UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
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Commission File Number: 0-18201
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EQUIVEST FINANCE, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 59-2346270
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
100 Northfield Street, Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 618-0065
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act Of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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As of March 31, 2000, 28,089,722 shares of common stock of Equivest Finance,
Inc. were outstanding.
Transitional Small Business Disclosure Format. Yes No X
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1
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Condensed Financial Information:
Consolidated Condensed Balance Sheets - March 31, 2000
(unaudited) and December 31, 1999 3
Unaudited Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Unaudited Consolidated Statement of Equity Accounts 5
Unaudited Consolidated Condensed Statements of Cash Flow -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
2000 1999
------------ ------------
Unaudited
ASSETS
Cash and cash equivalents $ 2,066,228 $ 8,010,888
Receivables, net 252,476,625 247,081,791
Investment in real estate joint venture 4,415,780 4,415,780
Inventory 87,658,058 87,925,117
Property and equipment, net 17,827,512 18,122,843
Goodwill, net 41,048,681 41,374,002
Other assets 20,035,724 10,055,233
------------ ------------
TOTAL ASSETS $425,528,608 $416,985,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 9,485,431 $ 6,288,195
Accrued expenses and other liabilities 23,910,260 20,832,657
Taxes payable 748,052 5,608,907
Deferred taxes 19,725,980 19,535,794
Notes payable 293,630,283 289,357,773
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TOTAL LIABILITIES 347,500,006 341,623,326
SUBSEQUENT EVENT, CONTINGENCIES
AND COMMITMENTS
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series 2 Class A, $3 par value; 15,000
shares authorized, 10,000 shares outstanding; $10,000,000 liquidation value 30,000 30,000
Common Stock, $.01 par value; 50,000,000
shares authorized; 28,089,722 shares outstanding 280,897 280,897
Additional paid in capital 62,246,553 62,246,553
Retained earnings 15,471,152 12,804,878
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TOTAL STOCKHOLDERS' EQUITY 78,028,602 75,362,328
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $425,528,608 $416,985,654
============ ============
See Accompanying Notes To Consolidated Condensed Financial Statements.
3
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
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2000 1999
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REVENUE
Timeshare interval sales $22,404,641 $ 4,932,236
Interest 9,365,057 5,521,093
Resort operations 5,809,836 1,019,504
Other income 584,960 290,240
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38,164,494 11,763,073
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COSTS AND EXPENSES
Interest 6,049,003 2,221,176
Cost of timeshare intervals sold 5,417,880 1,174,328
Sales and marketing 11,175,693 2,117,720
Resort management 4,002,705 882,661
Depreciation and amortization 1,153,564 747,641
Provision for doubtful receivables 1,782,756 434,820
General and administrative 3,966,619 1,396,042
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33,548,220 8,974,388
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INCOME BEFORE PROVISION FOR INCOME TAXES 4,616,274 2,788,685
PROVISION FOR INCOME TAXES 1,950,000 1,200,000
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NET INCOME $ 2,666,274 $ 1,588,685
=========== ===========
Basic earnings per common share $ 0.09 $ 0.06
=========== ===========
Diluted earnings per common share $ 0.09 $ 0.06
=========== ===========
See Accompanying Notes To Consolidated Condensed Financial Statements.
4
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY ACCOUNTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000
Redeemable
Preferred Additional
Stock-Series 2 Common Stock Paid in Retained
Total Class A Shares Amount Capital Earnings
----------- -------------- ---------- ----------- ----------- -----------
Balances at December 31, 1999 $75,362,328 $ 30,000 28,089,722 $ 280,897 $62,246,553 $12,804,878
Net Income 2,666,274 2,666,274
----------- -------- ---------- --------- ----------- -----------
Balances at March 31, 2000 $78,028,602 $ 30,000 28,089,722 $ 280,897 $62,246,553 $15,471,152
=========== ======== ========== ========= =========== ===========
See Accompanying Notes to Consolidated Condensed Financial Statements.
