FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 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.
(Exact name of registrant as specified in its charter)
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
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 21, 1997, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates was $20,246,643 based on a closing price
of $9.00 for the Common Stock, par value $ .01 per share (the "Common Stock"),
as reported on the NASDAQ National Market on such date.
As of March 21, 1997, the number of outstanding shares of Common Stock
was 8,610,225.
Information required by Part III is incorporated by reference to
portions of the registrant's 1997 proxy statement for the Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1996 fiscal year.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Vacation Break U.S.A., Inc. ("Vacation Break", and together with its
subsidiaries, the "Company"), develops, markets, operates and finances vacation
ownership interests ("VOIs") in premium resort properties in Florida and engages
in other leisure-oriented business activities. The VOIs offered by the Company
consist of undivided fee interests, which provide owners with the exclusive
right to use a vacation residence in perpetuity, typically for a one-week period
each year. The Company sells fully-furnished VOIs in its own resort properties
in South and Central Florida and also receives sales commissions in connection
with the sale of VOIs in resort properties owned by other developers in Florida.
The Company's principal business strategy is to sell VOIs in Company-owned
resorts rather than in properties owned by other developers, as sales of VOIs in
Company-owned resorts are more profitable and will generate future sources of
revenues and earnings through the Company's financing and resort management
activities.
The Company believes that the key to being a successful VOI developer
is by having strong, diversified and cost effective marketing programs. Through
marketing programs, the Company generates leads for the sale of VOIs.
Historically, the Company's principal means of attracting prospective purchasers
of VOIs has been through the sale of discounted, high quality vacation packages.
Marketing/lead generation is typically a significant cost to a VOI developer.
The Company believes that its vacation packages in part enable the Company to
generate leads for the sale of VOIs at a lower cost per lead than is typical in
the industry. The Company's current marketing strategy is to expand and
diversify its lead generation programs through both more traditional VOI
marketing programs and other lead generation programs. The vacation package
still serves as a major, and cost efficient, marketing tool for the Company
complemented by the addition of innovative approaches.
The Company believes that it provides VOI owners with an attractive
long-term vacation experience. The VOIs sold by the Company are all in full
service resorts that typically feature swimming pools, restaurants and access to
golf courses, marinas, beaches, tennis courts, spa or recreational facilities
and other amenities. In addition, the Company owns and operates two yachts and
two fishing vessels, which can be chartered by owners of VOIs at attractive
rates. The Company maintains close contact with its VOI owners by virtue of its
role as property manager of its VOI resorts. This exposure to VOI owners also
enables the Company to improve the management of its resorts, while reducing
marketing expenses which it would otherwise incur to the extent repeat and
referral business is generated through such contacts.
The Company believes that its VOIs are made more attractive through the
Company's participation in Resort Condominium International's ("RCI's") or
Interval International's ("Interval") exchange networks, which have a total of
more than 4,300 participating resort facilities in 81 countries and in excess of
2 million and 700,000 individual members worldwide with in excess of 1.85
million vacation exchanges annually. Membership in RCI or Interval entitles the
Company's customers to exchange their occupancy right in the unit in which they
own a VOI for an occupancy right in another participating resort, based upon
availability and the payment of a variable exchange fee to RCI or Interval.
The Company offers financing to the purchasers of VOIs in the Company's
resort properties and finances a substantial portion of its loans to purchasers
of VOIs with borrowings from unaffiliated lenders. At December 31, 1996, the
Company had a portfolio of 10,911 loans to VOI purchasers, which loans had a
weighted average maturity of approximately 5.3 years, and a weighted average
interest rate of 16.3% compared to a weighted average interest rate of 10.4% on
the Company's borrowings from its lenders. Fewer than 2% of the mortgage loans
for VOIs which the Company has financed have resulted in foreclosure. The
Company believes that its financing activities both enhance its ability to sell
VOIs and provide the Company with a significant source of revenues and earnings.
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The Company currently owns and is developing five VOI resort
properties. As of December 31, 1996, the Company has sold 6,971 VOIs at the SEA
GARDENS BEACH AND TENNIS RESORT in South Florida and has 49 VOIs remaining
available for sale at such resort, and the Company currently is constructing an
additional 4,368 VOIs at this resort with sales expected to commence in the
second quarter of 1997. A second resort, the SANTA BARBARA RESORT AND YACHT
CLUB, owned by the Company in South Florida opened in May 1995 and, of the
approximately 4,680 VOIs available for sale at this resort, 3,389 VOIs were sold
as of December 31, 1996. The Company also owns a 55% interest in the PALM AIRE
RESORT AND SPA in South Florida, which, upon completion of construction to
convert the property for the sale of VOIs, will have approximately 5,564 VOIs
available for sale. This property has the potential to accommodate additional
expansion of 14,716 VOIs from new purpose built phases. There were 1,954 VOIs
sold at this resort as of December 31, 1996. The Company has also entered into
an agreement pursuant to which it has the obligation to acquire 100 condominium
units at VACATION BREAK AT STAR ISLAND in the Orlando area to be sold as
approximately 5,200 VOIs of which 2,447 were sold as of December 31, 1996. The
Company also owns a 55% interest in the ROYAL VISTA (formerly known as OCEAN
RANCH) property where, upon completion of renovation and construction, the
Company will have an additional 5,148 VOIs in South Florida. Construction on
this project is expected to be completed in the late fall of 1997 with sales
expected to commence in the third quarter of 1997. The Company continually
monitors its VOI availability to approximately match it with expected tours
produced through the various marketing programs.
The Company has entered into an Agreement and Plan of Merger (the
"Acquisition Agreement") dated as of November 26, 1996 as amended on March 28,
1997 among the Company, Westview Resorts Corporation ("Westview"), Williamsburg
Plantation, Inc. ("Williamsburg"), The Berkley Group, Inc. ("Berkley"), and
Ocean Ranch Development, Inc. ("Ocean Ranch", and collectively with Westview,
Williamsburg and Berkley, the "Lambert Companies"). The Lambert Companies are
all majority owned and/or controlled by Jane E. Lambert.
Pursuant to the Acquisition Agreement, the Company will acquire
existing development and resorts at Bonaventure at Westview in Ft. Lauderdale
and Williamsburg, Virginia. In addition, the Company will acquire (i) Berkley
Vacation Resorts, Inc. ("BVRI"), and Cocowalk Development, Inc. both of which
are wholly owned subsidiaries of Berkley which own land adjacent to the
Bonaventure resort, (ii) a 45% interest in each of two properties, the Palm Aire
Resort and Spa ("Palm Aire") such 45% interest held by wholly owned subsidiary
of Berkley and Royal Vista ("Royal Vista") (formerly known as Ocean Ranch) in
each of which the Company currently owns the remaining 55% interest and (iii) a
25% interest in Daily Management, Inc. ("DMI").
The Company will (i) issue a total of 8.7 million shares of the
Company's Common Stock, 7.7 million of which (the "Lambert Shares") will be
issued to James E. Lambert and members of his family and 1.0 million of which
(the "Berkley Shares," and together with the Lambert Shares, the "Merger
Shares") will be issued to Berkley, (ii) distribute $19.0 million in cash to
James E. Lambert, and (iii) distribute to Berkley in cash an amount equal to the
actual costs incurred for the land and construction in progress on the date of
closing of the transactions contemplated by the Acquisition Agreement for the
land owned by BVRI and CDI.
Consummation of the transaction is subject to, among other things,
approval of the Company's shareholders. Upon approval of the transaction, the
Company's Board of Directors will consist of two designees chosen by James E.
Lambert, one designee chosen by the Berkley Group, three designees chosen by the
Company and two independent designees to be chosen by James E. Lambert and
Berkley.
In connection with the Mergers, the Company and Berkley will enter into
a Marketing, Sales and Administrative Services Agreement pursuant to which
Berkley will continue to perform marketing and related services for the Company
at Westview and Williamsburg. In addition, pursuant to an employment agreement
to be entered into between the Company and James E. Lambert, Mr. Lambert will
serve as the Company's Chief Executive Officer for an initial period of three
years following consummation of the transactions contemplated by the Acquisition
Agreement.
As a result of the Acquisition Agreement the Lambert Companies,
including James E. Lambert will own approximately 50.3% of the outstanding grou
shares of Common Stock of the Company.
In connection with the Mergers, the Company and Berkley will enter into
a Marketing, Sales and Administrative Services Agreement pursuant to which
Berkley will perform marketing and related services for the Company in Florida
and Virginia. In addition, pursuant to an employment agreement to be entered
into between the Company and James E. Lambert, Mr. Lambert will serve as the
Company's Chief Executive Officer for an initial period of three years following
consummation of the transactions contemplated by the Acquisition Agreement.
INDUSTRY OVERVIEW
The resort component of the leisure industry is serviced by two
separate alternatives for overnight accommodations: (i) commercial lodging
establishments and (ii) vacation ownership. Commercial lodging consists of the
hotel/motel sector in which a room is rented on a nightly, weekly or monthly
basis for the duration of the visit. This sector is supplemented by rentals of
privately-owned condominium units or homes. For many vacationers, particularly
those with families, the cost of a lengthy stay at a quality establishment can
be very expensive. In addition, room rates and availability are subject to
change periodically. Vacation ownership presents an economic alternative.
Vacation ownership is available through a variety of different
products, including whole ownership of homes and condominiums; interval
ownership plans, including fractional ownership of weekly or other periodic
intervals; condominium hotels; shared resort membership; campgrounds and ranch
acreage land. Unlike commercial lodging arrangements, the individual purchasing
one of the foregoing products acquires an ownership interest in the underlying
property or in the entity that owns the property.
Vacation interval ownership has existed in the United States since the
late 1960s and has, during the past few years, become one of the fastest-growing
real estate and vacation industries in the United States and worldwide. The
American Resort Development Association ("ARDA") estimates that approximately
1.7 million United States families own VOIs in resorts worldwide and that sales
volume in the vacation ownership interval industry in the United States in 1996
was in excess of $2.0 billion with worldwide sales in excess of $5.0 billion.
ARDA also estimates that Florida has a substantially higher concentration of
VOIs than any other state in the United States.
The Company believes that the following factors have contributed to the
recent growth in the vacation interval ownership industry:
* Increased acceptance of the vacation interval ownership concept among the
general public, as a result of positive public relations.
* Increased consumer confidence resulting from extensive regulation of the
vacation ownership industry.
* The cost and flexibility advantages of vacation ownership and exchange
through organizations such as RCI and Interval.
* An improvement in the quality of the resorts in which VOIs are being offered.
* Improved availability of financing for purchasers of vacation intervals.
* Increased consumer awareness of the value and benefits of vacation ownership,
including the cost savings relative to other lodging alternatives.
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The Company believes that one of the most significant factors
contributing to the current success of the vacation interval ownership industry
is the entry into the market of some of the world's major lodging, hospitality
and entertainment companies which, beginning in 1984 with the successful entry
of Marriott Ownership Resorts, have begun to develop and sell VOIs in resort
properties. Other major companies which now operate or are developing VOI
resorts include The Walt Disney Company, Hilton Hotels Corporation, Westin
Hotels and Resorts, Hyatt Corporation, Four Seasons Hotels and Resorts, Embassy
Suites Hotels, Ramada International Hotels and Resorts, Vistana Resort,
Signature Resorts and Fairfield Communities. The Company believes that these
companies are attracted to the vacation interval ownership concept because of
the industry's relatively high profit margins and the recognition that vacation
interval ownership provides an attractive alternative to the traditional
hotel-based vacation, which is complementary to their existing businesses.
Moreover, the Company believes that such participation by these companies has
enhanced the credibility, and consumer acceptance, of vacation interval
ownership.
BUSINESS STRATEGY
The Company's business strategy is to acquire, develop, market and
finance additional resort properties for its own account and to sell VOIs in
such properties. The Company has effected this strategy in several ways. The
Company (i) has purchased a 100% interest in certain resort properties, (ii) has
participated as a joint venture partner in connection with the acquisition and
development of certain resort properties, and (iii) has entered into a marketing
and purchase arrangement pursuant to which the Company has contracted to acquire
condominium units for sale as VOIs. The Company intends to continue to effect
its business strategy as it has in the past, and will determine the most
appropriate structure to market VOIs in a particular resort property on a
case-by-case basis in light of its available alternatives while maximizing
profit potential. The Company believes that the key to being a successful VOI
developer is by having strong, diversified and cost effective marketing
programs. Through marketing programs, the Company generates leads for the sale
of VOIs. Historically, the Company's principal means of attracting prospective
purchasers of VOIs has been through the sale of discounted, high quality
vacation packages. Marketing/lead generation is typically a significant cost to
a VOI developer. The Company believes that its vacation packages in part enable
the Company to generate leads for the sale of VOIs at a lower cost per lead than
is typical in the industry. The Company's current marketing strategy is to
expand and diversify its lead generation programs through both more traditional
VOI marketing programs and other lead generation programs. The vacation package
still serves as a major, and cost efficient, marketing tool for the Company
complemented by the addition of innovative approaches.
The Company strives to be responsive to the continuing needs of the
purchasers of its VOIs, who frequently serve as referral sources and repeat
buyers. The Company maintains close contact with VOI owners by virtue of its
role as property manager of principally all of its VOI resorts. Through acting
as property manager, the Company believes that it is able to continually improve
the vacation experience of its VOI owners. The Company believes that its
vacation packages and VOIs have been well-received by its customers, as
indicated by the Company's market research and that of the exchange companies.
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VOI RESORT PROPERTIES
The Company currently owns and is developing five vacation ownership
resort properties in Florida.
The SEA GARDENS BEACH AND TENNIS RESORT is situated on 7.5 acres in
Pompano Beach, Florida, and consists of a total of 7,020 VOIs of which 49
remained available for sale at December 31, 1996. VOIs in this resort are
offered for sale at prices ranging from $9,000 to $15,000 per week. The SEA
GARDENS BEACH AND TENNIS RESORT is situated on 250 feet of beachfront property,
and features a beach club restaurant, a beachfront activity center offering a
wide range of watersports and 14 tennis courts. The SEA GARDENS BEACH AND TENNIS
RESORT has been designated as a Gold Crown Resort by RCI, which awards this
designation to less than 13% of its in excess of 3,000 member resorts. This
resort has also received top honors for both landscaping and interior design in
ARDA's 1993 award competition. The Company is currently constructing a new 10
story phase of Sea Gardens which is expected to include 4,368 VOIs which will
commence selling in the second quarter of 1997 with construction expected to be
completed by December 1997.
The SANTA BARBARA RESORT AND YACHT CLUB, situated on 1 1/4 acres in
Pompano Beach, consists of 90 studio, one and two bedroom units for sale as
4,680 VOIs priced at an average of approximately $10,500 per week. This resort
features a swimming pool, a restaurant and banquet facilities, as well as
dockage on the Spanish River and close access to the beach and the Atlantic
Ocean. The Company began offering VOIs at this resort in May 1995 and, at
December 31, 1996, 1,291 VOIs remained available for sale at this resort. The
SANTA BARBARA RESORT AND YACHT CLUB has been designated as a Gold Crown Resort
by RCI and the resort received top honors as a renovated hotel in ARDA's 1995
awards competition.
In April 1995, the Company purchased a 55% interest in a general
partnership which acquired the PALM AIRE RESORT AND SPA, in Pompano, Florida,
which represents 5,564 VOIs to be offered at an average price of $10,500 per
week. This resort features a health spa, swimming pools, a restaurant, banquet
facilities, as well as access to adjacent golf courses. Additionally, purchasers
of VOIs are granted access to the beach at the Company's SEA GARDENS BEACH AND
TENNIS RESORT, which is situated approximately five miles from this resort. The
Company began offering VOIs for sale at this resort in August 1995 and, at
December 31, 1996, 3,610 of such VOIs remained available for sale. The FAIRWAYS
AT PALM AIRE, located at PALM AIRE RESORT AND SPA, has been designated as a Gold
Crown Resort by RCI.
Pursuant to a sales and marketing agreement with the Palm Vacation
Group, the Company has the right to serve as the exclusive marketing agent for
this resort for which it receives commissions based on sales of VOIs. The
Company is entitled to 55% of the net profits of the Palm Vacation Group. The
remaining 45% interest not owned by the Company is to be acquired as part of the
Acquisition Agreement See "-General".
In May 1995, the Company entered into a marketing and unconditional
purchase agreement under which the Company is obligated to purchase 100
condominium units, to be sold as VOIs, in a development being constructed in
Orlando, Florida. This project is known as VACATION BREAK AT STAR ISLAND. These
condominium units are expected to comprise approximately 5,200 VOIs which are
being offered at an average price of $12,500 per week. At December 31, 1996,
2,753 VOIs remained available for sale at this resort. The Company has an
unconditional obligation to pay a per unit-week purchase price associated with
the construction of these units equal to a percentage of the sales price
expected to be received by the Company for each VOI available for sale whether
or not such VOIs are in fact sold. VACATION BREAK AT STAR ISLAND has been
designated as a Five Star resort by Interval.
In January 1996, the Company purchased a 55% interest in a general
partnership which purchased the OCEAN RANCH RESORT, located in Pompano, Florida
expected to comprise 5,148 VOIs. Construction has commenced and is expected to
be completed by December 1997 with sales of VOIs anticipated to commence in the
third quarter of 1997. This property has been designated as a Five Star resort
by Interval.
