SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-27270
VACATION BREAK U.S.A., INC.
FLORIDA 59-2581811
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
6400 N. ANDREWS AVENUE
PLAZA SUITE 200
FT. LAUDERDALE, FL 33309
Registrant's telephone number (954) 351-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The number of shares outstanding of registrant's common stock at November 3,
1997 was 8,678,564 shares.
1
<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
VACATION BREAK U.S.A., INC.
INDEX
Page
No.
PART I FINANCIAL INFORMATION:
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Operations for the
three and nine months ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
2
<PAGE>
<TABLE>
<CAPTION>
Vacation Break U.S.A., Inc. and Consolidated Subsidiaries
Consolidated Condensed Balance Sheets
ASSETS
September 30, December 31,
1997 1996
---------------- ------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 3,386,471 $ 6,307,928
Certificates of deposit - 124,235
Restricted cash 1,569,850 1,647,236
Cash in escrow from vacation ownership interests sales 14,408,476 8,055,543
Mortgages receivable on vacation ownership interests
sales - net 92,482,981 73,028,510
Receivables - net 3,014,727 3,757,385
Note receivable 864,660 1,993,883
Vacation ownership interests held for sale and real
estate and development costs 24,768,408 25,310,450
Prepaid expenses and other assets 6,056,353 5,919,983
Investment in unconsolidated affiliates 1,846,917 1,946,917
Due from unconsolidated affiliates 44,393 54,369
Income tax receivable 58,238 58,238
Property and equipment - net 9,015,118 10,274,870
----------- -----------
TOTAL ASSETS $ 157,516,592 $ 138,479,547
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 18,645,313 $ 13,210,543
Due to unconsolidated affiliates 162,105 5,578
Notes and mortgages payable 68,606,398 53,302,723
Note payable to unconsolidated affiliate 435,000 532,778
Capital lease obligations 1,108,622 1,349,426
Deferred income taxes 10,820,155 6,207,527
Advance deposits 2,339,437 2,948,884
Deferred revenues - vacation packages 9,840,621 16,588,264
Deferred revenues - vacation ownership interests 1,864,334 6,407,050
Due to affiliate of joint ventures 3,822,685 7,517,719
Minority interest in joint ventures 3,866,715 2,582,436
----------- -----------
Total Liabilities 121,511,385 110,652,928
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' Equity:
Preferred stock ($ .01 par value; 25,000,000 shares
authorized; no shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively)
- -
Common stock ($ .01 par value; 25,000,000 shares authorized; 8,676,214
and 8,593,725 shares issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 86,762 85,937
Additional paid in capital 13,973,363 13,414,457
Retained earnings 21,945,082 14,326,225
----------- -----------
Total Stockholders' Equity
36,005,207 27,826,619
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 157,516,592 $ 138,479,547
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
3
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<TABLE>
<CAPTION>
Vacation Break U.S.A., Inc. and Consolidated Subsidiaries
Consolidated Condensed Statements of Operations
For the three and nine months ended September 30,
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Vacation ownership interests $ 24,773,656 $ 13,655,112 $ 75,752,722 $ 62,480,938
Resort operations and other 2,369,411 2,339,561 8,261,810 9,886,586
Interest earned on mortgages receivable 3,385,125 2,343,357 9,268,882 6,076,077
Commissions earned on marketing agreements - 631,069 - 1,700,026
---------- ---------- ---------- ----------
30,528,192 18,969,099 93,283,414 80,143,627
---------- ---------- ---------- ----------
Costs and operating expenses:
Vacation ownership interests - cost of units sold 7,118,232 3,466,552 21,740,865 17,337,603
Vacation ownership interests - sales & marketing costs 10,179,547 8,536,300 30,897,352 27,285,259
Resort operations and other 2,241,907 2,644,079 7,568,533 10,202,217
Interest expense on financed mortgages receivable 1,177,075 793,755 3,271,749 1,822,312
Commissions and related expenses on marketing agreements - 950,641 - 1,757,339
Interest expense - other (15,544) 13,434 326,508 598,716
General and administrative 3,007,302 2,255,495 10,155,774 8,687,704
Costs related to terminated merger - - 463,933 -
Provision for doubtful accounts 2,051,035 217,656 3,859,084 872,864
Depreciation 506,218 530,871 1,584,288 1,619,551
---------- ---------- ---------- ----------
26,265,772 19,408,783 79,868,086 70,183,565
---------- ---------- ---------- ----------
Income from operations before income taxes, minority
interest and equity in earnings of unconsolidated affiliate 4,262,420 (439,684) 13,415,328 9,960,062
Minority interest in earnings of joint ventures (100,569) (259,484) (1,283,829) (838,448)
Equity in earnings of unconsolidated affiliate 20,000 46,390 100,000 121,390
---------- -------- --------- ----------
Income before income taxes 4,181,851 (652,778) 12,231,499 9,243,004
Provision for income taxes (1,657,114) 170,527 (4,612,628) (3,298,306)
---------- ------- --------- ---------
Net income $ 2,524,737 $ (482,251) $ 7,618,871 $ 5,944,698
========= ======= ========= =========
Net income per share
Primary $ 0.28 $ (0.06) $ 0.85 $ 0.67
==== ==== ==== ====
Weighted average common stock and common stock equivalents
outstanding
Primary 9,151,479 8,570,000 8,974,092 8,813,129
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
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<TABLE>
<CAPTION>
Vacation Break U.S.A., Inc. and Consolidated Subsidiaries
Consolidated Condensed Statements of Cash Flows
For the nine months ended September 30,
(Unaudited)
1997 1996
-------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,618,871 $ 5,944,700
Adjustments to reconcile net income to net
cash (provided by) used in operating activities:
Provision for doubtful accounts 3,859,084 872,864
Depreciation and amortization 1,584,288 1,619,551
Equity in earnings of unconsolidated affiliate 100,000 (122,390)
Provision for deferred income taxes 4,612,628 3,250,195
Minority interest in earnings of joint ventures 1,283,829 2,640,158
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests sales (23,313,555) (21,438,864)
Receivables 742,658 (2,293,829)
Note receivable 1,129,223 8,238
Vacation ownership interests held for sale and
real estate and development costs 542,042 (5,202,346)
Prepaid expenses and other assets (136,370) (3,586,736)
Due to/from unconsolidated affiliates - net 166,503 (209,444)
Accounts payable and accrued liabilities 5,435,220 3,474,907
Deferred revenues - vacation ownership interests (4,542,716) (5,477,655)
Deferred income - vacation packages (6,747,643) (1,301,766)
Advance deposits (609,447) (833,027)
--------- -----------
Net cash used in operating activities (8,275,385) (22,655,444)
--------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (155,024) (2,247,796)
Additions to restricted cash (1,907,435) (3,160,623)
Releases of restricted cash 1,984,821 4,963,433
Increase (decrease) in cash in escrow from VOI sales - net (6,352,933) 6,297,576
Purchases of certificates of deposit - (121,497)
Maturities of certificates of deposit 124,235 629,507
--------- ---------
Net cash (used in) provided by investing activities (6,306,336) 6,360,600
--------- ---------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 48,045,833 37,431,170
Repayments of notes and mortgages payable (32,742,158) (20,013,836)
Borrowings from affiliate of joint ventures - 763,134
Repayments to affiliate of joint ventures (3,695,034) -
Repayment of note payable to unconsolidated affiliate (97,778) (27,222)
Borrowings on capital lease obligations 457,272 -
Payments on capital lease obligations (410,316) (293,454)
Stockholder's income tax distributions - (1,130,793)
Proceeds from the exercise of employee stock options 559,717 -
Proceeds from issuance of common stock - 1,182,669
---------- ----------
Net cash provided by financing activities 11,660,264 18,368,940
---------- ----------
Net (decrease) increase in cash and cash equivalents (2,921,457) 2,074,096
Cash and cash equivalents at beginning of period 6,307,928 8,499,386
--------- ----------
Cash and cash equivalents at end of period $ 3,386,471 $ 10,573,482
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Equipment purchased under capital lease obligations $ 169,512 $ -
========= ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
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 September 30, 1997 the consolidated financial statements
include the accounts of Vacation Break U.S.A., Inc. and its subsidiaries.
