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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 March 31, 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
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
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 of the registrant's common stock, par value $0.01 per
share outstanding at August 9, 2002: 18,055,077.
Page 1
SUNTERRA CORPORATION
INDEX
PAGE
ITEM NUMBER
Safe Harbor Statement - Cautionary Notice Regarding Forward- 3
Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 (Unaudited) 6
Notes to the Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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
Three Months Ended March 31, 2002 and 2001
(Amounts in thousands except per share data)
(Unaudited)
2002 2001
---- ----
Revenues:
Vacation Interest sales ....................................................... $ 35,067 $ 40,034
Vacation Interest lease revenue ............................................... 2,300 2,732
Club Sunterra membership fees ................................................. 1,775 1,428
Resort rental income .......................................................... 3,440 3,621
Management fees ............................................................... 5,226 5,747
Interest income ............................................................... 6,975 7,442
Other income .................................................................. 3,992 5,125
----------- ----------
Total revenues ................................................................ 58,775 66,129
----------- ----------
Costs and Operating Expenses:
Vacation Interests cost of sales .............................................. 7,870 8,536
Advertising, sales and marketing .............................................. 23,488 24,760
Maintenance fee and subsidy expense ........................................... 2,798 2,893
Provision for doubtful accounts and loan losses ............................... 1,330 3,605
Loan portfolio expenses ....................................................... 3,284 2,222
General and administrative .................................................... 18,567 15,197
Depreciation and amortization ................................................. 3,392 4,317
Reorganization costs, net ..................................................... (6,961) 7,352
----------- ----------
Total costs and operating expenses ............................................ 53,768 68,882
----------- ----------
Income (loss) from operations ................................................. 5,007 (2,753)
Interest expense (contractual interest of $14,698 and $14,217, net of unaccrued
interest of $10,100 and $10,100 and capitalized interest of $117 and $8
for the three months ended March 31, 2002 and 2001, respectively) ......... (4,481) (4,109)
Income on investment in joint ventures ........................................ 876 964
----------- ----------
Income (loss) before provision for income taxes ............................... 1,402 (5,898)
Provision (benefit) for income taxes .......................................... 510 (99)
----------- ----------
Net income (loss) ............................................................. $ 892 $ (5,799)
=========== ==========
Income (loss) per share:
Basic and diluted: ............................................................ $ 0.02 $ (0.16)
Weighted average number of common shares outstanding .......................... 36,025 36,025
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)
March 31, December 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents ................................................. $ 28,751 $ 27,207
Cash in escrow and restricted cash ........................................ 64,111 99,354
Mortgages and contracts receivable, net of an allowance of $33,888
and $36,206 at March 31, 2002 and December 31, 2001, respectively ..... 172,578 176,036
Retained interests in mortgages receivable sold ........................... 16,218 15,974
Due from related parties .................................................. 9,389 9,902
Other receivables, net .................................................... 15,041 13,013
Prepaid expenses and other assets ......................................... 26,025 18,747
Assets held for sale ...................................................... 11,666 11,324
Investment in joint ventures .............................................. 20,045 19,698
Real estate and development costs, net .................................... 175,689 180,087
Property and equipment, net ............................................... 65,718 67,431
Intangible and other assets, net .......................................... 22,968 24,718
------------ -----------
Total assets .............................................................. $ 628,199 $ 663,491
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Borrowings under debtor-in-possession financing agreement ................. $ 147,020 $ 68,311
Accounts payable .......................................................... 18,442 16,695
Accrued liabilities ....................................................... 92,235 86,939
Deferred revenue .......................................................... 96,751 86,134
Deferred tax liability .................................................... -- 291
Notes payable ............................................................. 23,668 28,005
Liabilities subject to compromise ......................................... 586,626 712,866
------------ -----------
Total liabilities ......................................................... 964,742 999,241
