10-K 1 diamondresorts-12312015x10k.htm DR 12.31.2015 FORM 10-K 10-K

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, 2015
OR
o
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: 001-35967
______________________________________
DIAMOND RESORTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
______________________________________
Delaware
 
46-1750895
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
10600 West Charleston Boulevard
Las Vegas, Nevada
 
89135
(Address of principal executive offices)
 
(Zip code)
 
 
 
(702) 684-8000
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class                                                      
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. YES x NO o
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 o 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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
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 x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. x
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 x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
                  (Do not check if a smaller reporting company)
 
 




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o YES x NO
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1,446,879,088 based on the last reported sale price on the New York Stock Exchange on June 30, 2015.
As of February 25, 2016, there were 69,705,619 outstanding shares of the common stock, par value $0.01 per share, of the registrant.    
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, in connection with the registrant's 2016 Annual Meeting of Stockholders, are incorporated by reference into Part III of this report.

 




 
TABLE OF CONTENTS
 PART I
 
 
    ITEM 1. BUSINESS
 
 
    ITEM 1A. RISK FACTORS
 
 
    ITEM 1B. UNRESOLVED STAFF COMMENTS
 
 
    ITEM 2. PROPERTIES
 
 
    ITEM 3. LEGAL PROCEEDINGS
 
 
    ITEM 4. MINE SAFETY DISCLOSURES
 
 
PART II
 
 
    ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
    ITEM 6. SELECTED FINANCIAL DATA
 
 
    ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
    ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
    ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
    ITEM 9A. CONTROLS AND PROCEDURES
 
 
    ITEM 9B. OTHER INFORMATION
 
 
PART III
 
 
    ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
    ITEM 11. EXECUTIVE COMPENSATION
 
 
    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
    ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 
    ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
PART IV
 
 
    ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 
SIGNATURES
 
 


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PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, which are covered by the "Safe Harbor for Forward-Looking Statements" provided by the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. We have tried to identify forward-looking statements in this report by using words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could.” These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this report as a result of various factors, including, among others:
the effects of our previously announced process to explore strategic alternatives, including the impact on our business, financial and operating results and relationships with our employees and other third parties (including homeowners associations (“HOA”) and prospective purchasers of vacation ownership interests (“VOIs” or “Vacation Interests”)) resulting from this process and uncertainty as to whether this process will result in a transaction or other action that maximizes stockholder value or any transaction or other action at all;
adverse trends or disruptions in economic conditions generally or in the vacation ownership, vacation rental and travel industries;
adverse changes to, or interruptions in, relationships with our affiliates and other third parties, including termination of our hospitality management contracts;
our ability to maintain an optimal inventory of VOIs for sale overall, as well as in eight multi-resort trusts and one single-resort trust (collectively, the "Diamond Collections");
our use of structures for development of new inventory in a manner consistent with our asset-light model, including the risk in these structures that we will not control development activities or the timing of inventory delivery and the risk that the third parties do not fulfill their obligations to us;
our ability to sell, securitize or borrow against our consumer loans;
decreased demand from prospective purchasers of VOIs;
adverse events, including weather-related and other natural disasters and crises, or trends in vacation destinations and regions where the resorts in our network are located;
changes in our senior management;
our ability to comply with current or future regulations applicable to the vacation ownership industry or any actions by regulatory authorities;
the effects of our indebtedness and our compliance with the terms thereof;
changes in the interest rate environment and their effects on our outstanding indebtedness;
our ability to successfully implement our growth strategy, including our strategy to selectively pursue complementary strategic acquisitions;
risks associated with acquisitions, including difficulty in integrating operations and personnel, disruption of ongoing business and increased expenses;
our ability to compete effectively; and
other risks and uncertainties discussed in "Item 1A. Risk Factors" and elsewhere in this annual report.
Accordingly, you should read this report completely and with the understanding that our actual future results may be materially different from what we expect.
Forward-looking statements speak only as of the date of this report. Except as expressly required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "SEC"), we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this

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report, whether as a result of new information or future events or otherwise. You should not place undue reliance on the forward-looking statements included in this report or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
On July 24, 2013, Diamond Resorts International, Inc. ("DRII") closed the initial public offering of an aggregate of 17,825,000 shares of its common stock at the IPO price of $14.00 per share (the "IPO"). In the IPO, DRII sold 16,100,000 shares of common stock, and Cloobeck Diamond Parent, LLC ("CDP"), in its capacity as a selling stockholder, sold 1,725,000 shares of common stock. Prior to the consummation of the IPO, DRII was a newly-formed Delaware corporation, incorporated in January 2013, that had not conducted any activities other than those incident to its formation and the preparation of filings with the SEC in connection with the IPO. DRII was formed for the purpose of changing the organizational structure of Diamond Resorts Parent, LLC ("DRP") from a limited liability company to a corporation. Immediately prior to the consummation of the IPO, DRP was the sole stockholder of DRII. In connection with, and immediately prior to the completion of the IPO, each member of DRP contributed all of its equity interests in DRP to DRII in return for shares of common stock of DRII. Following this contribution, DRII redeemed the shares of common stock held by DRP and DRP was merged with and into DRII. As a result, DRII became a holding company, with its principal asset being the direct and indirect ownership of equity interests in its subsidiaries, including Diamond Resorts Corporation ("DRC"). We refer to these and other related transactions entered into substantially concurrently with the IPO as the "Reorganization Transactions."
Except where the context otherwise requires or where otherwise indicated, references in this annual report on Form 10-K to "the Company," "we," "us" and "our" refer to DRP prior to the consummation of the Reorganization Transactions and DRII, as the successor to DRP, following the consummation of the Reorganization Transactions, in each case together with its subsidiaries.


INDUSTRY AND MARKET DATA

Certain market, industry and similar data included in this report have been obtained from third-party sources that we believe to be reliable, including the ARDA International Foundation, (the "AIF"). Our market estimates are calculated by using independent industry publications and other publicly available information in conjunction with our assumptions about our markets. We have not independently verified any market, industry or similar data presented in this report. Such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and "Item 1A. Risk Factors" in this report.
TRADEMARKS
Diamond Resorts International®, Diamond Resorts®, THE Club®, Polo Towers & Design®, Relaxation . . . simplified®, DRIVEN®, The Meaning of Yes®, We Love to Say Yes®, Vacations for Life®, Affordable Luxury. Priceless MemoriesTM, Stay Vacationed®, Events of a LifetimeTM, Vacations of a LifetimeTM and our other registered or common law trademarks, service marks or trade names appearing in this report are our property. This report also refers to brand names, trademarks or service marks of other companies. All brand trademarks, service marks or trade names cited in this report are the property of their respective holders.





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ITEM 1.     BUSINESS

Company Overview
We are a global leader in the hospitality and vacation ownership industry, with a worldwide resort network of 379 vacation destinations located in 35 countries throughout the world, including the continental United States ("U.S."), Hawaii, Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia, New Zealand and Africa (as of January 31, 2016). Our resort network includes 109 resort properties with approximately 12,000 units that we manage and 250 affiliated resorts and hotels and 20 cruise itineraries, which we do not manage and do not carry our brand, but are a part of our resort network and, through the Clubs (defined below), are available for our members to use as vacation destinations. We offer Vacations for Life®--a simple way to acquire a lifetime of vacations at top destinations worldwide. We believe in the power and value of vacations to create lifelong memories and nurture our humanity. They are essential to our well-being.
We offer a vacation ownership program whereby members acquire VOIs in the form of points. Members receive an annual allotment of points depending on the number of points purchased, and, through the Clubs, they can use these points to stay at destinations within our network of resort properties, including Diamond Resorts managed properties as well as affiliated resorts, luxury residences, hotels and cruises. Unlike a traditional interval-based vacation ownership product that is linked to a specific resort and week during the year, our points-based system permits our members to maintain flexibility relating to the location, season and duration of their vacation.
A core tenet of our management philosophy is delivering consistent quality and personalized services to each of our members, and we strive to infuse hospitality and service excellence into every aspect of our business and each member's vacation experience. This philosophy is embodied in We Love to Say Yes®, a set of Diamond values designed to provide each of our members and guests with a consistent, “high touch” hospitality experience through our commitment to be flexible and open in responding to the desires of our members and guests. Our service-oriented culture is highly effective in building a strong brand name and fostering long-term relationships with our members, resulting in additional sales to our existing member base and attracting new members.
On October 16, 2015, we completed the Gold Key Acquisition, which added six managed resorts to our network, in addition to unsold VOIs and other assets. On January 29, 2016, we completed the Intrawest Acquisition, which added nine managed resorts to our network, in addition to a portfolio of Vacation Interests notes receivable, unsold VOIs and other assets. See "Note 1—Background, Business and Basis of Presentation" and "Note 24—Business Combinations" of our consolidated financial statements included elsewhere in this annual report for the definition of and further detail on the Gold Key Acquisition and "Note 30—Subsequent Events" for the definition of and further detail on the Intrawest Acquisition.
Our business consists of two segments: (i) hospitality and management services and (ii) Vacation Interests sales and financing.
Hospitality and Management Services. We are fundamentally a hospitality company that manages a worldwide network of resort properties and provides services to a broad member base. We manage 109 resort properties, as well as the Diamond Collections, each of which holds ownership interests in a group of resort properties (including a vast majority of our managed resorts). Substantially all of our management contracts automatically renew, and the management fees we receive are based on a cost-plus structure. As the manager, we operate the front desks, provide housekeeping, conduct maintenance and manage human resources services. We also operate, directly or by managing outsourced providers of, amenities such as golf courses, food and beverage venues and retail shops, an online reservation system, customer contact centers, rental, billing and collection, accounting and treasury functions, communications and information technology services. In addition to resort services, key components of our business are the Clubs, which enable our members to use their points to stay at resorts in our network. Our Clubs include THE Club, which is the primary Club sold, and provides members with full membership access to all resorts in our resort network and offers the full range of member services, as well as other Clubs that enable their members to use their points to stay at specified resorts in our resort network and provide their members with a more limited offering of benefits. We refer to THE Club and other Club offerings as "the Clubs." The Clubs offer our members a wide range of other benefits, such as the opportunity to redeem their points for (or, in some cases, purchase for cash) various products and services, including private luxury property rentals, high-profile sporting events, guided journeys and adventures, various air miles programs and cruises. We believe the Clubs’ offerings enhance the overall experience of our members and, thus, the perceived value of their memberships. Fees paid by our members cover the operating costs of our managed resorts (including the absorption of a substantial portion of our overhead related to the provision of our management services), our management fees, maintenance fees for VOIs at resorts that we do not manage that are held by the Diamond Collections, and, in the case of members of the Clubs, membership dues. As part of our hospitality and management services, we typically enter into agreements with our managed resorts and the Diamond Collections under which we reacquire VOIs previously owned by members who have failed to pay their annual maintenance fees or other assessments, serving as the primary source of our VOI inventory that we sell.

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Vacation Interests Sales and Financing. We sell VOIs principally through presentations, which we refer to as “tours,” at our 61 sales centers, a majority of which are located at our managed resorts. We generate sales prospects by utilizing a variety of marketing programs, including presentations at our managed resorts targeted at existing members and current guests who stay on a per-night or per-week basis, overnight mini-vacation packages, targeted mailings, member referrals, telemarketing, gift certificates and various destination-specific marketing efforts. As part of our sales efforts, and to generate interest income and other fees, we also provide loans to qualified VOI purchasers.
The charts below show the total revenue and net income for each segment of our business for the year ended December 31, 2015 (with the percentages representing the relative contributions of these two segments):

The Vacation Ownership Industry
The vacation ownership industry enables individuals and families to purchase VOIs, which facilitates shared ownership and use of fully-furnished vacation accommodations at a particular resort or network of resorts. VOI ownership distinguishes itself from other vacation options by integrating aspects of traditional property ownership and the flexibility afforded by pay-per-day resorts or hotels. As compared to pay-per-day resort or hotel rooms, VOI ownership typically offers consumers more space and home-like features, such as a full kitchen, living and dining areas and one or more bedrooms. Further, room rates and availability at pay-per-day resorts and hotels are subject to periodic change, while much of the cost of a VOI is generally fixed at the time of purchase. Relative to traditional vacation property ownership, VOI ownership affords consumers greater convenience and a variety of vacation experiences and requires significantly less up-front capital, while still offering common area amenities such as swimming pools, playgrounds, restaurants and gift shops. Consequently, for many vacationers, VOI ownership is an attractive alternative to traditional vacation property ownership and pay-per-day resorts and hotels.
Typically, a vacation ownership resort is overseen by an organization generally referred to as a homeowners association ("HOA"), which is administered by a board of directors, generally elected by the owners of VOIs at the resort. The HOA is responsible for ensuring that the resort is financially sound and adequately maintained and operated. To fund the ongoing operating costs of the resort, each VOI holder is required to pay its pro rata share of the expenses to operate and maintain the resort, including any management fees payable to a company to manage and oversee the day-to-day operation of the resort. If a VOI owner fails to pay its maintenance fee, that owner will be in default, which may ultimately result in a forfeiture of that owner's VOI to the HOA and a consequent ratable increase in the expense-sharing obligations of the non-defaulted VOI owners.
The management and maintenance of a resort in which VOIs are sold are generally either provided by the developer of the resort or outsourced to a management company, but, in either case, many developers often regard the management services provided as ancillary to the primary activities of property development and VOI sales. Historically, certain real estate developers have created and offered VOI products in connection with their investments in purpose-built vacation ownership properties or converted hotel or condominium buildings. These developers have frequently used substantial project-specific debt financing to construct or convert vacation ownership properties. The sales and marketing efforts of these developers have typically focused on selling out the intervals in the development, so that the developer can repay its indebtedness, realize a profit from the interval sales and proceed to a new development project.
As the vacation ownership industry evolved, some in the industry recognized the potential benefits of a more integrated

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approach, where the developer's resort management operations complemented its sales and marketing efforts. In addition, the types of product offerings have also expanded over time, moving from fixed-or floating-week intervals at individual resorts, which provide the right to use the same property each year, or in alternate years, to points-based memberships in multi-resort vacation networks. These multi-resort vacation networks are designed to offer more flexible vacation opportunities. In addition to these resort networks, developers of all sizes may also affiliate with vacation ownership exchange companies in order to give customers the ability to exchange their rights to use the developer's resorts for the right to access a broader network of resorts. According to the AIF, a trade association representing the vacation ownership and resort development industries, the percentage of resort networks offering points-based products has been rising in recent years and, due to the flexibility of these types of products, the AIF believes that this trend will continue in the near future as companies that have traditionally offered only weekly intervals expand their product offerings. Entry into this market, particularly by single site developers, is expensive and complex due to the need for the necessary support systems, such as the technology requirements, legal know-how and strong business and inventory controls, to provide such services.
Growth in the vacation ownership industry has been achieved through expansion of existing resort companies as well as the entry of well-known lodging and entertainment companies that either operate vacation ownership businesses directly or license their brands to other operators of vacation ownership businesses, including Disney, Four Seasons, Hilton, Hyatt, Marriott, Starwood and Wyndham. The industry's growth can also be attributed to increased market acceptance of vacation ownership resorts, enhanced consumer protection laws and the evolution from a product offering a specific week-long stay at a single resort to the multi-resort points-based vacation networks, which offer a more flexible vacation experience.
According to the AIF's State of the Vacation Timeshare Industry Report ("State of the Industry Report"), as of December 31, 2014, the U.S. vacation ownership community was comprised of approximately 1,600 resorts, representing approximately 198,000 units and an estimated 8.7 million vacation ownership week equivalents. As reported by the AIF and reflected in the graph below, VOI sales during 2009 through 2011 were down significantly from levels prior to the economic downturn that started in 2008, which the AIF attributes largely to the fact that several of the larger VOI developers intentionally slowed their sales efforts through increased credit score requirements and larger down payment requirements in the face of an overall tighter credit environment; however, according to the State of the Industry Report, VOI sales in the U.S. increased by an average of more than 7.0% annually from 2011 to 2014. Based on AIF's Quarterly Pulse Survey reports, this trend of increasing VOI sales continued to accelerate to a 7.8% increase for the first three quarters of 2015 as compared to the same period in 2014.

Source: Historical timeshare industry research conducted by Ragatz Associates and American Economic Group, as of December 31, 2014.


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We expect the U.S. vacation ownership industry to continue to grow over the long term due to favorable demographics, more positive consumer attitudes, availability of capital and the low penetration of vacation ownership in North America. According to the AIF's bi-annual 2014 Shared Vacation Ownership Owners Report (the “Owners Report”), based upon a survey of the U.S. VOI owners, the median household income of VOI owners was $89,500 in 2014, 90% of VOI owners own their primary residence and 67% have a college degree. The Owners Report indicated that 83% of VOI owners rate their overall ownership experience as good to excellent and that the top four reasons for purchasing a VOI are resort location, saving money on future vacations, overall flexibility and quality of the accommodations. According to the Owners Report, less than 8% of U.S. households own a VOI. We believe this relatively low penetration rate of vacation ownership suggests the presence of a large base of potential customers.
The European vacation ownership industry is also significant. According to AIF, based on the latest survey, the European vacation ownership community was comprised of approximately 1,300 resorts in 2010, representing approximately 88,000 units. In addition, we believe that rapidly-growing international markets, such as Asia and South and Central America, present significant opportunities for expansion of the vacation ownership industry due to the substantial increases in spending on travel and leisure activities forecasted for consumers in those markets.
As the vacation ownership industry continues to mature, we believe that keys to success for a company in this industry include:
Hospitality Focus. Integrating hospitality into every aspect of a guest's vacation experience, including VOI sales, should result in higher levels of customer satisfaction and generate increased VOI sales, as compared to companies that do not view hospitality as an integral component of the services they provide.
Broad, Flexible Product Offering. Offering a flexible VOI product that allows customers to choose the location, season, duration and size of accommodation for their vacation, based upon the size of the product purchased, coupled with a broad resort network, will likely attract a broader spectrum of customers.
Consistent, High-Quality Resort Management. Ensuring a consistent, high-quality guest experience across a company's managed resorts and a brand the customer can trust should enhance VOI sales and marketing efforts targeted at new customers and increase the potential for additional VOI sales to existing customers.
Financing. Providing quick and easy access to consumer financing will often expedite a potential purchaser's decision-making process and result in additional VOI purchases.
We believe that competition in the vacation ownership industry is based primarily on the quality of the hospitality services and overall experience provided to customers, the number and location of vacation ownership resorts and hotels in the network, trust in the brand and the availability of program benefits.
Competitive Strengths
Our competitive strengths include:
A substantial portion of the revenue from our hospitality and management services business converts directly to Adjusted EBITDA.
Substantially all of our management contracts with our managed resorts and the Diamond Collections automatically renew, and under these contracts we receive management fees generally ranging from 10% to 15% of the other costs of operating the applicable resort or Diamond Collection (with a weighted average of 13.9% based upon the total management fee revenue for the year ended December 31, 2015). The covered costs paid by our managed resorts and the Diamond Collections include both the direct resort operating costs and the absorption of a substantial portion of our overhead related to this part of our business. Accordingly, our management fee revenue results in a comparable amount of Adjusted EBITDA. Generally, our revenue from management contracts increases to the extent that (i) operating costs (including reserves for capital projects such as renovations and upgrades) at our managed resorts and the Diamond Collections rise and, consequently, our management fees increase proportionately under our cost-plus management contracts; (ii) we add services under our management contracts; or (iii) we acquire or enter into contracts to manage resorts not previously managed by us. Adjusted EBITDA is a non-U.S. GAAP financial measure and should not be considered in isolation from, or as an alternative to net cash provided by (used in) operating activities or any other measure of liquidity, or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance, in any such case calculated and presented in accordance with U.S. GAAP. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources IndebtednessSenior Credit Facility" for further discussion regarding our Adjusted EBITDA.
The principal elements of our business provide us with significant financial visibility.
Management fees from our cost-plus management contracts. All anticipated operating costs of each of our managed

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resorts and Diamond Collections, including our management fees and costs pertaining to the specific managed resort or Diamond Collection, such as costs associated with the maintenance and operations of the resort, are included in the annual budgets of these resorts and Diamond Collections. These annual budgets are approved by the board of directors of each HOA and each Diamond Collection's non-profit members association (each, a "Collection Association"), as applicable, and are typically finalized before the end of the prior year. As a result, a substantial majority of our management fees are collected by January of the applicable year as part of the annual maintenance fees billed to VOI owners and released to us as services are provided. Unlike typical management agreements for traditional hotel properties, our management fees are not affected by average daily rates ("ADR") or occupancy rates at our managed resorts. In addition, while our management contracts may be subject to non-renewal or termination, no resort or Diamond Collection has terminated or elected not to renew any of our management contracts during the past five years.
Fees earned by operating the Clubs. Dues payments for each of the Clubs are billed and generally collected together with the member's related annual maintenance fees. Substantially all Club dues are collected by January of the applicable year. Members of the Clubs are not permitted to make reservations or access the applicable Club's services and benefits if they are not current in payment of these dues. The Clubs also provide specific services to the Diamond Collections, such as call center services, for which the Clubs charge a fee to the Diamond Collections, and are included in the Diamond Collection maintenance fees. Some of the Clubs offer a tiered loyalty membership whereby additional affiliated resorts and benefits are made available as the member purchases more points, resulting in higher Club dues for members in a higher loyalty tier.
VOI sales. Our VOI sales revenue is primarily a function of three levers: the number of tours we conduct, our closing percentage (which represents the percentage of VOI sales closed relative to the total number of tours at our sales centers) and the sales price per transaction. We generally have a high degree of near-term visibility as to each of these factors. Before the beginning of a year, we can predict with a high degree of confidence the number of tours we will conduct that year, and we believe that we can tailor our sales and marketing efforts to effectively influence our closing percentage and average transaction size in order to calibrate our VOI sales levels over the course of the year.
Financing of VOI sales in the U.S. We target the level of our consumer financing activity in response to capital market conditions. We accomplish this by offering sales programs that either encourage or discourage our customers to finance their VOI purchases with us, without compromising our underwriting standards. As of December 31, 2015, the weighted average Fair Isaac Corporation ("FICO") score (based upon loan balance) for our borrowers across our existing loan portfolio was 723, and the weighted average FICO score for our borrowers on loans originated by us since 2011 was 757. The default rate on our originated consumer loan portfolio was 7.7% (as a percentage of our outstanding originated portfolios) for 2015, and ranged from 5.7% to 8.2% on an annual basis from 2011 through 2015.
Our capital-efficient business model requires limited investment in working capital and capital expenditures.
Limited working capital required. Our hospitality and management services business consumes limited working capital because a substantial portion of the funds we receive under our management contracts is collected by January of each year and released to us as services are provided. Moreover, all resort-level maintenance and improvements (except for expenditures related to space owned by us) are paid for by the owners of VOIs, with our financial obligation generally limited to our pro rata share of the VOIs we hold as unsold VOIs.
Limited investment capital required. As a result of our VOI inventory strategy, we have limited requirements to build resort properties or acquire real estate to support our anticipated VOI sales levels. Although the volume of points or intervals that we recover could fluctuate in the future for various reasons, we reacquire approximately 2% to 5% of our total outstanding VOIs from defaulted owners on an annual basis. This provides us with a relatively low-cost, consistent stream of VOI inventory that we can resell, and we anticipate that this stream will satisfy a majority of our inventory needs in the foreseeable future. In certain geographic areas, we may from time to time acquire additional VOI inventory through open market purchases or other means. We supplement these inventory acquisition strategies with targeted development projects, particularly in attractive locations where member demand exceeds our existing supply. In these circumstances, we expect that we will generally seek to structure developments in a manner that limits our financial exposure, including by minimizing the amount of time between when we are required to pay for the new VOI inventory and when such inventory is sold. For example, in 2015, we entered into an agreement with Hawaii Funding LLC (the "Kona Seller"), an affiliate of Och-Ziff Real Estate, for the Kona Seller to develop a new resort on property located in Kona, Hawaii, in this manner (the "Kona Agreement"). Additionally, in a majority of our strategic transactions, we have acquired an ongoing business, consisting of management contracts, unsold VOI inventory and an existing owner base, which has generated immediate cash flows for us.
Access to financing. The liquidity to support our provision of financing to our customers for VOI purchases is

