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 MARCH 31, 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 May 10, 1996
was 8,570,000 shares.
<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
VACATION BREAK U.S.A., INC.
INDEX
PAGE
NO.
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PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets, March 31, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the
three month periods ended March 31, 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 15
Signatures 16
2
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
-------------- --------------
1996 1995
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $9,462 $8,499
Certificates of deposit 445 748
Restricted cash 3,607 4,091
Cash in escrow from vacation ownership interests sales 16,485 10,581
Mortgages receivable on vacation ownership interests
sales - net 54,142 45,424
Receivables - net 4,376 3,382
Vacation ownership interests held for sale 18,532 16,550
Vacation ownership interests - real estate and
development costs 1,760 1,752
Prepaid expenses and other assets 7,629 4,614
Investment in Port Lucaya Resort Company Limited 1,614 1,584
Property and equipment - net 10,247 9,867
-------------- --------------
TOTAL ASSETS $128,299 $107,092
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $13,981 $10,241
Due to unconsolidated affiliates 521 523
Notes and mortgages payable 35,498 28,901
Note payable to unconsolidated affiliate 560 560
Capital lease obligations 1,227 1,321
Deferred income taxes 3,155 2,498
Advance deposits 6,055 4,369
Deferred revenues - vacation packages 20,889 20,534
Deferred revenues - vacation ownership interests 13,448 9,233
Due to affiliate of Joint ventures 8,090 6,228
Tax distribution payable to majority stockholder 2,538 3,388
Minority interest in joint venture 408 37
-------------- --------------
Total Liabilities 106,370 87,833
-------------- --------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($ .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 March 31, 1996 and 8,300,000 shares issued and
outstanding at December 31, 1995) 86 83
Additional paid in capital 13,269 12,089
Retained earnings 8,574 7,087
-------------- --------------
Total Stockholders' Equity 21,929 19,259
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $128,299 $107,092
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
($ THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
-------------- --------------
<S> <C> <C>
REVENUES:
Vacation packages $16,436 $13,798
Vacation ownership interests 15,917 8,091
Commissions earned on marketing agreements 542 1,761
Resort operations and other 4,004 2,129
Interest earned on mortgages receivable 1,734 875
-------------- --------------
38,633 26,654
-------------- --------------
COSTS AND OPERATING EXPENSES:
Vacation packages 18,990 12,995
Vacation ownership interests 8,361 4,420
Commissions and related expenses on marketing agreements 296 1,006
Resort operations and other 3,901 2,023
Interest expense on financed mortgages receivable 529 351
Interest expense - other 466 98
General and administrative 2,839 2,144
Provision for doubtful accounts 197 114
Depreciation and amortization 569 327
-------------- --------------
36,148 23,478
-------------- --------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY IN EARNINGS (LOSS) OF
AFFILIATE 2,485 3,176
Minority interest in earnings of joint venture (370) -
Equity in earnings (loss) of Port Lucaya Resort Company
Limited 30 40
-------------- --------------
INCOME BEFORE INCOME TAXES 2,145 3,216
Income tax (expense) benefit (657) 282
Proforma income tax provision (expense) - (1,452)
-------------- --------------
NET INCOME $ 1,488 $ 2,046
============== ==============
NET INCOME PER SHARE $ 0.17 $ 0.32
============== ==============
Weighted average common shares and common stock
equivalents outstanding - primary and fully diluted 8,540,000 6,500,000
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
($ THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $1,488 $3,497
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 569 327
Equity in (earnings) of Port Lucaya Resort Company Limited (30) (40)
Provision for deferred taxes 657 (282)
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests
sales - net (8,718) (3,310)
Receivables - net (995) (293)
Vacation ownership interests held for sale (1,981) 860
Vacation ownership interests - real estate and
development costs (8) (506)
Prepaid expenses and other assets (3,057) (161)
Due to/from unconsolidated affiliates - net 42 (558)
Accounts payable and accrued liabilities 3,740 294
Deferred revenues - vacation ownership interests 4,215 -
Deferred income - vacation packages 355 -
Advance deposits 1,685 1,909
Minority interest in joint venture 370 1,552
-------------- --------------
Net cash (used in) provided by operating activities (1,668) 3,289
-------------- --------------
Cash Flows from Investing Activities:
Purchases of property and equipment (949) (548)
Additions to restricted cash (1,491) (1,861)
Releases of restricted cash 1,975 1,277
Increase in cash in escrow for vacation ownership interests
sales - net (5,904) (1,258)
Maturities of certificates of deposit 303 88
-------------- --------------
Net cash used in investing activities (6,066) (2,302)
-------------- --------------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 9,587 2,199
Repayments of notes and mortgages payable (2,989) (1,278)
Borrowings from affiliate of Palm Vacation Group 1,862 -
Borrowing of note payable to unconsolidated affiliate - (440)
Repayment of note payable to unconsolidated affiliate (2) -
Payments on capital lease obligations (93) (77)
Stockholder contributions - (84)
Stockholder income tax distributions (850) -
Proceeds from issuance of common stock 1,182 -
-------------- --------------
Net cash provided by financing activities 8,697 320
-------------- --------------
Net increase in cash and cash equivalents 963 1,307
Cash and cash equivalents at beginning of period 8,499 617
-------------- --------------
Cash and cash equivalents at end of period $9,462 $1,924
============== ==============
</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 subsidiaries (the "Company") is engaged
in the sale of vacation packages, hotel operations and the renovation,
construction, sale and financing of vacation ownership interests
(VOIs). At March 31, 1996, the consolidated financial statements
include the accounts of Vacation Break U.S.A., Inc. and its
subsidiaries. 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 March
31, 1996 and the consolidated results of its operations for the three
months ended March 31, 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 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.
