| CONTINGENCIES AND COMMITMENTS | 9. CONTINGENCIES AND COMMITMENTS
Guarantees
We have historically issued guarantees to certain lenders in
connection with the provision of third-party financing for our sale
of vacation ownership products for the North America and Asia
Pacific segments. The terms of these guarantees generally require
us to fund if the purchaser fails to pay under the term of its note
payable. Prior to the Spin-Off, Marriott International guaranteed
our performance under these arrangements, and following the
Spin-Off continues to hold a standby letter of credit related to
the Asia Pacific segment guarantee. If Marriott International is
required to fund any draws by lenders under this letter of credit
it would seek recourse from us. Marriott International no longer
guarantees our performance with respect to third-party financing
for sales of products in the North America segment. We are entitled
to recover any payments we make to third-party lenders under these
guarantees through reacquisition and resale of the financed
vacation ownership product. Our commitments under these guarantees
expire as the underlying notes mature or are repaid. The terms of
the underlying notes extend to 2022.
The following table shows the maximum potential amount of future
fundings for financing guarantees where we are the primary obligor
and the carrying amount of the liability for expected future
fundings, which is included on our Balance Sheet in the Other
caption within Liabilities.
($ in
thousands) Maximum Potential
Liability for Expected
Segment
Asia Pacific $
5,189 $
52
North America 2,846 164
Total guarantees where we are the primary obligor $ 8,035 $ 216
Commitments and Letters of Credit
In addition to the guarantees we describe in the preceding
paragraphs, as of January 1, 2016, we had the following
commitments outstanding:
• We have various contracts for the use
of information technology hardware and software that we use in the
normal course of business. Our aggregate commitments under these
contracts were $28.1 million, of which we expect $12.2 million,
$6.5 million, $3.1 million, $1.9 million, $1.7 million and
$2.7 million will be paid in 2016, 2017, 2018, 2019, 2020 and
thereafter, respectively.
• We have commitments of $3.4 million
to subsidize vacation ownership associations, which we expect to
pay in 2016.
• We have a commitment of $38.5 million
to purchase vacation ownership units located on the Big Island of
Hawaii, for use in our MVCD program, contingent upon the seller
subjecting the units to a condominium regime prior to our purchase.
We made a deposit of $1.5 million in connection with this
commitment in 2014, and we are committed to make the remaining
payment of $37.0 million upon satisfaction of the condition that
the seller subject the units to a condominium regime, which we
expect to occur within one year. Upon acquisition, we are committed
to renovate the units pursuant to a property improvement plan to be
agreed upon at a later date, for which an additional $45.0 million
to $55.0 million will be required to be funded. We are currently
evaluating the use of a capital efficient arrangement to delay the
timing of this capital investment.
• We have a commitment of $137.1
million to purchase vacation ownership units located in Marco
Island, Florida, of which we expect $33.3 million, $50.0 million
and $53.8 million will be paid in 2017, 2018 and 2019,
respectively. See Footnote No. 5, “Acquisitions and
Dispositions,” for additional information on this
transaction.
Surety bonds issued as of January 1, 2016 totaled $57.8
million, the majority of which were requested by federal, state or
local governments related to our operations.
Additionally, as of January 1, 2016, we had $3.3 million of
letters of credit outstanding under our $200 million revolving
credit facility (as amended, the “Revolving Corporate Credit
Facility”).
Loss Contingencies
In December 2012, Jon Benner, an owner of fractional interests at
The Ritz-Carlton Club and Residences, San Francisco (the “RCC
San Francisco”), filed suit in Superior Court for the State
of California, County of San Francisco, against us and certain of
our subsidiaries on behalf of a putative class consisting of all
owners of fractional interests at the RCC San Francisco who
allegedly did not receive proper notice of their payment
obligations under California’s Mello-Roos Community
Facilities Act of 1982 (the “Mello-Roos Act”). The
plaintiff alleged that the disclosures made about bonds issued for
the project under this Act and the payment obligations of
fractional interest purchasers with respect to such bonds were
inadequate, and this and other alleged statutory violations
constituted intentional and negligent misrepresentation, fraud and
fraudulent concealment. The relief sought included damages in an
unspecified amount, rescission of the purchases, restitution and
disgorgement of profits. In September 2014, we reached an
agreement to settle this action on the basis of a stipulated class;
the settlement was approved by the court on March 31, 2015. At
January 1, 2016, we had an accrual of $0.3 million related to
the settlement.
