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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
February 10, 1999
---------------------------------
Date of report (Date of earliest event reported)
SUNTERRA CORPORATION
---------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Maryland 000-21193 95-4582157
(State or other Jurisdiction Commission Title (IRS Employer
of Incorporation) Number) Identification Number)
</TABLE>
1791 Park Center Drive
Orlando, Florida 32835
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(Address of Principal Executive Offices)
(407) 532-1000
---------------------------------
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
On February 10, 1999, Sunterra Corporation, a Maryland corporation (the
"Company"), issued a press release announcing its fourth quarter and 1998
year-end results. A copy of the press release is attached as Exhibit 99 hereto
and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS
Exhibit 99 - Text of Press Release issued by the Company dated
February 10, 1999.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SUNTERRA CORPORATION
By: /s/ THOMAS A. BELL
---------------------------
Name: Thomas A. Bell
Title: Senior Vice President,
General Counsel and Secretary
Dated: February 18, 1999
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[SUNTERRA CORPORATION LETTERHEAD]
FOR IMMEDIATE RELEASE
Contact: L. Steven Miller At The Financial Relations Board:
Chief Executive Officer Lise Needham (general information)
(407) 532-1000 Elaine Asher (analyst contact)
Alicia Nieva-Woodgate (media)
Richard Goodman (415) 986-1591
Chief Financial Officer
(407) 532-1000
SUNTERRA CORPORATION REPORTS RECORD
FOURTH QUARTER AND YEAR-END RESULTS
FOURTH QUARTER TOTAL REVENUES UP 44%; FOURTH QUARTER NET INCOME INCREASES 27%
ORLANDO, FLORIDA, FEBRUARY 10, 1999 -- Sunterra Corporation (NYSE: OWN) today
announced record financial performance for the three months and year ended
December 31, 1998.
Fourth quarter 1998 net income, before cumulative effect of change in
accounting principle, increased by 26.5% to a record $12.9 million, or $.035
per diluted share, compared with recurring net income of $10.2 million, or
$0.28 per diluted share in the fourth quarter of 1997. Revenues increased by
43.6% over this same period to a record $126.9 million in the fourth quarter of
1998 from $88.4 million in the fourth quarter of 1997.
For the 1998 full year, net income, before cumulative effect of change in
accounting principle and extraordinary item, increased by 37.9% to $44.4
million, or $1.20 per diluted share, from recurring income of $32.2 million, or
$0.89 per diluted share in 1997. Revenues increased by 33.3% for the year to
$450.0 million in 1998 from $337.7 million in 1997.
Two weeks ago, the Company announced certain fourth quarter items -- a
gain on sale of mortgages receivable, consolidation charges, the write-down of
certain assets and the cumulative effect of change in accounting principle.
Excluding all these items, net income was $12.6 million, or $0.34 per diluted
share in the fourth quarter of 1998, and $43.4 million, or $1.18 per diluted
share for the year ended December 31, 1998.
L. Steven Miller, Sunterra's President and CEO reviewed the year as
follows:
"Sunterra's record fourth quarter sales and earnings performance marks our
tenth consecutive quarter of increasing value for our shareholders since the
Company went public in August 1996. 1998 was an important year in the
development of Sunterra, with major accomplishments on several key business
drivers:
- more -
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 2
- During 1998, we made significant progress in our strategy to convert
our mortgages receivable into cash, reduce our leverage and also
reduce the risk of portfolio default -- and we expect to continue on
this path in 1999. We accomplished this through a series of mortgages
receivable sales, a securitization and a conduit transaction that
generated combined cash inflows of $420 million; this cash allowed us
not only to fund the nearly $351 million in mortgage receivables
originated/acquired during the year, but also to refinance
approximately $69 million in debt at significantly lower interest
rates. As a result, our net mortgages receivable increased only 1%
during the year, to $336.0 million at year-end 1998 from $331.7
million at year-end 1997, despite a 28% increase in interval/point
sales over the same period.
- We achieved the critical mass and diversity of resort offerings
necessary to satisfy our owners' expectations. By year-end 1998, our
network encompassed 87 resorts in North America, Europe, the Caribbean
and Japan -- up from 70 at the end of 1997. Acquisitions included
resorts in Lake Tahoe, CA; St. Croix, Virgin Islands; Santa Fe, NM;
Ft. Lauderdale, Orlando, and Deerfield Beach, FL; Banner Elk, NC;
Pigeon Forge and Gatlinburg, TN; as well as Cannes, Tenerife, London,
Portugal and Tokyo. The number of Sunterra owners increased from
175,000 at year-end 1997 to over 240,000 at year-end 1998.
