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 SEPTEMBER 30, 2000
------------------
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
Incorporation or organization) Identification No.)
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 September 30, 2000, 28,089,722 shares of common stock of Equivest Finance,
Inc. were outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I FINANCIAL INFORMATION
- ------
Item 1. Financial Statements
Consolidated Condensed Financial Information:
Consolidated Condensed Balance Sheets - September 30, 2000 (unaudited) and 3
December 31, 1999
Unaudited Consolidated Condensed Statements of Income - Three Months Ended
September 30, 2000 and 1999 4
Unaudited Consolidated Condensed Statements of Income - Nine Months Ended
September 30, 2000 and 1999 5
Unaudited Consolidated Statement of Equity Accounts 6
Unaudited Consolidated Condensed Statements of Cash Flow - Nine Months Ended
September 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 29
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 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2000 1999
--------------------- ---------------------
Unaudited
ASSETS
Cash and cash equivalents $ 2,153,825 $ 8,010,888
Receivables, net 265,844,922 247,081,791
Investment in real estate joint venture -0- 4,415,780
Inventory 95,259,273 87,925,117
Property and equipment, net 17,075,423 18,122,843
Goodwill, net 40,332,160 41,374,002
Other assets 15,907,656 10,055,233
-------------------- --------------------
TOTAL ASSETS $ 436,573,259 $ 416,985,654
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 10,194,740 $ 6,288,195
Accrued expenses and other liabilities 27,242,903 20,832,657
Income taxes 25,249,954 25,144,701
Notes payable 289,858,760 289,357,773
-------------------- --------------------
TOTAL LIABILITIES 352,546,357 341,623,326
CONTINGENCIES, COMMITMENTS
AND LIQUIDITY
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 21,469,452 12,804,878
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 84,026,902 75,362,328
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,573,259 $ 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 September 30,
--------------------------------
2000 1999
---- ----
REVENUE
Timeshare interval sales $ 31,567,724 $ 11,889,372
Interest 9,967,046 6,422,072
Resort operations 6,669,592 6,674,306
Other income 228,873 690,759
--------------- ---------------
48,433,235 25,676,509
--------------- ---------------
COSTS AND EXPENSES
Interest 6,505,115 3,396,200
Cost of timeshare intervals sold 7,872,766 2,853,547
Sales and marketing 14,912,082 5,202,075
Resort management 5,050,505 6,098,748
Depreciation and amortization 1,194,189 608,157
Provision for doubtful receivables 2,509,332 620,599
General and administrative 4,184,274 1,910,387
--------------- ---------------
42,228,263 20,689,713
--------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,204,972 4,986,796
PROVISION FOR INCOME TAXES 2,675,000 2,075,000
--------------- ---------------
NET INCOME $ 3,529,972 $ 2,911,796
=============== ===============
Basic earnings per common share $ 0.12 $ 0.11
=============== ===============
Diluted earnings per common share $ 0.12 $ 0.11
=============== ===============
See Accompanying Notes To Consolidated Condensed Financial Statements.
4
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
9 Months Ended September 30,
----------------------------
2000 1999
---- ----
REVENUE
Timeshare interval sales $ 77,761,867 $ 28,232,866
Interest 28,900,754 18,009,170
Resort operations 19,339,515 14,016,003
Other income 1,009,897 1,335,047
-------------- --------------
127,012,033 61,593,086
-------------- --------------
COSTS AND EXPENSES
Interest 19,026,296 8,846,346
Cost of timeshare intervals sold 18,934,882 6,747,271
Sales and marketing 36,769,024 12,172,073
Resort management 14,012,687 12,092,083
Depreciation and amortization 3,577,716 2,207,154
Provision for doubtful receivables 6,198,559 1,449,919
General and administrative 13,428,295 5,749,126
-------------- --------------
111,947,459 49,263,972
-------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 15,064,574 12,329,114
PROVISION FOR INCOME TAXES 6,400,000 5,075,000
-------------- --------------
NET INCOME $ 8,664,574 $ 7,254,114
============== ==============
Basic earnings per common share $0.29 $0.27
============== ==============
Diluted earnings per common share $0.29 $0.26
============== ==============
See Accompanying Notes To Consolidated Condensed Financial Statements.
5
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY ACCOUNTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
Redeemable
Preferred
Stock-Series 2 Additional Retained
Total Class A Common Shares Stock Amount Paid 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 8,664,574 8,664,574
------------- ----------- -------------- ---------- -------------- --------------
Balances at September 30, 2000 $84,026,902 $ 30,000 28,089,722 $ 280,897 $ 62,246,553 $ 21,469,452
============= =========== ============== ========== ============== ==============
See Accompanying Notes To Consolidated Condensed Financial Statements.
