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Share Name | Share Symbol | Market | Type |
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Diamond Resorts International, Inc. | NYSE:DRII | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.00 | 0.00% | 30.22 | 0 | 01:00:00 |
Diamond Resorts International, Inc. (NYSE:DRII) (“Diamond” or the “Company”), today announced results for the fourth quarter and full year ended December 31, 2013.
David F. Palmer, President and Chief Executive Officer, stated, “Our business performed strongly this period, as we delivered a record fourth quarter, concluding a record year. Our results clearly reinforce the advantages of our differentiated business model, which combined with solid execution by our team, led to growth across nearly all the key metrics that define our business. As we look to 2014, we expect to continue to benefit from the recurring and predictable contractual cash flows and revenue growth associated with our hospitality and management services business and that we will capitalize on the flexibility of our vacation interest business to continue the positive momentum we have seen to date. We believe we have a unique business model in a highly fragmented and under-penetrated industry and are confident in our ability to continue to deliver strong results in the quarters and years ahead.”
Full Year 2013 Highlights
Fourth Quarter 2013 Highlights
Full Year Earnings Summary
Hospitality and Management Services
Total management and member services revenue in our Hospitality and Management Services segment increased $16.3 million, or 14.2%, to $131.2 million for the twelve months ended December 31, 2013 from $114.9 million for the twelve months ended December 31, 2012. Management fees increased as a result of full year ownership of Pacific Monarch Resorts, the inclusion of the managed properties from our acquisitions of Island One and the PMR Service Companies (both completed in July 2013) in 2013. We also experienced higher revenue from our club operations due to increased membership dues, higher collection rate and higher club member count in 2013 compared to 2012. We had a total of approximately 200,000 and 170,000 club members as of December 31, 2013 and 2012, respectively. These increases were partially offset by the reduction in commissions earned on fee-for-service management agreements with Island One which were terminated in conjunction with the Island One acquisition on July 24, 2013.
Management and member services expense increased $2.6 million, or 7.3%, to $37.9 million for the twelve months ended December 31, 2013 from $35.3 million for the twelve months ended December 31, 2012. The increase was primarily attributable to higher operating expense associated with higher club member count and higher operating costs at the resorts for which we act as the HOA. The above increases were partially offset by a reduction in the costs incurred under the fee-for-service agreements with Island One that terminated in conjunction with the Island One acquisition and an increase in the absorption of certain expenses by the HOAs that we manage. Management and member services expense as a percentage of management and member services revenue decreased to 28.9% in 2013 from 30.7% in 2012.
Vacation Interest Sales and Financing
Vacation Interest sales, net, increased $171.5 million, or 58.5%, to $464.6 million for the twelve months ended December 31, 2013 from $293.1 million for the twelve months ended December 31, 2012. The increase in Vacation Interest sales, net, was attributable to a $190.7 million increase in Vacation Interest sales revenue, partially offset by a $19.2 million increase in our provision for uncollectible Vacation Interest sales revenue. The $190.7 million increase in Vacation Interest sales revenue in 2013 compared to 2012 was generated by an increase in the number of transactions and a higher average sales price per transaction. During the third and fourth quarter, the Company closed three low performing off-site sales centers, which will enable us to increase sales efficiencies. Our total number of tours increased to 207,075 in 2013 from 180,981 in 2012, primarily due to an increase in the number of tours resulting from the expansion of our lead-generation and marketing programs. We closed a total of 29,955 Vacation Interest sales transactions in 2013, compared to 26,734 transactions in 2012. Our closing percentage (which represents the percentage of Vacation Interest sales transactions closed relative to the total number of tours at our sales centers during the period presented) decreased slightly to 14.5% in 2013 from 14.8% in 2012 as a result of an increase in focus on sales to new customers. Vacation Interest sales price per transaction increased to $16,771 in 2013 from $12,510 in 2012 due principally to a change in our selling strategy which focused on selling larger point packages and the success of the sales and marketing initiatives implemented in furtherance of this strategy.
Sales incentives increased $1.8 million, or 18.8% to $11.1 million for the twelve months ended December 31, 2013 from $9.4 million for the twelve months ended December 31, 2012. The amount we record as sales incentives is reduced by an estimated breakage amount and, accordingly, the estimated amount of such breakage increases our Vacation Interest sales revenue, net. In 2013, we adjusted sales incentives by $3.2 million relating to the expiration, and expected future expiration, of sales incentives we provided to customers prior to June 30, 2013 as we had more historical data to compute the estimated breakage. Excluding the $3.2 million reduction, sales incentives as a percentage of gross Vacation Interest sales revenue were 2.8% in 2013 compared to 2.9% in 2012.
Provision for uncollectible Vacation Interest sales revenue increased $19.2 million, or 75.5%, to $44.7 million for the twelve months ended December 31, 2013 from $25.5 million for the twelve months ended December 31, 2012, primarily due to the increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales in 2013 as compared to 2012.
Advertising, sales and marketing costs as a percentage of Vacation Interest sales revenue were 50.7% for the twelve months ended December 31, 2013, compared to 56.0% for the twelve months ended December 31, 2012, primarily due to the increase in Vacation Interest sales. Advertising, sales and marketing expense in 2013 included a charge of $2.1 million for stock-based compensation. Without this non-cash charge, advertising, sales and marketing as a percentage of gross Vacation Interest sales revenue would have been 50.3%, a decrease of 5.7 percentage points from the prior year period. The decrease of such costs as a percentage of Vacation Interest sales revenue was primarily due to improved absorption of fixed costs through increased sales efficiencies.
Vacation Interest cost of sales increased $24.5 million, or 76.3%, to $56.7 million for the twelve months ended December 31, 2013 from $32.2 million for the twelve months ended December 31, 2012. Of this increase, $18.7 million was due to an increase in Vacation Interest Sales in 2013 as compared to 2012. The remaining increase was a combination of the impact of the inclusion of the inventory purchased in the Pacific Monarch Resorts acquisition in 2012 and the impact of a smaller pool of low-cost inventory becoming eligible for recovery and capitalization pursuant to our inventory recovery agreements in 2013 as compared to 2012. The inventory purchased in the Pacific Monarch Resorts acquisition reduced the cost of sales in 2012 as the inventory had a lower cost basis than the average cost basis of our then existing inventory. The increase to cost of sales was compounded as a smaller pool of inventory became available for recovery and capitalization pursuant to our inventory recovery agreements in 2013.
General and Administrative Expense
General and administrative expense for the twelve months ended December 31, 2013 and December 31, 2012 included non-cash charges related to stock based compensation of $37.0 million and $3.3 million, respectively. In 2013, there was a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. In 2012, there was a one-time charge of $5.0 million related to the Executive Termination. Excluding these charges, general and administrative expense would have been $98.4 million in 2013, an increase of $7.7 million, or 8.5%, from $90.7 million in 2012. This increase is primarily due to additional costs incurred in connection with the operation of the Pacific Monarch Resorts for a full year, and the PMR Service Companies and Island One acquisitions. Giving effect to these charges, general and administrative expense as reported was $145.9 million in 2013 and $99.0 million in 2012.
Pre-tax Income/Loss and Net Income / Loss
Pre-tax income for twelve months ended December 31, 2013 and the twelve months ended December 31, 2012 included non-cash and one-time charges and adjustments of $63.8 million and $12.3 million, respectively. The non-cash items were charges related to stock-based compensation of $40.5 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX litigation in 2013 (representing the carrying value of our interest in certain Mexican land transferred to the plaintiff), a charge of $6.6 million related to the early extinguishment of debt which was repaid with proceeds from our IPO in July 2013, and a gain on bargain purchase from business combinations of $2.9 million in 2013 and $20.6 million in 2012. In addition, 2013 included a cash charge of $9.0 million related to the early extinguishment of debt and a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. In 2012, there was a one-time cash charge of $5.0 million related to the Executive Termination. Excluding these items, pre-tax income in 2013 would have been $67.0 million, an increase of $80.0 million from a pre-tax loss of $13.0 million in 2012. Including these items, pre-tax income in 2013 was $3.2 million and the pre-tax loss in 2012 was $0.7 million.
