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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number 000-21193
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SUNTERRA CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 95-458215-7
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1781 Park Center Drive
Orlando, Florida 32835
"www.sunterra.com"
(Address of principal executive offices)
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Registrant's telephone number, including area code:
(407) 532-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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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 [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the common stock on May 31, 2002, as
reported on the OTC Bulletin Board: $3.6 million.
Number of shares of the registrant's common stock outstanding at May 31,
2002: 36,025,820
SUNTERRA CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2001
TABLE OF CONTENTS
Safe Harbor Statement ............................................................................... 1
PART I
ITEM 1. Business ................................................................................... 1
ITEM 2. Properties ................................................................................. 20
ITEM 3. Legal Proceedings .......................................................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................ 22
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................... 22
ITEM 6. Selected Financial Data .................................................................... 23
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 24
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk ................................. 39
ITEM 8. Financial Statements and Supplementary Data ................................................ 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant ......................................... 41
ITEM 11. Executive Compensation ..................................................................... 46
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............................. 50
ITEM 13. Certain Relationships and Related Transactions ............................................. 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 52
(i)
Safe Harbor Statement - Cautionary Notice Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 headings "Business" and "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 herein under "Business-Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this report and relate, without
limitation, to matters arising from the status of the registrant and certain of
its subsidiaries as debtors in proceedings under Chapter 11 of the Bankruptcy
Code or arising from their expected emergence from such proceedings. Any or all
of these factors could cause our actual results and financial or legal status
for the year 2002 and beyond 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.
PART I
ITEM 1. BUSINESS
Sunterra Corporation, a Maryland corporation ("Sunterra" or "registrant"),
with its subsidiaries and affiliates (the "Company"), is a vacation ownership
(timeshare) company with 73 resort locations in North America, Europe, the
Caribbean, Hawaii and Latin America and approximately 250,000 owner families.
The Chapter 11 Cases
On May 31, 2000 (the "Petition Date"), Sunterra and 36 of its affiliates
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). On June 30, 2000 and November 1, 2000,
respectively, two additional affiliates, Design Internationale-RMI, Inc. and
Resorts Development International, Inc., filed voluntary petitions for relief
under Chapter 11. Each of the entities that has filed a petition for relief
under the Bankruptcy Code (collectively "Debtors") has continued in the
possession of its properties and the management of its businesses as debtors in
possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. These
cases (the "Chapter 11 Cases") are being jointly administered for procedural
purposes. On June 15, 2000, the United States Trustee appointed an official
committee of unsecured creditors (the "Creditors' Committee") in the Chapter 11
Cases. Sunterra's subsidiaries and related partnerships that are not Debtors
continue to operate their respective businesses outside the protection of the
Bankruptcy Code.
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Background to the Cases. For several months leading up to the filing of the
Chapter 11 Cases, the Debtors experienced severe credit availability and
liquidity problems that arose in large part because their then existing and
potential lenders were not willing to lend against the mortgages receivable
generated in the ordinary course of business. To finance vacation interest
sales, we have historically monetized the related mortgages receivable through
the use of an off-balance sheet conduit, securitizations, on-balance sheet
hypothecations, whole mortgages receivable sales and other vehicles. During
1999, we continued our program of non-recourse sales of mortgages receivable.
Markets for mortgages receivable include the asset-backed securitization market,
the commercial paper market and the commercial bank and finance company markets.
In the first quarter of 2000, funding availability under the Debtors'
credit facilities was curtailed based upon anticipated covenant violations that
would be reported for the fourth quarter of 1999. As a result, access to
liquidity under these facilities was on a very limited basis as compared to the
original terms of the facilities. On February 9, 2000, we agreed to limit the
maximum aggregate amount available under the conduit facility to $64.1 million,
and the remaining availability under this limitation of $12.8 million was drawn
in February 2000. In addition, on March 9, 2000, the Debtors and Bank of America
amended their senior credit facility (the "B of A Agreement"), which limited the
amount that could be borrowed thereunder to $35.4 million. The remaining
availability under this limitation of $12.2 million was used during the first
quarter of 2000. On March 20, 2000, a waiver was granted on the Debtors'
pre-sale line, which limited the amount that could be borrowed under the
pre-sale line to $9.6 million.
The agreements relating to certain of the Debtors' senior indebtedness
required them to maintain specified financial ratios, including interest
coverage and leverage and fixed charge coverage ratios. As of March 31, 2000,
the Debtors were in violation of net worth and net worth related debt covenants
in the B of A Agreement, pre-sale line and inventory line as a result of the
decline in net worth due to the net loss for the first quarter of 2000. After
protracted negotiations with the lenders, we were unable to obtain waivers of
these violations.
On May 15, 2000, we announced that we did not make our scheduled payment of
approximately $6.5 million with respect to our 9 1/4% Senior Notes and were in
violation of net worth and net worth-related covenants in our various credit
facilities. We also announced that we had not made mandatory paydowns of $5.1
million under two bank credit facilities, which had resulted in an event of
default under these agreements. As a result, we had no availability under any of
our then-existing credit facilities and only very limited cash on hand. On May
22, 2000, we announced major reductions in our United States sales and marketing
activities as part of our efforts to conserve cash while simultaneously
continuing our sales activities at our most profitable locations.
As a result of the defaults on the 9 1/4% Senior Notes and the credit
facilities, we determined to seek protection under Chapter 11 of the Bankruptcy
Code in order to restructure existing debt and maximize existing cash.
Status of Bankruptcy Proceedings and Plan of Reorganization. A disclosure
statement for a proposed plan of reorganization (the "Plan of Reorganization" or
"Plan") was approved by
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order of the Bankruptcy Court entered on April 25, 2002, and the Plan of
Reorganization and disclosure statement were mailed to creditors on or about May
14, 2002. The Plan received the requisite votes of creditor interests, and the
Bankruptcy Court confirmed the Plan after a hearing held on June 20, 2002. Under
the Plan, on the effective date thereof (the "Plan Effective Date"), holders of
secured and administrative claims will generally be paid in full in cash (or in
certain cases by the delivery of collateral or other property agreed to by the
applicable parties), the principal unsecured creditors will receive common stock
of the Company as reorganized and holders of certain junior subordinated bonds
will receive common stock and warrants to purchase common 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. Holders of common stock and options or other rights to acquire common
stock will not receive any payments in respect of such stock, options or rights,
and such stock, options and rights will be cancelled as of the Plan Effective
Date. The principal remaining business condition to effectiveness of the Plan is
the negotiation and closing of necessary exit financing. On May 15, 2002, we
received a commitment for such financing ("Exit Financing") from Merrill Lynch
Mortgage Capital Inc. ("Merrill"). The commitment letter provides for up to $300
million in financing, subject to borrowing base requirements and other
conditions. Our obligations under the Exit Financing facility will be secured by
liens on and security interests in our United States mortgages receivable and
substantially all of our other United States assets, as well as the stock of
certain of our foreign subsidiaries. Merrill's commitment is subject to the
execution of definitive documentation and other conditions.
Reference is made to the Plan of Reorganization, and to the order of the
Bankruptcy Court confirming the Plan, for all of the terms of the Plan. Copies
of the Plan and such order have been filed with the Securities and Exchange
Commission (the "SEC") as set forth under Item 14(a) of this report.
Financial Statement Adjustments
On March 19, 2001, with the approval of the Bankruptcy Court, we dismissed
Arthur Andersen LLP ("AA") as our independent auditor and retained Deloitte &
Touche LLP ("D&T") as our independent auditor. In connection with the
preparation of our financial statements for the year ended December 31, 2000, we
identified certain items in our prior period audited consolidated financial
statements that required a reduction to the previously reported December 31,
1999 retained earnings balance. The principal items so identified related to
corrections of errors and corrections of the application of accounting
principles generally accepted in the United States ("GAAP") to certain
transactions. The adjustments to all of such items netted to approximately $113
million, and the impact of the $113 million of adjustments is presented in our
2000 financial statements as a reduction in the previously reported December 31,
1999 retained earnings balance. See "Prior Period Adjustments" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein and Note 9 to the consolidated financial statements included
in this report.
We also made certain changes to our accounting policies that have a
cumulative effect on the financial statements as of January 1, 2000 that total
approximately $19 million and recognized certain asset impairment charges and
other adjustments to the fiscal year 2000 financial statements that totaled
approximately $189 million. The total adjustments, inclusive of
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the prior period adjustments to the 1999 retained earnings balance referred to
above, resulted in a decrease of approximately $321 million in retained earnings
from that previously reported as of December 31, 2000 in filings with the
Bankruptcy Court.
On April 25, 2002, AA delivered a letter to us and to the members of the
Audit Committee of our Board of Directors indicating that AA saw no need for a
reduction of our 1999 retained earnings balance and that AA believed that any
such reduction would be inappropriate and contrary to generally accepted
accounting principles. On May 15, 2002, representatives of AA met with members
of management and the Audit Committee to discuss the positions taken by AA in
its letter. AA did not provide any information in its April 25 letter or during
the May 15 meeting that caused us to believe that the adjustments we proposed to
record as a reduction to the 1999 retained earnings balance discussed above as
prior period adjustments were not appropriate.
As a result of these matters, we previously announced that our audited
financial statements for 1999 and prior periods, as well as our unaudited
financial statements for periods in 2000 and certain periods in 2001 that were
included in monthly operating reports previously filed with the Bankruptcy
Court, should not be used or relied upon.
As a result of the adjustments referred to above and because of AA's
disagreement with us with respect to the need for such adjustments for the 1999
financial statements, the previously issued audit reports on our financial
statements for 1999 cannot be used. Further, management does not believe that it
is possible to assemble or recreate the financial records that would be required
for another auditor to reaudit such financial statements, especially in light of
the substantial changes to our personnel since those periods. Therefore, we do
not have and upon emergence from the Chapter 11 proceedings will not have
available the three years of audited financial statements required for certain
filings and registration statements under applicable securities laws until an
audit report is issued on our financial statements for the 2002 fiscal year. We
believe also that we will not be able to present unaudited financial statements
for 1999 or any prior period in view of the material adjustments to the
previously reported 1999 retained earnings balance referred to above and, we
believe, our inability to undertake and complete satisfactorily an internal
review or an external reaudit for periods prior to 2000. As a result, the
information included in this report under "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" does not have the information for periods prior to 2000 that is
required to be included in this report.
General
Sunterra is one of the world's largest vacation ownership companies, as
measured by resort locations and owner families. Through both internal
development and strategic acquisitions, we expanded the number of our resort
locations in North America, Europe, the Caribbean, Hawaii and Latin America and
our owner family base from nine resort locations and approximately 25,000 owner
families at the time of our August 1996 initial public offering to 73 resort
locations and approximately 250,000 vacation owner families at May 31, 2002.
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Our operations consist of:
. marketing and selling to the public at our resort locations and
off-site sales centers:
- 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
- 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,"
. leasing Vacation Intervals at certain Carribbean locations,
. acquiring, developing and operating vacation ownership resorts,
. operating our Club Sunterra membership program,
. 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
. providing resort rental, management, maintenance and collection
services for which we receive fees paid by the resorts' homeowners
associations.
Segment and geographic information is presented in Note 23 to our
consolidated financial statements included in this report.
Marketing of Vacation Interests
We market and sell vacation interests in two distinct forms: Vacation
Intervals and Vacation Points (each described below under the caption "The
Vacation Ownership Industry" and referred to herein together as "Vacation
Interests").
We market Vacation Interests both at our resort locations and through
off-site sales centers. We employ a variety of marketing programs to generate
prospects for these sales efforts, including targeted mailings, overnight
mini-vacation packages, gift certificates, seminars and various
destination-specific local marketing efforts. Additionally, incentive premiums
in the form of entertainment tickets, hotel stays, gift certificates or free
meals are offered to guests and other potential customers to encourage resort
tours. Historically, we have sought to tailor the sales process to each
prospective buyer based upon the marketing program that brought the prospective
buyer to the resort for a sales presentation. Although the principal goal of our
marketing activities is the outright sale of Vacation Interests, in order to
generate additional revenue, we rent unoccupied units at select resorts through
direct consumer marketing, travel agents and/or vacation package wholesalers. We
believe that our room rental operations, in addition to providing us with
supplemental revenue, provide us with a good source of potential customers for
the purchase of Vacation Interests.
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Receivables Financing
The Company provides consumer financing to consumers for the purchase and
lease of Vacation Interests in North America. We benefit by retaining the
positive cash flow spread that results from the difference between our borrowing
rate (which averages approximately 7%) and the rate charged to our owner
families (which averages 14.4%). This financing generally is made available to
consumers who make a down payment within established credit guidelines, bears
interest at fixed rates, and is collateralized by the underlying Vacation
Interest. Our European subsidiary generally originates the mortgages receivable
for a third party financial institution and receives a commission (averaging
approximately 14%) of the principal amount of eligible consumer loans on a
non-recourse basis.
Historically, we provided mortgage financing for approximately 85% of our
domestic Vacation Interests sales or lease revenue. During fiscal year 2001, we
provided mortgage financing for approximately 80% of Vacation Interests sales
and leases. As of December 31, 2001, our mortgages and contracts receivable
portfolio included approximately 28,000 active loans and contracts totaling
approximately $202 million, with a stated maturity typically of seven to ten
years and a weighted average interest rate of 14.4% per year. Mortgages and
contracts receivable in excess of 60 days past due as of such date were 4.0% as
a percentage of gross mortgages and contracts receivable. Our allowance for loan
and contract losses was 17.3% as a percentage of gross mortgages and contracts
receivable at December 31, 2001.
Historically, we provided financial services for our on-and-off balance
sheet portfolios. Specifically, to finance our Vacation Interests sales, we
monetized the related mortgages receivable through the use of an off-balance
sheet conduit that securitized these receivables and, in turn, sold them in the
mortgage-backed securities market. We also used on-balance sheet hypothecations,
whole mortgages receivable sales and other financing vehicles. Given the
percentage of purchases that are financed, the availability of financing is
essential to provide liquidity to generate ongoing sales of Vacation Interest
purchases. After the Petition Date, we have used our debtor-in-possession
financing facilities to finance our mortgages receivable.
As of December 31, 2001, we serviced approximately 31,000 loans with an
outstanding balance of approximately $263.2 million relating to the conduit,
securitizations, joint venture properties and other facilities not included on
the balance sheet.
Management Services
Through our subsidiaries, Resort Property Management, Inc. ("RPM") and
Sunterra Pacific, Inc. ("Sunterra Pacific"), we also provide resort rental,
management, maintenance and collection services for which we receive fees paid
by the resorts' homeowner associations ("HOAs"). Under such arrangements, we
typically have primary responsibility for all activities necessary for the
day-to-day operation of the managed resort properties, including administrative
services, procurement of inventory and supplies and promotion and marketing.
Such management agreements typically provide that we are paid a monthly
management fee equal to a percentage of monthly maintenance fees and a
reservation and accounting fee at certain resorts. The management agreements are
usually for a three-year period and are automatically renewable annually, unless
prior notice of non-renewal is given by either party.
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With respect to each managed resort location, we obtain commercial general
liability insurance, all-risk property insurance under a manuscript policy,
business interruption insurance and other insurance customarily obtained for
similar properties. We also provide the managerial and other employees necessary
for the managed resort locations, including those necessary for review of the
operation and maintenance of the resorts, preparation of reports, budgets and
projections and employee training.
RPM has contracts with 15 HOAs at our resorts and an additional seven
contracts to manage non-Sunterra resorts, and Sunterra Pacific manages 16
Sunterra Pacific resorts. We also presently manage two Sunterra-affiliated
resorts and 16 non-Sunterra resorts through our wholly-owned, Hawaii-based Marc
Resorts affiliate. We expect that this affiliate will be sold in the near
future. Our remaining resort locations are managed by third party management
companies. Historically, we have sought to increase our property management
business, both for owned vacation ownership resorts and for other vacation
ownership resorts as well as hotels, condominiums and other types of resorts.
The Vacation Ownership Industry
The resort component of the leisure industry is serviced primarily by two
separate alternatives for overnight accommodations -- commercial lodging
establishments and vacation ownership resorts. Commercial lodging consists
generally of hotels and motels in which a room is rented on a nightly, weekly or
monthly basis for the duration of the visit, and, to a lesser degree, includes
rentals of privately-owned condominium units or homes. For many vacationers,
particularly those with families, the space provided in a rented hotel or motel
room relative to the cost (without renting multiple rooms), is not economical.
Also, room rates and availability at such establishments are subject to periodic
change. Consequently, vacation ownership presents improved lifestyle benefits to
owners and an economical alternative to commercial lodging for vacationers.
Increased governmental regulation, higher standards of quality and service,
increased flexibility and the rapid entry of a number of well-organized lodging
and entertainment companies, including Marriott International ("Marriott"), The
Walt Disney Company ("Disney"), Four Seasons Hotels & Resorts ("Four Seasons"),
Inter-Continental Hotels and Resorts, Inc. ("Inter-Continental"), Hilton Hotels
Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Carlson Companies
("Carlson") and Starwood Hotels and Resorts Worldwide, Inc. ("Starwood"), each
have increased the attractiveness of vacation ownership for consumers.
Vacation Interval Ownership
The purchase of a Vacation Interval typically entitles the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year,
or in alternative years, usually in perpetuity. Typically, the buyer acquires an
ownership interest in one or more vacation residences or the entire resort,
which is generally held in fee simple.
The owners of Vacation Intervals at each resort usually manage the property
through a non-profit HOA, which is governed by a board consisting of
representatives of the developer and owners of Vacation Intervals at the resort.
The board hires a management company, delegating
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many of the rights and responsibilities of the HOA, including grounds
landscaping, security, housekeeping and operating supplies, garbage collection,
utilities, insurance, laundry and repair and maintenance.
Each Vacation Interval owner is required to pay the HOA a share of the
overall cost of maintaining the property. These charges, which generally range
from $300 to $700 per Vacation Interval per year, consist of an annual
maintenance fee plus applicable real estate taxes, funding of replacement
reserves and, when needed, special assessments. If the owner does not pay such
charges, the owner's use rights may be suspended and the HOA may foreclose on
the owner's Vacation Interval.
Points-Based Vacation Ownership
In general, under a points-based vacation ownership system, owners, which
are more commonly referred to as "members," purchase points which act as an
annual currency exchangeable for occupancy rights at participating resorts. We
currently operate three separate points-based vacation ownership systems: our
United States "Club Sunterra" program, with approximately 40,000 members and 26
resort locations in the United States and the Caribbean; Sunterra Pacific's
"VTS" program, with 21 resort locations in the United States, Canada and Mexico;
and Sunterra Europe's GVC program, with 26 resort locations in the United
Kingdom, Portugal, Spain, the Canary Islands, Germany, France, Austria and
Italy.
Our Club Sunterra points-based vacation ownership system operates on a
basis very similar to the standard Vacation Interval ownership structure in that
members usually have a home resort and have a deeded, fee-simple interest in a
particular unit or units at that home resort. Club Sunterra members assign to
the club their occupancy rights to their deeded Vacation Interval and then spend
their points to acquire occupancy rights to a Vacation Interval that is
available through the Club. Members in Sunterra Pacific's VTS program do not
hold deeded fee simple interests, but rather own beneficial interests in a
trust, which holds legal title to the deeded fee simple interests. Members in
Sunterra Europe's GVC program also do not hold deeded fee simple interests, but
rather have membership in a limited liability company, Grand Vacation Club
Limited, plus a right to use the accommodations which are part of the club.
The advantages of a points-based vacation ownership system relate to the
flexibility given to members with respect to the use of their Vacation Points
versus the use of a traditional Vacation Interval. In traditional Vacation
Interval ownership, owners can either use their Vacation Interval for a one-week
stay in a specific unit size at a specific resort or can attempt to exchange
their weeks through an external exchange organization, such as Resort
Condominium International, LLC ("RCI") or Interval International, Inc. ("II"),
for which an exchange fee is charged. Because Vacation Points function as
currency under a points-based vacation ownership system, owners, subject to
availability and other factors, have flexibility in choosing the location,
season, duration and unit size of their Vacation Interest, based on their annual
Vacation Points allocations. In a points-based vacation ownership system, owners
can redeem their points for a stay in any one of the resorts included in the
club without having to exchange through an external exchange company, such as
RCI or II, without having to pay any exchange fees. Moreover, under our Club
Sunterra system, members are also able to effect exchanges through their
external exchange organization for vacation stays at resorts outside the Club
Sunterra resort
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network if they desire, as the annual Club Sunterra membership fee usually
includes annual membership in one of these exchange organizations.
A significant component of our business plan is an effort to achieve club
globalization through the integration of the three existing points-based systems
into a functionally single "Global Club" system.
Competition
We compete with both branded and non-branded hospitality and lodging
companies as well as other established vacation ownership companies. Although
major lodging and hospitality companies such as Marriott, Disney, Hilton, Hyatt,
Four Seasons, Inter-Continental, Carlson and Starwood have established or
declared an intention to establish vacation ownership operations, we believe
that the industry remains largely unbranded and highly fragmented. The majority
of the over 5,000 worldwide vacation ownership resorts are owned and operated by
smaller, regional companies.
Historically, we also have competed with the buyers of our Vacation
Intervals who subsequently decide to resell those Vacation Intervals. While we
believe that the market for resale of Vacation Intervals by buyers is generally
limited, such resales are typically at prices substantially less than the
original purchase price. The market price of Vacation Intervals sold by us at a
given resort or by our competitors in the market in which a resort is located
could be depressed by a substantial number of Vacation Intervals offered for
resale.
Insurance
We generally carry commercial general liability insurance and, with respect
to resort locations that we manage and for corporate offices, a manuscript
all-risk property insurance policy with fire, flood, windstorm and earthquake
coverage and additional coverage for business interruption arising from insured
perils. We believe that the insurance policy specifications, insured limits and
deductibles are similar to those carried by other resort hotel operators and we
believe them to be adequate. There are certain types of losses, such as losses
arising from acts of war or terrorism, that are not generally insured because
they are either uninsurable or not economically insurable.
Intellectual Property
We own and control a number of trade secrets, trademarks, trade names,
copyrights and other intellectual property rights, including the "Sunterra(R)"
and "Own Your World(R)" service marks, which, in the aggregate, are of material
importance to our business. We believe, however, that our business as a whole
does not materially depend on any one intellectual property asset or related
group of such assets. We are licensed to use technology and other intellectual
property rights owned and controlled by others, and we license other companies
to use technology and other intellectual property rights owned and controlled by
us.
-9-
Governmental Regulation
Our marketing and sales of Vacation Interests are subject to extensive and
ever-changing regulations by the federal and state governments and foreign
jurisdictions in which our resort properties are located and in which Vacation
Interests are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce generally. Other significant federal legislation to which we
are or may be subject includes the Truth-In-Lending Act and Regulation Z, the
Equal Credit Opportunity Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Telephone Consumer Protection Act, the Telemarketing and
Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Americans
With Disabilities Act, the Fair Credit Reporting Act, the Fair Debt Protection
Act, the Gramm Leach Bliley Act, the Real Estate Settlement Procedures Act, the
Deceptive Mail Prevention and Enforcement Act, the Civil Rights Acts of 1964 and
1968 and federal and state securities laws. In addition, many states have
adopted specific laws and regulations regarding the establishment of condominium
and timeshare projects and the sale of vacation interest ownership programs. For
example, in most states we are required to deliver an offering statement or
public report to all prospective purchasers of Vacation Interests, together with
certain additional information concerning the terms of the purchase. Laws in
most states generally grant the purchaser of a vacation interest the right to
cancel a contract of purchase at any time within a period ranging from three to
ten calendar days following the later of the date the contract was signed or the
date the purchaser received the last of the documents which we are required to
provide to the purchaser. Most states have other laws that regulate other
activities such as those relating to real estate licensure, exchange program
registration and sellers of travel licensure and anti-fraud laws, telemarketing
laws, prize, gift and sweepstakes laws and labor laws. Any failure to comply
with applicable laws or regulations could have a material adverse effect on our
business, results of operations or financial condition.
Certain state and local laws may also impose liability on property
developers with respect to construction defects discovered by future owners of
such property. Pursuant to such laws, future owners of Vacation Intervals may
recover from us amounts in connection with repairs made to a resort as a
consequence of defects arising out of our development of the property.
In addition, from time to time, potential buyers of Vacation Interests
assert claims with applicable regulatory agencies against vacation interest
salespersons for unlawful sales practices. Such claims could have adverse
implications for us in negative public relations and potential litigation and
regulatory sanctions.
A number of federal, state and local laws, including the Fair Housing
Amendments Act of 1988 and the Americans with Disabilities Act (collectively,
"Accessibility Laws"), impose requirements related to access to and use by
disabled persons of a variety of public accommodations and facilities. Although
we believe that our resorts are substantially in compliance with Accessibility
Laws, a determination that we are not in compliance with Accessibility Laws
could result in a judicial order requiring compliance, imposition of fines or an
award of damages to private litigants. Because some Accessibility Laws impose
ongoing obligations, we are likely to incur additional costs to improve the
accessibility of our resorts; however, such costs are not expected to have a
material adverse effect on our business, results of operations or financial
condition. Any new legislation may impose further burdens or restrictions on
property owners with respect to access by disabled persons. If an HOA at a
resort
-10-
were required to make significant improvements as a result of non-compliance
with the Accessibility Laws, special assessments might be needed to fund such
improvements, which additional costs might cause Vacation Interests owners to
default on their mortgages and/or cease making required HOA assessment payments.
In addition, the HOA under such circumstances would likely pursue the resort
developer to recover the cost of any corrective measures. We are not aware of
any non-compliance with Accessibility Laws that management believes would have a
material adverse effect on our business, results of operations or financial
condition.
We sell Vacation Interests at our resort locations through independent
sales agents. Such independent sales agents provide services to us under
contract, and we believe that they are not employees. Accordingly, we do not
withhold payroll taxes from the amounts paid to such independent contractors. In
the event the Internal Revenue Service or any state or local taxing authority
were to successfully classify such independent sales agents as our employees,
rather than as independent contractors, and hold us liable for back payroll
taxes, such reclassification could have a material adverse effect on us.
The marketing and sales of the GVC points-based vacation ownership system
and our other operations are subject to national and European regulation and
legislation. Within the European Community (which includes all the countries in
which we conduct our operations), the European Timeshare Directive of 1994
regulates vacation ownership activities. The terms of the Directive require us
to issue a disclosure statement providing specific information about our
resorts, and our vacation ownership operations require a 10-day rescission
period and a prohibition on the taking of advance payments prior to the
expiration of that rescission period. Member states are permitted to introduce
legislation that is more protective of the consumer when implementing the
European Timeshare Directive. Most of our purchasers are residents of the United
Kingdom, where the Directive has been implemented by way of an amendment to the
Timeshare Act 1992. In the United Kingdom, a 14-day rescission period is
mandatory. There are other United Kingdom laws which are applicable to us,
including the Consumer Credit Act 1974, the Unfair Terms in Consumer Contracts
Regulations 1994 and the Package Travel, Package Holidays and Package Tours
Regulations 1992. The Timeshare Act 1992 does appear to have extra-territorial
effect in that United Kingdom resident purchasers buying timeshare interests
where the accommodation is situated in other European Economic Area States may
rely upon it. All the countries in which we operate have consumer and other laws
which regulate our activities in those countries. We are a founder member of the
Organization for Timeshare in Europe (OTE), which is the European self
regulating trade body for vacation ownership companies. As a member, we are
obligated to comply with all laws as well as with certain codes of conduct
(including a code of conduct for the operation of points systems) promulgated by
the OTE.
Environmental Matters
Under various federal, state, local and foreign environmental, health,
safety and land use laws, ordinances, regulations and similar requirements, a
current or previous owner or operator of real property may be required to
investigate and clean up hazardous substances, wastes or releases of petroleum
products at such property and may be held liable to a governmental entity or to
third parties for associated damages and for investigation and clean-up costs
incurred by such parties in connection with the contamination. Such laws may
impose clean-up
-11-
responsibility and liability without regard to whether the owner knew of or
caused the presence of the contaminants, and the liability under such laws has
been interpreted to be joint and several unless the harm is divisible and there
is a reasonable basis for allocation of responsibility. The cost of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
or rent such property or to borrow using such property as collateral. Any
failure to comply with applicable environmental laws or regulations could have a
material adverse effect on our business, results of operations or financial
condition.
