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 June 30, 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 August 12, 1998: 13,017,717
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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
and six months ended June 30, 1998 and 1997 ........................... 1
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 ..................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 1998 ........................................ 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 .......................................... 4
Notes to Condensed Consolidated Financial Statements .................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ................... 15
Item 5. Other Matters ......................................................... 15
Item 6. Exhibits and Reports on Form 8-K ...................................... 15
Signatures ............................................................ 16
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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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
REVENUES:
Vacation Interval sales $ 36,633 $ 19,123 $ 62,872 $ 33,626
Interest income 4,024 2,095 6,983 4,028
Interest income from affiliates 16 96 31 204
Management fee income 591 502 1,093 1,001
Lease income 553 389 1,003 875
Other income 1,344 837 2,208 1,235
------------ ----------- ------------ -----------
Total revenues 43,161 23,042 74,190 40,969
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 6,851 1,993 10,549 3,215
Sales and marketing 16,023 7,552 28,432 13,501
Provision for uncollectible notes 4,412 3,169 7,856 5,525
Operating, general and administrative 4,245 2,934 8,112 5,105
Depreciation and amortization 686 454 1,250 784
Interest expense to affiliates -- 196 -- 422
Interest expense to unaffiliated entities 2,058 1,498 3,333 2,958
------------ ----------- ------------ -----------
Total costs and operating expenses 34,275 17,796 59,532 31,510
Income before provision for income taxes 8,886 5,246 14,658 9,459
Provision for income taxes (3,386) (1,942) (5,584) (3,501)
------------ ----------- ------------ -----------
NET INCOME $ 5,500 $ 3,304 $ 9,074 $ 5,958
============ =========== ============ ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.42 $ 0.38 $ 0.74 $ 0.73
============ =========== ============ ===========
DILUTED $ 0.41 $ 0.38 $ 0.73 $ 0.73
============ =========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 13,245,583 8,678,550 12,283,893 8,197,705
============ =========== ============ ===========
DILUTED 13,395,215 8,678,550 12,493,091 8,197,705
============ =========== ============ ===========
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)
June 30, December 31,
ASSETS 1998 1997
-------- ------------
Cash and equivalents $ 30,389 $ 4,970
Restricted cash 200 200
Notes receivable, net of allowance for doubtful accounts of
$20,259 and $15,450, respectively 131,961 92,036
Amounts due from affiliates 3,168 1,389
Inventory 42,463 28,310
Land, equipment and utilities, net 27,767 21,629
Land held for sale 466 466
Prepaid and other assets 16,110 7,401
-------- --------
Total Assets $252,524 $156,401
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 10,701 $ 5,106
Unearned revenues 4,217 3,122
Income taxes payable 2,672 1,500
Deferred income taxes, net 17,461 14,037
Notes payable and capital lease obligations 4,852 48,871
Senior subordinated notes 75,000 --
-------- --------
Total Liabilities 114,903 72,636
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 13,311,517 shares issued and
outstanding at June 30, 1998 and 11,311,517 shares
issued and outstanding at December 31, 1997 133 113
Additional paid-in capital 109,339 64,577
Retained earnings 28,149 19,075
-------- --------
Total Shareholders' Equity 137,621 83,765
-------- --------
Total Liabilities and Shareholders' Equity $252,524 $156,401
======== ========
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 amounts)
(Unaudited)
Common Stock
-------------------------
Number of Additional
Shares Issued Par Paid-in Retained
and Outstanding Value Capital Earnings Total
