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 March 31, 1999
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 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)
214-631-1166
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of May 13, 1999: 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
ended March 31, 1999 and 1998....................................................... 1
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998............................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 1999................................................... 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998....................................................... 4
Notes to the Condensed Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................... 13
Signatures.......................................................................... 13
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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
March 31,
--------------------------
1999 1998
---------- ----------
REVENUES:
Vacation Interval sales $ 41,327 $ 26,609
Sampler sales 1,245 450
---------- ----------
Total sales 42,572 27,059
Interest income 5,666 2,959
Interest income from affiliates 12 15
Management fee income 900 502
Other income 474 494
---------- ----------
Total revenues 49,624 31,029
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 5,769 3,698
Sales and marketing 21,054 12,409
Provision for uncollectible notes 4,133 3,444
Operating, general and administrative 6,296 3,867
Depreciation and amortization 1,205 564
Interest expense 3,282 1,275
---------- ----------
Total costs and operating expenses 41,739 25,257
Income before provision for income taxes 7,885 5,772
Provision for income taxes (3,036) (2,198)
---------- ----------
NET INCOME $ 4,849 $ 3,574
========== ==========
NET INCOME PER COMMON SHARE:
BASIC $ 0.38 $ 0.32
========== ==========
DILUTED $ 0.38 $ 0.31
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 12,889,417 11,311,517
========== ==========
DILUTED 12,889,417 11,537,446
========== ==========
See notes to 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)
March 31, December 31,
ASSETS 1999 1998
--------- ---------
Cash and equivalents $ 13,240 $ 11,355
Restricted cash 873 873
Notes receivable, net of allowance for uncollectible notes of
$24,533 and $23,947, respectively 198,082 173,959
Amounts due from affiliates 5,036 4,115
Inventories 82,708 71,694
Land, equipment, buildings, and utilities, net 40,490 34,025
Prepaid and other assets 14,794 16,899
--------- ---------
TOTAL ASSETS $ 355,223 $ 312,920
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 14,813 $ 8,144
Unearned revenues 4,138 4,082
Income taxes payable 1,183 4,136
Deferred income taxes, net 22,856 21,524
Notes payable and capital lease obligations 90,458 58,108
Senior subordinated notes 75,000 75,000
--------- ---------
Total Liabilities 208,448 170,994
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share, 100,000,000
shares authorized, 13,311,517 shares issued and
12,889,417 shares outstanding at March 31, 1999 and
December 31, 1998 133 133
Additional paid-in capital 109,339 109,339
Retained earnings 42,302 37,453
Treasury stock, at cost (422,100 shares at March 31, 1999
and December 31, 1998) (4,999) (4,999)
--------- ---------
Total Shareholders' Equity 146,775 141,926
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 355,223 $ 312,920
========= =========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
Common Stock
------------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ----------------------
Issued Value Capital Earnings Shares Cost Total
---------- ----- --------- -------- -------- -------- ---------
January 1, 1999 13,311,517 $ 133 $ 109,339 $ 37,453 (422,100) $ (4,999) $ 141,926
Net income -- -- -- 4,849 -- -- 4,849
---------- ----- --------- -------- -------- -------- ---------
March 31, 1999 13,311,517 $ 133 $ 109,339 $ 42,302 (422,100) $ (4,999) $ 146,775
========== ===== ========= ======== ======== ======== =========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net Income $ 4,849 $ 3,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,205 564
Deferred income taxes 1,332 1,669
Increase (decrease) in cash from changes in
assets and liabilities:
Amounts due from affiliates (921) (764)
Inventories (11,014) (5,949)
Prepaid and other assets 2,028 (1,154)
Accounts payable and accrued expenses 6,669 2,408
Unearned revenues 56 2,366
Income taxes payable (2,953) 529
-------- --------
Net cash provided by operating activities 1,251 3,243
-------- --------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (7,491) (2,081)
Sales of land, equipment, buildings, and utilities 4,494 --
Notes receivable, net (24,123) (17,802)
-------- --------
Net cash used in investing activities (27,120) (19,883)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 37,380 22,937
Payments on borrowings to unaffiliated entities (9,626) --
Payments on borrowings to affiliates -- (4,711)
-------- --------
Net cash provided by financing activities 27,754 18,226
-------- --------
Net increase in cash 1,885 1,586
CASH AND CASH EQUIVALENTS:
Beginning of period 11,355 4,970
-------- --------
End of period $ 13,240 $ 6,556
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,432 $ 1,502
Equipment acquired under capital lease or note $ 4,596 $ 749
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries ("the Company") presented herein do not include certain
information and disclosures required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in
the Company's Form 10-K for the year ended December 31, 1998 (File No.