6
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2000 1999
--------------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income $ 8,664,574 $ 7,254,114
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation 3,577,716 2,207,154
Provision for doubtful receivables 6,198,559 1,449,919
Changes in assets and liabilities, net of
effects from purchase of KGI (1999)
Other assets (2,310,185) (1,206,511)
Inventory (2,918,376) (580,426)
Accounts payable and accrued expenses 5,187,929 2,790,947
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,400,217 11,915,197
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (19,804,973) (23,223,795)
Purchase of equipment (201,960) (716,892)
Investment in joint venture -- (1,231,054)
Partial payment on purchase of KGI, net of cash acquired of $762,706
-- (1,941,492)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (20,006,933) (27,113,233)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
Repayments on loans receivable - related party -- 595,634
Proceeds from notes payable 185,081,232 78,258,000
Payments on notes payable (184,580,246) (58,355,384)
Restricted cash (4,751,333) (1,134,130)
Payments on non-recourse notes payable -- (1,758,140)
--------------- ----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (4,250,347) 17,605,980
--------------- ----------------
(DECREASE) INCREASE IN CASH (5,857,063) 2,407,944
--------------- ----------------
Cash and cash equivalents at beginning of period 8,010,888 3,486,720
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,153,825 $ 5,894,664
=============== ================
Supplemental Cash Flow Information:
Interest paid $ 19,141,063 $ 8,738,764
=============== ================
Income taxes paid $ 3,844,661 $ 4,093,433
=============== ================
Supplemental Schedule of Non-cash Investing Activity:
Reclassification of investment in joint venture to inventory as a result of
foreclosure $ 4,415,780 $ -0-
=============== ================
See Accompanying Notes To Consolidated Condensed Financial Statements.
7
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated condensed interim financial statements
as of September 30, 2000 and for the three-month and nine-month periods ended
September 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 nine-month periods ended September 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, Resort Funding, Inc. and its
subsidiary, BFICP Corporation (collectively, "Resort Funding"), EFI Funding
Company, Inc., EFI Development Funding, Inc., Equivest Capital Funding, Inc.
(inactive), Resort Marketing Services, Inc., Mirror Lake Development, Inc.,
Mirror Lake Realty, Inc., Eastern Resorts Corporation and its subsidiaries,
Eastern Resorts Company, LLC and Long Wharf Marina Restaurant, Inc.
(collectively, "Eastern Resorts"); Bluebeard's Castle, Inc., and subsidiaries
thereof, Castle Acquisition, Inc., Avenue Plaza LLC, Ocean City Coconut Malorie
Resort, Inc., St. Augustine Resort Development Group, Inc. and Equivest
Washington, Inc., Equivest St. Thomas, Inc., Equivest Maryland, Inc., Equivest
Florida, Inc., and Equivest Louisiana, 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 Vacation Club, Inc., and
Peppertree Resorts Management, 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 on May 3, 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.
8
Inventory and Cost of Timeshare Intervals Sold
Inventory is stated at the lower of cost or market and consists of
timeshare intervals held for sale and construction in progress of new timeshare
units, including the cost of land for future timeshare units. These costs are
charged to cost of property sold based upon the relative sales 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 September 30, 2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $3,529,972
Less: Preferred Stock dividends (150,000)
------------
Basic earnings per share:
Income available to common stockholders 3,379,972 28,089,722 $.12
====
Effect of dilutive securities:
Stock options 256,098
------------ -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $3,379,972 28,345,820 $.12
=========== =========== ====
For the Quarter Ended September 30, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $2,911,796
Less: Preferred Stock dividends (150,000)
------------
Basic earnings per share:
Income available to common stockholders 2,761,796 25,688,351 $.11
====
Effect of dilutive securities:
Warrants 87,117
Stock options 410,848
------------ -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $2,761,796 26,186,316 $.11
=========== =========== ====
9
For the Nine Months Ended September 30, 2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $8,664,574
Less: Preferred Stock dividends (450,000)
------------
Basic earnings per share:
Income available to common stockholders 8,214,574 28,089,722 $.29
====
Effect of dilutive securities:
Stock options 256,098
----------- ------------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 8,214,574 28,345,820 $.29
=========== =========== ====
For the Nine Months Ended September 30, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $7,254,114
Less: Preferred Stock dividends (450,000)
------------
Basic earnings per share:
Income available to common stockholders 6,804,114 25,528,607 $.27
====
Effect of dilutive securities:
Warrants 88,077
Stock options 414,461
-------------- -----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $6,804,114 26,031,145 $.26
========== =========== ====
Redeemable Preferred Stock
At September 30, 2000, the cumulative undeclared and unpaid dividends
amount to $1,350,000.
SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended,
is effective for fiscal years beginning after June 15, 2000 and will be adopted
for the period beginning January 1, 2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives are recorded each period in current
earnings or other comprehensive income depending on whether a derivative is
designated as part of a hedge transaction, and if it is, the type of hedge
transaction. The Company currently has no derivative instruments.
Reclassifications
Certain amounts for the three months and nine months ended September
30, 1999 have been reclassified to be consistent with the year 2000
classifications.
