Ultimate Escapes and Secure America Acquisition Corporation Business Combination Overview

By: Destination Club News
Date: September 19, 2009

Earlier this month, Secure America Acquisition Corporation and Ultimate Escapes announced their intention to enter into a "business combination" that would make Ultimate Escapes the first publicly traded destination club in the world. The pending acquisition requires approval by stockholders who received a 200+ page document concerning the venture.

If you would like to view the statement in its entirety, please click here, but we have taken the time to review the document and have pulled excerpts pertinent to Ultimate Escapes members past, present, and future.

Target Audience
"Ultimate Escapes’ management believes that it offers a unique and compelling value proposition that is a cost effective vacation alternative for a large, affluent target market that Spectrem Group estimates includes over 8.3 million 'millionaires" in the United States with assets between $1 million and $5 million and over 930,000 'pentamillionaires' in the United States with assets from $5 million to $30 million."

The Acquisition
"Pursuant to the terms of the Contribution Agreement, SAAC will receive approximately 4,687,500 membership units of Ultimate Escapes, assuming the maximum number of conversions and forward contracts (which units will increase, on a one-for-one basis, to the extent fewer than approximately 6,250,000 shares of SAAC common stock are converted into cash or canceled based upon the settlement of forward contracts immediately following the closing) and, of the $30 million expected to be left with SAAC, at least $20 million will be contributed to Ultimate Escapes. Under the terms of the Operating Agreement, the UE Owners will be entitled to convert their membership units on a one-to-one basis into shares of SAAC common stock, and Ultimate Escapes would be managed in accordance with the terms of the Operating Agreement."

"In addition, the UE Owners will become eligible to receive up to an aggregate of 7,000,000 additional membership units of Ultimate Escapes, convertible on a one-to-one basis into shares of SAAC common stock, upon the achievement by Ultimate Escapes of certain adjusted EBITDA milestones set forth in the Operating Agreement."

"For each membership unit of Ultimate Escapes issued to the UE Owners, the UE Owners will also receive one share of Series A Voting Preferred Stock. At any time that any UE Owner exchanges membership units of Ultimate Escapes for shares of SAAC common stock, a like number of shares of Series A Voting Preferred Stock will be canceled."

"The closing of the Acquisition is conditioned upon the following: (i) the Warrant Amendment Proposal has been approved; (ii) the SAAC directors, officers and sponsor, who are collectively referred to herein as the SAAC founders, cancel, on a pro rata basis, an aggregate number of shares of SAAC common stock they acquired prior to SAAC’s initial public offering, such that they will own an aggregate of 20% of the issued and outstanding shares of SAAC common stock at the closing, in accordance with the terms of letter agreements entered into between the SAAC founders and SAAC on August 31, 2009; (iii) holders of no more than 30% of the Public Shares elect to convert their shares into a portion of the cash held in the trust account; and (iv) certain other conditions as set forth in the Contribution Agreement."

"The parties to the Contribution Agreement intend to consummate the Acquisition as promptly as practicable after the Special Meeting of Stockholders and the Special Meeting of Warrantholders, provided that:"

  • "SAAC’s stockholders have approved the Contribution Agreement, Operating Agreement and the transactions contemplated thereby, including the Acquisition;"
  • "holders of no more than 30% of the Public Shares have voted against the Acquisition Proposal and demanded conversion of their shares into cash;"
  • "the Reorganization (as described below) has been completed, including the contribution of all of the assets and properties of Ultimate Resort to Ultimate Escapes and the consummation of the acquisition by Ultimate Escapes of the acquisition of Private Escapes Holdings, LLC, on terms and conditions substantially similar to and in accordance with those presented to SAAC; and"
  • "the other conditions specified in the Contribution Agreement have been satisfied or waived."

The Business Combination Between Ultimate Escapes and SAAC
"The business combination will be accounted for as a reverse merger, whereby Ultimate Escapes will be the continuing entity for financial reporting purposes and will be deemed, for accounting purposes, to be the acquirer of SAAC. The pro forma financial information included in this proxy statement is presented assuming both a 30% maximum conversion, whereby only the shares subject to conversion (30% of the total outstanding SAAC shares or 2,999,999 shares) are returned for cash and cancelled, and a maximum conversion and redemption, whereby shares of SAAC are converted (the 2,999,999 shares) and an additional 3,225,657 are repurchased immediately following the Acquisition leaving $30 million in cash before expenses and tax distributions)."

"Under the maximum conversion and repurchase of shares — The business combination will be accounted for as a reverse merger because, after the closing, the former members of Ultimate Escapes (i) will hold a majority (60.5%) ownership of the outstanding shares of common stock of SAAC (assuming the exchange of all membership units of Ultimate Escapes held by the UE Owners into shares of SAAC common stock) and will having voting control of the public company, (ii) will have the ability initially to appoint, for three years, the majority of the members of the board of directors of SAAC (iii) the senior management of Ultimate Escapes will be the senior management of the combined entity, and because the ongoing operations of SAAC will be the operations of Ultimate Escapes."

"Under a 30% maximum conversion of shares — The business combination will be accounted for as a reverse merger because, after the closing, the former members of Ultimate Escapes (i) will hold a 45.1% ownership of the outstanding shares of common stock of SAAC (assuming the exchange of all membership units of Ultimate Escapes held by the UE Owners into shares of SAAC common stock), with no other single owner or organized group holding more than 11.0%, (ii) will have the ability initially to appoint, as a result of the Voting Agreement, a copy of which is attached as Annex H, for three years, the majority of the members of the board of directors of SAAC, and (iii) the senior management of Ultimate Escapes will be the senior management of the combined entity, and because the ongoing operations of SAAC will be the operations of Ultimate Escapes."