Net income for the twelve months ended December 31, 2013 and the twelve months ended December 31, 2012 included the pre-tax charges discussed above. 2013 had a net loss of $2.5 million, which is a decrease of $16.1 million from a net income of $13.6 million in 2012.
Fourth Quarter Earnings Summary
Hospitality and Management Services
Total management and member services revenue in our Hospitality and Management Services segment increased $5.5 million, or 19.0%, to $34.9 million for the three months ended December 31, 2013 from $29.4 million for the three months ended December 31, 2012. Management fees increased as a result of the inclusion of the managed properties from our acquisitions of Island One and the PMR Service Companies (both completed in July 2013) during the period in 2013. We also experienced higher revenue from the clubs due to increased membership dues, higher collection rate and higher club member count during the period in 2013 compared to the period in 2012. These increases were partially offset by the reduction in commissions earned on fee-for-service agreements with Island One which were terminated in conjunction with the Island One acquisition on July 24, 2013.
Management and member services expense increased $0.2 million, or 2.3%, to $9.9 million for the three months ended December 31, 2013 from $9.7 million for the three months ended December 31, 2012. The increase was primarily attributable to higher operating expense associated with higher club member count and higher operating costs at the resorts for which we act as the HOA. The above increases were partially offset by a reduction in the costs incurred under the fee-for-service agreements with Island One that terminated in conjunction with the Island One acquisition and an increase in the absorption of certain resort management expenses to the HOAs that we manage. Management and member services expense as a percentage of management and member services revenue decreased to 28.5% during the period in 2013 from 33.1% during the period in 2012.
Vacation Interest Sales and Financing
Vacation Interest sales, net, increased $48.5 million, or 53.6%, to $138.8 million for the three months ended December 31, 2013 from $90.3 million for the three months ended December 31, 2012. The increase in Vacation Interest sales, net, was attributable to a $54.0 million increase in Vacation Interest sales revenue, partially offset by a $5.6 million increase in our provision for uncollectible Vacation Interest sales revenue. The $54.0 million increase in Vacation Interest sales revenue during the period in 2013 compared to the period in 2012 was generated due to an increase in the number of transactions and a higher average sales price per transaction. During the quarter, the Company closed one low performing off-site sales center, which will enable us to increase sales efficiencies. Our total number of tours increased to 50,104 during the period in 2013 from 50,098 during the period in 2012. We closed a total of 7,926 Vacation Interest sales transactions during the period in 2013, compared to 8,024 transactions during the period in 2012. Our closing percentage (which represents the percentage of Vacation Interest sales transactions closed relative to the total number of sales presentations at our sales centers during the period presented) decreased slightly to 15.8% during the period in 2013 from 16.0% during the period in 2012. Vacation Interest sales price per transaction increased to $18,313 during the period in 2013 from $13,007 during the period in 2012 due principally to a change in our selling strategy to focus on selling larger point packages and the success of the sales and marketing initiatives implemented in furtherance of this strategy.
Sales incentives increased $1.2 million, or 28.9% to $5.2 million for the three months ended December 31, 2013 from $4.0 million for the three months ended December 31, 2012. Sales incentives as a percentage of gross Vacation Interest sales revenue were 3.4% for the period in 2013 compared to 4.0% for the period in 2012.
Provision for uncollectible Vacation Interest sales revenue increased $5.6 million, or 59.5%, to $14.9 million during the period in 2013 from $9.4 million during the period in 2012, primarily due to the increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales during the period in 2013 as compared to the period in 2012.
Advertising, sales and marketing costs as a percentage of Vacation Interest sales revenue were 49.9% for the three months ended December 31, 2013, compared to 53.9% for the three months ended December 31, 2012. The decrease of such costs as a percentage of Vacation Interest sales revenue was primarily due to improved absorption of fixed costs through increased sales efficiencies.
Vacation Interest cost of sales decreased $3.7 million, to $11.2 million for the three months ended December 31, 2013 from $15.0 million for the three months ended December 31, 2012. Of this change, $3.6 million was an increase related to the increase in Vacation Interest Sales during the period in 2013 as compared to the period in 2012. The $3.6 million increase was offset by a $7.3 million decrease due to a larger pool of low-cost inventory becoming eligible for recovery and capitalization pursuant to our inventory recovery agreements during the period in 2013 as compared to the period in 2012.
General and Administrative Expense
General and administrative expense for the three months ended December 31, 2013 and the three months ended December 31, 2012 included a non-cash charge related to stock based compensation of $1.7 million and $3.3 million, respectively. During the period for 2013, there was a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. Excluding these charges, general and administrative expense would have increased $3.4 million, or 13.7%, to $28.2 million during the period in 2013 from $24.8 million during the period in 2012. This increase is primarily due to additional costs incurred in connection with the PMR Service Companies and Island One acquisitions completed in the third quarter of 2013. Giving effect to these charges, general and administrative expense as reported was $40.3 million during the period in 2013 and $28.1 million during the period in 2012.
Pre-tax Income/Loss and Net Income / Loss
The pre-tax income for the three months ended December 31, 2013 and the three months ended December 31, 2012 included non-cash and one-time charges of $14.6 million and $5.3 million, respectively. The non-cash items were charges related to stock-based compensation of $2.0 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX litigation in 2013, a charge of $2.2 million related to the early extinguishment of debt, a gain on bargain purchase from business combinations of $0.2 million in 2013 and an adjustment to bargain purchase from business combinations of $2.0 million in 2012. In addition, 2013 included a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. Excluding these items, pre-tax income in 2013 would have been $30.7 million, an increase of $38.1 million from pre-tax loss of $7.4 million in 2012. Including these items, pre-tax income in 2013 was $16.1 million and the pre-tax loss in 2012 was $12.7 million.
Net income for the three months ended December 31, 2013 and the three months ended December 31, 2012 included the pre-tax charges discussed above. Net income increased $15.3 million to $3.6 million during the period for 2013 from a net loss of $11.7 million during the period in 2012.
Capital Resources and Liquidity
As of December 31, 2013, we had cash and cash equivalents of $35.9 million, corporate indebtedness of $377.7 million and non-recourse debt of $411.3 million. Our cash used in operating activities was $5.4 million, reflecting $128.8 million net working capital use from the buildup of receivables, net of repayments. Our receivables are generally monetized through a securitization transaction, or by pledging them under one of our funding facilities. This monetization is shown under “financing activities” on our statement of cash flows. During 2013 we generated $125.2 million of net cash related to the monetization of our receivables portfolio which included $38.5 million as of December 31, 2013 in receivables activity related to the DROT 2013-2 securitization. Capital expenditures for the year ended December 31, 2013 were $15.2 million, an increase of $0.9 million from $14.3 million for the year ended December 31, 2012. Cash expenditures for the July 2013 acquisition of the PMR Service Companies were $47.4 million.
The indenture governing our 12% senior secured notes due 2018 includes covenants which are determined by reference to the Adjusted EBITDA of Diamond and its “restricted subsidiaries.” Adjusted EBITDA, as defined in the indenture, was $220.2 million for the year ended December 31, 2013. This includes a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation.
Outlook
For the full year ending December 31, 2014, the Company is providing the following guidance for its expected operating results:
Year Ending December 31, 2014 ($ in thousands) LowHigh
Pre-tax income $ 65,000 $ 92,500 Corporate interest expense $ 56,500 $ 54,500 Vacation interest cost of sales(a) $ 79,500 $ 69,500 Depreciation and amortization $ 32,000 $ 30,000 Other non-cash items(b) $ 22,000 $ 18,500For the year ending December 31, 2014, the Company anticipates cash expenditures for the acquisition of inventory, excluding inventory from acquisitions, to be between $30.0 million and $35.0 million. In addition, the company anticipates capital expenditures(c) to be between $18.0 million and $20.0 million.
