<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-21193
SIGNATURE RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 95-458215-7
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1875 SOUTH GRANT STREET, SUITE 650
SAN MATEO, CALIFORNIA 94402
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 312-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $0.01 per value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sales price of the Common Stock on March
27, 1998 as reported on the New York Stock Exchange, was approximately $555
million. At March 27, 1998 there were 35,880,507 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
================================================================================
<PAGE> 2
Item 7 of the Company's Annual Report for the fiscal year ended December
31, 1997 filed with the Securities and Exchange Commission on March 30, 1998
(the "10-K") is hereby amended and restated in its entirety as follows.
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the notes
thereto and the other financial data included elsewhere in this 10-K.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Business and Properties."
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the
Company's corporate and partnership predecessors and wholly-owned subsidiaries
and affiliates including AVCOM, PRG, LSI and their subsidiaries. The AVCOM, PRG
and LSI Acquisitions were accounted for using pooling-of-interests accounting
treatment for business combinations. Under such accounting treatment, the
results of operations are restated to include the operations of each acquired
entity of the years ended December 31, 1997, 1996 and 1995. The following
discussion also includes the results of operations for Marc, VI and the Global
Group. The Marc, VI and Global Acquisitions were each accounted for using the
purchase method of accounting for the business combinations.
Prior to its acquisition by the Company on February 7, 1997, AVCOM
recognized a net loss of $12.4 million for the year ended December 31, 1996. As
a result of applying pooling-of-interests accounting treatment to the AVCOM
Acquisition, this net loss has been reflected in the Company's consolidated
financial statements for the year ended December 31, 1996, reducing the
Company's 1996 reported consolidated net income. In addition, as a result of the
Company's 1997 acquisitions, the Company incurred $10.0 million of non-recurring
merger-related costs, reducing the Company's 1997 reported consolidated net
income. Therefore, to allow for a more meaningful comparison of the 1997 and
1996 financial results and management's discussion and analysis of such
financial results, reported total revenues and operating expenses have been
adjusted for non-recurring charges resulting from the AVCOM, PRG and the LSI
Acquisitions. The following table details the adjustments to reported total
revenues and costs and operating expenses for such non-recurring charges and
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Total reported revenues..................................... $168.3 $219.8 $337.7
Other income(a)............................................. -- (1.7) --
------ ------ ------
Adjusted total revenues........................... $168.3 $218.1 $337.7
====== ====== ======
Total reported costs and expenses........................... $139.6 $208.7 $284.0
Provision for doubtful accounts(b).......................... -- (2.0) --
General and administrative expenses(b)...................... -- (9.1) --
Resort property valuation allowance(b)...................... -- (2.6) --
Merger-related costs(c)..................................... -- -- (10.0)
Amortization of start-up costs(b)........................... -- (0.7) --
------ ------ ------
Adjusted total costs and expenses................. $139.6 $194.3 $274.0
====== ====== ======
Adjusted operating income......................... $ 28.7 $ 23.8 $ 63.7
====== ====== ======
</TABLE>
- ---------------
(a) For the year ended December 31, 1996, the Company recognized $1.7 million of
other income as the result of the settlement of certain receivables from the
former owners of the St. Maarten Resorts.
2
<PAGE> 3
(b) As the result of the AVCOM Acquisition, the Company recognized the following
non-recurring charges for the year ended December 31, 1996: (i) $2.0 million
in the provision for doubtful accounts; (ii) $9.1 million in general and
administrative expenses for severance costs, lease cancellations, litigation
reserves, and a reserve for losses associated with certain property
management and related expenses; (iii) $2.6 million in resort property
valuation allowance for the write-down of certain property to fair market
value; and (iv) $0.7 million in depreciation and amortization for the
amortization of startup costs over a period of one year.
(c) For the year ended December 31, 1997, the Company recognized $10.0 million
in non-recurring merger costs for the AVCOM, PRG and LSI Acquisitions. These
charges include investment banking, legal, accounting and other professional
fees.
