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Press Release: Sunterra Corporation
December 14, 2005
LAS VEGAS, NV -- Sunterra Corporation (NasdaqNM:SNRR) yesterday reported net income for its fiscal fourth quarter
ended September 30, 2005, of $7.2 million, or $0.30 per diluted share, compared to $12.9 million, or $0.54 per
diluted share in the 2004 September quarter. The current year quarter included $1.3 million of non-recurring charges,
while the prior year period included $3.0 million of non-recurring gains and utilized all then-remaining post-emergence
net operating losses, realizing a tax benefit of approximately $3.6 million.
For the year ended September 30, 2005, the company reported a net loss of $34.7 million, including a $55.0 million
impairment charge, and $2.0 million of restructuring charges. In the twelve months ended September 30, 2004, Sunterra
reported a net loss of $70.7 million, including impairment charges of $92.5 million and $8.1 million of non-recurring
gains, and additionally realized nearly $5 million of tax benefits from the use of all then-remaining post-emergence
net operating losses.
Adjusted EBITDA for the quarter ended September 30, 2005, was $22.8 million compared to $23.1 million in the prior-year
period. For the twelve-month period ended September 30, 2005, adjusted EBITDA rose nearly 24 percent to $73.3 million,
from $59.3 million in the prior year.
Nicholas Benson, Sunterra's president and chief executive officer, said: "This quarter closes off a fiscal
year in which Sunterra has once again delivered strong EBITDA growth in the vanguard of its industry peer group.
I am proud of all that our worldwide team members have accomplished during a period which has presented us with
both challenges and opportunities. Our new fiscal year has gotten underway broadly in line with our expectations
and I expect our continued performance in fiscal 2006 will reflect the momentum that we have enjoyed thus far."
North American Segment
Sunterra's North American segment grew Vacation Interest revenues to $66.6 million in fourth quarter 2005, up 20
percent from $55.5 million reported in the comparable 2004 period. This growth reflected strong volume across the
region and particularly in the company's southwest and Hawaiian properties. Vacation Interest revenues at sales
centers operational in both periods increased 13%. Total revenues rose 19 percent to $100.2 million in the 2005
fourth quarter, up $16.2 million from the $84.0 million reported a year ago, and were driven by increased vacation
interest sales, new rental programs, and higher interest revenue from purchased mortgage pools.
The direct contribution ratio from Vacation Interest sales (Vacation Interest and resort rental revenues less Vacation
Interest cost of sales, advertising sales and marketing expenses, and Vacation Interest carrying costs, as a percentage
of Vacation Interest revenue) increased by more than 50 percent, to 32 percent of Vacation Interest revenues for
the fourth quarter ended September 30, 2005, compared with 21 percent of Vacation Interest revenues in the comparable
2004 quarter. This reflects improvements in all components of the metric, including acquisitions of a significant
number of low-cost Vacation Interests (see below), improved marketing efficiencies, and the integration of a national
rental program with marketing programs.
Income before provision for taxes rose more than 40 percent to $13.2 million for the three months ended September
30, 2005, incorporating the improvements in direct contribution from Vacation Interest sales, leveraging of the
company's portfolio and administrative operations, and integration of several significant mortgage pools purchased
during fiscal 2005. The 2005 fourth quarter included a $0.5 million loss on the sale of assets, while the prior-year
period income before taxes of $9.3 million benefited from $1.0 million in recognized gains on the sale of assets
and $2.0 million of non-recurring items.
Twelve-month results reported by Sunterra's North American segment were also strong. The Vacation Interest contribution
ratio was 30 percent for the twelve months ended September 30, 2005, an improvement of more than 50 percent over
the 20 percent ratio reported for the same twelve-month period in 2004.
Vacation Interest revenues and total revenues for the fiscal year ended September 30, 2005, increased 24 percent
and 31 percent respectively, driven by the same factors as the quarterly results. Vacation Interest revenues at
sales centers operational in both periods increased 11%. The increase was the result of strong Vacation Interest
revenues, higher average mortgage balances, and a more effective national rental program in North America, partially
offset by the closure of the Sunterra Pacific operations, which contributed $13.5 million of revenue in the comparable
twelve-month period in 2004.
For fiscal year 2005, income before provision for income taxes was $37.4 million, compared with a loss before provision
for income taxes of $80 million in the same twelve-month period in 2004. The 2004 period included charges for impairment
of assets, primarily goodwill, totaling $92.5 million, as well as restructuring and reorganization charges of $0.3
million. While fiscal year 2005 included $0.3 million of gains on sales of assets, the twelve months ended September
30, 2004 benefited from $5.6 million of recognized gains on the sale of assets and $2.5 million of other non-recurring
gains.