(a)
In accordance with ASC 978, the Company records Vacation Interest Cost of Sales using the relative sales value method (See Note 2 - Summary of Significant Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2012 of Diamond Resorts Corporation). This method requires the Company to make a number of projections and estimates, which are subject to significant uncertainty and retroactive adjustment in the future periods. These "true-up" adjustments may result, and for the Company have resulted in prior periods, in major swings (both positive and negative) in the Company's pre-tax income computed in accordance with US GAAP that do not have a direct correlation to the operating performance for the periods in which the "true-ups" are made. It is difficult to predict with any degree of precision what the projections and estimates used in connection with the relative sales value method will be and what impact those projections and estimates will have on the amount recorded in future periods as Vacation Interest Cost of Sales. As a result, guidance for Vacation Interest Cost of Sales (and as a result, pre-tax income) covers a wide range of outcomes. (b) Other non-cash items include: stock based compensation, amortization of loan origination costs, and amortization of net portfolio discounts and premiums.(c)
Principally for IT infrastructure and sales center expansion/refurbishment. This does not include expenditures for the acquisition of inventory, or resort-level capital improvements which are paid by the homeowners associations.
Year End 2014 Earnings Call
The company will be conducting a conference call to discuss the full year and fourth quarter financial results at 5:00 p.m. Eastern Time on February 19, 2014, available via webcast on the Company's website at http://investors.diamondresorts.com/phoenix.zhtml?p=irol-eventDetails&c=251836&eventID=5098362. A webcast replay will become available within 2 hours of the call and will run for approximately one year on the Company’s website. Alternatively, participants may call into (866) 562-5561 from the United States, or (706) 679-1894 from outside the U.S. with conference ID 81171106; please dial in fifteen minutes early to ensure a timely start. A call replay will be available from 8:00 p.m. Eastern Time on February 19, 2014 through February 26, 2014 and can be accessed by dialing (800) 585-8367 with conference ID 81171106.
Cautionary Note Regarding Forward-Looking Statements
This press release contains forward-looking statements, including the guidance for expected operating results presented under “Outlook” above and other statements regarding the current expectations of Diamond Resorts International, Inc. (the “Company”) about its prospects and opportunities. These forward-looking statements are covered by the "Safe Harbor for Forward-Looking Statements" provided by the Private Securities Litigation Reform Act of 1995. The Company has tried to identify these forward looking statements by using words such as “expect,” “anticipate,” “estimate,” “plan,” “will,” “would,” “should,” “could,” “forecast,” “believe,” “guidance,” “projection,” “target” or similar expressions, but these words are not the exclusive means for identifying such statements. The Company cautions that a number of risks, uncertainties and other factors could cause the Company's actual results to differ materially from those expressed in, or implied by, the forward-looking statements, including, without limitation, adverse trends or disruptions in economic conditions generally or in the vacation ownership, vacation rental and travel industries; adverse changes to, or interruptions in, relationships with the Company's affiliates and other third parties, including termination of the Company's hospitality management contracts; the Company's ability to maintain an optimal inventory of vacation ownership interests for sale; the Company's ability to sell, securitize or borrow against its consumer loans; decreased demand from prospective purchasers of Vacation Interests; adverse events or trends in vacation destinations and regions where the resorts in our network are located; changes in the Company's senior management; the Company's ability to comply with regulations applicable to the vacation ownership industry; the effects of the Company's indebtedness and its compliance with the terms thereof; the Company's ability to successfully implement its growth strategy; and the Company's ability to compete effectively. For a detailed discussion of factors that could affect the Company's future operating results, please see the Company's filings with the Securities and Exchange Commission, including the disclosures under “Risk Factors” in those filings. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, changed circumstances or future events or for any other reason.
About Diamond Resorts International®
Diamond Resorts International®, with its network of 306 vacation destinations located in 33 countries throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, South America, Central America, Europe, Asia, Australia and Africa provides guests with choices and flexibility as they design their dream vacation, whether they're traveling an hour away or around the world. Our hassle-free, relaxing vacations give guests a truly memorable experience every time, for a lifetime.
Diamond Resorts International® owns, operates and manages vacation ownership resorts and, through resort and partner affiliation agreements, provides members and owners with access to 92 managed resorts, 162 affiliated resorts, 48 affiliated hotels and four cruise itineraries through THE Club® at Diamond Resorts International®. To learn more, visit Diamondresorts.com.
Basis of Presentation
On July 24, 2013, Diamond closed the initial public offering (“IPO”) of its common stock. Prior to the consummation of the initial public offering, Diamond was a newly-formed Delaware corporation that had not conducted any activities other than those incident to its formation and other actions in connection with the IPO. Diamond was formed for the purpose of changing the organizational structure of Diamond Resorts Parent, LLC (“DRP”) from a limited liability company to a corporation. Immediately prior to the consummation of the IPO, DRP was the sole stockholder of Diamond. In connection with, and immediately prior to the completion of the IPO, various reorganization transactions were effected ultimately with DRP merging with and into Diamond. See “Organizational Structure-Reorganization Transactions” in the Registration Statement on Form S-1 filed by Diamond with the Securities and Exchange Commission for additional information concerning these reorganization transactions. References in this press release to “Diamond,” “the Company,” ”DRII,” “we,” “us” and “our,” refer to Diamond Resorts International, Inc. and its subsidiaries, after giving effect to those reorganization transactions, and our consolidated financial statements and other historical financial data included in this press release for periods prior to July 24, 2013 are those of DRP and its subsidiaries after giving effect to the reorganization transactions.
Reconciliation of GAAP to Non-GAAP Measures
We believe supplementing our consolidated financial statements presented in accordance with U.S. GAAP with non-U.S. GAAP measures provides investors with useful information regarding our liquidity and short-term and long-term trends.
We define Adjusted EBITDA as our net income (loss), plus: (i) corporate interest expense; (ii) provision (benefit) for income taxes; (iii) depreciation and amortization; (iv) Vacation Interest cost of sales; (v) loss on extinguishment of debt; (vi) impairments and other non-cash write-offs; (vii) loss on the disposal of assets; (viii) amortization of loan origination costs; (ix) amortization of net portfolio premiums; and (x) stock-based compensation; less (a) gain on the disposal of assets; (b) gain on bargain purchase from business combination; and (c) amortization of net portfolio discounts. Adjusted EBITDA is a non-U.S. GAAP financial measure and should not be considered in isolation, or as an alternative to net cash provided by operating activities or any other measure of liquidity, or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance, in each case calculated and presented in accordance with U.S. GAAP. Additional information regarding our calculation of Adjusted EBITDA is provided below.
We present Adjusted EBITDA primarily because, as indicated above, the indenture governing our 12% senior secured notes due 2018 includes covenants which are determined by reference to the Adjusted EBITDA of the Company and its “restricted subsidiaries,” and other of our debt-related agreements include covenants that are determined by reference to Adjusted EBITDA. As a result, we believe that supplementing our consolidated financial statements presented in accordance with US GAAP with this non-GAAP measure provides investors with useful information with respect to our liquidity.
In addition to its application under the Indenture for our senior secured notes, our management uses Adjusted EBITDA: (i) for planning purposes, including the preparation of our annual operating budget; (ii) to allocate resources to enhance the financial performance of our business; (iii) to evaluate the effectiveness of our business strategies and (iv) as a factor for determining compensation for personnel employed by the Company.
We understand that, although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, it has limitations as an analytical tool, including:
The following tables present Adjusted EBITDA for us and our restricted subsidiaries, as calculated in accordance with, and for purposes of covenants contained in, the Notes Indenture, reconciled to each of (i) our net cash provided by (used in) operating activities and (ii) our net income (loss) for the periods presented.
