<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------
FORM 10-Q
-------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 000-21193
-------------------
SIGNATURE RESORTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-4582157
(State of incorporation) (I.R.S. Employer
Identification No.)
5933 W. CENTURY BOULEVARD, SUITE 210
LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices including zip code)
310-348-1000
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Number of shares of common stock outstanding of the issuer's Common Stock,
par value $0.01 per share as of September 30, 1996 : 17,392,205
------------------- -----------
================================================================================
<PAGE>
SIGNATURE RESORTS, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated statement of operations for the three
months ended September 30, 1995 and September 30, 1996...... 1
Consolidated statement of operations for the nine months
ended September 30, 1995 and September 30, 1996............. 2
Consolidated balance sheet as of
December 31, 1995 and September 30, 1996.................... 3
Consolidated statement of cash flow for nine months ended
September 30, 1995 and September 30, 1996................... 4
Notes to the consolidated financial statements............... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8-13
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K............................. 14
Signatures................................................... 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNATURE RESORTS, INC.
Consolidated Statement of Operations
Three Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1996
--------------------------------------------- -------------------------------------------
Pro forma Pro forma
Actual Adjustments(a) Pro forma Actual Adjustments(a) Pro forma
----------- -------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Interval Sales $17,586,249 $17,586,249 $20,704,672 $20,704,672
Interest Income 1,747,658 1,747,658 2,424,694 2,424,694
Other Income 2,001,460 80,054 (b) 2,081,514 1,671,466 50,000 (b) 1,721,466
----------- ----------- ----------- -----------
Total Revenues 21,335,367 21,415,421 24,800,832 24,850,832
COSTS AND OPERATING
EXPENSES
Interval Cost of Sales 4,287,053 (19,083)(c) 4,267,970 4,451,875 (21,000)(c) 4,430,875
Advertising Sales and
Marketing 8,181,476 8,181,476 9,677,717 9,677,717
Loan Portfolio
Interest Expense
- Treasury 947,658 (947,658)(c) 0 1,530,805 (560,099)(c) 970,706
Other Expenses 320,989 (21,343)(c) 299,646 389,477 (26,000)(c) 363,477
Provision For Doubtful
Accounts 550,132 550,132 683,794 683,794
General and Administrative
Resort Level 1,316,841 1,316,841 1,941,489 1,941,489
Corporate 477,152 477,152 824,510 824,510
Depreciation and
Amortization 416,450 416,450 565,612 565,612
----------- ----------- ----------- -----------
Total Costs and Operating
Expenses 16,497,751 15,509,667 20,065,279 19,458,180
NET OPERATING INCOME 4,837,616 5,905,754 4,735,553 5,392,652
Other Interest Expense 161,025 (161,025)(c) 0 521,147 (493,147)(c) 28,000
Loss (Gain) on Equity
Investment 275,370 61,600 (d) 336,970 31,816 98,000 (d) 129,816
----------- ----------- ----------- -----------
NET INCOME BEFORE TAXES 4,401,221 5,568,784 4,182,590 5,234,836
Income Taxes 210,322 1,896,722 (e) 2,107,044 485,917 1,486,142 (e) 1,972,059
----------- ----------- ----------- -----------
NET INCOME $ 4,190,899 $ 3,461,740 $ 3,696,673 $ 3,262,778
=========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding 11,354,705 6,037,500 (f) 17,392,205 14,218,613 3,276,223 (f) 17,494,836
----------- ----------- ----------- -----------
Earnings Per Share $0.37 $0.20 $0.26 $0.19
===== ===== ===== =====
</TABLE>
- --------------------------
(a) The consolidated pro forma statements of operations all give effect to the
exchange of direct and indirect interests in, and obligations of, certain
predecessor limited partnerships, limited liability companies and
corporations for shares of the Company's common stock (the "Consolidation
Transactions") as if it had occurred at the beginning of the period
indicated. The Consolidation Transactions were consummated concurrently with
the Offering in August 1996. The pro forma adjustments are based upon
currently available information and certain assumptions that the Company's
management believes are reasonable under current circumstances.
(b) Reflects increase in interest income due to the assumption of notes
receivable in the Consolidation Transactions of $2.7 million. Such notes
bear interest at a rate of 12% per annum.
(c) Reflects the following: (i) the elimination or reduction of interest expense
due to the retirement of $53.5 million of debt with respect to the period
ended September 30, 1995 and $54.3 million of debt retirement with respect
to the period ended September 30, 1996; (ii) the reduction of Interval cost
of sales due to the reduction of capitalized interest related to the
retirement of construction debt and; (iii) the elimination of financing fees
on advances not required as a result of the debt retirement. The average
interest rate on the debt retired was 11.1% and 11.5% for the three months
ended September 30, 1995 and 1996, respectively .
(d) Reflects the increase of goodwill amortization on the purchase of a joint
venture interest .
(e) Reflects the effects on historical statements of operations data of (b)-(d)
above that assumes the consolidated Company had been treated as a C
corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes (see Note 8).
(f) Reflects the Offering of 6,037,500 shares of the Company's common stock for
the three months ended September 30, 1995. The pro forma shares for the
period ended September 30, 1996 are based on the weighted average shares
outstanding as if the Offering had occured at the beginning of the period
(see Note 3).
See accompanying notes to the consolidated financial statements.
1
<PAGE>
SIGNATURE RESORTS, INC.
