1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 001-13003
SILVERLEAF RESORTS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2259890
(State of incorporation) (I.R.S. Employer
Identification No.)
1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)
214-631-1166
(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 of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of November 13, 2000: 12,889,417
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SILVERLEAF RESORTS, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Statements of Income for the three months
and nine months ended September 30, 2000 and 1999.............................................. 1
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.......................................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 2000........................................................... 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999....................................................... 4
Notes to the Condensed Consolidated Financial Statements....................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 13
Item 6. Exhibits and Reports on Form 8-K............................................................... 13
Signatures..................................................................................... 14
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 61,831 $ 50,706 $ 174,876 $ 138,481
Sampler sales 1,891 1,247 4,172 3,274
------------ ------------ ------------ ------------
Total sales 63,722 51,953 179,048 141,755
Interest income 9,803 7,554 27,939 19,981
Interest income from affiliates 8 12 25 36
Management fee income 150 678 697 2,218
Other income 1,836 1,337 4,036 2,997
------------ ------------ ------------ ------------
Total revenues 75,519 61,534 211,745 166,987
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 10,936 7,826 30,995 21,183
Sales and marketing 32,270 26,709 94,393 71,537
Provision for uncollectible notes 6,183 5,071 17,488 13,848
Operating, general and administrative 7,190 6,156 21,264 16,704
Other expense 1,004 992 2,892 2,578
Depreciation and amortization 1,893 1,439 5,528 3,979
Interest expense 8,973 4,517 23,141 11,544
------------ ------------ ------------ ------------
Total costs and operating expenses 68,449 52,710 195,701 141,373
Income before provision for income taxes
and extraordinary item 7,070 8,824 16,044 25,614
Provision for income taxes (2,722) (3,397) (6,178) (9,861)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 4,348 5,427 9,866 15,753
Extraordinary gain on extinguishment of
debt (net of income tax of $197) -- -- 316 --
------------ ------------ ------------ ------------
NET INCOME $ 4,348 $ 5,427 $ 10,182 $ 15,753
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.34 $ 0.42 $ 0.77 $ 1.22
Extraordinary item -- -- 0.02 --
------------ ------------ ------------ ------------
Net income $ 0.34 $ 0.42 $ 0.79 $ 1.22
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 12,889,417 12,889,417 12,889,417 12,889,417
============ ============ ============ ============
Diluted 12,889,417 12,889,417 12,892,057 12,889,417
============ ============ ============ ============
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
------------- ------------
Cash and cash equivalents $ 7,596 $ 4,814
Restricted cash 1,178 903
Notes receivable, net of allowance for uncollectible notes of
$31,942 and $32,326, respectively 389,113 286,581
Amounts due from affiliates 10,898 6,596
Inventories 123,599 112,810
Land, equipment, buildings, and utilities, net 51,630 51,050
Prepaid and other assets 19,211 17,203
------------ ------------
TOTAL ASSETS $ 603,225 $ 479,957
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 18,993 $ 15,539
Unearned revenues 8,704 5,601
Income taxes payable -- 185
Deferred income taxes, net 31,180 28,251
Notes payable and capital lease obligations 298,956 194,171
Senior subordinated notes 74,000 75,000
------------ ------------
Total Liabilities 431,833 318,747
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 13,311,517 shares issued, and
12,889,417 shares outstanding 133 133
Additional paid-in capital 109,339 109,339
Retained earnings 66,919 56,737
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
------------ ------------
Total Shareholders' Equity 171,392 161,210
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 603,225 $ 479,957
============ ============
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
Common Stock
-----------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ------------------------
Issued Value Capital Earnings Shares Cost Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
January 1, 2000 13,311,517 $ 133 $ 109,339 $ 56,737 (422,100) $ (4,999) $ 161,210
Net income -- -- -- 10,182 -- -- 10,182
---------- ---------- ---------- ---------- ---------- ---------- ----------
September 30, 2000 13,311,517 $ 133 $ 109,339 $ 66,919 (422,100) $ (4,999) $ 171,392
========== ========== ========== ========== ========== ========== ==========
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2000 1999
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OPERATING ACTIVITIES:
Net Income $ 10,182 $ 15,753
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 5,528 3,979
Gain on sale of investment (317) --
Deferred income taxes 2,929 4,938
Extraordinary gain on extinguishment of debt (513) --
Increase (decrease) in cash from changes in
assets and liabilities:
Restricted cash (275) (30)
Amounts due from affiliates (4,302) (4,466)
Inventories (10,789) (25,542)
Prepaid and other assets (1,958) (850)
Accounts payable and accrued expenses 3,454 7,280
Unearned revenues 3,103 4,356
Income taxes payable (185) (2,502)
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Net cash provided by operating activities 6,857 2,916
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INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (1,247) (15,576)
