<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-29114
VISTANA, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-3415620
(State of Incorporation) (IRS Employer Identification Number)
8801 Vistana Centre Drive
Orlando, FL 32821
(Address of Principal Executive Offices and Zip Code)
(407) 239-3100
(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 outstanding of the issuer's Common Stock, par value $.01 per
share, as of November 11, 1997: 19,007,630 shares.
This quarterly report on Form 10-Q contains ____ pages, of which this is page 1.
<PAGE>
2
VISTANA, INC. AND SUBSIDIARIES
Index
Part I Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets, September 30, 1997
(unaudited) and December 31, 1996
Condensed Consolidated Statements of Income for the three
month periods ended September 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statements of Income for the nine month
periods ended September 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1997 and 1996 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISTANA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
Assets September 30, 1997 December 31, 1996
------ ------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 9,211 $ 6,134
Restricted cash 7,759 3,847
Customer mortgages receivable, net 143,571 100,166
Other receivables, net 5,265 4,111
Inventory of Vacation Ownership Interests 29,393 16,541
Construction in progress 11,607 8,670
---------- ----------
Total Vacation Ownership Interests 41,000 25,211
Prepaid expenses and other assets 17,619 13,978
Land held for development 10,998 8,080
Property and equipment, net 13,508 12,395
Goodwill, net 15,155 --
---------- ----------
Total assets $ 264,086 $ 173,922
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Accounts payable and accrued liabilities 7,237 3,829
Accrued compensation and benefits 8,967 9,291
Customer deposits 9,580 4,995
Deferred income taxes 18,200 --
Other liabilities 8,902 6,160
Notes and mortgages payable 132,487 118,557
---------- ----------
Total liabilities 185,373 142,832
---------- ----------
Minority interest 4,386 4,442
---------- ----------
Shareholders' equity:
Common stock, $.01 par value:
Authorized 100,000,000 shares, issued and outstanding
19,007,630 shares at September 30, 1997 190 --
Additional paid-in capital 65,191 --
Retained earnings 8,946 --
Equity of predecessor entities -- 26,648
---------- ----------
Total shareholders' equity 74,327 26,648
---------- ----------
Total liabilities and shareholders' equity $ 264,086 $ 173,922
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
4
VISTANA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Amounts in Thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Vacation Ownership Interest sales $ 28,632 $ 17,539
Interest 4,619 3,579
Resort 4,378 3,459
Telecommunications 1,968 2,041
Other 115 143
----------- -----------
Total revenues 39,712 26,761
----------- -----------
Costs and operating expenses:
Vacation Ownership Interests cost of sales 6,327 4,134
Sales and marketing 12,229 7,525
Interest expense treasury 1,729 1,702
Provision for doubtful accounts 1,909 1,238
Resort 3,638 2,863
Telecommunications 1,566 1,517
General and administrative 3,227 1,966
Depreciation and amortization 751 741
Interest expense other 283 933
Other 782 422
Deferred executive incentive compensation - 360
----------- -----------
Total costs and operating expenses 32,441 23,401
----------- -----------
Operating income 7,271 3,360
Excess value recognized 18 35
Minority interest 7 -
----------- -----------
Income before income taxes 7,296 3,395
Provision for income taxes 2,753 -
----------- -----------
Net income $ 4,543 $ 3,395
=========== ===========
Earnings per share:
Primary $ .24
===========
Fully diluted $ .23
===========
Weighted average shares outstanding:
Primary 18,831,596
===========
Fully diluted 19,592,374
===========
Pro forma share data:
Income before income taxes $ 3,395
Income tax provision 1,290
-----------
Pro forma net income $ 2,105
===========
Pro forma net income per share $ 0.15
===========
Pro forma weighted average shares outstanding 14,175,000
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
5
VISTANA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Vacation Ownership Interest sales $ 68,715 $ 46,161
Interest 13,542 10,727
Resort 12,427 10,584
Telecommunications 5,164 5,257
Other 361 373
----------- -----------
Total revenues 100,209 73,102
----------- -----------
Costs and operating expenses:
Vacation Ownership Interests cost of sales 15,603 11,329
Sales and marketing 30,516 20,094
Interest expense treasury 4,858 5,026
Provision for doubtful accounts 4,717 3,272
Resort 10,201 8,847
Telecommunications 4,146 4,114
General and administrative 8,184 5,343
Depreciation and amortization 2,164 1,815
Interest expense other 1,355 2,972
Other 2,252 567
Deferred executive incentive compensation - 914
----------- -----------
Total costs and operating expenses 83,996 64,293
----------- -----------
Operating income 16,213 8,809
Excess value recognized 55 105
Minority interest 57 -
----------- -----------
Income before income taxes and extraordinary item 16,325 8,914
Provision for income taxes 5,555 -
Non-recurring charge associated with the change of tax status 13,201 -
----------- -----------
Income (loss) before extraordinary item (2,431) 8,914
Extraordinary item early extinguishment of debt (net of tax) (825) -
----------- -----------
Net income (loss) $ (3,256) $ 8,914
===== =====
Earnings per share
Loss per share before extraordinary item $ (.14)
Extraordinary item (.04)
-----------
Net loss per share $ (.18)
===========
Weighted average shares outstanding 17,828,047
===========
Pro forma share data:
Income before income taxes $ 8,914
Income tax provision 3,387
-----------
Pro forma net income $ 5,527
===========
Pro forma net income per share $ 0.39
===========
Pro forma Weighted average shares outstanding 14,175,000
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VISTANA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Amounts In Thousands)
(Unaudited)
[CAPTION]
<TABLE>
Nine months ended
September 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ (3,256) $ 8,914
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense 2,164 1,815
Amortization of discount on customer mortgages
receivable (2,296) (1,627)
Provision for doubtful accounts 4,717 3,272
Minority interest (57) --
Deferred income taxes 16,737 --
Changes in operating assets and liabilities, net of effects
of the Business Acquisition:
Other receivables, net (649) (122)
Vacation Ownership Interests (14,585) (4,227)
Prepaid expenses and other assets (3,637) (7,159)
Accounts payable and accrued liabilities 3,015 (1,906)
Accrued compensation and benefits (909) 867
Customer deposits 4,488 1,491
Repurchase obligation -- (540)
Other liabilities 708 3,685
-------- --------
Net cash provided by operating activities $ 6,440 $ 4,463
-------- ---------
Investing activities:
Expenditures for land, property and equipment $ (1,870) $ (1,027)
Business Acquisition (23,885) --
Origination of customer mortgages receivable (25,439) (14,391)
Additions to restricted cash (3,294) (220)
Beginning cash balance of Business Acquisition 333 --
--------- --------
Net cash used in investing activities $(54,155) $(15,638)
--------- --------
(continued)
</TABLE>
<PAGE>
7
VISTANA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow, continued
(Amounts In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1997 1996
---- ----
<S> <C> <C>
Financing activities:
Proceeds from notes and mortgages payable $ 81,601 $ 42,669
Payments on notes and mortgages payable (78,029) (33,888)
Proceeds from public offering 51,615 --
Payments of public offering costs (2,150) --
Equity distributions/redemption (2,245) (1,005)
Minority interest capital contribution - 2,563
--------- --------
Net cash provided by financing activities $ 50,792 $ 10,339
--------- --------
Net increase (decrease) in cash and
cash equivalents 3,077 (836)
Cash and cash equivalents, beginning of period 6,134 7,543
--------- --------
Cash and cash equivalents, end of period $ 9,211 $ 6,707
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 5,982 $ 7,906
========= ========
Cash paid during the period for income taxes $ 1,512 $ 0
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
8
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1997 and 1996
(1) General
Vistana, Inc. and its consolidated subsidiaries (the "Company") generate
revenues from the sale and financing of vacation ownership interests
("VOIs") in its resort properties which typically entitle the buyer to
ownership of a fully-furnished unit for a one week period on an annual or
an alternate-year basis. The Company's principal operations consist of (1)
constructing, furnishing, marketing and selling VOIs, (2) providing
consumer financing for the purchase of VOIs at its resorts, (3) managing
the operations of its resorts and related amenities, and (4) installation
and maintenance of telecommunications equipment for others on a limited
basis. The Company sells VOIs to both domestic and foreign purchasers. All
contracts relating to the sale of VOIs are denominated in United States
(U.S.) dollars.
