Thursday, July 27, 2006

Sunterra News Annoucement

Below is a summary of the latest Sunterra News Annoucement along with bit more information obtained from Anthony Guzzo at Sunterra. I have added a few comments of my own and hopefully these will appear in Italics.

"On July 25, 2006, Sunterra Corporation expanded its Board of Directors from six members to seven members and added John Ziegelman to the Board. John was the first activist shareholder challenging management to increase shareholder value and had previously asked for a Board seat to represent his views and interests. In light of the fact that there are now three separate shareholder groups demanding a "transaction" to increase shareholder value (which could be the sale of either European operations, the US operations or the entire Company), the Sunterra Board of Directors felt obliged to add a representative from that group to the Board of Directors so that they could see that the process that the Company was going through was appropriate and above board.

(Tony Comment) "This doesn't necessarily mean that the company or Sunterra Europe are more likely to be sold than before but it does make sure that the groups of shareholders who are pushing for a sale as the only way of increasing shareholder value can see that the company is in fact doing everything above board and is a much stronger company than they might think and very capable of increasing shareholder value by continuing to operate as one company, and that the restructuring that Sunterra has introduced and continues to introduce does make the company on both sides of the world both profitable and sound."

Also, on July 25, 2006, the Company has terminated the employment of Nick Benson for cause and asked him to resign as a member of the Board of Directors of the Company as a result of the ongoing investigation into certain allegations, including accounting improprieties, made by a former employee of the Company's Spanish operations. While Steve West had previously resigned his position as Chief Financial Officer, the Company announced that it plans to ask both Nick Benson and Steve West to return all bonuses and incentive/equity based compensation received from the Company since 2002.

(Tony Comment) "I don't think this necessarily means that Nick has done anything fraudulent but being the boss it is ultimately his responsibility so he has had to carry the can. The previously announced restatement of reported results and the investigation into the timing of the recording or accrued expenses are both indications that the Company reported incorrect numbers, either through deliberate actions or errors (there has been no statement either way on this). Clearly, as the President and CEO who certified the results, it doesn't matter whether the incorrect numbers were reported through deliberate actions or errors, Nick is being held accountable be the Board of Directors and Audit Committee. the actions taken by the Board to date indicate that while there has been no public comment on whether the incorrect numbers were fraudulent or not, Nick is being dismissed as he was responsible for those numbers and the determination as to why the numbers were incorrect will presumably be disclosed if and when that is determined."

With regard to the independent investigation, the Company announced that the fact-finding portion of it has been completed, but that management and the outside advisors need to reconcile their work to determine if there are any further issues with regard to tax compliance and the accrual/release of certain accrued expenses in the Company's European operations.

(Anthony Guzzo's explanation) "What this means is that the results as originally reported might not be correct for all the individual periods, due to the timing of recording certain reserves (accrued expenses). Those expenses may have been recorded in the wrong periods and while the overall profit and loss might be correct for a multiyear period, the results for the individual periods might be adjusted either to increase profits or reduce profits. The investigation has yielded evidence of such expenses being recorded in the wrong periods, but management and the outside advisors need to huddle up and verify what the proper periods for recorded such expenses were."

The Company continues to work diligently to complete this reconciliation as soon as practicable, so that it can review the results with Grant Thornton to perform the required restatements of the Company's historical financial statements.

Lastly, the Company reiterated that it is in the process of engaging an investment banking firm to assess strategic alternatives for the Company and is close to finalizing the engagement.

(Tony Comment) "Sunterra are obliged to do this as there are now 3 separate groups of shareholders (all investment funds) pushing for this. I am quite sure that there must be a good number of shareholders who are also members and it is unfortunate that they don't have the same right to make statements and demands as they are not in a collective and therefore don't own the required percentage of shares to make comments. I am sure that as members our view on things is different to that of investment groups who are just out to make money without regard to the company, the employees and definitely not the members!

It may be that the outside investment company does suggest that the way forward is to sell the company as a whole or to sell Sunterra Europe and Sunterra US separately. Sunterra Corporation are not obliged to take that advice although I assume they would be under a lot of pressure to do so. It may equally be the case that the investment company recommends that the company isn't sold and that it is a solid business and should be kept together, we will have to wait and see.

Tony Pearce