<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 001-13003
SILVERLEAF RESORTS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2259890
(State of incorporation) (I.R.S. Employer
Identification No.)
1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)
214-631-1166
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of August 11, 2000: 12,889,417
<PAGE> 2
SILVERLEAF RESORTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Statements of Income for the three months
and six months ended June 30, 2000 and 1999................................ 1
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999.......................................................... 2
Condensed Consolidated Statement of Shareholders' Equity for the
six months ended June 30, 2000............................................. 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999............................................... 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.......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................ 13
Item 6. Exhibits and Reports on Form 8-K........................................... 14
Signatures................................................................. 14
</TABLE>
<PAGE> 3
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Vacation Interval sales $ 59,159 $ 46,447 $ 113,045 $ 87,775
Sampler sales 984 1,327 2,281 2,027
------------ ------------ ------------ ------------
Total sales 60,143 47,774 115,326 89,802
Interest income 9,367 6,761 18,136 12,427
Interest income from affiliates 8 12 17 24
Management fee income 466 640 547 1,540
Other income 1,335 1,186 2,200 1,660
------------ ------------ ------------ ------------
Total revenues 71,319 56,373 136,226 105,453
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 10,618 7,587 20,060 13,357
Sales and marketing 31,597 24,143 62,124 44,828
Provision for uncollectible notes 5,916 4,645 11,304 8,777
Operating, general and administrative 6,767 5,180 14,074 10,548
Other expense 953 833 1,888 1,586
Depreciation and amortization 1,854 1,335 3,635 2,540
Interest expense 7,690 3,745 14,168 7,027
------------ ------------ ------------ ------------
Total costs and operating expenses 65,395 47,468 127,253 88,663
Income before provision for income taxes
and extraordinary item 5,924 8,905 8,973 16,790
Provision for income taxes (2,281) (3,428) (3,455) (6,464)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM $ 3,643 $ 5,477 $ 5,518 $ 10,326
Extraordinary gain on extinguishment of
debt (net of income tax of $197) 316 -- 316 --
------------ ------------ ------------ ------------
NET INCOME $ 3,959 $ 5,477 $ 5,834 $ 10,326
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.29 $ 0.42 $ 0.43 $ 0.80
Extraordinary item 0.02 -- 0.02 --
------------ ------------ ------------ ------------
Net income $ 0.31 $ 0.42 $ 0.45 $ 0.80
============ ============ ============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING: 12,889,417 12,889,417 12,889,417 12,889,417
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 4,243 $ 4,814
Restricted cash 978 903
Notes receivable, net of allowance for uncollectible notes of
$39,242 and $32,326, respectively 352,905 286,581
Amounts due from affiliates 8,694 6,596
Inventories 121,304 112,810
Land, equipment, buildings, and utilities, net 50,982 51,050
Prepaid and other assets 18,726 17,203
--------- ---------
TOTAL ASSETS $ 557,832 $ 479,957
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 16,560 $ 15,539
Unearned revenues 8,427 5,601
Income taxes payable -- 185
Deferred income taxes, net 29,299 28,251
Notes payable and capital lease obligations 262,502 194,171
Senior subordinated notes 74,000 75,000
--------- ---------
Total Liabilities 390,788 318,747
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 133 133
Additional paid-in capital 109,339 109,339
Retained earnings 62,571 56,737
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
--------- ---------
Total Shareholders' Equity 167,044 161,210
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 557,832 $ 479,957
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ---------------------------
Issued Value Capital Earnings Shares Cost Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 2000 13,311,517 $ 133 $ 109,339 $ 56,737 (422,100) $ (4,999) $ 161,210
Net income -- -- -- 5,834 -- -- 5,834
---------- ---------- ---------- ---------- ---------- ---------- ----------
June 30, 2000 13,311,517 $ 133 $ 109,339 $ 62,571 (422,100) $ (4,999) $ 167,044
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 5,834 $ 10,326
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,635 2,540
Deferred income taxes 1,048 3,055
Extraordinary gain on extinguishment of debt (513) --
Increase (decrease) in cash from changes in