10
C. Contingencies, Commitments and Liquidity
The Company's primary credit facility is a $150 million facility with
DG Bank Deutche Genossenschaftsbank AG ("DG Bank") as Agent for Autobahn 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 September 30, 2000, the DG Credit
Facility had an outstanding balance of $128.3 million.
In September 1999, Finova Capital Corporation ("Finova") extended a
$20.0 million revolving credit facility to the Company for third party loans.
The outstanding balance of this facility as of September 30, 2000 was $4.5
million. In May 2000, Finova extended an additional $30 million facility to the
Company for use in financing its own resorts. As of September 30, 2000, the
outstanding balance on the $30 million facility was $5.5 million. Finova has
advised the Company that it is not presently able to honor its commitments under
either credit line beyond the two projects funded to date due to its own
liquidity issues. Though the Company believes that Finova is obligated to resume
lending under the two facilities, it does not know whether or when Finova's
financial condition will enable it to honor its obligations.
In November 1999, the Bank of America, N.A. extended a $20.7 million
bridge loan facility to the Company for the acquisition of Peppertree Resorts.
As of September 30, 2000, the outstanding loan balance was $16.8 million. As of
November 19, 2000, Bank of America and the Company agreed in principal to extend
this facility to February 17, 2001, and certain other terms of the agreement
were modified. Under the revised agreement, the Company is continuing to make
fixed principal payments of $300,000 per month.
During the term of this extension the Company anticipates that it
will be discussing with Bank of America the terms of a longer-term extension of
this bridge facility. There can be no assurance that an agreement will be
reached before the expiration of the extended maturity date of February 17,
2001.
The Company had total indebtedness to CSFB on October 31, 2000 of
$46.7 million. Of this amount, $18.6 million relates to a revolving acquisition
and development financing line that is in an amortization phase, $2.1 million is
outstanding as part of a loan extended to the Company by CSFB in connection with
the purchase of Eastern Resorts Corporation, $13.6 million is mortgage
indebtedness relating to the Avenue Plaza Hotel and Pro Spa in New Orleans, LA
and $12.4 million is mortgage indebtedness relating to the Company's three
hotels located in St. Thomas, USVI. Of this total amount $20.7 million matures
on November 20, 2000. CFSB has agreed that it will extend the maturity of this
indebtedness until January 5, 2001 to permit further discussions regarding a
longer term extension. The Avenue Plaza loan matures December 31, 2000, and the
St. Thomas loan matures on August 11, 2001.
The CSFB credit lines are all secured except for a portion of the
debt relating to the Eastern Resorts acquisition. The A&D line, and both the
Avenue Plaza and St. Thomas mortgage loans, are all subject to principal
repayment through release fees relating to timeshare sales. The Company has
repaid approximately $88 million in total to CSFB during 2000 to date.
The Company and CSFB are in discussions concerning an extension of
all the Company's indebtedness. CSFB has agreed to extend the maturity of the
debt due on November 19, 2000 to January 5, 2001. CSFB has indicated a
willingness to discuss a longer term extension of its outstanding debt prior to
January, 2001. However, there is no assurance that an agreement will be reached
with CSFB concerning a longer term extension of the Company's indebtedness, or
if an extension is agreed, what the duration of any such longer term extensnion
will be, or the cost thereof.
11
As of September 30, 2000 the Company's accounts payable exceeded
$10.2 million. The balance of accounts payables has increased approximately $4
million since the end of 1999. The majority of this increase is due to the
operational results at Peppertree Resorts for the nine months ending September
30, 2000. During the quarter the Company closed several smaller Peppertree sales
centers, eliminated one Peppertree telemarketing center and significantly
reduced head count in Peppertree as part of its ongoing program to improve
profitability and liquidity.
