[DESCRIPTION] FORM 8-K/A
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
MAY 15, 1997
--------------------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
SIGNATURE RESORTS, INC.
--------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
MARYLAND 000-21193 95-4582157
<S> <C> <C>
(STATE OR OTHER JURISDICTION (COMMISSION TITLE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
</TABLE>
1875 SOUTH GRANT STREET, SUITE 650
SAN MATEO, CALIFORNIA 94402
--------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 312-7171
--------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE>
ITEM 5. OTHER EVENTS
The Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 9, 1997 is hereby amended and restated in its
entirety as follows. Except as indicated to the contrary, all information in
this report has been restated to reflect the Company's announced three-for-two
stock split in the form of a common stock dividend payable on October 27, 1997
to stockholders of record on October 10, 1997.
(a) Financial statements of Signature Resorts, Inc.
SELECTED CONSOLIDATED AND RESTATED HISTORICAL FINANCIAL INFORMATION OF THE
COMPANY
(DOLLAR AMOUNTS IN THOUSANDS)
The following table sets forth selected consolidated and restated historical
financial information of Signature Resorts, Inc. (the "Company"). For the
historical period ended December 31, 1996, the financial information presented
below includes the effect of the exchange of direct and indirect interests in,
and obligations of, certain predecessor limited partnerships, limited
liability companies and other corporations of the Company for shares of common
stock (the "Common Stock") of the Company (the "Consolidation Transactions")
and the Company's initial public offering of shares of Common Stock (the
"Initial Public Offering"), both of which were consummated on August 20, 1996.
For all of the periods presented, the financial information presented below
also gives effect to the Company's merger with AVCOM International, Inc.
("AVCOM") on February 7, 1997 (the "AVCOM Merger") and the Company's merger
with Plantation Resorts Group, Inc. ("PRG") on May 15, 1997 (the "PRG Merger")
by combining the historical information of AVCOM, PRG and the Company and
restating the historical financial information of the Company using the
pooling of interest method of accounting. Such historical financial
information does not give effect to the acquisition of LSI Group Holdings Plc
("LSI"), which was consummated on August 28, 1997. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", the consolidated
financial statements for the Company and the notes thereto and the
supplemental financial statements of the Company and the notes thereto which
give effect to the Company's acquisition of LSI, each of which are contained
elsewhere in this report.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- -------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Vacation Interval
sales................. $52,730 $68,867 $ 99,058 $ 118,552 $157,042 $ 68,226 $ 113,019
Interest income........ 10,355 12,770 15,747 20,006 24,935 11,899 17,779
Other income........... 811 1,110 1,033 7,144 9,923 5,450 4,823
------- ------- -------- ----------- ----------- ----------- -----------
Total revenues....... 63,896 82,747 115,838 145,702 191,900 85,575 135,621
------- ------- -------- ----------- ----------- ----------- -----------
Costs and operating
expenses:
Vacation Interval cost
of sales.............. 13,585 18,548 28,992 34,077 42,668 18,684 30,263
Advertising, sales and
marketing............. 24,404 32,711 47,081 54,610 78,029 32,396 51,303
Loan portfolio:
Interest expense--
treasury............ 7,500 7,435 8,224 10,077 13,482 6,364 7,938
Other expenses....... 853 840 1,460 2,018 4,495 1,769 3,292
Provision for
doubtful accounts... 2,593 1,703 1,956 3,500 8,009 2,269 3,648
General and
administrative........ 3,884 6,852 8,463 13,599 30,273 8,773 16,287
Resort property
valuation allowance... -- -- -- -- 2,620 -- --
Merger costs(a)........ -- -- -- -- -- -- 5,896
Depreciation and
amortization.......... 412 616 990 2,154 4,639 1,707 2,431
------- ------- -------- ----------- ----------- ----------- -----------
Total costs and
operating expenses.. 53,231 68,705 97,166 120,035 184,215 71,962 121,058
------- ------- -------- ----------- ----------- ----------- -----------
Income from
operations............ 10,665 14,042 18,672 25,667 7,685 13,613 14,563
Interest expense--
other................. -- 519 1,313 1,515 3,725 2,334 2,841
Equity loss on
investment in joint
venture............... -- -- 271 1,649 236 63 120
Minority interest in
income of
consolidated limited
partnership........... -- -- -- -- 199 -- 123
------- ------- -------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit)
for income taxes and
extraordinary item.... 10,665 13,523 17,088 22,503 3,525 11,216 11,479
Provision (benefit)
for income taxes...... 894 3,064 2,046 3,012 (5,244) 538 4,592
------- ------- -------- ----------- ----------- ----------- -----------
Income before
extraordinary item.... 9,771 10,459 15,042 19,491 8,769 10,678 6,887
Extraordinary item,
net of income taxes... -- -- -- -- -- -- 518
------- ------- -------- ----------- ----------- ----------- -----------
Net income............. $ 9,771 $10,459 $ 15,042 $ 19,491 $ 8,769 $ 10,678 $ 6,369
======= ======= ======== =========== =========== =========== ===========
Pro forma net income
(loss)(b)............. $ 6,504 $ 8,249 $ 10,424 $ 13,502 $ 2,115 $ 6,732 $ --
======= ======= ======== =========== =========== =========== ===========
Pro forma net income
per share of Common
Stock and Common
Stock Equivalents
(actual for June 30,
1997):
Pro forma net income
before extraordinary
item................ -- -- -- $ .61 $ .08 $ .31 $ .20
Extraordinary item,
net of income taxes. -- -- -- -- -- -- (.01)
------- ------- -------- ----------- ----------- ----------- -----------
Pro forma net income. -- -- -- $ .61 $ .08 $ .31 $ .19
======= ======= ======== =========== =========== =========== ===========
Pro forma weighted
average number of
shares of Common
Stock and Common
Stock Equivalents
outstanding (actual
for June 30, 1997).... -- -- 21,958,455 25,697,246 21,958,455 33,856,773
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(c).............. $18,786 $ 22,622 $28,891 $38,164 $40,011 $22,762 $31,262
Number of resorts at
period end............ 4 5 9 13 21 19 23
Number of Vacation
Intervals sold........ 4,365 5,917 8,834 9,726 11,707 5,147 8,437
Number of Vacation
Intervals in
inventory............. 5,157 2,830 6,915 23,439 30,399 31,157 29,225
Average price of
Vacation Intervals
sold(d)............... $12,080 $ 11,639 $11,213 $12,189 $13,414 13,255 13,396
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents, including
escrow................ $ 4,316 $ 16,451 $16,254 $19,555 $16,099 $15,493 $46,286
Mortgages receivable,
net................... 63,763 78,079 100,535 145,967 213,470 170,246 259,044
Total assets........... 98,531 136,607 199,980 282,834 425,196 347,863 521,249
Total debt............. 63,529 87,839 121,392 176,709 235,690 229,312 292,280
Stockholders' equity .. 28,860 34,232 59,470 71,962 120,138 79,110 178,415
</TABLE>
- --------
NOTES:
(a) Merger costs include expenses related to fees paid to financial advisors,
legal fees, and other transaction expenses in connection with the AVCOM
and PRG Mergers.
(b) Reflects the effect on the historical statement of operations data,
assuming the combined Company had been treated as a C corporation rather
than as individual limited partnerships and limited liability companies
for federal income tax purposes.
(c) EBITDA represents net income before interest expense-treasury, interest
expense-other, income taxes, non-recurring costs and depreciation and
amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. However, EBITDA should not be construed as a substitute for
income from operations, net income or cash flows from operating activities
in analyzing the Company's operating performance, financial position and
cash flows. The EBITDA measure presented herein may not be comparable to
EBITDA as presented by other companies. The following table reconciles
EBITDA to net income:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income.............. $ 9,771 $10,459 $15,042 $19,491 $ 8,769 $10,678 $ 6,369
Interest expense--
treasury............... 7,500 7,435 8,224 10,077 13,482 6,364 7,938
Interest expense--other. -- 519 1,313 1,515 3,725 2,334 2,841
Capitalized interest
expense included in
Vacation Interval cost
of sales............... 209 529 1,276 1,915 1,718 1,141 677
Income taxes............ 894 3,064 2,046 3,012 (5,244) 538 4,592
Non-recurring costs..... -- -- -- -- 13,600 (e) -- 5,896(e)
Depreciation and
amortization........... 412 616 990 2,154 3,961 (e) 1,707 2,431
Extraordinary item, net
of income taxes........ -- -- -- -- -- -- 518
------- ------- ------- ------- ------- ------- -------
EBITDA.................. $18,786 $22,622 $28,891 $38,164 $40,011 $22,762 $31,262
======= ======= ======= ======= ======= ======= =======
</TABLE>
(d) Dollars presented in actual amounts, not in thousands.
(e) Non-recurring costs for the year ended December 31, 1996 include costs
incurred at AVCOM for (i) an increase in the provision for doubtful
accounts of $2.0 million, (ii) a $5.3 million in severance cost, lease
cancellation, litigation reserves and other integration costs, (iii) a
$2.6 million write-down of certain property to estimated fair market
value, (iv) a $3.0 million reserve for losses associated with certain
property management and related contracts, and (v) a $0.7 million charge
relating to amortization of start-up costs over a period of one year. Non-
recurring costs for the six months ended June 30, 1997, are merger costs
relating to the AVCOM and PRG mergers.
3
<PAGE>
(b) Financial Statements of LSI Group Holdings Plc.
SELECTED FINANCIAL DATA OF LSI
(DOLLAR AMOUNTS IN THOUSANDS)
The income statement data for the years ended December 31, 1994, 1995 and
1996 and the balance sheet data as of December 31, 1995 and 1996 are derived
from the consolidated financial statements of LSI and the notes thereto which
have been audited by KPMG, independent chartered accountants and registered
auditors, and are included herein as pages F-48 through F-69. The balance
sheet data as of December 31, 1994 has been derived from LSI's consolidated
financial statements not included herein. The operating data and the balance
sheet data as of and for the six months ended June 30, 1996 and 1997 have been
derived from unaudited financial statements that in the opinion of LSI's
management reflects all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial information for such
periods and of such dates. The consolidated financial statements of LSI have
been prepared in conformity with United Kingdom generally accepted accounting
principles ("U.K. GAAP"), which differs in certain significant respects to
United States generally accepted accounting principles ("U.S. GAAP") (see Note
28 to the consolidated financial statements of LSI). The selected consolidated
financial data presented below have been adjusted for differences between U.K.
GAAP and U.S. GAAP and should be read in conjunction with LSI's consolidated
financial statements and the supplemental financial statements of the Company
and the notes thereto which give effect to the Company's acquisition of LSI,
each of which are contained elsewhere in this report.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Vacation Interval and
vacation point sales.... $ 17,298 $ 20,874 $ 25,258 $ 10,256 $ 17,327
Interest income.......... 218 333 480 209 262
Other income............. 514 1,409 2,209 1,065 1,841
-------- -------- -------- -------- --------
Total revenues......... 18,030 22,616 27,947 11,530 19,430
-------- -------- -------- -------- --------
Costs and operating
expenses:
Vacation Intervals and
vacation points cost of
sales................... 4,090 5,733 5,550 2,548 4,475
Advertising, sales and
marketing............... 7,017 7,648 11,011 3,989 7,736
Loan portfolio:
Interest expense--
treasury................ -- -- -- -- --
Other expenses........... 6 16 28 9 20
Provision for doubtful
accounts................ 89 166 302 68 87
General and
administrative............ 4,166 5,664 7,163 2,969 4,275
Depreciation and
amortization.............. 206 360 388 198 234
-------- -------- -------- -------- --------
Total costs and operating
expenses.................. 15,574 19,587 24,442 9,781 16,827
-------- -------- -------- -------- --------
Income from operations..... 2,456 3,029 3,505 1,749 2,603
Interest expense--other.... 204 213 38 18 15
Equity loss on investment
in joint venture.......... -- -- 63 -- --
-------- -------- -------- -------- --------
Income before provision
for taxes................. 2,252 2,816 3,404 1,731 2,588
Provision for income
taxes..................... 722 1,008 1,139 571 854
-------- -------- -------- -------- --------
Net income................. $ 1,530 $ 1,808 $ 2,265 $ 1,160 $ 1,734
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(a).................. $ 2,662 $ 3,389 $ 4,611 $ 1,947 $ 2,837
Number of resorts at
period end................ 7 7 10 9 11
Number of Vacation
Intervals sold............ 1,861 298 239 183 34
Number of vacation points
sold...................... 65,325 102,270 132,878 53,515 80,590
Number of vacation points
in inventory.............. 233,802 205,943 291,674 342,044 244,633
Average price of vacation
points sold(b)............ $ 198 $ 181 $ 186 $ 183 $ 216
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents.. $ 1,707 $ 3,224 $ 6,370 $ 4,612 $ 7,619
Mortgages receivable, net.. 1,368 1,438 2,048 1,513 1,764
Total assets............... 10,238 12,937 20,688 14,918 22,971
Total debt................. 1,617 323 432 154 516
Stockholders' equity....... 1,717 3,486 6,287 5,091 7,807
</TABLE>
4
<PAGE>
- --------
NOTES:
(a) EBITDA represents net income before interest expense, income taxes, non-
recurring costs and depreciation and amortization. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to service and/or incur indebtedness. However, EBITDA should not be
construed as a substitute for income from operations, net income or cash
flows from operating activities in analyzing LSI's operating performance,
financial position and cash flows. The EBITDA measure presented herein may
not be comparable to EBITDA as presented by other companies. The following
table reconciles EBITDA to net income:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- -----------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income................... $1,530 $1,808 $2,265 $1,160 $1,734
Interest expense--treasury... -- -- -- -- --
Interest expense--other...... 204 213 38 18 15
Income taxes................. 722 1,008 1,139 571 854
Non-recurring costs.......... -- -- 781(c) -- --
Depreciation and
amortization................ 206 360 388 198 234
------ ------ ------ ------ ------
EBITDA....................... $2,662 $3,389 $4,611 $1,947 $2,837
====== ====== ====== ====== ======
</TABLE>
(b) Dollars presented in actual amounts, not in thousands.
(c) Non-recurring costs represent a one-time bonus to LSI's founders.
5
<PAGE>
(c) Pro forma financial information.
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary pro forma financial information of
the Company. The pro forma information for the year ended December 31, 1996,
and for the six month period ended June 30, 1996, gives effect to the
Consolidation Transactions, the Initial Public Offering, the issuance of 5
3/4% convertible subordinated notes and shares of Common Stock in February
1997 ("the Concurrent Offerings"), the acquisition of LSI in August 1997 (the
"LSI Acquisition"), and the issuance of 9 3/4% senior subordinated notes (the
"Senior Subordinated Notes") in August 1997 (the "Note Offering") in each
case, as if it had occurred as of the beginning of the period presented. The
pro forma information for the six month period ended June 30, 1997, gives
effect to the Concurrent Offerings, the LSI Acquisition and the Note Offering,
in each case, as if each had occurred as of the beginning of the period
presented. The pro forma information for the years ended December 31, 1994 and
1995 gives effect to the LSI Acquisition as if it had occurred as of the
beginning of the period presented. The pro forma information included herein
does not give effect to the Company's pending acquisition of the Embassy
Suites Resort at Kaanapali Beach, Maui, Hawaii (the "Kaanapali Acquisition"),
Marc Hotels & Resorts, Inc. (the "Marc Acquisition") or Vacation
Internationale, Ltd. (the "VI Acquisition") because such acquisitions,
individually or in the aggregate, are not considered significant under
Regulation S-X, promulgated under the Securities Act of 1933, as amended
("Regulation S-X"). The Company's actual statement of operations data reflects
the combined operations of the Company, AVCOM and PRG using pooling-of-
interests accounting for all periods presented.
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
-----------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ ---------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Vacation Interval and
vacation point sales.... $116,356 $ 139,426 $ 182,300 $ 78,482 $ 130,346
Interest income.......... 15,965 20,339 25,415 12,108 18,041
Other income............. 1,547 8,553 12,342 6,675 6,664
-------- ---------- ---------- ---------- ----------
Total revenues.......... 133,868 168,318 220,057 97,265 155,051
-------- ---------- ---------- ---------- ----------
COSTS AND OPERATING
EXPENSES:
Vacation Intervals and
vacation points cost of
sales................... 33,082 39,810 48,168 21,203 34,738
Advertising, sales and
marketing............... 54,098 62,258 89,040 36,385 59,039
Loan portfolio:
Interest expense--
treasury............... 8,224 10,077 693 4,793 1,739
Other expenses.......... 1,466 2,034 4,457 1,738 3,312
Provision for doubtful
accounts............... 2,045 3,666 6,311 2,337 3,735
General and
administrative.......... 12,629 19,263 28,353 11,742 20,562
Resort property valuation
allowance............... -- -- -- -- --
Depreciation and
amortization............ 1,196 2,514 4,349 1,905 2,665
Non-recurring costs...... -- -- 14,381 -- --
Merger costs............. -- -- -- -- 5,896
-------- ---------- ---------- ---------- ----------
Total costs and
operating expenses..... 112,740 139,622 195,752 80,103 131,686
-------- ---------- ---------- ---------- ----------
Income from operations... 21,128 28,696 24,305 17,162 23,365
Interest expense--other.. 1,517 1,728 28,908 14,453 14,450
Equity loss on investment
in joint venture........ 271 1,649 689 355 120
Minority interest in
income of consolidated
limited partnership..... -- -- 199 -- 123
-------- ---------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes and
extraordinary item...... 19,340 25,319 (5,491) 2,354 8,672
Provision (benefit) for
income taxes............ 7,386 10,009 (2,419) 820 3,288
-------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item...... 11,954 15,310 (3,072) 1,534 5,384
Extraordinary item, net
of income taxes......... -- -- -- -- 518
-------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 11,954 $ 15,310 $ (3,072) $ 1,534 $ 4,866
======== ========== ========== ========== ==========
Pro forma unaudited net
income (loss) per common
and common equivalent
shares outstanding ..... $ .64 $ (.08) $ .04 $ .13
========== ========== ========== ==========
Pro forma unaudited
weighted average common
and common equivalent
shares outstanding ..... 23,954,856 36,648,843 35,411,106 36,226,508
</TABLE>
6
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
The pro forma statements of operations data set forth below for the year
ended December 31, 1996, and for the six months ended June 30, 1996 gives
effect, individually and in the aggregate, to the Consolidation Transactions,
the Initial Public Offering, the Concurrent Offerings, the LSI Acquisition and
the Note Offering and the application of the net proceeds therefrom, in each
case, as if each had occurred at the beginning of the period. The pro forma
information for the six month period ended June 30, 1997, gives effect to the
Concurrent Offerings, the LSI Acquisition and the Note Offering and the
application of the net proceeds therefrom in each case, as if each had
occurred at the beginning of the period. The pro forma statements of
operations data set forth below for the years ended December 31, 1994 and 1995
gives effect to the LSI Acquisition. The Company's actual statement of
operations data reflects the combined operations of the Company, AVCOM and PRG
using pooling-of-interests accounting for all periods presented. The pro forma
statements of operations data set forth below does not give effect to the
Kaanapali Acquisition, the Marc Acquisition, or the VI Acquisition because
such acquisitions, individually or in the aggregate, are not considered
significant under Regulation S-X.
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------
CONSOLIDATION
TRANSACTIONS/
INITIAL
PUBLIC OFFERING/
COMPANY CONCURRENT THE NOTE COMPANY
ACTUAL OFFERINGS(b) LSI(c) OFFERING(d) PRO FORMA
---------- ---------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Vacation Interval and
vacation point
sales(a)............... $ 157,042 $ -- $ 25,258 $ -- $ 182,300
Interest income......... 24,935 -- 480 -- 25,415
Other income............ 9,923 210 (e) 2,209 -- 12,342
---------- --------- --------- -------- ----------
Total revenues......... 191,900 210 27,947 -- 220,057
---------- --------- --------- -------- ----------
COSTS AND OPERATING
EXPENSES:
Vacation Intervals and
vacation points cost of
sales.................. 42,668 (50)(f) 5,550 -- 48,168
Advertising, sales and
marketing.............. 78,029 -- 11,011 -- 89,040
Loan portfolio:
Interest expense--
treasury.............. 13,482 (12,789)(f) -- -- 693
Other expenses......... 4,495 (66)(f) 28 -- 4,457
Provision for doubtful
accounts(g)........... 6,009 -- 302 -- 6,311
General and
administrative(g)...... 21,971 -- 6,382 -- 28,353
Resort property
valuation allowance(g). -- -- -- -- --
Depreciation and
amortization(g)........ 3,961 -- 388 -- 4,349
Non-recurring costs..... 13,600 -- 781 -- 14,381
Merger costs............ -- -- -- -- --
---------- --------- --------- -------- ----------
Total costs and
operating expenses..... 184,215 (12,905) 24,442 -- 195,752
---------- --------- --------- -------- ----------
Income (loss) from
operations............. 7,685 13,115 3,505 -- 24,305
Interest expense--other. 3,725 4,645 (f) 38 20,500 28,908
Equity loss on
investment in joint
venture................ 236 390 (h) 63 -- 689
Minority interest in
income of consolidated
limited partnership.... 199 -- -- -- 199
---------- --------- --------- -------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 3,525 8,080 3,404 (20,500) (5,491)
Provision (benefit) for
income taxes........... (5,244) 9,886 (i) 1,139 (8,200) (2,419)
---------- --------- --------- -------- ----------
Net income (loss)....... $ 8,769 $ (1,806) $ 2,265 $(12,300) $ (3,072)
========== ========= ========= ======== ==========
Pro forma earnings per
common and common
equivalent shares...... $ .34 $ (.08)
========== ==========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding............ 25,697,246 8,955,196 (k) 1,996,401 (j) -- 36,648,843
</TABLE>
7
<PAGE>
- --------
NOTES:
(a) Point sales include amounts attributable to sales of vacation points by
LSI pursuant to its points-based Grand Vacation Club system.
(b) Reflects the Consolidation Transactions and the issuance of 17,032,058
shares of Common Stock pursuant thereto, and the Initial Public Offering
of 9,056,250 shares of Common Stock, each in August 1996 and the
Concurrent Offerings of $138 million of 5.75% Convertible Subordinated
Notes due 2007 and 2,400,000 shares of Common Stock sold by the Company in
February 1997.
(c) The pro forma adjustments for the LSI Acquisition assume pooling-of-
interests accounting and are derived from the historical statement of
operations of LSI for the year ended December 31, 1996.
(d) Reflects the issuance of the Notes at an effective interest rate of 9.875%
per annum, plus the amortization of debt issuance costs.
(e) 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.
(f) Reflects the following: (i) the elimination or reduction of interest
expense due to the retirement of $140.4 million of debt; (ii) the
reduction of Vacation Interval cost of sales due to the reduction of
capitalized interest related to the retirement of debt; (iii) the
elimination of financing fees on advances not required as a result of the
debt retirement and (iv) the incurrence of interest expense of 5.75% on
$138 million of Convertible Subordinated Notes. The weighted average
interest rate on the debt retired was 11% per annum.
(g) The referenced line items have been adjusted to reflect the amounts set
forth in the "non-recurring costs" line item. These non-recurring costs
include costs incurred at AVCOM for (i) an increase in the provision for
doubtful accounts by $2.0 million, (ii) a $5.3 million in severance cost,
lease cancellation, litigation reserves and other integration costs, (iii)
a $2.6 million write-down of certain property to estimated fair market
value, (iv) a $3.0 million reserve for losses associated with certain
property management and related contracts, and (v) a $0.7 million charge
relating to amortization of start-up costs over a period of one year. Non-
recurring costs also include a one-time bonus to LSI's founders in the
amount of $0.8 million.
(h) Reflects the increase of goodwill amortization on the purchase of a joint
venture interest.
(i) Reflects the effect on 1996 historical statement of operations data set
forth in footnotes (e)-(h) above and assumes the combined Company had been
treated as a C corporation rather than as limited partnerships and limited
liability companies for federal income tax purposes.
(j) Represents 1,996,401 shares issued in connection with the LSI Acquisition.
(k) Reflects the incremental effect of the following items, assuming such
issuances had occurred as of January 1, 1996:
<TABLE>
<CAPTION>
DESCRIPTION SHARES
----------- ---------
<S> <C>
Initial Public Offering shares issued on August 20, 1996;
effect from January 1, 1996 through August 19, 1996........... 5,765,317
Concurrent Offerings shares issued in February 1997; effect for
the entire year ended December 31, 1996....................... 2,400,000
Options; effect for the entire year ended December 31, 1996.... 789,879
---------
Incremental effect assuming issuance as of beginning of period. 8,955,196
=========
</TABLE>
8
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------------------
CONSOLIDATION
TRANSACTIONS/
INITIAL PUBLIC
OFFERING/
COMPANY CONCURRENT THE NOTE COMPANY
ACTUAL OFFERING(b) LSI(c) OFFERING(d) PRO FORMA
---------- -------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Vacation Interval
and vacation
point sales(a)... $ 68,226 $ -- $ 10,256 $ -- $ 78,482
Interest income... 11,899 -- 209 -- 12,108
Other income...... 5,450 160 (f) 1,065 -- 6,675
---------- ---------- --------- -------- ----------
Total revenues.... 85,575 160 11,530 -- 97,265
---------- ---------- --------- -------- ----------
COSTS AND OPERATING
EXPENSES:
Vacation
Intervals and
vacation points
cost of sales.... 18,684 (29)(g) 2,548 -- 21,203
Advertising,
sales and
marketing........ 32,396 -- 3,989 -- 36,385
Loan portfolio:
Interest
expense--
treasury....... 6,364 (1,571)(g) -- -- 4,793
Other expenses.. 1,769 (40)(g) 9 -- 1,738
Provision for
doubtful
accounts....... 2,269 -- 68 -- 2,337
General and
administrative... 8,773 -- 2,969 -- 11,742
Depreciation and
amortization..... 1,707 -- 198 -- 1,905
Merger costs(h)... -- -- -- --
---------- ---------- --------- -------- ----------
Total costs and
operating
expenses......... 71,962 (1,640) 9,781 -- 80,103
---------- ---------- --------- -------- ----------
Income from
operations........ 13,613 1,800 1,749 -- 17,162
Interest
expense--other... 2,334 1,851 (g) 18 10,250 14,453
Equity loss on
investment in
joint venture.... 63 292 (i) -- -- 355
Minority interest
in income of
consolidated
limited
partnership...... -- -- -- -- --
---------- ---------- --------- -------- ----------
Income (loss)
before provision
(benefit) for
income taxes...... 11,216 (343) 1,731 (10,250) 2,354
Provision
(benefit) for
income taxes..... 538 3,811 (j) 571 (4,100) 820
---------- ---------- --------- -------- ----------
Net income (loss).. 10,678 (4,154) 1,160 (6,150) 1,534
Extraordinary item,
net of income
taxes............. -- -- -- -- --
---------- ---------- --------- -------- ----------
Pro forma unaudited
net income (loss). $ 10,678 $ (4,154) $ 1,160 $ (6,150) $ 1,534
========== ========== ========= ======== ==========
Pro forma earnings
per common and
common equivalent
shares............ $ .49 $ .04
========== ==========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding ...... 21,958,455 11,456,250(k) 1,996,401(l) -- 35,411,106
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------------------
COMPANY CONCURRENT THE NOTE COMPANY
ACTUAL OFFERINGS(e) LSI(c) OFFERING(d) PRO FORMA
------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Vacation Interval
and vacation
point sales(a)... $ 113,019 $ -- $ 17,327 $ -- $ 130,346
Interest income... 17,779 -- 262 -- 18,041
Other income...... 4,823 -- 1,841 -- 6,664
------------- ------------- ------------ ----------- ----------
Total revenues.... 135,621 -- 19,430 -- 155,051
------------- ------------- ------------ ----------- ----------
COSTS AND OPERATING
EXPENSES:
Vacation
Intervals and
vacation points
cost of sales.... 30,263 -- 4,475 -- 34,738
Advertising,
sales and
marketing........ 51,303 -- 7,736 -- 59,039
Loan portfolio:
Interest
expense--
treasury....... 7,938 (6,199) -- -- 1,739
Other expenses.. 3,292 -- 20 -- 3,312
Provision for
doubtful
accounts....... 3,648 -- 87 -- 3,735
General and
administrative... 16,287 -- 4,275 -- 20,562
Depreciation and
amortization..... 2,431 -- 234 -- 2,665
Merger costs(h)... 5,896 -- -- -- 5,896
------------- ------------- ------------ ----------- ----------
Total costs and
operating
expenses......... 121,058 (6,199) 16,827 -- 131,686
------------- ------------- ------------ ----------- ----------
Income from
operations........ 14,563 6,199 2,603 -- 23,365
Interest
expense--other... 2,841 1,344 15 10,250 14,450
Equity loss on
investment in
joint venture.... 120 -- -- -- 120
Minority interest
in income of
consolidated
limited
partnership...... 123 -- -- -- 123
------------- ------------- ------------ ----------- ----------
Income (loss)
before provision
(benefit) for
income taxes...... 11,479 4,855 2,588 (10,250) 8,672
Provision
(benefit) for
income taxes..... 4,592 1,942 854 (4,100) 3,288
------------- ------------- ------------ ----------- ----------
Net income (loss).. 6,887 2,913 1,734 (6,150) 5,384
Extraordinary item,
net of income
taxes............. 518 -- -- -- 518
------------- ------------- ------------ ----------- ----------
Pro forma unaudited
net income (loss). $ 6,369(i) $ 2,913 $ 1,734 $ (6,150) $ 4,866
============= ============= ============ =========== ==========
Pro forma earnings
per common and
common equivalent
shares............ $ .19 $ .13
============= ==========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding ...... 33,856,773 373,334(m) 1,996,401(l) -- 36,226,508
</TABLE>
9
<PAGE>
- --------
NOTES:
(a) Point sales include amounts attributable to sales of vacation points by
LSI pursuant to its points-based vacation club system.
