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, 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 November 12, 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 nine months ended September 30, 1999 and 1998...................... 1
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.................................................. 2
Condensed Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 1999................................... 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 1. Legal Proceedings...................................................... 15
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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 50,706 $ 38,427 $ 138,480 $ 102,364
Sampler sales 1,475 682 4,217 1,685
------------ ------------ ------------ ------------
Total sales 52,181 39,109 142,697 104,049
Interest income 7,554 4,262 19,981 11,244
Interest income from affiliates 12 16 36 47
Management fee income 678 725 2,218 1,819
Other income 1,337 1,107 2,997 2,250
------------ ------------ ------------ ------------
Total revenues 61,762 45,219 167,929 119,409
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 7,826 5,605 21,183 16,154
Sales and marketing 26,864 19,260 72,177 47,692
Provision for uncollectible notes 5,071 4,489 13,848 12,346
Operating, general and administrative 6,345 3,485 17,399 10,123
Other expense 876 740 2,185 2,213
Depreciation and amortization 1,439 1,029 3,978 2,280
Interest expense 4,517 1,756 11,545 5,088
------------ ------------ ------------ ------------
Total costs and operating expenses 52,938 36,364 142,315 95,896
Income before provision for income taxes 8,824 8,855 25,614 23,513
Provision for income taxes (3,397) (3,435) (9,861) (9,019)
------------ ------------ ------------ ------------
NET INCOME $ 5,427 $ 5,420 $ 15,753 $ 14,494
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.42 $ 0.42 $ 1.22 $ 1.16
============ ============ ============ ============
DILUTED $ 0.42 $ 0.42 $ 1.22 $ 1.14
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 12,889,417 13,054,380 12,889,417 12,543,544
============ ============ ============ ============
DILUTED 12,889,417 13,054,380 12,889,417 12,664,871
============ ============ ============ ============
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,
1999 1998
ASSETS ------------- -------------
Cash and cash equivalents $ 8,026 $ 11,355
Restricted cash 903 873
Notes receivable, net of allowance for uncollectible notes of
$29,018 and $23,947, respectively 258,499 173,959
Amounts due from affiliates 8,581 4,115
Inventories 97,236 71,694
Land, equipment, buildings, and utilities, net 48,501 34,025
Prepaid and other assets 16,492 16,899
------------- -------------
TOTAL ASSETS $ 438,238 $ 312,920
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 15,424 $ 8,144
Unearned revenues 7,412 4,082
Income taxes payable 1,634 4,136
Deferred income taxes, net 26,462 21,524
Notes payable and capital lease obligations 154,627 58,108
Senior subordinated notes 75,000 75,000
------------- -------------
Total Liabilities 280,559 170,994
------------- -------------
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 September 30, 1999
and December 31, 1998 133 133
Additional paid-in capital 109,339 109,339
Retained earnings 53,206 37,453
Treasury stock, at cost (422,100 shares at September 30, 1999
and December 31, 1998) (4,999) (4,999)
------------- -------------
Total Shareholders' Equity 157,679 141,926
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 438,238 $ 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 -- -- -- 15,753 -- -- 15,753
---------- ---------- ---------- ---------- ---------- ---------- ----------
September 30, 1999 13,311,517 $ 133 $ 109,339 $ 53,206 (422,100) $ (4,999) $ 157,679
========== ========== ========== ========== ========== ========== ==========
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,
------------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net income $ 15,753 $ 14,494
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,978 2,280
Deferred income taxes 4,938 6,037
Increase (decrease) in cash from changes in
assets and liabilities:
Restricted cash (30) --
Amounts due from affiliates (4,466) (1,601)
Inventories (25,542) (23,957)
Prepaid and other assets 177 (10,631)
Accounts payable and accrued expenses 7,280 5,837
Unearned revenues 3,330 1,688
Income taxes payable (2,502) 1,994
------------ ------------
Net cash provided by (used in) operating activities 2,916 (3,859)
------------ ------------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (15,576) (10,676)
Sales of land, equipment, buildings, and utilities 6,466 --
Notes receivable, net (84,540) (63,225)
------------ ------------
Net cash used in investing activities (93,650) (73,901)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 145,672 118,682
Payments on borrowings to unaffiliated entities (58,267) (78,808)
Net proceeds from issuance of common stock -- 44,782
Purchase of treasury stock -- (4,350)
------------ ------------
Net cash provided by financing activities 87,405 80,306
------------ ------------
Net (decrease) increase in cash (3,329) 2,546
CASH AND CASH EQUIVALENTS:
Beginning of period 11,355 4,970
------------ ------------
End of period $ 8,026 $ 7,516
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8,277 $ 2,216
Income taxes paid $ 7,426 $ 988
Equipment acquired under capital lease or note $ 9,114 $ 2,065
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 nine months ended September 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 beginning January 1, 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.
