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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
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, 1999
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
SUNTERRA CORPORATION
(Exact name of registrant as Specified in Its Charter)
Maryland 95-458215-7
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
1781 Park Center Drive
Orlando, Florida 32835
"www.sunterra.com"
(Address of Principal Executive Offices)
(407) 532-1000
(Registrant's telephone number, including area code)
Securities registered pursuant Name of Each Exchange
to Section 12(b) of the Act: on Which Registered:
Common stock, $.01 par value New York Stock Exchange
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 past 90 days. YES [X] NO [ ].
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: YES [X] NO [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the common stock on March 15,
2000, as reported on the New York Stock Exchange, was approximately $ 84
million. At March 15, 2000 there were 35,982,193 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's proxy statement for the 2000 annual
meeting of stockholders to be held on May 12, 2000 are incorporated by reference
in Part III of this Form 10-K.
SUNTERRA CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
Item Page
Number Number
- ------ ------
PART I
1. Business............................................. 1
2. Properties........................................... 21
3. Legal Proceedings.................................... 22
4. Submission of Matters to a Vote of Security Holders.. 23
PART II
5 Market for the Registrant's Common Equity and
Related Stockholder Matters........................ 23
6. Selected Financial Data.............................. 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 26
7A. Quantitative and Qualitative Disclosures
about Market Risk.................................. 34
8. Financial Statements and Supplementary Data.......... 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures............... 35
PART III
10. Directors and Executive Officers of the Registrant... 35
11. Executive Compensation............................... 35
12. Security Ownership of Certain Beneficial Owners
and Management..................................... 36
13. Certain Relationships and Related Transactions....... 36
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................ 36
Signatures........................................... 41
PART I
Special Cautionary Notice Regarding Forward-Looking Statements
We believe that it is important to communicate our future expectations to
our stockholders and to the public. This report contains forward-looking
statements, including in particular the statements about our plans, objectives,
expectations and prospects under the headings "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report. Additionally, the "Letter from the CEO" and other
sections of our 1999 Annual Report contain forward-looking statements. You can
identify these statements by forward-looking words such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek" and similar
expressions. Although we believe that the plans, objectives, expectations and
prospects reflected in or suggested by our forward-looking statements are
reasonable, those statements involve uncertainties and risks, and we can give no
assurance that our plans, objectives, expectations and prospects will be
achieved. Important factors that could cause our actual results to differ
materially from the results anticipated by the forward-looking statements are
contained in "Item 1. Business-Factors Affecting Future Performance" and
elsewhere in this report. All written or oral forward-looking statements
attributable to us are expressly qualified in their entirety by these cautionary
statements.
ITEM 1. BUSINESS
Introduction
Sunterra Corporation is the world's largest vacation ownership company, as
measured by resort locations and owner families. As of March 15, 2000, we have
90 resort locations in North America, Europe, the Caribbean and Japan. Through
both internal development and strategic acquisitions, we have expanded the
number of our resort locations and our owner family base from 9 resort locations
and approximately 25,000 owner families at the time of our August 1996 initial
public offering to 90 resort locations and approximately 300,000 vacation owner
families as of March 15, 2000.
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,
. 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, which we refer to together
as "vacation interests," at our resort locations and off-site sales
centers, and
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. providing resort rental, management, maintenance and collection
services for which we receive fees paid by the resorts' homeowners'
associations.
We provide mortgage financing for approximately 65% of our vacation
interests sales. In addition to enhancing sales revenues, financing customer
receivables generates profit margins and cash flows from the spread between the
interest rates that we charge on our mortgages receivable and our cost of
capital. This financing is typically collateralized by the underlying vacation
interests.
Recent Developments
Fourth Quarter Accounting Charges. In the fourth quarter of 1999, we
recorded a $43 million after-tax charge related to our mortgages receivable.
This charge is the result of an in-depth review of our balance sheet, which we
initiated at year-end. The $43 million after-tax charge consisted of:
. $27 million related to the write-off of receivables that were either 180
days or more past due or were 60 days or more delinquent after paying
only the initial down payment;
. $6 million related to accrued interest on those mortgages receivable;
. $4 million related to homeowners' association receivables;
. $4 million related to an adjustment in the retained interest in
mortgages receivable that we previously sold; and
. $2 million related to the write-down of a receivable from a marketing
company that is no longer supplying tours to us.
Also, during the fourth quarter of 1999, we recorded:
. a $10 million after-tax charge related to a re-evaluation of non-core
properties that we will market to prospective buyers as hotels rather
than timeshare projects as we originally developed them; and
. a $2 million after-tax charge related to capitalized debt costs and to
costs associated with acquisitions that we have now terminated.
Gross mortgages receivable at December 31, 1999 were $264 million, and the
allowance for bad debts net of estimated recoveries was $20 million, or 7.6%.
Mortgages receivable that were 180 days or more delinquent have been written off
pursuant to a policy that we adopted in the fourth quarter. In addition, we have
taken steps to ensure that, on a going-forward basis, all mortgages receivable
that are in default after paying only the initial down payment will be reversed
against sales when they become 60 days overdue. Our reserve for doubtful
accounts is based on a thorough aging and analysis of all receivables, with
progressively larger reserves taken for receivables as they become more
delinquent.
Senior Management Changes. In January 2000, our board of directors
appointed Richard Harrington as our chief executive officer to succeed L. Steven
Miller, who resigned from that position in January. Mr. Harrington was the chief
executive officer of our European subsidiary. Also in January 2000, our Board of
Directors appointed James Brocksmith, Jr., a former Deputy Chairman of the Board
and Chief Operating Officer of KPMG, to our board. In February 2000, our board
of directors appointed J. Taylor Crandall, the Chief Operating Officer of
Keystone, Inc., as our interim chairman of the Board, succeeding co-chairmen
Andrew J. Gessow and Steven C. Kenninger, and appointed T. Lincoln Morison,
former executive vice president of the First National Bank of Boston, as our
co-chief executive officer and president.
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Until May 1, 2000, Mr. Morison will share the chief executive officer
position with Mr. Harrington. Thereafter, Mr. Harrington will serve as non-
executive chairman of our European subsidiary and continue to serve as a
director of Sunterra Corporation and Mr. Morison will serve as our sole Chief
Executive Officer.
Acquisitions of Interests in New Resorts. Through our European subsidiary,
we made three acquisitions in 1999. In January we acquired a resort in Soriano
nel Cirino, Italy approximately 60 minutes outside of Rome; in May we acquired
Broome Park Resort in Canterbury, England; and in October we acquired Alpenclub
Schliersee, a resort in Bavaria, Germany. Each of these resorts will be included
in the Grand Vacation Club ("GVC"). In addition, through our Japanese
subsidiary, we entered into a leasing agreement with respect to eight units
located at one resort in Izu, Japan which will be included in Sunterra Japan
Vacation Club.
In the United States, we completed affiliation agreements with three
Florida resorts: the Coconut Mallory Marina and Resort in Key West, the Coconut
Palms Beach Resort in New Smyrna and the Vacation Villas at Fantasyworld in
Orlando.
We had previously entered into partnerships with affiliates of Westin
Hotels to acquire, develop, manage, operate, market and sell vacation interests
in a resort located in St. John, United States Virgin Islands and a resort to be
developed in Rancho Mirage, California. On December 10, 1999, we and our
subsidiary sold our interests in these partnerships to Starwood Hotels & Resorts
Worldwide, Inc., the parent company of Westin Hotels.
Business Strategy
Our business strategy is designed to:
. implement Club Sunterra and grow its vacation club membership base,
. expand our resort network through development and acquisition,
. increase sales through existing and future resort locations and off-site
sales centers,
. improve operating efficiencies and profitability, and
. expand our rental services and property management businesses.
Club Sunterra. We have introduced Club Sunterra at our on-site and off-site
sales centers. Club Sunterra is a new points-based vacation ownership system,
enabling members to vacation at any resort in the Club Sunterra network by
utilizing their annual allotment of points, called SunOptions, as a vacation
currency. We believe that the flexibility of the Club Sunterra product will
expand the market for vacation ownership, as it is designed to evolve with an
owner's lifestyle changes, and enable us to target a wider base of customers.
Through Club Sunterra, we believe that we have created a superior product
which provides customers with the variety and flexibility they desire in their
vacation experiences. We also believe that Club Sunterra increases the value of
vacation ownership by offering customers a myriad of options for vacation
planning. Club Sunterra creates an affinity relationship with the owner base and
provides the platform for cross marketing opportunities for leisure time
products and services.
In addition, we receive from each Club Sunterra member annual recurring
membership fees, which currently are $139 per member per year. This fee entitles
the member to participate in the Club Sunterra vacation ownership system,
including exchanges within the Club Sunterra resort network at no additional
charge, and an annual membership to a third party exchange company for exchanges
outside of the Club Sunterra resort network, for which the third party exchange
companies charge an additional fee.
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For certain affiliated, non-owned resorts, this fee may be higher due to
preexisting contracts with third party exchange companies.
Expand Resort Network. A larger network of resorts provides our owners,
guests and potential customers more vacation choices. With the implementation of
Club Sunterra, we are able to provide to current and future owners more options
to customize their vacations.
In addition, the expanded network of resorts will provide a greater base of
resorts from which to market and sell vacation interests, leverage the
development costs of more sophisticated delivery and support systems, and create
a consumer brand.
We believe that we have achieved a leading position in the industry by
developing and acquiring desirable resorts at attractive prices. We also
believe that our proven acquisition and development record and public company
status give us a competitive advantage in acquiring assets, businesses and
operations in the fragmented vacation ownership industry. Our continued
development of our infrastructure, building of our management team, and
implementation of Club Sunterra further enable us to successfully integrate
future acquisitions into our operations.
Increase Sales. We intend to increase sales of vacation interests through
the implementation of our more flexible vacation ownership product, Club
Sunterra. Through Club Sunterra, customers have access to our network of resorts
and the flexibility to choose the season, location, duration and unit size,
based on their annual allotment of SunOptions. Club Sunterra is designed to
profile the entire resort network, enabling purchasers to have a home resort
advantage, yet also the ability to use their SunOptions to experience a vacation
or multiple vacations at any of the resorts in the network. We believe sales
opportunities will significantly increase at all resort locations as well as at
off-site centers because the sales and marketing processes are no longer
associated with just one resort. The use of SunOptions increases customer
contact with our projects which, over time, will increase each customer's
affinity with Club Sunterra and our Sunterra Resorts brand.
Improve Operating Efficiencies and Profitability. We intend to improve
operating efficiencies and profitability by implementing the Club Sunterra
points-based vacation ownership system and consolidating and centralizing
several key operating functions, including mortgages receivable processing, call
center and reservations services, all of which were typically performed at each
resort location. Additionally, by leveraging against a larger customer base, we
anticipate that we will be able to lower our costs associated with delivering
services.
Expand Rental Services and Property Management Businesses. We intend to
expand our rental services operations and property management business. We
believe an efficient rental market does not currently exist with respect to
vacation ownership resorts, other resorts and condominium accommodations. We
intend to develop services that are designed to increase efficiency in the
rental market and capitalize on the growing need to provide owners with
flexibility associated with rental of their accommodations. We intend to pursue
these opportunities by utilizing our traditional sales channels and through our
Club Sunterra reservations systems. Additionally, we believe that substantial
opportunities exist 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 Market. The resort component of the leisure industry primarily is
serviced by two separate alternatives for overnight accommodations: commercial
lodging establishments and vacation ownership
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resorts. Commercial lodging consists of hotels and motels in which a room is
rented on a nightly, weekly or monthly basis for the duration of the visit and
is supplemented by rentals of privately-owned condominium units or homes. For
many vacationers, particularly those with families, the space provided to the
guest relative to the cost (without renting multiple rooms) is not economical.
Also, room rates and availability at such establishments are subject to change
periodically. In addition to providing improved lifestyle benefits to owners,
vacation ownership presents an economical alternative to commercial lodging for
vacationers.
The vacation ownership industry represents one of the fastest growing
segments of the lodging industry. We believe that overall, the vacation
ownership industry offers many vacationers a superior economic value and a more
flexible alternative to traditional commercial lodging accommodations, and as a
result, has historically achieved high levels of customer satisfaction.
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"),
Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), and Starwood
Hotels and Resorts Worldwide, Inc. ("Starwood"), have enhanced the industry's
image and increased consumer satisfaction.
We believe that we have significant opportunities to capitalize on positive
industry dynamics including continued worldwide industry growth and favorable
trends in consumer demographics. The large "Baby Boom" market segment is
projected to reach its greatest concentration in the next ten years, with an
estimated 40 million people turning 50 years old during that period.
Additionally, the "Generation X" market segment has a higher awareness of and
receptivity to vacation ownership products than has ever been experienced in the
21 to 35 year old category. Demographic trends favor continuing growth in
overall demand for vacation ownership products, as the population of individuals
aged 45 to 60 is expected to increase by more than 50% in the United States
within the next decade. Historically, individuals aged 45 to 60 represent a
market with significant discretionary income and are one of the vacation
ownership industry's primary target markets. In addition, we will seek to
capture an increasing share of the overall worldwide leisure travel and hotel
stay markets, providing substantial opportunities to increase market share from
contiguous, yet non-traditional marketing channels.
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,
usually in perpetuity. Typically, the buyer acquires an ownership interest in
the vacation residence, which is generally held in fee simple.
The owners of vacation intervals at each resort usually manage the property
through a non-profit homeowners' association, 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 many of the
rights and responsibilities of the homeowners' association, 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 homeowners' association
a share of the overall cost of maintaining the property. These charges, which
are generally $300 to $700 per year, per vacation interval, generally consist of
an annual maintenance fee plus applicable real estate taxes and, when needed,
special assessments. If the owner does not pay such charges, the owner's use
rights may be suspended and the homeowners' association may foreclose on the
owner's vacation interval.
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Points-Based Vacation Ownership
In general, under a points-based vacation ownership system, owners, which
we usually refer to as "members", purchase points which act as an annual
currency exchangeable for occupancy rights at any of the club's participating
resorts. 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 at that home resort. The advantages of a points-based vacation
ownership system relate to the flexibility given to members with respect to the
usage of their vacation points versus the usage 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 in a
specific resort or those members can exchange their week through an external
exchange organization such as Resort Condominiums International, LLC, or "RCI",
or Interval International, Inc., or "II". Because vacation points function as
currency under a points-based vacation ownership system, owners can, subject to
availability and other factors, choose the location, season, duration and unit
size of their vacation interest, based on their annual vacation points
allocations. Additionally, 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. Members of Club Sunterra are, however, able to exchange through their
respective external exchange organization for vacation stays at resorts outside
of the Club Sunterra resort network if they desire, as the $139 annual Club
Sunterra membership fee usually includes annual membership in one of these
exchange organizations. A separate exchange fee will be charged by RCI and II.
Each vacation points owner is required to pay the homeowners' association a
share of all costs of maintaining their home resort property (depending on the
vacation interest owned). These charges generally consist of an annual
maintenance fee plus applicable real estate taxes and special assessments,
assessed on an as-needed basis. If the owner does not pay such charges, the
owner's use rights may be suspended and the homeowners' association may
foreclose on the owner's vacation points.
We currently operate four points-based vacation ownership systems: Club
Sunterra (currently 27 resort locations in the United States), Sunterra Europe -
GVC (currently 26 resort locations in Europe), Sunterra Pacific -- VTS Program
(currently 22 resort locations in North America) and Sunterra Japan -- SJVC
(currently 4 resort locations in Japan). In addition to attracting new owners,
we will market Club Sunterra to our existing base of owner families.
Participation in Vacation Interest Exchange Networks
We believe that our vacation interests are made more attractive by our
participation in vacation interest exchange networks operated by RCI and II. In
a 1998 study sponsored by ARDA, the exchange opportunity was cited by purchasers
of vacation interests as one of the most significant factors in determining
whether to purchase a vacation interest. Participation in RCI and II allows our
customers to exchange their occupancy right in a particular year in the unit in
which they own a vacation interest for an occupancy right at the same time or a
different time in another participating resort, based upon availability and the
payment of a variable exchange fee. Members may exchange their vacation
interests for occupancy rights in another participating resort by listing their
vacation interests as available with the exchange organization and by requesting
occupancy at another participating resort, indicating the particular resort or
geographic area to which the member desires to travel, the size of the unit
desired and the period during which occupancy is desired. Both RCI and II assign
ratings to each listed vacation interest.
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These ratings are based upon a number of factors, including the location and
size of the unit, the quality of the resort and the period during which the
vacation interest is available. RCI and II attempt to satisfy the members
exchange request by providing an occupancy right in another vacation interest
with a similar rating. If RCI or II is unable to meet the member's initial
request, it suggests alternative resorts based on availability.
Sales and Marketing
Our primary means of selling vacation interests is through both our on-site
and off-site sales centers. A variety of marketing programs are employed to
generate prospects for these sales efforts, which include 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. Our sales process is tailored to each prospective buyer based upon the
marketing program that brought the prospective buyer to the resort for a sales
presentation. Prospective customers are identified through various means, and
are intended to include current owners of vacation interests.
Consumer Financing
In the United States, we offer consumer financing to the purchasers of our
vacation interests who make a down payment generally equal to at least 10% of
the purchase price. This financing generally bears interest at fixed rates and
is collateralized by the underlying vacation interest.
At December 31, 1999, our mortgages receivable portfolio included
approximately 29,000 promissory notes totaling approximately $264 million, with
a stated maturity of typically seven to ten years and a weighted average
interest rate of 14.3% per year. Mortgages receivable in excess of 60 days past
due at December 31, 1999 were 7.1% as a percentage of gross mortgages
receivable. Our allowance for doubtful accounts, net of estimated recoveries,
was 7.6% as a percentage of gross mortgages receivable.
Our European subsidiary currently contracts with a third-party bank to
provide financing to purchasers of vacation points in its GVC and is paid an
upfront commission of approximately 14% (which includes a 1% commission
contingent on the Company meeting certain volume thresholds) of the principal
amount of eligible consumer loans on a non-recourse basis.
Acquisitions
We obtain information with respect to resort acquisition opportunities
through interaction by our management team with resort operators, real estate
brokers, lodging companies and financial institutions with whom we have
established business relationships. From time to time, we are also contacted by
lenders and property owners who are aware of our development, management,
operations and sales expertise with respect to vacation resort properties.
