SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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: 0-27270
VACATION BREAK U.S.A., INC.
FLORIDA 59-2581811
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
6400 N. ANDREWS AVENUE
PLAZA SUITE 200
FT. LAUDERDALE, FL 33309
Registrant's telephone number (954) 351-8500
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 ____
The number of shares outstanding of registrant's common stock at
November 11, 1996 was 8,572,800 shares.
<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
VACATION BREAK U.S.A., INC.
<TABLE>
<CAPTION>
INDEX
Page
NO.
<S> <C>
PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the
nine month periods ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
</TABLE>
2
<PAGE>
Part I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
------------ ------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $10,573,482 $8,499,386
Certificates of deposit 239,807 747,817
Restricted cash 2,287,956 4,090,766
Cash in escrow from vacation ownership interests sales 4,283,331 10,580,907
Mortgages receivable on vacation ownership interests sales - net 65,989,680 45,423,680
Receivables - net 5,675,289 3,381,460
Vacation ownership interests - real estate and development costs 23,504,968 18,302,622
Prepaid expenses 4,934,194 3,596,452
Other assets 3,182,444 933,500
Investment in Port Lucaya Resort Company Limited 1,706,807 1,584,417
Due from unconsolidated affiliate 126,277 84,050
Property and equipment - net 10,494,947 9,866,702
------------ ------------
TOTAL ASSETS $132,999,182 $107,091,759
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
------------ ------------
1996 1995
------------ ------------
(Unaudited)
Accounts payable and accrued liabilities $13,715,640 $10,240,733
Due to unconsolidated affiliates 355,390 522,607
Notes and mortgages payable 46,318,028 28,900,694
Note payable to unconsolidated affiliate 532,778 560,000
Capital lease obligations 1,484,513 1,320,695
Deferred income taxes 5,756,471 2,498,088
Advance deposits 3,536,217 4,369,244
Deferred revenues - vacation packages 19,232,651 20,534,417
Deferred revenues - vacation ownership interests 3,755,526 9,233,181
Due to affiliate of joint ventures 6,991,009 6,227,875
Tax distribution payable to majority stockholder 2,257,412 3,388,205
Minority interest in joint ventures 2,677,380 37,222
------------ ------------
Total Liabilities 106,613,015 87,832,961
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($.01 par value; 25,000,000 shares authorized;
no shares issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized;
8,570,000 shares issued and outstanding at September 30, 1996 and
8,300,000 shares issued and outstanding at December 31, 1995) 85,700 83,000
Additional paid in capital 13,269,257 12,089,288
Retained earnings 13,031,210 7,086,510
------------ ------------
Total Stockholders' Equity 26,386,167 19,258,798
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $132,999,182 $107,091,759
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Vacation ownership interests $13,655,112 $10,863,790 $62,480,938 $28,831,662
Vacation packages 12,717,388 15,190,099 46,913,047 43,488,557
Resort operations and other 2,339,561 1,369,473 9,886,586 6,300,741
Interest earned on mortgages receivable 2,343,357 1,289,087 6,076,077 3,140,902
Commissions earned on marketing agreements 631,069 578,757 1,700,026 3,876,037
----------- ----------- ----------- -----------
31,686,487 29,291,206 127,056,674 85,637,899
----------- ----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Vacation ownership interests 8,439,182 6,984,584 35,411,136 16,905,394
Vacation packages 16,647,058 15,445,751 56,601,773 43,937,323
Resort operations and other 2,644,079 1,178,120 10,202,217 5,978,820
Interest expense on financed mortgages receivable 793,755 663,653 1,822,312 1,396,571
Commissions and related expenses on marketing agreements 584,641 505,200 1,280,339 2,530,448
Interest expense - other 13,434 102,873 598,716 331,684
General and administrative 2,255,495 2,048,756 8,687,704 6,032,516
Provision for doubtful accounts 217,656 149,292 872,864 926,100
Depreciation and amortization 530,871 376,232 1,619,551 1,116,733
----------- ----------- ----------- -----------
32,126,171 27,454,461 117,096,612 79,155,589
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY IN EARNINGS (LOSS)
OF AFFILIATES (439,684) 1,836,745 9,960,062 6,482,310
Minority interest in earnings of joint ventures (259,484) -- (838,448) --
Equity in earnings of Port Lucaya Resort Company Limited 46,390 44,075 121,390 125,000
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (652,778) 1,880,820 9,243,004 6,607,310
Income tax (expense) benefit 170,527 (143,220) (3,298,306) 417,780
Pro forma income tax provision (expense) -- (514,400) -- (2,819,400)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ($482,251) $1,223,200 $5,944,698 $4,205,690
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - PRIMARY ($0.056) $0.188 $0.675 $0.647
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - FULLY DILUTED ($0.054) $0.188 $0.669 $0.647
=========== =========== =========== ===========
Weighted average common shares and
common stock equivalents outstanding
- Primary 8,570,000 6,500,000 8,813,129 6,500,000
=========== =========== =========== ===========
- Fully diluted 8,932,611 6,500,000 8,891,606 6,500,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
September 30,
----------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $5,944,700 $7,025,090
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,619,551 1,116,733
Equity in (earnings) of Port Lucaya Resort Company Limited (122,390) (125,000)
Provision for deferred taxes 3,250,195 (417,780)
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests sales - net (20,566,000) (16,102,803)
Receivables - net (2,293,829) (103,608)
Income tax receivable 8,238 (71,246)
Vacation ownership interests - real estate and development costs (5,202,346) (7,694,239)
Prepaid expenses (1,337,742) (2,614,480)
Other assets (2,248,994) --
Due to/from unconsolidated affiliates - net (209,444) (323,351)
Accounts payable and accrued liabilities 3,474,907 4,018,430
Deferred revenues - vacation ownership interests (5,477,655) 6,291,005
Deferred income - vacation packages (1,301,766) 5,565,640
Advance deposits (833,027) 1,158,700
Minority interest in earnings of joint ventures 2,640,158 --
----------- ----------
Net cash used in operating activities (22,655,444) (2,276,909)
----------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,247,796) (2,276,950)
Additions to restricted cash (3,160,623) (5,836,826)
Releases of restricted cash 4,963,433 4,968,221
Increase in cash in escrow for vacation ownership interests
sales - net 6,297,576 (4,908,747)
Purchases of certificates of deposit (121,497) (36,072)
Maturities of certificates of deposit 629,507 209,518
----------- ----------
Net cash provided (used) in investing activities 6,360,600 (7,880,856)
----------- ----------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 37,431,170 14,705,154
Repayments of notes and mortgages payable (20,013,836 (5,160,060)
Repayment of note payable to unconsolidated affiliate (27,222) (125,000)
Due to affiliate of joint venture partner 763,134 4,169,191
Borrowing on capital lease obligations 457,272 --
Payments on capital lease obligations (293,454) (254,446)
Stockholder's income tax distributions (1,130,793) (976,250)
Proceeds from issuance of common stock 1,182,669 1,500
----------- ----------
Net cash provided by financing activities 18,368,940 12,360,089
----------- ----------
Net increase in cash and cash equivalents 2,074,096 2,202,324
Cash and cash equivalents at beginning of period 8,499,386 616,906
----------- ----------
Cash and cash equivalents at end of period $10,573,482 $2,819,230
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Vacation Break U.S.A., Inc. and its subsidiaries (the "Company") are
engaged primarily in the renovation, construction, sale and financing
of vacation ownership interests (VOIs). At September 30, 1996, the
consolidated financial statements include the accounts of Vacation
Break U.S.A., Inc. and its subsidiaries.
