburse reasonable expenses incurred by a director
or officer as a party to a proceeding in advance of final disposition of the proceeding, if such
director or officer furnishes the corporation a written affirmation of his or her good faith belief
that he or she has met the required standard of conduct, and such director or officer furnishes the
corporation a written undertaking to repay any advances, if it is ultimately determined that he or
she is not entitled to indemnification. The corporation shall not indemnify a director or officer
unless a separate determination has been made in the specific case that indemnification of such
person is permissible in the circumstances because he or she has met the required standard of
conduct; provided, however, that regardless of the result or absence of any such determination, to
the extent that a director or officer has been successful in the defense of any proceeding to which
he or she was a party, the corporation shall indemnify him or her against reasonable expenses
incurred by him or her in connection therewith. Such determination shall be made, at the election
of the board of directors, by majority vote of a quorum consisting of directors not at the time
parties to the proceeding. If a quorum cannot be obtained, then such determination shall be made
by majority vote of a committee duly designated by the board of directors, consisting solely of two
or more directors not at the time parties to the proceeding. A director or officer who is party to
a proceeding may apply for indemnification or advances for expenses to the court conducting the
proceeding or another court of competent jurisdiction.
The bylaws of MGM Development Corp. indemnify directors and officers to the fullest extent
permitted by the law if such director or officer acted in good faith in the reasonable belief that
his or her conduct was in the best interests of the corporation, and, in criminal proceedings,
without reasonable ground for belief that such action was unlawful. Termination of any proceeding
by judgment, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not,
of itself, create a presumption that the director or officer did not act in good faith.
Hawaii Registrant
Poipu Resort Partners, L.P. is a limited partnership organized under the laws of Hawaii.
The Hawaii Uniform Limited Partnership Act is silent as to indemnification.
The limited partnership agreement of Poipu Resort Partners, L.P. provides that the partnership
will indemnify each general partner, including any partners, shareholders or directors, officers or
employees of any
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partners or shareholders of such general partner, against any liability or loss or threat of
liability or loss, including legal fees, as a result of any claim or legal proceeding relating to
the performance or non-performance of any act concerning the partnership; provided such general
partner was acting in good faith within what such general partner reasonably believed to be the
scope of such general partner’s authority, and for a purpose which such general partner reasonably
believed to be in the best interests of the partnership. The partnership will not indemnify
general partners for acts of willful or gross neglect, actual fraud, breach of fiduciary
responsibility or willful misconduct.
Missouri Registrants
Foster Shores, LLC and Walsham Lake, LLC are limited liability companies organized under the
laws of Missouri.
The Missouri Limited Liability Company Act is silent as to indemnification. The limited
liability company agreements of each of Foster Shores, LLC and Walsham Lake, LLC provide for
indemnification of the respective company’s managers and members against any loss, expense, damage
or injury sustained in connection with the business of the company to the fullest extend provided
or permitted by the Missouri Limited Liability Company Act.
Nevada Registrants
Diamond Resorts Financial Services, Inc., Resorts Development International, Inc. and George
Acquisition Subsidiary, Inc. are incorporated under the laws of Nevada.
Chapter 78 of the Nevada Revised Statutes (the “NRS”) allows the directors and officers of a
corporation to be indemnified against liabilities they may incur while serving in such capacities.
A corporation may indemnify its directors or officers who were or are a party, or are threatened to
be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that they are or were
directors or officers of the corporation, or are or were serving at the request of the corporation
as directors or officers of another corporation, partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in
settlement, actually and reasonably incurred by them in connection with such action, suit, or
proceeding, unless it is ultimately determined by a court of competent jurisdiction that they
breached their fiduciary duties by intentional misconduct, fraud, or a knowing violation of law or
did not act in good faith and in a manner which they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe their conduct was unlawful. In addition, the applicable
statutory provisions mandate that the corporation indemnify its directors and officers who have
been successful on the merits or otherwise in defense of any action, suit, or proceeding against
expenses, including attorneys’ fees, actually and reasonably incurred by them in connection with
the defense. The corporation will advance expenses incurred by directors or officers in defending
any such action, suit, or proceeding upon receipt of written confirmation from such officers or
directors that they have met certain standards of conduct and an undertaking by or on behalf of
such officers or directors to repay such advances if it is ultimately determined that they are not
entitled to indemnification by the corporation.
The articles of incorporation of Diamond Resorts Financial Services, Inc. provide that
directors and officers of the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a director or officer, except
for liability for acts or omissions which involve intentional misconduct, fraud or knowing
violation of the law or the payment of distributions in violation of Section 78.300 of the NRS. The
bylaws of Diamond Resorts Financial Services, Inc. provide that the corporation may indemnify any
director, officer, agent or employee as to those liabilities and on those terms and conditions as
are specified in Section 78.751 of the NRS.
The bylaws of Resorts Development International, Inc. provide that each director and officer,
whether or not then in office, shall be indemnified by the corporation against all costs and
expenses reasonably incurred by or imposed upon him or her in connection with any action or
proceeding to which he or she may be made a party by reason of his or her being or having been a
director or officer of the corporation. The corporation will not indemnify a director or officer
who has been finally adjudged to have been derelict in the performance of his or her duties as a
director or officer. Such right to indemnification shall include reimbursement of the amounts and
expenses paid in settling any action or proceeding when settling appears to be in the interests of
the corporation.
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Table of Contents
The bylaws of George Acquisition Subsidiary, Inc. indemnify directors and officers against
liability incurred in a proceeding if a director or officer acted in a manner he or she believed in
a good faith to be in, or not opposed to, the best interests of the corporation and, in the case of
any criminal proceedings, he or she had no reasonable cause to believe the conduct was unlawful.
The termination of a proceeding by judgment, settlement or conviction, or upon a plea of nolo
contendere is not, of itself, determinative that the proposed indemnitee did not meet the standard
of conduct necessary to obtain indemnification. The corporation will not indemnify a person in
connection with a proceeding by, or in the right of, the corporation in which such person was
adjudged liable to the corporation, or a proceeding in which such person was adjudged liable on the
basis that he or she improperly received a personal benefit unless, and then only to the extent
that a court of competent jurisdiction determines pursuant to the NRS that, in view of the
circumstances of the proceeding, such person is fairly and reasonably entitled to indemnification.
Indemnification is limited to reasonable expenses incurred in connection with the proceeding. The
corporation will pay for or reimburse reasonable expenses incurred by a director or officer who is
made a party to a proceeding in advance of final disposition of the proceeding, if such director or
officer furnishes the corporation a written affirmation of his or her good faith belief that he or
she has met the required standard of conduct and a written undertaking to repay any advances, if it
is ultimately determined that he or she is not entitled to indemnification. The corporation will
not indemnify a director or officer unless a separate determination has been made in the specific
case that indemnification of such person is permissible in the circumstances because he or she has
met the required standard of conduct; provided, however, that regardless of the result or absence
of any such determination, to the extent that a director or officer has been successful in the
defense of any proceeding to which he or she was a party, the corporation shall indemnify him or
her against reasonable expenses incurred by him or her in connection therewith. Such determination
will be made, at the election of the board of directors, by majority vote of a quorum consisting of
directors not at the time parties to the proceeding. If a quorum cannot be obtained, then such
determination shall be made by majority vote of a committee duly designated by the board of
directors, consisting solely of two or more directors not at the time parties to the proceeding. A
director or officer who is party to a proceeding may apply for indemnification or advances for
expenses to the court conducting the proceeding or another court of competent jurisdiction.
Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, Chestnut Farms, LLC and Diamond
Resorts Polo Development, LLC are limited liability companies organized under the laws of Nevada.
The Nevada Limited Liability Company Act, Section 86.411 of the NRS, generally allows a
limited liability company to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (except an action by, or in the right of, the limited
liability company), by reason of being or having been a manager, member, employee or agent of the
limited liability company or serving or having served in certain capacities at the request of the
limited liability company. Indemnification may include attorneys’ fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person to be indemnified in
connection with the action, suit or proceeding.
Section 86.421 of the NRS generally allows a limited liability company to indemnify any person
who was or is a party or is threatened to be made a party to any threatened, pending or completed
action or suit by, or in the right of, the limited liability company to procure a judgment in its
favor by reason of being or having been a manager, member, employee or agent of the limited
liability company or serving or having served in certain capacities at the request of the limited
liability company, except that indemnification may not be made for any claim, issue or matter as to
which such a person has been finally adjudged by a court of competent jurisdiction to be liable to
the limited liability company or for amounts paid in settlement to the limited liability company,
unless and only to the extent that the court in which the action or suit was brought or other court
of competent jurisdiction determines upon application that, in view of all the circumstances, the
person is fairly and reasonably entitled to indemnification for such expenses as the court deems
proper. However, to be entitled to indemnification, the person to be indemnified must have acted in
good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the
best interests of the limited liability company and, with respect to any criminal action or
proceeding, such person must have had no reasonable cause to believe his or her conduct was
unlawful.
NRS Section 86.431 provides that to the extent a manager, member, employee or agent of a
limited liability company has been successful on the merits or otherwise in defense of any action
described above, he or she must be
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indemnified by the limited liability company against expenses, including attorneys’ fees actually
and reasonably incurred in connection with the defense.
NRS Section 86.441 allows a limited liability company, in its articles of organization,
operating agreement or other agreement, to provide for the payment of expenses incurred by members
or managers in defending any civil or criminal action, suit or proceeding as they are incurred and
in advance of the final disposition of the action, suit or proceeding, upon receipt of an
undertaking to repay the amount if it is ultimately determined by a court of competent jurisdiction
that the person is not entitled to indemnification by the company.
