ITEM 3 - LEGAL PROCEEDINGS
The Company is currently 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, 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 REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common equity has been registered pursuant to Section 12(b) of the Act but is not traded. At December 31, 2000, the Company had 49 common stock shareholders.
Dividend Policy
The Company has never paid cash dividends on its common stock. The Company anticipates it will retain all of its future earnings, if any, for use in the expansion and operation of its business and the Company does not anticipate paying cash dividends in the foreseeable future. In addition, the Senior Notes Indenture may restrict or prohibit the payment of dividends by Raintree.
ITEM 6
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.
(1) The financial data was derived from the Combined Historical Financial Statements of the Predecessor Business which were prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The historical vacation ownership segment information was prepared by identifying the direct vacation ownership revenues and expenses and allocating the vacation ownership segment and the hotel shared expenses based on the relative number of total rooms at the beginning of each period. The operating results of the hotel segment were reported by the Predecessor Business as discontinued operations and accordingly, are not included in this presentation.
(2) Because the Company acquired perpetual ownership of the Club Regina Resorts, which had been sold by the Predecessor Business as 30 to 50 year memberships to its customers, the historical financial information has been prepared by using the lease accounting method as required by U.S. GAAP, which required the Predecessor Business to recognize annually only 1/30th of cumulative vacation ownership revenues, net of cumulative provisions for doubtful accounts and cumulative commission expenses. For periods after August 17, 1997, financial data is presented using the full accrual method of accounting in accordance with SFAS No. 66 rather than the lease accounting method. (3) Depreciation was not recognized by the Predecessor Business during the periods presented because the prior owner had recorded a significant impairment loss in 1994, and the assets of the combined hotels and Club Regina Resorts were held for sale from then until their sale on August 18, 1997. The Company's Historical Consolidated Statement of Operations for the year ended December 31, 1997 includes the operations of the purchased Club Regina Resorts only for the period August 18, 1997 through December 31, 1997. (4) Reflects the results of operations of the Company for the twelve months ended December 31, 1997 including operations of the acquired Club Regina Resorts for the period from August 18, 1997 through December 31, 1997, and does not include results of operations of the Predecessor Business. The Company had no vacation ownership business activity prior to August 18, 1997. (5) EBITDA, as adjusted represents net income before interest expense, taxes, depreciation and amortization, and also includes equity in losses on equity investments, foreign currency exchange gains and losses, gain on extinguishment of debt and preferred stock dividends. EBITDA, as adjusted is presented because it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA, as adjusted should not be construed as a substitute for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position and cash flows. The EBITDA, as adjusted measure presented herein may not be comparable to EBITDA as presented by other companies.
The following table reconciles historical EBITDA to historical net loss reported for the vacation ownership segment to EBITDA, as adjusted:
(6) The ratio of earnings to fixed charges has been computed by dividing earnings before foreign income and asset taxes plus fixed charges by fixed charges. Fixed charges consist of interest expense, interest capitalized and preferred stock dividends. Fixed charges exceed the net loss by approximately $7.4 million, $11.7 million, $13.3 million and $22.2 million for the years ended December 31, 1997, 1998, 1999 and 2000, respectively.
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 50-year Vacation Interval weeks. The 30-year Vacation Interval weeks 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 week owners.
At June 30, 1998, the Company assigned a proportional beneficial interest of the Remainder Interests to each purchaser of Vacation Interval weeks who had bought subsequent to the August 18, 1997 acquisition. This structure also provides for the economic interest in the Vacation Interval week to be transferred to the purchaser and allows for the use of full accrual accounting method of profit recognition for sales made by the Company.
Effective July 1, 1998, the Company put into effect a new product structure to sell its Vacation Interval weeks under a right-to-use membership entitling owners to a 50-year contractual right to use Vacation Interval units. This right includes the right (proportional beneficial interest) to participate either in: (i) an extension of the contractual right to use if practicable under Mexican law or (ii) the proceeds from the sale of the Los Cabos, Cancun and Puerto Vallarta Resorts in 2047.
In Mexico, the Company uses a membership as its means of transferring Vacation Interval weeks rather than a deeded interest because Mexican real property law does not have effective mechanisms that would allow non-Mexican individuals or companies to directly own real property within 100 kilometers of the Mexican border or 50 kilometers of the Mexican coast which include the properties on which the Company's resorts are located. Accordingly, the Company does not sell deeded interests in Mexico. Mexican law allows Mexican corporations, wholly owned by foreign corporations, to own land within this zone. Accordingly, in Mexico the Vacation Interval week 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 using the equity method of accounting. The agreement is with Jackson Hole Ski Corporation, the owner and developer of the Teton Village ski area near Jackson Hole, Wyoming. The Company's reportable segments are based on geographic area. The reportable segments are managed separately due to their geographic location with managers focused on improving and expanding each segment's operations. However, resource allocation is not based on individual country results, but based on the best location for future resorts in order to enhance the Company's overall ability to sell timeshares 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:
Mexico's Segment Results - 2000 Compared to 1999. Revenues increased $15.0 million, or 22.4%, and operating income decreased $1.6 million or 21.1% for the year ending December 31, 2000. The increase in revenues primarily resulted from an overall increase in the number of Vacation Interval weeks sold. The number of weeks sold increased 1,058, or 28.0%, as both the number of qualified tours and the sales closing percentages increased. The decrease in operating income results from the loss on sale of property of $7.1 million.
Mexico's Segment Results - 1999 Compared to 1998. Revenues 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.
Canada's Segment Results - 2000 Compared to 1999. Revenues decreased $4.3 million primarily as the number of weeks sold decreased 37.9%. The decrease in weeks sold is reflective of a 29.1% decrease in tour flow primarily generated from its telemarketing operations, on-site sales office and owner referrals. However, operating income decreased by only $0.9 million because of a decrease in goodwill amortization of $1.5 million in 2000 and due to costs associated with Vacation Intervals sales decreasing along with sales.
Canada's Segment Results - 1999 Compared to 1998. The variations in operations between 1999 and 1998 noted for Canada 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.
United States' Segment Results - 2000 Compared to 1999. The United States operations consist of the recent acquisition of Cimarron Resorts. The operating loss is comprised primarily of sales, marketing, advertising and general expenses.
Corporate and other - 2000 Compared to 1999. The $0.1 million decrease in operating loss is primarily due to the decrease in accounting, tax and other consulting fees. The operating loss consists primarily of general and administrative costs that are not allocated to the segments.
Mexico's Inflation and Currency Changes
Since December 1994, Mexico has experienced difficult economic conditions, including significant devaluation and volatility of the peso with respect to the U.S. dollar, reduced economic activity, higher inflation, and high interest rates. Through 1998, Mexico was considered a highly inflationary economy, since the three-year cumulative rate of inflation exceeded 100%. Effective January 1, 1999, Mexico was no longer considered a highly inflationary economy. The financial statements of the Company were prepared for all periods using the U.S. dollar as the functional currency. The U.S. dollar is used since the debts are generally payable in U.S. dollars and sales prices are generally established in U.S. dollars.
The effects of the Mexican peso on the Company are tempered because the Company sells its Vacation Intervals based on prices set in U.S. dollars. Sales settled in pesos or UDI's are based on the U.S. dollar sales price converted at the current peso or UDI rate. This adjusts the price of Vacation Interval weeks 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 Interval weeks without financing them. However, approximately 54% of the Company's customers in Mexico elect to finance their purchase of Vacation Interval weeks through the Company. Of financed Vacation Interval receivables, approximately 37% 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 approximately 11% 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 increase or decrease in the peso exchange rate or inflation in Mexico. In particular, the average monthly peso exchange rate for the twelve months ended December 31, 2000 strengthened when compared to the average monthly peso exchange rate for the twelve months ended December 31, 1999. The Company estimates that current period costs were not materially impacted by the peso exchange rate since the monthly average peso exchange rate strengthened only slightly during 2000. However, the Company estimates that inflation in Mexico was approximately 9% during 2000. 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, 2000 to the twelve months ended December 31, 1999.
Vacation Interval sales increased by approximately $8.0 million, or 12.8%, from approximately $62.8 million for the year ended December 31, 1999 to approximately $70.8 million for the year ended December 31, 2000. Vacation Interval sales increased as the number of weeks sold increased by 695, or 14.7%, from 4,729 for the year ended December 31, 1999 to 5,424 for the year ended December 31, 2000 as both the number of qualified tours and the sales closing percentages increased.
Rental and service fee income increased by $2.0 million, or 22.7% for the year ended December 31, 2000 compared to the comparable prior year period. The increase results from an increase of approximately 4,700 new
members paying service fees during the year ended December 31, 2000 compared to the comparable prior year period.
Interest income on Vacation Interval receivables increased by $1.1 million or 15.3% for the year ended December 31, 2000 compared to the comparable prior year period. The increase results primarily from the higher amount of Vacation Interval receivables outstanding during the year ended December 31, 2000 compared to the comparable prior year period and a slightly higher overall average interest rate received during 2000.
Provision for doubtful accounts decreased by approximately $0.4 million, or 7.4%, from approximately $5.3 million for the year ended December 31, 1999, to approximately $4.9 million for the year ended December 31, 2000. This decrease is in response to a review of historical default rates and current collection rate history which were better than previously estimated. The Company previously estimated a default rate of approximately 8% compared to a current estimated default rate of approximately 5%. The Company believes that the reserve for doubtful accounts provides adequate coverage of default risk under current market conditions.
Advertising, sales and marketing expense increased approximately $5.0 million, or 17.0%, from approximately $29.3 million for the year ended December 31, 1999, to approximately $34.3 million for the year ended December 31, 2000. The acquisition of Cimarron increased advertising, sales and marketing approximately $1.1 million and sales at that location have not commenced. Increased sales commissions, sales promotions and marketing programs associated with higher sales levels contributed to the increase as well. As a percent of Vacation Interval sales, advertising, sales and marketing expenses increased from 46.8% for the year ended December 31, 1999 to 48.5% for the year ended December 31, 2000 primarily as a result of the increased costs of Cimarron operations and the decrease in the revenues from the Whiski Jack operation.
Maintenance and energy expenses increased approximately $3.3 million, or 28.9%, from approximately $11.4 million for the year ended December 31, 1999, to approximately $14.7 million for the year ended December 31, 2000. The increase in expenses was caused by maintenance and energy expenses associated with the acquisitions of units after the first nine months of 1999 including Villa Vera units in Mexico and the Westin units in Whiski Jack and the costs associated with 40 additional units during late 2000 that were previously used in an exchange program with the Westin Hotel. Additionally, the cost of contract maintenance services provided by the Westin Hotels increased by approximately $0.6 million in 2000 as compared to the prior year.