- We launched Club Sunterra, a points-based system providing new and
existing owners with a wider range of choice and significantly
enhanced flexibility in their vacation planning, while enabling us to
intensify our affinity relationship with our owners. During the fourth
quarter, we transitioned three of our resort locations from the sale
of solely intervals to the sale of solely Club Sunterra. We will
complete the rollout of Club Sunterra to all of our facilities in
1999.
- Approximately 60% of our sales growth in the fourth quarter of 1998
related to organic growth rather than acquisitions -- i.e., the sale
of intervals/points at locations that were part of the Sunterra
network in the fourth quarter of 1997. We expect that most of our
revenue growth in 1999 will relate to the further development of
existing properties we now own. And to sustain that growth, we
currently have construction activities underway at 14 properties.
- We have made major organizational changes at Sunterra in order to
establish a management team and an organizational structure that will
facilitate our aggressive growth plans. I am personally very excited
to have joined the Sunterra team in October as President and CEO, and
to have Richard Goodman come on board as CFO and Tom Bell as General
Counsel. With the move of Jim Noyes to head sales and Chuck Frey to
head owner services, we now have virtually the entire senior team in
place.
FOURTH QUARTER RESULTS
Gains in three areas drove the 43.6% increase in total revenues for the
fourth quarter. First, vacation interval/point sales increased by 39.3% to
$98.6 million in 1998 from $70.8
- more -
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 3
million in 1997, reflecting sales increases both in existing resorts ($15.6
million) as well as in resorts acquired since the fourth quarter of 1997 ($12.2
million). Second, other income more than doubled to $9.1 million from $4.3
million, reflecting a significant increase in the recurring resort management
fees paid by Sunterra's growing member base and rental revenues generated from
the Company's larger base of resorts. Third, included in fourth quarter
revenues in 1998 was the $5.7 million pretax gain on the sale of $79 million of
mortgages receivable into the $100 million Conduit Facility we established in
the fourth quarter; there was no such sale in the comparable prior year period.
The operating margin in the fourth quarter of 1998 was 25.0% compared
with 24.9% in the comparable prior year period. The operating margin in the
fourth quarter of 1998 includes a $5.1 million pretax charge for the
consolidation of functions to our Orlando headquarters and the write-down of
certain assets and a $5.7 million pretax gain on the sale of mortgages
receivable to the Conduit Facility. Excluding the effect of these items on both
profits and revenues, the operating margin in the fourth quarter of 1998 was
25.7% compared with 24.9% in the fourth quarter of 1997.
Cost of sales, as a percentage of vacation ownership sales, declined
slightly to 24.1% in the fourth quarter of 1998 from 24.2% in the fourth
quarter of 1997. By contrast, advertising, sales and marketing expenses, as a
percentage of vacation ownership sales, increased to 46.6% from 45.2% in the
comparable period of 1997. This increase primarily resulted from a mix-shift to
European sales which have higher sales expenses (but lower cost of product),
lower sales efficiencies connected with the launch of Club Sunterra, and the
start-up of four new off-site sales locations.
EBITDA for the fourth quarter of 1998 increased by 62.2% to $39.9
million from $24.6 million in the fourth quarter of 1997. EBITDA margins
increased to 28.3% from 27.8% over this same period, excluding the above
referenced mortgages receivable gain, consolidation charges and the write-down
of certain assets.
Fourth quarter 1998 net interest expense increased to $9.8 million,
$5.4 million higher than in the fourth quarter of 1997, primarily reflecting:
additional borrowings that funded acquisition and development costs; the
financing of an increase in our mortgages receivable portfolio prior to the
sale at year-end of $79 million of these mortgages receivable into the Conduit
Facility; and lower capitalized interest.
At December 31, 1998, net mortgages receivable were $336.0 million, a
reduction of $50.9 million from $386.9 million at September 30, 1998 - and up by
only $4.3 million from $331.7 million at year-end 1997.
Consumer loans in excess of 60 days past due, including defaulted loans
and loans in the deed-in-lieu process at December 31, 1998, were 7.4%, as a
percentage of gross mortgages receivable, up from 6.8% at December 31, 1997.
Net of inventory recoveries, these same
-more-
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 4
percentages would decrease to 4.6% and 4.3%, respectively. These year-to-year
variances entirely reflect a slight shift in the mix of mortgages receivable
due to the year-end sale of mortgages into the Conduit Facility. The Company's
allowance for doubtful accounts, as a percentage of gross mortgages receivable,
was 6.4% at December 31, 1998, versus 6.3% in the quarter ended September 30,
1998.
