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 JUNE 30, 2000
-------------
Commission File Number: 0-18201
-------
EQUIVEST FINANCE, INC.
----------------------
(Exact name of Registrant as specified in its charter)
Delaware 59-2346270
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
100 Northfield Street, Greenwich, Connecticut 06830
- --------------------------------------------- -----
(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 |_|
As of June 30, 2000, 28,089,722 shares of common stock of Equivest Finance, Inc.
were outstanding.
Transitional Small Business Disclosure Format. Yes |_| No |X|
1
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
INDEX
PART I FINANCIAL INFORMATION
- ------
Item 1. Financial Statements
Consolidated Condensed Financial Information:
Consolidated Condensed Balance Sheets - June 30, 2000
(unaudited) and December 31, 1999 3
Unaudited Consolidated Condensed Statements of Income -
Three Months Ended June 30, 2000 and 1999 4
Unaudited Consolidated Condensed Statements of Income -
Six Months Ended June 30, 2000 and 1999 5
Unaudited Consolidated Statement of Equity Accounts 6
Unaudited Consolidated Condensed Statements of Cash Flow -
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
- -------
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2000 1999
------------ ------------
Unaudited
ASSETS
Cash and cash equivalents $ 5,537,536 $ 8,010,888
Receivables, net 259,704,278 247,081,791
Investment in real estate joint venture -0- 4,415,780
Inventory 92,403,761 87,925,117
Property and equipment, net 17,872,510 18,122,843
Goodwill, net 40,713,460 41,374,002
Other assets 20,014,700 10,055,233
------------ ------------
TOTAL ASSETS $436,246,245 $416,985,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 10,696,633 $ 6,288,195
Accrued expenses and other liabilities 22,039,732 20,832,657
Taxes payable 4,982,827 5,608,907
Deferred taxes 19,725,980 19,535,794
Notes payable 298,304,143 289,357,773
------------ ------------
TOTAL LIABILITIES 355,749,315 341,623,326
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 17,939,480 12,804,878
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 80,496,930 75,362,328
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $436,246,245 $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 June 30,
---------------------------
2000 1999
---- ----
REVENUE
Timeshare interval sales $23,789,502 $11,411,257
Interest 9,568,651 6,066,005
Resort operations 6,693,804 6,322,193
Other income 362,348 354,048
----------- -----------
40,414,305 24,153,503
----------- -----------
COSTS AND EXPENSES
Interest 6,472,178 3,228,970
Cost of timeshare intervals sold 5,644,236 2,719,396
Sales and marketing 11,441,169 4,852,278
Resort management 4,959,478 5,110,674
Depreciation and amortization 1,229,963 851,356
Provision for doubtful receivables 1,906,471 394,500
General and administrative 4,517,482 2,442,699
----------- -----------
36,170,977 19,599,873
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,243,328 4,553,630
PROVISION FOR INCOME TAXES 1,775,000 1,800,000
----------- -----------
NET INCOME $ 2,468,328 $ 2,753,630
=========== ===========
Basic earnings per common share $ 0.08 $ 0.10
=========== ===========
Diluted earnings per common share $ 0.08 $ 0.10
=========== ===========
See Accompanying Notes To Consolidated Condensed Financial Statements.
4
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
6 Months Ended June 30,
-----------------------
2000 1999
---- ----
REVENUE
Timeshare interval sales $46,194,143 $16,343,493
Interest 18,933,708 11,587,098
Resort operations 12,669,924 7,341,698
Other income 781,024 644,288
----------- -----------
78,578,799 35,916,577
----------- -----------
COSTS AND EXPENSES
Interest 12,521,181 5,450,146
Cost of timeshare intervals sold 11,062,116 3,893,724
Sales and marketing 21,856,942 6,969,998
Resort management 8,962,183 5,993,335
Depreciation and amortization 2,383,527 1,598,997
Provision for doubtful receivables 3,689,227 829,320
General and administrative 9,244,021 3,838,741
----------- -----------
69,719,197 28,574,261
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,859,602 7,342,316
PROVISION FOR INCOME TAXES 3,725,000 3,000,000
----------- -----------
NET INCOME $ 5,134,602 $ 4,342,316
=========== ===========
Basic earnings per common share $ 0.17 $ 0.16
=========== ===========
Diluted earnings per common share $ 0.17 $ 0.16
=========== ===========
See Accompanying Notes To Consolidated Condensed Financial Statements.
5
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY ACCOUNTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
Redeemable
Preferred
Stock-Series Common Stock Additional Paid Retained
Total 2 Class A Shares Amount in 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 5,134,602 5,134,602
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 2000 $80,496,930 $ 30,000 $28,089,722 $ 280,897 $62,246,553 $17,939,480
=========== =========== =========== =========== =========== ===========
See Accompanying Notes To Consolidated Condensed Financial Statements.