General and administrative expenses increased approximately $1.1 million, or 10.4%, from approximately $10.9 million for the year ended December 31, 1999, to approximately $12.0 million for the year ended December 31, 2000. The Company's new operations at Cimarron resorts accounted for approximately $0.5 million of this increase. Additionally, in Mexico higher costs resulted from general inflation and an increase in overall business activities associated with higher sales volumes. As a percentage of revenue, general and administrative expenses remained nearly unchanged between periods.
Depreciation expense increased by $0.4 million during the year ended December 31, 2000 compared to the comparable prior year period. The increase primarily relates to depreciation associated with assets acquired in conjunction with the December 1999 Villa Vera Hotel and Racquet Club acquisition and increased investments in computer equipment.
For the year ended 2000, amortization of goodwill relates to the goodwill resulting from the acquisition of Whiski Jack, which was fully amortized during 1999. During for the second quarter 2000, a final payment was made to the sellers of $150,000 for achieving specific post-acquisition earnings, which was expensed during the period.
The Company sold its Cozumel property and certain other property held for sale in Mexico and recorded a loss of $7.1 million in 2000.
Interest expense increased approximately $4.1 million in 2000 as compared to 1999 due primarily to interest costs associated with a higher level of debt outstanding and increased average interest rates between the periods. Average debt outstanding increased $17 million between periods, while the average interest rates increased from approximately 12.8% to 13.3% for December 31, 1999 and December 31, 2000, respectively.
Equity in earnings on equity investments increased $1.1 million as development and construction operations at the Teton Club were completed in October 2000, and qualified timeshare sales commenced.
The change in foreign currency exchange gain/loss between 1999 and 2000 results from the changes in the Mexican peso. The change between periods occurred due to a weakening peso based on period end rates against the U.S. dollar and the holding of a higher level of peso denominated assets during 2000.
The Company purchased $5.5 million face value of Senior Notes that resulted in an extraordinary gain of $1.0 million, net of tax.
Comparison of the twelve months ended December 31, 1999 to the twelve months ended December 31, 1998.
The discussion of results presented below includes the results of operations of Whiski Jack, which was acquired on July 24, 1998. The variations noted for Whiski Jack are due to the reporting of post-acquisition partial-year results in 1998 for the period subsequent to the date of acquisition, July 24, 1998.
Total revenues increased approximately $7.4 million, or 10.0%, during 1999. This increase was primarily due to an 11.0% increase in Vacation Interval sales and a 24.0% increase in interest income on Vacation Interval receivables.
Vacation Interval sales grew approximately $6.2 million, or 11.0%, during 1999 as a result of the acquisition of Whiski Jack. In Mexico, Vacation Interval sales for the 12 months ended December 31, 1999 were unchanged from the level of the prior 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. The Teton Club expenses general, selling and other indirect costs currently 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 million 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations primarily from the sale of Vacation Interval weeks, receipt of payments on the Vacation Interval receivables, and the receipt of service fees charged to members. With respect to the sale of Vacation Interval weeks, the Company generates cash from all-cash sales, cash down payments on financed sales and collection of principal and interest on Vacation Interval receivables from financed sales. The Company also generates cash through loans secured by Vacation Interval receivables. At December 31, 2000, the Company had $78.7 million of Vacation Interval receivables of which $47.9 are currently pledged. At such date, approximately: (i) 46% of Vacation Interval receivables were U.S. dollar denominated, (ii) 37% of Vacation Interval receivables were denominated in UDI's, an obligation denominated in pesos which is adjusted for Mexican inflation, (iii) 11% of Vacation Interval receivables were denominated in Mexican pesos and 6% of Vacation Interval receivables were Canadian dollar denominated.
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.
The Company has planned 2001 capital expenditures of approximately $3.6 million. These expenditures include the development of sales and marketing programs, MIS/IT, accounting software and other office improvements. Additionally, the Company has 2001 planned expenditures for the purchase of Vacation Interval inventory in Palm Springs, California and Whistler, British Columbia. The expenditures for purchases of the Palm Springs inventory are incurred only as the inventory is required when the sale of the underlying timeshare is finalized pursuant to the agreement with the original developer. In Whistler, the expenditures for purchases of inventory are incurred in the ordinary business operations of the Whiski Jack subsidiary through the purchase of individual condominium units which are resold as timeshare thereby limiting the working capital requirement consistent with historical business and financial practices. The total 2001 planned expenditures for inventory are $18 million.
The Los Cabos development will require project financing for the first phase of approximately $6.5 million before development can proceed. The Company is currently negotiating for such financing with both U.S. and Mexican financial institutions and other investors. However, no commitment has been received from such institutions or investors. The Cabos project is included conditionally in the Company's 2001 plan, subject to obtaining such financing. Also, the Company will expend approximately $3.7 million for the refurbishment of the resort properties, substantially all of which is financed through annual maintenance fees received from owners of Vacation Intervals.
At December 31, 2000, the Company had remaining inventory of developed Vacation Interval weeks of 3,444 weeks for Club Regina in Mexico, including Cimarron and units at the Westin Whistler Hotel held for sale by Club Regina, and 464 weeks for Whiski Jack in Canada. Based on historical sales levels and planned sales for 2001, the remaining inventory for Club Regina and Whiski Jack will provide approximately 9 months and 7 months, respectively, of inventory for sales in 2001. Also, at December 31, 2000, the Company had approximately 1,400 of remaining developed Vacation Interval weeks at Teton Club joint venture and anticipates it will sell this remaining inventory by the end of 2003. The Company plans to increase its Vacation Interval weeks inventory through development of additional properties and making acquisitions in the short term, developing its land in Los Cabos, and making acquisitions in Mexico, the United States and Canada.
To finance its growth strategy, in addition to accessing its existing lines of credit, the Company may from time to time consider issuing debt, equity or other securities, entering into traditional construction financing or credit agreements, entering into joint venture or development agreements with respect to its undeveloped property, or hypothecating additional Vacation Interval receivables. The operating and financial restrictions and covenants in our debt agreements, including our bank credit facilities and the indenture governing the Senior Notes, may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. These debt agreements include covenants that require us to meet certain financial ratios and financial tests, including a
minimum capital test, a minimum general administrative and sales expenses to Vacation Interval sales ratio test and a minimum "Adjusted Current Assets" to "Adjusted Current Liabilities" ratio (as each is defined therein). In addition, the debt agreements restrict our ability to take additional action without the consent of the lenders such as the incurrence of additional debt or the sale of our interest in the resorts. Such covenants, required ratios and tests may require that we take action to reduce debt or to act in a manner that delays the achievement of our business objectives. If we breach any of these restrictions or covenants or suffer a material adverse change which restricts our borrowing ability under our credit facilities we would be unable to borrow funds thereunder without a waiver. A breach or inability to obtain timely waivers could cause a default under the Senior Notes and our other debt. Our indebtedness could then become immediately due and payable, in which case we may not have or be able to obtain sufficient funds to make these accelerated payments, including payments on the notes.
At December 31, 2000, the Company had outstanding $94.5 million of 13% Senior Notes, $14.6 million outstanding under the FINOVA receivables line of credit that at year-end bears interest at 11.25%, $4.4 million outstanding under the FINOVA inventory based credit facility that at year-end bears interest at 11.75%, $12.7 million outstanding under the Textron credit line that at year-end bears interest at 11.5%, $4.8 million outstanding under the Bancomer loan that at year-end bears interest at 12%, $4.1 million mortgage notes payable that at year-end bears interest at an average interest rate of 11.4%, and $5.6 million of bank and other debt that at year-end bears interest at an average interest rate of 12.6%. Approximately $23.2 million, $8.3 million, $6.9 million, $99.1 million, $2.4 million and $0.8 million of the outstanding debt which has stated repayment amounts is due in 2001, 2002, 2003, 2004, 2005 and thereafter, respectively. In addition to such debt, the Company has $5.6 million of Pay-in-Kind Preferred Stock outstanding at December 31, 2000. The Pay-in-Kind Preferred Stock is redeemable at any time before December 1, 2004, at which time the redemption is mandatory. With the exception of the $6.1 million semi-annual interest payments due June 1 and December 1 on the Senior Notes, interest is paid monthly on all debt obligations of the Company. At December 31, 2000, the Company had $1.0 million of accrued and unpaid interest on Senior Notes. As of December 31, 2000, the Company was not in compliance with the FINOVA loan covenant related to the ratio of administrative, sales and marketing expenses to Vacation Interval sales, but obtained a timely waiver for such year-end non-compliance.
At December 31, 2000, the Company was, and continues to be, highly leveraged, with substantial debt service requirements. As discussed above, the Company incurs significant liquidity needs to fund its semi-annual Senior Notes interest payments due June 1 and December 1. A significant portion of the Company's assets is pledged against existing borrowings. The Company has a shareholders' deficit, has incurred losses since its inception and expects to incur a net loss for fiscal 2001. To achieve profitable operations, the Company is principally dependent on its ability to restructure its Senior Notes with a reduction in the principal amount outstanding and to attract new equity or equity equivalent capital. The Company expects that it will obtain sufficient additional credit capacity or equity capital or complete a debt restructuring, sale of assets or a combination of the foregoing to meet its debt service obligations, including interest payments on its Senior Notes during 2001. The Company has historically incurred debt and issued equity securities to fund negative cash flows from operating activities and to make the payments on previously incurred debt obligations. The Company also expects to be able to fund capital requirements from anticipated capital project financings, which have not yet been negotiated. However, should the Company not be able to successfully negotiate additional credit capacity, there is no assurance that the Company would be able to meet all of its short-term debt service obligations unless it liquidates assets and reduces the size of its operations.
The Company's borrowing capacities under the FINOVA and Textron notes receivable based credit facilities are $20 million and $18 million, respectively. The Company estimates that based on Vacation Interval receivables not currently pledged, approximately $1.4 million and $5.3 million under the FINOVA and Textron lines of credit respectively, at December 31, 2000, were available for borrowing under the credit facilities. Additionally, the Company has available $20 million of notes receivable based facility capacity through the Cimarron Project Development, Management and Sales Agreement. This credit facility with Textron can be utilized only in conjunction with the credit sales of inventory acquired through the Cimarron agreement and outstanding loans bear interest at a fluctuating base rate based on Chase Manhattan Bank prime rate (9.5% at December 31, 2000) plus 225 basis points. Textron will lend 90% on pledged notes receivable denominated in United States dollars and held by United States residents. Borrowings can be made under this facility for 24 months after the date of the first draw, and the facility matures five years from the date of the first draw. No advances have been made under the receivables credit facility.
