10-K 1 v181147_10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
  

FORM 10-K
 

 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     

COMMISSION FILE NUMBER   001-33743
 

ULTIMATE ESCAPES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
26-0188408
   
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3501 West Vine Street, Suite 225
Kissimmee, Florida 34741
(Address of principal executive office)
(Zip code)
(407) 483-1900
(Registrant’s telephone number, including area code)
 

Securities registered pursuant to section 12(b) of the Exchange Act:
 
Common Stock, $0.0001 par value per share
 
Common Stock Purchase Warrants
 
Securities registered pursuant to section 12(g) of the Exchange Act:  None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.          Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.          Yes  ¨    No  x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨   No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
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 (Check one):
 
Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2009, the last business day of the registrants’ most recently completed second fiscal quarter, the aggregate market value of their common equity held by non-affiliates was $58,852,988 based on the closing sales price of the registrant’s common stock of $7.75 per share on June 30, 2009. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
The number of shares outstanding of the registrant’s Common Stock, par value $0.0001 per share, as of March 31, 2010:  2,517,793
 
Documents Incorporated by Reference
 
None


 
 

 

ULTIMATE ESCAPES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
 
   
Page
PART I
     
Item 1.
Business
4
Item 1A
Risk Factors
14
Item 2.
Properties
29
Item 3.
Legal Proceedings
32
Item 4.
(Removed and Reserved)
32
 
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
33
Item 6.
Selected Financial Data
36
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
47
Item 8.
Financial Statements and Supplementary Data
48
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
48
Item 9A
Controls and Procedures
48
Item 9B
Other Information
48
 
PART III
     
Item 10
Directors, Executive Officers and Corporate Governance
49
Item 11
Executive Compensation
56
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
61
Item 13
Certain Relationships and Related Transactions and Director Independence
64
Item 14
Principal Accountant Fees and Services
69
 
PART IV
     
Item 15
Exhibits and Financial Statement Schedules
70
Signatures
71
Exhibit Index
72

 
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements made in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “potential,” “intend” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, business strategy and means to implement the strategy, the amount and timing of capital expenditures, the likelihood of our success in building our business, financing plans, budgets, working capital needs and sources of liquidity.  We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control.
 
Forward-looking statements, estimates and projections are based on management’s beliefs and assumptions, are not guarantees of performance and may prove to be inaccurate. Forward-looking statements also involve risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement and which may have a material adverse effect on our business, financial condition, results of operations and liquidity. A number of important factors could cause actual results or events to differ materially from those indicated by forward-looking statements. These risks and uncertainties include, but are not limited to, those factors listed in this Report under “Risk Factors.
 
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.
 
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this Report could have a material adverse effect on us.

 
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PART I
 
ITEM 1.   BUSINESS
 
Ultimate Escapes, Inc. (“we”, “us”, “our” or “the company”) operate a family of luxury destination club offerings, including Elite ClubTM, Signature ClubTM and Premiere Club TM , with over 1,200 affluent club members. We provide club members and their families with flexible access to a growing portfolio of multi-million dollar club residences, exclusive member services and resort amenities. We believe that we offer our club members access to more club destinations than any other luxury destination club in the world, with over 140 luxury club residences in 45 global destinations available in the mainland United States and Hawaii, Mexico, Central America, the Caribbean and Europe as of December 31, 2009. Elite Club properties target approximately $3 million in value, Signature Club properties target approximately $2 million in value and Premiere Club properties target approximately $1 million in value. As of December 31, 2009, we had 433 Elite Club members, 545 Signature Club members and 236 Premiere Club members. The majority of the properties are owned by us, and the others are leased on either a long or short term basis. All of the properties owned by us are subject to one or more mortgages. Of the 37 properties leased by us as of December 31, 2009, 27 were subject to long-term leases and ten were subject to short-term leases (including two short-term leases in which Private Escapes Holdings, LLC (“PE Holdings”), an affiliate of ours, is the lessor).
 
We combine the privacy and intimacy of multi-million dollar residences in a wide variety of global resort destinations with “white glove” member concierge services and club amenities. Our management believes that we offer a unique and compelling value proposition that is a cost effective vacation alternative for a large, affluent target market that Spectrem Group estimates at year end 2008 included approximately 6.7 million “millionaires” in the United States with assets of at least $1 million and approximately 840,000 “pentamillionaires” in the United States with assets of at least $5 million. For the consumer market, a club membership offers a more flexible, efficient and cost effective vacation alternative as compared with the high costs, inefficiencies and hassles of second home ownership in this cost range, the expense, uncertainties and time-consuming effort to rent luxury villas in the United States and international markets or the high costs and typical small rooms of luxury hotels. For the corporate market, our corporate membership option targets the growing multi-billion dollar corporate reward and incentive market, and offers corporations an affordable, flexible corporate reward and incentive program for top performing employees, senior executives, board members, key advisors, existing customers and new prospects.
 
In addition to providing club members with flexible access to a portfolio of over 140 luxury club residences in 45 global destinations as of December 31, 2009, we provide our club members with preferred access to over 140 four and five-star hotel properties and resorts affiliated with The Ultimate Collection TM , offering club members access to hundreds of beach, mountain, golf, metropolitan and leisure club properties in world-class resorts and destinations throughout the world. With multiple club offerings and various club membership levels in each club, we believe that we have the widest market appeal in the destination club industry.
 
Club members join us by paying a one-time, membership fee (similar to a golf club membership) currently ranging from $70,000 to $450,000, depending on the club level and membership usage plan. Club members also pay annual dues currently ranging from $8,000 to $49,000 per year, again based on the corresponding club level and membership usage plan. In addition to annual dues, additional revenues are derived from upgrades, additional use fees and reciprocity fees from third party operations. As currently structured, if a club member resigns from the club, his or her club membership is redeemed on a three-in, one-out basis, which means that three new club members must join the club before a current club member who desires to resign from the club will have his or her club membership redeemed. Such redeemed club member typically receives 80% of the club membership resale proceeds with us retaining a 20% transfer fee. This redemption mechanism is common in private country clubs and has also been adopted by most destination clubs.

 
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We also offer an Ultimate DiscoveryTM “trial membership” whereby qualified club prospects or club member referrals can purchase a seven-day “mini-vacation package” for an average of $3,500 and experience the club as an authorized guest at one of our club properties within six months of purchasing an  Ultimate Discovery  trial membership. If the trial member purchases an Ultimate Escapes lifetime membership within 30 days of completing the Ultimate Discovery vacation experience, then 100% of the fee paid for the Ultimate Discovery trial membership is applied toward the purchase of the lifetime membership.
 
In 2008, we launched the Ultimate Reciprocity ProgramTM, an affiliate club membership reciprocity program targeting a growing market estimated by Ragatz Associates to consist of approximately 50,000 fractional and private residence club owners at hundreds of private residence clubs and luxury fractional ownership resorts in the United States, Mexico, Central America, the Caribbean and Europe. The Ultimate Reciprocity Program offers participating luxury resorts the opportunity to offer their shared-use owners an affiliate club membership that provides annual reciprocity access to our global club properties, affiliate member services and club amenities; this program provides owners at participating luxury resorts with reciprocal access to over 140 club properties offered by us in the continental United States, Hawaii, Mexico, Central America, the Caribbean and Europe. Participating resort developers sign multi-year reciprocity agreements with us and pay an upfront affiliate resort developer fee depending on resort size. In addition, participating resorts pay a one-time affiliate member fee of $3,000 for each shared-use owner that participates at each affiliated resort, which fee includes the affiliate club member’s first year annual dues. Affiliate club members also pay us a $250 transaction fee for each reciprocity transaction executed within our reservation system, and each affiliate club member continues to pay its affiliate member annual dues beginning in the second year of its affiliate club member reciprocity agreement with us.
 
Participating developers and shared-use owners contribute up to two weeks per year of participating shared-use ownership inventory into our proprietary web-based reservation system, providing over 1,200 club members with additional benefits, including expanded access to new destinations and affiliated resorts generally at no additional cost. The Ultimate Reciprocity Program also provides participating luxury resort developers with custom-designed websites developed and hosted by us that offer affiliate resort developers and their club members online information about our destinations, club properties, affiliate member services and on-line availability, leveraging our advanced web-based technology platform.
 
Participating resorts have access to a variety of our reciprocity services designed to help improve developer real estate sales performance, owner retention and owner referrals. Additionally, we offer participating resorts an opportunity to differentiate their shared ownership offerings from other non-affiliated resorts, helping to increase participating resort developer’s sales and maintain higher price points. To participating resort developers, bundling the Ultimate Reciprocity Program  with luxury shared ownership real estate creates a unique “hybrid” offering that greatly expands the number of luxury resort destinations and club properties that affiliate club members can book reservations and travel to.
 
Resorts that participate in the Ultimate Reciprocity Program receive increased market exposure from a base of over 1,200 affluent club members and their family and friends, some of whom also explore purchasing additional vacation real estate while traveling to club destinations. In addition, participating resorts benefit from reciprocal reservations booked by our club members and their guests, who on average spend between $5,000 and $10,000 per vacation on food, drinks, golf, spa, entertainment and shopping when traveling to various club properties and affiliated properties.
 
The destination club industry has gone through dramatic changes and a period of rapid consolidation over the last few years, which has led to fewer, larger destination clubs that have achieved operating efficiencies as a result of scalable, sustainable business models, experienced management teams, strong capital bases, financial transparency and affordable access to high quality club member services in the wide variety of global destinations.

 
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We believe that the two largest clubs in the industry, as measured by numbers of members, are Exclusive Resorts and our company, with a combined 82% global market share in the destination club industry, as noted in the chart below, which shows the number of club members in various destination clubs and market share, based on industry data available to us as of December 2009.

 
We were structured to be more affordable than other luxury consumer vacation travel options and business incentive travel options, including second home ownership, while simultaneously offering equal or superior benefits (especially for anyone requiring flexible access to private homes with multiple bedrooms for friends and family). For individual club members, we eliminate the burdens of owning one or multiple second homes and the uncertainties and expense of renting different homes or villas in multiple United States and international markets. For corporations, we offer a more affordable, flexible corporate reward and incentive program for top performers, key advisors, key employees and important customers and prospects.
 
We operate a proprietary occupancy model that provides club members with flexible access and reasonable availability, principally by maintaining a low 6-to-1 equivalent member-to-property ratio and purposely under-utilizing each club property, targeting annual club occupancy of 75% or less.  An equivalent member is a member who has a 60 day annual plan. For all club properties, occupancy was 57% during 2008 and 61% during 2009. We charge a one-time membership fee to join the club that we believe is generally lower than the typical down payment for a single second home property, and charge annual dues that are generally a fraction of the cost of owning and operating a single $1 – $3 plus million second home.
 
We have focused on the creation of a unique brand supported by a valuable portfolio of luxury properties in some of the world’s premier resort and urban destinations. These luxury properties target the affluent family vacationer. We believe that this affluent segment is particularly well-positioned for future growth.
 
We differentiate ourselves from our competitors with the widest offerings in the destination club industry, with multiple clubs each offering five tiers of club membership plans. The breadth of this offering provides our club members with multiple upgrade paths, both in terms of use rights and club levels. Our club membership provides club members with internal reciprocity use within all club properties, which in some cases requires a nightly reciprocity fee for members in Premiere Club or Signature Club to reserve residences in more expensive clubs (for example, Premiere Club members reserving Elite Club residences through internal reciprocity). The flexibility allows club members to grow and change with the club, while providing incremental revenues streams to us.
 
James M. Tousignant, the founder of Ultimate Resort, LLC (“Ultimate Resort”) and our President and Chief Executive Officer, and Richard Keith, the founder of Private Escapes Destination Clubs (“Private Escapes”) and our Chairman, along with many other members of our management team, have worked together for many years and have over 100 years of collective experience building and managing public and private companies.

 
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History
 
We were formed on May 14, 2007, as a blank check company for the purpose of acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more domestic or international operating businesses. We changed our name from “Fortress America Acquisition Corporation II” to “Secure America Acquisition Corporation” on August 6, 2007 and on October 29, 2009 changed our name to “Ultimate Escapes, Inc”.
 
