SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-21193
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SUNTERRA CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4582157
------------------------ -------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1781 PARK CENTER DRIVE
ORLANDO, FLORIDA 32835
-----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(407) 532-1000
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SUNTERRA.COM
------------------------------
(REGISTRANT'S WEBSITE ADDRESS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding of the issuer's Common Stock,
par value $0.01 per share as of May 12, 2000: 36,025,486.
<PAGE>
SUNTERRA CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Introduction......................................................... 3
Item 1. Financial Statements
Consolidated Statements of Income for the three
months ended March 31, 2000 and March 31, 1999............. 4
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999......................................... 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 1999................... 6
Notes to the Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 3. Defaults Upon Senior Securities............................ 16
Item 6. Exhibits and Reports on Form 8-K........................... 17
Signatures.......................................................... 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
INTRODUCTION
As indicated in Management's Discussion and Analysis of Financial
Condition and Results of Operation and in Notes 1 and 6 of the financial
statements, there is currently no availability under any of the Company's
existing credit facilities and cash on hand is also very limited.
Also in these sections, the Company indicates several important events
related to its outstanding notes and credit lines. First, the Company did not
make the payment of $6.5 million on its $140 million in senior notes scheduled
for May 15th; there is, however, a 30 day cure period before this becomes an
event of default. In addition, the decline in the Company's net worth as a
result of the quarter's net loss has resulted in violations of net worth and net
worth-related covenants in its senior bank credit facility, pre-sale line and
inventory line. Moreover, the Company did not make the mandatory pay down on May
1, 2000, of $4.0 million under the senior bank credit facility and $1.1 million
on the pre-sale line, which has resulted in an event of default under these
agreements. At the current time, the Company does not have waivers on these
violations.
Furthermore, although the Company began funding against a newly opened
$25 million mortgages receivables warehouse facility in April, that facility is
now closed to any further borrowings because a related proposal to open a $100
million facility for the non-recourse sale of mortgages receivables was recently
withdrawn.
The Company is actively pursuing alternatives to maintain liquidity,
including the sale of major assets. However, if these initiatives are not
successful -- and there is no assurance they will be -- then the Company is
unlikely to be able to continue operations.
At the same time that it is seeking additional sources of liquidity,
the Company is in discussions with banks and financial institutions to seek
waivers of the violations of its existing credit agreements and to obtain their
agreement not to pursue various remedies in the event of default on these
facilities, including declaring the entire indebtedness due and payable.
However, the Company can give no assurance that such an agreement can be reached
or what the terms of such an agreement would be. Additionally, an uncured event
of default under these credit facilities and indentures could trigger a default
under other agreements to which the Company is a party, including the senior
notes, senior subordinated notes and convertible subordinated notes. An event of
default under any of these agreements could materially adversely affect the
Company by, among other things, causing all of the Company's indebtedness to
become immediately due and payable.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2000 and 1999
(Amounts in thousands except per share data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Vacation Interests sales .................................... $ 81,573 $ 92,561
Interest income ............................................. 9,731 11,339
(Loss)gain on sales of mortgages receivable ................. (139) 1,597
Other income ................................................ 6,967 8,788
--------- ---------
Total revenues .......................................... 98,132 114,285
--------- ---------
Costs and Operating Expenses:
Vacation Interests cost of sales ............................ 20,806 22,452
Advertising, sales and marketing ............................ 49,071 42,670
Provision for doubtful accounts ............................. 2,794 2,290
Loan portfolio expenses ..................................... 2,758 897
General and administrative .................................. 18,706 15,050
Depreciation and amortization ............................... 6,076 3,413
Restructuring costs and asset write-downs ................... 8,876 --
--------- ---------
Total costs and operating expenses ...................... 109,087 86,772
--------- ---------
(Loss) income from operations ............................... (10,955) 27,513
Interest expense, net of capitalized interest of $1,349 and
$2,456 for the three months ended March 31, 2000 and 1999,
respectively ................................................ 14,798 12,090
Equity gain on investment in joint ventures .................... (983) (1,013)
Minority interest in loss of consolidated limited partnership .. (29) (10)
--------- ---------
(Loss) income before (benefit) provision for income taxes ...... (24,741) 16,446
(Benefit) provision for income taxes ........................... (9,154) 6,414
--------- ---------
Net (loss)income .......................................... $ (15,587) $ 10,032
--------- ---------
(Loss) earnings per share:
Basic: .................................................... $ (0.43) $ 0.28
Diluted: .................................................. $ (0.43) $ 0.27
Weighted average number of common shares outstanding .... 35,975 35,908
Weighted average number of common and potentially .......