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Pursuant to a marketing agreement with the Ocean Ranch Group, the
Company has the right to serve as the exclusive marketing agent for the OCEAN
RANCH RESORT, recently renamed the ROYAL VISTA RESORT, for which it receives
commissions based on sales of VOIs. The Company is entitled to 55% of the net
profits of the Ocean Ranch Group. The remaining 45% interest not owned by the
Company is to be acquired as part of the Acquisition Agreement. See "-General".
The following table presents key statistics representing VOI activities
in properties owned by the Company or under marketing and purchase agreements.:
<TABLE>
<CAPTION>
SEA SANTA STAR ROYAL
GARDENS BARBARA PALM AIRE ISLAND VISTA(1) TOTAL
------- ------- --------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Number of VOI's available 7,020 4,680 5,564 5,200 5,148 27,612
Net number of VOI's sold through
December 31, 1996 6,971 3,389 1,954 2,447* - 14,761
Percent sold through
December 31, 1996 99% 72% 35% 47%* 0% 53%
Net number of VOI's sold during the
12 months ended December 31, 1996 825 1,997 1,467 1,914* - 6,203
</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
SALE OF VOIS IN PROPERTIES OWNED BY OTHER DEVELOPERS
The Company sells VOIs in resort properties owned by other developers
in Florida, for which it receives a commission based upon a percentage of the
price of the VOI sold. These resort properties have included the Coconut Bay
Resort, the Silver Seas, the Fort Lauderdale Beach Resort and the Driftwood
Beach Club in Fort Lauderdale, Florida, the Costa Del Sol in
Lauderdale-by-the-Sea, Florida, the Lighthouse Cove in Pompano Beach, Florida
and the Ocean Reef Club in the Bahamas, and sales of VOIs are ongoing at the
Bonaventure Resort and Spa in Fort Lauderdale, Florida. The Company typically
receives a commission equal to approximately 45% to 48% of the sales price of a
VOI in resort properties owned by other developers.
PARTICIPATION IN VOI EXCHANGE NETWORK
The Company believes that its VOIs are made more attractive through the
Company's participation in VOI exchange networks. In a recent study sponsored by
the Alliance for Timeshare Excellence and ARDA, the exchange opportunity was
cited by purchasers of VOIs as one of the most significant factors in
determining whether to purchase a VOI. Each of the Company's VOI resort
properties has been designated by RCI as a Gold Crown Resort, which awards this
designation to fewer than 13% of its member resorts, or as a Five Star resort by
Interval. RCI is the world's largest VOI exchange organization, which has a
total of more than 3,000 participating resort facilities and approximately two
million members worldwide. The cost of the annual membership fee in RCI, which
is at the option and expense of the owner of the VOI, is $74 per year.
Membership in RCI or Interval entitles the Company's customers to exchange in a
particular year their occupancy right in the unit in which they own a VOI for an
occupancy right at the same time or a different time in another participating
resort, based upon availability and the payment of a variable exchange fee to
RCI or Interval. An RCI or Interval member may exchange his VOI for an occupancy
right in another participating resort by listing his VOI as available with RCI
or Interval and by requesting occupancy at another participating resort,
indicating the particular resort or geographic area to which the member desires
to travel, the size of the unit desired and the period during which occupancy is
desired. RCI or Interval assigns a rating to each listed VOI, based upon a
number of factors, including the location and size of the unit, the quality of
the resort and the period during which the VOI is available. RCI attempts to
satisfy the exchange request by providing an occupancy right in another VOI with
a similar rating.
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If RCI or Interval is unable to meet the member's initial request, it
suggests alternative resorts based on availability. RCI or Interval has assigned
high ratings to the VOIs in the Company's resort properties, and such VOIs have
in the past been exchanged for VOIs at other highly-rated member resorts.
Approximately 97% of all exchange requests are fulfilled by RCI and 99% are
fulfilled by Interval (based on information supplied by these companies).
MARKETING
The Company employs a variety of strategies to promote sales of VOIs.
The Company's principal means of attracting prospective purchasers of VOI's is
the marketing of various travel packages. These packages vary significantly by
length, components and price. The majority of these high quality packages are
seven-day/six-night stays with four nights accommodations in Florida, two nights
accommodations in the Bahamas, and a round-trip cruise to the Bahamas. Expanding
on the capabilities of its fulfillment and reservation system, the Company
employs several programs that open up the short length-of-stay (mini-vacation)
market. These include the sale of mini-vacations through Direct Response
Television, the targeted distribution of Premium Certificates as well as the
more traditional direct mail channel of marketing. Alternative distribution
channels for the Company's travel products have been developed, including a
major wholesale agreement with a national retail travel agency consortium, the
Internet, and the two major VOI exchange companies: RCI and Interval. The
Company has agreements with several well-known hotels in Florida and the Bahamas
to purchase blocks of rooms during specified time periods to provide
accommodations to purchasers of the Company's vacation packages. These hotels
include Best Western, Ramada, Marriott, Sheraton, Hilton, Hyatt, Holiday Inn,
Quality and Westin, among others. The Company also provides accommodations to
purchasers of its vacation packages in its 50%-owned Port Lucaya Resort and
Yacht Club in the Bahamas. In addition, the Company has agreements with several
well-known cruise line companies to provide round-trip cruises between Florida
and the Bahamas, including Carnival Cruise Lines, Premiere Cruise Lines, Dolphin
Cruise Line and Discovery Cruise Line. The Company markets some of its vacation
packages through its marketing facilities located in Fort Lauderdale, Florida
and in Johnson City, Tennessee. To capitalize on the significant flow of
prospects who are visiting the Company's markets via some other travel purveyor,
an Off Premise Contact program has been implemented. Relationship marketing
plays a significant role in the Company's marketing. This includes an Owner
Referral program, a past-traveler re-marketing plan and a home-based Travel
Ambassador program. These relationship marketing programs are being facilitated
by the implementation of scientific database marketing strategies made possible
by the Company's new CRS database reservation system. The Company also has an
in-house marketing program focusing on guests staying at the Company's vacation
ownership resorts, whether they are owners, renters or exchangers. Through a
combination of guest services and telephone contact, these guests are invited to
take a tour of the vacation ownership resort. With in excess of 400 units
operating at the various resorts, the in-house program has and will continue to
play a key role in the Company's VOI sales growth.
PORT LUCAYA RESORT AND YACHT CLUB
The Company operates THE PORT LUCAYA RESORT AND YACHT CLUB, located on
Grand Bahama Island, a 50%-owned joint venture with the Grand Bahama Development
Company Limited, which consists of 160 hotel rooms and suites and is the only
three star property on Grand Bahama Island. The Company is entitled to receive
all profits deriving from this property, and bears all of the risks associated
with such property. This resort, which was completed and commenced operations in
September 1993, is situated on five acres adjacent to the Lucaya beach and
across the street from the Lucaya Beach Casino and the Port Lucaya Festival and
Marketplace. This resort features a full-service marina, a restaurant, a large
pool and bar area and many other amenities. The Company believes that the resort
is one of the most highly rated hotels on Grand Bahama Island. This resort is
operated as a hotel to provide accommodations primarily to purchasers of the
Company's vacation package who purchase upgrades to the accommodation portion of
their vacation packages, and the Company has no current plans to offer VOIs at
this resort.
CUSTOMER FINANCING
The Company offers financing to the purchasers of VOIs in the Company's
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 $77.5 million (of which $42.4 million was
outstanding at December 31, 1996) of available financing to the Company bearing
interest at variable rates tied to the "prime" rate or LIBOR. This indebtedness
has been substantially guaranteed by the majority
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stockholder of the Company. Under these arrangements, the Company hypothecates
qualified purchaser promissory notes to the lenders, who lend the Company 75% to
85% of the principal amount of such notes or, in the case of presale (unit-weeks
sold prior to completion of construction and legal deeding of the unit-week)
financing, 60% to 65% of the principal amount of such sales. Payments under
these promissory notes are made by the purchaser borrowers directly to a
'lockbox,' or data processing center, and such payments are credited against the
Company's outstanding balance with the respective lenders. The Company has
historically derived substantial income from its financing activities. However,
because the Company's borrowings bear interest at fluctuating rates and the
Company's loans to purchasers of VOIs bear interest at fixed rates, the Company
bears the risk of increases in interest rates with respect to the loans which it
has hypothecated to unaffiliated lenders. The Company also bears the risk of
purchaser default. The Company closely monitors its loan accounts and determines
whether to foreclose on a case-by-case basis. Approximately 2% of the mortgage
loans for VOIs which the Company has financed have resulted in foreclosure.
RESORT ACQUISITION AND DEVELOPMENT PROCESS
The Company obtains information with respect to resort acquisition
opportunities through interaction by the Company's management team with resort
operators, real estate brokers, lodging companies, exchange companies and
financial institutions with which the Company has established business
relationships. From time to time, the Company is also contacted by lenders and
property owners who are familiar with the Company's business.
The Company has expertise in all areas of VOI resort development,
including, but not limited to, architecture, construction, finance, management,
operations, marketing and sales. After completing an analysis of the prospective
market and the general parameters of the property or the site, the Company
generates a conceptual design to determine the extent of physical construction
or renovation that can occur on the site in accordance with the requirements of
the local governing agencies. For most properties, the predominant factors in
determining the physical design of the site include density of units, maximum
construction height, land coverage and parking requirements. Following the
preparation of such a conceptual design, the Company analyzes other aspects of
the development process, such as construction cost and phasing, to match the
projected sales flow in the relevant market. At this stage of analysis, the
Company undertakes to compare sales, construction cost and phasing, debt and
equity structure, cash flow, financing and overall project cost to the
acquisition cost. The Company's procedures when considering a potential
acquisition are set forth below.
ECONOMIC AND DEMOGRAPHIC ANALYSIS. To evaluate the primary economic and
demographic indicators for the resort area, the Company considers the following
factors, among others, in determining the viability of a potential new VOI
resort in a particular location: (i) supply/demand ratio for VOIs in the
relevant market, (ii) the market's growth as a vacation destination, (iii) the
ease of converting a hotel or condominium property into a VOI resort, (iv) the
availability of additional land at the property for future development and
expansion, (v) competitive accommodation alternatives in the market, (vi)
uniqueness of location, and (vii) barriers to entry that would limit
competition. The Company examines the competitive environment in which the
proposed resort is located and all existing or to-be-developer resorts. In
addition, information respecting characteristics, amenities and financial
information at competitive resorts is collected and reviewed. This information
is used to assess the potential to increase revenues at the resort by making
capital improvements.
PRO FORMA OPERATING BUDGET. The Company develops a comprehensive pro
forma budget for the resort, utilizing available financial information in
addition to the other information collected from a variety of sources. The
estimated sales of units are examined, including the maintenance and marketing
fees associated with such unit. The debt required to be borrowed is analyzed as
well as the debt service requirements and the ability to pay back the debt in a
prudent manner. Finally, the potential for overall capital appreciation of the
resort is reviewed, including the prospects for liquidity through sales or
refinancing of the resort.
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ENVIRONMENTAL AND LEGAL REVIEW. In conjunction with each prospective
acquisition or development, the Company conducts real estate and legal due
diligence on the property. This due diligence includes an environmental
investigation and report by a reputable environmental consulting firm, including
tests on identified underground storage tanks. If recommended by the
environmental consulting firm, additional testing is generally conducted. The
Company also obtains a land survey of the property and inspection reports from
licensed engineers or contractors on the physical condition of the resort. In
addition, the Company conducts customary real estate due diligence, including
review of title documents, operating leases and contacts, zoning, and
governmental permits and licenses and a determination of whether the property is
in compliance with applicable laws.
OTHER OPERATIONS
ROOM RENTAL OPERATIONS. In order to generate additional revenue at
certain of its VOI resorts that have an excess inventory of VOIs, the Company
rents units with respect to such unsold or unused VOIs for use as a hotel. The
Company offers these unoccupied units both through direct consumer sales,
computerized reservation systems, travel agents or package vacation wholesalers.
In addition to providing the Company with supplemental revenue, the Company
believes its room-rental operations provide it with a good source of lead
generation for the sale of VOIs. As part of the management services provided by
the Company to VOI owners, the Company receives a fee for services provided to
rent an owner's VOI in the event the owner is unable to use or exchange the VOI.
RESORT MANAGEMENT. The Company's VOI resorts are generally managed by
the Company itself pursuant to management agreements with homeowner
associations. At each of the Company's resorts, the Company enters into a
management agreement with an association comprised of owners of vacation
interests at the resort to provide for management and maintenance of the resort.
Pursuant to each such management agreement, the Company is paid a monthly
management fee equal to 15% of weekly maintenance fees except for reserves. The
management agreements are typically for a three-year period, renewable annually
and automatically unless notice of non-renewal is given by either party.
Pursuant to each management agreement, the Company has sole responsibility and
exclusive authority for all activities necessary for the day-to-day operation of
the resorts, including administrative services, procurement of inventories and
supplies and promotion and publicity. With respect to each resort, the Company
also obtains comprehensive and general public liability insurance, all-risk
property insurance, business interruption insurance and such other insurance as
is customarily obtained for similar properties. The Company also provides all
managerial and other employees necessary for the resorts, including review of
the operation and maintenance of the resorts, preparation of reports, budgets
and projections, employee training, and the provision of certain in-house legal
services.
VOI OWNERSHIP
The purchase of a VOI typically entitles the buyer to use a
fully-furnished vacation residence, generally for a one-week period each year,
in perpetuity. Typically, the buyer acquires an ownership interest in the
vacation residence, which is held as tenant in common with other buyers of
interests in the property.
The owners of VOIs manage the property through a non-profit homeowners'
association, which is governed by a Board consisting of representatives of the
developer and owners of VOIs at the resort. The Board hires an agent, delegating
many of the rights and responsibilities of the homeowners' association to a
management Company, as described above, including grounds landscaping, security,
housekeeping and operating supplies, garbage collection, utilities, insurance,
laundry and repair and maintenance.
Each VOI owner is required to pay the homeowners' association a share
of all costs of maintaining the property. These charges can consist of an annual
maintenance fee (generally $325 to $425 per owner plus applicable real estate
taxes) and special assessments, assessed on an as-needed basis. If the owner
does not pay such charges the owner's use rights may be suspended and the
homeowners' association may foreclose on the owner's VOI.
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FUTURE ACQUISITIONS/MERGERS
The Company intends to expand its vacation interval ownership business
from time to time by acquiring or developing resorts located in attractive
resort destinations, and is in the process of evaluating strategic acquisitions
in a variety of locations. Such future acquisition and development of resorts
could have a substantial and material impact on the Company's operations and
prospects. The Company has not entered into any definitive acquisition agreement
with respect to any such resort or development opportunity other than the
Lambert Companies and there can be no assurance that such an agreement will be
negotiated or that any such acquisition will be consummated. In addition, the
Company may consider acquiring existing management and marketing companies, VOI
developers and marketers, loan portfolios or other industry related operations
or acquiring assets in the fragmented VOI development, marketing, finance and
management industry.
COMPETITION
The Company is subject to significant competition from other entities
engaged in the business of resort development, sales and operation, including
interval ownership, condominiums, hotels and motels. Beginning in 1984 with the
successful entry of Marriott Ownership Resorts, many of the world's most
recognized lodging, hospitality and entertainment companies have begun to
develop and sell VOIs in resort properties. Other major companies which now
operate or are developing VOI resorts include The Walt Disney Company, Hilton
Hotels Corporation, Westin Hotels and Resorts, Hyatt Corporation, Four Seasons
Hotels & Resorts, Embassy Suites Hotels, Ramada International Hotels and
Resorts, ITT Sheraton Inc., Fairfield Communities, Inc., Vistana Resort and
Signature Resorts, Inc. Many of these entities possess significantly greater
financial, marketing, personnel and other resources than those of the Company.
In addition, all the resort properties in which the Company sells VOIs are
located in Florida, and the Company intends to continue to concentrate a
significant portion of its activities in Florida. There are many hotels and
other vacation resorts in Florida which provide competitive alternatives to the
purchase of a VOI in one of the Company's resort properties. Hotels and other
resort properties located in other states may also provide a more attractive
alternative to prospective purchasers of VOIs. The Company believes, however,
that it has been able, and will continue, to compete effectively with these
other entities on the basis of the quality of its resort properties, resort
management, price and the attractiveness of Florida as a resort destination.
REGULATION
VOI AND TELEMARKETING REGULATION. The Company's vacation and interval
ownership sales and operations are subject to extensive regulation by the
federal government and the states and foreign jurisdictions in which its resort
properties are located and in which vacation packages and VOIs are marketed and
sold. On a federal level, the Federal Trade Commission has taken the most active
regulatory role through the Federal Trade Commission Act, which prohibits unfair
or deceptive acts or competition in interstate commerce. Other federal
legislation to which the Company is or may be subject appears in the Securities
Act, the Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act
and Regulation B, the Interstate Land Sales Full Disclosure Act and the Civil
Rights Acts of 1964 and 1968. In addition, many states have adopted specific
laws and regulations relating to the sale of vacation packages and to interval
ownership programs. In addition, Florida law requires the Company to file with a
designated state authority for its approval a detailed offering statement
describing the Company and all material aspects of a proposed development and
sale of VOIs. The Company is required to deliver the offering statement to all
prospective purchasers of a VOI, together with certain additional information
concerning the terms of the purchase. Florida law also grants the purchaser of a
VOI the right to cancel a contract of purchase at any time within ten calendar
days following the earlier of the date the contract was signed or the date the
purchaser has received the last of the documents required to be provided, and
requires the Company to provide purchasers of its vacation package with a 30-day
cancellation period and a full refund upon request within such period. The
Company currently maintains a policy conforming to these requirements. Many
other states have similar requirements to which the Company is subject. However,
no assurance can be given that the Company's interval ownership plans will not
be regulated as "securities" or that the cost of qualifying under interval
ownership regulations in all jurisdictions in which the Company desires to
conduct sales will not be prohibitive. Most states have other laws which
regulate the Company's activities such as real estate licensure; sellers of
travel licensure; anti-fraud laws; telemarketing laws; price, gift and
sweepstakes laws; and labor laws.