Consolidated Statement of Operations
Nine Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1996
-------------------------------------------- -------------------------------------------
Pro forma Pro forma
Actual Adjustments (a) Pro forma Actual Adjustments (a) Pro forma
----------- --------------- ----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Interval Sales $46,384,993 $46,384,993 $49,458,553 $49,458,553
Interest Income 4,668,436 4,668,436 6,626,609 6,626,609
Other Income 2,641,418 240,162 (b) 2,881,580 7,646,518 210,000 (b) 7,856,518
----------- ----------- ----------- -----------
Total Revenues 53,694,847 53,935,009 63,731,680 63,941,680
COSTS AND OPERATING EXPENSES
Interval Cost of Sales 12,547,235 (50,088)(c) 12,497,147 11,254,793 (50,000)(c) 11,204,793
Advertising Sales and
Marketing 22,429,056 22,429,056 24,408,031 24,408,031
Loan Portfolio
Interest Expense - Treasury 2,532,436 (2,532,436)(c) 0 4,021,948 (2,212,481)(c) 1,809,467
Other Expenses 757,809 (90,489)(c) 667,320 1,048,497 (66,000)(c) 982,497
Provision For Doubtful
Accounts 1,470,640 1,470,640 1,371,926 1,371,926
General and Administrative
Resort Level 2,759,876 2,759,876 4,960,842 4,960,842
Corporate 1,130,266 1,130,266 2,428,228 2,428,228
Depreciation and Amortization 1,158,337 1,158,337 1,674,822 1,674,822
----------- ----------- ----------- -----------
Total Costs and Operating
Expenses 44,785,655 42,112,642 51,169,087 48,840,606
NET OPERATING INCOME 8,909,192 11,822,367 12,562,593 15,101,074
Other Interest Expense 343,796 (343,796)(c) 0 1,867,765 (1,839,765)(c) 28,000
Loss (Gain) on Equity
Investment 1,293,424 61,600 (d) 1,355,024 94,695 390,000 (d) 484,695
----------- ----------- ----------- -----------
NET INCOME BEFORE TAXES 7,271,972 10,467,343 10,600,133 14,588,379
Income Taxes 210,322 3,730,698 (e) 3,941,020 539,204 4,952,881 (e) 5,492,085
----------- ----------- ----------- -----------
NET INCOME $ 7,061,650 $ 6,526,323 $10,060,929 $ 9,096,294
=========== =========== =========== ===========
Weighted Average Number of
Shares Outstanding 11,354,705 6,037,500 (f) 17,392,205 12,321,759 5,173,077 (f) 17,494,836
----------- ----------- ----------- -----------
Earnings Per Share $0.62 $0.38 $0.82 $0.52
=========== =========== =========== ===========
</TABLE>
- --------------------------
(a) The consolidated pro forma statements of operations all give effect to the
exchange of direct and indirect interest in, and obligations of, certain
predecessor limited partnerships, limited liability companies and
corporations for shares of the Company's common stock in (the "Consolidated
Transactions") as if it had occured at the beginning of the period
indicated. The Consolidation Transactions were consummated concurrently with
the Offering in August 1996. The pro forma adjustments are based upon
currently available information and certain assumptions that the Company's
management believes are reasonable under current circumstances.
(b) Reflects increase in interest income due to the assumption of notes
receivable in the Consolidation Transactions of $2.7 million. Such notes
bear interest at a rate of 12% per annum.
(c) Reflects the following: (i) the elimination or reduction of interest expense
due to the retirement of $53.5 million of debt with respect to the period
ended September 30, 1995 and $54.3 million of debt retirement with respect
to the period ended September 30, 1996; (ii) the reduction of Interval cost
of sales due to the reduction of capitalized interest related to the
retirement of construction debt and; (iii) the elimination of financing fees
on advances not required as a result of the debt retirement. The average
interest rate on the debt retired was 11.1% and 11.5% for the nine months
ended September 30, 1995 and 1996, respectively.
(d) Reflects the increase of goodwill amortization on the purchase of a joint
venture interest.
(e) Reflects the effects on historical statements of than as individual limited
partnerships and operations data of (b)-(d) above that assumes limited
liability companies for federal income the consolidated Company had been
treated as a C tax purposes (see Note 8).
(f) Reflects the Offering of 6,037,500 shares of the ended September 30, 1996
are based on the Company's common stock for the nine months ended weighted
average shares outstanding as if the September 30, 1995. The pro forma
shares for Offering had occurred at the beginning of the the nine months
period (see Note 3).
See accompanying notes to the consolidated financial statements.
