Sunterra Corp · 8-K · For 4/25/02 · EX-99.2
Filed On 5/13/02 · SEC File 1-13815 · Accession Number 1021408-2-6748
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/13/02 Sunterra Corp 8-K{5,7} 4/25/02 3:16 Donnell..Financial/NY/FA
Document/Exhibit Description Pages Size
1: 8-K Current Report 4 12K
2: EX-99.1 Press Release Dated 5/10/2002 2 13K
3: EX-99.2 Unaudited Financial Info for Fiscal 2000 & 2001 10 68K
EX-99.2 · Unaudited Financial Info for Fiscal 2000 & 2001
Exhibit Table of Contents
Exhibit 99.2
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Years Ended December 31, 2001 and 2000
(In thousands, except share and per share amounts)
--------------------------------------------------------------------------------
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2001 2000
Revenues:
Vacation Interest sales .................................................... $ 166,315 $ 187,199
Vacation Interest lease revenue ............................................ 10,913 6,523
Club Sunterra membership fees .............................................. 6,823 7,019
Resort rental income ....................................................... 12,282 13,457
Management fees ............................................................ 20,966 20,006
Interest income ............................................................ 30,501 26,506
Other income ............................................................... 24,647 27,403
----------- -----------
Total revenues ....................................................... 272,447 288,113
----------- -----------
Costs and Operating Expenses:
Vacation Interests cost of sales ........................................... 34,275 85,319
Advertising, sales and marketing ........................................... 104,273 150,742
Maintenance fees and subsidy expense ....................................... 14,075 16,668
Provision for doubtful accounts and loan losses ............................ 15,843 33,973
Loan portfolio expenses .................................................... 11,037 8,404
General and administrative ................................................. 76,076 117,183
Depreciation and amortization .............................................. 18,428 27,517
Reorganization expenses .................................................... 50,350 77,988
Restructuring expenses ..................................................... - 6,040
Impairment write-down of assets ............................................ - 37,430
Loss on abandonment of property and equipment .............................. - 959
Impairment loss on retained interests in mortgages receivable sold ......... - 30,015
----------- -----------
Total costs and operating expenses ................................... 324,357 592,238
----------- -----------
Loss from operations ................................................. (51,910) (304,125)
----------- -----------
Interest expense (contractual interest of $61,252 and $68,043, net of
unaccrued interest of $40,400 and $23,500 and capitalized interest of $375
and $1,795, respectively) .................................................. (20,477) (42,748)
Other income (expenses) ....................................................... 184 (12,291)
Income on investments in joint ventures ....................................... 3,381 2,727
----------- -----------
Loss before provision for income taxes and cumulative effect of change in
accounting principle ....................................................... (68,822) (356,437)
Provision for income taxes .................................................... 2,717 522
----------- -----------
Loss before cumulative effect of change in accounting principle ............... (71,539) (356,959)
Cumulative effect of change in accounting principle, net - (18,761)
----------- -----------
Net loss ...................................................................... $ (71,539) $ (375,720)
=========== ===========
Loss per share:
Basic and diluted ............................................................. $ (1.99) $ (10.43)
Weighted average number of common shares outstanding .......................... 36,025 36,009
INFORMATION CONTAINED HEREIN MUST BE READ IN CONJUNCTION WITH THE NOTES TO THE
FINANCIAL INFORMATION, THE DISCLOSURE STATEMENT AND PLAN OF REORGANIZATION.