Quarter Ended December 31, Year Ended December 31, 2013 2012 2013 2012 ($ in thousands) ($ in thousands) Net cash provided by (used in) operating activities $ 367 $ (739 ) $ (5,410 ) $ 24,600 Provision (benefit) for income taxes 12,554 (957 ) 5,777 (14,310 ) Provision for uncollectible Vacation Interest sales revenue(a) (14,939 ) (9,364 ) (44,670 ) (25,457 )Amortization of capitalized financing costs and original issue discounts(a)
(1,472 ) (1,551 ) (7,079 ) (6,293 ) Deferred income taxes(b) (11,304 ) (602 ) (3,264 ) 13,010 Loss on foreign currency (c) (30 ) (211 ) (245 ) (113 ) Gain on mortgage purchase(a) 40 1 111 27 Unrealized gain on derivative instruments(d) 657 — — —Unrealized loss on post-retirement benefit plan(e)
(113 ) — (887 ) — Corporate interest expense(f) 14,105 21,704 72,215 77,422Change in operating assets and liabilities excluding acquisitions(g)
44,392 12,539 146,922 12,183 Vacation interest cost of sales(h) 11,244 14,975 56,695 32,150 Adjusted EBITDA - Consolidated 55,501 35,795 220,165 113,219 Less: Adjusted EBITDA - Unrestricted Subsidiaries(i) 9,308 5,624 30,238 8,957 Plus: Intercompany elimination(j) 7,339 5,472 29,095 19,058 Adjusted EBITDA - Diamond Resorts International, Inc. and Restricted Subsidiaries $ 53,532 $ 35,643 $ 219,022 $ 123,320 (a) Represents non-cash charge or gain. (b) Represents the deferred income tax liability arising from the difference between the treatment for financial reporting purposes as compared to income tax return purposes, primarily related to the Island One Acquisition and the PMR Service Companies Acquisition in 2013 and the PMR Acquisition in 2012. (c) Represents net realized losses on foreign exchange transactions settled at unfavorable exchange rates and unrealized net losses resulting from the devaluation of foreign currency-denominated assets and liabilities. (d) Represents the effects of the changes in mark-to-market valuations of derivative liabilities. (e) Represents unrealized losses on our post-retirement benefit plan related to a collective labor agreement entered into with the employees of our two resorts in St. Maarten. (f) Represents corporate interest expense; does not include interest expense related to non-recourse indebtedness incurred by our special-purpose subsidiaries that is secured by our VOI consumer loans. (g) Represents the net change in operating assets and liabilities excluding acquisitions, as computed directly from the statements of cash flows. Vacation Interest cost of sales is included in the net changes in unsold Vacation Interests, net, as presented in the statements of cash flows. (h) We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, "Real-estate Time-Sharing Activities," which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates. (i) Represents the Adjusted EBITDA of unrestricted subsidiaries as defined in, and calculated in accordance with, the Notes Indenture. (j) Represents the elimination of revenues and expenses related to agreements entered into between our restricted and unrestricted subsidiaries. The agreements include service agreements for sales and marketing management (terminated on July 24, 2013), resort management, reservation services and portfolio management, whereby certain restricted subsidiaries operate these functions on behalf of the unrestricted subsidiaries for a fee. In addition to these service agreements, we have also entered into intercompany sales agreements, whereby certain restricted subsidiaries purchase unsold Vacation Interests from unrestricted subsidiaries. Quarter Ended December 31, Year Ended December 31, 2013 2012 2013 2012 ($ in thousands) ($ in thousands) Net income (loss) $ 3,573 $ (11,748 ) $ (2,525 ) $ 13,643 Plus: Corporate interest expense(a) 14,105 21,704 72,215 77,422 Provision (benefit) for income taxes 12,554 (957 ) 5,777 (14,310 ) Depreciation and amortization(b) 8,273 5,478 28,185 18,857 Vacation Interest cost of sales(c) 11,244 14,975 56,695 32,150 Loss on extinguishment of debt(c) 2,221 — 15,604 — Impairments and other non-cash write-offs(b) 308 619 1,587 1,009 Gain on the disposal of assets(b) (309 ) (387 ) (982 ) (605 ) (Gain) adjustment on bargain purchase from business combinations(d) (153 ) 2,024 (2,879 ) (20,610 ) Amortization of loan origination costs(b) 1,543 904 5,419 3,295 Amortization of net portfolio premium (discounts)(b) 104 (138 ) 536 (953 ) Stock-based compensation(e) 2,038 3,321 40,533 3,321 Adjusted EBITDA - Consolidated 55,501 35,795 220,165 113,219 Less: Adjusted EBITDA - Unrestricted Subsidiaries(f) 9,308 5,624 30,238 8,957 Plus: Adjusted EBITDA - Intercompany elimination(g) 7,339 5,472 29,095 19,058 Adjusted EBITDA - Diamond Resorts International, Inc. and Restricted Subsidiaries $ 53,532 $ 35,643 $ 219,022 $ 123,320 (a) Corporate interest expense does not include interest expense related to non-recourse indebtedness incurred by our special-purpose vehicles that is secured by our VOI consumer loans. (b) These items represent non-cash charges/gains. (c) We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates. (d) Represents the amount by which the fair value of the assets acquired net of the liabilities assumed in the PMR Service Companies Acquisition and the PMR Acquisition exceeded the respective purchase prices in 2013 and 2012, respectively. (e) Represents the non-cash charge related to stock-based compensation due to stock options exercisable for approximately 6.6 million shares of common stock we issued in connection with the IPO. (f) Represents the Adjusted EBITDA of unrestricted subsidiaries as defined in, and calculated in accordance with, the Notes Indenture. (g)Represents the elimination of revenues and expenses related to agreements entered into between our restricted and unrestricted subsidiaries. The significant agreements include service agreements for sales and marketing management, resort management, reservation services and portfolio management, whereby certain restricted subsidiaries operate these functions on behalf of the unrestricted subsidiaries for a fee. In addition to these service agreements, we have also entered into intercompany sales agreements, whereby certain restricted subsidiaries purchase unsold Vacation Interests from unrestricted subsidiaries.
The following tables present a reconciliation of (i) advertising, sales and marketing expense as reported to advertising, sales and marketing expense after excluding certain non-cash items; (ii) general and administrative expense as reported to general and administrative expense after excluding certain non-cash and one-time items; and (iii) income (loss) before provision (benefit) for income taxes to income (loss) before provision (benefit) for income taxes after excluding certain non-cash items for the periods presented below. We exclude these non-cash items because management excludes them from its forecasts and evaluation of our operational performance and because we believe that the GAAP measures including these items are not indicative of our core operating results.
Quarter Ended December 31, Year Ended December 31, 2013 2012 2013 2012 ($ in thousands) ($ in thousands) Advertising, sales and marketing expense $ 76,783 $ 53,774 $ 258,451 $ 178,365 Stock-based compensation (155 ) — (2,104 ) —Advertising, sales and marketing expense excluding stock-based compensation
$ 76,628 $ 53,774 $ 256,347 $ 178,365 Quarter Ended December 31, Year Ended December 31, 2013 2012 2013 2012 ($ in thousands) ($ in thousands) General and administrative expense $ 40,313 $ 28,078 $ 145,925 $ 99,015 Stock-based compensation (1,655 ) (3,321 ) (37,044 ) (3,321 ) Final settlement for the FLRX litigation (10,500 ) — (10,500 ) — Executive Termination — — — (5,000 ) General and administrative expense after excluding certain non-cash items $ 28,158 $ 24,757 $ 98,381 $ 90,694 Quarter Ended December 31, Year Ended December 31, 2013 2012 2013 2012 ($ in thousands) ($ in thousands) Income (loss) before provision (benefit) for income taxes $ 16,127 $ (12,705 ) $ 3,252 $ (667 ) Plus: Non-cash charge from stock-based compensation 2,038 3,321 40,533 3,321 Non-cash charge from early extinguishment of debt 2,221 — 6,570 — Non-cash charge from final settlement related to the FLRX litigation 5,500 — 5,500 — Cash charge from early extinguishment of debt — — 9,034 Cash charge from final settlement related to the FLRX litigation 5,000 — 5,000 — Cash charge related to the Executive Termination — — — 5,000 (Gain on) adjustment to bargain purchase (153 ) 2,024 (2,879 ) (20,610 ) Income (loss) before provision (benefit) for income taxes after excluding certain items $ 30,733 $ (7,360 ) $ 67,010 $ (12,956 )To properly and prudently evaluate our business, we encourage you to review our U.S. GAAP consolidated financial statements included in this press release, and not to rely on any single financial measure to evaluate our business. The non-U.S. GAAP financial measures included in this press release should not be considered in isolation, or as an alternative to net cash provided by operating activities or any other measure of liquidity, or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance, in any such case calculated and presented in accordance with U.S. GAAP.