In January 1996, Vacation Break Resorts at Ocean Ranch, Inc., a Florida
Corporation wholly-owned by Vacation Break U.S.A., Inc. was formed for
the purpose of acquiring a 55% interest in Ocean Ranch Vacation Group,
a Florida general partnership ("Ocean Ranch Vacation Group"). During
January 1996, Ocean Ranch Vacation Group, acquired the Ocean Ranch
resort located in Pompano, Florida, for a purchase price of $3.3
million. This property was acquired for the purpose of constructing
5,148 VOI weeks. The Company anticipates commencing sales on a
pre-completion basis in the spring of 1997. During the nine month
period ended September 30, 1996, the venture refinanced its acquisition
debt with a lender to provide a $12.7 million construction and
renovation loan. Construction commenced in the third quarter of 1996
with completion expected in the summer of 1997. During the nine months
ended September 30, 1996, two new companies were included in the
consolidated financial statements. For the year ended December 31,
1995, Vacation Break Resorts at Ocean Ranch, Inc. and Ocean Ranch
Vacation Group (a Florida general partnership) had not been formed and,
accordingly, did not form part of the consolidated 1995 financial
statements.
In the opinion of management, the unaudited consolidated financial
statements include all adjustments and accruals necessary to present
fairly the Company's consolidated financial position at September 30,
1996 and the consolidated results of its operations for the nine months
ended September 30, 1996 and 1995. The interim results of operations
are not necessarily indicative of the results which may occur for the
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. All significant
intercompany accounts and transactions are eliminated in consolidation.
These condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report to
Stockholders for the year ended December 31, 1995.
2. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
6
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number
of shares of common stock outstanding during each period and, if
dilutive, common stock equivalents. The dilutive effect of common stock
equivalents for the computation of earnings per share was greater than
3% for the nine months ended September 30, 1996 and, accordingly, the
earnings per share for that period are separately stated as primary and
fully diluted. The effect of common stock equivalents was anti-dilutive
for the three months ended September 30, 1996 and, accordingly, were
not included in the computation of earnings (loss) per share for that
period. Options and warrants were not granted or outstanding during the
nine months ended September 30, 1995. During the nine months ended
September 30, 1996, 189,025 options were granted to employees and
12,500 options were granted to outside directors, none of which were
exercised during the period.
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into a marketing and purchase agreement with a
developer whereby the Company sells VOIs on a precompletion basis.
Revenues relating to these sales are recorded as "Deferred Revenues -
VOIs" and are recognized on a percentage of completion basis until the
project is completed and certificates of occupancy are available for
the buyers. At the time the certificate of occupancy is issued, the
Company will be required to purchase all presold units from the
developer and simultaneously deed these units to the respective buyers.
At September 30, 1996, the Company was contingently liable to the
developer in the amount of $1,314,000 for presold VOIs which sales have
been recorded as "Deferred revenue - VOIs" as of September 30, 1996.
Such liability has not been reflected in the September 30, 1996 balance
sheet.
In May 1996, the Company entered into an agreement to acquire a minimum
of ninety five (with a maximum of one hundred and eight) condominium
units on the east coast of Central Florida for the purpose of
converting the condominium units into VOIs. If conditions precedent to
closing are met, the condominium units will be acquired in the fourth
quarter of 1996 with sales to commence in the first quarter of 1997.
Acquisition, renovation and receivable financing is in the process of
being obtained although the Company has not entered into a definitive
agreement with respect to such financing.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Condensed Consolidated Financial Statements, including the
notes thereto, contained elsewhere herein.
INTRODUCTION
Prior to 1993, substantially all of the Company's revenues were derived
from the sale of vacation packages and from commissions earned on the
sale of VOIs in properties owned by other developers. In 1993, the
Company began to develop its own properties and sell VOIs in these
properties while continuing to sell VOIs in properties owned by other
developers, thereby adding a substantial new source of revenues and
earnings.
The following table presents key statistics representing VOI activities
in properties owned by the Company or are subject to a purchase
agreement:
<TABLE>
<CAPTION>
SEA SANTA STAR OCEAN
GARDENS(1) BARBARA PALM AIRE ISLAND RANCH(2) TOTAL
---------- ------- --------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Number of VOIs available 11,388 4,680 5,564 5,200 5,148 31,980
Net number of VOIs sold through
September 30, 1996 6,899 2,878 1,582 1,911* - 13,270
Percent sold through
September 30, 1996 61% 61% 28% 37%* 0% 41%
Net number of VOIs sold during the
three months ended September 30, 1996 180 371 287 451* - 1,289
Net number of VOIs sold during the
nine months ended September 30, 1996 753 1,486 1,095 1,378* - 4,712
</TABLE>
* Includes units sold at properties where revenue and income
recognition were deferred or partially deferred for financial reporting
purposes.
(1) Includes 4,368 VOI weeks in a planned 84-unit phase, construction
of which is intended to commence in November 1996 with sales to
commence later in the fourth quarter of 1996.
(2) Acquired in January 1996, construction commenced in the third
quarter of 1996 and sales are expected to commence in the second
quarter of 1997.