"It is anticipated that there will be both a conversion and repurchase of shares such that the current members of Ultimate Escapes will hold at least a 50% voting control in SAAC following the Acquisition."

"In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, Ultimate Escapes will be deemed to have undergone a recapitalization, whereby it will be deemed to have issued approximately 8,750,001 or 4,717,930 of the shares of common stock, at the minimum and maximum conversion of shares, respectively, to the holders of SAAC’s common stock. Accordingly, although SAAC, as the parent company of Ultimate Escapes, will be deemed to have legally acquired Ultimate Escapes, in accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, Ultimate Escapes’ assets and liabilities will be recorded at their historical carrying amounts (subject to the recording of Private Escapes’ assets and liabilities at fair value, as a result of their acquisition by Ultimate Resort), with no additional goodwill or other intangible assets recorded as a result of the business combination of Ultimate Escapes and SAAC."

Reasons For The Acquisition
"SAAC’s board of directors carefully evaluated the agreements relating to the proposed Acquisition and reviewed industry and financial data in considering whether the terms of the Acquisition were reasonable and in the best interests of SAAC’s stockholders. While SAAC considered and analyzed numerous companies and acquisition opportunities in the homeland security industry in its search for an attractive business combination candidate, it did not believe that any of those candidates would be as attractive to public stockholders as the proposed Acquisition, which SAAC believes is in an industry with strong growth prospects. Based upon its assessment of the luxury destination club industry and its evaluation of Ultimate Escapes’ growth potential within that industry, SAAC’s board of directors unanimously approved the Acquisition and determined that it is in the best interests of SAAC and its stockholders."

"SAAC’s board of directors considered a wide variety of factors in connection with its evaluation of the Acquisition. In light of the complexity of those factors, its board of directors, as a whole, did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. Individual members of SAAC’s board of directors may have given different weight to different factors..."

"The SAAC board reviewed industry and financial data and considered the value of Ultimate Escapes in relation to its growth potential and profitable model. Given the unique nature of Ultimate Escapes’ business and the fact that the destination club industry is relatively new, the SAAC board did not have directly related public comparables with which to value the Ultimate Escapes transaction."

"The reason for this was that there was no comparable public company that has all of the attributes of Ultimate Escapes’ business. Ultimate Escapes charges various fees for providing use and access to properties similar to traditional hotel, exchange and timeshare companies. However, unlike most traditional publicly traded hospitality businesses, Ultimate Escapes owns the vast majority of the underlying real estate. In this aspect, Ultimate Escapes is similar to luxury hospitality REITs, which own the properties from which they receive cash flow. Although REITs historically trade on a yield basis as a function of the earnings distributed to stockholders in the form of a dividend, as of the date SAAC’s board of directors conducted its analysis, nearly all of the comparable luxury hospitality REITs were not paying a dividend and are trading on the basis of their asset values and cash flow generation prospects. Accordingly, in analyzing Ultimate Escapes from a comparable company basis, the board reviewed two sets of public companies and public/private transactions that had operations, customers and strategies that overlapped with that of Ultimate Escapes. Comparable public and private companies considered were in one of the following two categories: (i) membership, interval and fractional companies that offer lodging, exchanges and timeshares; and (ii) REITs that specialize in owning and operating luxury lodging and hospitality properties. See the section entitled, 'Proposals to be Considered by SAAC Stockholders — The Acquisition Proposal — Valuation.'"

"Based on the foregoing, the SAAC board of directors valued Ultimate Escapes at approximately $186 million by using (i) a multiple of Ultimate Escapes’ projected EBITDA for fiscal 2010 derived from the multiples evidenced by the share prices of identified public companies or paid by acquirors of identified private companies that operate in Ultimate Escapes business, and (ii) base case pro forma projections provided by Ultimate Escapes showing material compounded annual growth in revenues and EBITDA through 2011. The $186 million value of Ultimate Escapes is in excess of approximately $57 million, representing 80% of the balance of SAAC’s trust account (excluding deferred underwriting discounts and commissions), and the board accordingly concluded that the 80% requirement contained in SAAC’s amended and restated certificate of incorporation was met. The SAAC board of directors believes because of the financial skills and background of its directors, it was qualified to conclude that the acquisition of Ultimate Escapes met this requirement."

Selected Historical Consolidated Financial Information of Ultimate Resort Holdings, LLC
"The following selected historical consolidated financial information of Ultimate Resort Holdings, LLC as of June 30, 2009 and for the six months ended June 30, 2009 and 2008 is derived from Ultimate Resort’s unaudited consolidated financial statements, which are included elsewhere in this proxy statement. The following selected historical consolidated financial information of Ultimate Resort as of December 31, 2008 and 2007 and for the years then ended is derived from Ultimate Resort’s audited consolidated financial statements, which are included elsewhere in this proxy statement. The results of operations for interim periods are not necessarily indicative of the results of operations which might be expected for the entire year."