Proceeds from sales of land, equipment, buildings, and utilities -- 6,466
Notes receivable, net (102,532) (84,540)
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Net cash used in investing activities (103,779) (93,650)
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FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 142,508 145,672
Payments on borrowings to unaffiliated entities (42,804) (58,267)
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Net cash provided by financing activities 99,704 87,405
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Net decrease in cash 2,782 (3,329)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,814 11,355
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End of period $ 7,596 $ 8,026
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 21,276 $ 8,277
Income taxes $ 3,630 $ 7,426
Non-cash transactions:
Equipment acquired under capital lease or note $ 4,631 $ 9,114
Extraordinary gain on extinguishment of debt $ 513 $ --
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries ("the Company") presented herein do not include certain
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the
Company's Form 10-K for the year ended December 31, 1999 (File No. 001-13003) as
filed with the Securities and Exchange Commission. The accounting policies used
in preparing these condensed consolidated financial statements are the same as
those described in such Form 10-K. Certain previously reported amounts, however,
have been reclassified to conform to the 2000 presentation.
SFAS No. 133 -- In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended,
is effective for fiscal years beginning after June 15, 2000 and will be adopted
for the period beginning January 1, 2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives are recorded each period in current
earnings or other comprehensive income depending on whether a derivative is
designated as part of a hedge transaction, and if it is, the type of hedge
transaction. The impact of SFAS No. 133 on the Company's results of operations,
financial position, or cash flows will be dependent on the level and types of
derivative instruments the Company will have entered into at the time the
standard is implemented.
NOTE 2 - EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Weighted average shares outstanding - basic 12,889,417 12,889,417 12,889,417 12,889,417
----------- ----------- ----------- -----------
Issuance of shares from stock options exercisable -- -- 15,219 --
Repurchase of shares from stock options proceeds -- -- (12,579) --
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 12,889,417 12,889,417 12,892,057 12,889,417
=========== =========== =========== ===========
For the three months September 30, 2000, and the three and nine months ended
September 30, 1999, the weighted average shares outstanding assuming dilution
was anti-dilutive.
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NOTE 3 - DEBT
Loans, notes payable, capital lease obligations, and senior subordinated notes
as of September 30, 2000 and December 31, 1999 (in thousands):
September 30, December 31,
2000 1999
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$60 million revolving loan agreement, which contains certain financial
covenants, due December 2000, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the note, at
an interest rate of LIBOR plus 2.55% .............................................. $ 34,325 $ 39,623
$70 million revolving loan agreement, capacity reduced by amounts
outstanding under the $10 million inventory loan agreement, which contains
certain financial covenants, due August 2004, principal and interest payable
from the proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 2.65% ............................. 59,862 45,680
$75 million revolving loan agreement, which contains certain financial
covenants, due April 2005, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 3.00% ............................. 74,156 62,215
$75 million revolving loan agreement, which contains certain financial
covenants, due November 2005, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 2.67% ............................. 67,446 14,150
$40 million revolving loan agreement, which contains certain financial
covenants, due August 2005, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of Prime ........................................ 27,840 6,678
$10 million inventory loan agreement, which contains certain financial
covenants, due August 2002, interest payable monthly, at an interest
rate of LIBOR plus 3.50% .......................................................... 9,936 9,937
$10 million inventory loan agreement, which contains certain financial
covenants, due November 2001, interest payable monthly, at an interest
rate of LIBOR plus 3.25% .......................................................... 8,925 --
Various notes, due from October 2000 through November 2009, collateralized
by various assets with interest rates ranging from 4.20% to 14.0% ................. 3,795 4,088
------------- -------------
Total notes payable ......................................................... 286,285 182,371
Capital lease obligations ........................................................... 12,671 11,800
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Total notes payable and capital lease obligations ........................... 298,956 194,171
10 1/2% senior subordinated notes, due 2008, interest payable semi-
annually on April 1 and October 1, guaranteed by all of the Company's
present and future domestic restricted subsidiaries ............................... 74,000 75,000
------------- -------------
$ 372,956 $ 269,171
============= =============
At September 30, 2000, LIBOR rates were from 6.62% to 6.80%, and the Prime rate
was 9.50%. At December 31, 1999, LIBOR rates were from 5.82% to 6.00%, and the
Prime rate was 8.50%.
