May 10, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, those discussed in the Company's Form 10-K for the year ended December 31, 1999 (File No. 001-13003).
The Company currently owns and/or operates 22 resorts in various stages of development. These resorts offer a wide array of country club-like amenities, such as golf, swimming, horseback riding, boating, and many organized activities for children and adults. The Company represents an owner base of over 106,000. The condensed consolidated financial statements of the Company include the accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are wholly owned.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
Three Months Ended
March 31,
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2000 1999
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As a percentage of total revenues:
Vacation Interval sales 83.0% 84.2%
Sampler sales 2.0% 1.4%
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Total sales 85.0% 85.6%
Interest income 13.5% 11.6%
Management fee income 0.1% 1.8%
Other income 1.4% 1.0%
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Total revenues 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 17.5% 14.0%
Provision for uncollectible notes 10.0% 10.0%
As a percentage of total sales:
Sales and marketing 55.3% 49.2%
As a percentage of total revenues:
Operating, general and administrative 11.3% 10.9%
Depreciation and amortization 2.7% 2.5%
Other expense 1.4% 1.5%
As a percentage of interest income:
Interest expense 73.8% 57.8%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Revenues for the quarter ended March 31, 2000 were $64.9 million, representing a $15.8 million or 32.2% increase over revenues of $49.1 million for the quarter ended March 31, 1999. The increase was primarily due to a $12.6 million increase in sales of Vacation Intervals and a $3.1 million increase in interest income. The strong increase in Vacation Interval sales primarily resulted from an increase in the number of upgrade sales for the first quarter of 2000 versus the same period of 1999, improved closing percentages at several sales offices, and increased sales prices.
In the first quarter of 2000, the number of Vacation Intervals sold, exclusive of upgraded Vacation Intervals, increased 19.2% to 4,624 from 3,879 in the same period of 1999; the average price per interval increased 10.4% to $8,993 from $8,146. Total interval sales for the first quarter of 2000 included 1,666 biennial intervals (counted as 833 Vacation Intervals) compared to 1,417 (709 Vacation Intervals) in the first quarter of 1999. The Company also increased sales of upgraded intervals through the continued implementation of marketing and sales programs focused on selling upgraded intervals to the Company's existing Vacation Interval owners. In the first quarter of 2000, the 2,934 upgraded Vacation Intervals were sold at an average price of $4,193 compared to 2,248 upgraded Vacation Intervals sold at an average price of $4,329 during the comparable 1999 period.
Sampler sales increased $597,000 to $1.3 million for the quarter ended March 31, 2000, compared to $700,000 for the same period in 1999. The increase primarily resulted from a $544,000 cumulative reclassification between sampler sales and related expenses in the first quarter of 1999, in order to restate sampler unearned revenues and sampler deferred expenses separately on the balance sheet.
Interest income increased 54.6% to $8.8 million for the quarter ended March 31, 2000, from $5.7 million for the same period of 1999. This increase primarily resulted from a $118.2 million increase in notes receivable, net of allowance for uncollectible notes, since March 31, 1999, due to increased sales.
Management fee income, which consists of management fees collected from the resorts' management clubs, can not exceed the management clubs' net income. Management fee income decreased $819,000 for the first quarter of 2000, as compared to the first quarter of 1999, due to increased operating expenses at the management clubs.
Other income consists of water and utilities income, condominium rental income, marina income, golf course and pro shop income, and other miscellaneous items. Other income increased $391,000 to $865,000 for the first quarter of 2000 compared to $474,000 for the same period of 1999. The increase primarily relates to growth in water and utilities income and increased golf course and pro shop income at two resorts.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 17.5% in the first quarter of 2000, from 14.0% for the same period of 1999. As the Company continues to deplete its inventory of low-cost Vacation Intervals acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more recently constructed units, which were built at a higher average cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval sales has increased compared to 1999. This increase, however, was partially offset by increased sales prices since the first quarter of 1999.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 55.3% for the quarter ended March 31, 2000, from 49.2% for the same period of 1999. Due to recent growth rates and implementation of new leads generation programs, the Company experienced relatively higher marketing costs in the first quarter of 2000. The Company increased its headcount at the call centers significantly during the first quarter of 2000, which created inefficiencies due to temporary lack of available training resources. In addition, the Company has moved towards reliance on national retail chains for its leads generation efforts, in addition to the traditional local programs. The transition to national programs has been slower in generating leads than originally planned. A major focus of Company management in 2000 is to improve the efficiencies of the marketing process, which will bring sales and marketing expenses more in line with expectations.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales was unchanged at 10.0% for the first quarter of 2000, compared to the first quarter of 1999.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues increased to 11.3% for the quarter
ended March 31, 2000, as compared to 10.9% for the quarter ended March 31, 1999. The increase is primarily attributable to increased legal expenses, increases in payroll taxes, employee benefits, and workers' compensation related to Company growth, and an increase in title and recording fees due to increased borrowings against pledged notes receivable.
