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EX-32.2 - DRII 09.30.14 EX 32.2 - Diamond Resorts International, Inc.dr-09302014xex322.htm
EX-31.1 - DRII 09.30.14 EX 31.1 - Diamond Resorts International, Inc.dr-09302014xex311.htm
EX-32.1 - DRII 09.30.14 EX 32.1 - Diamond Resorts International, Inc.dr-09302014xex321.htm
EX-31.2 - DRII 09.30.14 EX 31.2 - Diamond Resorts International, Inc.dr-09302014xex312.htm
EX-10.3 - DRII 09.30.14 EX 10.3 - Diamond Resorts International, Inc.dr-09302014xex103.htm
EXCEL - IDEA: XBRL DOCUMENT - Diamond Resorts International, Inc.Financial_Report.xls
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________

FORM 10-Q
______________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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)
 
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 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 o
 
Accelerated filer o
 
 
 
Non-accelerated filer x
 
Smaller reporting company o
                  (Do not check if a smaller reporting company)
Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, Diamond Resorts International, Inc. qualifies as an "emerging growth company," as defined in the JOBS Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO
As of October 31, 2014, there were 75,660,588 outstanding shares of the common stock, par value $0.01 per share, of Diamond Resorts International, Inc.     




EXPLANATORY NOTE
Prior to the consummation of the initial public offering (the "IPO") of its common stock on July 24, 2013, Diamond Resorts International, Inc. ("DRII") was a newly-formed Delaware corporation that had not conducted any activities other than those incident to its formation and the preparation of filings with the Securities and Exchange Commission (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 units held by DRP and DRP was merged with and into DRII. As a result, DRII is now a holding company, and its principal asset is the direct and indirect ownership of equity interests in its subsidiaries, including Diamond Resorts Corporation ("DRC"), which is the operating subsidiary that has historically conducted the business reflected in this Quarterly Report on Form 10-Q and was the issuer of the 12.0% Senior Secured Notes due 2018 (the "Senior Secured Notes") that were redeemed on June 9, 2014. 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, (i) references in this Quarterly Report on Form 10-Q to "the Company," "we," "us" and "our," refer to DRP prior to the consummation of the Reorganization Transactions on July 24, 2013, and DRII, as the successor to DRP, following the consummation of the Reorganization Transactions, in each case together with its subsidiaries, including DRC and (ii) our condensed consolidated financial statements and other historical financial data included in this Quarterly Report on Form 10-Q are (a) those of DRP and its subsidiaries through July 24, 2013, after giving retroactive effect to the Reorganization Transactions and (b) those of DRII and its subsidiaries after July 24, 2013.






 
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
 
 
 
    ITEM 1. FINANCIAL STATEMENTS
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014 (unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)
 
 
Notes to the Unaudited Condensed Consolidated Financial Statements
 
 
    ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
    ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
    ITEM 4. CONTROLS AND PROCEDURES
 
 
PART II - OTHER INFORMATION
 
 
    ITEM 1. LEGAL PROCEEDINGS
 
 
    ITEM 1A. RISK FACTORS
 
 
    ITEM 5. OTHER INFORMATION
 
 
    ITEM 6. EXHIBITS
 
 
SIGNATURES
 
 
 


2


PART I — FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2014 and December 31, 2013
(In thousands, except share data)
 
 
September 30, 2014
 
December 31, 2013
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
Cash and cash equivalents
 
$
181,923

 
$
35,945

Cash in escrow and restricted cash
 
69,707

 
92,231

Mortgages and contracts receivable, net of allowance of $121,189 and $105,590, respectively
 
464,400

 
405,454

Due from related parties, net
 
45,213

 
46,262

Other receivables, net
 
34,030

 
54,588

Income tax receivable
 
29

 
25

Prepaid expenses and other assets, net
 
107,048

 
68,258

Unsold Vacation Interests, net
 
277,066

 
298,110

Property and equipment, net
 
70,661

 
60,396

Assets held for sale
 
14,706

 
10,662

Goodwill
 
30,632

 
30,632

Other intangible assets, net
 
183,493

 
198,632

Total assets
 
$
1,478,908

 
$
1,301,195

Liabilities and Stockholders' Equity:
 
 
 
 
Accounts payable
 
$
15,754

 
$
14,629

Due to related parties, net
 
57,475

 
44,644

Accrued liabilities
 
106,374

 
117,435

Income taxes payable
 
1,195

 
1,069

Deferred income taxes
 
52,865

 
22,404

Deferred revenues
 
90,670

 
110,892

Senior Credit Facility, net of unamortized original issue discount of $2,122 and $0, respectively
 
441,766

 

Senior Secured Notes, net of unamortized original issue discount of $0 and $6,548, respectively
 

 
367,892

Securitization notes and Funding Facilities, net of unamortized original issue discount of $172 and $226, respectively
 
451,441

 
391,267

Derivative liabilities
 
181

 

Notes payable
 
2,414

 
23,150

Total liabilities
 
1,220,135

 
1,093,382

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock $0.01 par value per share; authorized - 250,000,000 shares, issued and outstanding - 75,660,588 and 75,458,402 shares, respectively
 
757

 
755

Additional paid-in capital
 
477,867

 
463,194

Accumulated deficit
 
(202,376
)
 
(239,959
)
Accumulated other comprehensive loss
 
(17,475
)
 
(16,177
)
Total stockholders' equity
 
258,773

 
207,813

Total liabilities and stockholders' equity
 
$
1,478,908

 
$
1,301,195


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2014 and 2013
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended
   September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Management and member services
 
$
37,795

 
$
33,610

 
$
115,238

 
$
96,304

Consolidated resort operations
 
10,481

 
9,326

 
28,825

 
26,465

Vacation Interest sales, net of provision of $15,847, $13,851,
     $40,123 and $29,731, respectively
 
143,180

 
123,708

 
379,082

 
325,815

Interest
 
17,130

 
14,297

 
49,010

 
41,159

Other
 
13,379

 
10,661

 
40,049

 
29,184

Total revenues
 
221,965

 
191,602

 
612,204

 
518,927

Costs and Expenses:
 
 
 
 
 
 
 
 
Management and member services
 
8,549

 
9,408

 
23,377

 
27,952

Consolidated resort operations
 
9,216

 
9,602

 
25,662

 
26,169

Vacation Interest cost of sales
 
16,476

 
18,605

 
44,840

 
45,451

Advertising, sales and marketing
 
82,308

 
70,714

 
214,190

 
181,668

Vacation Interest carrying cost, net
 
5,162

 
10,154

 
19,766

 
29,141

Loan portfolio
 
1,400

 
2,296

 
6,249

 
7,555

Other operating
 
5,847

 
3,912

 
16,650

 
6,518

General and administrative
 
26,747

 
61,114

 
74,203

 
105,612

Depreciation and amortization
 
8,271

 
7,583

 
24,601

 
19,912

Interest expense
 
11,294

 
20,925

 
45,292

 
70,561

Loss on extinguishment of debt
 

 
13,383

 
46,807

 
13,383

Impairments and other write-offs
 
11

 
1,200

 
53

 
1,279

Loss (gain) on disposal of assets
 
224

 
(585
)
 
71

 
(673
)
Gain on bargain purchase from business combinations
 

 
(2,756
)
 

 
(2,726
)
Total costs and expenses
 
175,505

 
225,555

 
541,761

 
531,802

Income (loss) before provision (benefit) for income taxes
 
46,460

 
(33,953
)
 
70,443

 
(12,875
)
Provision (benefit) for income taxes
 
20,156

 
(7,626
)
 
32,860

 
(6,777
)
Net income (loss)
 
26,304

 
(26,327
)
 
37,583

 
(6,098
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
    Currency translation adjustments, net of tax of $0
 
(2,931
)
 
3,284

 
(1,420
)
 
293

    Post-retirement benefit plan
 
43

 
(2,106
)
 
128

 
(2,106
)
    Other
 
(1
)
 
10

 
(6
)
 
49

    Total other comprehensive (loss) income, net of tax
 
(2,889
)
 
1,188

 
(1,298
)
 
(1,764
)
Comprehensive income (loss)
 
$
23,415

 
$
(25,139
)
 
$
36,285

 
$
(7,862
)
Net income (loss) per share:
 
 
 
 
 
 
 
 
  Basic
 
$
0.35

 
$
(0.37
)
 
$
0.50

 
$
(0.10
)
  Diluted
 
$
0.34

 
$
(0.37
)
 
$
0.49

 
$
(0.10
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
  Basic
 
75,542

 
70,959

 
75,476

 
59,754

  Diluted
 
77,418

 
70,959

 
76,695

 
59,754


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2014
(In thousands, except share data)
(Unaudited)

 
 
Common Stock Shares
 
Common Stock Par Value
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholder's Equity
Balance at January 1, 2014
 
75,458,402

 
$
755

 
$
463,194

 
$
(239,959
)
 
$
(16,177
)
 
$
207,813

Exercise of stock options
 
156,000

 
2

 
2,307

 

 

 
2,309

Stock-based compensation
 
46,186

 

 
12,366

 

 

 
12,366

Net income for the nine months ended September 30, 2014
 

 

 

 
37,583

 

 
37,583

Currency translation adjustment, net of tax of $0
 

 

 

 

 
(1,420
)
 
(1,420
)
Change in post-retirement benefit plan, net of tax of $0
 

 

 

 

 
128

 
128

Other
 

 

 

 

 
(6
)
 
(6
)
Balance at September 30, 2014
 
75,660,588

 
$
757

 
$
477,867

 
$
(202,376
)
 
$
(17,475
)
 
$
258,773



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5




DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2014 and 2013
(In thousands)
(Unaudited)
 
 
2014
 
2013
Operating activities:
 
 
 
 
Net income (loss)
 
$
37,583

 
$
(6,098
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for uncollectible Vacation Interest sales revenue
 
40,123

 
29,731

Amortization of capitalized financing costs and original issue discounts
 
4,079

 
5,607

Amortization of capitalized loan origination costs and net portfolio discounts
 
6,555

 
4,308

Depreciation and amortization
 
24,601

 
19,912

Stock-based compensation
 
12,198

 
38,495

Loss on extinguishment of debt
 
46,807

 
13,383

Impairments and other write-offs
 
53

 
1,279

Loss (gain) on disposal of assets
 
71

 
(673
)
Gain on bargain purchase from business combinations
 

 
(2,726
)
Deferred income taxes
 
30,461

 
(8,040
)
Loss on foreign currency exchange
 
98

 
215

Gain on mortgage repurchase
 
(519
)
 
(71
)
Unrealized loss on derivative instruments
 
181

 
657

Unrealized loss on post-retirement benefit plan
 
128

 
774

Cash to be received on insurance settlements
 

 
(2,876
)
Changes in operating assets and liabilities excluding acquisitions:
 
 
 
 
Mortgages and contracts receivable
 
(105,158
)
 
(84,469
)
Due from related parties, net
 
5,786

 
(9,563
)
Other receivables, net
 
20,572

 
18,806

Prepaid expenses and other assets, net
 
(41,500
)
 
(28,313
)
Unsold Vacation Interests, net
 
9,881

 
7,370

Accounts payable
 
1,123

 
(2,417
)
Due to related parties, net
 
14,400

 
17,833

Accrued liabilities
 
(11,344
)
 
(4,978
)
Income taxes payable
 
135

 
1,294

Deferred revenues
 
(19,860
)
 
(7,115
)
Net cash provided by operating activities
 
76,454

 
2,325

Investing activities:
 
 
 
 
Property and equipment capital expenditures
 
(13,846
)
 
(12,792
)
Cash acquired in connection with the Island One Acquisition
 

 
725

Purchase of assets in connection with the PMR Service Companies Acquisition, net of cash acquired of $0 and $0, respectively
 

 
(47,758
)
Proceeds from sale of assets
 
257

 
3,126

Net cash used in investing activities
 
$
(13,589
)
 
$
(56,699
)
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 

6


DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued
For the nine months ended September 30, 2014 and 2013
(In thousands)
(Unaudited)
 
 
2014
 
2013
 
 
 
 
 
Financing activities:
 
 
 
 
Changes in cash in escrow and restricted cash
 
$
22,460

 
$
(17,670
)
Proceeds from issuance of Senior Credit Facility
 
442,775

 

Proceeds from issuance of 2013 Revolving Credit Facility
 

 
15,000

Proceeds from issuance of securitization notes and Funding Facilities
 
206,325

 
265,873

Proceeds from issuance of notes payable
 
1,113

 
3,882

Payments on Senior Credit Facility
 
(1,112
)
 

Payments on securitization notes and Funding Facilities
 
(146,206
)
 
(201,584
)
Payments on Senior Secured Notes, including redemption premium
 
(404,683
)
 
(56,628
)
Payments on notes payable
 
(28,492
)
 
(131,832
)
Payment of debt issuance costs
 
(11,048
)
 
(6,163
)
Proceeds from issuance of Common Stock, net of related costs
 

 
204,705

Proceeds from exercise of stock options
 
2,309

 

Repurchase of remaining outstanding warrants
 

 
(10,346
)
Payments related to early extinguishment of notes payable
 

 
(2,034
)
Net cash provided by financing activities
 
83,441

 
63,203

Net increase in cash and cash equivalents
 
146,306

 
8,829

Effect of changes in exchange rates on cash and cash equivalents
 
(328
)
 
(14
)
Cash and cash equivalents, beginning of period
 
35,945

 
21,061

Cash and cash equivalents, end of period
 
$
181,923

 
$
29,876

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash interest paid on corporate indebtedness
 
$
48,877

 
$
61,926

Cash interest paid on securitization notes and Funding Facilities
 
$
10,814

 
$
12,501

Cash paid for taxes, net of cash tax refunds
 
$
1,972

 
$
12

Purchase of assets in connection with the Island One Acquisition (2013) and PMR Service Companies Acquisition (2013):
 
 
 
 
     Fair value of assets acquired based on a valuation report
 
$

 
$
135,455

     Gain on bargain purchase recognized
 

 
(2,756
)
     Goodwill acquired
 

 
27,665

     Cash paid
 

 
(47,758
)
     DRII common stock issued
 

 
(73,307
)
     Deferred tax liability
 

 
(19,939
)
     Liabilities assumed
 
$

 
$
19,360

 
 
 
 
 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Insurance premiums financed through issuance of notes payable
 
$
6,173

 
$
7,822

Unsold Vacation Interests, net reclassified to property and equipment
 
$
6,080

 
$

Unsold Vacation Interests, net, reclassified to assets held for sale
 
$
4,250

 
$
10,165

Assets to be disposed but not actively marketed (prepaid expenses
   and other assets) reclassified to property and equipment
 
$
265

 
$

Information technology software and support financed through issuance of notes payable
 
$
472

 
$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1
— Background, Business and Basis of Presentation
Business and Background
On July 24, 2013, Diamond Resorts International, Inc. ("DRII") closed the initial public offering (the "IPO") of an aggregate of 17,825,000 shares of its common stock at the IPO price of $14.00 per share. 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. The net proceeds to DRII were $204.3 million after deducting all offering expenses. In connection with the IPO, DRII filed with the Securities and Exchange Commission (the "SEC") (i) a registration statement on Form S-1, which registered the shares of common stock offered in the IPO under the Securities Act of 1933, as amended and (ii) a registration statement on Form 8-A, which registered DRII's common stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of which became effective on July 18, 2013.
DRII was incorporated as a Delaware corporation on January 11, 2013 to effect the Reorganization Transactions (defined below) and consummate the IPO. Immediately prior to the consummation of the IPO, Diamond Resorts Parent, LLC ("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 units held by DRP and DRP was merged with and into DRII, with DRII being the surviving entity. The Company refers to these and other related transactions entered into substantially concurrently with the IPO as the "Reorganization Transactions."
DRII is a holding company, and its principal asset is the direct and indirect ownership of equity interests in its subsidiaries, including Diamond Resorts Corporation ("DRC"), which is the operating subsidiary that has historically conducted the business described below and was the issuer of the 12.0% senior secured notes due 2018 ("Senior Secured Notes"). On June 9, 2014, DRC redeemed all of the remaining outstanding principal amount under the Senior Secured Notes using a portion of the proceeds from the term loan portion of its $470.0 million Senior Credit Facility entered into on May 9, 2014. See "Note 6—Transactions with Related Parties" for the definition of the Senior Credit Facility and further detail on these transactions.
Except where the context otherwise requires or where otherwise indicated, references in the condensed consolidated financial statements to "the Company" refer to DRP prior to the consummation of the Reorganization Transactions on July 24, 2013 and DRII, as the successor to DRP, following the consummation of the Reorganization Transactions, in each case together with its subsidiaries, including DRC.
The Company operates in the hospitality and vacation ownership industry, with an ownership base of more than 515,000 owner-families, or members, and a worldwide network of 313 vacation destinations located in 34 countries throughout the world, including the continental United States ("U.S."), Hawaii, Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia and Africa. The Company’s resort network includes 93 resort properties with approximately 11,000 units that are managed by the Company and 214 affiliated resorts and hotels and six cruise itineraries, which the Company does not manage and do not carry the Company's brand, but are a part of the Company's network and, through THE Club and other Club offerings (the "Clubs"), are available for its members to use as vacation destinations.
The Company’s operations consist of two interrelated businesses: (i) hospitality and management services, which includes operations related to the management of resort properties and seven multi-resort trusts (the "Collections"), operations of the Clubs, operations of the properties located in St. Maarten for which the Company functions as the homeowners association (the "HOA" and together with all other homeowners associations managed by the Company, the "HOAs"), food and beverage venues owned and managed by the Company and the provision of other hospitality and management services and (ii) marketing and sales of Vacation Ownership Interests ("VOIs" or "Vacation Interests") and consumer financing for purchasers of the Company’s VOIs.
Basis of Presentation
Except where the context otherwise requires or where otherwise indicated, the condensed consolidated financial statements and other historical financial data included in this Quarterly Report on Form 10-Q are (i) those of DRP and its subsidiaries through July 24, 2013, after giving retroactive effect to the Reorganization Transactions and (ii) those of DRII and its subsidiaries after July 24, 2013. The weighted average common shares outstanding for the three- and nine-month periods ended September 30, 2013 are based upon the number of Class A and Class B common units of DRP outstanding through July 24, 2013, retroactively adjusted for the exchange thereof for shares of common stock of DRII pursuant to the Reorganization Transactions, and thereafter, based upon the outstanding shares of DRII common stock.

8

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


The accompanying condensed consolidated financial statements of Diamond Resorts International, Inc. and its subsidiaries have been prepared in accordance with accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. The accompanying condensed consolidated financial statements should be reviewed in conjunction with the Company's annual consolidated financial statements included in the 2013 Form 10-K. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results for the full year ending December 31, 2014 or any future period.

The Company’s statement of cash flows for the nine months ended September 30, 2013 was restated for an $8.1 million reclassification between the operating and financing sections to reflect the redemption premium paid in connection with the Tender Offer and exit fees paid in connection with the extinguishment of the Tempus Acquisition Loan and the PMR Acquisition Loan. This change increased cash flow from operating activities by $8.1 million and decreased cash flow from financing activities by the same amount; however, this change had no impact on previously-reported total cash flows, net loss, comprehensive loss, net loss per share, the balance sheet, the statement of operations or covenant compliance as of and for the nine months ended September 30, 2013. See "Note 16—Borrowings" for the definition of and further detail on the Tender Offer, the Tempus Acquisition Loan and the PMR Acquisition Loan.
Strategic Acquisitions
During the past several years, the Company has expanded its business operations by pursuing acquisitions of ongoing businesses in which the Company added locations to its network of available resorts, additional management contracts, new members to its owner base and additional VOI inventory that the Company may sell to existing members and potential customers.
On August 31, 2010, the Company acquired from ILX Resorts Incorporated certain resort management agreements, unsold VOIs and the rights to recover and resell such interests, a portfolio of consumer loans and certain real property, additional owner-families and other assets (the “ILX Acquisition”), which added ten additional resorts to the Company's resort network.
On July 1, 2011, the Company acquired from Tempus Resorts International, Ltd. and its subsidiaries certain management agreements, unsold VOIs and the rights to recover and resell such interests, the seller's consumer loan portfolio and certain real property, additional owner-families and other assets (the “Tempus Resorts Acquisition”), which added two resorts to the Company's resort network.
On May 21, 2012, the Company acquired from Pacific Monarch Resorts, Inc. and its affiliates certain management contracts, unsold VOIs and the rights to recover and resell such interests, a portfolio of consumer loans and certain real property, additional owner-families and other assets (the "PMR Acquisition"), which added nine resorts to the Company's resort network.
On October 5, 2012, the Company acquired all of the issued and outstanding shares of Aegean Blue Holdings Plc, thereby acquiring management contracts, unsold VOIs and the rights to recover and resell such interests, additional owner-families and certain other assets (the “Aegean Blue Acquisition”), which added five resorts located on the Greek Islands of Rhodes and Crete to the Company's resort network.
The above transactions were effected through special-purpose subsidiaries and were structured such that the Company held the acquired assets, and assumed certain related liabilities, through special-purpose subsidiaries. The respective lenders to each special-purpose subsidiary had recourse only to such entity and thus the specific assets that were acquired in each transaction; however, such indebtedness was included in the Company's condensed consolidated balance sheets. On May 9, 2014, all outstanding indebtedness of these special-purpose subsidiaries was repaid in full and these subsidiaries ceased to be special-purpose subsidiaries and became guarantor subsidiaries under the Senior Credit Facility.
On July 24, 2013, concurrent with the closing of the IPO, the Company acquired all of the equity interests of Island One, Inc. and Crescent One, LLC (together, the “Island One Companies”) in exchange for 5,236,251 shares of common stock. These shares represented an aggregate purchase price of $73.3 million based on the IPO price of $14.00 per share. In this transaction, the Company acquired management contracts, unsold VOIs, a portfolio of consumer loans and other assets owned by the Island One Companies, adding eight additional managed resorts in Florida to the Company's resort network and more owner-families to its ownership base (the “Island One Acquisition”). Prior to the closing of the Island One Acquisition, the Company had provided sales and marketing services and HOA management oversight services to Island One, Inc. See "Note 24—Business

9

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Combinations" of the Company's consolidated financial statements included in the 2013 Form 10-K for further detail on the Island One Acquisition.
On July 24, 2013, concurrent with the closing of the IPO, the Company acquired management agreements for certain resorts from Monarch Owner Services, LLC, Resort Services Group, LLC and Monarch Grand Vacations Management, LLC, each of which provided various management services to the resorts and the collection that were added to the Company's network through the PMR Acquisition (the “PMR Service Companies”), for $47.4 million in cash (the “PMR Service Companies Acquisition”). See "Note 24—Business Combinations" of the Company's consolidated financial statements included in the 2013 Form 10-K for further detail on the PMR Service Companies Acquisition.

Note 2    — Summary of Significant Accounting Policies
 Significant accounting policies are those policies that, in management's view, are most important in the portrayal of the Company's financial condition and results of operations. The methods, estimates and judgments that the Company uses in applying its accounting policies have a significant impact on the results that it reports in the financial statements. Some of these significant accounting policies require the Company to make subjective and complex judgments regarding matters that are inherently uncertain. See "Note 2—Summary of Significant Accounting Policies" set forth in the 2013 Form 10-K for a discussion of the Company's significant accounting policies that require significant judgment.
Principles of Consolidation—The accompanying condensed consolidated financial statements include all subsidiaries of the Company. All significant intercompany transactions and balances have been eliminated from the accompanying condensed consolidated financial statements.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue, bad debts, unsold Vacation Interests, net, Vacation Interest cost of sales, stock-based compensation and income taxes. These estimates are based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. The results of the Company's analyses 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 the Company's condensed consolidated financial statements.
Vacation Interest Sales Revenue, Net—Vacation interest sales revenue, net is comprised of Vacation Interest sales, net of a provision for uncollectible Vacation Interest sales revenue. Vacation interest sales consist of revenue from the sale of points, which can be utilized for vacations at any of the resorts in the Company's network for varying lengths of stay, net of an amount equal to the expense associated with certain sales incentives. A variety of sales incentives are routinely provided as sales tools. Sales centers have predetermined budgets for sales incentives and manage the use of incentives accordingly. A provision for uncollectible Vacation Interest sales revenue is recorded upon completion of each financed sale. The provision is calculated based on historical default experience associated with the customer's Fair Isaac Corporation ("FICO") score. Additionally, the Company analyzes its allowance for loan and contract losses quarterly and makes adjustments based on current trends in consumer loan delinquencies and defaults and other criteria, if necessary. Since late 2007, the Company has sold VOIs primarily in the form of points. All of the Company's Vacation Interest sales revenue, net is allocated to the Vacation Interest Sales and Financing business segment.
Vacation Interest sales, net of provision, consists of the following for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Vacation Interest sales
 
$
159,027

 
$
137,559

 
$
419,205

 
$
355,546

Provision for uncollectible Vacation Interest sales revenue
 
(15,847
)
 
(13,851
)
 
(40,123
)
 
(29,731
)
     Vacation Interest sales, net of provision
 
$
143,180

 
$
123,708

 
$
379,082

 
$
325,815

 
 
 
 
 
 
 
 
 
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue recognition requirements. The core principle of this guidance is that an entity is required to recognize revenue to depict the transfer of promised goods or

10

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for the Company in its interim period ending March 31, 2017. Early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard to determine the impact of its adoption on its financial statements.
In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)—Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ("ASU 2014-04"). ASU 2014-04 clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. ASU 2014-04 is effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The Company adopted ASU 2014-04 as of its interim period ended March 31, 2014. The adoption of this update did not have a material impact on the Company's financial statements.

Note 3
— Concentrations of Risk
 Credit Risk—The Company is exposed to on-balance sheet credit risk related to its mortgages and contracts receivable. The Company offers financing to the buyers of VOIs at the Company’s resorts. The Company bears the risk of defaults on promissory notes delivered to it by buyers of VOIs. If a buyer of VOIs defaults, the Company generally attempts to resell such VOIs by exercise of a power of sale. The associated marketing, selling, and administrative costs from the original sale are not recovered and such costs must be incurred again to resell the VOIs. Although in many cases the Company may have recourse against a buyer of VOIs for the unpaid price, certain states have laws that limit the Company’s ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, the Company has generally not pursued this remedy.
The Company maintains cash, cash equivalents, cash in escrow, and restricted cash with various financial institutions. These financial institutions are located throughout North America, Europe and the Caribbean. A significant portion of the Company's cash is maintained with a select few banks and is, accordingly, subject to credit risk. Periodic evaluations of the relative credit standing of financial institutions maintaining the deposits are performed to evaluate and mitigate, if necessary, any credit risk.
 Availability of Funding Sources—The Company has historically funded mortgages and contracts receivable and unsold Vacation Interests with borrowings through its financing facilities and internally generated funds. Borrowings are in turn repaid with the proceeds received by the Company from repayments of such mortgages and contracts receivable. To the extent that the Company is not successful in maintaining or replacing existing financings, it may have to curtail its sales and marketing operations or sell assets, thereby resulting in a material adverse effect on the Company’s results of operations, cash flows and financial condition.
 Geographic Concentration—Currently, portions of the Company's consumer loan portfolio are concentrated in certain geographic regions within the U.S. As of September 30, 2014, the Company's loans to California, Arizona and Florida residents constituted 31.7%, 8.8% and 5.6%, respectively, of the consumer loan portfolio. The deterioration of the economic condition and financial well-being of the regions in which the Company has significant loan concentrations, such as California, Arizona or Florida, could adversely affect its consumer loan portfolio, business and results of operations. No other state or foreign country concentration accounted for in excess of 5.0% of the portfolio. The credit risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial well-being of the borrowers.
Interest Rate Risk—Since a significant portion of the Company's indebtedness bears interest at variable rates, any increase in interest rates beyond amounts covered under the Company’s interest rate cap agreements or swap agreements, particularly if sustained, could have a material adverse effect on the Company’s results of operations, cash flows and financial position.
The Company derives net interest income from its financing activities because the interest rates it charges its customers who finance the purchase of their VOIs exceed the interest rates the Company pays to its lenders. Since the Company’s customer receivables generally bear interest at fixed rates, increases in interest rates will erode the spread in interest rates that the Company has historically obtained.
Between July 2010 and December 2012, the Company entered into a series of interest rate cap agreements (the "2010 and 2012 Cap Agreements") to manage its exposure to interest rate increases. The 2010 and 2012 Cap Agreements expired on July 20, 2013.

11

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


On July 20, 2013, as required by the Conduit Facility (see "Note 16Borrowings" for the definition of the Conduit Facility), the Company entered into an interest rate swap agreement with a notional amount of $55.0 million (the “July 2013 Swap”) that was scheduled to mature on July 20, 2023, to manage its exposure to fluctuations in interest rates. The Company paid interest at a fixed rate of 2.18% based on a floating notional amount according to a pre-determined amortization schedule and received interest based on one-month floating LIBOR.
On August 20, 2013, as required by the Conduit Facility, the Company entered into an interest rate swap agreement with a notional amount of $35.0 million (the “August 2013 Swap”) that was scheduled to mature on August 20, 2023, to manage its exposure to fluctuations in interest rates. The Company paid interest at a fixed rate of 2.42% based on a floating notional amount according to a pre-determined amortization schedule and received interest based on one-month floating LIBOR.
On November 20, 2013, the July 2013 Swap and the August 2013 Swap were terminated concurrent with the paydown of the Conduit Facility. A portion of the proceeds from the Diamond Resorts Owner Trust ("DROT") 2013-2 Notes (see "Note 16—Borrowings" for the definition of the DROT 2013-2 Notes) were used to pay off the then-outstanding balance on the Conduit Facility and the amounts due under the July 2013 Swap and August 2013 Swap.
On March 20, 2014, as required by the Conduit Facility, the Company entered into an interest rate swap agreement with a notional amount of $20.0 million (the "March 2014 Swap") that is scheduled to mature on March 20, 2024, to manage its exposure to fluctuations in interest rates. The Company pays interest at a fixed rate of 2.65% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.
On April 21, 2014, as required by the Conduit Facility, the Company entered into an interest rate swap agreement with a notional amount of $10.0 million (the "April 2014 Swap") that is scheduled to mature on March 20, 2024, to manage its exposure to fluctuations in interest rates. The Company pays interest at a fixed rate of 2.58% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.
On June 27, 2014, as required by the Conduit Facility, the Company entered into an interest rate swap agreement with a notional amount of $45.0 million (the "June 2014 Swap") that is scheduled to mature on June 20, 2024, to manage its exposure to fluctuations in interest rates. The Company pays interest at a fixed rate of 2.48% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.
On September 30, 2014, as required by the Conduit Facility, the Company entered into an interest rate swap agreement with a notional amount of $55.0 million (the "September 2014 Swap") that is scheduled to mature on September 20, 2024, to manage its exposure to fluctuations in interest rates. The Company pays interest at a fixed rate of 2.67% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.
As of September 30, 2014, the aggregate fair value of the March 2014 Swap, the April 2014 Swap, the June 2014 Swap and the September 2014 Swap was calculated to be $0.2 million based on valuation reports provided by counterparties.
On October 20, 2014, the March 2014 Swap, the April 2014 Swap, the June 2014 Swap and the September 2014 Swap were terminated. Also on October 20, 2014, as required by the Conduit Facility, the Company entered into a new interest rate swap agreement with a notional amount of $112.5 million (the "October 2014 Swap") that is scheduled to mature on October 20, 2024, to manage it's exposure to fluctuation interest rates. The Company pays interest at a fixed rate of 2.45% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.

Note 4
— Cash in Escrow and Restricted Cash
Cash in escrow and restricted cash as of the dates presented below consisted of the following (in thousands):

 
September 30, 2014
 
December 31, 2013
Securitization and Funding Facilities collection and reserve cash
 
$
24,674

 
$
49,987

Collected on behalf of HOAs and other
 
19,844

 
17,091

Rental trust
 
13,562

 
11,131

Escrow
 
10,732

 
11,887

Bonds and deposits
 
895

 
2,135

Total cash in escrow and restricted cash
 
$
69,707

 
$
92,231



12


Securitization and Funding Facilities collection and reserve cash contains reserve cash held for the benefit of the secured note holders and cash collections on certain mortgages receivable that secure collateralized notes. As of December 31, 2013, Securitization and Funding Facilities collection and reserve cash included $23.3 million related to the future funding of contracts receivables associated with the DROT 2013-2 Notes that was released to the Company's unrestricted cash account in January 2014. Securitization and Funding Facilities collection and reserve cash as of September 30, 2014 did not include such amount. See "Note 16—Borrowings" for the definition of and further detail on these borrowings.