During the quarter ended March 31, 1996, two new companies were added
to the consolidated financial statements in order to augment existing
operations. A summary of such additions follows:
/bullet/ In January 1996, Vacation Break Resorts at Ocean Ranch, Inc.,
a Florida Corporation wholly-owned by the Company was formed
to acquire a 55% interest in Ocean Ranch Vacation Group, a
Florida general partnership (the "Ocean Ranch Vacation
Group"). During January 1996, Ocean Ranch Vacation Group,
acquired a resort known as Ocean Ranch located in Pompano,
Florida. for a purchase price of $ 3,300,000. This property
was acquired for the purpose of converting the existing units
into 5,148 VOI weeks. The Company anticipates commencing
presales in the fall of 1996. The venture is in the process of
refinancing the existing first mortgage debt assumed and is
arranging for needed construction financing.
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.
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 and 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 are calculated on the weighted average number of
shares of common stock outstanding during each period and, when
dilutive, common stock equivalents. The dilutive effect of common stock
equivalents was less than 3% for the quarter ended March 31, 1996.
Options and warrants were not granted or outstanding during the quarter
ended March 31, 1995.
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into a marketing and purchase agreement with a
developer whereby the Company sells VOI's on a presales basis. Revenues
relating to presales are recorded in "Deferred Revenues - VOI's" until
the project is complete and certificates of occupancy are available for
the buyers. At that time, the Company will be required under the
agreement to purchase from the developer all units presold. The units
will be simultaneously deeded to the buyers and the related revenues
and costs recognized. At March 31, 1996, the Company was contingently
liable to the developer in the amount of $3,945,000 for presold VOI's
which sales have been recorded as deferred revenue - VOI's as of March
31, 1996. Such liability has not been reflected in the March 31, 1996
balance sheet.
5. SUBSEQUENT EVENTS
The Ocean Ranch Vacation Group has obtained a commitment from a lender
to provide approximately $12,700,000 for the construction and
renovation of the Ocean Ranch resort although it has not yet 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 table presents key statistics representing VOI activities in
properties owned by or under a purchase agreement:
<TABLE>
<CAPTION>
SEA SANTA STAR OCEAN
GARDENS BARBARA PALM AIRE ISLAND RANCH(1) TOTAL
------- ------- --------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Number of VOIs available 7,020 4,680 5,564 5,200 5,200 27,664
Net number of VOIs sold through
March 31, 1996 6,451 * 2,018 871 908 * - 10,248
Percent sold through
March 31, 1996 92 % * 43 % 16 % 17 % * 0 % 37 %
Net number of VOIs sold during the
three months ended March 31, 1996 305 * 626 384 375 * - 1,690
</TABLE>
* Includes units sold at properties where revenue and income recognition were
deferred or partially deferred for financial reporting purposes.
(1) Acquired in January 1996
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein.