dilutive common shares outstanding .................... 35,975 40,986
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
SUNTERRA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents ............................................. $ 20,737 $ 24,838
Cash in escrow and restricted cash .................................... 34,403 29,735
Mortgages receivable, net of an allowance of $19,389
and $20,060 at March 31, 2000 and December 31, 1999,
respectively ........................................................ 249,091 244,018
Retained interests .................................................... 46,345 46,274
Due from related parties .............................................. 14,167 11,550
Other receivables, net ................................................ 71,960 64,202
Income tax refund receivable .......................................... -- 2,315
Prepaid expenses and other assets ..................................... 23,941 20,421
Investment in joint ventures .......................................... 20,399 19,274
Real estate and development costs ..................................... 367,783 363,534
Property and equipment, net ........................................... 134,846 130,321
Intangible assets, net ................................................ 104,237 101,928
----------- -----------
Total assets ................................................... $ 1,087,909 $ 1,058,410
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ...................................................... $ 42,823 $ 30,483
Accrued liabilities ................................................... 109,727 96,936
Income taxes payable .................................................. 37 --
Deferred taxes ........................................................ 10,667 18,243
Notes payable ......................................................... 711,654 681,960
----------- -----------
Total liabilities .............................................. 874,908 827,622
Stockholders' equity:
Preferred stock (25,000,000 shares authorized; none
issued or outstanding) .............................................. -- --
Common stock($0.01 par value, 50,000,000 shares authorized;
35,981,859 and 35,970,032 outstanding at March 31, 2000
and December 31, 1999, respectively) ................................ 360 360
Additional paid-in capital ............................................ 164,533 164,419
Retained earnings ..................................................... 53,572 69,159
Accumulated other comprehensive loss .................................. (5,464) (3,150)
----------- -----------
Total stockholders' equity ..................................... 213,001 230,788
----------- -----------
Total liabilities and stockholders' equity ..................... $ 1,087,909 $ 1,058,410
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
SUNTERRA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net(loss)income .............................................. $(15,587) $ 10,032
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ............................. 6,076 3,413
Provision for doubtful accounts ........................... 2,794 2,290
Amortization of capitalized financing costs ............... 1,575 1,057
Equity gain on investment in joint ventures ............... (983) (1,013)
Resort property write-downs ............................... 2,836 --
Minority interest in loss of consolidated limited
partnership ............................................. (29) (10)
Loss (gain) on sales of mortgages receivable .............. 139 (1,597)
Proceeds from sales of mortgages receivable ............... 14,742 21,348
Changes in operating assets and liabilities:
Cash in escrow and restricted cash ........................ (4,668) (17,677)
Mortgages receivable ...................................... (24,583) (35,031)
Retained interests ........................................ 1,231 (373)
Due from related parties .................................. (2,617) 1,752
Other receivables, net .................................... (7,713) 2,915
Prepaid expenses and other assets ......................... (3,520) (1,334)
Real estate and development costs ......................... (7,085) (9,142)
Accounts payable and accrued liabilities .................. 24,902 9,861
Income taxes payable ...................................... 2,352 1,914
Deferred income taxes ..................................... (7,576) 1,380
-------- --------
Net cash used in operating activities ........................ (17,714) (10,215)
-------- --------
Investing activities:
Property and equipment ....................................... (9,470) (12,008)
Intangible assets ............................................ (3,241) (1,917)
Investment in joint ventures ................................. (142) (44)
-------- --------
Net cash used in investing activities ........................ (12,853) (13,969)
-------- --------
Financing activities:
Proceeds from notes payable .................................. 3,085 28,395
Payments on notes payable and mortgage-backed securities ..... (9,287) (13,212)
Proceeds from credit line facilities, net of
debt issuance costs ........................................ 46,110 17,501
Payments on credit line facilities ........................... (12,143) (2,000)
Other ........................................................ 114 56
-------- --------
Net cash provided by financing activities .................... 27,879 30,740
-------- --------
Net (decrease) increase in cash and cash equivalents ......... (2,688) 6,556
Effect of exchange rates on cash and cash equivalents ........ (1,413) (2,566)
Cash and cash equivalents, beginning of period ............... 24,838 28,250
-------- --------
Cash and cash equivalents, end of period ..................... $ 20,737 $ 32,240
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................... $ 8,216 $ 7,113
Cash paid for taxes, net of tax refunds ...................... $ (4,372) $ 2,902
Note Payable issued in connection with the acquisition of
minority interest in limited partnerships .................. $ 1,152 --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
SUNTERRA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The Company's financial statements for the first quarter of 2000 have
been prepared assuming the Company will continue as a going concern. As
discussed further in Note 6, the Company is in violation of certain covenants on
its credit facilities and is experiencing severe liquidity issues. The financial
statements do not include any adjustments related to the realization of the
assets or the settlement of the liabilities that might result from the outcome
of this uncertainty.
