SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT TO APPLICATION OR REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 17, 1999
EQUIVEST FINANCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 333-29015 59-2346270
(State or other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification No.)
of incorporation)
100 NORTHFIELD STREET
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 618-0065
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its current report dated November 17, 1999, on
Form 8-K as set forth in the pages attached hereto:
Item 7. Financial Statements and Exhibits
Listed below are the financial statements, pro forma financial information
and exhibits filed as part of this report:
a. Financial Statements of Business Acquired
The financial statements for the Acquired Company listed in the
accompanying Index to Financial Statements and Pro Forma Financial
Information are filed as part of this Report on Form 8-K/A.
b. Pro Forma Financial Information
The pro forma financial information of Equivest Finance, Inc. listed
in the accompanying Index to Financial Statements and Pro Forma
Financial Information are filed as part of this Report on Form
8-K/A.
c. Exhibits
None.
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 hereunto duly authorized.
EQUIVEST FINANCE, INC.
Date: January 29, 2000 By: /s/
-------------------------------------
Name: Gerald L. Klaben, Jr.
Title: Senior Vice President and Chief
Financial Officer
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
The following financial statements and pro forma financial statements are
included in Item 7 of this Current Report on Form 8-K:
Peppertree Resorts, Ltd.
Independent Auditors' Report
Combined Balance Sheets as of December 31, 1998 and 1997
Combined Statements of Income and Combined Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996
Combined Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996
Notes to Financial Statements for the Years Ended December 31, 1998, 1997 and
1996
Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and 1998
Condensed Consolidated Statements of Income for the Nine Months Ended
September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flow for the Nine Months Ended
September 30, 1999 and 1998
Notes to Financial Statements for the Nine Months Ended September 30, 1999
and 1998
Equivest Finance, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Balance Sheet - September 30, 1999
Unaudited Pro Forma Condensed Income Statement - Nine Months Ended
September 30, 1999
Unaudited Pro Forma Condensed Income Statement - Year Ended December 31,
1998
Notes to Unaudited Pro Forma Condensed Financial Statements
PEPPERTREE RESORTS, LTD.
AND AFFILIATES
Asheville, North Carolina
Combined Financial Statements
For The Years Ended December 31, 1998, 1997 and 1996
PEPPERTREE RESORTS LTD. AND AFFILIATES
Asheville, North Carolina
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F - 1
FINANCIAL STATEMENTS
Combined Balance Sheets F - 2
Combined Statements of Income F - 3
Combined Statements of Stockholders' Equity F - 4
Combined Statements of Cash Flows F 5-6
Notes to Combined Financial Statements F 7-27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Peppertree Resorts, Ltd. and Affiliates
Asheville, North Carolina
We have audited the accompanying combined balance sheets of Peppertree Resorts,
Ltd. and Affiliates as of December 31, 1998 and 1997, and the related combined
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Peppertree Resorts,
Ltd. and affiliates as of December 31, 1998 and 1997 and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 27 to the financial statements, certain errors resulting in
an understatement of previously reported income tax expenses and deferred tax
liabilities were discovered by management of the Company pertaining to the years
ended December 31, 1998 and 1997. Accordingly, the financial statements for each
of the years then ended have been restated to correct the errors.
Painter, Patrick & Russell, P.A.
Asheville, North Carolina
April 30, 1999, except for Note 26 and 27,
as to which the date is January 25, 2000
F-1
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Combined Balance Sheets
At December 31 1998 1997
- --------------------------------------------------------------------------------------
Assets
Cash and equivalents $ 510,666 $ 1,666,600
Restricted cash (Note 2) 583,292 108,250
Loans receivable, net (Note 3) 66,048,989 49,811,475
Accrued interest 519,834 142,951
Trade receivables, net of allowance for uncollectible
accounts of $104,403 and $74,007 319,799 367,516
Receivable from affiliate 153,974 341,160
Real estate inventories (Note 4) 13,704,476 10,770,670
Inventories (Note 5) 513,312 326,455
Deferred credit (Note 6) 907,676 253,819
Prepaid expenses and other assets (Note7) 352,340 940,001
Property and equipment, net (Note 8) 14,137,882 13,675,833
----------- -----------
Total assets $97,752,240 $78,404,730
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 2,980,397 $ 3,355,359
Accrued liabilities (Note 9) 2,142,611 2,135,880
Accrued income taxes 1,514,577 412,226
Due to managed entities (Note 10) 317,591 572,061
Financing arrangements and capital leases (Note 11) 60,940,700 45,729,209
Note payable - related party (Note 11) 5,112,444 5,550,858
Deferred revenues 637,491 397,295
Deferred tax liabilities (Note 14) 5,842,130 4,286,721
Deposits (Note 13) 75,768 80,507
----------- -----------
Total liabilities 79,563,709 62,520,116
----------- -----------
Minority equity interest 130,038 30,105
----------- -----------
Stockholders' equity:
Common stock 77,270 77,270
Additional paid-in capital 7,456,264 7,456,264
Retained earnings 10,524,959 8,320,975
----------- -----------
Total stockholders' equity 18,058,493 15,854,509
----------- -----------
Total liabilities and stockholders' equity $97,752,240 $78,404,730
=========== ===========
The accompanying notes are an integral part of the financial statements
F-2
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Combined Statements of Income
For the Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Revenues:
Vacation ownership interests $ 45,637,332 $ 30,904,925 $ 21,543,859
Resort and hotel operations 10,385,523 9,763,556 9,147,872
Property management 2,232,207 2,109,268 1,965,109
Interest income 8,107,713 6,841,675 6,287,945
Other revenues 242,268 502,263 352,722
------------ ------------ ------------
Total revenues 66,605,043 50,121,687 39,297,507
------------ ------------ ------------
Expenses:
Vacation ownership interests:
Cost of sales 11,688,072 7,469,964 5,213,480
Provision for loan losses 3,594,484 1,492,876 2,408,029
Sales and marketing 22,165,431 15,232,231 10,014,024
Administrative 4,104,593 3,954,840 2,977,555
Portfolio expenses 767,684 647,077 594,853
Resort and hotel operations 9,557,192 9,034,894 8,829,485
Property management 1,357,730 1,254,781 1,215,853
Interest expense 6,025,321 4,990,857 4,744,767
Depreciation 1,689,469 1,414,574 1,187,293
Loss contingency 792,269
Loss on abandonment of design 455,653
------------ ------------ ------------
Total expenses 60,949,976 46,284,363 37,640,992
------------ ------------ ------------
Other income:
Gain on sale of land 1,180,288
------------ ------------ ------------
Income before taxes 6,835,355 3,837,324 1,656,515
------------ ------------ ------------
Provision for income taxes:
Current 1,321,659 342,560 415,087
Deferred 1,555,409 3,534,999 (348,873)
------------ ------------ ------------
Total provisions for income taxes 2,877,068 3,877,559 66,214
------------ ------------ ------------
Income before minority equity interest 3,958,287 (40,235) 1,590,301
Less, minority equity interest 99,933 (25,757) (94,235)
------------ ------------ ------------
Net income $ 3,858,354 $ (14,478) $ 1,684,536
============ ============ ============
The accompanying notes are an integral part of the financial statements
F-3
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Combined Statements of Stockholders' Equity
For the Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------
Common stock $ 77,270 $ 77,270 $ 77,270
------------ ------------ ------------
Additional paid-in capital:
Balance - beginning of years 7,456,264 7,456,264 5,956,264
Additions 1,500,000
------------ ------------ ------------
Balance - end of years 7,456,264 7,456,264 7,456,264
------------ ------------ ------------
Retained earnings:
Balance - beginning of years 8,320,975 10,489,262 9,923,750
Net income 3,858,354 (14,478) 1,684,536
Decrease in minority interest share 38,967
Stockholders' distributions (1,654,370) (2,153,809) (1,157,991)
------------ ------------ ------------
Balance - end of years 10,524,959 8,320,975 10,489,262
------------ ------------ ------------
Total stockholders' equity $ 18,058,493 $ 15,854,509 $ 18,022,796
============ ============ ============
The accompanying notes are an integral part of the financial statements
F-4
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Combined Statements of Cash Flows
For the Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income before minority equity interest $ 3,958,287 $ (40,235) $ 1,590,301
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 1,715,770 1,435,967 1,206,997
Provision for loan losses and uncollectible
trade receivables 3,594,484 1,492,876 2,408,029
Loss contingency 792,269
Loss on abandonment of design 455,653
Working capital changes - sources (uses):
Restricted cash (475,042) 300,603 (22,021)
Trade and other receivables (329,166) (108,397) (60,551)
Receivable from affiliate 358,960 2,001,160 47,287
Real estate inventories (108,306) (954,463) (739,372)
Other inventories (186,857) (95,482) 40,998
Deferred credit (653,857) (253,819)
Prepaid expenses and other assets 561,360 (378,816) (36,354)
Accounts payable (374,962) 2,076,702 (306,177)
Accrued liabilities 6,731 96,279 329,317
Accrued income taxes 1,102,351 86,654 (142,167)
Deferred revenues 240,196 163,861 (235,662)
Deposits (4,739) (59,202) 40,736
Deferred tax liabilities 1,555,409 3,533,999 (348,873)
------------ ------------ ------------
Net cash provided from operating activities 10,960,619 10,089,956 4,228,141
------------ ------------ ------------
Cash flows from investing activities:
Loans receivable (20,003,772) (8,712,357) (3,616,667)
Capital expenditures (1,796,476) (2,235,279) (1,919,204)
------------ ------------ ------------
Net cash used for investing activities (21,800,248) (10,947,636) (5,535,871)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from financing arrangements 58,293,570 26,595,829 22,469,877
Principal payments of financing arrangements (45,777,230) (22,945,851) (20,184,586)
Principal payments on related party note (438,414)
Advances to/from managed entities (254,470) 193,513 119,681
Payments on capital leases (485,391) (364,132) (148,051)
Distributions to stockholders (1,654,370) (2,153,809) (1,157,991)
------------ ------------ ------------
Net cash provided from financing activities 9,683,695 1,325,550 1,098,930
------------ ------------ ------------
Increase (decrease) in cash and equivalents (1,155,934) 467,870 (208,800)
Cash and equivalents at beginning of years 1,666,600 1,198,730 1,407,530
------------ ------------ ------------
Cash and equivalents at end of years $ 510,666 $ 1,666,600 $ 1,198,730
============ ============ ============
The accompanying notes are an integral part of the financial statements
F-5
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Combined Statements of Cash Flows (continued)
For the Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest $6,115,313 $5,068,059 $4,685,512
Income taxes 110,752 256,906 557,254
Schedule of noncash investing and financing activities:
Property and equipment acquired:
With note payable $ $ 740,000 $ 35,697
Under capital lease 355,042 1,096,599 183,149
Real estate inventories acquired with notes
payable 2,825,500 469,650
Reclassification of real estate inventories to
property and equipment 311,301
Reclassification of land to real estate inventories 100,000
Conversion of stockholder advances
to paid-in capital 1,500,000
The accompanying notes are an integral part of the financial statements.