2
<PAGE>
SIGNATURE RESORTS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 4,341,591 $ 9,844,097
Cash in escrow......................................................... $ 1,945,856 $ 1,494,906
Mortgages receivable, net of an allowance of $2,433,361 at
December 31, 1995, and $5,693,022 September 30, 1996................. 68,255,778 87,955,723
Due from related parties............................................... 2,700,820 4,567,335
Other receivables, net................................................. 6,383,134 8,249,342
Prepaid expenses and other assets...................................... 2,125,118 2,274,542
Investment in joint venture............................................ 2,644,449 7,537,754
Real estate and development costs...................................... 46,757,151 85,030,279
Property and equipment, net............................................ 1,863,579 2,732,399
Intangible assets, net................................................. 4,223,834 4,842,175
------------ ------------
Total assets........................................................... $141,241,310 $214,528,552
============ ============
LIABILITIES AND EQUITY
Accounts payable....................................................... $ 4,599,000 $ 7,902,938
Accrued liabilities.................................................... 12,010,938 11,765,984
Due to related parties................................................. 1,422,098 1,631,848
Income taxes payable................................................... -- 569,451
Deferred taxes......................................................... -- 11,398,787
Notes payable to financial institutions................................ 72,395,704 81,144,879
Notes payable to related parties....................................... 12,343,518 --
------------ ------------
Total Liabilities...................................................... 102,771,258 114,413,887
Equity................................................................ 38,470,052 100,114,665
------------ ------------
Total liabilities and equity.......................................... $141,241,310 $214,528,552
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
SIGNATURE RESORTS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1995 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 7,061,650 $ 10,060,929
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization................................. 1,158,337 1,674,822
Provision for bad debt expense................................ 1,470,640 1,371,926
Equity loss on investment in joint venture.................... 1,293,424 94,695
Changes in operating assets and liabilities:
Cash in escrow................................................ 608,078 450,950
Due from affiliates........................................... (2,949,419) (1,866,515)
Prepaid expenses and other assets............................. 788,200 (149,423)
Real estate and development costs............................. (9,889,184) (38,273,128)
Other receivables............................................. (2,202,545) (1,866,208)
Accounts payable.............................................. 2,424,770 3,303,938
Accrued liabilities........................................... 7,661,592 (759,948)
Income taxes payable.......................................... -- 569,451
Deferred taxes payable........................................ -- 171,283
Due to affiliates............................................. 331,409 209,750
------------ ------------
Net cash (used in) provided by operating activities............. 7,756,952 (25,007,478)
INVESTING ACTIVITIES
Expenditures for property and equipment......................... (380,431) (1,149,402)
Expenditures for intangible assets.............................. (2,457,364) (2,012,581)
Mortgages receivable............................................ (31,956,955) (21,071,871)
------------ ------------
Net cash used in investing activities........................... (34,794,750) (24,233,854)
FINANCING ACTIVITIES
Proceeds from notes payable..................................... 52,984,364 76,759,011
Payments on notes payable....................................... (24,025,190) (68,009,836)
Proceeds from notes payable to related parties.................. 3,141,193 5,606,208
Payments on notes payable to related parties.................... (1,449,345) (17,949,726)
Equity Contributions............................................ 970,136 --
Proceeds from public offering................................... -- 74,657,189
Acquisition of minority limited partners' interests............. -- (6,751,037)
Equity distributions............................................ (1,500,000) (9,567,971)
------------ ------------
Net cash provided by financing activities....................... 30,121,158 54,743,838
Net increase in cash and cash equivalents....................... 3,083,360 5,502,506
Cash and cash equivalents, beginning of period.................. 1,854,572 4,341,591
------------ ------------
Cash and cash equivalents, end of period........................ $ 4,937,932 $ 9,844,097
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest........................ $ 4,753,739 $ 9,156,703
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Acquisition of Investment in Joint Venture in exchange
for stock....................................................... $ 7,658,000
============
Deferred taxes recorded in connection with the
Consolidation Transactions...................................... $ 11,227,504
============
Interest accrued on deferred installment gains.................. $ 517,993
============
Net assets of predecessor partnerships acquired in
exchange for stock, net of cash transferred at approximately
$4.5 million.................................................... $ 35,324,920
============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
Notes to the Consolidated Financial Statements
NOTE 1 - BACKGROUND
These consolidated financial statements do not include certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal recurring nature. Operating results for three months and nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 1996.
These statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in Amendment No. 4 of the Company's
Registration Statement on Form S-1 (File No. 333-06027) filed with the
Securities Exchange Commission on August 15, 1996. The accounting policies
used in preparing these consolidated financial statements are the same as those
described in such Registration Statement on Form S-1.
NOTE 2 - ACCOUNTS RECEIVABLE
The Company has accrued insurance claims as a result of hurricane damage to
its Royal Palm and Flamingo properties located in St. Maarten, Netherlands
Antilles of $3.8 million and $1.5 million at December 31,1995 and September 30,
1996, respectively. The receivable at September 30, 1996 consists of business
interruption insurance claims. The Company has submitted additional claims
above the amounts accrued for business interruption insurance and is in
negotiations with its carriers regarding these claims.
NOTE 3 - EARNINGS PER SHARE
Pro forma earnings per share is calculated based on the weighted average
number of shares of common stock outstanding and, if dilutive, common stock
equivalents, as if the Offering (which was consummated on August 20, 1996) had
occurred at the beginning of each period. The dilutive effect of common stock
equivalents for the computation of fully diluted earnings per share was less
than 3% of primary earnings per share for each period presented. Options and
warrants were not granted or outstanding during the year ended December 31,
1995. During the three and nine months ended September 30, 1996, options to
purchase approximately 1.4 million shares of the Company's common stock was
granted to employees, consultants and directors of the Company, none of which
was exercised during the period.
NOTE 4 - CAPITAL TRANSACTIONS AND PUBLIC OFFERING
During the three months ended September 30, 1996, the Company consummated the
Offering of 6,037,500 shares of the Company's common stock. The 6,037,500
shares of the Company's common stock were sold in the Offering at a price of
$14 per share. The net proceeds from the Offering, after the deduction of the
related issuance costs, amounted to approximately $74.0 million.
In addition, during the three months ended September 30, 1996, 11,354,705
shares of the common stock were issued in the Consolidation Transactions to the
former holders of interests in the Company's predecessor limited partnerships,
limited liability companies and corporations.
As part of the Consolidation Transactions, approximately $6.8 million of the
net proceeds of the Offering were used to purchase the interests of investors
who elected to receive cash in the Consolidation Transactions in lieu of
exchanging their interests for shares of the Company's common stock.