In April 2013, Krishna and Sherrie Narayan and other owners of 12
residential units at the resort formerly known as The Ritz-Carlton
Residences, Kapalua Bay (“Kapalua Bay”) filed an
amended complaint related to a suit originally filed in Circuit
Court for Maui County, Hawaii in June 2012 against us, certain of
our subsidiaries, Marriott International, certain of its
subsidiaries, and the joint venture in which we have an equity
investment that developed and marketed vacation ownership and
residential products at Kapalua Bay (the “Joint
Venture”). In the original complaint, the plaintiffs alleged
that defendants mismanaged funds of the residential owners
association (the “Kapalua Bay Association”), created a
conflict of interest by permitting their employees to serve on the
Kapalua Bay Association’s board, and failed to disclose
documents to which the plaintiffs were allegedly entitled. The
amended complaint alleges breach of fiduciary duty, violations of
the Hawaii Unfair and Deceptive Trade Practices Act and the Hawaii
condominium statute, intentional misrepresentation and concealment,
unjust enrichment and civil conspiracy. The relief sought in the
amended complaint includes injunctive relief, repayment of all sums
paid to us and our subsidiaries and Marriott International and its
subsidiaries, compensatory and punitive damages, and treble damages
under the Hawaii Unfair and Deceptive Trade Practices Act. We
dispute the material allegations in the amended complaint and
continue to defend against this action vigorously. We filed a
motion in the Circuit Court to compel arbitration of
plaintiffs’ claims. That motion was denied, but on appeal the
Hawaii Intermediate Court of Appeals reversed. The Hawaii Supreme
Court reversed the decision of the Intermediate Court of Appeals
and reinstated the action in Circuit Court, which set the case for
trial beginning September 16, 2016. We filed a petition with
the United States Supreme Court seeking review of the Hawaii
Supreme Court’s decision. On January 11, 2016, the
United States Supreme Court issued an order vacating the Hawaii
Supreme Court’s decision and remanding the case with
instructions to reconsider its ruling in light of a recent U.S.
Supreme Court decision reiterating the obligation of courts to
enforce arbitration agreements. On January 27, 2016, we filed
a motion to stay proceedings in the Circuit Court based on the
action of the U.S. Supreme Court. Plaintiffs opposed the motion,
and at a hearing on February 22, 2016 the Circuit Court stayed
proceedings until March 22, 2016 and set a hearing for that date.
On February 17, 2016, the Hawaii Supreme Court ordered the
parties to file supplemental briefs by March 2, 2016.
Additionally, in 2014, owners of two residential units agreed to
release their claims in this action. Given the inherent
uncertainties of litigation, we cannot estimate a range of the
potential liability, if any, at this time.
In June 2013, Earl C. and Patricia A. Charles, owners of a
fractional interest at Kapalua Bay, together with owners of
38 other fractional interests at Kapalua Bay, filed an amended
complaint in the Circuit Court of the Second Circuit for the State
of Hawaii against us, certain of our subsidiaries, Marriott
International, certain of its subsidiaries, the Joint Venture, and
other entities that have equity investments in the Joint Venture.
The plaintiffs allege that the defendants failed to disclose the
financial condition of the Joint Venture and the commitment of the
defendants to the Joint Venture, and that defendants’ actions
constituted fraud and violated the Hawaii Unfair and Deceptive
Trade Practices Act, the Hawaii Condominium Property Act and the
Hawaii Time Sharing Plans statute. The relief sought includes
compensatory and punitive damages, attorneys’ fees,
pre-judgment interest, declaratory relief, rescission and treble
damages under the Hawaii Unfair and Deceptive Trade Practices Act.
