1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE YEAR ENDED DECEMBER 31, 1997
Commission File Number:
333-264
Exact name of Registrant as specified in its charter:
South Seas Properties Company Limited Partnership
State or other Jurisdiction of incorporation or organization:
Ohio
I.R.S. Employer Identification Number:
59-2541464
Address of Principal Executive Offices:
12800 University Drive, Suite 350
Fort Myers, FL 33907
Registrant's Telephone Number, including Area Code:
(941) 481-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X YES NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
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SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
FORM 10-K
DECEMBER 31, 1997
INDEX PAGE NO.
COVER LETTER N/A
PART I
ITEM 1 - BUSINESS 1-4
ITEM 2 - PROPERTIES 4-7
ITEM 3 - LEGAL PROCEEDINGS 7
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS - FIRST AMENDMENT TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP 7
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - NOT APPLICABLE ----
ITEM 6 - SELECTED FINANCIAL DATA 7-10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-21
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS - SEE SEPARATE
DOCUMENT ----
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE - NOT APPLICABLE ----
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS AND KEY
EMPLOYEES 21-26
ITEM 11 - EXECUTIVE COMPENSATION 26-27
ITEM 12 - OWNERSHIP OF INTERESTS IN SOUTH SEAS, THE
GENERAL PARTNER AND THE MANAGEMENT COMPANY 27-29
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29-32
SIGNATURES 33
PART IV- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
EXHIBIT 3.1 - FIRST AMENDMENT TO AMENDED & RESTATED AGREEMENT OF
LIMITED PARTNERSHIP
EXHIBIT 10.1 - SECOND AMENDMENT (CAPITAL IMPROVEMENTS) TO AMENDED AND
RESTATED LOAN AGREEMENT
EXHIBIT 10.2 - FIRST SUPPLEMENTAL INDENTURE
EXHIBIT 10.3 - AMENDMENT NO.4 TO FIRST AMENDED AND RESTATED AGREEMENT &
CERTIFICATE OF LIMITED PARTNERSHIP OF SOUTH SEAS RESORT LIMITED
PARTNERSHIP
EXHIBIT 20.1 - PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF
SECURITY HOLDERS
EXHIBIT 27.1 - FINANCIAL DATA SCHEDULE
EXHIBIT 99.1 - CALCULATION OF WEIGHTED AVERAGE UNITS OUTSTANDING
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PART I
Item 1 - BUSINESS
Overview
South Seas Properties Company Limited Partnership (?South Seas?) is one of
the largest owners and operators of upscale beachfront destination resorts and
hotels in Florida. South Seas owns seven resort and hotel properties, plus an 18
hole golf course, and manages one additional resort property, (collectively
referred to as the ?Properties"), all located on Sanibel, Captiva, Estero and
Marco Islands off Southwest Florida's gulf coast. South Seas, through its 99%
owned subsidiary, South Seas Resorts Company Limited Partnership (?Management
Company"), leases and operates a resort and spa located on Tampa Bay, Florida.
The Properties are designed to appeal to families, leisure and retired travelers
and business groups. The Properties range in size and style from the 552-unit
South Seas Plantation resort on Captiva Island, to the 269 unit, 11 story Marco
Radisson, to the 30-unit Song of the Sea Inn, a bed-and-breakfast located on
Sanibel Island. By offering a wide variety of price points and vacation
experiences, South Seas is able to appeal to a broad section of the vacation
market. The Properties offer a combined total of approximately 1,700 condominium
and hotel units, consisting of approximately 2,300 guestrooms, including
luxurious beach homes, fully equipped condominiums, suites, cottages and hotel
rooms. South Seas owns and operates The Dunes Golf and Tennis Club on Sanibel
Island, which features an 18-hole, par 70 golf course, seven soft surface tennis
courts, full banquet and restaurant facilities and other amenities. Guests
staying at any of the Properties have access to the amenities and vacation
activities offered at all of the Properties. South Seas believes that this
feature, combined with the Properties' attractive locations, enhances customer
satisfaction and guests' perceptions of value.
Overall management and marketing of the Properties is coordinated through
the Management Company, which is headquartered in Fort Myers. The day-to-day
operation of each Property is the responsibility of an on-site general manager.
Management functions provided on a centralized basis include marketing,
reservations, human resources, property renovation and development, management
information systems, finance and accounting. By providing these functions on a
centralized basis, South Seas is able to achieve improved results on a more
cost-effective basis. Marketing of the Properties is accomplished through a
combination of South Seas' own sales force and arrangements with both national
and international representatives.
Lodging Industry
According to published industry data, the United States lodging industry
consists of approximately 47,000 different properties offering approximately 3.6
million rooms for daily rental. The most common classifications used to analyze
and compare properties within the lodging industry are location, average daily
room rate, size, region and age. Additionally, each such classification can be
further divided by service level (i.e., luxury, upscale, mid-price, economy or
budget). Toward the end of the 1980s and through the
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early 1990s, the lodging industry experienced increasing occupancy but declining
profitability. This was due to a significant increase in the supply of rooms
that offset almost all of the increase in demand. Overall, the lodging industry
had net losses of approximately $12 billion in the five years ended 1992. Over
the last five years, however, lodging industry profitability has improved. It is
believed that this increase in profitability is due principally to room rate
increases exceeding inflation, moderately increasing demand, and increased
attention to costs and lower interest rates. The lodging industry made profits
of $12.5 billion in 1996.
The following chart profiles the U.S. lodging industry: (i) as a whole,
(ii) by service and (iii) by property location for the years ending
December 31, 1995, 1996 and 1997.
LODGING INDUSTRY PROFILE
Percentage Change
Average Occupancy Average Daily 1996-97
Segment Room Rate
1995 1996 1997 1995 1996 1997 Sales Supply Demand
U.S.
Industry 65.1% 65.0% 64.5% $ 67.17 $ 70.81 $ 75.15 8.8% 3.4% 2.5%
By service:
Luxury 72.2% 73.7% 73.6% $117.70 $121.84 $128.61 9.6% 4.0% 3.9%
Upscale 68.4% 67.6% 67.4% $ 81.17 $ 84.08 $ 88.33 9.0% 4.0% 3.7%
Mid-price 66.3% 65.3% 64.6% $ 61.50 $ 64.17 $ 68.04 9.8% 4.6% 3.5%
Economy 62.5% 61.3% 60.6% $ 47.87 $ 49.57 $ 52.16 7.6% 3.5% 2.3%
Budget 61.7% 60.9% 59.8% $ 36.27 $ 39.84 $ 42.54 5.5% 0.7% -1.2%
By property
location:
Urban 67.9% 69.8% 69.7% $ 94.01 $106.56 $114.80 10.0% 1.9% 2.1%
Suburban 65.7% 66.3% 65.9% $ 60.80 $ 68.31 $ 72.23 10.5% 5.1% 4.5%
Airport 70.8% 71.0% 70.5% $ 66.20 $ 72.10 $ 77.98 9.2% 1.7% 0.9%
Highway 62.7% 61.7% 60.8% $ 48.03 $ 52.46 $ 55.16 6.9% 3.2% 1.6%
Resort 68.6% 69.1% 69.7% $103.82 $108.69 $114.85 8.4% 1.8% 2.6%
Source: Smith Travel Research Lodging Outlook
The above table indicates that sales have increased 9.0% from 1996 to 1997
in the upscale hotel segment and that supply of rooms has slightly exceeded
demand. By property location, resort sales have increased 8.4% from 1996 to
1997, while demand has out paced supply by a margin of .8%.
Smith Travel Research has not provided any form of consultation, advice or
counsel regarding any aspect of, and is in no way associated with this document.
Item 2 - PROPERTIES
Description of Properties
South Seas currently owns, manages or leases nine resort/hotel properties
and a golf and tennis club. The Properties are all located in Southwest Florida
and are managed by the Management Company.
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Owned Properties
South Seas Plantation. South Seas Plantation is the largest of the resort
properties in which South Seas owns an interest. South Seas holds a 99% limited
partnership interest in South Seas Resort Limited Partnership (SSRLP), the
entity that owns South Seas Plantation. San-Cap Resort, L.C., a Florida limited
liability company (owned equally by Mr. Taylor and Mr. Ten Broek. See
?Management") holds the 1% general partner interest in SSRLP. South Seas
Plantation is a 330-acre resort on the north end of Captiva Island, Florida. The
resort consists of approximately two miles of beach frontage on the Gulf of
Mexico, a major tennis facility, a nine-hole golf course, a major conference
center, a shopping complex, three restaurants and a major marina complex
accessible from the Gulf of Mexico and the Intracoastal waterway. Over 900
dwelling units have been developed since 1972, including hotel rooms (107) and
employee housing owned by SSRLP (approximately 160), condominiums and
single-family homes (580) and interval ownership or time-share condominiums
(110). SSRLP offers a rental program to condominium and single family home
owners at South Seas Plantation which includes a guaranteed lease or a sharing
of actual rental income between the owner of the property and SSRLP.
Radisson Suite Beach Resort ("Marco Radisson"). The Marco Radisson, located
on 7.8 acres on Marco Island, Florida, consists of 268 hotel units, 168 of that
are one-bedroom suites, 46 of which are two-bedroom suites and 54 of which are
guestrooms. Amenities at the Marco Radisson include approximately 360 feet of
direct beach frontage overlooking the Gulf of Mexico, a swimming pool, tennis
courts, a game room, a conference facility and two restaurants. South Seas
acquired it in September 1994.
Sundial Beach Resort. Sundial Beach Resort is located on Sanibel Island,
Florida. All 407-condominium units at the Sundial Beach Resort are privately
owned, and South Seas presently manages 271 of these units as rental units on
behalf of the owners. The Sundial Beach Resort consists of a main registration
building, an administrative building and various recreational facilities, all
located on approximately seven acres, including approximately 2,300 feet of Gulf
of Mexico beach frontage. In addition to rental units, meeting and banquet rooms
and executive offices, the main registration building includes three
restaurants, a deli and gift shop and a pool bar. The Sundial Beach Resort
complex also includes 12 tennis courts as well as a tennis pro shop and a retail
boutique. Other amenities on this property, some of which are owned by the
condominium associations and not by South Seas, include six swimming pools,
shuffleboard courts and covered outdoor recreation and banquet areas.
The Dunes Golf & Tennis Club. The Dunes Golf & Tennis Club on Sanibel
Island, Florida, is a semi-private golf and tennis club and the only
non-hospitality property in South Seas' portfolio. Guests staying at any of the
Properties are generally granted temporary golf and tennis privileges at The
Dunes Golf & Tennis Club on a fee basis. The club features an 18-hole, par 70
golf course designed by Mark McCumber, seven soft-surface tennis courts, a
swimming pool, volleyball courts, pro shop, full banquet facilities and a
full-
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service restaurant. In 1995, The Dunes Golf & Tennis Club underwent a $2.8
million renovation providing a completely new clubhouse, kitchen, dining area,
pro shop, putting greens, maintenance building and significant renovations to
the golf course and irrigation system.
Sanibel Inn. The Sanibel Inn is located on Sanibel Island, Florida. The
Sanibel Inn offers 96 guest rooms and includes approximately 570 feet of direct
beach frontage on the Gulf of Mexico, two meeting rooms, a swimming pool, tennis
courts, sailing and windsurfing, a full service restaurant and cabana service.
Phase I of a refurbishment program was completed in 1995 at a total cost of
$880,000. The scope of Phase I included renovations to its room interiors,
grounds and building exteriors. Phase II renovation program, consisting of
additional room interior upgrades, redesign of the entryway, and enhanced
landscaping throughout the property, costing approximately $225,000 was
completed in 1997. Twenty-eight of the 30 condominium units at Sanibel Inn are
presently managed as rental units by South Seas on behalf of the owners.
Best Western-Sanibel Island Beach Resort ("Best Western-Sanibel"). The Best
Western-Sanibel is located on Sanibel Island, Florida. It offers 46 guestrooms
and includes approximately 350 feet of direct beach frontage overlooking the
Gulf of Mexico, a swimming pool, tennis courts and shuffleboard courts. Unit
interiors were refurbished in 1997, totaling approximately $200,000.
Song of the Sea Inn. The Song of the Sea Inn is located on Sanibel Island,
Florida. The Song of the Sea Inn offers 30 guest rooms and includes
approximately 200 feet of direct beach frontage overlooking the Gulf of Mexico,
a swimming pool, whirlpool, tennis courts and laundry facilities. Unit interiors
were refurbished in 1997, totaling approximately $200,000.
Seaside Inn. The Seaside Inn on Sanibel Island consists of seven buildings
that house 32 rental units. This property is located on approximately 200 feet
of direct frontage on the Gulf of Mexico and features a swimming pool and a "Key
West" type of atmosphere for its guests. In 1995, the Seaside Inn underwent a
renovation of its rooms and exterior at a total cost of approximately $1.0
million.
Leased Property
Safety Harbor Spa and Resort ("Safety Harbor"). Safety Harbor is located on
Tampa Bay in Safety Harbor, Florida, near Clearwater, Florida. The resort
consists of 172 guestrooms, a 27,000-square-foot conference center, a
50,000-square-foot spa and fitness center (including natural underground water
springs), a tennis facility and two dining facilities. Safety Harbor is operated
by the Management Company under the terms of a lease agreement between Safety
Harbor Spa & Fitness Center, Inc. (the owner of Safety Harbor) and Safety Harbor
Management Company, Ltd. (a wholly-owned Subsidiary of the Management Company).
Managed Property
Best Western Pink Shell Beach Resort. The Best Western Pink Shell Beach
Resort is located on Estero Island, Florida, near Fort Myers Beach, overlooking
the Gulf of Mexico and Matanzas Bay. The 208
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guestrooms consist of one-, two- and three-bedroom cottages, one- and
two-bedroom suites, gulf front condominiums, efficiencies and hotel rooms. This
resort features a 200 foot fishing dock, meeting facilities, three swimming
pools, two lighted tennis courts, a beachfront bar and grill, a bayside cafe and
supervised children's programs. The Best Western Pink Shell Beach Resort is
owned by Florida Income Fund III, L.P. Mariner Capital Management, Inc., an
Affiliate of South Seas, and MCD Real Estate, Inc., an Affiliate of McDonald &
Company Securities, Inc., are the general partners of Florida Income Fund III,
L.P. The property was placed on the market for sale in 1997. The resort is
currently subject to a signed contract with a public REIT to purchase the
property. South Seas has agreed to lease the resort under a 10-year lease
arrangement with the public REIT. (See audited financial statements - Subsequent
Events footnote).
Item 3 - Legal Proceedings
South Seas and the Management Company are involved in legal proceedings
that have arisen in the ordinary course of business. While complete assurance
cannot be given as to the outcome of any litigation, South Seas believes any
financial impact or effect on the business of South Seas of pending litigation
would not be material.