"The following information is only a summary and should be read in conjunction with the unaudited interim consolidated financial statements of Ultimate Resort for the six months ended June 30, 2009 and 2008 and the notes thereto and the audited consolidated financial statements of Ultimate Resort for the years ended December 31, 2008 and 2007 and the notes thereto and the section entitled, 'Ultimate Resort Holdings’ Management’s Discussion and Analysis of Financial Condition and Results of Operations,' contained elsewhere in this proxy statement."

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Selected Historical Consolidated Financial Information of Private Escapes Holdings, LLC
"The following selected historical combined financial information of Private Escapes as of June 30, 2009 and for the six months ended June 30, 2009 and 2008, is derived from Private Escapes’ unaudited financial statements, which are included elsewhere in this proxy statement. The following selected historical combined financial information of Private Escapes as of December 31, 2008 and for the year then ended is derived from Private Escapes’ audited financial statements, which are included elsewhere in this proxy statement. The results of operations for interim periods are not necessarily indicative of the results of operations which might be expected for the entire year."

"The following information is only a summary and should be read in conjunction with the unaudited interim combined financial statements of Private Escapes for the six months ended June 30, 2009 and 2008 and the notes thereto and the audited combined financial statements of Private Escapes for the year ended December 31, 2008 and the notes thereto, contained elsewhere in this proxy statement."

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Selected Unaudited Pro Forma Condensed Combined Financial Information
"The following unaudited pro forma condensed combined financial information is designed to show the effects of the accounting merger of Ultimate Resort and Private Escapes and SAAC, giving effect to (a) the proposed accounting acquisition by Ultimate Escapes, through a contribution agreement, of certain assets of Private Escapes, to form Ultimate Escapes and (b) the proposed accounting reverse merger of Ultimate Escapes and SAAC pursuant to a contribution agreement..."

"The unaudited pro forma balance sheet data assumes that the accounting merger took place on June 30, 2009."

"The unaudited pro forma statement of operations data for the six months ended June 30, 2009 and for the year ended December 31, 2008 gives effect to the accounting merger as if it occurred on January 1, 2008."

"The summary unaudited pro forma condensed combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been a single company during these periods."

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Risks Related To Ultimate Escapes' Business and Operation
"The luxury vacation industry is highly competitive and Ultimate Escapes is subject to risks relating to competition that may adversely affect Ultimate Escapes’ performance."

"Ultimate Escapes operates principally in the luxury vacation industry and competes against numerous global, regional and boutique destination clubs; as well as other interval or shared usage or interval ownership resort and vacation property companies, real estate developers and sponsors; vacation home owners, brokers and managers; resort sponsors and managers; and, more broadly, luxury resort and other transient/leisure accommodations; as well as alternative leisure and recreation categories, such as golf clubs or other club membership organizations. Ultimate Escapes has encountered and expects to encounter in the future intense competition from its rivals in the destination club industry and from other companies offering competitive products and services. Many of Ultimate Escapes’ competitors have greater consumer recognition or resources and/or more established and familiar products than Ultimate Escapes. The factors that Ultimate Escapes believes are important to customers include:"

  • number and variety of club destinations available to members;
  • quality of member services and concierge services;
  • quality of destination club properties;
  • pricing of club membership plans;
  • type and quality of resort amenities offered;
  • reputation of club;
  • destination club properties in proximity to major population centers;
  • availability and cost of air and ground transportation to destination club properties; and
  • ease of travel to resorts (including direct flights by major airlines).

"Ultimate Escapes has many competitors for its members, including other major resort destinations worldwide. Ultimate Escapes also directly competes with other destination clubs, such as Exclusive Resorts, which is the largest company in the destination club marketplace, as measured by number of club members. Ultimate Escapes’ destination club members can choose from any of these alternatives."

"Ultimate Escapes competes with numerous other resorts that may have greater financial resources than Ultimate Escapes does and that may be able to adapt more quickly to changes in customer requirements or devote greater resources to promotion of their offerings than Ultimate Escapes can. Ultimate Escapes believes that developing and maintaining a competitive advantage will require continued investment in Ultimate Escapes’ technology platform, brand, existing destination club properties and the acquisition of additional luxury properties to its portfolio of destination club properties. Ultimate Escapes cannot assure that it will have sufficient resources to make the necessary investments to do so, and Ultimate Escapes cannot assure that it will be able to compete successfully in this market or against such competitors."

"The present economic slowdown and the uncertainty over its breadth, depth and duration has had a negative impact on the luxury vacation industry. There is now general consensus among economists that the economies of the United States, Europe and much of the rest of the world have been in a recession since December 2007. The current downturn in the economy may reduce the demand for Ultimate Escapes’ destination club memberships and may increase member resignations and redemptions. Accordingly, Ultimate Escapes’ financial results have been impacted by the economic slowdown and both our future financial results and growth could be further harmed if the recession continues for a significant period or becomes worse."

"In order for Ultimate Escapes’ destination clubs to remain attractive and competitive, Ultimate Escapes has to spend money periodically to keep the properties well maintained, modernized and refurbished and to add new luxury properties to its portfolio of destination club properties as it adds new club members. This creates an ongoing need for cash and, to the extent Ultimate Escapes cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. Ultimate Escapes could finance future expenditures from any of the following sources:"

  • cash flow from operations;
  • non-recourse, sale-leaseback or other financing;
  • bank borrowings;
  • member assessments;
  • public offerings of debt or equity;
  • sale of existing real estate;
  • private placements of debt or equity; or
  • some combination of the above.