1
SUNTERRA CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION SINCE MAY 31, 2000)
CONSOLIDATED BALANCE SHEETS - UNAUDITED
December 31, 2001 and 2000
(In thousands, except share and per share amounts)
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ASSETS 2001 2000
Cash and cash equivalents ................................................................. $ 27,207 $ 21,062
Cash in escrow and restricted cash ........................................................ 99,354 64,060
Mortgages and contracts receivable, net of allowances of $36,206 and
$37,326 at December 31, 2001 and 2000, respectively .................................... 176,036 188,207
Retained interests in mortgages receivable sold ........................................... 15,974 12,902
Due from related parties .................................................................. 9,902 11,283
Other receivables, net .................................................................... 13,013 28,360
Prepaid expenses and other assets ......................................................... 18,747 21,431
Assets held for sale ...................................................................... 11,324 49,047
Investments in joint ventures ............................................................. 19,698 18,862
Real estate and development costs, net .................................................... 180,087 220,113
Property and equipment, net ............................................................... 67,431 72,354
Intangible and other assets, net .......................................................... 24,718 27,429
--------- ---------
Total assets ..................................................................... $ 663,491 $ 735,110
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Borrowings under debtor-in-possession financing agreement ................................. $ 68,311 $ 44,750
Accounts payable .......................................................................... 16,695 16,751
Accrued liabilities ....................................................................... 86,939 88,606
Deferred revenue .......................................................................... 86,134 86,337
Deferred taxes ............................................................................ 291 1,634
Notes payable ............................................................................. 28,005 44,592
Liabilities subject to compromise ......................................................... 712,866 715,547
--------- ---------
Total liabilities ................................................................ 999,241 998,217
--------- ---------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock (25,000,000 shares authorized; none issued or outstanding) ............. - -
Common stock ($0.01 par value, 50,000,000 shares authorized; 36,025,486 shares
issued and outstanding at December 31, 2001 and 2000) ................................ 360 360
Additional paid-in-capital ............................................................. 164,607 164,607
Accumulated deficit .................................................................... (491,281) (419,742)
Accumulated other comprehensive loss ................................................... (9,436) (8,332)
--------- ---------
Total stockholders' deficiency ................................................... (335,750) (263,107)
--------- ---------
Total liabilities and stockholders' deficiency ................................... $ 663,491 $ 735,110
========= =========
INFORMATION CONTAINED HEREIN MUST BE READ IN CONJUNCTION WITH THE NOTES TO THE
FINANCIAL INFORMATION, THE DISCLOSURE STATEMENT AND THE PLAN OF REORGANIZATION.
2
Notes to Financial Information as of and for the Years Ended
December 31, 2000 and 2001
The following notes describe adjustments to the unaudited consolidated financial
information of Sunterra Corporation ("Sunterra Corp." or the "Company")
previously included in monthly operating reports filed with the Bankruptcy Court
for periods in 2000. The adjustments relate principally to accounting policy
changes, asset impairments resulting from the reorganization cases, various
year-end closing adjustments and the correction of accounting errors. The 2000
adjustments are summarized below.
REVENUE RECOGNITION
-------------------
Reopening of the Rescission Period
On January 4, 2001, Sunterra Corp. received an order from the bankruptcy court
to "provide certain consumers with renewed rescission rights with respect to the
sale of timeshare transactions entered into but not consummated fully prior to
the petition date and granting related relief." The Company sent registered
letters to customers that met these criteria, providing a new rescission period
in which to cancel their purchase. Since these purchasers were in the new
rescission period at December 31, 2000, all revenue associated with these sales
was reversed, unless the sale was previously recognized and reported to the
public through either an SEC Form 10-K or 10-Q. The last formal report filed
with the SEC was the 10-Q for the quarter ended March 31, 2000. Therefore, all
sales contracts subjected to the new rescission period that were recorded after
March 31, 2000 were reversed in full and recorded in 2001. All sales related to
the accounts in the new rescission period that were recorded before March 31,
2000 but cancelled after March 31, 2000 were recorded as a bad debt. The result
of these adjustments was a $32.1 million increase in the reported loss for 2000
and a reduction of the Company's retained earnings as of December 31, 2000.