6
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
Six Months Ended June 30,
-------------------------
2000 1999
------------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income $ 5,134,602 $ 4,342,316
Adjustments to reconcile net income to net cash
Provided by operating activities:
Amortization and depreciation 2,383,527 1,605,673
Provision for doubtful receivables 3,689,227 829,320
Changes in assets and liabilities, net of
Effects from purchase of KGI (1999)
Other assets (3,340,090) 234,554
Inventory (62,864) 817,447
Accounts payable and accrued expenses 4,105,187 (3,006,734)
Income taxes payable 425,505 1,807,496
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,335,094 6,630,072
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (14,801,394) (15,095,992)
Sale (purchase) of equipment -0- (489,330)
Investment in joint venture -0- (2,045,659)
Partial payment on purchase of KGI, net of cash
acquired of $762,706 -0- (1,941,492)
------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES (14,801,394) (19,572,473)
CASH FLOWS (USED IN) PROVIDED BY FINANCING
ACTIVITIES
Repayments on loans receivable - related party -0- 564,505
Proceeds from notes payable 132,930,034 49,224,186
Payments on notes payable (123,983,674) (34,195,281)
Restricted cash (8,953,412) 134,691
Payments on non-recourse notes payable 0 (2,700,990)
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING $ (7,052) $ 13,027,111
ACTIVITIES ------------- -------------
INCREASE (DECREASE) IN CASH (2,473,352) 84,710
------------- -------------
Cash at beginning of period 8,010,888 3,486,720
------------- -------------
CASH AT END OF PERIOD $ 5,537,536 $ 3,571,430
Supplemental Cash Flow Information:
Interest paid $ 12,191,264 $ 5,333,999
============= =============
Income taxes paid $ 2,531,951 $ 3,250,250
============= =============
Supplemental Schedule of Non-cash Investing
Activity:
Reclassification of investment in joint venture
to inventory as a result of foreclosure $ 4,415,780 -0-
============= =============
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated condensed interim financial statements as of
June 30, 2000 and for the three-month and six-month periods ended June 30, 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
and six-month periods ended June 30, 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); 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); and Equivest Texas, Inc, which was created in connection with the
acquisition by the Company of a resort development site in May, 2000. 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
8
timeshare units. These costs are charged to cost of property sold based upon the
relative sales 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 June 30, 2000
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $2,468,328
Less: Preferred Stock dividends (150,000)
----------
Basic earnings per share:
Income available to common stockholders 2,318,328 28,089,722 $.08
====
Effect of dilutive securities:
Stock options 256,098
---------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $2,318,328 28,345,820 $.08
========== =========== ====
For the Quarter Ended June 30, 1999
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $2,753,630
Less: Preferred Stock dividends (150,000)
----------
Basic earnings per share:
Income available to common stockholders 2,603,630 25,688,351 $.10
---------- ----------- ====
Effect of dilutive securities:
Warrants 69,519
Stock options 344,557
---------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $2,603,630 26,102,427 $.10
========== =========== ====
9
For the Six Months Ended June 30, 2000
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $5,134,602
Less: Preferred Stock dividends (300,000)
----------
Basic earnings per share:
Income available to common stockholders 4,834,602 28,089,722 $.17
====
Effect of dilutive securities:
Stock options 269,616
---------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $4,834,602 28,359,338 $.17
========== =========== ====
For the Six Months Ended June 30, 1999
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $4,342,316
Less: Preferred Stock dividends (300,000)
----------
Basic earnings per share:
Income available to common stockholders 4,042,316 25,447,412 $.16
====
Effect of dilutive securities:
Warrants 88,552
Stock options 416,251
---------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $4,042,316 25,952,215 $.16
========== =========== ====
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.
10
Reclassifications
Certain amounts for the three months and six months ended June 30, 1999
have been reclassified to be consistent with the year 2000 classifications.
C. Contingencies, Commitments and Liquidity
In September, 1997, Resort Funding commenced foreclosure proceedings in
the Common Pleas Court for Beaufort County, South Carolina against the Main
Street Development Company and others operating a resort property located in
Hilton Head, South Carolina due to delinquency of their obligations to Resort
Funding under an acquisition and development loan agreement. In March, 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 and that
Resort Funding had damaged it through various means. In September, 1998, the
developer agreed to deposit all past-due interest amounts into an escrow account
accessible only by order of the court, and to pay all future interest payments
as they become due into the escrow account, 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 June 30, 2000, the principal
balance owed to Resort Funding under the loan was approximately $3.4 million and
the escrow account had a balance of approximately $990,000. The promissory note
matured in February, 1999, and to date the developer has not repaid any
principal on the loan. Resort Funding's foreclosure proceeding and related
counterclaims were the subject of a mistrial relating to jury selection
proceedings in May of 2000, and a trial of these proceedings is now expected to
take place in September, 2000, in South Carolina. The South Carolina proceeding
will be tried before a jury, and there is no assurance that the Company will
either recover its unpaid principal and accrued interest, or defeat the
developer's claims for damages.
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"). The DG Credit Facility has a
committed term of five years, with an interest rate 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 June 30, 2000, the DG Credit Facility
had an outstanding balance of $104.3 million.
In September 1999, Finova Capital Corporation ("Finova") extended a $20.0
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 June 30, 2000 was
$5.1 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. As of June
30, 2000, the outstanding balance on the $30 million facility was $3.2 million.
Each such financing line from Finova requires separate approval for each
individual project to be funded thereunder. To date, one project has been funded
under each of the two lines. There is no assurance that future projects will be
funded under either Finova line.
In November 1999, the Bank of America, N.A. extended a $20.7 million
facility for the acquisition of Peppertree Resorts. As of June 30, 2000, the
outstanding loan balance was $17.1
11
million. As of June 30, 2000 Bank of America and the Company agreed to extend
this facility through November 17, 2000, and certain other terms of the
agreement were modified. Under the revised agreement, the Company will make
fixed principal payments of $300,000 per month beginning in September of 2000 in
lieu of repayment provisions tied to variable cash flow during the period
through the extended maturity date.
The Company has additional facilities remaining from prior agreements with
the acquired companies. These facilities include some of the traditional lenders
in the timeshare industry such as Textron and Finova. The balances of these
lines as of June 30, 2000 were approximately $57.4 million. In August, 2000, the
Company paid off a Peppertree loan from Liberty Bank for approximately $21
million and refinanced the collateral in its DG Bank facility at a significantly
lower rate of interest. While there is remaining credit availability under these
facilities of the acquired companies, the Company plans on using its own
facilities, which have more favorable terms, and replacing outstanding balances
with lower cost financing as soon as possible subject to the terms of such
indebtedness.