The condensed consolidated financial statements shown herein for the
Company and its consolidated subsidiaries for each respective period
include the operations of its predecessors in interest. The Company became
the parent company for all of the operations of its predecessors in
connection with its initial public offering (the "Offering") completed on
February 28, 1997.
At September 30, 1997, the condensed consolidated financial statements of
the Company include the accounts of the Company and its consolidated
subsidiaries and two partnerships between one or more subsidiaries and
unaffiliated third party partners wherein the Company exercises operational
and financial control over such partnerships. Interests of unaffiliated
third parties are reflected as minority interests.
On September 16, 1997, the Company completed the acquisition (the
"Acquisition") of entities comprising The Success Companies, Success
Developments, L.L.C. and Points of Colorado, Inc. (collectively, the
"Business Acquisition" or "Success and Points"). The Company acquired the
entire equity interest in the Business Acquisition for a purchase price of
approximately $24.0 million in cash, 207,630 shares of Company common stock
and contingent consideration of 430,814 shares of Company common stock.
The condensed consolidated financial statements of the Company as of and
for the three months and nine months ended September 30, 1997 have not been
audited. In the opinion of management, the unaudited condensed consolidated
financial statements include all adjustments and accruals (consisting of
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position at September 30, 1997 and the consolidated
results of its operations for the three months and nine months ended
September 30, 1997 and 1996. Results for interim periods are not
necessarily indicative of the results to be expected during the remainder
of the current year or for any future period. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
or condensed. All significant intercompany accounts and transactions have
been eliminated in consolidation. These financial statements and footnotes
should be read in conjunction with the audited combined financial
statements and notes included in Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-19045) filed with
the Securities and Exchange Commission on February 28, 1997. The accounting
policies used in preparing these condensed consolidated financial
statements are the same as those described in the Registration Statement on
Form S-1.
<PAGE>
9
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
which simplifies the calculation of earnings per share as currently
calculated under APB 15. Compliance with this statement cannot be
implemented by the Company before December 31, 1997.
In February 1997 FASB issued Statement of Financial Accounting Standards
No. 129 "Disclosure of Information about Capital Structure" which
establishes standards for disclosing information about an entity's capital
structures. This Statement is effective for financial statements for
periods ending after December 15, 1997. This Statement will not have a
material impact on the Company.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. This Statement will not
have a material impact on the Company.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131 "Disclosure about Segments of an Enterprise and Related Information"
which establishes standards for the way that public enterprises report
information about operating segments in annual financial statements. This
Statement requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about product and
services, geographic areas, and major customers. This Statement is
effective for financial statements for periods beginning after December 15,
1997. This Statement will not have a material impact on the Company.
(3) Earnings Per Share
Earnings per share is calculated on the weighted average number of shares
outstanding. The dilutive effect of common stock equivalents for the
computation of primary earnings per share was less than 3% for the nine
months ended September 30, 1997, therefore, no adjustment has been made to
the weighted average number of shares outstanding. The dilutive effect of
common stock equivalents for the computation of fully diluted earnings per
share was greater than 3% for the three months ended September 30, 1997,
therefore an adjustment of 760,779 shares has been made to the weighted
average numbers of shares outstanding. For periods prior to the Offering on
February 28, 1997, 14,175,000 shares were assumed to be outstanding which
included the shares issued by the Company in exchange for the interests in
the predecessor corporations and limited partnerships. Earnings per share
for the three and nine month periods ended September 30, 1996 have been
adjusted to reflect pro forma tax expense of $1.3 million and $3.4 million,
respectively.
<PAGE>
10
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(4) Capital Transactions and Public Offering
During the three months ended March 31, 1997, the Company consummated the
Offering of 4,625,000 shares of the Company's common stock at a price of $12 per
share. The net proceeds from the Offering, after deducting the related issuance
costs, amounted to approximately $49.5 million. In addition, 14,175,000 shares
of the Company's common stock were issued just prior to and in connection with
the formation transactions to the former holders of interests in the Company's
predecessor corporations and limited partnerships.
In addition, in connection with the Offering and the formation transactions, (1)
the former equity holders of the Company's predecessor corporations and limited
partnerships received a distribution of approximately $2.5 million, $0.3 million
of which represented the balance of such holders' federal and state income tax
liability attributable to their ownership of such entities through the date of
the Offering and $2.2 million of which represented the retained earnings of the
Company's predecessor corporations and limited partnerships for which such
holders had previously paid income tax; and (2) the Company used approximately
$39.8 million to prepay outstanding indebtedness, together with accrued interest
and related prepayment penalties.
The formation transactions have been accounted for as a reorganization of
entities under common control in a manner similar to a pooling of interests.
Accordingly, the net assets of the predecessor corporations and limited
partnerships were recorded at the predecessor entity's basis. In addition, the
accompanying condensed consolidated financial statements reflect historical
results of operations of the predecessor corporations and limited partnerships
on a combined basis.
<PAGE>
11
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(5) Customer Mortgages Receivable, Net
At September 30, 1997 and December 31, 1996, customer mortgages
receivable, net consisted of:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Customer mortgages receivable, gross $158,452 $115,970
Less:
Unamortized discount on repurchased customer
mortgages receivable (3,244) (5,539)
Unamortized excess value over consideration (38) (74)
Allowance for loss on receivables (11,599) (10,191)
-------- --------
Customer mortgages receivable, net $143,571 $100,166
======== ========
</TABLE>
As of September 30, 1997 and December 31, 1996, customer mortgages receivable,
gross, from foreign buyers aggregated approximately $30.1 million and $28.1
million, respectively, with obligors within no individual foreign country
aggregating more than 5% of gross outstanding customer mortgages receivable.
Stated interest rate on customer mortgages receivable outstanding at September
30, 1997 range from 00.0% to 17.9% per annum (averaging approximately 14.2% per
annum contractually). Interest is not imputed on customer mortgages receivable
with less than a market interest rate because such amounts are immaterial.
