UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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.
[ ] 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: 000-24331
Raintree Resorts International, Inc.
CR Resorts Capital S. de R.L. de C.V. *
(Exact name of Registrant as Specified in its Charter)
Nevada 76-0549149
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10000 Memorial Drive, Suite 480
Houston, Texas 77024
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (713) 613-2800
Securities registered pursuant
to Section 12(b) of the Act: 13% Redeemable Senior Notes due 2004
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 the 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 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. [X]
The aggregate market value of the voting stock held
by non-affiliates as of December 31, 1999:
Not Applicable.
As of December 31, 1999, the Registrant had 10,766,300 shares of Common
Stock outstanding and Warrants to purchase 2,369,962 shares of Common Stock.
*CR Resorts Capital, S. de R.L. de C.V., a subsidiary of Raintree Resorts
International, Inc., is a co-registrant, formed under the laws of the United
Mexican States (Mexican tax identification number CRC 970811E5A).
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
None
This report on Form 10-K includes 47 pages with the Index to Exhibits
located on pages 43 to 46.
Part I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
RAINTREE RESORTS INTERNATIONAL, INC.
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which represent the Company's
expectations and beliefs concerning future events that involve risks and
uncertainties, including those associated with the effects of international,
national and regional economic conditions. Investors are cautioned that all
forward-looking statements involve risks and uncertainty. Actual results may
differ materially from those projected in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this document will prove to be
accurate. Considering the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Except as otherwise noted, (i) all references to the "Company" or
"Raintree" are to Raintree Resorts International, Inc. and its subsidiaries,
including Whiski Jack Resorts Ltd. ("Whiski Jack"), The Teton Club, LLC, and to
the vacation ownership segment of the predecessor business (the "Predecessor
Business"), and (ii) all references to "pesos" or "Ps." are to the currency of
Mexico and all references to "dollars" or "$" are to U.S. dollars.
BUSINESS
Overview
Raintree is a developer, marketer and operator of luxury vacation ownership
resorts in North America with resorts in Mexico, the United States, and Canada.
The Company believes that by positioning itself in the luxury segment of the
vacation ownership market and offering flexible ownership alternatives and
membership benefits the Company is able to capitalize on the increasing
acceptance of vacation ownership by high income consumers who desire larger and
more luxurious vacation accommodations than generally available at upscale
hotels. The Company offers weekly intervals that provide use by or ownership of
weekly intervals ("Weekly Intervals"), at Club Regina Resorts and Whiski Jack
Resorts and fractional fee simple property interests typically of two to five
week periods ("Fractional Interests") at The Teton Club. The Company's resorts
are located in popular beach, mountain and golf destinations, including Cancun,
Los Cabos, Puerto Vallarta and Acapulco in Mexico, Whistler in British Columbia,
Jackson Hole in Wyoming and as of May 2000, Cimarron Resorts in Palm Springs,
California. The Company's future plans also include the development of a resort
on ocean-front property it owns adjacent to its resort in Los Cabos as well as
other locations in the United States, with focus primarily in the western
regions of the United States. The Mexican resorts operate under the name "Club
Regina" or the "Villa Vera" in Acapulco, the Whistler location operates under
the name "Whiski Jack Resorts", the Jackson Hole resort is called "The Teton
Club" and Cimarron Resorts is known as Club Regina Cimarron, a Palm Springs golf
resort. Unless otherwise noted all resorts are referred to as "Raintree
Resorts".
The Company primarily targets high income consumers of luxury vacation
experiences. The Company markets two types of vacation ownership interests in
resorts the Company owns, controls, or manages: Weekly Intervals in certain
resorts and Fractional Interests (Fractional Interests, together with Weekly
Intervals, "Vacation Intervals"). Weekly Intervals provide Members the assurance
of luxury accommodations in an efficiency, a one- or two-bedroom fully-furnished
vacation unit for one week annually, representing an attractive alternative to
hotel and lodging accommodations. Owners of Weekly Intervals also receive
convenient check-in and check-out services, full-scale patron restaurants and
bars, routine maid and room service, recreational facilities, health clubs, spas
and a complete range of other personal services. Fractional Interests provide
owners a deeded interest to two- or three-bedroom, fully-furnished vacation
residences for multiple weeks and are an attractive, convenient, lower-cost
alternative to "second home" ownership. Fractional Interests will include most
of the amenities described above and many additional personalized conveniences
such as equipment and clothing storage, pre-arrival shopping services, on-site
transportation, concierge services for a variety of activities and events, ski
passes and golf club memberships or preferred tee-times, and maintenance and
security services.
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Growth Strategy
The Company believes it can achieve significant growth internally and
through an aggressive development and acquisition program. Key elements of this
strategy include:
Develop and Acquire Additional Resorts. The Company intends to concentrate
its growth during the next two to three years in the development or acquisition
of resort properties that will substantially increase the Company's revenues
outside Mexico, while maintaining a strong supply of inventory for the "Raintree
Vacation Club". Currently the Raintree Vacation Club includes Club Regina
(including the Villa Vera and Club Regina Cimarron), Whiski Jack and The Teton
Club. The Company intends to develop additional vacation ownership resorts, in
the immediate future, primarily in the Western United States and Canada and then
in other parts of North America. The Company's evaluation of resort development
opportunities includes determination of the most desirable resort destinations
in North America, the number of annual tourists, the availability of golf club
memberships or preferred tee-times, property that is accessible to the resort
area's primary activities such as skiing, availability of other amenities,
including spas and luxury hotel type services and economic considerations. Where
appropriate, the Company will seek attractive hotel operators to own and manage
on-site hotels. In addition, the Company from time to time seeks opportunities
to acquire vacation ownership companies and assets, including those with
marketing and other programs which complement the Company's current operations
throughout North America.
Increase Sales of Vacation Intervals. The Company plans to increase the
rate of sales of Vacation Intervals through (i) increasing the number of sales
locations as the Company expands and (ii) increasing the effectiveness of the
marketing initiatives described above by increasing the use of marketing
channels such as travel agents, real estate agents, ecological and wildlife
based theme stores, domestic and international print media, cross-selling
opportunities of additional Vacation Intervals and upgrades to existing owners
and the world-wide web. As the number of Raintree Resorts increases and allows
Members access to more of those properties, the Company believes that the
resultant flexibility of its product will make its Vacation Intervals more
attractive.
The Product
The Company believes that by selling a membership it has created a product
that provides members with an attractive range of vacation planning choices and
value which, according to Lodging Magazine, is not generally available in
connection with traditional vacation ownership products. The Company's
memberships include Weekly Interval memberships ("Weekly Memberships"), and
Fractional Interest memberships ("Fractional Memberships") in one or more
Raintree Vacation Clubs. See "Overview" for a discussion of the benefits
available to Weekly Memberships and Fractional ownership.
The Raintree Vacation Club will establish a multiresort network together
with related services for the purpose of providing its members the privilege of
reserving the use of accommodations and related facilities of resorts affiliated
with the Raintree Vacation Club, and providing access to other benefits that the
Raintree Vacation Club may provide from time to time. The exchange among members
will be based on factors such as resorts location, quality, size of unit and
seasonal demand.
Weekly Memberships. Weekly Memberships at the Club Regina Resorts allow its
Members to stay at any Resort in Cancun, Los Cabos, Puerto Vallarta, Acapulco
and Palm Springs. Weekly Memberships at Whiski Jack Resorts are sold as a deeded
interest in a specific unit for a specific week. Weekly Memberships range in
price from approximately $6,500 for a studio unit with a maximum occupancy of
two, approximately $7,500 to $34,500 for a one-bedroom unit with a maximum
occupancy of four, and approximately $8,000 to $32,000 for a two-bedroom unit
with a maximum occupancy of six. Each one- and two-bedroom unit contains a
separate living room and kitchen area.
Weekly Intervals at the Club Regina Resorts can be purchased for any one of
three seasons: Holiday, Prime and Select. Holiday Weekly Intervals allow Members
to use the resorts during any time of the year including the five weeks of
highest demand. Prime Weekly Intervals allow Members to use the Club Regina
Resorts during any time of the year except the five weeks of highest demand,
while Select Weekly Intervals allow Members to use these resorts during 17 weeks
of traditionally lower demand. Weekly Intervals at the Club Regina Resorts are
sold under the Company's flexible "floating time," "floating unit," and
"floating location" program. This program allows a Member to use his or her
Weekly Interval at any time during the season to which it relates, or any less
expensive season at any Club Regina Resort. In addition, depending on the type
of Weekly Interval purchased, the program gives a Club Regina Resorts Member the
flexibility to: (i) elect the time of year to vacation at the Club Regina
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<PAGE>
Resorts, (ii) stay at the Club Regina Resorts at different times during a single
year by dividing such Member's week-long Weekly Interval into more than one
segment, (iii) increase the number of weeks that such Member is entitled to stay
at the Club Regina Resorts by dividing such Member's unit into smaller units,
and (iv) buy an annual or bi-annual Weekly Interval. Furthermore, Members may
divide their Weekly Intervals into three split-week segments and thereby spend a
portion of a week at a resort at one time and the other two portions at the same
or other resorts at other times. Finally, Club Regina Resorts Members with
Weekly Intervals for one- and two-bedroom units can divide their Weekly
Intervals and use a single module within any such unit over two weeks. For
example, under this program, subject to availability, a Member that purchased a
two-bedroom unit could divide that unit into six different split week stays
(three in one-bedroom accommodations and three in studio accommodations) over
the year. Members who are at least 55 years old have the option, subject to
availability, to accelerate the use of their Weekly Interval up to one extra
week during the "Prime" season or two extra weeks during the "Select" season so
long as such Members pay an additional service fee for each year that is
accelerated. In addition, Members of Raintree Vacation Clubs also benefit from
the Company's participation in the vacation interval exchange network operated
by Resort Condominiums International, Inc. ("RCI"), the world's largest vacation
interval exchange organization with approximately 2.2 million vacation interval
owners as members. Membership in RCI entitles Members, subject to availability,
to exchange their Weekly Intervals for occupancy at any of the approximately
3,100 other resorts participating in the RCI network. At Whistler, British
Columbia, the Company sells a deeded interest to Weekly Interval purchasers. The
deeded interests are marketed and generally sold in single week increments. The
average price per Weekly Interval sold in 1999 is $12,368. The Company has
investigated the design and regulatory implications of integrating buyers of
Weekly Intervals in Whistler into the vacation ownership club to which Club
Regina Resort members belong, and has temporarily postponed such integration.
The Company sells its Vacation Intervals at Club Regina Resorts under a
right-to-use membership entitling owners to a 50-year contractual right to use
Vacation Interval units, as permitted under Mexican law or a deeded, fee simple
interest in the Cimarron Resorts in Palm Springs, California. The right to use
includes the right to participate either in (i) an extension of the contractual
right to use if practicable under Mexican law or (ii) the proceeds from the sale
of the Los Cabos, Cancun, Puerto Vallarta and Acapulco Resorts in 2047.
Fractional Memberships. The Company's first vacation ownership resort
featuring Fractional Memberships (See "Overview" for a discussion of Fractional
Interests) is The Teton Club in Jackson Hole, Wyoming. The sales office for The
Teton Club opened in January 1999 and ground-breaking occurred in May 1999 with
completion expected by late 2000. Fractional Memberships are marketed and sold
in two to five week periods and currently range from approximately $48,000 to
over $320,000 depending upon the amount of time, season and size of unit. The
average reservation per membership to date is approximately $110,000.
Reservations totaling approximately $23 million, approximately 33% of total
sales value or 38% of Fractional Memberships available for sale with an average
price per week of $34,372, have been received through June 2000. The Company
intends to allow owners of Fractional Memberships to use other Raintree Resorts
on an as available basis. The Teton Club features fully furnished two- or
three-bedroom units and includes memberships in The Teton Pines Country Club.
Additionally, Fractional Memberships will allow a member to use his or her
Fractional Interest as an interval at any time during the year, subject to
availability and seasonal concentration restrictions. All units offering
Fractional Memberships will feature luxury amenities such as steam showers and
spa tubs; stone fireplaces; vaulted or high ceilings; and fully equipped
kitchens. In addition, the Company intends to allow these members to use the
Company's resorts containing Weekly Intervals as a part of the Company's plan to
integrate the availability of resorts and the type of vacation experience
desired by Members through the Raintree Vacation Club. Members of other Raintree
Resorts will be able to use the Teton Club when Fractional Membership owners
make such use available through the Raintree Vacation Club.
Sales and Marketing
The Company employs a variety of programs to market its Weekly Intervals
and Fractional Memberships. For example, the Club Regina Resorts are located on
properties shared with or co-located (a hotel located adjacent to our property
and with which we share some facilities) luxury hotels that generally provide
the Company with a steady source of high quality lead-generation. In addition,
the Company has designed and implemented innovative marketing initiatives to
attract affluent buyers of vacation intervals. These marketing venues include:
promotional programs such as telemarketing, discount vacation packages;
advantage points associated with airport shopping or auto rental; and off-site
sales offices. In addition, the Company owns contemporary retail "theme stores"
that offer high-end products associated with ecological consciousness, wildlife
conservation, photography, art and local culture and plans to expand this
community-oriented marketing venue because patrons of the theme stores tend to
match the profiles of Members. All of these marketing venues are designed to
create sales leads which are given to
4
<PAGE>
the Company's professionally trained sales representatives. The Company also
markets directly to existing Members in terms of offering larger units (e.g. one
bedroom to two bedroom) or additional weeks (e.g. add a week in a different
season) or Fractional Interests. As a part of the services provided to Members,
the Company offers financing to buyers of Weekly Intervals. The Company
encourages larger down-payments (at least 15%) than industry standards on its
Weekly Intervals to increase the quality of the pool of the Company's
receivables ("Vacation Interval receivables").
The Company sells Weekly Intervals through both on-site sales personnel at
each of its Club Regina Resorts and at sales offices currently located
throughout Mexico. A variety of marketing programs are employed to generate
prospects for these sales efforts, theme stores, presentations to co-located
hotel guests, as well as overnight mini-vacation packages, certificate programs,
travel agencies, telemarketing, owner referrals and various destination-specific
local marketing efforts. Additionally, incentive premiums are offered to
co-located hotel guests to encourage resort tours, in the form of entertainment
tickets, hotel stays, gift certificates or free meals. The Company's 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 target customers are identified through various means of profiling.
At applicable Club Regina Resorts, the Company emphasizes marketing its
Weekly Intervals to guests of co-located hotels. Programs directed to these
guests have been consistently successful, both in the number of prospects
generated and in the closing rate, due to the direct experience of such guests
with the quality of the resorts and the likelihood that such guests, who
typically belong to high income households, will prequalify to purchase Weekly
Intervals. In general, however, the Mexican and Canadian vacation ownership
industry tends to follow seasonal buying patterns with peak sales occurring
during the peak travel/tourism seasons, usually December through April and July
through August. The timing of these purchases, however, may be affected by
weather conditions and general or local economic conditions.
Sales of Weekly Intervals at or near the Raintree Resorts locations are
made through Company-owned theme stores, travel agencies and ground operators
and other lead generation points located in airports or shopping centers,
independently or in association with other businesses such as auto rental
companies and restaurants. The Company's theme stores, one of the Company's most
successful marketing programs, are retail businesses with a strong contemporary
appeal to affluent tourists, offering products associated with ecological
consciousness, wildlife, conservation and local culture, while at the same time
promoting the resort and inviting customers to attend sales presentations. A
share of these stores' profits is contributed to causes related to the stores'
themes. Currently, there are theme locations in Los Cabos, Puerto Vallarta and
Cancun. In Mexico, the Company also operates travel agencies in Los Cabos,
Cancun and Puerto Vallarta which provide traditional travel services to Westin
Hotel guests and potential members and also encourage their customers to attend
a Raintree presentation. Under the Company's ground operator program, the
Company also provides local transport and other services in each of Los Cabos,
Puerto Vallarta and Cancun to visitors of many different resorts in these
destinations and encourages those visitors to attend a Raintree presentation.
The Company also focuses on selling Weekly Intervals through off-site sales
centers in nine cities throughout Mexico. Each off-site sales office is staffed
with a sales manager, an office administrator, salespeople, verification
representatives and additional staff for guest registration and clerical
assistance. In addition, by using data base-oriented marketing approaches
including telemarketing, qualified prospects are offered mini-vacations, fly-in
and drive-in programs as a method to introduce the benefits of membership to
potential Members. Members are also contacted for referrals. Most recently, the
"universal salesman" program has been instituted whereby potential Members are
contacted by one representative of the Company, who is the potential Member's
only contact with the Company through closing of the purchase. The Company
believes that this program solves a significant problem in traditional vacation
ownership marketing approaches, which is the lack of continuity in a customer's
relationship with the seller.
Finally, the Company believes that one of its best marketing resources is
its current Members. Accordingly, the Company directs programs at these Members
to encourage them to purchase additional Weekly Intervals and Fractional
Interests. These programs include a points-based program by which Members who
refer other potential Members to the Company are given awards, and its bonus
week program whereby every new buyer is given a week to give to a friend or
relative. The Company cross-markets its products to its Members, offering the
right to upgrade in terms of a better season, additional weeks, additional rooms
and larger units. Finally, the Company markets the opportunity to stay at the
resort for additional days or weeks to Members as well as the right to rent
additional units for guests accompanying the Member to the resort.
5
<PAGE>
Under the laws of the jurisdictions in which the Company sells Vacation
Intervals, each purchaser has a right to rescind a purchase for a period ranging
from 5 to 7 days. During 1999, the Company estimates its rescission rate to be
less than 3% for Weekly Interval sales in Mexico and less than 6% for Weekly
Interval sales in Canada.
Customer Financing
Since an important part of the Company's sales strategy is the
affordability of Vacation Intervals, the Company believes that it will be
required to continue to finance a significant portion of its sales of such
Vacation Intervals. The Company has historically provided financing for
approximately 67% of its Vacation Interval buyers and approximately 33% of all
Vacation Interval buyers either pay cash at or within 60 days of closing. Prior
to its purchase by the Company, Whiski Jack only provided third party sources of
financing to its' Owners; however, the Company has begun providing in-house
financing to such purchasers. Sales of Fractional Interests will generally
continue to be financed by conventional financial or banking institutions.
Buyers who finance through the Company are required to make an adequate down
payment and pay the balance of the purchase price over one to 10 years. Interest
rates on in-house financings are substantially all at fixed rates. For each of
the year ended December 31, 1999 and the six months ended June 30, 2000, the
average down payment on a financed Vacation Interval was approximately 17% of
its purchase price.
Due to its ownership of Vacation Interval receivables, the Company bears
the risk of purchaser default. The Company's practice has been to continue to
accrue interest on its loans to purchasers of Vacation Intervals until such
loans are deemed to be uncollectible, at which point it expenses the interest
accrued on such loan, terminates the underlying conditional sale agreement and
returns the Vacation Interval to the Company's inventory for resale. The Company
closely monitors its loan accounts and determines whether to foreclose on a
case-by-case basis. The default rate in 1999 was 8%. Once a receivable is 240
days past due the Company writes off the Vacation Interval receivable.
At December 31, l999 and June 30, 2000, the Company had a portfolio of
approximately 8,300 and 9,188, respectively, Vacation Interval receivables
amounting to approximately $64 million and $68 million, respectively, in
outstanding principal amount, with a weighted average maturity of approximately
five years in both periods. The following presents by currency the percent
Vacation Interval receivables and the weighted average interest rate.
<TABLE>
<CAPTION>
At December 31, l999 At June 30, 2000
----------------------------- ------------------------------
Weighted Weighted
Average Average
Interest Interest
Contract Currency Denomination Amount % Rate Amount % Rate
------------------------------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Dollars 53% 15.0% 52% 15.0%
Mexican UDI 31% 8.3% 32% 8.4%
Mexican Pesos 9% 22.6% 10% 22.5%
Canadian Dollars 7% 14.0% 6% 14.1%
</TABLE>
The UDI is an obligation denominated in pesos which is adjusted for Mexican
inflation. The value of the UDI is tied to the Consumer Price Index of Mexico
(Indice Nacional de Precios al Consumidor). The proceeds of loans denominated in
UDI's are paid to a borrower in pesos at the applicable UDI-peso conversion
ratio on the day of the loan. Payments of both principal and interest to the
lender are made in pesos. The amount of payments in pesos to be made as of any
date depends on the applicability of the UDI-peso conversion ratio at that date.
The effect of denominating Vacation Interval receivables in UDIs is to protect
the Company from inflation in Mexico, but not from variations in the exchange
rate between the peso and the U.S. dollar. An additional effect is that when
Mexican inflation is high, that inflation rate is effectively added to the
Company's Vacation Interval receivable income, thereby increasing the Company's
Mexican peso revenue. Conversely, if the Mexican inflation rate should decline,
Vacation Interval receivable interest rates would decline.
Flexible Membership Programs
Each of the Club Regina Resorts has been rated "Gold Crown" by RCI (a
rating given to the top 10% of all vacation interval resorts), thus giving
Members with Weekly Intervals at those resorts superior interval exchange
opportunities. In a 1995 study sponsored by the Alliance for Timeshare
Excellence and ARDA (American Resort
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Development Association), the exchange opportunity was cited by purchasers of
weekly intervals as one of the most significant factors in determining whether
to purchase a vacation ownership interval. This is particularly true given most
weekly interval owners' propensity to travel. According to RCI, its members in
the United States engage in an average of 25.7 personal travel days per year and
an average of 6.2 domestic trips per year with an average duration of 4.2 days.
Members in an interval exchange program are typically allowed to exchange one or
more years of their vacation interval for an occupancy right in another
participating resort, based upon availability and the payment of a variable
exchange fee. A member may exchange his vacation interval for an occupancy right
in another participating resort by listing the vacation interval 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. Interval exchange programs usually assign a
rating to each listed interval, 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 interval is available, and attempts to satisfy the exchange request by
providing an occupancy right in another interval with a similar rating. If an
interval exchange program is unable to meet the member's initial request, it
suggests alternative resorts based on availability.
The Company's Weekly Interval membership programs at the Club Regina
Resorts provide access to multiple resorts, allowing Members to tailor their
vacations according to their schedule, desired length of stay, location
preference and space requirement. For example, under the Company's flexible
"floating time," "floating unit," and "floating location" program, each Member
of the Club Regina Resorts is entitled to stay at any of the Club Regina
Resorts. In addition, depending on the type of Weekly Interval purchased, the
program gives a Club Regina Member the flexibility to: (i) elect the time of
year to vacation at the Club Regina Resorts, (ii) stay at the Club Regina
Resorts at different times during a single year by dividing such Member's Weekly
Interval into more than one segment, (iii) increase the number of weeks that
such Member is entitled to stay at the Club Regina Resorts by dividing such
Member's unit into smaller units, and (iv) buy an annual or bi-annual Weekly
Interval. In Whistler, the Company sells fixed weekly deeded interests. In
addition, Members of Raintree Resorts may participate in the largest vacation
interval exchange network in the world operated by Resort Condominiums
International, Inc. ("RCI"), which entitles those Members, subject to
availability, to exchange their Weekly Intervals for occupancy at any of the
approximately 3,100 participating resorts. The Company's Fractional Memberships
will also provide exchange for the use of any other Raintree Vacation Club.
Given the innovative and flexible attributes of its products, the Company
believes it should be able to establish an international brand name vacation
ownership club.
The Raintree Resorts
Overview. The following tables set forth certain information regarding the
Company's resorts, current and planned Vacation Interval inventory, sales and
average prices.
<TABLE>
<CAPTION>
Resort Properties Under Management
Units(1)
--------------------
Date Total
Club Regina Opened Current Planned(2) Units
----------- ------ ------- -------- --------
<S> <C> <C> <C> <C>
Los Cabos.................. 1/94 130 134 (3) 264
Puerto Vallarta......... 6/92 204 -- 204
Cancun.................. 3/91 69 -- 69
Acapulco................ 10/98 59 (4) 28 87
Palm Springs............ 7/00 40 202 242
Whiski Jack
Whistler, B.C........... (5) 178 36 (6) 214
--- --- ---
Total................ 640 198 838
=== === ===
The Teton Club
Jackson Hole, Wyoming... 37 37
=== ===
<FN>
---------
(1) Units for Weekly Intervals contain one or two bedrooms and a common room
with a kitchen while units for Fractional Interests contain two or three
bedrooms and a common room with a kitchen.
(2) There can be no assurance that the Company's planned expansion will occur
or that the number of units will equal the estimates set forth.
(3) The expansions at Los Cabos are in the planning stages and it is uncertain
as to the precise number of units that may be developed.
(4) The Company acquired the Villa Vera in December 1999.
(5) Whiski Jack Resorts, which was acquired in July 1998, has been in the
vacation interval ownership business in Whistler, B.C. since 1978.
(6) The planned expansion in Whistler will be made primarily through the
acquisition of existing condominium units in Whistler Village.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
Developed Vacation Interval Weeks Inventory
December 31, 1999 June 30, 2000
------------------------------------------------ -----------------------------------------------------
Weeks % % Weeks % %
-------------------------- --------------------------
Available Remaining Sold Remaining Available Remaining Sold Remaining
----------- ----------- ---- ----------- ------------ ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Club Regina (1) 24,024 5,241 78% 22% 24,024 3,222 87% 13%
Whiski Jack 9,078 548 94% 6% 10,149 1,397 86% 14%
Teton Club (2) -- -- --% --% -- -- --% --%
<FN>
_____________
(1) Club Regina Cimarron provided 2,040 Vacation Interval weeks when stage 1
was completed in July 2000. If this inventory was included at June 30, 2000
it would have increased the percentage remaining to 17%.
(2) In the United States, The Teton Club will provide 1,776 Vacation Interval
weeks when completed in October 2000 .
</FN>
</TABLE>
<TABLE>
<CAPTION>
Weekly Intervals Sold/Average Price
Year Ended December 31, Six Months Ended
----------------------------------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ----------------- -----------------
Weekly # Sold Price # Sold Price # Sold Price # Sold Price # Sold Price # Sold Price
------ ------ ------- ------ ------- ------ ------- ------ ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Club Regina (1) 2,289 $10,941 2,508 $14,859 3,623 $14,163 3,563 $14,287 3,772 $13,520 2,359 $13,233
Whiski Jack (2) 533 $10,668 957 $12,368 330 $12,333
<FN>
--------------
(1) Includes vacation interval weeks sold by the Predecessor Business until August 17, 1997.
(2) Includes vacation interval weeks sold by the Company only for the periods subsequent to July 27, 1998.
</FN>
</TABLE>
Club Regina Resorts
Cancun. The Club Regina Resort at Cancun has offered Weekly Memberships
since March 1991. Ricardo Legorreta designed this resort, which is on an 11-acre
site at Punta Nizuc and is the first landmark tourists see after arriving in the
Cancun hotel zone from the airport. The resort, including the co-located Westin
hotel, consists of eight buildings and all rooms offer views of either the
Caribbean or the Nichupte Lagoon. The total accommodations in the Raintree
Resort in Cancun consist of 56 one-bedroom and 13 two-bedroom units.
The Club Regina units are in a self-contained section of three buildings.
This area has its own bar, snack bar, multi-purpose recreation room,
delicatessen, swimming pool and Jacuzzi. Of the total of 69 apartments, 56 are
one-bedroom, two-bath units with a maximum occupancy of four, and 13 have two
bedrooms and three baths, with a maximum occupancy of six people. The units all
have views of either the sea or lagoon, fully equipped kitchens, with stoves,
dishwashers, microwave ovens, terraces with small Jacuzzis, televisions in both
the living room and bedrooms, and other decorations and furnishings of a home.
Amenities include restaurants and bars, five swimming pools, four
whirlpools, two lighted tennis courts, a fitness center, a business center and
several lobby shops including a boutique, a beauty salon and a sundries shop
with magazines, books, tobacco goods and similar items. Members have priority
access to a nearby Robert Trent Jones, Jr. 18-hole golf course.
Puerto Vallarta. The Club Regina Resort at Puerto Vallarta has offered
Weekly Memberships since it began operating. This Raintree Resort was
inaugurated in June 1992 on a 21-acre site in the Marina Vallarta master-planned
resort in Puerto Vallarta. Architect Javier Sordo Madaleno designed the resort
and the co-located Westin Hotel within the framework of Puerto Vallarta's
architectural tradition. The total accommodations in the Raintree Resort in
Puerto Vallarta consist of 161 one-bedroom and 42 two-bedroom vacation ownership
units. All of these facilities are distributed along an 875-foot beach facing
the Pacific Ocean.
The 203 Club Regina Resort units are distributed among the seven buildings
in the complex. All have views of either the beach or the marina. Of the total,
161 are one-bedroom, two-bath units with a maximum occupancy of four; and 42
have two bedrooms and three baths, with a maximum occupancy of six. Each unit
has a fully equipped kitchen (including stove, dishwasher, microwave oven) and
its own Jacuzzi on a private terrace. Furnishings and decorations are consistent
with the quality of the complex and the idea of a Raintree Resort vacation home.
In the Club Regina Resort area there is a bar, snack bar, multi-purpose
recreational room and delicatessen.
8
<PAGE>
Other amenities include five restaurants and bars, four swimming pools,
three lighted tennis courts, a fitness center, a business center and shops. The
surrounding Marina Vallarta community includes an 18-hole golf course, a marina
with specialty shopping, and a separate large shopping center.
Los Cabos. The Club Regina Resort at Los Cabos has offered Weekly
Memberships since its inception. Javier Sordo Madaleno designed this Club Regina
Resort, completed in January 1994, on a 15-acre site on the beach where the
Pacific Ocean meets the Sea of Cortez. The two buildings of the co-located
Westin Hotel feature a curvilinear design connecting two hills. Inspired in
color and form by the surrounding desert, this eight story structure was
constructed in native red stone. Bright, bold accents of hot pink, yellow and
green highlight the garden oasis of tropical foliage. The 130 Club Regina Resort
apartments are housed in neighboring two-story structures.
The 130 Club Regina Resort vacation ownership units have been distributed
in small buildings over the hilly topography to offer views of the beach and
ocean. Of the total, 104 are one-bedroom, two-bath units with a maximum
occupancy of four; and 26 have two bedrooms and three baths, with a maximum
occupancy of six people. Each unit has a fully equipped kitchenette and its own
Jacuzzi on a private balcony. Amenities include four restaurants and bars, three
swimming pools, two lighted tennis courts, a fitness center, a business center
and shops. There are five championship golf courses in the area, designed by
Pete Dye, Robert Trent Jones, Jr., and Jack Nicklaus. Nearby, Cabo San Lucas has
a marina with specialty shopping.
The Company also owns approximately nine acres immediately adjacent to the
Westin Regina Hotel on the west side ("Cabo West") which it acquired in 1998.
The Company plans to develop Cabo West with approximately 100 two and
three-bedroom units and a possible hotel. The development of Cabo West is
expected to commence within the next 12 months subject to availability of
financing on terms that it believes are economic. The Company is negotiating
such financing with Mexican financial institutions, but it has not received a
commitment from any institution. The Company has future plans to construct
approximately 20 additional two-bedroom units, for 1,040 annual Weekly
Intervals, on a property the Company owns adjacent to the east side of the Club
Regina Resort at Los Cabos ("Cabo East"). The Company has not set a date as to
the development of Cabo East at this time, and development will also be
dependent on financing. There can be no assurance that such development will
occur or that the number of Weekly Intervals added to the Company's inventory
from such development will equal what is presently contemplated.
Acapulco. The Club Regina Resort at Acapulco, also known as The Villa Vera
Hotel, Spa & Racquet Club, consists of 59 units, suites and villas. The Company
instituted an on-site marketing program in early 1999 targeting non-Member
guests and designated rooms to be made available for Club Regina Resorts Members
with Weekly Memberships prior to its December 1999 acquisition. The Villa Vera
completed a renovation in April 1999, converting units for vacation interval
ownership under the Club Regina program.
The Villa Vera is located on the top of a mountain in the middle of the
Acapulco bay, providing a privileged view complemented with a beautiful
landscape of small white buildings surrounded by palm and fruit tree gardens.
Amenities include fourteen swimming pools, two paddle courts and two tennis
courts. Consistent with the theme of the resort, the services of an amenity Spa
were offered beginning in 1999, which services are comparable to ones found in
the best Mexican and American Spas. Additional amenities include a gourmet
restaurant, two pool bars, a meeting room and a house for special events. The
resort is built on an approximately 7-acre site, and has approximately 2 acres
of undeveloped land for future expansion.
