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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-29114
-------------
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) 239-3000
(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 10, 1999: 21,295,974 shares.
This quarterly report on Form 10-Q contains 17 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, 1999 (unaudited)
and December 31, 1998 Page 3
Condensed Consolidated Statements of Income for the three month periods
ended March 31, 1999 and 1998 (unaudited) Page 4
Condensed Consolidated Statements of Cash Flow for the three month
periods ended March 31, 1999 and 1998 (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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk Page 15
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,
1999 1998
---------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 23,279 $ 20,001
Restricted cash 30,284 29,054
Customer mortgages receivable, net 240,982 223,275
Other receivables, net 10,663 8,053
Inventory of Vacation Ownership Interests 61,933 50,019
Construction in progress 22,882 30,922
-------- --------
Total Vacation Ownership Interests 84,815 $ 80,941
-------- --------
Prepaid expenses and other assets 23,332 24,408
Land held for development 22,249 23,874
Intangible assets, net 20,438 19,743
Property and equipment, net 48,297 42,071
-------- --------
Total Assets 504,339 $471,420
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities 19,236 $ 17,502
Income taxes payable 2,152 424
Accrued compensation and benefits 9,906 10,883
Customer deposits 25,363 22,610
Deferred income taxes 26,738 25,753
Other liabilities 6,816 5,723
Notes and mortgages payable 264,438 242,644
-------- --------
Total Liabilities 354,649 325,539
Minority interest 865 1,665
Shareholders' Equity
Common stock, $.01 par value: Authorized 100,000,000 shares
Issued and outstanding 21,260,073 and 21,224,172 shares
at March 31, 1999 and December 31, 1998, respectively 212 212
Additional paid-in capital 112,005 111,502
Retained earnings 36,608 32,502
-------- --------
Total Shareholders' Equity 148,825 144,216
-------- --------
Total Liabilities and Shareholders' Equity $504,339 $471,420
======== ========
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,
-----------------------------
1999 1998
----------- -----------
Revenues:
Vacation Ownership Interest sales $ 50,084 $ 33,535
Interest 7,897 6,085
Resort 6,966 4,592
Telecommunications 1,652 2,043
Other 1,148 931
----------- -----------
Total revenues 67,747 47,186
----------- -----------
Costs and operating expenses:
Vacation Ownership Interest cost of sales 11,702 7,048
Sales and marketing 23,988 16,945
Interest expense - treasury 2,412 2,188
Provision for doubtful accounts 3,707 2,482
Resort 6,177 3,757
Telecommunications 1,414 1,647
General and administrative 5,580 4,595
Depreciation and amortization 2,306 1,180
Interest expense - other 1,860 373
Other 1,703 1,684
----------- -----------
Total costs and operating expenses 60,849 41,899
----------- -----------
Operating income 6,898 5,287
Excess value recognized 19 30
Minority interest 800 294
----------- -----------
Income before income taxes and cumulative effect of change in accounting 7,717 5,611
Provision for income taxes 3,010 2,132
----------- -----------
Income before cumulative effect of change in accounting 4,707 3,479
Cumulative effect of change in accounting, net of tax 601 --
----------- -----------
Net income $ 4,106 $ 3,479
=========== ===========
Per Share Data:
Basic
Income per share before cumulative effect of change in accounting $ .22 $ .17
Cumulative effect of change in accounting (.03) --
----------- -----------
Net income per share $ .19 $ .17
----------- -----------
Weighted average number of shares outstanding 21,239,330 21,015,112
=========== ===========
Diluted
Income per share before cumulative effect of accounting change $ .22 $ .16
Cumulative effect of change in accounting (.03) --
----------- -----------
Net income per share $ .19 $ .16
----------- -----------
Weighted average number of shares outstanding 21,292,747 21,629,749
=========== ===========
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,
---------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 4,106 $ 3,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 2,306 1,180
Amortization of discount on customer mortgages receivable (190) (412)
Provision for doubtful accounts 3,707 2,482
Minority interest (800) (294)
Deferred income taxes 985 2,082
Changes in operating assets and liabilities:
Other receivables, net (3,181) (2,345)
Vacation ownership interests (2,249) (12,984)
Prepaid expenses and other assets 596 (2,012)
Accounts payable and accrued liabilities 1,734 4,461
Income taxes payable 1,728 (482)
Accrued compensation and benefits (977) (1,736)
Customer deposits 2,753 3,260
Other liabilities 1,093 2,713
-------- --------
Net cash provided (used) by operating activities 11,611 (608)
-------- --------
INVESTING ACTIVITIES
Expenditures for land, property and equipment (7,673) (3,429)
Customer mortgages receivable, net (21,224) (13,610)
Additions to restricted cash (1,230) (5,342)
-------- --------
Net cash used in investing activities (30,127) (22,381)
-------- --------
FINANCING ACTIVITIES
Proceeds from notes and mortgages payable 57,709 74,497
Payments on notes and mortgages payable (35,915) (46,218)
Proceeds from exercised stock options -- 518
-------- --------
Net cash provided by financing activities 21,794 28,797
-------- --------
Net increase in cash and cash equivalents $ 3,278 $ 5,808
Cash and cash equivalents, beginning of period $ 20,001 $ 9,878
-------- --------
Cash and cash equivalents, end of period $ 23,279 $ 15,686
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,630 $ 2,370
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.