On October 29, 2009, we consummated a business combination with Ultimate Escapes Holdings, LLC (“Ultimate Escapes Holdings”), pursuant to a Contribution Agreement dated September 2, 2009, by and among us, Ultimate Escapes Holdings, Ultimate Resort Holdings, LLC (“Ultimate Resort Holdings”) and James M. Tousignant, in his capacity as the representative of the holders of the issued and outstanding ownership units of Ultimate Escapes Holdings and Ultimate Resort Holdings (the “Owner Representative”), as amended by Amendment No. 1 dated as of October 28, 2009 (the “Contribution Agreement”). Although we legally acquired Ultimate Escapes Holdings and it became our subsidiary, for accounting purposes, the business combination with Ultimate Escapes Holdings was accounted for as a reverse merger (the “reverse merger”), whereby Ultimate Escapes Holdings is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to have acquired us.
 
In accordance with the Contribution Agreement, we received 1,232,601 ownership units of Ultimate Escapes Holdings. The owners of Ultimate Escapes Holdings prior to the reverse merger, consisting of Ultimate Resort Holdings, PE Holdings and JDI Ultimate, L.L.C. (“JDI”) (collectively, the “UE Owners”) retained the remaining 7,556,675 ownership units of Ultimate Escapes Holdings, which, under the terms of the amended and restated operating agreement of Ultimate Escapes Holdings (the “Operating Agreement”) may be converted on a one-to-one basis into shares of our common stock.  These 7,556,675 ownership units are held as follows: 3,858,571 units by Ultimate Resort Holdings, 3,123,797 units by JDI and 574,307 units by PE Holdings. Of such retained units, 717,884 units were deposited into escrow at the closing of the reverse merger to secure the indemnification obligations of the UE Owners to us. Additionally, the UE Owners are eligible to receive up to an aggregate of 7,000,000 additional ownership units of Ultimate Escapes Holdings, convertible on a one-to-one basis into shares of our common stock upon the achievement of certain Adjusted EBITDA milestones, as set forth in the Operating Agreement. For each ownership unit of Ultimate Escapes Holdings issued to the UE Owners, the Owner Representative also received one share of our Series A Voting Preferred Stock. At any time that any UE Owner exchanges ownership units of Ultimate Escapes Holdings for shares of our common stock, a like number of shares of Series A Voting Preferred Stock will be canceled. Upon consummation of the reverse merger, Ultimate Escapes Holdings became our subsidiary, and the business and assets of Ultimate Escapes Holdings and its subsidiaries are our only operations.
 
Ultimate Escapes Holdings was founded in 2004, as Ultimate Resort, by Mr. 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 with entrepreneurial ventures and public companies.
 
Since its inception in 2004, Ultimate Resort grew rapidly to become one of the largest players in the destination club industry. Recognizing that achieving “critical mass”, which it viewed as having at least 800 to 1,000 club members, 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 Holdings acquired all of the assets and business of its parent company, Ultimate Resort, 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, secured debt financing was obtained from CapitalSource Finance, a NYSE-listed specialty lender. In addition, new club membership agreements were signed with 645 previous Tanner & Haley club members. In February 2008, additional real estate assets were purchased for $12 million from Ventures Equity Vacation Club and new club membership agreements were signed with 19 previous club members of Ventures Equity Vacation Club.

 
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In May 2008, Ultimate Resort Holdings signed a cooperative marketing agreement and a definitive contribution agreement to acquire certain assets and assume certain liabilities from Private Escapes, including club properties of approximately $50 million, located in 28 beach, mountain, golf and metropolitan destinations throughout the continental United States, Hawaii, Mexico, Central America, the Caribbean and Europe. Private Escapes was founded by our Chairman, Richard Keith, in 2003 and became a market leader at the one million dollar home entry level category and, over several years of operations, became the industry’s third largest destination club as measured by number of club members, according to HalogenGuides. Also in May 2008, Ultimate Resort Holdings began operating its business under the “Ultimate Escapes” brand name.
 
On September 15, 2009, Ultimate Resort Holdings contributed all of its assets and liabilities to Ultimate Escapes Holdings and, on the same date, Ultimate Escapes Holdings completed the acquisition of a majority of the assets of Private Escapes. On October 29, 2009, we completed the reverse merger business combination with Ultimate Escapes Holdings.

Industry

Luxury destination clubs first started to appear in the market in 1999 and since then have become the second largest segment of the $1.5 billion luxury shared-use vacation market in 2008, according to Ragatz Associates. The luxury shared-use vacation market includes destination clubs, traditional fractional interests and private residence clubs. Destination clubs differ from traditional fractional interests and private residence clubs in a number of ways. The destination club and fractional industry business models are fundamentally based on the purchase of either a deeded real estate interest (timeshare/fractional) or some form of member use right to access a collection of various club properties and destinations (destination club). Within the fractional and destination club umbrella, there are a variety of approaches, classified into the following three categories:
 
Traditional Timeshare Interval Week Ownership — The consumer purchases a deeded real estate interest to a specific week at a specific resort. This specific week purchased may then be exchanged through internal and/or external exchange systems (such as RCI LLC or Interval, Leisure Group, Inc.), either for a different interval week from another owner or, in some cases, for an exchange credit. The traditional timeshare product structure has been successful with low-to-medium income consumers, but has not been a preferred choice by high-income, affluent consumers looking for a luxury vacation experience, and, in our view, is not a competitive offering for affluent consumers, as compared to new luxury vacation lifestyle products like destination clubs being introduced to the market. Timeshare units are generally smaller (1 – 2 bedroom, 1,200 square feet), with modest furnishings and finishes and are generally thought to be over-priced, hard to resell by owners and less flexible from the consumer’s point of view.
 
Fractional Ownership/Private Residence Clubs — Similar to the traditional timeshare interval week system, the fractional or private residence club owner typically purchases a higher quality fractional unit that generally provides a larger deeded fractional interest, typically a one-sixth, one-tenth or one-twelfth deeded ownership interest in a particular fractional unit. Originally started in and around seasonal ski areas, this product’s pricing and use structure is generally based on seasonal usage patterns and owner use is typically planned nine to twelve months in advance.

 
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Destination Club Membership — Destination clubs generally offer non-equity, right-to-use club memberships that are structured more like membership in a private country club. Destination clubs sell club memberships that enable a club member to use the club’s homes, amenities and club member services for a specified amount of time, typically two to six weeks per year. They also provide their club members with access to fully furnished, luxury one to six bedroom residences in any of the club’s portfolio of residences. In addition, destination clubs typically provide many of the amenities of a luxury five-star hotel, including personal concierge services and access to private beaches, spas, golf courses, ski resorts and yacht clubs. Destination clubs have grown to $349 million in annual revenue in 2008, according to Ragatz Associates, appealing to affluent club members who have exclusive use of a growing portfolio of beautiful club homes, easy and flexible access, reasonable long-term value and a superior level of member services and resort amenities.
 
Growth Strategy
 
Our objective is to achieve significant EBITDA and revenue growth over the next several years. Key elements of our future growth strategy include:
 
Expand Organic Sales by:
 
Increasing brand awareness and marketing spend to generate new club membership sales
 
Increasing club 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 club member upgrades with regular incentive programs
 
Pursue Additional Acquisitions:  Less expensive to buy existing clubs and properties than build, due to historically lower club member acquisition costs and real estate costs.
 
Global Expansion in:
 
Europe
 
Asia
 
Marketing Partnerships/Joint Ventures with Hospitality REITS
 
“Private Label” Offerings with Resort and Hospitality Brands
 
Club Membership Plans and Benefits
 
We offer multiple club membership plans divided into three club tiers designated Premiere, Signature and Elite, that provide club members between 14 and 60 days of use annually at a unique collection of club and affiliate destinations located around the world. Our destination properties are located in or near markets with global tourist and business appeal that offer club members a world class vacation experience. By combining the best elements of multi-million dollar single family residences with world class amenities and concierge service, management believes it has created the best and most cost-effective option for access to luxury second-home ownership available in the market today.

 
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Premiere Club TM
 
Premiere Club membership plans range from the Bronze plan, with an initial membership fee of $70,000 and $8,000 in annual dues for 14 days of annual vacation use, up to the  Platinum Plus  plan, with an initial membership fee of $150,000 and $17,000 in annual dues for 60 days of annual vacation use. All of our club membership plans include extended family use for maximum value and flexibility, as club members may grant access to their unaccompanied family members (age 21 and over) for any amount of their given annual use. Each home in the Premiere Club portfolio is designed to accommodate families with children of all ages.  Premiere Club properties have a target home value of approximately $1 million. The club allows its members to upgrade their club membership plans as their vacation needs evolve every year.
 
Signature Club TM
 
Signature Club membership plans range from the Bronze plan, with an initial membership fee of $145,000 and $11,500 in annual dues for 14 days of annual vacation use, up to the  Platinum Plus  membership plan, with an initial membership fee of $300,000 and $35,500 in annual dues for 60 days of annual vacation use. All of our club membership plans included extended family use for maximum value and flexibility, as club members may grant access to their unaccompanied family members (age 21 and over) for any amount of their given annual use. Each home in the Signature Club portfolio is designed to accommodate families with children of all ages.  Signature Club properties are generally larger than homes in the Premiere Club and have a target home value of approximately $2 million. The club allows its members to upgrade their club membership plans as their vacation needs evolve every year.
 
Elite Club TM
 
Elite Club membership plans range from the Bronze plan, with an initial membership fee of $200,000 and annual dues of $16,000 for 14 days of annual vacation use, up to the Platinum Plus plan, with an initial membership fee of $450,000 and $49,000 in annual dues for 60 days of annual vacation use. All of our club membership plans included extended family use for maximum value and flexibility, as club members may grant access to their unaccompanied family members (age 21 and over) for any amount of their given annual use. Each home in the Elite Club portfolio is designed to accommodate families with children of all ages.  Elite Club properties are generally larger than homes in the Premiere Club and Signature Club and are of the highest standards, with target home values of approximately $3 million and the club allows club members to upgrade their club membership plans as their vacation needs evolve every year.
 
Members of any club membership plan can add a “corporate option” to their club membership for an additional 10% of their club membership and annual dues. This allows the club member to designate any key executives, employees, customers and business prospects (21 and over) to use the club unattended by the primary club member. The corporate use option has proven to be a valuable tool for employee rewards and retention programs.
 
The Ultimate Collection TM
 
The Ultimate Collection provides club members with access to over 140 luxury four and five-star hotels in many of the world’s most desirable cities and resorts throughout the United States, Europe, Asia, the Middle East, Central America and South America, Africa and Australia. Club members can make reservations at any of the beautiful luxury hotels in exciting cities and resorts, using up to seven of the club membership “included days” each year, as if a club member was using club properties.
 
Ultimate Rewards Program TM
 
The Ultimate Rewards Program is the destination club industry’s first club membership rewards points program which rewards club members who recommend a friend, family member or business colleague for club membership if they subsequently join us. Club members can redeem reward points for extra club days, annual dues, private yacht and jet charters, private chef services, trips to special events and much more.

 
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Smart Home Technology
 
We have invested in developing a proprietary web-based technology platform and we are planning to begin using “smart home” technology to improve our ability to manage club properties, reduce energy and water consumption and provide club members with a safer and more comfortable experience and home environment.
 
Seasonality
 
Our business, like most organizations in the travel industry, is subject to seasonal activity. The chart below shows overall club occupancy by month for 2009 and this seasonality pattern is typical for historical years as well. High travel seasons are typically January through March for winter vacations and June through August for summer vacations. A key factor is the school calendar, for those club members with children still living at home, which creates greater occupancy pressure during holiday periods. Seasonality also varies by type of destination. For example, club mountain properties are typically heavily occupied during the ski season, yet tend to remain vacant during the “shoulder seasons” (April through early June and September through December) resulting in an annualized occupancy of 40 – 45%. Conversely, club city destinations are typically not seasonal due to both business and pleasure trips, consistently generating month-over-month club occupancies in the 80 – 90% range.
 
2009 Seasonality
 
Regulation
 
Our business is subject to and affected by international, federal, state and local laws, regulations and policies, which are subject to change. The descriptions of the laws, regulations and policies that follow are summaries of those which we believe to be most relevant to our business and do not purport to cover all of the laws, regulations and policies that affect our businesses. We believe that we are in material compliance with these laws, regulations and policies.
 
Marketing Operations. Our club products are marketed through a number of distribution channels, each of which is regulated at the federal and state level. Such regulations may limit our ability to solicit new customers or to market additional products or services to existing customers. For example, to comply with state and federal “do not call” regulations, we have adopted processes to routinely identify and remove phone numbers listed on the various “do not call” registries from our calling lists and have instituted procedures for preventing unsolicited or otherwise unauthorized telemarketing calls. We have similarly adopted email messaging practices, and utilize various software systems responsive to the requirements of various state and federal regulations which may place limitations on our ability to engage our consumers in electronic mail marketing campaigns, most notably, the CAN-SPAM Act, which imposes various requirements on the transmission of e-mail messages whose primary purpose is to advertise or promote a commercial product or service. Further we have placed an emphasis on permission-based marketing and referrals.

