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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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
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 RIVERBEND 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 May 12, 1998: 13,311,517
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SILVERLEAF RESORTS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed consolidated statements of income for the three months
ended March 31, 1998 and 1997........................................................... 1
Condensed consolidated balance sheets for the three months ended
March 31, 1998 and the year ended December 31, 1997..................................... 2
Condensed consolidated statement of shareholders' equity for the
three months ended March 31, 1998 ...................................................... 3
Condensed consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997........................................................... 4
Notes to the condensed consolidated financial statements................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K........................................................ 14
Signatures.............................................................................. 15
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
--------------------------------
1998 1997
------------ ------------
REVENUES:
Vacation Interval sales $ 26,239 $ 14,503
Interest income 2,959 1,933
Interest income from affiliates 15 107
Management fee income 502 499
Lease income 450 485
Other income 864 399
------------ ------------
Total revenues 31,029 17,926
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 3,698 1,221
Sales and marketing 12,409 5,949
Provision for uncollectible notes 3,444 2,355
Operating, general and administrative 3,867 2,171
Depreciation and amortization 564 331
Interest expense to affiliates -- 225
Interest expense to unaffiliated entities 1,275 1,461
------------ ------------
Total costs and operating expenses 25,257 13,713
Income from continuing operations before income taxes 5,772 4,213
Income tax expense (2,198) (1,559)
------------ ------------
NET INCOME $ 3,574 $ 2,654
============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.32 $ 0.34
============ ============
ASSUMING DILUTION $ 0.31 $ 0.34
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 11,311,517 7,711,517
============ ============
DILUTED 11,537,446 7,711,517
============ ============
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
-------- --------
Cash and equivalents $ 6,556 $ 4,970
Restricted cash 200 200
Notes receivable, net 109,837 92,036
Amounts due from affiliates 2,153 1,389
Inventory 34,259 28,310
Land, equipment and utilities, net 23,911 21,629
Land held for sale 466 466
Prepaid and other assets 8,556 7,401
-------- --------
TOTAL ASSETS $185,938 $156,401
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 7,514 $ 5,106
Unearned revenues 5,488 3,122
Income taxes payable 2,029 1,500
Deferred income taxes, net 15,706 14,037
Notes payable and capital lease obligations 67,862 48,871
-------- --------
Total Liabilities 98,599 72,636
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share, 100,000,000
shares authorized, 11,311,517 shares issued and
outstanding at March 31, 1998 and December 31, 1997 113 113
Additional paid-in capital 64,577 64,577
Retained earnings 22,649 19,075
-------- --------
Total Shareholders' Equity 87,339 83,765
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $185,938 $156,401
======== ========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands, except share data)
(Unaudited)
Common Stock
------------------------
Number of $0.01 Additional
Shares Par Paid-in Retained
Issued Value Capital Earnings Total
---------- ---------- ---------- ---------- ----------
January 1, 1998 11,311,517 $ 113 $ 64,577 $ 19,075 $ 83,765
Net income -- -- -- 3,574 3,574
---------- ---------- ---------- ---------- ----------
March 31, 1998 11,311,517 $ 113 $ 64,577 $ 22,649 $ 87,339
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net Income $ 3,574 $ 2,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 564 330
Discontinued operations -- 524
Deferred tax provision 1,669 1,213
Increase (decrease) in cash from changes in
assets and liabilities:
Amounts due from affiliates (764) (257)
Inventory (5,949) (1,090)
Prepaid and other assets (1,154) (1,130)
Accounts payable and accrued expenses 2,408 180
Amounts due to affiliates -- 194
Unearned revenues 2,366 (217)
Income taxes payable 529 346
-------- --------
Net cash provided by operating activities 3,243 2,747
-------- --------
INVESTING ACTIVITIES:
Purchases of land, equipment and utilities (2,081) (339)
Notes receivable, net (17,802) (6,689)
-------- --------
Net cash used in investing activities (19,883) (7,028)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 22,937 8,231
Payments on borrowings to unaffiliated entities -- (3,528)
Payments on borrowings to affiliates (4,711) (212)
Discontinued operations -- (62)
-------- --------
Net cash provided by financing activities 18,226 4,429
-------- --------
Net increase in cash 1,586 148
CASH AND CASH EQUIVALENTS:
Beginning of period 4,970 973
-------- --------
End of period $ 6,556 $ 1,121
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,502 $ 1,184
Equipment acquired under capital lease or note 749 30
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except share and per share data)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q, and do not include certain
information and disclosures required by generally accepted accounting principles
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 months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1998.
These statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's Form 10-K/A (File
No. 001-13003) as filed with the Securities and Exchange Commission. The
accounting policies used in preparing these consolidated financial statements
are the same as those described in such Form 10-K/A.
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting on Comprehensive Income", effective January 1, 1998. The Company had
no items classified as other comprehensive income in the periods presented;
therefore, comprehensive income is not presented.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding. Earnings per share assuming dilution is computed by
dividing net income by the weighted average number of shares and equivalent
shares outstanding. The number of equivalent shares is computed using the
treasury stock method which assumes that the increase in the number of shares
resulting from the exercise of the stock options described in Note 3 is reduced
by the number of shares which could have been repurchased by the Company with
the proceeds from the exercise of the options. For the period ending March 31,
1998, the weighted average shares outstanding assuming dilution was calculated
by increasing the basic weighted average shares outstanding by the assumed
issuance of 892,333 shares upon exercise of the options and the repurchase of
666,404 shares with the proceeds of the exercise of such options.
NOTE 3 - STOCK PLAN
During 1997, the Company established a stock option plan (the "1997 Stock Option
Plan" or "Plan"). The 1997 Stock Option Plan provides for the award of
nonqualified stock options to directors, officers, and key employees, and the
grant of incentive stock options to salaried key employees. Nonqualified stock
options will provide for the right to purchase common stock at a specified price
which may be less than fair market value on the date of grant (but not less than
par value). Nonqualified stock options may be granted for any term and upon such
conditions determined by the board of directors of the Company. The Company has
reserved 1,100,000 shares of common stock for issuance pursuant to the Company's
1997 Stock Option Plan. In February 1998, the Board of Directors approved an
amendment to the plan reserving an additional 500,000 shares of common stock for
issuance under the plan; however, this amendment will not become effective
unless it is approved by the shareholders. As of March 31, 1998, approximately
1,004,500 options were granted as part of the 1997 Stock Option Plan. Such
options have a graded vesting schedule, with equal installments of shares
exercisable up through four years of the original grant date. These options are
exercisable at prices ranging from $16.00 to $25.50 per share, and expire ten
years from the date of grant.
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NOTE 4 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations as of March 31, 1998 and
December 31, 1997, consist of the following:
March 31, December 31,
--------- ------------
1998 1997
------- -------
$40 million revolving loan agreement, which contains certain financial
covenants, due October 2005, principal and interest payable from the proceeds
obtained from customer notes receivable which are pledged as collateral for
the note, at an interest rate of LIBOR plus 2.5% ............................. $29,838 $22,137
$12 million revolving loan agreement which contains certain financial covenants,
due May 2003, principal and interest payable from the proceeds obtained from
customer notes receivable which are pledged as collateral for the note, at an
interest rate of Base plus 2.75% (11.25% at December 31, 1997) ............... 3,669 4,122
$60 million revolving loan agreement, which contains certain financial
covenants, due December 1999, 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% ......................................... 1,456 1,529
$15 million revolving loan agreement which contains certain financial covenants,
due November 2002, principal and interest payable from the proceeds obtained
from customer notes receivable which are pledged as collateral for the note,
at an interest rate of Prime plus 2% ......................................... 13,618 12,596
$10 million line of credit due January 2000, with drawings permitted until
December 1998, at a variable rate of LIBOR plus 3%, secured by land,
improvements, and equipment of various existing resorts and new resorts ...... 3,936 4,070
$10 million revolving construction loan due October 2000, with drawings
permitted until April 1999, at a variable rate of LIBOR plus 3.5%, secured by
land, construction in process, and customer notes receivable ................. 9,991 --
Various notes, due from April 1998, through October 2002, collateralized by
various assets with interest rates ranging from 4.3% to 24.7% ................ 2,354 1,785
------- -------
Total notes payable .................................................. 64,862 46,239
Capital lease obligations ...................................................... 3,000 2,632
------- -------
Total notes payable and capital lease obligations ................... $67,862 $48,871
======= =======
Prime rate at March 31, 1998 was 8.5%.
LIBOR at March 31, 1998 was 5.75%.
