Sunterra Corporation Business Information, Profile, and History

Company Perspectives:

Sunterra's goal is to become the global currency of relaxation. Our k ey strategies include: expand our channels of distribution in key mar kets around the world; to complement our current product offerings wi th an active development program, including strategic partnerships; t o increase our brand name recognition; and to provide consistently hi gh levels of quality and reliability so that our current and prospect ive owner families can look forward to their vacations with trust and pleasure.

History of Sunterra Corporation

Sunterra Corporation is one of the largest vacation ownership compani es in the world, supported by nearly 100 resorts in 13 countries. Sun terra's properties are located in North America, Europe, and the Cari bbean, where its more than 300,000 customers can use their vacation o wnership interests to stay at selected resorts, typically for a one-w eek stay. The company offers financing services to its customers, ref erred to as "owner families," and also develops and manages resort pr operties.

Origins

Sunterra experienced the highs and lows of competing as a timeshare o perator during its first decade of business, recording phenomenal gro wth before falling spectacularly from the heights it had attained. Th e company's roller-coaster ride began in 1992, when Osamu Kaneko, And rew J. Gessow, and Steven C. Kenninger decided to delve into the acqu isition and development of timeshare resorts. Kaneko, a native of Jap an who was educated in the United States, had spent the previous 25 y ears developing and acquiring resorts, spending the years immediately preceding the formation of Sunterra working with Kenninger, a busine ss attorney. In 1985, the pair founded KOAR Group, Inc., a Los Angele s-based real estate acquisition and development company. The third me mber of the founding group, Gessow, brought his own entrepreneurial e xperience to the team, having founded Argosy Group, Inc., a Woodside, California-based real estate and acquisition company, in 1990.

When Kaneko, Kenninger, and Gessow started out, a single corporate en tity did not exist. Instead, a group of individual limited partnershi ps and limited liability companies (LLCs), each in charge of a partic ular resort and each affiliated with the founders, constituted Sunter ra's predecessor organization. With each acquisition, a new limited p artnership or LLC became part of the organization controlled by the f ounders, beginning with their first acquisition in November 1992, the purchase of the Cypress Pointe Resort in Lake Buena Vista, Florida. A single corporate entity did not exist until 1996, when KGK Resorts, Inc. was incorporated, a company that at the time of its creation co ntrolled nine resort properties acquired by Kaneko, Kenninger, and Ge ssow. After the acquisition of the Cypress Pointe Resort, the founder s purchased Plantation at Fall Creek, an 82-unit resort in Branson, M issouri. In 1994, two resorts were acquired, a 40-unit property in Hi lton Head, South Carolina, called Royal Dunes Resort, and an Embassy Vacation Resort in Koloa, Kauai, Hawaii, with 219 units. In 1995, aft er acquiring another Florida property, the 72-unit Grand Beach in Orl ando, the company acquired its first property in the Caribbean, the R oyal Palm Beach Club on St. Maarten in The Netherlands Antilles, a 14 0-unit resort. A second resort on St. Maarten was acquired the same y ear, the 172-unit Flaming Beach Club. In 1996, the company added dest inations in California, acquiring a property in South Lake Tahoe and the San Luis Bay Resort in Avila Beach.

The nine resorts in operation by the time KGK Resorts was incorporate d marked a turning point in the history of Sunterra, the end of the f irst chapter in the company's story and the beginning of the most eve ntful period in its development. The same month the company acquired the Avila Beach property it changed its name to Signature Resorts, In c., the corporate banner under which it completed its initial public offering (IPO) of stock two months later. When Signature Resorts comp leted its IPO in August 1996, the acquisition program executed during the previous years had produced impressive financial growth, increas ing revenue from $11 million in 1992 to $72 million in 1995. Following its IPO, however, the company began acquiring resorts more aggressively.

Rapid Expansion in the Late 1990s

By the end of 1997, roughly one year after its IPO, Signature Resorts could claim to be the largest vacation ownership company in the worl d, having spent the previous year acquiring resort properties at a fu rious pace. In a little more than 12 months, the company increased it s stable of resorts from nine to 81, giving its customers the opportu nity to vacation in eight North American and European countries. The company's annual sales shot past $300 million, propelled by its t orrid acquisition campaign. Its stock value reacted favorably to the expansion drive, reaching a high of $32.17 per share in October 1 997. Wall Street, as evinced in the increasing value of Signature Res orts' shares, approved of the company's decision to expand at a rapid clip, but the applause from investors and analysts soon ended. After reaching $32.17 per share, the company's stock value plummeted, falling at one point to five cents per share. "In its quest for growt h," an analyst reflected in a March 2, 2005 interview with Investo r's Business Daily, "financial caution was sacrificed and the com pany gave loans to people who weren't qualified."

The collapse of Signature Resorts' stock value represented a telling barometer of profound problems, reflecting the financial community's reaction to a company spinning out of control. The severity of the co mpany's problems was not revealed until early 2000, two years after S ignature Resorts had changed its name to Sunterra Corporation. In the three years since the major portion of the company's acquisition cam paign had ended, annual sales had grown to $500 million, a total derived from the 89 resorts under Sunterra's control at the dawn of t he 21st century. Such size had come at a hefty price, however, a pric e that proved nearly fatal to the company that heralded itself as the largest company of its kind in the world. The scope of its problems- -the effect of its acquisition campaign on its financial stability--f irst became apparent after an in-depth audit in early 2000 discovered that Sunterra would have to write off $43 million in delinquent accounts. From there, the company's situation worsened as the months passed. At the end of its fiscal quarter in March 2000, the company p osted an alarming $15.6 million loss, a result that stood in star k contrast to the $10 million profit recorded during the first qu arter of 1999. Steven Miller, who was appointed chief executive offic er in 1998, was replaced, as the company's board of directors tried t o contend with the problems presented to it. In May 2000, the company laid off 12 percent of its workforce, stopped work on several develo pment products, including a partly completed, $22 million headqua rters complex in Orlando, and hoped to stave off financial ruin. Sunt erra's difficulties proved greater than the measures implemented to c orrect them, however. The company's infrastructure--its customer serv ice operations, central reservations functions, and its accounting de partment--had not been able to keep pace with the rapid expansion fue led by acquisitions, exacerbating its debt problems. At the end of Ma y, after defaulting on scheduled loan payments, Sunterra admitted def eat and declared bankruptcy, awash in debt totaling $850 million. The company was delisted by the New York Stock Exchange in the summe r, and ended the year with a staggering $376 million loss.

