UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-29114
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VISTANA, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-3415620
(State of Incorporation) (IRS Employer Identification Number)
8801 Vistana Centre Drive
Orlando, Florida 32821
(Address of Principal Executive Offices and Zip Code)
(407) 239-3100
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of the issuer's Common Stock, par value $.01 per
share, as of May 7, 1998: 21,091,545 shares.
This quarterly report on Form 10-Q contains 16 pages, of which this is page 1.
1
VISTANA, INC. AND SUBSIDIARIES
Index
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, as of March 31, 1998 (unaudited) and
December 31, 1997 Page 3
Condensed Consolidated Statements of Income for the three month periods ended
March 31, 1998 and 1997 (unaudited) Page 4
Condensed Consolidated Statement of Cash Flow for the three month periods ended
March 31, 1998 and 1997 (unaudited) Page 5
Notes to Condensed Consolidated Financial Statements (unaudited) Page 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 10
Part II Other Information
Item 1. Legal Proceedings Page 16
None
Item 2. Changes in Securities Page 16
None
Item 3. Defaults upon Senior Securities Page 16
None
Item 4. Submission of Matters to a Vote of Security Holders Page 16
None
Item 5. Other Information Page 16
None
Item 6. Exhibits and Reports on Form 8-K Page 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISTANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
March 31, December 31,
1998 1997
---------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 15,686 $ 9,878
Restricted cash 14,538 9,196
Customer mortgages receivable, net 166,588 155,048
Other receivables, net 7,298 4,953
Inventory of Vacation Ownership Interests 30,063 27,271
Construction in progress 27,329 17,026
---------- ------------
Total Vacation Ownership Interests 57,392 44,297
---------- ------------
Prepaid expenses and other assets 16,613 15,021
Land held for development 13,729 13,840
Intangible Assets, net 18,109 17,275
Property and equipment, net 20,488 17,701
---------- ------------
Total Assets $330,441 $287,209
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 13,737 $ 9,276
Income taxes payable 1,445 1,927
Accrued compensation and benefits 8,111 9,847
Customer deposits 12,683 9,423
Deferred income taxes 19,617 17,535
Other liabilities 8,978 6,265
Notes and mortgages payable 137,827 109,547
---------- ------------
Total Liabilities 202,398 163,820
Minority interest 3,690 3,984
Shareholder's Equity
Common stock, $.01 par value:
Authorized 100,000,000 shares
Issued and outstanding 21,029,427 shares and 18,800,000
at March 31, 1998 and March 31, 1997, respectively 211 210
Additional paid-in capital 108,809 107,341
Retained earnings 15,333 11,854
---------- ------------
Total Shareholder's Equity 124,353 119,405
---------- ------------
Total Liabilities and Shareholder's Equity $330,441 $287,209
========== ============
See accompanying notes to condensed consolidated financial statements.
3
VISTANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
Revenues:
Vacation Ownership Interest sales $ 33,535 $ 18,246
Interest 6,085 4,445
Resort 4,592 3,886
Telecommunications 2,043 1,583
Other 931 143
---------- ----------
Total revenues 47,186 28,303
---------- ----------
Costs and operating expenses:
Vacation Ownership Interests cost of sales 7,048 4,217
Sales and marketing 16,945 8,581
Interest expense -- treasury 2,188 1,775
Provision for doubtful accounts 2,482 1,282
Resort 3,757 3,158
Telecommunications 1,647 1,271
General and administrative 4,595 2,362
Depreciation and amortization 1,180 708
Interest expense -- other 373 760
Other 1,684 790
---------- ----------
Total costs and operating expenses 41,899 24,904
---------- ----------
Operating income 5,287 3,399
Excess value recognized 30 18
Minority interest 294 79
---------- ----------
Income before income taxes and extraordinary item 5,611 3,496
Provision for income taxes 2,132 700
Non-recurring charge associated with the change of
tax status -- 13,201
---------- ----------
Income (Loss) before extraordinary item 3,479 (10,405)
Extraordinary item early extinguishment of debt (net of tax) -- (825)
---------- ----------
Net income (loss) $ 3,479 ($11,230)
=========== ==========
Per Share Data:
Basic
Income (loss) per share before extraordinary item $.17 ($0.66)
Extraordinary item -- ($0.05)
---------- ----------
Net income (loss) per share $.17 ($0.71)
=========== ==========
Weighted average number of shares outstanding: 21,015,112 15,819,444
=========== ==========
Diluted
Income (loss) per share before extraordinary item $.16 ($0.66)
Extraordinary item -- ($0.05)
---------- ----------
Net income (loss) per share $.16 ($0.71)
=========== ==========
Weighted average number of shares outstanding: 21,629,749 15,819,444
=========== ==========
Pro Forma Data:
Income before income taxes $ 3,496
Income tax provision 1,325
Net income 2,171
==========
Net income per share $.12
==========
Weighted average number of shares outstanding 18,800,000
==========
See accompanying notes to condensed consolidated financial statements.