F-6
PEPPERTREE RESORTS, LTD. AND AFFILIATES
Notes to Combined Financial Statements
December 31, 1998
Note 1 - Summary of Significant Accounting Policies
DESCRIPTION OF THE BUSINESS - Peppertree Resorts, Ltd. ("Peppertree") and its
combined affiliates (the "Company") generate revenues primarily from the sale
and financing of vacation ownership interest ("vacation intervals"), the sale of
vacation points packages ("vacation points"), ("vacation intervals" together
with "vacation points" - "vacation intervals"), the provision of resort
management and maintenance services and from the operation of a Holiday Inn
SunSpree hotel with recreational amenities. The Company's operations consist of
(1) marketing and selling vacation intervals at its resort locations that
entitle the buyer to use a fully-furnished vacation residence generally for a
one week period and vacation points that may be redeemed for occupancy rights at
participating resort locations, (2) acquiring, developing and operating vacation
ownership resorts, (3) providing consumer financing to individual purchasers for
the purchase of vacation interest at its resort locations, (4) providing resort
management and maintenance services for which it receives a fee paid by the
homeowners' associations, and (5) the operation of a 280 room hotel with a 18
hole golf course and an indoor/outdoor tennis facility.
BASIS OF PRESENTATION - The combined financial statements includes the accounts
of Peppertree and its affiliates that share common ownership, and financial,
administrative and managerial control. Therefore, the balance sheets, results of
operations and statements of cash flows have been combined for this
presentation. All significant intercompany accounts and transactions have been
eliminated in the combination. Minority equity interest and activity have been
shown separately. These combined financial statements include the accounts of
Peppertree and the following entities:
Peppertree Resorts Management, Inc. ("Management") (S-corporation)
Peppertree Resorts Villas, Inc. ("Villas") (S-corporation)
Peppertree Fontana Village, Inc. ("Fontana") (S-corporation)
Peppertree Ocean Club, Inc. ("Ocean Club") (C-corporation)
Peppertree Resorts Vacation Club, Inc. (Vacation Club") (C-corporation)
Great Smokies Hotel Associates ("Hotel") (limited partnership)
Peppertree Atlantic Beach Enterprises, Inc. ("Atlantic Beach")
(C-corporation)
Smokies Resorts Villas, Inc. ("Smokies Resorts") (proprietorship)
Crystal Coast Resorts, Inc. ("Crystal Coast") (C-corporation)
The accompanying notes are an integral part of the financial statements.
F-7
Note 1 - Summary of Significant Accounting Policies (continued)
CORPORATE REORGANIZATION AFTER END OF YEAR - Subsequent to the year end, in
1999, the Boards of Directors of Peppertree and certain of its affiliates
adopted a plan of reorganization whereby the stockholders of Management, Villas
and Vacation Club exchanged their stock for stock of Peppertree (See Note 20).
In a similar but separate transaction also in 1999, Crystal Coast, Smokies
Resorts, Ocean Club and Atlantic Beach were merged into Villas, which was
subsequently included in the stock exchange with Peppertree. With this exchange,
all of these entities became wholly-owned subsidiaries of Peppertree. Both of
these transactions were structured so as to comply with the provisions of IRC
Section 354 and are therefore considered to be free from any taxation.
CASH AND EQUIVALENTS - The Company considers all investments and other
highly-liquid investments that have an initial maturity of three months or less
to be cash equivalents.
REAL ESTATE INVENTORIES - Real estate inventories are valued at the lower of
cost or estimated net realizable value. Costs include land, buildings and
improvements and all related costs, such as construction costs, legal fees and
material construction interest.
Land and improvement costs are allocated for the purpose of accumulating costs
to match related sales revenues. The Company allocates acquisition and carrying
costs to these areas on the acreage or the value basis, as appropriate. Certain
amenity costs are allocated on benefit or per building basis, as appropriate.
INVENTORIES - The Company's resort and hotel inventories, as described in Note
5, are valued at lower of cost (determined on a first-in, first-out basis) or
market.
PREPAID EXPENSES AND OTHER ASSETS - Prepaid expenses consist of prepaid
marketing expenses, financing costs and other prepaid expenses. All of these
assets are expected to be either amortized or applied to purchases within the
next twelve months. Also included are deferred charges, net of accumulated
amortization, and deposits on purchases of real estate projects.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures
for maintenance and repairs that do not improve or extend the life of an asset
are charged to expenses as incurred. Major renewals and betterments are charged
to the fixed asset accounts. Upon retirement or sale of an asset, its cost and
related accumulated depreciation are removed from the property accounts and any
gain or loss is recorded in income or expense. Depreciation is computed using
accelerated and straight-line methods based on the estimated useful lives of the
assets, ranging generally from 7 to 40 years for buildings and from five to
seven years for machinery, furniture and equipment. Accelerated depreciation
methods are used for income tax purposes.
AMORTIZATION OF DEFERRED CHARGES - Franchise cost is amortized on the
straight-line method over the 10-year term of the franchise. Loan cost is
amortized on the straight-line method over the term of the loan to which the
cost relates.
The accompanying notes are an integral part of the financial statements.
F-8
ALLOWANCE FOR LOAN LOSSES - The Company provides for losses on loans receivable
arising from vacation ownership by a charge against earnings at a rate based on
historical cancellation experience. When a contract recorded in an earlier year
is canceled, the remaining contract balance, less recoverable costs, is charged
to the allowance for loan losses. When a contract is canceled in the same year
as the related sale, all entries applicable to the sale are reversed and
nonrecoverable selling expenses are charged against earnings.
The allowance for loan losses on vacation ownership interests mortgage loans
receivable is maintained at a level considered adequate by management to absorb
potential losses in the mortgage loan portfolio. Management's determination of
the adequacy of the allowance is based on specific evaluation of individual
mortgage loans, past loan loss experience, current economic conditions and other
relevant factors. The allowance is increased by provisions for loan losses
charged to operations.
REVENUE AND PROFIT RECOGNITION - Vacation ownership interest, which for 1998 and
1997 includes revenue from the sale of vacation points packages, is a concept
whereby weekly intervals and/or vacation points packages are sold in
fully-furnished vacation homes. Generally, vacation ownership interests are sold
under contracts that provide for a down payment and monthly installments,
including interest, for periods up to ten years. Sales are recorded as revenue
when a minimum down payment of at least 10% has been received.
Revenue relating to sales of vacation ownership interests in projects under
construction 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 costs, is recognized in the period of sale. The
remaining revenue is deferred and recognized as the remaining costs are
incurred. Until a contract qualifies for revenue recognition, all payments
received are accounted for as deposits. Commissions and other selling costs,
directly attributable to the sale, are deferred until the sale is recorded.
INCOME TAXES - The tax status of the Company's affiliates include limited
partnerships, sole proprietorship, "S" Corporations and "C" Corporations.
Partnerships and sole proprietorships are not considered taxable entities for
federal and state income tax purposes. Under the provision of Subchapter S of
the Internal Revenue Code, the taxable income of an "S" corporation is included
in the individual federal income tax returns of the stockholders. Therefore, no
federal or state income tax provisions for the affiliates operating as limited
partnerships, sole proprietorship, or "S" corporations are included in these
statements. Included in deferred income taxes are income taxes that are
applicable to years in which certain of the entities operated as a "C"
corporation. These deferred taxes are comprised of taxes on temporary
differences between revenues that are taxable in a period different than the
period in which they are recognized for financial statement purposes, and taxes
that relate to built-in gains.
The accompanying notes are an integral part of the financial statements.
F-9
Note 1 - Summary of Significant Accounting Policies (continued)
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets or
liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities and enacted tax rates that
will be in effect for the year in which the differences are expected to reverse.
Additionally, under SFAS No. 109, a valuation allowance must be established for
deferred tax assets if, based on available evidence, it is "more likely than
not" that all or a portion of the deferred tax assets will not be realized.
SFAS NO 130 - The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting on Comprehensive Income," effective January 1,
1998. The Company had no items classified as other comprehensive income in the
periods presented.
ENVIRONMENTAL COSTS - The Company owns and operates wastewater treatment plants
in conjunction with two of its vacation ownership resorts that could result in
environmental remediation and restoration costs. The Company expenses these
costs if they are related to existing conditions resulting from past or current
operations and from which no current or future benefit is discernible.