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:
- ------------------------------------------------------------------------------------------------------------------------
Financing Resort Development Total
- ------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2000:
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 10,160,507 $ 38,272,728 $ 48,433,235
- ------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 247,051 -- 247,051
- ------------------------------------------------------------------------------------------------------------------------
Segment Profit 1,535,244 5,316,376 6,851,620
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- ------------------------------------------------------------------------------------------------------------------------
Total segment profit 6,851,620
- ------------------------------------------------------------------------------------------------------------------------
Unallocated corporate expenses (646,648)
- ------------------------------------------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes
6,204,972
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1999:
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 7,001,259 $ 18,675,250 $ 25,676,509
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 1,203,694 -- 1,203,694
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Segment Profit 3,518,746 1,735,842 5,254,588
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of total segment
profit to consolidated income before income taxes:
- ------------------------------------------------------------------------------------------------------------------------
Total segment profit 5,254,588
- ------------------------------------------------------------------------------------------------------------------------
Unallocated corporate expenses (267,792)
- ------------------------------------------------------------------------------------------------------------------------
Consolidated income before provision for income taxes
4,986,796
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------------------------------------------------
Financing Resort Development Total
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000:
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 29,700,348 $ 97,311,685 $ 127,012,033
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 971,273 -- 971,273
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Segment Profit 5,332,566 12,017,561 17,350,127
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Reconciliation of total segment profit
to consolidated income before income
taxes:
- --------------------------------------------------------------------------------------------------------------------------
Total segment profit 17,350,127
- --------------------------------------------------------------------------------------------------------------------------
Unallocated corporate expenses (2,285,553)
- --------------------------------------------------------------------------------------------------------------------------
Consolidated income before
provision for income
taxes 15,064,574
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999:
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 19,189,342 $ 42,403,744 $ 61,593,086
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 1,630,609 -- 1,630,609
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Segment Profit 8,352,737 5,035,561 13,388,298
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Reconciliation of total segment profit to
consolidated income before income taxes:
- --------------------------------------------------------------------------------------------------------------------------
Total segment profit 13,388,298
- --------------------------------------------------------------------------------------------------------------------------
Unallocated corporate expenses (1,059,184)
- --------------------------------------------------------------------------------------------------------------------------
Consolidated income before
provision for income taxes 12,329,114
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
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, adverse weather conditions or other
natural causes affecting any of the Company's sales centers, costs of marketing
programs, including no-show rates among tour guests and price increases by third
party tour vendors, 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, increases in fees or interest costs associated with the
Company's indebtedness, availability of adequate liquidity, 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 SEPTEMBER 30, 2000
September 30, 2000 Compared to September 30, 1999
Net Income
Total revenue rose 89% to $48.4 million for the third quarter of 2000
as compared to $25.7 million for the same time period in 1999. Total expenses
increased 104% from $20.7 million for the third quarter of 1999 to $42.2 million
for the same time period in 2000. Income before provision for income taxes
increased 24% to $6.2 million for the three months ended September 30, 2000, as
compared to $5.0 million for the same period in 1999. Net income increased 21%
to $3.5 million for the three months ended September 30, 2000 from $2.9 million
for the same period in 1999.
During the quarter ended September 30, 2000, sales and marketing
expense increased 187% to $14.9 million from $5.2 million for the third quarter
of 1999. In addition to the increase in sales and marketing expense, interest
expense, cost of timeshare intervals sold, provision for doubtful receivables
and general and administrative costs contributed to the increase in total
expense. The increase in both revenues and expenses, and to a significantly
lower extent, the increase in net income, is 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, and to a lesser degree to
the acquisition of Riverside Suites on May 3, 2000. 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 September 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. Sales commissions, marketing
expenses and overhead costs as a percentage of VOI sales have all been
considerably higher at Peppertree sales centers than at the Company's sales
centers in other locations. Average price per sale and revenue per customer or
overall efficiency, have also been lower at the former Peppertree sales centers.
The Company is continuing its efforts to reduce Peppertree's higher cost
structure and higher cost per tour and to bring these costs into line with 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 and third quarter, Peppertree sales and marketing costs rose
to 52.3% and 56.1%, respectively, compared to sales and marketing costs for the
Company's non-Peppertree resorts of 44.0% and 39.2%, respectively. Throughout
the first three 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 also began 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 does not know whether
cost levels equal to the historic levels experienced at the non-Peppertree sales
centers will be achieved, or if so, when this will occur. While Peppertree
operations have been profitable for the nine months ended September 30, 2000,
and for the three months ended September 30, 2000, the pretax profit margin on
Peppertree revenues has been lower than most other operations of the Company.
16
VOI Sales
VOI sales revenues increased 166% to $31.6 million for the third
quarter of 2000, or 65% of total revenues from $11.9 million, or 46% of total
revenue, for the same time period in 1999. The increase in VOI sales revenues is
largely due to the impact of the Peppertree acquisition, and to a lesser degree
to the Riverside Suites acquisition and increased sales volume at certain resort
locations. VOI sales revenues at the resorts the Company owned as of September
30, 1999 increased 23% to $14.6 million for the third quarter of 2000, from
$11.9 for the same period in 1999, while Peppertree and Riverside Suites sales
revenues represented an increase of $15.0 million and $2.0 million, respectively
for the third quarter of 2000. During the third quarter of 2000, the Company
sold 1,427 fixed-week VOI's and 1,298 points packages, at a combined average
sales price of approximately $11,600. The total increase in VOI sales revenues
for the third quarter of 2000 reflected a 24% increase in the number of
fixed-week VOIs sold, and a 12% increase in the average sales price of a VOI
compared to the same quarter of 1999.
The Company now owns or manages 30 timeshare resort locations with a
completed VOI inventory of approximately 27,610 VOI's at September 30, 2000.
This represented an aggregate gross sales value of more than $320 million at the
average sales price per interval during the quarter ended September 30, 2000.
The Company operates twelve sales centers, five 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
September 30, September 30,
2000 1999
-------------------- ---------------
Timeshare intervals sold 2,725 1,154
Average Sales Price $11,600 $10,370
Number of VOI's in inventory at period end 27,610 24,500
As a result of the Peppertree acquisition, five 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.
