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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to ______
000-21193
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Commission File Number
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SUNTERRA CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 95-4582157
---------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of Incorporation or Identification Number)
organization)
1781 Park Center Drive
Orlando, Florida 32835
(407) 532-1000
(Address of principal executive offices including zip code)
(407) 532-1000
(Registrant's telephone number including area code)
WWW.SUNTERRA.COM
(Registrant's Website Address)
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
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12,13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a bankruptcy court. [X] Yes [ ] No
Number of shares outstanding of the issuer's common stock, par value $0.01
per share, at August 9, 2002: 18,055,077.
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Page 1
SUNTERRA CORPORATION
INDEX
PAGE
ITEM NUMBER
Safe Harbor Statement - Cautionary Notice
Regarding Forward Looking Statements 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations for the three months and six months 4
ended June 30, 2002 and 2001 (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 2002 6
and 2001 (Unaudited)
Notes to the Condensed Consolidated Financial 7
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about 17
Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Page 2
Safe Harbor Statement - Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including
in particular statements about our plans, objectives, expectations and prospects
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations". You can identify these statements by forward-looking
words such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"seek" and similar expressions. Although we believe that the plans, objectives,
expectations and prospects reflected in or suggested by our forward-looking
statements are reasonable, those statements involve uncertainties and risks, and
we can give no assurance that our plans, objectives, expectations and prospects
will be achieved. Important factors that could cause our actual results to
differ materially from the results anticipated by the forward-looking statements
are contained in our Annual Report on Form 10-K for the year ended December 31,
2001 under the headings "Business-Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in that
report and herein and relate, without limitation, to matters arising from the
emergence of the Company and certain of its subsidiaries as debtors from
proceedings under Chapter 11 of the Bankruptcy Code. Any or all of these factors
could cause our actual results and financial or legal status to differ
materially from those expressed or referred to in any forward-looking statement.
All written or oral forward-looking statements attributable to us are expressly
qualified in their entirety by these cautionary statements. Forward-looking
statements speak only as of the date on which they are made.
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Vacation Interest sales ......... $ 46,337 $ 41,868 $ 81,404 $ 81,901
Vacation Interest lease revenue . 2,254 2,573 4,554 5,305
Club Sunterra membership fees ... 1,792 1,395 3,567 2,823
Resort rental income ............ 3,412 3,197 6,852 6,819
Management fees ................. 5,815 4,764 11,041 10,510
Interest income ................. 7,387 7,783 14,362 15,226
Other income .................... 5,631 7,375 9,624 12,500
-------- -------- --------- ---------
Total revenues .................. 72,628 68,955 131,404 135,084
-------- -------- --------- ---------
Costs and Operating Expenses:
Vacation Interests cost of sales 9,692 8,069 17,562 16,605
Advertising, sales and marketing 29,639 25,878 53,128 50,638
Maintenance fee and subsidy
expense ......................... 2,293 4,008 5,091 6,901
Provision for doubtful accounts
and loan losses ................. 1,617 3,105 2,947 6,710
Loan portfolio expenses ......... 3,185 2,809 6,469 5,031
General and administrative ...... 19,222 18,123 37,794 33,320
Depreciation and amortization ... 3,436 4,310 6,829 8,627
Reorganization costs, net ....... 12,375 10,563 5,413 17,916
Restructuring costs ............. 665 -- 665 --
-------- -------- --------- ---------
Total costs and operating
expenses ........................ 82,124 76,865 135,898 145,748
-------- -------- --------- ---------
Loss from operations ............ (9,496) (7,910) (4,494) (10,664)
-------- -------- --------- ---------
Interest expense (a) ............ (3,655) (6,165) (8,136) (10,273)
Other non-operating income ...... -- 184 -- 184
Income on investment in joint
ventures ........................ 1,294 920 2,170 1,884
-------- -------- --------- ---------
Loss before provision for income
taxes ........................... (11,857) (12,971) (10,460) (18,869)
Provision for income taxes ...... 2,096 1,047 2,606 949
-------- -------- --------- ---------
Net loss ........................ $(13,953) $(14,018) $(13,066) $(19,818)
======== ======== ========= =========
Loss per share:
Basic and diluted ............... $ (0.39) $ (0.39) $ (0.36) $ (0.55)
Weighted average number of common
shares outstanding .............. 36,025 36,025 36,025 36,025
(a) Interest expense is comprised of contractual interest of $13,872 and $16,399, net of
unaccrued interest of $10,100 and $10,100 and capitalized interest of $117 and $134
for the three months ended June 30, 2002 and 2001, respectively. Interest expense is
comprised of contractual interest of $28,570 and $30,614, net of unaccrued interest of
$20,200 and $20,200 and capitalized interest of $234 and $141 for the six months ended
June 30, 2002 and 2001, respective.
The accompanying notes are an integral part of these condensed consolidated financial
statements.
Page 4
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except per share data)
(Unaudited)
June 30, December 31,
2002 2001
ASSETS
Cash and cash equivalents ....................... $ 33,402 $ 27,207
Cash in escrow and restricted cash .............. 52,675 99,354
Mortgages and contracts receivable, net of an
allowance of $32,737
and $36,206 at June 30, 2002 and December 31,
2001, respectively .............................. 169,679 176,036
Retained interests in mortgages receivable sold . 16,790 15,974
Due from related parties ........................ 5,908 9,902
Other receivables, net .......................... 14,529 13,013
Prepaid expenses and other assets ............... 28,015 18,747
Assets held for sale ............................ 12,283 11,324
Investment in joint ventures .................... 20,980 19,698
Real estate and development costs, net .......... 174,271 180,087
Property and equipment, net ..................... 65,880 67,431
Intangible and other assets, net ................ 25,350 24,718
--------- ---------
Total assets .................................... $ 619,762 $ 663,491
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Borrowings under debtor-in-possession financing
agreement ....................................... $ 165,659 $ 68,311
Accounts payable ................................ 22,529 16,695
Accrued liabilities ............................. 86,050 86,939
Deferred revenue ................................ 96,230 86,134
Deferred tax liability .......................... -- 291
Notes payable ................................... 21,766 28,005
Liabilities subject to compromise ............... 572,921 712,866
--------- ---------
Total liabilities ............................... 965,155 999,241
--------- ---------
Commitments and contingencies
Stockholders' deficiency
Preferred stock (25,000 shares authorized; none
issued or outstanding) .......................... -- --
Common stock ($0.01 par value, 50,000 shares
authorized; 36,025
outstanding at June 30, 2002 and December 31,
2001, respectively) ............................. 360 360
Additional paid-in capital ...................... 164,607 164,607
Accumulated deficit ............................. (504,347) (491,281)
Accumulated other comprehensive loss ............ (6,013) (9,436)
--------- ---------
Total stockholders' deficiency .................. (345,393) (335,750)
--------- ---------
Total liabilities and stockholders' deficiency .. $ 619,762 $ 663,491
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2002 and 2001
(Amounts in thousands)
(Unaudited)
2002 2001
---- ----
Operating activities:
Net loss ................................. $ (13,066) $(19,818)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization ............ 6,829 8,627
Provision for doubtful accounts and
loan losses .............................. 2,947 6,710
Amortization of capitalized loan
origination costs ........................ 333 1,259
Amortization of capitalized financing
costs .................................... 1,520 985
Discount on settlement of debt ........... (28,016) --
Income on investment in joint
ventures ................................. (2,170) (1,884)
Gain on sales of property and
equipment ................................ (4,274) (2,113)
Deferred income taxes .................... (313) 433
