UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
Commission File Number: 0-18201
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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: (888) 373-7678
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 March 31, 1999, 25,688,351 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-QSB
QUARTER ENDED MARCH 31, 1999
INDEX
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Financial Information: 3
Consolidated Balance Sheets - March 31, 1999(unaudited)
and December 31, 1998 3
Unaudited Consolidated Income Statements -
Three Months Ended March 31, 1999 and 1998 4
Unaudited Consolidated Statement of Equity Accounts 5
Unaudited Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Interim Consolidated Financial Information 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 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 19
SIGNATURES 20
2
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,1999 December 31,
------------- ------------
ASSETS (Unaudited) 1998
----------- ----
Cash and cash equivalents $ 4,404,183 $ 3,486,720
Receivables, net 156,223,212 142,326,363
Investment in real estate joint venture 3,698,865 2,971,207
Inventory 60,125,652 10,361,151
Deferred financing costs, net 3,271,831 3,755,600
Cash - restricted 1,294,118 1,422,459
Accrued interest receivable 1,214,435 971,026
Property and equipment, net 10,637,862 3,048,252
Goodwill, net 27,075,340 27,247,483
Stock registration costs 1,610,263 1,479,681
Other assets 2,189,792 314,521
------------ ------------
Total Assets $271,745,553 $197,384,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable 6,299,958 2,212,975
Accrued expenses and other liabilities 10,551,691 3,985,402
Taxes payable 4,824,131 1,994,381
Deferred income taxes 2,568,464 2,568,465
Notes payable 190,446,369 133,116,985
------------ ------------
Total Liabilities 214,690,613 143,878,208
------------ ------------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--
Series 2 Class A, $3 par value;
15,000 shares authorized,
10,000 shares outstanding 30,000 30,000
Common Stock, $.01 par value; 50,000,000
shares authorized, 25,688,351 shares
outstanding in 1999 and 25,198,351
outstanding in 1998 256,884 251,984
Additional paid-in capital 51,070,566 49,115,466
Retained earnings 5,697,490 4,108,805
------------ ------------
57,054,940 53,506,255
------------ ------------
$271,745,553 $197,384,463
============ ============
3
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended March 31,
------------------------
1999 1998
---- ----
REVENUE
Interest $ 5,521,093 $ 4,768,803
Timeshare interval sales 4,932,236 -0-
Resort operations 2,270,526 -0-
Other income 290,240 314,135
----------- -----------
13,014,095 5,082,938
----------- -----------
COSTS AND EXPENSES
Interest 2,221,176 1,653,228
Cost of timeshare intervals sold 1,174,328 -0-
Sales and marketing 2,117,720 -0-
Resort management 2,133,683 -0-
Depreciation and amortization 747,641 341,103
Provision for doubtful receivables 434,820 225,000
General and administrative 1,396,042 756,609
----------- -----------
10,225,410 2,975,940
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,788,685 2,106,998
PROVISION FOR INCOME TAXES 1,200,000 655,000
----------- -----------
NET INCOME $ 1,588,685 $ 1,451,998
=========== ===========
Basic earnings per common share $ 0.06 $ 0.06
=========== ===========
Diluted earnings per common share $ 0.06 $ 0.06
=========== ===========
4
See Accompanying Notes to Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS
Redeemable
Preferred Retained
Common Stock Additional Paid Stock-Series 2 Earnings
Total Shares Amount in Capital Class A (Deficit)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 $53,506,255 $25,198,351 $ 251,984 $49,115,466 $ 30,000 $ 4,108,805
Common stock issued for debt
on Kosmas Group International
Inc. properties acquisition
(see Note C) 1,960,000 490,000 4,900 1,955,100
Net Income 1,588,685 1,588,685
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 1999 $57,054,940 $25,688,351 $ 256,884 $51,070,566 $ 30,000 $ 5,697,490
=========== =========== =========== =========== =========== ===========
5
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW
3 Months Ended March 31,
1999 1998
------------ -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES
Net Income $ 1,588,695 $ 1,451,998
Adjustments to reconcile net income to
net cash (used in) operating activities:
Amortization and depreciation 738,533 315,801
Provision for doubtful receivables 434,820 225,000
Changes in assets and liabilities, net of
effects from purchase of KGI
Other assets (534,518) (402,091)
Inventory (195,187) -0-
Accounts receivable - related parties -0- (36,042)
Restricted cash 221,331 13,774
Accounts payable and accrued expenses 521,074 766,163
Accounts payable--related parties -0- (11,235)
Income taxes payable (670,250) -0-
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,104,498 2,323,368
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (4,727,996) (6,448,457)
