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
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Part II
ITEM 5
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.
ITEM 6
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.
ITEM 7
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.
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-Mexicans to directly own real property in certain areas (forbidden zones) for certain purposes. Accordingly, the Company does not sell deeded interests. Mexican law allows Mexican corporations, wholly owned by foreign corporations, to own land within the forbidden zones. 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 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 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. The following presents segment data in thousands:
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 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 were generally established in U.S. dollars.
The effects of the Mexican peso on the Company are tempered because the Company sells certain of its Vacation Intervals for U.S. dollars and 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):
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 a 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.
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.
- - 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):
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.
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 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 purchases and the receipt of down payments on financed Vacation Intervals.
The Company generates cash from financing Vacation Interval sales based on principal payments and the interest charged on Vacation Interval receivables. 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 has 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 Redeemable Preferred Stock and $578,000 of 10% Convertible Preferred Stock outstanding at December 31, 1999. The Redeemable 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 and $6.5 million at December 31, 1999 and March 14, 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 one of the loan covenants 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.
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 factoring additional Vacation Interval receivables. 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 use debt to finance any expansion plans beyond its plans to finance its current commitments.
At December 31, 1999, the Company had an inventory of vacation intervals weeks of 5,241 in Mexico and 548 in Canada. Accordingly, the Company believes its existing inventory will provide it with slightly more than one year of product available for sale under existing or planned marketing programs. 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, including the commitment to purchase 20 condominiums at an aggregate purchase price of approximately $3.9 million, 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 and anticipated results from operations 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 additional project financing and the Company is negotiating for such financing with Mexican financial institutions.
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 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 its future operations and from anticipated capital project financings which have not yet been negotiated. However, should the Company not achieve the anticipated level of operating results during 2000 or 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 is working to increase liquidity through hypothecation of its receivables. 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, denominated in US dollars, Mexican pesos and Mexican UDI's, are good quality and have favorable credit characteristics comparable to our American source receivables.
Additionally, 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 during the next year.
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.
ITEM 7A
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:
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 receivables 53,564 63,875 10,311
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
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 of this report and are incorporated herein by reference.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
ITEM 10
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. A summary of the background and experience of each of these individuals is set forth after the 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 and the Tolteca Group 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 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.
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), a New York Stock Exchange Company. 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.
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.
Christopher W. Allick has been a Director of the Company since January 1998. Since January 2000, Mr. Allick has been engaged in private investment banking. Mr. Allick served as a Managing Director of McDonald & Co. Securities, Inc. from July 1998 to December 1999. He was a Director and Executive Vice President of Jefferies & Company, Inc., a registered broker-dealer, from May 1993 until July 1998.
Christel DeHaan has been a director of the Company since January 1998. She currently serves as CEO of Christel House, CD Enterprises, Ltd. and the Christel DeHaan Family Foundation, Inc. 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, 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.
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 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.
Robert M. Werle has been a Director of the Company since September 1998. Mr. Werle is a Managing Director of Jefferies & Company, Inc. and has over 15 years of investment banking experience. Mr. Werle has been engaged in real estate investment banking for over 10 years with several investment banks including, prior to joining Jefferies in 1997, Robertson, Stephens & Company and PaineWebber Incorporated.
Other Key Employees
Ali Ahmed was Vice President - Corporate Affairs of the Company from March 1999 until November 1999, at which time he was made Vice President - Corporate and Legal Affairs. From 1996 through early 1999, Mr. Ahmed was an independent Certified Public Accountant, before which time, he held various positions from Senior Accountant to Divisional Controller at public corporations and a public accounting firm, including Coopers & Lybrand, where his main focus was SEC reporting. Mr. Ahmed is a licensed C.P.A. and a member of the State Bar of Texas.
Victor Cabral is a key officer of Club Regina responsible for all resort and theme store operations, human resources, and member services reservations and collections. Prior to joining Club Regina in early 1999, Mr. Cabral was director of tourism projects and hotel operations in Mexico and internationally for Grupo ICA, Mexico's largest construction company from 1997 through 1998. From 1995 to 1997, Mr. Cabral was chief operating officer for Grupo Real, a Mexican hotel management company. Mr. Cabral has a bachelors degree from the Universidad Autonoma de Santa Domingo in the Dominican Republic. Mr. Cabral was also Secretary of State for Tourism for the Dominican Republic from 1978 to 1981.
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. Mr. McGeough held a license from the British Colombia Real Estate Association from 1994 to 1999 with Northface Realty Co. Ltd. in Whistler, B.C., specializing in acquisitions for Whiski Jack. 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 as chief accounting officer for Telluride Venture Group II, developers of The River Club in Telluride, Colorado. From 1994 to 1998, Ms. Okamoto served as controller for Pahio Resorts, Inc., the largest privately owned vacation ownership development company in Hawaii.
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. Mr. Ripol holds degrees in engineering and finance.
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, Messrs. Harman and Werle in Class B and Messrs. Bech, McCarthy and Allick 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.
Robert Werle was appointed to the Company's Board of Directors pursuant to an agreement by and among Jefferies & Company and the Company, and Messrs. Bech, Powers and McCarthy. This agreement was entered into as part of the original issue of the Senior Notes.
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.
ITEM 11
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.
Report on Executive Compensation
This report documents the components of the Company's compensation programs for its executive officers and describes the basis on which fiscal 1999 compensation determinations were made with respect to the executive officers of the Company. All fiscal 1999 compensation decisions with respect to base salaries, annual compensation and stock option grants were made by the Board of Directors with the objectives of attracting, retaining, motivating and rewarding high caliber executive officers to manage the Company's business; inspiring executive officers to innovatively and aggressively pursue Company goals; and align the long-term interests of executive officers with those of the Company's stockholders through use of stock options.