The Company has a $30 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 June 30, 2000, $24.8 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.
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 June 30, 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 June 30, 2000, and matures on September 30, 2000. The Company is working with
various potential lenders to refinance this loan in connection with a $7 to $10
million construction facility for this property.
The Company also has a number of additional term loans, mostly associated
with first mortgages on the resort properties. These loans include a $14.6
million loan on the Avenue Plaza Hotel and Pro Spa in New Orleans, Louisiana, a
$12.9 million loan on the properties in St. Thomas, USVI, and several loans on
various Peppertree resorts totaling over $15 million. The majority of these
loans mature after the year 2000, and are repaid through release fees on sales
of VOI's. However, the Avenue Plaza Hotel and Pro Spa loan matures on December
31, 2000.
In addition to the above, the Company is working with a number of
potential lenders on additional facilities. The Company has received preliminary
proposals from two different commercial banks, and is also working with 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.
12
D. Segment Information
Financial information with respect to the financing and resort development
segments in which the Company operates follows for the periods indicated:
- --------------------------------------------------------------------------------------
Resort
Financing Development Total
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Three months ended June 30, 2000:
- --------------------------------------------------------------------------------------
Revenues from external customers $ 9,853,264 $30,561,041 $40,414,305
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Intersegment revenues 265,210 -- 265,210
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Segment Profit 1,471,154 3,685,073 5,156,227
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- --------------------------------------------------------------------------------------
Total segment profit 5,156,227
- --------------------------------------------------------------------------------------
Unallocated corporate expenses (912,899)
- --------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes 4,243,328
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Three months ended June 30, 1999:
- --------------------------------------------------------------------------------------
Revenues from external customers $ 6,391,856 $17,761,647 $24,153,503
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Intersegment revenues 107,703 -- 107,703
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Segment Profit 2,637,912 2,321,867 4,959,779
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- --------------------------------------------------------------------------------------
Total segment profit 4,959,779
- --------------------------------------------------------------------------------------
Unallocated corporate expenses (406,149)
- --------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes 4,553,630
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------------
Resort
Financing Development Total
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Six months ended June 30, 2000:
- --------------------------------------------------------------------------------------
Revenues from external customers $ 19,539,841 $ 59,038,958 $ 78,578,799
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Intersegment revenues 724,222 -- 724,222
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Segment Profit 3,797,322 6,701,185 10,498,507
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- --------------------------------------------------------------------------------------
Total segment profit 10,498,507
- --------------------------------------------------------------------------------------
Unallocated corporate expenses (1,638,905)
- --------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes 8,859,602
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Six months ended June 30, 1999:
- --------------------------------------------------------------------------------------
Revenues from external customers $ 12,188,083 $ 23,728,494 $ 35,916,577
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Intersegment revenues 426,915 -- 426,915
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Segment Profit 4,833,991 3,299,719 8,133,710
- --------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- --------------------------------------------------------------------------------------
Total segment profit 8,133,710
- --------------------------------------------------------------------------------------
Unallocated corporate expenses (791,394)
- --------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes 7,342,316
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
14
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.
15
THREE MONTHS ENDED JUNE 30, 2000
June 30, 2000 Compared to June 30, 1999
Net Income
Total revenue rose 67% to $40.4 million for the second quarter of 2000 as
compared to $24.2 million for the same time period in 1999. Total expenses
increased 85% from $19.6 million for the second quarter of 1999 to $36.2 million
for the same time period in 2000. Income before provision for income taxes
decreased 7% to $4.2 million for the three months ended June 30, 2000, as
compared to $4.6 million for the same period in 1999. Net income decreased 10%
to $2.5 million for the three months ended June 30, 2000 from $2.8 million for
the same period in 1999. During the quarter ended June 30, 2000, sales and
marketing expense increased 136% to $11.4 million from $4.9 million for the
second quarter of 1999. In addition to the increase in sales and marketing
expense, interest expense, cost of property sold, and general and administrative
costs contributed to the increase in total expense. The increase in both
revenues and expenses, and the decrease in net income, is largely due to the
addition of operating results associated with the acquisition of Peppertree
Resorts, Ltd. and certain of its affiliates ("Peppertree") in November of 1999.
Revenue and expenses relating to two earlier acquisitions, those of Eastern
Resorts in August of 1998, and several properties formerly owned by Kosmas Group
International (the "KGI" properties) in March of 1999, are included in the
figures for the quarter ended June 30, 1999.
Since the Peppertree acquisition in November 1999, the sales and marketing
program of Peppertree has operated at a significantly higher cost level, as a
percentage of vacation ownership interval ("VOI") sales revenue, than the
Company's non-Peppertree sales centers. The Company believes this is in part a
result of the long term effects of the severe hurricane-related flooding
experienced throughout many of Peppertree's marketing areas in the fall of 1999.
However, it also reflects a higher cost structure and cost per tour than exists
on average in the Company's non-Peppertree sales centers.
During the first quarter of 2000, Peppertree sales and marketing costs
were 50.9% of VOI sales, compared to 43.5% for the non-Peppertree resorts.
During the second quarter, Peppertree sales and marketing costs rose to 52.3%,
compared to sales and marketing costs for the Company's non-Peppertree resorts
of 44.0%. Throughout the first and second quarters of 2000 the Company
specifically sought to bring Peppertree's marketing costs into line with the
Company's experience at other locations, though the Company unsuccessfully
attempted to make such cost reductions through the former Peppertree senior
managers. At the beginning of June, 2000, the Company replaced the former
director of sales and marketing for Peppertree, and the former Peppertree Chief
Financial Officer left the Company at the same time. The Company has also begun
to reduce staffing levels both in call centers and at individual sales centers
of Peppertree. Sales commission levels, the number of managerial staff in sales
centers and regional headquarters staffing in Asheville, NC have also all been
reduced, along with other steps designed to reduce excessive Peppertree costs.