Other Expense
Other expense consists of water and utilities expenses, golf course and pro shop expenses, marina expenses, and other miscellaneous expenses. Other expense as a percentage of total revenues remained relatively flat at 1.4% for the quarter ended March 31, 2000, as compared to 1.5% for the quarter ended March 31, 1999. The $181,000 increase in other expense primarily relates to increased water and utilities expense.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues was relatively flat at 2.7% for the quarter ended March 31, 2000, compared to 2.5% for the quarter ended March 31, 1999. Overall, depreciation and amortization expense increased $576,000 for the first quarter of 2000, as compared to 1999, primarily due to investments in automated dialers, investments in telephone systems, and investments in a central marketing facility, which opened in September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 73.8% for the first quarter of 2000, from 57.8% for the same period of 1999. This increase is primarily the result of interest expense related to increased borrowings against pledged notes receivable. Also, the Company's weighted average cost of borrowing increased slightly in the first quarter of 2000 compared to the first quarter of 1999.
Income before Provision for Income Taxes
Income before provision for income taxes decreased to $3.0 million for the quarter ended March 31, 2000, as compared to $7.9 million for the quarter ended March 31, 1999, as a result of the above mentioned operating results.
Provision for Income Taxes
Provision for income taxes as a percentage of income before provision for income taxes remained flat at 38.5% in the first quarter of 2000, as compared to the first quarter of 1999.
Net Income
Net income decreased to $1.9 million for the quarter ended March 31, 2000, as compared to $4.8 million for the quarter ended March 31, 1999, as a result of the above mentioned operating results.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH. The Company generates cash primarily from down payments on the sale of Vacation Intervals, sampler sales, collections of principal and interest on customer notes receivable from Vacation Interval owners, management fees, and resort and utility operations. During the three months ended March 31, 2000, cash provided by operations was $386,000, compared to cash provided by operating activities of $1.3 million for the same period of 1999. The decrease in cash provided by operating activities was primarily a result of a decrease in net income and the timing of operational payments. The Company typically receives a 10% down payment on sales of Vacation Intervals and finances the remainder by receipt of a seven to ten year customer promissory note. The Company generates cash from financing of customer notes receivable (i) by borrowing at an advance rate of 70% to 85% of eligible customer notes receivable and (ii) from the spread between interest received on customer notes receivable and interest paid on related borrowings. Because the Company uses significant amounts of cash in the development and marketing of Vacation Intervals, but collects cash on customer notes receivable over a seven-year to ten-year period, borrowing against receivables has historically been a necessary part of normal operations.
For the three months ended March 31, 2000 and 1999, cash provided by financing activities was $37.2 million and $27.8 million, respectively. The increase in net cash provided by financing activities was primarily due to increased borrowings against pledged notes receivable during the three months ended March 31, 2000, compared to the same period of 1999. As of March 31, 2000, the Company's credit facilities provide for loans of up to $320.0 million. At March 31, 2000, approximately $216.5 million of principal and interest related to advances under the credit facilities was outstanding. For the three months ended March 31, 2000, the weighted average cost of funds for all borrowings, including the senior subordinated debt, was approximately 9.4%.
The Company believes that with respect to its current operations and capital commitments, its borrowing capacity under existing third-party lending agreements, together with cash generated from operations and future borrowings, will be sufficient to meet the Company's working capital and capital expenditure needs through the year ended December 31, 2000. The Company will continue to review the possibility of extending its borrowing capacity with existing lenders or issuing additional debt or mortgage-backed securities to finance future acquisitions, refinance debt, finance mortgage receivables, and provide for other working capital purposes.
USES OF CASH. Investing activities typically reflect a net use of cash as a result of loans to customers in connection with the Company's Vacation Interval sales, capital additions, and property acquisitions. Net cash used in investing activities for the three months ended March 31, 2000 and 1999, was $30.2 million and $27.1 million, respectively. The increase was primarily due to the increased level of customer notes receivable resulting from higher sales volume and $4.5 million of cash received in the first quarter of 1999 related to sales of equipment.