5
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
Three Months Ended March 31,
----------------------------
2000 1999
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income $ 2,666,274 $ 1,588,685
Adjustments to reconcile net income to net cash
Provided by operating activities:
Amortization and depreciation 1,153,564 747,641
Provision for doubtful receivables 1,782,756 434,820
Changes in assets and liabilities, net of
Effects from purchase of KGI (1999)
Other assets (386,354) (543,626)
Inventory (267,059) (195,187)
Accounts payable and accrued expenses 6,275,056 521,074
Income taxes payable (4,670,669) (670,250)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 6,553,568 1,883,167
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (7,177,590) (4,727,996)
Sale (purchase) of equipment -0- (1,103)
Investment in joint venture -0- (727,658)
Partial payment on purchase of KGI, net of cash acquired of
$762,706 -0- (763,324)
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NET CASH (USED IN) INVESTING ACTIVITIES (7,177,590) (6,220,081)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
Repayments on loans receivable - related party -0- 315,566
Proceeds from notes payable 90,396,127 19,908,995
Payments on notes payable (86,087,695) (14,619,786)
Restricted cash (9,593,148) 221,331
Payments on non-recourse notes payable (35,922) (571,729)
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NET CASH (USED IN) PROVIDED BY FINANCING $ (5,320,638) $ 5,254,377
ACTIVITIES
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INCREASE (DECREASE) IN CASH $ (5,944,660) 917,463
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Cash at beginning of period 8,010,888 3,486,720
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CASH AT END OF PERIOD $ 2,066,228 $ 4,404,183
Supplemental Cash Flow Information:
Interest paid $ 6,042,885 $ 1,899,555
============ ============
Income taxes paid $ 2,531,951 $ 1,870,250
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See Accompanying Notes To Consolidated Condensed Financial Statements.
6
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated condensed interim financial statements as of
March 31, 2000 and for the three-month period ended March 31, 2000 and 1999 have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal accruals) considered necessary for fair presentation have
been included. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results expected for the year ended
December 31, 2000. For further information, please refer to the consolidated
financial statements and footnotes thereto included in Equivest Finance, Inc.'s
(the "Company") Form 10-KSB for the year ended December 31, 1999.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Equivest Capital Funding, Inc. (inactive),
Resort Funding, Inc. and its subsidiary, BFICP Corporation (collectively,
"Resort Funding"), EFI Funding Company, Inc., EFI Development Funding, Inc.,
Eastern Resorts Corporation and its subsidiaries , Eastern Resorts Company, LLC
and Long Wharf Marina Restaurant, Inc. (collectively, "Eastern Resorts") ;
Bluebeard's Castle, Inc., Castle Acquisition, Inc., Avenue Plaza LLC, Ocean City
Coconut Malorie Resort, Inc., St. Augustine Resort Development Group, Inc. and
EFI D.C. Acquisition, Inc. (all of which were acquired or created in connection
with the acquisition by the Company of six timeshare vacation resorts, one
resort development site, management contracts and consumer notes receivable from
Kosmas Group International, Inc. (KGI) in March 1999) ; and Peppertree Resorts
Ltd., and its subsidiaries, Peppertree Resort Villas, Inc., Peppertree Resorts
Vacation Club, Inc., Peppertree Resorts Management, Inc. and Peppertree Realty,
Inc. (all of which were acquired in connection with the acquisition by the
Company of fifteen timeshare vacation resorts, management contracts and consumer
notes receivable from Peppertree Resorts, Ltd. ( Peppertree Resorts) in November
1999) . All significant intercompany balances and transactions have been
eliminated in consolidation.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and costs and expenses during
the reporting period. Actual results could differ from the Company's estimates.
Inventory and Cost of Timeshare Intervals Sold
Inventory is stated at the lower of cost or market and consists of
timeshare intervals held for sale and construction in progress of new timeshare
units, including the cost of land for future timeshare units. These costs are
charged to cost of property sold based upon the relative sales
7
values of the intervals sold. Intervals reacquired are placed back into
inventory at the lower of their original historical cost basis or market value.
Property and Equipment
Property and equipment (including equipment under capital lease) net of
accumulated depreciation, are stated at cost. The Company computes depreciation
using the straight-line method over the estimated useful lives of the assets,
which have been estimated as follows:
Buildings and improvements 5-40 years
Furniture and equipment 3-7 years
Earnings Per Share
Pursuant to SFAS 128, a reconciliation of the numerators and the
denominators of the basic and diluted per-share computation follows:
For the Quarter Ended March 31, 2000
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Income Shares Per-Share
(Numerator) (Denominator) Amount
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Net Income $ 2,666,274
Less: Preferred Stock dividends (150,000)
-----------
Basic earnings per share:
Income available to common stockholders 2,516,274 28,089,722 $ .09
=======
Effect of dilutive securities:
Warrants 16,123
Stock options 281,449
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Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 2,516,274 28,387,294 $ .09
=========== ========== =======
For the Quarter Ended March 31, 1999
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $1,588,685
Less: Preferred Stock dividends (150,000)
-----------
Basic earnings per share:
Income available to common stockholders 1,438,685 25,203,795 $ .06
=======
Effect of dilutive securities:
Warrants 99,538
Stock options 464,476
----------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $1,438,685 25,767,809 $ .06
=========== =========== =======
8
SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended, is effective
for fiscal years beginning after June 15, 2000 and will be adopted for the
period beginning January 1, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction. The
Company currently has no derivative instruments.
