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, 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 November 10, 1998: 12,889,417
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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 nine months ended September 30, 1998 and 1997 ....................... 1
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 ....................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 1998 .................................... 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 ................................................... 10
PART II. OTHER INFORMATION
Item 5. Other Matters ........................................................... 18
Item 6. Exhibits and Reports on Form 8-K ........................................ 18
Signatures .............................................................. 19
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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,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 37,409 $ 18,337 $ 100,281 $ 51,963
Interest income 4,262 2,407 11,244 6,435
Interest income from affiliates 16 16 47 220
Management fee income 725 752 1,819 1,753
Lease income 682 278 1,685 1,153
Other income 2,125 1,112 4,333 2,347
------------ ------------ ------------ ------------
Total revenues 45,219 22,902 119,409 63,871
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 5,605 1,916 16,154 5,131
Sales and marketing 19,260 8,219 47,692 21,720
Provision for uncollectible notes 4,489 2,523 12,346 8,048
Operating, general and administrative 4,225 3,401 12,336 8,506
Depreciation and amortization 1,029 471 2,280 1,255
Interest expense to affiliates -- -- -- 422
Interest expense to unaffiliated entities 1,756 463 5,088 3,421
------------ ------------ ------------ ------------
Total costs and operating expenses 36,364 16,993 95,896 48,503
Income before provision for income taxes 8,855 5,909 23,513 15,368
Provision for income taxes (3,435) (2,186) (9,019) (5,687)
------------ ------------ ------------ ------------
NET INCOME $ 5,420 $ 3,723 $ 14,494 $ 9,681
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.42 $ 0.33 $ 1.16 $ 1.05
============ ============ ============ ============
DILUTED $ 0.42 $ 0.33 $ 1.14 $ 1.04
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 13,054,380 11,311,517 12,543,544 9,247,048
============ ============ ============ ============
DILUTED 13,054,380 11,403,192 12,664,871 9,341,065
============ ============ ============ ============
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 1998 1997
------------- ------------
Cash and equivalents $ 7,516 $ 4,970
Restricted cash 200 200
Notes receivable, net of allowance for doubtful accounts of
$20,590 and $12,261, respectively 155,261 92,036
Amounts due from affiliates 2,990 1,389
Inventory 52,267 28,310
Land, equipment and utilities, net 31,256 21,629
Prepaid and other assets 18,368 7,867
--------- ---------
Total Assets $ 267,858 $ 156,401
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 10,943 $ 5,106
Unearned revenues 4,810 3,122
Income taxes payable 3,494 1,500
Deferred income taxes, net 20,074 14,037
Notes payable and capital lease obligations 14,846 48,871
Senior subordinated notes 75,000 --
--------- ---------
Total Liabilities 129,167 72,636
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 13,311,517 shares issued and 12,972,517
shares outstanding at September 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 33,569 19,075
Treasury stock, at cost, 339,000 shares (4,350) --
--------- ---------
Total Shareholders' Equity 138,691 83,765
--------- ---------
Total Liabilities and Shareholders' Equity $ 267,858 $ 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
------------------------ Additional Treasury Stock
Number of Par Paid-in Retained -------------------------------
Shares Issued Value Capital Earnings Shares Cost 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
Treasury stock -- -- -- -- 339,000 (4,350) (4,350)
Net income -- -- -- 14,494 -- -- 14,494
---------- ----- --------- -------- ------- -------- ---------
September 30, 1998 13,311,517 $ 133 $ 109,339 $ 33,569 339,000 $ (4,350) $ 138,691
========== ===== ========= ======== ======= ======== =========
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,
------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net Income $ 14,494 $ 9,681
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,280 1,255
Discontinued operations -- 917
Deferred income taxes 6,037 5,016
Increase (decrease) in cash from changes in
assets and liabilities:
Restricted cash -- (200)
Amounts due from affiliates (1,601) 4,240
Inventory (23,957) (5,951)
Prepaid and other assets (10,631) (1,607)
Accounts payable and accrued expenses 5,837 1,143
Amounts due to affiliates -- 284
Unearned revenues 1,688 (217)
Income taxes payable 1,994 690
--------- ---------
Net cash provided by (used in) operating activities (3,859) 15,251
--------- ---------
INVESTING ACTIVITIES:
Purchases of land, equipment and utilities (10,676) (4,649)
Proceeds from sale of land, equipment and utilities -- 420
Notes receivable, net (63,225) (26,200)
--------- ---------
Net cash used in investing activities (73,901) (30,429)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 118,682 27,279
Payments on borrowings to unaffiliated entities (78,808) (45,408)
Proceeds from borrowings from affiliates -- 25
Payments on borrowings to affiliates -- (15,074)
Net proceeds from issuance of common stock 44,782 51,143
Purchase of treasury stock (4,350) --
Discontinued operations -- (228)
--------- ---------
Net cash provided by financing activities 80,306 17,737
--------- ---------
Net increase in cash 2,546 2,559
CASH AND CASH EQUIVALENTS:
Beginning of period 4,970 973
--------- ---------
End of period $ 7,516 $ 3,532
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,216 $ 3,019
Income taxes paid $ 988 $ --
Equipment acquired under capital lease or note $ 2,065 $ 1,813
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 nine months ended September 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. Certain previously reported amounts, however,
have been reclassified to conform to the 1998 presentation.
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.
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 redefines how operating segments are determined and
requires disclosures of certain financial and descriptive information about a
company's operating segments. It establishes standards for reporting and
displaying information about operating segments in annual financial statements
and requires that enterprises report selected information about operating
segments in interim reports. SFAS No. 131 may require additional disclosures and
will be applied by the Company for its 1998 annual financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued, which
establishes standards for and disclosures of derivative instruments and hedging
activities. The Company currently has no derivative instruments in place.
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, 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
The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three and nine months ended
September 30, 1998 and 1997:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
Weighted average shares outstanding - basic 13,054,380 11,311,517 12,543,544 9,247,048
Issuance of shares from stock options proceeds -- 545,193 728,887 558,463
Repurchase of shares from stock options proceeds -- (453,518) (607,560) (464,446)
---------- ---------- ---------- ---------
Weighted average shares outstanding - diluted 13,054,380 11,403,192 12,664,871 9,341,065
========== ========== ========== =========
For the three months ended September 30, 1998, the weighted average shares
outstanding assuming dilution was anti-dilutive.
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 has
utilized 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 nine
months ended September 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)
--------------------------------
Nine Months Ended September 30,
--------------------------------
1998 1997
------------ --------------
Revenues $ 119,362 $ 63,651
Expenses 95,442 50,654
------------ ------------
Income before provision for income taxes 23,920 12,997
Provision for income taxes (9,175) (4,810)
------------ ------------
Net income $ 14,745 $ 8,187
============ ============
Net income per share:
Basic $ 1.11 $ 0.71
============ ============
Diluted $ 1.10 $ 0.70
============ ============
Weighted average shares outstanding:
Basic 13,311,517 11,553,116
============ ============
Diluted 13,432,844 11,644,711
============ ============
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NOTE 4 - DEBT
Notes payable, captial lease obligations, and Senior Subordinated Notes consist
of the following:
September 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% ................................ $ 10,992 $ 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% ..................... -- 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% .................................. 720 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 September 30, 1998 and 4.2% to
14.0% at December 31, 1997 ............................................ 660 1,785
--------------- ---------------
Total notes payable ........................................... 12,372 46,239
Capital lease obligations ............................................... 2,474 2,632
--------------- ---------------
Total notes payable and capital lease obligations ............. 14,846 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 ........................................................ $ 89,846 $ 48,871
=============== ===============
Prime rate at September 30, 1998 and December 31, 1997 was 8.50%.
Applicable LIBOR rates at September 30, 1998 and December 31, 1997 ranged from
5.25% to 5.38% and 5.72% to 5.81%, respectively.