In connection with the acquisition and development of Embassy Vacation
Resort Lake Tahoe ("Lake Tahoe") and Sunterra Resorts San Luis Bay Inn ("San
Luis Bay"), several areas of environmental concern have been identified. The
areas of concern at Lake Tahoe relate to possible soil and groundwater
contamination that has migrated onto the resort site from an underground
petroleum storage tank on an adjacent upgradient property. We have been
indemnified by the former owner of the upgradient property for certain costs and
expenses in connection with the off-site contamination. California regulatory
authorities are monitoring the off-site contamination and have required the
responsible parties to undertake remedial action. The parties have taken action
to comply with the remedial action plan put in place by the Lahontan Regional
Water Quality Control Board. Residual contamination may exist on the resort site
as a result of leaking underground storage tanks that were removed prior to our
acquisition of the resort site, and it is possible that access to the resort may
be necessary in the future in order to install an in-situ remediation system to
enhance remediation effectiveness. We do not believe that we will be held liable
for this contamination and do not anticipate incurring material costs in
connection therewith; however, there can be no assurance that the indemnitor
will meet its obligations in a complete and timely manner.
San Luis Bay is located in Avila Beach, California. The area has
experienced soil and groundwater contamination resulting from a nearby oil
refinery. California regulatory authorities have required the installation of
groundwater monitoring wells on the beach near the resort site (among other
locations). Remediation has been completed at this site. We do not believe that
we are liable for this contamination and do not anticipate incurring material
costs in connection therewith; however, there can be no assurance that claims
will not be asserted against us with respect to this matter.
Employees
As of December 31, 2001, we had approximately 5,600 full and part-time
employees and engaged approximately 550 independent sales agents to sell
vacation ownership interests. Of such numbers, approximately 850 full and
part-time employees and approximately 175 independent sales agents were employed
or engaged by the Debtors.
Risk Factors
The Company and its business are subject to various risks and
uncertainties, relating to or arising out of the nature of the business
conducted, the Chapter 11 Cases and the Company's expected emergence therefrom
and general business, economic, financing, legal and other factors
-12-
or conditions that may affect the Company. These risks and uncertainties include
but are not limited to those referred to herein under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
following:
Going Concern Matters
The consolidated financial statements have been prepared on a going concern
basis, which contemplates the continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 proceedings, such realization of assets and liquidation
of liabilities are subject to uncertainty. 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
and the Company's lack of the execution of the Exit Financing facility and a
post-emergence working capital facility, as also described in Note 3 to the
consolidated financial statements, give rise to substantial doubt about the
Company's ability to continue as a going concern. Management believes that the
Plan as confirmed on June 20, 2002 by the Bankruptcy Court provides for a
restructuring of the Company's business and its capital structure such that it
will be able to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that may be necessary if the
Company is not able to emerge from Chapter 11 and continue as a going concern.
We are subject to intense industry competition
The vacation ownership industry is highly competitive. Among the many
issues affecting all companies in this industry include competition from a broad
range of lodging, hospitality and entertainment companies, changes in consumer
behavior and the cost, ease and attractiveness of domestic and international
travel and seasonality.
We compete with both branded and non-branded hospitality and lodging
companies, as well as other established vacation ownership companies. Although
major lodging and hospitality companies such as Marriott, Disney, Hilton, Hyatt,
Four Seasons, Inter-Continental, Carlson and Starwood have established or
declared an intention to establish vacation ownership operations in the past
decade, the industry remains largely unbranded and highly fragmented. The
majority of the approximately 5,000 worldwide vacation ownership resorts are
owned and operated by smaller, regional companies.
We also compete with the buyers of Vacation Intervals who subsequently
decide to resell their Vacation Intervals. While we believe that the market for
resale of Vacation Intervals by buyers is presently limited, such resales are
typically at prices substantially less than the original purchase price. The
market price of Vacation Intervals sold by us at a given resort or by our
competitors in the market in which a resort is located could be depressed by a
substantial number of Vacation Intervals offered for resale.
Our ability to succeed will be dependent upon our ability to implement
successfully our business plan, as to which no assurance can be given
Our business plan effectively reflects a "bottom-up" approach intended to
realign our business on those operations which offer a significant opportunity
for sustainable growth and
-13-
eventual profitability. However, our ability to execute our plan must be
considered in light of the inherent risks, expenses and difficulties typically
encountered by companies emerging from bankruptcy, particularly companies with
new and evolving business models. Such unique difficulties include obtaining
widespread consumer acceptance for our systemwide "Global Club" points-based
vacation product line, the need to establish an affiliation providing a
favorable brand identity, the ability to sell non-core resorts on a timely and
favorable basis and the potential development of comparable vacation ownership
products by competitors.
We cannot assure you that the we can effectively integrate Club Sunterra and our
two other points-based vacation ownership programs into a true "Global Club"
As an integral part of our business plan, we will seek to achieve true club
globalization through the integration of our three existing separate
points-based global vacation systems (the "Club Sunterra" program, Sunterra
Pacific's "VTS" program and Sunterra Europe's GVC program) into a functionally
single "Global Club" system, with the existing Club Sunterra system serving as
the platform for this points-based exchange program. Although we have operated
these points-based vacation ownership systems separately through certain of the
companies we have acquired, we have not previously developed a true global
systemwide points-based vacation ownership system, and no assurance can be given
as to our ability to efficiently develop, integrate or operate such a system, or
the form that such system may take or the timing of the implementation any such
system. Risks associated with the integration and operation of a global club
include the risks that:
. our various points-based vacation ownership systems cannot be
efficiently integrated; and
. the points-based vacation ownership systems, like traditional
timeshare arrangements, are subject to extensive regulation by
federal, state and local jurisdictions, which regulation may adversely
impact, delay or prevent achievement of our integration goals.
We cannot assure you that we will be able to enter into the branding affiliation
called for by our business plan
Our ability to establish and maintain a branding affiliation with an
organization possessing a strong established identity among vacation ownership
consumers, such as an international lodging concern, Vacation Interval exchange
company or vacation ownership company, is also a key component of our business
plan. Although discussions to establish a brand affiliation are ongoing,
entering into a branding affiliation often is a complex and time-consuming
process that requires accommodating a number of competing interests. Moreover,
even if we do enter into such a relationship, such affiliations often present
their own risks, such as lack of a shared marketing vision, loss of managerial
control and a possible overall reduction in marketing flexibility. Consequently,
we can offer no assurance that we will be able to enter into and maintain a
successful brand affiliation.
If we are unable to offer purchasers of Vacation Interests the opportunity to
participate in effective exchange networks, our sales will suffer
-14-
The attractiveness of Vacation Interest ownership is enhanced significantly
by the availability of exchange networks that allow Vacation Interest owners to
exchange in a particular year the occupancy right in their Vacation Interest for
an occupancy right in another participating network resort. According to the
American Resort Development Association, the ability to exchange Vacation
Interests was cited by buyers as a primary reason for purchasing a Vacation
Interest. RCI and II both provide broad-based Vacation Interest external
exchange services. On June 20, 2002, we entered into an exclusive exchange
affiliation agreement with II, replacing our prior agreement with RCI. If
external exchange networks cease to function effectively, or if our resorts are
no longer included in an exchange network, notwithstanding our existing
points-based clubs, our sales of Vacation Interests could be materially
adversely affected.
Any downturn in general economic or industry conditions could decrease the
demand for vacation ownership units, impair our ability to collect our mortgages
receivable and increase our costs
Any downturn in economic conditions or any price increases related to the
travel and tourism industry, such as higher airfares or increased gasoline
prices, could depress discretionary consumer spending and have a material
adverse effect on our business. Any such economic conditions, including
recession, may also adversely affect the future availability of attractive
financing rates for us or our customers and may materially adversely affect our
business. Furthermore, changes in general economic conditions may adversely
affect our ability to collect our loans to Vacation Interest buyers. Because our
operations are conducted solely within the vacation ownership industry, any
adverse changes affecting the industry, such as an oversupply of vacation
ownership units, a reduction in demand for such units, changes in travel and
vacation patterns, changes in governmental regulation of the industry, increases
in construction costs or taxes and negative publicity for the industry, could
have a material adverse effect on our business.
The effects of the September 11, 2001 terrorist attacks and subsequent events on
the results of our operations cannot be predicted
At this time, it is not known how significantly the terrorists events of
September 11, 2001, as well as the actions taken by the United States and others
in response to such events, will affect the vacation ownership industry,
domestic and international travel and our businesses and operations. These
events further depressed an already slowing economy in the United States and
globally, including the markets in which we operate. If weak economic conditions
continue or worsen, our financial condition and results of operations may be
materially and adversely affected. Further, there is no assurance that there
will not be further terrorist attacks, either domestically or abroad, including
real or threatened attacks using chemical or biological agents and other weapons
of mass destruction. Although we have received no specific threats, such attacks
might directly impact our personnel, resorts or other properties, potentially
causing substantial losses or disruptions in our operations, all of which cannot
be predicted.
The potential liability for any failure to comply with environmental laws or for
any currently unknown environmental problems could be significant
-15-
Under various environmental laws and regulations, the owner or operator
of real property may be liable for the costs of removal or remediation of
certain hazardous or toxic substances or wastes located on or in, or emanating
from, such property, as well as related costs of investigation and associated
damages. Except as discussed in this report, we are not aware of any
environmental liability that could have a material adverse effect on our
business, assets or results of operations, nor have we been notified by any
governmental authority or any third party, and we are not otherwise aware, of
any material noncompliance or other claim relating to hazardous or toxic
substances or petroleum products in connection with any of our present or former
properties. No assurance, however, can be given that we will remain in
compliance with all environmental laws and regulations, or that the requirements
of such laws and regulations will not change.
Losses from hurricanes and earthquakes in excess of insured limits, as well as
uninsured losses, could be significant
Some of the our resorts are located in areas that are subject to
hurricanes and tropical storms. We have suffered damages from hurricanes and
tropical storms in the past, and we may continue to suffer damage from them in
the future. Additionally, the resorts may be subject to damage resulting from
earthquakes and other natural disasters. We intend to carry commercial liability
insurance and all-risk property insurance with coverage for fire, flood,
windstorm and earthquake insurance with additional coverage for business
interruption arising from insured perils for resort locations that we manage and
our corporate offices. However, there are certain types of losses, such as
losses arising from acts of war, civil unrest and terrorism, that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits occur,
we could lose our capital invested in a resort, as well as the anticipated
future revenues from the resort, and would continue to be obligated on any
mortgage indebtedness or other obligations related to the property. Any such
loss could have a material adverse effect on our businesses, properties or
operations.
Our historical consolidated financial results have been subject to significant
adjustments
We have made significant adjustments to our financial statements for
the year ended December 31, 2000 from our previously filed unaudited financial
statements for periods in the fiscal year ended December 31, 2000. We have also
identified certain items in our 1999 and prior year financial statements that
resulted in a significant reduction in our retained earnings balance at December
31, 1999. Moreover, if we are successful in the consummation of the Plan of
Reorganization and the transactions contemplated thereby, we will operate our
existing business under a new capital structure and with fewer resorts and will
be subject to "fresh start" accounting rules. Therefore, you should not rely on
either:
. the previously filed unaudited financial statements for
periods in 2000 and certain periods in 2001 (including the
monthly operating reports filed with the Bankruptcy Court
for periods in 2000 and for the months January through
October 2001); and
. the previously filed financial statements for 1999 and
prior periods.
-16-
We are dependent upon senior executive management, many of whom are new
Our future success largely depends on the skills and efforts of our
senior management team. Since the Petition Date, there has been significant
turnover in many of our key senior executives. Since October 2000, certain of
our senior management positions, including, until recently, the President and
Chief Executive Officer, have been filled on an interim basis by representatives
of Jay Alix & Associates ("JA&A"). Our current President and Chief Executive
Officer, Nicholas J. Benson, has held that position only since November 2001. In
addition, certain of our other key executives, such as our Chief Operating
Officer and Sunterra Europe's Chief Executive Officer, have joined the Company
since the bankruptcy filing. Certain additional senior management posts remain
open or are being staffed on an interim basis. Consequently, select key members
of senior management have a limited history and experience with our companies.
Although we believe that these interim management measures have stabilized
operations and allowed us to develop the Plan of Reorganization, continued
management turnover could lead to unstable and inconsistent management of our
business and affairs. We are actively recruiting for those senior management
positions that presently are open or are staffed on an interim basis.
We may be unable to attract, retain and motivate necessary management and other
skilled personnel
Our successful implementation of our business plan will also require us
to attract, motivate, train and retain additional skilled and experienced sales
and other personnel. We will face intense competition for such personnel. We may
not be able to attract, motivate and retain personnel with the skills and
experience needed to successfully manage our business and operations. Our
inability to attract, hire or retain the necessary executive, sales and
financial personnel, technical, marketing, information systems and other
personnel, or the loss of the services of any member of our senior management
team, could have a material adverse effect on our business, financial condition
or results of operations.
We will continue to be subject to extensive government regulation
Marketing and sales of Vacation Interests are subject to extensive and
ever-changing regulations by the federal and state governments and foreign
jurisdictions in which our resort properties are located and in which Vacation
Interests are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce generally. Other significant federal legislation to which we
may be subject includes the Truth-In-Lending Act and Regulation Z, the Equal
Credit Opportunity Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, Telephone Consumer Protection Act, Telemarketing and Consumer
Fraud and Abuse Prevention Act, Fair Housing Act, the Americans With
Disabilities Act, the Fair Credit Reporting Act, the Fair Debt Protection Act,
the Gramm Leach Bliley Act and the Civil Rights Acts of 1964 and 1968. In
addition, many states have adopted specific laws and regulations regarding the
establishment of condominiums and timeshare projects and the sale of vacation
interest ownership programs. For example, in most states, we will be required to
deliver an offering statement or public report to all prospective purchasers of
Vacation Interests, together with certain additional information concerning the
-17-
terms of the purchase. Laws in most states generally grant the purchaser of a
vacation interest the right to cancel a contract of purchase at any time within
a period ranging from three to ten calendar days following the later of the date
the contract was signed or the date the purchaser received the last of the
documents which we will be required to provide to the purchaser. Most states
have other laws that regulate other activities such as those relating to real
estate licensure, exchange program registration and sellers of travel licensure
and anti-fraud laws, telemarketing laws, prize, gift and sweepstakes laws and
labor laws. Any failure to comply with applicable laws or regulations could have
a material adverse effect on our business, results of operations or financial
condition.
We have not filed required quarterly and annual SEC reports since the
commencement of the Chapter 11 Cases and may not be able to comply with certain
SEC reporting requirements in the future
Since the Petition Date, Sunterra has not filed required quarterly and,
until the filing of this report, annual reports with the SEC. Specifically,
Sunterra failed to file Quarterly Reports on Form 10-Q for the quarters ended
June 30 and September 30 in 2000 and for the quarters ended March 31, June 30
and September 30 in 2001. Sunterra also failed to file an Annual Report on Form
10-K for the year ended December 31, 2000, was delinquent in filing this report
and is delinquent in filing its Quarterly Report on Form 10-Q for the first
quarter of 2002. We intend to seek to file certain of our delinquent SEC reports
as promptly as practicable, but some or all of such reports may not be filed. In
addition, because our previously audited financial statements for the 1999 and
1998 fiscal years cannot be used, and because we are not able to present
unaudited financial statements or certain information for any periods prior to
2000, this report does not, and certain of Sunterra's future filings under the
Securities Exchange Act of 1934 will not, comply with certain SEC requirements.
We may be subject to adverse regulatory or other consequences, which
could include administrative, enforcement or other proceedings brought by the
SEC, related to our past and future filing delinquencies and as a result of
issues related to the financial statement adjustments discussed herein under
"Business - Financial Statement Adjustments."
It is unlikely that an active public trading market for our new common stock
will develop in the foreseeable future and such common stock may be illiquid or
experience significant price volatility
On the Plan Effective Date, Sunterra's existing common stock will be
cancelled, and new common stock (the "New Sunterra Common Stock") will be issued
in accordance with the provisions of the Plan. We cannot assure you that the
stock will be listed or a market will develop for the New Sunterra Common Stock
issued under the Plan. Even if the New Sunterra Common Stock is listed or
quoted, an active market for such securities may not develop, and no
determination can be made as to the prices at which purchases or sales of such
securities may be made. The market price of the New Sunterra Common Stock may be
subject to significant fluctuations in response to numerous factors, including
variations in our annual or quarterly financial results or those of our
competitors, changes by financial analysts in their estimates, if any, of the
future earnings of the Company, conditions in the economy in general or in the
travel, vacation ownership and leisure industries in particular or unfavorable
publicity as well as the
-18-
"Risk Factors" discussed above. The stock market also has, from time to time,
experienced significant price and volume fluctuations that have been unrelated
to the operating performance of companies with publicly-traded securities.
Sunterra's Charter and Bylaws will contain provisions that could limit the value
of the New Sunterra Common Stock
Certain provisions of the Amended Articles of Incorporation and Amended
Bylaws of Reorganized Sunterra, as well as applicable state law, may have the
effect of delaying, deferring, or preventing a change in control of the company.
Such provisions may make it more difficult for other persons, without the
approval of our Board of Directors, to make a tender offer or otherwise acquire
substantial amounts of the New Sunterra Common Stock or to launch other takeover
attempts that a stockholder might consider to be in such stockholder's best
interest. These provisions could limit the price that certain investors might be
willing to pay in the future for shares of New Sunterra Common Stock.
We do not anticipate paying any dividends
We do not anticipate paying any dividends on the New Sunterra Common
Stock in the foreseeable future. In addition, covenants in certain debt
instruments to which we will be a party will restrict our ability to pay
dividends and make certain other payments. In particular, our current
debtor-in-possession financing facility prohibits, and we anticipate that our
Exit Financing and any other working capital facilities will prohibit or limit,
the payment of dividends or the making of other distributions to stockholders.
Certain institutional investors may only invest in dividend-paying equity
securities or may operate under other restrictions that may prohibit or limit
their ability to invest in the New Sunterra Common Stock.
We will be subject to various restrictions under our Exit Financing facility
Our Exit Financing facility will contain various restrictions and
limitations that may affect our business and affairs. We expect that such
restrictions and limitations will include those relating to our ability to incur
indebtedness and other obligations, to make investments and acquisitions and to
pay dividends and that we will be required to maintain certain financial ratios
and comply with other financial covenants. Our failure to comply with any such
provisions, or to pay our obligations under such financing, could result in
foreclosure by the lender of its security interests in our assets, as discussed
in the following paragraph, and could otherwise have a material adverse effect.
Virtually all of our assets will be subject to security interests
Substantially all cash, receivables, inventory and other assets of the
reorganized Company will be subject to liens and security interests after the
Plan Effective Date. If the lenders under the Exit Financing facility or any
other holder of a security interest becomes entitled to exercise their or its
rights as a secured party, they would have the right to foreclose upon and sell
or otherwise transfer the collateral subject to the security interest, and the
collateral accordingly would be unavailable to us or to our other creditors,
except to the extent, if any, that such other creditors have a superior or equal
security interest in the affected collateral or the
-19-
value of the affected collateral exceeds the amount of indebtedness in respect
of which such foreclosure rights are exercised.
We need to be able to access the securitization markets in the future
While we securitized our mortgages receivable prior to the Petition
Date, there can be no assurance with regard to our ability to access
successfully the securitization markets upon emergence from Chapter 11. Our
inability to do so could adversely affect our business and financial condition.
Our stock ownership will be concentrated, which may make it difficult for
stockholders to exert control over us or to replace our management
We expect that certain of our creditors will acquire, pursuant to the
Plan, amounts of New Sunterra Common Stock that may enable them to exert
substantial influence over the election of directors and the management and
affairs of the reorganized Company. Accordingly, if these persons vote their
shares of New Sunterra Common Stock in the same manner, they may have sufficient
voting power to determine the outcome of various matters submitted to the
stockholders for approval, including mergers, consolidations and the sale of
substantially all of our assets. Such control may result in decisions that are
not in the best interest of our other stockholders.
ITEM 2. PROPERTIES
As of May 31, 2002, we had a total of 73 resorts, 47 of which are
located in the United States, Canada, the Caribbean and Mexico, including two
resorts in Hawaii operated under a joint venture, and 26 in Europe. The
following table shows, as of that date, the number of resort locations that we
have in each state and country in which we operate:
State Number of Locations Country/Region Number of Locations
- ----- ------------------- -------------- -------------------
Arizona 6 Austria 1
California 5 Balearic Islands 2
Colorado 1 Canada 1
Florida 4 Canary Islands 7
Hawaii (a) 12 England 5
Idaho 1 France 2
Missouri 1 Germany 1
Nevada 2 Italy 1
New Mexico 1 Mexico 2
Oregon 2 Netherlands Antilles 2
South Carolina 1 Portugal 1
Tennessee 2 Scotland 1
Virginia 2 Spain 5
Washington 1 U.S. Virgin Islands 1
_______________
(a) We own two of these resorts in partnership with third parties.
-20-
All of the units in our resorts are fully furnished and include telephones,
televisions, VCRs and stereos, and all but the studio units feature full
kitchens. Most of the units contain a washer, dryer and microwave. Many units
also include a private deck.
In order to focus our business on those operations which offer a
significant opportunity for sustainable growth, we determined to seek to
maximize the operations and financial performance of so-called "core resorts"
and have identified several "non-core resorts" that do not provide a suitable
platform for our affiliation, Global Club and other strategic initiatives. Our
efforts in this regard have focused upon the closure of select sales centers and
the sale of "non-core resorts" and other assets. Such dispositions commenced
shortly after the Petition Date and are ongoing. Following confirmation of the
Plan, we intend to monitor and measure the operating and financial performance
of our core resorts against expectations in order to identify other resorts for
possible sale and achieve an optimal resort mix.
Our headquarters and principal administrative, marketing, legal,
construction, accounting, finance and support facilities are located in Orlando,
Florida, where we own a building containing approximately 25,000 square feet of
space. We also lease office space in Las Vegas, Nevada, Bellevue, Washington and
Carlsbad, California, containing a total of approximately 112,872 square feet of
space. In addition, we lease approximately 40,000 square feet of office space
and storage space in London, England which houses the headquarters of our
European operations. We are in the process of relocating our headquarters and
support facilities from Orlando to Las Vegas and expect to be completed by
December 31, 2002.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various claims
and actions. In the opinion of management, taking into account the effect of the
Plan of Reorganization, any liability arising from or relating to these claims,
or other claims under the Plan, should not materially and adversely affect the
Company, with the possible exception of the RCC matter described below.
Directors of Sunterra have been named defendants in a certain action filed
by the Creditors' Committee in Sunterra's name and on its behalf. The action was
filed on May 30, 2002 in the United States District Court for the District of
Maryland. The action alleges, among other matters, breach of fiduciary
obligations and gross negligence arising out of events prior to the Petition
Date and seeks damages on account of such claims.
In 1996, the State of Hawaii Department of Taxation ("DOT") began audits of
Sunterra Pacific and the VTS Operating Fund, Inc. (the "Operating Fund")
established by Sunterra Pacific as a repository for pass through funds relating
to obligations of Sunterra Pacific timeshare owners. On July 20, 2000, the DOT
issued final assessments for general excise and use tax claimed to be owned by
Sunterra Pacific for June 30, 1987 through June 30, 1999. The assessments for
back taxes, penalties and interest total approximately $5.35 million. In a
parallel audit of the Operating Fund, the DOT issued proposed assessments for
general excise and use tax for the period June 30, 1994 through June 30, 1998.
These assessments for back taxes, penalties and interest total $1.35 million.
Sunterra Pacific disputes many of the assessments described above and is
currently attempting to resolve the payment of the DOT assessments. Recently,
-21-
Sunterra representatives met with DOT representatives to discuss DOT'S
assessments and the possibility of settlement.
On November 13, 2000, a Consolidated Amended Class Action Complaint (the
"Complaint") was filed in the United States District Court for the Middle
District of Florida (Orlando Division) (the "District Court"), relating to a
putative securities fraud class action brought on behalf of purchasers of common
stock of Sunterra for the period from October 8, 1998 through January 19, 2000
(the "Class Period"). Shortly after the Class Period, fifteen cases were filed
in the District Court and were consolidated (the "Consolidated Cases").
Originally, Sunterra and several of its officers and directors were named as
defendants in the Consolidated Cases. Following the filing of the Chapter 11
Cases, the Consolidated Cases were automatically stayed against Sunterra
pursuant to Bankruptcy Code Section 362. The Complaint named former officers and
two current directors of Sunterra as defendants, as well as Arthur Andersen,
LLP, Sunterra's independent auditors during the Class Period. In or about the
spring of 2001, all of the defendants moved to dismiss the Complaint. On March
12, 2002, the District Court entered an order dismissing the Complaint against
each of the defendants without prejudice. Pursuant to the District Court's
order, the plaintiffs were to file a second amended complaint on or before May
3, 2002, which was subsequently extended to July 3, 2002, by order dated May 2,
2002.
Sunterra uses certain computer software under a software license granted by
RCI Technology Corp., formerly known as Resort Computer Corporation ("RCC").
That software is the foundation for Sunterra's integrated computer system, which
manages a wide range of hospitality functions, such as reservations, inventory
control, sales commissions, Club Sunterra operations, housekeeping and
marketing. RCC filed a motion in the Chapter 11 Cases alleging that the license
agreement should be deemed rejected, which RCC asserts would have the effect of
terminating the license. Sunterra opposed the motion, and the Court ruled in
favor of Sunterra and denied RCC's motion. On June 14, 2002, RCC filed a notice
of appeal of the Court's decision. Although we believe that RCC faces several
obstacles in this appeal, if they were ultimately successful and able to
effectively cause the termination of the license, such a result could have a
material adverse effect on the Company.
As discussed elsewhere in this report, Sunterra and certain of its
subsidiaries are debtors-in-possession in the Chapter 11 Cases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the 2001
fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Petition Date, our common stock was listed on the New York
Stock Exchange. On June 6, 2000, the Exchange delisted our common stock, which
has traded in the over-the-counter market since that time. Holders of common
stock will not receive any payments under the Plan of Reorganization on account
of their equity interests.
-22-
The following table sets forth the closing prices for the common stock
for each quarter during the fiscal years ended December 31, 2001 and December
31, 2000, as reported by the New York Stock Exchange prior to June 6, 2000 and
on the OTC Bulletin Board thereafter.
High Low
---------------- ----------------
Year Ended December 31, 2001
Fourth Quarter ............................. $0.12 $0.08
Third Quarter .............................. 0.18 0.10
Second Quarter ............................. 0.19 0.11
First Quarter .............................. 0.25 0.05
Year Ended December 31, 2000
Fourth Quarter ............................. 0.12 0.02
Third Quarter .............................. 0.26 0.08
Second Quarter ............................. 2.06 0.10
First Quarter .............................. 9.38 2.00
On April 26, 2002, there were 277 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. We currently
intend to retain future earnings to finance our operations. Any payment of
future dividends will be at the discretion of our Board of Directors and will
depend upon, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions in respect of the
payment of dividends and other factors that the Board of Directors deems
relevant. After the Plan Effective Date, our ability to pay dividends will be
restricted. See "Business -- Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
-23-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summarized consolidated financial data of
Sunterra Corporation for the fiscal years ended December 31, 2001 and 2000. For
the reasons discussed under "Business -- Financial Statement Adjustments," this
table does not include five years of financial data as required by applicable
SEC rules relating to Form 10-K. You should read the following financial data in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our consolidated financial statements
and related notes contained elsewhere in this report.