(b) Reflects the Consolidation Transactions and the issuance of 17,032,058
shares of Common Stock pursuant thereto, and the Initial Public Offering
of 9,056,250 shares of Common Stock, each in August 1996, and the
Concurrent Offerings of $138 million of 5.75% Convertible Subordinated
Notes due 2007 and 2,400,000 shares of Common Stock sold by the Company in
February 1997.
(c) The pro forma adjustments for the LSI Acquisition assume pooling-of-
interest accounting and are derived from the historical statement of
operations of LSI.
(d) Reflects the issuance of the Notes at an effective interest rate of 9.875%
per annum, plus amortization of debt issuance costs.
(e) Reflects the Concurrent Offerings of $138 million of 5.75% Convertible
Subordinated Notes due 2007 and 2,400,000 shares of Common Stock sold by
the Company in February 1997 assuming such issuances had occurred as of
the beginning of the period.
(f) 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.
(g) Reflects the following: (i) the elimination or reduction of interest
expense due to the retirement of $139.0 million and $99.0 million of debt
with respect to the period ended June 30, 1996 and 1997, respectively;
(ii) the reduction of Vacation Interval cost of sales due to the reduction
of capitalized interest related to the retirement of construction debt;
(iii) the elimination of financing fees on advances not required as a
result of the debt retirement; and (iv) the incurrence of interest expense
of 5.75% on $138 million of Convertible Subordinated Notes. The weighted
average interest rate on a per annum basis on the debt retired was
approximately 11%.
(h) Merger costs include expenses related to fees paid to financial advisors,
legal fees and other transaction expenses in connection with the AVCOM and
PRG Mergers.
(i) Reflects the increase in goodwill amortization on the purchase of a joint
venture interest.
(j) Reflects the effects on historical statements of operations data set forth
in footnotes (f)-(i) above and assumes the combined Company had been
treated as a C corporation rather than as individual limited partnerships
and limited liability companies for federal income tax purposes.
(k) Reflects the Initial Public Offering of Shares of Common Stock of
9,056,250 issued in August 1996 and the issuance of 2,400,000 shares of
Common Stock in February 1997 in connection with the Concurrent Offerings
assuming such issuances had occurred as of the beginning of the period.
(l) Represents 1,996,401 shares issued in connection with the LSI Acquisition.
(m) Reflects incremental effect of the 2,400,000 shares of Common Stock issued
in February 1997 in connection with the Concurrent Offerings assuming the
issuance had occurred as of the beginning of the period.
10
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 YEAR ENDED DECEMBER 31, 1995
---------------------------- ----------------------------------
COMPANY COMPANY COMPANY COMPANY
ACTUAL LSI(A) PRO FORMA ACTUAL LSI(A) PRO FORMA
------- ------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Vacation Interval and
vacation point
sales(b).............. $99,058 $17,298 $116,356 $ 118,552 $ 20,874 $ 139,426
Interest income........ 15,747 218 15,965 20,006 333 20,339
Other income........... 1,033 514 1,547 7,144 1,409 8,553
------- ------- -------- ---------- --------- ----------
Total revenues......... 115,838 18,030 133,868 145,702 22,616 168,318
------- ------- -------- ---------- --------- ----------
COSTS AND OPERATING
EXPENSES:
Vacation Intervals and
vacation points cost
of
sales................. 28,992 4,090 33,082 34,077 5,733 39,810
Advertising, sales and
marketing............. 47,081 7,017 54,098 54,610 7,648 62,258
Loan portfolio:
Interest expense--
treasury............ 8,224 -- 8,224 10,077 -- 10,077
Other expenses....... 1,460 6 1,466 2,018 16 2,034
Provision for
doubtful accounts... 1,956 89 2,045 3,500 166 3,666
General and
administrative........ 8,463 4,166 12,629 13,599 5,664 19,263
Resort property
valuation allowance .. -- -- -- -- -- --
Depreciation and
amortization.......... 990 206 1,196 2,154 360 2,514
Merger costs........... -- -- -- -- -- --
------- ------- -------- ---------- --------- ----------
Total costs and
operating expenses.... 97,166 15,574 112,740 120,035 19,587 139,622
------- ------- -------- ---------- --------- ----------
Income from operations.. 18,672 2,456 21,128 25,667 3,029 28,696
Interest expense--
other................. 1,313 204 1,517 1,515 213 1,728
Equity loss on
investment in joint
venture............... 271 -- 271 1,649 -- 1,649
Minority interest in
income of
consolidated limited
partnership........... -- -- -- -- -- --
------- ------- -------- ---------- --------- ----------
Income before provision
for income taxes....... 17,088 2,252 19,340 22,503 2,816 25,319
Provision for income
taxes................. 6,664(c) 722 7,386 9,001(c) 1,008 10,009
------- ------- -------- ---------- --------- ----------
Net income.............. $10,424 $ 1,530 $ 11,954 $ 13,502 $ 1,808 $ 15,310
======= ======= ======== ========== ========= ==========
Pro forma earnings per
common and common
equivalent shares..... $ 0.61 $ 0.64
========== ==========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding........... 21,958,455 1,996,401 23,954,856
</TABLE>
- -------
(a) The pro forma adjustments for the LSI Acquisition assume pooling-of-
interests accounting and reflect the historical statements of operations
data of LSI for the years ended December 31, 1994 and 1995.
(b) Point sales include amounts attributable to sales of vacation points by
LSI pursuant to its points-based Grand Vacation Club system.
(c) Reflects the effects on historical statements of operations data and
assumes the combined Company had been treated as a C corporation rather
than as individual limited partnerships and limited liability companies
for federal income tax purposes.
11
<PAGE>
The pro forma balance sheet data set forth below at June 30, 1997 gives
effect to the LSI Acquisition and the Note Offering and the application of the
net proceeds therefrom, as if each had occurred on June 30, 1997. The pro
forma adjustments are based upon currently available information and certain
assumptions that management of the Company believes are reasonable under
current circumstances. The pro forma balance sheet data set forth below does
not give effect to the Kaanapali Acquisition, the Marc Acquisition or the VI
Acquisition because such acquisitions are not considered significant under
Regulation S-X.
PRO FORMA BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
PRO FORMA ADJUSTMENTS
---------------------
COMPANY THE NOTE COMPANY
ACTUAL LSI(A) OFFERING(B) PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 44,361 $ 7,619 $111,593 $163,573
Cash in escrow......................... 1,925 -- -- 1,925
Mortgages receivable, net.............. 259,044 1,764 -- 260,808
Due from related parties............... 13,308 53 -- 13,361
Other receivables, net................. 15,834 3,230 -- 19,064
Prepaid expenses and other assets...... 23,952 105 -- 24,057
Investment in joint venture............ 7,277 -- 10,000 17,277
Real estate and development costs...... 134,215 4,232 17,000 155,447
Property and equipment, net............ 13,830 5,928 -- 19,758
Intangible assets, net................. 7,503 40 7,500 15,043
-------- ------- -------- --------
Total assets....................... $521,249 $22,971 $146,093 $690,313
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable....................... $ 13,942 $ 709 $ -- $ 14,651
Accrued liabilities.................... 31,067 11,910 -- 42,977
Due to related parties................. 1,127 -- -- 1,127
Income taxes payable................... 439 2,300 -- 2,739
Deferred taxes......................... 3,863 (271) -- 3,592
Notes payable to financial
institutions.......................... 154,280 516 (52,375) 102,421
Senior subordinated notes.............. -- -- 198,468 198,468
Convertible subordinated notes......... 138,000 -- -- 138,000
-------- ------- -------- --------
Total liabilities.................. 342,718 15,164 146,093 503,975
Minority interest in consolidated
limited partnership................... 116 -- -- 116
Equity................................. 178,415 7,807 -- 186,222
-------- ------- -------- --------
Total liabilities and equity....... $521,249 $22,971 $146,093 $690,313
======== ======= ======== ========
</TABLE>
- --------
(a) The pro forma adjustments for the LSI Acquisition assume pooling-of-
interests accounting and are derived from the historical financial
statements of LSI.
(b) Reflects the issuance of the Notes and the application of the proceeds
therefrom.
12
<PAGE>
(d) Management Discussion and Analysis of Financial Condition and Results of
Operations.
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the combined
accounts of Signature Resorts, Inc., AVCOM, PRG and subsidiaries that were
acquired or formed prior to August 20, 1996, and which became wholly-owned
subsidiaries in connection with the Consolidation Transactions, the AVCOM
Merger and the PRG Merger.
Comparison of the year ended December 31, 1996 to year ended December 31,
1995. For the year ended December 31, 1996, the Company achieved total
revenues of $191.9 million compared to $145.7 million for the year ended
December 31, 1995, an increase of $46.2 million or 32%. Such increase was due
to the growth of Vacation Intervals sold from 9,726 in 1995 to 11,707 in 1996,
a 20% increase coupled with a 10% increase in the average sales price from
$12,189 in 1995 to $13,414 in 1996. The growth in Vacation Intervals sold was
due to the commencement of sales at San Luis Bay, Embassy Vacation Resort Lake
Tahoe, Sedona Summit and Scottsdale Villa Mirage combined with a full year of
Vacation Interval sales at Royal Palm and Flamingo Beach Club.
Interest income increased $4.9 million, or 25%, due to an increase in
mortgages receivable from $146.0 million in 1995 to $213.5 million in 1996.
Other income, which includes rental income, management fees, other interest
income and portfolio income from the $10.2 million portfolio acquired with the
two St. Maarten resorts in 1995, increased $2.8 million from $7.1 million in
1995 to $9.9 million in 1996. The increase in other income was the result of
$1.7 million of income from the settlement of certain receivables from the
former owners of the St. Maarten resorts, and a $1.3 million increase in
portfolio income from the St. Maarten portfolio.
Total costs and operating expenses for the years ended 1995 and 1996
increased by $64.2 million from $120.0 million to $184.2 million,
respectively. The increase in total costs and operating expenses was the
result of significant charges incurred by AVCOM during the fourth quarter of
1996, costs and operating expenses, as a percentage of total revenues,
increased from 82% in 1995 to 96% in 1996. The significant AVCOM charges
include (i) an increase in the provision for doubtful accounts by
$2.0 million, (ii) $5.3 million in severance cost, lease cancellation,
litigation reserves and other integration costs, (iii) a $2.6 million write-
down of certain property to estimated fair market value, (iv) $3.0 million
reserve for losses associated with certain property management and related
contracts, and (v) a $0.7 million charge relating to amortization of start-up
costs over a period of one year. Excluding the significant AVCOM charges of
$13.6 million, costs and operating expenses as a percentage of total revenues
would have decreased to 89% of total revenues. As a percentage of Vacation
Interval revenues, Vacation Interval costs of sales decreased to 27% in 1996
compared to 29% in 1995 as the Company was able to purchase and construct
Vacation Intervals at a discount to historical development costs, reducing the
unit cost on average for each Vacation Interval sold.
Interest expense--treasury increased $3.4 million from $10.1 million in 1995
to $13.5 million in 1996, or 34% as the result of notes payable to financial
institutions and notes payable to related parties increasing from
$176.7 million to $235.7 million or 33% and the prime rate increasing during
the year. Other expenses increased 123% from $2.0 million in 1995 to $4.5
million in 1996. As a percentage of total revenues, other expenses increased
from 1% in 1995 to 2% in 1996. The provision for doubtful accounts increased
129% from $3.5 million in 1995 to $8.0 million as the result of a $2 million
increase in the AVCOM provision for doubtful accounts during the fourth
quarter of 1996.
General and administrative expenses increased $16.7 million from $13.6
million during 1995 to $30.3 million during 1996. As a percentage of total
revenues, general and administrative expenses were lower during 1995 at 9% as
compared to 16% during 1996. The increase in general and administrative
expenses was the result of (i) a $5.3 million expense relating to severance
arrangements, lease cancellations and other expenses related to the AVCOM
Merger, (ii) the addition of a number of senior officers and key executives in
connection
13
<PAGE>
with building the Company's management and organizational infrastructure
necessary to efficiently manage the Company's future growth, (iii) the
Company's expenses and reporting obligations as a public company,
(iv) increased overhead due to the acquisition and development of additional
resorts, and (v) added salary, travel, and office expenses attributable to the
current and planned growth of the Company.
Depreciation and amortization increased $2.4 million, or 115%, from $2.2
million in 1995 to $4.6 million, reflecting increased depreciation and
amortization resulting from (i) a $0.7 million AVCOM charge relating to
amortization of start-up costs over a period of one year from AVCOM's previous
policy of three years and (ii) an increase in capital expenditures and
intangible assets.
Equity loss on investment in joint venture decreased to $0.2 million in 1996
from $1.6 million in 1995 due to increased Vacation Interval sales and higher
hotel occupancy at Embassy Vacation Poipu Point during 1996. In 1996, 1,146
Vacation Intervals were sold at the Embassy Vacation Poipu Point, while 281
Vacation Intervals were sold at the Embassy Vacation Poipu Point in 1995.
Primarily as the result of the significant charges incurred by AVCOM during
the fourth quarter of 1996, as discussed above, income before provision for
income taxes decreased to $3.5 million during 1996 from $22.5 million in 1995.
However, income before provision for taxes of the Company (excluding AVCOM)
increased 16% to $23.9 million in 1996 from $20.6 in 1995. AVCOM's (loss)
income before provision for taxes decreased to $(20.4) million in 1996 from
$1.9 million in 1995, primarily as a result of $13.6 million of non-recurring
charges related to accrued expenses and the write-down and write-off of
certain assets of AVCOM.
Provision (benefit) for income taxes changed from an expense of $3.0 million
in 1995 to a tax benefit of $5.2 million in 1996. The 1996 tax benefit results
from the recognition of AVCOM's operating loss carryforwards.
As a result of the factors discussed above, net income decreased 55% from
$19.5 million for 1995 to $8.8 million for 1996.
Comparison of the year ended December 31, 1995 to year ended December 31,
1994. For the year ended December 31, 1995 the Company achieved total revenues
of $145.7 million compared to $115.8 million for the year ended December 31,
1994, an increase of $29.9 million or 26%. Total revenues grew due to a 20%
increase in Vacation Interval sales from $99.1 million to $118.6 million, a
27% increase in interest income from $15.7 million to $20.0 million, and a
$6.1 million increase in other income. The commencement of sales of Vacation
Intervals at Royal Palm, Flamingo Beach Club, Greensprings Plantation and
Embassy Vacation Resort Grand Beach drove Vacation Interval sales volume at
the resorts from 8,834 sold in 1994 to 9,726 sold in 1995, an increase of 10%.
These higher volumes, combined with price growth, drove the 20% increase in
Vacation Interval sales revenue. Interest income increased due to a 44%
increase in mortgages receivable, which grew from $101.1 million at the end of
1994 to $146.0 million at the end of 1995. Other income, which included rental
income management fees, other interest income and portfolio income from the
$10.2 million portfolio acquired with the two St. Maarten resorts in 1995 and
other operating income, increased $6.1 million from $1.0 million in 1994 to
$7.1 million in 1995. This increase was the result of the acquisition of a
mortgages receivable portfolio of approximately $10.2 million acquired with
the two St. Maarten resorts on which the Company earned $2.2 million. In
addition, the Company accrued $2.0 million of business interruption insurance
claims to compensate for lost revenues and profits related to damages
sustained from Hurricane Luis at the two St. Maarten resorts.
While total costs and operating expenses increased from $97.2 million for
the year ended December 31, 1994 to $120.0 million for the year ended December
31, 1995, an increase of 24%, as a percentage of total revenues, total costs
and operating expenses decreased from 84% in 1994 to 82% in 1995. Relative
decreases in Vacation Interval cost of sales and advertising, sales and
marketing expenses, as a percentage of total revenues were offset by relative
increases in general and administrative expenses and equity loss on investment
in joint venture.
14
<PAGE>
Loan portfolio expenses consisting of interest expense--treasury, other
expenses and provision for doubtful accounts increased from $11.6 million in
total in 1994 to $15.6 million in total in 1995, an increase of 34%. This
increase reflects the 44% increase in mortgages receivable due to Vacation
Interval sales growth and acquisitions of resorts made by the Company in 1995.
General and administrative expenses increased 61% from $8.5 million in 1994
to $13.6 million in 1995. The increase in general and administrative expenses
was the result of increased salary expenses and overhead due to the
acquisition of additional resorts and growth in the size of the Company.
Relative to total revenues, general and administrative expenses increased to
9% of revenues in 1995 from 7% of revenues in 1994.
Depreciation and amortization increased from $1.0 million in 1994 to $2.2
million in 1995, reflecting increased depreciation resulting from an increase
in capital expenditures.
The Company made its investment in the Embassy Vacation Resort Poipu Point
during the last quarter of 1994. The Embassy Vacation Resort Poipu Point has
experienced losses associated with the start-up operations of the related
resort, which is being converted to a vacation ownership resort. Equity loss
on investment in joint venture increased from $0.3 million in 1994 to $1.6
million in 1995 reflecting a full year's operations at the resort in 1995.
Income before provision for income taxes increased 32% to $22.5 million, or
15% of total revenues, in 1995 from $17.1 million, or 15% of total revenues,
in 1994.
Provision for income taxes increased to $3.0 million for the year ended
December 31, 1995 from $2.0 million for the year ended December 31, 1994 due
to the acquisition of Royal Palm Beach Club and Flamingo Beach Club resorts in
St. Maarten, Netherlands Antilles as well as increases in AVCOM earnings from
1994 to 1995. In July and August, the Company acquired the Royal Palm and
Flamingo resorts, respectively, incurring foreign taxes related to income
earned for the remainder of fiscal year 1995.
Net income increased $4.5 million to $19.5 million for the twelve months
ended December 31, 1995 from $15.0 million for the twelve months ended
December 31, 1994.
MERGER WITH AVCOM AND RELATED EXPENSES
In February 1997, the Company consummated the AVCOM Merger, acquiring AVCOM
for 1,324,554 shares of the Company's Common Stock, representing on a pro
forma basis approximately 4.4% of the shares of the Company's Common Stock
outstanding following such acquisition. Based upon the closing price of the
Common Stock on February 7, 1997, the 1,324,554 shares issued in the AVCOM
Merger were valued at an aggregate of approximately $32.2 million. The Company
also assumed approximately $68.3 million in debt in the AVCOM Merger. The
Company has accounted for this merger under the pooling-of-interest method of
accounting for business combinations.
Transaction costs relating to the negotiation of, preparation for, and
consummation of the AVCOM Merger and the combination of certain operations of
the Company and AVCOM resulted in a one-time charge to the Company's earnings
of $1.7 million in the first quarter of 1997. This charge includes the fees
and expenses payable to financial advisors, legal fees and other transaction
expenses related to the AVCOM Merger. In addition, there can be no assurance
that the Company will not incur additional charges in subsequent quarters to
reflect costs associated with the AVCOM Merger and the integration of the
Company's and AVCOM's operations.
MERGER WITH PRG AND RELATED EXPENSES
On May 15, 1997 the Company consummated its merger (the "PRG Merger") with
Plantation Resorts Group, Inc., a developer, marketer and operator of two
vacation ownership resorts in Williamsburg, Virginia. The merger was
consummated through the issuance of 3,601,844 shares of the Company's Common
Stock,
15
<PAGE>
representing on a pro forma basis approximately 10.7% of the shares of the
Company's Common Stock outstanding following such acquisition. Based upon the
closing price of the Common Stock on May 15, 1997, the shares issued in the
merger were valued at an aggregate of $59.1 million. The Company also assumed
approximately $58.4 million of debt in the PRG Merger. The Company has
accounted for this merger under the pooling-of-interest method of accounting
for business combinations.
As a result of the PRG Merger, the Company recorded a one-time charge of
$4.2 million during the second quarter 1997 for charges related to the PRG
Merger including financial advisors, legal, and other transaction related
expenses. However, there can be no assurance the Company will not incur
additional charges in subsequent quarters to reflect costs associated with the
PRG Merger and the integration of the Company's and PRG's operations.
ACQUISITION OF LSI AND RELATED EXPENSES
In June 1997, the Company entered into a definitive agreement to acquire
100% of the capital stock of LSI, a United Kingdom-based developer, owner and
operator of a points-based vacation club system with vacation ownership
resorts in England, Spain, and Austria (the "LSI Acquisition"). LSI's Grand
Vacation Club system allows members to exchange points for various vacation
alternatives at LSI's resorts through the year 2054. LSI's 11 resorts are
located in England's Lake District and Midlands (three resorts), Southern
England, the sun coast of Spain (three resorts), the Spanish island of Menorca
(two resorts), Lanzarote in the Canary Islands and the Austrian Alps.
On August 28, 1997, the Company consummated the LSI Acquisition, acquiring
100% of LSI's capital stock in exchange for 1,996,401 newly issued shares of
the Company's Common Stock, representing on a pro forma basis approximately
5.6% of the shares of the Company's Common Stock outstanding as of June 30,
1997. Based upon the closing price of the Common Stock on August 29, 1997, the
1,996,401 shares issued in the LSI Acquisition were valued at an aggregate of
approximately $48.2 million. In addition to the Common Stock issued in the LSI
Acquisition, the Company also assumed $0.5 million in debt and paid cash
consideration of approximately $1,036,000 to a former LSI shareholder. The
Company will account for the LSI Acquisition under the pooling-of-interest
method of accounting for business combinations.
Transaction costs relating to the negotiation of and preparation for the LSI
Acquisition and the anticipated combination of certain operations are expected
to result in a one-time charge to the Company's earnings of approximately $3.3
million in the third quarter of 1997. These charges will include the fees and
expenses payable to financial advisors, legal fees and other transaction
expenses related to the LSI Acquisition. In addition, there can be no
assurance that the Company will not incur additional charges in subsequent
quarters to reflect costs associated with the LSI Acquisition and the
integration of the Company's and LSI's operations.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company consummated the Note Offering of $200.0 million
of the Senior Subordinated Notes at a price of 99.234% of the principal amount
for an effective yield of 9.875% per annum. After deducting underwriters
discounts and expenses, the net proceeds to the Company were $191.0 million.
The Company intends to use the net proceeds from the Senior Subordinated Notes
Offering to retire approximately $52.4 million of existing indebtedness of the
Company, finance approximately $10 million in costs relating to the
acquisition of the Embassy Suites Resort at Kaanapali Beach, Maui, Hawaii, and
finance approximately $17 million ($15 million purchase cost and $2 million
conversion cost) relating to the acquisition of the Savoy Hotel in Miami
Beach, Florida (which was consummated on August 16, 1997). The balance will be
used to finance consumer mortgages, complete construction and expansion at
certain resorts, finance the acquisition and development of additional resorts
and vacation ownership-related assets and for working capital and other
general corporate purposes. Pending any such additional uses, the Company will
invest the excess proceeds in commercial paper, bankers' acceptances, other
short-term investment-grade securities and money-market accounts.
16
<PAGE>
In February 1997, the Company consummated its offering (the "Convertible
Offering") of $138.0 million aggregate principal amount of its 5.75%
Convertible Subordinated Notes due 2007 (the "Convertible Notes") and its
offering (the "Stock Offering" and together with the Convertible Offering the
"Concurrent Offerings") of 6.0 million shares of Common Stock (including 3.6
million secondary shares sold by certain selling stockholders). The net
proceeds to the Company from the sale of the 2.4 million shares of Common
Stock offered by the Company in the Stock Offering, based on a public offering
price of $24.33 per share, and from the sale of the $138.0 million aggregate
principal amount of the Convertible Notes offered by the Company in the
Convertible Offering, based on a public price of 100% of the principal amount
thereof, in each case after deducting underwriting discounts and estimated
expenses of the Stock Offering and the Convertible Offering, were
approximately $53.2 million and $134.9 million, respectively.
The Company has used approximately $161 million of the approximately
$188.1 million net proceeds of the Concurrent Offerings as follows:
(i) approximately $40.4 million to retire existing indebtedness of the
Company, (ii) approximately $21.1 million to retire the indebtedness of AVCOM
that was assumed by the Company in the AVCOM Merger, (iii) approximately
$8.0 million to finance acquisition costs related to the Westin Vacation Club
at St. John and (iv) approximately $91.5 million to complete construction and
expansion at certain resorts, to finance the acquisition and development of
additional resorts and vacation ownership-related assets, to finance sales of
Vacation Intervals, and for working capital and other general corporate
purposes. Prior to such uses, the Company had invested such proceeds in
commercial paper, bankers' acceptances, other short-term investment-grade
securities and money market accounts.