The Company's credit facilities provide for loans of up to $125 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 had 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 for the nine
months ended September 30, 1998 and 1997 are as follows (in thousands):
September 30,
-----------------
1998 1997
------ ------
Revenues $ 81 365
Expenses (188) (444)
----- -----
Net income (loss) $(107) $ (79)
===== =====
Combined summarized balance sheet information as of September 30, 1998 for the
Guarantor Subsidiaries is as follows (in thousands):
September 30,
-------------
1998
---------
Land, equipment, inventory and utilities, net $ 10
Other assets 17
---------
Total assets $ 27
=========
Investment by parent (includes equity and
amounts due to parent) $ 88
Other liabilities (61)
---------
Total liabilities and equity $ 27
=========
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.
The Company acquired a golf course and undeveloped land near Atlanta, Georgia,
for approximately $4.1 million. The undeveloped land was acquired in September
1998 for $0.6 million and the golf course was acquired in October 1998 for $3.5
million. The Company also acquired undeveloped land near Kansas City, Missouri,
for approximately $1.5 million in September 1998. These acquisitions are
accounted for under the purchase method of accounting based on preliminary
information, and are subject to final allocation of purchase price.
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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 over 72,000
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 Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ---------------
As a percentage of Total Revenues:
Vacation Interval sales 82.7% 80.1% 84.0% 81.4%
Interest income 9.5% 10.5% 9.5% 10.4%
Management fee income 1.6% 3.3% 1.5% 2.7%
Lease income 1.5% 1.2% 1.4% 1.8%
Other income 4.7% 4.9% 3.6% 3.7%
-------------- ------------- ------------- ---------------
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 15.0% 10.4% 16.1% 9.9%
Sales and marketing 51.5% 44.8% 47.6% 41.8%
Provision for uncollectible notes 12.0% 13.8% 12.3% 15.5%
As a percentage of Interest Income:
Interest expense 41.0% 19.1% 45.1% 57.7%
As a percentage of Total Revenues:
Operating, general and administrative 9.3% 14.9% 10.3% 13.3%
Depreciation and amortization 2.3% 2.1% 1.9% 2.0%
Total costs and operating expenses 80.4% 74.2% 80.3% 75.9%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues for the three months ended September 30, 1998 were $45.2 million,
representing a $22.3 million or 97.4% increase over revenues of $22.9 million
for the three months ended September 30, 1997. The increase was primarily due to
a $19.1 million increase in Vacation Interval sales, a $1.9 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 1998 third
quarter, the number of Vacation Intervals sold, exclusive of upgraded
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Vacation Intervals, increased 90.4% to 3,608 from 1,895 in the same period of
1997; the average price per Vacation Interval sold increased 10.8% to $8,046
from $7,263. Total Vacation Interval sales for the third quarter of 1998
included 1,030 biennial intervals (counted as 515 Vacation Intervals) compared
to 518 (259 Vacation Intervals) in the third 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 to $4.3 million for the three months ended September
30, 1998, from $2.4 million for the respective 1997 period. This increase
resulted from an increase in notes receivable 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 virtually flat at $0.7 million for the 1998 third
quarter as compared to $0.8 million for the same period of 1997.
Lease income, which relates to the Company's sampler program, increased to $0.7
million for the three months ended September 30, 1998, compared to $0.3 million
for the same period in 1997. The increase resulted from increased sales of
overnight samplers offered at new resorts.
Other income increased to $2.1 million for the quarter ended September 30, 1998,
from $1.1 million for the quarter ended September 30, 1997. The increase is
primarily the result of increased filing fees per Vacation Interval sold, from
$35 per contract during 1997 to $500 per contract by September 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 15.0% in
the third 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 51.5% for the three months ended September 30, 1998, from 44.8% 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.
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 September 30, 1998, from 13.8% for
the same period of 1997. This is the result of improvements in the Company's
collection efforts, 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.
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Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
decreased to 9.3% for the three months ended September 30, 1998, as compared to
14.9% for the three months ended September 30, 1997, however, increased $0.8
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 September 30, 1998, depreciation and amortization
expense as a percentage of total revenues was 2.3% as compared to 2.1% for the
same period of 1997. Overall, depreciation and amortization expense increased
$0.6 million for the third 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 increased to 41.0% for the
third quarter of 1998 from 19.1% for the same period of 1997. This increase is
primarily a result of interest incurred on the $75 million Senior Subordinated
Notes issued in the second quarter 1998.