Leasing Arrangements in St. Maarten Resorts
The Company acquired two resorts in the Netherlands Antilles, Royal Palm Beach
and Flamingo Beach, in 1995. Since the acquisitions, the Company has entered
into contracts with customers that provide the customers a right to use and
occupy a unit under a long-term lease agreement. The timeshare interest leased
is for a period of 99 years for Flamingo Beach and an original lease period of
60 years for Royal Palm Beach. The Royal Palm Beach lease contracts expire on
December 21, 2050. The Company treated the lease of these interests as a real
estate sale and recognized revenue upon the receipt of 10% down and execution of
the contract. The Company has changed the recording of these contracts as
operating leases. Accordingly, lease revenue has been deferred over the life of
the agreement. Direct selling costs associated with these contracts has also
been deferred and amortized over the life of the lease agreement. In addition,
costs originally charged to cost of goods sold have been reversed and the
acquisition of inventory has been capitalized and subject to depreciation. The
result of these adjustments is a reduction to the Company's retained earnings as
of December 31, 1999 in the amount of $47.3 million. The effect of the
corrections on 2000 was to increase the net loss by $ 9.7 million and decrease
retained earnings by $57 million on a cumulative basis as of December 31, 2000.
CASH
----
Cash account reconciliation errors were discovered during 2000 that related to
1999. Accordingly, retained earnings as of December 31, 1999 was reduced $1.8
million to correct the errors. The effect of this restatement in 2000 was to
reduce the loss previously reported in 2000 by $1.8 million. The net effect of
these adjustments did not change the December 31, 2000 retained earnings.
3
MORTGAGE LOANS
--------------
Allowance for Loan Losses
The Company's evaluation of the allowance for loan losses and the write-off of
uncollectible mortgage loans resulted in adjustments that increased the
provision for loan losses and increased the net loss in 2000 by $5.9 million and
decreased retained earnings by a like amount as of December 31, 2000.
Residual Interests in Loans Sold
The Company has recorded assets related to retained cash flow interests of loans
that have been sold. The value of these residual assets is dependent upon the
performance of the loan pools that have been sold. Any variance between the
actual performance of the loans and the estimated performance used to determine
the original value of the residual asset affects the current value of the
assets. Also, as a result of the Company filing for bankruptcy protection, the
flow of residual cash to the Company was altered and the value of the residual
assets was reduced. The Company also determined that certain errors had been
made in the financial models used to estimate the retained interests in 1999.
Revaluation of the residual assets as of December 31, 1999 and 2000 resulted in
a decrease in reported retained earnings as of December 31, 1999 of $5.0
million; an increase in the loss reported in 2000 of $ 9.6 million and a $14.6
million reduction of retained earnings as of December 31, 2000 on a cumulative
basis.
The Company also determined that a recorded residual interest from a separate
loan sale prior to 2000 was unsupported, and accordingly recorded a charge to
retained earnings as of December 31, 1999 in the amount of $1.4 million to
write-off the recorded asset.
Loans and Accrued Interest
The Company determined that the mortgage loan portfolio and the related accrued
interest receivable on the loan portfolio had not been accurately reconciled in
1999. Adjustments to correct the related account balances resulted in a decrease
to retained earnings as of December 31, 1999 of $1.2 million.
Loan Origination Costs
The Company reevaluated its methodology in the estimation and calculation of
loan origination costs on mortgage loans originated by the Company. The change
in estimate and methodology resulted in an increase in the loss reported in 2000
in the amount of $3.7 million. In addition, adjustments in mortgages receivable,
resulted in an adjustment to loan origination costs, reducing 1999 retained
earnings by $1.2 million. The total reduction to retained earnings as of
December 31, 2000 was $4.9 million.
4
INVENTORY
---------
Inventory Capitalization of HOA Maintenance Fees and Real Estate Taxes
The Company's prior accounting policy provided for the capitalization of
homeowner's association fees related to maintenance and property taxes during
the developer guarantee and subsidy periods. The costs were capitalized as
inventory carrying costs. The Company's policy did not contemplate that a
project's substantial completion date would exceed a typical subsidy period.
Accordingly, the Company believes that costs incurred after the year of
acquisition and two subsequent years should be charged to expense when incurred.