Historically, the Company's primary means of attracting prospective
purchasers of VOIs is through the sale of its discounted, high-quality
vacation packages. In effect, the Company utilizes its vacation package
as a major marketing component of its VOI program. As part of the
Company's vacation packages, travelers typically take a
Company-operated tour of a full amenity vacation resort. Historically,
approximately 85% of all vacation packages utilized resulted in a tour
of a vacation resort although in the third quarter of 1996
approximately 65% resulted in a tour of a VOI resort. During the three
years ended December 31, 1995 and the nine months ended September 30,
1996, approximately 11.5% of all tours taken resulted in the sale of a
VOI, and since the Company began selling VOIs in its own properties in
March 1993, approximately 11.5% of tours of resort properties owned by
the Company resulted in the sale of a VOI. The Company's vacation
package may be utilized by the customer at any time, subject to
availability, during the 18 month period following the sale.
Historically, the total costs of selling and fulfilling the Company's
vacation packages approximated or exceeded revenues derived from the
sale of such vacation packages, including revenues recognized from
vacation packages that are purchased but not utilized upon expiration
of the 18 month period following the sale. The Company believes that
its vacation package enables the Company to generate quality leads for
the sale of VOIs at a lower cost per lead than the majority of its
competition. Lead generation is typically a significant cost factor for
a VOI developer. Increases in vacation package sales in one year have
resulted, in the following year, in increases in the number of
vacations taken and
8
<PAGE>
increased VOI sales. Historically, approximately 55% of purchasers of
vacation packages have not taken their vacations. As of September 30,
1996, approximately 150,000 vacation packages sold by the Company
remained unused. Based on the Company's historical experience,
approximately 60,000 of such vacation packages are expected to be
utilized prior to expiration. The Company encourages usage of the
vacation package through continuously upgrading the quality and
flexibility in utilizing the package while maintaining the price at a
fairly constant rate. Through these practices the Company encourages
increased usage of the package and expects to continue to incur
increased costs of marketing, selling and fulfilling the package. As a
result, costs of the packages are expected to continue to exceed
revenue recognized from vacation package sales. The Company expects
that this shortfall will be more than offset by earnings from increased
levels of VOI sales.
The Company has experienced decreases in vacation package certificates
sold over the last twelve months and expects this trend to continue as
the Company is currently doing minimal direct sales of vacation
packages. As a result of the decreased effectiveness of this program,
the Company is continuing to diversify its marketing programs beyond
the sale of its vacation package certificates and is emphasizing other
marketing programs such as referrals, third party vacation programs,
off premise contact programs, mini-vacations, in-house and other
moderate cost traditional lead procurement programs with the primary
goal to produce a high quality, low to moderate cost tour at a resort
property and increase VOI sales. The Company fully expects its lead
generation costs to increase. Approximately 20% of tours taken during
the three months ended September 30, 1996 were from sources other than
the company's vacation packages although no assurance can be given that
this trend will continue.
The Company accounts for the sale of vacation packages by recognizing
the revenue from the sale of each vacation package as such vacation is
taken, and recognizes the revenue from vacations which are not taken
upon expiration of the 18 month period during which the vacations may
be taken. To the extent that the 18 month period is extended by the
Company, revenues and related expenses from the sales of such extended
vacation packages, including the nominal extension fees, are not
recognized until either the time that the vacation is taken or upon
expiration of the applicable extension period. Because a significant
percentage of the vacations sold are not taken by customers, increases
or decreases in vacation package sales levels during any fiscal period
will have a corresponding effect on the Company's statement of
operations during the 18 month period following the sale of such
vacation packages. Although the Company generates substantial revenues
from the sale of vacation packages, including the sale of vacations
that are not taken, the Company's earnings are primarily derived from
the sale of VOIs and the interest income earned from the financing of
the related mortgages receivable.
Generally, VOIs are sold under contracts requiring a 10% down payment
and monthly installments for periods of up to 7 years. VOI revenue is
primarily recognized when a 10% down payment has been received and the
10 day rescission period has expired. During the 10 day rescission
period, a customer may cancel for any reason and have the down payment
returned. Revenue relating to sales of VOIs in projects under
development is recognized using the percentage of completion method.
Under this method, the portion of revenues applicable to costs
incurred, as compared to total estimated construction and acquisition
costs, is recognized in the period of sale. The remaining revenue is
deferred and recognized as the remaining costs are incurred. As the
Company is currently in the early stage of development of several new
projects, it is anticipated that certain VOI sales in these projects
will generate deferred revenue as the Company is selling at a more
rapid pace then the construction of the related VOI units.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
The following table sets forth for the periods indicated key items of
the Company's financial statements expressed as a percentage of the
Company's total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Vacation ownership interests 43.1% (1)(2) 37.1% (1)
Vacation packages 40.1 51.9
Resort operations and other 7.4 4.7
Interest earned on mortgages receivable 7.4 4.4
Commissions earned on marketing agreements 2.0 1.9
Net income (loss)/Proforma net income (1.5) (1)(2) 4.2 (1)(3)
</TABLE>
<TABLE>
<CAPTION>
GROSS PROFIT PERCENTAGES
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Vacation ownership interests 38.2% (1)(2) 35.7% (1)
Vacation packages (30.9) (1.7)
Resort operations and other (13.0) 14.0
Interest earned on mortgages receivable 66.1 48.5
Commissions earned on marketing agreements 7.4 12.7
</TABLE>
(1) Does not include deferred revenues and related costs and income
from sales of VOIs deferred for financial statement reporting purposes.
(2) Includes the recognition of sales deferred at the beginning of the
period.
(3) Reflects the effect on historical statement of operations
data, assuming the Company had been treated as a C corporation rather
than as an S corporation for income tax purposes.
The Company's total revenues for the three months ended September 30,
1996 were $31.7 million, an increase of $2.4 million or 8.2% from
revenues of $29.3 million for the comparable period in 1995. The
Company sold 12,547 vacation packages during the three months ended
September 30, 1996, compared to 40,649 during the three months ended
September 30, 1995, reflecting the Company's increased focus on
diversifying its marketing programs. As of September 30, 1996, the
Company had approximately 150,000 unused vacations included in deferred
revenues-vacation packages. As a percentage of total lead generation
programs, vacation package certificate tours are expected to steadily
decrease as other lead generation programs are introduced. Although the
Company experienced an 18.6% decrease in the number of vacation
packages used during the third quarter of 1996 compared to the third
quarter of 1995, the Company continued to experience an increasing
level of VOI sales from Company-owned resort properties as a result of
tours generated from marketing sources other than the Company's
vacation packages. Approximately 20% of tours taken during the three
month period ended September 30, 1996, were from sources other than the
Company's vacation packages although no assurance can be given that
this trend will continue.
