1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 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
and six months ended June 30, 1999 and 1998............................................ 1
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998...................................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 1999 ........................................................ 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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 4. Submission of Matters to a Vote of Security Holders.................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................................... 15
Signatures............................................................................. 15
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 46,447 $ 37,328 $ 87,775 $ 63,937
Sampler sales 1,497 553 2,741 1,003
------------ ------------ ------------ ------------
Total sales 47,944 37,881 90,516 64,940
Interest income 6,761 4,024 12,427 6,983
Interest income from affiliates 12 16 24 31
Management fee income 640 591 1,540 1,093
Other income 1,186 649 1,660 1,143
------------ ------------ ------------ ------------
Total revenues 56,543 43,161 106,167 74,190
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 7,587 6,851 13,357 10,549
Sales and marketing 24,259 16,023 45,313 28,432
Provision for uncollectible notes 4,645 4,412 8,777 7,856
Operating, general and administrative 6,067 4,245 12,363 8,112
Depreciation and amortization 1,335 686 2,540 1,250
Interest expense 3,745 2,058 7,027 3,333
------------ ------------ ------------ ------------
Total costs and operating expenses 47,638 34,275 89,377 59,532
Income before provision for income taxes 8,905 8,886 16,790 14,658
Provision for income taxes (3,428) (3,386) (6,464) (5,584)
------------ ------------ ------------ ------------
NET INCOME $ 5,477 $ 5,500 $ 10,326 $ 9,074
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.42 $ 0.42 $ 0.80 $ 0.74
============ ============ ============ ============
DILUTED $ 0.42 $ 0.41 $ 0.80 $ 0.73
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 12,889,417 13,245,583 12,889,417 12,283,893
============ ============ ============ ============
DILUTED 12,889,417 13,395,215 12,889,417 12,493,091
============ ============ ============ ============
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
--------- ------------
Cash and cash equivalents $ 3,073 $ 11,355
Restricted cash 903 873
Notes receivable, net of allowance for uncollectible notes of
$26,343 and $23,947, respectively 228,423 173,959
Amounts due from affiliates 6,336 4,115
Inventories 89,984 71,694
Land, equipment, buildings, and utilities, net 43,274 34,025
Prepaid and other assets 16,351 16,899
--------- ---------
TOTAL ASSETS $ 388,344 $ 312,920
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 14,547 $ 8,144
Unearned revenues 6,635 4,082
Income taxes payable 134 4,136
Deferred income taxes, net 24,579 21,524
Notes payable and capital lease obligations 115,197 58,108
Senior subordinated notes 75,000 75,000
--------- ---------
Total Liabilities 236,092 170,994
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 June 30, 1999
and December 31, 1998 133 133
Additional paid-in capital 109,339 109,339
Retained earnings 47,779 37,453
Treasury stock, at cost (422,100 shares at June 30, 1999
and December 31, 1998) (4,999) (4,999)
--------- ---------
Total Shareholders' Equity 152,252 141,926
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 388,344 $ 312,920
========= =========
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
Common Stock
-----------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ----------------------
Issued Value Capital Earnings Shares Cost Total
---------- ---------- ---------- ---------- -------- ---------- ----------
January 1, 1999 13,311,517 $ 133 $ 109,339 $ 37,453 (422,100) $ (4,999) $ 141,926
Net income -- -- -- 10,326 -- -- 10,326
---------- ---------- ---------- ---------- -------- ---------- ----------
June 30, 1999 13,311,517 $ 133 $ 109,339 $ 47,779 (422,100) $ (4,999) $ 152,252
========== ========== ========== ========== ======== ========== ==========
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net Income $ 10,326 $ 9,074
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,540 1,250
Deferred income taxes 3,055 3,424
Increase (decrease) in cash from changes in
assets and liabilities:
Restricted cash (30) --
Amounts due from affiliates (2,221) (1,779)
Inventories (18,290) (14,153)
Prepaid and other assets 394 (8,709)
Accounts payable and accrued expenses 6,403 5,595