The Company plans payment of the June Senior Notes interest based on available cash and existing credit capacity under current credit lines. The payment of the December Senior Notes interest will require modification to
the terms of current credit agreements, including, the modification of collateral terms to increase the allowed amount of Vacation Interval receivables from Mexican obligors, to increase the portion of collateral which can be based on Mexican currency, expansion of the borrowing limit and restructuring the Senior Notes including reducing the outstanding balance. The Company is currently evaluating several alternatives for meeting this additional working capital need. However, to date, negotiations with existing lenders, and prospective financing sources have not resulted in any commitments to provide financing to meet 2001 working capital needs.
On a long-term basis, the Company has debt maturities of $8.3 million, $6.9 million, $99.1 million, $2.4 million and $0.8 million in 2002, 2003, 2004, 2005 and thereafter, respectively. In order to meet obligations in the long-term, the Company will need to achieve profitable operations, reduce its high leverage position and expand and extend its current credit facilities. Should the Company not achieve one or more of these requirements the Company's ability to continue to operate would be jeopardized.
The Company is working to reduce its high leverage position. The Company believes that there are several opportunities that may facilitate a capital restructuring. While the Company intends to continue to pursue such opportunities, there can be no assurance that a capital restructuring will occur.
As part of the Teton Club financing arrangement with FINOVA, the Company is directly obligated for 25% of the construction loan, pre-sale working capital loan and receivables loan not repaid by the Teton Club, and is also responsible for any working capital deficits at the Teton Club. As of December 31, 2000, Teton Club was not in compliance with loan covenants related to the level of monthly unit sales and the ratio of administrative, sales and marketing expenses to Vacation Interval sales, but obtained timely waivers for such year-end non-compliance.
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.
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 sales of Vacation Interval weeks 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, 2000, 37% 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 $76.4 million, and in fixed rate, long-term U.S. dollar denominated debt that is primarily publicly held, totaling approximately $98.0 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:
(1) The fair value of the Company's Senior Notes cannot be determined as none of the senior notes are actively traded on the open market. Also, the amount of premium or discount cannot be predicted were these notes to become actively traded in the future. (2) These financial instruments are held for other than trading purposes; the carrying amounts of these instruments approximates fair value.
The following table sets forth changes in market risk exposure between the years ended December 31, 1999 and 2000 (in thousands):
Increase/ 1999 2000 (decrease) ------- ------- ---------- Fixed rate long-term debt 109,379 104,765 (4,614) Variable rate long-term debt 35,409 35,869 460 Fixed rate long-term receivables 59,556 74,364 14,808 Variable rate long-term receivables 4,319 4,345 26
Fixed rate long-term debt decreased primarily due to the repurchase of $5.5 million of Senior Notes during 2000. Furthermore, variable rate long-term debt increased due to additional borrowings under accounts receivable lines of credit for payment of interest on Senior Notes and for other working capital needs.
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 as of December 31, 2000. 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, j2 Global Communications, a Nasdaq company, Pride Companies, L.P., a publicly traded master limited partnership, and several private companies.
Robert L. Brewton was appointed Executive Vice President - Chief Investment Officer of the Company in April 1998. Mr. Brewton was a Senior Partner and the Chief Investment Officer of Residential Company of America ("RCA"), a privately held multifamily real estate investment and management company, from January 1995 until March 1998 when it was sold. Prior to working at RCA, Mr. Brewton served as the President and Chief Operating Officer of Transwestern Property Company's (a multi service property management and investment company) Multifamily Division from November 1987 until January 1995 when it was merged into RCA. During his 24 year career in the real estate business, Mr. Brewton has been involved in all aspects of the multifamily housing industry and has served as either a principal, developer, or intermediary in over 100,000 apartment units nationwide. Mr. Brewton serves on the Advisory Committee of the National Multi Housing Council.
George E. Aldrich joined the Company in November 1998 as Senior Vice President - Accounting and Finance. In this capacity Mr. Aldrich is responsible for overseeing the financial reporting, tax, treasury and insurance functions. From August 1996 through November 1998, Mr. Aldrich served as Chief Financial Officer for KBC Advanced Technologies, Inc., a U.S. subsidiary of a British-based public company that provides consulting services and specialized software to the refining industry. From 1983 to 1996, Mr. Aldrich was Vice President - Controller for Wainoco Oil Corporation (now, Frontier Oil Corporation), with oil and gas exploration and production and refining operations, and is on the New York Stock Exchange. During Mr. Aldrich's tenure at Wainoco, Wainoco had operations in the United States and Canada as well as activities in other international locations. Prior to joining Wainoco, Mr. Aldrich was with Arthur Andersen LLP. Mr. Aldrich is a licensed C.P.A.
Bruce S. MacIntire joined the Company in October 1998 as Senior Vice President. In this capacity Mr. MacIntire is currently responsible for resorts development of the Company. From 1997 until joining the Company, Mr. MacIntire served as Vice President - Sales and Marketing for The River Club, a luxury fractional vacational ownership resort in Telluride, Colorado. From 1994 until 1997, Mr. MacIntire served as Vice President - Development for Marriott Ownership Resorts, Inc., the vacation interval club business unit of Marriott Hotels. In that capacity Mr. MacIntire managed development projects in Park City, Utah, Aruba, Marbella, Spain, Kauai,
Hawaii, Williamsburg, Virginia and Breckenridge, Colorado. Previously, Mr. MacIntire was head of marketing for The Doral Resort and Spa (currently The Peaks) in Telluride, Colorado including its Vacation Interval ownership sales and marketing. Mr. MacIntire has served in various capacities in the real estate industry since 1972.
Gustavo Ripol joined the Company in October 1997 and since December 2000 is Managing Director of Club Regina and Raintree Vacation Club including responsibility for business development in Mexico. From 1995 to 1997, he was RCI's Marketing and Communications Director for Latin America, where he was also responsible for developing new business units in the region for the marketing, sale and implementation of vacation ownership services. From 1993 to 1994, Mr. Ripol served as Planning Director for Bancomer's Tourism Division responsible for strategic planning for the hotel and vacation ownership business units and development of the Club Regina Resort vacation interval product. From 1987 to 1992, Mr. Ripol held various positions as Manager of Planning & Systems, Director of Finance and Administration and Director of Planning and Business Development for Grupo Los Remedios (a Mexican based construction and real estate development group). Mr. Ripol holds degrees in engineering and finance.
Brian R. Tucker has been with Raintree since August 1997 in various capacities and is a Senior Vice President responsible for operations. From 1995 through 1997, Mr. Tucker was an associate of Raintree Capital Company. Prior to joining Raintree Capital Company, Mr. Tucker was employed for five years at Deloitte & Touche Management Consulting Group where he advised clients in various industries concerning mergers, acquisitions and bankruptcy. Mr. Tucker also worked for British Petroleum as a drilling and production engineer for three years prior to receiving an M.B.A. from the Wharton School of Finance in 1990.
Christel DeHaan has been a director of the Company since January 1998. She currently serves as CEO of Christel House (a non-profit organization which educates under privileged children in undeveloped countries), CD Enterprises, Ltd. (a private investment firm controlled by Christel DeHaan) and the Christel DeHaan Family Foundation, Inc. (a non-profit organization controlled by Christel DeHaan). Ms. DeHaan co-founded Resort Condominiums International, Inc., ("RCI") the world's largest vacation interval exchange company, in 1974, and became its Chairman, CEO and sole shareholder in 1989. In November 1996, she sold RCI to HFS (now the Cendant Corporation) and served on its Board of Directors until January 1998. She is a founding director of the International Timeshare Foundation and was elected twice to the American Resort Development Association Board of Directors. She was appointed by President Clinton in 1995 to the White House Conference Task Force on Travel and Tourism, and was named to the British Tourism Hall of Fame in 1997. Ms. DeHaan is Chairman of the Board of Trustees of the University of Indianapolis, President of the American Pianists Association and serves on the Boards of Directors of the Indiana Symphony Society, Dance Kaleidoscope and American United Life Insurance.
Walker G. Harman has been a director of the Company since 1997. Mr. Harman was President and Chief Executive Officer of Metro Hotels, Inc. ("Metro") from 1978 until 1998, and was its sole owner from 1985 until its sale to Meristar Hotels and Resorts. Metro owned, developed and operated hotels and resorts including franchises such as Hilton, Radisson, Omni, Holiday Inn and Embassy Suites. Mr. Harman also owns and operates Sonny Bryan's Smokehouse (a chain of barbeque restaurants in the Dallas Metroplex area), which has 11 locations in the Dallas, Texas area. Mr. Harman currently serves as a member of board of directors of the Baylor Health Care System, the Board of Regents of Baylor University, and the board of directors of the Interfaith Housing Coalition. Mr. Harman is a member of the World Presidents Organization and the American Hotel Motel Management Association.
Thomas R. Powers has been a director of the Company since 1997. Mr. Powers is a founding principal of Raintree Capital Company. He served as Chairman, President and CEO of Transamerica Fund Management Company (a mutual fund management company) and its predecessor companies ("TFM") from 1976 to 1993. TFM was the investment advisor and underwriter for 21 mutual funds. In 1995, he completed a three-year term as a member of the Board of Governors of the National Association of Securities Dealers where he also served on the Executive Committee as well as Chairman of the Audit Committee and the Investment Companies Committee. For almost 20 years Mr. Powers served on the Board of Governors of the Investment Company Institute, the national association of mutual funds ("ICI"). During that time he served on ICI's Executive Committee and was Chairman from 1989 to 1990. From 1988 to 1997, Mr. Powers was a member and past Chairman of the Board of Regents of Baylor University and served as its Chairman. Mr. Powers is also a member of the Baylor University Foundation, a Trustee and member of the Finance Committee for the Memorial Healthcare System of Houston, Texas and a member and past President of the Houston Chapter of the Financial Executives Institute as well as a member of the Texas Society of C.P.A.'s and the American Institute of C.P.A.'s. Mr. Powers is also the current Chairman of the
Texas Infrastructure Fund, a quasi-state agency. Mr. Powers serves as a director of the Fidelity Charitable Gift Fund, a 501 (c)3 company and several private companies.
Other Key Employees
Patrick D. Hanes joined the Company in November 1998, as Project Director of the Teton Club. From May until November 1998, Mr. Hanes was the Director of Marketing for Telluride Venture Group II, developers of the River Club in Telluride, Colorado. From January 1995 until May 1998, Mr. Hanes served as Senior Vice President, Director of Operations for Pahio Vacation Ownership, Inc. (PVIO). PVIO is the largest independent developer of timeshare properties in Hawaii. In his capacity as Director of Operations, Mr. Hanes oversaw all aspects of sales and marketing at five PVIO projects and reported directly to the CEO. Mr. Hanes was awarded the 1998 ARDA GOLD AWARD for New Owner Package Development.