European Segment
Sunterra continued restructuring of its European operations during the 2005 fourth quarter, incurring a $1.0 million
charge in connection with the previously announced restructuring. Management estimates that the future annualized
savings resulting from these actions will be approximately $3 million.
Mr. Benson commented, "We are pleased with the progress of the restructuring program initiated last year.
The anticipated cost savings are being realized and we have refocused our sales and marketing operations to concentrate
on delivering quality earnings from our most efficient sales centers. We believe these changes have positioned
us to deliver a worthwhile improvement in our European business in fiscal 2006."
The segment reported Vacation Interest revenues of $18.4 million and total revenues of $23.6 million for the September
2005 quarter, decreases of $6.6 million and $8.8 million respectively, compared with the prior year period. This
decline at existing sales centers was attributable to the overall European vacation ownership environment and to
the company's related restructuring initiatives. The segment's Vacation Interest contribution margin decreased
to 8 percent for the quarter ended September 30, 2005, from 24 percent in the comparable 2004 quarter. On an operating
basis, the segment reported a loss before provision for income taxes of $0.7 million for the fourth quarter 2005,
including $1.0 million of restructuring charges, as noted.
Results for the full fiscal year reflect the market conditions and restructuring actions as well. The Vacation
Interest revenues and total revenues reported by Sunterra's European segment for the twelve months ended September
30, 2005, decreased 16 percent compared with the 2004 period. The operating results reported for the twelve months
ended September 2005 were a loss before provision for income taxes of $58.3 million, including $2.0 million of
restructuring charges and a $55.0 million impairment charge.
Receivables Portfolio and Static Pool Performance
Sunterra offers consumer financing to individual purchasers of Vacation Interests, primarily in North America,
and records a provision for estimated loan losses each period via a charge equal to a percentage of each loan.
The company’s provision for mortgages and contracts receivable losses rose to $3.7 million for the fourth quarter
of 2005, compared with $2.2 million in the same 2004 period, and rose to $12.2 million for the year ended September
30, 2005, from $8.9 million in the same twelve month period in the prior year. In both instances, the increase
in provision was attributable to higher levels of Vacation Interest sales in North America. During the fiscal year
ended September 30, 2005, approximately 14.6% of North American Vacation Interest revenues were cash sales and
required no financing by us. Of the remaining 85.4%, we financed approximately 70.3% and the remaining 29.7% was
either paid for in cash or by applying existing equity from another Vacation Interest.
Interest expense recognized on debt collateralized by receivables totaled $3.0 million and $10.9 million in the
three and twelve-month periods ended September 30, 2005, compared to $2.0 million and $6.1 million in the same
prior-year periods.
At September 30, 2005, Sunterra's allowance for loan and contract losses totaled $28.4 million, compared to $26.5
million at the close of fiscal 2004. The quarter-end allowance is approximately 2.8 times the mortgages charged
off in the year ended September 30, 2005. In addition, Sunterra purchased several portfolios in the past twelve
months that were recorded at fair value, which takes into account estimated future losses. Excluding the $98.7
million (net) of purchased portfolios, the allowance represents 11.6 percent of originated mortgages and contracts
receivable. We believe the allowance to be both reasonable and prudent.
During the year ended September 30, 2005, borrowers made an average down payment of 15.6 percent, and 32.2 percent
of borrowers repaid their entire loan within 90 days of origination, compared to 15.8 percent and 32.7 percent,
respectively, in the prior year period.
Subsequent to the close of the fourth quarter, Sunterra sold a portfolio of receivables with an outstanding balance
of $35 million, for a consideration of approximately $36 million, of which approximately $24 million of receivables
sold were from the purchased portfolios.
Since February 2001, the company has implemented strict underwriting criteria at the point of sale. Prior to this
point, the company did not subject applicants to any significant loan underwriting criteria, consistent with standard
timeshare industry practices. Of the $346.2 million in North American receivables principal outstanding at September
30, 2005, Sunterra (or a Sunterra affiliate) originated $294.1 million of the total, and $78.9 million of these
Sunterra-originated receivables were generated prior to implementation of FICO® score-based underwriting. The
weighted-average FICO® score on receivables originated during fiscal 2005 was 730.
To provide clarity on the performance of the company's portfolio and to facilitate comparison with other developers
of vacation ownership resorts, we are providing static pool performance data on receivables generated by our North
American operations.
The following table shows the static pool cumulative gross defaults (excluding the recovery value of the Vacation
Interests that collateralize the receivables) by year of origination through September 30, 2005. The default periods
below represent 12-month periods by which defaults recognized in the first twelve months after origination are
included in the "1" period. Amounts represent cumulative defaults to date, and do not include estimated
defaults to be recognized. Recent origination years have not been subjected to significant seasoning.