The Company anticipates that the Peppertree sales and marketing costs as a
percentage of VOI sales will decline during the balance of 2000 as a result of
cost-cutting measures, though the Company does not know whether cost levels
equal to the historic levels experienced at the non-Peppertree sales centers
will be achieved during the balance of the year.
In addition to Peppertree's margins being out of line with the Company's
experience in other locations, during the first and second quarters Peppertree
has experienced lower sales
16
volume than 1999 levels. This reflects a sharp decline in the number of tours at
Peppertree sales centers during the first half of 2000 compared to the
comparable period in 1999. The number of net qualified tours at Peppertree sales
center in the first quarter of 2000 was only approximately 67.7% of the number
of net tours during the first quarter of 1999. During the quarter ended June 30,
2000, the number of net tours at Peppertree rose to 88% of the number of net
tours during the second quarter of 1999. However, net tours in June of 2000
exceeded the total for June of 1999 by approximately 5.7%. In part due to the
fact that tour generation fixed costs were spread over a sharply reduced number
of tours during the first quarter, and to a lesser but still significant extent
during the second quarter, the overall Peppertree cost per tour increased
substantially in the first half of 2000. Based on experience to date, this
situation of lower number of tours and higher costs per tour has been
substantially improved since the replacement of former Peppertree management in
early June, 2000. The Company believes that the reduction in the number of tours
experienced early in 2000 and continuing into a portion of the second quarter
was largely attributable to the hurricane-related flooding and other severe
weather conditions in many of the core Peppertree marketing areas, and that
these factors were compounded by inadequate management. Barring unforeseen
developments, the Company anticipates that net tours and gross sales volumes
will continue to show recovery from the depressed levels experienced earlier in
2000, though there is no assurance that the number of tours , gross sales volume
or sales profit margins will improve over current levels, or will not in fact
decline compared with current or historic levels.
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 58% to $9.6 million for the second quarter
of 2000 from $6.1 million for the same time period in 1999, primarily due to
higher average outstanding balances on the loan portfolio of approximately $90
million for the second quarter of 2000. In addition, the weighted average
interest rate on the loan portfolio increased approximately 70 basis points. The
increase in the portfolio was due principally to the addition of owned 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 consumer loan portfolio increased to 91% of
total interest income for the second quarter of 2000, compared to 81% of
interest income for the same period in 1999. The percentage increase is
primarily due to higher average outstanding balances of the owned consumer
portfolio, and to a lesser degree to declining average outstanding balances of
acquisition, development, and construction loans ("A&D Loans").
Interest on A&D Loans decreased 35% to $0.7 million for the second quarter
of 2000 from $1.1 million for the same period in 1999, mainly due to lower
average outstanding balances due to the elimination in consolidation of
businesses acquired after March 25, 1999. A&D Loan originations declined 43%
from $4.9 million for the second quarter of 1999 to $2.8 million for the same
period in 2000, while third party consumer loan receivable originations declined
approximately 25% to $14.8 million for the second quarter of 2000 from $19.7
million for the second quarter of 1999. The decline in A&D loan originations is
principally attributable to a shift in the Company's strategy for building its
consumer loan portfolio from relying on third party A&D loans to growing captive
originations from its own resort activities.
17
VOI Sales
VOI sales revenues increased 108% to $23.8 million for the second quarter
of 2000, from $11.4 million for the same time period in 1999. The increase in
VOI sales revenues is largely due to the impact of the Peppertree acquisition
and increased sales volume at certain resort locations. VOI sales revenues at
the resorts the Company owned as of June 30, 1999 increased 6% to $12.0 million
for the second quarter of 2000, from $11.4 for the same period in 1999, while
Peppertree sales revenues represented an increase of $11.8 million for the
second quarter of 2000. Vacation ownership sales revenue increased to 59% of
total revenue for the second quarter of 2000, as compared to 47% for the same
period in 1999. The Company now owns or manages 30 timeshare resort locations
with a completed VOI inventory of approximately 27,236 VOI's at June 30, 2000.
This represented an aggregate gross sales value of more than $315 million at the
average sales price per interval during the quarter ended June 30, 2000. The
Company operates 17 sales centers, nine of which sell points in the Company's
vacation club rather than traditional VOIs.
The following tables sets forth the number of timeshare intervals sold and
the average sales price per timeshare interval:
Three Months Ended
June 30, June 30,
2000 1999
------- -------
Timeshare intervals sold, fixed weeks only 1,008 1,075
Average Sales Price per fixed week interval $11,684 $10,615
Number of VOI's in inventory at period end 27,236 26,011
As a result of the Peppertree acquisition, nine of the Company's sales
centers sell points in its vacation club rather than traditional timeshare
weeks. Pricing policies for club points involve a greater range of variation due
to different sizes of points packages than prices for fixed or floating week
VOI's. Therefore, statistics concerning "average sales price" no longer
correlate directly to prior measures of average sale price. Similarly, sales of
biennial VOI's are counted as sale of an interval, though the customer pays a
lower absolute price for his or her alternate year usage rights. Inclusion of
biennial sales tends to lower the average sales price per interval, though the
available number of VOIs in inventory would be much greater if used as biennials
rather than as whole weeks or their equivalent in points. Based on all the
foregoing factors, the stated average sales price per timeshare interval may not
reflect fully the actual revenues received for each equivalent to a whole week
of resort usage.