Reclassifications
Certain amounts for the three months ended March 31, 1999 have been
reclassified to be consistent with the year 2000 classifications.
C. Contingencies, Commitments and Liquidity
In September 1997, in the Common Pleas Court for Beaufort County, South
Carolina, Resort Funding commenced foreclosure proceedings against the Main
Street Development Company and others operating aresort property located in
Hilton Head, South Carolina due to approximately four months delinquency in
payment of theirobligations to Resort Funding under a previously executed
acquisition and development loan agreement. On November 3, 1997, Resort Funding
reached an agreement with the developer to settle the arrearage. As part of the
agreement, the developer paid Resort Funding all past due amounts in full and
remitted payment in advance for installments due for October, November, and
December, 1997. As additional security for future payments, the developer agreed
to grant Resort Funding a deed in lieu of foreclosure to be held in escrow
pending Resort Funding's receipt of all other payments, as the payments became
due.
However, in January 1998, the developer refused to deliver the deed in
lieu of foreclosure and terminated the November 3, 1997, agreement. On March 17,
1998, the developer filed an answer and counterclaim in the foreclosure action
alleging, among other things, that it was not in default of its loan agreements.
On September 30, 1998, the developer agreed to deposit all past-due interest
amounts into an escrow account accessible only by order of the court.
Additionally, the developer agreed to pay into the escrow account all future
interest payments as they become due, pending the outcome of the foreclosure
action and the defendant's counterclaim. In the event that any such payments are
not timely received, Resort Funding shall have the right to have a receiver
appointed to operate the resort. As of March 31, 2000, the principal balance
owed to Resort Funding under the referenced loan was approximately $3.4 million
and the escrow account had a balance of $868,191. The promissory note matured on
February 28, 1999. Resort Funding's acquisition and development loan agreement
provides that principal will be repaid through release fees on interval units
sold. As of March 31, 2000, the developer had not sold any interval units. There
can be no assurance Resort Funding will receive principal payments relating to
this obligation in the short term, or that it will not incur a loss on this
loan. Resort Funding intends to pursue vigorously its claim and to defend
against the counterclaims filed by the defendants. Resort Funding's foreclosure
proceeding and related counterclaims are now scheduled for trial at the end of
May, 2000 in South Carolina.
9
The Company's primary credit facility is a $150 million facility with DG
Bank Deutche Genossenschaftsbank AG ("DG Bank") as Agent for Autobahan Funding
Company LLC ("DG Credit Facility"). The facility went into place in January
2000, replacing the $75 million receivables line from November 1997 with Credit
Suisse First Boston Mortgage Capital LLC ("CSFB" and specifically the "CSFB
Consumer Receivable Line"). The DG Credit Facility has a committed term of five
years, and the interest rate is based on lender's commercial paper rate plus 135
basis points. Financing is through a special purpose entity wholly owned by the
Company which purchases receivables from the Company for use as pledged
collateral to bank loans. As of March 31, 2000, the DG Credit Facility had an
outstanding balance of 3 million.
In September 1999, Finova Capital Corporation ("Finova") extended a $20.7
million facility with the Company. The two-year facility finances third party
loans, including A&D loans, consumer loans (both hypothecation loans and
purchases), and pre-sale loans. The outstanding balance as of March 31, 2000 was
$4.6 million. In May 2000, the Company signed an additional two-year $30 million
facility with Finova. This second facility is similar to the $20 million line
except that it covers projects actually owned by the Company.
In November 1999, the Bank of America, N.A. extended a $20.7 million
facility for the acquisition of Peppertree Resorts. As of March 31, 2000, the
outstanding loan balance was $16.7 million. The loan matures August 17, 2000,
and may be extended for up to an additional nine months. In order to extend the
loan, the Company is required to meet certain covenants, pay extension fees and
be subject to certain amortization provisions tied to net cash flow. The loan is
collateralized by the stock of the businesses acquired and certain unencumbered
assets of the Company. The Company is not able to predict at this time whether
it will be in compliance with all required covenants at August 17, 2000, or to
predict the action Bank of America might take if the Company were not to be in
compliance with any such covenants.
The Company has some additional facilities remaining from prior agreements
with the acquired companies. These facilities include some of the traditional
lenders in the timeshare industry such as Liberty Bank, Textron, and Finova. The
balances of these lines as of March 31, 2000 were approximately $64.0 million.
