**EXHIBIT 14.5**

 

CONSOLIDATED FINANCIALSTATEMENTS

 

Harborside at Atlantis JointVenture Limited

Years Ended December 31,2005, 2004 and 2003

 

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Harborside atAtlantis Joint Venture Limited

 

ConsolidatedFinancial Statements

 

Years EndedDecember 31, 2005, 2004 and 2003

 

**Tableof Contents**

 
| Report of Independent  Registered Public Accounting Firms | 1      |
|-----------------------------------------------------------|--------|
|                                                      |   |
| Consolidated Financial  Statements                        |   |
|                                                      |   |
| Consolidated Balance  Sheets                              | 3      |
| Consolidated Statements  of Income                        | 4      |
| Consolidated Statements  of Shareholders’ Equity     | 5      |
| Consolidated Statements  of Cash Flows                    | 6      |
| Notes to Consolidated  Financial Statements               | 7      |

 

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**REPORTOF INDEPENDENT REGISTERD PUBLIC ACCOUNTING FIRM**

 

The Shareholders of Harborside Joint Venture Limited

 

We have audited the accompanying consolidatedbalance sheet of Harborside Joint Venture Limited (the Company) as of December31, 2005, and the related consolidated statements of income, shareholders’equity, and cash flows for the year in the period ended December 31, 2005.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Harborside at Atlantis Joint Venture Limited at December31, 2005, and the consolidated results of its operations and its cash flows forthe year in the period ended December 31, 2005, in conformity with U.S.generally accepted principles.

 
| /s/ ERNST & YOUNG LLP |   |   |
|---------------------------|--------|--------|
|                      |
| February 1, 2006          |
| Orlando, Florida          |

 

1

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Shareholders of

Harborside at Atlantis Joint Venture Limited:

 

We have audited the accompanying consolidated balance sheets ofHarborside at Atlantis Joint Venture Limited (a Bahamas Corporation) (theCompany) as of December 31, 2004 and 2003, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as of December31, 2004 and 2003, and the results of their operations and their cash flows forthe years then ended in conformity with accounting principles generallyaccepted in the United States of America.

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| Certified Public Accountants  |
|                          |
| Orlando, Florida              |
| July 29, 2005                 |

 

2

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Harborside at AtlantisJoint Venture Limited

 

Consolidated BalanceSheets

 
| ** **                                                                                                      | ** ** | **December 31** | ** **      |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------|-----------------|
| ** **                                                                                                      | ** ** | **2005**             | ** **      | **2004** | ** ** |
| **Assets**                                                                                                      |       |                 |            |   |   |
| Cash and cash  equivalents                                                                                      | ** ** | **$**                | **10,865,012**  |   | $ | 3,386,771 |   |
| Restricted cash                                                                                                 | ** ** | **1,354,410**        |            | 1,421,005 |   |
| Customer  mortgage loans receivable, less allowance for loan losses of $2,187,688 and  $3,036,551, respectively | ** ** | **37,215,012**       |            | 27,502,143 |   |
| Inventory of  vacation ownership interests                                                                      | ** ** | **47,483,019**       |            | 47,272,942 |   |
| Property and  equipment, net                                                                                    | ** ** | **3,142,036**        |            | 3,376,224 |   |
| Prepaid expenses  and other assets                                                                              | ** ** | **5,648,319**        |            | 7,468,587 |   |
| Total assets                                                                                                    | ** ** | **$**                | **105,707,808** |   | $ | 90,427,672 |   |
|                                                                                                            |       |                 |            |   |   |
| **Liabilities  and shareholders’ equity**                                                                  |       |                 |            |   |   |
| Accounts payable  and accrued liabilities                                                                       | ** ** | **$**                | **10,112,566**  |   | $ | 13,445,044 |   |
| Due to  affiliates                                                                                              | ** ** | **5,998,273**        |            | 1,443,718 |   |
| Other  liabilities                                                                                              | ** ** | **600,926**          |            | 13,830,667 |   |
| Notes payable                                                                                                   | ** ** | **19,562,095**       |            | 737,174 |   |
| Notes payable to  related parties                                                                               | ** ** | **9,906,420**        |            | 32,906,420 |   |
| Total  liabilities                                                                                              | ** ** | **46,180,280**       |            | 62,363,023 |   |
|                                                                                                            |       |                 |            |   |   |
| Shareholders’  equity:                                                                                     |       |                 |            |   |   |
| Common stock, $1  par value; 5,000 shares authorized, issued, and outstanding                                   | ** ** | **5,000**            |            | 5,000 |   |
| Additional  paid-in capital                                                                                     | ** ** | **15,739,000**       |            | 15,739,000 |   |
| Retained  earnings                                                                                              | ** ** | **43,783,528**       |            | 12,320,649 |   |
| Total  shareholders’ equity                                                                                | ** ** | **59,527,528**       |            | 28,064,649 |   |
| Total  liabilities and shareholders’ equity                                                                | ** ** | **$**                | **105,707,808** |   | $ | 90,427,672 |   |

