SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
Date of Report (Date of Earliest Event Reported)
September 16, 1997
------------------
Vistana, Inc.
(Exact name of registrant as specified in its charter)
Florida 0-29114 59-3415620
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
8801 Vistana Centre Drive, Orlando, Florida 32821
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 239-3100
N/A
(Former name or former address, if changed since last report.)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Listed below are the financials statements, pro forma financial information
and exhibits filed as a part of this report;
a. Financial Statements of Businesses Acquired.
The financial statements for the Acquired Companies listed in the
accompanying Index to Financial Statements and Pro Forma Financial Information
are filed as part of this Current Report on Form 8-K/A.
b. Pro Forma Financial Information.
The pro forma financial information of Vistana listed in the
accompanying Index to Financial Statements and Pro Forma Financial Information
is filed as part of this Current Report on Form 8-K/A.
(c) Exhibits:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
VISTANA, INC.
By: ________________________________
Name:
Title:
Date: October __, 1997
-3-
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
The following financial statements and pro forma financial information are
included in Item 7 of this Current Report on Form 8-K/A:
Points of Colorado, Inc.
- ------------------------
Independent Auditors' Report
Balance Sheets as of March 31, 1996 and 1997
Statements of Income and Accumulated Deficit for the Fiscal Years Ended
March 31, 1996 and 1997
Statements of Cash Flows for the Fiscal Years Ended March 31, 1996 and 1997
Notes to Financial Statements
Unaudited Financial Statements
Balance Sheet as of June 30, 1997
Statements of Income and Accumulated Deficit for the Three Months Ended
June 30, 1996 and 1997
Statements of Cash Flows for the Three Months Ended June 30, 1996 and 1997
Notes to Unaudited Financial Statements
Success Developments, L.L.C.
- ----------------------------
Independent Auditors' Report
Balance Sheet as of December 31, 1996
Statement of Operations and Members' Equity from June 10, 1996 (date of
inception) to December 31, 1996
Statement of Cash Flows from June 10, 1996 (date of inception) to December 31,
1996
Notes to Financial Statements
Unaudited Financial Statements
Balance Sheet as of June 30, 1997
Statement of Operations and Members' Equity for the Six Months Ended June 30,
1997
Statement of Cash Flows for the Six Months Ended June 30, 1997
Notes to Unaudited Financial Statements
The Success Companies
- ---------------------
Independent Auditors' Report
Combined Balance Sheets as of March 31, 1996 and 1997 and June 30, 1997
(unaudited)
Combined Statements of Operations for the Fiscal Years Ended March 31, 1996 and
1997 and for the Three Months Ended June 30, 1996 and 1997 (unaudited)
Combined Statements of Changes in Equity for the Fiscal Years Ended March 31,
1996 and 1997 and for the Three Months Ended June 30, 1997 (unaudited)
Combined Statements of Cash Flows for the Fiscal Years Ended March 31, 1996 and
1997 and for the Three Months Ended June 30, 1996 and 1997 (unaudited)
Notes to Combined Financial Statements
-4-
Vistana, Inc. Pro Forma Financial Information
- ---------------------------------------------
-5-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Points of Colorado, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Points of Colorado, Inc.
as of March 31, 1997 and 1996, and the related statements of income and
accumulated deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Points of Colorado, Inc. as of
March 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
KREISMAN CORPORATION
Denver, Colorado
May 12, 1997
F-1
POINTS OF COLORADO, INC.
BALANCE SHEETS
MARCH 31,
------------------------
1996 1997
----------- -----------
ASSETS
Cash and Cash Equivalents............... $ 431,928 $ 652,426
Other Receivables....................... 92,524 99,779
Timeshare Notes Receivable, Less
Allowance for Doubtful Notes of
$686,764 in 1997 and $481,377 in 1996.. 6,545,516 13,108,055
Other Notes Receivable.................. -0- 793,349
Holdback on Timeshare Notes............. 883,338 549,080
Inventory--Timeshare Units.............. 3,370,381 1,699,143
Investment--Success Developments, LLC... -0- 746,107
Prepaid Expenses and Other Assets....... 97,720 85,076
Deferred Compensation Asset............. 227,072 397,573
Furniture and Equipment................. 260,149 291,755
Less Accumulated Depreciation......... (165,219) (204,221)
----------- -----------
Total Assets........................ $11,743,409 $18,218,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts Payable...................... $ 83,428 $ 42,852
Accrued Payroll and Commissions....... 176,784 318,651
Customer Deposits..................... 44,107 73,061
Note Payable to Marine Midland Bank... 1,839,715 4,000,510
Other Liabilities..................... 44,145 134,677
Reserve for Reacquisition of Recourse
Notes................................ 150,000 -0-
Deferred Federal and State Income
Taxes................................ 472,135 1,950,035
Deferred Compensation Payable......... 227,072 397,573
----------- -----------
Total Liabilities................... 3,037,386 6,917,359
Stockholders' Equity
Common Stock, No Par Value, Authorized
50,000 Shares, Issued and Outstanding
80 Shares............................ 1 1
Additional Paid-In Capital............ 14,136,878 14,136,878
Accumulated Deficit................... (5,430,856) (2,836,116)
----------- -----------
Total Stockholders' Equity.......... 8,706,023 11,300,763
----------- -----------
Total Liabilities and
Stockholders' Equity............. $11,743,409 $18,218,122
=========== ===========
See Notes to Financial Statements.
F-2
POINTS OF COLORADO, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
YEAR ENDED MARCH 31,
------------------------
1996 1997
----------- -----------
Income
Sales--Timeshare Units............................ $ 6,686,950 $13,694,159
Financing Income, Net of
Servicing Costs.................................. 591,590 1,086,253
Other Income...................................... -0- 203,913
----------- -----------
7,278,540 14,984,325
Cost of Sales
Timeshare Units Sold.............................. 1,334,141 2,371,787
Closing Costs..................................... 369,918 739,790
----------- -----------
1,704,059 3,111,577
----------- -----------
Gross Profit.................................... 5,574,481 11,872,748
Other Expenses
Sales and Marketing............................... 3,289,190 6,771,878
General and
Administrative................................... 1,073,539 1,175,919
Other Expenses.................................... 175,369 -0-
----------- -----------
4,538,098 7,947,797
----------- -----------
Income Before Other
Income......................................... 1,036,383 3,924,951
Other Income
Reduction of Reserve for
Reacquisition of
Recourse Notes................................... 481,969 147,689
----------- -----------
Income Before Income
Taxes.......................................... 1,518,352 4,072,640
Provision for Income
Taxes.............................................. (399,199) (1,477,900)
----------- -----------
Net Income...................................... 1,119,153 2,594,740
Accumulated Deficit
Beginning of Period............................... (6,550,009) (5,430,856)
----------- -----------
End of Period..................................... $(5,430,856) $(2,836,116)
=========== ===========
See Notes to Financial Statements.
F-3
POINTS OF COLORADO, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
-----------------------
1996 1997
---------- -----------
Cash Flows from Operating
Activities
Net Income.................. $1,119,153 $ 2,594,740
Adjustments to Reconcile Net
Income to Cash Provided By
Operating Activities:
Depreciation.............. 35,570 40,487
Income from Success
Developments, LLC........ -0- (121,107)
Deferred Federal and State
Income Taxes............. 399,199 1,477,900
Discount Income on Note
Collections.............. (49,453) (31,729)
Reduction of Reacquisition
of Uncollectible Notes
Receivable............... (481,969) (147,689)
Reserve for Doubtful
Notes.................... 152,928 269,186
Changes in Operating Assets
and Liabilities:
Decrease in Inventory--
Timeshare Units.......... 1,334,141 1,671,238
(Increase) in Other
Assets................... (258,226) (165,112)
Increase in Accounts
Payable and Other
Liabilities.............. 242,483 391,278
---------- -----------
Total Adjustments....... 1,374,673 3,384,452
---------- -----------
Cash Provided by Operating
Activities................... 2,493,826 5,979,192
---------- -----------
Cash Flows from Investing
Activities
Origination of Timeshare
Notes...................... (5,915,665) (11,226,861)
Principal Reductions of
Timeshare Notes............ 1,696,521 4,424,554
Acquisition and Loans
Related to Success
Developments, LLC.......... -0- (1,418,349)
Purchases of Furniture and
Equipment.................. (67,822) (33,091)
---------- -----------
Cash Used by Investing
Activities................... (4,286,966) (8,253,747)
---------- -----------
Cash Flows from Financing
Activities
Loan from Marine Midland
Bank....................... 1,977,136 3,781,499
Payments to Marine Midland
Bank....................... (356,282) (1,620,704)
Decrease in Holdback on
Timeshare Notes............ 346,238 334,258
---------- -----------
Cash Provided by Financing
Activities................... 1,967,092 2,495,053
---------- -----------
Net Increase in Cash.......... 173,952 220,498
Cash and Equivalents
Beginning of Period......... 257,976 431,928
---------- -----------
End of Period............... $ 431,928 $ 652,426
========== ===========
Supplemental Cash Flow
Disclosures:
Interest Paid............... $ 84,696 $ 279,473
========== ===========
See Notes to Financial Statements.