 
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Privacy and Data Collection.  The collection and use of personal data of our customers, as well as the sharing of our customer data with affiliates and third parties, are governed by privacy laws and regulations enacted in the United States and in other jurisdictions around the world. For instance, several states have introduced legislation or enacted laws and regulations that require compliance with standards with standards for data collection and protection of privacy and, in some instances, provide for penalties for failure to notify customers when the security of a company’s electronic/computer systems designed to protect such standards are breached, even by third parties. Other states, such as California, have enacted legislation that requires enhanced disclosure on Internet web sites regarding consumer privacy and information sharing among affiliated entities or have such legislation pending. In addition, the European Union Directive on Data Protection requires that, unless the use of data is “necessary” for certain specified purposes, including, for example, the performance of a contract with the individual concerned, consent must be obtained to use the data (other than in accordance with our stipulated privacy policies) or to transfer it outside of the European Union. We believe that we are in material compliance with the laws and regulations applicable to privacy and data collection as such are relevant to our business.
 
 
Internet.  A number of laws and regulations have been adopted to regulate the Internet, particularly in the areas of privacy and data collection. In addition, it is possible that existing laws may be interpreted to apply to the Internet in ways that the existing laws are not currently applied, particularly with respect to the imposition of state and local taxes on transactions through the Internet. Regulatory and legal requirements are particularly subject to change with respect to the Internet. We cannot predict with certainty whether such new requirements will affect our practices or impact our ability to market our products and services online.
 
 
Seller of Travel Regulation.  Our activities in the State of Florida are governed by the Florida Sellers of Travel Act, Chapter 559, Florida Statutes. We currently hold all necessary registrations under this statute, and believe that we are in material compliance with its provisions.
 
 
Regulations of Timeshare Plan and Similar Products.  We are confident based upon various regulatory opinions and court decisions that our business is not currently subject to any various State regulations governing timeshare plans and similar products, provided however that we have not received nor requested either a declaratory ruling or no-action letter from any State agency with respect to same. Because of the lack of any enacted regulation as specifically respects the destination club industry, we cannot predict with certainty the likelihood of the imposition of new laws and regulation of the industry, or the likelihood that existing regulations of timeshare plans will be extended, interpreted and applied to include the destination club industry and/or the club products currently being marketed and sold in our business.
 
Competition
 
We operate principally in the luxury vacation industry and compete against numerous global, regional and boutique destination clubs; as well as other 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 resorts and other transient/leisure accommodations; as well as alternative leisure and recreation categories, such as golf clubs or other club membership organizations. We have encountered and expect to encounter in the future intense competition from our rivals in the destination club industry and from other companies offering competitive products and services. Many of our competitors have greater consumer recognition or resources and/or more established and familiar products than us. The factors that we believe are important to customers include:

 
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number and variety of club destinations available to club 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).
 
We have many competitors for our club members, including other major resort destinations worldwide. We also directly compete 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. Our destination club members can choose from any of these alternatives.
 
Club Members Located Abroad
 
As of December 31, 2009, we had 54 club members that reside outside the United States in the following countries:
 
Mexico
    2  
Canada
    41  
Estonia
    1  
Germany
    1  
United Kingdom
    8  
Brazil
    1  
Total:
    54  
 
Intellectual Property
 
We own the trademarks “Ultimate Escapes,” “Ultimate Resort,” “Private Escapes” and related trademarks. Such trademarks are material to our business. All of the material trademarks are registered (or have applications pending) with the United States Patent and Trademark Office as well as, in some cases, with the relevant authorities in certain foreign countries.
 
We also own the following Internet domain names: ultimateescapes.com, whatisadestinationclub.com, whatsadestinationclub.com, private-escapes.com, ultimateescapes.info, ultimateescapes.net, ultimateescapes.org, ultimateescapes.tv, privateescapes.com and privateescapes.co.uk.

 
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Employees
 
As of December 31, 2009, we had 88 full time employees. Our employees are not covered under any collective bargaining agreement and we have never experienced a work stoppage. We believe we have good relations with our employees.
 
ITEM 1A.
RISK FACTORS
 
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
 
Risks Related to Our Company
 
We have a history of losses, and may never achieve or sustain profitability.
 
We incurred substantial losses, and we may continue to incur substantial losses in the future. We incurred net losses of $13.0 million and $23.2 million during the year ended December 31, 2009 and the year ended December 31, 2008, respectively. We have also experienced a decrease in new club membership sales and existing club member upgrades during the last six months of 2008 and all of 2009. These circumstances raise substantial doubt about our ability to continue to fund operating losses and provide necessary operating liquidity. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
 
We have received a report from our independent registered public accounting firm expressing doubt regarding our ability to continue as a going concern.
 
Our independent registered public accounting firm noted in their report accompanying our consolidated balance sheets of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in owners’ equity (deficit) and cash flows for the years ended December 31, 2009 and 2008 that our recurring losses from operations and ongoing requirements for additional capital investment raise substantial doubt about our ability to continue as a going concern. Management plans to maintain our viability as a going concern by:
 
if necessary, selling selected club properties;
 
closely maintaining and reducing operating expenses; and
 
seeking to raise additional working capital.
 
We cannot assure you that our plans will be successful. This doubt about our ability to continue as a going concern could adversely affect our ability to obtain additional financing at favorable terms, if at all, as such an opinion may cause investors to have reservations about our long-term prospects, and may adversely affect our relationship with customers and others. If we cannot successfully continue as a going concern, our stockholders may lose their entire investment in us.

 
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Our business is capital intensive and the lack of available financing to fund the acquisition of additional destination club properties and our operations could adversely affect our ability to maintain and grow our club membership base which could adversely affect our business, financial condition and results of operations.
 
In order for our destination clubs to remain attractive and competitive, we have to spend a significant amount of money to keep the properties well maintained, modernized and refurbished and to add new luxury properties periodically to our portfolio of destination club properties as we add new club members. This creates an ongoing need for cash and, to the extent we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. We could finance future expenditures from any of the following sources:
 
 
cash flow from operations;
 
 
non-recourse, sale-leaseback or other financing;
 
 
bank borrowings;
 
 
annual dues increases or club member assessments;
 
 
public and private offerings of debt or equity;
 
 
sale of existing real estate; or
 
 
some combination of the above.
 
We might not be able to obtain financing for future expenditures on favorable terms or at all, which could inhibit our ability to continue to grow. Events during 2008 and 2009, including the failures and near failures of numerous 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, our financial results have been and may continue to be impacted by the cost and availability of funds needed to grow our business.
 
We have a substantial amount of indebtedness, which could adversely affect our financial position.
 
We have a substantial amount of indebtedness. As of December 31, 2009, we had total debt of approximately $123 million, consisting of $99 million of borrowings under our senior secured credit facility and $24 million of additional debt obligations secured by destination club properties. Our senior secured credit facility is an amended and restated $110 million revolving credit facility with CapitalSource, secured by our real estate assets, which will mature on April 30, 2011, subject to extension by us for up to two one-year periods. The revolving credit facility includes financial and operational covenants that limit our ability to incur additional indebtedness and pay dividends as well as purchase or dispose of significant assets. Covenants in the revolving credit facility include obligations to maintain either a restricted cash balance of not less than six months of debt service or a debt service coverage ratio of 1.25 to 1, to maintain a leverage ratio between debt and consolidated net worth of no more than 3.5 to 1, to comply with specified ratios of number of club properties to club members, to have a net loss of no more than $10 million in fiscal 2009  and $5 million in fiscal 2010, and to have net income in each year thereafter (as adjusted in each year for the non-refundable portion of new member initiation fees not yet recognized in income and, in 2009, for non-cash stock-based compensation), and to maintain a consolidated debt ratio of no more than 80%. Although we believe that we are in compliance with all of the covenants in the revolving credit facility, we have previously violated certain covenants contained in our prior revolving credit facility with CapitalSource, which covenant violations were waived by the lender, we cannot provide any assurance that in the future, if we were to need a waiver of a breach of a covenant, that such a waiver would be granted. In addition, we have approximately $23 million in additional indebtedness secured by real estate assets with various first and second mortgage lenders. In the event we default on our secured debt obligations, the lenders could enforce their rights under the loan agreements, which would impair our ability to conduct our business and have a material adverse effect on our business, financial condition and results of operations. If we are unable to make payments on one or more mortgages on the properties or otherwise default on our debt obligations, the lenders could foreclose on such properties, which would have a material adverse effect on our business, financial condition and results of operations. We may also incur significant additional indebtedness in the future. Our substantial indebtedness may:

 
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make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on our indebtedness;
 
 
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
 
 
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;
 
 
require us to use a substantial portion of our cash flow from operations to make debt service payments;
 
 
limit our flexibility to plan for, or react to, changes in our business and industry;
 
 
place us at a competitive disadvantage compared to less leveraged competitors; and
 
 
increase our vulnerability to the impact of adverse economic and industry conditions.
 
We may not be able to generate sufficient cash to service our debt obligations.
 
Our ability to make payments on and to refinance our indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
 
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. 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 dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit agreement restricts our ability to dispose of assets, and requires the use of proceeds from any disposition of assets to repay our indebtedness. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
 
The luxury vacation industry is highly competitive and we are subject to risks relating to competition that may adversely affect our performance.
 
We operate principally in the luxury vacation industry and compete against numerous global, regional and boutique destination clubs; as well as other 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 resorts and other transient/leisure accommodations; as well as alternative leisure and recreation categories, such as golf clubs or other club membership organizations. We have encountered and expect to encounter in the future intense competition from our rivals in the destination club industry and from other companies offering competitive products and services. Many of our competitors have greater consumer recognition or resources and/or more established and familiar products than us. The factors that we believe are important to customers include:
 
 
number and variety of club destinations available to club members;
 
 
quality of member services and concierge services;
 
 
quality of destination club properties;
 
 
pricing of club membership plans;

 
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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).
 
We have many competitors for our club members, including other major resort destinations worldwide. We also directly compete 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. Our destination club members can choose from any of these alternatives.
 
We compete with numerous other resorts that may have greater financial resources than we do and that may be able to adapt more quickly to changes in customer requirements or devote greater resources to promotion of their offerings than we can. We believe that developing and maintaining a competitive advantage will require continued investment in our technology platform, brand, existing destination club properties and the acquisition of additional luxury properties to our portfolio of destination club properties. There can be no assurance that we will have sufficient resources to make the necessary investments to do so, or that we will be able to compete successfully in this market or against such competitors.
 
We are subject to the operating risks common to the luxury vacation industry which could adversely affect our business, financial condition and results of operations.
 
Our business is subject to numerous operating risks common to the luxury vacation industry. Some of these risks include:
 
 
impact of war and terrorist activity (including threatened terrorist activity) and heightened travel security measures instituted in response thereto;
 
 
travelers’ fears of exposure to contagious diseases;
 
 
decreases in the demand for transient rooms and related lodging services, including a reduction in personal and business travel as a result of general economic conditions;
 
 
cyclical over-building in the vacation ownership industry;
 
 
restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations and other governmental and regulatory action;
 
 
changes in travel patterns;
 
 
the costs and administrative burdens associated with compliance with applicable laws and regulations, including, among others, franchising, timeshare, privacy, licensing, labor and employment, and regulations under the Office of Foreign Assets Control and the Foreign Corrupt Practices Act;
 
 
the availability and cost of capital to allow us to fund acquisitions of additional destination club properties, renovations and investments;
 
 
disruptions in relationships with third parties, including marketing alliances and affiliations with luxury resort property owners;
 
 
foreign exchange fluctuations; and
 
 
the financial condition of the airline industry and the impact on air travel.
 
The matters described above could result in a decrease in the number, or lack of growth, in our destination club members and could have a material adverse effect on the luxury vacation industry, which in turn could have a material adverse effect on our business, financial condition and results of operations.

 
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The current slowdown in the travel industry and the global economy generally will continue to impact our financial results and growth.
 
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 has reduced, and may in the future reduce the demand for our destination club memberships and may increase club member resignations and redemptions. Accordingly, our 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.
 