 

*Seeaccompanying notes.*

 

3

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Harborside at AtlantisJoint Venture Limited

 

Consolidated Statementsof Income

 
| ** **                                       | ** ** | **Year Ended December 31** | ** **     |
|--------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                       | ** ** | **2005**                                  | ** **     | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                        |       |                                      | ** **     |   |   |   |   |
| Vacation  ownership interest sales               | ** ** | **$**                                     | **78,813,278** | ** ** | $ | 37,412,560 |   | $ | 37,571,639 |   |
| Resort and other  income                         | ** ** | **7,681,571**                             | ** **     | 1,360,083 |   | 2,939,280 |   |
| Interest income                                  | ** ** | **4,757,799**                             | ** **     | 3,819,314 |   | 3,594,068 |   |
| Total revenues                                   | ** ** | **91,252,648**                            | ** **     | 42,591,957 |   | 44,104,987 |   |
|                                             |       |                                      | ** **     |   |   |   |   |
| Costs and  operating expenses:                   |       |                                      | ** **     |   |   |   |   |
| Cost of vacation  ownership interests sold       | ** ** | **21,838,501**                            | ** **     | 11,225,078 |   | 11,390,954 |   |
| Sales and  marketing                             | ** ** | **24,333,780**                            | ** **     | 15,389,362 |   | 14,565,378 |   |
| General,  administrative, and operating expenses | ** ** | **11,013,366**                            | ** **     | 7,146,711 |   | 7,542,801 |   |
| Depreciation                                     | ** ** | **829,617**                               | ** **     | 774,882 |   | 804,894 |   |
| Provision for  loan losses                       | ** ** | **(466,631**                              | **)**          | 1,022,307 |   | 1,106,991 |   |
| Interest  expense, net                           | ** ** | **1,718,761**                             | ** **     | 1,082,761 |   | 1,913,279 |   |
| Gain on casualty  damage remediation, net        | ** ** | **—**                                | ** **     | (7,692,824 | ) | (465,165 | ) |
| Other                                            | ** ** | **522,375**                               | ** **     | 136,562 |   | 1,265,152 |   |
| Total costs and  operating expenses              | ** ** | **59,789,769**                            | ** **     | 29,084,839 |   | 38,124,284 |   |
|                                             |       |                                      | ** **     |   |   |   |   |
| Net income                                       | ** ** | **$**                                     | **31,462,879** | ** ** | $ | 13,507,118 |   | $ | 5,980,703 |   |

 

*Seeaccompanying notes.*

 

4

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Harborside atAtlantis Joint Venture Limited

 

ConsolidatedStatements of Shareholders’ Equity

 

Year EndedDecember 31, 2005, 2004 and 2003

 
| ** **                  | ** ** | **Common Stock** | ** ** | **Additional   Paid-in  Capital** | ** ** | **Retained   Earnings   (Accumulated  Deficit)** | ** ** | **Total   Shareholders’  Equity** | ** ** |
|-----------------------------|------------|-----------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Shares**                  | ** ** | **Amount**            |
| Balance,  December 31, 2002 |       | 5,000                 |       | $                                      | 5,000      |                                                       | $          | 15,739,000                                  |       | $ | (7,167,172 | ) | $ | 8,576,828 |   |
| Net income                  |       | —                |       | —                                 |       | —                                                     |       | 5,980,703                                   |       | 5,980,703 |   |
|                        |       |                  |       |                                   |       |                                                       |       |                                        |       |   |   |
| Balance,  December 31, 2003 |       | 5,000                 |       | $                                      | 5,000      |                                                       | 15,739,000 |                                        | (1,186,469 | ) | 14,557,531 |   |
| Net income                  |       | —                |       | —                                 |       | —                                                     |       | 13,507,118                                  |       | 13,507,118 |   |
|                        |       |                  |       |                                   |       |                                                       |       |                                        |       |   |   |
| Balance,  December 31, 2004 |       | 5,000                 |       | $                                      | 5,000      |                                                       | 15,739,000 |                                        | 12,320,649 |   | 28,064,649 |   |
| Net income                  |       | —                |       | —                                 |       | —                                                     |       | 31,462,879                                  |       | 31,462,879 |   |
|                        |       |                  |       |                                   |       |                                                       |       |                                        |       |   |   |
| Balance,  December 31, 2005 | ** ** | **5,000**             | ** ** | **$**                                  | **5,000**  | ** **                                                 | **$**      | **15,739,000**                              | ** ** | **$** | **43,783,528** | ** ** | **$** | **59,527,528** | ** ** |