The following table sets forth certain operating information, as adjusted
for the non-recurring charges and revenues described above.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Vacation Interval and Vacation Point sales.................. 82.8% 83.6% 83.2%
Interest income............................................. 12.1% 11.6% 12.7%
Other income................................................ 5.1% 4.8% 4.1%
------- ------- -------
Total revenues.............................................. 100.0% 100.0% 100.0%
AS A PERCENTAGE OF VACATION INTERVAL AND VACATION POINT
SALES:
Vacation Interval and Vacation Point cost of sales.......... 28.6% 26.4% 25.4%
Advertising, sales and marketing............................ 44.7% 48.8% 45.1%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative.................................. 11.4% 13.0% 12.5%
SELECTED OPERATING DATA:
Vacation Intervals sold..................................... 10,024 11,946 17,271
Vacation Points sold........................................ 102,270 132,878 194,055(a)
Average sales price per Vacation Interval................... $12,298 $13,146 $13,885
Average sales price per Vacation Point...................... $ 181 $ 186 $ 213(b)
Number of Vacation Intervals in inventory at end period..... 23,439 30,399 29,168
Number of Vacation Points in inventory at end period........ 205,943 291,674 599,554(c)
Number of resorts at period end(d).......................... 20 31 70
</TABLE>
- ---------------
(a) Includes 180,426 Vacation Points sold by the Grand Vacation Club and 13,629
Vacation Points sold by the VTS Program. Vacation Points assumed through the
Global Acquisition have been converted into the Grand Vacation Club at a
rate of ten to one.
(b) Calculated as the weighted average price per Vacation Point of Grand
Vacation Club ($220 per Vacation Point) and the VTS Program ($119 per
Vacation Point). Vacation Points assumed through the Global Acquisition have
been converted to the Grand Vacation Club at a rate of ten to one.
(c) Includes 461,473 Vacation Points in Grand Vacation Club and 138,081 Vacation
Points in the VTS Program. Vacation Points assumed through the Global
Acquisition have been converted to the Grand Vacation Club at a rate of ten
to one.
(d) Includes resort locations of AVCOM, PRG and LSI acquired by the Company in
1997 and accounted for by the pooling-of-interests method.
COMPARISON OF 1996 TO 1997
The following discussion of financial results adjusts the reported
statement of operations data for the non-recurring charges incurred during the
years ended December 31, 1997 and 1996. For the year ended December 31, 1997,
the Company recognized $10.0 million in non-recurring merger-related expenses
for the
3
<PAGE> 4
acquisition by merger of AVCOM, PRG and LSI and a $6.0 million charge to record
deferred taxes related to cumulative temporary differences between financial and
tax reporting for entities acquired in the PRG Acquisition that were previously
taxed as partnerships at the partner level. For the year ended December 31,
1996, the Company incurred the following non-recurring charges related to the
AVCOM Acquisition: (i) general and administrative expense increased by $9.1
million for severance costs, lease cancellations, litigation reserves, reserves
for losses associated with certain property management and related contracts;
(ii) provision for doubtful accounts increased by $2.0 million; (iii) resort
property valuation allowance increased by $2.6 million to write down certain
property to market value for projects initiated by AVCOM which were subsequently
abandoned; and (iv) depreciation and amortization increased by $0.7 million
related to the amortization of start-up costs over a period of one year. Also,
in 1996, the Company recognized $1.7 million of other income as the result of a
settlement of certain receivables from the former owners of the St. Maarten
resorts.
In 1997, total reported revenues were $337.7 million, compared with
adjusted total revenues of $218.1 million in 1996, an increase of $119.6
million, or 55%. This increase was due primarily to a 53% increase in Vacation
Interval sales, a 66% increase in Vacation Points sales, and a 69% increase in
interest income. The growth in Vacation Interval sales was due to both an
increase in the number of Vacation Intervals sold to 17,271 in 1997 from 11,946
in 1996, an increase of 45%, and an increase in the average price of Vacation
Intervals sold to $13,885 in 1997 from $13,146 in 1996, a 6% increase. The
average sales price will change from period to period depending upon the mix of
resorts in sales and the types of intervals sold.