Palm Springs. The Club Regina Cimarron at Palm Springs, California consists
of approximately 37 acres of land adjacent to two 18-hole golf courses developed
and managed by OB Sports of Seattle, Washington and when fully developed will
consist of 242 two-bedroom condominium units or 12,342 weekly intervals. The
units encircle a large, desert-landscaped courtyard with a poll, a spa and
barbeques. Gold Crown amenities include the championship golf course and a
par-56 short course. The clubhouse holds a full-service restaurant, a pro-shop,
and a preview center for the vacation ownership villas. Club Regina Cimarron is
foremost a golfer's resort, allowing owners to book eight tee times up to 10
months in advance of their stay. Golfers also get a discount of 55 percent off
greens fees while staying at the resort, as well as discounts at OB Sports'
other courses.
The Company purchases Vacation Intervals from the project owner, a Canadian
developer, as they are sold by the Company to Vacation Interval purchasers or
are acquired for Company inventory purposes. Also, the Company will provide
development management for project construction. Forty of such units were
completed in July 2000. A commitment for a development loan by Textron has been
received by the project owner for the development of the second 40 two-bedroom
units and this construction is expected to begin during late 2000. The Company
has the
9
<PAGE>
option to extend its agreement for the next construction stage consisting of 36
units no later than December 31, 2002 and it may thereafter exercise its option
in succeeding stages of 42, 44 and 40 units on or before March 31, 2004, June
30, 2005 and September 30, 2006, respectively.
Whiski Jack
Whistler, British Colombia. The Raintree Resorts at Whistler, Canada,
consist of the operations of Whiski Jack Resorts Ltd. in the popular mountain
resort area of Whistler/Blackcomb, British Columbia. In July 1998, the Company
acquired Whiski Jack, a leader in vacation ownership marketing and sales at
Whistler/Blackcomb Mountain for almost 20 years. Whiski Jack has completed
marketing fixed deeded weeks at nine different resorts in the Whistler Village
area and the Company is currently marketing unsold inventories at five
additional resorts. The Company recently purchased seven units at the new
Intercontinental Cascades Hotel. In addition, the Company has 19 units under
contract at the new Westin Whistler resort scheduled for completion in early
2000. The Company is also evaluating several other opportunities to acquire
units in Whistler Village during 2000.
Teton Club
Jackson Hole, Wyoming. The Raintree Resorts in the United States currently
consists of one resort under development in Wyoming. The Company has entered
into a partnership agreement with Jackson Hole Ski Corporation ("JHSC"), the
owner and developer of the Teton Village ski area near Jackson Hole, Wyoming,
through which the Company is developing The Teton Club containing 37 two- and
three-bedroom units. The Teton Club is offering a deeded interest in the real
estate in two or five week intervals and upon sell-out will consist of
approximately 590 memberships. Membership in Teton Pines Country Club while in
residence at The Teton Club and ski privileges are included in the membership.
Certain Matters Regarding Formation of the Company
Operating Agreements. As of August 18, 1997, the Company and an affiliate
of Starwood Lodging Corporation ("Starwood") entered into an Operating Agreement
for each of the then existing resorts in Cancun, Puerto Vallarta and Los Cabos
("Initial Resorts") and each co-located Westin Hotel, establishing the
day-to-day operating relationship between the Westin Hotels and the Initial
Resorts, including operating standards, plans, budgets, allocation of services,
expansion and construction of additional facilities, and allocation of labor and
other expenses. Each Operating Agreement runs with the property and is binding
on any future owners of any Westin Hotel or Initial Resort. Each Operating
Agreement provides that the applicable Initial Resort/Westin Hotel must be
operated as a "first class" resort and establishes a procedure by which a joint
operating plan and budget will be maintained by Starwood and the Company for the
applicable resort. Additionally, Starwood must provide the same services to each
Initial Resort as it provides to the adjacent Westin Hotel and additional
services may be contracted for, subject to the first class standard and
appropriate allocation of costs between the applicable Westin Hotel and Initial
Resort. Each Operating Agreement prohibits the applicable Initial Resort from
renting, selling or marketing any units on a transient basis except with respect
to: (i) the provision of complimentary accommodations to prospective members
that participate in marketing presentations arranged by such resort, (ii) the
rental of units to wholesalers specifically targeting potential purchasers,
(iii) the rental of units to persons accompanied by respective Members, and (iv)
the rental of units to vacation ownership operators experiencing overflow in
their facilities. If any Initial Resort rents or sells a unit on a transient
basis not described above, then the Company will be subject to significant
penalties including treble damages for lost income, and opportunity plus a first
time fine of $25,000 and $100,000 thereafter. Starwood currently rents 40 rooms
at Los Cabos and the Company has rented the "Pink Tower" of the Westin Regina at
Cancun.
Asset Management Agreement. In connection with Starwood's purchase of the
Westin Hotels from the Company on August 18, 1997, the Company and Starwood
entered into an Asset Management Agreement, which has a term of 50 years. The
agreement terminates in August 2047 unless otherwise extended for an additional
50 years by the Company. Pursuant to this agreement, the Company retained an
interest in the net cash flows of the Westin Hotels equal to 20% of the net cash
flow of the Westin Hotels in excess of approximately $18.5 million per year (the
"Base Amount"). After December 31, 2000, the Base Amount will decrease pursuant
to a formula. The Company began recognizing revenue from the Asset Management
Agreement in 1999, which amounted to $275,000 based on 4 1/2 months in 1997 and
1998. The Company is also entitled to 20% of the net sale proceeds of the Westin
Hotels subject to the priority return to Starwood upon a sale.
10
<PAGE>
Trusts. The Initial Resorts are held through trusts. These trusts were
created on August 18, 1997, when three separate trust agreements (the "Trust
Agreements") were entered into among the Company's three operating subsidiaries
("Operating Subsidiaries"), a subsidiary of CR Mexico and Bancomer, as trustee,
pursuant to which title to the Resorts was transferred to Bancomer, acting
solely in its capacity as trustee. Originally, under the Trust Agreements, the
Operating Subsidiaries had the right to use and exploit the vacation ownership
units until August 18, 2027 (the "Initial Term"), and a subsidiary of CR Mexico
had the right to hold direct title to the vacation ownership condominium units
after August 19, 2027 (the "Remainder Rights"). In March 1998, the Trust
Agreements were modified to extend the Initial Term from 30 to 50 years. The
Company has assigned the proportional beneficial interests to trusts for the
benefit of Members who purchased their interest from the Company subsequent to
August 18, 1997.
Government Regulation
General. The Company's marketing and sales of Vacation Intervals and
certain of its other operations are subject to extensive regulation by the
states and foreign jurisdictions in which the Raintree Resorts are located and
in which Vacation Intervals are marketed and sold.
Most U.S. states and Canadian provinces have adopted specific laws and
regulations regarding the sale of weekly interval ownership programs.
Washington, Oregon, California, Hawaii and British Columbia require the Company
to register the Raintree Resorts, the Company's vacation program, and the number
of Vacation Intervals available for sale in such state or province with a
designated state or provincial authority. The Company must amend its
registration if it desires to increase the number of Vacation Intervals
registered for sale in that state or province. Either the Company or the state
or provincial authority assembles a detailed offering statement describing the
Company and all material aspects of the project and sale of Vacation Intervals.
The Company is required to deliver the offering statement to all new purchasers
of Vacation Intervals, together with certain additional information concerning
the terms of the purchase. Laws in each state where the Company sells Vacation
Intervals grant the purchaser of Vacation Intervals the right to cancel a
contract of purchase at any time within a period ranging from three to seven
calendar days following the later of the date the contract was signed or the
date the purchaser received the last of the documents required to be provided by
the Company. Most states have other laws which regulate the Company's
activities, such as real estate licensure laws, laws relating to the use of
public accommodations and facilities by disabled persons, sellers of travel
licensure laws, anti-fraud laws, advertising laws, and labor laws.
The Federal Trade Commission has taken an active regulatory role in the
interval ownership industry 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 Opportunity Credit Act and
Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate
Standards Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Civil Rights Act
of 1964 and 1968, the Fair Housing Act and the Americans with Disabilities Act.
Although the Company believes that it is in material compliance with all
federal, state, local and foreign laws and regulations to which it is currently
subject, there can be no assurance that it is in fact in compliance. Any failure
by the Company to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company will continue to incur significant
costs to remain in compliance with applicable laws and regulations, and such
costs could increase substantially in the future.
The Mexican Ministry of Tourism (Secretaria de Turismo) is the principal
regulator of the Company's activities in the tourism services area. The Company
believes that it has obtained from the Mexican Ministry of Tourism, and
registered in the Mexican National Tourism Registry, all material permits
required for the operation of the Club Regina Resorts. In order to maintain
registration under the Mexican National Tourism Registry, services such as
restaurants and bars must be provided at the Club Regina Resorts. The Company
expects to cause these services to be rendered by Starwood and Westin pursuant
to the Operating Agreements. See "Certain Considerations - Recent Acquisition;
Lack of Prior Operating History." The Company also believes that it is in
material compliance with all federal, state, local and foreign laws and
regulations to which it and its Weekly Intervals marketing and sale activities
are or may be subject. However, no assurance can be given that the cost of
qualifying under weekly interval ownership regulations in all jurisdictions in
which the Company desires to conduct sales will not be significant. Any failure
to comply with applicable laws or regulations could have a material adverse
effect on the Company.
11
<PAGE>
Under various United States federal, state, local and foreign laws,
ordinances and regulations, the owner or operator of real property generally is
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in, or emanating from, such property, as well as
related costs of investigation and property damage. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. Other
federal and state laws require the removal or encapsulation of
asbestos-containing material when such material is in poor condition or in the
event of construction, demolition, remodeling or renovation. Other statutes may
require the removal of underground storage tanks. Noncompliance with these and
other environmental, health or safety requirements may result in the need to
cease or alter operations at a property. There can be no assurance that any
environmental assessments undertaken by the Company with respect to the Raintree
Resorts have revealed all potential environmental liabilities, or that an
environmental condition does not otherwise exist as to any one or more of the
Raintree Resorts that could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's present operations and development activities in Mexico,
Canada and the United States are subject to Mexican, Canadian and U.S. federal,
state and local laws and regulations, respectively, relating to the protection
of the environment, including those concerning water supply, wastewater, noise,
soil pollution and generation and handling of hazardous waste and materials and
environmental impact. The possibility exists that in the future the Company and
its facilities and operations will encounter (i) newer and stricter federal,
state or local environmental laws and regulations, (ii) more rigorous
interpretations of existing environmental laws and regulations, and/or (iii)
stricter enforcement of federal, state and local environmental law regulations.
The Company believes that the Raintree Resorts are in compliance in all
material respects with all federal, state and local laws and regulations
relating to water, atmospheric pollution, hazardous wastes or substances, in all
jurisdictions in which it currently operates or develops operations. The Company
has not been notified by any environmental authority or any third party, of any
material noncompliance, liability or claim related to those environmental
matters in connection with any of its present properties.
Insurance
The Company carries comprehensive liability, fire, hurricane, storm,
earthquake and business interruption insurance with respect to the Company's
resorts, with policy specifications, insured limits and deductibles customarily
carried for similar properties which the Company believes are adequate. There
are, however, certain types of losses that are generally not insured because
they are either uninsurable or not economically insurable. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in a resort, as well as the anticipated future revenues from
such 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 the Company.
Risk Factors
Managing Inventory. Our business depends, in part, on properly managing
Vacation Interval inventory of ownership interests to sell. If we hold excessive
inventory, the carrying costs of that inventory may adversely affect our
business, results of operations and financial results. Conversely, we may also
be adversely affected by holding insufficient inventory and thereby lose sales
that we might have otherwise made. In some locations we have had limited
inventory. At Club Regina, our remaining developed Vacation Intervals inventory
at December 31, 1999 was 5,241 weeks or 22% of the total weeks available and at
June 30, 2000 was 3,222 weeks or 13%. Including the Vacation Interval inventory
to be made available for sale by Club Regina in July 2000, under the Cimarron
Resorts project development, management and sales agreement the remaining
Vacation Interval inventory of total weeks at Club Regina would have been 17% at
June 30, 2000. In Whistler, the Whiski Jack Resorts has very limited inventory
that it owns and generally acquires units or ownership interests from individual
owners to re-sell as market demand dictates. At Whiski Jack the remaining
developed Vacation Interval inventory at December 31, 1999 was 548 weeks or 6%
of the total weeks available and at June 30, 2000 was 1,397 weeks or 14%. (The
increase was due to the acquisition of additional inventory.) There can be no
assurance that the Company will be able to implement its internal growth and
acquisition strategy successfully and thereby increase its inventory of Vacation
Intervals. If the Company is unable to acquire or develop additional inventory,
or if we acquire too much inventory the Company's business, results of
operations, and financial condition could be materially adversely affected.
12
<PAGE>
Substantial Leverage and Ability to Service Debt. The Company is, and will
continue to be, highly leveraged, with substantial debt service in addition to
operating expenses and planned capital expenditures. The Company's level of
indebtedness will have several important effects on its future operations, and
could have important consequences to the holders of the Company's common stock,
including, without limitation, (i) the Company has historically incurred debt
and issued equity securities to fund negative cash flow from operating
activities and to make the payments on previously incurred debt obligations,
(ii) covenants contained in the indenture governing the Senior Notes (the
"Indenture") and the loans and credit agreements with Bancomer, FINOVA, and
Textron will require the Company to meet certain financial tests, and other
restrictions will limit its ability to pay dividends, borrow additional funds or
to dispose of assets, and may effect the Company's flexibility in planning for,
and reacting to, changes in its business, including possible acquisition
activities, (iii) the Company's leveraged position will substantially increase
its vulnerability to adverse changes in general economic, industry and
competitive conditions, (iv) the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate and other purposes may be limited, and (v) in the event of a change of
control of the Company, the Company may be required to purchase all of the
outstanding Senior Notes at 101% of the principal amount, as the case may be, of
the Senior Notes plus any accrued and unpaid interest thereon, and Additional
Interest (as defined in the Indenture), if any, to the date of purchase. The
exercise by the holders of the Senior Notes of their rights to require the
Company to offer to purchase Senior Notes upon a change of control could also
cause a default under other indebtedness of the Company, even if the change of
control itself does not, because of the financial effect of such purchase on the
Company. Additionally, our leveraged position will substantially increase our
vulnerability to adverse changes in general economic, industry and competitive
conditions. Due to the Company's weak financial condition, such adverse changes
would raise costs or lower revenue, be hard to mitigate and quickly have an
adverse effect on our business. If the Company is unable to generate sufficient
cash flow from operations in the future to service its debt, it may be required,
among other things to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, including the
Senior Notes, to sell selected assets, or to reduce or delay planned capital
expenditures.
At December 31, 1999, the Company had outstanding $100 million of 13%
Senior Notes due 2004, $24.9 million outstanding under the FINOVA credit line
("FINOVA"), which at year-end bears interest at 10.6%, $7.1 million outstanding
under the Textron credit line, which at year-end bears interest at 10.5%, $6.8
million outstanding under the Bancomer loan, which at year end-end bears
interest at 12%, $3.4 million of bank debt and other debt bearing interest
ranging from 8.3% to 14.5%, and $0.3 million mortgage notes payable to a bank
that at year-end bore an average interest rate of 8.5%. Approximately $19.6
million, $8.2 million, $6.8 million, $4.2 million, $103.0 million and $3.1
million of the outstanding debt which has stated repayment amounts is due in
2000, 2001, 2002, 2003, 2004 and there-after, respectively. In addition to such
debt, the Company has $5.1 million of Pay-in-Kind Preferred Stock and $578,000
of 10% Convertible Preferred Stock outstanding at December 31, 1999. The
Pay-in-Kind Preferred Stock is redeemable at any time before December 1, 2004,
at which time the redemption is mandatory. The 10% Convertible Preferred Stock
was fully redeemed during January and February 2000. With the exception of the
$6.5 million semi-annual interest payments due June 1 and December 1 on the
Senior Notes, interest is paid monthly on all debt obligations of the Company.
At December 31, 1999 the Company had $1.1 million of accrued and unpaid interest
on Senior Notes.
At June 30, 2000, the Company had outstanding $100 million of 13% Senior
Notes due 2004, $22.1 million outstanding under the FINOVA credit line
("FINOVA"), which at period end bears interest at 11.5%, $9.4 million
outstanding under the Textron credit line, which at period end bears interest at
11.5%, $5.3 million outstanding under the Bancomer loan, which at year end-end
bears interest at 12%, $8.5 million of other debt bearing interest averaging
10.5%.
In the short-term from June 2000, the Company is working to increase
liquidity through hypothecation of its receivables. The Company anticipates it
will need approximately $8.2 million in new working capital borrowings over the
next 12 months. This will include expanding capacity under its current
facilities and, if necessary, obtaining credit lines from new sources. During
the next 12-month period, the working capital borrowing base, namely timeshare
receivables, is projected to grow by approximately $12.0 million. Emphasis will
be placed on the level of hypothecation of loans from Mexican buyers of Club
Regina Vacation Intervals. These receivables are denominated in US dollars,
Mexican pesos and Mexican UDI's. Currently the Company has a $10 million
receivables hypothecation facility with Textron. The receivable pool, which
provides the collateral for the Textron facility, is large enough to support a
credit facility of almost $20.5 million at a loan value ratio of 82.5%. The
Company has begun discussions with Textron regarding the expansion of this
credit facility to $15 or $20 million and anticipates that the facility will be
expanded prior to the December 1st, 2000 and June 1st, 2001 Senior Notes
interest payments.
13
<PAGE>
The Company is highly leveraged and, under the Indenture, there are
limitations on the Company's ability to borrow funds and make certain equity
investments. Additionally, the Company is required under the credit agreements
to maintain certain financial covenants, including minimum equity levels.
Accordingly, there can be no assurance that the Company will be able to expand
its current credit facility.
Growth Strategy Risks. The Company intends to grow primarily through the
development and acquisition of additional resorts. The Company's future growth
and financial success will depend upon a number of factors, including its
ability to identify attractive resort acquisition opportunities, consummate the
acquisitions of such resorts on favorable terms, convert such resorts to use as
vacation ownership resorts and profitably sell Vacation Intervals at such
resorts. If the vacation ownership industry continues to consolidate, increased
competition for acquisition candidates may develop such that there may be fewer
acquisition opportunities available to the Company as well as higher purchase
prices. There can be no assurance that the Company will be able to finance,
identify, acquire or profitably manage additional businesses, or successfully
integrate acquired businesses into the Company without substantial costs, delays
or other operational or financial problems. Further, acquisitions involve a
number of special risks, including (i) possible adverse effects on the Company's
operating results, (ii) diversion of management's attention, (iii) lack of local
market knowledge and experience, (iv) inability to hire, train and retain key
acquired personnel, (v) inability to secure sufficient marketing relationships
with local hospitality, retail and tourist attraction operators, (vi) risks
associated with unanticipated events or liabilities, and (vii) adverse changes
in zoning laws, changes in real estate taxes and other operating expenses, some
or all of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Customer dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on the reputation of the Company and render ineffective the Company's sales and
marketing initiatives.
In addition, as the Company expands its resort locations to resorts
catering to snow skiing, golf, hiking, fishing and other pursuits, the Company
plans to market additional Vacation Intervals available to existing Members.
There can be no assurance that the Company will be able to implement such
marketing programs on an economic basis, if at all. Finally, there can be no
assurance that the Company or other businesses acquired in the future will
achieve anticipated revenues and earnings.
Development and Construction Risks. The Company intends to construct,
redevelop, convert and expand additional resorts. There can be no assurance that
the Company will complete the expansion plans set forth in "Business - The
Raintree Resorts" and "Business - Growth Strategy" or undertake to develop other
resorts or complete such development if undertaken. Risks associated with the
Company's development, construction and redevelopment/conversion activities may
include the risks that: (i) acquisition and/or development opportunities may be
abandoned; (ii) construction costs of a property may exceed original estimates,
possibly making the resort uneconomical or unprofitable; (iii) sales of Vacation
Intervals at a newly completed property may be insufficient to make the property
profitable; (iv) financing may not be available on favorable terms for the
development of, or the continued sales of Vacation Intervals at, a property; (v)
construction may not be completed on schedule, resulting in decreased revenues
and increased interest expense and (vi) borrowing capacity may be limited by the
Company's existing indebtedness. In addition, the Company's construction
activities will typically be performed by third-party contractors, the timing,
quality and completion of which the Company will be unable to control.
Furthermore, construction claims may be asserted against the Company for
construction defects and such claims may give rise to liabilities. New
development activities, regardless of whether they are ultimately successful,
typically require a substantial portion of management's time and attention.
Development activities are also subject to risks relating to the Company's
inability to: (i) obtain, or avoid delays in obtaining, all necessary zoning,
land-use, building, occupancy and other required governmental permits and
authorizations, (ii) coordinate construction activities with the process of
obtaining such permits and authorizations, and (iii) obtain the financing
necessary to complete the necessary acquisition, construction, and/or conversion
work. In addition, local laws may 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 the Company
amounts in connection with any repairs made to the developed property. Finally,
to the extent the Company elects to develop properties adjacent to luxury hotels
to provide Members with service offered to guests of such hotels, the Company
will need to negotiate the terms by which such hotels would provide services to
the Company and to the Members. There can be no assurance that the Company will
be able to negotiate such terms on a basis that is favorable to the Company.
Expansion and Regulation of Company's Business Outside of Mexico. Raintree
has recently expanded its business, including Vacation Interval marketing and
sales and acquisition and development of additional resorts outside of Mexico.
These activities are subject to extensive regulation by the applicable
jurisdictions in which its
14
<PAGE>
resort properties were located and in which Vacation Intervals are or are to be
marketed and sold. While the Company will continue to use its best efforts to be
in material compliance with all foreign laws and regulations to which it may
become subject, no assurance can be given that the cost of qualifying under
vacation interval ownership regulations and other regulations in any
jurisdiction in which the Company desires to conduct sales and operate its
business would not be significant. Any failure to comply with applicable laws or
regulations could have a material adverse effect on the Company.
Adverse Mexican Economic Conditions and Government Policies. The following
information was derived in part from the Form 18-K, as amended, filed by the
United Mexican States with the Commission on June 20, 1997, and updated with
Form 18-K, as amended, filed by the United Mexican States with the Commission on
January 10, 2000. The Company does not warrant the accuracy or completeness of
such information.
Because the Club Regina Resorts are located in Mexico and a significant
percentage of the owners of Weekly Intervals are Mexican nationals
(approximately 45% as of December 31, 1999), the Company's financial condition
and results of operations are greatly affected by the strength of the Mexican
economy.
During the late 1980s and early 1990s, as a result of Mexican government
initiatives and the attendant increase in foreign investment, Mexico's growth
rate increased, the inflation rate was reduced significantly and the U.S.
dollar/peso exchange rate was relatively stable. During 1994, however, Mexico
experienced an economic crisis caused in part by a series of internal
disruptions and political events, including a large current account deficit
(8.0% of gross domestic product in 1994), reduced level of domestic savings (15%
of gross domestic product in 1994), civil unrest in the southern state of
Chiapas, the assassination of two prominent political figures and significant
devaluation of the peso. These events undermined the confidence of investors in
Mexico during 1994 and, combined with an increase in interest rates, led to a
substantial outflow of capital. The weaker value of the peso relative to the
dollar increased the cost, in peso terms, of imported goods and services, and
thereby increased the rate of inflation in Mexico to 52.0% in 1995 (as compared
to 7.1% in 1994). To the extent that employers adjusted wages upward to
compensate for the decline in purchasing power resulting from the devaluation of
the peso, and then adjusted prices to reflect increased wage costs, additional
inflationary pressures arose. The devaluation of the peso also led to a lack of
confidence on the part of investors in Mexico's ability to repay its short-term
obligations and, consequently, a reluctance of investors to reinvest in Mexico's
maturing government bonds. As a result, Mexico experienced a liquidity crisis
closely linked to the $29.2 billion of short-term government bonds (Tesobonos)
outstanding at the end of 1994 and maturing in 1995.
Since 1995, the Mexican government has instituted programs which sought to
(i) stabilize the exchange rate and maintain the current floating rate exchange
policy, (ii) stabilize the Mexican banking sector, (iii) establish tax
incentives for business to increase productivity and employment, (iv) increase
exports, (v) reform the pension system to encourage private domestic savings,
(vi) control inflation by decreasing public spending and implementing a
restrictive monetary policy, (vii) increase private sector investment through
privatization of transportation and telecommunications and (viii) increase
public-sector revenues, in part through increases in the general rate of the
value-added tax for certain goods and services from 10% to 15% (except for
certain "free zones" such as Cancun, Cozumel and Los Cabos, where the rate
continues to be 10%), increases in prices of fuel oil, natural gas and
electricity and increases in the minimum wage. In addition, the Mexican
government sought to minimize inflation by promoting the gradual implementation
of price increases.
Economic conditions in Mexico improved somewhat in 1996, with gross
domestic product in 1996 5.1% higher than gross domestic product in 1995, and
interest rates on 28-day Cetes declining to an average of 31.4% (from an average
of 48.4% in 1995). In the first quarter of 1997, gross domestic product
increased by 5.1% as compared to the same period in 1996. On January 15, 1997,
the Mexican government repaid the remaining balance that it borrowed on the line
of credit extended by the United States and Canada.
According to preliminary figures, gross domestic product increased by 3.2%
in real terms in the first nine months of 1999, as compared with the same period
of 1998. Furthermore, inflation during the first eleven months of 1999 was
11.2%, as compared with 15.8% in the same period of 1998. Also, during 1999,
interest rates on 28-day Cetes averaged 21.4% and interest rates on 91-day Cetes
averaged 22.4%, as compared with average rates on 28-day and 91-day Cetes of
24.8% and 26.2%, respectively, during 1998. The assumptions and targets
underlying Mexico's 2000 budget, as embodied in the Criterios Generales de
Politica Economica (General Economic Policy Guidelines) for 2000, provides for
real gross domestic product growth of 4.5%, an average rate on the 28-day Cetes
of 16.4%, and an average exchange rate of 10.4 pesos per US dollar. There can be
no assurance that the economic plan of
15
<PAGE>
the Mexican government will achieve its stated goals or the improvement of the
Mexican economy will continue in future periods.
The future performance of the Mexican economy may be adversely affected by
political instability in Mexico. On August 28, 1996, a little-known group
calling itself the Ejercito Popular Revolucionario (the Popular Revolutionary
Army, or "EPR") initiated attacks in various parts of Mexico, concentrating on
military and police targets, and since that date has claimed responsibility for
a number of other attacks and has been involved in direct skirmishes with
Mexican government troops. Although the extent of popular support enjoyed by the
EPR is not known, and none of the attacks occurred within 600 miles of any of
the Club Regina Resorts, the attacks adversely affected Mexico's foreign
exchange and securities markets. No assurance can be given that attacks in the
future by the EPR or any other insurgent group will not have a similar, or
worse, effect on such markets.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Accordingly, Mexican
governmental actions could have a significant effect on companies with Mexican
operations (including the Company), market conditions, prices and returns on
securities of companies with significant Mexican operations (including those of
the Company). On July 6, 1997, national elections were held in Mexico in which
parties opposed to the ruling Institutional Revolutionary Party ("PRI")
increased their representation in the Mexican legislature and captured the
mayoralty of Mexico City and the governorship of several states of Mexico.
Although the term of President Ernesto Zedillo, a member of the PRI, is
scheduled to continue until the year 2000, there can be no assurance that the
increased political power of parties opposed to the PRI will not result in a
change in Mexico's economic policies or the ability of President Zedillo to
implement plans or agreements similar to those referred to above. Any change in
Mexico's economic policies could have a material adverse effect on the Company's
business, results of operations, financial condition, ability to obtain
financing and prospects.
Future declines in the gross domestic product of Mexico, continued high
rates of inflation in Mexico or other adverse social, political or economic
developments in or affecting Mexico or other emerging market countries could
have a generally adverse effect on the Mexican economy, which could result in a
material adverse effect on the Company's business, results of operations,
financial condition, ability to obtain financing and prospects and on the market
price of the Company's securities. Finally, securities of companies, such as
Raintree, with significant exposure to emerging markets are, to varying degrees,
influenced by economic and market conditions in other emerging market countries.
Although economic conditions are different in each country, investors' reactions
to developments in one country may have effects on the securities of issuers in
other countries. There can be no assurance that the trading price of the Common
Stock will not be adversely affected by events elsewhere, especially in emerging
market countries.
In addition, the Company denominates many of its Vacation Interval
receivables in UDIs. See "Customer Financing." Although the Company believes
that its UDI program protects it from peso inflation, it does not insulate the
Company from foreign currency risk, and there can be no assurance that the rate
of return on the Company's UDI denominated loans will not be adversely affected
by a change in dollar/peso exchange rates.
Exchange Rates. The value of the peso has been subject to significant
fluctuations with respect to the U.S. dollar in the past and may be subject to
significant fluctuations in the future. The peso has experienced significant
fluctuations in short time periods including a major decline in March 1994
(following the assassination of a leading candidate in Mexico's presidential
elections) of that year. Between January 1, 1995 and December 31, 1999, the
Mexican peso depreciated an additional 80.3% to Ps. 9.5 per U.S. dollar at
December 31, 1999 and fluctuated from a high, relative to the U.S. dollar, of
Ps. 5.27 to a low, relative to the U.S. dollar, of Ps.10.6. No assurance can be
given that the peso will not further depreciate in value relative to the U.S.
dollar in the future.
According to preliminary figures, during the first nine months of 1999,
Mexico's international payments current account registered a deficit of US $9.7
billion, 14.2% less than the deficit of US $11.3 billion registered in the same
period of 1998. At December 30, 1999, Mexico's international reserves totaled US
$30.7 billion, an increase of US $593 million from December 30, 1998.
Also, during 1999, the Foreign Exchange Commission of Mexico maintained the
size limit of its monthly auctions of options to sell dollars to Banco de Mexico
at US $250 million per month. During this period, Banco de Mexico accumulated
international assets totaling US $2.2 billion through this program.
16
<PAGE>
Furthermore, in February 1997, the Foreign Exchange Commission of Mexico
established a program enabling the Banco de Mexico to sell up to US $200 million
to Mexican commercial banks pursuant to an auction mechanism on any day in which
the peso/dollar exchange rate announced by Banco de Mexico and applicable to the
payment of obligations denominated in foreign currencies exceeds the applicable
rate on the preceding business day by more than 2%. Banco de Mexico has not sold
dollars under this program since May 25, 1999.
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves in the past. The Mexican government does not
currently restrict the ability of Mexican or foreign persons or entities to
convert pesos to U.S. dollars. As noted in the foregoing, however, it does
exercise some degree of control over foreign currency markets, and no assurance
can be given that the Mexican government will not institute a restrictive
exchange control policy in the future. Any such restrictive exchange control
policy could adversely affect the Company's ability to convert dividends or
other payments received in pesos into U.S. dollars, and could also have a
material adverse effect on the Company's business and financial condition.
The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rate for the purchase and sale of U.S.
dollars (presented in each case as the average between such purchase and sale
rates), expressed in pesos per U.S. dollar.
Free Market Rate
-------------------------------------------
Year Ended Period
December 31 High Low Average(1) End
----------- ------ ----- --------- ------
1992 3.12 3.08 3.10 3.12
1993 3.33 3.12 3.17 3.33
1994 5.75 3.11 3.39 5.00
1995 8.05 5.27 6.42 7.69
1996 8.05 7.33 7.61 7.88
1997 8.43 7.71 8.07 8.06
1998 10.63 8.04 9.16 9.90
1999 10.60 9.24 9.55 9.53
---------
(1)Average excha nge rates represent the annual average of the daily free
exchange rates.
Source: Banco de Mexico until November 5, 1993, with the free market rate
representing the average of the buy and sell rates on the relevant dates.
Commencing November 8, 1993, the free market rate is the Noon Buying Rate
for Mexican pesos reported by the Federal Reserve of the United States.
Seasonality. The Mexican and Canadian vacation ownership industry in
general tends to follow seasonal buying patterns with peak sales occurring
during the peak travel/tourism seasons, usually December through April and July
and August. In Mexico, American tourists tend to vacation in the destinations
where the Club Regina Resorts are located in the December through April season
while Mexican tourists tend to travel to these destinations more frequently
during the summer months. The timing of these purchasers, however, may be
effected by weather conditions and general and local economic conditions.
Seasonality influences could have a material adverse effect on the Company's
operations.
General Economic Conditions; Concentration in Vacation Ownership Industry.