We are subject to the risks that generally relate to real estate investments, which may have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to the risks that generally relate to investments in real property because we own most of our destination club properties. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. In addition, our loan facility restricts our ability to sell our assets, including our real estate holdings. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income and financial condition will be adversely affected. The real estate investment industry is susceptible to trends in the national and/or regional economies and there can be no assurance that we can operate our destination club properties and then later sell any or all of them at a profit.
 
The need for ongoing property renovations could adversely affect our business, financial condition and results of operations.
 
Our properties require routine maintenance as well as periodic renovations and capital improvements. Ongoing renovations at a particular property may negatively impact the desirability of the property as a vacation destination. A significant decrease in the supply of available vacation rental accommodations and the need for vacation rental services during renovation periods, coupled with the inability to attract vacationers to properties undergoing renovations, could have a material adverse effect on our business, financial condition and results of operations.

 
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Environmental liabilities, including claims with respect to mold or hazardous or toxic substances, could have a negative impact on our reputation and cause us to incur additional expense to remedy any such liability or claim.
 
Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous property owner of real property may be liable for the costs of removal or remediation of hazardous or toxic substances, including mold, on, under or in such property. These laws could impose liability without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properly clean up such substances when present, could jeopardize our ability to develop, use, sell or rent the real property or to borrow using the real property as collateral. If we arrange for the disposal or treatment of hazardous or toxic wastes, we could be liable for the costs of removing or cleaning up wastes at the disposal or treatment facility, even if we never owned or operated that facility. Other laws, ordinances and regulations could require us to manage, abate or remove lead or asbestos containing materials. Similarly, the operation and closure of storage tanks are often regulated by federal, state, local and foreign laws. Certain laws, ordinances and regulations, particularly those governing the management or preservation of wetlands, coastal zones and threatened or endangered species, could limit our ability to develop, use, sell or rent our real property.
 
We cannot provide any assurances that environmental issues will not exist with respect to any destination club property we own or acquire. Even if environmental inspections are made, environmental issues may later be determined to exist because the inspections were not complete or accurate or environmental releases migrate to the properties from adjacent property. In addition to liability for environmental issues which can substantially adversely impact our business and financial condition, the marketability of the destination club properties for sale or refinancing can be adversely affected because of the concerns of a third party who may buy or lend money on the properties over the possible environmental liability and/or environmental clean-up costs. In addition, our reputation may be damaged by any alleged claim or incurrence of environmental liabilities, which could reduce demand for our destination club memberships and have a material adverse effect on our business.
 
We own properties that are located internationally and thus are subject to special political and monetary risks not generally applicable to our domestic properties.
 
We operate properties located abroad which, as of December 31, 2009, included 44 properties in 12 international locations. We intend to expand our portfolio of international destination club properties. Properties abroad generally are subject to various political, geopolitical, and other risks that are not present or are different in the United States. These risks include the risk of war, terrorism, civil unrest, expropriation and nationalization and regulation, as well as the impact in cases in which there are inconsistencies between U.S. law and the laws of an international jurisdiction. In addition, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions, in the event that we increase our operation of properties abroad.
 
We have a limited operating history, which may make it difficult to predict our future performance.
 
We have been operating only since 2004 and therefore do not have an established operating history. In addition, the acquisition of certain assets and liabilities of Private Escapes was consummated on September 15, 2009, and as a result we now have a much larger base of club members, club properties and employees to manage and operate. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
 
We may experience financial and operational risks in connection with acquisitions. In addition, businesses acquired by us may incur significant losses from operations or experience impairment of carrying value.
 
We completed our acquisition of certain assets and liabilities of Private Escapes on September 15, 2009, and intend to selectively pursue other acquisitions. However, we may be unable to identify attractive acquisition candidates or complete transactions on favorable terms. In addition, in the case of acquired assets or businesses, we may need to:

 
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successfully integrate the operations, as well as the accounting, financial and disclosure controls, management information, technology, human resources and other administrative systems, of acquired businesses with existing operations and systems;
 
maintain third party relationships previously established by acquired companies;
 
retain senior management and other key personnel at acquired businesses; and
 
successfully manage acquisition-related strain on our and/or the acquired businesses’ management, operations and financial resources.
 
We may not be successful in addressing these challenges or any others encountered in connection with historical and future acquisitions. In addition, the anticipated benefits of one or more acquisitions may not be realized and future acquisitions could result in potentially dilutive issuances of equity securities and/or the assumption of contingent liabilities. Also, the value of goodwill and other intangible assets acquired could be impacted by one or more unfavorable events or trends, which could result in impairment charges. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.
 
We may not be able to achieve our growth objectives.
 
We may not be able to achieve our objectives for maintaining our existing club members, increasing our number of new club members through organic growth, acquisitions and acquiring additional luxury properties to add to our portfolio of destination club properties. Our ability to complete acquisitions of additional properties depends on a variety of factors, including our ability to obtain financing on acceptable terms and requisite lender and government approvals. Even if we are able to complete acquisitions of additional luxury properties, we may not be able to grow our club membership base or effectively integrate such acquisitions.
 
Extensive laws and government regulations could affect the way we conduct our business plan.
 
Our business exists in a regulatory environment that is changing and evolving and where certain regulatory matters are currently uncertain. Such matters include, but are not limited to, the question of whether our destination club memberships constitute timeshare/vacation ownership plans or timeshare use plans, as well as whether such club memberships being offered may constitute the offering of unregistered securities under the US federal and/or state securities laws. We believe that our club membership sales do not constitute timeshare/vacation ownership plans or timeshare use plans, nor do they constitute offers of securities under any federal or state laws or regulations. If, however, the club membership sales were determined to constitute timeshare/vacation ownership plans or timeshare use plans, or be deemed to be securities under any state or federal law, we would be required to comply with applicable state timeshare regulations or state and federal securities laws, including those laws pertaining to registration or qualification of securities, licensing of salespeople and other matters. If we cannot comply with the applicable timeshare regulations or state and federal securities requirements, in that event, and/or the determination may create liabilities or contingencies, including rescission rights relating to the club memberships we previously sold, as well as fines and penalties that could adversely affect our business, financial condition and results of operations.

 
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If we are unable to obtain the necessary permits and approvals in connection with our acquisition of destination club properties, it may have a material adverse effect on our business.
 
We intend to continue to acquire additional destination club properties for our portfolio. To successfully acquire and operate the properties as intended, we and/or our subsidiaries must apply for and receive any necessary federal, state and/or local and foreign permits and licenses as may be applicable to the properties. We expect to receive such necessary permits and approvals; however, there can be no assurance that such permits and approvals will be obtained. Failure to receive the necessary permits and approvals could prohibit or substantially and adversely impact our operations.
 
Increased insurance risk, perceived risk of travel and adverse changes in economic conditions as a result of recent events could significantly reduce our cash flow, revenues and earnings.
 
We believe that insurance and surety companies are re-examining many aspects of their business, and may take actions including increasing premiums, requiring higher self-insured retentions and deductibles, requiring additional collateral on surety bonds, reducing limits, restricting coverages, imposing exclusions, such as mold damage, sabotage and terrorism, and refusing to underwrite certain risks and classes of business. Any increased premiums, mandated exclusions, change in limits, coverages, terms and conditions or reductions in the amounts of bonding capacity available may adversely affect our ability to obtain appropriate insurance coverages at reasonable costs, which could significantly reduce our business cash flow, revenues and earnings. 
 
The illiquidity of real estate investments could significantly limit our ability to respond to adverse changes in the performance of our properties and significantly reduce our cash flow, revenues and earnings.
 
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
 
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions on us. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly reduce our cash flow, revenues and earnings.
 
We are subject to litigation in the ordinary course of business which could be costly and time consuming.
 
We are, from time to time, subject to various legal proceedings and claims, either asserted or unasserted. Any such claims, whether with or without merit, could be time-consuming and expensive to defend and could divert management’s attention and resources. Although our management believes that we have adequate insurance coverage and accrues loss contingencies for all known matters that are probable and can be reasonably estimated, we cannot assure that the outcome of all current or future litigation will not be costly and time consuming and otherwise divert management’s attention away from operating the business.

 
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Fluctuations in real estate values may require us to write down the book value of real estate assets.
 
Under United States generally accepted accounting principles, we are required to assess the impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors management considers that could trigger an impairment review include significant underperformance relative to minimum future operating results, significant change in the manner of use of the assets, significant technological or industry changes, or changes in the strategy for our overall business. When we determine that the carrying value of certain long-lived assets is impaired, an impairment loss equal to the excess of the carrying value of the asset, or asset group, over its estimated fair value is recognized. These impairment charges would be recorded as operating losses. Any material write-downs of assets could have a material adverse effect on our financial condition and earnings.
 
We will incur increased costs as a result of being a public company.
 
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The U.S. Sarbanes-Oxley Act of 2002 and related rules of the SEC and stock exchanges regulate corporate governance practices of public companies. We expect that compliance with these public company requirements will increase costs and make some activities more time-consuming. For example, we have created new board committees and adopted new internal controls and disclosure controls and procedures. In addition, we incur additional expenses associated with our SEC reporting requirements. A number of those requirements require us to carry out activities we have not done previously. For example, under Section 404 of the Sarbanes-Oxley Act, our management will need to assess and report on our internal control over financial reporting and our independent accountants may need to issue an opinion on that assessment and the effectiveness of those controls. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our independent accountants identified a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us.
 
We also expect that it will be difficult and expensive to obtain and maintain director and officer liability insurance, and we 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 us to attract and retain qualified persons to serve on our 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. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
We depend on key personnel for the future success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets.
 
Our future success and ability to manage future growth depends, in large part, upon the efforts and continued service of our senior management team, which has substantial experience in the resort and hospitality industry. Our President and Chief Executive Officer, James Tousignant, our Chairman, Richard Keith, and our Chief Financial Officer, Philip Callaghan, have been actively involved in the acquisition, ownership and operation of resort properties and are actively engaged in our management. Messrs. Tousignant, Keith and Callaghan substantially determine our strategic direction, especially with regard to operational, financing, acquisition and disposition activity. The departure of any of them could negatively impact our ability to grow and manage our operations.
 
Although we are party to employment agreements with some of our key personnel, these employment agreements do not require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services.
 
It could be difficult for us to find replacements for such key personnel, as competition for such personnel is intense. The loss of services of one or more members of senior management could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

 
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Damage to our destination club properties and other operational risks may disrupt our business and adversely impact our financial results.
 
Depending on the location of our destination club properties, a particular property may bear an increased risk for damage by inclement weather, construction defects, environmental matters, acts of terrorism, or other forces or acts, whether intentional or unintentional. In addition, we rely heavily on our information systems and other data processing systems. Any such damage to properties or disruption in information systems could cause us to suffer financial loss, a disruption of our businesses, regulatory intervention or reputational damage.
 
Furthermore, we depend on our headquarters in Kissimmee, Florida, where most of our information systems and personnel are located, for the continued operation of our business. A natural disaster or other catastrophic event or disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. The impact of any disaster or disruption on our business will likely be exacerbated by the fact that we do not have any disaster recovery program in place to mitigate the harm or minimize the lost data that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.
 
We are vulnerable to the risk of unfavorable weather conditions and continued inclement weather could reduce our revenues and earnings.
 
Our ability to attract visitors to our resorts is influenced by weather conditions. Unfavorable weather conditions can adversely affect visits and our revenues and profits. Adverse weather conditions may discourage visitors from participating in outdoor activities at our resorts. There is no way for us to predict future weather patterns or the impact that weather patterns may have on results of operations or visitation. Extreme weather conditions such as hurricanes or prolonged periods of adverse weather conditions, or the occurrence of such conditions during peak visitation periods, could have a material adverse effect on our financial condition and results of operations by reducing revenues and earnings.
 
Our property development and management operations are conducted in many areas that are subject to natural disasters and severe weather, such as hurricanes and floods. We also may be affected by unforeseen engineering, environmental, or geological problems. These conditions could delay or increase the cost of construction projects, damage or reduce the availability of materials, and negatively impact the demand for resorts in affected areas. If insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity and capital resources could be adversely affected.

 
23

 
 
Our success depends, in part, on the integrity of our systems and infrastructure. System interruptions may have an adverse impact on our business, financial condition and results of operations.
 