--------------- ----- ------- -------- -----
January 1, 1998 11,311,517 $113 $ 64,577 $19,075 $ 83,765
Issuance of common stock 2,000,000 20 44,762 -- 44,782
Net income -- -- -- 9,074 9,074
--------------- ---- -------- ------- --------
June 30, 1998 13,311,517 $133 $109,339 $28,149 $137,621
=============== ==== ======== ======= ========
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)
Six Months Ended
June 30,
-----------------------
1998 1997
--------- --------
OPERATING ACTIVITIES:
Net Income $ 9,074 $ 5,958
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,250 784
Discontinued operations -- 506
Deferred income taxes 3,424 2,663
Increase (decrease) in cash from changes in
assets and liabilities:
Amounts due from affiliates (1,779) 4,332
Inventory (14,153) (1,357)
Prepaid and other assets (8,709) (625)
Accounts payable and accrued expenses 5,595 349
Amounts due to affiliates -- 24
Unearned revenues 1,095 (192)
Income taxes payable 1,172 858
--------- --------
Net cash provided by (used in) operating activities (3,031) 13,300
--------- --------
INVESTING ACTIVITIES:
Purchases of land, equipment and utilities (6,187) (1,841)
Notes receivable, net (39,925) (15,694)
--------- --------
Net cash used in investing activities (46,112) (17,535)
--------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 103,990 15,187
Payments on borrowings to unaffiliated entities (74,210) (42,017)
Payments on borrowings to affiliates -- (14,789)
Net proceeds from issuance of common stock 44,782 51,143
Discontinued operations -- (62)
--------- --------
Net cash provided by financing activities 74,562 9,462
--------- --------
Net increase in cash 25,419 5,227
CASH AND CASH EQUIVALENTS:
Beginning of period 4,970 973
--------- --------
End of period $ 30,389 $ 6,200
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,994 $ 2,471
Income taxes paid $ 988 $ --
Equipment acquired under capital lease or note $ 749 $ 700
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
The condensed consolidated financial statements of Silverleaf Resorts, Inc. and
subsidiaries ("the Company") presented herein 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 and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto 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 the condensed
consolidated financial statements presented herein 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.
On April 3, 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on Costs of Start-Up Activities", effective
for fiscal years beginning after December 15, 1998. SOP 98-5 requires that costs
for start-up activities, including organization costs, should be charged to
expense as incurred. The Company currently follows the practice of charging
start-up costs to expense as incurred. The adoption of SOP 98-5, therefore, will
have no effect on results of operations or financial position of the Company.
NOTE 2 - EARNINGS PER SHARE
For the three and six months ended June 30, 1998, the weighted average shares
outstanding assuming dilution was calculated by increasing the basic weighted
average shares outstanding by the assumed issuance of 900,000 and 1,025,000
shares, respectively, upon exercise of the options and the repurchase of
750,368 and 815,801 shares, respectively, with the proceeds from the exercise
of such options.
NOTE 3 - PUBLIC OFFERINGS
Effective April 3, 1998, the Company completed the sale of 2,000,000 shares of
Company common stock at a price of $24.375 per share. On the same date, the
majority shareholder of the Company sold 875,000 additional shares of Company
common stock.
Also effective April 3, 1998, the placement of $75 million aggregate principal
amount of 10 1/2% senior subordinated notes due 2008 ("Senior Subordinated
Notes") was completed by the Company. The Senior Subordinated 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 Company received proceeds from these
two offerings in an aggregate net amount of $118,940,000. Costs incurred in
connection with the offerings were approximately $4.4 million. The Company is
utilizing the proceeds primarily for the repayment of notes payable and capital
lease obligations, and its construction and acquisition programs.