------------ -----------
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 March 31, 2002 and December 31, 2001) ........... 360 360
Additional paid-in capital ................................................ 164,607 164,607
Accumulated deficit ....................................................... (490,389) (491,281)
Accumulated other comprehensive loss ...................................... (11,121) (9,436)
------------ -----------
Total stockholders' deficiency ............................................ (336,543) (335,750)
------------ -----------
Total liabilities and stockholders' deficiency ............................ $ 628,199 $ 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
Three months ended March 31, 2002 and 2001
(Amounts in thousands)
(Unaudited)
2002 2001
---- ----
Operating activities:
Net income (loss) ......................................................... $ 892 $ (5,799)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................................. 3,392 4,317
Provision for doubtful accounts and loan losses ........................... 1,330 3,605
Amortization of capitalized loan origination costs ........................ 159 622
Amortization of capitalized financing costs ............................... 1,140 269
Discount on settlement of debt............................................. (26,874) --
Income on investment in joint ventures .................................... (876) (964)
Gain on sales of property and equipment ................................... (1,517) (112)
Deferred income taxes ..................................................... (220) (20)
Change in retained interests in mortgages receivable sold ................. (408) (467)
Changes in operating assets and liabilities:
Cash in escrow and restricted cash ........................................ 32,197 (33,358)
Mortgages and contracts receivable ........................................ 2,682 670
Due from related parties .................................................. 513 (165)
Other receivables, net .................................................... (1,608) 6,016
Prepaid expenses and other assets ......................................... (7,403) (2,986)
Real estate and development costs ......................................... 4,686 12,350
Deferred revenue .......................................................... 10,617 11,103
Liabilities not subject to compromise:
Accounts payable ........................................................ 2,348 (530)
Accrued liabilities ..................................................... 6,236 (5,349)
Liabilities subject to compromise ......................................... 628 3,358
----------- ----------
Net cash provided by (used in) operating activities ................. 27,914 (7,440)
Investing activities:
Proceeds from sale of assets .............................................. 531 17,594
Capital expenditures ...................................................... (1,226) (694)
Increase in intangible and other assets ................................... (182) (150)
Investment in joint ventures .............................................. 529 584
----------- ----------
Net cash (used in) provided by investing activities ................. (348) 17,334
------------ ----------
Financing activities:
Borrowings under debtor-in-possession financing agreement ................. 78,895 --
Proceeds from notes payable ............................................... -- 3,012
Payments on debtor-in-possession financing agreement ...................... (186) --
Payments on notes payable and mortgage-backed securities .................. (4,337) (4,511)
Payment of accrued interest in settlement of pre-petition debt ............ (13,484) --
Payments on credit line facilities ........................................ (86,339) --
----------- ----------
Net cash used in financing activities ............................... (25,451) (1,499)
----------- ----------
Effect of changes in exchange rates on cash and cash equivalents ............. (571) (9,738)
----------- ----------
Net increase (decrease) in cash and cash equivalents ......................... 1,544 (1,343)
Cash and cash equivalents, beginning of period ............................... 27,207 21,062
----------- ----------
Cash and cash equivalents, end of period ..................................... $ 28,751 $ 19,719
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest ....................... $ 2,535 $ 2,017
Cash paid for taxes, net of tax refunds ................................... $ 2,874 $ (672)
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 three months ended March 31,
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:
March 31, December 31,
2002 2001
---- ----
Secured obligations (see note 7)................. $ 46,917 $ 160,130
Subordinated debt................................ 478,000 478,000
----------- -----------
Subtotal - notes payable subject to compromise... 524,917 638,130
Accounts payable................................. 31,955 31,982
Accrued interest................................. 15,044 27,267
Accrued expenses and other liabilities........... 14,710 15,487
----------- -----------
$ 586,626 $ 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. As discussed in Note 12, the Bankruptcy Court confirmed the
Proposed Plan (the Plan) by an order entered by the Bankruptcy Court on June 21,
2002. 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 debtor's assets is compared to the
liabilities and claims against the debtor's 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 and net