Rental Operations
We generate additional revenue by renting the unsold or unused vacation
interests at certain of our resorts. We rent unoccupied units through direct
consumer sales, travel agents and/or vacation package wholesalers. In addition
to providing supplemental revenue, we believe room-rental operations provide us
with a good source of potential customers for the purchase of vacation
interests. As part of the management services we provide to vacation interests
owners, we receive a fee for services provided to rent an owner's vacation
interest in the event the owner is unable to use or exchange their vacation
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interest. In addition, we have purchased traditional resort condominiums and
resort hotels with the intention of converting each such resort location to a
vacation ownership property. Until a unit is sold as vacation interests, we rent
the underlying unit on a nightly basis. Resorts acquired in the future may be
operated in this fashion during the start-up of vacation interests sales.
Resort Management
We generally manage our resorts pursuant to management agreements with the
local homeowner association, although our Embassy Vacation Resort ("EVR") Grand
Beach and EVR Lake Tahoe are managed by Promus pursuant to a management
agreement we have with them. At December 31, 1999, we managed 27 Sunterra
Resorts, two EVR resorts, 19 Sunterra Pacific resorts, 27 Sunterra Europe
resorts, and 3 Sunterra Japan resorts. We also manage third party units at an
additional 18 resorts in Hawaii, and 3 in Florida. The remaining resort
locations are managed by third party management companies.
At each of the resorts we manage, we enter into an agreement to provide for
management and maintenance of the resort. Pursuant to each such management
agreement, we are typically paid a monthly management fee equal to 10% to 15% of
monthly maintenance fees. The management agreements are typically for a three-
year period, automatically renewable annually unless notice of non-renewal is
given by either party. Pursuant to each management agreement, we have primary
responsibility and authority for all activities necessary for the day-to-day
operation of the managed resort locations, including administrative services,
procurement of inventories and supplies and promotion and publicity. With
respect to each managed resort location, we generally also obtain comprehensive
and general public liability insurance, all-risk property insurance, business
interruption insurance and such other insurance as is customarily obtained for
similar properties. We also usually provide all 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. At EVR Grand Beach and EVR Lake Tahoe,
Promus provides these services, and we share in the profit. Our European
subsidiary manages each resort in GVC pursuant to contracts that typically
provide for a management fee of 15% of monthly maintenance fees.
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 Hotels and Resorts, Carlson Companies, 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 our vacation intervals who subsequently
decide to resell those vacation intervals. While we believe, based on experience
at our resorts, 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 each resort is
located could be depressed by a substantial number of vacation intervals offered
for resale.
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Insurance
We carry comprehensive general liability, fire, flood, windstorm and
earthquake insurance with additional coverage for business interruption arising
from insured perils for our resort locations and corporate offices. 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. In August 1998, our St. Maarten and St. Croix resorts were damaged by
Hurricane Georges. Approximately 80% of the property damage, less the
applicable deductible of $1,000,000, has been recovered from the insurance
companies, and we anticipate the remaining balance will be recovered once the
insurance company inspects the completed repairs. A claim is pending for
compensation for business interruption at the affected resorts, and we
anticipate the claim will be concluded with the insurance company this year.
Additionally, in November of 1999, our St. Maarten resorts were again damaged by
Hurricane Lenny. Insurance payments for the property damage are forthcoming,
and the insurance companies have agreed to the scope of damage and have made
advance payments to pay for the repairs which are underway. In accordance with
the industry practice for Caribbean resorts, we carry a 2% windstorm deductible,
which in this instance is approximately $1,900,000. We anticipate filing a
business interruption claim once the full impact of the storm has been assessed.
There are, however, certain types of losses, such as losses arising from
acts of war, that are not generally insured because they are either uninsurable
or not economically insurable.
Trademarks
We own and control a number of trade secrets, confidential information,
trademarks, trade names, copyrights and other intellectual property rights,
including the "Sunterra" and "Own Your World" 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 or related group of such properties. We are licensed to use technology
and other intellectual property rights owned and controlled by others, and,
similarly, we license other companies to use technology and other intellectual
property rights owned and controlled by us.
Governmental Regulation
Our marketing and sales of vacation interests are subject to extensive
regulations by the federal government and the states 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. Other
federal legislation to which the Company is 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, Telephone Consumer
Protection Act, Telemarketing and Consumer Fraud and Abuse Prevention Act, Fair
Housing Act and the Civil Rights Act of 1964 and 1968. In addition, many states
have adopted specific laws and regulations regarding the sale of vacation
interest ownership programs. The laws of most states, including Florida, South
Carolina and Hawaii require us to file with a designated state authority, for
its approval, a detailed offering statement describing ourselves and all
material aspects of the project and sale of vacation interests. The laws of
California require us to file numerous documents and supporting information with
the California Department of Real Estate, the agency responsible for the
regulation of vacation interests. When the California Department of Real Estate
determines that a project has complied with California law, it will issue a
public report for the project. 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 where we sell vacation interests
9
generally grant the purchaser of a vacation interest the right to cancel a
contract of purchase at any time within a period ranging from 3 to 10 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
him. Most states have other laws that regulate our activities such as real
estate licensure, exchange program registration, sellers of travel licensure,
anti-fraud laws, telemarketing laws, prize, gift and sweepstakes laws, and labor
laws. We believe that we are in material compliance with all federal, state,
local and foreign laws and regulations to which we are currently or may be
subject. However, no assurance can be given that we will not incur significant
costs in qualifying under vacation interest ownership regulations in all
jurisdictions in which we desire to conduct sales. Any failure to comply with
applicable laws or regulations could have a material adverse effect on us.
During 1999 we received a subpoena from the Office of the Attorney General
of the State of Florida as part of an inquiry of certain marketing practices of
timeshare developers. Following discussions with that office, we provided
certain material and believe the inquiry is over.
Certain state and local laws may also impose liability on property
developers with respect to construction defects discovered or repairs made by
future owners of such property. Pursuant to such laws, future owners may recover
from us amounts in connection with the repairs made to the developed 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 state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons on a variety of public accommodations and
facilities. These requirements did not become effective until after January 1,
1991. Although we believe that our resorts are substantially in compliance with
laws governing the accessibility of our facilities to disabled persons, a
determination that we are not in compliance with the ADA could result in a
judicial order requiring compliance, imposition of fines or an award of damages
to private litigants. We are likely to incur additional costs of complying with
the ADA; however, such costs are not expected to have a material adverse effect
on our results of operations or financial condition. Additional legislation may
impose further burdens or restrictions on property owners with respect to access
by disabled persons. If a homeowners' association at a resort was required to
make significant improvements as a result of non-compliance with the ADA,
vacation interests owners may default on their mortgages and/or cease making
required homeowners' association assessment payments. We are not aware of any
non-compliance with the ADA, the Fair Housing Act or similar laws that
management believes would have a material adverse effect on our business, assets
or results of operations.
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 may 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
10
us to issue a disclosure statement providing specific information about our
resorts and our vacation ownership operations as well as making mandatory 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. In the United Kingdom, where the majority of
our marketing and sales operations take place, 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 we are or may be subject to including the Consumer Credit Act 1974,
the Unfair Terms in Consumer Contracts Regulations 1995 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 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 operating 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 (collectively, "Environmental Laws"), a current or previous
owner or operator of real property may be required to investigate and clean up
hazardous or toxic substances or wastes or releases of petroleum products or
wastes 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 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. In
addition, persons who arrange for the disposal or treatment of hazardous or
toxic substances at a disposal or treatment facility may also be liable for the
costs of removal or remediation of a release of hazardous or toxic substances or
wastes at such disposal or treatment facility, whether or not such facility is
owned or operated by such person. In addition, some Environmental Laws create a
lien on the contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. Finally, the owner of a site may
be subject to statutory or common law claims by third parties based on damages
and costs resulting from environmental contamination emanating from a site. In
connection with its ownership and operation of our properties, we potentially
may be liable for such costs. In addition, as a result of the consummation of
the acquisitions, we could be held liable for the pre-existing environmental and
other liabilities of the acquired companies, if any.
Certain Environmental Laws govern the removal, encapsulation or disturbance
of asbestos-containing materials ("ACMs") when such materials are in poor
condition or in the event of construction, remodeling, renovation or demolition
of a building. Such laws may impose liability for release of ACMs and may
provide for third parties to seek recovery from owners and operators of real
properties for personal injury associated with ACMs. In connection with our
ownership and operation of our properties, we potentially may be liable for such
costs.
In connection with our acquisition and development of resort properties in
Lake Tahoe, Nevada and San Luis Bay, California, several areas of environmental
concern have been identified. The areas of concern at the Lake Tahoe resort
relate to possible soil and groundwater contamination that has migrated onto the
resort site from an upgradient source. In addition, residual contamination may
exist on the resort
11
site as a result of leaking underground storage tanks that were removed prior to
our acquisition of the resort site. California regulatory authorities are
monitoring the off-site contamination and have required or are in the process of
requiring the responsible parties to undertake remedial action. We have been
indemnified by Chevron (USA), Inc. for certain costs and expenses in connection
with the off-site contamination. 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.
Our resort in San Luis Bay is located in an area of Avila Beach, California
which 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 commenced. It is possible that our operations could
be adversely impacted, including possible temporary interference with access to
the resort site and temporary loss of beach access. 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, 1999, we had approximately 7,800 full and part time
employees. We have also engaged approximately 1,000 independent sales agents to
sell vacation ownership interests. We believe that relations with our employees
and independent sales agents are good. Only a minimal number of employees are
represented by labor unions, including certain employees located at the St.
Maarten, Netherlands Antilles resorts and certain employees at two resorts in
Hawaii who voted for representation by a union. Negotiations for a first
contract with the employees at the Hawaii resorts are in progress.
Factors Affecting Future Performance
Risk of Increasing Leverage; Liquidity
At December 31, 1999, we had approximately $682.0 million of outstanding
indebtedness, excluding accounts payable.
To finance our vacation interests sales, we monetize 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. In Europe we originate the mortgages receivable for a third party
institution and receive a commission.
As of December 31, 1999, our primary credit facilities were: a $100 million
mortgages receivable conduit facility ("conduit facility") for the non-recourse
sale of mortgages receivable, most of which are subsequently sold into asset-
based securitizations; an on-balance sheet revolving $60 million senior credit
facility ("senior credit facility"), with a group of banks that uses mortgages
receivable as collateral; a $14 million mortgages receivable bulk purchase line
and a $15 million forward purchase commitment for the sale of mortgages
receivable; a $15 million pre-sale/unseasoned line of credit to finance pre-sale
notes and certain mortgages receivable ("pre-sale line"); and a $50 million
revolving inventory line of credit ("inventory line") to finance unsold vacation
interests inventory.
In the first quarter of 2000, funding availability under our credit
facilities was curtailed based on anticipated covenant violations that would be
reported for the 1999 fourth quarter. As a result, the full use of these
facilities was temporarily withheld, and access to liquidity under these
facilities was granted on an individual request basis pending the completion of
waivers and amendments to the related agreements.
12
Presently, these waivers and amendments are in place and provide for
our compliance with the covenants and terms of the agreements as of December 31,
1999. Access to the availability under these facilities was also reestablished,
although on a 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. The remaining
availability under this limitation of $12.8 million was drawn in February 2000.
On March 9, 2000 we amended our senior credit facility which, in addition to
other changes to the agreement, limited the amount that could be borrowed under
the senior credit facility 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 to our pre-sale line which, in
addition to other changes to the agreement, limited the amount that could be
borrowed under the pre-sale line to $9.6 million. The remaining
availability of $0.6 million has not been borrowed. After December 31, 1999,
additional receivable sales to the bulk purchase line and forward purchase
commitment for mortgages receivable are to be made at the discretion of the
provider.
On March 20, 2000 we amended our inventory line which, among other changes,
increased amounts available by $25 million. As of March 16, 2000, $15.6 million
remained available under the inventory line.
In 1999 we continued our program of non-recourse sales of mortgages
receivable. We sold $136.6 million of mortgages receivable through the conduit
facility and also sold an additional $20.4 million of mortgages receivable in
seven separate transactions throughout the year. We securitized $106.8 million
of mortgages receivable in May 1999 and securitized another $65.2 million of
mortgages receivable in December 1999, of which $143.0 million had previously
been sold into the conduit facility in 1998 and 1999.
Markets for our mortgages receivable include the asset-backed
securitization market, the commercial paper market (utilized by the conduit
facility) and the commercial bank and finance company markets. A decline in
these markets or a decrease in our ability to access these markets could
materially adversely affect our results of operations, cash flows and capital
resources.
The indentures for our $140 million 9 1/4% senior notes due 2006 and our
$200 million 9 3/4% senior subordinated notes due 2007 contain covenants that,
among other things, limit and/or condition our ability and the ability of our
restricted subsidiaries to incur additional indebtedness, pay dividends or make
other distributions with respect to our capital stock or that of our restricted
subsidiaries, create certain liens, sell certain of our assets or assets of our
restricted subsidiaries and enter into certain mergers and consolidations. In
addition, certain of our other indebtedness that is not subordinated by its
terms in right of payment to any indebtedness or other obligation of ours
("senior indebtedness"), contain other and more restrictive covenants that,
among other things, restrict and/or condition the following: the making of
investments, loans, and advances and the paying of dividends and other
restricted payments; the incurrence of additional indebtedness; the granting of
liens, other than certain permitted liens; mergers, consolidations and sales of
all or a substantial part of our business or property; the sale of assets; and
the making of capital expenditures.
Certain of our senior indebtedness, including the senior credit facility,
also require us to maintain certain financial ratios, including interest
coverage, leverage and fixed charge ratios. There can be no assurance that these
requirements will be met in the future. If they are not, the holders of the
indebtedness under certain of our other senior indebtedness may be entitled to
declare such indebtedness immediately due and payable.
13
We have made recent changes in our senior management team, and we can give no
assurances that our senior management team will function effectively together.
In January 2000, our board of directors appointed Richard Harrington as our
chief executive officer to succeed L. Steven Miller, who resigned from those
positions in January. In February 2000, our board of directors appointed J.
Taylor Crandall as our interim chairman of the board, succeeding co-chairmen
Andrew J. Gessow and Steven C. Kenninger, and appointed T. Lincoln Morison as
our co-chief executive officer and president. Until May 1, 2000, Mr. Morison
will share the chief executive officer position with Mr. Harrington. Thereafter,
Mr. Harrington will serve as non-executive chairman of our European subsidiary,
and Mr. Morison will serve as our sole chief executive officer. These new
executive officers have not previously worked together to any significant
extent. Our future performance depends significantly on their ability to work
successfully with each other and with other members of our management team and
board of directors. Further, the loss or interruption of the services of any of
these executive officers could have a material adverse effect on our business,
financial condition and results of operations.
In providing financing to purchasers of vacation interests, we face interest
rate risks, significant risks of default and substantial costs in the event of
defaults.
We offer customer financing to the purchasers of vacation interests at our
resort locations and off-site sales centers who make a down payment generally
equal to at least 10% of the purchase price. This financing generally bears
interest at fixed rates and is collateralized by the underlying vacation
interests. We have entered into agreements with lenders for the financing and
sale of customer receivables.
We have historically derived income from our financing activities. At
December 31, 1999, our mortgages receivable portfolio included approximately
29,000 promissory notes totaling approximately $264 million, a weighted average
maturity of about eight years, and a weighted average interest rate of 14.3% per
year. At year-end, borrowings against these receivables included $51 million of
variable-rate debt. Because our loans to buyers of vacation interests bear
interest at fixed rates, we bear the risk of increases in interest rates with
respect to the variable-rate loans we have from our lenders. In addition, the
promissory notes are pre-payable at any time without penalty; to the extent that
market interest rates decrease, we face an increased risk that customers will
pre-pay their loans and reduce our income from financing.
We bear the risk of defaults by buyers who financed the purchase of their
vacation interests through us. We do not, however, bear the risk of defaults
with respect to outstanding principal balances on mortgages receivable that we
have sold to third parties. Mortgages receivable in excess of 60 days past due
at December 31, 1999 were 7.1% as a percentage of gross mortgages receivable.
Our allowance for doubtful accounts, net of recoveries, was 7.6% as a percentage
of gross mortgages receivable. If actual results vary significantly from our
estimates, we may sustain significant losses.
14
If a buyer of a vacation interest defaults on a mortgage receivable, we may
foreclose and recover the underlying vacation interest. However, we will incur
relatively substantial costs in foreclosing on the vacation interest, returning
it to inventory and reselling it. In addition, although in many cases we may
have recourse against vacation interest purchasers and sales agents for the
purchase price paid and for commissions paid, respectively, we can give no
assurance that the vacation interest purchase price or any commissions will be
fully or partially recovered in the event of a buyer default under a mortgage
receivable. We are subject to the costs and delays associated with the
foreclosure process, and we can give no assurance that the value of the
underlying vacation interests being foreclosed upon at the time of resale will
exceed the purchase price of the defaulted loans, taking into consideration the
costs of foreclosure and resale, or that the costs of any such foreclosures will
not have a material adverse effect on our results of operations.
We can give no assurances that we can effectively integrate Club Sunterra with
our existing operations
We developed our Club Sunterra points-based vacation exchange system, which
offers points-based exchanges throughout our worldwide network of resort
locations. Although we have purchased and operated points-based vacation
ownership systems through some of the companies that we have acquired, we have
not previously developed a company-wide points-based vacation ownership system,
and no assurance can be given as to our ability to efficiently develop or
operate such a company-wide system. Risks associated with the operation of our
Club Sunterra company-wide points-based vacation ownership system include the
risks that:
. the North American points-based vacation ownership systems cannot be
efficiently combined or operated with our current vacation ownership
operations; and
. the North American points-based vacation ownership systems may be or
become subject to extensive regulation by federal, state and local
jurisdictions, possibly making such points-based vacation ownership
systems uneconomical or unprofitable.
Seasonal and other factors outside our control may affect our operations and
cause fluctuations in our quarterly operating results.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our gross revenues and net income from the sale of
vacation interests. This seasonality may cause significant variations in
quarterly operating results. If sales of vacation interests are below seasonal
normality during a particular period, our annual operating results could be
materially adversely affected.
Due to the foregoing and other factors, we believe that our quarterly and
annual revenues, expenses and operating results could vary significantly in the
future and that period-to-period comparisons should not be relied upon as
indications of future performance. Because of the above factors, it is possible
that our operating results will be below the expectations of securities market
analysts and investors, which could have an adverse effect on the market value
of our common stock. Numerous factors, including announcements of fluctuations
in our or our competitors' operating results and market conditions for
hospitality and vacation ownership industry securities in general, could have a
significant impact on the future price of our common stock. In addition, the
securities market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of such companies. These broad fluctuations may adversely affect the
market price of our common stock.
15
Our strategy of growth through construction and acquisition of resorts entails
numerous risks which could cause us to incur significant expenses.