In addition, pursuant to the Consolidation Transactions, during the three
months ended September 30, 1996 (i) former partners of the Company's predecessor
limited partnerships and limited liability companies received approximately $2.3
million of distributions to fund income tax obligations which had accrued
through the date of the Offering and with respect to whom no pre-Offering
profits of the Company had been distributed, (ii) approximately $7.3 million of
equity distributions were made in the Consolidation Transactions by such
predecessor companies to the former partners of the consolidated company in
connection with the repayment of outstanding debt to their affiliates and the
acquisition of equity interests by the Company, and (iii) the Company recorded a
$11.7 million adjustment to equity for deferred taxes and interest assumed by
the Company as part of the Consolidation Transactions.
The Consolidation Transactions have been accounted for as a reorganization of
entities under common control. Accordingly, the net assets of the predecessor
partnerships were recorded at the predecessor partners' basis. In addition, the
accompanying financial statements reflect the historical results of operations
of the predecessor partnerships on a combined basis.
5
<PAGE>
Notes to Consolidated Financial Statements (Cont.)
NOTE 5 - RELATED-PARTY TRANSACTIONS
The Company accrued $652,164 and $1,418,022 as a receivable and payable,
respectively, at December 31, 1995 with the homeowners' associations at its
resorts. The related party payable to the homeowners' associations at December
31, 1995 included $1,029,900 of a special assessment fee charged to the Company.
At September 30, 1996, the Company, had accrued $2,903,873 and $1,631,856 as a
receivable and payable, respectively, with the various homeowners' associations
at its resorts. All amounts are classified as due from and due to related
parties in the accompanying consolidated balance sheets.
The Company recorded a receivable of $1,153,829 and $120,697 from two of its
predecessor partnerships at December 31, 1995 for pre-development costs incurred
by the Company at its Embassy Vacation Resort Lake Tahoe and San Luis Bay
Resorts. Such predecessor partnerships were consolidated into the Company on
August 20, 1996 as a result of the Consolidation Transactions.
Included in due from related parties at December 31, 1995 and September 30,
1996 are approximately $310,000 and $1,549,555, respectively, relating to
expenses paid on behalf of related parties to be subsequently reimbursed to the
Company by such related party. Subsequent to September 30, 1996, the Company
collected $739,458 of this amount.
The Company also made payments of $295,001 during the twelve months ended
December 31, 1995 to an affiliate of the Company for construction consulting and
expense reimbursement. For the three months and nine months ended September 30,
1996, no such payments were made.
NOTE 6 - INVESTMENT IN JOINT VENTURE
Concurrent with the Offering, the Company acquired an approximately 30.5%
interest in the limited partnership that owns the Embassy Vacation Resort Poipu
Point. As a result of such acquisition, the Company has recorded a $2,546,513
note receivable from the limited partnership on which the Company has accrued
approximately $30,000 of interest. The note bears interest at a rate of 12% per
annum. In addition, $4,988,000 of goodwill was recorded as part of this
acquisition which is being amortized on a per Interval basis as Intervals are
sold. The amortization of such goodwill for the three months and nine months
ended September 30, 1996 was $76,371 for each period.
NOTE 7 - COMMITMENT
On September 23, 1996, the Company announced the signing of a merger agreement
to acquire AVCOM International, Inc. ("AVCOM"), a company traded on the Nasdaq
Over-The-Counter market, for approximately $34.6 million of the Company's common
stock plus the assumption of net debt. AVCOM is the parent company of All
Seasons, Resorts, Inc., a developer, marketer and operator of timeshare resorts
in Arizona, California and Texas. Under the terms of the merger agreement, the
Company has agreed to issue approximately 1,480,000 shares of common stock in
exchange for all of the outstanding capital stock of AVCOM, based on the average
high and low trading prices of the Company's common stock on September 20, 1996
of $19.44 per share. The actual number of shares to be issued is subject to
adjustment if the price of common stock on the Nasdaq National Market System
exceeds $23.33 per share, or falls below $15.55 per share and under certain
other circumstances. In addition, as of September 30, 1996 the Company will
assume approximately $22.6 million of AVCOM's net debt and pursuant to the
merger agreement, the Company committed to loan AVCOM $2.5 million. Management
expects the merger to qualify for pooling accounting treatment. The Company has
received an opinion from its independent financial advisor that the
consideration paid by the Company for AVCOM is fair from a financial point of
view. The proposed merger is subject to the approval of the stockholders of
AVCOM, the satisfactory completion of due diligence by the Company, the
expiration of the waiting period under the Hart-Scot-Rodino Antitrust
Improvements Act of 1976 and other customary conditions. This transaction is not
reflected in the accompanying financial statements.
6
<PAGE>
Notes to Consolidated Financial Statements (Cont.)
NOTE 8 - INCOME TAXES
During the quarter ended September 30, 1996 the Company issued 17,392,205
shares of common stock. The Company is now subject to federal, state and foreign
income taxes from the effective date of sale of the common stock. In addition,
the Company is required to record a deferred tax liability for cumulative
temporary differences between financial reporting and tax reporting in the
period following the effective date of the Offering. During the three months
ended September 30, 1996, the Company recorded approximately $315,000 of current
income tax expense and approximately $171,000 of deferred income tax expense.
Additionally, the Company recorded deferred taxes of $11.2 million related to
deferred taxes from previous years that were assumed as part of the Offering.