Year Ended
December 31,
---------------------------------
2001 2000
(Amounts in thousands except
per share amounts and Other
Operating Data)
Statement of Operations Data:
Revenues:
Vacation Interest sales $ 166,315 $ 187,199
Vacation Interest lease revenue 10,913 6,523
Club Sunterra membership fees 6,823 7,019
Resort rental income 12,282 13,457
Management fees 20,966 20,006
Interest income 30,501 26,506
Other income 24,647 27,403
----------- -----------
Total revenues 272,447 288,113
----------- -----------
Costs and Operating Expenses:
Vacation Interests cost of sales 34,275 85,319
Advertising, sales and marketing 104,273 150,742
Maintenance fees and subsidy expense 14,075 16,668
Provision for doubtful accounts and loan losses 15,843 33,973
Loan portfolio expenses 11,037 8,404
General and administrative 76,076 117,183
Depreciation and amortization 18,428 27,517
Reorganization expenses 50,350 77,988
Restructuring expenses - 6,040
Impairment write-down of assets - 37,430
Loss on abandonment of property and equipment - 959
Impairment loss on retained interests in mortgages receivable sold - 30,015
----------- -----------
Total costs and operating expenses 324,357 592,238
=========== ===========
Loss from operations $ (51,910) $ (304,125)
=========== ===========
Loss before provision for income taxes and cumulative effect of change
in accounting principle $ (68,822) $ (356,437)
=========== ===========
Net loss $ (71,539) $ (375,720)
=========== ===========
Loss in cumulative effect of change in accounting principle per common
share, basic and diluted $ 0.00 $ (0.52)
Net loss per common share, basic and diluted $ (1.99) $ (10.43)
Other Operating Data:
Number of resorts (at end of year) 79 82
Vacation Intervals available for sale or lease 43,313 56,435
Balance Sheet Data:
Cash and cash equivalents $ 27,207 $ 21,062
Total assets 663,491 735,110
Borrowings under debtor-in-possession financing agreement 68,311 44,750
Notes payable 28,005 44,592
Liabilities subject to compromise 712,866 715,547
Total stockholders' deficiency (335,750) (263,107)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6,
"Selected Financial Data", and our financial statements and related notes and
the other financial data included elsewhere in this report. This discussion
gives effect to the prior period adjustments as further discussed in Note 9 to
the consolidated financial statements. 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 set
forth herein under "Business -- Risk Factors." See the Safe Harbor Statement at
the beginning of this report.
Financial information is provided under this Item 7 only for the years
ended December 31, 2001 and 2000 for the reasons discussed under "Business --
Financial Statement Adjustments" herein.
-24-
Overview
Our operations consist of (i) marketing and selling vacation ownership
interests at our 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 or every other year in perpetuity (Vacation Intervals), and vacation
points, which may be redeemed for occupancy rights, or for varying lengths of
stay, at participating resort locations (Vacation Points, and together with
Vacation Intervals, Vacation Interests), (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 our resort locations and off-site
sales centers and (v) providing resort rental management and maintenance
services for which we receive fees paid by the resorts' homeowner associations.
On the Petition Date, Sunterra and 36 of its wholly owned subsidiaries each
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
Two additional affiliates subsequently filed voluntary petitions under Chapter
11. See "Business -- The Chapter 11 Cases" herein for a description of the
Chapter 11 proceedings, the proposed Plan of Reorganization and related matters.
Until the Plan of Reorganization is confirmed by the Bankruptcy Court and
becomes effective, there can be no assurance that we will emerge from the
bankruptcy proceedings, and the effect of all of the terms and conditions of
such Plan on our business cannot be fully determined at this point. We believe
that cash from operations along with financing provided through our existing
debtor-in-possession financing agreement, as well as our anticipated completion
of the Exit Financing transaction, should provide for a restructuring of our
business and capital structure and fund sufficient liquidity to allow us to
continue as a going concern. However, the loans outstanding under our existing
debtor-in-possession financing agreement described below mature on July 31,
2002, and if financing under the Exit Financing facility were not available, or
if the Plan of Reorganization could not be consummated, by that date, we would
be required to obtain a further extension of the maturity date from the lender
under the debtor-in-possession financing agreement, and we can provide no
assurance that such extension could be obtained.
We incurred significant net losses totaling $71.5 million and $375.7
million for the years ended December 31, 2001 and 2000, respectively. The fiscal
year 2001 net loss included significant charges for (i) advertising, sales and
marketing expenses of $104.3 million, (ii) general and administrative expenses
of $76.1 million and (iii) other reorganization expenses of $50.4 million. The
fiscal year 2000 net loss included significant charges for (i) advertising,
sales and marketing expenses of $150.7 million, (ii) general and administrative
expenses of $117.2 million, (iii) other reorganization expenses and
restructuring costs of $38.7 million and (iv) loss on impairment of properties,
equipment and goodwill and development costs of $122.3 million. The net loss for
fiscal year 2000 also includes charges totaling $30.0 million to reflect
impairment loss on retained interests in mortgages receivable sold. See the
additional discussion below under "Results of Operations" for the year ended
December 31, 2001 compared to the year ended December 31, 2000.
-25-
Critical Accounting Policies and Significant Estimates
This discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts and the retained interests in mortgages receivable sold. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. The results form the
basis for judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our critical accounting policies and the related significant estimates are
as follows:
Revenue Recognition
(i) Vacation Interests
We recognize sales of Vacation Interests in the United States on an accrual
basis after a binding sales contract has been executed, a 10% minimum down
payment has been received, the rescission period has expired, construction is
substantially complete and certain minimum project sales levels have been met.
If all the criteria are met except that construction is not substantially
complete, then revenues are recognized on the percentage of completion (cost to
cost) basis. For sales that do not qualify for either accrual or percentage of
completion accounting, all revenue is deferred using the deposit method.
The European operations recognize Vacation Interests revenue after the
rescission period expires and upon receipt of all purchase consideration,
usually subsequent to the closing of a mortgage loan provided to the customer by
a third party. The European operations do not sell Vacation Interests in
properties prior to completion of construction and do not record deferred
revenue.
(ii) Vacation Interest lease revenue
Transactions involving Vacation Interests in certain Caribbean locations
are legally structured as long-term lease arrangements for either 99 years or a
term expiring in 2050. The Vacation Interests subject to such leases revert to
the Company at the end of the lease terms. Such transactions are accordingly
accounted for as operating leases, with the sales value of the intervals
recorded as deferred revenue at the date of execution of the transactions.
Revenue deferred under these arrangements is amortized on a straight-line method
over the term of the lease agreements. In addition, we collect maintenance fees
from the lessees on these properties, which are accrued as earned and included
in Vacation Interest lease revenue. The direct leasing costs of the lease
contracts are also deferred and amortized over the term of the leases.
-26-
(iii) Club Sunterra membership fees
Revenue on the upgrade of Vacation Interval ownership to club membership
is deferred and amortized over ten years. Club membership annual dues are
accrued as earned.
(iv) Resort rental income and management fees
We rent unsold Vacation Interests on a short-term basis. Such resort
rental income is accrued as earned. Property management fee revenues are accrued
as earned in accordance with the management contracts.
(v) Interest income
Mortgages and contracts receivable interest is accrued as earned based on
the contractual provisions of the mortgages and contracts. Interest accrual is
suspended on mortgages and contracts receivable that are at least 180 days
delinquent or are a first payment default.
(vi) Other income
Included in other operating income is revenue on sales of one-week leases
and mini-vacations which allow prospective owners to sample a resort property
and which is deferred until the vacation is used by the customer or the
expiration date of the mini-vacation passes.
Other operating income also includes nonrefundable commissions earned by
the European subsidiary on the origination of loans to customers by a third
party to finance purchases of Vacation Interests. The commission revenue is
recorded upon recognition of the related Vacation Interest sales revenue.
Retained Interests in Mortgages Receivable Sold
Retained interests in mortgages receivable sold are generated upon sale
of mortgages receivable and represent the net present value of the expected
excess cash flow to the Company after repayment by the purchaser of principal
and interest on the obligations secured by the sold mortgages receivable. The
retained interests are classified as available-for-sale based on our intent and
the existence of prepayment options. Retained interests are marked to fair value
at each reporting date based on certain assumptions and the adjustments, if any,
are reported as a component of other comprehensive income (loss) in the
statements of stockholders' equity (deficiency). Adjustments for permanent
impairment of the value of retained interests are recorded in our consolidated
statements of operations in the period of impairment.
Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses
Mortgages and contracts receivable are recorded at the lower of amortized
cost or market, including deferred loan and contract origination costs, less the
related allowance for loan and contract losses. Loan and contract origination
costs incurred in connection with providing financing for Vacation Interests
have been capitalized and are being amortized over the term of the mortgages or
contracts receivable as an adjustment to interest income on mortgages and
contracts receivable using the effective interest method.
-27-
We provide for estimated mortgages receivable cancellations and defaults
at the time the Vacation Interval sales are recorded by a charge to operations
and a credit to an allowance for loan losses. A similar loss allowance is
provided for certain interval transactions structured as long-term operating
lease arrangements by a charge to deferred lease revenue, which is included in
deferred revenue on the consolidated balance sheets, and a credit to an
allowance for loan losses. We perform an analysis of factors such as economic
conditions and industry trends, defaults, past due agings and historical
write-offs of mortgages and contracts receivable to evaluate the adequacy of the
allowance.
We charge off mortgages and contracts receivable upon default on the
first scheduled principal and interest payment (first payment defaults) or 180
days of contractual delinquency. Vacation Interests recovered on defaulted
mortgages receivable are recorded in real estate and development costs and as a
reduction of loan charge-offs at the lower of historical cost or fair market
value of Vacation Interests at the respective property. All collection and
foreclosure costs are expensed as incurred.
Real Estate and Development Costs
Real estate and development costs are valued at the lower of cost or net
realizable value. Development costs include both hard and soft construction
costs, and together with real estate costs, are allocated to Vacation Interests.
Interest, taxes and other carrying costs incurred during the construction period
are capitalized and such costs incurred on completed Vacation Interval inventory
are expensed. Costs are allocated to units sold on the relative sales value
method.
Goodwill
We review goodwill, along with other long-lived assets, for impairment at
each reporting date. Impairment exists when future undiscounted cash flows are
not sufficient to recover the carrying amount of the related asset.
Valuation Allowance on Net Deferred Tax Assets
We account for income taxes in accordance with the liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in our
financial statements or tax returns. Net deferred tax assets are evaluated for
expected future realization, which is dependent on our ability to generate such
future taxable income sufficient to utilize these assets. A valuation allowance
is recorded against net deferred tax assets to the extent they are estimated to
be less than likely to be realized.
Prior Period Adjustments
Subsequent to the issuance of our annual consolidated financial
statements for the year ended December 31, 1999, we determined that, as
discussed below and under "Business -- Financial Statement Adjustments" above
and in Note 9 to our consolidated financial statements, the accounting
treatments that had been originally afforded to certain transactions were
inappropriate and that certain accounting errors had been made during 1999 and
prior years.
-28-
Accordingly, retained earnings as previously reported as of December 31, 1999
has been reduced by approximately $113.2 million, net of an income tax benefit
of $18.2 million.
The following table summarizes the components of the adjustment to
retained earnings:
Revenue recognition on leased Vacation Interests ................................. $ 47,331
Improper capitalization of costs in real estate and development costs ............ 34,049
Improper capitalization of deferred costs, goodwill and equipment ................ 18,437
Other revenue recognition errors ................................................. 8,116
Other accounting and recording errors ............................................ 23,474
-------
131,407
Income tax effect of prior period adjustments .................................... (18,226)
-------
$ 113,181
=======
Results of Operations
The following table sets forth certain operating information for the
fiscal years 2001 and 2000:
2001 2000
---- ----
As a percentage of total revenues:
Vacation Interest sales .................................... 61.0% 65.0%
Vacation Interest lease revenue ............................ 4.0 2.3
Club Sunterra membership fees .............................. 2.5 2.4
Resort rental income ....................................... 4.5 4.7
Management fees ............................................ 7.8 6.9
Interest income ............................................ 11.2 9.2
Other income ............................................... 9.0 9.5
----- -----
Total revenues ......................................... 100.0% 100.0%
As a percentage of Vacation Interest sales:
Vacation Interests cost of sales ........................... 20.6% 45.6%
Maintenance fees and subsidy expense ....................... 8.5 8.9
Provision for doubtful accounts and loan losses ............ 9.5 18.1
Advertising, sales and marketing ........................... 62.7 80.5
As a percentage of total revenues:
General and administrative ................................. 27.9% 40.7%
Loan portfolio expenses .................................... 4.1 2.9
Depreciation and amortization .............................. 6.8 9.6
Reorganization expenses .................................... 18.5 27.1
Restructuring costs ........................................ - 2.1
Impairment write-down of assets ............................ - 13.0
Impairment loss on retained interests in mortgages
receivable sold ............................................ - 10.4
Loss on abandonment of property and equipment .............. - 0.3
Total costs and operating expenses ......................... 119.1 205.6
-29-
Comparison of the year ended December 31, 2001 to the year ended December
31, 2000
We achieved total revenues of $272.4 million for the year ended December
31, 2001, compared to $288.1 million for the year ended December 31, 2000, a
decrease of 5.4%. Overall revenues for domestic operations fell 9.9% to $181.7
million for the year ending December 31, 2001 compared to $201.7 million for the
year ended December 31, 2000, while revenues from foreign operations increased
5.0% to $90.7 million for the year ended December 31, 2001.
Vacation Interest sales of $166.3 million for the year ended December 31,
2001 decreased by $20.9 million, or 11.2%, compared to sales of $187.2 million
for the year ended December 31, 2000. The decrease is attributable to domestic
operations, which saw Vacation Interest revenues decline by $22.5 million due to
the uncertainty surrounding our status as a debtor-in-possession, the impact of
the terrorists' attacks on the travel and leisure industry following September
11, 2001, implementation of revised credit and underwriting policies during 2001
(resulting in lower sales to potential higher-risk customers), less spending on
sales and marketing activities, the closing of sales centers at off-site
locations and certain resort locations and discontinued sales efforts for
properties designated for disposal. Vacation Interest sales from foreign
operations increased by $1.6 million in 2001.
Further impacting Vacation Interest sales during 2000, the Bankruptcy
Court issued an order (in November 2000) for the Company to provide certain
consumers with renewed rescission rights for timeshare transactions entered into
but not consummated fully prior to the Petition Date. As a result, $31 million
in revenue was converted to pending sales. The reconfirmation acceptance for
these transactions was substantially completed in 2001 and Vacation Interest
sales of $16.8 million were recognized in 2001 for customers that elected not to
rescind.
Vacation Interest lease revenue increased $4.4 million, or 67.3%, to
$10.9 million for the year ended December 31, 2001 from $6.5 million for the
year ended December 31, 2000. The increase is primarily attributable to
maintenance fees billed to the owners of certain Caribbean properties in 2001.
Club Sunterra membership fees earned of $6.8 million for the year ended
December 31, 2001 were $0.2 million lower than membership fees earned for the
year ended December 31, 2000 of $7.0 million, despite a 12% increase in club
membership. Certain sales incentives that directly contributed to membership fee
revenue were discontinued in 2000.
Resort rental income decreased 8.7% to $12.3 million for the year ended
December 31, 2001 from $13.5 million for the year ended December 31, 2000,
primarily as a result of the decrease in the number of Company-owned Vacation
Interests available for rental due to on-going sales of Vacation Interests and
the disposition of certain resort properties in 2000 and 2001.
Interest income, primarily from financing provided to purchasers and
lessees of Vacation Interests, increased 15.1% to $30.5 million for the year
ended December 31, 2001 from $26.5 million for the year ended December 31, 2000.
The increase largely resulted from an accretion in residual interests retained
for mortgages receivable sold.
-30-
Other income, which mainly consists of sampler vacation program revenues,
travel service revenue, resort amenity income and finance commissions, fell by
10.1% to $24.6 million for the year ended December 31, 2001 from $27.4 million
for the year ended December 31, 2000. This decrease is primarily due to the
recognition of revenue resulting from the expiration of pre-sold sampler
programs in 2000.
Vacation Interest cost of sales of $34.3 million for the year ended
December 31, 2001 decreased $51.0 million, or 59.8%, from $85.3 million for the
year ended December 31, 2000. As a percentage of Vacation Interest sales for the
years ended December 31, 2001 and 2000, Vacation Interest cost of sales was
20.6% and 45.6%, respectively. This decrease is primarily attributable to a
$39.6 million impairment write-down of real estate and development costs
recorded in 2000. No such write-downs were recorded in 2001. Excluding the
impairment write-down, Vacation Interest cost of sales was 20.6% and 24.5% of
Vacation Interest sales for the years ended December 31, 2001 and 2000,
respectively. The remaining decrease of $11.4 million relates to the decline in
Vacation Interest sales from 2000 to 2001 and a product mix that reflects the
disposition of certain non-core properties.
Maintenance fees and subsidy expense decreased 15.6%, or $2.6 million, to
$14.1 million for the year ended December 31, 2001 from $16.7 million for the
year ended December 31, 2000 and totaled 8.5% of Vacation Interest sales for the
year ended December 31, 2001 as compared to 8.9% for the year ended December 31,
2000. 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 2000 and 2001) and decreases in developer subsidies
and guarantees.
The provision for doubtful accounts and loan losses was $15.8 million for
the year ended December 31, 2001 compared to $34.0 million for the year ended
December 31, 2000. Of these amounts, $10.6 million and $24.5 million for 2001
and 2000, respectively, related to mortgages and contracts receivable. The
resulting allowances for mortgages and contracts receivable at December 31, 2001
and 2000 were $36.2 million and $37.3 million, respectively, representing
approximately 17.1% and 16.5%, respectively, of the total portfolio outstanding
at those dates. The balance of the provision for doubtful accounts of $5.2
million for 2001 and $9.4 million for 2000 represents estimated uncollectible,
amounts due from homeowner associations and other receivables.
For the year ended December 31, 2001, advertising, sales and marketing
costs were $104.3 million or 62.7% of Vacation Interest sales compared to $150.7
million or 80.5% for the year ended December 31, 2000. This represents a $46.4
million or 30.8% decrease from 2000, with domestic operations accounting for
$47.1 million of the change. This decrease was primarily a result of the
decrease in Vacation Interest sales, the closing of certain sales centers and
the elimination or revision of sales and marketing and incentive programs that
were deemed not to be cost effective.
General and administrative expenses decreased $41.1 million or 35.1% to
$76.1 million for the year ended December 31, 2001 from $117.2 million for the
year ended December 31, 2000. Included in the change was a $16.0 million
reduction in administrative payroll. As a percentage of total revenues, general
and administrative expenses improved to 27.9% for 2001
-31-
from 40.7% for 2000 and reflect our efforts to increase efficiencies as we move
toward exiting Chapter 11. The closing of sales centers and other
facilities and disposal of certain resort locations also contributed directly to
the improvement over 2000.
Loan portfolio expenses increased 31.3% to $11.0 million for the year ended
December 31, 2001 from $8.4 million for the year ended December 31, 2000,
including a $1.5 million increase in salaries. The overall increase is
attributable to efforts in maximizing collections on delinquent accounts and
recovering our Vacation Interests from defaulted loans and contracts, as well as
improving loan and contract administration.
Depreciation and amortization expense decreased 33.0%, or $9.1 million, to
$18.4 million for the year ended December 31, 2001 from $27.5 million in 2000,
primarily as a result of impairment write-downs of property and equipment and
goodwill of $37.4 million and $44.6 million, respectively, that were recorded in
2000. Additionally, no depreciation was recorded in 2001 for certain property
and equipment with a net book value of $13.6 million that were designated as
held for sale in the fourth quarter of 2000.
Reorganization expenses decreased 35.4%, or $27.6 million, to $50.4 million
for the year ended December 31, 2001 from $78.0 million for the year ended
December 31, 2000. The decrease was primarily the result of write-downs totaling
$45.3 million and $16.4 million related to asset impairments and debt issuance
costs, respectively, recorded in year 2000. The decrease was partially offset by
an increase in professional fees charged to reorganization expense which totaled
$47.8 million for the year ended December 31, 2001 compared to $14.7 million for
the year ended December 31, 2000.
We incurred restructuring costs of $6.0 million for the year ended December
31, 2000 primarily related to severance and termination benefits for 55
employees, as well as lease termination and other sales center closure costs
incurred prior to bankruptcy. No restructuring costs were recorded in fiscal
year 2001.
Impairment losses on retained interests in mortgages receivable sold
totaling $30.0 million for the year ended December 31, 2000 was primarily the
result of a contractual change, as a direct result of the bankruptcy filing,
which affords the purchaser a higher priority in the distribution of principal
and interest payments collected and an increase in the interest rate paid on
borrowings under certain off-balance sheet facilities. Additionally, we reduced
our estimates of future cash collection on loans sold based on historical
performance.
Interest expense for the year ended December 31, 2001, net of capitalized
interest of $0.4 million, was $20.5 million, compared to $42.8 million, net of
capitalized interest of $1.8 million, for the year ended December 31, 2000. The
decrease was primarily attributable to cessation of interest accruals of
unsecured subordinated debt obligations after the bankruptcy filing. Contractual
interest on these obligations of $40.4 million in 2001 and $23.5 million in 2000
was unaccrued due to the bankruptcy filing.
Other non-operating income (expenses) for the year ended December 31, 2000
is comprised of a one-time charge to write off uncollectible mortgages that were
replaced through
-32-
the conduit financing facility. The replacement of these mortgages ceased upon
the bankruptcy filing.
In 2000 we recorded a one-time charge of $18.8 million for the cumulative
effect of a change in the method of accounting for homeowners' fees and property
taxes during the developer guarantee and subsidy periods. Prior to 2000, we had
capitalized such costs during these periods as part of real estate and
development costs. After an evaluation of this policy, it was determined that a
preferable method, in accordance with industry conventions, is to charge these
costs to expense as incurred at the time a project is substantially complete and
available for occupancy.
We recorded provisions for income taxes of $2.7 million and $0.5 million
for 2001 and 2000, respectively, primarily related to our European operations.
The income tax benefits arising from the substantial operating losses for these
years have been offset by a valuation allowance taken against the resulting
deferred tax assets, the future realization of which is currently considered
less than likely.
Liquidity and Capital Resources
The consolidated financial statements have been prepared on a going concern
basis, which contemplates the continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 proceedings, such realization of assets and liquidation
of liabilities are subject to uncertainty. 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
and the Company's lack of the execution of the Exit Financing facility and a
post-emergence working capital facility, as also described in Note 3 to the
consolidated financial statements, give rise to substantial doubt about the
Company's ability to continue as a going concern. Management believes that the
Plan as confirmed on June 20, 2002 by the Bankruptcy Court provides for a
restructuring of the Company's business and its capital structure such that it
will be able to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that may be necessary if the
Company is not able to emerge from Chapter 11 and continue as a going concern.
We generate cash principally from down payments on Vacation Interest sales
and leases financed, cash sales of Vacation Interests, principal and interest
payments on mortgages and contracts receivable and collection of Club Sunterra
membership fees, resort rental income and management fees.
During the year ended December 31, 2001, net cash used in operating
activities was $25.9 million and was primarily the result of the net loss of
$71.5 million less non-cash expenses of $18.4 million for depreciation and
amortization and the provision for doubtful accounts of $15.8 million, and net
collections of mortgages and contracts receivable and other receivables of $11.8
million.
During the year ended December 31, 2001, net cash provided by investing
activities was $34.1 million. Cash provided by investing activities was
principally the result of proceeds from
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the sale of assets and investments of $44.8 million, the largest of which was
the sale of Savoy on South Beach, a resort property in Florida, resulting in net
proceeds of $17.3 million, subject to a mechanic's lien for $780,000. The
Company has agreed to pay $532,000 to settle the dispute of the mechanic's lien
claimant. Cash used in investing activities of $12.5 million included property
and equipment acquisitions of $9.3 million in Europe and $1.2 million in North
America.
During the year ended December 31, 2001, net cash provided by financing
activities was $4.3 million. Cash provided by financing activities was
principally the result of our borrowings under our debtor-in-possession
financing agreement (the DIP Facility) of $78.7 million, net of debt issuance
costs, and proceeds from notes payable of $3.6 million. Cash used in financing
activities was principally for the payoff of an initial debtor-in-possession
financing agreement of $56.7 million, $16.1 million for payments on
mortgage-backed securities and $5.3 million for payments on notes payable.
We currently anticipate spending $7.7 million for real estate and
development costs at existing resort locations during 2002. We plan to fund
these expenditures with cash generated from operations and borrowings under the
DIP Facility and the anticipated 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 December 31, 2001 was $36.2 million, or
17.1% of the total portfolio of mortgages and contracts receivable outstanding
at that date. Management believes the allowance is adequate. However, if the
amount of the mortgages and contracts receivable that are 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: our ability to successfully complete the Exit
Financing transaction, demand for our product, our ability to securitize our
mortgages receivable, our ability to obtain borrowings under our current and
anticipated borrowing 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.
Completed units at various resort properties are acquired 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. Prior to the
bankruptcy filing, our principal method of funding our cash requirements was
borrowing against or selling the mortgages receivable originating from the sale
of Vacation Interests. Historically, we were able to securitize our mortgages
receivable at terms favorable to us and anticipate that in the future we will be
able to continue to do so. If we are unable to borrow against or to sell our
mortgages receivable in the future, particularly if we suffer any significant
decline in the credit quality of our mortgages receivable or if the market for
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our mortgages receivable declines, 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 2001. Further, trends in our
portfolio during 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 December 31, 2001, there were approximately 30,500 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
Overview
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. Prior to the bankruptcy filing, we financed our
business principally from the sale of mortgages and contracts receivable and
loans under various financing agreements. Mortgages receivable were sold to our
conduit facility and through securitization transactions. See further discussion
of the conduit facility and securitization transactions below.
The Financial Accounting Standards Board (FASB) and other accounting
regulatory bodies are currently discussing potential new accounting standards
for off-balance sheet arrangements. Although it is considered likely that these
new standards will affect us, management is unable to determine the potential
impact on our financial position and results of operations given the preliminary
nature of the discussions.
(i) Off-balance sheet financing arrangements
We have used certain off-balance sheet financing arrangements to provide
liquidity and improve cash flows for the Company. We do not expect the Chapter
11 Cases to significantly impact our off-balance sheet financing arrangements,
although, as described above, there has been a contractual change in the
priority of distribution of principal and interest payments collected which
impacted the value of our retained interests in mortgages receivable sold.
In order to obtain liquidity from our mortgages receivable, we sold certain
mortgages receivable from 1998 to 2000 through entities that are intended to
meet the accounting criteria for Qualifying Special Purpose Entities (Qualifying
Entities). Among other criteria, a qualifying entity's activities must be
restricted to passive investment in financial assets and issuance of beneficial
interests in those assets.
The Qualifying Entities raised cash by issuing beneficial interests in the
form of rights to cash flows from the mortgage receivable assets as collateral
for borrowings under a line of credit
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or under promissory notes issued to third-party investors. We provide servicing
for the transferred assets and collect a fee for those services, as well as
retaining 100% interest in the excess spread over the borrowing rate. Sales of
mortgages receivable to the Qualifying Entities are made without recourse to us
as to collectibility. All of the Qualifying Entities' assets serve as collateral
for the obligations. We are not required to provide any guarantees or liquidity
support for the Qualifying Entities. Certain of these Qualifying Entities are
not consolidated in our financial statements, nor are the transferred mortgages
receivable and the obligations of the Qualifying Entities reflected on our
consolidated balance sheets.
Conduit Facility - We established a Qualifying Entity that is the
obligor on a $100 million Mortgages Receivable Conduit Facility. We sold
undivided interests in mortgages receivable to the Qualifying Entity at 95% of
face value without recourse to us as to collectibility. The Qualifying Entity
financed those purchases through advances on the Conduit Facility collateralized
by an undivided interest in the transferred mortgages receivable. Certain of the
loans sold into the Conduit Facility were subsequently repurchased by the
Company and sold into securitizations described below. Although there is no
contractual requirement in the Conduit Facility agreement, as certain mortgages
receivable defaults occurred, we transferred in 2000 a total of $3.5 million in
new mortgages receivable without consideration. The Conduit Facility expired on
December 17, 2001.
Securitization Transactions - We established certain Qualifying
Entities to issue fixed rate notes payable collateralized by an undivided
interest in transferred mortgages receivable. We retain 100% interest in the
future cash flows generated by the sold mortgages receivable portfolios in
excess of the cash required by the Qualifying Entities to fully repay principal
and contractual interest on their obligations. Such excess cash is principally
generated by the excess of the weighted average contractual interest received on
the mortgage loans over the interest rates on the Qualifying Entities' notes.