At March 31, 1999 and 1998, 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, 1999 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, 1999 and the consolidated results of its operations for the three
months ended March 31, 1999 and 1998. 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. CAPITAL TRANSACTIONS AND BASIS OF PRESENTATION
The Company became the parent for all of the operations of its predecessors in
connection with the initial public offering (the "Initial Offering") completed
on February 28, 1997. 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 the
Company 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 Transactions, 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 in the Formation Transaction 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.
For the three months ended March 31, 1999, the Company had no amounts considered
as other comprehensive income. Therefore, comprehensive income is equivalent to
net income as reported on the face of the condensed consolidated statements of
income.
6
NOTE 3. CUSTOMER MORTGAGES RECEIVABLE, NET
At March 31, 1999 and December 31, 1998, customer mortgages receivable, net,
consisted of:
March 31, December 31,
1999 1998
-------- --------
(In thousands)
Customer mortgages receivable, gross $262,457 $243,263
Less:
Unamortized discount on repurchased customer mortgages receivable (640) (830)
Allowance for doubtful accounts (20,835) (19,158)
-------- --------
Customer mortgages receivable, net $240,982 $223,275
======== ========
As of March 31, 1999 and December 31, 1998, customer mortgages receivable,
gross, from buyers not residing in the United States or Canada aggregated
approximately $43.6 million and $42.2 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, 1999 range from 00.0% to 17.9% per annum
(averaging approximately 14.4% 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:
Three Months ended
March 31,
-----------------------------------
1999 1998
------- -------
(In thousands)
Balance, beginning of period $19,158 $12,594
Provision for doubtful accounts 3,707 2,482
Customer mortgages receivable charged off (2,030) (1,252)
------- -------
Balance, end of period $20,835 $13,824
======= =======
NOTE 4. NOTES AND MORTGAGES PAYABLE
At March 31, 1999 and December 31, 1998, notes and mortgages payable consisted
of:
March 31, December 31,
1999 1998
--------- -----------
(In thousands)
Notes payable secured by customer mortgages receivable bearing interest at
rates which include fixed interest of 6.1% and variable rates ranging
from prime plus 2% (9.75% at March 31, 1999), LIBOR plus 2.5% (7.56% at
March 31, 1999), LIBOR plus 2.65% (7.71% at March 31, 1999) and LIBOR
plus 1% (6.06% at March 31, 1999) $147,492 $133,265
Notes payable and mortgage obligations secured by real estate bearing
interest at rates which include fixed interest at 8.2% and variable rates
ranging from prime plus 2%, LIBOR plus 3.25% (8.31% at March 31, 1999),
LIBOR plus 2.65%, and LIBOR plus 2.85% (7.91% at March 31, 1999) 99,222 91,532
Other notes and mortgage loans payable bearing variable interest at rates
which include LIBOR plus 2.25% (7.31% at March 31, 1999) and prime plus 2%
17,724 17,847
-------- --------
Total notes and mortgages payable: $264,438 $242,644
======== ========
7
NOTE 5. 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.
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 1999, 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 6. 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, and amended by the
Company's shareholders in April 1998. As amended, the Stock Plan covers 2.5
million shares of Common Stock and 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. 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, 1999, the only grants that had
been made under the Stock Plan were NSOs.