There were non-recurring items in the fourth quarters of both 1998 and
1997. As previously announced, as a result of the AICPA's Statement of Position
98-5 (SOP 98-5) "Reporting on the Costs of Start-up Activities", the Company
incurred a $1.5 million non-cash after-tax cumulative adjustment for the period
ending December 31, 1998. Net income for the fourth quarter of 1997 included a
non-cash after-tax charge of $6.0 million resulting from the change in tax
status of an acquired enterprise to a "C" Corporation for federal income tax
purposes. Reported net income of $0.31 per diluted share in the fourth quarter
of 1998 and $0.12 per diluted share in the fourth quarter of 1997 includes
these non-recurring items.
FULL-YEAR RESULTS
For the year ended December 31, 1998, total revenues increased 33.3% to
$450.0 million from $337.7 million in 1997. Factors which contributed to the
increase in year over year revenues include a 27.9% increase in the sale of
vacation points and intervals to $359.4 million from $281.1 million, a 22.4%
increase in interest income to $52.5 from $42.9 million, a $6.7 million gain on
the sale of mortgages receivable, and a 126.8% increase in other income to
$31.3 million from $13.8 million, primarily due to dramatic increases in
recurring resort management fees and rental revenues across Sunterra's larger
base of resorts.
Operating margins significantly improved to 26.1% from 22.7% in the year
earlier period, excluding a gain on sale of mortgages receivable, the
consolidation charges and the write-down of certain assets in 1998, and the
merger related costs in 1997. Cost of sales, as a percentage of vacation
ownership sales, declined to 23.8% from 25.4% in 1997, primarily as a result of
a higher mix of European sales, which have lower product cost, but higher sales
costs. This was also the primary factor in advertising, sales and marketing
expenses, as a percentage of vacation ownership sales, increasing to 45.6% from
45.1% in the year ago period.
EBITDA for 1998 increased 59.5% to $136.2 million from $85.4 million in
1997, reflecting EBITDA margins of 30.3% and 25.3%, respectively. Excluding the
above referenced mortgages receivable gain, consolidation charges, and the
write-down of certain assets in 1998 and the merger-related costs in 1997,
EBITDA margins increased to 29.2% in 1998 from 25.3% in 1997.
Net interest expense increased 95.5% to $43.8 million from $22.4 million
in the year ended December 31, 1997. The increase primarily reflects additional
borrowings over the year to support continuing development and acquisitions, as
well as mortgage financings associated with increased sales of vacation points
and intervals.
-more-
Sunterra Corporation is the world's largest vacation ownership company,
with 87 resort
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 5
locations around the world, two new resorts under construction and more than
240,000 owner families.
This release contains forward-looking statements, which include
Sunterra's expansion plans, future prospects and other forecasts and statements
of expectations. Actual results may differ materially from those expressed in
any forward looking statements made by Sunterra due to, among other things,
factors related to the timing and terms of future acquisitions and the
introduction of Club Sunterra, mortgages receivable financing, integration of
acquired operating companies and resort properties and those factors identified
in Sunterra's filings with the Securities and Exchange Commission, including
those set forth in Items 1 and 2 of Sunterra's Annual Report on Form 10-K for
the year ended December 31, 1997, and current reports on Form 8-K, and Forms
10-Q for the periods ending March 31, 1998 and June 30, 1998 and September 30,
1998.