Any downturn in economic conditions or any price increases (e.g., airfares)
related to the travel and tourism industry could depress discretionary consumer
spending and have a material adverse effect on the Company's business. Any such
economic conditions, including recessions, may also adversely affect the future
availability of attractive financing for the Company or its customers and may
materially adversely affect the Company's business, financial condition and
results of operations. Furthermore, adverse changes in general economic
conditions may adversely affect the collectibility of the Vacation Interval
receivables. Because the Company's operations are conducted almost entirely
within the vacation ownership industry, any adverse changes affecting the
vacation ownership industry such as an oversupply of vacation ownership units, a
reduction in demand for vacation ownership units, changes in travel and vacation
patterns, changes in governmental regulations of the vacation ownership industry
and increases in construction costs or taxes, as well as negative publicity,
could have a material adverse effect on the Company's operations.
Sales Volume Risks. The Company depends on sales leads generated from
guests of its hotels located adjacent to some of our properties and with which
we share some facilities, other local offices, theme stores, real estate agents
and off-site offices. With respect to off-site offices, as the number of
potential customers in the geographic area of a sales office who have attended a
sales presentation increases, the Company may have increasing difficulty in
attracting additional potential customers to a sales presentation at that
office, and it may become increasingly
17
<PAGE>
difficult for the Company to maintain current sales levels at its existing sales
offices. Accordingly, the Company anticipates that a substantial portion of its
future sales growth will depend on opening additional off-site sales offices
which may be subject to local taxes and compliance with additional registration
and other requirements. There can be no assurance, however, that sales from
existing or new off-site sales offices will meet the Company's expectations. If
the Company does not open additional sales offices or if existing or new sales
offices do not perform as expected, the Company's business, results of
operations and financial condition could be materially adversely affected.
Geographic Concentration in Mexico; Concentration of Customers in North
America. Until July 1998, the Company only sold Vacation Intervals in Mexico and
during 1999, approximately 42% of the Company's revenues are from sales to
Mexican nationals. At December 31, 1999 approximately 34% of Members resided in
Mexico. The Company intends to continue to sell Vacation Intervals in Mexico and
to initiate registration to permit sales in selected locations in the United
States. Since most of the Company's sales offices are currently located in
Mexico, any economic downturn in Mexico could have a disproportionate material
adverse effect on the Company's business, results of operations and financial
condition. Also, at December 31, 1999, approximately 66% of the Company's
Members resided in the United States or Canada, and as a result, the Company may
be vulnerable to downturns in the U.S. and Canadian economies as well.
Additionally, at December 31, 1999 four of the Company's six resorts are located
in Mexico.
Competition. The Company is subject to significant competition from other
entities engaged in the business of resort development, sales and operation,
including vacation interval ownership, condominiums, hotels and motels. Some of
the world's most recognized lodging, hospitality and entertainment companies
have begun to develop and sell vacation intervals in resort properties. Major
companies that now operate vacation ownership resorts properties include
Marriott International, Inc., The Walt Disney Company, Hilton Hotels
Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, Inc., and Westin.
In addition, other publicly-traded companies in the vacation ownership industry,
such as Sunterra Resorts, Inc., Trendwest Resorts, Inc., Bluegreen Corp., and
SilverLeaf, Inc. currently compete, or may compete, with the Company. The
Company believes that the fractional interest segment of the vacation ownership
market is highly fragmented and, although no major company competitors exist,
includes such competitors as Franz Klammer Lodge in Telluride, Resort Quest
International, Inc., a company specializing in vacation home rentals and America
Skiing Corporation, which sell one-quarter share interests in vacation homes at
certain of its ski locations. Many of these entities possess significantly
greater financial, marketing and other resources than those of the Company.
Management believes that recent and potential future consolidation in the
vacation interval industry will increase industry competition.
Independent Contractors. A portion of the Company's sales force has been
comprised of independent contractors. From time to time, U.S., Mexican and
Canadian federal, state and provincial authorities have asserted that
independent contractors are employees, rather than independent contractors. If,
as a result of any such assertion the Company were required to pay for and
administer added benefits and taxes related to the time such persons have been
classified as independent contractors, the Company's operating costs would
increase.
Natural Disasters - Uninsured Loss. The Company's resorts may be subject to
hurricanes, earthquakes and adverse weather patterns such as "El Nino" and
damages as a result thereof. There are certain types of losses for which the
Company does not have insurance coverage because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in a resort,
as well as the anticipated future revenues from such 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 the Company.
Employees
At December 31, 1999, the Company employed 401 full-time and 47 part-time
persons, with 261 persons in Mexico, 175 persons in Canada and 12 persons in the
United States and utilized 890 contract persons primarily as independent sales
agents in Mexico. At June 30, 2000, the Company employed 386 full-time and 107
part-time persons, with 242 persons in Mexico, 184 persons in Canada and 67
persons in the United States and utilized 890 contract persons primarily as
independent sales agents, 175 persons in Canada and 12 persons in the United
States and utilized 851 contract persons primarily as independent sales agents
in Mexico. The Company believes employee relations are good.
18
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
The Company is currently subject to litigation with respect to claims that
arose prior to August 18, 1997 respecting employment, contract, construction and
commissions disputes, among others. In management's judgment, none of such
lawsuits against the Company is likely to have a material adverse effect on the
Company. Moreover, pursuant to the Stock Purchase Agreement with Bancomer, the
Company is entitled to indemnification for all such claims against it. In
addition, the Company is subject to litigation with respect to a limited number
of claims that arose on or after August 18, 1997. In the opinion of management,
the resolution of such claims will not have a material adverse effect on the
operating results or financial position of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
19
<PAGE>
Part II
ITEM 5 - MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common equity has not been registered pursuant to Section
12(b) of the Act and is not traded. At December 31, 1999 and September 23, 2000,
the Company had 51 and 52 common stock shareholders, respectively.
Dividend Policy
The Company has never paid cash dividends on its common stock. The Company
anticipates it will retain all of its future earnings, if any, for use in the
expansion and operation of its business and the Company does not anticipate
paying cash dividends in the foreseeable future. In addition, the Senior Notes
Indenture may restrict or prohibit the payment of dividends by Raintree.
ITEM 6 - SELECTED FINANCIAL DATA
The historical income statement data presented below for Desarrollos
Turisticos Regina S. de R.L. de C.V. and its subsidiaries ("Predecessor
Business") was derived from the historical financial statements of the
Predecessor Business and includes the use of the lease accounting method for the
Vacation Interval revenues reported by the combined resorts, because the
Predecessor Business did not sell Vacation Intervals that met the requirements
for the full accrual method of accounting. The historical income statement data
presented below for the Company uses the full accrual method of accounting
subsequent to the date it purchased the vacation ownership segment ("Club Regina
Resorts") of the Predecessor Business.
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements of the Company and the Predecessor Business and the notes thereto
included elsewhere herein.
20
<PAGE>
<TABLE>
<CAPTION>
Summarized Historical Financial Data
Vacation Ownership Segment
of Predecessor Business (1) (2) Company
------------------------------------ ------------------------------------
Seven and
(Unaudited) 1/2 months
Years Ended December 31, Ended Years Ended December 31,
---------------------- August 17, ------------------------------------
1995 1996 1997 1997(4) 1998 1999
-------- -------- -------- -------- -------- --------
Historical Income Statement Data: (in thousands except share and per share data)
Vacation ownership revenues:
<S> <C> <C> <C> <C> <C> <C>
Vacation Interval sales .................... $ 25,034 $ 37,263 $ 31,479
Less amounts deferred ................... (24,461) (36,435) (30,653)
Plus amounts recognized ................. 1,131 2,039 1,650
-------- -------- --------
Total Vacation Interval revenue ....... 1,704 2,867 2,476 $ 18,098 $ 56,508 $ 62,749
Rental and service fee income .............. 4,105 5,497 7,021 3,896 8,926 8,888
Interest income on Vacation Interval
receivables ........................... 1,839 3,294 3,277 1,557 5,848 7,252
Other income ............................... 690 760 1,329 2,153 2,701 2,514
-------- -------- -------- -------- -------- --------
Total vacation ownership revenues........... 8,338 12,418 14,103 25,704 73,983 81,403
Costs and operating expenses
Cost of Vacation Interval sales ......... 4,569 13,161 17,007
Provision for doubtful accounts ......... 2,318 4,450 5,242
Advertising, sales and marketing
Commissions paid ........................ 4,919 7,108 5,512
Less amount deferred .................. (4,824) (5,807) (5,413)
Plus amount recognized ................ 178 303 313
Advertising, sales and marketing ........ 4,128 3,829 4,899
-------- -------- --------
Total advertising, sales and marketing. 4,401 5,433 5,311 8,576 23,874 29,343
Maintenance and energy .................. 3,183 3,798 4,669 1,938 8,013 11,387
General and administrative .............. 6,637 5,400 4,504 5,417 11,463 10,888
Depreciation (3)......................... -- -- -- 49 620 973
Amortization of goodwill ................ -- -- -- -- 2,885 1,606
-------- -------- -------- -------- -------- --------
Total costs and operating expenses.......... 14,221 14,631 14,484 22,867 64,466 76,446
-------- -------- -------- -------- -------- --------
Operating income (loss) from vacation
ownership operations .................... (5,883) (2,213) (381) 2,837 9,517 4,957
Interest expense, net ................... 3,884 3,108 2,827 3,931 14,947 17,958
Equity in losses on equity investments -- -- -- -- 25 352
Foreign currency exchange (gains) losses,
net ................................... 2,464 (351) 74 1,333 4,274 (801)
-------- -------- -------- -------- -------- --------
Loss from vacation ownership
operations before provision for taxes ... (12,231) (4,970) (3,282) (2,427) (9,729) (12,552)
Foreign income and asset taxes........... 3,356 3,312 1,756 909 672 709
-------- -------- -------- -------- -------- --------
Net loss from vacation ownership operations
before preferred stock dividend ......... (15,587) (8,282) (5,038) (3,336) (10,401) (13,261)
-------- -------- -------- -------- -------- --------
Preferred stock dividends................... -- -- -- 232 711 675
-------- -------- -------- -------- -------- --------
Net loss attributable to common shareholders $(15,587) $ (8,282) $ (5,038) $ (3,568) $(11,112) $(13,936)
======== ======== ======== ======== ======== ========
Net loss from operations per share ......... $ (0.40) $ (.88) $ (1.10)
======== ======== ========
Basic and diluted weighted average shares .. 8,976,586 12,617,371 12,636,262
========= ========== ==========
Other Historical Financial Data:
EBITDA (5)............................... $ (5,883) $ (2,213) $ (381) $ 2,886 $ 13,022 $ 7,536
======== ======== ======== ======== ======== ========
Cash used in operating activities (3,923) (3,504) (13,107)
======== ======== ========
Cash used in investing activities (86,338) (10,433) (6,318)
======== ======== ========
Cash provided by financing activities 99,266 7,848 24,657
======== ======== ========
Ratio of earnings to fixed charges (6) * * *
======== ======== ========
<FN>
----------
(1) The financial data was derived from the Combined Historical Financial Statements of the Predecessor Business which were
prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The historical vacation
ownership segment information was prepared by identifying the direct vacation ownership revenues and expenses and allocating
the vacation ownership segment and the hotel shared expenses based on the relative number of total rooms at the beginning of
each period. The operating results of the hotel segment were reported by the Predecessor Business as discontinued operations
and accordingly, are not included in this presentation.
(2) Because the Company acquired perpetual ownership of the Club Regina Resorts, which had been sold by the Predecessor Business as
a 30 to 50 year memberships to its customers, the historical financial information has been prepared by using the lease
accounting method as required by U.S. GAAP, which required the Predecessor Business to recognize annually only 1/30th of
cumulative vacation ownership revenues, net of cumulative provisions for doubtful accounts and cumulative commission expenses.
For periods after August 17, 1997, financial data is presented using the full accrual method of accounting in accordance with
SFAS No. 66 rather than the lease accounting method. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
21
<PAGE>
(3) Depreciation was not recognized by the Predecessor Business during the periods presented because the prior owner had recorded a
significant impairment loss in 1994 and the assets of the combined hotels and Club Regina Resorts were held for sale from then
until their sale on August 18, 1997. The Company's Historical Consolidated Statement of Operations for the year ended December
31, 1997 includes the operations of the purchased Club Regina Resorts only for the period August 18, 1997 through December 31,
1997.
(4) Reflects the results of operations of the Company for the twelve months ended December 31, 1997 including operations of the
acquired Club Regina Resorts for the period from August 18, 1997 through December 31, 1997, and does not include results of
operations of the Predecessor Business. The Company had no vacation ownership business activity prior to August 18, 1997.
(5) EBITDA represents net income before interest expense, taxes, depreciation and amortization, and also includes equity in losses
on equity investments, foreign currency exchange gains and losses and preferred stock dividends. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should
not be construed as a substitute for income from operations, net income or cash flows from operating activities in analyzing
the Company's operating performance, financial position and cash flows. The EBITDA measure presented herein may not be
comparable to EBITDA as presented by other companies.
</FN>
</TABLE>
<TABLE>
<CAPTION>
The following table reconciles historical EBITDA to historical net loss reported for the vacation ownership segment:
Vacation Ownership Segment
of Predecessor Business Company
------------------------------------ ------------------------------------
Seven and
(Unaudited) 1/2 months
Years Ended December 31, Ended Years Ended December 31,
---------------------- August 17, ------------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net loss available to common stockholders .. $(15,587) $ (8,282) $ (5,038) $ (3,568) $(11,112) $(13,936)
Interest expense, net ..................... 3,884 3,108 2,827 3,931 14,947 17,958
Foreign income and asset taxes ............. 3,356 3,312 1,756 909 672 709
Depreciation and amortization ............. -- -- -- 49 3,505 2,579
Equity in losses on equity investments ..... -- -- -- -- 25 352
Foreign currency exchange (gains)
losses, net.............................. 2,464 (351) 74 1,333 4,274 (801)
Preferred stock dividends .................. -- -- -- 232 711 675
-------- -------- -------- -------- -------- --------
EBITDA ..................................... $ (5,883) $ (2,213) $ (381) $ 2,886 $ 13,022 $ 7,536
======== ======== ======== ======== ======== ========
<FN>
(6) The ratio of earnings to fixed charges has been computed by dividing earnings before foreign income and asset taxes
plus fixed charges by fixed charges. Fixed charges consist of interest expense and capitalized and preferred stock
dividends. Fixed charges exceed the net loss by approximately $7.4 million, $11.7 million and $13.3 million for the
years ended December 31, 1997, 1998 and 1999, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1998 1999
--------- --------- ---------
Historical Consolidated Balance Sheet Data (in thousands)
<S> <C> <C> <C>
Cash and cash equivalents .............................................. $ 9,005 $ 2,960 $ 8,311
Vacation Interval receivables and other trade receivables, net ......... 41,915 51,835 61,232
Land held for vacation ownership development ........................... 12,405 22,170 24,119
Facilities and office furniture and equipment........................... 1,542 3,046 5,255
Cost of unsold vacation ownership intervals and related memberships .... 33,178 27,606 23,605
Total assets ........................................................... 119,979 129,667 145,871
Notes payable .......................................................... 1,000 17,135 44,787
Senior Notes, due 2004, net of unamortized original issue discount ..... 90,780 92,093 93,426
Redeemable Preferred Stock ............................................. -- -- 5,143
Shareholders' investment (deficit) ..................................... 13,052 2,773 (15,523)
</TABLE>
22
<PAGE>
ITEM 7 - MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and related notes thereto.
COMPANY FORMATION AND INITIAL OPERATIONS IN MEXICO
The Company was organized to seek acquisition opportunities within the
vacation ownership industry. On August 18, 1997, the Company acquired the Club
Regina Resorts in Mexico for approximately $86.8 million. In connection with the
purchase transactions, the Company placed the property underlying each of the
three Club Regina Resort properties into three separate trusts held by the
Company's operating subsidiaries that were established for each resort. The
operating subsidiaries have the right (the "Present Interests") to use the Club
Regina Resorts for a period of 30 years ending August 18, 2027. A separate
subsidiary of the Company owns rights (the "Remainder Interests") pursuant to
which it has the right to indefinitely use the Club Regina Resorts after August
18, 2027.
Until March 13, 1998, the Predecessor Business and the Company sold a right
to use a vacation ownership unit ("Vacation Interval") for a period of 30 years.
This 30-year period was initially selected because Mexican law limited property
ownership by trusts to 30 years. Subsequently, Mexican law was changed to allow
a trust ownership period of 50 years and in March 1998, the Company began
selling a 50-year Vacation Interval. The 30-year Vacation Intervals that had
been sold prior to the acquisition, however, were not extended to 50 years, and
the Company began selling an extension to these pre-acquisition Vacation
Interval owners.
At June 30, 1998, the Company assigned a proportional beneficial interest
of the Remainder Interests to each purchaser of Vacation Intervals who had
bought subsequent to the August 18, 1997 acquisition. This structure also
provides for the economic interest in the Vacation Interval to be transferred to
the purchaser and allows for the use of full accrual accounting method of profit
recognition for sales made by the Company.
Effective July 1, 1998, the Company put into effect a new product structure
to sell its Vacation Intervals under a right-to-use membership entitling owners
to a 50-year contractual right to use Vacation Interval units. This right
includes the right (proportional beneficial interest) to participate either in
(i) an extension of the contractual right to use if practicable under Mexican
law or (ii) the proceeds from the sale of the Los Cabos, Cancun and Puerto
Vallarta Resorts in 2047.
The Company uses a membership as its means of transferring Vacation
Intervals rather than a deeded interest because Mexican real property law does
not have effective mechanisms that would allow non-Mexican individuals or
companies to directly own real property within 100 kilometers of the Mexican
border or 50 kilometers of the Mexican coast which include the properties on
which the Company's resorts are located.. Accordingly, the Company does not sell
deeded interests. Mexican law allows Mexican corporations, wholly owned by
foreign corporations, to own land within this zone. Accordingly, the Vacation
Interval is sold through a right to use.
ACQUISITION OF WHISKI JACK
In July 1998, the Company acquired Whiski Jack Resorts Ltd. ("Whiski Jack")
for approximately $6.6 million. The acquisition was accounted for as a purchase
and, accordingly, the results of operations are included in the financial
statements only for the periods subsequent to the date of acquisition.
ACQUISITION OF VILLA VERA
On December 1, 1999, the Company acquired the Villa Vera Hotel, Spa &
Racquet Club ("Villa Vera") for approximately $6.2 million. The acquisition was
accounted for as a purchase and, accordingly, the results of operations are
included in the financial statements only for the periods subsequent to the date
of acquisition.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Item 6 "Selected Financial Data" and the Company's Financial Statements and the
notes thereto and other financial data included elsewhere in this Form 10-K. The
following Management's Discussion and Analysis of Financial Conditions and
Results of Operations
23
<PAGE>
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements.
Segment Results
General. The Company has only one line of business, which develops, markets
and operates luxury vacation ownership resorts in three geographic areas;
Mexico, Canada and the United States. The United States operations are carried
out through a joint venture accounted for using the equity method of accounting.
The agreement is with Jackson Hole Ski Corporation, the owner and developer of
the Teton Village ski area near Jackson Hole, Wyoming. The Company's reportable
segments are based on geographic area. The reportable segments are managed
separately due to their geographic location with managers focused on improving
and expanding each segment's operations. However resource allocation is not
based on individual country results, but based on the best location for future
resorts in order to enhance the Company's overall ability to sell timeshare
under a club concept. Revenues are attributed to countries based on the location
of the vacation ownership resorts. The following presents segment data in
thousands:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------
Operating
Net Income Capital
Sales % (Loss) % Expenditures %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
1999 -
Mexico $ 66,955 82.3% $ 7,555 152.4% $ 4,780 75.7%
Canada 14,403 17.7% 381 7.7% 616 9.7%
Corporate and other 45 -- (2,979) (60.1)% 922 14.6%
--------- ------ --------- ------ --------- ------
Total $ 81,403 100.0% $ 4,957 100.0% $ 6,318 100.0%
========= ====== ========= ====== ========= ======
1998 -
Mexico $ 66,036 89.3% $ 13,481 141.7% $ 11,381 97.0%
Canada 6,524 8.8% (1,550) (16.3)% 163 1.4%
Corporate and other 1,423 1.9% (2,414) (25.4)% 190 1.6%
--------- ------ --------- ------ --------- ------
Total $ 73,983 100.0% $ 9,517 100.0% $ 11,734 100.0%
========= ====== ========= ====== ========= ======
1997 -
Mexico $ 24,857 96.7% $ 3,670 129.4% $ 930 94.8%
Corporate and other 847 3.3% (833) (29.4)% 51 5.2%
--------- ------ --------- ------ --------- ------
Total $ 25,704 100.0% $ 2,837 100.0% $ 981 100.0%
========= ====== ========= ====== ========= ======
</TABLE>
Segment Results - Acquisition Periods. The results presented above include
the results of operations of the Canadian segment, Whiski Jack, which was
acquired on July 24, 1998 and for the Mexican segment, Club Regina, which was
acquired on August 18, 1997. The variations in operations between 1999 and 1998
noted for Whiski Jack are due to the reporting of post-acquisition partial-year
results in 1998 for the period subsequent to the date of acquisition, July 24,
1998. The variations in operations between 1998 and 1997 noted for Club Regina
are due to the reporting of post-acquisition partial-year results in 1997 for
the period subsequent to the date of acquisition, August 18, 1997. Additionally,
the Company had no vacation ownership business activity prior to August 18,
1997.
Mexico's Segment Results - 1999 Compared to 1998. Net sales increased
marginally approximately $0.9 million, or 1.4%, during 1999. Operating income
decreased approximately $5.9 million. The decrease in operating income results
from an overall increase in cost of Vacation Interval sales, provision for
doubtful accounts, advertising, sales and marketing and maintenance and energy.
See "Consolidated Results" and "Mexico's Inflation and Currency Changes" for
additional information.
Mexico's Inflation and Currency Changes
Since December 1994, Mexico has experienced difficult economic conditions,
including significant devaluation and volatility of the peso with respect to the
U.S. dollar, reduced economic activity, higher inflation, and high interest
rates. Through 1998, Mexico was considered a highly inflationary economy, since
the three-year cumulative rate of inflation exceeded 100%. Effective January 1,
1999, Mexico was no longer considered a highly inflationary economy. The
financial statements of the Company were prepared for all periods using the U.S.
dollar as the
24
<PAGE>
functional currency. The U.S. dollar is used since the debts are
payable in U.S. dollars and prices were generally established in U.S. dollars.
The effects of the Mexican peso on the Company are tempered because the
Company sells its Vacation Intervals based on prices set in U.S. dollars. Sales
settled in pesos or UDI's are based on the U.S. dollar sales price converted at
the current peso or UDI rate this adjusts the price of Vacation Intervals sold
for pesos to keep the revenue from such sales constant in dollar terms.
Therefore, devaluation and inflation of the peso have not affected the Company's
revenue from customers who purchase Vacation Intervals without financing them.
However, approximately 67% of the Company's customers in Mexico elect to finance
their purchase of Vacation Intervals through the Company. Of those financed,
approximately 31.4% of Mexico's Vacation Interval receivables are denominated in
UDI's which insulate the Company from effects of peso inflation over extended
time periods with respect to those receivables. However, the Company is not
insulated from the effect of changes in the U.S dollar/peso exchange rate with
respect to UDI receivables or the 9.4% of Mexico's receivables denominated in
pesos. Accordingly, to the extent the rate of Mexican inflation exceeds or is
less than the rate of devaluation of the peso during any period, the Company's
rate of return in constant dollar terms on UDI denominated Vacation Interval
receivables will increase or decrease.
Additionally, management believes that in interpreting the comparisons of
operational results discussed below, two factors are of importance: currency
exchange rates and inflation. Changes in costs between prior year and current
year periods could partially result from increases or decreases in the peso
exchange rate or inflation in Mexico. In particular, the average monthly peso
exchange rate for the twelve months ended December 31, 1999 weakened when
compared to the average monthly peso exchange rate for the twelve months ended
December 31, 1998. The Company estimates that current period costs increased by
approximately 4-5% because of fluctuations in the average peso exchange rate
between periods. In addition, the Company estimates that inflation in Mexico was
approximately 12.3% during 1999. Expenditures in Mexico for advertising, sales
and marketing, maintenance and energy, and for general and administrative
expenses are settled primarily in pesos, and were negatively impacted by the
combined effects of inflation and peso changes.
Consolidated Results
Comparison of the twelve months ended December 31, 1999 to the twelve months
ended December 31, 1998.
The Company believes that the following analysis is helpful to understand
the changes in the activity levels between 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
Annual Amounts of
------------------------
Percentage
Increase Increase
1998 1999 (Decrease) (Decrease)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Vacation ownership revenues:
Vacation Interval sales .................. $ 56,508 $ 62,749 $ 6,241 11.0%
Interest Income on Vacation Interval
receivables, rental and service fee
income, and other income ............. 17,475 18,654 1,179 6.7%
-------- -------- --------
Total revenues ...................... 73,983 81,403 7,420 10.0%
Operating expenses:
Cost of Vacation Interval sales .......... 13,161 17,007 3,846 29.2%
Provision for doubtful accounts........... 4,450 5,242 792 17.8%
Advertising, sales and marketing.......... 23,874 29,343 5,469 22.9%
Maintenance and energy ................... 8,013 11,387 3,374 42.1%
Depreciation and amortization............. 620 973 353 56.9%
Amortization of goodwill ................. 2,885 1,606 (1,279) (44.3)%
General and administrative ............... 11,463 10,888 (575) (5.0)%
-------- -------- --------
Total operating expenses............. 64,466 76,446 11,980 18.6%
-------- -------- --------
Operating income ......................... $ 9,517 $ 4,957 $ (4,560) (47.9%)
======== ======== =========
</TABLE>
25
<PAGE>
The discussion of results presented below include the results of operations
of Whiski Jack, which was acquired on July 24, 1998. The variations noted for
Whiski Jack are due to the reporting of post-acquisition partial-year results in
1998 for the period subsequent to the date of acquisition, July 24, 1998.
Total revenues increased approximately $7.4 million, or 10.0%, during 1999.
This increase was primarily due to an 11.0% increase in Vacation Interval sales
and a 24.0% increase in interest income on Vacation Interval receivables.
Vacation Interval sales grew approximately $6.2 million, or 11.0%, during
1999 as a result of the acquisition of Whiski Jack. In Mexico, Vacation Interval
sales for the 12 months ended December 31, 1999 were unchanged from the level of
last year. The actual number of vacation interval weeks sold in Mexico increased
5.9% from 3,563 in 1998 to 3,772 in 1999 while the average price of a vacation
interval week declined 5.4% from $14,287 in 1998 to $13,520 in 1999. The
decrease in the average price per interval sold is a result of a decrease in the
number of higher priced prime and holiday season intervals owned by the Company
for sale.
Interest income on Vacation Interval receivables grew by approximately $1.4
million, or 24.0%, during 1999. This increase is due primarily to the
corresponding increase in the interest bearing Vacation Interval receivables,
which increased from $53.6 million to $64.0 million, or 19.4%, during 1999.
Vacation Interval receivables increased due to an overall increase in credit
sales.
Rental and service fee income decreased slightly during 1999. In 1998, the
acquisition of Whiski Jack offset the decrease in total rental and service fee
income by approximately $0.7 million. In Mexico, rental and service fee income
decreased by approximately $0.7 million, or 8.4%, due to the increased usage by
a larger owner base which resulted in fewer unsold units available for rental to
guests of members.
Cost of Vacation Interval sales increased by approximately $3.8 million, or
29.2%, during 1999. The acquisition of Whiski Jack accounted for approximately
$2.2 million of this increase. In Mexico, cost of vacation interval sales
increased approximately $1.7 million, or 15.0%. This increase in Mexico was
primarily due to the Company's response to market demand for specific unit
types. During the period, the Company did not at all times adequately possess
the type of units for sale that were in demand, and as a result, the Company
packaged certain units together in order to meet such demand. This increased the
related cost of vacation interval sales since the packaged units sell at a
comparatively lower price than the individual units sold separately, therefore,
resulting in a higher allocated cost.
Provision for doubtful accounts increased by approximately $0.8 million, or
17.8% during 1999. The Company makes a provision for doubtful accounts to
maintain a balance sheet reserve of approximately 12% of Vacation Interval
receivables. Additionally, the provision was increased in response to the
increase in the level of credit sales. The Company believes that this reserve
provides adequate coverage of default risk under current market conditions.
Advertising, sales and marketing expenses increased approximately $5.5
million, or 22.9%, during 1999. The acquisition of Whiski Jack contributed
approximately $3.4 million of this increase. In Mexico, the advertising, sales
and marketing expenses increased approximately $2.1 million as a result of
greater overall selling and marketing efforts during 1999. The increased sales
and marketing efforts are primarily due to the relatively lower level of
availability of higher demand, and therefore higher priced, prime and holiday
season interval inventory as compared to the level of unsold inventory
represented by lower demand time periods. Additionally, in 1999, the Company
incurred $0.4 million in costs associated with establishing product branding.
Maintenance and energy expenses increased approximately $3.4 million, or
42.1%, in 1999. The acquisition of Whiski Jack increased maintenance and energy
expenses by approximately $1.2 million. In Mexico, maintenance and energy
expenses increased approximately $2.2 million primarily due to an increase of
approximately 4,300 additional members between the two comparable periods.
Depreciation and amortization expense increased by 56.9% or $0.4 million
during 1999. The acquisition of Whiski Jack contributed $0.1 million of this
increase. In Mexico, the increase relates to full-year depreciation associated
with leasehold improvements relating to the relocation of the Mexico City
headquarters and implementation of new operations software during 1998.
Amortization of goodwill in 1999 relates to the acquisition of Whiski Jack.
The goodwill was fully amortized during 1999 because the number of units
acquired with the July 1998 acquisition of Whiski Jack were all sold by the end
of 1999.
26
<PAGE>
General and administrative expenses decreased by 5.0%, or $0.6 million, in
1999 as compared to 1998. The Company decreased the cost of professional fees in
1999, which was offset by approximately $0.3 million of additional costs related
to Whiski Jack's full year of operations in 1999.
Interest expense increased approximately $3.0 million in 1999 as compared
to 1998, as the Company increased its debt from $117.1 million at December 31,
1998 to $144.8 million at December 31, 1999. The Company capitalized interest of
$1.8 million and $0.8 million in 1998 and 1999, respectively, associated with
the land development in Cozumel and Los Cabos.
Equity in losses on equity investments increased $0.3 million as
development, construction and pre-sales operations commenced during 1999 at the
Teton Club. General, selling and other indirect costs are expensed currently by
the Teton Club and the Company reports its ownership interest of such costs.
Foreign currency exchange losses were approximately $4.3 million in 1998
compared to a foreign currency exchange gain of $0.8 in 1999. The value of the
peso increased from 9.865 per U.S. dollar at December 31, 1998 to 9.522 per U.S.
dollar at December 31, 1999, resulting in the 1999 exchange gain. To partially
offset peso devaluation during periods when the peso declines in value, the
Company maintains a portfolio of UDI receivables (receivables denominated in an
alternate Mexican currency that is adjusted for inflation on a daily basis).
These inflation adjustments should offset the long-term effect of the peso
devaluation. The amount of UDI inflation adjustments, which is included under
interest income on Vacation Interval receivables, was approximately $1.9 million
and $1.7 million for the years ended December 31, 1998 and 1999, respectively.
Comparison of the twelve months ended December 31, 1998 to the twelve months
ended December 31, 1997 (the combined results of the Vacation Interval segment
of the Predecessor Business and the Company).
The following discussion relates to the financial condition and results of
operations of the Company and the vacation ownership segment of the Predecessor
Business, and is based on the financial information included in "Selected
Financial Data." The Company did not begin significant operations until August
18, 1997 and, therefore, a comparison of the Company's results between 1997 and
1998 is not meaningful as it provides results for less than a full years'
operations for 1997. In order to provide meaningful analysis of the changes in
the operational activity levels, the Predecessor Businesses' results for the
first 7 1/2 months of 1997 are being combined with the Company's results for the
last 4 1/2 months of 1997 (both periods as outlined in the "Selected Financial
Data" section), and are presented without adjusting for the impact of either
deferred Vacation Interval revenues or deferred commission expenses as included
in the "Selected Financial Data".
After taking into account the above, the comparison of 1998 to combined
1997 remains difficult because the Company's accounting principles for the
following revenue and expense elements were not comparable with the accounting
principles used to develop the historical operating data for the Predecessor
Business:
- Vacation Interval revenues -- Prior to August 18, 1997, the
Predecessor Business sold 30-year Vacation Intervals that were
recognized using operating lease accounting, thus deferring
substantially all revenues until future periods. Starting August 18,
1997 the Company sold Vacation Intervals that transferred the entire
economic interest to the purchaser and recognizes all Vacation
Interval revenues under the full accrual method of profit recognition.