While there is approximately $44.0 million of availability under these credit
facilities, the Company plans on using its other facilities, which have more
favorable terms, and replacing outstanding balances with lower cost financing as
soon as possible under the terms of such indebtedness.
The Company has a $30.0 million Acquisition and Development Line ("A&D
Line") with CSFB that matures November 2000, and is currently in an amortization
period where no additional draws can be made. As of March 31, 2000, $26.4
million was outstanding under the A&D Line. The Company is planning to replace
this credit facility in 2000. However, there is no assurance that the Company
will find a replacement lender, or if so, that the terms and conditions of any
replacement loan will not be less favorable than current terms.
In addition to the above, the Company is working with a number of
additional lenders for additional facilities. The Company has also received a
preliminary $50 million consumer receivable facility proposal and a preliminary
$40 million A&D and consumer receivable proposal from two different commercial
banks. The Company is also working with a number of local banks in areas where
the Company has active construction projects in order to finance the ongoing
construction of additional resorts. There is no assurance that the Company will
finalize any of these additional credit facilities.
On August 25, 1998, the Company borrowed approximately $15 million under a
CSFB Bridge Loan in order to finance the cash portion of the purchase price for
Eastern Resorts. As of
10
March 31, 2000, the unpaid balance of the Bridge Loan was approximately $2.1
million. The maturity of the remaining outstanding principal has been extended
to November, 2000.
In March 1999, the Company assumed a loan from CSFB to KGI for a property
located in Washington, D.C. This loan had an outstanding balance of $3.0 million
at March 31, 2000, and matures on September 30, 2000.
The Company also has a number of additional term loans, mostly associated
with first mortgages on the resort properties. These loans include a $15.4
million loan on the Avenue Plaza Hotel and Pro Spa in New Orleans, Louisiana, a
$13.5 million loan on the properties in St. Thomas, USVI, and several loans on
various Peppertree resorts totaling over $22 million. The majority of these
loans matures after the year 2000, and are repaid out of release fees on sales
of VOI's. However, the loan on the Avenue Plaza Hotel and Pro Spa matures on
December 31, 2000.
Beginning September 1996, the Trustee of the Bennett Estate (the "Estate"
as defined more fully in the Form 10-KSB for the year ended December 31, 1999)
reached settlements of the claims of certain lenders (the "Banks") relating to
claims of such Banks to certain lease collateral of the Estate. These
settlements required the settling banks to make new non-callable term loans to
Resort Funding at concessionary interest rates of 0.5% to 4.0% (the "Settlement
Loans"). Resort Funding is also obligated to pay the Estate an annual
arrangement fee of 3% of the unpaid principal balance of the Settlement Loans.
The Settlement Loans have a weighted average interest rate of 2.2% as of March
31, 2000. As of March 31, 2000, Resort Funding's total outstanding balance on
the Settlement Loans was approximately $19.2 million and the weighted average
remaining maturity was 39 months. The Settlement Loans are collateralized in
part by notes receivable of the Company.
D. Segment Information
Financial information with respect to the financing and resort development
segments in which the Company operates follows for the three months ended March
31, 2000:
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Financing Resort Development Total
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- --------------------------------------------------------------------------------------------------------
Revenues from external customers $ 9,686,577 $28,477,917 $38,164,494
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- --------------------------------------------------------------------------------------------------------
Intersegment revenues 280,461 -- 280,461
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- --------------------------------------------------------------------------------------------------------
Segment Profit 2,326,168 3,016,112 5,342,280
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- --------------------------------------------------------------------------------------------------------
Reconciliation of total segment
profit to consolidated income
before income taxes:
- --------------------------------------------------------------------------------------------------------
Total segment profit 5,342,280
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Unallocated corporate expenses (726,006)
- --------------------------------------------------------------------------------------------------------
Consolidated income before provision for
income taxes 4,616,274
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- --------------------------------------------------------------------------------------------------------
11
Financial information with respect to the financing and resort development
segments in which the Company operates follows for the three months ended March
31, 1999:
- --------------------------------------------------------------------------------------------------------
Financing Resort Development Total
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Revenues from external customers $ 5,796,227 $ 5,967,846 $11,763,073
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Intersegment revenues 138,695 -- 138,695
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Segment Profit 2,370,804 803,127 3,173,931
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Reconciliation of total segment
profit to consolidated income
before income taxes:
- --------------------------------------------------------------------------------------------------------
Total segment profit 3,173,931
- --------------------------------------------------------------------------------------------------------
Unallocated corporate expenses (385,246)
- --------------------------------------------------------------------------------------------------------
Consolidated income before provision for
income taxes 2,788,685
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- --------------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-looking Statements
Certain matters discussed or incorporated herein by reference contain
forward-looking statements. These statements may be identified by the use of
words or phrases such as "believe," "expect," "anticipate," "should," "planned,"
"estimated," and "potential." Forward-looking statements are based on the
Company's current expectations. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for such forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause actual results and experience to differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. These factors include, among others, general economic and business
conditions, industry trends, changes in business strategy or development plans,
availability and quality of management, a downturn in the real estate cycle or
other factors which result in lower sales of vacation ownership interests,
possible financial difficulties of one or more of the developers with whom the
Company does business (such as the risk of carrying non-performing assets or
losses if defaulted loans prove to have insufficient collateral backing),
fluctuations in interest rates, prepayments by consumers of indebtedness,
prepayments by developers, inability of developers to honor replacement
obligations for defaulted consumer notes, and competition from organizations
with greater financial resources.