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, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Weighted average shares outstanding - basic 12,889,417 13,054,380 12,889,417 12,543,544
Issuance of shares from stock options exercisable -- -- -- 728,887
Repurchase of shares from stock options proceeds -- -- -- (607,560)
------------- ------------- ------------- -------------
Weighted average shares outstanding - diluted 12,889,417 13,054,380 12,889,417 12,664,871
============= ============= ============= =============
For the three and nine months ended September 30, 1999, and for the three months
ended September 30, 1998, 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 September 30, 1999 and December 31, 1998 (in thousands):
September 30, December 31,
1999 1998
------------- ------------
$60 million revolving loan agreement, which contains certain financial
covenants, due December 2000, 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% .................... 36,602 11,210
$70 million revolving loan agreement, which contains certain financial
covenants, due August 2004, 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 2.65% .................... 44,802 29,856
$75 million revolving loan agreement which contains certain financial
covenants, due April 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 3% ....................... 60,073 13,638
Various notes, due from December 1999 through October 2005,
collateralized by various assets with interest rates ranging from
4.2% to 12.4% .......................................................................... 3,300 223
------------ ------------
Total notes payable .............................................................. 144,777 54,927
Capital lease obligations ................................................................ 9,850 3,181
------------ ------------
Total notes payable and capital lease obligations ................................ 154,627 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
------------ ------------
$ 229,627 $ 133,108
============ ============
At September 30, 1999, prime rate was 8.25% and the LIBOR rates were from 5.34%
to 6.02%. At December 31, 1998, prime rate was 7.75% and LIBOR rates were from
5.15% to 5.28%.
Effective September 1, 1999, the Company reached a definitive agreement with a
lender to increase its $40 million revolving loan agreement, due October 2005,
to a $70 million five-year revolving loan agreement, due August 2004. The credit
facility is based on an 85% advance rate against receivables compared to the
previous advance rate of 70%. The interest rate on the amended credit facility
is LIBOR plus 2.65% compared to the previous interest rate of LIBOR plus 2.5%.
Effective September 30, 1999, the Company entered into a $30 million revolving
loan agreement with a lender. The $30 million revolving loan agreement, which
contains certain financial covenants, is due September 30, 2006, and bears
interest at either the lender's alternate base rate, as defined, or the adjusted
Eurodollar rate plus 2.75%, as defined, determined at the time of each advance.
Principal and interest are paid from the proceeds obtained from customer notes
receivable pledged as collateral for the note. There were no amounts outstanding
under this revolving loan agreement as of September 30, 1999.
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. Each Guarantor
Subsidiary is a wholly-owned subsidiary of the Company, and together comprise
all direct
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and indirect subsidiaries of the Company.
Combined summarized operating results of the Guarantor Subsidiaries for the nine
months ended September 30, 1999 and 1998, are as follows (in thousands):
September 30,
--------------------------
1999 1998
---------- ----------
Revenues $ 46 $ 81
Expenses (65) (188)
---------- ----------
Net loss $ (19) $ (107)
========== ==========
September 30,
1999
--------------
Other assets $ 10
--------------
Total assets $ 10
==============
Investment by parent (includes equity
and amounts due to parent) $ 10
--------------
Total liabilities and equity $ 10
==============
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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 90,000.
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
As a percentage of total revenues:
Vacation Interval sales 82.1% 85.0% 82.5% 85.7%
Sampler sales 2.4% 1.5% 2.5% 1.4%
---------- ---------- ---------- ----------
Total sales 84.5% 86.5% 85.0% 87.1%
Interest income 12.2% 9.5% 11.9% 9.5%
Management fee income 1.1% 1.6% 1.3% 1.5%
Other income 2.2% 2.4% 1.8% 1.9%
---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 15.4% 14.6% 15.3% 15.8%
Provision for uncollectible notes 10.0% 11.7% 10.0% 12.1%
As a percentage of total sales:
Sales and marketing 51.5% 49.2% 50.6% 45.8%
As a percentage of total revenues:
Operating, general and administrative 10.3% 7.7% 10.4% 8.5%
Other expense 1.4% 1.6% 1.3% 1.9%
Depreciation and amortization 2.3% 2.3% 2.4% 1.9%
As a percentage of interest income:
Interest expense 59.7% 41.0% 57.7% 45.1%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Revenues for the quarter ended September 30, 1999 were $61.8 million,
representing a $16.5 million or 36.6% increase over revenues of $45.2 million
for the quarter ended September 30, 1998. The increase was primarily due to a
$12.3 million increase in sales of Vacation Intervals and a $3.3 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 September 30, 1998, in Georgia, South Carolina, and
Tennessee.