Note 2 - Background
The operations of Sunterra Corporation 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.
In the opinion of management, all adjustments considered necessary for
a fair presentation have been included and are of a normal recurring nature.
Operating results for the three months ended March 31, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. Certain reclassifications were made to the 1999 accompanying consolidated
financial statements to conform to the 2000 presentation.
Note 3 - Earnings Per Share
Basic earnings per share was calculated by dividing net (loss) income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share was calculated by dividing net (loss) income
available to common stockholders after assumed conversion of dilutive securities
by 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 the three
months ended March 31, 2000 and 1999:
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
(amounts in thousands)
Net (loss)income ........................... $(15,587) $ 10,032
Interest on convertible notes, net of
Taxes (a) ................................ -- 1,210
-------- --------
Net (loss) income available to common
Stockholders after assumed conversion of
Dilutive securities(a) ................... $(15,587) $ 11,242
======== ========
7
<PAGE>
Weighted average number of common shares
Used in basic EPS ......................... 35,975 35,908
Effect of dilutive convertible notes (a) ... -- 4,537
Effect of dilutive stock options (b) ....... -- 541
-------- --------
Weighted average number of common shares and
Dilutive potential common shares
Used in diluted EPS(a) .................... 35,975 40,986
======== ========
(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 2000 calculation of
net loss or weighted average number of common shares and dilutive
potential common shares outstanding used on 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 2000 calculation of 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.
Note 4 - Sales of Mortgages Receivable
In the first quarter of 2000, the Company recognized a pretax loss of
$0.1 million, net of expenses, on the sale of $16.5 million of mortgages
receivable, comprised of (1) $15.6 million of mortgages receivable which were
sold into the Company's Mortgages Receivable Conduit Facility ("Conduit
Facility") and (2) $0.9 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,
without recourse to Sunterra. The Company then retains 100% of the excess spread
over the borrowing rate. The $15.6 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 14%.
During the first quarter of 2000, the Company also sold to a finance
company $0.9 million of gross mortgages receivable for $0.8 million in cash. The
company sold these receivables at 100% of par value with a 50% participation in
the remaining interest spread. These receivables had a 10 year weighted average
remaining life and a weighted average interest rate of 15%.
As a result of the sales of mortgages receivable into the Conduit
Facility and the sale of mortgages receivable to a finance company, the Company
generated retained interests of $2.2 million. Retained interests are valued by
the Company assuming a 12% to 14% gross default rate (before recoveries), a 13%
to 23% prepayment rate, 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 held for sale based on management's intent
and the existence of prepayment options.
Note 5 - Restructuring Costs and Asset Write-downs
During the first quarter the Company reorganized its executive
management, sales and marketing operations, and several corporate support
departments. As a result of these actions the Company incurred a restructuring
charge of $6.1 million during the first quarter. The restructuring charge
includes $4.4 million primarily for severance and termination benefits for 55
employees and $1.7 million in costs for lease terminations and other sales
center closure costs. At March 31, 2000, $3.2 million of these costs are
included in accrued liabilities.