During the Company's process of reviewing the application of these policies in
prior years, it was determined that there were also errors in the original
application. These errors resulted in a decrease to retained earnings as of
December 31, 1999 of $29.3 million. After this determination, the Company
elected to change its method of accounting for these costs to a more preferable
method of accounting. This new method charges these costs to expense when
incurred. This change resulted in a cumulative charge effective January 1, 2000
in the approximate amount of $18.1 million. The combination of these
adjustments, as well as the 2000 year adjustment of $10 million, resulted in a
total reduction to retained earnings of $57.4 million.
Capitalization of Interest on Inventory Under Construction
The Company capitalized interest on the timeshare property under construction.
This interest calculation was applied to the homeowners association fees
described in "Inventory Capitalization of HOA Maintenance Fees and Real Estate
Taxes" above. As a result of the reduction of these costs from inventory, the
capitalized interest was reduced as a charge to the retained earnings as of
December 31, 1999 of $ 1 million. In addition, the Company made an adjustment to
change the method of accounting for interest on property held for development,
but not under construction, that was previously capitalized. This change in
accounting has been recorded as of January 1, 2000 as a cumulative effect
adjustment of $ 5.8 million. The total of these adjustments, as well as the
2000-year adjustment of $1 million, reduced retained earnings $7.8 million as of
December 31, 2000.
Capitalization of Foreclosure Costs in Inventory
The Company capitalized foreclosure costs to inventory. The cost of foreclosing
on delinquent mortgages is considered an incidental cost and should be expensed
as incurred. The correction of this error resulted in a reduction of retained
earnings of $.8 million as of December 31, 1999.
Cost of Inventory Sold
As a result of the reduction in inventory costs described above, inventory and
the resultant cost of goods sold were reduced to reflect adjusted cost of sale
rates. This adjustment resulted in an increase to retained earnings of $3.6
million as of December 31, 2000.
Inventory Recovered
Correction of the carrying values to inventory recovered in loan defaults as a
result of the inventory errors noted above resulted in a charge to retained
earnings as of December 31, 1999 of $ 3.6 million.
Abandonment of Inventory
As a result of the bankruptcy, the Company abandoned certain phases or projects
that were in process or in the early stages of development. This abandonment
resulted in an impairment loss adjustment in 2000 and a reduction to retained
earnings of $5.9 million as of December 31, 2000.
Impairment of Inventory
The Company has identified operations that provide the best opportunity for
growth. These operations have been identified as core properties. Non-core
properties are resorts that do not provide the strategic benefits identified by
the Company. The Company obtained independent appraisals on each of the resorts
to determine the fair value at December 31, 2000. As a result of these
appraisals the Company recorded impairment losses in 2000 on inventory and real
estate held for sale and a resultant reduction to retained earnings of $31
million as of December 31, 2000.
Sunterra Japan
The Company, based on its assessment of "core" versus "noncore" properties, has
determined the operations in Japan are noncore properties. The entire operation,
inclusive of its four resorts, was sold in March 2002. The Company has recorded
an impairment loss adjustment in 2000, which resulted in a reduction of retained
earnings of $6.3 million as of December 31, 2000.
5
Harbour Lights
The Company had applied for approval to sell timeshare intervals at a resort
called "Harbour Lights". The Company never received the approvals to sell
timeshare intervals and the operations of the entity reverted back to hotel
operations. The elimination of the timeshare plan and conversion of the property
to hotel resulted in the recording of additional hotel expenses and depreciation
on the property. This adjustment resulted in an increase in the net loss in 2000
and reduction of retained earnings of $1.9 million as of December 31, 2000.
DEFERRED MARKETING COSTS
------------------------
The Company incorrectly deferred marketing costs related to sales in the
rescission period and in the unrecognized portion of deferred sales under the
percentage of completion accounting method. The Company corrected its accounting
policy to defer only directly associated incremental costs incurred to sell
timeshare intervals. This change resulted in a reduction to retained earnings of
$2.9 million as of December 31, 1999 and an increase to 2000 retained earnings
of $.8 million.