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 55% to $10.0 million for the third quarter
of 2000 from $6.4 million for the same time period in 1999, primarily due to
higher average outstanding balances on the loan portfolio of approximately $75
million for the third quarter of 2000. In addition, the weighted average
interest rate on the loan portfolio increased approximately 140 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.
17
The rate of consumer loan originations relating to purchasers of
VOI's in the Company's own resorts increased significantly. VOI sales in the
third quarter of 2000 were $31.6 million, which generated approximately $26.2
million in new consumer loans. During the comparable quarter of 1999, VOI sales
were only $11.9 million, which generated approximately $9.1 million in new
consumer loan originations.
Interest income related to the consumer loan portfolio increased to
93% of total interest income for the third quarter of 2000, compared to 80% 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 49% to $0.7 million for the third
quarter of 2000 from $1.3 million for the same period in 1999, due to lower
average outstanding balances of A&D loans. Third party A&D Loan originations
declined 96% from $3.8 million for the third quarter of 1999 to $0.1 million for
the same period in 2000, while third party consumer loan receivable originations
declined approximately 23% to $15.5 million for the third quarter of 2000 from
$20.2 million for the third quarter of 1999. The decline in A&D loan
originations is primarily attributable to a shift in the Company's strategy from
relying on third party A&D loans to building its own consumer loan portfolio and
to growing consumer loan originations from its own resort activities.
Resort Operations
Resort operations revenue totaled $6.7 million for both the third
quarter of 2000 and the third quarter of 1999. However, resort management
expenses as a percentage of resort operation revenue decreased to 75.7% for the
third quarter of 2000 compared with 91.4% 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 to independent operators and other cost
reduction measures.
Other Income
Other income decreased 67% to $0.2 million for the third quarter of
2000 as compared to $0.7 million for the same time period in 1999. The decrease
in other income is primarily due to a decline other income associated with
acquisition properties and lower commitment fee income.
Provision For Doubtful Receivables
The provision for doubtful receivables increased 304% to $2.5 million
for the third quarter of 2000 from $0.6 million for the same time period in
1999. The increase in the provision for doubtful receivables results in part
from the sharp increase in consumer receivables generated from the Company's own
resorts properties. However, the increase also reflects a decision by management
to increase the Company's provisions for doubtful receivables from 5.2% of VOI
sales during the third quarter of 1999 to 7.9% of VOI sales during the third
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 third quarter of 2000 increased the dollar amount of provisions in
the third quarter of 2000 by approximately $0.9 million compared with what it
would have been under the rate of provisioning in effect during the third
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
18
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 September 30, 2000 as compared to
September 30, 1999:
19
Allowance for Doubtful Accounts
(in thousands)
Quarter Ended
09/30/00 09/30/99
-------- --------
Allowance for doubtful accounts,
Beginning of period 10,804 6,632
Provision for loan losses 2,509 621
Charges to allowance for doubtful accounts (3,200) (439)
Recoveries 63 -0-
--------- -------
Allowance for doubtful accounts, end of period 10,176 6,814
As a % of total loans 3.7% 3.7%
At September 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 $33.7
million or 12.1% of total loans. This represented a reserve coverage ratio
("RCR") of 4.1 times the $8.2 million of consumer receivables that were 60 days
past due at September 30, 2000 on the entire consumer note receivable portfolio.
Included in this amount were total reserves and over collateralization of $23.5
million on third party consumer receivables or approximately 20.0% of the
outstanding consumer receivables portfolio attributable to third party resorts.
This represented a RCR of 10.8 times the $2.2 million of such receivables that
were 60 or more days past due at September 30, 2000.
At September 30, 2000 the Company maintained an aggregate allowance
for doubtful receivables of $10.2 million, or 6.9% of the outstanding consumer
receivable portfolio from owned resorts. This represented an RCR of 1.7 times
the approximate $6.0 million in consumer receivables from owned resorts that
were 60 days past due as of that date. The $10.2 million aggregate allowance for
doubtful receivables at September 30, 2000 represented an increase of 49%
compared with $6.8 million at September 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 September 30, 2000:
Consumer Receivable Loan Portfolio
As of September 30, 2000
(In Thousands)
Current 30 - 59 days 60 - 89 days 90+ days Total
------- ------------ ------------ -------- -----
Owned Resorts $137,044 $3,748 $2,138 $3,882 $146,812
93.3% 2.6% 1.5% 2.6% 100.0%
Third Party (1) $112,559 $3,138 $1,322 $867 $117,886
95.5% 2.7% 1.1% 0.7% 100.0%
Total $249,603 $6,886 $3,460 $4,749 $264,698
94.3% 2.6% 1.3% 1.8% 100.0%
(1) Includes the consumer receivables that collateralize the hypothecation
loans.