"Ultimate Escapes might not be able to obtain financing for future expenditures on favorable terms or at all, which could inhibit Ultimate Escapes’ ability to continue to grow. Events over the past year, including the failures and near failures of financial services companies and the decrease in liquidity and available equity and debt capital have negatively impacted the capital markets for real estate investments. Accordingly, Ultimate Escapes’ financial results have been and may continue to be impacted by the cost and availability of funds needed to grow its business."

"Ultimate Escapes has a substantial amount of indebtedness. As of June 30, 2009, Ultimate Escapes had total debt of approximately $126 million, consisting of $25 million of debt obligations secured by destination club properties and $101 million of borrowings under its senior secured credit facilities. Ultimate Escapes expects to have an additional $9 million available for borrowing under the revolving portion of an amended senior secured credit facility that Ultimate Escapes is negotiating, which is anticipated to result in a $110 million revolving credit facility with CapitalSource, secured by Ultimate Escapes’ real estate assets. The proposed revolving credit facility will mature on April 30, 2011, subject to extension by Ultimate Escapes for up to two one-year periods. In addition, Ultimate Escapes has approximately $25 million in additional indebtedness secured by real estate assets with various first and second mortgage lenders. In the event Ultimate Escapes defaults on its secured debt obligations, the lenders could enforce their rights under the loan agreements, which would impair Ultimate Escapes’ ability to conduct its business and have a material adverse effect on Ultimate Escapes’ business, financial condition and results of operations. If Ultimate Escapes is unable to make payments on one or more mortgages on the properties or otherwise default on its debt obligations, the lenders could foreclose on such properties, which would have a material adverse effect on Ultimate Escapes’ business, financial condition and results of operations. Ultimate Escapes may also incur significant additional indebtedness in the future. Ultimate Escapes’ substantial indebtedness may:"

  • make it difficult for Ultimate Escapes to satisfy its financial obligations, including making scheduled principal and interest payments on its indebtedness;
  • limit Ultimate Escapes’ ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
  • limit Ultimate Escapes’ ability to use its cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;
  • require Ultimate Escapes to use a substantial portion of its cash flow from operations to make debt service payments;
  • limit Ultimate Escapes’ flexibility to plan for, or react to, changes in its business and industry;
  • place Ultimate Escapes at a competitive disadvantage compared to less leveraged competitors; and increase Ultimate Escapes’ vulnerability to the impact of adverse economic and industry conditions.

"As a public company, Ultimate Escapes will incur significant legal, accounting and other expenses that it did not incur as a private company. The U.S. Sarbanes-Oxley Act of 2002 and related rules of the U.S. Securities and Exchange Commission, or SEC, and stock exchanges regulate corporate governance practices of public companies. Ultimate Escapes expects that compliance with these public company requirements will increase costs and make some activities more time-consuming. For example, Ultimate Escapes will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, Ultimate Escapes will incur additional expenses associated with its SEC reporting requirements. A number of those requirements will require Ultimate Escapes to carry out activities it has not done previously. For example, under Section 404 of the Sarbanes-Oxley Act, for Ultimate Escapes’ annual report on Form 10-K for the year ended December 31, 2009, depending upon certain facts existing upon closing of the Acquisition, may need to document and test its internal control procedures, Ultimate Escapes’ management will need to assess and report on its internal control over financial reporting and Ultimate Escapes’ independent accountants will need to issue an opinion on that assessment and the effectiveness of those controls. Furthermore, if Ultimate Escapes identifies any issues in complying with those requirements (for example, if Ultimate Escapes or its accountants identified a material weakness or significant deficiency in Ultimate Escapes’ internal control over financial reporting), Ultimate Escapes could incur additional costs rectifying those issues, and the existence of those issues could adversely affect Ultimate Escapes, its reputation or investor perceptions of Ultimate Escapes."

"Ultimate Escapes also expects that it will be difficult and expensive to obtain director and officer liability insurance, and Ultimate Escapes may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for Ultimate Escapes to attract and retain qualified persons to serve on its board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. Ultimate Escapes cannot predict or estimate the amount of additional costs it may incur or the timing of such costs."

Background of the Acquisition
"The terms of the Contribution Agreement and Operating Agreement are the result of arm’s length negotiations between the representatives of SAAC and Ultimate Escapes. The following is a brief description of the background of these negotiations, the Acquisition and related transactions."

"SAAC is a blank check company formed under the laws of the State of Delaware on May 14, 2007 to acquire through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more businesses or assets in the homeland security industry."

"A registration statement for SAAC’s IPO was declared effective on October 23, 2007. On October 29, 2007, SAAC consummated its IPO of 10,000,000 units. Each unit consists of one share of common stock and one warrant to purchase one share of common stock. Each warrant expires on October 23, 2011, or earlier upon redemption, and entitles the holder to purchase one share of SAAC common stock at an exercise price of $5.25 per share. The common stock and warrants started trading separately on January 18, 2008."

"The net proceeds after offering expenses from the sale of the SAAC units in the IPO were approximately $73,687,000. In addition, SAAC’s sponsors purchased 2,075,000 warrants to purchase common stock in a private placement completed immediately prior to the closing of the IPO for total consideration of $2,075,000. Of these amounts, $79,200,000, including deferred underwriting discounts and commissions of approximately $3,200,000 and a loan in the amount of $150,000 from Secure America Acquisition Holdings, LLC, was deposited in trust and, in accordance with SAAC’s amended and restated certificate of incorporation, will be released either upon the consummation of a business combination or upon the liquidation of SAAC."