The following unaudited condensed pro forma financial information for the six
months ended June 30, 1998 and 1997 was prepared from the consolidated 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
June 1997 and the equity and debt offerings completed in April 1998, including
debt repaid from proceeds of such offerings, as if all of these transactions had
occurred on January 1, 1997. The pro forma information is for informational
purposes only and not necessarily indicative of the financial position or
results of operations that would have resulted had these offerings actually
occurred on January 1, 1997, nor does it purport to represent future financial
position or results of operations of the Company (in thousands, except per share
amounts):
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Pro Forma Condensed Consolidated
Statements of Income
(Unaudited)
---------------------------
Six Months Ended June 30,
---------------------------
1998 1997
----------- -----------
Revenues $ 74,159 $ 40,765
Expenses 59,534 32,320
----------- -----------
Income before provision for income taxes 14,625 8,445
Provision for income taxes 5,572 3,125
----------- -----------
Net income $ 9,053 $ 5,320
=========== ===========
Net income per share:
Basic $ 0.68 $ 0.46
=========== ===========
Diluted $ 0.67 $ 0.46
=========== ===========
Weighted average shares outstanding:
Basic 13,311,517 11,553,116
=========== ===========
Diluted 13,520,715 11,553,116
=========== ===========
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NOTE 4 - DEBT
Notes payable, capital lease obligations, and Senior Subordinated Notes consist
of the following:
June 30, 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% ................................................. $ 722 $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) .............................................................. -- 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% ................................................ 34 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% ................................................... 503 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 .................................................................................. -- 4,070
Various notes, due from April 1998 through October 2002, collateralized by
various assets with interest rates ranging from 4.3% to 24.7% at June 30, 1998
and 4.2% to 14.0% at December 31, 1997 ........................................................... 911 1,785
------- -------
Total notes payable ...................................................................... 2,170 46,239
Capital lease obligations .......................................................................... 2,682 2,632
------- -------
Total notes payable and capital lease obligations ........................................ 4,852 48,871
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 ................................................................ 75,000 --
------- -------
Total ................................................................................... $79,852 $48,871
======= =======
Prime rate at June 30, 1998 and December 31, 1997 was 8.50%.
Applicable LIBOR rates at June 30, 1998 and December 31, 1997 ranged from 5.69%
to 5.84% and 5.72% to 5.81%, respectively.
The Company's credit facilities provide for loans of up to $130 million.
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NOTE 5 - SUBSIDIARY GUARANTEES
All subsidiaries of the Company have guaranteed the $75.0 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 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, and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company, and together comprise all direct and
indirect subsidiaries of the Company. During the second quarter, the Company
liquidated several subsidiaries with nominal operations.
Combined summarized operating results of the Guarantor Subsidiaries are as
follows (in thousands):
June 30,
----------------
1998 1997
---- ----
Revenues $ 26 190
Expenses (98) (329)
---- -----
Net income (loss) $(72) $(139)
==== =====
Combined summarized balance sheet information as of June 30, 1998 for the
Guarantor Subsidiaries is as follows (in thousands):
June 30,
1998
--------
Land, equipment, inventory and utilities, net $ 12
Other assets 16
----
Total assets $ 28
====
Investment by parent (includes equity and
amounts due to parent) $ 72
Other liabilities (44)
----
Total liabilities and equity $ 28
====
NOTE 6 - ACQUISITIONS
On May 29, 1998, the Company consummated an agreement with Crown Resort Co., LLC
("Crown") acquiring timeshare management rights and unsold Vacation Intervals at
eight resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South
Carolina, Tennessee, and Texas for $4.8 million. The acquisition was accounted
for under the purchase method of accounting based on preliminary information,
and is subject to final allocation of the purchase price.
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
Company is currently conducting customary due diligence procedures related to
Atlanta, Georgia, and has completed due diligence related to Kansas City,
Missouri. There is no assurance that either proposed acquisition will be
completed.
NOTE 7 - SUBSEQUENT EVENT
On June 26, 1998, the Board of Directors of the Company authorized the
repurchase of up to 300,000 shares of the Company's common stock. Subsequent to
June 30, 1998, approximately 294,000 shares had been repurchased at an average
price of $13.21 per share.
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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.