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The Company has been sued by Napa and Ventura Counties in California
and the State of Idaho for deceptive trade practices stemming from its marketing
of vacation packages. In March 1997, several states as part of a twelve state
investigation, namely Illinois, Washington, Vermont, Connecticut and
Massachusetts, filed suit against the Company in conjunction with the marketing
of the vacation packages alleging deceptive trade practices. The Company
believes that it is in material compliance with all federal, state and foreign
laws and regulations to which it is currently or may be subject to and is in the
process of settling the various state actions to which it is a party or if the
actions do not settle in a reasonable period of time, defend its marketing
practices. Any failure to comply with applicable laws or regulations could have
a material adverse effect on the Company although the Company believes these
state actions will be settled without a material impact on the financial
condition of the Company. See "Legal Proceedings."
The Company is a member of ARDA, the principal trade association
representing the segment of the leisure industry that deals with ownership of
resort and vacation products. Membership in ARDA entitles the Company to various
benefits and services, including advertising in ARDA publications and exhibiting
at ARDA trade shows. ARDA has adopted a Code of Standards and Ethics, which sets
forth standards of conduct and ethics to which the Company is subject. The
Company believes that it is in compliance with such code. However, failure to
comply with such code may result in termination of membership in ARDA, which
could have a material adverse effect on the Company.
LAND USE REGULATION. In developing a community, the Company must obtain
the approval of numerous government authorities that regulate matters such as
permitted land uses, density levels, the installation of utilities including
water, drainage and waste disposal, and the dedication of acreage for open
space, parks, schools and other community purposes. Several authorities in
Florida, including Broward and Osceola counties, have imposed impact fees as a
means of defraying the costs of providing certain governmental services to
developing areas. The amount of these impact fees has increased significantly
during recent years. Building codes in these counties require the use of
specific construction materials which increase the energy efficiency of homes.
In addition, Broward and Osceola counties have attempted to impose restrictive
zoning and density requirements in order to limit the number of persons who live
and work within their boundaries. Counties and cities within the State of
Florida have also, at times, declared moratoriums on the issuance of building
permits and imposed other restrictions in the areas where sewage treatment
facilities and other public facilities do not reach minimum standards. To date,
restrictive zoning laws and imposition of moratoriums have not had a material
adverse effect on the Company's development activities. However, there is no
assurance that such restrictions will not adversely affect the Company in the
future.
Certain permits and approvals will be required to complete the
developments currently being planned by the Company. The ability to obtain
necessary permits and approvals is often beyond the Company's control and could
restrict or prevent the development of otherwise desirable property. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved and unconverted property. In addition, the continued effectiveness
of permits already granted is subject to factors such as changes in politics,
rules and regulations and their interpretation and application.
The Florida Local Government comprehensive Planning and Land
Development Regulation Act provides that public facilities, including, but not
limited to, sewer, solid waste, drainage, potable water, parks, roads and
recreation facilities shall be available concurrently with the impact of land
development projects that would use such facilities. This requirement is known
as the "concurrency" requirement. Counties and cities are required to implement
concurrency by adopting local comprehensive plans and land development
regulations. These plans and regulations establish the guidelines for
concurrency review and the exemptions from the concurrency requirement. All of
the Company's construction and development projects have been found to satisfy
concurrency requirements.
ENVIRONMENTAL MATTERS. Under various federal, state and local
environments laws, ordinances and regulations, a current of previous owner or
operator of real estate may be required to investigate and clean up hazardous or
toxic substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and for
investigation and clean-up costs incurred by each party in connection with the
contamination. Such laws typically impose clean-up responsibility and liability
without regard to whether the owner knew or caused the presence of the
contaminants, and the liability under such laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances, or
the failure to properly remediate the contamination on such
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property, may adversely affect the owner's ability to sell or rent such property
or to borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances at a disposal or
treatment facility also may be liable for the costs of removal or remediation of
a release of hazardous or toxic substances at such disposal or treatment
facility, whether or not such facility is owned or operated by such person. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. Finally, the owner of a site may be subject to common law claims
by third parties based on damages and costs resulting from environmental
contamination emanating from a site. In connection with its ownership and
operation of properties, the Company may be potentially liable for such costs.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of
properties, the Company may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the Environments Protection Agency (the "EPA") and the
Surgeon General recommend testing residences for the presence of radon in indoor
air, and the EPA further recommends that concentrations of radon in indoor air
be limited to less than 4 picocuries per liter of air (Pci/L) (the "Recommended
Action Level"). The presence of radon in concentrations equal to or greater than
the Recommended Action Level in one or more of the Company's properties may
adversely affect the Company's ability to sell VOIs at such properties and the
market value of such property. Recently enacted federal legislation will require
the Company to disclose to potential purchasers of VOIs at the Company's resorts
that were constructed prior to 1978 of any known lead-paint hazards and will
impose treble damages for failure to so notify.
Electric transmission lines are located in the vicinity of the
Company's properties. Electric transmission lines are one of many sources of
electro-magnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the Company
understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse effects. In addition, fear of adverse health effects from
transmission lines has been a factor considered in determining property values
in obtaining financing and in condemnation proceedings in eminent domain brought
by power companies seeking to construct transmission lines. Therefore, there is
a potential for the value of a property to be adversely affected as a result of
its proximity to a transmission line and for the Company to be exposed to damage
claims by persons exposed to EMFs.
The Company has conducted Phase I assessments of each of its resorts in
order to identify potential environmental concerns. These Phase I assessments
have been carried out in accordance with accepted industry practices and
consisted of non-invasive investigations of environments conditions at the
properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant government records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, a visual
inspection of potential lead-based paint and suspect friable ACMs where
appropriate, a radon survey, and the preparation and issuance of written
reports. The Company's assessments of its properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business assets or results of operations, nor is the
Company aware of any such material environmental liability. Nevertheless, it is
possible that the Company's assessments do not reveal all environmental
liability or that there are material environmental liabilities of which the
Company is unaware. The Company does not believe that compliance with applicable
environmental laws or regulations will have a material adverse effect on the
Company or its financial condition or results of operations.
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The Company believes that its properties are in compliance with all
material respects of all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority or any third party, and is not otherwise
aware, of any material noncompliance, liability or claim relating to hazardous
or toxic substances or petroleum products in connection with any of its present
properties.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the
executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Ralph Muller 56 Chairman of the Board of Directors and
Chief Executive Officer
Kevin Sheehan 38 President
Joyce North 54 Executive Vice President - Sales
Henry M. Cairo 48 Chief Financial Officer and Chief
Operating Officer
Marco Manzie 38 Vice President - Resort Services
Steven McPhee 55 Senior Vice President - Corporate Development
RALPH MULLER co-founded the Company, and he has been serving the
Company full-time since its inception in 1985 as Chairman of the Board and Chief
Executive Officer, and served as President of the Company from its inception
until May 1995. Mr. Muller is also the President, Chief Executive Officer and
Director of each of Serenity Homes, Inc., a company engaged in the business of
purchasing and developing for sale residential real property, Sea America, Inc.,
a company engaged in the business of owning and administering a fleet of fishing
and recreational boats as part of a 400 member boat club and USA Today Realty, a
full-service real estate brokerage firm. Mr. Muller has over 25 years of
experience in the vacation/leisure industry.
KEVIN M. SHEEHAN co-founded the Company and has served as President of
the Company since May 1995. Mr. Sheehan served as Executive Vice President of
the Company from January 1991 until May 1995. From October 1987 to January 1991,
Mr. Sheehan served as the Company's Vice President - Marketing. Prior to joining
the Company in 1987, Mr. Sheehan served in various positions in the vacation
interval ownership industry.
JOYCE NORTH has served as the Executive Vice President - Sales of the
Company since January 1991. From 1980 to 1990, Ms. North marketed and sold
vacation interval ownership interests for independent developers in the Pocono
Mountains in Pennsylvania, Williamsburg, Virginia and French Lick, Indiana.
HENRY M. CAIRO, a certified public accountant and an attorney-at-law,
has served as Chief Financial Officer and Chief Operating Officer of the Company
since June 1995 and has been a Director of the Company since December 1995. From
December 1990 to May 1995, Mr. Cairo was a partner with the certified public
accounting firm of Checkers Simon & Rosner and was a partner with the CPA firm
of Laventhol & Horwath previous to 1990. Mr. Cairo has over 16 years of
experience in the vacation interval ownership industry, representing developers,
lenders, marketing and management companies and homeowner associations. Mr.
Cairo is a member of ARDA, where he has spoken at numerous conferences on
subjects relating to the vacation interval ownership industry, including
developer profitability and operational matters. Mr. Cairo currently serves as a
member of the ARDA Finance Committee, and formerly served as the Chairman of the
ARDA Accounting and Taxation Committee and Finance Committee.
MARCO MANZIE has served as Vice President - Resort Services of the
Company since December 1992. From April 1989 to December 1992, Mr. Manzie was
the general manager of the Sheraton Design Center Hotel in Fort Lauderdale,
Florida.
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STEVEN MCPHEE has served as Senior Vice President - Corporate
Development since February 1996. Mr. McPhee served as a consultant to the
Company from March 1994 to January 1996. Prior to joining the Company, Mr.
McPhee operated his own consulting company providing services to the vacation
ownership industry in the areas of business and people development, sales,
marketing and organizational development. Mr. McPhee is a member of ARDA where
he has spoken at numerous conferences on subjects relating to the vacation
ownership industry. Mr. McPhee currently represents the Company as an ARDA
Committee member. Mr. McPhee has been in the resort development business since
1976.
SEASONALITY
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its gross revenues and net income from the
sale of VOIs, which have been generally higher in the December through March
period. This seasonality may cause significant variations in quarterly operating
results.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 935
full-time employees. In addition, the Company has agreements with approximately
275 independent real estate agents, which grant them the right to sell VOIs in
the Company's resort properties. The Company has no union contracts and believes
that its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
EXECUTIVE AND MARKETING OFFICES
The Company's executive offices are located in Fort Lauderdale,
Florida, where the Company leases approximately 60,000 square feet of office
space. These leases expire in 2001. The Company also leases approximately 21,000
square feet of office space in Johnson City, Tennessee where it conducts
marketing operations. The lease for this facility expires in April 2001 and
contains a 5 year renewal option and a purchase option which may be exercised in
the sole discretion of the Company. The Company believes that all of its office
space is adequate to meet its needs for the foreseeable future and that, if
necessary, it can obtain additional space at a commercially reasonable cost
without undue operational disruption. See Item 1 - "Business -- VOI Resort
Properties" for a description of the Company's resort properties.
ITEM 3. LEGAL PROCEEDINGS.
On June 2, 1994, Global Marketing & Travel, Inc., d/b/a Vacation Break
of Florida ('Global Marketing'), commenced an action against the Company in the
Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida
alleging breach of an oral agreement and seeking the payment of certain
allegedly owed reserve commissions in the approximate amount of $2.3 million.
The complaint alleges that from approximately January 1, 1988 to December 31,
1992, Global Marketing, an independent sales firm, performed marketing services
for the Company pursuant to an alleged oral agreement. Pursuant to the terms of
this alleged agreement, Global Marketing was to receive a commission for each
sale of a Company vacation package, which commission was based on the price of
such package, less various charges and deductions. The complaint further alleges
that included as a deduction from the commission was a reserve fee, which was
used to cover chargebacks for travel package cancellations or refund requests.
Global Marketing asserts that pursuant to this alleged oral agreement, such
reserve fee was to be returned to Global Marketing after a reasonable amount of
months and that to date, approximately $2.3 million of reserve fees are still
held by the Company. The Company believes that it has adequate defenses to this
action and is defending this action fully and vigorously.
The Attorneys General of Connecticut, Illinois, Massachusetts, New
Mexico, New York, North Carolina, Texas, Vermont, Washington, West Virginia and
Wisconsin (collectively, the "Multi-State Group") have been engaged in a
multi-state investigation of the Company's marketing and sales practices. To
date, the Company has been unable to reach settlements with respect to the
matters under investigation. The Attorneys General of Washington and Illinois
commenced actions in March 1997. The Company believes that other states in the
Multi-State Group may be currently contemplating similar actions.
In addition, the Attorneys General of Maryland, Idaho and Michigan have
commenced
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actions against the Company and the District Attorneys for the counties of Napa
and Ventura California have commenced a separate joint action against the
Company. Each such action involved allegations similar to the actions brought
or contemplated by the Multi-State Group.
With respect to the above referenced actions or contemplated actions,
the Company is alleged to have violated certain state laws in connection with
certain of its marketing and sales practices. These actions generally seek
injunctive relief, damages, civil penalties and related fees and costs
incidental thereto. The Company believes that it has meritorious defenses to all
such claims and that it has attempted to comply in all material respects with
applicable laws and regulations. The Company will vigorously defend these
actions at the same time that it seeks settlement of each of the above described
actions. The Company does not anticipate that its legal and settlement costs
will have a material impact on the business and financial condition of the
Company.
On March 28, 1997, the Company was served with a lawsuit filed in the
Circuit Court for Pinellas County, Florida by Market Response Group and Laser
Company, Inc. (MRG&L) the plaintiff, against the Company and Kevin M. Sheehan,
its President. MRG&L was a former vendor to Vacation Break with respect to
direct mail marketing. The complaint alleges that the defendants, in concert
with other companies, conspired to boycott MRG&L and to fix prices for mailings
in violation of the Florida Antitrust Act, and in concert with others, engaged
in various acts of unfair competition, deceptive trade practices and common law
conspiracy. The complaint also alleges that the defendants breached various
provisions of a Sales and Marketing Agreement with plaintiff and interfered with
and caused other companies to breach Sales and Marketing Agreements with MRG&L
and that the defendants misappropriated proprietary information. The complaint
also demands that the Company indemnify plaintiff for costs incurred by MRG&L to
defend a 1996 Federal Trade Commission action. MRG&L claims to have suffered
substantial damages. The actual aggregate amount of damages claimed is not
calculable but appears to exceed $50 million. The Company believes it has
meritorious defenses to each and every claim, intends to defend each and every
claim vigorously, and will file counterclaims if appropriate.
The Company is currently a defendant in certain litigation arising in
the ordinary course of business. However, except as described above, there is no
other material pending or threatened litigation involving the Company or any of
its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's' security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on the NASDAQ National
Market ("NASDAQ NMS") under the symbol "VBRK" on December 22, 1995. The
following table sets forth, for the period indicated, the high and low sales
prices for the Common Stock as reported on the NASDAQ NMS:
1995 HIGH LOW
---- ---- ---
Fourth quarter $ 5.375 $ 5.00
1996 HIGH LOW
---- ---- ---
First quarter $ 8.875 $ 5.25
Second quarter $ 13.25 $ 6.50
Third quarter $ 13.50 $ 9.25
Fourth quarter $ 20.00 $ 6.00
As of March 21, 1997, there were 32 holders of record of Common Stock
of the Company. The Company believes that there are over 400 beneficial holders
of its Common Stock.
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Vacation ownership interests $ -- $ 20,583 $ 27,644 $ 40,291 $ 80,020
Resort operations and other 1,671 4,203 7,602 9,086 12,343
Interest earned on mortgages receivable -- 871 2,508 4,704 8,657
Commissions earned on marketing agreements 14,385 12,629 8,839 4,503 1,721
-------- -------- -------- -------- --------
Total revenues 16,056 38,286 46,593 58,584 102,741
Cost of units sold - VOIs -- 5,729 6,076 9,500 22,135
Sales and marketing costs - VOI's -- 5,070 5,412 12,455 34,683
Total costs and operating expenses 15,322 28,073 35,056 49,539 90,909
Operating income 734 10,213 11,537 9,045 11,832
Net income 666 10,423 12,283 6,053 7,240
Pro forma net income (1) 199 5,676 7,765 5,845
Pro forma net income per share (1) $ 0.03 $ 0.87 $ 1.19 $ 0.90
Net income per share
Primary $ 0.82
Fully diluted $ 0.80
Pro forma weighted average number of common
shares outstanding 6,500 6,500 6,500 6,525
Weighted average number of common shares
outstanding -
Primary 8,843
Fully diluted 9,092
BALANCE SHEET DATA:
Total assets $ 21,173 $ 32,146 $ 55,886 $107,092 $138,421
Total liabilities $ 25,301 $ 31,097 $ 44,231 $ 87,833 $110,595
Stockholders' equity $ (4,128) $ 1,049 $ 11,655 $ 19,259 $ 27,826
</TABLE>
(1) Effective November 1, 1995, the Company terminated all S Corporation
elections. The effect of these conversions to C Corporations was the recognition
of a deferred tax provision of $3,090,000 in the quarter ended December 31, 1995
in the historical financial statements. Pro forma net income reflects the effect
on historical statement of operations data, assuming the companies had been
treated as C Corporations rather than as S Corporations for income tax purposes,
and assuming that combined federal and state effective income tax rates
aggregate 38.6% for 1993, 1994 and 1995 and 37.7% for 1992.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, including the notes thereto,
contained elsewhere herein.