The activity in the customer mortgages receivable allowance for doubtful
accounts is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
----------------------------
(In thousands)
<S> <C> <C>
Balance, beginning of period $10,191 $ 9,353
Provision for doubtful accounts 4,717 3,272
Allowance related to the Business Acquisition 1,076 -
Customer mortgages receivable charged off (4,385) (3,563)
------- --------
Balance, end of period $11,599 $ 9,062
======= ========
</TABLE>
<PAGE>
12
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(6) Notes and Mortgages Payable
At September 30, 1997 and December 31, 1996 notes and mortgages payable
consisted of:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(In thousands)
<S> <C> <C>
Notes payable to lenders, which bear interest at $ 94,579 $73,248
fixed and variable rates which at September 30, 1997
were between 8.2% and 11.3%. A total of $191.6 million
has been approved for borrowing, assuming sufficient
receivables are available for collateral. Maturity dates
range from September, 1998 to August, 2007. All notes
are secured by customer mortgages receivable.
Notes payable and mortgage obligations to lenders, $ 32,291 $ 22,078
which had interest at rates from 8.2% to 10.5% at
September 30, 1997 (plus incentive fees). A total
of $58.2 million may be borrowed. Maturity dates
range from December, 1997 to March, 2006. Such
notes and mortgages are secured by real estate.
Notes payable to lenders, which bear interest at rates $ 5,617 $ 23,231
from 8.7% to 11.0% at September 30, 1997. A total
of $8.0 million may be borrowed. Maturity dates range
from March, 1999 to November, 2001. Such notes are
unsecured or are secured by personal property.
-------- --------
Total notes and mortgages payable $132,487 $118,557
======== ========
</TABLE>
<PAGE>
13
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the quarter ended March 31, 1997, the Company repaid $38.9 million of
debt with the proceeds of the Offering. In that quarter, the Company recorded an
expense relating to the write-off of previously capitalized fees and prepayment
penalties of $0.8 million, net of related tax benefits of $0.5 million.
During the quarter ended September 30, 1997, the Company entered into a $12.7
million loan facility for the construction of Embassy Vacation Resort in Myrtle
Beach, South Carolina and related amenities, as well as a related $10.0 million
receivables based revolving credit facility. During the third quarter, the
Company also entered into a $30.0 million receivables based revolving credit
facility secured by receivables generated primarily at Vistana Resort in
Orlando, Florida and a $15.0 million receivables based revolving credit facility
secured by Points of Colorado's receivables. All of these receivables facilities
are priced at the London Interbank Offer Rate ("LIBOR") plus 2.50%. The
construction loan facility is priced at LIBOR plus 3.25%.
Additionally, the information presented includes $10.4 million of debt which was
outstanding and which was assumed as a part of the Business Acquisition.
(7) Income Taxes
As the result of the Offering and the related formation transactions, the
Company became subject to federal, state and foreign income taxes and was
required to record in the quarter ended March 31, 1997, a deferred tax liability
of $13.2 million for cumulative temporary differences between financial
reporting and tax reporting. The deferred tax assets, deferred tax liabilities
and the current tax provision were estimated based on management's current
estimate as of the end of the period. The provision for income taxes reflects
the income tax expense from the date of the formation transactions through the
applicable three or nine month period.
The Company reports most of its sales of VOIs on the installment method for
federal income tax purposes. As a result, the Company does not recognize taxable
income on these sales until the installment payments have been received from the
Company's customers. The Company is subject to the Alternative Minimum Tax
("AMT") as a result of the deferred income which results from the installment
sales method. In the second quarter of 1997 the Company began paying state AMT
and in the current quarter began paying federal AMT. The Company expects to pay
state and federal AMT for the balance of the fiscal year.
Under Section 453(l) of the Internal Revenue Code, interest may be imposed on
the amount of tax attributable to the installment payments on customer
receivables 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 required to pay tax in
a particular year, no interest is imposed since the interest is based on the
amount of tax paid in that year. The Company has not included a provision for
any of this interest since it is not currently subject to tax. However, in the
future it may become so. The Company continues to monitor its tax provision and
may adjust it to provide for this interest in the future if it becomes subject
to taxation.
<PAGE>
14
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(8) Stock Plans
In December 1996, the Company granted certain executive officers and other
employees options to purchase an aggregate of 535,000 shares of common stock at
an exercise price of $11.00 per share, none of which were exercised during the
period. In addition, in the quarter ended March 31, 1997, the Company granted
options to purchase 1,026,000 shares of common stock at an exercise price of
$12.00 per share to certain employees, directors and an outside consultant.
Additionally during the quarter ended September 30, 1997, options to purchase
256,000 shares of common stock were granted to employees of the Company at
exercise prices which averaged $18.03 per share. None of such options have been
exercised.
Certain of the former owners of the Company's predecessor corporations and
limited partnership interests granted to certain executive officers and other
employees of the Company options to acquire an aggregate of 1,350,000 shares of
common stock at an exercise price of $12 per share. These options are
currently exercisable in full and will terminate ten years after the date of
grant.
(9) Percentage of Completion
In the prior quarter, the Company began pre-construction sales at its Embassy
Vacation Resort at Myrtle Beach, South Carolina. There were no pre-construction
VOI sales or any VOI sales recognized under percentage of completion method in
either the first or second quarter of 1997. During the quarter ended September
30, 1997, construction commenced and the Company began recognizing revenue
related to VOI sales using the percentage of completion method. Under this
method, the portion of revenues related to applicable costs incurred, as
compared to the total estimate of such costs, is recognized as revenue. The
remaining revenue is deferred and recognized as the remaining costs are
incurred.
<PAGE>
15
VISTANA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(10) Acquisition Transactions
On September 16, 1997, the Company completed the acquisition of entities
comprising The Success Companies, Success Developments, L.L.C. and Points of
Colorado, Inc. The Company acquired the entire equity interest in the Business
Acquisition for a purchase price of approximately $24.0 million in cash, 207,630
shares of Company common stock and contingent consideration of 430,814 shares of
Company common stock. Delivery of the contingent shares is dependent upon
Success and Points achieving certain operating results for calendar years 1998
through 2000. Management of the Company has determined that the contingent
consideration is an additional cost of the acquisition rather than compensation
expense. The purchase method of accounting was followed in accounting for this
transaction. The goodwill associated with the Acquisition is being amortized on
a straight line basis over 20 years. Operations of the Business Acquisition from
September 16, 1997 through September 30, 1997 are included in the accompanying
condensed consolidated statements of income.
During the quarter ended September 30, 1997, the Company purchased from an
affiliate of The PGA of America approximately 25 acres of land adjacent to an
existing 36-hole golf facility owned by another affiliate of The PGA of America
in Port St. Lucie, Florida. The stated purchase price for this property was
$3.75 million, and the Company financed its purchase of the property through the
payment of $1.5 million in cash from its existing working capital and the
issuance of a noninterest bearing note to the seller for the balance. The
noninterest bearing note was recorded at a net discounted amount reflecting the
Company's assumed cost of borrowing at 8.2%. Concurrent with the closing of the
land purchase, the Company and an affiliate of The PGA of America executed a
long-term affiliation agreement which provides for, among other things, the
development of future vacation ownership resorts and marketing and golf access
agreements for the Port St. Lucie, Florida property.