F-4
POINTS OF COLORADO, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
NOTE A--THE COMPANY
Points of Colorado, Inc. (the "Company"), is the developer and manager of
Falcon Point and Eagle Point (collectively, the "Associations"), two timeshare
projects that contain 54 and 58 condominiums, respectively. The Company is the
owner of the remaining unsold timeshare interests and markets and sells them
to the public along with timeshare units purchased from Christie Lodge. The
Company is a Colorado corporation which was organized on July 31, 1986.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in the bank as well as a working cash
management account held for the primary purpose of general liquidity. The
holdings in the cash management account normally mature within three months
from the date of acquisition.
Inventory--Timeshare Units
Timeshare inventories are valued at the lower of cost to acquire, develop,
and renovate the projects or market. Cost of timeshare units sold for Eagle
Point and Falcon Point is based upon the combined costs of inventories
allocated to the individual weeks on the basis of the relative sales value of
each week, and upon actual cost for Christie Lodge.
Allowance for Doubtful Notes
The Company provides an allowance for doubtful notes for those notes held by
the Company based on a review of the account status of existing receivables and
historical collection experience.
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using
accelerated methods. The estimated lives used in determining depreciation are:
Furniture and Equipment......................................... 5-7 years
Maintenance, repairs, and minor renewals are charged to expense as incurred,
whereas improvements and major renewals of facilities are capitalized. Upon
sale or disposition of properties, the asset account is relieved of the cost
and the accumulated depreciation account is charged with depreciation taken
prior to the sale, and any resultant gain or loss is credited or charged to
earnings.
Revenue and Cost Recognition
Revenue from timeshares is recognized upon closing of the sale. Acquisition
and other direct costs and indirect costs related to acquisition and
development of timeshare units are capitalized. Capitalized costs are
allocated to individual timeshare units. The capitalized costs of units are
charged to earnings when the related revenue is recognized. Selling and
administrative costs are charged to earnings when incurred.
F-5
POINTS OF COLORADO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Credit risk with respect to timeshare notes receivable is generally
diversified due to the large number of customers and their dispersion across
many different geographic areas of the United States. The Company performs
credit evaluations of its customers' financial condition, and all its notes
receivable are collateralized by the interval units sold.
NOTE C--INVESTMENT--SUCCESS DEVELOPMENTS, LLC
The Company and its partners organized Success Developments, LLC on June 10,
1996, and the Company contributed $625,000 for its fifty percent interest. The
Limited Liability Company is the owner and developer of Villas of Cave Creek,
a timeshare project in Arizona. The Company is the managing member. This
investment is being accounted for using the equity method of accounting. The
investment account has been increased for the Company's share of the
investee's net income as of March 31, 1997.
NOTE D--TRANSACTIONS WITH MARINE MIDLAND BANK
The Agreement also requires Marine to pay the Company monthly an Interest
Differential between the interest earned on the notes and a Minimum Required
Yield established by Marine at the time the note was purchased by Marine. At
March 31, 1997, the aggregate Interest Differential to be paid over four years
on the 790 notes was $188,532. The actual amount of Interest Differential that
will be received by the Company is dependent upon the performance of the
portfolio and the amount of early payoffs of the notes. Due to the inherent
uncertainty of the future value of the Differential, no asset is recorded at
the time of sale; consequently, the
F-6
POINTS OF COLORADO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
monthly Interest Differential is recorded as income when earned. During the
years ended March 31, 1997 and 1996, the Company earned $167,202 and $276,710 of
Interest Differential, respectively.
On December 2, 1996, Marine agreed to provide a $7,500,000 Term Loan ("Loan")
to the Company for four years. Under its provisions, Marine will advance 85% of
the principal amount of all notes pledged on the Loan. Interest on the Loan is
computed at 2% over Marine's Prime Rate (10.5% at March 31, 1997). All payments
from the collateralized notes go directly to Marine, and monthly interest
charges are added to the Loan balance. The Company and its shareholders have
agreed to pay Marine 85% of the outstanding principal balance of any pledged
note that is more than sixty days delinquent. At March 31, 1997, the Company
owed $4,000,510 to Marine and had pledged notes with an aggregate principal
balance of $5,333,219. The Company has the option to lock-in its interest rate
under this loan. At March 31, 1997, $898,759 of the outstanding loan balance had
a fixed interest rate of 8.78%, and $1,469,409 had a fixed interest rate of
9.75%.
NOTE E--INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets or liabilities are determined based on
the difference between the financial reporting and tax basis of assets and
liabilities and enacted tax rates that will be in effect for the year in which
the differences are expected to reverse. The provision for deferred income
taxes at March 31, 1997 and 1996, of $1,477,900 and $399,199 respectively
results primarily from the use of the installment sales method of reporting
profits and the use of the specific charge off method for bad debts for tax
purposes. At March 31, 1997, the Company had aggregate operating loss
carryforwards of approximately $2,600,000, which will expire on March 31, 2011
and approximately $1,400,000, which will expire on March 31, 2012.
NOTE F--DEFERRED COMPENSATION PLAN
On July 1, 1995, the Company implemented a Nonqualified Deferred Compensation
Plan which permits an eligible officer or director to reduce the Compensation
that the Company would otherwise pay by an amount equal to a percentage of his
Compensation or by a specific dollar amount. Such election, if any, is made in
writing each quarter of the Plan Year. The deferred compensation is
distributable in cash after termination of employment, the Participant's death,
or the Participant attaining the age of 55 years, and amounted to $397,573 and
$227,072 at March 31, 1997 and 1996, respectively. The agreement is funded under
a grantor trust agreement whereby the Company pays to the grantor trust amounts
necessary to meet the obligations under the deferred compensation agreements.
The deferred compensation expense was $170,501 and $227,072 for the years ended
March 31, 1997 and 1996, respectively.
The Company has recorded the assets and liabilities for the deferred
compensation at gross amounts in the Balance Sheet because such assets and
liabilities belong to the Company rather than to any external plan or trust. The
assets are recorded at cost, and the liability is computed and recorded in
accordance with SFAS 87, "Employers' Accounting For Pensions."
NOTE G--STOCK REDEMPTION AGREEMENT
Under a stock redemption agreement dated December 9, 1994, the Company is
obligated to purchase the stock of a terminated, permanently disabled, or
deceased stockholder at a price determined annually by the Company at its most
recent annual meeting or by formulas and under terms contained in the agreement.
The Company has purchased life insurance on each stockholder in order to help
fund these obligations.
In addition, there are restrictive transfer provisions which govern the sale
or transfer of the Company's stock unrelated to the termination, disability, or
death of a stockholder. The Company has a first right of refusal for 30 days to
purchase the shares offered. The remaining stockholder(s) have a second right of
refusal for 30 days to purchase the shares refused by the Company. Acceptance by
all the stockholders is required to sell stock to an outside third party.
NOTE H--COMMITMENTS AND CONTINGENCIES
The Company leases its office space under a lease which expired on April 30,
1997. On May 30, 1997, the lease was renewed for a five year term. Future
required minimum annual rental payments are as follows:
Year Ending March 31, 1998....................................... $ 77,210
1999....................................... 79,215
2000....................................... 81,412
2001....................................... 84,052
2002....................................... 86,692
NOTE I--FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of its cash. The Company maintains cash
balances at several financial institutions located in Colorado. Balances at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company carries some funds in excess of the Federal Deposit
Insurance Corporation limit.
Fair Value
Fair value estimates presented below are based on relevant market
information. As these estimates are subjective in nature and involve
uncertainties and significant judgement, they are not necessarily indicative of
the amount that the Company could realize on a current market exchange. The
fair value disclosures for financial instruments are as follows:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheets approximate their fair values at March 31, 1997 and 1996.
F-7
POINTS OF COLORADO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Loans Receivable: The net carrying amounts of loans receivable are a
reasonable estimate of their fair values at March 31, 1997 and 1996 based on
historical payment experiences.
Financing Arrangements: The carrying amounts of the variable and fixed
interest rate borrowings approximated their fair values at March 31, 1997
and 1996.
F-8
POINTS OF COLORADO, INC.
BALANCE SHEET
JUNE 30, 1997
ASSETS (Unaudited)
Cash and Cash Equivalents $ 544,598
Other Receivables 257,419
Timeshare Notes Receivable, Less
Allowance for Doubtful Notes of
$744,165 14,233,820
Other Notes Receivable 818,090
Holdback on Timeshare Notes 330,858
Inventory - Timeshare Units 1,461,822
Investment - Success Developments, LLC 937,856
Prepaid Expenses and Other Assets 32,321
Deferred Compensation Asset 443,448
Furniture and Equipment 300,337
Less Accumulated Depreciation (211,954)
-----------
TOTAL ASSETS $19,148,615
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 34,935
Accrued Payroll and Commissions 250,364
Customer Deposits 145,279
Note Payable to Marine Midland Bank 3,739,283
Other Liabilities 1,106,753
Deferred Federal and State Income
Taxes 1,518,160
Deferred Compensation Payable 443,448
-----------
TOTAL LIABILITIES 7,238,222
STOCKHOLDERS' EQUITY
Common Stock, No Par Value, Authorized
50,000 Shares, Issued and Outstanding
80 Shares 1
Additional Paid-In Capital 14,136,878
Accumulated Deficit (2,226,486)
-----------
TOTAL STOCKHOLDERS' EQUITY 11,910,393
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $19,148,615
===========
See Notes to Financial Statements.