4
VISTANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income (Loss) $ 3,479 $(11,230)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense 1,180 708
Amortization of discount on customer mortgages
receivable (412) (765)
Provision for doubtful accounts 2,482 1,282
Minority interest (294) (79)
Deferred income taxes 2,082 13,394
Changes in operating assets and liabilities:
Other receivables, net (2,345) 315
Vacation ownership interest (12,984) (4,228)
Prepaid expenses and other assets (2,012) 1,624
Accounts payable and accrued liabilities 4,461 66
Income taxes payable (482) --
Accrued compensation and benefits (1,736) (2,595)
Customer deposits 3,260 860
Other liabilities 2,713 1,132
------- -------
Net cash provided (used) by operating activities (608) 484
------- -------
INVESTING ACTIVITIES
Expenditures for land, property and equipment (3,429) (849)
Origination of customer mortgages receivable (13,610) (5,032)
Additions to restricted cash (5,342) (2,078)
------- -------
Net cash used in investing activities (22,381) (7,959)
------- -------
FINANCING ACTIVITIES
Proceeds from notes and mortgages payable 74,497 17,593
Payments on notes and mortgages payable (46,218) (49,301)
Proceeds from exercised stock options 518 --
Proceeds from public offering -- 51,615
Costs of public offering -- (2,150)
Equity distributions -- (2,245)
------- -------
Net cash provided (used) by financing activities 28,797 15,512
------- -------
Net increase in cash and cash equivalents $ 5,808 $ 8,037
======= =======
Cash and cash equivalents, beginning of period $ 9,878 $ 6,134
Cash and cash equivalents, end of period $ 15,686 $ 14,171
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,370 $ 2,436
Taxes 532 --
See accompanying notes to condensed consolidated financial statements.
5
VISTANA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. General
Vistana, Inc. and its consolidated subsidiaries (the "Company") generate
revenues from the sale and financing of Vacation Ownership Interests ("VOI's")
in its resort properties which typically entitle the buyer to ownership of a
fully-furnished unit for a one week period on an annual or an alternate-year
basis. The Company's principal operations consist of (1) constructing,
furnishing, marketing, selling and financing the sale of VOI's, and (2) managing
the operations of its resorts and related amenities. The Company sells VOI's to
both domestic and foreign purchasers. All contracts relating to the sale of
VOI's are denominated in U. S. dollars.
The condensed consolidated financial statements shown herein for the Company and
its consolidated subsidiaries for each respective period include the operations
of its predecessors in interest. The Company became the parent company for all
of the operations of its predecessors in connection with its initial public
offering (the "Initial Offering") completed on February 28, 1997. At March 31,
1998 and 1997, the consolidated financial statements of the Company include the
accounts of the Company and its consolidated subsidiaries and two partnerships
between one or more subsidiaries and unaffiliated third party partners wherein
the Company exercises operational and financial control over such partnerships.
Interests of unaffiliated third parties are reflected as minority interests.
The condensed consolidated financial statements of the Company as of and for the
three months ended March 31, 1998 have not been audited. In the opinion of
management, the unaudited condensed consolidated financial statements include
all adjustments and accruals (consisting of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position at
March 31, 1998 and the consolidated results of its operations for the three
months ended March 31, 1998 and 1997. Results for interim periods are not
necessarily indicative of the results to be expected during the remainder of the
current year or for any future period. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted or condensed.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The accounting policies used in preparing these condensed
consolidated financial statements are the same as those described in the
Company's Annual Report on Form 10-K and the consolidated financial statements
incorporated by reference therein.
Note 2. Effect of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" which simplifies the calculation of earnings per share. Basic earnings
per share ("EPS") excludes dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue Common Stock were
exercised and shared in the earnings of the Company. The Company adopted this
Standard in December 1997. For the three months ended March 31, 1998,
approximately 0.6 million net shares relative to options granted were considered
dilutive after giving effect for taxes and the application of the treasury stock
method and were included in the diluted EPS calculation. An additional .03
million shares were considered anti-dilutive and therefore excluded from the
diluted EPS calculation.