Note 5 — Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses
The Company provides financing to purchasers of VOIs at North American and St. Maarten sales centers that are collateralized by their VOIs. Eligibility for this financing is determined based on the customers’ FICO credit scores. As of September 30, 2014, the mortgages and contracts receivable bore interest at fixed rates between 0.0% and 18.0%. The terms of the mortgages and contracts receivable range from one year to 15 years (with the majority being 10 years) and such financing may be prepaid at any time without penalty. The weighted average interest rate of outstanding mortgages and contracts receivable was 14.9% and 15.1% as of September 30, 2014 and December 31, 2013, respectively.
The Company charges off mortgages and contracts receivable upon the earliest of (i) the completion of cancellation or foreclosure proceedings or (ii) the customer's account becoming over 180 days delinquent. Once a customer has made six timely payments, following the event leading to the charge-off, the charge-off is reversed. A default in a customer's initial payment results in a rescission of the sale. All collection and foreclosure costs related to delinquent loans are expensed as incurred. Mortgages and contracts receivable between 90 and 180 days past due as of September 30, 2014 and December 31, 2013 were 1.9% and 2.5%, respectively, of gross mortgages and contracts receivable.
Mortgages and contracts receivable originated by the Company are recorded net of deferred loan and contract origination costs, and the related allowance for loan and contract losses. Loan and contract origination costs incurred in connection with providing financing for VOIs are capitalized and amortized over the estimated life of the mortgages or contracts receivable, based on historical prepayments, as a decrease to interest revenue using the effective interest method. Amortization of deferred loan and contract origination costs charged to interest revenue was $2.4 million and $1.4 million for the three months ended September 30, 2014 and 2013, respectively, and $6.6 million and $3.9 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company recorded a $3.3 million discount on April 27, 2007 on the mortgage pool acquired in connection with the acquisition and merger with Sunterra Corporation, which discount was being amortized over the life of the related acquired mortgage pool. This discount was fully amortized during the three months ended March 31, 2014, and, accordingly, as of September 30, 2014 there was no net unamortized discount on this acquired mortgage pool. As of December 31, 2013, the net unamortized discount on this acquired mortgage pool was $0.2 million. During the three months ended September 30, 2013, a de minimis amount of amortization was recorded as an increase to interest income, and during the nine months ended September 30, 2013, amortization of $0.1 million was recorded as an increase to interest income. No amortization was recorded during the three months ended September 30, 2014. During the nine months ended September 30, 2014, $0.2 million of amortization was recorded as an increase to interest income.
The Company recorded a $0.8 million premium on July 1, 2011, on the purchased mortgage pool that was part of the Tempus Resorts Acquisition, which was being amortized over the life of the related acquired mortgage pool. This premium was fully amortized during the year ended December 31, 2013 as a result of the loans being sold as part of the Tempus 2013 Notes (see "Note 16—Borrowings" for the definition of the Tempus 2013 Notes). During the three and nine months ended September 30, 2013, amortization of $0.4 million and $0.5 million, respectively, were recorded as a decrease to interest revenue.
The Company recorded a $0.1 million premium on May 21, 2012 on the mortgage pool purchased in the PMR Acquisition, which was being amortized over the life of the related acquired mortgage pool. This premium was fully amortized during the year ended December 31, 2013. No amortization was recorded as a decrease to interest revenue during the three and nine months ended September 30, 2013.
The Company recorded a $0.6 million premium on July 24, 2013 on the mortgage pool purchased in the Island One Acquisition, which is being amortized over the life of the related acquired mortgage pool. As of September 30, 2014 and December 31, 2013, the net unamortized premium was $0.3 million and $0.5 million, respectively. During the three months ended September 30, 2014, $0.1 million of amortization was recorded as a decrease to interest revenue, and during the nine months ended September 30, 2014, $0.2 million was recorded as a decrease to interest revenue. No amortization was recorded as a decrease to interest revenue during the three and nine months ended September 30, 2013.

13

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Mortgages and contracts receivable, net, as of the dates presented below, consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Mortgages and contracts receivable, acquired
$
44,748

 
$
77,271

Mortgages and contracts receivable, contributed
207

 
443

Mortgages and contracts receivable, originated
521,286

 
417,595

     Mortgages and contracts receivable, gross
566,241

 
495,309

Allowance for loan and contract losses
(121,189
)
 
(105,590
)
Deferred profit on Vacation Interest transactions
(1,890
)
 
(2,197
)
Deferred loan and contract origination costs, net of accumulated amortization
11,236

 
8,223

Inventory value of defaulted mortgages that were previously contributed or acquired
9,668

 
9,411

Premium on mortgages and contracts receivable, net of accumulated amortization
334

 
515

Discount on mortgages and contracts receivable, net of accumulated amortization

 
(217
)
     Mortgages and contracts receivable, net
$
464,400

 
$
405,454

As of September 30, 2014 and December 31, 2013, $500.4 million and $404.2 million, respectively, of the gross amount of mortgages and contracts receivable were collateralized against the Company’s various debt instruments included in "Securitization notes and Funding Facilities" in the accompanying condensed consolidated balance sheets. See "Note 16—Borrowings" for further detail.
Deferred profit on Vacation Interest transactions represents the revenues less the related direct costs (sales commissions, sales incentives, cost of sales and allowance for loan losses) related to sales that do not qualify for revenue recognition under the provisions of Accounting Standards Codification (“ASC”) 978, “Real Estate-Time-Sharing Activities" ("ASC 978"). See "Note 2—Summary of Significant Accounting Policies" set forth in the 2013 Form 10-K for a description of revenue recognition criteria.
Inventory value of defaulted mortgages that were previously contributed and acquired represents the inventory underlying mortgages that have defaulted. Upon recovery of the inventory, the value is transferred to unsold Vacation Interests, net.
Activity in the allowance for loan and contract losses associated with mortgages and contracts receivable as of the dates presented below consisted of the following (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
 
Balance, beginning of period
 
$
114,577

 
$
87,193

 
$
105,590

 
$
83,784

 
 
Provision for uncollectible Vacation Interest sales revenue
 
15,882

 
13,659

 
40,175

 
29,128

 
(a)
Provision for purchased portfolios
 

 
3,972

 

 
3,972

 
 
Mortgages and contracts receivable charged off
 
(9,972
)
 
(7,617
)
 
(26,709
)
 
(21,486
)
 
 
Recoveries
 
714

 
925

 
2,136

 
2,757

 
 
Effect of translation rate
 
(12
)
 
21

 
(3
)
 
(2
)
 
 
Balance, end of period
 
$
121,189

 
$
98,153

 
$
121,189

 
$
98,153

 
 
_____________
(a) The provision for uncollectible Vacation Interest sales revenue in the table above showing activity in the allowance for loan and contract losses associated with mortgages and contracts receivable is exclusive of ASC 978 adjustments related to deferred revenue, as well as adjustments for the rescission period required under applicable law. The ASC 978 adjustments increased the provision for uncollectible Vacation Interest sales revenue by a de minimis amount for the three months ended September 30, 2014 and increased the provision by $0.1 million for the three months ended September 30, 2013. The ASC 978 adjustments increased the provision for uncollectible Vacation Interest sales revenue for the nine months ended September 30, 2014 by a de minimis amount and increased the provision by $0.8 million for the nine months ended September 30, 2013. There were no adjustments for the rescission period for the three and nine months ended September 30, 2014. The adjustments for the rescission period increased the provision for uncollectible Vacation Interest sales revenue by $0.1 million for the three months ended September 30, 2013 and decreased the provision for uncollectible Vacation Interest sales revenue by $0.2 million for the nine months ended September 30, 2013.

14

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


A summary of credit quality as of the dates presented below is as follows (in thousands):
FICO Scores
 
September 30, 2014
 
%
 
December 31, 2013
 
%
>799
 
$
50,349

 
9
%
 
$
45,235

 
9
%
700 – 799
 
290,330

 
51
%
 
237,557

 
48
%
600 – 699
 
181,323

 
32
%
 
152,601

 
31
%
<600
 
24,604

 
4
%
 
24,076

 
5
%
No FICO Scores
 
19,635

 
4
%
 
35,840

 
7
%
 
 
$
566,241

 
100
%
 
$
495,309

 
100
%
The Company captures FICO credit scores when each loan is underwritten. FICO credit score information is updated annually and was last updated as of March 31, 2014 for then-existing mortgages and contracts receivable. The "No FICO Scores" category in the table above is primarily comprised of customers who live outside of the U.S.
Note 6
— Transactions with Related Parties
Due from Related Parties, Net, and Due to Related Parties, Net
Amounts due from related parties, net, and due to related parties, net, consist primarily of transactions with HOAs or Collections for which the Company acts as the management company. Due from related parties, net, transactions include (i) management fees for the Company’s role as the management company; (ii) certain expenses reimbursed by HOAs and Collections and (iii) the allocation of a portion of the Company’s Vacation Interest carrying costs, management and member services, consolidated resort operations, loan portfolio and general and administrative expenses according to a pre-determined schedule approved by the board of directors at each HOA and Collection. Due to related parties, net, transactions include (i) the amounts due to HOAs under inventory recovery agreements that the Company enters into regularly with certain HOAs and similar agreements with the Collections, pursuant to which the Company recaptures VOIs, either in the form of vacation points or vacation intervals, and brings them into the Company’s inventory for sale to customers; (ii) the maintenance fee and assessment fee liability owed to HOAs or Collections for VOIs owned by the Company (this liability is recorded on January 1 of each year for the entire amount of the annual maintenance and assessment fees, and is relieved throughout the year by payments remitted to the HOAs and the Collections; these maintenance and assessment fees are also recorded as prepaid expenses and other assets in the accompanying condensed consolidated balance sheets and amortized ratably over the year); (iii) cleaning fees owed to the HOAs for room stays incurred by the Company’s customers; (iv) subsidy liabilities according to a developer guarantee at a resort and (v) miscellaneous transactions with other non-HOA related parties.
Amounts due from related parties and due to related parties, some of which are due on demand, carry no interest. Due to the fact that the right of offset exists between the Company and the HOAs and the Collections, the Company evaluates amounts due to and from each HOA and Collection at each reporting period to reduce the receivables and the payables on each party's books of record. Any remaining balances are then reclassified as either a net due to or a net due from related parties for each HOA and Collection in accordance with the requirements of ASC 210, "Balance Sheet— Offsetting."
Due from related parties, net as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Amounts due from HOAs
 
$
38,638

 
$
36,957

Amounts due from Collections
 
6,298

 
7,938

Amounts due from other
 
277

 
1,367

Total due from related parties, net
 
$
45,213

 
$
46,262


Due to related parties, net as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Amounts due to HOAs
 
$
20,162

 
$
16,032

Amounts due to Collections
 
37,313

 
28,381

Amounts due to other
 

 
231

Total due to related parties, net
 
$
57,475

 
$
44,644


15

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Guggenheim Relationship
Two members of the Company's board, Messrs. Zachary Warren and Scott Minerd, are principals of Guggenheim Partners, LLC ("Guggenheim"), an affiliate of DRP Holdco, LLC (the "Guggenheim Investor"), a significant investor in the Company. Pursuant to an agreement with the Company, Guggenheim has the right to nominate two members to the Company's board, subject to certain security ownership thresholds, and Messrs. Warren and Minerd serve as members of the Company's board as the nominees of Guggenheim.
In connection with the amendment and restatement of the Company's Conduit Facility on April 11, 2013, an affiliate of Guggenheim became a commercial paper conduit for the Conduit Facility. Also, another affiliate of Guggenheim is currently an investor in the Company's $64.5 million DROT 2011 Notes issued on April 27, 2011 (the "DROT 2011 Notes") and was an investor in the Company's Senior Secured Notes that were redeemed on June 9, 2014. See "Note 16Borrowings" for the definition of and more detail regarding these borrowings.
On July 1, 2011, the Company completed the Tempus Resorts Acquisition. In order to fund the Tempus Resorts Acquisition, Tempus Acquisition, LLC, a subsidiary of the Company, entered into the Tempus Acquisition Loan with Guggenheim Corporate Funding, LLC. See "Note 16Borrowings" for the definition of and more detail on the Tempus Acquisition Loan. On July 24, 2013, the outstanding principal balance under the Tempus Acquisition Loan, along with accrued and unpaid interest and exit fees, was paid off in full using an aggregate of $50.0 million in proceeds from the IPO.
During the three and nine months ended September 30, 2013, Tempus Acquisition, LLC made an aggregate of approximately $0.3 million and $2.8 million, respectively, in interest payments and approximately $47.5 million and $52.8 million, respectively, in principal payments on the Tempus Acquisition Loan. Tempus Acquisition, LLC also made exit fee payments of approximately $2.7 million in the three and nine months ended September 30, 2013.
In connection with the funding of the Tempus Acquisition Loan (which was entered into in connection with the Tempus Resorts Acquisition) pursuant to the Loan and Security Agreement, dated as of June 30, 2011, among Tempus Acquisition, LLC, the lenders party thereto and Guggenheim Corporate Funding, LLC, the Company issued a warrant (the “Tempus Warrant”) to Guggenheim Corporate Funding, LLC, as the administrative agent, for the benefit of the lenders, pursuant to a warrant agreement, between the Company and Guggenheim Corporate Funding, LLC. Following the Company's payoff of the Tempus Acquisition Loan in full on July 24, 2013, the Tempus Warrant terminated for no consideration pursuant to the terms of the Tempus Warrant. See "Note 16—Borrowings" for further detail.
On May 21, 2012, the Company completed the PMR Acquisition. In order to fund the PMR Acquisition, DPM Acquisition, LLC, a wholly-owned subsidiary of the Company, and its subsidiaries (collectively, "DPMA") entered into the PMR Acquisition Loan with Guggenheim Corporate Funding, LLC. See "Note 16Borrowings" for the definition of and more detail on the PMR Acquisition Loan. On July 24, 2013, the outstanding principal balance under the PMR Acquisition Loan, along with accrued and unpaid interest and exit fees, was paid off in full using an aggregate of $62.1 million in proceeds from the IPO.
During the three and nine months ended September 30, 2013, DPMA made an aggregate of approximately $0.4 million and $3.4 million, respectively, in interest payments and approximately $59.3 million and $64.6 million, respectively, in principal payments on the PMR Acquisition Loan. DPMA also made exit fee payments of approximately $3.1 million in the three and nine months ended September 30, 2013.
In connection with the funding of the PMR Acquisition Loan pursuant to the Loan and Security Agreement, dated as of May 21, 2012, among DPMA, the lenders party thereto and Guggenheim Corporate Funding, LLC, which was entered into in connection with the PMR Acquisition, the Company issued a warrant (the “PMR Warrant”) to Guggenheim Corporate Funding, LLC, as the administrative agent, for the benefit of the lenders, pursuant to a warrant agreement, between the Company and Guggenheim Corporate Funding, LLC. Following the Company's payoff of the PMR Acquisition Loan in full on July 24, 2013, the PMR Warrant terminated for no consideration pursuant to the terms of the PMR Warrant. See "Note 16—Borrowings" for further detail.
On September 27, 2013, the Company paid approximately $10.3 million to repurchase warrants to purchase shares of common stock of DRC held by an affiliate of Guggenheim Partners, LLC and another institutional investor, and, substantially concurrently therewith, the Company borrowed approximately $15.0 million under the 2013 Revolving Credit Facility. The affiliate of Guggenheim Partners, LLC that held one of these warrants received approximately $2.8 million in connection with such repurchase. See "Note 16—Borrowings" for definitions of, and more detail on, the 2013 Revolving Credit Facility.
On May 9, 2014, the Company entered into a credit agreement with Credit Suisse AG, acting as the administrative agent and the collateral agent for various lenders (the “Senior Credit Facility Agreement”), including an affiliate of Guggenheim. The Senior Credit Facility Agreement provides for a $470.0 million senior secured credit facility (the “Senior Credit Facility”).

16

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Affiliates of Guggenheim (1) received fees of approximately $1.8 million relating to their participation in the Senior Credit Facility, and (2) on behalf of Guggenheim’s investment advisory clients, (i) provided an approximate aggregate principal amount of $111.3 million of the $445.0 million in term loans under the Senior Credit Facility ($110.7 million of the $442.8 million term loan proceeds received by the Company) and (ii) have agreed to provide an approximate aggregate principal amount of $6.3 million in loans under the $25.0 million revolving line of credit. Further, affiliates of Guggenheim held approximately $114.1 million in aggregate principal amount of Senior Secured Notes that were redeemed by DRC on June 9, 2014. See "Note 16Borrowings" for further detail on the Senior Credit Facility and the redemption of the Senior Secured Notes.

Hospitality Management and Consulting Service, LLC ("HM&C") Management Services Agreement
Pursuant to a services agreement that the Company entered into with HM&C effective as of December 31, 2010 (as amended and restated effective as of December 31, 2012 (the "HM&C Agreement"), HM&C provides two categories of management services to the Company on a cost-recovery basis: (i) executive and strategic oversight of the services that the Company provides to HOAs and the Collections through the Company’s hospitality and management services operations, for the benefit of the Company and of the HOAs and the Collections ("HOA Management Services"). The fees for these services are generally included in the determination of the annual budget for the HOAs and the Collections and paid to the Company and (ii) executive, corporate and strategic oversight of the Company’s operations and certain other administrative services.
HM&C provides the Company with the services of Mr. Stephen J. Cloobeck (the Company's founder and Chairman), the Company's three executive officers and approximately 53 other employees (including, Sheldon Cloobeck, the father of Mr. Cloobeck), each of whom devotes his or her full business time and attention to the Company. Pursuant to the HM&C Agreement, HM&C is entitled to receive (i) an annual management fee for providing HOA Management Services; (ii) an annual management fee for providing corporate management services; (iii) an annual incentive payment based on performance metrics determined by the board of directors of the Company, subject to certain minimum amounts set forth in the HM&C Agreement and (iv) reimbursement of HM&C's expenses incurred in connection with the activities provided under the HM&C Agreement. The HM&C Agreement also provides for the payment of additional fees to HM&C as and when agreed by the Company and HM&C in the event HM&C provides certain additional services to the Company for the benefit of HOAs or the Collections or in connection with any acquisitions, financing transactions or other significant transactions undertaken by the Company or its subsidiaries, although the Company has not paid any such additional fees to HM&C to date. The Company incurred management fees, incentive payments (excluding stock-based compensation) and expense reimbursements in connection with the HM&C Agreement of $7.7 million and $18.1 million for the three and nine months ended September 30, 2014, respectively, and $7.5 million and $20.4 million for the three and nine months ended September 30, 2013, respectively. The HM&C Agreement has a term that is currently set to expire on December 31, 2015, and thereafter automatically renews for successive annual periods unless terminated by the Company or HM&C.
As of September 30, 2014 and December 31, 2013, the Company owed HM&C $3.3 million and $7.3 million, respectively, in unpaid and accrued fees related to services performed.
Aircraft Lease
In January 2012, the Company entered into an Aircraft Lease Agreement with N702DR, LLC, a limited liability company of which Mr. Cloobeck is a beneficial owner and a controlling party. Pursuant to this lease agreement, the Company leases an aircraft from N702DR, LLC and paid N702DR, LLC $0.6 million for each of the three months ended September 30, 2014 and 2013, and $1.8 million for each of the nine months ended September 30, 2014 and 2013.
Praesumo Agreement
In June 2009, the Company entered into an Engagement Agreement for Individual Independent Contractor with Praesumo Partners, LLC, a limited liability company of which Mr. Lowell D. Kraff, the Vice Chairman of the Board of Directors of the Company, is a beneficial owner and a controlling party. Pursuant to this engagement agreement, Praesumo provides Mr. Kraff as an independent contractor to the Company to provide, among other things, acquisition, development and finance consulting services. In September 2012, the agreement was renewed for an additional one-year term and the agreement automatically renewed for an additional one-year term in September 2013. In August 2014, the agreement was further amended to extend the term for an additional year, with the term expiring August 31, 2015. In consideration of these services provided pursuant to this agreement, the Company paid to Praesumo Partners, LLC, in the aggregate, $0.4 million and $1.3 million in fees and expense reimbursements for the three and nine months ended September 30, 2014, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2013, respectively. These amounts do not include certain travel-related costs paid directly by the Company.

17

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Luumena
Mr. Kraff was also a beneficial owner of Luumena, LLC, which provides digital media services. The Company did not pay Luumena, LLC any amount during the three months ended September 30, 2013 and paid Luumena, LLC $0.2 million during the nine months ended September 30, 2013. Effective January 1, 2014, Mr. Kraff no longer had any beneficial ownership in Luumena, LLC.
Technogistics
Mr. Kraff was also a beneficial owner of Technogistics, LLC, which provides direct marketing services. The Company paid Technogistics, LLC $0.4 million and $1.0 million during the three and nine months ended September 30, 2013, respectively. Effective January 1, 2014, Mr. Kraff no longer had any beneficial ownership in Technogistics, LLC.
Trivergance Business Resources
Mr. Kraff was also a beneficial owner of Trivergance Business Resources, LLC. Commencing on January 1, 2013, Trivergance Business Resources, LLC began providing promotional, product placement, marketing, public relations and branding services to the Company, including the development of a new consumer marketing website. The Company paid Trivergance Business Resources, LLC $0.2 million and $0.7 million during the three and nine months ended September 30, 2013, respectively. Effective January 1, 2014, Mr. Kraff no longer had any beneficial ownership in Trivergance Business Resources, LLC.
Mackinac Partners
Since September 2008, Mr. C. Alan Bentley has served in various officer capacities, including as Executive Vice President, and as a director, of certain subsidiaries of DRP. In January 2013, Mr. Bentley was named Executive Vice President and Chief Financial Officer. Mr. Bentley is also a partner of Mackinac Partners, LLC, a financial advisory firm that provides consulting services to the Company. The services provided by Mackinac Partners, LLC to the Company include advisory services relating to mergers and acquisitions, capital formation, corporate finance and litigation support. In addition to these services, which Mackinac Partners, LLC provides at hourly rates, Mackinac Partners, LLC also provides to the Company strategic advisory services of one of its managing partners at a rate of $0.2 million for each three-month period effective January 1, 2013. For the three and nine months ended September 30, 2014, the Company paid fees and expense reimbursements to Mackinac Partners, LLC of $0.2 million and $1.6 million, respectively, and, for the three and nine months ended September 30, 2013, paid fees and expense reimbursements to Mackinac Partners, LLC of $0.3 million and $1.7 million, respectively.
Katten Muchin Rosenman LLP
Mr. Howard S. Lanznar, who joined the Company as the Executive Vice President and Chief Administrative Officer in September 2012, was a partner of the law firm of Katten Muchin Rosenman LLP ("Katten") until August 31, 2014 and is currently Of Counsel at the firm. Additionally, Richard M. Daley, who is a member of the Board of Directors of the Company and the Compensation Committee, is Of Counsel at Katten. Katten renders legal services to the Company. During the three and nine months ended September 30, 2014, the Company paid to Katten fees of $0.8 million and $3.0 million, respectively, and, during the three and nine months ended September 30, 2013, paid fees of $2.2 million and $4.8 million, respectively.

Note 7
— Other Receivables, Net
Other receivables, net, as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Receivables related to mini-vacation and sampler programs, net
 
$
16,279

 
$
11,844

Mortgage and contracts interest receivable
 
5,307

 
5,025

Rental receivables and other resort management-related receivables, net
 
5,096

 
3,595

Club dues receivable, net
 
3,062

 
29,418

Value added tax refund receivable
 
2,042

 
2,274

Owner maintenance fees receivable, net
 
479

 
116

Insurance claims receivable
 
31

 
96

Other receivables
 
1,734

 
2,220

Total other receivables, net
 
$
34,030

 
$
54,588


18

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued



Note 8
— Prepaid Expenses and Other Assets, Net
The nature of selected balances included in prepaid expenses and other assets, net, includes:
Vacation Interest purchases in transit—purchases of Vacation Interests from third parties for which the title has not been officially transferred to the Company. These Vacation Interest purchases in transit are reclassified to unsold Vacation Interests, net, upon successful transfer of title.
Unamortized maintenance fees—prepaid annual maintenance fees on unsold Vacation Interests owned by the Company billed by the HOAs and the Collections for resorts included in the Company's resort network that are managed by the Company, which are charged to expense ratably over the year.
Deferred commissions—commissions paid to sales agents related to deferred revenue from sales of sampler programs and mini-vacations ("Sampler Packages"), which allow purchasers to stay at a resort property on a trial basis. These amounts are charged to Vacation Interest carrying cost as the associated revenue is recognized.
Prepaid member benefits and affinity programs—usage rights of members of the Clubs can be exchanged for a variety of products and travel services, including airfare, cruises and excursions. Prepaid usage rights are amortized ratably over the year.
Unamortized exchange fees—unamortized portion of the amount paid to Interval International, Inc. ("Interval International"), which provides an external VOI exchange program, for memberships with Interval International. This balance is amortized ratably over the year.
Prepaid rent—portion of rent paid in advance and charged to expense in accordance with lease agreements.
Prepaid maintenance fees—prepaid annual maintenance fees billed by the HOAs at the resorts not managed by the Company on unsold Vacation Interests owned by the Company, which are charged to expense ratably over the year.
Prepaid expenses and other assets, net, as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Vacation Interest purchases in transit
 
$
18,259

 
$
12,495

Unamortized maintenance fees
 
18,213

 

Debt issuance costs, net
 
17,198

 
20,086

Deferred commissions
 
17,171

 
13,153

Prepaid member benefits and affinity programs
 
6,910

 
2,497

Deferred inventory recovery agreements
 
4,539

 

Deposits and advances
 
4,235

 
4,068

Other inventory or consumables
 
4,202

 
3,028

Prepaid insurance
 
3,210

 
2,359

Prepaid sales and marketing costs
 
2,403

 
815

Unamortized exchange fees
 
1,564

 

Prepaid rent
 
1,155

 
344

Prepaid professional fees
 
1,064

 
2,207

Prepaid maintenance fees
 
874

 
2,501

Assets to be disposed (not actively marketed)
 
264

 
537

Other
 
5,787

 
4,168

Total prepaid expenses and other assets, net
 
$
107,048

 
$
68,258


With the exception of Vacation Interest purchases in transit and assets to be disposed (not actively marketed), prepaid expenses are expensed as the underlying assets are utilized or amortized. Debt issuance costs incurred in connection with obtaining funding for the Company have been capitalized and are being amortized over the lives of the related funding agreements as a component of interest expense using a method which approximates the effective interest method. Amortization of capitalized debt issuance costs included in interest expense was $1.0 million and $1.5 million for the three months ended September 30, 2014 and 2013, respectively, and $3.5 million and $4.6 million for the nine months ended September 30, 2014 and 2013, respectively. See "Note 16—Borrowings" for more detail.

19

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Debt issuance costs, net of amortization, recorded as of September 30, 2014 were comprised of $10.1 million related to the Senior Credit Facility, $3.0 million related to the DROT 2013-2 Notes, $1.4 million related to the DROT 2013-1 Notes, $0.9 million related to the Tempus 2013 Notes, $0.8 million related to the DROT 2011 Notes and $0.5 million related to the Conduit Facility. See "Note 16—Borrowings" for definitions of these terms and more detail on the Company's borrowings.
Debt issuance costs, net of amortization, recorded as of December 31, 2013 were comprised of $10.2 million related to the Senior Secured Notes, $3.6 million related to the DROT 2013-2 Notes, $1.7 million related to the DROT 2013-1 Notes, $1.3 million related to the Conduit Facility, $1.1 million related to the DROT 2011 Notes, $1.1 million related to the Tempus 2013 Notes, $1.0 million related to the 2013 Revolving Credit Facility and $0.1 million related to the ILXA loans. See "Note 16—Borrowings" for definitions of these terms and more detail on the Company's borrowings.
Debt issuance costs of $0.1 million were written off in May 2014 in connection with the payoff of the ILX Inventory Loan and the Tempus Inventory Loan using a portion of the proceeds from the term loan portion of the Senior Credit Facility. In addition, debt issuance costs of $0.9 million were written off in May 2014 due to the termination of the 2013 Revolving Credit Facility in connection with the Company's entry into the Senior Credit Facility. Furthermore, debt issuance costs of $9.4 million were written off in connection with the redemption of the Senior Secured Notes in June 2014. The Company recognized a charge of $46.8 million in loss on extinguishment of debt, including the $10.5 million write off of these debt issuance costs, for the nine months ended September 30, 2014. See "Note 16—Borrowings" for more detail on the redemption of the Senior Secured Notes.
 
Note 9
— Unsold Vacation Interests, Net
Unsold Vacation Interests, net as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Completed unsold Vacation Interests, net
 
$
244,835

 
$
251,688

Undeveloped land
 
24,456

 
28,513

Vacation Interest construction-in-progress
 
7,775

 
17,909

Unsold Vacation Interests, net
 
$
277,066

 
$
298,110

Activity related to unsold Vacation Interests, net, for the periods presented below consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
   Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
 
$
292,248

 
$
307,613

 
$
298,110

 
$
315,867

Vacation Interest cost of sales
 
(16,476
)
 
(18,605
)
 
(44,840
)
 
(45,451
)
(Reinstatement) recovery of inventory — North America
 
(1,543
)
 
179

 
17,037

 
20,127

Purchases in connection with business combinations
 

 
4,823

 

 
4,823

Inventory recovery activity — Europe
 
367

 
3,086

 
4,084

 
4,478

Open market and bulk purchases
 
6,306

 
181

 
7,838

 
1,609

Accrued bulk purchases
 

 
(804
)
 
1,810

 
662

Capitalized legal, title and trust fees
 
2,192

 
(39
)
 
3,689

 
1,107

Transfer of construction-in-progress to property and equipment, net
 

 

 
(5,616
)
 

Construction-in-progress
 
104

 
1,387

 
596

 
3,579

Loan default recoveries, net
 
1,121

 
612

 
1,970

 
2,572

Transfers to assets held for sale
 
(4,250
)
 
(14
)
 
(4,250
)
 
(10,165
)
Impairment of inventory
 

 
(1,200
)
 

 
(1,200
)
Effect of foreign currency translation
 
(2,770
)
 
2,355

 
(1,650
)
 
1,062

Other
 
(233
)
 
2,135

 
(1,712
)
 
2,639

Balance, end of period
 
$
277,066

 
$
301,709

 
$
277,066

 
$
301,709


20

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


See "Note 2—Summary of Significant Accounting Policies" set forth in the 2013 Form 10-K for discussion on unsold Vacation Interests, net.

Note 10
— Property and Equipment, Net
Property and equipment, net as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Land and improvements
 
$
19,298

 
$
18,606

Buildings and leasehold improvements
 
43,942

 
35,604

Furniture and office equipment
 
20,038

 
18,650

Computer software
 
30,916

 
24,488

Computer equipment
 
15,672

 
12,521

Construction in progress
 
471

 
10

Property and equipment, gross
 
130,337

 
109,879

Less accumulated depreciation
 
(59,676
)
 
(49,483
)
Property and equipment, net
 
$
70,661

 
$
60,396

Depreciation expense related to property and equipment was $3.5 million and $3.0 million for the three months ended September 30, 2014 and 2013, respectively, and $9.8 million and $8.1 million for the nine months ended September 30, 2014 and 2013, respectively.
Property and equipment are recorded at either cost for assets purchased or constructed or fair value in the case of assets acquired through business combinations. The costs of improvements that extend the useful life of property and equipment are capitalized when incurred. These capitalized costs may include structural costs, equipment, fixtures and floor and wall coverings. All repair and maintenance costs are expensed as incurred.
Buildings and leasehold improvements are depreciated using the straight-line method over the lesser of the estimated useful lives, which range from four to 40 years, or the remainder of the lease terms. Furniture, office equipment, computer software and computer equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years.

Note 11 — Goodwill
Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company does not amortize goodwill, but rather evaluates goodwill for potential impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit, as defined in ASC 350-20, "Intangibles—Goodwill," is below the carrying amount. During the three months ended September 30, 2014, the Company performed its annual evaluation of potential impairment of goodwill as required in the ordinary course of business. The Company assessed various qualitative factors and determined that it was not more likely than not that the fair value of any of its reporting units was below the carrying amount. As such, the Company concluded that the first and second steps of the goodwill impairment test were unnecessary.
The balance at September 30, 2014 and December 31, 2013 represents the goodwill recorded in connection with the Island One Acquisition completed on July 24, 2013.
See "Note 2Summary of Significant Accounting Policies" set forth in the 2013 Form 10-K for further detail on the Company's policy related to goodwill impairment testing.