Sale (purchase) of equipment (1,103) -0-
Investment in joint venture (727,658) -0-
Partial payment on purchase of KGI, net
of cash acquired of $762,706 (763,324) -0-
------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (6,220,081) (6,448,457)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes receivable - related
party 315,566 1,084,413
Proceeds from recourse notes payable 19,908,995 7,154,117
Payments on recourse notes payable (14,619,786) (6,470,192)
Proceeds from non-recourse notes payable -0- 1,382,118
Payments on non-recourse notes payable (571,729) (918,069)
Payment of preferred stock dividends -0- (8,819)
Redemption of preferred stock -0- (7,800)
------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5,033,046 2,215,768
------------ -----------
INCREASE (DECREASE) IN CASH 917,463 (1,909,321)
Cash at beginning of period 3,486,720 4,620,479
------------ -----------
CASH AT END OF PERIOD $ 4,404,183 $ 2,711,158
============ ===========
6
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated interim financial statements as of March 31,
1999 and 1998 and for the three-month period ended March 31, 1999 and 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Rule
10-01 of Regulation S-X. Accordingly, they 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, 1999 are
not necessarily indicative of the results expected for the year ended December
31, 1999. 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, 1998.
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. ("Resort Funding") and its subsidiary, BFICP Corporation,
Eastern Resorts Corporation and its subsidiary, Long Wharf Marina Restaurant,
Inc. (collectively, "Eastern Resorts") and, as of March 26, 1999, Bluebeard's
Castle, Inc., Castle Acquisition, Inc., Avenue Plaza LLC, Ocean City Coconut
Malorie, Inc., St. Augustine Resort Development Group, Inc. and EFI D.C.
Acquisition, Inc. (see Note C). 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.
Interest Income
The Company recognizes interest income on consumer financing contracts
using the interest method over the term of the contract. The Company recognizes
interest income on outstanding resort acquisition and development loans when
earned, based on the terms of the loan agreements. The accrual of interest on an
impaired loan is discontinued when accrued and unpaid interest, together with
the loan principal outstanding, exceeds the loan's projected cash flow or the
loan's net collateral value.
7
Vacation Ownership
Vacation ownership revenue represents sales of timeshare intervals on the
accrual basis. Revenue is recognized after a binding sales contract has been
executed, a 10% minimum down payment has been received, and the statutory
rescission period has expired. If all other criteria are met but construction of
the unit to which the timeshare interval relates is not substantially complete,
revenue is recognized on the percentage of completion basis.
Resort Operations
Resort operations' income represents income received by the Company for
management services provided to homeowners associations at various resort
properties. These revenues are recognized on the accrual basis in the period in
which the services are provided.
Other Income
Other income primarily represents fees, which are recognized as income
when the Company performs the related service. These services include billing
services for developers, and loan commitment, chargeback and collection fees
charged to resorts.
Allowance for Doubtful Receivables
Receivables have been reduced by an allowance for doubtful receivables.
The allowance is an amount which management believes will be adequate to absorb
possible losses on existing receivables. The evaluation incorporates past loss
experience, known and inherent risks in the portfolio, adverse conditions that
may affect the borrower's ability to repay, the estimated value of underlying
collateral, and current economic conditions. Receivables are charged against the
allowance when management believes that collectibility is unlikely. Because of
uncertainties in the estimation process, it is at least reasonably possible that
management's estimate of loan losses inherent in the loan portfolio and the
related allowance will change in the near term.
The Company follows Statement of Financial Accounting Standards No. 114
(SFAS 114) "Accounting by Creditors for Impairment of a Loan". Under SFAS 114,
the allowance for doubtful receivables for loans identified as impaired is
specifically determined using the loan's projected discounted cash flow or its
net collateral value.
Inventory and Cost of Property 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 values of the
intervals sold. Intervals reacquired are placed back into inventory at the lower
of their original historical cost basis or market value.
Deferred Financing Costs
Deferred financing costs represent unamortized expenses associated with
issuing certain debt and fees payable pursuant to certain bank settlement
transactions and debt associated with the acquisition of Eastern Resorts.