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In the third quarter of 1999, the number of Vacation Intervals sold, exclusive
of upgraded Vacation Intervals, increased 9.4% to 3,948 from 3,608 in the same
period of 1998; the average price per interval increased 13.2% to $9,357 from
$8,265. Total interval sales for the third quarter of 1999 included 1,514
biennial intervals (counted as 757 Vacation Intervals) compared to 1,030 (515
Vacation Intervals) in the third 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 third quarter of 1999, the 3,152
upgraded Vacation Intervals were sold at an average price of $4,367 compared to
1,891 upgraded Vacation Intervals sold at an average price of $4,551 during the
comparable 1998 period.
Sampler sales increased $793,000 to $1.5 million for the quarter ended September
30, 1999, compared to $682,000 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 76.9% to $7.6 million for the quarter ended September
30, 1999, from $4.3 million for the same period of 1998. This increase primarily
resulted from a $103.2 million increase in notes receivable, net of allowance
for uncollectible notes, since September 30, 1998, due to increased sales.
Management fee income decreased $47,000 for the 1999 third quarter, as compared
to the 1998 third quarter. This decrease was primarily the result of an increase
in the resorts' management clubs' operating expenses.
Other income consists of water and utilities income, condominium rental income,
marina income, golf course and pro shop income, and other miscellaneous items.
Other income increased $230,000 to $1.3 million for the third quarter of 1999
compared to $1.1 million for the same period of 1998. The increase primarily
relates to the Apple Mountain golf course and pro shop, which opened in the
fourth quarter of 1998, and the Holiday Hills restaurant, which opened in the
second quarter of 1999.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 15.4% in
the third quarter of 1999, from 14.6% for the same period of 1998. This increase
was primarily the result of the sales mix in the third quarter of 1999 including
a larger percentage of newer, higher cost inventory compared to the third
quarter of 1998.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 51.5% for
the quarter ended September 30, 1999, from 49.2% 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 third quarter of 1999 from 11.7% for the same period
of 1998. This is the result of continued 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 10.3% for the quarter ended September 30, 1999, as compared to 7.7%
for the quarter ended September 30, 1998. The increase is
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primarily attributable to higher than expected travel, legal, and professional
fees, primarily related to expansion into new markets, increases in payroll
taxes, employee benefits, and workers' compensation related to Company growth,
and an increase in title and recording fees due to increased borrowings against
pledged notes receivable.
Other Expense
Other expense consists of water and utilities expenses, golf course and pro shop
expenses, marina expenses, and other miscellaneous expenses. Other expense as a
percentage of total revenues remained relatively flat at 1.4% for the quarter
ended September 30, 1999, as compared to 1.6% for the quarter ended September
30, 1998. The $136,000 increase in other expense primarily relates to the Apple
Mountain golf course and pro shop, which opened in the fourth quarter of 1998,
and the Holiday Hills restaurant, which opened in the second quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues was
unchanged at 2.3% for the quarter ended September 30, 1999, compared to the
quarter ended September 30, 1998. Overall, depreciation and amortization expense
increased $410,000 for the third quarter of 1999, as compared to 1998, primarily
due to investments in new automated dialers, investments in telephone systems,
and investments in two central marketing facilities, which opened in September
1998 and September 1999, respectively.
Interest Expense
Interest expense as a percentage of interest income increased to 59.7% for the
third quarter of 1999, from 41.0% 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 decreased to $8.8 million for the
quarter ended September 30, 1999, as compared to $8.9 million for the quarter
ended September 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
remained relatively flat at 38.5% in the third quarter of 1999 as compared to
38.8% in the third quarter of 1998.