Income before Provision for Income Taxes
Income before provision for income taxes increased 49.9% to $8.9 million for the
quarter ended September 30, 1998, from $5.9 million for the quarter ended
September 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 38.8% in the third quarter of 1998 as compared to 37.0% in the
third 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 $1.7 million, or 45.6%, for the three months ended
September 30, 1998, compared to the respective 1997 period as a result of the
results of operations discussed above.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues for the nine months ended September 30, 1998 were $119.4 million,
representing a $55.5 million or 87.0% increase over revenues of $63.9 million
for the nine months ended September 30, 1997. The increase was primarily due to
a $48.3 million increase in Vacation Interval sales, a $4.6 million increase in
interest income, and a $2.0 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. For the nine months
ended September 30, 1998, the number of Vacation Intervals sold, exclusive of
upgraded Vacation Intervals, increased 83.1% to 9,651 from 5,271 in the same
period of 1997; the average price per Vacation Interval sold increased 6.6% to
$8,039 from $7,539. Total Vacation Interval sales for the first nine months of
1998 included 2,582 biennial intervals (counted as 1,291 Vacation
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Intervals) compared to 1,422 (711 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 69.7% to $11.3 million for the nine months ended
September 30, 1998, from $6.7 million for the respective 1997 period. This
increase resulted from an increase in notes receivable 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 $1.8 million for the nine months ended
September 30, 1998 as compared to $1.8 million for the comparative 1997 period.
Lease income, which relates to the Company's sampler program, increased to $1.7
million for the nine months ended September 30, 1998, compared to $1.2 million
for the same period in 1997. The increase resulted from increased sales of
overnight samplers offered at new resorts.
Other income increased to $4.3 million for the nine months ended September 30,
1998, from $2.3 million for the nine months ended September 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 $500 per contract by
September 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 16.1% in
the first nine months of 1998 from 9.9% 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 47.6% for the nine months ended September 30, 1998, from 41.8% 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.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
decreased to 12.3% for the nine months ended September 30, 1998, from 15.5% for
the same period of 1997. This is the result of improvements in the Company's
collection efforts, 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 10.3% for the nine months ended September 30, 1998, as compared to
13.3% for the nine months ended September 30,
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1997, however, increased $3.8 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 nine months ended September 30, 1998, depreciation and amortization
expense as a percentage of total revenues decreased to 1.9% from 2.0% for the
same period of 1997. Overall, depreciation and amortization expense increased
$1.0 million for the first nine months 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 45.1% for the
nine months ended September 30, 1998, compared to 57.7% 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 53.0% to $23.5 million for
the nine months ended September 30, 1998, from $15.4 million for the same period
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 38.4% in the nine months ended September 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 $4.8 million, or 49.7%, for the nine months ended September
30, 1998, compared to the respective 1997 period as a result of the results of
operations discussed above.
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 nine months ended September 30, 1998, cash used in operations was
$3.9 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. 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 nine months ended September 30, 1998 and 1997, cash provided by
financing activities was $80.3 million and $17.7 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
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Notes due 2008. The Company's credit facilities provide for loans of up to $125
million. At September 30, 1998, approximately $11.7 million of principal and
interest related to advances under the credit facilities was outstanding.
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 nine months ended September 30, 1998 and 1997 was $73.9
million and $30.4 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
Many of the world's computer systems record years in a two-digit format. Such
computer systems will be unable to properly interpret dates beyond the year
1999, which could potentially lead to disruptions in the Company's operations.
The Company has conducted a review of its information technology ("IT") systems
currently utilized and is in the process of identifying and assessing non-IT
systems in order to determine its potential year 2000 deficiencies. This study
included reviewing all applicable reports, files, inquiry screens, maintenance
screens, batch programs, software, hardware, and other interactive applications.