The notes contain a "clean up" call provision that allows the notes to be called
and mortgages receivable to be transferred back to us when the remaining
principal value of the notes reaches 10% of the original principal value.
At the time of the closings of the transactions described above, we
received "true sale" legal opinions that were relied upon in connection with
determinations of the qualified status of these special purpose entities.
Various accounting principles generally accepted in the United States specify
the conditions that we must observe in not consolidating qualifying special
purpose entities. Accounting for special purpose entities is under review by the
FASB, and the off-balance sheet status of the special purpose entities may
change as a result of those reviews.
(ii) DIP Facility; Finova Transaction
On May 31, 2000 the Bankruptcy Court provided interim approval of a
debtor-in-possession financing agreement that provided us with a $25 million
revolving credit facility (the Original DIP Facility). On August 3, 2000 the
Bankruptcy Court entered a final order approving the Original DIP Facility and
increasing the availability under the facility to $45 million on August 3, 2000.
On April 3, 2001, the Bankruptcy Court approved a replacement
debtor-in-possession financing agreement (the Replacement DIP Facility) with
Greenwich Capital Markets, Inc. The Replacement DIP Facility provides financing
of up to $160 million to the Company in the form of term loans and a revolving
credit facility. The Original DIP Facility
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was retired with proceeds of a term loan under the Replacement DIP Facility.
Interest under the Replacement DIP Facility is payable monthly at the one-month
LIBOR rate plus 3.5% (5.4% at December 31, 2001), and the unused portion of the
revolving credit facility is subject to a commitment fee of 0.5%. The
Replacement DIP Facility matures on July 31, 2002. The loans are subject to
mandatory prepayment under various circumstances, including prepayment on a
monthly basis with proceeds of certain sales of Vacation Interests (in the case
of term loans), prepayment with certain monthly cash balances (in the case of
revolving loans) and prepayment with proceeds of certain sales or dispositions
by the Debtors of other assets (in the case of both term loans and revolving
loans). Borrowings are collateralized by all unencumbered assets of the Debtors
and are afforded an administrative priority under the Bankruptcy Code. There
were borrowings of $68.3 million outstanding under the Replacement DIP Facility
at December 31, 2001.
In January 2002, we entered into an amendment to the Replacement DIP
Facility. This amendment increased, subject to certain conditions, the amounts
that may be borrowed by the Debtors thereunder, changed the maturity date of the
loans thereunder from June 30, 2002 to April 30, 2002 (subject to the ability of
the Debtors to extend such date to June 30, 2002 upon meeting certain
requirements), changed certain of the covenants of the Debtors, added additional
covenants and provided for the payment of certain additional fees to the lender
(including fees payable in connection with the payment of the Finova Loans
discussed below).
In January 2002, pursuant to order of the Bankruptcy Court, we also
entered into a Payoff Agreement and Mutual Release (the "Finova Agreement") with
Finova Capital Corporation ("Finova"). The Finova Agreement provided for the
payment by us and certain of our affiliates ("Sunterra Parties") of various
loans from and financing facilities ("Finova Loans") with Finova or its
affiliates and the return by Finova of collateral securing the Finova Loans.
Pursuant to the Finova Agreement, on January 28, 2002, the Sunterra Parties paid
Finova, 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). The payment to Finova represented a discount of approximately
$27 million from the principal amount of the Finova Loans, and we recorded that
amount in 2002 as an extraordinary gain on settlement of debts. Pursuant to the
Finova Agreement, each of the Sunterra Parties and Finova 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 Sunterra Parties obtained a portion of the
funds to pay the Finova Loans from term loans under the Replacement DIP Facility
and paid a fee of $13.4 million to the lender under that facility.
In June 2002, we entered into an additional amendment to the
Replacement DIP Facility. Pursuant to this amendment, the maturity date of the
loans thereunder was extended to July 31, 2002 and provision was made for the
payment of certain additional fees to the lender.
(iii) Debt Settlement
The Plan of Reorganization provides for treatment of seventeen classes
of different claims. Among the various agreements reached by the Debtors as part
of the Plan were agreements dated June 19, 2002 with two senior secured lenders,
the Bank of America Bank Group (comprised of Bank of America, Societe Generale
and Oaktree Capital Management) and
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Oaktree Capital Management, separately representing approximately $37 million
and $11 million in secured claims, respectively. Oaktree Capital Management
holds a 50% interest in the Bank of America Bank Group claim. The settlement
with Oaktree Capital Management contemplates a payoff and mutual release of all
claims held by Oaktree Capital Management, totaling approximately $29 million,
for $22.5 million. The settlement reached with the remaining Bank of America
Bank Group contemplates issuance of a new note for $11.5 million. The terms of
this note include, among other things, a secured interest in the cash flows of
selected mortgages receivable, a five-year amortization period and an interest
rate of prime plus 2%.
(iv) Derivatives
We have utilized derivative financial instruments from time to time,
which have historically included interest rate cap agreements, to manage
well-defined interest rate exposure. Derivative financial instruments are not
used for trading or speculative purposes. Counterparties to our derivative
financial instruments are generally major financial institutions. We manage the
risk of counterparty default on our derivative financial instruments through the
use of credit standards, counterparty diversification and monitoring of
counterparty financial conditions. We have not experienced any losses due to
counterparty default.
At December 31, 2001 and 2000, no agreements were in effect and no
amounts were due by or owed to us under these agreements as a result of the
bankruptcy filing.
Disclosures about Contractual Obligations and Commercial Commitments
Reference is made to the discussion herein under Item 1, "Business --
The Chapter 11 Cases -- Status of Bankruptcy Proceedings and Plan of
Reorganization." Pending the effectiveness of the Plan, the Company has
substantial contractual commitments and commercial commitments as of December
31, 2001 that are subject to compromise or rejection, such that additional
summary disclosure of such obligations and commitments would not be meaningful.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 8 to the
consolidated financial statements included in this report.
Recent Events
In March 2002, we announced a plan for an organizational restructuring
and relocation of our North American operations and our global corporate
management team to Las Vegas, Nevada before the end of 2002. As a result of the
restructuring, we expect to incur approximately $1.0 million in employee
severance and other costs.
In March 2002, we sold our operations in Japan to the local Japanese
management group for $0.3 million in cash and assumption of certain liabilities,
resulting in no material gains or losses. These assets were included in assets
held for sale at December 31, 2001.
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Lease agreements relating to a 1999 sale-leaseback transaction,
payments on which were suspended as a result of the bankruptcy proceedings, were
amended subsequent to December 31, 2001. As a result of the amendments, the
minimum lease terms have been extended from November 2002 to April 2004, and our
payment obligations have been reduced by $1.2 million.
As discussed herein under "Business - Status of Bankruptcy Proceedings
and Plan of Reorganization," the Bankruptcy Court confirmed our Plan of
Reorganization on June 20, 2002, and we expect to emerge shortly from the
Chapter 11 Cases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
We are exposed to on-balance sheet credit risk related to our mortgages
and contracts receivable. We offer financing to the buyers and lessees of
Vacation Intervals at our resorts. We bear the risk of defaults on promissory
notes delivered to us by buyers of Vacation Intervals. If a buyer of a Vacation
Interval defaults, we generally must foreclose on the Vacation Interval and
attempt to resell it; the associated marketing, selling and administrative costs
from the original sale are not recovered and such costs must be incurred again
to resell the Vacation Interval. Although in many cases we may have recourse
against a Vacation Interval buyer for the unpaid price, certain states have laws
that limit our ability to recover personal judgments against customers who have
defaulted on their loans. Accordingly, we have generally not pursued this
remedy. If a lessee of a Vacation Interval defaults, the lessee forfeits its
contract rights previously held to use the Vacation Interval, and we are able to
re-lease the Vacation Interval without further recovery efforts.
Availability of Funding Sources
We have historically funded substantially all of the notes receivable,
timeshare inventories and land inventories which we originate or purchase with
borrowings through our financing facilities, sales of notes receivable,
internally generated funds and proceeds from public debt and equity offerings.
Borrowings are in turn repaid with the proceeds received by us from repayments
of such notes receivable. To the extent that we are not successful in
maintaining or replacing existing financings, we would have to curtail our
operations or sell assets, thereby resulting in a material adverse effect on our
results of operations, cash flows and financial condition.
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Geographic Concentration
Our owned and serviced loan portfolio borrowers are geographically
diversified within the United States and internationally. At December 31, 2001,
borrowers residing in the United States accounted for approximately 93.5% of
serviced loans. With the exception of Arizona and California, which represented
17.2% and 16.9%, respectively, no state or foreign country concentration
accounted for more than approximately 15.0% of the serviced portfolios. The
credit risk inherent in such concentrations is dependent upon regional and
general economic stability, which affects property values and the financial
well-being of the borrowers.
Foreign Currency Risk
Our total revenues denominated in a currency other than U.S. dollars
for 2001, primarily revenues derived from the United Kingdom and Japan, were
approximately 33% of total revenues. Our net assets maintained in a functional
currency other than U.S. dollars at December 31, 2001, which were primarily
assets located in Western Europe, were approximately 27% of total net assets.
The effect of changes in foreign currency exchange rates has not historically
been significant to our operations or net assets.
Interest Rate Risks
As of December 31, 2001, we had floating interest rate debt of
approximately $251 million, including approximately $68 million outstanding
under the Replacement DIP Facility and approximately $155 million subject to
compromise under the bankruptcy proceedings. The floating interest rates are
based upon the prevailing LIBOR or prime rates. For the Replacement DIP Facility
and floating rate debt not subject to compromise, interest rate changes can
impact earnings and operating cash flows. For floating rate debt subject to
compromise, interest rate changes can impact current earnings; however,
accumulated interest combined with the outstanding principal balance is limited
to the fair market value of the underlying collateral.
Of the approximately $483 million in fixed rate debt outstanding at
December 31, 2001, $478 million represents unsecured subordinated notes for
which no interest has been accrued subsequent to the bankruptcy filing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant are listed in
the index contained in Item 14 herein and are included in this report beginning
on page F-1. Selected quarterly financial data is not included in this report
because the Company does not presently have the data necessary to provide such
information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item 9 is incorporated by reference to
the information provided in the registrant's Form 8-K/A (date of event: March
19, 2001).
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NOTE: The information in this Item 10 relates to directors of Sunterra as
of March 31, 2002. Pursuant to the Plan of Reorganization, as of the Plan
Effective Date, the Board of Directors will consist of the Chief Executive
Officer of the Company and six other persons selected by creditors in accordance
with the provisions of the Plan.
The table below sets forth information with respect to directors and
executive officers as of March 31, 2002.
Name Position
- ---- --------
Nicholas J. Benson President and Chief Executive Officer
Gregory F. Rayburn Senior Vice President and Chief Restructuring Officer
Andrew Gennuso Senior Vice President and Chief Operating Officer
Lawrence E. Young Vice President and Chief Financial Officer
Ross J. Altman Senior Vice President, General Counsel and Secretary
Ann Cohen Vice President, Corporate Controller
David C. Johnston Vice President, Corporate Treasurer
Jack Myers Vice President of Human Resources
Thomas Skraby Vice President of Finance and Operations
James Weissenborn Vice President, Sunterra Financial Services
Adam M. Aron Director
James G. Brocksmith Director
Sanford R. Climan Director
J. Taylor Crandall Director
Joshua S. Friedman Director
Andrew J. Gessow Director
Richard Harrington Director
Osamu Kaneko Director
Steven C. Kenninger Director
W. Leo Kiely, III Director
Nicholas J. Benson. Mr. Benson, who is 40, has served as Sunterra's
President and Chief Executive Officer since November 2001. Mr. Benson was the
Chief Executive Officer of Sunterra Europe from January 2000 until assuming the
position as President and CEO of
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Sunterra. Mr. Benson served as the Chief Operating Officer of Sunterra Europe
from June 1997 until his promotion to Chief Executive Officer of Sunterra
Europe. Prior to joining the Company Mr. Benson was a solicitor with the London
law firm of Rowe & Maw, where he specialized in aviation and leisure industry
law. Prior to joining Rowe & Maw, Mr. Benson served as a British Army officer
for ten years.
Gregory F. Rayburn. Mr. Rayburn, who is 43, acted as President and Chief
Executive Officer of Sunterra from October 2000 until November 2001, when he
became Senior Vice President and Chief Restructuring Officer. Mr. Rayburn is a
principal of JA&A. Prior to joining JA&A, Mr. Rayburn was the President and
co-founder of the Capstone Group, a private investment partnership managing the
assets of partners and outside investors. Mr. Rayburn also served as a partner
in the Corporate Recovery Services Group at Arthur Andersen LLP.
Andrew Gennuso. Mr. Gennuso, who is 47, has been the Senior Vice President
and Chief Operating Officer of Sunterra since May 2001. Previously, Mr. Gennuso
served as the Regional Vice President of Sales and Marketing for the
Western/Pacific Region. Prior to joining the Company, Mr. Gennuso was Vice
President of Sales and Marketing for Hilton Grand Vacation Club in Las Vegas,
Nevada. Mr. Gennuso was also the owner and President of Direct Marketing Group,
an independent sales and marketing company that provided turnkey marketing sales
support for developers in California and Nevada.
Lawrence E. Young. Mr. Young, who is 41, has been the Vice President and
Chief Financial Officer of Sunterra since October 2000. Mr. Young is a Senior
Associate at JA&A. Prior to joining JA&A, Mr. Young served as a principal with
Carpediem Capital, an investment fund mainly focused on distressed companies.
Mr. Young was also a senior manager at Deloitte & Touche LLP, where he
specialized in turnarounds of troubled companies.
Ross J. Altman. Mr. Altman, who is 46, has been Senior Vice President,
General Counsel and Secretary of Sunterra since July 2001. Prior to joining the
Company, Mr. Altman served as Senior Vice President, General Counsel and
Secretary of Beloit Corporation, a global equipment manufacturer, and EPC, a
contractor of pulp and paper plants. In June of 1999 Beloit Corporation filed
for protection under Chapter 11 of the Bankruptcy Code in United States
Bankruptcy Court in Delaware. Mr. Altman was also a partner in the Chicago
office of the law firm of Rudnick & Wolfe (now known as Piper Rudnick), where he
chaired the firm's construction law practice group.
Ann Cohen. Ms. Cohen, who is 41, served as Vice President, Corporate
Controller of Sunterra since October 2000. Ms. Cohen served as Vice President,
Accounting and Regional Controller-East prior to her appointment as Vice
President, Corporate Controller. Prior to joining the Company, Ms. Cohen served
as Controller for Trammel Crow Residential Services. Ms. Cohen also served as
Corporate Tax Manager for Kislak National Bank and as an auditor for Coopers &
Lybrand. Ms. Cohen resigned as an officer of Sunterra as of May 15, 2002.
David C. Johnston. Mr. Johnston, who is 28, has been the Vice President,
Corporate Treasurer, of the Company since October 2000. Mr. Johnston is an
associate at JA&A. Prior to joining JA&A, Mr. Johnston was in the audit and tax
practice at Plante & Morgan, L.L.P. in Detroit, Michigan, where he consulted on
clients financial matters, including cost reduction,
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profit enhancement, tax beneficial strategies and corporate finance. Mr.
Johnston is a certified public accountant.
Jack Myers. Mr. Myers, who is 38, has been Vice President of Human
Resources of Sunterra since September 2000. Prior to joining the Company, Mr.
Myers was the Corporate Director of Human Resources at Starwood Hotels and
Resorts. Mr. Myers also held the position of Regional Director of Human
Resources for Starwood Hotels and Resorts. Mr. Myers resigned on March 14, 2002
effective June 30, 2002.
Thomas Skraby. Mr. Skraby, who is 41, has been Vice President of Finance
and Operations since October 2001. Prior to that, he served as Vice President
and Regional General Manager of Sunterra. Mr. Skraby served as Regional
Controller for Western and Hawaiian Operations prior to his appointment as Vice
President and Regional General Manager. Prior to joining the Company, Mr. Skraby
served as Chief Financial Officer for Dame Construction Company, Inc. and as
Corporate Controller and Treasurer for Jonathan Homes/American Heritage Homes.
James Weissenborn. Mr. Weissenborn, who is 45, has been Vice President of
Sunterra Financial Services, Inc. since December 2000. Mr. Weissenborn is
President of Mackinac Partners. Prior to founding Mackinac Partners, Mr.
Weissenborn worked for Pulte Corporation, where he led international, active
adult community, manufacturer housing and finance company start-ups. Mr.
Weissenborn also directed Pulte's merger and acquisition process and served as
the executive Vice President and Chief Financial Officer at First Heights Bank,
a wholly owned subsidiary of Pulte.
Adam M. Aron. Mr. Aron, who is 47, has served as director since October
1997 and serves on the Audit Committee of the Board. Mr. Aron has served as
Chairman of the Board and Chief Executive Officer of Vail Resorts, Inc. since
July 1996. Prior to joining Vail Resorts, Mr. Aron served as President and Chief
Executive Officer of Norwegian Cruise Line Ltd. from July 1993 to July 1996; as
Senior Vice President of Marketing for United Airlines from November 1990 to
July 1993 and as Senior Vice President of Marketing for Hyatt Hotels Corporation
from 1987 to 1990.
James G. Brocksmith. Mr. Brocksmith, who is 61, was elected to the Board of
Directors on January 28, 2000 and serves on the Audit Committee of the Board.
Since January 1997, Mr. Brocksmith has been a business consultant whose clients
have included BestBuy Company, The Ohio Company and Vistana, Inc. He previously
served as a partner of KPMG from 1971 to January 1997. From 1990 to 1996, he
served as Deputy Chairman of the Board and Chief Operating Officer of KPMG. Mr.
Brocksmith is a member of the Board of Directors of AAR Corp., Nationwide
Financial Services, Inc. and Sempra Energy.
Sanford R. Climan. Mr. Climan, who is 46, has served as director since
August 1996. Mr. Climan has been Managing Director of Entertainment Media
Ventures, a Los Angeles based venture capital fund focused on investment in the
areas of technology, media and the Internet, since March 1999. From June 1997
through February 1999 and from June 1986 to September 1995, Mr. Climan was a
member of the senior management team at Creative Artists Agency ("CAA"), a
leading talent and literary representation firm, working with both talent and
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corporate clients. From October 1995 through May 1997, Mr. Climan was Executive
Vice President and President of Worldwide Business Development for Universal
Studios, Inc., where he oversaw corporate international strategy and the
following Universal Studios operating units -- Consumer Products, Home Video,
Pay Television, New Media, Spencer Gifts and Strategic Marketing. Prior to
joining CAA in 1986, Mr. Climan held executive positions at various
entertainment companies, working in general management capacities as well as
overseeing areas of motion picture and television production and distribution.
Mr. Climan is a director of Equity Marketing, Inc.
J. Taylor Crandall. Mr. Crandall, who is 48, has served as a director since
October 1997 and as Interim Chairman of the Board since February 25, 2000. Mr.
Crandall also served on the Audit Committee and as Chairman of the Executive
Committee of the Board of Directors. Mr. Crandall has served as Vice President
and Chief Financial Officer of Keystone, Inc., the principal investment vehicle
of Robert M. Bass of Fort Worth, Texas, since October 1996 and as its Chief
Operating Officer since August 1998. He has also served as president, director
and sole stockholder of Acadia MGP, Inc. (the managing general partner of Acadia
Investment Partners, L.P., which is the sole general partner of Acadia Partners,
L.P., an investment partnership) since 1992. Mr. Crandall also serves as a
director of American Skiing Company, Broadwing, Inc., Meristar Hospitality,
Inc., Meristar Hotels & Resorts, Inc., US Oncology, Inc. and Washington Mutual
Inc.
Joshua S. Friedman. Mr. Friedman, who is 46, has served as a director since
August 1996 and serves on the Audit Committee of the Board. Mr. Friedman is a
founder of Canyon Capital Advisors LLC ("Canyon"), a private merchant banking
firm and an affiliate of Canpartners Incorporated, and has been a Managing
Partner of Canyon since its inception in 1990. Mr. Friedman also serves as a
director of several privately held companies and charitable organizations.
Andrew J. Gessow. Mr. Gessow, who is 45, has served as a director since May
1996 and served as Co-Chairman of the Board from September 1998 to February
2000, previously serving as Chief Executive Officer from February 1998 to
September 1998, as Co-Chief Executive Officer from July 1997 to February 1998
and as President from June 1996 to February 1998. Mr. Gessow is a member of the
Executive Committee of the Board of Directors. Mr. Gessow founded Argosy Group
Inc., a real estate acquisition and development company and one of the Company's
predecessor entities, in 1990 and served as its President from 1990 through
August 1996. Prior thereto, Mr. Gessow served as a partner with Trammell Crow
Company.
Richard Harrington. Mr. Harrington, who is 44, has served as a director
since November 1999. Mr. Harrington was Chief Executive Officer and co-owner of
LSI, which was acquired by Sunterra in August 1997. Mr. Harrington also
co-founded Harvington Properties Limited, a leading developer of commercial and
residential property in the United Kingdom, and London Spanish plc, a real
estate business which develops properties on the Costa del Sol, Spain.
Osamu Kaneko. Mr. Kaneko, who is 54, has served as a director since May
1996. He served as Chairman of the Board from June 1996 to September 1998, as
Chief Executive Officer from June 1996 to July 1997 and as Co-Chief Executive
Officer from July 1997 to February 1998. Mr. Kaneko also served as Chairman of
KK Sunterra Japan, a former subsidiary of the
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Company that owned and operated the Company's Japanese resort facilities. From
1974 to 1985, Mr. Kaneko was the Executive Vice President of Hasegawa Komuten
(USA) Inc., the American subsidiary of Hasegawa Komuten Ltd., a Japanese real
estate development company. In this capacity, Mr. Kaneko was responsible for the
development of income producing properties in Hawaii, including resort
condominiums and hotels. In 1985, Mr. Kaneko co-founded KOAR Group, Inc. (and
its predecessors), a real estate acquisition and development company, with
Steven C. Kenninger and, until December 1999, served as its Chief Executive
Officer.
Steven C. Kenninger. Mr. Kenninger, who is 49, has served as a director
since May 1996 and served as Co-Chairman of the Board from September 1998 to
February 2000. He served as President from February 1998 to September 1998 and
as Chief Operating Officer of the Company from June 1996 to February 1998. Mr.
Kenninger co-founded KOAR Group, Inc. (and its predecessors), a real estate
acquisition and development company, with Osamu Kaneko in 1985 and most recently
served as its President. Mr. Kenninger was a practicing attorney in Los Angeles,
California at the law firms of Paul, Hastings, Janofsky & Walker from 1977 to
1981 and Riordan & McKinzie from 1981 to 1985, where he was a partner.
On May 14, 1998 KOAR-Tahoe Partners, L.P. filed a petition for Chapter 11
bankruptcy protection. The general partner and 30% owner of KOAR-Tahoe Partners,
L.P. is KOAR-Tahoe Investment Partnership, L.P., in which Mr. Kaneko is a 39.54%
limited partner, Mr. Kenninger is a 9.54% limited partner and Kaneko KOAR-Tahoe,
Inc. (of which Mr. Kaneko is the sole shareholder) is a 2.86% general partner.
KOAR-Tahoe Partners, L.P. filed a plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code on December 8, 1998. With the concurrence and consensual
support of all creditors and the debtor, the Court approved in the fourth
quarter of 2000 a plan of reorganization for KOAR-Tahoe Partners, L.P., which
became effective, was implemented and resulted in a sale in December 2000 of the
underlying hotel to a third party investor and the payment in full of unsecured
creditors of KOAR-Tahoe Partners, L.P. The Company has never had an interest in
KOAR-Tahoe Partners, L.P.
W. Leo Kiely, III. Mr. Kiely, who is 55, has served as a director since
August 1996. Mr. Kiely has been President and Chief Operating Officer of Coors
Brewing Company since 1993. From 1982 through 1993, Mr. Kiely held various
executive positions with Frito-Lay Inc., a subsidiary of PepsiCo, most recently
serving as President of Frito-Lay's Central Division. Prior to joining
Frito-Lay, Mr. Kiely was President of Ventura Coastal Corporation, a division of
Seven-Up Corporation, from 1979 though 1982. Mr. Kiely is a director of Coors
Brewing Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of the copies of Forms 3, 4 and 5 received by
it, or written representations from certain reporting persons that no other
reports were required for such persons, the Company believes that all filing
requirements under Section 16(a) of the Exchange Act applicable to its officers,
directors and ten-percent stockholders were complied with during the fiscal year
ended December 31, 2001.
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ITEM 11. EXECUTIVE COMPENSATION
NOTE: Payment of amounts that may be payable, or implementation of
arrangements or rights that may be in effect, as described in Items 11, 12 and
13 of this Part III may be subject to or affected by the Plan of Reorganization.
In particular, pursuant to the Plan, no payments will be made on account of
common stock or options or other rights to acquire common stock, and the
Company's stock option plan adopted prior to the Petition Date will be
terminated.
Executive Compensation
The Summary Compensation Table below sets forth the compensation paid
or accrued by the Company in 1999, 2000 and 2001 for (i) the Company's Chief
Executive Officer in 2001; (ii) the other four most highly compensated executive
officers whose salary and bonus exceeded $100,000 in 2001 and who were serving
as executive officers of the Company as of December 31, 2001; and (iii) two
other executive officers for whom disclosure would have been required under
clause (ii) above but for the fact that they were no longer serving as executive
officers of the Company at the end of 2001 (the "Named Executive Officers").
Summary Compensation Table
Long-term
Annual Compensation Compensation
---------------------------------------------------------- ----------------
Securities
Name and Fiscal Other Annual Underlying
Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ------------------------ ---------- -------------- ------------ ------------------ ----------------
Nicholas J. Benson 2001 308,000 252,000
President and Chief 2000 266,000 266,000 186,200(2) -
Executive Officer (1) 1999 238,000 182,000
Andrew Gennuso 2001 215,385 157,208
Senior Vice President and 2000 90,962 53,000 264,692(3) -
Chief Operating Officer 1999 211,731 158,125
Ross J. Altman 2001 200,769 (4) -
Senior Vice President,
General Counsel and
Secretary
Thomas Skraby 2001 211,731 44,500 170,000(2) -
Vice President of Finance 2000 164,250 51,500
and Operations 1999 142,962 30,000
Ann Cohen 2001 197,922 170,000(2) -
Vice President, Corporate 2000 164,250 71,500
Controller 1999 142,962 35,000
Genevieve Giannoni 2001 253,846 317,308(5) -
Senior Vice President, 2000 296,865 22,500
Owner Services 1999 254,808 112,500
Charles Frey 2001 46,154 404,957(6) -
President, Sunterra 2000 297,539
1999 280,000 75,000
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(1) Mr. Benson became President and Chief Executive Officer of Sunterra as
of November 19, 2001. Previously, he was Chief Executive Officer of the
Company's United Kingdom subsidiary.
(2) Retention/loyalty bonus.
(3) Represents $23,077 vacation payout and $34,615 severance payment paid
upon Mr. Gennuso's May 19, 2000 termination of employment. Mr. Gennuso
was rehired by the Company on May 21, 2001.
(4) Mr. Altman was hired by the Company on May 1, 2001.
(5) Represents $21,154 vacation payout, $21,154 severance and $275,000
retention/loyalty bonus paid upon Ms. Giannoni's December 1, 2001
termination of employment.
(6) Represents $253,846 severance and $151,111 retention/loyalty bonus paid
upon Mr. Frey's February 23, 2001 termination of employment.
The Company retained JA&A to provide restructuring services pursuant to
a retention letter dated October 6, 2000, which was subsequently approved by the
Bankruptcy Court (the "Retention Agreement"). In connection with the Company's
retention of JA&A, the following JA&A employees are serving in certain senior
management positions although they are not employees of the Company: Gregory F.
Rayburn as Senior Vice President and Chief Restructuring Officer, Lawrence E.
Young as Vice President and Chief Financial Officer and David Johnston as Vice
President, Corporate Treasurer. Pursuant to the Retention Agreement, the Company
makes payments to JA&A based in part on hourly charges for the services of
JA&A's employees. JA&A will also receive certain incentive fees pursuant the
Retention Agreement. The Company does not expect these employees of JA&A to
continue their services to the Company for any extended period of time following
the Plan Effective Date.