F-9
POINTS OF COLORADO, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
Three Months Ended June 30,
1996 1997
------------ -------------
INCOME (Unaudited) (Unaudited)
Sales - Timeshare Units $3,134,200 $2,961,744
Financing Income, Net of Servicing Costs 177,065 426,029
Other Income -0- 191,749
------------ -------------
3,311,265 3,579,522
COST OF SALES
Timeshare Units Sold 585,514 553,696
Closing Costs 160,849 181,013
------------ -------------
746,363 734,709
------------ -------------
GROSS PROFIT 2,564,902 2,844,813
OTHER EXPENSES
Sales and Marketing 1,491,725 1,547,254
General and Administrative 269,669 319,804
------------ -------------
1,761,394 1,867,058
------------ -------------
INCOME BEFORE INCOME TAXES 803,508 977,755
Provision for Income Taxes (309,500) (368,125)
------------ -------------
NET INCOME 494,008 609,630
ACCUMULATED DEFICIT
Beginning of Period (5,430,856) (2,836,116)
------------ -------------
End of Period $(4,936,848) $(2,226,486)
============ =============
See Notes to Financial Statements.
F-10
POINTS OF COLORADO, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended June 30,
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) (Unaudited)
Net Income $ 494,008 $ 609,630
Adjustments to Reconcile Net Income
to Cash Provided By Operating Activities:
Depreciation 8,491 7,733
Income from Success Developments, LLC -0- (191,749)
Deferred Federal and State Income Taxes 309,500 (431,875)
Discount Income on Note Collections (13,973) (5,853)
Reserve for Doubtful Notes 79,966 74,403
Changes in Operating Assets and Liabilities:
Decrease in Inventory - Timeshare Units 438,512 237,321
(Increase) in Other Assets (25,531) (104,885)
Increase in Accounts Payable
and Other Liabilities 129,491 968,090
----------- -----------
TOTAL ADJUSTMENTS 926,456 553,185
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 1,420,464 1,162,815
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of Timeshare Notes (2,670,068) (2,363,003)
Principal Reductions of Timeshare Notes 1,011,521 1,168,688
Loans Related to Success Developments, LLC -0- (24,741)
Purchases of Furniture and Equipment (10,510) (8,582)
----------- -----------
CASH USED BY INVESTING ACTIVITIES (1,669,057) (1,227,638)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan from Marine Midland Bank 575,249 592,474
Payments to Marine Midland Bank (254,444) (853,701)
Decrease in Holdback on Timeshare Notes 11,093 218,222
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 331,898 (43,005)
----------- -----------
NET INCREASE (DECREASE) IN CASH 83,305 (107,828)
CASH AND EQUIVALENTS
Beginning of Period 431,928 652,426
----------- -----------
End of Period $ 515,233 $ 544,598
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest Paid $ 41,169 $ 105,100
=========== ===========
See Notes to Financial Statements.
F-11
POINTS OF COLORADO, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1997
(Unaudited)
Note A - Investment - Success Developments, LLC
The Company and its partners organized Success Developments, LLC
on June 10, 1996, and the Company contributed $625,000 for its fifty
percent interest. The Limited Liability Company is the owner and
developer of Villas of Cave Creek, a timeshare project in Arizona. The
Company is the managing member. This investment is being accounted for
using the equity method of accounting. The investment account has been
increased for the Company's share of the investee's net income as of
June 30, 1997.
Condensed unaudited financial information of the Limited
Liability Company as of June 30, 1997 is summarized below:
Assets $8,403,096
Liabilities $6,527,384
Results of Operations from
date of inception $ 625,712
By agreement, the Company provides management services to the
Limited Liability Company.
The Company has loaned the LLC construction funds and has loaned
the other partners acquisition funds. Note principal and interest of
15% per annum from the Limited Liability Company are due December 1,
1997. Note principal and interest of 15% per annum from other members
are due January 31, 1999. At June 30, 1997, the aggregate of the notes
receivable and accrued interest was $818,090.
The Company is guarantor on a $10,000,000 two year line of credit
dated July 29, 1996 in conjunction with the investment.
Note B - Transactions with Marine Midland Bank
The majority of timeshare week sales are financed by notes
secured by the weeks purchased. Notes were sold to Marine by the
Company during 1993 and 1994 under an Agreement of Finance
("Agreement"), dated July 30, 1993, with full recourse to the Company
to repurchase any note that becomes delinquent in excess of sixty
days. The Agreement requires the Company to maintain a net worth of
$2,500,000.
Marine holds back, in a Reserve Account, 10% of the principal
balance of the notes so purchased, to provide additional security in
case of default. The Company has the right to receive the amount by
which the Reserve Account exceeds 15% of the remaining principal
balance of the notes owned by Marine on July 30th of each year. At
June 30, 1997, Marine owned 671 notes
F-12
Note B - Transactions with Marine Midland Bank (continued)
which were sold to Marine by the Company, with a principal balance of
$2,112,155. The Reserve Account balance of $330,858 was 15.67% of that
amount.
The Agreement also requires Marine to pay the Company monthly an
Interest Differential between the interest earned on the notes and a
Minimum Required Yield established by Marine at the time the note was
purchased by Marine. At June 30, 1997, the aggregate Interest
Differential to be paid over four years on the 671 notes was $151,280.
The actual amount of Interest Differential that will be received by
the Company is dependent upon the performance of the portfolio and the
amount of early payoffs of the notes. Due to the inherent uncertainty
of the future value of the Differential, no asset is recorded at the
time of sale; consequently, the monthly Interest Differential is
recorded as income when earned. During the three months ended June 30,
1997 and 1996, the Company earned $28,000 and $51,000 of Interest
Differential, respectively.
On December 2, 1996, Marine agreed to provide a $7,500,000 Term
Loan ("Loan") to the Company for four years. Under its provisions,
Marine will advance 85% of the principal amount of all notes pledged
on the Loan. Interest on the Loan is computed at 2% over Marine's
Prime Rate (10.5% at June 30, 1997). All payments from the
collateralized notes go directly to Marine, and monthly interest
charges are added to the Loan balance. The Company and its
shareholders have agreed to pay Marine 85% of the outstanding
principal balance of any pledged note that is more than sixty days
delinquent. At June 30, 1997, the Company owed $3,717,109 to Marine
and had pledged notes with an aggregate principal balance of
$5,180,991. The Company has the option to lock-in its interest rate
under this loan. At June 30, 1997, $773,697 of the outstanding loan
balance had a fixed interest rate of 8.78%, and $1,286,415 had a fixed
interest rate of 9.75%.
Note C - Commitments and Contingencies
The Company leases its office space under a five year lease dated
May 30, 1997. Future required minimum annual rental payments are as
follows:
Year Ending June 30, 1998 $ 98,363
1999 105,039
2000 108,531
2001 112,022
2002 105,611
F-13
INDEPENDENT AUDITORS' REPORT
To the Members
Success Developments, L.L.C.
Denver, Colorado
We have audited the accompanying balance sheet of Success Developments,
L.L.C. as of December 31, 1996, and the related statements of operations and
members' equity and cash flows for the period from June 10, 1996 (Date of
Inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Success Developments, L.L.C.
as of December 31, 1996, and the results of its operations and its cash flows
for the period then ended, in conformity with generally accepted accounting
principles.
KREISMAN CORPORATION
Denver, Colorado
March 5, 1997
F-14
SUCCESS DEVELOPMENTS, L.L.C.
BALANCE SHEET
(SEE INDEPENDENT AUDITORS' REPORT)
ASSETS
DECEMBER 31,
1996
------------
Cash and Cash Equivalents..................................... $ 77,540
Due From Members--Note H...................................... 4,375
Timeshare Notes Receivable, Less Allowance for Doubtful
Notes of $18,452--Note D...................................... 856,086
Inventory--Timeshare Units--Note D............................ 4,089,124
Prepaid Expenses and Other Assets............................. 172,927
Leasehold Improvements, Less Accumulated Amortization of
$32,603...................................................... 117,260
Furniture and Equipment, Less Accumulated
Depreciation of $6,214....................................... 30,329
----------
Total Assets.............................................. $5,347,641
==========
LIABILITIES AND MEMBERS' EQUITY
Liabilities
Accounts Payable............................................ $ 109,771
Customer Deposits........................................... 16,637
Note Payable to Heller Financial--Note D.................... 3,922,999
Other Liabilities........................................... 11,259
Due to Managing Member--Note H.............................. 187,825
----------
Total Liabilities......................................... 4,248,491
Members' Equity--Note C....................................... 1,099,150
----------
Total Liabilities and Members' Equity..................... $5,347,641
==========
See Notes to Financial Statements.
F-15
SUCCESS DEVELOPMENTS, L.L.C.
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
(SEE INDEPENDENT AUDITORS' REPORT)
FROM JUNE 10, 1996
(DATE OF INCEPTION)
TO DECEMBER 31, 1996
--------------------
Revenues
Sales--Timeshare Units..................... $1,104,620
Other Revenue.............................. 9,297
----------
1,113,917
Cost of Sales
Timeshare Units Sold....................... 283,050
Closing Costs.............................. 30,432
----------
313,482
----------
Gross Profit............................. 800,435
Other Expenses
Sales and Marketing........................ 570,928
Financing Costs............................ 199,479
Association Subsidies--Note F.............. 24,084
Development Costs--Abandoned Project....... 10,000
General and Administrative................. 146,794
----------
951,285
----------
Net Loss................................. (150,850)
Members' Equity at June 10, 1996............. -0-
Members' Contributions....................... 1,250,000
----------
Ending Members' Equity................... $1,099,150
==========
See Notes to Financial Statements.