Unearned revenues 2,553 1,095
Income taxes payable (4,002) 1,172
--------- ---------
Net cash provided by (used in) operating activities 728 (3,031)
--------- ---------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (11,489) (6,187)
Sales of land, equipment, buildings, and utilities 4,494 --
Notes receivable, net (54,464) (39,925)
--------- ---------
Net cash used in investing activities (61,459) (46,112)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 71,502 103,990
Payments on borrowings to unaffiliated entities (19,053) (74,210)
Net proceeds from issuance of common stock -- 44,782
--------- ---------
Net cash provided by financing activities 52,449 74,562
--------- ---------
Net (decrease) increase in cash (8,282) 25,419
CASH AND CASH EQUIVALENTS:
Beginning of period 11,355 4,970
--------- ---------
End of period $ 3,073 $ 30,389
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,431 $ 1,994
Income taxes paid $ 7,411 $ 988
Equipment acquired under capital lease or note $ 4,640 $ 749
See notes to condensed consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries ("the Company") presented herein do not include certain
information and disclosures required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 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, 2000 and will be adopted for the
period ended December 31, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction. The
impact of SFAS No. 133 on the Company's results of operations, financial
position, or cash flows will be dependent on the level and types of derivative
instruments the Company will have entered into at the time the standard is
implemented. The Company currently has no derivative instruments.
NOTE 2 - EARNINGS PER SHARE
The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three and six months ended June 30,
1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average shares outstanding - basic 12,889,417 13,245,583 12,889,417 12,283,893
Issuance of shares from stock options exercisable -- 900,000 -- 1,025,000
Repurchase of shares from stock options proceeds -- (750,368) -- (815,802)
---------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 12,889,417 13,395,215 12,889,417 12,493,091
========== ========== ========== ==========
For the three and six months ended June 30, 1999, the weighted average shares
outstanding assuming dilution was anti-dilutive.
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NOTE 3 - DEBT
Loans, notes payable, capital lease obligations, and senior subordinated notes
as of June 30, 1999 and December 31, 1998 (in thousands):
June 30, 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% ........ 50,104 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% ......... 38,519 29,856
$75 million revolving loan agreement which contains certain financial
covenants, expires April 2001, 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 3% ........... 16,763 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 12.4% .............................................................. 3,371 223
-------- --------
Total notes payable .................................................. 108,757 54,927
Capital lease obligations .................................................... 6,440 3,181
-------- --------
Total notes payable and capital lease obligations .................... 115,197 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
-------- --------
$190,197 $133,108
======== ========
At June 30, 1999, prime rate was 7.75% and the LIBOR rates were from 5.23% to
5.37%. At December 31, 1998, prime rate was 7.75% and LIBOR rates were from
5.15% to 5.28%.
In accordance with the terms and conditions of the $60.0 million revolving loan
agreement, on July 7, 1999, the Company exercised its right to obtain a one-year
extension on the maturity date. Accordingly, the obligation will mature on
December 21, 2000.
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 and six months ended June 30, 1999 and 1998, are as follows (in
thousands):
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9
June 30,
------------
1999 1998
---- ----
Revenues $ 13 $ 26
Expenses (63) (98)
---- ----
Net loss $(50) $(72)
==== ====
Combined summarized balance sheet information as of June 30, 1999 for the
Guarantor Subsidiaries is as follows (in thousands):
June 30,
1999
--------
Other assets $ 9
---
Total assets $ 9
===
Investment by parent (includes equity
and amounts due to parent) $ 9
---
Total liabilities and equity $ 9
===
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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.