Item 4 - Submission of Matters to a Vote of Security Holders
In March 1998, South Seas partners voted to amend the partnership agreement
providing the general partner the ability to elect to enter into a transaction
involving all or substantially all of the partnership's properties, without a
vote of over 50% of the limited partners. Additionally, the amendment also
included language to continue the partnership subsequent to a transaction
involving all or substantially all of the partnership's properties.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters -
not applicable
Item 6 - SELECTED HISTORICAL FINANCIAL DATA (dollars in thousands, except
ratios, notes and per unit data)
The selected historical financial data presented below as of and for each
of the three years ended December 31, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements of South Seas and should be read in
conjunction with such consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected historical data presented below for the
years ended December 31, 1993 and 1994 is also derived from the audited
consolidated financial statements of South Seas, which statements are not
presented separately herein.
The selected historical financial data includes operations of businesses
(as disclosed in Note 1 of the consolidated financial statements) for all
periods presented or since formation if the entity began operations after
January 1, 1994. These controlled entities include the businesses acquired from
The Mariner Group, Inc.
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on January 1, 1994 and the resorts which were acquired from the Song of the Sea
Company, Ltd., and Jolly Roger Resort, Ltd. (formed July 23, 1992) on June 1,
1995. On December 31, 1993, South Seas increased its ownership interest in SSRLP
to 99% through the acquisition of the remaining limited partnership interests.
Prior to December 31, 1993, South Seas owned a 70.5% interest in SSRLP. The
Marco Radisson has been included since its acquisition on September 23, 1994,
the Sanibel Inn has been included since its acquisition on June 1, 1995, the
Safety Harbor Resort and Spa has been included since the commencement of its'
lease on June 1, 1995, and the Seaside Inn has been included since its'
acquisition on January 1, 1997.
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Years Ended December 31,
1993 1994 1995 1996 1997
Income Statement Data:
Total Revenues $ 73,243 $ 79,485 $ 99,083 $ 110,325 $ 119,433
Operating Expense 51,466 54,228 66,000 74,622 77,980
Gen and Admin 10,665 13,773 19,957 19,987 22,119
Deprec and Amortiz 3,666 4,423 5,703 7,326 9,105
Interest expense 4,284 5,485 9,391 10,536 10,181
Other (income) exp (2,844)(a) (72) 606 181 677
Minority int income 1,301 14 13 10 19
Extraordinary item -- -- -- 2,046 --
Net income/(loss) $ 4,705 $ 1,634 $ (2,587) $ (4,383) $ (648)
Net income/(loss)
per partnership
unit (b) 1.12 0.39 (.60) (1.00) (.15)
Distributions per
partnership unit 0.37 .85 .40(c) .28 .30
Other data:
EBITDA (d) $ 12,655 $ 11,542 $ 12,507 $ 13,479 $ 18,638
Capital expenditures (e) $ 1,391 $ 25,403 $ 8,389 $ 8,969 $ 8,779
Consolidated Net Operating
Profit (f) $ 11,112 $ 11,484 $ 13,126 $ 15,716 $ 19,334
Balance Sheet Data:
Total assets $ 57,874 $ 84,938 $ 110,826 $ 111,042 $ 115,383
Long-term obliga-
tions (incl current
portion) $ 54,317 $ 80,211 $ 105,049 $ 112,808 $ 116,468
Partners' capital
deficiency $ (7,529) $ (9,522) $ (13,527) $ (18,529) $ (19,711)
<FN>
(a) In 1993, South Seas recovered $1,866,000 of prior period costs expended
to repair certain condominium units as a result of a litigation
settlement. Also in 1993, South Seas recorded a gain in the amount of
$978,000 in connection with the sale of a real estate parcel.
(b) Includes distributions made by Song of the Sea Company, Ltd. and Jolly
Roger Resort, Ltd. of $479,000 and $759,000 in 1993 and 1994,
respectively.
(c) Distribution represents a return of capital.
(d) EBITDA (earnings before interest, depreciation, and amortization) is
presented here not as a substitute for operating income, net income or
cash flows from operating activities determined in accordance with
generally accepted accounting principles, but rather as a measure of
South Seas' operating performance and ability to service debt. South
Seas has included EBITDA because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance, leverage and liquidity and to determine a
company's ability to service debt.
(e) Excludes capital expenditures incurred by acquired resorts prior to
acquisition.
(f) Consolidated Net Operating Profit is not determined in accordance with
generally accepted accounting principles and it is presented here not as
a substitute for consolidated net operating income as determined in
accordance with generally accepted accounting principles, but rather as
a defined term from the Indenture to determine compliance with certain
covenants contained in the Indenture. South Seas has defined
Consolidated Net Operating Profit as net income (loss) without regard to
depreciation and amortization, interest expense, minority interest and
any non-recurring, unusual items of income or expense.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the audited
consolidated financial statements for South Seas and the notes thereto.
GENERAL
South Seas is one of the largest owners and operators of upscale beachfront
and/or destination resorts and hotels on Southwest Florida's gulf coast. South
Seas owns seven resort and hotel properties, leases, operates and manages one
resort spa, owns a golf and tennis club, and manages one additional resort
property located on Ft. Myers Beach. South Seas consolidates the results of
operations of its owned properties and records management fees on the managed
property.
South Seas has implemented a growth strategy that focuses on improving
results at existing properties through increased revenues and increasing its
operating leverage through centralized management. South Seas' growth strategy
also focuses on acquiring and, to a lesser extent, developing new resorts and
hotels in targeted markets with demographic and business characteristics
consistent with its market profile. The Sanibel Inn was acquired on June 1,
1995 in exchange for 71,374 limited partnership units ("Units") plus a
contingent, deferred cash payment of up to $700,000. This acquisition was
accounted for under the purchase method for financial reporting purposes, and
its results of operations have been included in the consolidated financial
statements of South Seas for periods subsequent to the date of acquisition. In
June 1995, South Seas entered into a long-term lease agreement (the "Safety
Harbor Lease" amended in January, 1997) through a wholly owned subsidiary,
Safety Harbor Management Company, Ltd. ("Safety Harbor Management Co.") with an
unrelated party pursuant to which it operates and manages the Safety Harbor
Resort and Spa ("Safety Harbor," Safety Harbor and the Sanibel Inn are
collectively referred to herein as the "New Resorts"). The lease period, as
amended, expires May 31, 2000. The Safety Harbor Lease also provides Safety
Harbor Management Co., with an option, expiring on May 31, 2000, to purchase
Safety Harbor for an aggregate purchase price of $11.4 million (less
approximately $3.0 million in option payments payable over the term of the
lease), with an additional earn-out arrangement of $8.0 million payable over a
number of years based upon the financial performance of the property.
Management views the Safety Harbor Lease as a turnaround opportunity at an
under-performing resort, as evidenced by its occupancy rate of approximately
35% in 1994 and 1995. Management believes that the performance of Safety Harbor
can continue to be improved by making certain renovations at the resort and
also utilizing South Seas' marketing resources and operating skills. The Safety
Harbor Lease requires that South Seas spend a minimum of $3.0 million in
capital toward renovation during the term of the lease. South Seas has
benefited, following a period where the resort was renovated and repositioned,
from improved operating results at Safety Harbor. In 1997, Safety Harbor's net
operating income improved by $2.9 million over 1996, with occupancy of 66.0%
versus 39.6% in 1996. On January 6, 1997, South Seas purchased from an
affiliated limited partnership, real and personal property used in the
operation of a resort (Seaside Inn) on Sanibel Island, Florida for $6.5
million. In connection with the acquisition, South Seas assumed liabilities of
$2.5 million.
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SEASONALITY
Properties owned or operated by South Seas are affected by normally
recurring seasonal patterns. Room rates are substantially higher and occupancy
is somewhat higher during the months of January, February, March and April than
during the remainder of the year. Approximately 45% of South Seas' revenues are
earned in the first four months of each year. Accordingly, South Seas'
operations are seasonal in nature, with lower revenue and net income in the
second, third and fourth calendar quarters.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Revenues. Revenues consist principally of room rentals, food and beverage
sales, retail sales, spa and fitness revenues, and golf course operations. Other
revenue includes marina operations, long distance telephone charges, and fees
for the use of recreation facilities, commissions from realty sales, interest
income and other miscellaneous items. Revenues for the year ended December 31,
1997 increased by $9.1 million, or 8.3% over the prior period.
Rooms revenues increased by $6.3 million, or 9.8% over 1996. Approximately
$1.6 million, or 24.6% of the increase represents room revenues attributable to
the Seaside Inn ("New Resort"). Room revenues at resorts owned throughout both
periods ("Comparable Resorts") increased by approximately 7.4%. The increase in
room revenues at Comparable Resorts resulted from an increase in the average
daily rate ("ADR"), and an increase in occupancy. ADR at Comparable Resorts was
$186.82 for 1996, compared to $190.91 in 1997, an increase of $4.09, or 2.2%.
Occupancy percentage at Comparable Resorts increased to 70.5% for 1997 from
66.4% for 1996. The increase in ADR and occupancy reflects South Seas' efforts
to maximize revenue per available room ("REVPAR") during peak demand periods.
During 1997, REVPAR for Comparable Resorts increased $10.45, or 8.4% over 1996.
The New Resort had an occupancy percentage of 81.0%, ADR of $165.12 and REVPAR
of $133.70 during 1997.
Food and beverage revenues for 1997 increased by $1.8 million, or 9.6%. All
properties with food and beverage operations experienced strong growth in
revenues over 1996, consistent with the growth in room revenues. Safety Harbor
experienced a 32.5% increase primarily due to their significant room night
growth.
Golf revenues for 1997 increased by $484,000 or 14.8%. Predominantly fair
weather, combined with increased daily fee play (vs. member play) were the
primary factors in the revenue growth.
Spa and fitness revenues increased by $192,000, or 7.8% reflecting the
significantly higher occupancy experienced at Safety Harbor.
Other revenues for the year ended December 31, 1997 increased by $141,000 or
1.0% over the prior period. Safety Harbor experienced a $534,000 increase
in other revenues due to higher occupancy and thus greater utilization of other
facilities. This increase was offset by a decrease in interest income. South
Seas entered into a revolving line of credit in late 1996, and therefore
experienced lower interest income earnings offset by savings in interest expense
due to the ability to pay down the line with excess cash balances.
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Expenses. Expenses for 1997 increased by $7.7 million, or 7.6%, over the
prior year. The dollar increase resulted from expenses associated with the New
Resort (approximately $1.0 million), as well as increases in depreciation and
amortization (approximately $1.8 million), general and administrative-corporate
(approximately $1.5 million) and a non-recurring, non-cash expense of $480,000,
related to the termination of general partner fee in exchange for units.
Room expense increased by $1.7 million, or 11.4% over 1996. Room expense at
Comparable Resorts increased $1.4 million, or 9.3%. As a percentage of room
revenues, room expense remained fairly constant with a slight increase from
23.3% to 23.7%, primarily due to higher payroll from improved service levels.
Food and beverage costs increased $1.2 million or 7.8% over the prior year.
As a percentage of food and beverage revenues, food and beverage expense
decreased from 78.9% to 77.6%.
Total general and administrative expense increased by $2.1 million, or
10.7%, over 1996. As a percentage of revenues, general and administrative
expense increased from 18.1% to 18.5%. Approximately $293,000, or 13.7%, of the
increase was related to expenses associated with the operations of the New
Resort. Approximately $1.0 million in additional bonuses and profit sharing was
recognized in 1997, due to actual performance exceeding operating budgets.
Depreciation and amortization expense increased by $1.8 million, or 24.3%
over 1996. As a percentage of revenues, depreciation and amortization expense
increased from 6.6% to 7.6%. The increase, both in dollars and as a percentage
of revenues, resulted from the impact of increased depreciation expense on the
significant fixed asset additions placed in service within the last year, and
the increased amortization of goodwill (due to New Resort acquisition) and
increased amortization on loan costs.
Net Loss. As a result of the foregoing factors, net loss for 1997 was a $3.7
million improvement over 1996, $2.0 million or 54.1% of which was the result of
not having an extraordinary item write-off in 1997.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
Revenues. Revenues consist principally of room rentals, food and beverage
sales, retail sales, spa and fitness revenues, and golf course operations. Other
revenue includes marina operations, long distance telephone charges, and fees
for the use of recreation facilities, commissions from realty sales, interest
income and other miscellaneous items. Revenues for the year ended December 31,
1996 increased by $11.2 million, or 11.4% over the prior period.
Rooms revenues increased by $6.2 million, or 10.6% over 1995. Approximately
$4.3 million, or 69.0% of the increase represents room revenues attributable to
Safety Harbor and the Sanibel Inn ("New Resorts" included for seven months in
1995 and full year in 1996). Room revenues at resorts owned throughout both
periods ("Comparable Resorts") increased by approximately 3.4%. The increase in
room revenues at Comparable Resorts resulted from an increase in the
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average daily rate (?ADR?), and an increase in occupancy. ADR at Comparable
Resorts was $194.79 for 1996, compared to $192.22 in 1995, an increase of $2.57,
or 1.3%. Occupancy percentage at Comparable Resorts increased to 74.8% for 1996
from 74.0% for 1995. The increase in ADR and occupancy reflects South Seas?
efforts to maximize revenue per available room (?REVPAR?) during peak demand
periods. During 1996, REVPAR for Comparable Resorts increased $3.60, or 2.5%
over 1995. The New Resorts had an occupancy percentage of 49.6%, ADR of $137.55
and REVPAR of $68.29 during 1996. Management of South Seas believes that the
lower occupancy levels at the New Resorts can be attributed to the continuing
low occupancy levels at Safety Harbor.
Food and beverage revenues for 1996 increased by $945,000, or 5.3%. The
increase was primarily due to the additional food and beverage operations
related to the New Resorts. Food and beverage revenues for Comparable Resorts
for 1996 decreased slightly by $29,000 compared to the prior year. The decrease
was primarily due to a decrease of $448,000 at South Seas Plantation, attributed
to the closing for renovation of the King?s Crown restaurant, offset by an
increase of $216,000, at The Dunes Golf & Tennis Club (closed for renovation in
1995), and an increase of $301,000 at the Marco Radisson due to an increase in
banquet revenues. Food and beverage sales at the New Resorts contributed
$977,000 to increased sales over 1995.
Retail revenues for 1996 increased by $297,000, or 5.1%. Retail operations
at the New Resorts were up by $165,000 or 127.9% over the prior period. Retail
revenues for Comparable Resorts for 1996 increased by $132,000, compared to the
prior year.
Golf revenues for 1996 increased by $945,000 or 40.5%. The increase in golf
revenues was primarily due to the reopening of the Dunes Golf & Tennis Club,
which was closed for six months in 1995 for renovations.
Spa and fitness revenues increased by $1.2 million, or 99.0% reflecting the
results of operations at Safety Harbor, which was leased effective June 1, 1995.
Thus, 1996 results reflect 12 months of activity versus seven months in 1995.