The Company currently owns and/or operates 20 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 approximately
61,000 owners. 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 Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
As a percentage of Total Revenues:
Vacation Interval sales 84.9% 83.0% 84.7% 82.1%
Interest income 9.3% 9.5% 9.4% 10.3%
Management fee income 1.4% 2.2% 1.5% 2.5%
Lease income 1.3% 1.7% 1.4% 2.1%
Other income 3.1% 3.6% 3.0% 3.0%
------- ------- ------- -------
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 18.7% 10.4% 16.8% 9.6%
Sales and marketing 43.7% 39.5% 45.2% 40.2%
Provision for uncollectible notes 12.0% 16.6% 12.5% 16.4%
As a percentage of Interest Income:
Interest expense 50.9% 77.3% 47.5% 79.9%
As a percentage of Total Revenues:
Operating, general and administrative 9.8% 12.7% 10.9% 12.5%
Depreciation and amortization 1.6% 2.0% 1.7% 1.9%
Total costs and operating expenses 79.5% 77.2% 80.3% 76.9%
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues
Revenues for the three months ended June 30, 1998 were $43.2 million,
representing a $20.2 million or 87.3% increase over revenues of $23.0 million
for the three months ended June 30, 1997. The increase was primarily due to a
$17.5 million increase in Vacation Interval sales, a $1.8 million increase in
interest income, and a $0.5 million increase in other income. The strong
increase in Vacation Interval sales primarily resulted from increased sales at
existing resorts and sales at three 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, and Oak N' Spruce near Boston, Massachusetts,
which opened a sales office in the second quarter of 1998. In the 1998 second
quarter, the number of Vacation Intervals sold, exclusive of upgraded Vacation
Intervals, increased 74.1% to 3,381 from 1,942 in the same period of 1997; the
average price per Vacation Interval sold increased 9.2% to $8,431 from $7,719.
Total Vacation Interval sales for the second quarter of 1998 included 873
biennial intervals (counted as 437 Vacation Intervals) compared to 552 (276
Vacation Intervals) in the second quarter of 1997. The Company experienced
increased revenues generated from sales of upgraded Vacation Intervals at the
existing resorts through the continued implementation of marketing and sales
programs focused on selling upgraded intervals to the Company's existing
Vacation Interval owners. In addition, Vacation Interval sales at existing
resorts increased as a result of enhanced telemarketing capacity, arising from
investments in computer and automated dialing technology.
Interest income increased 84.4% to $4.0 million for the three months ended June
30, 1998, from $2.2 million for the respective 1997 period. This increase
resulted from an increase in notes receivable, net of allowance for
uncollectible notes, due to increased sales, as well as interest income
generated from the proceeds of the debt and equity offerings completed on April
3, 1998.
Management fee income remained flat at $0.6 million for the 1998 second quarter
as compared to $0.5 million for the same period of 1997.
Lease income, which relates to the Company's sampler program, increased to $0.6
million for the three months ended June 30, 1998, compared to $0.4 million for
the same period in 1997. The increase resulted from increased sales of overnight
samplers offered at new resorts.
Other income increased to $1.3 million for the quarter ended June 30, 1998, from
$0.8 million for the quarter ended June 30, 1997. The increase is primarily the
result of increased filing fees per Vacation Interval sold, from $35 per
contract during 1997 to $250 per contract by June 30, 1998. This increase was
also due to higher amenity usage fees and higher water and sewer income from
resort utility operations.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 18.7% in
the second quarter of 1998 from 10.4% for the same period of 1997. 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 in comparison with the respective prior year period.
Sales and Marketing
Sales and marketing costs as a percentage of Vacation Interval sales increased
to 43.7% for the three months ended June 30, 1998, from 39.5% for the same
period of 1997. This increase is due primarily to the implementation of new
marketing programs, start up costs in recently opened markets or markets yet to
open where sales have not yet reached mature levels to offset costs, and the
deferred sales recognition associated with sales at resorts under construction
whereby only the direct sales commissions costs related to such sales have been
similarly deferred.
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Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
decreased to 12.0% for the three months ended June 30, 1998, from 16.6% for the
same period of 1997. This is the result of improvements in the Company's
collection effort, including increased staffing as well as improved collections
administrative software, the implementation of a program through which
delinquent loans are assumed by existing owners with a solid credit record, and
an increase in receivables related to upgrade sales, which typically represent
better performing accounts, resulting in fewer delinquencies.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
decreased to 9.8% for the three months ended June 30, 1998, as compared to 12.7%
for the three months ended June 30, 1997, however, increased $1.3 million in
1998 compared to 1997. The decrease in operating, general and administrative
expenses as a percentage of total revenues is the result of the Company's
ability to increase sales without proportionate increases in overhead. The
dollar increase is attributable to additional salaries and other increased costs
resulting from growth and the Company's publicly traded status effective June
1997.