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DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 12 — Other Intangible Assets, Net

Other intangible assets, net as of September 30, 2014 consisted of the following (in thousands):
 
 
Gross Carrying
Cost
 
Accumulated
Amortization
 
Net Book
Value
Management contracts
 
$
202,456

 
$
(42,173
)
 
$
160,283

Member relationships and exchange clubs
 
55,936

 
(35,874
)
 
20,062

Distributor relationships and other
 
4,867

 
(1,719
)
 
3,148

Total other intangible assets
 
$
263,259

 
$
(79,766
)
 
$
183,493

Other intangible assets, net as of December 31, 2013 consisted of the following (in thousands):
 
 
Gross Carrying
Cost
 
Accumulated
Amortization
 
Net Book
Value
Management contracts
 
$
202,948

 
$
(31,905
)
 
$
171,043

Member relationships and exchange clubs
 
56,128

 
(32,090
)
 
24,038

Distributor relationships and other
 
4,875

 
(1,324
)
 
3,551

Total other intangible assets
 
$
263,951

 
$
(65,319
)
 
$
198,632

Amortization expense for management contracts is recognized on a straight-line basis over the estimated useful lives of the management contracts, ranging from five to 25 years. Amortization expense for management contracts was $3.5 million and $3.0 million for the three months ended September 30, 2014 and 2013, respectively, and $10.4 million and $7.5 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization expense for member relationships, member exchange clubs, distributor relationships and other is recorded over the period of time that the relationships are expected to produce cash flows. Amortization expense for member relationships, member exchange clubs, distributor relationships and other intangibles was $1.3 million and $1.5 million for the three months ended September 30, 2014 and 2013, respectively, and $4.4 million for each of the nine months ended September 30, 2014 and 2013. Membership relationships and distributor relationships have estimated useful lives ranging from three to 30 years; however, the Company expects to generate significantly more cash flows during the earlier years of the relationships than the later years. Consequently, amortization expenses on these relationships decrease significantly over the lives of the relationships. See "Note 2—Summary of Significant Accounting Policies" set forth in the 2013 Form 10-K for further detail on the Company's policy related to impairment testing of the Company's intangible assets.
The estimated aggregate amortization expense for intangible assets as of September 30, 2014 is expected to be $17.6 million, $14.3 million, $13.5 million, $13.0 million and $12.9 million for the successive 12 month periods ending September 30, 2015 through 2019, respectively, and $112.1 million for the remaining lives of these intangible assets.

Note 13 — Assets Held for Sale
Assets held for sale as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014

 
December 31, 2013

Certain completed units in Cabo, Mexico
 
$
5,855

 
$
5,855

Vacant land in Orlando, Florida
 
4,000

 

Vacant land in Kona, Hawaii
 
3,600

 
3,600

Points equivalent of unsold units and resorts in Europe
 
1,251

 
1,207

Total assets held for sale
 
$
14,706

 
$
10,662

In July 2014, the Company received, and accepted, a letter of intent from a third party to purchase a certain parcel of vacant land located in Orlando, Florida and reclassified the land value of $4.0 million from unsold Vacation Interests, net to assets held for sale.
 

22

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 14 — Accrued Liabilities
The Company records estimated amounts for certain accrued liabilities at each period end. Accrued liabilities are obligations to transfer assets or provide services to other entities in the future as a result of past transactions or events. The nature of selected balances included in accrued liabilities of the Company includes:
Accrued marketing expenses—expenses for travel vouchers and certificates used as sales incentives to buyers as well as attraction tickets as tour incentives. Such vouchers and certificates will be paid for in the future based on actual redemption.
Accrued escrow liability—deposits in escrow received on Vacation Interests sold.
Accrued operating lease liabilities—difference between straight-line operating lease expenses and cash payments associated with any equipment, furniture or facilities leases classified as operating leases.
Accrued liability related to business combinations—contingent liability associated with an earn-out clause in connection with the Aegean Blue Acquisition.
Accrued exchange company fees—estimated liability owed to Interval International for annual dues related to exchange services provided to the Company.
Accrued call center costs—expenses associated with the outsourced customer service call center operations.
Deposits on pending sale of assets—deposits that the Company has received in connection with the pending sales of certain assets. The sale of these assets has not been consummated due to the fact that not all consideration has been exchanged. These deposits are, therefore, accounted for using the deposit method in accordance with ASC 360.
Accrued contingent litigation liabilities—estimated settlement costs for existing litigation cases.
Accrued liabilities as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Accrued payroll and related
 
$
26,821

 
$
32,117

Accrued commissions
 
18,810

 
16,234

Accrued other taxes
 
14,754

 
11,589

Accrued marketing expenses
 
13,062

 
11,828

Accrued insurance
 
4,286

 
4,418

Accrued escrow liability
 
3,939

 
3,210

Accrued operating lease liabilities
 
3,656

 
3,580

Accrued liability related to business combinations
 
3,258

 
3,550

Accrued exchange company fees
 
2,987

 
1,689

Accrued professional fees
 
2,695

 
2,100

Accrued call center costs
 
2,083

 
1,443

Deposits on pending sale of assets
 
1,827

 
1,311

Accrued interest
 
425

 
19,084

Accrued contingent litigation liabilities
 
8

 
257

Other
 
7,763

 
5,025

Total accrued liabilities
 
$
106,374

 
$
117,435


On May 9, 2014, the Company repaid all outstanding indebtedness under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan, along with an aggregate of $1.8 million in associated accrued interest and fees, using proceeds from the term loan portion of the Senior Credit Facility.

On June 9, 2014, DRC redeemed all of the remaining outstanding principal amount under the Senior Secured Notes, and paid approximately $14.2 million of accrued interest, using a portion of the proceeds from the term loan portion of the Senior Credit Facility. See "Note 16Borrowings" for further detail on the Senior Credit Facility and the redemption of the Senior Secured Notes.


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DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 15 — Deferred Revenues
The Company records deferred revenues for payments received or billed but not earned for various activities.
Deferred Sampler Packages revenue—sold but unused trial VOIs. The Company generates revenue on sales of Sampler Packages. This revenue is recognized when the purchaser completes a stay at one of the Company’s resorts or the trial period expires, whichever is earlier. Such revenue is recorded as a reduction to Vacation Interest carrying cost in accordance with ASC 978 (with the exception of the Company’s European sampler product and a U.S. fixed-term product, which have a duration of between three and four years and, as such, are treated as Vacation Interest sales revenue).
Deferred maintenance and reserve fee revenue—maintenance fees billed as of January first of each year and earned ratably over the year for the two resorts in St. Maarten where the Company functions as the HOA. In addition, the owners are billed for capital project assessments to repair and replace the amenities or to reserve the potential out-of-pocket deductibles for hurricanes and other natural disasters. These assessments are deferred until the refurbishment activity occurs, at which time the amounts collected are recognized as consolidated resort operations revenue, with an equal amount recognized as consolidated resort operations expense.
Club deferred revenue—annual membership fees in the Clubs billed to members (offset by an estimated uncollectible amount) and amortized ratably over a one-year period and optional reservation protection fees recognized over an approximate life of the member's reservation, which is generally six months on average.
Accrued guest deposits—amounts received from guests for future rentals recognized as revenue when earned.
Deferred management fee and allocation revenue—management fees and allocations paid in advance by the HOAs to the Company for its role as the management company. The Company allocates a portion of its Vacation Interest carrying costs, management and member services, consolidated resort operations, loan portfolio, and general and administrative expenses to the HOAs. These advance payments are recorded as deferred revenue when they are received and recognized as revenue during the period in which they are earned.
Deferred revenue from an exchange company—unearned portion of a $5.0 million payment that the Company received in 2008 as consideration for granting the exclusive rights to Interval International to provide call center services and exchange services to the Company. In accordance with ASC 605-50, "Revenue Recognition — Customer Payments and Incentives," the $5.0 million was being recognized over the 10-year term of the agreements as a reduction of the costs incurred for the services provided by Interval International. In April 2014, the Company renegotiated the contract with Interval International, relieving the Company from its obligation to repay the unearned portion to Interval International and resulting in the release of this deferred revenue to the statement of operations and comprehensive income (loss) as a reduction of costs incurred for the services provided by Interval International.
Deferred revenues as of the dates presented below consisted of the following (in thousands):
 
 
September 30, 2014
 
December 31, 2013

Deferred Sampler Packages revenue
 
$
58,042

 
$
54,010

Deferred maintenance and reserve fee revenue
 
14,113

 
12,375

Club deferred revenue
 
10,138

 
37,516

Accrued guest deposits
 
5,999

 
3,836

Deferred management fees and allocation revenue
 
1,155

 
284

Deferred amenity fee revenue
 
651

 

Deferred revenue from an exchange company
 

 
1,891

Other
 
572

 
980

Total deferred revenues
 
$
90,670

 
$
110,892

 
Note 16 — Borrowings

Senior Credit Facility. On May 9, 2014, the Company entered into the Senior Credit Facility Agreement, which provides for a $470.0 million Senior Credit Facility (including a $445.0 million term loan, issued with 0.5% of original issue discount and having a term of seven years and a $25.0 million revolving line of credit having a term of five years). Borrowings under the Senior Credit Facility bear interest, at the Company's option, at a variable rate equal to LIBOR plus 450 basis points, with a one percent LIBOR floor applicable only to the term loan portion of the Senior Credit Facility, or an alternate base rate plus 350

24

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


basis points.

The Company used the proceeds of the term loan portion of the Senior Credit Facility, as well as approximately $5.4 million of cash on hand, to redeem all of the remaining outstanding Senior Secured Notes, including the applicable redemption premium and accrued and unpaid interest up to (but excluding) the June 9, 2014 redemption date, and to repay all outstanding indebtedness, together with accrued interest and fees, under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan. In conjunction with the Company's entry into the Senior Credit Facility, the Company also terminated the 2013 Revolving Credit Facility, under which no borrowings were then outstanding. See below for the definition of and further detail on these retired borrowings.

Other significant terms of the Senior Credit Facility include: (i) one percent minimum annual amortization due in quarterly payments of $1.1 million; (ii) an excess cash flow sweep (as defined in the Senior Credit Facility Agreement) beginning in the second quarter of 2015 (for 2015, relating only to the cash generated for the period from July 1, 2014 through December 31, 2014 and, thereafter, based on annual results) of a maximum of 50%, stepping down to a 25% excess cash flow sweep when the secured leverage ratio (which represents the ratio of (1) secured total debt to (2) Adjusted EBITDA for the most recent four fiscal quarters for which financial statements are available) is greater than 1:1, but equal to or less than 1.5:1, and no excess cash flow sweep if the secured leverage ratio is less than or equal to 1:1; (iii) a soft call provision of 1.01 for the first 12 months of the Senior Credit Facility; (iv) no ongoing maintenance financial covenants for the term loan, and a financial covenant calculation required on the revolving line of credit if outstanding loans under the revolving line of credit exceed 25% of the commitment amount at the end of any quarter; (v) a non-committed incremental $150.0 million facility available for borrowing, plus additional amounts greater than $150.0 million, subject in the case of such additional amount only to the Company meeting a required secured leverage ratio and (vi) the Company's ability to make restricted payments, including the payment of dividends or share repurchases, up to an aggregate of $25.0 million over the term of the loan (less certain investment and debt amounts specified under the Senior Credit Facility Agreement), plus the portion of cash flow that is not used to amortize debt pursuant to the excess cash flow provision described above, subject to, among other things, the Company's meeting a required total leverage ratio (which represents the ratio of (a) total debt to (b) Adjusted EBITDA for the most recent four fiscal quarters for which financial statements are available).

At September 30, 2014, the outstanding principal balance under the term loan was $443.9 million, and no principal balance was outstanding under the revolving line of credit.

Senior Secured Notes. The Senior Secured Notes carried an interest rate of 12.0% and were scheduled to mature in August 2018. On August 23, 2013, DRC completed a tender offer to repurchase Senior Secured Notes in an aggregate principal amount of $50.6 million using proceeds from the IPO (the "Tender Offer"), as required by the Notes Indenture in the event of an IPO. Holders that validly tendered their Senior Secured Notes received $1,120 per $1,000 principal amount of Notes, plus accrued and unpaid interest up to (but excluding) August 23, 2013.

On June 9, 2014, DRC redeemed all of the remaining outstanding principal amount under the Senior Secured Notes at a redemption price equal to 108.077% of the face value of the Senior Secured Notes being redeemed (or $1,080.77 per $1,000 in principal amount of the Senior Secured Notes). The total redemption amount paid was $418.9 million, which included $374.4 million in principal amount of outstanding Senior Secured Notes, $30.2 million representing the applicable redemption premium and $14.2 million of accrued and unpaid interest up to (but excluding) June 9, 2014. The redemption of the Senior Secured Notes on June 9, 2014 was paid using a portion of the proceeds from the term loan portion of the Senior Credit Facility.
Conduit Facility. On April 11, 2013, the Company entered into an amended and restated Conduit Facility agreement that extended the maturity date of the facility to April 10, 2015. That amended and restated Conduit Facility provides for a 24-month facility that is annually renewable for 364-day periods at the election of the lenders, bears interest at either LIBOR or the commercial paper rate (each having a floor of 0.50%) plus 3.25%, and has a non-use fee of 0.75%. The overall advance rate on loans receivable in the portfolio is limited to 85% of the aggregate face value of the eligible loans. The maximum borrowing capacity was $125.0 million on April 11, 2013 and was subsequently increased to $175.0 million on September 26, 2014, when the Company entered into an amendment to the amended and restated Conduit Facility agreement.
Securitization Notes. On January 23, 2013, the Company completed a securitization transaction and issued the DROT Series 2013-1 Class A and B Notes with a face value of $93.6 million (the "DROT 2013-1 Notes"). The DROT 2013-1 Notes mature on January 20, 2025 and carry a weighted average interest rate of 2.0%. The net proceeds were used to pay off the $71.3 million then-outstanding principal balance under the Conduit Facility and to pay expenses incurred in connection with the issuance of the DROT 2013-1 Notes, including the funding of a reserve account required thereby.

25

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


On September 20, 2013, the Company completed a securitization transaction and issued the Diamond Resorts Tempus Owner Trust 2013 Notes with a face value of $31.0 million (the "Tempus 2013 Notes"). The Tempus 2013 Notes bear interest at a rate of 6.0% per annum and mature on December 20, 2023. The proceeds from the Tempus 2013 Notes were used to pay off in full the then-outstanding principal balances and accrued interest and fees under the Tempus Receivables Loan and Notes Payable—RFA fees (defined below).
On October 21, 2013, the Company redeemed all of the DROT 2009 Class A notes and Class B notes previously issued on October 15, 2009 as part of the 2009 securitization transaction. The aggregate redemption prices were $24.4 million and $1.8 million, respectively, and were funded using the proceeds from borrowings under the Conduit Facility.
On November 20, 2013, the Company completed another securitization transaction that was comprised of AA and A+ rated notes (the "DROT 2013-2 Notes") with a face value of $225.0 million that included a $44.7 million prefunding account. The initial proceeds of $180.3 million were used to pay off the $152.8 million then-outstanding principal balance, accrued interest and fees associated with the Conduit Facility, terminate the July 2013 and August 2013 Swaps, pay certain expenses incurred in connection with the issuance of the DROT 2013-2 Notes and fund related reserve accounts with the remaining proceeds transferred to the Company for general corporate use. As of December 31, 2013, cash in escrow and restricted cash included $23.3 million related to the prefunding account, all of which was released to the Company's unrestricted cash account in January 2014.
Quorum Facility. The Company's subsidiary, DRI Quorum 2010, LLC, entered into a Loan Sale and Servicing Agreement (the "LSSA"), dated as of April 30, 2010 (as amended and restated, the “Quorum Facility”) with Quorum Federal Credit Union ("Quorum") as purchaser. The LSSA and related documents provide for an aggregate minimum $40.0 million loan sale facility
and joint marketing venture, whereby DRI Quorum may sell eligible consumer loans and in-transit loans to Quorum on a nonrecourse, permanent basis, provided that the underlying consumer obligor is a Quorum credit union member. The LSSA was amended and restated as of December 31, 2012 to increase the aggregate minimum committed amount to $80.0 million and to extend the term of the agreement to December 31, 2015; provided that Quorum may further extend the term for additional one-year periods by written notice.
ILXA Receivables Loan and Inventory Loan. On August 31, 2010, the Company completed the ILX Acquisition through its wholly-owned subsidiary, ILX Acquisition, Inc. ("ILXA"). In connection with the ILX Acquisition, ILXA entered into an Inventory Loan and Security Agreement ("ILXA Inventory Loan") and a Receivables Loan and Security Agreement ("ILXA Receivables Loan") with Textron Financial Corporation. The ILXA Inventory Loan was a non-revolving credit facility in the maximum principal amount of $23.0 million at an interest rate of 7.5%. The ILXA Receivables Loan was a receivables facility with an initial principal amount of $11.9 million at an interest rate of 10% and was collateralized by mortgages and contracts receivable of ILXA. Both loans were scheduled to mature on August 31, 2015. On May 9, 2014, the Company repaid all outstanding indebtedness under the ILXA Inventory Loan in the amount of $8.4 million, along with $0.2 million in accrued interest and $1.5 million in exit fees and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility. On May 9, 2014, the Company repaid all outstanding indebtedness under the ILXA Receivables Loan in the amount of $4.5 million, along with a de minimis amount in accrued interest and other fees, using general corporate funds.
Tempus Acquisition Loan and Tempus Resorts Acquisition Financing. On July 1, 2011, the Company completed the Tempus Resorts Acquisition through Mystic Dunes, LLC, a wholly-owned subsidiary of Tempus Acquisition, LLC. In order to fund the Tempus Resorts Acquisition, Tempus Acquisition, LLC entered into a Loan and Security Agreement with Guggenheim Corporate Funding, LLC, as the administrative agent for the lenders, which included affiliates of, or funds or accounts managed or advised by, Guggenheim Partners Investment Management, LLC, which is an affiliate of the Guggenheim Investor, and Silver Rock Financial LLC, another investor of the Company (the “Tempus Acquisition Loan”). The Tempus Acquisition Loan was collateralized by all assets of Tempus Acquisition, LLC. The Tempus Acquisition Loan was initially in an aggregate principal amount of $41.1 million (which included a $5.5 million revolving loan) but was subsequently amended during the year ended December 31, 2012 to allow for additional borrowings. The Tempus Acquisition Loan bore interest at a rate of 18.0% and was scheduled to mature on June 30, 2015.
On July 1, 2011, an aggregate of $7.5 million of the Tempus Acquisition Loan was used by Tempus Acquisition, LLC to purchase a 10% participating interest in the Tempus Receivables Loan (defined below), and the remaining proceeds were loaned to Mystic Dunes, LLC pursuant to a Loan and Security Agreement having payment terms identical to the Tempus Acquisition Loan (the "Mystic Dunes Loan"). The Mystic Dunes Loan was collateralized by all assets of Mystic Dunes, LLC.
On July 24, 2013, the Company repaid all outstanding indebtedness under the Tempus Acquisition Loan in the amount of $46.7 million, along with $0.6 million in accrued interest and $2.7 million in exit fees and other fees, using the proceeds from the IPO. In addition, the Mystic Dunes Loan was paid off in full.

26

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


On July 1, 2011, Mystic Dunes Receivables, LLC, a subsidiary of Mystic Dunes, LLC, entered into a Loan and Security Agreement (the "Tempus Receivables Loan") with Resort Finance America, LLC ("RFA"). The Tempus Receivables Loan was a receivables credit facility in the amount of $74.5 million, collateralized by mortgages and contracts receivable acquired in the Tempus Resorts Acquisition. The Tempus Receivables Loan bore interest at a rate that was the higher of (i) one-month LIBOR plus 7.0% or (ii) 10%, adjusted monthly, and was scheduled to mature on July 1, 2015. Furthermore, the Company was obligated to pay RFA an initial defaulted timeshare loans release fee over 36 months from August 2011 through July 2014 ("Notes Payable—RFA fees"). The fee was recorded at fair value as of July 1, 2011 using a discount rate of 10.0%.
On September 20, 2013, the Tempus Receivables Loan and Notes Payable—RFA fees were paid off in full using the proceeds from the Tempus 2013 Notes.
On July 1, 2011, another subsidiary of Mystic Dunes, LLC entered into an Amended and Restated Inventory Loan and Security Agreement with Textron Financial Corporation (the “Tempus Inventory Loan”) in the maximum amount of $4.3 million, collateralized by certain VOI inventory acquired in the Tempus Resorts Acquisition. The Tempus Inventory Loan bore interest at a rate equal to the three-month LIBOR (with a floor of 2.0%) plus 5.5% and was scheduled to mature on June 30, 2016, subject to extension to June 30, 2018.
On May 9, 2014, the Company repaid all outstanding indebtedness under the Tempus Inventory Loan in the amount of $2.0 million, along with a de minimis amount in accrued interest and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility.
PMR Acquisition Loan and Inventory Loan. On May 21, 2012, DPMA completed the PMR Acquisition whereby it acquired assets pursuant to an Asset Purchase Agreement, among DPMA and Pacific Monarch Resorts, Inc., Vacation Interval Realty, Inc., Vacation Marketing Group, Inc., MGV Cabo, LLC, Desarrollo Cabo Azul, S. de R.L. de C.V., and Operadora MGVM S. de R.L. de C.V. Pursuant to the Asset Purchase Agreement, DPMA acquired four resort management agreements, unsold VOIs and the rights to recover and resell such interests, a portion of the seller's consumer loans portfolio and certain real property and other assets, for approximately $51.6 million in cash, plus the assumption of specified liabilities related to the acquired assets.
In order to fund the PMR Acquisition, on May 21, 2012, DPMA entered into a Loan and Security Agreement with Guggenheim Corporate Funding, LLC, as the administrative agent for the lenders, which included affiliates of, or funds or accounts managed or advised by, Guggenheim Partners Investment Management, LLC, which is an affiliate of the Guggenheim Investor; Wellington Management Company, LLP, including some of the investors in the Company; and Silver Rock Financial LLC, another one of the investors in the Company (the “PMR Acquisition Loan”). The PMR Acquisition Loan was collateralized by substantially all of the assets of DPMA. The PMR Acquisition Loan was initially in an aggregate principal amount of $71.3 million (consisting of a $61.3 million term loan and a $10.0 million revolving loan). The PMR Acquisition Loan bore interest at a rate of 18.0%, and was scheduled to mature on May 21, 2016.

On July 24, 2013, the Company repaid all outstanding indebtedness under the PMR Acquisition Loan in the principal amount of $58.3 million, along with $0.8 million in accrued interest and $3.1 million in exit fees and other fees, using the proceeds from the IPO.

On May 21, 2012, DPMA also entered into an Inventory Loan and Security Agreement (the "DPM Inventory Loan") with RFA PMR LoanCo, LLC. The DPM Inventory Loan provided debt financing for a portion of the purchase price of the defaulted receivables to be purchased by DPMA pursuant to a collateral recovery and repurchase agreement entered into between DPMA and an affiliate of RFA PMR LoanCo, LLC in connection with the PMR Acquisition. The interest rate was a variable rate equal to the sum of LIBOR plus 6.0% per annum; provided that LIBOR was never less than 2.0% or greater than 4.0% per annum.

On May 9, 2014, the Company repaid all outstanding indebtedness under the DPM Inventory Loan in the principal amount of $7.3 million, along with $0.1 million in accrued interest and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility. There was no principal balance outstanding under the DPM Inventory Loan as of September 30, 2014; however, the Company has the option of borrowing additional amounts under the DPM Inventory Loan.
      
2013 Revolving Credit Facility. On September 11, 2013, the Company entered into a $25.0 million revolving credit facility with Credit Suisse AG acting as the administrative agent for a group of lenders (the “2013 Revolving Credit Facility”). The 2013 Revolving Credit Facility provided that, subject to customary borrowing conditions, the Company could, from time to time prior to the fourth anniversary of the effective date of the 2013 Revolving Credit Facility, borrow, repay and re-borrow loans in an aggregate amount outstanding at any time not to exceed $25.0 million, and borrowings under the 2013 Revolving Credit Facility bore interest, at the Company's option, at a variable rate equal to the sum of LIBOR plus 4.0% per annum or an adjusted base

27

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


rate plus 3.0% per annum. The repayment of borrowings and certain other obligations under the 2013 Revolving Credit Facility were secured on a pari passu basis by the collateral that secured the Senior Secured Notes. On May 9, 2014, the Company terminated the 2013 Revolving Credit Facility in conjunction with its entry into the Senior Credit Facility, which includes a $25.0 million revolving line of credit. There was no principal balance outstanding under the 2013 Revolving Credit Facility immediately prior to its termination.
Island One Borrowings. In connection with the Island One Acquisition completed on July 24, 2013, the Company assumed the loan sale agreement entered into by a subsidiary of Island One, Inc. on January 31, 2012 with Quorum that provides for an aggregate minimum $15.0 million loan sale facility (the "Island One Quorum Funding Facility"). Under the Island One Quorum Funding Facility, eligible consumer loans and in-transit loans are sold to Quorum on a non-recourse, permanent basis, provided that the underlying consumer obligor is, or becomes, a Quorum credit union member. The Island One Quorum Funding Facility provides for a purchase period of three years at a variable program fee of the published Wall Street Journal prime rate plus 6.0% with a floor of 8.0%. The loan purchase commitment is conditional upon certain portfolio delinquency and default performance measurements. As of September 30, 2014, the weighted average purchase price payment of the Quorum Facility and the Island One Quorum Funding Facility was 86.8% of the obligor loan amount and the weighted average program purchase fee was 5.5% of the obligor loan amount.
In addition, in the Island One Acquisition, the Company assumed a mortgage-backed loan (the "Island One Receivables Loan") that bore interest at the published Wall Street Journal prime rate plus 5.5% with a floor of 7.0%. The Island One Receivables Loan was scheduled to mature on May 27, 2016 and was collateralized by certain consumer loan portfolios. The advance rates on loans receivable in the portfolio were limited to 70.0% to 90.0% of the face value of the eligible loans depending upon the credit quality of the underlying mortgages. The Island One Receivables Loan was subject to certain financial covenants, including a minimum tangible net worth and a maximum debt to tangible net worth ratio. On October 28, 2013, the Company paid off in full the then-outstanding principal balance under the Island One Receivables Loan in an amount equal to $4.1 million, using the Company's general corporate funds.
Furthermore, in the Island One Acquisition, the Company assumed a conduit facility that was scheduled to mature on September 30, 2016 (the "Island One Conduit Facility") until it was paid off in full on February 11, 2014, using payments remitted by the Company's customers. The Island One Conduit Facility bore interest at a rate of 7.4% per annum, was secured by certain consumer loan portfolios and was guaranteed by Island One, Inc. The Company was required to make mandatory monthly principal payments based upon the aggregate remaining outstanding principal balance of the eligible underlying collateral.
In the Island One Acquisition, the Company also assumed a note payable in the amount of $0.7 million secured by certain real property in Orlando, Florida (the "Island One Note Payable"). The loan bore interest at 5.0% per annum and required monthly principal and interest payments, until it was repaid in full on December 31, 2013, using the Company's general corporate funds.
Notes Payable. The Company finances premiums on certain insurance policies under two unsecured notes, both of which are scheduled to mature in January 2015 and carry an interest rate of 3.1% per annum. In addition, the Company purchased certain software licenses during the three months ended June 30, 2014, with annual interest-free payments due for the next three years, and this obligation was recorded at fair value using a discount rate of 5.0%.

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DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


The following table presents selected information on the Company’s borrowings as of the dates presented below (dollars in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Principal
Balance
 
Weighted
Average
Interest
Rate
 
Maturity
 
Gross Amount of Mortgages and Contracts as Collateral
 
Borrowing / Funding Availability
 
Principal
Balance
Senior Credit Facility
 
$
443,888

 
5.5%
 
5/9/2021
 
$

 
$
25,000

 
$

Original issue discount related to Senior Credit
Facility
 
(2,122
)
 
 
 
 
 

 

 

Senior Secured Notes
 

 
 
 
 
 

 

 
374,440

Original issue discount related to Senior Secured
     Notes
 

 
 
 
 
 

 

 
(6,548
)
Notes payable-insurance policies (2)
 
2,089

 
3.1%
 
Various
 

 

 
3,130

Notes payable-other (2)
 
319

 
5.0%
 
Various
 

 

 
172

Total Corporate Indebtedness
 
444,174

 
 
 
 
 

 
25,000

 
371,194

 
 
 
 
 
 
 
 
 
 
 
 
 
ILXA Inventory Loan (1)(2)(3)
 

 
 
 
 
 

 

 
11,268

DPM Inventory Loan (1)(2)(3)
 

 
 
 
 
 

 

 
6,261

Tempus Inventory Loan (1)(2)(3)
 

 
 
 
 
 

 

 
2,308

Notes payable-other (1)(2)(3)
 
6

 
—%
 
11/18/2015
 

 

 
11

Total Non-Recourse Indebtedness other than Securitization Notes and Funding Facilities
 
6

 
 
 
 
 

 

 
19,848

 
 
 
 
 
 
 
 
 
 
 
 
 
Conduit Facility (1)
 
157,619

 
3.8%
 
4/10/2015
 
183,747

 
17,381

(4)

Diamond Resorts Owner Trust Series 2013-2 (1)
 
148,379

 
2.3%
 
5/20/2026
 
154,968

 

 
218,235

DRI Quorum Facility and Island One Quorum Funding Facility(1)
 
59,826

 
5.5%
 
Various
 
67,376

 
23,268

(4)
51,660

Diamond Resorts Owner Trust Series 2013-1 (1)
 
47,021

 
2.0%
 
1/20/2025
 
50,652

 

 
63,059

Diamond Resorts Tempus Owner Trust 2013 (1)
 
20,006

 
6.0%
 
12/20/2023
 
24,416

 

 
28,950

Diamond Resorts Owner Trust Series 2011-1 (1)
 
18,762

 
4.0%
 
3/20/2023
 
19,196

 

 
24,792

Original issue discount related to Diamond
Resorts Owner Trust Series 2011-1
 
(172
)
 
 
 
 
 

 

 
(226
)
ILXA Receivables Loan (1)(3)
 

 
 
 
 
 

 

 
4,766

Island One Conduit Facility (1)
 

 
 
 
 
 

 

 
31

Total Securitization Notes and Funding Facilities
 
451,441

 
 
 
 
 
500,355

 
40,649

 
391,267

Total
 
$
895,621

 
 
 
 
 
$
500,355

 
$
65,649

 
$
782,309

(1) Non-recourse indebtedness
 
 
 
 
 
 
 
 
 
 
 
 
(2) Other notes payable
 
 
 
 
 
 
 
 
 
 
 
 
(3) Borrowing through special-purpose subsidiaries only
 
 
 
 
(4) Borrowing / funding availability is calculated as the difference between the maximum commitment amount and the outstanding principal balance; however, the actual availability is dependent on the amount of eligible loans that serve as the collateral for such borrowings.
Borrowing Restrictions and Limitations
All of the Company’s borrowing under the Senior Credit Facility, securitization notes and the Conduit Facility contain various restrictions and limitations that may affect the Company's business and affairs. These include, but are not limited to, restrictions and limitations relating to its ability to incur indebtedness and other obligations, to make investments and acquisitions and to pay dividends. The Company is also required to maintain certain financial ratios and comply with other financial and performance covenants. The failure of the Company to comply with any of these provisions, or to pay its obligations, could result in foreclosure by the lenders of their security interests in the Company’s assets, and could otherwise have a material adverse effect on the Company. The Company was in compliance with all of the financial covenants as of September 30, 2014.


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DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 17 — Income Taxes
In accordance with ASC 740-270, Accounting for Income Taxes in Interim Periods, the income tax provision for the three and nine months ended September 30, 2014 was determined using an estimated annual effective tax rate based on estimated income before provision for income taxes for the full year ending December 31, 2014.
The income tax provision for the three and nine months ended September 30, 2013 was determined based on pre-tax book income for the three and nine months ended September 30, 2013, which was then adjusted for book-tax differences; however, because the Company included, prior to the Reorganization Transactions, U.S. entities not taxed at the corporate level, non-U.S. disregarded entities, differences in tax rates between the U.S. and foreign jurisdictions, valuation allowances on its foreign and domestic net operating losses and other deferred tax assets, and rate change adjustments in calculating its income tax provision, the Company's estimated effective tax rate differed significantly from the federal statutory rate of 35% for the three and nine months ended September 30, 2013.