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NOTE 5 - SUBSIDIARY GUARANTEES
All subsidiaries of the Company have guaranteed the Notes (as
defined in Note 8) which were issued in the offering of $75.0 million of Senior
Subordinated Notes. The separate financial statements of each guaranteeing
subsidiary (each, a "Guarantor Subsidiary") are not presented because the
Company's management has concluded that such financial statements are not
material to investors. The guarantee of each Guarantor Subsidiary is full and
unconditional and joint and several, and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company.
Combined summarized operating results of the Guarantor
Subsidiaries are as follows (in thousands):
March 31,
-----------------------
1998 1997
---------- -----------
Revenues $ 17 76
Expenses (54) (170)
------ ------
Net loss $ (37) $ (94)
====== ======
Combined summarized balance sheet information as of March 31,
1998 for the Guarantor Subsidiaries is as follows (in thousands):
March 31,
1998
--------------
Land, equipment, inventory and utilities, net $ 1,781
Other assets 290
--------
Total assets $ 2,071
========
Investment by parent (includes equity and
amounts due to parent) $(2,095)
Other liabilities 24
--------
Total liabilities and equity $(2,071)
========
At March 31, 1998, there was no subsidiary of the Company, the
capital stock of which will comprise a substantial portion of the collateral for
the Notes within the meaning of Rule 3-10 of Regulation S-X.
NOTE 6 - ACQUISITIONS
In January 1998, the Company entered into an agreement with Crown
Resort Co., LLC ("Crown") to acquire timeshare management rights at eight
resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina,
Tennessee, and Texas for $3.8 million. As part of this arrangement, Silverleaf
will also acquire any unsold Vacation Intervals at the eight resorts. This
proposed acquisition is subject to satisfactory completion of customary
due-diligence procedures; accordingly, there is no assurance that the proposed
acquisition will be completed.
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In January 1998, the Company entered into an employment agreement
proposing to make an individual an executive officer of the Company. The
agreement does not become effective until the individual relocates to Dallas,
Texas, which must occur before July 1, 1998. The agreement provides for an
annual base salary, options for the purchase of common stock, and other fringe
benefits. The agreement also provides for the purchase of the employee's
condominium, upon the individual's relocation to Dallas, for $108. Additionally,
if the officer is terminated without "good cause", the Company shall be
obligated to make severance payments in an amount equal to the officer's base
annual salary.
In February 1998, the Company purchased all the issued and
outstanding shares of a California marketing corporation for $250. This purchase
was completed in conjunction with a December 1997 employment agreement entered
into with an executive officer.
In February 1998, the Company acquired a parcel of land in
Galveston, Texas for approximately $1.2 million. The Company intends to develop
this parcel, along with an adjoining parcel acquired in December 1997, as a new
beach-front Destination Resort.
In February 1998, the Company entered into two agreements, one to
acquire a golf course and undeveloped land near Atlanta, Georgia for $3.5
million, and another to acquire undeveloped land near Kansas City, Missouri for
$1.6 million. The proposed acquisitions are subject to satisfactory completion
of customary due diligence procedures; accordingly, there is no assurance that
either proposed acquisition will be completed.
NOTE 7 - PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed pro forma financial information
as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 was
prepared from the financial statements of the Company by adjusting for the
effect of all public offerings in 1998 and 1997, which includes the Company's
initial public offering completed in 1997 and the equity and debt offerings
discussed in Note 8, including debt repaid from proceeds of such offerings, as
if all of these transactions had occurred on January 1, 1997. The pro forma
results do not include extraordinary losses on early extinguishment of debt.