Other revenues for the year ended December 31, 1996 increased by $1.7
million or 12.2% over the prior period. Approximately $1.3 million of the
increase was attributable to the Comparable Resorts. Additional club membership
revenue at the renovated Dunes Golf & Tennis Club accounted for $257,000 of the
increase. Other revenues at Sundial were up approximately $236,000, primarily in
the recreation department. This is a result of termination of the bike and boat
concession agreement, which provided only a percentage of rental income. This
operation is now owned and directly provided by the resort to its guests. Total
telephone fees company-wide increased by $263,000 due to a combination of rate
increases and due to improved systems to capture telephone charges by guests.
The New Resorts contributed $435,000 or 26.1% of the total increase in other
revenues.
Expenses. Expenses for 1996 increased by $10.3 million, or 11.2%, over the
prior year. The dollar increase resulted principally from
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expenses associated with the New Resorts, as well as increases in depreciation
and amortization and interest expense.
Room expense increased by $1.9 million, or 14.7% over 1995. Room expense at
Comparable Resorts increased $1.1 million, or 9.3%. Approximately $767,000 of
the total increase reflects the additional expenses associated with the New
Resorts. Also, in February, 1996, South Seas appointed a vice president of
reservations (see ?Management"). Costs associated with this position are
included in room expense. As a percentage of room revenues, room expense
increased slightly from 22.5% to 23.3%.
Food and beverage costs increased $1.3 million or 10.0% over the prior year.
Approximately $720,000 or 54.0% of the total increase was attributable to the
New Resorts. As a percentage of food and beverage revenues, food and beverage
expense increased from 75.6% to 78.9%.
Sales and marketing costs for the year ended December 31, 1996 increased
$1.7 million or 27.3% over the prior period, of which $887,000 or 53.2% of the
total increase was associated with operations of the New Resorts. The $779,000
or 14.7% increase experienced at the Comparable Resorts is above the percentage
growth in revenues and reflects marketing efforts targeted for the off-season.
As a percentage of total revenues, sales and marketing increased from 6.2% in
the year ended December 31, 1995 to 7.1% in 1996, primarily due to increased
marketing effort to reposition Safety Harbor.
In 1996, maintenance and grounds expense increased by $1.1 million or 22.6%
over the prior period, of which $232,000 or 22.1% of the total increase was
attributable to the New Resorts. Increase at the Comparable Resorts for the same
period was $819,000 and was consistent with expected maintenance costs for 1996.
The Dunes Golf & Tennis Club attributed approximately $241,000 of 29.4% of the
increase from comparable resorts. This is due to the facility being closed and
under renovation in 1995. As a percentage of total revenues, maintenance and
grounds expense increased from 4.7% to 5.2%.
Total general and administrative expense increased slightly by $30,000, or
.2%, over 1995. As a percentage of revenues, general and administrative expense
decreased from 20.1% to 18.1%. Approximately $1.5 million of the increase was
attributable to general and administrative expenses associated with the
operations of the New Resorts. These costs were offset by a decrease at the
Comparable Resorts of $1.4 million. Effective January 1,1996, South Seas changed
its health insurance plan from a self-insured plan (with maximum loss caps) to a
fully insured program. This resulted in substantial savings company-wide, the
most significant of which was realized at South Seas Plantation (approximately
$250,000), Sundial Beach Resort ($130,000) and a reduction in reserves based on
expected claims from prior periods of $115,000. Also in 1996, South Seas
experienced reduced workers compensation claims, casualty reserve adjustments
resulted in reduced costs over 1995, the most significant of which were $359,000
at South Seas Plantation and $318,000 at Sundial Beach Resort. Finally, due to
results of operations, the bonuses paid to the Management Company's corporate
staff were reduced
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by approximately $362,000 in 1995 over 1996.
Depreciation and amortization expense increased by $1.6 million, or 28.5%
over 1995. As a percentage of revenues, depreciation and amortization expense
increased from 5.7% to 6.7%. The increase, both in dollars and as a percentage
of revenues, resulted from the impact of New Resorts acquired in June, 1995
($453,000 or 28.3% of the total), increased depreciation expense on the
significant fixed asset additions placed in service within the last year and
higher amortization of loan costs associated with the public debt offering and
the $80 million consolidation loan (see ?Liquidity and Capital Resources").
Interest expense increased by $1.1 million, or 12.2% over 1995. The increase
was attributable to the additional indebtedness that was incurred in March 1996
with the issuance of $43.5 million of convertible bonds.
Extraordinary item - early extinguishment of debt. In March, 1996 and
September, 1996, South Seas obtained new loan facilities that paid off
significant amounts of debt prior to their original maturities. Therefore,
approximately $2.0 million in unamortized loan costs and pre-payment penalties
have been treated as an extraordinary item.
Net Loss. As a result of the foregoing factors, net loss for 1996
increased by $1.8 million, or 69.4%, compared to 1995.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1994
Revenues. Revenues consisted principally of room rentals, food and beverage
sales, retail sales and golf course operations. Other revenue includes marina
operations, long distance telephone charges, fees for the use of recreation
facilities and spa facilities, management fees, commissions from realty sales,
interest income and other miscellaneous items. Revenues for the year ended
December 31, 1995 increased by $19.4 million, or 24.4%, over the prior year,
principally as a result of significant increases in room revenues, food and
beverage revenues and other revenues offset slightly by a decrease in golf
revenues.
Room revenues increased by $13.3 million, or 29.6%, over 1994. Approximately
$10.3 million, or 77%, of the increase represents room revenues attributable to
the New Resorts. Room revenues at resorts owned throughout both periods
("Comparable Resorts") increased by approximately 6.9%. The increase in room
revenues at Comparable Resorts resulted from an increase in the average daily
rate ("ADR"), partially offset by a decrease in occupancy. ADR at Comparable
Resorts was $210.58 for 1995, compared to $199.61 in 1994, an increase of
$10.97, or 5.5%. Occupancy percentage at Comparable Resorts decreased to 73.9%
for 1995 from 75.3% for 1994. The increase in ADR reflects South Seas' efforts
to maximize revenue per available room ("REVPAR") during peak demand periods.
During 1995, REVPAR for Comparable Resorts increased $5.30, or 3.5% over 1994.
The New Resorts had an occupancy percentage of 67.4%, ADR of $137.98 and REVPAR
of $93.04 during the period of their ownership or operation, as the case may be,
by South Seas or the Management
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Company. Management of South Seas believes that the lower occupancy levels at
the New Resorts can be attributed, in part, to the timing of the acquisitions
(See "Seasonality"), the major refurbishment work that was being undertaken at
the Sanibel Inn and the continuing low occupancy levels at Safety Harbor.
Food and beverage revenues for 1995 increased by $3.1 million, or 22.2%. The
increase was primarily due to the additional food and beverage operations
related to the New Resorts. Food and beverage revenues for Comparable Resorts
for 1995 increased by $531,000 compared to the prior year. The increase was
primarily due to growth in food and beverage revenues at existing properties of
$770,000, offset by a decrease of $238,000 due to the closing of The Dunes Golf
& Tennis Club for renovation. Food and beverage sales at the New Resorts
contributed $2.6 million to increased sales over 1994. The Marco Radisson
(reflecting 12 months of activity vs. three months) generated approximately $1.4
million, and Safety Harbor generated $1.2 million.
Retail revenues for 1995 increased by $521,000 or 9.6%. The increase was
primarily due to retail operations at the New Resorts. Retail revenues for
Comparable Resorts for 1995 increased by $59,000, compared to the prior year.
The increase was primarily due to increased volume at existing Properties of
$155,000 offset by a decrease at The Dunes Golf & Tennis Club of $96,000 (due to
its closure for renovations).
Golf revenues for 1995 decreased by $237,000, or 9.2%. The decline in golf
revenues was primarily due to the closing of The Dunes Golf & Tennis Club for
renovations during 1995.
Other revenues for 1995 increased by $1.5 million, or 11.6%. Approximately
$978,000 of the increase was attributable to the addition of the New Resorts.
Expenses. Expenses for 1995 increased by $22.9 million, or 29.4%, over the
prior year. As a percentage of revenues, expenses increased from 98.0% to
101.9%. The dollar increase resulted principally from expenses associated with
the New Resorts. The increase in expenses as a percentage of revenues resulted
primarily from the timing of the leasing of Safety Harbor and the acquisition of
the Sanibel Inn after the peak tourist season. See ?Seasonality.?
Room expense increased by $3.2 million, or 32.8%, over 1994. Room expense at
Comparable Resorts increased $1.3 million, or 15.8%. Approximately $2.4 million
of the total increase reflects the additional expenses associated with the New
Resorts. As a percentage of room revenues, room expense increased from 21.9% to
22.5% The increase in room expense as a percentage of room revenues primarily
resulted from the lower occupancy percentage at the New Resorts and the decrease
in occupancy percentage at the Comparable Resorts.
General and administrative expense increased by $6.2 million, or 45.3%, over
1994. As a percentage of revenues, general and administrative expense increased
from 17.3% to 20.2%. Approximately $3.8 million of the increase was attributable
to general and administrative expenses associated with the operations of the New
Resorts. The balance of the increase, or approximately $2.4 million,
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reflected increases in management and support personnel costs relating to South
Seas? centralized operations, including marketing, purchasing, sales, accounting
and management information systems and approximately $2.0 million of additional
insurance expense. The increase in insurance expense, both in dollars and as a
percentage of revenues, resulted from the impact of increased employee claims
under South Seas? health and workers compensations self-insurance programs as
well as increases associated with the addition of New Resorts. Management
believes that the upward trend in general and administrative expense as a
percentage of revenues was due primarily to two factors: (i) increased costs
associated with establishing the corporate infrastructure (i.e., centralized
operations, including marketing, purchasing, sales, accounting and management
information systems) needed to integrate and operate the New Resorts and (ii)
the effect of normally recurring seasonal patterns on revenues at the New
Resorts subsequent to their acquisition.
Depreciation and amortization expense increased by $1.3 million, or 28.9%,
over 1994. As a percentage of revenues, depreciation and amortization expense
increased from 5.6% to 5.7%. The increase, both in dollars and as a percentage
of revenues, resulted from the impact of New Resorts acquired in 1995 and the
opening of a centralized reservations facility.
Interest expense increased by $3.9 million, or 71.2% over 1994. The increase
was primarily attributable to the indebtedness that was incurred in late 1994
and early 1995 to acquire the Marco Radisson and provide funds for renovations.
South Seas incurred $23.5 million of debt to acquire the Marco Radisson (the
acquisition loan was in place for the last three months of 1994), $4.9 million
of debt in 1995 to make renovations at the Marco Radisson and assumed $11.35
million of debt in June 1995 in connection with its acquisition of Sanibel Inn.
Net Income. As a result of the foregoing factors (including the effect of
normally recurring seasonal patterns on revenues at the New Resorts subsequent
to their acquisition), net income for 1995 decreased by $4.2 million, or 258.3%,
compared to 1994. Net income was also adversely affected by a $340,000 charge to
operations associated with the write-off of certain offering and transfer costs
associated with the acquisition of the Best Western-Sanibel and Song of the Sea.
In addition, net income was adversely affected by a $458,000 non-cash loss
realized on the disposal of certain fixed assets related to renovations at The
Dunes Golf & Tennis Club.
LIQUIDITY AND CAPITAL RESOURCES
South Seas has historically financed its operations and capital expenditures
through a combination of cash generated from operations, bank borrowings,
borrowings from private investors, bond offerings and short-term credit
facilities.
On March 28, 1996, South Seas completed the public offering of
$43,500,000 of its 10% subordinated notes as offered in the Form S-1
Registration Statement (?Notes Offering"). The total aggregate principal amount
raised was $43,500,000, including the full $3.5 million over-allotment, with
interest payable monthly at 10%, and with no principal reduction until maturity
on April 15, 2003.
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The Notes are non-callable during the first four years of the term then
become redeemable, in whole or in part, at the option of South Seas at various
redemption prices (108.24% to 112.62% of principal) during or after the year
2000. Subsequent to the occurrence of certain events, at any time during the
term of the Notes, the holders of Notes will be offered the opportunity to
convert the Notes at an exchange rate of $12 per partnership unit (subject to
adjustment in certain circumstances). Upon the stated maturity of the Notes,
holders of Notes will be offered the opportunity to convert the Notes at an
exchange rate of $10.50 per unit (subject to adjustment in certain
circumstances).
South Seas believes that cash generated by operations, together with the
proceeds from the Notes Offering will be adequate to meet its working capital,
debt service and capital expenditure requirements. South Seas? outstanding
indebtedness, together with the Notes, places certain debt service obligations
on the partnership. South Seas believes that it may be necessary to obtain
additional debt or equity capital in order to accommodate its plan for growth
and expansion in 1998 and beyond. South Seas intends to pursue resort and/or
hotel acquisitions and to a lesser extent development opportunities in order to
achieve growth in its portfolio of properties.
South Seas anticipates that implementation of its growth strategy will require
it to obtain additional debt or equity financing. The amount of additional
financing required by South Seas in order to implement its growth strategy will
depend on several factors, including the purchase price and renovation costs
associated with acquisitions and South Seas? available cash resources at the
time of a particular transaction. Although there can be no assurance as to South
Seas? ability to obtain financing in the amounts it requires on commercially
reasonable terms, if at all, South Seas believes that, based upon its current
financial condition and results of operations, such financing will be available
to it. South Seas? inability to obtain additional financing could have a
material adverse effect on its results of operations, financial condition and
future prospects. The indenture places restrictions on the amount of additional
Funded Indebtedness (as defined in the prospectus delivered in connection with
the Notes Offering) that South Seas may incur.
In December 1996, South Seas obtained an irrevocable, transferable letter of
credit in an amount not to exceed $3.26 million, for use as a replacement for a
reserve fund established in connection with the 10% Subordinated Notes. No
amounts had been drawn at December 31, 1996 or 1997.
In March 1997 South Seas retained Nationsbanc Montgomery Securities
("Montgomery"), to advise the partnership on various strategic financial
alternatives. South Seas has had discussions with a number of potential parties
and capital sources. South Seas and Montgomery are continuing to evaluate South
Seas' options.
On December 31, 1997, South Seas had cash and cash equivalents of $2.9
million; and restricted cash of $144,000. Cash and cash equivalents decreased by
$3.5 million during the year ended December 31, 1997.
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Cash flow from operations was approximately $11.1 million for the year ended
December 31, 1997 as compared to $2.4 million in the prior period. Cash flow
from operations was positively impacted by a $2.3 million decrease in interest
paid during 1997. This significant decrease in interest paid was attributed to
the early retirement of numerous notes, bonds and accrued interest (of
approximately $1.1 million) thereon with the proceeds from the public offering
in 1996. Net proceeds of $2.7 million (from the line of credit) were used
towards the purchase of capital assets. In addition to funding its operating
activities, South Seas? major uses of cash during the 1997 period were principal
payments on outstanding debt of approximately $2.1 million, capital expenditures
and purchase of resort assets of approximately $12.2 million, and distributions
to partners of approximately $1.3 million.