12
THREE MONTHS ENDED MARCH 31, 2000
March 31, 2000 Compared to March 31, 1999
Net Income
Income before provision for income taxes increased 66% to $4.6 million for
the three months ended March 31, 2000, as compared to $2.8 million for the same
period in 1999. Net income increased 68% to $2.7 million for the three months
ended March 31, 2000 from $1.6 million for the same period in 1999. The increase
in net income is primarily attributable to the addition of the timeshare
operating results for acquisition-related properties.
Total revenue rose 224% to $38.2 million for the first three months of
2000 as compared to $11.8 million for the same time period in 1999. Revenue
growth is largely due to the addition of revenue associated with acquired
properties. Revenue and income relating to Eastern Resorts has been included
since August 28, 1998, while the comparable figures for the former KGI
Properties and the Peppertree Properties relate only to the period after March
26, 1999 and November 17, 1999, respectively.
Interest Income
Interest income includes interest earned from the Company's consumer
receivable portfolio and interest earned from the Company's third party loan
portfolio. Interest income increased 70% to $9.4 million for the first three
months of 2000 from $5.5 million for the same time period in 1999, primarily due
to higher average outstanding balances on the loan portfolio of approximately
$102 million for the first quarter of 2000. In addition, the weighted average
interest rate on the loan portfolio increased approximately 75 basis points. The
increase in the portfolio was due principally to the addition of acquired
resort's existing portfolios and continued growth of the owned consumer loan
portfolio. Third party hypothecation loans also increased in size and the
weighted average interest rate increased.
Interest income related to the owned consumer loan portfolio increased to
44% of total interest income for the first three months of 2000, compared to 15%
of interest income for the same period in 1999. Interest income earned from the
Company's third party loans increased slightly from $4.7 million for the first
three months of 1999 to $5.3 million for the first three months of 2000, mainly
due to higher average outstanding balances of the third party consumer
portfolio, which was partially offset by the elimination of loans through
consolidation and a decline in interest rates. The Company previously extended
loans to certain of the acquisition properties, which are now eliminated during
consolidation.
Interest on acquisition, development, and construction loans ("A&D Loans")
decreased 31% to $0.8 million for the first three months of 2000 from $1.2
million for the same period in 1999, mainly due to lower average outstanding
balance due to the elimination in consolidation of businesses acquired after
March 25, 1999. A&D Loan originations declined 73% from $6.8 million for the
first quarter of 1999 to $1.9 million for the same period in 2000, while third
party consumer loan receivables originations remained relatively constant at $15
million. The decline in A&D loan originations is attributable to a shift in the
Company's growth strategy from third party A&D loans to the owned timeshare and
consumer financing segments.
13
VOI Sales
VOI revenues increased to $22.4 million for the three months ended March
31, 2000, from $4.9 million for the same time period in 1999. Vacation ownership
revenue increased to 59% of total revenue for the first three months of 2000 as
compared to 42% for the same period in 1999. The increase in VOI revenues is
largely due to the impact of two acquisitions that the Company completed in
1999. The Company now owns or manages 29 timeshare resort locations with a
completed VOI inventory of approximately 26,000 and operates 17 sales centers.
The following tables sets forth the number of timeshare intervals sold and
the average sales price per timeshare interval:
Three Months Ended
March 31, March 31,
2000 1999
--------- ---------
Timeshare interest sold 2,110 485
Average Sales Price per Timeshare interval $10,550 $10,170
Number of VOI's in inventory at period end 25,577 25,752
Resort Operations
Resort operations revenue totaled $5.8 million for the first three months
of 2000, as compared to $1.0 million for 1999. The increase in resort operations
is largely due to the impact of the two acquisitions that the Company completed
in 1999. Resort management expenses as a percentage of resort operation revenue
decreased to 69% for the first three months of 2000 compared with 87% for the
same period in 1999. The decline in resort management expense as a percentage of
resort operation revenue is in large part the result of the addition of resort
properties with greater profit margins from overnight rentals.