The total current tax liability and deferred tax liability at September 30, 1996
was $569,451 and $11,398,787, respectively. Both the deferred tax assets,
deferred tax liabilities, and the current tax provision were estimated based on
management's most recent information as of September 30, 1996.
In addition, the Company recorded $517,993 of accrued interest related to
installment gains from previous years that were assumed as part of the Offering.
The unaudited pro forma provision for income taxes represents the estimated
income taxes that would have been reported had the Company filed federal, state
and foreign income tax returns as a regular corporation.
7
<PAGE>
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following discussion of the Company's results of operations is
derived from the consolidated statement of operations for the three and nine
months ended September 30, 1995 and September 30, 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES
Interval sales.................................................. 82% 83% 86% 78%
Interest Income................................................. 9% 10% 9% 10%
Other Income.................................................... 9% 7% 5% 12%
------- ------- ------- -------
Total Revenues................................................ 100% 100% 100% 100%
------- ------- ------- -------
AS A PERCENTAGE OF INTERVAL SALES
Interval cost of sales.......................................... 24% 22% 27% 23%
Advertising, sales and marketing................................ 47% 47% 48% 49%
AS A PERCENTAGE OF INTEREST INCOME
Loan Portfolio:
Interest expense - treasury.................................... 54% 63% 54% 61%
Other expenses................................................ 18% 16% 16% 16%
AS A PERCENTAGE OF TOTAL REVENUES
Provision for doubtful accounts................................. 3% 3% 3% 2%
General and administrative...................................... 8% 11% 7% 12%
Depreciation and amortization................................... 2% 2% 2% 3%
Interest expense - other........................................ 1% 2% 1% 3%
Equity loss on investment in joint venture...................... 1% 0% 2% 0%
------- ------- ------- -------
Total costs and operating expenses.............................. 77% 81% 83% 80%
------- ------- ------- -------
SELECTED OPERATING DATA:
Intervals sold at Existing Resorts (1).......................... 1,706 2,088 4,321 5,157
Intervals sold at Consolidated Resorts (2)...................... 1,594 1,735 4,209 4,233
Intervals sold at non-branded resorts (3)....................... 1,204 1,374 2,961 3,226
Intervals sold at Embassy Vacation Resorts (4).................. 502 714 1,360 1,931
Average sales price per Interval at Consolidated Resorts (5).... $11,033 $11,934 $11,020 $11,684
Average sales price per Interval at non-branded resorts (6)..... $10,134 $11,071 $10,265 $10,757
Average sales price per Interval at
Embassy Vacation Resorts (7)................................... $14,695 $18,156 $13,222 $17,343
Number of Intervals in inventory at period-end (8).............. 18,122 20,564 18,122 20,564
</TABLE>
- ---------------------
(1) Reflects Intervals sold at the Company's existing resorts; Cypress Pointe
Resort, Plantation at Fall Creek, Royal Dunes Resort, Royal Palm Beach
Club, Flamingo Beach Club, San Luis Bay Resort, Embassy Vacation Resort
Grand Beach, and Embassy Vacation Resort Poipu Point (the "Existing
Resorts"). Embassy Vacation Resort Lake Tahoe sales during the third
quarter are not presented because there were none eligible for accrual
under the percentage of completion method.
(2) Reflects Intervals sold at the Company's Existing Resorts, with the
exception of Intervals sold at the Embassy Vacation Resort at Poipu Point
in which the Company holds a partial interest and is accounted for by the
Company under the equity method (the "Consolidated Resorts").
(3) Reflects Intervals sold at the Company's non-branded resorts.
(4) Reflects Intervals sold at the Embassy Vacation Resort Grand Beach and 112
Intervals sold at the non-consolidated Embassy Vacation Resort Poipu Point
for the three and nine months ended September 30, 1995 and 353 and 924
Intervals sold for the three and nine months ended September 30, 1996,
respectively.
(5) Reflects average price achieved on sales of Intervals at Consolidated
Resorts.
(6) Reflects average price achieved on sales of Intervals at non-branded
resorts
(7) Reflects average price achieved on sales of Intervals at Embassy Vacation
Resorts.
(8) Reflects Interval inventory at all Existing Resorts.
8
<PAGE>
Comparison of the three months ended September 30, 1996 to the three months
ended September 30, 1995. For the three months ended September 30, 1996 the
Company achieved total revenue of $24.8 million compared to $21.3 million for
the three months ended September 30, 1995, an increase of $ 3.5 million or 16%.
This increase was primarily due to an 18% increase in Interval sales and a 39%
increase in interest revenue. Interest revenue for the three month period
primarily grew due to a $19.7 million increase in mortgage receivables, which
grew to $88.0 million as of September 30, 1996 from $68.3 million as of December
31, 1995, an increase of 29%.
For the three months ended September 30, 1996, Interval sales at the Existing
Resorts, grew to $28.2 million from $19.6 million for the comparable period in
1995, an increase of 44%, and Interval sales at the Consolidated Resorts
increased 18% to $20.7 million for the three months ended September 30, 1996
from $17.6 million for the comparable period in 1995. The average price of
Intervals sold at the Consolidated Resorts grew during the period to $11,934
from $11,033, an increase of 8%. The number of Intervals sold at the
Consolidated Resorts increased during the period 9% to 1,735 from 1,594.
Management attributes the increase in Intervals sold to commencement of sales at
the San Luis Bay Resort and increasingly more effective marketing programs.
Interval sales at non-branded resorts increased 14% to 1,374 for the three
months ended September 30, 1996 from 1,204 for the comparable period of 1995.