In June 2000, the Company recognized an extraordinary gain of $316,000, net of
income tax of $197,000, related to the early extinguishment of $1.0 million of
10 1/2% senior subordinated notes.
Effective August 18, 2000, the Company reached a definitive agreement with a
lender to increase its $30 million revolving loan agreement, due September 2006,
to a $40 million five-year revolving loan agreement, due August 2005.
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NOTE 4 - SUBSIDIARY GUARANTEES
As of September 30, 2000, all subsidiaries of the Company have guaranteed the
$74.0 million of senior subordinated notes. The separate financial statements
and other disclosures concerning each guaranteeing subsidiary (each, a
"Guarantor Subsidiary") are not presented herein because the Company's
management has determined that such information is not material to investors.
The guarantee of each Guarantor Subsidiary is full and unconditional and joint
and several. Each Guarantor Subsidiary is a wholly owned subsidiary of the
Company, and together comprise all direct and indirect subsidiaries of the
Company.
Combined summarized operating results of the Guarantor Subsidiaries for the nine
months ended September 30, 2000 and 1999, are as follows (in thousands):
September 30,
-----------------------
2000 1999
---------- ----------
Revenues $ -- $ 46
Expenses -- (65)
---------- ----------
Net loss $ -- $ (19)
========== ==========
Combined summarized balance sheet information as of September 30, 2000 for the
Guarantor Subsidiaries is as follows (in thousands):
September 30,
2000
-------------
Other assets $ 10
-------------
Total assets $ 10
=============
Investment by parent (includes equity
and amounts due to parent) $ 10
-------------
Total liabilities and equity $ 10
=============
NOTE 5 - SUBSEQUENT EVENTS
Effective October 16, 2000, the Company reached a definitive agreement with a
lender to increase its $40 million revolving loan agreement, due August 2005, to
a $45 million revolving loan agreement.
Effective October 30, 2000, the Company entered into a $100 million revolving
credit agreement to finance Vacation Interval notes receivable through an
off-balance-sheet special purpose entity, formed on October 16, 2000. The
agreement has a term of 5 years. On November 1, 2000, the first funding of $41.4
million was drawn against this credit facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are forward looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed in the Company's Form 10-K for
the year ended December 31, 1999 (File No. 001-13003).
The Company currently owns and/or operates 22 resorts in various stages of
development. These resorts offer a wide array of country club-like amenities,
such as golf, swimming, horseback riding, boating, and many organized activities
for children and adults. The Company represents an owner base of over 113,000.
The condensed consolidated financial statements of the Company include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly owned.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
As a percentage of total revenues:
Vacation Interval sales 81.9% 82.4% 82.6% 82.9%
Sampler sales 2.5% 2.0% 2.0% 2.0%
---------- ---------- ---------- ----------
Total sales 84.4% 84.4% 84.6% 84.9%
Interest income 13.0% 12.3% 13.2% 12.0%
Management fee income 0.2% 1.1% 0.3% 1.3%
Other income 2.4% 2.2% 1.9% 1.8%
---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 17.7% 15.4% 17.7% 15.3%
Provision for uncollectible notes 10.0% 10.0% 10.0% 10.0%
As a percentage of total sales:
Sales and marketing 50.6% 51.4% 52.7% 50.5%
As a percentage of total revenues:
Operating, general and administrative 9.5% 10.0% 10.0% 10.0%
Other expense 1.3% 1.6% 1.4% 1.5%
Depreciation and amortization 2.5% 2.3% 2.6% 2.4%
As a percentage of interest income:
Interest expense 91.5% 59.7% 82.8% 57.7%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
Revenues for the quarter ended September 30, 2000 were $75.5 million,
representing a $14.0 million or 22.7% increase over revenues of $61.5 million
for the quarter ended September 30, 1999. The increase was primarily due to an
$11.1 million increase in sales of Vacation Intervals and a $2.2 million
increase in interest income. The strong increase in Vacation Interval sales
primarily resulted from an increase in the number of upgrade sales for the third
quarter of 2000 versus the same period of 1999, increased sales and improved
closing percentages at several sales offices, and increased sales prices.