Cash flow from operations was approximately $2.4 million for the year ended
December 31, 1996 as compared to $7.1 million in the prior period. Cash flow
from operations was negatively impacted by a $3.3 million increase in interest
paid during 1996. This significant increase in interest paid was attributed to
the early retirement of numerous notes, bonds and accrued interest (of
approximately $1.1 million) thereon with the proceeds from the public offering
and now having higher debt balances with monthly interest payments. South Seas?
other major source of cash in the 1996 period was proceeds of $43.5 million from
the Notes Offering. In addition to funding its operating activities, South Seas?
major uses of cash during the 1996 period were principal payments and
refinancing on outstanding debt of approximately $64.1 million (primarily
through proceeds of the Notes Offering, including $11.9 million under revolving
lines), capital expenditures and asset purchases of approximately $9.0 million,
and distributions to partners of approximately $1.2 million.
Cash flow from operations was approximately $7.1 million in 1995, as
compared to $7.8 million in 1994. Cash flow from operations was negatively
impacted by a $5.0 million increase in interest paid during 1995. South Seas'
other major source of cash for 1995 was proceeds of approximately $28.6 million
from the issuance of long-term debt. In addition to funding its operating
activities, South Seas' major uses of cash during 1995 were principal payments
and refinancing on outstanding long-term debt of approximately $15.7 million,
capital expenditures and asset purchases of approximately $8.4 million, and
distributions to partners of approximately $1.7 million.
Under the terms of the Indenture, South Seas is obligated to make capital
expenditures in respect of the Properties in an amount equal to 2.5% of its
consolidated resort related revenues for the immediately preceding fiscal year.
South Seas? intends to make capital expenditures and additional refurbishment of
certain properties of approximately $10.3 million during 1998. In addition,
management plans anticipate spending $4.8 million in maintenance and repairs.
At December 31, 1997, South Seas had $69.8 million in aggregate principal
amount of long-term indebtedness (net of current maturities) outstanding under
four notes payable. These notes are secured by various mortgages on the
Properties and by security
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interests in substantially all of South Seas' other assets. The outstanding
principal of these notes is due in increasing annual amounts until maturity in
2003. Approximately $67.1 million of these notes bear interest at approximately
8.7% per annum, and $3.5 million bear interest at 8.5%.
At December 31, 1997, South Seas had $43.5 million in subordinated
indebtedness, represented by bonds payable. The interest rate on this
subordinated indebtedness is 10% per annum.
Aggregate principal amount of current maturities due as of
December 31, 1997 was approximately $1.3 million of notes and $228,000 of
capital leases.
On September 26, 1996, South Seas secured a $80 million mortgage note
payable with $40 million in term and $40 million under a revolving credit
facility. Simultaneously with closing, South Seas entered into an interest rate
swap on the combined $26.75 million loan and the $18.25 million advance, which
effectively fixed the interest rate at 8.47% per annum, beginning September,
1996 through June, 1998. On January 9, 1998, South Seas entered into another
interest rate swap on this amortizing note beginning July 1998 through September
2001, which effectively fixed the interest rate at 8.61%.
The agreements governing South Seas' outstanding indebtedness contain
various covenants limiting its ability to incur additional indebtedness, merge
or sell a controlling interest in South Seas, dispose of or acquire material
assets, issue securities, create liens, make capital expenditures, make
distributions to partners, or engage in transactions with related parties, and
requiring it to maintain certain levels of insurance, interest rate protection,
specified levels of net worth and operating income, make a minimum level of
capital improvements annually, maintain a minimum level of working capital, and
satisfy certain financial ratios.
South Seas exercised an option to purchase the Seaside Inn on Sanibel Island
in January, 1997 (previously a managed property). The purchase price was $6.5
million. South Seas assumed approximately $2.5 million of aggregate principal
indebtedness encumbering this property, which was refinanced in the first half
of 1997. The funds used to pay the balance of the purchase price were derived
from the revolving credit facility. South Seas did not incur any significant
additional general and administrative expense in connection with integrating the
Seaside Inn's operation.
Based on a lease amendment executed in January 1997, South Seas has an
option to purchase Safety Harbor from its current owner for an exercise price
of $11.4 million (less approximately $3.0 million in scheduled option
payments payable over the term of the lease) with an additional earn-out
arrangement of $8.0 million, payable over a number of years based on the
financial results of the property. The payment term is subject to a minimum
payment with a maximum term of 40 years. The option will expire on May 31,
2000. Management believes that it can continue to substantially improve Safety
Harbor's operating results during future periods by renovating the resort and
utilizing South Seas' marketing and operating management resources.
Under the terms of its agreement with the former owner of the Marco
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Radisson, South Seas is obligated to make an additional payment upon the sale of
the Property in an amount equal to at least $1.5 million. Prior to such a
transaction, the former owner of the property has an option to receive a payment
equal to 15% of the increase in the value of the property determined in
accordance with a formula based upon a multiple of the property's adjusted net
operating income less South Seas' cost basis in the property. Upon exercise of
this option, South Seas would become obligated to pay the former owner the
formula amount over a five-year period together with interest thereon at the
rate of 8% per annum.
In the opinion of management, no material adverse effect on either results
of operations or financial position is anticipated due to the modification or
replacement of existing information systems in order to accommodate year 2000
implications. As of December 31, 1997 substantially all computerized systems
have been modified or replaced.
South Seas is not currently a party to any legal proceeding which, in
Management's opinion, is likely to have a material adverse effect on its
operating results or financial position.
Item 8 - Consolidated Financial Statements
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure - not applicable
PART III
Item 10 - Directors, Executive Officers and Key Employees
South Seas does not have any directors, executive officers or employees.
South Seas does, however, have a seven-member advisory board consisting of the
following individuals: Robert M. Taylor, Allen G. Ten Broek, Robert F. Anderson,
Michael B. Peceri, Timothy R. Bogott, Paul J. Powers and Peter C. Yesawich. The
advisory board's primary function is to render nonbinding advice to the General
Partner of South Seas with respect to strategic policies and decisions affecting
South Seas.
T&T Resorts, L.C., the General Partner of South Seas, has no directors or
employees but does have a manager and executive officers. Robert M. Taylor is
the sole manager, Chairman and Chief Executive Officer of T&T Resorts, L.C. and
Allen G. Ten Broek is the Vice-Chairman and President of T&T Resorts, L.C. The
following is a biographical summary of the experience of Messrs. Taylor and Ten
Broek.
Robert M. Taylor. Mr. Taylor is Chairman and Chief Executive Officer of T&T
Resorts, L.C., a position in which he has served since its formation in February
1996. Mr. Taylor also serves as Chairman and Chief Executive Officer of S.S.
Resort Management, L.C. (the general partner of the Management Company), a
position in which he has served since its formation in 1994. In 1971, Mr. Taylor
founded The Mariner Group, Inc., a company that has developed and managed
numerous condominium resorts and other properties along Florida's southwest
coast. Before founding The Mariner Group, Inc., Mr. Taylor worked for McKinsey &
Company, a worldwide management consultant
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company, in the firm's Cleveland, Ohio, office. Prior to that, he served in the
U.S. Army for two years, during which time he was stationed in Virginia and on
the Island of Okinawa. Before his military service, Mr. Taylor worked with AT&T
in Chicago. Mr. Taylor served from 1983 to 1996 as a director of Acme Cleveland
Corp., a maker of industrial sensors and telecommunications equipment. Mr.
Taylor also has served on the boards of a number of corporate, banking and
community organizations, including the Miami branch of the Federal Reserve Bank
and the Executive Committee of the Florida Council of 100. He currently serves
as Chairman of the Board of Colonial Bank of Southwest Florida, and on the board
of the Foundation for Lee County Schools, as well as the Lee County Port
Authority Special Airport Management Committee. A native of Columbus, Ohio, Mr.
Taylor graduated from The Ohio State University in 1965 with a master of
business administration degree and was the University's outstanding senior
graduate in 1965.
Allen G. Ten Broek. Mr. Ten Broek is the Vice Chairman and President of T&T
Resorts, L.C., a position in which he has served since its formation in February
1996. Mr. Ten Broek is also President and CEO of The Mariner Group, Inc., a
position in which he has served since October 1995 and earlier held from 1979 to
1992. From 1992 through 1995, Mr. Ten Broek served as Vice Chairman and Managing
Executive of Hilton Grand Vacations Company, timeshare sales, development and
vacation club affiliated with Hilton Hotels. Mr. Ten Broek is an original
shareholder of The Mariner Group, Inc. and has been a director of The Mariner
Group, Inc. since 1973. Mr. Ten Broek is a former director of the Bank of the
Islands and Florida National Bank of Lee County, and was a founding director of
Community Bank of the Islands. He has held a variety of director and officer
positions with local community organizations. Mr. Ten Broek is the Chairman
Emeritus of the Florida Shore and Beach Preservation Association and has served
as chairman of two statewide task forces appointed by the Governor. He was
recently elected Chairman of the newly formed American Coastal Coalition. Mr.
Ten Broek is an officer or director of various other affiliates of the
Partnership.
As noted earlier, the Management Company currently manages each of the
Properties, of which South Seas owns a 99% limited partnership interest (the 1%
general partnership interest in the Management Company is held by S.S. Resort
Management L.C., a Florida limited liability company). The Management Company is
a Florida limited partnership. The Management Company is responsible for the
day-to-day management of the Properties on behalf of South Seas. The Management
Company has general responsibility and authority for all aspects of property
management, including the establishment of operations policies, leasing,
marketing, advertising, maintenance and security of the Properties, the
supervision of construction, repairs and improvements and the employment and
supervision of on-site personnel and consultants. The Management Company also
renders certain administrative services to South Seas, including supervising the
preparation of investor reports, handling investor inquiries, coordinating
federal and state tax filings, maintaining books and records, handling financing
and refinancing and investing uncommitted funds.
The Management Company does not have any directors or executive officers.
The general partner of the Management Company is S.S.
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Resort Management, L.C., and a Florida limited liability company. Robert M.
Taylor, Timothy R. Bogott and Richard E. Krichbaum serve as the managers of S.S.
Resort Management, L.C. The managers of S.S. Resort Management, L.C., by
majority vote, have the power to appoint executive officers of S.S. Resort
Management, L.C.
The following sets forth certain information concerning the executive
officers of S.S. Resort Management, L.C.
Name Age Position
Robert M. Taylor 56 Chairman and Chief Executive Officer
Michael B. Peceri 71 Vice Chairman
Timothy R. Bogott 51 President
Richard E. Krichbaum 42 Vice President of Finance & Administration
G. Scott Siler 48 Vice President of Development
Salvatore S. Dickinson 38 Vice President of Marketing and Sales
Leonard P. Myers 51 Vice President of Human Resources
Ralph G. Suda 51 Vice President of Reservations
Brian P. Garavuso 35 Vice President of Technology
The following is a biographical summary of the experience of the executive
officers of S.S. Resort Management, L.C. (other than Mr. Taylor, whose
biographical summary is previously set forth):
Michael B. Peceri. Mr. Peceri is Vice Chairman of S.S. Resort Management,
L.C., and a position in which he has served since its formation in 1994. Mr.
Peceri was the Vice President of the International Hotel and Motel Association
and became its president for a one-year term beginning in 1996. Mr. Peceri began
his hospitality industry career in 1972 as manager of the Song of the Sea Resort
Motel in southwest Florida. From the Song of the Sea, Mr. Peceri progressively
moved into additional senior positions, serving as executive vice president and
general manager of South Seas Plantation from 1976 to 1980, president of Marquis
Hotels and Resorts (an Affiliate of The Mariner Group, Inc. and South Seas) from
its inception in 1980 until 1991, when he became chairman (a position in which
he served until he was appointed vice chairman of S.S. Resort Management, L.C.).
Mr. Peceri was the 1994 chairman of the American Hotel and Motel Association,
past president of the Florida Hotel and Motel Association, the past president of
the Sanibel/Captiva Chamber of Commerce and former vice chairman of the Lee
County Tourist Development Council. Mr. Peceri also has served on the Advisory
Council to the State of Florida's director of tourism and on the Governor's Task
Force for Tourism Funding. Mr. Peceri was named "Florida Hotelier of the Year"
in 1986.
Timothy R. Bogott. Mr. Bogott is President of S.S. Resort Management, L.C.,
and a position in which he has served since its formation in 1994. A veteran of
both the real estate and hospitality industries, Mr. Bogott joined The Mariner
Group, Inc. in 1976 as project manager and director of administration. In 1979,
he was elected as the secretary/treasurer of The Mariner Group, Inc., and in
1983 was named its vice president of finance. From 1984 to 1993, Mr. Bogott
served as president and chief executive officer and as director of Mariner
Capital Management Inc. and Mariner Capital Investment Corporation, both
Affiliates of The Mariner Group, Inc. Before joining The Mariner Group, Inc.,
Mr. Bogott was assistant vice
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president of Palmetto Savings and Loan Association in Ft. Myers, Florida. Prior
to that he held various management positions with The First National Bank of Ft.
Myers and the American National Bank of Denver, Colorado. Mr. Bogott is a former
member of Lee Memorial Hospital's Finance Committee. He is currently a member of
the Board of Directors of the Florida Hotel Motel Association. He is a graduate
of the University of Colorado business school. He also attended the Florida
School of Banking and the School of Banking of the South.
Richard E. Krichbaum. Mr. Krichbaum is Vice President of Finance and
Administration and Chief Financial Officer of S.S. Resort Management, L.C., and
a position in which he has served since its formation in 1994. Mr. Krichbaum
joined The Mariner Group, Inc. in 1984 as director of project finance and was
promoted to treasurer and vice president of finance in 1987 before being named
vice president and chief financial officer in 1992. Before joining The Mariner
Group, Inc., Mr. Krichbaum worked seven years with the E.J. DeBartolo Corp. in
Youngstown, Ohio. Mr. Krichbaum currently serves on the Advisory Board of the
University of South Florida, Fort Myers campus; as a director of the United Way
of Lee County; a director and officer of South Ft. Myers Little League baseball,
and he has also served as a director of the Boy Scouts of Southwest Florida. A
native of Youngstown, Ohio, Mr. Krichbaum graduated from Youngstown State
University in 1979 with a bachelors of science degree in accounting. He received
his master's degree in finance from Youngstown State University in 1986.
G. Scott Siler. Mr. Siler is Vice President of Development of S.S. Resort
Management, L.C., and a position in which he has served since its formation in
1994. Mr. Siler joined The Mariner Group, Inc. in 1972 as director of food and
beverage operations for South Seas Plantation, a post he held until 1977. During
his 25-plus years with The Mariner Group, Inc., Mr. Siler has held a variety of
other management and senior management positions, serving as vice president of
food and beverage operations for Mariner Properties Inc., vice president of food
and beverage operations for Marquis Hotels and Resorts, and vice president of
operations for Marquis Hotels and Resorts. Mr. Siler has also served as general
manager of Sundial Beach and Tennis Resort, vice president of development for
Marquis Hotels and Resorts, and president of Marquis Hotels and Resorts. Mr.