Michael W. McGeough is Managing Director of Whiski Jack Resorts Ltd., having assumed this position in October, 1999. From 1994 to 1999 Mr. McGeough was employed by Whiski Jack specializing in acquisitions for Whiski Jack and held a license from the British Columbia Real Estate Association. From 1991 to 1994, he worked as a sales consultant with Whiski Jack. Prior to that, Mr. McGeough worked as a securities trader with First Vancouver Securities and Yorkton Securities in Vancouver, B.C., and was President of Stealth Marketing, Inc. Mr. McGeough is currently a director of the Canadian Resort Development Association. He has passed the Canadian Securities Course, and graduated from International College in Vancouver.
Cheryl C. Okamoto joined the Company as Director of Operations - The Teton Club in November 1998 and is now Vice President - Administration. In this capacity, Ms. Okamoto is responsible for administrative and accounting operations of The Teton Club and future U.S. based vacation ownership locations. Prior to joining the Company, Ms. Okamoto served from July 1998 to November 1998 as chief accounting officer for Telluride Venture Group II, developers of The River Club in Telluride, Colorado. From 1994 to July 1998, Ms. Okamoto served as controller for Pahio Resorts, Inc. the largest privately owned vacation ownership development company in Hawaii. Director Classes and Agreements
The Company's Board of Directors currently consists of four members and is divided into three classes, one class of which is elected each year to hold office for a three-year term and until successors are elected and qualified. The terms of the Class A, Class B and Class C directors of the Company will expire at the 2001, 2002 and 2000 annual meetings, respectively. Mr. Powers and Ms. DeHaan serve in Class A, Mr. Harman in Class B and Mr. Bech in Class C. Successors to the directors whose terms have expired are required to be elected by stockholder vote while vacancies in unexpired terms and any additional positions created by board action are filled by action of the existing Board of Directors. The executive officers named above were elected to serve in such capacities until the next annual meeting of the Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. No family relationships exist among the executive officers or directors of the Company.
Director Compensation
Directors do not receive compensation for serving as directors. Directors are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof incurred in their capacity as directors.
Committees of the Board of Directors
The Company has an Executive Committee and an Audit and Compensation Committee. The Audit and Compensation Committee reviews and reports to the Board of Directors the scope and results of audits by the Company's outside auditor. The committee also recommends the firm of certified public accountants to serve as the Company's independent public accountants, subject to nomination by the Board of Directors and approval of the stockholders, authorize all audit and other professional services rendered by the auditor and periodically review the independence of the auditor. The Committee also determines the compensation of the Company's executive officers. Membership of the Audit and Compensation Committee is restricted to those directors who are not active or retired officers or employees of the Company. Ms. DeHaan and Messrs. Harman and Powers are members of the Audit and Compensation Committee and Mr. Powers serves as Chairman. All the current directors are also members of the Executive Committee, of which Mr. Bech serves as Chairman.
Report of the Audit Committee of the Board of Directors
Report of the Audit Committee of the Board of Directors:
March 29, 2001
To the Board of Directors of Raintree Resorts International, Inc.
We have reviewed and discussed with management the Company's audited financial statements as of and for the year ended December 31, 2000.
We have discussed with the independent auditors the matters required to be discussed by statement of Auditing Standards No. 61, "Communication with Audit Committees," as amended, by the Audit Standards Board of the American Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standard No. 1, "Independence Discussions with Audit Committees," as amended, by the Independence Board, and have discussed with the auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommended to the Board of Directors that the financial statements referred to above be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Mr. Powers, Chairman
Summary of 2000 Audit Firm Fees
During 2000, the Company retained its principal auditors, Andersen, to provide services in the following categories and amounts:
Audit fees (1) $ 700,000 Tax consultation $ 127,000 All other fees (2) $ 93,000 - --------------------
(1) Audit fees represent services provided in connection with the audit of Raintree's consolidated and subsidiaries' financial statements for the year ended December 31, 2000, reviews of interim financial information included in Raintree's quarterly reports on Form 10-Q during the year and statutory audits related to certain Mexican subsidiaries.
(2) All other fees represent services incurred during 2000 related to, among other things, consultation on registration statement and debt restructuring.
The Audit Committee has considered whether the provisions of non-audit services by the Company's principal auditor are compatible with maintaining independence.
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 2000, 1999 and 1998.
Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company recommends to the Board the level of compensation and benefits for the Company's executive officers and key managers and oversees the administration of executive compensation programs. The Compensation Committee is composed solely of independent directors.
The Committee's overall policy regarding compensation of the Company's executive officers is to provide base salaries, annual bonuses and stock option grants that will: (i) attract, retain, motivate and reward high caliber officers to manage the Company's business, (ii) inspire the executive officers to innovatively and aggressively pursue Company goals, and (iii) align the long-term interests of the executive officers with those of the Company's stockholders.
Compensation for each of the Company's executive officers was determined on an individual basis, taking into account compensation by industry competitors, their performance as executive officers and general economic conditions. Also, compensation considers their industry and professional experience.
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. The executive officers were granted stock options under the Company's 1997 Long Term Incentive Plan. See " - 1997 Long Term Incentive Plan."
In 2000, the Compensation Committee recommended awarding bonuses or stock options to the named officers. In granting awards the Committee considered the improvement in the Company's operating results, progress in deleveraging the Company's capital structure, evaluation of each individual's performance and lack of prior awards and restraint on compensation increases.
The Compensation Committee of the Board of Directors
Christel DeHaan Walker G. Harman Thomas R. Powers
Stock Options Granted in Last Fiscal Year
The following table provides certain information regarding the number of stock options to purchase shares of the Company's Common Stock granted to the Named Executive Officers during 2000, which were granted with a 10-year term.
Option Exercises and Option Values
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 Common 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 January 31, 2001, by each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, (giving effect for such purpose the outstanding Warrants to purchase Common Stock and Company Stock options currently exercisable or exercisable in 60 days) each of the Company's directors and executive officers and all executive officers and directors of the Company as a group. Unless otherwise indicated, each person's address is 10000 Memorial Drive, Suite 480, Houston, Texas 77024. The number of shares of Common Stock currently outstanding is 12,019,807 and there are outstanding warrants to purchase 2,616,455 shares of Common Stock at $0.01 per share, and 500,000 shares of Common Stock at $5 per share, and stock options to purchase 480,500 shares.
Beneficial Ownership(1) ---------------------- Shares Beneficially Percent Name Owned(1) of Class ------------------- ---------- -------- Douglas Y. Bech (2) 3,016,486 24.7 Robert L. Brewton (2) 569,500 4.7 George Aldrich (2) 99,200 * Bruce MacIntire (2) 32,200 * Gustavo Ripol (2) 33,000 * Brian R. Tucker (2) 147,800 1.2 Christel DeHaan 928,933 7.6 10 West Market Street, Suite 1990 Indianapolis, IN 46204 Walker G. Harman (3) 1,940,000 16.0 Thomas R. Powers 1,246,213 10.3 All directors and officers as a group 7,263,632 60.4 (9 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 and stock options currently exercisable or exercisable in 60 days are included for purposes of computing the percentage of each individual's outstanding shares. (2) Includes stock options to purchase 60,000, 51,000, 30,000, 21,000, 18,000 and 27,000 shares of Common Stock that are currently exercisable or become exercisable in 60 days from January 31, 2001, and are held by Messrs. Bech, Brewton, Aldrich, MacIntire, Ripol and Tucker, respectively. (3) Includes 1,840,000 shares of Common Stock and warrants to purchase 100,000 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 and warrants MMIP holds. Mr. Harman disclaims ownership of 120,000 of such shares.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1999 and 2000, the aggregate principal amount of mortgages payable to related parties, employees and affiliates of Whiski Jack Resorts, was $1,014,000 and $1,459,000, 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.
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* -- 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)
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*-- 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)
10.8*-- 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)
10.9*-- 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)
10.10* -- 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)
10.11* -- 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)
10.12* -- 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)
10.13* -- 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)
10.14* -- 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)
10.15* -- 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)
10.16* -- 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)
10.17* -- 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)
10.18* -- 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)
10.19* -- 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. (incorporated by reference to Exhibit 10.23 to Registrant's Form 10-K for the year ended December 31, 1999)
10.20* -- 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. (incorporated by reference to Exhibit 10.24 to Registrant's Form 10-K for the year ended December 31, 1999)
10.21* -- 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. (incorporated by reference to Exhibit 10.25 to Registrant's Form 10-K for the year ended December 31, 1999)
10.22* -- Payment Guaranty and Subordination Agreement, dated November 23, 1999, to Textron Financial Corporation Loan Agreement dated November 23, 1999. (incorporated by reference to Exhibit 10.26 to Registrant's Form 10-K for the year ended December 31, 1999)
10.23* -- 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. (incorporated by reference to Exhibit 10.27 to Registrant's Form 10-K for the year ended December 31, 1999)
10.24* -- Employment Agreement, dated November 16, 1998, between Raintree Resorts International, Inc. and George E. Aldrich. (incorporated by reference to Exhibit 10.28 to Registrant's Form 10-K/A for the year ended December 31, 1999)
10.25* -- Employment Agreement, dated January 1, 1999, between Raintree Resorts International, Inc. and Douglas Y. Bech. (incorporated by reference to Exhibit 10.29 to Registrant's Form 10-K/A for the year ended December 31, 1999)
10.26* -- Employment Agreement, dated January 1, 1999, between Raintree Resorts International, Inc. and Robert L. Brewton. (incorporated by reference to Exhibit 10.30 to Registrant's Form 10-K/A for the year ended December 31, 1999)
10.28* -- Limited Liability Company Agreement of the Teton Club, LLC, dated November 3, 1998, between Raintree Resorts International, Inc. and JHSC Properties, Inc. (Incorporated by reference to Exhibit 10.33 to Registrant's Form 10-K/A for the year ended December 31, 1999)
10.29* -- Letter Agreement dated May 11, 2000 to the First Amended and Security Agreement dated April 23, 1999 between FINOVA and Raintree Resorts International, Inc., 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., CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., Promotora Villa Vera, S. de R.L. de C.V. and Villa Vera Resort, S. de R.L. de C.V. (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q/A for the quarter ended March 31, 2000)
10.30+ -- Modifying Loan Agreement, dated December 15, 2000 between Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, and CR Resorts Capital, S. de R.L. de C.V.
10.31+ -- Employment Agreement, dated October 16, 1998, between Raintree Resorts International, Inc. and Bruce MacIntire.
10.32+ -- Second Letter Agreement dated October 13, 2000 to the First Amended and Security Agreement dated April 23, 1999 between FINOVA and Raintree Resorts International, Inc., 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., CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., Promotora Villa Vera, S. de R.L. de C.V. and Villa Vera Resort, S. de R.L. de C.V.