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.
Stock Options: 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 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."
Stock Options Granted
The Company currently has outstanding options to purchase 534,000 shares of common stock, all of which were granted at $5.00 per share, and options for 100,000 shares granted to Mr. McCarthy at $2.00 per share. The Company makes no representation as to the current market value of its common stock.
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.
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.
ITEM 12
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 December 31, 1999, 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) 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, or a total of 13,136,262.
Beneficial Ownership(1) -------------------------- Shares Beneficially Percent Name Owned(1) of Class ------------------------------------ ---------- -------- Douglas Y. Bech (2) 1,961,912 14.9 John McCarthy (2) 215,367 1.6 Robert L. Brewton (2) 120,000 * George Aldrich (2) 56,000 * Bruce MacIntire (2) 12,000 * Brian R. Tucker (2) 106,000 * Christopher W. Allick (3) 72,955 * 345 California Street, Suite 3400 San Francisco, CA 94104 Christel DeHaan 783,333 6.0 10 West Market Street, Suite 1990 Indianapolis, IN 46204 Walker G. Harman (4) 1,840,000 14.0 Thomas R. Powers 1,110,213 8.5 Robert Werle (5) 328,345 (6) 2.5 Jefferies & Company, Inc. 11100 Santa Monica Blvd. 10th Floor Los Angeles, CA 90025 William T. Criswell (7) 1,077,440 8.2 3000 Bent Cypress Drive Wellington, FL 33414 All directors and officers as a group 6,606,125 50.3 (8) (12 persons)
* 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 to purchase 1,869,962 shares for $0.01 per share and 500,000 shares for $5 per share are included for purposes of computing the percentage of outstanding shares. (2) Excludes options to purchase shares of Common Stock. (3) Mr. Allick's shares are beneficially owned by and are held of record by Jefferies & Company, Inc.
(4) 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. (5) Mr. Werle disclaims beneficial ownership to all such shares except 33,061 shares. (6) Excludes 72,955 shares owned beneficially by Mr. Allick. (7) Includes 673,400 shares of Common Stock that Mr. Criswell or affiliated entities hold, subject to the claims of two other persons. (8) All directors and officers as a group have an aggregate voting power with respect to the outstanding shares of Common Stock (excluding the Warrants) of 61.3%.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14
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 . 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)
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)
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.
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.
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.
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 March 17, 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 March 17, 2000 Douglas Y. Bech Officer (principal executive officer)
/s/ JOHN MCCARTHY - -------------------------- President and Chief Executive Officer March 17, 2000 John McCarthy of Club Regina Resorts, Mexico, and Director
/s/ GEORGE E. ALDRICH - -------------------------- Senior Vice President - Finance March 17, 2000 George E. Aldrich and Accounting (principal financial and accounting officer)
/s/ CHRISTOPHER W. ALLICK - -------------------------- Director March 17, 2000 Christopher W. Allick
/s/ CHRISTEL DEHAAN - -------------------------- Director March 17, 2000 Christel DeHaan
/s/ WALKER G. HARMAN - -------------------------- Director March 17, 2000 Walker G. Harman
/s/ THOMAS R. POWERS - -------------------------- Director March 17, 2000 Thomas R. Powers
/s/ ROBERT M. WERLE - -------------------------- Director March 17, 2000 Robert M. Werle
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
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):
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.
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):
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 deficit in shareholder's investment, 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 its future operations and from anticipated capital
project financings which have not yet been negotiated. However, should the Company not achieve the anticipated level of operating results during 2000 or 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.
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 JHSC Properties, Inc. 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 one of the loan covenants 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 in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. 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 as follows:
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 under FASB Statement No. 52 - Foreign Currency Translation. 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.
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 or later.
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.
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 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.
Revenue Recognition
The Company recognizes sales of Vacation Intervals on an accrual basis after a binding sales contract is executed and a 10% minimum down payment is received. For transactions that do not qualify for accrual method of accounting, all revenue is deferred using the deposit method.
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. Since the Company has a net losses for all periods reported, no conversion is assumed as conversion of the Company's warrants and stock options would be anti-dilutive.
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):
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.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to 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 APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants.
New Accounting Pronouncement
In June 1998, the FASB issued 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.
3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES
Vacation Interval receivables and other trade receivables were as follows (in thousands):
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%, in 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):
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):
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 ========= =========
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, 2000. 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 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):
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. SHAREHOLDERS' INVESTMENT
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 Redeemable Preferred Stock (Redeemable Preferred Stock) plus 500,000 five-year Warrants to purchase the Company's Common Stock at $5.00 per share. The Redeemable Preferred Stock requires that annual dividends be paid either in cash equaling 9% of the Redeemable Preferred Stocks' $100 per share Liquidation Preference, or in an equivalent number of shares of such Redeemable Preferred Stock valued at the Liquidation Preference. As of December 31, 1999, the Company opted to pay a stock dividend of 2,250 shares. Also, the Redeemable Preferred Stock is redeemable at any time before December 1, 2004, at which time redemption is mandatory.
Convertible Preferred Stock
In connection with the purchase of Whiski Jack, the Company issued 20,775 shares of redeemable 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.
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 - As allowed by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123), the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 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 FAS 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 FAS 123.
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.
A summary of all the Company's stock option activity, and related information for the years ended December 31 follows:
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.
9. 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.
Federal income taxes are as follows (in thousands):
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):
10. 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-cancellable 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):
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, 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.
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
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
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.
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):
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.
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.
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
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.
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.
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.
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.
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.
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 -------- 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 ========