 

*Seeaccompanying notes.*

 

5

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Harborside at Atlantis JointVenture Limited

 

Consolidated Statementsof Cash Flows

 
| ** **                                                                                   | ** ** | **Year Ended December 31** | ** **     |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                                                                   | ** ** | **2005**                                  | ** **     | **2004** | ** ** | **2003** | ** ** |
| **Operating  activities**                                                                    | ** ** | ** **                                | ** **     | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                   | ** ** | **$**                                     | **31,462,879** | ** ** | $ | 13,507,118 |   | $ | 5,980,703 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                      | ** **     |   |   |   |   |
| Depreciation                                                                                 | ** ** | **829,617**                               | ** **     | 774,882 |   | 804,894 |   |
| Amortization of  deferred financing costs                                                    | ** ** | **221,659**                               | ** **     | 197,494 |   | 145,818 |   |
| Provision for  loan losses                                                                   | ** ** | **(466,631**                              | **)**          | 1,022,307 |   | 1,106,991 |   |
| Changes in  operating assets and liabilities:                                                |       |                                      | ** **     |   |   |   |   |
| Customer  mortgage loans receivable                                                          | ** ** | **(9,246,238**                            | **)**          | (6,666,404 | ) | (4,844,986 | ) |
| Inventory of  vacation ownership interests                                                   | ** ** | **(210,077**                              | **)**          | (22,989,164 | ) | 10,941,477 |   |
| Prepaid expenses  and other assets                                                           | ** ** | **1,598,609**                             | ** **     | (4,999,247 | ) | 790,519 |   |
| Accounts payable  and accrued liabilities                                                    | ** ** | **(3,332,478**                            | **)**          | 6,225,073 |   | (4,333,792 | ) |
| Due to  affiliates                                                                           | ** ** | **4,554,555**                             | ** **     | (728,792 | ) | (5,334,974 | ) |
| Other  liabilities                                                                           | ** ** | **(13,229,741**                           | **)**          | 12,372,068 |   | (3,004,519 | ) |
| Net cash  provided by (used in) operating activities                                         | ** ** | **12,182,154**                            | ** **     | (1,284,665 | ) | 2,252,131 |   |
|                                                                                         |       |                                      | ** **     |   |   |   |   |
| **Investing  activities**                                                                    |       |                                      | ** **     |   |   |   |   |
| Decrease in  restricted cash                                                                 | ** ** | **66,595**                                | ** **     | 82,243 |   | 591,191 |   |
| Cash paid for  property and equipment                                                        | ** ** | **(595,429**                              | **)**          | (144,542 | ) | (642,867 | ) |
| Net cash used in  investing activities                                                       | ** ** | **(528,834**                              | **)**          | (62,299 | ) | (51,676 | ) |
|                                                                                         |       |                                      | ** **     |   |   |   |   |
| **Financing  activities**                                                                    |       |                                      | ** **     |   |   |   |   |
| Payments on  notes payable                                                                   | ** ** | **(7,242,177**                            | **)**          | (4,722,159 | ) | (973,107 | ) |
| Proceeds from  notes payable                                                                 | ** ** | **26,067,098**                            | ** **     | — |   | — |   |
| Payments on  notes payable to related parties                                                | ** ** | **(31,000,000**                           | **)**          | — |   | (9,000,000 | ) |
| Proceeds from  notes payable to related parties                                              | ** ** | **8,000,000**                             | ** **     | 3,000,000 |   | — |   |
| Net cash used in  financing activities                                                       | ** ** | **(4,175,079**                            | **)**          | (1,722,159 | ) | (9,973,107 | ) |
|                                                                                         |       |                                      | ** **     |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        | ** ** | **7,478,241**                             | ** **     | (3,069,123 | ) | (7,772,652 | ) |
| Cash and cash  equivalents, beginning of year                                                | ** ** | **3,386,771**                             | ** **     | 6,455,894 |   | 14,228,546 |   |
| Cash and cash  equivalents, end of year                                                      | ** ** | **$**                                     | **10,865,012** | ** ** | $ | 3,386,771 |   | $ | 6,455,894 |   |
|                                                                                         |       |                                      | ** **     |   |   |   |   |
| **Supplemental  cash flow disclosures**                                                      |       |                                      | ** **     |   |   |   |   |
| Cash paid for  interest                                                                      | ** ** | **$**                                     | **2,313,914**  | ** ** | $ | 1,443,393 |   | $ | 3,004,819 |   |