In the opinion of management, the unaudited consolidated financial
statements include all adjustments and accruals necessary to present fairly the
Company's consolidated financial position at September 30, 1997 and the
consolidated results of its operations for the three and nine months ended
September 30, 1997 and 1996 and its statement of cash flows for the nine month
periods ended September 30, 1997 and 1996. The interim results of operations are
not necessarily indicative of the results which may occur for the year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. All significant intercompany accounts and transactions are
eliminated in consolidation. These unaudited consolidated condensed financial
statements and notes thereto should be read in conjunction with the annual
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K as filed with the United States Securities and
Exchange Commission on March 31, 1997.
2. RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified
to conform to the 1997 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 three and nine months
ended September 30, 1996. This presentation more closely correlates to the
presentation method of other companies in the vacation ownership industry.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 specifies new standards designed to improve the earnings per
share ("EPS") information provided in financial statements by simplifying the
existing computational guidelines. Some of the changes made to simplify EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, (b) eliminating the modified treasury stock method
and the three percent materiality provision, and (c) revising the contingent
share provisions and the supplemental EPS data requirements. SFAS 128 also makes
a number of changes to existing disclosure requirements. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company has not yet determined the impact of the
implementation of SFAS 128.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income. The purpose of reporting comprehensive income is to
present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. SFAS 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Company has not
yet determined the impact of the implementation of SFAS 130.
6
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VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain "second level"
information by geographic area and for products/services. SFAS 131 also makes a
number of changes to existing disclosure requirements. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The Company has not yet determined the impact of the implementation
of SFAS 131.
4. 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 VOIs. Actual results could differ from those
estimates.
5. NET INCOME PER SHARE
Earnings per share amounts are based upon the weighted average number
of common shares and common share equivalents. Common share equivalents are
excluded from the computation for periods in which they have an anti-dilutive
effect. The dilutive effect of common share equivalents for the computation of
earnings per share is less than 3% for the nine months ended September 30, 1996.
The use of Common share equivalents for the EPS computation was anti-dilutive to
the computation of the fully diluted EPS for the three months ended September
30,1996 and the nine months ended September 30, 1997. Accordingly, all earnings
per share computations are reported as primary. During the nine months ended
September 30, 1997, approximately 270,000 options were granted to employees,
60,000 options were granted to outside directors and 30,000 warrants were
granted to a financial advisor. An employee of the financial advisor is a member
of the Board of Directors of the Company.
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to two state actions related to the Company's
marketing program alleging that Vacation Break violated the consumer protection
or telemarketing law of such states. The Company is and will continue to
actively attempt to settle with each of these states over the next several
months and does not anticipate legal and settlement costs will have a material
impact on the results of operations, liquidity or financial condition of the
Company. As of September 30, 1997, the Company settled proceedings with the
counties of Napa and Ventura, California and the states of California, Maryland,
New York, Connecticut, Massachusetts, Texas, North Carolina, West Virginia, New
Mexico, Wisconsin, Minnesota, Illinois and Washington relating to the same
marketing practice as the pending proceedings. In connection with such
settlements (excluding the counties of Napa and Ventura, California and the
states of California and Maryland), the Company has agreed to provide a fund of
up to $225,000 to satisfy claims from eligible consumers who submit a written
request for a refund within a 60 day period of time. In addition, the Company
has also agreed to pay the states with which it has reached settlements an
aggregate of $332,500 in reimbursement of their investigative costs and related
fees.
7
<PAGE>
On March 28, 1997, a lawsuit was filed against the Company and Kevin M.
Sheehan, its President, in the Circuit Court for Pinellas County, Florida by
Market Response Group and Laser Company, Inc. (MRG&L). 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 intends to defend each and every claim vigorously, and will
file counterclaims if and when appropriate. The Company's management does not
believe that the resolution of the lawsuit filed by MRG&L will have a material
adverse impact on the financial condition or liquidity of the Company; however,
it should be noted that such litigation is in the early stages of discovery.
Additionally, 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 condition of the Company.
7. PRIOR MERGER DISCUSSIONS
In November 1996 the Company announced that it had entered into an
Agreement and Plan of Merger (as amended in March 1997) with various companies
owned or controlled by James E. Lambert. On April 23, 1997 the Company announced
that this Agreement and Plan of Merger had been terminated by mutual agreement
of the parties. The Company had incurred legal, accounting and various other
costs in anticipation of and preparation for the proposed merger. These costs,
which amounted to approximately $0.5 million, have been charged to the
operations of the Company as "Costs related to terminated merger" included on
the statement of operations for the nine months ended September 30, 1997.
8. SUBSEQUENT EVENTS
On August 10, 1997, the Company announced that it has entered into a
definitive agreement to merge with Fairfield Communities, Inc. ("Fairfield")
through a stock exchange anticipated to be completed in the fourth quarter of
1997. The agreement calls for Fairfield Communities to issue 0.6075 shares of
common stock in exchange for each share of the Company's outstanding common
stock. The Company will incur substantial legal, accounting, investment banking
and other expenses in connection with the proposed merger. The completion of the
acquisition is subject to approval by both Fairfield's and the Company's
shareholders, regulatory approvals, as well as the satisfactory receipt of other
conditions to closing.
8
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<TABLE>
<CAPTION>
The following table presents key statistics representing VOI activities
in properties owned by the Company or under marketing and purchase agreements.:
SEA SANTA STAR ROYAL
GARDENS(1) BARBARA PALM AIRE ISLAND VISTA(2) BREAKERS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Number of VOIs available 11,388 4,680 5,564 6,396 5,148 1,000 31,980
Net number of VOIs sold through
September 30, 1997 7,078 * 4,645 4,425 4,128 * - 256 20,276
Percent sold through
September 30, 1997 62% * 99% 80% 65% * 0% 26% 63%
Net number of VOIs sold during the
3 months ended September 30, 1997 124 * 129 818 506 * - 193 1,577
Net number of VOIs sold during the
9 months ended September 30, 1997 107 * 1,256 2,471 1,681 * - 256 5,515
<FN>
* Includes units sold at properties where revenue and income recognition were
deferred or partially deferred for financial reporting purposes.
(1) Includes 4,368 unit weeks at the Ocean Palms phase under construction.
(2) Acquired in January 1996 - formerly known as "Ocean Ranch" and currently
under construction.
</FN>
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Condensed 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 in the
statement of operations for the three and nine month periods ended September 30,
1997. Previous years' amounts have been reclassified to reflect this change in
presentation, which more closely correlates to the presentation 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. In the three and nine month
periods ended September 30, 1997, the Company realized no commission revenues
from the sale of VOIs in properties owned by other developers.