loss and net loss per share assuming the Company had adopted SFAS No. 142 during
the three months ended March 31, 2001 are $0.4 million, $5.4 million and $0.15
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
Page 8
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:
March 31, December 31,
2002 2001
---- ----
Mortgages and contracts receivable............... $ 203,057 $ 209,022
Deferred loan origination costs, net............. 3,409 3,220
------------ -----------
Mortgages and contracts receivable, gross........ 206,466 212,242
Less allowance for loan and contract losses...... (33,888) (36,206)
------------ -----------
Mortgages and contracts receivable, net.......... $ 172,578 $ 176,036
============ ===========
Activity in the allowance for loan and contract losses associated with mortgages
and contracts receivable is as follows:
Three months Three months
ended March 31, ended March 31,
2002 2001
---- ----
Balance, beginning of period ................ $ 36,206 $ 37,326
Provision for loan and contract losses ...... 1,120 2,740
Receivables charged off, net ................ (3,438) (3,125)
----------- -----------
Balance, end of period ...................... $ 33,888 $ 36,941
=========== ===========
Page 9
Note 5 - Real Estate and Development Costs
Real estate and development costs consist of the following:
March 31, December 31,
2002 2001
---- ----
Land .............................................$ 53,876 $ 53,876
Development costs ................................ 441,053 458,193
Capitalized interest ............................. 20,194 20,234
---------- ----------
515,123 532,303
Interests recoverable under defaulted mortgages .. 18,881 20,126
Less accumulated vacation interest cost of sales . (358,315) (372,342)
---------- ----------
Net real estate and development costs ............$ 175,689 $ 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 March 31:
2002 2001
---- ----
Professional fees..................................$ 6,373 $ 6,898
Employee retention and severance programs.......... 741 369
Net gains on asset sales........................... (1,517) (112)
Other.............................................. 1,120 559
Gain on settlement of debt (Note 7)................ (13,615) --
Interest income.................................... (63) (362)
---------- ----------
$ (6,961) $ 7,352
========== ==========
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
$13.6 million, which is included as an offset to reorganization costs.
Note 8 - Comprehensive Loss
Comprehensive loss includes all changes in equity (net assets) during a period
from non-owner sources. The reconciliation of net income (loss) to comprehensive
net loss is as follows:
Three months ended March 31:
2002 2001
---- ----
Net income (loss) .................................$ 892 $ (5,799)
Unrealized (loss) gain on available for sale
securities......................................... (163) 305
Foreign currency translation adjustments .......... (1,522) (2,868)
----------- ----------
Total comprehensive loss ..........................$ (793) $ (8,362)
=========== ==========
Page 10
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 Total
Debtors Non-Debtors Foreign Non-Debtors Total
Three months ended March 31,
2002
Revenues from external
customers..................... $ 29,422 $ 10,950 $ 18,403 $ 29,353 $ 58,775
(Loss) income before income
tax (benefit) provision .... (2,086) 1,426 2,062 3,488 1,402
Segment assets................ 526,298 35,625 66,276 101,901 628,199
Three months ended March 31,
2001
Revenues from external
customers..................... $ 37,897 $ 10,972 $ 17,260 $ 28,232 $ 66,129
(Loss) income before income
tax (benefit) provision .... (9,912) 3,309 705 4,014 (5,898)
Segment assets................ 648,013 21,448 57,990 79,438 727,451
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 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
$0.1 million for the three months ended March 31, 2002.
Note 12 - Subsequent Events
On June 21, 2002, the Bankruptcy Court entered an order confirming the Company's
proposed plan of reorganization. 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 includes 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 must obtain a binding commitment for a financing facility
available to finance mortgages and contracts receivable.
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.
Page 11
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;
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 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, 2002 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 of 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 new common stock, par
value $0.01 per share;
Page 12
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 of our 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 March 31, 2002 to the Three Months Ended
March 31, 2001
We achieved total revenues of $58.8 million for the three months ended March 31,
2002, compared to $66.1 million for the three months ended March 31, 2001, a
decrease of 11.1%. Overall revenues for domestic operations decreased 17.4% to
$40.4 million for the three months ended March 31, 2002 compared to $49.0
million for the three months ended March 31, 2001, and revenues from foreign
operations increased 6.6% to $18.4 million for the three months ended March 31,
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 $11.7 million were recognized for the three months ended March
31, 2001 for such customers that reconfirmed their acceptance of the sales
agreements during that period (the "reconfirmed 2000 sales").