During the first quarter the Company recognized asset write-downs of
$2.8 million based on bids received as part of the disposal process of a
non-core property held for sale.
8
<PAGE>
Note 6 - Notes Payable
Notes payable consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- -----------
<S> <C> <C>
Endpaper loans with interest payable monthly at prime plus 2%
to prime plus 3% (11.0% to 12.0% at March 31, 2000),
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 ............. $ 16,759 $ 18,989
Lines of credit, collateralized by certain inventory.
Interest is payable monthly at LIBOR plus 4.5% (10.6%
at March 31, 2000). Principal is payable upon the sooner of
the sale of the collateralized inventory or from 2000-
2001 .................................................................. 94,989 69,864
Lines of credit, collateralized by pre-sale and unseasoned
mortgages receivable. Interest is payable monthly at
prime rate plus 3.25% (12.25% at March 31, 2000).
Principal is due as the collateralized mortgages
receivable become seasoned or from 2000-2001 .......................... 8,960 8,960
Senior Credit Facility of $60 million with interest payable
quarterly at prime rate plus 2% (11.0% on March 31,
2000); collateralized by specific mortgages receivable;
due from 2000-2001 .................................................... 35,400 23,242
Securitized notes, collateralized by certain mortgages
receivable. Interest and principal is payable monthly at
an average interest rate of 6.7% due 2014 ............................. 60,327 64,683
Securitized notes, collateralized by certain mortgages
receivable. Interest and principal is payable monthly at
an average interest rate of 7.75% due 2004 ............................ 2,158 2,753
9.25% Senior Notes, interest due May and November,
principal due May 2006 ................................................ 140,000 140,000
9.75% Senior Subordinated Notes, interest due April and
October and principal due October 2007 ................................ 200,000 200,000
5.75% Convertible Subordinated Notes, interest payments due
January and July, principal due January 2007 .......................... 138,000 138,000
Other notes payable ..................................................... 15,061 15,469
-------- --------
Total notes payable ..................................................... $711,654 $681,960
======== ========
</TABLE>
On March 14, 2000, availability under the Company's inventory line was
increased by $25.0 million to $75.0 million and the interest rate was raised
0.75% to LIBOR plus 4.50%. All of this additional availability was drawn down by
March 31, 2000.
On April 13, 2000, the Company entered into a $25 million mortgages
receivable line with the same lender as its inventory line. Interest on this
facility is LIBOR plus 4.5%. The Company utilized $4.6 million of this facility
through the end of April. However, the lender has restricted any further
borrowings under this facility because a related proposal to open a $100 million
facility for the non-recourse sale of mortgages receivables was recently
withdrawn.
As of March 31, 2000, the Company was not in compliance with certain
covenants on its credit facilities. The Company is in violation of net worth and
net worth related
9
<PAGE>
debt covenants in its senior credit facility, pre-sale line and inventory line
as a result of the decline in the Company's net worth due to the quarter's net
loss. In addition, the Company did not make a mandatory pay down on May 1, 2000
of $4.0 million under its senior credit facility and $1.1 million on the
pre-sale line, which has resulted in an event of default under those agreements.
In addition, the Company did not make the May 15, 2000 scheduled
payment of $6.5 million on its $140 million senior notes. There is a 30 day cure
period before this becomes an event of default.
As a result of the covenant violations and events of default, there is
no availability under any of the Company's credit facilities.