F-16
SUCCESS DEVELOPMENTS, L.L.C.
STATEMENT OF CASH FLOWS
(See Independent Auditors' Report)
From June 10, 1996
(Date of Inception)
to December 31, 1996
--------------------
Cash Flows from Operating Activities
Net Loss.................................. $ (150,850)
Adjustments to Reconcile Net Loss to Cash
Used By Operating Activities:
Depreciation and Amortization........... 71,282
Reserve for Bad Debts................... 18,452
Completed Timeshare Units Sold.......... 283,050
(Increase) Decrease In:
Due From Members...................... (4,375)
Prepaid Expenses and Other Assets..... (49,556)
Increase (Decrease) In:
Accounts Payable......................
Customer Deposits..................... 16,637
Other Liabilities..................... 11,259
-----------
Total Adjustments................... 346,749
-----------
Cash Generated by Operating Activities...... 195,899
-----------
Cash Flows from Investing Activities
Additions To Property, Equipment and
Leasehold Improvements................... (186,406)
Timeshare Notes Receivable................ (874,538)
Inventory--Timeshare Units................ (4,372,174)
Accounts Payable as Related to Inventory.. 109,771
-----------
Cash Used by Investing Activities........... (5,323,347)
-----------
Cash Flows from Financing Activities
Loan from Heller Financial................ 4,237,575
Payments to Heller Financial.............. (314,576)
Loan Acquisition Costs.................... (155,836)
Member Loans.............................. 187,825
Contributions of Capital.................. 1,250,000
-----------
Cash Provided by Financing Activities....... 5,204,988
-----------
Net Increase in Cash........................ 77,540
Cash and Equivalents
Beginning of Period....................... -0-
-----------
End of Period............................. $ 77,540
===========
Supplemental Cash Flow Disclosures:
Interest Paid............................. $ 151,591
===========
See Notes to Financial Statements.
F-17
SUCCESS DEVELOPMENTS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(See Independent Auditors' Report)
Note A--The Company
Success Developments, L.L.C. (the "Company"), is the owner and developer of
Villas of Cave Creek, a timeshare project that contains 25 condominium units.
The Company is in the process of selling the remaining unsold timeshare
interests. The Company is an Arizona Limited Liability Company, organized on
June 10, 1996.
The Company is owned 50% by the managing member Points of Colorado, Inc. and
50% by three individuals who own and operate the company responsible for the
sales and marketing of the timeshare units.
The Company has a finite life, and unless terminated earlier, will cease to
exist fifty years after the date of filing with the state. According to the
laws of the state of Arizona, no member of the limited liability company is
personally liable for any debts or losses of the Company beyond the capital
contribution made by that member.
Note B--Summary of Significant Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in the bank.
Inventory--Timeshare Units
Timeshare inventory is valued at the lower of cost to acquire, develop, and
renovate the project or market. Cost of timeshare units sold is based upon the
combined costs of Villas of Cave Creek inventory allocated to each week.
Allowance for Doubtful Notes
The Company provides an allowance for doubtful notes for those notes held by
the Company, based on a review of the current status of existing receivables
and historical collection experience within the industry.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using
accelerated methods. The estimated lives used in determining depreciation are:
Furniture and Equipment......................... 5-7 years
Leasehold Improvements.......................... 23 months (term of lease)
Maintenance, repairs, and minor renewals are charged to expense as incurred,
whereas improvements and major renewals of facilities are capitalized. Upon
sale or disposition of properties, the asset account is relieved of the cost
and the accumulated depreciation account is charged with depreciation taken
prior to the sale, and any resultant gain or loss is credited or charged to
earnings.
F-18
SUCCESS DEVELOPMENTS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue and Cost Recognition
Revenue from timeshares is recognized upon closing of the sale. Acquisition
and other direct costs and indirect costs related to acquisition and
development of timeshare units are capitalized. Capitalized costs are allocated
to individual timeshare units. The capitalized costs of units are charged to
earnings when the related revenue is recognized. Selling and administrative
costs are charged to earnings when incurred.
Concentration of Credit Risk
Credit risk with respect to timeshare notes receivable is generally
diversified due to the large number of customers and their dispersion across
many different geographic areas of the United States. The Company performs
credit evaluations of its customers' financial condition, and all its notes
receivable are collateralized by the interval units sold.
NOTE C--MEMBERS' EQUITY
The two classes of members are manager and nonmanager. There is no difference
in interests, rights, preferences, and privileges. Equity by class at December
31, 1996 was as follows:
Managing member............................................... $ 549,575
Nonmanaging members........................................... 549,575
----------
Total Members' Equity..................................... $1,099,150
==========
NOTE D--TRANSACTIONS WITH HELLER FINANCIAL
On July 29, 1996, Heller Financial agreed to provide a $10,000,000 loan to
the Company for two years (due on July 28, 1998) of which $3,500,000 was
allocated to the acquisition of Villas of Cave Creek. Interest on the
acquisition portion of the note is variable, and at December 31, 1996 was
10.28%. The Agreement requires the Company to maintain a net worth of $1,000,000
until 90% of the Interval Units are sold, and to pledge as collateral all
Interval Units at Villas at Cave Creek which have not been sold. Under the
provisions, the principal is paid when Interval Units are sold, in the amount of
$3,365 for Whole Interval Units and $1,685 for Biennial Interval Units. All
members have personally guaranteed the note.
The majority of timeshare week sales are financed by notes secured by the
weeks purchased. All of the timeshare notes are pledged on the Heller loan.
Heller advances 87.5% of the principal amount of all timeshare notes. Interest
on the pledged notes is variable, and at December 31, 1996 was 9.78%. All
payments from the collateralized notes go directly to Heller, and monthly
interest charges are added to the loan balance.
NOTE E--LEASES
The Company leases its sales facility under a lease expiring June 30, 1997,
which requires an annual rental fee of $36,000. On or before April 30, 1997, the
Company has the option to extend the lease term to June 30, 1998.
Future minimum rental payments required under the operating lease as of
December 31, 1996 are $18,000 for the year ending December 31, 1997. Total
rental expense for the Company, after reimbursements (see Note H) was $9,200.
NOTE F--ASSOCIATION SUBSIDY
As developer, the Company is required to subsidize the Association for the
cost of operating and maintaining the resort to the extent assessments received
from the timeshare owners fall short of the
F-19
SUCCESS DEVELOPMENTS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Association's financial requirements. During the year ended December 31, 1996,
the Company provided subsidies of $24,084 to the Association.
NOTE G--INCOME TAXES
The Company is classified as a partnership for federal and state income tax
purposes. The Company's net income or loss is allocated among the members in
accordance with the operating agreement. Consequently, a provision for federal
and state income taxes has not been included in the Company's financial
statements.
NOTE H--RELATED PARTY TRANSACTIONS
The Company paid $498,839 for sales commissions to an Arizona company owned
and operated by three members. The Arizona company will reimburse the Company
for the lease expense for the sales facility during the period of sales
operations. At December 31, 1996, the Arizona organization owed the Company
$4,375 for sales expenses.
The Company paid or accrued $60,000 for management services provided by
Points of Colorado, Inc.
NOTE I--DEVELOPMENT STAGE
Although the Company is now in full operation, it was in the development
stage during a portion of the year ended December 31, 1996.
F-20
SUCCESS DEVELOPMENTS, L.L.C.
BALANCE SHEET
JUNE 30, 1997
ASSETS (Unaudited)
Cash and Cash Equivalents $ 79,556
Due From Members 7,875
Timeshare Notes Receivable, Less
Allowance for Doubtful Notes of $109,088 4,536,029
Inventory - Timeshare Units 3,292,799
Prepaid Expenses and Other Assets 340,075
Leasehold Improvements, Less Accumulated Amortization of $76,157 108,404
Furniture and Equipment, Less Accumulated Depreciation of $11,667 38,358
----------
TOTAL ASSETS $8,403,096
==========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Accounts Payable $ 150,569
Customer Deposits 55,503
Note Payable to Heller Financial 5,915,163
Other Liabilities 14,622
Due to Managing Member 391,527
----------
TOTAL LIABILITIES 6,527,384
MEMBERS' EQUITY 1,875,712
----------
TOTAL LIABILITIES AND
MEMBERS' EQUITY $8,403,096
==========
See Notes to Financial Statements.
F-21
SUCCESS DEVELOPMENTS, L.L.C.
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 1997
REVENUES (Unaudited)
Sales - Timeshare Units $ 5,486,812
COST OF SALES
Timeshare Units Sold 1,453,614
Closing Costs 146,657
-----------
1,600,271
-----------
GROSS PROFIT 3,886,541
OTHER EXPENSES
Sales and Marketing 2,549,911
Financing Costs - Net of Interest Income - $181,314 238,366
Association Subsidies - Note F 82,872
Development Costs - Abandoned Project 13,050
General and Administrative 225,780
-----------
3,109,979
-----------
NET INCOME 776,562
BEGINNING MEMBERS' EQUITY 1,099,150
-----------
ENDING MEMBERS' EQUITY $ 1,875,712
===========
See Notes to Financial Statements.
F-22
SUCCESS DEVELOPMENTS, L.L.C.