Average sales price per Interval at non-branded resorts increased by 9% to
$11,071 in the third quarter of 1996 from $10,134 in the third quarter of 1995.
These increases are attributed to the commencement of sales at the San Luis Bay
Resort, sales of Phase II at Cypress Pointe Resort, and increasingly more
effective marketing programs.
Interval sales at Embassy Vacation Resorts increased 42% to 714 in the third
quarter of 1996 from 502 in the third quarter of 1995 while the average sales
price per Interval at Embassy Vacation Resorts increased 24% to $18,156 in the
third quarter of 1996 from $14,695 in the third quarter of 1995. These increases
primarily resulted from a full quarter of sales at the Embassy Vacation Resort
at Poipu Point as the resort was not in operation for the entire three months
ended September 30, 1995.
Other income decreased by $0.3 million to $1.7 million for the three months
ended September 30, 1996 from $2.0 for the three months ended September 30,
1995. This decrease is attributed to a $0.3 million decrease in principal and
interest income from a mortgage portfolio that was acquired during the three
months ended September 30, 1995 during which the Company aggressively collected
past due mortgage receivables from solvent borrowers in such portfolio. All
principal and interest collected from this portfolio represent other income as
the portfolio was acquired at no incremental cost in connection with a property
acquisition.
Operating costs increased to $20.1 million for the three months ended
September 30, 1996 from $16.5 million for the three months ended September 30,
1995, an increase of 22%. As a percentage of revenues, operating costs
increased to 81% in the third quarter of 1996 from 77% in the third quarter of
1995. Decreases occurring in Interval costs of sales, other expenses, and equity
loss on investment in joint venture as a percentage of revenues were more than
offset by increases occurring in interest expense-treasury, general and
administrative, and interest expense-other, as explained below.
Interval cost of sales decreased as a percentage of Interval sales to 22% in
the third quarter of 1996 from 24% in the third quarter of 1995 as a result of
an increase in average sales price per Interval sold. The Interval cost of sales
per unit remained relatively flat.
Loan portfolio expenses consisting of interest expense, other expenses and
provision for doubtful accounts increased to $2.6 million for the three months
ended September 30, 1996 from $1.8 million for the comparable period in 1995, an
increase of 44%. This increase reflects the 57% increase in average mortgages
payable due to increased factoring of mortgages receivable related to Interval
sales growth, an increased factoring rate, and the commencement of sales at San
Luis Bay Resort during the third quarter of 1996.
General and administrative expenses increased to $2.8 million for the three
months ended September 30, 1996 from $1.8 million for the three months ended
September 30, 1995, an increase of 56%. The increase in general and
administrative expenses was the result of (i) the addition of a number of senior
managers and key executives in order to build the management and organizational
infrastructure necessary to efficiently manage the Company's future growth, (ii)
the Company's expenses and reporting obligations as a public company, (iii)
increased overhead due to the acquisition of additional resorts, and (iv) added
salary, travel and office expenses attributable to the current and planned
growth in the size of the Company.
Depreciation and amortization increased to $0.6 million for the three months
ended September 30, 1996 from $0.4 million for the comparable period in 1995.
This increase was the result of additional capital expenditures and intangible
assets.
9
<PAGE>
Loss on equity investment decreased to $31,813 for the three months ended
September 30, 1996 from $0.3 million for the three months ended September 30,
1995 due to increased Interval sales and hotel occupancy at the Embassy Vacation
Resort Poipu Point during the third quarter of 1996. For the three months ended
September 30, 1996, 353 Intervals were sold at the Embassy Vacation Resort Poipu
Point, while 112 Intervals were sold for the three months ended September 30,
1995.
Pre-tax net income decreased 5% to $4.2 million from $4.4 million, or 1% of
total revenues, for the three months ended September 30, 1996.
Comparison of the nine months ended September 30, 1996 to the nine months
ended September 30, 1995. For the nine months ended September 30, 1996, the
Company achieved total revenue of $63.7 million compared to $53.7 million for
the nine months ended September 30, 1995, an increase of $10.0 million or 19%.
Total revenue grew primarily due to a 7% increase in Interval sales to $49.5
million from $46.4 million, a 40% increase in interest income to $6.6 million
from $4.7 million, and a 192% increase in resort operations and other income to
$7.6 million from $2.6 million during the nine months ended September 30, 1996
as compared to the comparable period in 1995, respectively. A complete nine
months of Interval sales at Royal Palm and Flamingo Beach Club, and the
commencement of sales at the San Luis Bay Resort in June 1996 drove the 7%
increase in Interval sales volume at the Consolidated Resorts.
For the nine months ended September 30, 1996 Interval sales at the Existing
Resorts, grew to $82.3 million from $55.7 million for the comparable period in
1995, an increase of 48%. Interval sales at the Consolidated Resorts increased
7% to $49.5 million and from $46.4 million for the comparable period in 1995.
The average price of Intervals sold at the Consolidated Resorts, grew during the
period to $11,684 from $11,020, an increase of 6%. The number of Intervals
sold at the Consolidated Resorts increased during the period 1% to 4,233 from
4,209 Management attributes the increase in Intervals sold to commencement of
sales at the San Luis Bay Resort and increasingly more effective marketing
programs.
Interval sales at non-branded resorts increased 9% to 3,226 for the nine
months ended September 30, 1996 from 2,961 for 1995. Average sales price per
Interval at non-branded resorts increased by 5% to $10,757 in 1996 from $10,265
in 1995. These increases are attributed to the commencement of sales at the San
Luis Bay Resort and increasingly more effective marketing programs.