Vacation Points sales during 1997 increased 66% to $41.1 million from $24.7
million in 1996. The number of Vacation Points sold in 1997 increased 46%, to
194,055, from 132,878 in 1996, while the average price per Vacation Point sold
increased 15% to $213 from $186 in 1996. The increase in the number of Vacation
Points sold in 1997 is the result of a 30% increase in Vacation Points sold in
LSI, along with the addition of Vacation Points sales by VI, which was acquired
in November 1997, and the Global Group, which was acquired in December 1997.
Interest income increased 69% to $42.9 million from $25.4 million in 1996.
The increase is the result of an increase in portfolio interest income from
increased gross mortgages receivable, and interest income from investments.
Gross mortgages receivable increased $121.9 million, or 52%, to $354.7 million
in 1997 from $232.8 million in 1996. Interest income from investments increased
by $4.9 million in 1997. Other income, which includes rental income, management
fees, commissions on the sale of European receivables, and other interest
income, increased $3.4 million to reported other income of $13.8 million in 1997
from adjusted other income of $10.4 million in 1996, an increase of 33%.
Vacation Interval and Vacation Point cost of sales, as a percentage of
Vacation Interval and Vacation Point sales, was 25% for 1997, compared with 26%
for the prior year as the Company continued to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost on
average for each vacation interest sold.
Advertising, sales and marketing expenses increased $37.7 million to $126.7
million for 1997 from $89.0 million for 1996. As a percentage of Vacation
Interval and Vacation Point sales, advertising, sales and marketing expenses
decreased to 45% for 1997 from 49% for 1996. The decrease resulted primarily
from decreased expenses at the resorts acquired in the AVCOM Acquisition as well
as from the company-wide application of best marketing practices taken from the
Company's best performing resorts.
Interest expense-treasury decreased as a percentage of reported total
revenues to 4% in 1997 from 6% of adjusted total revenues in the prior year. The
Company began financing mortgages receivable with the proceeds from the
Concurrent Offerings and the Senior Subordinated Note Offering, rather than with
hypothecation debt. Interest expense relating to these offerings is classified
as interest expense-other. Other loan portfolio expenses increased $1.0 million
during 1997 to $5.5 million from $4.5 million during the prior year. However, as
a percentage of gross mortgages receivable, other loan portfolio expense
decreased to 1.6% in 1997 from 1.9% in 1996.
4
<PAGE> 5
The provision for doubtful accounts increased $2.3 million during 1997 to
$8.6 million at year end from an adjusted $6.3 million at the end of 1996. The
allowance for doubtful accounts as a percentage of gross mortgages receivable
decreased to a reported 6.5% at December 31, 1997 from an adjusted 6.6% at
December 31, 1996. The charge off rate as a percentage of the average mortgages
receivable loan balance was 0.7% for 1997 compared to 2.1% for 1996.
General and administrative expenses increased to a reported $42.3 million
in 1997 from adjusted general and administrative expenses of $28.3 million in
1996, an increase of 49%. General and administrative expenses were 13% of 1997
reported total revenues and 1996 adjusted total revenues. The increase in
general and administrative expenses was the result of (i) the addition of a
number of senior officers and key executives in order to build the management
and organizational infrastructure necessary to efficiently manage the Company's
growth, (ii) increased overhead due to the acquisition of additional resorts,
and (iii) added salary, travel and office expenses attributable to the growth in
the size of the Company.
Depreciation and amortization increased $2.2 million, or 51%, to a reported
$6.5 million during 1997 from adjusted depreciation and amortization of $4.3
million in 1996, reflecting an increase in capital expenditures and intangible
assets. Depreciation and amortization was 1.9% of reported total revenues in
1997 and 2.0% of adjusted total revenues in 1996.