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 development stage of certain
projects, it is anticipated that certain VOI sales in these projects will
generate deferred revenue as the Company completes sales at a more rapid pace
than 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.
9
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<TABLE>
<CAPTION>
The following table sets forth certain consolidated operating
information of the Company for the three month periods ended September 30, 1997
and 1996
THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES
Sales of vacation ownership interests 81.1 72.0
Resort operations and other 7.8 12.3
Interest earned on mortgages receivable 11.1 12.4
Commissions earned on marketing agreements 0.0 3.3
----- -----
Total revenues 100.0 100.0
===== =====
AS A PERCENTAGE OF VACATION OWNERSHIP INTEREST SALES
Vacation ownership interests costs of units sold 28.7 25.4
Sales and marketing 41.1 62.5
Provision for doubtful accounts 8.3 1.6
AS A PERCENTAGE OF REVENUES FROM RESORT OPERATIONS
AND OTHER
Resort operations and other expense 94.6 113.0
AS A PERCENTAGE OF INTEREST EARNED ON MORTGAGES RECEIVABLE
Interest expense on financed mortgages receivable 34.8 33.9
AS A PERCENTAGE OF COMMISSIONS EARNED ON
MARKETING AGREEMENTS
Commission and related expenses on marketing agreements n/a 150.6
AS A PERCENTAGE OF TOTAL REVENUES
General and administrative 9.9 11.9
Depreciation and amortization 1.7 2.8
Interest expense - other 0.0 0.1
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's total revenues for the three months ended September 30,
1997 were $30.5 million, an increase of $11.6 million or 61.0% from the three
months ended September 30, 1996. The Company sold 1,577 VOIs in completed and
pre-construction units at Company-owned properties during the three months ended
September 30, 1997, an increase of 22.3% from 1,289 VOIs sold during the three
months ended September 30, 1996. The following table reconciles VOI sales
recorded to VOI revenues recognized for the periods.
<TABLE>
<CAPTION>
Three months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
VOI sales revenues recorded during the period $ 20,941,550 $ 15,897,670
VOI sales revenues deferred at the beginning of the period 5,696,440 1,512,968
VOI sales revenues deferred at the end of the period (1,864,334) (3,755,526)
--------- ---------
VOI sales revenues recognized during the period $ 24,773,656 $ 13,655,112
========== ==========
</TABLE>
Costs of units sold as a percentage of VOI sales increased from 25.4%
for the three months ended September 30, 1997 to 28.7% for the three months
ended September 30, 1996. The unit-week cost to the Company for the Star Island
units is currently fixed by contract at 35% of the related VOI sales price,
resulting in a higher cost per unit than at other projects, but providing
protection against volatility in construction and financing costs.
10
<PAGE>
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 three months ended September 30, 1997. Previous
years' amounts have been reclassified to reflect this change in presentation
which more closely correlates with the presentation 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, were $10.2 million, or 41.1% of related VOI
revenues, for the three months ended September 30, 1997 compared to $8.5
million, or 62.5% of related VOI revenues, for the three months ended September
30, 1996. The significantly higher costs as a percentage of related revenues for
the quarter ended September 30, 1996 were the result of a 20% decrease in tours
during this period primarily resulting from the conversion of the Company's
reservation system and a fire aboard a third party vendor's cruise ship, which
materially altered the itinerary of vacation package travelers. The costs of
sales commissions and administrative expenses have remained relatively constant,
as a percentage of recognized sales volume for the three months ended September
30, 1997 compared to the three months ended September 30, 1996.
The Company's revenues from resort and other operations increased slightly
to $2.4 million for the three months ended September 30, 1997 from $2.3 million
for the three months ended September 30, 1996. Cost of resort operations
decreased to $2.2 million for the three months ended September 30, 1997 from
$2.6 million for the three months ended September 30, 1996 as a result of
eliminating unprofitable food and beverage operations and improving rental
program operations. Such costs as a percentage of revenues from resort and other
operations decreased to 94.6% for the three months ended September 30, 1997 from
113.0% for the three months ended September 30, 1996.
At September 30, 1997, the Company's weighted average interest rate on
its entire loan portfolio was 16.3%, as compared to 16.1% at September 30, 1996.
The Company's weighted average interest rate on borrowings against loans
hypothecated by the Company to unaffiliated lenders was 10.1% at September 30,
1997 compared to 10.5% at September 30, 1996. As a result of the continued
increase in sales of VOIs and the proportionate increase of VOIs sold at
Company-owned properties from 1993 through September 30, 1997, the Company's
interest income from financing activities increased to $3.4 million for the
three months ended September 30, 1997 from $2.3 million for the three months
ended September 30, 1996. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by the Company to unaffiliated
lenders of $1.2 million during the three months ended September 30, 1997 as
compared to $0.8 million during the three months ended September 30, 1996.
The Company's continued development of Company-owned resort properties
and sale of VOIs in such properties resulted in the discontinuance of
commissions received in connection with the sale of VOIs for other developers.
During 1996, the Company terminated its sales and marketing arrangement with a
developer in the Bahamas and curtailed the sales of VOIs in the Bahamas. The
Company derived no revenues from such commissions for the three months ended
September 30, 1997 as compared to $0.6 million for the three months ended
September 30, 1996 with related costs in the 1996 period of $1.0 million or
150.6% of related commission revenues.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead, increased to $3.0 million for the three months
ended September 30, 1997 from $2.3 million for the three months ended September
30, 1996, and accounted for approximately 9.9% of the Company's total revenues
during the three months ended September 30, 1997 as compared to 11.9% during the
three months ended September 30, 1996.
The provision for doubtful accounts increased to $2.1 million for the
three months ended September 30, 1997 from $0.2 million for the three months
ended September 30, 1996. This represents 8.3% of VOI sales revenues for the
three months ended September 30, 1997 as compared to 1.6% for the three months
ended September 30, 1996. The Company monitors its provision for doubtful
accounts on a quarterly basis to provide for future losses associated with
defaults on customer mortgages receivable. This increase was due primarily to
the increased provision for doubtful accounts resulting from the Company's
increased mortgage receivable portfolio balance and to reflect current
delinquency trends.
Depreciation and amortization expense remained constant at $0.5 million
for the three months ended September 30, 1997 and September 30, 1996.
As a result of the foregoing, the Company's net income was $2.5 million
for the three months ended September 30, 1997, an increase of $3.0 million or
623.5% from a loss of $0.5 million for the three months ended September 30,
1996.