A principal component of our strategy has been to grow through development
and construction of new resort locations and acquisition of existing resort
locations. Risks associated with our development, construction, acquisition and
expansion activities may include the risks that:
. acquisition and/or development opportunities may be abandoned;
. construction costs of a resort may exceed original estimates, possibly
making the resort uneconomical or unprofitable;
. sales of vacation interests at a newly completed or acquired resort may
not be sufficient to make the resort profitable;
. financing may not be available on favorable terms for development,
construction or acquisition of, or the continued sales of vacation
interests at, a resort; and construction may not be completed on
schedule, resulting in decreased revenues and increased interest
expense.
A failure by us to successfully complete our development, construction,
redevelopment, conversion, acquisition and expansion activities may have a
material adverse effect on our results of operations.
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 operations.
We face significant competition from many of the world's most established and
recognized lodging, hospitality and entertainment companies as well as from
buyers who later resell their vacation interests.
We are subject to significant competition at each of our resorts from other
entities engaged in the business of resort development, sales and operation,
including vacation interest ownership, condominiums, hotels and motels. Many of
the world's most recognized lodging, hospitality and entertainment companies
have begun to develop and sell vacation interests in resort properties. Other
major companies that now operate or are developing or planning to develop
vacation ownership resorts include Marriott, Disney, Hilton, Hyatt, Four
Seasons, Inter-Continental, Carlson Companies, and Starwood. Many of these
entities possess significantly greater financial, marketing, personnel and other
resources than we do and may be able to grow at a more rapid rate or more
profitably as a result. We also compete with other established vacation
ownership companies.
16
In addition, we compete with the buyers of our vacation intervals who
subsequently decide to resell those vacation interests. While we believe, based
on experience at our resorts, that the market for resale of vacation interests
by buyers is presently limited, such resales are typically at prices
substantially less than the original purchase price. The market price of
vacation intervals that we sell at a given resort or by our competitors in the
market in which each resort is located could be depressed by a substantial
number of vacation interests offered for resale.
If we are unable to offer purchasers of vacation interests the opportunity to
participate in effective exchange networks, our sales of vacation interests will
suffer.
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 provide broad-based vacation interest exchange services,
and our resort locations are currently qualified for participation in either the
RCI or II exchange networks. If these exchange networks cease to function
effectively, or if our resorts are no longer included in these exchange
networks, our sales of vacation interests could be materially adversely
affected.
If our vacation interests are deemed to be securities under the federal
securities laws, many purchasers would have the right to rescind their purchase
and recover the purchase price paid.
It is possible that the vacation interests may be deemed to be a security
as defined in Section 2(1) of the Federal Securities Act of 1933. If the
vacation interests were determined to be a security for such purpose, their sale
would require registration under the Securities Act. We have not registered the
sale of our vacation interests under the Securities Act and do not intend to do
so in the future. If the sale of the vacation interests were found to have
violated the registration provisions of the Securities Act, many purchasers of
vacation interests would have the right to rescind their purchases of vacation
interests. If a substantial number of purchasers sought rescission and were
successful, our business could be materially adversely affected. We have been
advised by our vacation ownership counsel, Schreeder, Wheeler & Flint, LLP, that
in the opinion of such counsel, based on its review of our vacation interests
programs and the sales practices utilized in such program, the vacation
interests do not constitute a security within the meaning of Section 2(1) of the
Securities Act.
An adverse judgment in class action lawsuits against us could materially
impact our financial condition.
We are involved in various litigation matters, including several class
action lawsuits against us and certain directors, officers and former officers.
The class action lawsuits allege violations of Federal securities laws and seek
recovery of unspecified damages. A damage award in excess of any available
insurance could have a material adverse effect on our business, financial
condition and results of operations.
The marketing and sale of vacation interests is subject to extensive
governmental regulation, and the costs of compliance, as well as the
consequences of non-compliance, could be significant.
Our marketing and sales of vacation interests and other operations are
subject to extensive regulation by the federal government and the states and
foreign jurisdictions in which our resorts are located and in which we market
and sell vacation interests. We believe that we are in material compliance with
all federal, state, local and foreign laws and regulations to which we are
currently subject. However, we can give no assurance that the cost of qualifying
under vacation ownership regulations in all jurisdictions in which we desire to
conduct sales will not be significant or that we are in fact in compliance with
all applicable federal, state, local and foreign laws and regulations. Any
failure to comply with applicable laws or regulations could have a material
adverse effect on us.
17
The potential liability for any failure to comply with environmental laws or for
any currently unknown environmental problems could be significant.
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.
We are not aware of any environmental liability that would 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 by us or other claim against us
relating to hazardous or toxic substances or petroleum products in connection
with any of our present or former properties. We believe that we are in
compliance in all material respects with all environmental laws and regulations.
No assurance, however, can be given that we will remain in compliance with all
environmental laws and regulations or that we are aware of all environmental
liabilities that relate to all of our present and former properties.
Losses from hurricanes and earthquakes in excess of insured limits, as well as
uninsured losses, could be significant.
Some of 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 will continue to suffer damage from them in the future. Our resorts
in California and Hawaii may be subject to damage resulting from earthquakes. We
carry comprehensive general liability, fire, flood, windstorm and earthquake
insurance with additional coverage for business interruption arising from
insured perils for our resort locations and corporate offices.
However, there are certain types of losses, such as losses arising from
acts of war and civil unrest, that are not generally insured because they are
either uninsurable or not economically insurable and for which we do not have
insurance coverage. 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 us.
Our stock ownership is concentrated, which may make it difficult for
stockholders to exert control over us or to replace our management.
Our founders, Messrs., Andrew J. Gessow , Osamu Kaneko and Steven C.
Kenninger, own 9.9%, 9.7% and 2%, respectively, of our common stock as of March
15, 2000, which may enable them, collectively, to exert substantial influence
over the election of directors and the management and affairs of Sunterra
Corporation. Accordingly, if these persons vote their shares of 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.
We are subject to laws and have adopted other provisions that have anti-takeover
effects, which may discourage transactions that may be beneficial to
stockholders and limit the price of our stock.
Some of the provisions of our charter and bylaws, as well as Maryland
corporate law, may have anti-takeover effects that may delay, defer or prevent a
takeover attempt that a stockholder might consider to be in the stockholder's
best interest.
18
For example, such provisions may deter tender offers for our common stock which
offers may be beneficial to stockholders or deter purchases of large blocks of
common stock, thereby limiting the opportunity for stockholders to receive a
premium for their common stock over then-prevailing market prices. These
provisions include the following:
Preferred Shares. The charter authorizes the board of directors to issue
preferred stock in one or more classes and to establish the preferences and
rights of any class of preferred stock issued, including the right to vote and
the right to convert into preferred stock. No preferred stock is issued or
outstanding.
Staggered Board. The board of directors has three classes of directors,
each serving a staggered term so that the directors' terms currently will expire
in 2000, 2001 and 2002. Directors for each class will be chosen for a three-year
term upon the expiration of the term of the current class. The affirmative vote
of two-thirds of the outstanding common stock is required to remove a director.
Maryland Business Combination Statute. Under the Maryland General
Corporation Law, specified "business combinations," including the issuance of
equity securities, between a Maryland corporation and any person who owns,
directly or indirectly, 10% or more of the voting power of the corporation's
shares of capital stock, which we refer to as an "Interested Stockholder," must
be approved by at least 80% of the voting shares. In addition, an Interested
Stockholder may not engage in a business combination for five years following
the date he or she became an Interested Stockholder.
Maryland Control Share Acquisition. Maryland law provides that "control
shares" of a corporation acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the votes
eligible under the statute to be cast on the matter. "Control shares" are voting
shares of beneficial interest which, if aggregated with all other such shares of
beneficial interest previously acquired by the acquirer, would entitle the
acquirer directly or indirectly to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii) a
majority of all voting power. Control shares do not include shares of beneficial
interest the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A "control share acquisition" means
the acquisition of control shares, subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders, then,
subject to certain conditions and limitations, the issuer may redeem any or all
of the control shares, except those for which voting rights have previously been
approved, for fair value. If voting rights for control shares are approved at a
stockholders meeting and the acquirer becomes entitled to vote a majority of the
shares of beneficial interest entitled to vote, all other stockholders may
exercise appraisal rights.
Because we rely on computers and other electronic devices, problems related to
the year 2000 date change could still disrupt or damage our business operations.
Through March 15, 2000, we have had no significant problems related to Year
2000 issues associated with our products or the computer systems, software and
other equipment that we use. However, unanticipated Year 2000 problems could
still occur, and we cannot guarantee that the Year 2000 problem will not
adversely affect our business, financial condition or results of operations.
Our international operations subject us to a number of risks.
A material portion of our business comes from outside the United States. We
believe that our continued growth and profitability will require expansion of
our sales in international markets. If we cannot expand our international
operations, it is likely to impact negatively our operating results.
19
In addition, even if we successfully expand our international operations, we
cannot assure that we will be able to maintain or increase our international
market presence.
Risks inherent in our international business activities include, among
others:
. the fluctuations in foreign currency exchange rates;
. difficulties in staffing international locations;
. burdens of complying with a wide variety of foreign laws and
regulations;
. management of an organization spread over various countries;
. unexpected changes in regulatory requirements; and
. overlap of different tax structures.
Any or all of these risks could materially and adversely affect our business,
financial condition and results of operations.
We are subject to risks from currency fluctuations as a result of the
continued expansion of our international operations, and the fluctuations in the
value of foreign currencies in which we conduct our business may cause us to
experience currency transaction gains and losses. Because of the number of
foreign currencies involved, our constantly changing currency exposure and the
volatility of currency exchange rates, we cannot predict the effect of exchange
rate fluctuations upon our future operating results. These currency risks could
materially and adversely affect our business, financial condition and results of
operations.
Shares of our outstanding stock are currently eligible for future sale, and some
holders of our securities have registration rights.
Sales of a substantial number of shares of our common stock, or the
prospect of these sales, could adversely affect the market price of our common
stock. These sales or the prospect of these sales could also impair our ability
to raise needed funds in the capital markets at a time and price favorable to
us. As of March 15, 2000, we had a total of 35,982,193 shares of common stock
outstanding, most of which are freely tradable without restriction under the
Securities Act. The remaining outstanding shares will be eligible for sale in
the public market at various times pursuant to Rule 144 of the Securities and
Exchange Commission.
We have options outstanding under our stock option plans for the purchase
of common stock and have reserved additional shares of common stock that we may
issue upon the exercise of options granted in the future under these plans. (See
Note 14 in our consolidated financial statements). We have also reserved 750,000
shares of common stock that we may issue under our employee stock purchase plan.
We have in effect a registration statement under the Securities Act covering our
issuance of shares upon the exercise of these outstanding options and our
issuance of shares under our employee stock purchase plan. All of these shares
will be freely tradable in the public market, except for shares held by our
directors, officers and principal stockholders, which will be eligible for
public sale at various times pursuant to Rule 144 of the SEC. Additionally, as
of March 15, 2000, we had 500,000 warrants outstanding to a lender for the
purchase of shares of common stock at an exercise price of $3 per share.
20
We also have outstanding $138 million of 5 3/4% convertible subordinated
notes due 2007 which were issued in 1997. The convertible notes may be exchanged
by the holders into freely tradable shares of our common stock based upon a
conversion price of $30.417 per share, which, assuming full conversion, would
result in the issuance of an additional 4,536,937 shares.
ITEM 2. PROPERTIES
As of March 15, 2000, we had 41 resort locations in North America, 30 in
Europe, three in the Caribbean, twelve in Hawaii, and four in Japan. The
following table shows, as of March 15, 2000, 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 8 Balearic Islands 3
Colorado 1 Canada 1
Florida 6 Canary Islands 8
Hawaii (a) 12 England 6
Idaho 1 France 4
Missouri 1 Germany (c) 1
Nevada (a) 2 Italy 1
New Mexico 1 Japan (b) 4
North Carolina 1 Mexico 2
Oregon 2 Netherlands Antilles 2
South Carolina 1 Portugal 1
Tennessee 4 Scotland 1
Texas 1 Spain 4
Virginia 2 U.S. Virgin Islands 1
Washington 1 --
--
Total 50 40
== ==
(a) We own three of these resorts in partnership with third parties.
(b) We lease one of the four resorts in Japan.
(c) New resort locations since December 31, 1999, include one resort in
Germany.
21
As of December 31, 1999, we had the following number of completed units,
units under construction, potential unit expansion and total potential units:
Number of Completed Units (a) Total
Operating ---------------------------- Units Under Potential Unit Potential
Resorts Sold Unsold Total Construction (b) Expansion (c) Units
----------- -------- ------ -------- ---------------- -------------- ---------
Sunterra Resorts 27 2,329 475 2,804 276 2,051 5,131
Sunterra Europe -
GVC 26 1,654 312 1,966 226 110 2,302
Sunterra Pacific - VTS
program 22 762 10 772 --- --- 772
Sunterra Japan - SJVC 4 13 37 50 --- 8 58
Embassy Vacation
Resorts 2 189 139 328 30 230 588
Other 6 40 31 71 --- --- 71
Joint Ventures 2 124 252 376 --- --- 376
-- ----- ----- ----- --- ----- -----
Total 89 5,111 1,256 6,367 532 2,399 9,298
== ===== ===== ===== === ===== =====
(a) Completed units represent only those units that have received their
certificate of occupancy as of December 31, 1999.
(b) The Company estimates that it will incur approximately $38 million in 2000
to complete the units under construction at December 31, 1999.
(c) Potential unit expansion includes, as of December 31, 1999, units planned
to be developed on land then owned by us or under option to be acquired and
which were not then under construction. We estimate that we would incur
approximately $500 million to develop all of the potential unit expansion.
However, except for the projects currently under construction, we have not
committed to develop any other of the potential unit expansion.
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.
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 7 other locations including Orlando, Las
Vegas and Carlsbad, California containing a total of approximately 112,872
square feet of space.
ITEM 3. LEGAL PROCEEDINGS
Purported class actions were filed against us in the United States District
Court for the Middle District of Florida by Atara Hirth on January 21, 2000; by
Ziv Gani on January 25, 2000; by Ellis Cox on January 26, 2000; by Steven R.
Mathis on January 26, 2000; by Simon J. Wachsberg on January 26, 2000; by
Carlton J. Sherman, Jr. and Winning Options III Club on January 27, 2000; by
Sheldon Silver on February 1, 2000; by Thomas B. Bates on February 1, 2000; and
Guahong Xu on February 8, 2000; by Clifton Wynn Eldred on February 15, 2000; by
Chris Campbell on March 2, 2000; by Jeff Horowitz on March 6, 2000; by Vincent
Batista on March 8, 2000; by Bulldog Capital Management, L.P. on March 8, 2000;
and by William Behl on March 10, 2000. These actions name us and a number of
our executive
22
officers and directors as defendants and claim to be on behalf of persons who
purchased our common stock from October 4, 1998 through January 19, 2000, or
from October 6, 1998 through January 19, 2000. The actions assert claims under
federal securities laws, alleging that the defendants inflated the price of our
common stock by making false and misleading statements and/or omissions about
our operating condition and our reserves for mortgages receivable. The actions
further allege that some of our officers and directors sold our common stock at
these inflated prices. The plaintiffs in these actions seek monetary damages,
interest, costs, and expenses. The litigation is still in the preliminary stage.
Neither a lead plaintiff nor lead counsel has been appointed. We and the other
defendants are not required to respond at this time. We are defending these
actions vigorously.
We are also currently subject to additional litigation and claims
respecting employment, tort, contract, construction and commissions, among
others. In our judgment, none of these additional lawsuits or claims against us
is likely to have a material adverse effect on us or our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange under the symbol
"OWN." The following table sets forth the high and low sale prices for the
common stock for each quarter during the fiscal years ended December 31, 1999
and December 31, 1998, as reported on the NYSE Composite Tape:
High Low
------------- -------------
Year Ended December 31, 1999
Fourth Quarter............................................................. $13.50 $ 9.56
Third Quarter.............................................................. 15.75 10.75
Second Quarter............................................................. 15.25 8.19
First Quarter.............................................................. 16.06 9.13
Year Ended December 31, 1998
Fourth Quarter............................................................. 15.25 4.06
Third Quarter.............................................................. 15.81 6.50
Second Quarter............................................................. 19.81 13.75
First Quarter.............................................................. 25.75 19.06
On March 15, 2000, there were approximately 205 holders of record of our
common stock and we estimate that there were approximately 4,400 beneficial
owners of our common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain future
23
earnings to finance our operations and fund the growth of our business. 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. Our ability to pay dividends is restricted. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summarized consolidated financial data of
Sunterra Corporation for each of the five fiscal years ended December 31, 1999.