10
<PAGE>
The Company recognized revenues from the sale of vacation packages of
$12.7 million during the third quarter of 1996 compared to $15.2
million during the third quarter of 1995. Vacation package revenues
decreased as a percentage of total revenues to 40.1% in the third
quarter of 1996 compared to 51.9% during the third quarter of 1995,
primarily due to a $2.8 million increase in the sale of VOIs in Company
owned resorts. The cost of vacation packages increased to $16.6 million
in the quarter ended September 30, 1996 from $15.4 million in the
quarter ended September 30, 1995 partially due to the increase in costs
associated with fulfilling vacation packages with changed itineraries
due to computer reservation problems and a vendors cruise ship fire. In
addition, during the third quarter of 1996, the Company, to fulfill
vendor guarantees, did not upgrade travelers with the customary margins
and frequency. Included in the cost of vacation packages are the direct
cost of providing hotel accommodations and cruises, commissions paid to
telephone marketing representatives, mailing and telephone costs, rent,
salaries paid to employees involved in reservations, verification and
confirmation activities and customer service, processing fees and
expenses relating to lead generation. As a result of the foregoing, the
Company recorded a loss of $3.9 million from the sale of vacation
packages during the three months ended September 30, 1996, compared to
a loss from the sale of vacation packages of $256,000 in the comparable
quarter of 1995. The Company sold 12,547 vacation packages in the three
months ended September 30, 1996, a decrease of 28,102 vacation packages
sold or 69.1% from the comparable period in 1995 as a result of the
Company's increased use of third party vacation packages. If, as has
been the case in the past, a significant number of vacations are not
taken, the revenue from such vacation packages will be recognized
during the first quarter of 1998. The number of vacations taken in the
third quarter of 1996 decreased by 18.6% to 10,463 from 12,859
vacations taken during the third quarter of 1995. During the quarter
ended September 30, 1996, approximately 65% of all vacation package
travelers toured Company owned resorts, a decrease of approximately 20%
from the Company's historical experience. The decrease in tours was
primarily the result of the Company's reservation system conversion and
a fire aboard a third party vendor's cruise ship, which materially
altered the itinerary of vacation package travelers commencing in May
1996. The Company has attempted to rectify these problems but expects
the effect to persist into the fourth quarter of 1996.
The Company sold an aggregate of 1,289 VOIs in completed units and
pre-completion units at Company properties during the quarter ended
September 30, 1996, compared to 1,290 VOIs in Company-owned completed
and pre-completion units during the third quarter of 1995. The VOI
sales volume represented 43.1% of total revenues in the third quarter
of 1996 and 37.1% of total revenues in the comparable period of 1995
(exclusive of partially deferred revenues from sales in pre-completion
units). The increase reflects the acquisition and development by the
Company of additional resort properties beginning in 1994 and the shift
in the Company's emphasis from selling VOIs in resort properties owned
by other developers to selling VOIs in its own resort properties, which
VOI sales are more profitable. The Company sold $15.9 million of VOIs
in the three months ended September 30, 1996, of which $13.7 million
was derived from the sales of VOIs in completed units and was recorded
as earned revenue and $2.2 million was derived from the sales of VOIs
in pre-completion units which has been recorded as an increase in the
Company's deferred revenue-VOIs on the Company's balance sheet at
September 30, 1996. In comparison, the Company sold $16.0 million of
VOIs in completed units during the quarter ended September 30, 1995, of
which $10.9 million was recognized as earned revenue and $5.0 million
was recorded as an increase in the Company's "Deferred revenues - VOIs"
on the Company's balance sheet at September 30, 1995. The costs of the
VOIs sold by the Company and recorded as earned revenues increased to
$8.4 million exclusive of deferred costs related to pre-completion VOI
sales in the third quarter of 1996 from $7.0 million in the third
quarter of 1995, reflecting the higher level of VOI sales. The deferred
costs related to VOIs under development were approximately $2.4 million
at September 30, 1996. The cost of VOIs sold consists primarily of the
direct costs relating to the revenue recognized on the units in which
VOIs are sold, marketing expenses, including sales commissions and
other marketing costs and sales and support expenses directly related
to the sale of VOIs. The cost of VOIs sold as a percentage of revenues
derived from the sale of VOIs decreased to 60.9% in the three months
ended September 30, 1996 from 64.3% in the three
11
<PAGE>
months ended September 30, in 1995, due in part to processing costs
remaining level while sales volume increased 25.7 %. This decrease was
partially offset by the increased product costs at the Star Island
Property.
The reconciliation of VOI sales revenue recorded and deferred revenues
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30,
-------------
1996 1995
---- ----
<S> <C> <C>
VOI sales revenues recorded during the period $15,897,670 $15,969,294
VOI sales revenues deferred at the beginning of the period 1,512,968 1,185,501
VOI sales revenues deferred at the end of the period (3,755,526) (6,291,005)
----------- -----------
VOI sales revenues recognized during the period $13,655,112 $10,863,790
========== ==========
</TABLE>
The Company's continued emphasis on development of company owned resort
properties and the sale of VOIs in such properties resulted in a slight
increase in commissions earned in connection with the sale of VOIs for
other developers. The Company derived commission revenues of $631,000
in the three months ended September 30, 1996, an increase of $52,000 or
9.0% from the three months ended September 30, 1995. Furthermore,
commissions as a percentage of total revenues was 2.0% and 1.9% in the
three months ended September 30, 1996 and 1995, respectively.
Commissions and related administative expenses which the Company paid
under marketing agreements increased by $79,000 in the third quarter of
1996 from $505,000 in the third quarter of 1995. Such expenses as a
percentage of commission revenues increased to 92.3% in the third
quarter of 1996 from 87.3% in the third quarter of 1995 as a result of
costs associated with the closing of sales and marketing operations for
a third party developer in the Bahamas.
The Company's revenues from resort and other operations increased to
$2.3 million in the quarter ended September 30, 1996 from $1.4 million
in the quarter ended September 30, 1995, primarily as a result of
operations at the PALM AIRE RESORT & SPA, which was acquired in the
second quarter of 1995, and the commencement of operations at the SANTA
BARBARA RESORT AND YACHT CLUB. The cost of resort operations increased
to $2.6 million in the third quarter of 1996 from $1.2 million in the
third quarter of 1995. Such costs as a percentage of revenues from
resort and other operations increased to 113.0% in the three months
ended September 30, 1996 from 86.0% in the comparable quarter of 1995.