The complaint was subsequently further amended to add owners of two
additional fractional interests as plaintiffs. The Circuit Court
granted our motion to compel arbitration of the claims asserted by
the plaintiffs. Plaintiffs appealed that decision to the Hawaii
Intermediate Court of Appeals and also initiated arbitration. On
July 24, 2015, the Intermediate Court of Appeals reversed the
decision of the Circuit Court and directed that the action be
reinstated in the Circuit Court, based on the Hawaii Supreme
Court’s decision in the Narayan case discussed above, which
has since been vacated by the U.S. Supreme Court. We dispute the
material allegations in the amended complaint and intend to defend
against this action vigorously. Given the early stages of the
action and the inherent uncertainties of litigation, we cannot
estimate a range of the potential liability, if any, at this time.
Additionally, owners of two fractional interests have since agreed
to release their claims in this action, and the owners of another
fractional interest, who are not parties to the Charles action,
agreed to release similar claims, in each instance for nominal
sums.
In June 2013, owners of 35 residences and lots at The Abaco Club
filed a complaint in Orange County, Florida Circuit Court against
us, one of our subsidiaries, certain subsidiaries of Marriott
International and the resort’s owners’ association,
alleging that the defendants failed to maintain the golf course,
golf clubhouse, roads, water supply system, and other facilities
and equipment in a manner commensurate with a five-star luxury
resort, and certain deficiencies in the quality of services
provided at the resort. The plaintiffs also alleged that the
defendants failed to honor an obligation to extend a right of first
offer to club owners in connection with plans to sell the club
property. The plaintiffs alleged statutory and common law claims
for breach of contract, breach of fiduciary duty, and fraud and
sought compensatory and punitive damages. We filed a motion to
dismiss the complaint. In April 2014, this action was abated for a
period after we entered into a non-binding letter of intent to
dispose of undeveloped and partially developed land, an operating
golf course, spa and clubhouse and related facilities at The Abaco
Club to an entity to be comprised of certain members of The Abaco
Club, including certain of the plaintiffs, and others. Upon the
closing of the sale in December 2014, all claims asserted against
us in this matter were dismissed with prejudice.
In August 2014, Michael and Marla Flynn, owners of weeks-based
Marriott Vacation Club vacation ownership products at two of our
resorts in Hawaii, filed a claim with the American Arbitration
Association on behalf of a putative class consisting of themselves
and all others similarly situated. The claimants alleged that the
introduction of our points-based MVCD program caused an actionable
decrease in the value of their vacation ownership interests. The
relief sought included compensatory and exemplary damages,
restitution, injunctive relief, interest and attorneys’ fees
pursuant to applicable timeshare and unfair trade practices acts
and common-law theories of breach of contract and breach of an
implied covenant of good faith and fair dealing. On March 30,
2015, the arbitrator ruled that the Flynns’ claims are not
subject to arbitration, and dismissed the Flynn proceeding. On
October 2, 2015, Michael and Marla Flynn, joined by Patrick
and Mary Flynn as Trustees of the Flynn Family Trust, filed a civil
action in the United States District Court for the District of
Hawaii, asserting similar claims and seeking similar relief on
behalf of themselves and a putative class consisting of themselves
and all others similarly situated. On December 24, 2015, we
filed a motion to dismiss. A hearing on the motion was held on
February 16, 2016 and the motion remains pending. We dispute
the material allegations in the complaint and intend to defend
against the action vigorously. Given the early stages of the action
and the inherent uncertainties of litigation, we cannot estimate a
range of potential liability, if any, at this time.
On January 29, 2015, Norman and Carreen Abramson, owners of
weeks-based Marriott Vacation Club vacation ownership products at
one of our resorts in California and of our points-based MVCD
program, filed an action in the United States District Court for
the Central District of California on behalf of a putative class
consisting of themselves and all others similarly situated.
Mr. and Mrs. Abramson alleged that the introduction of
the MVCD program caused an actionable decrease in the value of
their vacation ownership interests, and sought as relief
compensatory and punitive damages, restitution, injunctive relief,
interest and attorneys’ fees pursuant to applicable
timeshare, consumer protection and unfair competition acts. On
March 30, 2015, we filed a motion to dismiss. On June 30,
2015, Mr. and Mrs. Abramson filed a motion for class
certification, which the Court denied on September 28, 2015.