INTRODUCTION
Vacation package revenues less vacation package costs have been
included as Vacation ownership interests - sales and marketing costs section in
the statement of operations for the year ended December 31, 1996. Previous
years' amounts have been reclassified to reflect this change in reporting which
more closely correlates the reporting methods of other companies in the VOI
industry.
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 new source of revenues and earnings including sales
of vacation ownership interests and interest earned on mortgages receivable. The
Company generates additional revenues from resort operations, which include room
rental operations and ancillary resort operations such as food and beverage
sales and from management fees.
Generally, VOIs are sold under binding sales contracts executed by the
Company and the purchaser requiring a 10% down payment and monthly installments
for periods of up to 7 years. VOI revenue is 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 stage of development of certain
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. Costs associated with the acquisition
and development of vacation ownership resorts, including carrying costs such as
interest, are generally capitalized and subsequently recorded as a cost of sales
as the related revenues are recognized.
17
<PAGE>
The following table sets forth certain consolidated operating
information for the entities comprising the Company for the three years ended
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES
Sales of vacation ownership interests 77.9 68.8 59.3
Resort operations and other 12.0 15.5 16.3
Interest earned on mortgages receivable 8.4 8.0 5.4
Commissions earned on marketing agreements 1.7 7.7 19.0
----- ------- -------
Total revenues 100.0 100.0 100.0
===== ===== =====
AS A PERCENTAGE OF VACATION OWNERSHIP INTEREST SALES
Vacation ownership interests costs of units sold 27.7 23.6 22.0
Sales and marketing 43.3 30.9 19.6
Provision for doubtful accounts 3.0 3.8 2.5
AS A PERCENTAGE OF REVENUES FROM RESORT OPERATIONS
AND OTHER
Resort operations and other 102.4 103.4 101.6
AS A PERCENTAGE OF INTEREST EARNED ON MORTGAGES RECEIVABLE
Interest expense on financed mortgages receivable 29.5 23.6 33.6
AS A PERCENTAGE OF COMMISSIONS EARNED ON
MARKETING AGREEMENTS
Commission and related expenses on marketing
agreements 106.7 74.5 52.3
AS A PERCENTAGE OF TOTAL REVENUES
General and administrative 11.3 16.6 18.4
Depreciation and amortization 1.8 2.9 1.9
Interest expense - other 1.2 1.3 .5
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's total revenues for 1996 were $102.7 million, an increase
of $44.1 million or 75.3% from revenues of $58.6 million for 1995. The Company
sold 6,203 VOIs at Company owned properties in the year ended December 31, 1996,
compared to 4,442 VOI units in 1995. This represents an increase in sales of
Company owned VOIs of 39.6% in 1996 over 1995. This increase reflects the
acquisition and development by the Company of additional resort properties in
1995 and 1996 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 $80.0 million in 1996, of which $2.8 million was
recognized from the net decrease in deferred revenues - VOIs from $9.2 million
recorded on the percentage of completion method on the Company's balance sheet
at December 31, 1995 to $6.4 million of VOI sales recorded as deferred revenue -
VOIs at December 31, 1996. The Company derived revenues of $49.5 million from
the sales of VOIs in completed units in 1995, of which $40.3 million from the
sales of VOIs in completed units was recorded as earned revenue and $9.2 million
from the sales of VOIs in pre-construction units was recorded as deferred
revenue - VOIs on the Company's balance sheet at December 31, 1995.
18
<PAGE>
Costs of units sold as a percentage of VOI sales increased from 23.6%
in 1995 to 27.7% in 1996 reflecting a larger percentage of VOIs sold in 1996
compared to 1995 from the Orlando project on which the unit-week cost is fixed
at 35% of the related VOI sales price, resulting in a higher cost per unit than
at other projects while providing less volatility in construction and financing
costs.
Vacation package revenues less vacation package costs have been
included as Vacation ownership interest - sales and marketing costs section in
the statement of operations for the year ended December 31, 1996. Previous
years' amounts have been reclassified to reflect this change in reporting which
more closely correlates with the reporting methods of other companies in the VOI
industry. These costs, which include VOI sales commissions, lead generation
marketing and vacation fulfillment costs and the administrative costs of
processing VOI sales contracts, increased to $ 34.7 million or 43.3% of related
VOI revenues in 1996 from $12.4 million or 30.9% of related VOI revenues in 1995
reflecting the Company's increased emphasis on diversification of lead
generation programs to include the fulfillment of third party certificate
programs, mini-vacations, referral and in-house sales programs as well as 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 costs of sales commissions and administrative costs have
remained constant, as a percentage of recognized sales volume, in 1996 compared
to 1995. The lead generation marketing and fulfillment costs (net of revenues
recognized from the sale of the Company's vacation packages) have increased.
This increase relates to numerous factors, including the Company's decision to
increase the quality of the vacation package in order to provide a vacation with
a more positive experience that will produce increased VOI sales, decreasing
response rates to certain direct mail programs and, 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. This 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 rectified these problems
during the fourth quarter of 1996.
The Company's revenues from resort and other operations increased to
$12.3 million in 1996 from $9.1 million in 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 and the commencement of operations at the PALM AIRE RESORT
& SPA and the SANTA BARBARA RESORT. Cost of resort operations increased to $12.6
million in 1996 from $9.4 million in 1995. Such costs as a percentage of
revenues from resort and other operations decreased to 102.4% in 1996 from
103.4% in 1995. This decrease in costs was primarily the result of the Company's
increased rental operations as well improved operating efficiency at the PORT
LUCAYA RESORT AND YACHT CLUB.
At December 31, 1996 and 1995, the Company's weighted average interest
rate on its entire loan portfolio was 16.3% and 16.4%, respectively, compared to
a weighted average interest rate on borrowings against loans hypothecated by the
Company to unaffiliated lenders of 10.4% and 11.7%, respectively. As a result of
the continued increase in sales of VOIs and the proportionate increase of VOIs
sold in Company-owned properties from 1993 through December 31, 1996, the
Company's interest income from financing activities increased to $8.7 million
for the year ended December 31, 1996 from $4.7 million for the year ended
December 31, 1995. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by the Company to unaffiliated
lenders of $2.6 million during 1996 compared to $1.1 million during 1995.
The Company's continued development of 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 $1.7 million in 1996, a decrease of $2.8
million or 62.2% from 1995. Furthermore, commissions as a percentage of revenues
decreased to 1.7% in 1996 from 7.7% in 1995. Commissions and related expenses
under marketing agreements decreased to $1.8 million in 1996 from $3.4 million
in 1995. Such expenses as a percentage of revenues from commissions increased to
106.7% in 1996 from 74.5% in 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. During the year, the Company
terminated its sales and marketing arrangement with a developer in the Bahamas
and curtailed selling VOIs in the Bahamas.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead including costs related to the Company's
expansion of its information systems area, as well as executive compensation,
increased to $11.6 million in 1996 compared to $9.7 million in 1995, and
amounted to approximately 11.2% of the Company's total revenues during 1996 as
compared to 16.6% in 1995.
19
<PAGE>
The provision for doubtful accounts increased to $2.4 million for the
year ended December 31, 1996 from $1.5 million for the year ended December 31,
1995. This represents 3.0% of VOI sales revenues in 1996 compared to 3.8% in
1995. The Company annually monitors its provision for doubtful accounts to
provide for future losses associated with any defaults on customer mortgages
receivable. This increase was primarily due to the increased provision against
mortgages receivable resulting from the increased mortgage receivable portfolio
balance.
Depreciation and amortization expense increased 5.9% to $1.8 million
for the year ended December 31, 1996 from $1.7 million for the year ended
December 31, 1995, primarily due to increased purchases of computer hardware,
software and other equipment.
As a result of the foregoing, the Company's net income was $7.2 million
for the year ended December 31, 1996, an increase of $1.1 million or 18.0% from
the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's total revenues for 1995 were $58.6 million, an increase
of $12.0 million or 25.8% from revenues of $46.6 million for 1994. The Company
sold 4,442 VOIs in the year ended December 31, 1995, compared to 2,396 VOIs in
1994. This represents an increase in sales of Company owned VOIs of 63.1%
(exclusive of preconstruction sales) in 1995 over 1994 and represents 68.8% of
total revenues in 1995 (exclusive of deferred revenues from sales in
pre-construction units) and 59.3 % of total revenues in 1994. This increase
reflects the acquisition and development by the Company of additional resort
properties in 1994 and 1995 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 $49.5 million in 1995, of which $40.3 million
from the sales of VOIs in completed units was recorded as earned revenue and
$9.2 million from the sales of VOIs in pre-construction units was recorded as
deferred revenue -VOIs on the Company's balance sheet. The Company derived
revenues of $27.6 million from the sales of VOIs in completed units in 1994.
Cost of units sold as a percentage of VOI sales increased slightly from
22.0% in 1994 to 23.6% in 1995 reflecting the commencement of sales in three new
developments, commencement of sales in a new purpose built phase of the SEA
GARDENS RESORT and the higher product costs associated with the Orlando (Star
Island) project.
Vacation package revenues less vacation package costs have been
included as Vacation ownership interest - sales and marketing costs section in
the statement of operations for the year ended December 31, 1995. Previous
years' amounts have been reclassified to reflect this change in reporting which
more closely correlates with the reporting methods of other companies in the VOI
industry. These costs, which include VOI sales commissions, lead generation
marketing and vacation fulfillment costs and the administrative costs of
processing VOI sales contracts, increased to $ 12.4 million or 30.9% of related
VOI revenues in 1995 from $5.4 million or 19.6% of related VOI revenues in 1994
reflecting the Company's initiation of emphasis on diversification of lead
generation programs to include the fulfillment of third party certificate
programs, mini-vacations, referral and in-house sales programs as well as 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 costs of sales commissions and administrative costs have
remained constant, as a percentage of recognized sales volume, in 1995 compared
to 1994. The lead generation marketing and fulfillment costs (net of revenues
recognized from the sale of the Company's vacation packages) have increased.
This increase relates to numerous factors, including the Company's decision to
increase the quality of the vacation package in order to provide a vacation with
a more positive experience that will produce increased VOI sales and a
decreasing response rates to certain direct mail programs.
The Company's revenues from resort and other operations increased to
$9.1 million in 1995 from $7.6 million in 1994, primarily as a result of an
increase in the occupancy rate and food and beverage sales at the PORT LUCAYA
RESORT AND YACHT CLUB and the commencement of operations at the PALM AIRE RESORT
& SPA. Cost of resort operations increased to $9.4 million in 1995 from $7.7
million in 1994. Such costs as a percentage of revenues from resort and other
operations increased to 103.4% in 1995 from 101.6% in 1994. This increase in
costs was primarily the result of the Company's commencement of operations at
the PALM AIRE RESORT AND SPA.
20
<PAGE>
At December 31, 1995 and 1994, the Company's weighted average interest
rate on its entire loan portfolio was 16.4% and 16.0%, respectively, compared to
a weighted average interest rate on borrowings against loans hypothecated by the
Company to unaffiliated lenders of 11.7% and 10.8%, respectively. As a result of
the continued increase in sales of VOIs and the proportionate increase of VOIs
sold in Company-owned properties from 1993 through December 31, 1995, the
Company's interest income from financing activities increased to $4.7 million
for the year ended December 31, 1995 from $2.5 million for the year ended
December 31, 1994. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by the Company to unaffiliated
lenders of $1.1 million during 1995 compared to $843,000 during 1994.
The Company's continued development of 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 $4.5 million in 1995, a decrease of $4.3
million or 49.1% from 1994. Furthermore, commissions as a percentage of revenues
decreased to 7.7% in 1995 from 19.0% in 1994. Commissions and related expenses
under marketing agreements decreased to $3.4 million in 1995 from $4.6 million
in 1994. Such expenses as a percentage of revenues from commissions increased to
74.5% in 1995 from 52.3% in 1994 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.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead including costs related to the Company's
expansion of its information systems area, as well as executive compensation,
increased to $9.7 million in 1995 compared to $8.6 million 1994, and amounted to
approximately 16.6% of the Company's total revenues during 1995.
The provision for doubtful accounts increased to $1.5 million for the
year ended December 31, 1995 from $679,000 for the year ended December 31, 1994.
This increase was due to the increased provision against mortgages receivable
resulting from the increased mortgage balance. The Company also provided
additional reserves at December 31, 1995 against commissions receivable under
marketing agreements.
Depreciation and amortization expense increased 87.8% to $1.7 million
for the year ended December 31, 1995 from $905,000 for the year ended December
31, 1994, primarily due to increased purchases of computer hardware, software
and other equipment.
In connection with the Company's IPO, the Company terminated the S
Corporation tax status elections for all of the affiliated companies reporting
under this tax provision effective November 1, 1995. Net income includes a one
time non-recurring charge to earnings in the amount of $3.1 million in 1995
associated with the tax effect of the conversion of these companies from S
Corporation tax status to C Corporation tax status.
As a result of the foregoing, the Company's net income was $6.1 million
for the year ended December 31, 1995 after a non-recurring charge of $3.1
million associated with the conversion of S Corporations to C Corporation
status, a decrease of $6.2 million or 50.7% from the year ended December 31,
1994.
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 $77.5 million of available financing
(of which $42.4 million was outstanding as of December 31, 1996) to the Company
bearing interest at variable rates tied to the "prime" rate plus 2.00% to 2.50%
or a rate ranging between 425 and 475 basis points over LIBOR. Included in this
availability is up to $17.5 million of pre-sale financing (financing of sales of
units under construction which have not been deeded), of which none was
outstanding at December 31, 1996. 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
21
<PAGE>
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 $77.5 million, $17.5 million of such financing are revolving
loans with expired availability that the Company is in the process of extending
thru December 31, 1997; $30.0 million of such financing is a revolving loan with
scheduled availability until December 1997;$15.0 million of such financing is a
revolving loan with scheduled availability until August 1997 and $15.0 million
of such financing is a revolving loan scheduled to terminate March 1998. After
the respective 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 the third quarter of 1997.
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 December 31, 1996, the Company had a portfolio of 10,911
loans to VOI purchasers, which loans had a weighted average maturity of
approximately 5.3 years, and a weighted average interest rate of 16.3%, compared
to a weighted average interest rate of 10.4% 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. The Company
presently has no commitments to make capital expenditures other than (i) $13.0
million construction facility from SunTrust and Finova Capital Corporation to
finance the construction of the ten story, 84 unit Ocean Palms addition to the
SEA GARDENS RESORT and (ii) $12.7 million construction facility from Bank
Atlantic to finance the construction of the 99 unit renovation and new
construction to ROYAL VISTA RESORT (formerly known as OCEAN RANCH) and (iii) an
unconditional $8.8 million obligation to purchase units at STAR ISLAND, complete
construction of such units and guarantee a maximum of $6.5 million of
construction debt.
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 years ended December 31, 1996 and 1995, the Company derived interest
income of $8.7 million and $4.7 million, respectively, from the financing of
purchaser notes receivable and incurred interest expense of $2.6 million and
$1.1 million, 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 years ended December 31, 1996 and 1995, the Company's
operating activities used approximately $32.7 million and $4.3 million,
respectively, in cash and cash equivalents and its investing activities provided
approximately $2.5 million and used approximately $10.7 million, respectively,
in cash. During these periods $28.0 million and $22.9 million, respectively, was
provided through the Company's financing activities, resulting in a net decrease
in cash and cash equivalents of $2.2 million in 1996 and a net increase in cash
and cash equivalents of $7.9 million during 1995.
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 1997, 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
22
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Accountants F-27
Schedule II - Valuation and Qualifying Accounts F-28
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Vacation Break U.S.A., Inc., and Subsidiaries
We have audited the accompanying consolidated balance sheets of Vacation Break
U.S.A., Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statements presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vacation Break U.S.A., Inc. and Subsidiaries as of December 31, 1996 and 1995
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
March 14, 1997, except for Note 24, as to which the date is March 28, 1997.