11
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth certain consolidated operating
information of the Company for the nine month periods ended September 30, 1997
and 1996
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES
Sales of vacation ownership interests 81.2 78.0
Resort operations and other 8.9 12.3
Interest earned on mortgages receivable 9.9 7.6
Commissions earned on marketing agreements 0.0 2.1
----- -----
Total revenues 100.0 100.0
===== =====
AS A PERCENTAGE OF VACATION OWNERSHIP INTEREST SALES
Vacation ownership interests costs of units sold 28.7 27.7
Sales and marketing 40.8 43.7
Provision for doubtful accounts 5.1 1.4
AS A PERCENTAGE OF REVENUES FROM RESORT OPERATIONS
AND OTHER
Resort operations and other expense 91.6 103.2
AS A PERCENTAGE OF INTEREST EARNED ON MORTGAGES RECEIVABLE
Interest expense on financed mortgages receivable 35.3 30.0
AS A PERCENTAGE OF COMMISSIONS EARNED ON
MARKETING AGREEMENTS
Commission and related expenses on marketing agreements n/a 103.4
AS A PERCENTAGE OF TOTAL REVENUES
General and administrative 10.9 10.8
Depreciation and amortization 1.7 2.0
Interest expense - other 0.4 0.7
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's total revenues for the nine months ended September 30,
1997 were $93.3 million, an increase of $13.1 million or 16.4% from the nine
months ended September 30, 1996. The Company sold 5,515 VOIs in completed and
pre-construction units at Company-owned properties during the nine months ended
September 30, 1997, an increase of 17.0% from 4,712 VOIs sold during the nine
months ended September 30, 1996. The following table reconciles VOI sales
recorded to VOI revenues recognized for the periods.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
VOI sales revenues recorded during the period $ 71,210,006 $ 57,003,283
VOI sales revenues deferred at the beginning of the period 6,407,050 9,233,181
VOI sales revenues deferred at the end of the period (1,864,334) (3,755,526)
--------- ---------
VOI sales revenues recognized during the period $ 75,752,722 $ 62,480,938
========== ==========
</TABLE>
Costs of units sold as a percentage of VOI sales increased slightly to
28.7% for the nine months ended September 30, 1997 from 27.7% for the nine
months ended September 30, 1996. The unit-week cost to the Company for the
Orlando units is fixed by contract at 35% of the related VOI sales price,
resulting in a higher cost per unit than at other projects, but providing
protection against volatility in construction and financing costs.
12
<PAGE>
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 nine months ended September 30, 1997. Previous
years' amounts have been reclassified to reflect this change in presentation
which more closely correlates with the presentation 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, were $30.9 million, or 40.8% of related VOI
revenues, for the nine months ended September 30, 1997 compared to $27.3
million, or 43.7% of related VOI revenues, for the nine months ended September
30, 1996. The significantly higher costs, as a percentage of related revenue,
for the nine months ended September 30, 1996 were the result of a 20% decrease
in tours during the third quarter of 1996 primarily resulting from the
conversion of the Company's reservation system and a fire aboard a third party
vendor's cruise ship, which materially altered the itinerary of vacation package
travelers. The costs of sales commissions and administrative costs have remained
relatively constant, as a percentage of recognized sales volume for the nine
months ended September 30, 1997 compared to the nine months ended September 30,
1996.
The Company's revenues from resort and other operations decreased to
$8.3 million for the nine months ended September 30, 1997 from $9.9 million for
the nine months ended September 30, 1996, primarily as a result of having fewer
units available for resort occupancy during the 1997 period, including the last
phase of Palm Aire which underwent renovations for VOI sales during the second
quarter of 1997. Additionally, the Company closed certain of its unprofitable
food and beverage operations during the year. Cost of resort operations
decreased to $7.6 million for the nine months ended September 30, 1997 from
$10.2 million for the nine months ended September 30, 1996 as a result of the
reduction of related revenues due to a reduction in available rooms and the
closing of certain food and beverage operations. Such costs as a percentage of
revenues from resort and other operations decreased to 91.6% for the nine months
ended September 30, 1997 from 103.2% for the nine months ended September 30,
1996.
At September 30, 1997, the Company's weighted average interest rate on
its entire loan portfolio was 16.3%, compared to 16.1% at September 30, 1996.
The Company's weighted average interest rate on borrowings against loans
hypothecated by the Company to unaffiliated lenders was 10.1% at September 30,
1997 compared to 10.5% at September 30, 1996. As a result of the continued
increase in sales of VOIs and the proportionate increase of VOIs sold at
Company-owned properties from 1993 through September 30, 1997, the Company's
interest income from financing activities increased to $9.3 million for the nine
months ended September 30, 1997 from $6.1 million for the nine months ended
September 30, 1996. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by the Company to unaffiliated
lenders of $3.3 million during the nine months ended September 30, 1997 compared
to $1.8 million during the nine months ended September 30, 1996.
The Company's continued development of Company-owned resort properties
and sale of VOIs in such properties resulted in the discontinuance of
commissions received in connection with the sale of VOIs for other developers.
During late 1996, the Company terminated its sales and marketing arrangement
with a developer in the Bahamas and curtailed the sales of VOIs in the Bahamas.
The Company derived no revenues from such commissions for the nine months ended
September 30, 1997 and $1.7 million for the nine months ended September 30, 1996
with related costs in the 1996 period of $1.8 million or 103.4% of related
commission revenues.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead, increased to $10.2 million for the nine months
ended September 30, 1997 from $8.7 million for the nine months ended September
30, 1996, and accounted for approximately 10.9% of the Company's total revenues
during the nine months ended September 30, 1997 as compared to 10.8% during the
nine months ended September 30, 1996. The increase for the nine months ended
September 30, 1997 is also attributable in part to an increase for various legal
and regulatory matters.
During the nine months ended September 30, 1997, the Company charged
approximately $0.5 million to operations, representing legal, accounting and
other costs related to the termination of the merger agreement with the Lambert
Companies.
The provision for doubtful accounts increased to $3.9 million for the nine
months ended September 30, 1997 from $0.9 million for the nine months ended
September 30, 1996. This represents 5.1% of VOI sales revenues for the nine
months ended September 30, 1997 as compared to 1.4% for the nine months ended
September 30, 1996. The Company monitors its provision for doubtful accounts on
a quarterly basis to provide for future losses associated with defaults on
customer mortgages receivable. This increase was due to the increased provision
for doubtful accounts resulting from the increased mortgage receivable portfolio
balance and to reflect current delinquency trends.
13
<PAGE>
Depreciation and amortization expense remained constant at $1.6 million for
the nine months ended September 30, 1997 and the nine months ended September 30,
1996.
As a result of the foregoing, the Company's net income was $7.6 million
for the nine months ended September 30, 1997, an increase of $1.7 million or
28.2% from $5.9 million for the nine months ended September 30, 1996.
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 for an aggregate of up to approximately $90.0 million of available
financing to the Company (of which $57.5 million was outstanding as of September
30, 1997) bearing interest at variable rates tied to the "prime" rate plus 2.00%
to 2.50% or a rate ranging between 375 and 475 basis points over LIBOR. Included
in this availability is up to $20.0 million of pre-construction sales financing
(financing of sales of units under construction which have not been deeded), of
which $5.0 million was outstanding at September 30, 1997. A significant portion
of this indebtedness has been guaranteed by Ralph Muller, the Chairman, Chief
Executive Officer and majority shareholder of the Company. Under these
arrangements, the Company hypothecates, or pledges as security, qualified
purchaser promissory notes to these lenders, who lend the Company 75% to 85% of
the principal amount of such notes or, in the case of pre-sale financing, 60% of
the purchase price of the underlying VOI or 65% of the outstanding balance 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 $90.0 million, $10.0
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 March 1998; $40.0 million of such financing is a
revolving loan with scheduled availability until November 1998 and $25.0 million
of such financing is a revolving loan with scheduled availability until May
1999. The Company is in the process of consolidating the $15.0 million line and
the $25.0 million line into a $40.0 million warehouse facility. After the
termination of the respective availability periods, the outstanding borrowings
under the four lines 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 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 for 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 September 30, 1997, the Company had a portfolio of 14,263
loans to VOI purchasers, which loans had a weighted average maturity of
approximately 4.9 years, and a weighted average interest rate of 16.3%, compared
to a weighted average interest rate of 10.1% 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 funds have been provided from operations
and from secured term loans under existing credit facilities, as well as from
the proceeds of the Company's initial public offering ("IPO"). The Company
presently has no commitments to finance capital expenditures other than (i) a
$14.0 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) a $13.7 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 and (iv) a $1.7 million construction facility from Bank
Atlantic to finance the renovation of 23 units at Palm Aire Resort and Spa.