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In the third quarter of 2000, the number of Vacation Intervals sold, exclusive
of in-house Vacation Intervals, increased 14.4% to 4,517 from 3,948 in the same
period of 1999; and the average price per interval increased 4.2% to $9,751 from
$9,357. Total interval sales for the third quarter of 2000 included 1,723
biennial intervals (counted as 862 Vacation Intervals) compared to 1,514 (757
Vacation Intervals) in the third quarter of 1999. The Company increased sales of
upgraded intervals through the continued implementation of marketing and sales
programs focused on selling upgraded intervals to the Company's existing
Vacation Interval owners. In July 2000, the Company began to offer a downgrade
product to delinquent customers as a mechanism for lowering such customers'
monthly installment payments. Including these downgrades, 4,804 in-house
Vacation Intervals were sold at an average price of $3,702 during the third
quarter of 2000, compared to 3,152 upgraded Vacation Intervals sold at an
average price of $4,367 during the comparable 1999 period. Excluding downgrades,
4,406 upgrades were sold during the third quarter of 2000, at an average price
of $4,797.
Sampler sales increased $644,000 to $1.9 million for the quarter ended September
30, 2000, compared to $1.2 million for the same period in 1999. The increase
relates to an increase in sales contracts and the timing of revenue recognition
which corresponds to when purchasers of samplers utilize their stays.
Interest income increased 29.7% to $9.8 million for the quarter ended September
30, 2000, from $7.6 million for the same period of 1999. This increase primarily
resulted from a $130.6 million increase in notes receivable, net of allowance
for uncollectible notes, since September 30, 1999, due to increased sales.
Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income decreased $528,000 for the third quarter of 2000, as
compared to the third quarter of 1999, due to increased operating expenses at
the management clubs.
Other income consists of water and utilities income, condominium rental income,
marina income, golf course and pro shop income, and other miscellaneous items.
Other income increased $499,000 to $1.8 million for the third quarter of 2000
compared to $1.3 million for the same period of 1999. The increase primarily
relates to a gain of $317,000 associated with the sale of land. The increase
also relates to growth in water and utilities income and increased golf course
and pro shop income at two resorts.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 17.7% in
the third quarter of 2000, from 15.4% for the same period of 1999. As the
Company continues to deplete its inventory of low-cost Vacation Intervals
acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more
recently constructed units, which were built at a higher average cost per
Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval
sales has increased compared to 1999. This increase, however, was partially
offset by increased sales prices since the third quarter of 1999.
Sales and Marketing
Sales and marketing costs as a percentage of total sales decreased to 50.6% for
the quarter ended September 30, 2000, from 51.4% for the same period of 1999.
The Company realized efficiency improvements in its marketing processes during
the third quarter of 2000, specifically in its staffing of available training
resources and in its transition towards increased reliance on national retail
chains for its leads generation efforts.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
was unchanged at 10.0% for the third quarter of 2000, compared to the third
quarter of 1999.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
decreased to 9.5% for the third quarter of 2000, compared to 10.0% for the same
period of 1999. Overall, operating, general and administrative expenses
increased $1.0 million for the third quarter of 2000, as compared to 1999,
primarily due to increased
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headcount, higher salaries, increased legal expense, and increased title and
recording fees due to increased borrowings against pledged notes receivable.
Other Expense
Other expense consists of water and utilities expenses, golf course and pro shop
expenses, marina expenses, and other miscellaneous expenses. Other expense as a
percentage of total revenues decreased to 1.3% for the quarter ended September
30, 2000, as compared to 1.6% for the quarter ended September 30, 1999. In
absolute dollars, other expense was virtually unchanged in the quarter ended
September 30, 2000 compared to the same 1999 period.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.5% for the quarter ended September 30, 2000, compared to 2.3% for
the quarter ended September 30, 1999. Overall, depreciation and amortization
expense increased $454,000 for the third quarter of 2000, as compared to 1999,
primarily due to investments in automated dialers, investments in telephone
systems, and investments in a central marketing facility, which opened in
September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 91.5% for the
third quarter of 2000, from 59.7% for the same period of 1999. This increase is
primarily the result of interest expense related to increased borrowings against
pledged notes receivable. Also, the Company's weighted average cost of borrowing
increased to 9.7% in the third quarter of 2000 compared to 9.1% in the third
quarter of 1999.