Resort Operations
Resort operations revenue totaled $6.7 million for the second quarter of
2000, as compared to $6.3 million for 1999. The increase in resort operations is
largely due to the impact of the Peppertree acquisition. Resort management
expenses as a percentage of resort operation revenue decreased to 74% for the
second quarter of 2000 compared with 81% 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 resort management. In addition, resort management income and
related expense decreased at certain locations due to management's decision to
lease certain restaurant locations.
18
Other Income
Other income increased 2% to $0.4 million for the second quarter of 2000
as compared to $0.4 million for the same time period in 1999. The increase in
other income is primarily due to other income associated with acquisition
properties.
Provision For Doubtful Receivables
The provision for doubtful receivables increased 383% to $1.9 million for
the second quarter of 2000 from $0.4 million for the same time period in 1999.
The increase in the provision for doubtful accounts results in part from the
sharp increase in consumer receivables generated from the acquisition-related
properties. However, the increase also reflects a decision by management to
increase the Company's provisions for doubtful receivables from 3.5% of VOI
sales during the second quarter of 1999 to 8% of VOI sales during the second
quarter of 2000. This increase reflects what the Company's Target Reserve
Methodology suggests is a more appropriate long term rate of provisioning. The
increased percentage rate of provisioning for doubtful receivables in effect
during the second quarter of 2000 increased the dollar amount of provisions in
the second quarter of 2000 by approximately $1.1 million compared with what it
would have been under the rate of provisioning in effect during the second
quarter of 1999. The Company assumes all default risk for receivables relating
to purchases of VOI's in the Company's own resorts. However, the Company has a
right to put defaulted consumer receivables relating to consumer purchases in
third party resorts to the third party developers. Thus, as the proportion of
the Company's total consumer loan portfolio that relates to the Company's own
resorts grows, the total level of provisioning for doubtful receivables relating
to the Company's own sales becomes more significant.
The Company has established a Minimum Target Reserve 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 June 30, 2000 as compared to June 30,
1999:
19
Allowance for Doubtful Accounts
(in thousands)
Quarter Ended
06/30/00 06/30/99
-------- --------
Allowance for doubtful accounts,
Beginning of period 10,014 4,929
Allowance related to an acquisition 501 1,325
Provision for loan losses 1,906 394
Charges to allowance for doubtful accounts (1,866) (16)
Recoveries 249 -0-
------- -------
Allowance for doubtful accounts, end of period 10,804 6,632
As a % of total loans 4.0% 3.6%
At June 30, 2000, the Company had total reserves (including over
collateralization on the Hypothecation Loans) for its loan portfolio (including
consumer receivable and acquisition and development loans) equal to $33.9
million or 12.6% of total loans. This represented a reserve coverage ratio
("RCR") of 4.4 times the $7.7 million of consumer receivables that were 60 days
past due at June 30, 2000 on the entire consumer note receivable portfolio.
Included in this amount were total reserves and over collateralization of $23.2
million on third party consumer receivables or approximately 19.9% of the
outstanding consumer receivables portfolio attributable to third party resorts.
This represented an RCR of 11.8 times the $1.9 million of such receivables that
were 60 or more days past due at June 30, 2000.
At June 30, 2000 the Company maintained an aggregate allowance for
doubtful receivables of $10.8 million, or 7.9% of the outstanding consumer
receivable portfolio from owned resorts. This represented an RCR of 1.9 times
the approximate $5.7 million in consumer receivables from owned resorts that
were 60 days past due as of that date. The $10.8 million aggregate allowance for
doubtful receivables at June 30, 2000 represented an increase of 63% compared
with $6.6 million at June 30, 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.
20
The following table sets forth the portfolio performance of the consumer
receivable portfolio at June 30, 2000:
Consumer Receivable Loan Portfolio
As of June 30, 2000
(In Thousands)
Current 30 - 59 days 60 - 89 days 90+ days Total
------- ------------ ------------ -------- -----
Owned Resorts $ 129,138 $ 2,721 $ 1,947 $ 3,801 $137,607
93.8% 2.0% 1.4% 2.8% 100.0%
Third Party (1) $ 111,996 $ 2,577 $ 1,196 $ 767 $116,536
96.1% 2.2% 1.0% 0.7% 100.0%
Total $ 241,134 $ 5,298 $ 3,143 $ 4,568 $254,143
94.9% 2.1% 1.2% 1.8% 100.0%
(1) Includes the consumer receivables that collateralize the hypothecation
loans.
At June 30, 2000, 94.9% of the consumer receivable portfolio was current,
and there were 787 notes with a principal balance of $4.6 million that were over
91 days past due. Of this amount, $3.8 million were notes relating to the
consumer receivables in the Company's resorts. During the second quarter of
2000, the company wrote off 373 consumer notes with an outstanding principal
balance of $2.5 million. With limited exceptions, the Company services the loans
in its portfolio internally, using its own personnel and facilities. However,
loans owned by Peppertree are the subject to a long term outsourcing contract
for collection services with an affiliate of Interval International. To date the
collections performance of the outsourcing collections provider appears to be
appreciably worse than the historic performance of the Company's internal
collections staff.
Interest Expense
Interest expense, net of capitalized amounts, increased 100% to $6.5
million for the second quarter of 2000 as compared to $3.2 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 $100 million, while the weighted average interest rate on
outstanding debt increased from 6.9% for second quarter of 1999 to 9.1% for the
second quarter of 2000. The sharp increase in the weighted average interest rate
on outstanding debt is primarily attributable to the assumption by the Company
of Peppertree debt with interest rates significantly higher than the Company's
average cost of funds. As outstanding Peppertree debt at higher rates is repaid,
the Company's weighted average cost of funds is expected to decline, though
total interest expense will continue to be driven by the higher amount of
outstanding debt.