Interest expense-other, reported net of capitalized interest of $6.8
million and $6.7 million at December 31, 1997 and 1996, respectively, increased
$5.6 million, or 147%, to $9.4 million for 1997 from $3.8 million in 1996. The
increase was due primarily to the interest on the Convertible Notes and the
Senior Subordinated Notes issued in 1997.
As a result of the factors discussed above and the $2.6 million resort
property valuation allowance, total costs and operating expenses increased by
$79.7 million, or 41%, to an adjusted $274.0 million in 1997 from an adjusted
$194.3 million in 1996. Total adjusted costs and operating expenses as a
percentage of reported total revenues was 81% in 1997. This represents a
decrease of 8% from adjusted total costs and operating expenses as a percentage
of adjusted total revenues of 89% in 1996.
In addition, as a result of the factors discussed above, adjusted income
before provision for income taxes and extraordinary item and non-recurring costs
increased 172% to $53.4 million in 1997 from $19.6 million for 1996. An
extraordinary item of $0.8 million, net of income taxes, was charged to net
income in 1997 as the result of the early retirement of notes payable to
financial institutions.
For 1997, income taxes increased $27.3 million over 1996, reflecting a
change in the Company's status to a C corporation subsequent to its August 1996
initial public offering, as well as a $6.0 million charge to income tax expense
taken in the fourth quarter resulting from recording deferred taxes for
previously non-taxable entities acquired in the PRG Acquisition. Previously, the
Company's predecessor entities only incurred federal income taxes with regard to
AVCOM and foreign income taxes with respect to LSI and the Company's
wholly-owned subsidiaries located in St. Maarten, Netherlands Antilles.
Income before extraordinary item and non-recurring charges (net of taxes)
was $20.3 million for 1997, an increase of $9.3 million, or 85%, from $11.0
million in 1996. Net income was $19.5 million for 1997, compared with $11.0
million for 1996, an increase of $8.5 million or 77%. Assuming the Company had
been taxed as a C corporation in 1996, pro forma net income would have been $4.4
million, compared with $19.5 million net income for 1997, an increase of 343%.
COMPARISON OF 1995 TO 1996
The following discussion of financial results adjusts the reported
statement of operations data for the following non-recurring charges and
revenues. In 1996, the Company incurred the following non-recurring charges
related to the AVCOM Acquisition: (i) general and administrative expense
increased by $9.1 million for severance costs, lease cancellations, litigation
reserves, reserves for losses associated with certain property management and
related contracts; (ii) provision for doubtful accounts increased by $2.0
million; (iii) resort property valuation allowance increased by $2.6 million to
write down certain property to market value for projects initiated by AVCOM
which were subsequently abandoned; and (iv) depreciation and amortization
5
<PAGE> 6
increased by $0.7 million related to the amortization of startup costs over a
period of one year. Also, in 1996, the Company recognized $1.7 million of other
income as the result of a settlement of certain receivables from the former
owners of the St. Maarten resorts.
For 1996, the Company achieved adjusted total revenues of $218.1 million,
compared with reported total revenues of $168.3 million for 1995, an increase of
$49.8 million or 30%. The increase was due to the growth of Vacation Intervals
sold to 11,946 in 1996 from 10,024 in 1995, a 19% increase, coupled with a 7%
increase in the average sales price to $13,146 in 1996 from $12,298 in 1995. The
growth in Vacation Intervals sold was due to the commencement of sales at
Sunterra Resorts San Luis Bay, Sedona Summit and Scottsdale Villa Mirage and
Embassy Vacation Resort Lake Tahoe, combined with a full year of Vacation
Interval sales at Sunterra Resorts Royal Palm Beach and Flamingo Beach. The
average price per Vacation Point sold at the Company's European resorts
increased 3% to $186 for 1996 from $181 in 1995. In addition, Vacation Point
sales at the Company's European resorts increased 30% to 132,878 sold in 1996
from 102,270 sold in 1995.
Interest income increased $5.1 million, or 25%, due to an increase in gross
mortgages receivable to $232.8 million in 1996 from $160.7 million in 1995.