The Company generates cash for operations from the sale of Vacation
Intervals, the financing of the sales of Vacation Intervals, the rental of
unsold Vacation Interval units, and the receipt of management fees. With
respect to the sale of Vacation Intervals, the Company generates cash for
operations from cash sales of Vacation Intervals, from the receipt of down
payments from customers acquiring Vacation Intervals, and from the
hypothecation of mortgages receivable from purchasers equal to 85% to 90% of
the amount borrowed by such purchasers. The Company generates cash related to
the financing of Vacation Interval sales on the difference between the
interest charged on the mortgages receivable, which averaged 15.0% in 1996,
and the interest paid on the notes payable secured by such mortgages
receivable, which averaged 9.7% in 1996.
During the years ended December 31, 1996, 1995, and 1994 cash (used in)
provided by operating activities was ($30.2) million, $9.9 million and ($3.8)
million, respectively. Cash generated from operating activities was lower in
1996 when compared to the comparable period in 1995 primarily due to a $53.9
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. Cash generated from operating
activities was higher for the year ended December 31, 1995 when compared to
the same period in the prior year primarily due to higher net income,
decreases in the amount spent on acquisition and development activities, and
increases in payables outstanding at the end of 1995 when compared to at the
end of 1994.
Net cash used in investing activities for the years ended December 31, 1996,
1995 and 1994 was $84.6 million, $54.8 million, and $33.4 million,
respectively. Net cash used by investing activities was higher for the year
ended December 31, 1996 when compared to the same period in 1995 principally
due to increases in mortgages receivable which resulted from higher sales of
Vacation Intervals. During 1996, the change in gross mortgages receivable was
$22.1 million higher than during the comparable period in 1995 due to an
increase in the number of Vacation Intervals sold and increased average sales
price per Vacation Interval sold.
For the years ended December 31, 1996, 1995 and 1994, net cash provided by
financing activities was $112.4 million, $48.7 million and $35.3 million,
respectively. These net cash figures were affected by the Company's increased
borrowings secured by mortgages receivable to fund operations and increased
payments on these borrowings due to amortizations on a larger portfolio. In
addition, year to year 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. During 1996, the
Company issued 9,056,250 shares of Common Stock in the Initial Public Offering
in August 1996 resulting in approximately $73.3 million of net proceeds. The
net proceeds of the
17
<PAGE>
Initial Public 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 requires funds to finance the future acquisition and development
of vacation ownership resorts and properties and to finance customer purchases
of Vacation Intervals. Such capital has been provided by secured financings on
Vacation Interval inventory, and secured financings on mortgages receivable
generally funded by third party lenders and capital contributions. As of
December 31, 1996, the Company had approximately $188 million of additional
borrowing capacity under certain third party lending agreements. As of
December 31, 1996, the Company had $21.3 million outstanding under its notes
payable secured by Vacation Interval inventory or land and $123.9 million
outstanding under its notes payable secured by mortgages receivable.
During 1997, the Company anticipates spending approximately $56.5 million
for expansion and development activities at the Company's resorts. The Company
may also be required to expend additional amounts to fund certain AVCOM
guarantees relating to the North Bay Resort at Lake Arrowhead. The Company
plans to fund these expenditures primarily with the net proceeds of the
Concurrent Offerings, the Note Offering, available capacity on credit
facilities and cash generated from operations. In addition, during 1997, the
Company anticipates spending approximately $8.8 million to finance the
acquisition, development and conversion costs related to the St. John
acquisition. These expenditures are expected to be funded primarily with the
net proceeds of the Concurrent Offerings, the Note Offering, available
borrowing capacity under lines of credit and cash generated from operations.
In addition, the Company anticipates spending approximately $212.0 million
to complete its expansion plans at its resorts (excluding the resorts acquired
in the AVCOM Merger (the "All Seasons Resorts") and the resorts acquired in
the PRG Merger (the "PRG Resorts") during the periods following 1997. The
Company also plans to spend $34.0 million to complete expansion plans at the
All Seasons Resorts and $96.7 million at the PRG Resorts during the periods
following 1997. The Company anticipates financing the expansion plans of the
Company's resorts through cash acquired from operations, future credit
facilities and/or future issuance of securities. There can be no assurance
that the Company will be able to obtain the financing necessary to continue
such expansion plans.
The Company intends to pursue a growth-oriented strategy. From time to time,
the Company may acquire, among other things, additional vacation ownership
properties, resorts and completed Vacation Intervals; land upon which
additional vacation ownership resorts may be built; management contracts; loan
portfolios of Vacation Interval mortgages; portfolios which include properties
or assets which may be integrated into the Company's operations; and operating
companies providing or possessing management, sales, marketing, development,
administration and/or other expertise with respect to the Company's operations
in the vacation ownership industry.
The Company has received a commitment from a bank lender to provide it with
the $100 million Senior Credit Facility. The Senior Credit Facility is
expected to have a variable borrowing rate, depending on the amount of
advances against mortgages receivable, ranging from LIBOR plus 7/8% to LIBOR
plus 1 3/8%. Additionally, the Company may, in the future, negotiate
additional credit facilities, or issue, in addition to the Convertible Notes
and the Notes, other corporate debt or equity securities. 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 Concurrent Offerings, the Note Offering and
cash generated from operations and future borrowings, 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 and other factors, the Company may from time to time consider the
issuance of debt or other securities, the proceeds of which would be used to
finance
18
<PAGE>
acquisitions, to refinance debt or for other general corporate purposes. The
Company believes that the Company's resorts are adequately covered by
insurance.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SIGNATURE RESORTS, INC.
By:
/s/ Andrew D. Hutton
___________________________________
Name: Andrew D. Hutton
Title: Vice President and General
Counsel
Dated: October 10, 1997
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants........................ F-2
Report of Independent Auditors............................................ F-4
Report of Independent Auditors............................................ F-5
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. F-6
Consolidated Statements of Income for each of the three years ended
December 31, 1996........................................................ F-7
Consolidated Statements of Equity for each of the three years ended
December 31, 1996........................................................ F-8
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1996........................................................ F-9
Notes to Consolidated Financial Statements................................ F-10
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
Supplemental Consolidated Balance Sheets as of June 30, 1997, December 31,
1996 and 1995............................................................ F-27
Supplemental Consolidated Statements of Income for the six month periods
ended June 30, 1997
and 1996 and for each of the three years ended December 31, 1996......... F-28
Supplemental Consolidated Statements of Equity for the six month periods
ended June 30, 1997
and 1996 and for each of the three years ended December 31, 1996......... F-29
Supplemental Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1997
and 1996 and for each of the three years ended December 31, 1996......... F-30
Notes to Supplemental Consolidated Financial Statements................... F-31
LSI GROUP HOLDINGS PLC
Independent Auditors' Report.............................................. F-48
Consolidated Profit and Loss Accounts for the three years ended December
31, 1996 ................................................................ F-49
Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-50
Consolidated Cash Flow Statements for the three years ended December 31,
1996 .................................................................... F-51
Consolidated Statements of Total Recognized Gains and Losses for the three
years ended December 31, 1996............................................ F-52
Consolidated Note of Historical Cost Profits and Losses for the three
years ended December 31, 1996............................................ F-52
Consolidated Reconciliation of Movements in Shareholders' Funds for the
three years ended December 31, 1996...................................... F-53
Notes to Consolidated Financial Statements................................ F-54
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Signature Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of Signature
Resorts, Inc. (a Maryland Corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1995 and 1994
consolidated financial statements of AVCOM International, Inc. and
subsidiaries, a company acquired during 1997 in a transaction accounted for as
a pooling of interests, as discussed in Note 1. Such statements are included
in the consolidated financial statements of Signature Resorts, Inc. and
subsidiaries and reflect total assets and total revenues of 13 percent and 24
percent in 1995, and total revenues of 22 percent in 1994, respectively, of
the related consolidated totals. These statements were audited by other
auditors, whose report has been furnished to us and our opinion, insofar as it
relates to amounts included for AVCOM International, Inc. and subsidiaries, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Signature Resorts, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying supplemental
consolidated balance sheets of Signature Resorts, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related supplemental consolidated
statements of income, equity and cash flows for each of the years in the
three-year period ended December 31, 1996. The supplemental consolidated
statements give retroactive effect to the merger with LSI Group Holdings plc
on August 28, 1997, which has been accounted for as a pooling of interests as
described in Note 1. These supplemental consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements
based on our audits.
We did not audit the 1996, 1995 and 1994 financial statements of LSI Group
Holdings plc and the 1995 and 1994 financial statements of AVCOM
International, Inc. and subsidiaries included in the supplemental consolidated
financial statements of Signature Resorts, Inc. and subsidiaries, which
statements reflect total assets and revenues of 5 percent and 13 percent in
1996, total assets and revenues of 17 percent and 34 percent in 1995, and
total revenues of 32 percent in 1994, respectively, of the related
supplemental consolidated totals. These statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for LSI Group
Holdings plc and AVCOM International, Inc. and subsidiaries, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the supplemental consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the supplemental consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the supplemental
consolidated financial statements. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
F-2
<PAGE>
In our opinion, based on our audits and the reports of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Signature Resorts,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, after giving retroactive effect to the merger with LSI
Group Holdings plc as described in Note 1, all in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida
August 28, 1997 (except with
respect to the matters discussed in
Note 16, as to which the dates are
September 3, September 23,
and September 29, 1997.)
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AVCOM International, Inc.
We have audited the consolidated balance sheet of AVCOM International, Inc.
(Company) as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1995 (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of AVCOM International, Inc. as of December 31, 1995, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Phoenix, Arizona
May 31, 1996, except for
Note 12, as to which the
date is July 1, 1996
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
LSI Group Holdings Plc
We have audited the consolidated balance sheets of LSI Group Holdings Plc and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, equity and cash flow for each of the years in the three-
year period ended December 31, 1996 (not presented separately herein). These
financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LSI
Holdings Plc and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles in the United States of America.
KPMG
Chartered Accountants
Registered Auditors
Preston, England
March 27, 1997
F-5
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................... $ 14,387,000 $ 16,806,000
Cash in escrow...................................... 1,712,000 2,749,000
Mortgages receivable, net of an allowance of
$16,989,000 and $13,114,000 at December 31, 1996
and 1995, respectively............................. 213,470,000 145,967,000
Due from related parties............................ 11,760,000 17,524,000
Other receivables, net.............................. 8,885,000 8,116,000
Prepaid expenses and other assets................... 14,185,000 8,824,000
Investment in joint venture......................... 7,397,000 2,644,000
Real estate and development costs................... 137,401,000 68,098,000
Property and equipment, net......................... 11,504,000 6,332,000
Intangible assets, net.............................. 4,495,000 5,774,000
------------ ------------
Total assets.................................... $425,196,000 $282,834,000
============ ============
LIABILITIES AND EQUITY:
Accounts payable.................................... $ 22,413,000 $ 9,614,000
Accrued liabilities................................. 38,893,000 19,519,000
Due to related parties.............................. 1,656,000 1,906,000
Income taxes payable................................ 1,323,000 500,000
Deferred taxes...................................... 3,545,000 2,624,000
Notes payable to financial institutions............. 235,690,000 167,266,000
Notes payable to related parties.................... -- 9,443,000
------------ ------------
Total liabilities............................... 303,520,000 210,872,000
------------ ------------
Commitments and contingencies (Note 10)
Minority interest in consolidated limited
partnership........................................ 1,538,000 --
------------ ------------
Stockholders equity:
Preferred stock (25,000,000 shares authorized; and
none issued or outstanding)...................... -- --
Common stock ($0.01 par value, 50,000,000 shares
authorized; 31,014,705 outstanding on December
31, 1996; par value $100 and $.01 on 200 and
4,926,398 shares outstanding at December 31,
1995, respectively).............................. 310,000 69,000
Additional paid-in capital........................ 101,826,000 3,743,000
Retained earnings................................. 18,002,000 32,292,000
Members' deficit.................................. -- (1,432,000)
Partners' equity:
General partners' equity.......................... -- 4,176,000
Limited partners' equity.......................... -- 33,114,000
------------ ------------
Total equity.................................... 120,138,000 71,962,000
------------ ------------
Total liabilities and equity.................... $425,196,000 $282,834,000
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Vacation interval sales............. $157,042,000 $118,552,000 $ 99,058,000
Interest income..................... 24,935,000 20,006,000 15,747,000
Other income........................ 9,923,000 7,144,000 1,033,000
------------ ------------ ------------
Total revenues.................... 191,900,000 145,702,000 115,838,000
------------ ------------ ------------
COSTS AND OPERATING EXPENSES:
Vacation Interval cost of sales..... 42,668,000 34,077,000 28,992,000
Advertising, sales, and marketing... 78,029,000 54,610,000 47,081,000
Loan portfolio:
Interest expense--treasury........ 13,482,000 10,077,000 8,224,000
Other expenses.................... 4,495,000 2,018,000 1,460,000
Provision for doubtful accounts... 8,009,000 3,500,000 1,956,000
General and administrative.......... 30,273,000 13,599,000 8,463,000
Resort property valuation allowance. 2,620,000 -- --
Depreciation and amortization....... 4,639,000 2,154,000 990,000
------------ ------------ ------------
Total costs and operating
expenses......................... 184,215,000 120,035,000 97,166,000
------------ ------------ ------------
Income from operations.............. 7,685,000 25,667,000 18,672,000
Interest expense--other (net of
capitalized interest of $6,723,000,
and $3,315,000 in 1996 and 1995,
respectively)........................ 3,725,000 1,515,000 1,313,000
Equity loss on investment in joint
venture............................ 236,000 1,649,000 271,000
Minority interest in income of
consolidated limited partnership... 199,000 -- --
------------ ------------ ------------
Income before (benefit) provision
for income taxes.................. 3,525,000 22,503,000 17,088,000
Provision (benefit) for income
taxes.............................. (5,244,000) 3,012,000 2,046,000
------------ ------------ ------------
Net income......................... $ 8,769,000 $ 19,491,000 $ 15,042,000
============ ============ ============
PRO FORMA INCOME DATA (UNAUDITED):
Income before provision for income
taxes............................. $ 3,525,000 $ 22,503,000 $ 17,088,000
Pro forma provision for income
taxes.............................. 1,410,000 9,001,000 6,664,000
------------ ------------ ------------
Pro forma net income............... $ 2,115,000 $ 13,502,000 $ 10,424,000
============ ============ ============
Pro forma net income per common and
common equivalent share ........... $ .08 $ .61 --
Pro forma weighted average common
and common equivalent shares
outstanding........................ 25,697,246 21,958,455 --
</TABLE>
See accompanying notes to the consolidated financial statements.
F-7
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL GENERAL LIMITED
SHARES PAID-IN RETAINED MEMBERS' PARTNERS' PARTNERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS DEFICIT EQUITY EQUITY TOTAL EQUITY
----------- -------- ------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1993........... 4,926,398 $ 49,000 $ 2,571,000 $ 19,774,000 $ -- $ (59,000) $ 11,897,000 $ 34,232,000
Payment for stock
held in escrow..... -- -- 10,000 -- -- -- -- 10,000
Repurchase of AVCOM
common stock....... -- -- (30,000) -- -- -- -- (30,000)
Contributions....... -- -- -- -- -- 3,205,000 12,315,000 15,520,000
Distributions....... -- -- -- (4,434,000) -- -- (870,000) (5,304,000)
Net income.......... -- -- -- 10,479,000 -- 183,000 4,380,000 15,042,000
---------- -------- ------------ ------------ ----------- ----------- ------------ ------------
Balance at December
31, 1994........... 4,926,398 49,000 2,551,000 25,819,000 -- 3,329,000 27,722,000 59,470,000
---------- -------- ------------ ------------ ----------- ----------- ------------ ------------
Issuance of Common
Stock.............. 200 20,000 157,000 -- -- -- -- 177,000
Proceeds from the
sale of AVCOM
common stock, net
of issuance costs
of $115,000........ -- -- 885,000 -- -- -- -- 885,000
Contributions....... -- -- 150,000 655,000 1,000 374,000 -- 1,180,000
Distributions....... -- -- -- (4,811,000) (2,437,000) (43,000) (1,950,000) (9,241,000)
Net income.......... -- -- -- 10,629,000 1,004,000 516,000 7,342,000 19,491,000
---------- -------- ------------ ------------ ----------- ----------- ------------ ------------
Balance at December
31, 1995........... 4,926,598 69,000 3,743,000 32,292,000 (1,432,000) 4,176,000 33,114,000 71,962,000
---------- -------- ------------ ------------ ----------- ----------- ------------ ------------
Distributions of
partnership equity
and other equity
interests.......... -- -- -- (7,191,000) (5,394,000) -- (1,633,000) (14,218,000)
Conversion of
convertible notes
payable to AVCOM
common stock....... -- -- 400,000 -- -- -- -- 400,000
Proceeds from the
sale of common
stock to the
public, net of
offering costs,
including
16,211,558 shares
issued in exchange
for partners' and
members' equity.... 25,267,807 253,000 73,071,000 -- -- -- -- 73,324,000
Stock issued and
goodwill recorded
in connection with
the acquisition of
investment in Joint
Venture............ 820,500 8,000 4,981,000 -- -- -- -- 4,989,000
Acquisition of
minority limited
partners'
interests.......... -- -- (7,465,000) -- -- -- -- (7,465,000)
Deferred taxes
recorded in
connection with the
Consolidation
Transactions....... -- -- (9,464,000) -- -- -- -- (9,464,000)
Interest accrued on
deferred
installment gains
in connection with
the Consolidation
Transactions....... -- -- (820,000) -- -- -- -- (820,000)
Net (loss) income... -- -- -- 1,610,000 3,568,000 (164,000) 3,755,000 8,769,000
Exchange of
partners' and
members' equity for
stock in connection
with the
Consolidation
Transactions....... (200) (20,000) 37,380,000 (1,370,000) 3,258,000 (4,012,000) (35,236,000) --
Assignment to
venturers' of
receivable due from
related party...... -- -- -- (3,449,000) -- -- -- (3,449,000)
Write-off of
receivable from
related party...... -- -- -- (3,890,000) -- -- -- (3,890,000)
---------- -------- ------------ ------------ ----------- ----------- ------------ ------------
Balance at December
31, 1996........... 31,014,705 $310,000 $101,826,000 $ 18,002,000 $ -- $ -- $ -- $120,138,000
========== ======== ============ ============ =========== =========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-8
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................... $ 8,769,000 $ 19,491,000 $ 15,042,000
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization...... 4,639,000 2,154,000 990,000
Gain on sale of notes receivable... -- (566,000) (571,000)
Provision for doubtful accounts.... 8,009,000 3,500,000 1,956,000
Resort property valuation
allowance......................... 2,620,000 -- --
Equity loss on investment in joint
venture........................... 236,000 1,649,000 271,000
Minority interest in income of
consolidated limited partnership.. 199,000 -- --
Loss on disposal of property and
equipment......................... 573,000 -- --
Changes in operating assets and
liabilities:
Cash in escrow................... 1,037,000 473,000 (1,617,000)
Due from related parties......... (1,575,000) (4,083,000) (5,182,000)
Prepaid expenses and other
assets.......................... (5,361,000) (3,791,000) (51,000)
Real estate and development
costs........................... (71,923,000) (18,021,000) (17,884,000)
Other receivables................ (769,000) (5,603,000) (744,000)
Accounts payable................. 12,799,000 5,131,000 1,221,000
Accrued liabilities.............. 18,554,000 7,610,000 1,800,000
Income taxes payable............. 823,000 97,000 91,000
Deferred taxes................... (8,543,000) 448,000 506,000
Due to related parties........... (250,000) 1,381,000 401,000
------------- ------------ ------------
Net cash (used in) provided by
operating activities............... (30,163,000) 9,870,000 (3,771,000)
------------- ------------ ------------
INVESTING ACTIVITIES:
Expenditures for investment in joint
venture............................ -- -- (4,565,000)
Expenditures for property and
equipment.......................... (6,899,000) (3,831,000) (1,258,000)
Expenditures for intangible assets.. (2,206,000) (2,608,000) (3,300,000)
Mortgages receivable................ (75,512,000) (48,353,000) (24,230,000)
------------- ------------ ------------
Net cash used in investing
activities......................... (84,617,000) (54,792,000) (33,353,000)
------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable to
financial institutions............. 170,054,000 98,733,000 42,557,000
Payments on notes payable to
financial institutions............. (101,230,000) (45,407,000) (20,010,000)
Proceeds from notes payable to
related parties.................... 5,606,000 3,711,000 5,145,000
Payments on notes payable to related
parties............................ (15,049,000) (1,343,000) (2,569,000)
Contributions ...................... 1,500,000 1,358,000 15,520,000
Proceeds from Initial Public
Offering........................... 73,324,000 885,000 --
Acquisition of minority limited
partners' interests................ (7,465,000) -- --
Repurchase of AVCOM common stock.... -- -- (30,000)
Distributions....................... (14,379,000) (9,241,000) (5,304,000)
------------- ------------ ------------
Net cash provided by financing
activities......................... 112,361,000 48,696,000 35,309,000
------------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents................... (2,419,000) 3,774,000 (1,815,000)
Cash and cash equivalents, beginning
of period.......................... 16,806,000 13,032,000 14,847,000
------------- ------------ ------------
Cash and cash equivalents, end of
period............................. $ 14,387,000 $ 16,806,000 $ 13,032,000
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest........................... $ 24,210,000 $ 14,400,000 $ 11,855,000
Cash paid during the period for
income taxes....................... $ 734,000 $ 2,050,000 $ 1,236,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INFORMATION
Stock issued and goodwill recorded
in connection with the acquisition
of investment in joint venture..... $ 4,989,000
Deferred taxes recorded in
connection with the Consolidated
Transactions....................... $ 9,464,000
Interest accrued on deferred
installment gains in connection
with the Consolidation
Transactions....................... $ 820,000
Net assets of predecessor
partnership acquired in exchange
for 17,032,058 shares of common
stock in connection with the
Consolidation Transactions......... $ 37,380,000
Conversion of convertible notes
payable to AVCOM common stock...... $ 400,000
Assignment to venturers of
receivable due from related party
recorded as a reduction of
venturers' equity.................. $ 3,449,000
Write off of receivable from related
party recorded as a reduction of
stockholders' equity............... $ 3,890,000
</TABLE>
See accompanying notes to the consolidated financial statements.
F-9
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. NATURE OF BUSINESS
Signature Resorts, Inc. and its wholly-owned subsidiaries (the Company)
generate revenues from the sale and financing of vacation ownership interests
in their resorts, which typically entitle the owner to use a fully furnished
vacation resort in perpetuity, typically for a one-week period each year
(each, a Vacation Interval). The Company's principal operations consist of (i)
developing and acquiring vacation ownership resorts, (ii) marketing and
selling Vacation Intervals at its resorts, (iii) providing consumer financing
for the purchase of Vacation Intervals at its resorts, and (iv) managing the
operations of its resorts.
The Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its Common Stock (the
Initial Public Offering) by offering 9,056,250 shares to the public. The gross
proceeds from the public offering were $84,525,000. The Company incurred
$11,201,000 of costs associated with this offering. Concurrent with the
Initial Public Offering, certain predecessor limited partnerships, limited
liability companies and corporations (the Entities) exchanged their direct or
indirect interest in, and obligations of the entities, for 16,211,558 shares
of the Company's common stock (the Consolidation Transactions). The
accompanying consolidated financial statements reflect the financial position
and results of operations of the Entities since the date they were acquired or
formed, which range from November 1986 to June 1996. Concurrent with the
Initial Public Offering, the Company exchanged 820,500 shares of Common Stock
with the former holders of interests in the Embassy Vacation Resort at Poipu
Point, Koloa, Kauai, Hawaii.
On September 23, 1996, the Company announced the signing of a merger
agreement to acquire AVCOM International Inc. (AVCOM) for approximately $34.6
million of the Company's Common Stock. AVCOM is the parent company of All
Seasons Resorts, Inc., a developer, marketer and operator of vacation
ownership resorts in Arizona, California and Texas. On February 7, 1997 this
merger (the "AVCOM Merger") was consummated. Under the terms of the merger
agreement, the Company issued approximately 1,324,554 shares of its common
stock in exchange for all the outstanding capital stock of AVCOM. The AVCOM
Merger has been treated as a pooling-of-interests and is reflected in the
accompanying financial statements as if it took place at the beginning of the
earliest period presented.
On May 15, 1997, the Company announced the acquisition and merger (the PRG
Merger) of Plantation Resorts Group, Inc. (PRG), a Williamsburg, Virginia,
based developer, owner and operator of vacation ownership intervals. PRG owns
and operates vacation ownership resorts in Williamsburg, Virginia. PRG was
incorporated in April 1997 through a private placement of its common stock in
which certain predecessor joint ventures and corporations (the PRG Entities)
exchanged their interests for shares of PRG's common stock (the PRG Exchange).
The PRG Merger was consummated through the issuance of 3.6 million shares of
the Company's common stock. The PRG Merger has been treated as a pooling-of-
interests and is reflected in the accompanying financial statements as if it
took place at the beginning of the earliest period presented.
Total revenues of the combined entities were $191,900,000, $145,702,000 and
$115,838,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. AVCOM contributed $48,421,000, $34,269,000 and $24,854,000 and
PRG contributed $48,425,000, $38,825,000 and $46,694,000 to the Company's
total revenues during the years ended December 31, 1996, 1995 and 1994,
respectively.
Net income of the combined entities was $8,769,000, $19,491,000 and
$15,042,000 during the years ended December 31, 1996, 1995 and 1994,
respectively. AVCOM contributed $(12,442,000), $1,040,000 and $922,000 and PRG
contributed $7,031,000, $7,538,000 and $9,829,000 to the Company's net (loss)
income during the years ended December 31, 1996, 1995 and 1994, respectively.
There were no intercompany transactions between the Company and PRG for all
periods presented.
F-10
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of the AVCOM Merger, AVCOM recorded approximately $13.6 million of
expenses during 1996 as a result of the write-down and write-off of certain
assets recorded by AVCOM.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the combined accounts of
Signature Resorts, Inc., AVCOM, PRG and the Entities discussed in Note 1 that
were acquired or formed prior to August 20, 1996, which became wholly-owned
subsidiaries in connection with the Consolidation Transactions, the AVCOM
Merger or the PRG Merger. As a result, the combined accounts are now referred
to as consolidated financial statements for the historical periods presented.
All significant intercompany transactions and balances have been eliminated
from these consolidated financial statements.
The Consolidation Transactions have been accounted for as a reorganization
of entities under common control. Accordingly, the net assets of the
predecessor entities were recorded at the predecessor entities' basis. In
addition, the accompanying financial statements reflect the historical results
of operations of the predecessor partnerships on a combined basis.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market, and all highly
liquid investments purchased with an original maturity of three months or
less.
Cash in Escrow
Cash in escrow is restricted cash consisting of deposits received on sales
of Vacation Intervals that are held in escrow until a certificate of occupancy
is obtained or the legal rescission period has expired.
Real Estate and Development Costs
Real estate is valued at the lower of cost or net realizable value.
Development costs include both hard and soft construction costs and together
with real estate costs are allocated to Vacation Intervals. Interest, taxes,
and other carrying costs incurred during the construction period are
capitalized.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of 3 to 7 years. Buildings
are amortized over the estimated useful life of 39 to 40 years.
Depreciation and amortization expense related to property and equipment was
$1,154,000, $590,000, and $295,000 in 1996, 1995 and 1994, respectively.