Option Grants During 2001 Fiscal Year
No options were granted to directors, officers, employees or
consultants of the Company during the year ended December 31, 2001.
December 31, 2001 Year-End Option Values
The following table contains information concerning the stock options
issued under the Company's Amended and Restated 1996 Equity Participation Plan
and held by the Named Executive Officers as of December 31, 2001. As set forth
above, all such options will terminate as of the Plan Effective Date, and the
exercise price of all such options exceeds the value of the underlying common
stock, based on the price of such common stock on May 31, 2002 as reported on
the OTC Bulletin Board.
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Number of Securities
Underlying Unexercised
Options At Fiscal Year-End (#)
----------------------------------
Name and Principal Position Exercisable Unexercisable
- -------------------------------------------- ---------------- ----------------
Nicholas J. Benson 46,500 21,000
President and Chief Executive Officer
Andrew Gennuso 31,750 23,250
Senior Vice President and
Chief Operating Officer
Ross J. Altman 0 0
Senior Vice President, General Counsel and
Secretary
Thomas Skraby 19,400 5,600
Vice President of Finance and Operations
Ann Cohen 19,300 5,700
Vice President, Corporate Controller
Genevieve Giannoni 143,970 20,000
Senior Vice President, Owner Services
Charles Frey 0 0
President, Sunterra
Employment Agreements
The Company has entered into an Amended and Restated Employment
Agreement dated November 19, 2001 with Nicholas J. Benson, providing for Mr.
Benson to serve as President and Chief Executive Officer of the Company. Mr.
Benson's employment agreement, which was approved by the Bankruptcy Court,
provides for an initial term of three years and may be extended for consecutive
periods of one year, provided the parties agree in writing to such extension not
less than ninety days prior to the end of the initial term or anniversary date.
Under the agreement, Mr. Benson is to receive an annual salary of $450,000 and
an annual cash bonus beginning in 2002 in an amount between $150,000 and
$550,000, based upon the achievement of certain quantitative performance goals.
Effective as of the Plan Effective Date, Mr. Benson will receive options to
purchase 512,821 or 2.27% of the fully diluted common stock as of such date.
These options will have an exercise price equal to $15.25 per share and will be
subject to vesting, commencing on December 17, 2001, over four years (subject to
Mr. Benson's continued employment). Mr. Benson's options generally will not
expire until the date that is nine years from the Plan Effective Date, provided
that if Mr. Benson is terminated by the Company without "cause," or if Mr.
Benson terminates his employment for "good reason" (each as defined in the
employment agreement), any unvested options will expire as of the date of such
termination, and any unexercised vested options shall expire on the earlier of
the expiration date of the option or the date that is twelve months after the
date of such termination. If Mr. Benson's employment is terminated due to death
or disability, any unvested options will expire as of the date of such death or
disability, and any unexercised vested options will expire on the earlier of the
expiration date of the option or the date that is twelve months after the date
of such termination. If Mr. Benson voluntarily terminates his employment other
than for good reason, any unvested options
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and one-half of the unexercised vested options will expire as of the date of
such termination, and the remaining one-half of Mr. Benson's options that were
vested and unexercised as of the date of such termination will expire on the
earlier of the expiration date of the option or the date that is three months
after the date of such termination. Notwithstanding the foregoing, the options
shall become fully vested upon the occurrence of a "change in control" of the
Company (as defined in the employment agreement). Mr. Benson is eligible to
receive a one-time performance bonus based on the aggregate recovery and
distribution to the Company's general unsecured creditors in an amount between
$129,360 and $388,080, based on a recovery schedule. Mr. Benson is also eligible
to receive a one-time bonus in an amount between $86,240 and $258,720 based on
the timing of the Company's filing of the Plan of Reorganization. The Company
provides Mr. Benson with (i) health, insurance, retirement and other benefits
plans and programs, (ii) living expenses up to $4,000 per month incurred by Mr.
Benson for temporary housing, (iii) two automobiles for use with respect to his
employment and (iv) a special bonus of at least $500,000 to be paid in the event
of a change in control prior to approval of the Plan of Reorganization by the
Bankruptcy Court which results in Mr. Benson's options not being issued. Mr.
Benson's employment agreement contains certain restrictive covenants, including
restrictive covenants relating to non-competition and nondisclosure of
confidential information.
The Company has entered into an Employment Agreement dated May 21, 2001
with Andrew Gennuso, providing for Mr. Gennuso to serve as Senior Vice President
and Chief Operating Officer of the Company. Mr. Gennuso's employment agreement,
which was approved by the Bankruptcy Court, provides for an initial term ending
on May 31, 2002 and extends automatically for consecutive periods of one year,
unless either party provides notice of termination not less than ninety days
prior to an anniversary date. Under the agreement, Mr. Gennuso is to receive an
annual salary of $350,000 and an annual cash bonus in an amount up to $350,000,
based upon the satisfaction of certain performance goals. Mr. Gennuso is also
eligible to receive a one-time performance bonus based on the aggregate recovery
and distribution to the Company's general unsecured creditors in an amount
between $135,500 and $495,000, based on a recovery schedule. Mr. Gennuso is also
eligible to receive a one-time bonus in an amount between $60,000 and $300,000
based on the timing of the Company's filing of the Plan of Reorganization. The
Company provides Mr. Gennuso with (i) health, insurance, pension, vacation and
other benefits, (ii) temporary living expenses and permanent relocation expenses
incurred by Mr. Gennuso, if any, in the event of his relocation to the Company's
main headquarters and (iii) an automobile for use with respect to Mr. Gennuso's
performance of duties for the Company. Mr. Gennuso's employment agreement
contains certain restrictive covenants, including restrictive covenants relating
to non-competition and nondisclosure of confidential information.
The Company has entered into an Employment Agreement dated May 1, 2001
with Ross J. Altman, providing for Mr. Altman to serve as Senior Vice President,
General Counsel and Secretary of the Company. Mr. Altman's employment agreement,
which was approved by the Bankruptcy Court, provides for an initial term ending
on December 31, 2003 and extends automatically for consecutive periods of one
year, unless either party provides notice of termination not less than ninety
days prior to an anniversary date. Under the agreement, Mr. Altman receives an
annual salary of $300,000 and an annual cash bonus in an amount up to $120,000,
based upon the satisfaction of certain performance goals. Mr. Altman is also
eligible to receive a one-time performance bonus based on the aggregate recovery
and distribution to the
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Company's general unsecured creditors in an amount between $90,000 and $270,000,
based on a recovery schedule. Mr. Altman is also eligible to receive a one-time
bonus of between $30,000 and $150,000 based on the timing of the Company's
filing of the Plan of Reorganization. The Company provides Mr. Altman with (i)
health, insurance, pension, vacation and other benefits, (ii) temporary living
expenses and permanent relocation expenses incurred by Mr. Altman in connection
with his relocation to the Company's main headquarters and (iii) an automobile
for use with respect to Mr. Altman's performance of duties for the Company. Mr.
Altman's employment agreement contains certain restrictive covenants, including
restrictive covenants relating to non-competition and nondisclosure of
confidential information.
Compensation of Directors
The Company pays its directors an annual fee of $25,000 in addition to a
fee of $1,000 per meeting of the Board of Directors and any committee thereof
(including telephonic meetings) for their services as directors. In addition,
directors are reimbursed for expenses of attending each meeting of the Board of
Directors.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
NOTE: The information in this Item 12 relates to ownership of shares of
common stock of Sunterra as of May 31, 2002. Pursuant to the Plan of
Reorganization, no payments will be made on account of the common stock or
options or rights to acquire common stock, and such stock, options and rights
will be cancelled as of the Plan Effective Date.
The following table sets forth information as of May 31, 2002 with
respect to the beneficial ownership of common stock by (i) each person known by
us to own beneficially 5% or more of the outstanding common stock; (ii) each of
our directors; (iii) each of the Named Executive Officers; and (iv) all of our
executive officers and directors as a group. As a result of the matters
discussed in the introductory note to this Item 12 and under the caption
"December 31, 2000 Year-End Option Values" in Item 11, stock options are not
included in this table. The total number of shares outstanding as of May 31,
2002 was 36,025,820.
Amount and Nature of Percentage of
Name of Beneficial Owner Beneficial Ownership Class
- ------------------------ --------------------- -------------
Keystone, Inc. (1) .............. 2,150,700 5.97%
201 Main Street
Suite 3100
Fort Worth, Texas 76012
Robert M. Bass (1) .............. 3,023,100 8.39
201 Main Street
Suite 3100
Fort Worth, Texas 76012
Nicholas J. Benson .............. 0 *
Andrew Gennuso .................. 0 *
Ross J. Altman .................. 0 *
Thomas Skraby ................... 300 *
Ann Cohen ....................... - (2) - (2)
Genevieve Giannoni .............. 5,000 *
Charles Frey .................... - (2) - (2)
Adam M. Aron .................... 0 *
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James G. Brocksmith ....................... 0 *
Sanford R. Climan ......................... 4,875 (3) *
J. Taylor Crandall ........................ 115,000 (4) *
Joshua S. Friedman ........................ 247,370 (5) *
Andrew J. Gessow .......................... 3,523,786 (6) 9.78
Richard Harrington ........................ 606,673 1.68
Osamu Kaneko .............................. 3,063,960 (7) 8.50
Steven C. Kenninger ....................... 717,867 (8) 1.99
W. Leo Kiely, III ......................... 0 *
All directors and executive officers
as a group ................................ 8,284,831 23.00
- -------------
* less than 1%
(1) Information based solely on a Schedule 13D filed jointly with the SEC
on October 26, 1998, as amended on December 10, 1998, by Keystone, Inc.
("Keystone") and Robert M. Bass. Keystone beneficially owns 2,150,700
(or 5.97%) of the outstanding shares of common stock. Mr. Bass, the
President and sole director of Keystone, beneficially owns 3,023,100
(or 8.39%) of the outstanding shares of common stock, of which 872,400
shares are individually owned and 2,150,700 are beneficially owned
through Keystone. J. Taylor Crandall, a director of Sunterra, is the
Vice President and Chief Operating Officer of Keystone. He disclaims
beneficial ownership of any of the shares owned by either Keystone or
Mr. Bass.
(2) Information not available.
(3) Includes 1,125 shares held in custody for Mr. Climan's children.
(4) See also note (1) above.
(5) Canpartners Incorporated ("Canyon") holds 65,507 shares and is the sole
general partner of CPI Securities LP ("CPI"), which holds 17,057
shares. Mr. Friedman is a shareholder and director of Canyon and may be
deemed to have a beneficial ownership of the shares held by Canyon and
CPI. Mr. Friedman disclaims beneficial ownership of the shares. The
82,564 shares held by Canyon and CPI do not include 154,035 shares held
by Mr. Friedman's wife or 10,771 shares held by an irrevocable trust
for the benefit of Mr. Friedman's children. The beneficial ownership of
such shares is disclaimed by Canyon.
(6) Mr. Gessow's three children each have an irrevocable trust that owns
107,487 shares of the Company's common stock, for an aggregate of
322,461 shares. In each case, a third party serves as trustee and
neither Mr. Gessow nor the children have voting or investment control
over the shares in such trusts. Accordingly, Mr. Gessow disclaims
beneficial ownership of these shares, and these shares are excluded
from the amount of shares beneficially owned by Mr. Gessow. The address
of Mr. Gessow is 2934 Woodside Road, Woodside, California 94062.
(7) Includes 28,194 shares that are held in a trust for the benefit of Mr.
Kaneko's children. Mr. Kaneko's business address is: K.K. daVinci
Advisors, daVinci Higashi Nihonbashi, 2-24-14 Higashi Nihonbashi,
Chuo-Ku, Tokyo 103-0004 Japan.
(8) All of the shares indicated are held by Mr. Kenninger through a living
trust under which Mr. Kenninger may be deemed presently to hold
beneficial ownership. Mr. Kenninger's co-trustee spouse disclaims
beneficial ownership of any of the shares owned by either Mr. Kenninger
or the living trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 2001, the Company entered into a contract with a company in
which Mr. Gennuso, Sunterra's current Senior Vice President and Chief Operating
Officer, has a 60%
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ownership interest. This company arranges tours of vacation residences for
potential customers. Management believes that the terms of the agreement are
comparable to those of an arms-length transaction. In 2001, the Company paid
$100,000 to this company under this agreement, and management believes that
amounts to be paid to this company during 2002 may range from $1 million to $2
million.
The Company is indebted to funds managed by Mr. Friedman, a director of
Sunterra, and his associates, which hold two issues of corporate bonds of
Sunterra in an aggregate face amount of approximately $5,500,000.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index to Financial Statements
We have provided the following consolidated financial statements
immediately following the Index to Financial Statements on Page F-1 of this
report:
Page
------
Sunterra Corporation and Subsidiaries
Independent Auditors' Report ......................................... F-2
Consolidated Statements of Operations for the
years ended December 31, 2001 and 2000 .......................... F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 ......... F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 2001 and 2000 ...................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Loss for the years ended December 31,
2001 and 2000 ................................................... F-7
Notes to Consolidated Financial Statements ........................... F-8
We have omitted all schedules to our consolidated financial statements
because they are not required under the related instructions or are inapplicable
or because we have included the required information in our consolidated
financial statements or related notes.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K with the SEC during
the quarter ended December 31, 2001:
Current Report on Form 8-K filed with the SEC on November 20, 2001,
relating to the appointment of a Chief Executive Officer.
Current Report on Form 8-K filed with the SEC on October 26, 2001,
relating to the announcement of adjustments to unaudited financial statements.
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(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed below.
The following exhibits either (a) are filed with this report or (b)
have previously been filed with the SEC and are incorporated herein by reference
to those prior filings. We will furnish any exhibit upon request made to our
General Counsel, 1781 Park Center Drive, Orlando, Florida 32835. We charge $.50
per page to cover expenses of copying and mailing.
Exhibit
Number Description
- -------- ---------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Sunterra Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998)
3.2 Bylaws of Sunterra Corporation, as amended (incorporated by reference
to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996)
4.1 Indenture dated as of January 15, 1997 by and between Sunterra
Corporation and Norwest Bank Minnesota, National Association, as
trustee, for the 5 3/4% Convertible Subordinated Notes of Sunterra
Corporation due 2007 (incorporated by reference to Exhibit 4 to the
registrant's Registration Statement on Form S-1 (No. 333-30285))
4.2 Indenture dated as of August 1, 1997 by and between Sunterra
Corporation and Norwest Bank Minnesota, National Association, as
trustee, for the 9 3/4% Senior Subordinated Notes of Sunterra
Corporation due 2007 (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 on Form S-3 to the registrant's Registration
Statement on Form S-1 (No. 333-30285))
4.3 Indenture dated as of April 15, 1998 by and between Sunterra
Corporation and Norwest Bank Minnesota, National Association, as
trustee for the 9 1/4% Senior Notes of Sunterra Corporation due 2006
(incorporated by reference to Exhibit 4.3 to the registrant's
Registration Statement on Form S-4 (No. 333-51803))
4.4 Indenture dated as of May 1, 1998, by and between Sunterra Finance
L.L.C. as issuer of the bonds, Sunterra Corporation as Servicer and
LaSalle National Bank as Trustee and Back-up Servicer for Signature
Resorts Vacation Ownership Receivables -- Backed Notes 1998-A
(incorporated by reference to Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.1 Credit Agreement dated as of February 18, 1998 by and among Sunterra
Corporation, certain lender parties thereto, NationsBank of Texas,
N.A., as administrative lender, and Societe Generale, as document
agent, including Amendments 1, 2 and 3 thereto (incorporated by
reference to Exhibit 10.1 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998)
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10.2 Servicing Agreement dated as of May 1, 1998 by and between Sunterra
Finance L.L.C. as issuer of the bonds, Sunterra Corporation as
Servicer and LaSalle National Bank as Trustee and Back-up Servicer
for Signature Resorts Vacation Ownership Receivables - Backed Notes
1998-A (incorporated by reference to Exhibit 10.8 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.3 Receivables Purchase Agreement dated as of December 17, 1998 among
Blue Bison Funding Corp., Sunterra Corporation and Barton Capital
Corporation (incorporated by reference to Exhibit 10.3 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998)
10.4 Agreement of Limited Partnership of Pointe Resort Partners, L.P.
(subsequently renamed Poipu Resort Partners L.P.) dated October 11,
1994 (incorporated by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form S-1 (No. 333-06027))
+10.5 Amended and Restated 1996 Equity Participation Plan of Sunterra
Corporation, including form of stock option agreement thereunder
(incorporated by reference to Exhibit 10.16 to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998)
+10.6 Sunterra Corporation Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.5 to the registrant's Registration Statement
on Form S-1 (No. 333-06027))
+10.7 First Amendment to Employee Stock Purchase Plan of Sunterra
Corporation effective as of November 1, 1997 (incorporated by
reference to Exhibit 10.2 to the registrant's Registration Statement
on Form S-8 (No. 333-15361))
+10.8 1998 New-Hire Stock Option Plan of Sunterra Corporation (incorporated
by reference to Exhibit 10.19 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998)
10.9 Indenture dated as of March 31, 1999 by and between TerraSun, LLC as
issuer of the bonds, Sunterra Financial Services, Inc. as Servicer,
LaSalle National Bank as Trustee and as Back-up Servicer for
TerraSun, LLC Vacation Ownership Receivables-Backed Notes 1999-A
(incorporated by reference to Exhibit 10.21 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1999)
10.10 Indenture dated as of December 1, 1999 by and between Dutch Elm, LLC
as issuer of the bonds, Sunterra Financial Services, Inc. as Servicer
and LaSalle Bank National Association as Trustee and as Back-up
Servicer for Dutch Elm, LLC Vacation Ownership Receivables-Backed
Notes 1999-B (incorporated by reference to Exhibit 10.24 to the
registrant's Annual Report on Form 10-K for the year ended December
31, 1999)
10.11 Amended and Restated Credit Agreement dated December 31 1999 by and
among Sunterra Corporation (formerly known as Signature Resorts,
Inc.),
-54-
certain lenders party thereto and Bank of America, N.A., formerly
NationsBank, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.25 to the registrant's Annual Report on
Form 10-K for the year ended December 31, 1999)
10.12 First Amendment to Amended and Restated Credit Agreement
dated as of March 8, 2000 by and among Sunterra
Corporation, All Seasons Resorts, Inc., MMG Development
Corp., Harich Tahoe Developments, Port Royal Resort, LP,
Grand Beach Resort, LP, Powhatan Associates, Greensprings
Associates, Lake Tahoe Resort Partners, LLC and Bank of
America N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.28 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.13 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 registrant's Current Report on
Form 8-K (date of event: May 9, 2002))
10.14 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 registrant's Current Report on
Form 8-K (date of event: January 25, 2002))
10.15 Financing Agreement dated as of April 20, 2001 among Sunterra
Corporation, certain affiliates of Sunterra Corporation and
Greenwich Capital Markets, Inc. (incorporated by reference to
Exhibit 10 to the registrant's Current Report on Form 8-K (date
of event: April 20, 2001))
10.16 First Amendment, dated as of January 3, 2002, to Financing
Agreement filed as Exhibit 10.17 (incorporated by reference to
Exhibit 10.1 to the registrant's Current Report on Form 8-K (date
of event: January 25, 2002))
10.17 Second Amendment, dated as of May 9, 2002, to Financing Agreement
filed as Exhibit 10.17 (incorporated by reference to Exhibit 10.1
to the registrant's Current Report on Form 8-K (date of event:
May 9, 2002))
10.18 Third Amendment, dated as of June 6, 2002, to Financing Agreement
filed as Exhibit 10.17 (incorporated by reference to Exhibit 99.2
to the registrant's Current Report on Form 8-K (date of event :
June 12, 2002))
+10.19 Amended and Restated Employment Agreement dated as of November
19, 2001 between Sunterra Corporation and Nicholas Benson
(incorporated by reference to Exhibit 10.3 to the registrant's
Current Report on Form 8-K (date of event: January 25, 2002))
*+10.20 Employment Agreement dated May 21, 2001 between Sunterra
Corporation and Andrew Gennuso
*+10.21 Employment Agreement dated May 1, 2001 between Sunterra
Corporation and Ross J. Altman
-55-
*10.22 Confirmation Order, dated June 20, 2002, of the Bankruptcy Court
*18 Letter on Change in Accounting Principle from Deloitte & Touche
LLP, dated as of June 20, 2002
*21 Subsidiaries of Sunterra Corporation
- ----------------------------
+ Compensatory management plan
* Filed herewith
-56-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNTERRA CORPORATION
June 28, 2002 By: /s/ Nicholas J. Benson
------------------------------
Name: Nicholas J. Benson
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Nicholas J. Benson President and Chief June 28, 2002
-------------------------
Nicholas J. Benson Executive Officer
/s/ Lawrence E. Young Vice President and June 28, 2002
-------------------------
Lawrence E. Young Chief Financial Officer
/s/ James F. Anderson Vice President, June 28, 2002
-------------------------
James F. Anderson Corporate Controller
/s/ Adam Aron Director June 28, 2002
-------------------------
Adam Aron
/s/ James Brocksmith Director June 28, 2002
-------------------------
James Brocksmith
/s/ Sanford R. Climan Director June 28, 2002
-------------------------
Sanford R. Climan
/s/ J.Taylor Crandall Director June 28, 2002
-------------------------
J. Taylor Crandall
/s/ Joshua S. Friedman Director June 28, 2002
-------------------------
Joshua S. Friedman
/s/ Andrew J. Gessow Director June 28, 2002
-------------------------
Andrew J. Gessow
-57-
/s/ Richard Harrington Director June 28, 2002
-------------------------
Richard Harrington
/s/ Osamu Kaneko Director June 28, 2002
-------------------------
Osamu Kaneko
/s/ Steven C. Kenninger Director June 28, 2002
-------------------------
Steven C. Kenninger
/s/ W. Leo Kiely III Director June 28, 2002
-------------------------
W. Leo Kiely III
-58-
INDEX TO FINANCIAL STATEMENTS
Page
-------
Sunterra Corporation and Subsidiaries
Independent Auditors' Report ........................................... F-2
Consolidated Statements of Operations for the
years ended December 31, 2001 and 2000 ............................ F-3
Consolidated Balance Sheets as of December 31,
2001 and 2000 ..................................................... F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 2001 and 2000 ........................ F-5
Consolidated Statements of Stockholders' Equity (Deficiency)
and Comprehensive Loss for the years ended December 31,
2001 and 2000 ..................................................... F-7
Notes to Consolidated Financial Statements ............................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sunterra Corporation:
We have audited the accompanying consolidated balance sheets of Sunterra
Corporation and subsidiaries (debtor-in-possession) (the Company) as of December
31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity (deficiency) and comprehensive loss, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Notes 1, 2 and 3, the Company has filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such consolidated financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4, the
Company's consolidated stockholders' deficiency of $336 million as of December
31, 2001, its status as a debtor-in-possession operating under Chapter 11
Bankruptcy Court protection, the lack of approval of the Proposed Plan discussed
in Note 3, and the Company's lack of binding commitments for an Exit Facility
and a post emergence Working Capital Facility, as also discussed in Note 3,
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 4. The
consolidated financial statements do not include adjustments that might result
from the outcome of this uncertainty.
The Company has not presented the selected quarterly financial data, specified
by Item 302(a) of Regulation S-K, that the Securities and Exchange Commission
requires as supplementary information to the basic consolidated financial
statements.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its method of accounting for developer paid owners' association fees and
property taxes during the developer guarantee and subsidy periods of real estate
project developments in 2000.
/s/ DELOITTE & TOUCHE LLP
Orlando, Florida
May 15, 2002 (June 20, 2002 as to Note 33)
F-2
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 and 2000
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
2001 2000
Revenues:
Vacation Interest sales .................................................. $ 166,315 $ 187,199
Vacation Interest lease revenue .......................................... 10,913 6,523
Club Sunterra membership fees ............................................ 6,823 7,019
Resort rental income ..................................................... 12,282 13,457
Management fees .......................................................... 20,966 20,006
Interest income .......................................................... 30,501 26,506
Other income ............................................................. 24,647 27,403
------------ ------------
Total revenues ......................................................... 272,447 288,113
------------ ------------
Costs and Operating Expenses:
Vacation Interests cost of sales ......................................... 34,275 85,319
Advertising, sales and marketing ......................................... 104,273 150,742
Maintenance fees and subsidy expense ..................................... 14,075 16,668
Provision for doubtful accounts and loan losses .......................... 15,843 33,973
Loan portfolio expenses .................................................. 11,037 8,404
General and administrative ............................................... 76,076 117,183
Depreciation and amortization ............................................ 18,428 27,517
Reorganization expenses .................................................. 50,350 77,988
Restructuring expenses ................................................... - 6,040
Impairment write-down of assets .......................................... - 37,430
Loss on abandonment of property and equipment ............................ - 959
Impairment loss on retained interests in mortgages receivable sold ....... - 30,015
------------ ------------
Total costs and operating expenses ..................................... 324,357 592,238
------------ ------------
Loss from operations ................................................... (51,910) (304,125)
------------ ------------
Interest expense (contractual interest of $61,252 and $68,043, net of
unaccrued interest of $40,400 and $23,500 and capitalized interest of
$375 and $1,795, respectively) ........................................... (20,477) (42,748)
Other non-operating income (expenses) ....................................... 184 (12,291)
Income on investments in joint ventures ..................................... 3,381 2,727
------------ ------------
Loss before provision for income taxes and cumulative effect of change in
accounting principle ..................................................... (68,822) (356,437)
Provision for income taxes .................................................. 2,717 522
------------ ------------
Loss before cumulative effect of change in accounting principle ............. (71,539) (356,959)
Cumulative effect of change in accounting principle, net .................... - (18,761)
------------ ------------
Net loss .................................................................... $ (71,539) $ (375,720)
============ ============
Loss per share:
Basic and diluted ........................................................... $ (1.99) $ (10.43)
Weighted average number of common shares outstanding ........................ 36,025 36,009
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
Cash and cash equivalents ......................................................... $ 27,207 $ 21,062
Cash in escrow and restricted cash ................................................ 99,354 64,060
Mortgages and contracts receivable, net of allowances of $36,206 and
$37,326 at December 31, 2001 and 2000, respectively ............................ 176,036 188,207
Retained interests in mortgages receivable sold ................................... 15,974 12,902
Due from related parties .......................................................... 9,902 11,283
Other receivables, net ............................................................ 13,013 28,360
Prepaid expenses and other assets ................................................. 18,747 21,431
Assets held for sale .............................................................. 11,324 49,047
Investments in joint ventures ..................................................... 19,698 18,862
Real estate and development costs, net ............................................ 180,087 220,113
Property and equipment, net ....................................................... 67,431 72,354
Intangible and other assets, net .................................................. 24,718 27,429
------------ ------------
Total assets ...................................................................... $ 663,491 $ 735,110
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Borrowings under debtor-in-possession financing agreement ......................... $ 68,311 $ 44,750
Accounts payable .................................................................. 16,695 16,751
Accrued liabilities ............................................................... 86,939 88,606
Deferred revenue .................................................................. 86,134 86,337
Deferred taxes .................................................................... 291 1,634
Notes payable ..................................................................... 28,005 44,592
Liabilities subject to compromise ................................................. 712,866 715,547
------------ ------------
Total liabilities ................................................................. 999,241 998,217
------------ ------------
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 shares issued
and outstanding at December 31, 2001 and 2000) ................................. 360 360
Additional paid-in-capital ..................................................... 164,607 164,607
Accumulated deficit ............................................................ (491,281) (419,742)
Accumulated other comprehensive loss ........................................... (9,436) (8,332)
------------ ------------
Total stockholders' deficiency .......................................... (335,750) (263,107)
------------ ------------
Total liabilities and stockholders' deficiency .......................... $ 663,491 $ 735,110
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
(In thousands)
- --------------------------------------------------------------------------------
2001 2000
Operating activities:
Net loss ............................................................................... $ (71,539) $ (375,720)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................................... 18,428 27,517
Provision for doubtful accounts and loan losses ........................................ 15,843 33,973
Amortization of capitalized financing costs ............................................ 3,580 9,392
Income on investment in joint ventures ................................................. (3,381) (2,727)
Other non-operating expenses ........................................................... - 12,291
Impairment loss on retained interests in mortgages receivable sold ..................... - 30,015
(Gain) loss on sales of property and equipment ......................................... (4,118) 429
Loss on sales of mortgages receivable .................................................. - 175
Proceeds from sales of mortgages receivable ............................................ - 14,742
Asset impairments ...................................................................... - 122,298
Deferred income taxes .................................................................. (1,534) 19,954
Loss on asset abandonment .............................................................. - 959
Write-offs of prepetition debt issuance costs .......................................... - 16,378
Change in retained interests in mortgages receivable sold .............................. (3,072) 102
Cumulative effect of change in accounting principle .................................... - 18,761
Changes in operating assets and liabilities:
Cash in escrow and restricted cash ..................................................... (34,767) (32,137)
Mortgages and contracts receivable ..................................................... 1,150 13,521
Due from related parties ............................................................... 1,111 (124)
Other receivables, net ................................................................. 7,257 (18,338)
Prepaid expenses and other assets ...................................................... 2,305 5,275
Real estate and development costs ...................................................... 39,564 19,861
Liabilities not subject to compromise:
Accounts payable ..................................................................... 884 12,756
Accrued liabilities .................................................................. 632 39,990
Income taxes payable ................................................................. 3,263 329
Liabilities subject to compromise ...................................................... (1,511) -
------------ ------------
Net cash used in operating activities ............................................. (25,905) (30,328)
------------ ------------
Investing activities:
Proceeds from sale of assets ........................................................... 44,840 26,287
Capital expenditures ................................................................... (10,547) (19,866)
Increase in intangible and other assets ................................................ (1,947) (7,136)
Investment in joint ventures ........................................................... 1,713 313
------------ ------------
Net cash provided by (used in) investing activities ............................... 34,059 (402)
------------ ------------
(Continued)
F-5
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
(In thousands)
- --------------------------------------------------------------------------------
Financing activities: 2001 2000
Borrowings under debtor-in-possession financing agreement 80,257 44,750
Debt issuance costs (1,520) (1,540)
Proceeds from notes payable 3,630 5,620
Borrowings under credit line facilities - 49,954
Payments on debtor-in-possession financing agreement (56,696) -
Payments on notes payable and mortgage-backed securities (20,218) (42,634)
Payments on credit line facilities (1,170) (13,174)
Other - 188
---------- ----------
Net cash provided by financing activities 4,283 43,164
---------- ----------
Effect of changes in exchange rates on cash and cash equivalents (6,292) (15,888)
---------- ----------
Net increase (decrease) in cash and cash equivalents 6,145 (3,454)
Cash and cash equivalents, beginning of year 21,062 24,516
---------- ----------
Cash and cash equivalents, end of year $ 27,207 $ 21,062
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest $ 12,045 $ 27,710
Cash paid for taxes, net of tax refunds $ 785 $ 855
The accompanying notes are an integral part of these consolidated financial
statements.