Vacation Interest sales of $35.1 million for the three months ended March 31,
2002 decreased by $5.0 million or 12.4%, compared to sales of $40.0 million for
the three months ended March 31, 2001. Excluding the effect of the $11.7 million
of reconfirmed 2000 sales recorded during the three months ended March 31, 2001,
Vacation Interest sales increased by $6.8 million or 24.0%.
Vacation Interest lease revenue decreased $0.4 million, or 15.8%, to $2.3
million for the three months ended March 31, 2002 from $2.7 million for the
three months ended March 31, 2001. The decrease is primarily attributable to a
decrease in the amount of maintenance fees billed to owners of certain Caribbean
properties in 2002.
Club Sunterra membership fees earned of $1.8 million for the three months ended
March 31, 2002 were $0.3 million higher than membership fees earned for the
three months ended March 31, 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 6.3% to $7.0 million for the three months ended
March 31, 2002 from $7.4 million for the three months ended March 31, 2001. The
decrease largely resulted from a net decrease in the balance of 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 22.1% to
$4.0 million for the three months ended March 31, 2002 from $5.1 million for the
three months ended March 31, 2001. This decrease is primarily due to the
phase-out of the Encore sampler program and the disposition of certain resort
properties in 2001.
Vacation Interest cost of sales of $7.9 million for the three months ended March
31, 2002 decreased $0.7 million, or $7.8%, from $8.5 million for the three
months ended March 31, 2001, and is attributable to the decrease in Vacation
Interest sales. As a percentage of Vacation Interest sales for the three months
ended March 31, 2002 and 2001, Vacation Interest cost of sales was 22.4% and
21.3%, respectively.
Page 13
For the three months ended March 31, 2002, advertising, sales and marketing
costs were $23.5 million or 67.0% of Vacation Interest sales compared to $24.8
million and 61.8%, respectively, for the three months ended March 31, 2001. This
represents a $1.3 million or 5.1% decrease from the three months ended March 31,
2001 and is consistent with the decrease in Vacation Interest sales.
The provision for doubtful accounts and loan losses was $1.3 million for the
three months ended March 31, 2002 compared to $3.6 million for the three months
ended March 31, 2001. Of these amounts, $1.1 million and $2.7 million for the
three months ended March 31, 2002 and 2001, respectively, related to mortgages
and contracts receivable. The allowances for mortgages and contracts receivable
at March 31, 2002 was $33.9 million, representing approximately 16.7% of the
total portfolio outstanding at that date, compared to $36.2 million and 17.3% 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 $0.2 million for the three months ended March 31, 2002 and $0.9
million for the three months ended March 31, 2001 represents estimated
uncollectible amounts due from homeowner associations and other receivables.
Loan portfolio expenses increased 47.8% to $3.3 million for the three months
ended March 31, 2002 from $2.2 million for the three months ended March 31,
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.
General and administrative expenses increased $3.4 million or 22.2% to $18.6
million for the three months ended March 31, 2002 from $15.2 million for the
three months ended March 31, 2001. As a percentage of total revenues, general
and administrative expenses were 31.6% and 23.0% for the three months ended
March 31, 2002 and 2001, respectively. Professional fees account for $1.5
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 three months
ended March 31, 2002 increased 12.1% over the same period in 2001.
Depreciation and amortization expense decreased 21.4%, or $0.9 million, to $3.4
million for the three months ended March 31, 2002 from $4.3 million for the
three months ended March 31, 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 are a $7.0 million contra-expense due to the offset of gain
on settlement of debt of $13.6 million against reorganization costs of $6.7
million incurred in the three months ended March 31, 2002. Reorganization costs
for the three months ended March 31, 2001 were $7.4 million. The decrease in
reorganization costs (excluding the gain on settlement of debt) is primarily due
to a gain recorded on the sale of a Japanese subsidiary that had been designated
as held for sale as part of the Company's reorganization.