Other Income
Other income increased 102% to $0.6 million for the three months ended
March 31, 2000 as compared to $0.3 million for the same time period in 1999. The
increase in other income is primarily due to other income associated with
acquisition properties and an increase in service income associated with
consumer receivables. Other income associated with acquisition properties
represented 84% of the increase in other income.
Provision For Doubtful Receivables
The provision for doubtful receivables increased 310% to $1.8 million for
the first three months of 2000 from $0.4 million for the same time period in
1999. The increase in the provision for doubtful accounts is primarily due to an
increase in consumer receivables generated from the acquisition-related
properties.
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The Company has established a minimum reserve target for its owned
consumer loans based on the principal aging of the Consumer Loans. The following
list sets forth the target reserve level based on the aging of any given owned
consumer note receivable:
o Current - 29 days past due 5%
o 30 - 59 days past due 10%
o 60 - 89 days past due 50%
o 90+ days past due 95%
The targeted reserve level is based on the outstanding principal balance
of the Consumer loan less an inventory recapture amount. When the Company
believes that collectibility of a receivable is unlikely, that amount is charged
against the allowance for doubtful receivables. The following table sets forth
the allowance for doubtful accounts at March 31, 2000 as compared to March 31,
1999:
Allowance for Doubtful Accounts
(in thousands)
03/31/00 03/31/99
-------- --------
Allowance for doubtful accounts,
Beginning of period 10,073 3,835
Allowance related to an acquisition -0- 832
Provision for loan losses 1,783 435
Charges to allowance for doubtful accounts (1,863) (173)
Recoveries 21 -0-
------- ------
Allowance for doubtful accounts, end of period 10,014 4,929
As a % of total loans 3.8% 2.8%
At March 31, 2000, the Company had total reserves (including
overcollateralization on the Hypothecation Loans) for its loan portfolio
(including consumer receivable and acquisition and development loans) equal to
$33.5 million or 12.7% of total loans. This represented a reserve coverage ratio
("RCR") of 5.2 times the $6.5 million of consumer receivables that were 60 days
past due at March 31, 2000 on the entire consumer note receivable portfolio.
Included in this amount were total reserves and over collateralization of $23.5
million on third party consumer receivables or approximately 22.4% of the
outstanding consumer receivables portfolio attributable to third party resorts.
This represented an RCR of 8.1 times the $2.9 million of such receivables that
were 60 or more days past due at March 31, 2000.
At March 31, 2000 the Company maintained an aggregate allowance for
doubtful receivables of $10.0 million, or 7.9% of the outstanding consumer
receivable portfolio from owned resorts. This represented an RCR of 2.8 times
the approximate $3.6 million in consumer receivables from owned resorts that
were 60 days past due as of that date. The $10.0 million aggregate allowance for
doubtful receivables at March 31, 2000 represented an increase of 103%
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compared with $4.9 million at March 31, 1999. This largely reflects the
significant increases in reserves required by the Company's target reserve
methodology compared with reserving policies previously in effect at ERC, KGI or
Peppertree. The allowance for doubtful accounts is maintained at a level
believed adequate by management based upon a monthly analysis of the receivable
portfolio.
The following table sets forth the portfolio performance of the consumer
receivable portfolio at March 31, 2000:
Consumer Receivable Loan Portfolio
As of March 31, 2000
(In Thousands)
Current 30 - 59 days 60 - 89 days 90+ days Total
------- ------------ ------------ -------- -----
Owned Resorts $119,427 $2,957 $1,532 $2,085 $126,001
94.8% 2.3% 1.2% 1.7% 100.0%
Third Party (1) $114,247 $3,070 $1,744 $1,144 $120,205
95.0% 2.6% 1.5% 1.0% 100.0%
Total $233,674 $6,027 $3,276 $3,229 $246,206
94.9% 2.4% 1.3% 1.3% 100.0%
(1) Includes the consumer receivables that collateralize the hypothecation
loans.
At March 31, 2000, 94.9% of the consumer receivable portfolio was current,
and there were 583 notes with a principal balance of $3.2 million that were over
91 days past due. Of this amount, $2.1 million were notes relating to the
consumer receivables in the Company's resorts. During the first three months of
2000, the company wrote off 392 consumer notes with an outstanding principal
balance of $2.7 million. With limited exceptions, the Company services the loans
in its portfolio internally, using its own personnel and facilities,
again.)although loans currently owned by Peppertree are the subject of
outsourcing arrangements for collection services.