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
21
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 second quarter of 2000
totaled $5.6 million or 23.7% of VOI revenue, compared to $2.7 million for the
second quarter of 1999, or 23.8% of VOI revenue. The increase in cost of
timeshare intervals sold is primarily due to increased sales volume as the
percentage of VOI cost of sales actually fell slightly.
Depreciation and Amortization
Depreciation and amortization increased 44% to $1.2 million for the second
quarter of 2000 from $0.9 million for the same period in 1999. The increase is
primarily due to $0.3 million increase associated with depreciation expense, and
$0.2 million increase associated with goodwill amortization. These increases are
a result of the impact of the Peppertree acquisition the Company completed in
1999.
Goodwill amortization increased 102% to $0.3 million for the second
quarter of 2000 from $0.2 million for the same period in 1999 and represented
68% 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 of the properties totaled $0.3 million and accounts for 46%
of the increase in depreciation and amortization expense. 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 $11.4 million for the second
quarter of 2000 from $4.9 million for the same time period in 1999. Sales and
marketing expense increased to 48.1% as a percentage of VOI revenue for the
second quarter of 2000, compared to 42.5% for the same period in 1999. The
increase in total sales and marketing expense is largely due to the inclusion of
operating results from Peppertree. During the second quarter of 2000
Peppertree's sales and marketing expense as a percent of VOI sales was 52.3% as
compared to 44.0% for the Company's non-Peppertree sales centers during the same
period. 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 second quarter of 2000 totaled $5.0
million, or 74% of resort operations revenue, as compared $5.1 million, or 81%
of resort operations revenue, for the comparable period in 1999. The decline in
resort management expenses as a percentage of resort operations revenue reflects
management's efforts to improve efficiency in this area.
22
General and Administrative
General and administrative expense increased 85% to $4.5 million for the
second quarter of 2000 from $2.4 million for the same period in 1999. The
increased costs are attributable to the inclusion of general and administrative
costs associated with Peppertree, which represented 84% of the total increase in
general and administrative costs. The following items also contributed to the
increase in general and administrative expense: payroll costs, outside service
costs, and servicing fees due to growth of the Company.
General and administrative expense as a percentage of total revenue
increased to 11.2% of total revenue for the second quarter of 2000, compared
with 10.1% of total revenue for the second quarter of 1999. 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 second quarter of 2000 decreased 1%
to $1.8 million from $1.8 million for the same period in 1999. The decrease is
attributable to the decrease in pretax income during the second quarter of 2000
as compared to the same period in 1999. The provision for income taxes
represents approximately 42% and 40% of pretax income for the second quarter of
2000 and 1999, respectively
23
SIX MONTHS ENDED JUNE 30, 2000
June 30, 2000 Compared to June 30, 1999
During the six months ended June 30, 2000, the Company's results included
all the acquisition properties. These are Eastern Resorts, acquired in August
1998, the KGI Properties, acquired March 25, 1999, and Peppertree, acquired
November 17, 1999. Therefore, the six months ended June 30, 1999 include Eastern
Resorts for the entire period, but the former KGI properties only for the period
March 25 through June 30, 1999. The six month period ended June 30, 2000
contains Eastern Resorts, Peppertree and the KGI Properties for the full period.
Net Income
Total revenue rose 119% to $78.6 million for the first six months of 2000
as compared to $35.9 million for the same time period in 1999. Income before
provision for income taxes increased 21% to $8.9 million for the six months
ended June 30, 2000, as compared to $7.3 million for the same period in 1999.
Net income increased 18% to $5.1 million for the six months ended June 30, 2000
from $4.3 million for the same period in 1999. Growth in revenue, expense and
net income is largely due to the addition of the acquired properties.
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 63% to $18.9 million for the first six
months of 2000 from $11.6 million for the same time period in 1999, primarily
due to higher average outstanding balances on the loan portfolio of
approximately $100 million for the first six months of 2000. In addition, the
weighted average interest rate on the loan portfolio increased approximately 70
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 consumer loan portfolio increased to 91% of
total interest income for the first six months of 2000, compared to 80% of
interest income for the same period in 1999. The increase is primarily due
higher average outstanding balances of the owned consumer portfolio.
Interest on acquisition, development, and construction loans ("A&D Loans")
decreased 33% to $1.5 million for the first six months of 2000 from $2.3 million
for the same period in 1999, mainly due to lower average outstanding balances
due to the elimination in consolidation of businesses acquired after March 25,
1999. A&D Loan originations declined 44% from $11.7 million for the first six
months of 1999 to $6.5 million for the same period in 2000, while third party
consumer loan receivables originations declined approximately 26% from $37.1
million for the first six months of 1999 to $27.6 million for the first six
months of 2000. The decline in A&D loan originations is attributable to a shift
in the Company's consumer loan growth strategy from generating receivables
through new A&D lending to relying more on captive originations from sale of
VOI's in the Company's own resorts.
24
VOI Sales
VOI sales revenues increased to $46.2 million for the six months ended
June 30, 2000, from $16.3 million for the same time period in 1999. Vacation
ownership sales revenue increased to 59% of total revenue for the first six
months of 2000 as compared to 46% for the same period in 1999. The increase in
VOI sales revenues is largely due to the impact of two acquisitions that the
Company completed in 1999. The Company now owns or manages 30 timeshare resort
locations with a completed inventory of approximately 27,236 VOIs. The Company
operates 17 sales centers, 9 of which sell points in the Company's vacation
club.