Calendar Cumulative Static Pool Defaults by Years of Origination
Year -------------------------------------------------------
Originated 1 2 3 4 5 6 7 > 7
---- ---- ---- ---- ---- ---- ---- ----
1998 7.3% 14.7% 18.4% 20.8% 22.4% 23.6% 24.4% 24.6%
1999 6.0% 11.9% 15.8% 18.5% 20.6% 22.0% 22.4% N/A
2000 2.6% 6.4% 9.1% 11.3% 12.9% 13.4% N/A N/A
--------------------------------------------------------------------
2001 1.0% 3.1% 4.8% 6.0% 6.3% N/A N/A N/A
2002 1.1% 3.6% 5.4% 6.0% N/A N/A N/A N/A
2003 1.3% 3.7% 4.5% N/A N/A N/A N/A N/A
2004 1.6% 2.6% N/A N/A N/A N/A N/A N/A
Vacation Interests
On a consolidated basis, Vacation Interest cost of sales as a percentage of Vacation Interest revenues (the "cost-off
rate") for the three months ended September 30, 2005, was 15.6 percent compared with 19.8 percent for the
comparable period in 2004. On a geographic segment basis, the cost-off rate in North American operations for the
three months ended September 30, 2005 was 16.3 percent, a significant decrease from the 23.1 percent recognized
in the September 2004 quarter. This decrease was attributed to the lower-cost Vacation Interests acquired in the
Epic Resorts Group transaction and a significant number of Vacation Interests acquired via the loan pool purchase
transactions. Sunterra's European segment reported cost-off rates of 13.2 percent and 12.5 percent for the same
periods in 2005.
For the twelve month period ended September 30, 2005, consolidated Vacation Interest cost of sales decreased to
15.6 percent from 19.9 percent in the prior year. The North American segment cost-off rates for the year reflected
trends similar to the fourth quarter, decreasing to 16.5 percent from 22.7 percent. Sunterra's European operations
also reported a decrease in cost-off rates for the year to 13.0 percent from 14.4 percent in the twelve months
ended September 30, 2004, attributed to the lower-cost Vacation Interests acquired in the Thurnham Leisure transaction.
At the close of the September 2005 quarter, Sunterra’s unsold Vacation Interests include $135.9 million of finished
Vacation Interests (includes those recoverable under defaulted mortgages and receivables), $16.2 million of Vacation
Interests under construction, and undeveloped land with recorded value of $32.3 million. Of the total finished
Vacation Interests, $115.4 million is recorded within the company’s North American operations and represents approximately
37,000 week-equivalents with a total estimated retail value (at current pricing) of $682 million, or 39 months
of sales at 2005 sales volume. The remaining $20.5 million of finished Vacation Interests are located within Sunterra’s
European operations, and comprise approximately 11,000 week-equivalents with a total estimated retail value (at
current pricing) of $130 million, or 22 months of sales at 2005 sales volume.
Interest expense recognized on debt collateralized by or attributed to Vacation Interests, including the company's
senior subordinated convertible debt, totaled $1.8 million and $8.4 million in the three and twelve month periods
ended September 30, 2005, compared to $2.1 million and $6.6 million in the same prior-year periods.
Effect of New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 152,
Accounting For Real Estate Time-Sharing Transactions, which significantly alters accounting for vacation ownership
transactions. The company will adopt this pronouncement effective October 1, 2005. SFAS No. 152 requires the impact
of the adoption of these provisions to be provided as a cumulative effect of a change in accounting principle.
The company is in the process of finalizing the impact of SFAS No. 152 on its statements of position, statement
of operations and cash flows, but believes preliminarily that the cumulative effect of a change in accounting principle
will be a pre-tax charge in the range of $8 million to $12 million. A major component of the cumulative effect
of a change in accounting principle is a deferral of vacation interval sales that, as of September 30, 2005, were
valid sales under prior accounting guidance, but upon the adoption of SFAS No. 152 will be deferred and recognized
over the period in which the buyer’s commitment (as defined in SFAS No. 152) reaches 10% of the sales value of
the Vacation Interest. These deferred sales and costs will be recognized in future periods as they qualify for
revenue recognition. The company expects that the significant portion of these deferred revenues and costs will
be recognized in the first quarter of fiscal 2006.
Other significant components of the charge include an expected increase to the provision for loan losses and an
expected increase in unsold Vacation Interests. These adjustments will be necessary to modify the loan loss allowance
to eliminate an estimate for the recapture of Vacation Interests relating to defaulted mortgages. The increase
in unsold Vacation Interests is an estimate of the value of the Vacation Interests that will be recovered in the
future due to loan defaults.