- Cost of Vacation Interval revenues -- Prior to August 18, 1997, the
Predecessor Business did not record Vacation Interval cost of sales.
Instead, the value of the assets was depreciated over the assets'
useful life. Starting August 18, 1997, the Company amortizes a portion
of the book value of the cost of unsold Vacation Intervals with each
sale of a Vacation Ownership interval using the relative sales value
method.
- Provision for doubtful accounts -- Prior to August 18, 1997, the
Predecessor Business recognized no receivables because virtually all
revenues were deferred. Therefore, no provision for bad debts was
required. Starting August 18, 1997, the Company began recognizing
receivables consistent with full revenue recognition accounting and a
provision to bad debts as necessary to provide for losses inherent in
the contract receivables portfolio.
27
<PAGE>
- Commission expenses -- Similar to Vacation Interval revenues, a
substantial portion of commission expenses representing direct selling
expenses were deferred prior to August 18, 1997. Commencing August 18,
1997, all commission expenses were recognized consistent with full
revenue recognition accounting.
- Depreciation -- Prior to August 18, 1997, no depreciation was
recognized because the Predecessor Business had committed to selling
the assets and had, therefore, classified the assets as assets to be
disposed of in accordance with the provisions of FASB 121, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to
be Disposed Of" and the assets were recorded at their net realizable
value.
The annual changes between 1998 and combined 1997 that are presented below
are caused, in part, by the difference in these accounting principles used by
the Company and by the Predecessor Business.
The Company believes that this analysis is helpful to understand the
changes in the aggregate activity levels between combined 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1997
------------------------------------- Annual Amounts of
Predecessor ---------------------
Business - Company - Percentage
Seven and Four and Combined Increase Increase
1/2 Months 1/2 Months Total 1998 (Decrease) (Decrease)
--------- --------- --------- --------- -------- --------
Vacation ownership revenues:
<S> <C> <C> <C> <C> <C> <C>
Vacation Interval sales ............ $ 31,479 $ 18,098 $ 49,577 $ 56,508 $ 6,931 14.0%
Interest Income on Vacation Interval
receivables, rental and service fee
income, and other income ....... 11,627 7,606 19,233 17,475 (1,758) (9.1)%
--------- --------- --------- --------- --------
Total revenues ................ $ 43,106 $ 25,704 $ 68,810 $ 73,983 $ 5,173 7.5%
Operating expenses:
Cost of Vacation Interval sales .... -- $ 4,569 $ 4,569 13,161 $ (*) (*)
Provision for doubtful accounts..... -- 2,318 2,318 4,450 (*) (*)
Advertising, sales and marketing.... 10,411 8,576 18,987 23,874 4,887 25.7%
Maintenance and energy ............. 4,669 1,938 6,607 8,013 1,406 21.3%
Depreciation and amortization....... -- 49 49 620 (*) (*)
Amortization of goodwill ........... -- -- -- 2,885 2,885 --
General and administrative ......... 4,504 5,417 9,921 11,463 1,542 15.5%
--------- --------- --------- --------- --------
Total operating expenses....... 19,584 22,867 42,451 64,466 (*) (*)
--------- --------- --------- --------- --------
Operating income ................... $ 23,522 $ 2,837 $ 26,359 $ 9,517 $ (*) (*)
========= ========= ========= ========= ========
<FN>
(*) The amount and percentage change are not presented since the amount between years are not prepared on a comparable basis.
See discussion above.
</FN>
</TABLE>
Total recognized revenues increased approximately $5.2 million, or 7.5%,
during 1998. This increase was primarily due to a 14% increase in recognized
Vacation Interval sales, a 21% increase in interest income on Vacation Interval
receivables offset by a 18.2% decrease in rental and service fee income.
Recognized Vacation Interval sales grew approximately $6.9 million, or
14.0%, during 1998. The acquisition of Whiski Jack contributed approximately
$5.6 million of this increase. In Mexico, Vacation Interval sales increased by
approximately $1.3 million, or 2.7%, for the 12 months ended December 31, 1998.
The primary reason for this increase in Mexico was the implementation of new
marketing programs combined with the opening of two new sales offices during the
first nine months of 1998. The sales increase occurred despite the fact that the
actual number of weekly intervals sold in Mexico decreased 1.7%. Also, the
selling environment was impacted by several factors; first, the change in the
Mexican VAT tax laws effective January 1, 1998 whereby the sale of vacation
intervals became subject to either 10% or 15% VAT; second, a milder winter in
the U.S. and Canada that decreased the level of tourism in the first half of
1998 to Mexican resort destinations; third, adverse weather conditions in the
third quarter of 1998 including a hurricane in Los Cabos, a strong tropical
storm in Cancun and significant flooding in Puerto Vallarta; and fourth, the
uncertain economic climate in Mexico and throughout the world during the latter
part of 1998.
28
<PAGE>
Interest income on Vacation Interval receivables grew by approximately $1
million, or 21%. This increase is due primarily to the corresponding increase in
the interest bearing Vacation Interval receivables, which increased from $43.9
million to $53.6 million, or 22.1%, during 1998. Vacation Interval receivables
increased with the acquisition of Whiski Jack and, in addition, due to an
overall increase in sales.
Rental and service fee income decreased by 18.2% or $2 million during 1998.
In Mexico, rental and service fee income decreased by approximately $2.6
million, or 23.7%, due in part to the rental of units to Westin at an average
rate lower than that experienced by the company during 1997. The rate negotiated
with Starwood for 1998 would have been higher except that a one-time fee of
$1.25 million was also negotiated with Starwood. This fee was recognized in 1998
as other income. Rental and service fee income was also negatively impacted
because the negotiated agreement with Starwood precludes the Company from
renting the remaining unsold units to transient vacationers other than Club
Regina members and their guests and guests secured through marketing and
promotional programs. Finally, increased usage by a larger owner base resulted
in fewer unsold units available for rental to guests of members or for use in
marketing promotions. The acquisition of Whiski Jack offset the decrease by
approximately $0.6 million.
The Predecessor Business did not recognize depreciation after the prior
owner classified the assets as assets to be disposed of. Under lease accounting,
the depreciation represented the cost applicable to the units leased whereas
under the full accrual method, the cost of the property is allocated to
inventory. After the August 18, 1997 acquisition, the Company began recognizing
cost of sales based on its allocation of its purchase price to unsold inventory
of Vacation Intervals and allocated the cost based on the relative sales value
method. Depreciation during 1998 relates to leasehold improvements associated
with the relocation of the Mexico City headquarters during the first quarter of
1998 combined with the implementation of new RCC software, which is the main
operations software used by the Company.
The 1998 amortization of goodwill relates to the acquisition of Whiski
Jack. The goodwill is being amortized as the number of units acquired are sold.
The Predecessor Business did not record any provision for uncollectible
accounts because most of its Vacation Interval revenues were deferred, however,
the Company made a full provision for its estimated uncollectible accounts
because Vacation Interval sales after August 18, 1997 are fully recognized each
period.
Advertising, sales and marketing expenses increased approximately $4.9
million, or 25.7%, during 1998. The acquisition of Whiski Jack contributed
approximately $1.6 million to the increase. In Mexico, advertising, sales and
marketing expenses increased as a result of greater marketing efforts. In
particular, the Company has implemented marketing programs that involve theme
stores designed to promote the Company's presence through popular local cultural
and environmental themes.
Maintenance and energy expenses increased approximately $1.4 million, or
21.3%, in 1998. The acquisition of Whiski Jack contributed approximately $0.5
million to the increase. In Mexico, maintenance and energy expenses increased
approximately $0.9 million during 1998 as a result of higher occupancy rates.
The general and administrative expenses increased approximately $1.5
million, or 15.5%, in 1998. Primary causes of this increase included
approximately $1.1 million related to Whiski Jack and additional costs from
increased compensation of certain key executives, plus an increase in the number
of executive, administrative and temporary personnel in Mexico and the U.S. to
support an active development program and an administrative operation
independent of the prior owner.
Interest expense increased approximately $5.8 million in 1998 as compared
to 1997 as the Company used primarily debt in the acquisition of the timeshare
business. The Company capitalized interest of $0.5 million and $1.8 million in
1997 and 1998, respectively, associated with the land development in Cozumel and
Los Cabos during 1998.
Foreign currency exchange losses increased approximately $2.9 million, or
205.5%, in 1998. The value of the peso decreased from 8.083 per U.S. dollar at
December 31, 1997 to 9.865 per U.S. dollar at December 31, 1998, or 22%, causing
the significant 1998 exchange loss. The Company maintains a portfolio of UDI
receivables (receivables denominated in an alternate Mexican currency that is
adjusted for inflation on a daily basis) to partially offset the peso
devaluation. These inflation adjustments should offset the long-term effect of
the peso devaluation
29
<PAGE>
but do not offset the short-term losses that have occurred in 1998. The amount
of UDI inflation adjustments, which is included under interest income on
Vacation Interval receivables, was approximately $0.6 million and $1.9 million
for the years ended December 31, 1997 and 1998, respectively.
Included in vacation ownership revenues and operating expenses for 1998 is
the $1.6 million operating loss of Whiski Jack for the period subsequent to the
date of acquisition through year end 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations primarily from the sale of
Vacation Intervals, receipt of payments on the Vacation Interval receivables,
and the receipt of service fees charged to members. With respect to the sale of
Vacation Intervals, the Company generates cash from all-cash sales and the
receipt of down payments on financed Vacation Interval sales.
The Company generates cash through principal collections and interest
income from Vacation Interval receivables generated through financed Vacation
Interval sales. Additionally, the Company uses Vacation Interval receivables as
collateral in order to obtain loans. At December 31, 1999, the Company had $64.0
million of Vacation Interval receivables with a weighted average maturity of
approximately five years. At such date, approximately (i) 59.2% of all of the
Vacation Interval receivables were U.S. or Canadian dollar denominated (ii)
31.4% of all Vacation Interval receivables were denominated in UDI's, an
obligation denominated in pesos which is adjusted for Mexican inflation, and
(iii) 9.4% of all Vacation Interval receivables were denominated in pesos.
At December 31, 1999, the Company had outstanding $100 million of 13%
Senior Notes due 2004, $24.9 million outstanding under the FINOVA credit line
("FINOVA"), which at year-end bears interest at 10.6%, $7.1 million outstanding
under the Textron credit line, which at year-end bears interest at 10.5%, $6.8
million outstanding under the Bancomer loan, which at year end-end bears
interest at 12%, $3.4 million of bank debt and other debt bearing interest
ranging from 8.3% to 14.5%, and $0.3 million mortgage notes payable to a bank
that at year-end bore an average interest rate of 8.5%. Approximately $19.6
million of the outstanding debt which has stated repayment amounts is due in
2000. In addition to such debt, the Company has $5.1 million of Pay-in-Kind
Preferred Stock and $578,000 of 10% Convertible Preferred Stock outstanding at
December 31, 1999. The Pay-in-Kind Preferred Stock is redeemable at any time
before December 1, 2004, at which time the redemption is mandatory. The 10%
Convertible Preferred Stock was fully redeemed during January and February 2000.
With the exception of the $6.5 million semi-annual interest payments due June 1
and December 1 on the Senior Notes, interest is paid monthly on all debt
obligations of the Company.
The Company's borrowing capacity under the FINOVA credit facility currently
includes a $20 million accounts receivable based credit facility and a $16.5
million inventory based non-revolving line of credit; the combined credit
facility provides an aggregate borrowing limit of $34 million. The Company's
borrowing capacity under the Textron credit facility is $10 million. The Company
estimates that based on Vacation Interval receivables not currently pledged,
approximately $6.6 million, $3.6 million and $3.0 million under the FINOVA and
Textron lines of credit respectively, and $2.0 million at December 31, 1999 and
June 30, 2000, respectively, were available for borrowing under the credit
facilities.
Additionally, as part of the Teton Club financing arrangement with FINOVA,
the Company is directly obligated for $8.3 million of the construction loan,
$1.9 million of the pre-sale working capital loan and $5 million of the
receivables loan, and is also responsible for any working capital deficits at
the Teton Club. As of December 31, 1999, Teton Club was not in compliance with a
technical covenant related to the level of unit sales loan covenant but obtained
a timely waiver for such year-end non-compliance, and is currently in compliance
and expects to be in compliance during 2000 and thereafter.
The Company intends to pursue a growth-oriented strategy. From time to
time, the Company may acquire, among other things, additional vacation ownership
properties, resorts and completed vacation ownership units, land upon which
additional vacation ownership resorts may be built (which may require capital
expenditures by the Company) and/or other operations in the vacation ownership
industry. The Company is evaluating certain resort asset acquisition or
development opportunities, but it currently has no contracts or capital
commitments relating to any potential acquisitions or developments other than
those discussed below. However, the Company is actively pursuing financing for
development of the Los Cabos land. In addition, the Company is evaluating
several strategic partnership opportunities, but it likewise has no firm
agreements relating to any such potential strategic partnership opportunities.
30
<PAGE>
To finance its growth strategy, in addition to accessing its lines of
credit, the Company may from time to time consider issuing debt, equity or other
securities, entering into traditional construction financing or credit
agreements, entering into joint venture or development agreements with respect
to its undeveloped property, or hypothecating additional Vacation Interval
receivables. The operating and financial restrictions and covenants in our debt
agreements, including our bank credit facilities and the indenture governing the
Senior Notes, may adversely affect our ability to finance future operations or
capital needs or to engage in other business activities. Our debt agreements
include covenants that will require us to meet certain financial ratios and
financial tests, including a minimum capital test, a minimum general
administrative and sales expenses to Vacation Interval sales ratio test and a
minimum "Adjusted Current Assets" to "Adjusted Current Liabilities" ratio (as
each is defined therein). In addition, the debt agreements may restrict our
ability to take additional action without the consent of the lenders including
incurring additional debt and selling our interest in the resorts. Such
covenants, required ratios and tests may require that we take action to reduce
debt or to act in a manner contrary to our business objectives. If we breach any
of these restrictions or covenants or suffer a material adverse change which
restricts our borrowing ability under our credit facilities we would be unable
to borrow funds thereunder without a waiver. A breach could cause a default
under the Senior Notes and our other debt. Our indebtedness may then become
immediately due and payable. We may not have or be able to obtain sufficient
funds to make these accelerated payments, including payments on the notes.
Accordingly, there can be no assurance that the Company will be able to use debt
to finance any expansion plans beyond its plans to finance its current
commitments or expand its current working capital credit capacity.
At December 31, 1999, the Company had remaining inventory of developed
vacation intervals weeks of 5,241 in Mexico and 548 in Canada, or 22% and 6%,
respectively. In Canada, the existing inventory will provide it with
approximately six months of product availability for sales based on historical
sales levels. The Company plans to increase its Vacation Interval inventory
through development of additional properties and making acquisitions in the
short term, including acquiring condominiums in Whistler, British Columbia of
which a commitment to purchase 20 condominiums at an aggregate purchase price of
approximately $3.9 million has been made, developing the Teton Club joint
venture, developing its land in Los Cabos, developing its land in Cozumel, and
making acquisitions in Mexico, the United States and Canada.
The Company believes that its current financial position plus borrowings
available under the credit agreements will satisfy its currently planned 2000
capital expenditures of approximately $10.9 million. The 2000 planned
expenditures include the development activities in Los Cabos and the purchase of
Vacation Interval inventory in Whistler, British Columbia. The Los Cabos
development will require project financing before development can proceed and
the Company is negotiating for such financing with both U.S. and Mexican
financial institutions and other investors. However, no commitment has been
received from such institutions or investors.
At December 31, 1999, the Company is, and will continue to be, highly
leveraged, with substantial debt service requirements. A significant portion of
the Company's assets is pledged against existing borrowings. The Company has a
shareholder's deficit, has incurred losses since its inception and expects to
incur a net loss for fiscal 2000. To achieve profitable operations, the Company
is dependent on a number of factors, including its ability to reduce its debt
service requirements, to increase its Vacation Interval inventory through
development projects and through the acquisition of existing resort properties,
and its ability to continually sell Vacation Intervals on an economical basis,
taking into account the cost of such intervals and related marketing and selling
expenses. The Company expects that its existing credit capacity combined with
additional credit capacity which must be negotiated during 2000 will be
sufficient to enable the Company to meet its debt service obligations, including
interest payments on its Senior Notes during 2000. The Company also expects to
be able to fund capital requirements from anticipated capital project financings
which have not yet been negotiated. However, should the Company not be able to
successfully negotiate future secured credit capacity, there is no assurance
that the Company will be able to meet all of its 2000 debt service payments. The
Company has historically incurred debt and issued equity securities to fund
negative cash flows from operating activities and to make the payments on
previously incurred debt obligations.
In the short-term from June 2000, the Company is working to increase
liquidity through hypothecation of its receivables. The Company anticipates it
will need approximately $8.2 million of new working capital borrowings during
2000. This will include expanding capacity under its current facilities and, if
necessary, obtaining credit lines from new sources. Emphasis will be placed on
the level of hypothecation of loans from Mexican buyers of Club Regina Vacation
Intervals. These receivables are denominated in US dollars, Mexican pesos and
Mexican UDI's. Currently, the Company has a $10 million receivables
hypothecation facility with Textron. The receivable pool, which provides the
collateral for the Textron facility, is large enough to support a loan of
approximately $20.5 million at the current Textron advance rate. The Company has
begun discussions with Textron regarding the
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<PAGE>
expansion of this credit facility to $15 or $20 million and anticipates that the
facility will be expanded prior to the December 1st 2000 and June 1st 2001
Senior Notes interest payment.
On a long-term basis, the Company has debt maturities of $8.2 million, $4.2
million, $103.0 million and $3.1 million in 2001, 2002, 2003, 2004 and
thereafter, respectively. In order to meet obligations in the long-term, the
Company will need to achieve profitable operations, reduce its high leverage
position and expand and extend its current credit facilities. Should the Company
not achieve one or more of these requirements the Company's ability to continue
to operate would be jeopardized.
The Company is working to reduce its high leverage position. The Company
believes that there are several opportunities that may facilitate a capital
restructuring. While the Company intends to continue to pursue such
opportunities, there can be no assurance that a capital restructuring will
occur.
PREFERRED STOCK EXCHANGE
On July 1, 1999, all 37,500 shares of Class A Preferred stock of the
Company were exchanged for 50,000 shares of a new class of Pay-in-Kind Preferred
Stock plus 500,000 five-year Warrants to purchase the Company's Common Stock at
$5.00 per share. The Company's primary purpose in engaging in the preferred
stock exchange was to reduce the dividend rate from 16.5% to 9%. The main
advantage the Class A Preferred holder received in the exchange was to receive a
set redemption date.
SEASONALITY
The Mexican and Canadian vacation ownership industry in general tends to
follow seasonal buying patterns with peak sales occurring during the peak
travel/tourism seasons, usually December through April and July and August.
Seasonal influences also affect the Company's earnings so that income and cash
receipts from customer initial down payments are typically higher in the first
and fourth calendar quarters. In Mexico, American tourists tend to vacation in
the destinations where the Club Regina Resorts are located in the December
through April season while Mexican tourists tend to travel to these destinations
more frequently during the summer months.
IMPACT OF YEAR 2000
Neither the Company nor, to its knowledge, any of its vendors have
experienced any significant disruptions in operations as a result of year 2000
issues. The Company does not anticipate any of these problems in the future. No
material capital purchases of equipment or services were made in direct support
of the Company's year 2000 preparations.
32
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates and foreign currency exchange rates, which the company
does not currently hedge by taking opposite positions in the market in the form
of derivative financial instruments. In addition to the U.S. dollar, the Company
conducts its business in the Mexican peso and the Canadian dollar. Currently, a
substantial portion of the Company's operations are conducted in Mexico and, as
a result, are subject to the impact of any changes in the value of the Mexican
peso against the U.S. dollar.
This exposure to the Mexican peso, however, is reduced by several factors:
(1) the pricing of vacation intervals is set in U.S. dollars and thus,
notwithstanding competitive pricing issues, is not affected by fluctuations in
foreign currency, and (2) as of December 31, 1999, 76.9% of the Company's
receivables that are denominated in Mexican pesos are protected against currency
fluctuations resulting from inflation. This portion of the Company's receivables
is denominated in UDI's, a Mexican currency tied to the peso and indexed monthly
for inflation.
Since December 1994, Mexico has experienced difficult economic conditions,
including significant devaluation and volatility of the peso with respect to the
U.S. dollar, reduced economic activity, higher inflation, and high interest
rates. Through 1998, Mexico was considered a highly inflationary economy for
purposes of applying SFAS 52, since the three-year cumulative rate of inflation
exceeded 100%. Effective January 1, 1999, Mexico was no longer considered a
highly inflationary economy. The financial statements of the Company were
prepared for all periods using the U.S. dollar as the functional currency. The
U.S. dollar is used since the debts are payable in U.S. dollars and prices are
generally established in U.S. dollars.
The Company is exposed to interest rates with respect to its long-term debt
obligations and receivables. The Company's primary exposures are in long-term
receivables in Mexico, totaling approximately $59.6 million, and in fixed rate,
long-term U.S. dollar denominated debt that is primarily publicly held, totaling
approximately $102.4 million.
The following table sets forth (in thousands) the average interest rates
for the scheduled maturities of the Company's long-term debt obligations and
receivables in the context of (a) interest rate risk and (b) foreign currency
exchange rate risk:
<TABLE>
<CAPTION>
Estimated
Fair Value at
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate long-term debt:
Amount (U.S. dollar) 2,350 -- -- -- 100,000 -- 102,350 --(1)
Average interest rate 10.0% -- -- -- 13.0% -- 12.9%
Amount (Canadian dollar) 849 531 547 543 509 687 3,666 3,666(2)
Average interest rate 10.7% 10.7% 10.7% 10.7% 10.7% 10.7% 10.7%
Amount (Mexican peso) 2,793 2,793 1,164 -- -- -- 6,750 6,750(2)
Average interest rate 12.0% 12.0% 12.0% -- -- -- 12.0%
Variable rate long-term debt:
Amount (U.S. dollar) 13,543 4,809 5,001 3,584 2,441 2,644 32,022 32,022(2)
Average interest rate 10.8% 10.6% 10.4% 10.3% 10.3% 10.3% 10.5%
Fixed rate long-term Receivables:
Amount (U.S. dollar) 9,831 8,671 6,930 4,645 2,086 1,306 33,469 33,469(2)
Average interest rate 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
Amount (Canadian dollar) 598 615 649 679 671 1,107 4,319 4,319(2)
Average interest rate 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Amount (Mexican peso) 7,643 6,742 5,388 3,611 1,622 1,081 26,087 26,087(2)
Average interest rate 11.6% 11.6% 11.6% 11.6% 11.6% 11.6% 11.6%
<FN>
(1) The fair value of the Company's senior notes cannot be determined as none of the senior notes are actively traded on the open
market. Also, the amount of premium or discount cannot be predicted were these notes to become actively traded in the future.
(2) These financial instruments are held for other than trading purposes; the carrying amounts of these instruments approximates
fair value.
</FN>
</TABLE>
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<PAGE>
The following table sets forth changes in market risk exposure between the
years ended December 31, 1998 and 1999:
Increase/
1998 1999 (decrease)
------- ------- ----------
Fixed rate long-term debt 108,049 112,766 4,717
Variable rate long-term debt 9,086 32,022 22,936
Fixed rate long-term 53,564 63,875 10,311
receivables
Fixed rate long-term debt increased primarily due to a loan obtained from
Bancomer of approximately $6.8 million during 1999, which was used for payment
of the Senior Notes interest. Furthermore, variable rate long-term debt
increased due to additional borrowings under the FINOVA accounts receivable and
inventory lines of credit by approximately $15.8 million, and due to new
borrowings during 1999 under a line of credit loan obtained from Textron
Financial Corporation of approximately $7.1 million.
Fixed rate long-term receivables denominated in U.S. dollars increased
approximately $8.9 million, and in Canadian dollars increased approximately $1.6
million. These increases were due to an overall increase in the Company's
Vacation Interval accounts receivable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the consolidated financial statements, Report of
Independent Auditors and the Consolidated Financial Statements, which appear
beginning on Page F-1 of this report and are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
34
<PAGE>
Part III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company or its
subsidiaries as of September 1, 2000. A summary of the background and experience
of each of these individuals is set forth after the table.
<TABLE>
<CAPTION>
Executive Officers
and Directors Age Position
--------------------- ------ ----------------------------------------------------------
<S> <C> <C>
Douglas Y. Bech 55 Chairman and Chief Executive Officer
John McCarthy 45 President and Chief Executive Officer of Club Regina Resorts,
Mexico, and Director
Robert L. Brewton 47 Executive Vice President - Chief Investment Officer
George E. Aldrich 53 Senior Vice President - Finance and Accounting
Bruce S. MacIntire 49 Senior Vice President - Operations
Gustavo Ripol 37 Senior Vice President - Raintree Vacation Club
Brian R. Tucker 37 Senior Vice President - Corporate Planning and Development
Christel DeHaan 57 Director
Walker G. Harman 54 Director
Thomas R. Powers 61 Director
</TABLE>
Douglas Y. Bech is a founding principal of Raintree Capital Company, LLC,
established in 1994, and the principal promoter in organizing the Company and
effecting the acquisition of the Club Regina Resorts and Westin Regina Hotels.
From 1994 through October 1997, Mr. Bech was a partner in the Houston office of
the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. From 1993 to 1994, Mr.
Bech was a partner in the Houston office of the law firm of Gardere & Wynne,
L.L.P. Mr. Bech was associated with and a senior partner of Andrews & Kurth,
L.L.P. from 1970 until 1993. Throughout his career Mr. Bech has specialized in
mergers and acquisitions and financial and securities transactions. Mr. Bech
serves as a director of Frontier Oil Corporation, a New York Stock Exchange
company, eFax.com, Inc., a Nasdaq company, Pride Companies, L.P., a publicly
traded master limited partnership, and several private companies.
John McCarthy has been the President of the Company and Chief Executive
Officer of Club Regina Resorts - Mexico since August 1997. From 1992 until
August 17, 1997, he served first as Vacation Ownership Director and beginning
1993 as Director General of Bancomer's Tourism Division, with overall executive
responsibility for Club Regina Resorts. From 1983 to 1992 Mr. McCarthy held
several positions in Grupo Los Remedios, a large construction and development
group, where, among other projects, he developed a vacation ownership resort in
Ixtapa, Mexico. Mr. McCarthy's previous experience was with the Babcock
International Group (an international construction company) and the Tolteca
Group (a Mexican based construction and real estate development company) where
he obtained experience in Finance, Personnel, Administration and product
development. He is the past President and Secretary of the Asociacion Mexicana
de Desarrolladores Turisticos (AMDETUR), the Mexican equivalent of ARDA; he is
also the past Secretary and present adviser of the Consejo Nacional Empresarial
Turistico, Mexico's Tourism Board. He serves on the boards of Hoteles Presidente
Intercontinental Mexico (seven Hotels) and Complejos Turistico Huatulco (Club
Med Huatulco). He is the Treasurer of Brimex, a charitable foundation funded by
the British Government and members of the British community in Mexico for the
poor, the sick and those who have suffered because of natural disasters. Mr.
McCarthy is also a professor and serves on the Board of The Tourism School at
the Universidad Anahuac del Sur.
Robert L. Brewton was appointed Executive Vice President - Chief Investment
Officer of the Company in April 1998. Mr. Brewton was a Senior Partner and the
Chief Investment Officer of Residential Company of America ("RCA"), a privately
held multifamily real estate investment and management company, from January
1995 until March 1998 when it was sold. Prior to working at RCA, Mr. Brewton
served as the President and Chief Operating Officer of Transwestern Property
Company's (a multi service property management and investment company)
Multifamily Division from November 1987 until January 1995 when it was merged
into RCA. During his 24 year career in the real estate business, Mr. Brewton has
been involved in all aspects of the multifamily housing industry and has served
as either a principal, developer, or intermediary in over 100,000 apartment
units nationwide. Mr. Brewton serves on the Advisory Committee of the National
Multi Housing Council.
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<PAGE>
George E. Aldrich joined the Company in November 1998 as Senior Vice
President - Accounting and Finance. In this capacity Mr. Aldrich will be
responsible for overseeing the financial reporting, tax, treasury and insurance
functions. From August 1996 through November 1998 Mr. Aldrich served as Chief
Financial Officer for KBC Advanced Technologies, Inc., a U.S. subsidiary of a
British-based public company that provides consulting services and specialized
software to the refining industry. From 1983 to 1996 Mr. Aldrich was Vice
President - Controller for Wainoco Oil Corporation (now, Frontier Oil
Corporation), with oil and gas exploration and production and refining
operations, and is on the New York Stock Exchange. During Mr. Aldrich's tenure
at Wainoco, Wainoco had operations in the United States and Canada as well as
activities in other international locations. Prior to joining Wainoco, Mr.
Aldrich was with Arthur Andersen LLP. Mr. Aldrich is a licensed C.P.A.
Bruce S. MacIntire joined the Company in October 1998 as Senior Vice
President. In this capacity Mr. MacIntire is responsible for all resort
operations of the Company other than Club Regina. From 1997 until joining the
Company, Mr. MacIntire served as Vice President - Sales and Marketing for The
River Club, a luxury fractional vacational ownership resort in Telluride,
Colorado. From 1994 until 1997 Mr. MacIntire served as Vice President -
Development for Marriott Ownership Resorts, Inc., the vacation interval club
business unit of Marriott Hotels. In that capacity Mr. MacIntire managed
development projects in Park City, Utah, Aruba, Marbella, Spain, Kauai, Hawaii,
Williamsburg, Virginia and Breckenridge, Colorado. Previously, Mr. MacIntire was
head of marketing for The Doral Resort and Spa (currently The Peaks) in
Telluride, Colorado including its vacation interval ownership sales and
marketing. Mr. MacIntire has served in various capacities in the real estate
industry since 1972.
Gustavo Ripol joined the Company in October 1997 and is responsible for
business development in Mexico as well as development of the Raintree Vacation
Club. From 1995 to 1997, he was RCI's Marketing and Communications Director for
Latin America, where he was also responsible for developing new business units
in the region for the marketing, sale and implementation of vacation ownership
services. From 1993 to 1994, Mr. Ripol served as Planning Director for
Bancomer's Tourism Division responsible for strategic planning for the hotel and
vacation ownership business units and development of the Club Regina Resort
vacation interval product. From 1987 to 1992, Mr. Ripol held various positions
as Manager of Planning & Systems, Director of Finance and Administration and
Director of Planning and Business Development for Grupo Los Remedios (a Mexican
based construction and real estate development group). Mr. Ripol holds degrees
in engineering and finance.
Brian R. Tucker has been with Raintree since August 1997 in various
capacities and is a Senior Vice President responsible for corporate planning and
development. From 1995 through 1997, Mr. Tucker was an associate of Raintree
Capital Company. Prior to joining Raintree Capital Company, Mr. Tucker was
employed for five years at Deloitte & Touche Management Consulting Group where
he advised clients in various industries concerning mergers, acquisitions and
bankruptcy. Mr. Tucker also worked for British Petroleum as a drilling and
production engineer for three years prior to receiving an M.B.A. from the
Wharton School of Finance in 1990.
Christel DeHaan has been a director of the Company since January 1998. She
currently serves as CEO of Christel House (a non-profit organization which
educates under privileged children in undeveloped countries), CD Enterprises,
Ltd. (a private investment firm controlled by Christel DeHaan) and the Christel
DeHaan Family Foundation, Inc. (a non-profit organization controlled by Christel
DeHaan). Ms. DeHaan co-founded Resort Condominiums International, Inc., ("RCI")
the world's largest vacation interval exchange company, in 1974, and became its
Chairman, CEO and sole shareholder in 1989. In November 1996, she sold RCI to
HFS (now the Cendant Corporation) and served on its Board of Directors until
January 1998. She is a founding director of the International Timeshare
Foundation and was elected twice to the American Resort Development Association
Board of Directors. She was appointed by President Clinton in 1995 to the White
House Conference Task Force on Travel and Tourism, and was named to the British
Tourism Hall of Fame in 1997. Ms. DeHaan is Chairman of the Board of Trustees of
the University of Indianapolis, President of the American Pianists Association
and serves on the Boards of Directors of the Indiana Symphony Society, Dance
Kaleidoscope and American United Life Insurance.