"Prior to the consummation of its IPO, neither SAAC, nor anyone on its behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction with SAAC."

"Promptly following the consummation of the IPO on October 29, 2007, SAAC commenced consideration of potential target companies with the objective of consummating a business combination. SAAC also contacted several investment bankers, private equity firms, consulting firms, legal and accounting firms as well as contacts from numerous other business relationships. Through these and further efforts, SAAC identified and reviewed information with respect to more than 50 potential companies."

"On several occasions, SAAC engaged in multiple meetings with potential targets and engaged in serious discussions with a select few target businesses. Negotiations were discontinued with such target businesses for various reasons, including insufficient transaction sizes, undesirable pricing or sellers deciding not to sell."

"On July 1, 2009 Mr. McMillen was contacted by a representative of Morgan Joseph & Co., which we refer to as Morgan Joseph, one of SAAC’s underwriters for its initial public offering, inquiring about SAAC’s interest in a potential business combination with a company in the luxury hospitality industry that Morgan Joseph was representing, Ultimate Escapes. On July 6, 2009, SAAC and Ultimate Escapes executed a confidentiality and non-disclosure agreement."

"On July 13, 2009 representatives of SAAC and Ultimate Escapes held a conference call to discuss the opportunity. On July 14, 2009, Mr. McMillen met with a representative of Morgan Joseph in New York City to continue discussions on the opportunity. On July 15, 2009, another conference call was conducted between SAAC and its financial advisor, SunTrust Robinson Humphrey, and Ultimate Escapes and Morgan Joseph to discuss the financial statements and projections of Ultimate Escapes. On July 17, 2009, SAAC sent Ultimate Escapes a draft non-binding letter of intent that included terms requiring Ultimate Escapes to close a pending transaction with Private Escapes Holdings, LLC, or Private Escapes, as a condition to a business combination between SAAC and Ultimate Escapes."

"On July 20 and 21, 2009, negotiations continued telephonically between the parties and, on July 21, 2009, a final draft of the non-binding letter of intent was executed by SAAC and Ultimate Escapes. On July 22, 2009, Mr. McMillen visited Ultimate Escapes’ headquarters in Orlando, Florida, and, on July 27, 28 and 29, 2009, Mr. McMillen and a consultant hired by SAAC conducted an extensive review of Ultimate Escapes’ operations, the industry in which it operated, its financial statements and projections and other detailed due diligence investigations. During that period, Mr. McMillen visited several of Ultimate Escapes’ properties in New York City. On July 29, 2009, SAAC held a telephonic board meeting to discuss SAAC’s search for a prospective target and the proposed transaction with Ultimate Escapes. Mr. Tousignant, the President and Chief Executive Officer of Ultimate Escapes, made a presentation to SAAC’s board of directors. SAAC’s board of directors authorized management to continue negotiations with Ultimate Escapes."

"On July 31, 2009, a draft of the Contribution Agreement was circulated by SAAC’s counsel to Ultimate Escapes and its counsel. On August 3, 2009, Mr. McMillen had a dinner meeting with Mr. Tousignant in New York City and continued negotiations on the deal terms and, on August 4, 2009, Messrs. McMillen and Tousignant and the legal counsel and financial advisors to each of SAAC and Ultimate Escapes spent the day in New York City working to refine the Contribution Agreement and related ancillary documents."

"On August 6, 2009, Mr. Tousignant had a dinner meeting in the Washington, DC area with several members of SAAC’s board of directors and advisors."

"On August 7, 2009, a meeting of SAAC’s board of directors was held. All directors attended, as did, by invitation, Mr. Tousignant, the members of SAAC’s Advisory Board, and SAAC’s legal counsel, either telephonically or in person. Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were delivered to the directors. After considerable review and discussion, including a discussion concerning the risks of Ultimate Escapes not closing its pending acquisition with Private Escapes on a timely basis, SAAC’s board of directors unanimously approved the Contribution Agreement, related ancillary documents and all transactions contemplated therein, subject to final negotiations, and authorized Messrs. McMillen and Weiss to finalize the terms of the Acquisition."

"On August 24, 2009, Ultimate Escapes amended its projections for fiscal years ending 2009, 2010, 2011 and 2012. The appraisal of Ultimate Escapes’ properties was also adjusted downward to approximately $167 million. As a result of these developments, the parties renegotiated certain terms of the definitive agreements. On August 31, 2009, SAAC’s board of directors convened a meeting to review and discuss the revised definitive agreements, including, without limitation, the amended terms of the Acquisition, and approved the terms and conditions of the definitive agreements, including, without limitation, the Acquisition, on the basis of such revised financial projections and appraisal."

"The Contribution Agreement was executed on September 2, 2009. Prior to the market open on September 3, 2009, SAAC issued a press release and, on September 3, 2009, filed a Current Report on Form 8-K disclosing the execution of the Contribution Agreement and discussing the terms of the Acquisition."