The financial data presented below gives effect to our acquisitions of AVCOM
International, Inc. in February 1997, Plantation Resorts Group, Inc. in May 1997
and LSI Group Holdings, plc in August 1997 by combining the historical
information of AVCOM, Plantation Resorts, LSI and Sunterra Corporation and
restating our historical financial data using the pooling-of-interests method of
accounting. 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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------ ------------ ------------
(Dollars in Thousands)
INCOME STATEMENT DATA:
Revenues
Vacation interests sales......................... $ 423,733 $ 359,426 $281,063 $182,300 $139,426
Interest income(a)............................... 41,117 52,529 42,856 25,415 20,339
Gain on sales of mortgages receivable............ 5,441 6,698 -- -- --
Other income..................................... 36,677 31,301 13,774 12,132 8,553
---------- ---------- -------- -------- --------
Total revenues.............................. 506,968 449,954 337,693 219,847 168,318
---------- ---------- -------- -------- --------
Costs and Operating Expenses:
Vacation interests cost of sales................. 106,996 85,649 71,437 48,218 39,810
Advertising, sales and marketing................. 202,101 163,828 126,739 89,040 62,258
Provision for doubtful accounts(a) (c)........... 52,290 12,616 8,579 8,311 3,666
Loan portfolio expenses.......................... 6,652 3,680 5,522 4,523 2,034
General and administrative(c).................... 69,851 50,699 42,254 37,436 19,263
Depreciation and amortization(c)................. 15,752 10,556 6,499 5,027 2,514
Resort property write-downs(a) (c)............... 17,967 --- --- 2,620 ---
Merger costs, organizational costs
and other asset write-downs(b)............... --- 5,056 9,973 --- --
---------- ---------- -------- -------- --------
Total costs and operating expenses........... 471,609 332,084 271,003 195,175 129,545
---------- ---------- -------- -------- --------
Income from operations........................... 35,359 117,870 66,690 24,672 38,773
Interest expense, net(a).......................... 48,495 44,399 22,426 17,245 11,805
Other expenses(a)................................. 11,705 -- -- -- --
Realized loss on available for-sale securities(a) 5,491 -- -- -- --
Equity(income)loss on investment in joint ventures (2,441) 708 639 299 1,649
Minority interest in (income) loss of consolidated
limited partnership............................. (237) 18 181 199 --
---------- ---------- -------- -------- --------
(Loss) income before (benefit) provision
for income taxes, extraordinary items
and cumulative effect of change in
accounting principle........................... (27,654) 72,745 43,444 6,929 25,319
---------- ---------- -------- -------- --------
24
(Benefit) provision for income taxes from
continuing operations........................... (10,232) 28,371 17,196 (4,105) 4,020
Provision for deferred income taxes
resulting from the cumulative effect of
previously non-taxable acquired entities........ -- -- 5,960 -- --
---------- ---------- -------- -------- --------
Total (benefit) provision for income taxes (10,232) 28,371 23,156 (4,105) 4,020
---------- ---------- -------- -------- --------
(Loss) income before extraordinary item and
cumulative effect of change in
accounting principle............................ (17,422) 44,374 20,288 11,034 21,299
Extraordinary items, net of tax................... -- 129 766 -- --
Cumulative effect of change in
accounting principle, net of taxes.............. -- 1,466 -- -- --
---------- ---------- -------- -------- --------
Net (loss) income................................ $( 17,422) $ 42,779 $ 19,522 $ 11,034 $ 21,299
========== ========== ======== ======== ========
Diluted (loss) earnings per share................. $(0.48) $1.16 $0.54 $0.40 $0.89
Pro forma net income(d)........................... $ 4,380 $ 15,310
OTHER DATA (UNAUDITED FOR ALL
PERIODS):
Number of resort locations at
period end..................................... 89 87 70 31 20
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents, including
escrow and restricted cash..................... $ 54,573 $ 54,201 $ 47,972 $ 22,469 $ 22,779
Mortgages receivable, net........................ 244,018 335,982 331,735 215,518 147,405
Total assets..................................... 1,058,410 1,021,132 761,145 445,884 295,771
Total debt....................................... 681,960 627,089 435,208 236,122 177,032
Stockholders' equity............................. 230,788 251,713 207,910 126,425 75,448
- -----------------
(a) Non-cash special charges for the year ended December 31, 1999 included
charges incurred directly and indirectly involving our mortgages receivable
resulting in: (i) an increase in the provision for doubtful accounts from
the write-off of $44.3 million in mortgages receivable net of estimated
recoveries, (ii) a $9.6 million write-off of related accrued interest
income, (iii) a $0.8 million write-off of deferred loan origination costs,
(iv) $10.0 million in other expenses from the write-off of homeowners'
association receivables and a receivable from a tour operator, and (v) a
$5.5 million realized loss on available for sale securities. In addition,
there was a non-recurring $16.7 million resort property write-down of
certain non-core properties to net realizable value.
(b) Non-recurring costs for the year ended December 31, 1998 include $5.1
million relating to the consolidation of certain administrative functions
from Los Angeles, California to Orlando, Florida and the write-down of
certain assets. Non-recurring costs for the year ended December 31, 1997
are merger costs relating to the AVCOM, Plantation Resorts and LSI
acquisitions. Merger-related costs include expenses related to fees paid to
financial advisors, legal fees, and other transaction expenses in
connection with the AVCOM, Plantation Resorts and LSI acquisitions.
25
(c) Non-recurring costs for the year ended December 31, 1996 include costs
incurred at AVCOM for (i) an increase in provision for doubtful accounts of
$2.0 million, (ii) $9.1 million in severance costs, lease cancellations,
litigation reserves and other integration costs and a reserve for losses
associated with certain property management and related contracts, (iii) a
$2.6 million write-down of certain property to estimated fair market value,
and (iv) a $0.7 million charge relating to amortization of start-up costs
over a period of one year.
(d) Reflects the effect on the historical statement of operations data,
assuming the combined company had been treated as a C corporation rather
than as individual limited partnerships and limited liability companies for
federal income tax purposes.
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. 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 in "Item 1. Business-Factors Affecting Future Performance."
Results of Operations
The following discussion of our results of operations includes our
corporate and partnership predecessors and wholly-owned subsidiaries and
affiliates including AVCOM, Plantation Resorts, LSI and their subsidiaries. We
completed the AVCOM (10 resort locations), Plantation Resorts (two resort
locations) and LSI (11 resort locations) acquisitions in February, May and
August 1997, respectively, and accounted for them using pooling-of-interests
accounting treatment for business combinations. Under such accounting treatment,
the results of operations are restated to include the operations of each
acquired entity for the year ended December 31, 1997. The following discussion
also includes the results of operations for Marc Hotels & Resorts, Inc.,
Sunterra Pacific, Inc. (formerly known as Vacation International, Ltd.), the
Global Development, Ltd., MMG Holding Corporation and Harich Tahoe Developments.
The Marc, Sunterra Pacific, Global, MMG and Harich acquisitions were each
accounted for using the purchase method of accounting for the business
combinations. The Marc (22 managed resort locations), Sunterra Pacific (21
resort locations) and Global (13 resort locations) acquisitions were consummated
in October, November and December 1997, respectively, for a combined purchase
price of $68.9 million in assets and assumption of $31.6 million in liabilities.
The MMG (6 resort locations) and Harich (one resort location) acquisitions were
consummated in February and July 1998, respectively, for a combined purchase
price of $143.9 million in assets and assumption of $44.5 million in
liabilities.
In the fourth quarter of 1999, we recorded a $43 million after-tax charge
related to our mortgages receivable. This charge is the result of an in-depth
review of our balance sheet, which we initiated at year-end. The $43 million
after-tax charge consisted of:
. $27 million related to the write-off of receivables that were either 180
days or more past due or were 60 days or more delinquent after paying
only the initial down payment;
. $6 million related to accrued interest on those mortgages receivable;
. $4 million related to homeowners' association receivables;
. $4 million related to an adjustment in the retained interest in
mortgages receivable that we
26
previously sold; and
. $2 million related to the write-down of a receivable from a marketing
company that is no longer supplying tours to us.
Also, during the fourth quarter of 1999, we recorded:
. a $10 million after-tax charge related to a re-evaluation of non-core
properties that we will market to prospective buyers as hotels rather
than timeshare projects as we originally developed them; and
. a $2 million after-tax charge related to capitalized debt costs and to
costs associated with acquisitions that we have now terminated.
The following table sets forth certain operating information:
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
AS A PERCENTAGE OF TOTAL REVENUES:
- ----------------------------------
Vacation interests sales.............................................. 83.6% 79.8% 83.2%
Interest income....................................................... 8.1% 11.7% 12.7%
Gain on sales of mortgages receivable................................. 1.1% 1.5% --
Other income.......................................................... 7.2% 7.0% 4.1%
----- ----- -----
Total revenues................................................ 100.0% 100.0% 100.0%
AS A PERCENTAGE OF VACATION INTERESTS SALES:
- --------------------------------------------
Vacation interests cost of sales...................................... 25.3% 23.8% 25.4%
Advertising, sales and marketing...................................... 47.7% 45.6% 45.1%
AS A PERCENTAGE OF TOTAL REVENUES:
- ----------------------------------
Provision for doubtful accounts....................................... 10.3% 2.8% 2.5%
General and administrative............................................ 13.8% 11.3% 12.5%
Resort property write-down............................................ 3.5% ---% ---%
Merger costs, organizational charges and write-down of certain assets. ---% 1.1% 3.0%
Comparison of 1999 to 1998
Total revenues for the year ended December 31, 1999 were $507.0 million
compared with $450.0 million in 1998, an increase of $57.0 million, or 12.7%.
Vacation interests sales increased 17.9% to $423.7 million from $359.4 million.
The increase in vacation interests sales reflects an increased number of
purchases of vacation interests at our resorts. However, as a result of
Hurricanes Floyd and Lenny, the impact of Year 2000 travel concerns, and fewer
than expected acquisitions, 1999 vacation interests sales were lower than
expected.
Included in vacation interests sales in 1999 are approximately $138.3
million of vacation point sales from Club Sunterra, our new points-based
vacation ownership system that was implemented at certain North American resorts
and off-site sales locations beginning the fourth quarter of 1998. Vacation
point sales from Club Sunterra were $6.4 million in 1998.
Interest income, which includes accretion related to retained interests in
mortgages receivable, decreased 21.7% to $41.1 million during 1999 from $52.5
million during 1998. The decrease is due to the
27
write-off of $9.6 million in accrued interest, which is related to the write-off
of mortgages receivable during the fourth quarter. The average mortgage
receivable note carries a 14.3% interest rate and is fully amortized over a
weighted average period of nine years.
During 1999, we recorded a $5.4 million pre-tax gain on non-recourse sales
of $186.0 million mortgages receivable comprised of: (i) $136.6 million of
mortgages receivable which were sold into our mortgages receivable conduit
facility, the majority of which were subsequently part of securitizations; (ii)
$16.2 million of mortgages receivable which were part of the sale through
securitization of $100 million principal amount of vacation ownership
receivables-backed notes 1999-A (the "1999-A securitization); and (iii) $12.8
million of mortgages receivable which were part of the sale through a
securitization of $58.7 million principal amount of vacation ownership
receivables-backed notes 1999-B (the "1999-B securitization"); and (iv) $20.4
million of mortgages receivable which were sold to a finance company. These
sales were part of our program of monetizing mortgages receivable through the
use of off-balance sheet conduits, securitizations and other vehicles. We
recorded a $6.7 million pre-tax gain on the sale of $180.9 million mortgages
receivable during 1998.
Other income (which includes resort management and rental fees, membership
fees, as well as loan commission revenues) increased 17.3% during 1999 to $36.7
million from $31.3 million during 1998. This increase reflected higher rental
income, primarily as a result of a larger base of managed resorts, and an
increase in the receipt of membership revenues generated from Club Sunterra.
Other income was 7.2% of total revenues for 1999 compared with 7.0% in 1998.
As a percentage of vacation interests sales, vacation interests cost of
sales increased to 25.3% during 1999 from 23.8% during 1998 primarily reflecting
an increased mix of higher cost product at some of our new and existing resorts.
Vacation interests cost of sales were higher at certain of our existing resorts
due to higher construction costs associated with the development of new product.
Vacation interests cost of sales increased 25.0% to $107.0 million during 1999
from $85.6 million during 1998.
As a percentage of vacation interests sales, advertising, sales and
marketing expenses increased to 47.7% during 1999 from 45.6% during 1998 due to
marketing initiatives to support the transition to Club Sunterra and lower sales
in the fourth quarter, partially reflecting the effect of Hurricane Lenny and
Year 2000 travel concerns. Advertising, sales and marketing expenses increased
23.4% to $202.1 million during 1999 from $163.8 million during 1998.
The provision for doubtful accounts increased $39.7 million to $52.3
million during 1999 from $12.6 million during 1998. The increase in the
provision is primarily the result of the $44.3 million write-off of mortgages
receivable, net of estimated recoveries, during the fourth quarter. This write
off in part reflects the adoption in the fourth quarter of a change in
methodology under which we write-off mortgages receivable that are 180 days or
more delinquent. In the fourth quarter, we also wrote off all mortgages
receivable that were in default after making only the initial down payment.
The allowance for doubtful accounts as a percentage of gross mortgages
receivable increased to 7.6% at December 31, 1999, up from 6.4% at December 31,
1998 as a result of the change in our methodology in estimating the allowance
for mortgages receivable at year end. Mortgages receivable 60 days or more past
due at December 31, 1999 were 7.1% as a percentage of gross mortgages
receivable, a decrease from 7.4% at December 31, 1998. Net of recoveries, these
same percentages decreased to 4.8% and 5.0% respectively.
As a percentage of total revenues, general and administrative expenses
increased to 13.8% during 1999 from 11.3% during 1998. General and
administrative expenses increased 37.9% to $69.9 million during 1999 from $50.7
million during 1998. The increase in general and administrative expenses was
28
due primarily to the larger scale of operations, investments made in our
infrastructure relating to the transition to Club Sunterra, additions of middle
and senior management, and Year 2000 expenses.
Depreciation and amortization increased $5.2 million, or 49.1%, to $15.8
million during 1999 from $10.6 million in 1998. As a percentage of revenues,
depreciation and amortization increased to 3.1% during 1999 from 2.3% for 1998.
The increase in depreciation and amortization was primarily due to additional
depreciation expense, reflecting a larger base of depreciable assets from the
prior year period, including computer hardware and software costs and other
infrastructure additions.
Resort property write-downs of $18 million during 1999 were the result of
the $16.7 million write down of certain non-core properties to net realizable
value and a $1.3 million write-off of costs associated with acquisitions that
have been terminated.
Interest expense, net of capitalized interest, increased $4.1 million, or
9.2%, to $48.5 million during 1999 from $44.4 million during 1998. The increase
was due primarily to an increase in debt.
Other expenses of $11.7 million during 1999 were the result of a write-off
of other receivables ($7.2 million due from homeowner associations where we
manage the property and $2.8 million due from a marketing company that is no
longer supplying us tours) and a $1.7 million write off of capitalized debt
costs associated with credit facilities that have been or are in the process of
being terminated.
Realized loss on available-for-sale securities of $5.5 million during 1999
resulted from a mark-to-market adjustment in the retained interest in mortgages
receivable that were previously sold.
Our income tax rate was 37% for 1999, resulting in a net loss of $17.4
million. For 1998, our income tax rate was 39%, resulting in net income of
$42.8 million.
Comparison of 1998 to 1997
Total revenues for the year ended 1998 were $450.0 million compared with
$337.7 million in 1997, an increase of $112.3 million, or 33.3%. Vacation
interests sales increased 27.9% to $359.4 million from $281.1 million. The
increase in vacation interests sales reflects increased prices for both vacation
points and vacation intervals at our resorts, increased sales activities at some
of our resorts, the recording of vacation points sales resulting from the
Sunterra Pacific and Global acquisitions, both of which were consummated in the
fourth quarter of 1997, and the recording of vacation interval sales resulting
from the MMG acquisition which was consummated in February 1998. Included in
vacation interests sales in 1998 are approximately $6.4 million of vacation
point sales from Club Sunterra, which we implemented at some resorts and off-
site sales locations during the fourth quarter of 1998.
Interest income increased 22.4% to $52.5 million during 1998 from $42.9
million during 1997, reflecting the increase in net mortgages receivable of
$83.2 million, or 25.1%, prior to the December 1998 sale of approximately $79.0
million into our conduit facility.
During 1998, we recorded gains from the sale of mortgages receivable of
$6.7 million as the result of four transactions. During the third quarter of
1998, we closed three receivable sales consisting of $69.1 million, $21.5
million, and $11.3 million face value of mortgages receivable. In connection
with the Harich acquisition in July 1998, we sold $69.1 million of mortgages
receivable at 96% of par, while retaining a majority interest in the excess
interest spread. Additionally, in the third quarter of 1998, we sold $21.5
million of mortgages receivable at face value and retained a majority interest
in the excess spread. During the third quarter, we sold $11.3 million of
mortgages receivable at face value for 105% of par. During the fourth quarter of
1998, we entered into the conduit facility and recorded a $5.6 million
29
pre-tax gain on a sale of $79.0 million of mortgages receivable. We did not sell
mortgages receivable during 1997.
Other income increased 126.8% to $31.3 million during 1998 from $13.8
million during 1997, reflecting an increase in recurring resort management fee
revenues paid by our growing member base. Other income also includes rental
income, commissions paid for the origination of European mortgages receivable
for a U.K.-based financial institution, and interest income from short-term
investments. As a percentage of total revenues, other income increased to 7.0%
during 1998, up from 4.1% during 1997.
As a percentage of vacation interests sales, vacation interests cost of
sales improved to 23.8% during 1998 from 25.4% during 1997. This improvement was
largely the result of favorable product cost reductions at some of our more
mature resorts, along with a greater percentage of revenues coming from the
comparatively lower product cost of our European operations. Vacation interests
cost of sales increased 19.9% to $85.6 million during 1998 from $71.4 million
during 1997.
As a percentage of vacation interests sales, advertising, sales and
marketing expenses increased slightly to 45.6% from 45.1%, due to higher
marketing expenses incurred to ramp up sales at Sunterra Pacific, which was
acquired during the fourth quarter of 1997. In addition, we were building
infrastructure in off-site sales centers in the U.S. and Europe, the costs of
which were expensed during 1998, as well as other marketing initiatives to
support the transition to Club Sunterra. Advertising, sales and marketing
expenses increased 29.2% to $163.8 million during 1998 from $126.7 million
during 1997.
The provision for doubtful accounts increased $4.0 million to $12.6 million
during 1998 from $8.6 million during 1997. As a percentage of total revenues,
the provision for doubtful accounts was 2.8% during 1998 compared to 2.5% during
1997.
Loan portfolio expenses decreased to $3.7 million in 1998 from $5.5 million
in 1997, due largely to the cost savings associated with centralizing the
servicing efforts of Plantation Resorts and AVCOM.
As a percentage of total revenues, general and administrative expenses
improved to 11.3% during 1998 from 12.5% in 1997, reflecting the continued
elimination of duplicative overhead costs in consolidating acquisitions and
greater efficiencies resulting from our larger size. General and administrative
expenses increased 19.9% to $50.7 million during 1998 from $42.3 million during
1997. The increase in general and administrative expenses was due primarily to
the acquisition of additional resorts and the development of Club Sunterra in
1998.
Depreciation and amortization increased $4.7 million, or 72.3%, to $11.2
million during 1998 from $6.5 million in 1997. As a percentage of total
revenues, depreciation and amortization increased to 2.5% during 1998 from 1.9%
for 1997. The increase in depreciation and amortization was driven by the
amortization of goodwill associated with the Marc, Sunterra Pacific, Global and
MMG acquisitions, as well as additional depreciation expense reflecting a larger
base of depreciable assets from the prior period, including hardware and
software costs related to the development of Club Sunterra and other
infrastructure additions.
Interest expense, net of capitalized interest, increased $21.4 million, or
95.5%, to $43.8 million during 1998 from $22.4 million during 1997. The increase
was due primarily to increases in debt from public securities offerings and
borrowings under our senior credit facility, and from our privately placed on-
balance sheet asset-backed securitization issued in June 1998.
Income before provision for income taxes, excluding merger, organization,
and asset writedown costs, increased 45.7% to $77.8 million during1998 from
$53.4 million for 1997.
30
During the fourth quarter of 1998, we recorded a $1.5 million cumulative
effect of change in accounting principle, net of taxes, as the result of the
early adoption of the AICPA's Statement of Position 98-5 (SOP 98-5), "Reporting
on the Costs of Start-up Activities." The SOP required us to expense all
previously capitalized start-up costs as of January 1, 1998 and requires us to
expense all such expenses as incurred after January 1, 1998.