 

*Seeaccompanying notes.*

 

6

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Harborside at AtlantisJoint Venture Limited

 

Notes to ConsolidatedFinancial Statements

 

December 31, 2005

 

**1.Nature of Business**

 

Harborside at AtlantisJoint Venture Limited (HAJV) is the holding company of Harborside at AtlantisDevelopment Limited (HAD) and Harborside at Atlantis Management Limited (HAM)(collectively, the Company). HAD was established to construct, furnish, market,sell, and finance vacation ownership interests (VOIs) at the Harborside atAtlantis Resort (the Resort) located in the Commonwealth of the Bahamas. HAMwas established to manage the Resort. The shareholders of HAJV are VistanaBahamas Holdings, Ltd. (Vistana Holdings) and Kerzner International TimeshareLimited (Kerzner) (formerly Sun International Timeshare Limited), each owning a50% interest in the Company.

 

The Company generatesrevenues from the sale and financing of VOIs at the Resort, which typicallyentitle the buyer to ownership of a fully furnished unit for a one-week periodon an annual or an alternate-year basis. The Company’s operations also consistof managing the operations of the Resort and related amenities. The Companysells VOIs to both domestic and foreign purchasers. All contracts relating tothe sale of VOIs are denominated in U.S. dollars. In addition, the Companygenerates revenues from the rental of unoccupied units at the Resort.

 

**2.Summary of Significant Accounting Policies**

 

**Principlesof Consolidation**

 

The consolidatedfinancial statements of the Company include the accounts of HAJV, HAD, and HAM.All significant intercompany accounts and transactions have been eliminated inconsolidation.

 

**Cash andCash Equivalents**

 

Cash and cash equivalentsconsist of all highly liquid investments purchased with an original maturity ofthree months or less. The Company minimizes its credit risk associated withcash and cash equivalents by utilizing high credit quality financialinstitutions. However, a significant portion of the Company’s cash ismaintained with a single bank and, accordingly, the Company is subject tocredit risk. Periodic evaluations of the relative credit standing of thefinancial institutions maintaining the Company’s deposits are performed toevaluate and mitigate, if necessary, credit risk.

 

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**RestrictedCash**

 

Restricted cash consistsof deposits received on sales of VOIs that are held in escrow until theapplicable statutory rescission period has expired.

 

**CustomerMortgage Loans Receivable and Allowance for Loan Losses**

 

Customer mortgage loansreceivable are recorded at the lower of amortized cost or market less therelated allowance for loan losses.

 

The Company provides for estimatedcustomer mortgage loans receivable cancellations and defaults at the time theVOI sales are recorded by a charge to operations and a credit to an allowancefor loan losses. The Company performs an analysis of factors such as economicconditions and industry trends, defaults, past due agings, and historicalwrite-offs of customer mortgage loans receivable to evaluate the adequacy ofthe allowance. Recoveries on defaulted customer mortgage loans receivable arerecorded in inventory of VOIs and as a reduction of loan charge-offs at thehistorical cost of VOIs. All collection and foreclosure costs are expensed asincurred. Interest income is suspended on all notes receivable when principalor interest payments are more than three months contractually past due and notresumed until such loans are less than three months past due.