At September 30, 2000, 94.3% of the consumer receivable portfolio was
current, and there were 829 notes with a principal balance of $4.7 million that
were over 91 days past due. Of this amount, $3.9 million were notes relating to
the consumer receivables in the Company's resorts. With limited exceptions, the
Company services the loans in its portfolio internally, using its own personnel
and facilities. However, loans owned by Peppertree are subject to a long-term
outsourcing contract for collection services with an affiliate of Interval
International, Meridian Financial Services, Inc. To date the collections
performance of the Peppertree notes subject to the outsourcing collections
contract appears to be worse than the historic performance of the Company's
non-Peppertree notes.
Interest Expense
Interest expense, net of capitalized amounts, increased 92% to $6.5
million for the third quarter of 2000 as compared to $3.4 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 $85 million, while the weighted average interest rate on
outstanding debt increased from 7.1% for third quarter of 1999 to 8.7% for the
third 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 facility requires
the
21
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 third quarter of 2000
totaled $7.9 million or 24.9% of VOI revenue, compared to $2.9 million for the
third quarter of 1999, or 24.0% of VOI revenue. The increase in cost of
timeshare intervals sold is primarily due to the inclusion of operating results
for properties acquired after the third quarter of 1999 and to a lesser extent
to increased sales volume.
Depreciation and Amortization
Depreciation and amortization increased 96% to $1.2 million for the
third quarter of 2000 from $0.6 million for the same period in 1999. The
increase is primarily due to $0.3 million increase associated with depreciation
expense, $0.2 million increase associated with goodwill amortization, and a $0.1
million increase in debt related costs. These increases are primarily a result
of the impact of the Peppertree acquisition the Company completed in 1999.
Goodwill amortization increased 122% to $0.4 million for the third
quarter of 2000 from $0.2 million for the same period in 1999 and represented
36% 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 $0.4 million and accounts for
53% 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 $14.9 million for the third
quarter of 2000 from $5.2 million for the same time period in 1999. Sales and
marketing expense increased to 47.2% as a percentage of VOI revenue for the
third quarter of 2000, compared to 43.8% 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 third quarter of 2000 Peppertree's
sales and marketing expense as a percent of VOI sales was 56.1% as compared to
39.2% for the Company's non-Peppertree sales centers during the same period.
Peppertree sales centers currently experience a substantially higher cost level,
particularly relating to tour costs, and operate at a lower efficiency in terms
of average revenue per guest, than the Company's other sales centers. The
Company continues to introduce 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 third quarter of 2000 totaled $5.1
million, or 75.7% of resort operations revenue, as compared $6.1 million, or
91.4% 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,
including outsourcing of food and beverage operations at certain locations.
22
General and Administrative
General and administrative expense increased 119% to $4.2 million for
the third quarter of 2000 from $1.9 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 66% of the total increase in
general and administrative costs. The following items also contributed to the
increase in general and administrative expense: payroll costs, travel and
entertainment, outside service costs, and servicing fees due to growth of the
Company.
General and administrative expense as a percentage of total revenue
increased to 8.6% of total revenue for the third quarter of 2000, compared with
7.4% of total revenue for the third quarter of 1999. General and administrative
costs may continue to increase in absolute dollars as the Company invests in its
management and organization infrastructure.
Provision For Income Taxes
The provision for income taxes for the third quarter of 2000
increased 29% to $2.7 million from $2.1 million for the same period in 1999. The
increase is attributable to the increase in pretax income during the third
quarter of 2000 as compared to the same period in 1999. The provision for income
taxes represents approximately 43.1% and 41.6% of pretax income for the third
quarter of 2000 and 1999, respectively.
23
NINE MONTHS ENDED SEPTEMBER 30, 2000
September 30, 2000 Compared to September 30, 1999
During the nine months ended September 30, 2000, the Company's
results included Eastern Resorts, acquired in August 1998, the KGI Properties,
acquired March 25, 1999, Peppertree, acquired November 17, 1999, and Riverside
Suites acquired May 3, 2000. Therefore, the nine months ended September 30, 1999
include Eastern Resorts for the entire period, but the former KGI properties
only for the period March 25 through September 30, 1999. The nine month period
ended September 30, 2000 contains Eastern Resorts, Peppertree and the KGI
Properties for the full period. Riverside Suites operating results, acquired May
3, 2000, are included only for the third quarter ended September 30, 2000.
Net Income
Total revenue rose 106% to $127.0 million for the first nine months
of 2000 as compared to $61.6 million for the same time period in 1999. Total
expenses increased 127% from $49.3 million for the nine months ending September
30, 2000 to $111.9 million for the same period in 2000. Income before provision
for income taxes increased 22% to $15.1 million for the nine months ended
September 30, 2000, as compared to $12.3 million for the same period in 1999.
Net income increased 19% to $8.7 million for the nine months ended September 30,
2000 from $7.3 million for the same period in 1999. Growth in revenue, expense
and net income is largely due to the addition of the acquired properties, though
both the number of VOI's sold and the average price per sale increased in 2000
compared to the comparable period in 1999.