The condensed consolidated financial statements of the Company include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly-owned.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
--------- ------- ------- ------
As a percentage of total revenues:
Vacation Interval sales 82.1% 86.5% 82.7% 86.2%
Sampler sales 2.7% 1.3% 2.6% 1.3%
----- ----- ----- -----
Total sales 84.8% 87.8% 85.3% 87.5%
Interest income 12.0% 9.3% 11.7% 9.5%
Management fee income 1.1% 1.4% 1.4% 1.5%
Other income 2.1% 1.5% 1.6% 1.5%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 16.3% 18.4% 15.2% 16.5%
Provision for uncollectible notes 10.0% 11.8% 10.0% 12.3%
As a percentage of total sales:
Sales and marketing 50.6% 42.3% 50.1% 43.8%
As a percentage of total revenues:
Operating, general and administrative 10.7% 9.8% 11.6% 10.9%
Depreciation and amortization 2.4% 1.6% 2.4% 1.7%
As a percentage of interest income:
Interest expense 55.3% 50.9% 56.4% 47.5%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Revenues for the quarter ended June 30, 1999 were $56.5 million, representing a
$13.4 million or 31.0% increase over revenues of $43.2 million for the quarter
ended June 30, 1998. The increase was primarily due to a $9.1 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
marketing success of several sales offices that opened subsequent to June 30,
1998, in Georgia, Pennsylvania, South Carolina, and Tennessee.
In the second quarter of 1999, the number of Vacation Intervals sold, exclusive
of upgraded Vacation Intervals, increased 19.2% to 4,031 from 3,381 in the same
period of 1998; the average price per interval decreased 0.7% to
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$8,532 from $8,591. Total interval sales for the second quarter of 1999 included
1,455 biennial intervals (counted as 728 Vacation Intervals) compared to 873
(437 Vacation Intervals) in the second quarter of 1998. The company also
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 second quarter of 1999, the
2,762 upgraded Vacation Intervals were sold at an average price of $4,364
compared to 1,896 upgraded Vacation Intervals sold at an average price of $4,368
during the comparable 1998 period.
Sampler sales increased $944,000 to $1.5 million for the period ended June 30,
1999, compared to $553,000 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 increased sales of the Company's
Endless Escape Program to owners of Vacation Intervals at seven resorts that
have been managed by the Company since May 1998.
Interest income increased 67.7% to $6.8 million for the quarter ended June 30,
1999, from $4.0 million for the same period of 1998. This increase primarily
resulted from a $96.5 million increase in notes receivable, net of allowance for
uncollectible notes, since June 30, 1998, due to increased sales.
Management fee income increased $49,000 for the 1999 second quarter, as compared
to the 1998 second 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
the management clubs' 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
increased $537,000 to $1.2 million for the second quarter of 1999 compared to
$649,000 for the same period of 1998. The increase was primarily the result of
seasonal success at the Holiday Hills and Apple Mountain golf pro shops, as well
as income generated by the new Holiday Hills restaurant.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 16.3% in
the second quarter of 1999, from 18.4% for the same period of 1998. This
decrease was primarily the result of a greater percentage of sales of
Destination Resorts units and Presidents units in the second quarter of 1999
compared to the second quarter of 1998. These units typically represent a lower
cost of sales percentage in comparison to overall inventory. In addition, the
sales mix in the second quarter of 1999 included a higher percentage of older,
lower priced vintage units compared to the second quarter of 1998.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 50.6% for
the quarter ended June 30, 1999, from 42.3% 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, was 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 second quarter of 1999 from 11.8% 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.
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Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenue
increased to 10.7% for the quarter ended June 30, 1999, as compared to 9.8% for
the quarter ended June 30, 1998. The increase is primarily attributable to
higher salaries, increased headcount, and an increase in title and recording
fees due to increased borrowings against pledged notes receivable.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenue increased
to 2.4% for the quarter ended June 30, 1999, compared to 1.6% for the quarter
ended June 30, 1998. Overall, depreciation and amortization expense increased
$649,000 for the second 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 55.3% for the
second quarter of 1999, from 50.9% for the same period of 1998. This increase is
primarily the result of interest expense related to increased borrowings against
pledged notes receivable.
Income before Provision for Income Taxes
Income before provision for income taxes remained flat at $8.9 million for the
quarter ended June 30, 1999, as compared to the quarter ended June 30, 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 second quarter of 1999 as compared to 38.1% in the
second quarter of 1998. This increase resulted from an increase in state income
taxes, primarily due to increased operations in Illinois, Missouri,
Massachusetts, Georgia, and South Carolina.