Expenditures that extend the life of the related property or mitigate or prevent
future environmental contamination are capitalized. The Company determines its
liability on a site by site basis and records a liability at the time when it is
probable and can be reasonably estimated. The estimated liability of the Company
is not discounted or reduced for possible recoveries from insurance carriers.
USE OF ESTIMATES - The preparation of the combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
RECLASSIFICATIONS - Certain amounts for 1997 and 1996 have been reclassified to
conform to current year presentation.
Note 2 - Restricted Cash
Restricted cash includes funds that have been retained by lenders, escrow agents
and in trust accounts from funding on receivables and down payments on
purchases. Performance reserves are maintained by the lenders in an uninsured
interest-bearing account as security for the performance of the note
obligations. The lender calculates annually the required balance of reserves and
disburses any excess funds to the Company. Funds are released from trust
accounts when contracts meet the requirements of a sale. At December 31, 1998
and 1997, the restricted cash balances were $583,292 and $108,250, respectively.
The accompanying notes are an integral part of the financial statements.
F-10
Note 3 - Loans Receivable
Loans receivable consisting of vacation ownership interest mortgages are
described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Current $62,276,903 $47,236,730
Over 30 days 1,616,957 1,059,969
Over 60 days 750,623 570,497
Over 90 days 4,506,012 4,398,123
----------- -----------
69,150,495 53,265,319
Less, allowance for loan losses 3,101,506 3,453,844
----------- -----------
Loans receivable, net $66,048,989 $49,811,475
================================================================================
Interest rates on mortgages range primarily from 15% to 17%. Contractual
maturities of these receivables within the next five years are as follows: 1999
- - $15,703,397; 2000 - $12,582,619; 2001 - $10,171,864; 2002 - $8,408,799 and
2003 - $6,497,058.
Allowance for loan losses has been provided as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginnings of years $ 3,453,844 $ 2,338,770 $ 1,016,689
Provision for loan losses 3,594,484 1,492,876 2,408,029
Charge-offs and recoveries, net (3,946,822) (377,802) (1,085,948)
----------- ----------- -----------
Balance at end of years $ 3,101,506 $ 3,453,844 $ 2,338,770
================================================================================
Note 4 - Real Estate Inventories
At December 31, 1998 and 1997 the real estate inventories consisted of 3,042 and
728 vacation ownership interest weeks available for sale or under construction
with a cost of $8,620,097 and $6,431,090. Land and improvements for future
development included in inventory totaled $5,084,379 and $4,339,580 for a total
real estate inventory of $13,704,476 and $10,770,670 at December 31, 1998 and
1997, respectively.
The accompanying notes are an integral part of the financial statements.
F-11
Note 5 - Inventories
Inventories are described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Premium inventories $293,743 $166,928
Resort inventories:
Food and groceries 41,731 49,253
Souvenirs and gifts 40,655 31,452
Gasoline and oil 4,644 4,284
General merchandise 60,810 10,331
Building and maintenance supplies 39,071 32,110
Hotel inventories 32,658 32,097
-------- --------
Inventories $513,312 $326,455
================================================================================
Note 6 - Deferred Credit
When vacation points packages are sold, the Company transfers, irrevocably, to a
Trust a deed for the portion of the vacation property that relates to the
vacation time commitments made by the sale. At December 31, 1998, 421 intervals
had been transferred to the Trust in excess of requirements of the Trust
agreement. These excess intervals have been assigned a value and are reflected
on the Company's balance sheet as deferred credits in the amount of $907,676 and
$253,819, for the years ended December 31, 1998 and 1997, respectively.
Note 7 - Prepaid Expenses and Other Assets
Prepaid expenses and other assets are described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Prepaid marketing expense $ 20,600 $ 96,055
Prepaid financing costs 192,838
Other prepaid expenses 77,886 22,282
Deposits on real estate purchases 734,347
Deferred charges, net of accumulated amortization
of $253,987 and $224,147, respectively 61,016 87,317
-------- --------
Prepaid expenses and other assets $352,340 $940,001
================================================================================
The accompanying notes are an integral part of the financial statements.
F-12
Note 8 - Property and Equipment
A description of property and equipment is as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
At cost:
Land $ 430,583 $ 603,778
Land improvements 1,459,828 1,454,751
Treatment plant 1,601,503 1,522,774
Buildings 16,209,582 15,881,227
Equipment 5,920,382 5,147,626
Furniture and fixtures 1,746,710 1,552,372
Leasehold improvements 983,313 245,930
Autos and trucks 809,968 768,194
----------- -----------
29,161,869 27,176,652
Less, accumulated depreciation 15,023,987 13,500,819
----------- -----------
Property and equipment, net $14,137,882 $13,675,833
================================================================================
Depreciation expense was $1,689,469 and $1,414,574 and $1,187,293 for 1998, 1997
and 1996, respectively.
Note 9- Accrued Liabilities
Accrued liabilities are described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Salaries, commissions and bonuses $ 979,267 $ 739,173
Accrued interest 271,582 85,634
Taxes, other than income 106,166 48,200
Sales and marketing 38,461 122,219
Refunds due on rescissions 523,549
Pension expense 22,993
Other 747,135 594,112
---------- ----------
Accrued liabilities $2,142,611 $2,135,880
================================================================================
Note 10 - Due to Managed Entities
The Company has contracts with various entities to provide general managerial
and supervisory services, as well as to act as collection agent for homeowners'
dues and assessments. At December 31, 1998 and 1997, amounts due to these
entities from the Company were $317,591 and $572,061, respectively.
The accompanying notes are an integral part of the financial statements.
F-13
Note 11 - Financing Arrangements and Capital Leases
Financing arrangements which are collateralized by vacation ownership interest
mortgages and real estate are described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Revolving credit agreements $53,513,206 $38,450,801
Notes payable 6,290,618 6,011,183
Capital leases 1,136,876 1,267,225
----------- -----------
Financing arrangements and capital leases $60,940,700 $45,729,209
================================================================================
REVOLVING CREDIT AGREEMENTS - The Company has a loan under an amended revolving
credit agreement with FINOVA. The agreement includes Peppertree Resort Villas,
Inc., Atlantic Beach Enterprises, Inc., Crystal Coast Resorts, Inc. and
Peppertree Ocean Club, Inc., all related parties, all of which are jointly and
severally liable for obligations of the agreement. Repayments relate to vacation
ownership interest mortgages collections that have been pledged, and the
agreement calls for an interest rate of prime plus 2.25%. Maximum borrowings on
this line are $30,000,000. The borrowing term of the receivables loan is
thirty-six months after the restatement date of June 26, 1996. The maturity date
is eighty-four months from the date of the receivables loan borrowing term. The
balance at December 31, 1998 was $15,741,134.
The Company has two revolving credit loans with Marine Midland Bank. The first
agreement provides for funding of vacation ownership interest and matures on
September 1, 1999. Maximum borrowings are $15,275,000 and the interest rate is
prime plus .75%. A second line with Marine Midland Bank provides for maximum
borrowings of $2,000,000. This line carries an interest rate of prime plus 2%
and matures on January 1, 1999. The outstanding balance on these lines at
December 31, 1998 was $7,306,547.
On May 28, 1998, the Company entered into a revolving loan agreement with
Litchfield Financial Corporation. Under this agreement, maximum borrowings are
$30 million, to be secured by accounts arising from the sales of timeshare
interests in Peppertree Vacation Club. The interest rate is prime plus 1.5%.
Included in the total maximum borrowings is a $2 million substandard
hypothecation line, which carries an interest rate of prime plus 2.25%. The
borrowing period extends for thirty-six months past the execution of the loan
agreement. In addition, the Company has an operating hypothecation line with
maximum borrowings of $2 million. This line carries an interest rate of prime
plus 2.25% and matures on April 1, 1999. At December 31, 1998, the outstanding
balance on these lines was $14,696,627.
The accompanying notes are an integral part of the financial statements.
F-14
Note 11 - Financing Arrangements and Capital Leases (continued)
The Company has also entered into a revolving term agreement with Litchfield
Financial Corporation under the Inventory Credit Agreement dated May 12, 1997.
According to this agreement, the lender established an inventory line of credit
to be secured by the Company's unsold inventory of timeshares at Peppertree at
Tamarack and undeveloped property at this project. This agreement was amended in
1998 to increase maximum borrowings from $1.5 million to $3.5 million to
facilitate the Company's purchase of real property at Wild Wing Plantation in
Myrtle Beach, South Carolina. The additional $2 million is secured by a pledge
of the property in the Wild Wing Project. The interest rate for this advance is
prime plus 2.5%. The repayment terms include interest only until January 1, 1999
at which time minimum quarterly principal reductions will begin. All unpaid
principal and interest are due on July 1, 2002. The balance on this inventory
line of credit at December 31, 1998 was $1,215,383.
The Company has a revolving credit agreement with Liberty Bank. The agreement,
dated May 10, 1996 as amended on March 27, 1998, provides for funding of
vacation ownership interest mortgages and extends until March 31, 2003. The
agreement provides for a revolving loan secured by vacation ownership interest
mortgages in an amount not to exceed $15 million. The note bears interest at the
rate of prime plus .75%. The outstanding balance on the revolving line at
December 31, 1998 was $14,269,515.
The Company also has an inventory credit line with Liberty Bank. Maximum
borrowing under this line is limited to $568,000. The note bears interest at the
rate of prime plus 2% and is payable September 1, 1999. The outstanding balance
on this line at December 31, 1998 was $284,000.