Mr. and Mrs. Abramson also amended their complaint, and
we filed a motion to dismiss the amended complaint on
October 9, 2015. The Court granted that motion and granted
plaintiffs leave to file an amended complaint. On December 31,
2015, the parties reached an agreement in principle to settle the
case for a nominal sum.
On May 26, 2015, we and certain of our subsidiaries were named
as defendants in an action filed in the Superior Court of San
Francisco County, California, by William and Sharon Petrick and
certain other present and former owners of fractional interests at
the RCC San Francisco. The case is not filed as a putative class
action. The plaintiffs allege that the affiliation of the RCC San
Francisco with our points-based MVCD program, certain alleged sales
practices, and other alleged acts of us and the other defendants
caused an actionable decrease in the value of their fractional
interests. The relief sought includes, among other things,
compensatory and punitive damages, rescission, and pre- and
post-judgment interest. Plaintiffs filed an amended complaint on
October 9, 2015. On January 22, 2016, we filed a motion
to dismiss; a hearing on the motion is scheduled for March 21,
2016. We dispute the material allegations in the amended complaint
and intend to defend against the action vigorously. Given the early
stages of the action and the inherent uncertainties of litigation,
we cannot estimate a range of the potential liability, if any, at
this time.
On December 31, 2015, we and certain of our subsidiaries were
named as defendants in an action filed in the District Court of
Pitkin County, Colorado by RCHFU, L.L.C., the owner of a fractional
interest at The Ritz-Carlton Club, Aspen Highlands
(“RCC-Aspen Highlands”). The case is filed as a
putative class action; plaintiff seeks to represent a class
consisting of itself and all others similarly situated. The
plaintiff alleges that its fractional interest was devalued by the
affiliation of RCC-Aspen Highlands and other Ritz-Carlton Clubs
with our points-based MVCD program. The relief sought
includes, among other things, unspecified damages, pre- and
post-judgment interest, and attorneys’ fees. We dispute the
material allegations in the complaint and intend to defend against
the action vigorously. Given the early stages of the action and the
inherent uncertainties of litigation, we cannot estimate a range of
the potential liability, if any, at this time.
Other
We estimate the cash outflow associated with completing the phases
of our existing portfolio of vacation ownership projects currently
under development will be approximately $5.0 million, of which $4.3
million is included within liabilities on our Balance Sheet at
January 1, 2016. This estimate is based on our current
development plans, which remain subject to change, and we expect
the phases currently under development will be completed by
2016.
During 2014, we agreed to settle a dispute with a service provider
relating to services provided to us prior to 2011. In connection
with the settlement, we received a one-time payment of $7.6 million
from the service provider, which no longer provides services to us.
We recorded a gain of $7.6 million as a result of the settlement,
which is included in the Litigation settlement line on the
Statement of Income for the year ended January 2, 2015.
Leases
We have various land, corporate facilities, real estate and
equipment operating leases. The land lease consists of a long-term
golf course land lease with a term of 30 years. The corporate
facilities leases are for our corporate headquarters and have lease
terms of approximately six years. The other operating leases are
primarily for office and retail space as well as equipment
supporting our operations and have lease terms of between three and
ten years. Certain of these leases provide for minimum rental
payments and additional rental payments based on our operations of
the leased property. We have summarized our future obligations
under operating leases at January 1, 2016 below:
($ in thousands) Land Corporate Other Total
Fiscal Year
2016 $
1,061 $
3,486 $
9,768 $
14,315
2017 1,061 3,580 7,915 12,556
2018 1,061 3,679 4,483 9,223
2019 1,061 3,779 2,308 7,148
2020 1,061 3,882 2,070 7,013
Thereafter 9,551 2,658 5,368 17,577
Total minimum lease payments $ 14,856 $ 21,064 $ 31,912 $ 67,832
The following table details the composition of rent expense
associated with operating leases, net of sublease income, for the
last three years:
($ in thousands) 2015 2014 2013
Minimum rentals $
9,401 $
6,806 $
9,417
Additional rentals 3,876 5,520 4,527
$ 13,277 $ 12,326 $ 13,944 |
