Thursday, September 28, 2006

Sale of Sunterra FAQs

I have now received the Questions from members with my Answers along with Al Bentley's Clarification of a couple of the points I asked for help on.

I hope this helps to answer your questions and explains better what is actually happening. These FAQs are also now being used by Sunterra to answer questions from members asking about the sale of Sunterra Europe.

Q1. Will our Interval International bookings be safe?

Reply from Interval International: Regardless of the outcome of any sale, we would never cancel existing bookings.

Sunterra Europe "banks" available weeks in advance with Interval International. This means that Interval International is in effect "paid in advance" by Sunterra Europe.

Q2. I thought that being points owners meant that we owned the company so it seems that it is being sold out from under us without consultation!

The entity that is being offered for sale is Sunterra Europe[Group Holdings] plc and its various subsidiaries (referred to herein as "Sunterra Europe" or the "Company"). Sunterra Europe, among other things, sales memberships in Club Sunterra and manages the majority of the Club properties pursuant to various management agreements.

The resort properties that are a part of Club Sunterra are actually held in trust for the members. Sunterra Europe is the largest member of Club Sunterra and the largest beneficiary of the trust as it owns the most number of points in Club Sunterra.

All of the members of Club Sunterra, including Sunterra Europe and the fixed/float owners, collectively own the resort properties. Sunterra Europe is offering its assets for sale which include its beneficial ownership of the Club Sunterra Trust. Sunterra Europe can not sell the weeks or points that are owned by non-Sunterra Europe members (i.e., the more than 45,000 members of Club Sunterra) as they do not own them. Current and future members of Club Sunterra will always maintain their beneficial interest in the property and thus be able to book their accommodations, subject only to the rights of the members to sale or transfer their ownership interest to another party, and the payment of their annual maintenance fees.

In other words, Sunterra Europe is not selling the members interest in the properties or the trust, only its own interest.

Q3. Where does any money for the sale of Sunterra Europe go? Who gets it?

The proceeds of any sale would go to Sunterra Corporation, as they are the owners of Sunterra Europe, the entity that is being offered for sale. The member's interest belongs to the members and is not being offered for sale.

Q4. Will we be offered the chance to sell our points at a reasonable price (should we so wish), so that we get some of the money ourselves?

Sunterra Europe does not have a contractual obligation to buy back points from members. In addition, management of the Company has advised that they do not have plans to buy back points at the current time.

There is no way to know what a potential buyer may or may not do in this regard. However, it is likely that a buyer would step into Sunterra Europe's place in regards to any existing contracts and thus would not be obligated to purchase points from members. While a buyer may choose to repurchase points from members, pursuant to the existing agreements they would not be obligated to do so. The current management of the Company would have no input one way or the other on any plans by a new owner of Sunterra Europe to offer to purchase points from members, including whether an offer were to be made and, if so, at what price.

Q5. Is it possible to calculate the likely cost, say per point, of members buying the company?

This is a question I can't answer as I do not know the price that Sunterra Corporation is asking for Sunterra Europe. An estimate based upon the 48,000 members and the estimated cost of approximately $100 million dollars and you would be talking about $2,000 per member family (if you could persuade them all get involved!).

If the members have an interest in buying Sunterra Europe they would need to form an acquisition company, get financial commitments for a fixed sum in excess of $2,000 per member family from as many of them as possible and then go to an investment banker and ask to borrow the remaining funds needed (as inevitably there will be several thousand member families not interested in doing this). In addition, officers and directors would need to be appointed to negotiate the transaction. There is no prohibition to the members in doing so if they can get organized and raise the appropriate level of funds.

Q6. Why is Sunterra selling?

Sunterra Europe is owned by a publicly traded company, Sunterra Corporation, and they have decided it is in the best interests of their shareholders to sell Sunterra Europe.

Q7. What occurred to make that decision and what period of consultation was made?

An unsolicited offer to buy Sunterra Europe was received by Sunterra Corporation. As a publicly traded company Sunterra Corporation was obligated to assess the offer for their shareholders by having the company valued. Now that this has been done they have decided to offer Sunterra Europe for sale as they already have several interested parties and expect that the announcement will attract more offers.

Q8. Would you be relaxed about booking forward for next year making it necessary to pay part of next years management fees up front? I wish to book now for holidays in March & July 2007 what should I do?

Yes, I don't see any problems with booking holidays. Whatever happens, I can't see any reason why holidays shouldn't continue as they always have. Sunterra representatives have told me that all bookings are safe and will be honoured.