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, and
(ii) an option, which vests on February 10, 2001, to purchase an aggregate of
0.04 million shares of Common Stock at an exercise price equal to $12 per share.
Subsequent to the Initial Offering, the Principal Shareholders granted certain
executive officers (i) 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 (ii) an option, which vests over a period of four years, to
purchase an aggregate of 0.04 million shares of Common Stock at an exercise
price equal to $24.25 per share. All of 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,
1999 and December 31, 1998.
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 1.0 million shares of Common Stock is reserved for issuance under the
Purchase Plan. Shares purchased under the Purchase Plan are issued semi-
annually on October 1 and April 1. As of March 31, 1999, approximately 39,000
shares had been issued under the Purchase Plan.
8
NOTE 7. 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. For the three months ended
March 31, 1999 and March 31, 1998, approximately 0.05 million and 0.6 million
net shares, respectively, 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 0.3 million and
0.03 million shares, respectively, were considered anti-dilutive and therefore
excluded from the diluted EPS calculation. Contingent shares recorded but not
issued were considered outstanding for purposes of computing diluted EPS.
NOTE 8. ACCOUNTING CHANGE
On January 1, 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities" (SOP 98-5), issued by the American
Institute of Certified Public Accountants. SOP 98-5 requires costs of start-up
activities and organizational costs be expensed as incurred. The effect of
initially applying the provisions of SOP 98-5 was reported as a change in
accounting principle and, thereafter, all such costs have been expensed as
incurred. The change in accounting principle resulted in the write-off of
amounts capitalized as pre-opening costs as of December 31, 1998. The
cumulative effect of the write-off, which totaled $0.6 million (net of tax), has
been expensed and reflected in the condensed consolidated statements of income
for the three months ended March 31, 1999.
NOTE 9. SEGMENT REPORTING
Revenue from
External Operating
Customers Income (1)
------------ ---------
March 31, 1999
Timeshare Development $59,129 $6,282
Resort Operations 6,966 476
------- ------
Total Segments 66,095 6,758
Other 1,652 140
Total Company $67,747 $6,898
======= ======
March 31, 1998
Timeshare Development $40,551 $4,421
Resort Operations 4,592 556
------- ------
Total Segments 45,143 4,977
Other 2,043 310
Total Company $47,186 $5,287
======= ======
(1) Total Company operating income equals income before taxes, extraordinary
item and cumulative effect of accounting change.
9
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, 1999 and March 31, 1998.
Three Months Ended
March 31,
----------------------------------
1999 1998
-------- --------
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES:
VOI sales 73.9% 71.1%
Interest 11.7% 12.9%
Resort 10.3% 9.7%
Telecommunications 2.4% 4.3%
Other 1.7% 2.0%
-------- --------
Total revenues 100.0% 100.0%
======== ========
AS A PERCENTAGE OF VOI SALES:
VOI cost of sales 23.4% 21.0%
Sales and marketing 47.9% 50.5%
Provision for doubtful accounts 7.4% 7.4%
AS A PERCENTAGE OF INTEREST REVENUES:
Interest expense - treasury 30.5% 36.0%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative 8.2% 9.7%
Depreciation and amortization 3.4% 2.5%
Interest expense - other 2.7% .8%
Other 2.5% 3.6%
Total costs and operating expenses 89.8% 88.8%
AS A PERCENTAGE OF RESORT REVENUES:
Resort expenses (1) 88.7% 81.8%
AS A PERCENTAGE OF TELECOMMUNICATION REVENUES:
Telecommunications expenses (1) 85.6% 80.6%
SELECTED OPERATING DATA:
Number of resorts at end of period 10 6
Number of VOI's sold - actual (2) 4,670 3,463
Average sales price per VOI sold - actual (2) $ 9,938 $ 9,684
Number of VOI's sold - annualized (3) 3,673 2,842
Average sales price per VOI sold - annualized (3) $12,637 $11,800
Percentage of alternate unit week sales 42.7% 35.9%
Number of VOI's in inventory at end of period (4) 25,519 15,115
- -----------------------------------
(1) Does not include interest and depreciation expenses.
(2) Includes sales of both annual and alternate-year VOI's.