Segment Reporting
The Company presents its results of operations in two segments: (i) Hospitality and Management Services, which includes operations related to the management of resort properties and the Collections, revenue from club operations and the provision of other services; and (ii) Vacation Interest Sales and Financing, which includes operations relating to the marketing and sales of Vacation Interests, as well as the consumer financing activities related to such sales. While certain line items reflected on the statement of operations and comprehensive income (loss) fall completely into one of these business segments, other line items relate to revenues or expenses which are applicable to more than one segment. For line items that are applicable to more than one segment, revenues or expenses are allocated by management, which involves significant estimates. Certain expense items (principally corporate interest expense and depreciation and amortization) are not, in management's view, allocable to either of these business segments as they apply to the entire Company. In addition, general and administrative expenses are not allocated to either of these business segments because, historically, management has not allocated these expenses for purposes of evaluating the Company's different operational divisions. Accordingly, these expenses are presented under Corporate and Other.
DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT For the Quarters Ended December 31, 2013 and 2012 (In thousands) Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 Hospitality andManagement
Services
VacationInterest Sales
and Financing
Corporateand
Other
Total Hospitality andManagement
Services
VacationInterest Sales
and Financing
Corporateand
Other
Total Revenues: Management and member services $ 34,934 $ — $ — $ 34,934 $ 29,363 $ — $ — $ 29,363 Consolidated resort operations 9,047 — — 9,047 8,234 — — 8,234 Vacation Interest sales, net ofprovision of $0, $14,939, $0,
$14,939, $0, $9,364, $0 and $9,364, respectively
— 138,798 — 138,798 — 90,334 — 90,334 Interest — 15,580 305 15,885 — 13,754 398 14,152 Other 1,137 11,060 — 12,197 760 7,719 — 8,479 Total revenues 45,118 165,438 305 210,861 38,357 111,807 398 150,562 Costs and Expenses: Management and member services 9,955 — — 9,955 9,733 — — 9,733 Consolidated resort operations 8,164 — — 8,164 7,691 — — 7,691 Vacation Interest cost of sales — 11,244 — 11,244 — 14,975 — 14,975 Advertising, sales and marketing — 76,783 — 76,783 — 53,774 — 53,774 Vacation Interest carrying cost, net — 12,206 — 12,206 — 9,689 — 9,689 Loan portfolio 329 1,747 — 2,076 227 2,079 — 2,306 Other operating — 5,588 — 5,588 — 3,088 — 3,088 General and administrative — — 40,313 40,313 — — 28,078 28,078 Depreciation and amortization — — 8,273 8,273 — — 5,478 5,478 Interest — 3,960 14,105 18,065 — 4,495 21,704 26,199 Loss on extinguishment of debt — — 2,221 2,221 — — — — Impairments and other write-offs — — 308 308 — — 619 619 Gain on disposal of assets — — (309 ) (309 ) — — (387 ) (387 ) (Gain) adjustment on bargainpurchase from business combinations
— — (153 ) (153 ) — — 2,024 2,024 Total costs and expenses 18,448 111,528 64,758 194,734 17,651 88,100 57,516 163,267 Income (loss) before provision (benefit) for income taxes 26,670 53,910 (64,453 ) 16,127 20,706 23,707 (57,118 ) (12,705 ) Provision (benefit) for income taxes — — 12,554 12,554 — — (957 ) (957 ) Net income (loss) $ 26,670 $ 53,910 $ (77,007 ) $ 3,573 $ 20,706 $ 23,707 $ (56,161 ) $ (11,748 ) DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT For the Years Ended December 31, 2013 and 2012 (In thousands) Year Ended December 31, 2013 Year Ended December 31, 2012 Hospitality andManagement
Services
VacationInterest Sales
and Financing
Corporateand
Other
Total Hospitality andManagement
Services
VacationInterest Sales
and Financing
Corporateand
Other
Total Revenues: Management and member services $ 131,238 $ — $ — $ 131,238 $ 114,937 $ — $ — $ 114,937 Consolidated resort operations 35,512 — — 35,512 33,756 — — 33,756 Vacation Interest sales, net ofprovision of $0, $44,670, $0,
$44,670, $0, $25,457, $0 and $25,457, respectively
— 464,613 — 464,613 — 293,098 — 293,098 Interest — 55,601 1,443 57,044 — 51,769 1,437 53,206 Other 8,673 32,708 — 41,381 4,595 24,076 — 28,671 Total revenues 175,423 552,922 1,443 729,788 153,288 368,943 1,437 523,668 Costs and Expenses: Management and member services 37,907 — — 37,907 35,330 — — 35,330 Consolidated resort operations 34,333 — — 34,333 30,311 — — 30,311 Vacation Interest cost of sales — 56,695 — 56,695 — 32,150 — 32,150 Advertising, sales and marketing — 258,451 — 258,451 — 178,365 — 178,365 Vacation Interest carrying cost, net — 41,347 — 41,347 — 36,363 — 36,363 Loan portfolio 1,111 8,520 — 9,631 858 8,628 — 9,486 Other operating — 12,106 — 12,106 — 8,507 — 8,507 General and administrative — — 145,925 145,925 — — 99,015 99,015 Depreciation and amortization — — 28,185 28,185 — — 18,857 18,857 Interest — 16,411 72,215 88,626 — 18,735 77,422 96,157 Loss on extinguishment of debt — — 15,604 15,604 — — — — Impairments and other write-offs — — 1,587 1,587 — — 1,009 1,009 Gain on disposal of assets — — (982 ) (982 ) — — (605 ) (605 ) Gain on bargain purchase frombusiness combinations
— — (2,879 ) (2,879 ) — — (20,610 ) (20,610 ) Total costs and expenses 73,351 393,530 259,655 726,536 66,499 282,748 175,088 524,335 Income (loss) before provision (benefit) for income taxes 102,072 159,392 (258,212 ) 3,252 86,789 86,195 (173,651 ) (667 ) Provision (benefit) for income taxes — — 5,777 5,777 — — (14,310 ) (14,310 ) Net income (loss) $ 102,072 $ 159,392 $ (263,989 ) $ (2,525 ) $ 86,789 $ 86,195 $ (159,341 ) $ 13,643Consolidating Financial Statements - Restricted and Unrestricted Subsidiaries
The following consolidating financial statements present the financial position, results of operations, and statements of cash flow for (1) those subsidiaries of the Company which have been designated "Unrestricted Subsidiaries" for purposes of the Senior Secured Note Indenture; and (2) the Company and all of its other subsidiaries. As of December 31, 2013 and December 31, 2012, the Unrestricted Subsidiaries were FLRX Inc. and its subsidiaries, ILX Acquisition Inc. and its subsidiaries, Tempus Acquisition, LLC and its subsidiaries, DPM Acquisition, LLC and its subsidiaries and Aegean Blue Holdings Plc and its subsidiaries.
DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS For the Quarters Ended December 31, 2013 and 2012 (In thousands) (Unaudited) Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Revenues: Management and member services $ 33,597 $ 6,160 $ (4,823 ) $ 34,934 $ 29,166 $ 3,859 $ (3,662 ) $ 29,363 Consolidated resort operations 8,191 856 — 9,047 6,922 1,312 — 8,234Vacation Interest sales, net of provision (adjustment) of $14,307, $632, $0, $14,939, $9,807, $(443), $0 and $9,364, respectively
128,337 10,461 — 138,798 80,714 9,620 — 90,334 Interest 15,267 618 — 15,885 11,061 3,091 — 14,152 Other 12,973 12,032 (12,808 ) 12,197 8,885 9,679 (10,085 ) 8,479 Total revenues 198,365 30,127 (17,631 ) 210,861 136,748 27,561 (13,747 ) 150,562 Costs and Expenses: Management and member services 10,890 2,834 (3,769 ) 9,955 10,489 2,775 (3,531 ) 9,733 Consolidated resort operations 7,697 467 — 8,164 6,417 1,274 — 7,691 Vacation Interest cost of sales 12,300 (1,056 ) — 11,244 14,043 932 — 14,975 Advertising, sales and marketing 71,971 5,852 (1,040 ) 76,783 49,833 4,906 (965 ) 53,774 Vacation Interest carrying cost, net 8,835 4,321 (950 ) 12,206 7,208 3,135 (654 ) 9,689 Loan portfolio 2,050 464 (438 ) 2,076 2,279 893 (866 ) 2,306 Other operating 6,019 3,664 (4,095 ) 5,588 3,376 1,971 (2,259 ) 3,088 General and administrative 37,285 3,028 — 40,313 22,401 5,677 — 28,078 Depreciation and amortization 4,088 4,185 — 8,273 2,438 3,040 — 5,478 Interest 13,015 5,050 — 18,065 16,858 9,341 — 26,199 Loss on extinguishment of debt 2,221 — — 2,221 — — — — Impairments and other write-offs 308 — — 308 619 — — 619 (Gain) loss on disposal of assets (309 ) — — (309 ) (418 ) 31 — (387 )(Gain) adjustment on bargain purchase from business combinations
— (153 ) — (153 ) — 2,024 — 2,024 Total costs and expenses 176,370 28,656 (10,292 ) 194,734 135,543 35,999 (8,275 ) 163,267Income (loss) before provision (benefit) for income taxes
21,995 1,471 (7,339 ) 16,127 1,205 (8,438 ) (5,472 ) (12,705 )Provision (benefit) for income taxes
11,718 836 — 12,554 (1,615 ) 658 — (957 )Net income (loss)
$ 10,277 $ 635 $ (7,339 ) $ 3,573 $ 2,820 $ (9,096 ) $ (5,472 ) $ (11,748 ) DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF OPERATIONS For the Years Ended December 31, 2013 and 2012 (In thousands) (Unaudited) Year Ended December 31, 2013 Year Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Revenues: Management and member services $ 126,768 $ 22,206 $ (17,736 ) $ 131,238 $ 114,189 $ 13,032 $ (12,284 ) $ 114,937 Consolidated resort operations 30,476 5,036 — 35,512 28,352 5,404 — 33,756Vacation Interest sales, net of provision (adjustment) of $43,237, $1,433, $0, $44,670, $27,080, $(1,623), $0 and $25,457, respectively
429,981 34,632 — 464,613 270,490 22,608 — 293,098 Interest 50,096 6,948 — 57,044 39,914 13,292 — 53,206 Other 45,857 45,299 (49,775 ) 41,381 32,542 28,053 (31,924 ) 28,671 Total revenues 683,178 114,121 (67,511 ) 729,788 485,487 82,389 (44,208 ) 523,668 Costs and Expenses: Management and member services 41,175 10,904 (14,172 ) 37,907 36,884 8,723 (10,277 ) 35,330 Consolidated resort operations 29,863 4,470 — 34,333 25,366 4,945 — 30,311 Vacation Interest cost of sales 55,439 1,256 — 56,695 30,292 1,858 — 32,150 Advertising, sales and marketing 239,367 22,586 (3,502 ) 258,451 168,905 11,413 (1,953 ) 178,365 Vacation Interest carrying cost, net 31,010 14,393 (4,056 ) 41,347 30,083 8,843 (2,563 ) 36,363 Loan portfolio 9,486 2,660 (2,515 ) 9,631 9,239 3,036 (2,789 ) 9,486 Other operating 14,721 11,556 (14,171 ) 12,106 10,685 5,390 (7,568 ) 8,507 General and administrative 131,369 14,556 — 145,925 74,324 24,691 — 99,015 Depreciation and amortization 13,286 14,899 — 28,185 9,231 9,626 — 18,857 Interest 60,999 27,627 — 88,626 67,392 28,765 — 96,157 Loss on extinguishment of debt 10,664 4,940 — 15,604 — — — — Impairments and other write-offs 387 1,200 — 1,587 1,009 — — 1,009 (Gain) loss on disposal of assets (983 ) 1 — (982 ) (636 ) 31 — (605 )Gain on bargain purchase from business combinations
— (2,879 ) — (2,879 ) — (20,610 ) — (20,610 ) Total costs and expenses 636,783 128,169 (38,416 ) 726,536 462,774 86,711 (25,150 ) 524,335 Income (loss) before provision (benefit)for income taxes
46,395 (14,048 ) (29,095 ) 3,252 22,713 (4,322 ) (19,058 ) (667 )Provision (benefit) for income taxes
4,772 1,005 — 5,777 (1,406 ) (12,904 ) — (14,310 ) Net income (loss) $ 41,623 $ (15,053 ) $ (29,095 ) $ (2,525 ) $ 24,119 $ 8,582 $ (19,058 ) $ 13,643 DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS As of December 31, 2013 and December 31, 2012 (In thousands, except share data) (Unaudited) December 31, 2013 December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Assets: Cash and cash equivalents $ 26,678 $ 9,266 $ — $ 35,944 $ 16,963 $ 4,098 $ — $ 21,061 Cash in escrow and restricted cash 90,363 1,868 — 92,231 40,785 1,526 — 42,311Mortgages and contracts receivable, net of allowance of $98,549, $7,041, $0, $105,590, $61,067, $22,717, $0, and $83,784, respectively
388,538 16,915 1 405,454 266,303 46,633 (4 ) 312,932Due from related parties, net
261,422 11,463 (226,623 ) 46,262 45,428 4,510 (26,943 ) 22,995 Other receivables, net 50,422 4,166 — 54,588 40,292 5,757 — 46,049 Income tax receivable 25 16,706 (16,706 ) 25 927 — — 927 Prepaid expenses and other assets, net 53,388 14,460 410 68,258 49,512 9,409 (897 ) 58,024 Unsold Vacation Interests, net 276,717 72,750 (51,357 ) 298,110 263,493 74,635 (22,261 ) 315,867 Property and equipment, net 40,359 20,037 — 60,396 33,664 21,456 — 55,120 Assets held for sale 1,207 9,455 — 10,662 5,070 154 — 5,224 Intangible assets, net 109,183 120,082 — 229,265 30,914 81,584 — 112,498 Total assets $ 1,298,302 $ 297,168 $ (294,275 ) $ 1,301,195 $ 793,351 $ 249,762 $ (50,105 ) $ 993,008Liabilities and Stockholders' equity (deficit):
Accounts payable $ 11,798 $ 2,831 $ — $ 14,629 $ 13,467 $ 2,252 $ — $ 15,719 Due to related parties, net 15,750 263,377 (234,483 ) 44,644 42,632 57,179 (35,607 ) 64,204 Accrued liabilities 106,570 10,993 (128 ) 117,435 91,511 16,004 (1,064 ) 106,451 Income taxes payable 1,069 — — 1,069 701 — — 701 Deferred income taxes 27,715 11,395 (16,706 ) 22,404 — — — — Deferred revenues 103,745 7,147 — 110,892 92,490 1,343 — 93,833Senior Secured Notes, net of unamortized original issue discount of $6,548, $0, $0, $6,548, $8,509, $0, $0, and $8,509, respectively
367,892 — — 367,892 416,491 — — 416,491Securitization notes and Funding Facilities, net of unamortized original issue discount for $226, $0, $0, $226, $753, $0, $0, $753, respectively