"On February 15, 2008, SAAC entered into a financial advisory agreement with SunTrust Robinson Humphrey, the lead underwriter for SAAC’s IPO, to assist SAAC in finding a potential target business to acquire, to conduct financial analysis and transaction feasibility analysis and to assist in the negotiations and related strategy for prospective acquisitions. Under a similar agreement entered into between Ultimate Escapes and Morgan Joseph, each of such entities are entitled to financial advisory fees equal to the greater of (i) 0.75% of the consideration paid by SAAC for a business combination and (ii) $1 million, plus 0.5% of the value of any earn-out units issued to the UE Owners in 2010 and 0.25% of the value of any earn-out units issued to the UE Owners in 2011. If, however, the trust fund balance is less than $25 million, then such advisory fees would be reduced to the lesser of $1.25 million or 0.75% of the trust fund balance."

"Pursuant to a letter agreement to be entered into as a condition to the consummation of the Acquisition, the underwriters of SAAC’s IPO, including SunTrust Robinson Humphrey and Morgan Joseph, will be entitled to receive an aggregate of 4% of the funds held in the trust account, less amounts paid to converting stockholders, funds used by SAAC to repay bridge loans made, or to repurchase or redeem shares of SAAC’s common stock or similar arrangements, in connection with obtaining approval of the Acquisition, referred to herein as the trust fund balance, which represents a reduction of their deferred underwriting discounts and commissions as agreed with SAAC in connection with its IPO. A copy of the form of this letter agreement is attached as Annex J. If the Acquisition is not consummated, SunTrust Robinson Humphrey and Morgan Joseph will receive neither their deferred underwriting discounts and commissions in connection with SAAC’s IPO nor their financial advisory fees in connection with the Acquisition."

Structure of the Acquisition
"Pursuant to the terms of the Contribution Agreement, SAAC will receive approximately 4,687,500 membership units of Ultimate Escapes, representing approximately 39.5% of Ultimate Escapes’ membership units as of the closing (assuming the maximum number of conversions and forward contracts and that, of the $30 million expected to be left with SAAC, at least $20 million will be contributed to Ultimate Escapes), which units will increase, on a one-for-one basis, to the extent fewer than approximately 6,250,000 shares of SAAC common stock are converted into cash or canceled based upon the settlement of forward contracts immediately following the closing. All of the assets which constituted Ultimate Escapes’ business prior to the Acquisition will continue to be held by Ultimate Escapes following the closing. Following the Acquisition, SAAC will change its name to Ultimate Escapes, Inc. and will be a holding company with the following structure:"

  • SAAC will own approximately 39.5% of Ultimate Escapes’ membership units immediately following the closing, which percentage will increase to the extent fewer than approximately 6,250,000 shares of SAAC common stock are converted into cash or canceled based upon the settlement of forward contracts immediately following the closing;
  • The UE Owners will retain the remaining 7,178,841 of Ultimate Escapes’ membership units on an aggregate basis and will be eligible to receive up to an aggregate of 7,000,000 additional membership units of Ultimate Escapes. The retained units and any earn-out units are exchangeable into shares of SAAC common stock on a one-for-one basis; and
  • Ultimate Escapes will own, directly or indirectly, 100% of the operating companies that comprise the Ultimate Escapes business prior to the consummation of the transactions.

Conditions to Closing of the Acquisition
"The obligations of the parties to the Contribution Agreement to consummate the Acquisition are subject to, among other things, the satisfaction (or waiver by each other party) of the following specified conditions set forth in the Contribution Agreement before consummation of the Acquisition:"

  • the SAAC stockholders shall have approved the Pre-Acquisition Charter Amendment Proposal;
  • the SAAC stockholders shall have approved the Contribution Agreement and Operating Agreement and the transactions contemplated by those agreements in accordance with the Delaware General Corporation Law, referred to herein as the DGCL, the holders of a majority of the issued and outstanding Public Shares shall have approved the foregoing agreements and the transactions contemplated therein and the holders of less than 30% of the Public Shares shall have voted against the Acquisition and properly exercised their rights to convert their shares into a pro rata share of the trust account;
  • the SAAC stockholders shall have approved each of the Post-Acquisition Charter Amendment, the Director Election and the Stock Incentive Proposals;
  • the Reorganization has been completed, including the contribution of all of the assets and properties of Ultimate Resort to Ultimate Escapes and the consummation of the acquisition by Ultimate Escapes of Private Escapes Holdings, LLC, on terms and conditions substantially similar to and in accordance with those presented to SAAC;
  • that the applicable waiting period under any antitrust laws shall have expired or been terminated;
  • all authorizations, approvals or permits required to be obtained from any governmental authority and all consents required from third parties required in connection with the Acquisition shall have been obtained;
  • no governmental entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which has the effect of making the Acquisition illegal or otherwise prohibiting consummation of the Acquisition substantially on the terms contemplated by the Contribution Agreement; and
  • each party has duly executed and delivered the Operating Agreement, the Indemnification and Escrow Agreement, the Voting Agreement and the Registration Rights Agreement.

History
"Ultimate Escapes was founded in 2004 as Ultimate Resort, LLC, by James M. Tousignant to address what he perceived was an emerging and underserved segment of the luxury shared-use market — the high-end “luxury destination club.” Mr. Tousignant has over 20 years of management experience, including successful entrepreneurial ventures with high growth companies and extensive public company experience."

"Since its inception in 2004, Ultimate Resort rapidly grew to become one of the largest players in the destination club industry. Recognizing that achieving “critical mass” is a key component to operating a successful destination club business model, Ultimate Resort aggressively pursued a two-tiered growth strategy of organic growth combined with strategic transactions to reach critical mass quickly."