Note 18 — Commitments and Contingencies
Lease Agreements
The Company conducts a significant portion of its operations from leased facilities, which include regional and global administrative facilities as well as off-premise booths and tour centers at or near active sales centers. The longest of these obligations extends into 2019. Many of these agreements have renewal options, subject to adjustments for inflation. In most cases, the Company expects that in the normal course of business, such leases will be renewed or replaced by other leases. Typically, these leases call for a minimum lease payment that increases over the life of the agreement by a fixed percentage or an amount based upon the change in a designated index. All of the facilities lease agreements are classified as operating leases.
In connection with the Company's lease of an aircraft from Banc of America Leasing & Capital, LLC, Mr. Cloobeck entered into a guaranty in favor of Banc of America Leasing & Capital, LLC. Pursuant to this guaranty, Mr. Cloobeck guarantees the Company's lease payments and any related indebtedness to Banc of America Leasing & Capital, LLC. In connection with this aircraft lease and pursuant to this lease agreement, the Company paid Banc of America Leasing & Capital, LLC $0.3 million for each of the three months ended September 30, 2014 and 2013, and $0.9 million for each of the nine months ended September 30, 2014 and 2013. The Company did not compensate Mr. Cloobeck for providing such guaranties.
In addition, the Company leases office and other equipment under both long-term and short-term lease arrangements, which are generally classified as operating leases.
Purchase Obligations
The Company has entered into various purchase obligations relating to sales center remodeling, resort amenity improvement and corporate office expansion projects. The total remaining commitment was $1.3 million as of September 30, 2014.
Long-Term Incentive Plan
During the first quarter of 2014, the Company implemented a long-term incentive plan to retain certain key management personnel (none of whom were executive officers of the Company at the time of grant). All amounts due under this plan are payable in the first quarter of 2016 if certain Company objectives are met and the respective participants are actively employed by the Company at such time. The Company granted a total of $3.5 million in long-term incentives under this plan, which is being expensed ratably over the two-year period ending December 31, 2015.  
Hurricane Odile
In September 2014, Hurricane Odile, a Category 4 hurricane, inflicted widespread damage on the Baja California peninsula, particularly in the state of Baja California Sur, in which the Cabo Azul Resort, one of the Company’s managed resorts, is located.

The Company owns unsold Vacation Interests and property and equipment at the Cabo Azul Resort and some of its assets have suffered significant damage. The Cabo Azul Resort will remain closed for the next several months as the property is repaired; however, management believes the Company has sufficient property insurance and business interruption insurance coverage so that damage caused by Hurricane Odile and the subsequent business interruption will not have a material impact on the Company's financial condition or results of operations.


30

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 19 — Fair Value Measurements
ASC 820, "Fair Value Measurements" ("ASC 820"), defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3: Unobservable inputs used when little or no market data is available.
As of September 30, 2014, the only assets and liabilities of the Company measured at fair value on a recurring basis were its derivative instruments, which consisted of the March 2014 Swap, the April 2014 Swap, the June 2014 Swap and the September 2014 Swap and had an aggregate fair value of $0.2 million based on valuation reports provided by counterparties and were classified as Level 3, based on the fact that the credit risk data used for the valuation is not directly observable and cannot be corroborated by observable market data. The Company’s assessment of the significant inputs to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. See "Note 3—Concentrations of Risk" for further detail on these swap agreements.
As of September 30, 2014, mortgages and contracts receivable had a balance of $464.4 million, net of allowance. The allowance for loan and contract losses against the mortgages and contracts receivable is derived using a static pool analysis to develop historical default percentages based on FICO scores to apply to the mortgage and contract population. The Company evaluates other factors such as economic conditions, industry trends and past due aging reports in order to determine the adjustments needed to true up the allowance, which adjusts the carrying value of mortgages and contracts receivable to management's best estimate of collectability. As a result of such evaluation, the Company believes that the carrying value of the mortgages and contracts receivable approximated its fair value at September 30, 2014. These financial assets were classified as Level 3, as there is little market data available.
As of September 30, 2014, the borrowings under the Senior Credit Facility were classified as Level 2 based on an internal analysis performed by the Company utilizing the discounted cash flow model. The Company believes the fair value of the Senior Credit Facility approximated its carrying value at such date due to the fact that it was recently issued and, therefore, measured using other significant observable inputs.
As of September 30, 2014, the Company’s DROT 2011 Notes, DROT 2013-1 Notes, the Tempus 2013 Notes and DROT 2013-2 Notes were classified as Level 2. The fair value of the DROT 2011 Notes, DROT 2013-1 Notes and DROT 2013-2 Notes, was determined with the assistance of an investment banking firm, which the Company believes approximated similar instruments in active markets. The Company believes the fair value of the Tempus 2013 Notes approximated their carrying value due to the fact that they were recently issued and, therefore measured using other significant observable inputs.
As of September 30, 2014, the Quorum Facility and the Island One Quorum Funding Facility were classified as Level 2 based on an internal analysis performed by the Company utilizing the discounted cash flow model and the quoted prices for identical or similar instruments in markets that are not active.
As of September 30, 2014, the fair value of all other debt instruments was not calculated, based on the fact that they were either due within one year or were immaterial.
As of December 31, 2013, mortgages and contracts receivable had a balance of $405.5 million, net of allowance. The allowance for loan and contract losses against the mortgages and contracts receivable is derived using a static pool analysis to develop historical default percentages based on FICO scores to apply to the mortgage and contract population. The Company evaluates other factors such as economic conditions, industry trends and past due aging reports in order to determine the adjustments needed to true up the allowance, which adjusts the carrying value of mortgages and contracts receivable to management's best estimate of collectability. As a result of such evaluation, the Company believes that the carrying value of the mortgages and contracts receivable approximated its fair value at December 31, 2013. These financial assets are classified as Level 3, as there is little market data available.
The borrowings under the Senior Secured Notes were classified as Level 2 as of December 31, 2013 based on a quoted price of $110.5 on a restricted bond market, as they were not actively traded on the open market.

31

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


As of December 31, 2013, the Company’s DROT 2011 Notes, DROT 2013-1 Notes, the Tempus 2013 Notes, and DROT 2013-2 Notes were classified as Level 2. The fair value of the DROT 2011 Notes, DROT 2013-1 Notes and DROT 2013-2 Notes was determined with the assistance of an investment banking firm, which the Company believes approximated similar instruments in active markets. The Company believes the fair value of the Tempus 2013 Notes approximated their carrying value due to the fact that they were recently issued and, therefore, measured using other significant observable inputs including the current refinancing activities.
As of December 31, 2013, the Quorum Facility, the ILXA Receivables Loan, the ILXA Inventory Loan, the Tempus Inventory Loan, the DPM Inventory Loan, the Island One Quorum Funding Facility and the Island One Conduit Facility were classified as Level 2 based on an internal analysis performed by the Company utilizing the discounted cash flow model and the quoted prices for identical or similar instruments in markets that are not active.
As of December 31, 2013, the fair value of all other debt instruments was not calculated, based on the fact that they were either due within one year or were immaterial.
In accordance with ASC 820, the Company also applied the provisions of fair value measurement to various non-recurring measurements for the Company’s financial and non-financial assets and liabilities and recorded the impairment charges. The Company’s non-financial assets consist of property and equipment, which are recorded at cost, net of depreciation, unless impaired, and assets held for sale, which are recorded at the lower of cost or their estimated fair value less costs to sell.
The carrying values and estimated fair values of the Company's financial instruments as of September 30, 2014 were as follows (in thousands):
 
 
Carrying Value
 
Total Estimated Fair Value
 
Estimated Fair Value (Level 2)
 
Estimated Fair Value (Level 3)
Assets:
 
 
 
 
 
 
 
 
    Mortgages and contracts receivable, net
 
$
464,400

 
$
464,400

 
$

 
$
464,400

Total assets
 
$
464,400

 
$
464,400

 
$

 
$
464,400

Liabilities:
 
 
 
 
 
 
 
 
    Senior Credit Facility, net
 
$
441,766

 
$
441,766

 
$
441,766

 
$

    Securitization notes and Funding Facilities, net
 
451,441

 
454,242

 
454,242

 

    Notes payable
 
2,414

 
2,414

 
2,414

 

Total liabilities
 
$
895,621

 
$
898,422

 
$
898,422

 
$

 
 
 
 
 
 
 
 
 
The carrying values and estimated fair values of the Company's financial instruments as of December 31, 2013 were as follows (in thousands):
 
 
Carrying Value
 
Total Estimated Fair Value
 
Estimated Fair Value (Level 2)
 
Estimated Fair Value (Level 3)
Assets:
 
 
 
 
 
 
 
 
    Mortgages and contracts receivable, net
 
$
405,454

 
$
405,454

 
$

 
$
405,454

Total assets
 
$
405,454

 
$
405,454

 
$

 
$
405,454

Liabilities:
 
 
 
 
 
 
 
 
    Senior Secured Notes, net
 
$
367,892

 
$
413,756

 
$
413,756

 
$

    Securitization notes and Funding Facilities, net
 
391,267

 
392,317

 
392,317

 

    Notes payable
 
23,150

 
23,095

 
23,095

 

Total liabilities
 
$
782,309

 
$
829,168

 
$
829,168

 
$


Note 20 — Stock-Based Compensation
On July 8, 2013, the board of directors of the Company approved the Diamond Resorts International, Inc. 2013 Incentive Compensation Plan (the "2013 Plan"), which authorized the issuance of non-qualified and incentive stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, other stock-based awards and annual cash incentive awards to: (i) officers and employees of the Company or any of the Company's subsidiaries (including leased employees and co-employees with a professional employer organization); (ii) non-employee directors of the Company or

32

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


(iii) consultants or advisors to the Company or any of its subsidiaries (collectively, the “Eligible Persons”). Under the 2013 Plan, a total of 9,733,245 shares of common stock are authorized for issuance. As of September 30, 2014, 1,515,960 shares remained available for issuance under the 2013 Plan.
On July 18, 2013, the Company granted to the former holders of DRP Class B common units ("BCUs") non-qualified stock options, which were immediately vested, exercisable for an aggregate of 3,760,215 shares of common stock, at an option price of $14.00 per share, in part to maintain the incentive value intended when the Company originally issued those BCUs to these individuals and to provide an incentive for such individuals to continue providing service to the Company. The grantees of these immediately vested options include Messrs. Cloobeck, Kraff, David F. Palmer (President and Chief Executive Officer of the Company), Bentley, Lanznar and two employees of the Company. Messrs. Cloobeck, Palmer, Bentley and Lanznar are not employed or compensated directly by the Company, but are rather employed or independently contracted and compensated by HM&C pursuant to the HM&C Agreement. See "Note 6—Transactions with Related Parties" for further detail on the HM&C Agreement.
On July 18, 2013, the Company also issued non-qualified stock options exercisable for an aggregate of 2,672,100 shares of common stock to certain Eligible Persons (including individuals who received the options discussed in the immediately preceding paragraph) in connection with the IPO at an option price of $14.00 per share with a service-only vesting condition. 25% of shares issuable upon the exercise of such options vested immediately on the grant date and the remaining 75% vest equally on each of the next three anniversary dates. All options issued on July 18, 2013 expire on July 18, 2023.
From July 19, 2013 to September 30, 2014, the Company issued additional non-qualified stock options, exercisable for an aggregate of 1,736,000 shares of common stock, to Eligible Persons, each at an option price equal to the market price on the applicable grant date. 25% of shares issuable upon the exercise of such options vested immediately on the grant date and the remaining 75% vest equally on each of the next three grant date anniversary dates. All of these options expire ten years from the grant date.
The Company accounts for its stock-based compensation issued to its employees and non-employee directors (in their capacity as such) in accordance with ASC 718, "Compensation - Stock Compensation" ("ASC 718"). For a stock-based award with service-only vesting conditions, the Company measures compensation expense at fair value on the grant date and recognizes this expense in the statement of operations and comprehensive income over the vesting period during which the employees of the Company provide service in exchange for the award. The Company accounts for stock-based compensation issued to employees and independent contractors of HM&C and Mr. Kraff (the "Non-Employees," and the stock-based compensation issued to such individuals, the "Non-Employee Grants") in accordance with ASC 505-50, "Equity-Based Payments to Non-Employees." The fair value of an equity instrument issued to Non-Employees is measured by using the stock price and other measurement assumptions as of the date at the earlier of: (i) a commitment for performance by the grantees has been reached or (ii) the performance by the grantees is complete. Accordingly, these grants are re-measured at each balance sheet date as additional services are performed.
The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of the stock options granted to its employees and Non-Employees. At September 30, 2014, the expected volatility was calculated based on the historical volatility of the stock prices for a group of identified peer companies for the expected term of the stock options on the grant date (which is significantly greater than the volatility of the S&P 500® index as a whole during the same period) due to the lack of historical stock trading prices of the Company. The average expected option life represented the period of time the stock options were expected to be outstanding at the issuance date based on management’s estimate using the simplified method prescribed under SEC Staff Accounting Bulletin Topic 14 Share-Based Payment ("SAB 14") for employee grants and contractual terms for non-employee grants. The risk-free interest rate was calculated based on U.S. Treasury zero-coupon yield with a remaining term that approximated the expected option life assumed at the date of issuance. The expected annual dividend per share was 0% based on the Company’s expected dividend rate.

33

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


The following table sets forth fair value per share information, including related assumptions, used to determine compensation cost for the Company’s non-qualified stock options consistent with the requirements of ASC 718.
 
 
Nine Months Ended
 September 30, 2014
 
Nine Months Ended
September 30, 2013
 
 
Non-Employees
 
Company Employees
 
Non-Employees
 
Company Employees
Weighted average fair value per share
 
$
12.3

 
$
8.1

 
$
8.9

 
$
7.4

Expected stock price volatility
 
52.8
%
 
52.8
%
 
49.8
%
 
52.9
%
Expected option life (years)
 
6.00

 
6.00

 
9.13

 
6.55

Risk-free interest rate
 
1.70
%
 
1.71
%
 
2.40
%
 
1.80
%
Expected annual dividend yield
 
%
 
%
 
%
 
%
Stock option activity related to stock option grants issued to the Non-Employees and employees of the Company during the nine months ended September 30, 2014 was as follows:
 
Non-Employees
 
Company Employees
 
Options
 (In thousands)
 
Weighted-Average Exercise Price
(Per Share)
 
Weighted-Average Remaining Contractual Term
 (Years)
 
Aggregate Intrinsic Value
 (In thousands)
 
Options
 (In thousands)
 
Weighted-Average Exercise Price
(Per Share)
 
Weighted-Average Remaining Contractual Term
 (Years)
 
Aggregate Intrinsic Value
 (In thousands)
Outstanding at January 1, 2014
4,458

 
$
14.00

 
9.5
 
$
19,882

 
2,128

 
$
14.34

 
9.5
 
$
8,776

Granted
550

 
18.60

 
9.4
 
 
 
1,020

 
18.96

 
 
 
 
Exercised

 

 
 
 
 
 
(156
)
 
14.81

 
 
 
 
Forfeited

 

 
 
 
 
 
(50
)
 
16.09

 
 
 
 
Outstanding at
September 30, 2014
5,008

 
$
14.51

 
8.8
 
$
41,339

 
2,942

 
$
15.88

 
9.7
 
$
20,228

Exercisable at
September 30, 2014
4,111

 
$
14.15

 
8.8
 
$
35,377

 
1,251

 
$
16.85

 
8.9
 
$
7,389

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been realized by the option holders had all option holders exercised their options on September 30, 2014. The intrinsic value of a stock option on any date is the excess of the Company’s closing stock price on that date over the exercise price, multiplied by the number of shares subject to the option.
The following table summarizes the Company’s unvested stock option activity for the nine months ended September 30, 2014:
 
Non-Employees
 
Company Employees
 
Options
(In thousands)
 
 Weighted-Average Exercise Price
(Per Share)
 
Options
 (In thousands)
 
 Weighted-Average Exercise Price
 (Per Share)
Unvested at January 1, 2014
727

 
$
14.00

 
1,389

 
$
14.39

Granted
550

 
18.60

 
1,020

 
18.96

Vested
(379
)
 
15.67

 
(648
)
 
16.02

Forfeited or expired

 

 
(50
)
 
16.09

Unvested at September 30, 2014
898

 
$
16.11

 
1,711

 
$
16.51

During the nine months ended September 30, 2014, the Company issued restricted common stock to certain non-employee members of the board of directors of the Company, which vest equally on each of the first three anniversary dates from the grant date. The following table summarizes the Company’s unvested restricted stock activity for the nine months ended September 30, 2014:

34

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


 
 Shares
   (In thousands)
 
 Weighted-Average Exercise Price
 (Per Share)
Unvested at January 1, 2014
32

 
$
14.46

Granted
23

 
19.16

Vested
(11
)
 
14.46

Forfeited or expired

 

Unvested at September 30, 2014
44

 
$
16.92

During the nine months ended September 30, 2014, the Company also issued unrestricted shares of common stock to the members of the board of directors of the Company (other than Messrs. Cloobeck, Palmer and Kraff) in lieu of cash
retainers for service on the Company's board of directors and applicable board committees, the values of which were measured at the trading prices of the Company's common stock on the issuance dates. The value of the restricted shares of common stock is being amortized on a straight-line basis over its three-year vesting period and the value of the unrestricted shares of common stock is being amortized on a straight-line basis through December 31, 2014.
The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 (in thousands). Stock options issued to employees of HM&C are deemed Non-Employee Grants.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Non-Employee stock option grants
$
1,241

 
$
32,283

 
$
5,312

 
$
32,283

Company employee grants
1,909

 
6,041

 
6,171

 
6,041

Common stock and restricted stock grants
issued to members of the board of directors
186

 
171

 
715

 
171

Total
$
3,336

 
$
38,495

 
$
12,198

 
$
38,495

In accordance with SAB 14, the Company records stock-based compensation to the same line item on the statement of operations as the grantees' cash compensation. In addition, the Company records stock-based compensation to the same business segment on the statement of operations as the grantees' cash compensation for segment reporting purposes in accordance with ASC 280, "Segment Reporting."
The following table summarizes the effect of the stock-based compensation for the three months ended September 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
Management and member services
 
$
350

 
$

 
$

 
$
350

 
$
718

 
$

 
$

 
$
718

Advertising, sales and marketing
 

 
537

 

 
537

 

 
1,950

 

 
1,950

Vacation Interest carrying cost, net
 

 
65

 

 
65

 

 
174

 

 
174

Loan portfolio
 

 
102

 

 
102

 

 
264

 

 
264

General and Administrative
 

 

 
2,282

 
2,282

 

 

 
35,389

 
35,389

Total
 
$
350

 
$
704

 
$
2,282

 
$
3,336

 
$
718

 
$
2,388

 
$
35,389

 
$
38,495


35

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


The following table summarizes the effect of the stock-based compensation for the nine months ended September 30, 2014 and 2013 (in thousands):
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
Management and member services
 
$
1,314

 
$

 
$

 
$
1,314

 
$
718

 
$

 
$

 
$
718

Advertising, sales and marketing
 

 
1,804

 

 
1,804

 

 
1,950

 

 
1,950

Vacation Interest carrying cost, net
 

 
212

 

 
212

 

 
174

 

 
174

Loan portfolio
 

 
338

 

 
338

 

 
264

 

 
264

General and Administrative
 

 

 
8,530

 
8,530

 

 

 
35,389

 
35,389

Total
 
$
1,314

 
$
2,354

 
$
8,530

 
$
12,198

 
$
718

 
$
2,388

 
$
35,389

 
$
38,495

The following table summarizes the Company’s unrecognized stock-based compensation expense as of September 30, 2014 (dollars in thousands):
 
Non-Employees Grants
 
Company Employees Grants
 
Director Common Stock and Restricted Stock Grants
 
Total
Unrecognized stock-based compensation expense
$
10,429

 
$
11,933

 
$
750

 
$
23,112

Weighted-average remaining amortization period
2.1

 
2.1

 
1.5

 
2.0

Note 21 — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
 
 
Cumulative Translation Adjustment
 
Post-retirement Benefit Plan
 
Other
 
Total
Balance, December 31, 2013
 
$
(14,171
)
 
$
(2,064
)
 
$
58

 
$
(16,177
)
Period change
 
(1,420
)
 
128

 
(6
)
 
(1,298
)
Balance, September 30, 2014
 
$
(15,591
)
 
$
(1,936
)
 
$
52

 
$
(17,475
)
 
 
 
 
 
 
 
 
 

Note 22 — Net income (loss) per share
The Company calculates net income per share in accordance with ASC Topic 260, "Earnings Per Share." Basic net income (loss) per share is calculated by dividing net income or loss for common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) by weighted-average common shares outstanding during the period plus potentially dilutive common shares, such as stock options and restricted stock.
Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and restricted stock are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.
For both the three and nine months ended September 30, 2013, the potentially dilutive stock options and restricted stock excluded from the net income (loss) per share computation were 33,561 and 1,103, respectively, as their effect would be antidilutive due to the net loss reported by the Company.

36

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


The table below sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Computation of Basic Net Income (Loss) Per Share:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
26,304

 
$
(26,327
)
 
$
37,583

 
$
(6,098
)
Weighted average shares outstanding
 
75,542

 
70,959

 
75,476

 
59,754

Basic net income (loss) per share
 
$
0.35

 
$
(0.37
)
 
$
0.50

 
$
(0.10
)
 
 
 
 
 
 
 
 
 
Computation of Diluted Net Income (Loss) Per Share:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
26,304

 
$
(26,327
)
 
$
37,583

 
$
(6,098
)
Weighted average shares outstanding
 
75,542

 
70,959

 
75,476

 
59,754

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Restricted stock (a)
 
22

 

 
13

 

Options to purchase common stock
 
1,854

 

 
1,206

 

Shares for diluted net income (loss) per share
 
77,418

 
70,959

 
76,695

 
59,754

Diluted net income (loss) per share
 
$
0.34

 
$
(0.37
)
 
$
0.49

 
$
(0.10
)
(a) Includes unvested dilutive restricted stock which are subject to future forfeitures.
    

Note 23 — Post-retirement Benefit Plan
In 1999, the Company entered into a collective labor agreement with the employees at its resorts in St. Maarten, where the Company currently functions as the HOA (the "Collective Labor Agreement"). The Collective Labor Agreement provides for an employee service allowance to be paid to employees upon their termination, resignation or retirement. Upon review of the Collective Labor Agreement, the Company determined that the employee service allowance should be accounted for as a defined benefit plan (the "Defined Benefit Plan") in accordance with the requirements of ASC 715, "CompensationRetirement Benefits."
The Company’s net obligation in respect of the Defined Benefit Plan is calculated by estimating the amount of future benefit that employees have earned in the current financial period and prior periods. The recording of the Defined Benefit Plan resulted in the recognition of (i) an unfunded pension liability of $2.9 million as of September 30, 2014; (ii) service costs, interest costs and amortized prior service costs of $0.1 million and $0.3 million for the three and nine months ended September 30, 2014 and $0.8 million for both the three and nine months ended September 30, 2013 and (iii) other comprehensive loss of $2.0 million for the accumulated benefit obligation of the Defined Benefit Plan related to the years prior to January 1, 2012. During the three months ended September 30, 2014, $0.1 million of benefits were paid to employees in accordance with the Defined Benefit Plan. During the nine months ended September 30, 2014, benefits totaling $0.2 million, were paid to employees in accordance with the Defined Benefit Plan.
A summary of benefit obligations, fair value of plan assets and funded status is as follows (in thousands):
 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
Projected obligations at the beginning of the period
$
2,920

 
$
2,910

Service costs
42

 
126

Interest costs
25

 
74

Benefits paid
(62
)
 
(185
)
Projected obligations at September 30, 2014
$
2,925

 
$
2,925


37

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


At September 30, 2014 and December 31, 2013, the Company had no plan assets. The benefit obligation and plan assets as of September 30, 2014 and December 31, 2013 were as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Fair value of plan assets
$

 
$

Benefit obligation
(2,925
)
 
(2,910
)
Unfunded obligation
$
(2,925
)
 
$
(2,910
)
Weighted-average assumptions used to determine net periodic benefit cost for the three and nine months ended September 30, 2014 and 2013 were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Settlement (discount) rate
 
4.11
%
 
3.31
%
 
4.11
%
 
3.31
%
Increase in future compensation
 
3.00
%
 
3.00
%
 
3.00
%
 
3.00
%
Amounts recognized in accumulated other comprehensive loss as of September 30, 2014 and December 31, 2013 consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Net loss
$
223

 
$
223

Prior year service cost
1,713

 
1,841

Total amounts included in accumulated other comprehensive loss
$
1,936

 
$
2,064

Components of net periodic benefit costs for the three and nine months ended September 30, 2014 and 2013 were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
42

 
$
322

 
$
126

 
$
322

Interest cost
 
25

 
153

 
74

 
153

Amortization of prior service costs
 
43

 
299

 
128

 
299

Net pension cost
 
$
110

 
$
774

 
$
328

 
$
774

Other changes in plan assets and projected benefit obligations recognized in other comprehensive loss for the three and nine months ended September 30, 2014 and 2013 were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net loss
 
$

 
$
223

 
$

 
$
223

Amortization of prior service costs
 
(43
)
 
299

 
(128
)
 
299

Total recognized in other comprehensive loss
 
(43
)
 
522

 
(128
)
 
522

Net pension cost
 
110

 
774

 
328

 
774

Total recognized in net pension cost and other comprehensive loss
 
$
67

 
$
1,296

 
$
200

 
$
1,296


Note 24 — Segment Reporting
The Company presents its results of operations in two segments: (i) Hospitality and Management Services, which includes operations related to the management of resort properties and the Collections, operations of the Clubs, operations of the properties located in St. Maarten for which the Company functions as the HOA, food and beverage venues owned and managed by the Company and the provision of other hospitality and management services and (ii) Vacation Interest Sales and Financing, which includes operations relating to the marketing and sales of Vacation Interests, as well as the consumer financing activities related to such sales. While certain line items reflected on the statement of operations and comprehensive income fall completely into one of these business segments, other line items relate to revenues or expenses that are applicable

38

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


to more than one segment. For line items that are applicable to more than one segment, revenues or expenses are allocated by management, which involves significant estimates. Certain expense items (principally corporate interest expense and depreciation and amortization) are not, in management’s view, allocable to either of these business segments, as they apply to the entire Company. In addition, general and administrative expenses (which exclude Hospitality and Management Services related overhead that is allocated to the HOAs and Collections) are not allocated to either of these business segments because, historically, management has not allocated these expenses for purposes of evaluating the Company’s different operational divisions. Accordingly, these expenses are presented under Corporate and Other.
Management believes that it is impracticable to allocate specific assets and liabilities related to each business segment. In addition, management does not review balance sheets by business segment as part of their evaluation of operating segment performances. Consequently, no balance sheet segment reports have been presented.
Information about the Company’s operations in different business segments for the periods presented below is as follows:

39

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT
For the Three Months Ended September 30, 2014 and 2013
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
37,795

 
$

 
$

 
$
37,795

 
$
33,610

 
$

 
$

 
$
33,610

Consolidated resort operations
 
10,481

 

 

 
10,481

 
9,326

 

 

 
9,326

Vacation Interest sales, net of provision of $0, $15,847, $0, $15,847, $0, $13,851, $0, and $13,851, respectively
 

 
143,180

 

 
143,180

 

 
123,708

 

 
123,708

Interest
 

 
16,783

 
347

 
17,130

 

 
13,971

 
326

 
14,297

Other
 
2,018

 
11,361

 

 
13,379

 
1,227

 
9,434

 

 
10,661

Total revenues
 
50,294

 
171,324

 
347

 
221,965

 
44,163

 
147,113

 
326

 
191,602

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
8,549

 

 

 
8,549

 
9,408

 

 

 
9,408

Consolidated resort operations
 
9,216

 

 

 
9,216

 
9,602

 

 

 
9,602

Vacation Interest cost of sales
 

 
16,476

 

 
16,476

 

 
18,605

 

 
18,605

Advertising, sales and marketing
 

 
82,308

 

 
82,308

 

 
70,714

 

 
70,714

Vacation Interest carrying cost, net
 

 
5,162

 

 
5,162

 

 
10,154

 

 
10,154

Loan portfolio
 
385

 
1,015

 

 
1,400

 
278

 
2,018

 

 
2,296

Other operating
 

 
5,847

 

 
5,847

 

 
3,912

 

 
3,912

General and administrative
 

 

 
26,747

 
26,747

 

 

 
61,114

 
61,114

Depreciation and amortization
 

 

 
8,271

 
8,271

 

 

 
7,583

 
7,583

Interest expense
 

 
3,866

 
7,428

 
11,294

 

 
4,267

 
16,658

 
20,925

Loss on extinguishment of debt
 

 

 

 

 

 

 
13,383

 
13,383

Impairments and other write-offs
 

 

 
11

 
11

 

 

 
1,200

 
1,200

Loss (gain) on disposal of assets
 

 

 
224

 
224

 

 

 
(585
)
 
(585
)
Gain on bargain purchase from business combinations
 

 

 

 

 

 

 
(2,756
)
 
(2,756
)
Total costs and expenses
 
18,150

 
114,674

 
42,681

 
175,505

 
19,288

 
109,670

 
96,597

 
225,555

Income (loss) before provision (benefit) for income taxes
 
32,144

 
56,650

 
(42,334
)
 
46,460

 
24,875

 
37,443

 
(96,271
)
 
(33,953
)
Provision (benefit) for income taxes
 

 

 
20,156

 
20,156

 

 

 
(7,626
)
 
(7,626
)
Net income (loss)
 
$
32,144

 
$
56,650

 
$
(62,490
)
 
$
26,304

 
$
24,875

 
$
37,443

 
$
(88,645
)
 
$
(26,327
)



40

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT
For the Nine Months Ended September 30, 2014 and 2013
(In thousands)
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
 
Hospitality and
Management
Services
 
Vacation
Interest Sales
and Financing
 
Corporate and
Other
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
115,238

 
$

 
$

 
$
115,238

 
$
96,304

 
$

 
$

 
$
96,304

Consolidated resort operations
 
28,825

 

 

 
28,825

 
26,465

 

 

 
26,465

Vacation Interest sales, net of provision of $0, $40,123, $0, $40,123, $0, $29,731, $0, and $29,731, respectively
 

 
379,082

 

 
379,082

 

 
325,815

 

 
325,815

Interest
 

 
47,798

 
1,212

 
49,010

 

 
40,021

 
1,138

 
41,159

Other
 
7,352

 
32,697

 

 
40,049

 
7,535

 
21,649

 

 
29,184

Total revenues
 
151,415

 
459,577

 
1,212

 
612,204

 
130,304

 
387,485

 
1,138

 
518,927

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
23,377

 

 

 
23,377

 
27,952

 

 

 
27,952

Consolidated resort operations
 
25,662

 

 

 
25,662

 
26,169

 

 

 
26,169

Vacation Interest cost of sales
 

 
44,840

 

 
44,840

 

 
45,451

 

 
45,451

Advertising, sales and marketing
 

 
214,190

 

 
214,190

 

 
181,668

 

 
181,668

Vacation Interest carrying cost, net
 

 
19,766

 

 
19,766

 

 
29,141

 

 
29,141

Loan portfolio
 
895

 
5,354

 

 
6,249

 
782

 
6,773

 

 
7,555

Other operating
 

 
16,650

 

 
16,650

 

 
6,518

 

 
6,518

General and administrative
 

 

 
74,203

 
74,203

 

 

 
105,612

 
105,612

Depreciation and amortization
 

 

 
24,601

 
24,601

 

 

 
19,912

 
19,912

Interest expense
 

 
10,790

 
34,502

 
45,292

 

 
12,451

 
58,110

 
70,561

Loss on extinguishment of debt
 

 

 
46,807

 
46,807

 

 

 
13,383

 
13,383

Impairments and other write-offs
 

 

 
53

 
53

 

 

 
1,279

 
1,279

Loss (gain) on disposal of assets
 

 

 
71

 
71

 

 

 
(673
)
 
(673
)
Gain on bargain purchase from business combinations
 

 

 

 

 

 

 
(2,726
)
 
(2,726
)
Total costs and expenses
 
49,934

 
311,590

 
180,237

 
541,761

 
54,903

 
282,002

 
194,897

 
531,802

Income (loss) before provision (benefit) for income taxes
 
101,481

 
147,987

 
(179,025
)
 
70,443

 
75,401

 
105,483

 
(193,759
)
 
(12,875
)
Provision (benefit) for income taxes
 

 

 
32,860

 
32,860

 

 

 
(6,777
)
 
(6,777
)
Net income (loss)
 
$
101,481

 
$
147,987

 
$
(211,885
)
 
$
37,583

 
$
75,401

 
$
105,483

 
$
(186,982
)
 
$
(6,098
)


41

DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued


Note 25 — Loss on Extinguishment of Debt
On May 9, 2014, the Company repaid all outstanding indebtedness under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan using a portion of the proceeds from the term loan portion of the Senior Credit Facility. The unamortized debt issuance costs on the ILX Inventory Loan and the Tempus Inventory Loan were recorded as a loss on extinguishment of debt.
In addition, on May 9, 2014, the Company terminated the 2013 Revolving Credit Facility in conjunction with its entry into the Senior Credit Facility and recorded the unamortized debt issuance costs as a loss on extinguishment of debt.
On June 9, 2014, the Company redeemed all of the remaining 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 unamortized debt discount were recorded as a loss on extinguishment of debt. See "Note 16Borrowings" for further detail on these transactions.
Loss on extinguishment of debt consisted of the following for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Senior Secured Notes
 
$

 
$
8,443

 
$
45,767

 
$
8,443

2013 Revolving Credit Facility
 

 

 
932

 

ILXA Inventory Loan
 

 

 
83

 

Tempus Inventory Loan
 

 

 
25

 

PMR Acquisition Loan
 

 
3,196
 

 
3,196

Tempus Acquisition Loan
 

 
1,744
 

 
1,744

Total loss on extinguishment of debt
 
$

 
$
13,383

 
$
46,807

 
$
13,383


Note 26 — Subsequent Events
On October 20, 2014, the March 2014 Swap, the April 2014 Swap, the June 2014 Swap and the September 2014 Swap were terminated. Also on October 20, 2014, as required by the Conduit Facility, the Company entered into the October 2014 Swap with a notional amount of $112.5 million that is scheduled to mature on October 20, 2024, to manage it's exposure to fluctuation interest rates. The Company pays interest at a fixed rate of 2.45% based on a floating notional amount according to a pre-determined amortization schedule and receives interest based on one-month floating LIBOR.
On October 28, 2014, the Board of Directors of the Company authorized a share repurchase program allowing for the expenditure of up to $100.0 million for the repurchase of the Company’s common stock. Repurchases will be made from time to time in accordance with applicable securities laws in the open market and/or in privately negotiated transactions, and may include repurchases pursuant to trading plans under Rule 10b5-1 of the Exchange Act). The repurchase program does not obligate the Company to acquire any particular amount of common stock or to acquire shares on any particular timetable, and the program may be suspended at any time at the Company’s discretion. The timing and amount of share repurchases will be determined by the Company’s management based on its evaluation of market conditions, the trading price of the stock, applicable legal requirements, compliance with the provisions of the Company’s credit agreement, and other factors.
The Company has evaluated all events or transactions that occurred after September 30, 2014 up to the filing date and did not identify any other subsequent events, the effects of which would require disclosure or adjustment to condensed consolidated balance sheets or condensed consolidated statements of operations and comprehensive income.