Management fees are due and payable pursuant to the Club rules and regulations. Members should NOT withhold the payment of their management fees as it is in violation of the terms of the Club membership and unfair to those members who do pay on a timely basis.

Q9. Like many members, access to USA, Hawaii and Caribbean resorts have been welcomed. What are the chances of being able to convert our Sunterra Europe points to that of Sunterra America?

There has been no offer from Sunterra Corporation to do this at this time and there are no plans that I am aware of any such offer in the future. What this type of swap would actually entail is essentially a buyback of your Sunterra Europe points by Sunterra Europe and a sale of Sunterra US points by Sunterra US. Personally, I wouldn't do it. I would stick with what we have at the moment until we know what the future holds.

Q10. Can Tony find out which of the European resorts are held in trust and which are not? As the ones that are in trust are more likely to be sold off as a package, whereas those that are not can be sold individually to whoever bids the most money.

We own points, which are converted into weeks, and those weeks are held in trust to guarantee the accommodation is there for us. These weeks are spread over all the resorts apart from the Alpen Club. Sunterra Corporation has specifically said that they are not looking to sell their interest in specific resorts but are seeking a transaction that includes the sale of all the resorts of Sunterra Europe in a package deal.

Q11. Can Tony keep us as informed as possible about developments and when he hears them and not just when the company posts the news on its American website?

What members need to realise is that because Sunterra Corporation is a publicly traded company, they can't tell us anything that they haven't already told their shareholders, which means published the information on the Corporate website. They also cannot tell us anything before information is given to the shareholders. To do so would subject the members to possible insider trading violations.

Q12. It seems to me that Tony is only ever aware of what is happening whenever the company makes an announcement on there so maybe we should be checking there for news rather than paying someone else to do it for us.

Whilst it is true that very often (but not always) I am not aware of what is happening until it is published on the Corporate Website, what I am able to do is find out from the people at the top what the information actually means to us as members. I try to keep members informed with the real information whenever I can.

Q13. Is there anyway that we can be told who any potential buyers are? I doubt that this is possible due to privacy laws, but it would be useful as I am sure that these companies have their own websites and this means that we can have a look at them and see what kind of company it is.

You have answered your own question here there is no way we are going to find out who the interested parties are until a deal is publicly disclosed. This is just the way it is with these situations.

It is likely that the Company will file a disclosure statement on Form 8K with the SEC at various times through the process including the execution of a letter of intent, definitive agreement and completion of the sale.

Q14. There do seem to be a lot of rumours going around on the Internet about who is buying the company and there are some stating that the Member Directors could be fired when a new company takes over Sunterra Europe. How much of the various rumours are true?

If you choose to read those sites then that is up to you, personally I prefer to stay in the real world. I don't see how John and I can be fired when we aren't employed by Sunterra in any way, but are in fact elected directors of the points club legal entity, Club Sunterra Limited.

Q15. Although some past rumours that Tony has stated were not true in any capacity now seem to be acknowledged as fact can Tony apologise for misleading us the members over these.

I don't believe that I have ever misled the members so if you would like to back this statement up then perhaps I can answer it. At the time I was asked for the facts regarding those rumours, I responded about there validity with true and honest answers. The fact that some of those rumours may have later actually happened is beyond my control.

Q16. We have a holiday booked for next year at Pine Lake and assume this is safe. We also do not want to shell out ever increasing management fees if we are not going to have the same sort of service etc that we have been used to from latterly GVC now Sunterra.

I don't think you have anything to worry about re your holiday in Pine Lake next year and expect the service to remain the same as it is now as whoever buys Sunterra would be daft to not take on the staff and systems that have been running the show so far.

Q17. What happens to my week if the company is sold?

I am presuming you are a fixed week owner? If this is the case, then your week will remain at the resort with a different management company, so no real change apart from paying a different company for the fees.

Q18. Will I be reimbursed for all monies invested in this week (i.e. my initial payment, the £50 charge paid for refurbishment of the apartments, of which I've yet to see)?

No, the week is owned at the resort so nothing changes.

Q19. Will Management Fees be rising or will they be frozen (until such time the company is sold)?

The resorts decide management fees so they will only go up by whatever the average of what all the resorts decide. Nothing that is happening to Sunterra will affect the management fees.

Q20. I asked the above because about two months ago I received a telephone call from the Sunterra branch in America. I was asked if I was using my week this year or, indeed, if I was thinking of selling. The caller's name is David and he gave me his telephone number to ring him at any time. He said that the European part of the company was very popular in the States and there is plenty of interest to book holiday weeks in Europe.