(Concluded)
F-6
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE
LOSS YEARS ENDED DECEMBER 31, 2001 and 2000
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Additional Retained Accumulated Total
Outstanding Paid-in Earnings Other Stockholders'
Capital (Accumulated) Comprehensive Equity Comprehensive
Deficit) Income (Loss) (Deficiency) Income (Loss)
BALANCE AT DECEMBER 31, 1999
As previously reported 35,970 $ 360 $ 164,419 $ 69,159 $(3,150) $ 230,788
Prior period adjustments (Note 9) - - - (113,181) - (113,181)
----------- ------ ---------- ------------ ------------ -----------
BALANCE AT DECEMBER 31, 1999
As restated 35,970 360 164,419 (44,022) (3,150) 117,607
Net loss - - - (375,720) - (375,720) $(375,720)
Other 55 - 188 - - 188 -
Other comprehensive income (loss):
Unrealized gain on securities
classified as available-for-
sale, net of tax of $0 - - - - 1,199 1,199 1,199
Currency translation adjustments,
net of tax of $0 - - - - (6,381) (6,381) (6,381)
----------- ------ ---------- ------------ ------------ ----------- ----------
BALANCE AT DECEMBER 31, 2000 36,025 360 164,607 (419,742) (8,332) (263,107)
Comprehensive loss for the year
ended December 31, 2000 $(380,902)
==========
Net loss - - - (71,539) (71,539) $ (71,539)
Other comprehensive income (loss):
Unrealized gain on securities
classified as available-for-
sale, net of tax of $0 - - - - 420 420 420
Currency translation adjustments,
net of tax of $0 - - - - (1,524) (1,524) (1,524)
----------- ------ ---------- ------------ ------------ ----------- ----------
BALANCE AT DECEMBER 31, 2001 36,025 $ 360 $ 164,607 $ (491,281) $(9,436) $(335,750)
=========== ====== ========== ============ ============ ===========
Comprehensive loss for the $ (72,643)
year ended December 31, 2001 ==========
F-7
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Amounts in thousands, except where stated and per share data)
Note 1 - Reorganization of the Business Under Chapter 11
The operations of Sunterra Corporation (Sunterra) and its wholly owned
subsidiaries (collectively, the Company) 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 receives fees paid by the resorts' homeowners'
associations.
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 are being jointly administered. Joint administration allows the
cases to be administered as a single case, but does not affect the substantive
rights of the debtors or parties in interest. These entities are currently
operating as debtors-in-possession (the Debtor Entities) in accordance with the
provisions of the Bankruptcy Code. Sunterra Corporation's subsidiaries that have
not filed voluntary petitions for relief under Chapter 11 (the Non-Debtor
Entities, and collectively with the Debtor Entities, the Company) continue to
operate their respective businesses outside the protection of the Bankruptcy
Code.
The Chapter 11 filings were primarily the result of the termination of the
Debtor Entities' ability to borrow under their existing credit facilities and
their inability to obtain new financing to meet their cash flow requirements. To
finance sales of Vacation Interests, the Company monetized the related mortgages
receivable through the use of lines of credit collateralized by Vacation
Interests and mortgages and contracts receivable, an off-balance sheet conduit,
on-balance sheet hypothecations, mortgage receivable sales, and other vehicles.
Markets for mortgages receivable include the asset-backed securitization market,
the commercial paper market and the commercial bank and finance company markets.
Significant defaults in the mortgages and contracts receivable portfolio and
related write-offs in 1999 resulted in a decrease in the Debtor Entities'
abilities to access these markets, and materially and adversely affected cash
flows and capital resources during the latter part of 1999, resulting in various
debt covenant violations as of December 31, 1999, and in the first quarter of
2000. As a result, access to liquidity under the Debtor Entities' debt
facilities was limited as compared to the original terms of the facilities. Due
to the liquidity crisis precipitated by these factors, the Debtor Entities had
limited cash on hand and were not able to make the scheduled payment on the 9
1/4% Senior Notes in May 2000. The Debtor Entities sought protection under
Chapter 11 in order to restructure existing debt and maximize cash flow.
The Debtor Entities received approval from the Bankruptcy Court to pay or
otherwise honor certain of their prepetition obligations, including homeowners'
association maintenance fees, developer subsidies for unsold properties, certain
employee wages and certain obligations to independent sales agents. In addition,
the Bankruptcy Court authorized the Debtor Entities to maintain their employee
benefit programs. The Debtor Entities have incurred and will incur significant
costs associated with the reorganization, which are being expensed as incurred.
See Note 11 - Reorganization Expenses and Restructuring Costs.
F-8
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. The terms of the ultimate settlement of these
liabilities will be determined based upon a plan of reorganization to be
confirmed by the Bankruptcy Court. Such liabilities are reflected in the
consolidated balance sheets as liabilities subject to compromise (See Note 2).
Substantially all litigation pending against the Debtor Entities as of the
Petition Date is stayed and no party may take action to recover a prepetition
claim except pursuant to an order of the Bankruptcy Court. Pursuant to the
Bankruptcy Code, the Debtor Entities may reject certain prepetition executory
contracts and unexpired leases with the approval of the Bankruptcy Court.
Parties affected by these rejections may file claims against the Debtor Entities
with the Bankruptcy Court. In July 2001 the Bankruptcy Court established the bar
date of August 30, 2001 as the last date and deadline for filing proofs of
claims. The Bankruptcy Court's bar date order exempted certain claims from being
filed by August 30, 2001, including claims held by Debtor Entities, contingent
claims for rejection of executory contracts and unexpired leases, and claims on
account of equity interests. In addition, the Bankruptcy Court approved two
extensions of the period during which the Non-Debtor Entities had the right to
file proofs of claim. The most recent extension expired on December 17, 2001.
The Company's subsidiary in Europe has obtained a license from the Civil
Aviation Authority (the CAA) to operate as a tour operator through September
2002. Under the license with the CAA, the Company has agreed to limit repayment
of advances between the Company and its subsidiary in Europe to those amounts
that have been outstanding less than one year, which approximates $6.8 million
at December 31, 2001, unless prior approval is received.
Note 2 - Liabilities Subject to Compromise
Amounts classified as liabilities subject to compromise are identified below.
All amounts may be subject to future adjustment depending on actions of the
Bankruptcy Court, further developments with respect to disputed claims, or other
events. Additional prepetition claims may arise from rejection of additional
executory contracts or unexpired leases by the Debtor Entities. The additional
liability, if any, relating to the remainder of outstanding disputed claims is
not subject to reasonable estimation. As a result, no provision has been
recorded for these claims. The Company will recognize the additional liability,
if any, as these amounts become subject to reasonable estimation. Uncertainty
exists regarding the measurement of certain of these liabilities, and ongoing
Bankruptcy Court proceedings could result in the reclassification of certain
liabilities currently subject to Chapter 11 proceedings. Pursuant to a confirmed
plan of reorganization, prepetition claims may be paid and discharged at amounts
substantially less than their allowed amounts.
On a consolidated basis, recorded liabilities subject to compromise under the
Chapter 11 proceedings as of December 31 consist of the following:
2001 2000
Secured obligations ............................. $ 160,130 $ 161,583
Subordinated debt ............................... 478,000 478,000
----------- -----------
Subtotal - notes payable subject to compromise .. 638,130 639,583
Accounts payable ................................ 31,982 35,040
Accrued interest ................................ 27,267 22,040
Accrued expenses and other liabilities .......... 15,487 18,884
----------- -----------
$ 712,866 $ 715,547
=========== ===========
Pursuant to the Bankruptcy Code, principal and interest payments generally may
not be made on prepetition debt claims without Bankruptcy Court approval. The
Bankruptcy Code generally disallows the payment of interest that accrues post
petition with respect to unsecured or undersecured claims. Accordingly, such
interest has not been accrued by the Company since it is not probable that it
will be treated as an allowed claim. The amount of
F-9
contractual interest on prepetition debt not accrued by the Company was $23.5
million for the period from May 31, 2000 to December 31, 2000 and $40.4 million
for the year ended December 31, 2001.
Note 3 - Proposed 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, and May 9, 2002, the Proposed
Plan) and accompanying disclosure statements with the Bankruptcy Court. The
Debtor Entities currently have the exclusive right to propose a plan of
reorganization and solicit acceptances of such plan. By order of the Bankruptcy
Court, the original exclusive period in which to file and obtain acceptances of
a plan was extended to May 1, 2002.
Substantially all prepetition liabilities of the Debtor Entities will be dealt
with in the Proposed Plan to be voted on in accordance with the provisions of
the Bankruptcy Code. If the Debtor Entities fail to obtain acceptance of its
Proposed Plan within the exclusivity period or any extensions thereof, any
creditor or equity holder may be free to file a plan of reorganization with the
Bankruptcy Court and solicit acceptance thereof.
The Proposed Plan currently provides for (i) payment in full of allowed
administrative and fee claims (which include assumed contracts, professional
fees and indenture trustee fees and expenses), replacement 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 Proposed
Plan provides for distributions to creditors of: (i) cash, (ii) new debt
securities, (iii) new common stock (New Sunterra Stock) of reorganized Sunterra
Corporation, and (iv) warrants for the purchase of New Sunterra Stock. The
Proposed Plan presumes an effective date of June 30, 2002. The Proposed Plan
sets forth post-reorganization debt of the Debtor Entities of $220 million,
issuance of 20 million shares of New Sunterra Stock and issuance of warrants to
purchase 1.4 million shares of New Sunterra Stock. Under the Proposed Plan, the
Debtor Entities will be 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 will be deemed to be filed against all of the
debtors as a single entity. The consolidated assets will create a single fund
from which all claims against the consolidated Debtor Entities are satisfied.
Under the Bankruptcy Code, prepetition liabilities 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 Entities' assets is compared to the
liabilities and claims against the Debtor Entities to determine the equity value
of the reorganized company. The equity value set forth in the Proposed Plan is
$305 million for purposes of estimating claim recoveries and implementing the
Proposed Plan. The Proposed Plan provides for no distributions to the holders of
the Company's common stock, and all outstanding shares of such common stock will
be cancelled as of the effective date of the Proposed Plan.
According to the terms of the Proposed Plan, it may not be confirmed unless the
Debtor Entities have obtained a binding commitment for a credit facility (the
Exit Facility) in an amount sufficient to pay all outstanding obligations under
the replacement debtor-in-possession Facility (See Note 20), allowed
administrative claims, allowed professional fee claims and other cash amounts
required to be paid under the Proposed Plan. Additionally, the Debtor Entities
must obtain a binding commitment for a financing facility available to finance
mortgages and contracts receivable (the Working Capital Facility). On May 15,
2002, the Debtor Entities obtained a binding commitment, subject to certain
execution conditions and approval by the Bankruptcy Court, with respect to the
Exit Facility, which provides for working capital (see Note 32).
Note 4 - Basis of Presentation
The accompanying consolidated financial statements have been presented in
conformity with the American Institute of Certified Public Accountants' (AICPA)
Statement of Position 90-7, Financial Reporting By Entities In Reorganization
Under the Bankruptcy Code, issued November 19, 1990 (SOP 90-7). SOP 90-7
requires a segregation of liabilities subject to compromise by the Bankruptcy
Court as of the Petition Date and identification of all transactions and events
that are directly associated with the reorganization of the Debtor Entities.
F-10
The consolidated financial statements have been prepared on a going concern
basis, which contemplates the continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 proceedings, such realization of assets and liquidation
of liabilities are subject to uncertainty. While under the protection of Chapter
11, in the normal course of business the Company may not sell or otherwise
dispose of operating and long-lived assets and liquidate prepetition
liabilities, without the prior approval of the Bankruptcy Court. The Company
recorded $61.7 million in valuation adjustments and write-offs in reorganization
expenses in 2000 to reflect the impact of the Chapter 11 proceedings on the
Company's ability to realize certain assets. Further, the Proposed Plan may
materially change the amounts reported in the consolidated financial statements,
which do not give effect to any adjustments to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of the Proposed
Plan. The appropriateness of using the going concern basis is dependent upon,
among other things, the Company's ability to comply with the existing
debtor-in-possession financing agreement that has been approved by the
Bankruptcy Court and to obtain confirmation of a plan of reorganization.
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 discussed
in Note 3, and the Company's lack of binding commitments for an Exit Facility
and a post emergence Working Capital Facility, as also described in Note 3, give
rise to substantial doubt about the Company's ability to continue as a going
concern. Management believes that the amended Proposed Plan as filed May 9, 2002
with the Bankruptcy Court, assuming the Company will be successful in obtaining
an Exit Facility and a post-emergence Working Capital Facility, provides for a
restructuring of the Company's business and its capital structure such that it
will be able to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that may be necessary if the
Company is not able to emerge from Chapter 11 and continue as a going concern.
Pursuant to SOP 90-7, the Company will adopt fresh start reporting as of the
effective date of the Proposed Plan. Under fresh start reporting, the
reorganization value of the entity is allocated to the entity's assets and
liabilities. If any portion of the reorganization value cannot be attributed to
specific tangible or identified intangible assets of the emerging entity, such
amounts are to be reported as reorganization value in excess of amounts
allocable to identifiable assets. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which
will be effective for the fiscal year beginning January 1, 2002, the excess
reorganization value is assumed to have an indefinite useful life and will not
be amortized. The excess reorganization value will be tested for impairment at
least annually as specified in SFAS No. 142. As a result of adopting fresh start
reporting upon emerging from Chapter 11 status, the Company's financial
statements will not be comparable with those prepared before the Proposed Plan
is confirmed, including the historical consolidated financial statements
included herein.
Note 5 - Concentrations of Risk
Credit Risk - The Company is exposed to on-balance sheet credit risk related to
its mortgages and contracts receivable.
The Company offers financing to the buyers and lessees of Vacation Intervals at
the Company's resorts. These buyers generally make a down payment of at least
10% of the purchase price and deliver a promissory note to the Company for the
balance. The promissory notes generally bear interest at a fixed rate, and are
payable over a seven-year to ten-year period, and the notes on sold Vacation
Intervals are secured by a first mortgage on the Vacation Interval. The Company
bears the risk of defaults on these promissory notes.
If a buyer of a Vacation Interval defaults, the Company generally must foreclose
on the Vacation Interval and attempt to resell it; the associated marketing,
selling, and administrative costs from the original sale are not recovered; and
such costs must be incurred again to resell the Vacation Interval. Although the
Company in many cases may have recourse against a Vacation Interval buyer for
the unpaid price, certain states have laws that limit the Company's ability to
recover personal judgments against customers who have defaulted on their loans.
Accordingly, the Company has generally not pursued this remedy. If a lessee of a
Vacation Interval defaults, the lessee forfeits its contract rights previously
held to use the Vacation Interval and the Company is able to re-lease the
Vacation Interval without further recovery efforts.
F-11
Interest Rate Risk - The Company has historically derived net interest income
from its financing activities because the interest rates it charges its
customers who finance the purchase or lease of their Vacation Intervals exceed
the interest rates the Company pays to its lenders. Because the Company's
indebtedness bears interest at variable rates and the Company's customer
receivables bear interest at fixed rates, increases in interest rates will erode
the spread in interest rates that the Company has historically obtained and
could cause the rate on the Company's borrowings to exceed the rate at which the
Company provides financing to its customers. Therefore, any increase in interest
rates, particularly if sustained, could have a material adverse effect on the
Company's results of operations, cash flows, and financial position.
Availability of Funding Sources - The Company has historically funded
substantially all of the notes receivable, timeshare inventories, and land
inventories which it originates or purchases with borrowings through its
financing facilities, sales of notes receivable, internally generated funds, and
proceeds from public debt and equity offerings. Borrowings are in turn repaid
with the proceeds received by the Company from repayments of such notes
receivable. To the extent that the Company is not successful in maintaining or
replacing existing financings, it would have to curtail its operations or sell
assets, thereby having a material adverse effect on the Company's results of
operations, cash flows, and financial condition. See Notes 2 and 3.
Geographic Concentration - The Company's owned and serviced loan portfolio
borrowers are geographically diversified within the United States and
internationally. At December 31, 2001, borrowers residing in the United States
accounted for approximately 93.5% of serviced loans. With the exception of
Arizona and California, which represented 17.2% and 16.9%, respectively, no
state or foreign country concentration accounted for more than approximately
15.0% of the serviced portfolios. The credit risk inherent in such
concentrations is dependent upon regional and general economic stability, which
affects property values and the financial well being of the borrowers.
Note 6 - Certain Significant Risks and Uncertainties
In connection with the Chapter 11 cases, the Debtor Entities have developed a
Proposed Plan that will be submitted for approval by parties in interest and
confirmation by the Bankruptcy Court. In the event that the Proposed Plan is
accepted and becomes effective, continuation of the Company's business
thereafter is dependent on the Company's ability to achieve successful future
operations. The Company's ability to continue as a going concern is dependent
upon, among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the Company's
debtor-in-possession and exit financing agreements and the ability to generate
sufficient cash from operations and financing arrangements to meet obligations.
There can be no assurances that the Company will be successful in achieving
confirmation and effectiveness of a plan of reorganization, future profitable
operations, compliance with the terms of the debtor-in-possession and exit
financing arrangements and sufficient cash flows from operations and financing
arrangements to meet its obligations.
Note 7 - Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying financial statements include the
combined accounts of Sunterra and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated from the
consolidated financial statements.
As described in Note 1, Sunterra Corporation and certain of its wholly owned
subsidiaries filed for reorganization under Chapter 11 of the Bankruptcy Code.
Other wholly owned subsidiaries that have not filed for bankruptcy protection
are included in the consolidated financial statements. Net assets of the
Non-Debtor Entities, prior to elimination of net intercompany amounts, are $22.8
million and $16.2 million at December 31, 2001 and 2000, respectively. Net
post-petition intercompany amounts are a receivable due to the Non-Debtor
Entities from the Debtor Entities of $3.8 million at December 31, 2001, and a
payable due to the Debtor Entities from the Non-Debtor Entities of $2.2 million
at December 31, 2000.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash, money
market funds, and all highly liquid investments purchased with an original
maturity date of three months or less.
F-12
Cash in Escrow and Restricted Cash - Cash in escrow consists of deposits
received on sales and leases of Vacation Interests that are held in escrow until
a certificate of occupancy is obtained, the legal rescission period has expired
and, for sales of Vacation Interests, the deed of trust has been recorded in
governmental property ownership records. Restricted cash consists primarily of
cash collections on certain mortgages receivable that secure collateralized
notes, cash held on behalf of homeowner associations in Europe, and proceeds
from the disposition of assets that collateralize other secured borrowings.
Mortgages and Contracts Receivable and Allowance for Loan and Contract Losses -
Mortgages and contracts receivable are recorded at the lower of amortized cost
or market, including deferred loan and contract origination costs, less the
related allowance for loan and contract losses. Loan and contract origination
costs incurred in connection with providing financing for Vacation Interests
have been capitalized and are being amortized over the term of the mortgages or
contracts receivable as an adjustment to interest income on mortgages and
contracts receivable using the effective interest method. Amortization of loan
and contract origination fees charged to interest income was $2.6 million and
$5.4 million for 2001 and 2000, respectively.
The Company provides for estimated mortgages receivable cancellations and
defaults at the time the Vacation Interval sales are recorded by a charge to
operations and a credit to an allowance for loan losses. A similar loss
allowance is provided for certain interval transactions structured as long-term
operating lease arrangements by a charge to deferred lease revenue, which is
included in deferred revenue on the consolidated balance sheets, and a credit to
an allowance for loan losses. The Company performs an analysis of factors such
as economic conditions and industry trends, defaults, past due agings and
historical write-offs of mortgages and contracts receivable to evaluate the
adequacy of the allowance.
The Company charges off mortgages and contracts receivable upon default on the
first scheduled principal and interest payment (first payment defaults) or 180
days of contractual delinquency. Vacation Interests recovered on defaulted
mortgages receivable are recorded in real estate and development costs and as a
reduction of loan charge-offs at the historical cost of Vacation Interests at
the respective property. All collection and foreclosure costs are expensed as
incurred.
Retained Interests in Mortgages Receivable Sold - Retained interests in
mortgages receivable sold are generated upon sale of mortgages receivable and
represent the net present value of the expected excess cash flow to the Company
after repayment by the purchaser of principal and interest on the obligations
secured by the sold mortgages receivable. The retained interests are classified
as available-for-sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, based on management's intent and the existence of prepayment
options. Retained interests are marked to fair value at each reporting date
based on certain assumptions and the adjustments are reported as a component of
other comprehensive income (loss) in the statements of stockholders' equity
(deficiency). Adjustments for permanent impairment of the value of retained
interests are recorded in the Company's consolidated statements of operations in
the period of impairment.
Real Estate and Development Costs - Real estate and development costs are valued
at the lower of cost or net realizable value. Development costs include both
hard and soft construction costs and together with real estate costs are
allocated to Vacation Interests. Interest, taxes and other carrying costs
incurred during the construction period are capitalized and such costs incurred
on completed Vacation Interval inventory are expensed. Costs are allocated to
units sold on the relative sales value method. Real estate and development costs
also include the value of Vacation Interests collateralizing delinquent
mortgages and contracts receivable that have been charged off in which the
Company does not yet hold title pending completion of the foreclosure process.
Prepaid Expenses - Prepaid expenses are charged to expense as the underlying
assets are used or are amortized.
Assets Held for Sale - Assets held for sale consists of resort properties
determined to be non-core operations and are held at their estimated fair value
less costs to sell and are not subject to depreciation.
Investments in Joint Ventures - The Company owns a 30% interest in Poipu Resort
Partners, L.P. and a 23% interest in West Maui Resort Partners, LP (Ka'anapali)
and accounts for its investments in joint ventures under the equity method.
Goodwill associated with each joint venture is amortized as Vacation Interests
are sold.
F-13
Property and Equipment - Buildings and leasehold improvements are depreciated
using the straight-line method over the lesser of the estimated useful lives (40
years), or the remainder of the lease terms, respectively. Furniture, office
equipment and computer equipment are depreciated using the straight-line method
over their estimated useful lives, which range from three to seven years.
Capitalized Software Costs - The Company capitalizes costs for internally
developed software in accordance with SOP 98-01, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, and amortizes the
amounts over a period of five years.
Intangible and Other Assets - Financing and debt issuance costs incurred in
connection with obtaining funding for the Company have been capitalized and are
being amortized over the lives of the funding agreements as a component of
interest expense using a method which approximates the effective interest
method.
Goodwill recorded in connection with the acquisition of subsidiaries is
amortized over the estimated useful life of ten years. At each balance sheet
date, the Company evaluates the realizability of its goodwill based upon the
expectations of undiscounted cash flows and operating income expected to be
generated from the related acquired businesses. If any goodwill is determined to
be impaired, impairment losses are recognized as a charge to operations during
the period the impairment is determined.
Foreign Currency Translation - Assets and liabilities in foreign locations are
translated into U.S. dollars using rates of exchange in effect at the end of the
reporting period. Income and expense accounts are translated into U.S. dollars
using average rates of exchange. The net gain or loss is shown as translation
adjustment and included in other comprehensive income (loss) in stockholders'
equity (deficiency). Gains and losses from foreign currency transactions are
included in the consolidated statements of operations. There were no significant
gains or losses on foreign currency transactions in 2001 or 2000.
Derivative Instruments - The Company uses interest rate cap agreements from time
to time to manage interest rate exposure. At December 31, 2001 and 2000, no
agreements were in effect and no amounts were due by or owed to the Company
under these agreements.
Revenue Recognition - The Company recognizes sales of Vacation Interests in the
U.S. on an accrual basis after a binding sales contract has been executed, a 10%
minimum down payment has been received, the rescission period has expired,
construction is substantially complete and certain minimum project sales levels
have been met. If all the criteria are met except that construction is not
substantially complete, then revenues are recognized on the percentage of
completion (cost to cost) basis. For sales that do not qualify for either
accrual or percentage of completion accounting, all revenue is deferred using
the deposit method. Deferred Vacation Interests revenue under the percentage of
completion and deposit methods is included in accrued liabilities and totaled $0
and $1.4 million at December 31, 2001 and 2000, respectively.
The European operations recognize Vacation Interests revenue after the
rescission period expires and upon receipt of all purchase consideration,
usually subsequent to the closing of a mortgage loan provided to the customer by
a third party. The European operations do not sell Vacation Interests in
properties prior to completion of construction and do not record deferred
revenue.
Leases of Vacation Interests in certain Caribbean locations are legally
structured as long-term lease arrangements for either 99 years or a term
expiring in 2050. The Vacation Interests subject to such leases revert to the
Company at the end of the lease terms. Such transactions are accordingly
accounted for as operating leases, with the sales value of the intervals
recorded as deferred revenue at the date of execution of the transactions.
Revenue deferred under these arrangements is amortized on a straight-line method
over the term of the lease agreements. In addition, the Company collects
maintenance fees from the lessees on these properties, which is accrued as
earned and is included in Vacation Interest lease revenue. The direct leasing
costs of the lease contracts are also deferred and amortized over the term of
the leases. The leased assets consist of buildings and improvements and
furniture and fixtures and are depreciated over terms of 40 years and 7 years,
respectively. Deferred leased Vacation Interests revenue, net of a deferred
charge for contract defaults, included in deferred revenue at December 31, 2001
and 2000 amounted to $69.3 million and $67.9 million, respectively.