(11) Pro forma Information
The following unaudited pro forma condensed consolidated statements of
operations for the three months and nine months ended September 30, 1997 and
1996 present the combined results of operations of the Company and the Business
Acquisition. The purchase accounting and other pro forma adjustments, as
described in the related notes are calculated as if the Acquisition and the
Offering had been consummated on January 1, of each respective year:
<PAGE>
16
VISTANA, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statements of Operations
For the three months ended September 30, 1997 and September 30, 1996
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1997 September 30, 1996
------------------ ------------------
Actual Adjustments(a) Pro forma Actual Adjustments(e) Pro forma
------ -------------- --------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Vacation Ownership Interest sales $ 28,632 $ 4,912 $ 33,544 $ 17,539 $ 4,092 $ 21,631
Interest 4,619 646 5,265 3,579 379 3,958
Resort 4,378 - 4,378 3,459 45 3,504
Telecommunications 1,968 - 1,968 2,041 - 2,041
Other 115 324 439 143 68 211
-------- -------- --------- -------- -------- ---------
Total revenues $ 39,712 $ 5,882 $ 45,594 $ 26,761 $ 4,584 $ 31,345
-------- -------- --------- -------- -------- ---------
Costs and operating expenses:
Vacation Ownership Interests cost
of sales 6,327 1,403 7,730 4,134 968 5,102
Sales and marketing 12,229 2,408 14,637 7,525 1,510 9,035
Loan portfolio:
Interest expense - treasury 1,729 453(b) 2,182 1,702 62(f) 1,764
Provision for doubtful accounts 1,909 101 2,010 1,238 103 1,341
Resort 3,638 306 3,944 2,863 169 3,032
Telecommunications 1,566 - 1,566 1,517 - 1,517
General and administrative 3,227 862 4,089 1,966 553 2,519
Depreciation and amortization 751 166(c) 917 741 202(g) 943
Interest expense - other 283 7 290 933 (503)(h) 430
Other 782 - 782 422 - 422
Deferred executive incentive compensation - - 360 - 360
-------- -------- --------- -------- -------- ---------
Total costs and operating expenses $ 32,441 $ 5,706 $ 38,147 $ 23,401 $ 3,064 $ 26,465
-------- -------- --------- -------- -------- ---------
Operating income 7,271 176 7,447 3,360 1,520 4,880
Excess value recognized 18 - 18 35 - 35
Minority interest 7 - 7 - - -
-------- -------- --------- -------- -------- ---------
Income before income taxes
and extraordinary item $ 7,296 $ 176 $ 7,472 $ 3,395 $ 1,520 $ 4,915
Provision for income taxes 2,753 86(d) 2,839 - 1,868(d) 1,868
Non-recurring charge associated with
the change of tax status - - - - - -
-------- -------- --------- -------- -------- ---------
Net income $ 4,543 $ 90 $ 4,633 $ 3,395 $ (348) $ 3,047
======== ======== ========= ======== ======== =========
Historical net income (loss) per share
before extraordinary item $ 0.24 $ 0.24
======== ========
Historical weighted average shares
outstanding 18,831,596 14,175,000
========== ==========
Pro forma net income per share
of common stock $ 0.24 $ 0.16
========= =========
Pro forma weighted average shares
of common stock outstanding 19,007,630 19,007,630
========== ==========
</TABLE>
<PAGE>
Note: The pro forma statements of income give effect to the consolidation of
the Company's predecessor corporations and partnerships and the treatment
of the combined Company as a C corporation, the Company's Offering, and
the Business Acquisition as if these events occurred at the beginning of
each respective period. The pro forma adjustments are based upon the
current available information and certain assumptions that the Company's
management believes reasonable under current circumstances.
(a) Reflects the results of operations for the Business Acquisition from
July 1, 1997 through the date of acquisition, September 16, 1997.
(b) Reflects interest expense for the Business Acquisition ($42); also
reflects interest expense on borrowings of approximately $24.0
million at 8.2% to make the Business Acquisition ($411).
(c) Reflects depreciation and amortization of the Business Acquisition
($8); and amortization of goodwill from the Business Acquisition
($158).
(d) Reflects pro forma income tax effect of the entities in the Business
Acquisition being taxable as C corporations and part of the Vistana
consolidated group.
(e) Reflects the results of operations for the Business Acquisition
from July 1, 1996 through September 30, 1996.
(f) Reflects interest expense for the Business Acquisition ($81); also
reflects interest expense on borrowings of approximately $24.0
million at 8.2% to make the Business Acquisition ($493); and a
reduction of interest expense ($512) due to early debt retirement as
a result of the Offering.
(g) Reflects depreciation and amortization of the Business Acquisition
($13); and amortization of goodwill from the Business Acquisition
($189).
(h) Reflects interest expense for the Business Acquisition ($6); and a
reduction of interest expense ($509) due to early debt retirement as
a result of the Offering.
<PAGE>
18
VISTANA, INC. AND ITS SUBSIDIARIES
Pro Forma Condensed Consolidated Statements of Operations
For the nine months ended September 30, 1997 and September 30, 1996
(Amounts in thousands except share data) (Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
--------------------------------------- --------------------------------------
Actual Adjustments(a) Pro forma Actual Adjustments(g) Pro forma
-------- -------------- --------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Vacation Ownership Interest sales $ 68,715 $ 16,533 $ 85,248 $46,161 $ 9,719 $55,880
Interest 13,542 1,708 15,250 10,727 630 11,357
Resort 12,427 - 12,427 10,584 34 10,618
Telecommunications 5,164 - 5,164 5,257 - 5,257
Other 361 922 1,283 373 693 1,066
---------- -------- ---------- ---------- ------- ----------
Total revenues $100,209 $ 19,163 $119,372 $73,102 $11,076 84,178
---------- -------- ---------- ---------- ------- ----------
Costs and operating expenses:
Vacation Ownership Interests cost
of sales 15,603 4,386 19,989 11,329 2,289 13,618
Sales and marketing 30,516 7,111 37,627 20,094 3,454 23,548
Loan portfolio:
Interest expense - treasury 4,858 1,518(b) 6,376 5,026 25(h) 5,051
Provision for doubtful accounts 4,717 278 4,995 3,272 233 3,505
Resort 10,201 781 10,982 8,847 429 9,276
Telecommunications 4,146 - 4,146 4,114 - 4,114
General and administrative 8,184 2,416 10,600 5,343 1,389 6,732
Depreciation and amortization 2,164 562(c) 2,726 1,815 606(i) 2,421
Interest expense - other 1,355 (309)(d) 1,046 2,972 (1,510)(j) 1,462
Other 2,252 - 2,252 567 - 567
Deferred executive incentive compensation - - - 914 - 914
---------- -------- ---------- ---------- ------- ----------
Total costs
operating expenses $ 83,996 $ 16,743 $100,739 $64,293 $ 6,915 $71,208
---------- -------- ---------- ---------- ------- ----------
Operating income 16,213 2,420 18,633 8,809 4,161 12,970
Excess value recognized 55 - 55 105 - 105
Minority interest 57 - 57 - - -
---------- -------- ---------- ---------- ------- ----------
Income before income taxes
and extraordinary item $ 16,325 $ 2,420 $ 18,745 $ 8,914 $ 4,161 $13,075
Provision for income taxes 5,555 1,568(e) 7,123 - 4,969(e) 4,969
Non-recurring charge associated with
the change in tax status 13,201 (13,201)(f) - - - -
---------- -------- ---------- ---------- ------- ----------
Net income (loss) before
extraordinary item $ (2,431) $ 14,053 $ 11,622 $ 8,914 $ (808) $ 8,106
Extraordinary item 825 (825)(f) - - - -
---------- -------- ---------- ---------- ------- ----------
Net income (loss) $ (3,256) $ 14,878 $ 11,622 $ 8,914 $ (808) $ 8,106
========== ======== ========== ========== ======= ==========
Historical net income (loss) per share
before extraordinary item $ (0.14) $ 0.63
========== ==========
Historical weighted average shares
outstanding 17,828,047 14,175,000
========== ==========
Pro forma net income per share of
common stock $ 0.61 $ 0.43
========== ==========
Pro forma weighted average shares
of common stock outstanding 19,007,630 19,007,630
========== ==========
</TABLE>
<PAGE>
19
Note: The pro forma statements of income give effect to the consolidation of
the Company's predecessor corporations and partnerships and the treatment
of the combined Company as a C corporation, the Company's Offering, and
the Business Acquisition as if these events occurred at the beginning of
each respective period. The pro forma adjustments are based upon the
current available information and certain assumptions that the Company's
management believes reasonable under current circumstances.