Our success depends, in part, on our ability to maintain the integrity of our systems and infrastructure, including websites, information and related systems and call centers. System interruptions may adversely affect our ability to operate websites, process and fulfill club member reservations and other transactions, respond to customer inquiries and generally maintain cost-efficient operations. We may experience occasional system interruptions that make some or all systems or data unavailable or prevent us from efficiently providing services. We also rely on third-party computer systems, broadband and other communications systems and service providers in connection with the provision of services generally, as well as to facilitate, process and fulfill transactions. Any interruptions, outages or delays in these systems, or deterioration in the performance of these systems and infrastructure, could impair our ability to provide services. Fire, flood, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes, acts of war or terrorism, acts of God and similar events or disruptions may damage or interrupt computer, broadband or other communications systems and infrastructure at any time. Any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing services. Although we have backup systems for certain aspects of our operations, these systems are not fully redundant and disaster recovery planning is not sufficient for all eventualities. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. If any of these adverse events were to occur, it could adversely affect our business, financial condition and results of operations.
 
In addition, any penetration of network security or other misappropriation or misuse of personal consumer information could cause interruptions in our operations and subject us to increased costs, litigation and other liabilities. Claims could also be made against us for other misuse of personal information, such as for unauthorized purposes or identity theft, which could result in litigation and financial liabilities, as well as administrative action from governmental authorities. Security breaches could also significantly damage our reputation with consumers and third parties with whom we do business. It is possible that advances in computer capabilities, new discoveries, undetected fraud, inadvertent violations of company policies or procedures or other developments could result in a compromise of information or a breach of the technology and security processes that are used to protect consumer transaction data. As a result, current security measures may not prevent any or all security breaches. We may be required to expend significant capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. Consumers are generally concerned with security and privacy of the Internet, and any publicized security problems affecting us may discourage consumers from doing business with us, which could have an adverse effect on our business, financial condition and results of operations.
 
Our success depends on the value of our name, image and brand, and if demand for our destination club properties and their features decreases or the value of our name, image or brand diminishes, our business, revenues and results of operations would be reduced.
 
Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by producing and maintaining luxurious, attractive, and exciting properties and services, as well as our ability to remain competitive in the areas of design and quality. There can be no assurance that we will be successful in this regard or that we will be able to anticipate and react to changing consumer tastes and demands in a timely manner.
 
Furthermore, a high media profile is an integral part of our ability to shape and stimulate demand for our destination club memberships with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract that media coverage, we may need to substantially increase our advertising and marketing costs, which would decrease our earnings. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting target customers.
 
Our business would be adversely affected if our public image or reputation were to be diminished. Our brand names and trademarks are integral to our marketing efforts. If the value of our name, image or brands were diminished, our business, revenues and results of operations would be reduced.

 
24

 
 
Any failure to protect our trademarks could have a negative impact on the value of our brand names and reduce our business and reduce revenues.
 
We believe our trademarks are critical to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand. Monitoring the unauthorized use of our intellectual property is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure that all of the steps we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and our market acceptance, competitive advantages or goodwill, which could reduce our business and reduce revenues.
 
Changes in weather patterns as a result of global warming could have an adverse effect on our business.
 
Scientific reports indicate that, as a result of human activity:
 
temperatures around the world have been increasing and are likely to continue to increase as a result of increasing atmospheric concentrations of carbon dioxide and other carbon compounds;
 
the frequency and severity of storms, and flooding, are likely to increase;
 
severe weather is likely to occur in places where the climate has historically been more mild; and
 
average sea levels have risen and are likely to rise more, threatening worldwide coastal development.
 
We cannot predict the effects that these phenomena may have on our business. We could be impacted to the extent that global warming trends affect established weather patterns or exacerbate extreme weather or weather fluctuations, hindering or preventing travel by our club members in certain circumstances. They might also affect the desirability of some of our properties, such as ones located on beaches or in skiing areas, increase the cost and reduce the availability of insurance covering damage from natural disasters for some of our properties and lead to new laws and regulations that increase our expenses and reduce our revenues. Any of these consequences, and other consequences of global warming that we do not foresee, could materially and adversely affect our sales, profits and financial condition.
 
Risks Related to Our Common Stock
 
It may be difficult for you to resell shares of our common stock if an active market for our common stock does not develop.
 
As a result of the delisting of our securities from the NYSE Amex in February 2010, our common stock is not actively traded on a securities exchange and we currently do not meet the initial listing criteria for any registered securities exchange. Our securities are currently quoted on the Over-the-Counter Bulletin Board. This factor may impair our stockholders' ability to sell their shares when they want and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.

 
25

 
 
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
 
As of March 31, 2010, our executive officers, directors and affiliated entities together beneficially owned over 70% of our outstanding common stock (after giving effect to the exchange of all ownership units of Ultimate Escapes Holdings held by them into shares of our common stock, excluding any earn-out units that may be issued)..  In addition, James M. Tousignant, our President and Chief Executive Officer and a member of our board of directors, holds, as representative on behalf of the other owners of Ultimate Escapes Holdings, 7,556,675 shares of our Series A Preferred Voting Stock, which vote as a single class with shares of our common stock on all matters. As a result, Mr. Tousignant has control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company that other stockholders may view as beneficial.
 
We may issue additional shares of our common stock, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock.
 
Outstanding warrants to purchase an aggregate of 12,075,000 shares of common stock are currently exercisable. These warrants would only be exercised if the $8.80 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market.
 
In addition, if we achieve certain Adjusted EBITDA targets in each of 2010, 2011 and/or 2012, we will be required to issue up to 7,000,000 additional shares of common stock to certain of Ultimate Escapes Holdings’ owners upon conversion of additional ownership units issued if such targets are met. See “Certain Relationships and Related Transactions and Director Independence — Operating Agreement of Ultimate Escapes Holdings” for additional information. Any such issuances would dilute the percentage ownership by our current stockholders and reduce their influence on our management. These issuances may also result in a decrease in the trading price of our common stock.
 
Future sales of our common stock may cause the market price of our securities to drop significantly, even if our business is doing well.
 
In accordance with lock-up obligations contained in the Operating Agreement of Ultimate Escapes Holdings, the UE Owners will be able to sell their shares of our common stock they are entitled to receive upon conversion of their ownership units in connection with the reverse merger beginning on the first anniversary of the consummation of the reverse merger. Pursuant to the registration rights agreement entered into in connection with the consummation of the reverse merger, the UE Owners have registration rights, subject to certain limitations, with respect to shares of our common stock for which their ownership units of Ultimate Escapes Holdings may be exchanged. We have agreed to file, as soon as possible after the closing date of the reverse merger but in no event later than June 29, 2010, a registration statement covering the shares of our common stock for which their ownership units of Ultimate Escapes Holdings may be exchanged. The UE Owners also have certain “piggyback” registration rights applicable to some registration statements filed by us following the consummation of the reverse merger. In addition, pursuant to a registration rights agreement between us and our initial stockholders, our initial stockholders or their permitted transferees will be entitled to rights to demand two times that we register the resale of the founder shares and the sponsor warrants (and shares underlying the sponsor warrants) at any time, in addition to certain “piggyback” registration rights applicable to registration statements filed by us, generally commencing one year after the consummation of the reverse merger as to the founder shares and two months after the consummation of the reverse merger as to the sponsor warrants (and shares underlying the sponsor warrants). The presence of these additional securities trading in the public market may have an adverse effect on the market price of our securities. The sale by any of the foregoing, or entities they control or their permitted transferees, could cause the market price of our securities to decline.

 
26

 
 
Our ability to request indemnification from the UE Owners for damages arising out of the reverse merger is limited to those claims where damages exceed $600,000 and is also limited to the shares of common stock issued in the reverse merger that are held in escrow or may be set-off against earn-out payments.
 
To provide a fund to secure the indemnification obligations of Ultimate Escapes Holdings to us against losses that we may sustain as a result of (i) the inaccuracy or breach of any representation or warranty made by Ultimate Escapes Holdings or any UE Owner in the Contribution Agreement or any schedule or certificate delivered by it or the UE Owners in connection with the Contribution Agreement and (ii) the non-fulfillment or breach of any covenant or agreement made by Ultimate Escapes Holdings in the Contribution Agreement, the UE Owners placed in escrow an aggregate of 717,884 ownership units of Ultimate Escapes Holdings, or 10% of the aggregate number of ownership units owned by the UE Owners immediately prior to the reverse merger. With respect to claims based upon certain representations and warrants deemed “Fundamental Representations” by the parties or fraud or intentional misconduct, those claims are not limited to the escrowed units but are subject to a cap of 25% of the aggregate number of ownership units owned by the UE Owners immediately prior to the reverse merger, which amount in excess of the escrowed units may be satisfied by us setting off such claims against payments due to the UE Owners for any future earn-out payments. Claims for indemnification may be asserted against the escrow by us once our damages exceed a $600,000 deductible and will be reimbursable, by cancellation of such units or set-off against future earn-out payments, as applicable, to the full extent of the damages in excess of such amount. Claims for indemnification may be asserted until the later of fifteen days after the date on which we file our Annual Report on Form 10-K for the year ending December 31, 2010 or April 15, 2011, with respect to certain claims; up to the applicable statute of limitations with respect to claims based upon the breach of certain designated representations and warranties; and up to the sixth anniversary of the closing date of the Contribution Agreement with respect to claims based upon the breach of “Fundamental Representations” by the parties or fraud or intentional or willful misrepresentation or omission. As a consequence of these limitations, we may not be able to be entirely compensated for indemnifiable damages that we may sustain.
 
Public stockholders at the time of the reverse merger who purchased units in our initial public offering and did not exercise their conversion rights may have rescission rights and related claims.
 
There were several aspects of the reverse merger and the other matters which were not described in the prospectus issued by us in connection with our initial public offering. These include: that we may consummate a business combination outside of the homeland security industry; that we may seek to amend the definition of “business combination” in our certificate of incorporation; that we may seek to amend our amended and restated certificate of incorporation to provide conversion rights to holders of public shares, regardless of whether such holder votes for or against the business combination; that the funds in the trust account might be used to purchase shares from our stockholders who have indicated their intention to vote against the reverse merger and convert their shares into cash; and that we may seek to amend the terms of the warrant agreement between us, our warrant agent and warrant holders (the “Warrant Agreement”), to revise the exercise price and the expiration date. Consequently, our consummation of a business combination with Ultimate Escapes Holdings (which does not operate in the homeland security industry), our filing of certain charter amendments in connection with the reverse merger, our use of funds in the trust account to purchase shares of stockholders who had indicated their intention to vote against the reverse merger or our amendment of the Warrant Agreement might be grounds for a stockholder who purchased shares in the initial public offering, excluding our founders, and still held them at the time of the reverse merger without seeking to convert them into cash, to seek rescission of the purchase of the units he acquired in the initial public offering. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. If we are required to pay damages, our results of operations could be adversely affected.

 
27

 
 
If the reverse merger’s benefits do not meet the expectations of financial or industry analysts, the market price of our securities may decline.
 
The market price of our securities may decline if:
 
we do not achieve the perceived benefits of the reverse merger as rapidly, or to the extent anticipated by, financial or industry analysts; or
 
the effect of the reverse merger  on our financial results is not consistent with the expectations of financial or industry analysts.
 
Accordingly, investors may experience a loss as a result of a decline in the market price of our securities. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
 
Volatility of our stock price could adversely affect stockholders.
 
The market price of our common stock could also fluctuate significantly as a result of:
 
quarterly variations in our operating results;
 
interest rate changes;
 
changes in the market’s expectations about our operating results;
 
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
 
changes in financial estimates and recommendations by securities analysts concerning our company or our industry in general;
 
operating and stock price performance of other companies that investors deem comparable to us;
 
news reports relating to trends in our markets;
 
changes in laws and regulations affecting our business;
 
material announcements by us or our competitors;
 
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur;
 
general economic and political conditions such as recessions and acts of war or terrorism; and
 
other matters discussed in the risk factors.
 
Fluctuations in the price of our common stock could contribute to the loss of all or part of an investor’s investment in our company.
 
We currently do not intend to pay dividends on our common stock and consequently your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
 
We currently do not plan to declare dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our board of directors. The terms of our current indebtedness contain, and agreements governing future indebtedness will likely contain, restrictions on our ability to pay cash dividends. Consequently, your only opportunity to achieve a return on your investment in the common stock of our company will be if the market price of our common stock appreciates and you sell your common stock at a profit.
 
28

 
ITEM 2.
PROPERTIES
 
We believe that our existing facilities are suitable and adequate for our business and have sufficient capacity for their intended purpose.
 