Avoid these companies telling you they can sell or rent your week for you. All they are after is an up front fee from you and that is the sole purpose of the call. I have confirmed with Sunterra that there are NO such calls being made by official representatives of Sunterra USA or Sunterra Europe.

Q21. It would have been far better for Sunterra to advise their members in writing, rather than relying on hearsay. What about all those members who do not receive Tony's emails??? - Poor show there!!

I am sure that Sunterra will let members know, as soon as it is practical (probably with the annual maintenance fee billing) that Sunterra Europe is for sale. What Sunterra Europe committed to is informing members of Club Sunterra of any sale of Sunterra Europe and how such a sale would affect them. At the current time, there really is not much information to offer the members as there is no agreement to sell Sunterra Europe in place and in fact no one has even yet to begin negotiating one.

Q22. When are the members going to be officially notified of Sunterra's intention to sell Sunterra Europe or are we going to be kept in the dark until the sale is agreed?

See answer to question 21.

Q23. Post sale, where do the members stand vis a vis the legality of the documentation signed with Sunterra and their rights to the inventory on any subsequent liquidation. In other words will our rights be fully assigned on completion of the sale?

There isn't going to be any liquidation, the management company will change but our rights will remain the same. The trust looks after our interests and will ensure that the inventory is there for us as they do now. As discussed in Question #2 above, the Sunterra Europe is selling only is assets, including its beneficial interest in the trust. The members inventory is owned by the members, not Sunterra.

Q24. If there is any dissolution of our rights or points values as a consequence of the sale, are Sunterra going to offer a refund of our investment in full or in part from the sale proceeds.

The points values for the resorts are set and won't be changing so no they won't be offering any refunds as our rights are the same whoever the management company is

Q25. Will European members still have the ability to book Sunterra accommodation in the USA on the existing terms.

Members of Club Sunterra still do at the current time.

Once there is a sale agreement, I can't guarantee that a continuing affiliation between Sunterra USA and Sunterra Europe will be part of the terms of such agreement, but I think it is very likely that an ongoing exchange system with Sunterra US would be arranged to satisfy members so as not to disappoint either the European or the US members.

In addition, the exchange agreement with Interval International (II) will continue to allow members to exchange into properties anywhere in the world.

Q26. Will points values remain the same for all properties in the portfolio when booking holidays i.e. if a holiday is now 4500 points for say a week in January in the Canaries at ABC resort, is that going to be protected so that it remains the same post sale.

See answer to question 24.

Q27. Once this sale goes through, do we the investors, receive a windfall?

That depends on what you mean by "investors." If you mean that you are a stockholder of Sunterra Corporation, the proceeds and ultimate terms of a sale agreement will affect the value of your Sunterra Corporation stock. If you mean that you are a points owner of Club Sunterra, the answer is no as there is no sale of any of the assets of the points club. The sale of Sunterra Europe will include the points that it owns in Club Sunterra. The members points are not a part of any potential sale transaction. Under either scenario, I don't think a cash windfall is something we can realistically expect.

Q28. After this sale, how will this affect access to the foreign accommodation currently have with Sunterra?

When you say foreign if you mean the European resorts then yes I am sure we will maybe even more depending on who buys Sunterra Europe. As far as the US resorts then this may depend on an exchange agreement with Sunterra US as per my answer to question 25.

In addition, the members will continue to have their exchange privileges through Interval International.

Q29. After this sale, how will this affect access to the foreign accommodation we currently have with Interval International?

Any bookings we already have with Interval will be honoured. Sunterra Europe banks weeks with Interval International on a regular basis. What happens regarding the future will depend on which exchange company the new owners are affiliated with. You can be sure there will be one at least.

Q30. How does this sale affect the current investment and upgrading of the resorts in Europe and the UK in particular?

The refurbishment programs are all agreed with the resorts using resort funds so they should continue as planned.

Q31. Will our management fee be reduced in proportion to the overall reduction of available resorts?

There is no indication that the number of available resorts will decrease. Remember our fees are only based on the European resorts not the US resorts.

Q32. Amongst the members of Sunterra Europe are Entrepreneurs, Accountants, and Directors, in fact we probably have all the knowledge and experience required to set up our own company to take over and run Sunterra Europe. Having seen one successful members buy out I would be happy to lend my efforts in securing our future. Sunterra has a large number of members; good inventory and excellent resorts. Is any one else interested in investigating this possibility?

See answer to question 5.