"In May 2007, Ultimate Resort, LLC changed its name to Ultimate Resort Holdings, LLC and purchased certain real estate assets for approximately $105 million in federal bankruptcy court as a result of the 2006 bankruptcy of Tanner & Haley. To finance the acquisition of the real estate assets, Ultimate Resort obtained secured debt financing from CapitalSource Finance, a NYSE-listed specialty lender. In addition, Ultimate Resort separately signed new membership agreements with 645 previous Tanner & Haley members who elected to become new members of Ultimate Resort. In February 2008, Ultimate Resort purchased certain real estate assets for $12 million from Ventures Equity Vacation Club. In addition, Ultimate Resort separately signed new membership agreements with 19 previous members of Ventures Equity Vacation Club who elected to become new members of Ultimate Resort."

Market Drivers and Industry Outlook
"While there are significant differences between destination club offerings and timeshare offerings, Ultimate Escapes believes that the continued growth of luxury destination clubs will parallel the dramatic growth of timeshare sales over the last 20 years."

"Low-end timeshare offerings and high-end destination club offerings (as well as fractional interests and private residence clubs), both generally appeal to growing consumer demand for cost effective, flexible “shared-use” vacation travel alternatives. The vast majority of timeshare owners participate in vacation exchange networks like RCI LLC (a subsidiary of Wyndham Worldwide Corp.) and Interval Leisure Group, Inc., that allow timeshare owners the opportunity to exchange their timeshare weeks in their “home” resort for exchange use in other affiliated timeshare resorts, creating an expanded range of vacation experiences for timeshare owners. Wherever they vacation, timeshare owners know that they can “leave the keys” and go home after one to two weeks of vacation without the hassles and expenses of owning a one or two bedroom vacation condo and having to fund the annual operating costs and maintain the vacation property all year round. Destination club members generally join a club to avoid the costs and hassles of luxury second home ownership, as well as enjoy the flexibility to be able to travel to various club properties in a growing number of desirable luxury resort destinations, bundled with full concierge services and member services every year they remain a club member."

"According to Northcourse, Inc., a leisure real estate consulting firm, 75% of income qualified households in the United States have not yet purchased any type of second vacation home. Northshore suggests the reason for this behavior may be directly related to the costs of second homes and the fact that second home owners typically use second homes only three to four weeks per year. Destination club members, unlike second home owners, do not experience the large upfront costs, annual costs and ownership hassles associated with owning one or multiple second homes."

"Destination club memberships and timeshares units are generally purchased by the same age demographic — the “baby boomer” generation. According to recent member surveys, over 70% of Ultimate Escapes’ club members are between the ages of 45 – 64. According to ARDA (American Resort Developers Association), baby boomers born between 1946 – 1964 make up 55.2% of all timeshare owners; individuals born between 1925 – 1945 account for an additional 22.9% of timeshare ownership. According to ARDA, the average age of timeshare owners today is 52 years old."

"The real difference between the typical destination club member and the typical timeshare owner is in their level of income and financial net worth. According to ARDA, the average annual income of timeshare owners is less than $100,000 and the average net worth of timeshare owners is also less than $100,000. In Ultimate Escapes’ recent member survey, the club’s members responded that over 50% have annual incomes ranging from $250,000 to $5 million per year and more than 50% of club members have a net worth greater than $5 million."

"According to the Joint Center for Housing Studies at Harvard University (JCHS), in 2004, there were about 11 million households in the top tenth percentile of incomes-incomes of greater than $129,000 per year. Of this group, only 37% owned vacation or investment residential property (second homes, timeshares, one-to-four family rental properties, and other types of residential properties). The age groups with the largest share in owning other residential property were 16.3% of families with household head age of between 45 – 54 years old, 19.5% of families with household head age of between 55 – 64 years old, and 19.9% of families with household head age of between 65 – 74 years old."

"The affluent population is increasing in both annual income and net worth, driving demand for high-end, luxury vacation alternatives. According to JCHS, in their 1995 and 2004 Survey of Consumer Finances, net worth increased for all groups but increased at a much faster rate for households in the top quartile of the population. Wealth also notably jumped for households with heads of households in the 50 – 59 age groups and 60 – 69 age groups."

"At the very high end of the affluent population, Spectrem Group, a consulting and market research firm specializing in affluent and retirement markets, estimates that there are approximately 8.3 million “millionaires” (high net worth individuals with investable assets between $1 and $5 million, excluding housing) and roughly 930,000 “pentamillionaires” (very high net worth individuals with investable assets from $5 to $30 million, excluding housing)."

"The increasing wealth of “baby boomers,” coupled with the desirability of shared-use vacation alternatives, bodes well for continued destination club growth over many years, particularly given the low 1% market penetration of qualified buyers of luxury share-use vacation offerings, according to Ragatz Associates. If destination clubs are able to achieve the same market penetration in their target market over the next 10 – 20 years as timeshare operators have achieved over the last 20 years, the destination club industry could potentially grow from approximately 5,000 club members today to over 400,000 club members in 10 – 20 years (assuming a 5% market penetration of Sprectrem Group’s estimated 8.3 million “millionaires” and over 930,000 'pentamillionaires' in the US), without even considering the large potential corporate membership market (there are millions of private and public companies globally)."