STATEMENT OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net Loss $ 776,562
Adjustments to Reconcile Net Loss
to Cash Used By Operating Activities:
Depreciation and Amortization 87,707
Reserve for Bad Debts 90,636
(Increase) Decrease In:
Inventory - Timeshare Units 796,325
Due From Members (3,500)
Prepaid Expenses and Other Assets 9,098
Increase (Decrease) In:
Accounts Payable 40,798
Customer Deposits 38,866
Other Liabilities 3,363
-----------
TOTAL ADJUSTMENTS 1,063,293
-----------
CASH GENERATED BY OPERATING ACTIVITIES 1,839,855
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions To Property, Equipment and Leasehold Improvements (48,180)
Origination of Timeshare Notes (4,531,792)
Real Estate Deposits (214,946)
Principal Reductions of Timeshare Notes 761,213
-----------
CASH USED BY INVESTING ACTIVITIES (4,033,705)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan from Heller Financial 3,853,601
Payments to Heller Financial (1,861,437)
Member Loans 203,702
-----------
CASH PROVIDED BY FINANCING ACTIVITIES 2,195,866
-----------
NET INCREASE IN CASH 2,016
CASH AND EQUIVALENTS
Beginning of Period 77,540
-----------
End of Period $ 79,556
===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest Paid $ 281,249
===========
See Notes to Financial Statements.
F-23
SUCCESS DEVELOPMENTS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
Note A - Members' Equity
The two classes of members are manager and nonmanager. There is no
difference in interests, rights, preferences, and privileges. Equity by
class at June 30, 1997 was as follows:
Managing member $ 937,856
Nonmanaging members 937,856
----------
Total Members' Equity $1,875,712
==========
Note B - Transactions with Heller Financial
On July 29, 1996, Heller Financial agreed to provide a $10,000,000
loan to the Company for two years (due on July 28, 1998) of which
$3,500,000 was allocated to the acquisition of Villas of Cave Creek.
Interest on the acquisition portion of the note is variable, and at June
30, 1997 was 10.56%. The Agreement requires the Company to maintain a net
worth of $1,000,000 until 90% of the Interval Units are sold, and to pledge
as collateral all Interval Units at Villas at Cave Creek which have not
been sold. Under the provisions, the principal is paid when Interval Units
are sold, in the amount of $3,365 for Whole Interval Units and $1,685 for
Biennial Interval Units. All members have personally guaranteed the note.
The majority of timeshare week sales are financed by notes secured by
the weeks purchased. All of the timeshare notes are pledged on the Heller
loan. Heller advances 87.5% of the principal amount of all timeshare notes.
Interest on the pledged notes is variable, and at June 30, 1997 was 10.06%.
All payments from the collateralized notes go directly to Heller, and
monthly interest charges are added to the loan balance.
Note C - Leases
The Company leases its sales facility under a lease expiring June 30,
1998, which requires an annual rental fee of $36,000. Lease payments are
made by an Arizona company owned and operated by three members (see
Note D).
Total rental expense for the Company was $13,459.
F-24
Note D - Related Party Transactions
The Company paid $2,470,901 for sales commissions to an Arizona
company owned and operated by three members. The Arizona company also pays
for the lease for the sales facility. At June 30, 1997, the Arizona
organization owed the Company $7,875 for sales expenses.
The Company paid or accrued $90,000 for management services provided
by Points of Colorado, Inc.
F-25
Report of Independent Certified Public Accountants
Board of Directors
The Success Companies
We have audited the accompanying combined balance sheets of The Success
Companies (the Companies) as of March 31, 1996 and 1997, and the related
combined statements of operations, changes in equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Success
Companies at March 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Miami, Florida
August 27, 1997
F-26
The Success Companies
Combined Balance Sheets
March 31 June 30
1996 1997 1997
------------------------------ ------------
(Unaudited)
Assets
Current assets:
Cash $ 84,098 $ 198,311 $ 195,226
Accounts receivable 214,564 804,537 642,373
Due from affiliates 9,501 60,150 55,633
Inventory of vacation ownership intervals - 33,267 32,383
Prepaid expenses and other assets 29,713 89,760 104,910
--------------------------- ----------
Total current assets 337,876 1,186,025 1,030,525
Property and equipment, net of accumulated
depreciation of $55,195, $93,416 and $118,000
at March 31, 1996 and 1997 and June 30, 1997,
respectively 130,272 229,087 237,225
Deferred income taxes 16,048 48,158 48,158
Other assets 14,087 32,041 29,849
--------------------------- ----------
$ 498,283 $1,495,311 $1,345,757
=========================== ==========
Liabilities and equity
Current liabilities:
Current portion of long-term debt $ 58,049 $ 66,511 $ 63,224
Notes payable to affiliates 160,000 280,000 230,000
Accounts payable 66,146 57,795 55,040
Accrued expenses 202,794 650,185 587,533
Due to affiliates 326,947 327,271 298,642
--------------------------- ----------
Total current liabilities 813,936 1,381,762 1,234,439
Long-term debt, net of current portion 10,589 26,669 24,827
Commitments and contingencies
Equity:
Common stock, no par value, 52,500 shares
authorized; 9,500 shares issued and outstanding 24,000 24,000 24,000
Due from officers for stock purchase (24,000) (24,000) (24,000)
Partners' capital/(deficit) retained earnings (326,242) 86,880 86,491
--------------------------- ----------
Total equity (326,242) 86,880 86,491
--------------------------- ----------
Total liabilities and equity $ 498,283 $1,495,311 $1,345,757
=========================== ==========
See accompanying notes.
F-27
The Success Companies
Combined Statements of Operations
Three months ended
Year ended March 31 June 30
1996 1997 1996 1997
---------------------------- ---------------------------
(Unaudited)
Revenues:
Commissions $ 4,288,886 $7,973,693 $1,477,104 $2,556,806
Interest income 10,550 5,161 871 1,650
Other 225,489 461,726 92,880 57,195
--------------------------------------------------------------------
4,524,925 8,440,580 1,570,855 2,615,651
Expenses:
Selling expenses 1,675,328 2,785,844 490,990 808,837
Marketing expenses 2,058,854 3,143,515 526,172 1,109,391
Resort administration 801,128 823,611 90,475 178,700
General and administrative
expenses 845,036 496,892 97,602 195,421
Fees to affiliates 180,000 726,500 35,000 302,500
Depreciation 44,480 50,275 13,020 10,519
Interest expense 12,230 34,031 6,595 10,672
---------------------------- ---------------------------
5,617,056 8,060,668 1,259,854 2,616,040
---------------------------- ---------------------------
(Loss) income before benefit
for income taxes (1,092,131) 379,912 311,001 (389)
Benefit for income taxes (16,048) (32,110) - -
---------------------------- ---------------------------
Net (loss) income $(1,076,083) $ 412,022 $ 311,001 $ (389)
============================ ===========================
See accompanying notes.
F-28
The Success Companies
Combined Statements of Changes in Equity
Due from Partners'
Officers Capital/
Common Stock for Stock Retained
Shares Amount Purchase Earnings Total
-------------------------------------------------------------------------
Balance at April 1, 1995 1,500 $16,000 $(16,000) $ 63,000 $ 63,000
Common stock issued/
capital contributions 8,000 8,000 (8,000) - -
Net loss - - - (1,076,083) (1,076,083)
Add net loss related to
uncombined balance
sheet entities - - - 686,841 686,841
-------------------------------------------------------------------------
Balance at March 31, 1996 9,500 24,000 (24,000) (326,242) (326,242)
Net income - - - 412,022 412,022
Capital contributions - - - 1,100 1,100
-------------------------------------------------------------------------
Balance at March 31, 1997 9,500 24,000 (24,000) 86,880 86,880
Net (loss) (Unaudited) - - - (389) (389)
-------------------------------------------------------------------------
Balance at June 30, 1997
(Unaudited) 9,500 $24,000 $(24,000) $ 86,491 $ 86,491
=========================================================================
See accompanying notes.
F-29
The Success Companies
Combined Statements of Cash Flows
Year ended Three months ended
March 31 June 30
1996 1997 1996 1997
---------------------------- ---------------------------
(Unaudited)
Operating activities
Net (loss) income $(1,076,083) $ 412,022 $ 311,001 $ (389)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 44,480 50,275 13,020 10,519
Net loss related to uncombined balance sheet entities 686,841 -- -- --
Deferred income taxes (16,048) (32,110) -- --
Changes in operating assets and liabilities:
Accounts receivable (214,564) (589,973) (205,437) 162,164
Due from affiliates (8,187) (50,649) (2,007) 4,517
Inventory of vacation ownership intervals -- (33,267) -- 884
Prepaid expenses and other assets (17,684) (60,047) (7,278) (15,150)
Other assets (7,855) (17,954) (174) 2,192
Accounts payable 66,146 (8,351) (32,832) (2,755)
Accrued expenses 197,210 447,391 154,313 (62,652)
Due to affiliates 326,947 324 54,236 (28,629)
---------------------------- ---------------------------
Net cash (used in) provided by operating activities (18,797) 117,661 284,842 70,701
Investing activities
Expenditures for property and equipment (91,720) (149,090) (1,310) (18,657)
---------------------------- ---------------------------
Net cash used in investing activities (91,720) (149,090) (1,310) (18,657)
---------------------------- ---------------------------
Financing activities
Capital contributions -- 1,100 -- --
Proceeds from (repayment of) notes payable to affiliates 100,000 120,000 -- (50,000)
Proceeds from debt 74,036 32,591 -- --
Payments on debts (5,398) (8,049) (3,224) (5,129)
---------------------------- ---------------------------
Net cash provided by (used in) financing activities 168,638 145,642 (3,224) (55,129)
---------------------------- ---------------------------
Net increase (decrease) in cash 58,121 114,213 280,308 (3,085)
Cash at beginning of period 25,977 84,098 84,098 198,311
---------------------------- ---------------------------
Cash at end of period $ 84,098 $ 198,311 $ 364,406 $195,226
============================ ===========================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 5,476 $ 16,730 $ 2,288 $ 5,370
============================ ===========================
Cash paid during the period for taxes $ 33,811 $ -- $ 7,947 $ --
============================ ===========================
See accompanying notes.