Amortization of these costs is computed on a straight-line basis over the term
of the associated debt and does not differ materially from that computed using
the effective interest method.
8
Goodwill Amortization
Goodwill related to the acquisition of Eastern Resorts is being amortized
over a 40-year period.
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:
Restaurant/condominiums/office building/warehouse 39 years
Computers 5 years
Marina 7-10 years
Furniture and fixtures 7 years
Motor vehicles 5 years
Equipment 7 years
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
is an asset and liability approach to accounting for deferred income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. A valuation allowance reduces
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Earnings Per Share
The Company computes earnings per share under Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires
the presentation of earnings per share by all entities that have common stock or
potential common stock (such as options, warrants or convertible securities)
outstanding that trade in a public market. Those entities that have only common
stock outstanding present basic earnings per share amounts. All other entities
present basic and diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations.
C. Acquisition of Properties from Kosmas Group International, Inc.
On March 26, 1999, the Company completed its previously announced
acquisition of six timeshare vacation resorts, one resort development site,
management contracts and consumer notes receivable from Kosmas Group
International, Inc. ("KGI").
Bluebeard's Castle, Bluebeard's Beach Club and Resort and the Elysian
Beach Hotel and Resort, three of the resorts acquired by the Company, are
located in St. Thomas, U.S.V. I. These three properties currently include 311
units, with the ability to construct significant additional units. In addition,
the Company acquired the Avenue Plaza Hotel and Resort in New Orleans,
9
Louisiana, which currently has 265 units. The Avenue Plaza is located on St.
Charles Avenue in the Garden District of New Orleans. The Coconut Malorie Hotel
and Resort in Ocean City, Maryland has 85 units in an all-suite configuration,
and is located directly on the intra-coastal waterway. Finally, the Ocean Gate
Resort in St. Augustine, Florida, includes 24 two-and three-bedroom units on a
beachfront property. The Company also purchased rights to acquire two tracts of
additional contiguous land that will enable it to construct an additional 60
units in St. Augustine. The Company also acquired land on Pennsylvania Avenue in
Washington, D.C. on which it intends to construct a new timeshare resort of
approximately 65 units, using existing permits and plans.
The Company's acquisition involved cash consideration of $4 million, less
certain adjustments, and the assumption of approximately $72 million in debt or
other liabilities relating to the acquired resorts. In addition, the Company
agreed to purchase the interest of a third party with prior outstanding debt
relating to the St. Thomas properties, together with additional inventory in one
of the St. Thomas resorts, for $2 million in cash and 490,000 shares of Equivest
stock. The Company will also issue an additional 250,000 shares of its common
stock to KGI if the Company has at least $6 million in net income from the
acquired properties during the twelve months ending March 31, 2000. KGI and the
Company agreed to indemnify each other with respect to certain liabilities.
The purchase price and its allocation to assets acquired follows:
Purchase price
Cash $ 4,000,000
490,000 shares of common stock at $4.00 per share 1,960,000
Liabilities assumed 71,858,000
Other acquisition costs 750,000
===========
$78,568,000
===========
Estimated fair value of identifiable assets
including cash of $762,706 $78,568,000
===========
The following pro forma data presents the results of the combined entities
as if the purchase occurred at the beginning of each period presented. The pro
forma data is not indicative of the results of operations of the Company had the
purchase occurred on these dates, or of the results of future operations. It
does not include any adjustments for cost savings and other benefits which
management anticipates from the acquisition, and it assumes that the same price
would have been paid at an earlier time. Rather, the data reflects only the
direct effects of purchase accounting, interest expense and indebtedness
incurred, and necessary income tax adjustments.
The pro forma summary includes management's estimate of the historical
operating results of the businesses acquired on March 26, 1999. They have been
based on preliminary historical internal financial statements of KGI for the
periods and management's analytical review of certain amounts. The amounts may
be adjusted based on final compilation by the Company. Additionally, the pro
forma adjustments included in the summary are based upon the Company's
determination to date of the purchase price of the business acquired and its
allocation to the assets acquired. Because certain liabilities assumed have not
been finalized, the purchase
10
price is subject to change. Based on analyses completed to date, management does
not believe a change would materially affect the pro forma information. The
March 31, 1998 pro forma information includes the results from the purchase of
Eastern Resorts, which was effective August 28, 1998.