Siler is a member of the Tourist Development Council of Lee County, Florida, and
the Cornell Society of Hotelmen.
Salvatore S. Dickinson. Mr. Dickinson is Vice President of Marketing and
Sales of S.S. Resort Management, L.C., and a position in which he has served
since September 1994. Prior to joining S.S. Resort Management, L.C. in 1994, Mr.
Dickinson served for more than nine years with Yesawich, Pepperdine & Brown,
Inc., the nation's largest advertising, marketing and public relations firm
specializing in serving travel industry clients, during which time he managed
accounts such as the Lee County Visitor and Convention Bureau, Premier Cruise
Lines (The Big Red Boat), Hilton International and The Continental Companies
(TCC). Mr. Dickinson is an active member who serves on the board of directors of
the Hospitality Sales & Marketing Association International as well as its
foundation's board and is a member of the American Advertising Federation. He
also serves as an adjunct faculty of the business school of Florida Gulf Coast
University and on the marketing committee for VisitFLA, the public-
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private partnership responsible for the state's tourism promotion. Mr. Dickinson
received his bachelor's degree in advertising and master's degree in marketing
communications from Florida State University.
Leonard P. Myers. Mr. Myers is Vice President of Human Resources of S.S.
Resort Management, L.C., and a position in which he has served since its
formation in 1994. Mr. Myers joined The Mariner Group, Inc. in 1981 to direct
employee relations, including recruiting, training, quality assurance and
employee services at South Seas Plantation. Prior to joining The Mariner Group,
Inc., Mr. Myers served as a psychologist at the Lee Mental Health Center in Ft.
Myers, Florida, as a Training Specialist at Sunland Training Center in Orlando,
Florida, and as Personnel Manager for Imhoff Brothers Inc., a restaurant
franchise company in Windam, Minnesota. Mr. Myers is a board member on the Wages
Coalition and is also a member of the Organizational Flexibility Profile
Advisory Board. He also serves on the board for the Association for
International Practical Training. Mr. Myers is the past chairman of the Human
Resources Committee for the Lee County School Board. He is a past president of
the Health Care Coalition and the Career Education Advisory Council. Mr. Myers
received his masters' degree in community/industrial psychology in 1976 from the
University of Central Florida in Orlando.
Ralph G. Suda. Mr. Suda is Vice President of Reservations for S.S. Resort
Management, L.C., and a position he has held since February 1996. Prior to
joining S.S. Resort Management, L.C., Mr. Suda served as the Vice President of
Reservations for The Ritz-Carlton Hotel Company in Atlanta for two years.
Previously, he spent 19 years with the Hyatt Hotels Corporation in a variety of
positions and locations ranging from Rooms Director to General Manager. He is
past president of the Lexington Hotel/Motel Association, and has served on the
boards of the Lexington Chapter, Kentucky Restaurant Association, and the
Advisory Board, University of Kentucky Hospitality Management Program. Mr. Suda
also served on the boards of Junior Achievement and Big Brothers/Big Sisters. He
received a bachelor's degree in business administration from the University of
Hawaii. Effective January 1998, Mr. Suda assumed the responsibilities of general
manager of the Marco Radisson.
Brian P. Garavuso. Mr. Garavuso is the Vice President of Technology for
S.S. Resort Management, L.C., a promotion from his previous title of Director of
Management of Information Systems, a position he has held since its formation in
1994. He has been with the company since 1983 and has held a variety of
management positions. Specific duties included the establishment of the
company's Vacation Planning Center, the central reservations facility. He also
served as vice president and controller for Marquis Hotels and Resorts. Mr.
Garavuso serves on the technology sub-committee for the American Hotel & Motel
Association and he is past chairman of the Springer-Miller Host Systems Users
Group. A native of Long Island, New York, he graduated from the University of
South Florida in 1986 with a bachelor's degree in business administration.
General Partner
T&T Resorts, L.C., the General Partner of South Seas, has the power and
authority to manage and control the activities of South
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Seas and is liable for all the debts of South Seas (to the extent not paid by
South Seas), except with respect to the Notes and any other indebtedness
incurred by South Seas which is nonrecourse to the General Partner.
South Seas does not directly employ any of the persons responsible for
managing its resort and hotel operations. Rather, the officers of S.S. Resort
Management, L.C., the general partner of the Management Company manage South
Seas' operations.
Compensation of the General Partner
T&T Resorts, L.C., the General Partner of South Seas, receives no
management fee or similar compensation in connection with its services as
general partner of South Seas and will receive no remuneration other than (i)
distributions in respect of its equity interest in South Seas and (ii)
reimbursement for all direct and indirect costs and expenses incurred on behalf
of South Seas and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, South Seas.
Item 11 - Executive Compensation
The executive officers of S.S. Resort Management, L.C., manage and operate
South Seas' business. The following table sets forth compensation for 1997 of
the executive officers of S.S. Resort Management, L.C.
earning more than $100,000.
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Summary Compensation Table
Annual Compensation
Other
Name and Bonus(1) Bonus(l) Annual
Principal Position Salary Incentive Profit Sharing Compensation(2)
Robert M. Taylor
Chairman/CEO $235,004 $ 94,000 $ 32,000 $ 16,200
Timothy R. Bogott
President $170,003 $ 72,000 $ 29,200 $ 14,600
Richard E. Krichbaum
Vice President $125,002 $ 43,600 $ 11,400 $ 1,600
G. Scott Siler
Vice President $121,002 $ 35,500 $ 6,200 $ 2,691
Salvatore S. Dickinson
Vice President $104,501 $ 30,500 $ 8,500 $ 1,863
Ralph G. Suda
Vice President $104,501 $ 31,200 $ 9,800 $ 1,021
Leonard P. Myers
Vice President $ 82,251 $ 23,655 $ 5,345 $ 1,871
Brian P. Garavuso
Vice President $ 78,501 $ 31,000 $ 8,100 $ 1,826
<FN>
(1) The Management Company has adopted both an incentive bonus plan and a
profit sharing bonus plan in which all of the executive officers of the
Management Company are eligible to participate. Under the incentive bonus
plan, subject to the achievement of certain financial and other objectives,
Mr. Taylor and Mr. Bogott may earn up to 40%, which may be adjusted upward
based on exceptional performance, of their respective base compensation,
and each other executive officer may earn up to 30%, which may be adjusted
upward based on exceptional performance, of his respective base
compensation as an annual bonus. Under the profit sharing bonus plan, an
aggregate bonus pool is established in the amount of 25% of the excess of
actual net operating income over budgeted net operating income. The bonus
pool is then allocated to the executive officers and other employees of the
Management Company at the discretion of Mr. Bogott. Both the incentive
bonus plan and the profit sharing bonus plan are payable in cash.
(2) Amounts reported as other annual compensation represent matching
contributions made by the Management Company under its Section 401 (k)
Plan. The 401 (k) Plan allows participants to defer up to the statutory
maximum of their annual salary on a pre-tax basis. Up to 4% of an
employee's salary deferred by such employee will be matched by a Management
Company contribution equal to 50% of the amount deferred. Contributions
made by the Management Company vest immediately. The amounts reported as
other annual compensation for Mr. Taylor and Mr. Bogott include Advisory
Board fees of $13,000 each, paid by South Seas.
Item 12 - Ownership of Interests in South Seas, The General Partner and the
Management Company
The following table sets forth certain information with respect to each
beneficial owner of more than 5% of South Seas' voting securities.
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Amount and Nature Percentage
Name of Beneficial Owner of Beneficial Ownership of Class
T&T Resorts, L.C. (1) 45,158 General Partnership Units 100%
The Mariner Group, Inc. 600,685 Limited Partnership Units 13.44%
Robert M. Taylor (2) 522,861 Limited Partnership Units 11.70%
Robert F. Anderson 452,273 Limited Partnership Units 10.12%
Allen G. Ten Broek 426,785 Limited Partnership Units 9.55%
<FN>
(1) Mr. Taylor and Mr. Ten Broek are the sole equity owners of T&T Resorts,
L.C., the General Partner of South Seas. Mr. Taylor owns 51% of the
membership interests of T&T Resorts, L.C. and Mr. Ten Broek owns 49% of
the membership interests of T&T Resorts, L.C.
(2) Robert M. Taylor shares investment and voting power with his spouse with
regard to 20,000 units.
The following table sets forth the beneficial ownership interest in South
Seas held by each executive officer of S.S. Resort Management, L.C., the general
partner of the Management Company.
Amount and Nature Percentage
Name of Beneficial Owner of Beneficial Ownership of Class
Robert M. Taylor (1) 23,031 General Partnership Units 51.00%
Robert M. Taylor (2) 522,861 Limited Partnership Units 11.70%
Timothy R. Bogott (3) 150,000 Limited Partnership Units 3.36%
G. Scott Siler 47,487 Limited Partnership Units 1.06%
Richard E. Krichbaum 33,060 Limited Partnership Units 0.74%
Leonard P. Myers 14,000 Limited Partnership Units 0.31%
Brian P. Garavuso 8,000 Limited Partnership Units 0.18%
Salvatore S. Dickinson 7,000 Limited Partnership Units 0.16%
Ralph G. Suda 7,000 Limited Partnership Units 0.16%
<FN>
(1) Owned indirectly through Mr. Taylor?s 51% ownership interest in T&T
Resorts, L.C., the General Partner of South Seas.
(2) Robert M. Taylor shares investment and voting power with his spouse with
regard to 20,000 Units.
(3) Eighty-two Thousand Five Hundred (82,500) of Mr. Bogott?s Units are
subject to a Redemption Agreement between Mr. Bogott and South Seas (the
?Redemption Agreement"). The Redemption Agreement reflects certain
rights that Mr. Bogott was entitled to as an officer of Mariner Capital
Management, Inc., that South Seas agreed to honor at the time Mr. Bogott
joined the Management Company. Generally, the Redemption Agreement
provides that if Mr. Bogott dies or his employment with S.S. Resort
Management, L.C. is terminated by S.S. Resort Management, L.C., South
Seas will repurchase, at Mr. Bogott?s request, 82,500 of Mr. Bogott?s
Units at a price equal to the higher of $12 per Unit or such price as
the advisory board of South Seas determines. If Mr. Bogott voluntarily
terminates his employment with S.S. Resort Management, L.C., South Seas
will repurchase, at Mr. Bogott?s request, 82,500 of Mr.
Bogott?s Units at a price equal to $10 per Unit.
South Seas owns a 99% limited partnership interest in the Management
Company and S.S. Resort Management, L.C. owns the 1% general partnership
interest in the Management Company. The beneficial ownership interests of S.S.
Resort Management, L.C., a Florida limited liability company, are held as
follows: 99% by Mr. Taylor, 0.5% by Mr. Bogott and 0.5% by Mr. Krichbaum.
The addresses of the persons shown in the tables above are as follows: T&T
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Resorts, L.C., the Mariner Group, Inc., and Messrs. Taylor, Ten Broek, Bogott,
Siler, Krichbaum, Myers, Dickinson, Suda and Garavuso, c/o South Seas, 12800
University Drive, Suite 350, Fort Myers, Florida 33907 and Mr. Anderson, P.O.
Box 08337, Fort Myers, Florida 33907.
Compensation Committee Interlocks and Insider Participation
Messrs. Taylor, Ten Broek and Bogott made compensation decisions with
respect to the executive officers of the Management Company with respect to
fiscal year 1997.
The following discussion of certain relationships and transactions includes
transactions involving, directly or indirectly, (i) the following executive
officers of the General Partner: Robert M. Taylor - Chairman and Chief Executive
Officer and Allen G. Ten Broek - Vice Chairman and President; (ii) the following
executive officers of the general partner of the Management Company: Mr. Taylor
- - Chairman and Chief Executive Officer, Michael B. Peceri - Vice Chairman,
Timothy R. Bogott - President, Richard E. Krichbaum - Vice President of Finance
and Administration and G. Scott Siler - Vice President of Development; and (iii)
the following owners of more than 5% of the outstanding Units: Mr. Taylor, Mr.
Ten Broek, The Mariner Group, Inc. and Robert F. Anderson.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With The Mariner Group, Inc.
South Seas paid $4.9 million, $3.5 million and $3.6 million in 1995, 1996
and 1997, respectively, to The Mariner Group, Inc. in exchange for services
performed by The Mariner Group, Inc. as an administrator for insurance coverage.
South Seas expects this relationship to continue for the foreseeable future.
South Seas paid $236,000, $261,000 and $260,000 in 1995, 1996 and 1997,
respectively, to The Mariner Group, Inc. pursuant to a sublease of office space.
The term of the sublease for such office space expires on May 28, 2000. Under
the sublease, rent increases at a rate of 5% per year.
Effective January 1, 1994, South Seas issued 381,505 Units to The Mariner
Group, Inc. in exchange for certain property owned by certain wholly-owned
Subsidiaries of The Mariner Group, Inc., including the Sundial Beach and Tennis
Resort, The Dunes Golf & Tennis Club, management agreements for the Sanibel Inn
and a dining club and assets relating to two real estate brokerage services. For
purposes of this transaction, an aggregate value of $4,604,765.35 ($12.07 per
Unit) was ascribed to the Units received by The Mariner Group, Inc. See Note 1
to the Consolidated Financial Statements for a discussion of the accounting
treatment of this transaction.
Effective January 1, 1994, South Seas issued 210,253 Units to Mariner
Capital Management, Inc. in exchange for certain property owned by Mariner
Capital Management, Inc., including all of the stock of Mariner Capital
Investment Corp. and management rights for the Best Western-Sanibel, the Song of
the Sea Inn, the Best Western Pink Shell Beach Resort and the Seaside Inn. The
Mariner Group, Inc. owned a 60% interest and Mr. Bogott owned a 25% interest in
Mariner Capital Management, Inc. as of January 1, 1994. For purposes of this
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transaction, an aggregate value of $2,537,753.71 ($12.07 per Unit) was ascribed
to the Units received by Mariner Capital Management, Inc. See Note 1 to the
Consolidated Financial Statements for a discussion of the accounting treatment
of this transaction.
The determination of the per Unit value referred to in the two immediately
preceding paragraphs and the number of Units transferred in each transaction was
based on values ascribed to the Properties owned by South Seas and the
properties transferred to South Seas as described above. The gross values of
these Properties were generally determined by capitalizing income, using
trailing 12-month adjusted operating income available to service debt and
various multiples selected by the parties ranging from 9 to 13, then deducting
outstanding indebtedness and making other adjustments as necessary. Mr. Taylor,
Mr. Bogott and Mr. Krichbaum coordinated the valuation process.
In January 1997, South Seas exercised an option to purchase the Seaside Inn
from its owner, Florida Income Fund, L.P., for $6.5 million. The exercise price
of the option was determined by negotiation between South Seas and Florida
Income Fund, L.P. The parties to these negotiations valued the Seaside Inn by
capitalizing income, using the Seaside Inn's prospective 12-month adjusted
operating income available to service debt and a multiple selected by the
parties, then deducting outstanding indebtedness and making other adjustments.