F-2
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 6,307,928 $ 8,499,386
Certificates of deposit 124,235 747,817
Restricted cash 1,647,236 4,090,766
Cash in escrow from vacation ownership interests sales 8,055,543 10,580,907
Mortgages receivable on vacation ownership interests sales - net 73,028,510 45,423,680
Receivables - net 3,757,385 3,381,460
Note receivable 1,993,883 --
Vacation ownership interests held for sale and real estate and
development costs 25,310,450 18,302,622
Prepaid expenses and other assets 5,919,983 4,521,714
Investment in unconsolidated affiliates 1,946,917 1,584,417
Due from unconsolidated affiliates 54,369 84,050
Income tax receivable 58,238 8,238
Property and equipment - net 10,274,870 9,866,702
------------ ------------
TOTAL ASSETS $138,479,547 $107,091,759
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Accounts payable and accrued liabilities $ 13,210,543 $ 10,240,733
Due to unconsolidated affiliates 5,578 522,607
Notes and mortgages payable 53,302,723 28,900,694
Note payable to unconsolidated affiliate 532,778 560,000
Capital lease obligations 1,349,426 1,320,695
Deferred income taxes 6,207,527 2,498,088
Advance deposits 2,948,884 4,369,244
Deferred revenues - vacation packages 16,588,264 20,534,417
Deferred revenues - vacation ownership interests 6,407,050 9,233,181
Due to affiliate of joint ventures 7,517,719 6,227,875
Tax distribution payable to majority stockholder -- 3,388,205
Minority interest in joint ventures 2,582,436 37,222
------------ ------------
Total Liabilities 110,652,928 87,832,961
------------ ------------
Commitments and contingencies (Notes 12, 13, 15 and 22)
Stockholders' Equity:
Preferred stock ($ .01 par value; 25,000,000 shares authorized;
no shares issued and outstanding at December 31, 1996 and 1995)
Common stock ($ .01 par value; 25,000,000 shares authorized;
8,593,725 and 8,300,000 shares issued and outstanding at
December 31, 1996 and 1995, respectively ) 85,937 83,000
Additional paid in capital 13,414,457 12,089,288
Retained earnings 14,326,225 7,086,510
------------ ------------
Total Stockholders' Equity 27,826,619 19,258,798
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $138,479,547 $107,091,759
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Vacation ownership interests $ 80,020,405 $ 40,290,672 $ 27,644,415
Resort operations and other 12,342,683 9,085,790 7,601,805
Interest earned on mortgages receivable 8,657,255 4,704,111 2,507,822
Commissions earned on marketing agreements (1) 1,720,841 4,502,905 8,839,229
------------- ------------- -------------
102,741,184 58,583,478 46,593,271
------------- ------------- -------------
Costs and operating expenses:
Vacation ownership interests - cost of units sold 22,135,634 9,500,289 6,076,497
Vacation ownership interests - sales & marketing costs 34,682,902 12,445,671 5,412,522
Resort operations and other 12,636,161 9,398,743 7,722,634
Interest expense on financed mortgages receivable 2,550,656 1,108,741 843,083
Commissions and related expenses on marketing agreements 1,835,501 3,353,682 4,623,456
Interest expense - other 1,220,627 770,992 237,636
General and administrative 11,591,523 9,712,220 8,556,066
Provision for doubtful accounts 2,436,748 1,525,214 679,205
Depreciation and amortization 1,819,564 1,722,502 904,611
------------- ------------- -------------
90,909,316 49,538,054 35,055,710
------------- ------------- -------------
Income from operations before income taxes,
minority interest and equity in earnings of unconsolidated affiliates 11,831,868 9,045,424 11,537,561
Minority interest in earnings of joint ventures (1,045,214) (37,222) --
Equity in earnings of unconsolidated affiliates 162,500 161,851 149,698
------------- ------------- -------------
Income before income taxes 10,949,154 9,170,053 11,687,259
Income tax (expense) benefit (3,709,439) (26,709) 595,480
Non-recurring charge associated with the conversion of
S Corporations to C Corporation tax status -- (3,090,000) --
------------- ------------- -------------
Net income $ 7,239,715 $ 6,053,344 $ 12,282,739
============= ============= =============
Net income per share:
Primary $ 0.82
=============
Assuming full dilution $ 0.80
=============
Average number of common and common equivalent
shares outstanding:
Primary 8,843,247
=============
Assuming full dilution 9,091,851
=============
Pro forma income data (unaudited):
Income before income tax provision, as reported $ 9,170,053 $ 11,687,259
Pro forma income tax provision 3,324,598 3,922,745
------------- -------------
Pro forma net income $ 5,845,455 $ 7,764,514
============= =============
Pro forma net income per share $ 0.90 $ 1.19
============= =============
Pro forma common and common equivalent shares outstanding 6,524,658 6,500,000
============= =============
</TABLE>
(1) Commissions earned on marketing agreements with related parties were
$74,000, $1,509,000 and $2,200,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
See accompanying notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - December 31,1993 5,100 $ 5,100 $ 5,127,489 $(4,083,444) $ 1,049,145
Issuance of common stock:
Vacation Break Resorts, Inc. 500 500 -- -- 500
Vacation Break Construction, Inc. 500 500 -- -- 500
Stockholder contribution -- -- 55,925 -- 55,925
Stockholder distributions -- -- -- (1,733,898) (1,733,898)
Net income -- -- -- 12,282,739 12,282,739
--------- ------- ----------- ----------- -----------
Balance - December 31, 1994 6,100 6,100 5,183,414 6,465,397 11,654,911
Issuance of common stock:
Resorts Title, Inc. 500 500 -- -- 500
Vacation Break Resorts at Palm-Aire, Inc. 500 500 -- -- 500
Vacation Break Resorts at Star Island, Inc. 500 500 -- -- 500
Vacation Break Welcome Centers, Inc. 500 500 -- -- 500
Proceed from initial public offering - net 1,800,000 18,000 6,962,774 -- 6,980,774
Effect of 65,000 to 1 stock split 6,499,900 64,900 (64,900) -- --
Exchange of common stock in connection with mergers (8,000) (8,000) 8,000 -- --
Stockholder distributions -- -- -- (5,432,231) (5,432,231)
Net income -- -- -- 6,053,344 6,053,344
--------- ------- ----------- ----------- -----------
Balance - December 31, 1995 8,300,000 83,000 12,089,288 7,086,510 19,258,798
Issuance of common stock:
Exercise of stock options 23,725 237 145,380 145,617
Exercise of underwriters' overallotment - net 270,000 2,700 1,179,789 -- 1,182,489
Net income -- -- -- 7,239,715 7,239,715
--------- ------- ----------- ----------- -----------
Balance - December 31, 1996 8,593,725 $85,937 $13,414,457 $14,326,225 $27,826,619
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,239,715 $ 6,053,344 $ 12,282,739
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for doubtful accounts 2,436,748 1,525,214 679,205
Depreciation and amortization 1,819,564 1,722,502 904,611
Equity in earnings of unconsolidated affiliates (162,500) (161,851) (149,698)
Provision for deferred taxes 3,709,439 3,124,987 (549,065)
Minority interest in earnings of joint ventures 1,045,214 37,222 --
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests sales (29,891,578) (24,421,233) (12,209,629)
Receivables (525,925) (1,265,021) (529,309)
Note receivable (1,993,883) -- --
Income tax receivable (50,000) 588,173 (354,782)
Vacation ownership interests held for sale and
real estate and development costs (5,897,334) (7,667,072) (4,271,719)
Prepaid expenses and other assets (1,398,269) (3,276,664) (471,318)
Due to/from unconsolidated affiliates - net (487,348) (113,653) 602,210
Accounts payable and accrued liabilities 2,969,810 3,665,191 2,128,655
Income tax payable -- -- (173,683)
Tax distributions to majority stockholder (3,388,205) -- --
Deferred revenues - vacation ownership interests (2,826,131) 9,233,181 --
Deferred revenues - vacation packages (3,946,153) 6,250,324 363,440
Advance deposits (1,420,360) 412,888 870,586
------------ ------------ ------------
Net cash used in operating activities (32,767,196) (4,292,468) (877,757)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,880,954) (3,540,801) (2,548,194)
Additions to restricted cash (3,682,716) (7,117,723) (4,713,629)
Releases of restricted cash 6,126,246 6,155,984 3,499,424
Decrease (Increase) in cash in escrow from
vacation ownership interests sales - net 2,525,364 (6,878,841) (2,072,785)
Purchases of certificates of deposit (121,293) (602,817) (1,237,895)
Maturities of certificates of deposit 744,875 1,323,402 595,660
Investment in unconsolidated affiliates (200,000) -- (91,214)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,511,522 (10,660,796) (6,568,633)
------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 63,013,765 20,456,101 13,820,261
Repayments of notes and mortgages payable (38,611,736) (8,308,722) (5,432,336)
Borrowings from affiliate of joint ventures 1,289,844 6,227,875 --
Repayment of note payable to unconsolidated affiliate (27,222) (125,000) (125,000)
Payments on capital lease obligations (428,541) (353,258) (283,219)
Equity investment from joint venture partner 1,500,000 -- --
Stockholder contributions -- -- 55,925
Stockholder distributions -- (2,044,026) (1,733,898)
Proceeds from initial public offering - net -- 6,980,774 --
Proceeds from issuance of common stock 1,328,106 2,000 1,000
------------ ------------ ------------
Net cash provided by financing activities 28,064,216 22,835,744 6,302,733
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,191,458) 7,882,480 (1,143,657)
Cash and cash equivalents at beginning of year 8,499,386 616,906 1,760,563
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,307,928 $ 8,499,386 $ 616,906
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Vacation Break U.S.A., Inc. and consolidated subsidiaries (the
"Company") is engaged in the sale of vacation packages, hotel
operations and the renovation, construction, sale and financing of
resort vacation ownership interests (VOIs). At December 31, 1996, the
entities comprising the consolidated Company are as follows:
Vacation Break U.S.A., Inc.
Atlantic Marketing Realty, Inc.
Sea Gardens Beach and Tennis Resort, Inc.
Vacation Break International Limited
Vacation Break Marketing Company Limited
Vacation Break Management, Inc.
Resort Yachts of America, Inc.
Serenity Yacht Club, Inc.
Vacation Break Construction, Inc.
Vacation Break Resorts, Inc.
Resorts Title, Inc.
Vacation Break Welcome Centers, Inc.
Vacation Break Resorts at Palm Aire, Inc.
Vacation Break Resorts at Ocean Ranch, Inc.
Vacation Break Resorts at Star Island, Inc.
Palm Vacation Group (a Florida general
partnership)
Ocean Ranch Vacation Group (a Florida
general partnership)
Vacation Break Marketing Consultants, Inc.
For the year ended December 31, 1995, Vacation Break Resorts
at Ocean Ranch, Inc., Ocean Ranch Vacation Group and Vacation Break
Marketing Consultants, Inc. had not been formed and, accordingly, did
not form part of the consolidated 1995 financial statements. For the
year ended December 31, 1994, Vacation Break Resorts at Star Island,
Inc., Vacation Break Resorts at Palm Aire, Inc., Vacation Break Resorts
at Ocean Ranch, Inc., Resorts Title, Inc., Palm Vacation Group and
Vacation Break Welcome Centers, Inc. had not been formed and,
accordingly, did not form part of the consolidated 1994 financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and the companies listed in Note 1, which are wholly-owned
or majority-owned by the Company. All significant intercompany
transactions and balances have been eliminated from these consolidated
financial statements. The 1994 financial statements reflect the
accounts of the Company as if consolidation had occurred prior to this
date.
CASH AND CASH EQUIVALENTS
All highly liquid cash investments with a maturity of three
months or less from the date of purchase are considered cash
equivalents.
F-7
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTIFICATES OF DEPOSIT
Certificates of deposit have original maturities in excess
of three months but not exceeding one year at the time of purchase. The
carrying amounts approximate market value due to their short
maturities.
REVENUE RECOGNITION
VACATION OWNERSHIP INTERESTS:
VOI's consist of specified fixed week interval ownership in
fully furnished units. Generally, VOI's are sold under contracts for
deed requiring a 10 % down payment and monthly installments for periods
of up to 7 years. VOI revenue is recognized when a 10 % down payment
has been received and a 10 day rescission period has expired. During
the 10 day rescission period, a customer may cancel for any reason and
have the down payment refunded. Revenue relating to sales of VOI's 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. Sales commissions and direct marketing costs
relating to VOI's accounted for under the percentage of completion
method are deferred until the associated revenues are recognized.
As part of the Company's strategy associated with the
marketing of VOIs, vacation package certificates are sold on a
non-refundable basis. The customer has up to eighteen months to
exercise the certificate, at which time the certificate expires, if not
extended for an additional twelve months generally upon payment of a
nominal fee. All revenues, and direct costs incurred relating to the
sale of vacation package certificates, are deferred until either the
vacation is taken or the eighteen month period has expired and the
Company is no longer contractually obligated to fulfill the vacation.
To the extent that vacation package certificates are extended beyond
the eighteen month period, revenues, including fees received upon
extension and related direct costs, are deferred until either the
vacation is taken or the extended period has expired. Revenues and
related costs from vacation packages are included net in "Vacation
ownership interests - sales & marketing costs".
ADVANCE DEPOSITS:
Customers have the opportunity to purchase upgrades to their
basic vacation package. Upgrades primarily include more luxurious
accommodations and car rentals. Upgrades are paid, generally within 45
days of the scheduled vacations, and are recognized as revenue when the
vacations are taken.
COMMISSIONS ON MARKETING AGREEMENTS:
The Company has entered into marketing agreements with certain
non-affiliated companies and certain non-consolidated affiliated
companies to sell vacation ownership interests on their behalf.
Commissions are recognized as revenue after a 10 day rescission period.
F-8
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company has established allowances for doubtful accounts
for receivables and for mortgages receivable on vacation ownership
interests. The allowance for mortgages receivable is based on industry
and the Company's historical default experience and is net of
anticipated cost recoveries on the underlying vacation ownership
interests. The allowance for receivables is based primarily upon prior
loss experience and the identification of specific accounts deemed
uncollectible. Cancellations of prior years sales are charged against
the provision while cancellation of current years sales are charged
against VOI sales revenues in the period of cancellation.
VACATION OWNERSHIP INTERESTS HELD FOR SALE AND REAL ESTATE AND
DEVELOPMENT COSTS
VOI's held for sale and real estate and development costs
represent the costs of unsold units, recorded at cost which is lower
than estimated net realizable value. Costs include land, land
improvements, construction, including capitalized interest and real
estate taxes, furnishing of the facility and a portion of the costs of
amenities constructed for the use and benefit of the VOI owners. Cost
of VOI units sold is determined using the relative sales value method.
Real estate acquisition costs are allocated to specific projects based
on their relative fair value before development.
PROPERTY AND EQUIPMENT
Property and equipment, which relate primarily to the
Company's hotel, spa and corporate operations and do not relate to
vacation ownership interests, are stated on the basis of cost less
accumulated depreciation and amortization. The Company provides for
depreciation on a straight-line basis over the following estimated
useful lives: building and improvements, 27.5 years; software costs, 5
years; equipment, furniture and fixtures, 5 to 7 years; and yachts, 10
years.
During 1996, management changed the estimates of the useful
lives of computer hardware from 5 to 7 years and software costs from 3
to 5 years. These changes resulted in an increase to income before
income taxes of $415,000, an increase to net income of approximately
$255,000 and an increase to primary and fully diluted earnings per
share of $0.03.
Assets under capital leases are capitalized using an implicit
interest rate appropriate at the inception of each lease and are
amortized over the shorter of the applicable lease term or the useful
life of the asset.
When assets are retired or otherwise disposed of, the costs
and accumulated depreciation are removed from the respective accounts
and any related gain or loss is recognized. Maintenance and repair
costs are charged to expense as incurred, and renewals and improvements
that extend the useful lives of assets are capitalized.
F-9
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-lived assets to be held and used are reviewed for
impairment whenever changes in circumstances indicate that the related
carrying amounts may not be recoverable under the provisions of
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." When required, impairment losses on assets to be held and
used are recognized based on the fair value of the asset. The Company
determined that there was no impairment as of December 31, 1996 and
1995.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company has a 50% interest in the Port Lucaya Resort
Company Limited and a 25% interest in Vacation Marketing Consultants,
Inc., which are accounted for under the equity method.
INCOME TAXES
The Company and its consolidated subsidiaries utilize the
asset and liability method of accounting for deferred income taxes.
Under this method, deferred tax assets and liabilities are established
based on the differences between financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The Company provides a valuation allowance against deferred
tax assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Additionally, certain of the Company's consolidated
subsidiaries include Bahamian corporations which are not currently
subject to income taxation for Bahamian tax purposes or for U.S.
federal and state income tax purposes.
Prior to November, 1995, the Company and its consolidated
subsidiaries were either taxed as regular corporations at the corporate
level or elected to be taxed as S Corporations under provisions of the
Internal Revenue Code. The consolidated subsidiaries which were taxed
as S Corporations prior to November 1995, were not subject to federal
and state income taxes at the corporate level. Instead, the taxable
income of the S Corporations for the period of time prior to November
1995 was included in the individual income tax return of their sole
stockholder. On October 31, 1995, the Company's S Corporation
subsidiaries terminated their S Corporation elections and, accordingly,
became subject to federal and state income taxes.
ADVERTISING AND PROMOTION EXPENSE
Advertising expenses are charged to operations during the year
in which they are incurred. Such expenses relate principally to a
direct mail advertising program. For the years ended December 31, 1996,
1995 and 1994, these costs were approximately $2,067,000 and $3,716,000
and $3,712,000, respectively. Such costs are primarily included in
vacation package costs.
F-10
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of certificates of
deposit, mortgages receivable on VOI sales, note receivable, notes and
mortgages payable and amounts due to affiliate of Palm Vacation Group.
Certificates of deposit have maturity dates of one year or less.
Accordingly, their carrying values approximate their fair values. The
fair values of mortgages receivable on VOI sales, note receivable and
amounts due to affiliate of Palm Vacation Group have been estimated
based on interest rates available for similar credit and debt
instruments and approximate their carrying values. Of the total balance
of notes and mortgages payable, 98% bear interest at variable rates.
Accordingly, their carrying values approximate their fair values. The
remaining notes and mortgages payable bear interest at rates available
for similar instruments.
NEW ACCOUNTING PRONOUNCEMENTS
For the year ended December 31, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation.". This pronouncement
establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees based on
new fair value accounting rules. The Company has chosen to account for
stock-based compensation under provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations, as permitted under SFAS No. 123. Accordingly,
the adoption of this standard did not affect the Company's results of
operation, financial position or liquidity.