NOTES PAYABLE - Notes payable are described as follows:
- --------------------------------------------------------------------------------------------
Interest Maturity 1998 1997
Rate Dates Total Total
- --------------------------------------------------------------------------------------------
Real estate/vacation ownership
interest mortgages 3.0-12.00% Various $ 5,718,153 $ 4,724,281
Equipment 8.0-14.75% Various 45,446 89,833
Unsecured 5.5-9.5% Various 527,019 1,197,069
----------- -----------
Notes payable $ 6,290,618 $ 6,011,183
============================================================================================
NOTES PAYABLE - RELATED PARTY - The principal shareholder of the Company holds a
note issued by the Company the amount of which represents cumulative
undistributed S-corporation earnings as reported in prior years by the
shareholder on his individual income tax returns. This note contains an interest
provision of 7%. As of December 31, 1998 and 1997, the unpaid balances were
$5,112,444 and $5,550,858, respectively.
The accompanying notes are an integral part of the financial statements.
F-15
Note 11 - Financing Arrangements and Capital Leases (continued)
CAPITAL LEASES - Capital leases are described as follows:
- --------------------------------------------------------------------------------
At December 31 1998 1997
- --------------------------------------------------------------------------------
Capital lease obligations, at varying rates of
computed interest from 8% to 18% on leased
equipment and vehicles with a cost of $2,394,693
and $2,032,913 at December 31, 1998 and 1997, less
accumulated amortization of $939,030 and $528,555 $ 1,136,876 $ 1,267,225
=========== ===========
Scheduled principal repayments on long-term debt and payments on capital lease
obligations are as follows:
- --------------------------------------------------------------------------------
Year Ended Notes Obligations under
December 31 Payable Capital Leases
- --------------------------------------------------------------------------------
1999 $ 4,642,943 $ 645,783
2000 204,758 486,314
2001 808,886 245,724
2002 180,574 51,993
2003 195,273 318
Thereafter 5,370,628 0
------------ -----------
$ 11,403,062 1,430,132
============
Less, amounts representing interest on
obligations under capital leases 293,256
-----------
Capital lease obligations $ 1,136,876
================================================================================
Note 12 - Operating Leases
Leases that do not meet the criteria for capitalization are classified as
operating leases with rent charged to operations as incurred.
The following is a schedule of the future minimum payments under operating
leases as of December 31, 1998.
- --------------------------------------------------------------------------------
Year Ending Minimum Lease
December 31 Payments
- --------------------------------------------------------------------------------
1999 $ 341,945
2000 290,862
2001 267,462
2002 215,918
2003 1,588,013
-----------
Total minimum lease payments $ 2,704,200
================================================================================
The accompanying notes are an integral part of the financial statements.
F-16
Note 12 - Operating Leases (continued)
Total rent expensed in 1998, 1997 and 1996 for operating leases was
approximately $400,377, $244,396 and $240,809, respectively.
Note 13 - Deposits
Deposits relating to resort operations consist of advance payments for
reservations, which at December 31,1998 and 1997 totaled $75,768 and $80,507,
respectively.
Note 14 - Income Taxes
The components of income taxes for each of the three years are as follows:
- --------------------------------------------------------------------------------
For the Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Current tax provision:
Federal $1,144,998 $ 305,876 $
State 176,661 36,684 415,087
---------- ---------- ----------
Total current income taxes 1,321,659 342,560 415,087
---------- ---------- ----------
Deferred income tax (benefit):
Federal 1,118,019 2,935,484 (352,458)
State 437,390 599,515 3,585
---------- ---------- ----------
Total deferred income taxes 1,555,409 3,534,999 (348,783)
---------- ---------- ----------
Total income taxes $2,877,068 $3,877,559 $ 66,214
================================================================================
Deferred tax liabilities are comprised of the following:
- --------------------------------------------------------------------------------
For the Years Ended December 31 1998 1997
- --------------------------------------------------------------------------------
Deferred income tax assets attributable to:
Federal and State net operating
loss carryforwards $ 7,086,883 $ 2,331,957
------------ ------------
Deferred tax liabilities attributable to:
Built-in gains (13,484) (40,137)
Installment method reporting (12,915,529) (6,578,541)
------------ ------------
Total deferred tax liabilities (12,929,013) (6,618,678)
------------ ------------
Net deferred tax liability $ (5,842,130) $ (4,286,721)
================================================================================
The accompanying notes are an integral part of the financial statements.
F-17
Note 14 - Income Taxes (continued)
At December 31, 1998, the Company had available net operating loss carryforwards
for income tax purposes as follows:
- --------------------------------------------------------------------------------
Year Ending Net Operating Loss Federal State
December 31 Carryforwards Expiration Expiration
- --------------------------------------------------------------------------------
1996 $ 876,528 2011 2001 - 2011
1997 2,443,832 2017 2002 - 2017
1998 15,116,292 2018 2003 - 2018
Note 15 - Employee Savings Plan
The Company offers an employee savings plan that provides for retirement
benefits for eligible employees. The plan is funded by elective employee
contributions of up to 15% of their compensation and the Company matches 25% of
employee contributions for each participant up to 5% of the employee's
compensation. The Company expensed contributions of $42,418, $44,057 and $27,133
for the years ended December 31, 1998, 1997 and 1996, respectively.
Note 16 - Gain on Sale of Land
During 1998, the town of Hilton Head Island, South Carolina (the Town) condemned
land held for development by the Company. The Town agreed to purchase the
property from the Company at the price of $4.5 million. After settlement of all
legal fees and other obligations, the Company realized a gain on the sale in the
amount of $1,180,288.
Note 17 - Loss on Abandonment of Design
During 1995 and 1996, the Company incurred costs for architectural design fees
relating to a future building project. However, in 1996, the original design was
abandoned and a new design began to be developed. The Company determined that
75% of these costs were unusable, and charged $455,653 to expense in 1996.
Note 18 - Losses Related to Sales Rescissions
During 1997, the Company designed a new concept for marketing vacation
properties. The new concept involved the sale of vacation points packages which
was originally considered by the Company to be sales that were not subject to
the registration requirements of the North Carolina Real Estate Commission's
timeshare provisions. After several of the points packages had been sold, the
Commission ruled against the Company and, in accordance with the provisions of
the registration provisions, required an additional right of rescission to be
offered to each purchaser.
The accompanying notes are an integral part of the financial statements.
F-18
Note 18 - Losses Related to Sales Rescissions (continued)
According to the instructions of the Commission, the rescission letters were to
be effective from the date the member received the notice and continue for five
days thereafter. The letters for the first phase were mailed on December 5,
1997. All rescissions made as a result of this letter were corrected within the
year by a reversal of the sales transaction.
Subsequent to the year-end, two additional groups of letters were mailed to
offer rescissions on contracts related to 1997 sales. According to SFAS No. 5
regarding contingencies, a loss must be accrued if (1) information indicates
that it is probable that an asset as been impaired or a liability has been
incurred, and (2) the amount of the loss can be reasonably estimated. Based on
the response to the first phase of letters, it became probable that additional
losses would be incurred related to the second and third rescission letters and
the amounts could be reasonably estimated. These estimates were subsequently
confirmed by a review of the actual responses to the second and third mailings.
At December 31, 1997 an adjustment was made by the Company charging the reserve
for loan losses with an anticipated loss of $522,539.
The total 1997 sales affected by the rescissions were $1,216,671 in 1997 and
$1,015,277 in 1998. Because of the circumstances surrounding these rescissions,
the Company did not recapture the sales and marketing cost related to these
sales, thereby sustaining an unusual cost in these accounts of approximately
$935,000.
When vacation points packages are sold, the Company transfers, irrevocably, to a
Trust a deed for the portion of the vacation property that relates to the
vacation time commitments made by the sale. As a result of the aforementioned
rescissions granted to the purchasers, the related properties held by the Trust
became unassigned and therefore available for assignment to other purchasers.
Therefore, since the original transfers to the Trust were irrevocable, the Trust
issued deferred credits to the Company in an amount equal to the Company's
original cost of the properties. The properties that are related to these
deferred credits are again available for assignment by the Company. This amount
is reflected on the Company's balance sheet as deferred credits for $253,819.
Note 19 - Litigation
The Company is the defendant in a number of lawsuits, investigations and claims
(some of which involve substantial amounts) arising out of the conduct of its
business. These lawsuits include sexual discrimination in the workplace, sexual
harassment by certain supervisory employees, wrongful termination of employment
and other claims.
One of the lawsuits was brought by a former employee alleging seven causes of
action including discrimination and sexual harassment in the workplace, wrongful
termination, tortuous interference with prospective economic advantage and
intentional infliction of emotional distress. The complaint states that the
plaintiff is seeking compensatory damages in excess of $100,000 together with
punitive damages and attorney's fees. The Company's legal counsel has asserted a
substantial defense and believes that several of these issues can be eliminated
by pre-trial motions which would reduce the issues for a jury to decide. The
statutory cap on Plaintiff's claim pursuant to Title VII, under which some of
these claims have been filed, is $300,000 for non-economic compensatory and
punitive damages.
The accompanying notes are an integral part of the financial statements.
F-19
Note 19 - Litigation (continued)
All of the Company's insurance carriers were notified of this action. Coverage
has been denied on the grounds that the allegations do not relate to accidental
occurrences, which are covered, but rather involve intentional conduct, which is
not covered by insurance. Further, the insurance carriers have taken the
position that their policies do not provide coverage for punitive damages.
The Company intends to defend this action vigorously. A court-ordered mediation
settlement conference has been scheduled. No range of reasonable possible
losses, if any, can be estimated at this time. No provisions have been included
in these financial statements regarding this action.