Income before Provision for Income Taxes and Extraordinary Item
Income before provision for income taxes and extraordinary item decreased to
$7.1 million for the quarter ended September 30, 2000, as compared to $8.8
million for the quarter ended September 30, 1999, as a result of the above
mentioned operating results.
Provision for Income Taxes
Provision for income taxes as a percentage of income before provision for income
taxes and extraordinary item remained flat at 38.5% in the third quarter of
2000, as compared to the third quarter of 1999.
Net Income
Net income decreased to $4.3 million for the quarter ended September 30, 2000,
as compared to $5.4 million for the quarter ended September 30, 1999, as a
result of the above mentioned operating results.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
Revenues for the nine months ended September 30, 2000 were $211.7 million,
representing a $44.8 million or 26.8% increase over revenues of $167.0 million
for the nine months ended September 30, 1999. The increase was primarily due to
a $36.4 million increase in sales of Vacation Intervals and a $7.9 million
increase in interest income. The strong increase in Vacation Interval sales
primarily resulted from an increase in the number of upgrade sales for the first
nine months of 2000 versus the same period of 1999, increased sales and improved
closing percentages at several sales offices, and increased sales prices.
In the first nine months of 2000, the number of Vacation Intervals sold,
exclusive of in-house Vacation Intervals, increased 3.4% to 12,264 from 11,858
in the same period of 1999; and the average price per interval increased 12.9%
to $9,798 from $8,680. Total interval sales for the nine months ended September
30, 2000 included 5,157 biennial intervals (counted as 2,579 Vacation Intervals)
compared to 4,386 (2,193 Vacation Intervals) in the nine months ended September
30, 1999. The Company increased sales of upgraded intervals through the
continued
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implementation of marketing and sales programs focused on selling upgraded
intervals to the Company's existing Vacation Interval owners. In July 2000, the
Company began to offer a downgrade product to delinquent customers as a
mechanism for lowering such customers' monthly installment payments. Including
downgrades, 12,510 in-house Vacation Intervals were sold at an average price of
$4,374 during the first nine months of 2000, compared to 8,162 upgraded Vacation
Intervals sold at an average price of $4,356 during the comparable 1999 period.
Excluding downgrades, 12,112 upgrades were sold during the nine months ended
September 30, 2000, at an average price of $4,794.
Sampler sales increased $898,000 to $4.2 million for the nine months ended
September 30, 2000, compared to $3.3 million for the same period in 1999. The
increase relates to an increase in sales contracts and the timing of revenue
recognition which corresponds to when purchasers of samplers utilize their
stays.
Interest income increased 39.7% to $28.0 million for the nine months ended
September 30, 2000, from $20.0 million for the same period of 1999. This
increase primarily resulted from a $130.6 million increase in notes receivable,
net of allowance for uncollectible notes, since September 30, 1999, due to
increased sales.
Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income decreased $1.5 million for the nine months ended September
30, 2000, as compared to the same period of 1999, due to increased operating
expenses at the management clubs.
Other income consists of water and utilities income, condominium rental income,
marina income, golf course and pro shop income, and other miscellaneous items.
Other income increased $1.0 million to $4.0 million for the nine months ended
September 30, 2000, compared to $3.0 million for the same period of 1999. The
increase consists of a $317,000 gain associated with the sale of land, growth in
water and utilities income, and increased golf course and pro shop income at two
resorts.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 17.7% in
the nine months ended September 30, 2000, from 15.3% for the same period of
1999. As the Company continues to deplete its inventory of low-cost Vacation
Intervals acquired primarily in 1995 and 1996, the Company's sales mix has
shifted to more recently constructed units, which were built at a higher average
cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation
Interval sales increased compared to 1999. This increase, however, was partially
offset by increased sales prices since September 30, 1999.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 52.7% for
the nine months ended September 30, 2000, from 50.5% for the same period of
1999. Due to recent growth rates and implementation of new leads generation
programs, the Company experienced relatively higher marketing costs in the first
nine months of 2000. The Company increased its headcount at the call centers
significantly since the third quarter of 1999, which created inefficiencies due
to temporary lack of available training resources. The Company also moved
towards reliance on national retail chains for its leads generation efforts, in
addition to the traditional local programs. The transition to national programs
was slower in generating leads than originally planned. In the third quarter of
2000, however, marketing efficiencies were realized as sales and marketing costs
as a percentage of sales declined.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
was unchanged at 10.0% for the nine months ended September 30, 2000, compared to
the same period of 1999.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
remained unchanged at 10.0% for the nine months ended September 30, 2000, as
compared to the nine months ended September 30, 1999. Overall, operating,
general and administrative expense increased $4.6 million, for the first nine
months of 2000, as compared
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to 1999, primarily due to increased headcount, higher salaries, increased legal
expense, and increased title and recording fees due to increased borrowings
against pledged notes receivable.