Note 7 - Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during
a period from non-owner sources. The reconciliation of net (loss) income to
comprehensive net (loss) income is as follows:
THREE MONTHS ENDED
. MARCH 31,
---------------------
2000 1999
-------- --------
(amounts in thousands)
Net (loss) income .......................... $(15,587) $ 10,032
Unrealized (loss) gain on available for
sale securities .......................... (901) 1,534
Foreign currency translation adjustments.... (1,413) (2,566)
-------- --------
Total comprehensive (loss) income... $(17,901) $ 9,000
======== ========
Note 8 - 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 the United
States include Mexico, Canada, Netherlands Antilles, United Kingdom, Japan,
Italy, Spain, Portugal, Austria, Germany and France. The Company's management
evaluates performance of each segment based on profit or loss from operations
before income taxes not including extraordinary items and 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 of the Company's Annual Report on Form 10-K for the year ended December
31, 1999). 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:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN ELIMINATION TOTAL
------------- -------- ------------ ---------
(amounts in thousands)
<S> <C> <C> <C> <C>
Three Months ended March 31, 2000
Total revenues.............................. $70,267 $27,865 $98,132
(Loss) income before (benefit) provision
for income taxes......................... (26,657) 1,916 (24,741)
Identifiable assets......................... 980,352 209,014 (101,457) 1,087,909
Three Months ended March 31, 1999
Total revenues.............................. $85,369 $28,916 $114,285
Income before provision for income taxes.... 11,848 4,598 16,446
Identifiable assets......................... 993,524 171,869 (90,898) 1,074,495
</TABLE>
10
<PAGE>
Note 9 - 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.
The Company is also currently subject to additional litigation and
claims regarding employment, tort, contract, construction and commissions, 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.
Note 10 - Income Taxes
The Company accounts for income taxes using an asset and liability
approach in accordance with Statement of Financial Accounting Standards 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. During the first quarter of 2000
the Company recorded an income tax benefit at an amount it believes is
realizable.
Note 11 - Subsequent Event
Subsequent to May 15, 2000, the Company entered into negotiations with
a third party to sell certain assets for approximately $4.0 million in cash,
which would result in a pretax loss on these assets of approximately $5.0
million. Negotiations relating to the sale of these assets are still in process
and the Company has not entered into a definitive agreement relating to the
sale. The Company cannot assure that this transaction will close or that, if the
transaction does close, that the Company will receive $4.0 million for the
assets.
Although the successful sale of these assets would provide the Company
with some additional liquidity, the sale will not provide the Company with
sufficient liquidity to ensure that the Company will be able to continue
operations. The Company continues to pursue alternatives to maintain liquidity,
including the sale of major assets. However, if these initiatives are not
successful - and there is no assurance they will be - then the Company is
unlikely to be able to continue operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 to the Three Months
Ended March 31, 1999
Total revenues for the three months ended March 31, 2000 were $98.1
million compared with $114.3 million in the three months ended March 31, 1999, a
decrease of $16.2 million, or 14.2%. Vacation Interests sales decreased 11.9% in
the first quarter of 2000, to $81.6 million from $92.6 million in the first
quarter of 1999. The decrease in Vacation Interests sales reflects our decision
to eliminate certain high volume but very low margin tour flow sources in
Florida and northwest markets as well as the closing of sales lines in Latin
America. During the first quarter of 2000, we have initiated programs to develop
more profitable tour sources throughout our system.
Vacation Interests sales in the first quarter of 2000 consist of over
90% of Vacation Points sales as we near the completion of our conversion to
points based products. The remaining Vacation Interests sales in the first
quarter of 2000 primarily represent Interval sales at our Embassy Vacation
Resort properties and our properties in the Caribbean. Vacation Points sales in
the first quarter of 1999 were 48% of Vacation Interests sales.
Interest income, which includes accretion related to retained
interests, decreased to $9.7 million in the first quarter of 2000 from $11.3
million in the first quarter of 1999 due to a decrease in our average
outstanding mortgages receivable balance during the first quarter of 2000 as
compared to the first quarter of 1999. The average mortgage receivable note
carries a 14.3% interest rate and is fully amortized over a weighted average
period of nine years.
During the first quarter of 2000, we recorded a $0.1 million pre-tax
loss on the sale of $16.5 million mortgages receivable. These sales were part of
the Company's program of monetizing mortgages receivable through the use of
off-balance sheet conduits, securitizations and other vehicles. The Company
recorded a $1.6 million pretax gain on the sale of $25.9 million mortgages
receivable during the first quarter of 1999.
Other income, which includes resort management and rental fees,
decreased 20.5% during the first quarter of 2000 to $7.0 million from $8.8
million in the first quarter
11
<PAGE>
of 1999, reflecting lower net rental income due to increased maintenance fees
expensed as a result of reductions in developer guarantees. Other income was
7.1% of total revenues for the first quarter of 2000, compared with 7.7% in the
first quarter of 1999.