Other income, which includes rental income, management fees, other interest
income, commission on the sale of European receivables, and portfolio income
from the $10.2 million portfolio acquired with the two St. Maarten resorts in
1995, increased $1.8 million to an adjusted $10.4 million in 1996 from a
reported $8.6 million in 1995.
As a percentage of Vacation Interval and Vacation Point sales, Vacation
Interval and Vacation Point cost of sales decreased to 26% in 1996, compared
with 29% in 1995, as the Company was able to purchase and construct vacation
units at a discount to historical development costs, reducing the unit cost and
points cost on average for each Vacation Interval and Vacation Point sold.
Advertising sales and marketing expenses increased $26.7 million to $89.0
million in 1996 from $62.3 million in 1995. As a percentage of Vacation Interval
and Vacation Point sales, advertising, sales and marketing expenses increased to
49% for 1996 from 45% in 1995. The increase was primarily due to advertising,
sales and marketing expenses incurred at AVCOM which were 58% and 42% of total
Vacation Interval and Vacation Point sales in 1996 and 1995, respectively.
Interest expense-treasury increased $3.4 million to $13.5 million in 1996
from $10.1 million in 1995, as the result of notes payable to financial
institutions and notes payable to related parties increasing from $177.0 million
to $236.1 million, or 33%, and the prime rate increasing during the year. Other
expenses increased 125% to $4.5 million in 1996 from $2.0 million in 1995. Other
expenses increased to 2% of adjusted total revenues in 1996 from 1% of reported
total revenues in 1995. The provision for doubtful accounts increased by $2.6
million to an adjusted $6.3 million from a reported $3.7 million in 1995.
General and administrative expenses increased $9.0 million to an adjusted
$28.3 million in 1996 from reported general and administrative expenses of $19.3
million in 1995. As a percentage of adjusted total revenues, adjusted general
and administrative expenses were 13% in 1996. This amount compares to reported
general and administrative expenses as a percentage of reported total revenues
of 11% in 1995. The increase in adjusted general and administrative expenses was
the result of (i) the addition of a number of senior officers and key executives
in connection with building the Company's management and organizational
infrastructure necessary to efficiently manage the Company's future growth, (ii)
the Company's expenses and reporting obligations as a public company, (iii)
increased overhead due to the acquisition and development of additional resorts,
and (iv) added salary, travel, and office expenses attributable to the then
current and planned growth of the Company.
Depreciation and amortization increased $1.8 million, or 72%, to an
adjusted $4.3 million in 1996 from a reported depreciation and amortization of
$2.5 million in 1995, reflecting an increase in capital expenditures and
intangible assets.
As a result of the factors discussed above, costs and operating expenses
for 1996 increased by $54.7 million to an adjusted $194.3 million in 1996 from a
reported $139.6 million in 1995. Adjusted costs and operating expenses increased
to 89% of adjusted total revenues in 1996, compared with 83% of reported costs
and operating expenses as a percentage of reported total revenues in 1995.
6
<PAGE> 7
Equity loss on investment in joint venture decreased to $0.3 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.
Income before provision for income taxes decreased to $6.9 million in 1996
from $25.3 million in 1995, primarily due to the significant charges incurred by
AVCOM during the fourth quarter of 1996, as discussed previously. However,
income before provision for taxes for the Company (excluding AVCOM) increased
17%, to $27.3 million in 1996, from $23.4 million 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 $4.0
million in 1995 to a tax benefit of $4.1 million in 1996. The 1996 tax benefit
results from the recognition of AVCOM's operating loss carryforward. Previously,
the Company's predecessor entities incurred federal income taxes only with
respect to AVCOM, as well as foreign income taxes with respect to LSI and the
Company's wholly-owned subsidiaries in St. Maarten, Netherlands Antilles.
As a result of the factors discussed above, net income decreased 48% to
$11.0 million in 1996 from $21.3 million in 1995.