Additionally, the FASB issued SFAS No. 123(R), Share-Based Payment. This standard requires all companies to recognize
compensation expense for all share-based payments, including stock options, at fair value. The company will adopt
this pronouncement effective October 1, 2005. The company estimates that the adoption of SFAS No. 123(R) will result
in pre-tax charges totaling approximately $1.4 million to $1.8 million during the year ending September 30, 2006.
Fiscal Year 2006 Guidance
All comments in the following paragraphs and certain comments in this release above are deemed forward-looking
statements. These statements reflect expectations of the company’s performance given its current base of assets
and the expected macro-economic environment. Actual results may differ materially. The following Adjusted EBITDA,
Income before cumulative effect of change in accounting principle and net income guidance includes the expected
$3 million gain to be recognized in the first quarter of fiscal 2006 relating to the company’s sale of $35 million
of mortgages receivable. The ‘Under “FY 2005” GAAP’ column in the table excludes the impact of the adoption of
SFAS 152 and future accounting under the pronouncement, as well as the effects of expensing share-based payments
under SFAS 123(R). See “Effect of New Accounting Pronouncements” above.
Sunterra expects to report the following consolidated results for its fiscal year ending September 30, 2006 (amounts
in thousands):
Fiscal 2006 Guidance
---------------------------------------
Fiscal Under "FY 2005 GAAP" Under "FY 2006 GAAP"
2005 ------------------- -------------------
Actual Low High Low High
-------- --------- --------- --------- ---------
Vacation Interest
revenue $283,812 $ 325,000 $ 335,000 $ 285,000 $ 295,000
Total revenues $423,930 $ 455,000 $ 465,000 $ 395,000 $ 405,000
Adjusted EBITDA $ 73,273 $ 83,000 $ 86,000 $ 70,000 $ 73,000
(Loss) Income Before
Cumulative Effect of
Change in Accounting
Principle $(34,734)(1)$ 26,000 $ 28,000 $ 18,000 $ 20,000
Cumulative Effect of
Change in Accounting
Principle, net $ - $ - $ - $ (7,000)$ (5,000)
Net (Loss) Income $(34,734)(1)$ 26,000 $ 28,000 $ 11,000 $ 15,000
(1) The net loss for fiscal year 2005 includes a $55 million impairment
charge and a total of $2 million in restructuring charges.
The company estimates that it will invest $82 million to $86 million in Vacation Interests in fiscal 2006, and
make capital expenditures of $8 million to $10 million in the same period, primarily to upgrade common areas at
certain European resorts and to refurbish sales centers in both geographic segments.
Investor Conference Call
Sunterra's senior management will host a conference call on Wednesday, December 14, 2005, at 11:00 a.m. Eastern
time, to discuss its financial results, guidance and related topics. This conference call will be broadcast live
over the Internet. Participants are invited to access the event at www.sunterra.com, visiting the Investor Relations
section of the "Sunterra Corp" tab at least fifteen minutes before the scheduled start time to register
and to download and install any necessary audio software.
Those unable to participate via the Internet or planning to ask questions may dial the following number five to
ten minutes prior to the scheduled conference call time: (866) 362-4832. International callers please call (617)
597-5364. The pass code required for this call is 51992374.
A replay of the conference call will be available on Sunterra's website in the Calendar section, or by dialing
(888) 286-8010 or, for international callers, (617) 801-6888. The code to access the replay is 80471039.
About Sunterra
Sunterra is one of the world's largest vacation ownership companies with more than 314,000 owner families and nearly
100 branded or affiliated vacation ownership resorts throughout the continental United States and Hawaii, Canada,
Europe, the Caribbean and Mexico. Sunterra news releases, as well as additional news and information on the company,
can be found at www.sunterra.com.
Forward-Looking Statements
Statements about future results and plans made in this release and the statements attached hereto constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act. The company cautions that these
statements are not guarantees of future performance, and involve risks and uncertainties and other factors that
may cause results to differ materially from those anticipated at the time such statements are made. Future results,
performance and achievements may be affected by our ability to successfully implement the cost reduction and marketing
plans of our European operations, general economic conditions, including a global economic downturn, the impact
of war and terrorist activity, business and financing conditions, foreign exchange fluctuations, governmental and
regulatory actions, the cyclicality of the vacation ownership industry, relationships with key employees, domestic
and international political and geopolitical conditions, competition, downturns in leisure travel patterns, risk
associated with the level and structure of our indebtedness, risk associated with potential acquisitions and dispositions,
and other circumstances and uncertainties. These risks and uncertainties are presented in detail in our filings
with the Securities and Exchange Commission, including our most recent annual report on Form 10-K. Although we
believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we
can give no assurance that our expectations will be attained or that results will not materially differ.