Walker G. Harman has been a director of the Company since 1997. Mr. Harman
was President and Chief Executive Officer of Metro Hotels, Inc. ("Metro") from
1978 until 1998, and was its sole owner from 1985 until its sale to Meristar
Hotels and Resorts. Metro owned, developed and operated hotels and resorts
including franchises such as Hilton, Radisson, Omni, Holiday Inn and Embassy
Suites. Mr. Harman also owns and operates Sonny Bryan's Smokehouse (a chain of
barbeque restaurants in the Dallas Metroplex area), which has 11 locations in
the Dallas, Texas area. Mr. Harman currently serves as a member of board of
directors of the Baylor Health Care System, the Board of Regents of Baylor
University, and the board of directors of the Interfaith Housing Coalition. Mr.
Harman is a member of the World Presidents Organization and the American Hotel
Motel Management Association.
36
<PAGE>
Thomas R. Powers has been a director of the Company since 1997. Mr. Powers
is a founding principal of Raintree Capital Company. He served as Chairman,
President and CEO of Transamerica Fund Management Company (a mutual fund
management company) and its predecessor companies ("TFM") from 1976 to 1993. TFM
was the investment advisor and underwriter for 21 mutual funds. In 1995, he
completed a three-year term as a member of the Board of Governors of the
National Association of Securities Dealers where he also served on the Executive
Committee as well as Chairman of the Audit Committee and the Investment
Companies Committee. For almost 20 years Mr. Powers served on the Board of
Governors of the Investment Company Institute, the national association of
mutual funds ("ICI"). During that time he served on ICI's Executive Committee
and was Chairman from 1989 to 1990. From 1988 to 1997, Mr. Powers was a member
and past Chairman of the Board of Regents of Baylor University and served as its
Chairman. Mr. Powers is also a member of the Baylor University Foundation, a
Trustee and member of the Finance Committee for the Memorial Healthcare System
of Houston, Texas and a member and past President of the Houston Chapter of the
Financial Executives Institute as well as a member of the Texas Society of
C.P.A.'s and the American Institute of C.P.A.'s. Mr. Powers is also the current
Chairman of the Texas Infrastructure Fund, a quasi-state agency. Mr. Powers
serves as a director of the Fidelity Charitable Gift Fund, a 501 (c)3 company
and several private companies.
Other Key Employees
Patrick D. Hanes joined the Company in November 1998, as Project Director
of the Teton Club. From May until November 1998, Mr. Hanes was the Director of
Marketing for Telluride Venture Group II, developers of the River Club in
Telluride, Colorado. From January 1995 until May 1998, Mr. Hanes served as
Senior Vice President, Director of Operations for Pahio Vacation Ownership, Inc.
(PVIO). PVIO is the largest independent developer of timeshare properties in
Hawaii. In his capacity as Director of Operations, Mr. Hanes oversaw all aspects
of sales and marketing at five PVIO projects and reported directly to the CEO.
Mr. Hanes was awarded the 1998 ARDA GOLD AWARD for New Owner Package
Development.
Michael W. McGeough is President of Whiski Jack Resorts Ltd., having
assumed this position in October, 1999. From 1994 to 1999 Mr. McGeough was
employed by Whiski Jack specializing in acquisitions for Whiski Jack and held a
license from the British Columbia Real Estate Association. From 1991 to 1994, he
worked as a sales consultant with Whiski Jack. Prior to that, Mr. McGeough
worked as a securities trader with First Vancouver Securities and Yorkton
Securities in Vancouver, B.C., and was President of Stealth Marketing, Inc. Mr.
McGeough is currently a director of the Canadian Resort Development Association.
He has passed the Canadian Securities Course, and graduated from International
College in Vancouver.
Mario Muro is a key officer of Club Regina responsible for all marketing
programs. Prior to the closing of the Purchase Transactions, Mr. Muro was
Project Manager, Regional Director of Bancomer Tourism Division from 1993 to
1997. He was Director of the Los Remedios Tourism Division from 1992 to 1993,
and Director of the Grand Baja Club B.C. Project from 1991 to 1992. Mr. Muro was
President of the Association of Commercializers of TimeSharing in Puerto
Vallarta, First President of the Association of Tourist Developers in Ixtapa
Zihuatanajo and is currently the President of the AMDETUR until the year 2000.
Mr. Muro, who has 25-years experience in the vacation ownership and tourism
industry, has developed various vacation ownership marketing programs including
theme stores, marketing through travel agencies, and the Club Regina referral
program. Mr. Muro has a degree in accounting from the Instituto Tecnologico
Autonomo de Mexico.
Cheryl C. Okamoto joined the Company as Director of Operations - The Teton
Club in November 1998 and is now Vice President - Administration. In this
capacity, Ms. Okamoto is responsible for administrative and accounting
operations of The Teton Club and future U.S. based vacation ownership locations.
Prior to joining the Company, Ms. Okamoto served from July 1998 to November 1998
as chief accounting officer for Telluride Venture Group II, developers of The
River Club in Telluride, Colorado. From 1994 to July 1998, Ms. Okamoto served as
controller for Pahio Resorts, Inc. the largest privately owned vacation
ownership development company in Hawaii.
37
<PAGE>
Director Classes and Agreements
The Company's Board of Directors currently consists of seven members and is
divided into three classes, one class of which is elected each year to hold
office for a three-year term and until successors are elected and qualified. The
terms of the Class A, Class B and Class C directors of the Company will expire
at the 2001, 2002 and 2000 annual meetings, respectively. Mr. Powers and Ms.
DeHaan serve in Class A, Mr. Harman in Class B and Messrs. Bech and McCarthy in
Class C. Successors to the directors whose terms have expired are required to be
elected by stockholder vote while vacancies in unexpired terms and any
additional positions created by board action are filled by action of the
existing Board of Directors. The executive officers named above were elected to
serve in such capacities until the next annual meeting of the Board of
Directors, or until their respective successors have been duly elected and have
been qualified, or until their earlier death, resignation, disqualification or
removal from office. No family relationships exist among the executive officers
or directors of the Company.
Director Compensation
Directors do not receive compensation for serving as directors. Directors
are reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof incurred in their capacity as
directors.
Committees of the Board of Directors
The Company has an Executive Committee and an Audit and Compensation
Committee. The Audit and Compensation Committee reviews and reports to the Board
of Directors the scope and results of audits by the Company's outside auditor.
The committee also recommends the firm of certified public accountants to serve
as the Company's independent public accountants, subject to nomination by the
Board of Directors and approval of the stockholders, authorize all audit and
other professional services rendered by the auditor and periodically review the
independence of the auditor. The Committee also determines the compensation of
the Company's executive officers. Membership of the Audit and Compensation
Committee is restricted to those directors who are not active or retired
officers or employees of the Company. Ms. DeHaan and Messrs. Harman and Powers
are members of the Audit and Compensation Committee and Mr. Powers serves as
Chairman. Messrs. Bech, McCarthy, Powers and Harman and Ms. DeHaan are members
of the Executive Committee, of which Mr. Bech serves as Chairman.
38
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Company's five most highly compensated executive officers (the "Named Executive
Officers"). Compensation information is shown for all services rendered during
the fiscal years 1999 and 1998, and for the period from August 18, 1997 to
December 31, 1997.
<TABLE>
<CAPTION>
Securities
Annual Compensation * Underlying
--------------- ------------ ------------ -----------
Name/Principal Position Year Salary Bonus Other Total Options/SARs
----------------------- ---- --------- ------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Y. Bech 1999 $260,000 -- -- 260,000 --
Chairman and 1998 240,000 15,000 -- 255,000 100,000
Chief Executive Officer 1997 90,000 -- -- 90,000 --
John McCarthy 1999 250,000 -- -- 250,000 --
President 1998 250,000 10,000 -- 260,000 20,000
1997 87,179 -- -- 87,179 100,000
Robert L. Brewton (1) 1999 242,970 -- -- 242,970 --
Executive Vice President- 1998 154,531 32,658 -- 187,189 85,000
Chief Investment Officer
George Aldrich (2) 1999 170,000 -- -- 170,000 --
Senior Vice President- 1998 21,250 -- -- 21,250 50,000
Finance and Accounting
Brian Tucker 1999 155,000 -- -- 155,000 --
Senior Vice President- 1998 150,000 10,000 -- 160,000 35,000
Planning and Development 1997 45,000 -- -- 45,000 --
<FN>
_______________
(1) Mr. Brewton's employment with the Company commenced on April 15, 1998.
(2) Mr. Aldrich's employment with the Company commenced on November 15, 1998.
* The Company provides the Named Executive Officers with certain group, life,
health, medical and other non-cash benefits generally available to all
salaried employees.
</FN>
</TABLE>
Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company
recommends to the Board the level of compensation and benefits for the Company's
executive officers and key managers and oversees the administration of executive
compensation programs. The Compensation Committee is composed solely of
independent directors.
The Committee's overall policy regarding compensation of the Company's
executive officers is to provide base salaries, annual bonuses and stock option
grants that will (i) attract, retain, motivate and reward high caliber officers
to manage the Company's business; (ii) inspire the executive officers to
innovatively and aggressively pursue Company goals; and (iii) align the
long-term interests of the executive officers with those of the Company's
stockholders.
Compensation for each of the Company's executive officers were determined
on an individual basis, taking into account compensation by industry
competitors, their performance as executive officers of the Regina Resorts when
owned by Bancomer, if applicable, and general economic conditions. Mr.
McCarthy's compensation was negotiated based upon his performance as an
executive officer of the Regina Resorts prior to the Company's purchase thereof
and the Company's desire to retain him, formalized in an employment agreement.
See "- Employment Agreements." Mr. Bech's compensation was structured to be
comparable to Mr. McCarthy's compensation. Messrs. Brewton's and Tucker's
compensation were based on their experience in real estate acquisition and
development and financial and corporate planning, respectively.
The Company uses stock options to relate the benefits received by executive
officers and key employees to the amount of appreciation realized by the
stockholders over comparable periods. While the Company directly granted
39
<PAGE>
Mr. McCarthy stock options, the other executive officers were granted stock
options under the Company's 1997 Long Term Incentive Plan. See " - 1997 Long
Term Incentive Plan."
In 1999 the Compensation Committee, in light of the Company's limited
financial resources and based on the financial performance of the Company, did
not recommend awarding any bonuses or stock options to any of the named
officers, including Mr. Bech. As noted above, Mr. Bech's base salary for 1999
was determined by the terms of an Employment Agreement with the Company.
The Compensation Committee of the Board of Directors
Christel DeHaan
Walker G. Harman
Thomas R. Powers
Stock Options Granted in Last Fiscal Year
The Company did not issue options to any named executive in 1999.
<TABLE>
<CAPTION>
Option Exercises and Option Values
Value of Unexercised
Total In-the-Money Options
Shares Options at Year-End 1999 at Year-End 1999*
------------------------ ------------------------
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
----------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas Y. Bech -- -- 40,000 60,000 -- --
John McCarthy -- -- 80,000 40,000 -- --
Robert L. Brewton -- -- 34,000 51,000 -- --
George Aldrich -- -- 20,000 30,000 -- --
Brian Tucker -- -- 14,000 21,000 -- --
----------
<FN>
* The Company does not have any publicly-traded equity and, therefore, the market value of the Company's Common Stock is
considered speculative. In early 1998, the Company issued a certain number of shares of Common Stock at $5.00 per share but
makes no representation as to the current value of such shares.
</FN>
</TABLE>
1997 Long Term Incentive Plan
In August 1997, the Board of Directors of the Company approved the
Company's 1997 Long Term Incentive Plan (the "Plan"). The purpose of the Plan is
to provide directors, officers, key employees, consultants and other service
providers with additional incentives by increasing their ownership interests in
the Company. Individual awards under the Plan may take the form of one or more
of: (i) either incentive stock options and nonqualified stock options ("NQSOs"),
(ii) stock appreciation rights, (iii) restricted or deferred stock, (iv)
dividend equivalents and (v) other awards not otherwise provided for, the value
of which is based in whole or in part upon the value of common stock.
The Compensation Committee, or such other committee as the Board of
Directors designates, who will administer the Plan and select the individuals
who will receive awards and establish the terms and conditions of those awards.
The maximum number of shares of Common Stock that may be subject to outstanding
awards, determined immediately after the grant of any award, may not exceed the
greater of 800,000 shares or 8% of the aggregate number of shares of Commons
Stock outstanding at the time of such grant. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted;
provided, however, that without the consent of any affected participant in the
Plan, no such action may materially impair the rights of such participant under
any award granted to him.
40
<PAGE>
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executive Officers. Each employment agreement provides for three-year employment
terms at the end of which each extends for successive one-year terms. Each of
the employment agreements provides for an initial base salary plus a bonus
pursuant to the Company's bonus plan administered by the Compensation Committee
of the Company's Board of Directors. Each of the Named Executive Officers is
entitled to certain severance benefits and is subject to a one-year
non-competition agreement with the Company in the event of termination.
Exculpatory Charter Provision; Liability and Indemnification of Officers and
Directors
The Company has included in its Amended and Restated Articles of
Incorporation provisions to eliminate the personal liability of its directors
for monetary damages resulting from breaches of their fiduciary duty; provided,
however, that such provision does not eliminate liability for (i) acts or
omissions not in good faith or which involve intentional misconduct, fraud, or a
knowing violation of law, or (ii) violations under Section 78.300 of the NGCL
concerning unlawful distributions to shareholders. However, these provisions
will not limit the liability of the Company's directors under the federal
securities laws. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
41
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 25, 2000, by each person known by
the Company to be the beneficial owner of more than 5% of the Common Stock,
(giving effect for such purpose the outstanding Warrants to purchase Common
Stock and Company Stock options currently exercisable or exercisable in 60 days)
each of the Company's directors and executive officers and all executive
officers and directors of the Company as a group. Unless otherwise indicated,
each person's address is 10000 Memorial Drive, Suite 480, Houston, Texas 77024.
The number of shares of Common Stock currently outstanding is 10,766,300 and
there are outstanding Warrants to purchase 1,869,962 shares of Common Stock at
$0.01 per share, and 500,000 shares of Common Stock at $5 per share, and stock
options to purchase 634,000 shares.
Beneficial Ownership(1)
Shares
Beneficially Percent
Name Owned(1) of Class
---------------------------- ------------ ----------
Douglas Y. Bech (2) 2,001,912 18.5
John McCarthy (2) 320,367 2.9
Robert L. Brewton (2) 170,667 1.4
George Aldrich (2) 86,000 *
Bruce MacIntire (2) 30,000 *
Gustavo Ripol (2) 28,000 *
Brian R. Tucker (2) 120,000 1.1
Christel DeHaan 783,333 7.3
10 West Market Street, Suite 1990
Indianapolis, IN 46204
Walker G. Harman (3) 1,840,000 17.1
Thomas R. Powers 1,110,213 10.3
All directors and officers as a group 6,225,492 57.8
(10 persons)
[FN]
-------------------
* Less than 1%
(1) To the Company's knowledge, such person has sole voting and investment
power with respect to all Common Stock shown as beneficially owned by such
person, unless otherwise indicated. The outstanding Warrants and stock
options currently exercisable or exercisable in 60 days are included for
purposes of computing the percentage of each individual's outstanding
shares.
(2) Includes stock options to purchase 40,000, 105,000, 34,000, 30,000, 18,000,
24,000 and 14,000 shares of Common Stock that are currently exercisable or
become exercisable in 60 days form June 30, 2000 and are held by Messrs.
Bech, McCarthy, Brewton, Aldrich, MacIntire, Ripol and Tucker,
respectively.
(3) Includes 1,840,000 shares of Common Stock held by Metro Mexico Investment
Partners ("MMIP"). Mr. Harman is a general partner of MMIP and, as such,
can be deemed to have beneficial ownership of the shares MMIP holds. Mr.
Harman disclaims ownership of 120,000 of such shares.
</FN>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998 and 1999, the aggregate principal amount of mortgages
payable to related parties, employees and affiliates of Whiski Jack Resorts, was
$1,868,000 and $1,014,000, respectively. Interest accrues on the mortgages at
rates ranging from prime plus 3% to prime plus 7.75% per annum and is payable in
monthly installments over periods ranging from twelve months to ten years.
42
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
(a) (1) and (a) (2) Financial Statements and Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section
of this report beginning on page F-1. All other schedules are not
applicable or not required and accordingly have been omitted.
(a) (3) Exhibits
The following documents are filed as part of this report.
Exhibit No. Description
----------- ------------
3.1* -- Amended and Restated Articles of Incorporation Raintree Resorts
International, Inc. ("RRI US"), dated August 12, 1997. (incorporated
by reference to Exhibit 3.1 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
3.2* -- Articles of Incorporation of C.R. Resorts Capital, S. de R.L. de
C.V., dated August 11, 1997 (English Translation which includes
by-laws). (incorporated by reference to Exhibit 3.2 to Amendment No. 1
dated April 22, 1998 to Registrant's Registration Statement on Form
S-4/A-File No. 333-49065)
3.3* -- By-Laws of Raintree Resorts International, Inc., formerly known as
Club Regina Resorts, Inc., effective April 15, 1997. (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
3.4* -- Certificate of Designations of Class A Redeemable Convertible
Preferred Stock of RRI US. (incorporated by reference to Exhibit 3.4
to Amendment No. 1 dated April 22, 1998 to Registrant's Registration
Statement on Form S-4/A-File No. 333-49065)
3.5* -- Certificate of Amendment to the Amended and Restated Articles of
Incorporation of Club Regina Resorts, Inc., changing the name to
Raintree Resorts International, Inc., dated May 12, 1998.
(incorporated by reference to Exhibit 3.5 to Amendment No. 2 dated May
22, 1998 to Registrant's Registration Statement on Form S-4/A-File No.
333-49065)
3.6* -- Certificate of Designations of Class B Preferred Stock of the
Company. (incorporated by reference to Exhibit 3.1 to Registrant's
Form 10-Q for the quarter ended September 30, 1998)
4.1* -- Indenture (including Forms of Registered Note and Outstanding
Note), dated December 5, 1997, among the Issuers and IBJ Schroder Bank
& Trust Company. (incorporated by reference to Exhibit 4.1 to
Amendment No. 1 dated April 22, 1998 to Registrant's Registration
Statement on Form S-4/A-File No. 333-49065)
4.2* -- Series B Warrant Agreement (including form of warrant), dated
December 5, 1997, between RRI US and Jefferies & Company, Inc.
(Initial Purchaser). (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 dated April 22, 1998 to Registrant's Registration
Statement on Form S-4/A-File No. 333-49065)
4.3* -- Warrant Agreement (including form of warrant), dated December 5,
1997, between RRI US and the Warrant Agent. (incorporated by reference
to Exhibit 4.3 to Amendment No. 1 dated April 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
4.4* -- Articles of Raintree Resorts Holdings Ltd., (Canada) dated July 19,
1998. (incorporated by reference to Exhibit 4.1 to Registrant's Form
10-Q for the quarter ended June 30, 1998)
43
<PAGE>
9.1* -- Voting Trust, Exchange and Support Agreement, dated as of July 27,
1998, by and among Raintree Resorts International, Inc., Raintree
Resorts International Canada Ltd. and Raintree Resorts Holdings, ULC.
(incorporated by reference to Exhibit 4.2 to Registrant's Form 10-Q
for the quarter ended June 30, 1998)
10.1*-- Second Amended and Restated Stock Purchase Agreement, dated August
18, 1997, by and among Bancomer, RRI US, Desarrollos Turisticos
Bancomer, S.A. de C.V. and CR Hotel Acquisition Company, L.L.C.
(incorporated by reference to Exhibit 10.1 to Amendment No. 1 dated
April 22, 1998 to Registrant's Registration Statement on Form
S-4/A-File No. 333-49065)
10.2*-- Cross Indemnity Agreement, dated August 18, 1997 by and among
Bancomer, RRI US and others named therein. (incorporated by reference
to Exhibit 10.2 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.3*-- Post-Closing Agreement, dated August 19, 1997, by and among
Bancomer, RRI US and others named therein. (incorporated by reference
to Exhibit 10.3 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.4*-- Asset Management Agreement, dated August 18, 1997, by and among
Starwood Lodging Corporation and RRI US. (incorporated by reference to
Exhibit 10.4 to Amendment No. 2 dated May 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
10.5*-- Form of Operating Agreement by and among Starwood and subsidiaries
of RRI US (English translation). (incorporated by reference to Exhibit
10.5 to Amendment No. 1 dated April 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
10.6*-- Warrant Shares Registration Rights Agreement, dated December 5,
1997, between RRI US and the Initial Purchaser. (incorporated by
reference to Exhibit 10.6 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.7*-- A/B Exchange Registration Rights Agreement, dated December 5,
1997, among the Issuers and the Initial Purchaser. (incorporated by
reference to Exhibit 10.7 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.8*-- Series B Warrant Registration Rights Agreement, dated December 5,
1997, between RRI US and the Initial Purchaser. (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.9*-- Form of Indemnity Agreement. (incorporated by reference to Exhibit
10.10 to Amendment No. 1 dated April 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
10.10* -- Form of Registration Rights Agreement, by and among RRI US and
stockholders of RRI US. (incorporated by reference to Exhibit 10.11 to
Amendment No. 1 dated April 22, 1998 to Registrant's Registration
Statement on Form S-4/A-File No. 333-49065)
10.11* -- Form of Shareholders Agreement, by and among RRI US and
stockholders of RRI US. (incorporated by reference to Exhibit 10.12 to
Amendment No. 1 dated April 22, 1998 to Registrant's Registration
Statement on Form S-4/A-File No. 333-49065)
10.12* -- 1997 Long-Term Incentive Plan. (incorporated by reference to
Exhibit 10.13 to Amendment No. 1 dated April 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
10.13* -- Tax Allocation Agreement dated August 18, 1997, by and among
Starwood Lodging Corporation and RRI US. (incorporated by reference to
Exhibit 10.14 to Amendment No. 1 dated April 22, 1998 to Registrant's
Registration Statement on Form S-4/A-File No. 333-49065)
44
<PAGE>
10.14* -- Agreement dated May 20, 1996 by and among Starwood Capital Group,
L.L.C., RRI US and Raintree Capital Company, LLC. (incorporated by
reference to Exhibit 10.15 to Amendment No. 1 dated April 22, 1998 to
Registrant's Registration Statement on Form S-4/A-File No. 333-49065)
10.15* -- Agreement dated May 20, 1996 by and among SLT Realty Limited
Partnership, RRI US and Raintree Capital Company, LLC. (incorporated
by reference to Exhibit 10.16 to Amendment No. 1 dated April 22, 1998
to Registrant's Registration Statement on Form S-4/A-File No.
333-49065)
10.16* -- Agreement on Opening of Loan Against Current Account with Trust
Guarantee, dated July 20, 1998, by and among Bancomer Sociedad Anonima
de Capital Variable, Institucion de Banca Multiple, Grupo Financiero,
C.R. Resorts Capital S. de R.L. de C.V., and C.R. Resorts Puerto
Vallarta, Variable Capital Limited Liability Corporation.
(incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q
for the quarter ended June 30, 1998)
10.17* -- Registration Rights Agreement, dated as of July 27, 1998, by and
among Raintree Resorts International, Inc., a Nevada corporation, and
certain Shareholders thereof. (incorporated by reference to Exhibit
10.2 to Registrant's Form 10-Q for the quarter ended June 30, 1998)
10.18* -- Loan and Security Agreement for $20,000,000, dated November 23,
1998, by and between FINOVA Capital Corporation and CR Resorts Cancun,
S. de R.L. de C.V.; CR Resorts Los Cabos, S. de R.L. de C.V.; CR
Resorts Puerto Vallarta, S. de R.L. de C.V.; Corporacion Mexitur, S.A.
de C.V.; CR Resorts Cancun Timeshare Trust S. de R.L. de C.V.; CR
Resorts Cabos Timeshare Trust, S. de R.L. de C.V. and CR Resorts
Puerto Vallarta Timeshare Trust, S. de R.L. de C.V. (incorporated by
reference to Exhibit 10.18 to Registrant's Form 10-K for the year
ended December 31, 1998)
10.19* -- Corporate Guarantee and Subordination Agreement to the Loan and
Security Agreement for $20,000,000 with FINOVA, dated November 23,
1998, by and between FINOVA Capital Corporation and Raintree Resorts
International, Inc. (incorporated by reference to Exhibit 10.19 to
Registrant's Form 10-K for the year ended December 31, 1998)
10.20* -- First Amended and Restated Loan and Security Agreement for
$20,000,000 Receivables Loan and $13,500,000 Inventory Loan, dated
April 23, 1999, by and between FINOVA Capital Corporation and CR
Resorts Cancun, S. de R.L. de C.V.; CR Resorts Los Cabos, S. de R.L.
de C.V.; CR Resorts Puerto Vallarta, S. de R.L. de C.V.; CR Resorts
Cabos Timeshare Trust, S. de R.L. de C.V. and CR Resorts Puerto
Vallarta Timeshare Trust, S. de R.L. de C.V. (incorporated by
reference to Exhibit 10.1 to Registrants' Form 10-Q for the quarter
ended June 30, 1999)
10.21* -- Consent of Guarantor and Amendment No. 1 to Corporate Guarantee
and Subordination Agreement to the Loan and Security Agreement for
$20,000,000 with FINOVA, dated April 23, 1999, by and between FINOVA
Capital Corporation and Raintree Resorts International, Inc.
(incorporated by reference to Exhibit 10.2 to Registrants' Form 10-Q
for the quarter ended June 30, 1999)
10.22* -- Loan and Security Agreement for $33,250,000 Construction Loan,
$7,500,000 Working Capital Loan and $20,000,000 Receivables Loan,
dated June 29, 1999, by and between FINOVA Capital Corporation and The
Teton Club, L.L.C. and Raintree Resorts International, Inc.
(incorporated by reference to Exhibit 10.3 to Registrants' Form 10-Q
for the quarter ended June 30, 1999)
10.23* -- Amendment No. 1, dated November 30, 1999, to First Amended and
Restated Loan and Security Agreement for $20,000,000 Receivables Loan
and $13,500,000 Inventory Loan by and between FINOVA Capital
Corporation and CR Resorts Cancun, S. de R.L. de C.V.; CR Resorts Los
Cabos, S. de R.L. de C.V.; CR Resorts Puerto Vallarta, S. de R.L. de
C.V.; CR Resorts Cabos Timeshare Trust, S. de R.L. de C.V. and CR
Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V.
45
<PAGE>
10.24* -- Consent of Guarantor and Amendment No. 2 to Corporate Guarantee
and Subordination Agreement to the First Amended and Restated Loan and
Security Agreement for $20,000,000 Receivables Loan and $13,500,000
Inventory Loan.
10.25* -- Loan Agreement, dated November 23, 1999, between Textron
Financial Corporation, CR Resorts Cancun, S. de R.L. de C.V., CR
Resorts Los Cabos, S. de R.L. de C.V., CR Resorts Puerto Vallarta, S.
de R.L. de C.V., Corporacion Mexitur, S. de R.L. de C.V., CR Resorts
Cancun Timeshare Trust, S. de R.L. de C.V., CR Resorts Cabos Timeshare
Trust, S. de R.L. de C.V., and CR Resorts Puerto Vallarta Timeshare
Trust, S. de R.L. de C.V.
10.26* -- Payment Guaranty and Subordination Agreement, dated November 23,
1999, to Textron Financial Corporation Loan Agreement dated November
23, 1999.
10.27* -- Loan Agreement, dated November 26, 1999, between Bancomer, S.A.,
Institucion de Banca Multiple, Grupo Financiero, and CR Resorts
Capital, S. de R.L. de C.V.
10.28+ -- Employment agreement, dated November 16, 1998, between Raintree
Resorts International, Inc. and George E. Aldrich.
10.29+ -- Employment agreement, dated January 1, 1999, between Raintree
Resorts International, Inc. and Douglas Y. Bech.
10.30+ -- Employment agreement, dated January 1, 1999, between Raintree
Resorts International, Inc. and Robert L. Brewton.
10.31+ -- Employment agreement, dated August 18, 1997, between Raintree
Resorts International, Inc. and John McCarthy.
10.32+ -- Employment agreement, dated January 1, 1999, between Raintree
Resorts International, Inc. and Brian R. Tucker.
10.33+ -- Limited Liability Company Agreement of the Teton Club, LLC, dated
November 3, 1998, between Raintree Resorts International, Inc. and
JHSC Properties, Inc.
21.1* -- List of Subsidiaries of RRI Inc.
27.1+ -- Financial Data Schedule
-----------------------
* previously filed
+ filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the year ended
December 31, 1999.
(c) The exhibits required by Item 601 of Regulation S-K have been listed above.
(d) Financial statement Schedules
None - Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the financial statements or the notes thereto.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on September 28, 2000.
RAINTREE RESORTS INTERNATIONAL, INC.