VOI Sales
VOI sales revenues increased to $77.8 million, or 61% of total
revenue, for the nine months ended September 30, 2000, from $28.2 million, or
46% of total revenue, for the same time period in 1999. The increase in VOI
sales revenues is largely due to the impact of two acquisitions that the Company
completed in 1999, and the acquisition the Company completed in 2000. During the
first nine months of 2000, the Company sold 3,582 fixed-week VOI's and 3,378
points packages, at a combined average sales price of approximately $11,146. The
total increase in VOI sales revenues for the nine months ended September 30,
2000, reflected a 32% increase in the number of fixed-week VOIs sold, and an 8%
increase in the average sales price of a VOI compared to the same period in
1999. The Company now owns or manages 30 timeshare resort locations with a
completed inventory of approximately 27,610 VOIs. The Company operates twelve
sales centers, five 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:
Nine months Ended
September 30, September 30,
2000 1999
---------- --------------
Timeshare intervals sold 6,960 2,713
Average Sales Price $11,146 $10,356
Number of VOI's in inventory at period end 27,610 24,500
As a result of the Peppertree acquisition, five 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,
24
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.
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 61% to $28.9 million for the first nine
months of 2000 from $18.0 million for the same time period in 1999, primarily
due to higher average outstanding balances on the loan portfolio of
approximately $85 million for the first nine months of 2000. In addition, the
weighted average interest rate on the loan portfolio increased approximately 150
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. The rate of consumer loan
originations relating to purchases of VOIs in the Company's own resorts
increased significantly. VOI sales in the nine months ended September 30, 2000
were $77.8 million, which generated approximately $63.8 million in new consumer
loans. During the comparable period of 1999, VOI sales were only $28.2 million,
which generated approximately $20.8 million in new consumer loan originations.
Interest income related to the consumer loan portfolio increased to
93% of total interest income for the first nine 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 39% to $2.2 million for the first nine months of 2000 from
$3.6 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. Third party A&D Loan originations declined 57%
from $15.5 million for the first nine months of 1999 to $6.7 million for the
same period in 2000, while third party consumer loan receivables originations
declined approximately 25% from $57.3 million for the first nine months of 1999
to $43.2 million for the first nine 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 the sale of VOI's in the Company's own resorts.
Resort Operations
Resort operations revenue totaled $19.3 million for the first nine
months of 2000, as compared to $14.0 million for 1999. The increase in resort
operations is largely due to the impact of the acquisition of Peppertree. Resort
management expenses as a percentage of resort operation revenue decreased to
72.5% for the first nine months of 2000 compared with 86.3% 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, as well as
cost reduction measures.
Other Income
Other income decreased 24% to $1.0 million for the nine months ended
September 30, 2000 as compared to $1.3 million for the same time period in 1999.
The decrease in other income is primarily due to lower commitment fee income.
25
Provision For Doubtful Receivables
The provision for doubtful receivables increased 328% to $6.2 million
for the first nine months of 2000 from $1.5 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 sales at the Company's
own resort properties. However, the increase also reflects a decision by
management to increase the Company's provisions for doubtful receivables from
4.6% of VOI sales during the first nine months of 1999 to 8.0% of VOI sales
during the first nine months 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 nine months of 2000 increased the dollar
amount of provisions in the first nine months of 2000 by approximately $2.6
million compared with what it would have been under the rate of provisioning in
effect during the first nine months 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 September 30, 2000 as compared to
September 30, 1999:
Allowance for Doubtful Accounts
(in thousands)
09/30/00 09/30/99
-------- --------
Allowance for doubtful accounts,
Beginning of period 10,073 3,835
Allowance related to an acquisition 501 2,157
Provision for loan losses 6,198 1,450
Charges to allowance for doubtful accounts (6,929) (628)
Recoveries 333 -0-
-------- -------
Allowance for doubtful accounts, end of period 10,176 6,814
As a % of total loans 3.7% 3.7%
26
At September 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 $33.7
million or 12.1% of total loans. This represented a reserve coverage ratio
("RCR") of 4.1 times the $8.2 million of consumer receivables that were 60 days
past due at September 30, 2000 on the entire consumer note receivable portfolio.
Included in this amount were total reserves and over collateralization of $23.5
million on third party consumer receivables or approximately 19.9% of the
outstanding consumer receivables portfolio attributable to third party resorts.
This represented an RCR of 10.8 times the $2.2 million of such receivables that
were 60 or more days past due at September 30, 2000.
At September 30, 2000 the Company maintained an aggregate allowance
for doubtful receivables of $10.2 million, or 6.9% of the outstanding consumer
receivable portfolio from owned resorts. This represented an RCR of 1.7 times
the approximate $6.0 million in consumer receivables from owned resorts that
were 60 days past due as of that date. The $10.2 million aggregate allowance for
doubtful receivables at September 30, 2000 represented an increase of 49%
compared with $6.8 million at September 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 September 30, 2000:
Consumer Receivable Loan Portfolio
As of September 30, 2000
(In Thousands)
Current 30 - 59 days 60 - 89 days 90+ days Total
------- ------------ ------------ -------- -----
Owned Resorts $137,044 $3,748 $2,138 $3,882 $146,812
93.3% 2.6% 1.5% 2.6% 100.0%
Third Party (1) $112,559 $3,138 $1,322 $867 $117,886
95.5% 2.7% 1.1% 0.7% 100.0%
Total $249,603 $6,886 $3,460 $4,749 $264,698
94.3% 2.6% 1.3% 1.8% 100.0%
(1) Includes the consumer receivables that collateralize the
hypothecation loans.