Other Expense
Other expense consists of water and utilities expenses, golf course and pro shop
expenses, marina expenses, and other miscellaneous expenses. Other expense as a
percentage of total revenues remained relatively flat at 1.4% for the nine
months ended September 30, 2000, as compared to 1.5% for the same period of
1999. The $314,000 increase in other expense primarily relates to increased
water and utilities expense.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.6% for the nine months ended September 30, 2000, compared to 2.4%
for the nine months ended September 30, 1999. Overall, depreciation and
amortization expense increased $1.5 million for the nine months ended September
30, 2000, as compared to 1999, primarily due to investments in automated
dialers, investments in telephone systems, and investments in a central
marketing facility, which opened in September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 82.8% for the
nine months ended September 30, 2000, from 57.7% for the same period of 1999.
This increase is primarily the result of interest expense related to increased
borrowings against pledged notes receivable. Also, the Company's weighted
average cost of borrowing increased to 9.6% in the first nine months of 2000
compared to 9.2% in the first nine months of 1999.
Income before Provision for Income Taxes and Extraordinary Item
Income before provision for income taxes and extraordinary item decreased to
$16.0 million for the nine months ended September 30, 2000, as compared to $25.6
million for the nine months ended September 30, 1999, as a result of the above
mentioned operating results.
Provision for Income Taxes
Provision for income taxes as a percentage of income before provision for income
taxes and extraordinary item remained flat at 38.5% for the first nine months of
2000, as compared to the same period of 1999.
Extraordinary Item
The Company recognized an extraordinary gain of $316,000, net of income tax of
$197,000, related to the early extinguishment of $1.0 million of 10 1/2% senior
subordinated notes in the first nine months of 2000. There were no extraordinary
items during the first nine months of 1999.
Net Income
Net income decreased to $10.2 million for the nine months ended September 30,
2000, as compared to $15.8 million for the nine months ended September 30, 1999,
as a result of the above mentioned operating results.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH. The Company generates cash primarily from down payments on the
sale of Vacation Intervals, sampler sales, collections of principal and interest
on customer notes receivable from Vacation Interval owners, management fees, and
resort and utility operations. During the nine months ended September 30, 2000,
cash provided by operations was $6.9 million, compared to cash provided by
operating activities of $2.9 million for the same period of 1999. The increase
in cash provided by operating activities was primarily a result of the timing of
inventory construction payments. The Company typically receives a 10% down
payment on sales of Vacation Intervals and finances the remainder by receipt of
a seven to ten year customer promissory note. The Company generates cash from
financing of customer notes receivable (i) by borrowing at an advance rate of
70% to 85% of
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eligible customer notes receivable and (ii) from the spread between interest
received on customer notes receivable and interest paid on related borrowings.
Because the Company uses significant amounts of cash in the development and
marketing of Vacation Intervals, but collects cash on customer notes receivable
over a seven-year to ten-year period, borrowing against receivables has
historically been a necessary part of normal operations.
For the nine months ended September 30, 2000 and 1999, cash provided by
financing activities was $99.7 million and $87.4 million, respectively. The
increase in net cash provided by financing activities was primarily due to
decreased payments on borrowings during the nine months ended September 30,
2000, compared to the same period of 1999. As of September 30, 2000, the
Company's credit facilities provide for loans of up to $335.0 million. At
September 30, 2000, approximately $282.5 million of principal and interest
related to advances under the credit facilities was outstanding. For the nine
months ended September 30, 2000, the weighted average cost of funds for all
borrowings, including the senior subordinated debt, was approximately 9.6%.