F-30
The Success Companies
Notes to Combined Financial Statements
March 31, 1996 and 1997
June 30, 1997 (Unaudited)
1. Description of Business and Principles of Combination
The Success Companies (the Companies) are principally engaged in providing
marketing and sales services of vacation ownership in Colorado and Arizona under
contracts with developers. The Companies have contracts with Success
Developments, LLC, an entity in which the principals of the Companies own a 50%
interest, and Points of Colorado, Inc. which owns a 50% interest in Success
Developments, LLC. Additionally, the Companies operate a nationwide
telemarketing center in Phoenix, Arizona. The Companies also provide management
services, market research, lead sales and vacation certificate sales.
The accompanying combined financial statements include the accounts of The
Success Companies, Inc., Success West Communications, Inc., Data Marketing
Associates, Inc., Success of Colorado, LLC (latest date the LLC can dissolve is
July 25, 2025), Success of Arizona, LLC (latest date the LLC can dissolve is
December 31, 2050), Fiesta Vacations, LLC (latest date the LLC can dissolve is
December 31, 2050), and the operations for the year ended March 31, 1996 of
Success Marketing, Inc. (SMI) and Success Ventures, Inc. (SVI). Fiesta Vacations
began operations on March 1, 1997 but was legally formed on July 16, 1997.
Success of Arizona commenced operations in fiscal 1997. All significant
intercompany accounts and transactions have been eliminated in combination.
Subsequent to March 31, 1997, the shareholders/partners have agreed to sell The
Success Companies to Vistana, Inc. (Vistana). Pursuant to the Purchase and Sales
Agreement, Vistana will acquire the stock of The Success Companies, Inc.,
Success West Communications, Inc., Data Marketing Associates, Inc., Success of
Colorado, LLC, Success of Arizona, LLC, and Fiesta Vacations, LLC. SMI and SVI
are currently inactive and are not part of the Purchase and Sales Agreement.
However, for the year ended March 31, 1996, the operations of SMI and SVI were
significant in relation to the combined operations. Accordingly, the results of
operations for SMI and SVI for the year ended March 31, 1996 have been included
in the accompanying combined financial statements; however, the related combined
balance sheets of these entities at March 31, 1996 and 1997 and June 30, 1997
have not been included in the accompanying balance sheets.
F-31
The Success Companies
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies
Property and Equipment
Property and equipment are recorded at cost and includes furniture, fixtures and
equipment, tenant improvements, vehicles and marketing booths. Depreciation is
recorded using the straight-line method applied to the cost of the assets over
their estimated useful lives of five to seven years.
Revenue Recognition
Commission income is recognized on the accrual basis after a binding sales
contract has been executed, a 10 percent minimum down payment has been received,
the recision period has expired and all credit underwriting standards have been
met. Commission income is based on sales of $10,120,345, $16,876,395, $3,005,729
and $5,410,747 for the years ended March 31, 1996 and 1997 and the three months
ended June 30, 1996 and 1997, respectively.
Income Taxes
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Under Statement No. 109, the liability
method is used in accounting for income taxes where deferred income tax assets
and liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the differences reverse.
Advertising Costs
The Companies expense advertising costs as incurred. Advertising expense,
included in marketing expense in the accompanying statements of operations, were
$647,975, $1,145,415, $184,292 and $323,232 for the years ended March 31, 1996
and 1997 and the three months ended June 30, 1996 and 1997, respectively.
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 amounts reported in the financial statements and accompanying notes.
Accordingly, actual results could differ from those reported.
F-32
The Success Companies
Notes to Combined Financial Statements (continued)
3. Inventory of vacation ownership intervals
On March 25, 1997, the Companies entered into a marketing agreement with a
developer whereby the developer reserved 50 vacation ownership intervals of
their resort inventory for the Companies for $25,000 plus closing fees. The
Companies have the right to sell the reserved inventory for six months and are
entitled to the proceeds net of any closing and marketing costs associated with
the sales.
Subsequent to March 31, 1997, the Companies acquired the intervals from the
developer.
4. Due From/To Affiliates
Due from affiliates represents advances to officers or shareholders of the
Companies and receivables from affiliated entities. Due to affiliates represents
net advances from affiliated entities. Such advances are noninterest bearing.
5. Debt
March 31
1996 1997
----------------------------------
$50,000 line of credit, interest payable monthly
at prime plus 2% (10.25% and 11.25% at March 31,
1996 and 1997, respectively), due on March 31,
1998 guaranteed by the shareholders and officers
of the Companies $50,000 $50,000
Tenant improvement loan, interest at 10% per
annum, payable in monthly principal and interest
installments of $666 through November 2001, at
which time the principal balance and accrued
interest is due. -- 32,591
Other notes payable 18,638 10,589
----------------------------------
68,638 93,180
Less current portion 58,049 66,511
----------------------------------
$10,589 $26,669
==================================
F-33
The Success Companies
Notes to Combined Financial Statements (continued)
5. Debt (continued)
Scheduled principal maturities of line of credit, loans and notes payable are as
follows:
Year ending March 31
1998 $66,511
1999 8,242
2000 6,471
2001 7,148
2002 4,808
-------
$93,180
=======
6. Related Party Transactions
Notes payable to affiliates consist of the following:
March 31 June 30
1996 1997 1997
----------------------------- ----------------
(Unaudited)
Notes payable to shareholders, interest
only, at 12% per annum, payable
monthly through September 30,
1997, at which time the principal
balance is due. $100,000 $200,000 $150,000
Note payable to Strategic Alliance
Marketing, Inc., a related party,
interest only, at 12% per annum,
payable monthly through September
30, 1997, at which time the principal
balance is due. 20,000 20,000
Note payable to Success Marketing, Inc.,
interest at 7% per annum. 60,000 60,000 60,000
----------------------------- ----------------
$160,000 $280,000
$230,000
============================= ================
The note payable to Success Marketing, Inc. is contractually payable in monthly
installments of principal and interest of $1,168 through August 1999. No
payments of principal and interest have been made on the note to date. The
parties intend to settle the note when the Purchase and Sales Agreement becomes
effective. See Note 1.
F-34
The Success Companies
Notes to Combined Financial Statements (continued)
6. Related Party Transactions (continued)
The Companies paid consulting fees of $180,000, $666,500, $35,000 and $262,500
for the years ended March 31, 1996 and 1997 and for the three months ended June
30, 1996 and 1997, respectively, to affiliates and is included in fees to
affiliates expense in the accompanying statements of operations.
Management fees of $60,000 and $40,000 were paid to an affiliate for the years
ended March 31, 1997 and for the three months ended June 30, 1997, respectively,
and is included in fees to affiliates expense in the accompanying statements of
operations.
The Companies received management fees of $30,000 during the year ended March
31, 1997 from an affiliate and is included in other income in the accompanying
statements of operations.
Substantially all commission income represents amounts earned from entities in
which one or more of the principals of the Companies have common ownership
interests.
7. Leases
The Company leases office space and equipment under operating leases expiring in
various years through 2002. Minimum future rentals to be paid under
noncancelable leases with original lease terms greater than one year as of March
31, 1997 for each of the next five years and in the aggregate are as follows:
Year ending March 31
1998 $ 240,431
1999 215,691
2000 211,818
2001 214,700
2002 141,200
----------
$1,023,840
==========
Rental expense under these leases was $870, $81,933, $570 and $59,392 for the
years ended March 31, 1996 and 1997 and for the three months ended June 30, 1996
and 1997, respectively.
F-35
The Success Companies
Notes to Combined Financial Statements (continued)
8. Income Taxes
At March 31, 1996 and 1997, the Companies have net operating loss carryforwards
of approximately $58,046 and $152,486, respectively, that expire in 2011. The
use of a significant portion of these net operating loss carryforwards may be
restricted under Section 382 of the Internal Revenue Code.
The components of the benefit for income taxes are as follows:
Three months ended
Year ended March 31 June 30
1996 1997 1996 1997
--------------------------------- --------------------------------
(Unaudited)
Deferred federal $(16,048) $(32,110) $ -- $ --
================================= ================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The net deferred tax
asset at March 31, 1996 and 1997 is comprised of net operating losses.
The differences between the actual income tax benefit and income taxes computed
by applying the statutory federal income tax rate to loss before income taxes as
follows:
March 31
1996 1997
----------------------------
Amount at statutory federal rate $(17,105) $(40,870)
Meal and entertainment 1,057 1,095
NOL utilization -- 7,665
-----------------------------
$(16,048) $(32,110)
=============================
No taxes have been provided on income from the limited liability companies owned
by the partners. However, such income is included in the combined statements of
operations for the years ended March 31, 1996 and 1997 and for the three months
ended June 30, 1996 and 1997.