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
By: /s/ GEORGE E. ALDRICH
----------------------------------------
George E. Aldrich
Senior Vice President - Finance and Accounting
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ DOUGLAS Y. BECH
-------------------------- Chairman and Chief Executive September 28, 2000
Douglas Y. Bech Officer (principal executive officer)
/s/ JOHN MCCARTHY
-------------------------- President and Chief Executive September 28, 2000
John McCarthy Officer of Club Regina Resorts, Mexico,
and Director
/s/ GEORGE E. ALDRICH
-------------------------- Senior Vice President - Finance September 28, 2000
George E. Aldrich and Accounting (principal
financial and accounting officer)
/s/ CHRISTEL DEHAAN
-------------------------- Director September 28, 2000
Christel DeHaan
/s/ WALKER G. HARMAN
-------------------------- Director September 28, 2000
Walker G. Harman
/s/ THOMAS R. POWERS
-------------------------- Director September 28, 2000
Thomas R. Powers
47
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................................................F-2
Consolidated Balance Sheets as of
December 31, 1998 and 1999...........................................................................F-3
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 1997, 1998 and 1999.................................................F-4
Consolidated Statements of Shareholder's Investment (Deficit)
for the years ended December 31, 1997, 1998 and 1999.................................................F-5
Consolidated Statements of Cash Flows for the period
for the years ended December 31, 1997, 1998 and 1999.................................................F-6
Notes to Consolidated Financial Statements...............................................................F-7
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A WHOLLY OWNED FINANCE SUBSIDIARY)
Report of Independent Public Accountants.................................................................F-25
Balance Sheets as of December 31, 1998 and 1999..........................................................F-26
Statements of Operations and Accumulated Results
for the period August 18, 1997 through December 31, 1997
and for the years ended December 31, 1998 and 1999...................................................F-27
Statements of Cash Flows for the period
August 18, 1997 through December 31, 1997 and for the years
ended December 31, 1998 and 1999.....................................................................F-28
Notes to Financial Statements............................................................................F-29
FINANCIAL STATEMENTS OF PREDECESSOR BUSINESS FOR JANUARY 1, 1997 THROUGH
AUGUST 17, 1997 - DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Report of Independent Public Accountants.................................................................F-33
Consolidated Statement of Operations for the Period
January 1, 1997 through August 17, 1997..............................................................F-34
Consolidated Statement of Cash Flows for the Period
January 1, 1997 through August 17, 1997..............................................................F-35
Notes to Consolidated Financial Statements...............................................................F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Raintree Resorts International, Inc.:
We have audited the accompanying consolidated balance sheets of Raintree Resorts
International, Inc. (a Nevada corporation) and subsidiaries (collectively, the
Company) as of December 31, 1998, and 1999, and the related consolidated
statements of operations and comprehensive loss, shareholders' investment and
cash flows for each of the three years in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Raintree Resorts
International, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 17, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
December 31,
---------------------------------------
1998 1999
------------------ -----------------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................... $ 2,960 $ 8,311
Vacation Interval receivables and other trade receivables, net........... 51,835 61,232
Inventories ............................................................. 775 896
Refundable Mexican taxes ................................................ 3,488 4,521
Facilities and office furniture and equipment, net ...................... 3,046 5,255
Land held for vacation ownership development ............................ 22,170 24,119
Equity investments....................................................... 2,949 3,532
Cost of unsold vacation ownership intervals and related club memberships. 27,606 23,605
Retained interest in hotel cash flows ................................... 4,000 4,000
Deferred loan costs, net ................................................ 7,413 7,342
Goodwill, net .......................................................... 1,240 --
Prepaid and other assets ............................................... 2,185 3,058
--------- ---------
Total assets ................................................................ $ 129,667 $ 145,871
========= =========
Liabilities and Shareholders' Investment
Liabilities
Accounts payable and accrued liabilities ............................... $ 11,850 $ 14,098
Notes payable .......................................................... 17,135 44,787
Senior Notes, due 2004, net of unamortized original issue
discount of $7,907 and $6,574, respectively .......................... 92,093 93,426
Taxes payable .......................................................... 1,618 1,101
Unearned services fees .................................................. 2,028 2,028
--------- ---------
Total liabilities .......................................................... 124,724 155,440
Commitments and Contingencies
Redeemable Preferred Stock
Pay-in-Kind preferred stock; par value $.001; 5,000,000 shares authorized,
52,250 shares issued and outstanding at December 31, 1999 and $5,225
aggregate liquidation preference at December 31, 1999................. -- 5,143
Convertible preferred stock; $100 per share liquidation value;
20,775 and 5,775 shares issued and outstanding at December 31, 1998
and 1999, respectively ............................................... 2,170 811
--------- ---------
2,170 5,954
Shareholders' Investment (Deficit)
Class A preferred stock; par value $.001; 5,000,000 shares authorized,
37,500 shares issued and outstanding at December 31, 1998 and none
outstanding at December 31, 1999 ..................................... 851 --
Common stock; par value $.001; 45,000,000 shares authorized, shares
issued and outstanding 10,766,300 at December 31, 1998
and 1999, respectively ............................................... 11 11
Additional paid-in capital .............................................. 6,428 2,003
Warrants to purchase 1,869,962 shares of common stock and 2,369,962
shares of common stock at December 31, 1998 and 1999, respectively.... 9,331 9,331
Accumulated deficit ..................................................... (13,737) (26,998)
Cumulative translation adjustment ....................................... (111) 130
--------- ---------
Total shareholders' investment (deficit) .................................... 2,773 (15,523)
--------- ---------
Total liabilities and shareholders' investment (deficit)..................... $ 129,667 $ 145,871
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except share and per share data)
Years Ended December 31,
--------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Statement of Operations
Revenues
Vacation Interval sales ........................... $ 18,098 $ 56,508 $ 62,749
Rental and service fee income ..................... 3,896 8,926 8,888
Interest income on vacation interval receivables .. 1,557 5,848 7,252
Other income ...................................... 2,153 2,701 2,514
--------- --------- ---------
Total revenues ................................. 25,704 73,983 81,403
Costs and Operating Expenses
Cost of Vacation Interval sales ................... 4,569 13,161 17,007
Provision for doubtful accounts ................... 2,318 4,450 5,242
Advertising, sales and marketing .................. 8,576 23,874 29,343
Maintenance and energy ............................ 1,938 8,013 11,387
General and administrative ........................ 5,417 11,463 10,888
Depreciation ...................................... 49 620 973
Amortization of goodwill .......................... -- 2,885 1,606
--------- --------- ---------
Total costs and operating expenses ............. 22,867 64,466 76,446
--------- --------- ---------
Operating income .................................... 2,837 9,517 4,957
Interest expense, net ............................. 3,931 14,947 17,958
Equity in losses on equity investments............. -- 25 352
Foreign currency exchange (gains)/losses, net ..... 1,333 4,274 (801)
--------- --------- ---------
Net loss before taxes ............................... (2,427) (9,729) (12,552)
Foreign income and asset taxes .................... 909 672 709
--------- --------- ---------
Net loss before preferred dividends ................. (3,336) (10,401) (13,261)
Preferred stock dividends ......................... 232 711 675
--------- --------- ---------
Net loss attributable to common shareholders ........ $ (3,568) $ (11,112) $ (13,936)
========= ========= =========
Net loss per share
(Basic and Diluted) ............................... $ (0.40) $ (0.88) $ (1.10)
Weighted average number of common shares:
(Basic and Diluted) ............................... 8,976,586 12,617,371 12,636,262
Comprehensive loss
Net loss before preferred stock dividends ........... $ (3,336) $ (10,401) $ (13,261)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment ......... -- (111) 241
--------- --------- ---------
Comprehensive loss .................................. $ (3,336) $ (10,512) $ (13,020)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (DEFICIT)
(in thousands except share and per share data)
Total
Class A Additional Warrants Cumulative Shareholders'
Common Common Preferred Paid-In To Purchase Accumulated Translation Investment
Shares Stock Stock Capital Stock Deficit Adjustment (Deficit)
---------- ------- ---------- -------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issue 8,100,000 common shares........ 8,100,000 $ 8 $ 4 $ 12
Issue 2,000,000 commons shares
on August 18, 1997 to subsidiary
of Starwood Capital in connection
with the purchase transactions .. 2,000,000 2 2
Issue 37,500 preferred shares in
exchange for shareholder loans of
$3.75 million .................. $ -- 3,750 3,750
Issue common shares; 200,000 for
cash; 258,450 in connection with
Senior Note offering; and 142,850
in connection with the purchase
transaction ..................... 601,300 1 3,292 3,293
Issue warrants to purchase
1,869,962 common shares and
related issue costs ............. $ 9,331 9,331
Accrued stock dividends on
Class A Preferred Stock........ 232 (232)
Net loss for the year ended
December 31, 1997................ $(3,336) (3,336)
---------- ------- ------ -------- ------- ------- ------- --------
Balance, December 31, 1997........... 10,701,300 11 232 6,814 9,331 (3,336) -- 13,052
---------- ------- ------ -------- ------- ------- ------- --------
Issue 65,000 common shares
at $5 per share ................. 65,000 -- 325 325
Accrued stock dividends on
Class A Preferred Stock........ 619 (619)
Accrued stock dividends on
Convertible Preferred Stock.... (92) (92)
Cumulative translation adjustment.. $ (111) (111)
Net loss for the year ended
December 31, 1998................ (10,401) (10,401)
---------- ------- ------ ------- ------- -------- ------- --------
Balance, December 31, 1998........... 10,766,300 11 851 6,428 9,331 (13,737) (111) 2,773
---------- ------- ------ ------- ------- -------- ------- --------
Accrued stock dividends on
Class A Preferred Stock........ 309 (309)
Accrued stock dividends on
Convertible Preferred Stock.... (141) (141)
Class A preferred stock exchanged
for redeemable preferred stock..... (1,160) (3,750) (4,910)
Accrued stock dividends and
accretion of Pay-in-Kind Preferred
stock.............................. (225) (225)
Cumulative translation adjustment.. 241 241
Net loss for the year ended
December 31, 1999................ (13,261) (13,261)
---------- ------- ------ ------- ------- -------- ------- --------
Balance, December 31, 1999........... 10,766,300 $ 11 $ -- $ 2,003 $ 9,331 $(26,998) $ 130 $(15,523)
========== ======= ====== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
---------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities
Net loss .......................................................... $ (3,336) $ (10,401) $ (13,261)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 160 4,818 3,912
Amortization of deferred loan costs ............................. 92 1,215 1,367
Provision for doubtful accounts ................................. 2,318 4,450 5,242
Equity in losses on equity investments .......................... -- 25 352
Changes in other operating assets and liabilities:
Vacation Interval receivables and other trade receivables ....... (5,753) (11,383) (14,342)
Inventories ..................................................... (132) 164 (84)
Refundable Mexican taxes......................................... (3,375) 629 (1,033)
Cost of unsold vacation ownership intervals and related club
memberships ................................................... 627 8,515 4,038
Deferred loan costs.............................................. (407) 69 1,296
Prepaid and other assets ........................................ (1,460) 127 (2,128)
Accounts payable and accrued liabilities ....................... 6,681 7 2,092
Taxes payable .................................................. (815) (541) (557)
Unearned services fees .......................................... 1,070 (1,129) (1)
----------- ---------- ----------
Net cash used in operating activities (3,923) (3,504) (13,107)
Investing activities
Purchase of vacation ownership business, net of cash acquired ..... (85,482) (3,225) --
Purchase of land and other assets held for vacation ownership
development ..................................................... (43) (5,240) (2,884)
Additions to facilities and office furniture and equipment ........ (813) (1,968) (3,434)
----------- ---------- ----------
Net cash used in investing activities ................................... (86,338) (10,433) (6,318)
Financing activities
Issuance of stock ................................................. 1,013 325 --
Proceeds from shareholder loans ................................... 4,900 -- --
Proceeds from issuance of notes payable to a bank in connection
with the purchase transactions .................................. 82,954 -- --
Additional notes payable, net of related expenses ................. 1,000 11,190 39,487
Repayment of notes payable ........................................ (84,104) (3,667) (13,330)
Purchase of Company's convertible preferred stock.................. -- -- (1,500)
Issuance of Senior Notes, less related expenses ................... 93,910 -- --
----------- ---------- ----------
Net cash provided by financing activities ............................... 99,673 7,848 24,657
Increase (decrease) in cash and cash equivalents ........................ 9,005 (6,089) 5,232
Effect of exchange rate changes on cash ................................. -- 44 119
Cash and cash equivalents, at beginning of the period ................... -- 9,005 2,960
----------- ---------- ----------
Cash and cash equivalents, at end of the period ......................... $ 9,005 $ 2,960 $ 8,311
=========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest .......................... $ 3,252 $ 14,053 $ 15,873
Cash paid during the period for income and asset taxes ............ 183 1,672 1,171
Non-cash investing and financing activities
Issuance of warrants in conjunction with debt offering ............ $ 9,331 $ -- $ --
Issuance of common stock in conjunction with debt offering ........ 1,292 -- --
Issuance of common stock in settlement of financial advisory fees . 1,000 -- --
Conversion of shareholder loans to preferred stock ................ 3,750 -- --
Issuance of preferred stock in conjunction with purchase of
Whiski Jack ..................................................... -- 2,078 --
Issuance of notes payable in conjunction with purchase of land -- 5,000 --
Dividends paid in-kind upon preferred stock exchange .............. -- -- 1,160
Stock dividend accrued on preferred stock ......................... 232 711 450
Stock dividend issued on pay-in-kind preferred stock .............. -- -- 225
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. GENERAL INFORMATION
General
The financial statements include the accounts of Raintree Resorts
International, Inc., a Nevada corporation, (the "Ultimate Parent") and all of
its wholly owned subsidiaries (collectively, the "Company"). The Company
develops, markets, and operates vacation ownership resorts in North America with
resorts in Mexico, Canada and the United States. The Company's headquarters are
located in Houston, Texas with administrative offices in Mexico City, Mexico and
Whistler, British Columbia, Canada.
Company Formation and Initial Operations
On August 18, 1997, Raintree Resorts International, Inc. which was
incorporated in August 1996, purchased all of the stock of Desarrollos
Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the "Predecessor
Business"). In summary, the Company acquired net vacation ownership assets
("Club Regina Resorts") of approximately $86.8 million from a Mexican bank
(Bancomer) using shareholder loans of approximately $3.8 million and seller
financing of approximately $83 million. The allocation of the purchase price was
to the following net assets (in millions):
<TABLE>
<S> <C>
Vacation Interval receivables and other trade receivables........................................ $ 37.2
Land held for vacation ownership development .................................................... 12.2
Cost of unsold vacation ownership intervals and employee housing, etc. .......................... 33.8
Investment in a 50% held company ................................................................ 2.5
Cash and other assets ........................................................................... 6.0
Retained interests in hotel cash flows .......................................................... 4.0
------
Total assets .................................................................................... 95.7
Less liabilities assumed ........................................................................ (8.9)
------
Net purchase price .............................................................................. $ 86.8
======
</TABLE>
Contemporaneous with the purchase, the real property of the Predecessor
Business, the Club Regina Resorts and Westin Hotels, was segregated such that
each would be able to be owned by separate companies. The Westin Hotels were
then sold by the Company to SLT Realty Limited Partnership, an affiliate of
Starwood Lodging Trust and Starwood Lodging Corporation (collectively
"Starwood") for $132.75 million on August 18, 1997. No gain or loss was
recognized on the sale. These transactions are referred to herein as the
"Purchase Transactions."
As a result of the Purchase Transactions, the Company then owned and
operated three luxury Mexican vacation ownership resorts in Cancun, Puerto
Vallarta and Cabo San Lucas, Mexico. Prior to August 18, 1997, the Company did
not have significant operations or revenues, and prior to April 1997, the
Company was inactive.
Effective July 1, 1998, the Company implemented a new product structure to
sell its Vacation Intervals ("Vacation Intervals") under a right-to-use
membership entitling owners to a 50-year contractual right to use Vacation
Interval units. This right includes the right to participate either in (i) an
extension of the contractual right to use if practicable under Mexican law or
(ii) the proceeds from the sale of the Los Cabos, Cancun and Puerto Vallarta
Resorts in 2047. This new membership has a term of 50 years instead of the 30
years as a result of a change in Mexican law. The Company has also extended the
same rights of ownership to purchasers of vacation ownership interest for the
period from August 18, 1997 to July 1, 1998.
F-7
<PAGE>
Acquisition of Whiski Jack Resorts, Ltd.
On July 24, 1998, the Company acquired the assets and assumed certain
liabilities of Whiski Jack Resorts Ltd. ("Whiski Jack") for approximately $6.6
million. The acquisition was accounted for as a purchase and, accordingly, the
results of operations are included in the financial statements only for the
periods subsequent to the date of acquisition. The purchase price has been
allocated to the assets and liabilities assumed based upon the fair values at
the date of acquisition. The excess purchase price over the fair values of the
net assets acquired has been recorded as goodwill, totaling approximately $4.5
million, and has been amortized pro rata as the individual weeks acquired in the
acquisition were sold. Amortization expense was $2.9 million and $1.6 million
for the years ended December 31, 1998 and 1999, respectively.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
Acquisition of Villa Vera Hotel & Racquet Club
The Company acquired the land and facilities of the Villa Vera Hotel &
Racquet Club (the "Villa Vera") for $6.2 million in December 1999. The purchase
price includes the cost of converting certain of the 59 hotel units into
vacation ownership units, and the addition of a restaurant and spa. The purchase
price has been allocated to the assets and liabilities assumed based upon the
fair values at the date of acquisition. The Villa Vera is located in Acapulco,
Mexico. The vacation ownership units acquired increased the Company's inventory
by approximately 3,068 vacation interval weeks.
Proforma Financial Information
The following unaudited pro forma consolidated results of operations for
the year ended December 31, 1997 and 1998 assume the Predecessor Business and
Whiski Jack acquisitions occurred as of January 1, 1997 (in thousands except per
share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net revenues ................................................................... $ 77,666 $ 81,237
Net loss ....................................................................... (9,122) (6,654)
Net loss available to common shareholders ...................................... (9,949) (7,500)
Basic and diluted loss per common share ........................................ (0.94) (0.70)
</TABLE>
The pro forma adjustments include the pre-acquisition results of the
Predecessor Business for the period from January 1, 1997 to August 17, 1997, and
Whiski Jack for 1997 and for the period from January 1, 1998 to July 23, 1998.
The adjustments include the recognition of deferred revenue and expenses that
were previously accounted for under the lease method of accounting by the
Predecessor Business, the amortization of goodwill generated from the
acquisitions, interest expense on the debt assumed to be issued to finance the
purchase, and the effect of the acquisitions on income taxes. The pro forma
amounts are based upon certain assumptions and estimates and do not reflect any
benefit from economies which might have been achieved from combined operations.
The pro forma results do not necessarily represent results which would have
occurred if the acquisitions had taken place at the beginning of each of the
fiscal periods presented, nor are they indicative of the results that will be
obtained in the future.
Liquidity
In connection with the Purchase Transactions, the Company borrowed
approximately $83 million and replaced such borrowing with its Senior Notes. At
December 31, 1999, the Company is, and will continue to be, highly leveraged,
with substantial debt service requirements. A significant portion of the
Company's assets are pledged against existing borrowings. The Company has a
shareholder's deficit , has incurred losses since its inception and expects to
incur a net loss for fiscal 2000. To achieve profitable operations, the Company
is dependent on a number of factors, including its ability to reduce its debt
service requirements, to increase its Vacation Interval inventory through
development projects and through the acquisition of existing resort properties,
and its ability to continually sell Vacation Intervals on an economical basis,
taking into account the cost of such intervals and related marketing and selling
expenses. The Company expects that its existing credit capacity, combined with
additional credit
F-8
<PAGE>
capacity which must be negotiated during 2000, will be sufficient to enable the
Company to meet its debt service obligations, including interest payments on its
Senior Notes during 2000. The Company also expects to be able to fund capital
requirements from anticipated capital project financings which have not yet been
negotiated. However, should the Company not be able to successfully negotiate
future secured credit capacity, there is no assurance that the Company will be
able to meet all of its 2000 debt service payments. The Company has historically
incurred debt and issued equity securities to fund negative cash flows from
operating activities and to make the payments on previously incurred debt
obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Raintree
Resorts International, Inc., and all of its wholly owned subsidiaries. All
significant intercompany balances have been eliminated in consolidation. The
Company reports its 50% interest in a company that owns and rents housing to
both employees and non-employees of the Company, and its share of the investment
and losses in The Teton Club, LLC, using the equity method of accounting.
Certain reclassifications have been made to prior year's financial statements to
be consistent with the current year's presentation.
Investment in the Teton Club
The Teton Club, LLC ("Teton Club"), a joint venture between the Company and
the owner and developer of the Teton Village ski area near Jackson Hole, Wyoming
is developing 37 condominium units in Teton Village near Jackson, Wyoming. The
financing for this project was arranged with FINOVA Capital Corporation and
consists of $33.3 million for construction financing, $7.5 million for pre-sale
working capital requirements and $20 million for receivables financing. The
receivable financing is a hypothecation line-of-credit and will be used to repay
the construction and pre-sale working capital loans and to fund operating
expenses. As of December 31, 1999, Teton Club was not in compliance with a
technical covenant related to the level of unit sales loan covenant but obtained
a timely one-time waiver for such year-end non-compliance, and is currently in
compliance and expects to be in compliance during 2000 and thereafter. The
Company, as part of the financing arrangement, is directly obligated for $8.3
million of the construction loan, $1.9 million of the pre-sale working capital
loan and $5 million of the receivables loan. Additionally, the Company is
responsible for working capital deficits. The Company is also required to
maintain certain covenants and ratios, including a specified yearly net worth.
As of December 31, 1999, $8.7 million had been drawn on the construction portion
of the financing, and $1.9 million had been drawn on the working capital portion
of the financing.
Foreign Currency Accounting and Fluctuations
The Company maintains its Mexican accounting records and prepares its
financial statements for its Mexican subsidiaries in Mexican pesos. The accounts
of the Mexican subsidiaries have been re-measured into United States ("U.S.")
dollars. The Company's stated sales prices are U.S. dollar denominated as are a
significant amount of its Vacation Interval contracts receivable. Additionally,
the Company's debt is U.S. dollar denominated. Accordingly, the Mexican pesos
are translated to U.S. dollars for financial reporting purposes in using the
U.S. dollar as the functional currency and exchange gains and losses as well as
translation gains and losses are reported in income and expense. The resulting
net exchange and translation losses for the period August 18, 1997 through
December 31, 1997 (the period the Company had operations in Mexico) and for the
year ended December 31, 1998, were $1,333,000 and $4,299,000, respectively. The
Company had a net exchange and translation gain for the year ended December 31,
1999 of $801,000. These net losses were primarily related to the decline in the
value of the peso to the U.S. dollar during the years ended December 31, 1997
and 1998, and the net gain during 1999 was due to marginal recovery of rates
during 1999.
F-9
<PAGE>
The following are the Mexican Peso exchange rates on a quarterly basis
since August 1997:
<TABLE>
<CAPTION>
Exchange rates Pesos US Dollar
-------------- ----- ---------
<S> <C> <C> <C>
August 18, 1997........................................................ 7.766 = $1.00
December 31, 1997...................................................... 8.083 = $1.00
March 31, 1998......................................................... 8.517 = $1.00
June 30, 1998 ......................................................... 9.041 = $1.00
September 30, 1998 .................................................... 10.112 = $1.00
December 31, 1998...................................................... 9.865 = $1.00
March 31, 1999......................................................... 9.516 = $1.00
June 30, 1999.......................................................... 9.488 = $1.00
September 30, 1999..................................................... 9.358 = $1.00
December 31, 1999...................................................... 9.522 = $1.00
</TABLE>
The Company uses the U.S. dollar as the functional currency in Mexico based
on the Company's analysis of the salient factors for selection of functional
currency. Therefore, the recent decline in the inflation rate in Mexico below
the threshold for mandatory designation of the functional currency, as the U.S.
dollar in Mexico will not change the Company's accounting for its Mexican
operations.
The Company maintains its Canadian accounting records and prepares its
financial statements for its Canadian subsidiaries in Canadian dollars. The
balance sheet accounts of the Canadian subsidiaries have been re-measured into
U.S. dollars. Accordingly, the Canadian dollars are translated to U.S. dollars
for financial reporting purposes using the U.S. dollar as the basis for
reporting translation gains and losses. The resulting net translation gains and
losses are reported as required in the equity section of the balance sheet under
the caption "cumulative translation adjustment."
The future valuation of the Mexican peso and the Canadian dollar related to
the U.S. dollar cannot be determined, estimated or projected.
Comprehensive Income
Comprehensive income is defined by Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", and is net income plus
direct adjustments to stockholders' equity. The cumulative translation
adjustment of the Company's Canadian foreign subsidiaries is the only such
direct adjustment applicable to the Company.
Cash and Cash Equivalents
The Company considers demand accounts and short-term investments with
maturities of three months or less when purchased to be cash equivalents. Cash
and cash equivalents included $0.8 million and $1.1 million in restricted funds
at December 31, 1998 and 1999, respectively.
Vacation Interval Receivables and Concentration of Geographic and Credit Risk
As of December 31, 1999, 81.2% of the Company's Vacation Interval sales
entitled the owner, upon payment of a service fee, a defined right to use
vacation ownership facilities at the Club Regina Resorts in Mexico. While the
Company does not obtain collateral for such Vacation Interval receivables, the
Company does not believe it has significant credit risk with regard to its
Vacation Interval receivables, because in the instance of uncollectibility of a
contract, the Company retains the right to recover and re-sell the underlying
defaulted Vacation Interval. Historically, the Company has been able to re-sell
such intervals at prices in excess of the defaulted receivable balances.
Management believes the allowance for uncollectible accounts is adequate to
cover probable losses inherent in the contracts receivable portfolio at December
31, 1999 and 1998.
The Company estimates that at December 31, 1999, approximately 52.5% of all
of the Vacation Interval receivables were U.S. dollar denominated, 31.4% of all
Vacation Interval receivables were denominated in UDI's, an obligation
denominated in pesos which is adjusted for Mexican inflation ("UDI"), 9.4% of
all Vacation Interval receivables were denominated in Mexican pesos and 6.7% of
all Vacation Interval receivables were denominated in Canadian dollars.
F-10
<PAGE>
A significant portion of the Company's customers reside in Mexico and all
of the Company's sales offices which sell vacation ownership interest of Club
Regina are currently located in Mexico. Any economic downturn in Mexico, which
has a history of economic instability, could have a material adverse effect on
the Company's business, results of operations and financial condition.
Seasonality
The Mexican and Canadian vacation ownership industry in general tends to
follow seasonal buying patterns with peak sales occurring during the peak
travel/tourism seasons, usually December through April and July and August.
Seasonal influences also affect the Company's earnings so that net income and
cash receipts from customer initial down payments are typically higher in the
first and fourth calendar quarters. In Mexico, American tourists tend to
vacation in the destinations where the Club Regina Resorts are located in the
December through April season while Mexican tourists tend to travel to these
destinations more frequently during the summer months.
Fair Market Value of Financial Instruments
The carrying amount of Vacation Interval receivables, other trade
receivables and notes payable approximate their estimated fair market value
because of the short-term maturity of those instruments and/or because they bear
market interest rates as of December 31, 1999. The fair market value of the
Senior Notes has not been determined since they are not traded on a formal
exchange market and they are volatile due to being speculative in nature.
Inventories
Inventories, which include supplies, other consumables, and items held for
sale in the Company's retail shops are stated at the lower of cost (FIFO method)
or estimated market.
Facilities and Office Furniture and Equipment
The Company currently maintains facilities that include a restaurant and
spa that are complementary to its resort operations, in addition to office
furniture and equipment. These assets are stated at cost, net of accumulated
depreciation of $0.7 million and $1.7 million at December 31, 1998 and 1999,
respectively. The office furniture and equipment are related to assets used by
the Company in its administration and marketing functions and is depreciated
using the straight line method over the estimated useful lives of three to seven
years. Additionally, the restaurant and spa are depreciated using the
straight-line method over the estimated useful lives of 10 years.
Land Held for Vacation Ownership Development
The Company owns a parcel of undeveloped beachfront property located in
Cozumel, Mexico and a parcel of land adjacent to its Regina Resort located in
Cabo San Lucas, Mexico. The Company plans to construct additional vacation
ownership facilities on these parcels of land. Although preliminary
architectural and engineering planning has commenced, no commitments have been
made regarding these planned expansion projects. Further work on the Cozumel
property will not occur prior to 2001.
Land held for vacation ownership development includes the cost of land, and
additionally, development costs and capitalized interest. Interest related to
these developmental properties of $1.8 million and $0.8 million during the years
ended December 31, 1998 and 1999, respectively, was capitalized.
The Company capitalizes interest on expenditures incurred for land and
development when activities have commenced necessary to get the asset ready for
its intended use. The capitalization period ends when the asset is placed in
service or progress to complete the project is substantially suspended.
Costs of Unsold Vacation Ownership Intervals and Related Club Memberships
In Mexico, the Company is the beneficiary of trusts that hold fee simple
title to the vacation ownership facilities at the Club Regina Resorts. The
Company reports its allocated acquisition costs related to these trust rights to
use these facilities, to the extent that such Vacation Intervals were unsold,
within the balance sheet as "Cost of unsold vacation ownership interval weeks
and related club memberships". At December 31, 1998 and 1999, the Company holds
rights for 6,072 and 5,241 vacation interval weeks, respectively. The Company
also includes in inventory the rights to weeks sold prior to August 18, 1997
that revert back to the Company at the end of the 30-year lease. Trust
F-11
<PAGE>
rights in Mexico are carried at the lower of carrying amount or fair value less
cost to sell. Fair value is estimated by discounting estimated future net cash
flow from the sale of such rights.
In Canada, the Company sells Vacation Interval ownership properties on a
weekly interval basis under a fee simple transfer of title arrangement. The
Company reports its costs related to these properties at the lower of cost or
market, within the balance sheet as "Cost of unsold vacation ownership intervals
and related club memberships". At December 31, 1998 and 1999, the Company held
title to properties totaling 585 and 548 vacation interval weeks, respectively.
Retained Interests in Hotel Cash Flows
In connection with the August 18, 1997 Purchase Transactions discussed in
Note 1, the Company sold the Westin Hotels to Starwood but retained an economic
interest in the hotels which is defined by an agreement under which Starwood
will pay the Company 20% of it's future cash flows, as defined, over a 50-year
period. The Company allocated $4.0 million of its net purchase price to this
agreement based on the estimated present value of expected payments arising from
the agreement. The Company began recognizing revenue under the agreement in
1999, which amounted to approximately $275,000 based on the partial year 1997
and 1998. The Company will carefully monitor the expected cash flow based on the
reported results of the hotel operations and will record an impairment loss if
the carrying value of this asset should exceed the present value of the expected
future cash payments.
Deferred Loan Costs
The costs incurred in connection with the Senior Notes, various credit
agreements and loans have been deferred and are being amortized over the terms
of the Senior Notes, credit agreements and loans using the effective interest
method. The balance of deferred loan costs was $7,413,000 and $7,342,000 at
December 31, 1998 and 1999, respectively. Amortization expense for the years
ended December 31, 1997, 1998 and 1999 totaled $92,000, $1,215,000 and
$1,367,000, respectively, and is included in interest expense. The amounts
reported for additional notes payable and issuance of Senior Notes in the
Consolidated Statements of Cash Flows are net of deferred loan costs incurred of
$407,000, $385,000 and $1,296,000 in 1997, 1998 and 1999, respectively.
Revenue Recognition
The Company recognizes sales revenue on Vacation Intervals when a minimum
10% down payment is received, a binding sales contract is executed for which the
refund or recession period has expired, collectibility of the receivable
representing the remainder of the sales price is reasonably assured and the
Company has completed substantially all of its obligations with respect to any
continuing involvement with the Vacation Interval. In cases relating to sales of
Vacation Intervals in projects under construction, revenue is recognized using
the percentage-of-completion method. Under this method, the portion of revenue
applicable to costs incurred, as compared to total estimated construction and
direct selling costs, is recognized in the period of sale. The remaining amount
is deferred and recognized as Vacation Interval sales in future periods as the
remaining costs are incurred. For transactions which do not meet the criteria
listed, the deposit method is used. Under this method, the sale is not
recognized, a receivable is not recorded and inventory is nor relieved. Any cash
received is carried as a liability until the sale an be recognized. The Company
provides refunds to purchasers based on legal refund requirements applicable at
the location of sale.
Advertising Expense
The Company expenses advertising costs as incurred.
Loss Per Share
Basic per share results are computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Additionally, shares issuable for little or no consideration are
considered common shares and are included in the computation of basic earnings
per share. On December 5, 1997 in conjunction with the issue of Senior Notes,
the Company issued warrants to purchase 1,869,962 shares of common stock at a
conversion price of $.01 per share. Since the 1,869,962 common shares issuable
under the Senior Notes warrants can be purchased for little or no cash
consideration and these warrants
F-12
<PAGE>
were fully vested upon issuance, they are included in the computation of basis
earnings per share as of the date they were issued.
The following is a reconciliation of the numerator and denominator for
basic and diluted loss per share (in thousands except share and per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C>
Numerator - Basic and Diluted:
Loss available to common shareholders ................. $ (3,568) $ (11,112) $ (13,936)
Denominator:
Basic -
Weighted average number of common shares ........... 8,843,383 10,747,409 10,766,300
Weighted average number of common shares
issuable for little consideration upon the
exercise of Senior Note warrants ................ 133,203 1,869,962 1,869,962
--------- ---------- ----------
8,976,586 12,617,371 12,636,262
Diluted -
Adjustments:
Warrants ............................ .............. -- -- --
Common stock options ............................... -- -- --
Preferred Stock .................................... -- -- --
--------- ---------- ----------
8,976,586 12,617,371 12,636,262
Loss per share
Basic and diluted...................................... $ (0.40) $ (0.88) $ (1.10)
</TABLE>
At December 31, 1999, the Company had outstanding 634,000 stock options
with a weighted-average exercise price of $4.22 per share, 500,000 common stock
warrants with an exercise price of $5.00 per share and preferred stock with
$5,225,000 of Liquidation Preference convertible upon redemption at the
Company's option into shares of common stock valued at the Liquidation
Preference. These warrants, common stock options and preferred stock were not
included in diluted earnings per share as the exercise prices exceeded the
estimated fair value of common stock. The Senior Notes warrants were included in
both the computation of basis and diluted earnings per share.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
In accordance with Financial Accounting Standard ("SFAS No. 123"),
"Accounting for Stock-Based Compensation" the Company accounts for transactions
with other than employees in which goods and services are the consideration
received for issuance of equity instruments based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measured.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price no greater than the fair value of the shares, as
determined by the Board of Directors, at the date of grant. The Company accounts
for stock option grants in accordance with Accounting Principle Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly,
recognizes no compensation expense for the stock option grants.
F-13
<PAGE>
New Accounting Pronouncement
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes a new
model for accounting for derivatives and hedging activities and supersedes and
amends a number of existing accounting standards. The Company currently does not
employ derivative instruments and believes that the adoption of SFAS No. 133,
required originally in the year 2000 and updated by SFAS No. 137 to year 2001,
will not materially impact the Company.
On December 3, 1999, the United States Securities and Exchange Commission
staff released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition",
to provide guidance on the recognition, presentation and disclosure of revenue
in financial statements. The Company has reviewed its revenue recognition
procedures for each business segment and is satisfied that it is in compliance
with the requirements of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation 44 which is titled
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25". The Company has reviewed its accounting
for stock compensation and is satisfied that it is in compliance with the
requirements of FASB Interpretation 44.
3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES
Vacation Interval receivables and other trade receivables were as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Vacation Interval receivables ....................................... $ 53,563 $ 63,875
Service fee receivables ............................................. 1,047 992
Other trade receivables ............................................. 4,787 4,432
Less - allowances for doubtful accounts (7,562) (8,067)
--------- ---------
Total ....................................................... $ 51,835 $ 61,232
========= =========
</TABLE>
Service fee receivables are from Vacation Interval owners for the payment
of annual service fees. Other receivables are from Vacation Interval owners for
charges while staying at the resorts, banks, credit card companies and other.