As a percentage of Vacation Interests sales, Vacation Interests cost of
sales increased to 25.5% for the first quarter of 2000 from 24.3% for the first
quarter of 1999 primarily reflecting an increased mix of higher cost product at
some of our new and existing resorts. Vacation Interests cost of sales decreased
7.6% to $20.8 million in the first quarter of 2000 from $22.5 million in the
first quarter of 1999.
As a percentage of Vacation Interests sales, advertising, sales and
marketing expenses increased to 60.2% during the first quarter of 2000 from
46.1% during the first quarter of 1999. This increase was the result of a
combination of factors including: the impact of fixed marketing costs against
lower sales levels, high telemarketing costs, and high costs per tour in certain
markets. Advertising, sales and marketing expenses increased 15.0% to $49.1
million during the first quarter of 2000 from $42.7 million in the first quarter
of 1999.
The provision for doubtful accounts increased to $2.8 million in the
first quarter of 2000 from $2.3 million in the first quarter of 1999, due to an
increase in mortgages receivable outstanding as of March 31, 2000, and as a
result of our adoption in the fourth quarter of 1999 of a change in methodology
under which we write-off mortgages receivable that are 180 days or more
delinquent.
The allowance for doubtful accounts as a percentage of gross mortgages
receivable decreased to 7.2% at March 31, 2000, down from 7.6% at December 31,
1999. Consumer loans serviced by the Company in excess of 60 days past due were
6.3% as a percentage of gross mortgages receivable, a decrease from 7.1% at
December 31, 1999. Net of inventory recoveries, these same percentages decrease
to 4.3% and 4.8%, respectively.
Loan portfolio expenses, which are primarily costs incurred in
servicing our loan portfolio, increased to $2.8 million in the first quarter of
2000, up from $0.9 million in the first quarter of 1999. The increase reflects
the cost of our fully staffed centralized portfolio operations which were
initiated in the first quarter of 1999. As a percentage of total revenues, other
loan portfolio expenses were 2.8% for the first quarter of 2000, compared to
0.8% for the first quarter of 1999.
As a percentage of total revenues, general and administrative expenses
increased to 19.1% in the first quarter of 2000 from 13.2% in the first quarter
of 1999. General and administrative expenses increased 24.3% to $18.7 million
during the first quarter of 2000 from $15.1 million during the first quarter of
1999. The increase in general and administrative expenses reflects Club Sunterra
related operating costs, an increase in legal fees and other professional fees,
higher information technology costs and the inclusion in the first quarter of
1999 of certain insurance settlements. The current level of general and
administrative expenses is slightly lower than the fourth quarter of 1999 as
reductions in staffing and other savings initiatives that occurred late in the
first quarter of 2000 had little impact in the quarter.
In the first quarter of 2000, we recorded a $3.8 million after-tax
charge for severance and other expenses related to our first quarter
restructuring that reorganized our executive management, sales and marketing
operations, and several corporate support departments. In addition, during the
first quarter of 2000, we recorded a $1.8 million after-tax write-down of an
asset based on bids received as part of the disposal process of a non-core
property held for sale.
Depreciation and amortization increased $2.7 million, or 79.4%, to $6.1
million in the first quarter of 2000 from $3.4 million in the first quarter of
1999. As a percentage of revenues, depreciation and amortization was 6.2% for
the first quarter of 2000, an increase from 3.0% for the first quarter of 1999.
The increase in depreciation and amortization was primarily due to the
amortization of SWORD, the comprehensive technology platform that we completed
at the end of 1999.
Interest expense, net of capitalized interest, increased $2.7 million,
to $14.8 million for the first quarter of 2000 from $12.1 million for the first
quarter of 1999. The increase was due primarily to the higher level of
borrowings for the quarter ended
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<PAGE>
March 31, 2000 compared to the prior year period, as well as a $1.1 million
decrease in capitalized interest expense as a result of lower capital spending.