Changes in retained interests in
mortgages receivable sold ................ (1,625) (1,528)
Changes in operating assets and liabilities:
Cash in escrow and restricted cash ....... 44,439 (22,858)
Mortgages and contracts receivable ....... 4,013 (536)
Due from related parties ................. 3,994 (463)
Other receivables, net ................... (1,481) 6,876
Prepaid expenses and other assets ........ (9,653) (1,303)
Real estate and development costs ........ 3,910 21,906
Deferred revenue ......................... 10,096 8,848
Liabilities not subject to compromise:
Accounts payable ....................... 6,548 (2,104)
Accrued liabilities .................... 68 (11,954)
Liabilities subject to compromise ........ (1,317) 2,091
--------- --------
Net cash provided by (used in)
operating activities ................. 22,782 (6,826)
--------- --------
Investing activities:
Proceeds from sale of assets ............. 99 22,093
Capital expenditures ..................... (4,600) (2,180)
Increase in intangible and other
assets ................................... (827) (3,694)
Investment in joint ventures ............. 888 1,420
--------- --------
Net cash (used in) provided by
investing activities ................. (4,440) 17,639
--------- --------
Financing activities:
Borrowings under debtor-in-possession
financing agreement ...................... 101,895 59,013
Debt issuance costs ...................... (3,000) --
Proceeds from notes payable .............. 2,847 2,474
Payments of accrued interest on
settlement of debt ....................... (13,484) --
Payments on debtor-in-possession
financing agreement ...................... (4,547) (50,856)
Payments on notes payable and
mortgage-backed securities .............. (9,086) (10,048)
Payments on credit line facilities ....... (96,957) (1,146)
--------- --------
Net cash used in financing
activities ........................... (22,332) (563)
Effect of changes in exchange rates ........ 10,185 (10,514)
--------- --------
Net increase (decrease) in cash and
cash equivalents ........................... 6,195 (264)
Cash and cash equivalents, beginning of
period ..................................... 27,207 21,062
--------- --------
Cash and cash equivalents, end of
period ..................................... $ 33,402 $ 20,798
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest, net of
capitalized interest ..................... $ 4,059 $ 10,282
Cash paid for taxes, net of tax
refunds .................................. $ 1,524 $ (1,424)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
SUNTERRA CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share amounts)
(Unaudited)
Note 1 - Background and Basis of Presentation
The operations of Sunterra Corporation (Sunterra) and its wholly owned
subsidiaries consist of (i) marketing and selling vacation ownership interests
at its locations and off-site sales centers, which entitle the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year in
perpetuity (Vacation Intervals), and vacation points which may be redeemed for
occupancy rights, for varying lengths of stay, at participating resort locations
(Vacation Points, and together with Vacation Intervals, Vacation Interests),
both of which generally include a deeded, fee-simple interest in a particular
unit, (ii) leasing Vacation Intervals at certain Caribbean locations, (iii)
acquiring, developing, and operating vacation ownership resorts, (iv) providing
consumer financing to individual purchasers for the purchase of Vacation
Interests at its resort locations and off-site sales centers, and (v) providing
resort rental management and maintenance services for which the Company (defined
below) receives fees paid by the resorts' homeowners' associations.
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal recurring nature. Operating results for the six months ended June 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
These statements should be read in conjunction with the audited financial
statements and footnotes included in the Company's 2001 Annual Report on Form
10-K. Accounting policies used in preparing these financial statements are the
same as those described in such Form 10-K, unless otherwise noted herein.
As of December 31, 2001, the Company's consolidated stockholders' deficiency of
$335.8 million, its status as a debtor-in-possession operating under Chapter 11
Bankruptcy Court protection, the lack of approval of the proposed plan of
reorganization, and the Company's lack of binding commitments for exit and post
emergence working capital financing, gave rise to substantial doubt about the
Company's ability to continue as a going concern. As further described in Note
12 below, in June and July of 2002, the Company's reorganization plan was
confirmed by the Bankruptcy Court, the Company successfully obtained exit and
working capital financing and emerged from Chapter 11. Accordingly, management
believes that the restructuring of the Company's business and its capital
structure have provided it the ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which assumes continuity of operations and
realization of assets and settlement of liabilities and commitments in the
normal course of business.
As a result of the emergence of the Company from Chapter 11 (defined below) as
discussed in Notes 2 and 12, adjustments will be recorded to state assets and
liabilities at fair value in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code (SOP 90-7). These financial
statements do not include any adjustments that will result from the resolution
of the Chapter 11 Cases (defined below) or other matters discussed in the
accompanying notes. In connection with its emergence from bankruptcy, the
Company will adopt the fresh start accounting provisions of SOP 90-7 in the
third quarter of 2002, which will result in the revaluation of assets and
liabilities to reflect the provisions of the Plan (defined below). Management
believes this adoption will change materially the amounts currently recorded in
these financial statements. The accompanying condensed consolidated financial
statements do not reflect any adjustments that will be recorded as a result of
the Company's emergence from Chapter 11.
Note 2 - Reorganization of the Business Under Chapter 11
On May 31, 2000 (the Petition Date), Sunterra Corporation and 36 of its wholly
owned subsidiaries each filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code (Chapter 11) in the United States
Bankruptcy Court for the District of Maryland (Baltimore Division) (the
Bankruptcy Court). Two additional subsidiaries subsequently filed voluntary
petitions under Chapter 11 of the Bankruptcy Code. The bankruptcy cases of
Sunterra Corporation and its subsidiaries that filed for relief under the
Bankruptcy Code were jointly administered. These entities were operated as
debtors-in-possession (the Debtor Entities) in accordance with the provisions of
the Bankruptcy Code. Sunterra Corporation's subsidiaries that did not file
voluntary petitions for relief under Chapter 11 (the Non-Debtor Entities, and
collectively with the Debtor Entities, the Company) continued to operate their
respective businesses outside the protection of the Bankruptcy Code.
Page 7
Under Chapter 11, actions to enforce certain claims against the Debtor Entities
are generally stayed if such claims arose, or are based on events that occurred,
before the Petition Date. Such liabilities are reflected in the accompanying
condensed consolidated balance sheets as liabilities subject to compromise, as
presented below:
June 30, December 31,
2002 2001
---- ----
Secured obligations (see note 7) ....... $ 35,037 $160,130
Subordinated debt ...................... 478,000 478,000
-------- --------
Subtotal - notes payable subject to .... 513,037 638,130
compromise
Accounts payable ....................... 31,664 31,982
Accrued interest ....................... 13,427 27,267
Accrued expenses and other liabilities . 14,793 15,487
-------- --------
$572,921 $712,866
======== ========
Plan of Reorganization
On January 31, 2002, the Debtor Entities filed a joint plan of reorganization
(as amended on February 20, 2002, April 19, 2002, April 26, 2002 and May 9,
2002, the Proposed Plan) and accompanying disclosure statements with the
Bankruptcy Court. The Bankruptcy Court confirmed the Proposed Plan (the Plan) by
an order entered by the Bankruptcy Court on June 21, 2002. According to the
terms of the Plan, the Plan becomes effective when certain conditions, as set
forth in the Plan, are either satisfied or waived by the Official Committee of
Unsecured Creditors. One of these conditions included the Debtor Entities
obtaining a binding commitment for a credit facility in an amount sufficient to
pay all outstanding obligations under the DIP facility, allowed administrative
claims, allowed professional fee claims and other cash amounts required to be
paid under the Plan. Additionally, the Debtor Entities were required to obtain a
binding commitment for a financing facility available to finance mortgages and
contracts receivable. With the closing of the Exit Financing Facility
transaction, the conditions to the effectiveness of the Plan were fulfilled on
July 29, 2002 as discussed in Note 12.