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provided through the Conduit Facility, the $100.0 million loan sale facility with Quorum Federal Credit Union (the "Quorum Facility") (collectively, the “Funding Facilities”) and securitization financings and, as a result, also consumes limited working capital. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesIndebtedness" for the definition of and further detail of these borrowings.
Our scalable VOI sales and marketing platform has considerable operating leverage and drives increases in Adjusted EBITDA.
We have built a robust and versatile sales and marketing platform. This platform enables us to take actions that directly impact the three levers that primarily determine our VOI sales revenue: the number of tours we conduct, our closing percentage and the sales price per transaction. Our objective is to consistently monitor and adjust these three factors to reach an optimum level of VOI sales based on our available VOI inventory. With our scalable sales platform in place, we do not foresee the need to significantly increase the number of sales centers (other than in connection with business acquisitions) or the size of our sales support team. Accordingly, we believe our VOI sales business has considerable operating leverage and the ability to drive increases in Adjusted EBITDA.
Our high level of customer satisfaction results in significant sales of additional VOIs to our members.
We believe our efforts to introduce hospitality, service excellence and quality into each member's vacation experience have resulted in a high degree of customer satisfaction, driving significant sales of additional VOIs to our existing members who previously purchased points from us, as well as members we acquired in our strategic acquisitions who purchased points from us for the first time (“Acquired Members”). After an Acquired Member makes his or her first purchase from us, all future transactions involving that Acquired Member are treated as sales to an existing member. In 2015, approximately 69% of our VOI sales were to existing members who previously purchased points from us, and approximately 10% of these sales were to Acquired Members. In 2014, approximately 62% of our VOI sales were to existing members, and approximately 15% were to Acquired Members.
Our accomplished leadership team positions us for continued growth.
We have an experienced leadership team that has delivered strong operating results through disciplined execution. Our management team have taken a number of significant steps to refine our strategic focus, build our brand recognition and streamline our operations, including (i) maximizing revenue from our hospitality and management services business; (ii) driving innovation throughout our business, most significantly by infusing our hospitality focus into our customer interactions; and (iii) adding resorts to our network and owners to our owner base through complementary strategic acquisitions and efficiently integrating businesses acquired. Certain members of our management team and board of directors have substantial equity interests in our Company that closely align their economic interests with those of our other stockholders.
Growth Strategies
Our growth strategies are as follows:
Continue to grow our hospitality and management services business.
We expect our hospitality and management services revenue will continue to grow as rising operating expenses at our managed resorts result in higher revenues under our cost-plus management contracts. We intend to generate additional growth in our hospitality and management services business by (i) increasing Club membership revenue; (ii) broadening hospitality service and activity offerings for members of the Clubs; including opportunities for our members to purchase third-party products and services; and (iii) adding services provided to our members under our management agreements and pursuing additional management and service contracts.
Increase Club membership revenue. Purchasers of our points, in almost all cases, are automatically granted membership in THE Club. In addition, as existing members purchase more points and thereby upgrade Club memberships to a higher loyalty tier with additional member benefits, higher fees are collected. When we complete an acquisition, we typically create a tailor-made Club, introducing a subset of additional resorts and benefits. This results in an owner base that becomes familiar with the benefits of THE Club, and should therefore be more likely to upgrade and purchase points from us with membership in THE Club. We also have implemented programs to encourage interval owners at our managed resorts to join THE Club.
Broaden hospitality service and activity offerings. We intend to continue to make membership in the Clubs more attractive to our members by expanding the number and variety of offered services and activities, such as airfare, cruises, guided excursions, golf outings, entertainment, theme park tickets, luggage and travel protection and access to luxury accommodations outside our network of resorts, such as the Diamond Luxury Selection, a Club member

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benefit exclusively for our members with large point ownership and, therefore, in a higher loyalty tier. Qualifying members can access The Diamond Luxury Selection using their points through THE Club for stays within a collection of approximately 2,500 private luxury properties. Additionally, we now offer to our members in a higher loyalty tier access to luxury cruises, premier vacation adventures and premier sports events (including VIP access). We believe the Clubs’ offerings enhance the overall experience of our members and, thus, the perceived value of their memberships. As membership in the Clubs becomes more valuable to consumers through hospitality-focused enhancements, we may be able to increase the dues paid by members of the Clubs, in addition to commission revenue that we are able to generate as a result of these Club membership enhancements.
Add services provided to our members under management contracts and pursue additional management and service contracts. We expect to add services provided to our members under our management contracts, which may result in increased management fees relating to those new services. In addition, we may purchase or otherwise obtain additional management contracts at resorts that we do not currently manage. Furthermore, we intend to broaden our business-to-business services on a fee-for-service basis to other companies in the hospitality and vacation ownership industry. For example, we have, on occasion, entered into fee-for-service agreements with resort operators and hospitality companies pursuant to which we provide them with resort management services, VOI sales and marketing services and inventory rental services. These types of arrangements can be highly profitable for us because we are not required to invest significant capital. In the future, in situations where we can leverage our unique expertise, skills and infrastructure, we intend to expand our provision of business-to-business services on an à la carte basis or as a suite of services to third-party resort developers and operators and other hospitality companies.
Continue to leverage our scalable sales and marketing platform to increase VOI sales revenue.
We intend to continue to utilize the operating leverage in our sales and marketing platform. While we focus on attracting potential new owners, we will also continue to market to our existing long-term membership base, and expect that through these efforts and our continuing commitment to ensuring high member satisfaction, a significant percentage of our VOI sales will continue to be made to our existing members. We will also continue to target the ownership base at resorts that we now manage as a result of our strategic acquisitions to encourage these prospective customers to purchase our VOIs. While we anticipate that the bulk of our future VOI sales will be made through our traditional selling methods, we are seeking to more fully integrate the VOI sales experience into our hospitality and management services. We have found that, by driving innovation throughout our business, most significantly by infusing our hospitality focus into the sales process and creatively engaging with potential purchasers, we improve potential purchasers' overall experience and level of satisfaction and, as a result, are able to increase the likelihood that they will buy our VOIs and increase the average transaction size. We have extended this philosophy of increased engagement and hospitality focus into other sales techniques, and intend to continue to innovate in this area.
Pursue additional revenue opportunities consistent with our capital-efficient business model.
We believe that we can achieve growth without pursuing revenue opportunities beyond those already inherent in our core business model. However, to the extent consistent with our capital-efficient business model, we intend to:
Selectively pursue strategic transactions. We intend to continue to pursue acquisitions of ongoing businesses, including management contracts and VOI inventory, on an opportunistic basis where we can achieve substantial synergies and cost savings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" for a discussion of our recent acquisitions. We will evaluate future acquisitions with a focus on adding additional resort locations, management contracts, new members to our owner base and VOI inventory that we may sell to existing members and potential customers.
Prudently expand our geographic footprint. We believe that there are significant opportunities to expand our business into new geographic markets in which we currently may have affiliations, but do not manage resorts or market or sell our VOIs. We believe that certain countries in Asia and Central and South America are particularly attractive potential new markets for us due to the substantial increases in spending on travel and leisure activities forecasted for their consumers. To the extent that we can maintain our high quality standards and strong brand reputation, we are selectively exploring acquisitions of ongoing resort businesses in these markets and may also pursue co-branding opportunities, joint ventures or other strategic alliances with existing local or regional hospitality companies. For example, we recently entered into a joint venture with affiliates of Dorsett Hospitality International, a large hotel developer, owner and operator in Asia, and China Travel International Investment Hong Kong Ltd., an investment holding company engaged in the operation of travel destinations (including hotels, theme parks, natural and cultural scenic spots and leisure resorts), travel agencies and related business operations and invested $1.5 million in this joint venture. We expect the venture to create, market, sell and service prepaid multiple-year vacation packages and associated benefits to customers in Asia. In addition, we may engage in targeted development projects, particularly in attractive locations where member demand exceeds our existing supply, in a manner consistent with our capital-light

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model, such as our recent agreement with respect to the development of a new resort in Kona, Hawaii. We believe that expansion of our geographic footprint will produce revenue from consumers in the markets into which we enter and also make our resort network more attractive to existing and prospective members worldwide.
Our Customers
Our customers are typically families seeking a flexible vacation experience. A majority of our new customers stay at one of the resorts in our network, either by reserving a unit on a per-night or per-week basis, exchanging points through an external exchange service, or purchasing a mini-vacation package, prior to purchasing a VOI. We have also generated significant additional sales to our existing members who wish to purchase additional points and thereby increase their benefit options within our resort network.
We believe a majority of our customers are between 45 and 65 years old. The baby boomer generation is the single largest population segment in the U.S. and Europe and is our key target market. With the premium resorts in our network and the broad range of benefits that we offer, we believe we are well-positioned to target an affluent subsection of the baby boomer population.
Our Services
Hospitality and Management Services. We manage 109 resort properties, which are located in the continental U.S., Hawaii, Mexico, the Caribbean and Europe, as well as the Diamond Collections. As the manager of these resorts and the Diamond Collections, we operate the front desks, provide housekeeping, conduct maintenance and manage human resources services. We also operate, or outsource the operation of, amenities such as golf courses, food and beverage venues and retail shops, an online reservation system, customer service contact centers, rental, billing and collection, accounting and treasury functions and communications and information technology services.
As an integral part of our hospitality and management services, we have entered into inventory recovery and assignment agreements ("IRAAs") with a substantial majority of the Collection Associations and HOAs for our managed resorts in North America, together with similar arrangements with the European Collection and a majority of our European managed resorts, whereby we recover VOIs previously owned by members who have failed to pay their annual maintenance fee or assessments due to, among other things, death or divorce or other life-cycle events or lifestyle changes. Because the majority of the cost of operating the resorts that we manage is spread across our member base, by recovering VOIs previously owned by members who have failed to pay their annual maintenance fee or assessments, we reduce bad debt expense at the managed resorts and Diamond Collection level, which is a component of the management fees billed to members by each resort's HOA or Collection Association, supporting the financial well-being of those managed resorts and the Diamond Collections.
HOAs. Each of the Diamond Resorts managed resorts, other than certain resorts in our European Collection and Latin America Collection, is typically operated through an HOA, which is administered by a board of directors. Directors are elected by the owners of VOIs at the resort (which may include one or more of the Diamond Collections) and may also include representatives appointed by us as the developer of the resort. As a result, we are entitled to voting rights with respect to directors of a given HOA by virtue of (i) our ownership of VOIs at the related resort; (ii) our status as the developer of the resort; or (iii) our ownership of points in the Diamond Collections that hold VOIs at the resort. The board of directors of each HOA hires a management company to provide the services described above, which in the case of all Diamond Resorts managed resorts, is us.
Our management fees with respect to a resort are based on a cost-plus structure and are calculated based on the direct and indirect costs (including the absorption of a substantial portion of our overhead related to the provision of management services) incurred by the HOA of the applicable resort. Under our current resort management agreements, we receive management fees generally ranging from 10% to 15% of the other costs of operating the applicable resort (with a weighted average of 13.9% based upon the total management fee revenue for the year ended December 31, 2015). Unlike typical commercial lodging management contracts, our management fees are not impacted by changes in a resort's ADR or occupancy level. Instead, the HOA for each resort engages in an annual budgeting process in which the board of directors of the HOA estimates the costs the HOA will incur for the coming year. In evaluating the anticipated costs of the HOA, the board of directors of the HOA considers the operational needs of the resort, the services and amenities that will be provided at or to the applicable resort and other costs of the HOA, some of which are impacted significantly by the location, size and type of the resort. Included in the anticipated operating costs of each HOA are our management fees. The board of directors of the HOA discusses the various considerations and votes to approve the annual budget, which determines the annual maintenance fees charged to each owner. One of the management services we provide to the HOA is the billing and collection of annual maintenance fees on the HOA's behalf. Annual maintenance fees for a given year are generally billed during the previous November, due by January and deposited in a segregated or restricted account, which is not included in our consolidated

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balance sheet but is managed by us on behalf of the HOA. As a result, a substantial majority of our fees for February through December of each year are collected from owners in advance. Funds are released to us from these accounts on a monthly basis for the payment of management fees as we provide our management services.
Our HOA management contracts typically have initial terms of three to ten years, with automatic renewals. These contracts can generally only be terminated by the HOA upon a majority vote of the owners (which may include one or more of the Diamond Collections) prior to each renewal period, other than in some limited circumstances involving cause.
Our HOA management contracts with the managed resorts that are part of the European Collection generally have either indefinite terms or lengthy remaining terms (approximately 40 years) and can only be terminated for an uncured breach by the manager or a winding up of the European Collection.
No HOA has terminated any of our management contracts during the past five years. We generally have the right to terminate our HOA management contracts at any time upon written notice to the respective HOA. During the past five years, we have terminated only one HOA management contract and sold two immaterial HOA management contracts.
Diamond Collections. The Diamond Collections currently consist of the following:

the Diamond Resorts U.S. Collection (the “U.S. Collection”), which includes interests in resorts located in Arizona, California, Colorado, Florida, Indiana, Missouri, Nevada, New Mexico, South Carolina, Tennessee, Virginia and St. Maarten;

the Diamond Resorts Hawaii Collection (the “Hawaii Collection”), which includes interests in resorts located in Arizona, California, Hawaii, Nevada and Utah;

the Diamond Resorts California Collection (the “California Collection”), which includes interests in resorts located in Arizona, California and Nevada;

the Premiere Vacation Collection (the “Premiere Vacation Collection”), which includes interests in resorts located in Arizona, Colorado, Indiana, Nevada and Baja California Sur, Mexico;

the Monarch Grand Vacations (the “Monarch Grand Collection”), which includes interests in resorts located in California, Nevada, Utah and the Cabo Azul Resort located in San Jose Del Cabo, Mexico;

the Diamond Resorts European Collection (the “European Collection”), which includes interests in resorts located in Austria, England, France, Italy, Norway, Portugal, Scotland and Spain;

the Diamond Resorts Latin America Collection (the “Latin America Collection”), which currently includes interests in the Cabo Azul Resort located in San Jose Del Cabo, Mexico;

the Diamond Resorts Mediterranean Collection (the “Mediterranean Collection”), which includes interests in resorts located in the Greek Islands of Crete and Rhodes; and

Club Intrawest, which includes interests in resorts located in Canada, Mexico, as well as Florida and California, which was added to our resort network in connection with the Intrawest Acquisition in January 2016.

Each of the Diamond Collections is operated through a Collection Association, which is administered by a board of directors. Directors are generally elected by the points holders within the applicable Diamond Collection, subject to limited exceptions.
We own a significant number of points in each of the Diamond Collections (which in the case of the Mediterranean Collection are in the form of shares but for simplicity are also referred to in this annual report as points), which we hold as inventory. The board of directors of each Diamond Collection hires a company to provide management services to the Diamond Collection, which in each case is us.
As with our HOA management contracts, management fees charged to the Diamond Collections in the U.S. are based on a cost-plus structure and are calculated based on the direct and indirect costs (including the absorption of a substantial portion of our overhead related to the provision of our management services) incurred by the Diamond Collection. Under our current Diamond Collection management agreements, we receive management fees of 15% of the costs of the applicable Diamond Collection (except with respect to our management agreement with the Monarch Grand Collection, under which we receive a management fee of 10% of the costs of the Monarch Grand Collection). Our management fees are included in the budgets

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prepared by each Collection Association, which determines the annual maintenance fee charged to each owner and is voted on and approved by the board of directors of each Collection Association. One of the management services we provide to all of the Diamond Collections is the billing and collection of annual maintenance fees on the Diamond Collection's behalf. Annual maintenance fees for a given year are generally billed during the previous November, due by January and deposited in a segregated or restricted account, which is not included in our consolidated balance sheet but is managed by us on behalf of each Diamond Collection. As a result, a substantial majority of our fees for February through December of each year are collected from owners in advance. Funds are released to us from these accounts on a monthly basis for the payment of management fees as we provide our management services.
Apart from the management contract for the European Collection and the Mediterranean Collection, our Diamond Collection management contracts have initial terms of three to ten years, with automatic renewals of three to ten years, and can generally only be terminated by the Diamond Collection upon a majority vote of the Diamond Collection's members prior to each renewal period, other than in some limited circumstances involving cause. In the case of the Mediterranean Collection, the management agreement is indefinite and irrevocable. No Diamond Collection has terminated, or elected not to renew, any of our management contracts during the past five years. We generally have the right to terminate our Diamond Collection management contracts at any time upon written notice to the applicable Diamond Collection. The management contract for the European Collection has an indefinite term, can only be terminated by the European Collection for an uncured breach by the manager or a winding up of the European Collection, and may not be terminated by the manager.
Clubs. Another key component of our hospitality and management services business is our management of the Clubs. We operate a Vacation Interests exchange program that enables our members to use their points to stay at resorts outside of their home Diamond Collection, as well as other affiliated resorts, hotels and cruises, for which an annual fee is charged. In addition, the Clubs provide services to the Diamond Collections, such as reservation call center services and customer services, which are billed on a cost-plus basis to the Diamond Collections directly.
The Clubs offer our members a wide range of other benefits, such as the opportunity to purchase various products and services, including guided excursions and member events and reservation protection products, for which we earn commissions. See "Our Flexible Points-Based Vacation Ownership System and the ClubsThe Clubs" for additional information regarding the Clubs.
Vacation Interests Sales and Financing. We market and sell VOIs that provide access to our resort network of 109 Diamond Resorts managed resorts and 250 affiliated resorts and hotels and 20 cruise itineraries.
The VOI inventory that we reacquire pursuant to our IRAAs provides us with a steady stream of low-cost VOI inventory that we can sell to our current and prospective members. Our VOI inventory is also supplemented by recovering VOIs previously owned by members who default on their consumer loans, whether the consumer loans were originated by us or were acquired from third-parties, as well as inventory purchased in strategic acquisitions. In addition, we may engage in targeted development projects, particularly in attractive locations where member demand exceeds our existing supply.
We have 61 sales centers across the globe, 51 of which are located at managed resorts, six of which are located at affiliated resorts and four of which are located off-site. We currently employ an in-house sales and marketing team at 49 of these locations and also maintain agency agreements with independent sales organizations at 12 locations. A relatively small portion of our sales, principally sales of additional points to existing members, are effected through our call centers. Our sales representatives utilize a variety of marketing programs to generate prospects for our sales efforts, including presentations at resorts targeted to current members and guests, enhanced mini-vacation packages that we refer to as Events of a LifetimeTM, overnight mini-vacation packages, targeted mailing, telemarketing, gift certificates and various destination-specific local marketing efforts. Additionally, we offer incentive premiums in the form of tickets to local attractions and activities, hotel stays, gift certificates or meals to guests and other potential customers to encourage attendance at tours.
We generate our VOI sales primarily through conducting tours at our sales centers. These tours generally include a tour of the resort properties, as well as an in-depth explanation of our points-based VOI system and the value proposition it offers our members. Our tours are designed to provide guests with an in-depth overview of our Company, our resort network and benefits associated with membership in THE Club, as well as a customized presentation to explain how our products and services can meet their vacationing needs. We also conduct tours at various offsite and hotel locations (outside of our managed resorts) based on potential leads for VOI sales identified through innovative marketing targeted toward individuals with desired demographics.
Our sales force is highly trained in a consultative sales approach designed to ensure that we meet customers' needs on an individual basis. We manage our sales representatives' consistency of presentation and professionalism using a variety of sales tools and technology. The sales representatives are principally compensated on a variable basis determined by performance, subject to a base compensation amount.
Our marketing efforts are principally directed at the following channels:

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our existing member base;
consumers who own VOIs sold by businesses we have acquired;
guests who stay at our managed resorts;
off-property contacts who are solicited from the premises of hospitality, entertainment, gaming and retail locations;
participants in third-party vacation ownership exchange programs, such as Interval International, Inc. (“Interval International”), and Resorts Condominiums International, LLC (“RCI”), who stay at our managed resorts;
member referrals; and
other potential customers who we target through various marketing programs.
We employ innovative programs and techniques designed to infuse hospitality into our sales and marketing efforts. For example, we offer enhanced mini-vacation packages at some of our managed resorts, which we refer to as Events of a LifetimeTM, at which our members or prospective customers who have purchased such packages are invited to dine together, along with our sales team members, and to attend a show, golf outing or other local attraction as a group over a two-day period. At the end of the stay, our sales team provides an in-depth explanation of our points-based VOI system and the value proposition it offers our members. In addition, we have an initiative in which select members and guests receive “high-touch” services such as a special welcome package, resort orientation and concierge services, as part of a pre-scheduled in-person tour. Results from these enhanced programs and initiatives have been positive. We have found that, by driving innovation throughout our business, most significantly by infusing our hospitality focus into the sales process and creatively engaging with potential purchasers, we improve potential purchasers' overall experience and level of satisfaction and, as a result, are able to increase the likelihood that they will buy our VOIs and increase the average transaction size.
Although the principal goal of our marketing activities is the sale of points, in order to generate additional revenue and offset the carrying cost of our VOI inventory, we use a portion of the points and intervals which we own or acquire the right to use to offer accommodations to consumers on a per-night or per-week basis, similar to hotels. We generate these stays through direct consumer marketing, travel agents, external websites and our own website and vacation package wholesalers. We believe that these operations, in addition to generating supplemental revenue, provide us with a good source of potential customers for the purchase of points.
We provide loans to eligible customers who purchase VOIs through our U.S., Mexican and St. Maarten sales centers and choose to finance their purchase. These loans are collateralized by the underlying VOI, generally bear interest at a fixed rate, have a typical term of 10 years and are generally made available to consumers who make a down payment within established credit guidelines. Our minimum required down payment is 10%. From January 1, 2011 through December 31, 2015, our average cash down payment was 20.0% and the average initial equity contribution for new VOI purchases by existing owners (which take into account the value of VOIs already held by purchasers and pledged to secure a new consumer loan) was 30.2%, which resulted in an average combined cash and equity contribution of 50.2% for these new VOI purchases.
As of December 31, 2015, our loan portfolio (including loans we have transferred to special-purpose subsidiaries in connection with the Conduit Facility, Quorum Facility and securitization transactions) was comprised of approximately 64,000 loans with an outstanding aggregate loan balance of $916.1 million. Our total portfolio includes loans that have been written off for financial reporting purposes due to payment defaults and delinquencies but which we continue to administer and loans that were originated by us and loans that were acquired in connection with our acquisitions.
Approximately 46,000 of these consumer loans were loans under which the consumer was not in default, and the outstanding aggregate loan balance was $751.8 million. Approximately 42,000 of these loans were originated by us and approximately 4,000 of the loans were acquired in connection with one of our acquisitions.
Approximately 18,000 loans within our loan portfolio, with an outstanding aggregate loan balance of $164.3 million, were loans that are in default (accounts that are greater than 180 days delinquent and have not yet been foreclosed upon or canceled). Approximately 15,000 of these loans that were in default as of December 31, 2015 were loans acquired by us, including approximately 12,000 already in default at the time we acquired them in connection with various acquisitions and approximately 3,000 of the loans were not yet in default at the time of the acquisition. Approximately 3,000 of the loans that were in default in default as of December 31, 2015 were originated by us. The loans originated by us have already been written off for financial reporting purposes but we continue to administer them until we elect, subject to applicable law, to foreclose or cancel them. Loans that were in default at the time they were acquired were never included in our loan portfolio and, accordingly, are not part of our provision for uncollectible accounts or reserve for uncollectible accounts. We elect to recover VOI inventory underlying defaulted loans based on a variety of factors, including our VOI inventory needs and the carrying costs associated with recapturing the VOI inventory. Consumer loans in default at the time of acquisition represent

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future sources of low-cost inventory to us.
The weighted-average interest rate for all of the loans in our portfolio as of December 31, 2015 was 14.9%, which includes a weighted average interest rate for loans in default of 16.4%. As of December 31, 2015, 8.8% of our owner-families had an active loan outstanding with us.
We underwrite each loan application to assess the prospective buyer's ability to pay through the credit evaluation score methodology developed by FICO based on credit files compiled and maintained by Experian (for U.S. residents) and Equifax (for Canadian residents). In underwriting each loan, we review the completed credit application and the credit bureau report and/or the applicant’s performance history with us, including any delinquency on existing loans with us, and consider in specified circumstances, among other factors, whether the applicant has been involved in bankruptcy proceedings within the previous 12 months and any judgments or liens, including civil judgments and tax liens, against the applicant. As of December 31, 2015, the weighted average FICO score (based upon loan balance) for our borrowers across our existing loan portfolio was 723, and the weighted average FICO score for our borrowers on loans we originated since 2011 was 757.
Our consumer finance servicing division includes underwriting, collection and servicing of our consumer loan portfolio. Loan collections and delinquencies are managed by utilizing modern collection technology and an in-house collection team to minimize account delinquencies and maximize cash flows. We generally monetize a substantial portion of the consumer loans we generate from our customers through conduit and securitization financings. We act as servicer for consumer loan portfolios, including those monetized through conduit or securitization financings and receivables owned by third parties, for which we receive a fee.
Through arrangements with certain financial institutions in Europe, we broker financing for qualified customers who purchase points through our European sales centers.
Our Resort Network
Our resort network consists of 379 vacation destinations, which includes 109 Diamond Resorts managed properties with approximately 12,000 units worldwide that we manage, and 250 affiliated resorts and hotels and 20 cruise itineraries (as of January 31, 2016), which we do not manage and which do not carry our brand name but are a part of our resort network and, consequently, are available for our Club members to use as vacation destinations. Through our management, we provide guests with a consistent and high quality suite of services and amenities, and, pursuant to our management agreements, we have oversight and management responsibility over the staff at each location. Of the managed resorts, 47 have food and beverage operations, 49 have a gift shop, pro shop or convenience store, and 29 have a golf course, leisure center or spa. Most of these amenities are operated by third parties pursuant to leases, licenses or similar agreements. Revenue from these operations is included in Consolidated Resort Operations Revenue in our consolidated statements of operations.
Affiliated resorts are resorts with which we have contractual arrangements to use a certain number of vacation intervals or units. These resorts are made available to members of the Clubs through affiliation agreements. In the majority of cases, our affiliated resorts provide us with access to their vacation intervals or units in exchange for our providing similar usage of intervals or units at our managed resorts, and no fees are paid by us in connection with these exchanges. However, in a limited number of circumstances, we receive access to accommodations at our affiliated hotels and cruises through two other types of arrangements. In the first of these types of arrangements, we pay an upfront fee to an affiliated hotel or cruise company for access to a specified number of vacation intervals or units, and we incorporate this upfront fee into our calculation for annual dues to be paid by members of the Clubs. In the second of these types of arrangements, a member who desires to stay at an affiliated hotel for a particular time period deposits points with us and, in exchange, we pay our affiliated hotel the funds required in order to allow such member access and, in turn, we use the points redeemed to secure a unit, which we then use for marketing or rental purposes. The benefit of these arrangements, in comparison to traditional exchange companies, is that there is no need to wait for an owner to deposit their week’s ownership into the program in order to then make it available to members. These arrangements secure availability for our members in advance and, therefore, tend to provide better customer service and availability.
We identify and select affiliated resorts based on a variety of factors, including location, amenities and preferences of our members. We have established standards of quality that we require each of our affiliates to meet, including with respect to the maintenance of their properties and level of guest services. In general, our affiliate agreements allow for termination by us upon 30 days’ notice to the affiliate, although some of our affiliate agreements cannot be terminated until a specified future date. Further, our affiliate agreements permit us to terminate our relationship with an affiliate if it fails to meet our standards. In any event, none of our affiliate agreements requires us to make any payments in connection with terminating the agreement. In addition to our affiliate agreements, we own, through one or more of the Diamond Collections, intervals at a few of our affiliated resorts.
Our network of resorts includes a wide variety of locations and geographic diversity, including beach, mountain, ski and

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major city locations, as well as locations near major theme parks and historical sites. The accommodations at these resorts are fully furnished and typically include kitchen and dining facilities, a living room and a combination of bedroom types including studios and one-, two-, three- and four-bedroom units with multiple bathrooms. Resort amenities are appropriate for the type of resort and may include an indoor and/or outdoor swimming pool, hot tub, children's pool, fitness center, golf course, children's play area and/or tennis courts. Further, substantially all of our Diamond Resorts managed resorts in Europe and some of our Diamond Resorts managed resorts in North America include onsite food and beverage operations, the majority of which are operated by third-party vendors.
The following table presents a summary of our managed resorts, affiliated resorts and hotels and cruises by geographic location as of January 31, 2016:
 
 
Number of Managed Resorts
 
Number of Affiliated Resorts and Hotels
 
Number of Cruises
North America and the Caribbean
 
64

 
142

 
14

Europe
 
45

 
32

 
4

Central and South America
 

 
3

 
2

Asia
 

 
54

 

Australia
 

 
12

 

Africa
 

 
7

 

Total
 
109

 
250

 
20

Diamond Luxury Selection
In addition to our managed resorts, affiliated resorts and hotels and cruises, since October 2013 we have offered members with large point ownership, as an additional Club benefit, the ability to use their points to rent from a collection of approximately 2,500 private luxury properties, including villas, resorts, boutique hotels and yachts, through participation in The Diamond Luxury Selection. In general, a qualifying member is able to rent these private luxury properties by depositing a designated number of points with us, and we are then required to pay to the owners of these private luxury properties, on behalf of our members, a rental fee. This rental fee determines the number of points required to be used by our members for any particular rental. We also have the ability to use these properties for marketing or rental purposes. We do not manage these luxury properties, they do not carry our brand name and they are not part of any of our Diamond Collections or our resort network.
Our Flexible Points-Based Vacation Ownership System and the Clubs
Our Points-Based System. Our customers become members of our vacation ownership system by purchasing points, which act as an annual currency that is exchangeable for occupancy rights in accommodations at the managed and affiliated resorts in our network. In 2015, the average cost to purchase points equivalent to an annual one-week vacation in our network globally was $26,007. Purchasers of points do not acquire a direct ownership interest in the resort properties in our network. Rather, our customers acquire a membership in one of the Diamond Collections. See "Operation and Management of the Diamond Collections" for additional information regarding the Diamond Collections.
The principal advantage of our points-based system is the flexibility it gives to members with respect to the use of their points versus the use of traditional intervals. With traditional intervals, an owner has the “fixed” use of a specific accommodation type for a designated one-week time period at a specific resort or has the “floating” use of a specific type of accommodation for a week to be selected for a particular season at that same resort. An owner may exchange their interval through an external VOI exchange program, such as the exchange programs offered by Interval International or RCI, for which an annual membership fee as well as an exchange transaction fee are charged to the owner. Unlike traditional interval owners, points holders can redeem their points for one or more vacation stays in the resorts included in our network without having to use an external exchange company and without having to pay any exchange transaction fees. Because points function as currency within our resort network, our members have flexibility to choose the location, season, duration and size of accommodation for their vacation based on their annual points allocation, limited only by the range of accommodations within our resort network, the number of points owned, availability and, in some cases, by membership type limitations. Members of a particular Diamond Collection have the ability to make reservations at resorts within that Diamond Collection before those resorts are open for bookings by members of other Diamond Collections. Our members may also “save” their points from prior

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years, “borrow” points from future years, or pay cash for additional one-time points usage for additional flexibility with respect to reserving vacations at peak times, in larger accommodations, for longer periods of time or for vacationing more often throughout the year.
We allocate points values for each of the resorts in our network. Points values are determined by unit type for each resort and are based on season, demand, location, views, amenities and facilities. Once the accommodation has been placed in a Collection, the points values assigned cannot be altered. We make a points directory available to our customers online, which allows them to evaluate how they may allocate their available points and select dates and locations for stays at resorts within our network, subject to certain rules and restrictions.
We operate in-house call centers globally for members to make reservations, payments and to handle queries. In addition, we offer a comprehensive online booking service which members can use to reserve stays at the resorts in our network, manage their purchased points and pay fees. We also manage an in-house concierge service for our members with large point ownership at a higher loyalty tier of Club membership, offering services 24/7 globally.
Between January 2013 and November 2015, our European subsidiary offered a VOI product with a limited term (the “European Term Product”) available to purchasers in Europe. Purchasers of the European Term Product received an allocation of points which represented an assignment of a specific week or weeks in a specific unit (without specific occupancy rights), at certain of our European resort properties, as well as use rights to any of the resort properties within our European Collection, for a period of 15 years. At the end of the 15-year period, the trustee of the European Collection will attempt to sell the unit and the net proceeds will be distributed to the then current owners of the unit, which may, or may not, include us. The current trustee of the European Collection also provided trust services relating to the European Term Product. The owners of the European Term Product paid annual maintenance fees at substantially the same rate as owners of points in our European Collection and were also members of THE Club and paid Club fees as part of their maintenance fees. For the year ended December 31, 2015, a large majority of the sales of the European Term Product have been to existing members of the European Collection, in particular points owners. We discontinued offering the European Term Product in November 2015 as we switched our focus to VOI sales in the form of points.
The Clubs. Through the Clubs, we operate VOI exchange programs that enable our members to use their points, or points equivalent in the case of intervals, at resorts within our resort network, subject to certain rules and restrictions. The Clubs continue to provide services to a segment of the membership base who historically purchased intervals at some of our managed properties. Purchasers of points in the Collections other than Club Intrawest are automatically granted membership in THE Club, except for purchasers in Florida and Mexico who must affirmatively elect to join THE Club. THE Club provides members with access to all resorts in our network and offers the full range of member services. In certain circumstances, typically in connection with an acquisition, we offer a restricted version of THE Club for a lower annual fee for new members resulting from such acquisition, which allows those members to stay at a subset of resorts within our network and provides those members with a portion of the benefits available to full members of THE Club.
In addition to the exchange programs, the Clubs offer a global array of other member benefits, discounts, offers and promotions that allow members to exchange points for a wide variety of products and travel services, including airfare, cruises and guided excursions. Most members of the Clubs, irrespective of ownership of points or intervals, have access to an external VOI exchange program for vacation stays at resorts outside of the Clubs' resort network if they desire, as the annual membership fee generally also includes annual membership in the Interval International external exchange program. For our more limited Club offerings, exchanges through the Interval International external exchange program typically require payment to Interval International of an additional membership fee and transaction fees.
Generally, members of the Clubs do not have the right to terminate their membership. However, due to regulatory requirements, members who purchase points in Arizona, California, Florida, Hawaii and Mexico may terminate their membership in the Clubs under specific circumstances. Following two acquisitions completed in 2010 and 2012, we also offered the existing members of the Premiere Vacation Collection and the Monarch Grand Collection the option to opt out of our limited Club offerings that were granted following the respective acquisitions. To date, only a minimal number of purchasers of points have opted out of the Clubs.
In addition to annual dues associated with the Clubs, we also earn revenue associated with legacy owners of deeded intervals at resorts that we acquired in our strategic acquisitions exchanging the use of their intervals for membership in the Clubs, which requires these owners to pay the annual fees associated with Club membership. Furthermore, we also earn reservation protection plan revenue, which is an optional fee paid by customers when making a reservation to preserve their points should they need to cancel their reservation, and earn other revenue through our provision of travel-related services and other affinity programs. In the past, we also earned revenue associated with customer conversions into THE Club, which involved the payment of a one-time fee by interval owners who wished to retain their intervals but also participate in THE Club. Expenses associated with our operation of the Clubs include costs incurred for the in-house call centers, annual membership fees paid to a third-party exchange company, where applicable, and administrative expenses.

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Operation and Management of the Diamond Collections
Purchasers of points acquire interests in one of the Diamond Collections. For each Diamond Collection, one or more trustees hold legal title to the deeded fee simple real estate interests or the functional equivalent, or, in some cases, leasehold real estate interests for the benefit of the respective Diamond Collection's association members in accordance with the applicable agreements. Under trust agreements, points are established as the currency to be used by members for the use and occupancy of accommodations held in trust. The Diamond Collections generally have members’ associations, which are organizations of persons who own membership points in the applicable Diamond Collection, which are managed by a board of directors. The associations act as agents for all of the members in collecting assessments and paying taxes, utility costs and other costs incurred by the Diamond Collection on behalf of members. Generally, the term of each Diamond Collection, except the European Collection, is perpetual (or in the case of the Latin America Collection, may be renewed or reconstituted and thus is practically perpetual) and may only be terminated with a unanimous vote of the board of directors and approval by a significant majority of the voting power of members. The European Collection trusts, including customer use rights, have approximately 40-year terms. The Mediterranean Collection trusts, including customer use rights, expire between the end of December 2029 and the end of December 2043.
The Collection Associations have entered into management agreements with us pursuant to which the board’s management powers are delegated to us. The management agreements generally have three to ten year terms and automatically renew for additional three to ten year terms unless terminated by the applicable members’ association. The Club Intrawest management agreement automatically renews annually unless terminated by the members' association.
For each of the Diamond Collections, pursuant to the applicable trust and related agreements, we have the right to hold a significant number of unsold points as inventory for sale. Further, in North America, we hold title (via subsidiary resort developer entities) to certain intervals which have not yet been transferred to a Diamond Collection. When these intervals are transferred to a Diamond Collection, we will receive an allocation of points. The majority of the common areas for resorts located in North America are owned by the related HOA. At certain locations, we own commercial space which we utilize for sales centers as well as other guest services, such as a gift shop, mini-market or a food and beverage facility. The amount of such commercial space represents an insignificant portion of our total facilities and no such space is used for any significant retail or commercial operations.
Each Diamond Collection member is required to pay to the respective Diamond Collection a share of the overall cost of that Diamond Collection's operations, which includes that Diamond Collection's share of the costs of maintaining and operating the component resort units within that Diamond Collection. A specific resort property may have units that are included in more than one Diamond Collection, or have a combination of units owned by a Diamond Collection and by individual interval owners. To the extent that an entire resort property is not held completely within a specific Diamond Collection, each Diamond Collection pays only the portion of operating costs attributable to its interval ownership in that resort. With the exception of the Mediterranean Collection and Club Intrawest, each Diamond Collection member's annual maintenance fee is composed of a base fee and a per point fee based on the number of points owned by the member. The annual maintenance fee is intended to cover all applicable operating costs of the resort properties and other services, including reception, housekeeping, maintenance and repairs, real estate taxes, insurance, rental expense, accounting, legal, human resources, information technology and funding of replacement and refurbishment reserves for the underlying resorts. In 2015, the annual maintenance fee for a holder of points equivalent to one week at one of the resorts in our network generally ranged between $1,240 and $1,715, with an average of $1,468. Special assessments may be levied if insufficient operating funds are available or if planned capital improvements exceed the amount of available replacement and refurbishment reserves.
Managed Resorts Outside of Diamond Collections
VOIs for a limited number of the resorts managed by us, consisting principally of the resorts acquired in our July 24, 2013 acquisition of management contracts, unsold VOIs, a portfolio of consumer loans and other assets from Island One, Inc. and Crescent One, LLC in exchange for $73.3 million of shares of our common stock (the "Island One Acquisition"), are not included in any of our Diamond Collections. Owner-families hold deeded VOIs in these resorts. Unsold intervals have been allocated point equivalent amounts that allow members of the Clubs to stay at these resorts.
Interval Ownership
We generally discontinued selling deeded intervals in October 2007; however, several of the resorts we manage continue to have a significant number of legacy deeded interval owners. We believe that points offer our members greater choice and flexibility in planning their vacations as compared to intervals. From an operational perspective, our points-based structure enables us to more efficiently manage our inventory and sales centers by selling points-based access to our global resort network from any sales location, rather than being limited to selling intervals at a specific resort.

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An interval typically entitles the owner to use a fully-furnished vacation accommodation for a one-week period, generally during each year or in alternate years, usually in perpetuity. Typically, the owner holds either a fee simple ownership interest in a specific vacation accommodation or an undivided fee simple ownership interest in an entire resort. An interval owner has the right to stay only at the specific resort from which the interval owner has purchased the interval. However, many of our interval owners in the U.S. are also members of one of the Clubs, and thereby are entitled to the points equivalent for their interval which they may use to stay at other resorts in our network.
Each interval owner is required to pay an annual maintenance fee to the related HOA to cover the owner's share of the cost of maintaining the property. The annual maintenance fee is intended to cover the owner's share of all operating costs of the resort and other related services, similar to a Diamond Collection member’s annual maintenance fee. Assessments may be billed if insufficient operating funds are available or if planned capital improvements exceed the amount of available replacement and refurbishment reserves. In 2015, annual maintenance fees for interval owners generally ranged between $624 and $1,629 per year for a one-week interval, with an average of $1,046. The amount of an interval owner's annual maintenance fees and assessments is determined on a pro rata basis consistent with such person's ownership interest in the resort. For purposes of this allocation, each of the Diamond Collections is assessed annual maintenance fees and assessments based on the intervals held by such Diamond Collection.
Relationship among Points Owners, THE Club, HOAs and Diamond Collections
The following diagram depicts the relationship among our points owners that are members of THE Club, the HOAs and the Diamond Collections:
Recovery of VOIs
In the ordinary course of our business, we recover VOIs from our members as a result of (i) failures by our members to pay their annual maintenance fee or any assessment, which failures may be due to, among other things, death or divorce or other life-cycle events or lifestyle changes and (ii) defaults on our members' consumer loans for the purchase of their VOIs. With respect to consumer loan defaults, we are able to exercise our rights as a secured lender to foreclose upon the VOI subject to our lien.