Depreciation and Amortization
For the three months ended June 30, 1998, depreciation and amortization expense
as a percentage of total revenues decreased to 1.6% from 2.0% for the same
period of 1997. Overall, depreciation and amortization expense increased $0.2
million for the second quarter of 1998 as compared to 1997, primarily due to
investments in a new automated dialer, telephone system, and central marketing
facility.
Interest Expense
Interest expense as a percentage of interest income decreased to 50.9% for the
second quarter of 1998 from 77.3% for the same period of 1997. This decrease
was due to the payment of indebtedness with proceeds from the Company's equity
and debt offerings in the second quarter of 1998, which resulted in lower
interest expense on outstanding indebtedness, as well as the increase in
interest income discussed above.
Income before Provision for Income Taxes
Income before provision for income taxes increased 69.4% to $8.9 million for the
quarter ended June 30, 1998, from $5.2 million for the quarter ended June 30,
1997, as a result of the above mentioned operating results.
Provision for Income Taxes
Income tax expense as a percentage of income before provision for income taxes
increased to 38.1% in the second quarter of 1998 as compared to 37.0% in the
second quarter of 1997. This increase resulted from an increase in state income
taxes due to additional operations commencing in Illinois, Missouri, and
Massachusetts.
Net Income
Net income increased $2.2 million, or 66.5%, for the three months ended June 30,
1998, compared to the respective 1997 period as a result of the results of
operations discussed above.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues
Revenues for the six months ended June 30, 1998 were $74.2 million, representing
a $33.2 million or 81.0% increase over revenues of $41.0 million for the six
months ended June 30, 1997. The increase was primarily due to a $29.3 million
increase in Vacation Interval sales, a $2.8 million increase in interest income,
and a $1.0 million increase in other income. The strong increase in Vacation
Interval sales primarily resulted from increased sales at existing resorts and
sales at three 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, and Oak N' Spruce near Boston, Massachusetts, which opened a sales office
in the second quarter of 1998. In the first half of 1998, the number of Vacation
Intervals sold, exclusive of upgraded Vacation Intervals, increased 79.0% to
6,043 from 3,376 in the same period of 1997; the average price per Vacation
Interval sold increased 4.4% to $8,035 from $7,693. Total Vacation Interval
sales for the first six months of 1998 included 1,552 biennial intervals
(counted as 776 Vacation Intervals) compared to 904 (452 Vacation Intervals)
during the respective 1997 period. The Company experienced increased revenues
generated from sales of upgraded Vacation Intervals at the existing resorts
through the continued implementation of marketing and sales programs focused on
selling upgraded intervals to the Company's existing Vacation Interval owners.
In addition, Vacation Interval sales at existing resorts increased as a result
of enhanced telemarketing capacity, arising from investments in computer and
automated dialing technology.
Interest income increased 65.7% to $7.0 million for the six months ended June
30, 1998, from $4.2 million for the respective 1997 period. This increase
resulted from an increase in notes receivable, net of allowance for
uncollectible notes, due to increased sales, as well as interest income
generated from the proceeds of the debt and equity offerings completed on April
3, 1998.
Management fee income remained flat at $1.1 million for the six months ended
June 30, 1998 as compared to $1.0 million for the comparative 1997 period.
Lease income, which relates to the Company's sampler program, increased to $1.0
million for the six months ended June 30, 1998, compared to $0.9 million for the
same period in 1997. The increase resulted from increased sales of overnight
samplers offered at new resorts.