INTRODUCTION
Prior to 1993, substantially all of the Company's revenue was 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 Company's principal 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. During the three years ended December 31, 1995 and the three
months ended March 31, 1996, approximately 9.6% 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. Historically, the total
costs of selling and fulfilling the Company's vacation packages approximated
revenues derived from the sale of such vacation packages, including recognizing
revenues from vacation packages that are purchased but not utilized upon
expiration of the 18 month period following the sale. 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. The Company believes that its
vacation package enables the Company to generate quality leads for the sale of
VOIs at a significantly 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, because VOI
sales results are related to vacations taken, increased VOI sales. Historically,
approximately 55% of purchasers of vacation packages have not taken their
vacations. As of March 31, 1996, approximately 172,000 vacation packages sold by
the Company remained unused. Based on the Company's historical experience,
approximately 77,000 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
8
<PAGE>
practices the Company expects to encourage increased usage of the package and to
incur increased costs of marketing, selling and fulfilling the package. As a
result, in the future, costs of the package are expected 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 experienced decreases in vacation packages sold during the last quarter
of 1995 and the first quarter of 1996 and is continuing to diversify its
marketing programs beyond the sale of its vacation package certificates to other
marketing programs such as referrals, third party certificate programs, in-house
and other low cost lead procurement programs with the primary goal to produce a
high quality, low cost tour and increased VOI sales.
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, and the right to
take vacations expires 18 months after the sale, 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 period 18 months
following the sale of such vacation packages. Thus, in periods of rising sales
of vacation packages, the Company may experience lower levels of revenues from
vacation packages if the prior year had significantly lower levels of vacation
package sales. 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.
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 completion of the related VOI
units.
On October 31, 1995, the status of certain of the Affiliated Companies as S
Corporations terminated for federal and state income tax purposes. At such time,
income taxes primarily relating to installment sales and deferred revenue became
a net liability of the Company. As of December 31, 1995, such liability was
approximately $3.1 million. It is anticipated that the Company will pay these
taxes over the next seven years as the installments to which the deferred
revenues relate are received.
9
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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:
PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
Vacation packages 42.5% 51.8%
Vacation ownership interests 41.2 (1) 30.3
Commissions earned on marketing agreements 1.4 6.6
Resort operations and other 10.4 8.0
Interest earned on mortgages receivable 4.5 3.3
Net income/Pro forma net income 3.8 (1) 7.7 (2)
(1) Does not include deferred revenues and related net income from sales of VOIs
deferred for financial statement reporting purposes.
(2) 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
The Company experienced a 19.9% increase in the number of vacation packages used
during the first quarter of 1996 compared to the first quarter of 1995 and
continued to experience an increasing level of VOI sales from Company-owned
resort properties. The Company's total revenues for the three months ended March
31, 1996 were $38.6 million, an increase of $12.0 million or 45.1% from revenues
of $26.6 million for the comparable period in 1995. In addition, the Company
sold 26,342 vacation packages during the three months ended March 31, 1996,
compared to 38,750 during the three months ended March 31, 1995. As of March 31,
1996, the Company had approximately 172,000 unused vacations included in
deferred revenues-vacation packages which, combined with the utilization of new
vacation packages to be sold by the Company, should generate substantially
increasing VOI sales over the next eighteen months if inventory is available and
the Company's efficiency in generating sales is maintained.
The Company recognized revenues from the sale of vacation packages of $16.4
million during the first quarter of 1996, an increase of approximately $2.6
million or 18.8% from $13.8 million during the first quarter of 1995. This
increased sales volume was due in part to an increase in the number of vacations
taken (19.9% increase) as well as an increase in ancillary revenues from various
vacation upgrades. These increases include the recognition of higher revenues
upon the expiration of vacation packages in the first quarter of 1996 than
during the first quarter of 1995. Vacation package revenues decreased as a
percentage of total revenues to 42.5% in the first quarter of 1996 compared to
51.8% during the first quarter of 1995, primarily due to a $7.8 million increase
in the sale of VOIs in Company owned resorts. The cost of vacation packages
increased to $19.0 million in the quarter ended March 31, 1996 from $13.0
million in the quarter ended March 31, 1995. 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 $2.5 million from the sale of vacation packages during the 1996
quarter, compared to income from the sale of vacation packages of $800,000 in
the 1995 quarter. The Company will continue to emphasize customer service and
increased fulfillment costs providing the results are an increased tour flow and
more efficient VOI sales. The Company sold 26,342 vacation packages in the three
months ended March 31, 1996,
10
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a decrease of 12,408 vacation packages sold or 32.0% 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
the third quarter of 1997. The number of vacations taken in the first quarter of
1996 increased by 19.9% to 14,680 from 12,242 vacations taken during the first
quarter of 1995.
The Company sold 1,315 VOIs in completed units and 375 VOIs in pre-construction
units at Company owned properties or property sold under a purchase agreement
during the quarter ended March 31, 1996, compared to 686 VOIs in Company-owned
completed units during the first quarter of 1995. This represents an increase in
sales volume of Company owned VOIs of 96.7% (including pre-construction sales)
in the first quarter of 1996 over the first quarter of 1995 and represents 41.2%
of total revenues in the 1996 quarter (exclusive of deferred revenues from sales
in pre-construction units) and 30.4 % of total revenues in the 1995 quarter.