Intangible Assets
Organizational costs incurred in connection with the formation of the
Company have been capitalized and are being amortized on a straight-line basis
over a period of three to five years. Start-up costs relate to costs incurred
to develop a marketing program prior to receiving regulatory approval to
market the related property and are being amortized on a straight line basis
over a period of one year.
F-11
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financing and loan origination fees incurred in connection with obtaining
funding for the Company have been capitalized and are being amortized over the
life of the respective loans.
Goodwill recorded in connection with the acquisition of the Investment in
Joint Venture is being amortized by a fixed amount per Interval as Intervals
are sold.
Revenue Recognition
The Company recognizes sales of Vacation Intervals on an accrual basis after
a binding sales contract has been executed, a 10% minimum down payment has
been received, the rescission period has expired, construction is
substantially complete, and certain minimum sales levels have been achieved.
If all the criteria are met except that construction is not substantially
complete, then revenues are recognized on the percentage-of-completion (cost
to cost) basis. For sales that do not qualify for either accrual or
percentage-of-completion accounting, all revenue is deferred using the deposit
method.
Revenues from resort management and maintenance services are recognized on
an accrual basis as earned.
Income Taxes
Prior to August 20, 1996, the predecessor entities were taxed either as a
corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level. The
Company became subject to federal, state, and foreign income taxes from the
effective date of the Initial Public Offering. The pro forma net income per
common and common equivalent share uses the historical net income of the
Company as adjusted by the unaudited pro forma provision for income taxes to
reflect the net income per common and common equivalent share, as if the
Company had been treated as a C corporation rather than as individual limited
partnerships and limited liability companies for federal income tax purposes
for the years ended December 31, 1996, 1995 and 1994.
As a result of the AVCOM Merger (see Note 1), AVCOM's results of operations
have been included in the accompanying financial statements under the pooling-
of-interests method of accounting. During each period presented, AVCOM was
taxed as a C corporation.
Prior to the PRG Merger, certain of the PRG Entities were not subject to
federal and state income taxes for all periods presented. In connection with
the PRG Exchange and the PRG Merger, PRG became a C corporation, which made it
subject to federal and state income taxes from the date of incorporation. As a
result the pro forma provision for income taxes assumes the PRG entities were
treated as C corporations for federal income tax purposes.
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax assets and liabilities are measured by applying enacted statutory
tax rates applicable to the future years in which the related deferred tax
assets or liabilities are expected to be settled or realized. Income tax
expense consists of the taxes payable for the current period and the change
during the period in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-12
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Newly Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (SFAS 121), which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for the expected disposition of long-lived assets. The Company
adopted SFAS 121 during the year ended December 31, 1996. The impact of
adopting SFAS 121 was to reduce net income by $2,620,000 and has been recorded
as a resort property valuation allowance to reduce real estate and development
costs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 was adopted
during the year ended December 31, 1996. SFAS 123 requires that the Company's
financial statements include certain disclosures about stock-based employee
compensation arrangements and permits the adoption of a change in accounting
for such arrangements. Changes in accounting for stock-based compensation are
optional and the Company has adopted only the disclosure requirements.
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share. The statement establishes standards for computing and presenting
earnings per share (EPS) and applies to publicly held common stock or
potential common stock. The statement simplifies the standards for computing
EPS previously found in APB Opinion No. 15, Earnings Per Share (Opinion 15).
It replaces presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
The statement requires implementation for the Company during the fourth
quarter of 1997 and does not allow for early implementation. However, if the
Company had implemented SFAS 128, basic EPS and diluted EPS would have been
$0.16 and $0.64, for the years ended December 31, 1996 and 1995, respectively.
Reclassifications
Certain reclassifications were made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
3. ACCOUNTS RECEIVABLE
The Company has accrued insurance claims, of $1.25 million and $3.8 million
at December 31, 1996 and 1995, respectively, which are included in other
receivables, as a result of hurricane damage to its Royal Palm and Flamingo
properties located in St. Maarten, Netherlands Antilles. The receivable at
December 31, 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. Subsequent to December 31, 1996, the Company collected $650,000
in partial payment of this receivable.
F-13
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGES RECEIVABLE
The Company provides financing to the purchasers of Vacation Intervals which
are collateralized by their interest in such Vacation Intervals. The mortgages
receivable generally bear interest at the time of issuance of between 12% and
17% and remain fixed over the term of the loan, which is five to ten years.
The weighted average rate of interest on outstanding mortgages receivable is
15% as of December 31, 1996.
As of December 31, 1996, approximately 4.1% of the Company's consumer loans
were considered by the Company to be delinquent (past due 60 or more days). In
addition, the Company had commenced deed-in-lieu of foreclosure or foreclosure
action on 1.2% of its consumer loans as of December 31, 1996.
At December 31, 1996 and 1995, approximately $3.7 million and $1.8 million,
respectively, of mortgages receivable are non-interest bearing. These
mortgages have not been discounted as management has determined that the
effect would not be material to the consolidated financial statements.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $2,434,000 and $1,968,000 at December 31, 1996 and
1995, respectively. The accrued interest receivable at December 31, 1996 and
1995 is net of an allowance for doubtful accounts of $165,000 and $145,000,
respectively, and is included in other receivables, net.
The following schedule reflects the principal maturities of mortgages
receivable:
<TABLE>
<S> <C>
Year ending December 31:
1997....................................................... $ 30,249,000
1998....................................................... 30,330,000
1999....................................................... 30,148,000
2000....................................................... 30,800,000
2001....................................................... 31,010,000
Thereafter................................................. 77,922,000
------------
Total principal maturities of mortgages receivable......... 230,459,000
Less allowance for doubtful accounts....................... (16,989,000)
------------
Net principal maturities of mortgages receivable......... $213,470,000
============
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts is
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Balance, beginning of the period................. $ 13,114,000 $ 8,738,000
(Decrease) increase in allowance for purchased
mortgage receivables............................ (400,000) 3,156,000
Provision........................................ 8,009,000 3,500,000
Receivables charged off.......................... (3,734,000) (2,280,000)
------------ -----------
Balance, end of the period..................... $ 16,989,000 $13,114,000
============ ===========
</TABLE>
During September 1995, the Company recorded an allowance for doubtful
accounts of $3,412,000 for certain mortgage portfolios acquired in conjunction
with the acquisition of the two properties in St. Maarten.
F-14
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated cost of sales consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ -------------
<S> <C> <C>
Land.......................................... $54,514,000 $ 26,458,000
Development costs, excluding capitalized
interest..................................... 228,228,000 149,112,000
Capitalized interest.......................... 13,276,000 6,553,000
------------ -------------
Total real estate and development costs....... 296,018,000 182,123,000
Less accumulated cost of sales................ (155,997,000) (114,025,000)
Less resort property valuation allowance...... (2,620,000) --
------------ -------------
Net real estate and development costs....... $137,401,000 $ 68,098,000
============ =============
</TABLE>
As of December 31, 1996, the Company commenced vacation interval sales at
certain properties or phases of certain properties that are expected to be
completed during 1997. The estimated costs to complete the projects, or the
specific phases of the projects, is approximately $28.4 million.
6. INVESTMENT IN JOINT VENTURE
The Company owns partnership interests in the Embassy Vacation Resort at
Poipu Point, Koloa, Kauai, Hawaii (the "Poipu Partnership"). As co-managing
general partner, the Company holds a 0.5% partnership interest for purposes of
distributions, profits and losses. The Company is also a limited partner and
holds a 29.93% limited partnership interest for purposes of distributions,
profits and losses, for a total partnership interest of 30.43%. In addition,
following repayment of any outstanding partner loans, the Company is entitled
to receive a preferred 10% per annum return on the initial capital investment
of approximately $4.6 million. After payment of such preferred return and the
return of approximately $4.6 million of capital to the Company on a pari passu
basis with the other partner in the partnership, the Company is entitled to
receive approximately 50% of the net profits. In the event certain internal
rates of return specified under the partnership agreement are achieved, the
Company is entitled to receive approximately 55% of the net profits.
Summarized financial information for the Poipu Partnership is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Mortgages receivable................................ $15,920,000 $ 3,474,000
Real estate and development costs, net.............. 38,262,000 3,248,000
Net property and equipment.......................... 510,000 39,287,000
Total assets........................................ 60,474,000 50,696,000
Notes payable....................................... 40,903,000 35,494,000
Advances from partners.............................. 6,675,000 4,000,000
Partners' capital................................... 8,452,000 8,688,000
Revenues............................................ 23,904,000 10,119,000
Net loss............................................ 237,000 5,419,000
</TABLE>
Concurrent with the Initial Public Offering, the Company exchanged 820,000
shares of stock with the former holders of interests in the Poipu Partnership
for the 30.43% interest in the joint venture. As a result of this exchange,
$4,989,000 of goodwill was recorded as an increase in investment in joint
venture and is being amortized on a per Interval basis as Intervals are sold.
The amortization of such goodwill for the year ended December 31, 1996 was
$168,000 and is included in equity loss on investment in joint venture. The
Company also acquired a $2,547,000 note receivable from the partnership in
connection with the exchange. The principal balance and accrued interest
related to this note receivable was $2,031,000 and $291,000 respectively, and
is included in due from related parties as of December 31, 1996.
F-15
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Organizational costs............................... $ 2,569,000 $ 2,547,000
Start-up costs..................................... 2,433,000 2,051,000
Bond issuance costs................................ 933,000 933,000
Loan origination fees.............................. 2,712,000 1,514,000
Financing fees..................................... 1,620,000 1,444,000
----------- -----------
Total intangible assets............................ 10,267,000 8,489,000
Less accumulated amortization...................... (5,772,000) (2,715,000)
----------- -----------
Net intangible assets............................ $ 4,495,000 $ 5,774,000
=========== ===========
</TABLE>
Amortization expense was $3,485,000, $1,564,000 and $694,000 in 1996, 1995
and 1994, respectively. In addition, $428,000 of fully amortized intangibles
were retired from the related asset and accumulated amortization accounts in
1996.
8. NOTES PAYABLE
Notes payable to financial institutions consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Construction loans payable not to exceed $49.0 million
in the aggregate, interest payable monthly at prime
plus 2% (10.65% at December 31, 1995)................. $ -- $ 9,268,000
Construction and acquisition loan payable, due October
31, 1998 with interest payable monthly at LIBOR plus
4.25% (9.94% at December 31, 1995) collateralized by
land, improvements and vacation ownership interests... -- 1,898,000
Revolving lines of credit not to exceed $161 million in
the aggregate (limited by eligible collateral), with
interest payable monthly at prime plus 2% to prime
plus 3% (10.25% to 11.25% at December 31, 1996),
payable in monthly installments of principal and
interest equal to 100% of all proceeds of the
receivables collateral collected during the month but
not less than the accrued interest, with any remaining
principal due seven to ten years after the date of the
last advance related to mortgages receivable,
collateralized by specific mortgages receivable....... 61,290,000 45,791,000
Revolving line of credit, collateralized by certain
mortgages receivable with interest payable at prime
plus 1.5% to prime plus 1.75% (9.75% to 10% at
December 31, 1996) or LIBOR plus 4.25% (9.78% at
December 31, 1996), payable in monthly installments of
principal and interest equal to 100% of all proceeds
of the receivables collateral collected during the
month but not less than the accrued interest, with any
remaining principal from September 2000 to October
2003.................................................. 21,648,000 18,125,000
</TABLE>
F-16
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
------------ -----------
<S> <C> <C>
Revolving line of credit of $40.0 million and $25
million during 1996 and 1995, respectively, with
interest payable monthly at LIBOR plus 3% (8.69% at
December 31, 1996) payable in monthly installments
of principal and interest equal to 100% of all
proceeds of the receivables collateral collected
during the month but not less than the accrued
interest, with any remaining principal due June
1998................................................ $ 37,226,000 $12,277,000
Revolving working capital line of credit of $4.0
million, with interest payable monthly at prime plus
2% (10.25% at December 31, 1996), due in April 1999,
collateralized by certain mortgage receivables...... 3,707,000 521,000
Acquisition loans payable not to exceed $14.45
million in the aggregate, with interest payable
monthly at prime plus 2% to prime plus 3% (10.25% to
11.25% at December 31, 1996), due on dates ranging
from January 1998 to June 1999, payable with a
portion of the proceeds received on the sale of
Vacation Intervals, collateralized by specific
mortgages receivable................................ 4,396,000 5,998,000
Acquisition note payable with monthly principal and
interest payments due at 8%, collateralized by
certain real property, due January 10, 2001......... 615,000 --
Acquisition note payable with monthly interest
payments due at 6.75%, collateralized by certain
real property, due June 14, 1999.................... 552,000 --
Acquisition note payable with monthly principal and
interest payments due at 9%, collateralized by
certain real property, due February 14, 2014........ 436,000 --
Construction loan payable not to exceed $47 million
in the aggregate, with monthly interest payable at
prime plus 2% (10.25% at December 31, 1996)
principal payable with a portion of the proceeds
received on the sale of Vacation Intervals,
collateralized by specific land and unsold interval
inventory, due from January 1998 to April 2004...... 16,476,000 3,692,000
Construction loan payable not to exceed $3.0 million
in the aggregate, with monthly interest payable at
LIBOR plus 4.25% (9.78% at December 31, 1996)
principal payable with a portion of the proceeds
received on the sale of Vacation Intervals,
collateralized by specific land and unsold interval
inventory, due by October 31, 1998.................. 419,000 --
Noninterest bearing land purchase obligation (net of
a $335,000 discount for imputed interest at 8.5% in
1996) due October 1, 1997........................... 2,165,000 1,500,000
Note payable with monthly interest payable at LIBOR
plus 4.25% (9.78% at December 31, 1996) payable with
a portion of the proceeds on the sale of Vacation
Intervals, collateralized by specific land.......... 516,000 --
Noninterest bearing land loan of $500,000 payable at
$54 per interval sold with remaining balance due May
1, 1997............................................. 500,000 --
Notes payable to certain investors and former owners,
with monthly principal payments of $100,000, plus
interest at 12%, with additional interest of $325
per interval sold, due April 10, 1998............... 1,655,000 2,900,000
Mortgages receivable sold with option to repurchase,
collateralized by certain mortgages receivable...... 6,281,000 --
</TABLE>
F-17
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Noninterest bearing purchase money mortgage note,
payable in annual installments of $2.0 million with
final payment due November 5, 1997 (net of a
discount of $670,000 for imputed interest at 8.5%
at December 31, 1996 collateralized by specific
land).............................................. $ 1,330,000 $ 5,588,000
Bonds payable, due April 2004 with interest at
7.75%, payable from collections of mortgages
receivable, collateralized by mortgages receivable. 17,460,000 23,180,000
Endpaper loan, due dates from December 2002 to April
2003 with interest at prime plus 2% to prime plus
2.25% (10.25% to 10.5% at December 31, 1996),
payable from collections of mortgages receivable,
collateralized by mortgages receivable............. 30,327,000 23,748,000
Endpaper loan, due dates from December 2002 to June
2005 with interest at prime plus 1.25% (9.5% at
December 31, 1996), payable from collections of
mortgages receivable, collateralized by mortgages
receivable......................................... 5,259,000 2,104,000
Other notes payable................................. 23,432,000 10,676,000
------------ ------------
Total notes payable............................... $235,690,000 $167,266,000
============ ============
</TABLE>
Under the terms of the revolving lines of credit agreements, totaling
approximately $220 million, the Company may typically borrow from 85% to 90%
of the balances of the pledged mortgages receivable. A total of $112 million
is available under these certain agreements at December 31, 1996, the
borrowing capacity expires seven to ten years after the date on which the last
advance related to mortgages receivable was executed.
The loans contain certain covenants, the most restrictive of which require
certain of the consolidated entities to maintain a minimum net worth and
require certain expenses to not exceed certain percentages of sales. At
December 31, 1996, the Company was in compliance with all covenants or had
received waivers with respect to these covenants.
Dividends are restricted by certain of the Company's debt agreements which
require tangible net worth of at least $140 million.
Subsequent to December 31, 1996, the Company paid $84,551,000 of the
$235,690,000 notes payable outstanding at December 31, 1996, including all
other notes payable. The expected maturities of the remaining notes payable,
are as follows:
<TABLE>
<S> <C>
Due in fiscal year
1997........................................................ $ 36,095,000
1998........................................................ 29,379,000
1999........................................................ 27,775,000
2000........................................................ 26,191,000
2001........................................................ 21,467,000
2002 and thereafter......................................... 10,232,000
------------
$151,139,000
============
</TABLE>
In February 1997, the Company consummated its offering (the "Convertible
Offering") of $138 million aggregate principal amount of its 5.75% Convertible
Subordinated Notes due 2007 (the "Convertible Notes") and its offering (the
"Stock Offering" and together with the Convertible Offering the "Offerings")
of 6.0 million shares of its Common Stock (including 2.4 million primary
shares sold by the Company and 3.6 million secondary shares sold by certain
selling stockholders).
F-18
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Convertible Notes may be exchanged for shares of the Company's Common
Stock at any time prior to maturity on January 15, 2007. Each $1,000 principal
amount of Convertible Notes is exchangeable at a conversion price of $30.417
per share, subject to adjustment under certain circumstances as stated in the
related Indenture.
The net proceeds to the Company from the sale of the 2.4 million primary
shares of Common Stock offered by the Company in the Stock Offering, based on
public offering price of $24.33 per share, and from the sale of the $138.0
million aggregate principal amount of 5.75% Convertible Subordinated Notes due
2007 offered by the Company in the Convertible Offering, based on a public
price of 100% of the principal amount thereof, in each case after deducting
underwriting discounts and estimated expenses of the Offerings, were $53.2
million and $134.9 million, respectively.
In August 1997, the Company consummated a private placement offering (the
"Senior Subordinated Notes Offering") of $200.0 million aggregate principal
amount of its 9.75% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes") at a price of 99.234% of the principal amount for an
effective yield of 9.875% per annum. After deducting underwriters discounts
and expenses, the net proceeds to the Company were $191.0 million.
9. RELATED-PARTY TRANSACTIONS
At December 31, 1996, the Company, had accrued $4,405,000 and $1,590,000 as
a receivable and payable, respectively, with the various homeowners'
associations at its resorts. The Company accrued $1,220,000 and $1,771,000 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 $1,030,000 of a
special assessment fee charged to the Company. The Company generally accrues
receivables from homeowners' associations for management fees and certain
other expenses. Payables to the homeowners' associations consist mostly of
maintenance fees for units owned by the Company. All of these amounts are
classified as due from and due to related parties in the accompanying
consolidated balance sheets.
The Company recorded a receivable of $1,154,000 and $121,000 from two of its
predecessor partnerships at December 31, 1995, for predevelopment costs
incurred by the Company at its Embassy Vacation Resort Lake Tahoe and San Luis
Bay Resorts. These receivables were included as due from related parties. Such
predecessor partnerships were consolidated into the Company on August 20,
1996, as a result of the Consolidation Transactions.
Additionally, amounts due from related parties include advances to
affiliates and owners of the Company of $4,044,000 and $12,316,000 at December
31, 1996 and 1995, respectively. These amounts represent advances to entities
owned by shareholders to fund working capital and expansion.
Due from related parties also includes amounts due from shareholders
totaling $383,000 and $1,817,000 at December 31, 1996 and 1995, respectively.
These amounts represent advances for services to be provided to the Company.
For each of the three years in the period ended December 31, 1996,
shareholders of the Company, through their affiliates, provided certain
marketing and development services to the Company as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Marketing................................ $16,071,000 $11,812,000 $15,597,000
Development.............................. 13,572,000 10,612,000 9,006,000
</TABLE>
The above services were performed at rates negotiated by the shareholders
and are reflected in the accompanying consolidated statements of income,
except for development-related costs, which have been capitalized as real
estate and development costs.
F-19
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company wrote off a receivable from a related party that
the Company determined would not be collected. The receivable of $3,890,000
was charged to stockholders' deficit in accordance with Accounting Principles
Board Opinion No. 26, Early Extinguishment of Debt, since the related party
was under common control. In addition, a predecessor entity that was acquired
by the Company in connection with the PRG Merger, assigned its rights to a
receivable from a related party to its owners (i.e., the Venturers'). This
receivable of $3,449,000 was treated as a reduction of stockholders' equity
since the related party was under common control.
The Company made payments of $295,000 during the twelve months ended
December 31, 1995, to an affiliate of the Company for construction consulting
and expense reimbursement. For the year ended December 31, 1996, no such
payments were made.
Notes payable to related parties as of December 31, 1995 consist of the
following:
<TABLE>
<S> <C>
Notes payable to CPI Securities, L.P., an affiliate of a limited
partner, with interest at 12%, payable monthly and the entire
principal balance and all accrued interest due on December 31,
1996........................................................... $2,722,000
Notes payable to Grace Investments, Ltd. one of the limited
partners, with interest at 12% payable monthly, due on December
31, 1996....................................................... 1,667,000
Notes payable to Dickstein & Company, L.P., an affiliate of a
limited partner, with interest payable monthly at 12%, due on
December 31, 1996.............................................. 1,111,000
Acquisition loan payable with interest payable at 12%, due on
December 31, 1996.............................................. 1,495,000
Notes payable to partners, with interest accrued at 16%, payable
on demand...................................................... 2,157,000
Other........................................................... 291,000
----------
Total notes payable to related parties........................ $9,443,000
==========
</TABLE>
During 1996, notes payable to related parties were satisfied as part of the
Consolidation Transactions.
10. COMMITMENTS AND CONTINGENCIES
The Company has license agreements with Embassy Vacation Resorts, a division
of The Promus Corporation ("Promus"), to franchise the Grand Beach and Lake
Tahoe properties. The agreements allow the resorts to be operated and marketed
as "Embassy Vacation Resorts." The agreements provide for Promus to be paid a
percentage of net sales of the Embassy Vacation Resort properties. Additional
terms are stated in the related license agreements.
The Company has an agreement with Westin Hotels & Resorts ("Westin") to
acquire, develop, and sell Vacational Intervals at four and five star Westin
Vacation Clubs. In December 1996, the Company announced plans to acquire the
first Westin Vacation Club. This property will be located in St. John, U.S.
Virgin Islands. The Company and Westin will form the Westin Partnership owned
50% each by the Company and Westin to acquire an interest in the St. John
Resort. Of the $10.5 million purchase price, each company is obligated to
contribute $2.5 million. The remaining $5.5 million of the acquisition price
will be paid by the Westin Partnership using debt financing. In addition, the
Westin Partnership will borrow approximately $7.1 million to complete the
conversion of the project to a Westin Vacation Club.
The Company is currently subject to litigation and claims regarding
employment, tort, contract, construction, and commission disputes, among
others. In the judgment of management, none of such lawsuits or claims against
the Company is likely to have a material adverse effect on the Company or its
business.
F-20
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and cash in escrow: The carrying amount reported
in the balance sheet for cash and cash equivalents and cash in escrow
approximates their fair value because of the short maturity of these
instruments.
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable to financial institutions: The carrying amount reported in the
balance sheet for notes payable approximates its fair value because the
interest rates on these instruments approximate current interest rates charged
on similar current borrowings.
Notes payable to related parties: The fair value of the notes payable to
related parties is not determinable since these financial instruments are not
readily marketable and are payable to related parties.
12. OTHER INCOME
Included in other income for the year ended December 31, 1996, is primarily
$3.5 million of income from the realization of purchased mortgages receivable,
$1.7 million of income related to the settlement of certain receivables from
the former owners of the St. Maarten properties, $2.0 million of rental
income, $0.9 million of management fees, $(0.5) million of losses from AVCOM's
property management and health spa operations, and $1.0 million of consulting
and development income related to certain joint marketing programs. Other
income for the year ended December 31, 1995, consists primarily of business
interruption insurance proceeds of $2.0 million, income from the realization
of purchased mortgages receivable of $2.2 million, rental income of $1.3
million, $1.2 million of management fees.
F-21
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. STOCK OPTIONS
The Company issued 2,653,500 stock options during 1996 which were
outstanding at December 31, 1996. The Company accounts for these options under
APB Opinion No. 25, Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. Under SFAS 123, the Company's net
income and unaudited pro forma earnings per share would have been $6,491,000
and ($0.01), respectively, during the year ended December 31, 1996. SFAS 123
would not have affected the Company's net income and earnings per share for
the years ended December 31, 1995 and 1994. A summary of the Company's stock
options for the year ended December 31, 1996 is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding options, beginning of year.................. -- --
Granted................................................. 2,653,500 $10.29
Exercised............................................... -- --
Forfeited............................................... -- --
Expired................................................. -- --
--------- ------
Outstanding options, end of year........................ 2,653,500 $10.29
========= ======
Exercisable at end of year.............................. 522,000 $10.18
Weighted average fair value of options granted.......... $ 4.23
</TABLE>
The following is a summary of the exercise prices and terms of the 2,653,500
options granted during 1996.
<TABLE>
<CAPTION>
EXERCISE PRICE OPTIONS TERM
-------------- ------- -------
<S> <C> <C>
$ 8.00.................................................... 562,500 4 years
9.33.................................................... 793,500 5 years
9.33.................................................... 675,000 3 years
11.87.................................................... 60,000 5 years
12.08.................................................... 165,000 4 years
16.08.................................................... 397,500 4 years
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 6.0%, expected dividend yield of zero, expected
volatility of 35%, and expected lives of 5 years.
14. EMPLOYEE BENEFIT PLANS
During 1996, the Company authorized 750,000 shares of Common Stock to be
issued in connection with its 1996 Equity Participation Plan and The Employee
Stock Purchase Plan (the "Plan"). The Plan allows employees that work at least
20 hours per week to purchase Common Stock of the Company at a 15% discount
from the lesser of the stock price on the date of grant or the date the stock
is purchased. Employees may purchase up to a maximum of 10% of their annual
compensation or $25,000. As of December 31, 1996, no shares were issued or
outstanding related to the Plan.
The Company also sponsors a 401(k) deferred savings plan (the "401(k) Plan")
in which employees can contribute up to 10% of their eligible compensation on
a pre-tax basis subject to certain maximum amounts. Under the terms of the
401(k) Plan, the Company can, at its option, match 50% of employee
contributions up to three percent of compensation. No contributions were made
to the 401(k) Plan by the Company during 1996.
F-22
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. INCOME TAXES
On August 20, 1996, the Company consummated a public offering which made it
subject to federal, state, and foreign income taxes from the effective date of
the Initial Public Offering. In addition, the Company is now required to
record a deferred tax liability for cumulative temporary differences between
financial reporting and tax reporting following the effective date of the
Initial Public Offering. For the year ended December 31, 1996, the Company
recorded approximately $3,331,000 of current income tax expense and
approximately $8,575,000 of deferred income tax benefit. Additionally, the
Company recorded deferred taxes of $9,464,000 related to deferred taxes from
prior years that were assumed as part of the Initial Public Offering. The
total current tax liability and deferred tax liability at December 31, 1996
was $1,323,000 and $3,545,000, respectively.
The Company has recorded $820,000 of accrued interest related to deferred
installment gains from previous years that were assumed as part of the Initial
Public Offering. During the year ended December 31, 1996, the Company recorded
an additional $78,000 of expense related to these deferred installment gains.
Prior to August 20, 1996, the predecessor entities were taxed either as a
corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level.