Additionally, two former employees have named the Company and certain of its
affiliates and a former employee as defendants in a sexual harassment and
discrimination lawsuit. Five causes of action have been included in this case -
all relating to sexual harassment and discrimination, infliction of emotional
distress and negligence in employee retention. The Company is contesting both
liability and damages in these issues and will continue to resist until such
time as it may appear that the case can be reasonably settled. The plaintiffs
have asked for $3.1 million to settle their claims. Legal counsel for the
Company believes that this demand is not based upon a realistic assessment of
this case and is not able to estimate or predict the outcome of this action. The
statutory limits for Title VII claims for each plaintiff in this case is the
same as that described above. No provision has been included in these financial
statements regarding this action.
The Company has been named as a party to a foreclosure action in South Carolina
in which it is alleged that the Plaintiff in this action conspired with officers
and agents of the Company to take property in the foreclosure action for the
benefits of Plaintiff and the Company. Management has denied these allegations
and believes that the case does not have factual support and anticipates that
the Company will be dismissed from this action prior to adjudication. Management
has made no provision in these financial statements for any contingent loss from
this action.
The Company is involved in various lawsuits, claims and inquiries, most of which
are routine to the nature of the business. In the opinion of management, the
resolution of these matters will not materially affect the financial position,
result of operations or liquidity of the Company.
Note 20 - Subsequent Corporate Reorganization
CORPORATE REORGANIZATION - In 1999, the Boards of Directors of Peppertree and
certain of its affiliates (as described below) adopted a plan of reorganization
whereby the stockholders of the affiliate corporations exchanged their stock in
the respective organizations for stock of Peppertree. In a similar but separate
transaction also in 1999 the shareholders of Crystal Coast, Smokies Resorts,
Ocean Club and Atlantic Beach approved a merger of these entities into Villas.
The stock of Villas was then exchanged for stock of Peppertree. Both of these
transactions were structured so as to comply with the provisions of IRC Section
354 and are therefore considered to be free from any taxation.
The accompanying notes are an integral part of the financial statements.
F-20
Note 20 - Subsequent Corporate Reorganization (continued)
Peppertree is the surviving entity in these exchanges and has issued its stock
in exchange for the surrender of the common stock of the following entities.
With this transaction these entities became wholly owned subsidiaries of
Peppertree.
Peppertree Resorts Management, Inc. ("Management") (S-corporation)
Peppertree Resorts Villas, Inc. ("Villas") (S-corporation)
Peppertree Resorts Vacation Club, Inc. ("Vacation Club") (C-corporation)
Of all of the entities that have been combined in these financial statements,
(Note 1) only Peppertree Fontana Village, Inc. and the Great Smokies Hotel
Associates were not included in the merger on January 1, 1999. Even though both
continue to be supported by management and financial control common to all of
the entities, neither was a part of the exchange and both continue to exist
independently.
CHANGE IN TAXABLE STATUS RESULTING FROM 1999 REORGANIZATION - The S-corporation
status of these entities has been terminated as of December 31, 1998 thereby
changing the way tax obligations will be recognized for 1999 and future years.
Even though certain of the affiliates have for 1998 and prior years, accounted
for income taxes under SFAS 109, some of the affiliates elected S-corporation
status at inception and all income tax obligations on these "S" entities have
been transferred to the individual shareholders. For 1998 and prior all taxable
obligations have been reported to the individual shareholders for inclusion in
their individual income tax returns.
In accordance with the income tax accounting policies followed by the Company,
income is recognized on vacation interval sales at the time the sale is made.
For income tax purposes income is deferred on all installment obligations from
these interval sales and is recognized as taxable income at the time the
obligation is collected. As of January 1, 1999, the taxable income that has
previously been included in the Company's net income but for income tax purposes
has been deferred until the installment obligations are collected, amounts to
$17,895,000.
As a result of the stock exchange and the termination of the S-corporation
status, the Company will as of January 1, 1999, assume the tax responsibilities
related to the deferred income. In accordance with FAS 109 the effects of
recognizing a deferred tax liability upon the change in an entities' status from
a nontaxable to a taxable entity is required to be charged to continuing
operations in the year of change. Therefore, as of January 1, 1999, the Company
has entered an income tax charge of $6,886,099 in its 1999 financial statements
along with the related deferred tax liability. This deferred tax liability will
be payable over the next 5 to 7 years as the installment notes are collected.
The accompanying notes are an integral part of the financial statements.
F-21
Note 20 - Subsequent Corporate Reorganization (continued)
As a result of the stock exchange, the consolidated balance sheet for the
Company in January 1999 is as follows:
Assets
Cash and equivalents $ 1,093,958
Loans and trade receivables 67,042,596
Real estate inventories 14,217,788
Deferred credits and charges 1,260,016
Property and equipment 14,137,882
------------
Total assets $ 97,752,240
============
Liabilities & stockholders' equity
Accounts payable & accrued expenses $ 5,123,008
Financing arrangements and capital leases 60,940,700
Notes payable and other indebtedness to related parties 5,430,035
Accrued income taxes 1,514,577
Deferred taxes 12,728,229
Deferred revenues 637,491
Other 75,768
------------
Total liabilities 86,449,808
------------
Minority equity interest 130,038
------------
Capital stock and additional-paid-in-capital 7,533,534
Retained earnings - December 31, 1998 10,524,959
Income tax charge to current operations (6,886,099)
------------
Total stockholders' equity 11,172,394
------------
Total liabilities and stockholders' equity $ 97,752,240
============
Note 21 - Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial
arrangements with off-balance sheet risk. To meet its financial needs, the
Company sells, certain of its loans receivable to financial institutions with
recourse and guarantees. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the financial statements.
In connection with these loans, agreements generally require the Company to
repurchase loans that do not meet the performance standards of the loan purchase
agreements. This includes loans that become delinquent within a stated period of
time after being sold to the permanent investor or are canceled. At December 31,
1998 the outstanding balance of loans sold subject to repurchase was $888,719.
Cash performance reserve funds held by the purchaser totaled $28,941 at December
31, 1998.
The accompanying notes are an integral part of the financial statements.
F-22
Note 22 - Concentration of Credit Risk
The Company's business activities are regionally diversified with significant
operations in North and South Carolina, Tennessee, Wisconsin, Virginia and
Missouri but concentrated in the vacation ownership interests industry. The
Company had $66,048,989 in loans receivable outstanding at December 31, 1998.
The mortgages are secured by the underlying real estate and a minimum down
payment of at least 10% is generally required. This exposes the Company to an
industry concentration of risk in the amount of $66,048,989.
The Company maintains cash balances at major financial institutions located in
communities where the resorts are located. It also has cash performance reserves
on deposit with noninsured institutions. Uninsured balances are approximately
$1,222,090 at December 31, 1998.
Note 23 - Contingencies
A Phase I environmental site assessment of the Holiday Inn Sunspree's property
indicated there were recognized environmental conditions. These conditions
include potential surface water contamination from off-site and on-site sources,
as well as the potential for soil and groundwater contamination due to chemical
and material storage handling practices at the golf course maintenance building.
A Phase II assessment is scheduled to begin in the near future. However, there
is currently no estimate of potential clean up costs, if any may be needed.
Therefore, no liability for such costs has been included in these financial
statements.
Note 24 - Fair Value of Financial Instruments
The fair value estimates presented herein are based on relevant market
information. As these estimates are subjective in nature and involve
uncertainties and significant judgment, they are not necessarily indicative of
the amount that the Company could realize on a current market exchange. The fair
value disclosures for financial instruments are as follows:
Cash and cash equivalents: The carrying amounts reported in the combined
balance sheets approximate their fair values at December 31, 1998 and
1997.
Cash performance reserves and escrow accounts: The carrying amounts
reported in the combined balance sheets approximate their fair values at
December 31, 1998 and 1997.
Loans receivable: The carrying amounts of loans receivable are a
reasonable estimate of their fair values at December 31, 1998 and 1997
based on valuation models using risk adjusted interest rates and
historical prepayment experiences.
Financing arrangements: The carrying amounts of the Company's borrowings
with variable interest rates approximated their fair values at December
31, 1998 and 1997.
The accompanying notes are an integral part of the financial statements.
F-23
Note 25 - Year 2000 Compliance
As has been widely reported, many computer systems process dates based on two
digits for the year of a transaction and are unable to process dates in the year
2000 and beyond. In connection with its ongoing information system management
efforts, the Company has previously replaced or modified a significant portion
of its key financial information and operational systems that were not year 2000
compliant. Remaining financial and operational systems have been assessed, and
detailed plans have been developed and are being implemented to make the
necessary modifications to ensure year 2000 compliance. The financial impact of
making the required system changes for year 2000 compliance are not expected to
have a material effect on the Company's financial statements.
Note 26 - Subsequent Event
In November 1999 the Company concluded a transaction whereby its vacation
interval business, including resort management, was merged into an acquiring
entity. The Company's hotel and resort operation businesses were not included in
the transaction.
The following tables break down information from the consolidated financial
statements between the vacation interval and hotel resort operations businesses:
(In thousands) Intercompany
Vacation Receivables/
As of December 31, 1998 Interval Hotel Payables Consolidated
-------- ----- -------- ------------
Assets $ 95,065 $ 9,115 $ (6,429) $ 97,751
Liabilities 76,358 9,764 (6,429) 79,693
Equity (deficiency in assets) 18,707 (649) 18,058
As of December 31, 1997
Assets $ 74,366 $ 9,575 $ (5,536) $ 78,405
Liabilities 58,648 9,439 (5,536) 62,551
Equity (deficiency in assets) 15,718 136 15,854
The accompanying notes are an integral part of the financial statements.