Other income increased to $2.2 million for the six months ended June 30, 1998,
from $1.2 million for the six months ended June 30, 1997. The increase is
primarily the result of increased filing fees per Vacation Interval sold, which
increased from $35 per contract during 1997 to $250 per contract by June 30,
1998. This increase was also due to higher amenity usage fees and higher water
and sewer income from resort utility operations.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 16.8% in
the first half of 1998 from 9.6% for the comparative 1997 period. 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 in comparison with the respective prior year period.
Sales and Marketing
Sales and marketing costs as a percentage of Vacation Interval sales increased
to 45.2% for the six months ended June 30, 1998, from 40.2% for the same period
of 1997. This increase is due primarily to the implementation of new marketing
programs, start up costs in recently opened markets or markets yet to open where
sales have not yet reached mature levels to offset costs, and the deferred sales
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recognition associated with sales at resorts under construction whereby only
the direct sales commissions costs related to such sales have been similarly
deferred.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
decreased to 12.5% for the six months ended June 30, 1998, from 16.4% for the
same period of 1997. This is the result of improvements in the Company's
collection effort, including increased staffing as well as improved collections
administrative software, the implementation of a program through which
delinquent loans are assumed by existing owners with a solid credit record, and
an increase in receivables related to upgrade sales, which typically represent
better performing accounts, resulting in fewer delinquencies.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
decreased to 10.9% for the six months ended June 30, 1998, as compared to 12.5%
for the six months ended June 30, 1997, however, increased $3 million in 1998
compared to 1997. The decrease in operating, general and administrative expenses
as a percentage of total revenues is the result of the Company's ability to
increase sales without proportionate increases in overhead. The dollar increase
is attributable to additional salaries and other increased costs resulting from
growth and the Company's publicly traded status effective June 1997.
Depreciation and Amortization
For the six months ended June 30, 1998, depreciation and amortization expense as
a percentage of total revenues decreased to 1.7% from 1.9% for the same period
of 1997. Overall, depreciation and amortization expense increased $0.5 million
for the first half of 1998 as compared to 1997, primarily due to investments in
a new automated dialer, telephone system, and central marketing facility.
Interest Expense
Interest expense as a percentage of interest income decreased to 47.5% for the
six months ended June 30, 1998, compared to 79.9% for the same period of 1997.
This decrease was due to the payment of indebtedness with proceeds from the
Company's equity and debt offerings in the second quarter of 1998, which
resulted in lower interest expense on outstanding indebtedness, as well as the
increase in interest income discussed above.
Income before Provision for Income Taxes
Income before provision for income taxes increased 55% to $14.7 million for the
six months ended June 30, 1998, from $9.5 million for the first half of 1997, as
a result of the above mentioned operating results.
Provision for Income Taxes
Income tax expense as a percentage of income before provision for income taxes
increased to 38.1% in the six months ended June 30, 1998 as compared to 37.0% in
the comparable period of 1997. This increase resulted from an increase in state
income taxes due to additional operations commencing in Illinois, Missouri, and
Massachusetts.
Net Income
Net income increased $3.1 million, or 52.3%, for the six months ended June 30,
1998, compared to the respective 1997 period as a result of the results of
operations discussed above.
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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 Vacation Interval
owners, management fees, sampler sales, and resort and utility operations.
During the six months ended June 30, 1998 cash used in operations was $3
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 borrowing. The Company uses significant amounts of
cash in the development and marketing of Vacation Intervals, however, collects
cash on customer notes receivable over a seven-year period. Therefore, borrowing
against receivables has historically been a necessary part of normal operations.
For the six months ended June 30, 1998 and 1997, cash provided by financing
activities was $74.6 million and $9.5 million, respectively. The increase in net
cash provided by financing activities was mainly attributable to the issuance,
in the second quarter of 1998, of $75 million of Senior Subordinated Notes due
2008. The Company's credit facilities provide for loans of up to $130 million.
At June 30, 1998, approximately $1.3 million of principal and interest related
to advances under the credit facilities was outstanding. The Company expects to
borrow on its lines of credit during the third quarter of 1998.