The Plan provides for (i) payment in full of allowed administrative and fee
claims (which include, among other things, assumed contracts, professional fees
and indenture trustee fees and expenses), debtor-in-possession lender claims and
priority taxes; and (ii) settlement and resolution of all other claims against
the Debtor Entities as of the Petition Date. The Plan provides for distributions
to creditors of: (i) cash, (ii) new debt securities, (iii) shares of common
stock of the reorganized Company (New Sunterra Stock), and (iv) warrants for the
purchase of New Sunterra Stock. Certain of the unsecured creditors will also
receive non-transferable beneficial interests in a trust to be established for
purposes of pursuing certain claims against third parties. The Plan set forth
post-reorganization debt of the Debtor Entities of $220 million, issuance of
approximately 20 million shares of New Sunterra Stock and issuance of warrants
to purchase 600,000 shares of New Sunterra Stock. Pursuant to the terms of the
Plan, the Debtor Entities are deemed substantively consolidated and treated as a
single entity to eliminate: (i) cross-corporate guaranties by one Debtor Entity
of another Debtor Entity, (ii) duplicate claims against more than one Debtor
Entity, and (iii) intercompany claims among the substantively consolidated
Debtor Entities. As a result of the substantive consolidation, each claim filed
against one of the Debtor Entities is deemed to be filed against all of the
debtors as a single entity. The consolidated assets create a single fund from
which all claims against the consolidated Debtor Entities will be satisfied.
Under the Bankruptcy Code, pre-petition liabilities and creditors must be
satisfied before stockholders may receive any distribution. The ultimate
recovery of stockholders, if any, is determined and set forth in a plan of
reorganization where the fair value of the Company's assets is compared to the
liabilities and claims against the Company to determine the equity value of the
reorganized company. An equity value of $305 million was used for purposes of
estimating claim recoveries and implementing the Plan. The Plan provided for no
distributions to the holders of the Company's common stock, and all then
outstanding shares of such common stock were canceled as of the effective date
of the Plan on July 29, 2002.
Note 3 - New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No.141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for
under a single method, the purchase method. Use of the pooling-of-interests
method is no longer permitted. SFAS No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and certain other intangible assets with indefinite
useful lives no longer be amortized to earnings, but instead be reviewed at
least on an annual basis for impairment. The amortization of goodwill and
certain other intangible assets with indefinite useful lives ceased upon
adoption of SFAS No. 142, which occurred on January 1, 2002. In accordance with
disclosure requirements SFAS No. 142, amortization expense for goodwill, net
loss and net loss per share assuming the Company had adopted SFAS No. 142 during
the three months ended June 30, 2001 are $0.4 million, $13.6 million and $0.38
Page 8
per share, respectively. Amortization expense for goodwill, net loss and net
loss per share during the six months ended June 30, 2001 are $0.8 million, $19.0
million and $0.53 per share, respectively.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is applicable for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of a tangible long-lived asset. SFAS
No. 143 also requires the enterprise to record the contra to the initial
obligation as an increase to the carrying amount of the related long-lived asset
(i.e., the associated asset retirement costs) and to depreciate that cost over
the remaining useful life of the asset. The liability is changed at the end of
each period to reflect the passage of time (i.e., accretion expense) and changes
in the estimated future cash flows underlying the initial fair value
measurement. The adoption of SFAS No. 143 will occur with the implementation of
fresh start accounting as of July 31, 2002 and is not expected to have a
material impact on the accompanying condensed consolidated financial statements.
In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is applicable for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and portions of APB Opinion 30, Reporting the Results of Operations. SFAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
previously required. The adoption of SFAS No. 144 on January 1, 2002 did not
have a material impact on the accompanying condensed consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 eliminates the requirement to classify gains and losses from the
extinguishment of indebtedness as extraordinary, requires certain lease
modifications to be treated the same as a sale-leaseback transaction, and makes
other non-substantive technical corrections to existing pronouncements. The
Company has adopted SFAS No. 145 in 2002 and classified the net gain on
settlement of debt (Note 7) as a component of reorganization expenses on the
accompanying condensed consolidated financial statements.
In June 2002, the Financial Accounting Standards Board (FASB) has issued
Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. The standard nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)
and requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 will occur with the
implementation of fresh start accounting as of July 31, 2002. Management does
not anticipate the adoption of this statement to have a material impact on the
Company's results of operations.
Note 4 - Mortgages and Contracts Receivable
The following summarizes the Company's total mortgages and contracts receivable:
June 30, December 31,
2002 2001
---- ----
Mortgages and contracts receivable.............. $198,737 $209,022
Deferred loan origination costs, net............ 3,679 3,220
-------- --------
Mortgages and contracts receivable, gross....... 202,416 212,242
Less allowance for loan and contract losses..... (32,737) (36,206)
-------- --------
Mortgages and contracts receivable, net......... $169,679 $176,036
======== ========
Page 9
Activity in the allowance for loan and contract losses associated with mortgages
and contracts receivable is as follows:
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Balance, beginning of period $ 33,888 $ 36,941 $ 36,206 $ 37,326
Provision for loan and
contract losses............. 1,458 2,679 2,578 5,419
Receivables charged off, net (2,609) (1,345) (6,047) (5,445)
Other ...................... -- (975) -- --
-------- -------- -------- --------
Balance, end of period ..... $ 32,737 $ 37,300 $ 32,737 $ 37,300
======== ======== ======== ========
Note 5 - Real Estate and Development Costs
Real estate and development costs consist of the following:
June 30, December 31,
2002 2001
---- ----
Land ........................................... $ 53,885 $ 53,876
Development costs .............................. 456,187 458,193
Capitalized interest ........................... 20,309 20,234
--------- ---------
530,381 532,303
Interests recoverable under defaulted mortgages 17,459 20,126
Less accumulated vacation interest cost of sales (373,569) (372,342)
--------- ---------
Net real estate and development costs .......... $ 174,271 $ 180,087
========= =========
Note 6 - Reorganization Costs
Reorganization costs are comprised of expenses and losses offset by income and
gains that were realized or incurred by the Company as a result of
reorganization under Chapter 11 and are expensed as incurred. These items have
been segregated from normal operating costs and consist of the following:
Three months ended Six months ended
June 30: June 30:
2002 2001 2002 2001
---- ---- ---- ----
Professional fees ........ $ 9,738 $ 11,615 $ 16,111 $ 18,513
Employee retention and ... 210 517 952 887
severance programs
Net gains on asset sales . (2,756) (2,000) (4,274) (2,113)
Other .................... 6,354 892 7,474 1,451
Gain on settlement of debt (1,142) -- (14,758) --
(Note 7)
Interest income .......... (29) (461) (92) (822)
-------- -------- -------- --------
$ 12,375 $ 10,563 $ 5,413 $ 17,916
======== ======== ======== ========
Note 7 - Gain on Settlement of Debt
In January 2002, pursuant to an order of the Bankruptcy Court, the Company
entered into an agreement (the Finova Agreement) with Finova Capital Corporation
(Finova) that provided for payment by the Company of various loans and financing
facilities (Finova Loans) from Finova or its affiliates. Pursuant to the Finova
Agreement, the Company paid, in cash and by application of other funds, $100
million (determined after giving effect to a prior release to Finova of $5
million held by Finova as cash collateral) and Finova returned collateral
securing the Finova Loans. The payment to Finova represented a discount of $27.0
million from the principal amount of the Finova Loans. Pursuant to the Finova
Agreement, the Company and Finova each released the other parties from
liabilities and obligations relating to the Finova Loans and certain other
matters, including those that were the subject of pending litigation between the
parties. The Company obtained a portion of the funds to pay the Finova Loans
from term loans under its debtor-in-possession (DIP) financing facility and paid
a brokerage fee of $13.4 million to its DIP lender for negotiating the
settlement with Finova. The Company recorded a net gain on settlement of debt of
$13.6 million, which is included as an offset to reorganization costs.