10.33+ -- Loan Modification Agreement for $13,000,000 Receivables Loan dated November 20, 2000, between Textron Financial 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. 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., CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., and Raintree Resorts International, Inc.
10.34+ -- Second Loan Modification Agreement for $20,000,000 Receivables Loan dated December 29, 2000 between and Textron Financial 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. 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., CR Resorts Puerto Vallarta Timeshare Trust, S. de R.L. de C.V., Villa Vera Resort, S. de R.L. de C.V., Promotora Villa Vera, S. de R.L. de C.V., and Raintree Resorts International, Inc.
10.35+ -- Second Amended and Restated Payment Guaranty and Subordination Agreement dated December 29, 2000 between Textron Financial Corporation and Raintree Resorts International, Inc.
21.1+ -- List of Subsidiaries of RRI Inc.
27.1+ -- Financial Data Schedule
- ---------------------- * previously filed + filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the year ended December 31, 2000.
(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.
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 29, 2001.
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 29, 2001 Douglas Y. Bech Officer (principal executive officer)
/s/ GEORGE E. ALDRICH - -------------------------- Senior Vice President - Finance March 29, 2001 George E. Aldrich and Accounting (principal financial and accounting officer)
/s/ CHRISTEL DEHAAN - -------------------------- Director March 29, 2001 Christel DeHaan
/s/ WALKER G. HARMAN - -------------------------- Director March 29, 2001 Walker G. Harman
/s/ THOMAS R. POWERS - -------------------------- Director March 29, 2001 Thomas R. Powers
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, 1999, and 2000, and the related consolidated statements of operations and comprehensive loss, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 2000. 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, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas March 29, 2001
RAINTREE RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
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):
Vacation Interval receivables and other trade receivables ............ $ 37.2 Land held for vacation ownership development ......................... 12.2 Cost of unsold vacation ownership intervals and employee housing, etc. 33.8 Investment in a 50% held company ..................................... 2.5 Cash and other assets ................................................ 6.0 Retained interests in hotel cash flows ............................... 4.0 ------- Total assets ......................................................... 95.7 Less liabilities assumed ............................................. (8.9) ------- Net purchase price ................................................... $ 86.8 =======
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.
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 $4.6 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. During the second quarter of 2000, $150,000 expensed as goodwill relates to the final payment to the sellers of amounts due under a provision relating to achieving specific post-acquisition earnings.
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.
Cimarron Resorts Project Development, Management and Sales Agreement
On May 3, 2000, a newly formed subsidiary of the Company entered into a project development, management and sales agreement whereby the Company assumes full operating control and management of Cimarron Resorts in Palm Springs, California from the project owners, Royale Mirage Partners, L.P. ("RMP"). Under the agreement, the Company is entitled to all revenues from sales of Cimarron Resorts Vacation Interval weeks and is responsible for all sales and marketing as well as management and customer services. The Company will record the gross receipts from the sales of Vacation Interval weeks since the Company is required to indemnify RMP for any sale that is cancelled and take ownership of the Vacation Interval weeks. The Company has not acquired any ownership interest in RMP, ownership of the time-share property or assumed any obligation under the RMP construction loan. Should the cost of construction exceed RMP's construction loan borrowing capacity, the Company would be required to assume such liabilities.
The Company purchases Vacation Interval weeks from RMP as they are sold by the Company to purchasers or are acquired for Company inventory purposes. The Company will also provide development management of project construction. The Company has acquired sales and administrative assets of $0.6 million and assumed payment of unpaid liabilities of $1.1 million with the excess of the liabilities assumed over the assets acquired recorded as an intangible asset. Under the agreement, the Company is required to pay RMP $2,346,000 and has recorded this as an accrued liability and an intangible asset (Exclusivity Agreement). The Company will repay the RMP obligation by payment of $575 for each Vacation Interval week it acquires from RMP with the unpaid balance of $2,346,000 due on June 30, 2003. Even if the Company is unable to sell all Vacation Interval weeks in the first phase by June 30, 2003, any remaining balance will still be due to RMP. The Company will recognize the expense associated with these intangible assets through amortization to cost of sales equal to the greater of (1) the aggregate amortization based on equal monthly charges through June 30, 2003, or (2) the aggregate amortization based on a ratable per Vacation Interval weeks charge for each of the 4,080 Vacation Interval weeks to be sold in the first phase. The Company has recorded the transaction as a purchase. At December 31, 2000, the Company has not acquired any inventory from RMP.
Cimarron Resorts consists of approximately 35 acres of land adjacent to two 18-hole golf courses developed and managed by OB Sports of Seattle, Washington and when fully developed will consist of 242 two-bedroom condominium units or 12,342 Vacation Interval weeks. Forty of such units were completed in July 2000. A commitment for a development loan by Textron has been received by the project owner for the development of the second 40 two-bedroom units and this construction is expected to begin during 2001. The Company has the option to extend its agreement for the next construction stage consisting of 36 units no later than December 31, 2002 and it may thereafter exercise its option in succeeding stages of 42, 44 and 40 units on or before March 31, 2004, June 30, 2005 and September 30, 2006, respectively. The agreement terminates if an option for any succeeding stage is not selected and upon the completion of any stage selected but not completed. The Company placed Cimarron Resorts into its Club Regina operations to be sold as Club Regina two-bedroom inventory, and for exchange purposes into its Raintree Vacation Club.
Liquidity
In connection with the Purchase Transactions, the Company borrowed approximately $83 million and replaced such borrowing with its Senior Notes. At December 31, 2000, the Company is, and will continue to be, highly leveraged, with substantial debt service requirements. The Company incurs significant liquidity needs to fund semi-annual interest payments of $6.1 million due June 1 and December 1 on its Senior Notes. A significant portion of the Company's assets are pledged against existing borrowings. The Company has a shareholders' deficit , has incurred losses since its inception and expects to incur a net loss for fiscal 2001. To achieve profitable operations, the Company is dependent on a number of factors, including its ability to reduce or restructure its Senior Notes with a reduction in the principal amount outstanding, 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, and to attract new equity or equity equivalent capital. The Company expects that it will obtain sufficient additional credit capacity or equity capital or complete a debt restructuring or sale of assets or a combination of the foregoing to meets its debt service obligations, including interest payments on its Senior Notes during 2001. The Company has historically incurred debt and issued equity securities to fund negative cash flows from operating activities to make the payments on previously incurred debt obligations. The Company also expects to be able to fund capital requirements from anticipated capital project financings, which have not yet been negotiated. However, should the Company not be able to successfully negotiate additional credit capacity, there is no assurance that the Company would be able to meet all of its short-term debt service obligations unless it liquidates assets and reduces the size of its operations.
The Company plans payment of the June Senior Notes interest based on available cash and existing credit capacity under current credit lines. The payment of the December Senior Notes interest will require modification to the terms of current credit agreements, including the modification of collateral terms to increase the allowed amount of Vacation Interval receivables from Mexican obligors, to increase the portion of collateral which can be based on Mexican currency, expansion of the borrowing limit and restructuring the Senior Notes including reducing the outstanding balance. The Company is currently evaluating several alternatives for meeting this additional working capital need. However, to date, negotiations with existing lenders, and prospective financing sources have not resulted in any commitments to provide financing to meet 2001 working capital needs.
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.
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 interest in its share of the investment and losses in The Teton Club, LLC, using the equity method of accounting. Certain reclassifications have been made to prior year's financial statements to be consistent with the current year's presentation.
Investment in the Teton Club
The Teton Club, LLC ("Teton Club"), a joint venture between the Company and the owner and developer of the Teton Village ski area near Jackson Hole, Wyoming has developed and is selling fractional interest in 37 condominium units in Teton Village near Jackson, Wyoming. The financing for this project was arranged with FINOVA Capital Corporation and consists of construction financing, 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. The Company, as part of the financing arrangement, is directly obligated for 25% of the construction loan, the pre-sale working capital loan and the receivables loan to the extent of nonpayment by the Teton Club. Additionally, the Company is responsible for working capital deficits. The Company is also required to maintain certain covenants and ratios that are the same as required under the Company's borrowings from FINOVA (see footnote 5 to the financial statements for a discussion of the Company's compliance requirements). As of December 31, 2000, $22.7 million and $2.7 million had been drawn on the construction and working capital portions of the FINOVA financing. The Teton Club was not in compliance with the loan covenants related to the level of monthly unit sales and the ratio of administrative, sales and marketing costs to sales, but obtained a timely waiver for the year-end non-compliance.
Foreign Currency Accounting and Fluctuations
The Company maintains its Mexican accounting records and prepares its financial statements for its Mexican subsidiaries in Mexican pesos. The accounts of the Mexican subsidiaries have been re-measured into United States ("U.S.") dollars. The Company's stated sales prices are U.S. dollar denominated as are a significant amount of its Vacation Interval contracts receivable. Additionally, the Company's debt is U.S. dollar denominated. Accordingly, the Mexican pesos are translated to U.S. dollars for financial reporting purposes in using the U.S. dollar as the functional currency and exchange gains and losses as well as translation gains and losses are reported in income and expense. The resulting net exchange and translation gains and losses are primarily related to the increases or decline in the value of the peso to the U.S. dollar during such periods.
The following presents the foreign currency exchange gains and loss for the year 1998, 1999 and 2000 (in thousands):
Foreign Currency Exchange Gain/(Loss) ------------------------------------- 1998 1999 2000 ------- ------- ------- First Quarter $ (829) $ 529 $ 778 Second Quarter (1,098) (727) (1,774) Third Quarter (1,824) 443 755 Fourth Quarter (523) 556 (884) ------- ------- ------- $(4,274) $ 801 $(1,125) ======== ======= =======
The following presents the Mexican Peso exchange rates on a quarter end basis since March 1998:
Pesos = $1.00 US Dollar ----------------------------- 1998 1999 2000 ---- ---- ---- March 31 ....................... 8.517 9.516 9.233 June 30 ........................ 9.041 9.488 9.954 September 30 ................... 10.112 9.358 9.429 December 31..................... 9.865 9.522 9.600
The Company uses the U.S. dollar as the functional currency in Mexico based on the Company's analysis of the salient factors for selection of functional currency. Therefore, the recent decline in the inflation rate in Mexico below the threshold for mandatory designation of U.S. the dollar as the functional currency 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 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 $1.1 million and $2.0 million in restricted funds at December 31, 1999 and 2000, respectively.
Vacation Interval Receivables and Concentration of Geographic and Credit Risk
As of December 31, 2000, 94.2% 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.
The Company estimates that at December 31, 2000, approximately 46% of all of the Vacation Interval receivables were U.S. dollar denominated, 37% of all Vacation Interval receivables were denominated in UDI's, an obligation denominated in pesos which is adjusted for Mexican inflation ("UDI"), 11% of all Vacation Interval receivables were denominated in Mexican pesos and 6% 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, 2000. The fair market value of the Senior Notes cannot be 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 $1.7 million and $3.1 million at December 31, 1999 and 2000, 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 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 this planned expansion project.