14
<PAGE>
The Company intends to continue to provide financing to purchasers of
VOIs and to obtain funds to finance the negative cash flow resulting from the
payment of sales commissions and other selling expenses and to make release
payments on bank indebtedness relating to development of its resort properties.
For the nine months ended September 30, 1997 and 1996, the Company derived
interest income of $9.3 million and $6.1 million, respectively, from the
financing of purchaser notes receivable and incurred interest expense of $3.3
and $1.8 million, respectively, relating to loans secured by notes hypothecated
to these unaffiliated lenders.
During the nine months ended September 30, 1997 and 1996, the Company's
operating activities used approximately $8.3 million and approximately $22.7
million, respectively, in cash and cash equivalents and its investing activities
used approximately $6.3 million and provided approximately $6.4 million,
respectively, in cash. During these periods $11.7 million and $18.4 million,
respectively, was provided through the Company's financing activities, resulting
in a net decrease in cash and cash equivalents of $2.9 million for the nine
months ended September 30, 1997 and a net increase of cash and cash equivalents
of $2.1 million for the nine months ended September 30, 1996.
The Company believes that funds from operating and financing
activities, borrowings under its existing credit facilities and the remaining
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 and appropriate, through additional financing.
No assurance can be given that additional financing will be available on terms
and conditions acceptable to the Company.
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 which represent the Company's expectations or beliefs
concerning future events, including, but not limited to, statements regarding
increased sales of VOIs in Company owned resorts and the sufficiency of the
Company's cash flow, as well as receivables financing, for its future liquidity
and capital resource needs. These forward looking statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements. These factors include,
without limitation, the Company's ability to continue to develop and market
resort properties, increases in marketing costs, the availability of favorable
financing agreements, increases in sales of vacation packages, fluctuations in
interest rates and the effects of governmental regulation. Results actually
achieved may differ materially from expected results included in these
statements as a result of these or other factors.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Refer to Note 6, Commitments and Contingencies, of the Consolidated
Condensed Financial Statements included elsewhere herein.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.85 Amendment, dated September 24, 1997 to Construction Loan
Agreement dated November 27, 1996 between Sea Gardens Beach and
Tennis Resort, Inc. and SunTrust Bank, South Florida, N.A.
10.86 First amendment, dated October 16, 1997 to Construction
Loan Agreement between Ocean Ranch Vacation Group and Bank
Atlantic
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
b. Reports on Form 8-K:
NONE
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VACATION BREAK U.S.A., INC.
By: /S/ RALPH P. MULLER
Ralph P. Muller
Chairman of the Board and Chief Executive Officer
Date: November 12, 1997
By: /S/ KEVIN M. SHEEHAN
Kevin M. Sheehan
President
Date: November 12, 1997
By: /S/ HENRY M. CAIRO
Henry M. Cairo
Chief Financial Officer and Chief Operating Officer
Date: November 12, 1997
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.85 Amendment, dated September 24, 1997 to Construction Loan
Agreement dated November 27, 1996 between Sea Gardens Beach and
Tennis Resort, Inc. and SunTrust Bank, South Florida, N.A.
10.86 First amendment, dated October 16, 1997 to Construction
Loan Agreement between Ocean Ranch Vacation Group and Bank
Atlantic
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
AMENDMENT TO
CONSTRUCTION LOAN AGREEMENT
THIS AMENDMENT dated this 24th day of September, 1997 is an amendment
to that certain Construction Loan Agreement between SUN TRUST BANK, SOUTH
FLORIDA, N.A. ("Lender") and SEA GARDENS BEACH AND TENNIS RESORT, INC., a
Florida corporation ("Borrower"), which construction Loan Agreement is
hereinafter referred to as the "Agreement".
W I T NE S S E T H:
WHEREAS, Lender has issued a commitment letter dated August 12, 1997
(the "Commitment") to the Borrower, which Commitment extends to the Borrower an
additional $1,000,000.00 in construction financing (the "Future Advance") for
construction of the improvements set forth in SCHEDULE 1 attached to this
Amendment (the "Improvements"); and
WHEREAS, the Borrower, as well as the guarantors, have accepted the
terms and conditions of the Commitment; and
WHEREAS, the parties desire to amend the Agreement as more fully set
forth hereafter.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, including but not limited to
the Future Advance made by the Lender to the Borrower, the parties hereto agree
as follows:
1. Prior to any disbursements of the Future Advance, the Borrower and
the guarantors set forth on EXHIBIT "A" (the "Guarantors") shall execute and
deliver or cause to be executed and delivered to Lender the documents set forth
on SCHEDULE 2 attached (the "Future Advance Loan Documents").
2. Initial funding of the Future Advance loan proceeds will be made in
accordance with the requirements of Article II of the Agreement.
3. The method and conditions of disbursement of the Future Advance loan
proceeds shall be in accordance with Article V of the Agreement.
4. The term "Note" as used in the Agreement shall hereafter refer to
the $14,000,000.00 Consolidated Promissory Note of even date delivered by the
Borrower to the Lender and which consolidates and replaces the $13,000,000.00
Future Advance Promissory Note described in the Agreement and the $1,000,000.00
Future Advance Promissory Note from Borrower to lender of even date representing
the Future Advance. The term "Loan Documents" shall hereafter be deemed to
include Future Advance Loan Documents.
1
<PAGE>
5. The Borrower hereby restates and ratifies all of its representations
and warranties set forth in Article III of the Agreement, as well as the
covenants of the Borrower set forth in Article IV of the Agreement, and hereby
confirms that all such representations and warranties are true and correct as of
the date of the execution of this Amendment and there has been no breach of any
affirmative or negative covenants of the borrower under the Agreement.
6. Paragraph 9 Article VIII ("PARTIAL RELEASES.") is hereby deleted and
is replaced with following:
9. PARTIAL RELEASE IN THE OCEAN PALMS PARCEL. Provided there
exists no event of default under this Loan Agreement, the Note, the
Mortgage or any related Loan Documents, at the closings of the sale of
vacation ownership weeks in the Ocean Palms parcel, Lender will release
such vacation ownership weeks from the lien of the Mortgage upon
payment of the applicable release price together with a $25.00 release
fee per vacation ownership week ($12.50 for biennial unit weeks). The
release prices shall be determined based upon the outstanding principal
balance of the Note as of the date that the Future Advance loan
proceeds are fully funded and shall be in such an amount that would
cause repayment of that Note principal balance on such date in full
assuming eighty-five percent (85%) of the vacation ownership weeks in
the Ocean Palms Parcel are sold and released. The release price for
biennial vacation ownership weeks will be one-half of the vacation
ownership week release price.
Payments received from the Borrower after 1:00 a.m.
eastern time will be effective on the next business day.