The following tables sets forth the number of timeshare intervals sold and
the average sales price per timeshare interval:
Six months Ended
June 30, June 30,
2000 1999
------- -------
Timeshare intervals sold, fixed weeks only 2,151 1,560
Average Sales Price per fixed week interval $11,456 $10,476
Number of VOI's in inventory at period end 27,236 26,011
As a result of the Peppertree acquisition, nine of the Company's sales
centers sell points in its vacation club rather than traditional timeshare
weeks. Pricing policies for club points involve a greater range of variation due
to different sizes of points packages than prices for fixed or floating week
VOI's. Therefore, statistics concerning "average sales price" no longer
correlate directly to prior measures of average sale price. Similarly, sales of
biennial VOI's are counted as sale of an interval, though the customer pays a
lower absolute price for his or her alternate year usage rights. Inclusion of
biennial sales tends to lower the average sales price per interval, though the
available number of VOIs in inventory would be much greater if used as biennials
rather than as whole weeks or their equivalent in points. Based on all the
foregoing factors, the stated average sales price per timeshare interval may not
reflect fully the actual revenues received for each equivalent to a whole week
of resort usage.
Resort Operations
Resort operations revenue totaled $12.7 million for the first six months
of 2000, as compared to $7.3 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 71% for the first six months of 2000 compared with 82% for the same
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.
Other Income
Other income increased 21% to $0.8 million for the six months ended June
30, 2000 as compared to $0.6 million for the same time period in 1999. The
increase in other income is primarily due to other income associated with
acquisition properties and in part due to an increase in service income
associated with consumer receivables. Other income associated with acquisition
properties represented 96% of the increase in other income.
25
Provision For Doubtful Receivables
The provision for doubtful receivables increased 345% to $3.7 million for
the first six months of 2000 from $0.8 million for the same time period in 1999.
The increase in the provision for doubtful accounts results in part from the
sharp increase in consumer receivables generated from the acquisition-related
properties. However, the increase also reflects a decision by management to
increase the Company's provisions for doubtful receivables from 3.5% of VOI
sales during the first half of 1999 to 8% of VOI sales during the first half of
2000. This increase reflects what the Company's Target Reserve Methodology
suggests is a more appropriate long term rate of provisioning. The increased
percentage rate of provisioning for doubtful receivables in effect during the
first half of 2000 increased the dollar amount of provisions in the first half
of 2000 by approximately $2.1 million compared with what it would have been
under the rate of provisioning in effect during the first half of 1999. The
Company assumes all default risk for receivables relating to purchases of VOI's
in the Company's own resorts. However, the Company has a right to put defaulted
consumer receivables relating to consumer purchases in third party resorts to
the third party developers. Thus, as the proportion of the Company's total
consumer loan portfolio that relates to the Company's own resorts grows, the
total level of provisioning for doubtful receivables relating to the Company's
own sales becomes more significant.
The Company 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 June 30, 2000 as compared to June 30,
1999:
Allowance for Doubtful Accounts
(in thousands)
06/30/00 06/30/99
-------- --------
Allowance for doubtful accounts,
Beginning of period 10,073 3,835
Allowance related to an acquisition 501 2,157
Provision for loan losses 3,689 829
Charges to allowance for doubtful accounts (3,729) (189)
Recoveries 270 -0-
------- -------
Allowance for doubtful accounts, end of period 10,804 6,632
As a % of total loans 4.0% 3.6%
26
At June 30, 2000, the Company had total reserves (including over
collateralization on the Hypothecation Loans) for its loan portfolio (including
consumer receivable and acquisition and development loans) equal to $33.9
million or 12.6% of total loans. This represented a reserve coverage ratio
("RCR") of 4.4 times the $7.7 million of consumer receivables that were 60 days
past due at June 30, 2000 on the entire consumer note receivable portfolio.
Included in this amount were total reserves and over collateralization of $23.2
million on third party consumer receivables or approximately 19.9% of the
outstanding consumer receivables portfolio attributable to third party resorts.
This represented an RCR of 11.8 times the $1.9 million of such receivables that
were 60 or more days past due at June 30, 2000.
At June 30, 2000 the Company maintained an aggregate allowance for
doubtful receivables of $10.8 million, or 7.9% of the outstanding consumer
receivable portfolio from owned resorts. This represented an RCR of 1.9 times
the approximate $5.7 million in consumer receivables from owned resorts that
were 60 days past due as of that date. The $10.8 million aggregate allowance for
doubtful receivables at June 30, 2000 represented an increase of 63% compared
with $6.6 million at June 30, 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 Eastern Resorts, 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 June 30, 2000:
Consumer Receivable Loan Portfolio
As of June 30, 2000
(In Thousands)
Current 30 - 59 days 60 - 89 days 90+ days Total
------- ------------ ------------ -------- -----
Owned Resorts $128,870 $2,721 $1,947 $3,801 $137,339
93.8% 2.0% 1.4% 2.8% 100.0%
Third Party (1) $111,995 $2,577 $1,196 $ 767 $116,536
96.1% 2.2% 1.0% 0.7% 100.0%
Total $240,866 $5,298 $3,143 $4,568 $253,875
94.9% 2.1% 1.2% 1.8% 100.0%
(1) Includes the consumer receivables that collateralize the hypothecation
loans.
At June 30, 2000, 94.9% of the consumer receivable portfolio was current,
and there were notes with a principal balance of $4.6 million that were over 91
days past due. Of this amount, $3.8 million were notes relating to the consumer
receivables in the Company's resorts. During the first six months of 2000, the
company wrote off 765 consumer notes with an outstanding principal balance of
$5.2 million. With limited exceptions, the Company services the loans in its
27
portfolio internally, using its own personnel and facilities, although loans
currently owned by Peppertree are the subject of outsourcing arrangements for
collection services.