 

**Inventoryof Vacation Ownership Interests**

 

Inventory of VOIs isvalued at the lower of cost or net realizable value. Development costs include realestate and construction costs, including capitalized interest, and areallocated to VOIs. Interest and other carrying costs incurred during theconstruction period are capitalized, and such costs incurred on completed VOIinventory are expensed. Costs are allocated to units sold on the relative salesvalue method. During the years ended December 31, 2005, 2004 and 2003,$979,272, $432,875 and $0, respectively, of interest was capitalized intoinventory. In early 2004, the Company started the construction of its secondphase (Phase 1B) of VOIs, which consisted of 228 villas. As of December 31,2005 and 2004, the construction of Phase 1B was 100% and 57% complete,respectively. The Company periodically evaluates the recovery of the carryingamount of its properties under the guidelines of SFAS No. 144, *Accounting**for theImpairment or Disposal of Long-Lived Assets*. The Company believesthat none of its long-lived assets have been impaired as of December 31, 2005.

 

8

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**Propertyand Equipment**

 

Property and equipmentare stated at cost. Depreciation of property and equipment is computed over theapplicable estimated useful lives of the assets (between three and ten years),or in the case of leasehold improvements, over the term of the related lease,if shorter, using the straight-line method. Depreciation expense on propertyand equipment for the years ended December 31, 2005, 2004 and 2003 was$829,617, $774,882 and $804,894, respectively.

 

In connection with thedevelopment of the Resort, the Company constructed guest registrationfacilities and on-site sales and marketing facilities (Resort and SalesFacilities). The Company will retain ownership and control over thesefacilities until the project is sold-out, at which time the Resort and Sales Facilitieswill revert to the owners. Resort and Sales Facilities are included in propertyand equipment. The building is depreciated based on current sales to totalproject sales.

 

**DeferredFinancing Costs**

 

TheCompany capitalizes direct and incremental costs incurred in connection withits long-term financing arrangements. These costs are amortized to interestexpense over the life of the related debt instrument using the straight-linemethod, which materially approximates the effective interest method. Amortizationof deferred financing costs totaled $221,659, $197,494 and $145,818 for theyears ended December 31, 2005, 2004, and 2003, respectively.

 

**CustomerDeposits**

 

Until a VOI contractqualifies as a sale, all payments received are accounted for as deposits, whichare included in other liabilities in the accompanying consolidated balancesheets. If a contract is canceled after the applicable statutory period,deposits forfeited are recorded as income.

 

9

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**RevenueRecognition**

 

The Company recognizessales of VOIs when a minimum of 10% of the sales price has been received incash, the rescission period has expired, collectibility of the receivablerepresenting the remainder of the sales price is reasonably assured and theCompany has completed substantially all of its obligations with respect to anydevelopment related to the real estate sold. If all the criteria are met exceptthat construction is not substantially complete, then revenues are recognizedon the percentage-of-completion method using the cost-to-cost basis ofmeasurement.

 

For sales that do notqualify for either accrual or percentage-of-completion recognition, all revenueis deferred using the deposit method. Under the deposit method, cash receivedfrom customers is classified as a refundable deposit in the liability sectionof the consolidated balance sheets and profit recognition is deferred until therevenue recognition criteria have been met.

 

The Company rents unsoldVOIs on a short-term basis. Such resort rental income is accrued as earned.Property management fee revenues are accrued as earned in accordance with themanagement contracts and are included in resort and other income in theaccompanying statements of income.

 

Customer mortgage loansreceivable interest is accrued as earned based on the contractual provisions ofthe notes and contracts.

 

**Salesand Marketing Costs**

 

Sales and marketing costsare expensed as incurred, except for costs directly related to sales associatedwith VOI contracts not eligible for revenue recognition as described above.Such deferred costs principally consist of sales commissions and are charged tooperations as the related revenue is recognized. Deferred sales and marketingcosts are classified as prepaid expenses in the accompanying consolidatedbalance sheets and at December 31, 2005 and 2004 amounted to $667,152 and$3,181,601, respectively.

 

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**IncomeTaxes**

 

The accompanyingconsolidated statements of income do not include a provision for income taxesas no income tax or capital gains tax is imposed on Bahamian corporations.