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 received after the year of sale
for the period beginning on the date of sale and ending on the date the
installment payments are received. 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 condensed 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 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 million per year, which will result in the Company paying
substantial additional federal and state 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 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 six months ended June 30, 1998 and 1997 was $46.1 million and
$17.5 million, respectively. The increase was primarily due to the increased
level of customer notes receivable resulting from higher sales volume and the
purchase of Crown for $4.8 million.
YEAR 2000 ISSUES
Computer systems may not properly categorize and process date information for
the year 2000 and subsequent years because of the two-digit formats. Systems
that do not properly classify dates could generate erroneous data or cause a
system to fail. Based on the Company's assessment of year 2000 issues, it has
implemented a project time line in order to ensure compliance, and believes all
systems should be year 2000 compliant by the end of the second quarter of 1999.
Company management believes additional external costs to the Company will be
minimal, as the majority of resources necessary to complete the compliance
procedures are within the Company.
SUBSEQUENT EVENTS
On June 26, 1998, the Board of Directors of the Company authorized the
repurchase of up to 300,000 shares of the Company's common stock. Subsequent to
June 30, 1998, approximately 294,000 shares had been repurchased at an average
price of $13.21 per share.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 20, 1998, a proposal
to elect the nominee listed in the following table as a director of the Company
was submitted to a vote of the Company's stockholders.
Nominee Votes For Votes Withheld
------- --------- --------------
Stuart Marshall Bloch 11,065,896 1,289
At the same meeting, proposals to (i) approve and adopt an Amendment to the 1997
Stock Option Plan and (ii) ratify the appointment of Deloitte & Touche L.L.P. as
independent accountants for the ensuing year were submitted to a vote of the
Company's stockholders. Both proposals were adopted by the stockholders. The
voting was as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
Amendments to 1997 Stock Option Plan 10,974,705 146,280 6,200
Ratification of Independent Accountants 11,065,825 0 1,360
Item 5. Other Matters
On June 26, 1998, the Board of Directors of the Company authorized the
repurchase of up to 300,000 shares of the Company's common stock. Subsequent to
June 30, 1998, approximately 294,000 shares had been repurchased at an average
price of $13.21 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 First Amendment to 1997 Stock Option Plan for Silverleaf
Resorts, Inc., effective as of May 20, 1998.
10.1 Employment Agreement with Harry J. White, Jr.
10.2 Amendment to Employment Agreement with Sharon K. Brayfield.
10.3 Non-Qualified Stock Option Agreement dated June 25, 1998 with
Thomas C. Franks.
10.4 Incentive and Non-Qualified Stock Option Agreement dated June
25, 1998 with Sharon K. Brayfield.
10.5 Non-Qualified Stock Option Agreement dated June 29, 1998 with
Harry J. White, Jr.
10.6 Bill of Sale and Blanket Assignment dated May 28, 1998
between the Company and Crown Resort Co., LLC.
27.0 Financial Data Summary
(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: August 12, 1998 By: /s/ ROBERT E. MEAD
------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: August 12, 1998 By: /s/ HARRY J. WHITE JR.
------------------------------
Harry J. White Jr.
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
4.1 First Amendment to 1997 Stock Option Plan for Silverleaf
Resorts, Inc., effective as of May 20, 1998.
10.1 Employment Agreement with Harry J. White, Jr.
10.2 Amendment to Employment Agreement with Sharon K. Brayfield.
10.3 Non-Qualified Stock Option Agreement dated June 25, 1998 with
Thomas C. Franks.
10.4 Incentive and Non-Qualified Stock Option Agreement dated June
25, 1998 with Sharon K. Brayfield.
10.5 Non-Qualified Stock Option Agreement dated June 29, 1998 with
Harry J. White, Jr.
10.6 Bill of Sale and Blanket Assignment dated May 28, 1998
between the Company and Crown Resort Co., LLC.
27.0 Financial Data Summary