In 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which
addresses the reporting requirements for presenting comprehensive income in
interim and annual 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. Compliance with this
Statement is effective for fiscal years beginning after December 31, 1997. For
the three months ended March 31, 1998, the Company had no amounts considered as
"other" comprehensive income in accordance with SFAS No. 130. Therefore,
comprehensive income is equivalent to net income as reported on the face of the
statement of income.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" which establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements. This Statement requires reporting of selected
information about operating segments. This Statement is effective for fiscal
years beginning after December 15, 1997, although it is not required for interim
financial statements in the initial year of application. This Statement will not
have a material impact on the Company.
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP
98-5). SOP 98-5 is applicable to all nongovernmental entities
6
and requires that costs of start-up activities, including organization costs, be
expensed as incurred. Except for certain specified investment companies, SOP 98-
5 is effective for financial statements for fiscal years beginning after
December 15, 1998. This Statement will not have a material impact on the
Company.
Note 3. Capital Transactions and Basis of Presentation
The Company became the parent for all of the operations of its predecessors in
connection with the Initial Offering. At the time of the Initial Offering each
of the owners of the predecessor entities (the "Principal Shareholders")
transferred to the Company all of the existing common stock and partnership
interests owned by them in exchange for 14.2 million shares (20 shares of the
Common Stock of Vistana, Inc. were outstanding at the time of the Initial
Offering) of the Company (the "Formation Transactions"). A total of 5.6 million
shares of the Common Stock of the Company were offered (4.6 million shares by
the Company and 0.9 million shares by the Principal Shareholders) to the public
in the Initial Offering. In addition, in connection with the Initial Offering
and the Formation Transaction, former equity holders of the Company's
predecessor corporations and limited partnerships received a distribution of
approximately $2.6 million, $0.3 million of which represented the balance of
such holders' federal and state income tax liability attributable to their
ownership of such entities through the date of the Initial Offering, and $2.3
million of which represented the retained earnings of the Company's predecessor
corporations and limited partnerships for which such holders had previously paid
income tax. The Formation Transactions were accounted for as a reorganization of
entities under common control in a manner similar to a pooling of interests.
Accordingly, the net assets of the predecessor corporations and limited
partnerships were recorded at the predecessor entities' basis.
The majority of the consolidated subsidiaries were formed in 1991 by the
principal shareholders to acquire and own, either directly or indirectly, the
assets and certain liabilities of the predecessor operating entities from the
previous owner. The consolidated financial statements shown herein for the
Company and its consolidated subsidiaries for each respective period include the
operations of its predecessors in interest.
Pro forma (unaudited) financial data presented on the face of the condensed
consolidated statement of income for the three months ended March 31, 1997
reflect the elimination of the non-recurring charge for deferred taxes
pertaining to the predecessor entities relative to all years prior to 1997.
Note 4. Customer Mortgages Receivable, Net
At March 31, 1998 and December 31, 1997, customer mortgages receivable, net,
consisted of:
March 31, December 31,
1998 1997
--------- ------------
(In thousands)
Customer mortgages receivable, gross $182,493 $170,147
Less:
Unamortized discount on repurchased customer mortgages receivable (2,066) (2,478)
Unamortized excess value over consideration (15) (27)
Allowance for loss on receivables (13,824) (12,594)
-------- --------
Customer mortgages receivable, net $166,588 $155,048
======== ========
As of March 31, 1998 and December 31, 1997, customer mortgages receivable,
gross, from foreign buyers aggregated approximately $36.3 million and $34.5
million, respectively, with buyers within no individual foreign country
aggregating more than 5% of gross outstanding customer mortgages receivable.
Stated interest rates on customer mortgages receivable outstanding at March 31,
1998 range from 00.0% to 17.9% per annum (averaging approximately 14.25% per
annum contractually). Interest is not imputed on customer mortgages receivable
with less than a market interest rate because such amounts are immaterial. The
activity in the customer mortgages receivable allowance for doubtful accounts is
as follows:
March 31, March 31,
1998 1997
--------- ---------
(In thousands)
Balance, beginning of period $12,594 $10,191
Provision for doubtful accounts 2,482 1,282
Customer mortgages receivable charged off (1,252) (1,512)
------- -------
Balance, end of period $13,824 $ 9,961
======= =======
7
Note 5. Notes and Mortgages Payable
At March 31, 1998 and December 31, 1997 notes and mortgages payable consisted
of:
March 31, December 31,
1998 1997
---- ----
(In thousands)
Notes payable secured by customer mortgages receivable bearing interest at
rates which include fixed interest of 11.34% and variable rates ranging from
prime plus 1.5% (10% at March 31, 1998), prime plus 2% (10.5% at March 31,
1998) LIBOR plus 2.5% (8.18% at March 31, 1998) and LIBOR plus 1% (6.68% at
March 31, 1998) $ 93,665 $ 79,202
Notes payable and mortgage obligations secured by real estate bearing interest
at variable rates which include prime plus 2%, LIBOR plus 3.25% (8.93% at
March 31, 1998) and fixed interest at 8.2% 33,917 27,527
Other notes and mortgage loans payable bearing primarily variable interest at
rates which include LIBOR plus 2.25% (7.93% at March 31, 1998) and prime plus 2% 10,245 2,818
-------- --------
Total notes and mortgages payable: $137,827 $109,547
======== ========
During the quarter ended March 31, 1997, the Company repaid $39.7 million of
debt and related interest and prepayment penalties in connection with the
Initial Offering. The Company recorded an expense relating to the write-off of
previously capitalized fees and prepayment penalties of $0.8 million, net of
related tax benefits of $0.5 million.