F-14
Revenue on the upgrade of Vacation Interests ownership to club membership that
allows owners to exchange an annual Vacation Interval at their home resort for
time at another resort is deferred and amortized over ten years, which
represents the expected average life of a club membership. Deferred revenue on
club memberships at December 31, 2001 and 2000 is $9.8 million. Club membership
annual dues are accrued as earned.
The Company rents unsold Vacation Interests on a short-term basis. Such resort
rental income is accrued as earned. Property management fee revenues are accrued
as earned in accordance with the management contracts.
Included in other operating income is revenue on sales of one-week leases and
mini-vacations which allow prospective owners to sample a resort property and
which is deferred until the vacation is used by the customer or the expiration
date of the one year lease or mini-vacation passes. Deferred revenue on one-week
leases and mini-vacations at December 31, 2001 and 2000 is $2.7 million and $2.9
million, respectively.
Other operating income also includes nonrefundable commissions earned by the
European subsidiary on the origination of loans to customers by a third party to
finance purchases of Vacation Interests. The commission revenue is recorded upon
recognition of the related Vacation Interest sales revenue.
Mortgages and contracts receivable interest is accrued as earned based on the
contractual provisions of the notes and contracts. Interest accrual is suspended
on delinquent mortgages and contracts receivable.
Reopening of the Rescission Period - 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, sales initially recorded in 2000 amounting to $31
million in revenue were converted to pending sales as a result of the order.
Such sales were reversed in full in 2000, pending receipt from the customers of
a reconfirmation of acceptance of the sales agreement. The reconfirmation
process was substantially completed in 2001 and Vacation Interest sales of $16.8
million were recognized in 2001 for customers that elected not to rescind.
Advertising, Sales and Marketing Costs - Advertising, sales and marketing costs
are expensed as incurred, except for costs directly related to sales and leases
associated with contracts not eligible for revenue recognition as described
above. Such deferred costs principally consist of sales commissions and are
charged to operations as the related revenue is recognized. Deferred selling
costs are classified as prepaid expenses in the accompanying consolidated
balance sheets and at December 31, 2001 and 2000 were $10.9 million and $11.5
million, respectively.
Maintenance Fees and Subsidy Expense - The Company incurs a portion of operating
expenses of the unit owners' associations based on ownership of the unsold
Vacation Interests at each of the respective properties. In addition, the
developer may enter into a subsidy guarantee to fund negative cash flows for a
period not to exceed three years from acquisition or commencement of the resort
development. Such costs are expensed as incurred.
Loan Portfolio Expenses - Loan portfolio expenses include payroll,
administrative and occupancy costs of the finance subsidiary as well as loan
servicing fees paid to third parties. These costs are expensed as incurred.
Income Taxes - The Company accounts for income taxes in accordance with the
liability method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Deferred tax
assets and liabilities are measured by applying enacted statutory tax rates
applicable to the future years in which the deferred tax assets or liabilities
are expected to be realized or settled. Income tax expense consists of the taxes
payable for the current period and the change during the period in deferred tax
assets and liabilities.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
the Company in preparation of its financial statements include: (i) mortgages
and contracts receivable
F-15
allowance for losses, (ii) valuation of retained interests, (iii) estimated net
realizable value of assets held for sale and (iv) impairment of long-lived
assets. Actual results could differ from those estimates.
Loss per Share - Basic loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. All
potential common shares related to the 5.75% Convertible Subordinated Notes Due
2007 (the Convertible Notes) and dilutive stock options have been excluded from
the calculation of diluted earnings per share because the effect would be
anti-dilutive.
The Proposed Plan specifies cancellation of all outstanding equity securities of
the Company and issuance of approximately 20 million shares of New Sunterra
Stock to be issued in the reorganized company.
Other Comprehensive Income (Loss) - Other comprehensive income (loss) includes
all changes in equity (net assets) from non-owner sources such as foreign
currency translation adjustments and unrealized gains or losses on available for
sale marketable securities. The Company accounts for other comprehensive income
(loss) in accordance with SFAS No. 130, Reporting Comprehensive Income.
Note 8 - New Accounting Pronouncements
In 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Under SFAS No. 133, as amended, all derivative
instruments are recognized on the balance sheet at their fair values and changes
in fair value are recognized immediately in earnings, unless the derivatives
qualify as hedges of future cash flows. For derivatives qualifying as hedges of
future cash flows, the effective portion of changes in fair value is recorded in
other comprehensive income, and then recognized in earnings along with the
related effects of the hedged items. Any ineffective portion of hedges is
reported in earnings as it occurs. Implementation of SFAS No. 133 resulted in no
material impact to the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition, which was required to be adopted by
the Company no later than the fourth quarter of 2000. Adoption of SAB No. 101
did not result in any material changes to the Company's revenue recognition
policies.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 140, which replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities and rescinds SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125.
SFAS No. 140 revises SFAS No. 125's standards for accounting for securitizations
and other transfers of financial assets and collateral and requires certain
disclosures, but it carried over most of SFAS 125's provisions without
reconsideration. SFAS No. 140 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001 and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company adopted the new disclosures required under SFAS
No. 140 as of December 31, 2000. Adoption of SFAS No. 140 did not have a
material impact on the Company's consolidated results of operations or financial
position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations and
specifies criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized effective January 1, 2002, but instead be tested for
impairment at least annually. Management has not yet determined the amount of
goodwill impairment, if any, under these new standards. The Company adopted the
provisions of SFAS No. 141 as of July 1, 2001. SFAS No. 142 is effective January
1, 2002 and amortization of goodwill will cease as of that date. Management
cannot forecast the effect of non-amortization provisions on 2002 net income as
it may be significantly affected by the application of fresh-start reporting if
the confirmation of the Proposed Plan occurs in 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances
F-16
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company is required to adopt SFAS No. 144 on January 1, 2002. The initial
adoption of SFAS No. 144 is not expected to have a material impact on the
Company's consolidated results of operations or financial position.
The FASB is currently deliberating the issuance of an interpretation of SFAS No.
94, Consolidation of All Majority-Owned Subsidiaries, to provide additional
guidance to assist companies in identifying and accounting for special purpose
entities (SPEs), including when SPEs should be consolidated by the investor. The
interpretation would introduce a concept that consolidation would be required by
the primary beneficiary of the activities of an SPE unless the SPE can meet
certain independent economic substance criteria. It is not possible to determine
at this time what conclusions will be included in the final interpretation;
however, the result could impact the accounting treatment of these entities by
the Company.
The Accounting Standards Executive Committee of the AICPA is currently
deliberating on the issuance of a Statement of Position (SOP) to provide
consistent accounting guidance for the vacation ownership industry including
criteria for and methods of revenue recognition, accounting for selling costs,
accounting for credit losses, accounting for repossession of vacation ownership
intervals, accounting for operations during interval holding periods, accounting
for developer subsidies to interval homeowners' associations, and accounting for
upgrade transactions. It is not possible to determine at this time the impact
that the conclusions of the SOP may have on the consolidated financial
statements of the Company, or when the SOP will be finalized and effective.
Note 9 - Prior Period Adjustments
Subsequent to the issuance of its annual consolidated financial statements for
the year ended December 31, 1999, the Company's management determined that, as
discussed below, the accounting treatments that had been originally afforded to
certain transactions were inappropriate and that certain accounting errors had
been made during 1999 and prior years. Accordingly, retained earnings as
previously reported as of December 31, 1999 has been restated and decreased by
approximately $113.2 million, net of an income tax benefit of $18.2 million. The
following table summarizes the components of the adjustment to retained
earnings:
Revenue recognition on leased Vacation Interests ........................... $ 47,331
Improper capitalization of costs in real estate and development costs ...... 34,049
Improper capitalization of deferred costs, goodwill and equipment .......... 18,437
Other revenue recognition errors ........................................... 8,116
Other accounting and recording errors ...................................... 23,474
---------
131,407
Income tax effect of prior period adjustments .............................. (18,226)
---------
$ 113,181
=========
Revenue Recognition on Leased Vacation Interests - The Company improperly
recognized revenue related to the leasing of Vacation Interests on resorts in
St. Maarten, Netherlands Antilles, as real estate sales of Vacation Interests
since the acquisition of the resorts in 1995. The lease terms related to these
resorts are conveyed for a period of 99 years at one resort and a term expiring
in 2050 at the other resort. The maximum lease term available under this resort
at the date of acquisition was 55 years. The Company recorded an adjustment to
reduce the vacation interest revenue and record the lease income on a
straight-line basis over the life of the respective lease. In addition, costs of
sales from prior years was reversed and the Company reclassified the total
amount of capitalized inventory to property and equipment and computed
depreciation on those assets on the straight-line method over 40 years for
buildings and 7 years for furnishings.
Improper Capitalization of Costs in Real Estate and Development Costs - The
Company determined that it had improperly capitalized developer subsidies and
maintenance fees in excess of the budgeted guarantee periods for
F-17
most of its domestic properties. The Company had also erroneously capitalized
losses on the incidental hotel operations on developer owned intervals as real
estate and development costs. In addition, foreclosure costs, bad debts,
corporate salaries and intercompany profits from the Company's resort management
subsidiary were erroneously capitalized. These costs were removed from real
estate and development costs in the year capitalized and charged to expense, and
associated costs of sales were corrected for the capitalization errors in the
prior years.
Improper capitalization of deferred costs, goodwill and equipment -
Deferred costs - The Company erroneously deferred indirect sales and
marketing expenses on pending sales contracts. This capitalization policy was
corrected to include only the deferral of direct costs associated with these
sales. In addition, start-up and development costs that should have been
expensed in prior years in accordance with SOP 98-5, Reporting on the Cost of
Start-up Activities, were erroneously capitalized and costs associated with
direct marketing projects were incorrectly capitalized. The Company corrected
these errors by reducing the related assets and charged the costs to expense
during the periods incurred.
Goodwill - The Company inappropriately recorded a write-off associated
with a default on a note due from the seller on the acquisition of a marketing
company as an addition to goodwill during 1999. Upon subsequent review, the
Company determined that this amount should have been recorded as a bad debt. In
addition, on several acquisitions the Company capitalized non-eligible costs as
acquisition costs, which increased the purchase price and ultimate allocation of
goodwill. The Company corrected the improper capitalization of these costs and
reduced the amortization of goodwill for these errors.
Equipment - The Company incorrectly capitalized certain training,
administrative and other costs relating to various computer hardware and
software acquired and in the internal development of a software system. The
Company corrected these errors by charging such costs to expense in the periods
incurred and reduced depreciation related to the reduced carrying amounts for
these errors.
Other revenue recognition errors -
Adjustments were recorded to correct other revenue recognition errors
made in prior periods on the application of the percentage of completion
accounting method, in accounting for the Club and sampler programs as follows:
Percentage of Completion Accounting - The Company erroneously ceased
recording revenues under the percentage of completion (POC) accounting method in
1998 on sales of Vacation Intervals under construction when it introduced its
Club program and applied the full accrual method to all sales. Full accrual
accounting is applied when a binding sales contract has been executed, a 10%
minimum down payment has been received, the rescission period has expired,
construction is essentially complete and certain minimum sales levels have been
met. If all of the above criteria are met, except that construction is not
substantially complete, then revenues should have been recognized on the POC
basis. The Company corrected the incorrect change from POC to full accrual on
contracts related to projects in which construction was not essentially
complete.
Club Program - The Company has determined that indirect period costs
were improperly deferred in 1998 and 1999 related to its Club program. These
costs were offset against the Club revenue that was deferred and were being
recognized over a ten-year period. The Company corrected the deferral of the
indirect expenses and charged such costs to expense in the period incurred.
Lease Sampler (Encore) Program - The Company determined that it had
inappropriately accounted for customer payments in prior years associated with
the Encore program as revenue in advance of fulfilling the Company's obligations
or program terms. As a result, the Company has corrected its method of
accounting for Encore sales to properly match revenues to the fulfillment of its
obligations.
F-18
Other accounting and recording errors -
Adjustments were recorded to correct other accounting and recording
errors related to prior years as follows:
Installment Interest - The Company accrued an obligation in 1996 and
1997 for interest due under the installment method of accounting under Internal
Revenue Code section 453(l). The Company has determined that the recording of
this interest was incorrect, since the obligation to pay the interest only
arises when the taxpayer owes corporate income taxes. During the years in which
this expense was accrued the Company did not owe regular corporate tax and, as
such, was not required to accrue this interest.
Other Receivables - The Company sold mortgages during 1998 through an
off-balance sheet conduit securitization. During 1999, the Company elected to
replace certain defective mortgages receivable that collateralized advances to a
qualifying special purpose entity under a conduit facility (see Note 22). These
mortgages receivable returned from the conduit, which were substantially
uncollectible and should have been charged off, were recorded as other
receivables at their contract values. The Company also determined that it had
improperly recorded certain period costs as other receivables and had improperly
accrued for certain gain contingencies.
Cash - The Company determined that certain cash accounting errors were
not recorded in the year the errors arose. In addition cash accounts related to
certain unconsolidated affiliates were erroneously included in the Company's
consolidated financial statements.
Retained Interests - The Company determined that certain errors had
been made in 1998 and 1999 in the financial models used to estimate the value of
retained interests in mortgages receivable sales in 1999. As a result, the
Company corrected these errors in these financial models which reduced the gains
recorded on the mortgages receivable sales or increased the impairment losses on
the retained interests.
Loan Origination Costs - The Company determined that its methodology in
the calculation of loan origination costs on mortgage loans originated by the
Company was incorrect. The Company corrected the errors to properly account for
loan origination costs.
Mortgages and Contracts Receivable - The Company determined that there
were errors in the reconciliations between the detailed information underlying
the subsidiary ledger and the general ledger balance for mortgages and contracts
receivable, interest receivable and the allowance for losses. The Company
corrected these errors, which resulted in additional charges in 1999.
Note 10 - Accounting Change
The Company's accounting policies prior to 2000 provided for the capitalization
of homeowners' association fees and property taxes during the developer
guarantee and subsidy periods as inventory carrying costs in real estate and
development costs. The Company has evaluated this policy and determined that the
preferable method in accordance with industry conventions is to charge these
costs to expense as incurred once a project is substantially complete and
available for occupancy. The effect of this change was to increase the Company's
net loss for 2000 by the cumulative amount of the adjustment of $18.8 million
($0.52 per share) as of January 1, 2000. Income tax benefits related to this
accounting change were not recognized because their realization is not assured.
F-19
Note 11 - Reorganization Expenses and Restructuring Costs
Reorganization expenses 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:
2001 2000
Professional fees ........................... $ 47,818 $ 14,656
Asset impairments ........................... - 45,312
Write off of debt issuance costs ............ - 16,377
Employee retention and severance programs ... 5,944 466
Provision for rejected executory contracts .. 2,125 649
(Gains) losses on asset sales ............... (4,118) 429
Other ....................................... - 779
Interest income ............................. (1,419) (680)
----------- -----------
$ 50,350 $ 77,988
=========== ===========
The Company made cash payments for reorganization expenses of $43.8 million and
$8.0 million in 2001 and 2000, respectively.
During the first quarter of 2000, the Company reorganized its executive
management, sales and marketing operations, and several corporate support
departments. As a result of these actions, the Company incurred a restructuring
charge of $6.0 million. The restructuring charge included $4.4 million primarily
for severance and termination benefits for 55 employees and $1.6 million in
costs for lease terminations and other sales center closure costs.
Note 12- Mortgages and Contracts Receivable
The Company provides financing to purchasers and lessees of Vacation Interests
that are collateralized by their interest in such Vacation Interests. The
mortgages and contracts generally bear interest at fixed rates between 12% and
17% at the time of issuance. The term of the mortgages and contracts typically
average seven to ten years, and may be prepaid at any time without penalty. The
weighted average interest rate of outstanding mortgages and contracts receivable
was 14.4% and 14.3% at December 31, 2001 and 2000, respectively. Mortgages and
contracts receivable in excess of 60 days past due at December 31, 2001 and 2000
were 4.0% and 5.5%, respectively, of gross mortgages and contracts receivable.
The following reflects the scheduled contractual principal maturities of
mortgages and contracts receivable:
Year ending December 31:
2002 ..................................... $ 16,711
2003 ..................................... 19,284
2004 ..................................... 22,178
2005 ..................................... 25,669
2006 ..................................... 29,623
2007 and thereafter ...................... 95,557
-----------
$ 209,022
===========
F-20
The following summarizes the Company's total mortgages and contracts receivable
at December 31:
2001 2000
Mortgages receivable ......................... $ 194,755 $ 205,787
Contracts receivable ......................... 14,267 15,841
----------- -----------
Subtotal ..................................... 209,022 221,628
Deferred loan origination costs, net ......... 3,220 3,905
----------- -----------
Mortgages and contracts receivable, gross .... 212,242 225,533
Less allowance for loan and contract losses .. (36,206) (37,326)
----------- -----------
Mortgages and contracts receivable, net ...... $ 176,036 $ 188,207
=========== ===========
Activity in the allowance for loan and contract losses associated with mortgages
and contracts receivable is as follows:
2001 2000
Balance, beginning of period ................. $ 37,326 $ 19,138
Provision for loan losses .................... 10,606 24,544
Receivables charged off ...................... (10,019) (6,761)
Other ........................................ (1,707) 405
----------- -----------
Balance, end of period ....................... $ 36,206 $ 37,326
=========== ===========
Included in other receivables on the accompanying consolidated balance
sheets are $1.9 and $2.3 million at December 31, 2001 and 2000, respectively, of
accrued interest receivable related to mortgages and contracts receivable.
Note 13 - Sales of Mortgages Receivable
Sales in 2001
In April 2001, the Company recognized a gain of $0.1 million, net of expenses,
on the sale to a finance company of $2.6 million in mortgages receivable without
recourse. The mortgages receivable were recorded at fair market value as assets
held for sale at December 31, 2000, with an allowance for loan losses of $1.0
million. The mortgages receivable had a five-year weighted average remaining
life and a weighted average interest rate of 15%.
Sales in 2000
Under the terms of the Company's off-balance sheet Mortgages Receivable Conduit
Facility (the Conduit Facility), the Company sold mortgages receivable to a
wholly owned special purpose entity at 95% of face value, before a required 6%
cash reserve funded from cash flow, without recourse to the Company as to
collectibility. The Company retained 100% of the excess spread over the
borrowing rate.
In the first quarter of 2000, the Company recognized a loss of $0.1 million, net
of expenses, on the sale of $16.5 million of mortgages receivable, comprised of:
(1) $15.6 million of undivided interests in mortgages receivable with a nine
year weighted average remaining life and a weighted average interest rate of 14%
which were sold into the Conduit Facility and (2) $0.9 million of mortgages
receivable with a 10 year weighted average remaining life and a weighted average
interest rate of 15% which were sold to a finance company at 100% of par value
with a 50% participation in the remaining interest spread.
The Company retains the servicing rights to the securitized mortgages
receivable portfolios. The Company receives a fee that is substantially equal to
the costs of providing the servicing functions. As such, no asset or liability
has been recognized on the consolidated balance sheets for the servicing rights
retained.
F-21
During 2001 and 2000, the following cash flows occurred relating to the
Company's off-balance sheet conduit and securitization transactions:
2001 2000
Proceeds received from new sales into the Conduit Facility .............. $ - $ 15,681
Cash received from retained interests ................................... $ - $ 2,624
Servicing fees received ................................................. $ 1,109 $ 1,283
Fair Value of Retained Interests in Mortgages Receivable Sold
The Company measures the fair value of retained interests in mortgages
receivable sold at each reporting date by estimating the expected future cash
flows using updated economic assumptions for the weighted average life,
prepayment speed and expected default rates based on historical experience and
then discounting the estimated cash flows at a current fair value interest rate.
These assumptions are developed based on the static pool methodology whereby the
prepayment speed and expected default rates are developed based on the age and
payment characteristics of the mortgages receivable. At December 31, 2001, the
key economic assumptions and the sensitivity of the current fair value of
retained interests in mortgages receivable sold to an immediate 10% or 20%
adverse change in those assumptions are as follows:
Carrying amount/fair value of retained interests .............. $ 15,974
Weighted average remaining term (in years) .................... 6.1-7.2
Prepayment speed assumption (annual rate) ..................... 2%-28%
Impact on fair value of 10% adverse change .................... $ (33)
Impact on fair value of 20% adverse change .................... $ (65)
Expected gross defaults (annual rate) ......................... 0.1%-10%
Impact on fair value of 10% adverse change .................... $ (588)
Impact on fair value of 20% adverse change .................... $ (1,171)
Residual cash flows discount rate (annual) .................... 16.0%
Impact on fair value of 10% adverse change .................... $ (1,264)
Impact on fair value of 20% adverse change .................... $ (2,418)
These sensitivities are hypothetical. As the figures indicate, changes in fair
value based on a 10 percent variation in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments and increased credit losses),
which might magnify or counteract the sensitivities.
As a result of the Chapter 11 proceedings, there has been a contractual change
in the priority of distribution of principal and interest payments collected
which impacted the value of the Company's retained interests in mortgages
receivable sold. The result of this contractual change was an impairment of the
value of the retained interest of $11.7 million, which is included as a portion
of the impairment loss on the retained interests in mortgages receivable sold in
the consolidated statements of operations.
Note 14 - Other Receivables and Allowance for Doubtful Accounts
Other receivables at December 31, 2001 and 2000 consist of amounts due to the
Company for accrued interest on mortgages and contracts receivable, property
management fees, homeowners' association maintenance fees and other income, less
an allowance for doubtful accounts of $17.5 million and $12.9 million,
respectively.
F-22
Activity in the allowance for doubtful accounts is as follows:
2001 2000
Balance, beginning of period ................ $ 12,905 $ 10,756
Provision for doubtful accounts ............. 5,237 9,429
Receivables charged off ..................... (1,040) (4,630)
Other ....................................... 445 (2,650)
---------- ----------
Balance, end of period ...................... $ 17,547 $ 12,905
========== ==========
Note 15 - Assets Held for Sale
Assets held for sale consist of the following at December 31:
2001 2000
Real estate and development costs ............ $ 6,939 $ 32,310
Property and equipment, net .................. 2,353 13,576
Other assets ................................. 2,032 3,161
---------- ----------
$ 11,324 $ 49,047
========== ==========
In 2001 the Company realized proceeds of $41.6 million for dispositions of
assets held for sale with an aggregate net book value of $37.7 million at
December 31, 2000. See Note 27 for a summary of significant dispositions.
Note 16 - Real Estate and Development Costs
Real estate and development costs consist of the following at December 31:
2001 2000
Land ..................................................... $ 53,876 $ 53,658
Development costs ........................................ 458,193 456,672
Capitalized interest ..................................... 20,234 20,341
---------- ----------
532,303 530,671
Interests recoverable under defaulted mortgages .......... 20,126 35,241
Less accumulated vacation interest cost of sales ......... (372,342) (345,799)
---------- ----------
Net real estate and development costs .................... $ 180,087 $ 220,113
========== ==========
Vacation Interests cost of sales for 2000 included an impairment charge of
$34.9 million to reduce real estate and development costs to their estimated net
realizable value, and a $4.5 million write down of common area costs resulting
from a substantial change in planned future expansion at one of the Company's
existing resort locations.
Cost of Vacation Interests sold for 2001 included approximately $4.9 million of
costs related to the recognition of sales deferred in 2000 under the re-opening
of the rescission period described at Note 7.
Note 17 - Property and Equipment
Property and equipment consists of the following at December 31:
2001 2000
Land and improvements .......................... $ 4,257 $ 4,284
Buildings and leasehold improvements ........... 56,252 49,098
Furniture and office equipment ................. 21,846 20,918
Computer equipment ............................. 22,878 22,192
Software ....................................... 14,054 13,870
---------- ----------
119,287 110,362
F-23
Less accumulated depreciation and amortization .......... (51,856) (38,008)
---------- ----------
Property and equipment, net ............................. $ 67,431 $ 72,354
========== ==========
Depreciation and amortization expense related to property and equipment was
$15.1 million and $22.0 million in 2001 and 2000, respectively.
Property and equipment includes $6.4 million of equipment under capital leases
at December 31, 2001 and 2000. Accumulated amortization of assets acquired under
capital leases at December 31, 2001 and 2000 was $4.9 million and $3.2 million,
respectively. Amortization expense for 2001 and 2000 for capital lease assets
was $1.7 million and $1.8 million, respectively, and is included in depreciation
expense in the accompanying consolidated statements of operations. The related
capital lease obligations of $3.0 million and $3.3 million at December 31, 2001
and 2000, respectively, are included in liabilities subject to compromise on the
consolidated balance sheets.
Note 18 - Intangible and Other Assets
Intangible and other assets consist of the following at December 31:
2001 2000
Goodwill ...................................... $ 26,045 $ 32,378
Postpetition debt issuance costs .............. 3,060 7,814
Other ......................................... 3,957 8,322
---------- ----------
33,062 48,514
Less accumulated amortization ................. (8,344) (21,085)
---------- ----------
Intangible and other assets, net .............. $ 24,718 $ 27,429
========== ==========
Amortization expense was $3.3 million and $5.5 million in 2001 and 2000,
respectively. Amortization of capitalized financing costs included in interest
expense was $1.0 million and $3.0 million for 2001 and 2000, respectively.
In 2000 an impairment write down of $44.6 million was taken against Goodwill as
a result of the bankruptcy proceedings. Also recorded in 2000 was a $16.4
million write off of debt issuance costs related to prepetition loan
obligations. Both amounts are included in reorganization expenses in the
accompanying consolidated statements of operations.
In 2001, the Company removed $17.0 million of fully amortized intangible assets
and related amortization.
Note 19 - Asset Impairment
In accordance with SFAS No. 121, Impairment of Long-lived Assets and Assets to
be Disposed Of, the Company reviews its long-lived assets for impairment at each
reporting date. Impairment exists when future undiscounted cash flows are not
sufficient to recover the carrying amount of the related asset. No impairments
were recorded as a result of the Company's review of long-lived assets for 2001.
The following impairment write-downs were recorded in 2000:
Software ................................................ $ 21,448
Non-core assets ......................................... 56,256
Goodwill ................................................ 44,594
-----------
$ 122,298
The impairment of software was determined based on an evaluation of the
on-going utility of the Company's internally developed software program designed
for enterprise-wide management of inventory, properties, Club Sunterra, and
sales and marketing. Impairment of non-core assets and goodwill relates
primarily to
F-24
real estate and development costs and property and equipment of resort locations
to be disposed of and marketing operations discontinued as part of the
reorganization process.
The impairment charges for 2000 are included in the following captions
in the accompanying consolidated statements of operations:
Vacation Interests cost of sales ....................... $ 39,556
Reorganization expenses ................................ 45,312
Impairment write-down .................................. 37,430
-----------
$ 122,298
===========
Note 20 - Debtor-in-possession Financing
On May 31, 2000 the Bankruptcy Court approved a debtor-in-possession (DIP)
financing agreement that provided the Company with a $25 million committed
revolving credit facility (the Original DIP Facility). The Bankruptcy Court
approved an amendment to this agreement increasing the facility to $45 million
on August 3, 2000. The credit facility had a maturity date of November 1, 2001,
with interest payable monthly at prime plus 4% (13.5% at December 31, 2000).
There were borrowings of $44.8 million outstanding under the Original DIP
Facility at December 31, 2000.
On April 3, 2001, the Bankruptcy Court approved a replacement DIP financing
agreement (the Replacement DIP Facility) with a new lender. The Replacement DIP
Facility provides financing of up to $160 million to the Company in the form of
term loans and a revolving credit facility. The Original DIP Facility was
retired with proceeds of a term loan under the Replacement DIP Facility.