NRS Section 86.461 permits a limited liability company to purchase and maintain insurance or
make other financial arrangements on behalf of the limited liability company’s current and former
managers, members, employees or agents, or any persons serving or who have served in certain
capacities at the request of the limited liability company, for any liability or expense incurred
by them in their capacities as managers, members, employees or agents or arising out of their
status as such, whether or not the limited liability company has the authority to indemnify him or
her against such liability and expenses.
The limited liability company agreements of each of Diamond Resorts Holdings, LLC, Chestnut
Farms, LLC and Diamond Resorts Polo Development, LLC provides for the indemnification of the
managers and members of each such company from and against any loss, expense, damage or injury
suffered or sustained in connection with the business of the company to the fullest extent provided
or permitted by the NRS.
The limited liability company agreement of Diamond Resorts Parent, LLC indemnifies board
members and officers against any loss, expense, damage or injury incurred by a board member or
officer acting in a manner believed in good faith to be in the best interests of the company, in
connection with the formation, operation and/or management of the company, the company’s purchase
or operation of property, or as a result of the board member or officer agreeing to act as a board
member or officer of the company or any subsidiary. The board member or officer will have a right
to employ, at the expense of the company, separate counsel of such person’s choice in such action,
suit or proceeding and the company shall advance the reasonable out-of-pocket expenses in
connection therewith. The satisfaction of the obligations of the company’s indemnification
obligations will be limited to the assets of the company, and no member will have any personal
liability on account thereof. The company may indemnify and advance expenses to an employee or
agent of the company who is not a board member or officer to the same or to a greater extent as the
company may indemnify and advance expenses to a board member of officer.
Washington Registrant
Mazatlan Development Inc. is incorporated under the laws of Washington.
Sections 23B.08.510 and 23B.08.570 of the Washington Business Corporation Act (the “WBCA”)
authorize Washington corporations to indemnify their directors, officers, employees and agents
under certain circumstances against expenses and liabilities incurred in legal proceedings
involving such person as a result of their service in such capacities. Section 23B.08.560 of the
WBCA authorizes a corporation by provision in its articles of incorporation, bylaws or a
shareholder resolution to agree to indemnify a director and obligate itself to advance or reimburse
expenses without regard to the provisions of Sections 23B.08.510 through 23B.08.550; provided,
however that no such indemnification shall be made for or on account of any (a) acts or omissions
of a director that involve intentional misconduct or a knowing violation of law, (b) conduct in
violation of Section 23B.08.310 of the WBCA (relating to unlawful distributions) or (c) any
transaction from which a director personally received a benefit in money, property or services to
which the director was not legally entitled.
The bylaws of Mazatlan Development Inc. provide that the corporation will indemnify directors
and officers to the fullest extent authorized by the WBCA against all expense, liability and loss
actually and reasonably incurred or suffered in connection with actual or threatened action, suit
or proceeding, whether civil, criminal, administrative or investigative. The corporation shall
indemnify any such director or officer only if such proceeding was authorized by the board of
directors of the corporation. The payment of all expenses in advance of the final disposition of a
proceeding shall be made only on behalf of such director or officer, to repay all amounts so
advanced if it shall ultimately be determined that such director or officer is not entitled to be
indemnified. If a claim for indemnification is not paid in full by the corporation within sixty
(60) days after a written claim has been
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received, except in the case of a claim for expenses incurred in defending a proceeding in
advance of its final disposition, in which case the applicable period shall be twenty (20) days,
the claimant may at any time thereafter bring suit against the corporation to recover the unpaid
amount of the claim and, to the extent successful, the claimant shall be entitled to be paid the
expense of prosecuting such claim.
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Table of Contents
Item 21. Exhibits and Financial Statement Schedules.
| Exhibit | Description | |
2.1**
|
Asset Purchase Agreement, dated as of August 31, 2010, by and between ILX Acquisition, Inc. and ILX Resorts Incorporated and certain related entities identified therein. (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
2.2**
|
Securities Purchase Agreement, dated as of June 17, 2010, by and between Diamond Resorts Parent, LLC and DRP Holdco, LLC (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
2.3**
|
Securities Purchase Agreement, dated as of February 18, 2011, by and between Diamond Resorts Parent, LLC and the purchasers named therein (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
3.1*
|
Articles of Incorporation of Diamond Resorts Corporation, as amended (f/k/a Sunterra Corporation; f/k/a Signature Resorts, Inc.; f/k/a KGK Resorts, Inc.) | |
3.2*
|
Amended and Restated Bylaws of Diamond Resorts Corporation, as amended (f/k/a Sunterra Corporation; f/k/a Signature Resorts, Inc.; f/k/a KGK Resorts, Inc.) | |
3.3*
|
Articles of Organization of Diamond Resorts Parent, LLC | |
3.4**
|
Third Amended and Restated Operating Agreement of Diamond Resorts Parent, LLC | |
3.5*
|
Articles of Organization of Diamond Resorts Holdings, LLC, as amended (f/k/a DR Resort Holdings, LLC) | |
3.6*
|
Operating Agreement of Diamond Resorts Holdings, LLC (f/k/a DR Resort Holdings, LLC) | |
3.7*
|
Certificate of Incorporation of AKGI-St. Maarten N.V. | |
3.8*
|
Bylaws of AKGI-St. Maarten N.V. | |
3.9*
|
Articles of Organization of Chestnut Farms, LLC | |
3.10*
|
Limited Liability Company Agreement of Chestnut Farms, LLC | |
3.11*
|
Certificate of Formation of Cumberland Gate, LLC | |
3.12*
|
Limited Liability Company Agreement of Cumberland Gate, LLC | |
3.13*
|
Certificate of Formation of Diamond Resorts California Collection Development, LLC, as amended (f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra Development II, LLC; f/k/a Club Sunterra Development St. Maarten, LLC; f/k/a Sunterra Texas Development, LLC) | |
3.14*
|
First Amended and Restated Limited Liability Company Operating Agreement of Diamond Resorts California Collection Development, LLC (f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra Development II, LLC; f/k/a Club Sunterra Development St. Maarten, LLC; f/k/a Sunterra Texas Development, LLC) | |
3.15*
|
Certificate of Formation of Diamond Resorts Citrus Share Holding, LLC, as amended (f/k/a Sunterra Citrus Share Holding, LLC; f/k/a Sunterra South Marketing, LLC) | |
3.16*
|
Limited Liability Company Agreement of Diamond Resorts Citrus Share Holding, LLC, as amended (f/k/a Sunterra Citrus Share Holding, LLC; f/k/a Sunterra South Marketing, LLC) | |
3.17*
|
Certificate of Formation of Diamond Resorts Coral Sands Development, LLC, as amended (f/k/a Sunterra Coral Sands Development, LLC) | |
3.18*
|
Limited Liability Company Agreement of Diamond Resorts Coral Sands Development, LLC (f/k/a Sunterra Coral Sands Development, LLC) | |
3.19*
|
Certificate of Formation of Diamond Resorts Cypress Pointe I Development, LLC, as amended (f/k/a Sunterra Cypress Pointe I Development, LLC) | |
3.20*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe I Development, LLC (f/k/a Sunterra Cypress Pointe I Development, LLC) | |
3.21*
|
Certificate of Formation of Diamond Resorts Cypress Pointe II Development, LLC, as amended (f/k/a Sunterra Cypress Pointe II Development, LLC) | |
3.22*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe II Development, LLC (f/k/a Sunterra Cypress Pointe II Development, LLC) | |
3.23*
|
Certificate of Formation of Diamond Resorts Cypress Pointe III Development, LLC, as amended (f/k/a Sunterra Cypress Pointe III Development, LLC) | |
3.24*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe III Development, LLC (f/k/a Sunterra Cypress Pointe III Development, LLC) |
II-11
Table of Contents
| Exhibit | Description | |
3.25*
|
Certificate of Formation of Diamond Resorts Daytona Development, LLC, as amended (f/k/a Sunterra Daytona Development, LLC; f/k/a Sunterra Bent Creek Golf Course Development, LLC) | |
3.26*
|
Limited Liability Company Agreement of Diamond Resorts Daytona Development, LLC (f/k/a Sunterra Daytona Development, LLC; f/k/a Sunterra Bent Creek Golf Course Development, LLC) | |
3.27*
|
Certificate of Incorporation of Diamond Resorts Centralized Services Company, as amended (f/k/a Sunterra Centralized Services Company) | |
3.28*
|
Bylaws of Diamond Resorts Centralized Services Company (f/k/a Sunterra Centralized Services Company) | |
3.29*
|
Certificate of Incorporation of Diamond Resorts Developer and Sales Holding Company, as amended (f/k/a Sunterra Developer and Sales Holding Company; f/k/a Avcom International, Inc.; f/k/a American Vacation Company, Inc.) | |
3.30*
|
Bylaws of Diamond Resorts Developer and Sales Holding Company (f/k/a Sunterra Developer and Sales Holding Company; f/k/a Avcom International, Inc.; f/k/a American Vacation Company, Inc.) | |
3.31*
|
Certificate of Formation of Diamond Resorts Epic Mortgage Holdings, LLC, as amended (f/k/a Sunterra Epic Mortgage Holdings, LLC; f/k/a Sunterra KGK Partners Finance, LLC) | |
3.32*
|