386,501 4,766 — 391,267 209,450 46,852 — 256,302 Revolving credit facility — — — — — — — — Derivative liabilities — — — — — — — — Notes payable 3,302 19,848 — 23,150 3,238 134,668 — 137,906 Total liabilities 1,024,342 320,357 (251,317 ) 1,093,382 869,980 258,298 (36,671 ) 1,091,607 Stockholders' equity (deficit):Common stock $0.01 par value; authorized -
250,000,000 shares; issued and outstanding - 75,458,402, 0, 0 and 75,458,402, 54,057,867, 0, 0 and 54,057,867 shares
755 — — 755 541 — — 541 Additional paid-in capital 463,194 9,675 (9,675 ) 463,194 155,027 9,675 (9,675 ) 155,027 Accumulated deficit (173,722 ) (32,416 ) (33,821 ) (239,959 ) (215,433 ) (17,563 ) (4,438 ) (237,434 )Accumulated other comprehensive (loss) income
(16,267 ) (448 ) 538 (16,177 ) (16,764 ) (648 ) 679 (16,733 )Total stockholders' equity (deficit)
273,960 (23,189 ) (42,958 ) 207,813 (76,629 ) (8,536 ) (13,434 ) (98,599 )Total liabilities and stockholders' equity (deficit)
$ 1,298,302 $ 297,168 $ (294,275 ) $ 1,301,195 $ 793,351 $ 249,762 $ (50,105 ) $ 993,008 DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS For the Quarters Ended December 31, 2013 and 2012 (In thousands) (Unaudited) Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Operating Activities: Net income (loss) $ 10,277 $ 635 $ (7,339 ) $ 3,573 $ 2,820 $ (9,096 ) $ (5,472 ) $ (11,748 ) Adjustments to reconcile net income(loss) to net cash (used in) provided
by operating activities:
Provision (benefit) for uncollectible Vacation Interest sales revenue 14,307 632 — 14,939 9,807 (443 ) — 9,364 Amortization of capitalized financingcosts and original issue discounts
1,433 39 — 1,472 1,463 88 — 1,551 Amortization of capitalized loanorigination costs and net portfolio
discounts (premiums)
1,576 71 — 1,647 835 (69 ) — 766 Depreciation and amortization 4,088 4,185 — 8,273 2,438 3,040 — 5,478 Stock-based compensation 2,038 — — 2,038 3,321 — — 3,321 Loss on extinguishment of debt 2,221 — — 2,221 — — — — Impairments and other write-offs 308 — — 308 619 — — 619 (Gain) loss on disposal of assets (309 ) — — (309 ) (418 ) 31 — (387 ) (Gain) adjustment on bargain purchase frombusiness combinations
— (153 ) — (153 ) — 2,024 — 2,024 Deferred income taxes 10,923 11,280 (10,899 ) 11,304 — 602 — 602 (Gain) loss on foreign currency exchange (14 ) 44 — 30 142 69 — 211 (Gain) on mortgage repurchase — (40 ) — (40 ) (1 ) — — (1 ) Unrealized gain on derivative instruments (657 ) — — (657 ) — — — — Unrealized loss on post-retirement benefit plan 113 — — 113 — — — — Changes in operating assets andliabilities excluding acquisitions:
Mortgages and contracts receivable (45,106 ) 742 (1 ) (44,365 ) (25,834 ) 5,145 — (20,689 ) Due from related parties, net (11,960 ) (9,420 ) 19,859 (1,521 ) (26,323 ) (495 ) 10,388 (16,430 ) Other receivables, net (22,865 ) 1,027 — (21,838 ) (22,230 ) 1,094 — (21,136 ) Prepaid expenses and other assets, net 19,512 3,448 (1,168 ) 21,792 13,250 1,192 (65 ) 14,377 Unsold Vacation Interests, net 817 (3,431 ) 7,339 4,725 2,318 1,611 6,320 10,249 Accounts payable (449 ) (3,565 ) — (4,014 ) 371 (3,185 ) — (2,814 ) Due to related parties, net (29,027 ) 10,126 (19,706 ) (38,607 ) (13,363 ) (1,176 ) (11,236 ) (25,775 ) Accrued liabilities 20,091 (3,395 ) 1,016 17,712 20,706 (1,026 ) 65 19,745 Income taxes payable (34 ) (10,899 ) 10,899 (34 ) (1,186 ) — — (1,186 ) Deferred revenues 20,954 804 — 21,758 31,433 (313 ) — 31,120 Net cash (used in) provided byoperating activities
(1,763 ) 2,130 — 367 168 (907 ) — (739 ) Investing activities: Property and equipment capital expenditures (2,471 ) 59 — (2,412 ) (2,989 ) (73 ) — (3,062 ) Cash acquired in connection with theIsland One Acquisition
(156 ) — — (156 ) — — — — Purchase of assets in connection withthe Pacific Monarch and Post Net of :
$0, $0, $0, $0, $0, $0, $0, and $0,
respectively cash acquired
— 341 — 341 — — — — Purchase of assets in connection withthe Aegean Blue Acquisition, net of cash
acquired of $0, $0, $0, $0, $0, $2,072, $0,
and $2,072, respectively
— — — — — (4,471 ) — (4,471 ) Proceeds from sale of assets 1,001 — — 1,001 606 — — 606 Net cash (used in) provided by investingactivities
$ (1,626 ) $ 400 $ — $ (1,226 ) $ (2,383 ) $ (4,544 ) $ — $ (6,927 ) DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS—Continued For the Quarters Ended December 31, 2013 and 2012 (Unaudited) (In thousands) Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Financing activities: Changes in cash in escrow and restricted cash $ (31,904 ) $ 849 $ — $ (31,055 ) $ (2,854 ) $ 1,226 $ — $ (1,628 ) Proceeds from issuance ofsecuritization notes and Funding
Facilities
286,804 — — 286,804 35,357 1,586 — 36,943 Proceeds from issuance of notespayable
— 1,475 — 1,475 — 15,403 — 15,403 Payments on revolving credit facility (15,000 ) — — (15,000 ) — — — — Payments on securitization notes andFunding Facilities
(224,956 ) (932 ) — (225,888 ) (28,433 ) (3,973 ) — (32,406 ) Payments on senior secured notes — — — — — — — — Payments on notes payable (3,704 ) (1,686 ) — (5,390 ) (2,837 ) (5,085 ) — (7,922 ) Payments of debt issuance costs (3,833 ) — — (3,833 ) (89 ) 100 — 11 Proceeds from issuance of CommonStock, net of related costs
(373 ) — — (373 ) — — — — Payments of costs related to issuanceof common and preferred units
— — — — 35 — — 35 Net cash provided by (used in)financing activities
7,034 (294 ) — 6,740 1,179 9,257 — 10,436 Net increase (decrease) in cash andcash equivalents
3,645 2,236 — 5,881 (1,036 ) 3,806 — 2,770 Effect of changes in exchange rateson cash and cash equivalents
165 22 — 187 201 (157 ) — 44 Cash and cash equivalents, beginningof period
22,868 7,008 — 29,876 17,798 449 — 18,247 Cash and cash equivalents, end of period $ 26,678 $ 9,266 $ — $ 35,944 $ 16,963 $ 4,098 $ — $ 21,061 SUPPLEMENTAL DISCLOSURESOF CASH FLOW INFORMATION:
Cash paid for interest $ 3,935 $ 1,191 $ — $ 5,126 $ 3,209 $ 5,059 $ — $ 8,268 Cash paid for taxes, net of cash tax refunds (cash tax refunds, net of cash paid for taxes) $ 1,242 $ 87 $ — $ 1,329 $ (432 ) $ 56 $ — $ (376 ) DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS—Continued For the Quarters Ended December 31, 2013 and 2012 (Unaudited) (In thousands) Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Insurance premiums financed through issuance of notes payable $ 3,658 $ — $ — $ 3,658 $ 2,931 $ — $ — $ 2,931 Assets held for sale reclassified tounsold vacation interests
$ 3,995 $ — $ — $ 3,995 $ — $ — $ — $ — Unsold Vacation Interests, netreclassified to assets held for sale
$ — $ 3,600 $ — $ 3,600 $ 1,784 $ — $ — $ 1,784 Other receivables reclassified toassets held for sale