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With respect to members who have failed to pay their annual maintenance fee or any assessment, we have entered into IRAAs with a substantial majority of the Collection Associations and HOAs for our managed resorts in North America, together with similar arrangements with the European Collection and a majority of our European managed resorts. Each agreement provides that in the event that a member fails to pay these amounts, we have the option to enforce the rights of the HOA or Collection Association with respect to the subject VOI, which includes preventing members from using their points or intervals and, if the delinquency continues, recovering the property in the name of the HOA or Collection Association. Our rights to recover VOIs for failure to pay annual maintenance fees or assessments are subject to any prior security interest encumbering such VOI, including any interest we hold as a lender on a consumer loan. We are responsible for payment of certain fees, ranging from 30% to 100% of the annual maintenance fees relating to the defaulted intervals or points. Depending upon whether the VOI in default is intervals or points, recovery is effected through a foreclosure proceeding or by contract termination. The recovery of points is more efficient than the recovery of intervals, because the recovery of intervals is governed by local real estate foreclosure laws that significantly lengthen recovery periods and increase the cost of recovery.
Under the terms of our IRAAs, we are granted full use of the inventory as a result of delinquent annual maintenance fees or assessments for rental and marketing purposes, and we are under no obligation to commence recovery proceedings. Generally, when we recover intervals, we pay from approximately one to three years' worth of annual maintenance fees on such intervals. Upon recovery, the HOA or Collection Association transfers title to the VOI to us, and we are responsible for all annual maintenance fees and assessments thereafter. We have written or oral agreements with most of our European HOAs that provide us similar rights with respect to recovering delinquent VOIs. After recovery, VOIs are returned to our inventory and become available for sale. Although we recover inventory in the form of intervals as well as points, all inventory recovered is sold in the form of points. Recovered intervals are transferred to one of the Diamond Collections and become part of our points-based system.
VOIs recovered through the default process are added to our existing inventory and resold at full retail value. Although the volume of points or intervals that we recover could fluctuate in the future for various reasons, we have recovered in the ordinary course of our business approximately 2% to 5% of the total outstanding VOIs in each of the past five years. Recovered VOI inventory may be sold by us in the form of points to new customers or existing members.
Competition
In our hospitality and management services segment, our competition includes pure real estate and hospitality management companies, as well as the VOI companies that conduct hotel management operations, some of which are noted below. Our competitors may seek to compete against us based on the pricing terms of our current hospitality management contracts. Our competitors may also compete against us in our efforts to expand our fee-based income streams by pursuing new management contracts for resorts that are not currently part of our network.
In our Vacation Interests sales and financing segment, we compete for prospects, sales leads and sales personnel from established, highly visible vacation ownership resort operators, as well as a fragmented array of smaller operators and owners. In marketing and selling VOIs, we compete against not only vacation ownership companies, but also the vacation ownership divisions of other hospitality companies. Our competitors include Bluegreen Corporation, Hilton Hotels Corporation, Marriott Vacations Worldwide Corporation, Vistana Signature Experiences, Inc. and Wyndham Worldwide Corporation. In addition, in certain markets, we compete with many established companies focused primarily on vacation ownership, and it is possible that other potential competitors may develop properties near our current resort locations and thus compete with us in the future.
We also compete with other vacation options such as cruises, as well as alternative lodging companies such as Airbnb and other similar entities, which operate websites that market available furnished, privately-owned residential properties in locations throughout the world, including homes and condominiums that can be rented on a nightly, weekly or monthly basis, and particularly in Europe, low-cost tour operators.
There has been consolidation within the vacation ownership industry, including by us through our targeted acquisitions. Recently, International Leisure Group, which owns and manages the Hyatt Residence Club and provides management services through Hyatt Vacation Ownership, agreed to acquire Vistana Signature Experiences, Inc. We believe that the vacation ownership industry will continue to consolidate in the future. In our rental of VOIs, we compete not only with all of the foregoing companies, but also with traditional hospitality providers such as hotels and resorts. In our consumer financing business, we compete with numerous subsets of financial institutions, including mortgage companies, credit card issuers and other providers of direct-to-consumer financing. These providers permit purchasers to utilize a home equity line of credit, mortgage, credit card or other instrument to finance their VOI purchase.

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Governmental Regulation
Our marketing and sale of VOIs and other operations are subject to extensive regulation by the federal government and state timeshare laws and, in some cases, by the foreign jurisdictions where our VOIs are located, marketed and sold. The U.S. federal legislation that is or may be applicable to the sale, marketing and financing of VOIs includes, but is not limited to, the Federal Trade Commission Act, the Fair Housing Act, the Americans with Disabilities Act, the Truth-in-Lending Act and Regulation Z, the Home Mortgage Disclosure Act and Regulation C, the Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Gramm-Leach-Bliley Act, the Deceptive Mail Prevention and Enforcement Act, Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980, the Bank Secrecy Act, the USA Patriot Act, and the Civil Rights Acts of 1964, 1968 and 1991 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
In addition, the majority of states and foreign jurisdictions where the resorts in our network are located extensively regulate the creation and management of vacation ownership resorts, the marketing and sale of VOIs, the escrow of purchaser funds and other property prior to the completion of construction and closing, the content and use of advertising materials and promotional offers, the delivery of an offering memorandum describing the sale of VOIs and the creation and operation of exchange programs and the multi-site Vacation Interests plan reservation system. Many other states and certain foreign jurisdictions have adopted similar legislation and regulations affecting the marketing and sale of VOIs to persons located in those jurisdictions. In addition, the laws of most states and foreign jurisdictions in which we sell VOIs grant the purchaser of the interest the right to rescind a purchase contract during the specified rescission period provided by law. Rescission periods vary by jurisdiction in which we operate, but typically are five to 15 days from the date of sale.
The Diamond Collections are required to register pursuant to applicable statutory requirements for the sale of VOI plans in an increasing number of jurisdictions. For example, our subsidiary that serves as the developer of the U.S. Collection is required to register pursuant to the Florida Vacation Plan and Timesharing Act. Such registrations, or any formal exemption determinations, for the Diamond Collections confirm the substantial compliance with the filing and disclosure requirements of the respective timeshare statutes by the applicable Diamond Collection. They do not constitute the endorsement of the creation, sale, promotion or operation of the Diamond Collections by the regulatory body, nor relieve us or our affiliates of any duty or responsibility under other statutes or any other applicable laws. Registration under a respective timeshare act is not a guarantee or assurance of compliance with applicable law nor an assurance or guarantee of how any judicial body may interpret the Diamond Collections' compliance therewith.
Additionally, certain third parties have indicated that the Consumer Financial Protection Bureau (“CFPB”) might increase their oversight of the vacation ownership industry. While the CFPB recently enacted new disclosure rules for lenders in the real estate mortgage lending industry, these rules were applicable to the real estate mortgage lending industry, not just vacation ownership industry lenders. The CFPB’s new rules also do not apply if the underlying transaction does not involve the sale of a real estate interest, and because we sell points-based VOIs, our operations have not been affected by these new CFPB rules. While we have no knowledge of any efforts to increase oversight by the CFPB or any other governmental authority, the enactment of any additional laws or regulations by the CFPB or any other governmental authorities applicable to the vacation ownership industry may adversely affect our operations.
Furthermore, most states and foreign jurisdictions have other laws that apply to our activities, including but not limited to real estate licensure laws, travel sales licensure laws, advertising laws, anti-fraud laws, telemarketing laws, prize, gift and sweepstakes laws and labor laws. In addition, we subscribe to “do not call” ("DNC") lists for certain states and foreign jurisdictions into which we make telemarketing calls, as well as the federal DNC list. Enforcement of the federal DNC provisions began in the fall of 2003, and the rule provides for fines of up to $16,000 per violation. We also maintain an internal DNC list as required by law. Our master DNC list is comprised of our internal list, the federal DNC list and the applicable state DNC lists.
In addition to government regulation relating to the marketing and sales of VOIs, our servicing and collection of consumer loans is subject to regulation by the federal government and the states and foreign jurisdictions in which such activities are conducted. These regulations may include the federal Fair Credit Reporting Act, the Fair Debt Collections Practice Act, the Electronic Funds Transfer Act and Regulation B, the Right to Financial Privacy Act, the Florida Consumer Collection Practices Act, the Nevada Fair Debt Collection Practices Act and similar legislation in other states and foreign jurisdictions.
Certain local laws may also impose liability on property developers with respect to construction defects discovered by future owners of such property. Under these laws, future owners of VOIs may recover amounts in connection with repairs made to a resort as a consequence of defects arising out of the development of the property.
A number of the U.S. federal, state and local laws and the laws of the foreign jurisdictions where we operate, including the Fair Housing Amendments Act of 1988 and the Americans with Disabilities Act, impose requirements related to access to

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and use by disabled persons of a variety of public accommodations and facilities. A determination that we are subject to and that we are not in compliance with these accessibility laws could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. If an HOA at a resort was required to make significant improvements as a result of noncompliance with these accessibility laws, assessments might be needed to fund such improvements, which additional costs might cause owners of VOIs to default on their mortgages or cease making required HOA assessment payments. In addition, the HOA under certain circumstances may pursue the resort developer to recover the cost of any corrective measures. Any new legislation may impose further burdens or restrictions on property owners with respect to access by disabled persons. To the extent that we hold interests in a particular resort (directly or indirectly through our interests in a Diamond Collection), we would be responsible for our pro rata share of the costs of improvements resulting from noncompliance with accessibility laws.
The marketing and sale of our points-based VOIs and our other operations in Europe are subject to national regulation and legislation. Directive 2008/122/EC of the European Parliament (the “Directive”) regulates vacation ownership activities within the European Union (which includes the majority of the European countries in which we conduct our operations). The Directive required transposition into domestic legislation by the members of the European Union no later than February 23, 2011 and replaced the previous regulatory framework introduced by EC Directive 94/47/EC. Most of our purchasers in Europe are residents of the United Kingdom, where the Directive has been implemented under The Timeshare, Holiday Products, Resale and Exchange Contracts Regulations 2010. The Directive has now been implemented in all other member states, as well as in Norway, which, although not a member of the European Union, is a member of the European Economic Area. The Directive (i) requires delivery of specified disclosure in the potential purchaser's native language (some of which must be provided in a specified format); (ii) requires a “cooling off” rescission period of 14 calendar days after they return to their resident country; and (iii) prohibits any advance payments in all member states.
Prior to February 23, 2011, vacation ownership activities within the European community were governed by the European Timeshare Directive of 1994 (94/47/EC) (or the 1994 Directive).
Other United Kingdom laws which are applicable to us include the Consumer Credit Act 1974 as amended by the Consumer Credit Act 2006, the Consumer Credit (Disclosure of Information) Regulations 2010, the Consumer Credit (Agreements) Regulations 2010 (as amended), the Misrepresentation Act 1967, the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contracts Regulations 1999 (as amended), the Consumer Protection from Unfair Trading Regulations 2008, the Data Protection Act 1998 and the Privacy and Electronic Communications (EC) Regulations 2003, the Equality Act 2010, the Employment Rights Act 1996, the Environmental Protection Act 1990, the Clean Air Act 1993, the Companies Act 2006 and the Trade Descriptions Act 1968. The Timeshare, Holiday Products, Resale and Exchange Contracts Regulations 2010 has an extra-territorial effect when United Kingdom residents purchase VOIs in accommodations located in other European Economic Area states.
We are also subject to the laws and regulations of Mexico and Canada, including regulations applicable to developers and providers of timeshare services throughout Mexico and Canada. In addition to specific timeshare rules and regulations, we are also subject to its constitution and other laws and regulations of Mexico, including limitations with respect to ownership of land near Mexico's borders and beaches by Mexican citizens and companies (including Mexican subsidiaries of foreign companies); provided, however, that the federal government may grant the same right to foreign parties if they agree to consider themselves Mexican nationals with respect to such property and bind themselves not to invoke the protection of their governments in matters relating thereto and take title through a Mexican trust.
All of the countries in which we operate have consumer protection and other laws that regulate our activities in those countries.
We believe that we are in compliance with all applicable governmental regulations, except where noncompliance would not reasonably be expected to have a material adverse effect on us.
Seasonality
Vacation Interests Sales and Financing Segment. Historically, our fiscal quarter ended March 31 has produced the weakest operating results primarily due to the effects of reduced leisure travel. The next three quarters have historically produced the strongest operating results because they coincide with the typical summer vacation season and winter holidays, which result in a greater number of families vacationing as compared to the first fiscal quarter. Generally, a greater number of vacationers at the resorts in our network results in higher tour flow through our sales centers and increased VOI sales.

Hospitality and Management Services Segment. Our management service business is generally not subject to seasonal fluctuations due to pre-determined management fees and recovery of our expenses incurred on behalf of the HOAs and the

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Collection Associations we manage. We experience little seasonality in the operation of our Clubs as a majority of the Club revenue is pre-determined and recognized ratably throughout the year.
Insurance
We generally carry commercial general liability insurance. With respect to resort locations that we manage and for corporate offices, we and the HOAs carry all-risk property insurance policies with fire, flood, windstorm and earthquake coverage as well as additional coverage for business interruption arising from insured perils. Further, we carry pollution insurance on all Diamond Resorts managed resort and administrative locations, which covers multiple perils, including exposure to Legionnaire's Disease. We believe that the insurance policy specifications, insured limits and deductibles are similar to those carried by other resort owners and operators. There are certain types of losses, such as losses arising from acts of war or terrorism, which are not generally insured because they are either uninsurable or not economically insurable.
Intellectual Property
We own and control a number of trade secrets, trademarks, service marks, trade names, copyrights and other
intellectual property rights, including Diamond Resorts International®, Diamond Resorts®, THE Club®, Polo Towers & Design®, Relaxation . . . simplified®, Diamond Resorts®, DRIVEN®, The Meaning of Yes®, We Love to Say Yes®, Vacations for Life®, Affordable Luxury. Priceless MemoriesTM, Stay Vacationed®, Events of a LifetimeTM ,Vacations of a LifetimeTM, which, in the aggregate, are of material importance to our business. We are licensed to use technology and other intellectual property rights owned and controlled by others, and we license other companies to use technology and other intellectual property rights owned and controlled by us. In addition, we have developed certain proprietary software applications that provide functionality to manage lead acquisition, marketing, tours, gifting, sales, contracts, member profiles, maintenance fee billing, property management, inventory management, yield management and reservations.
Environmental Matters
The resort properties that we manage are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability relating to the management, storage and disposal of hazardous substances and other regulated materials and the cleanup of contaminated sites. The resorts are also subject to various environmental laws and regulations that govern certain aspects of their ongoing operations. These laws and regulations control such things as the nature and volume of wastewater discharges, quality of water supply and waste management practices. The costs of complying with these requirements are generally covered by the HOAs that operate the affected resort property, and the majority of the HOAs maintain insurance policies to insure against such costs and potential environmental liabilities. To the extent that we hold interests in a particular resort (directly or indirectly through our interests in a Diamond Collection), we would be responsible for our pro rata share of losses sustained by such resort as a result of a violation of any such laws and regulations.
Employees
As of December 31, 2015, we had 8,174 full and part-time employees. Our employees are not represented by a labor union, with the exception of 138 employees in St. Maarten, 209 employees in Mexico, 277 employees in Hawaii and 25 employees in Nevada. Certain of our employees in Europe are also represented by unions. We are not aware of any union organizational efforts with respect to our employees at any other locations. We believe we have a good relationship with the members of our workforce.
Available Information
We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information with the SEC. We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Copies of these materials, filed by us with the SEC, are available free of charge on our website at investors.diamondresorts.com. These filings are available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You can also obtain copies of these materials by visiting the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC's website at www.sec.gov. The information on, or that may be accessed through, these websites is not incorporated into this filing and should not be considered a part of this filing.


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ITEM 1A.    RISK FACTORS
We are subject to various risks, including those described below, which could materially adversely affect our business, financial condition and results of operations and, in turn, the value of our securities. In addition, other risks not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition and results of operations, perhaps materially. The risks discussed below also include forward-looking statements, and actual results and events may differ substantially from those discussed or highlighted in these forward-looking statements. Before making an investment decision with respect to any of our securities, you should carefully consider the following risks and uncertainties described below and elsewhere in this annual report. See also “Cautionary Statement Regarding Forward-Looking Statements.”
Risks Related to Our Business
Our revenues are highly dependent on the travel industry and declines in or disruptions to the travel industry, such as those caused by adverse economic conditions, terrorism and man-made disasters may adversely affect us.
A substantial amount of our VOI sales activities occur at the managed resort locations in our network, and the volume of our sales correlates directly with the number of prospective customers who visit these resorts each year. The number of visitors to these resorts depends upon travel industry conditions, on an overall basis and in the specific geographic areas in which our resorts are located. Such conditions may be adversely affected by a variety of factors, such as weather conditions, general travel patterns and the potential impact of natural disasters and crises.
Actual or threatened war, terrorist activity, political unrest or civil strife and other geopolitical uncertainty could have a similar effect. In addition, any increased concern about terrorist acts directed against the U.S. and foreign citizens, transportation facilities and assets, and travelers' fears of exposure to contagious diseases may reduce the number of tourists willing to fly or travel in the future, particularly if new significant terrorist attacks or disease outbreaks occur or are threatened.
More generally, the travel industry has been hurt by various events occurring in prior years, including the effects of weak domestic and global economies. A sustained downturn in travel patterns, including as a result of increases in travel expenses, could cause a reduction in the number of potential customers who visit the managed resorts in our network. If we experience a substantial decline in visitors to these resorts, our VOI sales would likely decline.
Our future success depends on our ability to market VOIs successfully and efficiently, including sales to new members, as well as sales of additional points to our existing ownership base.
We compete for customers with hotel and resort properties and with other vacation ownership resorts and other vacation options such as cruises. The identification of sales prospects and leads, and the marketing of our products to those leads, are essential to our success. We have incurred and will continue to incur significant expenses associated with marketing programs in advance of closing sales to the leads that we identify. If our lead identification and marketing efforts do not yield enough leads or we are unable to successfully convert sales leads to a sufficient number of sales, our growth, including from our efforts to expand Club revenue, and our overall financial performance may be adversely affected. We have continued to expand our use of hospitality-focused marketing methods, such as enhanced mini-vacation packages focused on small groups of potential customers. These marketing methods are more expensive and require a greater commitment of resources than traditional marketing activities, and there can be no assurance that we will be successful in continuing to expand these efforts.
In addition, a significant portion of our sales are additional points purchased by existing members who previously purchased points from us, as well as by customers of resorts where we recently acquired the HOA management contracts, and our results of operations depend in part on our ability to continue making sales to these members and customers. Our recent rate of sales of additional points to existing owners and such other customers may not be sustainable in future periods. Furthermore, we do not receive all of the same benefits from sales of additional points to existing members as we do from sales of points to new members, such as new Club members paying the associated fees and to whom we can offer services, activities and upgrade opportunities and an expanded ownership base to which we can potentially sell additional points.
Our business may be adversely affected if we are unable to maintain an optimal level of points or intervals in inventory for sales to customers.
Our ability to maintain an optimal level of points or intervals in inventory for sale to customers is dependent on a number of factors, including fluctuations in our sales levels and the amount of inventory recovered through consumer loan and association fee defaults.
If we experience a significant decline in our inventory of points available for sale, we may be required to expend more capital to acquire or build inventory.
We have entered into IRAAs with substantially all of the Collection Associations and HOAs for our managed resorts in

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North America, together with similar arrangements with the European Collections and a majority of our European managed resorts. Pursuant to these agreements and arrangements, we have the option to recapture VOIs either in the form of points or intervals, and may recover the underlying inventory at a later date. During each of the past five years, approximately 2% to 5% of the outstanding points or intervals were recovered by us pursuant to these agreements. We need to maintain such level of recovery to provide us with our relatively low-cost inventory of VOIs for sales to our customers. However, the volume of points or intervals recovered by us could decline in the future for a variety of reasons, including as a result of termination or non-renewal of our IRAAs and a decrease in owners who are delinquent on their maintenance fees. In addition, if a viable VOI resale market were to develop in the future, our members may choose to resell their interests to third parties. Further, in the event applicable state law makes it more difficult to recover points or intervals, it could extend the time required to consummate a recovery or otherwise make it more difficult to consummate such recoveries. An increased level of VOI sales would also reduce our inventory available for sale.
If our inventory available for sale were to decline significantly, generally or in a particular Diamond Collection, we may need to either substantially reduce the volume of our VOI sales or make significant capital expenditures to replenish our inventory by purchasing points or intervals or building or acquiring new inventory at new or existing resorts. To the extent we need or desire to build or acquire new inventory, we may rely upon arrangements with third-party financial sponsors, such as the arrangement we entered into in 2015 with the Kona Seller, an affiliate of Och-Ziff Real Estate, to develop a new resort on property located in Kona, Hawaii. See "Note 18—Commitments and Contingencies" of our consolidated financial statements included elsewhere in this annual report and "Item 9B.—Other Information" for additional information regarding our arrangement with the Kona Seller. Any such arrangements are subject to a variety of risks, including that the financial sponsor may fail to deliver new inventory promptly or in a manner that meets agreed upon specifications; the financial sponsor may not be able to obtain or maintain financing necessary to build the new inventory; construction may be delayed for various reasons, including due to any delay or failure in obtaining necessary permits or authorizations or the occurrence of natural disasters; and we or the financial sponsor may incur unanticipated project costs. These risks could adversely affect the development of the new inventory.
If the volume of our inventory of points held by us were to significantly increase, our carrying costs with respect to that inventory would increase.
If VOI sales levels do not keep pace with inventory recovery levels, the volume of our inventory of points or intervals may become higher than desired. Also, if the amount of customer defaults increases, our carrying costs will increase due to the maintenance fees on the recovered VOI inventory that we are required to pay.
Our strategic acquisitions have provided us with additional VOI inventory, and potential future acquisitions may include additional inventory. Further, as part of some of our acquisitions, we have incurred additional obligations to repurchase defaulted inventory (either by taking back defaulted consumer loans or repurchasing the inventory that collateralizes such loans). We incur carrying costs associated with our VOI inventory, as we are obligated to pay annual maintenance fees and assessments on any VOIs held in inventory, and higher-than-desired VOI inventory levels would result in increases in these carrying costs. If our inventory available for sale were to increase significantly, we may need to sell some of this excess inventory at significantly discounted prices or expand our rental programs. In addition, the IRAAs we enter into with the HOAs and Collection Associations are subject to annual renewal, and as a result, we may not always repurchase VOI inventory from customers in default. If we do not repurchase such inventory, the annual maintenance fees and assessments are allocated among the remaining non-defaulting owners of units in the HOA and the Collection Association, increasing the amounts paid by each of those owners (including us, to the extent we hold units in inventory). This increases the risk that owners of such other units may be unwilling or unable to pay such increased fees and may default as well. The increased per-unit costs could also make units in the HOA and the Collection Association less attractive to prospective purchasers.
A substantial portion of our business is dependent upon contracts with HOAs to manage resort properties and with the Diamond Collections. The expiration, termination or renegotiation of these management contracts could adversely affect our business and results of operations.
We are party to management contracts relating to 109 properties and the Diamond Collections, under which we receive fees for providing management services. We derive a substantial amount of revenue from these contracts, and our hospitality and management services business accounts for a greater percentage of our Adjusted EBITDA than of our total consolidated revenue. See “Business—Our Services—Hospitality and Management Services” for further information regarding management of our managed resorts and the Diamond Collections. Some state regulations impose limitations on the amount of fees that we may charge the HOAs and Collection Associations for our hospitality management services and the terms of our management contracts. Our management contracts generally have three to ten year terms and are automatically renewable, but provide for early termination rights in certain circumstances. Any of these management contracts may expire at the end of its then-current term (following notice by a party of non-renewal) or be terminated, or the contract terms may be renegotiated in a manner adverse to us. In addition, our growth strategy contemplates adding services provided to our members under our management