7. The Borrower and Lender hereby confirm, except as amended herein,
that all the other terms and conditions of the Agreement shall remain in full
force and effect and the Borrower further covenants that it known of no defaults
by the Borrower or the Lender under the Agreement and the Borrower has no
defenses or offsets to the enforcement of the Agreement or the Loan Documents or
the Future Advance Loan Documents and that same continue in full force and
effect this date and will continue so during the term of the Loan and the Future
Advance.
IN WITNESS WHEREOF, the Borrower and Lender have duly executed this
Agreement the day and year written above.
Witnesses: BORROWER:
SEA GARDENS BEACH AND TENNIS
RESORT, INC.
/s/ SANDRA L. WITTE By:/s/ HENRY M. CAIRO
- ---------------------------------- ---------------------------------
HENRY M. CAIRO, Chief Operating
/s/ CAROLYN C. BLACK Officer/Chief Financial Officer
- ----------------------------------
2
<PAGE>
LENDER:
SUN TRUST BANK, SOUTH FLORIDA, N.A.
/s/ SANDRA L. WITTE By:/s/ CHARLENE A. BENDER
- ---------------------------------- ---------------------------------
CHARLENE A. BENDER
/S/ CAROLYN C. BLACK First Vice President
- ----------------------------------
3
<PAGE>
EXHIBIT "A"
(Guarantors)
RALPH P. MULLER
VACATION BREAK RESORTS, INC.
VACATION BREAK U.S.A., INC.
ATLANTIC MARKETING REALTY, INC.
4
<PAGE>
SCHEDULE I
$ 210,786 Construction of two model units located on the second floor
behind the banquet area initially to be utilized as The
Palms model units with ultimate sale as unit weeks.
18,891 Remodeled Exit rooms.
201,556 Remodeled Sales Room
186,035 Converted restaurant to Welcome Center.
252,056 Remodeling Reception Area & General Offices
130,676 Housewares for The Palms
- ----------
$1,000,000 TOTAL
5
<PAGE>
SCHEDULE 2
(Description of Loan Documents)
1. $1,000,000.00 Future Advance Promissory Note
2. Closing Statement
3. Mortgage Modification Agreement
4. Ratification of Guarantees
5. Closing Protection Letter
6. Mortgagor's Affidavit
7. Flood Hazard Notice
8. Insurance Anti-Coercion Statement
9. Corporate Resolutions and Certificates of Good Standing
10. Opinion of Borrower's counsel
11. Compliance Certificate
12. Spousal Joinder
6
FIRST AMENDMENT TO CONSTRUCTION LOAN AGREEMENT
THIS FIRST AMENDMENT TO CONSTRUCTION LOAN AGREEMENT (this "First
Amendment") is made as of the 16th day of October, 1997, by and between OCEAN
RANCH VACATION GROUP, a Florida general partnership ("Borrower") and
BANKATLANTIC, a Federal Savings Bank ("Lender").
W I T N E S S E T H :
WHEREAS, Borrower and Lender have entered into that certain
Construction Loan Agreement dated June 13, 1996 (the "Loan Agreement") in
connection with a loan from Lender to Borrower in the aggregate sum of up to
$12,700,000.00 (the "Existing Loan"), the proceeds of which are to be used by
Borrower to finance, among other matters, the construction of certain
renovations to an existing hotel in connection with the development of time
share units (the "Improvements") upon certain lands situate and lying in Broward
County, Florida, as more particularly described in the Loan Agreement (the
"Property"); and
WHEREAS, Borrower has requested that Lender lend to Borrower a future
advance loan in the amount of $1,000,000.00 (the "Future Advance Loan") to
finance additional construction costs in connection with the Improvements.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
1. The above and foregoing preamble is acknowledged to be true and is
hereby incorporated by reference herein.
2. All capitalized terms utilized herein and not otherwise defined
shall have the same meanings assigned to them in the Loan Agreement.
3. Certain subparagraphs of paragraph 1.2 ("Definitions") of the Loan
Agreement are restated to read, in full, as follows:
"AGREEMENT" or "LOAN AGREEMENT": Collectively, that certain
Construction Loan Agreement dated June 13, 1996, as amended by a First
Amendment to Construction Loan Agreement dated of even date herewith.
"ASSIGNMENT OF RENTS, LEASES AND DEPOSITS": That certain Assignment of
Rents, Leases and Deposits dated June 13, 1996 and recorded on June 25,
1996 in O.R. Book 25052, Page 0248 of the Public Records of Broward
County, Florida, which assigns to Lender, among other items, all of
Borrower's right, title and interest in and to all agreements for the
lease of the Property, or any part thereof, if any, and any rent,
issues and profits derived or to be derived from the Property. Such
Assignment of Rents, Leases and Deposits has been reaffirmed pursuant
to that Certain Reaffirmation Agreement dated of even date herewith.
1
<PAGE>
"ASSIGNMENTS": Collectively, (i) the Assignment of Rents, Leases and
Deposits, (ii) the Collateral Assignment of Rights and Agreements
Affecting Real Estate, and (iii) the Collateral Assignment of Sales
Contracts, each of which is dated June 13, 1996 and has been reaffirmed
pursuant to that certain Reaffirmation Agreement dated of even date
herewith.
"COLLATERAL ASSIGNMENT OF RIGHTS AND AGREEMENTS AFFECTING REAL ESTATE":
A Collateral Assignment of Rights and Agreements Affecting Real Estate
executed on June 13, 1996 by Borrower, assigning to Lender, among other
items, all of its right, title and interest in and to certain
agreements entered into by Borrower with respect to the Property and
certain licenses, permits and agreements affecting the Property. Such
Collateral Assignment of Rights and Agreements Affecting Real Estate
has been reaffirmed pursuant to that certain Reaffirmation Agreement
dated of even date herewith.
"COLLATERAL ASSIGNMENT OF SALES CONTRACTS": A Collateral Assignment of
Sales Contracts dated June 13, 1996, assigning to Lender, among other
items, all of Borrower's right, title and interest in and to any Sales
Contracts entered into by Borrower with respect to the Property. Such
Collateral Assignment of Sales Contracts has been reaffirmed pursuant
to that certain Reaffirmation Agreement dated of even date herewith.
"CREDIT FACILITY LETTER": That certain letter executed by and between
Lender and Borrower dated April 11, 1996, and that certain letter
executed between Borrower and Lender dated August 29, 1997 as to the
Future Advance Loan and all amendments to the foregoing, the terms and
conditions of which are hereby incorporated by reference herein, but in
the event of any conflict or discrepancy between the terms of this
Agreement and the Credit Facility Letter, the terms of this Agreement
shall control.
"GUARANTY": Collectively, those certain Absolute Unconditional and
Continuing Guaranties executed by each Guarantor of even date herewith
guaranteeing (a) repayment of the Notes and all other indebtedness of
Borrower to Lender and (b) performance by Borrower of all of Borrower's
obligations under the Notes, this Agreement and the other Loan
Documents.
"LOAN DOCUMENTS": Those documents executed or submitted in connection
with the Loan, including without limitation, (i) the Modification
Promissory Note, (ii) the Future Advance Note, (iii) the Consolidated
Note, (iv) the Mortgage, as modified by that certain Receipt for Future
Advance and Mortgage Modification Agreement dated of even date
herewith, (v) the Loan Agreement as amended by this Amendment, (vi) the
Guaranty, (vii) the Financing Statements, (viii) the Borrower's
Affidavit, (ix) the Assignments, (x) the Hazardous Substance
Certificate and Indemnification Agreement, (xi) the Americans With
Disabilities Certificate and Indemnification Agreement, (xii) the
Reaffirmation Agreement of even date herewith, and (xiii) all other
documents and instruments executed by Borrower in connection with the
Loan.