F-24
Note 26 - Subsequent Event (continued)
(In thousands)
Income
(Loss)
For the Year Ended December 31, 1998 Before Net
Other Income Income Income
Revenues Expenses Income Taxes Tax (Loss)
-------- -------- ------ ------ ------ ------
Vacation Interval $ 56,180 $ 49,734 $ 1,180 $ 7,626 $ 2,877 $ 4,749
Hotel 10,810 11,601 (791) (791)
Intercompany
transactions (385) (385)
Consolidated 66,605 60,950 1,180 6,835 2,877 3,958
For the Year Ended December 31, 1997
Vacation Interval 40,165 35,528 4,637 3,877 760
Hotel 10,271 11,071 (800) (800)
Intercompany
transactions (314) (314)
Consolidated 50,122 46,285 3,837 3,877 (40)
For the Year Ended December 31, 1996
Vacation Interval 29,580 26,919 2,661 66 2,595
Hotel 9,986 10,990 (1,004) (1,004)
Intercompany
transactions (268) (268)
Consolidated 39,298 37,641 1,657 66 1,591
Intercompany transactions represent revenues and expenses between the vacation
interval and hotel/resort operations segments. They are included in the segment
amounts but are not included in consolidated amounts.
The net income amounts are before minority interest reductions which are not
material.
Note 27 - Correction of an Error
Prior to 1997, the Company operated Peppertree Atlantic Beach Associates
(Atlantic Beach) and Peppertree Maggie Valley Associates (Maggie Valley) as
unincorporated businesses. Both of these entities were wholly owned by the
stockholder of the Company. Because of the significant common ownership and
control, the assets and liabilities and results of operations of these
proprietorships have consistently been combined with other elements of the
Company for financial reporting purposes. Since these entities were wholly
owned, the stockholder had assumed and paid all income taxes for both entities
on his personal income tax returns. Since the income taxes were the sole
responsibility of the shareholder, no income tax expense nor deferred income
taxes had been reported in the combined financial statements of the Company for
these entities.
The accompanying notes are an integral part of the financial statements.
F-25
Note 27 - Correction of an Error (continued)
During the due diligence phase of the merger in November 1999, the Company
discovered by reviewing documents filed with the North Carolina Secretary of
State that two new corporations had been created, Smokies Resorts Villas, Inc
and Crystal Coast Resorts, Inc., into which the assets of both Atlantic Beach
and Maggie Valley were in fact transferred as of January 1997, respectively.
Both of these corporations should have been reported in the Company's financial
statements as such for 1998 and 1997 for income tax purposes and financial
reporting. The financial statements of the Company as originally issued (with
report dated April 30, 1999), included all of the assets, liabilities and
operating activities of Atlantic Beach and Maggie Valley but did not include any
income tax provisions. Therefore, the financial statements for 1998 and 1997
(only 1997 and 1998 have been affected) have been adjusted to include the
following changes:
1998 1997
----------- -----------
Income before taxes as originally reported $ 6,835,355 $ 3,837,324
----------- -----------
Provision for income taxes as originally reported 2,491,826 275,299
Additional income taxes as result of the correction
Current 1,177,127 301,474
Deferred (791,885) 3,300,786
----------- -----------
Total provision for income taxes $ 2,877,068 $ 3,877,559
----------- -----------
Minority interest 99,933 (25,757)
----------- -----------
Net income as restated $ 3,858,354 $ (14,478)
=======================================================================================
Income taxes on the income of Atlantic Beach and Maggie Valley for 1998 and 1997
were paid by the stockholder. As a result of this entity change, corporate
income tax returns have been prepared by the Company to report the income and
calculate the income tax liability. The stockholder will file amended returns
for 1997 and 1998 and request refunds from the US Treasury for the excess amount
of income taxes paid by him for these entities.
As a result of the change from a proprietorship in which the stockholder had all
of the income tax responsibilities to a C corporation, the Company will, as of
January 1, 1997, assume the tax responsibilities related to the deferred
installment notes. In accordance with FAS 109 the effects of recognizing a
deferred tax liability upon the change in an entity's status from a non-taxable
to a taxable entity is required to be charged to continuing operations in the
year of change. Therefore these financial statements have been adjusted to
reflect an income tax charge of $3,128,945 to the operations for the year ended
December 31, 1997. The deferred liability will be payable over the next 5 to 7
years as the installments notes are collected.
The combined balance sheet of the Company has been corrected to reflect the
additional income tax liability and the deferred income taxes assumed by the
Company as a result of the incorporation of the entities.
The accompanying notes are an integral part of the financial statements.
F-26
Note 27 - Correction of an Error (continued)
The changes to the balance sheets are as follows:
1998 1997
------------ ------------
Total liabilities as originally reported $ 75,576,207 $ 58,917,856
Income tax liability 1,478,601 301,474
Deferred income taxes 2,508,901 3,300,786
------------ ------------
Total liabilities as restated $ 79,563,709 $ 62,520,116
------------ ------------
Stockholders' equity as originally reported $ 22,045,995 $ 19,456,769
Additional income tax expense (385,242) (3,602,260)
Prior year's adjustments (3,602,260)
------------ ------------
Stockholders' equity as restated $ 18,058,493 $ 15,854,509
================================================================================
The accompanying notes are an integral part of the financial statements.
F-27
Peppertree Resorts, Ltd. And Affiliates
Condensed Consolidated Balance Sheets
(dollars in thousands)
At September 30, 1999 1998
- ---------------------------------------------------------------------------------------- -------------------------------------
VOI Non-VOI Total VOI Non-VOI Total
--- ------- ----- --- ------- -----
Assets
Cash and cash equivalents $ (339) $ 491 $ 152 $ 16 $ 178 $ 194
Restricted cash 180 -- 180 1,036 113 1,149
Loans receivables, net 76,923 -- 76,923 62,988 (101) 62,887
Other receivables 82 399 481 -- 305 305
Related party receivables 7,101 (7,101) -- 5,989 (5,922) 67
Real estate inventories 19,295 -- 19,295 17,821 -- 17,821
Inventories 278 302 580 239 267 506
Other assets 419 89 508 555 72 627
Property and equipment, net 7,516 8,135 15,651 5,434 8,291 13,725
--------- --------- --------- --------- --------- ---------
Total assets $ 111,455 $ 2,315 $ 113,770 $ 94,078 $ 3,203 $ 97,281
========= ========= ========= ========= ========= =========
Liabilities
Accounts payable $ 2,327 $ 662 $ 2,989 $ 2,723 $ 807 $ 3,530
Accrued liabilities & accrued expenses 4,641 721 5,362 2,411 -- 2,411
Financing arrangements and capital leases 70,917 1,786 72,703 57,741 2,674 60,415
Notes payable-related parties 7,071 -- 7,071 5,262 (384) 4,878
Deferred revenues & deposits 424 166 590 142 378 520
Deferred tax liabilities 14,408 -- 14,408 5,254 -- 5,254
--------- --------- --------- --------- --------- ---------
Total liabilities 99,788 3,335 103,123 73,533 3,475 77,008
Stockholders' equity
Common stock 27 50 77 27 50 77
Paid in capital 3,206 4,250 7,456 3,206 4,250 7,456
Retained earnings 8,571 (5,320) 3,251 17,312 (4,572) 12,740
Treasury stock (137) -- (137) -- -- --
--------- --------- --------- --------- --------- ---------
Total stockholders' equity 11,667 (1,020) 10,647 20,545 (272) 20,273
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 111,455 $ 2,315 $ 113,770 $ 94,078 $ 3,203 $ 97,281
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-28
Peppertree Resorts, Ltd. And Affiliates
Condensed Consolidated Statements of Income
(dollars in thousands)
For the Nine Months Ended September 30, 1999 1998
- ----------------------------------------------------------------------------------------- ------------------------------------
VOI Non-VOI Total VOI Non-VOI Total
--- ------- ----- --- ------- -----
Revenues
Vacation ownership sales $ 37,794 $ -- $ 37,794 $ 35,681 $ -- $ 35,681
Interest income 7,351 -- 7,351 5,669 -- 5,669
Property management 1,603 -- 1,603 1,362 -- 1,362
Resort operations -- 8,636 8,636 -- 8,228 8,228
Other income 967 109 1,076 149 -- 149
-------- -------- -------- -------- -------- --------
Total operating income 47,715 8,745 56,460 42,861 8,228 51,089
-------- -------- -------- -------- -------- --------
Expenses
Cost of VOI sales 9,334 -- 9,334 9,389 -- 9,389
Sales and marketing 18,858 -- 18,858 16,282 -- 16,282
Provision for doubtful accounts 2,859 -- 2,859 3,374 -- 3,374
General and administrative 3,463 211 3,674 2,591 -- 2,591
Portfolio expenses 793 -- 793 688 -- 688
Depreciation 584 811 1,395 323 684 1,007
Resort operations -- 7,906 7,906 -- 7,459 7,459
Property management & developer contributions 878 -- 878 660 -- 660
Interest expense 5,471 165 5,636 3,959 219 4,178
Other expense 1,183 -- 1,183 -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses 43,423 9,093 52,513 37,266 8,362 45,628
-------- -------- -------- -------- -------- --------
Income before income taxes 4,292 (348) 3,944 5,595 (134) 5,461
Provision for income taxes 8,538 -- 8,538 1,072 -- 1,072
-------- -------- -------- -------- -------- --------
Net income/(loss) $ (4,246) $ (348) $ (4,594) $ 4,523 $ (134) $ 4,389
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-29
Peppertree Resorts, Ltd. And Affiliates
Condensed Consolidated Statements of Cash Flow
(dollars in thousands)
For the Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income/(loss) $ (4,594) $ 4,389
Adjustments to reconcile net income to net --
cash provided from operating activities: --
Depreciation and amortization 1,395 1,007
Provision for loan losses and uncollectible --
trade receivables 2,859 3,374
Working capital changes-sources (uses): --
Restricted cash 403 (1,041)
Trade and other receivables (161) 63
Receivable from affiliate 154 274
Real estate inventories (3,574) (6,326)
Other inventories (67) (180)
Prepaid expenses and other assets (156) 313
Accounts payable (309) 175
Accrued liabilities 1,740 (298)
Accrued income taxes (1,515) (412)
Deferred revenues (123) 42
Deferred tax liabilities 10,045 967
-----------------------
Net cash provided from operating activities 6,097 2,347
-----------------------
Cash flows from investing activities:
Loans receivable (13,213) (16,307)
Capital expenditures (914) (105)
-----------------------
Net cash used for investing activities (14,127) (16,412)
-----------------------
Cash flows from financing activities:
Proceeds from financing arrangements 55,903 40,551
Principal payments of financing arrangements (47,381) (27,286)
Principal payments on related party note (851) (673)
-----------------------
Net cash provided from financing activities 7,671 12,592
-----------------------
Increase (decrease) in cash and equivalents (359) (1,473)
Cash and equivalents at beginning of years 511 1,667
-----------------------
Cash and equivalents at end of years $ 152 $ 194
=======================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest 5,636 4,178
Income taxes 36 111
Schedule of non-cash investing and financing activities:
Real estate inventory acquired with notes payable 1,109 470
Property and equipment acquired with note payable 1,994 951
Deferred income taxes recorded upon conversion
from "S" to "C" corporation 5,407
Treasury stock acquired with notes payable 137
Dividend distribution of retained earnings by issuance of note
payable related party 2,810
The accompanying notes are an integral part of the financial statements.