Page 10
In May 2002, the Company executed amendments to lease agreements relating to a
1999 sale-leaseback transaction, payments on which were suspended as a result of
the bankruptcy proceedings. As a result of the amendments, the minimum lease
terms have been extended from November 2002 to April 2004, and the Company's
payment obligations have been reduced by $1.1 million, which is recorded as an
offset to reorganization expenses as a gain on settlement of debt.
Note 8 - Comprehensive Loss
Comprehensive loss includes all changes in equity (net assets) during a period
from non-owner sources. The reconciliation of net loss to comprehensive net loss
is as follows:
Three months ended Six months ended
June 30: June 30:
(amounts in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Net loss .................. $(13,953) $(14,018) $(13,066) $(19,818)
Unrealized (loss) gain on
available for sale
securities ................ -- 115 (163) 420
Foreign currency
translation adjustments ... 5,103 126 3,586 (2,742)
-------- -------- -------- --------
Total comprehensive loss .. $ (8,850) $(13,777) $ (9,643) $(22,140)
======== ======== ======== ========
Note 9 - Segment and Geographic Information
Due to the Chapter 11 proceedings, the Company operates in three segments, North
American Debtor Entities, North American Non-Debtor Entities and foreign
entities. All of these segments operate in one industry segment that includes
the development, marketing, sales, financing and management of vacation
ownership resorts. The Company's areas of operation outside of North America
include the United Kingdom, Japan, Italy, Spain, Portugal, Austria, Germany and
France. The Company's management evaluates performance of each segment based on
profit or loss from operations before income taxes not including extraordinary
items and the cumulative effect of change in accounting principles. Information
about the Company's operations in different geographic locations or segments is
shown below:
North North
America America Non- Total
Debtors Debtors Foreign Non-Debtors Total
------- ------- ------- ----------- -----
Three months ended
June 30, 2002:
Revenues from
external customers ... $ 33,939 $11,585 $27,104 $ 38,689 $ 72,628
(Loss) income before
income tax (benefit)
provision .......... (21,214) 2,698 6,659 9,357 (11,857)
Segment assets ....... 514,869 27,820 77,073 104,893 619,762
Three months ended
June 30, 2001:
Revenues from
external customers ... $ 35,196 $ 9,847 $23,912 $33,759 $ 68,955
(Loss) income before
income tax (benefit)
provision .......... (18,961) 2,423 3,567 5,990 (12,971)
Segment assets ....... 622,925 24,833 55,646 80,479 703,404
Six months ended
June 30, 2002:
Revenues from
external customers ... $ 63,361 $22,536 $45,507 $68,043 $131, 404
(Loss) income before
income tax (benefit)
provision .......... (23,305) 4,124 8,721 12,845 (10,460)
Segment assets ....... 514,869 27,820 77,073 104,893 619,762
Six months ended
June 30, 2001:
Revenues from
external customers ... $ 73,093 $20,818 $41,173 $61,991 $ 135,084
(Loss) income before
income tax (benefit)
provision .......... (29,057) 6,856 3,332 10,188 (18,869)
Segment assets ....... 622,925 24,833 55,646 80,479 703,404
Note 10 - Commitments and Contingencies
A lawsuit was filed in Florida in January 2000 against the Company and certain
directors, officers and former officers of the Company that alleges violation of
federal securities laws on behalf of persons who purchased the Company's common
stock from October 4, 1998, through January 19, 2000, or from October 6, 1998,
through January 19, 2000, and seeks recovery of unspecified damages. Subsequent
to the filing of the bankruptcy petition, the plaintiffs filed an amended
complaint, which excluded the Company, as any actions had been stayed as a
result of the petition filing. The lawsuit was dismissed in March 2002 without
prejudice to the plaintiffs. On July 3, 2002 the plaintiffs filed a second
consolidated amended class action complaint with the Court. The Company was not
named as a defendant in this amended complaint. The action is currently pending
in the Court. The Company believes that, pursuant to the discharge granted under
the Bankruptcy Code, Debtor
Page 11
Entities cannot be held liable to the plaintiffs if the Debtors are named in the
lawsuit. However, certain indemnity rights may be owed by the Debtor Entities to
the defendant officers and directors if a judgment is rendered against them.
We are also currently subject to litigation and claims regarding employment,
tort, contract, construction, sales taxes and commission disputes, among others.
Much of such litigation and claims is pre-petition and is stayed under the
Company's Chapter 11 proceeding. In our judgment, none of such litigation or
claims against the Company is likely to have a material adverse effect on the
Company's financial statements or its business.
Note 11 - Related Party Transaction
In October 2001, the Company entered into a contract with Westpac Resort Group
LLC (Westpac), a company 60% owned by the Chief Operating Officer. Westpac
arranges tours of vacation residences for potential customers. Management
believes that the terms of the agreement are comparable to that of an
arms-length transaction. Total payments to Westpac under this agreement were
$0.4 million for the three months ended June 30, 2002 and $0.5 million for the
six months ended June 30, 2002.
Note 12 - Subsequent Event
On July 29, 2002, the Company entered into an agreement for a $300 million
senior secured exit and working capital credit facility (the Exit Financing
Facility) and the Company emerged from Chapter 11. The proceeds of the Exit
Financing Facility were or are to be used to pay amounts payable in connection
with consummation of the Plan, provide mortgage receivable and other working
capital financing to the Company and to pay fees and expenses related to the
Exit Financing Facility. A portion of proceeds from the initial funding drawn on
the Exit Financing Facility was used to pay off amounts outstanding under the
Debtor Entities' DIP facility.
Under the terms of the Exit Financing Facility, the Company obtained a two-year
senior asset-based non-amortizing revolving credit facility in the amount of
$300 million. The availability of borrowings under the Exit Financing Facility
is based on the amount of eligible mortgages receivable, the value of eligible
vacation interests inventory and the value of certain real property and other
assets. The Exit Financing Facility is secured by a first priority lien on the
mortgages receivable and vacation interests inventory, as well as certain real
property and other assets of the Company, subject to certain exceptions.
Borrowings under the Exit Financing Facility bear interest at an annual rate
equal to one month LIBOR plus 3%, 5%, or 7%, depending on the type of asset
collateralizing various advances. In addition to the facility fee (2.5% of $300
million) paid in connection with the commitment and the closing of the Exit
Financing Facility, the Company issued a warrant exercisable for 1,190,148
shares of new common stock at an exercise price of $15.25 per share (the deemed
value of the shares for purposes of the Plan), subject to adjustment under
certain anti-dilution provisions of the warrant and will pay an unused
commitment fee of 0.25% per annum on the excess availability under the credit
facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The accompanying unaudited condensed consolidated financial statements set forth
certain data with respect to the financial position, results of operation, and
cash flows of the Company which should be read in conjunction with the following
discussion and analysis. The terms "Company," "we," "our," and "us" refer to
Sunterra Corporation and its subsidiaries. The following discussion and analysis
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those
contained in our Annual Report on Form 10-K for the year ended December 31, 2001
under the headings "Business-Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in that
report. See the Safe Harbor Statement at the beginning of this report.