2
<PAGE>
"MORTGAGE": Collectively, that certain Mortgage Deed and Security
Agreement dated June 13, 1996 and recorded on June 25, 1996 in O.R.
Book 25052, Page 0214 of the Public Records of Broward County, Florida,
as modified pursuant to that certain Receipt for Future Advance and
Mortgage Modification Agreement dated of even date herewith to be
recorded in the Public Records of Broward County, Florida. The Mortgage
is a valid first mortgage lien on Borrower's fee simple interest in the
Property, and all fixtures and personal property owned by Borrower to
be located on or used in connection with the Property.
"NOTES": Collectively, the following Promissory Notes executed by
Borrower in favor of Lender: (i) a Modification Promissory Note in the
principal amount of $12,700,000.00, modifying the original Promissory
Note dated June 13, 1996 in the amount of $12,700,000.00 (the
"Modification Note"); (ii) a $1,000,000.00 Promissory Note evidencing
the Future Advance Loan (the "Future Advance Note"); (iii) a
$13,700,000.00 Consolidated Promissory Note, consolidating the
foregoing Modification Note and the Future Advance Note (the
"Consolidated Note").
"TITLE INSURANCE POLICY": Collectively, Title Insurance Policy No.
10-2007-107-00000084 issued by Chicago Title Insurance Company to
Lender and all endorsements issued with respect to the same including,
without limitation, the endorsement to be issued as of even date
herewith relating to the Future Advance Loan.
4. Article 2 of the Loan Agreement is hereby deleted and replaced with
the following:
2.1 PROCEEDS OF THE LOAN. A portion of the Loan in the maximum
amount of $1,500,000.00 is available to reimburse Borrower for costs
incurred in connection with the acquisition of the Property. The
balance of the Loan, after deduction for (i) the amount of the
"Interest Reserve" (as described below) and (ii) the allocation for the
land cost, in the amount of $11,900,000.00, shall be available to
finance construction of the Improvements in accordance with the revised
budget attached as Exhibit "A" hereto; provided, however, that no
Advances shall be disbursed for Construction Costs unless and until
Borrower has first expended, from its own funds, an amount of not less
than $1,000,000.00 against Construction Costs for the Improvements
("Borrower's Additional Equity"). Borrower will be renovating the
Property in connection with the development of 99 or 100 time share
units (the "Units") on the Property. Provided there does not exist an
Event of Default and no event which with notice or lapse of time or
both would become an Event of Default and subject to the terms of this
Agreement, Lender will lend and advance for the account of Borrower
from time to time under the Loan such sums as may be required to
finance construction of the Improvements in accordance with the
construction budget approved by Lender (after Borrower has funded, and
Lender has approved, Borrower's Additional Equity). The Loan shall
mature on a "Maturity Date" as set forth in the note evidencing the
Loan and no advances shall be available thereunder after the Maturity
Date.
3
<PAGE>
2.2 INTEREST RESERVE. A sum equal to $300,000.00 as and for an
interest reserve (the "Interest Reserve") shall be established out of
the Loan proceeds to be used for the sole purpose of paying the
interest due and owing under the Note until such time as the Interest
Reserve is fully expended; provided, however, that no such funding of
interest owing under the Note will occur under the Interest Reserve
unless and until Borrower has first expended from Borrower's own funds
the total amount of $500,000.00 in payment of interest accruing under
the Note. Borrower hereby authorizes Lender to draw upon the Interest
Reserve for interest payments due under the Note on a monthly basis.
Notwithstanding the establishment of the Interest Reserve, Borrower
shall be responsible for all interest payments due under the Note, and,
upon the Interest Reserve being fully expended, or, upon the occurrence
of any default under the Note, this Agreement or in any of the Loan
Documents, Borrower shall make all interest payments using Borrower's
own funds.
2.3 SECURITY FOR THE LOAN. Borrower's obligation to repay the
Loan is evidenced by the Note executed simultaneously herewith, which
sets forth the method for payment, rate of interest, and such further
terms as are therein set forth. The repayment of the Note is to be
secured by the Loan Documents, which documents Borrower shall deliver,
or cause to be delivered, to Lender simultaneously with the execution
of the Note.
5. Section 12.24 ("Partial Releases") is hereby deleted and replaced
with the following:
12.24 PARTIAL RELEASES. Provided there is no event of default
by Borrower under the Loan, Borrower shall be entitled to the partial
release of a Unit Week from the lien and encumbrance of the Mortgage
upon the payment of the "Partial Release Price" calculated as provided
hereinbelow. Partial releases will be available for Unit Weeks provided
that at least 50% of the Unit Weeks available in the applicable Unit
have been sold, as evidenced by fully executed and binding Sales
Contracts for those Unit Weeks. Partial releases will be available for
Biennial Weeks provided that an aggregate of at least twenty-six (26)
Unit Weeks in the applicable Unit (consisting of sales of Unit Weeks
and Biennial Weeks) have been sold, as evidenced by fully executed and
binding Sales Contracts. For purposes of calculating the number of
"sold" Unit Weeks under this paragraph, each Biennial Week shall count
as one-half (1/2) of a Unit Week, such that the sale of 2 Biennial
Weeks shall equal the sale of 1 Unit Week. The partial release of any
Unit Week or any Biennial Week from the lien of the Mortgage shall
include a partial release as to all security interests with regard to
that Unit including Lender's security interest in Sales Contracts and
personal property as reflected in the UCC-1 Financing Statements and
other Loan Documents.
The "Partial Release Price" for a Unit Week shall be an amount
equal to the greater of: (1) 28% of the gross sales price of the Unit
Week or (ii) $3,300.00. The "Partial Release Price" for a Biennial Week
shall be an amount equal to the greater of: (i)
4
<PAGE>
28% of the gross sales price of the Biennial Week or (ii) $1,650.00. To
the extent that Borrower requests that an entire Time Share Unit be
released prior to the sale of at least 50% of the Unit Weeks contained
in such Unit, the "Partial Release Price" for such Unit shall be equal
to the greater of: (i) $173,000.00 or (ii) 28% of the average gross
sales price of Unit Weeks (as set forth in existing Sales Contracts)
with respect to the subject Unit.
6. Borrower hereby warrants and represents that all warranties and
representations contained in the Loan Agreement are true and correct as of the
date hereof, and Borrower is not in default under the Loan Agreement as of the
date hereof. Borrower further warrants and represents that there are no
defenses, setoffs, claims or counterclaims which could be asserted against
Lender. Borrower does also hereby reaffirm any and all pledges of collateral and
all security interests pledged in favor of Lender.
7. In the event of any conflict between the terms and provisions of the
Loan Agreement (prior to this Amendment) and the terms and provisions of this
Amendment, the terms and provisions of this Amendment shall control and prevail,
and otherwise, except as modified herein, the Loan Agreement shall continue
binding and in full force and effect.
8. That all, each and every of the terms, covenants and conditions in
the Loan Agreement which are not inconsistent herewith are hereby expressly
confirmed, ratified and declared to be in full force and effect.