Non-IT systems are generally more difficult to assess because they often contain
embedded technology that may be subject to year 2000 problems. In completing its
assessment, the Company has identified several primary computer systems that are
currently not year 2000 compliant. Each of these computer systems and its year
2000 compliance status are discussed below:
Marketing system - The current Marketing system requires modifications in order
to be year 2000 compliant. These modifications are anticipated to be completed
during the second quarter of 1999.
Sales and Credit system - The Sales and Credit system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the Sales
and Credit system is scheduled to be completed by February 1999.
Accounts Receivable system - The Accounts Receivable system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the
Accounts Receivable system is scheduled to be completed during the first quarter
of 1999.
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Inventory system - The Inventory system is currently being redeveloped to be
year 2000 compliant, among other enhancements. The redevelopment of the
Inventory system should be completed in the second quarter of 1999.
Finance Administration system - The Finance Administration system will need to
be redeveloped in order to be year 2000 compliant. The redevelopment of the
Finance Administration system is scheduled to be completed during the first
quarter of 1999.
Sales Commissions system - The Sales Commissions system is currently being
redeveloped to be year 2000 compliant, among other enhancements. The
redevelopment of the Sales Commissions system should be completed during the
first quarter of 1999.
Predictive dialer software - The Company's predictive dialer software should be
year 2000 compliant with an upgrade scheduled for the fourth quarter of 1998.
The General Ledger and Accounts Payable systems are currently not year 2000
compliant as well. However, these systems should be year 2000 compliant by the
first quarter of 1999 as the Company converts to new accounting software.
In the redevelopment phase of each module, the system being modified will be
tested by the appropriate programmers to ensure proper handling of dates. Test
procedures have already been developed as well as a complete test environment.
The necessary personnel and processing resources have been determined and
assigned to the appropriate projects. All major redeveloped systems will be run
parallel with the existing systems to ensure completeness and accuracy. All
redeveloped systems will be verified and accepted by the appropriate users prior
to eliminating the existing systems. Any other primary computer systems
currently utilized by the Company, that are not mentioned above, are already
year 2000 compliant.
In addition to the major computer systems described above, the Company primarily
utilizes standardized Microsoft Office products that are year 2000 compliant.
All personal computer ("PC") applications that are not in Microsoft Office are
written in Visual Basic and programmed to handle year 2000 issues. All operating
systems utilized by the Company, which include Novell, Intranetware, OS/400,
Windows 95, and Windows NT, are year 2000 compliant. The Company's AS400
hardware and related Network servers are year 2000 compliant as well. The
Company is in the process of inspecting and evaluating all data communications
equipment, including PCs, and should complete this evaluation process by January
1999. The Company has located a minimal number of PCs requiring replacement and
anticipates that no significant deficiencies of data communications equipment
will be found.
The Company has made inquiries of its major vendors, consisting primarily of
financial institutions, regarding their year 2000 compliance status and its
potential impact to the Company's business. Based on these discussions, the
Company does not anticipate year 2000 difficulties associated with its major
vendors. The Company, however, has made contingency plans to change vendors if
year 2000 problems at its existing vendors create interruptions to its business.
Company management believes that the total cost of the aforementioned year 2000
computer system and equipment enhancements will be less than $300,000, including
an estimate of internal payroll committed to the projects, of which
approximately $150,000 has already been incurred. The Company will utilize both
internal and external resources to achieve year 2000 compliance. The Company
estimates that its identification and assessment activities are approximately
90% complete and that its remediation is approximately 20% complete.
The failure to correct a material year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of year 2000 readiness of third party vendors, the Company is unable
to determine at this time whether the consequences of year 2000 failures will
have a material impact on the Company's results of operations, liquidity, or
financial condition. The
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Company believes, however, that its year 2000 compliance plan and time line
provide adequate staffing, resources, and time to mitigate and proactively
respond to any unforeseen year 2000 problems in a timely and preemptive manner.
The cost of year 2000 compliance and the estimated date of completion of
necessary modifications, however, are based on the Company's best estimates,
which were derived from various assumptions of future events. There can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated.
SUBSEQUENT EVENTS
In October 1998, the company acquired a golf course near Atlanta, Georgia, for
approximately $3.5 million and undeveloped land near Kansas City, Missouri, for
approximately $1.5 million, utilizing proceeds from its available lines of
credit.