This increase in costs was primarily the result of the Company's
seasonality of operations at the PALM AIRE RESORT AND SPA and the
consummation of operations at the SANTA BARBARA RESORT AND YACHT CLUB.
The Company has historically incurred losses during the start-up phase
of new resorts and no assurance can be given that resort operations
wlll become profitable.
General and administrative expenses, consisting primarily of expenses
related to corporate overhead including substantial costs related to
the Company's expansion of its information systems department, as well
as related compensation, increased to $2.3 million in the three months
ended September 30, 1996 compared to $2.0 million in the three months
ended September 30, 1995, and amounted to approximately 7.1% of the
Company's total revenues during the quarter ended September 30, 1996 as
compared to approximately 7.0% of the Company's total revenues during
the quarter ended September 30, 1995.
The provision for doubtful accounts increased to $218,000 for the three
months ended September 30, 1996 from $150,000 for the three months
ended September 30, 1995. This provision includes an allowance for
doubtful accounts on mortgages receivable as well as commissions
receivable on marketing contracts. The portion of the provision
relating to mortgages receivable increased during the three months
ended September 30, 1996 as compared
12
<PAGE>
to the three months ended September 30, 1995 as a result of the
increased mortgage receivables related to increased VOI sales volume.
However, during the three months ended September 30, 1996, the portion
of the provision for doubtful accounts relating to commissions
receivable decreased from the three months ended September 30, 1995, as
the Company continued to de-emphasize its sale of VOIs in properties
owned by other developers.
Depreciation and amortization expense increased 41.1% to $531,000 for
the quarter ended September 30, 1996 from $376,000 for the quarter
ended September 30, 1995, primarily due to increased purchases of
computer hardware, software and other equipment.
As a result of the continued increase in sales of VOIs sold in
Company-owned properties, the Company's interest income from financing
activities increased to $2.3 million for the quarter ended September
30, 1996 from $1.3 million for the quarter ended September 30, 1995.
This approximated 7.4% of revenues during the third quarter of 1996 as
compared to 4.4% of revenues during the similar period of the prior
year. This increase was partially offset by interest paid on increased
borrowings against loans hypothecated by the Company to unaffiliated
lenders of $794,000 during the third quarter of 1996 compared to
$664,000 during the third quarter of 1995. At September 30, 1996, the
Company had a portfolio of 10,048 loans to VOI purchasers, which loans
had a weighted average maturity of 5.4 years and a weighted average
interest rate of 16.1%, compared to a weighted average interest rate of
10.5% on Company borrowings from unaffiliated lenders secured by VOI
mortgages receivable. The Company has historically derived substantial
income from its financing activities.
The Company provides a provision for income taxes at an effective rate
of 38% of the consolidated net income of Vacation Break U.S.A., Inc.
and its consolidated United States subsidiaries. The consolidated net
loss includes income from non-taxable Bahamian Corporations. After
giving effect to the non-taxable income included in the consolidated
net loss, the effective tax rate for the three months ended September
30, 1996 was 26.1%.
As a result of the foregoing, the Company incurred a net loss of
$482,000 for the quarter ended September 30, 1996, a decrease of $1.7
million or 394% from Proforma net income of $1.2 million for the
quarter ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
The following table sets forth for the periods indicated key items of
the Company's financial statements expressed as a percentage of the
Company's total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Vacation ownership interests 49.2% (1)(2) 33.7% (1)
Vacation packages 36.9 50.8
Resort operations and other 7.8 7.4
Interest earned on mortgages receivable 4.8 3.6
Commissions earned on marketing agreements 1.3 4.5
Net income/Proforma net income 4.7 (1)(2) 4.9 (1)(3)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
GROSS PROFIT PERCENTAGES
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Vacation ownership interests 43.3% (1)(2) 41.4% (1)
Vacation packages (20.7) (1.0)
Resort operations and other (3.2) 5.1
Interest earned on mortgages receivable 70.0 55.5
Commissions earned on marketing agreements 24.7 34.7
</TABLE>
(1) Does not include deferred revenues and related net income from
sales of VOIs deferred for financial statement reporting purposes.
(2) Includes the recognition of sales deferred at the beginning of the
period.
(3) Reflects the effect on historical statement of operations
data, assuming the Company had been treated as a C corporation rather
than as an S corporation for income tax purposes.
The Company's total revenues for the nine months ended September 30,
1996 were $127.1 million, an increase of $41.5 million or 48.5% from
revenues of $85.6 million for the comparable period in 1995. The
Company sold 56,145 vacation packages during the nine months ended
September 30, 1996, compared to 123,727 during the nine months ended
September 30, 1995 reflecting the Company's increased focus on
diversifying its marketing programs to generate tour flow. As of
September 30, 1996, the Company had approximately 150,000 unused
vacations included in deferred revenues-vacation packages which,
combined with the utilization of new vacation packages to be sold by
the Company as well as sales tours generated from marketing sources
other than the Companies vacation packages, should generate increased
VOI sales over the next eighteen months if inventory is available and
the Company's efficiency in generating sales is maintained. The Company
experienced a 9.0% increase in the number of vacation packages used
during the first nine months of 1996 compared to the first nine months
of 1995 and continued to experience an increasing level of VOI sales
from Company-owned resort properties. Approximately 20% of tours taken
during the nine months ended September 30, 1996 were from sources other
than the Company's vacation packages.
The Company recognized revenues from the sale of vacation packages of
$46.9 million during the first nine months of 1996, an increase of
approximately $3.4 million or 7.8% from $43.5 million during the first
nine months of 1995. This increase was due to an increase in the number
of vacations taken (9.0% increase), an increase in revenues derived
from various vacation upgrades, and the recognition of greater revenues
upon the expiration of vacation packages in the first nine months of
1996 as compared to the first nine months of 1995. Vacation package
revenues decreased as a percentage of total revenues to 36.9% in the
first nine months of 1996 compared to 50.8% during the first nine
months of 1995, primarily due to a $33.6 million increase in the sale
of VOIs in Company owned resorts. The cost of vacation packages
increased to $56.6 million in the nine months ended September 30, 1996
from $43.9 million in the nine months ended September 30, 1995
primarily due to the increase in costs associated with fulfilling
vacations coupled with the increased costs associated with fulfilling
vacation packages with changed itineraries due to the computer
reservation problems and a vendors cruise ship fire. Included in the
cost of vacation packages are the direct cost of providing hotel
accommodations and cruises, commissions paid to telephone marketing
representatives, fulfilling vendor guarantees, mailing and telephone
costs, rent, salaries paid to employees involved in reservations,
verification and confirmation activities and customer service,
processing fees and expenses relating to lead generation. As a result
of the foregoing, the Company recorded a loss of $9.7 million from the
sale of vacation packages during the first nine months of 1996,
compared to a loss from the sale of vacation packages of $449,000 in
the first nine months of 1995. The Company will continue to emphasize
customer service and incur increased fulfillment costs provided that
the results are an increased tour flow and more efficient VOI sales.