An appraisal of the Seaside Inn conducted subsequent to the execution of the
option agreement indicated that the fair market value of the Seaside Inn was
$5,700,000, excluding the value of the management contract. This appraisal made
certain valuation assumptions including a reserve for a lower number of rental
units. Management believes the purchase price for the Seaside Inn is
representative of the fair market value for the property at the time of
purchase. Prior to January 1997, the Management Company managed this Property
pursuant to the terms of a management agreement between the Management Company
and Florida Income Fund, L.P. Under such management agreement, the Management
Company received 6% of the gross revenues generated by this Property, plus
reimbursement of all costs incurred in connection with the operation of this
Property. This management agreement expires on December 31, 1999. Mariner
Capital Management, Ltd., (Mariner Capital Management, Ltd., has an arrangement
with Mariner Capital Management, Inc., whereby Mariner Capital Management, Ltd.,
earns 100% of the net income of Mariner Capital Management, Inc.) and MCD Real
Estate, Inc., an Affiliate of McDonald & Company Securities, Inc., are the
general partners of Florida Income Fund, L.P. The Mariner Group, Inc. owns a 60%
interest and Mr. Bogott owns a 25% interest in Mariner Capital Management, Ltd.
Although South Seas and Florida Income Fund, L.P. believe the exercise price for
the option to be fair, given the relationships of the parties involved, the
exercise price of the option cannot be considered to have been negotiated fully
at arm's length.
The Management Company currently manages the Best Western Pink Shell Beach
Resort pursuant to the terms of a management agreement between the Management
Company and Florida Income Fund III, L.P. Under such Management Agreement, the
Management Company receives 6% of the gross revenues generated by this Property,
plus reimbursement of all costs incurred in connection with the operation of
this Property. This management agreement expires on the sale of this
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property, which is anticipated to occur in May 1998. South Seas has agreed to
lease the property from the buyer, a public REIT, under a separate transaction.
Mariner Capital Management, Inc. and MCD Real Estate, Inc. are also the general
partners of Florida Income Fund III, L.P. (See audited financial statements -
Subsequent Events footnote).
The following individuals directly or indirectly owned the following
interests in The Mariner Group, Inc. as of the dates set forth below:
Jan 1, 1995 Jan 1, 1996 Jan 1, 1997
Robert M. Taylor(l) 16.73% 16.53% 16.51%
Robert F. Anderson(2) 12.61% 15.18% 15.17%
Allen G. Ten Broek 11.09% 11.54% 11.53%
Timothy R. Bogott(3) 0.82% 1.24% 1.24%
Richard E. Krichbaum 0.33% .32% .32%
G. Scott Siler 0.81% .79% .79%
Michael B. Peceri 1.01% 1.03% 1.03%
<FN>
(1) Includes shares held by partnerships for the benefit of Mr. Taylor's family
or in his spouse's name.
(2) Includes shares held by Mr. Anderson as trustee with respect to trusts
established for the benefit of Mr. Anderson's family.
(3) Includes shares held in an IRA account.
Other Transactions
In 1997, a $500,000 option payment on land purchase was paid to an
affiliate.
Mr. Taylor and Mr. Ten Broek (or the limited liability company,
San-Cap, L.C.) received in the aggregate $78,000, $81,000 and $66,000 for the
years 1995, 1996 and 1997, respectively, from South Seas Resort Limited
Partnership, a 99%-owned Subsidiary of South Seas, as fees for services
performed in their capacities as general partners of such limited partnership.
Mr. Taylor and Mr. Ten Broek each received 50% of such fees, which were
calculated by multiplying gross revenues of the partnership by 0.15% pursuant to
the terms of its partnership agreement. Effective October 1997, South Seas
issued a total of 40,000 partnership units to Messrs. Taylor and Ten Broek in
exchange for termination of this fee.
Between September and November 1994, South Seas issued $2,950,000
aggregate principal amount of promissory notes earning interest at 14% per annum
to 23 accredited purchasers. These notes matured and were redeemed on December
29, 1995. The following individuals purchased notes in the following amounts in
September 1994:
Mr. Anderson (as trustee) $200,000
Mr. Bogott $100,000
Mr. Peceri $ 50,000
Between January and May 1995, South Seas issued $5,000,000 aggregate
principal amount of mortgage notes bearing interest at 13%
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32
per annum. Mr. Taylor, together with his spouse, purchased $60,000 aggregate
principal amount of these notes. The notes were repaid in full with proceeds of
the public debt offering in March, 1996.
Effective January 1, 1995, South Seas issued (i) 421,049 Units to
Jolly Roger Resort, Ltd., a Florida limited partnership, in exchange for the
Best Western-Sanibel and (ii) 252,835 Units to Song of the Sea Company, Ltd., a
Florida limited partnership, in exchange for the Song of the Sea Inn. For
purposes of these transactions, an aggregate value of $5,343,111.81 ($12.69 per
Unit) was ascribed to the Units received by Jolly Roger Resort, Ltd. and an
aggregate value of $3,208,476.15 ($12.69 per Unit) was ascribed to the Units
received by Song of the Sea Company, Ltd. See Note 1 to the Consolidated
Financial Statements for a discussion of the accounting treatment of these
transactions. Mariner Capital Partnerships, Inc. was the general partner of each
of Jolly Roger Resort, Ltd. and Song of the Sea Company, Ltd. and its combined
ownership and carried interest equaled 14.5% and 11.4% of Jolly Roger Resort,
Ltd. and Song of the Sea, Ltd., respectively. The Mariner Group, Inc. owned a
60% interest and Mr. Bogott owned a 25% interest in Mariner Capital
Partnerships, Inc. as of January 1, 1995. The following individuals owned the
following interests, directly and indirectly, in Song of the Sea Company, Ltd.
as of January 1, 1995:
Mr. Taylor......................................................2.2500%
Mr. Bogott......................................................4.4545%
Mr. Peceri......................................................4.4545%
Mr. Krichbaum (and family)......................................0.5728%
The determination of the per Unit value referred to in the
preceding paragraph and the number of Units transferred in each transaction was
based on values ascribed to the properties owned by South Seas and the
properties transferred to South Seas as described above. The gross values of
these properties were generally determined by capitalizing income, using
trailing 12-month adjusted operating income available to service debt and
various multiples selected by the parties ranging from 9 to 13, then deducting
outstanding indebtedness and making other adjustments as necessary. Mr. Taylor,
Mr. Bogott and Mr. Krichbaum coordinated the valuation process.
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33
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
SIGNATURES
DECEMBER 31, 1997
Pursuant to the requirements 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.
/s/ Robert M. Taylor /s/ Richard E. Krichbaum
ROBERT M. TAYLOR RICHARD E. KRICHBAUM
CHAIRMAN OF T&T RESORTS, L.C. VICE PRESIDENT OF FINANCE
GENERAL PARTNER OF S.S. RESORT MANAGEMENT L.C.
SOUTH SEAS PROPERTIES GENERAL PARTNER OF
COMPANY LIMITED PARTNERSHIP SOUTH SEAS RESORTS
(SIGNATURE) COMPANY, L.P.
MARCH 31, 1998 (SIGNATURE)
MARCH 31,1998
/s/ Timothy R. Bogott /s/ Virginia S. Brooks
TIMOTHY R. BOGOTT VIRGINIA S. BROOKS
PRESIDENT CORPORATE CONTROLLER
S.S. RESORT MANAGEMENT, L.C. S.S. RESORT MANAGEMENT,
GENERAL PARTNER OF SOUTH SEAS L.C.
RESORTS COMPANY, L.P. GENERAL PARTNER OF SOUTH
(SIGNATURE) SEAS RESORTS COMPANY, L.P.
MARCH 31, 1998 (SIGNATURE)
MARCH 31, 1998
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SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED FINANCIAL STATEMENTS,
TOGETHER WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF
DECEMBER 31, 1996 AND 1997
AND FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
35
C O N T E N T S
Page
REPORT OF INDEPENDENT ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of partners' capital deficiency 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 18
36
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
Advisory Board and Partners
South Seas Properties Company Limited Partnership
Fort Myers, Florida
We have audited the accompanying consolidated balance sheets of South Seas
Properties Company Limited Partnership as of December 31, 1996 and 1997 and the
related consolidated statements of operations, partners' capital deficiency, and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Partnership'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 audit 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
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 South
Seas Properties Company Limited Partnership as of December 31, 1996 and 1997 and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Miami, Florida
February 21, 1998
-1-
37
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31
-----------------------------------
ASSETS 1996 1997
----- ----
CURRENT ASSETS
Cash and cash equivalents $ 6,459 $ 2,933
Restricted cash 201 144
Accounts receivable, trade 6,743 5,814
Receivables from affiliates 543 27
Inventories 1,677 1,714
Prepaid expenses and other 1,637 2,255
--------- ---------
Total current assets 17,260 12,887
PROPERTY, PLANT AND EQUIPMENT, net 79,904 87,684
LOAN COSTS, net 5,660 4,386
GOODWILL, net 6,440 6,942
OTHER ASSETS 1,778 3,484
--------- ---------
Total assets $ 111,042 $ 115,383
========= =========
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
CURRENT LIABILITIES
Current maturities of notes and mortgages payable $ 2,015 $ 1,500
Accounts payable 4,410 4,986
Accrued expenses 2,197 1,767
Accrued payroll and related 2,743 3,772
Customer deposits 4,976 5,297
Deferred revenue 1,585 1,949
--------- ---------
Total current liabilities 17,926 19,271
NOTES AND MORTGAGES PAYABLE, less current maturities 65,988 70,163
BONDS PAYABLE, less current maturities 43,500 43,500
OTHER LONG-TERM OBLIGATION 1,305 1,305
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP UNITS SUBJECT TO REDEMPTION 825 825
MINORITY INTERESTS 27 30
PARTNERS' CAPITAL DEFICIENCY (18,529) (19,711)
--------- ---------
Total liabilities and partners' capital deficiency $ 111,042 $ 115,383
========= =========
The accompanying notes are an integral part of these financial statements
-2-
38
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Year Ended December 31
----------------------------------------------------
1995 1996 1997
---- ---- ----
REVENUES
Rooms $ 58,259 $ 64,427 $ 70,768
Food and beverage 17,756 18,701 20,496
Retail 5,811 6,108 6,263
Golf 2,331 3,276 3,760
Spa and fitness 1,230 2,448 2,640
Other 13,696 15,365 15,506
--------- --------- ---------
Total revenues 99,083 110,325 119,433
--------- --------- ---------
EXPENSES
Rooms 13,106 15,033 16,755
Food and beverage 13,413 14,756 15,913
Retail 4,215 4,333 4,561
Golf 902 874 940
Spa and fitness 731 1,408 1,590
Other 6,043 6,438 6,319
Condominium lease and rental expenses 16,823 18,296 18,212
Sales and marketing 6,107 7,773 7,599
Maintenance and grounds 4,660 5,711 6,091
General and administrative - resort properties 16,884 17,132 18,180
General and administrative - corporate overhead 3,073 2,855 3,939
Termination of fee paid to subsidiary's general partner -- -- 480
Depreciation and amortization 5,703 7,326 9,105
--------- --------- ---------
Total operating expenses 91,660 101,935 109,684
--------- --------- ---------
Income before non-operating items and extraordinary item 7,423 8,390 9,749
Interest expense (9,391) (10,536) (10,181)
Net gain/(loss) on disposal/sale of fixed assets (266) 4 --
Acquisition costs and other (340) (185) (197)
Minority interests (13) (10) (19)
--------- --------- ---------
Loss before extraordinary item (2,587) (2,337) (648)
Extraordinary expense (write-off of loan costs) -- (2,046) --
--------- --------- ---------
Net loss $ (2,587) $ (4,383) $ (648)
========= ========= =========
Net loss per unit before extraordinary expense $ (.60) $ (.53) $ (.15)
========= ========= =========
Net loss per unit for extraordinary expense $ -- $ (.47) $ --
========= ========= =========
Net loss per unit, basic and diluted $ (.60) $ (1.00) $ (.15)
========= ========= =========
Weighted average units outstanding 4,279 4,370 4,461
========= ========= =========
The accompanying notes are an integral part of these financial statements
-3-
39
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL DEFICIENCY
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Outstanding Units
--------------------------------
General Limited General Limited
Partners Partners Total Partners Partners Total
-------- -------- ----- -------- -------- -----
Balance, December 31, 1994 851 3,368 4,219 $ (39) $ (9,483) $ (9,522)
Net loss for the year ended
December 31, 1995 -- -- -- (511) (2,076) (2,587)
Units issued to purchase resort property -- 71 71 -- 906 906
Units issued for conversion of debt to equity -- 18 18 -- 225 225
Partnership units subject to redemption -- -- -- -- (825) (825)
Distributions ($.40 per unit) -- -- -- (341) (1,383) (1,724)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 851 3,457 4,308 (891) (12,636) (13,527)
Net loss for the year ended
December 31, 1996 -- -- -- (44) (4,339) (4,383)
Distributions ($.28 per unit) -- -- -- (12) (1,217) (1,229)
Management equity units issued -- 118 118 -- 1,180 1,180
Notes receivable on management equity units -- -- -- -- (570) (570)
Units exchanged into limited partner units (807) 807 -- -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 44 4,382 4,426 (947) (17,582) (18,529)
Net loss for the year ended
December 31, 1997 -- -- -- (6) (642) (648)
Distributions ($.30 per unit) -- -- -- (13) (1,325) (1,338)
Management equity units issued -- 50 50 -- 597 597
Units issued in exchange for termination
of fee paid to subsidiary's general partner -- 40 40 -- 480 480
Notes receivable on management equity units -- -- -- -- (273) (273)
Units exchanged into general partner units 1 (1) -- -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 45 4,471 4,516 $ (966) $(18,745) $(19,711)
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
-4-
40
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE 1 OF 2
(IN THOUSANDS)
Year Ended December 31
-----------------------------------------------------
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers and others $ 102,747 $ 109,233 $ 121,214
Cash paid to suppliers, employees and affiliates (86,985) (94,952) (100,132)
Interest paid (9,191) (12,527) (10,189)
Interest received 520 656 208
--------- --------- ---------
Net cash provided by operating activities 7,091 2,410 11,101
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,389) (8,969) (8,779)
Net cash acquired (used) in resorts property purchases 353 -- (3,411)
Proceeds from sale of assets 202 2 --
Loans to affiliates, net of repayments 433 (543) 190
Change in restricted cash (4,896) 5,617 57
Acquistion costs and deposits (572) (185) (967)
Option payments -- -- (911)
--------- --------- ---------
Net cash used in investing activities (12,869) (4,078) (13,821)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 28,589 70,480 79
Deferred loan costs (1,173) (6,438) (260)
Principal payments, long-term debt (13,404) (38,645) (1,803)
Principal payments, under capital lease obligations (422) (613) (267)
Principal payments, bonds payable (1,890) (12,998) --
Payments under line of credit -- (11,885) (11,007)
Draws under line of credit -- 1,500 13,673
Proceeds from sale of equity units under option plan -- 610 324
Distributions to partners (1,724) (1,229) (1,338)
Distributions to minority interest, net of contributions (10) 5 (16)
Other (113) -- (191)
--------- --------- ---------
Net cash provided by/(used in) financing activities 9,853 787 (806)
--------- --------- ---------
Net increase/(decrease) in cash 4,075 (881) (3,526)
Cash and cash equivalents, beginning of year 3,265 7,340 6,459
--------- --------- ---------
Cash and cash equivalents, end of year $ 7,340 $ 6,459 $ 2,933
========= ========= =========
The accompanying notes are an integral part of these financial statements
-5-
41
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE 2 OF 2
(IN THOUSANDS)
Year Ended December 31
-----------------------------------------------------
1995 1996 1997
----- ----- ----
RECONCILIATION OF NET LOSS TO NET CASH
CASH PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (2,587) $ (4,383) $ (648)
-------- -------- --------
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation/amortization expense 5,703 7,326 9,105
(Gain)/loss on disposal/sale of fixed assets 266 (4) --
Minority interest 13 10 19
Acquisition costs and other 340 185 197
Extraordinary item - write-off of loan costs -- 2,046 --
Termination of fee paid to subsidiary's general partner -- -- 480
Changes in assets and liabilities (net of acquisitions) (Increase)
decrease in:
Accounts receivable, net (93) (482) 946
Inventories (150) 170 (37)
Prepaid expenses and other assets (412) 222 (409)
Increase (decrease) in:
Accounts payable (855) 1,264 299
Accrued expenses 2,651 (4,724) 561
Customer deposits 1,325 268 224
Deferred revenues 890 512 364
-------- -------- --------
Total adjustments 9,678 6,793 11,749
-------- -------- --------
Net cash provided by operating activities $ 7,091 $ 2,410 $ 11,101
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of $491 were incurred during 1995 when South
Seas entered into leases for the upgrade of equipment.