The Company has grown significantly from its August 1996 Initial Public
Offering from nine to 70 resort locations at December 31, 1997. This growth has
been achieved in part through the acquisition for cash of individual properties
and operating companies and by the issuance of Common Stock for operating
companies which were accounted for using the pooling-of-interests method of
accounting for business combinations. An indication of the change in the
financial results of the Company as a result of these acquisitions is shown in
the table below which reconciles the Company's total revenues, EBITDA and income
before provision for income taxes as reported for the years ended December 31,
1996 and 1995 in its Annual Reports on Form 10-K to the restated and combined
amounts for the same periods reflecting pooling-of-interests accounting:
<TABLE>
<CAPTION>
EFFECT OF REPORTED
FORM 10-K POOLING TRANSACTIONS HEREIN
--------- -------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Total revenues....................................... $95,054 $124,793 $219,847
EBITDA............................................... 27,678 16,944 44,622
Income before provision for income taxes............. 17,243 (10,314) 6,929
YEAR ENDED DECEMBER 31, 1995
Total revenues....................................... $72,608 $ 95,710 $168,318
EBITDA............................................... 19,057 22,496 41,553
Income before provision for income taxes............. 11,554 13,765 25,319
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash for operations from the sale of vacation
ownership interests, the financing of the sales of vacation interest units, the
rental of unsold vacation interests, and the receipt of management fees. With
respect to the sale of vacation interests, the Company generates cash from (i)
vacation ownership interests, (ii) the receipt of down payments from customers,
and (iii) the financing of mortgages receivable ranging from 85% to 90% of the
amount borrowed. The Company generates cash from the financing of vacation
interests from the interest charged on mortgages receivable, which averaged
approximately 14.4% for the year ended December 31, 1997.
The Company's $100 million Senior Credit Facility was entered into on
February 18, 1998. The Senior Credit Facility has a variable borrowing rate
based on the percentage of the Company's mortgages receivable pledged under such
facility and the amount of funds advanced thereunder. The interest rate will
vary between
7
<PAGE> 8
LIBOR plus 7/8% and LIBOR plus 1 3/8%, depending on the amount of advances
against mortgages receivable. The Senior Credit Facility has a three-year term
and contains customary covenants, representations and warranties and conditions
to borrow the funds. As of March 20, 1998, approximately $87 million was
outstanding under the Senior Credit Facility. The Company is currently
negotiating with its bank syndicate to increase the amount available under the
Senior Credit Facility.
The Company expects to securitize approximately $100 million of its
mortgages receivable, of which $50 million has been pre-committed. The Company
expects to convey the mortgages receivable to a bankruptcy remote subsidiary,
which would issue the Securitized Notes. The Securitized Notes would be
nonrecourse to the Company. The Company is finalizing negotiations and expects
to complete the securitization by May 1998. If completed, the securitization
would be treated as a financing transaction for accounting purposes. The
mortgages receivable and the Securitized Notes would remain on the Company's
balance sheet. The Company would recognize no gain or loss on the Securitized
Notes transaction.
For the year ended December 31, 1997, the Company had $50.0 million in
negative cash flows from operations. Because the Company typically finances 90%
of the purchase price of the vacation interests it sells, it typically incurs
significant operating costs in excess of the actual cash proceeds initially
received from the sale of a vacation interest. To meet the Company's cash
requirements to finance these customer receivables, the Company borrows funds
available under its credit facilities. The Company expects to repay its credit
facilities with proceeds from the issuance of pass-through mortgage-backed
securities under which the Company sells the mortgages receivable and principal
or interest payments from its portfolio of mortgages receivable. The Company may
also sell or factor additional mortgages receivable or borrow under existing or
future lines of credit.
In August 1997, the Company consummated the $200.0 million Senior
Subordinated Note Offering. After deducting underwriters discounts and expenses,
and giving effect to original issue discount of approximately $1.5 million, the
net proceeds to the Company were $191.0 million. The Company has exchanged new
registered notes (the "Senior Subordinated Exchange Notes") for the
privately-issued Senior Subordinated Notes, such exchange being registered with
the Securities and Exchange Commission. The form and terms of the Senior
Subordinated Exchange Notes are identical to the Senior Subordinated Notes,
except that the Senior Subordinated Exchange Notes are registered under the
Securities Act of 1933, as amended.