The following information is not necessarily indicative of what
the performance would have been had these offerings actually occurred on January
1, 1997, nor does it purport to represent future results of operations of the
Company. (In thousands, except share and per share information.):
Income Statement
-----------------------------
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -----------
Revenues $ 31,014 $ 17,818
Expenses 25,706 14,126
----------- -----------
Income from continuing operations
before income taxes 5,308 3,692
Income taxes 2,021 1,366
----------- -----------
Income from continuing operations $ 3,287 $ 2,326
=========== ===========
Net income per share:
Basic $ 0.25 $ 0.20
=========== ===========
Diluted $ 0.24 $ 0.20
=========== ===========
Weighted average shares outstanding:
Basic 13,311,517 11,354,122
=========== ===========
Diluted 13,537,446 11,354,122
=========== ===========
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Pro Forma
Balance Sheet
------------------
Three Months Ended
March 31, 1998
------------------
ASSETS
Cash and equivalents $ 55,032
Notes receivable 109,837
Inventory 34,259
Other assets 38,276
--------
Total Assets $237,404
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and capital lease obligations $ --
Senior Subordinated Notes due 2008 75,000
Income taxes 17,567
Other payables 13,002
--------
Total Liabilities 105,569
Shareholders' Equity 131,835
--------
Total Liabilities and Shareholders' Equity $237,404
========
NOTE 8 - SUBSEQUENT EVENTS
Effective April 8, 1998, the Company completed the sale of
2,000,000 shares of Company common stock (the "Equity Offering") at a price of
$24.375 per share. In addition to the 2,000,000 shares sold by the Company, the
majority shareholder of the Company sold 875,000 additional shares of the
Company.
The Company also completed its placement of $75.0 million
aggregate principal amount of 10 1/2% Senior Subordinated Notes due 2008 (the
"Notes"). The Notes are general unsecured obligations of the Company, ranking
subordinate in right of payment to all senior indebtedness of the Company,
including indebtedness under the Company's revolving credit facilities (the
"Note Offering"). The Company received proceeds from these two offerings in an
aggregate net amount of $118,940. Costs incurred in connection with the Equity
and Note Offerings were approximately $7.0 million. The Company will utilize the
proceeds primarily for the repayment of notes payable and capital lease
obligations and its construction and acquisition programs. See Management's
Discussion and Analysis of Financial Condition and Results of Operations
elsewhere in this Form 10-Q.
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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/A
(File No. 001-13003) which is incorporated herein by reference.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
Three Months Ended
March 31,
---------------------------
1998 1997
------------ ------------
As a percentage of Total Revenues:
Vacation Interval sales 84.6% 80.9%
Interest income 9.6% 11.4%
Management fee income 1.6% 2.8%
Lease income 1.4% 2.7%
Other income 2.8% 2.2%
------------ ------------
Total revenues 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 14.1% 8.4%
Sales and marketing 47.3% 41.0%
Provision for uncollectible notes 13.1% 16.2%
As a percentage of Interest Income:
Interest expense 42.9% 82.6%
As a percentage of Total Revenues:
Operating, general and administrative 12.5% 12.1%
Depreciation and amortization 1.8% 1.8%
Total costs and operating expenses 81.4% 76.5%
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QUARTER ENDED MARCH 31, 1998 VERSUS QUARTER ENDED MARCH 31, 1997. Revenues
for the quarter ended March 31, 1998 were $31.0 million, representing a $13.1
million or 73.2% increase over revenues of $17.9 million for the quarter ended
March 31, 1997. The increase was primarily due to a $11.7 million increase in
sales of Vacation Intervals, a $0.9 million increase in interest income, and a
$0.5 million increase in other income. The strong increase in Vacation Interval
revenues resulted from the Company's increased telemarketing capacity, arising
from investments in computer and automated dialing technology. In addition to
the forgoing, the Company recorded first quarter sales at two of its new
resorts, Timber Creek near St. Louis, Missouri and Fox River near Chicago,
Illinois, which both opened sales offices in the fourth quarter of 1997.
In the 1998 first quarter, the number of Vacation Intervals sold, exclusive
of upgraded Vacation Intervals, increased 85.6% to 2,662 from 1,434 in the same
period of 1997; the average price per interval decreased 1.7% to $7,533 from
$7,658. Total interval sales for the first three months of 1998 included 679
biennial intervals (counted as 340 Vacation Intervals), compared to 352 (176
Vacation Intervals) in the first three months of 1997. The Company has increased
revenues generated from sales of upgraded intervals at the existing resorts
through the continued implementation of marketing and sales programs focused on
selling upgraded intervals to Silverleaf owners.
Interest income increased 45.8% to $2.9 million for the quarter ended March
31, 1998, from $2.0 million for the same period of 1997. This increase resulted
from a $47.4 million increase in notes receivable, net of allowance for
uncollectible notes, due to increased sales.
Management fee income remained flat at $0.5 million for the 1998 first
quarter, as compared to the 1997 first quarter.
Lease income, which relates to the Company's Sampler program, decreased to
$0.4 million for the period ended March 31, 1998, compared to $0.5 million for
the same period in 1997. The decrease resulted from the Company's marketing of
lower cost biennial intervals as an alternative to the Sampler program.