- FINANCIAL TABLES FOLLOW -
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 6
SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
($ IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
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<S> <C> <C>
Revenues:
Vacation ownership sales $ 98,592 $70,802
Interest income 13,550 13,327
Gain on sale of receivables 5,666 --
Other income 9,094 4,279
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Total Revenues 126,902 88,408
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Costs and Operating Expenses:
Vacation ownership cost of sales 23,721 17,120
Advertising, sales and marketing 45,979 31,982
Loan portfolio:
Other expenses 750 1,065
Provision for doubtful accounts 3,204 2,566
General and administrative 13,452 11,461
Depreciation and amortization 2,969 2,230
Organizational charges and write-down of
certain assets 5,056 --
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Total costs and operating expenses 95,131 66,424
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Income from operations 31,771 21,984
Interest expense - other, net 9,834 4,389
Minority interest in profits of LP 18 58
Equity loss on investment in JV 701 513
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Income before provision for taxes 21,218 17,024
Provision for income taxes 8,276 6,809
Provision for income taxes resulting from a change
in tax status of an acquired enterprise -- 5,960
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Total provision for income taxes 8,276 12,769
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Net income before cumulative effect of change
in accounting principle 12,942 4,255
Cumulative effect of change in accounting
principle, net of taxes 1,466 --
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Net income $ 11,476 $ 4,255
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Net income-diluted $ 12,686 $ 4,255
======== =======
Shares outstanding:
Basic 35,900 35,797
Diluted 40,676 36,664
Earnings per share - before cumulative effect
of change in accounting principle:
Basic $ 0.36 $ 0.12
Diluted $ 0.35 $ 0.12
Earnings per share
Basic $ 0.32 $ 0.12
Diluted $ 0.31 $ 0.12
</TABLE>
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SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
TWELVE MONTHS ENDED
($ IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
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<S> <C> <C>
Revenues:
Vacation ownership sales $359,426 $281,063
Interest income 52,529 42,856
Gain on sale of receivables 6,698 --
Other income 31,301 13,774
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Total Revenues 449,954 337,693
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Costs and Operating Expenses:
Vacation ownership cost of sales 85,649 71,437
Advertising, sales and marketing 163,828 126,739
Loan portfolio:
Other expenses 3,680 5,522
Provision for doubtful accounts 12,616 8,579
General and administrative 50,699 42,254
Depreciation and amortization 11,188 6,499
Organizational charges and write-down of certain assets 5,056 --
Merger related costs -- 9,973
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Total costs and operating expenses 332,716 271,003
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Income from operations 117,238 66,690
Interest expense, net 43,767 22,426
Minority interest in profits of LP 18 181
Equity loss on investment in JV 708 639
-------- --------
Income before provisions for taxes 72,745 43,444
Provision for income taxes 28,371 17,196
Provision for income taxes resulting from a change
in tax status of an acquired enterprise -- 5,960
-------- --------
Total provision for income taxes 28,371 23,156
-------- --------
Net income before cumulative effect in change of accounting
Principle and extraordinary items 44,374 20,228
Cumulative effect of change in accounting principle,
net of taxes 1,466 --
Extraordinary items, net of taxes 129 766
-------- --------
Net Income $ 42,779 $ 19,522
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Net Income - diluted $ 47,619 $ 19,522
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Shares outstanding:
Basic 35,888 35,373
Diluted 40,995 36,180
Earnings per share - before cumulative effect of change
in accounting principle and extraordinary items:
Basic $1.24 $0.57
Diluted $1.20 $0.56
Earnings per share:
Basic $1.19 $0.55
Diluted $1.16 $0.54
</TABLE>
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 8
SUNTERRA CORPORATION
Consolidated Balance Sheets
($ in thousands, unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 28,250 $ 38,487
Cash in escrow 25,951 9,485
Mortgages receivable, net 335,982 331,735
Due from related parties 25,849 25,576
Other receivables, net 50,725 17,669
Income tax receivable -- 4,719
Prepaid expense and other assets 22,031 13,047
Investment in joint ventures 17,876 15,657
Real estate and development costs 336,620 219,299
Property and equipment, net 81,125 35,024
Intangible assets, net 96,723 50,447
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TOTAL ASSETS $1,021,132 $761,145
========== ========
LIABILITIES AND EQUITY:
Accounts payable $ 21,864 $ 25,196
Accrued liabilities 80,242 68,047
Due to related parties -- 1,032
Income taxes payable 9,240 --
Deferred taxes 30,984 23,752
Notes payable 627,089 435,208
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TOTAL LIABILITIES 769,419 553,235
---------- --------
Stockholders' equity 251,713 207,910
---------- --------
TOTAL LIABILITIES AND EQUITY $1,021,132 $761,145
========== ========
</TABLE>
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Sunterra Corporation Reports Record 1998 Fourth Quarter and Year-End Results
February 10, 1999
Page 9
SUNTERRA CORPORATION
EBITDA RECONCILIATION
THREE AND TWELVE MONTHS ENDED
($ in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, Ended December 31,
-------------------- --------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $11,476 $ 4,255 $ 42,779 $19,522
Interest expense 9,834 4,389 43,767 22,426
Capitalized interest expense
included in cost of sales 868 922 3,455 3,082
Income taxes 8,276 6,809 28,371 17,196
Depreciation and amortization 2,969 2,230 11,188 6,499
Organizational costs and write-down
of certain assets 5,056 -- 5,056 --
Merger related costs -- -- -- 9,973
Cumulative effect of change in
accounting principle, net of tax 1,466 -- 1,466 --
Extraordinary items, net of tax -- -- 129 766
Provision for income taxes resulting
from a change in tax status of
an acquired enterprise -- 5,960 -- 5,950
=============================================
EBITDA $39,945 $24,585 $136,211 $85,424
=============================================
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