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contracts, which may result in increased management fees relating to those new services. We believe there are limits to how much we can increase management fees for additional services provided before the HOAs and Collection Associations are unwilling or unable to pay such increased fees, and, if such fees are perceived as being too high by prospective customers, our VOI sales may be adversely affected.
Our growth strategy also contemplates our acquisition of, and entry into, new management contracts. We face significant competition to secure new contracts and may be unsuccessful in doing so on favorable terms, if at all.
To the extent our rental proceeds may decline or our Vacation Interests carrying costs may increase, we may not be able to cover certain other expenditures against which we offset rental proceeds.
Under our IRAAs, we are required to pay owners' past due maintenance and assessment fees to the HOAs and Collection Associations. See "Item 1. Business—Recovery of VOIs." In order to offset these expenses, we rent the available units, in which case we are also obligated to pay to the HOAs and Collection Associations cleaning fees for room stays incurred by our guests who stay with us on a per-night or per-week basis. In 2015, 2014 and 2013, our net Vacation Interests carrying costs, consisting of carrying costs and cleaning fees related to the VOIs that we owned in each of these periods, less amounts generated from rental of these VOIs in these periods were $39.7 million, $35.5 million and $41.3 million, respectively. Additionally, participating members can rent private luxury properties, book high-profile sporting events and take customized international guided excursions by depositing a designated number of points with us. In turn, we pay a usage fee to third parties on behalf of our members. See "Item 1. Business—Our Resort Network—Diamond Luxury Selection." Similarly, under arrangements that we have with certain of our affiliated resorts, holders of our points or intervals who desire to stay at any such affiliated resort deposit points with us and, in exchange, we pay our affiliated resort the funds required to allow such holder access to the desired unit. In order to offset these payments to the third parties or the affiliated resorts, as applicable, we rent available units at our managed resorts. Our ability to rent units is subject to a variety of risks common to the hospitality industry, including competition from large and well-established hotels, changes in the number and occupancy and room rates for hotel rooms, seasonality and changes in the desirability of geographic regions of the resorts in our network. In addition, we experience strong competition in the rental market. We may be at a disadvantage when competing against larger and better-established hotel and resort chains that focus on the rental market, have more experience in and greater resources devoted to such market, and can offer rental customers additional benefits such as loyalty points related to rentals and a significantly larger pool of potentially available rental options. We also experience competition from numerous other smaller owners and operators of vacation ownership resorts, as well as alternative lodging companies such as Airbnb and other similar entities. See “Our industry is highly competitive and we may not be able to compete effectively.”
We utilize external exchange program affiliations as sources of sales prospects and leads, and any failure to maintain such affiliations could reduce these prospects.
We have an affiliation agreement for an external exchange program with Interval International, which complements our own vacation ownership exchange programs. As a result of this affiliation, members of THE Club may use their points to reserve the use of a vacation accommodation at more than 3,000 resorts worldwide that participate in Interval International. In addition, interval owners at our managed resorts may join either Interval International or RCI, as their HOA constitutions dictate. Such interval owners may then deposit their deeded intervals in exchange for an alternative vacation destination. When our points and intervals are exchanged through Interval International or RCI, this inventory is made available to owners from other resorts, who are potential customers for our VOI sales. If we do not maintain our external exchange program affiliations, the number of individuals exchanging interests through these programs to stay at our managed resorts may decline substantially. Furthermore, the benefits associated with being a member of THE Club may be less desirable to current and prospective members.
We are dependent on the managers of our affiliated resorts and the properties in the Diamond Luxury Selection to ensure that those properties meet our customers' expectations.
The members of the Clubs have access to all or a portion of the 250 affiliated resorts and hotels and 20 cruise itineraries in our resort network. Certain members with large point ownership may also rent properties through participation in the Diamond Luxury Selection. We do not manage, own or operate the affiliated resorts, hotels, cruises or the properties in the Diamond Luxury Selection, and we have limited or no ability to control their management and operations. If the managers of a significant number of those properties were to fail to maintain them in a manner consistent with our standards of quality, we may be subject to customer complaints and our reputation and brand could be damaged. In addition, our affiliation agreements with these resorts may expire, be terminated or not be renewed, or may be renegotiated in a manner adverse to us, and we may be unable to enter into new agreements that provide members of the Clubs with equivalent access to additional resorts. Furthermore, the properties in the Diamond Luxury Selection may not have a number of the attributes associated with traditional resort locations, such as security, fire safety and life safety systems. If a member is injured while staying at an affiliated property or a property in the Diamond Luxury Selection, we may have to rely on the insurance coverage of the

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manager or owner of such property, as our insurance policies may not apply in such situations.
The resale market for VOIs could adversely affect our business.
There is not currently an active, organized or liquid resale market for VOIs, and resales of VOIs generally are made at sales prices substantially below their original customer purchase prices. These factors may make the initial purchase of a VOI less attractive to potential buyers who are concerned about their ability to resell their VOIs. Also, buyers who seek to resell their VOIs compete with our own VOI sales efforts. If the secondary market for VOIs were to become more organized and liquid, the resulting availability of resale VOIs (particularly where the VOIs are available for sale at lower prices than ours) could adversely affect our sales and our sales prices. Furthermore, the volume of VOI inventory that we recapture each year may decline if a viable secondary market develops.
We are subject to certain risks associated with our management of resort properties.
Through our management of resorts and ownership of VOIs, we are subject to certain risks related to the physical condition and operation of the managed resort properties in our resort network, including:
the presence of construction or repair defects or other structural or building damage at any of these resorts;
any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements relating to these resorts;
any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms, which may increase in frequency or severity due to climate change or other factors; and
claims by employees, members and their guests for injuries sustained on these resort properties.
Some of these risks may be more significant in connection with the properties for which we recently acquired management agreements. For additional risks related to our acquired businesses, see “Our strategic transactions may not be successful and may divert our management's attention and consume significant resources.” If an uninsured loss or a loss in excess of insured limits occurs as a result of any of the foregoing, we or the HOAs or Collection Associations may be subject to significant costs. See “The properties included in our resort network may experience damages that are not covered by insurance.”
Additionally, a number of U.S. federal, state and local laws and the laws of the foreign jurisdictions where we operate, including the Fair Housing Amendments Act of 1988 and the Americans with Disabilities Act, impose requirements related to access to and use by disabled persons of a variety of public accommodations and facilities. A determination that our managed resorts are subject to, and that they are not in compliance with, these accessibility laws could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. If an HOA at one of our managed resorts was required to make significant improvements as a result of noncompliance with these accessibility laws, assessments might be needed to fund such improvements, which additional costs may cause our VOI owners to default on their consumer loans from us or cease making required HOA maintenance fee or assessment payments.
The resort properties that we manage are also subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability relating to the management, storage and disposal of hazardous substances and other regulated materials and the cleanup of contaminated sites. The resorts are also subject to various environmental laws and regulations that govern certain aspects of their ongoing operations. These laws and regulations control such things as the nature and volume of wastewater discharges, quality of water supply and waste management practices.
To the extent that we hold interests in a particular resort (directly or indirectly through our interests in a Diamond Collection), we would be responsible for our pro rata share of losses sustained by such resort as a result of a violation of any of the laws and regulations to which they are subject and for our pro rata share of any costs related to improvements to the resorts made in order to comply with such laws and regulations.
The properties included in our resort network may experience damages that are not covered by insurance.
Our managed resorts are covered by all-risk property insurance policies with fire, flood, windstorm and earthquake coverage, as well as additional coverage for business interruption arising from insured perils. However, market forces beyond our control may limit the scope of the insurance coverage that we obtain or our ability to obtain coverage at reasonable rates. Specifically, certain types of losses, such as losses arising from acts of war or terrorism, are generally not insured because they are either uninsurable or not economically feasible to insure. Accordingly, our insurance may not be adequate to cover all losses in every circumstance. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the resorts in our network, such resorts may not be adequately repaired in a timely manner or at all and we may lose some or all of the future

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revenues anticipated to be derived from such resorts.
Furthermore, if an HOA or a Collection Association is subject to any such loss, we will also be responsible for a portion of such loss to the extent of our ownership of VOIs in the resort or Diamond Collection, and any substantial assessments charged by the HOAs or Collection Associations as a result of any of these items could cause customer dissatisfaction, result in additional defaults on assessments by members or harm our business and reputation. For example, in October 2011, the HOA of one of our managed resorts levied a substantial assessment to the owner-families of that resort for water intrusion damage, and we are responsible for a portion of this assessment due to deeded inventory or Diamond Collection points held by us at the time of the assessment. In addition, pursuant to the related class action settlement, we agreed to pay any amount of assessments defaulted on by owners in return for our recovery of the related VOIs.
In addition, uninsured losses, natural disasters, terrorism or similar events may also have an adverse effect on our business, operations and financial condition. As an example, the Cabo Azul Resort and the surrounding areas in San Jose Del Cabo, Mexico were severely impacted by Hurricane Odile in September 2014. The storm damaged the buildings as well as the facilities and amenities related to the Cabo Azul Resort, resulting in the Cabo Azul Resort temporarily being taken out of service, until completion of necessary repairs as well as related infrastructure repairs in Baja California Sur by September 1, 2015, when the Cabo Azul Resort was reopened. See "Note 18—Commitments and Contingencies" of our consolidated financial statements included elsewhere in this annual report for further discussion.
We generally renew our insurance policies on an annual basis. If the cost of coverage becomes too high, we may need to reduce our policy limits, increase the deductibles or agree to certain exclusions from our coverage in order to reduce the premiums to an acceptable amount. Natural disasters and other catastrophic events could materially and adversely affect our ability to obtain adequate future insurance coverage at commercially reasonable rates.
Unfavorable general economic conditions in the U.S. and globally have adversely affected our business in the past and could in the future result in decreased demand for VOIs and our ability to obtain future financing.
There have been periods in which our business has been materially adversely affected by unfavorable general economic conditions, including effects of weak domestic and world economies. Future volatility and disruption in worldwide capital and credit markets and any declines in economic conditions in the U.S., Europe and in other parts of the world could adversely impact our business and results of operations, particularly if the availability of financing for us or for our customers is limited, or if general economic conditions adversely affect our customers' ability to pay amounts owed under our loans to them or for maintenance fees or assessments. If the HOAs and Collection Associations are unable to collect maintenance fees or assessments from our customers, not only would our management fee revenue be adversely affected, but the resorts we manage could fall into disrepair and fail to comply with the quality standards associated with the Diamond Resorts brand, which could decrease customer satisfaction, tarnish our reputation and impair our ability to sell our VOIs.
Our international operations are subject to risks not generally applicable to our North American operations.
We manage resorts in, and have sales and marketing operations in, 13 countries. Our operations in foreign countries are subject to a number of particular risks, including:
exposure to local economic conditions;
potential adverse changes in the diplomatic relations of foreign countries with the U.S.;
hostility from local populations;
restrictions and taxes on the withdrawal of foreign investment and earnings;
the imposition of government policies and regulations against business and real estate ownership by foreigners;
foreign investment restrictions or requirements;
limitations on our ability to legally enforce our contractual rights in foreign countries;
regulations restricting the sale of VOIs, as described in “BusinessGovernmental Regulation;”
foreign exchange restrictions and the impact of exchange rates on our business;
conflicts between local laws and U.S. laws;
withholding and other taxes on remittances and other payments by our subsidiaries; and

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changes in and application of foreign taxation structures, including value added taxes.
In addition, international markets, such as China, have recently experienced moderation in their economic growth and an increase in market volatility, which may have a negative effect on our managed resorts and sales and marketing operations located in, and our growth plans for, these international markets.
We are also subject to the laws and regulations of the European Union and countries in which we operate resorts. See “Item 1. BusinessGovernmental Regulation.” Our international business operations are also subject to various anti-corruption laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”). The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or generating business. We cannot provide assurance that our internal controls and procedures will always protect us from the reckless or criminal acts that may be committed by our employees or third parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption laws in international jurisdictions, criminal or civil penalties could be imposed on us.
We face challenges expanding our operations in new international markets in which we have limited experience, including developing markets in Asia and Latin America.
We are exploring growth opportunities in geographic markets in which we have limited experience. We currently have affiliation agreements in place with a number of resorts in Asia and a few resorts in Latin America, and may explore additional co-branding opportunities with existing resorts, joint ventures or other strategic alliances with local or regional operators in those markets. For example, we have entered into a joint venture to create, market, sell and service vacation packages and associated benefits (including vacation ownership) to customers in Asia.
We may also expand our footprint in international markets by pursuing acquisitions. For example, we recently expanded our operations into Canada as a result of the closing of our acquisition of the vacation ownership business of Intrawest Resort Club Group from Intrawest Resorts Holdings, Inc. in January 2016. As a result of our expansion into new international markets, we will have only limited experience in marketing and selling our products and services in those markets. Expansion into new and developing international markets is challenging, requires significant management attention and financial resources and may require us to attract, retain and manage local offices or personnel in such markets. We also need to comply with regulations and other laws to which our operations become subject as a result of any such international expansion. International expansion also requires us to tailor our services and marketing to local markets and adapt to local cultures, languages, regulations and standards. To the extent we are unable to adapt, or to the extent that we are unable to find suitable acquisition targets or potential affiliates in such markets or to the extent that any such acquisition or existing or future relationships with affiliates in such markets are not as beneficial to us as we expect, our expansion may not be successful. In some of these markets, including China, the concept of vacation ownership is relatively novel. As a result, in these markets there is limited infrastructure and government support for the vacation ownership industry and the industry may lack sufficient mechanisms for consumer protection. There is also currently not a large supply of vacation ownership products and resorts in those markets, which may limit opportunities and increase competition for those limited opportunities.
In addition, many countries in Asia and Latin America are emerging markets and are subject to greater political, economic, legal and social risks than more developed markets, including risks relating to:
political and governmental instability, including domestic political conflicts and inability to maintain consensus;

economic instability, including weak banking systems, inflation and currency risk, lack of capital, and changing or inconsistent economic policy;

weaknesses in legal systems, including inconsistent or uncertain national and local regimes, unavailability of judicial or administrative guidance and inexperience;

tax uncertainty, including tax law changes, limited tax guidance and difficulty determining tax liability or planning tax-efficient structures;

the lack of reliable official government statistics or reports; and

organized crime, money laundering and other crime.
There are also risks related to entering into joint ventures or strategic alliances with local or regional operators, including the joint venture with respect to operations in Asia noted above, such as the possibility that these operators might become bankrupt or fail to otherwise meet their obligations to us. We may not have, and specifically as a minority investor in the

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venture with respect to operations in Asia, we do not have, control over the joint venture's business or the decisions of the venture, and the other parties to the joint venture may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business. In addition, we may, in some circumstances, be liable for the actions of our partners. Furthermore, if we do enter into joint ventures or other affiliations with local or regional operators and a significant number of such operators fail to maintain their properties or provide services in a manner consistent with our standards of quality, we may be subject to customer complaints and our reputation and brand could be damaged. To the extent we expand into new international markets, our exposure to the risks described above in “Our international operations are subject to risks not generally applicable to our domestic operations” will also increase.
Our industry is highly competitive and we may not be able to compete effectively.
The vacation ownership industry is highly competitive. We compete against not only vacation ownership companies, but also vacation ownership divisions of other hospitality companies, including various high profile and well-established operators, some of which have substantially greater liquidity and financial resources than we do. Some of these operators also have substantially greater experience and familiarity with emerging international markets, such as Latin America and Asia, in which we intend to explore or may continue to explore opportunities. Many of the world's most recognized lodging, hospitality and entertainment companies develop and sell VOIs in resort properties. We also compete with numerous other smaller owners and operators of vacation ownership resorts, as well as alternative lodging companies, which have experienced significant growth in recent years. See "Item 1. Business—Competition" for further detail.
Our competitors could seek to compete against us based on the pricing terms of our current hospitality management contracts or in our efforts to expand our fee-based income streams by pursuing new management contracts for resorts that are not currently part of our network. We may not be able to compete successfully for customers, and increased competition could result in price reductions and reduced margins, as well as adversely affect our efforts to maintain and increase our market share.
Our existing indebtedness, or indebtedness that we may incur in the future, could adversely affect us, and the terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.
As of December 31, 2015, we had $574.7 million in principal amount outstanding under our Senior Credit Facility originally entered into on May 9, 2014 and subsequently amended on December 22, 2014 and December 3, 2015 (the "Senior Credit Facility"), $642.8 million of non-recourse indebtedness in securitization notes and borrowings of our subsidiaries and $4.8 million of other recourse indebtedness, for total principal indebtedness of $1.22 billion (excluding original issue discounts). See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for the definition of and additional information on these borrowings. Our ability to maintain a level of cash flows from operating activities to make scheduled payments, including excess cash flow sweep payments as required under our Senior Credit Facility, or to refinance our debt obligations depends on our future financial and operating performance, which is subject to prevailing economic and competitive conditions and to various financial, business, regulatory and other factors, some of which are beyond our control. If we are unable to fund our debt service obligations, we may be forced to reduce or delay capital expenditures or sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Further, our indebtedness may impair our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes, or such financing may not be available on terms favorable to us. We may also incur substantial additional indebtedness in the future. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face, as described above, could intensify.
In addition, the Senior Credit Facility and the agreements governing other debt obligations contain, and the agreements that govern our future indebtedness may contain, covenants that restrict our ability and the ability of our subsidiaries to:
incur additional indebtedness or issue certain preferred shares;
create liens on our assets;
pay dividends or make other equity distributions;
repurchase our capital stock;
purchase or redeem equity interests or subordinated debt;
make certain investments;
sell assets;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

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engage in transactions with affiliates.
As a result of these covenants, we could be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
Our business plan historically has depended on our ability to sell, securitize or borrow against the consumer loans that we generate, and our liquidity, financial condition and results of operations would be adversely impacted if we are unable to do so in the future.
We generally offer financing of up to 90% of the purchase price to qualified customers who purchase VOIs through our sales centers, other than those in Europe, and a significant portion of customers choose to take advantage of this opportunity. For example, from January 1, 2011 through December 31, 2015, we financed 74.5% of the total amount of our VOI sales. Our ability to borrow against or sell our consumer loans has been an important element of our continued liquidity, and our inability to do so in the future could have a material adverse effect on our liquidity and cash flows. Furthermore, our ability to generate sales of VOIs to customers who require or desire financing may be impaired to the extent we are unable to borrow against or sell such loans on acceptable terms.
In the past, we have sold or securitized a substantial portion of the consumer loans we originated from our customers. If we are unable to continue to participate in securitization transactions or generate liquidity and create capacity on our Funding Facilities, on acceptable terms, our liquidity and cash flows will be materially and adversely affected. Moreover, if we cannot offer financing to our customers who purchase VOIs through our U.S., Mexican and St. Maarten sales centers, our sales may be adversely affected.
We have historically relied on our Funding Facilities to provide working capital for our operations. The Funding Facilities are asset-backed commercial finance facilities, with terms currently scheduled to expire in 2017, secured by, or funded through the sale of, our consumer loans. If we are unable to extend or refinance our Funding Facilities by securitizing our consumer loan receivables or entering into new Funding Facilities, our ability to access sufficient working capital to fund our operations may be materially adversely affected and we may be required to curtail our sales, marketing and consumer finance operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for additional information.
To the extent that our Funding Facilities, Senior Credit Facility and operating cash flows are not sufficient to meet our working capital requirements, our ability to sustain our existing operations will be impaired.
We may be unable to raise additional capital we need to grow our business.
We may need to raise additional capital to expand our operations and pursue our growth strategies, including potential acquisitions of complementary businesses, and to respond to competitive pressures or unanticipated working capital requirements. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline.
Our credit underwriting standards may prove to be inadequate, and we could incur substantial losses if the customers we finance default on their obligations. In addition, we rely on certain third-party lenders to provide financing to purchasers of our VOIs in Europe, and the loss of these customer financing sources could harm our business.
We generally offer financing of up to 90% of the purchase price to qualified purchasers of VOIs sold through our U.S., Mexican and St. Maarten sales centers. There is no assurance that the credit underwriting system we utilize as part of our domestic consumer finance activities will result in acceptable default rates or otherwise ensure the continued performance of our consumer loan portfolio. The default rate on our consumer loan portfolio was 7.7% (as a percentage of our outstanding originated portfolios) for 2015, and ranged from 5.7% to 8.2% on an annual basis from 2011 through 2015. As of December 31, 2015, 6.3% (based on loan balance) of our VOI consumer loans that we held, or were held under securitizations and funding facilities, and that were not in default (which we define as having occurred upon the earlier of (i) the customer’s account becoming over 180 days delinquent, or (ii) the completion of cancellation or foreclosure proceedings) were more than 30 days past due. Although in many cases we may have personal recourse against a buyer for the unpaid purchase price, certain states have laws that limit our ability to recover personal judgments against customers who have defaulted on their loans. Even where permitted, attempting to recover a personal judgment may not be advisable due to the associated legal costs and the potential adverse publicity. Historically, we have generally not pursued personal recourse against our customers, even when available. If we are unable to collect the defaulted amount due, we traditionally have foreclosed on the customer's VOI or terminated the underlying contract and remarketed the recovered VOI. Irrespective of our remedy in the event of a default, we cannot recover the often significant marketing, selling and administrative costs associated with the original sale, and we will have to incur such costs again to resell the VOI. See “The resale market for VOIs could adversely affect our business” for additional risks related