Our income tax rate was 39% for both 1998 and 1997, resulting in net income
of $42.8 million for 1998, a 119.5% increase over $19.5 million for the year
ended December 31, 1997.
Liquidity and Capital Resources
We generate cash from:
. cash sales and cash down payments from sales of vacation interests,
. sales of our mortgages receivable through our conduit facility, asset-
backed securitizations and whole loan sales,
. financing of our mortgages receivable through our senior credit facility
and other lines of credit,
. financing of pre-sale contracts and mortgages receivable through our
pre-sale/unseasoned line,
. financing of unsold inventory through our inventory line,
. principal and interest payments and customer prepayments of principal
from our mortgages receivable portfolio,
. rental of unsold vacation interests,
. receipt of management, reservations and points-based vacation club fees,
. commissions paid for the origination of European mortgages receivable,
where we are paid a commission of 14% of the face value of certain
mortgages originated for a third party U.K. financial institution.
For 1999 and 1998, our cash flows provided from operations were $16.9
million and $4.1 million, respectively. Excluding investment in real estate and
development costs of $154.6 million and $183.1 million for 1999 and 1998,
respectively, cash provided by operations was $171.5 million and $187.2 million,
in those respective years. Approximately 84% of our total revenues during 1999
were from vacation interests sales; we financed approximately 65% of our
vacation interests sales, with the 35% balance being cash sales.
During 1999, we spent $53.7 million for property and equipment, primarily
for the development of computer systems for property and Club Sunterra
management, and $154.6 million for expansion and development activities at our
resort locations.
To finance our vacation interests sales, we monetize the related mortgages
receivables through the use of an off-balance sheet conduit, securitizations,
on-balance sheet hypothecations, whole mortgages
31
receivable sales, and other vehicles. In Europe we originate the mortgages
receivables for a third party institution and receive an origination fee in
exchange.
During 1999, we continued our program of non-recourse sales of mortgages
receivable. We sold $136.6 million of mortgages receivable through the conduit
facility in 1999. These sales were without recourse to us for defaults
experienced by the mortgages receivable portfolios. We also sold an additional
$20.4 million of mortgages receivable for $19.5 million in cash in seven
separate transactions. These were sold at 95% of par value with a 50%
participation in the remaining interest spread.
In May 1999, we completed the securitization of $100 million principal
amount of our 1999-A securitization. These fixed rate notes were issued at 94%
of the $106.8 million outstanding mortgages receivable principal balances, bear
interest at a weighted average rate of 6.66%, and are without recourse to us.
Included in the 1999-A securitization were $90.6 million mortgages receivable
which had been previously sold into our off-balance sheet conduit facility
during the fourth quarter of 1998 and the first quarter of 1999. The
securitization generated approximately $97 million in cash (after funding a
reserve account and paying transaction expenses), which we used to repay amounts
outstanding on the conduit facility and our senior credit facility.
In December 1999, we completed the securitization of $58.7 million
principal amount of our 1999-B securitization. These fixed rate notes were
issued at 90% of the $65.2 million outstanding mortgages receivable principal
balances, bear interest at a weighted average rate of 7.87%, and are without
recourse. Included in the 1999-B securitization were $52.4 million mortgages
receivable which had been previously sold into our off-balance sheet conduit
facility during 1999. The securitization generated approximately $55 million in
cash (after funding a reserve account and paying transaction expenses). The net
proceeds were used to repay amounts outstanding on the conduit facility and our
senior credit facility.
In May 1999, we put in place a $14.0 million mortgages receivable bulk
purchase line of credit and a $15.0 million forward purchase commitment for the
sale of mortgages receivable. In September 1999, we entered into a $50 million
inventory line of credit to finance certain of our unsold vacation interests
inventory. Additionally, in September 1999, we entered into a $15 million pre-
sale/unseasoned line to finance pre-sale notes and certain mortgages receivable.
In December 1999, we established a $125 million receivables warehouse
facility which was not funded at the time and has remained unused. We are still
negotiating the use of this facility but have not considered it in determining
our credit availability.
Coinciding with the new receivables warehouse facility, we both expanded
the eligibility criteria in our senior credit facility to accept a wider range
of less seasoned mortgages receivable into the senior credit facility and also
reduced its size to $60 million from $117.5 million.
In the first quarter of 2000, funding availability under all these
facilities and lines was curtailed based on anticipated covenant violations that
would be reported for the1999 fourth quarter. As a result, the full use of these
facilities was temporarily withheld, and access to liquidity under these
facilities was granted on an individual request basis pending the completion of
waivers and amendments to the related agreements. Waivers and amendments are now
in place that allow our compliance with the covenants and terms of the
agreements. Access to the availability under these facilities was also
reestablished, although on a 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
32
conduit facility to $64.1 million. In addition, the interest rate of the
facility was changed to the prime rate of the agent. On December 31, 1999, $51.3
million was outstanding under the conduit facility; $12.8 million of
availability under the conduit facility was used in February 2000.
On March 9, 2000 we amended our senior credit facility. The amendment
waived certain covenants and representations and warranties in the senior credit
facility agreement that we could not satisfy as of December 31, 1999. As of
March 30, 2000, we had entered into amendments to this facility limiting
outstanding borrowings to $35.4 million, requiring quarterly reductions to the
commitment during 2000, revising the maturity date to January 2, 2001 and
setting the borrowing rate at the reference rate plus 2.00%. The reference rate
is the higher of the Federal Funds Rate plus 0.50% or the agent's prime rate. On
December 31, 1999, $23.2 million was outstanding under the senior credit
facility; the $12.2 million of availability under the new maximum borrowing
limitation was used in the first quarter of 2000.
On March 14, 2000, availability under our inventory line was increased by
$25.0 million to $75 million and the interest rate was raised 0.75% to LIBOR
plus 4.50%. Additionally, on March 14, 2000, we issued 500,000 warrants to the
lender for the purchase of shares of common stock at an exercise price of $3 per
share. As of March 16, 2000, $15.6 million remained available under the
inventory line.
On March 20, 2000, a waiver was granted of certain covenants and
representations and warranties pertaining to our pre-sale line that we could not
satisfy as of December 31, 1999. As of March 30, 2000, we had entered into
amendments to this line limiting outstanding borrowings to $9.6 million,
requiring quarterly reductions to the commitment during 2000, revising the
maturity date to January 3, 2001 and setting the borrowing rate at the reference
rate plus 3.25%. The reference rate is defined as the lender's variable rate
index. On December 31, 1999, $9.0 million was outstanding under the facility;
the remaining availability of $0.6 million has not been borrowed.
After December 31, 1999, further advances on the bulk purchase line and
forward purchase commitment for mortgages receivable will be made at the
discretion of the provider. On December 31, 1999, a new $125 million receivables
warehouse facility was established but not funded at the time and has remained
unused. We are still negotiating the use of this facility, but have not
considered it in determining our availability. Effective January 20, 2000, we
cancelled a $5.0 million unsecured bank line of credit as its terms did not
permit access to the line upon the occurrence of a violation in any other
agreement.
We are involved in continuing discussions with our lenders with respect to
funding our current operations through our senior credit facility, conduit
facility, inventory line and pre-sale line. In addition to discussions regarding
our existing facilities, we are currently negotiating additional revolving
mortgages receivable warehouse facilities and mortgages receivable non-recourse
sales facilities.
However, we cannot guarantee that these negotiations will be successfully
concluded nor can we guarantee that we will not experience liquidity problems in
the future.
The indentures for our 9 1/4% senior notes and 9 3/4%senior subordinated
notes contain certain covenants that, among other things, limit and/or condition
our ability and the ability of our restricted subsidiaries to incur additional
indebtedness, pay dividends or make other distributions with respect to our
capital stock and the capital stock of our restricted subsidiaries, create
certain liens, sell certain assets of ours or our restricted subsidiaries and
enter into certain mergers and consolidations. In addition, certain of our
Senior Indebtedness, including our senior credit facility, contains other and
more restrictive covenants that,
33
among other things, restrict and/or condition the following: the making of
investments, loans and advances and the paying of dividends and other restricted
payments; the incurrence of additional indebtedness; the granting of liens,
other than certain permitted liens; mergers, consolidations and sales of all or
a substantial part of our business or property; the sale of assets; and the
making of capital expenditures.
As of December 31, 1999, we were in compliance with all covenants as
subsequently amended or waived.
Year 2000 Readiness
We depend significantly on a number of computer software programs in our
internal operating system and other aspects of our business. If any of these
software programs had not been programmed to recognize and properly process
dates after December 31, 1999, significant system failures or errors might have
resulted. We have experienced no such problems as of March 15, 2000. We believe
that our internal accounting and operating programs and systems were adequately
programmed to address the Year 2000 problem, and as part of an enterprise-wide
process, we integrated all of our resorts to a common platform in 1999. We also
replaced a substantial portion of our information systems with a fully
integrated enterprise information system. We have been reviewing and will
continue to review our financial and operating systems at each of our offices
and resort locations.
Our Year 2000 related costs were $0.8 million and $0.6 million in 1999 and
1998, respectively, excluding costs associated with replacements of computerized
systems and equipment in cases where replacement was not accelerated due to Year
2000 issues. We funded all Year 2000 related costs entirely from operating cash
flows. We have capitalized and depreciated the costs of hardware, software and
facility replacement over the expected useful life of the assets. We expensed
as incurred all costs related to software modification, as well as all costs
associated with our administration of the Year 2000 compliance effort.
Other companies interact electronically with us, and we must coordinate our
data communications and software processing with these other companies. We have
not experienced any material Year 2000 problems with any third party products
and systems upon which our business depends. The third parties with whom we do
business have not reported any Year 2000 issues to us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Our total revenues denominated in a currency other than U.S. dollars for
1999, primarily revenues derived from the United Kingdom and Japan, were
approximately 21.6% of total revenues. Our net assets maintained in a functional
currency other than U.S. dollars at December 31, 1999, which were primarily
assets located in western Europe and Japan, were approximately 12.4% 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, 1999, we had fixed interest rate debt of approximately
$553.4 million and floating interest rate debt of approximately $128.6 million.
The floating interest rates are based upon the
34
prevailing LIBOR rate or prime interest rate for our senior credit facility,
inventory line, pre-sale line, and conduit facility. For floating rate debt,
interest rate changes do not generally affect the market value of debt but do
impact future earnings and cash flows, assuming other factors are held constant.
Conversely, for fixed rate debt, interest rate changes do affect the market
value of debt but do not impact earnings or cash flows. A hypothetical one-
percent change in the prevailing LIBOR or prime rate would impact our after tax
earnings by less than $0.8 million per year. A similar change in the interest
rate would impact the total fair value of our fixed rate debt, excluding the
convertible notes, by approximately $20 million. It is impractical to estimate
the effect of a change in interest rates on the convertible notes because their
value depends, in part on the value of the common stock into which it is
convertible.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............... F-3
Consolidated Statements of Income for each of the three years
ended December 31, 1999................................................. F-4
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999........................................... F-5
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1999........................................... F-6
Notes to Consolidated Financial Statements................................. F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We will provide the information required by this Item under the captions
"Directors and Executive Officers" and " Compliance with Section 16(a) Under the
Securities Exchange Act of 1934" in our proxy statement for our 2000 annual
meeting of stockholders to be held on May 12, 2000. Such information is
incorporated in this Item by reference.
ITEM 11. EXECUTIVE COMPENSATION
We will provide the information required by this Item under the caption
"Executive Compensation" in the proxy statement for our 2000 annual meeting of
stockholders. Such information is incorporated in this Item by reference.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We will provide the information required by this Item under the captions "
Share Ownership of Directors and Executive Officers," "Other Information --
Certain Stockholders" and "Proposal No. 1: Election of Directors -- Compensation
of Directors" in our proxy statement for our 2000 annual meeting of
stockholders. Such information is incorporated in this Item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We will provide the information required by this Item under the caption
"Certain Transactions" in our proxy statement for our 2000 annual meeting of
stockholders. Such information is incorporated in this Item by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated 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
Report of Independent Certified Public Accountants.......................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998................ F-3
Consolidated Statements of Income for each of the three years
ended December 31, 1999.................................................. F-4
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999............................................ F-5
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1999............................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
2. Financial Statement Schedules
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.
3. Exhibits
The following exhibits either (a) are filed with this report or (b) have
previously been filed with the SEC and are incorporated in this Item by
reference to those prior filings. We will furnish any exhibit
36
upon request made to Thomas A. Bell, our General Counsel and Secretary,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)
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)
37
10.3 Receivables Purchase Agreement dated as of December 17, 1998 among Blue Bison
Funding Corp., Sunterra Corporation and Barton Capital Corporation
10.4 Construction Loan Agreement between Lake Tahoe Resort Partners, LLC, and FINOVA
Capital Corporation dated as of April 29, 1996 (incorporated by reference to
Exhibit 10.8.8 to the registrant's Registration Statement on Form S-1 (No.
333-18447))
10.5 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))
10.6 Joint Development Agreement dated as of January 16, 1998 between Westin Hotel
Company and Sunterra Corporation (incorporated by reference to Exhibit 10.1 to
the registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 20, 1998))
10.7 Registration Rights Agreement dated as of August 20, 1996 by and among Sunterra
Corporation and the persons named therein (incorporated by reference to Exhibit
10.1 to the registrant's Registration Statement on Form S-1 (No. 333-30285))
10.8 Registration Rights Agreement dated as of May 15, 1997 by and among Signature
Resorts Inc. and the persons named therein (incorporated by reference to Exhibit
4 to the registrant's Current Report on Form 8-K filed with the Commission on May
29, 1997)
10.9 Registration Rights Agreement dated as of August 28, 1997 by and among Sunterra
Corporation and Ian K. Ganney and Richard Harrington (incorporated by reference
to Exhibit 10.10 to Amendment No. 1 to the registrant's Registration Statement on
Form S-1 (No. 333-30285))
10.10 Registration Rights Agreement dated as of October 10, 1997 by and among Sunterra
Corporation and Michael V. Paulin, Rosemarie Paulin, Maya K. Paulin and Annemarie
H. Paulin (incorporated by reference to Exhibit 10.5 to the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997)
+10.11 Employment Agreement between Sunterra Corporation and Andrew J. Gessow
(incorporated by reference to Exhibit 10.2.2 to the registrant's Registration
Statement on Form S-1 (No. 333-30285))
+10.12 Employment Agreement between Sunterra Corporation and Steven C. Kenninger
(incorporated by reference to Exhibit 10.2.3 to the registrant's Registration
Statement on Form S-1 (No. 333-30285))
+10.13 Employment Agreement between Sunterra Corporation and L. Steven Miller
(incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998)
38
+10.14 Employment Agreement between Sunterra Corporation and Richard Goodman
(incorporated by reference to Exhibit 10.14 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998)
+10.15 Employment Agreement between Sunterra Corporation and James E. Noyes
(incorporated by reference to Exhibit 10.2.4 to the registrant's Registration
Statement on Form S-1 (No. 333-06027))
+10.16 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)
+10.17 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))
+10.18 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))
+10.19 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)
+10.20 Amended Consulting Agreement dated as of August 1, 1997 by and between Sunterra
Corporation, Resort Services, Inc. and Dr. Kay F. Gow and Robert T. Gow
(incorporated by reference to Exhibit 10.12 to the registrant's Registration
Statement on Form S-1 (No. 333-30285))
*10.21 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
+*10.22 Consulting Agreement and Modification of Stock Option Agreement dated August 14,
1999 by and between Sunterra Corporation and James E. Noyes
*10.23 Loan and Security Agreement dated as of September 30, 1999, by and between
FINOVA. Capital Corporation and Sunterra Corporation
*10.24 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
*10.25 Amended and Restated Credit Agreement dated December 31, 1999, by and among
Sunterra Corporation (formerly known as Signature Resorts, Inc.), certain lenders
party thereto, and Bank of America, N.A., formerly NationsBank, N.A., as
Administrative Agent
39
+*10.26 Consulting Agreement dated January 29, 2000 by and between Sunterra Corporation
and L. Steven Miller
+*10.27 Severance Payment Agreement dated January 29, 2000 by and between Sunterra
Corporation and L. Steven Miller
*10.28 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
*10.29 Amended and Restated Master Loan and Security Agreement dated as of March 14,
2000, by and between FINOVA Capital Corporation and Sunterra Corporation
*21 Subsidiaries of Sunterra Corporation
*23.1 Consent of Arthur Andersen, LLP
*23.2 Consent of Schreeder, Wheeler & Flint, LLP
*27 Financial Data Schedule for the fiscal year ended December 31, 1999
- ---------------
+ Compensatory management plan
* Filed herewith
(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, 1999:
Current Report on Form 8-K dated November 4, 1999 filed with the SEC on
November 5, 1999 relating to third quarter 1999 financial results.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed above.
(d) Financial Statement Schedules
See the response to Item 14(a)2 above.
40
SIGNATURES
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant in the capacities and
on the dates indicated.
Date Signature Title
---- --------- -----
March 30, 2000 /s/J. Taylor Crandall Chairman of the Board
------------------------
J. Taylor Crandall
March 30, 2000 /s/T. Lincoln Morison Co-Chief Executive Officer,
------------------------ President and Director
T. Lincoln Morison (Co- Executive Officer)
March 30, 2000 /s/Richard Harrington Co-Chief Executive Officer
------------------------ and Director
Richard Harrington
March 30, 2000 /s/Richard Goodman Executive Vice President and
------------------------ Chief Financial Officer
Richard Goodman (Principal Financial and
Accounting Officer)
March 30, 2000 /s/Andrew J. Gessow Director
------------------------
Andrew J. Gessow
March 30, 2000 /s/Osamu Kaneko Director
------------------------
Osamu Kaneko
March 30, 2000 /s/Steven C. Kenninger Director
------------------------
Steven C. Kenninger
March 30, 2000 /s/Adam M. Aron Director
------------------------
Adam M. Aron
March 30, 2000 /s/Sanford R. Climan Director
------------------------
Sanford R. Climan
March 30, 2000 /s/Joshua S. Friedman Director
------------------------
Joshua S. Friedman
41
March 30, 2000 /s/W. Leo Kiely III Director
------------------------
W. Leo Kiely III
March 30, 2000 /s/James Brocksmith, Jr. Director
------------------------
James Brocksmith, Jr.
42
INDEX TO FINANCIAL STATEMENTS
Page
-----
Sunterra Corporation and Subsidiaries
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............... F-3
Consolidated Statements of Income for each of the three years
ended December 31, 1999................................................. F-4
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999........................................... F-5
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1999........................................... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Sunterra Corporation:
We have audited the accompanying consolidated balance sheets of Sunterra
Corporation (formerly Signature Resorts, Inc.) (a Maryland corporation) and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunterra Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Orlando, Florida,
March 10, 2000 (except with respect
to the matters discussed in Note 19,
as to which the date is March 30, 2000).