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 derived revenues from the sale of VOIs of $20.1 million in the three
months ended March 31, 1996, of which $15.9 million was derived from the sales
of VOIs in completed units and was recorded as earned revenue and $4.2 million
was derived from the sales of VOIs in pre-construction units and was recorded as
deferred revenue-VOIs on the Company's balance sheet. The Company derived
revenues of $8.1 million from the sales of VOIs in completed units in the
quarter ended March 31, 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-construction VOI sales in the first quarter of 1996 from
$4.4 million in the first quarter of 1995, reflecting the higher level of VOI
sales. The deferred costs related to VOI's under development approximated an
additional $2.3 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 52.5% in the three months ended March
31, 1996 from 54.6% in the comparable quarter in 1995, due in part to slightly
lower product costs on completed VOI units. In addition, vacation package costs
increased in part due to the continued emphasis on providing qualified tours for
the VOI sales effort.
The Company's continued development of Company-owned resort properties and 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
revenues from such commissions of $542,000 in the three months ended March 31,
1996, a decrease of $1.2 million or 69.2% from the three months ended March 31,
1995. Furthermore, commissions as a percentage of revenues decreased to 1.4% in
the quarter ended March 31, 1996 from 6.6% in the three months ended March 31,
1995. Commissions and related expenses under marketing agreements decreased to
$296,000 in the first quarter of 1996 from $1.0 million in the first quarter of
1995. Such expenses as a percentage of revenues from commissions decreased to
54.5% in the first three months of 1996 from 57.1% in the first three 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 its emphasis from selling
VOIs in properties owned by other developers to selling VOIs in Company-owned
resort properties. The vacation package costs of providing tours to the Star
Island property have been recorded as vacation package costs while the VOI sales
revenues generated from these tours have been deferred.
The Company's revenues from resort and other operations increased to $4.0
million in the quarter ended March 31, 1996 from $2.1 million in the quarter
ended March 31, 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, 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 $3.9 million in the first quarter of
1996 from $2.0 million in the first quarter of 1995. Such costs as a percentage
of revenues from resort and other operations increased to 97.4% in the 1996
quarter from 95.0% in the 1995 quarter. This increase in costs was primarily the
result of the Company's commencement of operations at the PALM AIRE RESORT AND
SPA and commencement of operations at SANTA BARBARA RESORT AND YACHT CLUB.
General and administrative expenses, consisting primarily of expenses relating
to corporate overhead including costs related to the Company's expansion of its
information systems department, as well as executive
11
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compensation, increased to $2.8 million in the three months ended March 31, 1996
compared to $2.1 million the three months ended March 31, 1995, and amounted to
approximately 7.3% of the Company's total revenues during the quarter ended
March 31, 1996 as compared to approximately 8.0% of the Company's total revenues
during the quarter ended March 31, 1995.
The provision for doubtful accounts increased to $197,000 for the three months
ended March 31, 1996 from $114,000 for the three months ended March 31, 1995.
This increase was due to the increased provision against mortgages receivable
resulting from the increased mortgage balance.
Depreciation and amortization expense increased 74.0% to $569,000 for the
quarter ended March 31, 1996 from $327,000 for the quarter ended March 31, 1995,
primarily due to increased purchases of computer hardware, software and other
equipment during 1995 and the first quarter of 1996.
As a result of the continued increase in sales of VOIs and the proportionate
increase of VOIs sold in Company-owned properties since 1993, the Company's
interest income from financing activities increased to $1.7 million for the
quarter ended March 31, 1996 from $875,000 for the quarter ended March 31, 1995.
This approximated 4.5% of revenues during the first quarter of 1996 as compared
to 3.3% of revenues during the similar period the prior year. This increase was
partially offset by interest paid on increased borrowings against loans
hypothecated by the Company to unaffiliated lenders of $529,000 during the first
quarter of 1996 compared to $351,000 during the first quarter of 1995. At March
31, 1996, the Company had a portfolio of 7,984 loans to VOI purchasers, which
loans had a weighted average maturity of 5.4 years, and a weighted average
interest rate of 16.3%, compared to a weighted average interest rate of 11.2% on
borrowings against loans hypothecated by the Company to unaffiliated lenders.
The Company has historically derived substantial income from its financing
activities.