(3) Includes sales of annual intervals plus sales of alternate year intervals
adjusted on an annualized basis.
(4) Inventory classified as annual VOI's.
10
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED
MARCH 31, 1998.
REVENUE:
For the three months ended March 31, 1999, the Company recognized total revenues
of $67.7 million compared to $47.2 million for the three months ended March 31,
1998, an increase of $20.5 million, or 43.4%. This increase is primarily due to
a $16.6 million, or 49.6%, increase in sales of vacation ownership interests
(VOI's) from $33.5 million during 1998 to $50.1 million during 1999. VOI sales
increased due to a 34.9% increase in the number of VOI's sold from 3,463 in the
three months ended March 31, 1998 to 4,670 in 1999, a 2.6% increase in the
average sales price and the recognition in the first quarter of 1999 of $3.8
million in VOI sales as calculated under the percentage of completion method for
the Company's Scottsdale resort. Annualizing alternate year VOI sales, the
number of VOI's sold during the three months ended March 31, 1999, increased
29.2% to 3,673 from 2,842, and the average sales price per interval increased
7.1% to $12,637 from $11,800. The increase in VOI sales resulted from increased
VOI sales at the Company's Vistana Resort in Orlando, Vistana Resort at World
Golf Village and its resort at Myrtle Beach. In addition, VOI sales increased
in the quarter ended March 31, 1999 due to VOI sales at the Lakeside Terrace and
Scottsdale resorts which are included in revenues in the first quarter of 1999,
but not in the comparable period in 1998. The increase in average sales price
reflects increased volume from resorts with higher price-point inventory, offset
by higher sales of alternate-year VOI's.
Interest income increased 29.5% to $7.9 million from $6.1 million due to a 44.7%
increase in the average principal amount of net customer mortgages receivable,
from $166.6 million at March 31, 1998 to $241.0 million at March 31, 1999.
Interest income also includes the discount amortization on customer mortgages
receivable of $0.2 million and $0.4 million recognized during the three-month
periods ended March 31, 1999 and March 31, 1998, 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 which
had been previously sold in 1991 as well as recognition of a discount on certain
customer mortgages receivables repurchased in 1996 from an investment
partnership (both transactions pursuant to related clean-up call provisions). As
of March 31, 1999, $0.6 million of total unamortized discount remained and is
expected to be amortized through 1999.
Resort revenue increased 52.2%, from $4.6 million to $7.0 million, primarily as
a result of increased room rentals due to an increase in rooms available for
rental and higher occupancy levels. Telecommunication revenues (guest telephone
charges at the Company's resorts and revenues from contracting services provided
to third parties) decreased 17.6% from $2.0 million for the quarter ended March
31, 1998 to $1.7 million for the quarter ended March 31, 1999, primarily due to
lower revenue from contracting services offset by increased guest telephone
charges from higher resort occupancy.
COSTS AND OPERATING EXPENSES:
Total costs and operating expenses increased 45.1% to $60.8 million from $41.9
million, an increase as a percentage of total revenues from 88.8% in 1998 to
89.8% in 1999. VOI cost of sales (product cost), as a percentage of VOI sales,
increased from 21.0% in 1998 to 23.4% in 1999, reflecting the acquisition of
some higher cost product through lien foreclosures, seasonal pricing at the
Company's Myrtle Beach resort and a higher mix of one-bedroom VOI sales offset
by the increased sales of alternate-year VOI's. VOI cost of sales is expected to
remain higher than 1998 levels as new resorts having increased land and
construction costs comprise a larger part of the Company's VOI sales. Sales and
marketing expenses increased 42.0% from $16.9 million in 1998 to $24.0 million
in 1999, primarily due to a 49.6% increase in related VOI sales levels. As a
percentage of VOI sales, sales and marketing expenses decreased from 50.5% in
1998 to 47.9% in 1999, primarily as a result of higher sales volume, lower costs
at the Company's Myrtle Beach and Scottsdale resorts and increased efficiencies
at Vistana Resort in Orlando.