Limited Liability Company Agreement of Diamond Resorts Epic Mortgage Holdings, LLC (f/k/a Sunterra Epic Mortgage Holdings, LLC; f/k/a Sunterra KGK Partners Finance, LLC) | |
3.33*
|
Certificate of Formation of Diamond Resorts Fall Creek Development, LLC, as amended (f/k/a Sunterra Fall Creek Development, LLC) | |
3.34*
|
Limited Liability Company Agreement of Diamond Resorts Fall Creek Development, LLC (f/k/a Sunterra Fall Creek Development, LLC) | |
3.35*
|
Certificate of Incorporation of Diamond Resorts Finance Holding Company, as amended (f/k/a Sunterra Finance Holding Company) | |
3.36*
|
Bylaws of Diamond Resorts Finance Holding Company (f/k/a Sunterra Finance Holding Company) | |
3.37*
|
Articles of Incorporation of Diamond Resorts Financial Services, Inc., as amended (f/k/a Sunterra Financial Services, Inc.) | |
3.38*
|
Bylaws of Diamond Resorts Financial Services, Inc. (f/k/a Sunterra Financial Services, Inc.) | |
3.39*
|
Certificate of Formation of Diamond Resorts Grand Beach I Development, LLC, as amended (f/k/a Sunterra Grand Beach I Development, LLC) | |
3.40*
|
Limited Liability Company Agreement of Diamond Resorts Grand Beach I Development, LLC (f/k/a Sunterra Grand Beach I Development, LLC) | |
3.41*
|
Certificate of Formation of Diamond Resorts Grand Beach II Development, LLC, as amended (f/k/a Sunterra Grand Beach II Development, LLC) | |
3.42*
|
Limited Liability Company Agreement of Diamond Resorts Grand Beach II Development, LLC (f/k/a Sunterra Grand Beach II Development, LLC) | |
3.43*
|
Certificate of Formation of Diamond Resorts Greensprings Development, LLC, as amended (f/k/a Sunterra Greensprings Development, LLC) | |
3.44*
|
Limited Liability Company Agreement of Diamond Resorts Greensprings Development, LLC (f/k/a Sunterra Greensprings Development, LLC) | |
3.45*
|
Certificate of Formation of Diamond Resorts Hawaii Collection Development, LLC, as amended (f/k/a Club Sunterra Development Hawaii, LLC; f/k/a Club Sunterra Development III, LLC; f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra MergerClub, LLC; f/k/a Sunterra East Marketing, LLC) | |
3.46*
|
Amended and Restated Limited Liability Company Agreement of Diamond Resorts Hawaii Collection Development, LLC (f/k/a Club Sunterra Development Hawaii, LLC; f/k/a Club Sunterra Development III, LLC; f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra MergerClub, LLC; f/k/a Sunterra East Marketing, LLC) |
II-12
Table of Contents
| Exhibit | Description | |
3.47*
|
Certificate of Formation of Diamond Resorts Hilton Head Development, LLC, as amended (f/k/a Sunterra Hilton Head Development, LLC; f/k/a Sunterra Bent Creek Village Development, LLC) | |
3.48*
|
Limited Liability Company Agreement of Diamond Resorts Hilton Head Development, LLC (f/k/a Sunterra Hilton Head Development, LLC; f/k/a Sunterra Bent Creek Village Development, LLC) | |
3.49*
|
Articles of Incorporation of Diamond Resorts International Club, Inc., as amended (f/k/a Club Sunterra, Inc.) | |
3.50*
|
Bylaws of Diamond Resorts International Club, Inc. (f/k/a Club Sunterra, Inc.) | |
3.51*
|
Articles of Incorporation of Diamond Resorts International Marketing, Inc., as amended (f/k/a Resort Marketing International, Inc.) | |
3.52*
|
Bylaws of Diamond Resorts International Marketing, Inc., as amended (f/k/a Resort Marketing International, Inc.) | |
3.53*
|
Certificate of Formation of Diamond Resorts Las Vegas Development, LLC, as amended (f/k/a Sunterra Las Vegas Development, LLC; f/k/a Sunterra Polynesian Isles Development, LLC) | |
3.54*
|
Limited Liability Company Agreement of Diamond Resorts Las Vegas Development, LLC (f/k/a Sunterra Las Vegas Development, LLC; f/k/a Sunterra Polynesian Isles Development, LLC) | |
3.55*
|
Certificate of Incorporation of Diamond Resorts Management & Exchange Holding Company, as amended (f/k/a Sunterra Management and Exchange Holding Company) | |
3.56*
|
Bylaws of Diamond Resorts Management & Exchange Holding Company (f/k/a Sunterra Management and Exchange Holding Company) | |
3.57*
|
Articles of Incorporation of Diamond Resorts Management, Inc., as amended (f/k/a Sunterra Resort Management, Inc.; f/k/a RPM Management, Inc.) | |
3.58*
|
Bylaws of Diamond Resorts Management, Inc. (f/k/a Sunterra Resort Management, Inc.; f/k/a RPM Management, Inc.) | |
3.59*
|
Certificate of Formation of Diamond Resorts Mortgage Holdings, LLC, as amended (f/k/a Sunterra Mortgage Holdings, LLC) | |
3.60*
|
Limited Liability Company Agreement of Diamond Resorts Mortgage Holdings, LLC (f/k/a Sunterra Mortgage Holdings, LLC) | |
3.61*
|
Certificate of Formation of Diamond Resorts Palm Springs Development, LLC, as amended (f/k/a Sunterra Palm Springs Development, LLC; f/k/a Sunterra North Marketing, LLC) | |
3.62*
|
Limited Liability Company Agreement of Diamond Resorts Palm Springs Development, LLC, as amended (f/k/a Sunterra Palm Springs Development, LLC; f/k/a Sunterra North Marketing, LLC) | |
3.63*
|
Certificate of Formation of Diamond Resorts Poco Diablo Development, LLC, as amended (f/k/a Sunterra Poco Diablo Development, LLC) | |
3.64*
|
Limited Liability Company Agreement of Diamond Resorts Poco Diablo Development, LLC, as amended (f/k/a Sunterra Poco Diablo Development, LLC) | |
3.65*
|
Certificate of Formation of Diamond Resorts Poipu Development, LLC, as amended (f/k/a Sunterra Poipu Development, LLC; f/k/a Sunterra Lake Tahoe Development, LLC) | |
3.66*
|
Limited Liability Company Agreement of Diamond Resorts Poipu Development, LLC (f/k/a Sunterra Poipu Development, LLC; f/k/a Sunterra Lake Tahoe Development, LLC) | |
3.67*
|
Articles of Organization of Diamond Resorts Polo Development, LLC, as amended (f/k/a Polo Sunterra Development, LLC) | |
3.68*
|
Operating Agreement of Diamond Resorts Polo Development, LLC (f/k/a Polo Sunterra Development, LLC) | |
3.69*
|
Certificate of Formation of Diamond Resorts Port Royal Development, LLC, as amended (f/k/a Sunterra Port Royal Development, LLC) |
II-13
Table of Contents
| Exhibit | Description | |
3.70*
|
Limited Liability Company Agreement of Diamond Resorts Port Royal Development, LLC (f/k/a Sunterra Port Royal Development, LLC) | |
3.71*
|
Certificate of Formation of Diamond Resorts Powhatan Development, LLC, as amended (f/k/a Sunterra Powhatan Development, LLC) | |
3.72*
|
Limited Liability Company Agreement of Diamond Resorts Powhatan Development, LLC (f/k/a Sunterra Powhatan Development, LLC) | |
3.73*
|
Certificate of Formation of Diamond Resorts Residual Assets Development, LLC, as amended (f/k/a Sunterra Residual Assets Development, LLC) | |
3.74*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets Development, LLC (f/k/a Sunterra Residual Assets Development, LLC) | |
3.75*
|
Certificate of Formation of Diamond Resorts Residual Assets Finance, LLC, as amended (f/k/a Sunterra Residual Assets Finance, LLC) | |
3.76*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets Finance, LLC (f/k/a Sunterra Residual Assets Finance, LLC) | |
3.77*
|
Certificate of Formation of Diamond Resorts Residual Assets M&E, LLC, as amended (f/k/a Sunterra Residual Assets M&E, LLC) | |
3.78*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets M&E, LLC (f/k/a Sunterra Residual Assets M&E, LLC) | |
3.79*
|
Certificate of Formation of Diamond Resorts Ridge on Sedona Development, LLC, as amended (f/k/a Sunterra Ridge on Sedona Development, LLC) | |
3.80*
|
Limited Liability Company Agreement of Diamond Resorts Ridge on Sedona Development, LLC, as amended (f/k/a Sunterra Ridge on Sedona Development, LLC) | |
3.81*
|
Certificate of Formation of Diamond Resorts Ridge Pointe Development, LLC, as amended (f/k/a Sunterra Ridge Pointe Development, LLC) | |
3.82*
|
Limited Liability Company Agreement of Diamond Resorts Ridge Pointe Development, LLC (f/k/a Sunterra Ridge Pointe Development, LLC) | |
3.83*
|
Certificate of Formation of Diamond Resorts San Luis Bay Development, LLC, as amended (f/k/a Sunterra San Luis Bay Development, LLC) | |
3.84*
|
Limited Liability Company Agreement of Diamond Resorts San Luis Bay Development, LLC (f/k/a Sunterra San Luis Bay Development, LLC) | |
3.85*
|
Certificate of Formation of Diamond Resorts Santa Fe Development, LLC, as amended (f/k/a Sunterra Santa Fe Development, LLC) | |
3.86*
|
Limited Liability Company Agreement of Diamond Resorts Santa Fe Development, LLC (f/k/a Sunterra Santa Fe Development, LLC) | |
3.87*
|
Certificate of Formation of Diamond Resorts Scottsdale Development, LLC, as amended (f/k/a Sunterra Scottsdale Development, LLC; f/k/a Sunterra Poipu GP Development, LLC) | |
3.88*
|
Limited Liability Company Agreement of Diamond Resorts Scottsdale Development, LLC (f/k/a Sunterra Scottsdale Development, LLC; f/k/a Sunterra Poipu GP Development, LLC) | |
3.89*
|
Certificate of Formation of Diamond Resorts Sedona Springs Development, LLC, as amended (f/k/a Sunterra Sedona Springs Development, LLC) | |
3.90*
|
Limited Liability Company Agreement of Diamond Resorts Sedona Springs Development, LLC, as amended (f/k/a Sunterra Sedona Springs Development, LLC) | |
3.91*
|
Certificate of Formation of Diamond Resorts Sedona Summit Development, LLC, as amended (f/k/a Sunterra Sedona Summit Development, LLC) | |
3.92*
|
Limited Liability Company Agreement of Diamond Resorts Sedona Summit Development, LLC, as amended (f/k/a Sunterra Sedona Summit Development, LLC) | |
II-14
Table of Contents
| Exhibit | Description | |
3.93*
|
Certificate of Formation of Diamond Resorts St. Croix Development, LLC, as amended (f/k/a Sunterra St. Croix Development, LLC) | |
3.94*
|
Limited Liability Company Agreement of Diamond Resorts St. Croix Development, LLC (f/k/a Sunterra St. Croix Development, LLC) | |
3.95*
|
Certificate of Formation of Diamond Resorts Steamboat Development, LLC, as amended (f/k/a Sunterra Steamboat Development, LLC) | |
3.96*
|
Limited Liability Company Agreement of Diamond Resorts Steamboat Development, LLC (f/k/a Sunterra Steamboat Development, LLC) | |
3.97*
|
Certificate of Formation of Diamond Resorts Tahoe Beach & Ski Development, LLC, as amended (f/k/a Sunterra Tahoe Beach & Ski Development, LLC) | |