Our income tax rate was 37% for the three month period ended March 31,
2000, resulting in a net loss of $15.6 million. For the three months ended March
31, 1999, our income tax rate was 39%, resulting in net income of $10.0 million.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash from:
o cash sales and cash down payments from sales of vacation interests,
o sales of our mortgages receivable through our conduit facility,
asset-backed securitizations and whole loan sales,
o financing of our mortgages receivable through our senior credit facility
and other lines of credit,
o financing of pre-sale contracts and mortgages receivable through our
pre-sale/ unseasoned line,
o financing of unsold inventory through our inventory line,
o principal and interest payments and customer prepayments of principal from
our mortgages receivable portfolio,
o rental of unsold vacation interests,
o receipt of management, reservations and points-based vacation club fees,
o commissions paid for the origination of European mortgages receivable,
where we are paid a commission of 14% of the face value of certain
mortgages originated for a third party U.K. financial institution.
For the three months ended March 31, 2000, our cash flows used in
operations were $17.7 million, compared to cash used in operations of $10.2
million for the three months ended March 31, 1999. Excluding investment in real
estate and development costs of $27.9 million and $31.6 million, respectively,
cash provided by operations was $10.2 million for the three months ended March
31, 2000, compared to cash provided by operations of $21.4 million for the three
months ended March 31, 1999.
During the first quarter of 2000, we spent $9.5 million for property
and equipment which included cost incurred on the new headquarters and call
center, with further construction being postponed during the quarter, and for
the development of computer systems for property and Club Sunterra management,
and $27.9 million for expansion and development activities at our resort
locations.
To finance our vacation interests sales, it has been our practice to
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 an origination fee in
exchange.
During the first quarter of 2000, we continued our program of
non-recourse sales of mortgages receivable, but on a more limited basis than in
1999 due to restrictions on our facilities. We sold $15.6 million of mortgages
receivable through the conduit facility during the first quarter of 2000. These
sales were without recourse to us for defaults experienced by the mortgages
receivable portfolios. We also sold an additional $0.9 million of mortgages
receivable for $0.8 million in cash. These were sold at 100% of par value with a
50% participation in the remaining interest spread. There is currently no
availability under the conduit facility for the sale of additional mortgages
receivable.
On March 14, 2000, availability under our inventory line was increased
by $25.0 million to $75.0 million and the interest rate was raised 0.75% to
LIBOR plus 4.50%. All of this additional availability was drawn down by March
31, 2000.
On April 13, 2000, we entered into a $25.0 million mortgages receivable
line with the same lender as our inventory line. Interest on this facility is
LIBOR plus 4.5%. We utilized $4.6 million of the facility through the end of
April. However, the lender has restricted any further borrowings under this
facility because a related proposal to
13
<PAGE>
open a $100 million facility for the non-recourse sale of mortgages receivables
was recently withdrawn.
As of March 31, 2000, we were not in compliance with certain covenants
on our credit facilities. We are in violation of net worth and net worth related
debt covenants in our senior credit facility, pre-sale line and inventory line
as a result of the decline in our net worth due to the quarter's net loss. In
addition, we did not make a mandatory pay down on May 1, 2000 of $4.0 million
under our senior credit facility and $1.1 million on the pre-sale line, which
has resulted in an event of default under those agreements. At the current time
we do not have waivers of these violations.
In addition, we did not make the May 15, 2000 scheduled payment of $6.5
million on our $140 million senior notes. There is a 30 day cure period before
this becomes an event of default.
As a result of the covenant violations and events of default, there is
no availability under any of our credit facilities and cash is very limited. In
addition, we are actively pursuing alternatives to maintain liquidity, including
the sale of major assets. However, if these initiatives are not successful - and
there is no assurance that they will be - we are unlikely to be able to
continue operations.
Subsequent to May 15, 2000, we entered into negotiations with a third
party to sell certain assets for approximately $4.0 million in cash, which would
result in a pretax loss on these assets of approximately $5.0 million.
Negotiations relating to the sale of these assets are still in process and we
have not entered into a definitive agreement relating to the sale. We cannot
assure that this transaction will close or that, if the transaction does close,
that we will receive $4.0 million for the assets. Although the successful sale
of these assets would provide us with some additional liquidity, the sale will
not provide us with sufficient liquidity to ensure that we will be able to
continue operations.