Accordingly, the table below summarizes the unaudited pro forma provision for
income taxes that would have been reported had the Company been treated as a C
corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes for the years ended
December 31, 1996 and 1995. AVCOM's actual deferred income taxes and provision
for income taxes are included in the proforma schedules and 1996 actual
schedule below. The Company's actual income tax provision is presented for the
period subsequent to August 20, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
PRO FORMA UNAUDITED
-----------------------------------
1996 1996 1995 1994
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal.................. $ 2,785,000 $ 4,990,000 $5,654,000 $3,940,000
State.................... 481,000 846,000 711,000 606,000
Foreign.................. 65,000 58,000 686,000 --
----------- ----------- ---------- ----------
3,331,000 5,894,000 7,051,000 4,546,000
Deferred:
Federal.................. $(7,182,000) $(3,675,000) $1,363,000 $1,750,000
State.................... (1,393,000) (809,000) 594,000 368,000
Foreign.................. -- -- (7,000) --
----------- ----------- ---------- ----------
(8,575,000) (4,484,000) 1,950,000 2,118,000
----------- ----------- ---------- ----------
Provision (Benefit) for
income taxes............ $(5,244,000) $ 1,410,000 $9,001,000 $6,664,000
=========== =========== ========== ==========
</TABLE>
F-23
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation between the statutory provision for income taxes and the
actual provision for income taxes is shown as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
PRO FORMA UNAUDITED
--------------------------------
1996 1996 1995 1994
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income tax at U.S. federal
statutory rate............... $ 1,199,000 $1,199,000 $7,876,000 $5,810,000
State tax, net of federal
benefit...................... 162,000 162,000 1,035,000 786,000
Write-off of receivable from
related party................ (1,478,000) -- -- --
Non-deductible expenses....... 584,000 49,000 90,000 68,000
Non-taxable income from
Entities..................... (5,711,000) -- -- --
----------- ---------- ---------- ----------
(Benefit) provision for
income taxes............... $(5,244,000) $1,410,000 $9,001,000 $6,664,000
=========== ========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
PRO FORMA
UNAUDITED
1996 1995
------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............ $ 5,659,000 $ 4,365,000
Fixed assets and inventory................. 3,177,000 (359,000)
Accrued expenses........................... 2,312,000 62,000
Net operating loss carryforward............ 15,763,000 1,383,000
Federal benefit of state deferred tax...... -- 364,000
Foreign tax credit carryover............... 332,000 632,000
Minimum tax credit carryover............... 1,629,000 3,094,000
------------ ------------
Total deferred tax assets................ $ 28,872,000 $ 9,541,000
------------ ------------
Deferred tax liabilities:
Installment sales.......................... (27,191,000) (19,402,000)
Percentage of completion................... (4,370,000) --
Other...................................... (856,000) (1,164,000)
------------ ------------
Total deferred tax liabilities............... $(32,417,000) $(20,566,000)
------------ ------------
Net deferred taxes....................... $ (3,545,000) $(11,025,000)
============ ============
</TABLE>
Additionally, certain of the Company's consolidated affiliates include
foreign corporations which are taxed at a regular rate up to 45%. The Company
has filed a request for a tax holiday for AKGI-Royal Palm C.V.O.A. which
effectively reduces the tax to 2%. This 2% tax liability rate will be in
effect for the fiscal year ending December 31, 1997. Generally, a foreign tax
credit is allowed for any taxes paid on foreign income up to the amount of
U.S. tax.
16. SUBSEQUENT EVENTS
On March 13, 1997, the Company announced the execution of a definitive
agreement for the acquisition of the Savoy Hotel (the "Savoy Acquisition")
located in the South Beach district of Miami Beach, Florida. Following the
acquisition of the Savoy Hotel, which is expected to close in the third
quarter of 1997, the
F-24
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company intends to convert the existing 40 completed hotel units and the 28
partially completed units into approximately 65 studio, one and two bedroom
vacation ownership units. Following the closing and the receipt of necessary
governmental approvals, the Company intends to begin sales of vacation
intervals at the Savoy at South Beach during the fourth quarter of 1997.
On July 28, 1997, the Company announced the execution of a definitive
agreement to acquire the Embassy Suites Resort at Kaanapali Beach, Maui,
Hawaii (the "Kaanapali Acquisition") for approximately $78.0 million from a
Japanese partnership. The acquiring entity is a partnership formed by a
wholly-owned subsidiary of the Company (as the managing general partner), the
Whitehall Street Real Estate Limited Partnership VII and Apollo Real Estate
Advisors, L.P. The Company's subsidiary owns a 24% partnership interest in the
acquiring entity. The Embassy Suites Resort at Kaanapali Beach is a 413-suite,
full service resort hotel located on the beach in Kaanapali, Maui, Hawaii.
Upon the receipt of necessary governmental approvals, the Company intends to
convert the first phase of hotel suites to vacation ownership units. The
Company expects to operate the resort with approximately 256 hotel suites and
approximately 157 one-bedroom and two-bedroom vacation ownership units. The
Kaanapali Acquisition is anticipated to close during the fourth quarter of
1997 and vacation ownership sales at the resort are anticipated to commence in
the first half of 1998.
On August 28, 1997, the Company announced the completion of the acquisition
of 100% of the capital stock of LSI Group Holdings plc (LSI), in exchange for
1,996,401 newly-issued shares of Signature common stock and approximately
$1,036,000 in cash (the LSI Merger). United Kingdom-based LSI is a developer,
owner and operator of vacation ownership resorts located in Europe. Through
its Grand Vacation Club, LSI operates a points-based club system. The LSI
Merger has been treated as a pooling-of-interests and is reflected in the
accompanying supplemental consolidated financial statements as if it took
place in 1994, the year in which LSI began its operations.
On September 3, 1997, the Company announced the execution of a definitive
agreement to acquire 100% of the capital stock of Hawaii based Marc Hotels &
Resorts, Inc. The Company will acquire all the outstanding shares of
Marc Resorts for an aggregate purchase price of $6 million. The total
consideration will be comprised of a combination of newly issued shares of the
Company's Common Stock and cash. The allocation of stock and cash will be
determined prior to closing, which is expected to occur in the fourth quarter
of 1997 following the satisfaction of customary closing conditions. The
transaction is expected to qualify for purchase accounting.
On September 23, 1997, the Company announced the execution of a definitive
agreement to acquire 100% of the capital stock of Vacation Internationale,
Ltd. ("VI") for approximately $24.3 million, comprised of $8.0 million in cash
and the assumption of approximately $16.3 million of indebtedness. The
acquired assets include VI's approximately $12.8 million of mortgages
receivable portfolio. The transaction is expected to qualify for purchase
accounting.
F-25
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's agreement to acquire VI is subject to the satisfaction of
customary closing conditions and is anticipated to close during the fourth
quarter of 1997.
On September 29, 1997, the Company announced that its Board of Directors
approved a three-for-two stock split in the form of a common stock dividend on
the Company's Common Stock. Stockholders of record on October 10, 1997 (the
"Record Date") will receive one additional share of Common Stock for every two
shares owned on the Record Date. The dividend shares will be delivered October
27, 1997. Fractional shares will be paid in cash. All share and per share
amounts in the accompanying consolidated financial statements and notes have
been restated to reflect the three-for-two stock split.
F-26
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ -------------------------
1997 1996 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents............. $ 51,980,000 $ 20,757,000 $ 20,030,000
Cash in escrow........................ 1,925,000 1,712,000 2,749,000
Mortgages receivable, net of an
allowance of $19,351,000, $17,328,000
and $13,271,000 at June 30,1997,
December 31, 1996 and 1995,
respectively......................... 260,808,000 215,518,000 147,405,000
Due from related parties.............. 13,361,000 11,897,000 17,524,000
Other receivables, net................ 19,064,000 11,847,000 9,830,000
Prepaid expenses and other assets..... 24,057,000 14,738,000 8,860,000
Investment in joint venture........... 7,277,000 7,397,000 2,644,000
Real estate and development costs..... 138,447,000 142,870,000 72,404,000
Property and equipment, net........... 19,758,000 14,612,000 8,511,000
Intangible assets, net................ 7,543,000 4,536,000 5,814,000
------------ ------------ ------------
Total assets....................... $544,220,000 $445,884,000 $295,771,000
============ ============ ============
LIABILITIES AND EQUITY:
Accounts payable...................... $ 14,651,000 $ 24,418,000 $ 11,272,000
Accrued liabilities................... 42,977,000 49,198,000 25,025,000
Due to related parties................ 1,127,000 1,656,000 1,906,000
Income taxes payable.................. 2,739,000 3,268,000 1,615,000
Deferred taxes........................ 3,592,000 3,259,000 2,400,000
Notes payable to financial
institutions......................... 154,796,000 236,122,000 167,564,000
Notes payable to related parties...... -- -- 9,468,000
Convertible Subordinated Notes
Payable.............................. 138,000,000 -- --
------------ ------------ ------------
Total liabilities.................. 357,882,000 317,921,000 219,250,000
------------ ------------ ------------
Commitments and contingencies (Note
10)
Minority interest in consolidated
limited partnership.................. 116,000 1,538,000 --
------------ ------------ ------------
Convertible redeemable preferred
stock................................ -- -- 1,073,000
------------ ------------ ------------
Stockholders equity:
Preferred stock (25,000,000 shares
authorized; and none issued or
outstanding)....................... -- -- --
Common stock ($0.01 par value,
50,000,000 shares authorized;
35,434,506 and 33,011,106
outstanding on June 30, 1997 and
December 31, 1996, respectively;
par value $100 and $.01 on 200 and
6,922,799 shares outstanding at
December 31, 1995, respectively)... 354,000 330,000 89,000
Additional paid-in capital.......... 155,162,000 101,978,000 3,895,000
Retained earnings................... 30,347,000 23,544,000 35,607,000
Members' deficit.................... -- -- (1,432,000)
Partners' equity:
General partners' equity............ -- -- 4,176,000
Limited partners' equity............ -- -- 33,114,000
Cumulative foreign currency
translation adjustment............... 359,000 573,000 (1,000)
------------ ------------ ------------
Total equity....................... 186,222,000 126,425,000 75,448,000
------------ ------------ ------------
Total liabilities and equity....... $544,220,000 $445,884,000 $295,771,000
============ ============ ============
</TABLE>
See accompanying notes to the supplemental consolidated financial statements.
F-27
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Vacation interval and
vacation point sales. $130,346,000 $78,482,000 $182,300,000 $139,426,000 $116,356,000
Interest income....... 18,041,000 12,108,000 25,415,000 20,339,000 15,965,000
Other income.......... 6,664,000 6,515,000 12,132,000 8,553,000 1,547,000
------------ ----------- ------------ ------------ ------------
Total revenues........ 155,051,000 97,105,000 219,847,000 168,318,000 133,868,000
COSTS AND OPERATING
EXPENSES:
Vacation Interval and
vacation point cost
of sales............. 34,738,000 21,232,000 48,218,000 39,810,000 33,082,000
Advertising, sales,
and marketing........ 59,039,000 36,385,000 89,040,000 62,258,000 54,098,000
Loan portfolio:
Interest expense--
treasury............ 7,938,000 6,364,000 13,482,000 10,077,000 8,224,000
Other expenses....... 3,312,000 1,778,000 4,523,000 2,034,000 1,466,000
Provision for
doubtful accounts... 3,735,000 2,337,000 8,311,000 3,666,000 2,045,000
General and
administrative....... 20,562,000 11,742,000 37,436,000 19,263,000 12,629,000
Resort property
valuation allowance.. -- -- 2,620,000 -- --
Depreciation and
amortization......... 2,665,000 1,905,000 5,027,000 2,514,000 1,196,000
Merger Costs.......... 5,896,000 -- -- -- --
------------ ----------- ------------ ------------ ------------
Total costs and
operating expenses.. 137,885,000 81,743,000 208,657,000 139,622,000 112,740,000
------------ ----------- ------------ ------------ ------------
Income from
operations........... 17,166,000 15,362,000 11,190,000 28,696,000 21,128,000
Interest expense--other
(net of capitalized
interest of $6,723,000,
and $3,315,000 in 1996
and 1995,
respectively).......... 2,856,000 2,352,000 3,763,000 1,728,000 1,517,000
Equity loss on
investment in joint
venture.............. 120,000 63,000 299,000 1,649,000 271,000
Minority interest in
income of
consolidated limited
partnership.......... 123,000 -- 199,000 -- --
------------ ----------- ------------ ------------ ------------
Income before
provision (benefit)
for income taxes and
extraordinary item... 14,067,000 12,947,000 6,929,000 25,319,000 19,340,000
Provision (benefit)
for income taxes..... 5,446,000 1,109,000 (4,105,000) 4,020,000 2,768,000
------------ ----------- ------------ ------------ ------------
Net income before
extraordinary item... 8,621,000 11,838,000 11,034,000 21,299,000 16,572,000
Extraordinary item,
net of tax........... (518,000) -- -- -- --
------------ ----------- ------------ ------------ ------------
Net income............ $ 8,103,000 $11,838,000 $ 11,034,000 $ 21,299,000 $ 16,572,000
============ =========== ============ ============ ============
PRO FORMA INCOME DATA
(UNAUDITED):
Income before
provision for income
taxes................ $12,947,000 $ 6,929,000 $ 25,319,000 $ 19,340,000
Pro forma provision
for income taxes..... $ 5,179,000 $ 2,549,000 $ 10,009,000 $ 7,386,000
----------- ------------ ------------ ------------
Pro forma net income.. $ 7,768,000 $ 4,380,000 $ 15,310,000 $ 11,954,000
=========== ============ ============ ============
Pro forma net income
per common and common
equivalent share
(actual for June 30,
1997) ............... $ 0.23 $ 0.32 $ 0.16 $ 0.64 --
Pro forma weighted
average common and
common equivalent
shares outstanding
(actual for June 30,
1997)................ 35,853,174 23,954,856 27,639,647 23,954,856 --
</TABLE>
See accompanying notes to the supplemental consolidated financial statements.
F-28
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK FOREIGN
--------------------- ADDITIONAL GENERAL LIMITED CURRENCY
SHARES PAID-IN RETAINED MEMBERS' PARTNERS' PARTNERS' TRANSLATION
OUTSTANDING AMOUNT CAPITAL EARNINGS DEFICIT EQUITY EQUITY ADJUSTMENTS
----------- -------- ------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ 4,926,398 $ 49,000 $ 2,595,000 $19,751,000 $ -- $ (59,000) $ 11,897,000 $ --
Payment for
stock held in
escrow.......... -- -- 10,000 -- -- -- --
Repurchase of
AVCOM common
stock........... -- -- (30,000) -- -- -- -- --
Contributions.... -- -- -- -- -- 3,205,000 12,315,000 --
Distributions.... -- -- -- (4,434,000) -- -- (870,000) --
Net income....... -- -- -- 12,009,000 -- 183,000 4,380,000 --
Common stock
issued upon
formation of LSI
Group Holdings
plc............. 1,996,401 20,000 128,000 -- -- -- -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- 40,000
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Balance at
December 31,
1994............ 6,922,799 69,000 2,703,000 27,326,000 -- 3,329,000 27,722,000 40,000
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Issuance of
Common Stock.... 200 20,000 157,000 -- -- -- -- --
Proceeds from
the sale of
AVCOM common
stock, net of
issuance costs
of $115,000..... -- -- 885,000 -- -- -- -- --
Contributions.... -- -- 150,000 655,000 1,000 374,000 -- --
Distributions.... -- -- -- (4,811,000) (2,437,000) (43,000) (1,950,000) --
Net income....... -- -- -- 12,437,000 1,004,000 516,000 7,342,000 --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (41,000)
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Balance at
December 31,
1995............ 6,922,999 89,000 3,895,000 35,607,000 (1,432,000) 4,176,000 33,114,000 (1,000)
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Distributions of
partnership
equity and other
equity interests -- -- -- (7,191,000) (5,394,000) -- (1,633,000) --
Conversion of
convertible
notes payable to
AVCOM common
stock........... -- -- 400,000 -- -- -- -- --
Proceeds from
the sale of
common stock to
the public, net
of offering
costs, including
16,211,558
shares issued in
exchange for
partners' and
members' equity 25,267,807 253,000 73,071,000 -- -- -- -- --
Stock issued and
goodwill
recorded in
connection with
the acquisition
of investment in
Joint Venture... 820,500 8,000 4,981,000 -- -- -- -- --
Acquisition of
minority limited
partners'
interests....... -- -- (7,465,000) -- -- -- -- --
Deferred taxes
recorded in
connection with
the
Consolidation
Transactions.... -- -- (9,464,000) -- -- -- -- --
Interest accrued
on deferred
installment
gains in
connection with
the
Consolidation
Transactions.... -- -- (820,000) -- -- -- -- --
Net income
(loss).......... -- -- -- 3,875,000 3,568,000 (164,000) 3,755,000 --
Exchange of
partners' and
members' equity
for stock in
connection with
the
Consolidation
Transactions.... (200) (20,000) 37,380,000 (1,370,000) 3,258,000 (4,012,000) (35,236,000) --
Assignment to
venturers' of
receivable due
from related
party........... -- -- -- (3,449,000) -- -- -- --
Write-off of
receivable from
related party... -- -- -- (3,890,000) -- -- -- --
Dividends
declared........ -- -- -- (38,000) -- -- -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- 574,000
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Balance at
December 31,
1996............ 33,011,106 330,000 101,978,000 23,544,000 -- -- -- 573,000
========== ======== ============ =========== =========== =========== ============ =========
Unaudited
interim
information:
Proceeds from
the sale of
common stock to
the public, net
of offering
costs........... 2,400,000 24,000 52,966,000 -- -- -- -- --
Proceeds from
the exercise of
employee stock
options......... 23,400 -- 218,000 -- -- -- -- --
Distributions.... -- -- -- (1,300,000) -- -- -- --
Net income....... -- -- -- 8,103,000 -- -- -- --
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (214,000)
---------- -------- ------------ ----------- ----------- ----------- ------------ ---------
Balance at June
30, 1997........ 35,434,506 $354,000 $155,162,000 $30,347,000 $ -- $ -- $ -- $ 359,000
========== ======== ============ =========== =========== =========== ============ =========
<CAPTION>
TOTAL EQUITY
-------------
<S> <C>
Balance at
December 31,
1993............ $ 34,233,000
Payment for
stock held in
escrow.......... 10,000
Repurchase of
AVCOM common
stock........... (30,000)
Contributions.... 15,520,000
Distributions.... (5,304,000)
Net income....... 16,572,000
Common stock
issued upon
formation of LSI
Group Holdings
plc............. 148,000
Foreign currency
translation
adjustments..... 40,000
-------------
Balance at
December 31,
1994............ 61,189,000
-------------
Issuance of
Common Stock.... 177,000
Proceeds from
the sale of
AVCOM common
stock, net of
issuance costs
of $115,000..... 885,000
Contributions.... 1,180,000
Distributions.... (9,241,000)
Net income....... 21,299,000
Foreign currency
translation
adjustments..... (41,000)
-------------
Balance at
December 31,
1995............ 75,448,000
-------------
Distributions of
partnership
equity and other
equity interests (14,218,000)
Conversion of
convertible
notes payable to
AVCOM common
stock........... 400,000
Proceeds from
the sale of
common stock to
the public, net
of offering
costs, including
16,211,558
shares issued in
exchange for
partners' and
members' equity. 73,324,000
Stock issued and
goodwill
recorded in
connection with
the acquisition
of investment in
Joint Venture... 4,989,000
Acquisition of
minority limited
partners'
interests....... (7,465,000)
Deferred taxes
recorded in
connection with
the
Consolidation
Transactions.... (9,464,000)
Interest accrued
on deferred
installment
gains in
connection with
the
Consolidation
Transactions.... (820,000)
Net income
(loss).......... 11,034,000
Exchange of
partners' and
members' equity
for stock in
connection with
the
Consolidation
Transactions.... --
Assignment to
venturers' of
receivable due
from related
party........... (3,449,000)
Write-off of
receivable from
related party... (3,890,000)
Dividends
declared........ (38,000)
Foreign currency
translation
adjustments..... 574,000
-------------
Balance at
December 31,
1996............ 126,425,000
=============
Unaudited
interim
information:
Proceeds from
the sale of
common stock to
the public, net
of offering
costs........... 52,990,000
Proceeds from
the exercise of
employee stock
options......... 218,000
Distributions.... (1,300,000)
Net income....... 8,103,000
Foreign currency
translation
adjustments..... (214,000)
-------------
Balance at June
30, 1997........ $186,222,000
=============
</TABLE>
See accompanying notes to the supplemental consolidated financial statements.
F-29
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.............. $ 8,103,000 $ 11,838,000 $ 11,034,000 $ 21,299,000 $ 16,572,000
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities:
Depreciation and
amortization.......... 2,665,000 1,905,000 5,027,000 2,514,000 1,196,000
Gain on sale of notes
receivable............ -- -- -- (566,000) (571,000)
Provision for doubtful
accounts.............. 3,735,000 2,337,000 8,311,000 3,666,000 2,045,000
Resort property
valuation allowance... -- -- 2,620,000 -- --
Equity loss on
investment in joint
venture............... 120,000 63,000 299,000 1,649,000 271,000
Minority interest in
income of
consolidated Limited
Partnership........... 123,000 -- 199,000 -- --
Loss on disposal of
Property and
Equipment............. -- -- 573,000 -- --
Changes in operating
assets and
liabilities:
Cash in Escrow....... (213,000) 644,000 1,037,000 473,000 (1,617,000)
Due from Related
Parties............. (1,464,000) 8,258,000 (1,712,000) (4,083,000) (5,182,000)
Prepaid Expenses and
Other Assets........ (9,319,000) 1,325,000 (5,878,000) (3,753,000) 245,000
Real Estate and
Development Costs... 4,423,000 (40,810,000) (73,086,000) (19,012,000) (17,755,000)
Other Receivables.... (7,217,000) (9,026,000) (2,017,000) (5,797,000) (522,000)
Accounts Payable..... (9,767,000) 6,738,000 13,146,000 5,241,000 2,017,000
Accrued Liabilities.. (6,221,000) (157,000) 23,353,000 8,963,000 923,000
Income Taxes ........ (529,000) 354,000 1,653,000 353,000 689,000
Deferred Taxes....... 333,000 (296,000) (8,605,000) 497,000 541,000
Due to Related
Parties............. (529,000) (607,000) (250,000) 1,267,000 536,000
------------ ------------ ------------- ------------ ------------
Net Cash (Used In)
Provided By Operating
Activities............. (15,757,000) (17,434,000) (24,296,000) 12,711,000 (612,000)
------------ ------------ ------------- ------------ ------------
INVESTING ACTIVITIES:
Cash Received (Paid) for
Acquisition of
Subsidiary............. -- -- -- 129,000 (1,702,000)
Expenditures for
Investment in Joint
Venture................ -- (561,000) (63,000) -- (4,565,000)
Expenditures for
Property and Equipment. (6,342,000) (4,190,000) (8,214,000) (4,601,000) (2,074,000)
Expenditures for
Intangible Assets...... (4,476,000) (3,216,000) (2,206,000) (2,608,000) (3,300,000)
Mortgages receivable.... (49,025,000) (25,584,000) (76,424,000) (48,601,000) (24,356,000)
------------ ------------ ------------- ------------ ------------
Net Cash Used In
Investing Activities... (59,843,000) (33,551,000) (86,907,000) (55,681,000) (35,997,000)
------------ ------------ ------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from Notes
Payable to Financial
Institutions........... 22,347,000 85,428,000 170,394,000 98,733,000 45,318,000
Payments on Notes
Payable to Financial
Institutions........... (103,673,000) (32,994,000) (101,436,000) (46,890,000) (21,619,000)
Proceeds from
Convertible
Subordinated Notes..... 138,000,000 -- -- -- --
Proceeds from Notes
Payable to Related
Parties................ -- -- 5,606,000 3,711,000 5,145,000
Payments on Notes
Payable to Related
Parties................ -- -- (15,074,000) (1,343,000) (2,569,000)
Contributions .......... -- -- 1,500,000 1,357,000 15,520,000
Proceeds from Stock
Offerings.............. -- -- 73,324,000 885,000 --
Acquisition of Minority
Limited Partners'
Interests.............. -- -- (7,465,000) -- --
Redemption of
Convertible Redeemable
Preferred Stock........ -- (1,073,000) (1,080,000) -- --
Proceeds from Sale of
Convertible Redeemable
Preferred Stock........ -- -- -- 1,090,000 --
Net proceeds from sale
of common stock........ 52,990,000 -- -- -- --
(Distributions)
contributions from
minority limited
partnerships........... (1,545,000) 1,050,000 -- -- --
Repurchase of AVCOM
Common Stock........... -- -- -- -- (30,000)
Proceeds from Employee
Stock Options.......... 218,000 404 -- -- --
Distributions........... (1,300,000) (3,710,000) (14,413,000) (9,241,000) (5,304,000)
------------ ------------ ------------- ------------ ------------
Net Cash Provided by
Financing Activities... 107,037,000 49,105,000 111,356,000 48,302,000 36,461,000
------------ ------------ ------------- ------------ ------------
Net Increase (Decrease)
In Cash and Cash
Equivalents............ 31,437,000 (1,880,000) 153,000 5,332,000 (148,000)
Effect of Exchange Rates
on Cash and Cash
Equivalents............ (214,000) (150,000) 574,000 (41,000) 40,000
Cash and Cash
Equivalents, Beginning
of Period.............. 20,757,000 20,030,000 20,030,000 14,739,000 14,847,000
------------ ------------ ------------- ------------ ------------
Cash and Cash
Equivalents, End of
Period................. $ 51,980,000 $ 18,000,000 $ 20,757,000 $ 20,030,000 $ 14,739,000
============ ============ ============= ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for interest.. $ 8,697,000 $ 10,627,000 $ 24,127,000 $ 14,466,000 $ 12,059,000
Cash paid for taxes..... $ 4,042,000 $ (28,000) $ 1,629,000 $ 2,753,000 $ 1,325,000
SUPPLEMENTAL DISCLOSURE
OF NON-CASH INFORMATION
Stock issued and
goodwill recorded in
connection with the
acquisition of
investment in joint
venture................ $ 4,989,000
Deferred taxes recorded
in connection with the
Consolidation
Transactions........... $ 9,464,000
Interest accrued on
deferred installment
gains in connection
with the Consolidation
Transactions........... $ 820,000
Net assets of
predecessor partnership
acquired in exchange
for 17,032,058 shares
of common stock in
connection with the
Consolidation
Transactions........... $ 37,380,000
Assignment to venturers
of receivable due from
related party recorded
as a reduction of
venturers' equity...... $ 3,449,000
Write off of receivable
from related party
recorded as a reduction
of stockholders'
equity................. $ 3,890,000
Conversion of
convertible notes
payable to AVCOM common
stock.................. $ 400,000
</TABLE>
See accompanying notes to the supplemental consolidated financial statements.
F-30
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. NATURE OF BUSINESS
Signature Resorts, Inc. and its wholly-owned subsidiaries (the Company)
generate revenues from the sale and financing of vacation ownership interests
in their resorts, which typically entitle the owner to use a fully furnished
vacation resort in perpetuity, typically for a one-week period each year
(each, a Vacation Interval). The Company's principal operations consist of (i)
developing and acquiring vacation ownership resorts, (ii) marketing and
selling Vacation Intervals and vacation points at its resorts, (iii) providing
consumer financing for the purchase of Vacation Intervals and vacation points
at its resorts, and (iv) managing the operations of its resorts.