3.98*
|
Limited Liability Company Agreement of Diamond Resorts Tahoe Beach & Ski Development, LLC (f/k/a Sunterra Tahoe Beach & Ski Development, LLC) | |
3.99*
|
Certificate of Formation of Diamond Resorts U.S. Collection Development, LLC, as amended (f/k/a Club Sunterra Development, LLC; f/k/a Club Sunterra, LLC) | |
3.100*
|
First Amended and Restated Limited Liability Company Operating Agreement of Diamond Resorts U.S. Collection Development, LLC (f/k/a Club Sunterra Development, LLC; Club Sunterra, LLC) | |
3.101*
|
Certificate of Formation of Diamond Resorts Villa Mirage Development, LLC, as amended (f/k/a Sunterra Villa Mirage Development, LLC) | |
3.102*
|
Limited Liability Company Agreement of Diamond Resorts Villa Mirage Development, LLC, as amended (f/k/a Sunterra Villa Mirage Development, LLC) | |
3.103*
|
Certificate of Formation of Diamond Resorts Villas of Sedona Development, LLC, as amended (f/k/a Sunterra Villas of Sedona Development, LLC) | |
3.104*
|
Limited Liability Company Agreement of Diamond Resorts Villas of Sedona Development, LLC, as amended (f/k/a Sunterra Villas of Sedona Development, LLC) | |
3.105*
|
Certificate of Formation of Diamond Resorts West Maui Development, LLC, as amended (f/k/a Sunterra West Maui Development, LLC; f/k/a Sunterra West Marketing, LLC) | |
3.106*
|
Limited Liability Company Agreement of Diamond Resorts West Maui Development, LLC, as amended (f/k/a Sunterra West Maui Development, LLC; f/k/a Sunterra West Marketing, LLC) | |
3.107*
|
Articles of Organization of Foster Shores, LLC | |
3.108*
|
Limited Liability Company Agreement of Foster Shores, LLC | |
3.109*
|
Articles of Incorporation of George Acquisition Subsidiary, Inc. | |
3.110*
|
Bylaws of George Acquisition Subsidiary, Inc. | |
3.111*
|
Certificate of Formation of Ginger Creek, LLC | |
3.112*
|
Limited Liability Company Agreement of Ginger Creek, LLC | |
3.113*
|
Certificate of Formation of Grand Escapes, LLC | |
3.114*
|
Limited Liability Company Agreement of Grand Escapes, LLC | |
3.115*
|
Certificate of Formation of International Timeshares Marketing, LLC, as amended | |
3.116*
|
Limited Liability Company Agreement of International Timeshares Marketing, LLC, as amended | |
3.117*
|
Articles of Organization of Lake Tahoe Resort Partners, LLC | |
3.118*
|
Operating Agreement of Lake Tahoe Resort Partners, LLC, as amended | |
3.119*
|
Articles of Incorporation of Mazatlan Development, Inc., as amended (f/k/a Mazatlan Villas, Inc.) | |
3.120*
|
Bylaws of Mazatlan Development, Inc. (f/k/a Mazatlan Villas, Inc.) | |
3.121*
|
Articles of Incorporation of MMG Development Corp. | |
3.122*
|
Bylaws of MMG Development Corp. | |
II-15
Table of Contents
| Exhibit | Description | |
3.123*
|
Certificate of Limited Partnership of Poipu Resort Partners, L.P., as amended (f/k/a Pointe Resort Partners) | |
3.124*
|
Amended and Restated Agreement of Limited Partnership of Poipu Resort Partners, L.P. (f/k/a Pointe Resort Partners) | |
3.125*
|
Articles of Incorporation of Resort Management International, Inc. | |
3.126*
|
Bylaws of Resort Management International, Inc., as amended | |
3.127*
|
Articles of Incorporation of Resorts Development International, Inc. | |
3.128*
|
Bylaws of Resorts Development International, Inc. | |
3.129*
|
Articles of Organization of Walsham Lake, LLC | |
3.130*
|
Limited Liability Company Agreement of Walsham Lake, LLC | |
3.131*
|
Second Amended and Restated Certificate of Limited Partnership of West Maui Resort Partners, L.P., as amended (f/k/a West Maui Partners, L.P.) | |
3.132*
|
Second Amended and Restated Agreement of Limited Partnership of West Maui Resort Partners, L.P. (f/k/a West Maui Partners, L.P.) | |
4.1*
|
Indenture, dated as of August 13, 2010, among Diamond Resorts Corporation, Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee | |
4.2*
|
Registration Rights Agreement, dated as of August 13, 2010, among Diamond Resorts Corporation, Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, the subsidiary guarantors named therein, Credit Suisse Securities (USA) LLC, as representative of the initial purchasers, Banc of America Securities LLC, as representative of the initial purchasers, and Guggenheim Securities, LLC, as representative of the initial purchasers | |
4.3*
|
Security Agreement, dated August 13, 2010, among Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, Diamond Resorts Corporation, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as collateral agent | |
4.4*
|
Form of 12.00% Senior Secured Notes due 2018 (included in Exhibit 4.1) | |
5.1**
|
Opinion of Katten Muchin Rosenman LLP | |
5.2**
|
Opinion of Ballard Spahr LLP | |
5.3**
|
Opinion of Holland & Knight LLP | |
5.4**
|
Opinion of Imanaka Kudo & Fujimoto | |
5.5**
|
Opinion of Summers Compton Wells PC | |
10.1**
|
Second Amended and Restated Sale Agreement, dated as of August 31, 2010, by and between Diamond Resorts Depositor 2008 LLC and Diamond Resorts Issuer 2008 LLC, and acknowledged and agreed to by Diamond Resorts Finance Holding Company | |
10.2**
|
Second Amended and Restated Purchase Agreement, dated as of August 31, 2010, by and between Diamond Resorts Finance Holding Company and Diamond Resorts Depositor 2008 LLC | |
10.3**
|
Third Amended and Restated Indenture, dated as of August 31, 2010, by and among Diamond Resorts Issuer 2008 LLC, Diamond Resorts Financial Services, Inc., Wells Fargo Bank, National Association and Credit Suisse AG, Cayman Islands Branch | |
10.4**
|
Indenture, dated as of October 1, 2009, by and among Diamond Resorts Owner Trust 2009-1, Diamond Resorts Financial Services, Inc. and Wells Fargo Bank, National Association | |
10.5**
|
Note Purchase Agreement, dated as of October 9, 2009, by and between Diamond Resorts Owner Trust 2009-1 and Diamond Resorts Corporation, and confirmed and accepted by Credit Suisse Securities (USA) LLC |
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Table of Contents
| Exhibit | Description | |
10.6**
|
Third Amended and Restated Securityholders Agreement, dated as of February 18, 2011, by and among Diamond Resorts Parent, LLC and the other parties named therein | |
10.7**
|
Amended and Restated Registration Rights Agreement, dated as of June 17, 2010, by and among Diamond Resorts Parent, LLC and the other parties named therein, as amended | |
10.8**
|
Receivables Loan and Security Agreement, dated as of August 31, 2010, by and between Textron Financial Corporation and ILX Acquisition, Inc. | |
10.9**
|
Inventory Loan and Security Agreement, dated as of August 31, 2010, by and between Textron Financial Corporation and ILX Acquisition, Inc. | |
10.10**
|
Loan Sale and Servicing Agreement, dated as of April 30, 2010, by and among DRI Quorum 2010 LLC, Quorum Federal Credit Union, Diamond Resorts Financial Services, Inc. and Wells Fargo Bank, National Association | |
10.11**
|
Purchase Agreement, dated as of April 30, 2010, by and between Diamond Resorts Finance Holding Company and DRI Quorum 2010 LLC | |
10.12**
|
Credit and Security Agreement, dated as of November 23, 2010, by and among Tempus Acquisition, LLC, the lenders from time to time party thereto and Guggenheim Corporate Funding, LLC | |
10.13**
|
Pledge Agreement, dated as of November 23, 2010, by and between Tempus Holdings, LLC and Guggenheim Corporate Funding, LLC, as administrative agent for the lenders identified therein | |
10.14**
|
Guaranty, dated as of November 23, 2010, by Diamond Resorts Corporation, in favor of Guggenheim Corporate Funding, LLC, as administrative agent for the lenders identified therein | |
10.15**
|
Lease, dated as of January 16, 2008, by and between H/MX Health Management Solutions, Inc. and Diamond Resorts Corporation | |
10.16**†
|
Terms of Engagement Agreement for Individual Independent Contractor, dated as of June 2009, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC, as amended by the Extension Agreement, effective as of June 1, 2010, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC, and the Amendment to Extension Agreement, dated as of January 1, 2011, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC | |
10.17**†
|
Terms of Additional Engagement Agreement for Individual Independent Contractor, dated as of January 1, 2011, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC | |
10.18**†
|
Homeowner Association Oversight, Consulting and Executive Management Services Agreement, dated as of December 31, 2010, by and between Diamond Resorts Corporation and Hospitality Management and Consulting Service, L.L.C. | |
12.1*
|
Statement of Computation of Ratio of Earnings to Fixed Charges | |
21.1*
|
Subsidiaries of Diamond Resorts Parent, LLC | |
23.1*
|
Consent of BDO USA, LLP | |
23.2**
|
Consent of Katten Muchin Rosenman LLP (included as part of its opinion filed as Exhibit 5.1 hereto) | |
23.2**
|
Consent of Ballard Spahr LLP (included as part of its opinion filed as Exhibit 5.2 hereto) | |
23.3**
|
Consent of Holland & Knight LLP (included as part of its opinion filed as Exhibit 5.3 hereto) | |
23.4**
|
Consent of Imanaka Kudo & Fujimoto LLP (included as part of its opinion filed as Exhibit 5.4 hereto) | |
23.5**
|
Consent of Summers Compton Wells PC LLP (included as part of its opinion filed as Exhibit 5.5 hereto) |
II-17
Table of Contents
| Exhibit | Description | |
24.1*
|
Powers of Attorney (included in the signature pages of this registration statement) | |
25.1**
|
Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wells Fargo Bank, National Association, with respect to the Indenture governing the 12.00% Senior Secured Notes due 2018 | |
99.1**
|
Form of Letter of Transmittal | |
99.2**
|
Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees | |
99.3**
|
Form of Letter to Clients | |
99.4**
|
Form of Notice of Guaranteed Delivery |
| * | Filed herewith | |
| ** | To be filed by amendment | |
| † | Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this registration statement |
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Item 22. Undertakings.