assets and liabilities:
Restricted cash (75) (30)
Amounts due from affiliates (2,098) (2,221)
Inventories (8,494) (18,290)
Prepaid and other assets (1,716) (319)
Accounts payable and accrued expenses 1,021 6,403
Unearned revenues 2,826 3,266
Income taxes payable (185) (4,002)
-------- --------
Net cash provided by operating activities 1,283 728
-------- --------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (1,246) (11,489)
Proceeds from sales of land, equipment, buildings, and utilities -- 4,494
Notes receivable, net (66,324) (54,464)
-------- --------
Net cash used in investing activities (67,570) (61,459)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 98,766 71,502
Payments on borrowings to unaffiliated entities (33,050) (19,053)
-------- --------
Net cash provided by financing activities 65,716 52,449
-------- --------
Net decrease in cash (571) (8,282)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,814 11,355
-------- --------
End of period $ 4,243 $ 3,073
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,309 $ 7,431
Income taxes $ 2,790 $ 7,411
Non-cash transactions:
Equipment acquired under capital lease or note $ 2,165 $ 4,640
Extraordinary gain on extinguishment of debt $ 513 $ --
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
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 accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
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, 1999 (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 2000 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, as amended,
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
For the three and six months ended June 30, 2000 and 1999, the weighted average
shares outstanding assuming dilution was anti-dilutive.
5
<PAGE> 8
NOTE 3 - DEBT
Loans, notes payable, capital lease obligations, and senior subordinated notes
as of June 30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
$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% ................................................... $ 34,129 $ 39,623
$70 million revolving loan agreement, capacity reduced by amounts
outstanding under the $10 million inventory loan agreement, which contains
certain financial covenants, due August 2004, 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 2.65% .................................. 51,768 45,680
$75 million revolving loan agreement, which contains certain financial
covenants, due April 2005, 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 3.00% ................................................... 73,499 62,215
$75 million revolving loan agreement, which contains certain financial
covenants, due November 2005, 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 2.67% ................................................... 46,478 14,150
$30 million revolving loan agreement, which contains certain financial
covenants, due September 2006, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of Prime ............................................. 27,103 6,678
$10 million inventory loan agreement, which contains certain financial
covenants, due August 2002, interest payable monthly, at an interest
rate of LIBOR plus 3.50% ............................................................... 9,936 9,937
$10 million inventory loan agreement, which contains certain financial
covenants, due November 2001, interest payable monthly, at an interest
rate of LIBOR plus 3.25% ............................................................... 3,917 --
Various notes, due from August 2000 through November 2009, collateralized
by various assets with interest rates ranging from 4.20% to 14.0% ...................... 3,917 4,088
-------- --------
Total notes payable .............................................................. 250,747 182,371
Capital lease obligations ................................................................ 11,755 11,800
-------- --------
Total notes payable and capital lease obligations ................................ 262,502 194,171
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 .................................... 74,000 75,000
-------- --------
$336,502 $269,171
======== ========
</TABLE>
At June 30, 2000, LIBOR rates were from 6.64% to 6.77%, and the Prime rate was
9.50%. At December 31, 1999, LIBOR rates were from 5.82% to 6.00%, and the Prime
rate was 8.50%.
In June 2000, the Company recognized an extraordinary gain of $316,000, net of
income tax of $197,000, related to the early extinguishment of $1.0 million of
10 1/2% senior subordinated notes.
6
<PAGE> 9
NOTE 4 - SUBSIDIARY GUARANTEES
All subsidiaries of the Company have guaranteed the $74.0 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 and indirect subsidiaries of the Company.