Office Facilities
 
Our office facilities are leased, as follows:
 
Location
 
Purpose
 
Square Feet
   
Monthly Rent
 
Lease Expires
                       
Kissimmee, FL
 
Executive offices
    5,500     $ 11,650  
October 31, 2010
                       
Fort Collins, CO
 
Operations center
    4,500     $ 10,400  
August 31, 2010
                       
Kansas City, MO
 
Operations center
    8,800     $ 9,400  
December 31, 2010
 
Our executive offices are leased from La Mirada Plaza, LLC, an affiliate of James M. Tousignant, our President and Chief Executive Officer and a member of our board of directors.
 
Club Properties
 
The majority of our club properties are owned by us, and certain club properties are leased on either a long or short term basis. All of the properties owned by us are subject to one or more mortgages. We intend to sell certain club properties and those properties are classified as Held For Sale in our consolidated balance sheet. Of the 37 properties leased by us as of December 31, 2009, 27 were subject to long-term leases and ten were subject to short-term leases (including two short-term leases in which PE Holdings, an affiliate of ours, is the lessor).
 
The following table summarizes the number of club properties by location as of December 31, 2009.

   
UE Club
 
Destination
 
Owned
   
Leased
   
Total
Properties
   
Held For
Sale
 
US
 
Elite
 
Beaver Creek
    1       1       2       -  
       
Deer Valley
    2       1       3       -  
       
Delray Beach
    1       -       1       -  
       
Indian Rocks
    1       -       1       -  
       
Jackson Hole
    -       1       1       -  
       
Key West
    1       -       1       -  
       
Kiawah
    1       1       2       -  
       
La Quinta
    -       1       1       -  
       
Lake Las Vegas
    1       -       1       -  
       
Lake Tahoe
    -       1       1       -  
       
Maui
    1       1       2       -  
       
Naples
    -       1       1       -  
       
New York City
    4       1       5       -  
       
Scottsdale
    2       -       2       -  
       
Steamboat Springs
    -       1       1       -  

 
29

 

       
Stowe
    -       1       1       -  
       
Sun Valley
    2       -       2       -  
       
Telluride
    1       4       5       -  
       
Watercolor
    -       1       1       -  
       
Total Elite
    18       16       34       0  
                                         
   
Signature
 
Bend, Oregon
    -       1       1       -  
       
Big Island
    -       1       1       -  
       
Boca Raton
    -       1       1       -  
       
Breckenridge
    1       -       1       -  
       
Candlewood
    1       -       1       1  
       
Carlsbad
    1       -       1       1  
       
Chicago
    1       -       1       1  
       
Copper Mountain
    1       -       1       -  
       
Deer Valley
    -       1       1       -  
       
Jackson Hole
    2       -       2       -  
       
Kiawah
    1       2       3       -  
       
La Quinta
    1       1       2       -  
       
Lake George
    1       -       1       -  
       
Lake Tahoe
    1       -       1       -  
       
Maui
    -       2       2       -  
       
Miami Beach
    1       -       1       -  
       
Naples
    1       -       1       -  
       
New York City
    4       -       4       -  
       
Orlando
    -       1       1       -  
       
Outerbanks
    1       -       1       -  
       
Reynolds Plantation
    1       -       1       -  
       
Scottsdale
    2       1       3       1  
       
Steamboat Springs
    1       1       2       -  
       
Telluride
    2       1       3       -  
       
Watercolor
    1       -       1       -  
              25       13       38       4  
                                         
   
Premiere
 
Beaver Creek
    1       -       1       -  
       
Big Island
    2       -       2       -  
       
Carlsbad
    1       -       1       1  
       
Chicago
    1       -       1       -  
       
Fox Acres
    1       -       1       -  
       
Jackson Hole
    1       -       1       -  
       
Kiawah
    1       -       1       -  
       
La Quinta
    2       -       2       -  
       
Lake Las Vegas
    1       -       1       -  
       
Lake Tahoe
    3       -       3       1  
       
Miami
    1       -       1       -  
       
Naples
    1       -       1       -  

 
30

 

       
New York City
    3       -       3       -  
       
Outerbanks
    1       -       1       -  
       
Reynolds Plantation
    1       -       1       -  
       
Steamboat Springs
    1       -       1       1  
       
Stowe
    1       -       1       -  
       
Watercolor
    1       -       1       -  
       
Total Premiere
    24       0       24       3  
                                         
       
US Total
    67       29       96       7  
                                         
Foreign
 
Elite
 
Bahamas
    2       -       2       -  
       
Italy
    -       1       1       -  
       
London
    -       1       1       -  
       
Los Cabos, Mexico
    5       2       7       -  
       
Nevis
    5       -       5       -  
       
Paris
    -       1       1       -  
       
St. Thomas
    1       -       1       -  
       
Total Elite
    13       5       18       0  
                                         
   
Signature
 
Bahamas
    3       -       3       1  
       
Costa Rica
    -       1       1       -  
       
Dominican Republic
    1       -       1       -  
       
Italy
    1       -       1       -  
       
La Buscador (BVI)
    1       -       1       -  
       
London
    -       1       1       -  
       
Los Cabos, Mexico
    7       -       7       -  
       
Nevis
    2       -       2       -  
       
Turks & Caicos
    1       -       1       -  
       
Total Signature
    16       2       18       1  
                                         
   
Premiere
 
Belize
    1       -       1       -  
       
Costa Rica
    -       1       1       -  
       
Dominican Republic
    1       -       1       -  
       
Italy
    2       -       2       -  
       
Los Cabos, Mexico
    2       -       2       -  
       
Punta Mita, Mexico
    1       -       1       -  
       
Turks & Caicos
    1       -       1       -  
       
Total Premiere
    8       1       9       0  
                                         
       
Foreign Total
    37       8       45       1  
                                         
       
Grand Total
    104       37       141       8  

 
31

 
 
ITEM 3.
LEGAL PROCEEDINGS
 
We are not currently subject to any material legal proceedings. From time to time, however, we may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business, including claims involving club membership disputes.
 
ITEM 4.
(REMOVED AND RESERVED).

 
32

 
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Price Range of Our Securities
 
Our common stock and warrants are each listed on the OTC Bulletin Board under the ticker symbols ULEI and ULEIW, respectively.
 
Prior to February 19, 2010, our common stock and warrants were listed on the NYSE Amex under the symbols UEI and UEI.WS, respectively. Our units were listed on the NYSE Amex under the symbol UEI.U until October 30, 2009. Our units commenced public trading on October 23, 2007 and our common stock and warrants commenced public trading on January 18, 2008.
 
The table below sets forth, for the calendar quarters indicated, the high and low closing sales prices of our units, common stock and warrants as reported on the NYSE Amex or the OTC Bulletin Board, as appropriate.
 
Quarter Ended
 
Units
 
Common
 
Warrants
 
  
 
High
 
Low
 
High
 
Low
 
High
   
Low
 
March 31, 2008
   
7.95
 
7.41
   
7.30
     
6.67
     
0.68
   
0.28
 
June 30, 2008
   
7.72
 
7.40
   
7.49
     
7.18
     
0.32
   
0.25
 
September 30, 2008
   
7.70
 
7.46
   
7.60
     
7.35
     
0.26
   
0.10
 
December 31, 2008
   
7.28
 
7.00
   
7.32
     
6.99
     
0.13
   
0.02
 
March 31, 2009
   
7.65
 
6.58
   
7.85
     
7.35
     
0.15
   
0.02
 
June 30, 2009
   
7.80
 
7.45
   
7.90
     
7.32
     
0.06
   
0.01
 
September 30, 2009
   
7.93
 
7.80
   
7.91
     
7.75
     
0.15
   
0.04
 
December 31, 2009
   
8.52
 
7.93
   
8.25
     
3.70
     
0.40
   
0.06
 
 
As of March 31, 2010, our common stock and warrants closed at $2.02 and $0.02, respectively and there were 99 holders of record of our common stock and 2 holders of record of our warrants.
 
Dividend Policy
 
We have not paid any dividends on our common stock to date and do not anticipate paying any dividends in the foreseeable future. We intend to retain future earnings, if any, in the operation and expansion of our business. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of our current indebtedness precludes us, and the terms of any future indebtedness that we may incur could preclude us, from paying dividends.

 
33

 
 
Recent Sales of Unregistered Securities
 
On October 29, 2009, we consummated the reverse merger. Pursuant to the terms of the Contribution Agreement, we received 1,232,601 ownership units of Ultimate Escapes Holdings, in consideration for $9.8 million. The UE Owners retained the remaining 7,556,675 ownership units of Ultimate Escapes Holdings, which, under the terms of the Operating Agreement, may be converted by the UE Owners on a one-to-one basis into shares of our common stock. Of such retained units, 717,884 units were deposited into escrow at the closing of the reverse merger to secure the indemnification obligations of the UE Owners to us in connection with the reverse merger. Additionally, the UE Owners are eligible to receive up to an aggregate of 7,000,000 additional ownership units of Ultimate Escapes Holdings, convertible on a one-to-one basis into shares of our common stock, upon the achievement by Ultimate Escapes Holdings of certain Adjusted EBITDA milestones, as set forth in the Operating Agreement. For each ownership unit of Ultimate Escapes Holdings issued to the UE Owners, the Owner Representative also received one share of our Series A Voting Preferred Stock. At any time that any UE Owner exchanges ownership units of Ultimate Escapes Holdings for shares of our common stock, a like number of shares of Series A Voting Preferred Stock will be canceled. Upon consummation of the reverse merger, Ultimate Escapes Holdings became our subsidiary, and the business and assets of Ultimate Escapes Holdings and its subsidiaries are our only operations.
 
Also on October 29, 2009, we issued options to purchase a total of 8,800 shares of our common stock to our employees, at an exercise price of $0.01 per share, all of which options were exercised in full on that date.
 
The above shares were issued in private placements not involving a public offering under the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder. We have not engaged in general solicitation or advertising with regard to the issuance of the shares of Series A Preferred Voting Stock or the common stock and have not offered securities to the public in connection with these issuances.
 
Use of Proceeds
 
We were incorporated on May 14, 2007 as a blank check company for purposes of acquiring, by way of a business combination, one or more domestic or international businesses.  In connection with our initial public offering of our common stock and warrants (the “IPO”), the SEC declared our Registration Statement on Form S-1 (No. 333-144028), filed under the Securities Act of 1933, effective on October 23, 2007.

On October 29, 2007, we completed the IPO, issuing 10,000,000 Units, consisting of one share of common stock and one warrant, at $8.00 per Unit.  Upon the closing of the Offering, $79,200,000 of the aggregate gross proceeds of $80,000,000 were placed in a trust account and invested in United States government securities, pending completion of a business combination.  The net proceeds of the Offering not held in the trust account were permitted to be used to pay for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. Additionally, an aggregate of $1,000,000 of interest earned on the trust account balance was released to fund working capital requirements and an additional $150,000 of interest earned was released to repay a loan from Secure America Acquisition Holdings, LLC (“SAAH”). Additional funds were also released to fund tax obligations.

The reconciliation of the funds held in trust immediately prior to the business combination with Ultimate Escapes Holdings is as follows:
 
Contribution to Trust Fund
 
$
79,200,000
 
         
Interest income
   
2,007,884
 
         
Withdrawals to fund loan repayments
   
(150,000
)
         
Withdrawals to fund income taxes
   
(606,826
)
         
Withdrawals to fund operations
   
(1,000,000
)
         
Balance at October 29, 2009
 
$
79,451,058
 

 
34

 
 
On October 29, 2009, we consummated the business combination with Ultimate Escapes Holdings, as described under “History” in Item 1 - Business.
 
In connection with stockholder approval of the business combination, holders of 2,709,261 shares of our common stock elected to convert their shares to cash.  We also entered into forward contracts to purchase 6,031,921 of the shares of common stock sold in the initial public offering in privately negotiated transactions from stockholders who would otherwise have voted against the business combination, for an aggregate purchase price of approximately $48.1 million.  The closing of such purchases was effected upon the closing of the reverse merger out of the funds that were held in the trust account and were released as a result of the consummation of the business combination.  In connection with such purchases, we paid a fee to a fund managed by Victory Park Capital Advisors, LLC of $123,974 for purchasing an aggregate of 1,561,380 shares from stockholders who would otherwise have voted against the business combination and exercised their conversion rights.