The Company was incorporated in May 1996. On August 20, 1996, the Company
consummated an initial public offering of a portion of its Common Stock (the
Initial Public Offering) by offering 9,056,250 shares to the public. The gross
proceeds from the public offering were $84,525,000. The Company incurred
$11,201,000 of costs associated with this offering. Concurrent with the
Initial Public Offering, certain predecessor limited partnerships, limited
liability companies and corporations (the Entities) exchanged their direct or
indirect interest in, and obligations of the entities, for 16,211,558 shares
of the Company's common stock (the Consolidation Transactions). The
accompanying consolidated financial statements reflect the financial position
and results of operations of the Entities since the date they were acquired or
formed, which range from November 1986 to June 1996. Concurrent with the
Initial Public Offering, the Company exchanged 820,500 shares of Common Stock
with the former holders of interests in the Embassy Vacation Resort at Poipu
Point, Koloa, Kauai, Hawaii.
On September 23, 1996, the Company announced the signing of a merger
agreement to acquire AVCOM International Inc. (AVCOM) for approximately $34.6
million of the Company's Common Stock. AVCOM is the parent company of All
Seasons Resorts, Inc., a developer, marketer and operator of vacation
ownership resorts in Arizona, California and Texas. On February 7, 1997 this
merger (the "AVCOM Merger") was consummated. Under the terms of the merger
agreement, the Company issued approximately 1,324,554 shares of its common
stock in exchange for all the outstanding capital stock of AVCOM. The AVCOM
Merger has been treated as a pooling-of-interests and is reflected in the
accompanying supplemental consolidated financial statements as if it took
place at the beginning of the earliest period presented.
On May 15, 1997, the Company announced the acquisition and merger (the PRG
Merger) of Plantation Resorts Group, Inc. (PRG), a Williamsburg, Virginia,
based developer, owner and operator of vacation ownership intervals. PRG owns
and operates vacation ownership resorts in Williamsburg, Virginia. PRG was
incorporated in April 1997 through a private placement of its common stock in
which certain predecessor joint ventures and corporations (the PRG Entities)
exchanged their interests for shares of PRG's common stock (the PRG Exchange).
The PRG Merger was consummated through the issuance of 3.6 million shares of
the Company's common stock. The PRG Merger has been treated as a pooling-of-
interests and is reflected in the accompanying supplemental consolidated
financial statements as if it took place at the beginning of the earliest
period presented.
On August 28, 1997, the Company announced the completion of the acquisition
of 100% of the capital stock of LSI Group Holdings plc (LSI), in exchange for
1,996,401 newly-issued shares of the Company's common stock and approximately
$1,036,000 in cash (the LSI Merger). United Kingdom-based LSI is a developer,
owner and operator of vacation ownership resorts located in Europe. Through
its Grand Vacation Club, LSI operates a points-based club system. The LSI
Merger has been treated as a pooling-of-interests and is reflected in the
accompanying supplemental consolidated financial statements as if it took
place in 1994, the year in which LSI began its operations.
Total revenues of the combined entities were $219,847,000, $168,318,000 and
$133,868,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. AVCOM contributed $48,421,000, $34,269,000 and $24,854,000, PRG
contributed $48,425,000, $38,825,000 and $46,694,000 and LSI contributed
$27,947,000,
F-31
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$22,616,000 and $18,029,000 to the Company's total revenues during the years
ended December 31, 1996, 1995 and 1994, respectively.
Net income of the combined entities was $11,034,000, $21,299,000 and
$16,572,000 during the years ended December 31, 1996, 1995 and 1994,
respectively. AVCOM contributed $(12,442,000), $1,040,000 and $922,000, PRG
contributed $7,031,000, $7,538,000 and $9,829,000 and LSI contributed
$2,267,000, $1,808,000 and $1,529,000 to the Company's net income during the
years ended December 31, 1996, 1995 and 1994, respectively.
There were no intercompany transactions between the Company, PRG, and LSI
for all periods presented.
As part of the AVCOM Merger, AVCOM recorded approximately $13.6 million of
expenses during 1996 as a result of the write-down and write-off of certain
assets recorded by AVCOM.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the combined accounts of
Signature Resorts, Inc., AVCOM, PRG, LSI and the Entities discussed in Note 1
that were acquired or formed prior to August 20, 1996, which became wholly-
owned subsidiaries in connection with the Consolidation Transactions, the
AVCOM Merger, the PRG Merger or the LSI Merger. As a result, the combined
accounts are now referred to as consolidated financial statements for the
historical periods presented. All significant intercompany transactions and
balances have been eliminated from these consolidated financial statements.
The Consolidation Transactions have been accounted for as a reorganization
of entities under common control. Accordingly, the net assets of the
predecessor entities were recorded at the predecessor entities' basis. In
addition, the accompanying supplemental consolidated financial statements
reflect the historical results of operations of the predecessor partnerships
on a combined basis.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market, and all highly
liquid investments purchased with an original maturity of three months or
less.
Cash in Escrow
Cash in escrow is restricted cash consisting of deposits received on sales
of Vacation Intervals that are held in escrow until a certificate of occupancy
is obtained or the legal rescission period has expired.
Real Estate and Development Costs
Real estate is valued at the lower of cost or net realizable value.
Development costs include both hard and soft construction costs and together
with real estate costs are allocated to Vacation Intervals. Interest, taxes,
and other carrying costs incurred during the construction period are
capitalized.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of 3 to 7 years. Buildings
are amortized over the estimated useful life of 39 to 40 years.
F-32
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization expense related to property and equipment was
$1,542,000, $950,000, and $502,000 in 1996, 1995 and 1994, respectively.
Intangible Assets
Organizational costs incurred in connection with the formation of the
Company have been capitalized and are being amortized on a straight-line basis
over a period of three to five years. Start-up costs relate to costs incurred
to develop a marketing program prior to receiving regulatory approval to
market the related property and are being amortized on a straight line basis
over a period of one year.
Financing and loan origination fees incurred in connection with obtaining
funding for the Company have been capitalized and are being amortized over the
life of the respective loans.
Goodwill recorded in connection with the acquisition of the Investment in
Joint Venture is being amortized by a fixed amount per Interval as Intervals
are sold.
Foreign Currency Translation
Financial statements for the Company's subsidiaries outside the United
States are translated into U.S. dollars at year-end exchange rates for assets
and liabilities and weighted average exchange rates for income and expenses.
The resulting translation adjustments are recorded as a separate component of
equity.
Revenue Recognition
The Company recognizes sales of Vacation Intervals and Vacation Points on an
accrual basis after a binding sales contract has been executed, a 10% minimum
down payment has been received, the rescission period has expired,
construction is substantially complete, and certain minimum sales levels have
been achieved. If all the criteria are met except that construction is not
substantially complete, then revenues are recognized on the percentage-of-
completion (cost to cost) basis. For sales that do not qualify for either
accrual or percentage-of-completion accounting, all revenue is deferred using
the deposit method.
Revenues from resort management and maintenance services are recognized on
an accrual basis as earned.
Income Taxes
Prior to August 20, 1996, the predecessor entities were taxed either as a
corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level. The
Company became subject to federal, state, and foreign income taxes from the
effective date of the Initial Public Offering. The pro forma net income per
common and common equivalent share uses the historical net income of the
Company as adjusted by the unaudited pro forma provision for income taxes to
reflect the net income per common and common equivalent share, as if the
Company had been treated as a C corporation rather than as individual limited
partnerships and limited liability companies for federal income tax purposes
for the years ended December 31, 1996, 1995 and 1994.
As a result of the AVCOM Merger (see Note 1), AVCOM's results of operations
have been included in the accompanying supplemental consolidated financial
statements under the pooling-of-interests method of accounting. During each
period presented, AVCOM was taxed as a C corporation.
Prior to the PRG Merger, certain of the PRG Entities were not subject to
federal and state income taxes for all periods presented. In connection with
the PRG Exchange and the PRG Merger, PRG became a C corporation, which made it
subject to federal and state income taxes from the date of incorporation. As a
result the pro forma provision for income taxes assumes the PRG entities were
treated as C corporations for federal income tax purposes.
F-33
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the LSI Merger, LSI's results have been included in the
accompanying supplemental consolidated financial statements under the pooling-
of-interests method of accounting. During each period presented, LSI was
subject to income taxes levied by the various local and country taxing
authorities in the foreign countries in which it operates.
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax assets and liabilities are measured by applying enacted statutory
tax rates applicable to the future years in which the related deferred tax
assets or liabilities are expected to be settled or realized. Income tax
expense consists of the taxes payable for the current period and the change
during the period in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Newly Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (SFAS 121), which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for the expected disposition of long-lived assets. The Company
adopted SFAS 121 during the year ended December 31, 1996. The impact of
adopting SFAS 121 was to reduce net income by $2,620,000 and has been recorded
as a resort property valuation allowance to reduce real estate and development
costs.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 was adopted
during the year ended December 31, 1996. SFAS 123 requires that the Company's
financial statements include certain disclosures about stock-based employee
compensation arrangements and permits the adoption of a change in accounting
for such arrangements. Changes in accounting for stock-based compensation are
optional and the Company has adopted only the disclosure requirements.
During February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 (SFAS 128), Earnings Per Share. The statement establishes standards
for computing and presenting earnings per share (EPS) and applies to publicly
held common stock or potential common stock. The statement simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings
Per Share (Opinion 15). It replaces presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
F-34
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The statement requires implementation for the Company during the fourth
quarter of 1997 and does not allow for early implementation. However, if the
Company had implemented SFAS 128, basic EPS and diluted EPS would have been
$0.16 and $0.64, for the years ended December 31, 1996 and 1995, respectively.
Reclassifications
Certain reclassifications were made to the 1995 and 1994 accompanying
supplemental consolidated financial statements to conform to the 1996
presentation.
3. ACCOUNTS RECEIVABLE
The Company has accrued insurance claims, of $1.25 million and $3.8 million
at December 31, 1996 and 1995, respectively, which are included in other
receivables, as a result of hurricane damage to its Royal Palm and Flamingo
properties located in St. Maarten, Netherlands Antilles. The receivable at
December 31, 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. Subsequent to December 31, 1996, the Company collected $650,000
in partial payment of this receivable.
4. MORTGAGES RECEIVABLE
The Company provides financing to the purchasers of Vacation Intervals which
are collateralized by their interest in such Vacation Intervals. The mortgages
receivable generally bear interest at the time of issuance of between 12% and
17% and remain fixed over the term of the loan, which is five to ten years.
The weighted average rate of interest on outstanding mortgages receivable is
15% as of December 31, 1996.
As of December 31, 1996, approximately 4.1% of the Company's consumer loans
were considered by the Company to be delinquent (past due 60 or more days). In
addition, the Company had commenced deed-in-lieu of foreclosure or foreclosure
action on 1.2% of its consumer loans as of December 31, 1996.
At December 31, 1996 and 1995, approximately $4.4 million and $2.4 million,
respectively, of mortgages receivable are non-interest bearing. These
mortgages have not been discounted as management has determined that the
effect would not be material to the accompanying supplemental consolidated
financial statements.
Additionally, the Company has accrued interest receivable related to
mortgages receivable of $2,472,000 and $1,984,000 at December 31, 1996 and
1995, respectively. The accrued interest receivable at December 31, 1996 and
1995 is net of an allowance for doubtful accounts of $165,000 and $145,000,
respectively, and is included in other receivables, net.
The following schedule reflects the principal maturities of mortgages
receivable:
<TABLE>
<S> <C>
Year ending December 31:
1997....................................................... $ 30,725,000
1998....................................................... 30,643,000
1999....................................................... 30,355,000
2000....................................................... 30,935,000
2001....................................................... 31,120,000
Thereafter................................................. 79,068,000
------------
Total principal maturities of mortgages receivable......... 232,846,000
Less allowance for doubtful accounts....................... (17,328,000)
------------
Net principal maturities of mortgages receivable......... $215,518,000
============
</TABLE>
F-35
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity in the mortgages receivable allowance for doubtful accounts is
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning of the period.................. $13,271,000 $ 8,876,000
(Decrease) increase in allowance for purchased
mortgages receivable............................. (400,000) 3,156,000
Provision......................................... 8,311,000 3,666,000
Receivables charged off........................... (3,854,000) (2,427,000)
----------- -----------
Balance, end of the period...................... $17,328,000 $13,271,000
=========== ===========
</TABLE>
During September 1995, the Company recorded an allowance for doubtful
accounts of $3,412,000 for certain mortgage portfolios acquired in conjunction
with the acquisition of the two properties in St. Maarten.
5. REAL ESTATE AND DEVELOPMENT COSTS
Real estate and development costs and accumulated cost of sales consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Land.......................................... $ 54,614,000 $ 26,558,000
Development costs, excluding capitalized
interest..................................... 248,972,000 163,141,000
Capitalized interest.......................... 13,276,000 6,553,000
------------- -------------
Total real estate and development costs....... 316,862,000 196,252,000
Less accumulated cost of sales................ (171,372,000) (123,848,000)
Less resort property valuation allowance...... (2,620,000) --
------------- -------------
Net real estate and development costs....... $ 142,870,000 $ 72,404,000
============= =============
</TABLE>
As of December 31, 1996, the Company commenced vacation interval sales at
certain properties, or phases of certain properties, that are expected to be
completed during 1997. The estimated costs to complete the projects, or the
specific phases of the projects, is approximately $28.4 million.
6. INVESTMENT IN JOINT VENTURE
The Company owns partnership interests in the Embassy Vacation Resort at
Poipu Point, Koloa, Kauai, Hawaii (the "Poipu Partnership"). As co-managing
general partner, the Company holds a 0.5% partnership interest for purposes of
distributions, profits and losses. The Company is also a limited partner and
holds a 29.93% limited partnership interest for purposes of distributions,
profits and losses, for a total partnership interest of 30.43%. In addition,
following repayment of any outstanding partner loans, the Company is entitled
to receive a preferred 10% per annum return on the initial capital investment
of approximately $4.6 million. After payment of such preferred return and the
return of approximately $4.6 million of capital to the Company on a pari passu
basis with the other partner in the partnership, the Company is entitled to
receive approximately 50% of the net profits. In the event certain internal
rates of return specified under the partnership agreement are achieved, the
Company is entitled to receive approximately 55% of the net profits.
F-36
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information for the Poipu Partnership is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Mortgages receivable................................ $15,920,000 $ 3,474,000
Real estate and development costs, net.............. 38,262,000 3,248,000
Net property and equipment.......................... 510,000 39,287,000
Total assets........................................ 60,474,000 50,696,000
Notes payable....................................... 40,903,000 35,494,000
Advances from partners.............................. 6,675,000 4,000,000
Partners' capital................................... 8,452,000 8,688,000
Revenues............................................ 23,904,000 10,119,000
Net loss............................................ 237,000 5,419,000
</TABLE>
Concurrent with the Initial Public Offering, the Company exchanged 820,500
shares of stock with the former holders of interests in the Poipu Partnership
for the 30.43% interest in the joint venture. As a result of this exchange,
$4,989,000 of goodwill was recorded as an increase in investment in joint
venture and is being amortized on a per Interval basis as Intervals are sold.
The amortization of such goodwill for the year ended December 31, 1996 was
$168,000 and is included in equity loss on investment in joint venture. The
Company also acquired a $2,547,000 note receivable from the partnership in
connection with the exchange. The principal balance and accrued interest
related to this note receivable was $2,031,000 and $291,000 respectively, and
is included in due from related parties as of December 31, 1996.
7. INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Organizational costs............................... $ 2,569,000 $ 2,547,000
Start-up costs..................................... 2,433,000 2,051,000
Bond issuance costs................................ 933,000 933,000
Loan origination fees.............................. 2,712,000 1,514,000
Financing fees..................................... 1,620,000 1,444,000
Goodwill........................................... 41,000 40,000
----------- -----------
Total intangible assets............................ 10,308,000 8,529,000
Less accumulated amortization...................... (5,772,000) (2,715,000)
----------- -----------
Net intangible assets............................ $ 4,536,000 $ 5,814,000
=========== ===========
</TABLE>
Amortization expense was $3,485,000, $1,564,000 and $694,000 in 1996, 1995
and 1994, respectively. In addition, $428,000 of fully amortized intangibles
were retired from the related asset and accumulated amortization accounts in
1996.
F-37
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
Notes payable to financial institutions consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Construction loans payable not to exceed $49.0 million
in the aggregate, interest payable monthly at prime
plus 2% (10.65% at December 31, 1995)................ $ -- $ 9,268,000
Construction and acquisition loan payable, due October
31, 1998 with interest payable monthly at LIBOR plus
4.25% (9.94% at December 31, 1995) collateralized by
land, improvements and vacation ownership interests.. -- 1,898,000
Revolving lines of credit not to exceed $161 million
in the aggregate (limited by eligible collateral),
with interest payable monthly at prime plus 2% to
prime plus 3% (10.25% to 11.25% at December 31,
1996), payable in monthly installments of principal
and interest equal to 100% of all proceeds of the
receivables collateral collected during the month but
not less than the accrued interest, with any
remaining principal due seven to ten years after the
date of the last advance related to mortgages
receivable, collateralized by specific mortgages
receivable........................................... 61,290,000 45,791,000
Revolving line of credit, collateralized by certain
mortgages receivable with interest payable at prime
plus 1.5% to prime plus 1.75% (9.75% to 10% at
December 31, 1996) or LIBOR plus 4.25% (9.78% at
December 31, 1996), payable in monthly installments
of principal and interest equal to 100% of all
proceeds of the receivables collateral collected
during the month but not less than the accrued
interest, with any remaining principal from September
2000 to October 2003................................. 21,648,000 18,125,000
Revolving line of credit of $40.0 million and $25
million during 1996 and 1995, respectively, with
interest payable monthly at LIBOR plus 3% (8.69% at
December 31, 1996) payable in monthly installments of
principal and interest equal to 100% of all proceeds
of the receivables collateral collected during the
month but not less than the accrued interest, with
any remaining principal due June 1998................ 37,226,000 12,277,000
Revolving working capital line of credit of $4.0
million, with interest payable monthly at prime plus
2% (10.25% at December 31, 1996), due in April 1999,
collateralized by certain mortgage receivables....... 3,707,000 521,000
Acquisition loans payable not to exceed $14.45 million
in the aggregate, with interest payable monthly at
prime plus 2% to prime plus 3% (10.25% to 11.25% at
December 31, 1996), due on dates ranging from January
1998 to June 1999, payable with a portion of the
proceeds received on the sale of Vacation Intervals,
collateralized by specific mortgages receivable...... 4,396,000 5,998,000
Acquisition note payable with monthly principal and
interest payments due at 8%, collateralized by
certain real property, due January 10, 2001.......... 615,000 --
Acquisition note payable with monthly interest
payments due at 6.75% collateralized by certain
real property, due June 14, 1999..................... 552,000 --
</TABLE>
F-38
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Acquisition note payable with monthly principal and
interest payments due at 9%, collateralized by
certain real property, due February 14, 2014....... $ 436,000 $ --
Construction loan payable not to exceed $47 million
in the aggregate, with monthly interest payable at
prime plus 2% (10.25% at December 31, 1996)
principal payable with a portion of the proceeds
received on the sale of Vacation Intervals,
collateralized by specific land and unsold interval
inventory, due from January 1998 to April 2004..... 16,476,000 3,692,000
Construction loan payable not to exceed $3.0 million
in the aggregate, with monthly interest payable at
LIBOR plus 4.25% (9.78% at December 31, 1996)
principal payable with a portion of the proceeds
received on the sale of Vacation Intervals,
collateralized by specific land and unsold interval
inventory, due by October 31, 1998................. 419,000 --
Noninterest bearing land purchase obligation (net of
a $335,000 discount for imputed interest at 8.5% in
1996) due October 1, 1997.......................... 2,165,000 1,500,000
Note payable with monthly interest payable at LIBOR
plus 4.25% (9.78% at December 31, 1996) payable
with a portion of the proceeds on the sale of
Vacation Intervals, collateralized by specific
land............................................... 516,000 --
Noninterest bearing land loan of $500,000 payable at
$54 per interval sold with remaining balance due
May 1, 1997........................................ 500,000 --
Notes payable to certain investors and former
owners,with monthly principal payments of $100,000,
plus interest at 12%, with additional interest of
$325 per interval sold, due April 10, 1998......... 1,655,000 2,900,000
Mortgages receivable sold with option to repurchase,
collateralized by certain mortgages receivable..... 6,281,000 --
Noninterest bearing purchase money mortgage note,
payable in annual installments of $2.0 million with
final payment due November 5, 1997 (net of a
discount of $670,000 for imputed interest at 8.5%
at December 31, 1996 collateralized by specific
land).............................................. 1,330,000 $ 5,588,000
Bonds payable, due April 2004 with interest at
7.75%, payable from collections of mortgages
receivable, collateralized by mortgages receivable. 17,460,000 23,180,000
Endpaper loan, due dates from December 2002 to April
2003 with interest at prime plus 2% to prime plus
2.25% (10.25% to 10.5% at December 31, 1996),
payable from collections of mortgages receivable,
collateralized by mortgages receivable............. 30,327,000 23,748,000
Endpaper loan, due dates from December 2002 to June
2005 with interest at prime plus 1.25% (9.5% at
December 31, 1996), payable from collections of
mortgages receivable, collateralized by mortgages
receivable......................................... 5,259,000 2,104,000
Various lease obligations, due December 2003 with
interest at variable rates, collateralized by
property and equipment............................. 432,000 298,000
Other notes payable................................. 23,432,000 10,676,000
------------ ------------
Total notes payable................................. $236,122,000 $167,564,000
============ ============
</TABLE>
F-39
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the revolving lines of credit agreements, totaling
approximately $220 million, the Company may typically borrow from 85% to 90%
of the balances of the pledged mortgages receivable. A total of $112 million
is available under these certain agreements at December 31, 1996, the
borrowing capacity expires seven to ten years after the date on which the last
advance related to mortgages receivable was executed.
The loans contain certain covenants, the most restrictive of which require
certain of the consolidated entities to maintain a minimum net worth and
require certain expenses to not exceed certain percentages of sales. At
December 31, 1996, the Company was in compliance with all covenants or had
received waivers with respect to these covenants.
Dividends are restricted by certain of the Company's debt agreements which
require tangible net worth of at least $140 million.
Subsequent to December 31, 1996, the Company paid $84,551,000 of the
$236,122,000 notes payable outstanding at December 31, 1996, including all
other notes payable. The expected maturities of the remaining notes payable,
are as follows:
<TABLE>
<CAPTION>
Due in fiscal year
<S> <C>
1997........................................................ $ 36,268,000
1998........................................................ 29,422,000
1999........................................................ 27,818,000
2000........................................................ 26,234,000
2001........................................................ 21,510,000
2002 and thereafter......................................... 10,319,000
------------
$151,571,000
============
</TABLE>
In February 1997, the Company consummated its offering (the "Convertible
Offering") of $138 million aggregate principal amount of its 5.75% Convertible
Subordinated Notes due 2007 (the "Convertible Notes") and its offering (the
"Stock Offering" and together with the Convertible Offering the "Offerings")
of 6.0 million shares of its Common Stock (including 2.4 million primary
shares sold by the Company and 3.6 million secondary shares sold by certain
selling stockholders).
The Convertible Notes may be exchanged for shares of the Company's Common
Stock at any time prior to maturity on January 15, 2007. Each $1,000 principal
amount of Convertible Notes is exchangeable at a conversion price of $30.417
per share, subject to adjustment under certain circumstances as stated in the
related Indenture.
The net proceeds to the Company from the sale of the 2.4 million primary
shares of Common Stock offered by the Company in the Stock Offering, based on
public offering price of $24.33 per share, and from the sale of the $138.0
million aggregate principal amount of 5.75% Convertible Subordinated Notes due
2007 offered by the Company in the Convertible Offering, based on a public
price of 100% of the principal amount thereof, in each case after deducting
underwriting discounts and estimated expenses of the Offerings, were $53.2
million and $134.9 million, respectively.
In August 1997, the Company consummated a private placement offering (the
"Senior Subordinated Notes Offering") of $200.0 million aggregate principal
amount of its 9.75% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes") at a price of 99.234% of the principal amount for an
effective yield of 9.875% per annum. After deducting underwriters discounts
and expenses, the net proceeds to the Company were $191.0 million.
F-40
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company, had accrued $4,405,000 and $1,590,000 as
a receivable and payable, respectively, with the various homeowners'
associations at its resorts. The Company accrued $1,220,000 and $1,771,000 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 $1,030,000 of a
special assessment fee charged to the Company. The Company generally accrues
receivables from homeowners' associations for management fees and certain
other expenses. Payables to the homeowners' associations consist mostly of
maintenance fees for units owned by the Company. All of these amounts are
classified as due from and due to related parties in the accompanying
supplemental consolidated balance sheets.
The Company recorded a receivable of $1,154,000 and $121,000 from two of its
predecessor partnerships at December 31, 1995, for predevelopment costs
incurred by the Company at its Embassy Vacation Resort Lake Tahoe and San Luis
Bay Resorts. These receivables were included as due from related parties. Such
predecessor partnerships were consolidated into the Company on August 20,
1996, as a result of the Consolidation Transactions.
Additionally, amounts due from related parties include advances to
affiliates and owners of the Company of $4,044,000 and $12,316,000 at December
31, 1996 and 1995, respectively. These amounts represent advances to entities
owned by shareholders to fund working capital and expansion.
Due from related parties also includes amounts due from shareholders
totaling $383,000 and $1,817,000 at December 31, 1996 and 1995, respectively.
These amounts represent advances for services to be provided to the Company.
For each of the three years in the period ended December 31, 1996,
shareholders of the Company, through their affiliates, provided certain
marketing and development services to the Company as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Marketing.............................. $16,071,000 $11,812,000 $15,597,000
Development............................ 13,572,000 10,612,000 9,006,000
</TABLE>
The above services were performed at rates negotiated by the shareholders
and are reflected in the accompanying supplemental consolidated statements of
income, except for development-related costs, which have been capitalized as
real estate and development costs.
During 1996, the Company wrote off a receivable from a related party that
the Company determined would not be collected. The receivable of $3,890,000
was charged to stockholders' deficit in accordance with Accounting Principles
Board Opinion No. 26, Early Extinguishment of Debt, since the related party
was under common control. In addition, a predecessor entity that was acquired
by the Company in connection with the PRG Merger, assigned its rights to a
receivable from a related party to its owners (i.e., the Venturers'). This
receivable of $3,449,000 was treated as a reduction of stockholders' equity
since the related party was under common control.
The Company made payments of $295,000 during the twelve months ended
December 31, 1995, to an affiliate of the Company for construction consulting
and expense reimbursement. For the year ended December 31, 1996, no such
payments were made.