The Company sold 56,145 vacation packages in the nine months ended
September 30, 1996, a decrease of 67,582 vacation packages sold or
54.6% from the comparable period in 1995. If, as has been the case in
the past, a significant number of vacations are not taken, the revenue
from such vacation packages will be recognized during future periods.
14
<PAGE>
The number of vacations taken in the first nine months of 1996
increased by 9.0% to 42,663 from 39,153 vacations taken during the
first nine months of 1995. During the nine months ended September 30,
1996, approximately 80.0% of all vacation package travelers toured
Company owned resorts, a decrease of approximately 5.0% from the
Company's historical experience. The decrease in tours was primarily
the result of the Company's reservation system conversion and a fire
aboard a third party vendor's cruise ship, which materially altered the
itinerary of vacation package travelers commencing in May 1996. The
Company has attempted to rectify these problems but expects the effect
to persist into the fourth quarter of 1996.
The Company sold an aggregate 4,712 VOIs in completed and
pre-completion units at Company properties during the nine months ended
September 30, 1996, compared to 3,051 VOIs in Company-owned completed
units during the first nine months of 1995. This represents an increase
in sales volume of 54.4% (including pre-completion sales) in the first
nine months of 1996 compared to the first nine months of 1995 and
represents 49.2% of total revenues in the first nine months of 1996
(exclusive of deferred revenues from sales in pre-completion units) and
33.7 % of total revenues in the similar period of 1995. This increase
reflects the acquisition and development by the Company of additional
resort properties beginning in 1994 and the shift in the Company's
emphasis from selling VOIs in resort properties owned by other
developers to selling VOIs in its own resort properties, which VOI
sales are more profitable. The Company recognized revenues from the
sale of VOIs of $62.5 million in the nine months ended September 30,
1996, of which $57.0 million was derived from the sales of VOIs in
completed units and was recorded as earned revenue and $5.5 million was
derived from the sales of VOIs in pre-completion units which was
recorded as deferred revenue-VOIs on the Company's balance sheet at
December 31, 1995. In comparison, the Company derived revenues of $35.1
million from the sales of VOIs in the nine months ended September 30,
1995, of which $28.8 million was derived from the sales of VOIs in
completed units and was recorded as earned revenue and $6.3 million was
derived from the sales of VOIs in pre-completion units which was
recorded as deferred revenue on the Company's balance sheet at
September 30, 1995. The costs of the VOIs sold by the Company and
recorded as earned revenues increased to $35.4 million exclusive of
deferred costs related to pre-completion VOI sales in the first nine
months of 1996 from $16.9 million in the first nine months of 1995,
reflecting the higher level of VOI sales. The deferred costs related to
VOIs under development at September 30, 1996 were approximately $2.4
million. The cost of VOIs sold consists primarily of the direct costs
of the units in which VOIs are sold, marketing expenses, including
sales commissions and other marketing costs and sales and support
expenses directly related to the sale of VOIs. The cost of VOIs sold as
a percentage of revenues derived from the sale of VOIs decreased to
56.7% for the nine months ended September 30, 1996 from 58.6% for the
nine months ended September 30, 1995 due in part to fixed costs
remaining level while sales volume increased 116.7 %. This decrease was
partially offset by the increased product costs at the Star Island
Property.
The reconciliation of VOI sales revenue recorded and deferred revenues
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
1996 1995
---- ----
<S> <C> <C>
VOI sales revenues recorded during the period $57,003,283 $35,122,667
VOI sales revenues deferred at the beginning of the period 9,233,181 -
VOI sales revenues deferred at the end of the period (3,755,526) (6,291,005)
----------- -----------
VOI sales revenues recognized during the period $62,480,938 $28,831,662
=========== ===========
</TABLE>
15
<PAGE>
The Company's continued emphasis on the development of resort
properties and the sale of VOIs in such properties resulted in a
decrease in commissions received in connection with the sale of VOIs
for other developers. The Company derived commission revenues of $1.7
million in the nine months ended September 30, 1996, a decrease of $2.2
million or 56.4% from the nine months ended September 30, 1995.
Furthermore, commissions as a percentage of total revenues decreased to
1.3% in the nine months ended September 30, 1996 from 4.5% in the nine
months ended September 30, 1995. Commissions and related expenses under
marketing agreements decreased to $1.3 million in the first nine months
of 1996 from $2.5 million in the first nine months of 1995. Such
expenses as a percentage of commission revenues increased to 75.3% in
the first nine months of 1996 from 65.3% in the first nine months of
1995 as a result of a sustained level of fixed expenses and a decrease
in commission revenue, reflecting the Company's shift in emphasis from
selling VOIs in properties owned by other developers to selling VOIs in
Company-owned resort properties as well as costs associated with the
closing of sales and marketing operations for a third party developer
in the Bahamas.
The Company's revenues from resort and other operations increased to
$9.9 million in the nine months ended September 30, 1996 from $6.3
million in the nine months ended September 30, 1995, primarily as a
result of an increase in the occupancy rate and food and beverage sales
at the PORT LUCAYA RESORT AND YACHT CLUB, commencement of operations at
the PALM AIRE RESORT & SPA, which was acquired in the second quarter of
1995, and the commencement of operations at the SANTA BARBARA RESORT
AND YACHT CLUB in January 1996. The cost of resort operations increased
to $10.2 million in the first nine months of 1996 from $6.0 million in
the first nine months of 1995. Such costs as a percentage of revenues
from resort and other operations increased to 103.2% in the first nine
months of 1996 from 94.9% in the first nine months of 1995. This
increase in costs was primarily the result of the Company's
commencement of operations at the PALM AIRE RESORT AND SPA and SANTA
BARBARA RESORT AND YACHT CLUB. The Company has historically incurred
losses during the start-up phase of a new resort and no assurance can
be given that resort operations will become profitable.