F-2
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
ASSETS
December 31,
-------------------------------
1999 1998
-------- --------
Cash and cash equivalents.......................................................... $ 24,838 $ 28,250
Cash in escrow and restricted cash................................................. 29,735 25,951
Mortgages receivable, net of an allowance of $20,060 and 244,018 335,982
$22,869 at December 31, 1999 and 1998, respectively...........................
Retained interests................................................................. 46,274 12,518
Due from related parties........................................................... 11,550 25,849
Other receivables, net............................................................. 64,202 38,207
Income tax refund receivable....................................................... 2,315 --
Prepaid expenses and other assets.................................................. 20,421 22,031
Investment in joint ventures....................................................... 19,274 17,876
Real estate and development costs.................................................. 363,534 336,620
Property and equipment, net........................................................ 130,321 81,125
Intangible assets, net............................................................. 101,928 96,723
---------- ----------
Total assets.................................................................... $1,058,410 $1,021,132
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................................... $ 30,483 $ 21,864
Accrued liabilities................................................................ 96,936 80,242
Income taxes payable............................................................... -- 9,240
Deferred taxes..................................................................... 18,243 30,984
Notes payable...................................................................... 681,960 627,089
---------- ----------
Total liabilities............................................................ 827,622 769,419
---------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock (25,000,000 shares authorized; none issued or outstanding)...... -- --
Common stock ($0.01 par value, 50,000,000 shares authorized; 35,970,032 and
35,902,671 shares outstanding at December 31, 1999 and 1998, respectively).... 360 359
Additional paid-in capital...................................................... 164,419 163,290
Retained earnings............................................................... 69,159 86,581
Accumulated other comprehensive (loss) income................................... (3,150) 1,483
---------- ----------
Total stockholders' equity................................................... 230,788 251,713
---------- ----------
Total liabilities and stockholders' equity................................... $1,058,410 $1,021,132
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
CONSOLIDATED STATEMENTS OF INCOME
(Amount in thousands except per share data)
Year Ended December 31,
-------------------------------------
1999 1998 1997
REVENUES: -------- -------- --------
Vacation Interests sales................................................... $423,733 $359,426 $281,063
Interest income............................................................ 41,117 52,529 42,856
Gain on sales of mortgages receivable...................................... 5,441 6,698 --
Other income............................................................... 36,677 31,301 13,774
-------- -------- --------
Total revenues.......................................................... 506,968 449,954 337,693
-------- -------- --------
COSTS AND OPERATING EXPENSES:
Vacation Interests cost of sales........................................... 106,996 85,649 71,437
Advertising, sales, and marketing.......................................... 202,101 163,828 126,739
Provision for doubtful accounts............................................ 52,290 12,616 8,579
Loan portfolio expenses.................................................... 6,652 3,680 5,522
General and administrative................................................. 69,851 50,699 42,254
Depreciation and amortization.............................................. 15,752 10,556 6,499
Resort property write-downs................................................ 17,967 -- --
Merger costs, organizational costs and asset write-downs................... -- 5,056 9,973
-------- -------- --------
Total costs and operating expenses...................................... 471,609 332,084 271,003
-------- -------- --------
Income from operations..................................................... 35,359 117,870 66,690
Interest expense (net of capitalized interest of $11,265, $8,942 and $6,774
in 1999, 1998 and 1997, respectively)................................... 48,495 44,399 22,426
Other expenses............................................................. 11,705 -- --
Realized loss on available for sale securities............................ 5,491 -- --
Equity (gain) loss on investment in joint ventures.......................... (2,441) 708 639
Minority interest in (loss) income of consolidated limited
partnership........................................................... (237) 18 181
-------- -------- --------
(Loss) income before (benefit) provision for income taxes, extraordinary
items and cumulative effect of change in accounting principle............. (27,654) 72,745 43,444
-------- -------- --------
(Benefit) provision for income taxes from continuing operations............ (10,232) 28,371 17,196
Provision for deferred income taxes resulting from the cumulative effect
of previously non-taxable acquired entities............................... -- -- 5,960
-------- -------- --------
Total (benefit) provision for income taxes.............................. (10,232) 28,371 23,156
-------- -------- --------
(Loss) income before extraordinary items and cumulative effect of change in
accounting principle...................................................... (17,422) 44,374 20,288
Extraordinary items, net of taxes.......................................... -- 129 766
Cumulative effect of change in accounting principle, net of taxes.......... -- 1,466 --
-------- -------- --------
Net (loss) income.......................................................... $(17,422) $ 42,779 $ 19,522
======== ======== ========
EARNINGS PER SHARE (NOTE 3):
Basic:
(Loss) income before extraordinary item and cumulative effect of change
in accounting principle................................................ $ (0.48) $ 1.24 $ 0.57
Extraordinary item, net of taxes........................................ -- -- (0.02)
Cumulative effect of change in accounting principle, net of taxes....... -- (0.05) --
-------- -------- --------
Net (loss) income........................................................ $ (0.48) $ 1.19 $ 0.55
======== ======== ========
Diluted:
(Loss) income before extraordinary item and cumulative effect of change
in accounting principle................................................ $ (0.48) $ 1.20 $ 0.56
Extraordinary item, net of taxes........................................ -- -- (0.02)
Cumulative effect of change in accounting principle, net of taxes....... -- (0.04) --
-------- -------- --------
Net (loss) income....................................................... $ (0.48) $ 1.16 $ 0.54
======== ======== ========
Weighted average number of common shares outstanding (Note 3).............. 35,926 35,888 35,373
Weighted average number of common and potentially dilutive common shares
outstanding (Note 3)...................................................... 35,926 40,995 36,180
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
----------------------------------------------
1999 1998 1997
OPERATING ACTIVITIES: -------- -------- ---------
Net (loss) income......................................................... $ (17,422) $ 42,779 $ 19,522
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization.......................................... 15,752 10,556 6,499
Provision for doubtful accounts........................................ 52,290 12,616 8,579
Amortization of capitalized financing costs............................ 5,380 3,237 --
Gain on sales of mortgages receivable.................................. (5,441) (6,698) --
Resort property write-downs............................................ 17,967 -- --
Other expenses......................................................... 11,705 -- --
Realized loss on available-for-sale securities......................... 5,491 -- --
Write-down of certain assets........................................... -- 3,506 --
Cumulative effect of change in accounting principle.................... -- 2,403 --
Equity (gain) loss on investment in joint venture...................... (2,441) 708 639
Minority interest (loss) income of consolidated limited partnership.... (237) 18 181
Proceeds from sales of mortgages receivable............................ 161,384 173,146 --
Changes in operating assets and liabilities, net of effect of
acquisitions:
Cash in escrow and restricted cash..................................... (3,238) (16,460) (6,916)
Mortgages receivable................................................... (143,769) (117,526) (108,942)
Due from related parties............................................... 8,097 (5,420) (12,504)
Prepaid expenses and other assets...................................... (1,743) (7,814) 2,068
Real estate and development costs...................................... (47,582) (97,488) (65,595)
Retained interests..................................................... (4,179) -- --
Other receivables, net................................................. (36,004) (20,119) (4,448)
Accounts payable and accrued liabilities............................... 25,161 6,730 (10,398)
Income taxes........................................................... (11,555) 13,701 (6,518)
Deferred income taxes.................................................. (12,741) 7,237 19,481
Due to related parties................................................. -- (1,032) (636)
--------- --------- -----------
Net cash provided by (used in) operating activities....................... 16,875 4,080 (158,988)
--------- --------- -----------
INVESTING ACTIVITIES:
Cash paid for acquisition of subsidiaries................................. -- (99,340) (31,296)
Property and equipment.................................................... (53,710) (44,241) (19,973)
Intangible assets......................................................... (17,098) (10,852) (1,637)
Investment in joint ventures.............................................. (5,810) (1,347) (8,899)
Proceeds from sale of investment in joint ventures........................ 7,770 -- --
--------- --------- ---------
Net cash used in investing activities..................................... (68,848) (155,780) (61,805)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable............................................... 32,669 237,188 353,264
Payments on notes payable and mortgage-backed securities.................. (47,659) (112,697) (167,229)
Proceeds from credit line facilities, net of debt issuance costs.......... 170,570 240,568 --
Payments on credit line facilities........................................ (104,971) (224,615) --
Proceeds from stock offerings............................................. -- -- 52,643
Distributions............................................................. -- -- (738)
Other..................................................................... 1,130 321 648
--------- ---------- ---------
Net cash provided by financing activities................................. 51,739 140,765 238,588
Net (decrease) increase in cash and cash equivalents...................... (234) (10,935) 17,795
Effect of exchange rates on cash and cash equivalents..................... (3,178) 698 (65)
Cash and cash equivalents, beginning of period............................ 28,250 38,487 20,757
--------- --------- ---------
Cash and cash equivalents, end of period.................................. $ 24,838 $ 28,250 $ 38,487
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................... $ 54,587 $ 52,607 $ 18,508
Cash paid for taxes, net of tax refunds................................... $ 11,957 $ 1,968 $ 7,918
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Stock issued in connection with acquisition of Marc Resorts............... $ -- $ -- $ 6,010
Costs incurred in conjunction with debt issuances......................... $ 1,907 $ 9,295 $ 12,824
Tax benefit resulting from exercise of common stock options............... $ -- $ -- $ 1,469
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL COMPREHENSIVE
SHARES PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' INCOME
OUTSTANDING AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY (LOSS)
----------- ------ ---------- --------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 1996 33,011 $330 $101,978 $ 23,544 $ 573 $126,425
Net income....................... -- -- -- 19,522 -- 19,522 $ 19,522
Proceeds from the sale of
common stock, net of
offering costs................. 2,400 24 52,619 -- -- 52,643
Common stock issued in
connection with
purchase of subsidiary........ 213 2 6,008 -- -- 6,010
Distributions.................... -- -- -- (738) -- (738)
Other............................ 251 3 2,364 1,469 212 4,048 212
------ ---- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1997..... 35,875 359 162,969 43,797 785 207,910
Comprehensive income for the
year ending
December 31, 1997.............. $ 19,734
========
Net income....................... -- -- -- 42,779 -- 42,779 $ 42,779
Other............................ 28 -- 321 5 698 1,024 698
------ ---- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1998..... 35,903 359 163,290 86,581 1,483 251,713
Comprehensive income for the
year ending
December 31, 1998.............. $ 43,477
========
Net loss......................... -- -- -- (17,422) -- (17,422) $(17,422)
Other............................ 67 1 1,129 -- -- 1,130 --
Unrealized loss on securities
classified as available-for-
sale, net of tax of $902...... -- -- -- -- (1,455) (1,455) (1,455)
Currency translation
adjustments, net of tax
of $1,947.................... -- -- -- -- (3,178) (3,178) (3,178)
-- ---- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999..... 35,970 $360 $164,419 $ 69,159 $(3,150) $230,788
====== ==== ======== ======== ======= ========
Comprehensive loss for the
year ending
December 31, 1999.............. $(22,055)
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. NATURE OF BUSINESS
The operations of Sunterra Corporation (formerly Signature Resorts, Inc.) and
its wholly-owned subsidiaries (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) acquiring,
developing, and operating vacation ownership resorts, (iii) providing consumer
financing to individual purchasers for the purchase of Vacation Interests at its
resort locations and off-site sales centers, and (iv) providing resort rental
management and maintenance services for which the Company receives fees paid by
the resorts' homeowners' associations.
The Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its Common Stock (the
"Initial Public Offering") by offering 9,056,250 shares to the public. The gross
proceeds from the public offering were $84.5 million. The Company incurred $11.2
million of costs associated with this offering. Concurrent with the Initial
Public Offering, certain predecessor limited partnerships, limited liability
companies and corporations (the "Entities") exchanged their direct or indirect
interest in, and obligations of the entities, for 16,211,558 shares of the
Company's common stock (the "Consolidation Transactions"). The accompanying
consolidated financial statements reflect the financial position and results of
operations of the Entities since the date they were acquired or formed, which
range from November 1986 to June 1996. Concurrent with the Initial Public
Offering, the Company exchanged 820,500 shares of Common Stock with the former
holders of interests in the Embassy Vacation Resort at Poipu Point, Koloa,
Kauai, Hawaii.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying financial statements include
the combined accounts of the Company and its wholly-owned subsidiaries that were
acquired or formed prior to August 20, 1996, which became wholly-owned
subsidiaries in connection with the Consolidation Transactions. In addition, the
financial statements give effect to the acquisitions of AVCOM International,
Inc. ("AVCOM"), Plantation Resorts Group, Inc. ("PRG") and LSI Group Holdings
plc ("LSI") that occurred during 1997 and were treated as pooling-of-interests
(Note 18). All significant intercompany transactions and balances have been
eliminated from these consolidated financial statements.
The Consolidation Transactions have been accounted for as a reorganization of
entities under common control. Accordingly, the net assets of the Entities were
recorded at the Entities' historical cost. In addition, the accompanying
consolidated financial statements reflect the historical results of operations
of the predecessor partnerships on a combined basis.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash, money
market, and all highly liquid investments purchased with an original maturity of
three months or less.
Cash in Escrow and Restricted Cash -- Cash in escrow is restricted cash
consisting of deposits received on sales of Vacation Interests that are held in
escrow until a certificate of occupancy is obtained or the legal rescission
period has expired. Restricted cash includes a cash reserve required by the
securitized notes (Note 9) and Conduit Facility (Note 5) of approximately $5.5
million and $7.6 million as of December 31, 1999 and 1998, respectively.
Real Estate and Development Costs -- Real estate is 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. Costs are allocated to units sold on an
area method, which approximates the relative sales value basis.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
Property and Equipment - Buildings and leasehold improvements are depreciated
using the straight-line method over the estimated useful life of 40 years.
Furniture and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 7 years.
Investment in Joint Ventures -- The Company accounts for its investment in its
various joint ventures under the equity method of accounting. Goodwill
associated with each joint venture is amortized as Vacation Interests are sold.
At December 31, 1999, the Company held investments in VacationSpot.com,
Inc. which are recorded at their historical cost of $1.25 million, comprised of
$1.0 million Series B Preferred Stock and $0.25 million of Series C Preferred
Stock. Although the market value of the investments in VacationSpot.com, Inc. is
not readily determinable, management believes the fair value of these
investments exceed their carrying amount.
Intangible Assets -- In 1997, organizational costs incurred in connection with
the formation of the Company were capitalized and were amortized on a straight-
line basis over a period of three to five years. In 1997, start-up costs related
to costs incurred to develop marketing programs prior to receiving regulatory
approval to market the related property were amortized on a straight-line basis
over a period of one year. In 1998, the Company elected early adoption of the
AICPA's Statement of Position 98-5 (SOP 98-5), "Reporting on Costs of Start-up
Activities." As a result, the Company recorded a $1.5 million cumulative effect
of change in accounting principle, net of taxes, which represented the write off
of all organizational and start-up costs capitalized prior to January 1, 1998.
All such costs were expensed as incurred in 1998 and 1999.
Financing, loan origination fees and debt issuance costs incurred in
connection with obtaining funding for the Company have been capitalized and are
being amortized over three to ten years as interest expense using a method which
approximates the effective interest method.
Goodwill in connection with the acquisition of subsidiaries is being amortized
over the estimated useful lives of 10 to 30 years.
At each balance sheet date, the Company evaluates the realizability of its
goodwill based upon expectations of undiscounted cash flows and operating
income. Based upon its most recent analysis, the Company believes that no
material impairment of its goodwill exists at December 31, 1999.
Foreign Currency Translation -- Financial statements for the Company's
subsidiaries outside the United States are translated into U.S. dollars at year-
end exchange rates for assets and liabilities and weighted average exchange
rates for income and expenses. The resulting translation adjustments are
recorded as cumulative other comprehensive income in the consolidated statements
of equity.
Derivative Instruments -- The Company uses interest rate cap agreements to
manage interest rate exposure. As of December 31, 1999, no amounts were due by
or owed to the Company under these agreements.
Fourth Quarter Adjustments -- During the fourth quarter of 1999, the Company
recorded charges directly and indirectly involving its mortgages receivable
including: (i) a $44.3 million write-off of mortgages receivable, net of
estimated recoveries, in its provision for doubtful accounts, as a result of the
Company's change in its estimate of allowance for mortgages receivable (Note 4),
(ii) a $9.6 million write-off of related accrued interest offset against
interest income, (iii) a $0.8 million write-off of related deferred loan
origination costs, (iv) a $5.5 million realized loss on available-for-sale
securities adjusting the retained interest in mortgages receivable that were
previously sold to reflect the variance in the actual performance of the
mortgages receivable sold and the assumptions used to calculate the retained
interest, and (v) $10.0 million in other expenses reflecting the write-off of
homeowners' association receivables and a receivable from a tour operator.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
In addition, during the fourth quarter of 1999, the Company recorded resort
property write-downs totaling $18 million, including a $16.7 million write-down
of non-core properties to net realizable value and a $1.3 million write-off of
costs associated with acquisitions that have been terminated (Note 6).
During the fourth quarter of 1998, the Company recorded certain organization
charges and asset write-downs totaling $5.1 million. The organizational charges
related to anticipated severance and other charges associated with its
consolidation of certain corporate functions to the Company's headquarters in
Orlando, Florida.
Revenue Recognition -- The Company recognizes sales of Vacation Interests 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 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.
Advertising, Sales and Marketing -- The Company defers certain costs related
to its direct-response advertising of Vacation Interests. Such costs are
charged to expense when customers tour the Company's resort properties
(generally in less than twelve months) which corresponds to the estimated
revenue stream of the advertising activity. The total amount charged to expense
for 1999 was $2.6 million. There were no such costs in 1998 and 1997. Deferred
marketing cost at December 31, 1999, totaled $0.7 million.
Income Taxes -- The Company accounts for income taxes using an asset and
liability approach in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes, 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
related deferred tax assets or liabilities are expected to be settled or
realized. 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
generally accepted accounting principles 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 receivable allowance for
doubtful accounts, (ii) retained interests, and (iii) estimated net realizable
value of non-core properties held for sale. Actual results could differ from
those estimates.
Comprehensive Income -- In June 1997, the Financial Accounting Standards Board
(the "FASB") issued SFAS No. 130, Reporting Comprehensive Income (SFAS 130).
This statement establishes standards for reporting and the display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosures prescribed by SFAS 130 were made beginning with the first quarter of
1998.