Pro Forma Data of Combined Entities
3 months ended March 31,
1999 1998
---- ----
Revenue $ 22,823,000 $ 22,131,000
============ ============
Income before provision for income taxes $ 3,078,000 $ 2,649,000
============ ============
Net Income $ 1,763,000 $ 1,706,000
============ ============
Basic earnings per common share $ 0.06 $ 0.06
============ ============
Diluted earnings per common share $ 0.06 $ 0.06
============ ============
D. Contingencies, Commitments and Liquidity
In September 1997, Resort Funding commenced foreclosure proceedings
against a resort property located in Hilton Head, South Carolina which was
approximately four months delinquent in payment of its obligations to Resort
Funding under an acquisition and development loan agreement. On March 17, 1998,
the developer filed an answer and counterclaims in the foreclosure action
alleging, among other things, that it was not in default of the loan agreements.
Resort Funding intends to pursue vigorously its claims and defend the
counterclaims. 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. 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, 1999, the principal balance owed to Resort Funding under
the referenced loan was approximately $3.4 million 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, 1999, 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.
When it acquired Eastern Resorts, the Company obtained the cash portion of
the purchase price in large part through the proceeds of a $12.2 million
short-term bridge loan (the "Bridge Loan") from Credit Suisse First Boston
Mortgage Capital LLC ("CSFB"). Also in connection with the Eastern Resorts
acquisition, approximately $11 million in acquisition and development loans and
consumer receivable loans previously extended by Resort Funding to the
predecessor corporation of Eastern Resorts were transferred out of the Company's
existing revolving credit facilities into a new short-term facility established
by CSFB (the "Affiliate Paper Facility"). In connection with the acquisition of
the properties from KGI, CSFB agreed to permit the Company to modify the
financial terms of the Affiliate Paper Facility to be consistent with the terms
of the Company's existing revolving credit facilities with CSFB. The Company
originally anticipated repaying the Bridge Loan through a public offering. In
the interim, the Company has been paying the facility down
11
through payments received on the notes pledged as collateral for the Bridge
Loan. The Bridge Loan matures on June 11, 1999.
As of March 31, 1999, the balance on the Bridge Loan was approximately
$2.8 million, down from the original borrowing of $12.2 million. The Bridge Loan
is collateralized in part with notes receivable and in part with a general lien
on unpledged assets of Eastern Resorts.
Because of a change in market conditions, the Company delayed the original
schedule of its proposed public offering. The Company is discussing replacing
the Bridge Loan with other lenders, and has received preliminary, non-binding
proposals for new and expanded liquidity facilities. However, it currently
anticipates that it will complete repayment of the Bridge Loan predominantly out
of internal cash flow. There can be no assurance that the Company will be
successful in obtaining new sources of financing on terms acceptable to it, or
that modifications of the current terms of such indebtedness will not result in
materially less favorable terms. The Bridge Loan contains cross default
provisions linked to the Company's pre-existing CSFB debt facilities.
E. 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, 1999:
- --------------------------------------------------------------------------------
Resort
Financing Development Total
- --------------------------------------------------------------------------------
Revenues from external customers $ 5,521,041 $ 7,493,054 $ 13,014,095
- --------------------------------------------------------------------------------
Intersegment revenues 180,517 138,695 319,212
- --------------------------------------------------------------------------------
Segment profit 2,196,079 977,852 3,173,931
- --------------------------------------------------------------------------------
Segment assets 188,944,441 98,308,707 287,253,148
- --------------------------------------------------------------------------------
Expenditures for segment assets 10,149 165,386 175,535
- --------------------------------------------------------------------------------
Reconciliation of total
segment profit to consolidated
income before income taxes:
- --------------------------------------------------------------------------------
Total segment profit 3,173,931
- --------------------------------------------------------------------------------
Unallocated corporate expenses 385,246
- --------------------------------------------------------------------------------
2,788,685
- --------------------------------------------------------------------------------
The expenditure for resort development assets includes the business
acquisition on March 26, 1999 as described in Note C. For the three months ended
March 31, 1998, the Company operated only in the financing business.
12
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.
Net income
Income before provision for income taxes increased 32% to $2.8 million for
the first quarter of 1999, as compared to $2.1 million for the same period in
1998. Net income increased 9.0% to $1.6 million for the first quarter of 1999
from $1.5 million for the same period in 1998. During the first quarter of 1999,
the Company made a provision for income taxes of $1.2 million, an 83% increase
over the $0.7 million provision for income taxes for the first quarter of 1998.