001-13003) as filed with the Securities and Exchange Commission. The accounting
policies used in preparing these condensed consolidated financial statements
are the same as those described in such Form 10-K. Certain previously reported
amounts, however, have been reclassified to conform to the 1999 presentation.
SFAS No. 133 -- In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999 and will be adopted for the
period ended December 31, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of the derivatives are recorded each period in current earnings
or other comprehensive income depending on whether a derivative is designated
as part of a hedge transaction, and if it is, the type of hedge transaction.
The impact of SFAS No. 133 on the Company's results of operations, financial
position, or cash flows will be dependent on the level and types of derivative
instruments the Company will have entered into at the time the standard is
implemented. The Company currently has no derivative instruments.
SOP No. 98-5 -- On April 3, 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-5, "Reporting on Costs of Start-Up Activities"
("SOP No. 98-5"), effective for fiscal years beginning after December 15, 1998.
SOP No. 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
Company elected to early adopt SOP No. 98-5. At the time of its adoption, the
Company had no start-up costs capitalized and, therefore, the adoption had 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 months ended March 31, 1999
and 1998:
Three Months Ended
March 31,
-----------------------------
1999 1998
---------- ----------
Weighted average shares outstanding - basic 12,889,417 11,311,517
Issuance of shares from stock options exercised -- 892,333
Repurchase of shares from stock options proceeds -- (666,404)
---------- ----------
Weighted average shares outstanding - diluted 12,889,417 11,537,446
========== ==========
For the three months ended March 31, 1999, the weighted average shares
outstanding assuming dilution was anti-dilutive.
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NOTE 3 - DEBT
Loans, notes payable, capital lease obligations, and senior subordinated notes
as of March 31, 1999 and December 31, 1998 (in thousands):
March 31, December 31,
1999 1998
---------- ----------
$60 million revolving loan agreement, which contains certain financial
covenants, expires 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% .......... 31,401 11,210
$40 million revolving loan agreement, which contains certain financial
covenants, expires 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% ........... 36,267 29,856
$15 million revolving loan agreement which contains certain financial
covenants, expires 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% ............. 12,176 13,638
$15 million revolving construction loan due October 2000, with drawings
permitted until April 1999, a variable rate of LIBOR plus 3.5% secured
by land, construction in process, and customer notes receivable .............. -- --
Various notes, due from December 1999 through October 2005,
collateralized by various assets with interest rates ranging from
4.2% to 14.0% ................................................................ 3,252 223
---------- ----------
Total notes payable .................................................... 83,096 54,927
Capital lease obligations ...................................................... 7,362 3,181
---------- ----------
Total notes payable and capital lease obligations ...................... 90,458 58,108
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 75,000
---------- ----------
$ 165,458 $ 133,108
========== ==========
At March 31, 1999, prime rate was 7.75% and the LIBOR rate was 5.0%. At
December 31, 1998, prime rate was 7.75% and LIBOR rates were from 5.15% to
5.28%.
Effective March 31, 1999, the Company reached a definitive agreement with a
lender to increase its $15 million revolving loan agreement, expiring in
November 2002, to a $75 million two-year revolving loan agreement. The credit
facility is based on an 85% advance rate against receivables compared to the
previous advance rate of 70%. Additionally, the interest rate on the amended
credit facility improved to LIBOR plus 3% from prime plus 2%.
NOTE 4 - 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 the Company's management has determined that such
information is not material to investors. The guarantee of each Guarantor
Subsidiary is full and unconditional and joint and several, and each Guarantor
Subsidiary is a wholly-owned subsidiary of the Company, and together comprise
all direct and indirect subsidiaries of the Company.