In February 1997, the Company consummated its public offering of $138.0
million aggregate principal amount of Convertible Notes and its offering of 6.0
million shares of Common Stock (comprised of 2.4 million newly-issued shares
sold by the Company and 3.6 million secondary shares sold by certain selling
stockholders). The net proceeds to the Company from the sale of the 2.4 million
newly-issued shares of Common Stock and from the sale of the $138.0 million
aggregate principal amount of Convertible Notes, based on a public price of 100%
of the principal amount thereof, in each case after deducting underwriting
discounts and expenses, were $53.2 million and $134.9 million, respectively. The
Convertible Notes may be exchanged for shares of the Company's Common Stock at
any time prior to maturity on January 15, 2007 at a conversion price of $30.417
per share, subject to adjustment under certain circumstances as stated in the
related indenture.
The Company requires funds to finance the future acquisition and
development of vacation ownership resorts and properties and to finance customer
purchases of vacation interests. Such capital has been provided by secured
financings on vacation ownership inventory, secured financings on mortgages
receivable generally funded by third-party lenders and unsecured notes
(including the Convertible Notes and the Senior Subordinated Notes issued in
1997). As of December 31, 1997, the Company had approximately $199 million of
additional borrowing capacity under certain third-party lending agreements. As
of December 31, 1997, the Company had $91.0 million outstanding under its notes
payable secured by mortgages receivable and $6.2 million outstanding under its
notes payable secured by unsold vacation interest inventory or other assets.
During 1997, the Company spent approximately $137 million for expansion and
development activities at the Company's resort locations. The Company funded
these expenditures primarily with the net proceeds of the Concurrent Offerings,
the Senior Subordinated Note Offering, available capacity on credit facilities,
and cash generated from operations.
8
<PAGE> 9
The Company expects to incur approximately $20 million in 1998 to complete
projects currently under construction. For a description of potential expansion
plans, see "Business and Properties -- Description of the Company's Resort
Locations."
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 interests; 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.
In the future, in addition to the financing activities described, the
Company may issue corporate debt, equity securities, or collateralized
mortgage-backed securities to finance its acquisition activities. Any debt
incurred or issued by the Company may be secured or unsecured, fixed or variable
rate interest, and may be subject to such terms as management deems prudent.
The Company believes that, with respect to its current operations, the
Senior Credit Facility and borrowing capacity under certain third-party lending
agreements, together with cash generated from operations, future borrowings, and
securities offerings, will be sufficient to meet the Company's working capital
and capital expenditure needs for the period ended December 31, 1998. However,
depending upon conditions in the capital and other financial markets, other
factors and the Company's growth, development and expansion plans, the Company
may from time to time consider the issuance of other debt or equity securities,
the proceeds of which would be used to finance acquisitions, refinance debt,
finance mortgage receivables or for other purposes.
AVCOM ACQUISITION AND RELATED EXPENSES
In February 1997, the Company consummated the AVCOM Acquisition, 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
Acquisition were valued at an aggregate of approximately $32.2 million. The
Company also assumed approximately $68.3 million in debt and $53.7 million of
mortgages receivable in the AVCOM Acquisition. The Company has accounted for the
AVCOM Acquisition under the pooling-of-interests method of accounting for
business combinations.
Transaction costs relating to the negotiation of, preparation for, and
consummation of the AVCOM Acquisition 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 Acquisition.
PRG ACQUISITION AND RELATED EXPENSES
On May 15, 1997, the Company consummated its merger with PRG, a developer,
marketer and operator of two vacation ownership resorts in Williamsburg,
Virginia. The PRG Acquisition was consummated through the issuance of 3,601,844
shares of the Company's Common Stock, representing on a pro forma basis
approximately 10.7% of the shares of the Company's Common Stock outstanding
following such merger. Based upon the closing price of the Common Stock on May
15, 1997, the shares issued in the PRG Acquisition were valued at an aggregate
of $59.1 million. The Company also assumed approximately $58.4 million of debt,
$66.0 million of mortgages receivable and $5.7 million in cash in the PRG
Acquisition. The Company has accounted for the PRG Acquisition under the
pooling-of-interests method of accounting for business combinations.