In 1995, South Seas acquired the Sanibel Inn in exchange for 71,374
partnership units. As part of the exchange, South Seas acquired $13.4
million in assets and assumed $12.3 million in liabilities.
In 1995, South Seas issued 17,730 partnership units for the satisfaction
of $225 of accrued interest payable.
In 1997, South Seas issued 40,000 partnership units in exchange for the
termination of fee paid to subsidiary's general partner's charged at
South Seas Resort, L.P. (South Seas Plantation, a consolidated
partnership).
In 1997, depreciable land improvements (due to a beach renourishment
program completed by Lee County), of approximately $480 were recorded, as
well as, the related note payable.
The accompanying notes are an integral part of these financial statements
-6-
42
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
South Seas Properties Company Limited Partnership (South Seas)
is a beachfront and destination resort owner/operator in
Florida. South Seas owns seven resort properties and a golf
and tennis club all located on Florida's southwest coast. The
properties range from the 552-room (including leased
condominiums) South Seas Plantation on Captiva Island to the
30-unit Song of the Sea bed-and-breakfast inn on Sanibel
Island. The resorts contain numerous facilities and amenities,
including leased condominium units, hotel rooms, restaurants,
conference centers, retail outlets and recreation facilities.
In addition, South Seas' management company subsidiary, South
Seas Resorts Company, L.P. manages one other hospitality
property located on Ft. Myers Beach and operates a resort and
spa located in the Tampa/Clearwater area on Florida's west
coast.
RISK FACTORS
The business of South Seas is substantially dependent on
tourism and leisure and business travel, which is dependent on
general economic conditions in the U.S. and Europe. South Seas
leases and rents condominiums units at three resort
properties. A decline in the number of property owners that
participate in the guaranteed lease and rental programs may
have a material adverse affect on South Seas? results of
operations and financial condition.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of South Seas and its majority owned subsidiaries.
All material intercompany transactions and balances have been
eliminated in consolidation.
On January 1, 19974, South Seas acquired four operating
businesses from The Mariner Group, Inc. (Mariner) in exchange
for 591,758 partnership units. The acquired businesses
included a resort, golf course, reservation system and related
real estate sales and management contracts and personnel. In
1995, South Seas acquired two additional operating resort
properties (Song of the Sea Inn and Best Western-Sanibel
Island Beach Resort) in exchange for 673,884 partnership
units. The resorts were organized and managed by a Mariner
subsidiary that also served as general partner.
Because there was a high degree of common ownership and
control, the acquisitions discussed above have been accounted
for as reorganizations, in a manner similar to a pooling of
interests. Accordingly, the accounts of the acquired
businesses and partnership units issued have been included in
the accompanying financial statements for all periods
presented, at historical cost.
CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements
with an initial term of less than three months. For purposes
of the statement of cash flows, South Seas considers all
highly liquid debt instruments with original maturity of three
months or less to be cash equivalents. There were no amounts
invested in such agreements at December 31, 1996 or 1997.
-7-
43
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED
RESTRICTED CASH
Deposits from purchasers of condominiums and interval
ownership condominium units are deposited in escrow accounts
until closing. At December 31, 1995, approximately $5.6
million of restricted cash was reserved to retire bonds
payable in January 1996.
INVENTORIES
Inventories are stated at the lower of cost (first-in,
first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation
and amortization, which includes the amortization of assets
recorded under capital leases, has been computed principally
on the straight-line basis over the estimated useful lives as
follows:
Buildings and leasehold improvements Shorter of 39 years or remaining
lease term
Furniture, fixtures and equipment 5 years
Heavy equipment 5-7 years
Expendable supplies 3 years
Expendable supplies include linens, china, silverware and
glassware. They are depreciated to 100% of the cost of initial
stock. Replacements are expensed when purchased.
When depreciable assets are retired or sold, the cost and
related allowance for depreciation are removed from the
accounts, and the resulting gain or loss is included in net
income or loss. South Seas assesses the carrying value of its
fixed assets in order to determine whether an impairment has
occurred, taking into account both historical and forecasted
cash flows.
Maintenance and repairs, including the cost of minor
replacements, are charged to property maintenance expense
accounts. The cost of additions and betterments of property
are capitalized to property and equipment accounts.
LOAN COSTS
South Seas enters into interest rate protection agreements to
manage well-defined interest rate risk and does not use them
for trading or speculative purposes. Loan costs, including
premiums paid for purchased interest rate protection and
interest rate swap agreements, incurred in connection with
financing agreements, have been deferred and are being
amortized over the term of the loans. Accumulated amortization
of loan costs was $514 and $2,128 at December 31, 1996 and
1997, respectively. Counter-parties to the interest rate swap
agreements are major financial institutions. Credit loss from
counter-party non-performance is not anticipated.
South Seas periodically reviews the net carrying cost of such
instruments and adjusts any material variances through
accumulated amortization and amortization expense. Similarly,
if a derivative were to mature, be sold, be extinguished or is
terminated, the asset, at its net carrying value, is removed
from the accounts and the resulting gain or loss is included
in net income or loss.
-8-
44
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED
GOODWILL
Goodwill represents the excess of the purchase price over net
assets of businesses acquired and is being amortized on a
straight-line basis over 20-25 years. On a continual basis,
South Seas assesses the carrying value of goodwill in order to
determine whether an impairment has occurred, taking into
account both historical and forecasted cash flows. Accumulated
amortization of goodwill was $2,692 and $3,102 at December 31,
1996 and 1997, respectively.
REVENUES
Revenues from operations are recognized when services are
provided to guests. Deferred revenues represent prepaid golf
or spa memberships and gift certificates sold.
INCOME TAXES
South Seas income or loss is passed through to the partners
for inclusion in their respective tax returns; therefore,
there is no provision for income taxes in the accompanying
financial statements.
ADVERTISING COSTS
South Seas expenses the production costs of advertising the
first time the advertising takes place.
MANAGEMENT'S 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 amount of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
FAIR VALUE DISCLOSURE
The carrying amounts of cash and cash equivalents, short-term
debt and long-term, variable rate debt approximates fair
value. South Seas estimates the fair value of its long-term,
fixed rate debt generally using discounted cash flow analysis
based on South Seas current borrowing rates for debt with
similar maturities.
EARNINGS/(LOSS) PER UNIT
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
(SFAS 128), EARNINGS PER SHARE (EPS). SFAS 128 specifies new
standards designed to improve the EPS information provided in
financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and
increasing the comparability of EPS data on an international
basis. SFAS 128 is effective for fiscal periods ending after
December 15, 1997. The required disclosures of this
pronouncement have been included in the accompanying notes.
Basic net loss per unit is computed by dividing net loss by
the weighted average number of partnership units outstanding
during the period. Accordingly, units outstanding for per unit
purposes is lower than actual units issued and outstanding at
year end. Loss per unit assuming dilution is computed by
dividing net loss by the weighted average number of units
outstanding, increased by assumed conversion of other
potentially dilutive securities during the period.
-9-
45
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED
ALLOCATION OF NET INCOME/(LOSS)
Income/(loss) is allocated to the general partner and limited
partners based on partnership units owned compared to total
outstanding units. As of December 31, 1996 South Seas had
outstanding 4,426,568 units of which the general partners
owned 44,273 general partner units. As of December 31, 1997,
South Seas had outstanding 4,515,818 units of which the
general partner owned 45,158 general partner units.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS 130, Reporting Comprehensive Income, is effective for
fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purposes financial statements. This Statement requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements. South Seas does
not expect this standard to have a significant impact on its
reporting practices.
SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, effective for fiscal years beginning
after December 15, 1997, establishes standards for reporting
information about operating segments in annual financial
statements and interim financial reports issued to
unitholders. Generally, certain financial information is
required to be reported on the basis that is used internally
for evaluating performance of and allocation of resources to
operating segments. South Seas has not yet determined to what
extent the standard will impact its current practice of
reporting operating segment information.
RECLASSIFICATIONS
Certain amounts in the financial statements have been
reclassified to conform to the current presentation. These
reclassifications had no effect on the results of operations
previously reported.
NOTE 2. ACQUISITIONS/LEASE OF RESORT PROPERTY
On September 23, 1994, South Seas purchased the Radisson Suite
Beach Resort (Marco Radisson) for $23.5 million. The purchase
price was funded through a first mortgage in the amount of
$18.5 million, a contractual payment obligation in the amount
of $3.1 million, which was discounted at 14.8% to a value of
approximately $1.5 million (approximately $1.4 million as of
December 31, 1997), and the balance in cash. Terms of the
discounted obligation require total annual payments (paid in
equal quarterly installments) of $309 in 1998, $344 in 1999,
$421 in 2001, $462 in 2002, and three quarterly payments of
$126 each in 2003.
Also, an additional payment could be due to the seller of the
property, under certain conditions. This additional payment is
payable upon the following events: i) the sale of the property
in which the minimum amount due the seller is $1.5 million or
in the alternative ii) prior to any sale, the seller may
exercise an option to be paid on 15% of the increased net
value of the property which is computed using a multiple of
adjusted net operating income (as defined in the agreement)
less the cost basis of the property. Upon exercise of the
option, which can occur annually, South Seas is obligated to
pay the seller the computed amount over a five-year period
with interest at 8%. If exercised, this amount would be
treated as additional purchase price. As of December 31, 1997
no amounts were due.
-10-
46
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 2. ACQUISITIONS/LEASE OF RESORT PROPERTY CONTINUED
On June 1, 1995, South Seas purchased the Sanibel Inn, a
96-room hotel, for $13.4 million. In connection with the
acquisition, South Seas assumed liabilities of $12.3 million
and issued 71,374 units valued at $906. Pursuant to an
agreement between the parties, the former owners may receive
up to a maximum of $700 of additional consideration based on a
review of net operating income of the acquired resort at
December 31, 1998. The purchase price related to the
acquisition discussed above was allocated primarily to
property, plant and equipment. The contingent consideration,
if required to be paid, would be treated as additional
purchase price.
In June, 1995, South Seas entered into a four year lease
agreement, (amended in January 1997) with an option to extend
the lease term up to an additional six years and an option to
purchase the Safety Harbor Resort and Spa in Safety Harbor,
Florida. The amended lease requires annual payments of $1.2
million (allocated between rental payments and deposit toward
purchase price) and minimum capital improvements of $3.0
million during the term of the lease. The option is
exercisable no later than May 31, 2000. The exercise price of
the option is $11.4 million (less approximately $3.0 million
in scheduled option payments payable over the term of the
lease) with an additional earn-out arrangement, payable over
a number of years based on the financial results of the
property, of $8.0 million.
On January 6, 1997, South Seas purchased from an affiliated
limited partnership, real and personal property used in the
operation of the Seaside Inn on Sanibel Island, Florida for
$6.5 million. In connection with the acquisition, South Seas
assumed liabilities of $2.5 million.
All the acquisitions noted above have been accounted for using
the purchase method of accounting. Accordingly, the results of
operations of the acquired properties and the leased property
are included in South Seas results of operations from the
respective dates of acquisition or lease.
The aggregate consideration for South Seas' acquisitions has
been allocated to the assets and liabilities acquired based
upon their respective fair values. The components of the
purchase price allocation, including fees and expenses are as
follows:
1995 1997
---- ----
Fair value of net assets acquired, excluding
cash acquired $ 13,067 $ 5,184
Goodwill -- 911
Partnership units issued for the satisfaction
of accrued interest payable (225) --
Partnership units issued(906) --
Notes payable and other liabilities assumed (12,289) (2,684)
-------- --------
Cash used (acquired) in acquisition of properties $ (353) $ 3,411
======== ========
The following presents unaudited proforma condensed results of
operations for the year ended December 31, 1996 as if South Seas
had acquired Seaside Inn on January 1, 1996. The proforma
adjustments include elimination of amortization expense related
to loan costs and restatement of depreciation and interest
expense for a combined improvement in net income of $82. The
proforma results are presented for informational purposes only
and are not necessarily indicative of the future results of
operations of South Seas or the results of South Seas had the
acquisition occurred January 1, 1996.
-11-
47
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 2. ACQUISITIONS/LEASE OF RESORT PROPERTY CONTINUED
Proforma
Results
-------
Net revenues $111,752
Net loss $ (4,210)
==========
Net loss per unit - basic and
diluted $ (0.96)
==========
NOTE 3. INVENTORIES
Inventories consisted of the following at December 31:
1996 1997
---- ----
Food and beverage $ 451 $ 498
Retail outlets 912 864
Other supplies 314 352
------ ------
$1,677 $1,714
====== ======
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following
at December 31:
1996 1997
---- ----
Resort, restaurants and recreational
facilities, including property held under
capital leases of $1,454 and $1,119
at December 31, 1996 and 1997, respectively $ 119,602 $ 134,400
Less:
Accumulated depreciation and amortization (39,698) (46,716)
--------- ---------
$ 79,904 $ 87,684
========= =========
Included in property, plant and equipment is land with a
carrying value of $17.6 million and $19.0 at December 31, 1996
and 1997.