As a result of the foregoing, the Company's net income was $1.5 million for the
quarter ended March 31, 1996, a decrease of $558,000 or 27.2% from proforma net
income of $2.0 million for the quarter ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company offers financing to the purchasers of VOIs in the Company's 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 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, of which $19.3 million was outstanding as of March 31, 1996, to the
Company bearing interest at variable rates tied to the "prime" rate plus 1.75%
to 3.25% or a rate ranging between 425 and 475 basis points over LIBOR. Included
in this availability is up to $17.0 million of pre-sale financing, none of which
is currently outstanding. A significant portion of this indebtedness has been
guaranteed by Ralph Muller, the Chairman, Chief Executive Officer and majority
shareholder of the Company. Under these 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-sale 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 $78.0 million, $7.5 million of such financing
is a revolving loan with scheduled availability until May 1996; $30.0 million of
such financing is a revolving loan with scheduled availability until December
1997; $5.0 million of such financing is a revolving loan with scheduled
availability until May 1996; $15.0 million of such financing is a revolving loan
with scheduled availability until June 1997; $15.0 million of such financing is
a revolving loan scheduled to terminate March 1998; and $5.0 million of such
financing is a revolving loan with scheduled availability until September 1997.
After the respective
12
<PAGE>
termination of the availability period, the respective outstanding borrowings
under the aggregate agreements are required to be repaid over a period of five
to eight years. The Company believes that, for the four presently active selling
resorts, it has substantial loan availability to provide financing of new VOI
purchases through mid 1997. The Ocean Ranch Vacation Group has obtained a
commitment from a lender to provide approximately $12,700,000 for the
construction and renovation of the Ocean Ranch resort although it has not yet
entered into a definitive agreement with respect to such financing. 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 that are 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 March 31, 1996, the Company had a portfolio of 7,984 loans
to VOI purchasers, which loans had a weighted average maturity of approximately
5.4 years, and a weighted average interest rate of 16.3%, compared to a weighted
average interest rate of 11.2% 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 credit facilities, as well as from the proceeds of the IPO ("Initial
Public Offering"). The Company presently has no commitments to make capital
expenditures other than (i) the payment of $3.4 million to fund construction
expenses relating to the KEY WEST phase at the SEA GARDENS BEACH AND TENNIS
RESORT, which funds are being provided to the Company under a credit facility by
Sun Trust /South Florida, N.A. ('Sun Trust'), (ii) $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 being provided to the Company pursuant
to a credit facility by Bank Atlantic, (iii) $12.7 million to finance the
estimated expenses related to the conversion costs of the OCEAN RANCH resort for
sale as VOI's, which funds are expected to be provided to the Company by a third
party lender. The indebtedness under the credit facility provided by Sun Trust
has also been personally guaranteed by Mr. Muller as well as a $ 1.2 million
construction facility loan provided by Sun Trust for the SANTA BARBARA RESORT
AND YACHT CLUB, which construction has been substantially completed.
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
quarters ended March 31, 1996 and 1995, the Company derived interest income of
$1.7 million and $875,000 respectively, from the financing of purchaser notes
receivable and incurred interest expense of $529,000 and $351,000, respectively,
relating to loans secured by notes hypothecated to these unaffiliated lenders.
If the Company utilizes a significant portion of the IPO proceeds to finance the
initial negative cash flow instead of borrowing, the spread between its interest
income and interest expense will continue to increase.
During the quarters ended March 31, 1996 and 1995, the Company's operating
activities used approximately $1.7 million and provided approximately $3.3
million, respectively, in cash and its investing activities used approximately
$6.1 million and $2.3 million, respectively, in cash. During these periods $8.7
million and $320,000, respectively, was provided through the Company's financing
activities, resulting in a net increase in cash and cash equivalents of $9.5
million in the first quarter of 1996 and $1.9 million during the first quarter
of 1995.
The Company completed an Initial Public Offering 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 exercise of the underwriter's over-allotment
option.
13
<PAGE>
At December 31, 1995, the Company recorded an accrued distribution for taxes in
the amount of $3,388,205. This accrual, payable to the majority shareholder, was
the result of the conversion of all of the Company's 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. The Company will be required to fund this distribution during 1996.
During the first quarter of 1996, the Company funded approximately $850,000 of
distributions. The Company believes that it will be able to pay the balance of
this amount from funds generated by operations.
The Company believes that funds from operating and financing activities,
borrowings under its existing credit facilities and the net proceeds from the
Initial Public Offering are sufficient to satisfy its contemplated cash
requirements through 1996, 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 financings.
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 financings, 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.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
NONE
b. Reports on Form 8-K:
NONE
15
<PAGE>
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: May 13, 1996
By: /S/ KEVIN M. SHEEHAN
Kevin M. Sheehan
President
Date: May 13, 1996
By: /S/ HENRY M. CAIRO
Henry M. Cairo
Chief Financial Officer and Chief Operating Officer
Date: May 13, 1996
16
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