(a) Reflects the results of operations for the Business Acquisition from
January 1, 1997 through the date of acquisition, September 16, 1997.
(b) Reflects interest expense for the Business Acquisition ($462); also
reflects interest on borrowings at approximately $24.0 million at
8.2% to make the Business Acquisition ($1,397); and a reduction in
interest expense ($341) due to early debt retirement as a result of
the Offering.
(c) Reflects depreciation and amortization of the Business Acquisition
($26); and amortization of goodwill from the Business Acquisition
($536).
(d) Reflects actual interest expense for the Business Acquisition ($31);
and a reduction in interest expense ($340) due to early debt
retirement as a result of the Offering.
(e) Reflects pro forma income tax effect of the entities in the Business
Acquisition being taxable as C corporations and part of the Vistana
consolidated group.
(f) Reflects the elimination of non-recurring charges for deferred taxes
($13,201) that relate to the conversion of the tax status of the
Company's predecessor entities, as well as the elimination of the
extraordinary item from the early extinguishment of debt (net of
tax) ($825) related to debt repaid from the proceeds of the
Offering.
(g) Reflects the results of operations for the Business Acquisition from
January 1, 1996 through September 30, 1996.
(h) Reflects interest expense for the Business Acquisition ($81); also
reflects interest expense on borrowings of approximately $24.0
million at 8.2% to make the Business Acquisition ($1,480); and a
reduction of interest expense ($1,536) due to early debt retirement
as a result of the Offering.
(i) Reflects depreciation and amortization of the Business Acquisition
($39); and amortization of goodwill from the Business Acquisition
($567).
(j) Reflects actual interest expense for the Business Acquisition ($17)
and a reduction in interest expense ($1,527) due to early debt
retirement as a result of the Offering.
<PAGE>
(12) Subsequent Events
Subsequent to September 30, 1997, the Company acquired approximately 10 acres of
land for the development of a 150 unit Embassy Vacation Resort in Scottsdale,
Arizona. The resort is expected to be developed under a franchise agreement with
Promus Hotels, Inc. Construction is expected to commence during the first
quarter of 1998.
Effective October 1, 1997, the Company implemented the Vistana, Inc. Employee
Stock Purchase Plan to assist employees in acquiring a stock ownership interest
in the Company and to encourage them to remain in the employment of the Company.
The Employee Stock Purchase Plan meets the requirements of an "employee stock
purchase plan" under section 423 of the Internal Revenue Code. A maximum of one
million shares of common stock are reserved for issuance under this plan.
Subsequent to the end of the third quarter, the Company entered into and
completed, on November 3, 1997, an agreement to purchase the assets of guest
service and marketing companies (the "Acquired Companies") for $1.8 million in
cash and $3.2 million in contingent cash payments. Payout of the contingent
consideration is conditioned on the Acquired Companies achieving certain
operating results in each of the calendar years 1998 through 2000. Management of
the Company has determined that the contingent consideration is an additional
cost of the acquisition rather than compensation expense. The purchase method of
accounting will be followed in accounting for this transaction. The goodwill
associated with the acquisition will be amortized on a straight-line basis over
10 years.
Subsequent to September 30, 1997, the Company filed with the Securities and
Exchange Commission a Registration Statement relating to the proposed public
offering by the Company of four million shares of its common stock. In
connection with the offering, the Company will grant to the underwriters an
option to purchase up to 600,000 shares of its common stock to cover
over-allotments, if any.
<PAGE>
21
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following discussion of the Company's results of operations is derived from
the condensed consolidated statements of income for the three and nine months
ended September 30, 1997 and September 30, 1996.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Statement of operations:
As a Percentage of total revenues:
VOI Sales 72.1% 65.5% 68.6% 63.1%
Interest 11.6% 13.4% 13.5% 14.7%
Resort 11.0% 12.9% 12.4% 14.5%
Telecommunications 5.0% 7.7% 5.1% 7.2%
Other 0.3% 0.5% 0.4% 0.5%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
As a Percentage of VOI Sales:
VOI cost of sales 22.1% 23.6% 22.7% 24.5%
Sales and marketing 42.7% 42.9% 44.4% 43.5%
Provision for doubtful accounts 6.7% 7.1% 6.9% 7.1%
As a Percentage of interest revenues:
Loan portfolio:
Interest expense treasury 37.4% 47.6% 35.9% 46.9%
As a percentage of total revenues:
General and administrative 8.1% 7.3% 8.2% 7.3%
Depreciation and amortization 1.9% 2.8% 2.2% 2.5%
Interest expense other 0.7% 3.5% 1.4% 4.1%
Other 2.0% 1.6% 2.2% .8%
Deferred executive incentive compensation - 1.3% - 1.3%
----- ----- ----- -----
Total costs and operating expenses 81.7% 87.4% 83.8% 87.9%
As a Percentage of resort revenues:
Resort expenses (1) 83.1% 82.8% 82.1% 83.6%
As a Percentage of telecommunication
revenues:
Telecommunications expenses (1) 79.6% 74.3% 80.3% 78.3%
Selected operating data:
Number of resorts at end of period 6 3 6 3
Number of VOIs sold (2) 2,865 1,694 6,921 4,499
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
22
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Number of VOIs in inventory at period
end(3) 15,570 14,002 15,570 14,002
Average sales price per VOI sold $ 9,994 $10,354 $ 9,929 $10,260
</TABLE>
- --------
(1) Does not include interest and depreciation expenses.
(2) Includes both sales of annual and alternate-year VOIs.
(3) Inventory classified as annual VOIs.
<PAGE>
23
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996.
Revenue:
For the three months ended September 30, 1997, the Company recognized total
revenues of $39.7 million compared to $26.8 million for the three months ended
September 30, 1996, an increase of $12.9 million, or 48.4%. This increase is
primarily due to an $11.1 million increase in sales of VOIs from $17.5 million
during 1996 to $28.6 million during 1997, an increase of 63.2%. VOI sales
increased due to a 69.1% increase in the number of VOIs sold, moderated by a
3.5% decrease in the average sales price due to inclusion of sales from the
Hampton Vacation Resort-Oak Plantation ("HVR-Oak") and 15 days of sales from the
Business Acquisition which have a lower average selling price. The increase in
VOIs sold was a result of expanded sales and marketing programs, both in central
Florida and internationally. Additionally, 1997 revenues include sales of VOIs
at HVR-Oak, partial recognition of sales at the Embassy Vacation Resort, Myrtle
Beach and the inclusion of 15 days of sales from the Business Acquisition which
was acquired by the Company on September 16, 1997.