General and administrative expenses, consisting primarily of expenses
related to corporate overhead including substantial costs related to
the Company's expansion of its information systems department, as well
as executive compensation, increased to $8.7 million in the nine months
ended September 30, 1996 compared to $6.0 million in the nine months
ended September 30, 1995, and amounted to approximately 6.8% of the
Company's total revenues during the nine months ended September 30,
1996 as compared to approximately 7.0% of the Company's total revenues
during the nine months ended September 30, 1995 reflecting the
Company's emphasis on stabilizing labor and administrative costs.
The provision for doubtful accounts decreased to $873,000 for the nine
months ended September 30, 1996 from $926,000 for the nine months ended
September 30, 1995. This provision includes an allowance for doubtful
accounts relating to mortgages receivable as well as commissions
receivable on marketing contracts. The portion of the provision for
mortgages receivable increased during the nine months ended September
30, 1996 as compared to the nine months ended September 30, 1995 as a
result of the increased mortgages receivables related to increased VOI
sales volume. However, during the nine months ended September 30, 1996,
the portion of the provision for doubtful accounts on commissions
receivable decreased from the nine months ended September 30, 1995, as
the Company continued to de-emphasize its sale of VOIs in properties
owned by other developers.
Depreciation and amortization expense increased 45.5% to $1.6 million
for the nine months ended September 30, 1996 from $1.1 million for the
nine months ended September 30, 1995, primarily due to increased
purchases of computer hardware, software and other equipment.
16
<PAGE>
As a result of the continued increase in sales of VOIs in Company-owned
properties, the Company's interest income from financing activities
increased to $6.1 million for the nine months ended September 30, 1996
from $3.1 million for the nine months ended September 30, 1995. This
approximated 4.8% of revenues during the first nine months of 1996 as
compared to 3.6% of revenues during the similar period of the prior
year. This increase was partially offset by interest paid on increased
borrowings against loans hypothecated by the Company to unaffiliated
lenders of $1.8 million during the first nine months of 1996 compared
to $1.4 million during the first nine months of 1995. At September 30,
1996, the Company had a portfolio of 10,048 loans to VOI purchasers,
which loans had a weighted average maturity of 5.4 years and a weighted
average interest rate of 16.1%, compared to a weighted average interest
rate of 10.5% on Company from unaffiliated lenders secured by VOI
mortgages receivable. The Company has historically derived substantial
income from its financing activities.
The Company provides a provision for income taxes at an effective rate
of 38% of the consolidated net income of Vacation Break U.S.A., Inc.
and its consolidated United States subsidiaries. A portion of the
consolidated net income includes income from non-taxable Bahamian
Corporations. After giving effect to the non-taxable portion of the
consolidated net income, the effective tax rate for the nine months
ended September 30, 1996 was 35.7%.
As a result of the foregoing, the Company's net income was $5.9 million
for the nine months ended September 30, 1996, an increase of $1.7
million or 40.5% from Proforma net income of $4.2 million for the nine
months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company offers financing to the purchasers of VOIs in Company owned
resort properties who make a down payment generally equal to at least
10% of the purchase price. This financing bears interest at fixed
rates, unless the down payment equals at least 50% of the purchase
price and the purchaser agrees to pay the balance of the purchase price
within one year from the date of purchase, in which case the Company's
loan bears no stated interest. This financing is collateralized by a
mortgage on the underlying VOI. The Company has entered into agreements
with three lenders for the financing of customer receivables which
provide an aggregate of up to approximately $78.0 million of available
financing to the Company bearing interest at variable rates tied to the
"prime" rate or LIBOR. As of September 30, 1996, approximately $26.6
million was outstanding under such financing agreements. A significant
portion of this indebtedness has been guaranteed by Ralph Muller, the
Chairman of the Board, Chief Executive Officer and majority shareholder
of the Company. Under these financing arrangements, the Company
hypothecates, or pledges as security, qualified purchaser promissory
notes to these lenders, who lend the Company 75% to 85% of the
principal amount of such notes or, in the case of pre-completion
financing, 60% to 65% of the principal amount of such notes. Payments
under these promissory notes are made by the purchaser borrowers
directly to a 'lockbox,' or payment processing center, and such
payments are credited against the Company's outstanding balance with
the respective lenders. Of the aggregate availability of approximately
$78.0 million, $30.0 million of such availability is a revolving loan
with scheduled availability until December 1997; $15.0 million of such
availability is a revolving loan with scheduled availability until June
1997; $15.0 million of such availability is a revolving loan with
scheduled availability until March 1998; and $5.0 million of such
availability is a revolving loan with scheduled availability until
September 1997. In addition, during the nine months ended September 30,
1996, the Company did not extend $12.5 million of availability of which
$11.7 million was outstanding at September 30, 1996 and will be repaid
through customer receivable collections. The Company is currently
discussing the extension of this $12.5 million line with the lender.
Following termination of the availability period of each of the
respective agreements, borrowings under the aggregate agreements are
required to be repaid over a period of between five and eight years.
The Company believes that it has substantial loan availability to
provide financing of new VOI purchases through mid 1997 for the four
presently active selling resorts. Although the Company believes it can
obtain additional financing from other lenders if necessary, other than
as set forth herein, it does not presently have binding agreements to
extend the terms of such financing or for any replacement financing,
and there can be no assurance that alternative or additional
arrangements can be made on terms
17
<PAGE>
that will be satisfactory to the Company. Accordingly, future sales of
VOIs may be limited by both the availability of funds to finance the
initial negative cash flow that results from sales that are financed by
the Company and by reduced demand which may result if the Company is
unable to provide financing to purchasers of VOIs. If the Company is
required to sell its customer receivables, discounts from the face
value of such receivables may be required. At September 30, 1996, the
Company had a portfolio of 10,048 loans to VOI purchasers, which loans
had a weighted average maturity of approximately 5.4 years, and a
weighted average interest rate of 16.1%, compared to a weighted average
interest rate of 10.5% on borrowings against loans hypothecated by the
Company to unaffiliated lenders. The Company has historically derived
substantial income from its financing activities.