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, $0.8 million and $0.9 million during the years ended December 31, 1998, 1999 and 2000, respectively, was capitalized.
The Company capitalizes interest on expenditures incurred for land and development when activities have commenced necessary to get the asset ready for its intended use. The capitalization period ends when the asset is placed in service or progress to complete the project is substantially suspended.
Costs of Unsold Vacation Interval Weeks 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 and sells its Vacation Interval weeks ("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. The Company reports the costs related to these trust rights to use these facilities, to the extent that such Vacation Interval weeks were unsold, within the balance sheet as "Cost of unsold Vacation Interval weeks and related club memberships". At December 31, 1999 and 2000, the Company holds rights for 5,241 and 1,000 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 weeks 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 Interval weeks and related club memberships". At December 31, 1999 and 2000, the Company held title to properties totaling 548 and 828 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 recognized revenue from the Asset Management Agreement of $275,000 and $161,000 in 1999 and 2000. The 1999 revenue was based on 4 1/2 months of Westin operations in 1997 and full-year Westin operations in 1998, and the 2000 revenue was based on full-year Westin operations in 1999. 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 $7,342,000 and $6,427,000 at December 31, 1999 and 2000, respectively. Amortization expense for the years ended December 31, 1998, 1999 and 2000 totaled $1,215,000, $1,367,000 and $1,763,000, respectively, and is included in interest expense. The amounts reported for additional notes payable and issuance of Senior Notes in the Consolidated Statements of Cash Flows are net of deferred loan costs incurred of $385,000, $1,296,000 and $925,000 in 1998, 1999 and 2000, respectively.
Impairment of Long-Lived Assets and Identifiable Intangibles
The Company periodically evaluates its long-lived assets and identifiable intangibles for impairment. If upon evaluation the Company's management believes that the cost of one of its assets may be impaired, the Company will: (a) evaluate the extent to which that cost is recoverable by comparing the future undiscounted cash flows estimated to be associated with that asset to that asset's carrying amount and (b) write down that carrying amount to market value or discounted cash flows value to the extent necessary. At December 31, 2000, no provision for impairment was required based on the Company's evaluation of long-lived assets and identifiable intangibles.
Revenue Recognition
The Company recognizes sales revenue on Vacation Intervals when a minimum 10% down payment is received, a binding sales contract is executed for which the refund or rescission period has expired, collectibility of the receivable representing the remainder of the sales price is reasonably assured and the Company has completed substantially all of its obligations with respect to any continuing involvement with the Vacation Interval. In cases relating to sales of Vacation Intervals in projects under construction, revenue is recognized using the percentage-of-completion method. Under this method, the portion of revenue applicable to costs incurred, as compared to total estimated construction and direct selling costs, is recognized in the period of sale. The remaining amount is deferred and recognized as Vacation Interval sales in future periods as the remaining costs are incurred. For transactions which do not meet the criteria listed, the deposit method is used. Under this method, the sale is not recognized, a receivable is not recorded and inventory is not relieved. Any cash received is carried as a liability until the sale can be recognized. The Company provides refunds to purchasers based on legal refund requirements applicable at the location of sale.
On December 3, 1999, the United States Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue in the financial statements. The Company adopted the provisions of SAB No. 101 in 2000. Adoption of this statement did not result in a material impact or change to the Company's recognition policies.
Advertising Expense
The Company expenses advertising costs as incurred.
Loss Per Share
Basic per share results are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Additionally, shares issuable for little or no consideration are considered common shares and are included in the computation of basic earnings per share. On December 5, 1997, in conjunction with the issue of Senior Notes and on December 15, 2000, in conjunction with obtaining shareholder loans, the Company issued warrants to purchase 1,869,962 and 2,000,000 shares of common stock at a conversion price of $.01 per share, respectively. Since the common shares issuable under these warrants can be purchased for little or no cash consideration and these warrants were fully vested upon issuance, they are included in the computation of basis earnings per share as of the date they were issued.
The following is a reconciliation of the numerator and denominator for basic and diluted loss per share (in thousands except share and per share data):
At December 31, 2000, the Company had outstanding 730,500 stock options with a weighted-average exercise price of $3.63 per share, 500,000 common stock warrants with an exercise price of $5.00 per share and preferred stock with $5.7 million of Liquidation Preference convertible upon redemption at the Company's option into shares of common stock valued at the Liquidation Preference. These warrants, common stock options and preferred stock were not included in diluted earnings per share as the exercise prices exceeded the estimated fair value of common stock. The Senior Notes and shareholder loan warrants were included in both the computation of basic and diluted earnings per share.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
Stock Based Transactions
The Company grants stock options for a fixed number of shares to employees with an exercise price no greater than the fair value of the shares, as determined by the Board of Directors, at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants.
The Company accounts for transactions with other than employees in which goods and services are the consideration received for issuance of equity instruments based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measured.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. The Company currently does not employ derivative instruments and believes that the adoption of SFAS No. 133, required originally in the year 2000 and updated by SFAS No. 137 to year 2001, will not materially impact the Company.
In March 2000, the FASB issued FASB Interpretation 44 which is titled "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25". The Company has reviewed its accounting for stock compensation and is satisfied that it is in compliance with the requirements of FASB Interpretation 44.
In September 2000, the FASB issued Statement No. 140 as a replacement of FASB Statement No. 125. Statement 140 has as immediate impact through new disclosure requirements and amendments of the collateral provisions of Statement 125. It revises criteria for accounting for securitizations, other financial-asset transfers, but otherwise carries forward most of Statement 125's provisions without amendment. Management believes application of this statement will have no material effect on the financial statements.
3. VACATION INTERVAL RECEIVABLES AND OTHER TRADE RECEIVABLES
Vacation Interval receivables and other trade receivables were as follows (in thousands):
December 31, -------------------- 1999 2000 -------- -------- Vacation Interval receivables ......... $ 63,875 $ 78,709 Service fee receivables ............... 992 1,032 Other trade receivables ............... 4,432 5,953 Less - allowances for doubtful accounts (8,067) (9,554) -------- -------- Total ........................... $ 61,232 $ 76,140 ======== ========
Service fee receivables are from Vacation Interval owners for the payment of annual service fees. Other receivables are from Vacation Interval owners for charges while staying at the resorts, banks, credit card companies and other. At December 31, 2000, $47.9 million of Vacation Interval receivables were pledged to secure borrowing under the Company's credit facilities.
At December 31, 2000, the weighted average interest rate earned on Vacation Interval receivables that were denominated in U.S. dollars was 15.3%, in Mexican pesos was 22.3% and UDI's was 8.6% and in Canadian dollars was 14.6%. 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 2000. The overall weighted average interest rate is 13.6%. The interest rates range from 11.25% to 25.0%.
The following table reflects the principal maturities of Vacation Interval receivables as of December 31, 2000 (in thousands):
2001 .............................. $ 21,887 2002 .............................. 21,214 2003 .............................. 17,620 2004 .............................. 11,179 Thereafter ......................... 6,809
The activity in the Vacation Interval receivables and other trade receivables allowance for doubtful accounts for the year ended December 31, 1999 and 2000 is as follows (in thousands):
December 31, ------------------ 1999 2000 ------- ------- Balance, beginning of year ................ $ 7,562 $ 8,067 Provision charged to expense .............. 5,242 4,855 Receivables charge off, net of recoveries.. (4,737) (3,368) ------- ------- Balance, end of year ...................... $ 8,067 $ 9,554 ======= =======
The Company writes off past due receivables after 240 days. Vacation Interval receivables are written off to the reserve for doubtful accounts after being reduced by the cost of the Vacation Interval week recovered.
4. SENIOR NOTES PAYABLE
On December 5, 1997, the Company and its indirect wholly-owned Mexican financial subsidiary ("Issuers") jointly issued $100 million of Senior Notes due December 1, 2004. The Company also issued warrants to the noteholders to purchase 1,869,962 common shares. The estimated fair market value of the warrants on the date that the warrants were issued was $4.99 per warrant or $9,331,000 in total. This amount was recorded as an increase in shareholders' investment and original issue discount in the Company's balance sheet. The original issue discount is being amortized to interest 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). During 2000, the Company repurchased $5.5 million of Senior Notes.
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, ----------------- 1999 2000 ------- ------- Credit Agreement Notes and Loans ...................... $38,772 $36,588 Mortgages Payable ..................................... 3,387 4,112 Cabos West Notes Payable .............................. 2,350 2,350 Notes Payable to Financial Institution and Other Debt.. 278 2,142 Notes Payable to Shareholders ......................... -- 1,000 ------- ------- $44,787 $46,192 ======= =======
Current maturities for Vacation Interval receivable lines of credit of approximately $13.4 million are based on the estimated collections from the underlying collateral pledged on such lines. The current maturities of Senior Notes and notes payable are as follows (in thousands):
2001 .......................................... $ 23,222 2002 .......................................... 8,285 2003 .......................................... 6,939 2004 .......................................... 99,058 2005 .......................................... 2,428 Thereafter ..................................... 760
Credit Agreement Notes and Loans - In November 1998, the Company entered into a loan facility with FINOVA Capital Corporation, which included an agreement to provide a receivables based credit facility of $20 million and a $16.5 million inventory based credit facility. 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 primarily held by United States or Canadian residents. Pledged receivables may include up to 15% of notes receivables from obligors other than residents of the United States or Canada. These notes are assigned to the lender and as payments are received, they are applied to this loan. The outstanding receivables loan balance bears interest at a fluctuating base rate based on the "Corporate Base" rate of Citibank, N.A., New York plus 175 basis points that was 10.25% and 11.25% at December 31, 1999 and 2000, respectively. The outstanding inventory loan balance bears interest at a fluctuating base rate plus 225 basis points which at December 31, 1999 and 2000 was 10.75% and 11.75%, respectively. Interest under the notes is due monthly. 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. The Company anticipates that the pledged inventory under the inventory facility will be sold prior to the maturity of the facility. As of December 31, 2000, the outstanding balance of the receivables line of credit was $14.6 million and of the inventory based credit facility was $4.4 million. As of December 31, 2000, the Company was not in compliance with the FINOVA loan covenant related to the ratio of administrative, sales and marketing expenses to Vacation Interval sales, but obtained a timely waiver for such year-end non-compliance.