 

**Concentrationsof Credit Risk**

 

The Company offersfinancing to the buyers of VOIs. The customer mortgage loans received by theCompany bear interest at a fixed rate, are payable over terms of up to 10years, and are secured by a first mortgage on the VOI. Any adverse change ineconomic conditions or significant price increases or adverse events related tothe travel and tourism industry could have a material adverse effect on theCompany’s business. Such conditions may also adversely affect the futureavailability and cost of financing for the Company or its customers and resultin a material adverse effect on the Company’s business. In addition, changes ingeneral economic conditions may adversely affect the Company’s ability tocollect on its outstanding customer mortgage loans receivable.

 

The Company hashistorically derived net interest income from its financing activities becausethe interest rates it charges its customers who finance the purchase of theirVOIs exceed the interest rates the Company pays to its lenders. Because theCompany’s indebtedness bears interest at variable rates and the Company’scustomer mortgage loans receivable bear interest at fixed rates, increases ininterest rates will erode the spread in interest rates that the Company hashistorically obtained and could cause the rate on the Company’s borrowings toexceed the rate at which the Company provides financing to its customers. TheCompany has not engaged in interest rate hedging transactions. Therefore, anyincrease in interest rates, particularly over a sustained period, could have amaterial adverse effect on the Company’s results of operations, cash flows, andfinancial position.

 

**NewAccounting Pronouncement**

 

In December 2004, theFASB issued SFAS No. 152, *Accounting for Real EstateTime-Sharing Transactions*. SFAS No. 152 amends SFAS No. 66, *Accounting for the Sales of Real Estate*, and SFAS No. 67, *Accounting for Costs and Initial Rental Operations of Real EstateProjects*, in association with the issuance of AICPA SOP 04-2, *Accounting for Real Estate Time-Sharing Transactions*. Thesestatements were issued to address the diversity in practice caused by lack of

 

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guidance specific to realestate time-sharing transactions. Under SFAS No. 152, the majority of the costsincurred to sell timeshares will be charged to expense when incurred. Inregards to notes receivable issued in conjunction with a sale, an estimate of uncollectibilitythat is expected to occur must be recorded as a reduction of revenue at thetime that profit is recognized on a timeshare sale. Rental and other operationsduring holding periods must be accounted for as incidental operations, whichrequire that any incidental revenue in excess of incidental costs be recordedas a reduction of inventory costs. SFAS No. 152 is effective for financialstatements for fiscal years beginning after June 15, 2005, and therefore willbe implemented by the Company in the year ending December 31, 2006. The Companyexpects the adoption of this standard to result in a one-time pre-tax charge ofapproximately $3 million to $4 million in 2006.

 

**Use ofEstimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Accordingly, actual results could differfrom those estimates.

 

**Reclassification**

 

Certain amounts in the 2003and 2004 consolidated financial statements were reclassified to conform to the2005 presentation.

 

**3.Customer Mortgage Loans Receivable**

 

The Company providesfinancing to the purchasers of VOIs collateralized by their VOI interests. Thecustomer mortgage loans receivable bear interest, at the time of issuance,ranging from 7.9% to 17.9%, which remains fixed over the term of the loan and typicallyaverages six years. The customer mortgage loans receivable may be prepaid atany time without penalty. The weighted-average per annum rate of interest onoutstanding customer mortgage loans receivable was 15.7% and 15.2% as ofDecember 31, 2005 and 2004, respectively.

 

As of December 31, 2005,net customer mortgage loans receivable from buyers residing outside of theUnited States of America aggregated $1,374,034, with buyers within noindividual country other than the United States of America aggregating morethan 0.86% of gross outstanding customer mortgage loans receivable.

 

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The following schedulepresents the scheduled contractual principal maturities of customer mortgageloans receivable:

 
| **Year Ending December 31**                        | ** ** | **Amount** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|
|                                                              |       |       |       |
| 2006                                                              |       | $          | 3,976,186  |   |
| 2007                                                              |       | 4,522,403  |       |
| 2008                                                              |       | 4,313,067  |       |
| 2009                                                              |       | 4,190,577  |       |
| 2010                                                              |       | 4,113,284  |       |
| Thereafter                                                        |       | 18,287,183 |       |
| Total principal  maturities of customer mortgage loans receivable |       | 39,402,700 |       |
| Less allowance  for loan losses                                   |       | (2,187,688 | )          |
| Net principal  maturities of customer mortgage loans receivable   |       | $          | 37,215,012 |   |

 