F-36
The Success Companies
Notes to Combined Financial Statements (continued)
9. Commitments and Contingencies
Commissions earned and received on vacation ownership sales are subject to
commission refunds in the event of default by the purchaser and are calculated
based on a formula as defined in the Marketing and Sales Agreements.
Accordingly, included in accrued liabilities at March 31, 1996 and 1997 and June
30, 1997 is a reserve for commission refunds of $8,586, $42,239 and $42,602,
respectively.
On July 17, 1995, the Companies entered into an agreement with a contractor for
consulting services relating to generation and/or sale of qualified leads. Under
the agreement, in addition to a base compensation, the contractor was entitled
to 25 percent of the actual collected net proceeds on the sale of lists or
leads. Bonus payments were $32,425, $25,779 and $13,434 for the years ended
March 31, 1996 and 1997 and for the three months ended June 30, 1996,
respectively, and are included in marketing expense in the accompanying
statements of operations. The agreement was terminated on December 31, 1996.
The Success Companies, Inc. is a guarantor of a credit facility with Heller
Financial, Inc. on behalf of Success Development, LLC. Such credit facility
effected on May 20, 1996 consists of a $3.1 million revolving credit acquisition
loan piece and a $10 million receivable loan; however, the aggregate of the two
pieces may not exceed $10 million at any one point in time. The acquisition loan
is secured by a first priority mortgage lien and security interest in the Villas
at Cave Creek Resort. The receivable loan is secured by a first priority lien
and security interest to all notes receivable assigned to Heller Financial, Inc.
and any related accounts and proceeds. The amount outstanding on the loans at
March 31, 1997 and June 30, 1997 is $4,933,243 and $5,883,847, respectively.
A claim for breach of contract has been asserted by a landlord of the Companies
claiming reimbursement in the amount of $55,361 for costs of tenant
improvements, which costs are payable ratably over the life of the lease
pursuant to the lease agreement. The Companies dispute the claims in part on the
basis that they were not given the opportunity to review and approve the
expenditures. The parties have agreed to submit the matter to arbitration. Based
on the information currently available to them, the Companies believe that they
have strong defenses to the complaint and intend to pursue those defenses
vigorously.
F-37
The Success Companies
Notes to Combined Financial Statements (continued)
10. Claims for Commissions Earned
SMI and SVI have asserted claims against All Season Resorts, Inc. (ASR) for
commissions earned of approximately $1,080,000 during the year ended March 31,
1996 pursuant to specific sales and marketing agreements for services provided
to ASR.
No amounts related to this matter have been recorded in the accompanying
statement of operations for the year ended March 31, 1996.
Additional claims have been asserted by SMI and SVI against ASR for breach of
contract, promissory fraud and fraud. ASR has asserted a counterclaim for
damages. There has been no formal discovery in the case and there is no pending
trial date.
The court has granted SMI's Motion to Compel Arbitration and a preliminary
hearing has been scheduled for September 30, 1997. SMI seeks to recover damages
from ASR for ASR's failure and refusal to pay commissions for marketing services
rendered prior to termination of the existing sales and marketing agreement and,
also, for the sixty day termination period for which SMI was denied the
opportunity to market vacation intervals on behalf of ASR.
Based on management's interpretation of the specific sales and marketing
agreements and ASR's ability to pay, management believes it will prevail in its
claims.
F-38
Vistana, Inc. a Florida corporation ("Vistana") purchased the entities
comprising The Success Companies, Success Developments, L.L.C. and Points of
Colorado, Inc. (collectively "Success and Points"). The acquisition was closed
on September 16, 1997 for approximately $24 million in cash, approximately
207,000 shares of common stock at $17.89 per share and approximately 430,000
shares of common stock as contingent consideration. Vistana borrowed funds to
pay the cash portion of the purchase price. Payout of the approximately 430,000
(or 67%) shares is contingent upon Success and Points achieving certain
operating criteria for calendar years 1998 through 2000.
The unaudited pro forma combined balance sheet as of June 30, 1997 presents
the historical consolidated balance sheets of Vistana and Success and Points.
The purchase accounting adjustments, as described in the related notes and
below, are calculated as if the Success and Points acquisition had been
effective June 30, 1997.
The unaudited pro forma combined statement of income for the six months
ended June 30, 1997 and for the year ended December 31, 1996 present the
consolidated results of operations of Vistana and Success and Points. The
purchase accounting and other pro forma adjustments, as described in the related
notes and below, are calculated as if the Success and Points acquisition had
been effective January 1, 1996. In addition, the pro forma statements of
operations give effect to the combination of Vistana's predecessor corporations
and partnerships, conversion of the tax status of those entities and Vistana's
initial public offering as if those events occurred at the beginning of each
respective period. The pro forma adjustments are based upon currently available
information and certain assumptions that Vistana's management believes are
reasonable under current circumstances.
The unaudited pro forma combined financial statements are based on historical
financial statements of Vistana and Success and Points and should be read in
conjunction with their respective financial statements and notes. The pro forma
data is not necessarily indicative of the results of operations or financial
condition of Vistana had these transactions occurred on the dates indicated, nor
the results of future operations. Vistana anticipates cost savings and
additional benefits as a result of certain of the transactions contemplated in
the pro forma financial statements. Such benefits and any other changes that
might have resulted from management of the combined companies have not been
included as adjustments to the pro forma consolidated financial statements.
Certain amounts from the prior periods have been reclassified to conform to the
current presentation.
The unaudited pro forma combined financial statements may change due to
certain changes in the purchase accounting adjustments included in the pro forma
once all valuations of assets and liabilities are final.
F-39
VISTANA, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1997
(Amounts in Thousands Except for Per Share Data)
Historical Pro forma
Historical The Success Companies Acquisition Company
Vistana, Inc. and Points of Colorado adjustments pro forma
------------- ---------------------- ----------- ---------
Cash and cash equivalents $ 9,089 819 -- 9,908
Restricted cash 5,042 -- -- 5,042
Customer mortgages receivable, net 111,129 19,527 -- 130,656
Due from related parties -- -- -- --
Other receivables 3,959 988 -- 4,947
Inventory of Vacation Ownership Interest 20,952 4,787 -- 25,739
Construction in progress 13,001 -- -- 13,001
-------- ------- ------ -------
Total Vacation Ownership Interest 33,953 4,787 -- 38,740
Prepaid expenses and other assets 13,056 984 -- 14,040
Land held for development 7,664 -- -- 7,664
Property and equipment, net 12,966 459 -- 13,425
Deferred income taxes -- -- -- --
Goodwill -- -- 16,895 (a) 16,895
-------- ------ ------ -------
Total assets $196,858 27,564 16,895 241,317
======== ====== ====== =======
F-40
Historical Pro forma
Historical The Success Companies acquisition Company
Liabilities and Stockholders' Equity Vistana, Inc. and Points of Colorado adjustments pro forma
- ------------------------------------ ------------- ---------------------- ----------- ---------
Accounts payable and accrued
liabilities $ 5,401 1,298 873 (b) 7,572
Accrued compensation and benefits 7,524 443 -- 7,967
Customer deposits 7,008 201 -- 7,209
Deferred income taxes 15,217 1,518 1,367 (c) 18,102
Due to related parties -- 285 -- 285
Other liabilities 6,721 907 -- 7,628
Notes and mortgages payable 84,526 9,968 23,885 (d) 118,379
--------- ------ ------ -------
Total liabilities 126,397 14,620 26,125 167,142
Minority interest 4,393 -- -- 4,393
Common stock 188 -- 2 (e) 190
Additional paid-in capital 62,134 -- 3,712 (e) 65,846
Retained earnings 3,746 -- -- 3,746
Equity -- 12,944 (12,944)(f) --
--------- ------ ------ -------
Total stockholders' equity 66,068 12,944 (9,230) 69,782
--------- ------ ------ -------
Total liabilities and
stockholders' equity $ 196,858 27,564 16,895 241,317
========= ====== ====== =======
(a) Reflects goodwill.
(b) Reflects accrued acquisition cost of $873.
(c) Reflects the change in the deferred tax liability due to the acquisition.
(d) Reflects bank borrowings of $23,885 at 8.22% to finance the purchase.
(e) Reflects the issuance of 207,630 shares of common stock at $17.89 per share.
(f) Reflects the elimination of the investment in purchased companies' equity.