Interest income increased 29.1%, from $3.6 million to $4.6 million, due to a
29.6% increase in the average principal amount of net customer mortgages
receivable from $90.2 million to $116.9 million. Also included in interest
income is the discount amortization on customer mortgages receivable recognized
during the comparable three month periods ended September 30, 1997 and September
30, 1996 of $.8 million and $.5 million, respectively. This discount resulted
from a 1995 transaction in which the Company re-acquired certain customer
mortgages receivable (pursuant to a related clean up call provision) which had
been previously sold in 1991 as well as recognition of a discount on certain
customer mortgages receivable repurchased in 1996 (pursuant to a related clean-
up call provision) from an investment partnership. As of September 30, 1997,
$3.2 million of total unamortized discount remained and is expected to be
amortized through 1999.
Resort revenue increased 26.6%, from $3.5 million to $4.4 million, primarily as
a result of the impact of $0.8 million in room rentals at HVR-Oak which are
included for the three months ended September 30, 1997, but not for the
same period in 1996, and room rentals of $0.1 million from additional units
added at Vistana Resort during the quarter ended September 30, 1997.
Telecommunication revenues (guest telephone charges relating to the existing
resorts and revenues from contracting services provided to third parties)
decreased 3.6% from just over $2.0 million at September 30, 1996 to just under
$2.0 million at September 30, 1997, due to a decline in contracting revenues in
the amount of $0.1 million.
Costs and Operating Expenses:
Total operating costs and expenses increased $9.0 million, or 38.6% from $23.4
million in the third quarter of 1996 to $32.4 million in the comparable 1997
quarter but declined as a percentage of total revenues from 87.4% in 1996 to
81.7% in 1997. VOI product costs, as a percentage of VOI revenues, decreased
from 23.6% in 1996 to 22.1% in 1997, as a result of sales in the current period
of phases at Vistana Resort with relatively lower per unit costs and at HVR-Oak
which has a lower VOI per unit product cost. The Company anticipates later
phases at Vistana Resort will continue to have relatively lower per unit costs.
Sales and marketing expenses, as a percentage of VOI revenues, were relatively
unchanged (42.9% in 1996 to 42.7% in 1997) during the comparable three month
period.
<PAGE>
24
Loan portfolio expenses consisting of interest expense treasury were unchanged.
Provision for doubtful accounts decreased in the current quarter to 6.7% of VOI
revenues in 1997 compared to 7.1% in the same period in 1996. This decrease is
due to the inclusion of the operations of Success and Points for a portion of
the current period. Historically Success and Points have used a lower provision
for doubtful accounts than the Company based upon their loss experience. The
Company annually monitors its provision for doubtful accounts to provide for
future losses associated with any defaults on customer mortgages receivable and
provides for additions to the reserve as a percentage of VOIs sold in the
applicable period. Management believes that the provision is adequate for such
future losses. Resort expenses, as a percentage of resort revenues, increased to
83.1% from 82.8% for the three months ended September 30, 1997 and 1996,
respectively, as a result of relatively higher expenses at HVR Oak.
Telecommunications expenses increased to 79.6% as a percentage of total
telecommunication revenues for the three months ended September 30, 1997
compared to 74.3% for the same period in 1996. This increase was due to
increases in contracting costs.
General and administrative expenses increased from $2.0 million for the three
months ended September 30, 1996 to $3.2 million for the three months ended
September 30, 1997, increasing as a percent of total revenues from 7.3% in 1996
to 8.1% in 1997. The increase in general and administrative expenses was the
result of (1) increased revenue levels and commensurate business activities, (2)
the addition of a number of senior managers and key executives in order to build
the management and organizational infrastructure necessary to efficiently manage
the Company's anticipated future growth, (3) the Company's expenses and
reporting obligations as a public company, and (4) added salary, travel and
office expenses attributable to the current and planned growth in the size of
the Company. Depreciation and amortization declined as a percentage of total
revenues from 2.8% in the three months ended September 30, 1996 to 1.9% in the
three months ended September 30, 1997 reflecting the added costs of depreciation
from capital additions being spread over a larger revenue base. Other costs and
expenses did not change but declined as a percentage of total revenue to 2.0% in
the three month period ended September 30, 1997 from 2.9% (which includes
deferred executive incentive compensation in 1996) over the prior year's period.
Interest expense-other decreased from 3.5% in the three month period ended
September 30, 1996 as a percentage of total revenues to 0.7% in the same period
of 1997 due to early extinguishment of debt from funds provided by the Offering.
Operating income increased 116.4% to $7.3 million, or 18.3% of total revenues,
during the three months ended September 30, 1997 from $3.4 million, or 12.6% of
total revenues, during the three months ended September 30, 1996.
<PAGE>
25
Provision for Income Taxes:
As the result of the Offering and the related formation transactions, the
Company became subject to federal, state and foreign income taxes. For the
quarter ended September 30, 1997, the Company recorded a deferred income tax
expense provision of $2.8 million. The deferred tax assets, deferred tax
liabilities and the current tax provision were estimated based on management's
most recent information as of September 30, 1997. The provision for income taxes
reflects the income tax expense for the three month period ended September 30,
1997.
The Company reports most of its sales of VOIs on the installment method for
federal income tax purposes. As a result, the Company does not recognize
taxable income on these sales until the installment payments have been received
from the Company's customers. The Company is subject to the Alternative
Minimum Tax ("AMT") as a result of the deferred income which results from the
installment sales method. In the second quarter of 1997 the Company began paying
state AMT and in the current quarter began paying federal AMT. The
Company expects to pay state and federal AMT for the balance of the fiscal year.
Under Section 453(l) of the Internal Revenue Code, interest may be imposed on
the amount of tax attributable to the installment payments on customer
receivables 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 required to pay tax in
a particular year, no interest is imposed since the interest is based on the
amount of tax paid in that year. The Company has not included a provision for
any of this interest since it is not currently subject to tax. However, in the
future it may become so. The Company continues to monitor its tax provision and
may adjust it to provide for this interest in the future if it becomes subject
to taxation.
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996.
Revenue:
For the nine months ended September 30, 1997, the Company recognized total
revenues of $100.2 million compared to $73.1 million for the nine months ended
September 30, 1996, an increase of $27.1 million, or 37.1%. This increase is
primarily due to a $22.6 million increase in sales of VOIs from $46.2 million
during 1996 to $68.7 million during 1997, an increase of 48.9%. VOI sales
increased due to a 53.8% increase in the number of VOIs sold, reduced by a 3.2%
decrease in the average sales price. The lower average sales price is primarily
due to the inclusion in the nine months ended September 30, 1997 of the HVR-Oak
sales and 15 days of sales from the Business Acquisition which have a lower
average selling price. The increase in VOIs sold was a result of expanded sales
and marketing programs, both in central Florida and internationally, and sales
of VOIs at HVR-Oak, partial recognition of sales at Embassy Vacation Resort,
Myrtle Beach and the inclusion of 15 days of sales from the Business Acquisition
which are included in sales for 1997 but not for 1996.