Loan portfolio expenses consist of interest expense-treasury and the provision
for doubtful accounts. Interest expense-treasury increased to $2.4 million in
1999 from $2.2 million in 1998, primarily as a result of increased levels of
debt secured by customer mortgages receivable offset by a lower average cost of
funds. Because a significant portion of the Company's indebtedness bears
interest at variable rates and the Company's customer mortgages receivable earn
interest at fixed rates, increases in short-term interest rates could have an
adverse effect on the net interest margin earned by the Company on its customer
mortgages receivable. The provision for doubtful accounts remained at 7.4% of
VOI sales in 1999, consistent with the first quarter of 1998. The Company
periodically monitors its allowance for doubtful accounts to provide for future
losses associated with
11
any defaults on customer mortgages receivable. Management believes that the
allowance is adequate for such future losses.
Resort expenses increased as a percentage of resort revenue from 81.8% for the
quarter ended March 31, 1998 to 88.7% for the quarter ended March 31, 1999 as a
result of increased operating costs at the Company's newer resorts which were
not in operation during the first quarter of 1998. Telecommunication expense
decreased at a rate commensurate with that of the related revenues. General and
administrative expenses increased from $4.6 million for the three months ended
March 31, 1998 to $5.6 million for the three months ended March 31, 1999,
decreasing as a percent of total revenues from 9.7% in 1998 to 8.2% in 1999. The
decrease in general and administrative expenses as a percent of total revenues
was primarily the result of economies of scale relating to increased revenue
levels. Depreciation and amortization increased as a percentage of total
revenues to 3.4% for the three months ended March 31, 1999, compared to 2.5% in
the same period in 1998, primarily due to capital additions during the three
months ended March 31, 1999 and in 1998 for resort and sales facilities and for
information technology assets. Interest expense-other increased as a percentage
of revenue from 0.8% for the three months ended March 31, 1998 to 2.7% in the
same period in 1999 due to increased borrowings secured by real estate primarily
related to the construction of additional VOI inventory. Interest expense-other
excludes amounts capitalized of $0.7 million in both quarters ended March 31,
1999 and 1998.
Other income increased $0.2 million or 22.2% from $0.9 million for the three
months ended March 31, 1998 to $1.1 million for the three months ended March 31,
1999, primarily as a result of increased net sales of ticket inventory at the
Company's Central Florida marketing company. Other expenses of $1.7 million
remained consistent with the first quarter of 1998. Minority interest increased
$0.5 million from $0.3 million for the three months ended March 31, 1998 to $0.8
million for the three months ended March 31, 1999, reflecting the loss from
operations from consolidated ventures which are not wholly owned.
Operating income, excluding amounts for excess value recognized and minority
interest, increased 30.2% to $6.9 million, or 10.2% of total revenues, during
the three months ended March 31, 1999 from $5.3 million, or 11.2% of total
revenues, during the three months ended March 31, 1998. Operating income for
the three months ended March 31, 1999 includes $0.8 million relating to the
recognition of VOI sales and related costs previously deferred under the
percentage of completion method for the Company's Scottsdale resort.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Cost of Start-up Activities" (SOP 98-5), issued by the American Institute
of Certified Public Accountants. SOP 98-5 requires that future costs of start-
up activities be expensed as incurred. The effect of initially applying the
provisions of SOP 98-5 was reported as a change in accounting principle and
thereafter, all such costs have been expensed as incurred. The change in
accounting principle resulted in the write-off of the costs capitalized as of
December 31, 1998. The cumulative effect of the write-off, which totaled $0.6
million (net of tax), has been expensed and reflected in the condensed
consolidated statements of income for the three months ended March 31, 1999.
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 received on the customer
mortgages receivable and the interest paid on the notes payable secured by the
Company's pledge of such customer mortgages receivable (which averaged 6.9% at
March 31, 1999). As of March 31, 1999, the customer mortgages receivable
portfolio averaged a 14.4% stated rate of interest. Net cash provided by
operations for the three months ended March 31, 1999 was $11.6 million and cash
used by operations was $0.6 million for the three months ended March 31, 1998.
The increase in cash provided by operations for the quarter ended March 31,
1999, is primarily due to a decrease in the addition of units of VOI inventory
from the completion of construction of additional units of VOI inventory.
Net cash used in investing activities for the three months ended March 31, 1999
and 1998 was $30.1 million and $22.4 million, respectively. The increase in
1999 is principally due to increased sales of VOI's and the related increase in
origination of customer mortgages receivable.