| (a) | Each of the undersigned registrants hereby undertakes: |
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; | ||
| (ii) | to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and | ||
| (iii) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (2) | that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; | ||
| (3) | to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; | ||
| (4) | that, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use; and | ||
| (5) | that, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) | any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
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| (ii) | any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; | ||
| (iii) | the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and | ||
| (iv) | any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (b) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. | |
| (c) | Each of the undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. | |
| (d) | Each of the undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. |
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
| DIAMOND RESORTS PARENT, LLC |
||||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chairman of the Board and Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
March 11, 2011 | ||
/s/ David F. Palmer
|
President, Chief Financial Officer (Principal Financial Officer) and Manager |
March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer (Principal Accounting Officer) of Diamond Resorts Corporation, the subsidiary of Diamond Resorts Parent, LLC |
March 11, 2011 | ||
/s/ Lowell D. Kraff
|
Manager | March 11, 2011 | ||
/s/ B. Scott Minerd
|
Manager | March 11, 2011 | ||
/s/ Zachary Warren
|
Manager | March 11, 2011 |
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
| DIAMOND RESORTS HOLDINGS, LLC |
||||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chairman of the Board and Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Sole Manager |
March 11, 2011 | ||
/s/ David F. Palmer
|
President, Chief Financial Officer (Principal Financial Officer) |
March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer (Principal Accounting Officer) of Diamond Resorts Corporation, the subsidiary of Diamond Resorts Parent, LLC | March 11, 2011 |
S-2
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
| DIAMOND RESORTS CORPORATION |
||||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chairman of the Board and Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Sole Director |
March 11, 2011 | ||
/s/ David F. Palmer
|
President and Chief Financial Officer (Principal Financial Officer) |
March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer (Principal Accounting Officer) |
March 11, 2011 |
S-3
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
REGISTRANTS (as listed on the attached Schedule I of Subsidiary Registrants, the “Schedule I Registrants”) |
||||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chief Executive Officer
(Principal Executive Officer) of each of the Schedule I Registrants, and Sole Manager or Sole Director, as applicable, of each of the Schedule I Registrants |
March 11, 2011 | ||
/s/ David F. Palmer
|
Chief Financial Officer (Principal Financial Officer) of Diamond Resorts Corporation, the indirect parent of each of the Schedule I Registrants | March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer (Principal Accounting Officer) of Diamond Resorts Corporation, the indirect parent of each of the Schedule I Registrants | March 11, 2011 |
S-4
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
| POIPU RESORT PARTNERS, L.P. |
||||
| By: | Diamond Resorts Poipu Development, LLC, its general partner | |||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chief Executive Officer
(Principal Executive Officer) of Diamond Resorts Poipu Development, LLC, the general partner of Poipu Resort Partners, L.P. |
March 11, 2011 | ||
/s/ David F. Palmer
|
Chief Financial Officer (Principal Financial Officer) of Diamond Resorts Poipu Development, LLC, the general partner of Poipu Resort Partners, L.P. | March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer
(Principal Accounting Officer) of Diamond Resorts Poipu Development, LLC, the general partner of Poipu Resort Partners, L.P. |
March 11, 2011 |
S-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Las Vegas, State of Nevada, on this 11th day of March, 2011.
| WEST MAUI RESORT PARTNERS, L.P. |
||||
| By: | Diamond Resorts West Maui Development, LLC, its general partner | |||
| By: | /s/ Stephen J. Cloobeck | |||
| Stephen J. Cloobeck | ||||
| Chief Executive Officer | ||||
SIGNATURES AND POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen J. Cloobeck and David F. Palmer and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this registration
statement, including any filings pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and
anything necessary to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
| Name | Title | Date | ||
/s/ Stephen J. Cloobeck
|
Chief Executive Officer
(Principal Executive Officer) of Diamond Resorts West Maui Development, LLC, the general partner of West Maui Resort Partners, L.P. |
March 11, 2011 | ||
/s/ David F. Palmer
|
Chief Financial Officer (Principal Financial Officer) of Diamond Resorts West Maui Development, LLC, the general partner of West Maui Resort Partners, L.P. | March 11, 2011 | ||
/s/ Lisa Gann
|
Chief Accounting Officer (Principal Accounting Officer) of Diamond Resorts West Maui Development, LLC, the general partner of West Maui Resort Partners, L.P. | March 11, 2011 |
S-6
Table of Contents
SCHEDULE 1
SUBSIDIARY REGISTRANTS
AKGI-St. Maarten N.V.
Chestnut Farms, LLC
Cumberland Gate, LLC
Diamond Resorts California Collection Development, LLC
Diamond Resorts Centralized Services Company
Diamond Resorts Citrus Share Holding, LLC
Diamond Resorts Coral Sands Development, LLC
Diamond Resorts Cypress Pointe I Development, LLC
Diamond Resorts Cypress Pointe II Development, LLC
Diamond Resorts Cypress Pointe III Development, LLC
Diamond Resorts Daytona Development, LLC
Diamond Resorts Developer and Sales Holding Company
Diamond Resorts Epic Mortgage Holdings, LLC
Diamond Resorts Fall Creek Development, LLC
Diamond Resorts Finance Holding Company
Diamond Resorts Financial Services, Inc.
Diamond Resorts Grand Beach I Development, LLC
Diamond Resorts Grand Beach II Development, LLC
Diamond Resorts Greensprings Development, LLC
Diamond Resorts Hawaii Collection Development, LLC
Diamond Resorts Hilton Head Development, LLC
Diamond Resorts International Club, Inc.
Diamond Resorts International Marketing, Inc.
Diamond Resorts Las Vegas Development, LLC
Diamond Resorts Management and Exchange Holding Company
Diamond Resorts Management, Inc.
Diamond Resorts Mortgage Holdings, LLC
Diamond Resorts Palm Springs Development, LLC
Diamond Resorts Poco Diablo Development, LLC
Diamond Resorts Poipu Development, LLC
Diamond Resorts Polo Development, LLC
Diamond Resorts Port Royal Development, LLC
Diamond Resorts Powhatan Development, LLC
Diamond Resorts Residual Assets Development, LLC
Diamond Resorts Residual Assets Finance, LLC
S-7
Table of Contents
Diamond Resorts Residual Assets M&E, LLC
Diamond Resorts Ridge on Sedona Development, LLC
Diamond Resorts Ridge Pointe Development, LLC
Diamond Resorts San Luis Bay Development, LLC
Diamond Resorts Santa Fe Development, LLC
Diamond Resorts Scottsdale Development, LLC
Diamond Resorts Sedona Springs Development, LLC
Diamond Resorts Sedona Summit Development, LLC
Diamond Resorts St. Croix Development, LLC
Diamond Resorts Steamboat Development, LLC
Diamond Resorts Tahoe Beach & Ski Development, LLC
Diamond Resorts U.S. Collection Development, LLC
Diamond Resorts Villa Mirage Development, LLC
Diamond Resorts Villas of Sedona Development, LLC
Diamond Resorts West Maui Development, LLC
Foster Shores, LLC
George Acquisition Subsidiary, Inc.