Other income increased 116.6% to $0.9 million for the first three months of
1998, from $0.4 million for the first three months of 1997. This increase was
due primarily to higher amenity usage fees and higher water and sewer income
from resort utility operations.
Cost of sales as a percentage of gross Vacation Interval sales increased to
14.1% in the first quarter of 1998, from 8.4% for the same period of 1997. This
increase reflects increased sales of Vacation Intervals from new construction
units. The Company continues to deplete its inventory of low cost weeks acquired
primarily in 1995 and 1996. As a result of these factors and the Company's
construction program to build new inventory, the cost of sales percentage is
expected to increase.
Sales and marketing costs as a percentage of gross Vacation Interval sales
increased to 47.3% for the quarter ended March 31, 1998, from 41.0% for the same
period of 1997. This increase is due primarily to the implementation of new
marketing programs, and start up costs in new markets.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 13.1% for the first three months of 1998 from 16.2% for the
same period of 1997, reflecting an increased focus on collection efforts for
notes receivable. The improvement can also be attributed to an increase in
receivables relating to upgrade sales, which typically represent better
performing accounts, resulting in fewer delinquencies.
Operating, general and administrative expenses as a percentage of total
revenues increased to 12.5% for the quarter ended March 31, 1998, as compared to
12.1% for the quarter ended March 31, 1997. The increase is attributable to
additional salaries and other costs incurred, resulting from being a public
company.
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For the three months ended March 31, 1998, depreciation and amortization
expense as a percentage of total revenue remained unchanged from 1997 at 1.8%.
Overall, depreciation and amortization expense increased $0.2 million for the
first quarter of 1998, as compared to 1997, primarily due to investments in a
new automated dialer, telephone system and central marketing facility.
Interest expense as a percentage of interest income decreased to 42.9% for
the first quarter of 1998, from 82.6% for the same period of 1997. This decrease
was due to lower borrowing costs during the first quarter of 1998, resulting
primarily from payment of indebtedness with proceeds from the Company's initial
public offering in June 1997, and more favorable interest rates on outstanding
indebtedness.
Income from continuing operations before income taxes increased 37.6% to
$5.8 million for the quarter ended March 31, 1998, from $4.2 million for the
quarter ended March 31, 1997 as a result of the above mentioned operating
results.
Income tax expense as a percentage of income from continuing operations
before income taxes increased to 38.1% in the first quarter of 1998 as compared
to 37.0% in the first quarter of 1997. This increase resulted from an increase
in the statutory Federal income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH. The Company generates cash primarily from the sale of
Vacation Intervals, the financing of customer notes receivable from Silverleaf
owners, management fees, Sampler sales, and resort and utility operations.
During the three months ended March 31, 1998, cash provided by operations was
$3.2 million. The Company generates cash from financing of customer notes
receivable (i) by borrowing at an advance rate of 70% of 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
period, borrowing against receivables has historically been a necessary part of
normal operations.
For the three months ended March 31, 1998 and 1997, cash provided by financing
activities was $18.2 million and $4.4 million, respectively. The increase in net
cash provided by financing activities was mainly attributable to increased
borrowings on the revolving credit facilities to support inventory construction
and customer notes receivable financing. The Company's credit facilities provide
for loans of up to $130.0 million. At March 31, 1998, approximately $62.5
million of principal and interest related to advances under the credit
facilities was outstanding. For the three months ended March 31, 1998, the
weighted average cost of funds for these borrowings was approximately 8.3%.
For regular Federal income tax purposes, the Company reports substantially all
of the Vacation Interval sales it finances under the installment method. Under
this method, income on sales of Vacation Intervals is not recognized until cash
is received, either in the form of a down payment, or as installment payments on
customer notes receivable. The deferral of income tax liability conserves cash
resources on a current basis. Interest will be imposed, however, on the amount
of tax attributable to the installment payments 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 tax in a particular year, no interest is imposed since
the interest is based on the amount of tax paid in that year. The consolidated
financial statements do not contain an accrual for any interest expense, which
would be paid on the deferred taxes related to the installment method, as the
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interest expense is not estimable. In addition, the Company is subject to
current alternative minimum tax ("AMT") as a result of the deferred income,
which results from the installment sales treatment. Payment of AMT reduces the
future regular tax liability attributable to Vacation Interval sales, and
creates a deferred tax asset. In April 1998, the Internal Revenue Service
issued a letter ruling to the Company granting a requested AMT accounting
adjustment effective as of January 1, 1997. As a result, the Company's
alternative minimum taxable income for 1997 through 2000 will be increased each
year by an estimated amount of approximately $9.0 million per year, which will
result in the Company paying substantial additional federal taxes in those
years. The Company's net operating loss carryforwards, which also may be used
to offset installment sales income, expire beginning in 2007 through 2012.