We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
SUNTERRA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands, except per share data, and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
REVENUES:
Vacation Interest $ 85,051 $ 80,549 $283,812 $257,228
Resort rental 10,895 7,831 37,701 19,078
Management services 8,151 7,617 30,380 29,176
Interest 12,084 9,290 44,806 29,792
Other 7,579 11,039 27,231 28,612
-------- -------- -------- --------
Total revenues 123,760 116,326 423,930 363,886
-------- -------- -------- --------
COSTS AND OPERATING EXPENSES:
Vacation Interest cost of sales 13,305 15,952 44,228 51,100
Advertising, sales and marketing 46,704 45,502 164,695 147,903
Vacation Interest carrying cost 12,859 9,136 42,307 23,546
Provision for doubtful accounts
and loan losses 3,771 1,747 12,316 8,482
Loan portfolio 1,437 1,616 6,269 6,896
General and administrative 23,075 20,464 83,901 75,079
Loss (gain) on sales of assets 253 (987) (480) (5,567)
Depreciation and amortization 2,549 2,290 10,049 9,662
Interest 6,220 5,573 25,092 24,052
Restructuring and
reorganization, net 1,049 - 1,967 311
Impairment of assets and goodwill - - 55,030 92,483
-------- -------- -------- --------
Total costs and operating
expenses 111,222 101,293 445,374 433,947
-------- -------- -------- --------
Income (loss) from operations 12,538 15,033 (21,444) (70,061)
(Loss) income from investments
in joint ventures (126) (627) 538 2,416
-------- -------- -------- --------
Income (loss) before provision
for income taxes 12,412 14,406 (20,906) (67,645)
Provision for income taxes 5,243 1,465 13,828 3,028
-------- -------- -------- --------
Net income (loss) $ 7,169 $ 12,941 $(34,734) $(70,673)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.36 $ 0.65 $ (1.74) $ (3.53)
======== ======== ======== ========
Diluted $ 0.30 $ 0.54 $ (1.74) $ (3.53)
======== ======== ======== ========
Weighted average number of
common shares outstanding:
Basic 20,026 20,000 20,015 20,000
======== ======== ======== ========
Diluted 25,968 25,938 20,015 20,000
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2005 and 2004
(In thousands and unaudited)
September 30,
2005 2004
---------- ----------
ASSETS
Cash and cash equivalents $ 14,698 $ 26,842
Cash in escrow and restricted cash 70,523 88,663
Mortgages and contracts receivable, net 323,747 278,569
Retained interests in mortgages and contracts
receivable sold - 23,319
Due from related parties, net 17,261 6,279
Other receivables, net 25,082 26,608
Deferred tax asset 2,346 -
Prepaid expenses and other assets, net 42,602 47,944
Assets held for sale 2,726 551
Investment in joint venture - 7,187
Unsold Vacation Interests, net 184,432 168,858
Property and equipment, net 84,122 77,996
Goodwill, net 26,619 82,759
Intangible and other assets, net 2,350 1,283
---------- ----------
Total assets $ 796,508 $ 836,858
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings under line of credit agreements $ 198,849 $ 171,737
Accounts payable 10,712 10,401
Accrued liabilities 83,986 80,895
Income taxes payable 2,119 3,421
Deferred revenues 95,175 95,127
Securitization notes 113,671 151,710
Senior subordinated convertible notes 95,000 95,000
Notes payable 1,441 2,261
---------- ----------
Total liabilities 600,953 610,552
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 194 189
Additional paid-in capital 303,233 297,145
Accumulated deficit (116,948) (82,214)
Accumulated other comprehensive income 9,076 11,186
---------- ----------
Total stockholders' equity 195,555 226,306
---------- ----------
Total liabilities and stockholders' equity $ 796,508 $ 836,858
========== ==========
SUNTERRA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net cash provided by (used in)
operating activities $ 15,808 $ (8,686) $ 89,475 $ 2,547
Net cash used in investing
activities (45,401) (105,708) (87,725) (180,873)
Net cash provided by (used in)
financing activities 26,011 118,352 (14,589) 180,236
Effect of changes in exchange
rates on cash and cash
equivalents (82) 314 695 (316)
-------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents (3,664) 4,272 (12,144) 1,593
Cash and cash equivalents,
beginning of period 18,362 22,570 26,842 25,249
-------- -------- -------- --------
Cash and cash equivalents, end of
period $ 14,698 $ 26,842 $ 14,860 $ 26,842
======== ======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 5,950 $ 4,865 $ 20,239 $ 14,807
======== ======== ======== ========
Cash paid for income taxes,
net of tax refunds $ 54 $ 825 $ 3,061 $ 1,354
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
North American Segment Statements of Operations
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
REVENUES:
Vacation Interest $ 66,602 $ 55,472 $210,154 $169,359
Resort rental 10,468 7,424 35,939 17,463
Management services 5,444 4,327 20,427 18,630