42


ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion 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 discussion 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 Quarterly Report as a result of various factors, including, among others:
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 vacation ownership interests ("VOI" or "Vacation Interests") for sale overall, as well as in specific multi-resort trusts (the "Collections");
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 regulations applicable to the vacation ownership industry;
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;
our ability to compete effectively; and
other risks and uncertainties discussed in "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K").
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 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 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 Quarterly 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.

In addition, you should read the following discussion in conjunction with our condensed consolidated financial statements and other financial information included elsewhere in this Quarterly Report.


43


Overview

We are a global leader in the hospitality and vacation ownership industry, with an ownership base of more than 515,000 owner-families, or members, and a worldwide network of 313 destinations located in 34 countries, throughout the world, including the continental United States ("U.S."), Hawaii, Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia and Africa. Our resort network includes 93 resort properties with approximately 11,000 units that we manage and 214 affiliated resorts and six cruise itineraries, which we do not manage and do not carry our brand, but are a part of our network and are available for our members to use as vacation destinations. For financial reporting purposes, our business consists of two segments: (i) Hospitality and Management Services, which is comprised of our hospitality and management services operations, including our operations related to the management of our resort properties, the Collections and the Clubs and (ii) Vacation Interest Sales and Financing, which is comprised of our marketing and sales of VOIs and the consumer financing of purchases of VOIs. Our Clubs include THE Club, which provides members access to all resorts in our 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 network and provide their members with a more limited offering of benefits. We refer to THE Club and other Club offerings as “the Clubs”.
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) implementing a focus throughout our business on service and hospitality and (iii) adding resorts to our network through complementary strategic acquisitions and affiliations. Management has also implemented growth strategies to increase our revenues while remaining consistent with our capital-efficient business model.
IPO and Related Transactions
On July 24, 2013, we closed the initial public offering (the "IPO") of an aggregate of 17,825,000 shares of our common stock at the IPO price of $14.00 per share. In the IPO, we sold 16,100,000 shares of our common stock and Cloobeck Diamond Parent, LLC ("CDP"), in its capacity as a selling stockholder, sold 1,725,000 shares of our common stock. The net proceeds to us were $204.3 million after deducting all offering expenses.
On July 24, 2013, using proceeds from the IPO, (i) we repaid all outstanding indebtedness under the Tempus Acquisition Loan in the amount of $46.7 million, along with $0.6 million in accrued interest and $2.7 million in exit fees and other fees and (ii) we repaid all outstanding indebtedness under the PMR Acquisition Loan in the amount of $58.3 million, along with $0.8 million in accrued interest and $3.1 million in exit fees and other fees. See "Liquidity and Capital Resources" for the definition of and more detail regarding these borrowings.
On July 24, 2013, concurrent with the closing of the IPO, we acquired all of the equity interests of Island One, Inc. and Crescent One, LLC (together, the “Island One Companies”) in exchange for 5,236,251 shares of common stock. These shares represented an aggregate purchase price of $73.3 million based on the IPO price of $14.00 per share. In this transaction, we acquired management contracts, unsold VOIs, a portfolio of consumer loans and other assets owned by the Island One Companies, adding eight additional managed resorts in Florida to our resort network and more owner-families to our ownership base (the “Island One Acquisition”). Prior to the closing of the Island One Acquisition, we had provided sales and marketing services and homeowners associations ("HOAs") management oversight services to Island One, Inc. See "Note 24—Business Combinations" of our consolidated financial statements in the 2013 Form 10-K for further detail on the Island One Acquisition.
On July 24, 2013, concurrent with the closing of the IPO, we acquired management agreements for certain resorts from Monarch Owner Services, LLC, Resort Services Group, LLC and Monarch Grand Vacations Management, LLC, each of which provided various management services to the resorts and the Collection added to our network through the PMR Acquisition (the “PMR Service Companies”), for an aggregate cash purchase price of $47.4 million (the "PMR Service Companies Acquisition"). See "Note 24—Business Combinations" of our consolidated financial statements in the 2013 Form 10-K for further detail on the PMR Service Companies Acquisition and "Our Strategic Acquisitions" below for the definition of the PMR Acquisition.
On August 23, 2013, we completed a tender offer to repurchase our Senior Secured Notes in an aggregate principal amount of $50.6 million using proceeds from the IPO (the "Tender Offer"), as required by the indenture governing the Senior
Secured Notes (the "Notes Indenture"), in the event of an IPO. Holders that validly tendered their Senior Secured Notes received $1,120 per $1,000 principal amount of Senior Secured Notes, plus accrued and unpaid interest to (but excluding) the date of purchase.
On September 11, 2013, we entered into the $25.0 million 2013 Revolving Credit Facility with an affiliate of Credit Suisse AG, acting as the administrative agent for a group of lenders. The 2013 Revolving Credit Facility provided that, subject to customary borrowing conditions, we could, from time to time prior to the fourth anniversary of the effective date of the 2013 Revolving Credit Facility, borrow, repay and re-borrow loans in an aggregate amount outstanding at any time not to exceed

44


$25.0 million, and borrowings under the 2013 Revolving Credit Facility bore interest, at our option, at a variable rate equal to the sum of LIBOR plus 4.0% per annum or an adjusted base rate plus 3% per annum. See "Liquidity and Capital ResourcesIndebtedness2013 Revolving Credit Facility" for the definition of and additional detail on the 2013 Revolving Credit Facility.
On September 27, 2013, we paid approximately $10.3 million to repurchase warrants to purchase shares of common stock of DRC, and, substantially concurrently therewith, we borrowed approximately $15.0 million under the 2013 Revolving Credit Facility. On October 25, 2013, we repaid in full the $15.0 million then-outstanding principal balance under the 2013 Revolving Credit Facility using the proceeds from borrowings under the Conduit Facility, as defined in "Liquidity and Capital Resources" below.
Entry into Senior Credit Facility, Redemption of Senior Secured Notes and Repayment of Other Indebtedness
On May 9, 2014, we and DRC entered into a credit agreement (the "Senior Credit Facility Agreement") with Credit Suisse AG, acting as the administrative agent and the collateral agent for various lenders. The Senior Credit Facility Agreement provides for a $470.0 million senior secured credit facility (the "Senior Credit Facility"), which includes a $445.0 million term loan, issued with 0.5% of original issue discount, and having a term of seven years and a $25.0 million revolving line of credit having a term of five years. Borrowings under the Senior Credit Facility bear interest, at our option, at a variable rate equal to LIBOR plus 450 basis points, with a one percent LIBOR floor applicable only to the term loan portion of the Senior Credit Facility, or an alternate base rate plus 350 basis points. Borrowings under the Senior Credit Facility are secured on a senior basis by substantially all of our assets.
We used the proceeds of the term loan portion of the Senior Credit Facility, as well as approximately $5.4 million of cash on hand, to fund the approximately $418.9 million redemption amount for the outstanding Senior Secured Notes, which included $374.4 million in aggregate principal amount of Senior Secured Notes, $30.2 million representing the applicable redemption premium and $14.2 million of accrued and unpaid interest up to (but excluding) the June 9, 2014 redemption date, and to repay all outstanding indebtedness, together with accrued interest and fees, under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan. In conjunction with our entry into the Senior Credit Facility, we also terminated the 2013 Revolving Credit Facility, under which no borrowings were then outstanding.
See “Liquidity and Capital Resources—Indebtedness" for applicable definitions of, and further detail on, these transactions.
Hurricane Odile
In September 2014, Hurricane Odile, a Category 4 hurricane, inflicted widespread damage on the Baja California peninsula, particularly in the state of Baja California Sur, in which the Cabo Azul Resort, one of our managed resorts, is located.

We own unsold Vacation Interests and property and equipment at the Cabo Azul Resort and some of our assets have suffered significant damage. The Cabo Azul Resort will remain closed for the next several months as the property is repaired; however, management believes we have sufficient property insurance and business interruption insurance coverage so that damage caused by Hurricane Odile and the subsequent business interruption will not have a material impact on our financial condition or results of operations.

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 the Collections, our operations of the Clubs, operations of the properties located in St. Maarten for which we function as the HOA, food and beverage venues that we own and manage and the provision of other hospitality and management services. The second business segment, Vacation Interest Sales and Financing, includes our operations relating to the marketing and sales of our VOIs, as well as our consumer financing activities related to such sales. While certain line items reflected on our statement of operations and comprehensive income 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 "Item 7Management's Discussion and Analysis of Financial Condition—Key Revenue and Expense Items" set forth in the 2013 Form 10-K, which involves significant estimates. Certain expense items (principally corporate interest expense and depreciation and amortization) are not, in management's view, allocable to either of these business segments as they apply to the entire Company. In addition, general and administrative expenses are not allocated to either of our business segments because historically management has not allocated these expenses (which excludes Hospitality and Management Services related overhead that is allocated to the HOAs and Collections) for purposes of evaluating our different operational divisions. Accordingly, these expenses are presented under Corporate and Other.

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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 performances. Consequently, no balance sheet segment reports have been presented.
We also operate our business in two geographic areas: North America (including the Caribbean) and Europe. Our North America operations include our managed resorts in the continental U.S., Hawaii, Mexico and the Caribbean, and our Europe operations include our managed resorts in England, Scotland, Ireland, Italy, Spain, Portugal, Austria, Malta, France and Greece.

Key Revenue and Expense Items
See "Item 7Management's Discussion and Analysis of Financial ConditionKey Revenue and Expense Items" set forth in the 2013 Form 10-K for further detail on our Key Revenue and Expense Items.

Our Strategic Acquisitions
In addition to the Island One Acquisition and PMR Service Companies Acquisition discussed in the "Overview" section above, we have expanded our business in part through the acquisition of assets by wholly-owned special purpose subsidiaries.
On August 31, 2010, we acquired from ILX Resorts Incorporated certain resort management agreements, unsold VOIs and the rights to recover and resell such interests, a portfolio of consumer loans and certain real property and other assets (the “ILX Acquisition”), which added ten additional resorts to our resort network.
On July 1, 2011, we acquired from Tempus Resorts International, Ltd. and its subsidiaries certain management agreements, unsold VOIs and the rights to recover and resell such interests, the seller's consumer loan portfolio and certain real property and other assets (the “Tempus Resorts Acquisition”), which added two resorts to our resort network.
On May 21, 2012, we acquired from Pacific Monarch Resorts, Inc. and its affiliates certain management contracts, unsold VOIs and the rights to recover and resell such interests, a portfolio of consumer loans and certain real property and other assets (the "PMR Acquisition"), which added nine resorts to our resort network.
On October 5, 2012, we acquired all of the issued and outstanding shares of Aegean Blue Holdings Plc, thereby acquiring management contracts, unsold VOIs and the rights to recover and resell such interests and certain other assets (the “Aegean Blue Acquisition”), which added five resorts located on the Greek Islands of Rhodes and Crete to our resort network.
The above transactions were effected through special-purpose subsidiaries and were structured such that we held the acquired assets, and assumed certain related liabilities, through special-purpose subsidiaries. The respective lenders to each special-purpose subsidiary had recourse only to such entity and thus the specific assets that were acquired in each transaction; however, such indebtedness was included in our consolidated balance sheets. On May 9, 2014, all outstanding indebtedness of these special-purpose subsidiaries was repaid in full and these subsidiaries ceased to be special-purpose subsidiaries and became guarantor subsidiaries under the Senior Credit Facility. In the future, we may pursue other transactions that could use similar special-purpose entities in similar structures, and these entities may also be required to be consolidated on our financial statements.

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 Interest Sales and Financing segment, we are referring to the results relating to sales centers open during the entirety of the two applicable periods.

46


Comparison of the Three Months Ended September 30, 2014 to the Three Months Ended September 30, 2013
 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
Hospitality
and
Management
Services
 
Vacation
Interest Sales and Financing
 
Corporate
and Other
 
Total
 
Hospitality
and
Management
Services
 
Vacation
Interest Sales and
Financing
 
Corporate
and Other
 
Total
 
 
(In thousands)
 
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
37,795

 
$

 
$

 
$
37,795

 
$
33,610

 
$

 
$

 
$
33,610

Consolidated resort operations
 
10,481

 

 

 
10,481

 
9,326

 

 

 
9,326

Vacation Interest sales, net of provision $0, $15,847, $0, $15,847, $0, $13,851, $0 and $13,851, respectively
 

 
143,180

 

 
143,180

 

 
123,708

 

 
123,708

Interest
 

 
16,783

 
347

 
17,130

 

 
13,971

 
326

 
14,297

Other
 
2,018

 
11,361

 

 
13,379

 
1,227

 
9,434

 

 
10,661

Total revenues
 
50,294

 
171,324

 
347

 
221,965

 
44,163

 
147,113

 
326

 
191,602

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
8,549

 

 

 
8,549

 
9,408

 

 

 
9,408

Consolidated resort operations
 
9,216

 

 

 
9,216

 
9,602

 

 

 
9,602

Vacation Interest cost of sales
 

 
16,476

 

 
16,476

 

 
18,605

 

 
18,605

Advertising, sales and marketing
 

 
82,308

 

 
82,308

 

 
70,714

 

 
70,714

Vacation Interest carrying cost, net
 

 
5,162

 

 
5,162

 

 
10,154

 

 
10,154

Loan portfolio
 
385

 
1,015

 

 
1,400

 
278

 
2,018

 

 
2,296

Other operating
 

 
5,847

 

 
5,847

 

 
3,912

 

 
3,912

General and administrative
 

 

 
26,747

 
26,747

 

 

 
61,114

 
61,114

Depreciation and amortization
 

 

 
8,271

 
8,271

 

 

 
7,583

 
7,583

Interest expense
 

 
3,866

 
7,428

 
11,294

 

 
4,267

 
16,658

 
20,925

Loss on extinguishment of debt
 

 

 

 

 

 

 
13,383

 
13,383

Impairments and other write-offs
 

 

 
11

 
11

 

 

 
1,200

 
1,200

Loss (gain) on disposal of assets
 

 

 
224

 
224

 

 

 
(585
)
 
(585
)
Gain on bargain purchase from business combinations
 

 

 

 

 

 

 
(2,756
)
 
(2,756
)
Total costs and expenses
 
18,150

 
114,674

 
42,681

 
175,505

 
19,288

 
109,670

 
96,597

 
225,555

Income (loss) before provision (benefit) for income taxes
 
32,144

 
56,650

 
(42,334
)
 
46,460

 
24,875

 
37,443

 
(96,271
)
 
(33,953
)
Provision (benefit) for income taxes
 

 

 
20,156

 
20,156

 

 

 
(7,626
)
 
(7,626
)
Net income (loss)
 
$
32,144

 
$
56,650

 
$
(62,490
)
 
$
26,304

 
$
24,875

 
$
37,443

 
$
(88,645
)
 
$
(26,327
)


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Revenues
Total revenues increased $30.4 million, or 15.8%, to $222.0 million for the three months ended September 30, 2014 from $191.6 million for the three months ended September 30, 2013. Total revenues in our Hospitality and Management Services segment increased by $6.1 million, or 13.9%, to $50.3 million for the three months ended September 30, 2014 from $44.2 million for the three months ended September 30, 2013. This growth was driven by increases in management fees as a result of increases in operating costs at the resort level, which generated higher same-store management fee revenue and increases in revenue from our Club operations. Total revenues in our Vacation Interest Sales and Financing segment increased $24.2 million, or 16.5%, to $171.3 million for the three months ended September 30, 2014 from $147.1 million for the three months ended September 30, 2013. The increase was attributable to the increase in Vacation Interest sales, net, interest and other revenue. Revenue in our Corporate and Other segment was $0.3 million for each of the three months ended September 30, 2014 and September 30, 2013.
Management and Member Services. Total management and member services revenue, which is recorded in our Hospitality and Management Services segment, increased $4.2 million, or 12.5%, to $37.8 million for the three months ended September 30, 2014 from $33.6 million for the three months ended September 30, 2013. 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 89 cost-plus management agreements. We also experienced higher revenue from our Club operations in the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.
We had a total of approximately 188,000 and 183,000 members in the Clubs as of September 30, 2014 and 2013, respectively. We have experienced fluctuations in our member counts during 2014 due to the transition of members from clubs managed by the recently acquired businesses to the various Clubs we manage. This fluctuation does not impact revenue from the Clubs and is not indicative of our financial performance.
Consolidated Resort Operations. Consolidated resort operations revenue, which is recorded in our Hospitality and Management Services segment, increased $1.2 million, or 12.4%, to $10.5 million for the three months ended September 30, 2014 from $9.3 million for the three months ended September 30, 2013. The increase was primarily due to higher food and beverage revenues at certain restaurants that we own and manage and higher owner maintenance fee and assessment revenue recorded by our two resorts in St. Maarten. These increases were partially offset by lower revenue as a result of the leasing of certain golf courses to a third party during the second half of 2013.
Vacation Interest Sales, Net. Vacation Interest sales, net, in our Vacation Interest Sales and Financing segment increased $19.5 million, or 15.7%, to $143.2 million for the three months ended September 30, 2014 from $123.7 million for the three months ended September 30, 2013. The increase in Vacation Interest sales, net, was attributable to a $21.5 million increase in Vacation Interest sales revenue, partially offset by a $2.0 million increase in our provision for uncollectible Vacation Interest sales revenue.
The $21.5 million increase in Vacation Interest sales revenue during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was generated by sales growth on a same-store basis from 51 sales centers due to an increase in the number of sales presentations ("tours") and an increase in our volume per guest ("VPG," which represents Vacation Interest sales revenue divided by the number of tours). Our total number of tours increased to 60,920 for the three months ended September 30, 2014 from 56,822 for the three months ended September 30, 2013, primarily due to the expansion of our lead-generation and marketing programs. VPG increased by $157, or 6.3%, to $2,635 for the three months ended September 30, 2014 from $2,478 for the three months ended September 30, 2013, as a result of a higher average sales price per transaction partially offset by a reduction in closing percentage. We closed a total of 8,435 VOI sales transactions during the three months ended September 30, 2014, compared to 8,342 transactions during the three months ended September 30, 2013. Our 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) decreased to 13.8% for the three months ended September 30, 2014 from 14.7% for the three months ended September 30, 2013. VOI sales price per transaction increased to $19,028 for the three months ended September 30, 2014 from $16,881 for the three months ended September 30, 2013. The increase in average sales price per transaction, the increase in VPG and the lower closing percentage were due principally to a change in our focus on selling larger point packages and the success of the sales and marketing initiatives implemented in association with this strategy.
Sales incentives increased $1.4 million, or 37.1% to $5.0 million for the three months ended September 30, 2014 from $3.6 million for the three months ended September 30, 2013. As a percentage of gross Vacation Interest sales revenue, sales incentives were 3.1% for the three months ended September 30, 2014 compared to 2.6% for the three months ended September 30, 2013. This increase was due to the ongoing success of the sales incentive program implemented in December 2011, which usage has continued to trend upward resulting in an increase in sales incentives recorded.
Provision for uncollectible Vacation Interest sales revenue increased $2.0 million, or 14.4%, to $15.8 million for the three months ended September 30, 2014 from $13.9 million for the three months ended September 30, 2013, primarily due to the

48


increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The allowance for mortgages and contracts receivable as a percentage of gross mortgages and contracts receivable was 21.4% as of September 30, 2014, as compared to 21.3% as of September 30, 2013.
Interest Revenue. Interest revenue increased $2.8 million, or 19.8%, to $17.1 million for the three months ended September 30, 2014 from $14.3 million for the three months ended September 30, 2013. The increase was attributable to our Vacation Interest Sales and Financing segment, and was comprised of a $3.9 million increase resulting from a larger average outstanding balance in the mortgages and contracts receivable portfolio during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. This increase was partially offset by (i) a decrease of $0.5 million attributable to a reduction in the weighted average interest rate on the portfolio and (ii) a decrease of $1.0 million associated with the amortization of deferred loan origination costs. Amortization of deferred loan origination costs increased during the three months ended September 30, 2014 due to the increase in deferred loan origination costs during the last several years, primarily as a result of higher Vacation Interest sales revenue and a higher percentage of such revenue that is financed.
 Other Revenue. Other revenue increased $2.7 million, or 25.5%, to $13.4 million for the three months ended September 30, 2014 from $10.7 million for the three months ended September 30, 2013.
Other revenue in our Hospitality and Management Services segment increased $0.8 million, or 64.5%, to $2.0 million for the three months ended September 30, 2014 from $1.2 million for the three months ended September 30, 2013. This increase was primarily attributable to a litigation settlement payment received during the three months ended September 30, 2014 related to a dispute with a former manager at a resort we currently manage.
Other revenue in our Vacation Interest Sales and Financing segment increased $2.0 million, or 20.4%, to $11.4 million for the three months ended September 30, 2014 from $9.4 million for the three months ended September 30, 2013. Non-cash incentives increased $1.3 million to $4.5 million for the three months ended September 30, 2014 from $3.2 million for the three months ended September 30, 2013. The increase was primarily due to higher gross Vacation Interest sales revenue for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Non-cash incentives as a percentage of gross Vacation Interest sales revenue were 2.9% for the three months ended September 30, 2014 as compared to 2.3% for the three months ended September 30, 2013. This increase was due to the ongoing success of the sales incentive program implemented in December 2011, which usage has continued to trend upward resulting in an increase in sales incentives recorded. In addition, other revenue increased for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to higher closing fee revenue resulting from the increase in the number of VOI transactions closed.

Costs and Expenses
Total costs and expenses decreased $50.1 million, or 22.2%, to $175.5 million for the three months ended September 30, 2014 from $225.6 million for the three months ended September 30, 2013. Total costs and expenses in the three months ended September 30, 2014 included a $3.3 million non-cash stock-based compensation charge. Total costs and expenses in the three months ended September 30, 2013 included the following cash and non-cash items totaling $49.1 million related to the IPO and related transactions: (i) a $38.5 million non-cash stock-based compensation charge, primarily attributable to immediately-vested stock options issued in connection with the consummation of the IPO during the three months ended September 30, 2013 (see "Note 20—Stock-Based Compensation" of our condensed consolidated financial statements included elsewhere in this report for further detail on these stock options), and (ii) a $13.4 million loss on extinguishment of debt, of which $5.3 million was non-cash; partially offset by a $2.8 million gain on bargain purchase from business combinations resulting from the completion of the PMR Service Companies Acquisition on July 24, 2013.
Management and Member Services Expense. Management and member services expense, which is recorded in our Hospitality and Management Services segment, decreased $0.9 million, or 9.1%, to $8.5 million for the three months ended September 30, 2014 from $9.4 million for the three months ended September 30, 2013. For the three months ended September 30, 2014 and 2013, management and member services expense included $0.4 million and $0.7 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these non-cash stock-based compensation charges, management and member services expense as a percentage of management and member services revenue decreased to 21.7% for the three months ended September 30, 2014 compared to 25.9% for the three months ended September 30, 2013. The decrease was primarily attributable to lower exchange company costs associated with the Clubs during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, as a result of a renegotiated contract with Interval International, Inc. ("Interval International"), an exchange company, that was entered into in April 2014. Including the non-cash stock-based compensation charges discussed above, management and member services expense as a percentage of management and member services revenue decreased to 22.6% for the three months ended September 30, 2014 compared to 28.0% for the three months ended September 30, 2013.

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Consolidated Resort Operations Expense. Consolidated resort operations expense, which is recorded in our Hospitality and Management Services segment, decreased $0.4 million, or 4.0%, to $9.2 million for the three months ended September 30, 2014 from $9.6 million for the three months ended September 30, 2013. Consolidated resort operations expense as a percentage of consolidated resort operations revenue decreased 15.1% to 87.9% for the three months ended September 30, 2014 from 103.0% for the three months ended September 30, 2013. This decrease was primarily due to the leasing of certain golf courses to a third party during the second half of 2013 and lower operational expenses at our two resorts in St. Maarten, partially offset by higher food and beverage expenses at certain restaurants that we own and manage.
Vacation Interest Cost of Sales. Vacation Interest cost of sales, which is recorded in our Vacation Interest Sales and Financing segment, decreased $2.1 million, or 11.4%, to $16.5 million for the three months ended September 30, 2014 from $18.6 million for the three months ended September 30, 2013. This decrease consisted of a $5.0 million decrease resulting from changes in estimates under the relative sales value method, partially offset by a $2.9 million increase related to the increase in Vacation Interest Sales revenue. The changes under the relative sales value method related to the timing of the eligibility of inventory for recovery, partially offset by a smaller pool of inventory becoming eligible for capitalization in accordance with our inventory recovery agreements during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. These changes were also attributable to the bulk purchase of low cost inventory during the three months ended September 30, 2014, partially offset by the inclusion of low cost inventory purchased in connection with the Island One Acquisition on July 24, 2013. Vacation Interest cost of sales as a percentage of Vacation Interest sales, net decreased to 11.5% for the three months ended September 30, 2014 from 15.0% for the three months ended September 30, 2013. See "Critical Accounting Policies and Use of Estimates—Vacation Interest Cost of Sales" set forth in the 2013 Form 10-K for further detail regarding the relative sales value method.
Advertising, Sales and Marketing Expense. Advertising, sales and marketing expense, which is recorded in our Vacation Interest Sales and Financing segment, increased $11.6 million, or 16.4%, to $82.3 million for the three months ended September 30, 2014 from $70.7 million for the three months ended September 30, 2013. For the three months ended September 30, 2014 and 2013, advertising, sales and marketing expense included $0.5 million and $2.0 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these non-cash stock-based compensation charges, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue increased 1.4 percentage points to 51.4% for the three months ended September 30, 2014, compared to 50.0% for the three months ended September 30, 2013. This increase was primarily due to a sales force restructuring and a higher rate at which performance-based compensation was earned in the quarter, as Vacation Interest Sales exceeded sales targets. Including the non-cash stock-based compensation charges discussed above, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue was 51.8% for the three months ended September 30, 2014 and 51.4% for the three months ended September 30, 2013.
Vacation Interest Carrying Cost, Net. To offset our gross Vacation Interest carrying cost, we rent VOIs controlled by us to third parties on a short-term basis. We also generate revenue on sales of sampler programs and mini-vacations ("Sampler Packages"), which allow prospective owners to stay at a resort property on a trial basis. Vacation Interest carrying cost, net, which is recorded in our Vacation Interest Sales and Financing segment, decreased $5.0 million, or 49.2%, to $5.2 million for the three months ended September 30, 2014 from $10.2 million for the three months ended September 30, 2013. This decrease was primarily due to (i) an increase in rental revenue attributable to the inclusion of VOIs available for rent from the Island One Acquisition completed on July 24, 2013; (ii) more occupied room nights and higher average daily rates; and (iii) an increase in revenue due to increases in the number of, and the average price of, Sampler Packages sold, as a result of our increased focus on selling higher-priced Sampler Packages. This increase was partially offset by (a) higher operating expenses as a result of higher rental activity; (b) an increase in gross Vacation Interest carrying cost, primarily attributable to additional maintenance fees expense incurred related to the inventory acquired in the Island One Acquisition and (c) additional maintenance fee expense related to delinquent inventory recovered pursuant to our inventory recovery agreements during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.
Loan Portfolio Expense. Loan portfolio expense decreased $0.9 million or 39.0%, to $1.4 million for the three months ended September 30, 2014 from $2.3 million for the three months ended September 30, 2013. This decrease was primarily attributable to 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 contracts receivable originated in the three months ended September 30, 2014 resulted in higher loan origination costs deferred relative to the three months ended September 30, 2013. In addition, non-cash stock-based compensation charges decreased $0.2 million for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, related to stock options issued in connection with, and since, the consummation of the IPO.
Other Operating Expense. Other operating expense related to our Vacation Interest Sales and Financing segment increased $1.9 million, or 49.5%, to $5.8 million for the three months ended September 30, 2014 from $3.9 million for the

50


three months ended September 30, 2013. Non-cash incentives increased $1.3 million to $4.5 million for the three months ended September 30, 2014 from $3.2 million for the three months ended September 30, 2013. Non-cash incentives as a percentage of gross Vacation Interest sales revenue were 2.9% for the three months ended September 30, 2014 as compared to 2.3% for the three months ended September 30, 2013. This increase was due to the ongoing success of the sales incentive program implemented in December 2011, under which usage has continued to trend upward resulting in an increase in sales incentives recorded.
General and Administrative Expense. General and administrative expense, which is recorded under Corporate and Other, decreased $34.4 million, or 56.2%, to $26.7 million for the three months ended September 30, 2014 from $61.1 million for the three months ended September 30, 2013. For the three months ended September 30, 2014 and 2013, general and administrative expense included $2.3 million and $35.4 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these non-cash stock-based compensation charges, general and administrative expense decreased 4.9% for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, primarily due to an increase in the allocation of our expenses to the HOAs and the Collections we manage, partially offset by additional general and administrative expense incurred as a result of supporting operations assumed in connection with the Island One Acquisition and the PMR Service Companies Acquisition. Excluding the non-cash stock-based compensation charges discussed above, general and administrative expense as a percentage of total revenue was 11.0% for the three months ended September 30, 2014, as compared to 13.4% for the three months ended September 30, 2013. Including the non-cash stock-based compensation charges, general and administrative expense as a percentage of total revenue was 12.1% for the three months ended September 30, 2014, as compared to 31.9% for the three months ended September 30, 2013.
Depreciation and Amortization. Depreciation and amortization, which is recorded under Corporate and Other, increased $0.7 million, or 9.1%, to $8.3 million for the three months ended September 30, 2014 from $7.6 million for the three months ended September 30, 2013. This increase was primarily attributable to the addition of depreciable and amortizable assets in connection with the Island One Acquisition and the PMR Service Companies Acquisition (both completed on July 24, 2013), information technology related projects and equipment and renovation projects at certain sales centers.
Interest Expense. Interest expense, which is recorded in Corporate and Other and the Vacation Interest Sales and Financing segment, decreased $9.6 million, or 46.0%, to $11.3 million for the three months ended September 30, 2014 from $20.9 million for the three months ended September 30, 2013. Interest expense recorded in our Corporate and Other segment decreased $9.3 million, or 55.4%, to $7.4 million for the three months ended September 30, 2014 from $16.7 million for the three months ended September 30, 2013. Cash interest, debt issuance cost amortization and debt discount amortization relating to the Senior Secured Notes were $12.8 million lower for the three months ended September 30, 2014 due to the consummation of the Tender Offer in August 2013 and the redemption of the Senior Secured Notes on June 9, 2014. Cash and paid-in-kind interest and debt issuance cost amortization in connection with the PMR Acquisition Loan (which we entered into on May 21, 2012 and repaid in full on July 24, 2013) were $0.9 million lower due to their inclusion in a portion of the three months ended September 30, 2013, whereas no such cash and paid-in-kind interest and debt issuance cost amortization was recorded in the three months ended September 30, 2014. Cash and paid-in-kind interest and debt issuance cost amortization in connection with the Tempus Acquisition Loan (which we entered into on July 1, 2011 and repaid in full on July 24, 2013) were $0.7 million lower due to their inclusion in a portion of the three months ended September 30, 2013, whereas no such cash and paid-in-kind interest and debt issuance cost amortization was recorded in the three months ended September 30, 2014. Furthermore, cash interest and debt issuance cost amortization relating to the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan was $0.6 million lower due to their payoff on May 9, 2014. The above decreases were partially offset by $6.7 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. See "Liquidity and Capital Resources—Indebtedness” for the definition of and further detail on these transactions.
Interest expense recorded in our Vacation Interest Sales and Financing segment decreased $0.4 million, or 9.4%, to $3.9 million for the three months ended September 30, 2014 from $4.3 million for the three months ended September 30, 2013. The decrease was primarily attributable to our principal pay down of securitization notes and funding facilities bearing higher interest rates and their replacement with those bearing lower interest rates, partially offset by higher interest expense due to higher average outstanding balances under securitization notes and funding facilities during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. See "Liquidity and Capital Resources—Indebtedness" for the definition of and further detail on these borrowings.