Net Income
Net income remained flat at $5.5 million for the quarter ended June 30, 1999, as
compared to the quarter ended June 30, 1998, as a result of the above mentioned
operating results.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Revenues for the six months ended June 30, 1999 were $106.2 million,
representing a $32.0 million or 43.1% increase over revenues of $74.2 million
for the six months ended June 30, 1998. The increase was primarily due to a
$23.8 million increase in sales of Vacation Intervals and a $5.4 million
increase in interest income. The strong increase in Vacation Interval sales
primarily resulted from the marketing success of several sales offices that
opened subsequent to June 30, 1998, in Georgia, Pennsylvania, South Carolina,
and Tennessee.
In the first half of 1999, the number of Vacation Intervals sold, exclusive of
upgraded Vacation Intervals, increased 30.9% to 7,910 from 6,043 in the same
period of 1998; the average price per interval increased 2.1% to $8,343 from
$8,172. Total interval sales for the six months ended June 30, 1999, included
2,872 biennial intervals (counted as 1,436 Vacation Intervals) compared to 1,552
(776 Vacation Intervals) in the six months ended June 30, 1998. The company also
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 half of 1999, the
5,010 upgraded Vacation Intervals were sold at an average price of $4,348
compared to 3,356 upgraded Vacation Intervals sold at an average price of $4,337
during the comparable 1998 period.
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Sampler sales increased $1.7 million to $2.7 million for the six months ended
June 30, 1999, compared to $1.0 million 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 seven
resorts that have been managed by the Company since May 1998.
Interest income increased 77.5% to $12.5 million for the six months ended June
30, 1999, from $7.0 million for the same period of 1998. This increase primarily
resulted from a $96.5 million increase in notes receivable, net of allowance for
uncollectible notes, since June 30, 1998, due to increased sales.
Management fee income increased $447,000 for the first half of 1999, as compared
to the same period of 1998. 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
the management clubs' 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
increased $517,000 to $1.7 million for the six months ended June 30, 1999,
compared to $1.1 million for the same period of 1998. The increase was primarily
the result of increases in golf pro shop income at Apple Mountain and Holiday
Hills Resorts, as well as income generated by the new Holiday Hills restaurant.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 15.2% for
the six months ended June 30, 1999, from 16.5% for the same period of 1998. This
decrease is primarily the result of a greater percentage of sales of Destination
Resorts units and Presidents units in the first half of 1999 compared to the
first half of 1998. These units typically represent a lower cost of sales
percentage in comparison to overall inventory. In addition, the sales mix in the
first half of 1999 included a higher percentage of older, lower priced vintage
units compared to the first half of 1998.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 50.1% for
the six months ended June 30, 1999, from 43.8% 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, was 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 six months ended June 30, 1999, from 12.3% for the
six months ended June 30, 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 11.6% for the six months ended June 30, 1999, as compared to 10.9%
for the six months ended June 30, 1998. The increase is primarily attributable
to higher salaries, increased headcount, 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 six months ended June 30, 1999, compared to 1.7% for the six
months ended June 30, 1998. Overall, depreciation and amortization expense
increased $1.3 million for the first half 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 56.4% for the
first half of 1999, from 47.5% for the same period of 1998. This increase is
primarily the result of interest expense related to increased borrowings against
pledged notes receivable.
Income before Provision for Income Taxes
Income before provision for income taxes increased 14.5% to $16.8 million for
the six months ended June 30, 1999, from $14.7 million for the six months ended
June 30, 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 half of 1999 as compared to 38.1% in the same
period of 1998. This increase resulted from an increase in state income taxes,
primarily due to increased operations in Illinois, Missouri, Massachusetts,
Georgia, and South Carolina.