At September 30, 2000, 94.3% of the consumer receivable portfolio was
current, and there were 829 notes with a principal balance of $4.7 million that
were over 91 days past due. Of this amount, $3.9 million were notes relating to
the consumer receivables in the Company's resorts. With limited exceptions, the
Company services the loans in its portfolio internally, using its own personnel
and facilities, although loans currently owned by Peppertree are the subject of
outsourcing arrangements for collection services.
27
Interest Expense
Interest expense, net of capitalized amounts, increased 115% to $19.0
million for the first nine months of 2000 as compared to $8.8 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 $115 million, while the weighted average interest rate on
outstanding debt increased from 6.8% for the first nine months of 1999 to 8.8%
for the first nine 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 nine months of
2000 totaled $18.9 million or 24.3% of VOI revenue, compared to $6.7 million for
the nine months ended September 30, 1999, or 23.9% 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 to a lesser degree the
Riverside Suites acquisition.
Depreciation and Amortization
Depreciation and amortization increased 62% to $3.6 million for the
first nine months of 2000 from $2.2 million for the same period in 1999. The
increase is primarily due to $0.8 million increase associated with depreciation
expense, and $0.6 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 122% to $1.1 million for the first
nine months of 2000 from $0.5 million for the same period in 1999 and
represented 46% of the increase in depreciation and amortization. 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 $1.0 million and accounts for
62% 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 $36.8 million for the first
nine months of 2000 from $12.2 million for the same time period in 1999. Sales
and marketing expense increased to 47.3% as a percentage of VOI revenue for the
nine months of 2000, compared to 43.1% for the same period in 1999. The increase
in total sales and marketing expense is due to the inclusion of operating
results from acquired properties, and the increase in sales and marketing
expense as a percent of VOI sales is entirely due to the inclusion of operating
results from Peppertree. Peppertree's sales and marketing expense as a percent
of VOI sales for the nine months of 2000 was 53.5%, compared to an aggregate
28
of 42.0% for the non-Peppertree sales centers. Peppertree sales centers
currently experience a substantially higher cost level, particularly relating to
tour costs, and operate at a lower efficiency in terms of average revenue per
guest, than the Company's other sales centers. The Company continues to
introduce various cost-reducing measures, though these cost levels are likely to
remain higher than the Company's historic average during the balance of 2000.
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.
The Company has closed five smaller Peppertree sales centers due to the
inefficiency of their operations, eliminated one Peppertree telemarketing center
and reduced sales commission rates.
Resort Management
Resort management expense for the nine months ended September 30,
2000 totaled $14.0 million, or 72.5% of resort operations revenue, as compared
$12.1 million, or 86.3% 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, as well as
management's efforts to improve efficiency.
General and Administrative
General and administrative expense increased 134% to $13.4 million
for the first nine months of 2000 from $5.8 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 85% 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 10.6% of total revenue for the nine months ended September 30,
2000, compared with 9.3% of total revenue for the same period in 1999. General
and administrative costs may continue to increase in absolute dollars as the
Company invests in its management and organization infrastructure.
Provision For Income Taxes
The provision for income taxes for the nine months ended September
30, 2000 increased 26% to $6.4 million from $5.1 million for the same period in
1999. The increase is attributable to the increase in pretax income during the
first nine months of 2000 as compared to the same period in 1999. The provision
for income taxes represents approximately 42.4% and 41.2% of pretax income for
the first nine 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 September, 1997, in the Common Pleas Court for Beaufort County,
South Carolina, Resort Funding commenced foreclosure proceedings against the
Main Street Development Company, and others operating resort property located in
Hilton Head, South Carolina. In September, 2000, the parties settled this
litigation. Resort Funding was repaid the outstanding principal balance of $3.4
million plus accrued interest, less the sum of $600,000, which was written off
against reserves. The Company did not experience any impact on earnings due to
the settlement.
For other information regarding these legal proceedings and other
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, and the Company's 10-Q filed August 15, 2000, for the quarterly period
ending June 30, 2000, which are 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:
10.1 First Amendment to Credit Agreement dated as of June 30, 2000, to
that certain Credit Agreement dated as of November 17, 1999, among
Equivest Finance, Inc. (the "Borrower"), Peppertree Acquisition Corp.
("Newco"), Peppertree Acquisition Corp. II (Newco II") and Bank of
America, N.A. (the "Lender").
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during
the quarter covered by this report:
(i) August 16, 2000 Form 8-K announcing record second quarter
and first half revenues; net income of $.08 per diluted
share for second quarter.
30
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: November 14, 2000
31