Interval sales at Embassy Vacation Resorts, increased 42% to 1,931 in the
first nine months of 1996 from 1,360 in the first nine months of 1995 while the
average price per Interval increased 31% to $17,343 in the first nine months of
1996 from $13,222 in the first nine months of 1995. These increases primarily
resulted from a full nine months of sales at the Embassy Vacation Resort Poipu
Point, as the resort was not in operation for the entire nine months ended
September 30, 1995.
Interest income increased by 40% to $6.6 million in the first nine months of
1996 from $4.7 million in the first nine months of 1995 due to a $19.7 million
increase in mortgages receivables, which grew to $88.0 million at September 30,
1996 from $68.3 million at December 31, 1995, an increase of 29% coupled with
increased interest rates and a full year of interest income on all properties.
Other income increased by $5.0 million to $7.6 million during the nine months
ended September 30, 1996 from $2.6 million during the nine months ended
September 30, 1995. This increase was the result of rental income at the resorts
increasing to $1.2 million from $0.7 million in 1995, and the acquisition of a
mortgage receivable portfolio in July, 1995 on which the Company earned $4.6
million during the 1996 nine months and $1.3 million during the 1995 nine
months.
Operating costs increased to $51.2 million for the nine months ended September
30, 1996 from $44.8 million for the nine months ended September 30, 1995, an
increase of 14%. However, as a percentage of revenues, operating costs decreased
to 80% during the nine months ended September 30, 1996 from 83% during the nine
months ended September 30, 1995. Relative decreases in Interval cost of sales
and other expenses as a percentage of revenues were offset by relative increases
in advertising, sales, marketing, and interest expense-treasury, depreciation
and amortization and general and administrative expenses. The Company was able
to purchase and construct Intervals at a relative discount to historical
development costs, reducing the unit cost on average for each Interval sold.
This, coupled with an increase in average sales price per unit, has resulted in
a proportionate decrease in costs of Intervals sold to 23% of Interval sales
during the nine months ended September 30, 1996 from 27% of Interval sales
during the nine months ended September 30, 1995.
Loan portfolio expenses consisting of interest expense, other expenses and
provision for doubtful accounts increased to $6.4 million during the nine months
ended September 30, 1996 from $4.8 million during the nine months ended
September 30, 1995, an increase of 33%. This increase reflects the 57% increase
in average mortgages payable due to increased factoring of mortgages receivable
related to Interval sales growth, an increased factoring rate, and acquisitions
of resorts made by the Company during the nine months ended September 30, 1996.
10
<PAGE>
General and administrative expenses increased to $7.4 million during the nine
months ended September 30, 1996 from $3.9 million during the nine months ended
September 30, 1995, an increase of 90%. The increase in general and
administrative expenses was the result of (i) the addition of a number of senior
officers and key executives in connection with building the Company's management
and organizational infrastructure necessary to efficiently manage the Company's
future growth, (ii) the Company's expenses and reporting obligations as a public
company, (iii) increased overhead due to the acquisition of additional resorts,
and (iv) added salary, travel, and office expenses attributable to the current
and planned growth in the size of the Company. Relative to revenues, general and
administrative expenses were higher during the nine months ended September 30,
1996 at 12% of revenues versus 7% of revenues during the nine months ended
September 30, 1995.
Depreciation and amortization increased to $1.7 million during the nine months
ended September 30, 1996 from $1.2 million during the nine months ended
September 30, 1995, reflecting increased depreciation and amortization resulting
from an increase in capital expenditures and intangible assets.
Equity loss on joint venture decreased to $94,695 during the nine months ended
September 30, 1996 from $1.3 million during the nine months ended September 30,
1995. The decrease in the equity loss is attributable to increased Interval
sales and higher hotel occupancy at Embassy Vacation Poipu Point than during the
comparable period in 1995.
Pre-tax net income increased 45% to $10.6 million, or 17% of total revenue,
during the nine months ended September 30, 1996 from $7.3 million, or 14% of
total revenues, during the nine months ended September 30, 1995.
Liquidity and Capital Resources
During the nine months ended September 30, 1996 and 1995, cash (used in)
provided by operating activities was $(25.0) million, and $7.8 million,
respectively. Cash generated from operating activities was lower for the nine
months ended September 30, 1996 when compared to the comparable period in 1995
primarily due to a $28.3 million increase in expenditures on acquisition and
development activities associated with the acquisition and development of new
resorts and the expansion of existing resorts during the period.
Net cash used in investing activities for the nine months ended September 30,
1996, and 1995 was $(22.2) million and $(34.8) million, respectively. For the
nine months ended September 30, 1996, the change in net mortgage receivables was
$10.9 million lower than during the comparable period in 1995 due to more
effective collection efforts in 1996. As of September 30, 1996, approximately
7.5% of the Company's consumer loans were considered by the company to be
delinquent (past due by 60 or more days) and the Company has completed or
commenced foreclosure or deed-in-lieu of foreclosure on approximately 2.5% of
its consumer loans.
For the nine months ended September 30, 1996 and 1995, net cash provided by
financing activities was $54.7 million and $30.1 million, respectively. During
the quarter ended September 30, 1996, the Company issued 6,037,500 shares of
common stock in the Offering resulting in approximately $74.0 million of net
proceeds. The proceeds of the Offering were used by the Company to repay debt,
to fund expansion, and for other corporate purposes. In addition, period to
period net cash provided by investing activities fluctuates as a result of
borrowing activities for acquisition and development, and from equity
investments as a result of resort acquisitions.