Combined summarized operating results of the Guarantor Subsidiaries for the six
months ended June 30, 2000 and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------
2000 1999
---- ----
<S> <C> <C>
Revenues $ -- $ 1
Expenses -- (45)
---- ----
Net loss $ -- $(44)
==== ====
</TABLE>
Combined summarized balance sheet information as of June 30, 2000 for the
Guarantor Subsidiaries is as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
2000
----------
<S> <C>
Other assets $ 10
----------
Total assets $ 10
==========
Investment by parent (includes equity
and amounts due to parent) $ 10
----------
Total liabilities and equity $ 10
==========
</TABLE>
7
<PAGE> 10
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, 1999 (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 109,000.
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
------ ----- ----- -----
<S> <C> <C> <C> <C>
As a percentage of total revenues:
Vacation Interval sales 82.9% 82.4% 83.0% 83.2%
Sampler sales 1.4% 2.4% 1.7% 1.9%
------ ----- ----- -----
Total sales 84.3% 84.8% 84.7% 85.1%
Interest income 13.1% 12.0% 13.3% 11.8%
Management fee income 0.7% 1.1% 0.4% 1.5%
Other income 1.9% 2.1% 1.6% 1.6%
------ ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 17.9% 16.3% 17.7% 15.2%
Provision for uncollectible notes 10.0% 10.0% 10.0% 10.0%
As a percentage of total sales:
Sales and marketing 52.5% 50.5% 53.9% 49.9%
As a percentage of total revenues:
Operating, general and administrative 9.5% 9.2% 10.3% 10.0%
Other expense 1.3% 1.5% 1.4% 1.5%
Depreciation and amortization 2.6% 2.4% 2.7% 2.4%
As a percentage of interest income:
Interest expense 82.0% 55.3% 78.0% 56.4%
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
Revenues for the quarter ended June 30, 2000 were $71.3 million, representing a
$14.9 million or 26.5% increase over revenues of $56.4 million for the quarter
ended June 30, 1999. The increase was primarily due to a $12.7 million increase
in sales of Vacation Intervals and a $2.6 million increase in interest income.
The strong increase in Vacation Interval sales primarily resulted from an
increase in the number of upgrade sales for the second quarter of 2000 versus
the same period of 1999, improved closing percentages at several sales offices,
and increased sales prices.
8
<PAGE> 11
In the second quarter of 2000, the number of Vacation Intervals sold, exclusive
of upgraded Vacation Intervals, decreased 2.5% to 3,931 from 4,031 in the same
period of 1999; and the average price per interval increased 15.1% to $9,822
from $8,532. Total interval sales for the second quarter of 2000 included 1,768
biennial intervals (counted as 884 Vacation Intervals) compared to 1,455 (728
Vacation Intervals) in the second quarter of 1999. The Company increased sales
of upgraded intervals through the continued implementation of marketing and
sales programs focused on selling upgraded intervals to the Company's existing
Vacation Interval owners. In the second quarter of 2000, the 4,211 upgraded
Vacation Intervals were sold at an average price of $4,879 compared to 2,762
upgraded Vacation Intervals sold at an average price of $4,364 during the
comparable 1999 period.
Sampler sales decreased $343,000 to $984,000 for the quarter ended June 30,
2000, compared to $1.3 million for the same period in 1999. Despite an increase
in sales contracts, the decrease resulted from the timing of revenue recognition
which corresponds to when members utilize their stays.
Interest income increased 38.4% to $9.4 million for the quarter ended June 30,
2000, from $6.8 million for the same period of 1999. This increase primarily
resulted from a $124.5 million increase in notes receivable, net of allowance
for uncollectible notes, since June 30, 1999, due to increased sales.
Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income decreased $174,000 for the second quarter of 2000, as
compared to the second quarter of 1999, due to increased operating expenses at
the management clubs.