Ginger Creek, LLC
Grand Escapes, LLC
International Timeshares Marketing, LLC
Lake Tahoe Resort Partners, LLC
Mazatlan Development Inc.
MMG Development Corp.
Resort Management International, Inc.
Resorts Development International, Inc.
Walsham Lake, LLC
S-8
Table of Contents
EXHIBIT INDEX
| Exhibit | Description | |
2.1**
|
Asset Purchase Agreement, dated as of August 31, 2010, by and between ILX Acquisition, Inc. and ILX Resorts Incorporated and certain related entities identified therein. (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
2.2**
|
Securities Purchase Agreement, dated as of June 17, 2010, by and between Diamond Resorts Parent, LLC and DRP Holdco, LLC (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
2.3**
|
Securities Purchase Agreement, dated as of February 18, 2011, by and between Diamond Resorts Parent, LLC and the purchasers named therein (Certain schedules were omitted and registrant agrees to furnish supplementally a copy of such omitted schedules to the Commission upon request) | |
3.1*
|
Articles of Incorporation of Diamond Resorts Corporation, as amended (f/k/a Sunterra Corporation; f/k/a Signature Resorts, Inc.; f/k/a KGK Resorts, Inc.) | |
3.2*
|
Amended and Restated Bylaws of Diamond Resorts Corporation, as amended (f/k/a Sunterra Corporation; f/k/a Signature Resorts, Inc.; f/k/a KGK Resorts, Inc.) | |
3.3*
|
Articles of Organization of Diamond Resorts Parent, LLC | |
3.4**
|
Third Amended and Restated Operating Agreement of Diamond Resorts Parent, LLC | |
3.5*
|
Articles of Organization of Diamond Resorts Holdings, LLC, as amended (f/k/a DR Resort Holdings, LLC) | |
3.6*
|
Operating Agreement of Diamond Resorts Holdings, LLC (f/k/a DR Resort Holdings, LLC) | |
3.7*
|
Certificate of Incorporation of AKGI-St. Maarten N.V. | |
3.8*
|
Bylaws of AKGI-St. Maarten N.V. | |
3.9*
|
Articles of Organization of Chestnut Farms, LLC | |
3.10*
|
Limited Liability Company Agreement of Chestnut Farms, LLC | |
3.11*
|
Certificate of Formation of Cumberland Gate, LLC | |
3.12*
|
Limited Liability Company Agreement of Cumberland Gate, LLC | |
3.13*
|
Certificate of Formation of Diamond Resorts California Collection Development, LLC, as amended (f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra Development II, LLC; f/k/a Club Sunterra Development St. Maarten, LLC; f/k/a Sunterra Texas Development, LLC) | |
3.14*
|
First Amended and Restated Limited Liability Company Operating Agreement of Diamond Resorts California Collection Development, LLC (f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra Development II, LLC; f/k/a Club Sunterra Development St. Maarten, LLC; f/k/a Sunterra Texas Development, LLC) | |
3.15*
|
Certificate of Formation of Diamond Resorts Citrus Share Holding, LLC, as amended (f/k/a Sunterra Citrus Share Holding, LLC; f/k/a Sunterra South Marketing, LLC) | |
3.16*
|
Limited Liability Company Agreement of Diamond Resorts Citrus Share Holding, LLC, as amended (f/k/a Sunterra Citrus Share Holding, LLC; f/k/a Sunterra South Marketing, LLC) | |
3.17*
|
Certificate of Formation of Diamond Resorts Coral Sands Development, LLC, as amended (f/k/a Sunterra Coral Sands Development, LLC) | |
3.18*
|
Limited Liability Company Agreement of Diamond Resorts Coral Sands Development, LLC (f/k/a Sunterra Coral Sands Development, LLC) | |
3.19*
|
Certificate of Formation of Diamond Resorts Cypress Pointe I Development, LLC, as amended (f/k/a Sunterra Cypress Pointe I Development, LLC) | |
3.20*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe I Development, LLC (f/k/a Sunterra Cypress Pointe I Development, LLC) | |
3.21*
|
Certificate of Formation of Diamond Resorts Cypress Pointe II Development, LLC, as amended (f/k/a Sunterra Cypress Pointe II Development, LLC) | |
3.22*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe II Development, LLC (f/k/a Sunterra Cypress Pointe II Development, LLC) | |
3.23*
|
Certificate of Formation of Diamond Resorts Cypress Pointe III Development, LLC, as amended (f/k/a Sunterra Cypress Pointe III Development, LLC) | |
3.24*
|
Limited Liability Company Agreement of Diamond Resorts Cypress Pointe III Development, LLC (f/k/a Sunterra Cypress Pointe III Development, LLC) |
Table of Contents
| Exhibit | Description | |
3.25*
|
Certificate of Formation of Diamond Resorts Daytona Development, LLC, as amended (f/k/a Sunterra Daytona Development, LLC; f/k/a Sunterra Bent Creek Golf Course Development, LLC) | |
3.26*
|
Limited Liability Company Agreement of Diamond Resorts Daytona Development, LLC (f/k/a Sunterra Daytona Development, LLC; f/k/a Sunterra Bent Creek Golf Course Development, LLC) | |
3.27*
|
Certificate of Incorporation of Diamond Resorts Centralized Services Company, as amended (f/k/a Sunterra Centralized Services Company) | |
3.28*
|
Bylaws of Diamond Resorts Centralized Services Company (f/k/a Sunterra Centralized Services Company) | |
3.29*
|
Certificate of Incorporation of Diamond Resorts Developer and Sales Holding Company, as amended (f/k/a Sunterra Developer and Sales Holding Company; f/k/a Avcom International, Inc.; f/k/a American Vacation Company, Inc.) | |
3.30*
|
Bylaws of Diamond Resorts Developer and Sales Holding Company (f/k/a Sunterra Developer and Sales Holding Company; f/k/a Avcom International, Inc.; f/k/a American Vacation Company, Inc.) | |
3.31*
|
Certificate of Formation of Diamond Resorts Epic Mortgage Holdings, LLC, as amended (f/k/a Sunterra Epic Mortgage Holdings, LLC; f/k/a Sunterra KGK Partners Finance, LLC) | |
3.32*
|
Limited Liability Company Agreement of Diamond Resorts Epic Mortgage Holdings, LLC (f/k/a Sunterra Epic Mortgage Holdings, LLC; f/k/a Sunterra KGK Partners Finance, LLC) | |
3.33*
|
Certificate of Formation of Diamond Resorts Fall Creek Development, LLC, as amended (f/k/a Sunterra Fall Creek Development, LLC) | |
3.34*
|
Limited Liability Company Agreement of Diamond Resorts Fall Creek Development, LLC (f/k/a Sunterra Fall Creek Development, LLC) | |
3.35*
|
Certificate of Incorporation of Diamond Resorts Finance Holding Company, as amended (f/k/a Sunterra Finance Holding Company) | |
3.36*
|
Bylaws of Diamond Resorts Finance Holding Company (f/k/a Sunterra Finance Holding Company) | |
3.37*
|
Articles of Incorporation of Diamond Resorts Financial Services, Inc., as amended (f/k/a Sunterra Financial Services, Inc.) | |
3.38*
|
Bylaws of Diamond Resorts Financial Services, Inc. (f/k/a Sunterra Financial Services, Inc.) | |
3.39*
|
Certificate of Formation of Diamond Resorts Grand Beach I Development, LLC, as amended (f/k/a Sunterra Grand Beach I Development, LLC) | |
3.40*
|
Limited Liability Company Agreement of Diamond Resorts Grand Beach I Development, LLC (f/k/a Sunterra Grand Beach I Development, LLC) | |
3.41*
|
Certificate of Formation of Diamond Resorts Grand Beach II Development, LLC, as amended (f/k/a Sunterra Grand Beach II Development, LLC) | |
3.42*
|
Limited Liability Company Agreement of Diamond Resorts Grand Beach II Development, LLC (f/k/a Sunterra Grand Beach II Development, LLC) | |
3.43*
|
Certificate of Formation of Diamond Resorts Greensprings Development, LLC, as amended (f/k/a Sunterra Greensprings Development, LLC) | |
3.44*
|
Limited Liability Company Agreement of Diamond Resorts Greensprings Development, LLC (f/k/a Sunterra Greensprings Development, LLC) | |
3.45*
|
Certificate of Formation of Diamond Resorts Hawaii Collection Development, LLC, as amended (f/k/a Club Sunterra Development Hawaii, LLC; f/k/a Club Sunterra Development III, LLC; f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra MergerClub, LLC; f/k/a Sunterra East Marketing, LLC) | |
3.46*
|
Amended and Restated Limited Liability Company Agreement of Diamond Resorts Hawaii Collection Development, LLC (f/k/a Club Sunterra Development Hawaii, LLC; f/k/a Club Sunterra Development III, LLC; f/k/a Club Sunterra Development California, LLC; f/k/a Club Sunterra MergerClub, LLC; f/k/a Sunterra East Marketing, LLC) |
Table of Contents
| Exhibit | Description | |
3.47*
|
Certificate of Formation of Diamond Resorts Hilton Head Development, LLC, as amended (f/k/a Sunterra Hilton Head Development, LLC; f/k/a Sunterra Bent Creek Village Development, LLC) | |
3.48*
|
Limited Liability Company Agreement of Diamond Resorts Hilton Head Development, LLC (f/k/a Sunterra Hilton Head Development, LLC; f/k/a Sunterra Bent Creek Village Development, LLC) | |
3.49*
|
Articles of Incorporation of Diamond Resorts International Club, Inc., as amended (f/k/a Club Sunterra, Inc.) | |
3.50*
|