12
Net cash provided by financing activities was $21.8 million during the quarter
ended March 31, 1999 and $28.8 million in the comparable period in 1998,
the decrease reflects an initial borrowing under an unsecured revolving
line of credit in the first quarter of 1998 which remained outstanding at March
31, 1999.
The Company requires funds to finance the acquisition and development of
vacation ownership resorts and related inventory, to finance customer purchases
of VOI's and to fund working capital. Historically, these funds have been
principally provided by indebtedness secured by a portion of the Company's land,
construction in progress and inventory of unsold VOI's, customer mortgages
receivable and other assets. As of March 31, 1999, the Company had $99.2 million
outstanding under its notes payable secured by its land, construction in
progress and VOI inventory, $147.5 million outstanding under its notes payable
secured by customer mortgages receivable, and $17.7 million of other secured and
unsecured notes payable.
The Company's current credit facilities (the "Credit Facilities") provide for
term loans, of which $42.7 million were outstanding as of March 31, 1999, and
revolving lines of credit, of which $13.9 million were outstanding related to
notes secured by land, construction in progress and VOI inventory, and $92.8
million related to notes payable secured by customer mortgages receivable. At
March 31, 1999, total committed but unused available capacity under the
revolving lines of credit (assuming the availability of sufficient receivables
or other qualified assets) and term loans was $116.9 million and $49.1 million,
respectively. In addition, the Company has a $20.0 million revolving unsecured
line of credit which had a remaining capacity of $5.0 million as of March 31,
1999. As of March 31, 1999, the Company's term loans and revolving lines of
credit accrued interest at various rates between 6.06% and 9.75% per annum.
Approximately $208.7 million of the Company's indebtedness bears interest at
variable rates based on fixed spreads over a specified reference rate. The
Company bears the risk of increases in interest rates with respect to this
indebtedness.
As of March 31, 1999, the Company's scheduled principal payments on its long-
term indebtedness through 2003 (excluding payments on Credit Facilities secured
primarily by customer mortgages receivable, as discussed below) were $41.0
million in 1999 (remaining nine months), $38.2 million in 2000, $13.5 million
in 2001, $17.5 million in 2002 and $6.7 million in 2003 and thereafter. The
foregoing principal repayment obligations exclude amounts due on notes payable
secured by customer mortgages receivable, including the notes issued in
connection with the 1998 securitization of $66.2 million in customer mortgages
receivable, as such notes do not have fixed principal amortization dates.
Rather, all collections of principal and interest on the receivables serving as
collateral for these notes are paid to the lender on a monthly basis. Payments
are first applied to outstanding interest and then to principal. The total
amount of customer mortgages receivable pledged was $171.3 million and $160.9
million at March 31, 1999 and December 31, 1998, respectively.
At March 31, 1999, the Company's inventory of VOI's was 25,519 compared to
15,115 at March 31, 1998, an increase of 90.4%. The increase resulted from the
addition of the Company's new resorts at Myrtle Beach and Vistana Resort at
World Golf Village, the recently completed resorts at Scottsdale and Lakeside
Terrace as well as increases at the Company's existing resorts, primarily
Vistana Resort in Orlando.
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; (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); (4) subordination of certain
intercompany obligations; and (5) limitations on certain indebtedness. The
Company's Credit Facilities are generally established for fixed terms and are
also subject to early termination under certain events.
During the three months ended March 31, 1999, the Company entered into (i) a $30
million customer mortgages receivable-based revolving credit facility which
bears interest at prime plus 1% and (ii) a $5.0 million master equipment
facility which bears interest at LIBOR plus 1.5%. As of March 31, 1999, the
Company had not drawn on either of these credit facilities.
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
development of additional VOI inventory. The Company from time to time
13
evaluates additional acquisitions of operating companies and related assets, but
presently has no contracts or capital commitments relating to any such
acquisitions.
In the future, the Company may negotiate additional or renewed credit
facilities, issue debt or execute additional 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. However, adverse conditions in the capital
or other financial markets, adverse financial performance by the Company or its
subsidiaries, or the need for additional equity capital, could curtail or
increase the cost of the Company's access to debt.
The Company believes that the cash generated from operations and future
borrowings, including possible securitizations of customer mortgages receivable,
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 and may be necessary to provide or
supplement general working capital. 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. 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.
SEASONALITY
The Company's revenues are 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.