Note 6. Income Taxes
Upon completion of the Initial Offering, the Company became subject to federal
and state income taxes from the effective date of the sale of the Common Stock.
In addition, during the quarter ended March 31, 1998, the Company was required
to provide a deferred tax liability for cumulative temporary differences between
financial reporting and tax reporting in its consolidated statements of income
for the period following the effective date of the Initial Offering. Such
deferred taxes were based on the cumulative temporary differences at the date of
the Initial Offering and totaled $13.2 million.
The Company reports most of its sales of VOI's on the installment method for
federal income tax purposes. As a result, the Company does not recognize taxable
income on these sales until the installment payments have been received from the
Company's customers. In 1997, the Company became subject to the Alternative
Minimum Tax ("AMT") as a result of the deferred income which results from the
installment sales method. In 1998, the Company will continue to be subject to
state and federal AMT.
Under Section 453(l) of the Internal Revenue Code, interest may be imposed on
the amount of tax attributable to the installment payments on customer mortgages
receivable for the period beginning on the date of sale and ending on the date
the related tax is paid. If the Company is otherwise not subject to pay tax in a
particular year, no interest is imposed since the interest is based on the
amount of tax paid in that year. The Company has not included a provision for
this interest, as it is not currently subject to the tax. However, in the future
it may become so. The Company continues to monitor its tax provision and may
adjust it to provide for this interest in the future.
Note 7. Stock Plans
The Vistana, Inc. Stock Plan (the "Stock Plan") was adopted by the Company's
shareholders in December 1996, prior to the Initial Offering. As of March 31,
1998, the Stock Plan covered 1.9 million shares of Common Stock. The Stock Plan
permits the Company to grant to employees, directors, officers, and consultants
of the Company and its subsidiaries and affiliates: (i) incentive stock options
("ISOs"); (ii) non-qualified stock options ("NSOs"); (iii) stock appreciation
rights; (iv) phantom stock awards; and (v) restricted stock. An amendment
increasing the number of shares covered by the Stock Plan to 2.5 million was
approved by the shareholders and became effective on April 30, 1998. The Stock
Plan is administered by the Compensation Committee of the Board of Directors,
which also selects the individuals who receive grants under the plan. As of
March 31, 1998, the only grants that had been made under the Stock Plan were
NSOs.
8
In connection with the Initial Offering, the Principal Shareholders granted
certain executive officers and other employees of and a consultant to the
Company (i) immediately exercisable options to purchase an aggregate of 1.4
million shares of Common Stock at an exercise price equal to $12 per share, (ii)
an option, which vests on February 10, 2001, to purchase an aggregate of .04
million shares of Common Stock at an exercise price equal to $12 per share,
(iii) an option, which vests over a period of four years, to purchase 0.4
million shares of Common Stock at an exercise price equal to $24.62 per share,
and (iv) an option, which vests over a period of four years, to purchase an
aggregate of .04 million shares of Common Stock at an exercise price equal to
$24.25 per share. These options will terminate ten years after the date of
grant, subject to certain exceptions. The shares covered by these options were
included in shares issued and outstanding as of March 31, 1998 and December 31,
1997.
Effective October 1, 1997, the Company adopted the Vistana, Inc. Employee Stock
Purchase Plan (the "Purchase Plan") to assist employees in acquiring a stock
ownership interest in the Company and to encourage employees to remain in the
employ of the Company. The Purchase Plan meets the requirements of an "employee
stock purchase plan" pursuant to section 423 of the Internal Revenue Code. A
maximum of 1 million shares of Common Stock is reserved for issuance under the
Purchase Plan. The first purchase period under the Purchase Plan will occur
subsequent to March 31, 1998.