PROPERTY AND EQUIPMENT: SWORD SYSTEM
------------------------------------
The Company purchased a computer software system in 1998. During 1998 through
2000 the Company modified and implemented the new system (known internally as
SWORD) to meet its internal needs. The Company capitalized all costs incurred to
develop and prepare the SWORD system for its internal use. Certain payroll,
payroll related benefit costs and general and administration costs were not
eligible for capitalization. In addition, schedules prepared by the Company did
not support the total payroll and payroll related costs capitalized. The Company
corrected these capitalization errors related to periods prior to December 31,
2000. This correction resulted in a reduction to retained earnings of
approximately $7.3 million as of December 31, 1999.
In addition, as a result of the bankruptcy and ongoing issues related to the
functionality of the SWORD system, the Company believed the capitalized costs of
SWORD were impaired as of December 31, 2000. As a result, the remaining SWORD
capitalized costs were written down in 2000 by an impairment charge of $ 24.1
million to a carrying amount deemed by the Company to better reflect the
system's ongoing utility and fair value. The cumulative reduction in retained
earnings as of December 31, 2000 for these two adjustments amounted to $31.4
million.
Depreciation
As a result of the Company's reevaluation of the costs capitalized to the SWORD
system, depreciation expense was adjusted. In addition, the Company evaluated
the estimated life of the system. The revised depreciation resulted in a
decrease in the net loss in 2000 and an increase to retained earnings of $1
million as of December 31, 2000.
Oracle System
The Company acquired and implemented certain Oracle software modules during
1998. After implementation of the system, the Company incurred costs to train
certain employees on the use of the system. The Company capitalized a portion of
these training costs, but the costs should have been recorded as a current
period cost. The adjustment as a result of correcting the capitalized portion
resulted in a reduction of $1.4 million to retained earnings as of December 31,
1999. Amortization was adjusted $.3 million as a result of these changes as of
December 31, 2000.
During the year ended December 31, 2000, the Company abandoned the use of its
Oracle payroll system and converted all of its payroll applications to ADP. The
impairment adjustment charge as a result of abandoning the payroll system
resulted in an increase in the net loss in 2000 and a reduction to retained
earnings of $1.1 million as of December 31, 2000.
6
Soft Costs Capitalized to Computer Hardware Installation and Website
Development
A review of certain costs capitalized prior to 2000 related to desktop computers
and website development included noncapitalizable items. An adjustment was made
to remove these noncapitalizable items and reduce the depreciation expense
charged on the noncapitalizable portion, resulting in a net decrease to retained
earnings of $2.4 million as of December 31, 1999.
Impairment
As a result of the Company filing bankruptcy in May 2000, certain sales centers,
operation locations and administrative offices were closed. Equipment, signage
and leaseholds were abandoned. The adjustments related to the impairment or
abandonment of these assets resulted in an increase in the net loss in 2000 and
a decrease to retained earnings of $1.4 million as of December 31, 2000.
The Company has identified operations, which provide the best opportunity for
growth. These operations have been identified as core properties. Non-core
properties are resorts that do not provide the strategic benefits identified by
the Company. The Company obtained an independent appraisal on each of the
resorts to determine the fair value at December 31, 2000. As a result of these
appraisals the Company recorded an impairment loss in 2000 on fixed assets
related to the non-core properties of $12.9 million which reduced retained
earnings by a like amount as of December 31, 2000.
7
GOODWILL AND OTHER INTANGIBLES
------------------------------
Acquisition of a Tour and Travel Company
During 1997, Sunterra purchased a sales and marketing company. As part of the
purchase price of this company, a contingent payment of $2.2 million was
available to the prior owners. Sunterra loaned the owners the contingent payment
at the time of closing. The purchase agreement provided that the former owners
would earn this payment subject to the company achieving certain milestones over
a two-year period. The company did not meet the milestones and under the terms
of the agreement owed the money back to Sunterra. The borrowers defaulted on the
note. The proceeds charged-off were originally recorded as additional goodwill
but should have been recorded as a bad debt. The adjustment to the recording of
this transaction resulted in a decrease to retained earnings of $2.2 million as
of December 31, 1999.