Combined summarized operating results of the Guarantor Subsidiaries for the
three months ended March 31, 1999 and 1998, are as follows (in thousands):
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March 31,
----------------------
1999 1998
------ ------
Revenues $ 1 $ 17
Expenses (45) (54)
------ ------
Net loss $ (44) $ (37)
====== ======
Combined summarized balance sheet information as of March 31, 1999 for the
Guarantor Subsidiaries is as follows (in thousands):
March 31,
1999
------
Land, equipment, inventory, and utilities, net $ 6
Other assets 26
------
Total assets $ 32
======
Investment by parent (includes equity and
amounts due to parent) $ (29)
Other liabilities (3)
------
Total liabilities and equity $ (32)
======
NOTE 5 - ACQUISITIONS
In January 1999, the Company acquired undeveloped land near The Villages resort
in Tyler, Texas, for approximately $1.0 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are forward looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed in the Company's Form 10-K for
the year ended December 31, 1998 (File No. 001-13003).
The Company currently owns and/or operates 22 resorts in various stages of
development. These resorts offer a wide array of country club-like amenities,
such as golf, swimming, horseback riding, boating, and many organized
activities for children and adults. The Company represents an owner base of
over 80,000 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
March 31,
---------------------
1999 1998
----- -----
As a percentage of total revenues:
Vacation Interval sales 83.3% 85.8%
Sampler sales 2.5% 1.4%
----- -----
Total sales 85.8% 87.2%
Interest income 11.4% 9.6%
Management fee income 1.8% 1.6%
Other income 1.0% 1.6%
----- -----
Total revenues 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 14.0% 13.9%
Provision for uncollectible notes 10.0% 12.9%
As a percentage of total sales:
Sales and marketing 49.5% 45.9%
As a percentage of total revenues:
Operating, general and administrative 12.7% 12.5%
Depreciation and amortization 2.4% 1.8%
As a percentage of interest income:
Interest expense 57.8% 42.9%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues
Revenues for the quarter ended March 31, 1999 were $49.6 million, representing
a $18.6 million or 60% increase over revenues of $31.0 million for the quarter
ended March 31, 1998. The increase was primarily due to a $14.7 million
increase in sales of Vacation Intervals and a $2.7 million increase in interest
income. The strong increase in Vacation Interval sales primarily resulted from
the addition of seven new sales offices since March 31, 1998.
In the 1999 first quarter, the number of Vacation Intervals sold, exclusive of
upgraded Vacation Intervals, increased 45.7% to 3,879 from 2,662 in the same
period of 1998; the average price per interval increased 6.6% to $8,146 from
$7,639. Total interval sales for the first three months of 1999 included 1,417
biennial intervals (counted as 709 Vacation Intervals) compared to 679 (340
Vacation Intervals) in the first three months of 1998. The Company also
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increased sales of upgraded intervals through the continued implementation of
marketing and sales programs focused on selling upgraded intervals to the
Company's existing Vacation Interval owners. In the first quarter of 1999, the
2,248 upgraded Vacation Intervals were sold at an average price of $4,329
compared to 1,460 upgraded Vacation Intervals sold at an average price of
$4,297 during the comparable 1998 period.
Sampler sales increased $795,000 to $1.2 million for the period ended March 31,
1999, compared to $450,000 for the same period in 1998. The increase resulted
from increased sales of overnight samplers offered at new resorts, offset by an
increase in biennial interval sales, which are an alternative to the sampler
program. The increase also resulted from sales of the Company's Endless Escape
Program to owners of Vacation Intervals at eight resorts that have been managed
by the Company since May 1998.
Interest income increased 91% to $5.7 million for the quarter ended March 31,
1999, from $3.0 million for the same period of 1998. This increase primarily
resulted from an $88.2 million increase in notes receivable, net of allowance
for uncollectible notes, since March 31, 1998, due to increased sales.
Management fee income increased $398,000 for the 1999 first quarter, as
compared to the 1998 first quarter. This increase was primarily the result of
greater net income from the resorts' management clubs due to higher dues income
resulting from an increased membership base, partially offset by an increase in
operating expenses.
Other income consists of water and utilities income, condominium rental income,
marina income, golf pro shop income, and other miscellaneous items. Other
income remained relatively flat at $474,000 for the first three months of 1999
compared to $494,000 for the first three months of 1998. Increases in golf pro
shop income at Apple Mountain Resort were offset by the closing of the Oak N'
Spruce Resort restaurant.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 14.0% in
the first quarter of 1999, from 13.9% for the same period of 1998. 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 total sales increased to 49.5% for
the quarter ended March 31, 1999, from 45.9% for the same period of 1998.