Interest expense for the three months ended March 31, 2002, net of capitalized
interest of $0.1 million, was $4.5 million, compared to $4.1 million, net of
capitalized interest of $0.01 million, for the three months ended March 31,
2001. The increase was primarily attributable to increased borrowings under the
Company's DIP facility, offset by savings as a result of the settlement of the
Finova Loans in January 2002.
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 three months ended March 31, 2002, net cash provided by operating
activities was $27.9 million. Net income of $0.9 million plus non-cash expenses
totaling $6.0 million was offset by the non-cash discount on settlement of debt
of $27.0 million. Cash provided by operating activities was primarily provided
by changes in operating assets and liabilities, including a reduction of $32.2
million in cash and escrow and restricted cash, and increases in deferred
revenue of $10.6 million and accounts payable and accrued liabilities of $8.6
million.
Page 14
During the three months ended March 31, 2002, net cash used in investing
activities was $0.3 million, with proceeds from sale of assets of $0.5 million
and distributions from joint ventures of $0.5 million offset by capital
expenditures of $1.2 million.
During the three months ended March 31, 2002, net cash used in financing
activities was $25.5 million. Cash used in financing activities was primarily
the result of payments of $86.3 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 $78.9 million in borrowings on the DIP facility was
used to settle the Finova loans.
We currently anticipate spending approximately $3.9 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 March 31, 2002 was $33.9 million, or 16.7% 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 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 March 31, 2002, there were approximately 28,500 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 our 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 March 31, 2002, $147.0 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
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. Availability under the Exit Financing Facility after the initial
funding on July 29, 2002 was $56.8 million.
Page 15
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
three months ended March 31, 2002, primarily revenues derived from the United
Kingdom, were approximately 31.3% of total revenues. Our net assets maintained
in a functional currency other than U.S. dollars at March 31, 2002, which were
primarily assets located in Western Europe, were approximately 10.6% 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 March 31, 2002, we had floating interest rate debt of approximately $212.5
million, including approximately $147.0 million outstanding under the DIP
financing facility and approximately $65.5 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.
Of approximately $483 million in fixed rate debt outstanding at March 31, 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 Registrant 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 exercisable 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 subordinated 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
Page 16
10.1 Payoff Agreement and Mutual Release, dated as of January 25, 2002, among
Sunterra Corporation, certain affiliates of Sunterra Corporation and Finova
Capital Corporation (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K (date of event: January 25, 2002))
10.2 First Amendment, dated as of January 3, 2002, to Financing Agreement, dated
April 20, 2001, among Sunterra Corporation, certain affiliates of Sunterra
Corporation and Greenwich Capital Markets, Inc. (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K (date of event:
January 25, 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 January 28, 2002, reporting the negotiation of, and providing
a summary of the terms contained in, the proposed Plan of Reorganization by the
Debtors and Creditors' Committee.
Form 8-K filed on February 11, 2002, reporting the execution of a Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code, dated January 31, 2002,
by the Debtors and Creditors' Committee ("Plan of Reorganization"), a First
Amendment, dated as of January 3, 2002, to Financing Agreement, dated as of
April 20, 2001, by and among Sunterra Corporation, certain subsidiaries of
Sunterra Corporation, the financial institutions from time to time party thereto
and Greenwich Capital Markets, Inc., as agent, a Payoff Agreement and Mutual
Release, dated as of January 25, 2002, among Sunterra Corporation, certain
affiliates of Sunterra Corporation and Finova Capital Corporation, and an
Amended and Restated Employment Agreement, dated as of November 19, 2001,
between Sunterra Corporation and Nicholas J. Benson.
Form 8-K filed on February 20, 2002, including the Company's press release
announcing its appointment of a new CEO for its European subsidiary and new
President for Sunterra Financial Services.
Form 8-K filed on February 28, 2002 reporting the execution of a First Amended
and Restated Plan of Reorganization.
Form 8-K filed on March 12, 2002, including the Company's press release
announcing its organizational restructuring and corporate headquarters move.
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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