Following the consummation of the business combination, the amounts in the trust fund were disbursed as follows:
 
Balance at October 29, 2009
       
$
79,451,058
 
               
Conversion of 2,709,261 common shares to cash
   
21,525,365
         
Settlement of forward contracts to purchase 6,031,921 common shares
   
48,138,840
     
69,664,205
 
                 
Funds remaining representing 1,258,818 shares
           
9,786,853
 
                 
Payment of transaction expenses
   
383,792
         
Payment of equity funding costs
   
3,683,298
     
4,067,090
 
                 
Working capital provided to Ultimate Escapes Holdings
         
$
5,719,763
 
 
Issuer Purchases of Equity Securities
 
Period
 
Total Number of
Shares Purchased
   
Average Price Paid
per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
   
Maximum Number
(or Approximate
Dollar Value) of
Shares that may yet
be purchased
under the Plans or
Program
 
October
    8,741,182 (1)     7.94       8,741,182 (1)     -  
November
    -       -       -       -  
December
    -       -       -       -  
 
(1)  Of the 8,741,182 shares purchased, 2,709,261 shares were repurchased from stockholders who elected to convert their shares to cash in connection with the business combination. In connection with the business combination, we entered into forward contracts to purchase 6,031,921 of the shares of common stock sold in the initial public offering in privately negotiated transactions from stockholders who would otherwise have voted against the business combination, for an aggregate purchase price of $48,138,840.  

 
35

 
 
ITEM 6.
SELECTED HISTORICAL FINANCIAL DATA
 
 We are a “smaller reporting company” as defined by Regulations S-K and as such, are not required to provide the information contained in this Item pursuant to Regulation S-K.
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report.
 
Overview
 
We are a luxury destination club that sells club memberships offering members reservation rights to use our vacation properties, subject to the rules of the club member’s Club Membership Agreement. Our properties are located in various resort locations throughout the world.
 
On September 15, 2009, we consummated the acquisition of certain of the assets, liabilities, properties and rights thereto of Private Escapes, in exchange for ownership units in our subsidiary Ultimate Escapes Holdings. The operating results of Private Escapes are included in our consolidated financial statements from September 16, 2009. On October 29, 2009, we consummated the reverse merger with Ultimate Escapes Holdings.
 
The following discussion of financial condition and results of operations does not include the operating results of Secure America Acquisition Corporation (as we were named prior to the consummation of the reverse merger) prior to October 30, 2009.
 
We expect that our financial performance will improve in 2010 and 2011 as a result of the combination of the Ultimate Escapes Holdings and Private Escapes’ businesses, the utilization of current excess capacity and the arrangements with various hotels and resorts coming into effect in 2010, as well as anticipated improvements in worldwide economic conditions generally.
 
We had 1,214 members and 826 members as of December 31, 2009, and 2008, respectively.
 
Critical Accounting Policies
 
Our financial statements and the notes to our financial statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if:
 
it requires assumptions to be made that were uncertain at the time the estimate was made; and

 
36

 
 
changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on our results of operations or financial condition.
 
The following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of our financial statements. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations. The following critical accounting policies are not intended to be a comprehensive list of all of our accounting policies or estimates.
 
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Estimates that are critical to our accompanying consolidated financial statements arise from our belief that (1) we will be able to raise and/or generate sufficient cash to continue as a going concern, (2) our estimates of the expected lives of the club memberships from which we derive our revenues and on which we base our revenue recognition are reasonable, (3) all long-lived assets are recoverable, and (4) our estimates of the cost of our stock-based compensation plans are reasonable. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. It is at least reasonably possible that our estimates could change in the near term with respect to these matters.
 
Revenue Recognition - We derive our revenue from the club memberships we sell, which allow the club members to use the club properties owned or leased by us. Different levels of club membership provide access to different properties and/or increased usage of the properties. Club members pay a one-time club membership fee (which includes a non-refundable initiation fee), together with annual dues. Club members sometimes pay additional fees or charges related to their use of specific properties or club services. Club members may upgrade their level of membership at any time by paying additional upgrade fees and annual dues. The terms of each club membership is set out in a Club Membership Agreement.
 
Club members who resign may receive a partial redemption of their membership fee. We provide assistance to club members who resign by using commercially reasonable efforts to resell a resigned club members’ membership, and upon such resale, the resigning club member generally receives 80% of the proceeds of sale and we retain the remainder as a transfer fee. In the event we are unable to resell a resigning club members’ membership after an agreed period of time, we have certain arrangements with such club members to provide a partial redemption of their membership fee (excluding the initiation fee), based on a sliding scale that declines to zero over a 10 year period.
 
We amortize the non-refundable initiation fee over the expected life of the club membership, currently estimated as 10 years. The remaining portion of the club membership fee, which is included in membership deposits-redemption assurance program in our consolidated balance sheet, is amortized over a 10 year period using the straight line method. Management believes that, based on their knowledge of the industry and our competitors, our own extrapolated experience, and practices in similar membership organizations, that period reasonably reflects the expected life of the club memberships, and is consistent with any obligation we may have to provide a partial refund of the membership fee. Members who joined under a previous plan (no longer offered) may receive a refund of their membership fee (excluding the non-refundable initiation fee), subject to the redemption procedures identified in their Club Membership Agreements. These fees, which are included in membership deposits - other programs in our consolidated balance sheet, are subject to refund should the member resign and are not recognized in income.

 
37

 
 
Annual club membership dues are billed in advance. Payment of these annual dues permits the club member to continue to make reservations and use the club properties during their membership year and the annual dues are recognized in income on a straight-line basis over the 12 month period to which they relate. Revenue from ancillary charges and other services provided by us to club members when using club properties is recognized at the time of sale.
 
Impairment of Long-Lived Assets and Goodwill - We analyze our long-lived assets, including property and equipment and intangible assets, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360 “Property, Plant and Equipment” annually and when events and circumstances might indicate that the assets may not be recoverable. If the undiscounted net cash flows are less than the assets’ carrying amounts, we record an impairment based on the excess of the assets’ carrying value over fair value. Fair value is determined based on discounted cash flow models, quoted market values and third-party appraisals. We evaluate our real estate assets on a combined basis, as future cash flows include club membership sales and dues that are not identifiable to individual properties. Estimates of future cash flows are based on internal projections over the expected useful lives of the assets and include cash flows associated with future maintenance and replacement costs, but exclude cash flows associated with future capital expenditures that would increase the assets’ useful lives. Our management believes there is no impairment as of December 31, 2009.
 
Goodwill consists of the excess of the purchase price paid for Private Escapes over the fair value of the identifiable assets and liabilities acquired. Goodwill is not amortized, but is tested for impairment, at least annually, by applying the recognition and measurement provisions of FASB ASC 350-20 “Goodwill”, which compares the carrying amount of the asset with its fair value. If impairment of carrying value based on the estimated fair value exists, we measure the impairment through the use of projected discounted cash flows.  We operate as a single operating segment. We have not identified any components within our single operating segment and thus have a single reporting unit for purposes of our goodwill impairment test.
 
Stock-based Compensation - As described in our financial statements in “Note 13 — Equity Compensation”, we previously had a stock-based compensation plan utilizing equity units of our former parent company, Ultimate Resort, LLC.  That plan was discontinued on completion of the reverse merger on October 29, 2009, and as of that date we adopted the 2009 Stock Option Plan, which provides for the issuance of options to acquire up to 1,200,000 shares of our common stock.
 
We recognize compensation expense in an amount equal to the grant-date fair value of the equity units or, following adoption of the 2009 Stock Option Plan, the grant-date fair value of the common stock options. The estimated fair value of these equity units and options, as of the date of grant, is recorded as compensation cost over the vesting period.
 
Determining the fair value of the equity units previously issued required making potentially complex and subjective judgments. Our approach to valuation of the units, which were granted to employees at no cost to them, was to estimate their fair value based on the proceeds received by the parent company for other equity units with broadly similar characteristics. There was inherent uncertainty in making these estimates. During 2008 and 2009, we estimated the fair value at $30,000 per unit. During 2008, there were 83 equity units that vested and at December 31, 2008, there were a further 235 equity units that had not yet vested. All of these 235 equity units, together with 121 equity units issued in 2009, vested immediately on completion of the reverse merger on October 29, 2009. We recognized compensation expense of approximately $6.6 million in 2009, including approximately $5 million as a result of the accelerated vesting of these equity units upon consummation of the reverse merger.

 
38

 
 
Recent Accounting Pronouncements  
 
The following Accounting Standards Codification Updates have been issued, or will become effective, after the end of the period covered by this discussion:

Pronouncement
 
Issued
 
Title
ASU No. 2009-13
 
October  2009
 
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force
         
ASU No. 2009-14
 
October  2009
 
Software (Topic 985): Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force
         
ASU No. 2009-15
 
October  2009
 
Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing
         
ASU No. 2009-16
 
December  2009
 
Transfers and Servicing (Topic 860): Accounting for Transfers and Financial Assets.
         
ASU No. 2009-17
 
December  2009
 
Consolidations (Topic 810):  Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
         
ASU No. 2010-01
 
January  2010
 
Equity (Topic 505):  Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force
         
ASU No. 2010-02
 
January  2010
 
Consolidation (Topic 810):  Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification
         
ASU No. 2010-03
 
January 2010
 
Extractive Activities – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures
         
ASU No. 2010-04
 
January 2010
 
Accounting for Various Topics: Technical Corrections to SEC Paragraphs
         
ASU No. 2010-05
 
January 2010
 
Compensation  - Stock Compensation (Topic718): Escrowed Share Arrangements and the Presumption of Compensation
         
ASU No. 2010-06
 
January 2010
 
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
         
ASU No. 2010-07
 
January 2010
 
Not-for-Profit Entities (Topic 958): Not-for-Profit Entities - Mergers and Acquisitions
         
ASU No. 2010-08
 
February 2010
 
Technical Corrections to Various Topics
         
ASU No. 2010-09
 
February 2010
 
Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements
         
ASU No. 2010-10
 
February 2010
 
Consolidation (Topic 810): Amendments for Certain Investment Funds
         
ASU No. 2010-11
 
March  2010
 
Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives

 
39

 
 
To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our consolidated financial statements and management does not anticipate that these accounting pronouncements will have any future effect on our consolidated financial statements.

At its meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a consensus on five issues.  The consensuses were ratified by the FASB at its meeting on March 31, 2010, and the related Accounting Standards Codification Updates to be issued will become authoritative accounting guidance.  None of the consensuses address issues that we expect to have a material effect on our consolidated financial statements.

 
40

 

Results of Operations

The following table sets forth our historical consolidated income statement data (in thousands of dollars):
 
   
Year Ended
   
 
 
   
December 31,
       
   
2009
   
2008
   
%
Change
 
REVENUES
                 
Membership – annual dues
  $ 14,938     $ 17,486       -15 %
Membership – upgrade fees
    60       409       -85 %
Membership – membership fees
    7,052       3,650       93 %
Membership – assessment fees
    12,144       -       *  
Other revenue
    2,817       996       183 %
REVENUES
    37,011       22,541       64 %
                         
OPERATING EXPENSES:
                       
Property operating costs
    11,043       9,900       12 %
Depreciation and amortization
    5,526       4,479       23 %
Lease costs
    3,503       3,593       -3 %
Advertising
    1,231       2,307       -47 %
Salaries and contract labor (including $6,604 and $2,169 of non-cash stock-based compensation)
    11,753       9,419       25 %
General and administrative
    3,513       5,601       -37 %
Loss (gain) on sale of property and equipment
    535       (27     *  
    Loss on impairment of assets held for sale
    2,839       -       *  
Sales commissions
    479       1,032       -54 %
OPERATING EXPENSES
    40,422       36,304       11 %
                         
INCOME (LOSS) FROM OPERATIONS
    (3,411 )     (13,763     75 %
                         
OTHER INCOME (EXPENSE):
                       
Interest expense
    (10,006 )     (9,717     3 %
Interest income
    98       278       -65 %
Transaction expenses
    (384 )     -       *  
RAP exchange inducement
    (714 )     -       *  
Change in contingent acquisition consideration
    1,458       -       *  
OTHER INCOME (EXPENSE) – Net
    (9,548 )     (9,439     1 %
                         
INCOME BEFORE INCOME TAXES
    (12,959 )     (23,202     44 %
                         
BENEFIT (PROVISION) FOR INCOME TAXES
    (6 )     (20     -70 %
                         
NET LOSS
  $ (12,965 )   $ (23,222     44 %
 
*  % change not meaningful
 
41

 
Year Ended December 31, 2009 compared with the Year Ended December 31, 2008 (in thousands)
 
 Revenues
 
Revenues of $37,011 increased by $14,470, or 64%, during the year ended December 31, 2009, from $22,541 during the same period in 2008. The higher revenues in 2009 include a $12,144 assessment fee charged to members in 2009 that was not charged in 2008.  Membership annual dues were $14,938 in 2009, representing a decrease of $2,548, or 15% from annual dues of $17,486 in 2008, primarily because of early dues renewal programs offered in 2008 and not offered in 2009, which accelerated revenues into 2008.  Other revenue was $2,817 in 2009, representing an increase of $1,821, or 183% compared with $996 in 2008 due to the cross reservation program fees in 2009 charged to Private Escapes for allowing their members to stay at our properties.  This cross-reservation program ended effective September 15, 2009, when we acquired Private Escapes.
 