F-41
VISTANA, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
Six months ended June 30, 1997
(Amounts in Thousands Except for Per Share Data)
Combination
Transactions/
Initial
Public Offering Historical Pro forma
Historical Pro forma The Success Companies Acquisition Pro forma
Vistana, Inc adjustments Subtotal and Points of Colorado adjustments total
------------ ------------ -------- ---------------------- ----------- -----
Revenues:
Vacation Ownership Interest Sales $ 40,083 - 40,083 11,462 - 51,545
Interest 8,923 - 8,923 1,036 - 9,959
Resort 8,050 - 8,050 6 - 8,056
Telecommunications 3,195 - 3,195 - - 3,195
Other 246 - 246 1,040 - 1,286
---------- ---------- -------- -------- --------- --------
Total revenue 60,497 - 60,497 13,544 - 74,041
---------- ---------- -------- -------- --------- --------
Costs and operating expenses:
Vacation Ownership Interests cost of
sales 9,276 - 9,276 2,983 - 12,259
Sales and marketing 18,287 - 18,287 5,809 - 24,096
Loan portfolio:
Interest expense - treasury 3,130 (358)(a) 2,772 340 982(f) 4,094
Provision for doubtful accounts 2,809 - 2,809 177 - 2,986
Resort 6,562 - 6,562 - - 6,562
Telecommunications 2,580 - 2,580 - - 2,580
General and administrative 4,957 - 4,957 1,510 - 6,467
Depreciation and amortization 1,412 - 1,412 - 420(d) 1,832
Interest expense - other 1,071 (356)(a) 715 - - 715
Other 1,470 - 1,470 96 - 1,566
---------- ---------- -------- -------- --------- --------
Total costs and operating expenses 51,554 (714) 50,840 10,915 1,402 63,157
---------- ---------- -------- -------- --------- --------
Operating Income 8,943 714 9,657 2,629 (1,402) 10,884
Excess value recognized 36 - 36 - - 36
Minority interest income 50 - 50 - - 50
---------- ---------- -------- -------- --------- --------
Income before income taxes 9,029 714 9,743 2,629 (1,402) 10,970
Provision for income taxes 2,803 900 (b) 3,703 695 (229)(e) 4,169
Non-recurring charge associated with
the change in tax status 13,201 (13,201)(c) - - - -
---------- ---------- -------- -------- --------- --------
Net income (loss) before
extraordinary item $ (6,975) 13,015 6,040 1,934 (1,173) 6,801
========== ========== ======== ======== ========= ========
F-42
Combination
Transactions/
Initial
Public Offering Historical Pro forma
Historical Pro forma The Success Companies Acquisition Pro forma
Vistana, Inc. adjustments Subtotal and Points of Colorado adjustments total
------------ ------------- -------- ---------------------- ----------- ---------
Historical net income $ (0.40)
(loss) per share before ===========
extraordinary item
Historical weighted average 17,317,956
shares outstanding ===========
Pro forma net income 0.32 0.36
per share of common stock ========== ==========
Pro forma weighted average
shares of common stock 1,482,044 18,800,000 207,630 19,007,630
outstanding ========== ========== ======= ==========
(a) Reflects the effect on the 1997 historical statement of income of the
assumed issuance of common stock on January 1, 1997 and the reduction of
interest expense with the early retirement of $38.9 million of debt.
(b) Reflects the effect on the 1997 historical statement of income referred to
in (a) above and assumes the Company had been treated as a C corporation,
rather than the treatment of the Company's predecessors as S corporations
and limited partnerships for federal income tax purposes.
(c) Reflects the elimination of the non-recurring charge for deferred taxes
that relate to the conversion of the tax status of the Company's
predecessor entities.
(d) Reflects amortization of goodwill.
(e) Reflects the effect on the 1997 historical statement of income and assumes
all of the Success entities had been treated as C corporations, rather than
the treatment of the Companies as LLC's for federal income tax purposes.
(f) Reflects interest expense on bank borrowings of approximately $24 million
at 8.22%.
F-43
VISTANA, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 1996
(Amounts in Thousands Except for Per Share Data)
Combination
Transactions/ Historical
Initial Public The Success
Offering Companies and Pro forma
Historical Pro forma and Points Acquisition Pro forma
Vistana, Inc. adjustments Subtotal of Colorado adjustments total
------------- ------------ -------- ------------ ----------- -----
Revenues:
Vacation Ownership Interest Sales $60,063 - 60,063 14,062 - 74,125
Interest 15,546 - 15,546 1,083 - 16,629
Resort 13,587 - 13,587 119 - 13,706
Telecommunications 7,054 - 7,054 - - 7,054
Other 686 - 686 685 - 1,371
------- ------- ------- ------- ------- -------
Total revenue 96,936 - 96,936 15,949 - 112,885
------- ------- ------- ------- ------- -------
Costs and operating expenses:
Vacation Ownership Interests Cost of sales 14,595 - 14,595 3,351 - 17,946
Sales and marketing 27,877 - 27,877 5,967 - 33,844
Loan portfolio:
Interest expense - treasury 6,865 (961)(a) 5,904 199 1,963(e) 8,066
Provision for doubtful accounts 4,271 - 4,271 185 - 4,456
Resort 11,089 - 11,089 - - 11,089
Telecommunications 5,613 - 5,613 - - 5,613
General and administrative 7,873 - 7,873 2,245 - 10,118
Depreciation and amortization 2,553 (258)(a) 2,295 - 828(c) 3,123
Interest expense - other 4,154 (3,189)(a) 965 - - 965
Deferred executive compensation 1,114 - 1,114 - - 1,114
Other 443 - 443 89 - 532
------- ------- ------- ------- ------- -------
Total costs and operating expenses 86,447 (4,408) 82,039 12,036 2,791 96,866
------- ------- ------- ------- ------- -------
Operating income 10,489 4,408 14,897 3,913 (2,791) 16,019
Excess value recognized 105 - 105 - - 105
------- ------- ------- ------- ------- -------
Income before income taxes 10,594 4,408 15,002 3,913 (2,791) 16,124
Provision for income taxes - 5,382(b) 5,382 204 541(d) 6,127
------- ------- ------- ------- ------- -------
Net income (loss) $10,594 (974) 9,620 3,709 (3,332) 9,997
======= ======= ======= ======= ======= =======
F-44
Combination
Transactions/
Initial
Public Offering Historical Pro-forma
Historical Pro-forma The Success Companies Acquisition Pro forma
Vistana, Inc. Adjustments Subtotal and Points of Colorado Adjustments total
Historical net income $ 0.75
per share of common stock ===========
Historical weighted average 14,175,000
shares outstanding ===========
Pro forma income 0.51 0.53
per share of common stock ========== ==========
Pro forma weighted average
share of common stock 1,482,044 18,800,000 207,630 19,007,630
outstanding ========= ========== ======= ==========
(a) Reflects the effect on the 1996 historical statement of income of the
assumed issuance of common stock on January 1, 1996 and the reduction of
interest expense with the early retirement of $38.9 million of debt.
(b) Reflects the effect on the 1996 historical statement of income referred to
in (a) above and assumes the Company had been treated as a C corporation,
rather than the treatment of the Company's predecessors as S corporations
and limited partnerships for federal income tax purposes.
(c) Reflects amortization of goodwill.
(d) Reflects the effect on the 1996 historical statement of income and assumes
all of the Success entities had been treated as C corporations, rather than
the treatment of the Companies as LLC's for federal income tax purposes.
(e) Reflects interest expense on bank borrowings of approximately $24 million
at 8.22%.
F-45
NOTE A. BASIS OF PRESENTATION
Vistana and Success and Points announced an agreement in principle on August 15,
1997 for Vistana to acquire all of the outstanding common stock and equity
interests of Success and Points for approximately $28.4 million in cash and
common stock, and contingent consideration of approximately 430,000 shares of
common stock (see Note C). The transaction closed on September 16, 1997. The
purchase method of accounting will be followed and is assumed in the
accompanying pro forma financial information.
The acquisition was financed in part by a $24 million debt facility at an
interest rate of LIBOR plus 250 basis point (8.22% at September 16, 1997).
The historical statements of operations for Success and Points for the year
ended December 31, 1996 and for the six months ended June 30, 1997 include
companies whose year ends were converted from March 31, to conform to Vistana's
year end of December 31.
NOTE B. Goodwill
Following is a calculation of goodwill:
Acquisition Costs: ($ amounts in thousands)
---------------- ------------------------
Cash $ 23,885
Stock (207,630 at $17.89 per share)* 3,714
Cost of acquisition 873
--------
Subtotal 28,472
Fair value of assets acquired (11,577)
-------
Goodwill $ 16,895
========
*Does not consider contingent consideration of approximately 430,000 shares of
common stock (see Note C).
At this time, Vistana's management believes that the fair value of net assets
acquired approximates the acquired companies' book value.
F-46
NOTE C. CONTINGENT CONSIDERATION
Payout of approximately 430,000 (or 67%) of the shares is contingent upon
Success and Points achieving certain contingent criteria. In each of the
calendar years 1998 through 2000 upon satisfying certain net proceeds from sales
levels as set forth in the Agreement and Plan of Reorganization dated August 15,
1997, a portion of the contingent consideration can be earned by the selling
parties. Management of Vistana has determined that the contingent consideration
is an additional cost of the acquisition, rather than compensatory expense. In
addition, such contingent shares are not assumed to be outstanding in the
accompanying pro forma financial statements as the amount is not recorded until
the contingent criteria have been met. If the contingent criteria are met and
the shares are distributed, Vistana shall record the current fair value of the
shares as an additional cost of the purchase. The potentially affected assets,
most notably goodwill, shall be amortized over the remaining life of the assets.
The estimated impact on future earnings through the amortization of goodwill
would be approximately $380,000 per year assuming a stock price of $17.89 and
assuming all of the contingent shares are earned. This adjustment will change
based upon the fair value of the stock at the time the contingent shares are
earned and the number of shares earned.
NOTE D. AMORTIZATION PERIOD OF GOODWILL
The goodwill as a result of the acquisition of Success and Points will be
amortized over a 20 year period.
NOTE E. INCOME TAXES
The pro forma total effective income tax rate was assumed to be 38%.
F-47