Interest is payable monthly at the one-month LIBOR rate plus 3.5% (5.4% at
December 31, 2001), and the unused portion of the revolving credit facility is
subject to a commitment fee of 0.5%. Borrowings under the Replacement DIP
Facility mature on (and the availability period for revolving loans expires 21
days prior to) the earlier of June 30, 2002 or the date of substantial
consummation of a plan of reorganization approved by the Bankruptcy Court. The
loans are subject to mandatory prepayment under various circumstances, including
prepayment on a monthly basis with proceeds of certain sales of Vacation
Interests (in the case of term loans), prepayment with certain monthly cash
balances (in the case of revolving loans) and prepayment with proceeds of
certain sales or dispositions by the Debtor Entities of other assets (in the
case of both term loans and revolving loans). Borrowings are collateralized by
all unencumbered assets of the Debtor Entities and are afforded an
administrative priority under the Bankruptcy Code. There were borrowings of
$68.3 million outstanding under the Replacement DIP Facility at December 31,
2001. The terms of the Replacement DIP Facility were substantively modified
after December 31, 2001 as described in Note 32.
Note 21 - Notes Payable
Notes payable, including amounts classified as liabilities subject to
compromise, consist of the following at December 31:
2001 2000
Endpaper loans, collateralized by restricted cash and by mortgages and
contracts receivable. Interest is payable monthly at prime plus 2% to
prime plus 3% (6.75% and 11.5% at December 31, 2001 and 2000,
respectively) (1) ........................................................ $ 14,501 $ 14,523
Line of credit, collateralized by certain inventory. Interest is payable
monthly at LIBOR plus 4.5% (6.61% and 11.28% at December 31, 2001 and
2000, respectively) (1) .................................................. 75,000 75,000
Line of credit, collateralized by certain inventory. Interest is payable
monthly at LIBOR plus 3.75% (5.86% and 10.53% at December 31, 2001 and
2000, respectively) (1) .................................................. 19,165 19,165
Lines of credit, collateralized by restricted cash and pre-sale and
unseasoned mortgages and contracts receivable. Interest is payable
F-25
2001 2000
monthly at a variable interest rate (8% and 9.5% at December 31, 2001
and 2000, respectively). Principal is due as the collateralized
mortgages and contracts receivable become seasoned or January 2001 ........ 8,960 8,960
Lines of credit, collateralized by mortgages and contracts receivable.
Interest is payable monthly at a variable interest rate (6.61% and
10.63% at December 31, 2001 and 2000, respectively) (1) ................... 4,541 4,541
Senior Credit Facility of $35.4 million with interest payable quarterly at
the higher of the Federal Funds rate plus 2.5% or prime plus 2% (6.75%
and 8.5% at December 31, 2001 and 2000, respectively); collateralized by
specific mortgages receivable; due January 2001 ........................... 33,251 34,420
Other notes payable and capital lease obligations subject to compromise ...... 4,712 4,974
9.25% Senior Notes, interest due May and November, principal due May 2006 .... 140,000 140,000
9.75% Senior Subordinated Notes, interest due April and October and
principal due October 2007 ................................................ 200,000 200,000
5.75% Convertible Subordinated Notes, interest payments due January and
July, principal due January 2007 .......................................... 138,000 138,000
---------- ----------
Notes payable subject to compromise .......................................... 638,130 639,583
Securitized notes, collateralized by restricted cash and certain mortgages
receivable. Interest and principal is payable monthly at an average
interest rate of 6.7% due 2014 ............................................ 27,342 43,319
Other notes payable and capital lease obligations ............................ 663 1,273
---------- ----------
Notes payable ................................................................ 666,135 684,175
Notes payable subject to compromise .......................................... (638,130) (639,583)
---------- ----------
Total notes payable .......................................................... $ 28,005 $ 44,592
========== ==========
(1) Subsequent to December 31, 2001 (as described in Note 32) certain debt
obligations with Finova Capital were settled.
As a result of the Chapter 11 proceedings, none of the lines of credit or other
facilities referred to above may be drawn upon or otherwise accessed.
Substantially all of the Company's notes payable may be settled as a result of
troubled debt restructurings and the confirmation of a plan of reorganization
anticipated in 2002. The contractual maturities of indebtedness are as follows:
Due in the year ending December 31:
Contractual maturities for the period of May 31, 2000
through December 31, 2001, unpaid due to bankruptcy
proceedings ......................................... $ 120,939
2002 .................................................. 1,431
2003 .................................................. 222
2004 .................................................. 27,604
2005 .................................................. -
2006 .................................................. 140,000
2007 and thereafter ................................... 375,939
-----------
$ 666,135
===========
Note 22 - Off Balance Sheet Financing Arrangements
Off balance sheet financing arrangements have been used to provide
liquidity and improve cash flows for the Company. The Company does not expect
the bankruptcy cases to significantly impact its off-balance sheet financing
arrangements, although there has been a contractual change in the priority of
distribution of principal and interest payments collected which impacted the
value of the Company's retained interests in mortgages receivable sold. The
discussion below describes qualifying special purpose entities and related
financing transactions.
F-26
In order to obtain liquidity from its mortgages receivable, the Company
securitized certain of those assets through entities that are intended to meet
the accounting criteria for Qualifying Special Purpose Entities (Qualifying
Entities). Among other criteria, a qualifying entity's activities must be
restricted to passive investment in financial assets and issuance of beneficial
interests in those assets. Under accounting principles generally accepted in the
United States of America, entities meeting these criteria are not consolidated
in the sponsor's financial statements. The Company sold selected financial
assets to Qualifying Entities as described in Note 13 and below.
In 1999 and 2000, the Company sold mortgages receivable to Qualifying
Entities. The Qualifying Entities raised cash by issuing beneficial interests in
the form of rights to cash flows from the mortgage receivable assets as
collateral for borrowings under a line of credit or under promissory notes
issued to third-party investors. The Company provides servicing for the
transferred assets and collects a fee for those services as well as retaining
100% interest in the excess spread over the borrowing rate. Sales of mortgages
receivable to the Qualifying Entities are made without recourse to the Company
as to collectibility. All of the Qualifying Entities' assets serve as collateral
for the obligations. The Company is not required to provide any guarantees or
liquidity support for the Qualifying Entities. These Qualifying Entities are not
consolidated in the accompanying financial statements. The transferred mortgages
receivable and the obligations of the Qualifying Entities are not reflected on
the consolidated balance sheets of the Company.
Conduit Facility - The Company established a Qualifying Entity that is the
obligor on a $100 million Mortgages Receivable Conduit Facility. The Company
sold undivided interests in mortgages receivable to the Qualifying Entity at 95%
of face value without recourse to the Company as to collectibility. The
Qualifying Entity financed those purchases through advances on the Conduit
Facility collateralized by an undivided interest in the transferred mortgages
receivable. A majority of the loans sold into the Conduit Facility were
subsequently repurchased by the Company and sold into securitizations described
below. The Company's retained interests in the mortgage loans transferred to the
Qualifying Entity to secure its borrowings under the Conduit Facility were
estimated to have a fair value of $0 as of December 31, 2001. It is estimated
that the cash flow from the transferred mortgages receivable collateralizing
advances under the Conduit Facility will be insufficient to enable the
Qualifying Entity to repay principal and contractual interest on its
obligations. As such, the Company currently expects no future cash flow from
those mortgages receivable. Although there is no contractual requirement in the
Conduit Facility agreement, as certain mortgages receivable defaults occurred,
the Company transferred in 2000 a total of $3.6 million in new mortgages
receivable without consideration. The Conduit Facility expired on December 17,
2001.
Securitization Transactions - The Company established Qualifying Entities to
issue fixed rate notes payable collateralized by an undivided interest in
transferred mortgages receivable. The Company retains 100% interest in the
future cash flows generated by the sold mortgages receivable portfolios in
excess of the cash required by the Qualifying Entities to fully repay principal
and contractual interest on their obligations. Such excess cash is principally
generated by the excess of the weighted average contractual interest received on
the mortgage loans over the interest rates on the Qualifying Entities' notes.
The notes contain a clean up call provision that allows the notes to be called
and mortgages receivable to be transferred back to the Company when the
remaining principal value of the notes reaches 10% of the original principal
value.
The following summarizes the off-balance sheet mortgages receivable, net of
mortgages considered delinquent, held by qualifying special purpose entities:
(Unaudited)
--------------------------
December 31 2001 2000
Conduit Obligor $ 43,154 $ 54,602
1999-A Securitization Obligor 54,158 68,933
1999-B Securitization Obligor 38,248 48,776
----------- -----------
$ 135,560 $ 172,311
=========== ===========
F-27
The following summarizes the criteria for when mortgages are considered
delinquent and the related percentages of delinquency:
(Unaudited)
Delinquency Criteria
-------------------------------
December 31 Days 2001 2000
Conduit Obligor ............................ 120 23% 15%
1999-A Securitization Obligor .............. 180 17% 10%
1999-B Securitization Obligor .............. 180 15% 7%
The following summarizes the outstanding off-balance sheet obligations
collateralized by the mortgages receivable held by qualifying special purpose
entities:
(Unaudited)
-------------------------------
December 31 2001 2000
Conduit Obligor ............................ $ 42,475 $ 52,140
1999-A Securitization Obligor .............. 46,031 63,044
1999-B Securitization Obligor .............. 30,429 40,733
-------- --------
$118,935 $155,917
======== ========
At the time of the closings of the transactions described above, the Company
received true sale legal opinions that were relied upon to determine the
qualified status of these special purpose entities. Various accounting
principles generally accepted in the United States of America specify the
conditions that the Company must observe in not consolidating qualifying special
purpose entities. Accounting for special purpose entities is under review by the
FASB, and the off balance sheet status of the qualifying special purpose
entities may change as a result of those reviews.
Note 23 - Segment Information
Due to the Chapter 11 proceedings, the Company currently 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. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (see
Note 7). No single customer accounts for a significant amount of the Company's
sales. Information about the Company's operations in different geographic
locations is shown below:
F-28
North America North America Total
Debtors Non-Debtors Foreign Non-Debtors Eliminations Total
2001
Revenues from external
customers .............................. $ 140,310 $ 41,404 $ 90,733 $ 132,137 $ - $ 272,447
Interest expense ....................... 20,190 16 3,800 3,816 (3,529) 20,477
Depreciation and
amortization expense ................... 9,129 3,650 5,649 9,299 - 18,428
Income on investments in
joint ventures ......................... - (3,381) - (3,381) - (3,381)
(Loss) income before income tax
(benefit) provision and cumulative
effect of accounting changes ........... (78,911) 3,069 7,020 10,089 - (68,822)
Segment assets ......................... 576,176 46,305 130,766 177,071 (89,756) 663,491
Assets held for sale ................... 11,324 - - - - 11,324
Investment in joint ventures ........... 414 19,284 - 19,284 - 19,698
Expenditures for additions
to long-lived assets ................... 850 - 9,697 9,697 - 10,547
Other non-cash profit & loss items:
Reorganization expenses ................ 49,654 - 696 696 - 50,350
2000
Revenues from external customers ....... $ 158,261 $ 43,410 $ 86,442 $ 129,852 $ - $ 288,113
Interest expense ....................... 43,458 46 2,924 2,970 (3,680) 42,748
Depreciation and amortization
expense ................................ 17,846 4,596 5,075 9,671 - 27,517
Income on investments in joint
ventures ............................... (576) (2,151) - (2,151) - (2,727)
(Loss) income before income tax
(benefit) provision and cumulative
effect of accounting changes ........... (335,680) (20,394) (363) (20,757) - (356,437)
Segment assets ......................... 653,751 59,523 125,445 184,968 (103,609) 735,110
Assets held for sale ................... 49,047 - - - - 49,047
Investment in joint ventures ........... 1,247 17,615 - 17,615 - 18,862
Other non-cash profit & loss items:
Restructuring costs .................... 6,040 - - - - 6,040
Reorganization expenses ................ 75,858 - 2,130 2,130 - 77,988
Impairment write down of assets ........ 26,573 10,857 - 10,857 - 37,430
Impairment loss on retained interests
in mortgages receivable sold ........... 30,015 - - - - 30,015
Note 24 - Employee Benefit Plans
The Company has established a qualified retirement plan (401(k) Plan), with a
salary deferral feature designed to qualify under Section 401 of the Internal
Revenue Code of 1986, as amended. Subject to certain limitations, the 401(k)
Plan allows participating employees to defer up to 15% of their eligible
compensation on a pre-tax basis. The 401(k) Plan allows the Company to make
discretionary matching contributions of up to 50% of employee contributions,
though no such matching contributions were made during 2001 or 2000. During
2001, the Company received notification from the Department of Labor (DOL) that
the Plan may have failed certain requirements under the applicable sections of
the Internal Revenue Code. A final outcome of potential penalties and additional
funding has not been determined. The Company does not believe the plan will lose
its tax-exempt status.
The Company has a self-insured health plan which covers substantially all of its
full time employees in the United States. The health plan uses employee and
employer contributions to pay eligible claims. To supplement the plan, the
Company has stop-loss insurance to cover individual claims in excess of
$150,000. The Company has accrued for known claims that have been incurred but
not reported.
Effective October 11, 2000, the Company implemented an employee retention plan
for certain management and other key employees. The purpose of the plan was to
encourage these employees to continue their employment with
F-29
the Company during the Chapter 11 proceedings. The plan provided up to $3
million in retention bonuses for employees covered by the plan, subject to
continued employment and the plan's eligibility and vesting requirements.
Effective August 21, 2001, the Company amended its key employee retention plan.
As of December 31, 2001 and 2000, $1.1 million and $0.5 million, respectively,
had been accrued for retention bonuses and are included in reorganization
expenses in the consolidated statements of operations. The Company paid $1.8
million in bonuses under the retention plan in 2001.
The Company terminated an Employee Stock Purchase Plan (ESPP) effective June 14,
2000. The ESPP had been established to assist eligible employees to acquire
ownership in the Company and to encourage long-term employment with the Company.
The Company had reserved 750,000 shares of common stock for the ESPP of which
111,410 shares had been issued prior to termination of the plan.
Note 25 - Income Taxes
The components of the provision (benefit) for income taxes are summarized as
follows:
Year Ended December 31 2001 2000
Current:
Federal ................................................... $ - $ -
State ..................................................... 50 152
Foreign ................................................... 4,232 (1,264)
---------- ----------
Total current provision (benefit) for income taxes ........... 4,282 (1,112)
---------- ----------
Deferred:
Federal ................................................... - -
State ..................................................... - -
Foreign ................................................... (1,565) 1,634
---------- ----------
Total deferred (benefit) provision for income taxes .......... (1,565) 1,634
---------- ----------
$ 2,717 $ 522
========== ==========
The reconciliation between the statutory provisi+on for income taxes and the
actual provision for income taxes is shown as follows:
Year Ended December 31 2001 2000
Income tax at U.S. federal statutory rate .................... $ (24,088) $ (124,753)
State tax, net of federal benefit ............................ (2,870) (14,400)
Non-deductible goodwill ...................................... - 17,265
Bankruptcy expenses .......................................... 13,748 4,830
Other nondeductible differences .............................. 6,941 1,770
Change in valuation allowance ................................ 8,986 115,810
---------- ----------
Provision for income taxes $ 2,717 $ 522
========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax liabilities were as follows:
As of December 31 2001 2000
Deferred tax assets:
Allowances for losses ....................................... $ 37,961 $ 38,286
Fixed assets ................................................ 12,663 15,425
Real estate and development cost adjustments ................ 38,208 31,724
Intangible assets ........................................... 8,753 9,743
Capitalized interest ........................................ 2,952 2,952
Deferred profit ............................................. 21,682 21,393
Property impairment adjustments ............................. 6,875 14,190
F-30
As of December 31 2001 2000
Gains on mortgages sold .................................... 13,085 11,095
Accrued liabilities ........................................ 11,050 7,764
Net operating loss carryover ............................... 90,257 91,937
Foreign tax credit carryover ............................... 1,054 1,054
Foreign net operating loss carryover ....................... 8,209 7,738
State net operating loss carryover ......................... 7,499 7,690
Foreign deferrals .......................................... 2,580 2,625
Minimum tax credit carryover ............................... 3,574 3,574
Other ...................................................... 5,808 4,692
---------- -----------
Total gross deferred tax assets .............................. 272,210 271,882
Valuation allowance .......................................... (171,141) (162,024)
---------- -----------
Total net deferred tax assets ................................ 101,069 109,858
---------- -----------
Deferred tax liabilities:
Installment sales .......................................... (92,647) (101,763)
Percentage of completion ................................... (2,796) (2,247)
Foreign deferrals .......................................... (70) (1,634)
Technology expenses ........................................ (5,847) (5,848)
---------- -----------
Total deferred tax liabilities ............................... (101,360) (111,492)
---------- -----------
Net deferred tax liability ................................... $ (291) $ (1,634)
========== ===========
At December 31, 2001, the Company had available approximately $257.9 million of
unused federal net operating loss carryforwards and $187.5 million of unused
state net operating loss carryforwards (the NOLs) that may be applied against
future taxable income. These NOLs expire on various dates from 2004 through
2021. At December 31, 2001, the Company had available approximately $21.3
million of unused foreign net operating loss carryforwards that may be applied
against future taxable income. These foreign NOLs expire on various dates.
As a result of the Company's Chapter 11 filings and uncertainties regarding its
ability to generate sufficient taxable income to utilize its net operating loss
carryforwards, the Company recorded a valuation allowance against the balance of
its net deferred tax assets as of December 31, 2001.
Provision has not been made for taxes on approximately $37.8 million and $31.9
million of undistributed earnings of foreign subsidiaries as of December 31,
2001 and 2000, respectively. Those earnings have been and are expected to be
reinvested in the foreign subsidiaries. These earnings could become subject to
additional tax if they were remitted to the Company, or if the Company were to
sell its stock in the subsidiaries. It is not practicable to estimate the amount
of additional tax that might be payable on the foreign earnings.
Note 26 -Related Party Transactions
At December 31, 2001 and 2000, respectively, the Company had accrued $7.7
million and $6.2 million as net receivables from homeowners' associations at its
various resorts, generally for management fees and other operating and
maintenance expenses. Amounts payable to homeowners' associations consist
primarily of maintenance fees for units owned by the Company. The net receivable
due from homeowners' associations is included in due from related parties in the
accompanying consolidated balance sheets.
At December 31, 2001 and 2000, the Company had notes receivable bearing interest
at 12% of $2.2 million and $5.1 million, respectively, due from the Company's
joint ventures in Poipu Point and Ka'anapali, Hawaii. The notes receivable
consist primarily of certain reimbursable operating and development expenses for
start-up and development activities.
F-31
The Company's management fee income of $21.0 million and $20.0 million is
primarily received from the homeowners' associations of various properties owned
by the Company or its joint ventures.
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. In 2001, the Company paid $0.1 million to Westpac under
this agreement, and management believes that amounts paid to Westpac during 2002
may range from $1.0 million to $2.0 million.
The Company is indebted to funds managed by a director of Sunterra and his
associates which hold two issues of corporate bonds of Sunterra in an aggregate
face amount of approximately $5.5 million.
Note 27 - Dispositions
Gains and losses on dispositions are included in reorganization expenses. A
significant portion of the proceeds received on asset sales is held as
restricted cash. The following table presents significant dispositions of assets
during the years ended December 31, 2001 and 2000:
Property Date Net Gain
Description Sold Proceeds (Loss)
2000 Dispositions
Breckenridge Crossings ............ Resort April 2000 $ 8,845 $ -
Sunterra Centre ................... Office Building August 2000 9,035 (290)
Village at Steamboat .............. Resort November 2000 8,305 (92)
2001 Dispositions
Savoy on South Beach .............. Resort February 2001 17,582 149
Northbay Receivables .............. Mortgages Receivable May 2001 1,329 135
Greensprings Plantation ........... Land July 2001 2,406 528
Ridge Spa & Racquet Club .......... Resort September 2001 1,119 (67)
Napa Land ......................... Land September 2001 2,964 1
Harbour Lights .................... Resort September 2001 8,462 188
Powhatan Campground ............... Land December 2001 2,073 1,172
Gatlinburg Town Square ............ Resort December 2001 3,672 1,576
Note 28 - Future Minimum Lease Payments
At December 31, 2001, $3.0 million of capital lease obligations and related
accrued interest of $0.3 million are included in liabilities subject to
compromise on the consolidated balance sheet. As more fully described in Note
32, terms of certain capital leases were modified subsequent to December 31,
2001.
Total rental expense under operating leases in 2001 and 2000 was $3.2
million and $8.9 million, respectively.
At December 31, 2001, future minimum lease payments on operating leases were as
follows:
Operating
Year Ending December 31 Leases
2002 ................................................ $ 3,146
2003 ................................................ 2,891
2004 ................................................ 2,432
2005 ................................................ 1,977
2006 ................................................ 1,901
Thereafter .......................................... 1,409
---------
Total minimum lease payments ........................ $ 13,756
=========
F-32
The Company may assume or reject executory contracts, including lease
agreements, under the Bankruptcy Code. The Company has not completed its
assessment of executory contracts to be rejected. Pursuant to the terms of the
Proposed Plan, all unexpired leases not expressly assumed by the Debtor Entities
will be deemed rejected as of the effective date of the Proposed Plan. As such,
the summary of future minimum lease payments includes amounts for leases that
may potentially be rejected.
Note 29 - 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 and the plaintiffs have until July 3, 2002 to resubmit an amended
complaint. If such complaint is filed, the Company may be included as a
defendant.
In addition, the Company is 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 prepetition and is stayed
under the Company's Chapter 11 proceeding. In the judgment of management, 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.
The Company owns a partnership interest in the Embassy Vacation Resort at Poipu
Point, Koloa, Kauai, Hawaii. Under the terms of the partnership agreement, the
Company could be required to purchase the other partners' interest. At December
31, 2001, the Company does not believe that the events requiring such purchase
are likely to occur.
The Company has entered into employment contracts with certain key management
employees that specify severance payments upon termination of the contracts. The
Company is unable to determine the amount of severance payments that may
eventually be payable under the terms of these employment contracts.
Note 30 - Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
that the Company disclose estimated fair values for its financial instruments.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents and Restricted Cash - The carrying amount reported in
the balance sheets for cash and cash equivalents and restricted cash
approximates their fair value because of the short maturity of these
instruments.
Retained Interests in Mortgages Receivable Sold - The carrying amount reported
in the balance sheets for retained interests approximates fair value based on
the assumptions disclosed in Note 13.
Mortgages and Contracts Receivable - The carrying amount reported in the balance
sheets for mortgages and contracts receivable approximates fair value because
the weighted average interest rate on the portfolio of mortgages and contracts
receivable approximates current interest rates to be received on similar current
mortgages and contracts receivable.
Notes Payable - The carrying amounts reported in the balance sheets for notes
payable approximates their fair value because the interest rates on these
instruments approximate current interest rates charged on similar current
borrowings.
F-33
Note 31 - Stock Options
The Company accounts for stock options issued to employees under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
under which no compensation cost has been recognized. Under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net loss would have been
$72.6 million and basic and diluted loss per share would have been $2.02 for the
year ended December 31, 2001; and the Company's net loss would have been $378.5
million, and basic and diluted loss per share would have been $10.51 for the
year ended December 31, 2000. As of December 31, 2001, 3,481,641 options were
available for grant under the Company's equity participation plans. A summary of
the Company's stock options for the years ended December 31, 2001 and 2000 is
presented in the following table:
2001 2000
---------------------------- ------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
Outstanding options, beginning of year ........ 3,251,004 $ 10.94 5,097,898 $ 12.57
Granted ....................................... - - - -
Exercised ..................................... - - - -
Forfeited ..................................... (702,975) $ 10.66 (1,846,894) $ 10.73
---------- --------- ------------ ---------
Outstanding options, end of year .............. 2,548,029 $ 10.93 3,251,004 $ 10.94
========== ========= ============ =========
Exercisable at end of year .................... 2,315,329 $ 12.79 2,259,455 $ 10.98
========== ========= ============ =========
All stock options issued by the Company were issued to employees at exercise
prices equal to fair market value of the Company's common stock on the grant
date. The options range from three to five years for full maturity and the
exercise prices range from $8.875 to $25.667.
Note 32 - Subsequent Events from January 1, 2002 through May 15, 2002
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 provides for payoff 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 restricted cash
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 and the Company recorded
that amount in 2002 as an extraordinary gain on settlement of debt. Pursuant to
the Finova Agreement, the Company and Finova 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 the Replacement DIP Facility and paid a fee of $13.4
million to its replacement DIP lender.
In January 2002, the Company entered into an amendment (the DIP Facility
Amendment) amending the Replacement DIP Facility agreement among the Debtor
Entities. The DIP Facility Amendment increased, subject to certain conditions,
the amounts that may be borrowed by the Debtor Entities thereunder, changed the
maturity date of the loans under the Replacement DIP Facility from June 30 to
April 30, 2002 (subject to the ability of the Debtor Entities to extend such
date to June 30, 2002 upon meeting certain requirements), changed certain of the
covenants of the Debtor Entities and added additional covenants, required the
Debtor Entities to obtain by April 30, 2002 a commitment for financing for
emergence from the Chapter 11 proceedings and provided for the payment of
certain additional fees to Greenwich (including fees payable in connection with
the payment of the Finova Loans discussed above). On May 9, 2002, pursuant to an
order of the Bankruptcy Court, the Company entered into the Second Amendment to
the Replacement DIP Facility (the Second Amendment). Among other things, the
Second Amendment changes the maturity date of the loans under the Replacement
DIP Facility from April 30, 2002 to June 30, 2002 (subject to the ability of the
Debtor Entities to extend such date to July 31, 2002 upon meeting certain
requirements), and provides a mechanism whereby Greenwich is given certain
rights to match exit financing proposals the Company may obtain from third
parties.
F-34
On May 15, 2002, the Company received a binding commitment, subject to certain
execution conditions and approval by the Bankruptcy Court for a senior secured
exit credit facility (the Exit Financing Facility) in an aggregate principal
amount of $300 million. The proceeds of the Exit Financing Facility are to be
used to pay allowed claims payable in connection with consummation of the
Proposed Plan, provide mortgage receivable and other working capital financing
to the Company, and to pay fees and expenses related to the Exit Financing
Facility.
In March 2002, the Company announced a plan for an organizational restructuring
and relocation of its North American operations and the Company's global
corporate management team to Las Vegas, Nevada before the end of 2002. As a
result of the restructuring, the Company expects to incur approximately $1.0
million in employee severance and other costs. It has not been currently
determined which members of the Company's senior management team will remain
with the Company after the relocation.
In March 2002, the Company sold its operations in Japan to the local Japanese
management group for $0.3 million in cash and assumption of certain liabilities
resulting in no material gains or losses. These assets were included in assets
held for sale at December 31, 2001.
Lease agreements relating to a 1999 sale-leaseback transaction, payments on
which were suspended as a result of the bankruptcy proceedings, were amended
subsequent to December 31, 2001. 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 $1.2 million.
Note 33 - Subsequent Events from May 16, 2002 through June 20, 2002
The Company's Plan of Reorganization provides for treatment of seventeen classes
of different claims. Among the various agreements reached by the Debtors as part
of the Plan were agreements dated June 19, 2002 with two senior secured lenders,
the Bank of America Bank Group (comprised of Bank of America, Societe Generale
and Oaktree Capital Management) and Oaktree Capital Management, separately
representing approximately $37 million and $11 million in secured claims,
respectively. Oaktree Capital Management holds a 50% interest in the Bank of
America Bank Group claim. The settlement with Oaktree Capital Management
contemplates a payoff and mutual release of all claims held by Oaktree Capital
Management, totaling approximately $29 million, for $22.5 million. The
settlement reached with the remaining Bank of America Bank Group contemplates
issuance of a new note for $11.5 million. The terms of this note include, among
other things, a secured interest in the cash flows of selected mortgages
receivable, a five-year amortization period and an interest rate of prime plus
2%.
The Plan received the requisite votes of creditor interests, and the Bankruptcy
Court confirmed the Plan after a hearing held on June 20, 2002. Under the Plan,
on the effective date thereof (the "Plan Effective Date"), holders of secured
and administrative claims will generally be paid in full in cash (or in certain
cases by the delivery of collateral or other property agreed to by the
applicable parties), the principal unsecured creditors will receive common stock
of the Company as reorganized and holders of certain junior subordinated bonds
will receive common stock and warrants to purchase common 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. Holders of common stock and options or other rights to acquire common
stock will not receive any payments in respect of such stock, options or rights,
and such stock, options and rights will be cancelled as of the Plan Effective
Date. The principal remaining business condition to effectiveness of the Plan is
the negotiation and closing of necessary exit financing.
F-35