9
Note 8. Pro Forma Information
VISTANA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THREE MONTHS ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
March 31, 1997
-----------------------------------------
Pro Forma
Actual Adjustments Pro Forma
-------- ----------- ----------
Revenues:
Vacation Ownership Interest sales $ 18,246 $18,246
Interest 4,445 4,445
Resort 3,886 3,886
Telecommunications 1,583 1,583
Other 143 143
-------- ----------
Total revenues 28,303 28,303
Costs and operating expenses:
Vacation Ownership Interest cost of sales 4,217 4,217
Sales and marketing 8,581 8,581
Interest expense - treasury 1,775 (358) (a) 1,417
Provision for doubtful accounts 1,282 1,282
Resort 3,158 3,158
Telecommunications 1,271 1,271
General and administrative 2,362 2,362
Depreciation and amortization 708 708
Interest expense - other 760 (356) (a) 404
Other 790 790
-------- ----------- ----------
Total costs and operating expenses 24,904 (714) 24,190
-------- ----------- ----------
Operating income 3,399 714 4,113
Excess value recognized 18 18
Minority interest 79 79
-------- ----------- ----------
Income before income taxes and extraordinary item 3,496 714 4,210
Provision for taxes - regular (700) (900) (b) (1,600)
Non-recurring charge (13,201) 13,201 (c) 0
-------- ----------- ----------
Income (Loss) before extraordinary item (10,405) 13,015 2,610
Extraordinary item (net of tax) (825) 825 (d) 0
-------- ----------- ----------
Net income ($11,230) $13,840 $ 2,610
======== =========== ==========
Pro forma earnings per share - diluted $ 0.14
-------
Pro forma weighted average shares of common
stock outstanding - diluted 18,800,000
==========
(a) Reflects the Company's Initial Offering and related reduction of interest
expense with the early retirement of debt as if these events had occurred
at the beginning of the period.
(b) Reflects the treatment of the Company as a C corporation for federal income
tax purposes as of the beginning of the period.
(c) Reflects the elimination of the non-recurring charge for deferred taxes
that relate to the conversion of tax status for the Company's predecessor
entities.
(d) Reflects the elimination of the extraordinary items related to the early
extinguishments of debt, net of taxes, referred to in (a) above.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations is derived from
the condensed consolidated statements of income for the three months ended March
31, 1998 and March 31, 1997.
Three Months Ended
March 31
1998 1997
------ ------
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES:
VOI sales 71.1% 64.5%
Interest 12.9% 15.7%
Resort 9.7% 13.7%
Telecommunications 4.3% 5.6%
Other 2.0% 0.5%
------ ------
Total revenues 100.0% 100.0%
====== ======
AS A PERCENTAGE OF VOI SALES:
VOI cost of sales 21.0% 23.1%
Sales and marketing 50.5% 47.0%
Provision for doubtful accounts 7.4% 7.0%
AS A PERCENTAGE OF INTEREST REVENUES:
Loan portfolio:
Interest expense - treasury 36.0% 39.9%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative 9.7% 8.3%
Depreciation and amortization 2.5% 2.5%
Interest expense - other .8% 2.7%
Other 3.6% 2.8%
Total costs and operating expenses 88.8% 88.0%
AS A PERCENTAGE OF RESORT REVENUES:
Resort expenses (1) 81.8% 81.3%
AS A PERCENTAGE OF TELECOMMUNICATION REVENUES:
Telecommunications expenses (1) 80.6% 80.3%
SELECTED OPERATING DATA:
Number of resorts at end of period 6 3
Number of VOI's sold (2) 3,456 1,842
Number of VOI's in inventory at period end (3) 15,115 14,915
Average sales price per VOI sold $9,703 $9,905
- ----------
(1) Does not include interest and depreciation expenses.
(2) Includes both sales of annual and alternate-year VOI's.
(3) Inventory classified as annual VOI's.
11
Comparison of the three months ended March 31, 1998 to the three months ended
March 31, 1997.
Revenue:
For the three months ended March 31, 1998, the Company recognized total revenues
of $47.2 million compared to $28.3 million for the three months ended March 31,
1997, an increase of $18.9 million, or 66.8%. This increase is primarily due to
a $15.3 million increase in sales of Vacation Ownership Interests (VOI's) from
$18.2 million during 1997 to $33.5 million during 1998, an increase of 84.1%.
VOI sales increased due to an 87.6% increase in the number of VOI's sold, offset
slightly by a 2.0% decrease in the average sales price (which was primarily due
to a broader product mix and alternate year VOI's). The increase in VOI's sold
primarily resulted from the contribution of the Company's western operations
acquired in a September 1997 transaction accounted for as a purchase, increases
in VOI sales at the Company's Orlando area resorts and its international
division, and VOI sales at the Myrtle Beach and World Golf Village resorts
included in sales for the three month period in 1998, but not in the comparable
period in 1997.