The Company is currently evaluating the acquisition and/or development of a
number of resort properties and of completed Intervals as inventory, but
currently has no material binding contracts or capital commitments relating to
any such potential property or inventory acquisitions. In addition, the Company
is currently evaluating several timeshare asset and management and operating
company acquisitions to integrate into or to expand the operations of the
Company, but currently has no material binding contracts or capital commitments
relating to any such potential timeshare asset or management and operating
company acquisitions.
11
<PAGE>
In the future, the Company intends to negotiate additional credit facilities
or issue corporate debt or equity securities to finance its acquisition
activities. Any debt incurred or issued by the Company may be secured or
unsecured, fixed or variable rate interest and may be subject to such terms as
management deems prudent.
The Company believes that, with respect to its current operations, the net
proceeds to the Company from the Offering, together with cash generated from
operations and future borrowing, will be sufficient to meet the Company's
working capital and capital expenditure needs for the near future. However,
depending upon conditions in the capital and other financial markets, other
factors and the Company's aggressive growth and expansion plans, the Company may
from time to time consider the issuance of debt or other securities, the
proceeds of which would be used to finance acquisitions, to refinance debt or
for other purposes. The Company believes that the Company's properties are
adequately covered by insurance.
Acquisition of AVCOM International, Inc.
On September 23, 1996, the Company announced the signing of a merger agreement
to acquire AVCOM for approximately $34.6 million of the Company's common stock
plus the assumption of net debt. AVCOM is the parent company of All Seasons,
Resorts, Inc., a developer, marketer and operator of timeshare resorts in
Arizona, California and Texas.
Under the terms of the merger agreement, the Company has agreed to issue
approximately 1,480,000 shares of its common stock in exchange for all
outstanding capital stock of AVCOM, based on the average high and low trading
prices of the Company's common stock on September 20, 1996 of $19.44 per share.
The actual number of its shares of the Company's common stock to be issued is
subject to adjustment if the price of the Company's common stock on the NASDAQ
National Market System exceeds $23.33 per share, or falls below $15.55 per share
and under certain other circumstances. In addition as of September 30, 1996, the
Company will assume approximately $22.6 million of AVCOM's net debt and pursuant
to the merger agreement, the Company committed to loan AVCOM $2.5 million.
Management expects the merger will qualify for pooling accounting treatment. The
Company has received an opinion from its independent financial advisor that the
consideration paid by the Company in the proposed merger is fair from a
financial point of view. It is anticipated that the acquisition will be
consummated in the first quarter of 1997, subject to the occurrence of all
conditions to closing.
All Seasons Resorts, Inc. develops, markets and operates timeshare resorts in
the western United States, with four existing resorts in Sedona, Arizona, one at
Lake Arrowhead, California, one at South Lake Tahoe, California and one at
Houston, Texas. In addition, All Seasons has resorts currently under development
in Scottsdale, Arizona, and South Lake Tahoe, California, and has purchased
twelve acres of land in Sedona, Arizona for future development.
The proposed merger is subject to the approval of the stockholders of AVCOM,
the satisfactory completion of due diligence by the Company, the expiration of
the waiting periods under the Hart-Scot-Rodino Antitrust Improvements Act of
1976 and other customary conditions.
Change in Accountant
On September 17, 1996, the Company retained the accounting firm of Arthur
Andersen LLP as auditors for the fiscal year ending December 31, 1996 following
approval of the Company's board of directors, which was obtained on September
16, 1996. Arthur Anderson replaces Ernst & Young, LLP which had been retained
since the Company's inception. The decision to retain Arthur Andersen LLP was
based upon the prior relationship with a predecessor of the Company as auditors
for the fiscal year ending December 31, 1994 and Arthur Anderson LLP's
experience in the Company's industry.
12
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8K
(a) Reports on Form 8K
(I) Current report on Form 8K dated September 12, 1996, filed
with the Commission on September 18, 1996, reporting the
change in auditors.
(b) Exhibits
27.1 Financial Data Schedule
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996 By: /s/ Steven C. Kenninger
Steven C. Kenninger
Director, Chief Operating
Officer and Secretary
Dated: November 14, 1996 By: /s/ Charles C. Frey
Charles C. Frey
Senior Vice President and Treasurer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER
31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 6,287,447 11,339,003
<SECURITIES> 0 0
<RECEIVABLES> 70,689,139 93,648,745
<ALLOWANCES> 2,433,361 5,693,022
<INVENTORY> 46,757,151 85,030,279
<CURRENT-ASSETS> 0 0
<PP&E> 1,863,579 2,732,399
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 141,241,310 214,528,552
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 173,922
<COMMON> 0 99,940,743
<OTHER-SE> 38,470,052 0
<TOTAL-LIABILITY-AND-EQUITY> 141,241,310 214,528,552
<SALES> 59,070,917 49,458,553
<TOTAL-REVENUES> 72,607,778 63,731,680
<CGS> 15,649,805 11,254,793
<TOTAL-COSTS> 16,838,307 12,303,290
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,786,811 1,371,926
<INTEREST-EXPENSE> 4,061,620 5,889,713
<INCOME-PRETAX> 11,554,333 10,600,133
<INCOME-TAX> 641,545 539,204
<INCOME-CONTINUING> 10,912,788 10,060,929
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,912,788 10,060,929
<EPS-PRIMARY> .63 .82
<EPS-DILUTED> .63 .82
</TABLE>