Several factors contributed to the increase in sales and marketing costs as a
percentage of sales. This increase, in part, is due to the implementation of new
marketing programs, including a vacation product whereby related revenues
received are deferred until the guest actually stays at the resort.
Additionally, the Company is incurring substantial marketing and start up costs
associated with two new sales offices and one expanded sales office in recently
opened markets where sales have not yet reached mature levels. Finally,
implementation costs associated with four new automated dialers contributed to
the increase.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 10.0% for the first three months of 1999 from 12.9% for the
same period of 1998. This is the result of improvements in the Company's
collection efforts, including increased staffing, improved collections
software, the implementation of a program through which delinquent loans are
assumed by existing owners with a consistent payment history, and an increase
in receivables relating 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 increased to 12.7% for the quarter ended March 31, 1999, as compared
to 12.5% for the quarter ended March 31, 1998. The increase is primarily
attributable to additional salaries, legal and printing fees associated with
year-end reporting, and an increase in title and recording fees due to
increased borrowings against pledged notes receivable.
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Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenue increased
to 2.4% for the quarter ended March 31, 1999, compared to 1.8% for the quarter
ended March 31, 1998. Overall, depreciation and amortization expense increased
$641,000 for the first quarter of 1999, as compared to 1998, primarily due to
investments in new automated dialers, telephone systems, and a central marketing
facility.
Interest Expense
Interest expense as a percentage of interest income increased to 57.8% for the
first quarter of 1999, from 42.9% for the same period of 1998. This increase
was due to the interest expense generated by the $75.0 million 10.5% senior
subordinated notes placed in April 1998 offset by increased interest income
related to the previously discussed increase in notes receivable.
Income before Provision for Income Taxes
Income before provision for income taxes increased 36.6% to $7.9 million for
the quarter ended March 31, 1999, from $5.8 million for the quarter ended March
31, 1998 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 38.5% in the first quarter of 1999 as compared to 38.1% in the
first quarter of 1998. This increase resulted from an increase in state income
taxes, primarily due to additional operations commencing in Illinois, Missouri,
and Massachusetts.
Net Income
Net income increased $1.3 million, or 35.7%, to $4.9 million for the quarter
ended March 31, 1999, from $3.6 million for the quarter ended March 31, 1998,
as a result of the above mentioned operating results.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH. The Company generates cash primarily from down payments on the
sale of Vacation Intervals, sampler sales, collections of principal and
interest on customer notes receivable from Vacation Interval owners, management
fees, and resort and utility operations. During the three months ended March
31, 1999, cash provided by operations was $1.3 million, compared to $3.2
million for the same period of 1998. The decrease in cash provided by
operations was a result of increased construction of inventory in the first
quarter of 1999 compared to the first quarter of 1998. The Company typically
receives a 10% down payment on sales of Vacation Intervals and finances the
remainder by receipt of a seven to ten year customer promissory note. The
Company generates cash from financing of customer notes receivable (i) by
borrowing at an advance rate of 70% of eligible customer notes receivable and
(ii) from the spread between interest received on customer notes receivable and
interest paid on related borrowings. Because the Company uses significant
amounts of cash in the development and marketing of Vacation Intervals, but
collects cash on customer notes receivable over a seven to ten year period,
borrowing against receivables has historically been a necessary part of normal
operations.
For the three months ended March 31, 1999 and 1998, cash provided by financing
activities was $27.8 million and $18.2 million, respectively. The increase in
net cash provided by financing activities was mainly attributable to increased
borrowings on the revolving credit facilities to support inventory construction
and customer notes receivable financing. As of March 31, 1999, the Company's
credit facilities provide for loans of up to $130.0 million. At March 31, 1999,
approximately $79.8 million of principal and interest related to advances under
the credit facilities was outstanding. For the three months ended March 31,
1999, the weighted average cost of funds for all borrowings, including the
senior subordinated debt, was approximately 9.1%.