Acquisition Costs
Sunterra purchased resorts in Europe and an equity investment in a partnership
in Hawaii during 1998 and 1997, respectively. In connection with these
acquisitions, the Company incurred certain acquisition costs, a portion of which
costs were not eligible for capitalization and should have been charged to
expense when incurred. In addition, the Company capitalized goodwill in excess
of one year from an acquisition related to a sales and marketing company. The
correction of these costs, reduced by the correction of the related
amortization, resulted in a decrease to retained earnings of $1 million as of
December 31, 1999.
Impairment
Non-core properties are resorts that do not provide the strategic incentives
identified by the Company. Goodwill associated with the acquisitions of
properties now identified, as non-core should have been written-off if deemed
non-recoverable in 2000. The goodwill has been reduced by an impairment
adjustment. As a result of this impairment adjustment, the net loss in 2000 was
increased and retained earnings was decreased by $37.8 million as of December
31, 2000.
Management Contracts
During the end of 1999, the Company purchased management contracts from a
non-related timeshare company in Florida. The contracts provide for a term of 3
years. The Company's original amortization period was 10 years. An adjustment
has been made to provide for amortization over the life of the contracts,
resulting in an increase in the net loss in 2000 and a reduction in retained
earnings of $1.1 million as of December 31, 2000.
CONSOLIDATION
-------------
The Company owns resorts in the Netherlands Antilles, known as The Royal Palm
and the Flamingo. The Royal Palm and Flamingo resorts never formally established
an independent owners association. The Company is therefore the legal owner of
the resort operations. Accordingly, operations of the two resorts should be
consolidated in the Company's financial statements. The consolidation of the
homeowners associations for the two resorts resulted in an increase to retained
earnings of $.2 million as of December 31, 1999; an increase in the net loss in
2000 of $5.2 million, and a reduction in retained earnings of $5 million as of
December 31, 2000 on a cumulative basis.
CLUB
----
The Company established the "Club" program in late 1998. Owners purchase
"SunOptions" which provide the owners the opportunity to stay at any of the Club
resorts. Each owner's purchase of the SunOptions is collateralized by an
interval (real estate) at the owner's home resort. The Company collected
proceeds on the conversion of pure interval owners to Club. The company
incorrectly offset Club expenses against Club program income. The remaining net
revenue was amortized and deferred over a 10-year period. The Company has
grossed up the revenue and corrected other errors in its calculation of the
conversion revenue deferral. These corrections resulted in a reduction to
retained earnings of $1.8 million as of December 31, 1999; an increase in the
net loss in 2000 of $1.0 million, and a reduction to retained earnings of $2.8
million as of December 31, 2000 on a cumulative basis.
The Company provided first day incentives to convert customers to Club. These
incentives were not recorded in 2000 and resulted in a decrease to retained
earnings of $.7 million.
8
ENCORE PROGRAM
--------------
As inducement for potential customers to visit the resorts, the Company
established the "Encore Program". Under this program, customers purchase the
equivalent of a one-week stay at one of the Company's resorts. The terms of the
contract provide the customer with up to 18 months to use the program for a stay
at the resort. The Company recognized the proceeds received under this program
as revenue and recorded an estimated fulfillment liability for sales. The
Company has evaluated its policy of recording these transactions. As a result of
this reevaluation, adjustments were recorded which decreased retained earnings
as of December 31, 1999 by $1.2 million; decreased the net loss reported in 2000
by $1.9 million, and increased retained earnings of $ .7 million as of December
31, 2000 on a cumulative basis.
INCOME TAXES
------------
Tax benefits
As a result of the various adjustments discussed herein, additional income tax
benefits were recorded which increased the tax benefit and eliminated the
deferred tax liability as of December 31, 1999 by $18.2 million. The Company
also became aware of an alternative minimum tax refund opportunity for 2000,
which was recorded and decreased the loss for 2000 by $ 1.9 million. The total
effect to retained earnings amounted to an increase of $20.1 million as of
December 31, 2000.