Segment Reporting -- In June 1997, the FASB issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS 131). This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company adopted SFAS 131 during 1998.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
Derivative Instruments and Hedging Activities - In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 was amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133--an Amendment of FASB Statement No. 133 (SFAS 137) in June
1999. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as "Derivatives") and for hedging
activities. It requires that an entity recognize all Derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is in the process of reassessing current
derivative reporting to determine if changes in reporting will be required in
adopting this new standard. Any required disclosures prescribed by SFAS 133 will
be adopted in the first quarter of 2001, as required by SFAS 137.
Reclassifications -- Certain reclassifications were made to the 1998 and 1997
accompanying consolidated financial statements to conform to the 1999
presentation.
3. EARNINGS PER SHARE
Basic earnings per share was calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share was calculated by dividing the sum of the weighted average number of
common shares outstanding plus all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. The following
table reconciles the number of shares utilized in the earnings per share
calculations for each of the three years in the period ended December 31, 1999
(amounts in thousands):
Year Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Net (loss)income......................................................... $(17,422) $42,779 $19,522
Interest on convertible notes (a)........................................ -- 4,840 --
------- ------- -------
Net income available to common stockholders after $(17,422) $47,619 $19,522
assumed conversion of dilutive securities(a).......................... ======= ======= =======
Weighted average number of common shares used in basic 35,926 35,888 35,373
EPS...................................................................
Effect of dilutive convertible notes (a)................................. -- 4,537 --
Effect of dilutive stock options(b)...................................... -- 570 807
------- ------- -------
Weighted average number of common shares and dilutive 35,926 40,995 36,180
potential common shares used in diluted EPS(a)(b)................... ======= ======= =======
(a) The potential effect on net (loss) income and on common stock shares related
to the 5.75% Convertible Subordinated Notes Due 2007 (the "Convertible Notes")
have not been included in the 1999 or 1997 calculation of net (loss) income or
weighted average number of common shares and dilutive potential common shares
outstanding used in diluted earnings per share because the effect would be anti-
dilutive.
(b) The potential effect on common stock shares related to dilutive stock
options have not been included in the 1999 calculation of weighted average
numbers of common shares and dilutive potential common shares outstanding used
in diluted earnings per share because the effect would be anti-dilutive.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
4. MORTGAGES RECEIVABLE, NET
The Company provides financing to the purchasers of Vacation Interests that is
collateralized by their interest in such Vacation Interests. The mortgages
receivable generally bear interest at the time of issuance of between 12% and
17%, which remain fixed over the term of the loan, which typically averages
seven to ten years. The mortgages receivable may be prepaid at any time without
penalty. The weighted average rate of interest on outstanding mortgages
receivable was 14.3% as of December 31, 1999.
Mortgages receivable in excess of 60 days past due at December 31, 1999 were
7.1%, as a percentage of gross mortgages receivable.
During the fourth quarter, the Company recorded a $44.3 million write-off of
mortgages receivable, net of estimated recoveries, in its provision for doubtful
accounts, and a $9.6 million write-off of related accrued interest offset
against interest income.
The following schedule reflects the scheduled contractual principal maturities
of mortgages receivable (amounts in thousands):
Year Ending December 31:
- ------------------------
2000........................................................ $ 37,553
2001........................................................ 33,149
2002........................................................ 32,948
2003........................................................ 31,521
2004........................................................ 27,246
Thereafter.................................................. 101,661
--------
Total principal maturities of mortgages receivable.......... 264,078
Less allowance for doubtful accounts........................ (20,060)
--------
Net principal maturities of mortgages receivable............ $244,018
========
The activity in the mortgages receivable allowance for doubtful accounts is as
follows (amounts in thousands):
December 31,
---------------------------------------------------
1999 1998 1997
-------- -------- -------
Balance, beginning of the period............................ $ 22,869 $ 22,916 $17,328
Decrease in allowance for purchased mortgages
receivable............................................... (440) (584) (718)
Decrease in allowance for mortgages sold.................... -- (1,956) --
Increase in allowance related to acquired company........... -- 4,930 1,265
Provision for mortgages receivable doubtful accounts........ 49,703 11,409 7,234
Receivables charged off..................................... (52,072) (13,846) (2,193)
-------- -------- -------
Balance, end of the period.................................. $ 20,060 $ 22,869 $22,916
======== ======== =======
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
The provision for doubtful accounts for 1999, 1998, and 1997 includes $2.6
million, $1.2 million, and $1.4 million, respectively, for other receivables.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $3.3 million and $8.0 million at December 31, 1999 and
1998, respectively. The accrued interest receivable at December 31, 1999 and
1998 is net of an allowance for doubtful accounts of $0.6 million and $1.1
million, respectively, and is included in other receivables, net.
5. SALES OF MORTGAGES RECEIVABLE
For the year ended December 31, 1999, the Company recognized a pretax gain of
$5.4 million, net of expenses, on the sale of $186.0 million of mortgages
receivable, comprised of: (i) $136.6 million of mortgages receivable which were
sold into the Company's Mortgages Receivable Conduit Facility (the "Conduit
Facility"), the majority of which were subsequently part of securitizations;
(ii) $16.2 million of mortgages receivable which were part of the 1999-A
Securitization (defined below); (iii) $12.8 million of mortgages receivable
which were part of the 1999-B Securitization (defined below); and (iv) $20.4
million of mortgages receivable which were sold to a finance company.
Under the terms of the Conduit Facility, the Company sells mortgages
receivable through a wholly-owned special purpose entity at 95% of face value,
before a required 6% cash reserve, without recourse to the Company. The Company
then retains 100% of the excess spread over the borrowing rate. The $136.6
million of mortgages receivable which were sold into the Conduit Facility had a
9 year weighted average remaining life and a weighted average interest rate of
15%.
In May 1999, the Company completed the sale through a Securitization of $100
million principal amount of its Vacation Ownership Receivables-Backed Notes
1999-A ("1999-A Securitization"). These fixed rate notes were issued at 94% of
the $106.8 million outstanding mortgages receivable principal balances and bear
interest at a weighted average rate of 6.7%. The 1999-A Securitization generated
approximately $97 million in cash (after funding a reserve account and paying
transaction expenses), which the Company used to repay a portion of amounts
outstanding on the Conduit Facility and Senior Credit Facility. Of the $106.8
million mortgages receivable included in the 1999-A Securitization, all but
$16.2 million had previously been sold into the Company's Conduit Facility
during the fourth quarter of 1998 or the first quarter of 1999. The receivables
had an 8 year weighted average remaining life and a weighted average interest
rate of 15%.
In December 1999, the Company completed the sale through a Securitization of
$58.7 million principal amount of its Vacation Ownership Receivables-Backed
Notes 1999-B ("1999-B Securitization"). These fixed rate notes were issued at
90% of the $65.2 million outstanding mortgages receivable principal balances,
bear interest at a weighted average rate of 7.9% and are without recourse. The
1999-B Securitization generated approximately $55 million in cash (after funding
a reserve account and paying transaction expenses), which the Company used to
repay amounts outstanding on the Conduit Facility and the Senior Credit
Facility. Of the $65.2 million mortgages receivable included in the 1999-B
Securitization, all but $12.8 million had previously been sold into the
Company's Conduit Facility during 1999. These receivables had a 9 year weighted
average remaining life and a weighted average interest rate of 15%.
During 1999, the Company also sold to a finance company $20.4 million of
gross mortgages receivable for $19.5 million in cash in seven separate
transactions. The Company sold these receivables at 95% of par value with a 50%
participation in the remaining interest spread. These receivables had an 8 year
weighted average remaining life and a weighted average interest rate of 15%.
As a result of the 1999-A Securitization, the 1999-B Securitization, the
sales of mortgages receivable into the Conduit Facility and the sales of
mortgages receivable to a finance company, the Company generated retained
interests of $39.6 million. At December 31, 1999, the Company marked the
retained interest to market and recorded a $5.5 million realized loss on
available-for-sale securities. Retained interests are valued by the Company
assuming an 11% to 14% gross default rates (before recoveries), a 13% to 23%
prepayment rates, and a 16% discount rate, as deemed appropriate by the Company
depending on the seasoning and age of the mortgages receivable pool as well as
the terms and conditions of each separate sales transaction. The retained
interests are classified as available-for-sale based on management's intent and
the existence of prepayment options.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
6. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated Vacation Interests cost of
sales consist of the following (amounts in thousands):
December 31,
------------------------------
1999 1998
--------- ---------
Land............................................................................ $ 100,615 $ 102,653
Development cost, excluding capitalized interest................................ 660,736 536,053
Capitalized interest............................................................ 40,257 28,992
--------- ---------
Total real estate and development costs...................................... 801,608 667,698
Less accumulated Vacation Interest cost of sales................................ (438,074) (331,078)
--------- ---------
Net real estate and development costs........................................ $ 363,534 $ 336,620
========= =========
In 1999, the Company classified certain non-core properties as assets held for
sale. In accordance with SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of, the Company recorded a
$16.7 million write-down associated with these properties in the fourth quarter
of 1999. The carrying value of these assets was written down to the estimated
net realizable value based in part on offers from prospective third party buyers
of these properties less related sales costs. Accordingly, actual results could
vary significantly from these estimates.
As of December 31, 1999, the Company had commenced sales of Vacation Interests
at certain projects, or phases of certain projects, that are expected to be
completed during 2000. The estimated cost to complete the projects, or the
specific phases of the projects, is approximately $38 million.
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
December 31,
---------------------------------
1999 1998
-------------- --------------
Land............................................................................ $ 11,051 $ 9,134
Buildings and leasehold improvements............................................ 48,697 31,410
Furniture and equipment......................................................... 95,285 55,242
-------- --------
Total property and equipment................................................. 155,033 95,786
Less accumulated depreciation and amortization.................................. (24,712) (14,661)
-------- --------
Property and equipment, net.................................................. $130,321 $ 81,125
======== ========
Depreciation and amortization expense related to property and equipment was
$12.0 million, $6.5 million, and $2.8 million in 1999, 1998, and 1997,
respectively.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
8. INTANGIBLE ASSETS
Intangible assets and accumulative amortization consist of the following
(amounts in thousands):
December 31,
----------------------------------
1999 1998
-------------- --------------
Goodwill........................................................................ $ 78,547 $ 74,600
Debt issuance costs............................................................. 22,881 22,119
Loan origination fees........................................................... 10,276 8,669
Other........................................................................... 6,696 1,695
-------- --------
Total intangible assets....................................................... 118,400 107,083
Less accumulated amortization................................................... (16,472) (10,360)
-------- --------
Net intangible assets $101,928 $ 96,723
======== ========
Amortization expense was $3.8 million, $4.1 million and $3.7 million in 1999,
1998 and 1997, respectively. Amortization of capitalized financing costs,
included in interest expense, was $5.4 million and $3.2 million in 1999 and
1998, respectively. In addition, $1.6 million of amortized intangibles were
retired from the related asset and accumulated amortization accounts in 1999.
9. NOTES PAYABLE
Notes payable consist of the following (amounts in thousands) (Subsequent to
December 31, 1999, the terms and conditions of several of the following credit
lines were materially changed, as described in Note 19):
December 31,
--------------------------------
1999 1998
---------------- ----------------
Endpaper loans with interest payable monthly at prime plus 2% to prime plus
3% (10.5% to 11.5% at December 31, 1999), payable in monthly
installments of principal and interest equal to 100% of all proceeds of the
receivables collateral collected during the month; due from 2003-2007............. $ 18,989 $ 30,537
Lines of credit, collateralized by certain by certain inventory. Interest is payable
monthly at LIBOR plus 3.75% (9.6% at December 31, 1999). Principal is
payable upon the sooner of the sale of the collaterialized inventory
or from 2003-2004.................................................................. 69,864 --
Lines of credit, collaterialized by pre-sale and unseasoned mortgages
receivable. Interest is payable monthly at LIBOR plus 2.75% to 3.25%
(8.6% to 9.1% at December 31, 1999). Principal is due as the
collaterialized mortgages receivable become seasoned or September 2002............ 8,960 --
Senior Credit Facility of $60 million with interest payable quarterly at rates
ranging from LIBOR plus 1.5% to LIBOR plus 2% (7.3% to 7.8% on
December 31, 1999); collateralized by specific mortgages receivable; due
December 2002..................................................................... 23,242 17,110
Securitized notes, collateralized by certain mortgages receivable. Interest and
principal is payable monthly at an average interest rate of 6.7% due 2014......... 64,683 87,578
Securitized notes, collateralized by certain mortgages receivable. Interest and
principal is payable monthly at an average interest rate of 7.75% due 2004........ 2,753 6,900
9.25% Senior Notes, interest due May and November, principal due May
2006.............................................................................. 140,000 140,000
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
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
Other notes payable.................................................................. 15,469 6,964
-------- --------
Total notes payable $681,960 $627,089
======== ========
On December 31, 1999, the Company revised its Senior Credit Facility to expand
its eligibility criteria to accept a wider range of less seasoned mortgages
receivable as collateral into the Senior Credit Facility. The Company also
reduced its size to $60 million from $117.5 million, which coincided with the
establishment of a new $125 million receivables warehouse facility. At December
31, 1999, the interest rate of the Senior Credit Facility would vary between
LIBOR plus 1.50% and LIBOR plus 2.00% depending on the Company's Total Debt-to-
Capital Ratio.
In September 1999, the Company entered into a $50 million inventory line to
finance certain of its unsold vacation interests inventory (the "Inventory
Line"). The Inventory Line had $48.3 million outstanding on December 31, 1999
and was in addition to an existing inventory loan with the same lender that had
$21.6 million outstanding at December 31, 1999. The maturity of the Inventory
Line is September 30, 2003 and the maturity of the existing loan is March 1,
2004.
Also in September 1999, the Company entered into a $15 million pre-
sale/unseasoned line (the "Pre-sale Line") to finance certain mortgages
receivable. At December 31, 1999, the interest rate of the Pre-sale Line would
vary between LIBOR plus 2.75% to 3.25% or, reference rate plus 1.00% to 1.50%,
depending on the amount outstanding.
On December 31, 1999, a new $125 million receivables warehouse facility was
established but not funded at the time and has remained unused. The Company is
still negotiating the use of this receivable warehouse facility, but has not
considered it in determining the Company's availability.
At December 31, 1999, the Company was in default of certain covenants on the
above credit facilities. Subsequent to year end the Company obtained waivers and
renegotiated its covenants as more fully described in Note 19.
At December 31, 1998, the Company had $98.2 million available on the Senior
Credit Facility, $24.9 million available on the Conduit Facility and no amounts
available on the endpaper loans.
The Convertible Notes are convertible into Common Stock at any time prior to
maturity, unless previously redeemed, at a conversion price of $30.417 per
share, subject to adjustment under certain events.
The Company's loan agreements contain certain covenants, the most restrictive
of which requires the Company to maintain a minimum interest coverage ratio. At
December 31, 1999, the Company was in compliance with all covenants as
subsequently amended or waived (see Note 19). Dividends are restricted by
certain of the Company's debt agreements.
The expected maturities of indebtedness are as follows (amounts in thousands):
Due in the year ending December 31
- ----------------------------------
2000............................................................. $ 49,719
2001............................................................. 30,681
2002............................................................. 16,195
2003............................................................. 61,937
2004............................................................. 11,349
2005 and thereafter.............................................. 512,079
--------
Total............................................................ $681,960
========
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
10. RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, respectively, the Company had accrued $3.3
million and $7.3 million as net receivables from various homeowners'
associations at its resorts. The Company generally accrues receivables from
homeowners' associations for management fees and certain other expenses.
Payables to the homeowners' associations consist primarily of maintenance fees
for units owned by the Company. All of these amounts are classified as due from
related parties in the accompanying consolidated balance sheets.
As of December 31, 1999, the Company had accounts receivable and notes
receivable of $0.2 million, and $5.9 million, respectively, from the Company's
joint ventures in Poipu Point, Hawaii and Kaanapali, Hawaii. As of December 31,
1998, these accounts receivable and notes receivable balances due from Poipu
Point, Hawaii, Kaanapali, Hawaii and St. John, U.S. Virgin Islands were $2.8
million and $11.9 million, respectively. The accounts receivable relate to
certain reimbursable operating and development expenses. The notes receivable
represent loans made to the projects for start-up and development activities.
In 1999, the Company reimbursed to Mr. Gessow, then co-chairman of the Board
of Directors of Sunterra Corporation, approximately $0.4 million related to the
use of personal aircraft for business of the Company.
In 1997, Messrs. Gessow, Kaneko and Kenninger transferred 100% of their
interest in the Embassy Vacation Resort at Kaanapali Beach (the "Kaanapali
Resort") in exchange for the Company's agreement to reimburse to them expenses
they had incurred to acquire the Kaanapali Resort. On June 9, 1998, the Board of
Directors of the Company approved the reimbursement by the Company of an
aggregate of $626,858 to Messrs. Gessow ($250,743), Kaneko ($250,743) and
Kenninger ($125,372) for expenses incurred by them individually in connection
with the acquisition of the Kaanapali Resort.
The Company has been previously reimbursed $275,639 by The Whitehall Fund of
Goldman Sachs and Apollo, the Company's partners in the Kaanapali Resort, for
their pro rata portion of such expenses.
11. LEASES
In September 1999, the Company entered into two agreements for the sale and
leaseback of computer hardware. At the end of the lease, the Company has the
option to purchase the computer hardware at a price to be determined by the
Lessor and the Company, extend the lease for seven months, or return the
equipment to the Lessor. Of the two leases, one is classified as an operating
lease and one is classified as a capital lease in accordance with SFAS No. 13,
Accounting for Leases. (SFAS 13).
For the lease classified as an operating lease, the book value and
associated depreciation of the computer hardware of approximately $2.3 million
and $0.2 million respectively, have been removed from the accounts and the gain
realized on the sale approximating $0.2 million has been deferred. The deferred
gain will be credited to income as rent expense adjustments over the 36 month
lease term. Payments under the lease approximate $0.8 million annually,
commencing in December 1999.
For the lease classified as a capital lease, the book value and associated
depreciation of the computer hardware of approximately $2.6 million and $1.0
million respectively, have been reclassified under leased property. An
obligation under capital leases has been recorded for $2.4 million. The gain
realized on the sale approximating $1 million has been deferred. The gain will
be amortized in proportion to the amortization of the leased property. Payments
under the lease approximate $0.9 million annually, commencing in December 1999.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
At December 31, 1999, future minimum lease payments on capital and operating
leases were as follows (in thousands):
Capital Operating
Year Ending December 31 Leases Leases
- ----------------------------------------------------------- ---------------- -----------------
2000....................................................... $1,098 $ 809
2001....................................................... 1,024 809
2002....................................................... 831 742
------ ------
Total minimum lease payments............................... $2,953 $2,360
======
Imputed interest rate of 9.6%.............................. (364)
------
Present value of minimum lease payments.................... $2,589
======
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in several class action lawsuits against the Company
and certain directors, officers, and former officers. The class actions allege
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. A damages award in excess of any available insurance could have a
material adverse effect on the Company.