Interest income increased 38.6% to $6.1 million from $4.4 million due to a 7.5%
increase in the average principal amount of net customer mortgages receivable
from $155.0 million to $166.6 million. Also included in interest income is the
discount amortization on customer mortgages receivable recognized during the
three month periods ended March 31, 1998 and March 31, 1997 of $0.4 million and
$0.5 million, respectively, relating to the repurchase of customer mortgages
receivable. This discount resulted from a 1995 transaction in which the Company
re-acquired customer mortgages receivable (pursuant to a related clean up call
provision) which had been previously sold in 1991 as well as recognition of a
discount on certain customer mortgages receivable repurchased in 1996 (also
pursuant to a related clean up call provision) from an investment partnership.
As of March 31, 1998, $2.1 million of total unamortized discount remained and is
expected to be recognized through 2000.
Resort revenue increased 17.9%, from $3.9 million to $4.6 million, as a result
of the increase in resort operating locations as well as increased room rentals
and room rates. Telecommunication revenues (guest telephone charges relating to
the existing resorts and revenues from contracting services provided to third
parties) increased 25.0% from $1.6 million at March 31, 1997 to $2.0 million at
March 31, 1998, due primarily to increased telephone usage by resort guests.
Other revenue increased $.8 million as a result of the inclusion of revenue for
a guest service and marketing company acquired in November 1997 in a
transaction accounted for as a purchase.
Costs and Operating Expenses:
Operating costs and expenses increased 68.3% to $41.9 million from $24.9
million, an increase as a percentage of total revenues from 88.0% in 1997 to
88.8% in 1998. VOI product costs, as a percentage of VOI sales, decreased from
23.1% in 1997 to 21.0% in 1998, as a result of increased sales at certain
resorts with relatively lower per-unit costs as well as a higher level of
alternate year VOI's. Sales and marketing expenses increased 96.5% from $8.6
million in 1997 to $16.9 million in 1998, primarily due to an 84.1% increase in
related VOI sales levels as well as operating inefficiencies and adverse effects
of seasonality incurred in connection with pre-opening sales at the Company's
Myrtle Beach resort (scheduled to open in the second quarter 1998), start-up
costs incurred at the World Golf Village resort (scheduled to open in May 1998)
which commenced sales during the quarter, and costs associated with the
expansion of the Company's international operations.
Loan portfolio expenses consisting of interest expense-treasury increased to
$2.2 million in 1998 from $1.8 million in 1997 as a result of increased levels
of financing associated with higher VOI sales offset by reduced rates of
interest. The provision for doubtful accounts increased to 7.4% of VOI sales in
1998 compared to 7.0% in 1997. The Company annually monitors its provision for
doubtful accounts to provide for future losses associated with any defaults on
customer mortgages receivable and provides for additions to the reserve as a
percentage of VOI's sold in the applicable period. Management believes that the
provision is adequate. Resort and telecommunication expenses increased at a rate
commensurate with that of related revenues.
General and administrative expenses increased from $2.4 million for the three
months ended March 31, 1997 to $4.6 million for the three months ended March 31,
1998, increasing as a percent of total revenues, from 8.3% in 1997 to 9.7% in
1998. The increase in general and administrative expenses was primarily the
result of (1) increased revenue levels and commensurate business activities, (2)
the addition of a number of senior managers and key executives in order to
continue to build the management and
12
organizational infrastructure necessary to efficiently manage the Company's
planned future growth, (3) the Company's expenses and reporting obligations as a
public company, and (4) added salary, travel and office expenses attributable to
the current and planned growth in the size of the Company. Depreciation and
amortization increased at a rate consistent with that of total revenues. In
addition, other operating costs and expenses increased by $0.9 million as a
result of the inclusion of operating costs for the guest service and marketing
company acquired in November 1997 in a transaction accounted for as a purchase.
Interest expense-other decreased due to continued reduction of related debt
levels.
Operating income increased 55.9% to $5.3 million, or 11.2% of total revenues,
during the three months ended March 31, 1998 from $3.4 million, or 12.0% of
total revenues, during the three months ended March 31, 1997.
Extraordinary Item:
During the quarter ended March 31, 1997, the Company repaid $39.7 million of
debt and related interest and prepayment penalties. The Company recorded an
expense relating to the write-off of previously capitalized fees and prepayment
penalties of $0.8 million, net of related tax benefits of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES:
The Company generates cash from operations from the sales and financing of
VOI's, resort operations, management activities and telecommunication services.