Loss on Extinguishment of Debt. Loss on extinguishment of debt, which is recorded under Corporate and Other, was $13.4 million for the three months ended September 30, 2013. On July 24, 2013, we repaid all outstanding indebtedness under the Tempus Acquisition Loan and the PMR Acquisition loan using the proceeds from the IPO. The unamortized debt issuance cost on both the Tempus Acquisition Loan and the PMR Acquisition Loan and the additional exit fees paid totaling $4.9 million

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were recorded as loss on extinguishment of debt. In addition, on August 23, 2013, we completed the Tender Offer, and a pro rata portion of the unamortized debt issuance cost associated with the Senior Secured Notes and the call premium paid upon the completion of the Tender Offer, totaling $8.5 million, were recorded as loss on extinguishment of debt. See "Liquidity and Capital Resources—Senior Secured Notes” for further detail on the Tender Offer. We did not record any loss on extinguishment of debt for the three months ended September 30, 2014.
Impairments and Other Write-offs. Impairments and other write-offs, which is recorded under Corporate and Other, was a de minimis amount for the three months ended September 30, 2014 and $1.2 million for the three months ended September 30, 2013. The impairment for the three months ended September 30, 2013 was attributable to the write down of a parcel of real estate acquired in connection with the PMR Acquisition to its net realizable value based on a third-party appraisal.
Loss (Gain) on Disposal of Assets. Loss on disposal of assets, which is recorded under Corporate and Other, was $0.2 million for the three months ended September 30, 2014 compared to a gain on disposal of assets of $0.6 million for the three months ended September 30, 2013. The gain on disposal of assets recorded for the three months ended September 30, 2013 was primarily attributable to the sale of real estate at certain European locations recorded during the three months ended September 30, 2013.
Income Taxes. Provision for income taxes, which is recorded under Corporate and Other, was $20.2 million for the three months ended September 30, 2014, as compared to a benefit for income taxes of $7.6 million for the three months ended September 30, 2013. The increase was due to (i) an increase in our foreign tax provision and (ii) the existence of a full valuation allowance recorded against our net deferred tax assets, which resulted in a benefit for income taxes for the three months ended September 30, 2013 as compared to a provision for income taxes for the three months ended September 30, 2014.

Due to current favorable tax law regarding recognition of income from Vacation Interest sales and use of federal net operating loss carry-forwards, we do not anticipate significant federal or state cash income tax liabilities for the year ending December 31, 2014.







52


Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
Hospitality
and
Management
Services
 
Vacation
Interest Sales and Financing
 
Corporate
and Other
 
Total
 
Hospitality
and
Management
Services
 
Vacation
Interest Sales and
Financing
 
Corporate
and Other
 
Total
 
 
(In thousands)
 
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
$
115,238

 
$

 
$

 
$
115,238

 
$
96,304

 
$

 
$

 
$
96,304

Consolidated resort operations
 
28,825

 

 

 
28,825

 
26,465

 

 

 
26,465

Vacation Interest sales, net of provision $0, $40,123, $0, $40,123, $0, $29,731, $0 and $29,731, respectively
 

 
379,082

 

 
379,082

 

 
325,815

 

 
325,815

Interest
 

 
47,798

 
1,212

 
49,010

 

 
40,021

 
1,138

 
41,159

Other
 
7,352

 
32,697

 

 
40,049

 
7,535

 
21,649

 

 
29,184

Total revenues
 
151,415

 
459,577

 
1,212

 
612,204

 
130,304

 
387,485

 
1,138

 
518,927

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and member services
 
23,377

 

 

 
23,377

 
27,952

 

 

 
27,952

Consolidated resort operations
 
25,662

 

 

 
25,662

 
26,169

 

 

 
26,169

Vacation Interest cost of sales
 

 
44,840

 

 
44,840

 

 
45,451

 

 
45,451

Advertising, sales and marketing
 

 
214,190

 

 
214,190

 

 
181,668

 

 
181,668

Vacation Interest carrying cost, net
 

 
19,766

 

 
19,766

 

 
29,141

 

 
29,141

Loan portfolio
 
895

 
5,354

 

 
6,249

 
782

 
6,773

 

 
7,555

Other operating
 

 
16,650

 

 
16,650

 

 
6,518

 

 
6,518

General and administrative
 

 

 
74,203

 
74,203

 

 

 
105,612

 
105,612

Depreciation and amortization
 

 

 
24,601

 
24,601

 

 

 
19,912

 
19,912

Interest expense
 

 
10,790

 
34,502

 
45,292

 

 
12,451

 
58,110

 
70,561

Loss on extinguishment of debt
 

 

 
46,807

 
46,807

 

 

 
13,383

 
13,383

Impairments and other write-offs
 

 

 
53

 
53

 

 

 
1,279

 
1,279

Loss (gain) on disposal of assets
 

 

 
71

 
71

 

 

 
(673
)
 
(673
)
Gain on bargain purchase from business combinations
 

 

 

 

 

 

 
(2,726
)
 
(2,726
)
Total costs and expenses
 
49,934

 
311,590

 
180,237

 
541,761

 
54,903

 
282,002

 
194,897

 
531,802

Income (loss) before provision (benefit) for income taxes
 
101,481

 
147,987

 
(179,025
)
 
70,443

 
75,401

 
105,483

 
(193,759
)
 
(12,875
)
Provision (benefit) for income taxes
 

 

 
32,860

 
32,860

 

 

 
(6,777
)
 
(6,777
)
Net income (loss)
 
$
101,481

 
$
147,987

 
$
(211,885
)
 
$
37,583

 
$
75,401

 
$
105,483

 
$
(186,982
)
 
$
(6,098
)












53


Revenues
Total revenues increased $93.3 million, or 18.0%, to $612.2 million for the nine months ended September 30, 2014 from $518.9 million for the nine months ended September 30, 2013. Total revenues in our Hospitality and Management Services segment grew by $21.1 million, or 16.2%, to $151.4 million for the nine months ended September 30, 2014 from $130.3 million for the nine months ended September 30, 2013. This growth was driven by increases in management fees as a result of the inclusion of the managed resorts from the Island One Acquisition and the PMR Service Companies Acquisition, increases in operating costs at the resort level, which generated higher same-store management fee revenue, and increases in revenue from our Club operations. Total revenues in our Vacation Interest Sales and Financing segment increased $72.1 million, or 18.6%, to $459.6 million for the nine months ended September 30, 2014 from $387.5 million for the nine months ended September 30, 2013. The increase was attributable to the increase in Vacation Interest sales, net, interest and other revenue. Revenue in our Corporate and Other segment increased $0.1 million, or 6.5%, to $1.2 million for the nine months ended September 30, 2014, from $1.1 million for the nine months ended September 30, 2013.
Management and Member Services. Total management and member services revenue, which is recorded in our Hospitality and Management Services segment, increased $18.9 million, or 19.7%, to $115.2 million for the nine months ended September 30, 2014 from $96.3 million for the nine months ended September 30, 2013. Management fees increased as a result of the inclusion of the managed resorts from the Island One Acquisition and the PMR Service Companies Acquisition for the nine months ended September 30, 2014, as compared to only a portion of the nine months ended September 30, 2013, and increases in operating costs at the resort level, which generated higher management fee revenue on a same-store basis from 87 cost-plus management agreements. We also experienced higher revenue from our Club operations in the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due to additional members acquired as a result of the Island One Acquisition. The increases in management fee revenue and revenue from the Clubs were partially offset by the elimination of commissions earned on the fee-for-service management agreements with Island One, Inc., which were terminated in conjunction with the Island One Acquisition on July 24, 2013.
We had a total of approximately 188,000 and 183,000 members in the Clubs as of September 30, 2014 and 2013, respectively. We have experienced fluctuations in our member counts during 2014 due to the transition of members from clubs managed by the recently acquired businesses to the various Clubs we manage. This fluctuation does not impact revenue from the Clubs and is not indicative of our financial performance.
Consolidated Resort Operations. Consolidated resort operations revenue, which is recorded in our Hospitality and Management Services segment, increased $2.3 million, or 8.9%, to $28.8 million for the nine months ended September 30, 2014 from $26.5 million for the nine months ended September 30, 2013. The increase was primarily due to higher owner maintenance fee and assessment revenue recorded by our two resorts in St. Maarten, higher food and beverage revenues at certain restaurants that we own and manage and the retail ticket sales operations acquired in the Island One Acquisition. These increases were partially offset by lower revenue as a result of the leasing of certain golf courses to a third party during the second half of 2013.
Vacation Interest Sales, Net. Vacation Interest sales, net, in our Vacation Interest Sales and Financing segment increased $53.3 million, or 16.3%, to $379.1 million for the nine months ended September 30, 2014 from $325.8 million for the nine months ended September 30, 2013. The increase in Vacation Interest sales, net, was attributable to a $63.7 million increase in Vacation Interest sales revenue, partially offset by an $10.4 million increase in our provision for uncollectible Vacation Interest sales revenue.
The $63.7 million increase in Vacation Interest sales revenue during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was generated by sales growth on a same-store basis from 46 sales centers due to an increase in the number of tours and an increase in our VPG, as well as the revenue contribution from our sales centers acquired in connection with the Island One Acquisition. Our total number of tours increased to 165,739 for the nine months ended September 30, 2014 from 156,971 for the nine months ended September 30, 2013, primarily due to the expansion of our lead-generation and marketing programs. VPG increased by $420, or 19.5%, to $2,578 for the nine months ended September 30, 2014 from $2,158 for the nine months ended September 30, 2013, as a result of a higher average sales price per transaction and an increase in our closing percentage. We closed a total of 23,267 VOI sales transactions during the nine months ended September 30, 2014, compared to 20,598 transactions during the nine months ended September 30, 2013. Our closing percentage increased to 14.0% for the nine months ended September 30, 2014 from 13.6% for the nine months ended September 30, 2013. VOI sales price per transaction increased to $18,361 for the nine months ended September 30, 2014 from $16,442 for the nine months ended September 30, 2013. The increase in average sales price per transaction and VPG was due principally to a change in our focus on selling larger point packages and the success of the sales and marketing initiatives implemented in association with this strategy. The increase in closing percentage was mainly attributable to improved effectiveness of these sales and marketing initiatives.

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Sales incentives increased $9.0 million, or 151.0% to $14.9 million for the nine months ended September 30, 2014 from $5.9 million for the nine months ended September 30, 2013. As a percentage of gross Vacation Interest sales revenue, sales incentives were 3.5% for the nine months ended September 30, 2014 compared to 1.7% for the nine months ended September 30, 2013. The amount we record as sales incentives in each reporting period is reduced by an estimate of the amount of such sales incentives that we do not expect customers to redeem. During the first half of 2013, we completed the process of collecting adequate data regarding historical usage of our sales incentives provided under a program implemented in December 2011, and, as a result, the amount recorded as sales incentives for this period was reduced, and our Vacation Interest sales revenue was increased, by $3.2 million relating to the expiration, and expected future expiration, of sales incentives provided to customers prior to the nine months ended September 30, 2013. No such reduction of sales incentives relating to prior periods was recorded for the nine months ended September 30, 2014. In addition, due to the ongoing success of the program implemented in December 2011, usage of sales incentives has continued to trend upward, resulting in an increase in sales incentives recorded for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. Excluding the $3.2 million reduction in the nine months ended September 30, 2013, sales incentives as a percentage of gross Vacation Interest sales revenue increased to 3.5% for the nine months ended September 30, 2014 from 2.6% for the nine months ended September 30, 2013.
Provision for uncollectible Vacation Interest sales revenue increased $10.4 million, or 35.0%, to $40.1 million for the nine months ended September 30, 2014 from $29.7 million for the nine months ended September 30, 2013, primarily due to the increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The allowance for mortgages and contracts receivable as a percentage of gross mortgages and contracts receivable was 21.4% as of September 30, 2014, as compared to 21.3% as of September 30, 2013.
Interest Revenue. Interest revenue increased $7.8 million, or 19.1%, to $49.0 million for the nine months ended September 30, 2014 from $41.2 million for the nine months ended September 30, 2013. The increase was attributable to our Vacation Interest Sales and Financing segment, and was comprised of an $11.6 million increase resulting from a larger average outstanding balance in the mortgages and contracts receivable portfolio during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. This increase was partially offset by (i) a decrease of $1.8 million attributable to a reduction in the weighted average interest rate on the portfolio and (ii) a decrease of $2.7 million associated with the amortization of deferred loan origination costs. Amortization of deferred loan origination costs increased during the nine months ended September 30, 2014 due to the increase in deferred loan origination costs during the last several years, primarily as a result of higher Vacation Interest sales revenue and a higher percentage of such revenue that was financed.
 Other Revenue. Other revenue increased $10.8 million, or 37.2%, to $40.0 million for the nine months ended September 30, 2014 from $29.2 million for the nine months ended September 30, 2013.
Other revenue in our Hospitality and Management Services segment decreased $0.1 million, or 2.4%, to $7.4 million for the nine months ended September 30, 2014 from $7.5 million for the nine months ended September 30, 2013.
Other revenue in our Vacation Interest Sales and Financing segment increased $11.1 million, or 51.0%, to $32.7 million for the nine months ended September 30, 2014 from $21.6 million for the nine months ended September 30, 2013. Non-cash incentives increased $9.1 million to $13.7 million for the nine months ended September 30, 2014 from $4.6 million for the nine months ended September 30, 2013. The increase was primarily due to higher gross Vacation Interest sales revenue for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and a reduction of sales incentives recorded for the nine months ended September 30, 2013 resulting from the expiration, and expected future expiration, of sales incentives we provided to customers. Excluding the $3.2 million reduction in sales incentives in the nine months ended September 30, 2013, non-cash incentives as a percentage of gross Vacation Interest sales revenue were 3.3% for the nine months ended September 30, 2014 as compared to 2.2% for the nine months ended September 30, 2013. This increase was due to the ongoing success of the sales incentive program implemented in December 2011, which usage has continued to trend upward, resulting in an increase in sales incentives recorded. In addition, other revenue increased for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due to higher closing fee revenue resulting from the increase in the number of VOI transactions closed.

Costs and Expenses
Total costs and expenses increased $10.0 million, or 1.9%, to $541.8 million for the nine months ended September 30, 2014 from $531.8 million for the nine months ended September 30, 2013. Total costs and expenses in the nine months ended September 30, 2014 included a $46.8 million loss on extinguishment of debt, of which $16.6 million was non-cash, and a $12.2 million non-cash stock-based compensation charge. Total costs and expenses in the nine months ended September 30, 2013 included (i) a $38.5 million non-cash stock-based compensation charge, primarily attributable to immediately-vested stock options issued in connection with the consummation of the IPO during the nine months ended September 30, 2013 and (ii) a

55


$13.4 million loss on extinguishment of debt, of which $5.3 million was non-cash; partially offset by a $2.8 million gain on bargain purchase from business combinations resulting from the completion of the PMR Service Companies Acquisition on July 24, 2013.
Management and Member Services Expense. Management and member services expense, which is recorded in our Hospitality and Management Services segment, decreased $4.6 million, or 16.4%, to $23.4 million for the nine months ended September 30, 2014 from $28.0 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, management and member services expense included $1.3 million and $0.7 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these non-cash stock-based compensation charges, management and member services expense as a percentage of management and member services revenue decreased to 19.1% for the nine months ended September 30, 2014 compared to 28.3% for the nine months ended September 30, 2013. The decrease was primarily attributable to lower operating expense associated with the Clubs. In April 2014, we renegotiated the contract with Interval International, relieving us from our obligation to repay the unearned portion to Interval International under the original contract executed in 2008 and resulting in the one-time release of this deferred revenue to the statement of operations and comprehensive income (loss) as a reduction of exchange company costs and ongoing cost savings. Further, no costs were incurred under the fee-for-service agreements with Island One, Inc. for the nine months ended September 30, 2014, as the agreements were terminated in conjunction with the closing of the Island One Acquisition on July 24, 2013. Including the non-cash stock-based compensation charges discussed above, management and member services expense as a percentage of management and member services revenue decreased to 20.3% for the nine months ended September 30, 2014 compared to 29.0% for the nine months ended September 30, 2013.
Consolidated Resort Operations Expense. Consolidated resort operations expense, which is recorded in our Hospitality and Management Services segment, decreased $0.5 million, or 1.9%, to $25.7 million for the nine months ended September 30, 2014 from $26.2 million for the nine months ended September 30, 2013. Consolidated resort operations expense as a percentage of consolidated resort operations revenue decreased 9.9% to 89.0% for the nine months ended September 30, 2014 from 98.9% for the nine months ended September 30, 2013. This decrease was primarily due to the leasing of certain golf courses to a third party during the second half of 2013 and lower operational expenses at our two resorts in St. Maarten. These decreases were partially offset by additional expenses as a result of the retail ticket sales operations acquired in the Island One Acquisition and higher food and beverage expenses at certain restaurants that we own and manage.
Vacation Interest Cost of Sales. Vacation Interest cost of sales, which is recorded in our Vacation Interest Sales and Financing segment, decreased $0.7 million, or 1.3%, to $44.8 million for the nine months ended September 30, 2014 from $45.5 million for the nine months ended September 30, 2013. This decrease consisted of a $8.1 million decrease resulting from changes in estimates under the relative sales value method, partially offset by a $7.4 million increase related to the increase in Vacation Interest sales revenue. The changes under the relative sales value method related to the timing of the eligibility of inventory for recovery in accordance with our inventory recovery agreements, partially offset by a smaller pool of inventory becoming eligible for capitalization during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. These changes were also attributable to the bulk purchase of low cost inventory during the nine months ended September 30, 2014, partially offset by the inclusion of low cost inventory purchased in connection with the Island One Acquisition on July 24, 2013. Vacation Interest cost of sales as a percentage of Vacation Interest sales, net decreased to 11.8% for the nine months ended September 30, 2014 from 13.9% for the nine months ended September 30, 2013. See "Critical Accounting Policies and Use of Estimates—Vacation Interest Cost of Sales" set forth in the 2013 Form 10-K for further detail regarding the relative sales value method.
Advertising, Sales and Marketing Expense. Advertising, sales and marketing expense, which is recorded in our Vacation Interest Sales and Financing segment, increased $32.5 million, or 17.9%, to $214.2 million for the nine months ended September 30, 2014 from $181.7 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, advertising, sales and marketing expense included $1.8 million and $2.0 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these non-cash stock-based compensation charges, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue was 50.7% for the nine months ended September 30, 2014, compared to 50.5% for the nine months ended September 30, 2013. Including these non-cash stock-based compensation charges, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue was 51.1% for each of the nine months ended September 30, 2014 and 2013.
Vacation Interest Carrying Cost, Net. Vacation Interest carrying cost, net, which is recorded in our Vacation Interest Sales and Financing segment, decreased $9.3 million, or 32.2%, to $19.8 million for the nine months ended September 30, 2014 from $29.1 million for the nine months ended September 30, 2013. This decrease was primarily due to (i) an increase in rental revenue attributable to the inclusion of VOIs available for rent from the Island One Acquisition completed on July 24, 2013; (ii) more occupied room nights and higher average daily rates and (iii) an increase in revenue due to an increase in the number of, and the average price of, Sampler Packages sold, as a result of our increased focus on selling higher-priced Sampler

56


Packages. This increase was partially offset by (a) higher operating expenses as a result of higher rental activity; (b) an increase in gross Vacation Interest carrying cost primarily attributable to additional maintenance fees expense incurred related to the inventory acquired in the Island One Acquisition and (c) additional maintenance fee expense related to delinquent inventory recovered pursuant to our inventory recovery agreements during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.
Loan Portfolio Expense. Loan portfolio expense decreased $1.4 million, or 17.3%, to $6.2 million for the nine months ended September 30, 2014 from $7.6 million for the nine months ended September 30, 2013. This decrease was primarily attributable to an increase in the amount of loan origination costs deferred pursuant to ASC 310 described below. 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 contracts receivable originated in the nine months ended September 30, 2014 resulted in higher loan origination costs deferred relative to the nine months ended September 30, 2013. This decrease was partially offset by a $0.1 million increase in non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO.
Other Operating Expense. Other operating expense related to our Vacation Interest Sales and Financing segment increased $10.2 million, or 155.4%, to $16.7 million for the nine months ended September 30, 2014 from $6.5 million for the nine months ended September 30, 2013. Non-cash incentives increased $9.1 million to $13.7 million for the nine months ended September 30, 2014 from $4.6 million for the nine months ended September 30, 2013. The increase was primarily due to higher gross Vacation Interest sales revenue for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and a reduction of sales incentives recorded for the nine months ended September 30, 2013 resulting from the expiration, and expected future expiration, of sales incentives we provided to customers. Excluding the $3.2 million reduction in sales incentives recorded for the nine months ended September 30, 2013, non-cash incentives as a percentage of gross Vacation Interest sales revenue were 3.3% for the nine months ended September 30, 2014 as compared to 2.2% for the nine months ended September 30, 2013. This increase was due to the ongoing success of the sales incentive program implemented in December 2011, under which usage has continued to trend upward resulting in an increase in sales incentives recorded.
General and Administrative Expense. General and administrative expense, which is recorded under Corporate and Other, decreased $31.4 million, or 29.7%, to $74.2 million for the nine months ended September 30, 2014 from $105.6 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, general and administrative expense included $8.5 million and $35.4 million, respectively, of non-cash stock-based compensation charges related to stock options issued in connection with, and since, the consummation of the IPO. Excluding these stock-based compensation charges, general and administrative expense decreased 6.5% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to an increase in the allocation of our expenses to the HOAs and the Collections we manage, partially offset by additional general and administrative expense incurred as a result of supporting operations assumed in connection with the Island One Acquisition and the PMR Service Companies Acquisition. Excluding the non-cash stock-based compensation charges discussed above, general and administrative expense as a percentage of total revenue was 10.7% for the nine months ended September 30, 2014, as compared to 13.5% for the nine months ended September 30, 2013. Including these non-cash stock-based compensation charges, general and administrative expenses as a percentage of total revenue was 12.1% for the nine months ended September 30, 2014, as compared to 20.4% for the nine months ended September 30, 2013.
Depreciation and Amortization. Depreciation and amortization, which is recorded under Corporate and Other, increased $4.7 million, or 23.5%, to $24.6 million for the nine months ended September 30, 2014 from $19.9 million for the nine months ended September 30, 2013. This increase was primarily attributable to the addition of depreciable and amortizable assets in connection with the Island One Acquisition and the PMR Service Companies Acquisition (both completed in July 2013), information technology related projects and equipment and renovation projects at certain sales centers.
Interest Expense. Interest expense, which is recorded in Corporate and Other and the Vacation Interest Sales and Financing segment, decreased $25.3 million, or 35.8%, to $45.3 million for the nine months ended September 30, 2014 from $70.6 million for the nine months ended September 30, 2013. Interest expense recorded in our Corporate and Other segment decreased $23.6 million, or 40.6%, to $34.5 million for the nine months ended September 30, 2014 from $58.1 million for the nine months ended September 30, 2013. Cash interest, debt issuance cost amortization and debt discount amortization relating to the Senior Secured Notes were $18.7 million lower for the nine months ended September 30, 2014 due to the consummation of the Tender Offer in August 2013 and the redemption of the Senior Secured Notes on June 9, 2014. Cash and paid-in-kind interest and debt issuance cost amortization in connection with the PMR Acquisition Loan (which we entered into on May 21, 2012 and repaid in full on July 24, 2013) were $7.4 million lower due to their inclusion in a majority of the nine months ended September 30, 2013, whereas no such cash and paid-in-kind interest and debt issuance cost amortization was recorded in the nine months ended September 30, 2014. Cash and paid-in-kind interest and debt issuance cost amortization in connection with the Tempus Acquisition Loan (which we entered into on July 1, 2011 and repaid in full on July 24, 2013) were $5.8 million

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lower due to their inclusion in a majority of the nine months ended September 30, 2013, whereas no such cash and paid-in-kind interest and debt issuance cost amortization was recorded in the nine months ended September 30, 2014. Furthermore, cash interest and debt issuance cost amortization relating to the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan was $1.2 million lower due to their payoff on May 9, 2014. The above decreases were partially offset by the $10.6 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. See "Liquidity and Capital Resources—Indebtedness” for the definition of and further detail on these transactions.
Interest expense recorded in our Vacation Interest Sales and Financing segment decreased $1.7 million, or 13.3%, to $10.8 million for the nine months ended September 30, 2014 from $12.5 million for the nine months ended September 30, 2013. The decrease was primarily attributable to our principal pay down of securitization notes and funding facilities bearing higher interest rates and their replacement with those bearing lower interest rates, partially offset by higher interest expense due to higher average outstanding balances under securitization notes and funding facilities during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. See "Liquidity and Capital Resources—Indebtedness" for the definition of and further detail on these borrowings.
Loss on Extinguishment of Debt. Loss on extinguishment of debt, which is recorded under Corporate and Other, was $46.8 million for the nine months ended September 30, 2014, as compared to $13.4 million for the nine months ended September 30, 2013.
On May 9, 2014, we repaid all outstanding indebtedness under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan using a portion of the proceeds from the term loan portion of the Senior Credit Facility. Unamortized debt issuance cost on the ILX Inventory Loan and the Tempus Inventory Loan of $0.1 million was recorded as a loss on extinguishment of debt.
In addition, on May 9, 2014, we terminated the 2013 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 all of the remaining 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. See "Note 16Borrowings" of our condensed consolidated financial statements included elsewhere in this report and "Liquidity and Capital Resources—Indebtedness" for further detail on these transactions.
On July 24, 2013, we repaid all outstanding indebtedness under the Tempus Acquisition Loan and the PMR Acquisition loan using the proceeds from the IPO. The unamortized debt issuance cost on both the Tempus Acquisition Loan and the PMR Acquisition Loan and the additional exit fees paid totaling $4.9 million were recorded as loss on extinguishment of debt.

In addition, on August 23, 2013, we completed the Tender Offer, and a pro rata portion of the unamortized debt issuance
cost associated with the Senior Secured Notes and the call premium paid upon the completion of the Tender Offer, totaling $8.5 million, were recorded as loss on extinguishment of debt. See "Liquidity and Capital Resources—Senior Secured Notes” for further detail on the Tender Offer.
Impairments and Other Write-offs. Impairments and other write-offs, which are recorded under Corporate and Other, were $0.1 million for the nine months ended September 30, 2014 and $1.3 million for the nine months ended September 30, 2013. The impairment for the nine months ended September 30, 2013 was attributable to the write down of a parcel of real estate acquired in connection with the PMR Acquisition to its net realizable value based on a third-party appraisal.
Loss (Gain) on Disposal of Assets. Loss on disposal of assets, which is recorded under Corporate and Other, was $0.1 million for the nine months ended September 30, 2014 compared to a gain on disposal of assets of $0.7 million for the nine months ended September 30, 2013, mainly due to the sale of real estate at certain European locations recorded during the three months ended September 30, 2013.
Income Taxes. Provision for income taxes, which is recorded under Corporate and Other, was $32.9 million for the nine months ended September 30, 2014, as compared to a benefit for income taxes of $6.8 million for the nine months ended September 30, 2013. The increase was due to (i) income before provision for income taxes for the nine months ended September 30, 2014, as compared to a loss before provision for income taxes for the nine months ended September 30, 2013, and (ii) the existence of a full valuation allowance recorded against our net deferred tax assets, which resulted in a benefit for income taxes for the nine months ended September 30, 2013 as compared to a provision for income taxes for the nine months ended September 30, 2014.
Due to current favorable tax law regarding recognition of income from Vacation Interest sales and use of federal net operating loss carry-forwards, we do not anticipate significant federal or state cash income tax liabilities for the year ending December 31, 2014.