SFAS No. 128, "Earnings per Share" must be implemented by the
Company in 1997. This pronouncement specifies the computation,
presentation and disclosure requirements for earnings per share. It
requires presentation of earnings per share for entities that have
issued common stock or potential common stock if those securities trade
in the public market. The Company anticipates adopting SFAS No. 128,
although the impact of such disclosure has not been determined.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have
been reclassified to conform to the 1996 presentation. Vacation package
revenues, less vacation package costs, have been included as vacation
ownership interests-sales & marketing costs in the statement of
operations for the year ended December 31, 1996. This change in
presentation more closely correlates to the presentation method of
other companies in the vacation ownership industry.
NET INCOME PER SHARE
For the year ended December 31, 1996, primary earnings per
share are based on the weighted average number of shares outstanding
and the assumed exercise of dilutive stock options less the number of
treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's common stock. Fully diluted
earnings per share were computed using the higher of the average market
price or the end of the year market price.
For the years ended December 31, 1995 and 1994, primary
earnings per share were computed on net income decreased by pro forma
reductions resulting from a tax provision relating to an S Corporation
to C Corporation status, divided by the weighted average number of
common shares outstanding.
F-11
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Such estimates
consist of the allowances for doubtful accounts on mortgages receivable
on VOI sales and receivables, revenue recognition under the percentage
of completion method on VOI sales, depreciation and amortization of
property and equipment, accrued liabilities and deferred revenues on
vacation packages and VOI's. Actual results could differ from those
estimates.
3. RESTRICTED CASH
All cash received on VOI sales is recorded as restricted cash
pending the execution and recording of the contract.
The Company engages an outside service organization to process
all credit card charges received by the Company. This organization
retains a revolving reserve for charge backs against these credit card
charges.
4. RECEIVABLES - NET
Receivables - net consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Commissions on sales under
marketing agreements $ 606,834 $ 902,343
Vacation package sales 874,681 844,553
Hotel operations 438,624 222,998
Due from Condo Association 650,788 395,870
Interest receivable - VOI mortgages 862,649 465,784
Other 393,700 137,361
Due from officers and employees 160,688 563,513
--------- -------
3,987,964 3,532,422
Less: allowance for doubtful accounts (230,579) (150,962)
----------- --------
$ 3,757,385 $ 3,381,460
========= =========
</TABLE>
The Company generates commissions on sales under marketing
agreements through the sale of vacation ownership interests at a
non-related company and at Coconut Bay Resort Properties, Inc. and
Intracoastal Resorts, Inc., which are non-consolidated companies in
which the majority stockholder has an interest (Note 18). Receivables
relating to Coconut Bay Resort Properties, Inc. and Intracoastal
Resorts, Inc. are recorded separately on the balance sheet under the
caption, "Due from unconsolidated affiliates". Commissions receivable
are paid over a three to four year period by the above companies as the
purchasers of the vacation ownership interests pay down their mortgage
notes.
Receivables for vacation package sales represent credit card
sales being processed and amounts due from an independent marketing
company. Credit card receivables are generally remitted to the Company
within 3 days from the date of sale and are subject to a reserve (Note
3).
F-12
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RECEIVABLES - NET (CONTINUED)
Activity in the allowance for doubtful accounts, which relates
primarily to commissions under marketing agreements, was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance - Beginning of year $ 150,692 $ 320,691 $ 496,757
Provision 150,000 223,811 80,430
Receivables charged off (70,113) (393,810) (256,496)
------- -------- --------
Balance - End of year $ 230,579 $ 150,692 $ 320,691
======= ======= =======
</TABLE>
5. NOTE RECEIVABLE
During December 1996, the Company sold certain exclusive
marketing agreements with a number of independent telemarketing
operators (ITO's) to an outside travel group for $200,000 in cash and
an 8% promissory note due December 31, 1998 in the amount of
$2,300,000. As additional consideration, the Company assigned
receivables from the ITO's of approximately $2 million to the travel
group. The note will be paid through deductions of sales commissions
due to the travel group resulting from VOI sales generated through
leads from the travel group, with any remaining balance due December
31, 1998.
6. MORTGAGES RECEIVABLE ON VACATION OWNERSHIP INTERESTS
The Company provides financing to the purchasers of its VOI's
which is collateralized by their interest in such VOI's. These
mortgages receivable are generally payable over a period of one to
seven years, bearing interest at rates ranging from 8% to 18% and
requiring equal monthly installments of principal and interest. The
Company also offers non-interest bearing mortgages to purchasers who
pay at least 50% of the purchase price at the time of sale or within
thirty days from the date of sale and who repay the balance within one
year.
The Company has entered into agreements with certain financial
institutions for the financing of mortgages receivable at weighted
average interest rates of 10.4% and 11.7% as of December 31, 1996 and
1995, respectively. These agreements provide for advances on a recourse
basis for 75 % to 85 % of the face value of the mortgages receivable.
The principal and interest payments made by the mortgagees on any
mortgages financed with these financial institutions are remitted
directly to the financial institutions and are applied against the
Company's loan obligation.
Mortgages receivable on VOI's consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Hypothecated mortgages receivable $ 50,591,503 $ 21,639,731
Non-hypothecated mortgages receivable 24,715,007 25,055,159
---------- ----------
75,306,510 46,694,890
Less: allowance for doubtful accounts (2,278,000) (1,271,210)
----------- -----------
$ 73,028,510 $ 45,423,680
========== ==========
</TABLE>
F-13
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. MORTGAGES RECEIVABLE ON VACATION OWNERSHIP INTERESTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994 activity
in the allowance for doubtful accounts which relates to VOI sales was
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance - Beginning of year $ 1,271,210 $ 689,335 $ 300,000
Provision 2,286,748 1,301,403 598,775
Receivables charged off (1,279,958) (719,528) (209,440)
----------- --------- ---------
Balance - End of year $ 2,278,000 $ 1,271,210 $ 689,335
========= ========= =======
</TABLE>
7. VACATION OWNERSHIP INTERESTS HELD FOR SALE AND REAL ESTATE AND
DEVELOPMENT COSTS
At December 31, 1996 and 1995, the Company had the following
VOI units available for sale:
December 31,
1996 1995
---- ----
Competed units 3,914 3,737
Units under construction 8,937 10,169
----- ------
Total 12,851 13,906
====== ======
In January 1996, the Company purchased a 55% interest in a
general partnership which acquired the Ocean Ranch Resort for the
amount of $3.3 million to construct a 99 unit facility (5,148 VOI's) at
an estimated construction cost of $12.7 million.
In connection with the renovation and construction of various
projects under development, the Company has entered into a number of
non-cancelable construction contracts. At December 31, 1996,
approximately $8,900,000 remained on these contracts. In addition, the
Company has an unconditional $8.8 million obligation to purchase units
at Star Island and is obligated to complete construction of such units.
Further, the Company has guaranteed construction debt associated with
these units of up to $6.5 million.
For the years ended December 31, 1996, 1995 and 1994, interest
capitalized in project costs was approximately $2,265,000, $1,400,000
and $36,000, respectively.
8. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consisted of the
following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Prepaid cruises $ 158,340 $ 286,681
Prepaid insurance 467,505 579,960
Inventory for hotel operations 114,726 110,786
Deposits 436,185 429,199
Prepaid vacation fulfillment costs 1,075,295 695,832
Deferred financing costs 1,157,391 606,377
Deferred commissions & expenses - VOI's 1,685,868 1,634,930
Barter credits 550,000 -
Other 274,673 177,949
----------- -------
$ 5,919,983 $ 4,521,714
========= =========
</TABLE>
F-14
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation
and amortization consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Land $ 136,195 $ 361,183
Buildings and improvements 1,269,166 2,094,316
Equipment, furniture and fixtures 4,392,388 3,746,869
Purchased software costs 3,111,881 2,382,959
Yachts - resort activities 2,297,797 2,297,797
Leasehold improvements 942,271 583,227
Equipment held under capital leases 2,263,688 1,775,919
--------- ---------
14,413,386 13,242,270
Less: Accumulated depreciation and
amortization (4,138,516) (3,375,568)
------------ -----------
Total $ 10,274,870 $ 9,866,702
========== =========
</TABLE>
Depreciation and amortization expense for the years ended
December 31, 1996, 1995 and 1994 was $1,819,564, $1,722,502 and $904,611,
respectively.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the
following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Accounts payable $ 4,149,481 $ 5,849,923
Commissions, accrued wages,
vacation pay and payroll taxes 1,877,425 2,946,468
Marketing costs (barter) 550,000 -
Accrued construction costs 5,025,889 300,000
Accrued interest 723,286 547,443
Other liabilities 884,462 596,899
------------- -------
Total $ 13,210,543 $ 10,240,733
========== ==========
</TABLE>
F-15
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT AND FINANCING ARRANGEMENTS
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Revolving lines of credit not to exceed $77,500,000 in the aggregate
(limited by eligible collateral) - collateralized by VOI mortgages
receivable with interest at rates ranging from prime plus 2.00% to 2.5%
or 425 to 475 basis points over the three month LIBOR, floating,
maturing through the year 2005, substantially all of which has been
personally guaranteed by the majority stockholder of the Company. At
December 31, 1996 and 1995, the weighted average interest rates on
these notes were 10.4% and 11.7%, respectively. $ 42,394,175 $ 17,541,335
Mortgage payable - Specified unit week release prices required for each
VOI sold with final payment due June, 1997. Collateralized by land,
buildings and vacation ownership development costs, with interest
payable monthly at prime plus 1% and personally guaranteed by the
majority stockholder of the Company. At December 31, 1996 and 1995, the
interest rates were 9.25% and
9.5%, respectively 1,200,000 1,131,726
Mortgage payable - final payment of principal plus accrued interest on
February 3, 1996. - 4,500,000
Mortgage payable - Specified unit release prices required for each unit
sold with final payment due April, 1998. Collateralized by land, buildings
and vacation ownership development costs, with interest payable monthly at
prime plus 1.5%; collateralized by land, buildings and equipment; interest
at December 31, 1996 was 9.75%. (1) 3,973,050 -
Mortgage payable - Specified unit release prices required for each unit
sold with final payment due April, 1998. Collateralized by land, buildings
and vacation ownership development costs, with interest payable monthly at
prime plus 1.5%; interest at December 31, 1996 was 9.75%. (1) 2,440,000 -
Construction mortgage loan payable - specified unit-week release prices
required for each unit week sold with final payment due June, 2000. The
maximum borrowing amount under this facility is $12,700,000;
Collateralized by land, buildings and vacation ownership development costs,
with interest capitalized through completion of construction then payable
monthly at prime plus 1.0%; interest at December 31, 1996 was 9.25% 1,500,000 -
Mortgage payable - paid in 1996 through sales of VOI interests - 3,188,569
Mortgage payable - principal plus accrued interest at 9% fixed rate due
August 1996. - 905,298
Mortgage payable - monthly installments of $7,196 at 8% fixed rate,
plus a final payment of $600,100 due in August 1998, collateralized by
a yacht
and personally guaranteed by the majority stockholder of the Company. 650,702 686,105
F-16
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT AND FINANCING ARRANGEMENTS (CONTINUED)
Mortgage payable - monthly installments of $2,596 at 8.51% fixed rate,
plus a final payment of $211,981 due in July 1999, collateralized by a
yacht and
personally guaranteed by the majority stockholder of the Company. 240,073 250,318
Mortgage payable - monthly installments of $2,033 at 9% fixed rate plus
a final payment of $98,488 due in July, 2000, collateralized by a yacht
and
personally guaranteed by the majority stockholder of the Company 148,674 159,168
Mortgage payable - monthly installments of $1,508 plus interest at
prime plus 1%, plus a final payment of $92,009 due and paid in May
1996,
collateralized by a yacht. - 98,042
Other 756,049 440,133
------------ -------
$ 53,302,723 $ 28,900,694
========== ==========
</TABLE>
The notes payable of $42,394,175 require, among other things,
a minimum net worth of $7,500,000, as defined, to be maintained.
Estimated maturities of existing outstanding debt for each of
the next five years are as follows:
1997 $ 23,811,000
1998 19,702,000
1999 8,970,000
2000 769,000
2001 50,723
-----------
$ 53,302,723
============
(1) In March 1997 the Company borrowed an additional $4.0
million from the same lender, the proceeds of which were used to
paydown amounts due to affiliate of Palm Vacation Group. The unit
release prices required were increased with final payment extended to
September 1998 and interest payable monthly at prime plus 1.5%.
Additionally, the Company has entered into a participation
construction mortgage loan agreement to finance the construction of the
Ocean Palms phase of the Sea Gardens project. The maximum to be
borrowed will be $13.0 million (none outstanding at December 31, 1996)
with sixty percent of the loan bearing interest at prime plus 1.0% and
forty percent of the loan bearing interest at prime plus 2% with
interest capitalized during construction and paid monthly thereafter.
Specific unit-week release prices required for each unit-week sold with
final payment due November 2000. Collateralized by land, buildings and
vacation ownership development costs.
F-17
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT AND FINANCING ARRANGEMENTS (CONTINUED)
FINANCING AGREEMENTS
Under the terms of the revolving lines of credit agreements,
the Company may borrow up to 75% to 85% of the balances of pledged VOI
receivables relating to the sales of completed units. Additionally, the
revolving lines of credit agreements allow the Company to borrow up to
60% to 65% of the balances of pledged VOI receivables for units under
construction (presold units). The loans must be repaid over 4 to 8.5
year periods from the last borrowing or when the availability expires.
The following is a summary of the $77,500,000 borrowings available and
outstanding debt at December 31, 1996 under these credit agreements:
<TABLE>
<CAPTION>
AVAILABILITY
EXPIRATION TOTAL PRESOLD UNITS
AVAILABILITY DATE BORROWINGS AVAILABILITY BORROWINGS
------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
$ 30,000,000 December 1997 $ 13,864,981 $ 4,500,000 $ -
15,000,000 August 1997 6,510,904 7,000,000 -
15,000,000 March 1998 11,568,821 3,000,000 -
7,500,000 May 1996 4,576,943 - -
5,000,000 May 1996 3,629,454 - -
5,000,000 September 1997 2,243,072 3,000,000 -
--------- ------------ ------------- --------
$ 77,500,00 $ 42,394,175 $ 17,500,000 $ -
========= ========== ========== =======
</TABLE>
The Company is currently extending the availability dates for
borrowings through 1997 for the availability that expired in May 1996.
12. CAPITAL LEASE OBLIGATIONS
Future minimum non-cancelable lease payments for equipment
under capital leases as of December 31, 1996 together with the capital
lease obligations are:
1997 $ 626,208
1998 619,899
1999 241,106
2000 66,876
----------
Total minimum payments $ 1,554,089
Interest amount (204,663)
---------
Capital lease obligations $ 1,349,426
=========
F-18
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
Prior to November 1995, the Company and its consolidated
subsidiaries were either taxed as regular corporations at the corporate
level or elected to be taxed as S Corporations under provisions of the
Internal Revenue Code. The consolidated subsidiaries, which were taxed
as S Corporations prior to November 1995, were not subject to federal
and state income taxes at the corporate level. Net income, as presented
in the accompanying consolidated financial statements, includes a
provision (benefit) for income taxes for the entities which are subject
to federal and state income taxes at the corporate level.
The provision (benefit) for income taxes for the Company and
its consolidated subsidiaries consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ (7,097) $ (37,346)
State - (1,181) (9,069)
----------- ------------- ------------
- (8,278) (46,415)
------------ ------ -------
Deferred:
Federal 3,501,860 2,679,399 (442,285)
State 207,579 445,588 (106,780)
---------- ------- --------
3,709,439 3,124,987 (549,065)
--------- --------- --------
Provision (benefit) for income taxes $ 3,709,439 $ 3,116,709 $ (595,480)
========= ========= =======
</TABLE>
The significant components of the net deferred tax (liability)
asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 747,280 $ 1,030,385
Allowance for doubtful accounts 856,370 668,845
Deferred revenue 6,573,190 5,115,131
Vacation ownership interests held for sale 101,953 385,920
Other 50,494 11,680
Net operating loss carryforwards 5,029,521 2,918,255
State tax 78,611 -
Valuation allowance (44,338) (44,338)
-------------- ------------
13,393,081 10,085,878
-------------- ------------
Deferred tax liabilities:
Property and equipment (707,459) (452,056)
Installment method of accounting for income
tax reporting purposes (17,024,508) (10,911,802)
Conversion to accrual method of accounting (520,441) (762,538)
Investment in partnership (1,348,200) (457,570)
---------- -------------
(19,600,608) (12,583,966)
-------------- ------------
Net deferred tax liability $ (6,207,527) $ (2,498,088)
========= =========
</TABLE>
F-19
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (CONTINUED)
The Company provides a valuation allowance against deferred
tax assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. The Company and its consolidated subsidiaries have
established a valuation allowance against deferred tax assets of
$44,338 at December 31, 1996 and 1995. At December 31, 1996, the
Company has net operating losses available for carryforward of
approximately $13,400,000 and $8,070,000 for federal and state
purposes, respectively. Such carryforwards expire beginning in the year
2006.