In November 1999, the Company entered into a notes receivable loan facility with Textron Financial Corporation, and has a borrowing limit of $18.0 million, as amended. Certain of the Company's notes receivable collateralize the loan, and the loan has two borrowing components. The first borrowing component has a $13.0 million borrowing limit and is collateralized by up to 46% of notes receivable denominated in Mexican pesos or UDI's and the remainder in U.S. dollars. The amount of UDI denominated notes receivable is further limited to $3.0
million. Textron will lend 85%, 80% and 50% on pledged U.S. dollar, Mexican Peso and UDI denominated notes receivable, respectively. The second borrowing component has a $5.0 million borrowing limit and is collateralized by up to 15% of notes receivables denominated in Mexican pesos and the remainder in U.S. dollars. Textron will lend up to 80% on these pledged notes. These notes are assigned to the lender and as payments are received they are 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 31, 2005. The outstanding loans bears interest at a fluctuating base rate based on the Chase Manhattan Bank prime rate plus 200 and 275 basis points for the $13.0 million and $5.0 million components, respectively, that is adjusted on the first day of each month with the interest due monthly. As of December 31, 2000, the outstanding balance under the $13 million portion of the loan facility was $12.7 million. Interest on the loan is due monthly, and the interest rate on the outstanding balance was 10.5% and 11.5% as of December 31, 1999 and 2000, respectively.
In November 1999, the Company also entered into a $7 million loan agreement with Bancomer that is collateralized by certain of the Company's UDI denominated notes receivable with a required coverage of 300% of the outstanding loan balance. The loan agreement extends credit to the Company for a fixed 30-month term from November 1999 to May 2002. Furthermore, the agreement requires the Company to pay back the principal in UDI's in 30 equal monthly installments plus accrued interest beginning in December 1999. In November 2000, Bancomer loaned the Company $2 million on a short-term basis through a modification to the existing credit agreement. The $2 million additional loan was fully repaid in January 2001. The loan bears simple interest at a rate of 12% per annum, and as of December 31, 2000, had an outstanding balance of $4.8 million.
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 8.25% to 14.5% during 1999, and 8.25% to 15.25% during 2000, 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 10.7% and 11.4% during 1999 and 2000, respectively.
Cabos West Notes Payable - In September 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 13% and are due on demand.
Notes Payable to Financial Institution - In April 2000, the Company entered into a note payable to North Shore Credit Union, due on or before October 2001, with an interest rate of prime plus 2.5%. Certain Westin units purchased with the proceeds of the loan secure the note. At December 31, 2000, the loan bears interest at 10% and had an outstanding balance of $2 million.
Notes Payable to Shareholders - In December 2000, the Company obtained loans from the shareholders as a requirement for obtaining an additional $2.0 million loan from Bancomer. Twenty-three Company owned houses in Cancun, Mexico secure the shareholder loans. Participating shareholders received in proportion to their loans three-year warrants to purchase common stock at $.01 per common share. A total of 2,000,000 warrants were issued. The shareholder loans bear interest at 13.0% and are due June 30, 2001. The shareholder loans were repaid in January 2001.
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, and had equity income of $790,000 in 2000.
7. RELATED PARTY TRANSACTIONS AND AGREEMENTS
Related Party Mortgages Payable
At December 31, 1999 and 2000, the aggregate principal amount of mortgages payable to related parties was $1,014,000 and $1,459,000, respectively. Interest accrues on the mortgages at rates ranging from prime plus 2.00% to prime plus 7.75% per annum and is payable in monthly installments over periods ranging from twelve months to ten years.
Related Party Agreements
In connection with the Purchase Transactions, the Company and Starwood entered into various operating agreements related to the joint operation and ownership of certain common facilities at the combined resorts. Starwood has rented specified rooms at two of the Company's Club Regina Resorts for a one-year period ending August 18, 1998 for $1.06 million which has been recognized into income along with related fees of $1.95 million over the term of the agreements. The operating agreements provide for certain operating standards at the combined
resorts and prohibit the Company from renting vacant vacation ownership units on a transient basis. The Company will be liable for significant penalties should it violate certain provisions of these operating agreements.
In connection with the sale of the Westin Hotels to Starwood as discussed in Note 1, the Company entered into an agreement with Starwood that provided the Company with a retained economic interest in the future cash flows of the hotels in excess of defined levels. This agreement provides, among other things, for the Company to receive 20% of the cash flow, as defined, including cash flow from any future refinancing and/or sale of the hotel facilities. The Company is to provide certain strategic advisory services to Starwood that will involve minimal cost to the Company. The Company has allocated a value of $4 million to this retained interest in the balance sheet under the caption, "Retained interest in hotel cash flows," based on discounted estimated future cash flows to be received by the Company.
8. REDEEMABLE PREFERRED STOCK
The Company accrues dividends on redeemable preferred stock in the Consolidated Statement of Operations and Comprehensive Loss for amounts representing dividends not currently declared or paid, but which will be payable under the mandatory redemption provisions of the preferred stock.
Pay-in-Kind Preferred Stock
On July 1, 1999, all 37,500 shares of the Class A Preferred Stock of the Company were exchanged for 50,000 shares of a new class of Pay-in-Kind Preferred Stock ("Pay-in-Kind Preferred") plus 500,000 five-year warrants to purchase the Company's Common Stock at $5.00 per share. The Pay-in-Kind Preferred requires that annual dividends be paid, at the Company's option, either in cash equaling 9% of the Pay-in-Kind Preferred's $100 per share Liquidation Preference ("Liquidating Preference"), or in an equivalent number of shares of such Pay-in-Kind Preferred valued at the Liquidation Preference. As of December 31, 1999 and 2000, the Company opted to pay a stock dividend of 2,250 shares and 4,703 shares, respectively. Also, the Company has the right, at its option, to redeem at any time the Pay-in-Kind Preferred, in whole or in part, but not later than December 1, 2004, at which time the redemption shall become mandatory, upon payment either in cash of the Liquidation Preference and all accrued and unpaid dividends or shares of capital stock valued at the Liquidation Preference.
Upon any liquidation, dissolution or winding up of the Company, voluntary or involuntary (a "Liquidation"), the holders of the Pay-in-Kind Preferred shall be entitled to receive, out of assets of the Company which remain after satisfaction in full of all valid claims of creditors of the Company and which are available for payment to stockholders, and subject to the rights of the holders of any stock of the Company ranking senior to or on a parity with the Pay-in-Kind Preferred in respect of distributions upon Liquidation, before any amount shall be paid to or distributed among the holders of Common Stock or any Junior Securities in respect of distributions upon Liquidation, liquidating distributions per share of the Pay-in-Kind Preferred in the amount of the Liquidation Preference, plus an amount equal to the accrued and unpaid dividends thereon. If upon any Liquidation the amounts payable with respect to the stock and any other stock ranking as to any such distribution on a parity with the Pay-in-Kind Preferred are not paid in full, the holders of the Pay-in-Kind Preferred and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled.
The Company recorded the 50,000 shares of Pay-in-Kind Preferred that were exchanged for the 37,500 shares of Class A Preferred at the carrying value of the Class A Preferred as of the date of the exchange. No value was assigned to the Common Stock warrants as the value was determined to be de minimis.
Convertible Preferred Stock
In connection with the purchase of Whiski Jack, the Company issued 20,775 shares of Convertible Preferred Stock (Convertible Preferred) through its wholly owned subsidiary, Raintree Resorts International Canada, Ltd. (Raintree Canada). The preferred shares accrued dividends at the rate of 10% per annum and dividends totaling $0.2 million were paid during the first quarter of 2000 in conjunction with the redemption of all the outstanding shares.
9. PREFERRED STOCK DIVIDENDS
Preferred stock dividends are recorded as a reduction to additional paid-in-capital as the Company has an accumulated deficit. The following is a summary of preferred stock dividends accrued for the years ended December 31, 1998, 1999 and 2000, dollars in thousands:
1998 1999 2000 ---- ---- ---- Class A Preferred ..... $619 $309 $ -- Convertible Preferred.. 92 141 2 Pay-in-Kind Preferred.. -- 225 496 ---- ---- ---- $711 $675 $498 ==== ==== ====
The following is a summary of preferred stock dividends paid for the years ended December 31, 1998, 1999 and 2000, dollars in thousands:
1998 1999 2000 ------ ------ ------ Class A Preferred (A) ...... $ -- $1,160 $ -- Convertible Preferred ...... -- -- 235 Pay-in-Kind Preferred (B).. -- 225 496 ------ ------ ------ $ -- $1,385 $ 731 ====== ====== ======
Notes:
(A) In conjunction with the issuance of the Pay-in-Kind Preferred, the holders of the Class A Preferred received 50,000 shares of the Pay-in-Kind Preferred and 500,000 Common Stock warrants in exchange for all unpaid dividends as of June 30, 1999. (B) At the Company's option, the dividends were paid with 2,250 and 4,703 additional shares of Pay-in-Kind Preferred at December 31, 1999 and 2000, respectively.
The Company is amortizing the excess of the $5 million Liquidating Preference over the $4.9 million recorded value of the Pay-in-Kind Preferred as additional dividends. The amortization period is from the issue date, July 1, 1999, to the final redemption date December 1, 2004.
10. SHAREHOLDERS' EQUITY
Class A Preferred Stock
On October 29, 1997, the Company issued 37,500 shares of Class A Preferred Stock (Class A Preferred) which provide for preferential annual dividends of $619,000 (16.5% of $3.75 million), accruing from and after August 18, 1997. Cumulative dividends accrued dividends, on a quarterly basis, at the rate of 12% per year. Cumulative unpaid dividends totaled $851,000 at December 31, 1998. All the Class A Preferred was exchanged for Pay-in-Kind Preferred on July 1, 1999.
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.
Stock Option Summary - The Company has elected to follow APB No. 25 in accounting for its stock option plans. Under APB 25, the Company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. As required by SFAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions for the risk-free interest rate for the specified dates of grant:
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% 11/30/00 ..........................................5.28%
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, 1998, 1999 and 2000.
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, 2000, ranged from $1 to $5. The weighted-average remaining contractual life of those options is 8.2 years. The weighted-average grant-date fair value of options granted during 1998 was $2.13 and during 1999 and 2000 was zero.
The following presents, as of December 31, 2000, a breakdown of the above stock option data by $1 and $5 options including for the total options - number of options outstanding, the weighted-average exercise price and weighted-average remaining life, and for currently exercisable options - the number of options and weighted-average exercise price:
Weighted-Average Weighted-Average Remaining Life Number of Options Exercise Price In Years ------------------ ----------------- ----------------
Total Options - 250,000 $1.00 9.9 480,000 $5.00 7.3
Currently Exercisable - 250,000 $1.00 301,000 $5.00
Common Stock Warrants
Senior Notes Warrants - On December 5, 1997, the Company issued seven-year warrants to purchase 1,869,962 shares of common stock at $.01 per share in conjunction with the sale of Senior Notes. The warrants were fully vested upon their issuance and there are no circumstances under which the warrants would have to be returned to the Company by the holders. The warrants became exercisable on June 30, 2000, and expire on December 1, 2004. The estimated fair market value of the warrants on the issue date (December 5, 1997) of the warrants was $4.99 per warrant or $9,331,000 in total. The fair market value was determined using the Black-Scholes option pricing model which results in a fair market value equal to the estimated stock price resulting from the minimal exercise price of $.01 per share.