At the same time that we are seeking additional sources of liquidity,
we are in discussions with banks and financial institutions to seek waivers of
the violations of our existing credit agreements and to obtain their agreement
not to pursue various remedies in the event of default, including declaring the
entire indebtedness due and payable. However, we can give no assurance that such
an agreement can be reached outside of bankruptcy or what the terms of such an
agreement would be.
Additionally, an uncured event of default under these credit facilities
and indentures or under our senior notes could trigger a default under other
agreements to which the company is a party, including the senior notes, the
senior subordinated notes and convertible subordinated notes. An event of
default under any of these agreements could materially adversely affect us by,
among other things, causing all of our indebtedness to become immediately due
and payable.
The Company's financial statements for the first quarter have been
prepared assuming the Company will continue as a going concern. As noted above,
the Company is in violation of certain covenants on its credit facilities and is
experiencing severe liquidity issues. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The preceding discussion should be read in conjunction with the
financial statements and notes included elsewhere in this Form 10-Q. The
preceding Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain forward looking statements, which include our
growth and expansion plans, financing plans, future prospects and other
forecasts and statements of expectations. Although management believes these
statements are based on reasonable assumptions, actual results may differ
materially from those expressed in any of our forward looking statements due to,
among other things, factors related to the current liquidity situation, actions
that our lenders may take as a result of our violations of debt related
covenants and conditions, our ability to quickly obtain sufficient additional
funding and re-establish credit availability, the success of our restructuring
efforts, timing and terms of future acquisitions and the introduction of Club
Sunterra, mortgages receivable financing, integration of acquired operating
companies and resort properties, future acquisitions and other factors
identified in our filings with the Securities and Exchange Commission, including
those set forth in Parts I and II of our Annual Report on Form 10-K for the year
ended December 31, 1999 and in our Current Reports on Forms 8-K filed in 2000.
14
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Our total revenues denominated in a currency other than U.S. dollars
for the three months ended March 31, 2000, primarily revenues derived from the
United Kingdom and Japan, were approximately 22.6% of total revenues. Our net
assets maintained in a functional currency other than U.S. dollars at March 31,
2000, which were primarily assets located in western Europe and Japan were
approximately 12.9% of total net assets. The effects of changes in foreign
currency exchange rates has not historically been significant to our operations
or net assets.
Interest Rate Risk
As of March 31, 2000, we had fixed interest rate debt of approximately
$552.1 million and floating interest rate debt of approximately $159.6 million.
The floating interest rates are based upon the 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 $1.0
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 $19.7 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.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. 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 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 plantiffs in these actions seek monetary damages, interest, costs,
and expenses. The litigation is still in the preliminary stage. Neither
a lead plantiff 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 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2000, the Company was not in compliance with
certain covenants on its credit facilities. The Company is in violation
of net worth and net worth related debt covenants in its senior credit
facility, pre-sale line and inventory line as a result of the decline
in the Company's net worth due to the quarter's net loss. In addition,
the Company did not make a mandatory pay down on
16
<PAGE>
May 1, 2000 of $4.0 million under its senior credit facility and $1.1
million on the pre-sale line, which has resulted in an event of default
under those agreements.
In addition, the Company did not make the May 15, 2000
scheduled payment of $6.5 million on its $140 million senior notes.
There is a 30 day cure period before this becomes an event of default.
As a result of the covenant violations and events of default,
there is no availability under any of the Company's credit facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K, dated January 20, 2000 filed with the
Securities and Exchange Commission on January 20, 2000, announcing the
Company's preliminary fourth quarter 1999 results and the appointment
of Richard Harrington, as Chief executive officer.
(2) Current Report on Form 8-K, dated February 28, 2000 filed with the
Securities and Exchange Commission on February 29, 2000, announcing the
appointment of J. Taylor Crandall, as interim Chairman of the Board and
T. Lincoln "Lin" Morison, as co-chief executive officer, president and
a director of the Company.
(3) Current Report on Form 8-K, dated March 15, 2000 filed with the
Securities and Exchange Commission on March 16, 2000, announcing the
Company's fourth quarter and full year 1999 results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUNTERRA CORPORATION
BY: /s/ RICHARD GOODMAN
----------------------------
Richard Goodman
Executive Vice President,
And Chief Financial Officer
(Principal Financial Officer)
Dated: May 19, 2000
17
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