The reconciliation between the statutory provision for income
taxes and the actual provision (benefit) for income taxes is shown as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax at federal statutory rate $ 3,832,204 $ 3,209,519 $ 4,090,541
State taxes, net of federal benefit 134,926 288,871 (75,302)
(Decrease) increase in valuation
allowance - (68,859) (445,390)
Income not subject to federal and
state income tax (261,476) (3,413,985) (4,128,599)
Deferred taxes recorded due to change
in tax status - 3,090,000 -
Nontaxable income - - (36,730)
Nondeductible expenses 3,785 11,163 -
---------- ---------- -----------
Provision (benefit) for income taxes $ 3,709,439 $ 3,116,709 $ (595,480)
========== ========== ===========
</TABLE>
Prior to the consummation of the initial public offering
("IPO"), the S Corporations in the affiliated group entered into S
Corporation Tax Allocation and Indemnification Agreements (the "Tax
Agreements") with their sole stockholder prior to November 1995,
relating to their respective income tax liabilities. Because the S
Corporations became subject to corporate income taxation on November 1,
1995, the reallocation of income and deductions between the periods
during which the entities were treated as S Corporations and the
periods during which the entities will be subject to corporate income
taxation may increase the taxable income of one party while decreasing
that of another party. Subject to certain limitations, the Tax
Agreements provide that the stockholder will be indemnified by the
entities with respect to federal and state income taxes (plus interest
and penalties) shifted from a Company taxable year subsequent to the
consummation of this offering to a taxable year in which the Company
was an S Corporation, and the entities will be indemnified by the
stockholder with respect to federal and state income taxes (plus
interest and penalties) shifted from an S Corporation taxable year to a
Company taxable year subsequent to the consummation of the IPO. Any
payment made by the entities to the stockholder pursuant to the Tax
Agreements may be considered by the Internal Revenue Service or the
state taxing authorities to be nondeductible by the entities for income
tax purposes.
F-20
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PRO FORMA DISCLOSURES
PRO FORMA INCOME TAXES
As described in Note 2, prior to November 1995, some of the
Company's consolidated subsidiaries elected to be taxed as S
Corporations under provisions of the Internal Revenue Code. On October
31, 1995, those S Corporations terminated their S Corporation elections
and, accordingly, became subject to federal and state income taxes.
Upon termination of the S Corporation elections, deferred income taxes
reflecting the tax effect of temporary differences between the
Company's financial statement and tax bases of certain assets and
liabilities became a net liability of the Company and are reflected on
the consolidated balance sheet with a corresponding non-recurring
expense in the consolidated statement of income. Deferred taxes relate
primarily to accrued expenses, accounts receivable, deferred income,
the capitalization of costs to vacation ownership interests and the use
of the installment method of accounting for income tax reporting
purposes. The amount of such deferred tax liability computed using the
asset and liability method of accounting for deferred income taxes was
$3,090,000 at October 31, 1995.
The following unaudited information reflects the
reconciliation between the statutory provision for income taxes and the
actual provision relating to the income tax expense that the Company's
consolidated subsidiaries incurred for the tax years ended December 31,
1995 and 1994 and the pro forma income tax expense that would have been
incurred had they been subject to federal and state income taxes for
the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Income tax at federal statutory rate $ 3,209,519 (1) $ 4,090,541 (1)
State taxes, net of federal benefit 330,122 420,741
Change in valuation allowance (68,859) (445,390)
Foreign entities not yet subject to income tax (131,191) 38,525
Other (14,993) (181,672)
------- --------
Provision for income taxes $ 3,324,598 (1) $ 3,922,745 (1)
========= =========
</TABLE>
(1) Pro Forma provision for income taxes, as calculated,
assuming a combined federal and state income tax rate of 38.6% for the
years ended December 31, 1995 and 1994.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share has been computed by dividing
pro forma net income by the weighted average number of common shares
outstanding, after a 65,000-to-1 stock split effected prior to the
closing of the aforementioned offering and the issuance of 1,800,000
shares of Common Stock at December 27, 1995.
F-21
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OPERATING LEASES
The Company leases office space located in Fort Lauderdale,
Florida and Johnson City, Tennessee under operating leases expiring in
various years through 2001.
Minimum future rental payments under various non-cancelable
operating leases as of December 31, 1996, for each of the next five
years and thereafter are as follows:
CONSOLIDATED AFFILIATED
COMPANIES COMPANY TOTAL
--------- ------- -----
1997 $ 1,143,660 $ 916,595 $ 2,060,255
1998 1,021,046 853,353 1,874,399
1999 931,272 790,110 1,721,382
2000 507,858 726,867 1,234,725
2001 31,130 316,653 347,783
--------- --------- ---------
Total future minimum
rental payments $ 3,634,966 $ 3,603,578 $ 7,238,544
========= ========= =========
For the years ended December 31, 1996, 1995 and 1994 rent
expense was, $2,182,000, $1,728,000 and $1,622,000, respectively.
Lease payments to the affiliated company represent a lease
obligation associated with a hotel property operated by the Company and
owned by Port Lucaya Resort Company Limited, a 50% owned unconsolidated
subsidiary reported on the equity method of accounting.
16. EMPLOYEE BENEFITS
The Company has provided a 401(k) plan option to employees
effective January 1, 1994. This plan allows employees to contribute up
to 15 % of their earnings to the plan on a pre-tax basis. Full time
employees are eligible for enrollment into this plan after the
completion of one year of service with the Company. Employee
contributions are limited to the current annual maximum contribution
allowed by the Internal Revenue Service. The Company matches 50% of
employee contributions up to a maximum of 3% of employee earnings. The
Company contributed approximately $72,000, $25,000 and $24,000 to the
plan for the years ended December 31, 1996, 1995 and 1994,
respectively.
17. STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan")
provides for the granting of incentive stock options, which may only be
granted to employees and of non-statutory stock options, which may also
be granted to consultants and to independent contractors. The Chairman
of the Board and Chief Executive Officer has been excluded from
participation in the 1995 Plan. Prices of the options are determined by
the Board of Directors. However, the exercise price of options granted
can not be less than the fair market value of the Company's common
stock on the date of the grant, except that incentive stock granted to
a 10% stockholder must have an exercise price of at least 110% of the
fair market value of the Company's common stock at the date of the
grant. Options vest over 0 to 3 year periods and expire either 5 years
or 10 years from date of grant.
Under the 1995 Plan, 600,000 common shares were reserved for
issuance upon exercise of the options. The Board of Directors granted
options to purchase 364,500 common shares to employees when the Company
went public in December 1995.
F-22
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK OPTION PLAN (CONTINUED)
On March 25, 1996, the Board of Directors granted options to
purchase 189,025 common shares to employees of the Company and 8,000
common shares and another 2,000 common shares in August 1996 to the
outside members of the Board of Directors.
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Accordingly, no
compensation cost has been recognized for the 1995 plan. Had
compensation cost for the 1995 plan been determined based on the fair
value at the grant dates for the awards consistent with the provisions
of SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
Information regarding the Company's stock option plan is
summarized below:
1996 1995
---- ----
Net income:
As reported $ 7,239,715 $ 5,845,455 (1)
========= =========
Pro forma $ 6,774,122 $ 5,614,378
========= =========
Net income per share:
As reported
Primary $ 0.82 $ 0.90 (1)
==== ====
Assuming full dilution $ 0.80
======
Pro forma
Primary $ 0.77 $ 0.86
==== ====
Assuming full dilution $ 0.75
======
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: Dividend yield of 0%, expected volatility
of 45%, risk-free interest rates of 6.25% and 8.0% and expected lives 5
years.
(1) Represents pro forma (unaudited) net income and net income
per share assuming that the Company had C Corporation status during
1995 and that the common shares were outstanding for the entire year.
1995 STOCK OPTION PLAN
----------------------
WEIGHTED AVG.
SHARES EXERCISE PRICE
------ --------------
Outstanding at December 31, 1994 - -
Granted 364,500 $ 5.10
Exercised - -
Canceled (15,500) $ 5.00
------
Outstanding at December 31, 1995 349,000 $ 5.11
Granted 199,025 $ 6.54
Exercised (23,725) $ 6.13
Canceled (10,283) $ 6.17
------
Outstanding at December 31, 1996 514,017 $ 5.47
=======
Exercisable at December 31, 1996 254,668 $ 5.56
=======
Options available to grant at
December 31, 1996 36,475
======
Option price range at December 31, 1996 was $ 5.00 to $ 6.50
F-23
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTIES
The majority stockholder of the Company owns a 49 % interest
in the Coconut Bay Resort Properties, Inc. ("Coconut Bay"), a VOI
facility. For the years ended December 31, 1996, 1995 and 1994, the
Company received sales commissions relating to VOI sales of $54,000,
$128,000 and $200,000, respectively, from Coconut Bay.
During 1993, Coconut Bay loaned the Company $1,250,000 to be
repaid in annual installments of $125,000. The effective interest rates
on this note were 11.25% and 12.25% at December 31, 1996 and 1995,
respectively. At December 31, 1996, the balance owing on this note
amounted to approximately $533,000, including accrued interest.
The principal stockholder of the Company also owns a 33 %
interest in Intracoastal Resorts, Inc., which develops and sells VOI's.
For the years ended December 31, 1996, 1995 and 1994, the Company
received sales commissions from Intracoastal Resorts, Inc. relating to
VOI sales of $20,000, $1,381,000 and $2,000,000, respectively.
19. CASH DEPOSITS IN EXCESS OF INSURED LIMITS
The Company maintains cash balances (including restricted cash
and cash in escrow) and certificates of deposit at several financial
institutions in excess of the amounts insured by the Federal Deposit
Insurance Corporation. At December 31, 1996 and 1995, the Company's
uninsured cash balances and certificates of deposit in excess of
insured amounts totaled $12,737,574 and $10,617,556, respectively. The
Company has not historically suffered any losses from its uninsured
cash balances.
20. CASH FLOWS
Cash paid during the years ended December 31, 1996, 1995 and
1994 for interest, net of amounts capitalized, amounted to, $5,015,784,
$1,472,455 and $1,383,721, respectively.
Income taxes paid during the years ended December 31, 1996,
1995 and 1994 were $50,000, $0, and $480,000, respectively.
Significant non-cash investing and financing activities are as
follows:
During 1996, property and equipment having a net book value of
$1,110,494 were transferred to "Vacation ownership interest held for
sale and real estate and development costs".
During December 1995, a $3,388,205 distribution payable was
declared to the majority stockholder. This amount represented federal
and state taxes payable to the majority stockholder for taxable S
Corporation income included in his individual tax returns through
termination of the S Corporation elections. This amount was distributed
to the stockholder during 1996.
During the years ended December 31, 1996, 1995, and 1994, the
Company entered into capital lease agreements for $457,272, $456,526
and $1,327,459, respectively.
F-24
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. STOCKHOLDERS' EQUITY
The IPO registration of 1,800,000 shares of common stock of
the Company included an over-allotment option of 270,000 additional
shares of common stock to the Representatives at the initial offering
price of $5.00 per share. During January 1996, the Representatives
purchased these shares at the offering price less Representatives'
discount and non-accountable expense allowance. The Company's proceeds
from these sales were $1,182,489.
The Company has granted warrants to the Representatives to
purchase from the Company 180,000 shares of Common Stock. These
warrants are initially exercisable at an exercise price of $ 6.00 per
share commencing one year from the consummation of the Initial Public
Offering.
The consolidated financial statements of the Company are
comprised of a number of companies. During each of the years in the
three year period ended December 31, 1996, new companies were added to
the consolidated financial statements in order to augment existing
operations. A summary of such additions follows:
* During 1994, two companies were added to the Company's
consolidated financial statements, Vacation Break Construction,
Inc. was formed (500 common shares; $1 par value) to manage the
construction and renovation of additional vacation ownership
interests facilities. Vacation Break Resorts, Inc. was formed
(500 common shares; $1 par value) to purchase, develop and sell
the Santa Barbara Resort and Yacht Club.
* During 1995, four companies were added to the Company's
consolidated financial statements. Each company's capital
consisted of 500 shares of common stock; par value $ 1. Resorts
Title, Inc. was formed to process the legal and title work
operations for the various developer operations under the control
of Vacation Break U.S.A., Inc. or its wholly-owned subsidiaries.
Vacation Break Resorts at Palm Aire, Inc. was formed to hold a
55% interest in Palm Vacation Group, a Florida general
partnership, which purchased and is developing and selling VOI's
at the Palm Aire Resort and Spa located in Pompano Beach,
Florida. Vacation Break at Star Island, Inc. was formed to
acquire, develop and sell VOI's at the Star Island facility in
Orlando, Florida. Vacation Break Welcome Centers, Inc. was formed
to develop lead generation and tour processing operations in the
Orlando, Florida area.
* During 1996, three companies were added to the Company's
consolidated financial statements. Vacation Break Resorts at
Ocean Ranch, Inc. was formed to hold a 55% interest in Ocean
Ranch Vacation Group, a Florida general partnership, which
purchased and is developing VOIs at the Ocean Ranch property in
Pompano Beach, Florida. Vacation Break Marketing Consultants,
Inc. was formed to hold a 25% interest in Vacation Marketing
Consultants, Inc. whose purpose is to generate prospects to
purchase VOIs.
F-25
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. COMMITMENTS AND CONTINGENCIES
The Company is currently a defendant in certain litigation
arising in the ordinary course of business. In the opinion of
management, based on the advice of legal counsel, the outcome of these
actions will not have a material effect on the financial statements of
the Company.
The Company is a party to twelve state or County actions
related to the Company's marketing program alleging that the Company
violated their consumer protection or telemarketing laws. The Company
is and will actively attempt to settle with each of these states or
counties over the next few months and does not anticipate its legal and
settlement costs will have a material impact on the financial condition
of the Company. Accordingly, no provision has been recorded in the
financial statements.
23. SIGNIFICANT RISK FACTORS
The ability of the Company to expand its business through the
acquisition and development of new resort properties, as well as the
Company's ability to provide attractive financing to its customers,
depends to a large extent upon the availability of financing at
acceptable interest rates. A significant decrease in the availability
of such financing or a significant increase in interest rates could
have a material adverse impact on the Company's business.
The Company's VOI properties are concentrated in the South and
Central Florida areas. A natural disaster, such as a hurricane, could
have an adverse impact on the Company's ability to conduct business.
24. SUBSEQUENT EVENTS
The Company has entered into an Agreement and Plan of Merger
(the "Acquisition Agreement") dated as of November 26, 1996, as amended
through March 22, 1997, among the Company, Westview Resorts Corporation
("Westview"), Williamsburg Plantation, Inc. ("Williamsburg"), The
Berkley Group, Inc. ("Berkley"), and Ocean Ranch Development, Inc.
("Ocean Ranch", and collectively with Westview, Williamsburg and
Berkley, the "Lambert Companies"). The Lambert Companies are all
majority owned and/or controlled by James E. Lambert.
Pursuant to the Acquisition Agreement, the Company will
acquire existing developments and resorts at Bonaventure at Westview in
Ft. Lauderdale and Williamsburg, Virginia. In addition, the Company
will acquire (i) Berkley Vacation Resorts, Inc. ("BVRI"), and Cocowalk
Development, Inc. ("CDI") both of which are wholly-owned subsidiaries
of Berkley which own land adjacent to the Bonaventure resort, (ii) a
45% interest in each of two properties, the Palm Aire Resort and Spa
("Palm Aire") such 45% interest held by a wholly-owned subsidiary of
Berkley, and Royal Vista ("Royal Vista") (formerly known as Ocean
Ranch) in each of which the Company currently owns the remaining 55%
interest and (iii) a 25% interest in Daily Management, Inc. ("DMI").
The Company will (i) issue a total of 8.7 million shares of
the Company's Common Stock, 7.7 million of which (the "Lambert Shares")
will be issued to James E. Lambert and members of his family and 1.0
million of which (the "Berkley Shares," and together with the Lambert
Shares, the "Merger Shares") will be issued to Berkley, (ii) distribute
$19.0 million in cash to James E. Lambert, and (iii) distribute to
Berkley in cash an amount equal to the actual costs incurred for the
land and construction in progress on the date of closing of the
transactions contemplated by the Acquisition Agreement for the land
owned by BVRI and CDI.
Consummation of the transaction is subject to, among other
things, approval of the Company's shareholders. Upon approval of the
transaction, the Company's Board of Directors will consist of two
designees chosen by James E. Lambert, one designee chosen by the
Berkley Group, three designees chosen by the Company and two
independent designees to be chosen by James E. Lambert and Berkley.
In connection with the Mergers, the Company and Berkley will
enter into a Marketing, Sales and Administrative Services Agreement
pursuant to which Berkley will continue to perform marketing and
related services for the Company at Westview and Williamsburg. In
addition, pursuant to an employment agreement to be entered into
between the Company and James E. Lambert, Mr. Lambert will serve as the
Company's Chief Executive Officer for an initial period of three years
following consummation of the transactions contemplated by the
Acquisition Agreement.
As a result of the Acquisition Agreement, the Lambert
Companies, including James E. Lambert, will own approximately 50.3% of
the outstanding shares of Common Stock of the Company.
On March 28, 1997, the Company was served with a lawsuit filed
in the Circuit Court for Pinellas County, Florida by Market Response
Group and Laser Company, Inc. (MRG&L) the plaintiff, against the
Company and Kevin M. Sheehan, its President. MRG&L was a former vendor
to Vacation Break with respect to direct mail marketing. The complaint
alleges that the defendants, in concert with other companies, conspired
to boycott MRG&L and to fix prices for mailings in violation of the
Florida Antitrust Act, and in concert with others, engaged in various
acts of unfair competition, deceptive trade practices and common law
conspiracy. The complaint also alleges that the defendants breached
various provisions of a Sales and Marketing Agreement with plaintiff
and interfered with and caused other companies to breach Sales and
Marketing Agreements with MRG&L and that the defendants misappropriated
proprietary information. The complaint also demands that the Company
indemnify plaintiff for costs incurred by MRG&L to defend a 1996
Federal Trade Commission action. MRG&L claims to have suffered
substantial damages. The actual aggregate amount of damages claimed is
not calculable but appears to be in excess of $50 million. The Company
believes it has meritorious defenses to each and every claim, intends
to defend each and every claim vigorously, and will file
counterclaims if appropriate.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Vacation Break U.S.A., Inc. and Subsidiaries
Our report on the consolidated financial statements of Vacation Break U.S.A.,
Inc. and Subsidiaries is included on page F-2 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Fort Lauderdale, Florida
March 14, 1997, except for Note 24, as to which the date is March 28, 1997.