The increase in net income is primarily attributable to the inclusion of
operating results for Eastern Resorts and increased interest income resulting
from growth in the consumer portfolio. These increases were partially offset by
an increased provision for income taxes, higher selling, general and
administrative costs, an increase in interest expense, an increase in
debt-related costs and amortization, and the inclusion of expenses related to
Eastern Resorts.
Total revenue rose 156.0% to $13.0 million for the first three months of
1999 as compared to $5 million for the same time period in 1998. Revenue growth
is largely due to the addition of revenue associated with Eastern Resorts
totaling $8 million, coupled with increased portfolio growth in consumer
receivables financing. Total loan originations rose 36.2% to $26.4 million for
the first quarter ended March 31, 1999, compared to $19.4 million for the first
quarter ended March 31, 1998.
Interest income
Interest income on loans increased 16.0% to $5.5 million for the first
three months of 1999, from $4.7 million for the same period in 1998, mainly due
to the inclusion of $0.8 million in interest income related to Eastern Resorts.
In addition, growth in the consumer portfolio held for investment also
contributed to the increase in interest income, which was slightly offset by a
decline in interest rates. Interest income on consumer notes rose 6.0% to $3.5
million for the first three months of 1999 as compared to $3.3 million for the
same time period in 1998, and is attributable to the growth in the loan
portfolio. The average amount outstanding on the consumer
13
receivables portfolio for the first quarter of 1999 was approximately $12
million higher than the same period in 1998, although the average interest rate
dropped about 0.5%. Interest on acquisition, development and construction loans
("A,D & C Loans") decreased 13.0% to $1.2 million for the first quarter of 1999
from $1.3 million for the same period in 1998, predominantly due to lower
average outstanding balances. The average outstanding balance for A, D & C Loans
during the first three months of 1999 was approximately $7 million lower than
the same period in 1998. In addition, the average interest rates on such loans
declined approximately 0.7%.
Timeshare interval sales
During the first quarter of 1999, vacation ownership revenue totaled $4.9
million. The income associated with vacation ownership is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1998.
Resort operations
Resort operations for the first three months of 1999 totaled $2.3 million.
The revenue from resort operations is a result of the acquisition of Eastern
Resorts. Therefore, there is no corresponding amount for the same time period in
1998.
Other income
Other income decreased 8.0% to $0.29 million for the first three months of
1999, as compared to $0.31 million for the same period in 1998. The slight
decline was primarily due to a reduction in commitment fee income.
Interest expense
Interest expense increased 34.0% to $2.2 million for the first three
months of 1999, from $1.7 million for the same period in 1998, primarily due to
the inclusion of $0.2 million of interest expense associated with Eastern
Resorts, which represents approximately 37.0% of the entire increase in interest
expense. The Company's consumer receivables financing facility had higher
average outstanding balances of almost $11 million during the first three months
of 1999, compared to the same period in 1998, but interest rates were
approximately 70 basis points lower. Consequently, overall interest expense on
the Company's consumer receivables financing facility increased 12.0% to $0.9
million for the first three months of 1999 from $0.8 million for the first three
months of 1998.
The average interest rate on other bank notes decreased to 6.1% for the
first three months of 1999, from 6.8% for the same period in 1998. Nevertheless,
interest expense on other bank notes increased 35.0% to $1 million for the first
three months of 1999, from $0.7 million for the same period in 1998, due to a
higher average outstanding balance of approximately $15 million.
Depreciation and amortization
Depreciation and amortization increased 119.0% from $0.3 million for the
first quarter of 1998 to $0.7 for the same period in 1999. Debt-related costs,
including amortization of financing costs, totaled $0.6 million for the first
three months of 1999, an increase of 69.0% from $0.3 million for the same period
in 1998. The increase is primarily due to $0.2 million associated with the
financing of the Eastern Resorts acquisition. Goodwill amortization totaled $0.2
million
14
during the first three months of 1999. Goodwill is related to the acquisition of
Eastern Resorts and is being amortized on a straight-line basis over 40 years.
Provision for doubtful receivables
The provision for doubtful receivables increased 93.0% to $0.4 million for
the first quarter of March 31, 1999, compared to $0.2 million for the same
period in 1998. Management maintains an allowance for doubtful receivables that,
in the opinion of management, provides adequately for current and estimated
future losses of existing receivables.