Overview
We are a vacation ownership (timeshare) company with resort locations in North
America, Europe, the Caribbean, Hawaii and Latin America and approximately
250,000 owner families. Our operations consist of:
o marketing and selling to the public at our resort locations and off-site
sales centers: (1) vacation ownership interests which entitle the buyer to
use a fully-furnished vacation residence, generally for a one-week period
each year in perpetuity, which we refer to as "Vacation Intervals," and (2)
vacation points which may be redeemed for occupancy rights for varying
lengths of stay at participating resort locations, which we refer to as
"Vacation Points;"
o leasing Vacation Intervals at certain Caribbean locations;
o acquiring, developing and operating vacation ownership resorts;
o operating our Club Sunterra membership program;
Page 12
o providing consumer financing to individual purchasers for the purchase of
Vacation Intervals and Vacation Points, at our resort locations and
off-site sales centers, and;
o providing resort rental, management, maintenance and collection services
for which we receive fees paid by the resorts' homeowners associations.
Reorganization Under Chapter 11
As a result of the defaults on our senior unsecured notes and our secured credit
facilities, on May 31, 2000 we determined to seek protection under Chapter 11 of
the Bankruptcy Code in order to restructure existing debt and maximize existing
cash. On that date we filed voluntary petitions for relief in the Bankruptcy
Court under Chapter 11 of the Bankruptcy Code.
Following a hearing on June 20, 2002, the Bankruptcy Court entered an order on
June 21, 2002 confirming our Plan of Reorganization filed on January 31, 2002
(as amended on February 20, 2002, April 19, 2002, April 26 and May 9, 2002), as
amended (the Plan). We subsequently fulfilled the conditions to the
effectiveness of the Plan and on July 29, 2002 the Plan became effective. See
Note 2 to the accompanying unaudited condensed consolidated financial statements
for a summary certain provisions of the Plan, which is qualified in its entirety
by reference to the Plan filed as an exhibit to our Report on Form 8-K filed
with the Securities and Exchange Commission on May 28, 2002.
Also on July 29, 2002, and in connection with the consummation of the Plan, the
following actions, among others, occurred:
o we amended and restated our Bylaws and also filed Articles of Amendment and
Restatement with the Maryland State Department of Assessments and Taxation
authorizing an aggregate of 30,000,000 shares of our new common stock, par
value $0.01 per share;
o we entered into a loan agreement with Merrill Lynch Mortgage Capital Inc.
as agent and lender with a maximum availability of $300 million to be used
to make cash payments required under the Plan and for general corporate and
working capital purposes. As part of this loan agreement, we granted
Merrill Lynch a warrant exercisable for 1,190,148 shares of new common
stock at an exercise price of $15.25 per share (the deemed value of the
shares for purposes of the Plan), subject to adjustment under certain
anti-dilution provisions of the warrant;
o we also adopted the Sunterra Corporation 2002 Stock Option Plan, under
which we may grant options to purchase shares of new common stock and
reserved 2,012,821 shares of new common stock for issuance under the Plan;
o we entered into a Warrant Agreement with Mellon Investor Services LLC, as
warrant agent, which provides for the issuance by us of warrants to
purchase up to 600,000 shares of our new common stock to former holders of
certain subordinated notes as set forth in the Plan; and
o we entered into a Registration Rights Agreement with Merrill Lynch and
certain holders of new common stock, which provides that we will file a
shelf registration statement under the Securities Act of 1933, within 45
days of the filing of our Annual Report on Form 10-K for fiscal 2002, to
register the resale of shares of new common stock by certain holders.
Further, on July 29, 2002, all existing members of our Board of Directors were
deemed to have resigned and the new Board of Directors designated pursuant to
the Plan took office.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2002 to the Three Months Ended
June 30, 2001
We achieved total revenues of $72.6 million for the three months ended June 30,
2002, compared to $69.0 million for the three months ended June 30, 2001, an
increase of 5.3%. Overall revenues for domestic operations increased 0.1% to
$45.5 million for the three months ended June 30, 2002 compared to $45.0 million
for the three months ended June 30, 2001, and revenues from foreign operations
increased 13.3% to $27.1 million for the three months ended June 30, 2002.
In November 2000, the Bankruptcy Court issued an order for the Company to
provide certain consumers with renewed rescission rights with respect to the
sale of timeshare transactions entered into but not consummated fully prior to
the Petition Date. The Company sent registered letters to customers that met
this criterion providing a new rescission period. As such, certain sales
initially recorded in 2000 were deferred pending receipt from the customers of a
reconfirmation of acceptance of the sales agreement. Accordingly, Vacation
Interest sales of $3.7 million were recognized for the three months ended June
30, 2001 for such customers that reconfirmed their acceptance of the sales
agreements during that period (the "reconfirmed 2000 sales").
Vacation Interest sales of $46.3 million for the three months ended June 30,
2002 increased by $4.5 million or 10.7%, compared to sales of $41.9 million for
the three months ended June 30, 2001. Excluding the effect of the $3.7 million
of
Page 13
reconfirmed 2000 sales recorded during the three months ended June 30, 2001,
Vacation Interest sales increased by $6.9 million or 10.6%.
Vacation Interest lease revenue decreased $0.3 million, or 12.4%, to $2.3
million for the three months ended June 30, 2002 from $2.6 million for the three
months ended June 30, 2001. The decrease is primarily attributable to a decrease
in the amount of maintenance fees billed to the owners of certain Caribbean
properties in 2002.
Club Sunterra membership fees earned of $1.8 million for the three months ended
June 30, 2002 were $0.4 million higher than membership fees earned for the three
months ended June 30, 2001 of $1.4 million, due to an increase in club
memberships.
Interest income, primarily from financing provided to purchasers and lessees of
Vacation Interests, decreased 5.1% to $7.4 million for the three months ended
June 30, 2002 from $7.8 million for the three months ended June 30, 2001. The
decrease largely resulted from a net decrease in the Company's portfolio of
mortgages and contracts receivable.
Other income, which mainly consists of sampler vacation program revenues, travel
service revenue, resort amenity income and finance commissions, fell by 23.6% to
$5.6 million for the three months ended June 30, 2002 from $7.4 million for the
three months ended June 30, 2001. This decrease is primarily due to the
phase-out of the Encore sampler program and the disposition of certain resorts
in 2001.
Vacation Interest cost of sales of $9.7 million for the three months ended June
30, 2002 increased $1.6 million, or 20.1%, from $8.1 million for the three
months ended June 30, 2001. This increase is primarily attributable to the $4.5
million increase in Vacation Interest sales. As a percentage of Vacation
Interest sales for the three months ended June 30, 2002 and 2001, Vacation
Interest cost of sales was 20.9% and 19.3%, respectively.
For the three months ended June 30, 2002, advertising, sales and marketing costs
were $29.6 million or 64.0% of Vacation Interest sales compared to $25.9 million
or 61.8%, repsectively, for the three months ended June 30, 2001. This
represents a $3.8 million or 14.5% increase from the three months ended June 30,
2001 and is due to increased expenses resulting from more sales locations in
operation in 2002 during the three months ended June 30, 2002.
Maintenance fee and subsidy expense decreased 42.8%, or $1.7 million, to $2.3
million for the three months ended June 30, 2002 from $4.0 million for the three
months ended June 30, 2001 and totaled 4.9% of Vacation Interest sales for the
three months ended June 30, 2002 as compared to 9.6% for the three months ended
June 30, 2001. The decrease was primarily the result of a decrease in the number
of Company-owned Vacation Interests (due to ongoing sales and the disposition of
certain resort properties in 2001) and decreases in developer subsidies and
guarantees.