9. This Amendment may be modified only by written modification hereto,
signed by each of the parties hereto.
10. This Amendment constitutes the entire agreement between the parties
with respect to the subject matter hereof and shall be interpreted in accordance
with the laws of the State of Florida.
11. WAIVER AND RELEASE. AS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE
FUTURE ADVANCE AND TO ACCEPT THIS AGREEMENT, BORROWER DOES HEREBY RELEASE,
WAIVE, DISCHARGE, COVENANT NOT TO SUE, ACQUIT, SATISFY AND FOREVER DISCHARGE
LENDER, ITS OFFICERS DIRECTORS, EMPLOYEES AND AGENTS AND ITS AFFILIATES AND
ASSIGNS FROM ANY AND ALL LIABILITY, CLAIMS, COUNTERCLAIMS, DEFENSES, ACTIONS,
CAUSES OF ACTION, SUITS, CONTROVERSIES, AGREEMENTS, PROMISES AND DEMANDS
WHATSOEVER IN LAW OR IN EQUITY WHICH BORROWER EVER HAD, NOW HAS, OR WHICH ANY
PERSONAL REPRESENTATIVE, SUCCESSOR, HEIR OR ASSIGN OF BORROWER HEREAFTER CAN,
SHALL OR MAY HAVE AGAINST LENDER, ITS OFFICERS, DIRECTORS, EMPLOYEES, AND
AGENTS, AND ITS AFFILIATES AND ASSIGNS, FOR, UPON OR BY REASON OF ANY MATTER,
CAUSE OR THING WHATSOEVER, THROUGH THE DATE HEREOF. BORROWER FURTHER EXPRESSLY
AGREES THAT THE FOREGOING RELEASE AND WAIVER AGREEMENT IS INTENDED TO BE AS
BROAD AND INCLUSIVE AS IS PERMITTED BY THE LAWS
5
<PAGE>
OF THE STATE OF FLORIDA. IN ADDITION TO, AND WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, AND IN CONSIDERATION OF LENDER'S MAKING THE FUTURE ADVANCE AND
ACCEPTING THIS AGREEMENT, BORROWER COVENANTS WITH AND WARRANTS UNTO LENDER, AND
ITS AFFILIATES AND ASSIGNS, THAT THERE PRESENTLY EXIST NO CLAIMS, COUNTERCLAIMS,
DEFENSES, OBJECTIONS, OFFSETS OR CLAIMS OF OFFSETS AGAINST LENDER OR THE
OBLIGATION OF BORROWER TO PAY ALL INDEBTEDNESS AND OBLIGATIONS DUE AND OWING
FROM BORROWER TO LENDER WHEN AND AS THE SAME BECOME DUE AND PAYABLE.
WAIVER OF TRIAL BY JURY. BORROWER AND LENDER HEREBY MUTUALLY KNOWINGLY,
WILLINGLY AND VOLUNTARILY WAIVE THEIR RIGHT TO TRIAL BY JURY, AND, NO PARTY, NOR
ANY ASSIGNEE, SUCCESSOR, HEIR, OR LEGAL REPRESENTATIVE OF THE PARTIES (ALL OF
WHOM ARE HEREINAFTER REFERRED TO AS THE "PARTIES") SHALL SEEK A JURY TRIAL IN
ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEEDING BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR THE LOAN DOCUMENTS, OR ANY INSTRUMENT
EVIDENCING, SECURING, OR RELATING TO THE LOAN, ANY RELATED AGREEMENT OR
INSTRUMENT, ANY OTHER COLLATERAL FOR THE LOAN OR ANY COURSE OF ACTION, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS RELATING TO THE LOAN
OR TO THIS AGREEMENT. THE PARTIES ALSO WAIVE ANY RIGHT TO CONSOLIDATE ANY ACTION
IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY
NEGOTIATED BY THE PARTIES. THE WAIVER CONTAINED HEREIN IS IRREVOCABLE,
CONSTITUTES A KNOWING AND VOLUNTARY WAIVER, AND SHALL BE SUBJECT TO NO
EXCEPTIONS. LENDER HAS IN NO WAY AGREED WITH OR REPRESENTED TO BORROWER OR TO
ANY OTHER PARTY THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED
IN ALL INSTANCES.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
Signed, sealed and delivered BORROWER:
in the presence of:
OCEAN RANCH VACATION GROUP,
a Florida General Partnership
By: Ocean Ranch Development, Inc., a
Florida corporation, General Partner
By:/s/ DANIEL LAMBERT
- ------------------------------ ---------------------------------
Print Name:___________________ Its: PRESIDENT
(Corporate Seal)
- ------------------------------
Print Name:___________________
By: Vacation Break at Ocean Ranch, Inc.,
a Florida General Partner
By: /s/ HENRY M. CAIRO
- ------------------------------ ---------------------------------
Print Name:___________________ Henry M. Cairo, COO/CFO
(Corporate Seal)
- ------------------------------
Print Name:___________________
LENDER:
BANKATLANTIC, a Federal Savings Bank
By:/s/ MARCIA K. SNYDER
- ------------------------------ --------------------------------------
Print Name: Marcia K. Snyder
Executive Vice President
- ------------------------------
Print Name:___________________
7
EXHIBIT 11.1
<TABLE>
<CAPTION>
VACATION BREAK U.S.A., INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
Three months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Primary Primary
Actual number of common shares
outstanding 8,676,214 8,570,000
--------- ---------
Weighted average number of common
shares issued and outstanding 8,640,899 8,570,000
Common stock equivalents computed
under the Treasury Stock method 510,580 295,391
------- ----------
9,151,479 8,865,391
========= =========
Net income $ 2,524,737 $ 4,938,950
========= =========
Net income per share (1) $ 0.28 $ 0.56
==== ====
<FN>
(1) The dilutive effect of common stock equivalents was anti-dilutive to the
computation of fully diluted EPS for the three months ended September 30, 1996.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Primary Primary
Actual number of common shares
outstanding 8,676,214 8,570,000
--------- ---------
Weighted average number of common
shares issued and outstanding 8,609,615 8,555,000
Common stock equivalents computed
under the Treasury Stock method 364,477 201,236
----------- -------
8,974,092 8,756,236
========= =========
Net income $ 7,618,871 $ 6,426,949
========= =========
Net income per share (2) $ 0.85 $ 0.73
==== ====
<FN>
(2) The use of Common stock equivalents for the EPS computation was
anti-dilutive to the computation of the fully diluted EPS for the nine months
ended September 30, 1997 and less than 3% for the nine months ended September
30, 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,956
<SECURITIES> 0
<RECEIVABLES> 100,769
<ALLOWANCES> (4,404)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 14,076
<DEPRECIATION> (5,061)
<TOTAL-ASSETS> 157,958
<CURRENT-LIABILITIES> 21,426
<BONDS> 68,606
0
0
<COMMON> 87
<OTHER-SE> 35,918
<TOTAL-LIABILITY-AND-EQUITY> 157,958
<SALES> 84,015
<TOTAL-REVENUES> 93,283
<CGS> 21,741
<TOTAL-COSTS> 50,670
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,859
<INTEREST-EXPENSE> 3,598
<INCOME-PRETAX> 12,231
<INCOME-TAX> 4,613
<INCOME-CONTINUING> 7,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,619
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0
</TABLE>