Bylaws of Diamond Resorts International Club, Inc. (f/k/a Club Sunterra, Inc.) | |
3.51*
|
Articles of Incorporation of Diamond Resorts International Marketing, Inc., as amended (f/k/a Resort Marketing International, Inc.) | |
3.52*
|
Bylaws of Diamond Resorts International Marketing, Inc., as amended (f/k/a Resort Marketing International, Inc.) | |
3.53*
|
Certificate of Formation of Diamond Resorts Las Vegas Development, LLC, as amended (f/k/a Sunterra Las Vegas Development, LLC; f/k/a Sunterra Polynesian Isles Development, LLC) | |
3.54*
|
Limited Liability Company Agreement of Diamond Resorts Las Vegas Development, LLC (f/k/a Sunterra Las Vegas Development, LLC; f/k/a Sunterra Polynesian Isles Development, LLC) | |
3.55*
|
Certificate of Incorporation of Diamond Resorts Management & Exchange Holding Company, as amended (f/k/a Sunterra Management and Exchange Holding Company) | |
3.56*
|
Bylaws of Diamond Resorts Management & Exchange Holding Company (f/k/a Sunterra Management and Exchange Holding Company) | |
3.57*
|
Articles of Incorporation of Diamond Resorts Management, Inc., as amended (f/k/a Sunterra Resort Management, Inc.; f/k/a RPM Management, Inc.) | |
3.58*
|
Bylaws of Diamond Resorts Management, Inc. (f/k/a Sunterra Resort Management, Inc.; f/k/a RPM Management, Inc.) | |
3.59*
|
Certificate of Formation of Diamond Resorts Mortgage Holdings, LLC, as amended (f/k/a Sunterra Mortgage Holdings, LLC) | |
3.60*
|
Limited Liability Company Agreement of Diamond Resorts Mortgage Holdings, LLC (f/k/a Sunterra Mortgage Holdings, LLC) | |
3.61*
|
Certificate of Formation of Diamond Resorts Palm Springs Development, LLC, as amended (f/k/a Sunterra Palm Springs Development, LLC; f/k/a Sunterra North Marketing, LLC) | |
3.62*
|
Limited Liability Company Agreement of Diamond Resorts Palm Springs Development, LLC, as amended (f/k/a Sunterra Palm Springs Development, LLC; f/k/a Sunterra North Marketing, LLC) | |
3.63*
|
Certificate of Formation of Diamond Resorts Poco Diablo Development, LLC, as amended (f/k/a Sunterra Poco Diablo Development, LLC) | |
3.64*
|
Limited Liability Company Agreement of Diamond Resorts Poco Diablo Development, LLC, as amended (f/k/a Sunterra Poco Diablo Development, LLC) | |
3.65*
|
Certificate of Formation of Diamond Resorts Poipu Development, LLC, as amended (f/k/a Sunterra Poipu Development, LLC; f/k/a Sunterra Lake Tahoe Development, LLC) | |
3.66*
|
Limited Liability Company Agreement of Diamond Resorts Poipu Development, LLC (f/k/a Sunterra Poipu Development, LLC; f/k/a Sunterra Lake Tahoe Development, LLC) | |
3.67*
|
Articles of Organization of Diamond Resorts Polo Development, LLC, as amended (f/k/a Polo Sunterra Development, LLC) | |
3.68*
|
Operating Agreement of Diamond Resorts Polo Development, LLC (f/k/a Polo Sunterra Development, LLC) | |
3.69*
|
Certificate of Formation of Diamond Resorts Port Royal Development, LLC, as amended (f/k/a Sunterra Port Royal Development, LLC) |
Table of Contents
| Exhibit | Description | |
3.70*
|
Limited Liability Company Agreement of Diamond Resorts Port Royal Development, LLC (f/k/a Sunterra Port Royal Development, LLC) | |
3.71*
|
Certificate of Formation of Diamond Resorts Powhatan Development, LLC, as amended (f/k/a Sunterra Powhatan Development, LLC) | |
3.72*
|
Limited Liability Company Agreement of Diamond Resorts Powhatan Development, LLC (f/k/a Sunterra Powhatan Development, LLC) | |
3.73*
|
Certificate of Formation of Diamond Resorts Residual Assets Development, LLC, as amended (f/k/a Sunterra Residual Assets Development, LLC) | |
3.74*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets Development, LLC (f/k/a Sunterra Residual Assets Development, LLC) | |
3.75*
|
Certificate of Formation of Diamond Resorts Residual Assets Finance, LLC, as amended (f/k/a Sunterra Residual Assets Finance, LLC) | |
3.76*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets Finance, LLC (f/k/a Sunterra Residual Assets Finance, LLC) | |
3.77*
|
Certificate of Formation of Diamond Resorts Residual Assets M&E, LLC, as amended (f/k/a Sunterra Residual Assets M&E, LLC) | |
3.78*
|
Limited Liability Company Agreement of Diamond Resorts Residual Assets M&E, LLC (f/k/a Sunterra Residual Assets M&E, LLC) | |
3.79*
|
Certificate of Formation of Diamond Resorts Ridge on Sedona Development, LLC, as amended (f/k/a Sunterra Ridge on Sedona Development, LLC) | |
3.80*
|
Limited Liability Company Agreement of Diamond Resorts Ridge on Sedona Development, LLC, as amended (f/k/a Sunterra Ridge on Sedona Development, LLC) | |
3.81*
|
Certificate of Formation of Diamond Resorts Ridge Pointe Development, LLC, as amended (f/k/a Sunterra Ridge Pointe Development, LLC) | |
3.82*
|
Limited Liability Company Agreement of Diamond Resorts Ridge Pointe Development, LLC (f/k/a Sunterra Ridge Pointe Development, LLC) | |
3.83*
|
Certificate of Formation of Diamond Resorts San Luis Bay Development, LLC, as amended (f/k/a Sunterra San Luis Bay Development, LLC) | |
3.84*
|
Limited Liability Company Agreement of Diamond Resorts San Luis Bay Development, LLC (f/k/a Sunterra San Luis Bay Development, LLC) | |
3.85*
|
Certificate of Formation of Diamond Resorts Santa Fe Development, LLC, as amended (f/k/a Sunterra Santa Fe Development, LLC) | |
3.86*
|
Limited Liability Company Agreement of Diamond Resorts Santa Fe Development, LLC (f/k/a Sunterra Santa Fe Development, LLC) | |
3.87*
|
Certificate of Formation of Diamond Resorts Scottsdale Development, LLC, as amended (f/k/a Sunterra Scottsdale Development, LLC; f/k/a Sunterra Poipu GP Development, LLC) | |
3.88*
|
Limited Liability Company Agreement of Diamond Resorts Scottsdale Development, LLC (f/k/a Sunterra Scottsdale Development, LLC; f/k/a Sunterra Poipu GP Development, LLC) | |
3.89*
|
Certificate of Formation of Diamond Resorts Sedona Springs Development, LLC, as amended (f/k/a Sunterra Sedona Springs Development, LLC) | |
3.90*
|
Limited Liability Company Agreement of Diamond Resorts Sedona Springs Development, LLC, as amended (f/k/a Sunterra Sedona Springs Development, LLC) | |
3.91*
|
Certificate of Formation of Diamond Resorts Sedona Summit Development, LLC, as amended (f/k/a Sunterra Sedona Summit Development, LLC) | |
3.92*
|
Limited Liability Company Agreement of Diamond Resorts Sedona Summit Development, LLC, as amended (f/k/a Sunterra Sedona Summit Development, LLC) |
Table of Contents
| Exhibit | Description | |
3.93*
|
Certificate of Formation of Diamond Resorts St. Croix Development, LLC, as amended (f/k/a Sunterra St. Croix Development, LLC) | |
3.94*
|
Limited Liability Company Agreement of Diamond Resorts St. Croix Development, LLC (f/k/a Sunterra St. Croix Development, LLC) | |
3.95*
|
Certificate of Formation of Diamond Resorts Steamboat Development, LLC, as amended (f/k/a Sunterra Steamboat Development, LLC) | |
3.96*
|
Limited Liability Company Agreement of Diamond Resorts Steamboat Development, LLC (f/k/a Sunterra Steamboat Development, LLC) | |
3.97*
|
Certificate of Formation of Diamond Resorts Tahoe Beach & Ski Development, LLC, as amended (f/k/a Sunterra Tahoe Beach & Ski Development, LLC) | |
3.98*
|
Limited Liability Company Agreement of Diamond Resorts Tahoe Beach & Ski Development, LLC (f/k/a Sunterra Tahoe Beach & Ski Development, LLC) | |
3.99*
|
Certificate of Formation of Diamond Resorts U.S. Collection Development, LLC, as amended (f/k/a Club Sunterra Development, LLC; f/k/a Club Sunterra, LLC) | |
3.100*
|
First Amended and Restated Limited Liability Company Operating Agreement of Diamond Resorts U.S. Collection Development, LLC (f/k/a Club Sunterra Development, LLC; Club Sunterra, LLC) | |
3.101*
|
Certificate of Formation of Diamond Resorts Villa Mirage Development, LLC, as amended (f/k/a Sunterra Villa Mirage Development, LLC) | |
3.102*
|
Limited Liability Company Agreement of Diamond Resorts Villa Mirage Development, LLC, as amended (f/k/a Sunterra Villa Mirage Development, LLC) | |
3.103*
|
Certificate of Formation of Diamond Resorts Villas of Sedona Development, LLC, as amended (f/k/a Sunterra Villas of Sedona Development, LLC) | |
3.104*
|
Limited Liability Company Agreement of Diamond Resorts Villas of Sedona Development, LLC, as amended (f/k/a Sunterra Villas of Sedona Development, LLC) | |
3.105*
|
Certificate of Formation of Diamond Resorts West Maui Development, LLC, as amended (f/k/a Sunterra West Maui Development, LLC; f/k/a Sunterra West Marketing, LLC) | |
3.106*
|