Interest income increased 26.2%, from $10.7 million to $13.5 million due to a
28.2% increase in the average principal amount of net customer mortgages
receivable from $86.9 million to $111.4 million. Also included in interest
income is the discount amortization on customer mortgages receivable recognized
during the comparable nine month periods ended September 30, 1997 and September
30, 1996 of $2.3 million and $1.6 million, respectively, relating to the
repurchase of customer mortgages receivable. This discount resulted from a 1995
transaction in which the Company re-acquired customer mortgages receivable
(pursuant to a related clean up call provision) which had been previously sold
in 1991 as well
<PAGE>
26
as recognition of a discount on certain customer mortgages receivable
repurchased in 1996 (pursuant to a related clean-up call provision) from an
investment partnership. As of September 30, 1997, $3.2 million of total
unamortized discount remained and is expected to be amortized through 1999.
Resort revenue increased 17.4%, from $10.6 million to $12.4 million, as a result
of increased room rentals primarily from the impact of additional room rentals
at HVR-Oak, which are included for the nine months ended September 30, 1997,
but not for same period in 1996. Telecommunication revenues (guest telephone
charges relating to the existing resorts and revenues from contracting services
provided to third parties) remained relatively constant.
Costs and Operating Expenses:
Total operating costs and expenses increased $19.7 million or 30.6% from $64.3
million in the nine months ended September 30, 1996 to $84.0 million in the
comparable 1997 period, but declined as a percentage of total revenue from 87.9%
in 1996 to 83.8% in 1997. VOI product costs, as a percentage of VOI revenues,
decreased from 24.5% in 1996 to 22.7% in 1997, as a result of sales in the
current period of phases at Vistana Resort-Orlando with relatively lower per
unit costs and at HVR-Oak which has a lower VOI product cost. Sales and
marketing expenses increased 51.9% from $20.1 million in 1996 to $30.5 million
in 1997 during the comparable nine month period principally due to the 48.9%
increase in related VOI sales and the Company's sales facilities expansion. As a
percentage of VOI sales, selling and marketing expenses increased from 43.5% in
the period ended September 30, 1996 to 44.4% in the period ended September 30,
1997 as a result of higher marketing costs, as well as expenses related to
increased international sales, which carry higher sales and marketing costs, and
from the opening of new national and international sales facilities.
Loan portfolio expenses consisting of interest expense treasury decreased
slightly to $4.9 million in 1997 from $5.0 million in 1996 primarily as a result
of the interest benefit obtained in the nine months ended September 30, 1997 as
a result of the debt repayment made with a portion of the proceeds of the
Offering partially offset by increases in interest cost from additional
borrowings to finance the increasing levels of customer mortgages receivable and
to complete the Business Acquisition. Provision for doubtful accounts remained
relatively constant at 6.9% of VOI revenues in 1997 compared to 7.1% in 1996.
The Company annually monitors its provision for doubtful accounts to provide for
future losses associated with any defaults on customer mortgages receivable and
provides for additions to the reserve as a percentage of VOIs sold in the
applicable period. Management believes that the provision is adequate for such
future losses. Resort and telecommunication expenses increased at a rate
commensurate with that of related revenues.
General and administrative expenses increased from $5.3 million for the nine
months ended September 30, 1996 to $8.2 million for the nine months ended
September 30, 1997 increasing as a percent of total revenues, from 7.3% in 1996
to 8.2% in 1997. The increase in general and administrative expenses was the
result of (1) increased revenue levels and commensurate business activities, (2)
the addition of a number of senior managers and key executives in order to build
the management and organizational infrastructure necessary to efficiently manage
the Company's anticipated future growth, (3) the Company's expenses and
reporting obligations as a public company, and (4) added salary, travel and
office expenses attributable to the current and planned growth in the size of
the Company. Depreciation and amortization declined to 2.2% of total revenues in
the nine month period ended September 30, 1997 from 2.5% in the nine month
period ended September 30, 1996 reflecting the added costs of depreciation from
capital additions being spread over a larger revenue base. Interest
expense other decreased from 4.1% in 1996 as a percentage of total revenue to
1.4% in the same period of 1997 due to early extinguishment of debt with funds
provided by the Offering.
<PAGE>
27
Operating income increased 84.1% to $16.2 million, or 16.2% of total revenues,
during the nine months ended September 30, 1997 from $8.8 million, or 12.1% of
total revenues, during the nine months ended September 30, 1996.
Provision for Income Taxes:
As the result of the Offering and the related formation transactions, the
Company became subject to federal, state and foreign income taxes and was
required to record a nonrecurring deferred tax liability of $13.2 million for
cumulative temporary differences between financial reporting and tax reporting.
For the nine months ended September 30, 1997, the Company also recorded a
deferred income tax expense provision of $5.6 million, less $.5 million relating
to the extraordinary item which was recorded net of tax. The deferred tax
assets, deferred tax liabilities and the current tax provision were estimated
based on management's most recent information as of September 30, 1997. The
provision for income taxes reflects the income tax expense from the date of the
formation transactions through September 30, 1997.
The Company reports most of its sales of VOIs on the installment method for
federal income tax purposes. As a result, the Company does not recognize taxable
income on these sales until the installment payments have been received from the
Company's customers. The Company is subject to the Alternative Minimum Tax
("AMT") as a result of the deferred income which results from the installment
sales method. In the second quarter of 1997 the Company began paying state AMT
and in the current quarter began paying federal AMT. The Company expects to pay
state and federal AMT for the balance of the fiscal year.
Under Section 453(1) of the Internal Revenue Code, interest may be imposed on
the amount of tax attributable to the installment payments on customer
receivables 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 required to pay tax in
a particular year, no interest is imposed since the interest is based on the
amount of tax paid in that year. The Company has not included a provision for
any of this interest since it is not currently subject to tax. However, in the
future it may become so. The Company continues to monitor its tax provision and
may adjust it to provide for this interest in the future if it becomes subject
to taxation.
Extraordinary Item:
During the first quarter of 1997, the Company repaid $38.9 million of debt. The
Company recorded an expense relating to the write-off of previously capitalized
fees and prepayment penalties of $.8 million, net of related tax benefits of $.5
million.
Liquidity and Capital Resources
The Company generates cash from operations from the sales and financing of VOIs,
resort operations, management activities and telecommunication services. With
respect to the sale of VOIs, the Company generates cash for operations from
customer down payments and third party financing of customer mortgages
receivable in amounts typically equal to 90% of the related customer mortgage
receivable. The Company generates additional cash from the financing of VOIs
equal to the difference between the interest charged on the customer mortgages
receivable (which averaged 14.2% at September 30, 1997)
<PAGE>
28
and the interest paid on the notes payable secured by the Company's pledge of
such customer mortgages receivable (which averaged 9.9% at September 30, 1997).
Cash provided by operations for the nine months ended September 30, 1997 and
1996 increased to $6.4 million from $4.5 million, primarily due to improved
operating results in 1997.
Net cash used in investing activities for the nine months ended September 30,
1997 and 1996 was $54.2 million and $15.6 million, respectively, principally due
to increased sales of VOIs and the related increase in customer mortgages
receivable and the acquisition of Success and Points.