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 $149,000 to $1.3 million for the second quarter of 2000
compared to $1.2 million for the same period of 1999. The increase primarily
relates to growth in water and utilities income and increased golf course and
pro shop income at two resorts.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 17.9% in
the second quarter of 2000, from 16.3% for the same period of 1999. As the
Company continues to deplete its inventory of low-cost Vacation Intervals
acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more
recently constructed units, which were built at a higher average cost per
Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval
sales has increased compared to 1999. This increase, however, was partially
offset by increased sales prices since the second quarter of 1999.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 52.5% for
the quarter ended June 30, 2000, from 50.5% for the same period of 1999. Due to
recent growth rates and implementation of new leads generation programs, the
Company experienced relatively higher marketing costs in the second quarter of
2000. The Company increased its headcount at the call centers significantly
since the second quarter of 1999, which created inefficiencies due to temporary
lack of available training resources. In addition, the Company has moved towards
reliance on national retail chains for its leads generation efforts, in addition
to the traditional local programs. The transition to national programs has been
slower in generating leads than originally planned. A major focus of Company
management for the remainder of 2000 is to improve the efficiencies of the
marketing process, which will bring sales and marketing expenses more in line
with expectations.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
was unchanged at 10.0% for the second quarter of 2000, compared to the second
quarter of 1999.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
increased to 9.5% for the second quarter of 2000, compared to 9.2% for the same
period of 1999. The increase is primarily attributable to increased legal
expenses, increases in payroll taxes, employee benefits, and workers'
compensation related to Company growth, and increased title and recording fees
due to increased borrowings against pledged notes receivable.
9
<PAGE> 12
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 quarter ended June 30,
2000, as compared to 1.5% for the quarter ended June 30, 1999. The $120,000
increase in other expense primarily relates to increased water and utilities
expense.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.6% for the quarter ended June 30, 2000, compared to 2.4% for the
quarter ended June 30, 1999. Overall, depreciation and amortization expense
increased $519,000 for the second quarter of 2000, as compared to 1999,
primarily due to investments in automated dialers, investments in telephone
systems, and investments in a central marketing facility, which opened in
September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 82.0% for the
second quarter of 2000, from 55.3% for the same period of 1999. This increase is
primarily the result of interest expense related to increased borrowings against
pledged notes receivable. Also, the Company's weighted average cost of borrowing
increased to 9.6% in the second quarter of 2000 compared to 9.0% in the second
quarter of 1999.
Income before Provision for Income Taxes and Extraordinary Item
Income before provision for income taxes and extraordinary item decreased to
$5.9 million for the quarter ended June 30, 2000, as compared to $8.9 million
for the quarter ended June 30, 1999, as a result of the above mentioned
operating results.
Provision for Income Taxes
Provision for income taxes as a percentage of income before provision for income
taxes and extraordinary item remained flat at 38.5% in the second quarter of
2000, as compared to the second quarter of 1999.
Extraordinary Item
The Company recognized an extraordinary gain of $316,000, net of income tax of
$197,000, related to the early extinguishment of $1.0 million of 10 1/2% senior
subordinated notes in the second quarter of 2000. There were no extraordinary
items during the second quarter of 1999.
Net Income
Net income decreased to $4.0 million for the quarter ended June 30, 2000, as
compared to $5.5 million for the quarter ended June 30, 1999, as a result of the
above mentioned operating results.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
Revenues for the six months ended June 30, 2000 were $136.2 million,
representing a $30.8 million or 29.2% increase over revenues of $105.5 million
for the six months ended June 30, 1999. The increase was primarily due to a
$25.3 million increase in sales of Vacation Intervals and a $5.7 million
increase in interest income. The strong increase in Vacation Interval sales
primarily resulted from an increase in the number of upgrade sales for the six
months of 2000 versus the same period of 1999, improved closing percentages at
several sales offices, and increased sales prices.