F-27
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Allowance for mortgage receivables on vacation
ownership interests:
Balance at beginning of year $ 1,271,210 $ 689,335 $ 300,000
Provision 2,286,748 1,301,403 598,775
Write-offs (1,279,958) (719,528) (209,440)
----------- ----------- -----------
Balance at end of year $ 2,278,000 $ 1,271,210 $ 689,335
=========== =========== ===========
Allowance for receivables:
Balance at beginning of year $ 150,692 $ 320,691 $ 496,757
Provision 150,000 223,811 80,430
Write-offs (70,113) (393,810) (256,496)
----------- ----------- -----------
Balance at end of year $ 230,579 $ 150,692 $ 320,691
=========== =========== ===========
</TABLE>
F-28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has had no changes in or disagreements with its independent
certified public accountant on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a.) Identification of Directors
This item is incorporated by reference to Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders.
b.) Identification of Executive Officers
See Item 1 - Business for a discussion regarding the Company's executive
officers.
ITEM 11. EXECUTIVE COMPENSATION.
This item is incorporated by reference to Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
This item is incorporated by reference to Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is incorporated by reference to Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) See item 8 for a list of financial statements and financial statement
schedules included as part of this Annual Report on Form 10-K.
(b) No reports on Form 8-K were filed by the Registrant during the last
quarter of 1996.
(c) Exhibits
23
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of Registrant(1)
3.2 Amended and Restated Bylaws of Registrant(1)
4.1 Certificate for Shares of Common Stock, par value $.01(2)
10.1 Registrant's 1995 Stock Option Plan(1)
10.2 Form of Stock Option Agreement(1)
10.3 Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers(1)
10.4 Employment Agreement between Ralph Muller and the Registrant(2)
10.5 Employment Agreement between Kevin Sheehan and the Registrant(2)
10.6 Employment Agreement between Joyce North and the Registrant(2)
10.7 Employment Agreement between Henry M. Cairo and the Registrant(2)
10.8 [Intentionally omitted]
10.9 Employment Agreement between Marco Manzie and the Registrant(2)
10.10 Agreement for Sale and Purchase between the Registrant and Allard Resort
Hotel, Inc.(1)
10.11 Bill of Sale, dated November 9, 1994, from Allard Resort Hotel, Inc. to
Vacation Break Resorts, Inc.(1)
10.12 Mortgage Note, dated November 9, 1994, and Mortgage Deed and Security
Agreement, dated November 9, 1994, between Sun Bank/South Florida, N.A.
and Vacation Break Resort Inc.(1)
- ----------------
(1) Exhibit is incorporated by reference to an identical numbered exhibit
in the Company's Registration Statement on Form S-1, file number
33-92890.
(2) Exhibit is incorporated by reference to an identically numbered
exhibit to the Company's Amendment No. 1 to Registration Statement
on Form S-1, file number 33-92890.
(3) Exhibit is incorporated by reference to an identically numbered
exhibit to the Company's Amendment No. 2 to Registration Statement on
Form S-1, file number 33-92890.
24
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Loan Agreement and Future Advance Promissory Note (Revolving), each
dated November 9, 1994, by and between Sun Bank/South Florida, N.A. and
Sea Gardens(1)
10.15 Guaranty Agreements, dated November 9, 1994, by and among Sun Bank/South
Florida, N.A. and each of Registrant, I & M Marketing, Inc., Vacation
Break Resorts, Inc., Vacation Break Promotions, Inc., Vacation Break
Marketing, Inc., Atlantic Marketing Realty, Inc., and Ralph Muller and
Alice Muller(1)
10.16 Loan and Security Agreement dated March 15, 1993, by and among Textron
Franchise Corporation ("Textron") and Sea Gardens Beach & Tennis Resort,
Inc. ("Sea Gardens"), a borrower, and each of Ralph Muller, and
Registrant, Atlantic Marketing Realty, Inc., Financial Marketing, Inc.,
Vacation Break Marketing, Inc. and Vacation Break Promotions, Inc., as
guarantors (collectively, the Textron Guarantors")(1)
10.17 Guaranty and Subordination Agreement, dated March 15, 1993, by and among
Textron and each of the Textron Guarantors(1)
10.18 Agreement and Amendment to Loan and Security Agreement, dated November
16, 1993, by and among Textron, Sea Gardens and the Textron
Guarantors(1)
10.19 Agreement and Second Amendment to Loan and Security Agreement, dated
February 16, 1994, by and among Textron, Sea Gardens and the Textron
Guarantors(1)
10.20 Agreement and Third Amendment to Loan and Security Agreement, dated as
of November 30, 1994, by and among Textron, Sea Gardens and the Textron
Guarantors(1)
10.21 Loan and Security Agreement, dated August 16, 1993, between Greyhound
Financial Corporation (now known as Finova Capital Corporation
("Finova") and Sea Gardens(1)
10.22 Guaranty and Subordination Agreement, dated August 16, 1993, by and
among Finova and each of the Registrant, Ralph Muller and Alice Muller,
Atlantic Marketing Realty, Inc. Financial Marketing, Inc., Vacation
Break Marketing, Inc. and Vacation Break Promotions, Inc. as guarantors
(collectively, the "Finova Guarantors")(1)
10.23 Amendment No. 1 to Loan and Secuity Agreement, dated December 16, 1993,
between Finova and Sea Gardens(1)
10.24 Amendment No. 2 to Loan and Security Agreement, dated December 7, 1994,
between Finova and Sea Gardens(1)
10.25 Amendment to Guaranty and Subordination Agreement, dated December 7,
1994, by an among Finova and each of the Finova Guarantors(1)
25
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.26 Line of Credit Agreement and Promissory Note, each dated March 24, 1994,
between Sea Gardens and Carney Bank(1)
10.27 Guaranty Agreement, dated March 24, 1994, between Ralph Muller and
Carney Bank(1)
10.28 Guaranty Agreement, dated March 24, 1994, between Registrant and Carney
Bank(1)
10.29 Credit Facility, dated July 20, 1993, between Port Lucaya Resort Company
Limited and Barclays Bank PLC(1)
10.30 Debenture, dated October 28, 1992 from Port Lucaya Resort Company
Limited to Barclay Bank PLC(1)
10.31 Supplemental Debenture, dated August 12, 1993 from Port Lucaya Resort
Company Limited to Barclays Bank PLC(1)
10.32 Promissory Note, dated May 9, 1991, from Resort Yachts of America, Inc.
to Sun Bank/South Florida, N.A.(1)
10.33 Loan and Security Agreement, dated July 21, 1994, between Nations Bank
of Florida, N.A., Serenity Yacht Club, Inc. and Ralph Muller and Alice
Muller(1)
10.34 Continuing and Unconditional Guaranty, dated July 21, 1994, of each of
Ralph Muller and Alice Muller (relating to Nations Bank Loan and
Security Agreement)(1)
10.35 Loan and Security Agreement, dated August 9, 1993, between Serenity
Yacht Club, Inc. and Ralph Muller and Alice Muller(1)
10.36 Purchase and Marketing Agreement, dated May 15, 1995, between the
Registrant and Staten Island Development Corp.(1)
10.38 Purchase and Sale Agreement, dated March 20, 1995, by and among the
Registrant, the Berkley Group, Inc. and Palm Aire Ventures, Inc.(1)
10.39 Partnership Agreement, dated March 30, 1995, as amended, between
Vacation Break Resort at Palm Aire, Inc. and Palm Resort Group, Inc.(2)
10.40 Marketing Agreement, dated March 20, 1995, between Palm Vacation
Group and the Registrant(1)
10.41 Operating Agreement, dated August 3, 1992, between Registrant, Ralph
Muller and The Grand Bahama Development Company Limited (1)
10.42 Lease Agreement, dated May 5, 1992, between Registrant and Stiles-Clymer
Properties (suite 200), as amended(1)
10.43 Lease Agreement, dated January 19, 1993, between Registrant and
Stiles-Clymer Properties (suite 102)(1)
26
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.44 Lease Agreement, dated as of February 9, 1994, between Registrant
and Robert P. Williams trustee of The Crystal Springs Trust(1)
10.45 S. Corporation Tax Indemnification Agreement between the Registrant,
Atlantic Marketing Realty, Inc. and Ralph Muller(1)
10.46 S. Corporation Tax Indemnification Agreement between the Registrant,
Vacation Break Marketing, Inc. and Ralph Muller(1)
10.47 S. Corporation Tax Indemnification Agreement between the Registrant, Sea
Gardens and Tennis Resort, Inc. and Ralph Muller(1)
10.48 S. Corporation Tax Indemnification Agreement between Registrant, I&M
Marketing, Inc. and Ralph Muller(1)
10.49 Option Agreement between Ralph Muller and the Registrant regarding Sea
America, Inc.(2)
10.50 Loan and Security Agreement, dated as of May 1, 1995, among Textron,
Vacation Break Resorts, Inc., as borrower, and each of Ralph Muller,
Alice B. Muller, the Registrant, Atlantic Marketing Realty, Inc.,
Vacation Break Promotions, Inc., Vacation Break Marketing, Inc. I&M
Marketing, Inc. and Sea Gardens Beach and Tennis Resort, Inc.(2)
10.51 Guaranty and Subordination Agreement, dated as of May 1, 1995, among
Textron and each of Ralph Muller, Alice B. Muller, the Registrant,
Atlantic Marketing Realty, Inc., Vacation Break Promotions, Inc.,
Vacation Break Marketing, Inc., I&M Marketing, Inc. and Sea Gardens
Beach, and Tennis Resort, Inc.(2)
10.52 Secured Promissory Note, dated May 1, 1995, issued by Vacation Break
Resorts, Inc. to Textron(2)
10.53 Amendment to Loan Agreement, dated September 6, 1995, among Sun
Bank/South Florida N.A., Sea Gardens Beach and Tennis Resort, Inc. and
Vacation Break Resorts, Inc.(2)
10.54 Future Advance Mortgage Note, dated September 6, 1995, issued by
Vacation Break Resorts, Inc. to SunBank/South Florida, N.A.(2)
10.55 Consolidated Promissory Note, dated September 6, 1995, issued by
Vacation Break Resorts Inc. to SunBank/South Florida, N.A.(2)
10.56 Guaranty Agreements, dated September 6, 1995, among SunBank/South
Florida, N.A. and each of the Registrant, I&M Marketing, Inc., Atlantic
Marketing Realty, Inc., Vacation Break Promotions, Inc., Vacation Break
Marketing, Inc., Sea Gardens Beach and Tennis Resort, Inc. and Ralph
Muller and Alice B. Muller(2)
27
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.57 Construction Loan Agreement, dated September 6, 1995, between
SunBank/South Florida N.A. and Sea Gardens Beach and Tennis Resort,
Inc.(2)
10.58 Future Advance Promissory Note, dated September 6, 1995, issued by Sea
Gardens Beach and Tennis Resort, Inc. to SunBank/South Florida, N.A.(2)
10.59 Consolidated Promissory Note, dated September 6, 1995, issued by Sea
Gardens Beach and Tennis Resort, Inc. to SunBank/South Florida, N.A.(2)
10.60 Guaranty Agreements, dated September 1, 1995, among SunBank/South
Florida, N.A. and each of the Registrant, Atlantic Marketing Realty,
Inc., Vacation Break Promotions, Inc., I&M Marketing, Inc., Vacation
Break Marketing, Inc. and Ralph Muller and Alice B. Muller(2)
10.61 Financing Commitment, dated August 16, 1995, issued by Textron to
Vacation Break at Staten Island, Inc.(2)
10.62 Financing Commitment, dated September 8, 1995, issued by Heller
Financial, Inc. to Sea Gardens Beach and Tennis Resort, Inc., Vacation
Break Resorts, Inc. and Vacation Break at Star Island, Inc.(2)
10.64 Financing Commitment, dated October 20, 1995, issued by Bank Atlantic to
Palm Vacation Group(3)
10.65 Loan and Security Agreement, dated as of December 19, 1995, among Sea
Gardens Beach and Tennis Resort, Inc., Vacation Break Resorts, Inc.,
Vacation Break Resorts at Star Island, Inc. and Heller Financial, Inc.
10.66 Continuing Guaranty, dated December 19, 1995, between the
Registrant and Heller Financial, Inc.
10.67 Loan and Security Agreement, dated March 14, 1996 between Textron and
Vacation Break Resorts at Star Island, Inc.
10.68 Guaranty and Subordination Agreement, dated March 14, 1996, among
Textron and each of the Registrant, Atlantic Marketing Realty, Inc. and
Ralph Muller and Alice Muller
10.69 Loan and Security Agreement, dated as of March 14, 1996, between
Vacation Break Resorts at Palm Aire, Inc. and Heller Financial, Inc.
10.70 Continuing Guaranty, dated as of March 14, 1996, between the Registrant
and Heller Financial, Inc.
10.71 Amendment No. 5 to Loan and Security Agreement, dated as of March 1,
1996, among Sea Gardens Beach and Tennis Resort, Inc., Vacation Break
Resorts, Inc. and Finova
28
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.72 Consent of Guarantors and Amendment of Guaranty, dated as of March 1,
1996, among the Registrant, Atlantic Marketing Realty, Inc., Ralph
Muller and Alice Muller and Finova
10.73 Amendment and Restated Mortgage Deed and Security Agreement, dated
January 9, 1996 between Palm Vacation Group and BankAtlantic
10.74 Ocean Ranch Vacation Group Joint Venture Agreement, dated as of January
10, 1996, between Vacation Break at Ocean Ranch, Inc. and Ocean Ranch
Development, Inc.
10.75 Hotel Management Agreement, dated as of January 11, 1996, between Ocean
Ranch Vacation Group and Vacation Break Management, Inc.
10.76 Loan Agreement, dated June 13, 1996, by and between Ocean Ranch Vacation
Group and BankAtlantic
10.77 Absolute and Unconditional Continuing Guaranty, dated as of June 13,
1996, by Vacation Break U.S.A., Inc. (the "Registrant") in favor of
BankAtlantic
10.78 Promissory Note, dated June 13, 1996, by Ocean Ranch Vacation Group to
BankAtlantic
11.1 Statement regarding computation of per share earnings
16.1 Letter from J.L. Cohen & Associates regarding Registrant's change
in independent auditors(1)
21.1 Registrant's subsidiaries(1)
27.1 Financial Data Schedule
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 27, 1997
VACATION BREAK U.S.A., INC.
By: /S/ RALPH P. MULLER
--------------------------------------
Ralph P. Muller, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ RALPH P. MULLER Chairman of the Board and March 27, 1997
- -------------------- Chief Executive Officer
Ralph P. Muller (principal executive officer)
/S/ KEVIN SHEEHAN President and Director March 27, 1997
- -------------------
Kevin Sheehan
/S/ HENRY M. CAIRO Chief Financial Officer, March 27, 1997
- ------------------- Chief Operating Officer
Henry M. Cairo and Director
(principal financial officer and
principal accounting officer)
/S/ JOYCE NORTH Vice-President - Sales and March 27, 1997
- ---------------- Director
Joyce North
/S/ RONALD J. KORN Director March 27, 1997
- -------------------
Ronald J. Korn
/S/ RICHARD ADREY Director March 27, 1997
- ------------------
Richard Adrey
/S/ ALLEN C. HARPER Director March 27, 1997
- --------------------
Allen C. Harper
/S/ ARTHUR WEINSTEIN Director March 27, 1997
- ---------------------
Arthur Weinstein
/S/ MICHAEL J. KOLLENDER Director March 27, 1997
- -------------------------
Michael J. Kollender
30
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Statement regarding computation of per share earnings
21.1 Registrant's subsidiaries(1)
27.1 Financial Data Schedule
EXHIBIT 11.1
VACATION BREAK U.S.A., INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
1996 1995
--------------------- ---------
Fully
Primary Diluted Proforma
--------- --------- ---------
Actual number of common shares outstanding 8,593,724 8,593,724 8,300,000
--------- --------- ---------
Weighted average number of common
shares issued and outstanding 8,572,934 8,572,934 6,524,658
Common stock equivalents computed under
the Treasury Stock method 270,313 518,917 -
--------- --------- ---------
8,843,247 9,091,851 6,524,858
--------- --------- ---------
Net income $7,239,715 $7,239,715 $5,845,455
--------- --------- ---------
Net income per share $ 0.82 $ 0.80 $ 0.90
--------- --------- ---------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,955
<SECURITIES> 124
<RECEIVABLES> 81,289
<ALLOWANCES> (2,509)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 14,413
<DEPRECIATION> (4,138)
<TOTAL-ASSETS> 138,480
<CURRENT-LIABILITIES> 110,653
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 27,741
<TOTAL-LIABILITY-AND-EQUITY> 138,480
<SALES> 94,084
<TOTAL-REVENUES> 102,741
<CGS> 0
<TOTAL-COSTS> 84,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,437
<INTEREST-EXPENSE> 3,771
<INCOME-PRETAX> 10,949
<INCOME-TAX> 3,709
<INCOME-CONTINUING> 7,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,240
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.80
</TABLE>