The provision for doubtful accounts and loan losses was $1.6 million for the
three months ended June 30, 2002 compared to $3.1 million for the three months
ended June 30, 2001. Of these amounts, $1.5 million and $2.7 million for the
three months ended June 30, 2002 and 2001, respectively, related to mortgages
and contracts receivable. The resulting allowance for mortgages and contracts
receivable at June 30, 2002 was $32.7 million, respectively, representing
approximately 16.5% of the total portfolio outstanding at that date compared to
$36.2 million and 17.3%, respectively, at December 31, 2001. The decreases in
the provision for doubtful accounts and the allowance for mortgages and
contracts receivable reflect improved performance resulting from several Company
initiatives, including: standardization of underwriting procedures (including
higher levels of purchasers' overall creditworthiness), more timely
correspondence with customers whose mortgages and contracts are in danger of
becoming delinquent, and higher down payments being obtained upon initial sales
and leases. The Company has also benefited from customers prepaying their
receivables at higher rates than in the past. Additionally, management has
placed more emphasis on timely foreclosures and writing-off delinquent
receivables. The remainder of the provision for doubtful accounts of $0.1
million for the three months ended June 30, 2002 and $0.4 million for the three
months ended June 30, 2001 represents estimated uncollectible amounts due from
homeowner associations and other receivables.
Loan portfolio expenses increased 13.4% to $3.2 million for the three months
ended June 30, 2002 from $2.8 million for the three months ended June 30, 2001.
The overall increase is attributable to efforts to maximize collections on
delinquent accounts and recovering Vacation Interests from defaulted loans and
contracts, as well as improving loans and contract administration.
General and administrative expenses increased $1.1 million or 6.1% to $19.2
million for the three months ended June 30, 2002 from $18.1 million for the
three months ended June 30, 2001. As a percentage of total revenues, general and
administrative expenses were 26.5% and 26.3% for the three months ended June 30,
2002 and 2001, respectively. Professional fees, primarily attributable to the
enhancement of the Company's existing resort management and financial systems,
increased by $1.2 million over 2001. Excluding professional fees, general and
administrative expenses for the three months ended June 30, 2002 decreased by
1.1% from the same period 2001.
Depreciation and amortization expense decreased 20.3%, or $0.9 million, to $3.4
million for the three months ended June 30, 2002 from $4.3 million for the three
months ended June 30, 2001. In accordance with Statement of Financial Standards
No. 142 the Company ceased amortizing its goodwill on January 1, 2002. The
decrease is also the result of the disposition of certain properties in 2001.
Page 14
Reorganization costs were $12.4 million for the three months ended June 30, 2002
representing an increase of $1.8 million and 17.2% compared to reorganization
costs for the three months ended June 30, 2001 of $10.6 million. The increase in
reorganization costs is primarily due to $4.5 million in loan fees related to
the Company's DIP facility, offset by a gain on restructuring of capital lease
obligations of $1.1 million and a $1.8 million decrease in professional fees.
During the three months ended June 30, 2002, the Company incurred $0.7 million
of restructuring costs related to the relocation of its corporate headquarters
from Orlando, Florida to Las Vegas, Nevada.
Interest expense for the three months ended June 30, 2002, net of capitalized
interest of $0.1 million, was $3.7 million, compared to $6.2 million, net of
capitalized interest of $0.1 million, for the three months ended June 30, 2001.
The decrease was primarily attributable to the settlement of the Finova Loans in
January 2002 that were outstanding in 2001.
Comparison of the Six Months Ended June 30, 2002 to the Six Months Ended June
30, 2001
We achieved total revenues of $131.4 million for the six months ended June 30,
2002, compared to $135.1 million for the six months ended June 30, 2001, a
decrease of 2.7%. Overall revenues for domestic operations decreased 8.5% to
$85.9 million for the six months ended June 30, 2002 compared to $93.9 million
for the six months ended June 30, 2001, and revenues from foreign operations
increased 10.5% to $45.5 million for the six months ended June 30, 2002.
Included in total revenues for the six months ended 2001 are $15.4 million of
reconfirmed 2000 sales.
Vacation Interest sales of $81.4 million for the six months ended June 30, 2002
decreased by $0.5 million or 0.6%, compared to sales of $81.9 million for the
six months ended June 30, 2001. Excluding the effect of the $15.4 million of
reconfirmed 2000 sales recorded in 2001, Vacation Interest sales increased by
$14.9 million or 18.2%.
Vacation Interest lease revenue decreased $0.8 million, or 14.2%, to $4.6
million for the six months ended June 30, 2002 from $5.3 million for the six
months ended June 30, 2001. The decrease is primarily attributable to a decrease
in the amount of maintenance fees billed to the owners of certain Caribbean
properties in 2002.
Club Sunterra membership fees earned of $3.6 million for the six months ended
June 30, 2002 were $0.8 million higher than membership fees earned for the six
months ended June 30, 2001 of $2.8 million, due to an increase in club
memberships.
Interest income, primarily from financing provided to purchaser and lessees of
Vacation Interests, decreased 5.7% to $14.4 million for the six months ended
June 30, 2002 from $15.2 million for the six months ended June 30, 2001. The
decrease largely resulted from a net decrease in the Company's portfolio of
mortgages and contracts receivable.
Other income, which mainly consists of sampler vacation program revenues, travel
service revenue, resort amenity income and finance commissions, fell by 23.0% to
$9.6 million for the six months ended June 30, 2002 from $12.5 million for the
six months ended June 30, 2001. This decrease is primarily due to the phase-out
of the Encore sampler program and the disposition of certain resorts in 2001.
Vacation Interest cost of sales of $17.6 million for the six months ended June
30, 2002 increased $1.0 million, or $5.8%, from $16.6 million for the six months
ended June 30, 2001. This increase is primarily attributable to the increase in
Vacation Interest sales. As a percentage of Vacation Interest sales for the six
months ended June 30, 2002 and 2001, Vacation Interest cost of sales was 21.6%
and 20.3%, respectively.
For the six months ended June 30, 2002, advertising, sales and marketing costs
were $53.1 million or 65.3% of Vacation Interest sales compared to $50.6 million
or 61.8%, respectively, for the six months ended June 30, 2001. This represents
a $2.5 million or 4.9% increase from the six months ended June 30, 2001 and is
due to increased expenses resulting from more sales locations in operation
during the six months ended June 30, 2002.
Maintenance fee and subsidy expense decreased 26.2%, or $1.8 million, to $5.1
million for the six months ended June 30, 2002 from $6.9 million for the six
months ended June 30, 2001 and represented 6.3% of Vacation Interest sales for
the six months ended June 30, 2002 as compared to 8.4% for the six months ended
June 30, 2001. The decrease was primarily the result of a decrease in the number
of Company-owned Vacation Interests (due to ongoing sales and the disposition of
certain resort properties in 2001) and decreases in developer subsidies and
guarantees.
The provision for doubtful accounts and loan losses was $2.9 million for the six
months ended June 30, 2002 compared to $6.7 million for the six months ended
June 30, 2001. The decrease in the provision is due to the Company initiatives
discussed in the quarterly analysis above. Of these amounts, $2.6 million and
$5.4 million for the six months ended June 30, 2002 and 2001, respectively,
related to mortgages and contracts receivable. The remainder of the provision
for doubtful accounts of $0.3 million for the six months ended June 30, 2002 and
$1.3 million for the six months ended June 30, 2001 represents estimated
uncollectible amounts due from homeowner associations and other receivables.