10
<PAGE> 13
In the first half of 2000, the number of Vacation Intervals sold, exclusive of
upgraded Vacation Intervals, decreased 2.1% to 7,747 from 7,910 in the same
period of 1999; and the average price per interval increased 17.8% to $9,825
from $8,343. Total interval sales for the six months ended June 30, 2000
included 3,434 biennial intervals (counted as 1,717 Vacation Intervals) compared
to 2,872 (1,436 Vacation Intervals) in the six months ended June 30, 1999. The
Company increased sales of upgraded intervals through the continued
implementation of marketing and sales programs focused on selling upgraded
intervals to the Company's existing Vacation Interval owners. In the first half
of 2000, the 7,706 upgraded Vacation Intervals were sold at an average price of
$4,792 compared to 5,010 upgraded Vacation Intervals sold at an average price of
$4,348 during the comparable 1999 period.
Sampler sales increased $254,000 to $2.3 million for the six months ended June
30, 2000, compared to $2.0 million for the same period in 1999. The increase
relates to an increase in sales contracts and the timing of revenue recognition
which corresponds to when members utilize their stays.
Interest income increased 45.8% to $18.2 million for the six months ended June
30, 2000, from $12.5 million for the same period of 1999. This increase
primarily resulted from a $124.5 million increase in notes receivable, net of
allowance for uncollectible notes, since June 30, 1999, due to increased sales.
Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income decreased $993,000 for the first half of 2000, as compared
to the first half of 1999, due to increased operating expenses at the management
clubs.
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 $540,000 to $2.2 million for the six months ended June
30, 2000 compared to $1.7 million for the same period of 1999. The increase
primarily relates to growth in water and utilities income and increased golf
course and pro shop income at two resorts.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 17.7% in
the six months ended June 30, 2000, from 15.2% for the same period of 1999. As
the Company continues to deplete its inventory of low-cost Vacation Intervals
acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more
recently constructed units, which were built at a higher average cost per
Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval
sales increased compared to 1999. This increase, however, was partially offset
by increased sales prices since June 30, 1999.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 53.9% for
the six months ended June 30, 2000, from 49.9% for the same period of 1999. Due
to recent growth rates and implementation of new leads generation programs, the
Company experienced relatively higher marketing costs in the first half of 2000.
The Company increased its headcount at the call centers significantly since the
second quarter of 1999, which created inefficiencies due to temporary lack of
available training resources. In addition, the Company has moved towards
reliance on national retail chains for its leads generation efforts, in addition
to the traditional local programs. The transition to national programs has been
slower in generating leads than originally planned. A major focus of Company
management for the remainder of 2000 is to improve the efficiencies of the
marketing process, which will bring sales and marketing expenses more in line
with expectations.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
was unchanged at 10.0% for the six months ended June 30, 2000, compared to the
same period of 1999.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
increased to 10.3% for the six months ended June 30, 2000, as compared to 10.0%
for the six months ended June 30, 1999. The increase is primarily attributable
to increased legal expenses, 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.
11
<PAGE> 14
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 first half
of 2000, as compared to 1.5% for the first half of 1999. The $302,000 increase
in other expense primarily relates to increased water and utilities expense.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.7% for the six months ended June 30, 2000, compared to 2.4% for
the six months ended June 30, 1999. Overall, depreciation and amortization
expense increased $1.1 million for the first half of 2000, as compared to 1999,
primarily due to investments in automated dialers, investments in telephone
systems, and investments in a central marketing facility, which opened in
September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 78.0% for the
first half of 2000, from 56.4% for the first half of 1999. This increase is
primarily the result of interest expense related to increased borrowings against
pledged notes receivable. Also, the Company's weighted average cost of borrowing
increased to 9.5% in the first six months of 2000 compared to 9.2% in the first
six months of 1999.
Income before Provision for Income Taxes and Extraordinary Item
Income before provision for income taxes and extraordinary item decreased to
$9.0 million for the six months ended June 30, 2000, as compared to $16.8
million for the six months ended June 30, 1999, as a result of the above
mentioned operating results.