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PART II. OTHER INFORMATION
ITEM 5. OTHER MATTERS
On September 15, 1998, the Board of Directors of the Company amended its Stock
Repurchase Program originally authorized on June 26, 1998, increasing the number
of shares the Company may repurchase under such program from 300,000 to 430,000
shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Contract of Sale by and between Terry Adair and George R.
Bedell, as Trustee, dated March 27, 1998. (Sale closed
September 28, 1998.)
10.2 Contract of Sale by and between Great Atlantic Properties Corp.
and George R. Bedell, as Trustee, dated August 12, 1998.
10.3 Contract of Sale, dated February 25, 1998 (as amended in
October 1998), by and between the Company and J. Phillip
Ballard, Jr. and Eagle Greens Ltd., f/k/a Northeast Georgia
Recreational Development Co., Inc. (Sale closed October 15,
1998.)
10.4 Amendment to Contract of Sale, dated October 14, 1998, by and
between the Company and J. Phillip Ballard, Jr. and Eagle
Greens Ltd., f/k/a Northeast Georgia Recreational Development
Co., Inc.
10.5 Second Amendment to Contract of Sale, dated October 14, 1998,
by and between the Company and J. Phillip Ballard, Jr. and
Eagle Greens Ltd., f/k/a Northeast Georgia Recreational
Development Co., Inc.
10.6 Management Agreement, dated October 13, 1998, by and between
the Company and Eagle Greens Ltd.
10.7 First Amendment to Employment Agreement between the Company and
Jim Oestreich, dated June 12, 1998.
10.8 Second Amendment to Employment Agreement between the Company
and Jim Oestreich, dated September 29, 1998.
10.9 Non-Qualified Stock Option Agreement, dated June 12, 1998, with
Jim Oestreich.
10.10 First Amendment to Employment Agreement between the Company and
David T. O'Connor, dated August 31, 1998.
10.11 Non-Qualified Stock Option Agreement, dated August 31, 1998,
with David T. O'Connor.
10.12 One to Four Family Residential Contract (Resale) between the
Company and Thomas C. Franks, dated July 30, 1998.
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: November 13, 1998 By: /s/ ROBERT E. MEAD
----------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: November 13, 1998 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 Contract of Sale by and between Terry Adair and George R. Bedell, as
Trustee, dated March 27, 1998. (Sale closed September 28, 1998.)
10.2 Contract of Sale by and between Great Atlantic Properties Corp. and
George R. Bedell, as Trustee, dated August 12, 1998.
10.3 Contract of Sale, dated February 25, 1998 (as amended in October
1998), by and between the Company and J. Phillip Ballard, Jr. and
Eagle Greens Ltd., f/k/a Northeast Georgia Recreational Development
Co., Inc. (Sale closed October 15, 1998.)
10.4 Amendment to Contract of Sale, dated October 14, 1998, by and between
the Company and J. Phillip Ballard, Jr. and Eagle Greens Ltd., f/k/a
Northeast Georgia Recreational Development Co., Inc.
10.5 Second Amendment to Contract of Sale, dated October 14, 1998, by and
between the Company and J. Phillip Ballard, Jr. and Eagle Greens Ltd.,
f/k/a Northeast Georgia Recreational Development Co., Inc.
10.6 Management Agreement, dated October 13, 1998, by and between the
Company and Eagle Greens Ltd.
10.7 First Amendment to Employment Agreement between the Company and Jim
Oestreich, dated June 12, 1998.
10.8 Second Amendment to Employment Agreement between the Company and Jim
Oestreich, dated September 29, 1998.
10.9 Non-Qualified Stock Option Agreement, dated June 12, 1998, with Jim
Oestreich.
10.10 First Amendment to Employment Agreement between the Company and David
T. O'Connor, dated August 31, 1998.
10.11 Non-Qualified Stock Option Agreement, dated August 31, 1998, with
David T. O'Connor.
10.12 One to Four Family Residential Contract (Resale) between the Company
and Thomas C. Franks, dated July 30, 1998.
27.0 Financial Data Summary.