Interest Expense
Interest expense, net of capitalized amounts, increased 172% to $6.0
million for the first three months of 2000 as compared to $2.2 million for the
same time period in 1999. The increase in interest expense is a result of the
increased borrowings associated with the increased loan portfolio, increased
borrowings associated with the acquisitions, and an increase in the weighted
average outstanding interest rate. The average outstanding balance increased
approximately $155 million, while the weighted average interest rate on
outstanding debt increased from 6.6% for the first quarter of 1999 to 8.3% for
the first quarter of 2000.
The Company has not traditionally hedged against its interest rate risk
due to the wide spread on its receivables and the speed with which new
originations occur, and the relatively stable interest rate environment.
However, under the new $150 million DG Credit Facility, the
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facility requires the Company to hedge within the facility once the interest
rate spread has been reduced to a certain level. This is currently the largest
financing facility that the Company maintains.
Cost of Timeshare Intervals Sold
The cost of timeshare intervals sold for the first three months of 2000
totaled $5.4 million or 24.2% of VOI revenue, compared to $1.2 million for the
three months ended March 31, 1999, or 23.8% of VOI revenue. The increase in the
cost of property sold as a percentage of VOI revenue is primarily due to higher
product costs at certain acquisition sites, while the increase in dollar volume
is a result of the inclusion of operating results for acquisition properties.
Depreciation and Amortization
Depreciation and amortization increased 54% to $1.1 million for the first
three months of 2000 from $0.7 million for the same period in 1999. The increase
is primarily due to $0.3 million associated with depreciation expense, and $0.3
million associated with goodwill amortization. These increases are a result of
the impact of the two acquisitions the Company completed in 1999.
Goodwill amortization increased 102% to $0.3 million for the first quarter
of 2000 from $0.2 million for the same period in 1999 and represented 43% of the
increase. Goodwill associated with the Peppertree acquisition is approximately
$15 million and is being amortized over 20 years, while goodwill associated with
Eastern Resorts is being amortized over 40 years. Depreciation and amortization
of the properties totaled $0.3 million and accounts for 69% of the increase. The
increase in depreciation is a result of a larger base of depreciable assets
relating to the acquisition properties.
Sales And Marketing
Sales and marketing expense increased to $11.2 million for the first three
months of 2000 from $2.1 million for the same time period in 1999. Sales and
marketing expense increased to 49.9% as a percentage of VOI revenue for the
first quarter of 2000, compared to 42.9% for the same period in 1999. The
increase in total sales and marketing expense is due to the inclusion of
operating results from acquired properties. Peppertree sales centers currently
experience a higher cost level, particularly relating to tour costs, than the
Company's other sales centers. The Company anticipates that the Peppertree sales
and marketing expenses as a percent of VOI revenue will decline during 2000 as
the Company introduces various cost-reducing measures, though, these cost levels
are likely to remain higher than the Company's historic average during the
balance of 2000. There is no assurance that the excessive sales and marketing
costs at Peppertree will be corrected in 2000, or thereafter.
Resort Management
Resort management expense for the three months ended March 31, 2000
totaled $4.0 million, or 69% of resort operations revenue, as compared $0.9
million, or 87% of resort operations revenue, for the comparable period in 1999.
The decline in resort management expenses as a percentage of resort operations
revenue is primarily due to the addition of several resort properties that
derive significant room revenue from unsold timeshare inventory.
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General and Administrative
General and administrative expense increased 184% to $3.9 million for the
first three months of 2000 from $1.4 million for the same period in 1999. The
increased costs are attributable to the inclusion of general and administrative
costs associated with the acquisition properties, which represented 87% of the
total increase in general and administrative costs. The following items also
contributed to the increase in general and administrative expense: payroll
costs, travel costs, office related costs, outside service costs, and servicing
fees due to growth of the Company.
Although general and administrative expense increased, general and
administrative expense as a percentage of total revenue declined to 10.4% of
total revenue for the first three months of 2000, compared with 11.9% of total
revenue for the first three months of 1999. The decrease in general and
administrative expense as a percentage of total revenue is generally the result
of economies of scale relating to increased revenue levels. General and
administrative costs will continue to increase in absolute dollars as the
Company invests in its management and organization infrastructure in order to
achieve anticipated growth in the Company's corporate structure.