Net Income
Net income remained flat at $5.4 million for the quarter ended September 30,
1999, as compared to the quarter ended September 30, 1998, as a result of the
above mentioned operating results.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Revenues for the nine months ended September 30, 1999 were $167.9 million,
representing a $48.5 million or 40.6% increase over revenues of $119.4 million
for the nine months ended September 30, 1998. The increase was primarily due to
a $36.1 million increase in sales of Vacation Intervals and an $8.7 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 September 30, 1998, in Georgia, South Carolina, and
Tennessee.
In the first nine months of 1999, the number of Vacation Intervals sold,
exclusive of upgraded Vacation Intervals, increased 22.9% to 11,858 from 9,651
in the same period of 1998; the average price per interval increased 5.8% to
$8,680 from $8,207. Total interval sales for the nine months ended September 30,
1999, included 4,386 biennial intervals (counted as 2,193 Vacation Intervals)
compared to 2,582 (1,291 Vacation Intervals) in the nine months ended September
30, 1998. The company also increased sales of upgraded intervals through the
continued
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implementation of marketing and sales programs focused on selling upgraded
intervals to the Company's existing Vacation Interval owners. In the first nine
months of 1999, the 8,162 upgraded Vacation Intervals were sold at an average
price of $4,356 compared to 5,247 upgraded Vacation Intervals sold at an average
price of $4,414 during the comparable 1998 period.
Sampler sales increased $2.5 million to $4.2 million for the nine months ended
September 30, 1999, compared to $1.7 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 77.3% to $20.0 million for the nine months ended
September 30, 1999, from $11.3 million for the same period of 1998. This
increase primarily resulted from a $103.2 million increase in notes receivable,
net of allowance for uncollectible notes, since September 30, 1998, due to
increased sales.
Management fee income increased $399,000 for the first nine months 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 course and pro shop income, and other miscellaneous items.
Other income increased $747,000 to $3.0 million for the nine months ended
September 30, 1999, compared to $2.3 million for the same period of 1998. The
increase primarily relates to the Apple Mountain golf course and pro shop, which
opened in the fourth quarter of 1998, and the Holiday Hills restaurant, which
opened in the second quarter of 1999.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 15.3% for
the nine months ended September 30, 1999, from 15.8% 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 nine months of 1999
compared to the same period of 1998. These units typically represent a lower
cost of sales percentage in comparison to overall inventory. Sales price
increases during the nine months ended September 30, 1999, also contributed to
the decrease in cost of sales as a percentage of Vacation Interval sales
compared to the same period of 1998.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 50.6% for
the nine months ended September 30, 1999, from 45.8% 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 continued
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 continues to incur 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 nine months ended September 30, 1999, from 12.1% for
the nine months ended September 30, 1998. This is the result of continued
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 10.4% for the nine
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months ended September 30, 1999, as compared to 8.5% for the nine months ended
September 30, 1998. The increase is primarily attributable to higher salaries,
increased headcount, legal and printing fees associated with year-end reporting,
increased title and recording fees due to increased borrowings against pledged
notes receivable, and increased travel, legal, and professional fees, primarily
related to expansion into new markets.
Other Expense
Other expense consists of water and utilities expenses, golf course and pro shop
expenses, marina expenses, and other miscellaneous expenses. Other expense as a
percentage of total revenues decreased to 1.3% for the nine months ended
September 30, 1999, as compared to 1.9% for the nine months ended September 30,
1998. Overall, other expenses remained flat at $2.2 million for the nine months
ended September 30, 1999 and 1998.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.4% for the nine months ended September 30, 1999, compared to 1.9%
for the nine months ended September 30, 1998. Overall, depreciation and
amortization expense increased $1.7 million for the first nine months of 1999,
as compared to 1998, primarily due to investments in new automated dialers,
investments in telephone systems, and investments in two central marketing
facilities, which opened in September 1998 and September 1999, respectively.
Interest Expense
Interest expense as a percentage of interest income increased to 57.7% for the
first nine months of 1999, from 45.1% 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 8.9% to $25.6 million for the
nine months ended September 30, 1999, from $23.5 million for the nine months
ended September 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
remained relatively flat at 38.5% in the first nine months of 1999 as compared
to 38.4% in the same period of 1998.
Net Income
Net income increased $1.3 million, or 8.7%, to $15.8 million for the nine months
ended September 30, 1999, from $14.5 million for the nine months ended September
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 nine months ended September 30, 1999,
cash provided by operations was $2.9 million, compared to cash used in operating
activities of $3.9 million for the same period of 1998. The increase in cash
provided by operating activities was primarily a result of the timing of
operational payments. 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.