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to the resale of VOIs.
Currently, portions of our consumer loan portfolio are concentrated in certain geographic regions within the U.S. As of December 31, 2015, our loans to California residents constituted 33.3% of our consumer loan portfolio. No other state or foreign country concentration accounted for in excess of 10.0% of our consumer loan portfolio. California has been particularly negatively impacted during the economic downturn. Any deterioration of the economic condition and financial well-being of the regions in which we have significant loan concentration could adversely affect our consumer loan portfolio.
If default rates for our borrowers were to increase, we may be required to increase our provision for loan losses. An increased level of delinquencies could result from changes in economic or market conditions, increases in interest rates, adverse employment conditions and other factors beyond our control. Increased delinquencies could also result from our inability to evaluate accurately the credit worthiness of the customers to whom we extend financing or our inability to maintain the hospitality level that our customers have come to expect. In addition, increased delinquency rates may cause buyers of, or lenders whose loans are secured by, our consumer loans to reduce the amount of availability under our Funding Facilities, or to increase the interest costs associated with such facilities. In such an event, our cost of financing would increase, and we may not be able to secure financing on terms acceptable to us, if at all.
Under the terms of our securitization facilities, we are required, under certain circumstances, to repurchase or substitute loans if we breach any of the representations and warranties we made with respect to the eligibility of the receivables at the time we sold such receivables. Additionally, under the terms of our securitization facilities, we are permitted to repurchase, or substitute new eligible loans in exchange for, defaulted loans up to stated thresholds; to the extent the level of defaulted loans exceeds such stated thresholds, we may be required to pay substantially all of our cash flows generated from the underlying receivables to pay down the principal balance of the applicable securitization facility.
Finally, we rely on certain third-party lenders to provide consumer financing for sales of our VOIs in Europe. If these lenders discontinue providing such financing, or materially change the terms of such financing, we would be required to find an alternative means of financing for our customers in Europe. If we failed to find other lenders, our VOI sales in Europe could decline.
Changes in interest rates may increase our borrowing costs and otherwise adversely affect our business.
We rely on the securitization markets to provide liquidity for our consumer finance operations. Increases in interest rates, changes in the financial markets and other factors could increase the costs of our securitization financings, prevent us from accessing the securitization markets and otherwise reduce our ability to obtain the funds required for our consumer financing operations. To the extent interest rates increase and to the extent legally permitted, we may be required to increase the rates we charge our customers to finance their purchases of VOIs. Our business and results of operations are dependent on the ability of our customers to finance their purchase of VOIs, and in the U.S. we believe we are currently the only generally available lending source to directly finance the sales of our VOIs. Limitations on our ability to provide financing to our customers at acceptable rates or increases in the cost of such financing could reduce our sales of VOIs.
Our variable-rate borrowings consist of the Senior Credit Facility and the Conduit Facility, which stipulate a minimum LIBOR interest rate floor. In the event LIBOR increases above the interest rate floor and we have not entered into derivative instruments to hedge against such increases, our financial performance may be adversely affected.
Changes in the U.S. tax and other laws and regulations may adversely affect our business.
The U.S. government may revise tax laws, regulations or official interpretations in ways that could have a significant adverse effect on our business, including modifications that could reduce the profits that we can effectively realize from our international operations, or that could require costly changes to those operations, or the way in which they are structured. For example, the effective tax rates for most U.S. companies reflect the fact that income earned and reinvested outside the U.S. is generally taxed at local rates, which may be much lower than U.S. tax rates. If changes in tax laws, regulations or interpretations significantly increase the tax rates on non-U.S income, our effective tax rate could increase and our profits could be reduced. If such increases resulted from our status as a U.S. company, those changes could place us at a disadvantage to our non-U.S. competitors if those competitors remain subject to lower local tax rates.
Fluctuations in foreign currency exchange rates may affect our reported results of operations.
In addition to our operations in the U.S., we conduct operations in international markets from which we receive, at least in part, revenues in foreign currencies. For example, we receive Euros and British Pound Sterling in connection with our European managed resorts and European VOI sales and Mexican Pesos in connection with our operations in Mexico. Because our financial results are reported in U.S. dollars, fluctuations in the value of the Euro and British Pound Sterling against the U.S. dollar have had and will continue to have an effect, which may be significant, on our reported financial results. Exchange

33

                                            

rates have been volatile in recent years and such volatility may persist due to economic and political circumstances in individual Euro zone countries. In addition, we could experience exchange rate fluctuations depending upon the outcome of a referendum in the United Kingdom to be held in June 2016 on whether to remain in the European Union. 
In connection with our Intrawest Acquisition in January, we expanded our international operations by acquiring VOI sales operations and management contracts at six resorts in Canada. See "Note 30 — Subsequent Events" of our consolidated financial statements included elsewhere in this annual report for the definition of and further detail on the Intrawest Acquisition.
A decline in the value of any of the foreign currencies in which we receive revenues, including the Euro, British Pound Sterling. Mexican Peso or Canadian dollar, against the U.S. dollar will tend to reduce our reported revenues and expenses, while an increase in the value of any such foreign currencies against the U.S. dollar will tend to increase our reported revenues and expenses. Variations in exchange rates can significantly affect the comparability of our financial results between financial periods.
We are also exploring further international expansion opportunities in markets such as Asia and Latin America, including pursuing acquisitions in those geographic areas, or seeking out co-branding opportunities, joint ventures or other strategic alliances with local or regional operators in those markets. Any such international expansion would result in increased foreign exchange risk, as described above, as the revenue received from such expansion would primarily be in non-U.S. currency.
We are subject to extensive regulation relating to the marketing and sale of vacation interests and the servicing and collection of customer loans.
As discussed above, our marketing and sale of VOIs and our other operations are subject to extensive regulation by the federal government and state timeshare laws and, in some cases, by the foreign jurisdictions where our VOIs are located, marketed and sold. For a list of certain U.S. federal legislation that is or may be applicable to the sale, marketing and financing of our VOIs, see "Item 1. Business—Governmental Regulation." In addition, the majority of states and foreign jurisdictions where the resorts in our network are located extensively regulate numerous aspects of our industry, and many other states and certain foreign jurisdictions have adopted similar legislation and regulations affecting the marketing and sale of VOIs to persons located in those jurisdictions. Furthermore, most states and foreign jurisdictions have other laws not specific to our industry that apply to our activities, and all of the countries in which we operate have consumer protection and other laws that regulate our activities in those countries. The cost of compliance with such laws and regulations can be significant, and we cannot guarantee that we will at all times maintain compliance with all such regulations and other laws.
A determination that specific provisions or operations of the Diamond Collections do not comply with relevant timeshare acts or applicable law may have a material adverse effect on us, the trustees of the Diamond Collections, the Collection Associations or the related consumer loans. Such noncompliance could also adversely affect the operation of the Diamond Collections or the sale of points within the existing format of the Diamond Collections, which would likely increase costs of operations or the risk of losses resulting from defaulted consumer loans.
Moreover, from time to time, potential buyers of VOIs assert claims with applicable regulatory authorities alleging unlawful sales practices by the developers of the Diamond Collections and Vacation Interests salespersons. Actions by regulatory authorities, in response to these claims or otherwise, could result in our having to make modifications to our business practices or policies that adversely affect (or result in changes to our industry as a whole that adversely affect) our VOI sales or other business activities and could have other adverse implications for us, including negative public relations, potential litigation or regulatory sanctions.
We currently sell VOIs in the U.S. and Canada solely through our employees, and in Europe, we currently sell VOIs through employees and third-party sales agents. In the event the federal, state or local taxing authorities in foreign jurisdictions were to successfully classify such independent contractors or sales agents as our employees, rather than as independent contractors, we could be liable for back payroll taxes, termination indemnities and potential claims related to employee benefits, as required by local law. See "Item 1. BusinessGovernmental Regulation."
We are also subject to the laws and regulations of Mexico with respect to our operations of resorts located in Mexico. As discussed above, for purposes of ownership of land in Mexico foreign parties may acquire property located near Mexico's beaches and borders if they (i) agree not to invoke the protection of their governments in matters relating thereto and (ii) take title through a Mexican trust or subsidiary. Noncompliance with such agreement by a foreign party would result in forfeiture of the property to the country of Mexico. See "Item 1. BusinessGovernmental Regulation."
We are also subject to the laws and regulations of Canada, including timeshare and consumer protection laws and regulations and other laws and regulations applicable to developers and providers of timeshare services throughout Canada.

34

                                            

See "We are subject to certain risks associated with our management of resort properties" for a discussion of additional regulations and laws we are, or may be, subject to in connection with the operation of our business. The laws and regulations to which our operations are subject may change, and new and potentially more stringent and burdensome regulations, at the foreign, federal, state or local level, may be adopted and regulatory oversight may increase, including by the CFPB. We may need to modify our business practices and incur significant, unanticipated expenses as a result of our compliance with any such new laws or regulations or in response to any such increased oversight.
Depending on the provisions of applicable law and the specific facts and circumstances involved, violations of these laws, policies or principles to which our operations are, or may become subject, may limit our ability to collect all or part of the principal or interest due on our consumer loans, may entitle certain customers to a refund of amounts previously paid and could subject us to regulatory investigations or actions, fines, penalties, damages, administrative sanctions and increased exposure to litigation, and may also impair our ability to commence cancellation and forfeiture proceedings on our VOIs.
We are a party to certain litigation matters and are subject to additional litigation risk.
From time to time, we or our subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business, including claims and proceedings relating to our VOI sales, consumer finance business and hospitality and management services operations. Should there be increased scrutiny of our company or the vacation ownership industry, we may face an increased risk of significant legal proceedings or claims, which could include class action litigation by our members or HOAs. Any adverse outcome in any litigation involving us or any of our affiliates could negatively impact our business, reputation and financial condition.
Failure to maintain the security of personally identifiable information could adversely affect us.
In connection with our business, we collect and retain significant volumes of personally identifiable information, including credit card and social security numbers of our customers and other personally identifiable information of our customers and employees. The continued occurrence of high-profile data breaches provides evidence of the serious threats to information security. Our customers and employees expect that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding, both in the U.S. and other jurisdictions in which we operate. Protecting against security breaches, including cyber-security attacks, is an increasing challenge, and penetrated or compromised data systems or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss, fraudulent or unlawful use of customer, employee or company data. It is possible that our security controls over personally identifiable information, our training of employees on data security and other practices we follow may not prevent the improper disclosure of personally identifiable information that we store and manage. A significant theft, loss or fraudulent use of customer or employee information could adversely impact our reputation and could result in significant costs, fines and litigation.
Our reputation and financial condition may be harmed by system failures, computer viruses and any inability to keep pace with advancements in technology.
We maintain a proprietary hospitality management reservation and sales system. The performance and reliability of this system and our technology is critical to our reputation and ability to attract, retain and service our customers. Any system error or failure may significantly delay response times or even cause our system to fail, resulting in the unavailability of our services. Any disruption in our ability to provide the use of our reservation system to the purchasers of our VOIs, including as a result of software or hardware issues related to the reservation system, could result in customer dissatisfaction and harm our reputation and business. In addition, a significant portion of our reservations are made through the online reservation system that we operate on behalf of the Diamond Collections and the Clubs as opposed to over the phone, and our costs are significantly lower in connection with bookings through the online reservation system. As a result, if our online reservation system is unavailable for any reason, our costs will increase and the resale value and the marketability of our VOIs may decline. Our system and operations are vulnerable to interruption or malfunction due to certain events beyond our control, including natural disasters, power loss, telecommunication failures, data and other security breaches, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Any interruption, delay or system failure could result in financial losses, customer claims and litigation and damage to our reputation.
Competitive conditions within the vacation ownership industry require that we use sophisticated technology in the operation of our business. We may not be successful, generally or relative to our competitors in the vacation ownership industry, in timely implementing new technology into our systems, or doing so in a cost-effective manner. During the course of implementing any such new technology into our operations, we may experience system interruptions and failures discussed above. Furthermore, there can be no assurances that we will recognize, in a timely manner or at all, the benefits that we may expect as a result of our implementing new technology into our operations.

35

                                            

Our intellectual property rights are valuable, and our failure to protect those rights could adversely affect our business.
Our intellectual property rights, including existing and future trademarks, trade secrets and copyrights, are and will continue to be valuable and important assets of our business. We believe that our proprietary technology, as well as our other technologies and business practices, are competitive advantages and that any duplication by competitors would harm our business. The measures we have taken to protect our intellectual property may not be sufficient or effective. Additionally, intellectual property laws and contractual restrictions may not prevent misappropriation of our intellectual property or deter others from developing similar technologies. Finally, even if we are able to successfully protect our intellectual property, others may develop technologies that are similar or superior to our technology.
We are required to make a number of significant judgments in applying our accounting policies, and our use of different estimates and assumptions in the application of these policies could result in material changes to our reported financial condition and results of operations. In addition, changes in accounting standards or their interpretation could significantly impact our reported results of operations.
Our accounting policies are critical to the manner in which we present our results of operations and financial condition. Many of these policies, including with respect to the recognition of revenue and determination of Vacation Interests cost of sales are highly complex and involve many subjective assumptions, estimates and judgments. See "Note 2—Summary of Significant Accounting Policies" of our consolidated financial statements included elsewhere in this annual report for further detail. We are required to review these estimates regularly and revise them when necessary. Our actual results of operations vary from period to period based on revisions to these estimates. In addition, the regulatory bodies that establish accounting and reporting standards, including the SEC, the Financial Accounting Standards Board and the American Institute of CPAs, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. Changes to these standards or their interpretation could significantly impact our reported results in future periods.
Our directors and executive officers may have interests that could conflict with those of our stockholders.
There are relationships and transactions between our company and entities associated with our executive officers and directors and between certain of such entities. These relationships and transactions, and the financial interests of our executive officers and directors in the entities party to these relationships and transactions, as well as other financial interests of our executive officers and directors, may create, or may create the appearance of, conflicts of interest, when these executive officers and directors are faced with decisions involving those other entities or that could otherwise affect their financial interests. See "Note 6- Transactions with Related Parties" of our consolidated financial statements included elsewhere in this annual report for further detail on these relationships and transactions.
Loss of key members of management, or our inability to attract and retain qualified personnel could adversely affect our business.
Our success and future growth depends to a significant degree on the skills and continued services of our senior management team. The loss of key members of management could inhibit our growth prospects. Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel with different skills and experiences, with a sound understanding of our business and the vacation ownership industry. The market for highly qualified personnel (sale personnel in particular) is very competitive. As a result and potentially also because of our announcement that we are exploring strategic alternatives, we may not be able to continue to attract and retain the personnel needed to support our business.
Our strategic transactions may not be successful and may divert our management's attention and consume significant resources.
We intend to continue our strategy of selectively pursuing complementary strategic transactions. We may also purchase management contracts and purchase VOI inventory at resorts that we do not manage, with the goal of acquiring sufficient VOI ownership at such a resort to become the manager of that resort. The successful execution of this strategy will depend on our ability to identify opportunities for potential acquisitions that fit within our capital-light business model, enter into the agreements necessary to take advantage of these potential opportunities and obtain any necessary financing. We may not be able to do so successfully. In addition, from time to time, we encounter resistance from existing VOI owners at a resort when we attempt to become the new manager of such resort. Furthermore, our management may be required to devote substantial time and resources to pursue these opportunities, which may impact their ability to manage our operations effectively.
Acquisitions involve numerous additional risks, including: (i) difficulty in integrating the operations and personnel of an acquired business; (ii) potential disruption of our ongoing business and the distraction of management from our day-to-day operations; (iii) difficulty entering markets in which we have limited or no prior experience and in which competitors have a

36

                                            

stronger market position; (iv) difficulty maintaining the quality of services that we have historically provided across new acquisitions; (v) potential legal and financial responsibility for liabilities of acquired businesses; (vi) challenges in complying with regulations and other laws to which our operations may become subject as a result of acquired businesses being located in areas where we did not previously operate; (vii) overpayment for the acquired company or assets; (viii) increased expenses associated with completing an acquisition and amortizing any acquired intangible assets; and (ix) challenges in implementing uniform standards, controls, procedures and policies throughout an acquired business.
Some of our acquisitions have focused on acquiring management contracts and related businesses of operators in financial distress or in bankruptcy at the time of such acquisition. To the extent we pursue similar acquisitions in the future, we will be subject to additional risks, including risks and uncertainties associated with bankruptcy proceedings, the risk that such properties will be in disrepair and require significant investment in order to bring them up to our quality standards and potential exposure to adverse developments in the receivable portfolios that we acquire or agree to manage.
We also intend to expand our business-to-business services provided to resorts in our affiliated resort networks. We cannot assure you that our attempts to expand business-to-business services will be successful, and our failure to expand such services could harm our business and our relationships with those affiliated resorts.
Risks Related to the Ownership of our Common Stock

We are exploring possible strategic alternatives; this process may not result in a transaction or other action that creates additional value for our stockholders, or any transaction or other action at all, and this process may be disruptive to our business.
On February 24, 2016, our board of directors announced that it has formed a committee of independent directors to explore strategic alternatives to maximize stockholder value. This strategic review process, including the announcement thereof, could expose us and our operations to a number of risks and uncertainties, including the diversion of management’s attention from our business, the incurrence of significant expenses associated with the retention of legal, financial and other advisors as a result of the review of strategic alternatives, our failure to retain, attract or strengthen our relationships with key personnel, suppliers or customers (in particular, HOAs and prospective purchasers of VOIs), and exposure to potential litigation in connection with this process and effecting any strategic alternative. Due to these and other consequences of pursuing a strategic alternative, we may fail to achieve financial or operating objectives and may lose potential business opportunities.
There can be no assurance that this process will result in any transaction or other action by us or our board of directors, that any transaction or other action will be consummated or that any transaction or other action will maximize stockholder value or that we or our stockholders will otherwise realize the anticipated benefits from any such transaction or other action. Any potential transaction could be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, stockholder approval and the availability of financing. Even if a strategic alternative is identified, we may be affected by factors related to the feasibility and timing of consummating a transaction, including our ability, or the ability of others, to obtain required third-party consents and regulatory approvals and any adverse regulatory developments or determinations or adverse changes in, or interpretations of, the U.S. or foreign tax and other laws, rules or regulations that could materially impact, delay or prevent completion of any transaction or other action.
Further, as previously disclosed, we do not intend to discuss or disclose further developments during this process unless and until our board of directors has approved a specific action or otherwise determined that further disclosure is appropriate. Accordingly, speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of our company could cause our stock price to fluctuate significantly.
The concentration of our capital stock ownership with certain members of management and our Board of Directors and related entities, together with the Director Designation Agreement and the Stockholders Agreement, will limit stockholders' ability to influence corporate matters, including the ability to influence matters requiring stockholder approval.
Of the outstanding shares of common stock, members of management and our Board of Directors and related entities, together hold 25.5% of our outstanding common stock. In particular, entities controlled by Stephen J. Cloobeck, our founder and Chairman, hold 16.7% of our outstanding common stock, entities controlled by Lowell D. Kraff, our Vice Chairman, hold 2.3% of our outstanding common stock, and entities controlled by David F. Palmer, our President, Chief Executive Officer and a member of our Board of Directors, hold 5.6% of our outstanding common stock. In addition, certain members of management and our Board of Directors and other stockholders, which collectively hold 38.7% of our outstanding common stock, are parties to a Stockholders’ Agreement (the “Stockholders Agreement”) with us, pursuant to which such parties have agreed, subject to the terms of the Stockholders Agreement, in any election of members of our Board of Directors, to vote their shares of our common stock in favor of our Chief Executive Officer, and individuals designated by DRP Holdco, LLC, one of our significant investors (the "Guggenheim Investor"), as well as an entity controlled by our founder and Chairman, pursuant to a director

37

                                            

designation agreement (the “Director Designation Agreement”) among us and certain stockholders party to the Stockholders Agreement.
As a result of their collective ownership of our outstanding capital stock, members of management and our Board of Directors, including Messrs. Cloobeck, Kraff and Palmer, and related entities could have significant influence over matters requiring stockholder approval, including amendment of our certificate of incorporation and approval of significant corporate transactions. This influence could make the approval of certain transactions difficult without the support of such individuals and entities.
We incur significant costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; if we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and our reputation.
As a SEC reporting company, we are required to, among other things, maintain a system of effective internal control over financial reporting, which requires annual management and independent registered public accounting firm assessments of the effectiveness of our internal controls. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Over the past few years, we have dedicated a significant amount of time and resources to implement our internal financial and accounting controls and procedures, and have had to retain additional finance and accounting personnel with the skill sets that we need as a SEC reporting company. Substantial work may continue to be required to further implement, document, assess, test and remediate our system of internal controls. We may also need to retain additional finance and accounting personnel in the future.
If our internal control over financial reporting is not effective, we may be unable to issue our financial statements in a timely manner, we may be unable to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner or we may be otherwise unable to comply with the periodic reporting requirements of the SEC, our common stock listing on the NYSE could be suspended or terminated and our stock price could materially suffer. In addition, we or members of our management could be subject to investigation and sanction by the SEC and other regulatory authorities and to stockholder lawsuits, which could impose significant additional costs on us and divert management attention.
In addition, see "Item 9A. Controls and ProceduresInherent Limitations on the Effectiveness of Controls" for inherent limitations in a cost-effective control system.
Provisions in our amended and restated certificate of incorporation and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These include provisions that:
• classify our Board of Directors;
• limit stockholders’ ability to remove directors;
• include advance notice requirements for stockholder proposals and nominations; and
• prohibit stockholders from acting by written consent or calling special meetings.
Furthermore, the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our amended and restated certificate of incorporation. In addition, absent approval of our Board of Directors, our amended and restated bylaws may only be amended or repealed by the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for some litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternate forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative

38

                                            

action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any director or officer to us or our stockholders or creditors; (iii) any action asserting a claim against us or any director or officer pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; or (iv) any action asserting a claim against us or any director or officer governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit our stockholders’ ability to obtain a judicial forum that they find favorable for disputes with us or our directors, officers, employees or other stockholders.
Our stock price may be volatile or may decline regardless of our operating performance.
The market price for our common stock may be highly volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

variations in our financial results or those of companies that are perceived to be similar to us;

actions by us or our competitors, such as sales initiatives, acquisitions or restructurings;

changes in our earnings estimates or expectations as to our future financial performance, as well as financial estimates by securities analysts and investors, and our ability to meet or exceed those estimates or expectations;

additions or departures of key management personnel;

legal proceedings involving our company, our industry, or both;

changes in our capitalization, including future issuances of our common stock or the incurrence of additional indebtedness;

changes in market valuations of companies similar to ours;

the prospects of the industry in which we operate;

actions by institutional and other stockholders;

speculation or reports by the press or investment community with respect to us or our industry in general;

the level of short interest in our stock;

changes in our credit ratings;

general economic, market and political conditions; and

other risks, uncertainties and factors described in this annual report.

The stock markets in general have often experienced volatility that has sometimes been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type may be expensive to defend and may divert our management's attention and resources from the operation of our business.
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the stock price of our common stock or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, one or more of the analysts who cover our company may change their recommendations regarding our
company and our stock price could decline.


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ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES
Except for unsold VOI inventory, we generally do not have any ownership interest in the resorts in our network other than the ownership of various common areas and amenities at certain resorts and a small number of units in European resorts. We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements. In addition, we lease our global corporate headquarters, located in Las Vegas, Nevada, which consists of approximately 133,000 square feet of space. We also lease our European headquarters, located in Lancaster, United Kingdom, and lease 18 sales and marketing and administrative offices, both domestically and internationally.
We also own certain real estate, the majority of which is held for future or ongoing development, including 159.8 acres in Williamsburg, Virginia, 51.9 acres in Gatlinburg, Tennessee, 32.5 acres in Orlando, Florida, 21.4 acres in Kitty Hawk, North Carolina, 15.0 acres in Branson, Missouri, 7.0 acres in Las Vegas, Nevada, 4.2 acres in Scottsdale, Arizona, 2.1 acres in Costa del Sol, Spain, 2.0 acres in St. Maarten and 1.8 acres in Kona, Hawaii.
ITEM 3.     LEGAL PROCEEDINGS
From time to time, we or our subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business, including claims and proceedings relating to our VOI sales, consumer finance business and hospitality and management services operations. Accruals have been recorded when the outcome is probable and can be reasonably estimated.  While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on our financial position or our results of operations, legal proceedings are inherently uncertain and unfavorable resolution of some or all of these matters could, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.