Interest 11,496 8,689 42,179 27,369
Other 6,176 8,045 22,129 20,411
-------- -------- -------- --------
Total revenues 100,186 83,957 330,828 253,232
-------- -------- -------- --------
COSTS AND OPERATING EXPENSES:
Vacation Interest cost of sales 10,864 12,809 34,633 38,468
Advertising, sales and marketing 33,514 30,230 113,254 95,833
Vacation Interest carrying cost 11,144 8,045 35,370 19,401
Provision for doubtful accounts
and loan losses 3,517 1,548 11,580 7,651
Loan portfolio 1,407 1,582 6,157 6,699
General and administrative 19,558 14,620 65,920 52,339
Loss (gain) on sales of assets 451 (987) (282) (5,567)
Depreciation and amortization 1,638 1,293 5,888 5,614
Interest 4,810 4,886 21,409 22,357
Restructuring and
reorganization, net - - - 311
Impairment of assets and goodwill - - - 92,483
-------- -------- -------- --------
Total costs and operating
expenses 86,903 74,026 293,929 335,589
-------- -------- -------- --------
Income (loss) from operations 13,283 9,931 36,899 (82,357)
(Loss) income from investments
in joint ventures (126) (627) 538 2,416
-------- -------- -------- --------
Income (loss) before provision
for income taxes $ 13,157 $ 9,304 $ 37,437 $(79,941)
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
Direct Contribution From Vacation Interest Sales - North American Segment
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Vacation Interest revenues $ 66,602 $ 55,472 $210,154 $169,359
Resort rental revenues 10,468 7,424 35,939 17,463
Vacation Interest cost of sales (10,864) (12,809) (34,633) (38,468)
Advertising, sales and marketing (33,514) (30,230) (113,254) (95,833)
Vacation Interest carrying cost (11,144) (8,045) (35,370) (19,401)
-------- -------- -------- --------
Direct contribution from
Vacation Interest sales $ 21,548 $ 11,812 $ 62,836 $ 33,120
======== ======== ======== ========
Vacation Interest revenues 100.0% 100.0% 100.0% 100.0%
Vacation Interest cost of sales -16.3% -23.1% -16.5% -22.7%
Advertising, sales and marketing -50.3% -54.5% -53.9% -56.6%
Vacation Interest carrying cost,
net of rental revenues -1.0% -1.1% 0.3% -1.1%
-------- -------- -------- --------
Direct contribution from
Vacation Interest sales ratio 32.4% 21.3% 29.9% 19.6%
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
European Segment Statements of Operations
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- --------- -------- ---------
REVENUES:
Vacation Interest $ 18,449 $ 25,077 $ 73,658 $ 87,869
Resort rental 427 407 1,762 1,615
Management services 2,707 3,290 9,953 10,546
Interest 588 601 2,627 2,423
Other 1,403 2,994 5,102 8,201
-------- --------- -------- ---------
Total revenues 23,574 32,369 93,102 110,654
-------- --------- -------- ---------
COSTS AND OPERATING EXPENSES:
Vacation Interest cost of sales 2,441 3,143 9,595 12,632
Advertising, sales and marketing 13,190 15,272 51,441 52,070
Vacation Interest carrying cost 1,715 1,091 6,937 4,145
Provision for doubtful accounts
and loan losses 254 199 736 831
Loan portfolio 30 34 112 197
General and administrative 3,517 5,844 17,981 22,740
Gain on sales of assets (198) - (198) -
Depreciation and amortization 911 997 4,161 4,048
Interest 1,410 687 3,683 1,695
Restructuring 1,049 - 1,967 -
Impairment of assets and goodwill - - 55,030 -
-------- --------- -------- ---------
Total costs and operating
expenses 24,319 27,267 151,445 98,358
-------- --------- -------- ---------
(Loss) income before provision
for income taxes $ (745) $ 5,102 $(58,343) $ 12,296
======== ========= ======== =========
SUNTERRA CORPORATION AND SUBSIDIARIES
Direct Contribution From Vacation Interest Sales - European Segment
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Vacation Interest revenues $ 18,449 $ 25,077 $ 73,658 $ 87,869
Resort rental revenues 427 407 1,762 1,615
Vacation Interest cost of sales (2,441) (3,143) (9,595) (12,632)
Advertising, sales and marketing (13,190) (15,272) (51,441) (52,070)
Vacation Interest carrying cost (1,715) (1,091) (6,937) (4,145)
-------- -------- -------- --------
Direct contribution from
Vacation Interest sales $ 1,530 $ 5,978 $ 7,447 $ 20,637
======== ======== ======== ========
Vacation Interest revenues 100.0% 100.0% 100.0% 100.0%
Vacation Interest cost of sales -13.2% -12.5% -13.0% -14.4%
Advertising, sales and marketing -71.5% -60.9% -69.8% -59.3%
Vacation Interest carrying cost,
net of rental revenues -7.0% -2.7% -7.0% -2.9%
-------- -------- -------- --------
Direct contribution from
Vacation Interest sales ratio 8.3% 23.8% 10.1% 23.5%
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
Debt Portfolio Summary
As of September 30, 2005
(unaudited)
Period
End Average
Interest Balance % of Interest Maturity
Debt Rate (in 000's) Portfolio Rate (in years)
----------------------- -------- --------- --------- ------- --------
Floating Rate Debt:
Senior Financing Facility:
Mortgages and
contracts
receivables tranche LIBOR +
1.5%(1) $ 164,715 40% 5.38% 1.8
Unsold Vacation
Interests tranche LIBOR +
4% 32,674 8% 7.81% 1.8
Other LIBOR +
.35% 1,460 1% 4.16% 1.8
---------
Total Floating
Rate Debt 198,849 49% 5.77% 1.8
---------
Fixed Rate Debt:
3 3/4 Senior Subordinated
Convertible Notes due 2024 95,000 23% 3.75% 18.5
Sunterra Owner Trust
2004-1 Securitization 113,671 28% 4.14% 15.1
Other 1,441 0% 8.0% 4.0
--------- ---
Total Fixed
Rate Debt 210,112 51% 3.99% 16.5
--------- ---
Total Debt $ 408,961 100% 4.86% 9.4
========= ===
(1) Note: rate for mortgages and contracts receivable secured by Vacation
Interests at the former Epic Resort properties is 30-day LIBOR plus 2%.
DEBT MATURITIES
-----------------
< 1 year $ 379
1 - 3 years 199,504
4 - 5 years 407
> 5 years 208,671
---------
$ 408,961
=========
Non-GAAP Financial Measures
We believe that our presentation of earnings before interest, taxes, depreciation and amortization (EBITDA) and
adjusted EBITDA, which are non-GAAP (generally accepted accounting principles) financial measures, are important
supplemental measures of operating performance to investors. Our quantitative reconciliations of all non-GAAP measures
used in this release to the most directly comparable financial measure calculated and presented in accordance with
GAAP is represented in the tables following this discussion, which defines these terms and why we believe they
are useful measures of our performance.
EBITDA and Adjusted EBITDA
EBITDA is a commonly used measure of performance in our industry. We believe that EBITDA, when considered with
measures calculated in accordance with United States GAAP, gives investors a more complete understanding of our
operating results before the impact of investing and financing transactions and income taxes, and facilitates comparisons
between Sunterra and competitors.
Management has historically adjusted EBITDA when evaluating operating performance, because we believe that the
inclusion or exclusion of certain recurring and non-recurring items described below is necessary to provide the
most accurate measure of our core operating results and as a means to evaluate period-to-period results. We have
chosen to provide this information to investors to enable them to perform more meaningful comparisons of past,
present, and future operating results and as a means to evaluate the results of core on-going operations.
Adjusted EBITDA reflects EBITDA adjusted to exclude amortization of capitalized loan origination costs and the
portfolio premium recorded at the company’s emergence in July 2002, as well as the effect of gains and losses on
asset dispositions, the cumulative effect of changes in accounting principles, and foreign currency holding gains
and losses. The measure also excludes certain non-recurring items such as restructuring expenses, asset impairments,
and, in the case of results for periods prior to January 1, 2004, reorganization charges.
Management believes it is useful to exclude the amortization of capitalized loan origination costs and the portfolio
premium, as these charges are associated with specific portfolios that will be repaid in time. Management also
believes it is useful to exclude gains and losses on asset dispositions and the cumulative effect of changes in
accounting principles as these amounts are not reflective of our operating performance or the performance of our
assets and the amount of such items can vary dramatically from period to period. The timing and selection of an
asset for disposition is subject to a number of variables that are generally unrelated to our on-going operations.
Further, the company’s UK-based subsidiary, whose functional currency is the British pound sterling, will on occasion
hold Euros for operating purposes, resulting in currency holding gains or losses. Management believes the inclusion
of these items would not accurately reflect the operating performance of our operations and assets. Finally, management
believes it is useful to exclude restructuring and impairment charges as these are non-recurring in nature and
reduce the comparative value of the metric.
We have historically reported adjusted EBITDA to our investors and believe that the continued inclusion of this
measure provides consistency in our financial reporting. We use adjusted EBITDA in this news release because we
believe it is useful to investors in allowing greater transparency related to a significant measure used by management
in financial and operational decision-making. Adjusted EBITDA is among the more significant factors in management's
internal evaluation of total company performance. Management also uses adjusted EBITDA as a measure in determining
the value of acquisitions and dispositions. Management also uses adjusted EBITDA in the annual budget process.