In addition, the Company is currently subject to litigation and claims
regarding employment, tort, contract, construction, and commission disputes,
among others. 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 partner's interest. At
December 31, 1999, the Company does not believe that the events requiring such
purchase are likely to occur.
13. 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 cash in escrow: The carrying amount reported is
in the balance sheet for cash and cash equivalents and cash in escrow
approximates their fair value because of the short maturity of these
instruments.
Retained interests: The carrying amount reported in the balance sheet for
retained interests approximates its fair value based on the assumptions
disclosed in Note 5.
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable: The carrying amount reported in the balance sheet for notes
payable approximates its fair value because the interest rates on these
instruments approximate current interest rates charged on similar current
borrowings.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
Derivative instruments: The Company has two offsetting interest rate cap
agreements. These agreements both expire on December 21, 2001 and have identical
but offsetting settlement terms. The special purpose entity related to the
Company's conduit facility is the receiving party of any payments from the
counterparty institution and the Company is the paying party to that
counterparty. The notional amounts are $100 million each. Cash settlements under
these agreements only occur if LIBOR exceeds 7.50%. The special purpose entity
will use only that portion of its settlement received that is needed to cover
its interest and cash obligations with the remainder paid to the Company. To
date no payments have occurred under these agreements. As of December 31, 1999,
the cost to terminate these agreements is not material.
14. STOCK OPTIONS
The Company issued 502,773, 2,749,600 and 1,054,500 stock options during 1999,
1998, and 1997, respectively. The Company accounts for these options under APB
Opinion No. 25, Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. Under SFAS 123, Accounting for Stock-
Based Compensation, the Company's unaudited net loss would have been $22.1
million and both basic and diluted unaudited loss per share would have been
$0.62 on an unaudited pro forma basis for the year ended December 31, 1999. The
Company's unaudited net income would have been $38.7 million, and basic and
diluted unaudited earnings per share would have been $1.08 and $1.06,
respectively, for the year ended December 31, 1998. The Company's unaudited net
income would have been $16.9 million, and basic and diluted unaudited earnings
per share would have been $0.48 and $0.47, respectively, for the year ended
December 31, 1997. As of December 31, 1999, 1,181,772 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, 1999, 1998, and 1997 is presented
in the following table:
1999 1998 1997
---------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ------------ ----------- ------------- ----------- -------------
Outstanding options, beginning
of year.................................... 5,192,200 $10.21 3,289,407 $14.45 2,653,500 $10.29
Granted....................................... 502,773 12.32 2,749,600 13.49 1,054,500 23.99
Exercised..................................... (93,550) 8.29 (600) 9.33 (250,180) 9.33
Forfeited..................................... (503,525) 12.78 (846,207) 28.60 (168,413) 16.42
---------- ---------- ----------
Outstanding options, end of year.............. 5,097,898 $12.58 5,192,200 $10.21 3,289,407 $14.45
Exercisable at end of year.................... 2,743,297 $12.20 1,078,490 $10.41 817,528 $10.50
========== ========== ==========
Weighted average fair value
of options granted......................... $8.50 $5.64 $5.32
All stock options issued by the Company were issued to employees at fair
market value on the grant date. The options range from 3 to 5 years for full
maturity and the exercise prices range from $8.00 to $28.25.
The weighted average fair value of options granted is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 6.39%, expected dividend yield of zero,
expected volatility of 59%, and expected life of 8 years in 1999.
The weighted average fair value of options granted is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 6.0%, expected dividend yield of zero,
expected volatility of 35%, and expected lives of 3 to 5 years in 1998 and 1997.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
15. EMPLOYEE BENEFIT PLANS
The Company has established the Sunterra Resorts, Inc. Employee Stock Purchase
Plan to assist eligible employees to acquire stock ownership in the Company and
to encourage them to remain in the employment of the Company. The Employee Stock
Purchase Plan is intended to meet the requirements of an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, and generally allows eligible employees to purchase common stock at 85%
of fair market value, subject to dollar limitations.
The Company has reserved a maximum of 750,000 shares of Common Stock for
issuance pursuant to the Employee Stock Purchase Plan. As of December 31, 1999
and 1998, an aggregate of 67,783 and 29,269 shares, respectively, had been
issued pursuant to the Employee Stock Purchase Plan.
The Company also 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. Although the 401(k) Plan allows the Company to
make discretionary matching contributions of up to 50% of employee
contributions, the Company did not make any such matching contributions during
1999, 1998, or 1997.
16. INCOME TAXES
The components of the (benefit) provision for income taxes are summarized as
follows (in thousands):
Year ended December 31 1999 1998 1997
- ------------------------------------------------------ --------------------- -------------------- --------------------
Current:
Federal........................................... $ (2,162) $ 8,570 $ 2,194
State............................................. (9) 1,666 461
Foreign........................................... 3,934 5,691 2,533
-------- ------- -------
Total current provision for income taxes 1,763 15,927 5,188
-------- ------- -------
Deferred:
Federal........................................... (9,807) 11,385 16,125
State............................................. (1,590) 1,301 1,843
Foreign........................................... (598) (242) --
-------- ------- -------
Total deferred (benefit) provision
for income taxes................................... (11,995) 12,444 17,968
-------- ------- -------
(Benefit) provision for income taxes.................. $(10,232) $28,371 $23,156
======== ======= =======
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
The reconciliation between the statutory provision for income taxes and the
actual (benefit) provision for income taxes is shown as follows (amounts in
thousands):
Year ended December 31 1999 1998 1997
- ------------------------------------------------------ --------------------- -------------------- ---------------------
Income tax at U.S. federal statutory rate............. $ (9,679) $25,461 $15,205
State tax, net of federal benefit..................... (968) 1,929 1,738
Difference in foreign tax rates....................... (1,265) (202) (994)
Non-deductible expenses............................... 1,132 610 3,192
Deferred income taxes recorded upon acquisition of
previously non-taxable entities.................... -- -- (1,050)
Non-taxable income from entities...................... -- -- 5,960
Other................................................. 548 573 (895)
-------- ------- -------
(Benefit) provision for income taxes.................. $(10,232) $28,371 $23,156
======== ======= =======
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 (amounts in
thousands):
Year ended December 31 1999 1998 1997
- ------------------------------------------------------ --------------------- --------------------- ---------------------
Deferred tax assets:
Allowance for doubtful accounts.................... $ 9,108 $ 12,084 $ 8,867
Fixed assets and inventory......................... 2,826 1,666 1,305
Accrued liabilities................................ 1,666 1,961 4,152
Adjustment to basis of partnership property........ 312 1,429 3,474
Net operating loss carryover....................... 29,498 33,250 29,439
Foreign tax credit carryover....................... 1,340 991 62
Foreign net operating loss carryover............... 1,129 -- --
Capital loss carryover............................. 1,377 -- --
Minimum tax credit carryover....................... 3,384 8,840 5,776
Other.............................................. 1,900 1,963 367
-------- -------- --------
Total gross deferred tax assets................. 52,540 62,184 53,442
Valuation allowance................................ (929) -- (2,367)
-------- -------- --------
Total net deferred tax assets................... 51,611 62,184 51,075
Deferred tax liabilities:
Installment sales.................................. (60,765) (87,536) (73,818)
Percentage of completion........................... (96) (4,784) (160)
Technology expenses................................ (5,848) -- --
Other.............................................. (3,145) (848) (849)
-------- -------- --------
Total deferred tax liabilities.................. (69,854) (93,168) (74,827)
-------- -------- --------
Net deferred taxes.................................... $(18,243) $(30,984) $(23,752)
======== ======== ========
At December 31, 1999, the Company had available approximately $75 million of
unused Federal net operating loss carryforwards (the "NOLs") that may be applied
against future taxable income. These NOLs expire on various dates from 2004
through 2019.
The valuation allowance of $2.4 million in 1997 was related to loss
carryforwards acquired in a 1997 company purchase. Deferred tax liabilities
generated during 1998 favorably impacted the future realization of these loss
carryforwards resulting in the reversal of this reserve. Income taxes currently
payable have not been affected by the change in reserve. The reversal of the
reserve reduced the goodwill recorded on the 1997 company acquisition.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
The valuation allowance of $0.9 million in 1999 was related to loss
carryforwards of the Japanese operations. Under the provisions of SFAS No. 109,
the Company has recorded a valuation allowance to reserve against 100% of this
asset due to the uncertainty of the realization of such asset.
Provision has not been made for taxes on approximately $26.7 million of
undistributed earnings of foreign subsidiaries. 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; however, the Company believes that U.S. foreign tax credits would
largely eliminate any U.S. tax and offset any foreign tax.
17. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment, which includes the marketing,
sales, financing, and management of vacation ownership resorts, and two
geographic segments. The Company's areas of operation outside of the United
States include Mexico, Canada, Netherlands Antilles, United Kingdom, Japan,
Spain, Portugal, Austria, Italy, 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 2). The Company's customers are not concentrated in any specific geographic
region and 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 (amounts in thousands):
1999 United States Foreign Eliminations Total
---------------- ------------ --------------------- ----------------
Total revenues................................... $375,543 $131,425 $ 506,968
(Loss) income before income tax (benefit)
provision...................................... (53,162) 25,508 (27,654)
Identifiable assets.............................. 954,820 201,824 (98,234) 1,058,410
1998
Total revenues................................... $331,566 $118,388 $ 449,954
Income before provision for income taxes,
extraordinary items, and cumulative effect..... 53,331 19,414 72,745
Identifiable assets............................... 939,069 176,497 (94,434) 1,021,132
1997
Total revenues.................................... $270,296 $ 67,397 $ 337,693
Income before provision for income taxes and
extraordinary items............................ 31,177 12,267 43,444
Identifiable assets............................... 701,509 91,593 (31,957) 761,145
18. DISPOSITIONS AND ACQUISITIONS
In December 1999, the Company sold its 50% share in joint venture partnerships
with affiliates of Westin Hotels for $7.8 million in cash. The Company had
previously entered into partnerships with affiliates of Westin Hotels to
acquire, develop, manage, operate, market and sell vacation interests in a
resort located in St. John, U.S. Virgin Islands and a resort to be developed in
Rancho Mirage, California. In December 1999, the Company sold its interests in
these partnerships to Starwood Hotels & Resorts Worldwide, Inc., the parent
company of Westin Hotels. The loss is netted against equity gain on investment
in joint ventures in the consolidated income statement for the year ended
December 31, 1999.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
On February 7, 1997, the Company consummated its acquisition by merger of
AVCOM (the "AVCOM Acquisition"). AVCOM is the parent company of All Seasons
Resorts, Inc., a developer, marketer and operator of vacation ownership resorts
in Arizona, California and Texas. Under the terms of the AVCOM merger agreement,
the Company issued 1,324,554 shares of its common stock in exchange for all the
outstanding capital stock of AVCOM. The AVCOM Acquisition has been treated as a
pooling-of-interests and is reflected in the accompanying consolidated financial
statements as if it took place at the beginning of the earliest period
presented.
On May 15, 1997, the Company consummated its acquisition by merger (the "PRG
Acquisition") of PRG, a Williamsburg, Virginia, based developer, owner and
operator of vacation ownership resorts in Williamsburg, Virginia. PRG was
incorporated in April 1997 through a private placement of its common stock in
which certain predecessor joint ventures and corporations (the "PRG Entities")
exchanged their interests for shares of PRG's common stock. The PRG Acquisition
was consummated through the issuance of 3,601,844 shares of the Company's common
stock. The PRG Acquisition has been treated as a pooling-of-interests and is
reflected in the accompanying consolidated financial statements as if it took
place at the beginning of the earliest period presented.
On August 28, 1997, the Company consummated its acquisition by merger of 100%
of the capital stock of LSI in exchange for 1,996,401 newly-issued shares of the
Company's common stock and approximately $1.0 million in cash (the "LSI
Acquisition"). United Kingdom based LSI is a developer, owner and operator of
vacation ownership resorts located in Europe. Through its Grand Vacation Club,
LSI operates a points-based club system. The LSI Acquisition has been treated as
a pooling-of-interests and is reflected in the accompanying consolidated
financial statements as if it took place at the beginning of the earliest period
presented.
During 1998, the Company acquired MMG Holding Corporation, Harich Tahoe
Development, and ten resorts located in the United States, Europe, and Japan,
all in separate transactions. During 1997, the Company acquired Marc Hotels &
Resorts, Inc., Vacation International, Ltd., and Global Development Ltd. all in
separate transactions. Each of the aforementioned acquisitions in 1998 and 1997
were accounted for under the purchase method for business combinations. Assets
acquired and liabilities assumed in connection with the Company's 1998 and 1997
purchases are as follows (amounts in thousands):
1998 1997
----------- ------------
Assets acquired in acquisitions:
Cash in escrow......................................... $ 6 $ 857
Mortgages receivable, net.............................. 74,655 14,509
Due from related parties............................... 317 1,175
Other receivables, net................................. 2,091 2,719
Prepaid expenses and other............................. 1,170 377
Real estate and development costs...................... 19,833 10,834
Property and equipment, net............................ 8,362 3,202
Goodwill in conjunction with
acquisitions....................................... 37,421 35,186
-------- -------
Total assets acquired in
acquisitions....................................... $143,855 $68,859
======== =======
Liabilities assumed in acquisitions
Accounts payable....................................... 5,995 8,666
Accrued liabilities.................................... 3,005 21,359
Due to related parties................................. -- 12
Deferred income taxes.................................. 258 1,012
Notes payable.......................................... 35,257 227
Cumulative translation adjustment...................... -- 277
-------- -------
Total liabilities assumed in acquisitions................. $ 44,515 $31,553
======== =======
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
The following table sets forth certain unaudited pro forma information for
the Company's purchases as if they had occurred as of the beginning of the year
acquired and the immediately preceding year for 1998 and 1997 (amounts in
thousands, except per share data).
Pro Forma
Actual Adjustments Total
----------- ------------ -------------
(unaudited) (unaudited)
Year ended December 31, 1998
Total Revenues....................................... $449,954 $(17,362) $432,592
Net Income........................................... 42,779 (2,510) 40,269
Basic EPS............................................ $ 1.19 $ 1.12
Diluted EPS.......................................... $ 1.16 $ 1.10
Year ended December 31, 1997
Total revenues....................................... $337,693 $ 67,932 $405,625
Net income........................................... 19,522 (1,758) 17,764
Basic EPS............................................ $ 0.55 $ 0.50
Diluted EPS.......................................... $ 0.54 $ 0.49
19. SUBSEQUENT EVENTS
In the first quarter of 2000, funding availability under the Company's
facilities and lines was curtailed based on anticipated covenant violations that
would be reported for the 1999 fourth quarter. As a result, the full use of
these facilities was temporarily withheld, and access to liquidity under these
facilities was granted on an individual request basis pending the completion of
waivers and amendments to the related agreements. Presently, these waivers and
amendments are in place and provide for the Company's compliance with the
covenants and terms of the agreements as of December 31, 1999. Access to the
availability under these facilities was also reestablished, although on a
limited basis as compared to the original terms of the facilities.
On February 9, 2000, the Company agreed to limit the maximum aggregate
amount available under the Conduit Facility established in connection with the
Company's off-balance-sheet securitizations to $64.1 million. In addition, the
interest rate of the facility was changed to the prime rate of the agent. On
December 31, 1999, $51.3 million was outstanding under the Conduit Facility;
$12.8 million of availability under the Conduit Facility was used in February
2000.
On March 9, 2000 the Company amended its Senior Credit Facility. The
amendment waived certain covenants and representations and warranties in the
Senior Credit Facility agreement that could not be satisfied as of December 31,
1999. As of March 30, 2000, the Company had entered into amendments to its
Senior Credit Facility limiting outstanding borrowings to $35.4 million,
requiring quarterly reductions to the commitment during 2000, revising the
maturity date to January 2, 2001, and setting the borrowing rate at the
reference rate plus 2.00%. The reference rate is the higher of the Federal Funds
Rate plus 0.50% or the agent's prime rate. On December 31, 1999, $23.2 million
was outstanding under the Senior Credit Facility; the $12.2 million of
availability under the new maximum borrowing limitation was used in the first
quarter of 2000.
On March 14, 2000, availability under our Inventory Line was increased by
$25 million to $75 million and the interest rate was raised 0.75% to LIBOR plus
4.50%. Additionally, on March 14, 2000, the Company issued 500,000 warrants to
the lender for the purchase of shares of common stock at an exercise price of $3
per share. As of March 16, 2000, $15.6 million remained available under the
Inventory Line.
On March 20, 2000 a waiver was granted of certain covenants and
representations and warranties pertaining to the Company's Pre-sale
Line that could not be satisfied as of December 31, 1999. As of March 30, 2000,
the Company had entered into amendments to its Pre-sale Line limiting
outstanding borrowings to $9.6 million, requiring quarterly reductions to the
commitment during 2000, revising the maturity date to January 3, 2001, and
setting the borrowing rate at the reference rate plus 3.25%. The reference rate
is defined as the lender's variable rate index. On December 31, 1999, $9.0
million was outstanding under the facility; the remaining availability of $0.6
million has not been borrowed.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
After December 31, 1999, further advances on the bulk purchase line and
forward purchase commitment for mortgages receivable will be made at the
discretion of the provider. On December 31, 1999, a new $125 million receivables
warehouse facility was established but not funded at the time and has remained
unused. The Company is still negotiating the use of this facility, but has not
considered it in determining our availability. Effective January 20, 2000, the
Company cancelled a $5.0 million unsecured bank line of credit as its terms did
not permit access to the line upon the occurrence of a violation in any other
agreement.
The Company is involved in continuing discussions with its lenders with
respect to funding its current operations through its Senior Credit Facility,
Conduit Facility, Inventory Line and Pre-sale Line. In addition to discussions
regarding its existing facilities, the Company is currently negotiating with
other financial institutions additional revolving mortgages receivable warehouse
facilities and mortgages receivable non-recourse sales facilities.
As a result of the reduction of planned construction and acquisitions, the
sale of non-core properties, the increase in its inventory line, and the
negotiations underway with respect to additional mortgages receivable credit
facilities, the Company expects that it will be able to realize its assets and
satisfy its liabilities in the normal course of business. Accordingly, the
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or the amounts of liabilities or any
other adjustments that might result should the Company be unable to continue as
a going concern.
F-24