Q33. Can anyone tell me if there is anything in place to prevent Sunterra ramping up our management fees given they may assume they have nothing to lose now with Sunterra Europe members? Also next year I was intending to bank all my points until 2008 anyone know how this would work?

Management fees are decided by the resorts not Sunterra so there is no chance of them trying to hike them up. Don't forget they have a lot of unsold points that they have to pay fees on so they wouldn't want a big increase any more than we would. (See the answer to question to 19).

Banking of points will continue to work as it always has. Just remember that the banking of points does not delay the required payment of the management fees. Non-payment of management fees will result in the loss of your property.

Q34. What happens to holidays already booked - are they safe or likely to be lost? I am sure that I am not the only one who has booked flights and paid for them!

I am sure you have nothing to worry about and your holiday is quite safe. All flights, cruises, car hire etc. that have already been purchased and those that will be purchased will be provided. As Sunterra Travel is a subsidiary of Sunterra Europe, then it will be included in the sale, and the next company will operate all travel bookings made.

Sunterra Travel is a registered travel agency and maintains all of its required licenses and registrations .

Q35. Who are the 'suitors' for Sunterra Europe?

In general, potential suitors fall into two categories:

Strategic buyers. This type of buyer would likely be a hotel company, vacation ownership company or other company in the leisure industry in general and would be looking to acquire Sunterra Europe to either increase their presence in the vacation ownership market or achieve cost reductions through shear volume of transactions.

Financial buyers. This type of buyer would likely be a hedge fund, private investor, pension plan, etc. and would be looking to acquire Sunterra Europe with the goal of making a profit on its operations.

The specific names of both the interested financial buyers and the interested strategic buyers will be confidential information and nobody will be told until the letter of intent has been executed between the parties and the transaction is disclosed in the Company's SEC filings.

Q36. What will happen to the 'Scottish Action Group' - surely this mess MUST be cleaned up before any sale can have a chance of being a success?

This mess as you describe it involves a tiny number of members that have chosen a going to court route, which they don't seem to have followed through. Sunterra have made various offers in the past some of which have been accepted whilst a small number have rejected all attempts to help them. Depending on the structure of the sale agreement and the buyer involved, pending litigation can be handled by leaving it for the parent company to resolve or transferring it to the buyer for them to resolve. The key point is that not all pending litigation needs to be resolved in order for a sale agreement to be reached; there are several ways to cope with these complications.

Q37. Will there be massive fees to pay to transfer to the new owners?

I don't expect there to be any increase in fees to keep what we already have. We haven't been asked for more money as point's owners in the past when there has been a change of Management Company. The only people who have been asked for more money is people changing from fixed weeks into the points system.

Management fees are set by the members to operate the resorts for the benefit of all of the Club Sunterra members as well as the fixed/float owners. It is the management company's job to prepare a budget, have it approved by the committees, bill the members, collect the fees and administer the property. The level of management fees is reflective of the costs incurred relative to the level of services provided as desired by the Members.

Nobody can foresee the future but if a new management company does want more money from us then they will have a hard job unless they can prove beyond doubt that what we are been offered is worth the money. As I say I don't see it happening but if the value was there we would have decisions to make as individuals.

Q38. What happens to II? It seems as if the number of resorts available to us here in Europe may be drastically reduced.

See the answer to question 29.

Q39. Will management fees continue to spiral up and up?

See the answer to questions 19, 33 and 37.

Q40. Are ALL the 'Spanish Tax' issues now settled?

Sunterra Europe has recognized deficiencies in its calculation and payment of taxes in Spain. In order to resolve these deficiencies, Sunterra Europe filed amended tax returns and made additional payments to the Spanish government, but there has been no audit yet of those amended tax returns or agreement to settle the issues. Just as any other company or individual filing a tax return, the amended tax returns filed by Sunterra Europe are subject to audit and challenge by the Spanish government for a period of time after their filing per the rules and regulations as established by the Spanish government.

Q41. What about banked points will they be affected?

I don't think our banked points will be affected as the numbers of points we have for next year are already in the system.

Q42. What concerns me is management fees for next year. Is it worth paying them?

Our management fees go to the resorts so yes of course it is worth paying them to ensure that the resorts have enough money to operate. In addition, you are legally obliged to pay your management fees, so you will have to pay in the long run. After a period of time if your fees go unpaid you will forfeit your membership interest. In addition, you would be charged interest until they are paid. Finally, it is not fair to the members who honour their obligations and make the payments to operate the resorts on a timely basis if other members/owners default on their obligations or do not pay on a timely basis.

Tony Pearce