Interest Expense
Interest expense, net of capitalized amounts, increased 130% to $12.5
million for the first six months of 2000 as compared to $5.5 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 $130 million, while the weighted average interest rate on
outstanding debt increased from 6.7% for the first six months of 1999 to 8.8%
for the first six months of 2000. The increase in the weighted average interest
rate reflects the assumption by the Company of debt relating to Peppertree at
higher interest costs than the Company's own cost of capital. As former
Peppertree loan facilities are repaid, the weighted average cost of outstanding
debt will decline.
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 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 six months of 2000
totaled $11.1 million or 23.9% of VOI revenue, compared to $3.9 million for the
six months ended June 30, 1999, or 23.8% of VOI revenue. The increase in cost of
timeshare intervals sold is primarily due to the inclusion of operating results
for the Peppertree acquisition and increased sales volume.
Depreciation and Amortization
Depreciation and amortization increased 49% to $2.4 million for the first
six months of 2000 from $1.6 million for the same period in 1999. The increase
is primarily due to $0.5 million increase associated with depreciation expense,
and $0.4 million increase associated with goodwill amortization. These increases
are a result of the impact of the two acquisitions the Company completed in
1999.
Goodwill amortization increased 121% to $0.8 million for the first six
months of 2000 from $0.3 million for the same period in 1999 and represented 53%
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 of the properties totaled $0.6 million and accounts for 69%
of the increase in depreciation and amortization expenses. 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 $21.9 million for the first six
months of 2000 from $7.0 million for the same time period in 1999. Sales and
marketing expense increased to 47.3% as a percentage of VOI revenue for the six
months of 2000, compared to 42.6% for the
28
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. Peppertree's sales and marketing expense as
a percent of VOI sales for the six months of 2000 was 51.7%, compared to an
aggregate of 43.7% for the non-Peppertree sales centers. Although the former
Peppertree sales and marketing senior management has now been replaced, there is
no assurance that the excessive sales and marketing costs at Peppertree will be
corrected during the balance of 2000, or thereafter.
Resort Management
Resort management expense for the six months ended June 30, 2000 totaled
$9.0 million, or 71% of resort operations revenue, as compared $6.0 million, or
82% 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.
General and Administrative
General and administrative expense increased 141% to $9.2 million for the
first six months of 2000 from $3.8 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 83% of the
total increase in general and administrative costs. The following items also
contributed to the increase in general and administrative expense: payroll
costs, outside service costs, and servicing fees due to growth of the Company.
General and administrative expense as a percent of total revenue increased
to 11.8% of total revenue for the six months ended June 30, 2000, compared with
10.7% of total revenue for the same period in 1999. 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 six months ended June 30, 2000
increased 24% to $3.7 million from $3.0 million for the same period in 1999. The
increase is attributable to the increase in pretax income during the first six
months of 2000 as compared to the same period in 1999. The provision for income
taxes represents approximately 42% and 41% of pretax income for the first six
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.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In January 1996, Mr. Joseph Mooney, a former officer of the Company, filed
a lawsuit in the Circuit Court of Broward County, Florida against the Company
and certain other defendants, seeking damages in excess of $1.1 million. The
Company in turn filed counterclaims against Mr. Mooney.
The Court denied Mr. Mooney's claim for tortious interference and, in
June, 1999, the Court dismissed with prejudice all other complaints of Mr.
Mooney's against the Company. Mr. Mooney appealed the dismissal to the Fourth
District Court of Appeals. On May 24, 2000, the Florida Appellate Court affirmed
the Trial Court's dismissal with prejudice of Mr. Mooney's claims against the
Company. The Company is still participating in this action as it relates to any
interest it has on outstanding claims by Mr. Mooney against the remaining
defendants in this action.
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 timeshare
condominium project known as Riverside Suites in San Antonio, Texas (the "San
Antonio Project") out of an existing building along the San Antonio Riverwalk.
Certain disputes arose between Riverside, Resort Funding and contractors in
respect to work performed at the San Antonio Project. As a result, various
contractors filed liens against the San Antonio Project, and M. J. Boyle, the
General Contractor for the San Antonio Project, filed 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 for work performed
in connection with the San Antonio Project (the "Lien Action").
On April 18, 2000, the parties entered into a Settlement Agreement whereby
Resort Funding agreed to make, and has made, certain payments to M. J. Boyle, in
satisfaction of Boyle's outstanding claims. Riverside and Resort Funding entered
into a second Settlement Agreement whereby Equivest Texas, Inc. ("Equivest
Texas") a wholly owned subsidiary of the Company, took possession of the Resort
by a deed in lieu of foreclosure on May 3, 2000, and agreed to assume certain
payment obligations in connection therewith. Equivest Texas now operates the San
Antonio Project as a timeshare resort hotel, as part of the Company's resort
network.
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, and the Company's Form 10-Q filed May 15,
2000, for the quarterly period ending March 31, 2000, which is incorporated
herein by reference.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
30
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. (a) Exhibits.
The following exhibits are filed herewith:
10.1 Second Amendment Agreement dated as of August 4, 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.
10.2 Loan and Security Agreement by and between FINOVA Capital
Corporation and Eastern Resorts Company, LLC., dated as of June 15,
2000.
10.3 Registration Rights Agreement entered into as of the 16th day of
November, 1999, by and among Equivest Finance, Inc., and C. Wayne
Kinser, the Sharon Kay Williamson Charitable Remainder Unitrust, the
David Wayne Kinser Charitable Remainder Unitrust, Donald Clayton,
John McFarland and Herbert Patrick, Jr.
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the quarter
covered by this report:
(i) May 11, 2000 Form 8-K announcing record first quarter revenues and
earnings; earnings per share increase 50%.
(ii) May 16, 2000 Form 8-K announcing retention of UBS Warburg by Bennett
Funding Estate to consider strategic alternatives.
31
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, Jr.
Senior Vice President and Chief Financial Officer
Dated: August 14, 2000
32