$ — $ — $ — $ — $ 54 $ — $ — $ 54 Management contracts reclassified to assets held for sale $ — $ — $ — $ — $ 205 $ — $ — $ 205 DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2013 and 2012 (In thousands) (Unaudited) Year Ended December 31, 2013 Year Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Operating Activities: Net income (loss) $ 41,623 $ (15,053 ) $ (29,095 ) $ (2,525 ) $ 24,119 $ 8,582 $ (19,058 ) $ 13,643 Adjustments to reconcile net income(loss) to net cash (used in) provided
by operating activities:
Provision (benefit) for uncollectible Vacation Interest sales revenue 43,237 1,433 — 44,670 27,080 (1,623 ) — 25,457 Amortization of capitalized financingcosts and original issue discounts
6,293 786 — 7,079 5,626 667 — 6,293 Amortization of capitalized loanorigination costs and net portfolio
discounts (premiums)
5,391 564 — 5,955 3,117 (775 ) — 2,342 Depreciation and amortization 13,286 14,899 — 28,185 9,231 9,626 — 18,857 Stock-based compensation 40,533 — — 40,533 3,321 — — 3,321 Loss on extinguishment of debt 10,664 4,940 — 15,604 — — — — Impairments and other write-offs 387 1,200 — 1,587 1,009 — — 1,009 (Gain) loss on disposal of assets (983 ) 1 — (982 ) (636 ) 31 — (605 ) Gain on bargain purchase frombusiness combinations
— (2,879 ) — (2,879 ) — (20,610 ) — (20,610 ) Deferred income taxes 10,312 9,658 (16,706 ) 3,264 — (13,010 ) — (13,010 ) Loss on foreign currency exchange 124 121 — 245 44 69 — 113 Loss (gain) on mortgage repurchase 7 (118 ) — (111 ) (27 ) — — (27 ) Unrealized loss on post-retirement benefit plan 887 — — 887 — — — — Changes in operating assets andliabilities excluding acquisitions:
Mortgages and contracts receivable (156,681 ) 27,852 (5 ) (128,834 ) (68,662 ) 16,948 (2 ) (51,716 ) Due from related parties, net (203,169 ) (7,595 ) 199,680 (11,084 ) (17,098 ) (147 ) 19,123 1,878 Other receivables, net (8,881 ) 2,973 — (5,908 ) (7,447 ) (328 ) 19 (7,756 ) Prepaid expenses and other assets, net 3,064 (8,525 ) (1,060 ) (6,521 ) (7,039 ) 2,830 (86 ) (4,295 ) Unsold Vacation Interests, net (8,412 ) (8,589 ) 29,096 12,095 (36,948 ) (6,134 ) 19,057 (24,025 ) Accounts payable (6,488 ) 57 — (6,431 ) 1,641 (2,143 ) — (502 ) Due to related parties, net (27,848 ) 206,754 (199,680 ) (20,774 ) 27,716 14,437 (19,132 ) 23,021 Accrued liabilities 5,828 (2,260 ) 1,064 4,632 22,221 9,886 79 32,186 Income taxes payable 1,260 (16,706 ) 16,706 1,260 (3,232 ) — — (3,232 ) Deferred revenues 8,849 5,794 — 14,643 21,294 964 — 22,258 Net cash (used in) provided byoperating activities
(220,717 ) 215,307 — (5,410 ) 5,330 19,270 — 24,600 Investing activities: Property and equipment capital expenditures (14,654 ) (550 ) — (15,204 ) (13,994 ) (341 ) — (14,335 ) Cash acquired in connection with theIsland One Acquisition
569 — — 569 — — — — Purchase of assets in connection withthe Pacific Monarch and Post Net of :
$0, $0, $0, $0, $0, $0, $0, and $0,
respectively cash acquired
— (47,417 ) — (47,417 ) — (51,635 ) — (51,635 )Purchase of assets in connection with
the Aegean Blue Acquisition, net of cash
acquired of $0, $0, $0, $0, $0, $2,072, $0, and $2,072, respectively
— — — — — (4,471 ) — (4,471 ) Proceeds from sale of assets 4,127 — — 4,127 1,103 — — 1,103 Net cash used in investingactivities
$ (9,958 ) $ (47,967 ) $ — $ (57,925 ) $ (12,891 ) $ (56,447 ) $ — $ (69,338 ) DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS—Continued For the Years Ended December 31, 2013 and 2012 (Unaudited) (In thousands) Year Ended December 31, 2013 Year Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Financing activities: Changes in cash in escrow and restricted cash $ (48,400 ) $ (325 ) $ — $ (48,725 ) $ (7,375 ) $ 994 $ — $ (6,381 ) Proceeds from issuance of revolving credit facility 15,000 — — 15,000 — — — — Proceeds from issuance ofsecuritization notes and Funding
Facilities
551,964 713 — 552,677 116,354 3,453 — 119,807 Proceeds from issuance of notespayable
— 5,357 — 5,357 1,124 79,541 — 80,665 Payments on revolving credit facility (15,000 ) — — (15,000 ) — — — — Payments on securitization notes andFunding Facilities
(384,673 ) (42,799 ) — (427,472 ) (95,370 ) (19,331 ) — (114,701 ) Payments on senior secured notes (50,560 ) — — (50,560 ) — — — — Payments on notes payable (12,113 ) (125,109 ) — (137,222 ) (10,263 ) (21,004 ) — (31,267 ) Payments of debt issuance costs (9,980 ) (16 ) — (9,996 ) (113 ) (2,470 ) — (2,583 ) Proceeds from issuance of CommonStock, net of related costs
204,332 — — 204,332 — — — — Repurchase of remaining outstanding warrants (10,346 ) — — (10,346 ) — — — — Net cash provided by (used in)financing activities
240,224 (162,179 ) — 78,045 4,357 41,183 — 45,540 Net increase (decrease) in cash andcash equivalents
9,549 5,161 — 14,710 (3,204 ) 4,006 — 802 Effect of changes in exchange rateson cash and cash equivalents
166 7 — 173 519 (157 ) — 362 Cash and cash equivalents, beginningof period
16,963 4,098 — 21,061 19,648 249 — 19,897 Cash and cash equivalents, end of period $ 26,678 $ 9,266 $ — $ 35,944 $ 16,963 $ 4,098 $ — $ 21,061 SUPPLEMENTAL DISCLOSURESOF CASH FLOW INFORMATION:
Cash paid for interest $ 59,440 $ 20,113 $ — $ 79,553 $ 64,276 $ 16,091 $ — $ 80,367 Cash paid for taxes, net ofcash tax refunds
$ 1,104 $ 237 $ — $ 1,341 $ 1,960 $ — $ — $ 1,960 Purchase of assets from Island One,PMR Service Cos (2013) and PMR (2012):
Fair value of assets acquired basedon valuation reports
$ 81,281 $ 52,554 $ — $ 133,835 $ — $ 103,780 $ — $ 103,780 Gain on bargain purchaserecognized
— (2,879 ) — (2,879 ) — (20,741 ) — (20,741 ) Goodwill acquired 30,632 — — 30,632 — — — — Cash paid 569 (47,417 ) — (46,848 ) — (56,106 ) — (56,106 ) DRII common stock issued (73,307 ) — — (73,307 ) — — — — Deferred tax liability (17,403 ) (1,737 ) — (19,140 ) — (13,010 ) — (13,010 ) Liabilities assumed $ 21,772 $ 521 $ — $ 22,293 $ — $ 13,923 $ — $ 13,923 DIAMOND RESORTS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS—Continued For the Years Ended December 31, 2013 and 2012 (Unaudited) (In thousands) Year Ended December 31, 2013 Year Ended December 31, 2012 Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total Diamondand Restricted
Subsidiaries
UnrestrictedSubsidiaries
Elimination Total SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Insurance premiums financed through issuance of notes payable $ 11,480 $ — $ — $ 11,480 $ 10,504 $ — $ — $ 10,504 Unsold Vacation Interests, netreclassified to assets held for sale
$ 469 $ 9,301 $ — $ 9,770 $ 431 $ — $ — $ 431 Other receivables reclassified toassets held for sale
$ — $ — $ — $ — $ 54 $ — $ — $ 54 Management contracts reclassified to assets held for sale $ — $ — $ — $ — $ 13 $ — $ — $ 13
Media:Diamond Resorts International®Stevi Wara, 702-823-7069media@diamondresorts.comorInvestors:Sloane and CompanyJoshua Hochberg, 212-486-9500jhochberg@sloanepr.com
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