Provision For Income Taxes
The provision for income taxes for the three months ended March 31, 2000
increased 63% to $1.9 million from $1.2 million for the same period in 1999. The
increase is attributable to the increase in pretax income during the first three
months of 2000 as compared to the same period in 1999. The provision for income
taxes represents approximately 42% and 43% of pretax income for the first three
months of 2000 and 1999, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by Item 3 is incorporated herein by reference to
Management's Discussion and Analysis of Financial Condition and Result of
Operations in Item 2 above.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On or about March 12, 1998, Resort Funding provided two loans to a Project
Developer known as Riverside Suites Ltd. ("Riverside"), consisting of an
Acquisition and Development loan in the amount of $6.3 million and a
Hypothecation Loan facility with a maximum commitment of $15 million (the
"Loans"). These Loans were provided to Riverside to develop a time-share
condominium project known as Riverside Suites in San Antonio, Texas (the "San
Antonio Project") to be constructed in part and renovated in part out of an
existing building along the San Antonio Riverwalk. Certain disputes arose
between Riverside, Resort Funding and the subcontractors in respect to work
performed at the San Antonio Project and payments received thereon. As a result,
various contractors filed liens against the San Antonio Project, including one
by M. J. Boyle, the General Contractor for the San Antonio Project. On December
15, 1999, M. J. Boyle instituted an action against Riverside and Resort Funding
in the District Court of Bexar County, Texas for breach of contract and for $1.9
million allegedly owed to him by Resort Funding for work performed in connection
with the San Antonio Project (the "Lien Action").
On or about February 14, 2000, as a result of cost overruns and liens by
contractors, Resort Funding declared Riverside in default of its loans and set
the property for sale on March 7, 2000, under the Texas foreclosure laws. M. J.
Boyle, Riverside and Resort Funding mediated their various disputes and causes
of action on April 18, 2000, and entered into an agreement in resolution of the
disputes. Under this agreement Resort Funding agreed to pay $1 million to M. J.
Boyle and the various subcontractors on the project in return for release of
approximately $1.9 million in claims for unpaid construction costs owed by
Riverside, as well as for M. J. Boyles's signed release of lien and dismissal of
the Lien Action. In addition, a deed in lieu of foreclosure has been delivered
by Riverside to a wholly-owned subsidiary of the Company, EFI Texas Acquisition,
Inc. Because Riverside has not cured its default under the Loans, EFI Texas
Acquisition, Inc., the new holder of the Riverside loans, is contemplating
continuing to pursue the foreclosure action to clear any other outstanding and
unknown liens. Assuming that EFI Texas Acquisition, Inc. is the successful
bidder at this auction, it intends to continue to operate the San Antonio
Project as a timeshare resort.
For other information regarding certain litigation involving the Company,
its subsidiaries and affiliates, reference is made to the Company's Form 10-KSB
for the year-ended December 31, 1999, which is incorporated herein by reference.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. (a) Exhibits.
The following exhibits are filed herewith:
10.1 First Amendment Agreement dated as of January 31, 2000, to the
Receivables Loan and Security Agreement, dated as of January 31,
2000, among EFI Funding Company, Inc., Resort Funding, Inc.,
Autobahn Funding Company, LLC, DG Bank Deutsche Genossenschaftsbank
AG; US Bank Trust National Association and Sage Systems, Inc. with
Exhibit "A" Receivables Loan and Security Agreement dated as of
January 31, 2000, among the above-referenced parties.
10.2 First Amendment Agreement dated as of January 31, 2000, to the
Purchase Agreement, dated as of January 31, 2000, between Resort
Funding, Inc. and EFI Funding Company, Inc. with Exhibit "A"
Purchase Agreement dated as of January 31, 2000, between the
above-referenced parties.
10.3 Sinking Fund Account Agreement dated as of January 31, 2000, among
EFI Funding Company, Inc., Resort Funding, Inc., DG Bank Deutsche
Genossenschaftbank AG and Manufacturers and Traders Trust Company.
10.4 First Amendment Agreement dated as of January 31, 2000, to the
Purchase Agreement, dated as of January 31, 2000, between EFI
Development Funding, Inc., as seller and EFI Funding Company, Inc.,
as purchaser with Exhibit "A" Purchase Agreement dated as of January
31, 2000, between the above-referenced parties:
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the quarter
covered by this report:
(i) January 31, 2000 Amended Form 8-K filing the Combined
Financial Statements with respect to the acquisition of
Peppertree Resorts, Ltd.
(ii) March 14, 2000 Form 8-K announcing record 1999 revenues and
earnings per share.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, there unto duly authorized.
EQUIVEST FINANCE, INC.
BY: /s/ Gerald L. Klaben
-------------------------------------
Gerald L. Klaben, Jr.
Senior Vice President and Chief Financial Officer
Dated: May 15, 2000
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