F-30
Peppertree Resorts, Ltd.
Notes to Condensed Consolidated Financial Statements (dollars in thousands)
September 30, 1999 and 1998
NOTE 1 - Summary of Significant Accounting Policies
There have been no significant changes in the disclosures per the audited
financials statements of December 31, 1998.
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments which would be necessary for a fair presentation of the
results of operations for the interim periods presented.
NOTE 2 - Real Estate Inventory
At September 30, 1999 and 1998 the real estate inventories consisted of 2,119
and 4,419 vacation ownership interest weeks available for sale and total real
estate inventory of $19,295 and $17,821, respectively.
NOTE 3 - Property and Equipment
Property and equipment at September 30, 1999 and 1998 consists of the following:
1999 1998
---- ----
Balance at January 1, 1998 and 1997 $ 29,162 $ 27,177
Buildings and land 1,650 --
Furniture, fixtures, equipment and leasehold improvements 1,228 1,034
-------- --------
32,040 28,211
Less, accumulated depreciation (16,389) (14,486)
-------- --------
$ 15,651 $ 13,725
======== ========
NOTE 4 - Notes Payable
In the normal course of business, the Company procures financing for various
projects including construction of timeshare units. The following is the
summarization of the additional borrowings and principal payments on the various
notes at September 30, 1999 and 1998:
1999 1998
---- ----
Balance of notes payable at January 1, 1999 and 1998 $ 60,941 $ 45,729
Additional borrowings 59,143 41,972
Payment of debts (47,381) (27,286)
-------- --------
Balance $ 72,703 $ 60,415
======== ========
The accompanying notes are an integral part of the financial statements.
F-31
NOTE 5 - Litigation
The Company is involved in various lawsuits, claims and inquiries, most of which
are routine to the nature of the business. In the opinion of management, the
resolution for these matters will not materially affect the financial position,
result of operations or liquidity of the Company.
NOTE 6 - Corporate Reorganization
In 1999, the Boards of Directors of Peppertree and certain of its affiliates
adopted a plan of reorganization whereby the stockholders of the affiliate
corporations exchanged their stock in the respective organizations for the stock
of Peppertree. As a result of the stock exchange and the termination of the
S-corporation status, the Company assumed as of January 1, 1999, the tax
responsibilities related to the deferred income. In accordance with FAS 109 the
effect of recognizing a deferred tax liability upon the change in an entities'
status from a nontaxable to a taxable entity is required to be charged to
continuing operations in the year change. Therefore, as of January 1, 1999, the
Company has entered an income tax charge of $6,886 in its 1999 financial
statements along with the related deferred tax liability. This deferred tax
liability will be payable over the next 5 to 7 years as the installment notes
are collected.
The accompanying notes are an integral part of the financial statements.
F-32
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Equivest Finance, Inc. ("Equivest") purchased fifteen timeshare vacation resorts
from Peppertree Resorts, Ltd. ("Peppertree") on November 17, 1999. Equivest paid
$13.7 million in cash, issued 2.4 million shares of Equivest Common Stock, will
issue $2.9 million of additional Equivest Common Stock and pay an additional $.6
million in June 2000, and assumed approximately $93.0 million of notes payable
and certain other liabilities. Equivest is borrowing the funds from a new credit
facility to pay the cash portion of the purchase price.
The unaudited pro forma combined balance sheet as of September 30, 1999 presents
the historical consolidated balance sheets of Equivest and Peppertree. The
purchase accounting adjustments, as described in the related notes and below,
are calculated as if the Peppertree acquisition had been effective September 30,
1999.
The unaudited pro forma condensed statements of income for the nine months ended
September 30, 1999 and the year ended December 31, 1998 present the consolidated
results of operations of Equivest and Peppertree. The purchase accounting and
other pro forma adjustments, as described in the related notes and below, are
calculated as if the Peppertree acquisition had been effective as of January 1,
1998. The pro forma adjustments are based upon currently available information
and certain assumptions that Equivest's management believes are reasonable under
current circumstances.
The unaudited pro forma condensed financial statements are based on historical
financial statements of Equivest and Peppertree and should be read in
conjunction with their respective financial statements and notes. The pro forma
data is not necessarily indicative of the results of operations or financial
condition of Equivest had these transactions occurred on the dates indicated,
nor the results of future operations. Equivest anticipates cost savings and
additional benefits as a result of certain of the transactions contemplated in
the pro forma financial statements. Such benefits and any other changes that
might have resulted from management of the combined companies have not been
included as adjustments to the pro forma condensed financial statements.
The unaudited pro forma combined financial statements will change due to certain
changes in the purchase accounting adjustments included in the pro forma once
all valuations of assets and liabilities are final.
The accompanying notes are an integral part of the financial statements.
F-33
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Balance Sheet
September 30, 1999
(Amounts in Thousands Except for Per Share Data)
Historical Pro
Equivest Historical forma Pro
Finance, Peppertree Consol. Acquis. forma
ASSETS Inc. Properties Balances Adj. total
- ---------------------------------------------------------------- ---------- --------- --------- ---------
Cash $ 5,895 $ (339) $ 5,556 $ -- $ 5,556
Total receivables, net 167,402 76,923 244,325 (3,100) a) 241,225
Investment in real estate joint venture 4,202 -- 4,202 -- 4,202
Due From related party -- 7,101 7,101 -- 7,101
Inventory 60,880 19,295 80,175 -- 80,175
Deferred financing costs, net 2,453 -- 2,453 -- 2,453
Cash - restricted 2,664 180 2,844 -- 2,844
Accrued interest receivable 1,335 -- 1,335 -- 1,335
Property & equipment 11,223 7,516 18,739 -- 18,739
Goodwill, net 26,731 -- 26,731 13,624 b) 40,355
Stock registration costs 1,596 -- 1,596 -- 1,596
Other Assets 1,413 779 2,192 940 b) 3,132
--------- --------- --------- --------- ---------
Total Assets $ 285,794 $ 111,455 $ 397,249 $ 11,464 $ 408,713
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts Payable and Other Liabilities:
Accounts payable $ 4,968 $ 2,327 $ 7,295 $ -- $ 7,295
Deferred incomes taxes 5,902 14,408 20,310 (2,286) c) 18,024
Taxes payable 2,976 -- 2,976 -- 2,976
Deferred revenues -- 424 424 -- 424
Due to related party -- 7,071 7,071 (2,810) d) 4,261
Accrued expenses and other liabilities 9,649 4,641 14,290 (1,479) d) 12,811
--------- --------- --------- --------- ---------
Total Accounts Payable and Other
Liabilities 23,495 28,871 52,366 (6,575) 45,791
Notes payable 199,579 70,917 270,496 16,154 e) 286,650
--------- --------- --------- --------- ---------
Total Liabilities 223,074 99,788 322,862 9,579 332,441
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series 2
Class A 30 -- 30 -- 30
Common Stock, $.01 par value 257 27 284 2 f) 286
Additional paid-in capital 51,070 3,206 54,276 10,317 f) 64,593
Treasury stock -- (137) (137) 137 f) --
Retained earnings 11,363 8,571 19,934 (8,571) f) 11,363
--------- --------- --------- --------- ---------
62,720 11,667 74,387 1,885 76,272
--------- --------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $ 285,794 $ 111,455 $ 397,249 $ 11,464 $ 408,713
========= ========= ========= ========= =========
a) Reflects the amount required to state receivables purchased at fair value.
b) Reflects the goodwill arising out of the Peppertree purchase, including
the value of the non-compete agreement.
c) Reflects the historic deferred tax liability applicable to the receivable
fair value adjustment, along with a purchase price adjustment relating to
historical Peppertree liabilities.
d) Reflects a purchase price adjustment relating to historical Peppertree
liabilities.
e) Reflects the note payable arising out of the cash portion of the
Peppertree transaction along with the associated transaction costs.
f) Reflects the elimination of the pre-purchase equity amounts of the
companies acquired in the purchase accounting transaction, and the
issuance of stock as consideration in the Peppertree transaction.