Cost of timeshare intervals sold
The cost of property sold for the first quarter of 1999 totaled $1.2
million. The inclusion of cost of property sold is a result of the acquisition
of Eastern Resorts. Therefore, there is no corresponding amount for the first
quarter of 1998.
Sales and marketing
Sales and marketing expense for the first three months of 1999 totaled
$2.1 million. The inclusion of sales and marketing expense is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1998.
Resort management
Resort management expenses for the first quarter of 1999 totaled $2.1
million. The inclusion of resort management expenses is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1998.
General and administrative costs
General and administrative costs increased 85.0% to $1.4 million for the
first quarter of 1999, from $0.8 million for the same period in 1998. However,
general and administrative costs fell to 10.7% of revenues for the first quarter
of 1999, compared to 14.9% for the same period in 1998. The increased costs are
mainly due to the inclusion of $0.4 million of general and administrative
expenses associated with Eastern Resorts, which represents approximately 60.0%
of the increase in general and administrative costs. The following items also
contributed to the increase in general and administrative costs: payroll,
servicing, office, advertising, and travel costs. Payroll and payroll-related
expenses increased 24.0% for the first three months of 1999 due to a reduction
in payroll costs that were allocated to the estate in the bankruptcy case of a
major shareholder of the Company for certain of the Company's employees, an
increase in the number of employees, and an increase in compensation for certain
employees. Servicing costs increased 76.1% to $0.1 million for the first three
months of 1999 from $0.05 million for the first three months of 1998, primarily
due to an increased customer base. Travel and entertainment, advertising, and
office-related costs increased primarily due to growth of the Company.
Provision for income taxes
The provision for income taxes for the first three months of 1999
increased 83.0% to $1.2 million from $0.7 million for the same period in 1998.
As of March 31, 1999, the Company had no further net operating loss
carryforwards available.
15
Selected Financial Data of Resort Funding
as a Percentage of Total Revenues
Year Ended December 31,
-----------------------
Three
Months
Ended
March 31,
---------
1996 1997 1998 1999
----- ----- ----- -----
Revenues
Interest from:
Acquisition and development loans 29.8% 25.1% 18.2% 8.9%
Purchased consumer receivables 59.6% 64.4% 41.8% 24.1%
Hypothecation loans 0.4% 1.9% 4.0% 2.9%
Consumer loans -- -- -- --
Other loans 1.3% 5.8% 4.8% 6.5%
----- ----- ----- -----
Total interest on Loans 91.1% 97.2% 68.8% 42.4%
Timeshare interval sales -- -- 15.4% 37.9%
Resort operations -- -- 12.3% 17.5%
Other income 8.9% 2.8% 3.5% 2.2%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
Costs and Expenses
Interest 58.0% 50.6% 25.2% 17.1%
Cost of timeshare intervals sold -- -- 3.9% 9.0%
Sales and marketing -- -- 7.3% 16.3%
Resort management -- -- 11.0% 16.4%
Depreciation and amortization 6.3% 6.7% 7.3% 5.7%
Provision for doubtful receivables 1.3% 5.8% 2.7% 3.3%
General and administrative 22.6% 15.5% 13.9% 10.8%
----- ----- ----- -----
Total costs and expenses 88.2% 78.6% 71.3% 78.6%
----- ----- ----- -----
Income before provision for income taxes 11.8% 21.4% 28.7% 21.4%
Provision for income taxes 0.2% 1.2% 11.0% 9.2%
----- ----- ----- -----
Net income 11.6% 20.2% 17.7% 12.2%
===== ===== ===== =====
Year 2000 Update
General
The software and embedded microchips in certain computer systems identify
dates only by the last two digits of a year. For example, 1999 would be coded as
"99," 1998 as "98" and so on. The Year 2000 problem arises from the inability of
certain software programs and microchips to distinguish between dates in the
year 2000 and dates in the year 1900. As a result, a date entered "00" may be
read as 1900 instead of 2000. If uncorrected, functions using these systems
would not work properly in the year 2000. Problems which may occur as a result
of uncorrected software programs or microchips include system failures,
miscalculations or errors causing disruptions of operations.
16
Beginning in 1997, the Company undertook to assess its Year 2000 readiness
by identifying those computer systems used by the Company which may not be Year
2000 compliant. The Company is also assessing the Year 2000 readiness of other
entities with whom it has a material relationship.