The Company also requires funds to finance the future purchases of and
improvements to resort properties. Such capital has been, and is
anticipated to continue to be, provided from operations and from
secured term loans under existing and future credit facilities, as well
as from the proceeds of the Company's initial public offering of Common
Stock in December 1995 ("IPO"). The Company presently has no material
commitments to make capital expenditures other than (i) $4.75 million
to finance the estimated expenses related to the conversion of units at
the PALM AIRE RESORT AND SPA for sale as VOIs, which funds are
currently being provided to the Company as renovations progress
pursuant to a credit facility by Bank Atlantic, and (ii) $12.7 million
to finance the estimated expenses related to the conversion costs of
the OCEAN RANCH RESORT for sale as VOIs, which funds being provided to
the Company pursuant to a credit facility by Bank Atlantic. The
indebtedness under the credit facility provided by Sun Trust as well as
a $1.2 million construction facility loan provided by Sun Trust for the
SANTA BARBARA RESORT AND YACHT CLUB, has been personally guaranteed by
Mr. Muller. The Company has received a commitment letter for the
financing of the estimated $13.0 million of new construction costs at a
planned 84-unit phase of the Sea Gardens property from a lending
institution, with an expected closing in November 1996. Similarly, the
Company is in the process of financing the estimated $11.0 million
acquisition and renovation costs for a Central Florida, East Coast
property under contract with one of its third party lenders, although
the Company has not entered into a definitive agreement with respect to
such financing.
The Company intends to continue to provide financing to purchasers of
VOIs and to obtain funds to finance the negative cash flow resulting
from the payment of sales commissions and other selling expenses and to
make release payments on bank indebtedness relating to development of
its resort properties. For the nine months ended September 30, 1996 and
1995, the Company derived interest income of $6.1 million and $3.1
million, respectively, from the financing of purchaser notes
receivable, and incurred interest expenses of $1.8 million and $1.4
million respectively, relating to loans secured by notes hypothecated
to these unaffiliated lenders.
During the nine months ended September 30, 1996 and 1995, the Company's
operating activities used approximately $24.3 million and $2.3 million,
respectively, in cash, and its investing activities provided
approximately $8.0 million and used approximately $7.9 million,
respectively, in cash. During these periods $18.4 million and $12.4
million, respectively, was provided through the Company's financing
activities, resulting in a net increase in cash and cash equivalents of
$2.1 million in the third quarter of 1996 and $2.2 million during the
third quarter of 1995.
The Company completed an IPO of its Common Stock in December 1995,
which provided net proceeds to the Company of approximately $8.1
million. In January 1996, the Company received additional net proceeds
of approximately $1.2 million in connection with the underwriter's
exercise of its over-allotment option.
18
<PAGE>
At December 31, 1995, the Company recorded an accrued distribution for
taxes in the amount of approximately $3.4 million. This accrual,
payable to the majority shareholder, was the result of the conversion
of all of the Company's affiliated S corporations to C corporations.
This amount represents taxes, payable by the majority shareholder,
resulting from earnings of the S corporations prior to the termination
of such elections. During the first six months of 1996, the Company
funded approximately $1.1 million of such amount and funded the
remaining $2.3 million during October 1996.
The Company believes that funds from operating and financing
activities, borrowings under its existing credit facilities and the net
proceeds from the IPO are sufficient to satisfy its contemplated cash
requirements through the next twelve months, and that its long-term
financing requirements will be met through operating and financing
activities in the normal course of its business and, if deemed
necessary or appropriate, through additional financing.
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 which represent the Company's expectations or
beliefs concerning future events, including, but not limited to,
statements regarding increased sales of VOIs in Company owned resorts
and the sufficiency of the Company's cash flow, as well as receivables
financing, for its future liquidity and capital resource needs. These
forward looking statements are further qualified by important factors
that could cause actual results to differ materially from those in the
forward looking statements. These factors include, without limitation,
the Company's ability to continue to develop and market resort
properties, increases in marketing costs, the availability of favorable
financing agreements, increases in sales of vacation packages,
fluctuations in interest rates and the effects of governmental
regulation. Results actually achieved may differ materially from
expected results included in these statements as a result of these or
other factors.
19
<PAGE>
PART II. OTHER INFORMATION
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
b. Exhibits and 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.
VACATION BREAK U.S.A., INC.
By: /S/ RALPH P. MULLER
-------------------
Ralph P. Muller
Chairman of the Board and Chief Executive Officer
Date: November 13, 1996
By: /S/ KEVIN M. SHEEHAN
--------------------
Kevin M. Sheehan
President
Date: November 13, 1996
By: /S/ HENRY M. CAIRO
------------------
Henry M. Cairo
Chief Financial Officer and Chief Operating Officer
Date: November 13, 1996
20
EXHIBIT 11.1
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
THREE MONTHS ENDED
------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
FULLY PRIMARY AND
PRIMARY DILUTED FULLY DILUTED
------- ------- -------------
<S> <C> <C> <C>
Actual number of common shares
outstanding 8,570,000 8,570,000 6,500,000
--------- --------- ---------
Weighted average number of common
shares issued and outstanding 8,570,000 8,570,000 6,500,000
Common stock equivalents computed
under the Treasury Stock method 355,293 362,611 -
--------- --------- --------
8,925,293 8,932,611 6,500,000
--------- --------- ---------
Net income (loss) $ (482,251) $ (482,251) $ 1,223,200
======= ======= =========
Net income per share (1) $ (0.054) $ (0.054) $ 0.188
====== ====== =====
</TABLE>
(1) The use of Common stock equivalents for the EPS computation was
anti-dilutive for the three months ended September 30, 1996.
Consequently, weighted average number of shares outstanding was used
for the computation of EPS which resulted in a loss per share of $
0.056 for the quaret ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
FULLY PRIMARY AND
PRIMARY DILUTED FULLY DILUTED
------- ------- -------------
<S> <C> <C> <C>
Weighted average number of common
shares issued and outstanding 8,555,000 8,555,000 6,500,000
Common stock equivalents computed
under the Treasury Stock method 258,129 336,606 -
------- ------- ---------
8,813,129 8,891,606 6,500,000
----------- --------- ---------
Net income $ 5,944,698 $ 5,944,698 $ 4,205,690
========= ========= =========
Net income per share $ 0.675 $ 0.669 $ 0.647
===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,861
<SECURITIES> 240
<RECEIVABLES> 73,031
<ALLOWANCES> (2,161)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 14,517
<DEPRECIATION> (4,022)
<TOTAL-ASSETS> 132,999
<CURRENT-LIABILITIES> 106,613
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 26,300
<TOTAL-LIABILITY-AND-EQUITY> 132,999
<SALES> 120,981
<TOTAL-REVENUES> 127,057
<CGS> 0
<TOTAL-COSTS> 113,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 873
<INTEREST-EXPENSE> 2,421
<INCOME-PRETAX> 9,243
<INCOME-TAX> 3,298
<INCOME-CONTINUING> 5,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,945
<EPS-PRIMARY> 0.675
<EPS-DILUTED> 0.669
</TABLE>