Net Income
Net income increased $1.3 million, or 13.8%, to $10.3 million for the six months
ended June 30, 1999, from $9.1 million for the six months ended June 30, 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 six months ended June 30, 1999, cash
provided by operations was $728,000, compared to cash used in operating
activities of $3.0 million for the same period of 1998. The increase in cash
provided by operating activities was primarily a result of the timing of
payments and collections of unearned revenues. The Company typically receives a
10% down payment on sales of Vacation Intervals and finances the remainder by
receipt of a seven to ten year customer promissory note. The Company generates
cash from financing of customer notes receivable (i) by borrowing at an advance
rate of 70% to 85% of 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 six months ended June 30, 1999 and 1998, cash provided by financing
activities was $52.4 million and $74.6 million, respectively. The decrease in
net cash provided by financing activities was mainly attributable to issuing
$75.0 million of senior subordinated notes and $44.8 million of Company common
stock during the second quarter of 1998, offset by increased borrowings against
pledged notes receivable. As of June 30, 1999, the Company's credit facilities
provide for loans of up to $175.0 million. At June 30, 1999, approximately
$105.4 million of principal and interest related to advances under the credit
facilities was outstanding. For the six months ended June 30, 1999, the weighted
average cost of funds for all borrowings, including the senior subordinated
debt, was approximately 9.0%.
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In accordance with the terms and conditions of the $60.0 million revolving loan
agreement, on July 7, 1999, the Company exercised its right to obtain a one-year
extension on the maturity date. Accordingly, the obligation will mature on
December 21, 2000. The Company believes that with respect to its current
operations and capital commitments, its borrowing capacity under existing
third-party lending agreements, together with cash generated from operations and
future borrowings, will be sufficient to meet the Company's working capital and
capital expenditure needs through the first quarter of 2000. The Company will
continue to review the possibility of extending its borrowing capacity with
existing lenders or issuing additional debt, equity, or mortgage-backed
securities to finance future acquisitions, refinance debt, finance mortgage
receivables, and provide for other working capital purposes.
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 six months ended June 30, 1999 and 1998, was $61.5 million
and $46.1 million, respectively. The increase was primarily due to the increased
level of customer notes receivable resulting from higher sales volume.
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 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 identified several primary computer systems that were
not year 2000 compliant, including the Marketing system, the Sales and Credit
system, the Accounts Receivable system, the Inventory system, the Finance
Administration system, the Sales Commissions system, and the Predictive dialer
software. Virtually all year 2000 modifications and upgrades to these systems
were successfully tested and fully implemented by July 15, 1999.
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 either written in Visual Basic and programmed to handle year 2000
issues, or are other year 2000 certified packages. 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.
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The Company identified all non-IT systems that may be year 2000 sensitive,
primarily including access gates, alarms, irrigation systems, thermostats, and
utility meters and switches at its resorts. Although these systems vary by
resort, most of these systems were already year 2000 compliant or are not
reliant on a time-chip that would be affected by year 2000. The Company
believes, however, that any year 2000 modifications needed were completed as of
the end of the second quarter.
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 $365,000 has already been incurred. The Company is utilizing both
internal and external resources to achieve year 2000 compliance. The Company
estimates that its identification and assessment activities are approximately
98% complete and that its remediation is approximately 95% 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 completes its year 2000
conversion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 18, 1999, a proposal
to elect the nominees listed in the following table as the Class II Directors of
the Company was submitted to a vote of the Company's stockholders. The voting
was as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Sharon K. Brayfield 12,530,341 24,258
Michael A. Jenkins 12,530,341 24,258
At the same meeting, a proposal to ratify the appointment of Deloitte & Touche
L.L.P. as independent auditors for the ensuing year was submitted to a vote of
the Company's stockholders. The voting was as follows:
Votes For Votes Against Abstained
--------- ------------- ---------
Ratification of Independent Auditors 12,542,459 4,900 7,240
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: August 10, 1999 By: /s/ ROBERT E. MEAD
----------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: August 10, 1999 By: /s/ HARRY J. WHITE, JR.
----------------------------
Harry J. White, Jr.
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.0 Financial Data Schedule