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For the nine months ended September 30, 1999 and 1998, cash provided by
financing activities was $87.4 million and $80.3 million, respectively. The
increase in net cash provided by financing activities was primarily due to
increased borrowings against pledged notes receivable during the nine months
ended September 30, 1999, compared to the same period of 1998. This increase was
offset by the issuance of $75.0 million senior subordinated notes and $44.8
million of Company common stock during the second quarter of 1998. As of
September 30, 1999, the Company's credit facilities provide for loans of up to
$235.0 million. At September 30, 1999, approximately $141.5 million of principal
and interest related to advances under the credit facilities was outstanding.
For the nine months ended September 30, 1999, the weighted average cost of funds
for all borrowings, including the senior subordinated debt, was approximately
9.1%.
Effective September 1, 1999, the Company reached a definitive agreement with a
lender to increase its $40 million revolving loan agreement, due October 2005,
to a $70 million five-year revolving loan agreement, due August 2004. The credit
facility is based on an 85% advance rate against receivables compared to the
previous advance rate of 70%. The interest rate on the amended credit facility
is LIBOR plus 2.65% compared to the previous interest rate of LIBOR plus 2.5%.
Effective September 30, 1999, the Company consummated a $30 million revolving
loan agreement with a lender. The $30 million revolving loan agreement, which
contains certain financial covenants, is due September 30, 2006, and bears
interest at either the lender's alternate base rate, as defined, or the adjusted
Eurodollar rate plus 2.75%, as defined, determined at the time of each advance.
Principal and interest are paid from the proceeds obtained from customer notes
receivable pledged as collateral for the note.
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 third 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 nine months ended September 30, 1999 and 1998, was $93.7
million and $73.9 million, respectively. The increase was primarily due to the
increased level of customer notes receivable resulting from higher sales volume,
which was partially offset by equipment sales.
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
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operations. The Company has conducted a review of its information technology
("IT") systems currently utilized and has identified and assessed 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 had to
replace a minimal number of PCs and no significant deficiencies of data
communications equipment have been found.
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 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 $425,000 has already been incurred. The Company is utilizing both
internal and external resources to achieve year 2000 compliance. The Company has
upgraded or replaced all systems it has found that were not compliant. Although
the systems have been tested or certified, all programs and equipment will
continue to be monitored for compatibility and functionality.
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 provides for 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 any other contingency plans in place. The Company will continue to
evaluate the need for such plans.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently subject to litigation arising in the normal course of
its business. From time to time, such litigation includes claims regarding
employment, tort, contract, truth-in-lending, the marketing and sale of Vacation
Intervals, and other consumer protection matters. Litigation has been initiated
from time to time by persons seeking individual recoveries for themselves, as
well as, in some instances, persons seeking recoveries on behalf of an alleged
class. In the judgement of the Company, none of these lawsuits or claims against
the Company, either individually or in the aggregate, is likely to have a
material adverse effect on the Company, its business, results of operations, or
financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Receivables Loan and Security Agreement dated
September 1, 1999, between the Company and Heller Financial, Inc.
10.2 Amended and Restated Inventory Loan and Security Agreement dated
September 1, 1999, between the Company and Heller Financial, Inc.
10.3 Loan and Security Agreement dated September 30, 1999, between the
Company and BankBoston, N.A., as Agent, and BankBoston, N.A. and
various financial institutions, as Lenders.
10.4 Purchase and Sale Agreement dated July 30, 1999, between the Company
and American National Bank and Trust Company of Chicago, as Trustee.
27.0 Financial Data Schedule.
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(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: November 12, 1999 By: /s/ ROBERT E. MEAD
-------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: November 12, 1999 By: /s/ HARRY J. WHITE, JR.
-------------------------------
Harry J. White, Jr.
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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10.1 Amended and Restated Receivables Loan and Security
Agreement dated September 1, 1999, between the Company
and Heller Financial, Inc.
10.2 Amended and Restated Inventory Loan and Security
Agreement dated September 1, 1999, between the Company
and Heller Financial, Inc.
10.3 Loan and Security Agreement dated September 30, 1999,
between the Company and BankBoston, N.A., as Agent, and
BankBoston, N.A. and various financial institutions, as
Lenders.
10.4 Purchase and Sale Agreement dated July 30, 1999,
between the Company and American National Bank and
Trust Company of Chicago, as Trustee.
27.0 Financial Data Schedule.
_____________
(b) Reports on Form 8-K
None.