 Operating Expenses
 
Operating expenses were $40,422 in 2009, representing an increase of $4,117, or 11%, from operating costs of $36,305 in 2008.  Property operating costs increased $1,143 in 2009 from 2008 primarily due to the cross reservation program fees in 2009 charged by Private Escapes for allowing our members to stay at their properties prior to the September 15, 2009 acquisition of certain of their assets and liabilities.  Depreciation and amortization increased by $1,047 to $5,526 in 2009, from $4,479 in 2008 reflecting the acquisition of Private Escape properties in September 2009.   Advertising costs decreased $1,076 in 2009 from 2008 due to a revised marketing strategy to target member referrals and other qualified leads produced as a result of a joint marketing agreement with Private Escapes that began in the second half of 2008.  Salary costs increased by $2,334 in 2009 compared with 2008, primarily as a result of increased stock-based compensation expense, primarily as a result of the accelerated vesting of equity units in connection with the reverse merger with SAAC, offset by staffing reductions and labor cost savings of which had been implemented in late 2008.  General and administrative costs decreased in 2009 compared with 2008 by $2,088 due primarily to reductions in credit card fees of $1,445, insurance costs of $300, travel costs of $216, and office lease costs of $41.  In 2009, we incurred a net loss of $535 on the sale of certain properties and recognized an impairment loss of $2,839 related to certain properties held for sale, compared with a $27 net gain on the sale of certain properties in 2008.   The assets held for sale were chosen because of low occupancy by club members or because we determined that we had excess inventory.  Impairment was calculated by comparing the carrying value on the books with the expected net proceeds of the sale.  Sales commissions decreased $553 in 2009 compared with 2008 due to lower sales volumes in 2009.
 
 Income (Loss) Before Other Income (Expense)
 
As a result of the above, our loss before other income (expense) improved by $10,353, or 75%, to a loss of $3,411 for 2009, from a loss of $13,764 in 2008.
 
 Other Income (Expense)
 
Interest expense increased to $10,006 for 2009, from $9,717 in 2008, due to the additional acquisition debt in the September 2009 purchase of Private Escapes.  Interest income decreased by $180 to $98 in 2009 from $278 in 2008 due to lower interest-bearing money market cash balances in 2009 than 2008.
 
In connection with the consummation of the reverse merger in October 2009, we incurred $384 of transaction-related expenses.
 
In connection with the reverse merger in October 2009, we offered our members the opportunity to convert their outstanding Redemption Assurance Program (RAP) balance to our common stock. We subsequently issued $8,963 of common stock in connection with the conversion of $8,249 of the members’ RAP balance to common stock and recognized $714 as an inducement expense.

 
42

 
 
As of December 31, 2009, we recognized a gain of $1,458 related to the outstanding contingent consideration for our September 15, 2009 acquisition of the business of Private Escapes, as a result of both a change in the estimate of the contingent consideration payable and a decrease since the acquisition date in the fair value of our common stock, in which the consideration is payable.
 
Liquidity and Capital Resources (in thousands)
 
Historically, our primary sources of cash have been cash flows from equity capital, club membership fees, annual dues, bank borrowings and term loans. Cash has been used for real estate purchase transactions, repayment of long term debt, purchases of equipment and working capital to support our growth. In 2009, a one time assessment fee was levied on our membership base. In 2010, annual revenues from dues are expected to increase as a result of a cost of living increase in the dues charged and the anticipated high renewal rate of members. Membership fees and upgrade fees are subject to the health of the economy and are less predictable. We do not intend to levy an assessment fee in 2010 unless the majority of members vote in favor of any proposed assessment. We intend to seek to raise more equity in 2010. We also plan to sell excess properties in our portfolio, the proceeds of which will primarily be used to repay debt. We have plans to spread out the collection of annual dues more evenly throughout the year.
 
Cash and cash equivalents, consisting primarily of deposits with financial institutions and credit card holdbacks, but excluding $4,343 of restricted cash, was $2,747 at December 31, 2009, compared with $966 at December 31, 2008. The increase of $1,781 was largely attributable to the club member assessment program initiated and implemented in the first five months of 2009.
 
We anticipate being able to meet our projected internal growth and operating needs, including capital expenditures, and expect to meet the cash requirements of our contractual obligations for at least the next 12 months if we are successful in executing our plans to increase our capital resources. Planned capital expenditure projects include approximately $513 for the complete renovation of our seven Trump Tower units in New York.
 
We incurred net losses of $12,965 and $23,222 during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our current liabilities, excluding $12,600 of deferred annual membership dues that we expect to recognize in income in 2010, were $31,164, which exceeded our current assets of $6,710, excluding restricted cash of $4,343, by $24,454. In addition, although we have completed the acquisition of certain assets and liabilities of Private Escapes, refinanced our credit facility with CapitalSource and completed the reverse merger, we may not be able to meet certain covenants under the CapitalSource credit facility in the future. We have also experienced a decrease in new membership sales and existing member upgrades over the last six months of 2008 and throughout 2009.
 
The above factors, among others, indicate that we may encounter a liquidity event in the future which may cause us to be in default of our loan covenants. We are taking steps to increase cash flow in order to cover 2010 operational expenses, including, without limitation, the sale of selected club properties, and closely monitoring and reducing operating expenses wherever possible.
 
Total current and long term debt outstanding at December 31, 2009 was $123,279 compared with $96,765 outstanding at December 31, 2008. The debt outstanding at December 31, 2009 is primarily the amount outstanding under our CapitalSource credit facility of $98,982, a shareholder note payable of $10,000, various mortgages aggregating $13,590, as discussed below, and a non-mortgage notes totaling $707.

 
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CapitalSource Revolving Credit Facility
 
Our amended and restated loan and security agreement with CapitalSource, entered into on September 15, 2009, provides for borrowings up to the lesser of a defined maximum amount or a defined borrowing base amount. The maximum amount available is $110 million through December 31, 2009, $108 million from January 1, 2010 through June 30, 2010, $105 million from July 1, 2010 through December 31, 2010 and $100 million from January 1, 2011 to the maturity date of April 30, 2011. The borrowing base amount is a percentage of the appraised value of all owned property encumbered by a mortgage in favor of CapitalSource. Through March 31, 2010, that percentage was 75%, from April 1, 2010 through December 31, 2010 it is 70% and from January 1, 2011 it is 65%. We are currently in negotiations with CapitalSource to extend the dates by which time we have to meet these percentage requirements.
 
Interest under the loan agreement is calculated on the actual days elapsed and the basis of a 360 day year and is payable monthly at the three-month LIBOR (approximately 0.25% at January 1, 2010) plus 5% per annum, subject to a floor of 8.75%. An exit fee of $1.65 million is due on maturity or earlier if the loan is terminated for any reason. The maturity date may be extended at our request for two additional one year periods, provided there is no default under the loan agreement and on payment of an extension fee of 0.25% of the then maximum loan amount of $100 million. Except for payments required on the sale of a mortgaged property, no principal payments are due until maturity on April 30, 2011, except required cash payments of $2 million on December 31, 2009, $3 million prior to June 30, 2010 (which have both been paid as of March 31, 2010) and $5 million prior to December 31, 2010. As described above, we are currently in negotiations with CapitalSource which may require us to increase the repayment obligations due by June 30, 2010 and December 31, 2010. If we exercise one or both of the extension options, cash payments are required of $5 million on each of June 30, 2011, December 31, 2011, June 30, 2012 and December 31, 2012. We may voluntarily prepay any part of the loan at any time but may terminate the loan agreement only by providing 30 days written notice and prepaying outstanding amounts in full.
 
We are required to meet certain covenants as defined in the loan agreement, including:
 
Maintain either (1) a restricted cash balance of not less than six months debt service, or (2) a debt service coverage ratio of 1.25 to 1.00, based on the ratio of Adjusted EBITDA for the immediately preceding 12 calendar months, to debt service (excluding balloon maturities of indebtedness) on a consolidated basis for the immediately preceding 12 calendar months. On March 16, 2010, CapitalSource agreed to reduce the restricted cash balance interest reserve by approximately $1,500,000, to be replenished in equal installments at the end of June, September, and December 2010.
 
Remain in compliance at all times with applicable requirements as to the ratio of the number of properties to club members or “equivalent club members”, as set forth in the applicable club membership plans;
 
Maintain a leverage ratio between debt and consolidated tangible net worth of no more than 3.5:1;
 
For the years ending December 31, 2009 and 2010, the consolidated net loss must not exceed $10 million and $5 million, respectively, and for the year ending December 31, 2011 and each succeeding year, the consolidated net income must not be less than $1 (net loss is adjusted in each year for the non-refundable portion of new member initiation fees not yet recognized in income and for non-cash stock-based compensation expensed in 2009); and
 
The debt ratio (aggregate mortgage financing to the aggregate appraised value for all owned Property) on a consolidated basis must not exceed 80%.

 
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In addition to various covenants, the CapitalSource loan agreement contains customary events of default that would permit CapitalSource to accelerate repayment of amounts outstanding, including failure to pay any amounts outstanding under the loan agreement when due, insolvency, judgment or liquidation, failure to pay other borrowed money in excess of $500,000, failure to comply with the terms and conditions of the loan agreement, suspension of the sale of club memberships, termination of any club or club membership plan, failure to pay (without CapitalSource’s consent) any amounts due to a resigning club member in accordance with the terms of his or her club membership agreement and a change in our management (as defined in the loan agreement).

Note Payable to Shareholder
 
On April 30, 2007, Ultimate Resort Holdings issued a $10 million note payable to JDI, which at the time was a minority owner of Ultimate Resort Holdings and is now a minority owner of Ultimate Escapes Holdings. The obligations of Ultimate Resort Holdings under this note were subsequently assigned to Ultimate Escapes Holdings, when it assumed the Ultimate Resort Holdings operations, as discussed in Note 2 to our consolidated financial statements. On October 29, 2009, JDI assigned its interest in the note, as lender, to Ultimate Resort Holdings. The financial terms of the note remained unchanged. At the same time, Ultimate Resort, the majority owner of Ultimate Resort Holdings, acquired from JDI the minority interest in Ultimate Resort Holdings held by JDI. In consideration for the acquisition of the minority interest and the transfer, as lender, to Ultimate Resort Holdings of the note, JDI received 3,123,797 ownership units of Ultimate Escapes Holdings.

The note has a ten year term, with interest payable quarterly at 5% per annum and no principal payments are due until maturity on April 30, 2017. The note, which is subordinate to the revolving loan from CapitalSource, is collateralized by a second security interest in our assets and in certain real property.

Other Mortgage Loans
 
At December 31, 2009, we have other mortgage loans, aggregating $13,590, which we acquired when Ultimate Escapes Holdings acquired certain assets and liabilities of Private Escapes.  These mortgages are held by a number of mortgage providers and individuals and carry interest rates ranging from 3.4% to 15.0%. Certain of the mortgages are due within twelve months and, where possible, we are seeking to extend or renew these mortgages.

Included in these mortgage loans is $234 of the remaining outstanding principal balance of $936 related to a $3.75 million loan from Kederike, LLC, an entity in which Richard Keith, our Chairman, is a 50% owner. The original loan proceeds were used to pay a portion of the purchase price for the acquisition of four properties. Ultimate Escapes Holdings assumed $234 of the remaining outstanding principal balance when it acquired Private Escapes. The remainder of the outstanding principal balance of $702 was assumed by an entity controlled by Mr. Keith. Interest accrues on the loan at a rate equal to 1.5% above the interest rate applicable to the primary bank loan financing the original acquisition of the properties. The maturity date of the loan was October 15, 2009; however, the parties have negotiated an extension of the maturity date until June 30, 2010 on substantially the same terms.

 
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