Net cash provided by financing activities was $50.8 million during the nine
month period ended September 30, 1997 versus a net cash provided in 1996 of
$10.3 million primarily due to the Company's issuance in the first quarter of
1997 of 4,625,000 shares of common stock in the Offering resulting in
approximately $49.5 million of net proceeds. The net proceeds of the Offering
were used by the Company to repay $38.9 million of outstanding debt. The
remaining $10.6 million has been used to fund expansion and to provide the
Company with working capital.
The Company requires funds to finance the acquisition and development of
vacation ownership resorts and related inventory, and to finance customer
purchases of VOIs. Historically, these funds have been provided by indebtedness
secured by a portion of the Company's inventory of unsold VOIs, customer
mortgages receivable and other assets. As of September 30, 1997, the Company had
$32.3 million outstanding under its notes payable secured by its real estate and
VOI inventory, $94.6 million outstanding under its notes payable secured by
customer mortgages receivable and $5.6 million of other secured and unsecured
notes payable. As of September 30, 1997, the Company's scheduled principal
payments on its long-term indebtedness through 2001 (excluding payments on
credit facilities secured primarily by customer mortgages receivable) were $.5
million in 1997 (last three months), $1.4 million in 1998, $1.4 million in 1999,
$1.1 million in 2000 and $.7 million in 2001.
The Company's current credit facilities (the "Credit Facilities") provide for
real estate and construction loans, of which $32.3 million were outstanding as
of September 30, 1997, and revolving lines of credit, under which the Company
had borrowings of $94.6 million as of September 30, 1997 against total available
capacity under the revolving lines of credit (assuming the availability of
sufficient receivables) at that date of $191.6 million. As of September 30,
1997, the Company's loans accrued interest at various rates between 8.2% and
11.3% per annum. Approximately $118.1 million of the Company's indebtedness
bears interest at variable rates based on fixed spreads over a specified rate.
As the Company's mortgage receivable portfolio earns interest at fixed rates,
the Company's net interest income may decline if the variable rates on the
Company's borrowings increase. The Company's indebtedness under the Credit
Facilities is secured primarily by pledges of the Company's receivables
(primarily its customer mortgages receivable), mortgages on certain of the
Company's unsold inventory of VOIs and other owned real and personal property.
The terms of certain of the Credit Facilities impose certain operating and
financial restrictions upon the Company, including, without limitation, (1)
maintenance of a minimum tangible net worth by certain of the Company's
operating subsidiaries; (2) maintenance of certain financial ratios, including
the ratio of selling expenses to net VOI sales; and (3) limitations on cash
distributions by certain of the Company's operating subsidiaries to the amount
of the subsidiary's net income or net cash flow (subject to certain exceptions
for tax and other permitted distributions).
The Company intends to pursue a growth-oriented strategy; accordingly, the
Company may, from time to time acquire, among other things, additional vacation
ownership resorts and additional land upon which vacation ownership resorts may
be developed and companies operating resorts or having vacation ownership
assets, management, sales or marketing expertise commensurate with the Company's
operations in the vacation ownership industry. In this regard, the Company is
currently considering the acquisition of several additional land parcels for the
development of additional resorts, either with Promus Hotels, Inc. or under a
<PAGE>
29
non-multi-hotel brand or under the Vistana brand. The Company may also evaluate
asset and operating company acquisitions, but presently has no contracts or
capital commitments relating to any such potential acquisition.
In the future, the Company may negotiate additional credit facilities, or issue
debt or additional equity securities. Any debt incurred or issued by the Company
may be secured or unsecured, bear interest at fixed or variable rates, and be
subject to terms and conditions approved by management. The Company has
historically enjoyed good credit relationships and has been successful in
establishing new relationships and expanding existing credit facilities as its
growth and opportunities have necessitated. Management believes the Company will
continue to be able to borrow in this manner. In July 1997, the Company entered
into a $12.7 million loan facility for the construction of the Embassy Vacation
Resort in Myrtle Beach, South Carolina and related amenities, as well as a
related $10.0 million receivable based revolving credit facility. The Company
also obtained a $30.0 million receivable based revolving credit facility for its
Vistana Resort and a similar $15.0 million facility for its Points of Colorado
operations during the quarter ended September 30, 1997.
The Company believes that cash generated from operations and future borrowings,
will be sufficient to meet the Company's working capital and capital expenditure
needs for its existing operations for the next 12 months. The Company actively
intends to continue acquisition, development, construction, conversion and
expansion of vacation ownership resorts. Accordingly, depending upon conditions
in the capital and other financial markets, and other factors, the Company may
from time to time consider the issuance of debt, equity, or other securities,
the proceeds of which may be used to finance acquisitions, to refinance debt or
for general corporate purposes. In this regard, in October 1997, the Company
filed a registration statement with the Securities and Exchange Commission
relating to the proposed public offering of 4,000,000 shares of common stock.
See Note 12 of Notes to Condensed Consolidated Financial Statements. No
assurance can be given that this offering will be completed.
Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may include certain forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including (without limitation)
statements with respect to anticipated future operating and financial
performance, growth and acquisition opportunities and other similar forecasts
and statements of expectation. Words such as "expects", "anticipates",
"intends", "plans", "believes", "seeks", "estimates" and "should" and variations
of these words and similar expressions, are intended to identify these
forward-looking statements. Forward-looking statements made by the Company and
its management are based on estimates, projections, beliefs and assumptions of
management at the time of such statements and are not
<PAGE>
30
guarantees of future performance. The Company disclaims any obligation to update
or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information or otherwise.
Actual future performance, outcomes and results may differ materially from those
expressed in forward-looking statements made by the Company and its management
as a result of a number of risks, uncertainties and assumptions. Representative
examples of these factors include (without limitation) general industry and
economic conditions; interest rate trends; cost of capital and capital
requirements; availability of real estate properties; competition from national
hospitality companies; shifts in customer demands; changes in operating
expenses, including employee wages, benefits and training; governmental and
public policy changes and the continued availability of financing in the amounts
and at the terms necessary to support the Company's future business.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) A current Report on Form 8-K was filed on September 29, 1997 reporting
information under Item 2.
<PAGE>
31
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.
Vistana, Inc.
(Registrant)
Date: November 13, 1997
By:
Raymond L. Gellein, Jr.
Chairman and Co-Chief Executive
By:
John M. Sabin
Sr. Vice President and Chief Financial Officer
Chief Accounting Officer
Exhibit 27: Financial Data Schedule
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet, Consolidated Statement of Operations and
Consolidated Statement of Cash Flows included in the
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of
Income and is qualified in its entirety by reference to such financial
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</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,211
<SECURITIES> 0
<RECEIVABLES> 158,452
<ALLOWANCES> 11,599
<INVENTORY> 41,000
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<PP&E> 24,402
<DEPRECIATION> 6,783
<TOTAL-ASSETS> 264,086
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<COMMON> 190
<OTHER-SE> 74,137
<TOTAL-LIABILITY-AND-EQUITY> 264,086
<SALES> 68,715
<TOTAL-REVENUES> 100,209
<CGS> 15,603
<TOTAL-COSTS> 46,119
<OTHER-EXPENSES> 26,947
<LOSS-PROVISION> 4,717
<INTEREST-EXPENSE> 6,213
<INCOME-PRETAX> 16,325
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