Loan portfolio expenses increased 28.6% to $6.5 million for the six months ended
June 30, 2002 from $5.0 million for the six months ended June 30, 2001. The
overall increase is attributable to efforts to maximize collections on
delinquent accounts and recovering Vacation Interests from defaulted loans and
contracts, as well as improving loan and contract administration.
Page 15
General and administrative expenses increased $4.5 million or 13.4% to $37.8
million for the six months ended June 30, 2002 from $33.3 million for the six
months ended June 30, 2001. As a percentage of total revenues, general and
administrative expenses were 28.8% and 24.7% for the six months ended June 30,
2002 and 2001, respectively. Professional fees account for $2.7 million of the
increase and are primarily attributable to the enhancement of the Company's
existing resort management and financial systems. Excluding professional fees,
general and administrative expenses for the six months ended June 30, 2002
increased by 5.1% over the same period in 2001.
Depreciation and amortization expense decreased 20.8%, or $1.8 million, to $6.8
million for the six months ended June 30, 2002 from $8.6 million for the six
months ended June 30, 2001. In accordance with Statement of Financial Standards
No. 142 the Company ceased amortizing its goodwill on January 1, 2002. The
decrease is also the result of the disposition of certain properties in 2001.
Reorganization costs were $5.4 million (net of $14.8 million gains on settlement
of debt) for the six months ended June 30, 2002 compared to reorganization costs
of $17.9 million incurred in the six months ended June 30, 2001. Excluding the
gains on settlement of debt, the increase in reorganization costs of $2.3
million is primarily due to $4.5 million in loan fees related to the Company's
DIP facility, offset by a $2.4 million decrease in professional fees.
Interest expense for the six months ended June 30, 2002, net of capitalized
interest of $0.2 million, was $8.1 million, compared to $10.3 million, net of
capitalized interest of $0.1 million, for the six months ended June 30, 2001.
The decrease was primarily attributable to the settlement of the Finova Loans in
January 2002 that were outstanding in 2001.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash principally from:
o cash sales and cash down payments from sales and leases of Vacation
Interests,
o financing of our mortgages receivable and inventory through our senior
secured credit facility,
o principal and interest payments and customer prepayments of principal from
our mortgages receivable portfolio,
o rental of unsold vacation interests,
o receipt of management, reservations and points-based vacation club fees,
o commissions paid for the origination of European mortgages receivable,
where we are paid a commission of 14% of the face value of certain
mortgages originated for a third party U.K. financial institution, and
o dispositions of non-core properties.
During the six months ended June 30, 2002, net cash provided by operating
activities was $22.8 million and was primarily the result of the net loss of
$13.1 million less non-cash expenses totaling $11.6 million offset by the
non-cash discount on settlement of debt of $28.0 million and other non-cash
gains of $6.4 million. Cash provided by operating activities was also impacted
by changes in operating assets and liabilities, including a reduction of $44.4
million in cash in escrow and restricted cash, a reduction in real estate and
development costs of $3.9 million, an increase in deferred revenue of $10.1
million and net collections of receivables totaling $6.5 million offset by an
increase in prepaid expenses and other assets of $9.7 million.
During the six months ended June 30, 2002, net cash used in investing activities
was $4.4 million, primarily due to capital expenditures of $4.6 million.
During the six months ended June 30, 2002, net cash used in financing activities
was $22.3 million. Cash used in financing activities was primarily the result of
payments of $97.0 million on liabilities subject to compromise and related
accrued interest of $13.5 million, including settlement of debt with Finova
discussed in Note 7 to the accompanying condensed consolidated financial
statements. A portion of the $101.9 million in borrowings on the DIP facility
was used to settle the Finova loans.
We currently anticipate spending approximately $2.2 million for real estate and
development costs at existing resort locations during the remainder of 2002. We
plan to fund these expenditures with cash generated from operations and
borrowings under the Exit Financing Facility. We believe that, with respect to
our current operations, cash generated from operations and future borrowings
will be sufficient to meet our working capital and capital expenditure needs
through the end of 2002. If these are not sufficient, we have the ability to
adjust our spending on real estate and development costs.
The allowance for loan losses at June 30, 2002 was $32.7 million, or 16.3% of
the total portfolio of mortgages and contracts receivable outstanding at that
date. Management believes the allowance is adequate. However, if the amount of
mortgages and contracts receivable that is ultimately written off materially
exceeds the related allowances, our business, results of operations and
financial condition could be adversely affected.
Our plan for meeting our liquidity needs may be affected by, but not limited to,
the following: demand for our product, our ability to borrow funds under our
current financing arrangements, an increase in prepayment speeds and default
rates on our
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mortgages and contracts receivable, the threat and/or effects on the travel and
leisure industry of future terrorists' attacks and limitations on our ability to
conduct marketing activities.
Complete units at various resort properties are required or developed in advance
and we finance a significant portion of the purchase price of Vacation
Intervals. Thus, we continually need funds to acquire and develop property, to
carry notes receivable contracts and to provide working capital. We anticipate
being able to borrow against our mortgages receivable at terms favorable to us.
If we are unable to borrow against or sell our mortgages receivable in the
future, particularly if we suffer any significant decline in the credit quality
of our mortgages receivable, our ability to acquire additional resort units will
be adversely affected and our profitability from sales of Vacation Interests may
be reduced or eliminated.
Recent economic forecasts suggest a greater likelihood of increased prepayment
rates than those evidenced during prior years. Further, trends in our portfolio
in 2002 indicate increased prepayment rates over historical amounts. To the
extent that mortgages receivable pay off prior to their contractual maturity at
a rate more rapid than we have estimated, the fair value of our residual
interests will be impacted.
At June 30, 2002, there were approximately 25,600 Vacation Intervals available
for sale or lease. With the completion of current projects in progress, the
acquisition of new resorts and the expansion of existing resorts, we believe we
will have an adequate supply of Vacation Intervals available to meet our planned
growth through the early part of the year 2005.
Corporate Finance
On average, we finance approximately 80% of domestic Vacation Interest revenues.
Accordingly, we do not generate sufficient cash from sales to provide the
necessary capital to pay the costs of developing additional resorts and to
replenish working capital. We believe that revenues together with amounts
available under the Exit Financing Facility consummated on July 29, 2002 will be
sufficient to fund operations.
During the term of the Chapter 11 cases, the Debtor Entities maintained DIP
financing facilities to finance Vacation Interests and provide working capital.
At June 30, 2002, $165.7 million was outstanding under the DIP financing
facility. A portion of proceeds from the initial funding drawn on the Exit
Financing Facility was used to pay in full the amounts outstanding under the DIP
facility on July 29, 2002.
Under the terms of the Exit Financing Facility, the Company obtained a two-year
senior asset-based non-amortizing revolving credit facility in the amount of
$300 million. The availability of borrowings under the Exit Financing Facility
is based on the amount of eligible mortgages receivable, the value of eligible
vacation interests inventory and the value of certain real property and other
assets. The Exit Financing Facility is secured by a first priority lien on the
mortgages receivable and vacation interests inventory, as well as certain real
property and other assets of the Company, subject to certain exceptions.
Borrowings under the Exit Financing Facility bear interest at an annual rate
equal to one month LIBOR plus 3%, 5%, or 7%, depending on the type of assets
collateralizing various advances. In addition to the facility fee (2.5% of $300
million) paid in connection with the commitment and the closing of the Exit
Financing Facility, the Company issued a warrant exercisable for 1,190,148
shares of new common stock at an exercise price of $15.25 per share (the deemed
value of the shares for purposes of the Plan), subject to adjustment under
anti-dilution provisions of the warrant and will pay an unused commitment fee of
0.25% per annum on the excess availability under the credit facility.