Installment interest
During 1996 and 1997, the Company accrued interest expense on installment sales
under section 453(l) of the Internal Revenue Code (IRC). There was no accrual
made in any year subsequent to 1997. Since the Company did not owe any corporate
income taxes, the liability has been corrected. This adjustment resulted in an
increase to retained earnings of $2 million as of December 31, 1999.
Tax audits
The Company is under State tax audits for its resorts in Mexico and Hawaii. As a
result of negotiations under these audits, the Company has recorded an
additional accrual of $2.6 million in 2000 for additional taxes due.
PERCENTAGE OF COMPLETION
------------------------
Through 1998, the Company recorded revenues on intervals that were sold on
buildings that were currently under construction on the percentage of completion
accounting method. The Company ceased the use of this method in 1999, with the
adoption of Club and SunOptions. The Company should have continued under this
method in 1999 and future years. The effect of this correction was a reduction
to retained earnings of $4.4 million as of December 31, 1999; a decrease in the
net loss reported in 2000 by $3.2 million, and a decrease of $1.2 million in
retained earnings as of December 31, 2000 on a cumulative basis.
ACCRUALS and ACCOUNTS PAYABLE
-----------------------------
Guarantee on Contracts in Hawaii
The Company entered into management agreements with non-related parties in
Hawaii. Four of these contracts have earnings guarantees. The Company has
estimated that these guarantees will result in losses over the term of the
contract as a result of the decrease in the Hawaiian economy. The original
estimated loss was reevaluated and resulted in an additional loss accrual. The
accrual resulted in an increase in the 2000 net loss of $ 1.7 million, and a
like decrease to retained earnings as of December 31, 2000.
Guarantee on Contracts acquired from Kosmas
In connection with the acquisition of management contracts from a non-related
entity, the Company obtained a contract with an earnings guarantee. The Company
has estimated that this guarantee will result in losses over the term of the
contract (effective through the permitted contract termination date). The
accrual resulted in an increase in the 2000 net loss of $1.2 million and a
decrease to retained earnings of $1.2 million at December 31, 2000.
9
Accrued Mini-vacations and Encore Programs
As a result of the bankruptcy, the Company cancelled vacations and extended
stays due customers. These customers have filed claims in the bankruptcy court
for the vacation stay to which they allege they are entitled. The Company has
accrued an estimate of these vacations in the approximate amount of $1.5 million
for the mini-vacations and $.3 million for the encore program. This accrual has
increased the net loss in 2000 and reduced December 31, 2000 retained earnings
by a total of $1.8 million.
Accrued Commissions
The Company reconciled the estimated sales commissions due as of December 31,
2000, resulting in an increase in the net loss in 2000 of $1.1 million and an
increase in the accrued liability and a decrease in retained earnings of $1.1
million as of December 31, 2000.
OTHER RECEIVABLES and ASSETS
----------------------------
Sunterra Golf LLC
The Company sold its ownership interest in Sunterra Golf LLC to a non-related
third party. As part of the sales price, the Company accepted a note receivable.
The purchaser has not paid the receivable as identified under the terms of the
note. As a result, the Company wrote-off the note receivable. This adjustment
resulted in a decrease to retained earnings of $1 million as of December 31,
2000.
Caribbean
The Company's properties located in the Caribbean suffered damages as a result
of various hurricanes. There were various receivables outstanding with insurance
companies as a result of these hurricanes that will not be collected. The
Company has written-off these receivables, resulting in a reduction to retained
earnings of $1.5 million as of December 31, 2000.
Loans Transferred from SG Cowan Conduit
During 2000 it was discovered that defaulted loans returned to the Company
during 1999 by a securitization trust had been inadvertently classified as other
assets at their face value. An adjustment was recorded to decrease retained
earnings as of December 31, 1999 in the amount of $9.3 million to recognize the
loan losses-.and decreased the net loss for 2000 by the same amount. The net
effect of these adjustments did not change the December 31, 2000 retained
earnings.
Other
Various other errors were corrected as of December 31, 1999 relating to
improperly capitalized costs or improperly accrued miscellaneous receivables,
which resulted in a charge to retained earnings of $1.5 million.
10
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