The accompanying notes are an integral part of the financial statements.
F-34
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Income Statement
For the Nine Month ended September 30, 1999
(Amounts in Thousands Except for Per Share Data)
Historical Pro
Equivest Historical forma Pro
Finance, Peppertree Consol. Acquis. forma
Inc. Company Balances Adj. total
----------- ----------- ----------- ----------- -----------
Revenue:
Interest $ 18,009 $ 7,351 $ 25,360 $ -- $ 25,360
Timeshare interval sales 28,233 37,794 66,027 -- 66,027
Resort operations 18,042 1,603 19,645 -- 19,645
Other income 1,335 967 2,302 -- 2,302
----------- ----------- ----------- ----------- -----------
Total Revenue 65,619 47,715 113,334 -- 113,334
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Interest 8,847 5,471 14,318 1,118 b) 15,436
Cost of intervals sold 6,747 9,334 16,081 -- 16,081
Sales and marketing 12,172 18,858 31,030 -- 31,030
Resort management 16,118 878 16,996 -- 16,996
Depreciation and amortization 2,207 584 2,791 680 c) 3,471
Provision for doubtful accounts 1,450 2,859 4,309 -- 4,309
General and administrative 5,749 5,439 11,188 -- 11,188
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses 53,290 43,423 96,713 1,798 98,511
----------- ----------- ----------- ----------- -----------
Income Before Provision for Income
Taxes 12,329 4,292 16,621 (1,798) 14,823
Provision for Income Taxes 5,075 8,538 a) 13,613 (7,373) d) 6,240
----------- ----------- ----------- ----------- -----------
Net Income/(Loss) $ 7,254 $ (4,246) $ 3,008 $ 5,575 $ 8,583
=========== =========== =========== =========== ===========
Earnings per common share:
Basic $ .27 $ .29
=========== ===========
Diluted $ .26 $ .28
=========== ===========
Weighted avg. number of common shares
outstanding:
Basic 25,528,607 2,905,662 28,434,269
Diluted 26,031,145 2,905,662 28,936,807
a) Includes $6,886 of deferred income taxes resulting from conversion of
certain "S" corporations to "C" corporation status as of January 1, 1999
(see Note 20 to historical financial statements).
b) Reflects interest expense on bank borrowings of $16.56 million at 9.0% for
the Peppertree transaction.
c) Reflects amortization of goodwill arising from the Peppertree purchase.
d) Reflects the effect of income taxes on the tax deductible pro forma
acquisition adjustments and the elimination of the deferred income tax
adjustment described in Note a.
The accompanying notes are an integral part of the financial statements.
F-35
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Income Statement
For the Year ended December 31, 1998
(Amounts in Thousands Except for Per Share Data)
Historical
Equivest Historical Pro forma
Finance, Peppertree Consol. Acquis. Pro forma
Inc. Company Balances Adj. total
------------ ------------ ------------ ------------ ------------
Revenue:
Interest $ 20,399 $ 8,383 $ 28,782 $ -- $ 28,782
Timeshare interval sales 4,553 45,637 50,190 -- 50,190
Resort operations 3,646 1,925 5,571 -- 5,571
Other income 1,039 235 1,274 -- 1,274
------------ ------------ ------------ ------------ ------------
Total Revenue 29,637 56,180 85,817 -- 85,817
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Interest 7,458 5,762 13,220 1,465 a) 14,685
Cost of intervals sold 1,145 11,688 12,833 -- 12,833
Sales and marketing 2,175 22,165 24,340 -- 24,340
Resort management 3,270 1,037 4,307 -- 4,307
Depreciation and amortization 2,162 624 2,786 1,347 b) 4,133
Provision for doubtful accounts 791 3,595 4,386 1,144 c) 5,530
General and administrative 4,122 4,863 8,985 -- 8,985
------------ ------------ ------------ ------------ ------------
Total Costs and Expenses 21,123 49,734 70,857 3,956 74,813
------------ ------------ ------------ ------------ ------------
Other income: Gain on sale of land -- 1,180 1,180 -- 1,180
------------ ------------ ------------ ------------ ------------
Income Before Provision for Income
Taxes 8,514 7,626 16,140 (3,956) 12,184
Provision for Income Taxes 3,270 2,877 6,147 (1,273) d) 4,874
------------ ------------ ------------ ------------ ------------
Net Income $ 5,244 $ 4,749 $ 9,993 $ (2,683) $ 7,310
============ ============ ============ ============ ============
Earnings per common share:
Basic $ .20 $ .26
============ ============
Diluted $ .20 $ .26
============ ============
Weighted avg. number of common shares
outstanding:
Basic 23,010,104 2,655,588 25,665,692
Diluted 23,451,243 2,655,588 26,106,831
a) Reflects interest expense on bank borrowings of $16 million at 9.0% for
the Peppertree transaction, and also reflects interest expense on bank
borrowings of $560,000 as of June 30, 1998 at 9.0% for a deferred payment.
b) Reflects the amortization of the financing costs associated with the bank
borrowings, and reflects amortization of goodwill arising from the
Peppertree purchase.
c) Reflects an increase in the provision for doubtful accounts in accordance
with the policies of Equivest.
d) Reflects the income tax adjustment for (1) the tax deductible acquisition
adjustments and (2) the tax effect of the acquisition on historical
Peppertree income tax expense.
The accompanying notes are an integral part of the financial statements.
F-36
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Notes to Unaudited Pro Forma Condensed Financial Statements
NOTE A: ACQUISITION AND PURCHASE PRICE
On November 17, 1999 Equivest acquired Peppertree Resorts, Ltd. of Asheville,
North Carolina. The transaction has been accounted for as a purchase for
financial reporting purposes. The purchase price and its allocation to assets
acquired and liabilities assumed follows:
Cash $ 14,260,000
2,401,000 shares of common stock at $4.66 per share 11,200,000
Deferred common stock payment 2,352,000
Other acquisition costs 1,807,000
Liabilities assumed 92,999,000
------------
Total Purchase Price $122,618,000
------------
Total Asset Value $108,963,000
------------
Goodwill $ 13,655,000
============
Of these amounts, $600,000 in cash and $2.9 million in stock will be paid on
June 30, 2000. In determining shares of common stock issued, and to be issued,
the parties agreed to a share price based on the volume weighted average price
for the 20 trading days preceding the fifth business day prior to the issue
date. In recording the transaction, the share price has been discounted by 20%
to reasonably account for the limited number of shares being traded.
NOTE B: AMORTIZATION PERIOD OF GOODWILL
The goodwill that resulted from the acquisition of Peppertree is being amortized
over a 20 year period.
The accompanying notes are an integral part of the financial statements.
F-37
NOTE C: NOTES PAYABLE
The borrowing to finance the $16 million cash portion of the Peppertree purchase
price bears interest at LIBOR plus 3% (or Prime + 0.5%), which amounted to 8.75%
at the acquisition date. The borrowing is a bridge loan, which matures August
17, 2000. The loan also has two extensions, which could push back the maturity
until May 17, 2001.
Amortization of deferred financing costs related to this loan has been based on
the original maturity date of the loan.
NOTE D: INCOME TAXES
The pro forma total effective tax rate was assumed to be 40%. The goodwill
resulting from the purchase is not deductible for income tax purposes because
the purchase transaction is deemed to be non-taxable under the Internal Revenue
Code.
NOTE E: RECONCILIATION OF PEPPERTREE COMPANY AMOUNTS TO HISTORICAL COMBINED
FINANCIAL STATEMENTS
The historical combined financial statements of Peppertree Resorts, Ltd. and
Affiliates which are included herein include hotel and resort operation
businesses that were not included in the acquisition. Accordingly, they are not
included in the accompanying pro forma condensed financial statements.
The following tables break down information from the consolidated financial
statements between the vacation interval and hotel resort operations businesses
(in thousands):
- -----------------------------------------------------------------------------------------------------------------
Intercompany
As of September 30 ,1999 Vacation Interval Hotel Receivables/ Payables Consolidated
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Assets $111,455 $ 9,416 $ (7,101) $113,770
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Liabilities 99,788 10,436 (7,101) 103,123
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Equity (deficiency in assets) 11,667 (1,020) 10,647
- -----------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999:
Income
(Loss)
Before Net
Income Income Income
Revenues Expenses Taxes Tax (Loss)
-------- -------- ------ ------ ------
Vacation Interval $47,715 $43,423 $ 4,292 $ 8,538 $(4,246)
Hotel 8,745 9,093 (348) -- (348)
Consolidated 56,460 52,513 3,944 8,538 (4,594)
The accompanying notes are an integral part of the financial statements.
F-38
For the Year Ended December 31, 1998:
Income
(Loss)
Before Net
Other Income Income Income
Revenues Expenses Income Taxes Tax (Loss)
-------- -------- ------ ------ ------ ------
Vacation Interval $ 56,180 $49,734 $1,180 $7,626 $2,877 $4,749
Hotel 10,810 11,601 (791) (791)
Intercompany
transactions (385) (385)
Consolidated 66,605 60,950 1,180 6,835 2,877 3,958
Intercompany transactions represent revenues and expenses between the vacation
interval and hotel/resort operations segments. They are included in the segment
amounts but are not included in consolidated amounts.
The net income amounts are before minority interest reductions which are not
material.
The accompanying notes are an integral part of the financial statements.
F-39