40


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price of Common Stock
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “DRII.” As of February 25, 2016, there were 52 holders of record of our common stock.
The following table sets forth the quarterly high and low sales prices per share of our common stock as reported by the NYSE for the periods presented below:
 
 
Stock Price
Year Ended December 31, 2015
 
High
 
Low
First Quarter of 2015
 
$
35.42

 
$
25.69

Second Quarter of 2015
 
$
34.93

 
$
30.97

Third Quarter of 2015
 
$
32.49

 
$
22.80

Fourth Quarter of 2015
 
$
29.86

 
$
22.29

 
 
 
 
 
Year Ended December 31, 2014
 
High
 
Low
First Quarter of 2014
 
$
20.69

 
$
16.51

Second Quarter of 2014
 
$
23.83

 
$
16.89

Third Quarter of 2014
 
$
26.33

 
$
21.82

Fourth Quarter of 2014
 
$
28.50

 
$
19.59

Dividend Policy
We have never declared or paid any cash dividends on our capital stock. Our current policy, which is subject to regular review by our Board of Directors, is to retain any earnings to finance the development and expansion of our business, as well as to repurchase our common stock. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, general business conditions, other alternate uses of cash (including stock repurchases) and other then-existing factors that our Board of Directors may deem relevant. The Senior Credit Facility limits our ability to make restricted payments, including the payment of dividends and expenditures for stock repurchases, subject to specified exceptions based upon our excess cash flow sweep payments determined in accordance with the Senior Credit Facility. See "Note 16Borrowings" of our consolidated financial statements included elsewhere in this annual report for further details.
Issuer Purchases of Equity Securities
On October 28, 2014, our Board of Directors authorized a stock repurchase program allowing for the expenditure of up to $100.0 million for the repurchase of our common stock (the "Stock Repurchase Program"). The Stock Repurchase Program was originally announced on October 29, 2014 and has no scheduled expiration date.
On July 28, 2015, our Board of Directors authorized the expenditure of up to an additional $100.0 million for the repurchase of our common stock under the Stock Repurchase Program. The Senior Credit Facility limits our ability to make restricted payments, including the payment of dividends or expenditures for stock repurchases, subject to specified exceptions based upon our excess cash flow sweep payments determined in accordance with the Senior Credit Facility.


41


The following is a summary of common stock repurchased by us by month during the fourth quarter of 2015 under our stock repurchase program:
Period
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced program
 
Approximate dollar value of shares that may yet be purchased under the program (a)
October 1 to 31
 
1,023,264

 
$
24.10

 
1,023,264

 
$
77,281,000

November 1 to 30
 
1,048,867

 
$
27.28

 
1,048,867

 
$
48,662,000

December 1 to 31
 
1,045,468

 
$
26.89

 
1,045,468

 
$
20,547,000

Total
 
3,117,599

 
$
26.11

 
3,117,599

 
 
(a) Reflects availability under the Stock Repurchase Program; however, our ability to repurchase our stock is limited by the terms of the Senior Credit Facility. Accordingly, as of December 31, 2015, in accordance with the Senior Credit Facility we were permitted to purchase an additional $3.5 million in shares of our stock.
Stock Performance Graph
The following line graph compares the performance of our common stock against the S&P MidCap 400 Index and the S&P Composite 1500 Hotels, Resorts & Cruise Lines Index, from July 19, 2013 (the date our common stock commenced trading on the NYSE) through December 31, 2015. The graph tracks the performance of a $100 investment at the market close on July 19, 2013 in our Common Stock and in the S&P MidCap 400 Index and the S&P Composite 1500 Hotels, Resorts & Cruise Lines Index (with the reinvestment of all dividends and other distributions). The stock price performance reflected below is based on historical results and is not necessarily indicative of future stock price performance.
The Stock Performance Graph is not deemed to be “soliciting material” or to be “filed” with the SEC for the purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of DRII under the Securities Act of 1933 or the Securities Exchange Act of 1934.

42

                                            


ITEM 6.     SELECTED FINANCIAL DATA
Set forth below is selected consolidated audited financial and operating data at the dates and for the periods indicated.
The financial and operating data set forth below (i) through July 24, 2013 is that of DRP and its subsidiaries, after giving retroactive effect to the Reorganization Transactions and (ii) after July 24, 2013 is that of DRII and its subsidiaries. Our historical results are not necessarily indicative of the results that may be expected in any future period. The selected consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013, and the selected consolidated balance sheet data as of December 31, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the selected historical consolidated balance sheet data as of December 31, 2013, 2012 and 2011 have been derived from our audited consolidated statements of operations for the years ended December 31, 2012 and 2011 and our audited consolidated balance sheets as of December 31, 2013, 2012 and 2011 which are not included in this annual report.
The selected consolidated financial and operating data set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements included elsewhere in this annual report.

 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
($ in thousands, except as otherwise noted)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
954,040

 
$
844,566

 
$
729,788

 
$
523,668

 
$
391,021

Total costs and expenses
 
702,392

 
734,875

 
726,536

 
524,335

 
390,235

Income (loss) before provision (benefit) for income taxes and discontinued operations
 
251,648

 
109,691

 
3,252

 
(667
)
 
786

Provision (benefit) for income taxes
 
102,170

 
50,234

 
5,777

 
(14,310
)
 
(9,517
)
Net income (loss)
 
$
149,478

 
$
59,457

 
$
(2,525
)
 
$
13,643

 
$
10,303

Other Financial Data (Unaudited):
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
26,325

 
$
17,950

 
$
15,150

 
$
14,329

 
$
6,276

Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
     Operating activities
 
$
175,894

 
$
121,314

 
$
(2,158
)
 
$
22,374

 
$
13,099

     Investing activities
 
$
(203,685
)
 
$
(17,100
)
 
$
(58,065
)
 
$
(69,355
)
 
$
(109,743
)
     Financing activities
 
$
63,796

 
$
104,919

 
$
80,025

 
$
49,044

 
$
90,377

Operating Data:
 
 
 
 
 
 
 
 
 
 
     Managed resorts (1)
 
99

 
93

 
93

 
79

 
71

     Affiliated resorts and hotels (1)
 
247

 
236

 
210

 
180

 
144

     Cruise itineraries (1)
 
4

 
4

 
4

 
4

 
4

Total destinations
 
350

 
333

 
307

 
263

 
219

Total number of tours (2)
 
229,782

 
220,708

 
207,075

 
180,981

 
146,261

Closing percentage (3)
 
15.0
%
 
14.4
%
 
14.5
%
 
14.8
%
 
14.4
%
Total number of VOI sale transactions (4)
 
34,528

 
31,759

 
29,955

 
26,734

 
21,093

Average VOI sale price per transaction (5)
 
$
21,285

 
$
18,988

 
$
16,771

 
$
12,510

 
$
10,490

Volume per guest (6)
 
$
3,198

 
$
2,732

 
$
2,426

 
$
1,848

 
$
1,513




43

                                            

 
 
As of December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
($ in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
290,510

 
$
255,042

 
$
47,076

 
$
27,101

 
$
24,676

Vacation Interests notes receivable, net
 
622,607

 
498,662

 
405,454

 
312,932

 
283,302

Unsold Vacation Interests, net
 
358,278

 
262,172

 
298,110

 
315,867

 
256,805

Total assets
 
1,993,026

 
1,577,776

 
1,301,195

 
993,008

 
833,219

Senior Credit Facility, net of unamortized original issue discount
 
569,931

 
440,720

 

 

 

Securitization notes and Funding Facilities, net of unamortized original issue discount
 
642,758

 
509,208

 
391,267

 
256,302

 
250,895

Senior Secured Notes, net of unamortized original issue discount
 

 

 
367,892

 
416,491

 
415,546

Notes payable
 
4,750

 
4,612

 
23,150

 
137,906

 
71,514

Total liabilities
 
$
1,722,064

 
$
1,310,427

 
$
1,093,382

 
$
1,091,607

 
$
950,421


(1)
As of the end of each period.
(2)
Represents the number of sales presentations at our sales centers during the period presented.
(3)
Represents the percentage of VOI sales closed relative to the total number of tours at our sales centers during the period presented.
(4)
Represents the number of VOI sale transactions during the period presented.
(5)
Represents the average purchase price (not in thousands) of VOIs sold during the period presented.
(6)
Represents VOI sales (not in thousands) divided by the total number of tours during the period presented.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following discussion and analysis in conjunction with "Item 6. Selected Financial Data" and our consolidated financial statements and related notes in "Item 8. Financial Statements and Supplementary Data." The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Cautionary Statement Regarding Forward-Looking Statements” and "Item 1A. Risk Factors."

Overview
We are a global leader in the hospitality and vacation ownership industry, with a worldwide resort network of 379 destinations located in 35 countries, throughout the world, including the continental U.S., Hawaii, Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia, New Zealand and Africa. Our resort network includes 109 resort properties with approximately 12,000 units that we manage and 250 affiliated resorts and hotels and 20 cruise itineraries (as of January 31, 2016), which we do not manage and do not carry our brand, but are a part of our resort network and are available for our members to use as vacation destinations.
We are led by an experienced management team that has delivered strong operating results through disciplined execution.
Our management team has taken a number of significant steps to refine our strategic focus, build our brand recognition and streamline our operations, including (i) maximizing revenue from our hospitality and management services business; (ii) driving innovation throughout our business, most significantly by infusing our hospitality focus into our customer interactions; and (iii) adding resorts to our network and owners to our owner base through complementary strategic acquisitions

44

                                            

and efficiently integrating businesses acquired. We have also implemented growth strategies to increase our revenues while remaining consistent with our capital-efficient business model.
Significant 2015 Developments
HM&C Acquisition
Pursuant to the Homeowner Association Oversight, Consulting and Executive Management Services Agreement that we entered into with Hospitality Management and Consulting Service, LLC ("HM&C"), a Nevada limited liability company (the “HM&C Agreement”), HM&C has provided certain services to us, including the services of certain executive officers, including David F. Palmer, President and Chief Executive Officer, C. Alan Bentley, Executive Vice President and Chief Financial Officer, Howard S. Lanznar, Executive Vice President and Chief Administrative Officer, and other officers and employees and, through December 31, 2014, also provided the services of Stephen J. Cloobeck, our founder and Chairman.
On January 6, 2015, we entered into a Membership Interest Purchase Agreement (the "Purchase Agreement"), whereby we acquired from an entity controlled by Mr. Cloobeck and an entity controlled by Mr. Palmer (which entities owned 95.0% and 5.0% of the outstanding membership interests of HM&C, respectively), all of the outstanding membership interests in HM&C in exchange for an aggregate purchase price of $10,000 (the "HM&C Acquisition").
As a result of the HM&C Acquisition, effective January 1, 2015, transactions between us and HM&C were fully eliminated from our consolidated financial statements, as HM&C became our wholly-owned subsidiary.
Master Agreement
Concurrent with our entry into the Purchase Agreement, on January 6, 2015, we entered into a master agreement (the "Master Agreement") with Mr. Cloobeck, HM&C, JHJM Nevada I, LLC ("JHJM") and other entities controlled by Mr. Cloobeck or his immediate family members. Pursuant to the Master Agreement, the parties made certain covenants to and agreements with the other parties, including: (i) the termination effective as of January 1, 2015, of the services agreement between JHJM and HM&C; (ii) the conveyance to us of exclusive rights to market timeshare and vacation ownership properties from a prime location adjacent to Polo Towers on the "Las Vegas Strip," pursuant to the terms of an Assignment and Assumption Agreement; (iii) Mr. Cloobeck's agreement to various restrictive covenants, including non-competition, non-solicitation and non-interference covenants; and (iv) Mr. Cloobeck's grant to us of a license to use Mr. Cloobeck's persona, including his name, likeness and voice. In connection with the transactions contemplated by the Master Agreement, we paid Mr. Cloobeck or his designees an aggregate of $16.5 million and incurred $0.3 million in expenses related to this transaction.
In addition, in light of the termination of the services agreement between JHJM and HM&C and the existence of a director designation agreement dated July 17, 2013, we agreed in the Master Agreement that, at least through December 31, 2017, so long as Mr. Cloobeck is serving as a member of our Board of Directors, he will continue to be the Chairman of the Board and, in such capacity, will receive annual compensation equal to two times the compensation generally paid to other non-employee directors, and he, his spouse and children will receive medical insurance coverage.
Deconsolidation of the St. Maarten Resorts
Effective January 1, 2015, we assigned the rights and related obligations associated with assets we previously owned as the HOA of two properties located in St. Maarten to newly-created HOAs (the "St. Maarten HOAs"). Since then, we have had no beneficial interest in the St. Maarten HOAs, except through our ownership of VOIs, but continue to serve as the manager of the St. Maarten HOAs pursuant to customary management agreements. As a result, the operating results and the assets and liabilities of the St. Maarten properties were deconsolidated from our consolidated financial statements effective January 1, 2015 (with the exception of all employee-related liabilities, including a post-retirement benefit plan, which were transferred to the St. Maarten HOAs during the quarter ended September 30, 2015, and cash accounts, the majority of which are expected to be transferred to the St. Maarten HOAs during the quarter ending March 31, 2016) (the "St. Maarten Deconsolidation").
Gold Key Acquisition
On October 16, 2015, we completed the acquisition of substantially all of the assets of Ocean Beach Club, LLC, Gold Key Resorts, LLC, Professional Hospitality Resources, Inc., Vacation Rentals, LLC and Resort Promotions, Inc. (collectively, the “Gold Key Companies”) relating to their operation of their vacation ownership business in Virginia Beach, Virginia and the Outer Banks, North Carolina (the "Gold Key Acquisition"). We acquired management contracts, real property interests, unsold vacation ownership interests and other assets of the Gold Key Companies, adding six additional managed resorts to our resort network, in exchange for a cash purchase price of $167.5 million and the assumption of certain non-interest-bearing liabilities. At the closing of the Gold Key Acquisition, $6.2 million was deposited into an escrow account to support our obligations under a default recovery agreement, and is classified as restricted cash on our consolidated balance sheet.

45

                                            

Senior Credit Facility Amendment
On December 3, 2015, we amended our Senior Credit Facility (as defined under "Liquidity and Capital ResourcesIndebtednessSenior Credit Facility") to provide for a $150.0 million incremental term loan (the "Incremental Term Loan"). We received $147.0 million in cash upon the closing of the Incremental Term Loan, which was issued with a 2.0% original issue discount. See "Liquidity and Capital ResourcesIndebtednessSenior Credit Facility" for a discussion of the Incremental Term Loan and the Senior Credit Facility.
Subsequent Events
On January 29, 2016, we completed the acquisition of the vacation ownership business of Intrawest Resort Club Group from Intrawest Resorts Holdings, Inc., through which we acquired management contracts, Vacation Interests notes receivable and other receivables, real property interests, unsold VOIs and other assets in exchange for $85.0 million in cash plus the assumption of certain non-interest-bearing liabilities (the "Intrawest Acquisition"). The Intrawest Acquisition added nine managed resorts located in the United States, Canada and Mexico to our resort network.
On February 24, 2016, our board of directors announced that it formed a Committee of Independent Directors to explore strategic alternatives to maximize shareholder value. There can be no assurance that this exploration will result in any strategic alternatives being announced or consummated. We do not intend to discuss or disclose further developments during this process unless and until the board of directors has approved a specific action or otherwise determined that further disclosure is appropriate. See "Item 1A. Risk Factors—We are exploring possible strategic alternatives; this process may not result in a transaction or other action that creates additional value for our stockholders, or any transaction or other action at all, and this process may be disruptive to our business."
Critical Accounting Policies, Key Revenue and Expenses and Use of Estimates
The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations.
The preparation of our financial statements requires us to make difficult and subjective judgments that affect the reported amounts of assets, liabilities, revenues and expenses, often as a result of the need to make estimates regarding matters that are inherently uncertain. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue, bad debts, unsold Vacation Interests, net, Vacation Interests cost of sales, stock-based compensation expense and income taxes. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. See "Note 2—Summary of Significant Accounting Policies" of our consolidated financial statements included elsewhere in this annual report for further detail on these critical accounting policies. In addition, see "Note 2—Summary of Significant Accounting Policies" for detail on key revenue and expense items reported in our consolidated statement of operations and comprehensive income (loss).

Segment Reporting
For financial reporting purposes, we present our results of operations and financial condition in two business segments. The first business segment is hospitality and management services, which includes our operations related to the management of resort properties and Diamond Collections, revenue from our operation of the Clubs and the provision of other services. The second business segment, Vacation Interests sales and financing, includes our operations relating to the marketing and sales of our VOIs, as well as our consumer financing activities related to such sales. While certain line items reflected on our statement of operations and comprehensive income (loss) fall completely into one of these business segments, other line items relate to revenues or expenses which are applicable to both segments. For line items that are applicable to both segments, revenues or expenses are allocated by management as described under "Note 2—Summary of Significant Accounting Policies" of our consolidated financial statements included elsewhere in this annual report, which involve significant estimates. Certain expense items (principally corporate interest expense, depreciation and amortization and provision for income taxes) are not, in management's view, allocable to either of these business segments as they apply to the entire Company. In addition, general and administrative expenses are not allocated to either of our business segments because historically management has not allocated these expenses (which exclude hospitality and management services related overhead that is allocated to the HOAs and Collection Associations) for purposes of evaluating our different operational divisions. Accordingly, these expenses are presented under corporate and other.

46

                                            

Management believes that it is impracticable to allocate specific assets and liabilities related to each business segment. In addition, management does not review balance sheets by business segment as part of its evaluation of operating segment performance. Consequently, no balance sheet segment reports have been presented.
We also provide financial information for our geographic segments based on the geographic locations of our subsidiaries in “Information Regarding Geographic Areas of Operation.”

Results of Operations
In comparing our results of operations between two periods, we sometimes refer to "same-store" results. When referring to same-store results of our hospitality and management services segment, we are referring to the results relating to management contracts with resorts in effect during the entirety of the two applicable periods. When referring to same-store results of our Vacation Interests sales and financing segment, we are referring to the results relating to sales centers open during the entirety of both of the applicable periods.

The following discussion includes (a) certain financial measures not in conformity with U.S. GAAP, specifically (i) management and member services expense excluding non-cash stock-based compensation expense and, for the year ended December 31, 2014, excluding the non-cash benefit related to the contract renegotiation with Interval International, Inc. ("Interval International"), an exchange company, as discussed below; (ii) advertising, sales and marketing expense excluding non-cash stock-based compensation expense; and (iii) general and administrative expense excluding non-cash stock-based compensation expense and, for the year ended December 31, 2015, excluding the cash charge related to the termination of the services agreement between JHJM and HMCS; and (b) a reconciliation of each such non-U.S. GAAP financial measure to the most directly comparable financial measure in accordance with U.S. GAAP. We exclude these items because management excludes them from its forecasts and evaluation of our operational performance and because we believe that the U.S. GAAP measures including these items are not indicative of our core operating results. The non-U.S. GAAP financial measures included in this annual report should not be considered in isolation from, or as an alternative to, any measure of financial performance calculated and presented in accordance with U.S. GAAP.

47

                                            

Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014
 
 
Year Ended December 31, 2015
 
Year Ended December 31, 2014
 
 
Hospitality
and
Management
Services
 
Vacation
Interests Sales and Financing
 
Corporate
and Other
 
Total
 
Hospitality
and
Management
Services
 
Vacation
Interests Sales and
Financing
 
Corporate
and Other
 
Total
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
165,169

 
$

 
$

 
$
165,169

 
$
152,201

 
$

 
$

 
$
152,201

Consolidated resort operations
 
15,356

 

 

 
15,356

 
38,406

 

 

 
38,406

Vacation Interests sales, net of provision $0, $80,772, $0, $80,772, $0, $57,202, $0 and $57,202, respectively
 

 
624,283

 

 
624,283

 

 
532,006

 

 
532,006

Interest
 

 
78,989

 
1,330

 
80,319

 

 
66,849

 
1,549

 
68,398

Other
 
7,222

 
61,691

 

 
68,913

 
8,691

 
44,864

 

 
53,555

Total revenues
 
187,747

 
764,963

 
1,330

 
954,040

 
199,298

 
643,719

 
1,549

 
844,566

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
34,293

 

 

 
34,293

 
33,184

 

 

 
33,184

Consolidated resort operations
 
14,535

 

 

 
14,535

 
35,409

 

 

 
35,409

Vacation Interests cost of sales
 

 
28,721

 

 
28,721

 

 
63,499

 

 
63,499

Advertising, sales and marketing
 

 
350,411

 

 
350,411

 

 
297,095

 

 
297,095

Vacation Interests carrying cost, net
 

 
39,671

 

 
39,671

 

 
35,495

 

 
35,495

Loan portfolio
 
1,410

 
9,478

 

 
10,888

 
1,303

 
7,508

 

 
8,811

Other operating
 

 
28,371

 

 
28,371

 

 
22,135

 

 
22,135

General and administrative
 

 

 
112,501

 
112,501

 

 

 
102,993

 
102,993

Depreciation and amortization
 

 

 
34,521

 
34,521

 

 

 
32,529

 
32,529

Interest expense
 

 
16,895

 
31,581

 
48,476

 

 
15,072

 
41,871

 
56,943

Loss on extinguishment of debt
 

 

 

 

 

 

 
46,807

 
46,807

Impairments and other write-offs
 

 

 
12

 
12

 

 

 
240

 
240

Gain on disposal of assets
 

 

 
(8
)
 
(8
)
 

 

 
(265
)
 
(265
)
Total costs and expenses
 
50,238

 
473,547

 
178,607

 
702,392

 
69,896

 
440,804

 
224,175

 
734,875

Income (loss) before provision for income taxes
 
137,509

 
291,416

 
(177,277
)
 
251,648

 
129,402

 
202,915

 
(222,626
)
 
109,691

Provision for income taxes
 

 

 
102,170

 
102,170

 

 

 
50,234

 
50,234

Net income (loss)
 
$
137,509

 
$
291,416

 
$
(279,447
)
 
$
149,478

 
$
129,402

 
$
202,915

 
$
(272,860
)
 
$
59,457


Consolidated Results
Total revenues increased $109.4 million, or 13.0%, to $954.0 million for the year ended December 31, 2015 from $844.6 million for the year ended December 31, 2014. Total revenues for the year ended December 31, 2015 did not include any consolidated resort operations revenue associated with our resorts in St. Maarten as a result of the St. Maarten Deconsolidation, as compared to $24.7 million from our resorts in St. Maarten for the year ended December 31, 2014. Excluding the effect of the St. Maarten Deconsolidation, total revenues would have increased $134.1 million, or 16.4%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014.
Total revenues in our hospitality and management services segment decreased by $11.6 million, or 5.8%, to $187.7 million for the year ended December 31, 2015 from $199.3 million for the year ended December 31, 2014.
Total revenues in our Vacation Interests sales and financing segment increased $121.3 million, or 18.8%, to $765.0 million for the year ended December 31, 2015 from $643.7 million for the year ended December 31, 2014. Revenues in our corporate and other segment decreased $0.2 million, or 14.1%, to $1.3 million for the year ended December 31, 2015 from $1.5 million for the year ended December 31, 2014.
Total costs and expenses decreased $32.5 million, or 4.4%, to $702.4 million for the year ended December 31, 2015 from $734.9 million for the year ended December 31, 2014. Total costs and expenses for the year ended December 31, 2015 included a $14.9 million non-cash stock-based compensation charge and a $7.8 million cash charge in connection with the termination of

48

                                            

the services agreement between JHJM and HM&C, but did not include any consolidated resort operations expense associated with our resorts in St. Maarten as a result of the St. Maarten Deconsolidation. Total costs and expenses for the year ended December 31, 2014 included the following cash and non-cash items: (i) a $46.8 million loss on extinguishment of debt, of which $16.6 million was non-cash; (ii) a $16.2 million non-cash stock-based compensation charge; and (iii) $22.0 million in consolidated resort operations expense associated with our resorts in St. Maarten. Excluding the effect of the St. Maarten Deconsolidation, total costs and expenses would have decreased $10.5 million, or 1.5%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014.