The Company believes that with respect to its current operations and capital
commitments, its borrowing capacity under existing third-party lending
agreements, together with cash generated from operations and future borrowings,
will be sufficient to meet the Company's working capital and capital expenditure
needs through the year ended December 31, 2001. The Company will continue to
review the possibility of extending its borrowing capacity with existing lenders
or issuing additional debt or mortgage-backed securities to finance future
acquisitions, refinance debt, finance mortgage receivables, and provide for
other working capital purposes.
USES OF CASH. Investing activities typically reflect a net use of cash as a
result of loans to customers in connection with the Company's Vacation Interval
sales, capital additions, and property acquisitions. Net cash used in investing
activities for the nine months ended September 30, 2000 and 1999, was $103.8
million and $93.7 million, respectively. The increase was primarily due to the
increased level of customer notes receivable resulting from higher sales volume,
reduced capital expenditures, and $6.5 million of cash received in the first
nine months of 1999 related to sales of equipment.
SUBSEQUENT EVENTS
Effective October 16, 2000, the Company reached a definitive agreement with a
lender to increase its $40 million revolving loan agreement, due August 2005, to
a $45 million revolving loan agreement.
Effective October 30, 2000, the Company entered into a $100 million revolving
credit agreement to finance Vacation Interval notes receivable through an
off-balance-sheet special purpose entity, formed on October 16, 2000. The
agreement has a term of 5 years. On November 1, 2000, the first funding of $41.4
million was drawn against this credit facility.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently subject to litigation arising in the normal course of
its business. From time to time, such litigation includes claims regarding
employment, tort, contract, truth-in-lending, the marketing and sale of Vacation
Intervals, and other consumer protection matters. Litigation has been initiated
from time to time by persons seeking individual recoveries for themselves, as
well as, in some instances, persons seeking recoveries on behalf of an alleged
class. In the judgement of the Company, none of these lawsuits or claims against
the Company, either individually or in the aggregate, is likely to have a
material adverse effect on the Company, its business, results of operations, or
financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1, dated August 18, 2000, to Loan and Security
Agreement, dated September 30, 1999, among the Company,
BankBoston, N.A., and Liberty Bank.
10.2 Amendment No. 2, dated October 16, 2000, to Loan and Security
Agreement, dated September 30, 1999,
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among the Company, BankBoston, N.A., and Liberty Bank.
10.3 Receivables Loan and Security Agreement, dated October 30,
2000, by and among the Company, as Servicer, Silverleaf
Finance I, Inc., as Borrower, DG Bank Deutsche
Genossenschaftsbank, as Agent, Autobahn Funding Company LLC,
as Lender, U.S. Bank Trust N.A., as Agent's Bank, and Wells
Fargo Bank, National Association, as the Backup Servicer.
10.4 Purchase and Contribution Agreement, dated October 30, 2000,
between the Company, as Seller, and Silverleaf Finance I,
Inc., as Purchaser.
10.5 Supplemental Executive Retirement Plan Agreement between the
Company and Thomas C. Franks.
10.6 Supplemental Executive Retirement Plan Agreement between the
Company and Sharon K. Brayfield.
27.0 Financial Data Schedule.
- ----------
(b) Reports on Form 8-K
None.
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.
Dated: November 13, 2000 By: /s/ ROBERT E. MEAD
--------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: November 13, 2000 By: /s/ HARRY J. WHITE, JR.
--------------------------
Harry J. White, Jr.
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Amendment No. 1, dated August 18, 2000, to Loan and Security
Agreement, dated September 30, 1999, among the Company,
BankBoston, N.A., and Liberty Bank.
10.2 Amendment No. 2, dated October 16, 2000, to Loan and Security
Agreement, dated September 30, 1999,
among the Company, BankBoston, N.A., and Liberty Bank.
10.3 Receivables Loan and Security Agreement, dated October 30,
2000, by and among the Company, as Servicer, Silverleaf
Finance I, Inc., as Borrower, DG Bank Deutsche
Genossenschaftsbank, as Agent, Autobahn Funding Company LLC,
as Lender, U.S. Bank Trust N.A., as Agent's Bank, and Wells
Fargo Bank, National Association, as the Backup Servicer.
10.4 Purchase and Contribution Agreement, dated October 30, 2000,
between the Company, as Seller, and Silverleaf Finance I,
Inc., as Purchaser.
10.5 Supplemental Executive Retirement Plan Agreement between the
Company and Thomas C. Franks.
10.6 Supplemental Executive Retirement Plan Agreement between the
Company and Sharon K. Brayfield.
27.0 Financial Data Schedule.