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Liquidity and Capital Resources
Overview
We had $181.9 million and $35.9 million in cash and cash equivalents as of September 30, 2014 and December 31, 2013, respectively. Our primary sources of liquidity have historically been cash from operations and the financings discussed below.
Historically, our business has depended on the availability of credit to finance the consumer loans we have provided to our customers for the purchase of their VOIs. Typically, these loans have required a minimum cash down payment of 10% of the purchase price at the time of sale; however, selling, marketing and administrative expenses attributable to VOI sales are primarily cash expenses and often exceed the buyer's minimum down payment requirement. Accordingly, the availability of financing facilities for the sale or pledge of these receivables to generate liquidity is a critical factor in our ability to meet our short-term and long-term cash needs. We have historically relied upon our ability to sell receivables in the securitization market in order to generate liquidity and create capacity on our Conduit Facility and the Quorum Facility, as defined below (collectively, the “Funding Facilities”).
The terms of the consumer loans we seek to finance are generally longer than the Funding Facilities through which we seek to finance such loans. While the term of our consumer loans is typically ten years, the Funding Facilities typically have a term of less than three years. Although we seek to refinance conduit borrowings in the term securitization markets, we generally access the term securitization markets on an annual basis, and rely on the Funding Facilities to provide incremental liquidity between securitization transactions. Thus, we are required to refinance the Funding Facilities every one to two years in order to provide adequate liquidity for our consumer finance business.
On January 23, 2013, we completed a securitization transaction that was comprised of A+ and A rated notes with a face value of $93.6 million (the "DROT 2013-1 Notes"). The proceeds were used to pay off the $71.3 million then-outstanding principal balance, accrued interest and fees associated with the Conduit Facility and to pay certain expenses incurred in connection with the issuance of the DROT 2013-1 Notes with the remaining proceeds transferred to us for general corporate use.
On April 11, 2013, we entered into an amended and restated Conduit Facility agreement that extended the maturity date of the facility to April 10, 2015 (the "Conduit Facility"). The Conduit Facility provides for a 24-month facility that is annually renewable for 364-day periods at the election of the lenders, bears interest at either LIBOR or the commercial paper rate (each having a floor of 0.50%) plus 3.25% and has a non-use fee of 0.75%. The overall advance rate on loans receivable in the portfolio is limited to 85% of the aggregate face value of the eligible loans. The maximum borrowing capacity was $125.0 million on April 11, 2013 and was subsequently increased to $175.0 million on September 26, 2014, when we entered into an amendment to the amended and restated Conduit Facility agreement.
On September 20, 2013, we completed another securitization transaction and issued the Diamond Resorts Tempus Owner Trust 2013 Notes with a face value of $31.0 million (the "Tempus 2013 Notes"). The notes bear interest at a rate of 6.0% per annum and mature on December 20, 2023. The proceeds from the Tempus 2013 Notes were used to pay off in full the then-outstanding principal balances and accrued interest and fees under the Tempus Receivables Loan and Notes Payable—RFA fees. See "Tempus Acquisition Loan and Tempus Resorts Acquisition Financing" below for the definitions of the Tempus Receivables Loan and Notes Payable—RFA fees.
On November 20, 2013, we completed another securitization transaction that was comprised of AA and A+ rated notes (the "DROT 2013-2 Notes") with a face value of $225.0 million that included a $44.7 million prefunding account. The initial proceeds of $180.3 million were used to pay off the $152.8 million then-outstanding principal balance, accrued interest and fees associated with the Conduit Facility, terminate the two interest rate swap agreements then in effect, pay certain expenses incurred in connection with the issuance of the DROT 2013-2 Notes, and fund related reserve accounts with the remaining proceeds transferred to us for general corporate use. As of December 31, 2013, cash in escrow and restricted cash included $23.3 million related to the prefunding account, all of which was released to our unrestricted cash account in January 2014.
Although we completed these securitization and Funding Facilities transactions, we may not be successful in completing similar transactions in the future. If we are unable to continue to participate in securitization transactions or renew and/or replace our Funding Facilities on acceptable terms, our liquidity and cash flows would be materially and adversely affected.
We require access to the capital markets in order to fund our operations and may, in the implementation of our growth strategy, become more reliant on third-party financing. There can be no assurances that any such financing will be available to allow us to implement our growth strategy and sustain and improve our results of operations. As of September 30, 2014, the maximum funding availability under the Quorum Facility and the Conduit Facility was $23.3 million and $17.4 million, respectively.
On September 11, 2013, we entered into a $25.0 million revolving credit facility with an affiliate of Credit Suisse AG, acting as the administrative agent for various lenders (the "2013 Revolving Credit Facility"). The 2013 Revolving Credit

59


Facility provided that, subject to customary borrowing conditions, we could, from time to time prior to the fourth anniversary of the effective date of the 2013 Revolving Credit Facility, borrow, repay and re-borrow loans in an aggregate amount outstanding at any time not to exceed $25.0 million, and bore interest, at our option, at a variable rate equal to the sum of LIBOR plus 4.0% per annum or an adjusted base rate plus 3% per annum. The 2013 Revolving Credit Facility included negative covenants generally consistent with the negative covenants applicable to the Senior Secured Notes. The repayment of borrowings and certain other obligations under the 2013 Revolving Credit Facility was secured on a pari passu basis by the collateral that secures the Senior Secured Notes. On May 9, 2014, we terminated the 2013 Revolving Credit Facility in conjunction with our entry into the Senior Credit Facility.
On May 9, 2014, we entered into the Senior Credit Facility Agreement, which provides for a $470.0 million Senior Credit Facility (including a $445.0 million term loan with a term of seven years and a $25.0 million revolving line of credit with a term of five years). The Senior Credit Facility bears a variable interest rate, at our option, equal to LIBOR plus 450 basis points, with a one percent LIBOR floor applicable only to the term loan portion of the Senior Credit Facility, or an alternate base rate plus 350 basis points. The borrowings under the Senior Credit Facility are secured on a senior basis by substantially all of our assets. As of September 30, 2014, the availability under the revolving line of credit portion of the Senior Credit Facility was $25.0 million.
During the three months ended September 30, 2014 and 2013, we used cash of $16.1 million and $5.1 million, respectively, for (i) acquisitions of VOI inventory pursuant to inventory recovery agreements and in open market and bulk VOI inventory purchases (including a bulk purchase of bank owned inventory at Island One resorts for approximately $4.7 million); (ii) capitalized legal, title and trust fees and (iii) construction of VOI inventory. Of these total cash amounts (which do not reflect our acquisition of inventory in the Island One Acquisition), $0.1 million and $1.4 million during the three months ended September 30, 2014 and 2013, respectively, were used for the construction of VOI inventory, primarily related to construction of units at our managed properties in Mexico and Italy.
In addition, we had increases in unsold Vacation Interests, net, that did not have an impact on our working capital during the respective three month periods ended September 30, 2014 and 2013. Specifically, we capitalized $1.6 million and $6.6 million during the three months ended September 30, 2014 and 2013, respectively, related to inventory recovery agreements in the U.S., offset by an equal increase in due to related parties, net; cash will be used in future periods to settle these amounts. In addition, we transferred $0.2 million and $2.5 million during the three months ended September 30, 2014 and 2013, respectively, from due from related parties, net, to unsold Vacation Interests, net, as a result of our recovery of VOI inventory pursuant to inventory recovery arrangements in Europe; cash was used in prior periods when these amounts were recorded to due from related parties, net. Furthermore, we transferred $1.1 million and $0.6 million from mortgages and contracts receivable, net, to unsold Vacation Interests, net, during the three months ended September 30, 2014 and 2013, respectively, as a result of our recovery of underlying VOI inventory due to loan defaults.
During the nine months ended September 30, 2014 and 2013, we used cash of $39.3 million and $18.9 million, respectively, for (i) acquisitions of VOI inventory pursuant to inventory recovery agreements and in open market and bulk VOI inventory purchases (including a bulk purchase of bank owned inventory at Island One resorts for approximately $4.7 million); (ii) capitalized legal, title and trust fees and (iii) construction of VOI inventory. Of these total cash amounts (which do not reflect our acquisition of inventory in the Island One Acquisition), $0.6 million and $3.6 million during the nine months ended September 30, 2014 and 2013, respectively, were used for the construction of VOI inventory, primarily related to construction of units at our managed properties in Mexico and Italy.
In addition, we had increases in unsold Vacation Interests, net, that did not have an impact on our working capital during the respective nine month periods ended September 30, 2014 and 2013. Specifically, we capitalized $19.7 million and $20.9 million during the nine months ended September 30, 2014 and 2013, respectively, related to inventory recovery agreements in the U.S., offset by an equal increase in due to related parties, net; cash will be used in future periods to settle these amounts. In addition, we transferred $3.2 million and $2.5 million during the nine months ended September 30, 2014 and 2013, respectively, from due from related parties, net, to unsold Vacation Interests, net, as a result of our recovery of VOI inventory pursuant to inventory recovery arrangements in Europe; cash was used in prior periods when these amounts were recorded to due from related parties, net. Furthermore, we transferred $2.0 million and $2.6 million from mortgages and contracts receivable, net, to unsold Vacation Interests, net, during the nine months ended September 30, 2014 and 2013, respectively, as a result of our recovery of underlying VOI inventory due to loan defaults.
In October 2011, the HOA of one of our managed resorts in Hawaii levied an assessment to the owner-families of that resort for water intrusion damage. The original amount of the assessment was $65.8 million but, in connection with the settlement of a class action suit (the "Hawaii Water Intrusion Case"), the assessment was reduced to $60.9 million. For deeded inventory or Collection points held by us at the time of the assessment, we owed $9.7 million of the original assessment; however, as a result of the settlement, this was reduced by $1.2 million. This assessment is payable in annual installments over five years beginning January 2012. In addition, pursuant to the related class action settlement, we agreed to pay any amount of

60


assessments defaulted on by owners in return for our recovery of the related VOIs. We expect to fund any future installment payments, and payments of assessments defaulted on by owners, from operating cash flows.  
On October 28, 2014, our Board of Directors authorized a share repurchase program allowing for the expenditure of up to $100.0 million for the repurchase of our common stock. Repurchases will be made from time to time in accordance with applicable securities laws in the open market and/or in privately negotiated transactions, and may include repurchases pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The share repurchase program is effective immediately, and repurchases may begin as soon as November 3, 2014.
The repurchase program does not obligate us to acquire any particular amount of common stock or to acquire shares on any particular timetable and the program may be suspended at any time at our discretion. The timing and amount of share repurchases will be determined by management based on its evaluation of market conditions, the trading price of the stock, applicable legal requirements, compliance with the provisions of the Senior Credit Facility Agreement and other factors.
Cash Flow From Operating Activities. During the nine months ended September 30, 2014, net cash provided by operating activities was $76.5 million and was the result of net income of $37.6 million and non-cash revenues and expenses and non-cash and cash loss on extinguishment of debt totaling $164.8 million, partially offset by other changes in operating assets and liabilities that resulted in a net credit of $126.0 million. The significant non-cash revenues and expenses and non-cash and cash loss on extinguishment of debt included (i) $40.1 million in the provision for uncollectible Vacation Interest sales revenue; (ii) $46.8 million of loss on extinguishment of debt (which includes $30.2 million of redemption premium paid in cash and $16.6 million of non-cash write-off of unamortized debt issuance costs and debt discount); (iii) $24.6 million in depreciation and amortization; (iv) $30.5 million in deferred income taxes, primarily as a result of provision for income taxes recorded during the nine months ended September 30, 2014; (v) $12.2 million in stock-based compensation expense; (vi) $6.6 million in amortization of net portfolio discounts and (vii) $4.1 million in amortization of capitalized financing costs and original issue discounts; partially offset by $0.5 million in gain on mortgage repurchases.
During the nine months ended September 30, 2013, net cash provided by operating activities was $2.3 million and was the result of net loss of $6.1 million and non-cash revenues and expenses totaling $100.0 million, partially offset by other changes in operating assets and liabilities that resulted in a net credit of $91.6 million. The significant non-cash revenues and expenses included (i) $38.5 million in stock-based compensation costs; (ii) $29.7 million in the provision for uncollectible Vacation Interest sales revenue; (iii) $19.9 million in depreciation and amortization; (iv) $13.4 million in loss on extinguishment of debt; (v) $5.6 million in amortization of capitalized financing costs and original issue discounts; (vi) $4.3 million in amortization of capitalized loan origination costs and net portfolio discounts (net of premiums); (vii) $1.3 million in impairments and other write-offs; (viii) $0.8 million in unrealized loss on post-retirement benefit plan; (ix) $0.7 million in unrealized loss on derivative instruments and (x) $0.2 million loss on foreign currency exchange, offset by (a) $8.0 million in deferred taxes; (b) $2.9 million in gain from insurance settlement recognized in connection with the insurance proceeds we expected to receive related to property damage at one of our managed resorts, the Alter Ego Suit and insurance proceeds we expected to receive in connection with the Hawaii Water Intrusion Case; (c) $2.7 million in gain from bargain purchase from business combination and (d) $0.7 million in gain from disposal of assets. See "Liquidity and Capital Resources—FLRX Litigation" below for the definition of and further detail on the Alter Ego Suit.
Cash Flow From Investing Activities. During the nine months ended September 30, 2014, net cash used in investing activities was $13.6 million, consisting of $13.8 million used to purchase property and equipment, primarily associated with information technology related projects and equipment and renovation projects at certain sales centers, offset by $0.3 million in proceeds from the sale of assets in our European operations.
During the nine months ended September 30, 2013, net cash used in investing activities was $56.7 million, comprised of (i) $47.8 million paid in connection with the PMR Service Companies Acquisition and (ii) $12.8 million used to purchase property and equipment, primarily associated with information technology related projects and equipment, offset by (a) $3.1 million in proceeds from the sale of assets in our European operations and (b) $0.7 million in cash and cash equivalents acquired in connection with the Island One Acquisition.
Cash Flow From Financing Activities. During the nine months ended September 30, 2014, net cash provided by financing activities was $83.4 million. Cash provided by financing activities consisted of (i) $442.8 million in proceeds of the term loan portion of the Senior Credit Facility; (ii) $206.3 million from the issuance of debt under our securitization notes and Funding Facilities; (iii) a $22.5 million decrease in cash in escrow and restricted cash; (iv) $1.1 million from the issuance of notes payable and (v) $2.3 million in proceeds from the exercise of stock options. These amounts were partially offset by cash used in financing activities consisting of (a) $404.7 million in connection with the redemption of our Senior Secured Notes; (b) $146.2 million in repayments on our securitization notes and Funding Facilities; (c) $28.5 million in repayments on notes payable; (d) $11.0 million in debt issuance costs and (e) $1.1 million in repayments on our Senior Credit Facility.
During the nine months ended September 30, 2013, net cash provided by financing activities was $63.2 million. Cash provided by financing activities consisted of (i) $265.9 million from the issuance of debt under our securitization notes and

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Funding Facilities; (ii) $204.7 million from the IPO, net of related costs; (iii) $15.0 million from the issuance of debt under the 2013 Revolving Credit Facility and (iv) $3.9 million from the issuance of notes payable, consisting primarily of insurance policy premium financing notes. These amounts were partially offset by cash used in financing activities consisting of (a) $201.6 million in repayments on our securitization notes and Funding Facilities; (b) $131.8 million in repayments on notes payable; (c) $56.6 million in repayments on the Senior Secured Notes, including redemption premium; (d) a $17.7 million increase in cash in escrow and restricted cash; (e) $10.3 million for the repurchase of outstanding warrants to purchase shares of DRC common stock; (f) $6.2 million of debt issuance costs and (g) $2.0 million in payments related to the early extinguishment of notes payable.

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Indebtedness

The following table presents selected information on our borrowings as of the dates presented below (dollars in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Principal
Balance
 
Weighted
Average
Interest
Rate
 
Maturity
 
Gross Amount of Mortgages and Contracts as Collateral
 
Borrowing / Funding Availability
 
Principal
Balance
Senior Credit Facility
 
$
443,888

 
5.5%
 
5/9/2021
 
$

 
$
25,000

 
$

Original issue discount related to Senior Credit
Facility
 
(2,122
)
 
 
 
 
 

 

 

Senior Secured Notes
 

 
 
 

 

 

 
374,440

Original issue discount related to Senior Secured Notes
 

 
 
 
 
 

 

 
(6,548
)
Notes payable-insurance policies (2)
 
2,089

 
3.1%
 
Various
 

 

 
3,130

Notes payable-other (2)
 
319

 
5.0%
 
Various
 

 

 
172

Total Corporate Indebtedness
 
444,174

 
 
 
 
 

 
25,000

 
371,194

 
 
 
 
 
 
 
 
 
 
 
 
 
ILXA Inventory Loan (1)(2)(3)
 

 

 

 

 

 
11,268

DPM Inventory Loan (1)(2)(3)
 

 

 

 

 

 
6,261

Tempus Inventory Loan (1)(2)(3)
 

 

 

 

 

 
2,308

Notes payable-other (1)(2)(3)
 
6

 
—%
 
11/18/2015
 

 

 
11

Total Non-Recourse Indebtedness other than Securitization Notes and Funding Facilities
 
6

 
 
 
 
 

 

 
19,848

 
 
 
 
 
 
 
 
 
 
 
 
 
Conduit Facility (1)
 
157,619

 
3.8%
 
4/10/2015
 
183,747

 
17,381

(4)

Diamond Resorts Owner Trust 2013-2 (1)
 
148,379

 
2.3%
 
5/20/2026
 
154,968

 

 
218,235

DRI Quorum Facility and Island One Quorum
     Funding Facility(1)
 
59,826

 
5.5%
 
Various
 
67,376

 
23,268

(4)
51,660

Diamond Resorts Owner Trust Series 2013-1 (1)
 
47,021

 
2.0%
 
1/20/2025
 
50,652

 

 
63,059

Diamond Resorts Tempus Owner Trust 2013 (1)
 
20,006

 
6.0%
 
12/20/2023
 
24,416

 

 
28,950

Diamond Resorts Owner Trust Series 2011-1 (1)
 
18,762

 
4.0%
 
3/20/2023
 
19,196

 

 
24,792

Original issue discount related to Diamond
Resorts Owner Trust Series 2011-1
 
(172
)
 
 
 
 
 

 

 
(226
)
ILXA Receivables Loan (1)(3)
 

 

 

 

 

 
4,766

Island One Conduit Facility (1)
 

 

 

 

 

 
31

Total Securitization Notes and Funding Facilities
 
451,441

 
 
 
 
 
500,355

 
40,649

 
391,267

Total
 
$
895,621

 
 
 
 
 
$
500,355

 
$
65,649

 
$
782,309

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Non-recourse indebtedness
 
 
 
 
 
 
 
 
 
 
 
 
(2) Other notes payable
 
 
 
 
 
 
 
 
 
 
 
 
(3) Borrowings through special-purpose subsidiaries only
 
 
 
 
(4) Borrowing / funding availability is calculated as the difference between the maximum commitment amount and the outstanding principal balance; however, the actual availability is dependent on the amount of eligible loans that serve as the collateral for such borrowings.
See "Note 16—Borrowings" to our condensed consolidated financial statements included elsewhere in this report for additional information on indebtedness incurred by us.

Senior Credit Facility. On May 9, 2014, we and DRC entered into the Senior Credit Facility Agreement, which provides for a $470.0 million Senior Credit Facility, which includes a $445.0 million term loan, issued with 0.50% of original issue discount and having a term of seven years and a $25.0 million revolving line of credit having a term of five years. Borrowings under the Senior Credit Facility bear interest, at our option, at a variable rate equal to LIBOR plus 450 basis points, with a one percent LIBOR floor applicable only to the term loan portion of the Senior Credit Facility, or an alternate base rate plus 350 basis points. We used the proceeds of the term loan portion of the Senior Credit Facility, as well as approximately $5.4 million of cash on hand, to fund the approximately $418.9 million redemption amount for the outstanding Senior Secured Notes, which included $374.4 million in aggregate principal amount of Senior Secured Notes, $30.2 million representing the applicable redemption premium and $14.2 million of accrued and unpaid interest up to (but excluding) the June 9, 2014 redemption date,

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and to repay all outstanding indebtedness, together with accrued interest and fees, under the ILXA Inventory Loan, the Tempus Inventory Loan and the DPM Inventory Loan. In conjunction with our entry into the Senior Credit Facility, we also terminated the 2013 Revolving Credit Facility, under which no borrowings were then outstanding.
Other significant terms of the Senior Credit Facility include: (i) one percent minimum annual amortization due in quarterly payments of $1.1 million; (ii) an excess cash flow sweep (as defined in the Senior Credit Facility Agreement) beginning in the second quarter of 2015 (for 2015, relating only to the cash generated for the period from July 1, 2014 through December 31, 2014 and, thereafter, based on annual results) of a maximum of 50%, stepping down to a 25% excess cash flow sweep when the secured leverage ratio (which represents the ratio of (1) secured total debt to (2) Adjusted EBITDA for the most recent four fiscal quarters for which financial statements are available) is greater than 1:1, but equal to or less than 1.5:1, and no excess cash flow sweep if the secured leverage ratio is less than or equal to 1:1; (iii) a soft call provision of 1.01 for the first 12 months of the Senior Credit Facility; (iv) no ongoing maintenance financial covenants for the term loan, and a financial covenant calculation required on the revolving line of credit if outstanding loans under the revolving line of credit exceed 25% of the commitment amount at the end of any quarter; (v) a non-committed incremental $150.0 million facility available for borrowing, plus additional amounts greater than $150.0 million, subject in the case of such additional amount only to our meeting a required secured leverage ratio and (vi) our ability to make restricted payments, including the payment of dividends or share repurchases, up to an aggregate of $25.0 million over the term of the loan (less certain investment and debt amounts specified under the Senior Credit Facility Agreement), plus the portion of cash flow that is not used to amortize debt pursuant to the excess cash flow provision described above, subject to, among other things, our meeting a required total leverage ratio (which represents the ratio of (a) total debt to (b) Adjusted EBITDA for the most recent four fiscal quarters for which financial statements are available).
The Senior Credit Facility Agreement contains customary negative covenants, including covenants that limit our ability to: (i) incur additional indebtedness; (ii) create liens; (iii) enter into certain sale and lease-back transactions; (iv) make certain investments; (v) merge or consolidate or sell or otherwise dispose of all or substantially all of the assets of DRII, DRC and their restricted subsidiaries; (vi) engage in transactions with affiliates and (vii) pay dividends or make other equity distributions and purchase or redeem capital stock, subject to specified exceptions, including as described above. The restrictions on our incurrence of indebtedness and our ability to pay dividends are based upon our compliance with the then-applicable secured leverage ratio and total leverage ratio. The Senior Credit Facility Agreement also contains customary default provisions. The borrowings under the Senior Credit Facility are secured on a senior basis by substantially all of our assets.
As indicated above, covenants in the Senior Credit Facility Agreement requiring us to prepay outstanding amounts under the term loan using a portion of our excess cash flow, and covenants limiting our ability to incur indebtedness, to make certain investments and to pay dividends or make other equity distributions and purchase or redeem capital stock and the financial covenant compliance that is triggered by having more than 25% of the revolving credit commitment outstanding at the end of any quarter, are determined by reference to Adjusted EBITDA for us and our restricted subsidiaries. Covenants included in the Notes Indenture that governed the Senior Secured Notes were similarly determined by reference to Adjusted EBITDA for us and our restricted subsidiaries. As of September 30, 2014, all of our subsidiaries were designated as restricted subsidiaries, as defined in the Senior Credit Facility Agreement.
Adjusted EBITDA for us and our restricted subsidiaries is derived from our Adjusted EBITDA, which we calculate in accordance with the Senior Credit Facility Agreement as our net income (loss), plus: (i) corporate interest expense; (ii) provision (benefit) for income taxes; (iii) depreciation and amortization; (iv) Vacation Interest cost of sales; (v) loss on extinguishment of debt; (vi) impairments and other non-cash write-offs; (vii) loss on the disposal of assets; (viii) amortization of loan origination costs; (ix) amortization of net portfolio premiums and (x) stock-based compensation expense; less (a) gain on the disposal of assets; (b) gain on bargain purchase from business combination and (c) amortization of net portfolio discounts. Adjusted EBITDA is a non-United States generally accepted accounting principles ("U.S. GAAP") financial measure and should not be considered in isolation, 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. Provided below is additional information regarding the calculation of Adjusted EBITDA for purposes of the Senior Credit Facility Agreement.
Corporate interest expense is added back because interest expense is a function of outstanding indebtedness, not operations, and can be dependent on a company’s capital structure, debt levels and credit ratings. Accordingly, corporate interest expense can vary greatly from company to company and across periods for the same company; however, in calculating Adjusted EBITDA, interest expense related to lines of credit secured by the mortgages and contracts receivable generated in the normal course of selling Vacation Interests is not added back to net income (loss) because this borrowing is necessary to support our Vacation Interest sales business.
Loss on extinguishment of debt includes the effect of write-offs of capitalized debt issuance costs and original issue discounts due to payoff or substantial modifications of the terms of our indebtedness. While the amounts booked by us with

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respect to these events include both cash and non-cash items, the entire amounts are related to financing events, and not our ongoing operations. Accordingly, these amounts are treated similarly to corporate interest expense and are added back to net income in our Adjusted EBITDA calculation.
Vacation Interest cost of sales is excluded from our Adjusted EBITDA calculation because the method by which we are required to record Vacation Interest cost of sales pursuant to ASC 978, “Real Estate-Time-Sharing Activities" ("ASC 978") (a method designed for companies that, unlike us, engage in significant timeshare development activity) includes various projections and estimates, which are subject to significant uncertainty. Because of the cumulative “true-up” adjustment required by this method, as discussed below, this method can cause major swings in our reported operating income.
Pursuant to ASC 978, if we review our projections and determine that our estimated Vacation Interest cost of sales was higher (or lower) than our actual Vacation Interest cost of sales for the prior life of the project (which, for us, goes back to our acquisition of Sunterra Corporation in 2007), we apply the higher (or lower) Vacation Interest cost of sales retroactively. In such a case, our Vacation Interest cost of sales for the current period will be increased (or reduced) by the entire aggregate amount by which we underestimated (or overestimated) Vacation Interest cost of sales over such period (reflecting a cumulative adjustment extending back to the beginning of the current period). For additional information regarding how we record Vacation Interest cost of sales, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates—Vacation Interest Cost of Sales” set forth in the 2013 Form 10-K.
Vacation Interest sales revenue does not accrue until collectability is reasonably assured, and is not subject to cumulative adjustments similar to those required in determining Vacation Interest cost of sales pursuant to ASC 978. As a result, Vacation Interest sales revenue is included in the calculation of Adjusted EBITDA, even though Vacation Interest cost of sales is excluded from such calculation.
Stock-based compensation is excluded from our Adjusted EBITDA calculation because it represents a non-cash item. We calculate our stock-based compensation utilizing the Black-Scholes option pricing model that is dependent on management's estimate on the expected volatility, the average expected option life, the risk-free interest rate, the expected annual dividend per share and the annual forfeiture rate. A small change in any of the estimates could have a material impact on the stock-based compensation expense. Accordingly, stock-based compensation can vary greatly from company to company and across periods for the same company.
In addition to covenants contained in the Senior Credit Facility Agreement, financial covenants governing the Conduit Facility and the Tempus 2013 Notes are determined by reference to measures calculated in a manner similar to the calculation of Adjusted EBITDA. In addition, Adjusted EBITDA is not only used for purposes of determining compliance with covenants in our debt-related agreements, but our management also uses our consolidated Adjusted EBITDA: (i) for planning purposes, including the preparation of our annual operating budget; (ii) to allocate resources to enhance the financial performance of our business; (iii) to evaluate the effectiveness of our business strategies and (iv) as a factor for determining compensation for certain personnel.
However, Adjusted EBITDA has limitations as an analytical tool because, among other things:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not reflect cash requirements for income taxes;
Adjusted EBITDA does not reflect interest expense for our corporate indebtedness;
although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced, and Adjusted EBITDA does not reflect any cash requirements for these replacements;
we make expenditures to replenish VOI inventory (principally pursuant to our inventory recovery agreements and in connection with our strategic acquisitions), and Adjusted EBITDA does not reflect our cash requirements for these expenditures or certain costs of carrying such inventory (which are capitalized); and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
We encourage investors and securities analysts to review our U.S. GAAP condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and investors and securities analysts should not rely solely or primarily on Adjusted EBITDA or any other single financial measure to evaluate our liquidity or financial performance.
The following tables present Adjusted EBITDA, as calculated in accordance with, and for purposes of covenants contained in, the Senior Credit Facility Agreement, reconciled to each of (1) our net cash provided by operating activities and (2) our net income (loss). The tables below present this reconciliation on an actual basis for the three and nine months ended

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September 30, 2014 and 2013 and for the 12 months ended September 30, 2014 ("LTM"). LTM is calculated by adding the applicable financial data for the nine months ended September 30, 2014 to the corresponding amount for the year ended December 31, 2013, and then subtracting the corresponding amount for the nine months ended September 30, 2013. LTM Adjusted EBITDA is presented because, as discussed above, certain covenants in the Senior Credit Facility Agreement are based upon Adjusted EBITDA for us and our restricted subsidiaries for the four most recently ended fiscal quarters.
    
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
LTM
 
 
(In thousands)
Net cash provided by (used in) operating activities
 
$
23,549

 
$
(4,879
)
 
$
76,454

 
$
2,325

 
$
76,822

Provision (benefit) for income taxes
 
20,156

 
(7,626
)
 
32,860

 
(6,777
)
 
45,414

Provision for uncollectible Vacation Interest sales revenue(a)
 
(15,847
)
 
(13,851
)
 
(40,123
)
 
(29,731
)
 
(55,062
)
Amortization of capitalized financing costs and original issue discounts(a)
 
(1,125
)
 
(1,804
)
 
(4,079
)
 
(5,607
)
 
(5,551
)
Non-cash expense related to Alter Ego Suit(a)
 

 

 

 

 
(5,508
)
Deferred income taxes(b)
 
(19,679
)
 
8,040

 
(30,461
)
 
8,040

 
(41,765
)
(Loss) gain on foreign currency(c)
 
(14
)
 
3

 
(98
)
 
(215
)
 
(128
)
Gain on mortgage purchase(a)
 
136

 
33

 
519

 
71

 
559

Unrealized gain (loss) on derivative instruments(d)
 
15

 
(657
)
 
(181
)
 
(657
)
 
476

Unrealized loss on post-retirement benefit plan(e)
 
(43
)
 
(774
)
 
(128
)
 
(774
)
 
(241
)
Cash to be received (cash received) on insurance settlements(f)
 

 

 

 
2,876

 
(2,876
)
Corporate interest expense(g)
 
7,429

 
16,658

 
34,502

 
58,110

 
48,607

Change in operating assets and liabilities excluding acquisitions(h)
 
53,591

 
46,655

 
125,965

 
91,552

 
178,740

Vacation Interest cost of sales(i)
 
16,476

 
18,605

 
44,840

 
45,451

 
56,084

       Adjusted EBITDA - Consolidated
 
$
84,644

 
$
60,403

 
$
240,070

 
$
164,664

 
$
295,571


(a)
Represents non-cash charge or gain.
(b)
Represents the deferred income tax liability as a result of the provision for income taxes recorded for each period. In addition, each of the three months ended September 30, 2013, the nine months ended September 30, 2013 and LTM includes the difference between the treatment for financial reporting purposes as compared to income tax return purposes, primarily related to the Island One Acquisition and the PMR Service Companies Acquisition, each completed on July 24, 2013.
(c)
Represents net realized (loss) gain on foreign exchange transactions settled at (unfavorable) favorable exchange rates and unrealized net (loss) gain resulting from the (devaluation) appreciation of foreign currency-denominated assets and liabilities.
(d)
Represents the effects of the changes in mark-to-market valuations of derivative liabilities.
(e)
Represents unrealized loss on our post-retirement benefit plan related to a collective labor agreement entered into with the employees of our two resorts in St. Maarten.
(f)
Represents insurance settlements receivables recorded (received in cash) in connection with property damage claims and reimbursement of defense costs related to litigation.
(g)
Represents corporate interest expense; does not include interest expense related to non-recourse indebtedness incurred by our special-purpose subsidiaries that is secured by our VOI consumer loans.
(h)
Represents the net change in operating assets and liabilities excluding acquisitions, as computed directly from the statements of cash flows. Vacation Interest cost of sales is included in the net changes in unsold Vacation Interests, net, as presented in the statements of cash flows.
(i)
We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates.

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
LTM
 
 
(In thousands)
Net income (loss)
 
$
26,304

 
$
(26,327
)
 
$
37,583

 
$
(6,098
)
 
$
41,156

  Plus: Corporate interest expense(a)
 
7,429

 
16,658

 
34,502

 
58,110

 
48,607

Provision (benefit) for income taxes
 
20,156

 
(7,626
)
 
32,860

 
(6,777
)
 
45,414

Depreciation and amortization(b)
 
8,271

 
7,583

 
24,601

 
19,912

 
32,874

Vacation Interest cost of sales(c)
 
16,476

 
18,605

 
44,840

 
45,451

 
56,084

Loss on extinguishment of debt(d)
 

 
13,383

 
46,807

 
13,383

 
49,028

Impairments and other non-cash write-offs(b)
 
11

 
1,200

 
53

 
1,279

 
361

Loss (gain) on disposal of assets(b)
 
224

 
(585
)
 
71

 
(673
)
 
(238
)
Gain on bargain purchase from business combinations(e)
 

 
(2,756
)
 

 
(2,726
)
 
(153
)
Amortization of loan origination costs(b)
 
2,380

 
1,408

 
6,591

 
3,876

 
8,134

Amortization of net portfolio premium (discounts)(b)
 
57

 
365

 
(36
)
 
432

 
68

 Stock-based compensation(f)
 
3,336

 
38,495

 
12,198

 
38,495

 
14,236

Adjusted EBITDA - Consolidated
 
$
84,644

 
$
60,403

 
$
240,070

 
$
164,664

 
$
295,571


(a)
Corporate interest expense does not include interest expense related to non-recourse indebtedness incurred by our special-purpose vehicles that is secured by our VOI consumer loans.
(b)
These items represent non-cash charges/gains.
(c)
We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates.
(d)
For the nine months ended September 30, 2014, represents (i) $30.2 million of redemption premium paid on June 9, 2014 in connection with the redemption of the outstanding Senior Secured Notes using proceeds from the term loan portion of the Senior Credit Facility and (ii) $16.6 million of unamortized debt issuance costs and debt discount written off upon the extinguishment of the Senior Secured Notes, the 2013 Revolving Credit Facility, ILXA Inventory Loan and the Tempus Inventory Loan. For the three and nine months ended September 30, 2013, represents (1) $6.1 million of redemption premium paid on August 23, 2013 in connection with the Tender Offer and $2.4 million of the unamortized debt discount and debt issuance cost associated with the Senior Secured Notes (2) $4.9 million of the unamortized debt issuance cost on both the Tempus Acquisition Loan and the PMR Acquisition Loan written off and the additional exit fees paid upon the extinguishment of the Tempus Acquisition Loan and the PMR Acquisition Loan on July 24, 2013 using the proceeds from the IPO.
(e)
For the three and nine months ended September 30, 2013, represents an adjustment to the amount by which the fair value of the assets acquired net of the liabilities assumed in the PMR Service Companies Acquisition (completed in July 2013) exceeded the purchase price.
(f)
Represents the non-cash charge related to stock-based compensation expense due to stock options issued in connection with, and since, the consummation of the IPO.
Senior Secured Notes. The Senior Secured Notes carried an interest rate of 12.0% and were scheduled to mature in August 2018. On August 23, 2013, DRC completed the Tender Offer with respect to the Senior Secured Notes as required by the Notes Indenture in the event of the IPO. Holders that validly tendered their Notes received $1,120 per $1,000 principal amount of Notes, plus accrued and unpaid interest to (but excluding) the date of purchase. On June 9, 2014, DRC redeemed all of the remaining outstanding principal amount under the Senior Secured Notes at a redemption price equal to 108.077% of the face value of the Senior Secured Notes being redeemed (or $1,080.77 per $1,000 in principal amount of the Senior Secured Notes). The total redemption amount paid was $418.9 million, which included $374.4 million of principal balance, $30.2 million of redemption premium and $14.2 million of accrued and unpaid interest up to (but excluding) June 9, 2014, and was paid using a portion of the proceeds from the term loan portion of the Senior Credit Facility.