Hospitality and Management Services Segment
Management and Member Services Revenue. Total management and member services revenue increased $13.0 million, or 8.5%, to $165.2 million for the year ended December 31, 2015 from $152.2 million for the year ended December 31, 2014. Management fees increased as a result of increases in operating costs at the resort level, which generated higher management fee revenue on a same-store basis from 107 cost-plus management agreements. In addition, we generated incremental management fee revenue from the five cost-plus management agreements acquired in the Gold Key Acquisition. Furthermore, effective January 1, 2015, we completed the St. Maarten Deconsolidation, thus removing the revenues and expenses related to the two resorts in St. Maarten from our consolidated resort operations revenue and expense, respectively, while recognizing the management fee revenue associated with these resorts as management and member services revenue. Following the St. Maarten Deconsolidation, we recognized management fees with respect to such resorts of $3.2 million for the year ended December 31, 2015.
Consolidated Resort Operations Revenue. Consolidated resort operations revenue decreased $23.0 million, or 60.0%, to $15.4 million for the year ended December 31, 2015 from $38.4 million for the year ended December 31, 2014. This decrease was primarily attributable to the St. Maarten Deconsolidation effective January 1, 2015, which eliminated the consolidated resort operations revenue from these resorts from our consolidated financial statements. This decrease was partially offset by higher revenue from retail ticket sales operations and higher food and beverage revenues at certain restaurants that we own and manage.
Other Revenue. Other revenue decreased $1.5 million, or 16.9%, to $7.2 million for the year ended December 31, 2015 from $8.7 million for the year ended December 31, 2014. This decrease was primarily attributable to the reversal of a $1.1 million contingent liability associated with a previous business combination recorded during the year ended December 31, 2014.
Management and Member Services Expense. Management and member services expense increased $1.1 million, or 3.3%, to $34.3 million for the year ended December 31, 2015 from $33.2 million for the year ended December 31, 2014. For comparison purposes, the following table presents management and member services expense for the year ended December 31, 2015 and December 31, 2014 (in thousands), both on a U.S. GAAP basis and excluding the non-cash stock-based compensation and the non-cash benefit related to the contract renegotiation with Interval International, and such amounts as a percentage of management and member services revenue:
 
 
Year Ended December 31,
 
 
2015
 
2014
Management and member services expense
 
$
34,293

 
$
33,184

Less: Non-cash stock-based compensation
 
(1,307
)
 
(1,613
)
Plus: Non-cash benefit related to the contract renegotiation
 

 
1,780

Management and member services expense excluding non-cash stock-based
    compensation and non-cash benefit related to the contract renegotiation
 
$
32,986

 
$
33,351

Management and member services expense as a % of management and member
    services revenue
 
20.8
%
 
21.8
%
Management and member services expense excluding non-cash stock-based
compensation and non-cash benefit related to the contract renegotiation as a % of management and member services revenue
 
20.0
%
 
21.9
%

In April 2014, we renegotiated our contract with Interval International, which relieved us from our obligation to repay the unearned portion of a marketing allowance to Interval International under the original contract and resulted in the release of this deferred revenue to the statement of operations and comprehensive income (loss) of $1.8 million as a reduction of exchange company costs for the year ended December 31, 2014. The decrease in management and member services expense (excluding the non-cash stock-based compensation charges and the non-cash benefit) as a percentage of management and member services

49

                                            

revenue was attributable to the increase in management and members services revenue discussed above as well as efficiencies gained in connection with bringing a previously outsourced call center to an in-house operated facility.
Consolidated Resort Operations Expense. Consolidated resort operations expense decreased $20.9 million, or 59.0%, to $14.5 million for the year ended December 31, 2015 from $35.4 million for the year ended December 31, 2014. The decrease was primarily attributable to the St. Maarten Deconsolidation effective January 1, 2015, which eliminated the consolidated resort operations expense from these resorts from our consolidated financial statements. This decrease was partially offset by higher retail ticket sales expense as a result of higher ticket sales.

Vacation Interests Sales and Financing Segment
Vacation Interests Sales, Net. Vacation Interests sales, net increased $92.3 million, or 17.3%, to $624.3 million for the year ended December 31, 2015 from $532.0 million for the year ended December 31, 2014. The increase in Vacation Interests sales, net, was attributable to a $115.9 million increase in Vacation Interests sales revenue, partially offset by a $23.6 million increase in our provision for uncollectible Vacation Interests sales revenue.
The $115.9 million increase in Vacation Interests sales revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was generated by sales growth on a same-store basis from 48 sales centers. The addition of five sales centers as a result of the Gold Key Acquisition did not have a material impact on Vacation Interests sales revenue for the year ended December 31, 2015 as the acquisition was completed in October 2015 and the remainder of the year is traditionally a lower sales season in Virginia Beach, Virginia.
Our volume per guest, or VPG (which represents Vacation Interests sales revenue divided by the number of tours) increased by $466, or 17.1%, to $3,198 for the year ended December 31, 2015 from $2,732 for the year ended December 31, 2014 as a result of a higher average sales price per transaction and a higher closing percentage (which represents the percentage of VOI sales transactions closed relative to the total number of tours at our sales centers during the period presented). The number of tours increased to 229,782 for the year ended December 31, 2015 from 220,708 for the year ended December 31, 2014. Our closing percentage increased to 15.0% for the year ended December 31, 2015, as compared to 14.4% for the year ended December 31, 2014. Our VOI sales transactions increased by 2,769 to 34,528 during the year ended December 31, 2015, compared to 31,759 transactions during the year ended December 31, 2014 and VOI average transaction size increased $2,297, or 12.1%, to $21,285 for the year ended December 31, 2015 from $18,988 for the year ended December 31, 2014. The increase in average sales price per transaction and the higher closing percentage (and as a result, higher VPG) were due principally to the continued focus on moving customer transactions towards a one-week equivalent sales price of $26,007 and the success of the hospitality driven sales and marketing initiatives, which are based upon the power of vacations for happier and healthier living.
Provision for uncollectible Vacation Interests sales revenue increased $23.6 million, or 41.2%, to $80.8 million for the year ended December 31, 2015 from $57.2 million for the year ended December 31, 2014. This increase was primarily due to higher gross Vacation Interests sales for the year ended December 31, 2015, as compared to the year ended December 31, 2014. In addition, this increase was attributable to a higher percentage of financed sales and a change of certain portfolio statistics during the year ended December 31, 2015, as compared to the year ended December 31, 2014. The weighted average FICO score of loans written during the years ended December 31, 2015 and 2014 were 754 and 755, respectively.
The allowance for Vacation Interests notes receivable as a percentage of gross Vacation Interests notes receivable was 21.5% as of December 31, 2015 and December 31, 2014, as reflected on our consolidated balance sheets included elsewhere in this annual report.
Interest Revenue. Interest revenue increased $12.2 million, or 18.2%, to $79.0 million for the year ended December 31, 2015 from $66.8 million for the year ended December 31, 2014. The increase was attributable to our Vacation Interests sales and financing segment, and was comprised of a $17.4 million increase resulting from a larger average outstanding balance in the Vacation Interests notes receivable portfolio during the year ended December 31, 2015, as compared to the year ended December 31, 2014. This increase was partially offset by (i) a decrease of $1.7 million attributable to a reduction in the weighted average interest rate on the portfolio and (ii) a decrease of $3.7 million associated with the increased amortization of deferred loan origination costs. Amortization of deferred loan origination costs was higher during the year ended December 31, 2015 due to the increase in deferred loan origination costs during the last several years, primarily as a result of higher Vacation Interests sales revenue and a higher percentage of such revenue that is financed.
Other Revenue. Other revenue increased $16.8 million, or 37.5%, to $61.7 million for the year ended December 31, 2015 from $44.9 million for the year ended December 31, 2014. During the year ended December 31, 2015, we received an aggregate of $6.0 million in installments from our insurance carrier under our business interruption insurance policy for business profits lost during the period that the Cabo Azul Resort remained closed as a result of the damage suffered in Hurricane Odile. In addition, non-cash incentives increased $5.6 million to $24.1 million for the year ended December 31, 2015 from $18.5 million for the year ended December 31, 2014. Non-cash incentives as a percentage of gross Vacation Interests sales

50

                                            

revenue increased to 3.4% for the year ended December 31, 2015, as compared to 3.1% for the year ended December 31, 2014 due to a higher utilization of non-cash incentives by Vacation Interests purchasers. Furthermore, closing cost revenue increased as a result of higher Vacations Interests sales revenue.
Vacation Interests Cost of Sales. Vacation Interests cost of sales decreased $34.8 million, or 54.8%, to $28.7 million for the year ended December 31, 2015 from $63.5 million for the year ended December 31, 2014. This decrease was primarily attributable to changes in estimates under the relative sales value method including increases in the average selling price per point and a larger pool of low-cost inventory becoming eligible for capitalization in accordance with our IRAAs and other inventory recovery agreements during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease was partially offset by a $12.9 million increase in cost of sales related to an increase in Vacation Interests sales revenue and the $3.4 million impact of the Gold Key Acquisition in October 2015 on the relative sales value calculation. Vacation Interests cost of sales as a percentage of Vacation Interests sales, net decreased to 4.6% for the year ended December 31, 2015 from 11.9% for the year ended December 31, 2014. See "Note 2—Summary of Significant Accounting Policies—Vacation Interests Cost of Sales" of our consolidated financial statements included elsewhere in this annual report for additional information regarding the relative sales value method.
Advertising, Sales and Marketing Expense. Advertising sales and marketing expense increased $53.3 million, or 17.9%, to $350.4 million for the year ended December 31, 2015 from $297.1 million for the year ended December 31, 2014. For comparison purposes, the following table presents advertising, sales and marketing expense for the year ended December 31, 2015 and December 31, 2014 (in thousands), both on a U.S. GAAP basis and excluding the non-cash stock-based compensation, and such amounts as a percentage of gross Vacation Interests sales:
 
 
Year Ended December 31,
 
 
2015
 
2014
Advertising, sales and marketing expense
 
$
350,411

 
$
297,095

Less: Non-cash stock-based compensation
 
(2,440
)
 
(2,198
)
Advertising, sales and marketing expense excluding non-cash stock-based
    compensation
 
$
347,971

 
$
294,897

Advertising, sales and marketing expense as a % of gross Vacation Interests sales
 
49.7
%
 
50.4
%
Advertising, sales and marketing expense excluding non-cash stock-based
    compensation as a % of gross Vacation Interests sales
 
49.4
%
 
50.0
%

The decrease in advertising, sales and marketing expense (excluding the non-cash stock-based compensation charges) as a percentage of gross Vacation Interests sales was primarily due to improved leverage of fixed costs through increased sales.
Vacation Interests Carrying Cost, Net. Vacation Interests carrying cost, net increased $4.2 million, or 11.8%, to $39.7 million for the year ended December 31, 2015 from $35.5 million for the year ended December 31, 2014. This increase was primarily due to (i) additional maintenance fee expense related to inventory that we own, including inventory we recovered pursuant to our IRAAs; (ii) an increase in the utilization of member benefits during the year ended December 31, 2015, as compared to the year ended December 31, 2014; and (iii) higher operating expenses as a result of an increase in rental activity. This increase was partially offset by an increase in rental revenue due to (a) more occupied room nights and higher average daily rates; (b) an increase in revenue recognized in connection with sampler and mini-vacation packages; and (c) an increase in resort fees generated.
Loan Portfolio Expense. Loan portfolio expense increased $2.1 million, or 23.6%, to $10.9 million for the year ended December 31, 2015 from $8.8 million for the year ended December 31, 2014. This increase was primarily attributable to higher operating expense resulting from a larger portfolio for the year ended December 31, 2015, as compared to the year ended December 31, 2014. This increase was partially offset by an increase in the amount of loan origination costs deferred pursuant to Accounting Standards Codification ("ASC") 310, "Receivables" ("ASC 310"). In accordance with ASC 310, we defer certain costs incurred in connection with consumer loan originations, which are then amortized over the life of the related consumer loans. An increase in the value of Vacation Interests notes receivable originated in the year ended December 31, 2015 resulted in higher loan origination costs deferred relative to the year ended December 31, 2014.
Other Operating Expense. Other operating expense increased $6.3 million, or 28.2%, to $28.4 million for the year ended December 31, 2015 from $22.1 million for the year ended December 31, 2014. Non-cash incentives increased $5.6 million to $24.1 million for the year ended December 31, 2015 from $18.5 million for the year ended December 31, 2014. Non-cash incentives as a percentage of gross Vacation Interests sales revenue were 3.4% for the year ended December 31, 2015 as compared to 3.1% for the year ended December 31, 2014. This increase was due to a higher utilization of non-cash incentives by Vacation Interests purchasers.

51

                                            

Interest Expense. Interest expense increased $1.8 million, or 12.1%, to $16.9 million for the year ended December 31, 2015 from $15.1 million for the year ended December 31, 2014. The increase was primarily attributable to higher average outstanding balances under securitization notes and Funding Facilities during the year ended December 31, 2015, as compared to the year ended December 31, 2014. See "Liquidity and Capital ResourcesIndebtedness" for the definition of and further detail on these borrowings.
Corporate and Other
Interest Revenue. Interest revenue in our corporate and other segment decreased $0.2 million, or 14.1%, to $1.3 million for the year ended December 31, 2015 from $1.5 million for the year ended December 31, 2014.
General and Administrative Expense.     General and administrative expense increased $9.5 million, or 9.2%, to $112.5 million for the year ended December 31, 2015 from $103.0 million for the year ended December 31, 2014. For comparison purposes, the following table presents general and administrative expense for the year ended December 31, 2015 and December 31, 2014 (in thousands), both on a U.S. GAAP basis and excluding the non-cash stock-based compensation and the cash charge in connection with the termination of the services agreement between JHJM and HM&C, and such amounts as a percentage of total revenue:
 
 
Year Ended December 31,
 
 
2015
 
2014
General and administrative expense
 
$
112,501

 
$
102,993

Less: Non-cash stock-based compensation
 
(10,596
)
 
(11,701
)
Less: Charge related to the termination of the service agreement
 
(7,830
)
 

General and administrative expense excluding non-cash stock-based compensation
   and charge related to the termination of the service agreement
 
$
94,075

 
$
91,292

General and administrative expense as a % of total revenue
 
11.8
%
 
12.2
%
General and administrative expense excluding non-cash stock-based compensation
   and charge related to the contract termination as a % of total revenue
 
9.9
%
 
10.8
%

General and administrative expense for the year ended December 31, 2015 also included $0.8 million in expenses related to the secondary offering of shares of our common stock by certain selling stockholders consummated in March 2015 (the "March 2015 Secondary Offering"). See "Liquidity and Capital Resources—Overview” for further detail on the March 2015 Secondary Offering. The decrease in general and administrative expense as a percentage of total revenue (excluding the non-cash stock-based compensation charges and charge relating to the termination of the service agreement) reflected the improved leverage of fixed costs over a higher revenue base.
Depreciation and Amortization. Depreciation and amortization increased $2.0 million, or 6.1%, to $34.5 million for the year ended December 31, 2015 from $32.5 million for the year ended December 31, 2014. This increase was primarily attributable to the addition of assets such as (i) intangible assets acquired in connection with the Master Agreement that we entered into in January 2015 and tangible and intangible assets acquired in connection with the Gold Key Acquisition in October 2015; (ii) information technology related projects and equipment in 2015; and (iii) renovation projects at certain sales centers in 2015.
Interest Expense. Interest expense decreased $10.3 million, or 24.6%, to $31.6 million for the year ended December 31, 2015 from $41.9 million for the year ended December 31, 2014. Cash interest, debt issuance cost amortization and debt discount amortization relating to the 12.0% senior secured notes originally due in 2018 (the "Senior Secured Notes") were $21.0 million lower for the year ended December 31, 2015, as compared to the year ended December 31, 2014 due to the redemption of the Senior Secured Notes on June 9, 2014. See "—Loss on Extinguishment of Debt" below for further detail on the redemption. The above decreases were partially offset by $9.3 million of cash interest, debt issuance cost amortization and debt discount amortization relating to the Senior Credit Facility recorded since May 9, 2014, the date on which we closed the Senior Credit Facility, and the Incremental Term Loan completed in December 2015. See "Liquidity and Capital ResourcesIndebtedness” for a further discussion of the Senior Credit Facility.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was zero for the year ended December 31, 2015 and $46.8 million for the year ended December 31, 2014.
On May 9, 2014, we repaid all outstanding indebtedness under three inventory loans assumed in connection with previous acquisitions using a portion of the proceeds from the term loan portion of the Senior Credit Facility. Unamortized debt issuance cost on these inventory loans of $0.1 million was recorded as a loss on extinguishment of debt.

52

                                            

In addition, on May 9, 2014, we terminated our previous revolving credit facility in conjunction with our entry into the Senior Credit Facility and recorded a $0.9 million loss on extinguishment of debt related to unamortized debt issuance costs.
On June 9, 2014, we redeemed the then-outstanding principal amount under the Senior Secured Notes using a portion of the proceeds from the term loan portion of the Senior Credit Facility. As a result, $30.2 million of redemption premium, $9.4 million of unamortized debt issuance cost and $6.1 million of unamortized debt discount were recorded as a loss on extinguishment of debt.
Income Taxes. Provision for income taxes was $102.2 million for the year ended December 31, 2015, as compared to $50.2 million for the year ended December 31, 2014. The increase was due to an increase in our income before provision for income taxes. There are numerous timing differences in our reporting of income and expenses for financial reporting and income tax reporting purposes, which include, but are not limited to, the use of the installment method of accounting for reporting of VOI sales and interest income, stock-based compensation expense and the utilization of our net operating loss carry forwards ("NOLs").


53

                                            

Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013
 
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
 
Hospitality
and
Management
Services
 
Vacation
Interests Sales and Financing
 
Corporate
and Other
 
Total
 
Hospitality
and
Management
Services
 
Vacation
Interests Sales and
Financing
 
Corporate
and Other
 
Total
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
152,201

 
$

 
$

 
$
152,201

 
$
131,238

 
$

 
$

 
$
131,238

Consolidated resort operations
 
38,406

 

 

 
38,406

 
35,512

 

 

 
35,512

Vacation Interests sales, net of provision of $0, $57,202, $0, $57,202, $0, $44,670, $0 and $44,670, respectively
 

 
532,006

 

 
532,006

 

 
464,613

 

 
464,613

Interest
 

 
66,849

 
1,549

 
68,398

 

 
55,601

 
1,443

 
57,044

Other
 
8,691

 
44,864

 

 
53,555

 
8,673

 
32,708

 

 
41,381

Total revenues
 
199,298

 
643,719

 
1,549

 
844,566

 
175,423

 
552,922

 
1,443

 
729,788

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
33,184

 

 

 
33,184

 
37,907

 

 

 
37,907

Consolidated resort operations
 
35,409

 

 

 
35,409

 
34,333

 

 

 
34,333

Vacation Interests cost of sales
 

 
63,499

 

 
63,499

 

 
56,695

 

 
56,695

Advertising, sales and marketing
 

 
297,095

 

 
297,095

 

 
258,451

 

 
258,451

Vacation Interests carrying cost, net
 

 
35,495

 

 
35,495

 

 
41,347

 

 
41,347

Loan portfolio
 
1,303

 
7,508

 

 
8,811

 
1,111

 
8,520

 

 
9,631

Other operating
 

 
22,135

 

 
22,135

 

 
12,106

 

 
12,106

General and administrative
 

 

 
102,993

 
102,993

 

 

 
145,925

 
145,925

Depreciation and amortization
 

 

 
32,529

 
32,529

 

 

 
28,185

 
28,185

Interest expense
 

 
15,072

 
41,871

 
56,943

 

 
16,411

 
72,215

 
88,626

Loss on extinguishment of debt
 

 

 
46,807

 
46,807

 

 

 
15,604

 
15,604

Impairments and other write-offs
 

 

 
240

 
240

 

 

 
1,587

 
1,587

Gain on disposal of assets
 

 

 
(265
)
 
(265
)
 

 

 
(982
)
 
(982
)
Gain on bargain purchase from business combinations
 

 

 

 

 

 

 
(2,879
)
 
(2,879
)
Total costs and expenses
 
69,896

 
440,804

 
224,175

 
734,875

 
73,351

 
393,530

 
259,655

 
726,536

Income (loss) before provision for income taxes
 
129,402

 
202,915

 
(222,626
)
 
109,691

 
102,072

 
159,392

 
(258,212
)
 
3,252

Provision for income taxes
 

 

 
50,234

 
50,234

 

 

 
5,777

 
5,777

Net income (loss)
 
$
129,402

 
$
202,915

 
$
(272,860
)
 
$
59,457

 
$
102,072

 
$
159,392

 
$
(263,989
)
 
$
(2,525
)
Consolidated Results
Total revenues increased