Realization of the deferred tax asset arising from net operating losses is
dependent on generating sufficient taxable income prior to the expiration of
the loss carryforwards and other factors.
USES OF CASH. Investing activities typically reflect a net use of cash
because 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 three months ended March 31, 1998 and 1997 was $19.9 million
and $7.0 million, respectively. The increase was due to the increased level of
customer notes receivable resulting from higher sales volume, and the purchase
of the Galveston property for $1.2 million.
SUBSEQUENT EVENTS
On April 8, 1998, the Company consummated the sale of 2,000,000 shares of
common stock, at an offering price of $24.375 per share (the "Equity Offering").
In addition to the 2,000,000 shares offered by the Company, the majority
shareholder of the Company sold 875,000 additional shares of the Company's
common stock. On April 8, 1998, the Company also consummated its placement of
$75.0 million aggregate principal amount of 10 1/2% Senior Subordinated Notes
due 2008 (the "Note Offering"). Net proceeds after consideration of offering
expenses totaled approximately $118,940,000. The discussion of the Equity
Offering and the Note Offering contained in this report on Form 10-Q does not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
The Company plans to utilize the proceeds from the Equity Offering and Note
Offering to repay substantially all of its outstanding indebtedness, develop
units, amenities and infrastructure at the existing resorts and to develop
units, amenities, and infrastructure at new resorts and to fund acquisitions,
working capital and general corporate purposes. Upon completion of the Equity
Offering and the Note Offering, the Company had $130.0 million of borrowing
capacity under its existing credit facilities, which will offer additional
flexibility to acquire new timeshare resorts, land upon which new timeshare
resorts may be constructed, or other companies which operate resort-type
properties. The consummation of the Equity Offering and the Note Offering
notwithstanding, the Company does not have sufficient capital to fully implement
its master plan for the total development of over 3,000 units at the existing
resorts and new resorts. To completely finance such master plan development and
fund additional acquisitions, the Company will likely be required to raise
capital in addition to the Equity Offering and the Note Offering through
existing and additional credit facilities, additional debt offerings or public
offerings of its common stock, or any combination of the above.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture dated April 1, 1998 between the Company and Norwest
Bank Minnesota, National Association, as Trustee.
4.2 Certificate No. 001 of 10 1/2% Senior Subordinated Notes due 2008 in
the amount of $75,000,000.
4.3 Subsidiary Guarantee dated April 8, 1998 by Silverleaf Berkshires,
Inc.; Bull's Eye Marketing, Inc. (California); Bull's Eye Marketing,
Inc. (Delaware); Silverleaf Resort Acquisitions, Inc.; Silverleaf
Travel, Inc.; Silverleaf Hotels, Inc.; Database Research, Inc.;
Condominium Builders, Inc.; and Villages Land, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
none
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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.
Dated: May 12, 1998 By: /s/ ROBERT E. MEAD
-----------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: May 12, 1998 By: /s/ JOE W. CONNER
-----------------------------
Joe W. Conner
Chief Financial Officer
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INDEX TO EXHIBITS
4.1 Indenture dated April 1, 1998 between the Company and Norwest
Bank Minnesota, National Association, as Trustee.
4.2 Certificate No. 001 of 10 1/2% Senior Subordinated Notes due 2008 in
the amount of $75,000,000.
4.3 Subsidiary Guarantee dated April 8, 1998 by Silverleaf Berkshires,
Inc.; Bull's Eye Marketing, Inc. (California); Bull's Eye Marketing,
Inc. (Delaware); Silverleaf Resort Acquisitions, Inc.; Silverleaf
Travel, Inc.; Silverleaf Hotels, Inc.; Database Research, Inc.;
Condominium Builders, Inc.; and Villages Land, Inc.
27 Financial Data Schedule
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