Risks
Resort Funding. Resort Funding relies more on information systems for
servicing its loans than for any other individual function.
The computer software and hardware platform for Resort Funding's loan
servicing program is owned by The Processing Center, Inc. ("TPC"), a wholly
owned affiliate of the Company's largest shareholder. The platform is not yet
Year 2000 compliant. The Company has been working closely with TPC's programmers
and management information systems personnel to monitor TPC's progress in
modifying its systems. The Company understands that as of March 31, 1999, TPC's
remediation efforts were 95% complete, and that approximately 90% of the
platform had been satisfactorily tested. The Company is advised that TPC
anticipates completing its remediation program and testing all systems by June
1999. However, there can be no assurance that TPC's software and hardware
platform will be Year 2000 compliant by December 31, 1999. There also can be no
assurance that TPC will continue to make the servicing platform available to the
Company, although such platform is available for purchase. There is no assurance
that the Company will elect to acquire the servicing platform from TPC, or that
if it seeks to do so that it will be successful. The Company has previously used
unaffiliated third parties on occasion to perform its loan servicing.
Consequently, the Company believes it will be able to make arrangements with a
third-party to perform such services if necessary, but such arrangements are
currently not in place. As a contingency, the Company expects to identify
potential parties to perform its loan servicing by the end of the second quarter
of 1999 in the event that, in the Company's view, TPC's remediation efforts have
not progressed sufficiently to ensure timely Year 2000 compliance.
Resort Funding's own computer systems consist primarily of networked
personal computers ("PCs") used for accounting and word processing, which Resort
Funding recently acquired in the ordinary course of business. Resort Funding's
PCs and the software they use are substantially Year 2000 compliant.
Eastern Resorts. Eastern Resorts uses a third-party database server as its
primary software system for resort reservations, timeshare sales, and
homeowners' association receivables. Eastern Resorts recently installed an
upgraded version of this software, which is Year 2000 compliant. Communications
hardware between the main office of Eastern Resorts and certain of its resort
properties is not Year 2000 compliant. This equipment will be replaced, at a
cost estimated at $15,000, during the second quarter of 1999. The collections
system utilized by Eastern Resorts is not compliant; however Eastern Resorts'
collections will be transferred to Resort Funding before December 31, 1999. Any
non-compliant PCs will be replaced or upgraded in the ordinary course prior to
December 31, 1999, at minimal cost to the Company. The Company does not
anticipate that the cost of any Year 2000-related corrections or replacements
will be material. However, there can be no assurance that the actual cost to
make such corrections or acquire replacements will not exceed the Company's
expectations, which may have an adverse effect on the Company's financial
performance.
17
Third Parties. The Company's Year 2000 compliance program also includes
assessing the readiness of the Company's lenders, borrowers, major vendors,
suppliers and any other third parties with whom the Company has significant
dealings, who may be impacted by the Year 2000 problem. The extent to which such
parties have not modified their systems to address the Year 2000 issues may have
a significant, adverse impact on the operations or financial performance of the
Company. The Company has initiated contact with such third parties in order to
determine whether their systems are Year 2000 compliant and, if not, what steps
they have taken to address the problem. The Company has not yet received
sufficient confirmation from all of these parties in order to assess the
likelihood that all such parties will achieve Year 2000 compliance. If the
Company determines that a response to an inquiry is either insufficient or
otherwise indicates that the third-party will not achieve Year 2000 compliance,
the Company may follow up with personal contact with the third-party and, if
necessary, an on-site audit or testing of such party's systems. The Company
anticipates finalizing its assessment of third parties' Year 2000 readiness by
the second quarter of 1999. At that time, the Company will determine whether to
implement contingency plans to replace or supplement the services currently
provided by third parties. There can be no assurance that such third parties,
including borrowers, will be able to timely correct their Year 2000 problems,
and the failure to do so could have a material adverse effect on the Company's
results of operations, financial condition and liquidity.