With respect to the sale of VOI's, the Company generates cash for operations
from (i) customer down payments and (ii) third-party financing of customer
mortgages receivable in amounts typically equal to 90% of the related customer
mortgage receivable. The Company generates additional cash from the financing of
VOI's equal to the difference between the interest charged on the customer
mortgages receivable (which averaged 14.25% at March 31, 1998) and the interest
paid on the notes payable secured by the Company's pledge of such customer
mortgages receivable (which averaged 9.19% at March 31, 1998). Cash used by
operations for the three months ended March 31, 1998 was $0.6 million and cash
provided by operations for the three months ended March 31, 1997 was $0.5
million. The reduction in 1998 is due primarily to the increase in expenditures
to construct additional units in the inventory of VOI's, offset by the overall
increase in total operations attributable to the addition of the western
operations and higher sales and total revenues. The cash provided in 1997 was
significantly impacted by the non-recurring component of deferred taxes
recognized in connection with the Formation Transactions.
Net cash used in investing activities for the three months ended March 31, 1998
and 1997 was $22.4 million and $8.0 million, respectively. The increase in 1998
is principally due to increased sales of VOI's and the related increase in
customer mortgages receivable and restricted cash.
Net cash provided by financing activities was $28.8 million during the quarter
ended March 31, 1998 and $15.5 million in the comparable period in 1997,
primarily due to the increase in receivables-based financing. Included in the
comparable period in 1997 was the Company's Initial Offering which resulted in
approximately $49.5 million of net proceeds. The net proceeds of the Initial
Offering were used by the Company to repay $39.7 million of outstanding debt and
related interest and prepayment penalties.
The Company requires funds to finance the acquisition and development of
vacation ownership resorts and related inventory, and to finance customer
purchases of VOI's. Historically, these funds have been provided by indebtedness
secured by a portion of the Company's inventory of unsold VOI's, customer
mortgages receivable and other assets. As of March 31, 1998, the Company had
$33.9 million outstanding under its notes payable secured by its land and VOI
inventory, $93.7 million outstanding under its notes payable secured by customer
mortgages receivable and $10.2 of other secured and unsecured notes payable. As
of March 31, 1998, the Company's scheduled principal payments on its long-term
indebtedness through 2002 (excluding payments on credit facilities secured
primarily by customer mortgages receivable) were $11.1 million in 1998
(remaining nine months), $9.8 million in 1999, $15.6 million in 2000, $5.4
million in 2001 and $2.3 million in 2002 and thereafter.
The Company's current credit facilities (the "Credit Facilities") provide for
term loans, of which $31.0 million were outstanding as of March 31, 1998, and
revolving lines of credit, under which the Company had borrowings of $106.8
million as of March 31, 1998 against total available capacity under the
13
revolving lines of credit (assuming the availability of sufficient receivables)
at that date of $271.0 million. As of March 31, 1998, the Company's term loans
accrued interest at various rates between 8.2% and 11.3%, and the Company's
revolving lines of credit accrued interest at rates between 6.7% and 10.5%.
Approximately $131.1 million of the Company's indebtedness bears interest at
variable rates based on fixed spreads over a specified reference rate. The
Company's indebtedness under the Credit Facilities is secured by pledges of the
Company's receivables (primarily its customer mortgages receivable), mortgages
on certain of the Company's unsold inventory of VOI's and other owned real and
personal property. The terms of certain of the Credit Facilities impose certain
operating and financial restrictions upon the Company, including, without
limitation, (1) maintenance of a minimum tangible net worth by the Company and
certain of its operating subsidiaries; (2) maintenance of certain financial
ratios, including the ratio of selling expenses to net VOI sales; and (3)
limitations on cash distributions by certain of the Company's operating
subsidiaries to the amount of the subsidiary's net income or net cash flow
(subject to certain exceptions for tax and other permitted distributions).
Because most of the Company's indebtedness bears interest at variable rates and
the Company's customer mortgages receivable earn interest at fixed rates, the
Company bears the risk of increases in interest rates with respect to its
indebtedness.
The Company intends to pursue a growth-oriented strategy. Accordingly, the
Company may from time to time acquire, among other things, additional vacation
ownership resorts, additional land upon which vacation ownership resorts may be
expanded or developed, and companies operating resorts or having vacation
ownership assets, management, or sales or marketing expertise commensurate with
the Company's operations in the vacation ownership industry. The Company is
currently considering the acquisition of several additional land parcels for the
expansion of an existing resort and for the development of additional resorts.