Effective March 31, 1999, the Company reached a definitive agreement with a
lender to increase its $15 million revolving loan agreement, expiring in
November 2002, to a $75 million two-year revolving loan agreement. The credit
facility is based on an 85% advance rate against receivables compared to the
previous advance rate of 70%.
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Additionally, the interest rate on the amended credit facility improved to
LIBOR plus 3% from prime plus 2%.
For regular federal income tax purposes, the Company reports substantially all
of the Vacation Interval sales it finances under the installment method. Under
this method, income on sales of Vacation Intervals is not recognized until cash
is received, either in the form of a down payment or as installment payments on
customer notes receivable. The deferral of income tax liability conserves cash
resources on a current basis. Interest will be imposed, however, on the amount
of tax attributable to the installment payments for the period beginning on the
date of sale and ending on the date the related tax is paid. If the Company is
otherwise not subject to tax in a particular year, no interest is imposed since
the interest is based on the amount of tax paid in that year. 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 1998, the Internal Revenue
Service approved a change in the method of accounting for installment sales
effective January 1, 1997. As a result, the Company's alternative minimum
taxable income for 1997 through 2000 was or will be increased each year by an
estimated amount of approximately $9.0 million per year for the pre-1997
adjustment, 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 2018. 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 three months ended March 31, 1999 and 1998, was $27.1
million and $19.9 million, respectively. The increase was due to the increased
level of customer notes receivable resulting from higher sales volume and the
purchase of undeveloped land near The Villages resort in Tyler, Texas, for
approximately $1.0 million in January 1999.
YEAR 2000 COMPLIANCE
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
by June 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 June 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 by June 1999.
Inventory system - The Inventory system is currently being redeveloped to be
year 2000 compliant, among other enhancements. The redevelopment of the
Inventory system is scheduled to be completed by June 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 by June 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 is scheduled to be completed by
June 1999.
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Predictive dialer software - The Company's predictive dialer software is
scheduled to be year 2000 compliant with an upgrade scheduled for the second
quarter of 1999.
Full implementation of all programs is anticipated to be completed by June
1999.
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 programs
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 and upgraded 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 has evaluated all data communications equipment, including
PCs. The Company has located a minimal number of PCs requiring replacement and
no significant deficiencies of data communications equipment have been found.
The Company has identified non-IT systems that may be year 2000 sensitive,
including primarily access gates, alarms, irrigation systems, thermostats, and
utility meters and switches at its resorts. Although these systems vary by
resort, most of these systems are already year 2000 compliant or are not
reliant on a time-chip that would be affected by year 2000. The Company
anticipates that all these systems will be year 2000 compliant by the end of
the second quarter of 1999.
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, would 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 $430,000,
including an estimate of internal payroll committed to the projects, of which
approximately $290,000 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
95% complete and that its remediation is approximately 90% complete.
The failure to correct a material year 2000 internal 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
of third party vendors will have a material impact on the Company's results of
operations, liquidity, or financial condition. The 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.
In the event of a complete failure of the Company's information technology
systems, the Company would be able to continue the affected functions either
manually or through the use of non-year 2000 compliant systems. The primary
costs associated with such a necessity would be (1) increased time delays
associated with posting of information and (2) increased personnel to manually
process the information. The Company does not believe the increased costs
associated with such personnel would be significant. The Company currently does
not have a contingency plan in place. The Company will evaluate the need for a
plan during the remainder of 1999 as the Company progresses
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through the year 2000 conversion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Contract of Sale dated August 5, 1998, among David M. Fender and Jane
M. Fender (or "Seller") and George R. Bedell (or "Purchaser").
10.2 Third Amendment to Loan and Security Agreement dated as of March 31,
1999, between the Company and Textron Financial Corporation.
27.0 Financial Data Schedule.
- -------
(b) Reports on form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1999 By: /s/ ROBERT E. MEAD
-------------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: May 13, 1999 By: /s/ HARRY J. WHITE, JR.
-------------------------------------
Harry J. White, Jr.
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Contract of Sale dated August 5, 1998, among David M. Fender and
Jane M. Fender (or "Seller") and George R. Bedell (or "Purchaser").
10.2 Third Amendment to Loan and Security Agreement dated as of March
31, 1999, between the Company and Textron Financial Corporation.
27.0 Financial Data Schedule.