The activity in theallowance for loan losses on customer mortgage loans receivable during the yearended December 31, 2005 and 2004 is summarized as follows:

 
| ** **                  | ** ** | **2005**     | ** **    | **2004**  | ** ** |
|-----------------------------|------------|--------------|---------------|-----------|------------|
|                        |       |         |          |      |       |
| Balance,  beginning of year | ** ** | **$**        | **3,036,551** |      | $          | 2,556,409 |   |
| Charge-offs                 | ** ** | **(382,232** | **)**         | (542,165  | )          |
| Provision for  loan losses  | ** ** | **(466,631** | **)**         | 1,022,307 |       |
| Balance, end of  year       | ** ** | **$**        | **2,187,688** |      | $          | 3,036,551 |   |

 

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**4. Propertyand Equipment**

 

Property and equipmentconsisted of the following as of December 31, 2005 and 2004:

 
| ** **                     | ** ** | **2005**       | ** **    | **2004**   | ** ** |
|--------------------------------|------------|----------------|---------------|------------|------------|
|                           |       |           |          |       |       |
| Buildings and  improvements    | ** ** | **$**          | **3,323,473** |       | $          | 3,320,154 |   |
| Furniture and  fixtures        | ** ** | **2,919,671**  |          | 2,425,042  |       |
| Vehicles                       | ** ** | **373,885**    |          | 308,890    |       |
| ** **                     |       | **6,617,029**  |          | 6,054,086  |       |
| Less accumulated  depreciation | ** ** | **(3,474,993** | **)**         | (2,677,862 | )          |
| ** **                     |       | **$**          | **3,142,036** | ** ** | $          | 3,376,224 |   |

 

**5. NotesPayable**

 

**2001 Receivables Loan**

 

During 2001, the Companyentered into a receivables loan agreement (the 2001 Receivables Loan) with a maximumcredit line of $35 million. The 2001 Receivables Loan required that the Companydeliver to the lender customer mortgage loans receivable meeting certaincriteria in order to receive advances on the 2001 Receivables Loan. Advances onthe 2001 Receivables Loan bore interest at the 90-day LIBOR rate plus 3.25%. Asof December 31, 2004, $737,174 was outstanding under the 2001 Receivables Loan.The 2001 Receivables Loan was paid off during 2005. The Company incurred approximately$4,000, $140,000 and $310,000 in interest expense for the years ended December31, 2005, 2004 and 2003, respectively, in association with the 2001 ReceivablesLoan. These amounts are included in net interest expense in the accompanyingconsolidated statements of income.

 

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**2005 Receivables Loan**

 

During 2005, the Companyentered into a receivables loan agreement (the 2005 Receivables Loan) with amaximum credit line of $40 million. The proceeds were used to pay off the 2001Receivables Loan. The 2005 Receivables Loan requires that the Company deliverto the lender customer mortgage loans receivable, meeting certain criteria inorder to receive advances on the 2005 Receivables Loan. Advances on the 2005 ReceivablesLoan bear interest at 30-dayLIBOR rate plus 3.25% (7.64% at December 31, 2005). As of December 31,2005, $19,562,095 was outstanding under the 2005 Receivables Loan. Monthlycustomer payments of principal and interest with respect to the collateralized customermortgage loans receivable are deposited directly with the lender. The principaland interest payments are applied against the 2005 Receivables Loan in thefollowing order: first, to the payment of costs or expenses incurred by thelender in collecting any amounts due in connection with the Receivables Loan;second, to the payment of accrued and unpaid interest; and, thereafter, to thereduction of the principal balance. The 2005 Receivables Loan matures on March31, 2010. The Company incurred approximately $675,000 in interest expense forthe year ended December 31, 2005 in association with the 2005 Receivables Loan.This amount is included in net interest expense in the accompanyingconsolidated statements of income.

 

The 2005 Receivables Loanrequires, among other things, that the Company maintain certain minimumfinancial ratios. At December 31, 2005, the Company was in compliance with allcovenants.