The Company is also evaluating additional asset and operating company
acquisitions.
In the future, the Company may negotiate additional credit facilities, issue
debt or enter into securitizations of customer mortgages receivable. Any debt
incurred or issued by the Company may be secured or unsecured, bear interest at
fixed or variable rates, and be subject to terms and conditions approved by
management. The Company has historically enjoyed good credit relationships and
has been successful in establishing new relationships and expanding existing
credit facilities as its growth and opportunities have necessitated. Management
believes the Company will continue to be able to borrow in this manner.
The Company believes that the cash generated from operations and future
borrowings will be sufficient to meet its working capital and capital
expenditure needs for its current operations for the next 12 months. However,
depending upon the Company's growth opportunities, conditions in the capital and
other financial markets and other factors, the Company may from time to time
consider the issuance of debt, equity or other securities, the proceeds of which
may be used to finance acquisitions, to refinance debt or for general corporate
purposes.
During future periods, continued access to external funding will be necessary
for the Company to acquire, develop, and sell additional VOI inventory and to
finance customer purchases of its VOI's. If the Company were unable to obtain
credit facilities or debt or equity financing in amounts, and on terms and
conditions satisfactory for such purposes, such event would have a material
adverse effect on the Company's business and results of operations.
Inflation
Inflation and changing prices have not had a material impact on the Company's
revenues, operating income and net income during any of the Company's three most
recent fiscal years. Due to the current economic climate, the Company does not
expect that inflation and changing prices will have a material impact on the
Company's revenues, operating income or net income in the near term. To the
extent inflationary trends affect short-term interest rates, a portion of the
Company's debt service costs may be affected as well as the rates the Company
charges on its customer mortgages.
14
Seasonality
The Company's revenues are moderately seasonal. Owner and guest activity at the
Company's resorts in the eastern United States are currently the greatest from
February through April and June through August. Owner and guest activity at the
Company's resorts in the western United States are currently the greatest from
June 15 to Labor Day and Christmas to Easter. As a result of this seasonality,
the Company currently anticipates its weakest operating results during the first
quarter, and its strongest operating results during the third quarter, of each
calendar year. However, as the Company opens new resorts and expands into new
markets and geographic locations, it may experience increased or different
seasonality dynamics creating fluctuations in operating results that are
different from those experienced in the past.
Year 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
risk. The Company has continued to assess this risk as it relates to the
availability and integrity of financial systems and the reliability of
operational systems. The Company has established processes for evaluating and
managing the risks and costs associated with this issue. The computing portfolio
was previously identified and an initial assessment has been completed. The
remaining cost of achieving Year 2000 compliance is estimated to be
approximately $0.3 million over the cost of normal software upgrades and
replacements and will be incurred through fiscal 1999.
FORWARD-LOOKING INFORMATION
Statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the Company's prospective business
opportunities, financial performance and expansion plans, are forward-looking
statements that involve substantial risks and uncertainties. Such forward-
looking statements include, without limitation, (i) the plan to develop and sell
additional resorts, (ii) the intention to acquire additional land for the
expansion of existing resorts and for the development of future resorts, (iii)
the anticipation of when construction will commence for existing and future
vacation resorts, and (iv) statements relating to the Company or its operations
that are preceded by terms such as "anticipates," "believes," "intends,"
"expects," and similar expressions. In accordance with the Private Securities
Litigation Reform Act of 1995, the following are important risk factors that
could cause the Company's actual results, performance, or achievements to differ
materially from those implied by such forward-looking statements: (i) the
Company lacks experience in certain of the markets where it has purchased land
and is developing vacation ownership resorts, (ii) the Company is subject to
significant competition from other entities in the leisure and vacation
industry, (iii) the Company's success depends to a significant extent on its
ability to hire, train, and retain qualified employees, (iv) the Company's
ability to acquire, develop and sell VOI inventory and finance customer
purchases of its VOI's requires access to external funding on satisfactory
terms, and (v) the Company's indebtedness and related service obligations may
increase its vulnerability to adverse economic conditions.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
SIGNATURES:
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.
VISTANA, INC.
(Registrant)
Date: May 14, 1998 By: /S/ RAYMOND L. GELLEIN, JR.
------------------ -------------------------------------
Raymond L. Gellein, Jr.
Chairman and Co-Chief Executive
Officer
By: /S/ CHARLES E. HARRIS
-------------------------------------
Charles E. Harris
Vice Chairman and Chief
Financial Officer
By: /S/ MARK E. PATTEN
-------------------------------------
Mark E. Patten
Vice President and Chief
Accounting Officer
16