F-41
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes payable to related parties as of December 31, 1995 consist of the
following:
<TABLE>
<S> <C>
Notes payable to CPI Securities, L.P., an affiliate of a limited
partner, with interest at 12%, payable monthly and the entire
principal balance and all accrued interest due on December 31,
1996........................................................... $2,722,000
Notes payable to Grace Investments, Ltd. one of the limited
partners, with interest at 12% payable monthly, due on December
31, 1996....................................................... 1,667,000
Notes payable to Dickstein & Company, L.P., an affiliate of a
limited partner, with interest payable monthly at 12%, due on
December 31, 1996.............................................. 1,111,000
Acquisition loan payable with interest payable at 12%, due on
December 31, 1996.............................................. 1,495,000
Notes payable to partners, with interest accrued at 16%, payable
on demand...................................................... 2,157,000
Other........................................................... 316,000
----------
Total notes payable to related parties........................ $9,468,000
==========
</TABLE>
During 1996, notes payable to related parties were satisfied as part of the
Consolidation Transactions.
10. COMMITMENTS AND CONTINGENCIES
The Company has license agreements with Embassy Vacation Resorts, a division
of The Promus Corporation ("Promus"), to franchise the Grand Beach and Lake
Tahoe properties. The agreements allow the resorts to be operated and marketed
as "Embassy Vacation Resorts." The agreements provide for Promus to be paid a
percentage of net sales of the Embassy Vacation Resort properties. Additional
terms are stated in the related license agreements.
The Company has an agreement with Westin Hotels & Resorts ("Westin") to
acquire, develop, and sell Vacational Intervals at four and five star Westin
Vacation Clubs. In December 1996, the Company announced plans to acquire the
first Westin Vacation Club. This property will be located in St. John, U.S.
Virgin Islands. The Company and Westin will form the Westin Partnership owned
50% each by the Company and Westin to acquire an interest in the St. John
Resort. Of the $10.5 million purchase price, each company is obligated to
contribute $2.5 million. The remaining $5.5 million of the acquisition price
will be paid by the Westin Partnership using debt financing. In addition, the
Westin Partnership will borrow approximately $7.1 million to complete the
conversion of the project to a Westin Vacation Club.
The Company is currently subject to litigation and claims regarding
employment, tort, contract, construction, and commission disputes, among
others. In the judgment of management, none of such lawsuits or claims against
the Company is likely to have a material adverse effect on the Company or its
business.
The Spanish direct and indirect tax authorities have not yet established a
clear position regarding the taxation of vacation ownership operations. While
the uncertainty surrounding this area could potentially result in there being
an exposure to taxation in Spain, management believes that any such liability
would be mitigated by other relevant taxation factors. Due to the nature of
the uncertainty, management does not consider it practicable to make an
estimate of the potential financial effect.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and cash in escrow: The carrying amount reported
in the balance sheet for cash and cash equivalents and cash in escrow
approximates their fair value because of the short maturity of these
instruments.
F-42
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgages receivable: The carrying amount reported in the balance sheet for
mortgages receivable approximates its fair value because the weighted average
interest rate on the portfolio of mortgages receivable approximates current
interest rates to be received on similar current mortgages receivable.
Notes payable to financial institutions: The carrying amount reported in the
balance sheet for notes payable approximates its fair value because the
interest rates on these instruments approximate current interest rates charged
on similar current borrowings.
Notes payable to related parties: The fair value of the notes payable to
related parties is not determinable since these financial instruments are not
readily marketable and are payable to related parties.
12. OTHER INCOME
Included in other income for the year ended December 31, 1996, is primarily
$3.5 million of income from the realization of purchased mortgages receivable,
$1.7 million of income related to the settlement of certain receivables from
the former owners of the St. Maarten properties, $2.0 million of rental
income, $0.9 million of management fees, $(0.5) million of losses from AVCOM's
property management and health spa operations, $1.0 million of consulting and
development income related to certain joint marketing programs, $1.4 million
of commissions received from third party lending institutions related to the
lending institutions' financing of vacation interval and vacation point sales,
and $.6 million net commission income from sales of travel services. Other
income for the year ended December 31, 1995, consists primarily of business
interruption insurance proceeds of $2.0 million, income from the realization
of purchased mortgages receivable of $2.2 million, rental income of $1.3
million, $1.2 million of management fees, and $1.0 million of commissions
received from third party lending institutions in connection with financing of
vacation interval and vacation point sales.
13. STOCK OPTIONS
The Company issued 2,653,500 stock options during 1996 which were
outstanding at December 31, 1996. The Company accounts for these options under
APB Opinion No. 25, Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. Under SFAS 123, the Company's net
income and unaudited pro forma earnings per share would have been $8,756,000
and ($0.08), respectively, during the year ended December 31, 1996. SFAS 123
would not have affected the Company's net income and earnings per share for
the years ended December 31, 1995 and 1994. A summary of the Company's stock
options for the year ended December 31, 1996 is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding options, beginning of year.................. -- --
Granted................................................. 2,653,500 $10.29
Exercised............................................... -- --
Forfeited............................................... -- --
Expired................................................. -- --
--------- ------
Outstanding options, end of year........................ 2,653,500 $10.29
========= ======
Exercisable at end of year.............................. 522,000 $10.18
Weighted average fair value of options granted.......... $ 4.23
</TABLE>
F-43
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the exercise prices and terms of the 2,653,500
options granted during 1996.
<TABLE>
<CAPTION>
EXERCISE PRICE OPTIONS TERM
-------------- ------- -------
<S> <C> <C>
$ 8.00..................................................... 562,500 4 years
9.33..................................................... 793,500 5 years
9.33..................................................... 675,000 3 years
11.87..................................................... 60,000 5 years
12.08..................................................... 165,000 4 years
16.08..................................................... 397,500 4 years
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 6.0%, expected dividend yield of zero, expected
volatility of 35%, and expected lives of 5 years.
14. EMPLOYEE BENEFIT PLANS
During 1996, the Company authorized 750,000 shares of Common Stock to be
issued in connection with its 1996 Equity Participation Plan and The Employee
Stock Purchase Plan (the "Plan"). The Plan allows employees that work at least
20 hours per week to purchase Common Stock of the Company at a 15% discount
from the lesser of the stock price on the date of grant or the date the stock
is purchased. Employees may purchase up to a maximum of 10% of their annual
compensation or $25,000. As of December 31, 1996, no shares were issued or
outstanding related to the Plan.
The Company also sponsors a 401(k) deferred savings plan (the "401(k) Plan")
in which employees can contribute up to 10% of their eligible compensation on
a pre-tax basis subject to certain maximum amounts. Under the terms of the
401(k) Plan, the Company can, at its option, match 50% of employee
contributions up to three percent of compensation. No contributions were made
to the 401(k) Plan by the Company during 1996.
15. INCOME TAXES
On August 20, 1996, the Company consummated a public offering which made it
subject to federal, state, and foreign income taxes from the effective date of
the Initial Public Offering. In addition, the Company is now required to
record a deferred tax liability for cumulative temporary differences between
financial reporting and tax reporting following the effective date of the
Initial Public Offering. For the year ended December 31, 1996, the Company
recorded approximately $4,506,000 of current income tax expense and
approximately $8,611,000 of deferred income tax benefit. Additionally, the
Company recorded deferred taxes of $9,464,000 related to deferred taxes from
prior years that were assumed as part of the Initial Public Offering. The
total current tax liability and deferred tax liability at December 31, 1996
was $3,268,000 and $3,259,000, respectively.
The Company has recorded $820,000 of accrued interest related to deferred
installment gains from previous years that were assumed as part of the Initial
Public Offering. During the year ended December 31, 1996, the Company recorded
an additional $78,000 of expense related to these deferred installment gains.
Prior to August 20, 1996, the predecessor entities were taxed either as a
corporation at the corporate level, as an S corporation taxable at the
shareholder level, or as a partnership taxable at the partner level.
Accordingly, the table below summarizes the unaudited pro forma provision for
income taxes that would have been reported had the Company been treated as a C
corporation rather than as individual limited partnerships and limited
liability companies for federal income tax purposes for the years ended
December 31, 1996 and 1995. AVCOM's and LSI's actual deferred income taxes and
provision for income taxes are included in the pro forma schedules
F-44
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and 1996 actual schedule below. The Company's actual income tax provision is
presented for the period subsequent to August 20, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
PRO FORMA UNAUDITED
-----------------------------------
1996 1996 1995 1994
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Current:
Federal.................. $ 2,785,000 $ 4,990,000 $ 5,654,000 $3,940,000
State.................... 481,000 846,000 711,000 606,000
Foreign.................. 1,240,000 1,233,000 1,645,000 687,000
----------- ----------- ----------- ----------
4,506,000 7,069,000 8,010,000 5,233,000
Deferred:
Federal.................. $(7,182,000) $(3,675,000) $ 1,363,000 $1,750,000
State.................... (1,393,000) (809,000) 594,000 368,000
Foreign.................. (36,000) (36,000) 42,000 35,000
----------- ----------- ----------- ----------
(8,611,000) (4,520,000) 1,999,000 2,153,000
----------- ----------- ----------- ----------
(Benefit) provision for
income taxes............ $(4,105,000) $ 2,549,000 $10,009,000 $7,386,000
=========== =========== =========== ==========
</TABLE>
For financial reporting purposes, income from continuing operations before
income taxes includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
United States............................. $3,525,000 $22,503,000 $17,088,000
Foreign................................... 3,404,000 2,816,000 2,252,000
---------- ----------- -----------
$6,929,000 $25,319,000 $19,340,000
========== =========== ===========
</TABLE>
The reconciliation between the statutory provision for income taxes and the
actual provision for income taxes is shown as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
PRO FORMA UNAUDITED
-----------------------------------
1996 1996 1995 1994
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Income tax at U.S. federal
statutory rate........... $ 2,357,000 $2,357,000 $ 8,862,000 $6,575,000
State tax, net of federal
benefit.................. 163,000 163,000 1,037,000 783,000
Difference in foreign tax
rates.................... (34,000) (34,000) (56,000) (23,000)
Write-off of receivable
from related party....... (1,478,000) -- -- --
Non-deductible expenses... 598,000 63,000 166,000 51,000
Non-taxable income from
Entities................. (5,711,000) -- -- --
----------- ---------- ----------- ----------
Provision (Benefit) for
income taxes........... $(4,105,000) $2,549,000 $10,009,000 $7,386,000
=========== ========== =========== ==========
</TABLE>
F-45
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
PRO FORMA
UNAUDITED
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................ $ 5,659,000 $ 4,365,000
Fixed assets and inventory..................... 3,389,000 (135,000)
Accrued expenses............................... 2,386,000 62,000
Net operating loss carryforward................ 15,763,000 1,383,000
Federal benefit of state deferred tax.......... -- 364,000
Foreign tax credit carryover................... 332,000 632,000
Minimum tax credit carryover................... 1,629,000 3,094,000
------------ ------------
Total deferred tax assets.................... $ 29,158,000 $ 9,765,000
------------ ------------
Deferred tax liabilities:
Installment sales.............................. (27,191,000) (19,402,000)
Percentage of completion....................... (4,370,000) --
Other.......................................... (856,000) (1,164,000)
------------ ------------
Total deferred tax liabilities................... $(32,417,000) $(20,566,000)
------------ ------------
Net deferred taxes........................... $ (3,259,000) $(10,801,000)
============ ============
</TABLE>
Additionally, certain of the Company's consolidated affiliates include
foreign corporations which are taxed at a regular rate up to 45%. The Company
has filed a request for a tax holiday for AKGI-Royal Palm C.V.O.A. which
effectively reduces the tax to 2%. This 2% tax liability rate will be in
effect for the fiscal year ending December 31, 1997. Generally, a foreign tax
credit is allowed for any taxes paid on foreign income up to the amount of
U.S. tax.
16. SUBSEQUENT EVENTS
On March 13, 1997, the Company announced the execution of a definitive
agreement for the acquisition of the Savoy Hotel (the "Savoy Acquisition")
located in the South Beach district of Miami Beach, Florida. Following the
acquisition of the Savoy Hotel, which is expected to close in the third
quarter of 1997, the Company intends to convert the existing 40 completed
hotel units and the 28 partially completed units into approximately 65 studio,
one and two bedroom vacation ownership units. Following the closing and the
receipt of necessary governmental approvals, the Company intends to begin
sales of vacation intervals at the Savoy at South Beach during the fourth
quarter of 1997.
On July 28, 1997, the Company announced the execution of a definitive
agreement to acquire the Embassy Suites Resort at Kaanapali Beach, Maui,
Hawaii (the "Kaanapali Acquisition") for approximately $78.0 million from a
Japanese partnership. The acquiring entity is a partnership formed by a
wholly-owned subsidiary of the Company (as the managing general partner), the
Whitehall Street Real Estate Limited Partnership VII and Apollo Real Estate
Advisors, L.P. The Company's subsidiary owns a 24% partnership interest in the
acquiring entity. The Embassy Suites Resort at Kaanapali Beach is a 413-suite,
full service resort hotel located on the beach in Kaanapali, Maui, Hawaii.
Upon the receipt of necessary governmental approvals, the Company intends to
convert the first phase of hotel suites to vacation ownership units. The
Company expects to operate the resort
F-46
<PAGE>
SIGNATURE RESORTS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with approximately 256 hotel suites and approximately 157 one-bedroom and two-
bedroom vacation ownership units. The Kaanapali Acquisition is anticipated to
close during the fourth quarter of 1997 and vacation ownership sales at the
resort are anticipated to commence in the first half of 1998.
On September 3, 1997, the Company announced the execution of a definitive
agreement to acquire 100% of the capital stock of Hawaii based Marc Hotels &
Resorts, Inc. The Company will acquire all the outstanding shares of Marc
Resorts for an aggregate purchase price of $6 million. The total consideration
will be comprised of a combination of newly issued shares of the Company's
Common Stock and cash. The allocation of stock and cash will be determined
prior to closing, which is expected to occur in the fourth quarter of 1997
following the satisfaction of customary closing conditions. The transaction is
expected to qualify for purchase accounting.
On September 23, 1997, the Company announced the execution of a definitive
agreement to acquire 100% of the capital stock of Vacation Internationale,
Ltd. ("VI") for approximately $24.3 million, comprised of $8.0 million in cash
and the assumption of approximately $16.3 million of indebtedness. The
acquired assets include VI's approximately $12.8 million of mortgages
receivable portfolio. The transaction is expected to qualify for purchase
accounting.
The Company's agreement to acquire VI is subject to the satisfaction of
customary closing conditions and is anticipated to close during the fourth
quarter of 1997.
On September 29, 1997, the Company announced that its Board of Directors
approved a three-for-two stock split in the form of a common stock dividend on
the Company's Common Stock. Stockholders of record on October 10, 1997 (the
"Record Date") will receive one additional share of Common Stock for every two
shares owned on the Record Date. The dividend shares will be delivered October
27, 1997. Fractional shares will be paid in cash. All share and per share
amounts in the accompanying supplemental consolidated financial statements and
notes have been restated to reflect the three-for-two stock split.
17. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment, which includes the
development, acquisition, marketing, sales, financing and management of
vacation ownership resorts. The Company's areas of operation outside of the
United States include St. Maarten, Netherlands Antilles, the United Kingdom,
Spain and Austria. The Company's customers are not concentrated in any
specific geographic region and no single customer accounts for a significant
amount of the Company's sales.
Information about the Company's operations in different geographic locations
is shown below:
<TABLE>
<CAPTION>
UNITED
STATES FOREIGN TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1996
Total revenues........................ $179,003,000 $40,844,000 $219,847,000
Income before provision for income
taxes................................ 356,000 6,573,000 6,929,000
Identifiable assets................... 412,339,000 33,545,000 445,884,000
<CAPTION>
UNITED
STATES FOREIGN TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1995
Total revenues........................ $138,925,000 $29,393,000 $168,318,000
Income before provision for income
taxes................................ 18,162,000 7,157,000 25,319,000
Identifiable assets................... 267,162,000 28,609,000 295,771,000
<CAPTION>
UNITED
STATES FOREIGN TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1994
Total revenues........................ $115,838,000 $18,030,000 $133,868,000
Income before provision for income
taxes................................ 17,088,000 2,252,000 19,340,000
</TABLE>
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
LSI Group Holdings Plc
We have audited the accompanying consolidated balance sheets of LSI Group
Holdings Plc and subsidiaries at 31 December 1995 and 1996, and the related
consolidated profit and loss accounts, statements of total recognised gains
and losses, note of historical cost profit and losses, reconciliation of
movements in shareholders' funds and cash flow statements for each of the
years in the three year period ended 31 December 1996. These consolidated
financial statements are the responsibility of the management of LSI Group
Holdings Plc . Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LSI
Holdings Plc and subsidiaries at 31 December 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended 31 December 1996, in conformity with generally accepted
accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States of America would have affected net profit for
the three years ended 31 December 1996 and shareholders' funds at 31 December
1995 and 1996, to the extent summarised in Note 28 to the consolidated
financial statements.
KPMG
Chartered Accountants
Preston, England
27 March 1997, except for note 29 which
is as of 5 June 1997
F-48
<PAGE>
LSI GROUP HOLDINGS PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1994 1995
AS RESTATED AS RESTATED 1996
NOTE (Pounds)000 (Pounds)000 (Pounds)000
---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Turnover ............................. 2 14,646 15,241 18,068
Cost of sales......................... (6,648) (6,400) (7,419)
------ ------ ------
Gross profit.......................... 7,998 8,841 10,649
Distribution costs.................... (4,025) (4,446) (4,972)
Administrative expenses:
normal.............................. (2,499) (2,841) (3,279)
exceptional......................... 3 -- -- (500)
Other operating income................ 4 91 211 206
------ ------ ------
Operating profit...................... 1,565 1,765 2,104
Loss from interests in associated
undertakings......................... 11 -- -- (40)
Net interest receivable and similar
charges.............................. 7 (133) (42) 53
------ ------ ------
Profit on ordinary activities before
taxation............................. 4-6 1,432 1,723 2,117
Tax on profit on ordinary activities.. 8 (448) (608) (709)
------ ------ ------
Profit on ordinary activities after
taxation............................. 984 1,115 1,408
Dividends payable..................... 9 -- -- (22)
------ ------ ------
Retained profit for the financial
period............................... 18 984 1,115 1,386
====== ====== ======
</TABLE>
Certain costs included as administrative expenses in 1995 and 1994 have been
restated to cost of sales as this is considered a more appropriate treatment.
Results for 1994 relate entirely to acquisitions during 1994.
All amounts relate to continuing operations.
F-49
<PAGE>
LSI GROUP HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
31 DECEMBER
-----------------------
1995 1996
NOTE (Pounds)000 (Pounds)000
---- ----------- -----------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets................................. 10 4,170 4,525
Investments..................................... 11 -- --
------ ------
4,170 4,525
CURRENT ASSETS
Stocks.......................................... 12 2,773 3,194
Debtors (including debtors due in more than one
year of (Pounds)730,000 (1995:
(Pounds)603,000)).............................. 13 2,053 3,329
Cash at bank and in hand........................ 2,104 3,720
------ ------
6,930 10,243
Creditors: amounts falling due within one year.... 14 (5,464) (8,389)
------ ------
Net current assets................................ 1,466 1,854
------ ------
Total assets less current liabilities......... 5,636 6,379
Creditors: amounts falling due after more than one
year............................................. 15 (105) (188)
Provisions for liabilities and charges............ 16 -- 43
------ ------
Net assets.................................... 5,531 6,234
====== ======
CAPITAL AND RESERVES
Called up share capital......................... 17 791 100
Capital redemption reserve...................... 18 -- 691
Revaluation reserve............................. 18 973 946
Capital reserve on acquisition.................. 18 1,662 1,670
Profit and loss account......................... 18 2,105 2,827
------ ------
Shareholders' funds............................... 5,531 6,234
====== ======
Equity shareholders' funds........................ 4,840 6,234
Non-equity shareholders' funds.................... 691 --
------ ------
5,531 6,234
====== ======
</TABLE>
F-50
<PAGE>
LSI GROUP HOLDINGS PLC
CONSOLIDATED CASH FLOW STATEMENTS
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996
NOTE (Pounds)000 (Pounds)000 (Pounds)000
---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash inflow from operating
activities........................... 24 2,173 2,129 3,483
Return on investments and servicing of
finance
Interest received................... 29 16 53
Interest paid....................... (151) (47) --
Interest element of finance lease
rental payments.................... (11) (11) --
Dividend paid....................... -- -- (22)
------ ----- -----
Net cash inflow/(outflow) from returns
on investment and servicing of
finance.............................. (133) (42) 31
Taxation
UK corporation tax paid............. (58) (446) (573)
Investing activities
Purchase of tangible fixed assets... (590) (570) (593)
Purchases of subsidiary undertaking
(net of cash and cash equivalents
acquired).......................... 25 (1,110) 82 --
Sale of tangible fixed assets....... 58 81 42
------ ----- -----
Net cash outflow from investing
activities........................... (1,642) (407) (551)
------ ----- -----
Net cash inflow before financing...... 340 1,234 2,390
Financing
(Redemption)/issue of shares........ 17 -- 691 (691)
New debenture loan.................. 27 1,800 -- --
New bank loan....................... 27 -- -- 77
Repayment of loans.................. 27 (974) (838) (20)
Capital element of finance lease
rental payments.................... 27 (75) (102) (112)
------ ----- -----
Net cash outflow from financing....... 751 (249) (746)
------ ----- -----
Increase in cash and cash equivalents. 26 1,091 985 1,644
====== ===== =====
</TABLE>
Cash flows in 1994 relate entirely to acquisitions in 1994.
F-51
<PAGE>
LSI GROUP HOLDINGS PLC
CONSOLIDATED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996
(Pounds)000 (Pounds)000 (Pounds)000
----------- ----------- -----------
<S> <C> <C> <C>
Profit for the financial period............ 984 1,115 1,408
Unrealised surplus on revaluation of
properties................................ 1,000 -- --
----- ----- -----
1,984 1,115 1,408
===== ===== =====
</TABLE>
CONSOLIDATED NOTE OF HISTORICAL COST PROFITS AND LOSSES
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996
(Pounds)000 (Pounds)000 (Pounds)000
----------- ----------- -----------
<S> <C> <C> <C>
Reported profit on ordinary activities
before taxation........................... 1,432 1,723 2,117
Difference between historical cost
depreciation and the actual depreciation
charge for the year calculated on the
revalued amount........................... -- 27 27
----- ----- -----
Historical cost profit on ordinary
activities before taxation................ 1,432 1,750 2,144
===== ===== =====
Historical cost profit for the period
retained after taxation and dividend...... 984 1,142 1,413
===== ===== =====
</TABLE>
F-52
<PAGE>
LSI GROUP HOLDINGS PLC
CONSOLIDATED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
(EXPRESSED IN BRITISH POUNDS STERLING)
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996
(Pounds)000 (Pounds)000 (Pounds)000
----------- ----------- -----------
<S> <C> <C> <C>
Profit for the financial period............ 984 1,115 1,408
Dividends.................................. -- -- (22)
----- ----- -----
Retained profit............................ 984 1,115 1,386
New share capital subscribed............... -- 691 --
Share capital redeemed..................... -- -- (691)
Capital reserve arising on acquisition..... 1,296 -- 8
Goodwill arising on acquisition............ -- (21) --
Adjustments to capital reserve of previous
period.................................... -- 366 --
Unrealised surplus on revaluation of
properties................................ 1,000 -- --
----- ----- -----
Net addition to shareholders' funds arising
in the period............................. 3,280 2,151 703
Opening shareholders' funds................ 100 3,380 5,531
----- ----- -----
Closing shareholders' funds................ 3,380 5,531 6,234
===== ===== =====
</TABLE>
F-53
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN BRITISH POUNDS STERLING)
1. GENERAL
As used in the consolidated financial statements and related notes, the term
"Company" refers to LSI Group Holdings Plc and the term "Group" refers to LSI
Group Holdings Plc and its subsidiary undertakings.
Accounting policies
The following accounting policies have been applied consistently in dealing
with items which are considered material in relation to the consolidated
financial statements.
Basis of preparation
The consolidated financial statements have been prepared in accordance with
applicable accounting standards and under the historical cost accounting
rules, modified to include the revaluation of certain properties.
Basis of consolidation
The consolidated financial statements consolidate the accounts of LSI Group
Holdings Plc and all its subsidiary undertakings. These accounts are made up
to 31 December for each year.
For associated undertakings the Group includes its share of profits and
losses in the consolidated profit and loss account and its share of post
acquisition retained profits or accumulated deficits in the consolidated
balance sheet.
Unless otherwise stated, the acquisition method of accounting has been
adopted. Under this method, the results of subsidiary and associated
undertakings acquired or disposed of in the period are included in the
consolidated profit and loss account from the date of acquisition or up to the
date of disposal. Goodwill arising on consolidation (representing the excess
of the fair value of the consideration given over the fair value of the
separable net assets acquired) is written off against reserves on acquisition.
Any excess of the aggregate of the fair value of the separable net assets
acquired over the fair value of the consideration given (negative goodwill) is
credited directly to reserves.
On subsequent disposal or termination of a previously acquired business, the
profit or loss on disposal or termination is calculated after charging the
gross amount of any related goodwill previously taken to reserves.
Fixed assets and depreciation
Depreciation is provided by the Group to write off the cost less the
estimated residual value of tangible fixed assets by equal instalments over
their estimated useful economic lives as follows:
Buildings = 2% to 5% per annum
Fixtures, fittings and equipment = 20% per annum
Motor vehicles = 25% per annum
Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
ruling at the balance sheet date and the gains or losses on translation are
included in the profit and loss account.
F-54
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
Leases
Where the Group enters into a lease which entails taking substantially all
the risks and rewards of ownership of an asset, the lease is treated as a
"finance lease'. The asset is recorded in the balance sheet as a tangible
fixed asset and is depreciated over its estimated useful life or the term of
the lease, whichever is shorter. Future instalments under such leases, net of
finance charges, are included within creditors. Rentals payable are
apportioned between the finance element, which is charged to the profit and
loss account, and the capital element which reduces the outstanding obligation
for future instalments.
All other leases are accounted for as "operating leases' and the rental
charges are charged to the profit and loss account on a straight line basis
over the life of the leases.
Pensions
The Group operates a defined contribution pension scheme. The assets of the
scheme are held separately from those of the Group in an independently
administered fund. The amount charged against profits represents the
contributions payable to the scheme in respect of the accounting period.
Stocks
Stocks are stated at the lower of cost and net realisable value.
Timeshare stocks comprise the cost of unsold periods in timeshare
accommodation. Cost includes all direct costs incurred in bringing the stocks
to their present location and condition.
Net realisable value is based on estimated selling price less further cost
expected to be incurred to completion and disposal.
Taxation
The charge for taxation is based on the profit for the period and takes into
account taxation deferred because of timing differences between the treatment
of certain items for taxation and accounting purposes. Provision is made for
deferred tax only to the extent that it is probable that an actual liability
will crystallise.
2. TURNOVER
Turnover represents the amounts (excluding value added tax) derived from the
provision of goods and services to third party customers during the period.
Turnover includes contractually complete sales of stocks of holiday
ownership, in the form of points in the Grand Vacation Club and sales of stock
of holiday ownership in the Group's developments in the United Kingdom and
Spain. Subsequent fees for the management of the developments are included in
turnover including fees charged at cost plus an agreed percentage.
Turnover also includes income arising from further ancillary services such
as interest and commissions from the provisions of loans and the net gain on
the provision of travel and reservation services.
3. EXCEPTIONAL ITEM
Directors' emoluments for 1996 include year end bonuses of some
(Pounds)500,000 which are treated as an exceptional item in the profit and
loss account.