Externally, we believe these measures continue to be used by investors in their assessment of our operating performance
and the valuation of our company.
Limitations on the Use of Non-GAAP Measures
The use of EBITDA and adjusted EBITDA has certain limitations. Our presentation of EBITDA and adjusted EBITDA may
be different from the presentation used by other companies and therefore comparability may be limited. Depreciation
expense for various long-term assets, interest expense, income taxes, and other items have been and will be incurred
and are not reflected in the presentation of EBITDA or adjusted EBITDA. Each of these items should also be considered
in the overall evaluation of our results. Additionally, EBITDA and adjusted EBITDA do not consider capital expenditures
and other investing activities and should not be considered as a measure of our liquidity.
We compensate for these limitations by providing the relevant disclosure of our depreciation, interest, and income
tax expense, and other items both in our reconciliations to the GAAP financial measures and in our consolidated
financial statements, all of which should be considered when evaluating our performance.
EBITDA and adjusted EBITDA are used in addition to and in conjunction with results presented in accordance with
GAAP. EBITDA and adjusted EBITDA should not be considered as alternatives to net income (loss), income (loss) from
operations, cash flows from operations or any other operating performance measure prescribed by GAAP, nor should
these measures be relied upon to the exclusion of GAAP financial measures. EBITDA and adjusted EBITDA reflect additional
ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the
corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our
business than could be obtained absent this disclosure. Management strongly encourages investors to review our
financial information in its entirety and not to rely on a single financial measure.
SUNTERRA CORPORATION AND SUBSIDIARIES
Non-GAAP to GAAP Reconciliations - Historical Data
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
Three and Twelve Months Ended September 30, 2005 and 2004
(In thousands and unaudited)
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
NET INCOME (LOSS) $ 7,169 $ 12,941 $(34,734) $(70,673)
Interest expense 6,220 5,573 25,092 24,052
Provision for income taxes 5,243 1,465 13,828 3,028
Depreciation and amortization 2,549 2,290 10,049 9,662
-------- -------- -------- --------
EBITDA 21,181 22,269 14,235 (33,931)
Amortization of capitalized
loan origination costs and
portfolio premium 541 2,034 3,179 4,986
Loss (gain) on sales of assets 253 (987) (480) (5,567)
(Gain) loss on foreign currency (220) (226) (658) 985
Reorganization and
restructuring, net 1,049 - 1,967 311
Impairment of goodwill
and assets - - 55,030 92,483
-------- -------- -------- --------
ADJUSTED EBITDA $ 22,804 $ 23,090 $ 73,273 $ 59,267
======== ======== ======== ========
SUNTERRA CORPORATION AND SUBSIDIARIES
Non-GAAP to GAAP Reconciliations - Projected Data
Reconciliation of Projected Net Income Under FY 2005 GAAP
to Projected EBITDA and Projected Adjusted EBITDA Under FY 2005 GAAP
Twelve Months Ending September 30, 2006
(In thousands and unaudited)
Twelve Months Ending
September 30, 2006
----------------------
Low High
--------- ---------
PROJECTED NET INCOME UNDER FY 2005 GAAP $ 26,000 $ 28,000
Interest expense 26,000 26,000
Provision for income taxes 16,600 17,900
Depreciation and amortization 11,000 11,000
--------- ---------
PROJECTED EBITDA 79,600 82,900
Amortization of capitalized loan origination
costs and portfolio premium 3,400 3,100
--------- ---------
PROJECTED ADJUSTED EBITDA $ 83,000 $ 86,000
========= =========
SUNTERRA CORPORATION AND SUBSIDIARIES
Non-GAAP to GAAP Reconciliations - Projected Data
Reconciliation of Projected Net Income Under FY 2006 GAAP
to Projected EBITDA and Projected Adjusted EBITDA Under FY 2006 GAAP
Twelve Months Ending September 30, 2006
(In thousands and unaudited)
Twelve Months Ending
September 30, 2006
----------------------
Low High
--------- ---------
PROJECTED NET INCOME UNDER FY 2006 GAAP $ 11,000 $ 15,000
Interest expense 26,000 26,000
Provision for income taxes 6,600 9,900
Depreciation and amortization 11,000 11,000
--------- ---------
PROJECTED EBITDA 54,600 61,900
Amortization of capitalized loan origination
costs and portfolio premium 3,400 3,100
Gross cumulative effect of change
in accounting principle 12,000 8,000
--------- ---------
PROJECTED ADJUSTED EBITDA $ 70,000 $ 73,000
========= =========
Contact:
INVESTOR CONTACT:
Bryan Coy
702-304-7005
Email Contact
Source: Sunterra Corporation