"Timeshares currently comprise the largest segment of the overall shared ownership vacation market, with annual sales in 2008 of $9.7 billion, according to ARDA. According to ARDA, there were over 1,629 timeshare resorts operating in 2008, with seven million timeshare intervals owned and 99% of timeshare owners participating in either the RCI or Interval timeshare exchange program. As shown below, timeshare growth since its inception has been dramatic, and timeshare sales represents a significant portion of annual profits at public resort and hospitality companies including Marriott International, Inc., Wyndham Worldwide Corporation, Starwood Hotels & Resorts Worldwide, Inc., Hyatt Hotels Corporation, The Walt Disney Company and Hilton Hotels Corporation."

"Ultimate Escapes’ management believes that the emerging luxury destination club market is still in its infancy and many years of continued growth potential, as major resort and hospitality brands like Ritz Carlton Destination Clubs and other luxury brands and new market entrants continue to enter the growing luxury marketplace. Ultimate Escapes’ management believes that barriers to entry in the destination club market are increasing and further consolidation is likely, forcing smaller destination club players to focus on niche markets, sell to larger clubs or go out of business. Established hospitality and resort brands will likely enter the growing luxury destination club market in greater numbers, as most recently demonstrated by the 2009 launch of the Ritz Carlton Destination Club. In addition, new destination clubs will continue to form in Europe and Asia, as well as existing clubs expanding their presence internationally to address greater affluence and future high growth markets in Europe and Asia."

Growth Strategy
"Ultimate Escapes’ management expects to achieve significant EBITDA and revenue growth over the next several years. Key elements of Ultimate Escapes’ future growth strategy include:"

  • Expand Organic Sales by:
    • Increasing brand awareness and marketing spend to generate new membership sales
    • Increasing member referrals through member events held in major metropolitan markets
    • Increasing sales staff in major cities throughout North America and internationally
    • Expanding corporate membership sales programs
    • Encouraging member upgrades with regular incentive programs
  • Pursue Additional Acquisitions: Less expensive to buy existing clubs and properties than build, due to historically low member acquisition costs and real estate costs.
  • Global Expansion in:
    • Europe
    • Asia
  • Introduce New Club Offerings through:
    • Equity club offering
    • Points-based membership plans
  • Marketing Partnerships/Joint Ventures with Hospitality REITS
  • “Private Label” Offerings with Resort and Hospitality Brands

Elements of Compensation of Executive Officers
"The compensation received by Ultimate Escapes’ named executive officers in 2008 consisted of the following elements:"

"Cash Compensation. Base salaries for Ultimate Escapes’ executive officers are established based on the scope of their responsibilities, historical performance and individual experience. Base salaries are reviewed annually, and adjusted from time to time. During 2008, Mr. Tousignant’s base salary was $425,769, Mr. Callaghan’s base salary was $355,192, Mr. Keith’s base salary was $374,152, Ms. Siwek’s base salary was $327,421, and Mr. Healy’s base salary was $119,230. Mr. Healy also receives sales-based commissions, which totaled $295,823 in 2008. In 2008, neither Ultimate Resort or Private Escapes paid cash bonuses to its executive officers."

"Equity-Based Incentive Compensation. Ultimate Resort also makes equity incentive awards to its employees and non-employee directors from time to time, in the form of grants of units of membership interests, some of which are immediately vested and some of which vest over time, conditioned on continued employment with Ultimate Resort during the vesting period, subject to accelerated vesting immediately prior to a sale or similar transaction involving Ultimate Resort (including the Acquisition). These awards are designed to provide the award recipients with an increased proprietary interest in pursuing the long-term growth, profitability and financial success of Ultimate Resort."

"Other Benefits. Each named executive officer is entitled to participate in all company-wide benefit plans available to employees generally, which currently includes health, dental, life and short and long term disability insurance benefits. Ultimate Escapes does not currently, and has not previously, made available to any employees any defined benefit pension or nonqualified deferred compensation plan or arrangement."

Notes To Consolidated Financial Statements
"In January 2009, we made a one-time non-refundable assessment fee to all Club members in order to raise working capital for 2009. As of June 30, 2009, approximately 70% of the members had paid the assessment fee, aggregating $10,798,855. The assessment, which was based on the amount of the members’ annual dues paid in 2008, was payable in four equal monthly installments beginning in January 2009 and is being recognized in income ratably in 2009. Members that elected not to pay their required assessment were placed on suspended status and were not able to use the Club’s properties until they paid their assessment and any outstanding annual dues. Members who paid their assessment will receive certain benefits, including an increase in the redemption amount of their membership to be refunded if they subsequently resign, as well as additional accommodation privileges at club properties for the next three years. In August 2009, we reactivated the suspended members, including reinstating any unused days and reservation rights in effect at the time of suspension and began allowing reactivated members to make new club reservations, provided their annual dues were paid when due. If a reactivated member subsequently resigns, any portion of their initial membership fee to be refunded to them under their Club Membership Agreement will be reduced by the amount of the special assessment fee plus interest at 10% per annum."

Ultimate Escapes will be a good test case for the idea of a publicly traded destination club. Quite possibly, we may see the creation of a new way for clubs to exist. Ultimate Escapes has completed the Private Escapes acquisition, a major condition for the acquisition to move forward. Receiving approval will be the next step, planned to conclude in October. The acquisition will usher in a new level of disclosure to the club and many details regarding the club's structure have already been released, including the estimated 60% occupancy rate of the collected Ultimate Escapes' properties for 2009 and the growth strategy moving forward that indicates that the club may not be done with their mergers and acquisitions.

Check back frequently to learn more about how the acquisition progresses and other news about Ultimate Escapes.