Pay-in-Kind Preferred Stock Warrants - On July 1, 1999, the Company issued five-year warrants to purchase 500,000 shares of common stock at $5.00 per share in conjunction with exchange of Class A Preferred for Pay-in-Kind Preferred. The warrants were exercisable when issued. The estimated fair market value of the warrants on the issue date was determined to be deminimis. The fair market value was determined using the Black-Scholes option pricing model using a weighted-average assumption for risk-free interest rate of 5.78%, dividend yield of 0%, expected market price volatility factor of 0.66 and an option life of five years.
Shareholder Warrants - On December 15, 2000, the Company issued three-year warrants to purchase 2,000,000 shares of common stock at $.01 in conjunction with obtaining shareholder loans of $1.0 million. The warrants were exercisable when issued. The estimated fair market value of the warrants on the issue date was determined to be $10,000. The fair market value was determined using the Black-Scholes option pricing model using a weighted-average assumption for risk-free interest rate of 5.37%, divided yield of 0%, expected market price volatility of 0.68 and a warrant life of three years.
11. INCOME TAXES
The Company, a Nevada corporation, files an annual U.S. Federal income tax return. The Company incurred net losses for the period ended December 31, 1998, 1999 and 2000 in Mexico as well as the United States and for the period ended December 31, 2000 in Canada. No provision for U.S. or Mexican income taxes was made during 1998, 1999 or 2000. In Canada a tax benefit was recorded for 2000 based on the ability to carry back losses to previous years. The Company's Canadian operations, which were acquired in 1998, had net income in 1998 and 1999 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 1998 and 1999 Canadian taxes with no addition for dividend withholding tax or for U.S. federal income tax or credits on such income.
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 1998, 1999 and 2000, Mexican operations and, for 2000, Canadian operations gave rise to losses for purposes of U.S. federal income taxation. The Canadian operations in 1998 and 1999 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.
The Company has approximately $108.3 million of Mexican net operating losses, which will begin to expire as follows: 2003 -- $14.1 million, 2004 -- $41.6 million, 2005 -- $11.7 million, 2006 -- $13.3 million, 2007 -- $3.5 million, 2008 -- $9.4 million, and 2009 -- $13.3 million and 2010 -- $1.4 million. For financial statement purposes, a valuation allowance of $23.9 million has been recognized completely to offset the estimated $41.5 million of deferred tax assets related to those carryforwards. The Company has approximately $13.0 million of U.S. net operating losses, which will begin to expire as follows: 2017 -- $0.5 million, 2018 -- $2.9 million and 2019 -- $3.6 million and 2020 -- $6.0 million. For financial statement purposes, a valuation allowance has been recognized to offset the estimated deferred tax assets related to these carryovers.
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):
12. LOSS ON SALE OF PROPERTY HELD FOR SALE
The Company sold its investment in Cozumel land and sold other property during 2000. The Company received total consideration of $8.3 million and recognized a net loss of $7.1 million. The Company anticipates selling the remaining property held for sale at December 31, 2000 during 2001. The property is recorded at the lower of cost or estimated fair market value.
13. EXTRAORDINARY GAIN ON EXTINGUISMENT OF DEBT
During the third quarter of 2000, the Company repurchased $5.5 million of Senior Notes for $3.3 million. After adjusting the associated debt discount and deferred loan costs, the Company recorded as extraordinary gain of $1.0 million, net of related tax effects of $0.6 million. Since the Company is in a net loss position for tax purposes, the tax charge related to the gain on extinguishments of debt results in an equal tax benefit to tax expense before extraordinary items.
14. CONTINGENCIES AND COMMITMENTS
Lease Information
The Company leases administrative and sales office space and certain equipment under non-cancelable lease agreements. Total rent expense for the years ended December 31, 1998, 1999 and 2000 was approximately $1,659,000, $2,013,000 and $2,596,000, 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, 2000 (in thousands):
2001 ................................. $ 3,017 2002 ................................. 2,095 2003 ................................. 995 2004 ................................. 665 2005 ................................. 531 --------- Total ................................ $ 7,303 =======
Legal Proceedings
The Company is currently 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, 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, 1999 and 2000, and the related translated statements of operations and accumulated results and cash flows for each of the three years in the period ended December 31, 2000. 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, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN
March 29, 2001 Mexico City, Mexico
CR RESORTS CAPITAL, S. DE R.L. DE C.V. (A Wholly Owned Finance Subsidiary)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
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 financing the Ultimate Parent's Mexican operations.
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. Additionally, Capital recorded loans receivables from intercompany affiliates. 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 interest expense over the warrant exercise period of 84 months and was $1,200,000, for each of the three years in the period ended December 31, 2000. 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).
As a result of the Senior Notes transaction, at December 31, 2000, the Ultimate Parent is, and will continue to be, highly leveraged, with substantial debt service requirements. The Ultimate Parent incurs significant liquidity needs to fund semi-annual interest payments of $6.1 million due June 1 and December 1 on its Senior Notes. A significant portion of the Ultimate Parent's assets are pledged against existing borrowings. The Ultimate Parent has a shareholders' deficit, has incurred losses since its inception and expects to incur a net loss for fiscal 2001. To achieve profitable operations, the Ultimate Parent 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 Ultimate Parent expects that its existing credit capacity, combined with additional credit capacity, which must be negotiated during 2001, will be sufficient to enable the Ultimate Parent to meet its debt service obligations, including interest payments on Capital's Senior Notes during 2001. The Ultimate Parent has historically incurred debt and issued equity securities to fund negative cash flows from operating activities and to make the payments on previously incurred debt obligations. The Ultimate Parent also expects to be able to fund capital requirements from anticipated capital project financings, which have not yet been negotiated. However, should the Ultimate Parent not be able to successfully negotiate additional credit capacity, there is no assurance that the Ultimate Parent would be able to meet all of its short-term debt service obligations unless it liquidates assets and reduces the size of its operations.
At December 31, 2000, $5.5 million of Senior Notes were held by an affiliate.
The Senior Notes are payable in United States ("U.S.") dollars and bear interest at 13% with interest payable semiannually 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, assessments or other governmental charges of any 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 against 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 asset sales (as defined).
The Company has no employees, therefore, all administrative services are provided by an affiliated company.
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 all 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 following procedures:
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 loss for the period in which such gains and losses arise.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Deferred Loan Costs
The costs incurred in connection with the issuance of the Senior Notes due in 2004 have been deferred in the balance sheets and are being amortized using the effective interest rate method over the seven-year term of the notes. Amortization expense for the periods ended December 31, 1998, 1999 and 2000 totaled $1,109,000, $1,110,000 and $1,111,000, respectively, and is included in interest expense.
Income Taxes
Deferred income taxes are recognized for the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A valuation allowance has been recognized to completely offset the estimated deferred tax assets related to net operating loss carryovers. The provision for income taxes represents the amount of taxes payable and the applicable changes in deferred tax assets and liabilities.
There are no significant temporary differences between the book and tax bases of assets and liabilities. 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 5.
Financial Instruments
The fair value of the Senior Notes cannot be determined since they are not traded on a formal exchange market and 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, 1999 and 2000, the Company adjusted its foreign currency denominated assets and liabilities to the exchange rate of 9.5222 and 9.5997 Mexican pesos per U.S. dollar, respectively.
Revenue Recognition
Interest and fees charged to affiliates are recorded as they accrue.
3. RELATED-PARTY TRANSACTIONS AND BALANCES
Loans Receivable from Affiliates
Loans receivable from affiliates are payable in U.S. dollars upon demand and bear interest at 16%. Receivable balances at December 31 are (in thousands):
1999 2000 -------- -------- Top Acquisition Sub, S. de R.L. de C.V $ 31,942 $ 37,649 CR Resorts Puerto Vallarta, S. de R.L. de C.V 46,015 42,783 CR Resorts Cancun, S. de R.L. de C.V 13,407 8,339 CR Resorts Los Cabos, S. de R.L. de C.V 10,448 12,157 Corporacion Mexitur, S. de R.L. de C.V 2,291 (177) Other 390 (1,790) -------- -------- $104,493 $ 98,961 ======== ========
Loans receivable from affiliates and the related interest income are eliminated in the consolidation of Capital into the consolidated financial statements of the Ultimate Parent.
Notes Payable to Ultimate Parent
At December 31, 1999 and 2000, Capital had $11.72 million and $8.15 million of notes payable and accrued interest to the Ultimate Parent, which bear interest at 15.29% and are payable upon demand.
Notes payable to Ultimate Parent and the related 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 BANK
The Company also entered into a $7 million equivalent Units of Investment (UDI) based loan agreement with Bancomer on November 26, 1999, which is collateralized by 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, 2001. Furthermore, the agreement requires the Company to repay the loan in UDI's in 30 monthly installments beginning on December 29, 1999. Also, the loan bears simple interest at an annual rate of 12%, and as of December 31, 2000 had an outstanding balance of 10,002,605 UDI, equivalent to $3,031,257.
On December 15, 2000, the Company entered into an agreement to modify the original loan agreement with Bancomer. Under this agreement, the bank made a $2 million equivalent UDI based loan. The loan required the Company to pledge additional collateral including UDI denominated notes receivables and $1 million in a cash trust deposit. The $2 million loan was repaid in January 2001.
The UDI is an obligation denominated in pesos which is adjusted for Mexican inflation as determined by Banco de Mexico with respect to legal tender. The value of each UDI is proportionately adjusted to the variation in the Mexican National Consumer Price Index. The UDI adjustment factor at December 31, 1999 and 2000 was 2.671267 and 2.909158 which was based on the value of the peso to the U.S. dollar and results in a value of $0.28053 and $0.30304, respectively.
5. TAX ENVIRONMENT
Income and Asset Tax Regulations
The Company is subject to income taxes (ISR) and asset taxes (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. Beginning in 1999, the income tax rate increased from 34% to 35%, with the option pay this tax each year at a rate of 30% (transitorily 32% in 1999) with the remainder due 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 of the preceding three and following 10 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, 2000, the Company has tax loss carryforwards for income tax purposes in the restated amount of $261,215 expiring in 2007 which will be indexed for inflation through the year applied.
6. SHAREHOLDERS' DEFICIT
At December 31, 1999 and 2000, 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. The 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 may not be distributed to the shareholders during the existence of the Company, except in the form of a stock dividend.
During 2000, 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.