Reorganization After Collapse: Emerging from Bankruptcy in 2002

Once under court protection from its creditors, Sunterra focused on r econstituting itself for a return as a participant in the timeshare i ndustry. After several leadership changes, the company found the chie f executive officer to spearhead its revival, a former British Army o fficer, Nicholas J. Benson. Benson was promoted from within the Sunte rra organization, having joined the company in 1997 as chief operatin g officer of its European operations. He was promoted to chief execut ive officer of the company's international business in January 2000, the post he occupied before the board of directors appointed him as c hief executive officer of the entire company in November 2001. Under Benson's guidance, Sunterra reduced the number of properties it owned or managed from 89 to 75 as it worked on developing a reorganization plan to submit to the bankruptcy court. As the plan was being develo ped, the company announced that it was relocating its headquarters fr om Orlando to Las Vegas, part of a reorganization that divided the co mpany's operations into two divisions: Sunterra Europe, based in Engl and, and Sunterra USA, based in Las Vegas. After ending 2001 with ano ther loss, $72 million, the company submitted its reorganization plan in January 2002, ready to make a fresh start and to exercise gre ater financial discipline in the future.

Under Benson's leadership, Sunterra staged an impressive comeback. Th e company returned to profitability in 2003, achieving financial stab ility that allowed it to begin rebuilding its portfolio of resorts. B y the fall of 2004, Sunterra had regained its pre-Chapter 11 stature, owning or managing more than 90 resorts in 12 countries from which i ts more than 300,000 owner families could select as their vacation de stination. The company's fiscal year ended in September 2004, a year in which sales declined 7 percent to $288 million, but most impor tant, produced another encouraging profit result. For the year, Sunte rra collected $21 million in net income, spurring Benson and his management team to continue with their acquisition program.

As Sunterra concluded its first decade as a publicly traded company, it appeared to have put its troubles behind it. On the acquisition fr ont, the company continued to press forward, beginning the start of f iscal 2005 in October 2004 with the announcement of two purchases. Th e company acquired Jardines de Sol resort at Playa Blanca in Lanzarot e, Spain, a property with 54 villas, and signed an affiliation agreem ent with Alvechurch Waterway Holidays, which operated eight tradition al English canal boats moored at a marina in Cheshire on the Trent an d Mersey canal. In July 2005, Sunterra announced that it had entered an agreement to acquire the 69 percent it did not already own in the Embassy Vacation Resort Poipu Point on the Hawaiian island of Kauai, one of the first nine properties in which the company had invested be fore its IPO. Sunterra completed the deal in September 2005.

In the years ahead, Sunterra's success depended on the attractiveness of the resort properties it owned and managed and its ability to exp and its operations in a financially responsible manner. The lessons l earned from managerial mistakes made during the late 1990s served as valuable guidelines governing the company's acquisition efforts in th e 21st century, making it stronger, more disciplined, and sensitive t o the threat of expanding in a careless fashion. Toward this end, muc h of the responsibility for not falling victim to the same type of pr oblems that beset the company in the late 1990s fell to Benson and Su nterra's chief financial officer, Steven E. West. West joined Sunterr a as CFO in September 2002 after serving as the vice-president of fin ance for Coast Asset Management. In May 2005, he was promoted to the additional post of executive vice-president. As Sunterra plotted its future course, Benson and West were the two principal executives resp onsible for ensuring that the company's second decade of existence di d not end as the first one had, a challenge both executives appeared well equipped to meet.

Principal Subsidiaries: KGK Investors, Inc.; Lake Tahoe Resort Partners, LLC; Premier Vacations, Inc.; Resort Marketing Internation al, Inc.; Sunterra Centralized Services Global, LLC; Sunterra Central ized Services USA, LLC; Sunterra Financial Services, Inc.; Vacation T ime Share Travel, Inc. (Bahamas); Vacation Research Ltd. (U.K.); Sunt erra Spanish Sales SL (Spain); Sunterra Sales Italy S.R.L.; Octopus G mbH (Austria); Mercadotechnia de Hospedaje S.A. de C.V.; Kenmore Club Ltd. (U.K.); GVC Deutschland Holding GmbH (Germany).

Principal Competitors: Hilton Grand Vacations Company, LLC; Ma rriott Vacation Club International; Trendwest Resorts, Inc.

Chronology

• Key Dates:
• 1992: The first Sunterra resort is acquired, the Cypress Point e Resort in Lake Buena Vista, Florida.
• 1996: The company completes its initial public offering of sto ck, debuting on the New York Stock Exchange as Signature Resorts, Inc .
• 1998: After acquiring more than 70 properties during the previ ous year, Signature Resorts changes its name to Sunterra Corporation.
• 2000: Sunterra declares bankruptcy.
• 2001: Nicholas J. Benson is appointed chief executive officer.
• 2002: The company emerges from bankruptcy.
• 2005: The number of resorts owned or managed by Sunterra reach es 97.