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Conduit Facility. On April 11, 2013, we entered into an amended and restated Conduit Facility agreement that extended the maturity date of the facility to April 10, 2015. That amended and restated Conduit Facility provides for a 24-month facility that is annually renewable for 364-day periods at the election of the lenders, bears interest at either LIBOR or the commercial paper rate (each having a floor of 0.50%) plus 3.25% and has a non-use fee of 0.75%. The overall advance rate on loans receivable in the portfolio is limited to 85% of the aggregate face value of the eligible loans. The maximum borrowing capacity was $125.0 million on April 11, 2013 and was subsequently increased to $175.0 million on September 26, 2014, when we entered into an amendment to the amended and restated Conduit Facility agreement.
During the year ended December 31, 2013, we entered into two interest rate swap agreements, both of which were terminated on November 20, 2013 concurrent with the paydown of the Conduit Facility.
On March 20, 2014, as required by the Conduit Facility, we entered into an interest rate swap agreement with a notional amount of $20.0 million (the "March 2014 Swap") that is scheduled to mature on March 20, 2024, to manage our exposure to fluctuations in interest rates. We pay interest at a fixed rate of 2.65% based on a floating notional amount according to a pre-determined amortization schedule and receive interest based on one-month floating LIBOR.
On April 21, 2014, as required by the Conduit Facility, we entered into an interest rate swap agreement with a notional amount of $10.0 million (the "April 2014 Swap") that is scheduled to mature on March 20, 2024, to manage our exposure to fluctuations in interest rates. We pay interest at a fixed rate of 2.58% based on a floating notional amount according to a pre-determined amortization schedule and receive interest based on one-month floating LIBOR.
On June 27, 2014, as required by the Conduit Facility, we entered into an interest rate swap agreement with a notional amount of $45.0 million (the "June 2014 Swap") that is scheduled to mature on June 20, 2024, to manage our exposure to fluctuations in interest rates. We pay interest at a fixed rate of 2.48% based on a floating notional amount according to a pre-determined amortization schedule and receive interest based on one-month floating LIBOR.
On September 30, 2014, as required by the Conduit Facility, we entered into an interest rate swap agreement with a notional amount of $55.0 million (the "September 2014 Swap") that is scheduled to mature on September 20, 2024, to manage our exposure to fluctuations in interest rates. We pay interest at a fixed rate of 2.67% based on a floating notional amount according to a pre-determined amortization schedule and receive interest based on one-month floating LIBOR.
On October 20, 2014, the March 2014 Swap, the April 2014 Swap, the June 2014 Swap and the September 2014 Swap were terminated. Also on October 20, 2014, as required by the Conduit Facility, we entered into a new interest rate swap agreement with a notional amount of $112.5 million (the "October 2014 Swap") that is scheduled to mature on October 20, 2024, to manage our exposure to fluctuation interest rates. We pay interest at a fixed rate of 2.45% based on a floating notional amount according to a pre-determined amortization schedule and receive interest based on one-month floating LIBOR.
See "Note 3—Concentrations of Risk" to our condensed consolidated financial statements included elsewhere in this report for further detail on these swap agreements.
The Conduit Facility is subject to covenants, including as to the maintenance of specific financial ratios. The financial ratio covenants consist of a minimum consolidated interest coverage ratio of at least 1.5 to 1.0 as of the measurement date and a maximum consolidated leverage ratio not to exceed 5.0 to 1.0 on each measurement date. The consolidated interest coverage ratio is calculated by dividing Consolidated EBITDA (as defined in the credit agreement) by Consolidated Interest Expense (as defined in the credit agreement); both are measured on a trailing 12-month basis preceding the measurement date. As of September 30, 2014, our interest coverage ratio was 6.24x. The consolidated leverage ratio is calculated by dividing Total Funded Debt (as defined in the credit agreement) minus unrestricted cash and cash equivalents as of the measurement date by Consolidated EBITDA as measured on a trailing 12-month basis preceding the measurement date. As of September 30, 2014, our consolidated leverage ratio was 0.93x. Covenants in the Conduit Facility also include a minimum liquidity requirement. The total liquidity covenant stipulates that our aggregate unrestricted cash and cash equivalents as of the measurement date must exceed $10.0 million through the Commitment Expiration Date (as defined in the credit agreement). As of September 30, 2014, our unrestricted cash and cash equivalents under the non-special-purpose subsidiaries was $181.9 million, which was $171.9 million higher than the minimum requirement, and we were in compliance with all of the covenants described above.
Securitization Notes. On April 27, 2011, we issued the DROT 2011 Notes with a face value of $64.5 million (the "DROT 2011 Notes"). The DROT 2011 Notes mature on March 20, 2023 and carry an interest rate of 4.0%. The net proceeds were used to pay off in full the $36.4 million then-outstanding principal balance under our Conduit Facility, to pay down approximately $7.0 million of the Quorum Facility, to pay requisite accrued interest and fees associated with both facilities, and to pay certain expenses incurred in connection with the issuance of the DROT 2011 Notes, including the funding of a reserve account required thereby.
On January 23, 2013, we issued the DROT 2013-1 Notes with a face value of $93.6 million. The DROT 2013-1 Notes mature on January 20, 2025 and carry a weighted average interest rate of 2.0%. The net proceeds were used to pay off the $71.3

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million then-outstanding principal balance under our Conduit Facility and to pay expenses incurred in connection with the issuance of the DROT 2013-1 Notes, including the funding of a reserve account required thereby.
On September 20, 2013, we issued the Tempus 2013 Notes with a face value of $31.0 million. The Tempus 2013 Notes bear interest at a rate of 6.0% per annum and mature on December 20, 2023. The proceeds from the Tempus 2013 Notes were used to pay off in full the then-outstanding principal balances and accrued interest and fees under the Tempus Receivables Loan and Notes Payable—RFA fees.
On October 21, 2013, we redeemed all of the DROT 2009 Class A notes and Class B notes at aggregate redemption prices of $24.4 million and $1.8 million, respectively, using the proceeds from borrowings under the Conduit Facility. These notes were originally issued on October 15, 2009 with an initial face value of $169.2 million.
On November 20, 2013, we issued DROT 2013-2 Notes with a face value of $225.0 million that included a $44.7 million prefunding account. The initial proceeds of $180.3 million were used to pay off the $152.8 million then-outstanding principal balance, accrued interest and fees associated with the Conduit Facility, terminate the two interest rate swap agreements then in effect, pay certain expenses incurred in connection with the issuance of the DROT 2013-2 Notes, and fund related reserve accounts with the remaining proceeds transferred to us for general corporate use. As of December 31, 2013, cash in escrow and restricted cash included $23.3 million related to the prefunding account, all of which was released to our unrestricted cash account in January 2014.
Quorum Facility. Our subsidiary, DRI Quorum 2010, LLC (“DRI Quorum”), entered into a Loan Sale and Servicing Agreement (the “LSSA"), dated as of April 30, 2010 (as amended and restated, the "Quorum Facility") with Quorum Federal Credit Union ("Quorum") as purchaser. The LSSA and related documents provide for an aggregate minimum $40.0 million loan sale facility and joint marketing venture, whereby DRI Quorum may sell eligible consumer loans and in-transit loans to Quorum on a nonrecourse, permanent basis, provided that the underlying consumer obligor is a Quorum credit union member. The LSSA was amended and restated as of December 31, 2012 to increase the aggregate minimum committed amount of the Quorum Facility to $80.0 million and to extend the term of the agreement to December 31, 2015; provided that Quorum may further extend the term for additional one-year periods by written notice.     
ILXA Receivables Loan and Inventory Loan. On August 31, 2010, we completed the ILX Acquisition through our wholly-owned subsidiary, ILX Acquisition, Inc. (“ILXA”). In connection with the ILX Acquisition, ILXA entered into an Inventory Loan and Security Agreement (“ILXA Inventory Loan”) and a Receivables Loan and Security Agreement (“ILXA Receivables Loan”) with Textron Financial Corporation. The ILXA Inventory Loan was a non-revolving credit facility in the maximum principal amount of $23.0 million at an interest rate of 7.5%. The ILXA Receivables Loan was a receivables facility with an initial principal amount of $11.9 million at an interest rate of 10.0% and was collateralized by mortgages and contracts receivable of ILXA. Both loans were scheduled to mature on August 31, 2015. On May 9, 2014, we repaid all outstanding indebtedness under the ILXA Inventory Loan in the amount of $8.4 million, along with $0.2 million in accrued interest and $1.5 million in exit fees and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility. On May 9, 2014, we repaid all outstanding indebtedness under the ILXA Receivables Loan in the amount of $4.5 million, along with a de minimis amount in accrued interest and other fees, using general corporate funds.
Tempus Acquisition Loan and Tempus Resorts Acquisition Financing. On July 1, 2011, we completed the Tempus Resorts Acquisition through Mystic Dunes, LLC, a wholly-owned subsidiary of Tempus Acquisition, LLC. In order to fund the Tempus Resorts Acquisition, Tempus Acquisition, LLC entered into a Loan and Security Agreement with Guggenheim Corporate Funding, LLC, as the administrative agent for the lenders, which included affiliates of, or funds or accounts managed or advised by, Guggenheim Partners Investment Management, LLC, which is an affiliate of DRP Holdco, LLC (the "Guggenheim Investor"), and Silver Rock Financial LLC, another investor in our company (the “Tempus Acquisition Loan”). The Tempus Acquisition Loan was collateralized by all assets of Tempus Acquisition, LLC. The Tempus Acquisition Loan was initially in an aggregate principal amount of $41.1 million (which included a $5.5 million revolving loan) but was subsequently amended during the year ended December 31, 2012 to allow for additional borrowings. The Tempus Acquisition Loan bore interest at a rate of 18.0% and was scheduled to mature on June 30, 2015.
On July 1, 2011, an aggregate of $7.5 million of the Tempus Acquisition Loan was used by Tempus Acquisition, LLC to purchase a 10% participating interest in the Tempus Receivables Loan (defined below), and the remaining proceeds were loaned to Mystic Dunes, LLC pursuant to a Loan and Security Agreement having payment terms identical to the Tempus Acquisition Loan (the “Mystic Dunes Loan"). The Mystic Dunes Loan was collateralized by all assets of Mystic Dunes, LLC.
On July 24, 2013, we repaid all outstanding indebtedness under the Tempus Acquisition Loan in the principal amount of $46.7 million, along with $0.6 million in accrued interest and $2.7 million in exit fees and other fees, using the proceeds from the IPO. In addition, the Mystic Dunes Loan was paid off in full.
On July 1, 2011, Mystic Dunes Receivables, LLC, a subsidiary of Mystic Dunes, LLC, entered into a Loan and Security Agreement (the "Tempus Receivables Loan") with Resort Finance America, LLC ("RFA"). The Tempus Receivables Loan was

69


a receivables credit facility in the amount of $74.5 million, collateralized by mortgages and contracts receivable acquired in the Tempus Resorts Acquisition. The Tempus Receivables Loan bore interest at a rate that was the higher of (i) one-month LIBOR plus 7.0% or (ii) 10%, adjusted monthly, and was scheduled to mature on July 1, 2015. Furthermore, we were obligated to pay RFA an initial defaulted timeshare loans release fee over 36 months from August 2011 through July 2014 ("Notes Payable—RFA fees"). The fee was recorded at fair value as of July 1, 2011, using a discount rate of 10%.
On September 20, 2013, the Tempus Receivables Loan and Notes Payable—RFA fees were paid off in full using the proceeds from the Tempus 2013 Notes.

On July 1, 2011, another subsidiary of Mystic Dunes, LLC entered into an Amended and Restated Inventory Loan and Security Agreement with Textron Financial Corporation (the “Tempus Inventory Loan”) in the maximum amount of $4.3 million, collateralized by certain VOI inventory acquired in the Tempus Resorts Acquisition. The Tempus Inventory Loan bore interest at a rate equal to the three-month LIBOR (with a floor of 2.0%) plus 5.5% and was scheduled to mature on June 30, 2016, subject to extension to June 30, 2018.

On May 9, 2014, we repaid all outstanding indebtedness under the Tempus Inventory Loan in the amount of $2.0 million, along with a de minimis amount in accrued interest and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility.
PMR Acquisition Loan and Inventory Loan. On May 21, 2012, DPM Acquisition, LLC and subsidiaries (collectively, "DPMA") completed the PMR Acquisition whereby it acquired assets pursuant to an Asset Purchase Agreement, among DPMA and Pacific Monarch Resorts, Inc., Vacation Interval Realty, Inc., Vacation Marketing Group, Inc., MGV Cabo, LLC, Desarrollo Cabo Azul, S. de R.L. de C.V., and Operadora MGVM S. de R.L. de C.V. Pursuant to the Asset Purchase Agreement, DPMA acquired certain resort management agreements, unsold VOIs and the rights to recover and resell such interests, a portion of the seller's consumer loans portfolio and certain real property and other assets for approximately $51.6 million in cash, plus the assumption of specified liabilities related to the acquired assets.
In order to fund the PMR Acquisition, on May 21, 2012, DPMA entered into a Loan and Security Agreement with Guggenheim Corporate Funding, LLC, as the administrative agent for the lenders, which included affiliates of, or funds or accounts managed or advised by, Guggenheim Partners Investment Management, LLC, which is an affiliate of the Guggenheim Investor, Wellington Management Company, LLP, one of our investors, and Silver Rock Financial LLC, another one of our investors (the "PMR Acquisition Loan"). The PMR Acquisition Loan was collateralized by substantially all of the assets of DPMA. The PMR Acquisition Loan was initially in an aggregate principal amount of $71.3 million (consisting of a $61.3 million term loan and a $10.0 million revolving loan). The PMR Acquisition Loan bore interest at a rate of 18.0% and was scheduled to mature on May 21, 2016.
On July 24, 2013, we repaid all outstanding indebtedness under the PMR Acquisition Loan in the principal amount of $58.3 million, along with $0.8 million in accrued interest and $3.1 million in exit fees and other fees, using proceeds from the IPO.

On May 21, 2012, DPMA also entered into an Inventory Loan and Security Agreement (the "DPM Inventory Loan") with RFA PMR LoanCo, LLC. The DPM Inventory Loan provided debt financing for a portion of the purchase price of the defaulted receivables to be purchased by DPMA pursuant to a collateral recovery and repurchase agreement entered into between DPMA and an affiliate of RFA PMR LoanCo, LLC in connection with the PMR Acquisition. The interest rate was a variable rate equal to the sum of LIBOR plus 6.0% per annum; provided that LIBOR was never less than 2.0% or greater than 4.0% per annum.
 
On May 9, 2014, we repaid all outstanding indebtedness under the DPM Inventory Loan in the principal amount of $7.3 million, along with $0.1 million in accrued interest and other fees, using a portion of the proceeds from the term loan portion of the Senior Credit Facility. There was no principal balance outstanding under the DPM Inventory Loan as of September 30, 2014; however, we have the option of borrowing additional amounts under the DPM Inventory Loan.
2013 Revolving Credit Facility. On September 11, 2013, we entered into the $25.0 million 2013 Revolving Credit Facility. The 2013 Revolving Credit Facility provided that, subject to customary borrowing conditions, we could, from time to time prior to the fourth anniversary of the effective date of the 2013 Revolving Credit Facility, borrow, repay and re-borrow loans in an aggregate amount outstanding at any time not to exceed $25.0 million. Borrowings under the 2013 Revolving Credit Facility bore interest, at our option, at a variable rate equal to the sum of LIBOR plus 4.0% per annum or an adjusted base rate plus 3.0% per annum. The 2013 Revolving Credit Facility was subject to negative covenants generally consistent with the negative covenants applicable to the Senior Secured Notes. The repayment of borrowings and certain other obligations under the 2013 Revolving Credit Facility were secured on a pari passu basis by the collateral that secures the Senior Secured Notes. On May 9, 2014, we terminated the 2013 Revolving Credit Facility in conjunction with our entry into the Senior Credit

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Facility. There was no principal balance outstanding under the 2013 Revolving Credit Facility immediately prior to its termination.
Island One Borrowings. In connection with the Island One Acquisition completed on July 24, 2013, we assumed the loan sale agreement entered into by a subsidiary of Island One, Inc. on January 31, 2012 with Quorum that provides for an aggregate minimum $15.0 million loan sale facility (the "Island One Quorum Funding Facility"). Under the Island One Quorum Funding Facility, eligible consumer loans and in-transit loans are sold to Quorum on a non-recourse, permanent basis, provided that the underlying consumer obligor is, or becomes, a Quorum credit union member. The Island One Quorum Funding Facility provides for a purchase period of three years at a variable program fee of the published Wall Street Journal prime rate plus 6.0%, with a floor of 8.0%. The loan purchase commitment is conditional upon certain portfolio delinquency and default performance measurements. As of September 30, 2014, the weighted average purchase price payment of the Quorum Facility and the Island One Quorum Funding Facility was 86.8% of the obligor loan amount, and the weighted average program purchase fee was 5.5% of the obligor loan amount.
In addition, in the Island One Acquisition, we assumed a mortgage-backed loan (the "Island One Receivables Loan") that bore interest at the published Wall Street Journal prime rate plus 5.5%, with a floor of 7.0%. The Island One Receivables Loan was scheduled to mature on May 27, 2016 and was collateralized by certain consumer loan portfolios. The advance rates on loans receivable in the portfolio were limited to 70.0% to 90.0% of the face value of the eligible loans, depending upon the credit quality of the underlying mortgages. The Island One Receivables Loan was subject to certain financial covenants, including a minimum tangible net worth and a maximum debt to tangible net worth ratio. On October 28, 2013, we paid off in full the then-outstanding principal balance under the Island One Receivables Loan in an amount equal to $4.1 million using our general corporate funds.
Furthermore, in the Island One Acquisition, we assumed a conduit facility that was scheduled to mature on September 30, 2016 (the "Island One Conduit Facility") until it was paid off in full on February 11, 2014 using payments remitted by our customers. The Island One Conduit Facility bore interest rate at a rate of 7.4% per annum and was secured by certain consumer loan portfolios and guaranteed by Island One, Inc. We were required to make mandatory monthly principal payments based upon the aggregate remaining outstanding principal balance of the eligible underlying collateral.
In the Island One Acquisition, we also assumed a note payable in the amount of $0.7 million secured by certain real property in Orlando, Florida (the "Island One Note Payable"). The loan bore interest at 5.0% per annum and required monthly principal and interest payments, until it was repaid in full on December 31, 2013 using our general corporate funds.
Our indebtedness under the DROT 2011 Notes, the DROT 2013-1 Notes, the DROT 2013-2 Notes, the Conduit Facility, the Quorum Facility, the Tempus 2013 Notes, the Island One Quorum Funding Facility and the Island One Conduit Facility is non-recourse. Our securitizations represent debt that is securitized through bankruptcy-remote special-purpose entities, the creditors of which have no recourse to DRII or DRC for principal or interest. The funds received from the obligors of our consumer loans are directly used to pay the principal and interest due on the securitization notes.
Notes Payable. We finance premiums on certain insurance policies under two unsecured notes, both of which are scheduled to mature in January 2015 and carry an interest rate of 3.1% per annum. In addition, we purchased certain software licenses during the three months ended June 30, 2014, with annual interest-free payments due for the next three years, and this obligation was recorded at fair value using a discount rate of 5.0%.
Future Capital Requirements. Over the next 12 months, we expect that our cash flows from operations and the borrowings under the Funding Facilities and the Senior Credit Facility will be available to cover the interest payments due under our indebtedness and fund our operating expenses and other obligations, including any purchases of common stock under our share repurchase program. See "Liquidity and Capital Resources—Overview" for further detail on the share repurchase program.
Our future capital requirements will depend on many factors, including the growth of our consumer financing activities, the expansion of our hospitality management operations and potential acquisitions. Our ability to secure short-term and long-term financing in the future will depend on a variety of factors, including our future profitability, the performance of our consumer loan receivable portfolio, our relative levels of debt and equity and the overall condition of the credit and securitization markets. There can be no assurances that any such financing will be available to us. If we are unable to secure short-term and long-term financing in the future or if cash flows from operations are less than expected, our liquidity and cash flows would be materially and adversely affected, we may be required to curtail our sales and marketing operations and we may not be able to implement our growth strategy.
Deferred Taxes. As of December 31, 2013, we had available approximately $335.9 million of unused federal net operating loss carry-forwards, $331.9 million of unused state net operating loss carry-forwards, and $128.8 million of foreign net operating loss carry-forwards with expiration dates from 2017 through 2033 (except for certain foreign net operating loss carry-forwards that do not expire) that may be applied against future taxable income, subject to certain limitations.

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As a result of the IPO and the resulting change in ownership, our federal net operating losses will be limited under Internal Revenue Code Section 382 to $42.6 million in 2014 and an additional $29.5 million that becomes available each subsequent year. State net operating loss carry-forwards are also available for use subject to similar limitations in many cases. We do not anticipate significant federal or state cash income tax liabilities for the year ending December 31, 2014.
Commitments and Contingencies. From time to time, we or our subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business.
FLRX Litigation. FLRX was a defendant in a lawsuit originally filed in July 2003, alleging the breach of certain contractual terms relating to the obligations under a stock purchase agreement for the acquisition of FLRX in 1998, as well as certain violations under applicable consumer protection acts.
In January 2010, following a jury trial, a Washington state court entered a judgment against FLRX, awarded plaintiffs damages of $30.0 million plus post-judgment interest at a rate of 12% per annum and attorney's fees of approximately $1.5 million plus accrued interest, and ordered specific performance of certain ongoing contractual obligations pursuant to the breach of contract claim (the "FLRX Judgment"). FLRX's appeal and petition for review of the verdict were denied. Any liability in this matter is not covered by insurance. Neither DRC nor any of its other subsidiaries was a party to this lawsuit.
In April 2012, the plaintiffs in the FLRX case filed a lawsuit in King County Superior Court in the State of Washington against DRP and DRC (the "Alter Ego Suit"). The complaint, which alleged two claims for alter ego and fraudulent conveyance, sought to hold DRP and DRC liable for the judgment entered against FLRX. The Alter Ego Suit was subsequently removed to the U.S. District Court for the Western District of Washington, and DRP was dismissed as a defendant.
On November 15, 2013, the parties to the Alter Ego Suit executed a settlement agreement which provided for (i) the dismissal of the Alter Ego Suit, with prejudice; (ii) the payment of $5.0 million in cash to the plaintiffs; (iii) the transfer of shares of a subsidiary of DRC whose only assets at the time of transfer were majority interests in two undeveloped real estate parcels in Mexico with a carrying value of $5.3 million and an appraised value of $6.7 million for those majority interests and (iv) the release of DRC and all of its affiliates (other than FLRX) from any liability in connection with the FLRX Judgment or matters relating to that judgment. Such actions were completed in December 2013 and January 2014. As a result of the settlement, we recorded a pre-tax charge to earnings of $10.5 million during the fourth quarter of 2013. The Alter Ego case was dismissed by the United States District Court for the Western District of Washington on June 24, 2014.
The settlement did not impact FLRX's liability under the FLRX Judgment. Since FLRX currently conducts no operations and has no material assets, and since none of DRII or any other subsidiary has any obligation to provide any funding to FLRX, we believe that we will not have any material liability when the case against FLRX is ultimately resolved. It is possible that FLRX may at some point determine to file for protection under the Federal Bankruptcy Code.
Off-Balance Sheet Arrangements. As of September 30, 2014, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4) of Regulation S-K).
Contractual Obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations
—Contractual Obligations" in our Form 10-Q for the quarter ended June 30, 2014 for a summary of our contractual obligations as of June 30, 2014. As of September, 2014, there were no material changes outside the ordinary course of our business in contractual obligations since June 30, 2014.

Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue, bad debts and income taxes. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our condensed consolidated financial statements.
Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. For further detail of those Critical Accounting Policies and Use of Estimates that require significant

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judgment, see "Item 7Management's Discussion and Analysis of Financial ConditionCritical Accounting Policies and Use of Estimates" set forth in the 2013 Form 10-K.

New Accounting Pronouncements

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies; however, we have made an irrevocable election not to take advantage of this extended transition period provided in Section 7(a)(2)(B) of the Securities Act as allowed by Section 107(b)(1) of the JOBS Act.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for us for our interim period ending March 31, 2017. Early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. We are currently evaluating the standard to determine the impact of its adoption on our financial statements.
In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)—Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ("ASU 2014-04"). ASU 2014-04 clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. ASU 2014-04 is effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. We adopted ASU 2014-04 as of our interim period ended March 31, 2014. The adoption of this update did not have a material impact on our financial statements.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation. Inflation and changing prices have not had a material impact on our revenues, income (loss) from operations, and net income (loss) during any of our three most recent fiscal years; however, to the extent inflationary trends affect short-term interest rates, a portion of our debt service costs, as well as the rates we charge on our consumer loans, may be affected.
Interest Rate Risk. We are exposed to interest rate risk through our variable rate indebtedness, including the Conduit Facility and the Senior Credit Facility. We have attempted to manage our interest rate risk through the use of derivative financial instruments. For example, we are required to hedge 90% of the outstanding note balance under the Conduit Facility. We do not hold or issue financial instruments for trading purposes and do not enter into derivative transactions that would be considered speculative positions. To manage exposure to counterparty credit risk in interest rate swap and cap agreements, we enter into agreements with highly rated institutions that can be expected to fully perform under the terms of such agreements. At September 30, 2014, our derivative financial instruments consisted of four interest rate swap agreements, which did not qualify for hedge accounting. Interest differentials resulting from these agreements are recorded on an accrual basis as an adjustment to interest expense. We may enter into agreements for derivative financial instruments covering all or a portion of the term loan portion of the Senior Credit Facility; however, we have not entered into any such agreements and there can be no assurances that we will enter into such agreements.
To the extent we assume variable rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our results of operations, cash flows and financial position. We cannot assure that any hedging transactions we enter into will adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.
Additionally, we derive net interest income from our consumer financing activities to the extent the interest rates we charge our customers who finance their purchases of VOIs exceed the variable interest rates we pay to our lenders. Because our mortgages and contracts receivable generally bear interest at fixed rates, future increases in interest rates may result in a decline in our net interest income.
As of September 30, 2014, 67.2% of our borrowings, or $601.5 million, bore interest at variable rates; however, all of our variable-rate borrowings require a minimal interest rate floor when LIBOR is below certain levels. Assuming the level of variable-rate borrowings outstanding at September 30, 2014, and assuming a one percentage point increase in the 2014 average interest rate payable on these borrowings, it was estimated that for the first nine months of 2014 our interest expense would have increased and net income would have decreased by approximately $0.8 million.
Foreign Currency Translation Risk. In addition to our operations throughout 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 Pounds Sterling in connection with operations in 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, British Pound Sterling and Mexican Peso against the U.S. dollar have had, and will continue to have, an effect, which may be significant, on our reported financial results. A decline in the value of any of the foreign currencies in which we receive revenues, including the Euro, British Pound Sterling or Mexican Peso, 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. For additional information on the potential impact of exchange rate fluctuations on our financial results, see "Item 1ARisk Factors—Fluctuations in foreign currency exchange rates, including as a result of the ongoing European debt crisis, may affect our reported results of operations." in the 2013 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES
As an "emerging growth company," as such term is defined in the JOBS Act, we have not been subject to the requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002 that we provide an attestation report of our auditors on the effectiveness of our internal control over financial reporting. We will no longer qualify as an "emerging growth company" at the beginning of 2015 and, accordingly, will be required, pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, to include in our Annual Report on Form 10-K for our fiscal year ending December 31, 2014 an opinion from our auditor regarding the effectiveness of our internal controls as of the end of such fiscal year.
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based on

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such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC's rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
From time to time, we or our subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business.
St. Maarten Litigation
In December 2004 and January 2005, two separate cases were filed in the Joint Court of Justice of the Netherlands Antilles against AKGI St. Maarten NV or AKGI, one of our subsidiaries, challenging AKGI's title to seven whole ownership units at the Royal Palm Resort, and alleging the breach of certain agreements that existed prior to AKGI's acquisition of the resort. AKGI purchased the resort at auction in 1995. Each claimant alleges that, between 1989 and 1991, he purchased certain units from the prior owner of Royal Palm Resort, and that he holds in perpetuity, legal title to, or a leasehold interest in, these respective units and is entitled to a refund of the purchase price and an annual 12% return on the purchase price (which totaled $1.2 million in one case and $1.3 million in the other case). Due to the nature of the AKGI purchase and the underlying St. Maarten laws, we believe that the obligations to the claimants would only be enforceable if the agreement between the claimant and AKGI's predecessor was either a timeshare agreement or a lease agreement. AKGI has answered that the claimants' agreements were, in fact, investment contracts, and are therefore not enforceable under St. Maarten law. In February 2011, the case that was pending in the highest and final court of appeal was dismissed as to all claims, with our having no obligations, financial or otherwise, to claimant. The other case that was pending in the intermediate court of appeal was decided in favor of AKGI on September 29, 2014. Claimant has three months to appeal that decision. A lien has been placed on AKGI's interest in the Royal Palm Resort while the remaining action is pending.
 
See "Part I. Item 3—Legal Proceedings" in the 2013 Form 10-K and "Part II. Item 1 - Legal Proceedings" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 for further detail on our legal proceedings.

ITEM 1A.    RISK FACTORS

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There have been no material changes from the risk factors previously disclosed under “Item 1ARisk Factors” in the 2013 Form 10-K.

ITEM 5.     OTHER INFORMATION
On September 26, 2014, we and various of our direct and indirect wholly-owned subsidiaries entered into Omnibus Amendment No. 2 (the “Conduit Facility Amendment”) to the documents governing the Conduit Facility. The Conduit Facility Amendment increased the maximum facility balance under the Conduit Facility from $125,000,000 to $175,000,000.
Credit Suisse AG, New York Branch, serves as administrative agent for the Conduit Facility, and Wells Fargo Bank, National Association serves as indenture trustee, custodian and back-up servicer.
The description of the Conduit Facility Amendment set forth above in this Item 5 does not purport to be complete, and is qualified in its entirety by reference to the full text of Omnibus Amendment No. 2, dated as of September 26, 2014, by and among Diamond Resorts Issuer 2008 LLC, as Issuer; our company, Diamond Resorts Corporation and Diamond Resorts Holdings, LLC, as Performance Guarantors; Diamond Resorts Depositor 2008 LLC, as Depositor; Diamond Resorts Financial Services, Inc., as Servicer; Wells Fargo Bank, National Association, as Indenture Trustee, Custodian and Back-Up Servicer; Credit Suisse AG, New York Branch, as Administrative Agent and a Funding Agent; GIFS Capital Company, LLC, as Conduit; and Diamond Resorts Finance Holding Company, as Seller, which is attached as Exhibit 10.3 to this Form 10-Q and is incorporated herein by reference.

ITEM 6.     EXHIBITS
Exhibit
Description
10.1
First Amendment to Stockholders’ Agreement, dated as of August 11, 2014, among Diamond Resorts International, Inc. and the individuals and other entities party thereto (incorporated by reference to Exhibit 10.1 to Diamond Resorts International, Inc.'s Current Report on Form 8-K filed on August 13, 2014)
10.2
Third Extension Agreement, dated August 20, 2014, among Diamond Resorts Centralized Services Company and Praesumo Partners, LLC (incorporated by reference to Exhibit 10.1 to Diamond Resorts International, Inc.'s Current Report on Form 8-K filed on August 22, 2014)
10.3
Omnibus Amendment No. 2, dated as of September 26, 2014, by and among Diamond Resorts Issuer 2008 LLC, as Issuer; Diamond Resorts Corporation, Diamond Resorts Holdings, LLC and Diamond Resorts International, Inc., as Performance Guarantors; Diamond Resorts Depositor 2008 LLC, as Depositor; Diamond Resorts Financial Services, Inc., as Servicer; Wells Fargo Bank, National Association, as Indenture Trustee, Custodian and Back-Up Servicer; Credit Suisse AG, New York Branch, as Administrative Agent and a Funding Agent; GIFS Capital Company, LLC, as Conduit; and Diamond Resorts Finance Holding Company, as Seller
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act as of 1934, as amended
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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The following materials from Diamond Resorts International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); (iii) the Condensed Consolidated Statement of Stockholder's Equity; (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to the Condensed Consolidated Financial Statements, furnished herewith
 
 
 


    

    

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
DIAMOND RESORTS INTERNATIONAL, INC.
 
 
 
 
Date:
November 4, 2014
By:
/s/ DAVID F. PALMER
 
 
 
David F. Palmer
 
 
 
President and Chief Executive Officer (Principal Executive Officer)
 
 
 
 
Date
November 4, 2014
By:
/s/ C. ALAN BENTLEY
 
 
 
C. Alan Bentley
 
 
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 



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