Depreciation and capital lease amortization was $4,520, $5,756
and $7,053 for the years ended December 31, 1995, 1996 and 1997,
respectively.
During 1995, South Seas capitalized interest of approximately
$97 during the period that it's golf and tennis club was closed
for renovation. During 1996, South Seas capitalized interest of
approximately $44 during the period that it remodeled and
refurbished a major dining facility and retail center.
NOTE 5. OTHER ASSETS
Other assets consisted of the following at December 31:
-12-
48
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 5. OTHER ASSETS CONTINUED
1996 1997
---- ----
Option payments on leased property $ -- $ 911
Deposits or costs incurred on possible future acquisitions 436 820
Costs incurred with investment banker 81 425
Investment in unconsolidated affiliates 380 550
Other 881 778
------ ------
$1,778 $3,484
====== ======
NOTE 6. NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable consisted of the following
at December 31: 1996 1997
----- ----
Notes payable to financial institution
Mortgage note payable $ 40,000 $ 38,250
Revolving credit notes 27,107 32,350
Note payable to Lee County for beach renourishment, annual
principal payments of $72, plus accrued
interest at 6%, matures November 2003 -- 434
Capital leases payable to financial
institutions, interest from
7.2% to 9.5% per annum, maturing
through 2001 896 629
-------- --------
68,003 71,663
Less current maturities (2,015) (1,500)
-------- --------
$ 65,988 $ 70,163
======== ========
The mortgage note payable of $38,250 at December 31, 1997 bears
interest at LIBOR plus 225 to 300 basis points (the spread is
determined by loan covenants relating to South Seas financial
performance each quarter: 8.69% at December 31, 1997). Interest
is due monthly, quarterly principal payments (as amended in
February 1998) are $550 in March and June of 1998, $50 in
September and December of 1998, $675 per quarter in 1999, $813
per quarter in 2000, and $937 in 2001, with a balloon payment of
approximately $29.2 million in September 2001. South Seas had
two revolving credit notes at December 31, 1997, one under a $40
million revolver drawn to $28,850 at year end and another fully
drawn at $3.5 million. The $28,850 note bears interest at LIBOR
plus 225 to 300 basis points (same covenants on rate as
mentioned above: 8.70% at December 31, 1997) interest due
monthly and no principal payments required until maturity in
September 2001. The $3.5 million revolver is also subject to the
same interest rate calculation as noted above, interest was
8.53% at December 31, 1997. Interest is due monthly, with no
principal payments required until maturity in September 2001.
The notes and mortgages payable contain various covenants, the
more restrictive relate to restrictions on additional
borrowings, distributions to partners, and maintaining a minimum
cash balance of $1.0 million. Unused commitment fees are 3/8 of
1% per annum on the unused portion of the revolving credit
notes, to be billed quarterly in arrears calculated on the
average balance during the preceding quarter. Substantially, all
assets are pledged
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49
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 6. NOTES AND MORTGAGES PAYABLE CONTINUED
as collateral on the above debt at December 31, 1997. The
weighted average interest rate on current maturities of notes
and mortgages payable was 8.54% and 8.65% on December 31, 1996
and 1997, respectively.
In December, 1996, South Seas obtained an irrevocable
transferable letter of credit, in an amount not to exceed $3.26
million, for use as a replacement for a reserve fund established
in connection with the 10% subordinated bonds. No amounts had
been drawn at December 31, 1996 or 1997.
Notes and mortgages payable are scheduled to mature
approximately as follows:
Year Ending
December 31
-----------
1998 $ 1,500
1999 3,123
2000 3,357
2001 63,538
2002 and thereafter 145
----------
$ 71,663
==========
NOTE 7. BONDS PAYABLE
In March 1996, South Seas sold $43.5 million of 10% (interest
paid monthly) subordinated bonds (the ("Bonds") which mature
in 2003. The Bonds are redeemable, in whole or in part, at the
option of South Seas at various redemption prices (108.24% to
112.62% of principal) during or after the year 2000.
Subsequent to the occurrence of certain events, the holders of
Bonds will be offered the opportunity to exchange the Bonds at
an exchange rate of $12 per unit (subject to adjustment in
certain circumstances). Upon the stated maturity of the Bonds,
holders will be offered the opportunity to exchange the Bonds
at an exchange rate of $10.50 per unit (subject to adjustment
in certain circumstances).
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
South Seas is obligated under various operating leases for
equipment, office space and use of a resort facility. Total
lease commitments incurred under these leases was $1,473,
$2,099 and $1,994 for the years ended December 31, 1995,
1996 and 1997, respectively.
The future minimum commitments under the equipment leases,
office space and resort facility leases are as follows:
Year
1998 $1,821
1999 1,516
2000 684
2001 335
2002 330
------
$4,686
======
South Seas has rental and lease obligations to certain
owners of condominium units for the use of their units,
under two separate programs.
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50
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 8. COMMITMENTS AND CONTINGENCIES CONTINUED
The revenue-sharing program provides for variable monthly
income payments to owners based on the amount of income
generated by the owners' units each month. These rental
agreements are renewable on a yearly basis. Either party
may terminate the contract, provided a six-month written
notice is given to the other party.
The fixed lease program provides for fixed monthly payments
to owners based on the type, size, and condition of the
units. In addition, South Seas will pay additional rent to
the owners if approximately 40% of the annual gross income
generated by their units exceeds the amount of base lease
payments in a lease year. These leases are renewable on a
yearly basis. Either party may terminate the lease
agreement on the second anniversary date of the lease,
following receipt of written notice.
Total lease expense related to the fixed lease program for
the years ended December 31, 1995, 1996 and 1997 was $8.3
million, $8.3 million and $7.0 million, respectively. Based
on management's intentions to continue to renew these
leases on a yearly basis, the estimated future minimum
rental commitments under the fixed lease program will
approximate $7.0 million in 1998.
OTHER
South Seas is contingently liable with respect to
litigation incidental to the ordinary course of its
operations. In the opinion of management, based on the
advice of legal counsel, the ultimate disposition of
lawsuits will not have a material adverse affect on South
Seas financial position, results of operations, or cash
flows.
South Seas is self-insured, subject to "maximum loss"
limits for workers compensation, property and liability.
The insurance program is maintained by an affiliate who
administers a loss pool reserve into which South Seas pays
based upon its experience. Management believes the amount
paid and accrued is sufficient to cover future costs
related to the program.
South Seas has a redemption agreement with a senior
management officer to repurchase his partnership units.
Upon death or termination of his employment, South Seas is
obligated (at the officer's request) to repurchase 82,500
partnership units at a price equal to the greater of $12
per unit or such price as the advisory board of South Seas
determines. If it is a voluntary termination of employment,
South Seas will repurchase (at the officer's request)
82,500 units at $10 per unit.
CONCENTRATION OF CREDIT RISK
South Seas places cash deposits at major banks. At December
31, 1996 and 1997 bank account balances exceeded Federal
Deposit Insurance limits by approximately $6.5 million and
$2.7 million, respectively. Management believes credit risk
related to these deposits is minimal.
NOTE 9. RELATED PARTY TRANSACTIONS
South Seas entered into the following transactions with
affiliates:
- Included in general and administrative expenses for the
years 1995, 1996 and 1997 are fees of $78, $81 and $66
respectively, for services performed by the general
partners of a consolidated partnership.
- In 1995, 1996, and 1997, South Seas paid an affiliate,
acting as an administrator , for insurance coverage of
$4,860, $3,543 and $3,609, respectively.
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51
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 9. RELATED PARTY TRANSACTIONS CONTINUED
- Interest expense on notes payable to related parties,
which were extinguished in 1996, was approximately at
$349 and $92 for the years ended December 31, 1995 and
1996, respectively.
- Included in general and administrative expenses is rent
expense of $236, $261 and $260 for the years ended
December 31, 1995, 1996 and 1997, respectively, under
an operating lease with an affiliated entity for office
space.
- Included in other assets is a $500 deposit on land
purchase at December 31, 1997.
NOTE 10. DEFINED CONTRIBUTION PLAN
In 1994, South Seas established South Seas Resorts Company
Retirement and Savings Plan (the ?Plan?), under Section
401(k) of the Internal Revenue Code for all eligible
employees. The Plan allows employees to defer up to $9 of
their income on a pre-tax basis through contributions. In
accordance with the Plan, for every dollar the employee
contributes (up to 4% of the employee's compensation), South
Seas will contribute fifty cents plus an additional ten cents
if length of service is between five years and ten years, or
an additional twenty-five cents if length of service exceeds
10 years. South Seas may also elect to contribute a
discretionary amount determined on an annual basis. South
Seas made contributions to the applicable plan on behalf of
the employees of $280, $314 and $363 for the years ended
December 31, 1995, 1996 and 1997, respectively.
NOTE 11. MANAGEMENT EQUITY INCENTIVE PLAN
In 1996, South Seas adopted a Management Equity Incentive
Plan (the ?Incentive Plan?). Under the Incentive Plan,
eligible employees were given the right to purchase a
specific number of partnership units at $10 per unit and $12
per unit in 1996 and 1997, respectively, which approximated
fair market value at the date of purchase. Terms provided for
up to one-half of the total purchase price being financed by
a full recourse promissory note receivable to South Seas. The
terms of the promissory notes provide for interest payable
annually at 7%, with total principal due at maturity (48
months). With each unit purchased, options were granted to
purchase five additional units. Options vest over four years
and may be exercised at $12.00 per unit and $14.50 per unit,
for units issued in 1996 and 1997, respectively. Options
expire April 1, 2006 for units purchased in 1996 and April 1,
2007 for units purchased in 1997. If South Seas were to
achieve a public offering of these units at value in excess
of $12 per unit, all options have an immediate right to be
exercised without regard to the vesting schedule. A summary
of South Seas Incentive Plan activity during 1996 and 1997 is
presented below:
Number
of Weighted Average
Options Exercise Price Per Unit
------- -----------------------
(000)
Outstanding at January 1, 1996 0
Granted 590 $12.00
Exercised 0
Forfeited 0
-----
Outstanding at December 31,1996 590 $12.00
Granted 249 $14.50
Exercised 0
Forfeited (13) $12.00
-------
Options exercisable at December 31, 1997 826 $12.75
======= ======
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52
SOUTH SEAS PROPERTIES COMPANY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
NOTE 11. MANAGEMENT EQUITY INCENTIVE PLAN CONTINUED
Under the terms of the Incentive Plan, 108,500 units remained
available for issuance as of December 31,1997 at a price to be
determined at the discretion of the Compensation Committee.
For purposes of following disclosures required by SFAS 123,
?Accounting for Stock Based Compensation? the fair value of each
option granted has been estimated on the date of grant using the
minimum value method, with the following assumptions used for
grants in 1996: annual distributions (with slight growth)
consistent with South Seas current policy, which resulted in
payments of $.28 in 1996 and $.30 in 1997, and are projected at
$.40 in 1998; a risk free interest rate of 7%, and an expected
life of 6-9.5 years. The minimum fair value of each option
granted during 1996 and 1997 was $1.24 and $.07, respectively.
Pro forma compensation cost for 1996 and 1997 awards under the
Incentive Plan, recognized in accordance with SFAS 123, would
increase the South Seas net loss from $4,383 ($1.00 per unit),
to $4,447 ($1.02 per unit) in 1996; and in 1997, would increase
the net loss from $648 ($.15 per unit) to a net loss of $1,054
($.24 per unit). Since the pro forma compensation cost of the
Incentive Plan is recognized over the four year vesting period,
the foregoing pro forma increase in South Seas? net loss is not
representative of anticipated amounts in future years.
NOTE 12. EXTRAORDINARY EXPENSE
During 1996, South Seas refinanced substantially all of its
outstanding debt in a re-capitalization plan designed to
consolidate and reduce interest costs. As a result, South Seas
recorded an extraordinary item expense of $2.046 million in the
write-off of unamortized loan costs and prepayment penalties.
NOTE 13. TERMINATION OF FEE PAID TO SUBSIDIARY'S GENERAL PARTNER
In October 1997, South Seas issued 40,000 partnership units to
San-Cap, Ltd. (the 1% general partner of South Seas Resort L.P.
(SSRLP)) in exchange for the termination of the general partner
fee previously charged at that property (.15% of gross revenues
of SSRLP, a consolidated partnership).
NOTE 14. EARNINGS (LOSS) PER UNIT
Basic and diluted earnings/(loss) per unit for the years ended
December 31 was calculated as set forth below (in thousands,
except for per unit data):
1995 1996 1997
---- ---- ----
Net loss $ (2,587) $(4,383) $ (648)
======== ======= =======
Basic net loss per unit calculation:
Weighted average units outstanding 4,279 4,370 4,461
======= ======= =======
Actual units 4,309 4,427 4,516
======= ======= =======
Basic net loss per unit $ (0.60) $ (1.00) $ (0.15)
======= ======= =======
-17-
53
NOTE 14. EARNINGS PER UNIT CONTINUED
1995 1996 1997
---- ---- ----
Diluted net loss per unit calculation:
Weighted average units outstanding 4,279 4,370 4,461
Effect of dilutive units:
Unit options -- -- --
10% convertible bonds -- -- --
------ ------ ------
Diluted units 4,279 4,370 4,461
====== ====== ======
Diluted net loss per unit $(0.60) $(1.00) $(0.15)
====== ====== ======
Potentially dilutive units which have not been included in the
diluted per unit calculation include 3,107 and 4,123 in 1996 and
1997, respectively, from assumed conversion of convertible bonds
because their effect would be anti-dilutive due to the net loss
incurred by South Seas. Unit options issued under the Incentive
plan were not assumed exercised in 1996 or 1997 due to their
exercise price not exceeding market value. Accordingly, for the
periods presented, diluted net loss per unit is the same as
basic net loss per unit. Neither unit options nor convertible
bonds were in existence in 1995. Accordingly, there was no
impact in that year in the calculation of diluted net loss per
unit.
NOTE 15. SUBSEQUENT EVENTS
In March 1998, South Seas entered into a ten-year lease
agreement on the Best Western Pink Shell Resort on Ft. Myers
Beach, contingent on the purchaser, a public REIT, closing on
the purchase of the property. The lease requires annual minimum
rental payments of $2.2 million, plus a percentage rent based on
property revenues at various tiers. Terms of the agreement
include South Seas (through its wholly owned subsidiary)
purchasing $2.0 million of the existing furniture and fixtures
(to be used in the operation of the resort) and maintaining a
net worth of $2.0 million, $1.9 million of which is in the form
of a guarantee from South Seas. Due to the timing of the
transaction, the remaining 1998 rental payments have been set at
$211 per month with no percentage rent from the date of closing,
which is anticipated to occur in May 1998. Regular lease terms
become effective January 1, 1999.
On January 9, 1998, South Seas terminated its then only interest
rate collar outstanding and entered into an interest rate swap
agreement. Significant terms include:
Notional amount: $30.2 million
Dates covered: June 98 - Sept 01
Fixed rate: 5.86%
-18-