9
<PAGE> 10
The Company recorded a one-time charge of $4.2 million during the second
quarter 1997 for charges related to the PRG Acquisition including fees paid to
financial advisors, legal, and other transaction-related expenses. Certain
entities acquired in the PRG Acquisition were taxed as partnerships at the
partner level. As a result of the PRG Acquisition, the Company recorded a
deferred tax liability for cumulative temporary differences between financial
and tax reporting. This liability was established through a charge to the
Company's provision for income taxes in 1997.
LSI ACQUISITION AND RELATED EXPENSES
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 28, 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, $1.7 million of
mortgages receivable and $6.0 million in cash. The Company also paid cash
consideration of approximately $1 million to a former LSI shareholder. The
Company has accounted for the LSI Acquisition under the pooling-of-interests
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 resulted
in a one-time charge to the Company's earnings of $4.1 million in the third
quarter of 1997. These charges include the fees and expenses payable to
financial advisors, legal fees and other transaction expenses related to the LSI
Acquisition.
MARC HOTELS & RESORTS ACQUISITION
On October 10, 1997, the Company consummated the Marc Acquisition acquiring
100% of the capital stock of Marc Resorts for 212,717 newly issued shares of the
Company's Common Stock. The Company has accounted for the Marc Acquisition using
the purchase method of accounting for business combinations.
VACATION INTERNATIONALE ACQUISITION
On November 7, 1997, the Company consummated its acquisition of 100% of the
capital stock of VI for approximately $24.3 million, comprised of $8.0 million
in cash and promissory notes and the assumption of approximately $16.3 million
of long-term indebtedness. The Company has accounted for the VI Acquisition
using the purchase method of accounting for business combinations.
ACQUISITION OF EMBASSY SUITES RESORT AT KAANAPALI BEACH
On November 14, 1997, a partnership of which the Company is a managing
general partner consummated its acquisition of the Embassy Suites Resort at
Kaanapali Beach, Maui, Hawaii for approximately $78 million. 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.
ACQUISITION OF GLOBAL GROUP
On December 5, 1997, the Company consummated its acquisition of the
European vacation ownership business of the Global Group through an asset
purchase for cash consideration of approximately $18 million. The Company
assumed no debt as part of this transaction, but assumed approximately $7.0
million in current liabilities and acquired assets valued at approximately $15.8
million. The Company has accounted for the Global Acquisition using the purchase
method of accounting.
10
<PAGE> 11
YEAR 2000
The Company uses software that will be affected by the date change in the
year 2000 and recognizes that the arrival of the year 2000 poses challenges that
will require modifications of portions of its software to enable it to function
properly. As the year 2000 approaches, date sensitive systems will recognize the
year 2000 as 1900, or not at all. This may cause systems to process critical
financial and operational information incorrectly. The Company, like many other
companies, is expected to incur expenditures over the next few years to address
this issue. The Company has several information system improvement initiatives
under way to determine the full scope and related costs to insure that the
Company's systems continue to meet its needs and those of its customers. These
initiatives include upgrading and replacing some computer systems and the
conversion of others to be Year 2000 compliant. Although final cost estimates
have yet to be determined, it is anticipated that these Year 2000 costs will
result in an increase to Company expenses during 1998 and 1999. Suppliers,
customers, mortgages receivable servicers and creditors of the Company also face
Year 2000 issues. Their failure to successfully address the Year 2000 issue
could have a material adverse effect on the Company's business or results of
operations.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SIGNATURE RESORTS, INC.
(Registrant)
By: /s/ ANDREW D. HUTTON
------------------------------------
Andrew D. Hutton
Vice President, General Counsel and
Secretary
Dated: April 6, 1998
12