Provision for Income Taxes
Provision for income taxes as a percentage of income before provision for income
taxes and extraordinary item remained flat at 38.5% in the first half of 2000,
as compared to the same period of 1999.
Extraordinary Item
The Company recognized an extraordinary gain of $316,000, net of income tax of
$197,000, related to the early extinguishment of $1.0 million of 10 1/2% senior
subordinated notes in the first six months of 2000. There were no extraordinary
items during the first six months of 1999.
Net Income
Net income decreased to $5.8 million for the six months ended June 30, 2000, as
compared to $10.3 million for the six months ended June 30, 1999, as a result of
the above mentioned operating results.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH. The Company generates cash primarily from down payments on the
sale of Vacation Intervals, sampler sales, collections of principal and interest
on customer notes receivable from Vacation Interval owners, management fees, and
resort and utility operations. During the six months ended June 30, 2000, cash
provided by operations was $1.3 million, compared to cash provided by operating
activities of $728,000 for the same period of 1999. The increase in cash
provided by operating activities was primarily a result of the timing of
inventory construction 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
12
<PAGE> 15
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-year to
ten-year period, borrowing against receivables has historically been a necessary
part of normal operations.
For the six months ended June 30, 2000 and 1999, cash provided by financing
activities was $65.7 million and $52.4 million, respectively. The increase in
net cash provided by financing activities was primarily due to increased
borrowings against pledged notes receivable during the six months ended June 30,
2000, compared to the same period of 1999. As of June 30, 2000, the Company's
credit facilities provide for loans of up to $325.0 million. At June 30, 2000,
approximately $246.8 million of principal and interest related to advances under
the credit facilities was outstanding. For the six months ended June 30, 2000,
the weighted average cost of funds for all borrowings, including the senior
subordinated debt, was approximately 9.5%.
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 year ended December 31, 2000. The Company will continue to
review the possibility of extending its borrowing capacity with existing lenders
or issuing additional debt or mortgage-backed securities to finance future
acquisitions, refinance debt, finance mortgage receivables, and provide for
other working capital purposes.
The 10 1/2% senior subordinated notes issued by the Company require compliance
with a consolidated interest coverage ratio. The Company is currently in
compliance with such ratio and believes it will remain so in the future. Should
the Company slip below the ratio, management does not believe that its core
operations would be impaired because its key operational credit facilities are
not affected by the Company's failure to comply with that consolidated interest
coverage ratio. However, the Company's ability to incur certain types and
amounts of additional indebtedness, to pay dividends, and make investments in
unrestricted subsidiaries could be materially affected.
USES OF CASH. Investing activities typically reflect a net use of cash as a
result of loans to customers in connection with the Company's Vacation Interval
sales, capital additions, and property acquisitions. Net cash used in investing
activities for the six months ended June 30, 2000 and 1999, was $67.6 million
and $61.5 million, respectively. The increase was primarily due to the increased
level of customer notes receivable resulting from higher sales volume and $4.5
million of cash received in the first half of 1999 related to sales of
equipment.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 9, 2000, a proposal
to elect the nominees listed in the following table as the Class III Directors
of the Company was submitted to a vote of the Company's stockholders. The voting
was as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Robert E. Mead 12,402,130 58,808
James B. Francis, Jr. 12,403,685 57,253
</TABLE>
13
<PAGE> 16
At the same meeting, a proposal to ratify the appointment of Deloitte & Touche
L.L.P. as independent auditors for the ensuing year was submitted to a vote of
the Company's stockholders. The voting was as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstained
--------- ------------- ---------
<S> <C> <C> <C>
Ratification of Independent Auditors 12,426,159 9,958 24,821
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
----------
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 2000 By: /s/ ROBERT E. MEAD
-------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: August 11, 2000 By: /s/ HARRY J. WHITE, JR.
-------------------------------
Harry J. White, Jr.
Chief Financial Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