At December 31, 1999, the weighted average interest rate earned on Vacation
Interval receivables that were denominated in U.S. dollars was 15.0%, in Mexican
pesos was 22.6% and UDI's was 8.3% and in Canadian dollars was 14.1%. These
receivables are collected in monthly installments over periods ranging from 1 to
10 years, with a weighted average maturity of approximately five years as of
December 31, 1999 and 1998. The overall weighted average interest rate is 15.7%.
The interest rates range from 8% to 29%.
The following table reflects the principal maturities of Vacation Interval
receivables as of December 31, 1999 (in thousands):
2000 .......................................... $18,072
2001 .......................................... 16,028
2002 .......................................... 12,966
2003 .......................................... 8,934
Thereafter ..................................... 7,875
F-14
<PAGE>
The activity in the Vacation Interval receivables and other trade
receivables allowance for doubtful accounts for the year ended December 31, 1998
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
--------------- ----------------
<S> <C> <C>
Balance, beginning of year .......................................... $ 8,005 $ 7,562
Provision charged to expense ........................................ 4,450 5,242
Cancellation of contracts and receivables charge off ................ (4,893) (4,737)
---------- ----------
Balance, end of year ................................................ $ 7,562 $ 8,067
========== ==========
</TABLE>
The Company writes off past due receivables after 240 days. Vacation
Interval receivables are written off to the reserve for doubtful accounts after
being reduced by the cost of the Vacation Interval recovered.
4. SENIOR NOTES PAYABLE
On December 5, 1997, the Company and its indirect wholly-owned Mexican
financial subsidiary ("Issuers") jointly issued $100 million of Senior Notes due
December 1, 2004. The Company also issued warrants to the noteholders to
purchase 1,869,962 common shares. The estimated fair market value of the
warrants on the date that the warrants were issued was $4.99 per warrant or
$9,331,000 in total. This amount was recorded as an increase in shareholders'
investment and original issue discount in the Company's balance sheet. The
original issue discount is being amortized to expense over the warrant exercise
period of 84 months. A portion of net proceeds ($83 million) was used to repay
the outstanding loans and related accrued interest payable to the Company's
lender bank (Bancomer).
The Senior Notes are payable in U.S. dollars and bear interest at 13% per
annum with interest payable semi-annually on June 1st and December 1st. The
Senior Notes are general unsecured obligations of the Issuers.
The indenture pursuant to which the Senior Notes were issued (the
"Indenture") contains certain covenants that, among other things, limit the
ability of the Issuers to incur certain additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase equity
interests (as defined) or subordinated indebtedness, create certain liens, enter
into certain transactions with affiliates, sell assets of the Issuers, issue or
sell equity interests of the Company's subsidiaries, or enter into certain
mergers and consolidations. Additional indebtedness includes the ability of the
Company to borrow credit agreement debt up to 90% of its Vacation Interval
receivables. In addition, under certain circumstances, the Issuers will be
required to offer to purchase the Senior Notes at a price equal to 100% of the
principal amount, plus accrued and unpaid interest and liquidated damages, if
any, to the date of purchase, with the proceeds of certain asset sales (as
defined).
Any payments (interest or principal) made to the noteholders will be made
free and clear of any withholding for any present or future taxes, duties,
levies, imposts, assessments or other governmental charges of whatever nature
imposed by Mexico or any subdivision of Mexico, or by any related authority or
agency having power to tax, unless such taxes are required by law, rule or
regulation to be withheld or deducted, in which case, subject to certain
exceptions, the Issuers will pay such additional amounts ("Additional Amounts")
as may be necessary so that the net amount received by noteholders of the Senior
Notes (including Additional Amounts) after such withholding or deduction will
not be less than the amount that would have been received in the absence of such
withholding or deduction.
5. NOTES PAYABLE
Summary of Notes Payable (in thousands) -
December 31,
---------------------------------------
1998 1999
------------------ -----------------
Notes Payable to a Bank ............ $ 276 $ 278
Cabos West Notes Payable ........... 5,000 2,350
Credit Agreement Notes and Loans ... 9,086 38,772
Mortgages Payable .................. 2,773 3,387
--------- ---------
$ 17,135 $ 44,787
========= =========
F-15
<PAGE>
The current maturities of Senior Notes and notes payable are as follows (in
thousands):
2000 .............................. $ 19,565
2001 .............................. 8,210
2002 .............................. 6,783
2003 .............................. 4,172
2004 .............................. 102,957
Thereafter ......................... 3,100
Notes Payable to a Bank - The notes payable to a bank at December 31, 1998 and
1999 had interest payable at 7.75%, and 8.50%, respectively. The 1998 notes were
paid in 1999, and the 1999 notes are due in full in 2000.
Cabos West Notes Payable - On September 17, 1998, in connection with the Cabos
West land purchase, the Company entered into notes payable secured by the land.
The notes bear interest at approximately 10% and are due on demand.
Credit Agreement Notes - In November 1998, the Company negotiated a commitment
letter with FINOVA Capital Corporation, which included an agreement to provide a
receivables based credit facility of $20 million that was finalized in November
1998, and a $16.5 million inventory based credit facility that was finalized in
May 1999. The aggregate borrowing limit on these facilities is $34 million, as
amended. The agreement limits the use of proceeds to acquisitions, development,
working capital and repayment of existing obligations. FINOVA will lend 90% on
pledged notes receivable denominated in United States dollars and held by United
States or Canadian residents. These notes are assigned to the lender and as
payments are received, they are applied to this loan. The agreement requires
replacement of notes that become 60 days past due. Furthermore, the outstanding
receivables loan balance bears interest at a fluctuating base rate plus 175
basis points, which was 9.5% and 10.25% per annum at December 31, 1998 and 1999,
respectively. The outstanding inventory loan balance bears interest at a
fluctuating base rate plus 225 basis points, which at December 31, 1999 was
10.75% per annum. Interest under the notes is due monthly. The fluctuating base
rate is the "Corporate Base" rate of Citibank, N.A., New York, which the bank
publicly announces from time to time, and is a rate charged by the bank to it's
most creditworthy commercial borrowers. Also, the agreement requires the Company
to maintain certain minimum financial ratios including a minimum capital
requirement. The receivables line of credit matures 84 months from the date of
the last advance made against it, and the inventory based credit facility
matures on June 30, 2001. As of December 31, 1999, the outstanding balance of
the receivables line of credit was $9,760,000 and of the inventory based credit
facility was $15,159,000.
On November 23, 1999, the Company executed a $10 million receivables loan
facility with Textron Financial Corporation. The loan is collateralized by the
Company's notes receivable, with a limit of up to 30% of those notes denominated
in Mexican pesos of which Textron will lend 80% on pledged notes, and the
remainder in U.S. dollars on which Textron will lend 85% on pledged notes. The
pledged notes receivable are collected by a designated lockbox agent and the
proceeds are forwarded to the lender to be applied to this loan. The agreement
limits the use of proceeds to payment of debt, sales, marketing, working
capital, project development and administrative costs, and for future expansion
of timeshare development. Additionally, the entire outstanding loan balance is
to be paid in full on or before December 1, 2004. The loan bears a variable
interest rate of the Chase Manhattan Bank prime rate plus 200 basis points that
is adjusted on the first day of each month with the interest due monthly, and as
of December 31, 1999, was 10.5%. Interest on the loan is due monthly, and as of
December 31, 1999, the outstanding balance of the loan facility was $7,103,000.
The Company also entered into a $7 million loan agreement with Bancomer on
November 26, 1999, that was collateralized by all of the Company's UDI
denominated notes receivable, and is restricted to the timely payment of
interest to holders of the Company's Senior Notes. The loan agreement extends
credit to the Company for a fixed 30-month term from November 29, 1999 to May
29, 2002. Furthermore, the agreement requires the Company to pay back the
principal in UDI's in 30 equal monthly installments plus accrued interest in the
U.S. dollar equivalent amount of approximately $233,000 beginning on December
29, 1999. Also, the loan bears simple interest at a rate of 12% per annum, and
as of December 31, 1999, had an outstanding balance of $6,750,000.
Mortgages Payable - Mortgages payable consist of the assignment of specific
Whiski Jack Vacation Interval receivables to related and third party buyers. The
mortgages payable bear interest at a major Canadian Bank's prime rate plus 1.25%
to prime plus 8.5% during 1998, and prime plus 1.75% to prime plus 8% during
1999, and were
F-16
<PAGE>
payable in monthly installments including interest over periods ranging from
twelve months to ten years during both years. The average interest rates paid
were 11.1% and 10.7% during 1998 and 1999, respectively, and the prime rate was
6.75% and 6.5% at December 31, 1998 and 1999, respectively.
6. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
General
The Company has only one line of business, which develops, markets and
operates luxury vacation ownership resorts in three geographic areas; Mexico,
Canada and the United States. The United States operations are carried out
through a joint venture accounted for on the equity method of accounting. The
Company's reportable segments are based on geographic area. The reportable
segments are managed separately due to their geographic location with managers
focused on improving and expanding each segment's operations. However resource
allocation is not based on individual country results, but based on the best
location for future resorts in order to enhance the Company's overall ability to
sell timeshare under a club concept. Revenues are attributed to countries based
on the location of the vacation ownership resorts.
Segment Profit or Loss
The Company's accounting policies for segments are the same as those
described in the summary of significant accounting policies. Management
evaluates segment performance based on profit or losses before intercompany
interest charges, income taxes and nonrecurring gains and losses. Transfers
between segments are accounted for at market value.
The following table presents segment information (in thousands):
<TABLE>
<CAPTION>
Corporate
Mexico Canada and Other Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As of and for year ended December 31, 1999:
Revenues from external customers ......................... $ 66,955 $ 14,403 $ 45 $ 81,403
Interest revenue.......................................... 6,755 497 -- 7,252
Interest expense.......................................... 15,999 396 1,563 17,958
Depreciation and amortization............................. 784 1,736 59 2,579
Operating income (loss) .................................. 7,555 381 (2,979) 4,957
Income tax expense........................................ -- 709 -- 709
Total assets ............................................. 126,503 10,827 8,541 145,871
Capital expenditures ..................................... 4,780 616 922 6,318
As of and for year ended December 31, 1998:
Revenues from external customers ......................... $ 66,036 $ 6,524 $ 1,423 $ 73,983
Interest revenue.......................................... 5,725 123 -- 5,848
Interest expense.......................................... 13,207 195 1,545 14,947
Depreciation and amortization............................. 550 2,912 43 3,505
Operating income (loss) .................................. 13,481 (1,550) (2,414) 9,517
Income tax expense........................................ 100 572 -- 672
Total assets ............................................. 117,541 9,643 2,483 129,667
Capital expenditures ..................................... 11,381 163 190 11,734
As of and for year ended December 31, 1997:
Revenues from external customers ......................... $ 24,857 $ -- $ 847 $ 25,704
Interest revenue.......................................... 1,557 -- -- 1,557
Interest expense.......................................... 3,616 -- 315 3,931
Depreciation and amortization............................. 49 -- -- 49
Operating income (loss) .................................. 3,670 -- (833) 2,837
Income tax expense........................................ 909 -- -- 909
Total Assets ............................................. 105,051 -- 14,928 119,979
Capital expenditures ..................................... 930 -- 51 981
</TABLE>
F-17
<PAGE>
Corporate and other
The amounts shown as an operating loss under the column heading "Corporate
and Other" consist primarily of general and administrative costs that are not
allocated to the segments. Also, the U. S. joint venture is included in
corporate operations and had equity losses of $25,000 and $352,000 in 1998 and
1999, respectively.
7. RELATED PARTY TRANSACTIONS AND AGREEMENTS
Related Party Mortgages Payable
At December 31, 1998 and 1999, the aggregate principal amount of mortgages
payable to related parties was $1,868,000 and $1,014,000, respectively. Interest
accrues on the mortgages at rates ranging from prime plus 3% to prime plus 7.75%
per annum and is payable in monthly installments over periods ranging from
twelve months to ten years.
Related Party Agreements
In connection with the Purchase Transactions, the Company and Starwood
entered into various operating agreements related to the joint operation and
ownership of certain common facilities at the combined resorts. Starwood has
rented specified rooms at two of the Company's Club Regina Resorts for a
one-year period ending August 18, 1998 for $1.06 million which has been
recognized into income along with related fees of $1.95 million over the term of
the agreements. The operating agreements provide for certain operating standards
at the combined resorts and prohibit the Company from renting vacant vacation
ownership units on a transient basis. The Company will be liable for significant
penalties should it violate certain provisions of these operating agreements.
In connection with the sale of the Westin Hotels to Starwood as discussed
in Note 1, the Company entered into an agreement with Starwood that provided the
Company with a retained economic interest in the future cash flows of the hotels
in excess of defined levels. This agreement provides, among other things, for
the Company to receive 20% of the cash flow, as defined, including cash flow
from any future refinancing and/or sale of the hotel facilities. The Company is
to provide certain strategic advisory services to Starwood that will involve
minimal cost to the Company. The Company has allocated a value of $4 million to
this retained interest in the balance sheet under the caption, "Retained
interest in hotel cash flows," based on discounted estimated future cash flows
to be received by the Company.
8. REDEEMABLE PREFERRED STOCK
The Company accrues dividends on redeemable preferred stock in the
Consolidated Statement of Operations and Comprehensive Loss for amounts
representing dividends not currently declared or paid, but which will be payable
under the mandatory redemption provisions of the preferred stock.
Pay-in-Kind Preferred Stock
On July 1, 1999, all 37,500 shares of the Class A Preferred Stock of the
Company were exchanged for 50,000 shares of a new class of Pay-in-Kind Preferred
Stock ("Pay-in-Kind Preferred") plus 500,000 five-year warrants to purchase the
Company's Common Stock at $5.00 per share. The Pay-in-Kind Preferred requires
that annual dividends be paid, at the Company's option, either in cash equaling
9% of the Pay-in-Kind Preferred's $100 per share Liquidation Preference
("Liquidating Preference"), or in an equivalent number of shares of such
Pay-in-Kind Preferred valued at the Liquidation Preference. As of December 31,
1999, the Company opted to pay a stock dividend of 2,250 shares. Also, the
Company has the right, at its option, to redeem at any time the Pay-in-Kind
Preferred, in whole or in part, but not later than December 1, 2004, at which
time the redemption shall become mandatory, upon payment either in cash of the
Liquidation Preference and all accrued and unpaid dividends or shares of capital
stock valued at the Liquidation Preference.
Upon any liquidation, dissolution or winding up of the Company, voluntary
or involuntary (a "Liquidation"), the holders of the Pay-in-Kind Preferred shall
be entitled to receive, out of assets of the Company which remain after
satisfaction in full of all valid claims of creditors of the Company and which
are available for payment to stockholders, and subject to the rights of the
holders of any stock of the Company ranking senior to or on a parity
F-18
<PAGE>
with the Pay-in-Kind Preferred in respect of distributions upon Liquidation,
before any amount shall be paid to or distributed among the holders of Common
Stock or any Junior Securities in respect of distributions upon Liquidation,
liquidating distributions per share of the Pay-in-Kind Preferred in the amount
of the Liquidation Preference, plus an amount equal to the accrued and unpaid
dividends thereon. If upon any Liquidation the amounts payable with respect to
the stock and any other stock ranking as to any such distribution on a parity
with the Pay-in-Kind Preferred are not paid in full, the holders of the
Pay-in-Kind Preferred and such other stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled.
The Company recorded the 50,000 shares of Pay-in-Kind Preferred that were
exchanged for the 37,500 shares of Class A Preferred at the carrying value of
the Class A Preferred as of the date of the exchange. No value was assigned to
the Common Stock warrants as the value was determined to be de minimis.
Convertible Preferred Stock
In connection with the purchase of Whiski Jack, the Company issued 20,775
shares of Convertible Preferred Stock (Convertible Preferred) through its wholly
owned subsidiary, Raintree Resorts International Canada, Ltd. (Raintree Canada).
The shares are redeemable with a liquidation preference of $100 per share. The
preferred shares accrue dividends at the rate of 10% per annum. As of December
31, 1999, 5,775 shares were outstanding. The cumulative unpaid dividends totaled
$0.2 million at December 31, 1999. The Company redeemed 5,000 shares ($0.5
million) on each of April 1, 1999, July 31, 1999 and October 31, 1999. The
Company redeemed the remaining outstanding shares during January and February
2000.
9. PREFERRED STOCK DIVIDENDS
Preferred stock dividends are recorded as a reduction to additional
paid-in-capital as the Company has an accumulated deficit. The following is a
summary of preferred stock dividends accrued for the years ended December
31,1997, 1998 and 1999, dollars in thousands:
1997 1998 1999
--------- -------- -------
Class A Preferred ........................ 232 619 309
Convertible Preferred .................... -- 92 141
Pay-in-Kind Preferred .................... -- -- 225
------ ------ ------
$ 232 $ 711 $ 675
====== ====== ======
The following is a summary of preferred stock dividends paid for the years
ended December 31,1997, 1998 and 1999, dollars in thousands:
1997 1998 1999
--------- -------- --------
Class A Preferred (A)..................... $ -- $ -- $1,160
Convertible Preferred .................... -- -- --
Pay-in-Kind Preferred (B)................. -- -- 225
------ ------ ------
$ -- $ -- $1,385
====== ====== ======
Notes:
(A) In conjunction with the issuance of the Pay-in-Kind Preferred, the holders
of the Class A Preferred received 50,000 shares of the Pay-in-Kind
Preferred and 500,000 Common Stock warrants in exchange for all unpaid
dividends as of June 30, 1999.
(B) At the Company's option, the dividends were paid with 2,250 additional
shares of Pay-in-Kind Preferred.
The Company is amortizing the excess of the $5 million Liquidating
Preference over the $4.9 million recorded value of the Pay-in-Kind Preferred as
additional dividends. The amortization period is from the issue date, July 1,
1999, to the final redemption date December 1, 2004.
F-19
<PAGE>
10. SHAREHOLDERS' EQUITY
Class A Preferred Stock
On October 29, 1997, the Company issued 37,500 shares of Class A Preferred
Stock (Class A Preferred) which provide for preferential annual dividends of
$619,000 (16.5% of $3.75 million), accruing from and after August 18, 1997. The
dividend rate shall be 20% after August 18, 2002. Cumulative dividends accrue
dividends, on a quarterly basis, at the rate of 12% per year. Cumulative unpaid
dividends totaled $851,000 at December 31, 1998. No cash dividends are required
to be paid prior to an initial public offering ("IPO") of the Company's common
stock or the sale of the Company.
Upon any Liquidation of the Company, the holders of the Class A Preferred
are entitled to receive, out of assets of the Company which remain after
satisfaction in full of all valid claims of creditors of the Company and which
are available for payment to stockholders, and subject to the rights of the
holders of any stock of the Company ranking senior to or on a parity with the
Class A Preferred in respect of distributions upon Liquidation, before any
amount shall be paid to or distributed among the holders of Common Stock, or any
other shares ranking junior to the Class A Preferred in respect of distributions
upon Liquidation, liquidating distributions per share of the Class A Preferred
in the amount of $100 per share, plus an amount equal to the accrued and unpaid
dividends thereon. Preferred shares also provide that dividends will accrue
monthly whether paid currently or not. Dividends may be paid by the Company, at
its option in shares of common stock. The Class A Preferred is redeemable at the
Company's option and is convertible at the holders option at the time of an IPO
into shares of common stock.
All the Class A Preferred was exchanged for Pay-In-Kind Preferred on July
1, 1999 (See Footnote 8 - Redeemable Preferred Stock).
Company Stock Options
1997 Long-Term Incentive Plan - On August 18, 1997, the Board of Directors
and the Company's stockholders approved the Company's 1997 Long Term Incentive
Plan (the Plan). The purpose of the Plan is to provide directors, officers, key
employees, consultants and other service providers with additional incentives by
increasing their ownership interest in the Company. Individual awards under the
Plan may take the form of one or more of (i) either incentive stock options or
non-qualified stock options; (ii) stock appreciation rights; (iii) restricted or
deferred stock; (iv) dividend equivalents and (v) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the common stock.
The maximum number of shares of common stock that may be subject to
outstanding awards, determined immediately after the grant of any award, may not
exceed the greater of 800,000 shares or 8% of the aggregate number of shares of
common stock outstanding.
Other Options - On August 15, 1997, the Company issued stock options covering
100,000 shares of common stock to the Company's president at an agreed upon
exercise price of $2 per share, which management believes was not less than the
estimated fair market value of the common stock on the date of grant. A total of
25,000 of these options vested immediately; the remainder vest at the rate of
25,000 per year for three years.
Stock Option Summary - The Company has elected to follow APB No. 25 in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense on the issuance of its stock options because the
option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date. As required by SFAS 123, the Company has
determined the pro forma information as if the Company had accounted for stock
options granted under the fair value method of SFAS 123.
F-20
<PAGE>
The Black-Scholes option pricing model was used with the following
weighted-average assumptions for the risk-free interest rate for each of the
specified dates of grant:
8/15/97 ............................................. 6.33%
8/18/97 ............................................. 6.28
10/16/97 ............................................. 6.45
1/19/98 ............................................. 5.83
4/1/98 ............................................. 5.95
11/15/98 ............................................. 5.31
12/1/98 ............................................. 5.16
5/1/99 ............................................. 5.83
10/1/99 ............................................. 6.57
Furthermore, dividend yield of 0%, expected market price volatility factor
of 0, and an option life of ten years was assumed for each of the three years
ended December 31, 1997, 1998 and 1999.
The following are pro forma disclosures (in thousands, except share and per
share data) that may not be representative of similar future disclosures
because: (i) additional options may be granted in future years and (ii) the
computations used to estimate the "fair value" of the stock options are subject
to significant subjective assumptions, any one or all of which may differ in
material respects from actual amounts. Furthermore, management believes that
these disclosures may vary were the Company's common stock publicly traded.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net loss available to common shareholders as reported ............ $ (3,568) $ (11,112) $ (13,936)
Estimated "fair value" of stock options vesting during the periods. -- (192) --
----------- ----------- -----------
Adjusted net loss ................................................ $ (3,568) $ (11,304) $ (13,936)
=========== =========== ===========
Adjusted loss per share - basic and diluted ...................... $ (0.40) $ (0.88) $ (1.10)
Number of common shares used in the per share calculations:
Basic and diluted .............................................. 8,976,586 12,617,371 12,636,262
</TABLE>
A summary of all the Company's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Options Average Options Average Options Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- -------------- ------- --------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of the year ....... -- $ -- 258 $ 3.84 646 $ 4.54
Granted ................................... 263 3.86 450 5.00 27 5.00
Exercised ................................. -- -- -- -- -- --
Forfeited ................................. 5 5.00 62 5.00 39 5.00
Outstanding - end of the year ............ 258 3.84 646 4.54 634 4.53
Exercisable at the end of the year ....... 57 3.67 165 4.09 289 4.22
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$2 to $5. The weighted-average remaining contractual life of those options is
8.3 years. The weighted-average grant-date fair value of options granted during
1997 was zero, during 1998 was $2.13 and during 1999 was zero.
The following presents, as of December 31, 1999, a breakdown of the above
stock option data by $2 and $5 options including for the total options - number
of options outstanding, the weighted-average exercise price and
weighted-average-average remaining life, and for currently exercisable options -
the number of options and weighted-average exercise price:
Weighted-Average
Weighted-Average Remaining Life
Number of Options Exercise Price In Years
------------------ ----------------- ----------------
Total Options -
100,000 $2.00 7.6
534,000 $5.00 8.3
Currently Exercisable -
75,000 $2.00
214,000 $5.00
F-21
<PAGE>
Common Stock Warrants
Senior Notes Warrants - On December 5, 1997 the Company issued seven-year
warrants to purchase 1,869,962 shares of common stock at $.01 per share. The
warrants were fully vested upon their issuance and there are no circumstances
under which the warrants would have to be returned to the Company by the
holders. The warrants became exercisable on June 30, 2000 and expire on December
1, 2004. The estimated fair market value of the warrants on the issue date
(December 5, 1997) of the warrants was $4.99 per warrant or $9,331,000 in total.
The fair market value was determined using the Black-Scholes option pricing
model which results in a fair market value equal to the estimated stock price
resulting from the minimal exercise price of $.01 per share.
Pay-in-Kind Preferred Stock Warrants - on July 1, 1999 the Company issued
five-year warrants to purchase 500,000 shares of common stock at $5.00 per
share. The warrants were exercisable when issued. The estimated fair market
value of the warrants on the issue date was determined to be deminimis. The fair
market value was determined using the Black-Scholes option pricing model using a
weighted-average assumption for risk-free interest rate of 5.78%, dividend yield
of 0%, expected market price volatility factor of .66 and an option life of five
years.
11. INCOME TAXES
The Company, a Nevada corporation, files an annual U.S. Federal income tax
return. The Company incurred net losses for the period ended December 31, 1997,
1998 and 1999 in Mexico as well as the United States. Accordingly, no provision
for U.S. or Mexican income taxes was made during 1997, 1998 or 1999. The
Company's Canadian operations, which were acquired in 1998, were taxable for
Canadian tax purposes. The Company plans that the earnings of the Mexican and
Canadian subsidiaries will be permanently reinvested by those subsidiaries.
Accordingly, a provision for taxes has been made for 1999 Canadian taxes, with
no addition for dividend withholding tax or for U.S. federal income tax or
credits on such income.
The Company has approximately $96.7 million of Mexican net operating
losses, which will begin to expire as follows: 2002 -- $5.1 million, 2003 --
$16.9 million, 2004 -- $38.0 million, 2005 -- $10.3 million, 2006 -- $0.9
million, 2007 -- $2.9 million, 2008 -- $19.9 million, and 2009 -- $2.7 million.
For financial statement purposes, a valuation allowance of $23.4 million has
been recognized to offset the estimated $32.9 million of deferred tax assets
related to those carryforwards. The Company has approximately $8.3 million of
U.S. net operating losses, which will begin to expire as follows: 2019 -- $4.8
million, 2018 -- $3.0 million and 2017 -- $0.5 million. For financial statement
purposes, a valuation allowance has been recognized to offset the estimated
deferred tax assets related to these carryovers.
The U.S. federal income tax regulations may, under certain circumstances,
cause income transactions in Mexico or Canada to give rise to U.S. income taxes,
subject to an adjustment for foreign tax credits. For 1997, the Company's
Mexican operations subsequent to August 18, 1997 resulted in losses for purposes
of U.S. federal income taxation. For 1998 and 1999, Mexican operations gave rise
to a loss for purposes of U.S. federal income taxation, and as stated above, no
provision has been made for U.S. tax on such income. Conversely, the Canadian
operations gave rise to income for purposes of U.S. federal income taxation
under Subpart F of the Internal Revenue Code. This income will be recognized to
the extent of current Canadian earnings and profits. However, such income will
be offset by U.S. net operating losses currently available, and therefore, no
provision has been made for U.S. tax on such income. Furthermore, the foreign
tax credits associated with Subpart F income will give rise to an additional
deferred tax asset for U.S. purposes.
F-22
<PAGE>
Federal income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997 U. S. Mexico Total
---------------------------------- -------- -------- --------
<S> <C> <C> <C>
Federal income taxes
Current ........................... $ -- $ 909 $ 909
Deferred .......................... -- -- --
-------- -------- --------
$ -- $ 909 $ 909
======== ======== ========
Income tax expense (recovery) at
the statutory rate................... $ (390) $ (175) $ (565)
Increase (decrease) resulting from
Non-deductible expenses.............. 44 -- 44
Exchange losses net of tax inflation. -- 178 178
Other ............................... 346 906 1,252
-------- -------- --------
$ -- $ 909 $ 909
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998 U.S. Mexico Canada Total
---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal income taxes
Current ............................. $ -- $ 100 $ 572 $ 672
Deferred ............................ -- -- -- --
-------- -------- -------- --------
$ -- $ 100 $ 572 $ 672
======== ======== ======== ========
Income tax expense (recovery) at
the statutory rate................... $(1,056) $ 212 $ (531) $ (1,375)
Increase (decrease) resulting from
Non-deductible expenses.............. 160 -- 960 1,120
Exchange losses net of tax inflation. -- (224) -- (224)
Other ............................... 896 112 143 1,151
-------- -------- -------- --------
$ -- $ 100 $ 572 $ 672
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 U.S. Mexico Canada Total
---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal income taxes
Current ............................. $ -- $ -- $ 709 $ 709
Deferred ............................ -- -- -- --
-------- -------- -------- --------
$ -- $ -- $ 709 $ 709
======== ======== ======== ========
Income tax expense (recovery) at
the statutory rate................... $ (1,703) $ (3,149) $ (28) $ (4,880)
Increase (decrease) resulting from
Non-deductible expenses.............. -- -- 558 558
Foreign rate differential ........... -- -- 179 179
Valuation allowance ................. -- 3,149 -- 3,149
Other ............................... 1,703 -- -- 1,703
-------- -------- -------- --------
$ -- $ -- $ 709 $ 709
======== ======== ======== ========
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the years ended
result principally from the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1999
----------------------------------- ------------------------------------
U. S. Mexico Total U. S. Mexico Total
-------- --------- --------- --------- ---------- ---------
Deferred income tax liabilities
<S> <C> <C> <C> <C> <C> <C>
Depreciation ............... $ -- $ (812) $ (812) $ -- $ (1,095) $ (1,095)
Inventories ................ -- (305) (305) -- (350) (350)
Prepaid expenses / fees..... -- (253) (253) -- (461) (461)
Accounts receivable ........ -- (7,566) (7,566) -- (12,304) (12,304)
-------- --------- --------- --------- ---------- ---------
Total -- (8,936) (8,936) -- (14,210) (14,210)
Deferred income tax assets
Depreciation................ -- -- -- 2 -- 2
Accrued liabilities ........ -- -- -- 156 -- 156
Reserves ................... -- 3,517 3,517 -- 3,996 3,996
Unearned service fees ...... -- 700 700 -- 709 709
Asset tax carryovers ....... -- 1,026 1,026 -- -- --
Tax loss (NOL) carryovers .. 1,242 21,838 23,080 2,905 32,900 35,805
Charitable contribution
carryovers ................ -- -- -- 2 -- 2
Foreign tax credits ........ 75 -- 75 74 -- 74
-------- --------- --------- --------- ---------- ---------
Total 1,317 27,081 28,398 3,139 37,605 40,744
Valuation allowance (1,317) (18,145) (19,462) (3,139) (23,395) (26,534)
-------- --------- --------- --------- ---------- ---------
Total $ -- $ -- $ -- $ -- $ -- $ --
======== ========= ========= ========= ========== =========
</TABLE>
F-23
<PAGE>
12. CONTINGENCIES AND COMMITMENTS
General
The Company is subject to various claims arising in the ordinary course of
business, and is a party to various legal proceedings which constitute ordinary
routine litigation incidental to the Company's business. In the opinion of
management, all such matters are either adequately covered by insurance or are
not expected to have a material adverse effect on the Company.
Lease Information
The Company leases administrative and sales office space and certain
equipment under non-cancelable lease agreements. Total rent expense for the
years ended December 31, 1997, 1998 and 1999 was approximately $317,000,
$1,659,000, and $2,013,000, respectively. These operating leases expire in
various years in the future. Some of these leases may be renewed. Future minimum
payments under all of the Company's non-cancelable operating leases with initial
terms of one year or more were as follows at December 31, 1999 (in thousands):
<TABLE>
<S> <C>
2000 ............................................................................. $ 2,171
2001 ............................................................................. 1,360
2002 ............................................................................. 1,238
2003 ............................................................................. 451
2004 ............................................................................. 273
-------
Total ............................................................................ $ 5,493
=======
</TABLE>
Canadian Condominium Acquisitions
The Company has committed to purchase 20 condominium units in Whistler,
British Columbia at an aggregate purchase price of $3.9 million. Deposits of
$0.6 million have been paid prior to year end, and an additional $2.1 million
was paid in March 2000. The balance of $1.2 million is to be paid during 2000,
or thereafter, based on completion of construction and transfer of ownership.