Limited Liability Company Agreement of Diamond Resorts West Maui Development, LLC, as amended (f/k/a Sunterra West Maui Development, LLC; f/k/a Sunterra West Marketing, LLC) | |
3.107*
|
Articles of Organization of Foster Shores, LLC | |
3.108*
|
Limited Liability Company Agreement of Foster Shores, LLC | |
3.109*
|
Articles of Incorporation of George Acquisition Subsidiary, Inc. | |
3.110*
|
Bylaws of George Acquisition Subsidiary, Inc. | |
3.111*
|
Certificate of Formation of Ginger Creek, LLC | |
3.112*
|
Limited Liability Company Agreement of Ginger Creek, LLC | |
3.113*
|
Certificate of Formation of Grand Escapes, LLC | |
3.114*
|
Limited Liability Company Agreement of Grand Escapes, LLC | |
3.115*
|
Certificate of Formation of International Timeshares Marketing, LLC, as amended | |
3.116*
|
Limited Liability Company Agreement of International Timeshares Marketing, LLC, as amended | |
3.117*
|
Articles of Organization of Lake Tahoe Resort Partners, LLC | |
3.118*
|
Operating Agreement of Lake Tahoe Resort Partners, LLC, as amended | |
3.119*
|
Articles of Incorporation of Mazatlan Development, Inc., as amended (f/k/a Mazatlan Villas, Inc.) | |
3.120*
|
Bylaws of Mazatlan Development, Inc. (f/k/a Mazatlan Villas, Inc.) | |
3.121*
|
Articles of Incorporation of MMG Development Corp. | |
3.122*
|
Bylaws of MMG Development Corp. |
Table of Contents
| Exhibit | Description | |
3.123*
|
Certificate of Limited Partnership of Poipu Resort Partners, L.P., as amended (f/k/a Pointe Resort Partners) | |
3.124*
|
Amended and Restated Agreement of Limited Partnership of Poipu Resort Partners, L.P. (f/k/a Pointe Resort Partners) | |
3.125*
|
Articles of Incorporation of Resort Management International, Inc. | |
3.126*
|
Bylaws of Resort Management International, Inc., as amended | |
3.127*
|
Articles of Incorporation of Resorts Development International, Inc. | |
3.128*
|
Bylaws of Resorts Development International, Inc. | |
3.129*
|
Articles of Organization of Walsham Lake, LLC | |
3.130*
|
Limited Liability Company Agreement of Walsham Lake, LLC | |
3.131*
|
Second Amended and Restated Certificate of Limited Partnership of West Maui Resort Partners, L.P., as amended (f/k/a West Maui Partners, L.P.) | |
3.132*
|
Second Amended and Restated Agreement of Limited Partnership of West Maui Resort Partners, L.P. (f/k/a West Maui Partners, L.P.) | |
4.1*
|
Indenture, dated as of August 13, 2010, among Diamond Resorts Corporation, Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee | |
4.2*
|
Registration Rights Agreement, dated as of August 13, 2010, among Diamond Resorts Corporation, Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, the subsidiary guarantors named therein, Credit Suisse Securities (USA) LLC, as representative of the initial purchasers, Banc of America Securities LLC, as representative of the initial purchasers, and Guggenheim Securities, LLC, as representative of the initial purchasers | |
4.3*
|
Security Agreement, dated August 13, 2010, among Diamond Resorts Parent, LLC, Diamond Resorts Holdings, LLC, Diamond Resorts Corporation, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as collateral agent | |
4.4*
|
Form of 12.00% Senior Secured Notes due 2018 (included in Exhibit 4.1) | |
5.1**
|
Opinion of Katten Muchin Rosenman LLP | |
5.2**
|
Opinion of Ballard Spahr LLP | |
5.3**
|
Opinion of Holland & Knight LLP | |
5.4**
|
Opinion of Imanaka Kudo & Fujimoto | |
5.5**
|
Opinion of Summers Compton Wells PC | |
10.1**
|
Second Amended and Restated Sale Agreement, dated as of August 31, 2010, by and between Diamond Resorts Depositor 2008 LLC and Diamond Resorts Issuer 2008 LLC, and acknowledged and agreed to by Diamond Resorts Finance Holding Company | |
10.2**
|
Second Amended and Restated Purchase Agreement, dated as of August 31, 2010, by and between Diamond Resorts Finance Holding Company and Diamond Resorts Depositor 2008 LLC | |
10.3**
|
Third Amended and Restated Indenture, dated as of August 31, 2010, by and among Diamond Resorts Issuer 2008 LLC, Diamond Resorts Financial Services, Inc., Wells Fargo Bank, National Association and Credit Suisse AG, Cayman Islands Branch | |
10.4**
|
Indenture, dated as of October 1, 2009, by and among Diamond Resorts Owner Trust 2009-1, Diamond Resorts Financial Services, Inc. and Wells Fargo Bank, National Association | |
10.5**
|
Note Purchase Agreement, dated as of October 9, 2009, by and between Diamond Resorts Owner Trust 2009-1 and Diamond Resorts Corporation, and confirmed and accepted by Credit Suisse Securities (USA) LLC |
Table of Contents
| Exhibit | Description | |
10.6**
|
Third Amended and Restated Securityholders Agreement, dated as of February 18, 2011, by and among Diamond Resorts Parent, LLC and the other parties named therein | |
10.7**
|
Amended and Restated Registration Rights Agreement, dated as of June 17, 2010, by and among Diamond Resorts Parent, LLC and the other parties named therein, as amended | |
10.8**
|
Receivables Loan and Security Agreement, dated as of August 31, 2010, by and between Textron Financial Corporation and ILX Acquisition, Inc. | |
10.9**
|
Inventory Loan and Security Agreement, dated as of August 31, 2010, by and between Textron Financial Corporation and ILX Acquisition, Inc. | |
10.10**
|
Loan Sale and Servicing Agreement, dated as of April 30, 2010, by and among DRI Quorum 2010 LLC, Quorum Federal Credit Union, Diamond Resorts Financial Services, Inc. and Wells Fargo Bank, National Association | |
10.11**
|
Purchase Agreement, dated as of April 30, 2010, by and between Diamond Resorts Finance Holding Company and DRI Quorum 2010 LLC | |
10.12**
|
Credit and Security Agreement, dated as of November 23, 2010, by and among Tempus Acquisition, LLC, the lenders from time to time party thereto and Guggenheim Corporate Funding, LLC | |
10.13**
|
Pledge Agreement, dated as of November 23, 2010, by and between Tempus Holdings, LLC and Guggenheim Corporate Funding, LLC, as administrative agent for the lenders identified therein | |
10.14**
|
Guaranty, dated as of November 23, 2010, by Diamond Resorts Corporation, in favor of Guggenheim Corporate Funding, LLC, as administrative agent for the lenders identified therein | |
10.15**
|
Lease, dated as of January 16, 2008, by and between H/MX Health Management Solutions, Inc. and Diamond Resorts Corporation | |
10.16**†
|
Terms of Engagement Agreement for Individual Independent Contractor, dated as of June 2009, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC, as amended by the Extension Agreement, effective as of June 1, 2010, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC, and the Amendment to Extension Agreement, dated as of January 1, 2011, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC | |
10.17**†
|
Terms of Additional Engagement Agreement for Individual Independent Contractor, dated as of January 1, 2011, by and between Praesumo Partners, LLC and Diamond Resorts Centralized Services USA, LLC | |
10.18**†
|
Homeowner Association Oversight, Consulting and Executive Management Services Agreement, dated as of December 31, 2010, by and between Diamond Resorts Corporation and Hospitality Management and Consulting Service, L.L.C. | |
12.1*
|
Statement of Computation of Ratio of Earnings to Fixed Charges | |
21.1*
|
Subsidiaries of Diamond Resorts Parent, LLC | |
23.1*
|
Consent of BDO USA, LLP | |
23.2**
|
Consent of Katten Muchin Rosenman LLP (included as part of its opinion filed as Exhibit 5.1 hereto) | |
23.2**
|
Consent of Ballard Spahr LLP (included as part of its opinion filed as Exhibit 5.2 hereto) | |
23.3**
|
Consent of Holland & Knight LLP (included as part of its opinion filed as Exhibit 5.3 hereto) | |
23.4**
|
Consent of Imanaka Kudo & Fujimoto LLP (included as part of its opinion filed as Exhibit 5.4 hereto) | |
23.5**
|
Consent of Summers Compton Wells PC LLP (included as part of its opinion filed as Exhibit 5.5 hereto) |
Table of Contents
| Exhibit | Description | |
24.1*
|
Powers of Attorney (included in the signature pages of this registration statement) | |
25.1**
|
Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wells Fargo Bank, National Association, with respect to the Indenture governing the 12.00% Senior Secured Notes due 2018 | |
99.1**
|
Form of Letter of Transmittal | |
99.2**
|
Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees | |
99.3**
|
Form of Letter to Clients | |
99.4**
|
Form of Notice of Guaranteed Delivery |
| * | Filed herewith | |
| ** | To be filed by amendment | |
| † | Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this registration statement |