Availability under the Exit Financing Facility after the initial funding on July
29, 2002 was $56.8 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Our total revenues denominated in a currency other than U.S. dollars for the six
months ended June 30, 2002, primarily revenues derived from the United Kingdom,
were approximately 34.7% of total revenues. Our net assets maintained in a
functional currency other than U.S. dollars at June 30, 2002, which were
primarily assets located in Western Europe, were approximately 12.4% of total
net assets. The effects of changes in foreign currency exchange rates have not
historically been significant to our operations or net assets.
Interest Rate Risk
As of June 30, 2002, we had floating interest rate debt of approximately $216.4
million, including approximately $165.6 million outstanding under the DIP
financing facility and approximately $50.8 million subject to compromise under
the bankruptcy proceedings. The floating interest rates are based upon the
prevailing LIBOR or prime rates. For the DIP financing facility and floating
rate debt not subject to compromise, interest rate changes can impact earnings
and cash flows. For floating rate debt subject to compromise, interest rate
change can impact current earnings; however, accumulated interest combined with
the outstanding principal balance is limited to the fair market value of the
underlying collateral. Additionally, in a rising interest rate environment,
earnings may be reduced as interest charges increase on floating rate debt,
while the yield on the Company's portfolio of fixed rate mortgages and contracts
receivable remains unchanged.
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Of approximately $479.9 million in fixed rate debt outstanding at June 30, 2002,
$478 million represents unsecured subordinated notes for which no interest has
been accrued subsequent to the bankruptcy filing.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit was filed in Florida in January 2000 against the Company and certain
directors, officers and former officers of the Company that alleges violation of
federal securities laws on behalf of persons who purchased the Company's common
stock from October 4, 1998, through January 19, 2000, or from October 6, 1998,
through January 19, 2000, and seeks recovery of unspecified damages. Subsequent
to the filing of the bankruptcy petition, the plaintiffs filed an amended
complaint, which excluded the Company, as any actions had been stayed as a
result of the petition filing. The lawsuit was dismissed in March 2002 without
prejudice to the plaintiffs. On July 3, 2002 the plaintiffs filed a second
consolidated amended class action complaint with the Court. The Company was not
named as a defendant in this amended complaint. The action is currently pending
in the Court. The Company believes that, pursuant to the discharge granted under
the Bankruptcy Code, Debtor Entities cannot be held liable to the plaintiffs if
the Debtors are named in the lawsuit. However, certain indemnity rights may be
owed by the Debtor Entities to the defendant officers and directors if a
judgment is rendered against them.
We are also currently subject to litigation and claims regarding employment,
tort, contract, construction, sales taxes and commission disputes, among others.
Much of such litigation and claims is pre-petition and is stayed under the
Company's Chapter 11 proceeding. In our judgment, none of such litigation or
claims against the Company is likely to have a material adverse effect on the
Company's financial statements or its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 29, 2002, the Company and its debtor subsidiaries emerged from their
Chapter 11 proceedings. In connection therewith, outstanding shares of the
common stock of the Company were canceled, and shares of new common stock were
issued to pre-petition creditors pursuant to the Plan. The Company also issued
warrants to purchase 600,000 shares of its new common stock at an exercise price
of $20 per share (subject to certain adjustments) to holders of certain
subordinate notes as set forth in the Plan. No proceeds were received from these
securities issuances and the securities issuances are exempt from registration
pursuant to Chapter 11 ss.1145 of the Bankruptcy Code. The Company's articles of
incorporation were amended and restated, and a copy thereof has been filed with
the Securities and Exchange Commission as Exhibit 3.1 to the Company's Current
Report on Form 8-K (Date of Event: July 29, 2002).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are filed as part of this Form 10-Q or, where so
indicated, have been previously filed and are incorporated hereby by reference.
No. Description
3.1 Articles of Amendment and Restatement of Sunterra Corporation
(incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K (date of event: July 29, 2002))
3.2 Amended and Restated Bylaws of Sunterra Corporation
10.1 Third Amended and Restated Joint Plan of Reorganization, dated May 9,
2002, of Sunterra Corporation and its debtor affiliates under Chapter
11 of the Bankruptcy Code (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K (date of event: May 9, 2002))
10.2 Second Amendment, dated as of May 9, 2002, to Financing Agreement
dated as of April 20 2001 among Sunterra Corporation, certain
affiliates of Sunterra Corporation and Greenwhich Capital Markets,
Inc. (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K (date of event: May 9, 2002))
10.3 Third Amendment, dated as of June 6, 2002, to Financing Agreement
dated as of April 20 2001 among Sunterra Corporation, certain
affiliates of Sunterra Corporation and Greenwhich Capital Markets,
Inc. (incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K (date of event: June 12, 2002))
10.4 Confirmation Order, dated June 21, 2002, of the Bankruptcy Court
(incorporated by reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K)
10.5 Loan Agreement, dated as of July 29, 2002, by and between Merrill
Lynch Capital Mortgage Capital Inc., as agent for certain lenders
parties thereto, and Sunterra Corporation and certain of its
subsidiaries (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K (date of event: July 29, 2002))
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10.6 Warrant Agreement, dated as of July 29, 2002, by and between Sunterra
Corporation and Merrill Lynch Capital Mortgage Capital Inc.
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K (date of event: July 29, 2002))
10.7 Sunterra Corporation 2002 Stock Option Plan (incorporated by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K (date of
event: July 29, 2002))
10.8 Warrant Agreement, dated as of July 29, 2002, by and between Sunterra
Corporation and Mellon Investor Services LLC, as warrant agent
(incorporated by reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K (date of event: July 29, 2002))
10.9 Registration Rights Agreement, dated as of July 29, 2002, by and among
Sunterra Corporation, Merrill Lynch Mortgage Capital Inc. and certain
initial holders (incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K (date of event: July 29, 2002))
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
Form 8-K filed on May 13, 2002 reporting the execution by the Company of a Third
Amended and Restated Joint Plan of Reorganization and a Second Amendment to the
Financing Agreement by and among the Company, certain subsidiaries of the
Company, the financial institutions from time to time party thereto, and
Greenwich Capital Markets, Inc., and including the Company's November 2001 and
December 2001 Monthly Operating Reports filed with the Bankruptcy Court.
Form 8-K filed on May 28, 2002 including the Company's press release regarding
its unaudited results for 2001 and 2000 and adjustments to previously reported
December 31, 1999 retained earnings balance.
Form 8-K filed on May 31, 2002 including the Company's January 2002 and February
2002 Monthly Operating Reports filed with the Bankruptcy Court.
Form 8-K filed on June 13, 2002 reporting the Company's execution of a Third
Amendment to Financing Agreement and including a press release regarding the
Bankruptcy Court approval for financing with Merrill Lynch.
Form 8-K filed on June 13, 2002 including the Company's March 2002 Monthly
Operating Report filed with the Bankruptcy Court.
Form 8-K filed on June 28, 2002 reporting the confirmation by the Bankruptcy
Court of the Company's Plan of Reorganization and including a press release
regarding the Company's entering into an exclusive global affiliation agreement
with Interval International.
Form 8-K filed on June 28, 2002 including the Company's April 2002 Monthly
Operating Report filed with the Bankruptcy Court.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SUNTERRA CORPORATION
By: /s/ James F. Anderson
---------------------------------------
James F. Anderson
Vice President and Corporate Controller
(Chief Accounting Officer)
Dated: August 14, 2002
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