Cost
Since Resort Funding utilizes the computer software and hardware platform
of a third-party, the cost to the Company for addressing and correcting Year
2000 issues has not been material. As of March 31, 1999, the Company estimates
that it has spent $25,000 on Year 2000 remediation. Management does not
anticipate that the Company will incur any significant additional expense in
correcting its systems. However, there can be no assurance that the Company's
expenditures will not exceed its estimates. In the event that the Company is
forced to identify and contract with parties to replace existing suppliers and
vendors, such as TPC, the cost of such replacement may have a material adverse
effect on the Company's financial condition and results. Further, if the Company
is unable to perform on its contractual obligations to its lenders and borrowers
as a result of its own or an important third-party's failure to achieve Year
2000 compliance, the potential cost and liability for such failure may have a
material adverse effect on the Company's results of operations, financial
condition and liquidity.
Liquidity and Capital Resources
The Company's business requires continuous access to short- and long-term
sources of debt financing. The Company's principal cash requirements arise from
its lending activities, the funding of timeshare construction, sales and
marketing, debt service payments and operating expenses. The Company's primary
sources of liquidity are borrowings under secured lines of credit and cash flow
from operations. In the future, the Company expects to raise additional capital
through increasing its borrowing from financial institutions and issuing debt,
equity or asset-backed securities in the capital markets.
In March 1999, as part of the KGI transaction, the Company finalized
modifications to allow additional collateral to be placed into the existing
revolving credit facilities with CSFB. This additional collateral includes
consumer receivables generated by the Company's resort operations, as well as
collateral purchased from KGI. Based on the loan growth of the Company, it
expects that both of the CSFB revolving credit facilities will be fully drawn
during the second quarter of 1999, and thus it will be imperative for the
Company to secure additional forms of financing. Substantially all of the
Company's assets are pledged as collateral on existing loans.
When it acquired Eastern Resorts, the Company obtained the cash portion of
the purchase price in large part through the proceeds of a $12.2 million
short-term bridge loan (the "Bridge Loan") from Credit Suisse First Boston
Mortgage Capital LLC ("CSFB"). The Company originally anticipated repaying the
Bridge Loan through a public offering. In the interim, the Company has been
paying the facility down through payments received on the notes pledged as
collateral for the Bridge Loan. The Bridge Loan matures on June 11, 1999. As of
March 31, 1999, the balance on the Bridge Loan was approximately $2.8 million,
down from the original borrowing of $12.2 million. The Bridge Loan is
collateralized in part with notes receivable and in part with a general lien on
unpledged assets of Eastern Resorts.
Because of a change in market conditions, the Company delayed the original
schedule of its proposed public offering. Though the Company is discussing
replacing the Bridge Loan with other lenders, it currently anticipates that it
will complete repayment of the Bridge Loan substantially out of internal cash
flow. However, there can be no assurance that the Company will be successful in
obtaining new sources of financing on terms acceptable to it, or that
modifications of the current terms of such indebtedness will not result in
materially less favorable terms. The Bridge Loan contains cross default
provisions linked to the Company's pre-existing CSFB debt facilities.
The Company is currently in discussions with other lenders seeking to
replace the CSFB revolving credit facilities and to obtain additional financing
to support the Company's current operations and planned growth.
Acquisition of Properties from Kosmas Group International, Inc.
On March 26, 1999, the Company completed its previously announced
acquisition of six timeshare vacation resorts, one resort development site,
management contracts and consumer notes receivable from KGI. The acquisition
involved cash consideration of $4 million, less certain adjustments, and the
assumption of approximately $72 million in debt or other liabilities relating to
the acquired resorts. In addition, the Company agreed to purchase the interest
of a third party with prior outstanding debt relating to the St. Thomas
properties, together with additional inventory in one of the St. Thomas resorts,
for $2 million in cash and 490,000 shares of Equivest stock. The Company will
also issue an additional 250,000 shares of its common stock to KGI if the
Company has at least $6 million in net income from the acquired properties
during the twelve months ending March 31, 2000. KGI and the Company agreed to
indemnify each other with respect to certain liabilities.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For 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, 1998, 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.
Item 6. (a) Exhibits
The following exhibits are filed herewith:
11.1 Statement re: computation of earnings per share
(b) Reports on Form 8-K The Company filed the following reports on Form
8-K during the quarter covered by this report:
(i) February 23, 1999 Form 8-K. announcing the signing of a
definitive agreement to purchase properties from Kosmas Group
International, Inc.
(ii) March 10, 1999 Form 8-K announcing 1998 fourth-quarter and
year-end results
19
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.
---------------------------------
Gerald L. Klaben, Jr.
Senior Vice President and Chief Financial Officer
Dated: May 14, 1999
20