 

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**6.Commitments and Contingencies**

 

The Company leases officespace from unrelated parties under operating leases which expire in 2010.Annual rent expense under such operating leases for the years ended December31, 2005, 2004 and 2003 totaled approximately $659,000, $530,000 and $561,000,respectively, and is included in sales and marketing expenses. Future minimumlease payments, by year and in the aggregate, under noncancelable operatingleases are as follows:  

** **
| **Year Ending December 31** | ** ** | **Amount** | ** ** |
|--------------------------------------------|------------|------------|------------|
|                                       |       |       |       |
| 2006                                       |       | $          | 295,714    |   |
| 2007                                       |       | 307,911    |       |
| 2008                                       |       | 320,646    |       |
| 2009                                       |       | 333,923    |       |
| 2010                                       |       | 245,839    |       |
| Total future  minimum lease payments       |       | $          | 1,504,033  |   |

 

**7.Related Party Transactions**

 

The Company has enteredinto management agreements with Kerzner International Bahamas Limited (formerlySun International Bahamas Limited) and Starwood Vacation Ownership, Inc. (SVO),the owners of Kerzner and Vistana Holdings, respectively, to providemanagement, marketing, customer mortgage loans receivable processing, andadministrative assistance to the Company. The management fee is calculatedbased on a percentage of net VOI sales or customer mortgage loans receivable,depending on the type of service provided.

 

For the years endedDecember 31, 2005, 2004 and 2003, SVO charged the Company $3,635,943,$2,766,205 and $1,289,800, respectively, for general and administrativeexpenses and $327,490, $323,050 and $167,700 respectively, for customermortgage loans servicing fees. These amounts are classified as general,administrative and operating expenses in the accompanying consolidatedstatements of income. Kerzner charged the Company $3,305,403, $2,514,732 and$1,847,459 for the years ended December 31, 2005, 2004 and 2003, respectively,for marketing fees, which are included in sales and marketing expenses in theaccompanying consolidated statements of income. In addition, Kerzner chargedthe Company $849,522, $465,922 and $0 for the years ended December 31, 2005,2004 and 2003, respectively, for development fees, which were capitalized intoinventory in the accompanying consolidated balance sheets.

 

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As of December 31, 2005and 2004, the Company had recorded $5,998,273 and $1,443,718, respectively, asdue to affiliates in the accompanying consolidated balance sheets. As describedabove, this amount includes general and administrative expenses, customermortgage loans receivable servicing fees, and marketing fees payable to theshareholders, as well as other payroll costs. The payroll costs, general and administrativeexpenses, and marketing fees are payable quarterly based on net cash flowavailable, as defined in the shareholders’ agreement. The customer mortgageloans receivable servicing fees are payable monthly.

 

The Company entered intonotes payable agreements with Kerzner and Vistana Holdings (collectively, theLenders) during 2000, which bear interest at the 30-day LIBOR rate plus 2.5%(6.89% at December 31, 2005). The notes payable agreements are non-revolvingand are pari passu with respect to payments of principal and accrued interest. Asof December 31, 2005 and 2004, $9,906,420 and $32,906,420, respectively, wereoutstanding under the notes payable agreements. On a monthly basis, the Companymust pay to the Lenders an amount equal to the number of VOI registrationscompleted in the previous month multiplied by an amount per VOI. Repaymentterms in excess of the monthly payment are based on net cash available fordistribution to the shareholders, as defined. The monthly payment amount isfirst applied to accrued and unpaid interest and then to principal. The notespayable mature on December 31, 2006.

 

During the years endedDecember 31, 2005, 2004 and 2003, the Company incurred approximately $1,797,000,$1,193,000 and $1,458,000 in interest charges associated with the notespayable, respectively. Interest charges, net of capitalized amounts, areincluded in net interest expense in the accompanying consolidated statements ofincome.

 

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**8. Gain onCasualty Damage Remediation - Net**

 

During November 2001,Hurricane Michelle (the Hurricane) hit the island on which the Resort islocated. During 2002, the Company became aware of excessive water intrusion andmoisture levels within a portion of the vacation ownership units at the Resort,which management attributed to the Hurricane. The Resort was closed fromSeptember 2002 to the beginning of December 2002, due to the severity of themold and odor condition. During 2002, the Company was able to estimate the coststo be incurred in relation to the damage incurred by the Hurricane andrecognized approximately $13.9 million of related expenses to cover theconstruction remediation expenses, guest relocation expenses, and legal andprofessional expenses. During 2003, the Company received approximately $3.0million from the insurers and expensed an additional $2.6 million. During 2004,the Company received approximately $8.4 million from insurers and expensed anadditional $0.7 million. The claim was completely settled as of December 31,2004.

 

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