14
YEAR 2000
During the quarter ended March 31, 1999, the Company continued its efforts to
minimize the risk of disruption from the "year 2000 (`Y2K') problem." This
problem results from computer programs having been written using two digits
(rather than four) to store date information. The Company's overall plan to
address the Y2K problem is described more fully in its Annual Report on Form 10-
K for the year ended December 31, 1998, and the following is an update of the
information included therein.
IT Systems and non-IT Systems - Remediation efforts (including testing and
certification) continued with respect to the Company's previously identified
"critical" and "important" systems. The Company continues to expect that all
"critical" systems will be tested and certified as Y2K compliant by June 1999,
and that all "important" systems will be tested and certified by September 1999.
Costs-Total anticipated expenditures related to the Y2K project remain on
target and are not expected to require significant incremental internal
resources or third-party expense.
Based upon its efforts to date, the Company continues to believe that the
majority of both its IT and its non-IT systems, including all critical and
important systems, will remain fully operational after January 1, 2000.
Accordingly, the Company does not currently anticipate that internal systems
failures will result in any material adverse effect on its results of operations
or financial condition. At this time, the Company believes its most likely
"worst-case" scenario involves potential disruptions in the areas in which the
Company must rely on third parties whose systems may not work properly after
January 1, 2000. Although such failures could affect important operations of
the Company, either directly or indirectly, in a significant manner, and have a
material adverse effect on its results of operations and financial condition,
the Company cannot presently estimate either the likelihood or the potential
costs of such failures.
The nature and focus of the Company's efforts to address the Y2K issues may be
revised periodically as interim goals are achieved and new issues identified.
In addition, it is important to note that the description of the Company's
efforts involves estimates and projections with respect to activities required
in the future. These estimates and projections are subject to change as work
continues and additional information is made available, and such changes may be
substantial.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion should be read in conjunction with the Annual Report on
Form 10-K and for the year ended December 31, 1998 and the condensed
consolidated financial statements and notes thereto included elsewhere in the
Form 10-Q.
The Company is exposed to interest rate changes primarily as a result of its
notes and mortgages payable used to finance the acquisition and development of
vacation ownership resorts and related inventory and to fund working capital.
The Company is also exposed to interest rate changes with respect to its
customer mortgages receivable which earn interest at fixed rates. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Company may enter into derivative financial
instruments such as interest rate swaps in order to mitigate its interest rate
risk on a related financial instrument. The Company does not enter into
derivative or interest rate transactions for speculative purposes.
For a complete description of the Company's interest rate and foreign currency
related market risks, see the discussion in Part II, Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. There has not
been a material change in the Company's exposure to interest rate risks since
December 31, 1998.
FORWARD-LOOKING STATEMENTS
Statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are "forward-looking statements" within the meaning of
the federal securities laws, including statements concerning the Company's
future prospects and financial performance, expansion plans, business strategies
and their intended results, and similar statements about anticipated future
events and expectations that are not historical facts. Such statements are
subject to numerous risks and uncertainties, including the effects of economic
conditions, interest rates, consumer demand, payment and default risks on
customer mortgages receivable, competitive conditions, the impact of government
regulations and approval requirements, the availability and cost of capital to
finance future growth, the ability to acquire, develop and sell vacation
ownership inventory cost-effectively, the availability of qualified personnel,
the ability to transfer the experience and historical operating results of the
Company's mature resorts to its new properties, the ability to avoid disruption
from year 2000 technology problems, the satisfactory completion of proposed
joint venture, licensing, financing and other agreements, the satisfaction of
various conditions and compliance with various covenants contained in the
Company's existing agreements, and other risks described in the Company's
filings with the Securities and Exchange Commission on Forms 10-K, 10-Q, and
8-K. Such risks could cause actual results to differ materially from those
expressed or implied by forward-looking statements contained herein.
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 10.21-B: Second Amendment to Loan and Security Agreement
dated as of April 20, 1999 between Vistana
Timeshare Mortgage Corp. and Dresdner Bank AG New
York and Grand Cayman Branches, as Lender.
Exhibit 10.27-A: First Amendment to Master Vistana Resort
Receivables Loan Facility and Ratification of
Guaranty dated as of January 29, 1999 between
Heller Financial, Inc. and Vistana, Inc.
Exhibit 27: Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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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, 1999 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
17