F-55
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
4. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Profit on ordinary activities before
taxation is stated after charging
Auditors' remuneration:
Audit................................... 32 35 42
Other services.......................... -- 25 53
Depreciation and other amounts written off
tangible fixed assets (see note 10):
Owned................................... 110 237 272
Leased.................................. 75 55 71
Hire of plant and machinery--rentals
payable under operating leases........... 58 37 53
Other operating leases.................... 17 29 30
=== === ===
</TABLE>
Other operating income in 1995 includes the release of a government grant of
(Pounds)93,000 previously included as deferred income.
5. REMUNERATION OF DIRECTORS
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Directors' emoluments:
Salary (including benefits in kind)......... 228 417 970
Pension contributions....................... 17 42 42
--- --- -----
245 459 1,012
=== === =====
</TABLE>
The above remuneration is paid by a subsidiary undertaking. The emoluments,
excluding pension contributions, of the chairman were (Pounds)477,792 (1995:
(Pounds)187,175; 1994: (Pounds)113,982) and those of the highest paid director
were (Pounds)491,791 (1995: (Pounds)230,040; 1994: (Pounds)114,309).
The emoluments, excluding pension contributions, of the directors (including
the chairman and highest paid directors) were within the following ranges:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
(Pounds)110,001-(Pounds)115,000................... 2 -- --
(Pounds)185,001-(Pounds)190,000................... -- 1 --
(Pounds)230,001-(Pounds)235,000................... -- 1 --
(Pounds)475,001-(Pounds)480,000................... -- -- 1
(Pounds)490,001-(Pounds)495,000................... -- -- 1
====== ====== ======
</TABLE>
Benefits in kind relate to provision of company vehicles and private
residences.
F-56
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
6. STAFF NUMBERS AND COSTS
The average number of persons employed by the Group (including directors)
during the year, analysed by category, was as follows:
<TABLE>
<CAPTION>
NUMBER OF EMPLOYEES
----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Sales administration.............................. 23 24 32
Marketing......................................... 112 83 129
Resort management................................. 154 125 159
Travel and reservations........................... 21 24 30
Finance and Group administration.................. 32 32 30
------ ------ ------
342 288 380
====== ====== ======
</TABLE>
Included within marketing and resort management are 112 (1995: 72; 1994:
106) and 70 (1995: 56; 1994: 58) employees respectively, who are employed on a
part-time basis.
The aggregate payroll costs of these persons were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Wages and salaries.................... 2,251 2,366 3,540
Social security costs................. 157 194 222
Other pension costs (see note 22)..... 46 58 82
----- ----- -----
2,454 2,618 3,844
===== ===== =====
</TABLE>
7. NET INTEREST RECEIVABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
On bank loans, overdrafts and other
loans wholly repayable within five
years.................................. 137 43 6
Finance charges payable in respect of
finance leases and hire purchase
contracts.............................. 11 11 12
Other interest payable.................. 14 4 19
--- --- ---
162 58 37
Interest receivable..................... (29) (16) (90)
=== === ===
133 42 (53)
=== === ===
</TABLE>
8. TAXATION
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
UK corporation tax at 33% (1995 and
1994: 33%) on the profit for the year
on ordinary activities................ 448 610 770
Adjustment to previous years........... -- (2) (18)
Deferred tax........................... -- -- (43)
--- --- ---
448 608 709
=== === ===
</TABLE>
F-57
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
9. DIVIDENDS
The group paid dividends on preference shares of (Pounds)22,000 (1995 and
1994: (Pounds)nil) during the year.
10. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
ASSETS
FREEHOLD FIXTURES, IN THE
LAND AND MOTOR FITTINGS AND COURSE OF
BUILDINGS VEHICLES EQUIPMENT CONSTRUCTION TOTAL
----------- ----------- ------------ ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
Cost or valuation
At 1 January 1995....... 3,432 436 1,265 -- 5,133
Additions............... 343 132 194 -- 669
Disposals............... -- (109) -- -- (109)
----- ---- ----- --- -----
At 1 January 1996....... 3,775 459 1,459 -- 5,693
Additions............... 48 137 85 438 708
Disposals............... -- (87) -- -- (87)
----- ---- ----- --- -----
At 31 December 1996..... 3,823 509 1,544 438 6,314
----- ---- ----- --- -----
Depreciation and
diminution in value
At 1 January 1995....... -- 237 1,024 -- 1,261
Charge for year......... 82 33 177 -- 292
Disposals............... -- (30) -- -- (30)
----- ---- ----- --- -----
At 1 January 1996....... 82 240 1,201 -- 1,523
Charge for year......... 106 94 143 -- 343
On disposals............ -- (77) -- -- (77)
----- ---- ----- --- -----
At 31 December 1996..... 188 257 1,344 -- 1,789
----- ---- ----- --- -----
Net book value
At 31 December 1996..... 3,635 252 200 438 4,525
===== ==== ===== === =====
At 31 December 1995..... 3,693 219 258 -- 4,170
===== ==== ===== === =====
</TABLE>
Particulars relating to revalued assets are given below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Freehold land and buildings
At 1994 open market value.......................... 3,380 3,380
Aggregate depreciation thereon..................... (82) (164)
----- -----
3,298 3,216
===== =====
</TABLE>
Group properties valued at (Pounds)2,005,000 (1995: (Pounds)2,005,000) have
a historic cost of (Pounds)945,000 (1995: (Pounds)945,000) and aggregate
depreciation based on this historic cost of (Pounds)110,000 (1995:
(Pounds)55,000). The historic cost of the remaining Group properties is not
identifiable due to the inclusion of such properties in 1994 at a directors'
estimate of fair value together with certain costs having been provided for or
transferred to stock in previous years.
F-58
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
Included in the total net book value of motor vehicles is (Pounds)204,000
(1995: (Pounds)183,000) in respect of assets held under finance lease and
similar hire purchase contracts. Depreciation for the year on these assets was
(Pounds)71,000 (1995: (Pounds)55,000).
11. FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
INTERESTS IN
ASSOCIATED
UNDERTAKINGS
------------
(Pounds)000
<S> <C>
Cost and net book value
At 1 January 1995............................................. --
Additions..................................................... --
Loss from interest in associate............................... --
---
At 1 January 1996............................................. --
Additions (see note 19)....................................... 40
Loss from interest in associate............................... (40)
===
At 31 December 1996........................................... --
===
</TABLE>
Movements in interests in associated undertakings are detailed in note 19
and at 31 December 1996 the only associated undertaking was Vacation Club
Partnerships Limited, a company registered in England, in which the Group had
a 50% interest.
Details of the Company's principal trading subsidiary undertakings are
listed below:
<TABLE>
<CAPTION>
COUNTRY OF INCORPORATION
NAME OF COMPANY AND PRINCIPAL ACTIVITY OR REGISTRATION
- -------------------------------------- ------------------------
<S> <C>
Development and/or the sale of holiday ownership
Pine Lake Plc.......................................... England
Woodford Bridge Country Club Limited................... England
LS Promotions Limited.................................. England
LSI (Wychnor Park) Limited............................. England
Benal Holdings Limited................................. Gibraltar
Floriana Holdings Limited.............................. Gibraltar
Floriana Management Limited............................ Gibraltar
Los Amigos Beach Club Limited.......................... Isle of Man
Hewicoon SL............................................ Spain
Management of timeshare resorts
LS International Resort Management Limited............. England
Grand Vacations Management Limited..................... Jersey
Provision of finance and travel services
LS Financial Services Limited.......................... England
LSI Travel Club Limited................................ England
Provision of group administration
LS Interval Ownership Limited.......................... England
</TABLE>
All the above subsidiaries have only ordinary shares in issue.
F-59
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
All subsidiaries are wholly owned except for Los Amigos Beach Club
Management Limited ("LABCM") in which the Group has a 50% interest. This
Company is treated as a wholly owned subsidiary company on the basis of
materiality; LABCM had net liabilities of some (Pounds)210,000 at 31 December
1996 (1995: (Pounds)210,000) and was dormant in the year then ended (1995:
dormant). In addition the directors consider that they exert a dominant
influence on LABCM.
12. STOCKS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Unsold timeshare periods........................... 2,742 3,172
Raw materials and consumables...................... 31 22
----- -----
2,773 3,194
===== =====
</TABLE>
13. DEBTORS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Trade debtors...................................... 1,774 2,487
Amounts owed by associated undertaking............. -- 80
Other debtors...................................... 256 439
Prepayments and accrued income..................... 23 323
----- -----
2,053 3,329
===== =====
</TABLE>
Included within trade debtors is an amount of (Pounds)730,000 (1995:
(Pounds)603,000) which is due in more than one year.
14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Bank overdrafts................................... 28 --
Obligations under finance leases and hire purchase
contracts........................................ 87 64
Trade creditors................................... 1,068 1,171
Amounts owed to associated undertaking............ 16 --
Other creditors including taxation and social
security......................................... 1,176 2,449
Accruals and deferred income...................... 3,089 4,705
----- -----
5,464 8,389
===== =====
</TABLE>
Other creditors including taxation and social security are analysed as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Corporation tax.................................... 605 784
Other taxes........................................ 44 273
Social security.................................... 69 79
Other creditors.................................... 458 1,313
----- -----
1,176 2,449
===== =====
</TABLE>
F-60
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Bank loans........................................ 67 124
Obligations under finance lease and hire purchase
contracts (repayable within five years).......... 38 64
--- ---
105 188
=== ===
</TABLE>
Certain bank loans are denominated in Spanish pesetas and carry interest at
variable rates (currently some 11% per annum) and are repayable in equal
monthly instalments and are secured on certain Group properties located in
Spain. Other bank loans are secured on Group properties in the United Kingdom.
16. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
DEFERRED PROVISION FOR
TAXATION DILAPIDATION
----------- -------------
(Pounds)000 (Pounds)000
<S> <C> <C>
At 1 January 1995................................ -- 12
Utilised in year................................. -- (12)
--- ---
At 1 January 1996................................ -- --
Credited during year............................. (43) --
--- ---
At 31 December 1996.............................. (43) --
=== ===
</TABLE>
The deferred tax asset relates to a short term timing difference on certain
expense provisions which will reverse in 1997.
No provision has been made by the Group for the tax which would arise on the
capital gain were properties to be disposed of at their revalued amounts, as
there is no intention to dispose of these properties.
17. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Authorised
Ordinary shares of (Pounds)1 each................. 100 100
Cumulative convertible redeemable preference
shares of (Pounds)1 each......................... 691 691
--- ---
791 791
=== ===
Authorised, allotted, called up and fully paid
Ordinary shares of (Pounds)1 each................. 100 100
Cumulative convertible redeemable preference
shares of (Pounds)1 each......................... 691 --
--- ---
791 100
=== ===
</TABLE>
The preference shares were redeemable at par at any time until 31 January
1999 at the option of the Company and attracted dividends of 5% per annum. The
preference shares were redeemed at par during 1996.
F-61
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
18. RESERVES
<TABLE>
<CAPTION>
CAPITAL PROFIT
REDEMPTION REVALUATION CAPITAL AND LOSS
RESERVE RESERVE RESERVE ACCOUNT
----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
At 1 January 1994.............. -- -- -- --
Revaluation in year............ -- 1,000 -- --
Retained profit for year....... -- -- -- 984
Capital reserve arising on
acquisition (see note 19)..... -- -- 1,296 --
--- ----- ----- -----
At 1 January 1995.............. -- 1,000 1,296 984
Transfer between reserves...... -- (27) -- 27
Retained profit for year....... -- -- -- 1,115
Goodwill arising on acquisition
(see note 19)................. -- -- -- (21)
Adjustment to capital reserve
of previous years............. -- -- 366 --
--- ----- ----- -----
At 1 January 1996.............. -- 973 1,662 2,105
Transfer between reserves...... -- (27) -- 27
Retained profit for year....... -- -- -- 1,386
Capital reserve arising on
acquisition (see note 19)..... -- -- 8 --
Arising on redemption of
preference shares............. 691 -- -- (691)
--- ----- ----- -----
At 31 December 1996............ 691 946 1,670 2,827
=== ===== ===== =====
</TABLE>
Estimates of the fair value of certain liabilities within subsidiaries
acquired in 1994 proved to be some (Pounds)366,000 higher than the actual
liability. Therefore appropriate adjustment was made to the capital reserve in
1995.
19. ACQUISITIONS
Year ended 31 December 1996
On 31 December 1996 the Group acquired a further 50 ordinary shares of
(Pounds)1 each being 50% of the ordinary shares of (Pounds)1 each (issued at
nominal value) in Menorca Leisure Limited, a company registered in England.
The Group already held the other 50%. Menorca Leisure Limited made a profit of
some (Pounds)5,000 in the year ended 31 December 1996 and therefore, on the
grounds of materiality, no share of results is included in these financial
statements.
The consideration paid was (Pounds)1 with a capital reserve of (Pounds)8,000
arising.
In addition, the group acquired a 50% holding, being 50 ordinary shares of
(Pounds)1 each, in Vacation Club Partnerships Limited ("VCPL") a company
registered in England for a consideration of (Pounds)40,000.
The remaining 50% of the shares are held by a third party; each of the
parties holdings are subject to a joint venture agreement.
The principal activity of VCPL is the investment in Austrian companies which
are involved in marketing and managing of holiday ownership. The Group's share
of losses from acquisition to 31 December 1996 is (Pounds)40,000.
F-62
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
Year ended 31 December 1995
On 1 August 1995 the Group acquired Canaryroute Limited, a company owned by
the directors. Prior to its acquisition the Group provided goods and services
to Canaryroute Limited during 1995 of some (Pounds)120,000, these amounts
being based on commercial rates.
Details of the acquisition are as follows:
<TABLE>
<CAPTION>
BOOK VALUE
AND FAIR VALUE
TO THE GROUP
--------------
(Pounds)000
<S> <C>
Debtors..................................................... 10
Cash held................................................... 83
Creditors due within one year............................... (113)
----
(20)
====
Total purchase price (cash paid)............................ 1
====
Goodwill arising............................................ 21
====
</TABLE>
Canaryroute Limited achieved a profit of (Pounds)49,000 during the period 19
October 1994 to the date of its acquisition.
Canaryroute Limited contributed turnover of (Pounds)10,000 and an operating
loss of (Pounds)852 to the results of the Group for 1995. The cash flows
arising in Canaryroute Limited were consistent with these amounts.
Year ended 31 December 1994
On 5 January 1994 the Company acquired a number of the trading subsidiaries
of LSI Group Plc from the Joint Administrative Receivers of that company. The
acquisition also included certain property assets of LSI Group Plc and the
assumption of the debtors and creditors of LSL Group Plc due from/to the
relevant subsidiaries. The Company also acquired the share capital of Hewicoon
SL on 5 January 1994.
F-63
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
Details of these acquisitions are as follows:
(i) Acquisition from LSI Group Plc:
<TABLE>
<CAPTION>
FAIR VALUE
BOOK VALUE ADJUSTMENTS TO THE GROUp
----------- ----------- ------------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Fixed assets.............. 980 1,224 2,204
Stocks.................... 1,828 401 2,229
Debtors................... 2,687 -- 2,687
Net group balances........ (203) 203 --
Cash held................. 740 -- 740
Creditors due within one
year..................... (4,252) (204) (4,456)
Creditors due in more than
one year................. (119) -- (119)
Provisions for liabilities
and charges.............. (181) -- (181)
------ ----- ------
1,480 1,624 3,104
------ ----- ------
Total purchase price:
Property assets......... 450
Share capital........... 1,350
------
1,800
------
Capital reserve arising... 1,304
------
</TABLE>
Book values on acquisition on 5 January 1994 were based on the amounts
included in the statutory accounts of companies registered in England and
unaudited accounts of companies registered abroad, all such accounts were for
the year ended 31 December 1993.
The adjustments to book values relate to the following:
. the directors' assessment of the fair value of the freehold land and
buildings acquired together with a reclassification (to stock) of
(Pounds)401,000 included in the book value of land and buildings as
follows:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Fair value....................... 1,625
Reclassification................. (401)
-----
1,224
-----
</TABLE>
. the net intercompany balances of (Pounds)203,000 assumed on
acquisition;
. revision of tax liabilities of the acquired subsidiaries; resulting in
an increased liability of (Pounds)204,000.
The statutory accounts of acquired companies registered in England, together
with unaudited accounts of companies registered abroad include turnover of
(Pounds)152 million and profit before taxation and interest of
(Pounds)0.8 million for the year ended 31 December 1993. The directors have
made certain adjustments for non-recurring items in calculating these amounts.
Tax computations for certain of the subsidiaries acquired for years prior to
31 December 1993 were not agreed on completion of the 1994 accounts. The
taxation liabilities included above are therefore a prudent estimate based on
the status of the relevant computations at that time. Further adjustments to
the capital reserve were made in 1995 on finalising the liability (see note
18).
F-64
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
(ii) Hewicoon SL
<TABLE>
<CAPTION>
BOOK VALUE
AND FAIR VALUE
TO THE GROUP
--------------
(Pounds)000
<S> <C>
Fixed assets............................................... 177
Creditors.................................................. (56)
Bank loans................................................. (79)
---
42
---
Purchase price............................................. 50
---
Goodwill arising........................................... 8
---
</TABLE>
Hewicoon SL made a loss before taxation of (Pounds)8,000 in the year ended
31 December 1993. This loss related to interest incurred on loans taken out to
finance the acquisition and development of property assets in Spain which were
occupied by certain of the subsidiary undertakings. No income was generated.
20. CONTINGENT LIABILITIES
The Spanish direct and indirect tax authorities have not yet established a
clear regime as regards holiday ownership operations. In common with the
holiday ownership industry in general the Group recognise this to be a
situation which needs to be clarified in due course. While the uncertainty
surrounding this area could potentially result in there being an exposure to
taxation in Spain, the directors consider that any such liability would be
mitigated by other relevant taxation factors. Due to the nature of the
uncertainty, the directors do not consider it practicable to make an estimate
of the potential financial effect.
21. COMMITMENTS
(i) At 31 December 1996 there were authorised capital commitments of
(Pounds)1.35m (1995: (Pounds)nil).
(ii) Annual commitments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
LAND AND LAND AND
BUILDINGS OTHER BUILDINGS OTHER
----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Operating leases which
expire:
Within one year........... -- 18 -- 26
In the second to fifth
years inclusive.......... 29 18 30 26
--- --- --- ---
29 36 30 52
=== === === ===
</TABLE>
22. PENSION SCHEME
The group operates a defined contribution pension scheme. The pension cost
charge for the year represents contributions payable by the Group to the fund
and amounted to (Pounds)82,000 (1995: (Pounds)58,000) (1994: (Pounds)46,000).
There were no outstanding or prepaid contributions at either the beginning
or end of the financial year.
F-65
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
23. RELATED PARTY TRANSACTIONS
During 1996 the Group made loans of some (Pounds)80,000 to Lion Finance
Limited, a company in which the directors have an interest. The loans
attracted no interest and have been repaid since 31 December 1996. During 1995
the group acquired Canaryroute Limited which was previously owned equally by
the directors for a consideration of (Pounds)1,000 (see note 19).
During 1994, the following loans were made by the Group to Harvington
Properties Limited, a company in which Mr. R. Harrington, a director of the
Company, has a material interest. The loans carried interest at a rate of 10%
and both principal and interest were repaid in full by 31 December 1994.
<TABLE>
<CAPTION>
MAXIMUM DURING BALANCE AT
YEAR BEGINNING
(INCLUDING AND END OF
PRINCIPAL INTEREST) YEAR
--------- -------------- ----------
(Pounds) (Pounds) (Pounds)
<S> <C> <C>
100,000.......................................... 100,302 --
65,000.......................................... 65,107 --
100,000.......................................... 100,165 --
</TABLE>
24. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Operating profit...................... 1,565 1,765 2,104
Loss from associate................... -- -- (40)
Depreciation charge................... 185 292 343
Profit on sale of tangible fixed
assets............................... (15) (2) (32)
(Increase)/decrease in stocks......... 84 (628) (421)
(Increase)/decrease in debtors........ 314 (151) (1,276)
Increase in creditors................. 209 865 2,805
Reduction in provision for
dilapidation......................... (169) (12) --
----- ----- ------
Net cash inflow from operating
activities........................... 2,173 2,129 3,483
===== ===== ======
</TABLE>
25. NET CASH OUTFLOW ON PURCHASE OF SUBSIDIARY UNDERTAKINGS
<TABLE>
<CAPTION>
CASH
BALANCES
ACQUIRED CASH PAID TOTAL
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
YEAR ENDED 31 DECEMBER 1995
---------------------------
<S> <C> <C> <C>
Acquisition of Canaryroute Limited..... 83 (1) 82
=== ====== ======
<CAPTION>
YEAR ENDED 31 DECEMBER 1994
---------------------------
<S> <C> <C> <C>
Acquisition from LSI Group Plc......... 740 (1,800) (1,060)
Hewicoon SL............................ -- (50) (50)
--- ------ ------
740 (1,850) (1,110)
=== ====== ======
</TABLE>
Details of these acquisitions are included in note 19.
F-66
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
26. ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
CASH OVERDRAFT NET
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Balance at 1 January 1994.............. -- -- --
Net cash inflow/(outflow).............. 1,098 (7) 1,091
----- --- -----
Balance at 1 January 1995.............. 1,098 (7) 1,091
Net cash inflow........................ 1,006 (21) 985
----- --- -----
Balance at 1 January 1996.............. 2,104 (28) 2,076
Net cash inflow........................ 1,616 28 1,644
----- --- -----
Balance at 31 December 1996............ 3,720 -- 3,720
===== === =====
</TABLE>
27. ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Balance at beginning of year......... -- 1,033 192
New debenture loan................... 1,800 -- --
New bank loan........................ -- -- 77
Repayment of debenture loan.......... (965) (835) --
Repayment of bank loans.............. (9) (3) (20)
Bank loan of subsidiary acquired..... 79 -- --
Finance lease and hire purchase
obligations of subsidiary
undertakings acquired............... 74 -- --
Inception of finance lease and hire
purchase contracts.................. 129 99 115
Capital element of finance lease
rental payments..................... (75) (102) (112)
----- ----- ----
Balance at end of year............... 1,033 192 252
===== ===== ====
</TABLE>
28. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED
STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Group's consolidated financial statements are prepared in conformity
with generally accepted accounting principles applicable in the United Kingdom
(UK GAAP), which differ in certain significant respects from those applicable
in the United States of America (US GAAP). These differences, together with
the approximate effects of the adjustments on net profit and shareholders'
funds, relate principally to the items set out below:
(a) Acquisition accounting: Under UK GAAP, the difference between the
fair value of the identifiable assets and liabilities and the cost of
acquisition is goodwill (positive or negative) and recorded as an
adjustment to shareholders' funds. Under US GAAP, positive goodwill is
capitalised and amortised over its estimated useful life. For the purpose
of calculating the amortisation of goodwill a life of 20 years has been
assumed. Negative goodwill is allocated proportionately to reduce the
values assigned to non-monetary non-current assets (primarily fixed
assets), with any remaining negative goodwill treated as a deferred credit
and amortised systematically to income over a period not to exceed 40
years.
(b) Convertible redeemable preference shares: Under UK GAAP, preference
shares with mandatory redemption features or redeemable at the option of
the security holder would be classified as a component of shareholders'
funds. US GAAP requires such redeemable preference shares to be classified
separately from shareholders' funds.
F-67
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
(c) Deferred taxation: UK GAAP requires that no provision for deferred
taxation should be made if there is reasonable evidence that such taxation
will not be payable in the foreseeable future. Under US GAAP, deferred
taxation is recognised under the full liability method which permits
deferred tax assets to be recognised if their realisation is considered
more likely than not.
(d) Revaluation of fixed assets: UK GAAP allows periodic revaluations of
freehold land and buildings and the related depreciation is calculated on
the revalued amounts. The surplus on revaluation of fixed assets is
credited directly to shareholders' funds. Under US GAAP, such revaluations
are not permitted and depreciation is provided on the original cost.
(e) Cash flows: The principal difference between UK GAAP and US GAAP is
in respect of classification. Under UK GAAP, the Group presents its cash
flows for operating activities, returns on investments and servicing of
finance, taxation, investing activities, and financing activities. US GAAP
requires only three categories of cash flow activities which are operating,
investing and financing.
Cash flows arising from taxation and returns on investments and servicing
of finance under UK GAAP would, with the exception of dividends paid, be
included as operating activities under US GAAP; dividend payments would be
included as a financing activity under US GAAP. In addition, under UK GAAP,
cash and cash equivalents include overdraft which under US GAAP would be
presented as financing activities:
Under US GAAP, the following amounts would be reported:
<TABLE>
<CAPTION>
YEAR ENDED
31 DECEMBER
-----------------------------------
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Net cash provided by operating activities.. 1,982 1,641 2,963
Net cash used in investing activities...... (1,642) (407) (551)
Net cash provided by (used in) financing
activities................................ 758 (228) (796)
------ ----- -----
Net increase/(decrease) in cash and cash
equivalents............................... 1,098 1,006 1,616
------ ----- -----
Cash and cash equivalents under US GAAP.... 1,098 2,104 3,720
====== ===== =====
(f) Current assets and liabilities: U.K. GAAP requires the presentation of
a classified balance sheet. Current assets include amounts which fall after
more than one year. Provisions for liabilities and other charges include
amounts due within one year. U.S. GAAP permits the presentation of the
balance sheet for real estate companies to be unclassified.
Approximate effects on net profit of differences between UK and US GAAP:
<CAPTION>
YEAR ENDED
31 DECEMBER
-----------------------------------
1994 1995 1996
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Net profit in conformity with UK GAAP...... 984 1,115 1,408
Adjustments:
Goodwill amortisation.................... (1) (2) (2)
Depreciation adjustments resulting from
negative goodwill....................... 37 37 38
Revaluation of fixed assets.............. -- 27 27
Deferred taxes........................... (23) (31) (20)
------ ----- -----
Net profit in conformity with US GAAP...... 997 1,146 1,451
====== ===== =====
</TABLE>
F-68
<PAGE>
LSI GROUP HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN BRITISH POUNDS STERLING)
Approximate effects on shareholders' funds of difference between UK and US
GAAP:
<TABLE>
<CAPTION>
31 DECEMBER
-----------------------
1995 1996
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Shareholders' funds in conformity with UK GAAP......... 5,531 6,234
Adjustments:
Goodwill............................................. 26 24
Write-down of fixed assets resulting from negative
goodwill............................................ (1,794) (1,764)
Revaluation of fixed assets.......................... (973) (946)
Deferred taxation.................................... 144 124
Reclassification of convertible redeemable preference
shares.............................................. (691) --
------ ------
Shareholders' funds in conformity with US GAAP......... 2,243 3,672
====== ======
</TABLE>
29. SUBSEQUENT EVENT
On 5 June 1997, Signature Resorts, Inc. announced an agreement to acquire
100% of the capital stock of the Company.
30. COMPANIES ACT 1985
These consolidated financial statements do not comprise the company's
statutory accounts within the meaning of Section 240 of the Companies Act 1985
of Great Britain. Statutory accounts have been prepared for each of the years
ended 31 December 1994, 1995, 1996, on which the auditors' reports were
unqualified and have been delivered to the Registrar of Companies for England
and Wales.
F-69