Legal Proceedings
The Company is currently subject to litigation with respect to claims that
arose prior to August 18, 1997 respecting employment, contract, construction and
commissions disputes, among others. In management's judgment, none of such
lawsuits against the Company is likely to have a material adverse effect on the
Company. Moreover, pursuant to the Stock Purchase Agreement with Bancomer, the
Company is entitled to indemnification for all such claims against it. In
addition, the Company is subject to litigation with respect to a limited number
of claims that arose on or after August 18, 1997. In the opinion of management,
the resolution of such claims will not have a material adverse effect on the
operating results or financial position of the Company.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
CR Resorts Capital, S. de R.L. de C.V.:
We have audited the accompanying balance sheets of CR Resorts Capital, S. de
R.L. de C.V. (a Mexican Corporation), translated into U.S. dollars, as of
December 31, 1998 and 1999, and the related translated statements of operations
and accumulated results and cash flows for the period from August 18, 1997
through December 31, 1997, and for the years ended December 31, 1998 and 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 translated financial statements referred to above present
fairly, in all material respects, the financial position of CR Resorts Capital,
S. de R.L. de C.V., as of December 31, 1998 and 1999 and the results of its
operations and its cash flows for the period from August 18, 1997 through
December 31, 1997, and for the years ended December 31, 1998 and 1999 in
conformity with the accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN
March 17, 2000
Mexico City, Mexico
F-25
<PAGE>
<TABLE>
<CAPTION>
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A Wholly Owned Finance Subsidiary)
BALANCE SHEETS
(In thousands of U.S. dollars)
December 31,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Assets
Cash ................................................................. $ 24 $ 12
Loans and related accrued interest receivable from affiliates......... 94,751 104,493
Deferred loan costs, net of accumulated amortization of $1,176 and
$2,286 at December 31, 1998 and 1999, respectively................. 6,593 5,483
Other assets.......................................................... 295 1,088
----------- -----------
Total assets ............................................................. $ 101,663 $ 111,076
=========== ===========
Liabilities and Shareholders' Deficit
Accrued expenses ..................................................... $ 1,267 $ 488
Due to Raintree Resorts International, Inc. (Ultimate Parent) ........ 17,116 21,278
Notes payable to a bank .............................................. -- 6,750
Senior Notes due 2004, bearing interest at 13%, net of unamortized
original issue discount of $7,107 and $5,907 at
December 31, 1998 and 1999, respectively........................... 82,893 84,093
Accrued interest payable ............................................. 1,025 1,025
----------- -----------
Total liabilities ........................................................ 102,301 113,634
Shareholders' Deficit
Capital stock......................................................... -- --
Accumulated deficit................................................... (638) (2,558)
----------- -----------
Total shareholders' deficit............................................... (638) (2,558)
----------- -----------
Total liabilities and shareholders' deficit .............................. $ 101,663 $ 111,076
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A Wholly Owned Finance Subsidiary)
STATEMENTS OF OPERATIONS AND ACCUMULATED RESULTS
(In thousands of U.S. dollars)
For the Period
August 18, 1997 For the For the
through Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues, representing interest and related fees charged to affiliates .. $ 3,778 $ 15,960 $ 14,540
Expenses
Interest expense on bank loans and Senior Notes ..................... 3,623 14,949 14,679
Interest expense on notes payable to the Ultimate Parent ............ 42 889 1,151
General and administrative, including $94, $244 and $369 of
management fees charged by an affiliate for accounting and
administrative services for the periods ended
December 31, 1997, 1998 and 1999, respectively .................... 101 783 614
Translation loss (gain), net ........................................ 11 (22) 16
----------- ----------- -----------
Total expenses.................................................... 3,777 16,599 16,460
----------- ----------- -----------
Income (loss) before income taxes........................ 1 (639) (1,920)
Income taxes......................................................... -- (273) --
Tax loss carryforwards .............................................. -- 273 --
----------- ----------- -----------
Net income (loss) for the period ........................................ 1 (639) (1,920)
Accumulated results at beginning of period .............................. -- 1 (638)
----------- ----------- -----------
Accumulated results at end of period .................................... $ 1 $ (638) $ (2,558)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A Wholly Owned Finance Subsidiary)
STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
For the Period
August 18, 1997 For the For the
through Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C>
Operating activities
Net income (loss) for the period .................................... $ 1 $ (639) $ (1,920)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of loan costs and discount .......................... 158 2,379 2,310
Changes in operating assets and liabilities
Other assets ..................................................... (2) (363) (793)
Due to Ultimate Parent ........................................... 620 (615) 4,162
Due from affiliates .............................................. (4,158) (3,889) (9,742)
Accrued expenses and accrued interest ............................ 946 1,346 (779)
----------- ----------- -----------
Net cash used in operating activities ................................... (2,435) (1,781) (6,762)
Investing activities
Loans to affiliates ................................................. (86,704) -- --
----------- ----------- -----------
Cash used in investing activities ....................................... (86,704) -- --
----------- ----------- -----------
Financing activities
Proceeds from Ultimate Parent loan .................................. 3,750 3,800 --
Proceeds from issuance of notes payable to a bank in connection
with the purchase transactions ................................... 82,954 -- --
Repayment of bank loans ............................................. (82,954) (3,000) --
Issuance of Senior Notes ............................................ 90,000 -- --
Payments for debt issuance costs .................................... (5,603) (1,003) --
Proceeds from bank loan ............................................. 1,000 2,000 6,750
----------- ----------- -----------
Net cash provided by financing activities ............................... 89,147 1,797 6,750
----------- ----------- -----------
Increase (decrease) in cash ............................................. 8 16 (12)
Cash at beginning of period.............................................. -- 8 24
----------- ----------- -----------
Cash at end of period ................................................... $ 8 $ 24 $ 12
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest ............................ $ 2,913 $ 12,444 $ 12,369
=========== =========== ===========
Non-cash financing activities
Increase in due to affiliate resulting from debt discount
and costs ........................................................ $ 8,398 $ 2,790 $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-28
<PAGE>
CR RESORTS CAPITAL, S. DE R.L. DE C.V.
(A Wholly Owned Finance Subsidiary)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND FINANCIAL ACTIVITY
CR Resorts Capital, S. de R.L. de C.V. ("Capital"), which is 100% owned by
Canarias Future SRL, a wholly-owned subsidiary of Raintree Resorts
International, Inc. (formerly "Club Regina Resorts, Inc.") (the "Ultimate
Parent"), was formed in August, 1997 for purposes of obtaining financing of the
Ultimate Parent's Mexican operations.
The Company has no employees, therefore administrative services are
provided by an affiliated company.
On August 18, 1997, the Ultimate Parent purchased all of the stock of
Desarrollos Turisticos Regina S. de R.L. de C.V. and its subsidiaries (the
"Predecessor Businesses"). Contemporaneous with the purchase, the real property
was segregated into condominium regimes so that the Regina Resorts and Westin
Hotels would be able to be owned by separate companies. The Westin Hotels were
then sold to SLT Realty Limited partnership, an affiliate of Starwood Capital
Group, L.L.C. ("Starwood"). These transactions are referred to herein as the
Purchase Transactions.
On August 18, 1997, Capital obtained bank loans aggregating $82,954,000 as
well as other related party loans that were used to make loans to the operating
subsidiaries of the Ultimate Parent.
On December 5, 1997, Capital and its Ultimate Parent ("Issuers") jointly
issued $100 million of Senior Notes due December 1, 2004 ("Senior Notes") and
Capital recorded $90 million of such debt along with the related deferred loan
costs of $6,766,000. The Ultimate Parent also issued warrants to the noteholders
to purchase 1,869,962 common shares. These warrants were estimated to have a
value of $4.99 per warrant or $9,331,000 in total. This amount was recorded as
an increase in shareholders' investment by the Ultimate Parent and as original
issue discount and account payable to the Ultimate Parent in the amount of
$8,398,000, on Capital's balance sheet. The original issue discount is being
amortized to expense over the warrant exercise period of 84 months and was
$91,500, $1,200,000 and $1,200,000 for the periods ended December 31, 1997, 1998
and 1999, respectively, and is included in interest expense. Substantially, all
of the net proceeds of the Senior Notes offering were used to repay the
outstanding loans and related accrued interest payable by Capital to its lender
bank (Bancomer).
The Senior Notes are payable in United States ("U.S.") Dollars and bear
interest at 13% with interest payable semi-annually on June 1st and December
1st. The Senior Notes are general unsecured obligations of the Issuers.
Any payments (interest or principal) made to the noteholders will be made
free and clear of any withholding for any present or future taxes, duties,
levies, imposts, assessments or other governmental charges of whatever nature
imposed by Mexico or any subdivision of Mexico or by any related authority or
agency having power to tax, unless such taxes are required by law, rule or
regulation to be withheld or deducted, in which case, subject to certain
exceptions, the Issuers will pay such additional amounts ("Additional Amounts")
as may be necessary so that the net amount received by noteholders of the Senior
Notes (including Additional Amounts) after such withholding or deduction will
not be less than the amount that would have been received in the absence of such
withholding or deduction.
The indenture pursuant to which the Senior Notes were issued (the
"Indenture") contains certain covenants that, among other things, limit the
ability of the Issuers to incur additional Indebtedness and issue preferred
stock, pay dividends or make other distributions, repurchase equity interest (as
defined) or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Issuers, issue or sell equity
F-29
<PAGE>
interests of the Ultimate Parent's subsidiaries, or enter into certain mergers
and consolidations. Additional indebtedness includes the ability of the Issuers
to borrow credit agreement debt up to 90% of its Vacation Interval receivables.
In addition, under certain circumstances, the Issuers will be required to offer
to purchase the Senior Notes at a price equal to 100% of the principal amount,
plus accrued and unpaid interest and liquidating damages, if any, to the date of
purchase, with the proceeds of certain assets sales (as defined).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Translation to U.S. Dollars
All amounts are recorded in the Company's accounting records in Mexican
pesos. Since the significant transactions are denominated in U.S. dollars, the
functional currency of the Company's operations is the U.S. dollar. Therefore,
the Mexican peso financial statements were remeasured into U.S. dollars by
applying the procedures specified in Statement of Financial Accounting Standards
(SFAS) No. 52 as follows:
a) Quoted year-end rates of exchange are used to remeasure monetary assets
and liabilities.
b) All other assets and shareholders' deficit accounts are remeasured at
the rates of exchange in effect at the time the items were originally
recorded.
c) Revenues and expenses are remeasured at the average rates of exchange in
effect during the period.
d) Foreign exchange gains and losses recorded in Mexican pesos as a result
of fluctuations in the rate of exchange between the Mexican peso and U.S.
dollar are eliminated.
e) Translation gains and losses arising from the remeasurement are included
in the determination of net income (loss) for the period in which such
gains and losses arise.
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 amounts of assets and liabilities, the 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.
Actual results could differ from those estimates.
Deferred Loan Costs
The costs incurred in connection with the issue of the Senior Notes, due
2004, have been deferred in the balance sheets and are being amortized on an
effective interest rate method over the seven-year term of these Senior Notes.
Amortization expense for the periods ended December 31, 1997, 1998 and 1999
totaled $67,000, $1,109,000 and $1,110,000 respectively, and is included in
interest expense.
Income Taxes
Deferred income taxes are provided by the liability method in accordance
with SFAS No. 109 for all temporary differences between the amounts of assets
and liabilities for financial and tax reporting purposes.
SFAS No. 109 requires that deferred tax liabilities or assets at the end of
each period be determined using the tax rate expected to be in effect when the
related taxes are expected to be paid or recovered. Accordingly, income tax
provisions increase or decrease in the same period in which a change in tax
rates is enacted.
There are no significant timing differences between book and tax basis. Due
to the uncertainty of their realization, the Company has not recorded the
deferred income tax asset for the potential future tax saving related to tax
loss carryforwards amounts indicated in Note 6.
F-30
<PAGE>
Financial Instruments
The Company has considered the disclosure provisions of Statement of
Financial Accounting Standards No. 105, "Disclosure of Information about
Financial Instruments with off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk", as well as the provisions of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The Company does not have any financial instruments
which would call for any additional disclosures under Statements 105 and 107.
The fair market value of the Senior Notes has not been determined since they are
not traded on a formal exchange market and they are volatile due to being
speculative in nature.
Transactions in Foreign Currency
Foreign currency transactions are recorded at the exchange rate as of the
date of the transaction. At December 31, 1998 and 1999, the Company adjusted its
foreign currency denominated assets and liabilities to the exchange rate of
9.865 and 9.5222 Mexican pesos per U.S. dollar, respectively.
3. RELATED PARTY TRANSACTIONS AND BALANCES
Loans Receivable from Intercompany Affiliates
Loans receivable from affiliates are payable in U.S. dollars upon demand
and bear interest at 13.8% and 16% in 1998 and 1999, respectively. Receivable
balances at December 31, are (in thousands):
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Top Acquisition Sub, S. de R.L. de C.V. $ 27,290 $ 31,942
CR Resorts Puerto Vallarta, S. de R.L. de C.V. 51,722 46,015
CR Resorts Cancun, S. de R.L. de C.V. 9,308 13,407
CR Resorts Los Cabos, S. de R.L. de C.V. 11,951 10,448
Corporacion Mexitur, S. de R.L. de C.V. (5,900) 2,291
Other 380 390
----------- -----------
$ 94,751 $ 104,493
=========== ===========
</TABLE>
Loans receivable from affiliates and associated interest income are
eliminated in the consolidation of Capital into the consolidated financial
statements of the Ultimate Parent.
Notes Payable to Related Parties
At December 31, 1998 and 1999, Capital had $7.55 million and $11.72 million
of notes payable to the Ultimate Parent which bear interest at 16% and are
payable upon demand.
Notes payable to related parties and the associated interest expense are
all payable in U.S. dollars and have been eliminated in the consolidation of
Capital into the consolidated financial statements of the Ultimate Parent.
4. NOTES PAYABLE TO A BANK
The Company also entered into a $7 million loan agreement with Bancomer on
November 26, 1999, that was collateralized by Units of Investment (UDI)
denominated notes receivable and certain undeveloped land held by the Company's
affiliates, and is restricted to the timely payment of interest to holders of
the Company's Senior Notes. The loan agreement extends credit to the Company for
a fixed 30-month term from November 29, 1999 to May 29, 2000. Furthermore, the
agreement requires the Company to pay back the loan in UDI's in 30 roughly equal
monthly installments in the U.S. dollar equivalent amount of approximately
$233,000 beginning on December 29, 1999. Also, the loan bears simple interest at
a rate of 12% per annum, and as of December 31, 1999, had an outstanding balance
of 24,060,291 UDI equivalent to $6,750,000.
F-31
<PAGE>
The UDI is a unit of account, of a constant real value, which is determined
by Banco de Mexico with respect to legal tender. The value of each UDI is
proportionately adjusted to the Mexican National Consumer Price Index variation.
The UDI value as of December 31, 1999, was $0.28053.
5. LINE OF CREDIT
In July 1998, the Company received approval from Bancomer of a $20 million
line of credit, and the Company borrowed $2 million under this line of credit.
The loan was paid in November 1998 and this line of credit was terminated.
6. TAX ENVIRONMENT
Income and Asset Tax Regulations
The Company is subject to income taxes (ISR) and the asset tax (IMPAC). ISR
is computed taking into consideration the taxable and deductible effects of
inflation, such as amortization calculated on restated asset values and
considering the effects of inflation on certain monetary assets and liabilities
through the inflationary component. The statutory rate for income taxes was 34%
for the year ended December 31, 1998. Beginning in 1999, the income tax rate
increased from 34% to 35%, with the obligation to pay this tax each year at a
rate of 30% (transitorily 32% in 1999) and the remainder upon distribution of
earnings.
IMPAC is computed at an annual rate of 1.8% of the average of the majority
of restated assets less certain liabilities, and the tax is paid only to the
extent that it exceeds the ISR of the period. Any required payment of IMPAC is
recoverable against any excess of ISR over IMPAC for the preceding three and
following ten years.
The main differences that affect taxable income are the recognition of
inflation effects for tax purposes through the inflationary component, and
nondeductible expenses.
Tax Loss Carryforwards
At December 31, 1999 the Company has tax loss carryforwards for income tax
purposes in the restated amount of $383,000 expiring in 2007, which will be
indexed for inflation through the year applied.
7. SHAREHOLDERS' DEFICIT
At December 31, 1997, 1998 and 1999, capital stock consisted of two shares
fully subscribed and paid, representing the fixed portion in the amount of 3,000
Mexican pesos, which is not subject to withdrawal. Variable portion is
unlimited.
The annual net income of the Company (in Mexican pesos) is subject to the
legal requirement that 5% thereof be transferred to a legal reserve until the
reserve equals 20% of capital stock. This reserve would amount to 600 Mexican
pesos and could not be distributed to the shareholders during the existence of
the Company, except in form of a stock dividend.
As of 1999, dividends paid to individuals or foreign residents will be
subject to income tax withholding at an effective rate ranging from 7.5% to
7.7%, depending on the year in which the earnings were generated. In addition,
if earnings for which no corporate tax has been paid are distributed, the tax
must be paid upon distribution of the dividends. Consequently, the Company must
keep a record of earnings subject to each tax rate.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Desarrollos Turisticos Bancomer, S.A. de C.V.:
We have audited the accompanying consolidated statements of operations and cash
flows of Desarrollos Turisticos Bancomer, S.A. de C.V. (a Mexican Corporation)
and Subsidiaries (the Company), translated into U.S. dollars, for the period
from January 1, 1997 through August 17, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the translated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Desarrollos Turisticos Bancomer, S.A. de C.V. and Subsidiaries, for the period
from January 1, 1997 through August 17, 1997, in conformity with the accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN
March 19, 1999
Mexico City, Mexico
F-33
<PAGE>
<TABLE>
<CAPTION>
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of U.S. dollars)
January 1, 1997
Through
August 17, 1997
-----------
<S> <C>
Revenues
Vacation interval sales ........................................................ $ 31,479
Less: amounts deferred to future periods ....................................... (30,653)
Add: amounts recognized from prior periods ..................................... 1,650
-----------
2,476
Interest income on contracts receivables ....................................... 3,277
Rental of unsold units ......................................................... 4,560
Maintenance fee income ......................................................... 2,461
Other .......................................................................... 1,329
-----------
11,627
Total revenue ......................................................... 14,103
Operating expenses
Commissions paid to sales personnel........................................ 5,512
Less: amounts deferred to future periods .................................. (5,413)
Add: amounts recognized from prior periods ................................ 313
Maintenance of unsold units ............................................... 110
-----------
Total operating expenses, net ......................................... 522
Gross profit ................................................................... 13,581
Advertising, sales and marketing ............................................... 4,899
General and administrative ..................................................... 4,504
Maintenance ................................................................... 4,559
Interest expense ............................................................... 2,827
Value added and other taxes .................................................... 1,002
Translation loss, net .......................................................... 74
-----------
17,865
-----------
Loss from continuing operations before taxes .......................... (4,284)
Asset taxes .................................................................... 754
-----------
Net loss from continuing operations .............................. (5,038)
Discontinued hotel operations
Net income of discontinued hotel operations (less tax expense
of $1,256) ......................................................... 2,302
-----------
Net loss for the period......................................................... $ (2,736)
===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
January 1, 1997
Through
August 17, 1997
-----------
<S> <C>
Operating Activities
Net loss from continuing operations .............................................. $ (5,038)
Adjustments to reconcile net loss to net cash provided by operating activities -
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (10,088)
Deferred costs ............................................................ (5,100)
Accounts payable .......................................................... 628
Deferred revenue .......................................................... 26,269
Net income of discontinued hotel operations ............................... 2,302
Assets/liabilities of discontinued hotel operations........................ 264
-----------
Net cash provided by operating activities ........................................ 9,237
Investing Activities
Acquisition of property, plant, and equipment .................................... (849)
-----------
Net cash used in investing activities ............................................ (849)
Financing Activities
Proceeds from notes payable to related parties ................................... 1,727
Distribution to shareholders .................................................... (11,000)
-----------
Net cash used in financing activities ............................................ (9,273)
Decrease in cash and cash equivalents ............................................ (885)
Cash and cash equivalents at beginning of period ................................. 2,563
-----------
Cash and cash equivalents at end of period ....................................... $ 1,678
===========
Supplemental disclosure of cash flow information
Interest paid ............................................................... $ 7,197
Income and asset taxes paid ................................................. $ 1,752
Non-cash financing activities
Conversion of debt to equity ................................................ $ 120,743
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-35
<PAGE>
DESARROLLOS TURISTICOS BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to August 18, 1997, Desarrollos Turisticos Bancomer, S.A. de C.V.(the
"Company"), was a wholly owned subsidiary of Bancomer, S.A. de C.V.("Bancomer"),
a Mexican banking and financial services institution. The Company was acquired
by Raintree Resorts International Inc. (formerly "Club Regina Resorts, Inc.").
Contemporaneous with the purchase, the real property was segregated into
condominium regimes so that the Regina Resorts and Westin Hotels would be able
to be owned by separate companies. The Westin Hotels were then sold to SLT
Realty Limited Partnership, an affiliate of Starwood Capital Group L.L.C.
The Company owns and operates certain hospitality assets, which comprise
primarily deluxe resort hotels and vacation ownership properties in Cancun,
Puerto Vallarta, and Cabo San Lucas, Mexico. The Company's principal operations
consist of (1) developing and acquiring hotel and vacation ownership resorts,
(2) marketing and selling vacation intervals at its resorts, (3) providing
consumer financing for the purchase of vacation intervals at its resorts, and
(4) managing the operations of its resorts.
The accompanying consolidated financial statements include the accounts of
Desarrollos Turisticos Bancomer, S.A. de C.V., and all of its majority owned
subsidiaries, which are listed below:
Club Regina, S.A. de C.V.
Servicios Turisticos Integrales Cobamex, S.A. de C.V.
Corporacion Habitacional Mexicana, S.A. de C.V.
Corporacion Mexitur, S.A. de C.V.
Promotora y Desarrolladora Pacifico, S.A. de C.V.
Promotora Turistica Nizuc, S.A. de C.V.
Desarrollos Turisticos Integrales Cabo San Lucas, S.A. de C.V.
Desarrollos Turisticos Integrales de Cozumel, S.A. de C.V.
All significant intercompany balances and transactions have been
eliminated.
Translation to U.S. Dollars
All amounts are recorded in the Company's accounting records in Mexican
pesos.
Since the significant transactions in U.S. dollars are mainly vacation
interval sales, advertising expenses, advisory services and interest earned, the
functional currency of the Company's operations is the U.S. dollar. Therefore,
the Mexican peso consolidated financial statements were remeasured into U.S.
dollars by applying the procedures specified in Statement of Financial
Accounting Standards (SFAS) No. 52 as follows:
a) Quoted period-end rates of exchange are used to remeasure monetary
assets and liabilities.
b) All other assets and shareholders' equity accounts are remeasured at the
rates of exchange in effect at the time the items were originally recorded.
c) Revenues and expenses are remeasured at the average rates of exchange in
effect during the period.
d) Foreign exchange gains and losses recorded in Mexican pesos as a result
of fluctuations in the rate of exchange between the Mexican peso and U.S.
dollar are eliminated.
F-36
<PAGE>
e) Translation gains and losses arising from the remeasurement are included
in the determination of net income of the period in which such gains and
losses arise.
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 amounts of assets and liabilities, the 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.
Actual results could differ from those estimates.
Contracts Receivable and Concentration of Credit Risk
Substantially all contracts receivable relate to sales of vacation
ownership interests. While the Company does not obtain collateral for such
contracts, the Company does not believe it has significant concentrations of
credit risk in its contracts receivable because in the instance of
uncollectibility of a contract, the Company retains the right to recover and
resell the defaulted interval. Historically, the Company has been able to resell
such intervals at prices in excess of the defaulted receivable balances.
A portion of the Company's customers reside in Mexico and the Company
intends to continue to conduct business in Mexico. All of the Company's sales
offices are currently located in Mexico and any economic downturn in Mexico,
which has a history of economic instability, could have a material adverse
effect on the Company's business, results of operations and financial condition.
Revenue Recognition
The Company sells shares of Class B stock in a majority-owned subsidiary to
vacation ownership buyers. The rights associated with the Class B shares allow
the buyers to use a specified type of accommodation (one-bedroom, two-bedroom,
etc.) during a specified season at any of the Company's resorts on a first-come,
first-serve basis annually for approximately thirty years. The sales price of
such Class B shares is recognized using operating lease accounting and therefore
ratably over the thirty-year right to use period and the costs of selling the
Class B shares, which include brokerage commissions, commissions to sales
personnel, and marketing costs directly associated with successful sales, are
deferred and recognized ratably over the right-to-use period.
Interest income from contracts receivable is recognized as accrued.
Maintenance fees are billed to Class B shareholders annually and recognized
as earned over 12 months. Maintenance expenses are recognized when incurred.
A provision for uncollectible contracts receivable is accrued for contracts
which become more than 180 days past due. Deferred revenue related to contracts
cancelled in any year subsequent to the year of sale is recognized to the extent
of cumulative cash collections in excess of costs. Deferred costs are recognized
in their entirety.
Advertising Expense
Advertising costs, which include solicitations of prospective vacation
interval buyers, are expensed as incurred to the extent they cannot be directly
associated with a successful sale of Class B shares to a vacation interval
buyer. Advertising expenses in the period from January 1, 1997 through August
17, 1997 totaled $2,965, and are included in advertising, sales and marketing
expenses.
F-37
<PAGE>
Income Taxes
Deferred income taxes are provided by the liability method in accordance
with SFAS No. 109 for all temporary differences between the amounts of assets
and liabilities for financial and tax reporting purposes.
SFAS No. 109 requires that deferred tax liabilities or assets at the end of
each period be determined using the tax rate expected to be in effect when the
related taxes are expected to be paid or recovered. Accordingly, income tax
provisions increase or decrease in the same period in which a change in tax
rates is enacted.
Due to the uncertainty of the realization of the tax loss carryforwards,
the Company has not recorded the deferred income tax asset for the potential
future tax saving related to temporary differences, as indicated in Note 4.
Transactions in Foreign Currency
Foreign currency transactions are recorded at the exchange rate as of the
date of the transaction. At August 17, 1997, the Company adjusted its foreign
currency denominated assets and liabilities to the exchange rate of 7.766
Mexican pesos per U.S. dollar.
Employee Benefits
Under Mexican labor law, the Company is liable for indemnity payments and
seniority premiums to employees terminating under certain circumstances.
Seniority premiums are charged to operations as incurred.
Indemnity payments to involuntarily terminated employees are charged to
results in the period in which they are made.
2. CONTRACTS RECEIVABLE AND CREDIT LOSSES
Vacation ownership contracts receivables are originated when vacation
ownership buyers elect to finance their purchases through the Company. The
Company requires a minimum 15% down payment. A majority of purchasers are
citizens of the United States and Canada. Vacation ownership contracts
receivable bear interest from 14% to 15% and are collected in monthly
installments over periods ranging from 12 months to 7 years. Approximately 66%
of vacation interval contracts receivable were U.S. dollar-denominated at August
17, 1997.
Because the Company collects non-refundable cash from vacation ownership
buyers in excess of deferred profit, and because the Company has historically
been able to resell vacation ownership intervals at prices in excess of canceled
receivable balances, the Company does not provide for credit losses related to
doubtful contracts.
3. RELATED IMPAIRMENT LOSS
During the last quarter of 1994, management approved and committed to a
plan to dispose of the hotel and vacation interval assets of the Company. Based
on the issuance of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, in March 1995, the Company
concluded that the assets should be classified as held for sale and valued at
the lower of cost or fair value less costs to sell. An impairment loss was
recorded in the year ended December 31, 1994 to reflect the estimated sales
proceeds less costs to sell. No depreciation expense was provided from the
period from the adoption of the plan of disposal through the date of sale.
F-38
<PAGE>
4. TAX ENVIRONMENT
Income and Asset Tax Regulations
The Company is subject to income taxes (ISR) and the asset tax (IMPAC). ISR
is computed taking into consideration the taxable and deductible effects of
inflation, such as depreciation calculated on restated asset values, and the
deduction of purchases instead of cost of sales, which permits the deduction of
current costs, and considering the effects of inflation on certain monetary
assets and liabilities through the inflationary component. The statutory rate
for income taxes was 34% for the period ended August 17, 1997. Beginning in
1999, the income tax rate increased from 34% to 35%, with the obligation to pay
this tax each year at a rate of 30% (transitorily 32% in 1999) and the remainder
upon distribution of earnings.
IMPAC is computed at an annual rate of 1.8% of the average of the majority
of restated assets less certain liabilities, and the tax is paid only to the
extent that it exceeds the ISR of the period. Any required payment of IMPAC is
recoverable against any excess of ISR over IMPAC for the preceding three and
following ten years.
The subsidiaries of the Company generally file separate Mexican income tax
returns. Because operations of the Company and each of its subsidiaries have
resulted in losses, only nominal amounts of income taxes have become payable.
Employee Profit Sharing Regulations
The income for purposes of employee profit sharing does not consider the
inflationary component. Depreciation is based on historical rather than restated
values. Employee profit sharing has been computed on the basis of the results of
each individual company.
Tax Loss Carryforwards
At August 17, 1997 the Company has tax loss carryforwards for income tax
purposes which will be indexed for inflation through the year applied, in the
following restated amounts:
Expiration Date Amount
--------------- ----------
2002 $ 14,973
2003 22,295
2004 47,212
2005 12,296
2006 1,665
2007 3,896
----------
$ 102,337
==========
Net Loss
The annual net income of the Company (in Mexican pesos) is subject to the
legal requirement that 5% thereof be transferred to a legal reserve until the
reserve equals 20% of capital stock. This reserve may not be distributed to the
shareholders during the existence of the Company, except in form of a stock
dividend.
As of 1999, dividends paid to individuals or foreign residents will be
subject to income tax withholding at an effective rate ranging from 7.5% to
7.7%, depending on the year in which the earnings were generated. In addition,
if earnings for which no corporate tax has been paid are distributed, the tax
must be paid upon distribution of the dividends. Consequently, the Company must
keep a record of earnings subject to each tax rate.
F-39
<PAGE>
5. RELATED PARTY TRANSACTIONS
The Company's shareholder is the principal owner or has substantial
ownership interests in other entities with which the Company transacts business.
The following table summarizes transactions with related parties for the period
from January 1, 1997 through August 17, 1997:
Expense for the period:
Interest........................ $ 7,539
Lease........................... $ 244
6. COMMITMENTS
Certain subsidiaries of the Company entered into an operation and
administrative agreement with Westin Mexico, S.A. de C.V. ("Westin"), through
December 2003. The Company believes it has the right to terminate the agreement
pursuant to provisions related to change of control of Westin, but has not
asserted that right. Under the agreement, the subsidiaries are obligated to pay
certain cost and expense reimbursements related to promotion, marketing,
reservations, and sales.
Additionally, the subsidiaries are obligated to pay 0.9% of total operating
revenues for technical services provided by Westin. Technical services expense
was $1,564 for the period.
Additionally, Westin is entitled to management fees based on a percentage
of the total operating revenues of the hotels (ranging from 1% to 2% over the
life of the contract), as well as additional fees for maintaining certain
percentages related to gross margin operations (calculated as a percentage of
total operating revenues and ranging from 2.5% to 6%). Management fees were $756
and gross margin fees were $1,564 for the period, respectively.
7. CONTINGENCIES
The Company is subject to various claims arising in the ordinary course of
business, and is a party to various legal proceedings which constitute
litigation incidental to the Company's business. In the opinion of management,
all such matters are either adequately covered by insurance or are not expected
to have a material adverse effect on the Company.
8. SALE OF COMPANY
On the close of business on August 17, 1997, Bancomer sold its interest in
the Company to Raintree Resorts International, Inc. (formerly Club Regina
Resorts, Inc.) In connection with such sale, the Bancomer affiliate provided
financing to Raintree Resorts International for approximately $83,000.
9. DISCONTINUED OPERATIONS
As mentioned in Note 1, contemporaneously with the acquisition of the
Company, Raintree Resorts International, Inc. sold the hotel operations.
Accordingly, the Company's hotel segment has been presented as discontinued
operations in accordance with APB Opinion No. 30.
F-40
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Information relating to the discontinued hotel operations for the seven
and one-half month period ended August 17, 1997 are as follows:
Revenues:
Rooms ........................................... $ 20,832
Food and beverage ............................... 11,342
Other departments ............................... 2,297
Miscellaneous ................................... 242
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Total revenues ........................ 34,713
Expenses:
Rooms ........................................... 2,952
Food and beverage ............................... 6,068
Other departments ............................... 746
Advertising, sales and marketing ................ 2,964
General and administrative ...................... 6,311
Maintenance ..................................... 4,818
Interest expense ................................ 4,712
Value added and other taxes ..................... 1,682
Other expense ................................... 819
Translation loss ................................ 83
--------
31,155
Income before taxes ............................... 3,558
Asset taxes ..................................... 1,256
--------
Net income for the period.............. $ 2,302
========
F-41
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